Listen to every episode from the journal — insights, analysis and conversations
for the profession. Filter by section or issue to find what you need.
Showing 100 episodes
Theme
Ep. 1 — The MSME Growth Engine: Navigating Opportunities, Challenges, and the Role of CA in the Era of AI and Viksit Bharat 2047
CA Journal
· June 2026
00:00
--:--
The MSME Growth Engine: Navigating Opportunities, Challenges, and the Role of CA in the Era of AI and Viksit Bharat 2040India’s MSME sector plays a crucial role as an impetus behind the economic development of the nation on its journey towards becoming Viksit Bharat@2047. With the seamless integration of Artifi cial Intelligence and contribution of Chartered Accountants in strategic advisory, MSMEs are rapidly transitioning into globally competing “micromultinationals”, contributing over 31% of GDP and employing millions. It highlights the expanding role of CAs, shifting from compliance professionals to strategic growth advisors, facilitating data-centric decision-making, ESG conformity, and AI governance. Although there exist several opportunities such as improved credit availability, government incentives, and overseas expansion which are substantial, obstacles such as technological divide, funding gaps, and digital vulnerabilities still remain. The article highlights the role of MSMEs as engines of growth while also discussing the synergism of AI, policy support, and professional profi ciency that will metamorphize MSMEs into a paramount force in India’s vision of a $30–35 trillion economy.The Strategic Paradigm of India’s MSME Sector in 2026Consider a manufacturer of hosiery based out of Ludhiana, Punjab, a skilled fabric knitt er from Coimbatore, and a small-batch tea estate in Upper Assam. During the times of the old economy, these businesses were home-grown players striving to survive against exorbitant costs and intermediaries. In the era of Viksit Bharat 2047, the concept of “small” businesses no longer exists. Th ey are now referred to as Micro-Multinationals. Any business with a revenue of ₹100 crore in a Tier2 city now boasts of international reach and data insights, driven by Artifi cial Intelligence (AI) and steered by strategic CA advisory, that was previously only reserved for high-value powerhouse corporations Th e path traversed by the Indian economy in the year 2026 is principally defi ned by the strength of the Micro, Small, and Medium Enterprises (MSME) sector. As India advances towards the 100th year of its independence under the ideology of Viksit Bharat@2047, the MSME sector has transformed itself from a reinforcing auxiliary to the butt ress of industrial propulsion. In the present fi scal year 2025-26, the sector is instrumental in contributing approximately 31.1% of the national GDP and 35.4% of the combined manufacturing yield. With over 7.47 crore enterprises in its network, enabling employment for nearly 38.82 crore individuals, it continues to be the second-largest employer following agriculture. India’s real GDP is projected to grow at 7.4% in FY26, with a manufacturing GVA surge of 9.13% in recent quarters. This growth is mirrored in the rising prosperity of the average citizen, with per capita net national income expected to rise from ₹1.89 lakh in FY24 to ₹2.20 lakh by FY26.Viksit Bharat 2047: Ideological Pillars and the MSME MandateTh e ideology of Viksit Bharat 2047 is a national mission to transform India into a developed, self-reliant nation. It is built on four fundamental pillars: Yuva (Youth), Garib (Poor), Mahilayen (Women), and Annadata (Farmers).Youth: MSMEs serve as the laboratory for entrepreneurship, absorbing the demographic dividend into high-tech manufacturing.Poor: The sector offers social mobility through localized employment at low capital cost, targeting zero povertyWomen: The 2025-26 budget targets 70% participation of women in economic activities. Credit guarantee covers for women-led units have been enhanced to 90% to bridge gender disparities.Farmers: MSMEs in food processing (supported by a ₹10,900 crore PLI outlay) facilitate value addition, aiming to make India the “food basket of the world”As India advances through the year 2026, the layout for Viksit Bharat 2047 no longer remains an unimaginable vision; it is a live financial mission. At the core of this metamorphosis lies the Micro, Small, and Medium Enterprises (MSME) sector. Historically referred to as the “backbone” of the economy, the MSME sector has progressed into its fast-moving engine in 2026. With India aiming to become a $30 trillion to $35 trillion economy by its centenary of independence, MSMEs are entrusted with a pivotal breakthrough. Today, the sector contributes approximately 31% to India’s GDP and nearly 48.5% of its exports. These values are expected to surge to 50% of GDP and 60% of exports. This jump is being advanced by the dual forces of Artificial Intelligence and the strategic supervision of Chartered Accountants, who have shifted from conventional auditors to the engineers of progress.Understanding the Economic MagnitudeTo understand the scale of “Viksit Bharat,” one must look at the sheer financial volume MSMEs represent in 2026 and their projected path to 2047Current GDP Contribution (2026): With India’s GDP hovering around ₹320 lakh crore ($4 trillion), MSMEs contribute roughly ₹100 lakh crore.The Funding Gap: Despite the push for formalization, the credit gap remains significant at approximately ₹30 lakh croreGovernment Allocation: The Union Budget 2026-27 has earmarked over ₹22,000 crore for the Ministry of MSME, with a dedicated ₹10,000 crore SME Growth Fund designed to create “Global Champions.”The 2047 Vision: By 2047, the MSME sector is expected to manage an economic value exceeding ₹1,200 lakh crore, necessitating a level of efficiency only achievable through deep technological integration.The Roadmap to Viksit Bharat 2047To ensure MSMEs drive the $35 trillion dream, a four-pillar strategy is being implemented; the projections/ estimations are shown below:PillarObjectiveFinancial Target (Estimated)FormalizationProjected to move a greater number of microunits to the Udyam portal.Estimated to unlock higher opportunities in formal credit.Technology HubsProjected to establish AICommon Facility Centers across the country.Estimated reduction of tech-adoption cost by 60%.India’s real GDP is projected to grow at 7.4% in FY26, with a manufacturing GVA surge of 9.13% in recent quarters. This growth is mirrored in the rising prosperity of the average citizen, with per capita net national income expected to rise from ₹1.89 lakh in FY24 to ₹2.20 lakh by FY26.The Regional Powerhouses in INR TermsThe roadmap to a $30 trillion economy is paved by regional clusters. By 2047, the MSME contribution is projected to hit ₹1,200 lakh crore. Let’s look at the impact on the ground by taking few examples:Punjab’s Manufacturing Might: For a cycle-part manufacturer in Ludhiana, the cost of downtime is often ₹2 lakh per day. AI-driven predictive maintenance is now saving these units over ₹50 lakh annually in repair costs.Coimbatore’s Textile Tech: Modern looms in Tamil Nadu are utilizing AI to reduce fabric wastage by 12%, adding nearly ₹1.5 crore to the annual bottom line of medium-scale exporters.Assam’s Tea Renaissance: Small Tea Growers (STGs) contribute nearly 50% of India’s tea. AI-powered soil analysis and climate forecasting are increasing yields by 20%, ensuring that the ₹20,000 crore tea industry remains competitive against global rivals.The Role of CA in the Era of AI and Viksit Bharat 2047The role of the Chartered Accountant has undergone its most significant shift since the introduction of GST. In the Viksit Bharat roadmap, the CA is the “General Surgeon” of an MSME’s financial health and it’s “Pilot” in the digital skies.From Compliance to Strategic Advisory :- In 1990, a CA filed taxes. In 2026, a CA performs Data-Driven Business Modeling. Using AI tools, CAs provide MSMEs with “What-If ” analysis: “If we increase production of Part X by 20% using a robotic arm, what is the impact on our debt-service coverage ratio over 5 years?”The ESG Sentinel:- As India integrates into global supply chains, MSMEs face strict ESG (Environmental, Social, and Governance) mandates from international buyers. CAs are now the authorized professionals who certify an MSME’s carbon footprint and labour practices, ensuring they aren’t barred from the ₹80 lakh crore global green market.AI Governance and Ethical Audit :- With MSMEs adopting AI, there is a risk of algorithmic bias or data leaks. The “CA Mandate” now includes auditing the AI models themselves, ensuring that the financial data fed into these systems is secure and that the outputs are compliant with the Digital Personal Data Protection (DPDP) Act. The part played by Chartered Accountants in this age has constantly evolved. They are no longer just confined to the role of ‘Tax Filers’ but have become Navigators of GrowthThe Valuation Expert: Chartered Accountants now make use of AI to furnish real-time valuations, assisting business owners in negotiating from a place of power.Conclusion: The Lion AwakensThe passage towards 2047 isn’t confined to just a value on a GDP chart; it is about the enabling of the small business owner. When a cultivator of tea in Assam makes use of AI to maximize his harvest, or an owner of textiles employs a CA’s approach to go public on the NSE Emerge platform, India surfaces as a winner. The MSME Growth Engine is now charged by intellect and integrity. The shift from “Small” to “Significant” is far-reaching. By 2047, the world won’t just purchase goods labelled “Made in India” but those “Designed and Perfected by the Indian MSMEs”. The year 2047 will witness a nation where the contrast between a “small” and “large” business is bleared by technology. A minor unit in a Tier-3 city, powered by AI and steered by a technologically adept CA, will have the same methodical competencies as a multinational today. The MSME Growth Engine is no longer just about survival; it is about dominance. As the “CA Mandate” evolves and AI matures, the journey to Viksit Bharat is not just an economic target; it is a transformation of the Indian spirit of “Jugaad” into a global standard of “Innovation and Excellence.” The road to Viksit Bharat 2047 is not merely about surviving; it is about scaling through “manufacturing depth” and technological sophistication. AI provides the leverage to escape the low-productivity trap, while regulatory mechanisms like Section 43B(h) and TReDS 2.0 provide the necessary financial discipline and liquidity. As CAs, our role is to act as the bridge mentoring 7.5 crore MSMEs to navigate the complexities of digital transformation and global compliance. By fusing AI-driven innovation with the spirit of Atmanirbharta, the MSME sector will remain the heartbeat of India’s transformation into a global economic powerhouse.
Theme
Ep. 2 — GeM and MSMEs: Catalysing India’s Growth Engine through Digital Public Procurement
CA Journal
· June 2026
00:00
--:--
GeM and MSMEs: Catalysing India's Growth Engine through Digital Public ProcurementThis article looks at how the Government e-Marketplace (GeM) supports MSMEs through inclusive public procurement, digital transformation and financial access, highlighting initiatives such as #VocalForLocal, Womaniya, Startup Runway, GeM Sahay and TReDS integration that reinforce Make in India and the broader Aatmanirbhar Viksit Bharat 2047 vision.Micro, Small and Medium Enterprises (MSMEs) remain central to India's economic and social progress. Together they contribute close to 30% of GDP, account for over 45% of exports, and provide livelihoods to more than 110 million people, making them the backbone of the country's manufacturing, services and trade ecosystem. Beyond economic output, MSMEs foster entrepreneurship, support regional growth, uplift women and disadvantaged communities, and create sustainable livelihoods nationwide. As India works toward a more globally competitive and self-reliant economy, this sector is increasingly seen as a driver of innovation, resilience and inclusive growth.Public ProcurementPublic procurement typically accounts for roughly 15–20% of a nation's GDP, which makes an efficient procurement system vital to India's economy. A well-designed system that runs round the clock helps ensure government spending is allocated and used strategically. Standardising procurement across a country as large and diverse as India — spanning Central and State ministries, public sector enterprises, autonomous bodies, Panchayati Raj institutions and cooperative societies — was a significant challenge, given the fragmented, manual-intensive processes that existed earlier. GeM was created to bring a step change to this landscape and usher in e-governance through digitalisation.Genesis of the Government e-MarketplaceGeM's foundations build on the JAM Trinity (Jan Dhan–Aadhaar–Mobile), which enabled financial inclusion through bank accounts, biometric identity, and mobile-based service delivery. This was reinforced by the "Digital India" programme, which strengthened online infrastructure and connectivity, paving the way for seamless e-delivery of government services.By 2016, the government decided to overhaul the procurement processes previously run through the Directorate General of Supplies and Disposal, aiming for greater transparency, efficiency and accountability. Following recommendations from a Group of Secretaries to the Prime Minister, the Government e-Marketplace (GeM) was set up as a one-stop Special Purpose Vehicle for procuring common goods and services without intermediaries. GeM was launched on 9 August 2016 by the then Union Minister for Commerce and Industry, Smt. Nirmala Sitharaman, and developed initially as a pilot with technical support from the National e-Governance Division under MeitY. GeM operates as a 100% government-owned Section 8 company under the Department of Commerce.About Government e-Marketplace (GeM)GeM is an end-to-end digital procurement platform for government buyers, made mandatory under Rule 149 of GFR 2017, with several states amending their own procurement rules to align. Built on efficiency, transparency and inclusiveness, the platform actively promotes participation from under-served seller groups — micro and small enterprises, women and tribal entrepreneurs, persons with disabilities, startups, self-help groups, artisans, weavers and craftsmen under the One-Product, One-District initiative.Since 2016, GeM has onboarded 1.46 lakh government buyers and over 24.96 lakh sellers and service-providers, listing roughly 10,500 product categories and 330 service categories. As of 18 May 2026, 3.87 crore orders worth ₹18.94 lakh crore in Gross Merchandise Value (GMV) have been fulfilled, with MSMEs contributing close to 45% of that total. Products and services are split almost evenly, at roughly 51.74% and 48.26% of total GMV respectively.Fiscal YearProduct GMV (Cr)Service GMV (Cr)GMV Grand Total (Cr)FY 16-17420-420FY 17-185,83085,838FY 18-1916,61179817,409FY 19-2019,8113,06722,878FY 20-2130,0308,51138,541FY 21-2281,95124,6471,06,598FY 22-231,35,21866,0992,01,317FY 23-241,95,9542,07,6194,03,573FY 24-252,13,0943,28,5105,41,603FY 25-262,55,0532,47,5525,02,606FY 26-2726,54727,63854,185Grand Total (Cr)₹9,80,519₹9,14,448₹18,94,967Percentage Mix51.74%48.26% Table 1: GeM GMV Trend by Fiscal Year (Product and Services)Source: Compiled by AuthorPolicy and Marketplace Interventions for MSMEsTwo major policy frameworks support MSMEs on GeM: the Public Procurement Policy for Micro and Small Enterprises (PPP-MSE, 2018) and the Public Procurement (Preference to Make in India) Order, 2017 (PPP-MII). The former, anchored under the MSMED Act and run by the Ministry of MSME, mandates a minimum 25% procurement target from MSEs, with sub-targets of 4% for SC/ST-owned MSEs and 3% for women-owned MSEs, alongside L1+15% purchase preference and EMD/tender fee exemptions. The latter, administered by DPIIT, has no fixed quota but gives purchase preference to Class-I local suppliers based on local content, supporting domestic manufacturing and self-reliance goals.AspectPPP-MSE, 2018PPP-MIIFull NamePublic Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012 (amended 2018)Public Procurement (Preference to Make in India) OrderYear2018 amendment (original 2012)2017Nodal Ministry/Dept.Ministry of Micro, Small and Medium EnterprisesDPIIT, Ministry of Commerce and IndustryObjectiveInclusive procurementMake in India / self-relianceLegal BasisSection 11, MSMED Act, 2006Rule 153(iii), GFR 2017Primary ObjectivePromote MSE participation in government procurementPromote domestic manufacturing and local value additionTarget BeneficiariesMicro and Small EnterprisesLocal suppliers/manufacturersCore Policy InstrumentMandatory procurement targetPurchase preference based on local contentProcurement TargetMinimum 25% from MSEsNo fixed quotaSocial Inclusion Provisions4% sub-target SC/ST; 3% women-ownedNone specificPreference MechanismL1+15% purchase preferencePreference to Class-I local suppliersSupplier ClassificationUDYAM/MSME-registeredClass-I, Class-II, Non-localLocal Content RequirementNot primary criterionCentral featureEMD/Tender Fee ExemptionAvailable for eligible MSEsNot a core featureFocus AreaInclusion, entrepreneurship, MSME developmentManufacturing, localisation, self-relianceLinkage with National InitiativesInclusive growth, MSME promotionMake in India, Aatmanirbhar BharatApplicabilityCentral Ministries/Departments/CPSEsCentral Ministries/Departments/CPSEs and procuring entitiesImpact OrientationSocial and economic inclusionIndustrial and manufacturing competitivenessNature of PreferenceEnterprise-category basedProduct/local-content basedKey Policy GoalAssured market access for MSEsStrengthening domestic supply chains and indigenous capabilityComparison: PPP-MSE 2018 vs PPP-MIISource: Compiled by AuthorMSMEs have consistently exceeded the mandatory 25% procurement target across the years since FY16-17.Fiscal YearTotal Order Value (Cr)Gen MSE Order (Cr)% of Gen MSE Order ValueFY 16-174226916.30%FY 17-185,8732,26838.61%FY 18-1917,4209,20052.81%FY 19-2022,87813,81960.39%FY 20-2138,54122,60058.64%FY 21-221,06,59859,03355.38%FY 22-232,01,31797,33248.35%FY 23-244,03,5731,90,48947.20%FY 24-255,41,6031,95,97936.18%FY 25-265,02,6062,37,10047.17%FY 26-2754,18532,17659.38%Total₹18,40,831₹8,27,88544.97%PPP-MSE Target 25.00%Variance (+/-) 19.97%Table 2: Year-wise Gen MSE Participation in Total Order ValueSource: Compiled by AuthorWhile the women-owned MSE sub-target is being met, the SC/ST MSE sub-target remains a work in progress, and GeM continues to work with stakeholders in that ecosystem to onboard, support and build resilience among SC/ST MSEs.Fiscal YearTotal Order Value (Cr)MSE Order Value (Cr)Women MSE Order Value (Cr)SC/ST MSE Order Value (Cr)FY 16-174226980FY 17-185,8732,26831119FY 18-1917,4209,2001,229101FY 19-2022,87813,8161,722226FY 20-2138,54122,6002,421423FY 21-221,06,59859,0335,2301,198FY 22-232,01,31797,33210,7652,689FY 23-244,03,5731,90,48916,6784,287FY 24-255,41,6031,95,97922,0945,146FY 25-265,02,6062,37,10028,1676,588FY 26-2754,18532,1763,334747Total (Cr)₹18,40,831₹8,60,061₹91,960₹21,426PPP-MSE Target 25.00%3.00%4.00%% to Total Order Value 45.39%4.85%1.13%Variance (+/-) 20.39%1.85%-2.87%Table 3: PPP-MSE Procurement Performance Dashboard (FY16-17 to FY26-27)Source: Compiled by AuthorKey Marketplace Interventions#VocalForLocal Outlet Stores – 8 digital storefronts spotlighting products from women and tribal entrepreneurs, artisans, weavers, ODOP craftsmen, FPOs, SHGs and DPIIT-recognised startups, helping strengthen local supply chains and visibility for domestic manufacturing.Womaniya – a dedicated storefront with filters and catalogue icons that help buyers identify and procure from women-owned MSEs, supporting women's economic empowerment.Startup Runway – a channel for DPIIT-recognised startups to list innovative products across 14 recognised categories spanning healthcare, sustainability, mobility, IT and smart governance.GeM–UDYAM API Integration – a seamless two-step auto-registration process linking UDYAM registration with GeM seller onboarding via email/SMS prompts.GeM Sahay – a collateral-free, purchase-order-based working capital financing mechanism offering up to ₹25 lakh based on transaction history.TReDS Integration – invoice discounting through TReDS platform partners, improving liquidity and reducing payment delays, with further policy support from the Union Budget 2026–27.CSC Partnership – an MoU with Common Service Centres enabling 5 lakh+ village-level entrepreneurs to support seller onboarding and value-added services like catalogue photography and order management.Role for Accounting and Finance ProfessionalsChartered Accountants, Cost Accountants and finance professionals play a meaningful role in helping MSMEs formalise their businesses and adopt digital processes that connect them to wider supply chains. Their work today extends well beyond statutory compliance and tax advisory into financial planning, cost optimisation, working capital management, digital accounting adoption and business restructuring.On GeM specifically, professionals can help MSMEs onboard, manage GST compliance and bid documentation, and adopt digital accounting and reporting systems. They can also guide MSMEs on leveraging GeM Sahay and TReDS financing for working capital, and on aligning with ESG and sustainability expectations from institutional buyers and investors.The future trajectory of the MSME sector will depend on sustained support in terms of policy, enhanced digital infrastructure, improved ease of doing business, and closer collaboration between industry, government, financial institutions, and trade/MSME associations.Looking AheadDigital Public Infrastructure platforms like GeM demonstrate how technology-driven governance can widen economic opportunity while improving transparency, efficiency and accountability in public systems. By bringing together market access, financing and value-addition support in one digital ecosystem, GeM is reshaping the role of public procurement in India's development story. As the country moves toward its Aatmanirbhar Viksit Bharat 2047 vision, MSMEs — supported by initiatives such as #VocalForLocal, Womaniya, Startup Runway, GeM Sahay and TReDS — are positioned to drive manufacturing growth, employment generation and self-reliance.1. Government e-Marketplace. (2018, July). GeM handbook (p. 7). Government of India.2. Startup Genome. (2018, April). All Reports – Startup Genome.Authors may be reached at eboard@icai.in
Commercial Laws
Ep. 3 — The Importance of the Foreign Exchange Management Act [FEMA], 1999 in India
CA Journal
· June 2026
00:00
--:--
The Importance of the Foreign Exchange Management Act (FEMA), 1999 in IndiaIn today's era of rapid globalization, digital payments, and high-volume cross-border transactions, FEMA plays a very important role in facilitating international trade, managing foreign exchange reserves and maintaining the stability of the Indian currency. From the perspective of Chartered Accountants (CAs) in Practice in India, developing expertise in this field and providing consultancy services to clients engaged in multinational businesses is a welcoming and rewarding opportunity. In recent times, comparatively fewer CAs are practicing in this field as compared to Direct and Indirect Taxes. Recognizing the growing importance of this domain, ICAI has been continuously encouraging its members by organizing Certificate Courses on FEMA and regularly updating them on recent changes and their impact on the Indian economy. Through this article, the author shares views and learnings on the significance and impact of FEMA on Indian Markets in a fast-growing economy.What is FEMA, 1999?FEMA, 1999, is an Indian law enacted to regulate the flow of foreign currency, manage foreign exchange, and ensure monetary stability in the Indian economy. It covers all transactions, i.e., capital account transactions and current account transactions, including the scope of Foreign Direct Investments (FDI) and External Commercial Borrowings (ECB).This act empowers the Central Government to frame rules and the Reserve Bank of India (RBI) to issue regulations for managing foreign exchange, to facilitate external trade and maintain a stable forex market. In other words, the Central Government sets the policy framework, while the RBI regulates authorized dealers and oversees foreign exchange transactions.Top 10 Positive Impacts of FEMA, 1999, on the Indian Economy(a) Focus on Economic Stability & Forex ManagementFEMA focuses on maintaining economic stability by regulating capital flows and ensuring that cross-border transactions do not negatively impact the balance of payments. It is the cornerstone of India's foreign exchange regulations, which are designed to promote the orderly development and maintenance of the forex market along with the surety of economic stability.(b) Welcoming Foreign InvestmentFEMA is designed to facilitate external trade, systematically promote a foreign exchange market and actively encourage foreign direct investment (FDI) to boost India's economic growth. By providing clear and transparent guidelines for foreign capital flows (FDI and FPI), FEMA attracts foreign investors, boosting India's GDP and capital reserves. FEMA also allows dealing with most of the transactions unless the same are restricted.(c) Positive Response to Businesses and Start-UpsReducing constraints on foreign exchange, it makes it easy to do business while importing, exporting, and operating in global markets. Guidelines of FEMA Valuation restrict startups from giving away equity below fair value, which protects the stakeholders and assists in future fundraising. Further, adhering to FEMA guidelines helps startups and businesses to maintain a positive reputation and legal compliance, which is essential for attracting foreign investors.(d) Liberalization in Trade PracticesFEMA generally allows the transactions unless expressly prohibited in the act, which reverses the FE principle of prohibiting everything not permitted. Also, unlike FE, which treated foreign exchange violations as criminal acts, FEMA classifies them as civil offenses in most of the cases. Accordingly, FEMA plays a vital role in liberalizing the trade practices.(e) Shifting from Regulation to ManagementThe huge shift from the Foreign Exchange Regulation Act (FE), 1973, to the FEMA represents a foundational transformation in India's approach to foreign exchange that is moving from a regime of strict control and conservation to management and facilitation.Under the eyes of FERA, foreign exchange was a scarce resource to be controlled. FEMA started treating it as an economic asset to be managed for the development of the country. In addition, the primary objective was shifted from "conservation" of foreign exchange to "facilitating external trade and payments".(f) More than Law, it works like an Eco-SystemFEMA is more than just a law; it forms the foundation of India's foreign exchange ecosystem by safeguarding national interests while balancing the need to attract foreign investment with regulatory responsibility. It ensures the clarity to investors, compliance with global standards, and supports India's goal of becoming a globally competitive economy in this dynamic world. Most importantly, it continues to evolve, adapting to the changing needs of the Indian economy and global financial trends.(g) Boost Foreign InvestmentBy liberalizing foreign exchange transactions and activities and creating a more conducive regulatory environment in an economy, FEMA encourages foreign trade and investment, which directly or indirectly contributes to economic growth.(h) Enhancing Investor ConfidenceFEMA provides a transparent, crisp and predictable regulatory framework which helps enhance investor confidence and attract greater foreign investment into India.(i) Sector-Specific RegulationsFEMA governs industries on a sector-specific basis. The regulations under FEMA prescribe Foreign Direct Investment (FDI) caps and approval routes (automatic or government), based on industry type, to regulate foreign capital inflows and maintain stability in the market and the Indian economy.Since most of the people are shifting to digital modes nowadays, FEMA specializes the regulations that often focus on E-commerce industries in relation to cybersecurity to protect digital data (digital assets).(j) Shifting from Criminal to Civil PenaltiesFEMA, 1999, marked a fundamental change in Indian law, moving from a criminal-based, restrictive regime to a civil-based, facilitative framework. This transition reflects a shift in policy from conserving foreign exchange as a scarce resource to managing it as an economic asset to promote trade and investment.The huge shift from the Foreign Exchange Regulation Act (FERA), 1973, to the FEMA represents a foundational transformation in India's approach to foreign exchange — moving from a regime of strict control and conservation to management and facilitation.Compliances and Documentations under FEMA, 1999The main compliances required under FEMA, 1999, include mandatory reporting of foreign investments and transactions to the RBI through AD Category-I banks. These requirements involve the following:Filing the Annual Return on Foreign Liabilities and Assets (FLA)Reporting FDI via Form FC-GPR/FC-TRS within specified timelinesFill Entity Master FormMonthly ECB-2 filingsAdhering to LRS limits for outward remittancesComply with downstream investment rules if the subsidiary makes further investments in other Indian entitiesFiling of Annual Performance Report (APR), especially when involved in Overseas Direct Investment (ODI)Reporting of investments made in a Foreign Joint Venture (JV) or Wholly Owned Subsidiary (WOS) is requiredReporting of foreign exchange withdrawals by individuals is required, with daily reporting via CIMS for AD banksExport proceeds must be realized and returned to India within specific timeframesMaintaining proper records of all foreign exchange transactions (FIRC–Foreign Inward Remittance Certificate) and ensuring KYC (Know Your Customer) compliance is necessaryFiling Form 15CA/15CB with the authorized banks, etc.Register for an Import Export Code (IEC) in case of the Import and Export IndustryBasic Points to be Considered under FEMA, 1999Retaining Resident AccountsThe most common violation is failing to convert a Resident Savings Account to a Non-Resident Ordinary (NRO) account immediately upon becoming an NRI (generally defined under FEMA as a person staying outside India for more than 182 days during a financial year). Holding a resident savings account after attaining NRI status constitutes a violation of FEMA provisions. Therefore, an NRI should convert resident savings accounts into an NRO account. It is not easy, and not even possible for an NRI to close resident savings accounts while residing abroad.Using NRE Account after ReturningContinuing to operate a Non-Resident External (NRE) account for income earned in India after returning to India permanently is also a violation.Crypto/Prohibited InvestmentsUsing LRS funds to buy crypto-assets or using credit cards for prohibited items is not allowed and may be treated as Liberalised Remittance Scheme (LRS) Breach.Splitting RemittancesExceeding the $250,000 annual limit provided to the resident individuals by using multiple banks to send money abroad without realizing the cumulative total is a violation.Non-filing or wrong-filing is also a violation under FEMA.Important Monetary Limits under FEMA, 1999Liberalized Remittance Scheme (LRS): Resident individuals can remit up to USD 250,000 per financial year (April–March) for authorized purposes.Repatriation for NRIs/PIOs: Non-Resident Indians/Persons of Indian Origin (NRIs/PIOs) can repatriate up to USD 1 million per financial year from their NRO account (income/sale proceeds).Educational Expenses: Remittance for studies abroad is allowed up to the estimate provided by the institution or USD 100,000 per academic year, whichever is higher.Medical Treatment: Expenses for medical treatment abroad are permitted up to the estimate from a doctor/hospital, or within the LRS limit.Gifts and Donations: Remittance as gifts/donations by a resident is covered under the USD 250,000 LRS limit.FEMA and RBI Compliances: Core Reporting RequirementsRequirementApplicable FormsTimelineRegulating AuthorityFDI ReportingFC-GPR, FC-TRS30–60 daysRBIOverseas InvestmentForm FCOn or before making ODI remittanceRBIAPR for ODIForm APRAnnualRBIImport PaymentsA2 Form, KYCBefore sending paymentAD BankExport of Goods/ServicesSOFTEX Form, GR FormPeriodic (project specific or invoice based)RBI/ SEZ AuthorityCore reporting requirements under FEMA / RBISome Recent Actions of the Government Related to FEMA, 1999Some recent actions and measures by the Government of India and the RBI under the FEMA, 1999, during the year 2025–2026 have focused on liberalizing foreign investment, extending export realization timelines, strengthening compliance requirements for border-sharing nations, and updating compounding rules to enable faster and more digitized processing. The actions include:1. Changes made under Export and Import RegulationIn November 2025, the RBI extended the time limit for exporters to realize and repatriate proceeds to India from 9 months to 15 months. The RBI also updated regulations for India, Nepal, and Bhutan, allowing travellers to carry Indian currency notes up to ₹25,000 (excluding denominations above ₹100).2. Foreign Direct Investment (FDI) & Non-Debt Instruments (2025)In June 2025, the Government of India permitted Indian companies in FDI-prohibited sectors (e.g., lottery, gambling, real estate, etc.) to issue bonus shares to existing non-resident shareholders, provided the shareholding pattern does not change. The regulations continued to mandate prior government approval for any FDI from countries sharing land borders with India, which was strictly enforced in 2025.3. Liberalised Remittance Scheme (LRS) & Tax (2025–2026)Under Budget 2025, the threshold for Tax Collected at Source (TCS) was increased to ₹10 lakh per financial year, which relates to remittances under LRS. Remittances up to ₹10 lakh generally do not attract TCS, while rates of 0.5% to 20% apply above this limit. Also, remittances for education funded by loans from financial institutions do not attract TCS, encouraging students studying abroad.4. Compounding and Compliance Procedures (2025)Now, all regulatory approvals, including FEMA-related compounding applications, must be submitted exclusively through the RBI's PVAAH portal. The April 2025 amendments introduced a cap of ₹2,00,000 for compounding minor, technical, or reporting contraventions under FEMA to promote voluntary compliance and ease of doing business.5. Enforcement Actions (2025–2026)The Enforcement Directorate (ED) has intensified investigations into "front companies" which are used to channel foreign funds for non-permitted activities (mainly covering foreign NGOs). Engagement of ED is increasing day by day. Some recent actions taken by the ED team are –Case 1. "ED has provisionally attached assets worth Rs. 100.44 Crore under PMLA, 2002 in connection with large-scale illegal coal mining and pilferage in leasehold areas of Eastern Coalfields Limited. Earlier, on 08.01.2026, ED conducted searches at 10 premises in Kolkata and Delhi. Evidence seized during searches has been instrumental in linking proceeds of crime to the attached properties. Total attachment in the case now stands at Rs. 322.71 Crore."Case 2. "ED, Panaji has carried out search operations on 28.09.2025 & 29.09.2025 under FEMA, 1999, at 15 premises across Goa, Delhi-NCR, Mumbai and Rajkot, related to M/s. Golden Globe Hotels Pvt. Ltd., M/s. Worldwide Resorts and Entertainment Pvt. Ltd and Big Daddy Casino, Goa. During the search operations, various incriminating documents, digital evidences, cash amounting to Rs. 2.25 Crore (approx.) in Indian currency, USD 14,000 and other different foreign currency equivalent to around Rs. 8.50 Lakh were recovered and seized. Further, different cryptocurrencies including USDT of more than Rs. 90 Lakh were found and freezed."Case 3. "ED, Special Task Force, Headquarters has seized 13 bank accounts of M/s Reliance Infrastructure Ltd. under Section 37A of the Foreign Exchange Management Act (FEMA), 1999 for contraventions under section 4 of FEMA in the matter of siphoning of public funds from highway construction projects awarded by NHAI."6. Enhanced Reporting MonitoringRBI has upgraded the Single Master Form (SMF) system to allow auto-reconciliation and immediate email alerts for delayed filing of FC-GPR/FC-TRS forms. Also, duplication of work has been reduced on the iFirm portal.Role and Initiative taken by the Institute of Chartered Accountants of India (ICAI) on FEMA, 1999Since ICAI is a huge professional body, it plays a very important role in the administration, compliance, and education related to FEMA, with the help of its expert team.ICAI provides guidance to Chartered Accountants, encourages them to stay up to date on regulations for inbound/outbound investments, conducts specialized certificate courses on FEMA, and supports compliance with RBI regulations.It supports members in ensuring proper documentation and compliance with RBI guidelines (Notifications, Circulars) for foreign exchange transactions and is also involved in advisory roles.Through its committees, such as the Committee on Commercial Laws, Economic Advisory and NPO Cooperative (CCLEANC), ICAI, time to time publishes handbooks, such as the "CAs' Handbook on Inbound & Outbound Investments under FEMA," conducts webinars and seminars, conduct certificate courses to assist members in navigating regulations.FEMA: An Open Opportunity for Chartered Accountants (CAs) in their CareerWith continuously increasing cross-border transactions, foreign investments, and compliance and reporting requirements, FEMA offers significant and wide-growing career opportunities for CAs in India.Certification requirements for remittances, foreign investments, and capital transactions are required by Authorized Dealer (AD) Banks, which covers a wide scope for the profession.Client representations are required before the RBI for compounding of offences, approvals, and liaising with AD banks.Positions are available in leading firms and companies for managing the regulatory functions, particularly in roles involving Tax Advisory and Litigation for corporate clients.Challenges under FEMA, 1999a. The dynamic nature of FEMA regulations and frequent release of circulars from the RBI make compliance difficult for smaller firms and individuals, which can hamper their opportunities. Keeping pace with day-to-day regulatory updates can often be difficult.b. Due to the requirement for approvals in certain transactions, significant delays can occur, which require extensive documentation and time.c. Even unintentional non-compliance because of negligence or a clerical nature, such as technical, procedural lapses in reporting, can lead to severe penalties and, in some cases, the requirement to unwind transactions.d. There could be a chance of misuse in relation to the bank accounts of foreign nationals. Non-Resident Indians (NRIs) often struggle with correctly using NRE/NRO/FCNR accounts, with illegal use of resident savings accounts being a common violation. Also, NRIs face limitations on purchasing agricultural property, plantations, and farmhouses, etc. in India.e. Penalties are very heavy under FEMA, 1999.ConclusionOverall, the flexible, transparent, and business-friendly approach of FEMA has played a vital role in inviting foreign investments, continuously promoting ease of doing business, making India a developed country and ensuring smooth repatriation of earnings for NRIs and foreign investors.Despite its many advantages, FEMA demands strict compliance with reporting obligations, documentation, and sector-specific restrictions. Non-compliance can lead to penalties, regulatory actions, and restrictions on future transactions, making it essential for businesses and individuals to stay updated with RBI notifications and FEMA amendments.Under FEMA, what you cannot do directly, you cannot do indirectly either.Important Government Websites in relation to FEMA, 1999https://rbi.org.in/Scripts/Fema.aspxhttps://enforcementdirectorate.gov.in/femahttps://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=1171https://firms.rbi.org.in/firms/faces/pages/login.xhtmlAuthor may be reached at shweta.choraria@yahoo.com and eboard@icai.inThe Chartered Accountant · June 2026 · www.icai.org
India's Sustainable Financing LeapIndia is rapidly maturing as a global sustainable finance leader, ranking fourth among emerging markets with USD 55.9 billion in cumulative GSS+ debt issuance by end-2024. SEBI's June 2025 ESG Debt Securities Framework brings regulatory clarity to three distinct instruments: Social Bonds, Sustainability Bonds, and Sustainability-Linked Bonds — each serving a defined purpose, from funding social projects to linking coupon rates with ESG performance. Anchored in ICMA's global principles, the framework drives transparency and investor confidence, positioning India to channel capital toward inclusive growth and climate transition.The world of finance is undergoing a seismic shift. Traditional priorities of profit and immediate returns are giving way to a broader vision that integrates environmental, social, and governance (ESG) principles, emphasizing sustainability, fairness, and enduring stability. Within this evolving landscape, instruments like social bonds, sustainability bonds, and sustainability-linked bonds (SLBs) have become essential for channelling capital toward impactful, purpose-driven initiatives.On June 5, 2025, the Securities and Exchange Board of India (SEBI) launched its groundbreaking Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities) — "The Framework" — setting a new standard for the issuance and oversight of social, sustainability, and sustainability-linked bonds, distinct from Green Bonds, which already have their own SEBI framework.Mapping the Current LandscapeThe Climate Bonds Initiative, in partnership with MUFG Bank under the India Initiative on Climate Risk and Sustainable Finance (IICRSF), released the India Sustainable Debt State of the Market 2024 report. India has solidified its position as the fourth-largest emerging market for aligned GSS+ debt worldwide, trailing only China, South Korea, and Chile. By December 2024, cumulative GSS+ issuance soared to USD 55.9 billion — a 186% increase from USD 21.4 billion in 2021.Theme2024Cumulative since 2006DealsUSD bn% totalDealsUSD bn% totalGreen226.45116346.683Social75.544116.612Sustainability20.6542.24SLB00010.51Grand Total3112.510017955.9100India GSS+ ScorecardSource: India Sustainable Debt State of the Market 2024 (Climate Bonds Initiative / IICRSF / MUFG)"Green bonds continue to dominate, representing 83% of total aligned issuance, yet the market is diversifying rapidly across themes, instruments, and issuer profiles."In 2024, seven aligned social bonds added USD 5.5 billion, boosting cumulative social bond volume to USD 6.6 billion. NBFCs further contributed by arranging USD 1.8 billion in social loans. India's sustainable finance ecosystem is also being reshaped by the RBI's Green Deposit Framework, IFSCA's sustainable finance guidelines, and SEBI's enhanced disclosure requirements.Social BondsA Social Bond channels capital into projects that tackle pressing social issues or foster positive societal outcomes. Unlike traditional bonds, proceeds are tied to specific, impact-driven projects focused on underserved or vulnerable populations.Eligible Categories under the FrameworkAffordable basic infrastructure (clean drinking water, sewers, sanitation, transport, energy)Access to essential services (health, education, vocational training, healthcare)Affordable housingEmployment generation & just transition programmes (incl. SME financing and microfinance)Food security and sustainable food systemsSocio-economic advancement and empowermentAny other category specified by the Board from time to timeFour Core Components — ICMA Social Bond PrinciplesUse of ProceedsFund projects with clear social benefitTarget specific social issuesTransparent financing vs. refinancingContext-specific target populationProject Evaluation & SelectionCommunicate social objectiveDefine project eligibilityOutline benefit to target groupsDisclose perceived risksManagement of ProceedsTrack via sub-account or portfolioPeriodic allocation adjustmentsDisclose temporary placementsExternal audit verificationReportingAnnual reports until fully allocatedDetail projects, amounts, impactsDisclose qualitative & quantitative indicatorsCase StudyStandard Chartered Social BondIn March 2025, Standard Chartered issued its first-ever Social Bond — a EUR 1 billion, 8-year Non-Call 7 issuance — supporting sustainable development across emerging markets, with proceeds aimed at SME financing (including women-owned businesses) and access to healthcare, education, infrastructure, and food security. About 99% of the bank's social asset base sits in Asia, Africa, and the Middle East, including India, Malaysia, and Bangladesh.Sustainability BondsSustainability Bonds finance or refinance a combination of eligible green and social projects, blending environmental and social goals. They can help address the social costs of decarbonization — particularly relevant in India, where the transition away from coal and thermal power may disrupt livelihoods.Case StudyIndia Exim BankIndia Exim Bank listed its inaugural 10-year USD 1 billion Sustainability Bond in 2023 on the London Stock Exchange's Sustainable Bond Market, also listed on India INX at GIFT City. In February 2025, it issued two further Sustainable Bonds totalling USD 150 million.Sustainability-Linked Bonds (SLBs)SLBs tie debt terms to measurable sustainability goals rather than restricting use of proceeds. Issuers retain full discretion over how capital is deployed, while financial features such as coupon rates adjust based on achievement of predefined Sustainability KPIs against Sustainability Performance Targets (SPTs)."Sustainability-linked bonds" means a debt security which has its financial and/or structural characteristics linked to predefined sustainability objectives of the Issuer, measured through predefined Sustainability KPIs and assessed against predefined SPTs. — SEBI FrameworkFive Core Components — ICMA SLB PrinciplesSelection of KPIs — materiality, strategic alignment, measurability, external verifiability, and benchmarking.Calibration of SPTs — ambitious, beyond business-as-usual, benchmarked against peers or science-based references, set on a predefined timeline.Bond Characteristics — typically a coupon adjustment tied to SPT trigger events, proportionate and clearly documented.Reporting — annual, transparent updates on KPI performance and strategic context.Verification — mandatory independent external verification, publicly disclosed.Case StudyLarsen & Toubro SLBOn June 23, 2025, L&T issued ₹750 million in three-year sustainability-linked bonds under SEBI's ESG debt framework at a 6.35% coupon — 10–15 basis points below a comparable vanilla NCD, saving roughly ₹1.1 crore annually. The bond is tied to two KPIs against a fiscal-2022 baseline: a 30% cut in Scope 1 and 2 GHG intensity, and 15% women leaders among the top 500 managers by FY 2027. Meeting both targets drops the coupon to 6.10%; missing either raises it to 6.60%.ConclusionA profound shift is sweeping the global finance landscape, prioritizing purpose alongside profit. India's sustainable finance ecosystem is entering a decisive phase of maturity, marked by clearer rules, stronger accountability, and growing market sophistication. SEBI's ESG Debt Securities Framework provides the much-needed regulatory clarity to scale these instruments into mainstream capital markets, positioning India as a potential global benchmark in sustainable debt — provided issuers, especially first-time and mid-sized entities, can navigate the associated costs and compliance requirements.ReferencesSEBI ESG Debt Securities Framework CircularIndia Sustainable Debt State of the Market 2024ICMA Social Bond Principles (June 2023)ICMA Sustainability-Linked Bond Principles (June 2024)Standard Chartered — First Social Bond Press ReleaseIndia Exim Bank Sustainability Bond Listing — LivemintRupee SLBs — ET Edge InsightsArticle by CA. Jessika Kaur Duggal, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: jessikakduggal@gmail.com | eboard@icai.in
Indirect Taxation
Ep. 5 — Dipping Reliance on Customs’ Revenue: A Boost to India’s Quest for Negotiating Trade Deals
CA Journal
· June 2026
00:00
--:--
Dipping Reliance on Customs' RevenueTariff jitters have been regularly making headlines in business media all over the world, and India has been no different. Yet India has significantly reduced its reliance on customs duties as a source of tax revenue — from over one-third of the Union government's gross tax revenue in the late 1980s to just over 6% as per the 2026-27 Budget Estimates. This shift reflects a strategic move toward trade liberalization, improved domestic tax systems like GST, and a growing focus on industrial competitiveness rather than revenue protection, positioning India to offer tariff concessions in trade negotiations without jeopardizing fiscal stability.36.38%Peak customs share of gross tax revenue (1987-88)6.15%Projected customs share (2026-27 BE)₹44.04L crGross tax revenue (2026-27 BE)7Major FTAs concluded since 2021IntroductionCustoms duties and tariffs have long been at the heart of global economic discourse. Traditionally viewed as both a revenue tool and a protective measure, their role has evolved significantly in emerging economies like India. As geopolitical tensions and economic nationalism rise — typified by the United States' hardened trade posture — countries are re-evaluating their trade architectures. India's calibrated reduction in import tariffs, alongside an increasing array of Free Trade Agreements (FTAs), allows it to negotiate trade deals with less fiscal risk, strengthening its global economic positioning.The Dual Role of Customs DutiesCustoms duties serve two essential roles in a country's economy:Revenue Generation — especially in developing countries, customs duties were historically easy to collect and provided a steady stream of funds before robust domestic taxation mechanisms like GST or comprehensive income tax structures matured.Protective Barrier — beyond revenue, tariffs shield domestic industries from foreign competition, incentivizing local production, preserving employment, and nurturing infant industries.India has traditionally balanced these roles with care, but the balance has been shifting in recent years — from revenue generation toward regulatory and strategic use.The Long Arc: Four Decades of Declining Customs Revenue ShareIn 1980-81, customs revenue accounted for 25.87% of the Union's gross tax revenue, driven by high import duties and a relatively closed economy. Customs duties are projected to account for around 6% of gross tax revenue in the 2026-27 BE — a sharp decline from the historic high of 36.38% in 1987-88. Gross tax revenue has jumped from ₹14 lakh crore in 2015-16 to over ₹44 lakh crore in 2026-27, while customs duty has barely moved, remaining in the ₹2–2.5 lakh crore range over the last decade.Figure 1: Gross Tax Revenue vs. Customs Revenue (₹ lakh crore)0 10 20 30 45 1980-81 2004-05 2016-17 2026-27Gross Tax Revenue Customs RevenueIllustrative trend chart based on author's compilation; see data tables below for exact figures.Figure 2: Customs' Revenue Contribution to India's Tax Revenue Since 1980-81 (%)0% 10% 20% 30% 40% 1980-81 1987-88 (36.38%) 2018-19 (5.66%) 2026-27 (6.15%)Source: Author's CompilationCustoms Revenue Data: 1980-81 to 2013-14Financial YearGross Tax RevenueCustomsShare of Total Tax Revenue1980-810.130.0325.87%1981-820.160.0427.19%1982-830.180.0528.93%1983-840.210.0626.94%1984-850.230.0730.00%1985-860.290.1033.23%1986-870.330.1134.94%1987-880.380.1436.38% (peak)1988-890.440.1635.54%1989-900.520.1834.93%1990-910.580.2135.86%1991-920.670.2233.04%1992-930.750.2431.86%1993-940.760.2229.30%1994-950.920.2729.03%1995-961.110.3632.15%1996-971.290.4333.28%1997-981.390.4028.87%1998-991.440.4128.28%1999-20001.720.4828.19%2000-011.890.4825.21%2001-021.870.4021.53%2002-032.160.4520.74%2003-042.540.4919.12%2004-053.050.5818.89%2005-063.660.6517.77%2006-074.740.8618.23%2007-085.931.0417.55%2008-096.051.0016.50%2009-106.250.8313.34%2010-117.931.3617.12%2011-128.891.4916.79%2012-1310.361.6515.96%2013-1411.391.7215.11%Gross Tax Revenue, Customs Revenue, and Share (₹ lakh crore)Source: Author's CompilationCustoms Revenue Data: 2014-15 to 2026-27 (BE)Financial YearGross Tax RevenueCustomsShare of Total Tax Revenue2014-1512.451.8815.10%2015-1614.562.1014.45%2016-1717.162.2513.13%2017-18*19.191.296.72%2018-1920.801.185.66%2019-2020.101.095.44%2020-2120.271.356.65%2021-2227.092.007.37%2022-2330.542.136.99%2023-2434.662.336.73%2024-2537.962.336.14%2025-26 (RE)40.782.586.33%2026-27 (BE)44.042.716.15%Gross Tax Revenue, Customs Revenue, and Share (₹ lakh crore)*GST implemented mid-2017-18, restructuring the indirect tax base. Source: Author's Compilation from Union Budget.This stark decline is not merely a statistical anomaly but a deliberate consequence of policy shifts toward trade liberalization, WTO commitments, and an evolving tax regime that places greater emphasis on domestic revenue tools like GST and direct taxation. India has been systematically lowering its import tariffs, slowly since 2001-02 and more swiftly from 2015-16, in alignment with its broader trade liberalization strategy and WTO-bound tariff commitments."India has already entered into duty-free access for several imports under FTAs with ASEAN, Japan, and South Korea which allow zero or reduced customs duties on many imports."Selected Trade Agreements Concluded or Under Negotiation in Recent YearsS.NoCountry / InstitutionAgreement NameDate1MauritiusIndia Mauritius Comprehensive Economic Cooperation and Partnership Agreement22 Feb 20212United Arab EmiratesIndia UAE Comprehensive Economic Partnership Agreement18 Feb 20223AustraliaAustralia-India Comprehensive Economic Cooperation Agreement2 Apr 20224EFTAIndia EFTA Trade and Economic Partnership Agreement10 Mar 20245United KingdomIndia-UK Comprehensive Economic and Trade Agreement24 Jul 20256OmanIndia-Oman Comprehensive Economic Partnership Agreement18 Dec 20257European UnionIndia-EU Free Trade Agreement27 Jan 2026Source: Author's CompilationThese agreements have opened up duty-free or low-duty access to and from partner countries, naturally leading to reduced customs revenue but increased trade flows. The rationale is clear: short-term revenue foregone through tariff reductions is expected to be offset by long-term gains in trade expansion, efficiency, and economic growth.Major Customs Duty Reductions — Union Budget 2026-27CommodityFrom (%)To (%)Capital goods for manufacturing Lithium-Ion Cells for BESSApplicableNilCapital goods required for processing of critical minerals in IndiaApplicableNilSodium antimonate for use in manufacture of solar glass7.5NilGoods required for Nuclear Power Projects (exemption extended till 2035)ApplicableNilComponents and parts for manufacture of civilian and training aircraftsApplicableNilRaw materials for manufacture of aircraft parts for MRO by Defence sector unitsApplicableNilSpecified parts used in manufacture of microwave ovensApplicableNil17 anti-cancer drugs and medicines for rare diseasesApplicableNilDutiable personal-use goods (Heading 9804) imported for personal use2010Inputs for processing seafood products for export (duty-free import limit increased)1% of FOB value of exports3% of FOB value of exportsBCD exemption extended: Capital goods for Li-Ion cells for mobile phone batteriesApplicableNilSource: Author's CompilationStrategic Leverage in Trade NegotiationsThe decline in customs revenue dependence empowers India in at least three key ways during trade negotiations:1. Reduced Revenue RiskIn the 1990s, customs revenue made up nearly 30–35% of total tax receipts. Today, with that figure under 6%, the fiscal hit from liberalizing trade is minimal, giving India flexibility to offer concessions without undermining budgetary stability.2. Focus on Industrial Impact over Fiscal LossWithout the looming worry of revenue foregone, government can concentrate entirely on evaluating the impact of reduced tariffs on domestic producers — enabling smarter, sector-specific protections and phasing mechanisms.3. Better Risk Management for ExportersFacing challenges like the EU's Carbon Border Adjustment Mechanism (CBAM) and retaliatory tariffs, FTAs offering reciprocal duty-free access help India mitigate export revenue risks and maintain global competitiveness.The Shift from Revenue to RegulationAs customs duties lose fiscal importance, their future lies in regulatory oversight:Quality Control — ensuring imported goods meet safety and environmental standards.Strategic Protection — temporary duties to counter unfair trade practices or protect strategic sectors.Sustainability Goals — using tariffs to discourage environmentally harmful imports and promote green alternatives.This transformation reflects a maturing economy no longer reliant on border taxes to balance its books.Industrial Preparedness for a Low-Tariff EconomyCritics of tariff reduction often cite the vulnerability of local industries to international competition. However, India has used the last decade to prepare its industries through:PLI Schemes (Production Linked Incentives) incentivizing domestic manufacturing across mobile phones, pharmaceuticals, electronics, and textiles.Infrastructure investment — logistics parks, ports, and dedicated freight corridors improving cost competitiveness.Digital governance and compliance systems reducing transaction costs for exporters and importers alike.What Lies AheadAs India deepens its engagement with the world — particularly with the EU, US, UK, and Africa — its approach to customs duties will continue to evolve. More FTAs are expected, especially with countries in Africa and Latin America, while continued reduction in tariffs on strategic inputs will support Make in India and green transition initiatives.ConclusionIndia's sustained decline in dependence on customs revenue represents a paradigm shift in fiscal and trade policy. From being a key source of funds, customs duties have become an increasingly marginal tool, used more for strategic signalling than revenue collection. This shift grants India greater leverage and flexibility in trade negotiations, reduces the domestic economic cost of liberalization, and reflects a maturing fiscal framework supported by more sustainable and equitable tax bases. As India positions itself to strengthen its place in the global economic landscape, the proactivity shown by the country's financial leadership in realigning the customs framework over the last two decades will prove to be a cornerstone of its strategic future.Referencesindiabudget.gov.incommerce.gov.in — International Trade AgreementsArticle by CA. Lakshay Agarwal, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: eboard@icai.in
GST
Ep. 6 — Invisible Players, Visible Risk: Non-Filers and Unregistered Persons in the GST Regime
CA Journal
· June 2026
00:00
--:--
Definition of Assessment in GSTDefined under Section 2(11) of the CGST Act, 2017 — assessment means the determination of tax liability under the Act, and includes:Self-Assessment (Sec. 59)Re-AssessmentProvisional Assessment (Sec. 60)Summary Assessment (Sec. 64)Best Judgment Assessment (Sec. 62 and Sec. 63)Basically, an assessment is a quasi-judicial proceeding adopted in fixing the correct liability to pay tax.Note: There is no explicit provision permitting a Proper Officer to re-assess the tax liability of a taxable person — re-assessment is not provided in any specific section. A Proper Officer must take care not to carry out a roving exercise to redetermine liability except in case of rectification or any other method as provided in the law.Concept of Best Judgement Assessment (BJA)The definition of BJA is not provided under the GST Law. However, in general practice and as per other acts such as Income Tax Law, BJA means the assessment of a taxpayer carried out by the Assessing Officer (AO) as per the best of their judgement and based on all relevant information gathered, available material, and records."Best Judgement Assessment" must not be "worst" judgement assessment — judgement must be fair, not arbitrary. It should reflect realistic turnover, consider seasonal variations, and allow proportionate input tax credit.Types of Assessments in GSTAssessment (Sec. 59 to 64, Rule 98 to 100)AssessmentBy Tax PayerSelf-Assessment [Sec. 59]Provisional Assessment [Sec. 60, Rule 98]By Tax AuthoritiesScrutiny of Returns [Sec. 61, Rule 99]Best Judgement Assessment↳ Non-Filers of Returns [Sec. 62, Rule 100(1)]↳ Unregistered Persons [Sec. 63, Rule 100(2)]Summary Assessment, special cases [Sec. 64, Rule 100(3)(4)(5)]What Really Happens If You Do Not File Your GST Return? [Section 62]Notwithstanding anything to the contrary in Section 73 or Section 74 (or Section 74A), where a registered person fails to furnish the return under Section 39 or Section 45 — even after service of a notice under Section 46 — the proper officer may proceed to assess the tax liability to the best of their judgement, taking into account all relevant material available or gathered, and issue an assessment order within five years from the date specified under Section 44 for furnishing the annual return for the relevant financial year.Where the registered person furnishes a valid return within 60 days (earlier 30 days) of service of the assessment order, the order is deemed withdrawn — but liability for interest under Section 50(1) and late fee under Section 47 continues. If the valid return is not filed within 60 days, the taxpayer may furnish it within a further 60 days on payment of an additional late fee of ₹100 per day of delay beyond the initial 60 days; the assessment order is then deemed withdrawn, though interest and late fee liability still continues.Stepwise Procedure for Assessment of Non-Filers [Sec. 62 & Rule 100(1)]Rule 68 — Notice to non-filers: A notice in FORM GSTR-3A is issued electronically to a registered person who fails to furnish a return under Section 39, 44, 45, or 52.If the taxpayer fails to furnish the return within 15 days of issue of FORM GSTR-3A, the proper officer may assess the tax liability per Rule 100(1) of the CGST Rules, 2017, based on material available on record and the circumstances of each case.Assessment orders under Section 62(1) are issued in FORM GST ASMT-13, with a summary uploaded in FORM GST DRC-07.If a valid return is filed within 60 days of service of the ASMT-13 order, the assessment is deemed withdrawn — but interest (Sec 50(1)) and late fee (Sec 47) still apply.If not filed within 60 days, the taxpayer may file within a further 60 days (120 days total from service) by paying an additional late fee of ₹100/day beyond the initial 60 days; the assessment is still deemed withdrawn, but interest and late fee liability continues.If no return is filed within this period, the order becomes final and cannot be withdrawn even if returns are filed later — though the aggrieved person may appeal under Section 107.Once FORM GST DRC-07 is issued, recovery proceedings for tax assessed in FORM GST ASMT-13 follow.Forms Used for Proceedings under Section 62Sr. No.Form No.Purpose1GSTR-3A (System Generated)Notice to taxable person2GST ASMT-13Assessment order3GST DRC-07Summary of order uploaded electronicallyProcess Flow — Non-Filers of Returns3 days before due date: system message "File return before due date"→Due date of return (e.g. 20th of next month for GSTR-3B)→Immediately after due date: "Return not filed" message to Authorized Person / Proprietor / Partner / Director / Karta5 days after due date: Notice in FORM GSTR-3A issued electronically — file within 15 days→If filed within 15 days: notice stands withdrawnIf not filed within 15 days: Best Judgement Assessment using GSTR-1, 2A, E-Way bill, relevant materials, inspection→ASMT-13 issued with DRC-07 (summary of order)If valid return filed within 60 days: ASMT-13 deemed withdrawn→If not filed within 60 days: Proper officer may initiate recovery u/s 78 (pay demand within 3 months) and recovery u/s 79Standard Operating Procedure for Non-Filers of ReturnsCBIC, vide Circular No. 129/48/2019 dated 24.12.2019, issued a Standard Operating Procedure for the assessment of non-filers. A format of the notice to be issued under Section 46 instructs the defaulter to file pending returns within 15 days; failure to comply attracts Section 62 (best judgment assessment for non-filers) without further communication. The circular also prescribes guidelines to ensure uniformity in implementation across field formations.Amnesty Scheme for Non-Filers (Deemed Withdrawal of Best Judgement Assessment Order)A special amnesty scheme vide Notification No. 06/2023-CT dated 31-03-2023 allowed taxpayers who received best judgment assessment orders under Section 62(1) on or before 28.02.2023 to have these orders automatically withdrawn, if they filed all pending returns and paid the required tax, interest, and late fees between 1 April and 30 June 2023. Notification No. 24/2023-CT dated 17-07-2023 extended the deemed withdrawal date to 31-08-2023. This benefit applied regardless of ongoing or decided appeals, and was a one-time relief valid only for orders issued up to 28.02.2023.Case Law — Joy Mathew vs. Union of India (2020): The Kerala High Court held that filing returns within 30 days under Section 62(2) nullifies assessment orders and cancels recovery notices.Is Non-Registration a Loophole or a Liability? [Section 63]Notwithstanding anything to the contrary in Section 73 or Section 74 (or Section 74A), where a taxable person fails to obtain registration even though liable to do so, or whose registration has been cancelled under Section 29(2) but who was liable to pay tax, the proper officer may assess the tax liability to the best of their judgment for the relevant tax periods, and issue an assessment order within five years from the date specified under Section 44 for furnishing the annual return. No such order may be passed without giving the person an opportunity of being heard.Assessment Proceedings under Section 63The procedure starts when a tax officer learns — through inspection, survey, enforcement, intelligence unit information, or other means — that a taxable person has failed to obtain registration or pay taxes despite being liable to do so.The Adjudicating/Assessing Authority (A/A) issues a Show Cause Notice to the taxable person, scheduling a personal hearing if required.If no reply is received, the A/A issues a reminder — a maximum of three reminders can be issued.The taxable person may reply and request a personal hearing (PH), or apply for an extension of the PH date — adjournment can be allowed a maximum of three times.If PH is not required, the A/A issues an Assessment Order (ASMT-15) or a Drop Proceeding order based on the reply.If PH is required, the A/A conducts the hearing and passes the order accordingly.If the taxable person does not reply even after three reminders, the A/A passes an ex-parte order to the best of their judgement based on available information and records.Rule 100(2)The proper officer issues a notice under Section 63 in FORM GST ASMT-14, containing the grounds on which the assessment is proposed on a best judgment basis. A summary of the notice is uploaded in FORM GST DRC-01. After allowing 15 days for the person to furnish a reply, the officer may pass an order in FORM GST ASMT-15, with a summary uploaded in FORM GST DRC-07.Forms Used for Proceedings under Section 63S. No.Form No.Purpose1GST ASMT-14Notice to taxable person2GST DRC-01Summary of notice uploaded electronically3GST ASMT-15Assessment order4GST DRC-07Summary of order uploaded electronicallyExample — How Authorities Track the Unregistered and Non-FilersIn July 2025, Karnataka GST authorities issued notices to approximately 7,000 unregistered vendors based on UPI transaction data indicating potential tax liability under Section 63 of the CGST Act.Data Sources Used to Track Non-Filers and Unregistered PersonsSourcesGST Portal (gst.gov.in) — GSTR-1, 2A/2B, TDS/TCS returnsE-Way Bill System (ewaybillgst.gov.in)Banks & RBISEBI ReportsPayment Gateways — BillDesk, PayPal, Razorpay, Instamojo, StripeWallet Sites — Amazon Pay, Paytm, PhonePe, Google PayIncome Tax Department — Form 3CD, ITR, SFT ReportCustoms Department & CBICMCA & ROCGoods & Service Network (GSTN)MSME dataAudit & Investigations — field surveys, suspension/cancellation of GST registration, special drivesImplication of Section 62 on the Recipient (Buyer) — Rule 37ANew Rule 37A was inserted vide Notification No. 26/2022-CT dated 26.12.2022 to specify the mechanism for reversal of input tax credit already availed by the recipient in Form GSTR-3B. Where the supplier has furnished invoice or debit note details in Form GSTR-1 or IFF but has not furnished Form GSTR-3B by 30th November (earlier 30th September) of the subsequent financial year, the ITC availed by the recipient must be reversed along with interest.If the recipient reverses the ITC on or before 30th November of the succeeding financial year, no interest is payable on the reversal; if reversed after 30th November, interest under Section 50 applies. The recipient may re-avail the ITC in Form GSTR-3B once the supplier furnishes their Form GSTR-3B.Interest and Late FeesInterest and late fees apply even for non-filers and unregistered persons, independently of Sections 73 and 74.Interest (Section 50(1)): If tax is not paid within the prescribed time, interest of up to 18% is payable. If tax is declared late in a return under Section 39, interest applies only on the amount paid via the electronic cash ledger, unless proceedings under Sections 73, 74, or 74A have already commenced for that period.Late Fee (Section 47(1)): ₹100 per day, up to ₹5,000, for delay in filing returns under Sections 37, 39, 45, or 52.ConclusionGST compliance is not just about avoiding penalties; it is about unlocking peace of mind, credibility, and steady growth. Filing on time and staying registered turns obligations into opportunities. Think of compliance as your business's passport, not a burden — it does not restrict you, it is the currency of trust and the smartest investment, opening doors to trust, stability, and lasting success. Prevention is always cheaper than correction; discipline today secures freedom for tomorrow.ReferencesGST Act(s) and Rules Bare Law (issued by ICAI)Background Material on GST (issued by ICAI)cbic.gov.inidtc.icai.orgtutorial.gst.gov.in — FAQs GSTR-3AArticle by CA. Rinkesh Ashokkumar Mamrawala, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: carinkeshmamrawala@gmail.com | eboard@icai.in
Theme
Ep. 7 — From Delays to Discipline: Unlocking MSME Liquidity through Reforms
CA Journal
· June 2026
00:00
--:--
From Delays to Discipline: Unlocking MSME Liquidity through ReformsThis article explores key reforms aimed at addressing liquidity challenges faced by India's MSME sector. It highlights three pivotal developments: the introduction of an AI-enabled Online Dispute Resolution (ODR) mechanism, Section 43B(h) of the Income Tax Act linking tax deductions to timely MSME payments, and the revised MSME classification effective from April 2025. Together, these reforms are designed to formalize the sector, enforce payment discipline, and improve access to finance.Introduction: The Evolution and Formalization of the MSME SectorLiquidity is the lifeline of any business, but for MSMEs, it is often the defining factor between survival and excellence. Adequate cash flow ensures timely procurement of raw materials, payment of wages, and fulfilment of orders. However, the structural disadvantage of MSMEs in negotiating credit terms often results in delayed payments, forcing them into cycles of working capital stress.2003 — Formation of MSME Ministry2006 — MSMED Act: Regulating Credit Period/Dispute, Formation of MSEFCs2015 — Online Registration via Udyog Aadhaar; GeM/TReDS launched2017 — MSME Samadhaan portal launched2018 — TReDS made mandatory for PSUs/large companies2019 — MCA mandates reporting of MSME dues2020 — New MSME Definition + Udyam Registration2024 — Section 43B(h) of Income Tax Act introduced2025 — Revised MSME Definition; AI-based ODR launchedLiquidity, the Cultural ChallengeSeveral liquidity-focused initiatives have improved MSME receivables, yet challenges remain, particularly with PSUs and large corporates, where a cultural shift in payment behaviour toward MSMEs is still needed. In a study done in 2022, over ₹10.7 lakh crore, equivalent to nearly 6% of India's gross value added (GVA), were locked in delayed payments owed to MSMEs. A staggering 80% of invoices raised by MSMEs experience delays, with public sector undertakings and government entities among the most delayed payers.This delay in receivables severely disrupts working capital cycles for MSMEs, compelling them to rely on costly short-term borrowing or to limit operations due to cash flow constraints. The study highlights an inherent power imbalance in buyer-supplier relationships, where small enterprises are forced to accept prolonged credit periods to retain business.Several liquidity-focused initiatives have improved MSME receivables, yet challenges remain, particularly with PSUs and large corporates, where a cultural shift in payment behaviour toward MSMEs is still needed.1. Online Dispute Resolution: A Digital Solution for Payment DelaysA major stride in the formalization journey of the MSME sector is the introduction of an Online Dispute Resolution (ODR) platform, launched in mid-2025. Conceived under the MSME Development Act and further strengthening the MSME-SAMADHAAN initiative, this system transitions MSMEs from paper-based complaints to a fully end-to-end digital grievance redressal mechanism.From 15 October 2025, all new delayed payment cases must be filed exclusively on the new MSME ODR Portal (odr.msme.gov.in) — the Samadhaan portal stopped accepting new filings and redirects users to the ODR platform.The ProcessThe ODR portal provides an end-to-end dispute resolution process in two stages:Pre-MSEFC — a voluntary, out-of-court process comprising a Digital Guided Pathway and Unmanned Negotiation.MSEFC — the legal procedure under the MSMED Act, 2006, comprising Conciliation/Mediation and Arbitration.1. Access MSME ODR Portal8. Platform Scrutiny (Completeness & Jurisdiction)2. User Registration (MSME/Buyer/Supplier)9. Notice Issued to Respondent (Electronic Service)3. Login to Dashboard10. Respondent Registration & Reply4. Initiate New Dispute (File ODR Case)11. Appointment of Neutral (Mediator/Arbitrator)5. Enter Case Details (Parties, Amount, Issue)12. Online Mediation (Video/Chat/Document Mode)6. Upload Supporting Documents13A. Settlement Achieved → 16. Case Closed7. Payment of Prescribed ODR Fees13B. Mediation Failed → 14. Arbitration → 15. Award → 16. Case ClosedAdvantages for MSMEsAI-facilitated Resolution: Parties can opt for automated, AI-driven negotiation before formal MSEFC proceedings.Empowered Facilitation Councils: Tech and financial support provided to MSEFCs, with private ODR providers empanelled.Speedy Resolution: Designed to deliver outcomes in weeks, not months.Cost Efficiencies: Digital filing and reduced procedures keep expenses low.Accessibility and Convenience: Reduces geographical barriers for MSMEs across regions.Transparency and Accountability: Digital logs, AI-generated milestones, centralized case tracking.Financial Backing to MSEFCs: States receive grants for legal and IT capability building.Mandatory Payment Compliance: Buyers face default liability if dues aren't cleared in 45 days.Strategic Alignment: Developed under the World Bank-supported RAMP initiative.2. Tax-based Enforcement: Section 43B(h) of the Income Tax ActA transformative development for payment discipline is the introduction of Section 43B(h), effective from AY 2024–25. This amendment mandates that expenditure on purchases from Micro and Small Enterprises (MSEs) will be allowed as a deduction only if payment is made within the timelines prescribed under the MSMED Act — within 15 days, or 45 days if contractually agreed.This tax provision links compliance with the MSMED Act to tax deductibility, making it a powerful enforcement tool. Large buyers and corporates now have a financial disincentive to delay payments. For Chartered Accountants and auditors, this introduces new layers of disclosure and verification while preparing tax computations or certifying financials.3. Revised Classification Norms: Broadening the MSME BaseThe revised definition of MSMEs, effective from 1st April 2025, marks another key reform aimed at increasing the number of enterprises that can avail of government schemes, credit benefits, and legal protections under the MSMED Act.MicroInvestment ≤ ₹2.5 croreTurnover ≤ ₹10 croreSmallInvestment ≤ ₹25 croreTurnover ≤ ₹100 croreMediumInvestment ≤ ₹125 croreTurnover ≤ ₹500 crorePrior to the 2020 amendment, a small enterprise was defined by a gross investment limit of ₹5 crore. Today, the limit stands at ₹25 crore on a Written Down Value (WDV) basis, along with a turnover ceiling of ₹100 crore — effectively a 5 to 10 times expansion in threshold eligibility for MSEs.Legal Backbone: Judicial Support to the MSMED ActThe MSMED Act, 2006 provides a statutory cap on the credit period, restricting it to a maximum of 45 days, regardless of any mutual agreement to the contrary — a provision that has consistently received judicial backing.Eden Exports v. Union of India (2010): Madras High Court upheld the constitutionality of limiting the credit period.Silipi Industries v. Kerala State Electricity Board: Clarified counterclaims and limitation periods under the MSMED Act.NBCC India Ltd. v. Relcon Infraprojects Pvt. Ltd. (2025): Supreme Court affirmed that even unregistered MSEs are entitled to legitimate dues.Broader Awareness and Institutional EnablersIncreased awareness and regulatory emphasis have led auditors to scrutinize company disclosures related to MSME dues more closely, particularly Form MSME-1 filings and compliance with Section 43B(h).The 2019 MCA notification mandated half-yearly reporting of MSE dues. Companies failing to file Form MSME-1 under Section 405 of the Companies Act face a fine of ₹20,000 plus ₹1,000 per day of default, up to ₹300,000.The 2018 Ministry of MSME notification mandates large companies and CPSEs with turnover exceeding ₹250 crore (reduced from ₹500 crore in November 2024) to onboard with at least one of the three licensed TReDS platforms before 1st April 2025.In FY2024 alone, over ₹1.38 lakh crore worth of invoices were financed across 41.6 lakh transactions on RXIL, Invoicemart, and M1xchange — an 80% increase from ₹75,000 crore in FY2023. Cumulatively, the platforms have processed bills exceeding ₹5.33 lakh crore.ConclusionFor India to achieve its vision of "Viksit Bharat" by 2047, MSMEs will play a pivotal role. Their growth hinges on three key enablers: Robust Infrastructure with seamless last-mile delivery, access to Skilled Manpower, and Assured Liquidity. Daily hearings by MSEFCs, empowering them to execute awards, and automatic supplier classification without buyer discretion are steps that can further strengthen the liquidity ecosystem.Looking ahead, it is imperative that the government, MSMEs, and Chartered Accountants work in close coordination to build on this momentum, accelerating the formalization of the MSME sector.Author may be reached at eboard@icai.in
Theme
Ep. 8 — Fraud-Proofing Indian MSMEs: A Digital Toolkit for Chartered Accountants
CA Journal
· June 2026
00:00
--:--
Fraud-Proofing Indian MSMEs:A Digital Toolkit for Chartered AccountantsFrom instant payments to single-click fi lings, the digital economy of India is in a fast-paced transformation. Especially for the MSME sector, fi nancial processes are faster than ever. However, it often comes with blind spots, given that the industry is thriving on lean operations and vendor relationships largely based on trust. This article explores how Chartered Accountants can design guardrails without slowing down the business by quietly building resilience. With only a small fraction of MSMEs using ERPs or structured controls, CAs can make use of this opportunity to streamline the system and design fraud prevention checks. Using real-life cases, simple digital tools, behavioural nudges, and regulatory measures, this article outlines practical interventions to empower MSMEs to scale securely.In business or the tech world, speed is often mistaken for progress. We celebrate every leap in convenience, often by how quickly we get things done — instant payment systems, layered APIs that onboard vendors in minutes, approvals in hours, payments in seconds, filings at the click of a button.Yet anyone who has driven a fast car knows that speed is not produced by the engine alone. It is also the visibility, the lanes, the brakes. We don't go faster because of the accelerator, but because of how we have designed restraint into the system. Discipline is prosaic — mirrors, rules, and manuals, none of which are glamorous — yet it forms the backbone of safe and sustainable progress.Finance has significantly upgraded its engines over the last decade. Yet somewhere inside the boardrooms, the prevailing mantra became "remove friction," and convenience was often confused with safety. Nowhere is this more visible than in the MSME sector, which already runs on speed and proximity: shorter approval chains, familiar suppliers, and one person doing five jobs.The backbone of local employment and trade now operates atop high-speed financial infrastructure. But the same system also widens exposure. Reported cyberfraud losses reached the figure above, across 36.37 lakh financial fraud incidents, moving at the same speed as digital payments. In a recent case, an accountant at an export unit allegedly used the company's GST portal to generate fake invoices totalling ₹10 crore, reportedly skimming ₹1.8 crore in benefits — an irregularity uncovered only during a routine audit.The task, therefore, is not to slow MSMEs down, but to design brakes that make speed safer and more sustainable. The baseline is stark: only ~11% of MSMEs use ERP or structured accounting software, with many still operating without internal controls. This is exactly where Chartered Accountants close the gap — as control architects who introduce small, affordable safeguards at the points where value changes hands.Why MSMEs Are ExposedMSMEs enjoy real operational advantages: decisions move a few meters, not a few floors; exceptions are resolved by the person who actually knows the work; cash cycles are short with fast approvals. But this same operating model can unintentionally align three critical risks in one place:Authority — the power to decideAccess — the ability to actAcceptance — no one to questionFor instance, one staff member creates the vendor, approves the purchase order, and releases the payment. Since everyone trusts them and there is no second check, a duplicate or fake vendor gets repeatedly paid without notice. Operational "rails" — e-invoicing, real-time payments, API-based onboarding — have accelerated, while the guardrails of who approves, what gets approved, and with what proof have not kept pace.A recurrent set of red flags helps practitioners triage the risk:Master record creation without supporting documentationDuplicate entries with minor variationsTransactions posted during weekends or outside business hoursRounding off without backingEntry adjustments near period-end without audit trailsStructural LimitsSmall teams with overlapping rolesFounder override becomes routineNo segregation of dutiesProcess GapsScattered docs (paper / chat / email / desktop)Sequence not provable (PO → GRN → Invoice → Payment)Month-end back-datingLate reconciliationsTechnology Myths"Controls = big ERP" mindsetPartial digitisation with no frictionShared logins and weak KYCLimited Regulatory PushBelow audit thresholdsCompliance ≠ controlNo periodic access reviewCA's Expanded RoleMSMEs usually don't have the luxury of hiring a COO, CIO, Internal Auditor, or Compliance Head. Chartered Accountants are uniquely positioned to see the business end-to-end every quarter — the transactions, the gaps, the controls, the behaviour. Most MSMEs don't ask for "fraud controls" until there is a problem; CAs, being closest to the books and the owner, can spot the gaps, install safeguards, and respond to red flags as they emerge.As trusted advisors, professionals can translate the language of fraud into terms owners actually act on — not "procurement fraud" but "your accountant can create a fake vendor, bill for nothing, and approve it, alone." Framing risk in terms of business impact, rather than legal terminology, makes it tangible."Chartered Accountants are uniquely positioned to calibrate friction at those few points where there is a cash exit, an obligation creation, or to make evidence easy to read, aligning the work to professional standards."Installing Friction: Simple Digital ToolsWithout complex processes or large budgets, professionals can help MSMEs install friction where value changes hands — starting with how information is captured and validated. A simple setup using MS Excel or Google Sheets can feed dashboards that highlight where risk accumulates; basic low-code platforms bring structure to day-to-day transactions, such as routing vendor onboarding through a maker-checker workflow.Ghost vendors — verify GSTIN/PAN before onboarding using free tools, or maintain a shared spreadsheet with verified/unverified statusPayroll leaks — map attendance or biometric logs to salary payouts in a sheet template that flags mismatchesReimbursements — timestamp claims with no-code forms to prevent backdated entriesBank reconciliations — use simple Excel plug-ins to automate checks for duplicate or rounded entriesAwareness matters as much as tooling. Periodic training using anonymised real scenarios helps staff distinguish routine transactions from suspicious ones. Basic Excel rules or dashboards can flag multiple payments to the same UPI ID, sudden weekend entries, or unusual patterns. A simple whistleblower channel — a dedicated line or a monthly-reviewed drop box — encourages early reporting without fear.When signals emerge, a professional can run a scoped review before escalating to a full Forensic Accounting Investigation Standards (FAIS) engagement: Secure bank statements, GST/tax filings, WhatsApp/email trails Check who created, approved, and paid the transaction Match PO to payment across vendors or monthsCase Study — Digital Overhaul for a ₹12 Crore MSMEA precision-machining client with fewer than 50 employees and ₹12 crore turnover suspected money was "leaking somewhere" — though the root cause was limited process visibility rather than active fraud. Rather than a full forensic review, the engagement began with strengthening internal controls using low-cost digital tools, no heavy ERP required. Risk mapping Targeted control setup Automated monitoringA staff fraud-risk assessment via Google Forms generated a heat map identifying two weak areas: payments and inventory. For purchases above ₹10,000, Tally Prime's voucher approval system was activated, and Dropbox folders with access logs were created to store scanned, signed purchase orders linked to vouchers. An Excel VBA anomaly tracker (built with the help of generative AI) was configured to flag duplicate vendor entries, unusual round-offs, and non-business-hour transactions, with a monthly auto-mailed summary.Result at quarter-end review: duplicate vendors reduced to zero, an estimated ₹3.5 lakh saved from fraud leakage, and improved credit ratings from demonstrably stronger internal controls.DateVendor NameInvoice No.AmountFlag 1Flag 21/8/2025XYZ Ltd.INV00110,500——3/8/2025ABC Pvt. Ltd.INV00220,000——10/8/2025PQR Corp.INV00312,345——17/08/2025LMN & Co.INV0045,000——12/8/2025XYZ Ltd.INV0549,099——3/8/2025HBC Ltd.INV0091,800——Sample VBA Anomaly Tracker — BeforeSub AnomalyScan()
Dim ws As Worksheet
Set ws = ThisWorkbook.Sheets("Transactions")
Dim lastRow As Long
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
Dim i As Long
For i = 2 To lastRow
' Check for round-figure payments
If ws.Cells(i, 4).Value Mod 1000 = 0 Then
ws.Cells(i, 5).Value = "Rounded Value"
End If
' Check for weekend date
If Weekday(ws.Cells(i, 1).Value, vbMonday) > 5 Then
ws.Cells(i, 6).Value = "Weekend Entry"
End If
Next i
End SubDateVendor NameInvoice No.AmountFlag 1Flag 21/8/2025XYZ Ltd.INV00110,500——3/8/2025ABC Pvt. Ltd.INV00220,000Rounded ValueWeekend Entry10/8/2025PQR Corp.INV00312,345——17/08/2025LMN & Co.INV0045,000Rounded ValueWeekend Entry12/8/2025XYZ Ltd.INV0549,099——3/8/2025HBC Ltd.INV0091,800—Weekend EntrySample VBA Anomaly Tracker — AfterEmerging Fraud Types in MSME DigitisationProfessionals must also watch for newer, under-recognised fraud patterns confronting digitally enabled MSMEs:Fraud TypeImpactHow a CA Can HelpFake loan appsOwners' need for quick working capital falls prey to fraudulent digital lendersValidate fintech partners; educate on RBI-registered NBFCs; vet loan documents before submissionFake websites / suppliersLookalike sites trick businesses into paying advances for bulk ordersUse MCA/GST verification APIs; build a vendor onboarding checklistQR code switchMSMEs accepting payments via QR codes get scammed when codes are physically replacedAutomated reconciliation setupsImpersonation over the phoneOwners/staff conned by fraudsters posing as tax officialsSOPs for phone verification and approvalsPhishing via e-commerce platformsFake "order confirmation" or "returns" links harvest login credentialsRole-based logins, 2FA, security-hygiene trainingE-invoice portal misuseManipulated or out-of-system invoices used to claim fraudulent ITCCross-check GSTR filings with books; reconcile e-invoice numbers monthlyBNPL manipulationStaff misuse company Buy-Now-Pay-Later or credit wallet accounts personallyReview monthly BNPL statements; implement transaction capsPolicy and Platforms That Support PreventionFraud prevention cannot rest on internal controls alone. India's regulatory system has embedded protective mechanisms into digital and financial infrastructure:RBI's Digital Payment Security Measures — mandatory 2FA for online transactions; UPI security upgrades that flag suspicious activityMSME SAMADHAAN — a delayed payment monitoring system enabling MSMEs to report and recover delayed paymentsGovernment e-Marketplace (GeM) — a transparent channel to sell to government departments, reducing procurement fraud and payment defaultsCyber Suraksha Scheme — subsidised cybersecurity tools and secure payment platformsProfessionals can help navigate Samadhaan filings, GeM onboarding, and ICAI's SMP Committee Cloud Tools Repository — which offers secure documentation, e-signature, and video-meeting tools that support collaboration and streamlined digital workflows.Building Breaks, Not BarriersWe began with speed — in payments, decisions, trust, and the way risk travels through all of them. The MSME engine doesn't need to hit the brakes; it just needs to install them. A Chartered Accountant's role is not to ask for new software, but to embed friction that protects:Maker-checker steps on approvalsWeekly or monthly reconciliation alertsA simple prompt before UPI vendor payoutsMonthly pattern checks in payrollThese micro brakes prevent macro losses. Professionals provide the missing friction in the compressed ecosystems of MSMEs, where the same person often approves, disburses, and reconciles. Fraud prevention, in this context, is a design language — knowing when and where to pause so you don't crash later.ReferencesHaugh, N., Sethi, P., & Leroux, J. (2023, February). No Reward Without Risk: Addressing the Economic Impacts of Misinformation and Other Digital Harms on MSMEs.LiveMint. (2023, October 12). Export firm accountant booked for ₹10 crore GST fraud. livemint.comThe Economic Times. (2023, September). Fake Input Tax Credit racket using dummy MSME units. economictimes.indiatimes.comSinha, P. (2022). The Digital Evolution of MSMEs in India: Risks and Safeguards. Journal of Financial Compliance, 9(3), 45–56.RBI. (2023). Report on Digital Lending and Fintech Governance. rbi.org.inGovernment of India. (2024, July). Udyam Registration Statistics. Ministry of MSME. udyamregistration.gov.inMulakala, A., Cute, B., & Ogee, A. (2024, October 22). From vulnerability to resilience: Safeguarding MSMEs from cyberattacks. The Asia Foundation.Staysafeonline. (n.d.). Data Security – MSME vulnerabilities. staysafeonline.inAuthors may be reached at eboard@icai.in · The Chartered Accountant, June 2026, pp. 43–48 · www.icai.org
Theme
Ep. 10 — MSMEs as Catalysts of Industrial Growth, Employment, and Innovation in India
CA Journal
· June 2026
00:00
--:--
MSMEs as Catalysts of Industrial Growth, Employment, and Innovation in IndiaMSMEs are the true catalysts of the economy today. They are driving to industrial growth, employment generation, innovation, and regional development in our diverse nation. This article entails contribution and innovation brought in by the top 4 manufacturing industries - Textiles, Food Processing, Pharmaceuticals, and Auto Components. Collectively, these 4 industries contribute over 48 million jobs in the country. Each sector refl ects a growing culture of innovation: from sustainable textile production and millet-based food products to advanced pharmaceutical formulations and EV-ready auto components. These enterprises are increasingly leveraging automation, IoT, and digital systems to sharpen their competitive edge. Government initiatives that are fueling the growth of MSMEs in these industries include SAMARTH, PM MITRA, PMFME, PLI, and FAME II. If the administration continues to provide support to the MSMEs through policy & fi nancial support, technological, infrastructure and skill development, then it will lead India to be the global leader in almost all industries.IntroductionThe Micro, Small and Medium Enterprises (MSME) sector plays a vital role in India's economic development by contributing to industrial growth, employment generation, innovation, and regional development. MSMEs have been recognized as the backbone of the Indian economy, strengthening the manufacturing sector, encouraging entrepreneurship, and promoting regional development — though the adequacy and effectiveness of institutional support mechanisms continue to remain areas of discussion.Contribution, Growth Trends, and Government Schemes in MSME Sectoral DevelopmentMSMEs represent a diverse ecosystem of businesses, generally classified into three categories based on business activity: Manufacturing, Service, and Trading. This classification provides a structured framework for analysing growth trends, investment requirements, employment generation, sector-specific challenges, and specialised government schemes available to facilitate growth.Manufacturing UnitsManufacturing MSMEs play a crucial role in industrialization and economic expansion. This sector is also a major source of employment, particularly for semi-skilled and skilled workers. The following sections examine the impact, innovation, and industry-specific government incentives across four key manufacturing industries.1. Textile Manufacturing UnitsIndia's textile industry employs over 45 million people and contributes 2.3% to GDP, 13% to industrial production, and 12% to total exports. MSMEs dominate this sector, accounting for nearly 80% of textile capacity — especially in handlooms, powerlooms, and garment manufacturing."India is currently a global leader in the textile market and is expected to retain this position, due to the combination of a strong MSME foundation and India's rich heritage in traditional handicrafts, abundant raw material base including cotton and silk, and well-established global supply chains."Innovations in the Textile IndustryTextile MSMEs are increasingly adopting GOTS (Global Organic Textile Standard) certification, recycled polyester fibre manufacturing from waste PET bottles, eco-friendly dyeing technologies, and sustainable fabric production such as certified organic cotton or bamboo clothing. Many units are adopting digital printing, automated cutting/stitching machines, IoT-enabled looms, water recycling systems, zero-liquid- discharge technologies, and energy-efficient machines — alongside smart fabrics like no-iron shirts, customized small-batch production, and recycling old clothes into bags and accessories, generating rural employment.Central Government InitiativesA. SAMARTH Scheme (Scheme for Capacity Building in Textile Sector)Nature of Assistance: Financial assistance for skill development and capacity building through training, certification, and placement-linked skilling across handloom, handicrafts, jute, and sericulture.Who Can Apply: Textile manufacturing units, industry associations, NGOs, training institutes, start-ups with training infrastructure and placement tie-ups.How to Apply: Through the Ministry of Textiles and empanelled implementing agencies.B. PM MITRA (Pradhan Mantri Mega Integrated Textile Region and Apparel) SchemeNature of Assistance: Financial support for developing large textile parks, infrastructure, and common facilities through state implementing agencies and SPVs.Who Can Apply: State Governments, textile manufacturers, private investors, and industrial units in PM MITRA parks across Tamil Nadu, Telangana, Gujarat, Karnataka, Madhya Pradesh, Uttar Pradesh, and Maharashtra.How to Apply: Through the Ministry of Textiles or respective State-level agencies.C. Technology Upgradation Fund Scheme (ATUFS)Nature of Assistance: Capital subsidy for purchase of new machinery and technology in textile manufacturing.Who Can Apply: Existing textile MSMEs — spinning, weaving, garment, and processing units.How to Apply: Via the i-TUFS (ATUFS) Online Portal and notified lending banks.ParticularsWebsite LinkMinistry of Textiles (MoT)texmin.gov.inSAMARTH Official Portalsamarth-textiles.gov.inDirectorate of Handloomshandlooms.nic.inDevelopment Commissioner (Handicrafts)handicrafts.nic.inCentral Silk Boardcsb.gov.inCentral Wool Development Boardwoolboard.nic.inTable 1: Empanelled Implementing Agencies (SAMARTH)State / AuthorityWebsite LinkMinistry of Textiles (Central)texmin.gov.inTamil Nadu — SIPCOT (Virudhunagar)sipcotweb.tn.gov.inTelangana — TSIIC (Warangal)tsiic.telangana.gov.inGujarat — GIDC (Navsari)gidc.gujarat.gov.inKarnataka — KIADB (Kalaburagi)kiadb.inMadhya Pradesh — MPIDC (Dhar)invest.mp.gov.inUttar Pradesh — Invest UP (Lucknow)invest.up.gov.inMaharashtra — MIDC (Amravati)midcindia.orgTable 2: State-Level Agencies Managing PM MITRA ParksATUFS Major Lending Banks: State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, Bank of India, Indian Bank, IDBI Bank, Central Bank of India, Indian Overseas Bank, UCO Bank, Punjab & Sind Bank, and SIDBI. (Portal: itufstxcindia.gov.in)2. Food Processing Manufacturing UnitsThe entire food processing industry of India employs about 1.7 million people directly, and MSMEs contribute over 70% of total processing units nationwide. The sector supports agriculture's transition to value-addition and improves farmer incomes through modern supply chain systems.Innovations in Food ProcessingFood processing MSMEs are adopting certified organic sourcing, eco-friendly packaging, and modern milling technologies, along with cold-chain logistics, automated sorting and grading systems, dehydration and preservation technologies, millet-based and functional food production, and hygienic processing units. Notable innovations gaining market attention include dehydrated home-cooked meals for Indian students abroad, healthier millet cookies, and the return of low-glycaemic-index traditional foods like khapli atta and red rice. GI tags from DPIIT are also helping regional products like Kalari cheese from Udhampur, J&K gain recognition and build export-ready supply chains.Central Government InitiativesA. Operation Greens SchemeNature of Assistance: 35%–70% subsidy for food processing and storage infrastructure for Tomato, Onion & Potato (TOP) and other perishables, plus 50% subsidy on transportation and storage.Who Can Apply: FPOs, MSMEs, food processing units, cooperatives, logistics operators, and agri-entrepreneurs.How to Apply: Online via the SAMPADA Portal (sampada.gov.in) by submitting a Detailed Project Report (DPR).B. PM Formalization of Micro Food Processing Enterprises (PMFME) SchemeNature of Assistance: Credit-linked subsidy of 35% of project cost (up to ₹10 lakh per unit), plus branding, marketing, and training support.Who Can Apply: Individual micro food processing entrepreneurs, SHGs, FPOs, and cooperatives.How to Apply: Online via the PMFME portal (pmfme.mofpi.gov.in) or State Nodal Agencies.C. Credit Linked Capital Subsidy for Technology Upgradation (CLCS-TUS)Nature of Assistance: 15% capital subsidy on institutional finance for machinery and technology purchases.Who Can Apply: Existing MSME manufacturing units, including food processing industries.How to Apply: Through banks and financial institutions — SIDBI, NABARD, SBI, Bank of Baroda, PNB, Bank of India, Canara Bank, Indian Bank, Corporation Bank, Andhra Bank, and TN Industrial Investment Corporation.3. Pharmaceuticals Manufacturing UnitsThe Indian pharmaceutical industry was valued at US$50 billion in FY 2023-24 and is projected to reach US$130 billion by 2030, positioning India as the "pharmacy of the world." As the 3rd largest producer globally, India supplies 20% of generic medicines worldwide, and MSMEs contribute 35–40% of industry output, particularly in APIs, generics, and intermediates. India hosts over 500 USFDA-approved facilities and 2,000+ WHO-GMP certified units.Innovations in PharmaceuticalsPharmaceutical MSMEs are adopting WHO-GMP-compliant manufacturing, advanced formulation technologies, biotechnology-based processes, and contract manufacturing systems to produce complex generics, oncology drugs, and special formulations. They are diversifying into vitamin gummy bears, multivitamin patches, and rare disease drugs, often with incubator support focused on genetic disease, autoimmune diseases, cancer, drug research and development, and stem cell research.Central Government InitiativesA. Production Linked Incentive (PLI) Scheme for PharmaceuticalsNature of Assistance: Financial incentives based on incremental sales of eligible pharmaceutical products over a fixed period.Who Can Apply: Pharmaceutical manufacturing companies, including eligible MSMEs in drug and bulk drug production.How to Apply: Online via the Department of Pharmaceuticals portal (pharma-dept.gov.in).B. Credit Linked Capital Subsidy Scheme (CLCS-TUS)Nature of Assistance: 15% capital subsidy on investment in eligible plant and machinery.Who Can Apply: Existing pharmaceutical MSMEs seeking modernization or technology improvement.How to Apply: Through banks and financial institutions under the CLCS-TUS scheme.4. Auto Components Manufacturing UnitsIndia's auto component industry contributes 2.3% to GDP and directly employs over 1.5 million people. In 2024, turnover reached ₹6.14 lakh crore (US$74.1 billion), with domestic OEM supplies comprising 54% and exports accounting for 18%. MSMEs support India's automotive manufacturing ecosystem through forging, casting, machining, and aftermarket auto components."India's auto component industry contributes 2.3% to GDP and directly employs over 1.5 million people. In 2024, turnover of the industry reached ₹6.14 lakh crore (US$74.1 billion) with domestic OEM supplies comprising 54% and exports accounting for 18%."Innovations in Auto ComponentsAuto component MSMEs are adopting CNC machining, robotic-assisted manufacturing, 3D printing, and IoT-enabled production systems to manufacture precision components. Many units are developing EV components and export-quality lightweight materials, alongside quality control and supply chain management software, improving production speed, reducing material wastage, and supporting entry into EV supply chains.Central Government InitiativesA. ASPIRE SchemeNature of Assistance: Financial support for setting up Livelihood Business Incubators (LBIs) and Technology Business Incubators (TBIs), plus training and innovation grants.Who Can Apply: Government institutions, NGOs, technical institutes, incubation centers, and MSMEs.How to Apply: Through the Ministry of MSME (aspire.msme.gov.in) by submitting incubation project proposals.B. FAME II SchemeNature of Assistance: Financial incentives for electric vehicles, EV components, and charging infrastructure development.Who Can Apply: EV manufacturers, component manufacturers, transport agencies, and MSMEs in the EV supply chain.How to Apply: Through the Ministry of Heavy Industries (fame2.heavyindustries.gov.in) as per FAME II guidelines.ConclusionMSMEs continue to play a vital role in India's economic growth through employment generation, industrial development, innovation, exports, and entrepreneurship. With increasing adoption of technology, sustainable practices, and government support initiatives, the sector holds strong potential for future growth. Continued policy support, easier access to market and finance, and infrastructure development will further strengthen MSMEs and enhance India's global competitiveness.ReferencesMinistry of Micro, Small and Medium Enterprises (MSME): msme.gov.inMSME Connect: msme.gov.in/sites/default/files/MSME-Connect.htmUdyam Registration: udyamregistration.gov.inMinistry of Textiles: texmin.gov.inMinistry of Food Processing Industries (MoFPI): pmfme.mofpi.gov.inSAMPADA Portal: sampada.gov.inDepartment of Pharmaceuticals: pharma-dept.gov.inKhadi and Village Industries Commission (KVIC): kviconline.gov.inArticle by CA. Neha Agarwal, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: nehaagarwal.1717@gmail.com | eboard@icai.in
Corporate Finance
Ep. 11 — Mergers and Acquisitions: Transforming the Global Business Landscape 2026-2030
CA Journal
· June 2026
00:00
--:--
Mergers and Acquisitions: Transforming the Global Business Landscape 2026–2030M&A has evolved from a growth tool to a strategic necessity in today’s globalized market. The 2026– 2030 period will see transformative shifts driven by technology, regulatory reforms, and sustainability. This article examines M&A’s history, current trends, and future outlook, with emphasis on India’s rising prominence, the role of Chartered Accountants, and sectoral opportunities and challenges ahead.Historical Context of M&ASince 1996, India has recorded over 28,500 M&A deals with a cumulative value exceeding $1.06 trillion. In 2025 alone, deal value rose sharply to around $60.2 billion, with transaction volumes reaching 960+ deals, reflecting a strong rebound in high-value activity despite a relatively stable deal count.28,500+M&A deals in India since 1996$1.06TCumulative deal value since 1996$60.2B2025 deal value960+2025 transaction volumeTechnological TransformationTechnological innovation, particularly AI, blockchain, and digital tools, is a major driver of M&A. AI is transforming the process by streamlining operations, enhancing due diligence, automating tasks, and accelerating data analysis. In the IT sector, AI-driven M&A is rising, with generative AI projected to be used in 80% of M&A processes within three years, up from 16% today.Landmark M&A Deals (2020–2025)DealValueSectorStrategic RationaleMarket ImpactTesla – Maxwell Technologies (2019)$218MAutomotive & Energy StorageStrengthened Tesla's vertical integration in battery innovation.Enhanced potential for higher energy density and lower cost EV batteries.Amazon – MGM Studios (2021)$8.45BMedia & EntertainmentContent-driven acquisition to build scale in the attention economy.Bolstered Amazon Prime Video's library, including iconic IPs like James Bond, for subscriber retention in OTT wars.Microsoft – Activision Blizzard (2022)$68.7BTechnology & GamingA historic gaming deal giving Microsoft scale in gaming and future-ready access to the metaverse ecosystem.Triggered global competition concerns (US, UK, EU regulators). Cemented Microsoft's position vis-à-vis Sony and Tencent.AMD – Xilinx (2022)$35BSemiconductorsPortfolio diversification beyond CPUs/GPUs into adaptive computing and FPGAs.Elevated AMD as a full-stack semiconductor player competing with Intel and NVIDIA across HPC and AI workloads.Pfizer – Arena Pharmaceuticals (2022)$6.7BPharmaceuticalsPipeline strengthening in immuno-inflammatory drugs, complementing Pfizer's R&D-led growth.Accelerated Pfizer's diversification beyond vaccines into chronic-care therapeutics.Oracle – Cerner Corporation (2022)$28.3BHealthcare ITEntry into healthcare data systems, leveraging Oracle's cloud expertise to digitize health records.Convergence of tech + healthcare signaled digital health's rise as a core growth frontier.Reliance – Disney Merger (2024, Completed)$8.5BMedia & EntertainmentConsolidation of Star India, Viacom18, JioCinema & Hotstar into JioHotstar, combining TV, digital & sports under one platform.Commands 120 TV channels, 280M subscribers, >85% OTT share, 50% TV viewership; IPL rights drive mass user engagement.Tata Motors – Iveco (2025)$4.4–4.5BCommercial Vehicles BusinessExpands Tata Motors globally with access to Europe and Latin America via Iveco Group; accelerates entry into EV and hydrogen technologies; drives scale efficiencies.Enhances global positioning and investor sentiment; increases competitive pressure in the CV market; short-term leverage concerns but positive long-term outlook.Sectoral Analysis of Landmark DealsSectorKey DriversNotable DealsTechnologyCloud computing, AI, cyber security, and semiconductor advancementsMicrosoft–Activision, AMD–Xilinx, Oracle–CernerHealthcare and PharmaceuticalsDevelopment of vaccines, immunology, and healthcare ITPfizer–Arena Pharmaceuticals, Oracle–CernerMedia and EntertainmentCompetition among streaming platforms, global content demandAmazon–MGM Studios, Reliance–DisneyRenewable EnergyClean energy mandates, carbon neutrality goalsTesla–Maxwell TechnologiesImplications of Recent DealsMarket Transformation: These transactions reshaped competitive landscapes, creating opportunities for growth while intensifying competition.Regulatory Challenges: Deals faced scrutiny, particularly in technology and media, over antitrust concerns and data privacy issues.Strategic Realignments: Companies increasingly focused on vertical integration and technological synergies to drive innovation and efficiency.Thus, the landmark M&A deals between 2020–2025 underscored consolidation as a key strategy for overcoming challenges and seizing opportunities, driving innovation, transformation, and shaping the future of global business.The 2025 Performance and Projections for 20262025 OverviewIndia's M&A market witnessed a strong rebound in 2025, with total deal value reaching approximately $60 billion, reflecting robust growth driven by high-value transactions. While overall deal volumes remained relatively stable, the surge in billion-dollar deals significantly boosted aggregate value. The year was marked by increased domestic consolidation and renewed inbound interest, particularly in infrastructure, BFSI, and technology sectors.Projections for 2026Looking ahead, India's M&A market is expected to maintain positive momentum, with transaction values projected in the range of $65–75 billion, supported by improving capital availability and strategic consolidation trends. Key drivers include:AI & Digital Expansion: Continued investments in AI, cloud, and digital platforms driving strategic acquisitions.Infrastructure & Energy Push: Ongoing focus on renewables, logistics, and core infrastructure assets.Private Equity Momentum: Sustained recovery with increased dry powder deployment and platform-building strategies.Regulatory Stability: Policy continuity and ease of doing business supporting both domestic and cross-border transactions.Notable Deals Driving MomentumA. Mankind Pharma's Acquisition of Bharat Serums & VaccinesBelow is a comparative snapshot of Mankind–BSV (2024) vs. Pfizer–Arena Pharma (2022), wherein we can see how Indian pharma M&A trends are converging with global benchmarks.AspectMankind Pharma – BSV (2024)Pfizer – Arena Pharma (2022)Deal ValueINR 13,768 Cr (USD 1.65 Bn)USD 6.7 BnStake Acquired100%100%Funding StructureMix of internal accruals + debt (NCDs & CPs); equity raise plannedAll-cash transactionPrimary FocusWomen's Health, Fertility, Critical Care, ImmunoglobulinsImmuno-inflammatory diseasesStrategic SignificanceMakes Mankind a leader in women's health & fertility in India with access to high entry barrier, niche therapiesStrengthens Pfizer's pipeline in autoimmune & inflammatory diseases and expands innovative medicine portfolioR&D & InnovationIn-house complex biologics, recombinant platforms, niche critical care productsCutting-edge R&D in immuno-inflammatory drugsGeographic ScopeIndia leadership + expansion in global fertility/IVF marketsGlobal R&D and market integration, especially US & EUFinancial ImpactEBITDA-margin accretive, Net Debt/EBITDA target <2x by FY26Long-term growth through new drug pipelineWorkforce Integration2,500+ BSV employees added to MankindArena fully absorbed into Pfizer's global R&D and commercial structureComparison: Mankind–BSV (2024) vs. Pfizer–Arena Pharma (2022)Key insights:Indian M&A catching up to global pharma scale: While smaller in value than Pfizer's mega-deal, Mankind's acquisition is huge by Indian standards, reflecting increasing consolidation in specialty pharma.Focus areas diverge but are complementary: Pfizer bet on the future drug pipeline in autoimmune diseases and immunology, while Mankind consolidates existing leadership in women's health, fertility & critical care, while gaining biologics R&D.Market Impact: Pfizer's deal was pipeline-driven, betting on future blockbuster drugs; Mankind's deal is portfolio-driven, strengthening current market dominance plus future innovation.B. ACC–Ambuja Cement's Acquisition of Penna CementTransaction OverviewAcquirer: Ambuja Cements Ltd. (subsidiary of Adani Cement)Target: Penna Cement Industries Ltd. (PCIL)Stake Acquired: 100%Enterprise Value: ₹10,422 CroreCompletion Date: 16 August 2024Deal Type: Strategic acquisition to expand production capacity and geographical presenceStrategic RationaleCapacity Expansion: Adds 14 MTPA capacity; supports Ambuja's goal to achieve 140 MTPA capacity by FY2028, representing 16% CAGR growth (current 77.4 MTPA).Market Presence: Strengthens footprint in Southern & Eastern India where Ambuja had weaker presence; provides sea-route access to Sri Lanka via Penna's bulk cement terminals (BCTs).Resource Advantage: Access to ample limestone reserves ensuring long-term raw material security; surplus clinker from Jodhpur unit can support additional 3 MTPA grinding capacity; enhances economies of scale in production, logistics, and procurement.Adani Group's Cement StrategyMarket Share Goal: Capture 20% of India's cement market (currently the second largest after UltraTech Cement).Recent Investments: ₹1,600 crore invested in a new grinding unit in Bihar.M&A Pipeline: Nearly $3 billion earmarked for acquisitions. Potential targets include Gujarat's Saurashtra Cement, Jaiprakash Associates' cement business, and Vadraj Cement.ParameterAdani CementUltraTech CementCurrent Capacity (FY24)91.4 MTPA (Ambuja 77.4 + Penna 14 MTPA, incl. under-construction)138.0 MTPATarget Capacity (FY28)140 MTPA160 MTPA+ (aggressive expansions announced)Market Share (India)15% (aiming 20% by FY28)23% (market leader)Geographical PresenceStrong in North, West, Central; now expanded to South & East via PennaPan-India coverage, especially strong in South & EastStrategic AssetsPenna's Bulk Cement Terminals enabling coastal logistics & exports to Sri Lanka; ample limestone reserves; 18 integrated plants + 18 grinding units23 integrated plants + 29 grinding units; strong RMC and white cement portfolio; pan India distributionRecent Investments₹10,422 Cr for Penna Cement acquisition; ₹1,600 Cr grinding unit in Bihar; $3 Bn earmarked for further M&AContinuous capex for brownfield expansions; strong focus on renewable & energy efficiencyParent Group StrategyVision: 20% market share by FY28, capacity-led aggressive growth, debt-light strategyVision: Retain first position in leadership; expand into green cement & global marketsCompetitive EdgeFastest-growing player with M&A-led expansion; coastal export potential via Penna's BCTs; backed by Adani infra ecosystemScale advantage & brand leadership; extensive retail & RMC presence; established global credibilityComparison: Adani Cement (Ambuja + ACC + Penna) vs. UltraTech Cement (Aditya Birla Group)Key Hurdles and Legal Challenges in M&A: Role of CAsMergers and Acquisitions are intricate transactions with significant regulatory, financial, and operational challenges. Chartered Accountants play a pivotal role by ensuring compliance, structuring finances efficiently, mitigating risks, and coordinating with legal advisors.1. Regulatory Compliance ChallengesDomestic Transactions:Corporate Laws: CAs must ensure compliance with local laws such as the Companies Act, 2013, which governs shareholder approvals, disclosures, and post-merger filings.Sectoral Regulations: Industries such as banking, defense, and telecommunications are subject to additional regulatory scrutiny, requiring prior approvals.Competition Law: Approval from authorities like the Competition Commission of India (CCI) is essential to prevent anti-competitive practices.Cross-Border Transactions:Foreign Exchange Laws: Adhering to laws such as the Foreign Exchange Management Act in India is critical for cross-border transactions.Antitrust Approvals: M&A deals often require multi-jurisdictional antitrust reviews, such as those by the European Commission or the US Federal Trade Commission.Tax Treaties: Structuring deals to leverage Double Taxation Avoidance Agreements (DTAAs) while minimizing tax exposure is a key challenge.2. Taxation HurdlesDomestic Transactions:Capital Gains Tax: Analyzing and optimizing tax liabilities on the transfer of assets and shares are essential.Stamp Duty: Stamp duties on asset transfers vary across states and can significantly impact transaction costs.Cross-Border Transactions:Withholding Taxes: Ensuring compliance with withholding tax regulations on cross-border payments like royalties or dividends.Transfer Pricing: Accurate valuation of cross-border transactions to comply with transfer pricing regulations and avoid disputes.Tax Jurisdiction Conflicts: Identifying the jurisdiction for taxing income and gains is often contentious in international deals.3. Due Diligence ComplexitiesDomestic Transactions:Financial Review: Ensuring accuracy of financial statements, contingent liabilities, and compliance with domestic accounting standards.Disclosure Norms: Adhering to regulatory disclosure requirements to avoid penalties or delays.Cross-Border Transactions:Diverse Standards: Reconciling varying accounting and legal standards across jurisdictions.Language Barriers: Translating and interpreting financial and legal documents from foreign languages accurately.4. Legal and Structural HurdlesCultural and Governance Differences: Aligning corporate governance and cultural practices in cross-border deals.Sanctions and Trade Barriers: Avoiding deals with entities in sanctioned jurisdictions or industries.Intellectual Property (IP) Risks: Ensuring seamless transfer and protection of intellectual property rights (IPR).5. Securities and Disclosure RegulationsTakeover Code Compliance: Public company acquisitions require adherence to laws like SEBI (SAST) Regulations in India.Insider Trading Laws: Preventing misuse of confidential information during the transaction process.Disclosure Obligations: Accurate and timely reporting to regulators and stakeholders.6. Labor and Employment LawsEmployee Benefits Harmonization: Aligning employee contracts, pensions, and benefits across merging entities.Workforce Relocation: Addressing visa and immigration challenges in cross-border workforce integration.Jurisdiction-Specific Protections: Compliance with worker protection laws, including mandatory consultations in some jurisdictions.7. Data Protection and Privacy LawsGDPR Compliance: Ensuring compliance with the EU's General Data Protection Regulation (GDPR) in cross-border transactions.Data Localization Laws: Adhering to jurisdiction-specific data residency requirements.8. Emerging ChallengesESG Compliance: Integrating Environmental, Social, and Governance factors into M&A processes is becoming increasingly important.Technological Integration: Merging IT systems and ensuring cyber security in the newly formed entity.Litigation Risks: Managing disputes arising from breach of warranties or misrepresentation.Major post-integration risks include operational alignment (harmonizing operational systems and processes), repatriation of profits (addressing restrictions on profit repatriation to parent jurisdictions), and environmental compliance (addressing liabilities for past environmental violations of the target company).Emerging Trends Shaping M&A (2026–2030)Sustainability and Clean Energy: M&A activity in clean energy is expected to accelerate, driven by government initiatives to achieve 500 GW of clean energy capacity by 2030. Companies are increasingly focusing on ESG criteria as a cornerstone of their growth strategies.Digital Transformation: The integration of AI, blockchain, and IoT is reshaping industries, creating opportunities for technology-driven mergers.Healthcare and Pharmaceuticals: Post-pandemic, the healthcare sector has witnessed consolidation, with companies focusing on innovation and expanding their product portfolios.Infrastructure and Real Estate: The construction boom and urbanization trends in emerging markets have sparked significant M&A interest, with companies leveraging deals to access prime locations, streamline supply chains, and capitalize on smart city projects.The Role of Chartered Accountants (CAs) in M&A: Opportunities and ServicesStrategic Planning and AdvisoryIdentify potential targets aligned with industry trends and goals.Advise on deal structures (asset/share purchases, JVs).Conduct market research to assess competitiveness and growth prospects.Valuation and Financial ModelingPerform valuations (DCF, Comparable Companies, Precedent Transactions).Build financial models to forecast performance and synergies.Tax Structuring and OptimizationStructure deals to minimize tax liabilities and ensure compliance.Use tax treaties to avoid double taxation and optimize cash flows.Due Diligence ServicesCarry out financial, legal, and operational due diligence.Verify financial statements and uncover risks or compliance gaps.Regulatory Compliance and Risk ManagementEnsure compliance with corporate, tax, and securities laws.Manage approvals from regulators (e.g., competition authorities).Transaction Support ServicesAssist in negotiating deal terms, warranties, and indemnities.Draft financial sections of shareholder and regulatory filings.Post-Merger Integration (PMI)Align accounting systems, reporting, and processes.Track achievement of synergies and financial targets.Audit and Assurance ServicesProvide assurance on financial disclosures and reporting standards.Conduct special audits for acquisition-related statements.Advisory on ESGIntegrate ESG factors into M&A to create long-term value.Guide sustainability reporting and ESG compliance.Technological Integration and Cyber SecuritySupport IT and digital system integration.Ensure robust cyber security during and post-deal.Thus, the roles of CAs are pivotal in M&A, offering expertise across strategy, finance, compliance, and integration. Their role ensures smooth execution, risk management, and value creation, making them indispensable in today's complex deal environment.Observational Insight (2025)Technology, infrastructure, and financial services dominated deal value concentration.Mega-deals ($10B+) largely driven by scale, AI capability, and infrastructure control.Increasing cross-border strategic acquisitions, especially from emerging markets like India.Sector-wise Share of M&A Deals (Volume, 2025–26 est.)SectorApprox. ShareIT / Technology24%Industrials / Manufacturing15%Utilities / Power / Renewable13%Healthcare / Pharma10%Financial Services / Insurance9%Consumer Goods / FMCG8%Telecom / Infrastructure7%Others (incl. gaming, retail, energy)14%Future Outlook (2030 Projections)Global M&A is set to grow strongly, led by clean energy, technology, and healthcare. India is expected to emerge as a global hub for strategic investments with exponential M&A growth.Key Trends:Rise in cross-border collaborations.Stronger focus on sustainability and ESG.Expansion of private equity and venture capital in early-stage firms.ConclusionM&A will remain central to corporate growth and innovation, with India's dynamic market, supported by regulatory reforms and proactive policies, playing a pivotal role in global economic progress through 2026–2030.ReferencesBain & Company. "Looking Back: M&A Report 2025." Retrieved from: bain.comReuters. "Law Firms Rode Uneven M&A Wave as Big Deals Surged in 2024." Retrieved from: reuters.comFinancial Times. "Dealmakers Bet That Donald Trump Will Fuel Rebound in Megadeals." Retrieved from: ft.comMarketWatch. "Merger Activity is Down 40% from its Peak. Citigroup CEO Jane Fraser Sees a 'Big Unlock' Ahead." Retrieved from: marketwatch.comFinancial Times, India Briefingcfo.economictimes.indiatimes.comAuthor may be reached at canehasedhara@gmail.com and eboard@icai.inThe Chartered Accountant · June 2026 · www.icai.org
Theme
Ep. 12 — Digital Transformation in Public Financial Management: A Report on Governance, Integrity, and Technology
CA Journal
· June 2026
00:00
--:--
Digital Transformation in Public Financial Management: A Report on Governance, Integrity, and TechnologyDigital transformation in Public Financial Management (PFM) has evolved from a technological upgrade to a structural necessity for modern governance. This paper examines the transition toward digital PFM, highlighting its role in addressing a global integrity crisis characterised by annual losses of US $4.5 trillion due to inefficient use of public funds. As of 2025, digital maturity was defined by meaningful participation and integrated platforms, as evidenced by the World Bank's GovTech Maturity Index (GTMI), which reached a global average of 0.589.The transition faces complex challenges, categorised into legal, social, and ethical perspectives. Legally, 'blackbox' algorithms threaten judicial review, necessitating a 'duty of candour' from the state. Socially, a digital divide affecting 2.6 billion people risks exacerbating exclusion, while ethically, the rise of 'dark patterns' undermines public trust. Global case studies, such as Estonia's KSI (Keyless Signature Infrastructure) Blockchain and India's Unified Payments Interface (UPI), demonstrate successful implementations, while failures in Moldova and Toronto underscore the risks of weak oversight and privatized public policy.The article proposes a '3PT' framework — Policy, Process, People, and Technology — to guide future reforms. Key recommendations include re-engineering processes before automation, adopting phased rollouts, and transitioning from reactive monitoring to AI-driven predictive stewardship. Finally, the report emphasises the evolving role of accounting professionals as Digital Integrity Officers, essential for maintaining the 'auditability' of complex digital ledgers and securing the state's fiscal engine room.Public Financial Management (PFM)Public Financial Management (PFM) serves as the engine room of the modern state. It represents the essential operational framework for the collection, allocation, and accountability of public resources, thereby sustaining the social contract between the state and its citizenry (Osuntoyinbo, T. M., 2026).When PFM systems fail, the very foundation of governance erodes. This article seeks to address certain basic issues with regard to the urgent need of transforming PFM using information technology. Digital transformation of PFM is the need of the hour. This article looks at the digitisation and digital transformation aspects in PFM, rather than PFM itself.Imperative for DigitisationThe global community currently faces an integrity crisis of staggering proportions. International Monetary Fund (IMF) models estimate global losses of approximately US $4.5 trillion annually — nearly 5% of the world GDP — due to inefficient use of public funds within public financial systems. About US $1.7 trillion of this loss occurs specifically at the budgetary central government level (IMF, 2023). Traditional paper-based systems are structurally incapable of mitigating these risks as they fail to provide immutable, verifiable audit trails required for professional and democratic oversight. This vulnerability allows for unauthorized adjustments and hidden transactions that manual auditing cannot detect in real-time (Osuntoyinbo, T. M., 2026). Consequently, the transition to digital PFM is no longer an optional upgrade; it is a structural requirement to ensure fiscal stability and public trust."International Monetary Fund (IMF) models estimate global losses of approximately US $4.5 trillion annually — nearly 5% of the world GDP — due to inefficient use of public funds within public financial systems."The Landscape of Government Digital Maturity in 2025As of 2025, digital maturity has evolved beyond simple internet access to focus on meaningful participation — the ability of a state to deliver essential services through integrated, sophisticated platforms. "Governments must work with fintechs, telcos, content providers, and community leaders to scale up infrastructure, access, and support" (Pateriya, S., 2025). The World Bank's GovTech Maturity Index (GTMI) 2025 provides the benchmark for this transition, evaluating 198 economies across four primary pillars: core government systems, public service delivery, digital citizen engagement, and GovTech enablers (World Bank, 2025).The 2025 GTMI data reveals a global average increase to 0.589, up from 0.552 in 2022. However, this progress is marked by a widening gap between Group A (high maturity) leaders and Group D (low maturity) economies (World Bank, 2025). While advanced states are integrating frontier sub-indicators — specifically AI Ethics, Green Tech policies, and Digital Identity — developing nations often struggle with legacy system inertia.Key Issues in Digital TransformationDigital transformation, though a technical task, is invariably hindered by administrative and capacity gaps. The chart below highlights the core technical and non-technical challenges faced during the digitalisation process across regions. Technology isn't meant to be an unbiased instrument; it actively engages with organizational law and social fairness. Executing digital PFM without dealing with these hurdles can lead to risks related to digitizing ineffectuality or aggravating exclusion. It is helpful to resolve these issues not just from a technical standpoint but also from a governance approach.IndicatorStrategic FocusGlobal Status 2025AI Ethics & GovernanceEthical utilization of automated decision-making and bias mitigation.70% of government bodies are currently piloting or planning AI use.Green Tech PoliciesIntegration of environmental sustainability into digital architecture.New sub-indicator; high correlation with Group A maturity.Digital Identity (ID)Seamless authentication using National Digital IDs for public services.Fundamental to the "whole-of-government" approach in leading states.Cloud-Based PFMSecure, interoperable cloud enclaves replacing fragmented legacy servers.Essential for real-time macro-fiscal monitoring and data integrity.Table 1: Digital Maturity Indicators — 2025Source: Synthesized from World Bank GTMI 2025 and IMF Digital Solutions Guidelines (Rivero del Paso et al., 2023).Figure 1: Main Issues or Challenges Faced by PFM IT Systems in 30 CountriesLack of interoperability 27Cybersecurity concerns 20Needs evolved, systems not enough 19Quality of data 11Inconsistent data with other systems 9Rigid reporting 8Remote users lack access 8Slow / cumbersome reporting 7Using internal data is complicated 3Source: Digital Solutions Guidelines for Public Financial Management, IMF Technical Notes and Manuals 2023/007Legal/Administrative PerspectiveAs automation becomes rapidly integrated into government decision-making, 'blackbox' algorithms pose an immediate difficulty to legal obligations. Lord Sales (2025) highlights an intrinsic strain: judicial review depends on comprehending why a conclusion was reached — especially if it was drawn for proper purposes. When AI produces patterns that are indecipherable to humans, it poses a threat to impairment of judgment, where executives unthinkingly make use of algorithmic prompts, significantly hindering their judicial discretion.In order to alleviate this, following Lord Sales' emphasis upon the 'duty of candour' could prove to be helpful. This duty is applicable to the preliminary level of technology execution, necessitating administrative authorities to elucidate the system's logic and possibility of prejudice before legal proceedings. Additionally, if a system is innately impenetrable, the weight of clarification must pivot to the State to establish the system's rightfulness (Sales, 2025).Social PerspectiveThe technological gap continues to be a notable hurdle to engagement. Nearly 2.6 billion individuals continue to be offline (ITU, 2023). Beyond connection, a lack of required skills and a gap in the availability of economical devices bring about new types of alienation. Susceptible individuals often make use of obsolete devices that are no longer compatible with internet banking or subsidy applications. Narrowing this gap demands moving past conventional infrastructure to the collaboration of FinTech and Telecom, employing Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs) to capitalize on abundant public data, e.g. telecom data for credit rating of the financially underserved.Ethical PerspectiveWithin the Indian setting, the rise of dark patterns — manoeuvred UI/UX designs — erode trust. A study of 53 widely-used Indian applications disclosed that 52 amongst them made use of at least one delusive tactic such as interface interference or drip pricing (Law Web, 2025). Such methods result in users getting involved in unexpected financial obligations, endangering the probity of electronic payments.Case Studies: Triumphs and Challenges in Digital TransformationThere have been numerous triumphs and challenges from across the world with regard to digital transformation. A few cases are highlighted here to showcase the approaches required in this regard.Global CasesTriumphsEstonia: Considered the benchmark for data integrity, utilizing KSI Blockchain alongside its X-Road infrastructure. KSI uses 2048-bit public key encryption to create a tamper-proof, distributed validation structure, ensuring no government record can be retroactively manipulated (Access Now, 2019).Singapore: Through its GovTech initiative, Singapore employs a whole-of-government (WOG) approach to AI, using real-time anomaly detection to identify procurement irregularities and compliance breaches, maintaining world-leading integrity scores (Tech.Gov.sg, 2025).ChallengesMoldova: The 2014 billion-dollar bank fraud, where more than 12% of GDP was siphoned through shell companies and fraudulent lending, exposed the catastrophic risks of weak regulatory capacity and lack of digital oversight (Arnold, 2025).Toronto's Smart City Project (Sidewalk Labs): This digital transformation plan was shelved due to concerns over privacy, lack of trust, and the questionable political legitimacy of a private tech company being deeply involved in public policy and data collection (Eom & Lee, 2022).India CasesTriumphsUPI: The Unified Payments Interface is a global leader, processing over 15 billion transactions monthly as of late 2024 (Cornelli et al., 2024), revolutionizing social payment transparency.GIS Mapping for Property Tax in Kanpur: Authorities used GIS mapping to update fiscal cadastres and identify previously unrecorded properties, more than tripling annual revenue from house taxes (Access Partnership, 2018).Aadhaar-Linked Payments: India's biometric ID system authenticates Direct Benefit Transfers (DBT), reducing ghost beneficiaries and saving over US $1 billion in LPG subsidies alone (Access Partnerships, 2018).ChallengesSystemic Exclusion via Aadhaar Biometric Authentication: Poor connectivity and fingerprint registration failures for labourers and the elderly have denied essential PDS food rations, causing severe adversities including starvation (Access Now, 2018).Proliferation of Dark Patterns: Indian digital platforms face consumer protection failures, with 79% of patterns tricking users into surrendering personal data — prompting the government to classify 13 patterns as unfair trade practices (Law Web, 2025).Aadhaar Cybersecurity and Data Privacy Breaches: A centralised database has suffered repeated security failures; UIDAI lacks transparency and treats breach information as a "state secret" (Access Now, 2018)."India utilizes its biometric ID system to authenticate Direct Benefit Transfers (DBT), which has reduced ghost beneficiaries and saved the government over US $1 billion in LPG subsidies alone."Synthesis of Case Learnings & The Way Forward: The 3PT FrameworkDrawing on the analysis of global digital transformation efforts in PFM, the following learnings are structured to enhance quality and mitigate implementation failures, organized around the Policy, Process, People, and Technology (3PT) framework.Policy — The Foundation of IntegrityLegal & Regulatory Realignment: Comprehensive legislation for e-signatures, data privacy, and blockchain records, mandating digital systems as the single source of truth.Sustained Political Will: Major reforms typically take 7–14 years and require political commitment beyond single election cycles.Holistic Reform Programmes: Project framing as Public Expenditure Management reform appeals more to top policymakers than narrow technical modernisation.Process — Designing for EfficiencyProcess Re-engineering (BPR) First: Manual inefficiencies must be re-engineered for comprehensive control before technology deployment.Phased, Test-and-Learn Rollout: Pilots troubleshoot first, manage stakeholder expectations, and demonstrate early integrity dividends.Structured Controls: Systems should capture all transaction stages ex-ante, ensuring no expenditure escapes the digital audit trail.People — Building a Digital CultureEvidence-based Decisions: A shift from discretionary to data-driven decision-making among managers and staff.Talent Acquisition & Retention: Market-based salary scales and specific career paths to prevent loss of IT talent to the private sector.Stakeholder Engagement: Active communication with civil society and the private sector to overcome resistance and build trust.Technology & AI — The Frontier of AutomationAI as a Predictive Tool: Transition from reactive monitoring to predictive analytics that forecast fiscal stress and default patterns.Real-time Anomaly Detection: Machine learning flags duplicate payments, suspicious supplier behaviour, and inflated invoices instantaneously.Modernizing Legacy Systems: Movement toward cloud-native, microservices-based, API-driven architectures.Ethics & Algorithmic Scrutiny: Safeguards against algorithmic bias and judicial review methods adapted for automated decisions.While governments need to leapfrog to bypass paper-based stages, such an approach is effective only if foundational legal and identity frameworks are present. Without these, legacy system inertia causes new digital tools to simply digitise inefficiency, failing to transform the underlying governance.The Role of the Accounting Professionals in PFM Digital TransformationIn the era of AI, the Human-in-the-Loop (HITL) approach is the final safeguard against judgmental atrophy. The accountant's role must evolve from bookkeeper to Digital Integrity Officer and Forensic AI Auditor.Accountants are critical in validating AI-generated audit flags and ensuring that automated decisions comply with business and statutory requirements. Furthermore, the transition to accrual-based accounting — adopted by only 30% of governments as of 2021 — is made feasible by digital transformation through automated reconciliations and real-time data ingestion (IFAC, 2021). Professional accountants are the key drivers of this transition, ensuring the "auditability" of complex blockchain ledgers and maintaining fiscal accuracy."In the era of AI, the Human-in-the-Loop (HITL) is the final safeguard against judgmental atrophy. The accountant's role must evolve from bookkeeper to Digital Integrity Officer and Forensic AI Auditor."ConclusionThe digitisation of PFM is a structural necessity for the modern state. GTMI 2025 data confirms that while progress is being made, the journey is fraught with legal, social, and ethical complexities. Success requires a balanced approach: pairing advanced technologies like KSI Blockchain and AI Auditing with robust compliance mechanisms. By empowering accounting professionals as the vanguard of digital integrity, governments can move from reactive monitoring to a future of predictive, data-driven stewardship, finally securing the state's engine room.Author may be reached at eboard@icai.inReferencesAccess Now (2019) National Digital Identity Programmes: What's Next? accessnow.orgAccess Partnership (2018) Digital Innovation in Public Financial Management (PFM): Opportunities and implications for low-income countries. accesspartnership.comArnold, V. (2025) "Moldova: Consortium of Banks Emergency Liquidity Program, 2014," Journal of Financial Crises, Vol. 7, Iss. 1. elischolar.library.yale.eduCornelli, G., Frost, J., Gambacorta, L., Sinha, S. and Townsend, R. M. (2024) The organisation of digital payments in India — lessons from the Unified Payments Interface (UPI). BIS Papers No 152, pp 61–73. bis.orgEom, S-J. and Lee, J. (2022) 'Digital government transformation in turbulent times: Responses, challenges, and future direction', Government Information Quarterly, 39(2). pmc.ncbi.nlm.nih.govIFAC (2021) The Main Challenges of Public Sector Accounting Reforms and World Bank's Public Sector Accounting and Reporting (PULSAR) Program. ifac.orgInternational Monetary Fund (2023) Costing corruption and efficiency losses from weak PFM systems. PFM Blog. blog-pfm.imf.orgITU (2023) Press Release. itu.intLaw Web (2025) Dark Patterns in India: How Digital Platforms Are Deceiving Consumers and What Can Be Done? lawweb.inOsuntoyinbo, T. M. (2026) 'Building Trust in Public Finance: Digital Transformation and Financial System Integrity in Government', IRE Journals, 9(8), pp 625–643. doi.orgPateriya, S. (2025) 'Digital divide in 2025: Where we stand & what's widening the gap', NuovoPay. blog.nuovopay.comRivero del Paso, L., Pattanayak, S., Uña, G. and Tourpe, H. (2023) Digital Solutions Guidelines for Public Financial Management. IMF Technical Notes and Manuals 2023/007. imf.orgSales, Lord P. (2025) AI and Public Law: Automated Decision-Making in Government. Keynote Lecture, Government Legal Department's Annual Conference, 5 November. supremecourt.ukTech.Gov.Sg (2025) AI and data driven government. tech.gov.sgWorld Bank (2025) GovTech Maturity Index (GTMI). worldbank.org
Theme
Ep. 13 — From Accounts to Accountability: ICAI’s Role in Public Financial Management
CA Journal
· June 2026
00:00
--:--
From Accounts to Accountability: ICAI's Role in Public Financial ManagementA well-functioning Public Financial Management (PFM) system is what makes government genuinely effective and trustworthy. It governs how public money is raised, allocated, spent and accounted for — and ultimately determines whether fiscal discipline, transparency and public trust can be sustained.As governments shift toward real-time reporting and begin adopting tools such as Artificial Intelligence, the demand for accurate and well-organised financial data keeps growing. That reliability hinges on sound financial reporting. Lasting PFM reform, therefore, isn't just about new technology — it depends on strengthening the underlying systems and processes that protect the integrity of financial data.PFM in India: Progress and GapsIndia's PFM landscape shows real progress alongside ongoing challenges. A solid institutional and legal foundation — reinforced by audit oversight from the Comptroller and Auditor General (C&AG), fiscal discipline under the Fiscal Responsibility and Budget Management Act, and digital platforms like PFMS and Direct Benefit Transfer (DBT) — has helped improve transparency and cut down on leakages.Even so, weak financial reporting and limited capacity at the local level remain persistent obstacles. Recent reform efforts have leaned into transparency, fiscal discipline and outcome-based governance, but lasting impact will require deeper work on financial reporting, accountability and institutional capacity. The 16th Finance Commission is now working to improve how public resources are allocated and used across every tier of government.ICAI's Role in Strengthening PFMAs a partner in nation-building, the Institute of Chartered Accountants of India (ICAI) — through its Public & Government Financial Management Committee (PGFMC) — supports government bodies at every level by improving financial reporting and management practices, building official capacity through training and e-learning, aiding accounting reform implementation, and offering technical guidance.Setting Accounting Standards for GovernmentIndia's government structure operates at three levels — Central, State, and Local Self-Government — and standardisation efforts differ across each.Central and State GovernmentsMost accounting still follows a cash or modified-cash basis, though reforms are underway, most notably the Ministry of Railways' move toward accrual accounting.Under Article 150 of the Constitution, government accounts are kept in forms prescribed by the President on the advice of the C&AG, India's Supreme Audit Institution.The Government Accounting Standards Advisory Board (GASAB), set up by the C&AG's office, develops cash-based Indian Government Accounting Standards (IGAS) and accrual-based Indian Government Financial Reporting Standards (IGFRS).ICAI sits on GASAB and regularly contributes technical input on draft standards and related documents.Local Self-GovernmentRural Local Bodies/Panchayats: follow a cash-based system under the Model Accounting System (MAS), implemented through the e-GramSwaraj platform.Urban Local Bodies: required to use accrual-based accounting under the National Municipal Accounts Manual (NMAM), developed by the Ministry of Housing and Urban Affairs based on an earlier C&AG Task Force report.To bring consistency across local bodies, ICAI has issued 31 Accounting Standards for Local Bodies (ASLBs), modelled on international benchmarks such as the International Public Sector Accounting Standards (IPSAS). These are recommendatory until individual states choose to make them mandatory — Uttarakhand became the first state to revise its Municipal Accounts Manual in line with the ASLBs.ICAI is also part of a newly formed Steering Committee revising NMAM 2.0 under the C&AG's office.Building Government CapacityICAI invests heavily in capacity building through structured training programmes, workshops, vernacular-language webinars, and e-learning content. So far, roughly 3,500 government officials have been trained, including staff from the C&AG's office, the Indian Cost Accounts Service, Tamil Nadu's treasury and accounts department, and urban/rural local bodies across states such as Gujarat, Tamil Nadu, Maharashtra, Uttarakhand, Nagaland, Tripura, Bihar and Punjab.ICAI also runs a recurring webinar series on "Public Financial Management: Key for Growth & Governance," held every alternate Thursday to keep members and stakeholders up to date on PFM developments.3,500 Government officials trained6,000 Registrations for the Panchayat/Municipal accountant course356 Candidates who passed that course3,485 Participants trained via the Certificate Course on Public FinanceCertificate Courses for Local-Body AccountantsWorking with the C&AG's office, ICAI launched a certificate course in 2023 aimed at placing trained accountants in Panchayats and Municipal Bodies, even in remote areas. Several state Urban Development and Panchayati Raj departments now require this course for local-body accounts staff, a meaningful step toward stronger discipline and accountability at the grassroots level.Stakeholder Engagement and PartnershipsICAI maintains an active dialogue with the Ministry of Housing and Urban Affairs, the Ministry of Panchayati Raj, the Ministry of Rural Development, the C&AG's office, and various state government departments, offering technical and advisory support on financial reporting. It also engages with bodies like the National Institute of Public Finance and Policy, the International Public Sector Accounting Standards Board, and the South Asian Federation of Accountants.ICAI Collaborations & Strategic AlliancesCapacity Building Joint Research Technical SupportO/o C&AG of IndiaNational Institute of Urban Affairs (NIUA)Centre of Excellence for Financial Audit (CoEFA, Hyderabad)Mahatma Gandhi State Institute of Public Administration (MGSIPA)Andhra Pradesh Police DepartmentMultilateral Global PartnershipsThe World BankAsian Development Bank (ADB)Primary goal: improving audit quality for Externally Aided Projects (EAPs) in IndiaRecognising Reform: ICAI AwardsTo encourage progress, ICAI presents Awards for Promotion of Accounting Reforms in Local Bodies, recognising local bodies that improve transparency, accountability and the overall quality of their financial reporting.Publications and ResearchICAI regularly publishes material on public finance and government accounting, including a joint study with NITI Aayog on transitioning Urban Local Bodies to accrual accounting, which lays out implementation roadmaps, policy insights and reform strategies.Chartered Accountants can play an important role in Government across accounting, auditing, financial management and policy formulation — ultimately supporting better service delivery and more effective use of public funds.Professional Opportunities for MembersICAI also runs a Certificate Course on Public Finance and Government Accounting, covering government economic policy, budgeting, fiscal tools, public funds, grants, and the accounting systems used across Central, State and Local Bodies. Open to both CA members and government officials, the course is recognised in tenders issued by local bodies and government departments in Maharashtra, Madhya Pradesh and Jammu & Kashmir, and the C&AG's office counts it toward empanelment criteria for CA firms.ConclusionTransparency, accountability and fiscal discipline remain the foundation of effective governance, and strong PFM systems are central to India's progress toward becoming a developed economy. Through capacity building, standards development, institutional partnerships and policy support, ICAI has helped move the conversation from basic accounting toward genuine accountability in public finance — strengthening government officials' financial management capabilities along the way.As India advances its Viksit Bharat vision, ICAI's continued focus on reform aims to support a transparent, resilient and future-ready public financial system.Authors may be reached at cpf_ga@icai.in and eboard@icai.inSource: The Chartered Accountant journal, May 2026 · www.icai.orgContent adapted and reformatted from the original ICAI journal article (May 2026 issue).
Theme
Ep. 14 — The 16th Finance Commission and the Future of Local SelfGovernments in India
CA Journal
· June 2026
00:00
--:--
The 16th Finance Commission and the Future of Local Self-Governments in IndiaIntroductionLocal self-governments, both the Panchayats and the Municipalities, have a long history of existence in India. While the Panchayats have been around since ancient times, the Municipalities too have been governing the urban areas since the 17th century. Recognizing their importance in governing the grassroots level and their primacy in providing basic services, the Constitution of India placed the subject of 'local government' in the State List of the Seventh Schedule. As these institutions did not form part of the formalised government, the transfer of funds and functions had been ad hoc in nature until 1993.With the passage of the 73rd and 74th Constitutional Amendments, 1993, both the Panchayats and the Municipalities got recognition in the book of statute as institutions of self-government, respectively. Consequently, Part IX - The Panchayats and Part IX A - The Municipalities, were inserted in the Constitution containing sixteen and eighteen articles respectively. The State Legislature was made responsible for devolving the functions and finances to these local governments.In general, the related public expenditure incurred by the local governments exceeds the revenue generated by them. Hence, certain arrangements have been made for regular transfers of funds to them. Articles 243 I & Y necessitate every State to constitute, at regular intervals of five years, a finance commission (SFC), and assign it the task of reviewing the financial position of local governments and making recommendations on the sharing and assignment of various taxes, duties, tolls, fees etc. and grants-in-aid to be given to the local governments from the Consolidated Fund of a State. The provision causes stress on state finances.Hence, an amendment was also made in Article 280, through an insertion of sub-clauses (bb) and (c), and mandated the Union Finance Commission (UFC) to suggest "measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities" respectively. Towards this end, devolution of resources from the Union to States and States to Panchayats and Municipalities was considered a necessary requirement. The fact that Article 280 was amended to add clause (3) (bb) & (c) explains that just as the State government has the responsibility under Article 243 (I & Y) to devolve resources to the Panchayats and the Municipalities, the Union government also has a corresponding role and responsibility. It enabled and provided a legal basis for the pass-through of central funds to the local governments, with which the Union has no direct relationship.Union Finance Commission and Local Governments in the PastSince 1993, seven Union Finance Commissions (UFCs) have provided grants-in-aid to local governments. The table below shows grants to local governments by the successive UFCs, in absolute terms and their percentage share in the Union tax divisible pool.UFCPanchayats (Rs. Crore)Municipalities (Rs. Crore)% of Union Divisible Pool10th UFC4,3811,0001.411th UFC8,0002,0000.812th UFC20,0005,0001.213th UFC64,40823,1111.914th UFC2,00,29287,1493.815th UFC2,36,8051,21,0553.216th UFC4,35,2363,56,257—Source: Report of the 15th and 16th Union Finance CommissionsThe 10th UFC, chaired by Shri K. C. Pant, recommended a grant of a) Rs. 100 per capita for the rural population amounting to Rs. 4,381 crore for Panchayats, and b) Rs. 1,000 crore for Municipalities. This share constituted 1.38 percent of the Union divisible tax pool. Subsequently, the 11th UFC, led by Prof. A. M. Khusro and the 12th UFC headed by Prof. C. Rangarajan, made certain allocations as shown above. Each one of them increased the grants by about three times that of the previous allocation.The 13th UFC, led by Dr. Vijay Kelkar, marked a departure from the earlier practice of ad hoc lump-sum grants and introduced a share of the local governments in the Union tax divisible pool i.e., 1.42 percent for Panchayats and 0.51 percent for Municipalities, resulting in a total grant of Rs. 87,519 crore for the period 2010-15. However, the 14th Commission, led by Dr. Y. V. Reddy, reverted to the earlier approach by recommending an ad hoc grant of Rs. 2,00,292 crore for Panchayats and Rs. 87,149 crore for Municipalities.At the beginning, the share of Panchayats in the total local government grants was substantially high, which consistently declined over the years, only to assign increasing importance to Municipalities. The share of Municipalities has risen consistently, from 19 percent in the 10th UFC to a significant 45 percent in the 16th UFC, highlighting the increasing importance to urban governance in the context of urbanisation.Recent Background for the 16th UFCThe 15th UFC, chaired by Shri N. K. Singh, proposed Rs. 2.37 lakh crore for Panchayats and Rs. 1.21 lakh crore for Municipalities during 2021-26. Amid the backdrop of COVID-19, the Commission also recommended special grants of Rs. 70 thousand crore exclusively for primary health care systems. Further, the grants recommended for Municipalities were categorized as: basic grants of Rs. 82.9 thousand crore for smaller cities (<1 million population), and 100 percent performance-linked grants of Rs. 38.2 crore for million-plus cities via a Challenge Fund. It also provided Rs. 8000 crore as performance-based grants for the incubation of new cities, and Rs. 450 crore for shared municipal services. The 15th UFC's total grants, including special grants, accounted for 3.2 percent of the Union's divisible tax pool.The grants for Panchayats and the basic grants for cities other than million-plus cities were to be utilized as follows: 40 percent as untied grants to address local felt needs as per the 11th and 12th schedules (excluding salaries and other establishment costs), 30 percent earmarked for drinking water and water management, and the remaining 30 percent for sanitation, including the maintenance of open defecation free (ODF), solid waste, and faecal sludge management. Performance grants for Municipalities, on the other hand, incentivized service level benchmarks (SLBs) for urban drinking water supply, sanitation, and solid waste management and air quality improvements in larger cities.As part of the eligibility criteria for availing grants, the Commission required states to set up the State Finance Commission (SFC) and follow its recommendations by March 2024, in order to qualify for grants for 2024-25 and 2025-26. Additionally, to strengthen accountability, states were mandated to ensure that Panchayats publish provisional and audited accounts online. However, Municipalities were expected to go beyond this and fix minimum property tax floor rates and improve collection efficiency.Transfers to Local Government by the 16th UFCThe 16th UFC, under the leadership of Prof. Arvind Panagariya, has scaled up allocations to Rs. 4.35 lakh crore for Panchayats and Rs. 3.56 lakh crore for Municipalities for a period of five years commencing April 1, 2026."The grants for Municipalities include targeted support to growth centres through components such as the Urbanisation Premium of Rs. 10 thousand crore and the Special Infrastructure Component of Rs. 56.1 thousand crore."The Urbanisation Premium supports planned rural-urban transitions by helping states in building administrative structures and delivering basic services in expanding urban areas, while the Special Infrastructure Component is aimed at boosting wastewater management systems in 22 cities with populations between 1-4 million.Both rural and urban grants (excluding the share of urban premium and special infrastructure component) are subdivided into basic and performance grants in an 80:20 ratio. Of the basic grant, 50 percent is tied to sanitation and solid waste management, and/or water management; funds can also be utilized toward operation and maintenance expenditure of these items. The remaining 50 percent of the basic grant and the entire performance grant are untied in nature, with a proviso that these cannot be used for salaries or establishment expenses, with a cap of 20 percent on road-related spending.The entry-level conditions for availing basic grants promote better governance through continued reforms such as mandatory audits, regular elections, and the formation of SFC and tabling of its Action Taken Report (ATR) within six months of the submission of the SFC report, thereby improving transparency, accountability, and the overall functioning of the local governments.The performance grant, both for Panchayats and Municipalities, is further split equally between the rural/urban performance component and state performance component. Under the first component, the Commission aims to strengthen fiscal capacity by considering local governments' own source revenue (OSR) performance. Under the second component, it requires states to transfer at least 20 percent of the UFC's basic grant equivalent to local governments from their own sources.Additionally, to access the urbanization premium, states need to merge peri-urban villages into adjoining larger municipalities with a population of at least one lakh and formulate a rural-to-urban transition policy. For the Special Infrastructure Component, municipalities are required to undertake a detailed study in the first year of the award and enter into an MoU with MoHUA and the state government.Focus of UFCs on Good Accounting PracticesSuccessive UFCs have made important recommendations to improve the accounting practices of the local governments. The 11th UFC required the Comptroller and Auditor General (CAG) to supervise the record-keeping and auditing of the local government accounts, with audit reports to be inspected by the designated state legislative committee. The 12th UFC emphasized the need for disaggregated financial data (as per CAG formats) and a modern accounting system and databases.The 13th UFC supported the continuation of CAG guidance over Local Fund Audit Departments (LFADs) and proposed measures to strengthen them. The 14th UFC underscored the need to distinguish between various revenue sources in local government accounts, ensure timely auditing and compilation of accounts, and made the submission of audited accounts — up to two years prior — a condition for eligibility for performance grants for both gram panchayats and Municipalities.The 15th UFC further reinforced these requirements by mandating the online availability of both provisional and audited accounts as a prerequisite for receiving local government grants. This practice has been carried forward in the 16th UFC recommendations. While these reforms have significantly improved transparency, accountability, and the availability of financial information, the 16th UFC notes that there is a lot that remains yet to be completed to assure the obtainability of exact accounts and their audits in a timely manner.ImplicationsA trend towards progressive fiscal transfers to local governments by the successive UFCs since the 73rd and 74th CAAs shows the strengthening of these institutions through a predictable channel of funds. Anchored in the Constitutional amendments, these grants have supplemented the resources of the third-tier of the government, enabling better service delivery and stronger democracy.Allocation of Funds as Tied and Untied GrantsSuccessive UFCs have recommended tied grants to basic services like sanitation, solid waste management, health, drinking water, education, etc., to improve service delivery outcomes. At the same time, untied funds have been provided for the locally felt needs of these governments. Lastly, the 16th UFC has rebalanced the composition of basic grants by moving from the 15th UFC's 60:40 tied-untied ratio to a 50:50 distribution. While this shift increases the share of untied funds, tied grants continue to support essential services. The higher share of untied grants enables local governments to use such funds according to their own priorities and community needs, whether that involves repairing a road, supporting cultural activities, or investing in small-scale infrastructure projects. This flexibility strengthens fiscal decentralisation and enhances their ability to respond effectively to local demands.Revenue Mobilisation EffortsThe 15th UFC recommended performance grants exclusively for the urban sector, requiring Municipalities to set property floor rates in the first year, and ensure that property tax collections grew in line with GSDP in subsequent years for the remaining years of the award period. However, this condition led to fewer states qualifying for grants, with numbers falling from 22 in 2023-24 to 16 in 2024-25, as per MoHUA's submission to the 16th UFC.In contrast, the 16th UFC has suggested performance-linked grants based on the growth in OSR for both Panchayats and Municipalities. Panchayats are expected to increase their OSR annually by a minimum of 2.5 percent in 2027-28, or achieve 2.5 percent annual compound growth over OSR of 2025-26, whichever is lower, subject to Rs. 1200 per household per annum. For Municipalities, the requirement is a 5 percent annual growth, with an emphasis on increasing OSR from all sources, comprising rent earnings, income from holdings, service fees and the like.Accountability and AuditsThe UFCs over the years have emphasized timely preparation and auditing of accounts with oversight by the CAG. Eligibility for performance grants was linked to the submission of audited accounts, compelling compliance. Both the 15th and 16th UFCs have mandated the online publication of provisional and audited accounts, making financial data accessible to the public. These reform measures may result in significantly enhanced transparency and availability of financial data for informed policy-making.Increasing Share of Municipalities"The share of Municipalities has increased steadily from 19 percent in the 10th UFC to 45 percent in the 16th UFC, reflecting India's urban transition and the growing demands on urban infrastructure and governance."The 15th UFC highlighted that India's economic growth depends on well-managed urbanization. It recognised cities as key drivers of growth, investment, and poverty reduction, and stressed the need for better financing and governance of Municipalities. Building on this, the 16th Finance Commission emphasized planned urbanisation through timely identification of emerging urban areas, clear transition policies, and stronger administrative capacity, along with adequate financing and sound planning to improve productivity and liveability.Timely Constitution of SFCThe UFC is required to make transfers to the local governments based on the recommendations of the SFC reports. Since the 73rd and 74th CAAs, the states were expected to constitute their seventh SFC by 2024; however, only six states — Assam, Haryana, Himachal Pradesh, Kerala, Tamil Nadu, and Rajasthan — have done so. This has made it difficult for the UFCs to base their recommendations on the SFC reports.The 15th UFC made the constitution of SFCs and the laying of an explanatory memorandum before the State Legislature a mandatory condition for availing local government grants. The 16th UFC has continued this conditionality and further mandated that the ATR must be tabled in the State Legislature within six months of submission of the SFC report.Impact of Census OperationsThe 16th Census began in April 2026 with the first phase, covering house-listing and housing census, while the main population enumeration is scheduled for February 2027. All the administrative units have been frozen for the period January 1, 2026 to March 31, 2027, including Panchayats and Municipalities, until the census is completed. It is to be noted, however, that the resultant delimitation of constituencies and administrative divisions may affect the disbursal of grants to the local governments. The 16th UFC has not addressed this matter, making it necessary to put arrangements in place to ensure the smooth transfer of funds to these institutions.Conclusion"The 16th Finance Commission, like its predecessors, has supported the local governments through increased allocation with a stronger accountability framework for transparent and responsive governance."However, States have to come forward to comply with the 16th UFC's conditions:Strengthen the institution of SFCConduct regular elections at local levelsPublish annual accounts regularlyEmpower and incentivize the local governments to collect their OSRs efficientlyProvide matching contribution of 20%They also need to meet the preconditions for special grants, such as the urbanization premium and special infrastructure component. With respect to accounts and audit, it is expected that the CAG will provide Technical Guidance and Supervision to the LFADs. Due to these conditions, the state governments will enhance their skills and address the issue of manpower shortage.Notably, Panchayats have advanced in accounts reporting through the eGram Swaraj portal, covering over 2.6 lakh Panchayats. They follow the cash-based Model Accounting System (MAS), which simplifies accounting for all tiers of panchayats, tracks scheme-wise fund flows, and aligns with Union and state government accounts. Building on this momentum, efforts are underway to standardize municipal accounting practices, with the CAG-initiated revision of National Municipal Accounts Manuals (NMAM) 2.0, in consultation with reputed agencies, including the Institute of Chartered Accountants of India (ICAI).Successive UFCs have also recommended raising the ceiling on professional tax from Rs. 2,500 per annum, as prescribed in the Constitution. This ceiling was last revised in 1988 through the sixtieth Constitutional Amendment. Given that nearly four decades have elapsed since the last revision and considering inflation as well as expansion of the tax base, it is imperative to undertake appropriate legislative amendments to enhance the permissible limit to supplement the resources of the local governments.Additionally, an amendment to Article 285 of the Constitution is necessary to enable state and local governments to levy property tax on Union government properties, or at the very least, to recover the cost of local services provided to such properties.All UFCs, except the 14th edition, have recommended grants to local institutions in the tribal areas falling under the Fifth and Sixth Schedules. These grants were designed largely on the lines of Panchayats, with varied approaches. The 16th UFC has also reaffirmed the importance of supporting representative institutions in exempted areas and has recommended state government to make allocations to these areas at par with local governments in other areas. Since the Constitution (125th Amendment) Bill, 2019, is pending in the Parliament, a robust framework for the intergovernmental fiscal transfers to these areas will take time.Author may be reached at vnalok@gmail.com and eboard@icai.inSource: The Chartered Accountant, May 2026, www.icai.org
Theme
Ep. 15 — Can the Urban Challenge Fund enable a Level Playing Field for Unlocking the Indian Municipal Bond Market?
CA Journal
· June 2026
00:00
--:--
Can the Urban Challenge Fund Enable a Level Playing Field for Unlocking the Indian Municipal Bond Market?India's urban population is projected to exceed 52 crore by 2036, demanding massive infrastructure investment estimated at ₹1 lakh crore over two decades. In response, the Union Budget 2025 introduced the Urban Challenge Fund, approved in February 2026. Under the Fund, up to 25% of project expenses for financially viable projects will be met through Central Grants, provided at least 50% of funding comes from commercial sources such as municipal bonds, bank loans, or Public Private Partnerships (PPPs). This article examines whether the Urban Challenge Fund, alongside MoHUA fiscal incentives, Budget 2026, and SEBI's regulatory push, can democratise access to the municipal bond market for all cities, states, and Union Territories.IntroductionIndia's urban population is projected to exceed 52 crore by 2036, intensifying pressure on infrastructure and demanding ₹1 lakh crore in investment over the next two decades. Despite cities contributing over 63% to GDP, their own revenue contribution remains just 1%. Owing to growing service demand and limited financial resources, Urban Local Bodies (ULBs) have increasingly turned to borrowings — a trend that has surpassed the ₹13,364 crore recorded in FY2024 BE and is expected to keep rising. However, as a share of Gross State Domestic Product (GSDP), these borrowings still account for less than 0.05% of GDP, underscoring continued dependence on state transfers.Municipal bonds, especially green and pooled bonds, have emerged as strategic tools, spurred by the SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (last amended August 18, 2023) and MoHUA's fiscal incentives. Yet challenges such as low credit ratings, limited transparency, and poor market depth continue to hinder growth. In response, the Union Budget 2025 introduced the Urban Challenge Fund (UCF), requiring 50% market borrowing to drive reform. Persistent barriers include over-reliance on grants, inadequate financial transparency, compliance burdens, lack of secondary markets, and weak municipal creditworthiness.This article evaluates whether the UCF — launched in Budget 2025 and approved in February 2026 with a ₹10,000 crore allocation for FY 2026–27 — can open the bond market to all states, cities, and UTs as a level playing field, rather than privileging a few financially robust states and cities.About Municipal BondsMunicipal bonds are debt instruments issued by Indian cities to mobilise financial resources for urban infrastructure development — covering water supply, sanitation, solid waste management, transportation, and road networks. They offer a triple advantage: long-term capital for municipalities, support for public goods and services under the Twelfth Schedule of the 74th Constitutional Amendment Act (18 functions), and relatively stable returns for investors, often paired with MoHUA incentives.Between 1995 and 2005, ten municipal corporations collectively raised approximately ₹1,325 crore through tax-free municipal bonds, mainly for roads, water supply, and sewerage. The period 2006–2016 saw a sharp decline in issuances after the withdrawal of tax-free exemption, compounded by substantial central grant infusions that reduced the immediate need for market-based funding. As of 14 March 2026, bonds worth ₹4,240.34 crore have been issued by 29 cities.Types of Municipal BondsMunicipal bonds in India fall mainly into General Obligation (GO) bonds — backed by a municipality's taxing authority and used for non-revenue-generating infrastructure like schools and parks — and Revenue bonds, repaid from income generated by specific projects such as water supply or toll roads, making them riskier but potentially more rewarding. Thematic bonds (green, blue, yellow, brown) further align municipal financing with ESG objectives.Bond TypeThematic CategoryDescriptionTypical Use CasesGreen BondsEnvironment-friendly investmentsProjects with clear climate/environmental benefitsRenewable energy, waste management, energy-efficient buildingsBlue BondsOcean and water conservationWater-sector projects promoting marine ecosystem sustainabilityWastewater treatment, desalination, coastal protectionYellow Bonds (less common)Urban transport & energy efficiencyPublic transport, EV infrastructure, smart gridsMetro rail, clean busesBrown BondsHigh-emission, traditional infrastructureFossil fuel projects, roads, airports (non-green aligned)Highway expansion, fossil power plantsTable 1: Thematic Classification — Green, Blue, Yellow, and Brown BondsEvolution of India's Municipal Bond Market: MoHUA & SEBI ReformsIndia's municipal bond market has evolved over two decades through reform-linked grants, fiscal incentives, and regulatory intervention. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM, 2005) initiated this transformation by linking grants to credit rating reforms. The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities Mission (2015) advanced market-readiness through mandatory credit ratings and disclosures.A major boost came with AMRUT 2.0, offering fiscal incentives of ₹13 crore for every ₹100 crore raised (capped at ₹26 crore per ULB) for a first bond issuance. Subsequent issues attract additional incentives for green bonds (₹10 crore per ₹100 crore raised, capped at ₹20 crore) and yellow bonds (an additional ₹5 crore per ₹100 crore raised) for water, sanitation, and renewable energy projects.Further reforms include MoHUA's CityFinance.in guidelines requiring standardised Audited Financial Statements under a 100-mark performance framework (2020); the Nifty India Municipal Bond Index launched by NSE Indices; SEBI's mandatory Expected Loss (EL) ratings alongside traditional credit ratings; reduction of minimum bond face value from ₹1 lakh to ₹10,000 to widen retail participation; and permission for Foreign Portfolio Investor (FPI) participation.The Union Budget for FY 2026–27 added a further incentive of ₹100 crore for substantial municipal bond issuances of ₹1,000 crore or more, motivating large cities and ULBs to tap capital markets at scale — in addition to the existing AMRUT 2.0 support framework.#CityBond Size (₹ Cr)ROI (%)Date of IssueFinal Redemption1Pune MC2007.5920-Jun-201720-Jun-20272GHMC2008.9016-Feb-201816-Feb-20283Indore MC139.909.2529-Jun-201829-Jun-20284GHMC1959.3814-Aug-201814-Aug-20285Bhopal MC1759.5526-Sep-201826-Sep-20286GVMC (Vizag)8010.0021-Dec-201821-Dec-20287Ahmedabad MC2008.7015-Jan-201915-Jan-20248Surat MC2008.6827-Feb-201901-Mar-20249GHMC10010.2320-Aug-201921-Aug-202910Lucknow MC2008.5013-Nov-202018-Nov-203011Ghaziabad NN1508.1031-Mar-202106-Apr-203112Vadodara MC1007.1524-Mar-202228-Mar-202713Indore MC2448.2520-Feb-202320-Feb-203214Pimpri-Chinchwad MC2008.1528-Jul-202328-Jul-202815Ahmedabad MC2007.9006-Feb-202406-Feb-202916Vadodara MC1007.9005-Mar-202404-Mar-202917Rajkot MC1007.9021-Oct-202418-Oct-202918Agra NN508.1515-Apr-202515-Apr-203219Prayagraj NN508.0702-May-202502-May-203220Varanasi NN508.0109-May-202507-May-203221Greater Chennai Corp2007.9722-May-202521-May-203522Pimpri-Chinchwad MC2007.8504-Jun-202504-Jun-203023Gandhinagar MC257.6523-Jun-202523-Jun-203024Bhavnagar MC258.0028-Oct-202528-Oct-203025Surat MC2008.0014-Oct-202513-Oct-203026Nashik MC2007.8025-Nov-202525-Nov-203027Tirupur Corp1008.5008-Jan-202621-May-203528Coimbatore MC150.858.2923-Jan-202627-Jan-203029Greater Chennai Corp205.597.9509-Jan-202601-Sep-203630Tiruchirappalli City MC1008.5006-Feb-202606-Feb-2036Total4,340.34 Table 2: Status of Municipal Bond Issuance After SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2023Source: sebi.gov.in/statistics/municipalbonds.htmlChallenges to Municipal Bond Market Development in IndiaLow Revenue Generation: Indian ULBs generate approximately 1% of GDP in revenue, far below counterparts in Mexico, Thailand (2–4%), and Brazil, Russia, South Africa (7–9%), driving heavy dependence on central and state transfers. No state municipal corporation maintains a consistent positive operating surplus.Limited Borrowing and Bond Issuance: Borrowings constitute just 10% of total ULB revenues, with bonds accounting for a mere 0.5–1%. No municipal bonds were issued between FY14 and FY16.Concentration of Issuances: Over 75% of bond value and 70% of volume are concentrated among the top 10 municipal corporations, with Ahmedabad leading at ₹758 crore. Only 18% of ULBs have accessed the bond market.Geographic Disparity: Fewer than 20 states and UTs have issued municipal bonds. Gujarat dominates with more than ₹1,000 crore raised.Stringent Eligibility Norms: SEBI requires positive net worth, adherence to the National Municipal Accounting Manual (NMAM), state accounting standards, timely audits, and no default history — conditions many ULBs struggle to meet.Weak Financial Health: Only 36 of 467 AMRUT-rated ULBs secured A- or higher. Own tax revenue as a share of total revenue fell from 43% (FY2017) to 30% (FY2024 BE), while transfers rose from 24% to 38% over the same period.Financial Indiscipline: Per the 16th Finance Commission Report, many cities lack audit-ready financial statements for the preceding three years. Accrual accounting adoption varies sharply by state — near-universal in Andhra Pradesh, Tamil Nadu, and Telangana, but as low as 6–7% in Goa, Punjab, and Nagaland.Illiquidity & Secondary Market Gaps: The absence of a vibrant secondary market discourages investor participation, increasing illiquidity and risk perception.State/UTOwn RevenueRevenue ExpenditureOperating Surplus19-2020-2121-2219-2020-2121-2219-2020-2121-22Andhra Pradesh1,4921,7371,9831,7271,7491,951-235-1232Arunachal Pradesh2.852.133.155.728.6516-3-7-13Assam8510296257240219-173-138-122Bihar2042292639031,0141,110-698-785-847Chhattisgarh5205526451,9521,9001,410-1,432-1,348-765Delhi8,1127,1807,98514,85714,28215,079-6,746-7,102-7,094Goa414752364043579Gujarat5,9025,7926,9468,4499,35110,119-2,546-3,559-3,173Haryana1,0639581,2442,3652,2562,280-1,303-1,298-1,036Himachal Pradesh545253187168146-133-116-93Jammu and Kashmir151929168158159-153-138-130Jharkhand244220249549575544-305-355-296Karnataka4,4494,4862,4358,5047,1849,546-4,055-2,698-7,111Kerala5225545751,1711,4891,575-649-934-1,000Madhya Pradesh2,0191,9812,2834,5814,3854,832-2,562-2,404-2,549Maharashtra26,78223,17543,64536,03339,34946,022-9,251-16,175-2,377Manipur3.366.34.287.738.5812-4-2-8Mizoram181719414643-23-29-25Odisha2342773558909341,007-657-657-651Punjab1,2461,2631,4301,7552,0222,136-509-759-705Rajasthan3273614521,6341,5931,494-1,307-1,233-1,041Sikkim9.197.467.25121113-3-4-6Tamil Nadu3,5993,5113,8257,4918,1487,846-3,892-4,637-4,021Telangana3,1693,0543,6562,8903,0903,542280-36114Tripura8283123153137308-71-54-184Uttar Pradesh1,3371,3641,6324,5115,0965,742-3,175-3,732-4,110Uttarakhand105107101343414458-238-307-357West Bengal4,0594,6364,1054,9235,2075,548-863-571-1,443Table 3: Operating Surplus of Municipal Corporations — State-wise (₹ in Crores)Source: RBI report on Municipal Finances: Municipal Corporations (2024)Leveraging Technology and Policy Reforms to Strengthen Municipal FinanceCities must increasingly leverage technology to enhance internal revenues and reduce expenditure by addressing unassessed, under-assessed, and unpaid properties and households.States like Madhya Pradesh, Uttar Pradesh, and Gujarat have already issued guidelines to facilitate municipal bond issuances — a step other states should emulate, broadening issuance across all 28 states and 8 Union Territories.Recent SEBI reforms — removal of the minimum BBB- rating requirement and introduction of Expected Loss (EL) ratings — have made the regulatory environment more supportive by improving transparency and default risk assessment.Tax incentives for investments in municipal bonds, if introduced, would significantly boost investor interest and trust, supporting growth across India's 5,100+ cities.The Urban Challenge Fund (UCF): Catalysing Market-Based Urban Infrastructure FinancingThe Urban Challenge Fund (UCF), introduced in the Union Budget 2025–26 and approved in February 2026, is a key policy initiative driving sustainable urban development with a proposed corpus of ₹1 lakh crore. It will operate from FY 2025–26 to FY 2030–31, with an extendable implementation period up to FY 2033–34, focused on three strategic areas: Cities as Growth Hubs, Creative Redevelopment, and Water & Sanitation.Projects are judged on their potential to generate revenue, attract private investment, create employment, and enhance safety, inclusivity, service equity, and cleanliness. A co-financing model has the Central Government contributing up to 25% of project costs, with the remaining 50% financed through bonds, PPPs, or borrowings — incentivising ULBs to improve creditworthiness and financial management. The UCF's initial ₹10,000 crore allocation marks a shift from grant-based to blended finance models.The Fund covers all cities with a population of 10 lakh or more (2025 estimates), all State and Union Territory capitals not already covered, and major industrial cities with a population of 1 lakh or more.To facilitate market access for ULBs in the Northeastern and Hilly States, and smaller ULBs with populations under 100,000 elsewhere, a Credit Repayment Guarantee Scheme of ₹5,000 crore has been sanctioned. This offers a Central guarantee of up to ₹7 crore or 70% of the loan amount (whichever is lower) for first-time loans, rising to 50% on subsequent successful repayments — effectively supporting projects worth a minimum of ₹20 crore for the first instance and ₹28 crore for subsequent projects in smaller cities.ConclusionMunicipal bonds hold immense transformative potential for financing India's urban infrastructure through sustainable, market-based instruments. The ₹1 lakh crore Urban Challenge Fund, approved in February 2026, signals a paradigm shift toward leveraging capital markets for urban development. The 16th Finance Commission's emphasis on enhancing municipal own-source revenues (OSR) — linking performance grants to revenue improvements and targeting around 5% annual growth — is expected to strengthen city investment ratings, while mandatory publication of audited financial statements will boost transparency and investor confidence.Since nearly 50% of UCF funding is envisaged through market borrowings, including municipal bonds, improved OSR will strengthen debt-servicing capacity and creditworthiness. Together, these measures should create a more level playing field across states, enabling a broader set of cities — beyond a few frontrunners — to access the municipal bond market.Realising this potential will require institutionalising credit enhancement tools, standardising financial reporting under NMAM, and building robust project pipelines through technical assistance and transaction advisory support. Together, the UCF, large bonds under Budget 2025–26, and 16th Finance Commission reforms may catalyse a broader wave of municipal bond issuances across all regions — making the strengthening of India's municipal bond market not just a fiscal necessity, but a cornerstone of equitable, resilient, and financially self-reliant urban transformation.ReferencesAthar, S., White, R., & Goyal, H. (2022). Municipal finance in emerging economies: A comparative analysis. Journal of Public Finance.Bibhudatta, A., Amlan, D., & Rathee, D. (2025). Municipal green bonds: Financing urban sustainability in India. Urban Development Finance Journal.Bihari, S. C., & Mehta, R. (2020). Tax exemptions and fiscal sustainability: A policy analysis. Journal of Public Finance and Policy Research.CareEdge Ratings. (2025). Indian municipal bond market: High potential, slow progress.Goyal, H., & Agarwal, R. (2020). Municipal bonds: Financing urban development in India. Urban Finance Journal.IDFC Foundation. (2023). India Infrastructure Report 2023: Urban governance and infrastructure financing. IDFC Institute.Institute of Chartered Accountants of India (ICAI). (2018). Municipal bonds: Financing urban infrastructure in India.Kapoor, G., & Pati, P. (2017). Evolution of the global municipal bond market: Lessons for emerging economies. Financial Systems Review.Narayan, R., & Goyal, M. (2022). Revisiting tax incentives in developing economies: Lessons from India. South Asian Economic Journal.NITI Aayog. (2018). Strategy for New India @75. Government of India.Reserve Bank of India (RBI). (2022, 2024). Indian municipal finance report: A comparative study. RBI Publications.Securities and Exchange Board of India (SEBI). (2015). Issue and listing of municipal debt securities regulations [Last amended August 18, 2023].Source article: The Chartered Accountant, May 2026, pp. 28–34 (ICAI). Author may be reached at eboard@icai.in.The Chartered Accountant · May 2026
Theme
Ep. 16 — IPSASB SRS 1 ClimateRelated Disclosures Standard: A Breakthrough in Public Sector Financial Reporting
CA Journal
· June 2026
00:00
--:--
IPSASB SRS 1 Climate-Related Disclosures Standard: A Breakthrough in Public Sector Financial ReportingThe issuance of Sustainability Reporting Standard (SRS) 1, Climate-related Disclosures, by the International Public Sector Accounting Standards Board (IPSASB) marks a significant development in public sector financial reporting. The Standard introduces a structured framework for disclosing climate-related risks and opportunities within General Purpose Financial Reports (GPFRs). It is applicable from 1 January 2028, with early adoption permitted, and provides temporary relief from Scope 3 disclosures during the first three annual reporting periods following initial adoption.IntroductionClimate change has emerged as a critical macroeconomic and fiscal challenge for governments worldwide. Damage to public infrastructure from extreme weather, rising disaster-response spending, declining public health, falling workforce productivity, and decarbonisation pressures are significantly affecting public finances — even as the transition to a low-carbon economy presents opportunities for sustainable growth and resilience.Stakeholders need reliable information on how governments identify, manage, and respond to climate-related risks and opportunities, including impacts on asset impairment, provisioning, contingent liabilities, operating costs, and revenue uncertainty. IPSASB issued SRS 1 in January 2026 to establish a structured approach for incorporating such information into GPFRs, strengthening transparency, accountability, and fiscal decision-making.Climate-Related Disclosures in Public Financial ReportingSRS 1 provides a comprehensive framework for reporting climate-related risks, opportunities, governance structures, and performance metrics within GPFRs. By embedding such disclosures into mainstream financial reporting, the Standard moves public sector reporting beyond narrative sustainability statements toward structured, fiscally relevant information — serving not just investors but citizens, legislators, and other stakeholders concerned with stewardship of public resources.Significance in Public Financial ManagementClimate change affects fiscal sustainability in several interconnected ways:Increased public expenditure: Rising frequency and intensity of climate events drive higher spending on disaster relief, rehabilitation, and crop insurance. Climate change could push up to 132 million people into extreme poverty by 2030.Capital investment needs: Developing countries may require roughly US$4.5–5.4 trillion annually by 2030 for climate-resilient infrastructure.Revenue volatility: Disruptions in agriculture, fisheries, and tourism cause wide swings in government revenue; global GDP could fall 11–14% by 2050 due to climate change.Long-term fiscal risk: Persistent climate shocks could push public debt to unsustainable levels, with cumulative global losses estimated at $23 trillion between 2030 and 2050."SRS 1 provides a comprehensive framework for reporting climate-related risks, opportunities, governance structures, and performance metrics within GPFRs."While frameworks such as PEFA Climate, the IMF's Climate Public Investment Management Assessment (C-PIMA), and the World Bank's Disaster Risk Reduction–Public Financial Management (DRR-PFM) tool assess climate responsiveness from specific angles, SRS 1 integrates climate disclosures directly into general purpose financial reporting — enhancing relevance for budgeting, risk assessment, and policy evaluation, and establishing a common benchmark for reporting.Overview of SRS 1SRS 1 is organised around four core pillars: Governance, Strategy, Risk Management, and Metrics and Targets. Together, these provide a coherent framework for understanding how public sector entities identify, assess, and respond to climate-related risks and opportunities. Illustrative practices already observed in Indian public sector undertakings demonstrate alignment with the intent of this framework.PillarRequirementIllustrative ExampleGovernanceDisclose oversight mechanisms and management responsibilities for climate risks/opportunities.IOCL's BRSR 2024-25 describes a Corporate Climate Action Committee setting internal targets and monitoring net-zero progress.StrategyExplain how climate risks/opportunities influence objectives, planning, and service delivery.BHEL's Sustainability Report 2021-22 describes research into lower-impact products across their lifecycle.Risk ManagementDisclose processes for identifying, assessing, and managing climate-related risks.IOCL manages climate transition opportunities via renewable energy investment and supply-chain efficiency.Metrics & TargetsDisclose quantitative indicators such as GHG emissions and performance against targets.BHEL tracks Scope 1 & 2 emissions via UNFCCC protocols; Scope 3 not yet captured.Alignment with Global FrameworksSRS 1 is closely aligned with IFRS S2 (issued by the ISSB) and is conceptually consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). All three share a common structure centred on governance, strategy, risk management, and metrics — but SRS 1 is tailored specifically to the public sector context, extending beyond investor decision-making to accountability for public resources and service delivery.Key Differences Between SRS 1 and IFRS S2AspectSRS 1 (Public Sector)User focusBroader base: citizens, legislators, service recipients, and suppliers — not just investors and lenders.MaterialityBroader perspective based on accountability and stewardship, not just financial materiality.Whole-of-government perspectiveExpected to expand beyond entity-level to cover climate outcomes of policies and programmes.Long-term impactConsiders intergenerational impacts and long-term fiscal sustainability.Cross-government coordinationRequires integrated reporting across departments.Policy and investment linkagesCombined disclosure of fiscal implications from both policy and investment.Implementation Timeline and ChallengesSRS 1 applies to reporting periods beginning on or after 1 January 2028, with early adoption permitted and temporary Scope 3 relief for the first three reporting periods. Key implementation challenges include:Data quality: Fragmented digital platforms make organisation-wide climate data, especially Scope 3, hard to compile.Institutional coordination: Climate information is dispersed across departments, especially challenging for sub-national governments.Capacity constraints: Government accounting personnel often lack climate risk assessment expertise.System integration: Existing financial systems aren't built to capture climate data.Measurement complexity: Significant estimation and judgment are required, complicating audit scrutiny.Audit and assurance: Reliance on estimates and third-party data complicates verification of completeness and accuracy.These challenges can be addressed through phased implementation, capacity building, and better coordination between finance and climate professionals.Implications for Indian Public Sector EntitiesIndia has committed to net-zero emissions by 2070 and has introduced National and State Action Plans on Climate Change, emission intensity targets, and a centralised carbon trading platform. Climate budgeting and SDG budgeting initiatives are also gaining traction."IPSASB has made SRS 1 public sector financial reporting framework-agnostic — allowing countries like India to adopt it even without adopting the main IPSAS suite."Government entities eligible to adopt SRS 1 include the Union Government, state governments, urban local governments, public sector undertakings, and other government institutions. The Comptroller and Auditor General of India and the Controller General of Accounts can play key roles in driving adoption.Potential BenefitsImproved budget credibility through better identification and costing of climate risks.Enhanced fiscal risk management via structured disclosure of uncertainties and contingent liabilities.Strengthened public investment decisions through integrated climate considerations in project planning.Greater transparency and accountability in climate-related expenditure.Improved access to green and climate finance through enhanced investor confidence.Climate-Related Disclosures: Illustrative ExampleConsider a coastal state government vulnerable to rising sea levels and cyclones. Under SRS 1, it would disclose:Risks: Potential damage to ports and roads from cyclones; projected disaster relief expenditure; rising insurance and rehabilitation costs from coastal flooding.Strategy: Planned investment in sea walls, early warning systems, and disaster preparedness across short, medium, and long term.Metrics: Value of climate-retrofitted assets; percentage of infrastructure in high-risk coastal zones.Targets: Retrofitting X% of port infrastructure with flood-resilient design by 2030; reducing annual climate-related losses by ₹X crore over ten years.Role of Chartered AccountantsAdvisory: Designing climate reporting frameworks aligned with existing financial systems.Reporting: Ensuring consistency between climate disclosures and financial statements (provisions, contingent liabilities, asset valuations).Assurance: Providing independent assurance on climate disclosures.Risk assessment: Applying risk management thinking to identify and quantify climate-related risks.Capacity building: Training government officials to build institutional reporting capability.Way ForwardSRS 1 represents the first phase of climate-related public sector reporting. Future developments are expected to include expansion to policy-level reporting, integration with budgeting and fiscal planning, development of standardised sector-specific metrics, and greater global convergence with sustainability reporting frameworks.ConclusionThe introduction of SRS 1 marks a transformative step in public sector financial reporting. By embedding climate-related disclosures within GPFRs, the Standard enhances the relevance of financial reporting for fiscal risk management and policy decision-making. For India, it presents an opportunity to strengthen public financial governance, with Chartered Accountants playing a crucial role in enabling this transition and ensuring the credibility of climate-related disclosures.Authors may be reached at eboard@icai.inReferences & Footnotes1. World Bank – Climate Change & Poverty: worldbank.org/en/topic/health/brief/health-and-climate-change2. World Bank, COP26 Climate Brief – Adaptation & Resilience3. Swiss Re Institute, The Economics of Climate Change (2021)4. Deloitte, The Turning Point: Climate Change and Economic Growth (2022)5. PEFA Climate – Supplementary Framework for Assessing Climate Responsive PFM6. C-PIMA – Climate Public Investment Management Assessment, IMF7. Disaster Resilient and Responsive PFM Assessment Tool, World Bank8. IOCL BRSR 2024-25 — iocl.com9. BHEL Sustainability Report 2021-22 — bhel.com10. UNFCCC — unfccc.intSource: IPSASB, FSB-TCFD, IFRS Sustainability ResourcesSource: The Chartered Accountant, ICAI — May 2026 (pp. 35–39)
taxation
Ep. 17 — Whether a Non-Resident is Liable to Deduct TDS under Section 194-IA of the Income-tax Act, 1961
CA Journal
· June 2026
00:00
--:--
Whether a Non-Resident is Liable to Deduct TDS under Section 194-IA of the Income-tax Act, 1961This article examines the applicability of Tax Deduction at Source (TDS) under Section 194-IA of the Income-tax Act, 1961, in the context of immovable property transactions involving resident and non-resident parties. It clarifies the distinction between the obligations of resident and non-resident buyers, highlights judicial pronouncements regarding chargeability and extra-territorial application, and addresses practical enforcement challenges. With increasing globalization and cross-border mobility, the taxability and withholding obligations for such transactions hinge on principles of territorial nexus, source of income, and residential status. The article further explores CBDT circulars, procedural compliance hurdles, and practical safeguards, aiming to guide practitioners and taxpayers in navigating TDS obligations in cross-border property deals under evolving Indian tax law.IntroductionThe Indian real estate sector has witnessed increasing participation from non-resident investors alongside resident investors, leading to significant cross-border property transactions. Such transactions inevitably raise important questions under Indian tax laws, particularly in relation to the mechanism of Tax Deduction at Source (TDS). Among these, one area of concern is the applicability of Section 194-IA of the Income-tax Act, 1961, which mandates TDS on payments made by the buyer to a resident transferor for the transfer of immovable property exceeding specified thresholds. While the provision appears straightforward, its interpretation becomes complex when non-residents are involved as buyers in Indian property transactions.This issue has acquired greater significance in recent years due to increased global mobility, overseas Indians looking to invest in India, and foreign nationals seeking opportunities in the booming Indian property market. Non-resident investors are often unfamiliar with the complex procedural and compliance requirements of Indian tax law, and the potential for unintended non-compliance can create significant anxiety. Moreover, cross-border property transactions touch upon multiple legal regimes simultaneously, including Indian income-tax law, foreign exchange laws, registration rules, and even international tax treaties, adding to the uncertainty. The implications of TDS obligations under Section 194-IA, therefore, are not merely academic but have real-world consequences for non-resident buyers, the property market, and tax administration alike.TDS – A Statutory Collection MechanismTDS is a machinery provision designed to collect tax at the time when income either accrues, arises, or is paid. Under Indian tax law, the obligation to deduct tax at source is imposed upon the payer, i.e., the person responsible for making a payment, when it falls within the scope of relevant provisions of the Income-tax Act, 1961.Section 1(2) of the Act stipulates that the Act extends to the whole of India. The application of the Act, including compliance mechanisms such as tax deduction at source, is territorially bounded. It cannot be enforced beyond Indian jurisdiction unless there is a specific legal nexus. Section 6 of the Act determines the residential status of individuals and entities, and Section 5 outlines the scope of total income for different classes of taxpayers. A non-resident is taxed only on income that accrues or arises, or is deemed to accrue or arise, in India. However, the act of making a payment from outside India by a non-resident for a transaction that occurs within Indian territory does not by itself constitute a sufficient legal or territorial nexus to fasten a TDS obligation, unless the non-resident has a presence in India through a permanent establishment or a business connection.The Supreme Court in the case of CIT v. Eli Lilly & Co. (India) Pvt. Ltd. (2009) 312 ITR 225 (SC) has clarified the fundamental principle that the Indian Income-tax Act, 1961, does not have extra-territorial operation unless there is a sufficient territorial nexus between India and the person or transaction sought to be taxed. Relevant extracts are reproduced below:“On the question of extra-territorial operation of the 1961 Act the general concept as to scope of income tax is that, given a sufficient territorial connection or nexus between the person sought to be charged and the country seeking to tax him, income-tax may extend to that person in respect of his foreign income. The connection can be based on the residence of the person or business connection within the territory of the taxing state; and the situation within the state of money or property from which taxable income is derived (see The Law and Practice of Income Tax by Kanga and Palkhivala, seventh edition, at p. 10)”The Supreme Court’s decision in this matter affects the way TDS obligations are determined under Indian tax law. It reinforces that TDS obligations can only be imposed where there exists a sufficient territorial nexus between the payer or the transaction and India. Consequently, the Indian Income-tax Act has selectively imposed TDS obligations on non-residents only in clearly defined situations, where either the source of income lies in India or the payer has a presence in India.The Act clearly identifies non-residents as liable for TDS compliance only in specific circumstances, for example:Section 195 (payments to non-residents)Section 194E (payments to non-resident sportsmen or entertainers)Sections 194LB, 194LC, and 194LDIn the aforementioned provisions, the statute explicitly brings non-residents within the purview of TDS for outbound payments. However, there is no express provision in the Act imposing a TDS obligation on a non-resident payer who is located outside India and who makes a payment to a resident in India, unless such non-resident has a physical or economic presence in India.CBDT has not allocated jurisdiction to any Commissioner of Income-tax to administer or enforce TDS provisions against non-residents making payments to Indian residentsFurther, CBDT has not allocated jurisdiction to any Commissioner of Income-tax to administer or enforce TDS provisions against non-residents making payments to Indian residents, as evidenced by Notification No. 55/2014/F.No.187/39/2014 and Notification No. 57/2014/F.No.187/29/20141. This lack of administrative action clearly indicates that the legislature never intended to impose such an obligation.Furthermore, under Section 203A of the Act, a person is generally required to obtain a TAN in order to deposit TDS, file statements, or issue TDS certificates as required under the Income-tax Rules. For non-resident buyers who have no business connection, assets, or permanent establishment in India, these compliance steps are not straightforward. Even where specific provisions (such as Section 194-IA) allow TDS payment without a TAN, a non-resident would still be required to obtain a PAN, register on the Income-tax portal, and complete the associated compliance formalities.It is equally important to recognize that the fundamental purpose of TDS is not simply tax collection but also ensuring timely reporting and traceability of transactions for tax administration purposes. However, this compliance mechanism presupposes the payer’s ability to navigate the Indian tax infrastructure, including understanding filing deadlines, obtaining a TAN, and remitting tax payments through Indian banking systems. For non-resident individuals or entities lacking business in India, fulfilling these compliance obligations could be an arduous task, often necessitating the engagement of professional advisors, thereby adding to transaction costs and complexity. Such practical challenges underscore why the territorial nexus principle plays a decisive role in determining whether TDS obligations under Indian law can be realistically imposed on persons entirely situated outside the country.Another dimension relevant to the discussion is the interplay between Section 194-IA and the provisions for interest, penalty, and prosecution under the Act. For instance, under Section 201(1A), a person who fails to deduct or deposit TDS is liable to pay interest, while Section 271C imposes penalties for such defaults. However, imposing these consequences on non-resident buyers with no presence in India creates significant enforcement challenges. The absence of jurisdictional reach and administrative infrastructure to pursue recovery from non-residents further supports the view that Section 194-IA was not intended to cover non-resident purchasers lacking territorial nexus with India.Section 194-IAAs stated in the Explanatory Memorandum to the Finance Bill, 2013, the purpose of Section 194-IA is to widen the tax base and curb evasion in real estate transactions, where sellers often underreport the actual consideration to reduce their tax liabilities. By introducing Section 194-IA, the Government aimed to create a tracing mechanism for real estate transactions and ensure that property transfers exceeding certain thresholds were reported to the tax authorities.Section 194-IA provides that:(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum or the stamp duty value of such property, whichever is higher, as income-tax thereon. (2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property and the stamp duty value of such property, are both, less than fifty lakh rupees.This Section uses the word “any person, being a transferee” to define who is responsible for deducting tax at source. At first glance, this might appear to encompass both residents and non-residents. However, a closer reading of the Income-tax Act reveals that the term “person” under Section 2(31) merely defines the types of legal entities, such as individuals, HUFs, firms, companies, and others. It does not determine whether such persons are resident or non-resident or whether they have a sufficient territorial nexus with India.A view may be taken that the residential status of the buyer is irrelevant for Section 194-IA, and that the provision applies so long as the seller is a resident. Some also suggest that where the buyer is a non-resident, Section 195 should apply. However, this interpretation is not consistent with the statutory language. Section 195 is triggered only when a payment is made to a non-resident. The provision begins with the words “any person responsible for paying to a non-resident… any sum chargeable under the Act,” which makes it clear that it governs outbound payments made to non-residents. In the present case, the factual position is the opposite: the payment is made by a non-resident to a resident seller. Accordingly, section 195 has no application.Once Section 195 is excluded on this basis, the only provision that could potentially impose a TDS obligation is Section 194-IA. The issue, therefore, is not whether Section 195 overrides Section 194-IA, but whether Section 194-IA either expressly or by necessary implication extends to non-resident transferees who have no presence or territorial nexus in India. This is a jurisdictional enquiry, not merely a definitional one, and requires examining whether the machinery of TDS can practically and legally operate against a payer situated entirely outside India.The determination of whether a person is resident or non-resident falls under Section 6 of the Act, while the scope of their taxable income is governed by Section 5. Therefore, although the words “any person” in Section 194-IA appear broad, they cannot be interpreted in isolation to impose tax deduction obligations on non-residents lacking presence or business connections in India. Legislative clarity and territorial nexus remain fundamental principles in determining the extent of tax compliance obligations under the Act.Since Section 194-IA was introduced primarily to trace high-value property transactions and to bring transparency into the real estate sector, its core objective is informational in nature. However, even in the absence of TDS compliance under Section 194-IA, such transactions remain traceable through the alternative reporting mechanism prescribed under Section 285BA of the Act, read with Rule 114E of the Income-tax Rules, which mandates sub-registrars to report transactions of ₹30 lakh or more. This ensures that the tax department obtains visibility into significant property deals, reducing the necessity to impose TDS compliance obligations on non-resident buyers who lack any presence or business connection in India.Role of DTAASince the purchase of property in India by a non-resident buyer does not result in any income in the hands of the buyer and given that TDS obligations are imposed purely under domestic tax law, there is no need to refer to Double Taxation Avoidance Agreements (DTAAs) for determining whether Section 194-IA applies to such transactions. The DTAA provisions allocate taxing rights over capital gains to India but do not impose any obligation on non-resident buyers to deduct tax at source. Therefore, the analysis of Section 194-IA’s applicability to non-resident buyers remains solely within the realm of domestic Indian law.ConclusionIn view of above, a non-resident buyer of immovable property located in India is not liable to deduct tax at source under Section 194-IA, unless such buyer has a Permanent Establishment or a Business Connection in India. Inbound transactions by non-residents situated wholly outside Indian territory are not intended to be subject to TDS under the Act.Further, Rule 114B of the Income-tax Rules states that PAN must be quoted by both the seller and the buyer in case of sale or purchase of immovable property where the value exceeds ₹10 lakhs. This may create an obligation on the non-resident buyer to obtain a PAN in India, purely for the purpose of reporting the transaction, even though there is no TDS liability under Section 194-IA.Author may be reached at ch.sivapriya@outlook.com and eboard@icai.in1. These notifications are issued under section 120 of the Income-tax Act, 1961 defining jurisdictions of Commissioners of Income Tax. Source: The Chartered Accountant, May 2026 • www.icai.org
taxation
Ep. 18 — From Soil to Soilless: Redefi ning Agricultural Taxation in Modern India
CA Journal
· June 2026
00:00
--:--
From Soil to Soilless: Redefining Agricultural Taxation in Modern IndiaThis article examines the evolving landscape of agricultural taxation in India amid modern farming techniques like hydroponics and aeroponics. The central government lacks authority to tax agricultural income, a power reserved for states under the Constitution's State List, Entry 46. The states of Assam and West Bengal currently tax plantation crops, though other states are deterred by high administrative costs and political sensitivities. The rise of soilless farming challenges tax exemptions, as seen in the 2025 Madras High Court, which classified mushroom cultivation as business income. To navigate these changes, Agri-entrepreneurs should maintain land connections, document processes, and secure licenses to ensure compliance and preserve tax exemptions.IntroductionIndia's agricultural sector is shifting from traditional land-based cultivation to technology-driven methods like hydroponics, aeroponics, and controlled-environment farming. These advancements challenge the definition of "agricultural income" under the Income Tax Act, 1961, designed for traditional farming. This article analyzes the constitutional framework, judicial interpretations, and administrative challenges, focusing on recent rulings like the 2025 Madras High Court decision on mushroom cultivation, to assess how tax law adapts to agricultural innovation and its implications for policy and enforcement.Historical Context of Taxation in Indian AgricultureIn its 2002 report, the Task Force on Direct Taxes recommended taxing agricultural income, but no action was taken as the central government lacks authority; this power lies with states under Entry 46, State List, Seventh Schedule of the Constitution of India. Historically, states like Bihar, Odisha, Tamil Nadu, and Kerala taxed agricultural income, but currently, only Assam and West Bengal tax plantation crops (tea, coffee, rubber). Under the Income Tax Act, these crops have a portion treated as business income (40% tea, 25% coffee, 35% rubber), with the rest state taxable. West Bengal waived tea garden taxes for 2023–2025.High administrative costs and political sensitivities deter uniform taxation of agricultural income. Tax collection requires detailed land records and compliance, which is challenging in India's informal agricultural sector. Agriculture contributes 16% to GDP (FY24) and employs 46.1% of the population, linking it to food security and rural livelihoods. Taxing farmers risks evoking colonial-era taxation memories, making it politically sensitive. Thus, most states avoid taxing agricultural income, limiting it to commercially organized plantation crops.Evolution of Farming PracticesTechnological advancements have transformed Indian agriculture from a rainfall-dependent livelihood into a profitable enterprise. Methods like drip irrigation, greenhouse farming, hydroponics, aquaponics, and aeroponics, supported by drone monitoring and soil sensors, boost yields and efficiency. However, adoption is uneven, and the tax-exempt status of income from commercial setups like soilless systems or mushroom cultivation is debated. Without clear Central Board of Direct Taxes (CBDT) guidance, tax classification relies on judicial interpretation.Advanced Farming TechniquesGreenhouse FarmingGreenhouses enable controlled cultivation, protecting crops and regulating temperature, humidity, and light. They support soil-based, grow-bag, or soilless methods, ideal for high-value crops and urban farming.HydroponicsHydroponics involves growing plants in nutrient-enriched water, enabling faster growth and higher yields for lettuce, tomatoes, and herbs. It suits urban spaces and reduces soil-borne pests, gaining traction in Maharashtra, Karnataka, and Telangana.AquaponicsAquaponics integrates hydroponics with aquaculture, using fish waste to nourish plants, which filter water for fish. It conserves water and supports sustainable cultivation of greens and fish like tilapia in Kerala and Tamil Nadu.AeroponicsAeroponics involves misting plant roots with nutrients, offering resource efficiency and rapid growth for basil, lettuce, and microgreens. It suits vertical farms in urban areas like Delhi NCR and Mumbai."Technological advancements have transformed Indian agriculture from a rainfall-dependent livelihood into a profitable enterprise. Methods like drip irrigation, greenhouse farming, hydroponics, aquaponics, and aeroponics, supported by drone monitoring and soil sensors, boost yields and efficiency."Understanding the Law: Agricultural Income Tax LawIndirect TaxesUnder GST, unprocessed agricultural produce is exempt, regardless of cultivation method (soil, hydroponics, or aeroponics). Button mushrooms are classified as "Edible vegetables" (GST Chapter 07), supported by APEDA and FSSAI.However, processed goods (e.g., mushroom powder, frozen spinach) incur GST at 5% or 12%.Direct TaxesUnder the Income Tax Act, 1961, the term agricultural income is defined in clause (1A) of Section 2. This income is exempt under Section 10, subsection (1), of the Act. The exemption is granted specifically to agricultural income, so it is important to understand what constitutes agricultural income under the law.Clause (1A) of Section 2 can be broken down into three distinct components:Income from rent or revenue derived from agricultural landIncome from agricultural operationsIncome from buildings associated with agricultural activityItem (a) establishes two essential conditions: the land must be located in India, and it must be used for agricultural purposes. Rent typically refers to lease or tenancy payments received from agricultural land. Revenue may also include sharecropping arrangements or rent-in-kind, where the landlord receives a portion of the agricultural produce instead of monetary consideration. The Supreme Court in CIT vs. Raja Benoy Kumar Sahas Roy (1957) clarified that land must be subjected to integrated agricultural operations, both basic (tilling, sowing) and subsequent (weeding, harvesting), to qualify.Basic operations such as tilling of the land, sowing of seeds, and planting require expenditure of human skill and labour upon the land itself. Subsequent operations after the produce sprouts include weeding, digging the soil around the growth, tending, pruning, cutting, harvesting, and marketing. Only when the land is subjected to such integrated activity can it be said to be used for agricultural purposes.Item (b) covers three types of income: income directly from agricultural operations; income from processing carried out by the cultivator or rent-in-kind recipient to make the produce market-ready; and income from the sale of such produce, either as is or after applying only such ordinary processes. The processing or sale must relate to produce originating from the same land and carried out by the person who cultivated it. Industrial or commercial processing beyond what is ordinarily done would not qualify.Item (c) extends the definition to income from buildings used in relation to agricultural land. The building must be owned and occupied by the receiver of rent or revenue, or occupied by the cultivator or rent-in-kind recipient, must be located near the land, and used in connection with ordinary agricultural processes such as cleaning, sorting, or storing.In conclusion, for income to qualify as agricultural under the Income Tax Act, it must arise from activities integrally connected to the use of land for agricultural purposes, conforming to judicially established tests such as those in the Raja Benoy Kumar case. The focus is not only on the nature of the income but also on how and where it arises.Partnership Firm Warehousing Case and Interpretation of Section 2(1A)(c)ITO, Budaun vs. Assessee (ITAT Delhi, 24 March 2009)Three individuals, each owning agricultural land in their personal capacity, formed a partnership firm to operate a warehousing business. The firm constructed storage facilities on the land and rented them to government agencies for storing food grains such as wheat and rice, claiming this rental income as exempt agricultural income. The Tribunal examined three criteria:Ownership and Occupancy Requirement — The firm earned the rental income but did not own the land, which was held individually by the partners. Requirement not satisfied.Cultivator Connection — The firm did not cultivate any produce nor receive rent in kind; the stored grain belonged to government departments. Connection lacking.Link Between Land and Produce — The warehouse stored food grains unconnected to the land on which it was built. Criterion failed.Based on the failure to meet all three conditions, the Tribunal ruled that the income was not agricultural income and was taxable as business income.Summary Interpretation of Section 2 Clause (1A)Interpretation requires several cumulative conditions to be satisfied:The land must be located in India.The land must be used for agricultural purposes.There must be basic and subsequent operations on the land.The produce must result from human skill and labour applied to land and must be intended for consumption or trade and commerce.The use of controlled environments such as polyhouses or greenhouses does not disqualify the activity from being agricultural, so long as operations connected with land continue to exist.Activities conducted in factory-like settings, such as climate-controlled units for mushroom cultivation without any basic operations on land, are treated as manufacturing and do not qualify as agriculture under the Act.Button-Mushroom CultivationMarket and ClassificationButton mushrooms, which account for nearly 85% of India's edible mushroom market, significantly contribute to agricultural income, particularly in states such as Bihar, India's largest producer, Odisha, and Maharashtra. State horticulture departments support farmers, including small landholders, through training, financial aid, and technical assistance. Unlike traditional field crops, button mushrooms are grown in compost beds within enclosed structures.Income treatment varies; small-scale units may qualify as agricultural income, while large, controlled commercial setups face uncertainty over tax exemptions due to their factory-like nature. Without clear policy guidelines, tax eligibility often depends on judicial interpretation."Income treatment varies; small-scale units may qualify as agricultural income, while large, controlled commercial setups face uncertainty over tax exemptions due to their factory-like nature."Biological and Cultivation BasicsButton mushrooms (Agaricus bisporus) are neither vegetables nor fruits in biological terms. They belong to the fungal kingdom, entirely separate from both the plant and animal kingdoms. Fungi are heterotrophic organisms — they secrete enzymes to break down organic matter and absorb the resulting nutrients. Button mushrooms are saprophytic fungi that feed on decaying organic material, whereas plants are autotrophic, using chlorophyll to capture sunlight for photosynthesis.Legal Perspective on TaxationMadras High Court Ruling (2025)Principal Commissioner of Income Tax vs. M/s British Agro Products (India) Pvt. Ltd. — 9 May 2025The Madras High Court ruled that income from button-mushroom cultivation in climate-controlled facilities does not qualify as agricultural income under Section 10(1) of the Income Tax Act, 1961. The assessee claimed exemption citing Inventaa Industries (2018), but the Revenue argued that mushrooms are fungi, not plants; cultivation used compost trays, not land; and industrial features (e.g., depreciation on machinery) suggested manufacturing.Applying the test from CIT vs. Raja Benoy Kumar Sahas Roy (1957), the Court held that the absence of land-based operations disqualified the income, treating it as business income. The biological classification was irrelevant; the lack of land nexus was decisive. The Court rejected Inventaa Industries for insufficiently examining the statutory land requirement, contrasting it with Best Roses Biotech Pvt. Ltd. (ITAT Ahmedabad), where floriculture with 75% soil was deemed agricultural.Tax Implications of Modern Farming TechniquesUnder Indian tax law, agricultural income traditionally hinges on land-based operations like tilling and sowing. Modern soilless methods such as hydroponics and aeroponics challenge this framework, as they eliminate the use of soil entirely. Income from such methods is typically ineligible for exemption under Section 10(1), unless a clear connection to land exists.This legal debate first surfaced in nursery operations. Courts were divided — some upheld the tax exemption for plants grown in pots, while others denied it due to lack of land use, referencing the Supreme Court's Raja Benoy Kumar Sahas Roy ruling.To resolve these inconsistencies, Finance Minister P. Chidambaram clarified in the 2008–09 Budget that income from saplings or seedlings grown in a nursery, whether in pots or soil, should be tax-exempt. This led to Explanation 3 to Section 2(1A) of the Income Tax Act, which deems such nursery income to be agricultural, without mentioning soil or land.This legal fiction must be applied fully, as affirmed in CIT vs. S. Teja Singh (1959). Thus, nursery income from soilless methods like hydroponics may still qualify for exemption, even though the provision predates such technologies. However, the exemption only applies to the nursery phase from seed germination to sapling. Once plants mature (e.g., hydroponic lettuce), the income becomes taxable business income.StageTax TreatmentHydroponically sprouted seedlingsExemptMature crops grown hydroponicallyTaxableTherefore, Explanation 3 is a narrow carve-out for nursery operations, not a blanket exemption for all soilless agriculture. Entrepreneurs must carefully structure their operations and maintain documentation to remain within this protective legal scope.While the new Income-tax Act, 2025, maintains the same substantive definition of agricultural income, it introduces a more coherent drafting approach, consolidating the former explanations within the principal clause for a cleaner and more integrated formulation.Moving AheadAs Indian agriculture modernizes, tax law remains anchored in land-based definitions of agricultural income. Techniques like hydroponics and controlled-environment farming increasingly fall outside the exemption under Section 10(1), with courts treating such income as business income, especially in factory-style setups like button-mushroom cultivation.To manage this evolving legal landscape, Agri-entrepreneurs should:Maintain a Land Link: Design operations to involve soil-based or land-connected cultivation where possible.Document Activities: Use digital tools (e.g., FarmERP) to track all agricultural processes from land preparation to harvesting.Obtain Licenses: Secure nursery or horticulture licenses from state bodies or the NHB to legitimize seedling and soilless operations.Structure Nurseries Strategically: Operate nurseries as standalone seedling units to qualify under Explanation 3 to Section 2(1A). For soilless setups, obtain proper licensing and seek clarity through CBDT applications or advance rulings.Pursue Certifications: Obtain organic or pesticide-free certifications (e.g., APEDA, NPOP) to reinforce the agricultural nature of your business.These steps help mitigate tax risk and clarify the classification of income under an increasingly complex framework. Notably, countries like Australia classify hydroponics as business income unless clearly tied to land, highlighting the importance of legal and operational foresight in India's context.Key TakeawaysUltimately, the Income Tax Department is likely to rely on the "British Agro Products" judgment to challenge exemptions for factory-like setups. As such, Agri-tech entrepreneurs must design their businesses with tax clarity in mind. The key takeaway is that the exemption under Section 10(1) hinges not on the type of crop or technology used, but on whether the activity involves genuine, integrated operations on or from land.◆ ◆ ◆Author may be reached at harishpaliwal@outlook.com and eboard@icai.inTask Force on Direct Taxes (2002): https://www.indiabudget.gov.in/budget_archive/es2002-03/chapt2003/chap29.pdfRefer Article 246 in Constitution of IndiaWest Bengal Budget Speech 2022: https://finance.wb.gov.in/writereaddata/Budget_Speech/2022_English.pdfMOSPI Press Release: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2079024NHB Mushroom Cultivation: https://nhb.gov.in/pdf/Cultivation.pdfAPEDA Agri Exchange — India Production: https://agriexchange.apeda.gov.in/Production/Indiacat/Index
GST
Ep. 19 — Omission of Rule 96(10) of CGST Rules 2017 without a “Saving Clause”: Ease of doing business or the Legislative Oversight
CA Journal
· June 2026
00:00
--:--
Omission of Rule 96(10) of CGST Rules 2017 without a "Saving Clause": Ease of Doing Business or the Legislative OversightThe article examines the omission of Rule 96(10) of the CGST Rules, 2017, which earlier restricted IGST refunds for certain categories of exporters availing specified exemption benefits. Several taxpayers had challenged the validity of Rule 96(10) before various High Courts, contending that the rule was ultra vires the GST law. Subsequently, the Government omitted Rule 96(10) vide Notification No. 20/2024-Central Tax dated 8 October 2024. However, questions arose regarding the fate of pending litigations where exporters had availed IGST refunds allegedly in contravention of Rule 96(10). The article analyses judicial rulings that emphasized the absence of a "saving clause" in the omission notification and discusses how courts interpreted such omission to determine its impact on ongoing proceedings and pending disputes.The Goods and Services Tax (GST) regime, a landmark tax reform in India, has been in a constant state of evolution since its inception on July 1, 2017. The government, with time, has constantly brought changes through GST council meetings to ensure simplicity and, at the same time, maintain the revenue targets and curb any revenue leakages. While most legislative changes are aimed at simplification and easing compliance, a recent omission of a key rule has created a significant legal and financial ripple, positively affecting exporters across the country.The 54th GST council meeting held on 9th September 2024 recommended that rule 96(10) of CGST Rule 2017 be omitted prospectively. The minutes of the meeting did not specify anything related to existing demand/notices pertaining to rule 96(10) of the CGST Rules, 2017. Pursuant to the recommendation of the GST council meeting, notification No. 20/2024 – Central Tax dated 8th October 2024 was issued to omit Rule 96(10) entirely. The unconditional removal of Rule 96(10) of the Central Goods and Services Tax (CGST) Rules, 2017, without the inclusion of a saving clause, has become the central point of contention in several high-profile legal battles. This article will meticulously examine the critical role and features of a saving clause, the fundamental legal principle it embodies, and provide a detailed analysis of how two landmark rulings by the Calcutta and Gujarat High Courts have leveraged this very principle to grant substantial relief to exporters with pending disputes.Before we delve into the principles of the Saving Clause and analysis of observations made by the Hon'ble High Courts, a quick summary of Rule 96(10) is as follows:Rule 96 of the CGST Rules 2017 provides for rules governing the refund of Integrated Goods and Services Tax ("IGST") on goods or services exported outside India. Sub-rule 10 of Rule 96 provided that certain taxpayers will not be eligible to avail a refund of IGST paid on export of goods or services. These taxpayers included importers who have availed the benefit of IGST exemption at the time of import of materials (Advance license holders, EOU units, etc.). These categories of taxpayers were required to export under LUT and claim a refund of unutilised ITC under Rule 89 of the CGST Rules, 2017. However, Rule 89 of the CGST Rules restricted the refund of ITC on capital goods. This had led to a significant financial impact on exporters.Certain exporters, who have imported goods with exemption of IGST, have exported with payment of IGST and received IGST refund. Government authorities in such cases had initiated demand proceedings along with interest and penalty.Various petitions were filed with the court to determine Rule 96(10) as ultra vires to the GST law. With a number of High Court petitions across the country and repeated representations by the exporters, the government brought up a welcome move to omit Rule 96(10), albeit prospectively. The council meeting and subsequent notification were completely silent on pending proceedings with respect to Rule 96(10). The notification unconditionally omitted Rule 96(10) from the CGST Rules 2017 without any saving clause for pending proceedings.Having briefly gone through Rule 96(10) and relevant issues, we will first delve into the principle of the saving clause and then discuss observations made by two Hon'ble High Courts in this regard.Part I: The Core Legal Principle — The Imperative of a Saving ClauseA saving clause is not a mere formality; it is a crucial provision in legal drafting, particularly when a statute or rule is being repealed, amended, or omitted. Its fundamental purpose is to preserve the status quo ante, to ensure that the repeal does not retroactively affect rights, liabilities, or legal proceedings that arose under the old law. The concept is deeply rooted in the legal principle of "obliteration," which states that when a law is repealed or omitted, it is treated as if it never existed on the statute books. This is a powerful doctrine of statutory interpretation. The only way to prevent this "blotting out" effect is through an explicit saving provision."Rule 96 of the CGST Rules 2017 provides for rules governing the refund of Integrated Goods and Services Tax ("IGST") on goods or services exported outside India. Sub-rule 10 of Rule 96 provided that certain taxpayers will not be eligible to avail a refund of IGST paid on export of goods or services."The Doctrine of Obliteration and Its Judicial HistoryThe legal position on this matter has been crystallized by the Supreme Court of India in the landmark case of Kolhapur Canesugar Works Ltd. & Anr. v. Union of India & Ors. (2000). The Hon'ble Supreme Court, while interpreting a similar repeal in the context of the Central Excises Act, held that when a rule is omitted, it is as if it "had never been passed, and the statute must be considered as if the rule had never existed." The court further clarified that the only way to counter this legal effect is with an explicit saving clause. This precedent established a clear legal position: in the absence of a saving clause, all actions must stop where the repeal finds them. This principle became the foundation for the subsequent High Court rulings.The General Clauses Act, 1897, provides a general saving clause for the repeal of any Central Act or Regulation. Section 6 of this Act, in particular, states that unless a different intention appears, the repeal shall not affect any legal proceeding, right, privilege, or liability that was accrued under the repealed law. However, as the High Courts would later find, this general provision does not automatically apply to the "omission" of a rule, which is a different legal mechanism from a full-fledged "repeal" of an Act. This nuance is central to the entire issue.Part II: The Legislative Action — Omission of Rule 96(10)Rule 96(10) of the CGST Rules, 2017, was a source of widespread discontent among exporters. It was a restrictive provision that placed a significant hurdle on exporters by denying them the refund of Integrated Goods and Services Tax (IGST) paid on their exports. The condition was that an exporter could not claim this refund if they had availed benefits under specific customs duty exemption notifications on their inward supplies, such as the Advance Authorization Scheme / EOU. The intent behind the rule was to prevent a "double benefit," but in practice, it often led to a disproportional denial of refunds, even if the value of the exempted inputs was minuscule.Recognizing the hardship it caused, the government, on the recommendation of the GST Council, decided to omit Rule 96(10). The omission was carried out through Notification No. 20/2024-Central Tax dated October 8, 2024, without any accompanying saving clause. This legislative omission, while intended to be a positive step, created a legal vacuum and immediately brought the principle of "obliteration" to the forefront of litigation. Tax authorities, presuming that their pending notices and assessments were still valid, continued to pursue cases against exporters, setting the stage for the two landmark High Court rulings.Part III: Judicial Intervention — The Landmark High Court JudgmentsThe failure / intentional omission of the legislature to include a saving clause presented a critical opportunity for the judiciary to clarify the legal position and provide relief to taxpayers. Both the Hon'ble Calcutta High Court and the Hon'ble Gujarat High Court seized this opportunity, and their rulings have provided a powerful and consistent precedent.Calcutta High Court in M/s. Glen Industries Private LimitedIn the case of M/s. Glen Industries Private Limited & Anr. v. The Deputy Director, Directorate General of GST Intelligence & Ors., the petitioner was an exporter of plastic containers who had been issued a show-cause notice while Rule 96(10) was still in force. The notice was for the recovery of an alleged erroneous refund of approximately Rs. 1.96 crore. The final order confirming the tax demand, however, was passed on January 30, 2025, a date subsequent to the rule's omission on October 8, 2024.The Hon'ble Calcutta High Court, in its judgment dated March 26, 2025, meticulously analyzed the legal arguments. The petitioner's counsel, relying heavily on the Supreme Court's pronouncements in the Kolhapur Canesugar Works case, argued that the omission of the rule effectively removed the very legal foundation for the show-cause notice and all subsequent proceedings. The court agreed with this line of reasoning. It held that the omission of a subordinate legislation, like a rule, has the same effect as a repeal. The court stated that since the rule was "unconditionally omitted" and not "repealed and re-enacted" with a saving clause, the legal basis for the administrative action was gone."In a case where a particular provision is omitted and in its place another provision dealing with the same contingency is introduced without the saving clause in favour of the pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision."This judgment was a watershed moment, providing judicial confirmation that administrative authorities cannot pass orders invoking a provision that has been removed from the statute book, even if the proceeding was initiated when the rule was in force.Gujarat High Court in Messrs Addwrap Packaging Pvt. Ltd.The Gujarat High Court, faced with a similar set of facts in the case of Messrs Addwrap Packaging Pvt. Ltd. & Anr. v. Union of India & Ors., echoed a similar view and delivered a judgment that further solidified the legal position. The petitioners in this case also had pending refund disputes where the IGST refund was denied based on the now-omitted Rule 96(10). It may be noted that in the present order, more than 100 special civil applications were clubbed to pass an order pertaining to Rule 96(10) of the CGST Rules 2017.The Gujarat High Court's ruling, dated June 13, 2025, was more comprehensive in its reasoning. While the court was initially poised to rule on the constitutional validity of Rule 96(10), the Government's omission of the rule made this question academic. The Court then pivoted its entire analysis to the legal effect of the omission. It was observed that the Government's notification stated the rules "shall come into force on the date of their publication," which is a prospective application. However, the court astutely distinguished between the prospective effect of a law and the retrospective effect of its repeal.The court relied on Sections 6, 6A, and 24 of the General Clauses Act, 1897. It held that while Section 6 provides a general saving clause for the repeal of an "enactment," the omission of a rule is not a full-fledged repeal. However, by interpreting the term "repeal" broadly and by applying the doctrine from the Kolhapur Canesugar Works case, the Court concluded that the intent of the legislature was to make the provision inoperative from the date of its omission. The Court unequivocally stated that the omission of the rule applied to all pending proceedings as of the date of its removal, where final adjudication had not yet taken place."Therefore, we are of the opinion that Notification No.20/2024 dated 8th October, 2024 would be applicable to all the pending proceedings/cases meaning thereby that Rule 96(10) would stand omitted prospectively but applicable to pending proceedings/cases where final adjudication has not taken place. Therefore, in view of the foregoing reasons, the omission of Rule 96(10) would apply to all the proceedings/cases/petitions which are pending for adjudication either before this Court or before the respondent adjudicating authority, and no further proceedings are required to be carried forward and petitioners would be entitled to maintain refund claims of IGST paid on export of goods."The Hon'ble Gujarat High Court's judgment had a powerful two-fold impact:It Quashed All Pending Proceedings: The Court explicitly quashed all challenged show-cause notices, orders-in-original, and refund denials that were based on Rule 96(10), providing a direct remedy to the petitioners. The demand in cases, in which a show cause notice has been issued but an order has not been passed, or an OIO has been passed, but the matter has been challenged with a higher authority, has been ordered to be dropped altogether.It Clarified the Right to Refund: The Court also affirmed the exporters' right to pursue their IGST refunds under the general framework of the GST law, effectively removing the obstacle created by the omitted rule. The Court emphasized that the right to refund had always existed under the parent Act, and the rule was merely a procedural restriction that had now been removed.Part IV: The Broader ImplicationsThe consistent rulings from the Calcutta and Gujarat High Courts have profound implications for GST law and administrative practice in India.Legal Certainty for Taxpayers: These judgments have established a strong legal precedent that taxpayers can now use to challenge any pending notices or demands based on a provision that has been unconditionally omitted from the GST rules. This has effectively "unlocked" long-pending IGST refunds for countless exporters, providing them with much-needed cash flow and relief from litigation.A Reminder to Lawmakers: The rulings are a clear signal to the Government and its legislative drafting bodies about the critical importance of including saving clauses when amending or repealing laws. This is essential for ensuring legal continuity and preventing unnecessary litigation. The absence of such a clause forces the judiciary to interpret the legal vacuum, often in favor of the taxpayer.The Rule of Law and Judicial Activism: These rulings also highlight the crucial role of the judiciary in acting as a check on legislative and administrative overreach. By meticulously applying established legal principles, the High Courts have upheld the fundamental rights of citizens. The rulings reinforce the principle that the law must be drafted with precision and foresight, and that in the absence of such prudence, the Courts will uphold the fundamental rights of citizens and the established doctrines of statutory interpretation.ConclusionIn conclusion, the saga of Rule 96(10) is a potent case study. It may be interesting to wait and see the Government's action. The government's future course of action may determine whether the unconditional omission of Rule 96(10) was a regulatory oversight or a genuine step to close all the litigations. While concluding our analysis, it would be important to look forward to the following points in the future.Whether the Government challenges the order passed by the Hon'ble Gujarat High Court and the Hon'ble Calcutta High Court in the Apex Court?What would be the observation of the Hon'ble Supreme Court in this matter in case the matter is tabled before the Apex Court?Will the Government come up with a circular / instruction to clarify their position for all the pending matters with respect to Rule 96(10)?ReferencesMinutes of 54th GST Council MeetingNotification No. 20/2024 – Central Tax dated 8th October 2024Hon'ble Calcutta High Court order in the case of M/S. Glen Industries Private Limited & Anr. versus The Deputy Director, Directorate General of GST Intelligence & Ors. (2025 (4) TMI 492 - Calcutta High Court dated 26 March 2025)Hon'ble Gujarat High Court order in case of Messrs Addwrap Packaging Pvt. Ltd. & Anr. versus Union of India & Ors pronounced on 13 June 2025Author may be reached at karanrajvir18@gmail.com and eboard@icai.inThe Chartered Accountant · GST · May 2026 · www.icai.org
GST
Ep. 20 — When The Legislature Erases A Law - Do ‘Omissions’ Count as a ‘Repeal’ Under the General Clauses Act?
CA Journal
· June 2026
00:00
--:--
When The Legislature Erases A Law Do 'Omissions' Count as a 'Repeal' Under the General Clauses Act? — An Analysis Through the Lens of Proposed Omission of Section 13(8)(b) of the IGST Act, 2017 by the Finance Bill 2026The global economy is undergoing a structural shift marked by the rise of the services sector as the principal engine of growth. The Government of India's Finance Act 2026 omitted Section 13(8)(b) of the IGST Act, shifting the place of supply for intermediary services to the recipient's location — converting a taxable domestic supply into a zero-rated export. But the omission carries no saving clause, raising the question of whether eight years of pending disputes survive, a question four landmark cases have debated but not definitively settled.IntroductionThe Finance Act, 2026, has made an important legal development under the Goods and Services Tax (GST) framework. Among several amendments across various tax laws, one stands out not for its prospective commercial impact, but for the profound retrospective legal questions it has triggered: the omission of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), which governs the place of supply (POS) for intermediary services.Under the pre-omitted provision, the POS for intermediary services was the location of the supplier, meaning Indian intermediaries serving foreign clients were treated as making a domestic supply, attracting GST. The omission removes this rule entirely, falling back on the general provision in Section 13(2). What was previously a taxable domestic supply becomes a zero-rated export of services, eligible for refund of input tax credit or integrated tax paid.A large number of taxpayers, especially exporters of services, have suffered denial of export refunds and demands for output tax after their genuinely export-classifiable services were reclassified as "intermediary" services under the old Section 13(8)(b). Rule 86(4B) of the CGST Rules requires that an erroneous refund repaid with interest be recredited via PMT3A to the Electronic Credit Ledger, available to discharge output tax on inter-State supplies. The key question is whether this omission applies retrospectively from 1 July 2017, settling all disputes, or only prospectively from 30 March 2026, leaving years of litigation to be resolved on their own merits.Liberalisation Without a Safety NetJudicial decisions across multiple High Courts and CBIC's Circular No. 159/15/2021-GST have stressed that classification as an intermediary service depends entirely on the substance of the transaction, turning on four limbs: a minimum of three parties, two or more distinct supplies, the supplier not acting as principal to the main transaction, and a facilitative (not principal-to-principal) role.This fact-dependence has made the law litigation-prone. Tax authorities have often applied the intermediary tag mechanically, forcing exporters to litigate based on actual contracts and operations. Once the tag applies, POS shifts into India, converting a zero-rated export into a taxable supply and denying refund. Many such cases remain pending without finality.The 2026 omission, introduced without any savings clause, leaves open the fate of pending proceedings, demands, and disputes accumulated over the past eight years.The Common Law FoundationCommon law principles, inherited by India during the colonial period, remain interpretative aids unless displaced by statute. The relevant doctrine here is the Common Law Doctrine of Statutory Obliteration: when a provision is repealed or omitted, it is treated as erased from the statute book as if it never existed.However, the doctrine recognises the qualification of "transactions past and closed" — matters that have already attained finality are insulated from subsequent statutory removal. The far more significant category is matters still alive in litigation: demands under challenge and unadjudicated show cause notices. For these, whether the omission extinguishes the jurisdictional foundation of proceedings becomes urgently relevant.The General Clauses Act, 1897Section 6 of the General Clauses Act, 1897 provides the statutory answer to the uncertainty that unguarded removal of legislation could cause:Where this Act, or any Central Act or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not—(a) revive anything not in force or existing at the time at which the repeal takes effect; or(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or(e) affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid;and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.Section 6 codifies the doctrine of saving: repeal of a law is not the same as declaring it never existed. If Section 6 applies, pending proceedings, demands, and show cause notices under Section 13(8)(b) would survive and remain enforceable as if the omission never took place. But the threshold question is whether an "omission" falls within the word "repeal" — a question the courts have answered inconsistently over five decades.Rule 86(4B) of the CGST Rules mandates that where an erroneous refund is repaid along with interest, the refund will be recredited via PMT3A to the Electronic Credit Ledger (ECrL), available to discharge output tax on inter-State supplies.The Four Pillars of the Debate1. Rayala Corporation (P) Ltd. v. Director of Enforcement (1969) 2 SCC 412A five-judge Constitution Bench held Section 6 inapplicable to the omission of Rule 132-A of the Defence of India Rules. It stated, without analytical discussion, that "repeal" does not encompass "omission." Its more durable reasoning was textual: Section 6 requires repeal via a Central Act or Regulation, and Rule 132-A was omitted by a mere Ministry notification.2. Kolhapur Canesugar Works Ltd. v. Union of India (2000) 2 SCC 536A fresh Constitution Bench affirmed Rayala on both grounds regarding Central Excise Rules omitted by subordinate legislation, and laid down a three-tier framework: pending proceedings survive only if the new rule expressly provides for continuance, Section 6 applies, or a pari materia provision exists in the parent statute.3. M/S Fibre Boards (P) Ltd. v. CIT Bangalore (2015) 10 SCC 333A two-judge bench (Nariman and Sikri JJ.) challenged the established position. It held that Rayala's "omission is not repeal" remark was obiter dicta, not binding, since the case turned entirely on the Central Act requirement. It introduced Section 6A — which itself uses "repeal" to describe "express omission" — arguing both Constitution Bench decisions were rendered per incuriam for missing this provision. It also invoked State of Orissa v. M.A. Tulloch & Co. (1964), holding that if even implied repeal qualifies under Section 6, express omission must qualify too.4. Hikal Limited v. Union of India (Bombay High Court, 2025)Arising from the GST regime itself, concerning omission of Rules 89(4B) and 96(10) of the CGST Rules without a savings clause. The Court rejected the Revenue's argument that rules made under a Central Act inherit Section 6 protection, holding that Section 6's list of qualifying instruments is exhaustive and a Rule is not among them. The Court followed Rayala and Kolhapur on their primary textual ground, holding pending proceedings lapsed, while endorsing the Fibre Boards critique that the omission-versus-repeal distinction was obiter.The Legal Landscape TodayReading the four cases together, the law currently operates on a bifurcation based on the nature of the repealing instrument, not simply on omission versus repeal.For subordinate legislation — rules omitted by notification — Rayala, Kolhapur, and Hikal remain unambiguous: Section 6 does not apply, and pending proceedings lapse absent a savings clause or pari materia provision, because the repealing instrument is not a Central Act or Regulation.For Central Act provisions omitted through a Finance Act or other Parliamentary legislation, Fibre Boards represents the current judicial position: "repeal" in Sections 6 and 24 includes express omissions by virtue of Section 6A. The omission of Section 13(8)(b) falls in this second category, having been effected through the Finance Act 2026 — a Central Act — meaning the primary objection in Rayala, Kolhapur, and Hikal is absent here, and on the Fibre Boards analysis, Section 6 would be attracted.Do the Issues Actually Resolve?A constitutional tension remains: Fibre Boards was decided by a two-judge bench, while the Constitution Bench decisions it effectively overrides were decided by five judges. Strictly, a smaller bench cannot override a Constitution Bench, however sound its reasoning. In practice, whether the omission of Section 13(8)(b) attracts Section 6 remains genuinely litigable.Second Side of the CoinThe omission also creates new compliance consequences. Indian businesses receiving intermediary services from suppliers outside India previously fell outside India's POS under Section 13(8)(b). With its omission, the general rule in Section 13(2) now applies, shifting POS for such inbound services to the recipient's location — squarely within India — making reverse charge mechanism (RCM) liability unambiguous.Conclusion — A Legislative Proposal That Demands a Legal AnswerThe omission is commercially a liberalising measure long awaited by the intermediary services sector, correcting a structural anomaly and improving India's attractiveness as a global hub, particularly for GCCs. But implemented as a bare omission without a saving clause, transitional provision, or express statement of legislative intent, it has opened significant legal uncertainty.Rayala and Kolhapur established the still-surviving textual ground that Section 6 requires a Central Act, not mere omission. Fibre Boards, using Section 6A and the per incuriam doctrine, demonstrated that "repeal" includes express omission. Fibre Boards itself noted this was not a novel argument — General Finance Company & Anr. v. Assistant Commissioner of Income Tax (2002) 7 SCC 1 had acknowledged the argument's force but declined to refer it to a larger bench. Hikal confirmed the orthodoxy for subordinate rules while endorsing the Fibre Boards critique.Until a Supreme Court Constitution Bench definitively resolves whether "repeal" in Section 6 includes express omission through a Central Act, every stakeholder — service providers seeking refunds and Revenue authorities pursuing past demands — must navigate an unsettled landscape. A savings clause in the Finance Act 2026 could have closed this gap entirely; in its absence, the five-decade-old debate is live, consequential, and headed to court.ReferencesIntegrated Goods and Services Tax Act, 2017The Finance Bill, 2026The General Clauses Act, 1897Rayala Corporation (P) Ltd. v. Director of Enforcement (1969) 2 SCC 412Kolhapur Canesugar Works Ltd. v. Union of India (2000) 2 SCC 536M/S Fibre Boards (P) Ltd. v. CIT Bangalore (2015) 10 SCC 333Hikal Limited v. Union of India, 2025:BHC-AS:37892-DBGeneral Finance Company & Anr. v. Assistant Commissioner of Income Tax (2002) 7 SCC 1Author may be reached at madhavkumarjha759@gmail.com and eboard@icai.inSource: The Chartered Accountant, ICAI · May 2026 · www.icai.org
GST
Ep. 21 — Judicial Affi rmation of Bona Fide Credit Entitlement: A Landmark Supreme Court Ruling
CA Journal
· June 2026
00:00
--:--
Judicial Affirmation of Bona Fide Credit Entitlement: A Landmark Supreme Court RulingThe Supreme Court of India, in Commissioner of Trade & Tax, Delhi v. M/s Shanti Kiran India (P) Ltd. (judgment dated 9 October 2025), upheld the principle that a bona fide purchasing dealer cannot be denied Input Tax Credit (ITC) merely due to the selling dealer's failure to deposit collected tax. Affirming the Delhi High Court's earlier ruling in Quest Merchandising and the constitutional doctrine under Article 14, the Supreme Court held that responsibility for non-payment of tax rests with the defaulting seller, not the compliant purchaser.IntroductionThe judgment marks a significant reaffirmation of the principle of fairness and bona fide credit entitlement in indirect taxation. The issue — whether a purchasing dealer can be denied ITC merely because the selling dealer failed to deposit tax with the Government — resonates strongly with ongoing disputes under the Goods and Services Tax (GST) regime. This decision reinforces the foundational objective of ease of doing business, ensuring genuine buyers are not penalised for non-compliance by the selling dealer that is beyond their control.Case Background and FactsUnder the Delhi Value Added Tax Act, 2004 (DVAT Act), M/s Shanti Kiran India (P) Ltd., a registered dealer, had paid VAT to its sellers on valid invoices. The sellers' registration was valid on the date of transaction but was later cancelled, and they failed to deposit the tax with the department. As a result, the Department denied ITC to the purchaser under Section 9(2)(g) of the DVAT Act, which permits ITC only if the selling dealer has deposited the tax.The principal issue before the judiciary was whether ITC is available to purchasing dealers who:Paid taxes to registered selling dealer(s) in accordance with the invoices raised by them.Were bona fide purchasers who had paid taxes in good faith to registered selling dealer(s).Transacted with seller(s) who were registered with the Department on the date of the transaction.The Delhi High Court, following Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi (2017), held that bona fide purchasers cannot be denied ITC merely because the seller defaulted. It held that:The expression "dealer or class of dealers" in Section 9(2)(g) should be read as excluding a purchasing dealer who bona fide entered into transactions with validly registered selling dealers, with no mismatch between Annexure 2A and 2B of the Delhi VAT Return.The Department could not invoke Section 9(2)(g) to deny ITC where the selling dealer was validly registered and had issued a tax invoice reflecting the TIN.If the selling dealer failed to deposit the tax collected, the proper remedy was for the Department to proceed against the defaulting seller — not to deny ITC to the purchaser.The Department could still proceed under Section 40A of the DVAT Act where collusion between buyer and seller was established.Supreme Court's FindingsA two-judge bench comprising Justice Manoj Misra and Justice Nongmeikapam Kotiswar Singh upheld the Delhi High Court's view and dismissed the Department's appeal, directing it to grant ITC after due verification of invoices. The Court noted that the sellers' registration was undisputed on the date of transaction, and neither the transactions nor the invoices had been doubted on any inquiry into their veracity.Legal Reasoning and Constitutional PerspectiveThe Delhi High Court had earlier read down Section 9(2)(g) to avoid constitutional invalidity under Article 14, since a literal interpretation would make a purchaser vicariously liable for another's default. ITC, therefore, should be denied only where collusion or fraud exists — reasoning the Supreme Court upheld in full."The issue, whether a purchasing dealer can be denied Input Tax Credit (ITC) merely because the selling dealer failed to deposit tax with the Government, resonates strongly with ongoing disputes under the Goods and Services Tax (GST) regime."Relevance under the GST RegimeThough decided under the Delhi VAT Act, the principles bear directly on Section 16(2)(c) of the CGST Act, 2017, which similarly requires that tax charged by the supplier be "actually paid to the Government." High Court decisions in Bharti Telemedia Ltd. (2021), D.Y. Beathel Enterprises (2021), and Suncraft Energy (2023) have echoed this reasoning, holding that bona fide purchasers should not be denied ITC and that the Department must instead pursue the defaulting supplier.In Suncraft Energy, the Calcutta High Court relied on a similar reading of Section 9(2)(g) by the Delhi High Court in Arise India Limited v. Commissioner of Trade and Taxes, Delhi, holding the DVAT scheme of ITC availment to be substantially the same as under GST, subject only to procedural and statutory-form changes. The Department's special leave petition challenging Arise India was dismissed by the Supreme Court on 10 January 2018.ConclusionThe Supreme Court's judgment in Shanti Kiran India (P) Ltd. delivers more than a VAT-era clarification — it lays down a constitutional principle relevant to the entire indirect tax system, including GST. A taxpayer who has acted bona fide, purchased from a registered supplier, paid GST to that supplier, and discharged tax on its own output liability should not be deprived of ITC merely because the supplier failed to remit it. The ruling affirms input tax neutrality, protects genuine taxpayers, and reinforces equitable administration of tax law, giving GST taxpayers a strong precedent to invoke in similar disputes.◆ ◆ ◆Author may be reached at cajoydeb@mail.ca.in and eboard@icai.inSource: The Chartered Accountant, ICAI — May 2026 Issue, p. 60–62
MSME
Ep. 22 — Bridging Compliance and Capital: Chartered Accountants as Catalysts for MSME Expansion
CA Journal
· June 2026
00:00
--:--
Bridging Compliance and Capital: Chartered Accountants as Catalysts for MSME ExpansionHow India's Chartered Accountants are becoming strategic enablers — turning financial discipline, regulatory navigation and digital advisory into a growth engine for the country's 63 million micro, small and medium enterprises.The Micro, Small and Medium Enterprises (MSME) sector contributes approximately one-third to India's GDP and plays a pivotal role in driving the nation's economic development, recognized as one of the four key engines of growth alongside Agriculture, Investment and Exports. Sustained government focus on formalization has significantly enhanced credit penetration, enabling more enterprises to access formal financial systems and institutional support.Yet the sector remains structurally vulnerable: limited access to capital, inadequate technological infrastructure, and low resilience to market volatility continue to threaten its growth trajectory toward the vision of Viksit Bharat by 2047. Roughly 94% of India's MSMEs still operate informally and unregistered, even as the sector produces around 6,000 products — predominantly in manufacturing — across food, textiles, chemicals, metals, machinery and leather.30%Share of India's GVA35.4%Of manufacturing output63M+Enterprises nationwide110M+People employed40–45%Of India's exportsA Sector Defined by Diversity and ScaleGlobally, MSMEs represent close to 90% of all businesses, contribute roughly half of world GDP, and account for over 70% of formal employment. In India alone the sector spans more than 63 million enterprises. MSMEs are particularly effective at generating employment at lower capital cost than larger firms, catalyzing industrial development in rural and backward regions and helping narrow regional income gaps.FIG. 1 — KEY CHARACTERISTICS OF MSMEsDIVERSITYWide variation in size, industry, technology adoption and service offeringECONOMIC CONTRIBUTIONSubstantial share of GDP, exports and industrial outputEMPLOYMENT GENERATIONSecond-largest source of jobs after agriculture — reaching youth, women and vulnerable groupsThe Challenges Holding MSMEs BackOutdated technology, fragile supply chains and weak infrastructure compound a deeper problem: a persistent mismatch between the demand and supply of credit, driven largely by collateral constraints. Credit guarantee schemes and improved use of borrower data have begun to close that gap, while platforms such as TReDS — the Trade Receivables Discounting System — let MSMEs auction invoices for financing, lowering costs and improving access without collateral.FIG. 2 — CORE FUNCTIONAL AREAS OF MSME OPERATIONS (Source: FTAPCCI & IMCI)Marketing PracticesICT AdoptionHuman Capacity BuildingCost OptimizationMost MSMEs still lean on cold calling and relationship-based marketing; advanced tools like CRM, ERP and cloud computing remain underused due to cost and a shortage of skilled manpower. Yet over 70% of enterprises report income gains from even basic digital adoption — smartphones and UPI chief among them — signalling where the next wave of growth is likely to come from.Where Chartered Accountants Step InAs MSMEs navigate tighter regulation, complex global supply chains and intensifying competition — nearly 1,450 annual regulatory obligations per unit, costing roughly ₹13 lakh — Chartered Accountants have become indispensable strategic partners rather than back-office service providers."CAs uphold India's integration with global accounting and auditing standards, including IFRS, ISAs, and ethical standards, enabling MSMEs to present reliable and internationally comparable financial statements."Financial Stewardship & Access to Capital1- Cash-flow management and financial planningRobust bookkeeping, budget forecasting, working capital management and cash-flow modelling that directly shape an MSME's ability to scale.2- Improving access to financeCAs strengthen creditworthiness through auditable statements and valuation reports — MSMEs backed by a CA are reportedly twice as likely to secure loans from institutions like SIDBI, and CAs help unlock collateral-free credit of up to ₹5 crore under CGTMSE.3- Capital markets and structured financeWith MSMEs raising ₹7,453 crore via equity by January 2025, CAs guide listing on NSE Emerge and ensure disclosure compliance.Regulatory Compliance & Governance1- Mitigating compliance burdenAccurate GST filing, income tax compliance and statutory audits reduce exposure across more than 1,000 regulations spanning 480 high-risk provisions.2- Enhancing corporate governanceAlignment with IFRS and ISAs builds investor confidence and supports foreign investment inflows.3- Risk management and internal controlSystematic risk identification helps MSMEs withstand shocks such as supply chain disruption.Strategic Advisory & Value Creation1- Business advisory & strategic planningIdentifying cost efficiencies, market trends and reinvestment strategies that position MSMEs for long-term competitiveness.2- Digital transformation & analyticsGuiding adoption of AI, machine learning and cloud platforms — including the Udyam Portal and SBI's Udyami Mitra — while building cyber-resilient, quantum-prepared financial systems.3- Mentorship & ecosystem supportOn-ground guidance for Udyam registration, GST onboarding and scheme applications such as CGTMSE and Mudra, backed by ICAI's helpdesks and grievance redressal portal.Confronting the Hard NumbersA ₹69 trillion credit gap stands against just ₹10.9 trillion in available formal credit — a divide felt most acutely by women entrepreneurs facing limited collateral and restricted access to banking networks. CAs help close this gap by structuring viable loan proposals and credit models, while simultaneously guiding MSMEs toward greener, more sustainable operating models as global pressure for ESG compliance intensifies.Case Studies in PracticeBanking and MSME Sector Conclave 2025, Pune — highlighted how CAs bridge the information asymmetry between small businesses and lenders, clarifying documentation and collateral requirements and enabling single-window clearances across MSME clusters.Regulatory technology adoption — academic studies show that tech-savvy CAs implementing RegTech solutions can dramatically cut compliance costs while improving operational efficiency and risk visibility.Formalization in practice — through support with Udyam registration, GST compliance, capital markets listing and export documentation, CA-backed MSMEs see improved survival rates, better credit access and stronger growth.Strategic Horizons: The Road AheadFive priorities define where the CA–MSME partnership is headed next.Broaden Digital AdvisoryFacilitate Inclusive FinancingSimplify Compliance PathwaysDrive Sustainable InnovationStrengthen Professional EcosystemsThis means deepening competence in AI-enabled accounting and blockchain-based supply chain traceability; catalyzing inclusive finance for women-led and rural enterprises; advocating for compliance rationalization; supporting circular-economy and ESG-aligned business models; and scaling mentorship through ICAI initiatives like CIPD, incubation centers and startup yatras.A Multidimensional PartnershipAcross five pillars, the CA's role with India's MSMEs has moved well beyond the ledger.Financial ExpertiseEnabling access to capitalCash flow maturityCapital market participationRegulatory ProficiencyMitigating compliance riskElevating government standardsStrategic AdvisoryUnlocking new market opportunitiesCost efficienciesSustainability frameworksTech-Enabled Service DeliveryRegulatory technologyAnalyticsDigital literacyQuantum-ready systemsInstitutional OutreachScaling capacity via ICAI programsMentorship clinicsRegulator collaborationConclusionAs India confronts a challenging post-pandemic landscape marked by regulatory complexity, digital transformation, rising global competition, supply chain disruption and sustainability imperatives, MSMEs require more than transactional support — they need a strategic, tech-savvy, governance-oriented partnership. Chartered Accountants offer exactly that, through financial expertise, regulatory proficiency, strategic advisory, tech-enabled service delivery and institutional outreach.As India progresses toward its long-term ambition of a $5 trillion to $35 trillion economy by 2047, the CA–MSME partnership will remain a foundational pillar — solidifying financial discipline, improving compliance, expanding access to formal credit, and supporting the sector's digital and sustainable transformation.ReferencesBora, G. (2025). ET World MSME Day 2025: Driving innovation, impact, and intelligence. New Delhi: The Economic Times.CFO, C. (n.d.). Role of Chartered Accountant in Growth of MSMEs. Chhota CFO.Dewan, N. (2025). Regulatory overload: MSMEs face Rs 13 lakh yearly compliance costs. The Economic Times.FTAPCCI & IMCI. (n.d.). Current Practices and Challenges of MSMEs in Pursuit of Make in India Vision. FTAPCCI.Kumar, R. (2025). MSMEs in India: A Study of the Challenges, Opportunities, and Future Prospects. Journal of Emerging Technologies and Innovative Research, 12(3), 358–363.Mittal, M. (2025). Understanding Indian MSME Sector — Progress and Challenges. SIDBI.Nanda, C. S. (2025). The Chartered Accountant, 74(1), 6–9.iGOT Karmayogi. Retrieved from igotkarmayogi.gov.inAuthors may be reached at abhishekbhu008@gmail.com and eboard@icai.in
CORPORATE LAWS
Ep. 23 — Hindsight on Insider Trading
CA Journal
· June 2026
00:00
--:--
Hindsight on Insider TradingThe regulation of insider trading has emerged as a critical challenge in India's securities law regime, with implications for corporate governance, investor protection, and market fairness. This article undertakes an in-depth doctrinal and comparative analysis of insider trading under the SEBI (Prohibition of Insider Trading) Regulations, 2015. It critically examines the statutory framework, judicial interpretations, and enforcement practices in India, while synthesizing case law from foreign jurisdictions such as the United States and the United Kingdom. By integrating legal reasoning with policy considerations, the article identifies gaps in enforcement, ambiguities in definitions of unpublished price-sensitive information, and challenges in proving intent. It further explores how Indian jurisprudence has evolved from a formalistic approach to a more substantive understanding of fiduciary duties and fair disclosure. The study concludes with recommendations for strengthening India's legal framework by enhancing clarity, reducing compliance costs, and ensuring alignment with global best practices.CS Dr PT GiridharanFormer Additional Director (Corporate Laws), ICAICA. PT PadmanabhMember of the InstituteInsider Trading: Doctrinal Underpinnings and Global ParallelsInsider trading—trading in securities while in possession of unpublished price-sensitive information (UPSI)—directly undermines market fairness and investor confidence. The prohibition extends even to informal tip-offs among friends or casual conversations. Across major jurisdictions, including India (SEBI), the U.S. (SEC), and the U.K. (FCA), the foundational doctrine remains the same: “disclose or abstain.”In India, the SEBI (Prohibition of Insider Trading) Regulations, 2015, embody this principle through stringent preventive measures and penalties. The 2015 overhaul shifted the framework from mere prevention to absolute prohibition, ensuring that no person connected with a company can exploit UPSI for personal gain or secret profits.India's approach aligns closely with U.S. securities law. In Cady, Roberts & Co. (1961), the SEC held that information entrusted for corporate purposes must not be misused for personal advantage, emphasizing the intrinsic unfairness of allowing selective access to material information. The Supreme Court of India echoed this in Rakesh Agrawal v. SEBI (2003), affirming the duty to “disclose or abstain” and reiterating that the use of material non-public information is inherently fraudulent as it gives unfair advantage over uninformed investors. In Dirks v. SEC, the U.S. Supreme Court clarified that insider trading requires a breach of fiduciary duty involving manipulation or deception, supported by intent (mens rea).The U.K. adopts a dual enforcement system: insider dealing constitutes both a criminal offence under the Criminal Justice Act 1993 and a civil offence under the Market Abuse Regulation (MAR). The severe penalties imposed under both tracks highlight the strong stance taken by developed markets against insider trading.The Pitfalls of Insider Tradinga) India – SEBI Act, 1992 & PIT Regulations, 2015Section 15G of the Securities and Exchange Board of India Act, 1992 stipulates that any person contravening the Prohibition of Insider Trading (PIT) Regulations, 2015 shall be liable to a monetary penalty of not less than ₹10 lakh, which may extend to ₹25 crore or three times the amount of profits made out of the insider trading transaction, whichever is higher.Violations may also lead to prosecution and a prohibition on accessing the securities market for a specified period. In practice, SEBI orders in such matters usually impose monetary penalties coupled with market bans, though notably, there has not been any criminal conviction for insider trading in India so far.b) United States – Securities Exchange Act, 1933Under U.S. law, a criminal violation of insider trading provisions may attract a fine of up to USD 5 million and/or imprisonment for up to 20 years. Civil remedies include disgorgement of unlawful gains and other monetary penalties.It is pertinent to note that insider trading is not per se illegal; liability depends on proving, on a preponderance of probabilities, that such trading occurred. The legal test revolves around the materiality of the non-public information and whether the evidence outweighs a plea of innocence.c) United Kingdom – Criminal Justice Act, 1993In the UK, insider trading offences can result in unlimited fines and custodial sentences of up to seven years.Innocence or Evidence – The Rajaratnam CaseInsider trading becomes illegal when a person trades securities based on material, non-public information obtained through private or privileged channels. Proving that such trades are intentional rather than the result of innocent coincidence or independent analysis is one of the most challenging tasks for regulators. A notable example is United States v. Rajaratnam (No. 11-4416, 2nd Cir. 2013). In this case, two former business school friends were implicated—one of whom served as a director on the board of a multinational corporation. They exchanged a series of phone calls discussing unpublished price-sensitive information (UPSI) concerning the company's balance sheet ahead of its Annual General Meeting. The Director disclosed this confidential information to his friend, who, in turn, purchased shares of the company based on it. The trial lasted nearly three years. Despite compelling evidence, including wiretap recordings and trading records, the defendants argued that their actions were merely the outcome of legitimate market research—an argument the court rejected.The penalties were severe:Raj Rajaratnam (Chief of a hedge fund): 11 years' imprisonment—one of the longest terms ever imposed for insider trading in the U.S.—along with substantial monetary penalties.Rajat Gupta (Director and source of UPSI): two years' federal imprisonment, USD 13.9 million civil penalty, USD 5 million fine, and a permanent ban from serving as an officer or director of a public company.This case illustrates the complexity of proving intent in insider trading prosecutions, especially where parties appear to be at arm's length. The conviction ultimately rested on clear evidence that UPSI was transferred from a board member to a hedge fund manager, resulting in profitable trades.What Level of Proof is Necessary in Insider Trading Cases?In Dilip S. Pendse vs SEBI, decided on 19 November 2009 (Appeal No. 80 of 2009), the Securities Appellate Tribunal, while referring to the judgement delivered by Lord Denning, L.J., in Bater v. Bater (1950) 2 All E.R. 458, observed:“It is true that by our law there is a higher standard of proof in criminal cases than in civil cases, but this is subject to the qualification that there is no absolute standard in either case. In criminal cases, the charge must be proved beyond a reasonable doubt, but there may be degrees of proof within that standard. So also, in civil cases. The case may be proved by a ‘preponderance of probability’, but there may be degrees of probability within that standard. The degree depends on the subject matter.”Key Changes and Challenges in the PIT AmendmentsSEBI, through its notification of March 11, 2025 (published March 12, 2025), introduced major amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. Effective June 10, 2025, these changes broaden the scope of Unpublished Price Sensitive Information (UPSI), ease compliance for UPSI originating outside the listed entity, expand the definition of “connected person” to include more relatives, and tighten the sensitivity attached to UPSI. Regulation 2(1)(n) continues to define UPSI as non-public information relating to a company or its securities that could materially affect their price, supported by a non-exhaustive list of examples such as dividends and financial results. The definition aligns with the events under Para A and B of Part A of Schedule III, read with Regulation 30 of the LODR Regulations, which require each event to be examined for potential price sensitivity.Expanded Scope of UPSI under SEBI RegulationsKey Disclosure EventsFinancial & Credit Events: Rating changes (excl. ESG), planned fund-raising, loan resolution/restructuring or one-time settlements, winding-up/CIRP matters.Governance & Control: Agreements impacting management/control, changes in KMP (UPSI unless due to superannuation, term end, or auditor resignation).Compliance & Licensing: Grant, withdrawal, or suspension of key licenses/approvals.Misconduct & Investigations: Fraud/defaults/arrests (India/abroad), forensic audits for misstatements/misuse of funds, adverse authority orders.Contracts & Business Operations: Awards or terminations of non-routine contracts/orders.Legal Outcomes: Litigation/dispute results with significant company impact, guarantees/indemnities/sureties given outside normal business.Who All Are Covered Under a Connected Person?The revised definition of ‘connected persons’ broadens coverage beyond relatives to include the new categories mentioned, placing compliance obligations on them, with a presumption of inclusion unless they can prove otherwise.A connected person is anyone associated with a company in a way that gives them access to UPSI. The definition now also covers:firms, their partners, or employees where a connected person is a partner; andindividuals sharing a household or residence with a connected person.These additions extend compliance obligations beyond relatives, with a presumption of inclusion unless rebutted by the concerned person.“Insider trading becomes illegal when a person trades securities based on material, non-public information obtained through private or privileged channels.”Obligation of Connected PersonsConnected persons, as insiders, must comply with key rules:Under Regulation 3, they cannot share UPSI except for legitimate purposes, duties, or legal obligations;Under Regulation 4, they cannot trade while in possession of UPSI, and any permitted off-market insider trades must be reported to the company within two working days, which then informs the stock exchange within two trading days; andUnder Regulation 5, they may submit a pre-approved trading plan, a provision now extended to relatives of connected persons.Impact on Listed EntitiesListed entities mainly need to remind connected persons about the proper handling of UPSI. With the expanded definition, connected persons must exercise extra caution, as in any alleged violation of Regulation 4(1) of SEBI PIT Regulations, the burden is on them to prove they did not possess UPSI. Pre-clearance and disclosure obligations still apply only to designated persons and their immediate relatives, not all relatives. While SEBI allows listed entities to seek disclosures from connected persons, such requirements should be imposed after careful consideration. As a precaution, entities may obtain relatives' PAN details to monitor trading activities.'Relative' becomes 'Super Relative'The amended framework broadens “immediate relatives” into a wider “relative” category by removing the earlier requirements of financial dependency or involvement in trading decisions. Now, a relative includes a spouse, parents (own and spouse's), siblings (own and spouse's), children (own and spouse's), and the spouses of those siblings or children. This change ensures clearer identification of connected persons, effectively covering all close family members in insider trading regulations. The onus remains on such persons to prove that their connection did not involve influence from UPSI.Is 'Profit Motive' Essential to Prove a Charge in the Case of Insider Trading?In SEBI v. Abhijit Rajan (2022), the Supreme Court held that proving insider trading requires establishing a profit motive; a “distress sale” to save a company from bankruptcy is not insider trading. For information from outside the company, entries in the structured digital database can be made within two days, and a new proviso to Schedule B, Clause 4(1) allows the trading window to remain open for such information.The Responsibility of Professionals in Handling Insider TradingA compliance officer—typically a whole-time company secretary designated as a KMP under SEBI (LODR)—plays a central role in preventing insider trading by ensuring full regulatory compliance, protecting confidential board deliberations, guiding directors on secure audio/video participation, monitoring disclosures and shareholdings, and identifying conflicts, including excluding directors with over 2% interest from relevant proceedings. Well-versed in corporate and securities laws, the officer safeguards UPSI, maintains accurate records, and upholds strong governance standards.SEBI's recent actions against promoters of Kwality Limited, Edelweiss Financial Services and its compliance officer, and entities involved in insider trading in Zee Entertainment Enterprises Limited reinforce the importance of this role.For KMPs and connected persons, ethical conduct remains essential: trade only on public information, avoid ESOP or F&O dealings when in possession of UPSI, recognise that “relatives” may extend broadly, disclose all holdings, and abstain from trading when uncertain—since in insider-trading cases, evidence prevails and violations can lead to disgorgement, trading bans, and loss of holdings.SEBI's ongoing investigation into insider trading at a private bank is examining why the CEO and Deputy CEO traded in the bank's shares despite knowing about major accounting lapses involving derivative losses of ₹2,329 crore—information that qualified as UPSI. The case raises broader concerns about the timing of disclosures, fraud reporting, internal controls, adherence to the code of conduct by key managerial personnel, and the bank's overall governance and risk management. Regulators and stakeholders are also scrutinizing whether the auditors should have treated the derivative-related losses as fraud.The Ethical Behaviour for Key Managerial PersonnelTrade only on publicly available information; never trade while holding UPSI.You may be connected to the company, but avoid ESOP or F&O trades if you possess UPSI.“Relatives” can include extended or proximate relations.Studying insider trading is fine—just avoid becoming part of an insider network.As a KMP, safeguard UPSI and never misuse it.Always disclose your shareholdings to the company to avoid liability.The safest approach is to abstain and refrain from trading when in doubt.If you are a connected person, stay away from trading activities.In insider trading cases, evidence—not claimed innocence—prevails.Falling into the PIT results in disgorgement, trading bans, and loss of holdings.ConclusionInsider trading undermines market trust, and while India's regulations have evolved, adopting global best practices can make oversight more agile, data-driven, and deterrent. A resilient framework should integrate advanced surveillance, stronger cross-border collaboration, and a culture of ethics to keep capital markets transparent, fair, and inclusive.Synthesis Table 1: A look at the SEBI (PIT) Regulations, 2015, and as AmendedS. No.AspectKey Points1Definition of Insider TradingTrading a company's securities using confidential, non-public information for profit or to avoid loss.2ProhibitionNo trading, sharing, or facilitating trades using UPSI.3UPSINon-public information that could materially impact security prices if disclosed.4InsiderDirectors, KMPs, employees, or anyone with access to UPSI.5Connected PersonsImmediate relatives of insiders and specified professionals/advisors.6Trading WindowCompanies must close trading windows during sensitive periods; designated persons restricted.7Compliance OfficerAppointed by the company to monitor adherence and implement insider trading policy.8AmendmentsSEBI periodically updates regulations, e.g., 2019 expanded UPSI definition; 2025 amendments added further provisions.9EnforcementSEBI can investigate violations and impose fines, bans, and other disciplinary measures.Synthesis Table 2: Insider Regulations – A Global ScenarioFeatureIndiaUSAUKAustraliaStandardPossessionUseUsePossessionEnforcementSEBISEC/DOJFCAASICProofPossessionUse & intentMens reaStrict-likeWhistleblowerYesYesPartialYesTrendDigital forensics/WhatsApp leaksTippee liabilityCriminal sentencingHigh convictionsSynthesis Table 3: Comparative Enforcement StrengthIndia: Strong enforcement (4/5)USA: Moderate enforcement (2/5)UK: Moderate enforcement (2/5)Australia: Strong enforcement (4/5)The above highlights that India and Australia have the highest enforcement strength, while the USA and UK are relatively lower.Synthesis Table 4: Indian Case Laws on Insider Trading – An Evolving JurisprudenceCaseFactsOutcomeSignificanceRakesh Agrawal v. SEBI (1998)MD of ABS Industries accused of insider trading pre-merger.SAT ruled no intent; case was in his favor.Introduced "subjective intent" test, later replaced by possession-based standard.Hindustan Lever Ltd. v. SEBI (1998)HLL bought BBLIL shares before merger announcement.SEBI's allegation dismissed; news already public.Clarified "publication" timing for UPSI.SEBI v. Rajiv Gandhi (Satyam, 2009)Promoters sold shares before fraud disclosure.Heavy penalties imposed.Reinforced SEBI's authority on UPSI-related fraud.Reliance Industries Ltd. (2021)Trading in Reliance Petroleum shares using UPSI pre-merger.₹25 crore penalty by SEBI.Showed SEBI's aggressive action against corporate insiders.Synthesis Table 5: Global Case Laws on Insider Trading – A Stringent ApproachCaseFactsOutcomeImpactUnited States v. Martha StewartSold ImClone shares after tip before FDA rejection.Convicted for obstruction/false statements, not insider trading.Highlighted SEC's broad enforcement powers.Dirks v. SEC (1983)Analyst received tip; issue of tippee liability.Liability only if tipper breached fiduciary duty for personal benefit.Established personal benefit test for tippees.R v. McQuoid & Melbourne (UK, 2009)UPSI passed to father-in-law, who traded.Both imprisoned.Showed strong penalties for familial misuse of UPSI.ASIC v. Curtis (Australia, 2010)Traded using insider info from a girlfriend.2.5 years imprisonment.Reinforced strict enforcement in Australia.Authors may be reached at drptgiridharan@gmail.com and eboard@icai.inSource: The Chartered Accountant, May 2026 — Corporate Laws section, ICAI (pp. 70–74)
taxation
Ep. 24 — Analyzing Information Technology Act, 2000 through a Taxman’s lens
CA Journal
· June 2026
00:00
--:--
Analyzing the Information Technology Act, 2000 Through a Taxman's LensA Law Born from Growth and RiskIndia's IT industry expanded rapidly after the 1991 economic reforms opened the economy to global participation. Through the 1990s the sector's output and software exports grew sharply, and with that growth came a new category of risk: data breaches, viruses, and hacking incidents that the existing legal framework was not built to handle. Parliament responded with the IT Act, 2000, conceived with a dual mandate — legally enabling electronic commerce and documentation, while bringing cybercrime under the reach of the law.The Act's preamble sets out three goals: recognizing electronic transactions as legally equivalent to paper-based ones, enabling electronic filing with government agencies, and amending allied statutes such as the Indian Penal Code, the Indian Evidence Act, the Bankers' Books Evidence Act, and the Reserve Bank of India Act. Its reach extends well beyond cyber law into the everyday mechanics of taxation, which is the focus of this article.Giving Legal Force to Electronic RecordsSection 4 of the Act puts electronic records on equal legal footing with paper documents, provided they are accessible and usable for later reference. This single provision has outsized consequences for tax compliance: it means that wherever a tax notification or rule is silent on whether a "document" must be physical, a digital version satisfies the requirement by default. The article illustrates this with a customs exemption notification (Notification No. 102/2007-Customs) that lists supporting documents an importer must produce without specifying their format — a gap Section 4 fills, a reading the CESTAT endorsed in House Full International Ltd. v. Commissioner of Customs (Import), Mumbai (2014).When Is a Notice "Dispatched"?Digital communication between tax authorities and taxpayers — through email, government portals, or SMS — raises a technical question with major legal consequences: exactly when does a notice or order count as sent? Section 13(1) of the IT Act answers this by tying dispatch to the moment an electronic record leaves a computer resource under the originator's control.Case in Focus — Suman Jeet Agarwal v. ITO, Ward 61(1) (Delhi HC, 2022)The Delhi High Court examined the Income Tax Department's ITBA email system, which routes notices through several internal servers before they reach an assessee's inbox. The diagram below reflects the mail flow discussed in the judgment.Assessing Officer(Sender)⇒ITBA System(User Agent)⇒Sent Mail Queue⇒ITBA MTA Server(Messaging Gateway)⇒Assessee's MTA Server(Destination)⇒Mailbox & Gmail(Assessee)The court held that dispatch occurs the moment the message leaves the last server still under the Department's control — the ITBA MTA server — and enters the assessee's mail service infrastructure, which the Department does not control. This places the Department squarely as "originator" under Section 11(c) of the IT Act, and fixes the dispatch timestamp accordingly."Receipt of a notice or order by the party to whom it is addressed is essential for proper service under tax law — without it, the entire proceeding can be rendered void."When Is a Notice "Received"?Section 13(2) governs the time of receipt and turns on a key distinction: has the addressee designated a specific computer resource for receiving such communications?ScenarioTime of ReceiptAddressee designated a computer resourceWhen the record enters that designated resourceNo resource designated, but addressee retrieves itThe moment of actual retrievalNo resource designated, no retrieval shownWhen the record enters any computer resource of the addresseeRegulatory and judicial interpretation has filled in what counts as a "designated computer resource." A 2017 CBDT notification on e-Proceeding treats a taxpayer's registered e-filing account as such a resource. In Poomika Infra Developers v. State Tax Officer (Madras HC, 2025), the GST common portal itself was held to be a designated resource for both the department and the registered taxpayer, since login credentials give the taxpayer controlled access to it. Section 144B of the Income Tax Act similarly extends the definition to cover the assessee's registered portal account, linked mobile app, and registered email address.Where Does Dispatch and Receipt Legally "Happen"?Because electronic communication passes through servers scattered across geographies, Section 13(3) and 13(5) supply a fixed legal answer, overridable only by agreement between the parties:Place of dispatch = the originator's place of businessPlace of receipt = the addressee's place of businessMultiple business locations → the principal place of business governsNo place of business → usual place of residence; for companies, the registered officeSection 13(4) clarifies that this deemed "place" of receipt applies even though it may differ from the physical location of the actual server handling the record — keeping jurisdictional questions clean despite the underlying technical complexity.Keeping Records: Section 7 and Its LimitsIndian tax law imposes detailed record-retention obligations — Section 44AA and Rule 6F under the Income Tax Act, and Rules 56–57 of the CGST Rules, among others. Section 7 of the IT Act lets electronic records satisfy any retention requirement, provided three conditions hold: the record stays accessible for later reference, it is preserved in its original (or an accurately representative) format, and details identifying its origin, destination, and timing remain available.Important nuanceSection 7(2) applies the principle generalia specialibus non derogant — a specific law overrides a general one. So wherever tax legislation lays down its own, more specific retention rules, those rules control, and Section 7's general retention standard steps aside.The Electronic Gazette and the Exact Moment a Notification Takes EffectSince 2015, India has published Gazette notifications exclusively online, a shift the government tied directly to Section 8 of the IT Act, which allows publication in either the print or Electronic Gazette to satisfy any legal "publication" requirement.But the precise time of publication — not just the date — can decide a case. In Ruchi Soya Industries v. Union of India (Andhra Pradesh HC, 2019), the court held that a notification only takes legal effect once it has been digitally signed by the competent officer and then uploaded to the official Gazette website; the judgment noted the exact digital-signature timestamp as decisive. The Gujarat High Court reached a similar conclusion in Adani Wilmar Ltd. v. Union of India (2022).Looking AheadThe article closes by noting a widening gap: the IT Act, 2000 was built for an earlier digital economy, while cloud computing, digital currencies, AI-driven decision-making, distributed ledgers, and smart contracts now raise governance questions the original Act never anticipated — particularly around tax evasion risk and data privacy. Recent and proposed measures aimed at closing that gap include:TDS on payments made during transfer of virtual digital assetsRecognition of cloud-based storage within the definition of "books of accounts" under the proposed IT Bill, 2025The Promotion and Regulation of Online Gaming Bill, 2025The Digital Personal Data Protection Act, 2023The (draft) National Data Governance Framework Policy, 2022The proposal to eventually replace the IT Act, 2000 with a Digital India ActThe author's broader argument is that as digital infrastructure and tax administration grow more intertwined, sustained harmonization between technology law and tax law — not one-off fixes — is what will keep the system workable.Selected Case Law & Sources CitedHouse Full International Ltd. v. Commissioner of Customs (Import), Mumbai — CESTAT, 10 Nov 2014Suman Jeet Agarwal v. ITO, Ward 61(1) & Ors — Delhi High Court, W.P.(C)-10/2022, 27 Sep 2022Poomika Infra Developers v. State Tax Officer — Madras High Court, W.P. No. 33562 of 2024, 9 Apr 2025Ruchi Soya Industries v. Union of India — Andhra Pradesh High Court, W.P. No. 4533 & 4534 of 2019, 28 Sep 2019Adani Wilmar Ltd. v. Union of India — Gujarat High Court, R/SCA/8057/2019, 11 Nov 2022CBDT Notification No. 4/2017, dated 3 April 2017Originally published in The Chartered Accountant journal, ICAI, May 2026 issue — by CA. Abhinab Paul. This page is an independent summary prepared for reference purposes.
Technology
Ep. 25 — Securing the Trust Quotient: A Cybersecurity & Data Protection Framework for Modern CA Practices
CA Journal
· June 2026
00:00
--:--
Securing the Trust Quotient: A Cybersecurity & Data Protection Framework for Modern CA PracticesCybersecurity has emerged as a critical practice-management and governance imperative for Chartered Accountants, especially in small and mid-sized firms managing sensitive financial and personal data amid weaker controls. Digitisation, cloud adoption, and remote work have dissolved traditional perimeters, exposing firms to phishing, ransomware, credential theft, and breaches via insiders or vendors. The article connects these risks to ICAI’s confidentiality and due-care duties under the Code of Ethics, the IT Act’s “reasonable security practices,” and the Digital Personal Data Protection Act, 2023 (DPDP Act), with Rules notified in November 2025. It emphasises governance and risk management over mere compliance, while positioning cyber-insurance as a supplementary safeguard rather than a primary control.Introduction: From IT Issue to Practice-RiskOver the last decade, most CA firms have quietly but fundamentally changed how they work. Client interactions that once involved physical files, manual ledgers, and in-person meetings are now dominated by cloud-based accounting systems, online filing portals, shared drives, and video calls. Income-tax returns, GST filings, audit documentation, board packs, and management reports all move through digital channels, often accessed from multiple locations and devices.This article argues that cyber risk must be treated as an integral part of practice management and professional governance. It maps why CA firms are attractive targets, explains how attacks typically unfold in real life, connects cybersecurity to professional and legal obligations, and proposes a practical, layered framework that a small or mid-sized firm can adopt without needing a full-time Chief Information Security Officer (CISO).Why CA Firms Are Prime Targetsi. The Data Profile of a CA FirmCA firms sit at a unique junction in the economic system. They deal not only with numbers but with structured, verified information about individuals, businesses, and transactions. Typical firm repositories include tax returns, financial statements, trial balances, bank statements, KYC records, loan documents, projections, valuation reports, and working papers. In many cases, firms also handle copies of PAN, Aadhaar, cancelled cheques, and, increasingly, one-time access to client portals.From a criminal’s perspective, this is exceptionally valuable raw material. With a single client file, an attacker may be able to construct a complete personal or business profile for identity theft, targeted social-engineering scams, or fraudulent borrowing. At the corporate level, access to draft financials, M&A plans, and internal board papers can support insider trading, corporate espionage, or extortion attempts. Unlike random customer lists breached from e-commerce sites, data held by CAs is curated and trusted, which increases its “market price” in underground forums.ii. Misconceptions in Small and Mid-Sized PracticesDespite this exposure, many small and mid-sized firms believe that “we are too small to be on anyone’s radar” or that “hackers will only target banks and large corporates.” However, attackers often prefer entities with weaker defences, especially where the data value per target is high. International and Indian experience shows that SMEs and professional firms are frequently targeted because they tend to have:Limited budgets for security tools and skilled IT staff.Fragmented infrastructure with a mix of old and new devices and software.Informal practices such as shared passwords, uncontrolled USB usage, and unencrypted laptops.iii. Remote and Hybrid Work: The Vanishing PerimeterRemote and hybrid work, accelerated during the pandemic and now normalized, has dissolved the traditional “office perimeter” guarded by a firewall. Partners and staff routinely access client data from home networks, personal laptops and tablets, and mobile phones on the move. Wi-Fi routers at home may still run default passwords; family devices may share the network; sensitive emails may be checked over open hotel Wi-Fi.This shift means that security can no longer rely on the idea of a single safe network. Every endpoint and every identity used to access client data becomes part of the attack surface. Without basic measures such as VPNs, hardened devices, and multi-factor authentication (MFA), remote access significantly increases the chance that a compromised device, stolen password, or unsafe network opens a backdoor into the firm’s environment.Anatomy of Today’s Cyber Threats to CA Firmsi. Phishing, Spoofing and Business Email CompromisePhishing remains the single most common starting point for cyber incidents in professional firms. Attackers craft emails that appear to come from trusted entities—such as the Income Tax Department, GSTN, MCA, RBI-regulated lenders, or even large clients—and send them in bulk, often timed around deadlines when staff are under pressure. Common patterns include:Notices claiming discrepancies in an income-tax return with a link to “view order,” which actually leads to a credential-harvesting page.Messages from “bank relationship managers” seeking confirmation of client account details or sending “revised RTGS forms” with malware attachments.Emails apparently from a client CFO or partner asking for an urgent payment to a new vendor account or for sharing sensitive MIS reports through a shared link.Once a user clicks a malicious link or enters credentials, attackers may gain full access to that mailbox. They then quietly monitor and forward emails, reset passwords on linked cloud services, and send convincingly timed messages to other staff and clients to initiate frauds—this is typically termed Business Email Compromise (BEC).ii. Malware and RansomwareMalware is a broad term that includes viruses, trojans, and, increasingly, ransomware. In ransomware incidents, the attacker encrypts the firm’s data and demands a ransom (often in cryptocurrency) to provide the decryption key. Modern ransomware operations often combine this with data exfiltration: they first copy out sensitive data and then encrypt systems, threatening to publish the stolen information if the ransom is not paid.For a CA firm in peak filing or audit season, ransomware can be catastrophic. Access to trial balances, audit files, GST workings, and emails may be lost overnight. Even if backups exist, recovery may take days, during which staff are unable to work effectively, clients become anxious, and statutory deadlines may be missed. Moreover, if client data has been stolen, the firm must consider disclosure, contractual obligations, and reputation management in addition to restoration.iii. Social Engineering and “Jamtara-Style” AttacksNot all attacks rely on sophisticated code. Many simply exploit human psychology—authority, urgency, trust, or fear. Indian media and law-enforcement reports show how “Jamtara-style” call-centre frauds and organized cybercrime rings use phone calls, SMS, WhatsApp, and social media to deceive educated professionals. Examples relevant to CA firms include:Callers posing as bank officials or payment-gateway staff seeking OTPs “to reverse a failed transaction” relating to professional fees.Imposters claiming to be from client IT departments asking for VPN or email passwords “to fix an issue.”Attackers impersonating a partner on WhatsApp—using a downloaded profile photo—to ask a team member to urgently buy high-value gift vouchers or transfer funds.Because these attacks bypass technical controls, awareness and verification discipline (for example, calling back on known numbers) are essential defences.iv. Silent Data Exfiltration and Credential TheftWhile ransomware and BEC are visible, many damaging breaches begin with silent data theft. Infostealer malware and keyloggers installed through malicious attachments or cracked software can capture passwords, browser-stored credentials, and even screenshots. Each time a staff member logs into a tax portal, internet banking, or a cloud accounting system, their credentials may be sent to a remote command-and-control server.Over weeks or months, attackers may accumulate working papers, client lists, and authentication data without triggering obvious alarms. The first sign might be a client’s bank account being misused, tax refunds diverted, or confidential financials appearing in a competitor’s hands.v. Insider and Third-Party RisksInsider risks cover a spectrum—from deliberate theft of client lists by departing staff to well-meaning employees forwarding sensitive data to personal email for “working from home.” In firms with weak access controls, a junior staff member might have wide-ranging read access to multiple clients’ folders, increasing impact if their account is misused.Third-party risks arise when firms use outsourced book-keeping teams, freelance staff, or external IT vendors who have access to systems and data. Compromise of a remote-desktop solution, an unmanaged device used by an outsourced accountant, or lax security at an IT vendor can create a breach path into an otherwise well-controlled firm.Professional, Legal and Ethical Dimensionsi. Confidentiality, Due Care and the ICAI Code of EthicsThe ICAI Code of Ethics requires members to maintain the confidentiality of information acquired as a result of professional and business relationships and not to disclose such information without proper authority unless there is a legal or professional duty to do so. This obligation implies not only avoiding intentional disclosure but also exercising reasonable care to prevent unauthorized access.If a firm stores tax returns and financials on unencrypted laptops with shared passwords or uses free file-sharing platforms without access control, it may be difficult to argue that “reasonable care” was exercised when a breach occurs.In some fact patterns, a serious, preventable cyber incident could raise questions around professional competence and due diligence, particularly where clients suffer direct loss.ii. IT Law, Contracts and Client ExpectationsIndian law also expects “reasonable security practices.” The Information Technology Act, together with its rules on sensitive personal data and subsequent data-protection developments, impose obligations on entities that process financial and personal information to implement appropriate security controls.Separately, clients—especially banks, NBFCs, listed companies, and multinationals—are increasingly embedding data-protection and breach-notification clauses in engagement letters and vendor contracts. These may require CA firms to:Protect data using specified security standards.Restrict sub-processing or offshore storage.Notify clients within a defined time-frame if a breach affecting their data occurs.Failure to comply can lead to termination of engagement, claims for damages, and reputational escalation within the client group.iii. Cyber Insurance – Help, not a PanaceaCyber-insurance products for SMEs and professional firms have grown in India, offering coverage for forensics, legal expenses, incident response, extortion support, and sometimes business interruption. However, insurers generally impose minimum security baselines and may deny or limit claims if the insured has ignored basic controls, misrepresented its posture, or failed to patch known critical vulnerabilities.For CA firms, insurance should be viewed as a risk-transfer tool after foundational controls are in place. It may be particularly relevant where clients or foreign group entities expect evidence of financial resilience in case of cyber incidents.A Practical Cybersecurity Framework for CA FirmsFor readers, the most valuable discussion is “What exactly should a firm do?” The following framework is designed for small and mid-sized firms that may not have a dedicated Chief Information Security Officer (CISO) but can invest in disciplined practices and appropriate external support.i. Governance and PolicyCybersecurity must start with governance, not gadgets. Partners should:Explicitly assign responsibility for information security—either to a partner or a small committee—while retaining overall accountability.Maintain a simple risk register listing key digital assets (email, cloud drives, tax and audit tools, practice-management systems), main threats, and existing controls.Adopt a concise written Information Security Policy that covers acceptable use of devices, password rules, handling of client credentials, remote-work conditions, and incident reporting.The policy need not be lengthy, but it should be communicated, revisited annually, and supported by training and enforcement.ii. Identity and Access ManagementIdentity is the new perimeter. Some practical steps:Implement MFA for firm email accounts, cloud storage, practice-management tools, and VPN or remote-desktop access. Most mainstream platforms now support MFA at no extra cost.Avoid shared logins for staff; where a shared mailbox is needed (e.g., info@), use named accounts with delegated access.Apply the principle of least privilege: staff should have access only to clients and folders required for their engagements, and access should be promptly revoked when roles change or employment ends.Periodic (for example, quarterly) reviews of user accounts, especially for leavers and external vendors, reduce “orphaned” access that attackers can exploit.iii. Endpoint and Network SecurityBecause staff often work from multiple locations, firm devices must be hardened:Standardise on licensed operating systems and applications, with automatic patching turned on for OS, browsers, and office suites. Critical accounting and tax tools should be monitored for updates as vendors release security fixes.Install reputable endpoint-protection software (antivirus/EDR) and configure regular scans, web-filtering, and blocking of known malicious domains.Enable full-disk encryption on laptops and portable devices; enforce screen-lock and inactivity timeouts. Lost or stolen devices without encryption are a major breach vector.On networks:Use business-grade routers where possible; change default passwords and update firmware.Segment guest Wi-Fi from internal networks at the office.Require VPN connections when accessing firm resources from outside. Even simple, commercial VPN solutions can significantly improve security over open Wi-Fi.iv. Data Classification, Encryption and HandlingNot all data requires the same level of protection. A simple classification scheme—such as public, internal, confidential, and highly confidential—helps align controls with risk. For example:Public: published articles, marketing material.Internal: HR policies, general internal communication.Confidential: normal client working papers, tax computations.Highly confidential: draft financials of listed entities, M&A deals, investigation reports, board papers.For confidential and highly confidential data:Use secure sharing platforms with access control and, where possible, watermarking and download restrictions. Avoid sending large volumes of sensitive data as unencrypted email attachments.Ensure encryption in transit (HTTPS/TLS) is in place for portals and sharing tools; for very sensitive items, use password-protected archives shared through separate channels.Put clear rules around copying firm data to personal devices or external USB drives and consider technical controls to restrict or log such actions.v. Backup, Business Continuity and Incident ResponseBackups are the last line of defence against ransomware and accidental deletion. For CA firms, they should be non-negotiable. Recommended practices include:Follow the 3-2-1 rule: keep three copies of data, on two different media, with one copy offsite or in immutable cloud storage.Automate backups for critical file shares, cloud drives, and practice-management databases, and test restoration regularly to ensure that backups are not only present but usable.Define which systems are most critical (for example, audit files, tax working papers, emails) and set realistic Recovery Time Objectives (how fast they must be restored) and Recovery Point Objectives (how much data loss in hours or days is tolerable).An Incident Response Plan, even a simple two-page document, should outline:Who to inform first when suspicious activity is noticed.Immediate steps to contain impact (disconnecting devices, resetting passwords, preserving logs).External contacts—IT vendor, cyber forensic support, legal advisor, and, where relevant, client contact points and law-enforcement portals such as the National Cyber Crime Reporting Portal.Practising this plan through a tabletop exercise once a year can significantly improve response effectiveness.The Human Firewall: People, Culture and TrainingMany high-profile cyber incidents ultimately trace back to human action—clicking a malicious link, using a weak password, forwarding data insecurely, or ignoring early warning signs. For CA firms, investing in people and culture often yields the highest return on effort. Effective measures include:Periodic awareness sessions held every few months, focusing on real-world cases such as recent tax-related phishing scams or “Jamtara-style” frauds, instead of generic theoretical content.Simulated phishing exercises, where staff receive mock phishing emails and immediate feedback, to build pattern recognition.Clear “dos and don’ts” documented in a simple user guide: how to verify unexpected payment requests, what to do if you suspect malware, and which channels to use for sharing different types of data.Firms should encourage a no-blame reporting culture. Staff should feel safe admitting that they clicked a suspicious link or shared data incorrectly, so the firm can respond quickly and limit damage. Punitive reactions or ridicule discourage reporting and allow incidents to escalate.Vendors, Cloud, and the Wider Ecosystemi. Managing IT Vendors and SaaS ToolsGiven that many firms rely on cloud-based accounting, practice-management, document-sharing, and backup tools, vendor risk must be actively managed. Practical steps include:Reviewing contracts to ensure they address data security, sub-processors, data-location (where information is stored), and incident-notification timelines.Asking SaaS providers for evidence of security posture, such as ISO 27001 certification or SOC 2 reports, where appropriate for the firm’s risk level and client expectations.Limiting and periodically reviewing access granted to external IT support staff; terminating access when projects end, or vendors change.ii. Learning from Professional and Peer NetworksProfessional forums and peer networks are increasingly addressing themes such as cybercrime, digital practice, and technology risks through articles, webinars, and study-circle discussions. Engaging with this ecosystem enables firms to:Benchmark their preparedness against peers.Learn from anonymised case studies of incidents and near-misses.Access curated resources, sample policies, and checklists developed by practitioners with IT-risk expertise.As attacks continue to evolve, staying connected to such professional communities helps firms avoid learning “the hard way” through their own breaches.From Compliance Burden to Competitive AdvantageMany firms still view cybersecurity as a regulatory or client-driven burden—something to be handled minimally to “tick the box.” However, there is an emerging opportunity to reposition strong information security as a differentiator.Clients, particularly sophisticated corporates and international groups, increasingly ask how their data will be protected and may favour advisors who can articulate a clear posture. Firms with demonstrable controls—documented policies, MFA, tested backups, staff training, and incident-response readiness—are better placed to win and retain high-sensitivity mandates such as forensic assignments, insolvency, internal investigations, and transaction support.For readers building mid-sized practices, including a brief, plain-language description of the firm’s security approach in proposals and on websites can reinforce a message of trust and professionalism, provided it accurately reflects practice. Cyber-resilience then becomes not just a shield against loss, but a positive attribute of the firm’s brand.The Digital Personal Data Protection Act, 2023 (DPDP Act)The Digital Personal Data Protection Act, 2023 (DPDP Act), enacted on August 11, 2023, establishes India’s first comprehensive framework for safeguarding digital personal data while balancing individual privacy rights with legitimate data processing needs of businesses and government entities. It defines key roles such as Data Principals (individuals whose data is processed), Data Fiduciaries (entities controlling data), and Significant Data Fiduciaries (those handling large volumes or sensitive data), mandating consent-based processing—free, specific, informed, and unconditional—or legitimate uses, alongside obligations like data security, breach notifications, and grievance redressal.The Act establishes the Data Protection Board of India to enforce compliance, monitor breaches, and impose penalties up to ₹250 crore, with exemptions for personal/domestic use and public data, and restrictions on cross-border transfers to notified countries. Special protections apply to children’s data, prohibiting tracking or targeted advertising without verifiable parental consent.The Digital Personal Data Protection (DPDP) Rules, 2025The Digital Personal Data Protection (DPDP) Rules, 2025 explain how the DPDP Act, 2023 has to be followed in day-to-day practice. They were issued in November 2025 and laid down simple rules on how to take consent, what basic security measures to use (like access control, encryption, logs, and backups), and how quickly data breaches must be reported to both affected individuals and the Data Protection Board. For CA and audit firms, these Rules mean clearer expectations that firms should have written procedures, control over their IT vendors, and evidence that they are using reasonable security practices for client data.Cybersecurity Asset Management for CA FirmsCybersecurity asset management is, at its core, about knowing exactly what technology your CA firm uses and how it is protected. This means keeping a live, structured list of all laptops, desktops, servers, Wi-Fi routers, mobile phones, cloud applications, e-filing portals, and the locations where client tax, audit, and finance data are stored. Each of these assets is a potential entry point for an attacker, so having this visibility allows the firm to see which systems are critical, which ones are outdated, and where basic safeguards—like patches, antivirus, encryption, or access controls—are missing.In practical terms, firms can tag important assets (for example, folders containing working papers of listed entities or shared drives with PAN/Aadhaar details) as “high-risk,” and then ensure they are monitored more closely, updated promptly, and accessed only by authorised users. The same inventory helps identify “forgotten” machines, shadow IT tools, or unmanaged home devices that often become weak spots in ransomware or data-breach incidents, especially in remote and hybrid work models.For small and mid-sized practices that do not have a full-time Chief Information Security Officer (CISO), building basic discipline around asset management—clearly assigning ownership for key systems, scheduling simple quarterly reviews, and using modest automation to detect new or unpatched devices—offers a very practical way to demonstrate “reasonable security practices” under IT and data-protection laws. At the same time, it materially improves the firm’s ability to prevent, detect, and respond to cyber incidents, thereby protecting client data and supporting long-term trust in the practice.Conclusion: Building a Cyber-Resilient ProfessionThe profession’s social licence ultimately rests on trust—trust that CAs will handle financial and personal information with integrity, competence, and care. In a digital and remote-first world, that trust now extends to the robustness of firms’ cybersecurity practices.For CA firms across India, cyber threats are inevitable—the real question is whether they are prepared when they strike. By elevating cyber risk to a core practice-management priority, embedding it firmly in governance, and fortifying technical and human defences, firms can master the digital landscape with unshakeable confidence.For CA firms, cybersecurity goes far beyond IT spend—it is the essential base on which professional excellence and long-term resilience of the practice truly rest.♦ ♦ ♦ReferencesMinistry of Electronics and Information Technology (MeitY). The Digital Personal Data Protection Act, 2023.meity.gov.inPress Information Bureau (PIB). DPDP Rules, 2025 Notified (14 November 2025).pib.gov.inPRS Legislative Research. The Digital Personal Data Protection Bill, 2023 (Updated January 2026).prsindia.orgInstitute of Chartered Accountants of India (ICAI). Code of Ethics 2019.nagpuricai.orgMinistry of Electronics and Information Technology. Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011.dataguidance.comTanium. What is Cybersecurity Asset Management (CSAM)? (April 2025).tanium.comLansweeper. How Cybersecurity Asset Management Enhances Your Security (August 2025).lansweeper.comICAI. Cybersecurity & Data Privacy in GCCs (GCC Summit Presentation, June 2025).gcc.icai.orgAuthor may be reached at: peeyushsharmaca@gmail.com and eboard@icai.inThe Chartered Accountant · May 2026 · www.icai.org
Technology
Ep. 26 — Tax Automation: A Strategic Guide to Getting It Right
CA Journal
· June 2026
00:00
--:--
Tax Automation: A Strategic Guide to Getting It RightAs multinational businesses face mounting complexity from cross-border operations and digital compliance mandates such as e-invoicing and e-audits, manual tax management is no longer sustainable. This guide walks through why automation has become essential, how to define its scope, what to look for when evaluating vendors, where AI fits into the picture, and the pitfalls that can derail a project.Why Manual Tax Processes No Longer WorkGlobal companies juggle a wide range of obligations — cross-border transactions, foreign registrations, drop shipments — across jurisdictions that each have their own rules. Staying compliant means tracking constantly shifting tax laws and rates while also keeping up with digital reporting mandates that tax authorities are rolling out worldwide. Trying to manage all of this by hand has become unrealistic, which is why connecting ERP systems to a dependable automated tax engine has shifted from a nice-to-have to a core requirement.A properly built automation layer reduces manual effort, applies rate and rule updates automatically, keeps a detailed audit trail, and lowers the chance of costly errors or penalties. That said, choosing and rolling out the wrong system can be an expensive, time-consuming mistake — so the selection process deserves real rigor.What "Tax Automation" Actually CoversAt its core, tax automation is simply the use of technology to make tax work faster, more accurate, and more consistent. It rests on four connected pillars, all tied back to an organization's broader tax strategy:Automated Tax CalculationAutomated Reporting & ReconciliationStandardized Tax ProcessesStronger Overall ComplianceTax Strategy & PlanningAutomation doesn't have to be all-or-nothing. Some organizations automate only specific pieces — calculation or reporting, for example — while leaving other functions manual. Others go further and automate nearly everything. How far a company goes depends entirely on its own tax strategy and risk appetite, which is why defining clear objectives up front is the necessary first step.The Business Case for AutomationKeeping pace with digital mandates: Governments increasingly require e-invoicing, e-reporting, e-verification, and e-audit capabilities, which are nearly impossible to satisfy manually.Staying current automatically: Vendors update tax rates and rules in real time, removing the burden of manual tracking.Standardizing across geographies: A consistent process across teams, systems, and countries reduces training overhead and improves accuracy.Faster, cleaner reporting: High-volume data can be reconciled and reported quickly, supporting timely filings and audit readiness.Supporting outsourced and shared-service models: Automation lets centralized teams without deep local tax expertise still operate compliantly.Scaling with growth: Built-in global rule sets make it easier to enter new markets without rebuilding tax processes from scratch.Freeing up the tax team: Less time on repetitive tasks means more capacity for planning, advisory work, and process improvement."Automation isn't just about buying a tool — it's about understanding the objective and scope of tax automation, then choosing the solution that actually fits the organization."Defining the Scope Before You ShopOnce the "why" is clear, the next question is "how much." Several factors typically shape that decision:Regulatory obligations: Mandatory digital requirements in certain countries often force the issue.Jurisdictional coverage: Many companies start with complex tax jurisdictions like the US, Canada, India, and Brazil before expanding globally.Source systems in scope: ERP and non-ERP platforms (SAP, Oracle, Ariba, Coupa, CRM tools, etc.) that generate taxable transactions need to be clearly mapped.Depth of functionality: Calculation, reporting, analytics, and intelligence features vary significantly between vendors.Organizational structure: Centralized teams and shared service centers generally benefit most from heavier automation.Cost versus capability: Since tax is a cost center, budget constraints often have to be balanced against best-in-class functionality.Evaluating and Selecting a VendorWith objectives and scope defined, the next step is shortlisting and stress-testing candidate tools. A few evaluation criteria matter most:CriterionWhat to CheckSystem integrationSeamless connection to core source systems like SAP or Oracle is non-negotiable — weak integration should disqualify a vendor outright.Total cost of ownershipUpfront implementation cost plus ongoing licensing, support, and maintenance fees.Vendor track recordClient references, reviews, and documented success stories.Out-of-the-box fitTools requiring heavy customization for baseline scenarios are usually a poor match.Data readinessWhether the tool can handle data cleansing and work well with existing source data.Implementation effortRealistic timeline, complexity, and internal resourcing required.Support quality24/7, locally available support, validated through references.Coverage & complianceSupport for all relevant tax types (VAT, GST, sales & use tax) across federal, state, and local levels, with real-time rate updates.Reporting depthReal-time, intelligent reporting — and ideally tax-return preparation support.SecurityStrong data protection given how sensitive tax data is.UsabilityAn interface simple enough for both tax specialists and non-tax users.AI-Based vs. Rule-Based Tax EnginesTax technology vendors are increasingly layering AI on top of — or in place of — traditional rule-based engines. Two AI capabilities stand out:Smart search: Users can ask questions in plain language and get fast, accurate answers instead of digging through manuals.Smart categorization: AI automatically maps source-system data to the engine's tax categories, removing a traditionally manual mapping step.AI can learn from historical data, cut down on manual configuration, and spot patterns, fraud, or anomalies that rule-based systems would miss. But it comes with real trade-offs: results depend heavily on data quality, decisions can be opaque or biased, and audit trails are harder to produce and defend. Rule-based engines, by contrast, are mature, predictable, and easy to audit — but less adaptive.The most practical path forward for most organizations is a hybrid model: rule-based logic as the operational backbone, with AI applied selectively to areas like analytics where its strengths are most valuable.Where Tax Automation Projects Go WrongCommon Failure PointsPoor data quality: Automation output is only as good as the source data feeding it — "garbage in, garbage out" is the defining risk of these projects.Lack of cross-functional alignment: Tax, IT, Sales, Procurement, and Finance all need to be on the same page early; getting there is often harder than expected.Wrong tool selection: A mismatch with organizational size, complexity, or system landscape drives up cost and timeline.Weak training and change management: Leads to underutilization and resistance from end users.Over- or under-automation without governance: Both extremes raise compliance and audit risk.Neglected ongoing support: Without continued maintenance, calculation accuracy can degrade over time.ConclusionTax automation has moved from optional upgrade to operational necessity for multinational organizations of every size. Done well, it speeds up tax processes, reduces errors, and frees the tax function to focus on strategy rather than routine work — while keeping the organization aligned with shifting global regulations. But success depends on more than picking a popular tool: it requires a clear-eyed view of objectives, scope, data quality, and organizational readiness. Treated as an ongoing journey rather than a one-time purchase, tax automation can deliver lasting compliance, time, and cost benefits.Author contact: eboard@icai.inReferencesGoyal, A. (2025). The Impact of Artificial Intelligence on Taxation: The Role of AI and Key Use Cases. International Journal of Science and Research (IJSR), 14(5), 1213–1220.Deloitte. Tax Transformation Trends 2025. Available at deloitte.com.Deloitte. Tax Transformation Trends 2023. Available at deloitte.com.Originally published in The Chartered Accountant, May 2026, Institute of Chartered Accountants of India (icai.org).
Artificial Intelligence
Ep. 27 — Financing India’s Next Growth Cycle: AI Credit Scoring and the CA’s Role
CA Journal
· June 2026
00:00
--:--
Financing India's Next Growth Cycle: AI Credit Scoring and the CA's RoleArtificial Intelligence is reshaping credit scoring in India by moving beyond traditional CIBIL-based assessments toward data-driven, algorithmic decision-making. While these systems improve speed, coverage, and risk sensitivity in lending decisions, they also introduce new challenges related to governance, internal controls, audit assurance, and regulatory compliance. For CAs, the adoption of AI-driven credit scoring has direct implications for audit planning, evaluation of internal controls, regulatory compliance, and the exercise of Professional Skepticism. CAs equipped with AI governance expertise will play a critical role in enabling responsible and inclusive credit practices.As India moves toward its goal of becoming a developed country by 2047, access to formal credit remains a critical enabler of entrepreneurship — essential for job creation, productivity, and sustainable growth. India's development roadmap under Viksit Bharat @2047, supported by Digital India, the Jan Dhan–Aadhaar–Mobile (JAM) trinity, and MSME formalisation programmes, emphasises widening access to institutional finance.Despite this progress, structural gaps persist: over 400 million individuals remain outside the formal credit system due to limited conventional credit histories. Sample survey data shows that 78% of first-generation entrepreneurs access formal credit for the first time, and nearly 75% of MSMEs still depend on informal lenders. Artificial Intelligence is changing this equation — by interpreting digital transactions, alternative data, and behavioural patterns, AI can integrate excluded borrowers into the formal credit ecosystem.Historical Evolution of Credit Scoring SystemsCredit scoring traces its roots to the 1950s, when US lenders began using statistical analysis of repayment behaviour to assign numerical scores and standardize risk assessment. The FICO score, introduced in 1989 by Fair Isaac Corporation, dominates credit assessment worldwide, particularly in the United States.India's formal credit scoring system developed much later. CIBIL (Credit Information Bureau India Limited), established in 2000 and regulated under the Credit Information Companies Regulations Act, 2005, pioneered organized credit assessment in India. The CIBIL score operates on a 300–900 range, with scores above 750 considered excellent. India's credit infrastructure includes four major credit bureaus:TransUnion CIBILExperianEquifax IndiaCRIF High Mark Credit Information ServicesLimitations of the Traditional Credit Scoring SystemTraditional credit scoring relies on historical financial data from banks. Credit bureaus collect repayment and loan records, apply statistical models to assess default risk, generate a numerical score, and lenders use it for approvals and pricing. Over the decades this evolved into sophisticated proprietary algorithms, but the core premise — reliance on past borrowing and repayment records — remains unchanged. Key flaws include:1. Historical Bias and Structural DiscriminationTraditional models favour borrowers with stable, salaried employment and established banking relationships, disadvantaging farmers, start-up entrepreneurs, daily wage earners, and others with non-linear but often reliable income. Because bureaus rely on past formal borrowings, the poor are trapped in a cycle where absence of credit history prevents access to credit, and lack of access prevents creation of history.2. Narrow and Static Assessment FrameworkCurrent systems primarily analyse 10–20 parameters around loan repayment, outstanding debt, and credit utilization — excluding meaningful indicators such as rental payments, utility bills, insurance premiums, digital wallet transactions, and tax payment consistency. This limits innovation in credit products and prevents lenders from identifying genuinely creditworthy individuals.3. Inability to Capture Informal Economic ActivityThe current system is built for formal economies, yet over 80% of India's workforce is in the unorganised sector, contributing around 45% of GDP. Informal entities like chit funds, self-help groups, and local money lenders hold detailed but non-digitised repayment records that reflect borrowers' financial discipline but remain invisible to the formal system — pushing creditworthy small business owners toward higher-interest informal credit.4. Counterintuitive and Arbitrary OutcomesExisting models can penalise prudent behaviour: cash-based money management or early repayment may reduce scores, while multiple loan inquiries for better terms can further harm ratings — discouraging sound financial management.5. Opacity and Lack of ExplainabilityBorrowers see only a numerical score with little insight into the factors behind it, such as repayment timing, credit utilisation, or loan closure. This prevents individuals from improving their credit behaviour or correcting errors, and may conceal bias against those without a formal borrowing history.Traditional vs. AI-Based Credit Scoring: A Comparative ParadigmDimensionTraditional Credit Scoring (e.g., CIBIL)AI-Based Credit ScoringData ScopeNarrow data (10–20 parameters); formal loan & repayment history onlyVast data (thousands of points): digital payments, utilities, behaviourMethodologyStatic, rule-based statistical models on past recordsDynamic machine learning that continuously learns and refines from new dataInclusivityLimited access; excludes "credit-invisible" borrowers without formal historyBroad inclusion; integrates underserved groups (e.g. gig workers) via alternative dataTransparencyOpaque "black box"; numerical score with limited explanationExplainable AI (XAI) providing insight into decision logic (e.g. SHAP)AssessmentRetrospective snapshot; looks backward at historical performanceReal-time and predictive; monitors current signals to forecast future riskKey AI Technologies in Credit Risk AssessmentAI is breaking away from rigid, history-bound models to create systems that are dynamic, data-rich, and inclusive by design, drawing on continuous learning across real-time digital-economy signals.1. Machine Learning-Based Risk ModellingSupervised ML models — Logistic Regression, Decision Trees, Gradient Boosting — evaluate thousands of borrower variables (income, repayment history, transaction frequency) to estimate default probability, refining accuracy as new data arrives. This allows lenders to approve credit for first-time borrowers and small entrepreneurs lacking a formal bureau record. Kotak Mahindra Bank, for instance, deployed a Perfios credit-assessment and fraud-analytics pipeline that materially reduced manual effort in statement analysis and fraud checks.2. Natural Language Processing (NLP) and Conversational AINLP extracts insights from unstructured text such as customer feedback and financial reports. AI-powered OCR reads forms (even handwritten), detects tampering, and extracts borrower data automatically, reducing manual effort and speeding underwriting. Emerging use cases include sentiment analysis of applicant responses, while conversational AI agents improve financial literacy and provide pre- and post-loan support.3. AutoML and No-Code AI PlatformsAutoML automates data preparation, feature selection, model building, and validation — letting credit and finance teams use AI without deep technical skills. Indian banks such as Axis Bank use cloud AutoML tools like Google Vertex AI to test credit-risk models faster, making strong controls and CA oversight more important than ever.4. Explainable AI (XAI) and Model Governance ToolsRBI's FREE-AI framework emphasises that AI-based credit decisions should be understandable by design, supported by documentation rather than operating as opaque black boxes. Tools like SHAP (SHapley Additive Explanations) and LIME (Local Interpretable Model-Agnostic Explanations) help human reviewers, including auditors, understand the reasons behind automated decisions — SHAP shows how each factor affects the overall score, while LIME explains individual decisions.5. Behavioural and Anomaly Detection SystemsUnsupervised ML identifies deviations from historical norms — sudden withdrawals, inconsistent deposits, missed payments — enabling dynamic risk-score adjustments and early intervention. Citibank's "Customer 360" system, for example, combines bureau data with lifestyle and transaction analytics, feeding behavioural signals into a Decision Management System that dynamically reassigns risk bands and pricing tiers."AI-driven credit models now shape credit decisions, portfolio risk, and Expected Credit Loss (ECL) outcomes at scale. This shifts the Auditor's role from reviewing individual loan files to applying Professional Skepticism over data governance, model governance, explainability, and management reliance on automated outputs."RBI's FREE-AI: Framework for Responsible and Ethical Enablement of AIRBI's FREE-AI is India's first principle-based governance framework for AI adoption in financial services, guiding responsible and trustworthy use of AI from credit underwriting to fraud detection. It is built on seven guiding "Sutras":1. Trust is the FoundationBuilding public confidence in AI systems.2. People FirstEnsuring human oversight and accountability.3. Innovation Over RestraintEncouraging responsible experimentation.4. Fairness and EquityAvoiding bias and discrimination.5. AccountabilityAssigning clear responsibility for AI decisions.6. Understandable by DesignMaking AI transparent and explainable.7. Safety, Resilience & SustainabilityEnsuring long-term reliability and adaptability.Auditing the Algorithm: Internal Controls, Governance, and Professional SkepticismAs AI-driven credit models increasingly shape decisions, portfolio risk, and ECL outcomes, the auditor's role shifts from reviewing individual loan files toward Professional Skepticism over data governance, model governance, explainability, and management reliance on automated outputs.1. Audit Considerations for Data Usage and ConsentAI-based credit scoring uses vast amounts of sensitive personal and behavioural data, including financial transactions, tax records, and digital footprints — making compliance with the Digital Personal Data Protection (DPDP) Act, 2023 integral to audit. Auditors should evaluate controls ensuring purpose limitation, consent validity, and lawful use of data.Auditor Checks for AI-Enabled Credit Processes1Lawful PurposeVerify each data category has a documented, lawful credit-risk purpose consistent with policy and disclosures.2Informed ConsentExamine consent records for informed, specific permission to use data for AI assessment.3Prevent ReuseEvaluate controls ensuring data isn't reused for cross-selling or other analysis without consent.4Retention & DeletionReview automated deletion/anonymisation once purpose is fulfilled or consent withdrawn.5Breach ResponseReview breach detection and response for timely identification, escalation, and notification.2. Model Drift and OverfittingAI credit models are built on historical data and can deteriorate as conditions change — for example, models trained in low-rate environments may underestimate risk as rates rise or borrower cash flows weaken, particularly in MSME or unsecured retail portfolios. Outdated models risk delaying recognition of credit deterioration and understating provisions. Auditors should review independent model validation, compare predictions with actual default experience, test stressed scenarios, confirm intervention thresholds, and benchmark against challenger models.3. Explainability and TransparencyWhere models operate as black boxes, management may struggle to justify approvals, rejections, or risk classifications, creating litigation and compliance risk, and limiting the audit evidence available to support provisioning judgments. Auditors should confirm explainability tools and standardised reason codes are embedded in the process, review system-generated explanations for selected decisions, test consistency against policy thresholds, and perform "decision replay" using archived model versions to verify traceability and audit trail.4. AI-Driven ECL Measurement and Financial Statement ImpactUnder RBI's mandated Expected Credit Loss (ECL) approach, AI models influence default risk assessment, early warning signals, and forward-looking assumptions. Weak governance can delay migration of stressed accounts, understating provisions. Auditors should link model results to ECL assumptions, run sensitivity analysis on default rates, recovery assumptions, and macro variables, compare outcomes against historical stress periods, and assess management overlays for known model limitations.5. Governance, Accountability, and Vendor DependenceHeavy reliance on third-party vendors for AI credit models can create a "responsibility gap" if decision logic and data practices remain vendor-controlled. Auditors should assess board-approved AI policies and outsourcing contracts, verify contractual rights to vendor documentation, validation summaries, change notifications, and incident disclosures, and confirm critical vendor models are recorded in the model inventory and risk register.Case Study: Strategic Integration of AI in Credit Risk Management — JP Morgan Chase1. Transforming Traditional Credit Assessment ChallengesJP Morgan Chase replaced slow manual processes and static scoring with dynamic machine learning models, analysing financial histories alongside alternative sources like online behaviour and transaction patterns to build comprehensive borrower profiles — reducing defaults, accelerating approvals, and extending credit access to underserved segments.2. Key AI-Driven Operational EnhancementsAI uncovers patterns traditional methods overlook, supports predictive risk modelling using diverse variables, enables real-time application processing, and continuously refines accuracy amid market shifts. The firm's COiN (Contract Intelligence) tool reviews around 12,000 credit agreements in seconds, saving an estimated 360,000+ annual hours while flagging default clauses and risks.3. Primary Risks Introduced by AI SystemsModels trained on historical data may unintentionally replicate past patterns, leading to biased outcomes such as repeatedly flagging certain transaction types without adequate context. Complex decision logic can be difficult to interpret, limiting management's ability to explain outcomes to regulators or customers, and heavy automation can amplify errors during volatile markets. Greater reliance on sensitive data also raises privacy risk.4. Effective Risk Mitigation and Governance StrategiesRegular model validation and retraining help reduce bias and keep models relevant. Explainability tools and documented decision logic support transparency and regulatory review. Critical decisions retain human oversight, especially during abnormal market movements, and robust data-governance controls, access restrictions, and monitoring safeguard data integrity.ConclusionThe adoption of AI in India's credit ecosystem is not a question of if, but how responsibly it can be scaled. Long-term progress will depend less on sophisticated algorithms alone and more on data infrastructure, robustness of internal controls, model validation, and ethical oversight.In this evolving landscape, Chartered Accountants emerge as critical custodians of trust. The CA's role extends beyond traditional financial audits into auditing algorithms, validating model governance, challenging automated judgments through Professional Skepticism, and ensuring that AI-driven credit decisions translate into reliable financial reporting and prudent ECL recognition.AI should be seen as an enhancement to risk judgment, not a replacement for it. Those who build expertise in AI governance, audit of automated systems, and ethical assurance will not only safeguard the integrity of India's financial system but also define the future relevance of the profession itself.ReferencesTransUnion CIBIL's Latest CMI Report, 26 March 2025 — newsroom.transunioncibil.comThe Economic Times, 25 July 2025 — economictimes.indiatimes.comAnnual Report, Periodic Labour Force Survey 2017-18 — mospi.gov.inPress Information Bureau, Government of India, 2025 — pib.gov.inJPMorgan Chase & Co. Annual Report — reports.jpmorganchase.comDigitalDefynd, 2026 — 13 Ways JP Morgan Is Using AI: In-Depth Case Study — digitaldefynd.comRBI, 2025 — FREE-AI Report — rbidocs.rbi.org.inNITI Aayog, 2021 — Responsible AI — niti.gov.inDPDP Act, 2023 — meity.gov.inIIBF, 2024 — Algorithmic Brilliance: Unveiling the Power of AI in Credit — iibf.org.inAuthor may be reached at prathamshah807@gmail.com and eboard@icai.inSource: The Chartered Accountant, May 2026, pp. 95–101 · www.icai.org
Firms
Ep. 28 — Why CA Firms and Sole Proprietors are Increasingly Moving Towards Collaboration
CA Journal
· June 2026
00:00
--:--
Why CA Firms and Sole Proprietors are Increasingly Moving Towards CollaborationAs aptly stated by the late Mr. Ratan Tata, “If you want to walk fast, walk alone. But if you want to walk far, walk together.”This philosophy holds particular relevance for the Chartered Accountancy profession in today's rapidly evolving economic and technological environment. In an era dominated by social media influence, instant outcomes, and technology-driven impatience, professional quality and ethical standards often face erosion. Against this backdrop, Chartered Accountants must introspect on a fundamental question: Is our professional growth driven solely by individual economic gains, or by collective ethical responsibility and long-term institutional strength?Moving from a sole proprietorship to a collaborative firm is like a solo musician joining a symphony orchestra. While the solo musician has total control over their instrument, they can never produce the volume, complexity, or "impact" of a full orchestra. By agreeing to a shared "conductor" (leader) and "sheet music" (MoUs and documentation), the individual's talent is amplified rather than lost, allowing them to perform on much larger stages.Beyond Sole Proprietorship: A Broader Professional PerspectiveChartered Accountants today are no longer confined to local geographies or limited clientele. With strong ethical foundations, deep technical knowledge, and access to advanced technologies such as AI and digital platforms, CAs now possess the capability to operate at national and global levels.However, sole proprietors, particularly in smaller cities, often face inherent limitations: restricted resources, limited manpower, difficulty in handling complex matters before government authorities, tribunals, and courts, and challenges in scaling operations. While independence has its merits, professional isolation can restrict growth, confidence, and impact.Collaboration through partnerships, networks, alliances, LLPs, or structured MoUs enables pooling of diverse skill sets, risk-sharing, and stronger institutional credibility, qualities increasingly demanded by regulators, corporates, and government bodies.The First Step Towards CollaborationCollaboration need not begin with an immediate merger or formal partnership. A practical and low-risk approach is the formation of a task force of like-minded Chartered Accountants working on specific assignments under a well-drafted Memorandum of Understanding (MOU). Such arrangements help build trust, establish transparent fee-sharing mechanisms, leverage technology, and test long-term compatibility before moving towards deeper institutional integration.Strategic Roadmap for CollaborationThe shift from a "small shopkeeper" mentality to a global practitioner requires a phased approach.Phase 1: Project-Based Synergy — Form a task force of like-minded CAs to work on specific projects, testing trust and fee-sharing through MOUs before committing to full mergers.Phase 2: Skill-Based Integration — Combine subject matter experts with those possessing leadership, marketing, and fee recovery skills.Phase 3: Multi-Disciplinary Expansion — Form Networking, Mergers, or LLPs to build the capacity required to handle MNCs and large government institutions.Practical Challenges Faced by Sole Proprietors in Smaller CitiesIn practice, sole proprietors and small firms often face:Pressure from clients to compromise on complianceDelayed or disputed fee recoveriesLimited bargaining power even with mid-sized businessesLack of respect for professional independenceUnifying ethical and quality-conscious professionals allows them to command dignity, ensure compliance discipline, and eliminate under-pricing pressures, particularly in semi-urban and rural markets."Collaboration through partnerships, networks, alliances, LLPs, or structured MoUs enables pooling of diverse skill sets, risk-sharing, and stronger institutional credibility, qualities increasingly demanded by regulators, corporates, and government bodies."Professionalism over Mere BrotherhoodBuilding larger firms should be rooted in professionalism rather than fraternity alone. True collaboration requires commitment, accountability, and active participation. While ICAI has consistently promoted capacity building through seminars and continuing professional education, collaboration flourishes only when professionals engage beyond formal attendance.Handling Large Corporates, MNCs, and Government AssignmentsIt is increasingly impractical for a sole proprietor to independently service large corporations, multinational entities, or government institutions. Such engagements demand:Multidisciplinary ExpertiseStrong Internal ControlsRobust Reporting MechanismsScalability and ContinuityCollaborative and multi-disciplinary firms are better positioned to meet these expectations, thereby contributing to national GDP, reducing corporate fraud, and improving governance standards.Changing the Mindset: From Individual Survival to Collective ImpactWhen we expand our thinking beyond individual gain and view our actions through the lens of national and global governance, what is truly right and sustainable, we may initially face resistance. As independent professionals, our intent can be misunderstood, and standing by principles may appear costly in the short term. However, history shows that integrity-led choices compound over time.Collaboration ultimately reinforces the dignity and value of the Chartered Accountant designation earned through years of rigorous effort.Overcoming Liaisoning and Communication Barriers through the Power of Complementary Skill SetsMany professionals face limitations in liaising, communicating, and executing Government contracts and audits when operating individually or as small firms. Structured collaboration among Chartered Accountants through MOUs, networking arrangements, or mergers enables collective capability building, allowing firms to overcome scale, access, and operational constraints.When domain experts are integrated with professionals possessing leadership maturity, those skilled in people management, process design, marketing, and fee recovery, the combined entity becomes capable of executing large and complex assignments for both the government and corporate sectors. Such collaboration transforms individual competence into institutional strength.A collaborative model also fosters an accountability-driven culture, where roles are clearly defined, responsibilities are shared, and outcomes are owned collectively. This minimizes dependency on individuals, strengthens governance, and builds credibility with Government authorities and large organizations.The combination of technical experts with professionals skilled in leadership, people management, marketing, and fee recovery creates a balanced and resilient firm structure. Such synergy enables handling complex assignments across corporate and government sectors without compromising quality or ethics.Role of Government and National LeadershipThe vision of building globally competitive Indian CA firms articulated even at the highest levels of national leadership requires policy-level support. Fear of loss of individuality, confidentiality, and ethical dilution must be addressed through robust legal frameworks, governance structures, and institutional safeguards.Documentation, Leadership, and Ethical SafeguardsIntegrity before expansion — A large firm without moral unity risks collapse due to the actions of even one individual.Collective accountability — Reputation is fragile; professionals are deeply conscious of ethical failure and public trust.Purpose over manipulation — Organizations founded on tax evasion or legal misuse cannot contribute to national growth.Reputation as a shared asset — Safeguarding credibility must be embedded in the organizational framework.Holistic development — Along with work–life balance, spiritual and ethical grounding is essential to build responsibility, sensitivity, and long-term trust within members.While documentation is essential, the true challenge lies in preserving integrity, unity, and accountability. Hence, leadership with vision, ethical strength, and holistic understanding is indispensable.Spiritual and ethical sensitization alongside technical training must form an integral part of institutional development to safeguard reputational capital.Strengthening Communication Within the ProfessionProfessional rivalry in small cities, similar qualifications causing reluctance to share, fear of client data leakage, and ethical limits on case discussions. It needs to create secure peer forums and mentorship networks; promote recognition for transparent, ethical work; and adopt encrypted digital platforms and clear confidentiality protocols.CAs advise and report, but cannot enforce tax payments, client misunderstandings, and pressure from authorities during economic downturns. However, transparent communication and mutual respect are essential to break professional silos. Government support at departmental and ministerial levels is crucial to uphold the dignity and independence of the profession.Centralized Remuneration and Sustainable GrowthAs Dr. A.P.J. Abdul Kalam rightly observed, "Chartered Accountants are partners in nation-building."Chartered Accountants are trained to apply professional scepticism and analytical rigor, which makes it difficult to conceal material information when engagements are conducted properly. The profession has the capability to identify inconsistencies and address risks, including potential fraud. However, the effectiveness of this role is closely linked to appropriate fee structures and institutional support.Experience shows that arrangements such as centralized payment of audit fees, as seen in bank branch statutory audits, help ensure independence, consistency, and timely remuneration. In practice, especially in smaller towns, payment certainty often determines prioritization of work. While authorities cannot regulate every business interaction, they can strengthen the professional framework by ensuring clear engagement terms, adequate remuneration, and operational support. This would eliminate undue pressure, reduce early-career struggles, and discourage unethical compromises.Learning from Established Collaborative Models Where Collaboration Works BeautifullySeveral large public sector audits are conducted jointly by multiple Chartered Accountant firms. A review of such audit reports indicates that a significant number of Government Public Sector Undertakings (PSUs) are audited by Indian accounting firms. These entities are substantial in scale and complexity, requiring the combined capacity, expertise, and infrastructure of more than one firm. Joint audits facilitate effective distribution of work, sectoral specialization, risk sharing, and collective responsibility, thereby strengthening the overall audit process."Joint audits facilitate effective distribution of work, sectoral specialization, risk sharing, and collective responsibility, thereby strengthening the overall audit process."This approach demonstrates that when firms collaborate or combine their professional strengths, PSUs can provide substantial and sustained professional engagements. Such collaborative models enhance institutional capacity, promote knowledge sharing, and enable Indian firms to successfully manage large-scale and technically complex assignments. They also reflect the growing capability of the profession to deliver high-quality assurance services for significant public sector entities. Overall, these arrangements underscore how strategic cooperation among firms can support efficient execution, maintain audit quality, and build confidence in the governance and financial reporting framework of major public sector organizations.The large Indian audit firms, either individually or jointly, are engaged in the statutory audit of major corporate entities. Such entities typically have extensive domestic and international operations, and their annual reports highlight the role of prominent accounting firms in statutory audits and financial reporting processes. These instances provide a factual perspective on the involvement of large audit firms in overseeing the financial reporting and compliance functions of significant Indian corporates. They reflect the established practice of engaging experienced firms for complex and large-scale assignments, thereby reinforcing the importance of professional expertise, capacity, and structured audit mechanisms in maintaining transparency and accountability within major business organizations.It is also observed that several accounting firms that have established over the past 10–15 years may have limited public visibility or online recognition. Despite this, many such firms are engaged in substantial and technically demanding assignments. They operate at deeper functional levels and address matters through a skill-based and domain-driven approach within government bodies, public sector undertakings, and large corporate organizations.Alongside these engagements, these firms also cater to small and medium-sized enterprises, institutions, and salaried individuals. Their services are delivered through structured methodologies, sound technical expertise, and strict adherence to professional and regulatory standards. Fee arrangements are typically commensurate with the scope and quality of work, without compromising on ethical or professional requirements.This underscores the diversity and depth of the profession, where both established and relatively less visible firms contribute effectively across multiple sectors of the economy.Several homegrown firms have also demonstrated that ethical, skill-based collaboration can build strong national institutions without excessive branding.ConclusionThe evolution of the Chartered Accountancy profession demands a transition from fragmented individual practices to strong, collaborative institutions. By combining resources, expertise, and ethical values, Indian CA firms can confidently compete with global players and make a meaningful contribution to national development. The growing presence of large, well-structured Indian accounting firms shows that meaningful competition with global networks is increasingly possible even without historically dominant brand names. This evolution quietly underscores an important insight for small Chartered Accountant firms, sole proprietors, and individual professionals: in a changing professional landscape, collaboration is no longer optional; it is strategic. By coming together with shared intent, complementary strengths, and long-term vision, Indian CAs can build platforms that are resilient, relevant, and capable of creating impact at every level of the economy. The future of the profession belongs to those who choose to grow collectively rather than individually.ReferencesCompanies Act, 2013 (Section 139 and 141) — mca.gov.in — This section governs the appointment of auditors and specifically allows for Joint Audits, a concept reflected in the multi-firm audits of NTPC and IOC mentioned in the sources.ICAI Networking Guidelines — icai.org — The Guidelines for Networking of Indian CA Firms, 2021, provide the regulatory framework for Networking, Mergers, and Demergers, enabling firms to combine resources while maintaining professional ethics.The Limited Liability Partnership (Amendment) Act (LLP) Act, 2021 — mca.gov.in — Cited as a primary vehicle for collaboration, allowing for a corporate structure with the flexibility of a partnership.ICAI Code of Ethics 2019, 2020 and Revised Edition 2025 — icai.org — Governs professional conduct, confidentiality, and "secrecy of information" mentioned as a barrier to communication.Chartered Accountants (Amendment) Regulations, 2021 on Multi-Disciplinary Firms (MDFs) — icai.org — Supported by recent regulatory shifts allowing CAs to partner with other professionals (like CS or CMA) under specific ICAI guidelines.◆ ◆ ◆Author may be reached at caharsharora@gmail.com and eboard@icai.inThe Chartered Accountant · May 2026
Profession
Ep. 29 — The Audit Story: Charting the Future of Chartered Accountancy in India
CA Journal
· June 2026
00:00
--:--
The Audit Story: Charting the Future of Chartered Accountancy in IndiaAs Chartered Accountants, we are custodians of trust. For decades, our profession has been synonymous with statutory audits, balance sheet reviews, and manual ledger reconciliations. We are compliance watchdogs, valued for our ability to ensure adherence to regulations and provide assurance to stakeholders.However, as times have changed, so has the role of the profession. The audit profession, today, is at the intersection of technology, regulation, and client expectations. The traditional image of an auditor, hunched over dusty ledgers, relying on manual sampling, has been replaced by a dynamic, tech-enabled professional who must deliver far more than compliance. Clients are savvier, regulators are more assertive, and businesses demand strategic insights rather than check-the-box reviews.In this environment, survival is not enough. Therefore, a firm must craft and communicate its "audit story."An audit story is not just a record of engagements completed or reports issued. It is the narrative of a firm's professional journey; how it integrates technology, expertise, and foresight to deliver transformative value. It is the story of how a Chartered Accountant moves from being a cost center to a growth partner.In the Indian context, where the profession is under increasing scrutiny from bodies like NFRA, QRB, and ICAI's Disciplinary Committee, our audit story is being written in bold new ways.From Compliance to Growth PartnerIn today's competitive landscape, a firm's reputation is not built solely on its name or longevity. Instead, clients look for speed, transparency, innovation, and strategic insights. A compelling audit story positions us not as compliance officers, but as value creators.The essence of this story lies in three pillars:1. Showcasing a Unique Approach — Demonstrating how we solve problems differently.Example: A manufacturing client faced frequent inventory discrepancies. Instead of traditional checks, we used an audit analytics software to analyze all transactions, identify recurring errors, and suggest process improvements.Result: Inventory discrepancies dropped by 60%, and audit focus shifted to high-risk areas rather than random sampling.2. Enhancing Efficiency and Accuracy — Using modern tools to deliver high-quality audits faster.Example: A mid-sized IT client had 50,000+ quarterly transactions. Using AI-powered risk assessment, we automatically flagged unusual entries and reduced manual verification.Result: Audit cycle time decreased by 30%, accuracy improved, and partners could focus on strategic insights for the client.3. Driving Client Trust and Growth — Creating long-term partnerships that generate repeat business and referrals.Example: A family-run SME initially engaged us only for audits. By implementing interactive dashboards, clients could track performance year-round, and we offered quarterly advisory discussions.Result: The audit became a recurring engagement, advisory fees rose by 40%, and the client relationship evolved into a trusted partnership.For Chartered Accountants in India, this story must also emphasize quality and integrity. With stricter regulatory oversight, audit failures are not merely reputational risks but existential threats. Quality, therefore, is not optional; rather, it is the foundation of growth.Shaping the Future of Audits: Key Tools for CA FirmsThe future of auditing will be shaped not only by our professional judgment but also by how effectively we integrate financial and technological tools. Below are the key strategies and solutions that forward-looking Indian CA Firms are adopting to stay ahead:1. Audit Analytics Software — Moving Beyond SamplingIn the past, sampling was our lifeline. But sampling is inherently limiting. It gives us a slice, not the whole picture. An audit analytics software allows us to test entire populations of data, revealing insights that manual methods could never uncover.Key Benefits:Precision and Accuracy: By analyzing 100% of transactions subject to relevance and audit objectives, anomalies are more easily detected.Fraud Detection: Automated algorithms flag suspicious patterns proactively.Continuous Auditing: Integration with client ERPs (Tally, SAP, Oracle) allows near real-time review, reducing the lag between occurrence and detection of errors.This approach enables the auditor to demonstrate to the client that the entire population of transactions has been subjected to analytical review, rather than relying on limited samples. This significantly enhances the credibility of the audit process and reinforces stakeholder confidence.2. Cloud-Based Practice Management Systems — Collaboration Without BoundariesThe office server of the past is now an anachronism. Cloud-based systems offer secure, scalable platforms for practice management.Advantages:Accessibility: Partners and staff can work seamlessly across geographies.Real-Time Dashboards: Track project progress, billing, and staff allocation instantly.Cost-Effectiveness: Subscription models reduce upfront IT investment, making enterprise-grade tools available even to small firms.Examples in the Indian Context: Zoho Practice, QuickBooks Online, and CA-specific cloud suites tailored for our compliance-heavy environment.3. Workflow Automation — Efficiency at ScaleRepetition kills efficiency. Whether it is sending reminders, generating standard reports, or onboarding clients, automation reduces manual drudgery.Applications:Automated reminders for GST filings or audit confirmations.AI-driven task allocation based on skill and workload.Standardized templates for letters, contracts, and compliance checklists.Impact: Industry surveys suggest automation increases utilization rates by 18–20%, freeing up partners and staff for higher-value advisory work.4. Data Visualization Dashboards — Speaking the Client's LanguageNumbers alone rarely tell a story to non-finance professionals. Tools like Power BI and Tableau transform spreadsheets into interactive dashboards.Advantages:Client Understanding: Clear visuals help clients grasp trends and risks.Strategic Discussions: Meetings shift from compliance reviews to strategy conversations.Differentiation: Firms offering visualization stand apart from those delivering static reports.For SMEs especially, this shift converts audits from a statutory burden into a strategic advantage."An algorithm may flag a transaction as unusual, but only a Chartered Accountant can interpret whether it signals fraud, a control weakness, or simply a one-time business event. Context, professional scepticism, and human judgment are irreplaceable."5. AI-Powered Risk Assessment — Smarter PlanningArtificial Intelligence is no longer futuristic; it's embedded in auditing tools. AI modules analyze historical data and predict risk zones, enabling targeted audit planning.Applications:Predictive analytics highlight transactions warranting scrutiny.Dynamic scoping directs attention to high-risk areas.Automated compliance checks reduce documentation errors.There are tools which are already proving their worth globally, and Indian firms are beginning to follow suit.6. Benchmarking & KPI Tracking — Managing the Firm Like a BusinessAs professionals, we sometimes neglect the fact that our own firm is also a business. Benchmarking tools and KPI dashboards ensure we measure, track, and optimize performance.Key Metrics Include:Realization rates (billed vs. worked hours).Staff productivity and turnaround times.Profitability by service line or client segment.With data-driven insights, partners can make informed decisions on pricing, staffing, and expansion strategies.7. Strategic Pricing Models — From Hours to ValueHourly billing is being replaced by value-based pricing. Clients today want predictability and transparency in fees, while firms want fair compensation for value delivered.Advantages:Aligns client-firm interests.Builds trust by eliminating surprise billing.Improves profitability by preventing under-pricing.Data analytics also allows firms to model scenarios and anticipate scope creep, thereby ensuring sustainable engagements.Building a Future-Ready CA FirmAudit AnalyticsEnhances audit accuracy and efficiency.CloudProvides scalable and secure data storage.AutomationStreamlines repetitive tasks for efficiency.DashboardsOffers real-time insights for decision-making.AIEnables advanced data analysis and predictions.BenchmarkingCompares performance against industry standards.PricingOptimizes pricing strategies for profitability.Case Studies in the Indian ContextStory of a Boutique Firm That Found Its VoiceA boutique CA Firm based in Ahmedabad with ten professionals, felt invisible. Their audit reports were thorough, but clients skimmed them, treating audits as a compliance chore.One day, a client's CEO admitted: "We know audits are necessary, but they don't help us run our business." That comment changed everything.The firm began experimenting with Power BI dashboards. Instead of static audit reports, they delivered interactive visuals, highlighting revenue patterns, anomalies, and benchmark comparisons. For the first time, clients could see their business performance clearly in charts and trends.The response was electric. Clients started requesting quarterly reviews just to discuss the dashboards. What had been a once-a-year audit became an ongoing advisory relationship. Within a year, advisory revenue rose by 40%, all from the existing client base.The story of this firm shifted from that of a compliance provider to a strategic advisor, proving that presentation can be as powerful as analysis.The Small-Town Firm That Scaled Through CollaborationIn Nagpur, a CA Firm with two partners, often lost out on larger clients because they lacked bandwidth and sector expertise. Rather than struggle alone, they embraced ICAI's alliance model, collaborating with another mid-sized firm in Mumbai.Together, they shared resources, co-sourced talent, and presented themselves as a united front for larger audits. Cloud-based tools made collaboration seamless.Within three years, this firm expanded their client portfolio beyond SMEs to include listed entities. They retained their small-town base while projecting national-level credibility. Their story demonstrated that alliances, supported by technology, can level the playing field.Strategic Considerations for AdoptionSimply buying software won't change your audit story. Integration requires:Leadership Buy-In: Technology adoption succeeds only when partners and senior management actively use and champion it. If leadership demonstrates commitment, staff are more likely to embrace change. For example, a partner using a cloud dashboard in client meetings signals that this tool is not optional; it is part of the firm's core workflow.Training: Continuous upskilling ensures the team can maximize the potential of new tools. This can include formal vendor-led sessions, peer-to-peer learning, and refresher workshops. Staff who understand the "why" and "how" of a tool are more efficient and confident, reducing errors and improving adoption.Change Management: Resistance is natural. Communicate the benefits clearly, show quick wins, and recognize early adopters publicly. For instance, acknowledging a staff member who successfully implemented automated reconciliation processes encourages others to follow suit.Compliance: Any tool must align with regulatory standards, such as the ICAI guidance, NFRA expectations, and data documentation requirements. This includes audit trails, retention policies, and secure storage of client data. Ensuring compliance from day one prevents regulatory risk while building client confidence.Challenges & Risk MitigationEvery transformation carries risks. Key challenges include:High Initial Costs: Enterprise-level software, AI tools, and cloud platforms can require significant investment. Firms can mitigate this by phased adoption, starting with high-impact modules first, or by using subscription-based models that reduce upfront capital expenditure. This approach spreads costs and allows measurable ROI before full implementation.Resistance to Change: Some team members may prefer familiar legacy processes. Firms can mitigate this by establishing mentorship programs, gamified learning sessions, and public recognition of staff who successfully implement new tools. Celebrating small wins builds momentum and reduces fear or skepticism.Data Security Risks: Moving sensitive financial data to cloud platforms introduces cybersecurity challenges. Firms should conduct vendor due diligence, ensure end-to-end encryption, implement access controls, and provide ongoing cybersecurity training for staff. Regular third-party audits help ensure client data remains safe and compliant with regulations.Risks of Over-Relying on Automated ToolsTechnology is reshaping audits, but it is not a silver bullet. AI, analytics, and automation can process vast amounts of data and highlight anomalies with speed and precision. Yet, they remain tools, not decision makers. An algorithm may flag a transaction as unusual, but only a Chartered Accountant can interpret whether it signals fraud, a control weakness, or simply a one-time business event. Context, professional scepticism, and human judgment are irreplaceable.The real strength of the audit profession lies in combining technology with expertise. Machines deliver efficiency; humans deliver insight. The future of audits, therefore, is not about replacing people with systems, but about amplifying professional judgment through technology. It is machines plus human expertise that will define the credibility and impact of our work.The Road Ahead — Emerging Trends for CA FirmsThe next decade promises transformative shifts in how audits are conducted and advisory services are delivered. Chartered Accountants who understand these trends will be better positioned to stay relevant and add value.Blockchain Audits: Blockchain provides immutable transaction records, reducing the need for manual verification and audit evidence collection. For firms, this means faster, more reliable audit, with a clear trail for regulators and clients.Next-Gen AI: Beyond risk assessment, AI will draft audit documentation, model fraud scenarios, and suggest areas of focus. This frees auditors to spend more time on professional judgment and client advisory, rather than repetitive tasks.Client Portals: Clients increasingly expect secure, real-time access to documents, dashboards, and audit progress. Well-designed portals strengthen transparency, collaboration, and trust, turning audits into interactive, continuous engagements rather than periodic exercises.ESG Assurance: Regulatory and investor focus on Environmental, Social, and Governance metrics is growing. CA Firms that can provide ESG audits, sustainability reporting, and assurance services will have a competitive advantage, especially with businesses seeking ESG-aligned investors.Collaborative Models: ICAI's alliance framework allows small and mid-sized firms to pool resources and expertise, enabling participation in larger, complex audits. Collaboration, supported by cloud tools and standardized processes, allows firms to compete with larger players without losing their identity.The Indian government's push for digital adoption and capacity-building programs further accelerates these trends, making now the ideal time for firms to modernize.Implementation Roadmap1. Obtain Lead Partner ConsentGain approval from leadership to proceed.2. Focus on EssentialsIdentify and prioritize key tools like cloud and analytics.3. Test with One ClientConduct a pilot with a single client to test processes.4. Encourage AdoptionTrain staff and promote tool adoption.5. Expand to More ClientsGradually scale up implementation to more clients.6. Continuous ImprovementPeriodically monitor, refine, and improve processes.ConclusionAs Chartered Accountants, we must remember: our profession is not defined by the past, but by the story we choose to write today.We can continue as compliance officers, bound by checklists and deadlines, or we can seize the moment to become growth partners, trusted advisors, and innovators.By embracing audit analytics, workflow automation, cloud management, AI-driven insights, and value-based pricing, we can transform not only our firms, but also the businesses we serve. The journey is not without hurdles — investment, training, and cybersecurity risks are real. But they are surmountable. With deliberate strategy and courage to adapt, our audit stories will not just be about survival but about leadership in a rapidly evolving market.Therefore, the journey toward digital transformation must be ambitious, but it cannot be reckless. Regulatory scrutiny, data confidentiality, and client trust demand that firms adopt technology responsibly. Speed should never come at the cost of integrity, and automation should never overshadow professional judgment. By embracing innovation with caution and balance, Chartered Accountants can ensure that technology enhances, rather than undermines, the profession's credibility.Author may be reached at caharshalisalvi@gmail.com and eboard@icai.in
Theme
Ep. 30 — Application Systems in Business: Risks, Controls, and the Auditor’s Evolving Role
CA Journal
· June 2026
00:00
--:--
Application Systems in Business: Risks, Controls, and the Auditor's Evolving RoleHow Chartered Accountants can navigate risks in new and modified transaction processing systemsDigital transformation has redefined modern business, with application systems such as ERP, CRM, RPA, and AI platforms moving from support functions to the backbone of operations, transactions, and reporting. While these systems enhance efficiency and scalability, they also introduce risks in cybersecurity, compliance, financial reporting, and change management. Chartered Accountants play a critical role in addressing these risks by analysing vulnerabilities, designing robust controls, and validating their effectiveness. Drawing on frameworks like IIA's GTAGs, COBIT, COSO ERM, and ICAI initiatives, this article outlines practical methodologies and highlights emerging trends such as continuous auditing, AI monitoring, and blockchain assurance, positioning CAs as strategic advisors in technology-driven environments.IntroductionOver the past decade, organizations across the globe have accelerated their adoption of technology-driven models. Whether in manufacturing, financial services, retail, healthcare, or logistics, the reliance on application systems has grown exponentially. What was once a matter of operational convenience has now become a business imperative.Today, critical activities, ranging from payroll processing and inventory management to customer engagement and financial reporting, are automated through integrated application systems. These platforms are not only performing transaction processing but also providing advanced decision support through data analytics, predictive modelling, and real-time dashboards.The COVID-19 pandemic further catalyzed this transition. Remote working, online transactions, and digital collaboration tools became essential, and organizations had to adopt or upgrade application systems quickly to ensure continuity. While the benefits were clear, these rapid implementations also introduced unanticipated risks.For Chartered Accountants, this represents both an opportunity and a responsibility. As professionals trusted with ensuring transparency, compliance, and accountability, CAs must not only understand financial controls but also assess and assure the underlying application systems. The ICAI's Digital Accounting and Assurance Board (DAAB) has emphasized that technology-enabled assurance is now central to the CA's role.The Rise of Application Systems in Modern BusinessThe shift from manual processes to technology-enabled operations is not new. However, the scale, complexity, and pace of change in application systems have reached unprecedented levels.1. Enterprise Integration through ERP and CRMSystems such as SAP, Oracle NetSuite, and Salesforce unify core functions such as finance, procurement, HR, and customer management into integrated platforms. This reduces duplication, accelerates decision-making, and provides holistic visibility.Example. A manufacturing enterprise integrates its supply chain into its ERP, ensuring real-time inventory updates. While this reduces stock-outs, a minor misconfiguration could halt production across multiple plants.2. Emergence of Robotic Process Automation (RPA)Bots automate repetitive, rule-based tasks such as invoice matching or compliance reporting.While efficient, improper configuration can result in large-scale processing errors.3. Artificial Intelligence and Machine LearningPredictive analytics and anomaly detection applications are increasingly embedded in finance, fraud detection, and forecasting.However, algorithms may carry inherent bias or lack transparency, posing audit challenges.4. Cloud Computing and Software-as-a-Service (SaaS)Cloud applications lower costs and improve scalability.Yet, they raise unique issues around data security, vendor dependency, and regulatory compliance across jurisdictions.5. Mobile Applications and APIs as Enablers of Digital TransformationDigital transformation is reimagining business models, processes, and customer engagement through technology, with mobile applications as a key interface for customers and employees.APIs are secure channels that allow apps to communicate with core systems like ERP, CRM, payment gateways, and cloud platforms in real time, enabling seamless transactions and data updates.Mobile applications bring services directly to customers and employees, but their effectiveness relies on APIs — a banking app, for example, uses APIs to fetch balances, process transactions, and update customer records instantly.This integration requires auditors to assess API security, reliability, and integrity, as weaknesses could compromise both mobile and enterprise systems.How data exchange works in API-to-API communication. API-to-API communication enables automated, structured, and secure data exchange between independent applications. Systems authenticate using tokens, API keys, or OAuth, exchange data in formats like JSON or XML, and may use middleware for compatibility. While APIs improve efficiency, weak authentication, undocumented endpoints, or lack of monitoring pose risks, making control evaluation critical to maintaining data confidentiality, integrity, and availability.6. Blockchain ApplicationsDistributed ledgers are transforming trade finance, supply chain traceability, and audit trails.Adoption is promising but immature, creating uncertainty around controls and governance.Case in point. In the banking sector, transaction processing applications handle millions of daily records — any misconfiguration could lead to erroneous interest calculations, impacting both financial results and customer trust. In e-commerce, a malfunctioning payment gateway could disrupt thousands of transactions per second, causing not only revenue loss but also reputational fallout.Risks in New or Modified Transaction Processing SystemsThe IIA's GTAG 3: Managing and Auditing IT Vulnerabilities emphasizes that changes in IT environments invariably introduce vulnerabilities. The following risk categories are particularly relevant to application systems:01Operational RisksSystem downtime in critical industries (stock exchanges, hospitals)Data integrity errors during migrations or upgradesInadequate documentation of processes02Cybersecurity RisksExternal attacks: ransomware, denial-of-service, phishingInsider threats, including privilege abuseThird-party integrations expand the attack surface03Compliance & Regulatory RisksGlobal regulations (GDPR, India's DPDP Act)Automated systems must ensure audit trailsInability to demonstrate compliance04Financial Reporting RisksAutomated journal entries, revenue recognition, reconciliationsErrors can bypass manual review05Change Management RisksFrequent patches, upgrades, and modificationsWeak governance may allow unauthorized changes·Net effectAll five categories interact at the centre of cybersecurity risk and feed enterprise-level exposure.Risk Analysis Frameworks for ProfessionalsCAs and internal auditors must anchor their risk assessments in structured methodologies.IIA GTAG SeriesGTAG 1 (Information Technology Controls) provides the foundation for assessing general and application controls; GTAG 3 (Managing and Auditing IT Vulnerabilities) is specific to application changes and new systems; GTAG 11 (Developing the IT Audit Plan) integrates IT risks into enterprise-wide assurance.COBITProvides governance and management objectives, ensuring alignment between IT processes and business goals, and helps auditors assess the maturity of IT processes.COSO ERMEncourages risk-based thinking and integration of IT risks into enterprise-level decision making, aligning risk appetite with business objectives.NIST Cybersecurity FrameworkUseful for addressing the cybersecurity dimensions of application risks across five functions: Identify, Protect, Detect, Respond, Recover.Practical Methodology for CAsRisk identification — gather inputs from IT teams, process owners, and regulatory requirements.Risk assessment — evaluate likelihood and impact (financial, reputational, operational).Risk prioritization — focus on high-risk areas such as transaction accuracy, system security, and data confidentiality.Control mapping — link each risk to existing or proposed controls.Ongoing monitoring — establish continuous feedback loops.Designing and Implementing Application ControlsEffective risk management hinges on designing controls that are theoretically sound and embedded seamlessly into day-to-day operations. Application controls act as the first line of defense against data inaccuracies, fraud, and operational inefficiencies. Broadly, they fall into five categories.1. Preventive Controls stop errors before they occurProactive measures ensuring that only valid, authorized, and accurate transactions enter the system — input validation, role-based access controls (RBAC), and encryption / password policies.Example. In a banking application, input validation prevents account opening forms from being submitted without mandatory KYC details, while RBAC ensures account creation and loan approvals are handled by separate personnel.2. Detective Controls identify after the factOperate after a transaction has been processed, aiming to identify anomalies, errors, or unauthorized activities — exception reports, audit trails and log monitoring, and reconciliation reports.Example. In an e-commerce platform, exception reports highlight orders shipped without payment confirmation; audit logs trace who overrode the control and when.3. Corrective Controls restore stabilityMechanisms that restore systems to a stable state after an error or incident — backup and disaster recovery plans, incident response procedures, and rollback mechanisms.Example. During an ERP migration, rollback mechanisms allowed a manufacturing company to revert to the old database when errors were discovered in batch inventory uploads.4. IT General Controls (ITGCs) the foundational layerSupport the reliability of all application controls — change management, logical access controls, and the system development life cycle (SDLC).Example. Inadequate change management once caused an Indian FMCG company's ERP system to miscalculate inventory valuation after an update; post-incident, stricter ITGCs required multi-stage approvals before changes went live.5. Application-Specific Controls input · processing · outputInput controls govern the accuracy and completeness of data entry; processing controls cover system calculations and batch totals; output controls govern distribution of reports to authorized users only.Collaboration between CAs and IT TeamsDesigning and implementing controls is not solely a technology exercise. CAs bring knowledge of business risks, statutory compliance, and financial integrity; IT teams provide expertise in system logic, architecture, and technical feasibility. To be effective, controls must be documented in process maps and control matrices, implemented through ERP configuration, scripts, or workflow rules, tested periodically for operating effectiveness, and monitored continuously with exception alerts and management dashboards.Testing and Validating ControlsDesigning controls is only the first step. The true measure of reliability lies in testing whether controls are not only implemented but operating effectively over time — a requirement underscored by audit standards such as ISA 315 and ICAI's Standards on Auditing.Method 01Walkthroughs and ObservationAuditors trace a sample transaction from initiation to completion, observing how inputs, authorizations, processing, and outputs are managed. This provides contextual understanding of process design and identifies control gaps early.Example. In an ERP environment, auditors may track a purchase order from creation through vendor approval, goods receipt, and payment disbursement, confirming segregation of duties.Method 02Re-performanceThe auditor independently re-executes a control procedure to verify it operates as intended, providing stronger assurance than relying on management representations alone.Example. An auditor recalculates system-generated depreciation for a class of assets to validate that ERP logic matches accounting policy and statutory requirements.Method 03Data AnalyticsTools such as IDEA, ACL, Power BI, and Python scripts analyze entire transaction populations rather than samples, increasing coverage and improving anomaly detection.Example. In payroll audits, data analytics quickly flag duplicate bank account numbers, ghost employees, or abnormal overtime payments.Method 04Continuous AuditingAutomated scripts embedded within ERP or external monitoring systems run predefined rules and alert auditors in near real time, reducing the lag between risk occurrence and detection.Example. A retail organization scanned supplier master data daily and flagged duplicate bank accounts linked to multiple vendors, uncovering potential fraud before payments were made.Method 05Control Effectiveness ReviewsBeyond individual controls, auditors assess whether the overall control environment addresses key risks holistically, whether redundancies exist, and whether management actively monitors remediation.Example. An ITGC review might assess whether user access reviews are consistently performed across all critical applications, not just sampled for one module.Method 06Integration of Manual and Automated TestingWhere manual and automated controls coexist, auditors must assess the interaction between the two — automated configuration and logic accuracy on one side, manual oversight of exception reports on the other.Example. In a treasury system, automated limits may prevent over-exposure in foreign exchange contracts, but management review of exception reports ensures breaches are properly investigated.Best Practices for ProfessionalsRisk-based approach — prioritize testing of controls that mitigate high-impact risks.Use of CAATs — leverage scripts, queries, and software to test at scale.Documentation — maintain clear working papers of procedures performed, exceptions noted, and evidence collected.Follow-up — complement testing with recommendations and validation of corrective actions.Integration with internal audit — coordinate to avoid duplication and improve coverage.Emerging Trends & Future DirectionsAI and Machine Learning in AuditingAutomated anomaly detection reduces manual sampling.Predictive analytics highlight emerging risks before they materialize.Blockchain for TransparencyImmutable ledgers reduce reconciliation needs.Smart contracts enforce controls automatically.Continuous Monitoring as a NormMoving from periodic testing to real-time dashboards.Integration with enterprise risk management systems.Skill Transformation for CAsProficiency in IT risk management, cybersecurity, and data analytics is no longer optional.ICAI's DAAB initiatives provide structured pathways for capability building.ConclusionThe increased involvement of application systems in business is not merely a technological shift but a transformation in how organizations operate, compete, and manage risks. While these systems promise efficiency, accuracy, and scalability, they simultaneously magnify the consequences of failure.For Chartered Accountants, this represents both a challenge and an opportunity. By adopting frameworks from IIA, ISACA, NIST, and ICAI, CAs can step beyond compliance to become strategic partners in ensuring resilient, risk-aware businesses. Designing and testing controls in evolving application landscapes is no longer a specialized IT function — it is a core assurance responsibility.In essence, the profession must embrace a dual role: enabling innovation while safeguarding integrity. As custodians of trust in financial and business systems, Chartered Accountants stand at the intersection of technology and assurance, shaping the future of reliable business in the digital age.ReferencesThe Institute of Internal Auditors (IIA). GTAG 1: Information Technology Controls.The Institute of Internal Auditors (IIA). GTAG 3: Managing and Auditing IT Vulnerabilities.The Institute of Internal Auditors (IIA). GTAG 11: Developing the IT Audit Plan.ISACA. COBIT Framework for Governance and Management of Enterprise IT.Committee of Sponsoring Organizations of the Treadway Commission (COSO). Enterprise Risk Management — Integrating with Strategy and Performance.National Institute of Standards and Technology (NIST). Cybersecurity Framework.ICAI Digital Accounting and Assurance Board (DAAB). Publications and Guidance Notes.Industry whitepapers on ERP, RPA, and AI applications (Deloitte, PwC, EY, KPMG).CA. Richa Thapa, Member of the Institute, may be reached at richathapa18@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · APRIL 2026 · WWW.ICAI.ORG
Theme
Ep. 31 — Accounting Theories in the Digital Era: Progress and Paradigm Shifts
CA Journal
· June 2026
00:00
--:--
Accounting Theories in the Digital Era: Progress and Paradigm ShiftsDigital accounting has revolutionised the accounting profession by integrating emerging technologies such as artificial intelligence, cloud computing and blockchain technology. This transformation has enhanced the accuracy, speed, communication and transparency of financial reporting. The article analyses how emerging technologies support and modify major accounting theories — stakeholders, legitimacy, signalling, and user satisfaction theories — by improving communication, transparency, reporting quality and decision-making, while also raising concerns about privacy, security and bias.IntroductionTraditionally, accounting and auditing functions were more reliant on manual methods and human expertise. However, with the advent of technology and Artificial Intelligence (AI), these tasks have witnessed a paradigm shift. Accountants and other professionals have shifted their attention towards enhancing accounting and auditing practices through digital technologies, resulting in greater effectiveness, timely audit of financial statements, improvement in department performance, reduction in audit task burden, improvement in productivity, better risk evaluation and fraud identification, and improved audit report quality. However, adoption of digital technologies also brings various complexities and challenges.Al Wael et al.'s (2023) study explained resource limitations, organisational resistance, insufficient understanding of digital technologies, and ethical and regulatory concerns as barriers to adoption. Security issues in cloud environments, compatibility with existing standards, trust issues and data privacy were other challenges highlighted in prior research. These risks can reduce stakeholder confidence, disrupt organisations, and violate regulatory directives.In light of economic, regulatory and technological developments, accounting theories have also witnessed a paradigm shift. Emerging tools like AI, blockchain, and big data are helping develop new accounting theories that better address today's complex environment, marking the beginning of a new era of digital accounting.The Digital Accounting and Assurance Board (DAAB) is an important part of the Institute of Chartered Accountants of India's (ICAI) mission to integrate emerging technologies into accounting and auditing practices. DAAB provides technical guidance and conducts webinars to help professionals navigate digital assurance and auditing complexities, aiming to improve audit efficiency through better use of digital audit evidence.ObjectivesTo understand the evolution and concept of digital accounting.To explore the development of accounting principles and practices in the digital era.To explain the role of technology in the development of modern accounting theories.To propose new accounting theories suitable for the digital era.To examine challenges faced by accountants in adopting emerging technologies.Evolution and Concept of Digital AccountingTo remain competitive in today's digitalised world, accountants must adopt digital accounting. Several scholars have defined the concept in complementary ways:Deshmukh (2006): digital accounting is a computer system or software designed and programmed to be customized for recording transactions and generating financial statements for further analysis.Lehner et al. (2019) regarded it as a common language among accounting professionals, while Ahmed et al. (2019) describe it as the use of digital technologies and information systems for recording, analysing and reporting financial transactions within organisations.i. Conceptual Model of Digitalisation in Accounting (DIA)Zhang et al. (2022) proposed a conceptual model of DIA built around four components:a) Firm CharacteristicsFirms face pressures such as cost control, demand for higher transparency, work efficiency and competitive advantage, compelling them to adopt digital technologies.b) Executive CharacteristicsLeaders' and managers' aspiration levels and strategic intent play a significant role in digital transformation. Belief in the value of digitalisation increases the likelihood of successful transformation.c) Organisational CapabilitiesOrdinary Capabilities: help firms control costs and maintain technical business efficiency.Dynamic Capabilities: involve adapting quickly to change, building new routines, and innovating based on accumulated knowledge and learning.d) Digitalisation in Business ProcessesArchitectural Knowledge: understanding how technology systems fit together as a whole.Component Knowledge: the ability to use and manage individual technologies, such as specific software tools.ii. The Digital Competency Maturity Model (DCMM) Version 2.0ICAI has released a detailed model to encourage adoption of emerging technologies such as AI and blockchain among accounting firms and professionals. It assesses digital competency across automation of internal processes (attendance, documentation, communication, data security), availability of qualified accountants, level of automation in audit/tax/accounting/management consulting services, and integration of emerging technologies. A structured questionnaire helps firms identify strengths and gaps to plan their digital adaptation.Evolution of Accounting TheoriesEraPeriodKey DevelopmentsEarly 20th Century1900s–1920sAccounting mainly practical, focused on record keeping with minimal theoretical basis.Traditional Paradigm1920s–1950sAccounting emerged as a formal academic discipline; stewardship and historical cost principles established; Paton & Littleton introduced matching principle and revenue concept.Behavioural Paradigm1950s–1970sFocus on objectivity and verifiability; principles-based accounting emphasising consistency and compliance; human decision-making emphasised by Anthony (1965) and Kaplan (1977).Normative Paradigm1970s–1980sRoss (1977) framed accounting as a normative discipline aimed at economic efficiency; introduction of agency theory examining principal-agent relationships.Empirical Paradigm1980s–1990sRise of empirical, evidence-based research; formal standard-setting bodies (FASB, IASB) developed; Freeman (1984) advanced stakeholder-centric theory.Role of Emerging Technologies in the Development of Accounting Theories (1990s–Present)Accounting today is viewed as a social and political construct centred on social justice, transparency and sustainability. Barth (2006) emphasised Fair Value Accounting (FVA), shifting focus from historical cost to market value. This phase saw the increased role of accounting information systems and technology.An Accounting Information System (AIS) helps organisations gather, store, manage, process and report financial data. Romney and Steinbart (2020) describe an AIS as comprising people, procedures, data, software, IT infrastructure and internal controls. Technology like AIS automates routine tasks, improves accuracy, and enables advanced data analysis — encouraging a shift from historical cost toward fair value accounting and non-financial reporting such as ESG and stakeholder-centric disclosures. While automation improves efficiency, developing economies still face adoption challenges due to infrastructure and skill gaps.Proposed Accounting Theories in the Digital EraDigital Signalling TheoryBuilding on Spence's (1973) traditional signalling theory, which explains how firms use financial data to reduce information asymmetry with stakeholders, digital tools like cloud computing and big data make these signals faster and more effective. While an abundance of signals can create confusion or mislead, digital technology also improves transparency and verification, making this theory relevant in the modern era.Digital Stakeholders Engagement TheoryExtending Freeman's (1984) stakeholder theory, digital platforms now let stakeholders express demands rapidly, increasing corporate openness, transparency, sustainability and governance. AI and big data help companies better understand and respond to diverse stakeholder needs.Digital User Satisfaction TheoryBuilding on DeLone and McLean's (2003) Information System Success Model, which focuses on usability, functionality and relevance, technologies like AI, blockchain and cloud computing enhance user satisfaction through automation, cost reduction and real-time reporting.Digital Legitimacy TheorySuchman's (1995) legitimacy theory explains how organisations follow societal rules and norms through reporting and social responsibility. Online platforms now make this interaction faster and more transparent, enabling real-time accountability and elevating the importance of reputation and ethical behaviour.Momentum Theory of Digitalisation in Accounting (DIA)Zhang et al. (2022) compare digital transformation to water flowing from high hills (firm and executive characteristics) through sluice gates (organisational capabilities) into the ocean (digitalisation in accounting). Organisations' willingness to allocate resources and their organisational capabilities determine how successfully they adapt, with digitalisation in accounting representing the consolidated output of this flow.Challenges Faced by Accountants in Adopting Emerging TechnologiesTraditional accounting ethics — objectivity, confidentiality, professional competence and due care — require expansion as digitisation transforms core professional responsibilities.1. Accountants' AutonomyExcessive reliance on digital tools can reduce critical thinking and decision-making, leading to biased or misleading outcomes and raising accountability concerns.2. PrivacyAI and IoT technologies raise concerns around unauthorised access, confidentiality breaches and complex consent agreements, while also enabling employers to monitor staff activity.3. DehumanisationEulerich et al. (2023) describe dehumanisation as occurring when professionals are sidelined or replaced by automation, risking loss of judgement, empathy, isolation and job dissatisfaction.4. Technological ComplexitiesDwivedi et al. (2021) highlight the "black box problem" — the inability of auditors to explain or document an AI tool's decision-making process. Yang et al. (2024) add biases and computability issues as further barriers.5. Need for Continuous LearningRegular training and skill upgradation are essential; reluctance to learn new technology risks accountants being displaced by data scientists.6. Cyber Security ThreatsDigital accounting systems are inherently vulnerable. Common risks include:Breach of data: unauthorised access leading to theft and reputational harm.Ransomware: malicious software encrypting data and demanding ransom.Phishing: manipulating employees to disclose confidential information or install malware.Spoofing: attackers creating falsely authorised identities to access data.ConclusionIn view of rapid technological advancements, accounting theories have undergone significant transformation to integrate with the digital world. Digital technologies like AI, blockchain and cloud computing have reshaped signalling, legitimacy, stakeholder and user satisfaction theories — enhancing transparency, accountability and efficiency through reduced cost, real-time reporting and immediate communication.Despite these advantages, digital technologies raise concerns about privacy, autonomy, technological complexity, cybersecurity and bias. A May 2024 survey-based report by the AI Committee at ICAI found that AI adoption in India remains in its early stages with considerable growth potential, with diverse adoption levels and budget constraints limiting use in auditing. This points to the need for advanced theories that integrate ethics and governance tailored to digital complexities.The Committee for Members in Practice (CMP) under ICAI has tie-ups with software and technology providers to offer discounted access to audit and accounting tools for practising Chartered Accountants. ICAI has also launched AI certificate courses (AICA Level 1 and 2), with Level 2 covering advanced prompting techniques and practical AI applications in finance, auditing, compliance and analytics through a 5-day hybrid format carrying 30 CPE hours.More workshops, seminars, webinars and awareness programmes should therefore be organised by ICAI to promote acceptance and adoption of emerging technologies and theories in accounting and audit practices.ReferencesAhmed, S., Smith, J., & Chen, L. (2019). The role of digital technologies in transforming accounting practices. Journal of Accounting Research, 57(2), 345–378.Al Wael, H., Abdallah, W., Ghura, H., & Buallay, A. (2023). Factors influencing artificial intelligence adoption in the accounting profession: the case of public sector in Kuwait. Competitiveness Review: An International Business Journal, 34(1), 3–27.Barth, M. E. (2006). Fair value accounting: Evidence from investment securities and the market valuation of banks. The Accounting Review, 81(1), 1–25.DeLone, W. H., & McLean, E. R. (2003). The DeLone and McLean model of information systems success: A ten-year update. Journal of Management Information Systems, 19(4), 9–30.Deshmukh, A. (2006). Digital Accounting: The Effects of the Internet and ERP on Accounting. USA: IGI Global.Dwivedi, Y. K., et al. (2021). Artificial Intelligence (AI): Multidisciplinary perspectives on emerging challenges, opportunities, and agenda for research, practice and policy. International Journal of Information Management, 57, 101994.Eulerich, M., Wagener, M., Waddoups, N., & Wood, D.A. (2023). The dark side of robotic process automation. Accounting Horizons, 38(1), 1–10.Lehner, O., Leitner-Hanetseder, S., & Eisl, C. (2019). The whatness of digital accounting: status quo and ways to move forward. ACRN Journal of Finance and Risk Perspectives, 8(2), I–V.Yang, J., Blount, Y., & Amrollahi, A. (2024). Artificial intelligence adoption in a professional service industry: A multiple case study. Technological Forecasting and Social Change, 201, 123251.Zhang, M., Ye, T., & Jia, L. (2022). Implications of the "momentum" theory of digitalization in accounting: Evidence from Ash Cloud. China Journal of Accounting Research, 15(4), 100274.Authors may be reached at garimahgc13@gmail.com and eboard@icai.inThe Chartered Accountant · April 2026 · www.icai.org
Theme
Ep. 32 — Cybersecurity Audit Framework: Essential Toolkit for Modern Auditors
CA Journal
· June 2026
00:00
--:--
Cybersecurity Audit Framework: Essential Toolkit for Modern AuditorsRBI Cyber Framework SEBI CSCRF ISO 27001 NIST 800-53 SOC 2Indian businesses face escalating cyber threats, and regulators demand robust cybersecurity audits. This article serves as a practical toolkit for auditors, especially Chartered Accountants, to navigate complex frameworks — the RBI's cyber resilience requirements, SEBI's Cybersecurity and Cyber Resilience Framework (CSCRF), and global standards such as ISO 27001, NIST 800-53, and SOC 2. It structures audits around twelve core domains, each with example controls auditors can use to deliver actionable insights and strengthen cyber defences.Introduction: Cybersecurity as a Governance ImperativeCyber-attacks on Indian organisations have highlighted the need for strong cyber governance. In 2018, a co-operative bank in Pune lost ₹94 crore (≈US$13 million) after malware was used to compromise its payment system. Another incident saw 4.5 million airline passengers' data exposed after the carrier's IT vendor was hacked. These breaches prompted regulators to strengthen oversight. The RBI expanded its cyber framework to include detailed annexures specifying baseline controls, SOC requirements, and incident reporting templates. SEBI introduced the CSCRF to ensure cyber resilience across all financial-market entities. Chartered Accountants and internal auditors must therefore broaden their role from traditional financial oversight to advising on cyber risk, compliance, and resilience.RBI's Cybersecurity Framework: Annexures and Key ControlsThe RBI's cyber security circular (2016) outlines baseline controls for banks and payment operators, expanded through annexures that apply across regulated entities. Compliance requires a board-approved cybersecurity policy and a risk management programme covering prevention, detection, and response.Annex 1: Baseline Cybersecurity and Resilience RequirementsAnnex 1 lists minimum controls that banks must implement. Key areas include:Governance and risk management: Inventory of IT assets, classification of critical information, and periodic risk assessments.Protection and prevention: Secure configuration of hardware and software, network segmentation, encryption of sensitive data, strong authentication, and multi-factor access controls.Monitoring and detection: Centralised logging, continuous security monitoring, and threat intelligence to identify anomalies.Incident response and recovery: Procedures for incident reporting within two to six hours, root-cause analysis, corrective actions, and lessons learned.Vendor management: Due diligence of third parties and the right to audit service providers handling customer data.These controls apply to banks, but similar principles extend to non-bank payment operators via the RBI's 2023 Master Direction on cyber resilience, which emphasises risk assessments, encryption, and digital-payment security.Annex 2: Setting up a Cyber Security Operations Centre (C-SOC)Annex 2 requires banks to establish a Cyber Security Operations Centre (C-SOC) with capabilities for real-time monitoring, behaviour analytics, and incident response. The C-SOC must integrate logs from networks, servers, and applications, analyse them for anomalies, and coordinate responses across the organisation. Banks may operate the SOC in-house or outsource to qualified third parties, but they remain responsible for governance and oversight. Regular drills and evaluations ensure readiness and continuous improvement.Annex 3: Cyber Incident Reporting TemplateAnnex 3 standardises how banks report cyber incidents to the RBI. The template requires details such as the nature of the attack, systems affected, detection time, actions taken, root cause analysis, and measures to prevent recurrence. Banks must report incidents within six hours of discovery, aligning with CERT-In's reporting timelines, and follow up with updates as investigations progress.Third-Party Risk ManagementIn addition to the above, Annex 3 also includes guidelines on third-party risk management. Banks must identify critical vendors, conduct annual security assessments, and include confidentiality, data-protection, and right-to-audit clauses in contracts. Outsourcing cannot absolve banks of responsibility; they must monitor vendor compliance, ensure data localisation, and maintain controls over outsourced SOCs and cloud services.SEBI's Cybersecurity and Cyber Resilience Framework (CSCRF)SEBI released the CSCRF in August 2024 to establish uniform cyber governance across capital markets. It applies to market infrastructure institutions (stock exchanges, clearing corporations), qualified regulated entities (mutual funds, asset managers), and mid-size firms, as well as credit rating agencies, venture funds, and other regulated entities.Core Elements of CSCRFCybersecurity governance: Entities must adopt a board-approved cybersecurity policy, define roles and responsibilities, and implement a cyber risk management framework.Risk assessment and critical system identification: Organisations must classify IT assets, identify critical systems (trading platforms, payment gateways), and conduct periodic risk assessments.Cyber Capability Index (CCI): SEBI uses a numerical score to benchmark cybersecurity readiness. Market infrastructure institutions undergo third-party assessments twice a year, while qualified entities perform annual self-assessments.Security Operations Centre: All entities must establish 24×7 SOCs or use shared market SOCs created by exchanges. SOC efficacy must be reported periodically.Vulnerability Assessment and Penetration Testing (VAPT): Regular VAPT must cover all critical systems and be performed after major updates.Incident response and management: Entities must maintain a documented incident response plan and cyber crisis management plan. Incidents must be reported promptly through SEBI's portal.Data protection and access control: Mandatory encryption (full-disk and file-level) and strict access controls with multi-factor authentication.Backup and disaster recovery: Entities must maintain disaster recovery plans, perform regular backups, and test restoration.Red teaming and continuous improvement: SEBI mandates periodic red-team exercises and ongoing updates to policies and staff training.Compliance reporting and auditing: Entities must submit structured reports to SEBI and undergo regular cybersecurity audits, with adoption deadlines set for January 1, 2025, or April 1, 2025, depending on previous obligations.Why CSCRF MattersThe CSCRF emphasises both cybersecurity and resilience, requiring entities to anticipate, withstand, contain, recover from, and evolve after cyber incidents. By aligning controls to these goals, SEBI aims to ensure market stability and investor confidence. Auditors should evaluate organisations' adherence to the framework, ensuring that policies, SOC operations, data localisation, and vendor management meet SEBI's standards.Global Standards and Best PracticesIndian regulations should be benchmarked against global standards to ensure robust security:ISO/IEC 27001: Provides a structured information security management system, emphasising risk assessment, control implementation, and continual improvement.NIST SP 800-53 and NIST Cybersecurity Framework: Offer detailed control catalogues and a framework of functions (Identify, Protect, Detect, Respond, and Recover) that parallel the SEBI CSCRF goals.SOC 2 (Trust Services Criteria): Evaluates security, availability, processing integrity, confidentiality, and privacy; useful for service providers and technology firms.By mapping Indian requirements to these global frameworks, auditors can identify gaps, adopt international best practices, and prepare organisations operating across borders.Core Cybersecurity Audit Domains & ResponsibilitiesTo deliver a comprehensive cybersecurity audit, auditors should structure their review around the following domains. Each domain includes example controls to guide assessment.1 Governance & PolicyResponsibilitiesVerify the presence of a board-approved cybersecurity policy; evaluate management's oversight and assignment of security roles. Ensure policies align with RBI Annex 1 and SEBI CSCRF.Example controlsFormal information security charter; senior management training; periodic policy reviews; evidence of board minutes approving security strategy.2 Risk Assessment & ManagementResponsibilitiesCheck whether the organisation maintains an inventory of assets, assesses risks regularly, and records mitigation actions. Ensure risk appetite aligns with business objectives.Example controlsEnterprise risk register with cyber entries; documented methodology for evaluating threats and vulnerabilities; integration of cyber risks into overall risk management; evidence of scenario-based testing.3 Asset ManagementResponsibilitiesConfirm up-to-date inventories of hardware, software, data, and third-party services; validate asset classification and protection commensurate with sensitivity.Example controlsAutomated asset discovery; tagging of data and systems; configuration management database; secure asset decommissioning.4 Identity & Access Management (IAM)ResponsibilitiesAssess user provisioning, authentication, and authorization. Check the enforcement of least privilege, multi-factor authentication, and monitoring of privileged accounts.Example controlsRole-based access control matrix; periodic user access reviews; multi-factor authentication for administrators; privileged access management (PAM) solutions; timely revocation of credentials when employees depart.5 Network & System SecurityResponsibilitiesEvaluate network segmentation, firewalls, intrusion detection systems, and endpoint protection. Ensure secure configuration of servers and devices.Example controlsHardened system baselines; segregation of development and production networks; continuous vulnerability scanning; patch management schedules; anti-malware agents with real-time detection.6 Application SecurityResponsibilitiesReview the secure development life cycle (SDLC) and third-party software management. Check for regular vulnerability scans and penetration tests, particularly after major releases.Example controlsSecure coding guidelines; automated static/dynamic code analysis; penetration testing results; controls for open-source component management; change management records.7 Data Protection & PrivacyResponsibilitiesVerify data classification, encryption at rest and in transit, and adherence to data minimisation and retention policies. Assess compliance with India's Digital Personal Data Protection Act and other regulations.Example controlsEncrypted databases and communication channels; data loss prevention tools; backups stored offline; secure disposal processes; privacy impact assessments for new systems.8 Monitoring & LoggingResponsibilitiesEnsure critical systems generate logs that are consolidated and analysed. Logs should be synchronised with accurate time sources and retained in compliance with RBI and SEBI guidelines.Example controlsCentralised security information and event management (SIEM); use of behaviour analytics to flag anomalies; regular log reviews; alignment with Annex 2 SOC requirements; documented retention schedules.9 Incident Response & RecoveryResponsibilitiesReview documented incident response and cyber crisis management plans. Check whether drills are conducted, and evaluate business continuity and disaster recovery capabilities.Example controlsIncident classification matrices; defined communication protocols; evidence of tabletop exercises; off-site backups; alternate processing sites; defined recovery time and recovery point objectives.10 Third-Party & Supply-Chain SecurityResponsibilitiesExamine vendor risk management processes, including due diligence, contract clauses, and monitoring of service providers. Evaluate compliance with SEBI's requirements for supply-chain security (e.g., software bill of materials).Example controlsSupplier risk assessments; third-party security questionnaires; contractual terms covering confidentiality, breach notification, and audit rights; monitoring of outsourced SOC performance.11 Compliance & LegalResponsibilitiesEnsure all applicable laws and regulations (RBI, SEBI, CERT-In, DPDP Act) are identified and that policies and controls align with them. Verify timely submissions of required reports and evidence of regulatory audits.Example controlsCompliance matrix mapping controls to legal requirements; evidence of incident reports to regulators; records of external audit findings and remediation.12 Business Continuity & Disaster Recovery (BC/DR)ResponsibilitiesAssess preparedness to maintain operations during disruptions. Ensure business impact analysis has identified critical functions and that redundancy exists.Example controlsDocumented BC/DR plans; regular disaster recovery drills; geographically separate backup sites; redundancy in power and network infrastructure; communication plans for prolonged outages.Sample Audit Report FormatA well-structured report enhances the usefulness of audit findings:SectionContentExecutive SummarySummarise scope, objectives, key findings, and overall risk assessment for board review.Scope and ObjectivesDefine systems reviewed and compliance frameworks referenced (RBI, SEBI CSCRF, ISO 27001, NIST 800-53).MethodologyDescribe evidence gathered (policy review, interviews, configuration checks, VAPT results). Mention use of automation, analytics, or red-team reports where applicable.Detailed Findings and RecommendationsGroup findings by domain; state condition, cause, and impact; assign severity; propose remediation actions.ConclusionSummarise overall cyber posture and highlight priority recommendations. Provide management with a roadmap for improvement.AppendicesMay include vulnerability scan reports, inventories, or compliance matrices.Sector-Specific PerspectivesWhile core controls remain consistent, different sectors warrant emphasis on certain domains:Banking & FinanceCompliance with RBI's annexures and Master Direction. Scrutinise transaction monitoring, multi-factor authentication, encryption of customer data, and vendor oversight. Strong SOC monitoring and incident reporting are critical.Capital MarketsAdherence to SEBI's CSCRF is paramount. Emphasis on SOC operations, CCI scoring, VAPT after major system releases, and data localisation.Technology & Start-upsRapidly scaling firms often lack mature processes and rely heavily on cloud services. Assess cloud security posture, API security, and developer practices.Government & Public SectorHandles sensitive citizen data and critical infrastructure. Evaluate identity management, network segmentation, incident response readiness, and CERT-In's six-hour reporting rule.Audit-Tech Enablers and Future ConsiderationsAI and analytics: Machine learning can sift through vast log data to detect anomalies. Continuous monitoring solutions such as Cloud Security Posture Management (CSPM) help maintain compliance with CSCRF's SOC requirements.Automation: Scripts can collect evidence (user lists, configuration baselines, patch status) and verify remediations. Integration with Governance, Risk, and Compliance (GRC) platforms streamlines tracking.Penetration testing and red teaming: Regular ethical hacking exercises reveal real-world vulnerabilities. Auditors should review these results and confirm remediation.Looking ahead, threats like ransomware, supply-chain attacks, and privacy breaches will persist. Auditors must encourage resilient controls such as offline backups, vendor oversight, and data encryption. Emerging technologies (AI, quantum computing) will bring both opportunities and risks; staying informed of evolving standards and regulations is critical."By understanding and applying the RBI's annexures, SEBI's CSCRF, and global frameworks, auditors can structure comprehensive reviews across key domains."ConclusionCybersecurity auditing is now integral to corporate governance. For Chartered Accountants and internal auditors, mastering this domain is essential to protect organisations and uphold investor confidence. By understanding and applying the RBI's annexures, SEBI's CSCRF, and global frameworks, auditors can structure comprehensive reviews across key domains. Incorporating example controls and leveraging modern tools ensures audits are thorough, practical, and aligned with regulatory expectations. Continuous learning and adaptation will enable auditors to help organisations anticipate, withstand, contain, and recover from cyber threats, ensuring resilience in an increasingly digital world.Source: The Chartered Accountant, April 2026, Vol. 1277–1282 · Author may be reached at eboard@icai.in
Theme
Ep. 33 — Cloud Strategies for Different Business Sizes: A Decision-Making Matrix for CFOs or/and CIOs
CA Journal
· June 2026
00:00
--:--
Cloud Strategies for Different Business Sizes: A Decision-Making Matrix for CFOs and CIOsThis article explores the strategic considerations for cloud adoption in large corporations with regulated protocols versus small-to-medium enterprises (SMEs) with agile protocols. It contrasts the differing needs of these organizations, where large corporations prioritize compliance, security, and integration with legacy systems, while SMEs focus on scalability, cost-effi ciency, and rapid innovation. The article also highlights the collaborative role of the Chief Financial Offi cer (CFO) and Chief Information Offi cer (CIO) in the decision-making process, each bringing a distinct perspective i.e., technology and fi nancial feasibility, respectively. Additionally, the article presents a cloud adoption decision matrix that guides organizations in selecting the right cloud strategy based on factors such as regulatory compliance, cost, scalability, and speed of innovation. This matrix helps align both technical and fi nancial goals to ensure a successful cloud adoption strategy that meets the unique needs of both large enterprises and SMEs.IntroductionAdopting a cloud strategy is not just about technology; it's about future-proofing the business. It provides the foundation for operational efficiency, business agility, innovation, and growth. When choosing a cloud solution for large corporations versus small-to-medium enterprises (SMEs), the decision-making process is shaped by business size, regulatory requirements, flexibility needs, scalability, security, and cost constraints. Both kinds of organization benefit from cloud adoption, but their approaches will differ due to distinct business models, governance protocols, and technological demands.01 Key Differences in NeedsLarge Corporations · Regulated ProtocolsHeavily regulated due to industry standards (healthcare, finance, government) — compliance and security come first.Cloud adoption must be secure, with strong data governance and privacy mechanisms.Large-scale systems that need high availability, strong performance, and integration with complex legacy systems.Common regulations: GDPR, HIPAA, PCI-DSS, SOC 2.SMEs · Agile ProtocolsMore flexible, with fewer legacy systems — able to embrace rapid development and deployment.Prioritize cost-efficiency, scalability, and fast innovation over rigid compliance.Need to respond quickly to changing market demand.Favor lightweight cloud solutions built for speed and simplicity.02 Cloud Adoption Use CasesFor Large Corporations with Regulated ProtocolsFinancial Services — Banking, InsuranceA large financial institution adopts a private or hybrid cloud to meet PCI-DSS and SOX requirements while maintaining strong data security. Encryption, access controls, and audit logging protect customer data, and the environment scales to handle peak transaction volumes.Decision drivers: regulatory compliance, security, infrastructure control, hybrid cloud capability.Healthcare ProvidersA healthcare provider chooses a HIPAA-compliant government cloud offering for hosting electronic health records, relying on encryption, secure communication, and disaster recovery aligned with health data regulation.Decision drivers: HIPAA compliance, secure data transmission, redundancy, disaster recovery, regional data storage.Global RetailersA multinational retailer moves its ERP system to a multi-cloud environment to improve performance across regions while complying with local data protection laws such as GDPR, centralizing inventory and business intelligence.Decision drivers: regulatory requirements, multi-region availability, legacy integration, high availability.For SMEs with Agile ProtocolsSoftware Development StartupsA fast-growing SaaS startup builds a server-less architecture that scales automatically with demand, giving it a flexible environment to iterate quickly while keeping operational overhead low.Decision drivers: flexibility, deployment speed, cost-efficiency, scalability, developer-friendly tooling.E-Commerce CompaniesA mid-sized e-commerce platform runs on a flexible, managed cloud solution that absorbs demand spikes during holidays and promotions, paired with a CI/CD pipeline for frequent feature rollouts.Decision drivers: agility, cost, ease of management, scalability, fast go-to-market.Media and Entertainment FirmsAn SME media producer combines creative-cloud tools with cloud storage for seamless collaboration across globally distributed teams, keeping production costs down.Decision drivers: collaboration tools, cost, quick scaling, rapid development cycles, data accessibility.The cloud environment supports sensitive customer data with encryption, secure access controls, and audit logging — and scales to handle transaction volume while quickly scaling down resources during off-peak periods.03 Decision Analysis: When to Choose What?Regulatory ComplianceBusinesses operating in finance or healthcare need providers with specialized compliance features; private or hybrid clouds usually give more control over data and security. SMEs face fewer regulatory pressures and can rely on public cloud providers' built-in compliance certifications without much overhead.SecurityLarge corporations often need to retain control over encryption keys, enforce strict access controls, and continuously monitor security protocols. SMEs typically lean on cloud-native security features and let the provider carry much of the security management burden.Flexibility and AgilityLarge organizations value flexibility but remain anchored to legacy systems that demand stability — hybrid and multi-cloud strategies usually strike that balance. SMEs prioritize speed, often choosing PaaS or SaaS models to minimize overhead and innovate quickly.ScalabilityLarge corporations need both horizontal scaling across regions and vertical scaling within complex systems, which hybrid clouds support well. SMEs prioritize cost-effective, automatic scaling through server-less options.CostFor large corporations, cost is usually secondary to compliance, performance, and security — though optimization through reserved instances still matters. For SMEs, cost control is central, and pay-as-you-go pricing avoids large upfront investment.04 Risk Assessment: SaaS, IaaS & PaaSCloud adoption means choosing between service models — each with its own risk profile that CFOs and CIOs must weigh together.SaaSData security & complianceProviders control infrastructure, limiting direct oversight — regulated industries must validate GDPR, HIPAA, or SOC 2 alignment.Vendor lock-inCIOs must assess contract and exit terms to avoid dependency on a single provider.Cost managementCFOs must watch subscription pricing and shadow-IT spend outside governance.IaaSOperational riskFull infrastructure control requires skilled teams for patching, scaling, and tuning.Cost vs. performanceCFOs must weigh pay-as-you-go against reserved instances to avoid overruns.Regulatory burdenSensitive data may require multi-cloud or hybrid setups to satisfy regional law.PaaSLimited customizationFaster development comes with dependency on a proprietary platform.Data residencyCIOs must verify data sovereignty, especially for cross-border operations.Exit strategyRapid deployment benefits must be weighed against long-term scalability and lock-in.05 Controls, Policies & ComplianceGovernance & Control FrameworksFrameworks like COBIT and NIST define accountability, policy, and risk thresholds.The shared responsibility model: providers secure infrastructure, organizations remain responsible for data security and access management.CFOs focus on FinOps to optimize cloud spend; CIOs focus on Zero Trust access policies.Compliance by IndustryHealthcare → HIPAA complianceFinance → PCI-DSS for payment securityGlobal enterprises → GDPR for data protectionLarge enterprises often need on-premise and public cloud integration together to satisfy data residency laws across multiple regions.Security & Access ManagementIdentity and access management restricts access on least-privilege principles.Encryption protects data at rest and in transit.Incident response plans align disaster recovery with ISO 27001 standards.06 Who Decides: The CIO, CFO, or Both?Cloud adoption is a strategic decision that touches operations, finance, security, and long-term scalability — which is why, in most large organizations, it involves both the CIO and CFO working together.CIO — Technology PerspectiveTechnology fit: alignment with existing infrastructure and future IT needs.Security & compliance: encryption, access controls, monitoring.Scalability & flexibility: handling growth and supporting CI/CD.Innovation: enabling rapid deployment and DevOps agility.Integration with legacy systems via hybrid or multi-cloud approaches.CFO — Financial PerspectiveCost efficiency & ROI: total cost of ownership versus on-premise infrastructure.Budget impact: how costs distribute over time.Financial risk management: hidden fees, overage charges, outage exposure.Scalability as a financial lever: paying only for what's used.Vendor contract terms: pricing models and flexibility.Collaborative Decision-MakingTogether, the CIO and CFO align on strategic goals, balance new technology against budget reality, define shared success metrics such as ROI and operational efficiency, and jointly mitigate risks — from data security and compliance to vendor lock-in and migration disruption.07 Compact Strategy Guide01Initial AlignmentCIOUnderstands current IT infrastructure and future technical needs.CFOAssesses the financial outlook — cost structures, ROI, budget impact.TogetherEstablish a shared vision: agility, cost efficiency, security.02Vendor SelectionCIOReviews technology stack, compliance features, integration capability.CFOEvaluates pricing models and total cost of ownership.TogetherCompare financial and technical fit across vendors.03Cost-Benefit AnalysisCIOPresents technical benefits — performance, security, flexibility.CFORuns financial analysis — savings, ROI, efficiency.TogetherCalculate TCO and agree on budget allocation.04Risk Assessment and MitigationCIOIdentifies technical risks — migration, vulnerabilities, integration.CFOEvaluates financial risks — hidden costs, lock-in, overages.TogetherBuild mitigation plans and clear vendor contracts.05Execution and MonitoringCIOOversees migration, ensuring technical requirements are met.CFOTracks budget and ROI against projections.TogetherMonitor performance and financial impact, adjusting as needed.08 Decision Matrix for Cloud AdoptionCriteriaLarge Corporations · RegulatedSMEs · AgileRegulatory CompliancePrivate cloud / hybrid cloud / compliance-certified providersPublic cloud with built-in complianceSecurityStrict control over security — private cloud, encryption keysCloud-native security tools and complianceFlexibilityHybrid / multi-cloud for legacy system integrationFull cloud-native environments for agilityCostHigher budget, focus on cost optimization (reserved instances)Cost-efficient — pay-as-you-go, server-lessScalabilityHorizontal & vertical scaling — hybrid, multi-cloudServer-less, auto-scaling solutionsSpeed of InnovationSlower, due to regulatory and legacy constraintsFast development cycles, CI/CD pipelinesBusiness SizeLarge enterprise with complex systemsSmall to medium-sized, dynamic growthConclusionFor large corporations, cloud adoption must address regulatory, security, and integration concerns — often requiring private or hybrid cloud solutions that ensure compliance with strict industry protocols while supporting large-scale operations. For SMEs, cloud strategy should emphasize agility, speed, and cost-efficiency, with public cloud offerings, server-less architectures, or PaaS solutions enabling rapid deployment.Ultimately, the decision hinges on balancing regulatory needs and security for large corporations against agility and cost efficiency for SMEs. The key is aligning cloud strategy with organizational size, industry demands, and operational goals.The CIO and CFO play complementary roles: the CIO brings the technical expertise to evaluate platforms, ensure security, and align technology with business goals, while the CFO ensures the strategy is cost-effective and delivers value. Done right, this partnership lets an organization pursue both innovation and cost-efficiency while minimizing risk.Author may be reached at mail2dipra@gmail.com and eboard@icai.inReferencesAbdula, M., Averdunk, I., Barcia, R., Brown, K., & Emuchay, N. (2018). The cloud adoption playbook: Proven strategies for transforming your organization with the cloud. John Wiley & Sons. ISBN 9781119491811.Amazon Web Services. (2022). Cloud adoption framework: Business perspective. docs.aws.amazon.comForrester Research. (2024). The state of cloud in the U.S., 2024. forrester.comHarvard Business Review. (2016). The CIO's guide to cloud computing. hbr.orgHohpe, G. (2020). Cloud strategy: A decision-based approach to successful cloud migration.IDC. (n.d.). Cloud adoption trends. my.idc.comMcKinsey & Company. (2018). Cloud adoption to accelerate IT modernization. mckinsey.comNational Institute of Standards and Technology. (2011). The NIST definition of cloud computing (NIST SP 800-145). U.S. Department of Commerce.Weinman, J. (2012). Cloudonomics: The business value of cloud computing. John Wiley & Sons. ISBN 9781118286968.Originally published in The Chartered Accountant, April 2026 · www.icai.org
Theme
Ep. 34 — The Power of Automation – Smart Applications, Smarter Firms
CA Journal
· June 2026
00:00
--:--
The Power of Automation — Smart Applications, Smarter FirmsChartered Accountancy (CA) fi rms in India have long delivered reliable and trusted services through disciplined processes and time-tested methods. Rooted in professional ethics, strong client relationships, and regulatory expertise, these traditional practices have built the foundation of the profession’s credibility and success. However, in today’s rapidly evolving regulatory and business environment, where speed, accuracy, transparency, and client responsiveness are increasingly important, CA practices must gradually embrace digital transformation. Traditional manual workfl ows often create ineffi ciencies in communication, document management, and compliance tracking. Digital solutions such as client portal web applications and smart task and call management systems can signifi cantly improve operational effi ciency. A client portal enables secure document exchange, real-time compliance tracking, and structured communication with clients, while task and call management tools streamline internal workfl ows and strengthen accountability among team members. This article highlights how web portals, software automation, and smart workfl ow systems can boost productivity, ensure compliance accuracy, and help chartered accountants build more effi cient, scalable, and future-ready professional practices.Client Portal Web App: Strengthening Client Collaboration and Practice EfficiencyIn the dynamic world of professional accounting, Chartered Accountants (CAs) are expected to juggle client coordination, regulatory compliance, data accuracy, and constantly evolving tax laws, all under tight deadlines. Managing scatt ered communication, large volumes of data, stringent compliance timelines, and maintaining service transparency has become increasingly complex. In this demanding environment, manual systems are no longer sufficient. CA practices are facing mounting pressure to modernize their operations and meet rising client expectations. Traditional workflows heavily reliant on emails, physical fi les, and fragmented tools are proving inadequate in today’s fastpaced, digital-first landscape. Th e solution for this is a Client Portal Web Application, which is a secure,cloud-based platform designed to centralize communication, simplify document exchange, automate repetitive tasks, and minimize human errors. It not only optimizes internal effi ciency but also delivers a more seamless and professional client experience. Most importantly, such portals can be custom-developed to align with a chartered accountancy fi rm’s unique workfl ow, service off erings, management style, and scale, making them a powerful asset for transforming how CAs operate, collaborate, and deliver value to their clients.01Understanding the Client Portal Web AppA Client Portal Web App is a cloud-based solution enabling secure, structured interaction between practicing chartered accountants and their clients — replacing scattered messages, endless email threads, and physical paperwork with one centralized platform.Clients upload and access documents, check compliance statuses, and communicate with the CA team.Team members manage workflows, monitor deadlines, and cut down on routine administrative work.Partners & senior professionals oversee firm-wide activity, document flow, and service delivery.Most importantly, these portals can be custom-developed to align with a firm's unique workflow, service offerings, management style, and scale.02Secure Login, Role-Based Access & Audit TrailsIn a financial environment, safeguarding data and managing access are critical. A custom-developed portal can be tailored to include:Two-Factor Authentication (2FA) — ensuring only authorized users gain access.Role-based access control — precisely configured levels for clients, partners, and internal team members.Comprehensive activity logs & audit trails — every login, upload, and status change tracked in detail.A Client Portal Web App is a cloud-based solution that enables secure, structured interaction between practicing chartered accountants and their clients.03Smart Document StructuringEfficient document organization is essential to any CA practice. Through custom portal development, a smart, hierarchical document structure can be designed — organized first by service type (GST, Income Tax, TDS) and then by financial year — for quick, logical access to relevant files, tailored to the firm's operational model and client base.04Key Benefits & Core FunctionalitiesReal-Time Project Status UpdatesColor-coded statuses — Pending, In Review, Completed — let clients independently track filings, cutting down repetitive follow-up queries during high-pressure compliance periods.Seamless Document Collection & Cloud StorageCentralized, secure uploads for KYC documents, bank statements, invoices, and GST data in year-wise, service-wise folders — eliminating email trails and local storage dependency.Compliance Overview & Automated Due Date RemindersA dashboard of upcoming and overdue filings, with automated alerts via email, SMS, or in-app notification for ITR, GSTR-1/3B, TDS, and ROC filings.Service Overview, Billing & Payment Follow-UpClear bifurcation of services availed, downloadable invoices, automated payment reminders — and the option to restrict key documents until payment clears.On-Demand Document AccessUpload once, access perpetually — clients retrieve ITR acknowledgments, Form 26AS, and GST returns anytime, from any device.Integrated Chat PanelReal-time messaging, smart chatbots for FAQs, and permanent, non-editable chat logs for audit and dispute resolution.Push Notifications & Upload AlertsCritical updates on rule changes, compliance deadlines, and submission status — keeping the firm positioned as a proactive, tech-enabled advisor.Admin Dashboards for MonitoringTrack document and filing status across all clients, filter by submitted vs. pending, and generate reports for internal performance planning.Personnel Assignment & Controlled AccessClient-to-team mapping, unique client codes, and granular access rights — so operations staff see only the clients they're responsible for.05Smart Task & Call Management Web AppWhere the client portal manages the client-facing side, a Smart Task & Call Management Web App addresses internal workflow — structured task assignment and tracking, plus efficient handling of client calls converted into actionable service requests.Role-Based Dashboards with controlled accessReal-Time Task allocation & status updatesTimestamped Logs for full audit trailWhen a call comes in, a designated handler logs it directly into the platform and assigns it to the right team in real time — for example, a GST amendment request appears instantly in the GST team's dashboard, no verbal follow-up required.Reassignment & rescheduling — tasks can shift between team members as workloads change.Customizable filters & analytics — view tasks by To-Do, Ongoing, Successfully Closed, or Unsuccessful, and surface bottlenecks.06Business ImpactThe impact is multifold: scattered messages and verbal updates disappear, replaced by streamlined time management and task tracking. Clear responsibilities improve team coordination and client service. The system ensures audit readiness through complete activity logs, and secures access with Two-Factor Authentication.07Final Reflection: The Case for Custom-Developed SolutionsWhile many firms reach for off-the-shelf software, custom applications tailored to specific needs can become long-term digital assets — introducing meaningful automation, reducing manual intervention, and ensuring consistent, timely execution.Beyond operational gains, such solutions strengthen data security through access controls and encryption, while fostering a transparent, responsive client experience that supports long-term retention.The future belongs to those ready to innovate, adapt, and lead their practices into the digital era.Author may be reached at cakarishmasoni@gmail.com and eboard@icai.inThe Chartered Accountant Journal April 2026 · Vol. 1289–1293
Fraud Behavioural Aspects
Ep. 35 — The Fraud Triangle Reimagined: Why People Cross Ethical Lines
CA Journal
· June 2026
00:00
--:--
Fraud & Behavioural Aspects — The Chartered Accountant — April 2026The Fraud Triangle, Reimagined Why people cross ethical linesThe Fraud Triangle comprising pressure, opportunity, and rationalization has infl uenced our understanding of workplace fraud. In the contemporary digital and mixed work contexts, each facet of the triangle is undergoing a transformation. This article reconceptualizes the framework from a behavioural perspective. The accounting scams in public domains exemplify how Chartered Accountants and forensic experts may identify early indicators of fraud and develop more robust preventative techniques based on human insights.IntroductionWhy do people indulge in unethical practices? Th e Fraud Triangle comprising of pressure, opportunity, and rationalization has helped us answer that. It remains one of the most useful tools for understanding why people commit fraud at work. Th is article revisits the Fraud Triangle through a behavioural lens, exploring new pressures like the Fear of Missing Out (FOMO) and burnout, modern opportunities, and shift in moral lines. Using the scam of a banking institution as a case study and supported by legal and professional standards, it provides actionable insights for Chartered Accountants and fraud examiners to strengthen fraud prevention in a digital world.The Fraud Triangle“Thus, conscience does make cowards of us all.” Hamlet, Act 3, Scene 1When Shakespeare wrote those words, he captured something timeless — the quiet, invisible battle between what we feel and what we know is right. That same battle plays out today in offices and boardrooms, not on a stage, but in the quiet moments when someone decides to cross a line.White-collar crime is not just about numbers; it's about people under pressure who convince themselves that no one will notice, and still think of themselves as "good people."First developed by criminologist Donald Cressey, the triangle holds that three things must be present for fraud to happen: pressure, opportunity, and rationalization. For decades it has helped us understand why people commit fraud — but in today's world, the shape of each corner has shifted.
PRESSURE
OPPORTUNITY
RATIONALIZATION
The Fraud Triangle — Donald Cressey, reconceptualized for digital & hybrid workPressure doesn't just come from unpaid bills; it comes from toxic performance culture, social comparison, and silent mental health struggles. Opportunities have multiplied with remote work, digital systems, and weakened oversight. And rationalization? It's easier than ever: "Everyone's doing it." "It's just a shortcut." "I'll fix it later."If we want to catch fraud earlier — or better yet, prevent it — we need to look at the human side of fraud with fresh eyes.Pillar IModern Pressures Beyond Financial StressWhen we think about why people commit fraud, it's easy to picture someone desperate — drowning in debt, paying off medical bills, or battling addiction. Sometimes that's true. But more often today, the pressure that drives unethical decisions looks very different, and far more subtle.The Fear of Missing Out (FOMO): A New Kind of PressureScroll through social media for five minutes and you'll see it: former classmates posting promotions, friends celebrating luxury holidays, influencers showing off designer purchases. In a world saturated with curated images of success, even high-performing professionals can start to feel left behind.For some, that voice becomes hard to ignore — and when the opportunity arises to fudge an expense report, inflate a sales figure, or divert funds, it's rationalized as a way to "catch up" or "level the playing field."The Digital Economy: Rewriting ExpectationsThe rise of the digital economy has transformed how we work, spend, and measure success — and quietly reshaped what employees believe they "should" achieve, and how fast. Stories of instant success are everywhere:The crypto-currency investor who retires at 35.The influencer who earns more in a month than many do in a year.Even traditional professionals — CAs, lawyers, bankers — are exposed to this narrative daily. The flood of hyper-success stories creates a subtle but powerful pressure: "If everyone else is moving fast and winning big, why am I still grinding away slowly?"In such an environment, some begin to cut corners — inflating numbers, misrepresenting growth, or dipping into funds. Not because they are inherently dishonest, but because the digital economy has subtly shifted the goalposts for what "normal" success looks like.Burnout: When Exhaustion Clouds JudgmentPost-pandemic, burnout is a silent epidemic. Remote work blurred the line between office and home. An employee might think: "I've given this company everything. A little extra for myself won't hurt." In that moment of weakness, an ethical boundary can quietly dissolve.Job Insecurity and the Precarious WorkforceToday's workforce is far less stable than in decades past. Many professionals work on contracts or in gig roles; even permanent employees face constant restructuring. This chronic insecurity breeds fear, and with fear comes a survival mindset: "If I don't take this chance now, I may not have another."Toxic Corporate Cultures: Pressure Cookers for FraudIn some companies, sales targets are unattainable, underperformance is punished publicly, and bonuses depend entirely on short-term results. Fraud becomes almost a coping mechanism: "If I don't hit this target, I'm out. Everyone fudges the numbers — it's just how things work here."Why it mattersIf we only watch for obvious financial stress, we'll miss many of today's most powerful fraud drivers. FOMO, burnout, job insecurity, and toxic culture shape modern fraud risk in ways traditional controls can't easily detect.As CAs, we need a sharper lens for these pressures — because behind every fraud case is a human story that often begins with someone who felt trapped, exhausted, or left behind.Pillar IIOpportunities in a Digital, Hybrid WorldIf today's workplace is filled with new pressures, it is equally full of new opportunities — subtle, everyday chances to take what isn't rightfully ours. They don't look like locked safes or unguarded tills. They are passwords, expense apps, cloud folders, and remote logins that appear in the quiet moments when no one is watching.The Remote Work Effect: Out of Sight, Out of MindIn bustling offices, small ethical nudges — a glance from a colleague, a manager dropping by — helped keep misconduct in check. Now millions work from home, alone, often for months on end. Day-to-day supervision is weaker; performance is measured on outcomes, not behaviour. The voice that once said "someone will notice" starts to fade, and small liberties can quickly snowball.Digital Systems: New Tools, New TemptationsA procurement officer realizes they can slip a fake vendor into an overloaded approval queue. These aren't hardened criminals; they are ordinary people tempted by complexity and the illusion of invisibility that digital processes create.The Shadow World of Digital PaymentsIndia's UPI system and mobile wallets have transformed commerce — but speed and convenience come at a cost. A finance manager sends money through multiple wallets to obscure its origin. A fraudster sets up dummy UPI IDs to siphon small amounts from dozens of accounts. An employee rationalizes a quick unauthorized transfer: "I'll return it before anyone notices."Blurred Boundaries, Blurred EthicsIn hybrid work life, professional and personal boundaries often dissolve. An employee downloads client data to a personal cloud folder "just to work faster." Another uses a corporate card for a personal expense, planning to fix it later. None of these acts may start with criminal intent, but each chips away at ethical clarity.Such evolving risks make it imperative for organizations to revisit internal controls, as reinforced by Section 177(9) of the Companies Act, 2013, which mandates an effective vigil mechanism, and the ICAI Code of Ethics, which emphasizes professional integrity in a changing business environment.Why it mattersOpportunities for fraud today no longer look like unlocked safes or missing signatures. Today's fraud lives in small gaps — digital apps, cloud systems, and rationalizations that feel safe in the moment.As CAs, we must learn to see these gaps, not just in systems, but in the human moments where fraud begins.Pillar IIIRationalization in the Age of Moral FlexibilityNo one wakes up one morning and decides to become a fraudster. What happens is quieter, more human — small, private moments when someone looks at a choice and begins to tell themselves a story about why it's okay to make the wrong one.This is rationalization, the third side of the Fraud Triangle, and in a fast-moving world of shifting values, it is often the most dangerous force of all."Everyone's Doing It" — The Power of GroupthinkWhen employees see peers cutting corners and no one calls it out, they start to believe this is "how things work": "If no one else seems to care, why should I be the only one following the rules?""I'm Not Paid What I'm Worth" — Balancing the ScalesAn employee who feels underpaid or overlooked begins to think of fraud as a form of compensation: "They don't value my work — so why not take what I deserve?" This is not about greed. It's about resentment — and when resentment meets opportunity, the risk of fraud spikes."Why Should I Be Loyal When They Aren't?"When employees see their organization breaking promises or mistreating staff, their own moral compass can shift: "If they cheat, why should I stay honest?" When trust is broken, loyalty dissolves and self-interest takes over."Just This Once" — The Most Dangerous StoryThe most seductive rationalization of all is the one-time exception: "I'll pay it back next month. It's only a small amount. Just to get through a rough patch." But "just this once" often turns into twice, then a pattern. Most white-collar criminals start with small acts they believe they can control — and crossing the line again becomes easier each time.White-collar crime is not just about numbers; it's about people under pressure who convince themselves that no one will notice — and still think of themselves as "good people."Why it mattersFraud is not born out of opportunity alone. It grows in the stories people tell themselves — stories that justify, excuse, and slowly erode the boundaries of right and wrong.Our role is to support cultures where "this is wrong" is louder than "no one will notice."The role of Chartered AccountantsWhere We Can BeginFraud doesn't announce itself with alarms and sirens. It arrives quietly — through everyday decisions made under pressure, in systems that no longer fit the way we work, and in cultures where speaking up feels harder than staying silent. Fraud risk is a behavioural challenge requiring human insight beyond the numbers. Focus areaPractical actionsRelevant standards & laws01Expanding the definition of red flagsWatch for behavioural changes — sudden withdrawal or defensiveness from previously open employees.Observe shifts in tone during meetings.Incorporate non-financial indicators into internal audit checklists.SA 240 (Revised) — The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements02Adapting fraud risk assessments for hybrid workContinuously monitor access rights and digital controls.Enforce segregation of duties across remote teams.Adjust transaction monitoring to real-time digital flows (UPI, mobile payments, etc.).COSO Framework; ICAI Code of Ethics (2020)03Addressing rationalization through culturePromote leaders who model ethical choices.Facilitate open dialogue about burnout and ethical dilemmas.Section 177(9), Companies Act, 2013; SEBI (LODR)04Reconnecting ethics with everyday decisionsManagement and HR foster psychological safety while maintaining accountability.Integrate simple ethical checkpoints into everyday processes, making ethical decisions easier and automatic.ISO 37001; ICAI Guidance Note on Reporting under Section 143(12), Companies ActTable 1 — Practical actions mapped to relevant standards and lawsAs CAs, our job is not just to react to fraud once it happens, but to help create organizations where it struggles to take root. It means understanding the human stories behind the numbers, and building systems and cultures that protect both the organization and the people within it.ConclusionFraud is evolving, so must we. If we want to stay ahead of modern white-collar crime, we must reimagine our tools — not just our technology, but our understanding of people.Fraud risk isn't just a checklist. It is a living, human system, shaped by pressure, opportunity, and the stories we tell ourselves to justify crossing the line. In the end, the strongest controls are human, built on values, not just rules."The fault, dear Brutus, is not in our stars, but in ourselves."William Shakespeare, Julius Caesar (Act 1, Scene 2)Referencesacfe.com/fraud-resources/fraud-101-what-is-fraudCompanies Act, 2013 — Sections 177(9), 134(5), 143(12)SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015ICAI Code of Ethics, 2020SA 240 (Revised) — The Auditor's Responsibilities Relating to Fraud in an Audit of Financial StatementsICAI Guidance Note on Reporting under Section 143(12) of the Companies Act, 2013COSO Internal Control — Integrated FrameworkISO 37001 Anti-bribery Management SystemsAuthor CA. Lekshmi N, Member of the Institutelekshminsankar@gmail.com · eboard@icai.in
Commercial Law
Ep. 36 — Ease of Doing Business: Doing Away with Sections 138-148 of the Negotiable Instruments Act, 1881
CA Journal
· June 2026
00:00
--:--
Ease of Doing Business: Doing Away with Sections 138–148 of the Negotiable Instruments Act, 1881The Payment and Settlement System across the world during the 19th and 20th centuries was mainly by way of Cheques, Bills of Exchange, and Promissory Notes. Therefore, in India, the Negotiable Instruments Act, 1881, was enacted to regulate them; however, frequent cheque ‘Dishonour’ persisted, and in the absence of any convenient alternative for transferring large sums for goods or services, cheques remained the preferred mode of payment. In view of the prohibition under the Income Tax Act, 1961, from paying in cash above a specifi ed amount, the payment through cheques has also been a legal necessity in our country. However, the unscrupulous people or traders, with mala fi de intentions, either used to dishonour the cheques issued by them by not keeping suffi cient amount in their bank accounts or by stopping payment of the cheques or by altogether closing the accounts. There was no specifi c remedy under the Negotiable Instruments Act, 1881, for the victims except to fi le a complaint with the Police alleging cheating or to fi le a civil suit for recovery of the amount, which was time-consuming and expensive.In view thereof, to bring certainty to the mercantile transactions and to instil confidence in the system of cheque payments, the Parliament of India had amended the Negotiable Instruments Act, 1881, by way of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) and inserted Chapter No. XVII and Sections 138–142, under which the act of dishonour of cheques had been made an offence punishable with imprisonment for a period of one year or with a fine which could extend to twice the amount of the cheque. The said amendment came into force from 1.4.1989. Since transactions through cheques were a common phenomenon, there was also a high incidence of dishonour of cheques. In view of the fact that the dishonour of a cheque has been criminalised, a large number of criminal complaints came to be filed before the Courts, which completely overwhelmed the criminal justice system. The complaints remained pending for years due to the elaborate procedure involved in criminal trials. This has affected and choked the criminal justice system, and hence the disposal of other criminal cases. To expedite disposal of these complaints, the Act was once again amended in the year 2002 to bring in certain radical changes like making the offence triable summarily, fixing a time limit for completion of the trial, taking evidence by way of affidavits, etc. The offence has also been made compoundable while enhancing the punishment from one year imprisonment to two years imprisonment.The Supreme Court's Observations in GimpexIn the case of Gimpex Private Limited vs. Manoj Goel [MANU/SC/0829/2021] (Criminal Appeal No.1068/2021), the Hon'ble Supreme Court observed as under:"The object of bringing Section 138 into the statute was to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. It was to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficient arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers.It is quite evident that the legislative intent was to provide a strong criminal remedy in order to deter the high incidence of dishonour of cheques. What must be remembered is that the dishonour of a cheque can be best described as a regulatory offence that has been created to serve the public interest in ensuring the reliability of these instruments.The provision to punish the offender has encouraged the institution of a large number of cases that are relatable to the offence contemplated by Section 138 of the Act. So much so, that at present a disproportionately large number of cases involving the dishonour of cheques is choking our criminal justice system, especially at the level of Magistrates' Courts. As per the 213th Report of the Law Commission of India, more than 38 lakh cheque bouncing cases were pending before various courts in the country as of October 2008. This is putting an unprecedented strain on our judicial system."In a reply to the Parliament, the Government of India informed that there were 43.05 lakh cheque bouncing cases pending before various courts as on 18.12.2024.38 lakh+ Cheque bouncing cases pending as of Oct 2008 (Law Commission, 213th Report)43.05 lakh Cheque bouncing cases pending as on 18.12.20243.45 crore Total criminal cases pending across courts (National Judicial Grid)The Supreme Court's Suo Moto InterventionAcknowledging the deep-rooted problem, the Hon'ble Supreme Court took up the matter on its own in Suo Moto WP (Crl) No. 2/2020. In this case, the Supreme Court considered the delay in the disposal of cases under the Negotiable Instruments Act, which is creating a severe logjam in courts at all levels, especially the Trial Courts and the High Courts. The Hon'ble Supreme Court vide order dated 10.03.2021, inter alia, directed to constitute a 10-member Committee with the objective of submitting a report specifying the steps that must be taken in order to facilitate an early disposal of cases under the Negotiable Instruments Act. The Committee submitted its Report to the Court, wherein it, inter alia, suggested the creation of Special Negotiable Instruments Courts. The Amicus Curiae in the matter suggested a pilot study, in 5 judicial districts in the 5 states with the highest pendency (namely, Maharashtra, Rajasthan, Gujarat, Delhi, and Uttar Pradesh) so that the viability of the scheme can be examined based on the results of the pilot study.Thereafter, vide its order dated 19.05.2022, the Hon'ble Supreme Court has directed that the pilot study shall be conducted in the manner indicated in the said order for a duration of 1 year from 01.09.2022 to 31.08.2023 in 25 Special Courts with one Special Court in each of the 5 judicial districts which have been identified as having the highest pendency of NI Act cases by each of the five High Courts mentioned above. The pilot study was suggested to test the scheme of employing retired judicial officers and retired Court staff to operationalise these Special Courts in the five states with the highest pendency of cases, namely, Maharashtra, Rajasthan, Gujarat, Delhi, and Uttar Pradesh. The Supreme Court had also issued guidelines as to the setup of the said special courts, appointment of Presiding Officers, and Staff. Since the said period of one year for which the Special Courts were constituted expired on 31-08-2023, the hearings in the said special courts were stalled. Further, the Delhi High Court, through its notification dated 01-09-2023, directed to transfer back all the matters to their parent Court in the absence of any direction/clarification from the Supreme Court. The decision of the Supreme Court on the constitution or continuation of special Negotiable Instruments Courts is awaited. This is the scenario of the disposal of complaints filed for the dishonour of cheques before the Criminal Courts.The Rise of Digital PaymentsOn the other hand, with the advent of technology, new payment systems have come up, and their usage has spread rapidly. Now, persons can operate their accounts electronically, and a counterpart payment system through Electronic Clearing Service (ECS) has been introduced. Now, funds can be transferred through ECS, and as such, issuing or accepting cheques can be avoided. Similarly, Internet Banking facilitates a person to transfer huge amounts of money to the supplier of goods or services almost instantaneously. A person can transfer money through NEFT/RTGS, which is cost-effective and time-effective. Money can also be transferred through UPIs like Google Pay and PhonePe which is more efficient and faster, and even a common man or a layman in our country has become well conversant in using these UPI systems for the transfer of money.15,547 crore UPI transactions completed, Jan–Nov 2024₹23.49 lakh crore Total value of those UPI transactionsEarlier, there was no other alternative to a person who supplied goods or services other than to accept the cheques, as it cannot be expected of a person to carry a huge amount of physical cash. Further, payments above a specified limit were not being allowed as a business expenditure under the Income Tax Act, 1961, which further necessitated payment through cheques.In the case of P. Mohan Raj Vs. Shah Brothers Ispat Pvt. Ltd., Hon'ble Supreme Court described the proceedings of Section 138 as "Civil Sheep in a Criminal Wolf's clothing" while observing that the nature of the offence under Section 138 of the NI Act is quasi-criminal since it arises out of a civil wrong. Therefore, as the Supreme Court stated, dishonour of a cheque is originally a civil wrong, whereas by statute it has been made an offence.As per the National Judicial Grid, presently there are 3.45 crore criminal cases pending at various stages in various courts, including the Supreme Court. Presently, since alternate payment systems have come up, there is no need to accept payment through cheques, and if anyone accepts cheques will be doing so at their own risk and peril. There is no need to continue to encourage payment through cheques. Further, the Income Tax Act, 1961, has also been suitably amended to include payments made through electronic systems. The provisions of Section 138–147 have been made applicable to payments through ECS under Section 25 of the Payment and Settlements Systems Act, 2007, and are liable for punishment for dishonour of the mandate given for ECS payments. Other payment systems like Internet Banking, UPI etc., provide for instant payments, and RBI has issued guidelines regulating these payments. These payment systems are now well entrenched in our economy and have become an indispensable part of the payment systems. The credibility in these systems has now been well established, and there is no need to rely upon archaic payment systems like Cheques.Victims of heinous crimes, especially women, are unable to get quick justice owing to the huge pendency of cases in criminal courts. Therefore, the criminal courts are required to devote their resources and time to rendering justice in serious cases rather than complaints like dishonour of cheques.The Decriminalisation DebateThe Ministry of Finance, on 8th June 2020, issued a statement of reasons for 'Decriminalization of Minor Offences for Improving Business Sentiment and Unclogging Court Processes', including the offences under Section 138 of the Negotiable Instruments Act, 1881. The statement underlines the fact that the risk of imprisonment for actions or omissions that aren't necessarily fraudulent or the outcome of mala fide intent is a big hurdle in attracting foreign investments. It further stated that the uncertainty in legal processes and the time taken for resolution in the courts hurts the ease of doing business. Criminal penalties, including imprisonment for minor offences, act as deterrents, and this is perceived by the Government as one of the major reasons impacting business sentiment and hindering investments, both from domestic and foreign investors. The notification aims to help revive the economic growth and improve the justice system. The central government had invited the comments of State Governments/UT Administrations, Civil Society/Non-Government Organizations, Academicians, Public and Private Sector Organizations, Multilateral Institutions, and members of the public to submit their suggestions to the Department of Finance Services, Ministry of Finance, by 23rd June 2020.Some stakeholders had opposed the government's move or proposal to decriminalize the offence of dishonour of cheques. They have suggested that monetary limits can be fixed for cheque bounce cases to attract criminal prosecutions. The Government is yet to take any decision thereon.The Global Decline of ChequesFurther, the volume of the transactions through cheques has been declining over recent years thanks to the growing popularity of electronic payment methods like online banking, mobile banking, digital wallets etc. Once a widely prevalent method of payment, cheques have experienced a decline in usage in many countries due to the emergence of digital payment methods and other instruments such as Debit and Credit Cards. Several countries have either completely phased out or significantly reduced the usage of cheques. The monetary authority of Singapore announced that all corporate cheques will be done away with by the end of 2025. This was announced following the reduction in cheque transaction volumes by almost 70% from 61 million in 2016 to less than 19 million in 2022. Similarly, transactions in cheques in Australia once accounted for 85% of the number of non-cash payments and witnessed a 90% decrease in cheque usage over the past decade, and hence Australia has decided to phase out cheques by 2030.The developed countries like the UK, USA, France, Australia, Singapore, etc. have not criminalised the act of dishonour of cheques and still treat it as a civil wrong, with damages payable therefor. In fact, through UPI payment systems, our country is far advanced in payment systems than the above-referred developed countries.The Way ForwardHence, it is time to decriminalise dishonour of cheques so that pendency of criminal cases in various courts across the country is drastically reduced, and hence the provisions related to dishonour of cheques in the Negotiable Instruments Act, 1881 should be repealed by the Parliament. This urgent reform is required to be made to reform the judiciary and to reduce the unnecessary burden of carrying the weight of cheque dishonour cases.Presently, there is no threshold as to the amount to initiate criminal action for dishonour of cheques. At least, to start with, the Government should bring forth an amendment to fix a threshold of Rs. One crore and above to apply the provisions of Section 138 of the Negotiable Instruments Act, 1881. This move can drastically reduce the number of complaints being filed before the criminal courts for dishonour of cheques.Author may be reached atkshk.hareesh@gmail.com | eboard@icai.inSource: The Chartered Accountant, ICAI Journal — April 2026 (pp. 46–48)
Audit
Ep. 37 — Audit Documentation: A Cornerstone of Audit Quality
CA Journal
· June 2026
00:00
--:--
Audit Documentation: A Cornerstone of Audit QualityAudit documentation, commonly referred to as working papers, is integral to maintaining the quality and reliability of the auditing process. As emphasized by Standard on Auditing (SA) 230 “Audit Documentation”, it not only ensures compliance with professional standards but also demonstrates the thoroughness and rationale behind audit conclusions. Effective documentation supports audit quality, facilitates future audits, and aids supervision and regulatory reviews. However, challenges such as balancing detail, adapting to technological changes, and maintaining consistency across teams persist. This article explores the signifi cance of audit documentation, outlines best practices, and discusses emerging trends such as digital integration, highlighting its critical role in fostering transparency and trust in fi nancial reporting. It is not merely a requirement for compliance with standards but a critical component of the audit process that ensures quality, consistency, and transparency. The documentation refl ects the work performed by the auditor, the decisions made during the audit, and the evidence collected to support the conclusions reached. As outlined in SA 230, the meticulous preparation and maintenance of audit documentation is vital for achieving professional excellence and regulatory compliance.Understanding Audit Documentation Audit documentation is the written record that provides evidence of the auditor's work — the planning, the evidence gathered, and the conclusions reached. Records may be physical, electronic, or a blend of both.✓Evidence of audit quality. Substantiates that the audit was performed in accordance with applicable Standards on Auditing.✓Support for audit conclusions. Provides the rationale behind the auditor's opinions, ensuring they are well-founded.✓Facilitates future audits. Serves as a resource for planning and conducting recurring engagements.✓Basis for supervision and review. Supports peer review, quality control checks, and regulatory inspection.Key components of a complete audit file: the audit plan (nature, timing, and extent of procedures), audit programs (steps addressing specific risks), evidence collected (confirmation letters, inspection records, analytical procedures), significant professional judgments, and a summary of findings and conclusions.BWhat SA 230 Requires SA 230 prescribes four governing qualities every working paper file must satisfy.01 — STANDARDSufficient & appropriateDetailed enough for an experienced auditor with no prior knowledge of the engagement to understand the work, judgments, and conclusions.02 — STANDARDTimely & organizedPrepared promptly to preserve accuracy, and structured so records can be retrieved and reviewed with ease.03 — STANDARDComplete & transparentLeaves a clear trail of the audit process that demonstrates adherence to the Standards on Auditing.04 — STANDARDSecure & retainedStored to prevent unauthorized access and kept for a minimum of seven years from the date of the auditor's report.CWhere Documentation Breaks Down 01Balancing detail and brevityOver-documentation can bury critical findings; under-documentation risks non-compliance with the Standards on Auditing.02Adapting to technological changeDigital tools require documentation practices that capture system logs, screenshots, and electronic communications as evidence.03An evolving regulatory landscapeFrequent updates to Standards on Auditing from ICAI and other bodies require continuous adaptation of documentation practice.04Resource constraintsSmaller firms and individual practitioners often lack the time and cost capacity for fully comprehensive documentation.05Consistency across audit teamsLarger engagements struggle to keep documentation consistent without standardized templates or clear guidelines.DPractical Guidance for Effective Documentation ✓Use standardized templates. ICAI's Audit Working Paper Templates streamline the process and keep documentation aligned with the Standards on Auditing.✓Emphasize materiality. Document significant risks, key judgments, and findings — skip detail that adds no value to the audit.✓Leverage technology. Cloud-based documentation platforms enable real-time updates, team collaboration, and faster retrieval.✓Invest in regular training. Continuous professional education keeps auditors current with evolving standards and ICAI guidance.✓Build robust review mechanisms. Peer reviews and quality control checks confirm accuracy, completeness, and consistency.ICAI provides a wealth of resources, including Audit Working Paper Templates, to assist auditors in maintaining consistent and effective documentation.EThe Role of Documentation in Quality Assurance The Quality Review Board (QRB) treats documentation as the primary evidence of compliance with the Standards on Auditing during quality reviews. Three shortcomings recur most often:✗Incomplete or insufficiently detailed documentation of audit procedures and findings.✗Failure to document significant judgments and the rationale behind conclusions.✗Missing documentation of supervision and review processes.ICAI addresses these gaps through the Implementation Guide to SA 230, Audit Documentation (Revised 2022 Edition), which offers practical guidance for meeting documentation requirements.FSampling & Fraud Detection in Practice Documentation & audit samplingThe rationale behind sample selection, the procedures used, and the results obtained must be recorded clearly so the work is transparent and reviewable.ExampleTesting a client's accounts receivable: record the sample-selection method, the sample size, and the results of testing — including whether the sample was judged representative and how any exceptions affected the audit opinion.Documentation & fraud detectionDocumentation evidences that the audit was performed with appropriate professional scepticism, and that red flags were properly recorded and investigated.ExampleDiscrepancies surface in purchase order approvals and payment authorization during a procurement audit. The auditor records the inconsistency, the evidence gathered, and the steps taken to assess whether fraud occurred.GEmerging Trends & the Role of AI 01Increased use of digital evidenceTransaction logs and email correspondence are becoming standard evidentiary items as client systems digitize.02Integration of data analyticsFiles now record not just the analysis performed, but the rationale for the data sets chosen and the conclusions drawn from them.03Focus on cybersecurityDocumentation of cybersecurity risks and controls is gaining prominence, particularly for technology-driven clients.Where AI is starting to help✓Increased accuracy and speed in processing audit-relevant data.✓Reduced manual effort, freeing time for analysis and review.✓Sharper detection of potential audit risks through advanced data analysis.HConclusion Audit documentation is not merely a procedural requirement — it is a strategic tool that underpins the quality and credibility of the audit process. By embracing best practices, leveraging technology, and staying current on regulatory change, auditors strengthen the effectiveness of their documentation.As the profession evolves, robust documentation remains a cornerstone of audit quality — ensuring transparency, accountability, and trust across the financial reporting ecosystem.REFERENCE — Standard on Auditing SA-230; Implementation Guide to SA 230 (Revised 2022 Edition), Audit Documentation; Audit Working Paper Templates, ICAI.✓ FILE COMPLETEAuthorCA. Jyoti AggarwalMember of the Institutejyotiaggarwal102@gmail.com
// active nav highlighting + scroll reveal
const sections = document.querySelectorAll('.schedule');
const navLinks = document.querySelectorAll('.schedule-nav a');
const revealObserver = new IntersectionObserver((entries) => {
entries.forEach(entry => {
if (entry.isIntersecting) entry.target.classList.add('in');
});
}, { threshold: 0.08 });
document.querySelectorAll('.reveal').forEach(el => revealObserver.observe(el));
const navObserver = new IntersectionObserver((entries) => {
entries.forEach(entry => {
const id = entry.target.getAttribute('id');
const link = document.querySelector('.schedule-nav a[href="#' + id + '"]');
if (!link) return;
if (entry.isIntersecting) {
navLinks.forEach(l => l.classList.remove('active'));
link.classList.add('active');
}
});
}, { rootMargin: '-40% 0px -50% 0px' });
sections.forEach(s => navObserver.observe(s));
Firms
Ep. 38 — Building Future-Ready CA Firms: LLP vs Partnership Under ICAI’s Strategic Practice Frameworks
CA Journal
· June 2026
00:00
--:--
Building Future-Ready CA Firms:LLP vs Partnership Under ICAI's Strategic Practice FrameworksChartered Accountant (CA) fi rms in India are navigating a major infl ection point. Traditional partnership structures are increasingly strained under the weight of expanding regulatory demands, geographical presence needs, and client expectations for multidisciplinary expertise. The emergence of Limited Liability Partnerships (LLPs), particularly those enabled through ICAI’s 2022–2024 regulatory frameworks, offers an alternative that balances professional independence, scalability, and legal resilience. This article provides a holistic, structured, and ICAI-compliant comparison of LLPs and traditional partnerships with special emphasis on legal frameworks, audit controls, partner roles, merger protocols, governance models, succession planning, and technological integration. Through strategic use of the MDP Guidelines (2022), Networking Guidelines (2021), Aggregation Model (2024), and Merger/Demerger Frameworks (2024), the analysis lays out a clear decision matrix. Whether you’re a sole proprietor, mid-sized regional fi rm, or a returning professional from industry, LLPs now provide ICAI-approved, ethically governed structures aligned with modern fi rm aspirations. With benefi ts ranging from liability shielding and client trust to institutional brand building and global compatibility, the LLP model is no longer an option; it’s the roadmap to a future-ready CA practice.Introduction India’s professional landscape is undergoing transformation. Th e shift is not merely legal or operational but strategic and inevitable. As the global economy integrates, clients increasingly demand fi rms that can off er bundled services: audit, advisory, risk, tax, digital, legal, and ESG. Traditional partnerships, with their individualistic decision-making and informal governance, struggle to respond to these demands. With the introduction of the Limited Liability Partnership (LLP) Act, 2008, and further bolstered by ICAI’s proactive reforms including: Multidisciplinary Partnership (MDP) Guidelines, 2022 Networking Framework, 2021 LLP Aggregation Model, 2024The shift. Traditional partnership structures are increasingly strained under expanding regulatory demands, geographical presence needs, and client expectations for multidisciplinary expertise. Limited Liability Partnerships, enabled through ICAI's 2022–2024 frameworks, offer an alternative balancing professional independence, scalability and legal resilience.The frameworks. This article draws on the MDP Guidelines (2022), Networking Guidelines (2021), LLP Aggregation Model (2024), and Merger/Demerger Frameworks (2024) to lay out a clear decision matrix for sole proprietors, mid-sized firms, and returning professionals from industry.India's professional landscape is undergoing transformation. The shift is not merely legal or operational but strategic and inevitable. As the global economy integrates, clients increasingly demand firms that can offer bundled services: audit, advisory, risk, tax, digital, legal, and ESG. Traditional partnerships, with their individualistic decision-making and informal governance, struggle to respond to these demands.With the introduction of the Limited Liability Partnership Act, 2008, and further bolstered by ICAI's proactive reforms — the MDP Guidelines (2022), Networking Framework (2021), LLP Aggregation Model (2024), and Merger and Demerger Protocols (2024) — Chartered Accountants now have a legal, scalable, and strategic blueprint to build firms that are future-proof.What the LLP structure offersLimited liabilityPerpetual successionCustomizable governanceLegal identityProfessional brand continuityMultidisciplinary partnerships under regulationWho it suitsSole proprietors seeking scalability and successionMid-sized firms looking to standardize governanceNew CAs wanting structured career pathwaysIndustry-returning professionals needing re-entry via MDPs ICAI's MDP Framework — 2022The Multidisciplinary Partnership (MDP) framework introduced in 2022 revolutionized how CAs can collaborate with professionals from other domains.Permissible partners under Regulation 53BCompany Secretaries (CS)Cost and Management Accountants (CMA)AdvocatesEngineersArchitectsActuariesCore conditionsMajority CA control — CAs must remain in majority in both headcount and profit share.Audit independence — only CAs can sign attest functions; non-CAs are barred from accessing audit revenues.Naming rights — one MDP firm name per CA is permitted.Structural flexibility — MDPs may function as LLPs or traditional partnerships.Revenue segregation — non-CAs may share in non-audit services only.This framework serves three strategic purposes: enabling multidisciplinary service delivery under one brand, supporting returning professionals with expertise in law, valuation, or governance, and providing the structural base for ESG, forensic, IT audit, and legal advisory integration.§2Legal & Structural ComparisonIn traditional partnerships, governance is generally informal and power is distributed equally on a headcount basis unless modified by the deed — carrying a high risk of dissolution on a partner's retirement or death. LLPs replace that fragility with a filed, codified agreement.Traditional Partnership vs LLP — Legal & Structural ComparisonCriteriaPartnership FirmLLP (MDP or CA-only)Legal StatusNot a separate legal entitySeparate legal entity Sec. 3, LLP ActLiabilityUnlimited (joint & several)Limited to contribution Sec. 27–28SuccessionMay dissolve on partner exitPerpetual succession Sec. 24GovernanceDeed-based (varies by state)LLP Agreement — customizable, filed with MCAVotingDefault: one partner = one voteCapital-based or custom modelProfit SharingAs per deedAs per agreement; fixed + variable modelsAdmission / ExitRequires amendment deedMCA filing Form 4 + agreement updateLegal RecognitionWeak in tenders, PSU, MNC contractsRecognized under MCA; preferred for large contractsTransparencyLow (not public)High (public via MCA portal)§3Governance, Deadlock Management & Partner RightsIn contrast to the informality of a deed, LLPs provide robust governance features: retirement and expulsion clauses can be pre-coded into the LLP Agreement, expulsion for misconduct or inactivity can be enforced without dissolving the firm, and decision-making can be allocated by capital, role, seniority, or strategic contribution.Deadlock management mechanismsCasting vote by a designated Chairperson or Managing Partner.Arbitration clauses referring disputes to third parties or boards.Russian Roulette / Shotgun clauses — exit mechanisms where one partner offers to buy out the other at a set price; if declined, they must sell at that same price.Escalation to a Central Board or Ombudsman (for Aggregated LLPs) — unresolved disputes referred to a neutral central body for binding resolution.Traditional partnerships usually lack such pre-defined arrangements, leaving disputes open-ended or forcing dissolution.In an LLP structure, the legal and operational distinction between Designated Partners, Limited Partners, and functional team members enables the firm to strategically assign responsibilities — compliance, domain leadership, business development — without conferring equal ownership, liability, or voting rights.§4Role-Based ComparisonThis clear segmentation in LLPs allows a firm to assign functional roles without diluting control — structurally impossible in a traditional partnership, where all partners typically share equal liability and authority unless explicitly altered through complex deed clauses.Designated vs Limited Partners vs Traditional PartnersParameterDesignated Partner (LLP)Limited Partner (LLP)Partner (Traditional Firm)Legal ResponsibilityStatutorily responsible for filings, complianceNot liable beyond capitalJointly and severally liableManagement ParticipationYes, as defined in agreementYes — active participation required; silent partners not allowed by ICAIDefault = yesSigning Authority (Audit)Yes (if CA)Yes (if CA)Yes (if CA)DIN / DPIN RequiredYesNoNoEntry / Exit ProtocolForm 4 + LLP AgreementAs per LLP AgreementBy deed amendmentVoting PowerCustomizableCustomizableHeadcount (default), or as agreedLiability ExposureUnlimited for non-complianceLimited to contributionUnlimited personal liabilityRetirement / ResignationLLP Agreement + Form 4As per LLP AgreementMay require dissolution unless protected by deed§5ICAI-Compliant Profit ModelsProfit-sharing models are central to maintaining both equity and motivation in a professional firm. By structuring hybrid models — fixed plus incentive for domain heads — LLPs attract high-performance professionals while retaining audit compliance integrity.Key Compliance PrincipleOnly CAs can share audit revenues. Non-CAs in MDPs may participate only in non-audit work.— ICAI Code of Ethics, 2020 and SA 220Profit-Sharing Models & ICAI's ViewModelPartnership FirmLLPICAI's ViewEqual SharingYesYesPermittedCapital-based SharingYesYesEncouragedPerformance-Linked IncentivesYesYesAllowed (non-audit functions)Audit / Non-Audit Revenue SplitYesYesMandatory under ICAI Code & SA 220Fixed + Variable PayDifficult to structureYesPermitted if clearly defined§6Regulatory Filings, Transparency & Public CredibilityTraditional partnership firms are regulated under State-Level Registrars — leading to a lack of standardized forms, no online visibility, and no central monitoring. LLPs, by contrast, are regulated by the Ministry of Corporate Affairs, with filings accessible at mca.gov.in.Filing & Transparency ComparisonAspectPartnership FirmLLPPublic View of DocumentsNot availableYes, via MCA portalRequired FilingsMinimalAnnual Return Form 11, Financials Form 8, Partner Changes Form 4Technology IntegrationManual or physical filingsFully online via MCA-21Registrar Approval TimelineVaries; largely informalLegally mandated timelinesReputation for TendersWeak institutional identityStrong legal identity (preferred by PSUs, MNCs)LLPs inherently carry greater legal credibility and transparency, making them ideal for firms aiming for national or global expansion.§7Merger & Demerger Framework for CA FirmsWith growing firm sizes and multi-location practices, mergers and demergers are no longer exceptional — they are part of institutional strategy. The ICAI Merger and Demerger Guidelines (2024) offer a statutory path for formal consolidation.Merger guidelinesFile Form MDA-1 to ICAI: merging entities, post-merger governance, confirmation of CA majorityComplete the merger process within 6 monthsMCA filings: Form 3 (amend LLP Agreement), Form 14 (final confirmation to ROC)Audit assignments must remain with CA partners; client communication and conflict policies must be declared; merged firm applies for an updated FRNDemerger guidelinesFile Form MDA-2 with ICAIPredefine brand and name usage rightsPredefine client retention splitsPredefine staff migration protocolsPractical example. Two mid-sized LLPs may merge to secure PSU tenders and then demerge once mandates are secured — retaining market presence under a common brand using the Aggregation framework.§8ICAI Networking Guidelines — 2021ICAI allows firms to collaborate without merging, through networking.Three Approved Networking ModelsModelFeaturesICAI RestrictionsReferralPure client hand-off; no delivery coordinationMust not pool feesFormal NetworkJoint delivery, shared SOPsNo audit fee poolingAOP NetworkCommon name + revenue pooling (non-audit only)Requires ICAI registration & complianceWhy use networking?For pre-merger trial runsTo collaborate across citiesTo distribute niche domain expertise — ESG, forensics, GSTAudit integrity clause. Each network member is independent for audit purposes, with separate responsibility and rotation rules.§9LLP Aggregation Model — 2024The LLP Aggregation Model introduced by ICAI in 2024 is a hybrid between a merger and a network: a central brand is adopted across multiple LLPs in different cities or regions, sharing policies, branding, HR, and quality control — while legal identities remain separate.Why aggregation worksAvoids the complexities of a full mergerMaintains autonomy in deliveryEnables national brandingAttracts large mandates via a shared profileShared in aggregationTech stackBrandingPoliciesNon-audit revenue (if agreed)Not shared in aggregationAudit feesStatutory workPartner-level equityResult: each LLP retains operational control but aligns strategically — ideal for firms with strong city or regional roots.§10Entry Pathways into LLPs by Professional StageICAI now supports multiple entry pathways into LLP structures, depending on the professional's experience, size, and vision.A — Sole ProprietorsExperiencePathwayRole0–5 yearsJoin as salaried / junior partnerLearner, Team Contributor5–10 yearsMerge into an LLPDomain Contributor10–30 yearsLead verticals or geographySenior / Mentor Partner30+ yearsAdvisory / Board roleGovernance & SuccessionB — Industry CAs Returning to PracticeExperienceEntry RouteFocus Area5–10 yearsFunctional lead in MDP LLPDirect Tax, Finance10–20 yearsDomain / Vertical HeadGovernance, Regulatory20+ yearsBoard-level mentorStrategy & SuccessionC — Newly Qualified CAsRouteStructureBenefitEmploymentLLP or traditional firmMentorship + Domain ExposureStart Own FirmLLP structureBranding + Liability ProtectionJunior PartnerLLP or CA-only firmEquity + Long-term Growth Path§11Global Best Practices & Indian AlignmentGlobally, professional services firms — especially the Big Firms — are structured as LLPs for three main reasons: limited liability for managing partners, institutional continuity, and compliance with global transparency norms.ICAI's reforms from 2022 to 2024 mirror these global best practices by allowing multi-disciplinary models, enabling cross-border alliances, and requiring audit integrity and partner governance. Indian CA firms adopting the LLP structure find it easier to bid for international tenders, attract foreign investment via the automatic FDI route, and enter strategic tie-ups with overseas legal or audit entities.Example. A GST-focused LLP in India partnered with a Dubai-based tax consultancy under an MDP LLP model by adding non-attest partners. The LLP framework enabled brand sharing while revenue remained compliant with Indian audit rules.§12Case Snapshot: XYZ & Co.Transition to Aggregated LLPFirm background. XYZ & Co. was a 3-partner traditional firm based in Delhi, handling mid-sized audit and taxation mandates. By 2022, partners realized limitations in scale, retention, and risk coverage.Transformation journeyConverted to XYZ LLP via Form 17 and executed a comprehensive LLP Agreement.Onboarded partners from Mumbai and Hyderabad as Designated Partners to expand presence.Declared an LLP structure to ICAI with SOPs, branding, and HR policy.Adopted a unified tech stack — Zoho Practice, Keka, Google Workspace.Secured a PSU audit mandate based on multi-city presence and institutional branding.Rolled out succession plans, onboarding younger CAs as junior partners with vesting models.Result: within 18 months, XYZ LLP grew to 9 partners across 3 cities, maintained ICAI compliance, and operated with stronger client confidence, increased revenue, and governance visibility.§13Strategic Roadmap: Merging 2 Partnership Firms, 3 LLPs and 20 Sole Proprietors into One LLPThis roadmap is presented as a conceptual process flow depicting sequential regulatory progression.Strategic AlignmentAchieving alignment among participating firms on vision, long-term objectives, governance philosophy, and regulatory preparedness — assessing mutual compatibility, partner intent, quality benchmarks, and readiness for structured collaboration under ICAI guidelines.Networking StartFirms formally enter a networking arrangement, enabling coordinated service delivery, knowledge sharing, and brand alignment while continuing to operate as independent legal entities — a low-risk foundation for trust-building.Transition of Entities to LLPIdentified entities transition into LLP structures, including 20 sole proprietorships and 2 partnership firms, via FiLLiP and Form 17, execution of LLP Agreements, and obtaining DIN, PAN, and GST registrations. A unified technology stack supports scalable, professionally managed operations.Functional OnboardingStructured functional onboarding across the networked LLPs: senior professionals inducted as equity or mentor partners, domain specialists designated as vertical heads (GST, Audit, Risk), and junior partners aligned under a fixed-plus-incentive model with defined lock-in. Partner valuation uses revenue performance, client base strength, staff under management, and market goodwill.ICAI LLP AggregationParticipating LLPs are formally aggregated per ICAI's framework. The aggregation declaration is filed with ICAI, and a unified professional identity — logo, official email domains, SOPs, HR policies — is adopted. Audit and non-audit revenue streams are clearly segregated per the ICAI Code of Ethics.Final Merger of All LLPsAggregation culminates in the merger of all participating LLPs into one unified structure. A Scheme of Amalgamation is drafted; statutory filings include Form 6 (proposal), Form 14 (confirmation), and Form 3 (amended agreement). An independent valuer supports equitable equity structuring.ICAI Merger NotificationMerger notification is filed with ICAI through Form MDA-1, and a new Firm Registration Number is obtained. A formal board-level governance framework is instituted, including a rotating Managing Partner model for leadership continuity.Outcome: a fully ICAI-compliant, aggregated and merged LLP with a pan-India presence and a partner base exceeding fifteen professionals — operating under a robust governance framework, positioned to deliver multidisciplinary professional services at scale.§14From COP to ComplianceWhat each CA practice category can and cannot do — full-time, part-time, and employment with COP.Scope of Practice for COP HoldersCategoryCertificate of PracticeEmployment AllowedAttest FunctionsEligible for CA Firm PartnershipFull-Time PracticeYesNo (except under Reg. 190A)YesYesPart-Time PracticeYesYes (limited, with permission)NoNoEmployment with COPYesYesNoNoPermissible Roles for Full-Time Practicing CAsScenarioPermitted for Full-Time COP?NotesSole proprietor in one CA firm and partner in anotherYesMust inform ICAI, manage both ethicallyPartner in multiple CA firmsYesAllowed if in full-time practiceEmployment + partner in CA firmNot allowedContravenes full-time practice§15Technology Stack for Modern CA LLPsA scalable, secure, cloud-based technology ecosystem is essential for modern LLP-based firms.Recommended Cloud Tools by FunctionCategoryRecommended ToolsFunctionCommunicationGoogle Workspace / Microsoft 365Email, Calendar, Drive, DocsInternal MessagingArtha EMS / Slack / TeamsCollaboration, network practice channels, task collaborationPractice ManagementZoho Practice / CAOA / Octago / Pappilo / Artha EMSWorkflow, task management, deadlinesAudit ToolsTally ERP + Audit360 / CCH iFirmDocumentation, controls, checklistsDocument ManagementDropbox Business / SharePointSecure file sharing, version controleSigningDocuSign / Zoho Sign / Adobe SignSign LLP agreements, engagement lettersBilling & CRMZoho Books / QuickBooks / RazorpayInvoicing, collections, payment remindersHR & PayrollKeka / Zoho People / GreytHRPayroll, leave, onboardingValuation & AnalyticsExcel Online + Power BI / Zoho AnalyticsPartner equity, dashboards, insightsTech governance tipsUse 2FA for access to all critical platformsCentralize audit templates via the practice management systemAutomate client reminders via CRMRun biannual IT audits and backupsTrain all team members in tech protocolsConclusionThe modern CA firm must be professionally governed, legally compliant, client-first and multidisciplinary, technologically integrated, and ethically transparent under the ICAI Code. The LLP model offers this transformative path — combining flexibility with structure, risk mitigation with growth, and regulatory compliance with national and global competitiveness.Succession planning for sole proprietorsBrand elevation for city-based firmsReturn opportunities for industry veteransTeam-based governance for sustainabilityStructure shapes strategy. Among available structures, the LLP framework offers a scalable and compliant platform for future-ready CA firms. ICAI has provided the enabling guidelines — the future-ready firms must now act.Reproduced from The Chartered Accountant, April 2026, pp. 52–59 Author: aswpradeep@gmail.com · eboard@icai.in
GST
Ep. 39 — Interest Under GST
CA Journal
· June 2026
00:00
--:--
Interest Under GSTDid you know that the Central Excise Act, 1944, and the Customs Act, 1962, initially did not have any provision for the levy of interest? Levy of interest was first introduced in the Service tax in the year 1994, followed by an amendment in the Central Excise Act and Customs Act through the Finance Act, 1995. Even after 30+ years of its introduction in indirect tax laws, the interest-related provisions are still the subject matter of litigation in the majority of indirect tax laws. GST is also not an exception. The interest-related provisions have been in the Central Goods and Services Tax Act, 2017, since its inception, and even after 8 years, there exist some grey areas. This piece of articulation is focused on three issues related to the levy of interest under GST that are the centre point of litigation in present times.Issue I: Proviso to Section 50(1) & Anomalies ThereinInterest on delayed payment of tax is levied through section 50 of the Central Goods and Service Tax Act, 2017, read with rule 88B of the CGST Rules, 2017. The first issue pertains to the proviso to section 50(1). The relevant portion of section 50 is produced as follows:"Section 50. Interest on delayed payment of tax, -(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 or section 74A in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger."A bare reading of this proviso brings out the fact that interest shall be levied on the cash component of the total tax liability. However, this benefit shall be allowed only on the tax payable in respect of "supplies made during a tax period and declared in the return for the said period furnished after the due date". In other words, this proviso seems to extend the adjustment of ITC in respect of the supplies made during the tax period and declared in the returns for the said tax period. However, if the supplies made during the tax period are declared belatedly, in a subsequent return, the benefit of this proviso is not available. This may be understood with the help of the following example:Illustration ABC Ltd. issued 100 invoices during the month of August 2025. Out of these invoices, 90 invoices were shown in the GSTR-3B for the month of August 2025, filed on 20.10.2025. 10 invoices issued in the month of August 2025 were shown in the GSTR-3B for the month of September 2025, filed on 20.10.2025. As per the language of the proviso to section 50, the benefit of adjustment of ITC while computing the interest shall be allowed only in case of 90 invoices pertaining to the month of August 2025 and declared in the GSTR-3B for the same month. However, interest shall be computed on "gross tax liability" without extending the benefit of the proviso to section 50 in respect of 10 invoices pertaining to the month of August 2025 & declared in GSTR-3B for the month of September 2025.It is worthwhile to mention here that the above-referred proviso was added purposely in section 50 to curtail the malpractices. If this proviso were not so worded, there would have been a taxpayer who would have avoided the inclusion of a few tax invoices in GSTR-3B, as there was no balance in the Electronic Credit Ledger, and he was not willing to make payment in cash. However, the language of this proviso, even though thoughtfully drafted, does not address the following issues:Suppose, in the above-referred example, there is sufficient balance in the Electronic Credit Ledger during the month of August 2025 to meet the entire tax liability from ITC; however, the 10 invoices were mistakenly left to be included in the GSTR-3B. As per the language contained in the proviso to section 50, the benefit of adjustment of ITC is not allowed, and interest is payable on the gross tax liability ignoring the fact that there was a sufficient balance in the Electronic Credit Ledger to cover the entire tax amount pertaining to those 10 invoices on the due date of GSTR-3B for the month of August 2025.Suppose there was an invoice on which the date was mistakenly shown as 10.08.2024 instead of 10.08.2025. This is a pure clerical mistake that may be verified from the other data available on the records. However, the Revenue Department still demands the interest on the entire tax amount by mentioning that this case is not covered by the proviso to section 50. Interesting, right?There are a lot more similar issues that are popping up nationwide, where the interest is demanded without extending the benefit of balance in the Electronic Credit Ledger by following the principle of literal interpretation in this case. A suitable clarification is needed on this issue.Issue II: Recovery of Interest Due But Not PaidA. Legal ProvisionsSection 79 of the Central Goods and Services Tax Act, 2017 provides for the recovery of pending dues under the GST law by various means, including the debit from Electronic Cash Ledger, freezing of bank accounts, recovery from attachment of movable and immovable property belonging to the defaulter, etc. However, this provision cannot be invoked unless the proper procedure prescribed under law is followed. This procedure includes issuance of a show cause notice under section 73, 74, or 74A, allowing the opportunity to file the reply, granting of a personal hearing, which is followed by an order. Once a demand is confirmed by passing an order, thereafter, recovery proceedings under section 79 of the Central Goods and Services Tax Act, 2017, can be initiated. However, there are certain exceptions to this. One such exception is contained in section 75(12) of the Central Goods and Services Tax Act, 2017. This section reads as follows:"(12) Notwithstanding anything contained in section 73 or section 74 or section 74A, where any amount of self-assessed tax in accordance with a return furnished under section 39 remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of section 79.Explanation: For the purposes of this sub-section, the expression "self-assessed tax" shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39."An analysis of the above sub-section clarifies that where any amount of self-assessed tax remains unpaid or any amount of interest payable on such tax remains unpaid, no show cause notice is required to be served, and recovery can be directly made by invoking provisions of section 79. Further, sub-rule 5 of rule 142 of the Central Goods and Services Tax Rules, 2017 provides that a summary order is required to be issued in case of an order issued under section 75. This sub-rule reads as follows:"(5) A summary of the order issued under section 52 or section 62 or section 63 or section 64 or section 73 or section 74 or section 74A or section 75 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130 shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty, as the case may be, payable by the person concerned."Combined reading of section 75(12) and rule 142(5) brings out the fact that in case interest on self-assessed tax remains unpaid, the show cause notice in FORM GST DRC-01 is not required to be issued under section 73, 74, or 74A, and directly an order may be issued in FORM GST DRC-07.If we check the language of sections 73, 74, and 74A under which show cause notice can be issued, it clarifies that the show cause notice can be issued by the proper officer only if "any tax is not paid or short paid or erroneously refunded or input tax credit has been wrongly availed or utilised." Where the demand is only of interest with tax already paid in GSTR-3B, the pre-requisites laid down in these three sections are not met, and accordingly, a show cause notice cannot be issued in either of these sections. This also substantiates the language of section 75(12) of the Central Goods and Services Tax Act, 2017, which prescribes for direct recovery without issuance of a show cause notice. The validity of these provisions has been upheld by the Hon'ble Gujarat High Court in the case of Rajkamal Builder Infrastructure (P.) Ltd. v. Union of India [R/Special Civil Application No. 21534 of 2019] as decided on March 31, 2021. In this case, the Hon'ble High Court has held that the show cause notice in FORM GST DRC-01 cannot be issued in case of self-assessed tax and interest referred to in section 75(12) of the Central Goods and Services Tax Act, 2017.Revenue Department's TakeIt is pertinent to mention here that the Revenue Department normally issues a show cause notice for the recovery of interest even if no demand for tax is pending. Section 75(12) is never invoked by it. Perhaps it is done to impose a penalty which is not possible if the amount of interest due is directly recovered under section 79.Case in point A taxpayer had already paid the tax amount while filing the GSTR-3B pertaining to the financial year 2018-19. Only the interest of a nominal amount of around ₹3,000/- was due. As per provisions of section 75(12), the said amount of interest could have been recovered directly under section 79, and the matter would have closed. However, a show cause notice was issued under section 73, despite the fact that no show cause notice can be issued under section 73, as there is no demand for tax in the case. The show cause notice proposed the demand of interest of ₹3,000/- along with a penalty of ₹10,000/- under section 73. The matter was adjudicated by issuing an order under section 73, in which the demand of interest and penalty was confirmed.Meanwhile, an amnesty scheme was introduced by the Government by adding section 128A to the CGST Act, 2017. This scheme extends the waiver of interest or penalty, or both, if the tax amount is paid. As the order was under section 73, an application for waiver of interest and penalty was moved in FORM SPL-02. Interestingly, the application was proposed to be rejected by issuing a notice on the grounds that the case does not pertain to section 73; it is covered by section 75(12), which is not included in the amnesty scheme. This was backed by Circular No. 238/32/2024-GST dated 15th October, 2024. Paragraph 4 of the Circular is reproduced below.QuestionClarification (Paragraph 4 of Circular No. 238/32/2024-GST)Whether the benefit provided under Section 128A will be applicable in cases, where the tax due has already been paid and the notice or demand orders under Section 73 only pertains to interest and/or penalty involved?Where the tax due has already been paid and the notice or demand orders under Section 73 only pertains to interest and/or penalty involved, the same shall be considered for availing the benefit of section 128A. However, the benefit of waiver of interest and penalty shall not be applicable in the cases where the interest has been demanded on account of delayed filing of returns, or delayed reporting of any supply in the return, as such interest is related to demand of interest on self-assessed liability and does not pertain to any demand of tax dues and is directly recoverable under sub-section (12) of section 75. (emphasis supplied)Here, the Board Circular clearly specifies that where the demand of tax pertains to section 75(12), the direct recovery is to be made under section 79 — i.e., no show cause notice is needed. But what if the order under section 73 is already issued and a penalty is also imposed in the order, which is not lawful, as when a show cause notice is not issuable under section 73, the question of imposing a penalty under this section does not arise? The Circular should have clarified such cases and should have provided for waiver of penalty upon payment of interest. However, this is not done.Coming back to the case: the demand for interest and penalty was confirmed under section 73, which is an undisputed fact. With a confirmed demand under section 73, the taxpayer opted for the amnesty scheme; however, the proper officer switched approach, stating that the case is not covered under section 73, but rather it is covered by section 75(12), so the benefit of the amnesty scheme is not available. However, the order was issued under section 73, which is clearly reflected on FORM DRC-01 as well as FORM DRC-07, and there is no mention of section 75(12) in these documents. The situation now stands as follows:The taxpayer, having paid interest of ₹3,000/-, wants to claim relief from penalty under the amnesty scheme. Penalty is not imposable at all as provisions of section 73 are not applicable in this case.The Revenue Department is bent upon recovering the penalty as well because there is one confirmed demand under section 73, and the benefit of the amnesty scheme is not admissible because of the clarification given in the Board Circular.As the amount involved in the issue is very small, it does not appear feasible for the taxpayer to opt for an appeal.Issue III: Interest on Tax Payable Under the Reverse Charge MechanismTime Limit for Issuing an Invoice Under the Reverse Charge MechanismSection 31(3)(f) of the Central Goods and Service Tax Act, 2017 provides that where the supplies taxable under the reverse charge mechanism are received from an unregistered person, the tax invoice on such goods and services is required to be issued by such recipient who is liable to pay tax on the same. The time limit for issuance of such an invoice is prescribed in Rule 47A of the Central Goods and Service Tax Rules, 2017. This rule reads as follows:"Rule 47A. Time limit for issuing tax invoice in cases where recipient is required to issue invoice.Notwithstanding anything contained in rule 47, where an invoice referred to in rule 46 is required to be issued under clause (f) of sub-section (3) of section 31 by a registered person, who is liable to pay tax under sub-section (3) or sub-section (4) of section 9, he shall issue the said invoice within a period of thirty days from the date of receipt of the said supply of goods or services, or both, as the case may be."Thus, this rule prescribes that where an invoice is required to be issued by the recipient under section 31(3)(f), it is mandatory for him to issue the said invoice within a period of thirty days from the date of receipt of the said supply of goods or services or both.Time of Supply of Services Taxable Under the Reverse Charge MechanismThe time of supply of services under the reverse charge mechanism is determined as per section 13(3) of the Central Goods and Services Tax Act, 2017. This section reads as follows:"(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:-(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier, in cases where invoice is required to be issued by the supplier; or(c) the date of issue of invoice by the recipient, in cases where invoice is to be issued by the recipient:Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply:Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier."An analysis of the above-referred provision clarifies that in case of services liable to tax under the reverse charge mechanism, the liability to pay tax is determined based on the fact whether the supplier is registered or not. If the supplier is registered, the time of supply is determined as the earlier of the date of making payment (date of making entry or date of debit in bank account, whichever is earlier); or 61st day from the date of issue of invoice by the supplier.However, where the supplier is not registered, the liability to issue an invoice rests upon the recipient under section 31(3)(f). In such a case, the time of supply of services is determined as the earlier of two dates — date of making payment (date of making entry or date of debit in bank account, whichever is earlier); or date of issue of invoice by the recipient.Where the Invoice Under Section 31(3)(f) Is Not Issued Within the Time Stipulated in Rule 47A, Whether Interest Will Be Payable?Illustration X Ltd. received security services in relation to an event organised by it on 07.07.2025. These services are taxable under reverse charge, and the supplier is not registered. As per section 31(3)(f) read with rule 47A, the invoice is required to be issued by X Ltd. on or before 06.08.2025. However, the invoice is issued by X Ltd. on 15.09.2025, and payment is made to the supplier on 04.10.2025. X Ltd. is of the view that, as per section 13(3), the time of supply of these services will be 15.09.2025 (being earlier of date of issue of invoice, i.e., 15.09.2025, or date of making payment, i.e., 04.10.2025). Thus, the due date of tax payment will be 20.10.2025. However, the Revenue Department is of the view that the due date of issuance of the invoice under Rule 47A is 06.08.2025, and X Ltd. has knowingly delayed the issuance of the invoice to delay the payment of tax. As per the Department, the time of supply falls in the month of August, tax was due to be paid on 20.09.2025. Since the tax has been paid on 20.10.2025, interest is required to be paid on it.If we go by the bare language of section 13(3), the situation seems to tilt in favour of the assessee. The language of clause (c) of sub-section 3 of section 13 is clear and unambiguous. It used the word "date of issue of invoice" which is different than "due date of issue of invoice". The lawmakers have clearly distinguished these two terms while framing the provisions related to the time of supply. This may be ensured from the language of sections 12(2) and 13(2), which clearly differentiates between the two terms. As the language of section 13(3) clearly uses the words "date of issue of invoice", one cannot read it as "due date of issue of invoice". In this regard, it is worthwhile to mention the Apex Court judgment given in the case of Trutuf Safety Glass Industries v. Commissioner of Sales Tax, U.P. [C.A. Nos. 3467 of 2007] as decided on August 6, 2007. In this case, the Hon'ble Supreme Court held that "it is well settled principle in law that the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent." In view of this judgment, one can say that no interest is payable by X Ltd. in the above-referred illustration.Now, let us look at another side of the coin. Rule 47A, which prescribes the time limit for issuing the invoice under section 31(3)(f), was added to the CGST Rules 2017 with effect from 01.11.2024 by virtue of the Finance (No. 2) Act 2024. Prior to this date, there was no time limit for issuing an invoice under section 31(3)(f). Also, prior to this amendment, the determination of time of supply under section 13(3) was also not dependent on the issuance of an invoice by the recipient, as clause (c) was not there in section 13(3). Thus, the time of supply of services under reverse charge was dependent only on two dates — the date of making payment and the 61st day from the date of issue of the invoice by the supplier. Date of issue of the invoice by the recipient had no role to play in determining the time of supply.Due to these missing provisions, there was also ambiguity as to what the deadline was to claim input tax credit on such invoices in terms of section 16(4). To clarify these issues, Circular No. 211/5/2024-GST dated 26th June, 2024 was issued by CBIC. Para 2.6 of this Circular reads as follows:"2.6 A combined reading of the above provisions leads to a conclusion that as ITC can be availed by the recipient only on the basis of invoice or debit note or other duty paying document, and as in case of RCM supplies received by the recipient from unregistered supplier, invoice has to be issued by the recipient himself, the relevant financial year, to which invoice pertains, for the purpose of time limit for availment of ITC under section 16(4) in such cases shall be the financial year of issuance of such invoice only. In cases, where the recipient issues the said invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax." (emphasis supplied)So, this Circular clarifies that where the tax invoice is issued after the time of supply, interest is required to be paid on the delayed payment of tax. However, whether the clarification issued by this Circular is still binding? Let us examine through the following pointers:The Circular was issued when there was no explicit provision prescribing the due date of issuing invoices under section 31(3)(f). Further, at that time, the language of section 13(3) also did not consider the date of issue of the invoice by the recipient. Whether this Circular can still be said to be applicable when the statute has specifically amended section 13(3) and has also added rule 47A is questionable.The language of section 13(3) after amendment is clear and unambiguous, and this Circular is contradictory to the provision contained in this section. The Hon'ble Supreme Court in the case of Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries [Civil Appeal Nos. 4022 of 1999, 3197 & 4789 of 2000, 1469 of 2002, and 3589 to 3592 of 2005] as decided on October 14, 2008, has held that a Circular contradictory to statutory provisions has no existence in law.Thus, whether interest is payable on tax paid under reverse charge in cases where there is a delay in the issue of the invoice by the recipient is subject to litigation. The Revenue Department is relying on the above-referred Circular and is demanding interest in case there is a delay in the issue of the invoice under Rule 47A. In the author's view, as the language of section 13(3) is clear, interest is not payable in such cases. However, the penalty may be imposed for non-compliance with Rule 47A of the Central Goods and Services Tax Rules, 2017.Before PartingThe provisions related to the levy of interest under GST still have several gaps and inconsistencies. The GST Council should come up with necessary amendments to end the litigation in interest-related provisions. Clarity in legal provisions is not just about law; it's about trust. Clear rules mean fewer disputes, smoother compliance, and more confidence for taxpayers. When the system is predictable, businesses can focus on growth instead of litigation.Author may be reached at:preeti.parihar@gmail.com | eboard@icai.inOriginally published in The Chartered Accountant journal, April 2026 — pages 1312–1316.
GST
Ep. 40 — GST 2.0 and the Union Budget 2026-27: A Paradigm Shift
CA Journal
· July 2026
00:00
--:--
GST 2.0 and the Union Budget 2026‑27:A Paradigm ShiftIntroduced in 2017, GST replaced many indirect taxes and brought the country’s markets together, but its multi-slab structure made things complicated for both consumers and businesses. Through the simplifi cation of rates into mainly two slabs, the reduction of compliance burdens, and the improvement of transparency, as Prime Minister Narendra Modi announced, “The Government will bring Next Generation GST reforms, which will bring down tax burden on the common man. It will be a Diwali gift for you.” (Press Information Bureau, 2025), the 2025 GST 2.0 reforms represent a signifi cant shift toward clarity and effi ciency, and this reform brings India closer to international best practices, especially Canada’s more straightforward dual model, while maintaining the dual GST framework to maintain federal balance. Beyond revenue, the effects are evident: middle-class families benefi t from lower, more understandable bills, small retailers easily handle compliance online and farmers encounter fewer obstacles in inter-State commerce. The reform exhibits increased formalisation, better compliance and inclusive growth. GST 2.0 is further strengthened by the Union Budget 2026-27 in the form of tax administration rationalisation, digital compliance architecture and cut-down on litigation, making GST a central pillar of next-generation fi scal governance in India. The system is reaffi rmed as a pillar of New India’s economic future with GST 2.0, which changes its complicated structure into a framework that is people-centric, business-friendly, and growth-oriented.IntroductionFrom a city of toll booths to an expresswayIntroduced in 2017, GST replaced a tangle of Central and State indirect taxes and knit the country’s markets together — but its multi‑slab structure kept things complicated for consumers and businesses alike. Picture GST before 2025 as navigating a city of winding roads, toll booths, and detours, each adding time and expense. GST 2.0, by contrast, behaves like an expressway: a more direct route, with clearer signage along the way.By simplifying rates into mainly two slabs, easing compliance burdens, and improving transparency, the 2025 reforms mark a genuine shift toward clarity and efficiency — bringing India closer to international best practice, particularly Canada’s more straightforward model, while still preserving the dual GST framework that keeps Centre and States in fiscal balance. Middle‑class families see lower, more legible bills; small retailers manage compliance online; farmers move goods across State lines with fewer obstacles.The Union Budget 2026‑27 builds directly on this foundation, reinforcing GST 2.0 through tax administration rationalisation, a stronger digital compliance architecture, and a deliberate cut‑down on litigation — positioning GST as a central pillar of next‑generation fiscal governance in India.PG1319Nine Years, One LedgerGST timeline: 2017–2026From the historic midnight rollout to the Budget that folds GST 2.0 into law. 2017Launch of GSTRolled out on 1 July, unifying 17 Central and State taxes and 13 cesses under a single structure. 2018E‑way bill introducedMade mandatory for tracking goods movement across States, improving transparency. 2019Return simplificationFiling steps simplified; Aadhaar linked to registration for fraud prevention. 2020COVID impact & e‑invoicingRevenue dipped, but e‑invoicing began for large firms (₹500 crore+ turnover). 2021–22IGST refund automationExporters benefited from fast refunds via ICEGATE — turnaround cut to under a week. 2023Compliance tightened, MSMEs easedITC rules tightened overall, while compliance was made simpler for small businesses. 2025GST 2.0 — 8 years of GST56th GST Council Meeting adopts Next‑Gen amendments: fewer slabs, deeper tech integration. 2026Union Budget 2026‑27CGST, SGST and IGST sections amended; GST 2.0 written into administrative practice.Source: adapted from Insights IAS, 2025 & Gajendra Singh Godara, 2025The Price Puzzle, SolvedFrom four slabs to a cleaner structureGST 2.0 collapses the old multi‑rate ladder into two principal slabs, plus a distinct levy for luxury and sin goods — easing both billing and reconciliation.Before — GST 1.05%12%18%28%5%12%18%28%After — GST 2.05%18%40%5%essentials18%standard40%luxury & sinPG1318Transitional Provisions · Billing RuleWhich rate applies when the slab changes mid‑transaction?The applicable rate turns on the timing of three events — supply, invoice, and payment — relative to the 22 September rate change.CasePre‑22/09/2025 eventsPost‑22/09/2025 eventsRate applicableCase 1SupplyInvoice and PaymentNew rateCase 2Supply and InvoicePaymentOld rateCase 3Supply and PaymentInvoiceOld rateCase 4InvoiceSupply and PaymentNew rateCase 5Invoice and PaymentSupplyOld rateCase 6Acceptance of PaymentSupply and InvoiceNew rateIn short: when invoice and payment both fall after the revision, the new rate governs. When both precede it, the old rate holds. Where events straddle the change, the rate follows whichever of the three — supply, invoice, or payment — occurs last.Section 18, CGST ActInput Tax Credit: transitional treatmentTransitional ITC exists to protect the tax chain — credit is held or reclaimed strictly according to how the underlying supply is taxed after the change.CaseNature of changeITC treatment1Goods are not exempt to taxationKeep availing ITC normally2Goods become exemptedITC should be reversed under Section 18(4)3Goods have been zero‑ratedITC is not withdrawn; taxpayer can claim refund4Goods transferred between zero‑rated and exemptedNo ITC and no refund is allowedBusinesses are advised to regularly reconcile inventory against claimed credits — especially where new sector exemptions are announced — and to maintain complete documentation for rate transitions, eligible ITC, and reconciliation.PG1319Union Budget 2026‑27Five statutory amendments that carry GST 2.0 forwardSections 15 & 34, CGST ActPost‑sale discounts, without the paperwork. A pre‑existing agreement is no longer required. As long as a credit note is issued under Section 34 and the recipient reverses the related ITC, the discount can be excluded from taxable value.Section 54(6), CGST ActProvisional refunds for inverted duty structure. Taxpayers claiming refunds now become eligible for provisional refunds, improving cash flow while the final refund is processed.Section 54(14), CGST ActNo minimum threshold on export refunds. The minimum sanctioning threshold is removed for exports made with payment of GST, so refunds process regardless of amount.Section 13, IGST ActSimpler place‑of‑supply for intermediaries. The special rule for intermediary services is withdrawn; the general rule (location of the recipient) now applies, which may reduce disputes and improve export clarity.Section 101A(1A) — effective 1 April 2026No gap in the appellate process. Until the National Appellate Authority (NAA) is constituted, the Government can authorise an existing authority or tribunal to hear appeals under Section 101B.PG1322Figure 7 · Rs. in Lakh CroresFY‑wise GST collection since inception7.19FY17‑1811.77FY18‑1912.22FY19‑2011.36FY20‑2114.76FY21‑2218.10FY22‑2320.18FY23‑2414.07FY24‑25Source: Annapoorna, 2024PG1321On the GroundThree ledgers, three livesThe FarmerChhattisgarh, rice growerBeforeNumerous tax layers and checkpoints on the road to Maharashtra ate into earnings; delays hurt crop prices.AfterFewer slabs, faster inter‑State movement. Consumers get fresher produce; he earns more from the same crop.The Small TraderLocal retail storeBeforePerplexing slabs meant hiring an accountant just to file returns — a real cost for a small business.AfterDigital filing in minutes, with only two major slabs. More time for the store, less time on tax codes.The HouseholdMiddle‑class family budgetBeforeGrocery bills padded with several rates — 12% here, 18% there — made true costs hard to track.AfterNecessities like paneer, bicycles and toothpaste sit at 5%. Lower expenses, and a bill they can actually read.PG1320GST: From Global to LocalTwo models, one dual choiceGST was first introduced in France in 1954; over 160 nations now use some form of it. Broadly, two models dominate: single‑GST systems, as in Singapore and Australia, and dual systems — splitting collection between federal and state governments — as in Canada and India.India’s dual system applies CGST and SGST to transactions within a State, and IGST to inter‑State transactions, with the Centre distributing the State’s share onward. Canada’s GST, by contrast, is a straightforward consumption tax collected by the vendor and remitted to government — a $10 book becomes $10.60 once a flat rate is applied. GST 2.0 moves India’s more intricate dual model closer to that clarity, without giving up the federal revenue‑sharing that the dual structure exists to protect.PG1323ConclusionA ledger rewritten for trustIndia’s journey from a detailed, multi‑slab GST system in 2017 to the streamlined GST 2.0 of 2025 marks a clear shift toward efficiency, fairness and transparency. The 2025 reforms have meaningfully eased the frictions of the previous system, balancing inclusivity with simplicity while the dual GST framework continues to preserve India’s federal character through streamlined slabs and stronger compliance procedures.Taken together with the Union Budget 2026‑27, GST 2.0 is not merely an indirect tax reform but a pillar of India’s next‑generation fiscal system — a convergence that points from revenue extraction toward revenue facilitation, built on simplicity, technology, and the taxpayer’s trust.Considering it in conjunction with the Union Budget 2026‑27, GST 2.0 does not just appear as an indirect tax reform but a pillar of the next‑generation fiscal system in India.ReferencesAnnapoorna. (2024). Total GST Collection in India. cleartax.in/s/gst-collections-of-2024Arun Kumar Deshmukh, Ashutosh Mohan & Ishi Mohan. (2022). Goods and Services Tax (GST) Implementation in India: A SAP–LAP–Twitter Analytic Perspective. link.springer.comGajendra Singh Godara. (2025). GST Council (Goods and Services Tax Council), Constitutional Provisions, Functions, Way Forward. padhai.aiGST@8. (2025). Deloitte India. deloitte.comInsights IAS. (2022). Editorial Analysis: GST — Five years stronger. insightsonindia.comInsights IAS. (2025). 8 Years of GST. insightsonindia.comKeen, M. (2013). The Anatomy of the VAT. IMF Working Paper. imf.orgOECD. (2020). Consumption Tax Trends. oecd.orgPress Information Bureau. (2025a). Eight Years of GST. pib.gov.inPress Information Bureau. (2025b). PM Modi’s I‑Day Address: A Vision for Reform, Self‑Reliance, and Empowering Every Indian. pib.gov.inPress Information Bureau. (2025c, November 3). GST Revenue Soars in October 2025. pib.gov.inShreya Kashyap, TaxGuru. (2025). GST Council 56th Meeting: Tax Rate & Reforms. taxguru.inThe Economic Times / EY India. (2023). 6 years of GST — hits and the way forward. economictimes.indiatimes.comManisha Singhmanishhasingh3@gmail.comEditorial Boardeboard@icai.inOriginally publishedThe Chartered Accountant, April 2026 · icai.org
Social Audit
Ep. 42 — Annual Disclosure & Annual Impact Report for Social Enterprises on the Social Stock Exchange (SSE)
Ep. 43 — Proposed Ind AS 118: A Reform in Financial Reporting
CA Journal
· July 2026
00:00
--:--
Proposed Ind AS 118: A Reform in Financial ReportingThis article examines proposed Ind AS 118, which is expected to replace Ind AS 1 from 1 April 2027 (ICAI, 2025). The standard introduces a structured approach to the statement of profit and loss by classifying income and expenses into five categories with mandatory subtotals. It introduces and prescribes disclosure and reconciliation requirements for management-defined performance measures (MPM), strengthens aggregation and disaggregation principles, and brings consequential amendments to Ind AS 7, Ind AS 33 and Ind AS 34. Implementation requires retrospective application, including restatement of comparatives subject to transitional relief. The article outlines these provisions and highlights the procedural and presentation changes that companies need to undertake before the effective date.IntroductionIn April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements, which will replace IAS 1 from 1 January 2027 (IASB, 2024). The new standard aims to address inconsistency in financial reporting and enhance comparability across entities (IASB, 2024). Historically, companies across jurisdictions had significant flexibility in presenting financial statements, often using customised formats and reporting figures such as adjusted EBITDA or operating profit without standard definitions or reconciliations (Sabauri & Kvatashidze, 2025). A study conducted by the IASB on a sample of 100 companies revealed that more than 60 of them reported an operating profit figure, employing at least nine different calculation approaches (IASB, 2024). This diversity meant that even fundamental metrics like operating profit were presented differently, limiting users' ability to interpret and compare results.Consistent with India's IFRS convergence approach, the Exposure Draft of Ind AS 118 is substantially aligned with IFRS 18. Ind AS 118 introduces a new approach to financial statement presentation. The statement of profit and loss is reorganised into five categories with mandatory subtotals such as operating profit presented in a consistent manner, as discussed later in the article. The standard also requires companies to present operating expenses explicitly on the face of the statement, and management-defined performance measures (MPM) must be disclosed with supporting explanations and reconciliations. Additional provisions introduce principles for aggregation and disaggregation, discourage vague labelling such as "other" and update requirements for the cash flow statement, earnings per share, and interim reporting.IFRS 18 represents the most significant change to companies' presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago. It will give investors better information about companies' financial performance and consistent anchor points for their analysis. — Andreas Barckow, Chair, International Accounting Standards Board (IASB, 2024)Although these reforms are designed to improve clarity and consistency, their adoption will require companies to adjust systems, processes, and internal judgements in preparation for implementation (Chan & EY, 2024; EY, 2025; Ndarake et al., 2024).Major Changes Under Ind AS 118Ind AS 118 introduces several interrelated changes affecting both the presentation and disclosure of financial information. The figure below summarises the key presentation and disclosure-related changes introduced by Ind AS 118, which are discussed in detail in the subsequent sub-sections.Figure 1 — Impact of Ind AS 118 on Presentation and DisclosurePresentationFive mandatory categories in the statement of profit or lossOperating profit and profit before financing and tax made compulsoryDisclosureMandatory disclosure of management-defined performance measures (MPMs)Explanation, calculation method and reconciliation required for each MPMStatement of Profit and LossThe standard requires companies to classify all income and expenses into five categories of operating, investing, financing, income taxes and discontinued operations. Two new subtotals are mandated on the face of the statement of profit and loss which are operating profit or loss and profit or loss before financing and income taxes (IASB, 2024).The operating category functions as a residual category after applying the classification principles for investing and financing activities. It includes income and expenses from an entity's main business activities and all items not included in other categories. For most entities, revenue, materials consumed, employee benefits, depreciation and amortisation, selling, general and administrative expenses, and other similar items are part of operating activities. Where a company's main business activity is financing or investing, for example, banks, NBFCs or investment companies, items such as interest income and interest expense that would normally be classified as financing or investing are presented in the operating category. This treatment depends on the nature of the entity's main business activities and requires judgement (KPMG, 2024).The investing category includes income and expenses from assets that generate returns largely independent of an entity's other operations. Classification depends on the entity's main business activity and follows specific guidance for financial institutions. This category typically includes interest income, dividend income, rental income from investment property, and results from equity-accounted associates and joint ventures, unless the entity's main business activity is investing or financing (EY, 2025).The financing category includes income and expenses related to raising finance, for example interest on borrowings and lease liabilities and similar effects of provisions. After presenting financing income and expenses, the statement presents the subtotal "profit or loss before income tax", followed by tax expense and results from discontinued operations (Czajor, 2024; IASB, 2024).Ind AS 118 introduces a choice for how operating expenses may be analysed on the face of the statement of profit and loss by nature (e.g. material consumed, employee costs, depreciation) or by function (e.g. cost of sales, selling, marketing, administrative). When expenses are presented by function, additional disclosures in the notes are required to identify major components, including depreciation, amortisation, employee benefits, impairment and write-downs of inventories. The current Ind AS 1 permits only a by-nature presentation but the exposure draft of Ind AS 118 allows both methods (ICAI, 2025; IASB, 2024).The table below presents an illustrative format of the statement of profit and loss for entities whose main business activities do not involve financing or investing. This format does not apply to banks, non-banking financial companies, insurers or other entities whose core activities involve investing, insurance services or providing finance, as those entities follow specific classification guidance.Line ItemAmountCategoryRevenueXOperatingOther operating revenuesXOperatingTotal revenueXOperatingOperating expenses (based on nature, function, or mix of both)Cost of material consumed(X)OperatingPurchases of products for resale(X)OperatingChanges in inventories of finished goods, work-in-progress and product for sale(X)OperatingEmployee benefit expenses(X)OperatingDepreciation and amortisation expense(X)OperatingOther expenses OperatingTotal operating expenses(X)OperatingOperating profit or lossX—Share of profit or loss from equity accounted entitiesXInvestingIncome from other investmentsXInvestingInterest income from cash and cash equivalentsXInvestingProfit or loss before financing and income taxesX—Interest expense on borrowings and lease liabilities(X)FinancingInterest expense on pension liabilities and provisions(X)FinancingProfit or loss before income taxesX—Income tax expense(X)Income TaxesProfit or loss after tax from continuing operationsX—Profit or loss from discontinued operationsXDiscontinued OpsProfit or Loss for the periodX—Table 1 — Illustrative Format of the Statement of Profit and LossSource: Author's analysis based on literature reviewInd AS 118 introduces a choice for how operating expenses may be analysed on the face of the statement of profit and loss by nature (e.g. material consumed, employee costs, depreciation) or by function (e.g. cost of sales, selling, marketing, administrative).Management-Defined Performance Measures (MPMs)Ind AS 118 introduces a comprehensive framework for the disclosure of MPMs in response to the growing use of performance indicators that extend beyond those mandated by accounting standards. An MPM is defined as a subtotal of income and expenses, not otherwise prescribed by Ind AS, that management uses in public communications, such as investor presentations or press releases, to convey its perspective on a particular aspect of the entity's financial performance. Subtotals explicitly required by the standards, such as gross profit, operating profit, or profit before tax, are excluded from this definition (ICAI, 2025; IASB, 2024; KPMG, 2024).Figure 2 — Identification of Management-Defined Performance Measures under Ind AS 118What Qualifies as an MPMSubtotal of income and expensesNot explicitly required by Ind ASUsed by management in public communications to explain performanceWhat Is Not an MPMRatios and financial indicatorsMeasures not based on income and expensesNon-financial performance metricsTo ensure consistency and comparability, all MPMs must be disclosed together in a single note. For each measure, entities are required to describe the measure, explain the aspect of performance it highlights and the reason for its use, and provide a reconciliation to the most directly comparable Ind AS total or subtotal (EY, 2025; ICAI, 2025; IASB, 2024). For example, an entity may present "adjusted operating profit" in its investor communications by excluding items such as restructuring costs or impairment losses that management considers not reflective of ongoing operations. Ind AS 118 requires the entity to reconcile this adjusted measure to the operating profit reported in the statement of profit and loss, with clear explanations of each adjustment and the reasons for excluding those items. Such MPMs fall within the scope of the statutory audit.Ind AS 118 distinguishes between financial and non-financial performance measures. Non-financial metrics like customer satisfaction scores, store area or subscriber numbers are outside the scope of MPMs because they are not derived from income and expense information. Within financial performance measures, three categories are relevant, as shown below.Non-Financial MeasuresIFRS-Specified SubtotalsMPMsOther Non-Subtotal MeasuresNumber of subscribersProfit or lossAdjusted profit or lossFree cash flowCustomer satisfaction scoreOperating profitAdjusted operating profitReturn on equityStore surfaceOperating profit before depreciation and amortisationAdjusted EBITDANet debt / Same-store salesFigure 3 — Types of Performance Measures and MPMsSource: IFRS Foundation (2020)An MPM is defined as a subtotal of income and expenses, not otherwise prescribed by Ind AS, that management uses in public communications, such as investor presentations or press releases, to convey its perspective on a particular aspect of the entity's financial performance.The requirements for management-defined performance measures under Ind AS 118 were introduced because such measures were defined and presented differently in practice. In the absence of clear guidance, entities used varied approaches to adjust performance measures in their external communications. The examples below illustrate common reporting practices observed in practice.IPO Prospectus An IPO prospectus showed rapid revenue growth even though the company was making substantial losses. It introduced a management-defined "contribution margin" that excluded recurring operating costs. Although presented as a measure of efficiency, this adjustment reduced clarity about key obligations and ongoing losses, making it harder to assess the company's true financial position.Listed Company Restatement A listed company had to restate its early quarterly results due to concerns over aggressive revenue recognition and the use of a customised adjusted income measure. The restatement was followed by a sharp fall in share value, highlighting investor sensitivity to the credibility of reported figures.Overemphasis on Adjusted EBITDA More recently, analysts have criticised investor presentations that place heavy emphasis on adjusted EBITDA while giving less importance to operating profit. Such emphasis can divert attention from weaknesses in profitability and cash generation, even though the reported results remain unchanged.Enhanced Aggregation and Disaggregation PrinciplesInd AS 118 introduces the criteria for aggregation and disaggregation of financial information, building on but going beyond the guidance previously provided in Ind AS 1. Whereas earlier requirements relied largely on materiality and preparer judgement, the new standard explicitly distinguishes the roles of the primary financial statements and the accompanying notes. The primary statements — the statement of profit and loss, balance sheet, statement of changes in equity, and cash flow statement — are expected to provide a concise, structured summary of recognised elements, while the notes are intended to offer additional disaggregation and explanatory context to enable users to develop a fuller understanding of the reported information.The revised framework requires that items with similar characteristics be aggregated, and items with dissimilar characteristics, when material, must be disaggregated either on the face of the statements or in the notes. The standard discourages vague labels such as "other." Where the use of such a label is unavoidable, a more specific description (for example, "other operating expenses" or "other finance expenses") must be applied to convey the nature of the items. Preparers must ensure that these descriptions are not misleading and that they are used consistently across periods.In practice, these requirements require a review of existing presentation practices. For example, material one-off gains, including those arising from the disposal of a subsidiary, should not be grouped under "other income" without adequate explanation. Similarly, significant impairment losses must be shown as a separate line item rather than included within "other expenses" (EY, 2025; ICAI, 2025; IASB, 2024; KPMG, 2024).Other Key ChangesInd AS 118 introduces consequential amendments to related standards, particularly Ind AS 7, Ind AS 33, and Ind AS 34.Ind AS 7 — Statement of Cash FlowsFor Ind AS 7, a key change is the requirement for all entities using the indirect method to begin the statement of cash flows with operating profit. Previously, entities used different profit measures, leading to inconsistent reporting. The amendments also remove options for classifying interest and dividend cash flows. Dividends paid must always be presented as financing cash flows. Entities without a specified main business activity will classify interest paid as financing and interest and dividends received as investing. For entities whose main business is lending or investing, a single category approach will apply. Each type of cash flow, namely interest paid, interest received and dividends received, will be reported in one category, aligned with the classification of related income and expenses in the profit and loss statement. Even when those items appear in more than one category in profit or loss, the total for each type must be shown in a single category in the statement of cash flows. Many of these requirements already exist in Ind AS 7, which had earlier removed alternative classifications; the amendments therefore largely bring IAS 7 into line with Indian practice, while adding clarity through the defined starting point and the emphasis on the single-category approach (ICAI, 2025; IASB, 2024).Ind AS 33 — Earnings Per ShareFor earnings per share, amendments to Ind AS 33 allow entities, in addition to reporting basic and diluted EPS, to disclose supplementary EPS figures in the notes. These additional EPS measures may be based on subtotals such as operating profit or on MPMs that are already disclosed in the financial statements. Such figures must be presented only in the notes and without greater prominence than basic and diluted EPS shown on the face of the statement of profit and loss (ICAI, 2025; IASB, 2024).Ind AS 34 — Interim Financial ReportingChanges to interim reporting under Ind AS 34 ensure that interim financial statements incorporate the new subtotals and MPM disclosures in the same way as in annual financial statements. These amendments require preparers to restate comparative cash flow information and revise reporting formats from financial years beginning on or after 1 April 2027, in line with the effective date of Ind AS 118 (ICAI, 2025).Ind AS 118 introduces the criteria for aggregation and disaggregation of financial information, building on but going beyond the guidance previously provided in Ind AS 1.Preparing for Ind AS 118 ImplementationThe implementation of Ind AS 118 will require extensive planning as it significantly reshapes the structure of financial reporting. For the newly defined categories in the statement of profit and loss, entities will need to modify their systems to ensure that transactions are captured, classified, and reported consistently across the group. Processes must be established to produce accurate reconciliations of MPMs that can withstand audit scrutiny. Adequate training of finance teams, boards, and auditors will be essential to ensure a clear understanding of the revised requirements. Companies will also need to identify which of their publicly communicated metrics fall within the scope of MPMs, define how these measures will be calculated, and document the related internal policies (EY, 2025; KPMG, 2024; Neves, 2024).Because the standard requires retrospective application of presentation changes, entities may be required to reclassify comparative figures into the revised statement structure, subject to materiality and practicability considerations. This process may involve data reviews and manual adjustments, making early preparation critical. Reclassification of certain income and expense items from operating to investing or financing categories will modify familiar subtotals, even though total net profit remains unchanged. These structural effects will need to be clearly communicated to investors and analysts. In addition, reporting must align with Indian regulatory frameworks, including Schedule III of the Companies Act, SEBI requirements, and sector-specific guidelines, all of which are expected to be updated before the standard's effective date.The new requirements also introduce areas of judgement, such as determining an entity's principal business activities and deciding which public communications create MPMs. These judgements may affect key performance indicators and may require a review of loan covenants and other contractual terms. Successful implementation will therefore demand coordinated efforts across finance, IT, governance, and investor relations functions.ConclusionThe shift to Ind AS 118 represents a major reform in the way Indian companies present their financial statements. It introduces a more structured and disciplined approach that is intended to make reported information clearer and easier to compare.Moving to this new framework will involve significant effort from preparers and auditors, but its long-term impact will be seen in how effectively companies and users of financial statements adapt to the revised presentation and use it to gain deeper insights into business performance.ReferencesChan, V., & EY. (2024). IFRS 18 in brief. ey.comCzajor, P. (2024). IFRS 18: Advancing the Relevance and Utility of Financial Statements for Stakeholders. European Research Studies Journal, Vol. XXVII (Issue S2). ersj.euEY. (2025). A closer look at IFRS 18. ey.comIASB. (2024). History of IFRS 18. ifrs.orgIASB. (2024). IFRS 18 Presentation and Disclosure in Financial Statements Effects Analysis. IFRS Foundation. ifrs.orgIASB. (2024). IFRS 18 will improve communication in financial statements. ifrs.orgICAI. (2025). Exposure Draft Indian Accounting Standard (Ind AS) 118 Presentation and Disclosure in Financial Statements. icai.orgIFRS Foundation. (2020). General Presentation and Disclosures. ifrs.orgKPMG. (2024). Presentation and disclosure IFRS 18. kpmg.comNdarake, E., Ukpong, E., & Uwah, U. E. (2024). Impact of IFRS 18 Implementation in Financial Reporting. Journal of Accounting and Financial Management. iiardjournals.orgNeves, H. D. C. (2024). IFRS 18 Implementation in Brazilian Enterprises: Challenges and Opportunities. International Journal of Business Administration, 15(2), 102. doi.orgSabauri, L., & Kvatashidze, N. (2025). Management Reporting Preparation Issues. doi.orgAuthor may be reached at eboard@icai.inThe Chartered Accountant · www.icai.org · April 2026
Global Trade
Ep. 44 — Turning Costs into Strategy: How Indian Exporters Can Respond to Rising U.S. Tariffs
CA Journal
· July 2026
00:00
--:--
Turning Costs into Strategy: How Indian Exporters Can Respond to Rising U.S. TariffsThe recent escalation of tariffs in the United States has unsettled global trade patterns, particularly for exportoriented economies like India. While tariff hikes were directed mainly at Chinese products, their ripple effects were felt across value chains and competing suppliers. This article discusses the nature of tariffs, their impact on Indian exporters, and how Management Accounting techniques, specifi cally Cost Segregation, Contribution Margin (CM), and Break-Even Point (BEP) analysis, can help fi rms evaluate whether to sustain their presence in the U.S. or pivot to alternative markets. Drawing on India’s preferential trade agreements, the article identifi es regions such as the Middle East, Australia, and ASEAN as viable destinations where tariff relief, shorter logistics, and indirect cost savings could preserve competitiveness.IntroductionIn recent years, tariff s have re-emerged as a potent policy instrument in the global economy. Th e United States, long regarded as a champion of free trade, has increasingly used tariff s to protect strategic sectors. For Indian exporters, who oft en operate on thin margins, such measures can tilt the balance between profi t and loss. What makes the present context distinctive is that tariff s are no longer merely economic tools but also political signals. While recent tariff actions have been directed primarily at Chinese imports, Indian exporters to the U.S. face a more uncertain and arguably less predictable trade environment. It is therefore timely to revisit how Management Accounting can serve not just as a reporting function, but as a compass for strategic navigation.01 Tariffs and Their ImplicationsTariffs function as import duties that raise the landed cost of goods entering a country, reducing their price competitiveness. For Indian firms the consequence is twofold: products competing directly with Chinese exports may find an opening, provided they can land at competitive prices — while categories where Indian exports themselves face duties see margins erode unless the burden is offset elsewhere in the value chain.02 From Accounting to StrategyIntuition alone is insufficient in these conditions. Companies require a structured, numerical framework — and Management Accounting supplies exactly that, through three disciplines that together answer one strategic question: continue in the U.S. market, or reallocate to alternatives with lower tariffs and leaner indirect costs?Discipline ICost SegregationSeparates variable costs — raw materials, freight, tariffs, commissions — from fixed costs such as administration, certification, and promotion, so the negotiable is distinguished from the non‑negotiable.Discipline IIContribution MarginIsolates what remains after variable costs are deducted from the selling price — reframing the question from "how much are we selling?" to "how much are we keeping?"Discipline IIIBreak‑Even PointDivides fixed costs by per‑unit contribution margin to quantify exactly how many units or shipments are needed before a market turns profitable.03 Cost Segregation: Clarifying the Anatomy of CostsAn item that earlier attracted a 5% duty may now face 20% or even 50%, changing its economics overnight. Without a clear split between fixed and variable costs, companies risk misreading the true impact of such changes. Segregating costs lets exporters ask sharper questions:Which portion of the cost increase is truly variable, directly linked to tariff hikes?How much of the overhead remains unaffected, regardless of destination market?Which indirect costs — like financing inventory stuck in long shipping routes — are magnified when tariffs lengthen customs clearance times?An auto‑components manufacturer exporting to the U.S., for instance, may find that raw‑material duties inflate per‑unit costs while fixed expenses — plant maintenance, R&D salaries, insurance — stay unchanged. That distinction lets management decide whether producing additional units for a high‑tariff market is worthwhile, or whether production should shift toward tariff‑free destinations such as ASEAN or the UAE.04 Contribution Margin: Beyond Revenue, Towards ValueA common trap in turbulent times is chasing revenue at any cost — continuing to export even as tariffs quietly erode margins. Contribution margin analysis is the antidote, isolating the value each unit contributes toward fixed costs and profit once inflated variable costs are stripped away.Consignment ComparisonPer UnitU.S. Consignment — Before Tariffs₹40,000 CMU.S. Consignment — After Tariffs₹25,000 CMAustralian Order — After Tariffs₹35,000 CMHigher absolute U.S. sales volume masks the truth: Australia delivers more value per unit of capacity.For exporters, this shift in focus — from revenue to contribution — redirects strategy. Instead of spending marketing budget and managerial energy defending high‑volume, low‑margin markets, firms can prioritise destinations where contribution margins stay healthy.05 Break‑Even Analysis: Quantifying the Threshold of ViabilityEven when contribution margins shrink, companies may argue that a U.S. presence is essential for reputation or long‑term contracts. Break‑even analysis supplies the reality check.Apparel Exporter — Fixed Costs ₹5 CroreBEP ModelContribution Margin — Before Tariffs₹450 / unitContribution Margin — After Tariffs₹300 / unitBreak‑Even Volume — Before11,100 unitsBreak‑Even Volume — After16,600+ unitsRealistic U.S. Demand12,000 unitsDemand falls ~4,600 units short of break‑even — the strategy is unsustainable as priced.BEP is not merely an accounting formula; it is a litmus test of viability. It shifts boardroom conversation from vague optimism ("we must hold on to the U.S. market") to quantified scenarios ("we need 5,000 more units than the market can absorb") — allowing firms to make hard but necessary calls on scaling down, renegotiating, or pivoting.Tariff changes are more than alterations in trade policy; they are disruptions that ripple through cost structures, profit margins, and ultimately the strategic choices of firms. On the volatility of the external trade environment06 From Analysis to Strategy: Creating FocusIndividually, cost segregation, contribution margin, and break‑even analysis each highlight a different dimension of tariff impact. Together they form a decision‑making triad: segregation defines where the pain lies, contribution margin shows which market still creates value, and break‑even reveals which strategies are viable at scale. An exporter may discover that while tariffs hurt U.S. margins, ASEAN markets offer both higher contribution and a realistic break‑even — allowing the firm to double down on ASEAN while keeping only a symbolic U.S. presence.07 Alternative Markets for Indian ExportersIndia's expanding network of trade agreements gives exporters real options for reducing tariff exposure and diversifying demand.Middle East & GCCUAE & OmanUnder the India–UAE CEPA, over 90% of exports enter duty‑free; bilateral trade crossed USD 85 billion in FY2024. Oman's 2024 CEPA adds a logistics gateway to East Africa via the ports of Sohar and Duqm.OceaniaAustraliaThe Australia–India ECTA has eliminated duties on 85%+ of tariff lines — rising toward 90% — benefiting textiles, leather, gems, auto‑components, and processed foods.Southeast AsiaASEAN EconomiesThe ASEAN–India FTA reduces or eliminates duties across roughly three‑quarters of tariff lines. Vietnam, Indonesia, Thailand, and Malaysia offer proximity and growing demand.Re‑Export HubSingaporeMost goods enter duty‑free under the India–Singapore CECA, with predictable customs and minimal clearance delay — a direct market and a springboard into Asia‑Pacific.EuropeEFTA & the EUThe 2024 India–EFTA TEPA secures near‑complete duty‑free access to Switzerland, Norway, Iceland, and Liechtenstein. The broader EU remains viable for firms that can absorb compliance costs.FrontierAfricaPreferential access such as the India–Mauritius CECPA, shorter shipping distances, and lower competitive intensity can support healthier margins despite smaller individual volumes.08 Direct & Indirect Cost ConsiderationsTariff savings alone do not determine market attractiveness. Transit time, port clearance, documentation, and payment terms decisively alter profitability — indirect costs behave like "hidden revenue" once reduced.Oman / UAE 3–5 daysUnited States 30–40 daysA saving of even 2–3% in financing and logistics costs can offset moderate price discounts, lowering the break‑even point and improving resilience. Destination choice, in other words, must be evaluated on total cost economics, not tariff rates alone.09 Managerial ImplicationsTopline margins alone do not determine the best export destination. Finance managers must broaden their lens to incorporate indirect costs, tariff preferences, and market‑growth trajectories.Perhaps the most significant shift is not in numbers but in roles. Under stable trade regimes, accountants function as custodians of compliance. In a tariff‑laden world, their analyses shape strategy itself. On the evolving role of the finance function10 ConclusionTariffs in the U.S. remind us that international trade is as much about strategy as it is about price. Cost segregation, contribution margin, and break‑even analysis are indispensable to navigating uncertainty — technical tools that, in practice, transform ambiguity into actionable focus.The numbers suggest that while the U.S. remains significant, alternative destinations covered by CEPAs and FTAs can deliver equal or greater long‑term value once indirect costs are considered. Market selection becomes a strategic accounting decision guided by contribution margin, break‑even feasibility, and total cost economics — not a function of legacy export volumes alone.The role of the CEO, therefore, extends beyond markets. Strategic accounting serves as advisor: guiding firms on where to compete, how to price, and when to pivot.Author may be reached at nikhilmzaveri@gmail.com and eboard@icai.inReferencesASEAN Secretariat (2021). ASEAN–India Free Trade Agreement Overview. Jakarta.Department of Foreign Affairs and Trade (DFAT), Australia (2022). Australia–India Economic Cooperation and Trade Agreement. Canberra.Directorate General of Foreign Trade (DGFT), Government of India (2020). India–Chile Preferential Trade Agreement. New Delhi.JETRO (2020). Japan–India Comprehensive Economic Partnership Agreement. Tokyo.Korea International Trade Association (KITA) (2020). Korea–India CEPA. Seoul.Maersk (2023). Transit Times: India to Global Ports. Copenhagen.Ministry of Commerce and Industry, Government of India (2022). India–UAE CEPA. New Delhi.Ministry of External Affairs (MEA), Government of India (2021). India–Mauritius CECPA. New Delhi.Ministry of External Affairs (MEA), Government of India (2024). India–Oman CEPA. New Delhi.Ministry of Trade and Industry (MTI), Singapore (2020). India–Singapore CECA. Singapore.Office of the United States Trade Representative (USTR) (2024). Section 301 Tariff Actions. Washington DC.World Trade Organization (WTO) (2023). World Trade Report: Tariffs and Trade Measures. Geneva.The Chartered Accountant · Global Trade · April 2026 · www.icai.org
BANKING
Ep. 45 — Risk Management in Banking: Evolving Landscape and Opportunities
CA Journal
· July 2026
00:00
--:--
Risk Management in Banking: Evolving Landscape and OpportunitiesBanking risk management has transformed from traditional siloed approaches to sophisticated, technology-driven integration. Digital lending now uses AI and alternative data for instant decisions, while operational risks have expanded to include cyber threats and third-party dependencies. Market volatility has intensifi ed, and model risk management has become critical as banks deploy hundreds of AI models. Climate risk introduces unprecedented long-term scenarios. This evolution presents signifi cant opportunities for Chartered Accountants, who possess strong analytical foundations but must develop new technical skills in data science and machine learning to contribute effectively to modern integrated risk frameworks.IntroductionTh ebanking industry stands at a transformative juncture where traditional risk management approaches are being fundamentally reimagined. What once constituted risk management i.e. analyzing balance sheets, taking collateral, and maintaining compliance checklists, has evolved into a sophisticated, technology-driven discipline that requires new skills, frameworks, and perspectives. For Chartered Accountants, this evolution presents both challenges and unprecedented opportunities. Our analytical training, attention to detail, and understanding of fi nancial fundamentals provide a strong foundation for navigating this new landscape. However, success in modern risk management requires us to expand our toolkit beyond traditional approaches. Th is article examines the key transformations reshaping risk management in banking, analyzes the emerging challenges and opportunities, and provides insights for CAs looking to contribute meaningfully to this evolving field.The Foundation Shift: From Silos to IntegrationTraditional Risk Management FrameworkThe traditional approach to risk management was characterized by clear boundaries and distinct responsibilities. Credit risk resided with lending departments, operational risk focused on compliance and process failures, and market risk concerned itself primarily with trading activities. This siloed approach worked reasonably well in a simpler banking environment where risks were more predictable and contained.Risk assessment relied heavily on historical data, relationship banking, and manual processes. Credit decisions were based on financial statement analysis, collateral evaluation, and personal relationships built over years. Operational risk primarily concerned itself with rogue traders, processing errors, and physical security breaches.The Modern RealityToday's banking environment has rendered these traditional silos obsolete. A single digital lending decision now simultaneously touches credit algorithms, cybersecurity protocols, and operational processes. The interconnected nature of modern banking means that risks cascade across traditional boundaries in ways that were previously unimaginable.The Basel framework evolution illustrates this transformation perfectly. From the basic capital requirements of Basel I, we have progressed to the comprehensive risk management ecosystem of Basel III, with Basel IV introducing even more sophisticated approaches to risk measurement and management.Modern risk governance has fundamentally changed. Board risk committees now spend more time discussing cyber incidents than traditional loan defaults. Risk appetite statements include tolerance levels for artificial intelligence model drift alongside conventional credit metrics. The three lines of defense model has evolved from a compliance-focused approach to a strategic risk partnership framework.Credit Risk in the Digital AgeThe Paradigm ShiftThe transformation of credit risk assessment represents one of the most dramatic changes in banking risk management. Traditional relationship-based lending, where decisions relied on officer judgment and borrower understanding, has given way to data-driven decision-making processes.Digital lenders now make loan decisions within minutes using hundreds of data points that were previously unavailable. Mobile usage patterns, payment behavior, social media activity, and location data create an entirely different information universe for credit assessment. This shift has enabled financial inclusion and increased efficiency, but has also introduced new categories of risk.New Challenges and ComplexitiesThe validation challenges associated with modern credit risk models are immense. How does one audit algorithms that consider 500+ variables? How do you explain loan rejections based on smartphone usage patterns? These questions highlight the complexity of modern credit risk management.Artificial intelligence models that predict behavior using alternative data sources present fascinating insights — battery charging frequency and loan application timing apparently correlate with repayment probability. However, these correlations raise important questions about transparency, fairness, and long-term stability.Provisioning methodologies have become equally complex. Traditional approaches relied on historical loss rates and aging analysis. Modern digital lending deals with insufficient historical data, different borrower segments, and unconventional default patterns that challenge established provisioning frameworks.RBI’s Shift to Expected Credit Loss FrameworkRecognizing these evolving complexities, the Reserve Bank of India proposed significant changes to credit risk norms in its meeting on October 7, 2025. The RBI mooted replacing the incurred-loss-based provisioning framework with an Expected Credit Loss (ECL) based provisioning approach to further strengthen credit risk management practices and promote greater comparability across financial institutions.The draft ‘Reserve Bank of India (Scheduled Commercial Banks & All India Financial Institutions – Asset Classification, Provisioning and Income Recognition) Directions, 2025’ aims to align regulatory norms with internationally accepted regulatory and accounting standards. Key elements of this proposed framework include:Staging criteria for asset classification under the ECL approach, while retaining existing norms for non-performing asset (NPA) classificationIncome recognition aligned to the Effective Interest Rate (EIR) methodModel risk management — broad principles for implementing ECL modelsAdditionally, the draft ‘Reserve Bank of India (Scheduled Commercial Banks – Capital Charge for Credit Risk – Standardised Approach) Directions, 2025’ seeks to implement key elements of global reforms by the Basel Committee on Banking Supervision, tailored to the Indian context. Major revisions include nuanced and granular risk weight treatment for exposures to corporates, MSMEs and real estate, and inclusion of ‘transactors’ under the regulatory retail category — credit cards with timely repayments during the previous 12 months.These proposed guidelines are expected to enhance credit risk management practices and promote better comparability of reported financials across institutions, while increasing the robustness, granularity, and risk sensitivity of capital charge calculations.The Speed ChallengePerhaps the most concerning aspect of modern credit risk management is the acceleration of decision-making processes. Fintech companies originate loans faster than risk management practices can adapt. Feedback loops that previously provided learning opportunities over months have compressed to weeks, creating potential blind spots in risk assessment.Operational Risk: Beyond Traditional BoundariesThe Expanding ScopeOperational risk has evolved from a relatively predictable category focused on people, processes, systems, and external events to become potentially the most catastrophic risk category in modern banking. This transformation reflects the increasing complexity and interconnectedness of banking operations.Single API failures can bring down payment systems across multiple banks. Misconfigured cloud settings can expose millions of customer records. A single incorrect email click can trigger ransomware that shuts down operations for days. These scenarios were unimaginable in traditional operational risk frameworks.Risk · Capital · ExposureOperational risk now spans cyber threats, vendor dependencies, and cloud infrastructure — not just people and process failure.Digital Transformation ImpactEvery aspect of digital transformation has introduced new operational risks. Each fintech partnership creates third-party risk exposure. Every automation introduces potential failure points. Each AI deployment brings algorithmic risks that were absent from traditional risk frameworks.The interconnected nature of modern banking has created concentration risks that are difficult to quantify and manage. Vendor failures affect multiple banks simultaneously. Cloud provider issues can impact significant portions of the industry. The pursuit of operational efficiency has inadvertently increased systemic risk exposure.Cybersecurity and Third-Party Risk ManagementDigitalization has dramatically increased the attack surface for banks. The dependency on cloud providers, technology vendors, and partners means that weak links in any part of the ecosystem can lead to systemic risk. A cybersecurity breach at a third-party vendor can compromise multiple financial institutions simultaneously, making vendor risk management one of the most critical aspects of modern operational risk.Third-party risk management has emerged as a distinct discipline within operational risk. Banks now maintain vendor registers with hundreds of suppliers, each requiring risk profiling, interdependency analysis, and failure scenario planning. Due diligence for new vendors sometimes exceeds the scrutiny applied to major loan approvals.Business continuity planning has evolved from addressing localized disruptions to managing simultaneous failures across multiple critical systems and vendors. Scenario planning exercises that once seemed like science fiction are now based on real-world events and regulatory expectations.Market Risk and Liquidity ManagementFundamental Changes in Market DynamicsWhile the fundamentals of market risk — interest rate sensitivity, currency fluctuations, and price volatility — remain unchanged, the speed and magnitude of market movements have transformed dramatically. Markets can swing 50 basis points in a single day based on social media posts or algorithm-driven trading.Traditional asset-liability management models, built for stable environments, struggle with modern market volatility. The assumptions underlying these models — stable deposit bases, predictable interest rate cycles, and gradual market adjustments — no longer reflect reality.The Liquidity RevolutionDigital banking has fundamentally altered deposit behavior and liquidity management. Customers can move money between banks in seconds rather than days. Social media can trigger bank runs faster than regulators can respond. These changes have forced banks to reconsider their entire approach to liquidity management.The COVID-19 pandemic demonstrated that funding markets can disappear overnight, and supposedly “risk-free” government securities can become sources of significant losses. Traditional assumptions about stable deposits no longer apply when customers can chase yields with simple phone taps.Treasury functions have responded by maintaining liquidity buffers that would have seemed excessive five years ago. While the cost is significant, being caught short during stress periods can be fatal for financial institutions.Model Risk Management: The Invisible ChallengeThe Proliferation of ModelsModel risk has quietly become one of the most critical areas in risk management, yet it remains the least understood by senior management. Banks have evolved from using models for basic credit scoring to deploying them for virtually every business decision — loan approvals, pricing, provisioning, regulatory capital calculation, fraud detection, customer segmentation, and even branch location decisions.The complexity is staggering. Mid-sized banks now operate with over 200 models in production, each with data dependencies, performance metrics, validation requirements, and potential failure modes. The challenge of maintaining comprehensive understanding across all these models is significant.Model Risk and Explainability ChallengesUsing machine learning and AI improves prediction power, but with complex models comes increased risk of errors, bias, and non-transparent decisions. Regulatory scrutiny has intensified as regulators demand explanations for automated decisions that affect customers’ financial lives. Model mis-specification or insufficient oversight can lead to substantial losses.Traditional statistical models were interpretable — decisions could be explained and validated. Modern AI models often function as black boxes, performing effectively but making explanation to regulators or audit committees nearly impossible. This explainability challenge has become a critical concern for risk managers and boards alike.Model validation has evolved from checking mathematical accuracy to ensuring fairness, detecting bias, monitoring performance drift, and validating training data quality. The question is no longer just “is the model right?” but “is it right for the right reasons?”Concept Drift and Model DegradationOne of the most challenging aspects of model risk management is concept drift — when the underlying relationships that models were designed to capture change over time. Models trained on pre-COVID data performed poorly during the pandemic as economic relationships shifted and customer behaviors changed overnight.This highlights the importance of continuous monitoring and the need for robust governance frameworks that can detect when models are no longer fit for purpose, even when they appear to be performing as designed.Data Quality, Privacy, and GovernanceAdvanced analytics and AI-driven risk management depend fundamentally on high-quality data. However, this dependency introduces multiple risk dimensions that banks must actively manage.Data quality issues can compromise the entire risk management framework. Incomplete data, inconsistent formats across systems, outdated information, and errors in data entry can all lead to flawed risk assessments and poor decisions. The old adage “garbage in, garbage out” has never been more relevant.Privacy concerns have escalated with stringent data protection regimes like GDPR and local laws imposing severe penalties for breaches. Banks must balance the need for comprehensive data for risk assessment with customers’ rights to privacy and data protection. This balancing act becomes particularly complex when using alternative data sources for credit decisions.Third-party and vendor data sources introduce additional risks. When banks rely on external data providers, they must ensure data accuracy, currency, and compliance with regulatory requirements. The dependency on these external sources creates vulnerabilities that must be carefully managed through robust data governance frameworks.Effective data governance requires clear policies on data collection, storage, usage, and disposal. It demands investment in data quality management systems, regular audits, and training for personnel handling sensitive information. The cost of poor data governance — in regulatory penalties, reputational damage, and flawed decision-making — far exceeds the investment required for robust frameworks.Integrated Risk Management: The New ImperativeThe Breakdown of Traditional SilosModern risks do not respect organizational boundaries. Cyber-attacks simultaneously affect operational continuity, credit portfolios, market positions, and liquidity management. These interconnected risks cannot be managed effectively in isolation.Risk appetite frameworks have evolved from separate limits for each risk type to integrated frameworks that consider how risks amplify each other. Banks must now answer questions like: What is your appetite for operational risk during credit stress? How do you manage market risk while responding to cyber incidents?Stress Testing and Scenario AnalysisStress testing has become the closest approximation to integrated risk assessment. Instead of testing each risk category separately, banks now run scenarios that stress multiple risk types simultaneously. These exercises force institutions to consider what happens when interest rates rise while cyber incidents increase and credit losses spike — reflecting the reality that multiple stress factors often occur together.Organizational and Cultural ImplicationsThe move toward integrated risk management has significant organizational implications. Risk functions increasingly resemble technology companies rather than traditional banking departments, with data scientists working alongside credit officers and cybersecurity experts integrated into every risk discussion.Risk culture becomes critical when risks interact unpredictably. Organizations need people who think about second and third-order effects rather than just immediate responsibilities within their functional areas. This cultural shift requires bringing risk management into strategic decisions rather than treating it merely as a compliance or after-the-fact function.Incentive alignment is crucial — performance metrics and compensation structures must reward risk-aware behavior and penalize excessive risk-taking. When business units are incentivized solely on growth or revenue, risk considerations often take a backseat until problems emerge.Future Directions and Emerging ChallengesClimate Risk and ESG ConsiderationsClimate risk is forcing the industry to model scenarios without historical precedent. Traditional risk models assume the future resembles the past, but climate change breaks this fundamental assumption. Banks must now stress test for sea level rise affecting real estate portfolios over 30-year horizons and extreme weather events that could disrupt operations and credit performance.Broader environmental, social, and governance (ESG) risks are gaining prominence in risk management frameworks. These non-financial risks are harder to quantify and often manifest slowly, but may lead to large losses or erosion of stakeholder trust. Reputational risk from poor ESG practices can materialize suddenly and devastatingly in today’s socially connected world.Regulatory Evolution and Compliance BurdenAs regulatory rules evolve, banks need capability to respond quickly. Regulatory fragmentation, with different jurisdictions imposing different rules, creates complexity and compliance burden. The potential penalties for non-compliance have increased substantially, making regulatory risk management a critical priority.RegTech (Regulatory Technology) is evolving beyond compliance automation to predictive risk identification. Instead of detecting problems after they occur, banks are building systems that identify emerging risks before they materialize through real-time transaction monitoring, behavioral anomaly detection, and network analysis of systemic risks.Dynamic Risk ManagementRisk governance is becoming more dynamic, with static annual risk appetite statements being replaced by adaptive frameworks that adjust to changing conditions. Risk limits now flex based on market volatility, stress conditions, and emerging threat landscapes.This dynamism requires sophisticated monitoring systems, rapid decision-making processes, and governance structures that can respond quickly without compromising oversight effectiveness.Cost Versus Return Trade-offsUpgrading systems, training people, implementing robust controls, and building comprehensive risk management frameworks all require substantial investment. Banks must balance risk mitigation against profitability and competitive pressures.The challenge lies in quantifying the return on risk management investments. While the cost of controls is immediate and measurable, the benefit — avoiding losses that might never materialize — is difficult to demonstrate. This asymmetry can lead to underinvestment in risk management until a crisis forces reactive spending.Opportunities for Chartered AccountantsThe Professional AdvantageCAs possess several advantages in the evolving risk management landscape. Our analytical training, attention to detail, and understanding of financial fundamentals provide a strong foundation for risk management roles. The ability to analyze complex financial information, understand regulatory requirements, and communicate effectively with stakeholders remains highly valuable.The professional skepticism and ethical grounding that define CA training are particularly relevant in an environment where AI-driven decisions must be questioned and validated. Our experience with auditing and assurance translates well to model validation and risk assessment frameworks.Skill Development RequirementsSuccess in modern risk management requires expanding beyond traditional CA skillsets. Tomorrow’s risk professionals need technical skills including:Data Science Fundamentals — statistical analysis, data visualization, and basic programming (Python, R, SQL)Machine Learning Concepts — how algorithms work, their limitations, and validation approachesCybersecurity Awareness — basic understanding of cyber risks, controls, and incident responseSystems Thinking — understanding interconnections and anticipating cascading effectsBehavioral Psychology — insight into how people make decisions under uncertaintyScenario Planning — developing and analyzing complex stress scenariosThese technical skills must be complemented by judgment that comes from experience with real risk events and exposure to diverse risk situations.Addressing Skill GapsBanks face significant skill gaps in data science, cybersecurity, and scenario planning. CAs who invest in developing these capabilities position themselves to fill critical needs in the industry. Professional development programs, certifications in data analytics, and exposure to technology projects can help bridge these gaps.The democratization of risk awareness means that risk management is no longer confined to risk departments. Business line managers are becoming sophisticated risk thinkers, creating opportunities for CAs to contribute across various functions while maintaining their risk management focus.Career PathwaysThe expanding scope of risk management creates diverse career pathways:Model Risk Management Third-Party Risk Climate & ESG Risk RegTech Integrated Risk Management Risk AnalyticsModel Risk Management involves validating AI/ML models, ensuring explainability, and monitoring performance. Third-Party Risk covers managing vendor relationships, conducting due diligence, and monitoring dependencies. Climate and ESG Risk means developing frameworks for assessing long-term environmental and social risks. RegTech is about building or implementing technology solutions for regulatory compliance. Integrated Risk Management coordinates across risk types and develops stress testing scenarios, while Risk Analytics leverages data science for risk identification and measurement.Value Creation OpportunitiesCAs can create significant value by bridging the gap between traditional financial analysis and modern risk management techniques. The ability to translate complex risk concepts into business language that boards and senior management can understand remains in high demand.Specific areas where CAs can add value include:Provisioning and Capital Adequacy — helping implement ECL frameworks and enhanced capital charge calculations under the new RBI guidelinesRisk Reporting — designing dashboards and reports that provide actionable insights rather than just data dumpsGovernance Frameworks — developing policies and procedures that balance control with business agilityRisk Culture — promoting risk awareness and responsible decision-making across organizationsBusiness Partnering — working with business units to embed risk considerations in strategic planningConclusionThe evolution of risk management in banking represents both a challenge and an opportunity for the profession. While the complexity has increased dramatically, the fundamental need for analytical rigor, professional judgment, and ethical decision-making remains unchanged.For CAs, this evolution requires continuous learning and adaptation. The technical skills, regulatory knowledge, and business acumen that define our profession provide an excellent foundation, but success requires embracing new technologies, frameworks, and ways of thinking about risk.The future belongs to risk professionals who can combine analytical rigor with intuitive understanding of what could go wrong. As the banking industry continues to evolve, CAs who invest in developing these capabilities will find themselves well-positioned to contribute meaningfully to this critical function.The transformation of risk management is not complete: we are still in the early stages of this evolution. The frameworks, technologies, and approaches being developed today will help banks navigate uncertainties we cannot yet imagine. For CAs willing to embrace this challenge, the opportunities are immense.The key emerging challenges — model risk and explainability, data quality and governance, cybersecurity and third-party threats, regulatory compliance burden, cultural and organizational issues, cost-return trade-offs, and the growing prominence of non-financial risks — each represent areas where skilled professionals can make substantial contributions.Risk management in banking has evolved from a compliance function to a strategic capability. Those who understand this transformation and develop the skills to contribute effectively will find themselves at the forefront of one of the most important and dynamic areas in modern banking. The journey requires commitment to continuous learning, willingness to step outside traditional comfort zones, and courage to embrace the uncertainty that defines modern risk management itself.SGCA. Saurabh GuptaMember of the Institute · Reach the author at saurabh14776@gmail.com and eboard@icai.inIn this articleThe Foundation ShiftCredit Risk in the Digital AgeOperational RiskMarket Risk & LiquidityModel Risk ManagementIntegrated Risk ManagementFuture DirectionsOpportunities for CAsKey Data PointsBasel I → III → IV: capital rules evolving toward integrated risk ecosystems200+ models in production at mid-sized banksMarkets can swing 50 bps in a single dayRBI’s ECL provisioning proposal — Oct 7, 2025Six Skills for Tomorrow’s Risk CAData Science FundamentalsMachine Learning ConceptsCybersecurity AwarenessSystems ThinkingBehavioral PsychologyScenario PlanningThe Chartered Accountant · April 2026 · Page 90–95 · www.icai.org
SPECIAL-WRITE-UP
Ep. 50 — The Role of Chartered Accountants in Strengthening India’s Insolvency Ecosystem
CA Journal
· July 2026
00:00
--:--
The Role of Chartered Accountants in Strengthening India’s Insolvency EcosystemA Decade of IBC: Transforming India’s Credit EcosystemThe enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) marked a turning point in India’s economic and financial governance framework. Widely regarded as one of the most significant structural reforms of recent times, the Code sought to replace a fragmented and inefficient insolvency regime with a unified, modern, and market-oriented framework for resolving financial distress. Before the advent of the IBC, insolvency proceedings were often characterised by protracted litigation, multiplicity of forums, and substantial destruction of enterprise value. Businesses languished for years in various recovery and restructuring mechanisms, resulting in deterioration of assets, loss of employment, diminished investor confidence, and low recoveries for creditors. Frequently, by the time proceedings concluded, the underlying enterprise had ceased to exist as a viable going concern.Against this backdrop, the IBC introduced a comprehensive and time-bound mechanism aimed at facilitating resolution of distressed businesses while preserving economic value. By placing creditors at the centre of the decision-making process and prioritising resolution over liquidation, the Code brought about a fundamental shift in the treatment of financial distress in India. More importantly, it established a framework that promotes accountability, commercial discipline, and efficient allocation of capital, thereby strengthening the foundations of the country’s credit ecosystem.Over the past decade, the IBC has evolved beyond a statutory framework into a key institution of economic governance. Its influence extends far beyond insolvency proceedings, shaping borrower behaviour, lending practices, investment decisions, and corporate governance standards. The Code has contributed significantly to enhancing confidence in India’s financial architecture by providing a credible mechanism for addressing business failure and financial stress. Simultaneously, judicial pronouncements and regulatory refinements have helped develop a mature and evolving insolvency ecosystem capable of responding to changing economic realities and stakeholder expectations.The achievements of the Code are reflected in its outcomes. As on March 2026, resolution plans had been approved in 1,419 cases, resulting in realisations exceeding ₹4 lakh crore for creditors. Significantly, these recoveries amounted to approximately 95 per cent of the fair value and 167 per cent of the liquidation value of the resolved entities, demonstrating the effectiveness of resolution as a value-preserving mechanism. Since inception till March 2026, 8,987 cases were admitted under the Code, of which 7,102 had reached closure. Of these concluded cases, 4,099 companies, representing nearly 58 per cent of closures, were rescued through resolution, settlement, withdrawal, appeal, or review processes, while 3,003 proceeded to liquidation. Notably, around 42% of the cases that ended with resolution plans had previously been with the Board for Industrial and Financial Reconstruction or were defunct, underscoring the Code’s role in facilitating the revival of financially distressed enterprises.One of the most transformative effects of the IBC has been its impact on credit culture. The Code has altered the dynamics between borrowers and creditors by creating a credible consequence for persistent default. Faced with the possibility of losing management control upon admission into insolvency proceedings, many debtors have chosen to resolve financial stress at an early stage. This behavioural change is evident from the fact that more than 30,000 matters involving nearly ₹14 lakh crore were settled prior to admission under IBC. These settlements illustrate the significant deterrent value of the Code and underscore its role as an instrument for promoting consensual resolution outside formal insolvency proceedings.The broader impact of this behavioural shift is visible in the banking sector. The improvement in asset quality witnessed over the past decade cannot be viewed in isolation from the insolvency reforms introduced through the IBC. The gross non-performing asset ratio of the banking system, which stood at nearly 11.8 per cent in 2017, declined to approximately 2.1 per cent by September 2025. While several factors contributed to this improvement, the discipline induced by the insolvency framework and the increased willingness of borrowers to engage with creditors played an important role in strengthening the overall credit environment.More than 50% of the Insolvency Professionals registered with IBBI are Chartered Accountants, reflecting their significant presence in the profession. Insolvency Professionals constitute the backbone of the insolvency ecosystem.India’s insolvency framework has also earned increasing recognition at the international level. Reflecting improvements in recovery mechanisms and resolution efficiency, S&P Global Ratings upgraded India’s insolvency regime from Group C to Group B. This recognition is indicative of the progress made in creating a more effective and predictable resolution framework. Recovery rates have improved considerably when compared with the pre-IBC era. While creditors historically recovered only around 15–20 per cent of their claims through traditional mechanisms, average recoveries under the IBC have increased to nearly 30 per cent. Equally important, the time required for resolution has reduced substantially from an average of six to eight years under earlier frameworks to approximately two years under the Code.The effectiveness of the IBC is further reflected in the Reserve Bank of India’s Report on Trends and Progress of Banking in India 2024–25. The report identifies the Code as the most successful recovery channel for stressed assets among the various mechanisms available to banks. Of the total recoveries of 1.04 lakh crore made by Scheduled Commercial Banks during the year, approximately 0.54 lakh crore, accounting for more than half of the total recoveries, was realised through the IBC process. The report also notes an increase in recovery rates under the Code from 28.3 per cent in the previous year to 36.6 per cent in 2024–25, reaffirming its growing effectiveness in addressing stressed assets and improving balance sheet health within the banking sector.The impact of the IBC extends beyond recovery statistics and financial outcomes. Studies examining its behavioural effects point towards a significant improvement in repayment discipline among borrowers. Research conducted by the Indian Institute of Management, Bangalore observed a steady increase in the proportion of loan accounts transitioning from overdue status to normal classification following the introduction of the Code. This behavioural shift was also reflected in a sharp reduction in the average number of days an account remained overdue, which declined from 248–344 days to just 30–87 days.Evidence of the Code’s success is also visible in the post-resolution performance of rescued businesses. A study undertaken by the Indian Institute of Management, Ahmedabad in 2025 examined the long-term outcomes of companies resolved under the IBC and reported substantial improvements across key business indicators. During the five years following resolution, average sales increased by nearly 89 per cent, while asset turnover ratios improved by approximately 131 per cent, reflecting enhanced operational efficiency and business recovery. The average capital expenditure rose by approximately 106 per cent in five years after, reflecting renewed investment and economic viability. The study further noted a remarkable increase in the aggregate market valuation of resolved listed entities, which rose from nearly ₹2.8 lakh crore to about ₹9 lakh crore over five years, signalling strengthened investor confidence and improved long-term growth prospects following successful resolution.Role of Chartered Accountants under IBCThe success of the IBC, however, cannot be attributed solely to legislative design. It is equally a product of the professionals who operationalise the framework and translate statutory objectives into practical outcomes. Among these professionals, Chartered Accountants occupy a uniquely significant position. Indeed, the insolvency ecosystem is deeply dependent upon accounting expertise, financial analysis, valuation, auditing, forensic examination, restructuring advisory and regulatory compliance—areas that lie at the very core of the Chartered Accountancy profession.(i) Chartered Accountants qualified to register as IPsThe contribution of Chartered Accountants to the insolvency framework begins at the very foundation of the process. Recognising the specialised financial expertise required to administer insolvency proceedings, the IBC permits Chartered Accountants possessing the prescribed experience and qualifications to register as Insolvency Professionals. More than 50 per cent of the Insolvency Professionals registered with IBBI are Chartered Accountants, reflecting their significant presence in the profession. Insolvency Professionals constitute the backbone of the insolvency ecosystem. The effectiveness of the Code is, to a considerable extent, dependent upon their competence, independence and professional judgement. Once appointed as an Interim Resolution Professional or Resolution Professional, the Insolvency Professional assumes control of the affairs of the corporate debtor, manages its operations as a going concern, preserves and protects its assets, constitutes the Committee of Creditors and facilitates the entire resolution process. Each of these responsibilities requires an exceptional understanding of financial statements, business operations, stakeholder interests and commercial realities which are competencies that Chartered Accountants are uniquely equipped to provide.(ii) Maintaining Books of AccountsThe role of Chartered Accountants becomes particularly critical during the initial stages of insolvency proceedings. One of the first challenges confronting an Insolvency Professional is obtaining a clear and reliable picture of the financial affairs of the corporate debtor. In this endeavour, statutory auditors and accounting professionals often provide the essential starting point. The Code empowers the Insolvency Professional to access books of account, financial records and audit documents maintained by auditors and accountants of the corporate debtor. These records form the basis upon which the financial position of the distressed enterprise is reconstructed and assessed. Without accurate accounting information, the insolvency process itself would struggle to achieve transparency and credibility.The importance of accounting expertise extends further into the management of the corporate debtor during the Corporate Insolvency Resolution Process. In many cases, the financial records of distressed companies are incomplete, outdated or inadequately maintained. Chartered Accountants are engaged to assist Insolvency Professionals in reconstructing books of account, ensuring compliance with statutory obligations and maintaining accounting records throughout the resolution process. Their involvement enables continuity in financial reporting and facilitates informed decision-making by stakeholders.Chartered Accountants are engaged to assist Insolvency Professionals in reconstructing books of account, ensuring compliance with statutory obligations and maintaining accounting records throughout the resolution process. Their involvement enables continuity in financial reporting and facilitates informed decision-making by stakeholders.(iii) Verification of ClaimsOne of the most consequential responsibilities during insolvency proceedings is the verification and collation of claims. The composition of the Committee of Creditors, the determination of voting shares and the ultimate distribution of proceeds are all dependent upon the accurate admission of claims. This exercise often involves reconciliation of complex financial records, examination of supporting documentation and assessment of claims. Chartered Accountants, by virtue of their training in accounting, auditing and financial reconciliation, play a pivotal role in ensuring that claims are verified accurately and fairly.(iv) Audits during CIRPBeyond claim verification, Chartered Accountants contribute significantly to financial transparency and governance during the insolvency process. Recent amendments to the insolvency framework permit the Committee of Creditors to direct audits of the Corporate Debtor, where considered necessary. Given their expertise in auditing and assurance services, Chartered Accountants are naturally positioned to undertake such assignments. Their findings often provide critical insights that assist creditors in making informed decisions during the process.(v) Identification of Avoidance TransactionsPerhaps one of the most specialised contributions of Chartered Accountants within the insolvency ecosystem relates to the identification of avoidance transactions. The Code contains elaborate provisions empowering Resolution Professionals to examine whether the corporate debtor has entered into preferential, undervalued, extortionate or fraudulent transactions during the relevant look-back period. The identification of such transactions requires far more than a superficial review of records. It demands examination of financial statements, tracing of fund flows, analysis of related-party transactions and assessment of commercial rationale. Chartered Accountants, particularly those possessing forensic and investigative expertise, play a central role in this exercise. Their work not only facilitates recovery of value for creditors but also reinforces accountability and deters misconduct by errant managements.(vi) Evaluation of Resolution PlansThe contribution of Chartered Accountants becomes even more visible when the process enters the stage of evaluating resolution plans. The objective of the IBC is not merely to recover dues but to preserve viable businesses and maximise enterprise value. Resolution plans frequently involve complex restructuring proposals encompassing debt restructuring, mergers, demergers, asset transfers, operational turnaround strategies and fresh investments. The preparation and evaluation of such plans require rigorous financial modelling and commercial assessment. Chartered Accountants provide critical support in analysing business viability, projecting future cash flows, assessing financial feasibility and evaluating implementation strategies. Their expertise enables stakeholders to distinguish between commercially sustainable proposals and those that may be unlikely to succeed in practice.(vii) Valuation of AssetsValuation constitutes another area where Chartered Accountants make substantial contributions. Accurate valuation is indispensable for informed decision-making by creditors. The determination of fair value and liquidation value provides the benchmark against which resolution plans are assessed. Under the regulatory framework, members of the Institute of Chartered Accountants of India possessing the prescribed qualifications and experience are eligible to register as valuers for the asset class “Securities or Financial Assets”.(viii) Contribution to Liquidation ProceedingsThe significance of Chartered Accountants is equally evident in liquidation proceedings. While the Code prioritises resolution, liquidation remains necessary where revival is not commercially feasible. Liquidation involves identification and preservation of assets, verification of stakeholder claims, realisation of value and distribution of proceeds in accordance with the statutory waterfall mechanism. Each of these activities requires meticulous accounting and financial management. Chartered Accountants assist liquidators in maintaining accounts, ensuring compliance and safeguarding stakeholder interests throughout the liquidation process.The journey of the IBC over the last decade has demonstrated that insolvency resolution is ultimately about preserving value, restoring confidence and enabling economic renewal.Concluding RemarksThe broader success of the IBC has highlighted an important truth: insolvency resolution is not solely a legal process; it is fundamentally an exercise in financial and commercial decision-making. Law establishes the framework, but the effectiveness of the framework depends on professionals capable of interpreting financial realities, preserving value and building stakeholder confidence. Chartered Accountants bring precisely these capabilities to the insolvency ecosystem. Their professional training emphasises objectivity, analytical rigour, ethical conduct and public interest i.e., qualities that are indispensable in situations involving competing stakeholder interests and significant economic consequences.As India advances towards the vision of Viksit Bharat 2047, the importance of an efficient insolvency regime will continue to grow. Economic expansion, increasing credit penetration, globalisation of business operations and the emergence of complex financial structures will inevitably create new challenges in the management of financial distress. Addressing these challenges will require professionals who possess not only technical expertise but also strategic insight and commercial judgement. Chartered Accountants are exceptionally well positioned to meet this requirement.The journey of the IBC over the last decade has demonstrated that insolvency resolution is ultimately about preserving value, restoring confidence and enabling economic renewal. Chartered Accountants have been active participants in this journey from its inception. Whether as Insolvency Professionals, auditors, valuers, forensic experts, advisors or restructuring specialists, they have contributed significantly to the development of a robust and credible insolvency ecosystem. Their role extends beyond compliance and process management; they serve as custodians of transparency, accountability and value maximisation. As the insolvency framework continues to evolve, Chartered Accountants will remain central to its success, helping transform financial distress into opportunities for revival and ensuring that the objectives of the Code are translated into meaningful economic outcomes.Author may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 51 — Enhancing Professional Competence in Emerging and Developing Economies: A Blueprint for South Asia
CA Journal
· July 2026
00:00
--:--
Enhancing Professional Competence in Emerging and Developing Economies: A Blueprint for South AsiaThe ICAI journey mirrors India’s remarkable ascent as a global economic powerhouse. This milestone offers an opportune moment to reflect on the broader mandate facing the profession across emerging and developing economies (EDEs). IntroductionThe South Asian Federation of Accountants (SAFA) extends its warmest congratulations to the Institute of Chartered Accountants of India (ICAI) on the 78th Chartered Accountants day and on the historic milestone of the 75th edition of ‘The Chartered Accountant’ journal. The journal is the flagship publication that has served as an intellectual anchor, a voice of the leaders capturing the evolution of accountancy from a discipline of compliance to a cornerstone of global economic strategy from over seven decades.The ICAI journey mirrors India’s remarkable ascent as a global economic powerhouse. This milestone offers an opportune moment to reflect on the broader mandate facing the profession across emerging and developing economies (EDEs). The global economic narrative is increasingly written in the vibrant, high-growth corridors of EDEs, particularly within South Asia. Yet, for these regions to sustain their upward trajectories, the financial ecosystems supporting them must be built on a bedrock of absolute trust, transparency, and sophisticated financial architecture.The profession which builds on the foundation of Trust is that of Chartered Accountant, hence their role and responsibility evolve with time. In an era defined by rapid technological disruption, macroeconomic volatility, and evolving global regulatory landscapes, the prospects of the accounting profession have never been more dynamic or demanding. For EDEs, enhancing professional competence is not merely an institutional goal; it is a macroeconomic imperative.The Shifting Paradigm of Competence and the Prospect of the ProfessionThe prospect of the accounting profession is undergoing a profound structural evolution. We are moving rapidly away from the historic perception of the accountant as a rear-view chronicler of historical financial data. The modern Chartered Accountant is emerging as a forward-looking strategic architect, a data navigator, and a custodian of multi-dimensional corporate value. In EDEs, where markets are rapidly formalizing and expanding, the demand for sophisticated financial governance means that the profession’s strategic relevance will only intensify.We are witnessing a structural migration in global accounting standards. The rigorous application of complex frameworks such as IFRS 9 (Financial Instruments) and IAS 32 demands a deep conceptual understanding of financial engineering, credit risk modeling, and forward-looking measurement methodologies, moving decisively away from historical cost conventions. Professional Accountancy Organizations (PAOs) in EDEs must cultivate an educational ecosystem where practitioners do not just memorize standard text, but master the underlying economic realities these standards seek to represent.Directional Brief on Emerging Areas: Multidisciplinary SustainabilityAs the profession looks to the horizon, the traditional boundaries of accounting are expanding into highly specialized, non-traditional domains. The most critical emerging area is sustainability assurance and management, which demands a radical departure from siloed accounting practices.The modern accountant cannot operate in isolation. Tomorrow’s competency model relies heavily on the ability to lead and work within multidisciplinary teams. When evaluating environmental impacts, carbon footprints, or climate resilience, Chartered Accountants must collaborate seamlessly with environmental scientists, engineers, data analysts, and legal experts.Thinking Sustainability Beyond the Climate LensTo truly enhance competence in EDEs, we must expand our understanding of sustainability beyond environmental and climatic issues. While carbon reduction is vital, true sustainability in developing nations encompasses the entire spectrum of Social, Governance, and Resource Optimization metrics.The professional accountant’s competency matrix must now integrate frameworks like IFRS S1 and IFRS S2, but apply them to a broader canvas:Social & Gender Dimensions: Measuring and reporting on fair labor practices, gender equity in leadership, workplace safety, and the socio-economic impact of corporate operations on local communities.Resource Optimization: Developing sophisticated management accounting frameworks that measure how efficiently, economically, and effectively a company utilizes scarce natural and economic resources. By championing circular economy metrics and eliminating waste, accountants directly drive both profitability and national resource conservation.Macroeconomic Policy, Structural Impact, and Broad-Canvas Going ConcernProfessional competence can no longer be viewed strictly through the micro-lens of individual corporate balance sheets; it must be grounded in macro-economic policy realities. In developing economies, the performance of major enterprises directly influences national employment rates, income distribution, and socio-economic stability.Accountants must understand how fiscal and monetary policies cascade down to corporate health. This understanding is particularly vital when evaluating the going concern principle. In EDEs, a going concern failure has severe ramifications that ripple far beyond equity holders.Public Financial Management, Governance, and Navigating StagflationThe role of the profession in the public sector is just as critical as its role in corporate boardrooms. True regional stability requires an accounting fraternity that is deeply embedded in Public Financial Management (PFM) and fiscal governance. This mandate becomes acute during periods of macroeconomic distress such as stagflation (characterized by high inflation and low growth) and sharp currency devaluations.During such economic storms, governments face shrinking revenues and escalating costs. The profession must offer the technical expertise required to optimize fiscal management, ensure value for public money, and maintain robust governance to prevent leakages.Navigating the Technological Frontier and the Ethical ImperativeAs we expand our macroeconomic and public roles, the operational realities of our profession continue to be rewritten by Artificial Intelligence (AI) and blockchain technology. In many EDEs, technology offers an unprecedented opportunity to “leapfrog” legacy systems, streamlining audit processes and enhancing data analytics.As AI assumes routine analytical tasks, the professional’s value shifts entirely to human judgment, skepticism, and ethical oversight. We must guard against “black box” reliance, ensuring that automated financial insights comply with fundamental ethical principles of objectivity, integrity, and professional care.Bridging the “Mindset Gap”: Cultivating Leadership and OwnershipTechnical upskilling, while vital, addresses only half of the challenge. The true catalyst for enhancing professional competence lies in transforming the professional mindset i.e., moving practitioners away from a reactive, compliance-driven posture toward an active, leadership-driven mindset.This cultural evolution centers on three distinct shifts:The Courage Mindset: Accountants in emerging economies frequently operate in highly pressurized environments. True competence requires the moral courage to stand firm in the face of compromised governance, upholding the public interest above short-term institutional or political pressures.The Ownership Mindset: Practitioners must view themselves not as external observers, but as active stakeholders in the economic health of their nations, taking proactive ownership of corporate governance outcomes.A Culture of Mentorship: To institutionalize these mental models, the profession must embrace a vibrant, intergenerational culture of mentorship. Structured institutional programs are vital to pass down the unwritten tenets of leadership, resilience, and professional attitude to the next generation of young members.Building upon this foundational support, ICAI stands as the vital strategic bridge connecting global standard-setting bodies like the International Federation of Accountants (IFAC) with regional bodies like SAFA.ICAI’s Role in Connecting the Global and Regional Accounting EcosystemsThe execution of this vast competency agenda requires visionary institutional leadership. As the world’s largest professional accounting body, the Institute of Chartered Accountants of India (ICAI) bears a unique and profound responsibility. This accountability is explicitly demonstrated through its unstinting structural commitment to our region, notably by providing the permanent Secretarial office support to SAFA, which serves as the operational hub for our regional initiatives.Building upon this foundational support, ICAI stands as the vital strategic bridge connecting global standard-setting bodies like the International Federation of Accountants (IFAC) with regional bodies like SAFA.By leveraging its immense institutional capacity, ICAI plays a pivotal role in driving global best practices down into the South Asian region, while simultaneously ensuring that the unique, localized challenges of EDEs are articulated and respected on the global stage.Crucially, ICAI can champion deeper collaboration and networking amongst practitioners, CFOs, and public finance officials across borders. By creating shared platforms for dialogue, joint research, and cross-border training, ICAI can foster a unified, resilient financial ecosystem across South Asia. This collaborative network allows CFOs and practitioners to share real-world strategies for managing stagflation, implementing sustainability frameworks, and navigating digital transformations in real time, elevating the standard of the entire regional fraternity.Conclusion: The Trusted Sentinel of Global AscentAs India and its neighbouring emerging economies march confidently toward advanced economic status, the accountancy profession cannot afford to be a passive bystander, we must elevate our profession with the current needs; economic growth without transparent financial infrastructure and macroeconomic governance is inherently fragile. Hence, this is the responsibility of every professional to take the baton and contribute in making of the better world.Further, I would like to congratulate the glorious 75-edition legacy of ‘The Chartered Accountant’ journal that offers both a moment of pride and a call to action: we must recommit to nurturing a global fraternity of accountants who are not only technically peerless but also courageous guardians of the public interest. By strengthening professional standards, promoting transparency, and embracing ethical leadership, the accounting community can transform its expertise into a bulwark for sustainable, resilient growth, thereby ensuring that prosperity is durable and widely shared.Author may be reached at eboard@icai.inwww.icai.org | July 2026 The Chartered Accountant
SPECIAL-WRITE-UP
Ep. 52 — Reimagining Global Finance Through Bharat’s only International Financial Services Centre @GIFT City
CA Journal
· July 2026
00:00
--:--
Reimagining Global Finance Through Bharat’s only International Financial Services Centre @GIFT CityBharat’s incredible journey as the world’s largest and most diverse democracy over the last 78 years has been matched only by the pace of its economic growth over the last decade, powered by 1.4 billion Bharatiyas. Today, Bharat is scaling its ambition across exports, technology, infrastructure and manufacturing. Hon’ble Prime Minister’s call for Viksit Bharat @ 2047 has catalysed a series of strategic actions, including, legal, regulatory and procedural reforms, investment reforms in advanced manufacturing, infrastructure and services sector, Technology initiatives such as supporting Design in India, R&D funding through Anusandhan National Research Foundation (ANRF), Financial Inclusion programs such as ULI, UPI, etc., & Social inclusion programs such as Housing, Electricity, Telecom, Road connectivity for all, and more.For decades, the services sector has powered the Indian economy. Within this, a substantial share of the international financial services activity connected with India, such as financing for Indian companies, the leasing of an aircraft flown by an Indian air carrier, or a fund channelling global capital into Indian growth stories, was conducted from financial centres far from Indian shores. This was not for want of Indian talent; indeed, the world’s leading financial centres have long been substantially staffed by Indian professionals. The opportunity, the value addition and the ecosystem of high-quality professional services that accompany such activity were simply developing offshore. The question that animated the creation of an International Financial Services Centre on Indian soil was therefore a natural one: could such activities not be carried out from India itself, to India’s advantage and to the world’s?The GIFT International Financial Services Centre (GIFT IFSC) at Gandhinagar has been envisioned by the Hon’ble Prime Minister as a world-class hub where finance and technology converge to serve not only the nation’s aspirations but the needs of the global economy. This vision was translated into law. The Statement of Objects and Reasons accompanying the International Financial Services Centres Authority Act, 2019, set out the founding purpose:“An International Financial Services Centre enables bringing back the financial services and transactions that are currently carried out in offshore financial centres by Indian corporate entities and overseas branches and subsidiaries of financial institutions to India by offering world class business and regulatory environment. It would enable Indian corporates easier access to global financial markets.”The formation of a unified regulatory authority for IFSCs in India is the institutional expression of that statutory intent.GIFT IFSC represents a deliberate effort to re-imagine where global finance touching India is conducted, who conducts it, and on whose terms. As we mark the seventy-fifth edition of this distinguished Journal, a milestone that mirrors the maturing of the accounting profession alongside the maturing of Indian finance, it is a fitting moment to reflect on that vision and the institutional architecture being built to realise it.If substance is the foundation of the centre’s credibility, trust is its currency, and trust is built, importantly, by the accounting and auditing profession. The credibility of GIFT IFSC depends on honest financial reporting, sound audits, good governance, and entities that have real substance.From Aspiration to ArchitectureA financial centre is only as credible as the certainty it offers; capital, being the most mobile factor of production, settles where the rules for conducting business are clear and predictable. Until 2020, the banking, capital markets and insurance activity within the IFSC was regulated by the respective domestic authorities, each applying frameworks originally conceived for the domestic market. Parliament concluded that an international centre required a single, dedicated regulator. Accordingly, the International Financial Services Centres Authority was established in April 2020, vested with the powers of the four domestic financial sector regulators under fifteen Central statutes, confined to the IFSC.The merits of this unified architecture are best attested not by us, but by those who use it. A bank, a fund manager, an insurer and a fintech firm operating side by side under the purview of one regulator, navigate one coherent framework and apply through one digital window. For a global institution accustomed to negotiating with multiple agencies across jurisdictions, market participants consistently tell us that this coherence is among the centre’s most valued features. Credit for this institutional design belongs to the foresight of the Government and Parliament; our task at the Authority is to administer it well.The Financial Centre that has found Its ScaleA vision must ultimately be measured by its outcomes, and the early results are encouraging. As of March 2026, more than 1,200 registrations and authorisations, including in-principle approvals, stand granted in GIFT IFSC across banking, capital markets, fund management, insurance, leasing, fintech and other services. Assets booked through the IFSC Banking Units have grown from around USD 15 billion in 2020 to over USD 111 billion today. In FY2025-26, Trade Finance disbursements reached USD 50.67 bn. Funds domiciled in GIFT-IFSC have raised cumulative commitments approaching USD 40 billion, and over 370 aviation assets have been leased — an industry that simply did not exist on Indian soil a few years ago. Treasury centres of large multinational groups have raised USD 5 bn till date from banks and financial institutions and are optimising their global cash pools, funding global operations and carrying risk-management functions which they would once have spread across several offshore jurisdictions, and the recently operationalised Foreign Currency Settlement System now settles inter-bank foreign-currency payments within the centre in seconds, where correspondent banking once took a day or more.Audit, assurance and certification functions across the IFSC are entrusted to the profession, and our framework for book-keeping, accounting, taxation and financial-crime compliance services opens a direct avenue for Indian professionals to serve a global clientele from the IFSC itself.Behind each of these developments lies activity that would, in an earlier era, have been conducted from offshore financial centres. The significance goes beyond the numbers; it lies in the direction of travel: value that once flowed outward is being onshored, and with it the jobs, the expertise and the ecosystem of advisers, auditors and professionals that such activity sustains. Equally, the IFSC’s ambitions are not confined to serving India alone. A meaningful share of the credit extended from GIFT IFSC now flows to borrowers across many other jurisdictions, and our aspiration is to leverage India’s deep talent advantage to make the centre a strong exporter of international financial services to the region and the world. Newly notified frameworks for pension products, sustainable and transition finance, trade financing platforms serving our exporters and MSMEs continue to widen the centre’s canvas, while cooperation arrangements with peer regulators across major jurisdictions, and the operationalisation of foreign universities within the IFSC, reflect our conviction that a financial centre of lasting consequence must also be a centre of talent, technology and ideas.Fiscal Certainty and the Long HorizonInternational financial institutions commit capital over decades, and they require commensurate fiscal visibility. The Union Budget 2026 extended the tax holiday available to IFSC units from ten consecutive years out of fifteen to twenty consecutive years out of twenty-five, with income during the non-tax holiday period taxed at a competitive rate of fifteen per cent. For institutions making long-horizon investments this measure of certainty is a material consideration in capital-allocation decisions. I would only emphasise to the professional fraternity that these provisions are anchored in genuine substance: the framework expects and the Authority enforces real operations, real people and real decision-making within the IFSC. The centre’s long-term credibility rests on activity that is substantive, and professionals have a central role in upholding these standards.Trust, Substance and the Chartered AccountantIf substance is the foundation of the centre’s credibility, trust is its currency, and trust is built, importantly, by the accounting and auditing profession. The credibility of GIFT IFSC depends on honest financial reporting, sound audits, good governance, and entities that have real substance. These are exactly the areas where Indian Chartered Accountants have earned a global reputation.The role of the Chartered Accountant is an important one, one that helps in raising the trust of the ecosystem as envisioned in the Institute Motto: “य एष सुप्तेषु जागर्ति”. A centre that aspires to global standing needs professionals who hold the line on standards even when it is inconvenient to do so. It is in that quiet, daily discipline, far from headlines, that India’s reputational capital is built, and I am confident Chartered Accountants will continue to be its most dependable custodians. Audit, assurance and certification functions across the IFSC are entrusted to the profession, and our framework for book-keeping, accounting, taxation and financial-crime compliance services opens a direct avenue for Indian professionals to serve a global clientele from the IFSC itself. But I see this as something bigger than a professional opportunity alone. As the centre grows, the demands on the profession will deepen, in the assurance function, in transfer pricing, in documentation, in governance, and in the anti-money-laundering and know-your-customer vigilance. The Institute’s active engagement with GIFT IFSC, including through certification programmes and regular professional conferences, is a welcome and important move.To reimagine global finance through India’s IFSC vision is to assert a simple proposition: that the world’s engagement with India’s economy can and should increasingly be conducted from India itself. The world’s leading financial centres have long drawn deeply on Indian talent; GIFT IFSC now offers that talent the opportunity to do the same work from home, serving India and the world from Indian soil.The Road AheadThe Authority’s vision is stated plainly: to position GIFT IFSC as a leading, well-regulated global financial centre with stable, efficient and sustainable financial markets and a strong technology ecosystem in service of the vision of Viksit Bharat by 2047. A confident and globally engaged economy needs a financial centre capable of pricing risk, mobilising capital and intermediating between Indian ambition and global markets from within Indian jurisdiction. IFSCA intends to support key National Economic Missions such as Trade target of USD 2 trillion by 2030, the National Ship Building Mission, Renewable Energy targets, etc by attracting global financial institutions such as banks, fund managers, insurance entities, enabling availability of global equity, venture capital, debt and other financial services to Indian Corporates, SMEs and startups.To reimagine global finance through India’s IFSC vision is to assert a simple proposition: that the world’s engagement with India’s economy can and should increasingly be conducted from India itself. The world’s leading financial centres have long drawn deeply on Indian talent; GIFT IFSC now offers that talent the opportunity to do the same work from home, serving India and the world from Indian soil. In the spirit of the Authority’s motto, आ नो भद्राः क्रतवो यन्तु विश्वतः, let noble thoughts come to us from all directions, IFSCA, through GIFT IFSC seeks to draw the best of global finance to Indian shores.The Institute of Chartered Accountants of India and its members have been partners in every chapter of the nation’s economic journey. I warmly invite the members of ICAI to help drive financial services exports using GIFT IFSC as a platform. As GIFT IFSC takes its place among the world’s leading financial centres, I have every confidence that this partnership will remain at the very centre of the endeavour. My warm felicitations to the Institute on the landmark seventy-fifth edition of “The Chartered Accountant”.Author may be reached at eboard@icai.inwww.icai.org | July 2026 The Chartered Accountant
SPECIAL-WRITE-UP
Ep. 53 — Beyond Numbers: Leadership in an Era of AI, Sustainability and Change
CA Journal
· July 2026
00:00
--:--
Beyond Numbers: Leadership in an Era of AI, Sustainability and ChangeJhun YS, President, Confederation of Asian and Pacific Accountants (CAPA)While jurisdictions may differ in their levels of digital maturity and regulatory readiness, there is growing consensus that technological advancement increases rather than diminishes the importance of professional judgment, ethics and accountability.Across many sectors, finance professionals are playing a more active role in assessing risk, evaluating alternative scenarios and supporting strategic decision-making. This evolution reflects a broader shift in the profession, from a primary focus on reporting performance to helping organisations navigate uncertainty and build resilience.The profession of accountancy has contributed a lot to economic development by strengthening transparency, accountability and bringing confidence in financial systems. Accountants continue to play a vital role in supporting sound governance, informed decision-making and public trust across jurisdictions and markets.The evolving landscape of technological advancement, sustainability considerations and changing stakeholder expectations are reshaping organizations globally. Professional bodies and international institutions, including the International Federation of Accountants (IFAC), have increasingly emphasized the need for the profession to adapt while continuing to uphold its responsibilities.One of the most significant developments, and the most visible example, is the growing adoption of artificial intelligence and digital technologies. Across industries, organisations are adopting AI-enabled tools to process data, identify patterns and support decision-making. Understandably, discussions about the future of the profession often focus on what technology may replace. A more important question, however, is what technology cannot replace.A recently published research by the Institute of Chartered Accountants of Scotland (ICAS), “Shaping the Profession: Generative AI and professional judgement in accounting”, offers useful insights. While recognising the significant potential of AI to improve efficiency and support technical work, the study found that human judgment, ethical reasoning and professional accountability remain essential elements of professional practice. These findings suggest that as technology becomes more sophisticated, the qualities that distinguish trusted professionals become more valuable.Within the CAPA network of professional accountancy organisations across the Asia-Pacific region, similar conversations on the implications of AI for professional practice, are also taking place. While jurisdictions may differ in their levels of digital maturity and regulatory readiness, there is growing consensus that technological advancement increases rather than diminishes the importance of professional judgment, ethics and accountability.Historically, much of an accountant’s role is centered on recording, analyzing and validating information. Today, many of those processes are supported by technology. Yet, while machines can generate output, they cannot assume responsibility for the consequences of decisions. Accountability remains inherently human. At the same time, the environment in which organisations operate is becoming increasingly complex, shaped by economic volatility, geopolitical uncertainty, supply chain disruptions and rapidly changing stakeholder expectations.Across many sectors, finance professionals are playing a more active role in assessing risk, evaluating alternative scenarios and supporting strategic decision-making. This evolution reflects a broader shift in the profession, from a primary focus on reporting performance to helping organisations navigate uncertainty and build resilience.This distinction has important implications. As information processing becomes increasingly automated, judgment, scepticism, integrity and governance are becoming central to the profession’s relevance.The same principle can be seen in the growing demand for sustainability reporting and assurance. According to “The State of Play in Sustainability Assurance”, a 2025 joint-study by IFAC and AICPA & CIMA, sustainability reporting, among large global companies, has become increasingly widespread, with many organisations also seeking assurance over sustainability-related disclosures. The study reflects the growing demand for reliable, decision-useful information beyond traditional financial metrics.This development presents an important opportunity for the accounting profession. The profession’s established expertise in reporting, assurance, governance and risk management positions it well to support organisations as they respond to evolving regulatory expectations and stakeholder priorities. Increasingly, accountants are contributing not only to financial stewardship, but also to organisational resilience and sustainable business practices.Major professional services firms have also acknowledged the rising significance of trust, governance, and responsible use of technology. The recent report, which polled 700 board directors and executives in 56 countries, emphasized the need for accountability, transparency, and robust governance structures as organisations embed AI in their decision-making.Far from making professional accountants obsolete, growing automation underscores the enduring importance of the profession’s core principles. Automation can boost efficiency and analytical power, but markets and institutions still depend on trust, integrity, and accountability to operate effectively.Many contemporary organisational challenges cross conventional professional divides. Sustainability reporting demands collaboration with environmental and social experts. Digital transformation calls for input from technology and data specialists. Effective governance and risk management increasingly require continuous engagement among finance leaders, regulators, boards, and policymakers.This trend is evident across the Asia-Pacific region. Professional accountancy organisations are working closely with governments, educational institutions, regulators and industry to strengthen professional capacity and help organisations respond to emerging challenges. In this environment, collaboration is no longer simply beneficial; it has become a professional imperative.The profession must therefore continue to invest in future-ready competencies. IFAC and other professional bodies have emphasised the importance of equipping accountants with broader capabilities that extend beyond technical proficiency, including digital literacy, adaptability and critical thinking. Equally important is ensuring that the profession remains relevant and attractive to future generations, who increasingly seek purpose-driven careers, opportunities for continuous learning, and the ability to contribute to broader societal outcomes.With the international economy consistently progressing, the role of accountants continues to stretch beyond fiscal reporting. Through CAPA’s active collaboration with professional accountancy bodies, a unifying theme surfaces: the profession is greatly recognized not merely for its technical proficiency, but also for its capability to offer clarity, assurance, and perspective in an increasingly multifaceted world.The consistent economic development of India and its growing international impact create substantial professional opportunities that, in turn, result in sustainable progress, strengthened institutions and secure markets.As ICAI commemorates this significant landmark, it is important to acknowledge the responsibility that the profession of accountancy bears in shaping robust institutions and economies. Though reporting frameworks and technologies will keep evolving, the necessity for practical discernment, integrity, and committed leadership stays persistent.ReferencesGovernance of AI: A critical imperative for today’s boardshttps://www.deloitte.com/global/en/issues/trust/progress-on-ai-in-the-boardroom-but-room-to-accelerate.htmlAuthor may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 54 — The CA Profession: Trusted Partner in Economic Progress
CA Journal
· July 2026
00:00
--:--
The CA Profession: Trusted Partner in Economic ProgressIt will be exact fifty golden years since I became a CA and started my practice as a sole proprietor. Or even as a student, burning the midnight oil over thick volumes of accounts, audit, and Income Tax, and slowly and steadily increasing my practice, and finally as President of the Institute of Chartered Accountants of India, I have witnessed one constant truth: wherever India has grown, the Chartered Accountant has been present, quietly but decisively shaping that growth.We are, by nature, a profession that does not seek publicity or limelight. We work in the background, in the boardrooms, in the audit chambers, in the corridors of regulatory bodies, and yet the fingerprints of our work are visible on every significant milestone of India’s economic journey. From the liberalisation which started since 90’s to the introduction of GST, from the Foreign Exchange Management Act to the Insolvency and Bankruptcy Code, from the emergence of India’s startup ecosystem to its ambition of becoming the world’s third-largest economy, the Chartered Accountant has been a Trusted Partner at every step.The Profession Born with Independent IndiaIt is no coincidence that ICAI was established in 1949, just two years after Independence. The founding fathers of this nation understood that political freedom must be accompanied by economic sovereignty, and it demands great financial integrity. ICAI was thus not merely a professional body; it was an institution meant to take care of financial discipline and accountability to its stakeholders, investors, shareholders and, of course, the government. That was the reason why in 2005, our then President great Dr. A.P.J. Abdul Kalam, gave us the coveted salutation i.e., Partners in Nation Building. The Chartered Accountant was envisioned as the guardian of financial truth in a newly independent country, learning to stand on its own feet.Seventy-seven years later, with over 500,000 members and nearly a million students, ICAI stands as one of the largest and most respected accounting bodies in the world. But numbers alone do not capture our contribution. What captures it is the trust that businesses, governments, investors, and citizens place in the work that bears a CA’s signature. And that is what our beloved Prime Minister said in a large gathering in 2017, that the value of the signature of a CA is much more than that of a Prime Minister.Architects of Financial IntegrityAt the heart of the CA’s role is one irreplaceable quality: Integrity. In a world where financial fraud, tax evasion, and corporate misgovernance can erode investor confidence overnight, the Chartered Accountant serves as the first line of defence. Through independent audits, forensic investigations, due diligence assignments, and internal control systems, we ensure that financial statements reflect reality i.e., not aspiration, not manipulation, but the truth.This is not merely a technical function. It is a discharge of responsibility. When a CA signs an audit report, millions of stakeholders such as shareholders, lenders, employees, regulators, and pensioners rely on that signature. The entire edifice of market confidence rests, in no small measure, on the credibility of financial reporting. That is the reason that a CA is looked upon with utmost respect compared to many other professionals.Partners in Policy and GovernanceThe contribution of CAs extends well beyond the audit room. The members of our profession have played pivotal roles in designing India’s taxation architecture, drafting corporate legislation, and advising on financial sector regulation.The contribution of CAs extends well beyond the audit room. The members of our profession have played pivotal roles in designing India’s taxation architecture, drafting corporate legislation, and advising on financial sector regulation. ICAI has been an active participant in the formulation of the Goods and Services Tax framework, the Indian Accounting Standards convergence with IFRS, and the Companies Act reforms. Even the newly revamped Income Tax Act, 2025, could come up so timely because of the great, regular, sincere cooperation of CAs only. Our technical committees have submitted thousands of representations that have shaped policy in ways that benefit not just businesses but also the common citizens.At the grassroots level, CAs serve as trusted advisors to millions of small and medium enterprises that are the true engines of India’s economy. The neighbourhood CA firm that helps a textile trader in Surat file accurate returns, that advises a first-generation entrepreneur in Coimbatore on structuring her startup, that guides a cooperative society in rural Maharashtra toward financial discipline, that helps set up projects with attractive subsidy in the state of Himachal Pradesh or Sikkim and now in Jammu and Kashmir; this is where economic progress truly lives, and where our profession truly serves.India’s rapidly growing economy depends heavily on transparent financial systems and reliable reporting. Businesses, banks, investors, regulators, and government authorities rely on Chartered Accountants for accurate financial information, tax compliance, audits, advisory services, and risk management. Through these services, the profession contributes towards stronger governance, improved ease of doing business, and sustainable economic development.Over the years, the role of Chartered Accountants has expanded significantly. Apart from traditional auditing and taxation, CAs are now actively involved in startup advisory, business restructuring, valuation, mergers and acquisitions, forensic audits, insolvency processes, ESG reporting, international taxation, and strategic financial planning. Their contribution is especially important for MSMEs and startups, which rely heavily on professional financial guidance for growth and stability.The profession has also played an important role in implementing major economic reforms such as GST, faceless tax assessments, digital compliance systems, and online regulatory frameworks, and now, of course, in the area of Artificial Intelligence, Chartered Accountants have always acted as a bridge between businesses and the government by helping taxpayers understand and adapt to changing laws and digital systems.The profession has also played an important role in implementing major economic reforms such as GST, faceless tax assessments, digital compliance systems, and online regulatory frameworks, and now, of course, in the area of Artificial Intelligence, Chartered Accountants have always acted as a bridge between businesses and the government by helping taxpayers understand and adapt to changing laws and digital systems.The profession has contributed immensely towards the growth of startups and MSMEs, better tax compliance and government revenue, corporate governance and transparency, financial restructuring and strategic planning, implementation of GST, faceless assessments, and digital taxation systems, and new faceless proceedings in GST Tribunals and courts, which have helped the government save substantial time, energy, and, of course, tons of paper.Today, the CA profession is rapidly evolving in the era of Artificial Intelligence and digital transformation. Traditional accounting practices are being replaced by automation, cloud accounting, AI-based audits, and data analytics tools. Earlier, professionals spent significant time on data entry and routine compliance work. Today, AI-enabled systems can perform repetitive tasks within minutes. As a result, the role of Chartered Accountants is shifting from “data processing” to “decision-making and business advisory.” All these developments have paved the way for many more CAs who are also able to save their precious time, which in turn contributes to advising clients in various niche areas, which in turn helps the Government also in forming policies and pushing up economic growth to reach a 5 trillion economy by 2030.However, one million dollar question: while technology can automate processes, can it replace professional judgment, ethics, analytical thinking, and human decision-making? No. In no way it can match the acumen, sincerity, and integrity of a CA. Therefore, the future belongs to Chartered Accountants who combine financial expertise with technological skills.As India moves toward becoming a global economic powerhouse, Chartered Accountants will continue to play a vital role in ensuring transparency, sustainable growth, and financial discipline in the economy.The Rise of Global Capability Centres (GCCs): A New Frontier for India’s Professional EcosystemIndia is becoming a place for Global Capability Centres. This is a moment for India’s economy and the professional scene. There are already over 1,700 Global Capability Centres in India. They are doing very important work in areas like finance, technology, and risk management. India is now the centre for Global Capability Centres around the world.For Chartered Accountants, this is an opportunity. Global Capability Centres are not about doing routine tasks; they are actually centres of excellence that help companies make big decisions. The Institute of Chartered Accountants of India is in a position to provide Global Capability Centres with accountants who are very skilled and know about global reporting standards and rules.As a Past President of the Institute of Chartered Accountants of India, I think the accounting profession needs to get ready for this situation. We need to make sure our CAs have the skills and training to work in Global Capability Centres. This way, Indian CAs can stay ahead. Be trusted to handle money matters for companies around the world. Global Capability Centres are the future. We need to be a part of it. The Institute of Chartered Accountants of India and Global Capability Centres can work together to make this happen.Embrace the Future for Professional and the Country’s GrowthI am aware that the profession today stands at an inflection point. Artificial Intelligence, data analytics, blockchain, and automated compliance tools are transforming the landscape of accounting and auditing at a pace none of us fully anticipated. There are legitimate questions about which traditional functions of a CA may be automated, and which will endure.My answer, drawn from a lifetime in this profession, is this: technology can process data, but it cannot exercise judgment. It can flag anomalies, but it cannot understand context. It can generate reports, but it cannot build relationships of trust. The irreplaceable value of a Chartered Accountant has always been and will always be the combination of technical competence, ethical grounding and human judgment. These three together cannot be coded into an algorithm.What we must do, and what ICAI continues to do, is to ensure that every CA entering this profession is equipped not only with the accounting and auditing standards and simplified Income Tax Law today, but with the digital fluency and adaptive thinking required for tomorrow.A Promise to the NationAs India marches confidently toward its Viksit Bharat vision, a developed, self-reliant nation by 2047, the CA profession renews its promise to the nation. We will continue to uphold financial integrity as our sacred duty. We will continue to support the formalisation of the economy, the deepening of capital markets, and the strengthening of institutions. We will continue to be what we have always been, not merely number-crunchers, but a real Partner in Nation Building.We, the Chartered Accountants, are not here merely to record economic progress. We help create it, and that is the reason that our Hon’ble Prime Minister wants India to have Big CA Firms so that we gradually replace the label of Foreign Firms with Indian Chartered Accountants.Let us all respond not only to the call of our Hon’ble Prime Minister but also to the efforts of ICAI and its Council, which are working hard not only for knowledge and skill upgradation but also for aggregation and networking of firms, mergers, and collaboration of professionals.Ultimately, if a profession like ours – the Profession of CA, grows and strengthens, then only the Nation will grow and strengthen.Author may be reached at eboard@icai.inwww.icai.org | July 2026 The Chartered Accountant
SPECIAL-WRITE-UP
Ep. 55 — The Chartered Accountancy Profession in the Age of Artificial Intelligence, Sustainability, and Globalization
CA Journal
· July 2026
00:00
--:--
The Chartered Accountancy Profession in the Age of Artificial Intelligence, Sustainability, and GlobalizationThe Chartered Accountancy profession is experiencing one of the most significant transformations in its history. The convergence of Artificial Intelligence (AI), sustainability imperatives and globalization is fundamentally reshaping the nature of accounting, auditing, taxation and advisory services. Traditional professional functions that once relied heavily on manual processes and historical analysis are increasingly being augmented by intelligent technologies, data analytics and automated systems. Simultaneously, the rise of Environmental, Social and Governance (ESG) considerations and sustainability reporting has expanded the scope of corporate accountability beyond financial performance, creating new assurance and advisory opportunities for Chartered Accountants. Globalization has further intensified the complexity of professional practice through cross-border transactions, international financial reporting standards, global tax frameworks and increasing stakeholder expectations.For India, these developments present both challenges and unprecedented opportunities. As the country advances towards becoming a major global economic power, Chartered Accountants are already playing a pivotal role in strengthening financial transparency, supporting sustainable development and facilitating international business integration. We examine the impact of AI, sustainability and globalisation on the Chartered Accountancy profession, analyse emerging professional opportunities and highlight the competencies required for future-ready Chartered Accountants. It is being discussed that the profession’s continued relevance and leadership will depend upon its ability to combine technological proficiency, sustainability expertise, global business understanding, ethical judgment and a commitment to lifelong learning.IntroductionThe Chartered Accountancy profession has traditionally occupied a position of trust and responsibility within the economy. Chartered Accountants have long served as custodians of financial integrity, ensuring transparency, accountability and confidence in financial reporting and business decision-making. Through their roles as auditors, tax professionals, advisors and financial leaders, they have contributed significantly to economic development, corporate governance, and investor confidence.However, the profession today stands at a pivotal juncture. Three transformative forces i.e., (i) Artificial Intelligence (AI), (ii) Sustainability and (iii) Globalisation are simultaneously reshaping the business landscape and redefining professional expectations. Unlike previous waves of change, these developments are not occurring independently. Rather, they interact and reinforce one another, creating a fundamentally new environment in which Chartered Accountants must operate.Artificial Intelligence has evolved from a technological concept to a practical business tool. AI-driven applications are now capable of automating routine accounting tasks, analysing vast quantities of data, detecting anomalies, supporting audit procedures and generating predictive insights. While these developments enhance efficiency and accuracy, they also challenge traditional notions of professional value and require accountants to develop new technological competencies.At the same time, sustainability has emerged as a central concern for governments, regulators, investors, and society. Climate change, resource scarcity, social responsibility and governance failures have increased demands for corporate accountability beyond traditional financial metrics. Sustainability reporting and ESG disclosures are rapidly becoming mainstream requirements, creating significant opportunities for Chartered Accountants in assurance, reporting, risk management and strategic advisory services.Globalisation has further transformed the professional landscape. Businesses increasingly operate across jurisdictions, capital flows transcend national boundaries and investors demand comparable financial information across global markets. The convergence of accounting standards, the growth of multinational enterprises and the expansion of international taxation frameworks have expanded both the scope and complexity of professional practice.The future Chartered Accountant will not merely prepare financial statements or verify compliance. Instead, the profession is evolving toward becoming a strategic partner capable of providing assurance over financial and non-financial information, leveraging technology to enhance decision-making and supporting organisations in navigating an increasingly interconnected world.For the Indian Chartered Accountancy profession, these developments present an opportunity to redefine its role in a rapidly changing economy. The future Chartered Accountant will not merely prepare financial statements or verify compliance. Instead, the profession is evolving toward becoming a strategic partner capable of providing assurance over financial and non-financial information, leveraging technology to enhance decision-making and supporting organisations in navigating an increasingly interconnected world.The Indian Chartered Accountancy Profession: Contemporary ContextIndia possesses one of the world’s largest and most respected accountancy profession. The Institute of Chartered Accountants of India (ICAI), established under an Act of Parliament in 1949, has played a pivotal role in regulating and developing the profession while contributing significantly to the country’s economic growth and financial governance.The scope of professional services provided by Chartered Accountants has expanded considerably over the years. Beyond traditional areas such as accounting, auditing and taxation, Chartered Accountants today are actively involved in corporate finance, insolvency resolution process, forensic accounting, risk management, valuation, management consulting and strategic advisory services.India’s rapid economic growth has further increased the demand for highly skilled finance professionals. The expansion of capital markets, infrastructure development, manufacturing growth, startup ecosystems, digital commerce and foreign investment has created new opportunities for Chartered Accountants across sectors. Simultaneously, regulators, investors, and stakeholders expect higher standards of transparency, accountability and governance.Recognising these developments, ICAI has undertaken several initiatives to equip members and students with future-oriented skills. Increased emphasis on technology, data analytics, sustainability reporting, forensic auditing and international standards reflects the profession’s commitment to remaining relevant in a changing environment.Nevertheless, the pace of change requires continuous adaptation. Professional success is no longer determined solely by technical expertise in accounting and taxation. Increasingly, it depends upon a professional’s ability to integrate technology, understand sustainability challenges, interpret complex data and operate effectively within global business ecosystems.Artificial Intelligence (AI) and the Future of AccountingAI represents perhaps the most disruptive technological development affecting the accounting profession. By enabling machines to perform tasks that traditionally required human intelligence, AI is transforming how accounting and assurance services are delivered.Historically, accounting involved substantial manual effort in recording transactions, reconciling accounts, analysing financial data, and conducting audit procedures. Today, many of these activities can be automated using AI-powered tools and intelligent systems. As a result, Chartered Accountants are increasingly shifting from transactional processing to higher-value analytical and advisory functions.AI in Audit and AssuranceOne of the most significant applications of AI lies in audit and assurance services. Traditional audit methodologies often relied upon sampling techniques due to practical limitations in examining large datasets. AI-driven analytics now enable auditors to analyse entire populations of transactions, identify unusual patterns, and detect anomalies with greater precision.Continuous auditing systems powered by AI facilitate real-time monitoring of business activities, enabling earlier identification of risks and potential control failures. These capabilities enhance audit quality while providing more timely assurance to stakeholders.Importantly, AI does not eliminate the need for professional judgment. While technology can identify anomalies and patterns, human expertise remains essential in interpreting findings, assessing risks, evaluating materiality, and forming audit conclusions.AI in Taxation and ComplianceTax compliance has become increasingly complex due to evolving regulations, digital tax administration systems and extensive reporting requirements. AI offers significant advantages in managing these challenges.AI-enabled systems can automate compliance processes, monitor regulatory changes, identify tax risks and assist in tax planning. Predictive analytics can evaluate the potential impact of legislative developments, enabling organisations to respond proactively to regulatory changes.For practitioners, these capabilities reduce administrative burdens and allow greater focus on strategic tax advisory services.AI in Advisory and Decision-MakingPerhaps, the most transformative impact of AI lies in its ability to support strategic decision-making. Advanced analytics, machine learning models and predictive tools enable professionals to generate insights from vast amounts of financial and operational data.Chartered Accountants increasingly use AI to support business valuation, financial forecasting, risk assessment, performance analysis and investment evaluation. As routine processes become automated, professional value shifts toward interpretation, strategy, and business judgment.Ethical Considerations and Professional ResponsibilityThe growing adoption of AI also raises important ethical and governance considerations. Issues relating to data privacy, cyber security, algorithmic bias, transparency and accountability require careful attention.Chartered Accountants have a critical role in ensuring that AI systems are implemented responsibly and ethically. Professional principles such as integrity, objectivity, confidentiality and due care remain as important as ever. Indeed, the growing complexity of technology may increase society’s reliance on trusted professionals capable of providing ethical oversight.Sustainability, ESG and Corporate AccountabilityThe concept of corporate accountability has undergone a profound transformation over the past decade. Stakeholders increasingly recognise that financial performance alone does not provide a complete picture of organisational success. Environmental impact, social responsibility, governance quality and long-term sustainability have become critical considerations in investment and business decisions.As a result, ESG reporting and sustainability disclosures have moved from the margins of corporate reporting to the mainstream.The Rise of ESG ReportingInvestors, regulators, consumers, employees and lenders increasingly seek information about an organisation’s sustainability performance. Questions relating to carbon emissions, climate risks, workforce diversity, human rights, governance practices and resource management have become critical to corporate reporting.In India, the introduction of the Business Responsibility and Sustainability Reporting (BRSR) framework has significantly strengthened ESG disclosure requirements for listed entities. This represents a major shift from voluntary sustainability narratives toward structured and measurable reporting.Assurance Opportunities for Chartered AccountantsAs sustainability reporting becomes more sophisticated, stakeholders increasingly demand confidence in the reliability of ESG information. This has created a growing market for sustainability assurance services.The competencies traditionally associated with auditing verification, internal controls, evidence gathering, risk assessment and professional skepticism are highly relevant to ESG assurance engagements. Consequently, Chartered Accountants are uniquely positioned to provide credibility and trust in sustainability disclosures.Professional opportunities now extend beyond reporting into climate risk assessment, sustainability strategy, carbon accounting, green finance and integrated reporting.Emerging CompetenciesThe sustainability domain requires knowledge that extends beyond traditional accounting disciplines. Professionals increasingly need to understand climate science, greenhouse gas accounting, sustainability frameworks, stakeholder engagement and environmental regulations.The emergence of international sustainability standards is further expanding professional responsibilities. As global reporting frameworks evolve, Chartered Accountants will play an important role in helping organisations navigate compliance requirements while creating long-term value.Globalization and International Professional OpportunitiesGlobalization has fundamentally altered the structure of modern business. Capital, information, talent, and commerce increasingly flow across national borders, creating opportunities as well as complexity.For Chartered Accountants, globalisation has transformed accounting from a primarily domestic profession into an internationally connected discipline.International Financial ReportingThe convergence of Indian Accounting Standards (Ind AS) with International Financial Reporting Standards (IFRS) represents a significant milestone in India’s integration with global capital markets.Common reporting frameworks enhance transparency, improve comparability and facilitate cross-border investment. As businesses expand internationally, demand for professionals with expertise in both domestic and international reporting standards continues to grow.International Taxation and Transfer PricingThe globalization of business has increased the importance of international taxation, transfer pricing and cross-border regulatory compliance.Multinational enterprises face increasingly complex tax environments influenced by international agreements, anti-avoidance measures, digital taxation initiatives and evolving regulatory frameworks. Chartered Accountants with expertise in these areas are in high demand.Professional MobilityIndian Chartered Accountants increasingly contribute to global organizations through multinational corporations, consulting firms, shared service centres and Global Capability Centres (GCCs). International recognition arrangements and professional collaborations have further expanded career opportunities.Success in global environments requires more than technical competence. Communication skills, cultural awareness, adaptability and global business understanding have become equally important.The Synthesis – Navigating AI, Sustainability and Globalization SimultaneouslyThe true complexity confronting a modern Indian CA is not any one of these three trends in isolation, but it is their simultaneous operation. These forces no longer operate in isolation. They feed into and amplify one another, creating an interlocking system that is fundamentally redefining how businesses are structured, how they operate and what is expected of them by investors, regulators, employees and society at large. For professionals who are particularly in finance, accounting and governance need to understand how to navigate all three forces simultaneously and it is now defining the competency of this era.Where the Forces Meet: A Mutually Reinforcing SystemThe true complexity and opportunity lie in how these three forces intersect and reinforce each other. Globalization depends on technology. Without digital infrastructure enabling real-time communication and cross-border reporting, the modern multinational enterprise could not function at the speed markets demand. Technology makes large-scale ESG reporting achievable. Collecting sustainability data across multiple geographies, processing it into standardized formats and reporting under complex regulatory frameworks would be prohibitively slow without AI-driven analytics and automated data management. Globalization, by creating an international investment community with shared expectations, has driven the push to standardize ESG reporting globally that gives rise to frameworks like ISSB and GRI that now transcend national boundaries. The result is a self-reinforcing system where competence in one force without awareness of the others is insufficient. Effective navigation demands an integrated, systems-level understanding of how all three interact simultaneously.Impact on Business and the Evolving Role of ProfessionalsBusiness decisions are no longer based solely on financial data. Companies now evaluate performance through an integrated lens that includes digital capability, sustainability positioning and global compliance standing. Reporting obligations have multiplied accordingly, with organizations preparing financial statements, sustainability reports and regulatory disclosures that must all be internally consistent and externally credible. Chartered Accountants are uniquely positioned in this landscape. Grounded in financial reporting, governance and professional ethics, they are natural candidates to expand into international taxation, ERP implementation, AI-driven audit and ESG assurance. Their role has evolved from compliance-focused record-keeping to strategic, multidimensional contribution: spanning financial integrity, digital oversight and non-financial assurance.Challenges, Opportunities, and the Path ForwardNavigating all three forces simultaneously is not without friction. Regulatory fragmentation persists as different countries apply different accounting, tax and sustainability standards, creating compliance complexity for globally operating organisations. Data quality and consistency remain major concerns as ESG, and financial data often originate from unstructured or incompatible systems across multiple geographies.For professionals, the pace of change demands a commitment to continuous learning that is both intensive and permanent. Lifelong development has shifted from aspiration to occupational necessity. Yet the opportunities are substantial. Organizations that successfully integrate global awareness, digital capability and sustainability accountability are positioned to build investor trust, access favorable capital and attract purpose-driven talent. Professionals who embrace this convergence, cultivating breadth across disciplines and depth within them, will not simply remain relevant. They will shape the future of global business. The convergence is not a disruption to be managed. It is an invitation to lead.The profession’s competitive advantage will increasingly depend upon its ability to provide assurance, insight and strategic guidance across these interconnected domains.The profession’s competitive advantage will increasingly depend upon its ability to provide assurance, insight and strategic guidance across these interconnected domains.Recommendations for ICAI and Chartered AccountantsTo ensure continued relevance and leadership, the profession must adopt a proactive approach to transformation.ICAI should continue expanding educational initiatives in AI, data analytics, sustainability reporting, assurance, and international standards. Specialised certifications and advanced training programs can help members acquire emerging competencies.Practitioners should embrace lifelong learning and actively invest in technology-enabled service delivery models. Developing expertise in AI-assisted auditing, ESG assurance, climate finance, data analytics, and international taxation will enhance professional competitiveness.ICAI should integrate technology, sustainability, analytics, and global business concepts into accounting education. Stronger collaboration between industry and professional bodies can facilitate more effective skill development.Finally, organisations should recognise Chartered Accountants not merely as compliance professionals but as strategic partners capable of creating value through technology adoption, sustainability leadership, and global business integration.ConclusionThe Chartered Accountancy profession is entering a new phase. Artificial Intelligence, sustainability, and globalisation are changing how accountants work and what people expect from them.These changes aren’t threats; they’re chances to make the profession more valuable. AI improves analysis and changes how services are delivered. Sustainability increases responsibility and opens up new assurance work. Globalisation raises demand for professionals who can navigate cross-border, complex business situations.Tomorrow’s Chartered Accountant won’t be judged only on technical skills. They’ll need to be comfortable with technology, knowledgeable about sustainability, aware of global business, strong in ethics, and able to think strategically. Those who adopt these skills will stay relevant and help shape the future of business, governance, and sustainable growth.The profession has a history of adapting. The task now is to take the lead.Author may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 56 — Chartered Accountants in a Transforming World: Ethics, Innovation and Excellence
CA Journal
· July 2026
00:00
--:--
Chartered Accountants in a Transforming World: Ethics, Innovation and ExcellenceThe world is witnessing an era of unprecedented transformation. Rapid technological advancement, digital disruption, evolving stakeholder expectations, sustainability concerns, and changing regulatory landscapes are reshaping the way businesses operate. In such a dynamic environment, the role of Chartered Accountants (CAs) has expanded far beyond traditional accounting and auditing functions. Today, Chartered Accountants have to play the role of strategic advisors, custodians of public trust, architects of governance, and catalysts of sustainable growth.The ICAI Code of Ethics require every member to demonstrate (a) Integrity (b) Objectivity (c) Professional Competence and Due Care (d) Confidentiality and (e) Professional Behaviour. Basis this, the Excellence, Independence and Integrity are the cherished ideals for every professional.The demands of the twenty-first century require Chartered Accountants to embrace innovation while remaining firmly anchored in ethical values. The future belongs to professionals who can combine technological competence with human judgment, analytical skills with wisdom, and innovation with unwavering integrity. Important for each one of us is to learn, unlearn and re-learn.The Continuing Professional Education (CPE) is not just to complete the mandatory number of CPE hours. More than attending the CPE Seminars, the members should have a passion to obtain ‘gyan’.The Transforming Business LandscapeA few decades ago, globalization was the new ‘mantra’. Now each country wants to protect its interests first. So domestic jurisdictional interests overshadow the global ties. The year 2025 witnessed the US leveraging the tariffs to decide the foreign policies. The old traditional allies were no longer the trading friends.The recent SpaceX IPO has demonstrated how the financial markets are placing enormous value on innovation. Future potentials are more important than the current profits. In spite of reporting huge losses, the company achieved valuation approaching $1.8 trillion. The investors are placing more value on expected future earnings rather than focusing solely on current earnings.This IPO has great learnings for all of us. Is the business focusing adequately on Research and Development (R & D)? The Chartered Accountants will have to ask difficult questions. The markets may reward innovations long before its full economic benefits are visible. This will be so if the innovation can demonstrate the potential to transform an industry.The writing is also clear on the wall for all of us to read. There are people who are dreaming of building data centres in the space and there are investors who are backing them. Coupled with the continuous innovations in AI, this threatens the Indian USP1 of providing the English speaking cheap intellectual labour. The technology companies are learning this the hard way.It is not to suggest that the brick and mortar companies have no future. But one needs to be mindful of the pace of change in the global economy. It is accelerating at a very fast speed. Artificial Intelligence, Machine Learning, Blockchain, Cloud Computing, Data Analytics, and Automation are transforming business processes and decision-making frameworks. Therefore, the response time has to be faster than before and this will be an on-going activity.Thus, the role of a Chartered Accountant has to be to help the management to see the future and enable it to build a strategy to meet the challenges of the unknown.Organizations are generating vast volumes of data and seeking real-time insights rather than retrospective reporting.The stakeholders are demanding greater transparency, accountability, sustainability, and responsible corporate behaviour; and rightly so. This has led to greater regulatory scrutiny.The Chartered Accountant is uniquely positioned to bridge the gap between financial information, business strategy, and stakeholder confidence. The profession’s expertise in assurance, risk management, taxation, finance, and governance enables it to provide valuable guidance amidst complexity and change.It has often been complained that the cost of compliance has gone up. But one should not forget that the cost of non-compliance is even higher. In March 2022, the Reserve Bank of India (RBI) stopped a payment bank from onboarding new customers after supervisory concerns were identified. The continuous non-compliance led the RBI to direct the said payment bank from accepting the fresh deposits. Eventually the license has been revoked and the winding up proceedings have started. Business cannot be sustained without adhering to the regulatory compliances in letter and spirit.The Chartered Accountants have a greater responsibility to impress upon the top management to ensure that there are no regulatory violations and to build a robust eco-system of efficient compliances which are timely and also cost effective. This could be challenging but it also opens the door of innovative opportunities.The Chartered Accountant is uniquely positioned to bridge the gap between financial information, business strategy, and stakeholder confidence. The profession’s expertise in assurance, risk management, taxation, finance, and governance enables it to provide valuable guidance amidst complexity and change.The challenge is not merely to adapt transformation but to lead it.Ethics: The Foundation of TrustEthics has always been the cornerstone of the Chartered Accountancy profession. Technical competence may create opportunities, but integrity creates trust. In a world increasingly driven by algorithms and automation, ethical judgment remains an inherently human responsibility.The credibility of financial reporting, the effectiveness of audits, and the confidence of investors depend upon the ethical conduct of professionals. Society places significant trust in Chartered Accountants because they are expected to act independently, objectively, and in the public interest.This year, an unusual situation emerged when the part-time Chairman of the largest private sector bank in India resigned citing that certain practices within the bank were not consistent with his ethical values. The resignation triggered a sharp fall in the bank’s share price resulting in a significant decline in its market capitalization. It is reported that the investors lost around 1 lakh crores in value in a few days. Foreign Institutional Investors reduced their aggregate holding.It is a reminder to all of us that compliance, ethics and governance are not mere legal requirements. They are fundamental drivers of stakeholder trust and enterprise value. The sophisticated systems and regulations cannot substitute ethical behaviour. Whenever ethical standards are compromised, the consequences extend beyond individual organizations and affect public confidence in markets and institutions.The digital age presents new ethical challenges. The use of Artificial Intelligence raises questions about accountability and transparency. Data privacy concerns require careful stewardship of information. Increasing commercial pressures may create conflicts between business objectives and professional responsibilities.AI can process vast amount of data, identify patterns and make recommendations at a fast speed, unimagined before. But does it have moral compass? The answer lies with the person who is using it and for what purpose. The challenge of AI is not whether machines can think, but whether the human beings can use the technology to serve the humanity.Resilience is not a technical construct. It is a human capacity. Culture, Clarity and Courage will shape the contours of resilience.The Chartered Accountant has to drive the culture of ethics and compliance while remaining innovative and being excellent in the chosen professional area. Commercial success without ethics is temporary. Ethics without professional excellence will be preaching without practicing and will not find takers. Therefore, Excellence, Independence and Integrity are not mere ideals but essential to be implemented in day to day life.The Chartered Accountant has to drive the culture of ethics and compliance while remaining innovative and being excellent in the chosen professional area. Commercial success without ethics is temporary. Ethics without professional excellence will be preaching without practicing and will not find takers. Therefore, Excellence, Independence and Integrity are not mere ideals but essential to be implemented in day to day life.The Code of Ethics adopted by the ICAI is not only principle based, but it also adopts the best global practices while retaining the age old concepts of independence. It includes the legal requirements laid down in the statute. Apart from the technical skill and competence of the members constituting it, a profession derives its sustenance for a healthy growth from the quality of the code of conduct observed by its members in placing service before self and living up to tenets which further public interest. Such a Code of Ethics has to extend beyond the bounds set by statutes and cover obligations voluntarily undertaken to be able to command the respect and confidence of the public in general. The Code of Ethics has to be for the protection of the public and not merely self-serving.Audit is a unique profession. The contract of Audit is between the Auditee and the Auditor. But the true recipient of the outcome of the audit service is the third party who relies on the audited financial statements. This third party is the true customer. It is this customer whose confidence in our services should always be in our minds and whom we should remember when we think of ‘customer delight’.Professional integrity and independence are essential characteristics of all the learned professions but is more so in the case of Chartered Accountants. Independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him, or to his own self-interest. Independence of the auditor has not only to exist in fact, but also appear to so exist to all reasonable persons.Let us remind ourselves the age old saying:धर्मो रक्षति रक्षितःMeaning: “Those who protect righteousness are themselves protected by righteousness.”The theme “Chartered Accountants in a Transforming World: Ethics, Innovation and Excellence” captures the essence of the profession’s evolving journey. It highlights the three pillars that will define the relevance and success of Chartered Accountants in the years ahead.Author may be reached at eboard@icai.in1 Unique Selling Proposition www.icai.org | July 2026
SPECIAL-WRITE-UP
Ep. 57 — ICAI: A Catalyst for the Global Accountancy Profession
CA Journal
· July 2026
00:00
--:--
ICAI: A Catalyst for the Global Accountancy ProfessionI believe that proficiency may define the performance of an individual, but it is integrity that confers the right to lead. The values shaped by the very institution of Ethics, Integrity and Independence defines the principals for the Chartered Accountant. The very Institute that a professional upholds, from which we learn and through which we enact change, and by whose recognition we earn the title of Chartered Accountant, stands as a preeminent guardian of our profession. Founded on 1st July 1949 under the Chartered Accountants Act, 1949, the Institute of Chartered Accountants of India serves as the apex regulatory authority for the accounting profession in India and ranks among the most respected professional accounting bodies worldwide. Over seven decades, it has earned international recognition for its rigorous academic standards, ethical framework, technical depth, and firm commitment to the public interest. As India continues to grow as a global economic force, ICAI is aligning its steps with the government and broadening its international reach to create opportunity for its members across the world.IntroductionThe Institute is guided by its timeless motto, “Ya Aeshu Suptaeshu Jagruti” which means “One who remains awake while others sleep”. ICAI has stood as a guardian of trust, transparency, and accountability within India’s financial landscape. My own professional journey, which began in 1984 upon becoming a Chartered Accountant, has unfolded in parallel with the steady and impressive growth of this institution. Further, the privilege of serving as ICAI’s President in 2011 gave me a firsthand understanding of how the Institute consistently transcends its regulatory mandate to become a standard-bearer of professional excellence, ethical leadership, and forward-looking thought. Working hand in hand with government bodies, regulators, and international professional organisations, ICAI has been central to driving meaningful reforms, reinforcing governance structures, and aligning Indian standards with global benchmarks. As technological change, regulatory evolution, and cross-border economic activity continue to reshape the profession, ICAI has remained ahead of the curve sculpting its members as strategic advisors, governance architects, and trusted partners in the nation’s progress. In many ways, the story of ICAI mirrors India’s own economic and professional journey.Working hand in hand with government bodies, regulators, and international professional organisations, ICAI has been central to driving meaningful reforms, reinforcing governance structures, and aligning Indian standards with global benchmarks.ICAI’s Strategic Vision for a Future-Ready ProfessionIn response to sweeping changes in business, technology, governance, and international commerce, ICAI has adopted a long-term strategic framework to ensure that the profession remains relevant, resilient, and globally competitive. This framework is conveyed through two key strategic documents, “ICAI Vision 2030” and “ICAI Vision 2047”, which together chart a course for India’s accounting profession to assume a position of global leadership.Vision 2030 of ICAI: Shaping Global StandardsThe four strategic pillars of the Vision 2030 document is mentioned below:Becoming the World’s Leading Accounting Body ICAI aspires to define global standards, drive thought leadership, and actively shape accounting and assurance practices across both developed and developing economies.Upholding Integrity and Professional Independence The Institute is committed to reinforcing professional integrity, transparency, objectivity, and ethical conduct, ensuring that public confidence remains the cornerstone of the profession.Developing World-Class Competencies ICAI is determined to equip its students and members with future-ready skills, global exposure, and multidisciplinary capabilities through a comprehensive overhaul of its curriculum and ongoing professional development programmes.Delivering Excellence in Professional Services The profession will continue to broaden its expertise across accounting, assurance, taxation, finance, sustainability, governance, and advisory services, creating enhanced value for all stakeholders.Vision 2047: Ambition at ScaleExpanding the Profession ICAI aims to grow the CA community to 30 lakh members by 2047, in line with the demands of an expanding economy. To accelerate this, the examination structure has been revamped to offer three sittings per year for both the Foundation and Intermediate levels.AI Integration ICAI is actively bridging the technology gap by training professionals in Artificial Intelligence, Robotic Process Automation (RPA), and data analytics to strengthen financial reporting and auditing practices. A dedicated AI committee ensures that technology functions as an enabler rather than a disruptor.Empowering MSMEs ICAI is launching nationwide MSME Clinics at regional branches to provide advisory support on financial management, corporate governance, regulatory compliance, and credit-related matters, helping small businesses address challenges, build sustainability, and achieve long-term growth.Multi-Disciplinary Partnerships (MDPs) A framework is being established to enable large, integrated professional firms to compete effectively with global counterparts in accounting, law, and valuation.Global Expansion ICAI is widening its international presence and creating trade and professional opportunities for Indian Chartered Accountants in key markets such as the UK, EU, and Australia.Leading the Global Conversation on the Profession’s FutureICAI’s ambition to be a global leader is no longer confined to vision documents; it is increasingly evident in its expanding influence on international platforms and its ability to convene the world’s leading accounting minds. The Institute has organised and hosted landmark events that have actively shaped the trajectory of the profession, fostering a genuine exchange of ideas across borders.World Congress of Accountants (WCOA)ICAI made history by hosting the 21st World Congress of Accountants (WCOA) in November 2022 at the Jio World Convention Centre, Mumbai — the first time this prestigious event, widely regarded as the “Olympics of the Accountancy Profession,” was held in South Asia. Attracting thousands of delegates both in person and virtually from across the globe, the Congress focused on the profession’s role in safeguarding public interest and enabling sustainable economic development.World Forum of Accountants (WOFA)Building on the success of WCOA 2022, ICAI institutionalised its global engagement through the World Forum of Accountants (WOFA), its flagship international platform that regularly brings together accountants, regulators, policymakers, industry leaders, and academics from around the world. Following the successful editions of WOFA 2025 in New Delhi and WOFA 2.0 in Greater Noida in 2026, the Institute will host WOFA 2026 in Visakhapatnam, with a focus on technology, trust, and transformation. WOFA provides a distinctive space for Chartered Accountants to forge international networks, engage with global regulators and standard-setters, explore cross-border opportunities, and actively shape the future direction of the profession.Building a Global Network of Chartered AccountantsBeyond thought leadership platforms, ICAI’s commitment to internationalisation is equally reflected in its efforts to create practical, real-world opportunities for members through a robust network of Overseas Chapters, strategic alliances, and cross-border professional initiatives. Through 54 International Chapters and 31 Representative Offices, ICAI connects its members with global professional communities and opens doors to international career and business opportunities. Apart from this, ICAI has also been playing an active and influential role in the global accountancy profession through its participation in a wide range of prestigious international organisations.Professional Networking PlatformsOverseas Chapters regularly organise CPE seminars, industry roundtables, workshops, and international conferences that enable members to connect, collaborate, and grow professionally. Programmes such as ICAI’s Global Connect series further facilitate engagement between overseas members and professionals across jurisdictions, fostering cross-border knowledge sharing. ICAI’s international offices serve as gateways to local professional bodies, industry stakeholders, and business communities, opening pathways for career advancement and international business development.Regulatory Recognition and Professional MobilityActing as professional ambassadors for ICAI, overseas chapters engage with local regulators, government authorities, diplomatic missions, and Indian embassies to support member mobility, navigate regulatory challenges, and enhance professional recognition. The ICAI (Global Networking) Guidelines, 2025 provide a structured framework enabling firms and professionals to expand their global footprint and service capabilities.International Collaborations and Strategic PartnershipsTo strengthen the global standing of the Indian Chartered Accountancy profession and facilitate international professional mobility, the Institute has established an extensive network of international collaborations through both Mutual Recognition Agreements (MRAs) and Memoranda of Understanding (MoUs). ICAI currently maintains MRAs with eight prominent accounting bodies worldwide namely CPA Australia, CPA Canada, The Institute of Chartered Accountants in England and Wales (ICAEW), Chartered Accountants Australia and New Zealand (CAANZ), Institute of Chartered Accountants of Nepal (ICAN), Malaysian Institute of Certified Public Accountants (MICPA), South African Institute of Chartered Accountants (SAICA) and CPE Ireland (now merged with CA Ireland). These agreements enable ICAI members to obtain professional recognition and pursue membership opportunities with partner institutions, subject to prescribed eligibility requirements.Complementing these arrangements, ICAI has also entered into numerous MoUs with professional accounting bodies, academic institutions, and regulatory organisations across Asia, the Middle East, Europe, Africa, and the Pacific region. These partnerships foster knowledge sharing, capacity building, technical cooperation, research, and continuing professional development.The Institute has also been a founding member and an active member of several international organizations and accounting bodies. These memberships enable ICAI to contribute to the development of global accounting standards, foster international collaboration, exchange knowledge and best practices, represent the interests of the Indian accountancy profession on global platforms.As organisations around the world confront issues in risk management, sustainability reporting, digital transformation and regulatory compliance, Indian Chartered Accountants are ideally placed to deliver strategic solutions at scale. Through targeted capacity-building and ongoing professional development, ICAI is shaping a cadre of globally competent professionals who can drive innovation and enhance India’s stature in the international accountancy community.ICAI’s Global Role in AccountancyMembershipChartered Accountants WorldwideInternational Valuation Standards CouncilPan African Federation of AccountantsASEAN Federation of AccountantsXBRL InternationalIFRS FoundationInternational Forum of Accounting Standard SettersInternational VAT Association*International Fiscal Association*Founding MemberCAPAIFACSAFAAOSSGEdinburgh GroupEmerging Economies Group*Other AffiliationsGlobal Capability Centres (GCCs)As part of its internationalisation drive, ICAI has promoted Global Capability Centres (GCCs) as a pivotal opportunity for Chartered Accountants to move beyond traditional accounting tasks and assume strategic leadership roles within globally integrated organisations. With India now recognised as a preferred GCC destination, the Institute is equipping its members to succeed in a tech-driven landscape shaped by Artificial Intelligence, cloud platforms, cybersecurity, automation, and advanced analytics. The programme encourages cross-border knowledge exchange and brings together expertise in accounting, finance, governance and emerging fields. As organisations around the world confront issues in risk management, sustainability reporting, digital transformation and regulatory compliance, Indian Chartered Accountants are ideally placed to deliver strategic solutions at scale. Through targeted capacity-building and ongoing professional development, ICAI is shaping a cadre of globally competent professionals who can drive innovation and enhance India’s stature in the international accountancy community.Modernising the Profession: Reforms for a Competitive WorldStrengthening the roots of the Profession: Transforming the EducationICAI has undertaken significant reforms to modernise Chartered Accountancy education and align it with the evolving demands of the global business environment. The CA qualification continues to enjoy international recognition from the bodies like ECCTIS, with the programme receiving accreditation and recognition from leading global professional bodies. Beyond its core curriculum, ICAI has strengthened its commitment to lifelong learning through an extensive portfolio of certificate and post-qualification courses in emerging areas such as Artificial Intelligence, sustainability reporting, forensic accounting, risk management, and digital assurance. Recently, the Certificate Course on Financial and Accounting Information Systems (FAIS) equips members with the technological competencies required to navigate the ongoing digital transformation of businesses and financial reporting systems. ICAI is preparing present and future professionals to thrive in the digital economy and contribute effectively to an increasingly interconnected and technology-enabled financial ecosystem.Aggregation of CA Firms: A Strategic Imperative for Building India’s Own Big FourIn an increasingly globalised and technology-driven business environment, the aggregation of Chartered Accountant firms has become a strategic necessity for strengthening the profession’s competitiveness and relevance. By consolidating resources, talent, expertise, and technological capabilities, Indian CA firms can achieve the scale required to provide comprehensive, multidisciplinary services comparable to leading international networks. Such aggregation not only enhances operational efficiency and quality standards but also enables firms to invest in innovation, specialised knowledge domains, and global expansion. The significance of this transformation was underscored by Prime Minister Narendra Modi, who envisioned the emergence of large Indian accounting firms capable of standing alongside the world’s leading audit networks, calling for the creation of four Indian firms within the global “Big Eight.” This vision continues to inspire efforts toward building robust, home-grown professional institutions that can compete internationally, support India’s economic aspirations, and elevate the global stature of the Indian Chartered Accountancy profession.Revised Code of Ethics (13th Edition): Strengthening Ethical Excellence in a Changing Business LandscapeThe Revised Code of Ethics (13th Edition) represents a forward-looking effort to align the Chartered Accountancy profession with changing global norms, technological progress, and new business realities. Crafted to bolster professional competitiveness while preserving the highest ethical standards, the updated framework relaxes rules on advertising and web presence, allowing members and firms to showcase the information more effectively on modern digital platforms. The Code also brings greater harmony with the IESBA (2024) standards, reinforcing provisions on auditor independence, non-assurance services, and the reporting of legal and regulatory breaches, thereby promoting transparency and public confidence. Acknowledging the rising importance of sustainability and ESG disclosures, it introduces tailored ethical and independence requirements for sustainability assurance engagements. In addition, the widened remit for Management Consultancy Services now encompasses cutting-edge fields such as Artificial Intelligence, forensic accounting, and social impact assessment, underscoring the profession’s shifting role in a knowledge-driven economy.ConclusionAs commerce and finance knit even closer across borders, the Chartered Accountant’s remit goes well beyond compliance and reporting; it includes defending public trust, promoting transparency, and aiding sustainable economic growth. Dr. Rajendra Prasad, in his words, aptly said “the fast-increasing tempo of the industrial and economic development of the country makes it imperative that every Chartered Accountant should realise that he belongs to a profession which provides the first line of defence to the unwary public against money grabbers and opportunists. Your responsibility in this matter becomes all the greater because of the autonomy which your profession enjoys.” Those words resonate today as strongly as they did seven decades ago: autonomy confers privilege, but it also demands greater integrity and accountability in service of society.As ICAI advances a globally respected, future-ready profession through international partnerships, curricular reform, technological adoption, and ethical leadership, it is simultaneously opening fresh avenues of opportunity for members. Yet genuine transformation depends on practitioners themselves. The Institute provides vision, support, and an enabling ecosystem; practitioners must translate that into action. We must welcome innovation while remaining firmly rooted in the enduring values of ethics, excellence, and public service.Author may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 58 — The Future-Ready Audit Profession
CA Journal
· July 2026
00:00
--:--
The Future-Ready Audit ProfessionThe Profession in 1949Few professions can trace their modern origins to a single legislative moment, but the Indian Chartered Accountancy profession is one such exception. When Parliament enacted the Chartered Accountants Act on 1 May 1949, and it became effective on 1st July 1949. It was well before India became a republic; it did far more than create a new regulatory body. It planted the seeds of a profession that would, over the next seven and a half decades, grow into one of the most consequential pillars of India's economic architecture.Where we have reached is, by any measure, a modest beginning. The first cohort of members was small, just above 1600; the infrastructure was nascent; and the scope of professional work was narrow, largely confined to bookkeeping, preparation of accounts, and basic statutory audit. But the foundations laid in those early years, a commitment to professional ethics, a structure of rigorous examination, and an independent regulatory mandate, proved to be extraordinarily durable. Our salute to our founding fathers, the pillars of profession who nurtured and developed the profession with great vision and passion.The First Three DecadesThe 1950s, 1960s, and 1970s were, in retrospect, years of quiet consolidation. The Indian economy model, with its emphasis on public sector enterprise, industrial licensing, and tight capital controls, created a steady but unspectacular demand for audit services. Most of the work was statutory in nature: auditing public sector undertakings, conducting company audits as required under successive Companies Acts, and maintaining financial records for a manufacturing-led economy.The profession grew steadily laying the foundation for the significant expansion that followed in later years. Firms were small, predominantly proprietorships or modest partnerships, and largely regional in character. There was no concept of the large multi-city firm, and no specialist service lines, no advisory practices. The Chartered Accountant of this era was, essentially, a trusted neighbourhood professional, someone businesses called when they needed their books to be in order or their tax returns filed.Yet these decades mattered more than they might appear. The ICAI was building its examination infrastructure, developing its early pronouncements on auditing practice, and crucially, establishing in the minds of Indian business and government alike that the CA qualification meant something real. It was a period of institution-building, and the institution that emerged from it was robust enough to absorb the rapid changes that were coming. Late 1970s saw the setting up of the Accounting Standards Board. But the progress in respect of the standards took time to materialise.Subsequent Years: The Profession Finds Its StrideThe 1980s and early 1990s marked the beginning of a meaningful shift. India's gradual opening, tentative at first, then accelerating dramatically after the 1991 economic reforms, transformed the operating environment for Chartered Accountants almost overnight. Foreign investment began to flow in. Indian companies started looking outward. Capital markets woke up. And suddenly, the demand for credible, sophisticated financial assurance was no longer just a regulatory formality, it was a commercial necessity. Also, this was the period when Section 44AB of Income Tax Act was introduced to make tax audits mandatory for entities with a turnover prescribed under the Act. This popularised the profession in smaller cities.This was also the time when the profession, for the first time, experienced the emergence of professional committees / boards, like:Auditing Practices CommitteeBoard of EthicsExpert Advisory CommitteeTo all the challenges the profession faced, it responded well. Firms began to grow in size and geographic reach. Specialist departments, taxation, management consulting, and systems audit began to emerge within larger practices. The 'Big Eight' (later 'Big Six', then 'Big Four') international accounting firms deepened their India presence, initially through loose affiliations with domestic firms, and the exposure to international audit methodology began to influence how Indian practitioners approached their work.It was also during this period that the limitations of the old model began to show. The financial frauds of the late 1990s, with the securities scam of 1992 being among the most significant, brought renewed attention to the quality of financial reporting and the role of audit in strengthening corporate governance. These developments provided the profession with valuable opportunities for continuous enhancement of audit practices, a journey that has continued to shape its evolution over the decades.Technology has moved from a tool auditors used occasionally to the central medium through which modern business operates, and therefore the central medium through which modern audit must be conducted. Data analytics, continuous auditing, robotic process automation, and now artificial intelligence are all reshaping audit methodologyThe CA Profession: Accountants, Auditors and Tax ConsultantsFor much of its history, the Chartered Accountancy profession in India wore three hats and wore them simultaneously, without much sense of contradiction. The CA was, at once, the person who audited your financial statements, and filed your tax returns. These two in-one roles were both a strength and, ultimately, a constraint.It was a strength because it made the CA indispensable to Indian business. Small and medium enterprises relied on their CA for virtually everything financial, advice on structuring transactions, representation before tax authorities, annual audit, and often a good deal of informal management counsel besides. The relationship was personal, long-standing, and built on trust that was accumulated over years.But it was also a constraint, because wearing multiple hats meant that none of them was worn with quite the specialised depth that a more focussed professional might bring. The audit partner who also handled the client's tax matters was not, and could not easily be, the sceptical, arm's-length examiner that modern audit theory requires. Independence, in such a context, was more aspiration than reality. This balancing act between the generalist tradition of Indian CA practice and the increasingly specialised demand of modern financial assurance is one that the profession must address to meet the changing expectations of stakeholders.Multiple accounting scams came to light at both international and domestic levels. Internationally, Enron, Parmalaat, Lehman Bros etc. rocked accounting profession and shook public confidence in audited accounts. At the domestic level, cases involving organisations such as Global Trust Bank, Satyam, IL&FS, DHFL, Reliance Home Finance, and Jet Airways tested the resilience of the accounting profession. These experiences prompted important reforms and strengthened the profession's focus.Emergence of NFRAFor most of its existence, the ICAI has functioned as a self-regulatory professional institution, bringing together education, examinations, membership, standard setting, and professional oversight under one umbrella. This concentration of functions in a single self-regulatory body was inherited from Britain, and for decades it has worked well enough.The ICAI issued Statements on Auditing Practices, later formalised into Standards on Auditing. It continued to pronounce Accounting Standards for all entities, both corporate as well as non-corporate, till the time the National Advisory Committee on Accounting Standards (NACAS) was set up under the Companies Act 1956. Subsequent to this, ICAI would prepare the Accounting Standards and send the same to NACAS, who having gone through the same would recommend the government to notify the same, to be complied with by the companies. This, in a way, strengthened the implementation of Accounting Standards.ICAI continues to run the Board of Studies. It has been responsible for laying down the curriculum for studies. Needless to say, administratively, it functions under the Ministry of Corporate Affairs (MCA) which has a say in certain matters including change in curriculum. It acts as a catalyst on behalf of the profession in its engagement with the Government.An elected body that represents the interests of its members is perceived to be accommodative with its members when issues arise. It may not necessarily be true, but the risks cannot be denied altogether. As corporate failures mounted and public scrutiny of audit quality intensified, the argument for an independent regulator became harder to resist. To further strengthen the system and address the perceived limitations of the self-regulation model, the stage was set for the eventual emergence of NFRA, with effect from 1st October 2018.The establishment of National Financial Reporting Authority (NFRA), alongside the continued stewardship of Institute of Chartered Accountants of India (ICAI) and the oversight roles of regulators such as SEBI, RBI, and IRDAI, has contributed to a stronger governance ecosystem.The Continuous Evolution in the CurriculumAsk any CA who qualified before 2000 what they were taught about auditing, and they'll describe a curriculum built largely around vouching, verification, and the Companies Act. Ask someone who qualified in 2015, and you'll hear about risk assessment, internal controls, and information systems. Ask a current student, and they'll mention data analytics, sustainability reporting, and professional scepticism. The curriculum has evolved consistently. However, the continuing challenge is to ensure that it keeps pace with emerging technologies, evolving business models, and the changing expectations of the profession.The ICAI has, to its credit, periodically overhauled its examinations and syllabi, introducing the Common Proficiency Test, revamping the IPCC and Final examinations, and restructuring articleship requirements. The introduction of the Integrated Professional Competence framework, and more recently the new scheme of education and training, reflect genuine attempts to keep pace with a changing profession. At times, it appears that the changes are too frequent. And it raises an issue with regard to vision about the profession.Although the curriculum adopted by the Institute has undergone frequent revisions, but in a rapidly evolving economic environment, it is acceptable that the curriculum still has some scope of improvement. There have been times when the change in technology has outpaced the change in curriculum. It is a structural challenge for every professional body that must consult, deliberate, and reach consensus before moving. But it is a real gap, and closing it requires a more agile approach to curriculum development than the profession has historically managed.Recent Times: Gamut of Changes, or rather, a Tsunami of ChangesIf the first six decades of the profession were defined by gradual evolution, the last fifteen years have felt more like a series of seismic shocks arriving in quick succession. Several forces have converged simultaneously, and their cumulative impact on the profession in India is immense. This has been a period of unlearning what we learnt in the past and relearning new concepts.The Advent of GSTThe introduction of the Goods and Services Tax in July 2017 was, for the Chartered Accountancy profession, simultaneously an enormous opportunity and a steep learning curve. GST subsumed a bewildering patchwork of central and state indirect taxes into a single, technology-driven framework, and in doing so, transformed the compliance landscape for virtually every business in India.For auditors, GST created entirely new assurance territory. GSTR reconciliations, input tax credit verification, and anti-profiteering demanded competencies that most practitioners had to acquire on the job, often simultaneously with the clients they were advising. The profession adapted effectively to the new GST regime, with practitioners steadily enhancing their expertise and strengthening the quality of assurance services as the ecosystem matured.Cross-Border Transactions and Transfer PricingIndia's integration into global value chains has accelerated dramatically. Indian companies are either acquiring or setting up businesses abroad. This has led to cross-border transactions which need to be structured fairly. Transfer pricing, the pricing of transactions between related entities in different tax jurisdictions has become one of the most contested areas in corporate taxation, and auditors are expected to have a working grasp of it.The complexity here is real. A transfer pricing audit requires not just accounting knowledge but an understanding of economics, global value chains, and the OECD's BEPS (Base Erosion and Profit Shifting) guidelines. It is specialist work that demands specialist skills, and yet it falls squarely within the terrain that many CA firms are expected to navigate for their clients.New and Complex Financial InstrumentsThe days when the most complex items on a balance sheet were a bank overdraft, term loans, debentures etc, are gone. Indian companies, particularly in the financial services sector, now routinely deal in derivatives, convertible products, securitised assets, foreign currency convertible bonds, and a range of hybrid instruments that sit between debt and equity. Auditing the fair value of these instruments, assessing the appropriateness of the valuation models used, and evaluating the disclosures around them requires a level of financial sophistication that was simply not part of the traditional CA skill set.IFRS and International Standards on AuditingThe convergence of Indian Accounting Standards with IFRS, through the Ind AS framework, has been one of the most significant technical transformations in Indian financial reporting history. Ind AS introduced principles-based accounting, fair value measurement, and a fundamentally different approach to financial statement presentation that required auditors to develop new competencies, new scepticism about management estimates, and new ways of communicating audit findings.On the auditing side, Indian SAs remain substantially, but not fully aligned with ISAs. The gap matters most in areas like group audits (SA 600 vs ISA 600), where India's unique regulatory landscape has led to meaningful divergence. The NFRA's push to bring SA 600 in line with ISA 600 and the ICAI's vigorous advocacy on behalf of smaller firms reflect an important point to balance global harmonisation with local relevance. There is an urgent need for both the regulators to sit and resolve the issue without further delay.Ethical Standards Including NOCLARThe introduction of the Non-Compliance with Laws and Regulations (NOCLAR) framework into the ICAI's Code of Ethics was a quiet but significant moment. NOCLAR places an affirmative obligation on professional accountants who encounter, or suspect, non-compliance with laws or regulations to take appropriate action, including, in certain circumstances, reporting to an appropriate authority even without the client's consent.This is a substantial departure from the traditional model of professional confidentiality, and it has not been universally welcomed. For auditors who have spent their careers in a culture where the client relationship is sacred and confidentiality near-absolute, NOCLAR requires a fundamental reorientation of professional instincts. More importantly, it is the most difficult area for the auditor. An auditor may be able to report on certain non-compliances of different laws having bearing upon financial statements (this in any case is the requirement of SA 250 as well) but expecting him to ascertain the cases of bribes, money laundering etc, may be a real difficult proposition for the auditors. It is also an area where continued capacity-building, guidance, and experience can help bridge the gap between the expectations of the standards and their implementation in practice.Recognition for Larger Firms to Render Services Under One RoofThe regulatory permission for larger CA firms to offer multi-disciplinary services, combining audit, tax, advisory, and consulting under one organisational roof has reshaped the competitive landscape of the profession. Few of the firms have responded by building out capability in areas ranging from forensic accounting to cybersecurity advisory to sustainability consulting, presenting themselves to clients as comprehensive professional services organisations rather than traditional audit shops. But the profession continues to be dominated by smaller firms, particularly in smaller towns, and offers considerable potential for further growth and consolidation. ICAI's efforts to promote mergers and networking in past have not yielded desired results for varied reasons. One looks forward with keen interest to the effect of recent guidelines on Aggregation of CA Firms.This consolidation of firms may be commercially successful but professionally complicated. The more services a firm provides to an audit client, the more fraught the independence question becomes. Managing these conflicts, through robust internal governance, service restrictions, and transparent disclosure is a real quality challenge of the modern large firm.Information Technology and Artificial IntelligenceMost important change the profession faces today is the rapid change in technology which is bound to change the entire working of the profession.Technology has moved from a tool auditors used occasionally to the central medium through which modern business operates, and therefore the central medium through which modern audit must be conducted. Data analytics, continuous auditing, robotic process automation, and now artificial intelligence are all reshaping audit methodology. AI-powered tools can now scan entire transaction populations, identify anomalies, read contracts, and flag fraud indicators at a speed and scale that would have been unimaginable a decade ago.But technology also creates new risks. Clients are using AI to generate financial estimates, manage complex portfolios, and automate revenue recognition. Auditing the output of an AI system requires the auditor to understand, at least at a conceptual level, how that system works, what data it was trained on, and what its failure modes are. This is genuinely new territory, and the profession is still working out how to navigate it. ICAI has taken a number of initiatives to upskill the members in this respect. But far more requires to be done. More than seminars and conferences, ICAI needs to focus on workshops to train members in these areas.New RegulatorsPerhaps nothing has changed the landscape of the profession more fundamentally than the emergence of new regulators. The establishment of National Financial Reporting Authority (NFRA), alongside the continued stewardship of Institute of Chartered Accountants of India (ICAI) and the oversight roles of regulators such as SEBI, RBI, and IRDAI, has contributed to a stronger governance ecosystem.This is, on balance, a healthy development as the independent oversight raises the floor of audit quality, creates accountability that self-regulation cannot fully provide, and sends an important signal to capital markets that India takes the quality of financial assurance seriously. Further, it also creates complexity, potential for regulatory overlap, and, occasionally, conflicting demands that leave auditors genuinely uncertain about what is required of them.Strengthening Audit and AccountabilityThe profession has been called upon, repeatedly, to reflect on and strengthen its practices through the lens of high-profile corporates. Few of those have already been mentioned in the article. Each of these episodes raised the same important question: where were the auditors? In some cases, the answer was malfeasance. In others, there was a need for greater professional scepticism. In others still, it was an opportunity to strengthen the audit methodology. But in all of them, the profession gained valuable insights for improvement, and the scrutiny that followed was instrumental in driving reforms and enhancing audit quality.These failures matter beyond their immediate reputational consequences. They have driven regulatory change, prompted curriculum reform, and most importantly, encouraged individual practitioners to confront the gap between the assurance they provide and the assurance that stakeholders actually need. The auditor who signs off on financial statements that subsequently prove to be materially misleading cannot simply point to compliance with technical standards as a defence. The expectation has shifted and it will continue to shift.The Methodology of Audit: What Has ChangedThe Change from Substantive to Risk-Based SamplingThe shift from traditional substantive testing, where auditors would vouch and verify individual transactions from a random or judgement-based sample, to a risk-based approach, represents perhaps the most fundamental methodological evolution in audit over the past three decades. Under risk-based auditing, the auditor identifies where the risks of material misstatement are greatest, concentrates testing effort there, and calibrates the nature, timing, and extent of procedures accordingly.This sounds like common sense, and it is. But implementing it properly requires a rigour and sophistication that is not easy. A genuinely risk-based audit demands deep knowledge of the client's business, its industry, its control environment, and the specific risks that flow from all of these. It requires the auditor to make judgement calls about where risk is concentrated, and to be right about those calls. The failure in many audit quality deficiencies is not in the concept of risk-based auditing but in its execution: risk assessments that are superficial, control reliance that is not properly tested, and substantive procedures that are too thin to provide the assurance claimed.Risk-Based Audits: The New StandardThe SA 315 framework, Identifying and Assessing the Risks of Material Misstatement, is the backbone of modern audit methodology. It requires auditors to develop a thorough understanding of the entity and its environment, including its internal controls, and to use that understanding to design an audit that responds to the specific risks identified. Done well, it produces audits that are both more efficient and more effective than the old substantive-first approach.As the profession continues to strengthen its implementation of the framework, there are growing opportunities to further enhance the quality of risk assessments, deepen the understanding of internal controls, and align audit procedures more closely with identified risks. NFRA's inspection findings have provided valuable insights in this regard, helping to highlight areas for continued improvement and professional development. The solution lies not in a different standard as the standards are broadly sound, but in sustained investments in training, supervision, engagement quality reviews, and a professional culture that views risk assessment as a meaningful exercise of professional judgment and insight rather than merely a procedural requirement.As the profession continues to strengthen its implementation of the framework, there are growing opportunities to further enhance the quality of risk assessments, deepen the understanding of internal controls, and align audit procedures more closely with identified risksConclusion: The Road AheadSeventy-seven years is a long journey for any profession. The Chartered Accountancy profession in India has travelled from a small band of practitioners in a newly independent nation to a community of hundreds of thousands of qualified professionals operating across every sector of one of the world's fastest-growing economies. That journey deserves to be celebrated. With the celebration, every member should keep in mind that we should always learn from the past.The profession stands at the most consequential inflection point in its history. The forces pressing upon it, such as technological disruption, regulatory intensification, expanding stakeholder expectations, and the sobering lessons of repeated corporate failures, are not going to abate. They are going to intensify. The question is not whether the audit profession will change. It is whether the profession will lead that change or not.What Leadership looks like in Concrete TermsGreater Role in Corporate Governance Through TransparencyThe auditor's report has, for too long, been a document that almost nobody reads and that says almost nothing useful to those who do. The move towards more informative audit reporting, Key Audit Matters, enhanced going concern disclosures, commentary on significant estimates and judgements, is a step in the right direction. But it needs to go further. Future-ready auditors must see themselves as active contributors to the quality of corporate governance, not merely as attesters of financial statements. That means engaging more substantively with audit committees, communicating findings with clarity and courage, and being willing to say difficult things to powerful people.Upskilling in Laws, Ethical Standards and AIThere is no polite way to say this: a certain proportion of practising auditors in India may not be adequately current on developments in company law, taxation, ethical standards, or technology. This is not a personal failing; the pace of change has been extraordinary, and continuing professional education system needs substantial improvement. But it is a gap that the profession must close, deliberately and urgently. The ICAI's CPE requirements are a floor, not a ceiling. Every practitioner, whether a partner of a bigger firm or a sole proprietor in a small town, has a professional obligation to understand Accounting and Auditing Standards, NOCLAR, to engage with AI, and to keep their legal and regulatory knowledge current.Prepared for Greater Public ScrutinyThe era of the audit profession operating in comfortable obscurity is over. Parliamentary committees ask pointed questions about audit quality. Financial journalists scrutinise audit reports for what they don't say as much as what they do. Social media amplifies audit failures with brutal speed. The profession must accept this scrutiny not as an intrusion but as a legitimate consequence of the public trust it claims. Transparency, in audit quality, as in corporate governance, is not a risk to be managed, it is the price of relevance.Prepared for Class Action SuitsIndia does not yet have a mature class action litigation culture for audit-related failures, but the direction of travel is clear. The Companies Act 2013 introduced class action provisions. SEBI has mechanisms for investor complaints. As awareness of audit's role in investment decisions grows, and as spectacular failures continue to occur, the legal exposure of auditors will increase. This is not a reason to stop working out of fear; it is a reason to do the work properly, document it thoroughly, and ensure that every engagement is conducted with the rigour that would withstand judicial scrutiny.Challenges in the Assessment of Going ConcernThe COVID-19 pandemic exposed, with unusual clarity, how difficult going concern assessment can be in conditions of genuine uncertainty. But the pandemic was simply an extreme version of a challenge that auditors face constantly: how do you assess the ability of an entity to continue as a going concern when the future is, by definition, unknowable? The standards provide a framework, evaluate management's assessment, look at a minimum of twelve months from the date of the financial statements, consider the adequacy of disclosures but the judgement that fills that framework is the auditor's own. In an era of rising interest rates, geopolitical volatility, and supply chain disruption, going concern assessments will only become more complex and more consequential.Engaging With Those Charged With GovernanceThe relationship between the auditor and those charged with governance i.e., the TCWG, the audit committee and the board, is one of the most important and most underdeveloped aspects of modern audit practice in India. Too often, the interaction is perfunctory, a brief presentation at the end of the audit, the signing of management representation letters, a polite exchange about the audit fee. This is not good enough. The future-ready auditors engage with the TCWG, the audit committee throughout the year, not just at the end. They share their risk assessment findings early. They communicate difficult matters candidly. They treat the audit committee not as a formality to be managed but as a genuine partner in the assurance process. NFRA, recently formalised a very important concept of having planning and pre-audit meetings with TCWG. If done in substance, this can serve as a very good communication platform with TCWG. But for this, both auditors and TCWG members have to come out of their comfort zone and ask real questions.Techniques of Audit Must ChangeSampling process has to undergo a complete change. A sample of fifty invoices may not be sufficient for a world in which clients process millions of transactions a day. Audit techniques must evolve to match the complexity and volume of what is being audited. Population-level data analytics, continuous monitoring tools, AI-assisted anomaly detection, and blockchain-based audit trails are not futuristic concepts, these are available today, and the firms and practitioners who deploy them effectively will produce better, more efficient, more insightful audits than those who do not. Resistance to technology adoption in audit is a slow form of professional obsolescence.The Modern Auditor: Vigilant, Responsive and Forward-LookingThe traditional auditor is the watchdog: present, observant, a deterrent to misconduct by virtue of being there. It is a comforting image but an increasingly inadequate one. A watchdog that only watches is not much of a safeguard against a determined fraudster, a compliant management team, or a board that prefers comfortable ignorance to uncomfortable truth.The profession needs to evolve into something beyond watching. It should look for what is hidden rather than waiting to be shown what is visible. It must apply professional scepticism not as a compliance obligation but as a genuine investigative instinct, probing unusual transactions, questioning implausible explanations, following the trail of risk wherever it leads. The profession should report what it finds, loudly and without any reservation, regardless of how inconvenient that finding might be for the client or how much pressure is applied to soften the message.The auditor who is genuinely willing to qualify the opinion, issue an adverse report, report suspected fraud to the appropriate authority, or resign from an engagement where the auditor's independence or the integrity of the financial statements cannot be preserved will be ready for the future-vigilant, responsive and forward looking. The credible threat that the auditor will act on findings rather than accommodate them, is precisely what gives the audit opinion its value.India needs auditors of this calibre. The investors who rely on audited financial statements deserve them. The employees and pensioners whose economic security depends on the soundness of the companies they work for need them. The capital markets, which cannot function without credible assurance, require them. And the profession must produce them to claim the public trust and social standing that it rightly aspires to.The journey from 1949, to today has been remarkable albeit a mixed one. The journey ahead will be harder, more complex, and more demanding than anything that has come before. The profession is up to it, but only if it is honest about what is required, courageous in demanding it of itself, and unwilling to settle for anything less than the standard that the public interest requires.Authors may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 59 — Trust in Financial Ecosystems: Technology and Accountability
CA Journal
· July 2026
00:00
--:--
Trust in Financial Ecosystems: Technology and Accountability“Numbers may be precise, but trust arises not from numbers alone. It is built through transparency, strengthened by accountability, and sustained through independent verification.”IntroductionTrust has always been the cornerstone of financial systems. Businesses across time and the globe have been extending credit facility based on trust. The ability of financial institutions to mobilise savings and support economic growth depends fundamentally on the confidence stakeholders place in them. Depositors expect banks to safeguard their funds; investors rely on credible information to make decisions; citizens expect public money to be spent as intended and honestly accounted for. For decades, this confidence rested on institutional reputation, regulatory oversight and periodic audit. That foundation of trust is still running the system. However, the environment around it has changed beyond recognition.As the Supreme Audit Institution of India, the Comptroller and Auditor General (CAG) occupies a distinctive vantage point on this change.Under Article 148 of the Constitution, the CAG audits the receipts and expenditure of the Union and the States.CAG also audits the accounts of Public Sector Undertakings and Autonomous Bodies including numerous entities in the public financial landscape dealing in niche sectors such as: NBFCs & Development Finance Institutions; Insurance; Capital Markets & Securities; Asset Management, Pension & Trusteeship; Payments, FinTech & Digital Financial Infrastructure; Asset Reconstruction & Stressed Assets; Credit Rating, Risk & Credit Guarantee, Trade Finance & Financial Services; Consultancy, Project Development & Infrastructure; and Regulators, Foundations & Governance Institutions.CAG has been increasingly auditing the digital systems through which public money now moves i.e., Aadhaar-enabled welfare payments, the Unified Payments Interface, and the core operations and IT systems of financial sector service providers.Audit reports placed before Parliament and State Legislatures have, for over a century, served as a foundational mechanism of public accountability, placing this institution squarely at the intersection of how financial systems are evolving in the digital age, why accountability remains indispensable despite rising automation, and how audit must adapt to preserve trust in an increasingly interconnected world.Financial systems today are powered by integrated ERP platforms, cloud-based accounting, AI, Machine Learning, blockchain, robotic process automation and digital payment infrastructure. Data is generated continuously and decisions are increasingly made in real time. India’s own digital public infrastructure has been built on exactly these technologies, and the CAG’s audit mandate has grown alongside it.Financial systems today are powered by integrated ERP platforms, cloud-based accounting, AI, Machine Learning, blockchain, robotic process automation and digital payment infrastructure. Data is generated continuously and decisions are increasingly made in real time. India’s own digital public infrastructure has been built on exactly these technologies, and the CAG’s audit mandate has grown alongside it.Trust Has Become Ecosystem-CentricA financial ecosystem is no longer a single institution but a network of interconnected banks, fintechs, payment processors, regulators, auditors and technology vendors operating through shared digital infrastructure. A citizen’s experience of a single welfare payment or digital transaction may depend on the coordinated functioning of a mobile app, a payment gateway, banking infrastructure, cloud servers and fraud-monitoring tools working simultaneously. A weakness anywhere in that chain can damage confidence in the whole. Trust has, therefore, evolved from institution-centric to ecosystem-centric, which is precisely why audit has had to widen its lens from individual entities to the systems connecting them.The economic value of this trust is considerable. High-trust environments see lower transaction costs, deeper market liquidity and faster capital allocation; deficiencies bring higher compliance costs and reputational damage that can take years to repair. As Warren Buffett observed, “it takes twenty years to build a reputation and five minutes to ruin it”. The 2008 global financial crisis showed how governance and transparency failures can erode confidence rapidly; more recent cyber incidents confirm that threats to trust now extend well beyond financial reporting into the integrity of the technology itself. For a public audit institution, the stakes are no different in kind: a citizen’s trust in digital governance rests on the same foundations as an investor’s trust in a balance sheet.Technology: An Enabler of Trust, and a Source of New RiskThe modern financial system can be understood as operating through three interconnected layers: a transaction layer i.e., ERP systems, payment platforms and APIs that captures financial events in real time with minimal manual intervention; an analytics layer that converts this data into insights through dashboards and AI, letting management monitor risk on near real-time information rather than historical reports alone; and a reporting and assurance layer where information is consolidated into financial statements and regulatory filings, and audit validates its reliability. This structure is as visible in government financial management, through systems such as the Public Financial Management System (PFMS), as in the private sector, and audit must engage with all three layers, not the last alone.AI and Machine Learning now support credit assessment, fraud detection, anti-money laundering monitoring and predictive analytics, identifying patterns that traditional methods would miss; government auditors increasingly encounter the same tools in beneficiary-identification systems built into welfare schemes. But outcomes are only as good as the data behind them: biased datasets can produce unfair results, and complex algorithms can generate decisions that are difficult to explain. The auditor’s task of examining an insurance company’s credit model or a scheme’s eligibility algorithm alike is shifting from testing only a model’s output to questioning the model itself; an unusual flag is a reason to ask further questions, not proof of fraud. Advances like blockchain would create tamper-resistant, time-stamped records that strengthen confidence in cross-border payments and digital identity, reducing some manual checking since the technology leaves its own trail. But it does not remove the need for audit; it relocates scrutiny to whether the data was accurate when first entered and whether the underlying code does what it claims, since incorrect data on a ledger remains permanently wrong even as it looks authoritative.Cloud computing has made sophisticated financial systems accessible even to smaller entities and enabled real-time reporting, but it creates dependence on third-party providers visible in government systems too, as departments migrate core applications to the cloud. This is double-edged for audit: it offers direct, read-only access to systems for testing, but requires auditors to understand the cloud provider’s own controls, making reports such as SOC 1 and SOC 2 essential reading wherever systems are hosted externally. Cybersecurity threats and weak data governance sit behind all of this: institutions holding vast amounts of sensitive data are natural targets for attackers, and every downstream decision depends on the integrity of the data feeding it. Technology, in short, creates trust only when matched by sound controls and governance.Accountability Still Matters MostMany of the most damaging failures in modern finance occurred not because technology malfunctioned, but because organisations lacked adequate oversight of it. Accountability i.e., the obligation to explain and accept responsibility for decisions, needs examining at three levels, and audit itself is one of the principal mechanisms through which that examination occurs.Governance accountability requires boards and audit committees, and in the public sphere, secretaries, public sector boards and the legislatures to whom they report to understand the technologies generating the information placed before them. A director relying on an AI-driven model for a critical estimate, or a department relying on an algorithm for welfare eligibility, must be able to challenge its assumptions, not merely accept its output. CAG’s audit reports, tabled before Parliament and the State Legislatures and examined by Public Accounts Committees, exist precisely to test whether that challenge function is being exercised.Process accountability requires rethinking internal controls built for a manual world. Where automated tools now perform work once divided among several people, segregation of duties must be redesigned around new questions: who designed the automated process, who can change it, and who monitors its exceptions? Internal Financial Controls frameworks under the Companies Act, 2013 and equivalent requirements within government financial rules must address these automated control points explicitly, since weaknesses here directly affect the reliability of financial reporting in both sectors. CAG’s financial audit of Government Companies under Section 143(6) of the Companies Act exists precisely to point out these weaknesses.Professional accountability rests on the principle that technology is a powerful aid but never a substitute for judgment. Auditors, whether examining a listed company or a government scheme, remain responsible for the tools they use, including AI-enabled analytics, and must understand their limitations rather than treat their output as self-evidently correct.India’s own digital financial ecosystem illustrates the scale of what is at stake, and much of it now falls directly within this institution’s audit purview. Digital India, Aadhaar-enabled authentication, UPI, the Account Aggregator Framework and early CBDC experimentation have transformed access to financial services within a decade. As these platforms have scaled, CAG’s audits have correspondingly expanded to examine the IT systems and control environments underpinning them, alongside the Reserve Bank of India, SEBI, IRDAI, the IFSCA and the Ministry of Corporate Affairs, each raising its own expectations on governance and technology oversight. Sustainable innovation, in government and the financial sector alike, must be matched step for step by accountability.The Audit Profession Is Being RedefinedThe traditional image of an auditor, i.e. checking vouchers, tracing entries, and confirming balances, is giving way to a professional fluent in data and technology, in government audit, no less than in the Chartered Accountancy profession. CAG’s own offices have built dedicated data analytics and IT audit capabilities to keep pace with the systems they examine.The traditional image of an auditor, i.e. checking vouchers, tracing entries, and confirming balances, is giving way to a professional fluent in data and technology, in government audit, no less than in the Chartered Accountancy profession. CAG’s own offices have built dedicated data analytics and IT audit capabilities to keep pace with the systems they examine. We have comprehensively moved towards data-driven audits through our high-performance computing centre at our Centre for Data Management and Analytics (CDMA). This Centre has been the nodal driver for this transformation, guiding field offices, and developing analytics models and audit toolkits. In addition, we have recently inaugurated the Centre of Excellence in Financial Audit (CoEFA) at Hyderabad to lead our digital transformation by becoming a global leader in leveraging technology for strengthening and transforming financial audits.This mirrors the framework Standards on Auditing provide for the profession at large. SA 315 requires auditors to understand an entity’s IT environment and automated controls when identifying risk; SA 330 requires responses that increasingly involve testing automated controls and data analytics rather than sampling alone, scanning entire ledgers or scheme databases for unusual patterns to build conclusions on a broader evidence base. SA 240’s fraud-risk requirement in digital environments may now involve unauthorised system access rather than only manual misstatement, which is equally relevant to a government payment system as a corporate ledger. SA 402 has gained relevance as institutions outsource cloud services to third parties, and SA 500’s requirement for sufficient evidence now extends to system-generated logs and metadata, making IT General Controls core audit competence rather than a peripheral specialism.Continuous auditing takes this further by embedding monitoring directly within organisational systems, so exceptions are detected in near real time rather than months later, shifting audit from a retrospective exercise to a proactive one. Assurance is also expanding into ESG reporting, cybersecurity and data privacy compliance, domains where independence and scepticism remain directly transferable. None of this should reduce professional scepticism; if anything, it demands more. A well-designed algorithm can create false confidence, sometimes called automation complacency, and audit must remain alert to both human and machine output to protect the credibility of its conclusions.Building Trust in Digital Financial EcosystemsOrganisations and audit institutions alike can anchor efforts to strengthen stakeholder confidence around four ideas. Transparency of design means being able to explain how critical systems and automated processes work, including the data, assumptions and controls behind them. A system that cannot be explained tends to undermine the confidence it was meant to inspire. Traceability of data means every material figure, in a corporate statement or a scheme’s expenditure report alike, should be traceable to its originating transaction through a clear, auditable trail. Resilience of controls means controls must withstand system failures and unauthorised overrides, not merely operate correctly under normal conditions. Independence of verification remains the cornerstone beneath all three: however, sophisticated internal systems that become an objective external assessment by professionals with no stake in the outcome are what ultimately allow investors, regulators and citizens to rely on what they are told, i.e. the same principle, exercised through Parliament’s oversight of public accounts, that has anchored the CAG’s work for over a century.ConclusionTrust in financial systems is not a static achievement but a continuous commitment that must evolve alongside changing technology and stakeholder expectations. The digital age has brought genuine gains in transparency and real-time insight, but it has also introduced complexities that demand stronger oversight, not less. Far from diminishing the relevance of audit, these developments reinforce it: as the means by which information is generated change, the need for independent assurance and professional judgement becomes more critical, not less.Technology can make financial information faster and more accessible; accountability, supported by sound governance and independent assurance, is what makes it trustworthy. For centuries, financial systems have been built on trust. Technology may redefine how that trust is earned and verified, but it can never replace the need for it, and this institution remains committed to that enduring task.For audit, under constitutional mandate or professional standards, the path forward lies neither in uncritical adoption of every new technology, nor in resistance to change, but in disciplined integration guided by independence, objectivity, skepticism, and integrity. Technology can make financial information faster and more accessible; accountability, supported by sound governance and independent assurance, is what makes it trustworthy. For centuries, financial systems have been built on trust. Technology may redefine how that trust is earned and verified, but it can never replace the need for it, and this institution remains committed to that enduring task.Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT | www.icai.org | July 2026
Ep. 60 — Union Budget 2026–27: Growth and Structural Transformation
CA Journal
· July 2026
00:00
--:--
Union Budget 2026–27: Growth and Structural TransformationThe Union Budget 2026–27 has come amid global economic uncertainty and domestic economic resilience. It focuses on investment-led growth and structural reform, along with fiscal consolidation. The budget seeks to achieve rapid, sustainable and inclusive economic growth, and toward this objective, it prioritises capital expenditure within a prudent fiscal approach. Rationalisation of subsidies, selective customs duty adjustments, and reforms in financial markets reveal the structural transformation agenda of the budget. The budget moves toward improved fiscal sustainability by narrowing the fiscal deficit, primary deficit and the debt-to-GDP ratio, combining macroeconomic discipline, reforms, and productive public investment.IntroductionThe Union Budget 2026–27 has come amid an uncertain and fragile global economic scenario caused by geopolitical tensions, trade fragmentation, and elevated sovereign debts across developed and developing economies. In contrast, domestic economic performance showed resilience. With an estimated strong growth rate of real GDP of 7.4 per cent in the fiscal year 2025–26, the Indian economy emerged as the fastest-growing major economy for the fourth consecutive year. Robust domestic demand, enhanced capital outlays, sound macroeconomic fundamentals, and prudent monetary and fiscal policies have accentuated the pace of growth.The Union Budget for FY 2026–27 emphasises policy continuity and fiscal consolidation and reflects a structural shift in the role of government from direct provider of goods and services to a facilitator of private investment and market-led growth. With enhanced capital expenditure, along with reduced fiscal deficits and debt-GDP ratio, the budget reaffirms the government’s belief in investment-led growth and its commitment to fiscal prudence and inclusive development.Revenue and Expenditure TrendsTraditionally, the Union Budget presents estimates for three consecutive years1. Total government expenditure, which peaked at 17.7% of GDP during the pandemic year 2020–21, has since moderated and stabilised at around 15% of GDP. In contrast, and more importantly, effective capital expenditure has steadily increased from 2.6% of GDP in FY 2020–21 to 4.4% in FY 2026–27 (BE). Revenue expenditure is on a declining trend without compromising developmental expenditure. This compositional shift reflects a systematic transition from consumption-led fiscal expansion to asset creation and public investment.Figure 1: Trends in Union Government Expenditure (% of GDP)YearRevenue ExpenditureEffective Capital ExpenditureTotal Expenditure2019-2010.82.613.42020-2114.43.317.72021-2212.53.516.12022-2311.73.915.62023-2410.84.215.02024-25 (RE)10.54.014.62025-26 (RE)10.93.914.82026-27 (BE)11.04.415.5Source: Union Budget DocumentsIn terms of absolute figures, Union Government expenditure has more than doubled over the past decade, from ₹21.4 lakh crore in FY 2017–18 to ₹53.5 lakh crore in FY 2026–27 (BE). However, this fiscal growth has been broadly aligned with economic growth, reflected by a more stable expenditure-to-GDP ratio. The upward trend reflects growing developmental commitments, infrastructure expansion, and higher capital allocations.Figure 2: Trends in Union Government Expenditure (₹ Lakh Cr.)2017-182018-192019-202020-212021-222022-232023-242024-252025-26 (RE)2026-27 (BE)21.4223.1526.8635.1037.9441.9344.4346.5349.6553.47Source: Union Budget DocumentsThe revenue profile of the budget shows that Union Government revenue mainly comes from tax sources. About two-thirds of revenue comes from taxes, where income tax, corporation tax and GST are the largest contributors, reflecting improved compliance and formalisation of the economy. Government borrowings also significantly contribute to overall revenue, but a declining primary deficit indicates that these borrowings are largely used to meet interest liabilities.Figure 3: Sources of Revenue in the Union Budget, 2026-27 (% of Total Receipts)SourceShare (%)Borrowings & Other Liabilities24Income Tax21Corporation Tax18GST and Other Taxes15Non-tax Receipts10Union Excise Duty6Customs Duty4Non-debt Capital Receipts2Source: Union Budget, 2026-27The expenditure profile of the budget 2026–27 shows that a significant portion of the total expenditure is committed expenditure, wherein interest payments and states’ share of central taxes account for over 40 per cent of the budget. Further, defence expenditure and subsidies have about 18 per cent share. This profile indicates that the government has limited flexibility in its expenditure due to mandatory obligations, while the Fiscal Responsibility and Budget Management (FRBM) Act constrains its debt-raising capacity.Figure 4: Items of Expenditure in the Union Budget 2026-27 (% of Total Expenditure)ItemShare (%)States Share of Taxes and Duties22Interest Payment20Central Sector Schemes (excl. Capex on Defence & Subsidies)17Defence11Centrally Sponsored Schemes8Finance Commission & Other Transfers7Other Expenditure7Major Subsidies6Pension2Source: Union Budget, 2026-27Trends in Revenue from Direct and Indirect TaxesSustained buoyancy of central taxes over the last decade has strengthened the Centre’s fiscal position. Gross tax revenue remained mostly stable at around 11–12% of GDP, showing improved revenue productivity of central taxes. The share of direct tax relative to indirect taxes has been rising over this period due to greater tax elasticity with respect to income growth and the growing formalisation of the economy.The Threefold Approach in the BudgetThe budget introduces a threefold duty-based approach. The first duty is to accelerate and sustain economic growth; the second is to fulfil people’s aspirations and build their capacity; and the third is to ensure that growth provides inclusive access to resources and opportunities. This reflects a departure from fragmented, piecemeal policymaking to an integrated framework where economic growth, human capital, and inclusion support each other. The budget emphasises continuous, adaptive and forward-looking structural reforms, a robust and resilient financial sector, and cutting-edge technologies, envisaging greater complementarity between state and market, or public and private sectors.Scaling up ManufacturingToward the first duty of promoting economic growth, the budget proposes a strategic boost for manufacturing by focusing on legacy industrial sectors, MSMEs, infrastructure, energy, and city economic regions. Key steps include: biopharma SHAKTI (with an expenditure of ₹10,000 crore over the next five years) to develop India as a global biopharma manufacturing hub; India Semiconductor Mission 2.0; boosting expenditure on the Electricity Components Manufacturing Scheme; the establishment of rare earth corridors; and three dedicated chemical parks.MSME“A three-pronged approach has been proposed to provide equity support, liquidity support, and professional support to the MSMEs — including a ₹10,000 crore SME Growth Fund for equity and quasi-equity financial support.”The budget recognises that MSMEs are often trapped in low scale and low productivity despite being central to growth, employment and supply chains. As many MSMEs fail due to lack of risk capital and managerial capacity, the SME Growth Fund will provide equity and quasi-equity support. The TReDS platform will help garner liquidity support to loosen working capital constraints, while para-professionals trained by ICAI, ICSI and ICMAI, and the Corporate Mitras, will provide professional support to MSMEs at affordable costs.Capex and InfrastructureThe government has once again reaffirmed its commitment to infrastructure development by enhancing capital expenditure to ₹12.2 lakh crore and effective capital expenditure2 to ₹17.1 lakh crore. Despite progressive fiscal consolidation, there has been a six-times rise in capital expenditure in the last ten years, confirming a decisive shift toward asset creation as part of the core growth strategy. Alongside existing initiatives such as InVITs, REITs, NIIF and NABFID, there will be an Infrastructure Risk Guarantee Fund (IRGF) to provide a partial credit guarantee to lenders.The budget recognises cities, especially Tier II and Tier III, as engines of growth, innovation and opportunity, and a transformative concept of City Economic Regions (CERs) has been evolved with an allocation of ₹5,000 crore per CER for the next five years. It also emphasises environmentally sustainable freight and passenger transportation systems for logistics efficiency and regional connectivity, including freight corridors, coastal shipping, national waterways, high-speed lanes and seaplanes.Rationalisation of SubsidiesThe trend in expenditure on the three major subsidies (food, fertiliser and petroleum) shows a gradual recalibration of expenditure priorities. Food subsidy has stabilised at around 4–4.5 per cent of total expenditure; however, a sharp moderation is visible in the fertiliser subsidy for FY 2026–27, mainly due to the normalisation of global commodity prices rather than the withdrawal of support3. Petroleum subsidy remains marginal throughout. The overall pattern suggests that subsidy rationalisation is creating fiscal space for capital expenditure without compromising welfare commitments.Financial Sector ReformsThe budget proposes to take financial sector reforms forward by setting up a High-Level Committee on Banking for Viksit Bharat and restructuring Power Finance Corporation and Rural Electrification Corporation. India has evolved a robust banking system where banks have strong balance sheets, high profitability and near universal coverage; the committee will review the banking sector to align it further with the vision of Viksit Bharat. The budget also mentions corporate bond market reforms, incentives for municipal bonds and a review of foreign investment rules.Macroeconomic Framework in the Budget“The government’s focus remains largely on the enhancement of productive capacity and long-term economic resilience rather than redistribution and subsidisation for consumption. The budget targets around 7 per cent growth.”The budget has a nuanced macroeconomic framework visible in its approach toward public investment-led growth, fiscal consolidation, supply-side reforms, and thrust on the role of the private sector. The target of around 7 per cent growth is quite plausible against the underlying macroeconomic fundamentals.Fiscal Framework in the BudgetLike several past budgets, this budget shows the continued commitment of the government to fiscal prudence along with growth-accelerating expenditure. The budget proposes to prune the fiscal deficit to 4.3 per cent of GDP in FY 2026–27 and targets a reduction in the debt-to-GDP ratio to 55.6 per cent without compressing expenditure in productive sectors. Primary deficit is projected to decline to 0.7 per cent of GDP, while revenue deficit will remain at 1.5 per cent of GDP.A stable revenue deficit signals stability in the gap between revenue receipts and revenue expenditure. A lower revenue deficit means a larger share of government borrowings is directed toward capital expenditure rather than current consumption. A lower primary deficit reflects a move towards greater long-term debt sustainability, wherein the government reduces its reliance on borrowing beyond the cost of debt servicing4. These indicators suggest that the fiscal behaviour of the government is well aligned with the FRBM Act, which mandates fiscal prudence and sustainable debt management.Figure 9: Trends in Deficits of the Union Government (% of GDP) — selected yearsYearFiscal DeficitRevenue DeficitEffective Revenue DeficitPrimary Deficit2020-219.27.36.25.82022-236.43.92.83.02024-25 (A)4.81.70.91.42025-26 (RE)4.41.50.60.82026-27 (BE)4.31.50.30.7Source: Union Budget DocumentsService Sector, Human Capital and EmploymentThe budget realistically recognises that manufacturing alone cannot address the employment challenge for India’s growing workforce, and that the services sector has a comparative advantage in human capital-intensive activities. There is renewed emphasis on services like healthcare, the care economy, tourism, AVGC, design, education, and sports. Planned initiatives include university townships, one girls’ hostel in each district, and upgraded research infrastructure to boost participation and productivity. Rather than short-term employment schemes, the budget adopts a capability-building approach, treating skills, credentials and institutions as drivers of labour market outcomes.Agriculture SectorThe budget looks forward to a productivity-oriented empowerment of diversified areas within agriculture, comprising fisheries, livestock, high-value crops, and value chains. Greater focus is visible on high-value crops such as coconut, sandalwood, cocoa and cashew in coastal areas, and almonds, walnuts and pine nuts in hilly areas. An AI tool-based system named Bharat-VISTAAR for advisory support to farmers, and SHE-Marts to support rural women-led enterprises, will be launched.Tax ProposalsThe budget maintains a status quo in the rate and slab structure of income tax, and base corporate tax rates remain unchanged. The tax proposals are mainly focused on stability, which provides certainty to taxpayers, investors and businesses, with emphasis on administrative simplification, TCS rationalisation, and compliance reforms. A significant change has been made in the Securities Transaction Tax (STT) to rationalise taxation of high-frequency and speculative trading segments — a modest change that will enhance revenue from capital market taxation without any change in capital gains tax.Indirect tax proposals focus mainly on rationalisation of customs duties and simplification. The budget extends several basic customs duty exemptions and relaxations to support domestic manufacturing in sectors like energy, aviation, critical minerals, and defence, and to boost export-oriented sectors like marine, leather textiles, and e-commerce. Relaxations on personal use goods, certain lifesaving medicines and rare disease treatments will improve ease of living. Decriminalisation of minor tax offences and expansion of faceless, technology-driven assessments will further strengthen administrative efficiency.ConclusionThe Budget for the fiscal year 2026–27 shows policy continuation and a further investment-centric approach. Sustained enhanced capital expenditure is its main strength, and the persistence of high levels of effective capital expenditure shows that public investment will be the catalyst of economic growth. The budget unequivocally accepts the role of the private sector in development and proposes a facilitating framework for it to operate. Declining fiscal and primary deficit targets, along with a stabilising debt-GDP ratio, will provide confidence to investors in the economy.The government is steering the Indian economy toward a model of development that is inclusive and sustainable. With targeted capability creation, an improved fiscal framework, and investment in human capital, the budget will prove to be a catalyst for rapid economic growth.ReferencesGovt. of India, Union Budget documents for various yearsGovt. of India, Economic Survey, 2025-26Musgrave, A. Richard & Peggy B. Musgrave. 1989. Public Finance in Theory and Practice, 5th Edition, McGraw-Hill Book CompanyRangarajan C. & D.K. Srivastava. 2005. Fiscal Deficits and Government Debt: Implications for Growth and Stabilisation, Economic & Political Weekly, JulyRao, M.G. 2000. Tax Reform in India: Achievement and Challenges, Asia Pacific Journal, Vol. 7, No. 2Sury, M.M. 1990. Government Budgeting in India, Commonwealth Publishers, DelhiThe Annual Financial Statement presents estimates for three years: Revised Estimates (RE) for the ongoing year, Actual Estimates (AE) for the previous year, and Budget Estimates (BE) for the ensuing year.Effective capital expenditure is the sum of capital expenditure and grants given by the central government for capital asset creation.The fertiliser subsidy spiked during 2022–24 due to a surge in the prices of natural gas and fertiliser caused by the pandemic and geopolitical conflicts. As international commodity prices stabilise, the subsidy burden has decreased without any reduction in support to farmers.In India, fiscal deficit equals the net borrowings of the government. Primary deficit = Fiscal deficit − Interest payments. Revenue deficit is the difference between revenue expenditure and revenue receipts.Author may be reached at eboard@icai.in | www.icai.org | March 2026
Ep. 61 — Ease of Doing Business & Ease of Living : Exploring through the Lens of Tax Reforms
CA Journal
· July 2026
00:00
--:--
Ease of Doing Business & Ease of Living : Exploring through the Lens of Tax ReformsIndia’s journey in improving the ease of doing business has been noteworthy, with the country climbing 79 places in the World Bank Group’s Doing Business Report (DBR) over five years, reaching the 63rd position in 2019. With the DBR discontinued in 2020, the World Bank introduced the B-Ready Assessment in 2024. Business Ready (B-Ready) project developed by the World Bank Group for international benchmarking takes a broader view, examining more than 180 economies across ten topics of the business lifecycle as depicted in Table 1.Table 1.Stage of Business LifecycleTopicsOpening a businessBusiness Entry, Business LocationOperating a businessUtility Services, Labour, Financial Services, International Trade, Taxation, Dispute Resolution, Market CompetitionClosing a businessBusiness InsolvencyThe emphasis is on “quality of regulation” and its implementation. India is slated to feature in the third B-Ready Report, scheduled for release in 2026, setting the stage for the next chapter in its journey toward becoming a more competitive and business-friendly economy.India’s Tax Framework and the Three Pillars of Ease of Doing BusinessIn India, a Joint Working Group was constituted under the Chairmanship of Joint Secretary (Department of Revenue) in May 2024 to steer the mandate under Taxation topic for the World Bank’s Ease of Doing Business (EoDB) and Ease of Living initiatives (B-Ready Project). The Taxation topic measures the quality of regulation, administration, and practical implementation of tax systems across the three defined pillars. Each pillar is divided into categories and each category is further divided into sub-categories, which have indicators. A snapshot of the three pillars under the Taxation topic, and India’s Tax Framework vis-a-vis select categories of the said pillars is outlined in Table 2.Table 2.Select Categories and IndicatorsIndia’s Tax FrameworkSelect Categories and IndicatorsIndia’s Tax FrameworkSelect Categories and IndicatorsIndia’s Tax FrameworkPillar I: Quality of Regulations on TaxationThe first pillar assesses the quality of regulation related to taxation, encompassing both the legal framework (de jure) and the implementation (de facto) of the legal requirements.Clarity of Tax RegulationsIssuance of rulings and interpretations of the law in a timely, transparent, and consistent manner is important for promoting predictability and fairness in tax administration, providing certainty for taxpayers, improving the tax environment for businesses and addressing tax uncertainty. One of the indicators in this category is availability of tax guides and the means to obtain the tax guides.FAQs and Tutorials on a number of topics are available on the Income-tax website, which serve the purpose of tax guides. Tax charts and tables and calculators are also available on the website to facilitate computations.Circulars are also issued by the CBDT from time to time clarifying the position of law and these also serve as guidance to taxpayers.In the Union Budget 2026-27, not only is there an Explanatory Memorandum to the provisions of the Finance Bill, 2026, but also detailed FAQs have been issued by classifying the budget proposals in different categories.Also, the CBDT proposes to come out with a comprehensive Guidance Note containing FAQs on the different provisions of the Income-tax Act, 2025 which is to roll out from 1st April, 2026. These FAQs, Tutorials, Explanatory memorandum are available on the website of the Income-tax Department.All these indicate the sustained efforts taken by the Government to educate and increase awareness amongst the public on provisions of the income-tax law as well as the related procedures and compliances.Transparency of Changes in Tax RegulationHaving a transparent and predictable tax regulation enactment process enhances tax certainty. One of the most effective tools are announcing important changes in advance and engaging key participants of the private sector and society in the consultation.Accordingly, one of the indicators is Obtaining Feedback and Broad Public Consultation.The Income-tax department invites feedback and holds comprehensive stakeholder engagements while preparing and implementing the new income-tax law.As regards the new income-tax law, the department had invited public feedback on the Income-tax Bill, 2025 tabled in the Parliament on 13.02.2025. The Select Committee of the Parliament, which was entrusted with the task of examining the Income-tax Bill, 2025, conducted extensive stakeholder consultations and then gave its recommendations.Public feedback was also invited as early as in March 2025 seeking stakeholder inputs for drafting Income-tax Rules consequent to the Income-tax Bill, 2025. Thereafter, the Draft Income-tax Rules, 2026 have now been placed in public domain and public feedback is also being invited on the said Rules and forms. The Central Board of Direct Taxes is consulting with the stakeholders, including ICAI, on the changes required in the Draft Rules before notifying them.Pillar II: Public Services Provided by the Tax AdministrationThe second pillar measures the quality of tax administration by assessing the public services related to tax matters.Digitisation of the Tax Administration, Governance of Tax Authority and Dispute Resolution Mechanism fall under this pillar.One of the indicators is the availability of the facility of electronic filing of returns and making payments of tax.In India, all categories of taxpayers can file their return electronically and pay their taxes online. In addition, they can submit response to outstanding tax demand, request for rectification, respond to defective notice, view tax credit etc. online. TAN and PAN can be applied online and TDS return can be filed online. A step by step guide is available for each of the activities in the portal.Availability of two level Dispute Resolution Mechanism.Yes, the first appellate authority is the JCIT (Appeals)/CIT (Appeals) and the second appellate authority is the Income-tax Appellate Tribunal. The appealable orders before the different appellate authorities are provided in the Income-tax Act.Governance of Tax AuthorityPublic AccountabilityExistence of Code of Ethics of Tax administrationThe Taxpayers’ Charter of the Income Tax Department is a declaration of its Vision, Mission and Standards of Service Delivery. The same is available on the Income-tax website, which details what the Income-tax Department is committed to do and what it expects from the taxpayers.Taxpayers’ Charter reports are also publicly available on the Income-tax website.Existence of a tax ombudsman or equivalent authority.Taxpayer can file their grievances at CPGRAMS which is an online platform available to the citizens to lodge their grievances to the public authorities on any subject related to service delivery.Pillar III: Efficiency of Tax Systems in PracticeThe third pillar evaluates the practical effectiveness of the implemented tax regulations and public services.Time to file and pay taxes and use of electronic systems to file and pay taxes.The total time taken for preparation, filing and payment is an indicator.The total time taken for preparation, filing and payment would differ depending on the ITR which a person is required to file. ITR 1 and 4 can be filed very quickly since the details required are less.ITR 3, 5, 6 and 7 may take a longer time due to the extensive disclosures required. Auto-population from Form 3CD, AIS and Form 26AS reduces the time taken for preparing the return.Pre-filled electronic declarations are available for all assessees, irrespective of size, turnover/gross receipts. The data from TDS statements and Annual Information Return are pre-filled in the income-tax return of the taxpayer, in addition to their personal information which is pre-filled from the earlier year’s return of income.Use of electronic systems to file and pay taxes.In India, maximum percentage of the taxpayers use electronic systems to file and pay taxes.Thus, we can see India’s substantial progress in –ensuring clarity of tax laws by simplifying the tax law and making available FAQs and tutorials on the provisions of tax laws and tax tables and charts on the website.transparency of tax laws by inviting public feedback and holding extensive stakeholder consultations.enabling e-filing of returns and e-payment of taxes for all categories of tax-payers to ensure ease of compliance.It is noteworthy that a pan-India sensitisation exercise is being undertaken by the Tax Policy Research Unit (TPRU) of the Department of Revenue to apprise stakeholders on India’s engagement with the B-READY assessment.Tax Reforms for facilitating Ease of Doing Business: India’s Path to Viksit Bharat@2047Transformation of the direct tax framework, evolving from a system defining enforcement and deterrence into one that embodies simplicity and voluntary compliance, is the core to achieve India’s aspiration of Viksit Bharat@2047. This shift reflects a deeper commitment to building a tax regime that fosters confidence between the Government and its people. Landmark initiatives such as the Transparent Taxation – Honouring the Honest platform, the Jan Vishwas Act, 2023, and the enactment of the Income-tax Act, 2025 stand as milestones in this reform agenda.The Transparent Taxation – Honouring the Honest platform, encompassing major reforms like Faceless Assessment, Faceless Appeal and Taxpayers Charter, is part of the Government’s resolve to provide maximum governance with minimum government.The Jan Vishwas (Amendment of Provisions) Act, 2023 which received Presidential assent on 11th August 2023 decriminalized 183 provisions across 42 Acts. It adopted multiple approaches to decriminalization, including removing both imprisonment and fines, converting imprisonment and/or fines into monetary penalties, and introducing compounding of offences in some cases.Following recommendations of the Joint Parliamentary Committee, the Department for Promotion of Industry and Internal Trade (DPIIT) initiated further identification of minor criminal provisions for inclusion in a subsequent amendment bill. Building on this success, the Jan Vishwas (Amendment of Provisions) Bill, 2025, approved by the Union Cabinet on 12th August 2025, was introduced in the Lok Sabha on 18th August 2025. The Bill was then referred to a Select Committee, where it is currently under examination.This new reform initiative expands the scope to 16 Central Acts, proposing amendments to 355 provisions in total. Of these, 288 provisions are targeted for decriminalization to promote Ease of Doing Business, and 67 provisions are proposed to be amended to facilitate Ease of Living.Against this backdrop, it would be pertinent to examine the direct tax proposals in the Union Budget 2026-27 amending the Income-tax Act, 2025 aimed at enhancing ease of doing business and ease of living in India.Union Budget 2026-27: Direct Tax Proposals to facilitate Ease of Doing Business in IndiaEase of Doing Business (EoDB) stands as a central pillar of India’s reform strategy, propelling growth and fostering sustainable development. The Union Budget 2026-27 drives India’s EoDB agenda by ensuring tax clarity, easing compliance, and fostering trust-based governance. Key direct tax reforms include rationalising Minimum Alternate Tax (MAT) and buyback taxation, decriminalising prosecution provisions and rationalising penal provisions.Rationalisation of MATIn order to encourage companies to shift to the new tax regime under Section 200, the Finance Bill, 2026 proposes to allow set-off of MAT credit only in the new tax regime for domestic companies to the extent of 25% of the tax liability. Tax paid under the provisions of MAT would be the final tax in the old regime as per the regular provisions of the Act and no new MAT credit would be allowed. The rate of MAT is proposed to be reduced to 14% of book profit from the existing 15%. Also, all non-residents who pay tax on presumptive income would be exempt from MAT.However, only domestic companies shifting to the new tax regime under Section 200 from April 1, 2026 will be eligible for MAT credit. According to the FAQs issued by the Department, companies that transitioned earlier did so voluntarily, based on their financials, status, and analysis of deductions/exemptions, and benefited from lower tax rates under the new regime compared to the old. This rationale given highlights that inspite of being early adopters, the companies which shifted earlier are not entitled to MAT credit.In contrast, the tax treatment proposed for gains arising from sale of Sovereign Gold Bonds reflects a different approach. Even in respect of bonds purchased from the secondary market prior to the proposed amendment by the Finance Bill, 2026, capital gains exemption would be denied inspite of holding the same until maturity. If we apply the rationale of denying MAT credit to early adopters in this case, then, those who purchased the bonds at that point of time were aware of the exemption and this benefit governed their decision to purchase the bonds. The proposed denial of capital gains exemption on bonds purchased from the secondary market before February 1, 2026, even if held until maturity, would cause hardship to taxpayers. Investors acquired these bonds with the legitimate expectation of exemption, and this tax benefit influenced their purchase decision. A grandfathering provision is, therefore, essential to protect the exemption for bonds purchased prior to February 1, 2026 and held until maturity.Rationalisation of Buyback TaxationIt is proposed to rationalise the taxation of share buy-backs by providing that consideration received on buy-back shall be chargeable to tax under the head “Capital gains” instead of being treated as dividend income. This is a much sought after investor-friendly proposal in the Union Budget.However, in case of promoters, it is proposed that the effective tax liability on gains arising from buy-back shall be 30%, comprising tax payable at the applicable rates together with an additional tax. In case of promoter, being a domestic company, the effective tax liability will be 22%. The definition of promoter would be as per SEBI (Buy-back of Securities) Regulations, 2018 made under the SEBI Act, 1992, in case of a company whose shares are listed on a recognized stock exchange. In case of a company other than a company whose shares are listed on a recognized stock exchange in India, “promoter” would mean a promoter as defined in Section 2(69) of the Companies Act, 2013 or a person who holds, directly or indirectly, more than 10% of the shareholding in the company. There may be venture capital investors holding more than 10% who do not exercise promoter-like control. These investors may also be subject to higher rate of tax on capital gains on account of the 10% shareholding criterion. Also, since both direct and indirect holding are being considered, there could be issues relating to legal ownership versus beneficial ownership. These are some concerns which need to be addressed.Decriminalisation of Prosecution Provisions and Rationalisation of Penal ProvisionsProsecution provisions are being decriminalised and penal provisions are being rationalised to foster trust-based governance, which will facilitate ease of doing business.The Finance Bill, 2026 proposes complete decriminalisation of offence wherein a person fails to produce accounts and documents. Also, complete decriminalisation is proposed for failure to ensure payment of tax in case of benefits and perquisites provided or winnings from lotteries, crossword puzzles, online games or consideration for transfer of virtual digital asset, where the winnings/consideration are wholly in kind or partly in kind, and the part in cash is not sufficient to meet the TDS liability. It may be noted that at present, both penalty and prosecution are being attracted in respect of this offence.Offences where the amount sought to be evaded does not exceed Rs.10 lakh to attract only fine and there would be no imprisonment in such cases.The remaining prosecution provisions are being graded in commensuration with the tax sought to be evaded or income under-reported. Instead of rigorous imprisonment, there would be a simple imprisonment, with maximum imprisonment reduced from 7 years to 2 years, which would be in a case where the amount sought to be evaded or tax on under-reported income exceeds Rs.50 lakhs. The maximum imprisonment would be 6 months where the amount sought to be evaded or tax on under-reported income is between Rs.10 lakhs to Rs.50 lakhs. Fine can be imposed in lieu of or in addition to simple imprisonment in both cases.Penalties for certain technical defaults such as failure to get accounts audited, non-furnishing of transfer pricing audit report and default in furnishing statement for financial transactions, are proposed to be converted into fee.However, in case of fee for failure to get accounts audited, there is a concern due to the fee being a fixed amount of Rs.75,000 upto one month of delay and Rs.1,50,000 thereafter. It is noteworthy that the requirement to get books of account audited in case of an eligible assessee who declares lower than 6%/8% of total turnover as his profits and gains from business and whose total income exceeds the basic exemption limit has been introduced in the Income-tax Act, 2025. On account of this provision, even those individuals whose total income is less than Rs.12 lakh and have no tax liability on account of rebate under Section 156 (corresponding to Section 87A of the Income-tax Act, 1961) would be required to get their accounts audited, failing which they would be liable for a fee of Rs.1,50,000. Also, a salaried individual having a salary of say, Rs.9 lakh, and who makes a profit of say, Rs.20,000, from F & O transactions would have to get his accounts audited on account of his total income being higher than the basic exemption limit, failing which he would be liable for a fee of Rs.1,50,000. Here again, the individual does not have to pay tax consequent to rebate, but would be liable for a fee of Rs.1,50,000 for failure to get accounts audited. The fee should, therefore, ideally be a percentage of total turnover subject to a maximum of Rs.75,000, for delay upto a month and a maximum of Rs.1,50,000, for delay beyond a month.Addressing this concern will be essential as the Finance Bill, 2026 proceeds in the Lok Sabha.Immunity from penalty and prosecution for misreporting would be available if the taxpayer pays 100% of the tax amount as additional income-tax over and above the tax and interest due.Immunity from prosecution with retrospective effect from 01.10.2024 for non-disclosure of non-immovable foreign assets with aggregate value less than Rs.20 lakh.Union Budget 2026-27: Direct Tax Proposals for “Ease of Living”It is interesting to observe that this year, the Union Budget 2026-27 has introduced tax proposals in the category of “Ease of Living”. The introduction of simplified rule-based automated processes for obtaining lower or nil deduction certificates, relief measures such as exemption of interest awarded by the Motor Accident Claims Tribunal and consequent relief from deduction of tax, ease of compliance to investors filing declaration for no deduction of tax by enabling filing the same with the depository, increase in the time limit for filing revised return, extension of due date for filing of return in case of assessees carrying on business but not subject to audit are some of the proposals under this category.However, the inclusion of “supply of manpower” in the meaning of work for the purposes of TDS and the extension of the timeline for depositing employee contributions to provident fund, superannuation fund, etc., until the due date of filing the return, does not align with the category “Ease of Living”. While the former proposal introduces liability to deduct tax, the latter allows the employer to claim deduction by permitting remittance of employee’s contribution to provident fund etc. upto the due date of filing return. Though it may be argued that there are deterrents in the respective laws for delaying remittances, still the extension of time does not lead to “ease of living” for the employee to whom these sums belong.Outlined below are the tax proposals in the Union Budget 2026-27 aimed at facilitating ease of living –Extending the period of filing revised return by 3 months from its existing time limit of nine months to twelve months from the end of the relevant tax year i.e., from 31st December to 31st March. However, for revised returns which are filed beyond nine months from the end of relevant tax year, a fee of a sum of Rs. 1000 is proposed to be levied, if the total income of such person does not exceed Rs. 5,00,000; and a sum of Rs. 5000, in any other case.Extending the due date for filing return of income from 31st July to 31st August of the financial year following the relevant tax year in the case of assessees having income from profits and gains of business, or profession whose accounts are not required to be audited, and in the case of a partner of a firm whose accounts are not required to be audited.Exemption to an individual or his legal heir, on any interest awarded on compensation under the Motor Vehicles Act, 1988. At present, TDS is applicable on interest on the compensation amount awarded by the Motor Accidents Claims Tribunal to any person if such interest exceeds Rs.50,000 during the tax year. Consequent to the exemption, there would be no requirement of TDS on the payment or credit of interest on the compensation amount awarded by a Motor Accidents Claims Tribunal, to an individual.Enabling Electronic filing of application for issuance of certificate of lower or nil deduction of tax to reduce the compliance burden of small taxpayers. It is proposed to allow electronic filing of applications for such certificates before the prescribed income-tax authority, which may issue the certificate subject to prescribed conditions or reject the application if the conditions are not fulfilled or the application is incomplete.Enabling depositories to accept Form 15G/Form 15H from the investor and provide it directly to the companies for ease of taxpayers holding securities in multiple companies.Exemption from Tax deduction account number (TAN) for a resident buying immovable property from a non-resident. Tax can be deducted and deposited through resident buyer’s PAN based challan. This facility is already available to a resident buying immovable property from another resident. It is now being extended to a resident buying immovable property from a non-resident.The launch of the Foreign Assets of Small Taxpayers – Disclosure Scheme, 2026 (FAST-DS) reflects the Government’s responsiveness to the genuine difficulties faced by small taxpayers in cases of inadvertent foreign asset non-disclosure.Trust-Driven Tax Regime: Fostering Business & Empowering CitizensThrough these tax reforms, India takes a decisive step toward aligning its tax framework with global benchmarks of governance. This transformation embodies the Government’s vision of a modern, trust-driven direct tax regime; one that empowers citizens, strengthens transparency, and reinforces India’s commitment to fair and progressive taxation. These reforms pave way for greater ease of doing business and ease of living, making India’s tax system globally aligned, people-centric and business friendly.ReferencesBudget Speech Union Budget 2026-27Finance Bill, 2026, Explanatory Memorandum & FAQsIncome-tax Act, 2025PIB Headquarters Press Release posted on 5th February, 2026PIB Press Release posted on 6th February, 2026 – Ministry of FinancePIB Press Release posted on 10th February, 2026 – Ministry of Commerce & IndustryWorld bank website – Topic “Business Ready” [https://www.worldbank.org/en/businessready/topic/taxation]Author may be reached at eboard@icai.inThe Chartered Accountant • March 2026 • www.icai.org
Ep. 62 — Union Budget 2026: Recalibrating India’s Transfer Pricing and Cross-Border Tax Framework
CA Journal
· July 2026
00:00
--:--
Union Budget 2026: Recalibrating India's Transfer Pricing and Cross-Border Tax FrameworkThe Union Budget 2026 was announced by the Hon'ble Finance Minister of India on 1st February, 2026. It demonstrates a significant shift in India's international tax policy, shifting the focus on fine-tuning of a framework for greater certainty. Instead of limiting changes to rate adjustments or procedural refinements, the Finance Bill, 2026, recalibrates the key aspects of the transfer pricing regime. The primary focus is on dispute prevention & resolution, systematic management of technical defaults, and strict enforcement of statutory timelines to improve closure discipline.This article details the key international taxation initiatives within the Finance Bill, 2026, which impact transfer pricing and cross-border taxation. Emphasis is on compliance rationalization as well as enhancement of Safe Harbour and APA mechanisms, with specific focus on the IT services sector, and the evolution of tax systems targeting digital infrastructure. It also offers a synopsis of the consequences these amendments may have on the compliance side for multinational groups, ranging from governance to visibility in planning.CA. Rishabh AgarwalMember of the Institute CA. Praneeth NarahariMember of the InstituteSummary of the Finance Bill, 2026The Finance Bill, 2026 introduces a set of reforms that:Soften the compliance issues for technical TP defaults.Tighten APA implementation across group entities.Tie digital-infrastructure incentives with administrable TP certainty, building out a certainty regime for the IT services sector.Tighten procedural certainty on TP/DRP timelines and limit annulments on the basis of limitation.The Bill proposes to amend the fixed penalty exposure for failure to furnish the accountant's report for international/specified domestic transactions with a tiered fee regime linked to the length of time of delay. It signals a shift in approach where compliance discipline is retained, but the response to procedural delay becomes proportionate rather than punitive. Alongside this, the Safe Harbour certification ecosystem is supported through a rationalisation of the accountant definition, aimed at easing access and operational frictions in dispute-prevention entry points.The Bill addresses a known implementation gap by enabling associated enterprises covered by an APA (not only the applicant) to align return positions through return/modified return filing within a prescribed statutory window, limited to the APA's scope. This improves group-level coherence and reduces residual disputes arising from correlative impacts of APA outcomes.The Bill provides long-term tax certainty for foreign participation in India's data centre and cloud ecosystem through an extended exemption window for specified procurement models, while preserving tax jurisdiction over India-facing revenue streams via structuring conditions. Complementing this, a Safe Harbour margin for related-party data centre services introduces a clear pricing rule for a segment where benchmarking disputes are structurally frequent.The Bill consolidates dispute prevention for IT services by expanding Safe Harbour eligibility, shifting processing towards rule-driven automation, providing multi-year pricing continuity once opted, and fast-tracking unilateral APAs through a defined completion timeline with a taxpayer-request extension. The reforms, in aggregate, are intended to shift routine IT/ITeS pricing out of an extended controversy cycle into certainty predictable resolutions.Further, the bill reinforces procedural certainty in TP and DRP assessments by codifying limitation mechanics that have driven technical litigation. It clarifies the computation of the sixty-day TPO order buffer (including leap-year treatment) and aligns timelines across the 1961 Act and the Income-tax Act, 2025. It also ring-fences DRP finalisation timelines from general limitation rules, reducing limitation-based annulments.Overall, the package signals a clear direction: certainty-first administration for scaled cross-border service models, reduced controversy for technical defaults, and better operational alignment of APA outcomes across group entities.Procedural Rationalisation and Compliance LiberalisationDecriminalisation of Technical Transfer Pricing DefaultsLegislative AmendmentUnder the earlier framework of the Income-tax Act, 2025, Section 447 provided for a penalty of ₹1,00,000 for failure to furnish the report from an accountant as required under Section 172, which relates to reporting of international transactions or specified domestic transactions.The Finance Bill, 2026 proposes to replace Section 4281 and replace the penalty provision under Section 447 with a compliance mechanism based on fee.Therefore, under the substituted Section 428(d):Where any person fails to furnish a report from an accountant as required under Section 172, he shall be liable to pay by way of fee:₹50,000 for delay up to one month; and₹1,00,000 where the delay exceeds one month.2This replaces the earlier fixed penalty structure under Section 447 with a graded fee regime.RationaleThe previous regime imposed the same penalty regardless of the time of delay.The amendment attempts to:Decriminalise technical non-compliance,Introduce proportionality through graded fees, andDistinguish procedural lapses from substantive tax violations.Impact AssessmentThe reform reduces adversarial escalation in routine compliance and aligns enforcement with international documentation standards. Substituting punitory penalties with proportionate monetary levies, it improves the compliance framework without weakening reporting obligations.Rationalised Definition of “Accountant”Legislative AmendmentThe Hon'ble Finance Minister, in her speech, also announced to revise the definition of “accountant” for the purposes of the Safe Harbour Rules by widening professional eligibility under the certification framework.3 The change is primarily financial in nature, aimed at easing entry barriers for practitioners.Under the revised thresholds:The annual professional receipt limit for individual practitioners or valuers is reduced from ₹1 crore to ₹50 lakhs.For firms or entities engaged in accountancy or valuation services, the ceiling is lowered from ₹10 crores to ₹3 crores.Importantly, the qualitative safeguards remain intact. The minimum ten-year professional experience requirement continues to apply, as does the condition relating to multi-country presence wherever relevant. Recognition of foreign-qualified professionals is also retained.4RationalePreviously, the higher receipt thresholds effectively limited participation to larger firms, restricting access for competent mid-sized practices. The revision is intended to widen the certification base without relaxing experience or competence criteria.Impact AssessmentIn practical terms, the expanded eligibility pool of accountants should ease procedural constraints and improve access to Safe Harbour certifications. Over time, this may reduce compliance inefficiencies and improve overall efficiency of the framework.Structural Strengthening of the APA RegimeAPA Benefits Extended Across Associated EnterprisesLegislative AmendmentEarlier, under Section 169(1), the ability to file a modified return pursuant to an APA was confined to APA applicants only. The associated enterprises affected by the APA outcome had no statutory resort to align or revise their return accordingly.Section 169(1) now permits both the APA applicant and any affected associated enterprise to file a return or modified return, restricting to the matters falling within APA's scope. Such filings must be made within three months from the end of the month in which the APA is entered into5, and applies to agreements entered into on or after 1 April 2026 and to tax years commencing thereafter.6RationaleIn practice, transfer pricing adjustments under an APA frequently generate a corresponding effect across multiple group entities. Limiting the modified return facility to the APA applicant created structural imbalance and administrative rigidity in implementing group-level outcomes where the associated enterprises are also liable to tax in India.The amendment addresses this structural gap by enabling alignment of tax positions among group entities.Impact AssessmentBy means of extension of the modified return facility to AEs, the reform facilitates corresponding adjustments at the group level. Affected entities can realign their tax positions and, where relevant, seek refunds of taxes previously paid or withheld that no longer reflect the agreed APA pricing. This adjustment removes earlier administrative rigidity and supports coordinated implementation of APA outcomes. In doing so, it mitigates double taxation risk and reduces the likelihood of post-APA disputes.Fast Track Unilateral APAs for IT Services7Legislative AmendmentDraft rule 109 of the Income-tax Rules, 2026 (Erstwhile Rule 10L of Income-tax Rules, 1961) introduces defined timelines for concluding unilateral APAs. A new sub rule 3 has been added which states that a unilateral agreement be finalised within one year from the end of the financial year in which application is accepted for processing.Further, newly inserted sub rule 13 & 14 states that if a unilateral APA application for IT services is not concluded within two years from the end of the quarter in which it was filed, the proceedings are deemed to be closed automatically.However, the law allows the assessee to formally request an additional extension of six months beyond the initial two-year limit. This effectively allows a maximum window of up to two and a half years.RationaleThis procedural mandate aligns with the government's strategic objective to provide forward visibility and certainty in transfer pricing governance for India's global leadership in software and IT-enabled services.Impact AssessmentThe proposed APA timelines materially re-balance the unilateral APA process towards time-bound certainty and administrative accountability, particularly for IT/ITeS transactions where volume is high and fact patterns are repeatable. Introducing a wherever possible one-year completion objective signals an institutional expectation of faster closures, which should improve forward pricing visibility and reduce the commercial cost of prolonged uncertainty. More importantly, the automatic closure mechanism for IT-services unilateral APA applications that remain unresolved after two years creates a hard outer boundary that is likely to compress internal processing timelines and reduce indefinite pendency, which has historically been one of the primary practical limitations of APAs as a dispute-prevention tool.Overall, the change should increase the attractiveness of unilateral APAs for routine IT service models, but it will also reward disciplined documentation, early issue crystallisation, and proactive engagement to ensure that certainty is achieved within the statutory window.Tax Architecture for Digital Infrastructure and Cloud EcosystemsLong-Term Tax Certainty for Foreign Data Centre ProcurementLegislative AmendmentThe Finance Bill, 2026 amends Schedule IV of the Income-tax Act, 2025 to provide an exemption to a foreign company in respect of income accruing or arising in India, or deemed to accrue or arise in India, from procurement of data centre services from a specified data centre, for a period up to the tax year ending 31 March 2047.8The explanatory memorandum indicates that this measure is intended to incentivise long-term investment in India's data centre ecosystem and support the growth of an advanced digital infrastructure, including AI-driven capacity expansion.9RationaleLarge-scale data centre infrastructure and AI-based digital ecosystems are capital intensive, have long asset life cycles, and operate on long-term revenue models. Such investments require predictable tax treatment over extended periods.The amendment is intended to:Enhance India's attractiveness as a regional cloud and digital infrastructure jurisdiction,Provide long-term fiscal certainty to foreign cloud and hyperscale operators, andFacilitate expansion of high-capacity data centre and AI-linked infrastructure within India.The proposed convergence seeks to harmonise financial reporting and tax computation standards.Impact AssessmentThe extended exemption window strengthens India's positioning as a regional cloud and hyperscale infrastructure hub. It enhances investor confidence while preserving domestic tax jurisdiction over Indian customer revenues. At the same time, the reseller-based servicing model preserves domestic tax jurisdiction in respect of Indian customers.Safe Harbour for Related-Party Data Centre ServicesLegislative AmendmentA Safe Harbour has been introduced for data centre services provided from India to a related foreign entity, prescribing a 15% mark-up on operating cost as the arm's length price for such international transactions.The measure was announced in the Union Budget Speech, wherein the Hon'ble Finance Minister indicated the introduction of a Safe Harbour margin of 15 percent on cost for such services.10Further, the 15% operating profit margin is proposed to be incorporated within the Safe Harbour provisions of the Draft Income-tax Rules, 2026, thereby extending notified Safe Harbour treatment to intra-group data centre service transactions under the transfer pricing regime.11RationaleIntra-group data centre service arrangements typically involve infrastructure-intensive operations with limited external comparables, leading to frequent benchmarking disputes. The introduction of a fixed Safe Harbour margin seeks to provide certainty in pricing, reduce interpretational disputes, and simplify transfer pricing compliance for digital infrastructure service models.Impact AssessmentThe Safe Harbour delivers upfront pricing certainty, reduces documentation complexity, and enables scalable operating models for multinational digital groups. It complements the long-term exemption regime and creates a vertically integrated digital tax framework.Integrated Certainty Framework for the IT Services SectorScale Expansion of Safe Harbour EligibilityLegislative AmendmentThe turnover threshold for availing Safe Harbour in respect of IT services has been enhanced from ₹300 crores to ₹2,000 crores.12 The revised eligibility parameters have been incorporated in the Draft Income-tax Rules, 2026.13Further, India is a global leader in software development services, IT enabled services, knowledge process outsourcing services, and contract R&D services relating to software development. These business segments are quite inter-connected with each other. All these services are proposed to be clubbed under a single category of Information Technology Services.14 Thus, corresponding changes have been made in rule 88 (Eligible international transaction) of the Draft Income-tax Rules, 2026.This substantially widens the class of IT service providers eligible to opt for the Safe Harbour regime.RationaleThe earlier framework limited Safe Harbour access largely to smaller service providers. As the IT services sector expanded in scale and global integration, a significant segment of mid-sized and large enterprises remained outside the certainty mechanism.Further, the earlier Safe Harbour Rules had margins ranging from 17-24% for IT services which were quite inter-connected. Thus, there was a need to simplify and remove the overlap and cover all the IT services under a single Safe Harbour rate.The enhanced threshold aligns the Safe Harbour framework with the current scale of operations in the IT industry.Impact AssessmentThe substantial enhancement of the turnover threshold to ₹2,000 crores democratizes access to tax certainty, enabling a significant segment of mid-sized and large IT enterprises to bypass protracted transfer pricing audits. The reforms consolidate interconnected segments such as software development, ITES, KPO, and contract software R&D into a single Information Technology Services category. A uniform, competitive, fixed 15.5% margin is prescribed for this integrated segment. The reform reduces classification disputes and simplifies compliance.Automated Processing and Five-Year Pricing ValidityLegislative AmendmentThe Union Budget 2026 announced that the Safe Harbour regime for IT services would shift to an automated, rule-based processing model, removing the requirement for an officer-level examination.15The Draft Income-tax Rules, 2026 propose the effect to this change. The framework intends the electronic filing of Form 49, system-based verification of eligibility conditions, and electronic communication of decision to accept or reject the application within a prescribed period.16Additionally, where the Safe Harbour option is validly exercised, it shall be applicable for five consecutive tax years, which would make it possible to price or tax IT services for multiple years.17RationaleThe need for manual verification and re-verification year-on-year is debatable, and the scope for administrative delay is high. Hence, the reform is intended to reduce subjectivity and compliance inefficiencies by making the process automated and by allowing multi-year pricing continuity.Impact AssessmentUnder this provision, the option of a five-year Safe Harbour is very critical for multinationals, as it will help them in long-term fiscal planning for their Indian operations. This will mitigate the litigation uncertainties in the most critical service sector of India.Strengthening Procedural Certainty in TP and DRP ProceedingsClarifying TPO Order Timelines and ComputationLegislative AmendmentThe Finance Bill, 2026 has now made explicit time limits within which the Transfer Pricing Officer (TPO) has to pass an order. The revised Section 166(7) of the Income-tax Act, 2025 has drafted a systematic link between the assessment limitation period and the outer date on which the TPO's order must be issued.18Where the limitation period for completion of assessment expires:On 31 March of any year, the TPO order must be passed on or before 31 January of that year.On 31 December of any year, the TPO order must be passed on or before 31 October of that year.The amendment provides statutory clarity on the manner of computing the sixty-day buffer preceding the assessment limitation date.To reinforce this position, a clarificatory Sub-section (3AA) has been inserted in Section 92CA of the Income-tax Act, 1961. The provision expressly sets out the computation methodology for the sixty-day period referred to in Section 92CA(3A), including specific guidance for leap years.19RationaleThe change addresses a long-standing interpretational dispute concerning how the sixty-day timeline under Section 92CA(3A) is to be computed. That provision governs the deadline for the TPO to pass an order before the assessment limitation expires.While the legislative intent has consistently been to include the limitation date in computing the sixty-date period, certain judicial decisions excluded it. As a result, otherwise substantive transfer pricing determinations and corresponding assessments were quashed on a narrow procedural issue. The controversy has created unavoidable litigation, procedural uncertainty, and revenue leakage, with assessments being set aside despite there being a clear sixty-day buffer in practical terms for completing the final assessment process.With the introduction of the Finance Bill, 2026 from 1 April 2026, the broader objective has been to minimise interpretational disputes through clearer drafting. Hard-coding the intended computational rule and aligning the position in the Income-tax Act, 1961 ensures uniformity across both statutes. The notwithstanding clarification is therefore designed as a harmonising measure, thereby restoring consistency and limiting technical invalidations.Impact AssessmentThe clarification is likely to have immediate practical consequences for transfer pricing assessments. By prescribing a uniform method of computing the sixty-day period, the amendments reduce reliance on judicial interpretations that excluded the limitation date. This significantly reduces the risk of assessments being struck down on timing grounds rather than on merits of arm's length analysis.For ongoing and future cases, the measure enhances procedural predictability. TPO timelines and downstream assessment timelines become clearer and less vulnerable to last minute limitation challenges. In effect, disputes are likely to shift back to substantive issues like comparability analysis, margins, and adjustments rather than procedural computation.Where the clarification is issued with overriding effect, it may also affect pending cases where the taxpayers have been relying on more favourable precedents. This limits the scope for time baring based defence strategies and magnifies the importance of substantive grounds in appeals.In general, the amendment enhances uniformity and enforceability in both the statues.Clarification of Time Limits under Section 275 (DRP Mechanism)Legislative AmendmentThrough the Union Budget 2026, Section 275 of the Income-tax Act, 2025 has been amended to clarify the interaction between the DRP framework and the general limitation provisions under Sections 286.20The amendment makes it explicit that while Sections 286 govern the outer time limit up to the draft order stage, the one-month period prescribed under Section 275(4) and Section 275(14) for completion of assessment after acceptance of variations or receipt of DRP directions shall apply notwithstanding the limitation framework under Sections 286.Corresponding amendments have been made in Section 144C of the Income-tax Act, 1961 as well for maintaining coherency.RationaleThe amendment is driven by the need to restore certainty and coherence in the time-limit framework governing assessments routed through the Dispute Resolution Panel (DRP) under Section 144C.The structure of Section 144C is clear. Once a draft assessment order is issued to an eligible assessee, the subsequent stages operate within distinct and self-contained timelines. Section 144C(4) governs cases where the assessee accepts the variations or does not file objections before the DRP, while Section 144C(13) applies where DRP directions are issued. Both provisions function independently of the general limitation framework under Section 153 and 153B.Despite this statutory design, judicial interpretation has not been uniform. Certain decisions have treated Section 153 and 153B as imposing an overriding outer limitation even at the post-draft order or post-DRP stage, notwithstanding the specific carve-outs within Section 144C.The resulting divergence, further intensified by conflicting rulings including a split verdict at the apex level, has heightened litigation exposure on limitation grounds, particularly in high-value cases involving transfer pricing adjustments and non-resident assessments.Impact AssessmentThe clarification is likely to have immediate practical consequences for transfer pricing assessments. By prescribing a uniform method of computing the sixty-day period, the amendment curtails reliance on judicial interpretations that excluded the limitation date. This significantly reduces the risk of assessments being struck down on timing grounds rather than on the merits of the arm's length analysis.For current and future cases, the measure provides predictability as to procedural timelines in terms of TPOs and downstream assessments that are no longer at risk of a last-minute limitation challenge. Consequently, we anticipate that the disputes will come back to the substance of comparability analysis, margins, adjustments, etc.Where the clarification operates with overriding effect, it may impact pending disputes based on favourable precedents. Limitation-based challenges will narrow, increasing reliance on substantive appellate grounds. In sum, the amendment enhances consistency across both statutes, increases administrative certainty, and reduces reliance on limitation-based technical objections.ConclusionThe Union Budget 2026, along with the Draft Income-tax Rules, 2026 introduces a deliberate move towards certainty in India's transfer pricing and cross-border framework. The policy agenda is reflected in three key areas: increased automation, proportionate consequences for technical defaults, and expanded access to dispute prevention mechanism. Replacing a fixed penalty for TP reporting defaults with a graded fee structure reduces adverse clashes by procedural defaults, whilst upholding the reporting discipline. Likewise, the rationalised Safe Harbour certification framework reduces practical barriers in accessing certainty tools.The APA related changes are equally significant. Extending the modified return facility to associated enterprises closes a structural gap in group level implementation and is likely to reduce residual disputes and instances of economic double taxation. Defined timelines and an outer limit for unilateral APAs in the IT services segment introduce clearer administrative discipline. While this enhances forward visibility, it also places greater importance on timely submissions and active case management by taxpayers.They also align tax policy with India's digital infrastructure ambitions. The extension of foreign procurement exemption for data centre services, coupled with the fixed Safe Harbour margin for related-party data centre transactions, results in a multi-level model which blends investment certainty at capital stage with administrable pricing outcomes during the operational stage.They further add more certainty in TP and DRP workflows. It does this by structuring TPO timeline computation and making rules about data-specific calculations and leap-year treatment. It also stops litigation over the sixty-day buffer. It says that general limitation applies up to the draft order stage. DRP finalisation timelines work separately. Together, these things reduce limitation-based annulments and make disputes focus on substantive TP merits.The IT services package quickly expanded Safe Harbour eligibility, made service categorisation the same, did automated processing, and allowed five-year continuity to reduce audit intensity and stop classification disputes. For multinationals, the message is that certainty mechanisms are being extended and made into a system. Taxpayers will make more money if they adopt these mechanisms early with documentation and governance.Finance Bill, 2026, clause 83 (substituting section 428 of the Income-tax Act, 2025)Ibid.Union Budget 2026–27 Speech, para 137Draft Income-tax Rules, 2026, Rule 86 (definition of “accountant”).Finance Bill, 2026, Clause 45 (Substitution of section 169(1) of the Income-tax Act, 2025).Memorandum Explaining the Provisions in the Finance Bill, 2026, p. 42.Union Budget 2026–27 Speech, para 128Finance Bill, 2026, clause 109 (Amendment of Schedule IV of the Income-tax Act, 2025)Memorandum Explaining the Provisions in the Finance Bill, 2026, p. 43Union Budget 2026–27, Budget Speech of the Hon'ble Finance Minister, para 131Draft Income-tax Rules, 2026, Draft Rule 89, Table Sl. No. 9.Union Budget 2026–27 Speech, para 126.Draft Income-tax Rules, 2026, Rule 89, Table Sl. No. 1.Union Budget 2026–27 Speech, para 124-125Union Budget 2026–27 Speech, para 127Draft Income-tax Rules, 2026, Rule 91(2) and (3)Draft Income-tax Rules, 2026, Rule 91(1)Finance Bill, 2026, Clause 44 (Substitution of section 166(7) of the Income-tax Act, 2025).Finance Bill, 2026, Clause 4 (Insertion of section 92CA(3AA) in the Income-tax Act, 1961 – retrospective from 1 June 2007).Finance Bill, 2026, Clause 61 (Substitution of sub-sections (4), (14) in section 275 of the Income-tax Act, 2025).Authors may be reached at rishabha505@gmail.com, narahari.praneeth@gmail.com and eboard@icai.in
Ep. 63 — GST Amendments – Proposed through The Finance Bill, 2026
CA Journal
· July 2026
00:00
--:--
GST Amendments – Proposed through The Finance Bill, 2026The Finance Bill, 2026 proposes significant GST amendments primarily aimed at reducing litigation and improving cash flow. Post-supply discounts will now require only issuance of a credit note and ITC reversal by the recipient, removing the need for prior agreements or invoice linkage. Section 34 is amended to expressly permit credit notes for such discounts. Provisional 90% refunds are extended to inverted duty cases, easing working capital blockage. Refunds below ₹1,000 are allowed for exports with tax payment, benefiting small consignments. Pending constitution of the National Appellate Authority, GSTAT may hear conflicting advance rulings. Importantly, intermediary services will now follow recipient-based place of supply, impacting both imports and exports related services.Multiple expectations surround the budget for trade and industry. The intrigue associated with such expectations compounds the excitement around such proposals. With the year-round functioning of the GST Council and key decisions announced after every Council meeting, the surprise element of GST amendments has reduced significantly. However, the exact verbatim of the amendments still adds spice to known decisions. It is quite interesting to study both the intended and unintended, direct and far-reaching consequences of such amendments. On this notion, all the proposed amendments in the GST law have been examined below:1. GST reduction on discount only subject to ITC reversal by recipientSourceClause 137 of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (3) of Section 15 of the CGST Act, 2017.Provision Before AmendmentSection 15(3): The value of the supply shall not include any discount which is given—(b) after the supply has been effected, if—(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.Provision After AmendmentSection 15(3): In the Central Goods and Services Tax Act, 2017, (hereinafter referred to as the Central Goods and Services Tax Act), in section 15, in sub-section (3), for clause (b), the following clause shall be substituted, namely:—“(b) after the supply has been effected, if for such discount, a credit note has been issued by the supplier and input tax credit as is attributable to such discount has been reversed by the recipient of the supply, in accordance with the provisions of section 34.”Effect of the AmendmentThe conditions for the reduction of outward supply value for post supply discount are as follows:A credit note has been issued by the supplier with GSTITC attributable to such discount has been reversed by the recipientThe mechanism for tracking ITC reversal by the recipient has already been established through the invoice management system (IMS). In the IMS portal, if the ITC is rejected by the recipient, the tax attributed to such credit note is appended to outward tax liability in Table 3.1.(a) of the subsequent Form GSTR 3B.After an amendment, the following conditions would no longer stay relevant for post supply discounts:Having to be established in terms of agreement at or before the time of supplyHaving to be specifically linked to relevant invoicesAfter the given amendment, one need not link the credit note against the relevant invoices for satisfaction of Section 15(3)(b).However, the conditions for issuing of credit note u/s 34 would still be applicable towards discounts indirectly. Therefore, the said credit note for discount still needs to be issued and reported within 30th November of the financial year following the year in which the supply was made.In other words, even for post supply discount, one cannot issue credit notes with GST if the invoice for the original supply precedes the timelines defined above as per Section 34(2).2. Conditions for issuance of credit note to include post supply discountsSourceClause 138 of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (1) of Section 34 of the CGST Act, 2017.Provision Before AmendmentSection 34(1): Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.Provision After AmendmentSection 34(1): Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, or where a discount is referred to in a clause (b) of sub-section (3) of section 15 is given, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.Effect of the AmendmentCredit notes can currently be issued in the following situations:Taxable value or Tax charged in Invoice > Taxable value or Tax charged for supplyWhere goods supplied are returned by the recipient, i.e. Sales returnDeficiency in the supply of goods or servicesHowever, there was no reference to the issuance of a credit note in the most common situation, i.e. in the case of post supply discount given under Section 15.The post supply discount has now been proposed to be specifically covered as one of the reasons for the issuance of a credit note under Section 34.This seems to be more of a corrective action to correct the lacuna in the law. Even before such amendment, the credit notes with GST u/s 34 have been issued in the past for post supply discounts. Such actions of the past would continue to stand valid in our view even though the specific allowance u/s 34 has been proposed only through the Finance Bill 2026.3. 90% Provisional refund applicable for inverted-rated supplies as wellSourceClause 139(a) of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (6) of Section 54 of the CGST Act, 2017.Provision Before AmendmentSection 54(6): Notwithstanding anything contained in sub-section (5), the proper officer may, in the case of any claim for refund on account of zero-rated supply of goods or services or both made by registered persons, other than such category of registered persons as may be notified by the Government on the recommendations of the Council, refund, on a provisional basis, ninety percent of the total amount so claimed, in such manner and subject to such conditions, limitations and safeguards as may be prescribed, and thereafter make an order under sub-section (5) for final settlement of the refund claim after due verification of documents furnished by the applicant.Provision After AmendmentSection 54(6): Notwithstanding anything contained in sub-section (5), the proper officer may, in the case of any claim for refund on account of zero-rated supply of goods or services or both, or of unutilised input tax credit allowed under clause (ii) of the first proviso to sub-section (3), made by registered persons other than such category of registered persons as may be notified by the Government on the recommendations of the Council, refund, on a provisional basis, ninety percent of the total amount so claimed, in such manner and subject to such conditions, limitations and safeguards as may be prescribed, and thereafter make an order under sub-section (5) for final settlement of the refund claim after due verification of documents furnished by the applicant.Effect of the AmendmentCurrently, 90% of the provisional refund has to be sanctioned within 7 days of the issue of acknowledgement in RFD-02 (to be issued within 15 days of application in RFD-01) for the following types of supplies:Export of goods and/or servicesSupplies to SEZ unit/developerThis 90% provisional refund and the timeline would now be applicable to refund under the inverted rated structure as well. This would improve cash flow for businesses whose working capital is unnecessarily blocked due to purchase of higher-rated GST inputs.Having said this, the power to identify and evaluate risk still lies with the proper officer before granting such refund. Therefore, the discretion remains with the officer whether or not to grant such refund. However, any request for such provisional refund from the taxpayer would require documentation and adequate reasoning from the proper officer in case of non-compliance by such officer.Given that this amendment is prospective, it would only be applicable for all refunds filed after the effective date of such amendment irrespective of the periods for which they are filed.4. Refund of less than Rs. 1000 allowable for exports with payment of taxRefund is not permitted for an applicant if the refund is less than Rs. 1000. The reason behind this is that for small value refunds, the resources of the GST Department should not be invested.SourceClause 139(b) of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (14) of Section 54 of the CGST Act, 2017.Provision Before AmendmentSection 54(14): Notwithstanding anything contained in this section, no refund under sub-section (5) or sub-section (6) shall be paid to an applicant, if the amount is less than one thousand rupees.Provision After AmendmentSection 54(14): Notwithstanding anything contained in this section, no refund under sub-section (5) or sub-section (6), other than cases where refund of tax is claimed on account of goods exported out of India with payment of tax, shall be paid to an applicant if the amount is less than one thousand rupees.Effect of the AmendmentRefund is not permitted for an applicant if the refund is less than Rs. 1000. The reason behind this is that for small value refunds, the resources of the GST Department should not be invested.However, this restriction has been relaxed for the export of goods with payment of tax. This means that refunds of less than Rs. 1000 would be allowable for such exports made with tax payment.Such allowance is also because the process of exports with payment of tax is an automated process through ICEGATE portal, without the Department having to separately invest their resources in processing such refunds.For exports with payment of tax, every shipping bill is deemed to be an application. In certain industries, particularly e-commerce, each consignment sent by courier may be of very low value. They could not make exports because of this restriction on low-value refunds.This amendment aims to automate refunds on small-value consignments, particularly for exports made through courier.Also, exports through courier mode were not getting reflected on the ICES portal due to certain system limitations. With the upgradation of the systems in the recent past, it is now possible to match the invoices/shipping particulars from the GST portal with that reflecting on the ICEGATE portal.Therefore, these types of exporters can now plan for applying a refund with payment of tax rather than ‘without payment of tax’ as was being done earlier under compulsion.5. GSTAT to hear decisions on contrary rulings by Advance Ruling AuthoritiesGSTAT would only hear those questions which are subject matter of dispute with the other Advance Ruling authorities. For the other questions within the same judgement, the same may not be heard by the GSTAT.SourceClause 140 of the Finance Bill, 2026.Effective DateWith effect from 01.04.2026.Affected ProvisionInsertion of New Sub-section (1A) in Section 101A of the CGST Act, 2017.Insertion of New SectionIn Section 101A of the Central Goods and Services Tax Act, after sub-section (1), the following sub-section shall be inserted, namely:Section 101A(1A):“(1A) Notwithstanding anything contained in sub-section (1), till the National Appellate Authority is constituted under that sub-section, the Government may, on the recommendations of the Council, by notification, empower any existing Authority constituted under any law for the time being in force to hear appeals made under section 101B and in such case,––(a) the provisions of sub-sections (2) to (13) shall not apply; and(b) any reference to the National Appellate Authority under this Chapter shall be construed as a reference to such Authority.Explanation.–– For the purposes of this sub-section, the expression “Existing Authority” shall include a Tribunal”.Effect of the AmendmentIn case of conflicting Advance Ruling by different State authorities, the matter may be referred to the National Appellate Authority for Advance Ruling.However, such authority has not been constituted to date.Pending such constitution, the Government has the power to empower any other existing authority, including GSTAT, also in its place to hear appeals of advance ruling.Likely, all such appeals would be heard by the Principal Bench of the GST Appellate Tribunal.One may need to consider the following before applying for appeal before the said Appellate Tribunal for such matters:The Appellate Tribunal would only hear such matter if there are contrary advance ruling judgements. All other rulings, if made by the Appellate Authority for Advance Ruling, would attain finality unless a writ is admitted by the High Court.GSTAT would only hear those questions which are subject matter of dispute with the other Advance Ruling authorities. For the other questions within the same judgement, the same may not be heard by the GSTAT.The procedure and time limit would not be driven by Section 112 and their relevant rules. Instead, it would be driven by that established by the National Appellate Authority for Advance Ruling under Section 101B and 101C along with their respective rules.6. Place of supply for intermediary services to be based on the location of the recipientSourceClause 141 of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionClause (b) of Sub-section (8) of Section 13.Provision Before AmendmentSection 13(8): The place of supply of the following services shall be the location of the supplier of services, namely:(a) services supplied by a banking company or a financial institution, or a non-banking financial company, to account holders.(b) intermediary services.(c) services consisting of hiring of means of transport, including yachts but excluding aircraft and vessels, up to a period of one month.Provision After AmendmentSection 13(8): The place of supply of the following services shall be the location of the supplier of services, namely:(a) services supplied by a banking company or a financial institution, or a non-banking financial company, to an account holder.(b) services consisting of hiring of means of transport, including yachts but excluding aircraft and vessels, up to a period of one month.Effect of the AmendmentPlace of supply in case of intermediary services was considered to be the location of the supplier. This had the following implications:Fees paid to an intermediary outside India were not regarded as import of services. Therefore, no tax would be leviable on such transactions.Similarly, services provided by an intermediary to a recipient outside India were taxable and not classifiable as export of services.The differential treatment for ‘intermediary’ services has now been omitted from the GST law. Therefore, the place of supply for intermediary services will be considered as the location of the recipient from now on.This would have the following implications:Fees paid to ‘intermediary’ outside India will now be classifiable as import of services and taxable under reverse charge basis.Services provided by the ‘intermediary’ to the recipient outside India would be regarded as export of services.This is bound to reduce significant litigation under the GST law wherein an unnecessary distinction had been created for services of intermediary and other services. The most common ones have been described below:On the front of imports, it was quite difficult to convince the Department that any supplier of services was falling within this ambit of intermediary and therefore, the tax under reverse charge mechanism (RCM) was not paid. The Department would allege that if the payment is made outside India, then RCM would be bound to be applicable.Further, in case of exports of services, the Department would challenge the refunds applied on the grounds that it was falling within the scope of intermediary. This was more so in case of services of business promotion, consultancy and advertisement made on own account by a supplier within India.Author may be reached at eboard@icai.inThe Chartered Accountant • March 2026 • www.icai.org • Pages 37–41
Ep. 64 — Union Budget 2026: Transformative Amendments in Customs Law
CA Journal
· July 2026
00:00
--:--
Union Budget 2026: Transformative Amendments in Customs LawCustoms Law in India, enshrined in the Customs Act, 1962, serves as a cornerstone for regulating international trade by imposing duties on imports and exports. The proposed amendments in the Union Budget 2026 aim to modernize the Act by extending its jurisdiction to offshore activities like fishing, simplifying procedural requirements such as warehouse transfers and duty recoveries, enhancing the validity of advance rulings for greater predictability, and introducing duty-free treatments for specific sectors, ultimately fostering ease of doing business, encouraging voluntary compliance, reducing litigation, and supporting key industries like fisheries and e-commerce for importers, exporters, and taxpayers alike.CA. Shaikh Abdul Samad AhmadMember of the InstituteIntroductionThe Union Budget regulates international trade by imposing duties on imports and exports, and safeguarding domestic industries while promoting economic growth. A detailed examination of the amendments proposed and introduced to the Customs Act, 1962, under the Union Budget 2026 is set out below.i. Revolutionizing Fisheries TradeThe fisheries sector plays a vital role in India’s economy, contributing significantly to exports, employment, and food security. However, for decades, deep-sea fishing and offshore harvesting by Indian vessels remained outside the clear regulatory framework of the Customs Act, 1962. Prior to the Budget 2026, the Customs Act applied primarily within India’s territorial waters (up to 12 nautical miles). Fish harvested by Indian vessels in the Exclusive Economic Zone (EEZ) (up to 200 nautical miles) or on the high seas often faced ambiguity regarding duty treatment, export status, and regulatory oversight. This resulted in compliance uncertainty, potential duty leakage, and restricted growth of deep-sea fishing. The amendment extends the jurisdiction of the Customs Act beyond territorial waters, introduces special provisions for fish harvested in the EEZ and high seas, and aims to formalize and boost India’s marine exports. Key changes in Union Budget 2026 are as follows:Extension of Territorial Application (Section 1(2)): The Customs Act has been extended to cover fishing and fishing-related activities carried out by Indian-flagged fishing vessels beyond territorial waters, including the EEZ and high seas.Definition of “Indian-flagged Fishing Vessel” (Section 2): A new definition has been inserted to clarify that only vessels registered under the Merchant Shipping Act, 1958 and entitled to fly the Indian flag will qualify for the new benefits.Insertion of New Section 56A: This new provision provides for:Fish harvested by Indian-flagged vessels beyond territorial waters may be brought into India free of customs duty.Fish landed at foreign ports shall be treated as exports, subject to prescribed procedures, declarations, and safeguards.Allow C.B.I.&C to frame regulations regarding declaration, examination, assessment, and transit of such fish.1Extended Territorial Application2Clear Vessel Definition3New Section 56A FrameworkThe amendments mark a transformative step for India’s fisheries and seafood export industry. Deep-sea fishing operators can now harvest tuna, shrimp, and other high-value species in international waters without fear of customs duty on return. Landing catch at foreign ports (e.g., for better prices or processing) is now recognized as a legitimate export, improving foreign exchange earnings.ii. Substituting ‘Penalty’ with ‘Charge’ to Promote Voluntary Duty SettlementsSection 28 of the Customs Act, 1962 lays down the mechanism for recovery of duties that have not been levied, have been short-levied, not paid, or short-paid, together with applicable interest and penalty. Sub-sections (5) and (6) provide for closure of proceedings where importers or exporters voluntarily discharge the duty liability along with interest and a reduced levy of fifteen per cent within thirty days, thereby encouraging self-compliance and reducing litigation. However, under the erstwhile framework, amounts paid in such non-litigated cases continued to be characterised as “penalty”, leading to unintended consequences such as unfavourable accounting treatment, reputational concerns, audit objections, and a disincentive to voluntary compliance.The amendment to Section 28 reflects a clear policy shift towards encouraging voluntary compliance and reducing the adversarial nature of duty recovery proceedings. Under sub-section (6), the expression “penalty” has been replaced with “charge for non-payment of duty” in cases where importers or exporters voluntarily settle instances of short-paid or unpaid duty in terms of sub-section (5).This reclassification removes the negative stigma traditionally associated with the term “penalty,” which often implied wrongdoing even in cases arising from bona fide errors or inadvertent omissions. Importantly, the amendment does not alter the settlement mechanism itself. The timelines and the quantum payable, comprising the applicable duty, interest, and a charge equivalent to the earlier reduced penalty of fifteen per cent, remain unchanged. Nevertheless, the change strengthens a trust-based compliance framework, facilitates quicker dispute resolution, reduces avoidable litigation, and aligns with the Government’s broader objective of enhancing ease of doing business in international trade. The amendment applies prospectively, and pending matters may continue to be governed by the pre-amendment provisions, necessitating a case-specific evaluation.iii. Extension of Advance Ruling Validity from 3 Years to 5 Years“The Finance Bill, 2026 proposes a significant amendment to Section 28J of the Customs Act, 1962, which governs the applicability and validity of advance rulings issued by the Authority for Advance Rulings.”Under the old provisions (as amended by the Finance Act, 2022), an advance ruling was binding on the applicant, the concerned Commissioner of Customs and subordinate officers, and remained valid only for three years or until there was a change in law or facts on the basis of which the ruling was pronounced, whichever was earlier; a transitional proviso from 2022 reckoned the three-year period from the date of presidential assent for rulings then in force. The new proposal substitutes “three years” with “five years” and replaces the proviso to allow any advance ruling in force on the date of assent to the Finance Bill, 2026, to be extended (upon a request by the applicant) for five years from the original date of the ruling, while retaining the safeguard that the ruling ceases upon any change in law or facts.1Previous DurationAdvance rulings binding for 3 years or until change in law or material facts, requiring frequent reapplications.2Extended PeriodValidity now extends to 5 years with transitional extensions available upon request, significantly reducing administrative burden.3Strategic AdvantageEnhances predictability for importers and exporters, enables long-term supply chain planning, and reduces compliance costs substantially.This extension brings substantial benefits to trade and industry by providing long-term certainty and predictability in customs classification, valuation, exemption claims, and other critical matters. Importers and exporters can now plan multi-year investments, supply chains, and pricing strategies with greater confidence, without the frequent need to seek fresh rulings or face uncertainty after three years.iv. Deferred Payment of Import Duty – Extended to 30 Days and Opened to Eligible Manufacturer ImportersThe Government has significantly expanded the Deferred Payment of Import Duty facility under Section 47 of the Customs Act, 1962. Earlier limited to AEO Tier-2 & Tier-3 and Authorised Public Undertakings with only a 15-day deferral period, the scheme is now being opened to a new category called “Eligible Manufacturer Importers” and the deferral period has been doubled to 30 days. These changes, notified through Notification Nos. 12/2026-Customs (NT) and 13/2026-Customs (NT) dated 01.02.2026 and Circular No. 03/2026-Customs, will come into effect from 01.03.2026.Eligible Manufacturer Importers (approved by the Directorate of International Customs) can avail the 30-day deferral facility till 31st March 2028. The window is deliberately time-bound to encourage these manufacturers to eventually obtain AEO certification and graduate to continuous deferral benefits. The Indian AEO Programme is implemented vide CBIC Circular 33/2016–Customs dated 22.07.2016, as amended & Circular 26/2018-Cus dated 10.08.2018, which provides the statutory framework for the AEO programme.Once approved, the facility is available pan-India across all Customs locations and requires only a one-time authorisation of a nodal person with ICEGATE credentials. Importers simply select “D” (Deferred) instead of “T” (Transactional) in the Bill of Entry.Payment is now aligned with monthly cycles: duty on Bills of Entry returned in any month (except March) is payable by the 1st of the next month; March bills must be paid by 31st March itself. No interest is charged if paid on time. The reform directly improves working capital for manufacturers, reduces transaction costs, supports MSMEs, and strengthens the overall trust-based facilitation ecosystem while protecting revenue.Eligibility & Timeline: AEO Tier-2 & Tier-3 entities; Authorized Public Undertakings; NEW: Eligible Manufacturer Importers (approved by Directorate of International Customs). Facility available until March 31, 2028 for new manufacturers — designed to encourage AEO certification for continuous benefits. Simple Implementation: Approval is pan-India across all customs locations. One-time authorization of a nodal person with ICEGATE credentials is all it takes. At import: select “D” (Deferred) instead of “T” (Transactional) in your Bill of Entry. Payment due by 1st of next month (March bills paid by March 31). No interest if paid on time.v. End of Prior Permission – India’s Customs Warehousing Goes Fully Digital & Trust-BasedThe amendment to Section 67 of the Customs Act, 1962 removes the requirement of prior permission of a Customs officer for removal of warehoused goods from one bonded warehouse to another. Earlier, the owner could remove goods only with explicit officer permission and prescribed conditions to ensure due arrival. The new provision allows removal simply on system-based self-declaration and online intimation through the Indian Customs portal. Compliance is monitored through digital audit trails and risk-based holistic audits rather than transaction-wise checks.The Electronic Cargo Tracking System (ECTS) with GPS-enabled e-seals is being rolled out in phases for real-time visibility (with exceptions for bulk liquids, over-dimensional cargo, etc.). This change eliminates transaction-wise approvals, reduces paperwork, cuts delays, improves cash flow, and gives businesses greater flexibility in supply-chain planning while shifting oversight to automated digital tracking and risk-based monitoring.Customs bonded warehousing enables importers to store goods without paying duty upfront, with duty becoming payable only when goods are cleared for home consumption or export. The current reforms introduce end-to-end digital processes: electronic intimations, system-generated acknowledgements, automatic validity checks for bonds/insurance, and real-time alerts for warehousing period and timely removal. Inter-warehouse movements no longer require prior permission, transhipment bonds, or physical verification; space availability is confirmed online by the receiving warehouse itself.Goods are processed via a system-driven self-declaration on the Indian Customs portal. Automated acknowledgements are triggered by electronic intimations, shifting compliance monitoring from individual transaction checks to digital audit trail and strategic, risk-based holistic audits.vi. Inclusion of “Custody” in Postal & Courier RegulationsThe proposed amendment to Section 84 of the Customs Act substitutes the words “the examination” with “the custody, examination” in clause (b). Previously, Section 84(b) empowered the C.B.I.&C to frame regulations only for the examination, assessment of duty, and clearance of goods imported or to be exported by post or courier, leaving a statutory gap in regulating their physical custody during the interim period when such goods are held by postal authorities, courier terminals, or authorised handling centres before final clearance or export.The new provision explicitly brings “custody” within the regulatory ambit, enabling the Board to prescribe detailed rules on safe storage, security standards, accountability, and liability for loss or damage. This change is particularly beneficial in the context of surging e-commerce and express courier volumes, as it provides a clear legal foundation for safeguarding high-value consignments, reducing risks, and ensuring a more comprehensive, transparent, and accountable end-to-end framework for postal and courier shipments (indicate amendment to Notification 45/2017 - Custom).vii. Revised Baggage Rules, 2026: Key Updates and Passenger Facilitation Measuresa. IntroductionAs one of the world’s largest economies, India has become increasingly connected globally, with heightened movement of professionals, businesspeople, entrepreneurs, and skilled personnel for employment, investment, and collaboration opportunities. This has also led to a greater inflow of tourists from abroad, necessitating updates to align customs procedures with contemporary realities. The revisions to the Baggage Rules aim to address genuine passenger concerns encountered at airports, such as outdated allowances and procedural complexities. By enhancing duty-free limits and clarifying rules on temporary carriage of goods, the changes seek to prevent unnecessary detentions and ensure a smoother, faster, and hassle-free arrival process.The Baggage Rules, 2026, introduce rationalized definitions for key terms, including personal effects (which now explicitly include personal jewellery) and a new passenger category for foreigners holding a valid visa other than a tourist visa for extended stays. Duty-free exemptions continue for used personal effects and travel souvenirs, with revised general free allowances tailored to passenger categories and restricted benefits for land border arrivals. Provisions for temporary import and re-import of valuable goods are added, supported by digital monitoring and simplified procedures. Special jewellery allowances are now based solely on weight limits, eliminating outdated value caps, to modernize the framework.b. Duty-Free AllowancesDuty-free entitlements are available to various passenger categories arriving in India, including residents, tourists of Indian origin, foreigners with a valid visa other than tourist visa, tourists of foreign origin, and crew members. These include clearance of used personal effects required for daily necessities, along with general free allowances for articles excluding those in Annexure-I. Articles in Annexure-I are subject to restrictions and not permitted duty-free beyond specified limits (if any). The details of the permissible allowance (any mode other than land) and list of Negative Goods are given below:Sr. No.Class of PassengersDuty-Free Allowance (INR)1Resident75,0002Tourist of Indian origin75,0003Foreigner with valid visa (other than tourist)75,0004Tourist of foreign origin25,0005Crew Members (any mode)2,500Annexure-I Articles (Not Duty-Free Beyond Limits)FirearmsCartridges of firearms exceeding 50Cigarettes exceeding 100 sticks or cigars exceeding 25 or tobacco exceeding 125gAlcoholic liquor or wines in excess of two litresGold or silver in any form other than ornamentsTelevisionc. Used Personal JewelleryPassengers may bring used personal jewellery duty-free, provided it is reasonably necessary for their personal use during the journey and meets the essential needs of daily life.d. Special Jewellery AllowancesBesides the above, special duty-free allowances apply to jewellery for eligible residents or tourists of Indian origin residing abroad for over one year. These allowances are now based solely on weight limits, eliminating outdated value caps, to modernize the framework. The limit allowed in the new rules is as follows:Jewellery AllowanceWeight LimitFemale passengerUp to 40 gramsOther than female passengerUp to 20 gramse. Transfer of Residence FrameworkThe transfer of residence provisions has been simplified by merging previous annexures into a single rationalized list of duty-free items, incorporating an overall value cap and updating or removing obsolete items. Benefits are extended to foreign professionals based on their intended stay in India, while enhancements for Indian residents depend on their duration abroad. The details of the permissible allowance are as follows:CategoryStay DurationValue Limit (INR)Residents / Tourists of Indian Origin3 – 12 months1,50,000.001 – 2 years3,00,000.00More than 2 years7,50,000.00Foreigners with Valid Visa (Non-Tourist)6 – 12 months1,50,000.001 – 2 years3,00,000.00More than 2 years7,50,000.00Safeguards include frequency restrictions on claims and condonation of shortfalls in stay durations under special circumstances. Concessions for laptops and pet imports are now integrated, ensuring a unified, transparent regime that reduces disputes and facilitates clearance.Besides the above, the rules allowed one unit of the following articles, provided they fit within the total value caps mentioned above. The sample list is as follows:Appliances & ElectronicsLifestyle & KitchenModern Tech & GadgetsAir-ConditionerMicrowave OvenPersonal Computer (Desktop)Domestic RefrigeratorGas Cooking RangeLaptop or NotepadWashing MachineDish WasherTablet (e.g., iPad)Deep FreezerAir FryerPlay Station or Gaming ConsoleTelevisionElectric OvenSmall Bluetooth SpeakersHome Theatre SystemWater DispenserProjectorVideo Camera or ComboOil HeaterAmplifierVacuum CleanerAir CoolerMultifunction PrinterRobotic Vacuum CleanerDehumidifierAir PurifierDryer MachineMassage ChairMusical Instrumentf. Procedural and Implementation AspectsThese regulations come into force from 02.02.2026, implemented through notifications including No. 14/2026-Customs (N.T.) for the rules, No. 15/2026-Customs (N.T.) for declaration and processing regulations, and others for amendments and rescissions. Passengers carrying dutiable or prohibited goods must declare electronically via the automated system up to three days before arrival, with options for updates or alternative filing. Temporary certificates for import/re-import of valuables are valid up to six months or first departure/return, without extension provisions. Unaccompanied baggage must meet dispatch timelines, with extensions possible under specified circumstances, ensuring efficient clearance while upholding customs integrity.viii. Other Changes Proposed in the Custom NotificationsThe Union Budget 2026 has introduced a series of targeted amendments in Customs duty exemptions aimed at strengthening strategic manufacturing, clean energy, defence aviation, nuclear power, healthcare, and critical minerals supply chains. These changes primarily involve rationalisation and expansion of existing exemption notifications, insertion of new serial entries, extension of validity periods, and alignment of exemptions with end-use–based compliance frameworks such as the IGCRS Rules, 2022. Collectively, the amendments seek to promote domestic manufacturing, support public sector and strategic projects, ensure affordable access to essential medicines, including those for rare diseases, and simplify the customs exemption structure without altering the effective Basic Customs Duty rates.Table 1 summarises the key Customs duty changes and their respective effective dates.Sl. No.Description of ChangeEffective Date1Modification of S. No. 69A of Notification No. 25/2002: Extension of BCD exemption on capital goods used for manufacturing Lithium-Ion Cells for batteries of Electrically Operated Vehicles to also cover stationary energy storage applications (BESS).02.02.20262Insertion of S. No. 334A in Table I of Notification No. 45/2025-Customs: BCD exemption on raw materials for manufacture of aircraft parts for maintenance, repair or overhaul (MRO) of aircraft/parts/engines; applicable to PSU imports under MoD, subject to IGCRS Rules, 2022 and end-use certificate (JS level).02.02.20263Insertion of S. No. 335A in Table I of Notification No. 45/2025-Customs: BCD exemption on components or parts (including engines) of aircraft for manufacture of aircraft and parts thereof, subject to IGCRS Rules, 2022.02.02.20264Amendment to S. No. 66 of Table II of Notification No. 45/2025-Customs dated 24-10-2025: Exemption extended to goods for setting up specified Nuclear Power Projects irrespective of capacity; certification by JS level officer, DAE. Validity extended up to 30.09.2035 (contracts registered with the Customs Houses concerned on or before this date eligible).02.02.20265Amendment to List 3 appended to Table I of Notification No. 45/2025-Customs: Inclusion of 17 additional drugs/medicines for BCD exemption.02.02.20266Amendment to List 22 appended to Table I of Notification No. 45/2025-Customs: Inclusion of 7 rare diseases (as per NPRD, 2021) for customs duty exemption on drugs, medicines, and food for special medical purposes imported for personal use.02.02.20267Notification No. 36/2024-Customs simplification measure: 29 entries omitted and shifted to Tariff (01.05.2026); 22 redundant entries omitted (02.02.2026); 3 entries merged into Notification No. 45/2025-Customs dated 24-10-2025 w.e.f. 02.02.2026. Notification rescinded from 01.05.2026. Effective BCD rates unchanged.02.02.2026 / 01.05.2026Table 1. Key Customs Duty ChangesS. No. in Notification No. 36/2024-CustomsDescriptionInserted as S. No. in Table I of Notification No. 45/2025-Customs38Salts of oxometallic or peroxometallic acids of Beryllium and Rhenium110B39Inorganic or organic compounds of rare earth metals111A55Unwrought; waste and scrap; powders of (i) Gallium (ii) Germanium (iii) Indium (iv) Niobium (v) Vanadium226AEntries Merged from Notification No. 36/2024-Customs into Notification No. 45/2025-Customsix. Social Welfare Surcharge (SWS) RationalisationThe Social Welfare Surcharge (SWS) framework was amended via Notification No. 11/2018-Customs for exemption rationalisation. Continuity is ensured for graphite, quartz, silicon dioxide, compound alcoholic preparations, and spent catalysts/ash with precious metals. Personal-use imports (heading 9804) now attract SWS from 01.04.2026. Electronic toy parts are exempted from SWS (full exemption under heading 9503) from 02.02.2026. No increase in effective duty.x. Aircraft Tyres – AIDC ContinuityNew pneumatic rubber tyres for aircraft (4011.30.00) continue to attract 0.5% Agriculture Infrastructure and Development Cess (AIDC). Notification No. 11/2021-Customs was technically amended from 02.02.2026 to remove an obsolete reference — no change in AIDC rate. Applies except where NIL BCD exists.◆◆◆Author may be reached at eboard@icai.in | The Chartered Accountant • March 2026 • www.icai.org
Ep. 65 — Union Budget 2026-27 Highlights: Impact on MSMEs
CA Journal
· July 2026
00:00
--:--
Union Budget 2026-27 Highlights: Impact on MSMEsUnion Budget 2026 offers significant support for MSMEs across sectors. The Government's key interventions focus on liquidity, equity, compliance, and sectoral competitiveness, from the ₹10,000 crore SME Growth Fund to the strengthened TReDS framework and structured compliance support. Several sector-specific initiatives have also been introduced, particularly in textiles, electronics, solar, agro-processing, and tourism. The Budget reflects a clear shift from a debt-based financing model to an equity and working-capital oriented approach, enabling MSMEs to truly scale and contribute meaningfully to the GDP under the vision of Aatmanirbhar Bharat. Every strengthened MSME reflects the unseen contribution of a Chartered Accountant to India's economic backbone.The Union Budget 2026-27 presents a balanced framework which is aimed at accelerating economic growth and development. The proposal for FY 26-27 is described as the “Yuva Shakti-Driven Budget”. As the name suggests, it focuses on unlocking entrepreneurial potential by focusing on improvement of liquidity access, expanding risk capital availability and strengthening institutional guidance and support for small business.The data given below, in itself, is loud enough to establish that MSMEs have become the backbone of this nation's economy.The Budget is inspired by Three Kartavyas:Economic GrowthCapacity BuildingUniversal AccessAccording to The Economic Survey 2025–26, key highlights of the MSME Sector are:7.47 CrMSMEs across the country34.03 CrEmployment31.1%Contribution to GDP48.58%Of total exports35.4%Of manufacturing outputThe Key MSME Initiatives under the Union Budget 20261. INR 10,000 crore SME Growth Fund – A strong push towards Scale & CompetitivenessThe announcement of the ₹10,000 crore SME Growth Fund in Union Budget 2026 represents a structural intervention in India's MSME financing architecture. Unlike traditional credit-linked schemes, this initiative recognises a fundamental issue within the sector, i.e., the absence of adequate growth-stage capital.A significant number of MSMEs in India reach a “threshold stage” where demand exists, orders are coming in, and product-market fit is established; however, expansion is constrained due to limited access to capital.The proposed Growth Fund is expected to provide equity and quasi-equity support to high-performing and scalable MSMEs. This shift from pure debt financing to blended capital structures can materially strengthen businesses.Equity-style support improves debt-equity ratios, enhances creditworthiness, and increases the enterprise's ability to leverage additional funding at competitive rates.From a policy standpoint, this move is particularly noteworthy because earlier fund-of-funds frameworks were largely concentrated on startups. By extending similar structured capital mechanisms to established MSMEs, the government acknowledges that scale-ready manufacturing and service enterprises also require institutional capital support to compete globally.2. INR 2,000 crore top-up to Self-Reliant India Fund for Micro EnterprisesThe Union Budget 2026 provides a ₹2,000 crore top-up to the Self-Reliant India (SRI) Fund, reinforcing the government's commitment to MSME equity support. Originally established under the Atmanirbhar Bharat initiative, the SRI Fund is structured as a Category-II Alternative Investment Fund (AIF), with the aim of addressing the long-standing gap in growth capital for viable and high-potential MSMEs. It channels risk capital through a mother fund–daughter fund architecture, wherein the mother fund (managed by NSIC VC Fund Limited) invests into professionally managed daughter funds, which in turn deploy equity and quasi-equity into MSMEs.Under this model, the SRI Fund has a total corpus target of ₹50,000 crore, with ₹10,000 crore committed directly by the Government of India and the remaining ₹40,000 crore expected to be mobilised from private equity and venture capital investors. As of January 2026, the cumulative investment from the fund structure into investee entities stood at around ₹14,781 crore from the fund itself, while daughter fund investments into the MSME sector amounted to approximately ₹1,962 crore, leading to a total deployment (direct + daughter fund) in MSMEs of around ₹16,743 crore.The Budget-2026 infusion of an additional ₹2,000 crore specifically for micro enterprises is particularly significant for the smallest players in the ecosystem. Micro units often operate on thin margins, lack access to substantial collateral, and find it difficult to attract risk capital through conventional channels. By enhancing the SRI Fund corpus, the government aims to ensure that these enterprises do not get left behind in the transition from debt-dependent growth to equity-enabled scale-up, helping them adopt modern technologies, expand capacity, and participate more actively in value chains.Figure 1: SRI Fund Allocation Graph Post Budget 2026 (₹ in crore)Govt. Contribution10,000Private Equity Commitment40,000Budget 2026 Top-up2,000Source: Author's Compilation3. Liquidity Support Through TReDS ReformsDelayed payments remain one of the most persistent challenges faced by MSMEs. While often dismissed as a routine working capital issue, the problem runs much deeper. When payments are delayed, liquidity tightens. When liquidity tightens, confidence weakens. And when confidence weakens, expansion plans are postponed.The Economic Survey 2025–26 highlights that MSMEs continue to face significant outstanding dues running into lakhs of crores. Despite contributing approximately 30–31% to India's GDP and generating employment for over 34 crore individuals, MSMEs frequently struggle with uneven cash flows. A large share of manufacturing units falls in the small category, yet their ability to scale into mid-sized or large enterprises remains limited.To address this systemic issue, the Government introduced the Trade Receivables Discounting System (TReDS), a digital platform that allows MSMEs to discount their approved invoices and receive early payment from banks and NBFCs.Since its launch, TReDS platforms (including RXIL, M1xchange, InvoiceMart, and Invoicemart/DTX) have cumulatively financed over ₹5 lakh crore worth of invoices, with volumes steadily increasing. Further, companies with turnover exceeding ₹250 crore have been mandated to register on TReDS, strengthening participation and widening the receivables ecosystem.However, Budget 2026 proposes to deepen this framework further through a structured four-pillar reform approach as under:i. Mandatory TReDS Usage for CPSEsThe Budget mandates that all Central Public Sector Enterprises (CPSEs) must route MSME payments through TReDS. CPSE receivables are considered high-quality and low-risk from a credit standpoint. Routing them through TReDS significantly increases the availability of reliable, government-backed invoices on the platform. Once public sector entities demonstrate structured payment routing, large private corporates may also feel market pressure to align with similar transparency standards.Expected outcome:Higher transaction volumes across TReDS platformsFaster settlement cycles for MSMEsImproved liquidity stability for small businessesii. Credit Guarantee Support via CGTMSETo further strengthen lender participation, the Budget extends credit guarantee coverage for invoice discounting under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). As per available data, cumulative guarantees approved under CGTMSE have crossed ₹12 lakh crore, covering over one crore guarantees. This scale significantly reduces perceived risk for banks and NBFCs. By extending guarantee backing to invoice discounting transactions, lenders gain additional comfort. This is likely to increase competition among financiers on TReDS platforms.Expected outcome:Lower perceived credit risk for lenders & more participation by banks and NBFCsCompetitive discounting ratesiii. Integration with Government e-Marketplace (GeM)The proposed integration between GeM and TReDS aims to create seamless digital data flow. Currently, MSMEs supplying through GeM generate invoices that are verified within the procurement system. By linking GeM with TReDS, these verified receivables can be digitally transmitted to financiers without repetitive documentation and manual verification. This reduces due diligence friction and speeds up financing decisions. Moreover, payments from government departments would speed up to match the standards or MSMEs would be able to get the invoices discounted from TReDS, increasing their liquidity.Expected outcome:Improved data transparency & paperworkShorter cash-conversion cycles for MSMEsiv. Developing a Secondary Market for ReceivablesThe fourth reform pillar introduces the development of a secondary market for MSME receivables through securitisation. Under this model, receivables discounted on TReDS can potentially be packaged into asset-backed securities, allowing broader participation from institutional investors.Expected outcome:Expansion of the trade finance ecosystemBetter pricing of buyer credit riskIncreased liquidity across the MSME financing chainIf implemented effectively, TReDS reforms under Budget 2026 could become one of the most consequential liquidity interventions for MSMEs in recent years.4. The ‘Corporate Mitras’ InitiativeThis initiative directly addresses one of the less discussed yet deeply felt challenges of MSMEs, i.e., the burden of regulatory compliance and procedural formalities. The government plans to introduce a cadre of “Corporate Mitras”, particularly in Tier-II and Tier-III cities.In her Budget speech, the Finance Minister indicated that professional institutions such as ICAI, ICSI, and ICMAI will be encouraged to design short-term, modular training programmes to build this cadre. These trained Corporate Mitras are expected to assist MSMEs in managing compliance requirements, maintaining documentation standards, and navigating procedural obligations in a structured and affordable manner.For many micro and small enterprises operating in smaller towns, access to professional advisory support remains limited. However, in the last few years, we have noticed that more and more professionals are leaving jobs and coming into practices in their hometowns which in turn is already removing this gap in the market.The expected impact of the above proposal has many advantages like:Improved quality of documentation and statutory filingsAllowing entrepreneurs to focus more on operations and growth rather than procedural complexitiesBetter trained accountants and compliance officers for professional officesHowever, certain disadvantages/challenges may arise for existing professionals in such smaller towns wherein these professionals' recurring income comes from accounting and compliance services to these same MSMEs. This proposal may, on the contrary, lead to cost cutting and reduced quality in such compliances by creating an unhealthy competition between existing qualified professionals and trained Corporate Mitras, which in turn would increase litigation and have a negative impact on business readiness for expansion. Keeping this in mind, this proposal may turn out to be groundbreaking in Metro and Tier-I cities.Additionally, the Budget proposes the formation of an Education-to-Employment and Enterprise Standing Committee, with particular attention to the services sector.5. Self Help Entrepreneurs – SHE MartsThe Union Budget 2026 introduces the Self-Help Entrepreneur (SHE) Marts initiative to promote women-led entrepreneurship, particularly in rural and semi-urban regions.The concept goes beyond providing credit support; it focuses on creating community-owned retail spaces where women can operate and manage their own enterprises. These marts are proposed to be developed at the cluster level through Cluster Level Federations (CLFs), supported by structured financing mechanisms.Expected Outcome:Encourage growth of micro enterprises at the village levelImprove income stabilityPromote community-based enterprise financing modelsThe Key Sector Specific MSME Initiatives under the Union Budget 20261. Textile SectorInitiativeFocusTextile Expansion and Employment SchemeSupport for the adoption of modern machinery and technology upgrades.National Fibre SchemeFocuses on achieving self-reliance in natural fabrics like silk, wool etc.Tex-Eco InitiativeSupports MSMEs in meeting the rising global demand for environmentally sustainable and “green” textile products.Samarth 2.0Strengthens the skilling ecosystem by linking MSMEs with a pool of trained, industry-ready workers.Mega Textile ParksOffers plug-and-play infrastructure to MSMEs, enabling faster project execution and lower setup costs.2. Chemical SectorThe Budget proposes the development of Rare Earth Corridors in states such as Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to support domestic processing capabilities.3. Agro-Processing SectorExtension of the PLI Scheme for Food Processing by an allocation of ₹1,200 crore.Targeted Crop Development will focus on high-value crops such as coconut, cashew, cocoa, and sandalwood.Hilly Region Rejuvenation: Post-harvest processing for walnuts, almonds, pine nuts.Boost to Seafood Exports by the duty-free import limit for key processing inputs has been increased from 1% to 3% of FOB value.4. Tourism and Hospitality SectorEstablishment of Regional Medical Tourism Hubs.Upgradation of selected archaeological sites.Promotion of environmentally sustainable eco-tourism initiatives.These initiatives create opportunities for MSMEs in hospitality, transport, local handicrafts, and service sectors.5. Education and SkillingA pilot programme with IIMs will train 10,000 tourism guides across 20 key tourist destinations.Existing institutions will be upgraded to train 1 lakh Allied Health Professionals and 1.5 lakh caregivers.6. Lower Input Costs, Stronger EcosystemsBudget 2026 reduces customs duties on selected capital goods and key inputs used in lithium-ion battery manufacturing and solar-related production. The proposal to develop rare earth corridors further supports domestic supply chains, reducing dependency on imports for EV motors and advanced manufacturing inputs.Other Key MSME Initiatives through Tax and Compliance Relief under the Union Budget 2026The Budget proposes rationalisation of certain TDS and TCS rates and procedures, reducing unnecessary tax deductions and collections that often lead to blockage of funds.The new Income Tax Act, expected to come into force from April 2026, aims to simplify provisions, reduce interpretational complexity, and enhance clarity.The MAT rate has been reduced from 15% to 14%.Relaxations in Provisional Refund
BANK AUDIT
Ep. 66 — RBI Investment Directions: The New Playbook for Treasury and Audit
CA Journal
· July 2026
00:00
--:--
RBI Investment Directions: The New Playbook for Treasury and AuditRBI's investment framework for banks has shifted from a rule-heavy classification and caps approach to a principles & governance-driven, risk-aligned architecture synced with Basel III and Accounting Standards. The trajectory across the 2021, 2023, and 2025 Directions shows a clear pivot from mechanical limits and asymmetric valuation to SPPI-based classification, symmetric fair value treatment, and Board-anchored accountability. The 2025 Directions — the Reserve Bank of India (Commercial Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 dated 28th November 2025 — consolidate prior reforms and embed governance, valuation rigor, liquidity treatment, and prudential filters into a unified operating code for treasury portfolios.From Caps to Intent Based GovernanceThe earlier regime had a 25% HTM (Held to Maturity) cap with asymmetric accounting where mark-to-market losses hit P&L (profit and loss) immediately while gains were constrained. The 2023 revamp removed the HTM cap, introduced the SPPI (Solely Payments of Principal and Interest) test, and made fair value changes symmetric across AFS (Available for Sale) and FVTPL (Fair Value Through P&L). Also, the holding period norm for HFT instruments is eased. The new directives hard code governance through a standalone Board chapter and embedded FAQs clarifying LCR (Liquidity Coverage Ratio) monetisation, NPI (Non-Performing Investments) segregation, and non-SLR controls. Audit focus correspondingly shifts from mere numerical threshold/defeasance checks to documented acquisition intent, behavioural consistency, accounting, reporting and governance evidence. (Chapter II Para 6–14; Chapter IV Para 33–41).Board Oversight: Non-Delegable Core Chapter II Para 6–14There must be a Board approved detailed Investment Policy covering objectives for own and client/constituent books, eligible instruments and derivatives, sanction authorities, exposure ceilings (issuer, PSU/corporate, private placement), valuation frameworks, broker policies, limit and risk systems (Para 16-17). An Investment Committee is mandatory for equity, preference, convertibles, and equity-like exposures (Para 7 and 22). Boards must define impairment thresholds for subsidiaries, associates, and JVs (joint ventures), which sit outside HTM/AFS/FVTPL buckets (Para 8; Para 64(5)). Bank shall not reclassify investments between categories. Any portfolio reclassification requires Board and RBI's pre-approval, creating a control gate/hard bar against switching (Para 9; Para 66). A Board-approved HTM sale policy must specify permitted exits such as credit deterioration, buybacks, or OMO (open market operations) participation without invalidating HTM intent (Para 10; Para 69).Non-SLR investments require Board ensured risk systems and quarterly reviews of credit quality, valuation, and compliance with the 10% unlisted cap (Para 11–12; Para 90(12)). Broker concentration breaches must be reported post-facto to the Board (Para 13; Para 92(8)). A half-yearly portfolio review as of March 31 and September 30 must reach the Board by end-May and end-November, covering performance, prudential limits, SPPI consistency, and Level 3 valuation exposures (Para 14; Para 93). Audit work must inspect Board and Committee minutes, policy, and evidence of challenge as best audit practice (Para 93-94).Classification: SPPI and Business Model Tests Chapter IV Para 33–41All investments (excluding subsidiaries, associates, JVs) must be classified at or before acquisition into HTM, AFS, or FVTPL, with HFT (Held for Trading) as a sub-category within FVTPL (Para 33). An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest on the outstanding principal, where interest is restricted to basic lending components (i.e. time value of money, credit risk, and a normal lending margin) and does not include equity type returns, conversion features, or loss-absorbency triggers. Classification is objective driven, not instrument type driven. Even identical ISINs bought in the same lot can be placed in different buckets if acquisition intent differs and is documented (Para 34 FAQ). SLR status does not determine classification and instruments failing SPPI go to FVTPL (Para 34 FAQ). Investments in subsidiaries, associates, and joint ventures are kept outside (held sui generis) the HTM/AFS/FVTPL classification framework and are subject to specified impairment and prudential checks. Impairment thresholds for these investments must be Board-approved, and monitoring sits at Board level rather than treasury bucket classification level (Chapter IV and Chapter II Para 8 read with Para 64).An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest on the outstanding principal, where interest is restricted to basic lending components (i.e. time value of money, credit risk, and a normal lending margin) and does not include equity type returns, conversion features, or loss-absorbency triggers.HTM eligibility requires intent to hold till maturity and SPPI compliant cash flows (Para 35). Instruments automatically failing SPPI and therefore barred from HTM/AFS include convertibles, Basel III AT1/Tier 2 loss-absorbent bonds, equity-linked coupon notes, and equity or preference shares unless an irrevocable AFS equity election is made (Para 36). Securitisation notes other than equity tranches can qualify for HTM/AFS if tranche cash flows are SPPI, the underlying pool is SPPI, and tranche credit risk is not higher than the pooled assets (Para 37). AFS classification requires dual intent (collect cash flows and sell the paper) plus SPPI compliance (Para 38). AFS bucket includes SPPI compliant debt securities held for ALM (asset–liability management) where the bank's intent is flexible i.e., to collect cash flows and can also be sold before maturity (Para 39). FVTPL is the residual class and includes Non-SPPIs, equities unless onetime AFS election, mutual funds, AIFs (Alternative Investment Funds), REITs, InvITs, equity tranches, and index-linked bonds tied to equity indices (Para 40).HFT: The Active Trading SignalsHFT sits within FVTPL as a sub-category and demands daily fair valuation through P&L (Para 41(2)). Inclusion is presumed where securities are held for short-term resale, price movement gains, arbitrage, or hedging of trading books (Para 41(3)). Underwriting commitments expected to settle are included (Para 41(4)). Exclusions cover unlisted equities, securitisation warehousing, direct real estate, and equity funds unless look-through criteria are met (Para 41(6)). There must be no legal impediment to sale or fully hedge the HFT instruments (Para 41(1)). Unless specifically exempted, instruments arising from market-making, most fund equity exposures, listed equities, and trading-related repo-style transactions are presumed to be classified under HFT (Para 41(7)).Liquidity and LCR: HTM Guardrails Chapter IV Para 35 & 38 FAQsHQLA (High Quality Liquid Assets) as LCR holdings can sit in HTM if the bank does not routinely sell them. Repo usage is not inconsistent with HTM classification (Para 35 FAQ). However, if securities are intended for LCR monetisation and anticipated sales exceed 5% of opening HTM carrying value, they cannot be in HTM (Para 35 FAQ). Securities bought mainly for day-to-day liquidity management belong in AFS, while HTM is for structural ALM (Asset Liability Management) positions (Para 38 FAQ). Audit testing must validate SPPI assessments at acquisition, check classification consistency with behaviour, reconcile LCR holdings with HTM tagging, and can challenge borderline instruments like AT1, Tier 2, and structured notes.Valuation: Fair Value Hierarchy Discipline Chapter IX Para 73–87Valuation follows a three-level fair value hierarchy based on input observability. Level 1 uses unadjusted quoted prices in active markets (FBIL / NDS-OM traded prices) with no significant adjustments permitted (Para 73–75). Level 2 uses observable inputs other than direct quotes, such as yield curves, credit spreads, and matrix pricing for comparable instruments, with no significant unobservable inputs (Para 76–78). Level 3 relies on unobservable inputs (DCF (discounted cash flow) assumptions, recovery estimates, and model-based valuations) covering unquoted non-SLR securities, AIF units without daily NAV, and distressed debt without market prices (Para 79–87 in fragments).Level 3 valuations run on unobservable inputs, so RBI hard wires capital conservatism into their gain recognition. Net unrealised gains on Level 3 investments recognised in P&L or AFS-Reserve must be fully deducted from CET1 capital and are not available for distribution (except where SPPI instruments carry ≤50% credit risk weight) (Chapter IX Para 87). Further, Day-1 gains on Level 3 instruments are not taken upfront (they are deferred or amortised) while Day-1 losses are recognised immediately, enforcing asymmetric prudence at entry (Chapter V Para 46–47). For Level 3 derivatives too, unrealised gains routed through P&L are deducted from CET1 and barred from dividend payout (Chapter XII Para 109-111). Audit must verify Level 1 marks, test Level 2 model governance, challenge Level 3 assumptions, and verify CET1 deductions and reporting/disclosures.HTM securities are carried at amortised cost, not MTM, with premium/discount amortised over remaining life and subject to IRACP provisioning norms (Chapter V Para 48–49). AFS securities are fair-valued at least quarterly, with net unrealised gains/losses parked in AFS-Reserve (not P&L), premium/discount amortised, and post-sale gains moved to P&L (equity AFS gains to Capital Reserve) (Chapter V Para 50–55). FVTPL securities are fair-valued through P&L, with all valuation gains/losses recognised in earnings (Chapter V Para 56-58).Operational Controls: Non-SLR and Dealing Framework Chapter X Para 88–94Government securities must be held in demat form and settled via CCIL/NDS-OM, with STRIPS treated per norms. Short sale, When Issued and Value Free transfers should be in adherence with respective directions (Para 88–89). Non-SLR investments carry tighter filters: unlisted exposure capped at 10% of the non-SLR portfolio, limited headroom for infrastructure securitisations and ARC (Asset Reconstruction Company) paper, prohibition on zero coupon bonds with sinking fund exception, unrated exposures except defined infra contexts, and mandatory entry-level ratings supported by internal credit analysis (Para 90(1)–90(6)).Internal controls require segregation of front office, back office, and risk, review for Level 2/3 instruments, and exception reporting for limit or valuation breaches. Banks must perform their own credit assessment and not rely solely on external ratings when investing in non-SLR paper (Para 90 credit due diligence clauses). Exposure look-through rules apply for MF/AIF units when underlying unlisted exposure ≥10% for limit computation (look-through rule). Internal control architecture must enforce front–mid–back-office segregation, ACB review, book reconciliation, and audit trail across investment operations. Broker engagement needs Board-approved empanelment and limits, with breach reporting to the Board (Para 94; Para 92(8)). Audit must reconcile non-SLR caps, inspect internal credit files, test segregation of duties, and verify reporting thresholds and timelines.Prudential Treatment: Income, NPI, IFR Chapter XI Para 95–108Interest income on performing investments is accrued. Dividend income can be recognised after declaration and with right to receive being established. Broken Period Interest (BPI) is treated as income or expense and not capitalised (Para 95–97). Investments become NPI when overdue >90 days or earlier if credit-impaired (Para 98). NPIs must be segregated from performing portfolios with no offsetting of gains against NPI losses and valued instrument wise with haircuts. Preference share dividend arrears and ₹1-valued equities (no financials) also trigger NPI tagging. Issuer-level stress linkage applies: if borrower exposure is NPA, the bank's investment in its securities is also treated as NPI, and vice-versa (Para 99–100).Provision should be higher of IRACP (Income Recognition and Asset Classification Provisioning) norms or depreciation at NPI recognition (Para 101). Upgrades from NPI to standard require structured review and approval as per internal process. Central and State Government securities are never classified as NPI; Government-guaranteed paper turns NPI only if guarantee is repudiated (Para 104). Banks must maintain an Investment Fluctuation Reserve (IFR) of at least 2% of AFS + FVTPL portfolios as buffer, with limited Tier 2 capital recognition (Para 105-108). Audit must verify NPI registers, segregation logic, provisioning math, upgrade approvals, and IFR adequacy.Trade smart, classify smarter, document smartest — that's the new carry trade, because strong treasury books are built in policy rooms before they show up on trading screens and management dashboards.ConclusionReturns come from yield curves and spreads, but survival comes from SPPI logic, classification, valuation hierarchy, correct accounting, documentation and Board outcomes. Trade smart, classify smarter, document smartest — that's the new carry trade, because strong treasury books are built in policy rooms before they show up on trading screens and management dashboards. Duration risk is evident while governance risk is invisible, and RBI has a detailed framework which prices in both.Reach the author at eboard@icai.inThe Chartered Accountant • Bank Audit March 2026 • www.icai.org
BANK AUDIT
Ep. 67 — Requisites of a Quality Bank Audit
CA Journal
· July 2026
00:00
--:--
Requisites of a Quality Bank AuditBanks are subjected to several types of audits — Internal Audit, Concurrent Audit, Revenue Audit etc. In this article, we are going to discuss only about the statutory audits of bank as all the banks are statutorily required to get their financial statements audited for the year ended March 31 every year.Through this article, an effort is being made to highlight the important issues to be considered and the methodology to be followed, primarily while conducting the statutory audits of bank branches.Statutory bank branch audit is a two-step process wherein the branches are audited by the respective branch auditors who are appointed by the Head Office of the respective banks through a well-regulated and laid down process. The branch auditors are required to conduct the statutory audits of the bank branches allotted to them and issue their reports to the respective Statutory Central Auditors (SCAs) who have been entrusted with the exercise of consolidation of the branches under respective regional office(s)/zonal office(s). Once all SCAs are able to conduct the verification of the consolidation of the respective branches allotted to them, along with the completion of audit of the respective audit areas allotted to each one of them at the bank’s Head Office, the overall consolidated financial statements of the bank, including Notes to Accounts, are drawn up by the bank’s Head Office and verified by the SCAs, and the draft audit report on the consolidated financial statements of the bank as a whole is issued by them. Post this, the financial statements are reviewed by the audit committees of the respective banks who, on being satisfied, recommend the same to the bank’s Board of Directors for adoption/approval. On approval of the financial statements by the bank’s Board, the same are signed off by all the SCAs of the bank along with the audit report on the said financial statements.Therefore, the statutory audits of all public sector banks are conducted in two phases i.e., first at the branch level, and then at the Head Office level, after which the overall set of financial statements of the bank as a whole is produced.In case of private sector banks, however, there are usually two joint auditors who undertake the work of the statutory audit of the entire bank, and there is usually no involvement of statutory bank branch auditors.In case of private sector banks, however, there are usually two joint auditors who undertake the work of the statutory audit of the entire bank and there is usually no involvement of statutory bank branch auditors.While conducting the bank branch audits, the following issues need to be kept in mind:The audit work needs to be carried out diligently, ensuring compliance of all the applicable regulations.Recently, on November 28, 2025, the Reserve Bank of India has announced the consolidation of its appx. 9,455 circulars into 244 Master Directions with the aim to simplify its regulatory framework and enhance compliance efficiency. The branch auditors need to be updated on this aspect to ensure that the audit is conducted by taking into consideration the relevant Master Directions. Every year, the Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) issues the revised edition of the “Guidance Note on Audit of Banks” to provide detailed guidance to the auditors carrying out audit of banks and bank branches. For detailed guidance, reference may be made to this Guidance Note.Invariably, there is a pressure of time within which the branch audit work is supposed to have been completed. The branch auditors have to appreciate that, in view of the two-stage process of the audit (as explained earlier), their output in the form of issuance of their audit report becomes the input for the SCAs who have to take their observations into consideration.The time-frame is usually shared with the branch auditors as part of their appointment letter and is to be respected. Under no circumstances should the branch auditors hold up their work, which in turn would lead to the holding up of the audit work of the bank as a whole. In case the desired information is not made available, they should clearly mention that fact in their statutory audit report. SCAs are duty bound to go through the contents of each branch audit report (in respect of the branches allotted to them) and take appropriate view of the same.The best way to ensure that the audit work is concluded on time is to plan for the audit work well in advance by duly identifying the audit team members and giving them adequate training so that the audit work progresses smoothly while the audit is underway. Understanding the scope of work is equally important for the above planning. The engagement partner (EP) needs to lead the team in terms of understanding the final deliverable i.e., the authentication of financial statements, related schedules, annexures and details, various certificates, Long Form Audit Report, Tax Audit Report etc. The EP needs to allocate his resources for each of the above activities so that the work on the above progresses simultaneously, or else it would be a challenge to meet the deadlines.The audit team should have a good mix of experienced and trainees/article assistants, who need to be guided properly before commencement of the audit work, along with adequately detailed check-lists in respect of all the audit work-related areas. There is no substitute for experience and therefore, each bank branch under audit needs to be handled by an EP and audit manager having adequate experience of conducting bank audits.It is to be clearly understood that there are a variety of audit reports to be issued while conducting the branch audit such as Statutory Report, Long Form Audit Report (LFAR), Tax Audit Report etc. The branch auditors need to be sure that each of the above reports are independent of each other and not a substitute. Mere LFAR reporting is not sufficient, particularly in case of non-compliance of RBI IRAC norms i.e., if in the opinion of the branch auditor, an account is NPA and a detailed write-up of the same is mentioned in the LFAR, that alone is not sufficient. This fact has to be duly reported in the main report, i.e., the Statutory Audit Report as well through Memorandum of Changes (MoC).The branch auditors may be aware that the bank branch audit is unlike any other audit where the auditor ensures that the requisite rectification accounting entries are passed in case of any deviation/error. In case of bank branch audit, no accounting entry needs to be passed at the branch level and all the rectification accounting entries suggested by the branch auditor need to be routed through the MoC. All such entries suggested through the MoC are then compiled by the bank management and, on their due verification by SCAs, effect thereof is given at the bank’s Head Office.It is generally seen that for many audit firms, audit fee from the bank branch audit is their main source of income. Therefore, it is all the more important to ensure that adequate planning is done so as to be able to deliver a quality audit.It goes without saying that the branch auditors have to be cognisant of the fact that they need to maintain sufficient working papers demonstrating the execution of work, duly documenting issues raised, and their resolution and the methodology followed while conducting the branch audit. It is to be remembered that ‘work not documented is work not done’.It is to be noted that AASB, every year during the bank audit season, takes the initiative to set up an expert panel for resolving the issues being faced by the bank branch auditors. It is suggested to make use of this resource to the maximum possible extent.To Sum UpWe, the bank auditors are being watched by the sector regulator RBI and the society at large. Tremendous responsibility has been cast on us. It is up to us to take up the challenge and strive to do quality audit in the specified limited time-frame allotted. There is absolutely no excuse for a poor-quality audit.◆◆◆Author may be reached at eboard@icai.inwww.icai.org March 2026
Audit Trail - Requirements & Responsibilities"Audit Trail/Edit log" is the new buzzword that draws the attention of the management from a compliance perspective and of the auditors from reporting perspectives. These requirements emanate from the rules issued by the Ministry of Corporate Affairs under the Companies Act, 2013. This article is an attempt to break down the legal requirements and responsibilities from the perspective of management and the auditor.Audit TrailIt is a chronological record of the changes that have been made to the data that captures any change to a record, including:who made the changewhen it was madewhat fields were changedSimply, any change to data, including creating new data, updating, or deleting data, must be recorded.Management PerspectiveStatutory RequirementProviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires that for the financial year commencing on or after the 1st day of April 2023, every company that uses an accounting software for maintaining its books of account, shall use only such accounting software which has a feature of:recording an audit trail of each and every transaction,creating an edit log of each change made in the books of account, along with the date when such changes were made, andensuring that the audit trail cannot be disabled.ApplicabilityFrom the above, it is clear that every company (OPC/Section 8/Private/Public/foreign company) that uses an accounting software shall use such accounting software that has the capabilities to comply with the requirements of Rule 3 of the Companies (Accounts) Rules, 2014.The said rule is applicable only in case of accounting data maintained with the aid of an accounting software, i.e., working records that are maintained electronically but not through an accounting software do not require the audit trail. For example, fixed asset register, paysheets, calculations maintained in excel without the aid of any accounting software will not be under the purview of Rule 3(1) of Companies (Accounts) Rule, 2014. However, the entries passed in the accounting software, which are resultant of the above excel workings, will be under the purview.The audit trail functionality is only applicable for the books of accounts as defined in Section 2(13) of the Act. Therefore, the maintenance of an audit trail is not applicable to the "books and papers" and "books or papers" as defined in Section 2(12) of the Act, which includes deeds, writings, documents, minutes, and registers maintained on paper or in electronic form.Audit trail functionality is required even in cases where the accounting software does not allow the users to make any modifications subsequent to the entry posting.Management's ResponsibilityThe responsibility of the management includes:Determining the Books of AccountsAll the books of accounts that are maintained in an accounting software require the maintenance of an audit trail. Hence, it is of utmost importance to determine the books of accounts that the company intends to maintain/ maintain in the accounting software. The records maintained manually do not require the maintenance of an audit trail even though they are maintained electronically in excel. Only the changes made to books of accounts requires audit trail in accordance with the proviso to Rule 3(1) and not all the changes in the accounting software. For instance, creation/deletion of a user to the accounting software or changes to ESG data are the changes made to the accounting software and not to the books of accounts.Section 2(13) defines the books of accounts as records maintained in respect of (i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place; (ii) all sales and purchases of goods and services by the company; (iii) the assets and liabilities of the company; and (iv) the items of cost as may be prescribed under Section 148 in the case of a company which belongs to any class of companies specified under that section.Requirement of audit trail is applicable irrespective of the fact that the accounting software is maintained by an in-house team of accounts or outsourced to a third-party service provider.Selection of Accounting SoftwareThe management should maintain its accounting records in an accounting software that is empowered to provide the entity with an audit trail feature for all transactions made in the books of accounts. This feature should be capable enough to maintain a record of 1. change made (i.e., creation, modification, or deletion of a record), 2. when the change is made (i.e., time stamp of the change), 3. who made the change (i.e., user ID), 4. what data was changed (i.e., the transaction reference).The selected software, having the feature of an audit trail, should also be able to generate a report of the said trail when required.The requirement of an audit trail is applicable irrespective of the fact that the accounting software is maintained by an in-house team of accounts or outsourced to a third-party service provider. Hence, it is the responsibility of the management to evaluate whether the third-party service provider maintains the company's records on a platform that is capable of capturing an audit trail as required.RetentionAn Audit Trail will form part of the books of accounts required to be maintained in accordance with Section 128 of the Companies Act, 2013 and hence it has to be retained for a period of not less than eight financial years, immediately preceding a financial year or such higher period as may be prescribed by the central government in case of investigation under Chapter XIV of the Act.Non-ComplianceAccording to Section 128(6), non-compliance may lead to a fine which shall not be less than fifty thousand rupees, but which may extend to five lakh rupees.ChallengesChallenges majorly include:Cost of storage as such a huge record of data repository can be built only with enlarged storage capacities.Time invested in structuring the audit trail reports and run time efficiencies in a real environment may take a hit due to backend tracking of all changes.Effective and efficient controls need to be designed, implemented and maintained in order to comply with the new regulations.Daily backup will be an additional burden in view of the new audit trail requirement.Auditor PerspectiveStatutory RequirementSection 143(3)(j) of the Companies Act, 2013, read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 requires the audit reports issued for the financial year commencing on or after April 01, 2022, and shall include views or comments of the auditor on whether:the accounting software for maintaining its books of account, which has a feature of recording audit trail (edit log) facility, andthe same has been operated throughout the yearfor all transactions recorded in the software, andthe audit trail feature has not been tampered with andit has been preserved as per the statutory requirements for record retention.However, proviso to Rule 3(1) of Companies (Accounts) Rules, 2014 requires the maintenance of an Accounting Software which commences from April 01, 2023, creating an impediment for the auditor's ability to report on the said software from the financial year commencing on or after April 01, 2022. Hence, the reporting requirement under Rule 11(g) stands deferred to the financial year commencing on or after April 01, 2023.ApplicabilitySection 143(3)(j) of the Companies Act, 2013 read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 is applicable for the audit of all class of companies that maintains the Books of Accounts as specified in Section 128 of the Companies Act, 2013 with the aid of an Accounting Software for the financial year commencing on or after April 01, 2023.As the Section 129 extends the requirement of the Act to both standalone and consolidated financial statements on a par basis, the reporting on an audit trail is also mutatis mutandis applicable to both standalone and consolidated financial statements. However, the said reporting is not applicable for the components if the components included in the consolidated financials are an entity incorporated under statutes other than the Companies Act, 2013 (such as firm, LLP, etc.,) or those entities incorporated in a jurisdiction outside India where there is no similar accounting/reporting obligation cast. In such cases, the auditor of the parent company in his report on consolidated financial statements needs to report such fact of non-applicability on such components included.The reporting under this Rule is only applicable in case of audit reports issued in accordance with the Companies Act, 2013 where the "Report on other legal and regulatory" is included. Hence, it is not applicable for audit reports or limited review reports issued in accordance with SEBI Regulations or other special-purpose reports issued in accordance with other statutes.In case the accounting function has been outsourced to a third-party service provider who maintains the books of accounts of the entity using its own accounting software, then the audit trail requirements extend to the third party's accounting software as well.Audit ProceduresUnderstandAuditors need to:understand the books of accounts maintained and management's assessment of those books of accounts that are maintained in an accounting software from those that are maintained manually, accounting software used by the Company, whether the accounting function has been maintained internally or outsourced to a third-party service provider,identify the risks and controls implemented by the management,assess the risks identified and plan appropriate responses in order to address the audit risk through control and substantive testing.Risks may include, but are not limited to:Risk of audit trail may be disabled on a need basis.Unauthorized access to the audit trail report.Changes to audit trail functionality/configuration is not authorized/ log of those changes is not maintained.The audit trail may not cover the total period under consideration/ all transactions in the books of accounts.Audit trail may not be retained for the period as stated in Section 128 of the Companies Act, 2013.Changes may be made at data base level without the aid of the accounting application and the trail present may not capture the same.Other accounting software-specific risks.Use of ExpertsIt may be appropriate for the auditors to seek expert support considering the complexity of the accounting software. Auditor may involve the experts in the field of information technology to assist in obtaining a reasonable assurance about:the use by the management of an appropriate accounting software that is aided with an audit trail feature,audit trail has been operative throughout the year under consideration for audit for all transactions in the books of accounts at the application and database level,the trail is not compromised/tampered/disabled, andthe audit trail has been retained.Auditors need to carefully consider and determine the nature of the experts used. If the experts are specialized in the field of auditing, they will be covered under the definition of audit team and accordingly apply the requirements of SA 220 - Quality Control for an Audit of Financial Statements, and if the experts are specialized in the fields other than auditing i.e., only in information technology, they will be covered under the definition of auditors expert and accordingly apply the requirements of SA 620 - Using the Work of Auditors Expert.The auditor has the sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the auditor's use of the work of an auditor's expert; hence, he is responsible for concluding that the work of that expert is adequate for his purposes, and he may accept that expert's findings or conclusions in the expert's field as appropriate audit evidence.MaterialityAs the requirement of maintaining an audit trail is applicable for each and every transaction made in the books of account throughout the year, the materiality threshold is not applicable for evaluation, as it is a factual reporting.Controls & Substantive Testing PlansBased on the understanding of accounting software, risk, and control environment, auditors need to develop a plan to test the compliance by combining control and substantive procedures. The list provided includes some of the possible testing methods:Evaluate the controls implemented by the management to prevent unauthorised access, modifications to the audit trail, and those controls to ensure the audit trail captures all modifications to all transactions throughout the year.Inquiry with the system administrator about the customizations made to audit trail configurations where ERPs are customized in accordance with business requirements.Test and check the transactions for evidence of operating effectiveness of the audit trail feature throughout the year under consideration for audit for all modifications to the books of accounts.Check the configuration settings to identify whether the audit trail feature can be turned off/disabled at any time. In such scenarios, obtain the edit log of configuration settings to check the instances.Test the audit trail in the test environment by editing and deleting some sample transactions rather than making edits on the main/real environments.Verify the edit logs of the databases to ensure no direct modifications are made on the raw data.Auditors may use the results of the above procedures as corroborative audit evidence to confirm some other findings and may also use the above results to perform substantive analytics, which may reveal any structured misstatements/anomalies that may reduce the auditor's detection risk.Service OrganisationIn case where the accounting function has been outsourced to a third-party service provider who maintains the books of accounts of the entity using its own accounting software, the audit trail requirements extend to the third party's accounting software as well. In such scenarios, auditor may consider using independent auditor's report on service organisation (For Example, SOC 1/ SOC 2/SAE 3402) for compliance with audit trail requirement, and accordingly comply with SA 402 "Audit Considerations Relating to an Entity Using a Service Organization" or SAE 3402, "Assurance Reports on Controls at a Service Organization".Accounting SoftwareRecords maintainedMaintained Inhouse or OutsourcedIndependent auditor's report (in case outsourced)Hosting locationData baseOperating systemAudit trail EnabledRetention of Audit trail available for previous periodsApplicationDatabase DocumentationAuditor documentation should include the understanding obtained, procedures performed, conclusions reached, details w.r.t consultation or expert involvement, SOC-2/SAE 3402 reports on controls at a service organization, and other considerations of SA 402 (if applicable), and a written representation obtained from the management.In addition to the above, an auditor may also resort to the illustrative table provided above for documentation of audit evidence w.r.t the audit trail and its retention.ReportingThe auditors' views or comments w.r.t the audit trail need to be reported under the "Report on other legal and regulatory requirements" section of the audit report issued in accordance with SA 700 (Revised), "Forming an Opinion and Reporting on Financial Statements" or SA 705 (Revised), "Modifications to the Opinion in the Independent Auditor's Report".In case of any modification in the reporting as per the requirement of Rule 11(g), the auditor needs to check the said implications on the reporting of the following, as the requirement of maintaining an audit trail falls under the ambit of Section 128, which deals with "Books of Accounts to be kept by the Company".Section 143(3)(b) of the Act, requires the auditor to report on - whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him.Section 143(3)(h) of the Act requires the auditor to report on any qualification, reservation, or adverse remark relating to the maintenance of accounts and other matters connected therewith.In case of modification to Rule 11(g) on account of lapse of internal controls (design deficiencies or operation inefficiencies), the auditor needs to consider the said impact on the Report on the Internal Financial Controls with reference to the Financial Statements issued in accordance with Section 143(3)(i).For modifications in specific scenarios, auditors may recourse to para 30 and 31 of the Implementation Guide on Reporting on Audit Trail issued by the Institute.ConclusionThe new requirements do not prevent the management from deleting or modifying any books of accounts, whereas it requires the management to have a log of all details of subsequent modifications/deletions, which enables the management, auditor or other regulators to identify any structured/unstructured anomalies that may lead to the identification of material misstatements or other irregularities/contraventions.◆ ◆ ◆Author may be reached at kypagowtham@gmail.com and eboard@icai.inwww.icai.org March 2026
Commercial Law
Ep. 69 — India’s Ongoing Battle against Money Laundering and Terrorist Financing
CA Journal
· July 2026
00:00
--:--
India's Ongoing Battle against Money Laundering and Terrorist FinancingIndia, the world's fourth-largest economy and a leader in combating Money Laundering and Terrorist Financing, faces persistent threats from several terror groups. Its rapid economic digitisation, financial inclusions, and growing global financial integration pose evolving challenges in protecting its financial ecosystem from illicit activities.India's Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) Framework is engineered to adapt to emerging threats and for compliance with International Standards set by FATF. As a member of the Financial Action Task Force (FATF) since 2010 and of the Asia/Pacific Group on Money Laundering (APG) since 1998, India implements the FATF's 40 Recommendations to combat illicit financial flows.Understanding Money Laundering, Terrorism Financing, and Anti-Money LaunderingMoney Laundering – A criminal process of making illegally-gained proceeds (known as 'Dirty Money') from illicit activities (Drug Trafficking, Corruption, Human Trafficking, Wildlife Trafficking, Tax Evasion, Terrorism Financing, etc.) appear to have come from a legitimate source.Terrorist Financing – Channelising funds for terrorist activities, regardless of whether the source is legal or illegal.Anti-Money Laundering (AML) – A set of policies and practices to ensure that financial institutions and other regulated entities prevent, identify, and report illicit activities.Key Legislative Pillars Enhancing India's AML/CFT FrameworkThe Prevention of Money Laundering Act (PMLA), 2002The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of India's legal framework to combat money laundering. It mandates banks, financial institutions, intermediaries, and people carrying a designated business or profession to verify client identities, maintain records, and furnish information to the Financial Intelligence Unit of India (FIU-IND). The objective of the Act is to prevent money-laundering, confiscate illicit property, and adhere to regulations. The PMLA has reinforced anti-money laundering efforts to adapt to emerging financial crimes and international standards.The Act now includes CAs, CSs, and CMAs carrying out financial transactions on behalf of their clients.Cryptocurrency and Other Virtual Digital Assets are under its purview to intensify regulatory oversight over digital finance.Beneficial Ownership threshold reduced to 10% from 25%, expanding accountability.Redefinition of Politically Exposed Persons (PEPs) to boost the AML/CFT Framework.Religious and Charitable entities are brought under the purview of AML/CFT to avoid misuse for terror financing.Online Aadhaar authentication is exclusively permitted for Banking and Telecom sectors, with offline verification for Insurers.Development of Central KYC to prevent redundant data and streamline the KYC Process.Reporting entities to retain records for 5 years.Unlawful Activities (Prevention) Act (UAPA), 1967India's Anti-Terror Act for robust prevention of certain unlawful activities by individuals and associations in India, including terrorist activities and related matters. The UAPA Amendment Act, 2019, empowered the Union Government to designate individuals as terrorists without a formal judicial process, and the DG NIA to seize/attach the properties related to proceeds of terrorism in NIA Investigated cases.The Armed Forces (Jammu and Kashmir) Special Powers Act, 1990The Act provides Special Powers to the Armed Forces in the JK disturbed areas for Anti-Terrorism Operations.A high-level meeting chaired by Union Home Minister Amit Shah, attended by Union Home Secretary, Director (Intelligence Bureau), DGs of CRPF, BSF, and other senior officers, was held at New Delhi on 11-02-2025, which focused on monitoring terror-financing, intensifying actions over Narco-terror cases, and 'Zero Terrorism' in JK. A similar high-end meeting was held at Srinagar on 08-04-2025 to serve the aim of AML/CFT.Key Roles and Contributions of India's Central AML/CFT AuthoritiesFinancial Intelligence Unit-India (FIU-IND)FIU-IND is the central agency for receiving, processing, analysing, and disseminating information regarding suspect financial transactions. It coordinates and strengthens the efforts of national and international intelligence, investigation, and enforcement agencies in global Anti-Money Laundering and Counter Terrorism Financing. It reports directly to the Economic Intelligence Council, headed by the Finance Minister.It is a central repository for Critical Financial Intelligence and collating reports on Cash Transactions, Non-Profit Organisation Transactions, Cross Border Wire Transfers, Purchase or Sale of Immovable Property, Suspicious Transactions, and other reports obtained from the Reporting Entities. The intelligence is shared with national intelligence and regulatory authorities and Foreign FIUs to combat money laundering and related crimes. FIU-IND tracks money laundering trends, typologies, and developments for coordinated action.Enforcement Directorate (ED)The Nodal agency is crucial in safeguarding the nation's financial system by investigating serious economic offences where the crime proceeds are from predicted offences—corruption, fraud, organized crime, drug trafficking, environmental crime, and terrorism. Employing a risk-based approach, ED prioritises high-impact cases threatening economic stability/national security by tracing illicit funds, identifying shell companies, and dismantling complex laundering networks. ED supports and supplements global efforts in combating financial crime.Contributions during (2014-2024):April 2014-March 2024, ED initiated 5113 PMLA investigations (averaging 511 cases annually), filing 1332 Prosecution Complaints.FY2024-25 marked a remarkable achievement with 775 new investigations and 333 PCs filed, approx. INR 30,036 Cr assets provisionally attached (astonishing rise of 141%) and securing 34 individual convictions.By March 2025, INR 1,54,594 Cr in assets were under provisional attachment (with INR 15,261 Cr reconstitution across 30 cases during FY24-25). The process is expected to accelerate during FY25-26. Simultaneously, notable 1739 Prosecution Cases are currently at Trial with 47 decided cases. With only 3 acquittals on Merit, striking 93.6% conviction rate is commendable, reflecting the strengthened capabilities in Combating Money Laundering, showcasing its increasing efficacy in securing justice and financial integrity.National Investigation Agency (NIA)A Central Counter-Terrorism Law Enforcement Agency was established post 26/11 Mumbai attacks. As a professional investigation bureau, it adheres to international AML/CFT Standards. NIA sets standards of excellence in Counter Terrorism and national security investigations through a highly trained, partnership-oriented workforce. Serving as a vital intelligence hub, NIA deters existing and potential terrorist groups and individuals, thereby preventing potential attacks.To strengthen the national security, NIA has adopted a Multi-Pronged approach through major structural and collaborative initiatives:Establishment of the National Terror Data Fusion & Analysis Centre (NTDFAC) by NIA/Counter Terrorism Research Cell by the Government enhances investigative capabilities using Big Data analytics.Creation of Anti-Human Trafficking Division (AHTD), Anti-Cyber Terrorism Division (ACTD), and a Special Cell comprising legal experts to address emerging threats.Constitution of Terror Funding and Fake Currency (TFFC) Cell investigating Terror Funding and Fake Indian Currency Notes (FICN) cases.Collaborating with 26 nations and hosting the 2022 "No Money for Terror" conference reflects the global engagement.Capacity Building Programmes for its officers, police, and forces with foreign agencies and training law enforcement (including Bangladesh and Nepal police) on Fake Indian Currency Notes, fortify India's Counter-Terrorism framework. 40 Capacity Building programmes have trained State Police Forces (the first responders to any terrorist incident) on Counter Terrorism.The MoU between NIA and the National Forensic Science University strengthens Forensic Expertise.Since its inception, the NIA has registered 640 notable cases (pronounced judgment in 147 cases), achieving a striking conviction rate of 95.23%, thus reflecting the agency's investigation expertise and national security enforcement.Reserve Bank of India (RBI)RBI, a supreme regulator for banking and the financial system in India, is responsible for control, issuance, and maintenance of the supply of Indian Currency along with managing the country's main payment system and striving to promote India's Economic Development.The RBI sharply updates its Master Circulars/Directions to determine extensive KYC/AML/CFT norms and guidelines to be followed by the banks and other financial institutions (including NBFCs) with the aim of preventing them from being a channel for ML/TF.The guidelines cover the following crucial aspects:Develop a clear customer acceptance policyRisk ManagementRobust Customer Identification ProcedureCustomer Due Diligence, Beneficial Ownership Identification, On-Going/Enhanced and Simplified Due Diligence ProceduresTransaction MonitoringRecord ManagementReporting requirements to FIU-INDAppointment of Principal OfficerRequirements/obligations under International Agreements – Communications from International AgenciesReference: Master Direction – Know Your Customer (KYC) Direction, 2016 (Updated as on 14-08-2025)In October 2024, RBI issued guidelines on internal risk assessment for ML/TF risks for banks, NBFC's, and regulated entities to lay the foundation, methodology, and follow-up actions for internal risk assessments to identify and mitigate money laundering, terrorist financing, and proliferation financing risks across clients, geographies, products, and delivery channels.In April 2025, RBI signed an MoU with FIU-IND to enhance liaison efforts. The key aspects included designation of nodal officers for coordination, sharing relevant intelligence, establishing reporting procedures for regulated/reporting entities, outreach and training programs for the REs, skill enhancement, assessment of ML/TF risks and vulnerabilities, identifying red flag indicators signalling suspicious transactions, supervising and monitoring compliance with PMLA, its rules and RBI instructions, ensuring adherence to relevant AML/CFT international standards and hold quarterly meetings to discuss and exchange information on mutual interests.The Central Board of Direct Taxes (CBDT)The Income Tax Department combats tax evasion and avoidance. The Investigation Wing conducts search/seizures and surveys to locate undisclosed/unexplained incomes and assets. The DTAAs aid in detecting concealed foreign income. Reporting entities are mandated to file SFTs for high-value transactions, thereby providing a Crucial Tool in detecting Black Money. CBDT's financial intelligence supports India's compliance with International AML/CFT Standards, reinforcing transparency and accountability.The Central Board of Indirect Taxes and Customs (CBIC)CBIC robustly combats illicit financial activities, intercepting smuggling and controlling Narcotics. CBIC has introduced a Risk Management System for Imports by streamlining trade and interdicting high-risk shipments.The Department of Revenue has designated 'CBIC' as a PMLA 'Regulator' for the Dealers in Precious Metals and Stones and Real Estate Agents. DG-Audit, CBIC has issued guidelines on AML/CFT and Proliferation Financing for Real Estate Agents and Dealers in Precious Stones and Precious Metals. These mandates include client due diligence, transaction monitoring, record keeping, and suspicious transaction reporting to facilitate investigations. This multidimensional approach enhances transparency and national security.Securities and Exchange Board of India (SEBI)SEBI regulates securities and commodities market imposing vigorous AML/CFT compliance on market intermediaries through Master Circulars and guidelines, which include Client/Enhanced Due Diligence, Internal Control and Policies, Monitoring and Reporting of Suspicious/Cash Transactions to FIU-IND, record keeping, mandatory client account opening procedures, implementation of Group-wide AML/CFT Procedures, compliance with WMD Act and its Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. SEBI AML/CFT Certificate Course is launched for Securities Intermediaries, enhancing market resilience, deterring financial malfeasance, and upholding global compliance standards.Insurance Regulatory and Development Authority of India (IRDAI)A Statutory Body covering the policyholder's interests and regulating, promoting, and enriching the systematic growth of the insurance sector in India. The provisions of PMLA extend to Life Insurers. The International Regulatory agencies underline the application of Anti-Money Laundering measures as a bedrock in battle against illicit activities.The IRDAI instructed insurers to upload individual and Legal Entity (LE) KYC records to the Central KYC Registry, maintain confidentiality of unique KYC Identifiers, and to periodically update existing KYC records, in line with PML Rules, with LEs compliance starting from 01-04-2021.In January 2025, an MoU was signed with FIU-IND to facilitate seamless intelligence sharing. The collaboration mandates procedures for reporting to FIU-IND, enhancing training programs, conducting assessments of AML/CFT risks prevalent in the insurance sector, upgrading skills in entities regulated by IRDAI, and identifying red flag indicators for Suspicious Transaction Reports. This strengthens insurance sector integrity through transparency, vigilance, and regulatory collaboration.Ministry of Corporate Affairs (MCA)Strengthens AML/CFT efforts by ensuring corporate governance and transparency, targeting Corporate Financial Frauds. Recent amendments lowered the beneficial ownership disclosure to 10%, aligning with Global AML/CFT practises thereby strengthening the identity of the ultimate owner and preventing hiding illicit funds via Shell Companies. Mandated record keeping (including backups) and regular compliances creates transparent financial trail.A formal MoU with FIU-IND enables seamless sharing of financial data. Inter-agency partnership enhances enforcement, accountability, and global financial integrity.National Bank for Agriculture and Rural Development (NABARD)NABARD and FIU-IND's MoU in September 2024In September 2024, an MoU was signed with FIU-IND to enhance PMLA Act compliance. The MoU laid down procedures for reporting to FIU-IND under the PML Rules, upgradation of AML/CFT skills, assessment of risks and vulnerabilities, identification of red flag indicators for Suspicious Transaction Reports (STRs), and supervision of compliance with obligations under the PMLA and NABARD Guidelines. The MoU also aimed to ensure compliance with international standards and to assess and upgrade the skills of regulated entities in AML/CFT.Financial Action Task Force (FATF)i. The role of the Financial Action Task Force (FATF)The Financial Action Task Force (FATF) is a globally recognised key independent inter-governmental body that develops and promotes policies (known as FATF Recommendations) to guard the global financial system against money laundering, terrorist financing, and the proliferation financing of weapons of mass destruction. Its Recommendations are recognised as the global Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) standard.ii. India's progress in AML/CFT and areas for strengthening: FATF Mutual Evaluation Report (September 2024)FATF Mutual Evaluation Report applauded India's efforts in tackling illicit finance, highlighting its strong technical compliance with FATF's Recommendations. A joint FATF-APG-Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) evaluation honoured India's effective AML/CFT framework, emphasising the utilisation of financial intelligence and advancements in financial inclusion. Classified under the 'Regular Follow-up' Category by FATF alongside the UK, France, and Italy within the G20, India was praised for the risk management and preventive measures adopted by commercial banks. India has excelled in international co-operation, asset recovery, and financial sanctions for proliferation financing.However, the report spotted the areas requiring intensified efforts. The report urged strong prosecutions and sanctions for terrorist financiers, imposition of cash restrictions on precious metals and stones dealers (being a sensitive sector), strengthening risk-based measures to prevent NPO misuse for terror financing, and full compliance with Politically Exposed Persons (PEP) regulation to bolster financial security and mitigate risks involved.iii. India's Recent Collaborative/Capacity Building Initiatives1. Private Sector Collaborative ForumThe 2025 FAFT Private Sector Collaborative Forum (PSCF), hosted by RBI and MCA in Mumbai (25th-27th March 2025) stressed on Public-Private Partnerships to combat Financial Crime. Over 200 participants, including representatives from international banks, Fintechs, gatekeepers, and civil society, discussed money laundering, terror/proliferation financing, payment transparency, data protection, risk-based approaches, and beneficial ownership. FATF President, Elisa de Anda Madrazo, emphasised collaboration between the public and private sectors. RBI Governor, Shri Sanjay Malhotra, underscored collaboration and innovation for a safer, secure, fast, convenient, accessible, and affordable financial ecosystem. Highlights included—proposed FAFT Standard 'Travel Rule' revision, tripartite dialogue on NPO financial access, and WMD financing through global cooperation.2. Capacity Building Programme for Central Asian Republics on CFTThe Department of Revenue, in collaboration with the Ministry of External Affairs and National Security Council Secretariat, hosted the inaugural Capacity Building Programme for Central Asian Republics (CARs) (21-22 April 2025) on 'Countering the Financing of Terrorism (CFT) through Cryptocurrencies, Crowdfunding and Non-Profit Organisation'. Experts from Uzbekistan, Turkmenistan, Kazakhstan, Tajikistan, and Kyrgyzstan exchanged knowledge and advanced regional cooperation in countering terrorism financing led by experts from the FATF Cell of the Department of Revenue, Ministry of Home Affairs, NIA, and FIU-IND. Experts from the Eurasian Group (EAG) and the FATF-style Regional Body (FSRB) provided valuable AML/CFT insights regarding NPO/Virtual Assets.Tailoring to Central Asian needs, discussions covered Financial Intelligence in terrorism investigations, risks from misuse of Virtual Asset Service Providers (VASPs), radicalization financing, Crowdfunding and NPOs misuse for terrorist activities. The initiative strengthens Counter-Finance and Global dedication.Technical Advancements and Measures to Strengthen India's AML/CFT Framework1. Digital KYC for REsDigital KYC involves capturing the live photo (along with the Latitude and Longitude of the location) of the customer by the authorised officer of the Reporting Entity in compliance with the provisions, alongside officially valid document/the proof of Aadhaar possession in situations where offline verification is not viable. RBI has directed RE to develop a secure and authenticated application specifically for the digital KYC process, accessible across all customer touch points, ensuring that the KYC process is exclusively conducted through this approved platform.2. FINnet 2.0FIU-IND developed Financial Intelligence Network 2.0 (FINnet 2.0), an advanced AI-Machine Learning integrated IT system escalating AML/CFT efforts by flagging high-risk cases for immediate actions through risk scores generated for individuals, businesses, reports, networks, and cases. It enhances Financial Analysis by applying a Natural Language Processing system. The Sub-systems are:FINGate – Collects data from REs,FINCore – Uses AI and Machine Learning for summary generation and risk analysis,FINex – Disseminates Financial Intelligence to investigate and intelligence organisations for timely action.Existing entities on FINnet 1.0 must re-register on FINnet 2.0, while new entities require immediate registration. Non-Compliance prompts a violation of the act and regulations.3. Central KYC Records Registry (CKYCR)A Centralised repository for KYC records, which streamlines the KYC Process and reduces duplication. The 2015 amendment to PML (Maintenance of Records) Rules, 2005 requires every reporting entity to electronically file the client's KYC records with the CKYCR within 10 days of the establishment of a client-based relationship.India strengthens its financial integrity with digital innovation, streamlined regulations, inter-agency collaboration, and inclusive compliance enforcement.Challenges due to Judicial BacklogsThe May 2025 annual report of the ED highlighted that despite 100 special PMLA courts across the country, Money Laundering trials face several "systematic" and "procedural" hurdles. The primary challenge is the intrinsic linkage between the prosecutions of ML cases and the progress of the investigation/trial of the corresponding predicate offense. Delays in these primary proceedings invariably impact the PMLA trial.PMLA investigations involve complex financial structures, large volumes of financial data, and cross-border transactions necessitating intensive forensic analysis and extensive documentation, prolonging scrutiny.ConclusionIndia is progressing positively to combat illicit finance with its AML/CFT infrastructure undergoing a significant transformation, and by enhancing its domestic and international alliances. Yet continuous enhancement persists. Laws require continuous updating to combat emerging methods of Money Laundering and Terrorist Financing, especially those involving Fintech platforms and Virtual Assets.Securing the financial system and national security effectively requires providing ongoing training to enforcement and regulatory agencies and technological modernisation. Improved collaboration between FIU-IND, ED, NIA, SEBI, and RBI is also crucial. To boot, Financial Institutions require clear guidance and shared intelligence to actively participate in India's AML/CFT efforts.ReferencesAnnual Report – ED FY 2024-25PIB (Finance Ministry) – Capacity Building Programme for Central Asian Republics on CFT (22-04-2025)PIB (Ministry of Home Affairs) (11-02-2025)PIB (Finance Ministry) – FATF Private Sector Collaborative Forum (24-03-2025)Master Circular on AML/CFT, Ref No-IRDAI/SDD/GDL/CIR/175/09/2015 (29-09-2015)PIB (Finance Ministry) (MoU between RBI-FIU-Ind) (17-04-2025)PIB (Finance Ministry) – FATF MER (19-09-2025)PIB (MHA) – National Investigation Agency (11-12-2024)ICAI Article – Financial Intelligence Unit of India Leveraging AI to Combat Money LaunderingInternal Risk Assessment Guidance for Money Laundering/Terrorist Financing Nov/Dec 2024Author may be reached at casonia.ks1988@gmail.com and eboard@icai.inThe Chartered Accountant • March 2026 • www.icai.org
Financial Market
Ep. 70 — Cracking the Code of Credit Ratings: Practical Insights for Businesses and CAs
CA Journal
· July 2026
00:00
--:--
Cracking the Code of Credit Ratings: Practical Insights for Businesses and CAsIn today's credit-driven economy, businesses of all sizes require external funding to expand operations, invest in new projects, or manage working capital. A crucial enabler in accessing this capital at favorable terms is a good external credit rating. Assigned by independent credit rating agencies, this rating evaluates a company's ability to meet its financial obligations.A strong credit rating offers numerous benefits, including access to lower interest rates, increased investor confidence, and enhanced market reputation. Credit rating agencies rely on comprehensive methodologies that include financial performance, business risk, operational efficiency, management quality, and industry outlook.Chartered Accountants (CAs), with their deep financial and regulatory expertise, play a critical role in preparing businesses for the credit rating process. From preparing robust documentation to guiding strategic improvements and acting as liaisons with agencies, their contribution can significantly impact the final rating outcome.This article explores the fundamentals of external credit rating, methodologies adopted by agencies, how financial ratios play a role, and how CAs can support businesses throughout the journey.Introduction to External Credit RatingAn external credit rating is a formal, independent opinion on a borrower's creditworthiness, issued by a recognized Credit Rating Agency (CRA). It serves as a vital tool for lenders and investors to assess the risk associated with lending to or investing in a particular company.In India, key agencies include CRISIL, ICRA, CARE Ratings, and India Ratings & Research. Globally, agencies like Moody's, Standard & Poor's (S&P), and Fitch are prominent.Credit ratings are typically expressed in letter grades (e.g., AAA, AA, BBB, BB, etc.), where higher grades indicate better creditworthiness. These grades may also include modifiers like “+” or “–” for finer differentiation.Grades of Credit Ratings and their TypesCredit rating agencies use alphanumeric symbols to assign grades that reflect the creditworthiness of a borrower or financial instrument. These grades are broadly classified into investment grade and speculative (or junk) grade, with separate scales for long-term and short-term instruments.Long-Term Credit Rating ScaleUsed for instruments with a maturity period exceeding one year (e.g., bonds, debentures, term loans).Rating GradeMeaningCredit QualityAAAHighest safety; negligible credit riskInvestment GradeAAHigh safety; very low credit riskInvestment GradeAAdequate safety; low credit riskInvestment GradeBBBModerate safety; moderate credit riskInvestment Grade (lowest tier)BBModerate risk of defaultSpeculative GradeBHigh risk of defaultSpeculative GradeCVery high risk; near defaultSpeculative GradeDDefault or expected to defaultDefault GradeEach category from AA to B may have a “+” (plus) or “–” (minus) to show relative standing within the category.Example: AA+, AA, AA–Short-Term Credit Rating ScaleUsed for instruments with a maturity period of less than one year (e.g., commercial papers, working capital loans).Rating GradeMeaningCredit QualityA1+Highest degree of safetyInvestment GradeA1Very strong capacity to meet obligationsInvestment GradeA2Strong capacity; marginally lower safetyInvestment GradeA3Moderate safetyInvestment GradeA4Inadequate safety; high riskSpeculative GradeDDefaultDefault GradeSME Credit Rating Scale (By Indian Rating Agencies)Used for Micro, Small & Medium Enterprises (MSMEs) to assess creditworthiness for bank loans and government schemes.SME RatingMeaningSME 1Highest level of creditworthinessSME 2High level of creditworthinessSME 3Good creditworthinessSME 4–5Moderate creditworthinessSME 6–8Weak to poor creditworthinessSovereign Credit Rating Scale (For Countries)Used to assess the ability of a government to repay debt. Issued by global agencies like Moody's, S&P, and Fitch.AgencyInvestment GradeSpeculative GradeS&P / FitchAAA to BBB–BB+ to DMoody'sAaa to Baa3Ba1 to C“Credit rating agencies use alphanumeric symbols to assign grades that reflect the creditworthiness of a borrower or financial instrument. These grades are broadly classified into investment grade and speculative (or junk) grade, with separate scales for long-term and short-term instruments.”Why Credit Ratings Matter in Business FinancingCredit ratings serve as a shorthand for a company's financial health and repayment capability. Here's why they are so critical:Access to Cheaper Credit: Lenders rely heavily on credit ratings when determining interest rates. A higher credit rating reduces the perceived risk, enabling banks and financial institutions to offer loans at lower interest rates.Improved Loan Sanction Chances: Even if credit is available to an unrated or poorly rated company, the process is more stringent, slower, and often comes with stricter terms and higher collateral requirements.Increased Investor Confidence: Institutional investors often require a minimum credit rating before considering investment. A strong rating widens the investor base and allows participation in capital markets through bonds or commercial papers.Regulatory Compliance: In many cases, regulators and exchanges require credit ratings for issuing debt instruments or for listing securities. This is especially true for non-convertible debentures, bonds, and structured finance products.Business Reputation and Transparency: Ratings reflect sound financial practices and corporate governance. A consistently good rating enhances brand value and builds trust with suppliers, customers, and partners.Methodology Used by Credit Rating AgenciesWhile each credit rating agency has its own proprietary model, their methodologies typically include both quantitative and qualitative assessment. Here's a breakdown:a) Business Risk ProfileIndustry Risk: Is the industry cyclical, growing, or facing regulatory challenges?Competitive Position: Market share, pricing power, and barriers to entry.Revenue Diversity: Concentration risk across clients, geographies, or product lines.b) Financial Risk ProfileHistorical and Projected Financials: Revenue, profit margins, and growth.Leverage: Capital structure, debt-equity ratio.Cash Flow Adequacy: Whether operational cash flows are sufficient for debt servicing.c) Operational EfficiencyProductivity, fixed asset turnover, and capacity utilization are examined to judge the efficiency of resource deployment.d) Management and GovernanceManagement track record: Experience, strategic direction, and responsiveness.Governance: Board independence, audit practices, and related party transactions.e) Legal and Regulatory EnvironmentImpact of pending litigation, compliance issues, or regulatory action.f) Macroeconomic FactorsOverall economy, currency risk, and sector-specific economic indicators.g) Rating Committee DecisionAfter all analysis, a Rating Committee, usually composed of senior analysts and sector experts, reviews the case and assigns the final rating.Role of Financial Ratios in Credit RatingFinancial ratios are fundamental to the quantitative part of the credit rating process. Refer to the table provided below representing the key categories.Ratio CategoryRatio NameIdeal BenchmarkSignificancea) Leverage RatiosDebt-to-Equity RatioBelow 3:1 (varies by industry)Measures long-term solvency and financial leverage. Lower ratio = stronger capital structure.TOL / TNWBelow 4:1 (depends on sector)Reflects overall leverage; includes total liabilities vs. tangible net worth.b) Liquidity RatiosCurrent Ratio1.33:1 and aboveIndicates ability to meet short-term obligations using current assets.Quick Ratio1:1 or higherMore stringent test of liquidity; excludes inventory.c) ProfitabilityEBITDA MarginIndustry-dependentMeasures operational efficiency before interest, tax, depreciation, and amortization.Net Profit MarginPositive and consistentIndicates how much of revenue is retained as profit after all expenses.Return on Capital Employed (ROCE)Industry-dependentShows how effectively the company uses capital to generate profits.d) Coverage RatiosInterest Coverage Ratio (ICR)Above 2.5–3xShows ability to service interest obligations; higher is safer.Debt Service Coverage Ratio (DSCR)Minimum 1.25xReflects ability to repay both interest and principal from operational cash flows.e) Cash Flow MetricsFree Cash Flow to Firm (FCFF)Should be positive & consistentIndicates availability of internal cash to support operations and investments.Operating Cash FlowStable & positive vs. net incomeMeasures actual cash generation from core business operations.Maintaining favourable financial ratios can greatly improve or sustain a company's credit rating.Role of Chartered Accountants in Credit Rating ProcessChartered Accountants bring strategic, analytical, and compliance expertise to businesses undergoing the rating process.Step 1: Pre-Rating PreparationFinancial Health AnalysisSimulating Rating OutcomesIdentifying WeaknessesStep 2: Documentation & ReportingAudited Financial StatementsBusiness Plans & ProjectionsProject ReportsInternal Control DocumentationStep 3: Ratio Optimization & AdviceRestructuring Debt to improve leverageWorking Capital EfficiencyMargin & Cost Structure EnhancementsStep 4: Liaison with AgenciesMeetings with AnalystsHandling QueriesProviding ClarificationsStep 5: Post-Rating MonitoringOngoing Compliance MonitoringAddressing Triggers for DowngradesReadiness for Periodic ReviewsRegulatory and Market TrendsSEBI & RBI Regulations: Mandate credit ratings for certain instruments like commercial papers, NCDs, and structured obligations.MSME Focus: Various government schemes offer interest subsidies for MSMEs with external ratings.ESG Considerations: Many rating agencies now include Environmental, Social, and Governance (ESG) metrics in their frameworks.Technology and Data Analytics: CRAs are increasingly adopting AI tools and automated financial monitoring.Tips & Tricks for a Company to Achieve an Investment Grade Credit Rating(Investment grade = AAA to BBB-/Baa3 by rating agencies)Achieving an investment grade credit rating is a strategic goal that significantly reduces borrowing costs, boosts investor confidence, and improves market reputation. While the final rating is at the discretion of the rating agency, companies can take proactive measures to optimize their financial profile and transparency to influence the rating positively.1. Strengthen Financial RatiosCredit rating agencies put heavy emphasis on financial ratios. Here's how to improve them:a. Leverage RatiosKeep Debt-to-Equity (D/E) ratio low.TOL/TNW (Total Outside Liabilities to Tangible Net Worth): Keep it under control by reducing external liabilities.TipsUse retained earnings to fund expansion instead of debt.Repay high-cost loans early.b. Liquidity RatiosMaintain Current Ratio above 1.33 and Quick Ratio above 1.0.Have adequate working capital margins.TipsMonitor receivables and inventory cycles.Avoid overtrading and stretch supplier credit carefully.c. Profitability RatiosImprove EBITDA margins, Net Profit Margins, ROCE, and ROE.Margins reflect pricing power and cost efficiency.TipsInvest in automation, better vendor management, and product differentiation.Avoid frequent one-time losses.d. Coverage RatiosEnsure Interest Coverage Ratio (ICR > 2.5x) and DSCR > 1.5x.These reflect the ability to meet debt obligations.TipsRestructure existing loans for longer terms if DSCR is low.Keep EMI schedules in line with cash flow projections.2. Establish Robust Internal Controls and GovernanceA well-managed company is a safer bet for lenders.TipsForm an active Board with independent directors.Implement ERP software or MIS systems for real-time data and controls.Follow transparent accounting standards and get audits done by reputed firms.Document risk management policies and internal controls.3. Improve Cash Flow VisibilityAgencies value businesses with predictable and stable cash flows.TipsEnter into long-term contracts or repeat orders with clients.Reduce volatility in revenues by diversifying products or geographies.Maintain consistent operating cash flows even during low seasons.4. Maintain Clean Credit & Compliance Track RecordTipsAvoid defaulting on any statutory dues (GST, PF, TDS).Ensure timely loan repayments; even minor delays can hurt ratings.File all returns and statements regularly (ROC, Income Tax, etc.).5. Prepare a Strong Business Plan with Future OutlookAgencies assess forward-looking capabilities, not just historical performance.TipsCreate a clear business plan with revenue forecasts, capex needs, and funding structure.Highlight competitive advantages and market position.Include SWOT analysis and stress testing (e.g., impact of a demand drop).6. Optimize Capital StructureTipsKeep equity levels strong relative to debt.Convert some debt into equity or quasi-equity (like CCDs or preference shares).Use less risky funding instruments like ECBs, lease financing, or vendor credit.7. Maintain Industry Benchmarks and Peer ComparisonsAgencies evaluate you relative to industry peers.TipsTrack and match industry-average ratios.Benchmark costs, debt levels, and ROCE.If you're a market leader or innovator, highlight this explicitly.8. Avoid Red Flags that Lower RatingsDon'tsFrequent restructuring of debt.Reliance on promoter loans without documentation.Delay in publishing audited results.Aggressive expansion without stable cash flow backing.CruxAchieving an investment-grade credit rating is not just about numbers; it's about sound business practices, transparency, financial discipline, and strategic clarity. With consistent efforts and professional guidance, companies of all sizes, including MSMEs, can earn and maintain a favourable rating that unlocks better funding and growth opportunities.Conclusion and Way ForwardExternal credit ratings are more than just a regulatory checkbox — they are a reflection of a company's financial health, transparency, and future potential. For growing businesses, especially MSMEs, obtaining and maintaining a favorable credit rating can unlock significant financial advantages.“Chartered Accountants, as trusted financial advisors, can guide the credit rating process from start to finish. Their role is vital not only in helping businesses secure funding but also in establishing long-term financial discipline.”As rating methodologies evolve and become more sophisticated, businesses that invest in strong financial practices, compliance, and transparency — with expert support — will be best positioned to benefit.ReferencesSEBI (Credit Rating Agencies) Regulations, 1999RBI credit risk guidelines and Basel normsMSME schemes: CGTMSE, SIDBI programs, Interest SubventionRating methodologies from Indian agencies: CRISIL, ICRA, CARE, India RatingsGlobal frameworks: Moody's, S&P, Fitch RatingsRatio analysis: liquidity, leverage, profitability, coverageBest practices: financial structuring, internal controls, corporate governanceRole of Chartered Accountants as rating advisorsPractical insights from real-world consulting, audit, and financial managementAuthor may be reached at joshiritik037@gmail.com and eboard@icai.inThe Chartered Accountant • Financial Market • March 2026 • www.icai.org
MSME
Ep. 71 — Evaluating the Role of the Ministry of Food Processing Industries in Strengthening India’s Food Processing Ecosystem
CA Journal
· July 2026
00:00
--:--
Evaluating the Role of the Ministry of Food Processing Industries in Strengthening India’s Food Processing EcosystemThe Ministry of Food Processing Industries (MoFPI) was established to enhance food processing and reduce post-harvest waste in India, add value to farm produce goods, offer employment opportunities, and empower farmers’ incomes. This article is a brief discussion on the role of MoFPI, its key schemes, and the socio-economic significance of food processing in India. The flagship interventions by the ministry include the Pradhan Mantri Kisan SAMPADA Yojana (PMKSY), the PM Formalisation of Micro Food Processing Enterprises (PMFME), and the Production Linked Incentive Scheme for Food Processing Industry (PLISFPI) along with the Mega Food Park scheme, which help in the provision of infrastructure, incentives and capacity building to formalize and scale up processing units throughout the country. Such efforts have led to increased value addition, greater efficiency in the supply chain and increased exports of processed foods. Nonetheless, challenges such as a lack of cold chain and transport infrastructure, fragmentation of the supply chain among smallholders, state-level regulatory compounding, uneven implementation across states, and financing constraints faced by micro and small enterprises are still encountered in the sector.The article compares the benefits, such as income diversification for farmers, wastage minimization, job creation, and export potential, with drawbacks and limitation in the operation. It also proposes policy suggestions such as investment, specifically in the creation and preservation of food processing capacities, cold chains, making credit and packaging technology accessible to micro-enterprises, strengthening linkages between farmer-producer organisations and processors, and the simplification of commercialisation processes. Thus, with a sustained focus on infrastructure, technology adoption, and market linkages, MoFPI can achieve significant social and economic returns for India, as long as policies are framed to address on-the-ground bottlenecks and are implemented in a region-sensitive manner.MoFPI and Its Role in the Indian EconomyThe agricultural commodities produced by India are enormous in number, and a significant proportion of all the produced commodities is sold in raw form or lost due to spoilage before reaching the consumers. To fill this gap, the Ministry of Food Processing Industries (MoFPI) was established to reduce this gap through the enhancement of value addition, the development of processing infrastructure and the improvement of the food supply chain. The ministry seeks to reduce post-harvest losses, increase farmers’ earnings, generate employment, and increase exports of processed foods. The significance of the sector has increased due to increasing income levels, changing diets, urbanisation, retail, and expanding markets via exports. Organised programmes and incentives offered by MoFPI are focal in ensuring that the production of raw agricultural output is partly transformed into processed products that match both international and domestic standards.The Chartered Accountants play an essential role in the schemes offered by the Ministry of Food Processing Industries (MoFPI) related to grants and subsidy programs, which require assuring financial assurance and ensuring that funds are utilised well.The functions of MoFPI include policy support, infrastructure and enterprise development schemes, and food processing and state coordination. It has major schemes such as:Pradhan Mantri Kisan SAMPADA Yojana (PMKSY): A comprehensive scheme for creating processing units and clusters, cold chains, and infrastructure for perishables. It aims to create modern infrastructure with efficient supply chains.PM Formalisation of Micro Food Processing Enterprises (PMFME): Focused on micro enterprises, it promotes credit-linked support, branding, and common facilities to formalize and scale micro food processors.Production Linked Incentive Scheme for Food Processing Industry (PLISFPI): Designed to build globally competitive food manufacturing champions in India by incentivizing value-added food production.Mega Food Parks and other infrastructure schemes: These provide end-to-end infrastructure for aggregation, processing, and marketing to link farmers with processors and markets.Recent government press releases and budget allocations indicate continued financial assistance and targeted disbursement under these schemes to speed up processing infrastructure and formalisation. For example, the ministry has reported substantial disbursements under flagship programmes to support rural economies.India has long grappled with substantial post-harvest losses, particularly in perishable commodities, which not only undermine food security but also result in the inefficient use of agricultural produce. It is critical to develop infrastructure capacities like cold chains, pack-houses, and processing units that can prevent waste and expand shelf life. In addition to the intended waste minimisation, food processing also increases value addition substantially, with farmers and processors turning raw produce into products with high margins, such as using mangoes to make mango pulp or manufacture mango sauce. Such value addition is not only able to achieve improved price realisation, but also reduces dependence on fluctuating raw-commodity markets.Additionally, the food processing industry is labour-intensive by nature, bringing employment at various levels, such as collection, sorting, processing, packaging and cargo. Its growth presents ample prospects in rural and semi-urban employment generation activities as an alternative means of livelihood alongside traditional farming activities. The socio-economic significance of food processing has recently been seen in government figures that show millions of people working in registered and unregistered food processing units. Exports of processed foods have a better foreign exchange income on a global scale than raw commodities. The processed food exports of India have been soaring, creating numerous national brands and providing opportunities to enhance trade balances by minimizing reliance on imported processed goods. Aligning with India’s Mission of “Atmanirbhar Bharat”, the expansion of local processing capacity is, therefore, central to the realization of the full potential of economic and developmental prospects in the sector.Advantages of MoFPI InterventionsInfrastructure Development: Support in the form of subsidies, grants, and public–private partnerships under schemes such as PMKSY and Mega Food Parks has resulted in the establishment of new processing capacities, pack houses, and cold storage facilities. These measures have helped minimize post-harvest losses at the local level and enhance the resilience and efficiency of local agricultural supply chains.Support to Micro and Small Enterprises: The PMFME scheme supports micro-enterprises and producer groups by giving subsidies in the form of credit, training, and branding. This promotes formalization and allows entry into markets and access to institutional buyers for micro-units.Use of Technology and Advancements in Quality: Subsidies for modern machinery, cold chains, and packaging enable small and medium processors to be compliant with food safety and export standards so that Indian processed foods have a greater marketability. For example, PLISFPI promotes higher-value manufacturing.Value-chain Integration: Mega Food Parks and cluster-based interventions assist in aggregating farmers’ produce, connecting them with processors and reducing transaction costs. The models have the potential of eliminating exploitation of middlemen and stabilizing supplies of processors.Employment and Rural Development: Interventions that promote local processing diversify economic activity in rural areas and provide non-farm employment, which is particularly useful in under-employed agricultural areas.Disadvantages and ChallengesDespite progress, significant issues remain including inadequate cold-chain and refrigerated transport capacity, fragmented farm production, limited credit and technical support for micro-enterprises, complex regulatory compliance, uneven implementation across states, and exposure to market risks such as fluctuating prices and import competition.Evidence of ImpactAccording to recent government reporting and other global studies, investments has increased, and exports of processed food have been on the rise. For instance, MoFPI schemes have enabled numerous initiatives under PMKSY with high levels of grant aid, and national figures indicate increasing proportions of processed-food exports and employment in both registered and non-registered divisions. These indicators suggest positive growth trends and raise the possibility of further investment and reform that can achieve a greater level of growth in the sector.Policy Recommendations and Practical StepsA multi-pronged strategy is key to the implementation of MoFPI to maximize positive impacts and address existing challenges. First and foremost, cold-chain investments need to be focused on where it matters by having public investments and concessional finance targeted for refrigerated transport, rural pack-houses, and temperature-controlled storage, particularly in high-wastage zones such as horticulture belts and dairy corridors. This will serve to reduce post-harvest losses and stabilize supply chains.It is also important to enhance aggregation of farmers through Farmer Producer Organizations (FPOs) and cooperatives so that farmers can deliver reliably to processors and enjoy a larger value share. Contract farming and producer-processor collaborations with equitable and transparent risk-sharing agreements should be encouraged in an effort to include producers even more in the value chains. In the case of micro-enterprises, simplification of regulations by designing tiered, risk-based rules and developing streamlined pathways and systems through which basic hygiene approvals can be secured quickly and cheaply, coupled with the availability of shared facilities, will make a big difference in terms of entry barriers. Access to affordable credit will also have to be increased with the help of blended financing schemes, product-specific lending products, and guarantee schemes targeting food processing.Schemes are needed to assist small units to build brands, access e-commerce platforms, and contact institutional buyers as well as “India-made” brands to be promoted, with relevant incentives and facilitation of exports in processed food. Lastly, the actualization of better data collection of district and state level post-harvest losses and processing capacity will permit better-targeted interventions. Enhanced central and state government coordination will assist in eliminating regional inequalities and in guaranteeing uniform execution throughout the nation.Role and Achievements contributed by Chartered Accountants in the MoFPIThe Chartered Accountants play an essential role in the schemes offered by the Ministry of Food Processing Industries (MoFPI) related to grants and subsidy programs, which require financial assurance and effective utilisation of funds. Applicants under schemes such as Operation Greens and the Creation/Expansion of Food Processing & Preservation Capacities (CEFPPC) must provide certificates issued by Chartered Accountants. These certificates ensure the validation of key factors such as the expenditure of 2/3rd of the project cost on authorised components, 10% or even 100% of the project cost, as required, and that expenditure on unsecured loans or bridge loans have been properly certified and PAN numbers of lenders have been disclosed.These certifications are an effective way to ensure financial transparency, prevent the misuse of funds belonging to the state population and allow MoFPI to manage its programs successfully. Contributions of Chartered Accountants are not commonly featured as direct accomplishments, yet their role is clearly reflected in the seamless operation of MoFPI programmes. By facilitating adequate financial compliance, providing credible reporting on fund utilization, and promoting transparency in lending practices related to the projects, Chartered Accountants contribute to the strengthening of regulatory oversight and the enhancement of the credibility of the ministry. By doing this, they maintain financial discipline and play an important role in the success of food processing programs in the nation.Future Role of Chartered Accountants in MoFPIChartered Accountants (CAs) can contribute to a greater extent in assisting the Ministry of Food Processing Industries (MoFPI) in the future. In addition to issuing certificates, they are able to do yearly financial audits of projects to ensure that the funds are utilized appropriately and that businesses are financially stable. They can also educate small businesses and Farmer Producer Organisations (FPOs) on simple accounting and reporting to ensure that those who are covered in schemes such as PMFME are more adept at the financial management of their businesses.Their knowledge and expertise can also help CAs advise MoFPI to develop simpler and more cost-effective rules for grants and compliance which would facilitate faster releases of funds and easier payments. Another significant area is digitalization, where CAs can assist in creating systems to submit and validate certificates online, in particular, with respect to project costs and loan information, thereby saving time and effort. Lastly, CAs have the ability to evaluate project-related risks and propose means of mitigating it, enabling MoFPI to make better decisions regarding the allocation of financial resources. Through such roles, CAs can expand their focus beyond verification and emerge as strategic partners, making MoFPI schemes more effective and impactful.Recent Developments and Current StatusAn integrated summary of the new events and the prevailing position of the food processing industry in India is provided, based on similar and publication-quality information in the government sources. This analysis is chronologically organized in terms of year and includes major trends of the budgetary allocations, program implementation, sectoral performance and results of flagship projects carried out by the Ministry of Food Processing Industries (MoFPI). It has been synthesized and presented in a transparent, consistent and clear manner to aid a rigorous research and policy-driven analysis of the changing path of the sector and its potential future growth.Tremendous gains in cold-chain capacity building, operationalisation of Mega Food Parks, as well as financial support to micro and small business, especially in rural and semi-urban areas was achieved by 2023-24.In recent years, the Ministry of Food Processing Industries (MoFPI) has become much more policy-oriented in terms of infrastructure development, enterprise formalisation, and export-orientation. According to government statistics and budgetary requirements, there is a growing trend in the government spending on flagship programs like Pradhan Mantri Kisan SAMPADA Yojana (PMKSY), PM Formalisation of Micro Food Processing Enterprises (PMFME), and the Production Linked Incentive Scheme of Food Processing Industry (PLISFPI). Tremendous gains in cold-chain capacity building, operationalisation of Mega Food Parks, as well as financial support to micro and small business, especially in rural and semi-urban areas was achieved by 2023-24. World Food India 2023 further showcased India as a more attractive location in the global food processing sector, attracting substantial investment and foreign participation. The 2025-26 Budget Estimates support this trend, continuing the focus on technology adoption, capacity building, institutional support, and strengthening the value-chain links. These changes point to the fact that interventions by MoFPI are slowly shifting from policy formulation to on-ground implementation, although regional difference and implementation issues still exist.ConclusionThe Ministry of Food Processing Industries plays a strategic role in the efforts made by India to transition its economy from a predominantly agrarian-based to a value-based agri-food system. Through specific programs for infrastructural development, MoFPI has helped in the reduction of post-harvest losses, formalisation of enterprises and incentive-based production, thus increasing income opportunities for farmers, creating non-farm jobs, and expanding the export opportunity of processed food in India.Most of the recent developments under flagship programmes with the support of higher budgetary allocations and policy continuity implies a slow enhancement of the food processing ecosystem. Nevertheless, systematic issues associated with cold-chain lapses, a disjointed supply chain, regulatory complexity, and asymmetric state-level practices continue to limit the best possible results. Going forward, long-term investments, less complex compliance systems, better connections between farmers and processors, and area-specific implementation will be key to maximizing the socio-economic benefits of MoFPI initiatives. The programmes of the ministry can be decisive in establishing resilient, inclusive, and globally competitive agri-food value chains in India with the co-ordinated efforts of policymakers, industry players, and professionals like the Chartered Accountants.ReferencesPMFME – Welcome to PMFME-MOFPI, PMFME (Gov’t of India), https://www.pmfme.mofpi.gov.in/ (last visited Aug. 8, 2025).Ministry of Food Processing Industries, Production Linked Incentive Scheme for Food Processing Industry (PLISFPI), Ministry of Food Processing Industries (Gov’t of India), https://www.mofpi.gov.in/en/PLISFPI/central-sector-scheme-production-linked-incentive-scheme-food-processing-industry-plisfpi (last visited July 27, 2025).Ministry of Food Processing Industries, Mega Food Park, Ministry of Food Processing Industries (Gov’t of India), https://www.mofpi.gov.in/en/Schemes/mega-food-parks (last visited Aug. 5, 2025).SAMPADA Portal / PMKSY Scheme Management System, Ministry of Food Processing Industries, https://sampada-mofpi.gov.in/ (last visited July 28, 2025).Press Information Bureau, PIB Press Release — PLISFPI / PMKSY Updates, Press Information Bureau (Gov’t of India), https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2081393 (last visited Aug. 10, 2025).Ministry of Food Processing Industries, Evaluation Report — Mega Food Park Scheme (Evaluation Report PDF), https://www.mofpi.gov.in/sites/default/files/evaluation_report_mega_food_park.pdf (last visited Aug. 11, 2025).PMFME, PMFME Success Story — Sindh Dairy Product, PMFME Newsletters / Success Stories, https://www.pmfme.mofpi.gov.in/newsletters/success_stories/SindhDairyProduct.html (last visited July 28, 2025).PLISFPI Portal (Implementation), PLISFPI / IFCI Portal, https://plimofpi.ifciltd.com/ (last visited Aug. 11, 2025).Author may be reached at eboard@icai.in
Direct Tax
Ep. 72 — Indexation- Restored or Redesigned
CA Journal
· July 2026
00:00
--:--
Indexation — Restored or Redesigned?The Finance (No. 2) Act, 2024, initially led many to believe that indexation benefits had been restored for long-term capital gains on land and buildings — creating an illusion of relief. However, a closer look reveals that while the second proviso to Section 112(1)(a) offers a tax cap through a notional comparison with the pre-amendment regime, actual capital gains computation no longer includes indexed costs. This inflates taxable income, leading to loss of the rebate and exposure to surcharge if income exceeds ₹50 lakh. Furthermore, capital losses arising due to indexation are no longer recognized, eliminating the option for carry forward or set-off.It has been nearly a year since the Finance (No. 2) Act, 2024, reshaped the Indian tax landscape, and yet, one provision continues to spark debate among tax professionals and taxpayers alike — ‘The Indexation’. While the Act spanned reforms across personal income tax, corporate taxation, green initiatives, and digital compliance, the most significant and far-reaching impact has arguably emerged in the domain of capital gains taxation, which has seen a historic shift in both computation and taxation.The Finance Bill (No. 2), 2024, had proposed to withdraw the indexation benefit altogether. However, what eventually found its way into the final Act was more calibrated: a tax liability cap that simulates relief.It may look like indexation has returned — but has it, really?Evolution of Indexation: A Quick RecapThe concept of indexation has matured significantly since its inception in Indian tax law. It was first implemented in the 1992 Budget, following recommendations from the Raja Chelliah Committee, which sought to rationalise the taxation of long-term capital gains (LTCG) by accounting for inflation. The government introduced the Cost Inflation Index (CII), with 1981-82 as the base year (index value = 100), allowing taxpayers to adjust the cost of acquisition and improvement for inflation. This ensured that only real gains and not nominal increases, due to inflation, were taxed. In 2001, the government shifted the base year for indexation from 1981 to 2001 to simplify valuation and align it with more accessible historical data.More recently, the year 2024 saw a significant policy shift, with the gradual withdrawal of indexation benefits culminating in the Finance (No. 2) Act, 2024, which eliminated indexation for all capital assets in gain computation.But a pertinent question remains: Even after its withdrawal, does indexation persist in a different form?Demystifying the ConceptAt first glance, the final provisions led to a wave of optimism among taxpayers and professionals, with many interpreting them as a revival of indexation for long-term capital gains (LTCG). This perception stemmed from the shift between the original Finance Bill, which had proposed a complete withdrawal of indexation, and the enacted law, which introduced a tax liability cap on the sale of land & buildings by resident individuals and HUFs.But as is often the case in taxation, the devil lies in the details. The truth is more nuanced and a bit trickier than what the headlines suggest.Traditionally, Section 48 of the Income-tax Act, 1961, has governed the indexation in the computation of capital gains. It allowed for the deduction of the “indexed cost of acquisition” and “indexed cost of improvement” while calculating long-term capital gains. This often led to significantly reduced tax liability.However, the Finance Act (No. 2), 2024, changed the rules of the game.The second proviso to Section 48 is reproduced verbatim below:“Provided further that where long-term capital gain arises from the transfer [(which takes place before the 23rd day of July, 2024)] of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:”This makes it clear that for transfers on or after 23rd July 2024, indexation is no longer available for computing the capital gains.Then, Why the Talk of “Restoration”?This confusion stems from a new relaxation introduced under the second proviso to Section 112(1)(a). Section 112 of the Act governs the chargeability of Tax on long-term Capital Gains on all capital assets except listed equity shares of domestic companies, Units of Equity-oriented Mutual Fund, and Units of Business Trusts. The proviso attempts to cushion the impact of the withdrawn indexation benefit at the time of tax computation, though not for income inclusion.Section 112(1) stipulates that — “Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of, —(a) in the case of an individual or a Hindu undivided family, being a resident, —the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; andthe amount of income-tax calculated on such long-term capital gains, — (A) at the rate of twenty per cent for any transfer which takes place before the 23rd day of July, 2024; and (B) at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024:Further, the second proviso to the above stipulates that,“Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;”From this, we deduce that the benefit of indexation exists only for tax liability comparison, not for computing the actual capital gain. This relief allows assessees to effectively claim indexation “at the tax stage” if it results in lower tax payable, but not at the stage of income computation. It is pertinent to note that this relief is available only for sale by a Resident Individual or HUF of land or building or both. This relief is not available for Non-Resident Individuals, Companies, LLPs, Partnership Firms, etc.The capital gain added to the Gross Total Income will not reflect any indexed cost. It’s not a return of indexation but a cleverly worded tax cap!IllustrationLet’s break this down with an example covering different scenarios:Mr. D, who is a resident, sells his Residential flat for a consideration of Rs 1,20,00,000. The dates of acquisition and sale for the 3 scenarios are listed below:Flat acquired on 1st April 2007 and sold on 22nd July 2024.Flat acquired on 1st April 2007 and sold on or after 23rd July 2024.Flat acquired on 24th July 2024 and sold on 1st April 2028.He also invests ₹20 lakhs in another flat eligible for Section 54 exemption.The Computation of Capital gains and tax under each Scenario is as follows:ParticularsScenario 1Scenario 2Scenario 3Sold before 23rd July 2024Bought before 23rd July and sold on or after 23rd July 2024Bought & sold after 23rd July 202420% Tax with Indexation12.5% Tax without Indexation (Option-I)20% Tax with Indexation (Option-II)12.5% Tax without IndexationDate of sale of flat22nd July 2024On or after 23rd July 2024On or after 23rd July 20241st April 2028Date of acquisition of flat1st April 20071st April 20071st April 200723rd July 2024Sale Consideration1,20,00,0001,20,00,0001,20,00,0001,20,00,000Cost of Acquisition35,00,00035,00,00035,00,00035,00,000CII For FY 2007-08129NA129NACII For FY 2024-25363NA363NAIndexed Cost of Acquisition98,48,837[35,00,000×363/129]NA98,48,837[35,00,000×363/129]NACapital Gains21,51,16385,00,00021,51,16385,00,000Less: Exemption u/s 5420,00,00020,00,00020,00,00020,00,000Net Capital Gain1,51,16365,00,00065,00,000Capital gains for Tax Computation (A)1,51,16365,00,0001,51,16365,00,000Rate applicable (B)20%12.50%20%12.50%Tax on Capital Gains [A×B]30,2338,12,50030,2338,12,500 = 30,233 (Lower of Option I & II) RemarksAs the flat is sold before 23rd July 2024, Tax at 20% with indexation is applicable.Section 112 gives relief to resident Individuals & HUF on any excess tax payable under the new regime, i.e. the excess of Rs 7,82,267/- (8,12,500 − 30,233) shall be ignored. Thus on Capital gains of Rs 65,00,000, tax payable shall be Rs. 30,233/-As the flat is acquired and sold after 23rd July 2024, the New Capital Gains regime of 12.5% without indexation is applicable.Continuing the above example, assume Mr. D has income from other sources of Rs 5,00,000. Total Tax liability computation in the above scenarios is below:ParticularsScenario 1Scenario 2Scenario 3Capital Gains1,51,16365,00,00065,00,000Income from other sources5,00,0005,00,0005,00,000Total Income6,51,16370,00,00070,00,000Tax on LTCG (As computed above)30,23330,2338,12,500Tax on income from Other Sources10,000[After exhausting the basic exemption of Rs. 3 lakhs, the balance 2 lakhs is taxed at 5%]10,000[After exhausting the basic exemption of Rs. 3 lakhs, the balance 2 lakhs is taxed at 5%]5,000[After exhausting the basic exemption of 4 lakhs, the balance 1 lakh is taxed at 5%] * 40,23340,2338,17,500Less: Rebate u/s 87A25,000NANA 15,23340,2338,17,500Surcharge @10%NA4,02381,750 15,23344,2568,99,250Health and Education Cess @ 4%6091,77035,970Total Tax Payable15,84246,0269,35,220* It has been assumed that the budget 2025 rates shall prevail from FY2025-26 and onwards in Scenario 3.AnalysisThe comparative scenarios presented above bring into sharp focus the nuanced effect of the Finance (No. 2) Act, 2024. When Mr. D sells his flat before 23rd July 2024, the availability of indexation drastically reduces his capital gains, qualifying him for the rebate under section 87A due to lower total income. However, scenarios 2 and 3 demonstrate the reality of the post-amendment. Despite identical sale consideration and acquisition cost, the unavailability of indexation post-July 2024 inflates the reported capital gains, raising the total income significantly. This not only results in income surpassing the rebate threshold of Rs 7,00,000/- (or Rs 12,00,000 from FY2025-26 onwards) but also pushes the assessee to the surcharge territory.What should be the ideal Reinvestment?Whether it is investment under Sections 54, 54EC, or 54F, the maximum amount eligible for exemption remains unchanged from what it was before the Finance (No. 2) Act, 2024, amendments on properties acquired before 23rd July 2024. In other words, the reinvestment amount required to claim the exemption shall remain the same as before the amendment. The proviso in Section 112(1)(a) ensures that any excess tax payable, arising due to the withdrawal of indexation benefits, will be ignored, but only to the extent that the reinvestment complies with these pre-amendment limits. This means taxpayers can continue to plan their capital gains reinvestment based on erstwhile provisions without worrying about additional tax burdens triggered by the new computation rules.Loss of LossesOne of the most understated implications of this amendment is the erosion of capital losses that previously arose due to indexation. Under the old regime, an inflated indexed cost could turn even a high-value transfer into a long-term capital loss, eligible for carry-forward and set-off. The new regime eliminates this possibility altogether.For instance, in the above example, assume the purchase cost of the old flat was Rs. 1 Crore.Capital Gains calculation is as follows:ParticularsTransfer madeBefore 23rd July 2024On or After 23rd July 2024 Sale Consideration1,20,00,0001,20,00,000Less:Cost of Acquisition—1,00,00,000 Indexed Cost of Acquisition2,81,39,535[1,00,00,000×363/129]— Capital (Loss)/Gain(1,61,39,535)20,00,000ObservationAs illustrated above, if a property with a purchase price of ₹1 crore is sold for ₹1.2 crore, the indexed cost (₹2.81 crore) under the old regime would have generated a capital loss of over ₹1.6 crore, which is valuable for tax planning over future years. Post-23rd July 2024, this flips into a gain of ₹20 lakh, simply due to the withdrawal of indexation.ConclusionWhile the Finance Act appears to offer some relief through Section 112(1)(a), the core benefit of indexation, i.e., reducing the quantum of capital gains itself, has been fundamentally diluted. The restoration is, in effect, a comparative tax capping mechanism, not a reinstatement of indexation in its original sense.It may be noted that the provision parallel to section 112 of the Income-tax Act, 1961, in the 2025 Act is section 197, which also provides for the levy of tax on long-term capital gains @12.5% and adjustment of unexhausted basic exemption limit against long-term capital gains in case of resident individuals and HUFs. Further, in respect of long-term capital gains arising on transfer of land and building acquired before 23.7.2024 by resident individuals and HUFs, this section also provides that the excess tax computed by applying 12.5% on long-term capital gains (calculated without indexation of cost of acquisition/improvement) over the tax computed by applying 20% on long-term capital gains (calculated with indexation of cost of acquisition/improvement) has to be ignored.For practitioners and taxpayers alike, it’s crucial to differentiate between Indexed gains, which impact gross income, and Indexed tax, which impacts only final liability.As we navigate these transitions, a clear understanding and precise planning will be the key to minimising tax impact under the new regime. Planning must now consider not just rates and exemptions but the interplay between gross income reporting and tax liability computation.Referenceshttps://incometaxindia.gov.in/Pages/acts/income-tax-act.aspxhttps://youtu.be/5-5TwwzM8xs?si=HKNWOPuMnR8U0-0uhttps://youtu.be/G1ojtTKUI1w?si=Yre1z287p64ZZJizAuthor may be reached at raoramya005@gmail.com and eboard@icai.inThe Chartered Accountant • Direct Tax • February 2026 • www.icai.org
Audit
Ep. 73 — Understanding the Risk and Its Impact on Audit
CA Journal
· July 2026
00:00
--:--
Understanding the Risk and Its Impact on AuditSA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, lays down the foundational principles for risk assessment in audit engagements. Whereas SA 330, Auditor’s Response to Assessed Risk, requires designing and performing the audit process to respond to such risk in an audit engagement. While both of these standards offer a comprehensive framework, their practical application, particularly at the level of individual account balances, often poses challenges in real-world audit scenarios. While the importance of risk identification, assessment, and response is well understood by audit professionals, applying these concepts in a consistent and defensible way might be a practical challenge. This article explores these practical challenges and outlines a structured approach to help auditors more effectively identify, assess and respond to risks in line with the principles of SA 315 and SA 330.IntroductionSA 315 lays down a comprehensive framework for identifying and assessing the risks of material misstatement. It clearly defines how to understand the entity and its environment, and how to use that understanding to identify and assess risks at both the financial statement and assertion level.However, the objective of this article is to make that framework more relatable and operational through real examples and grounded explanations. This article is about building defensible audit workpapers, not just to satisfy regulators, but to strengthen confidence in our work. It’s not always about getting everything right in hindsight. Regulators, such as NFRA and others, assess whether the auditor applied professional logic at the right time. Even if a mistake is identified later, if auditors have defensible documentation showing that the audit response was designed based on the understanding and context available at that time, it will stand up to review.The article primarily focuses on understanding the risk and its impact at the transaction level. Accordingly, a prior comprehensive understanding is required, as per SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, in respect of:The entity and its environment including industry and regulatory factors;The applicable Financial Reporting Framework;Business model and strategies;Entity level control, IT environment and all components of Internal controls.Risk & AuditThe context of risk in an audit of a financial statement needs to be understood to take the discussion further and to ultimately plan and include our response as an audit process. Often, risk is misunderstood and perceived as more complex than the outcomes it is meant to address. In audit, generally, the desirable outcome is clear: a clean audit report, no qualifications, no disclaimers, no adverse opinions. The risk assessment ought to start from this point itself. The moment a clean audit report is perceived as the desirable outcome, the risk of not achieving it must be assessed. Ultimately, the attainment of such an outcome depends entirely on the reliability of the underlying financial statements on which the audit opinion is based. A clean report may not be achieved if account balances and disclosures in the financial statements are misstated.Hence, the risk of material misstatement is a risk and may change the desirable outcome of having a clean audit report. This perception itself shapes the thinking that drives us to identify the risk, assess it and respond to it appropriately.Identification and Assessing Risk at the Account Balance LevelTo identify the risk in the context of audit, it would be essential to align our focus to the matters that may affect the accounts balance and disclosures included in the financial statement. Anything that has the capacity to impact the balances and disclosures appearing in the financial statements can be a factor for identifying and assessing the risk. The balances are the result of transactions and adjustments. Therefore, to analyze a balance appearing in the financial statements, transactions or adjustments beneath it need to be analyzed.Now, the real question is: what should be the approach to analyze these transactions or adjustments? This needs a clear and clinical approach, which should be done in a manner that ensures completeness in the overall risk identification and assessment process. The question must be examined further to understand why an account balance becomes riskier. The answer could be –Complexity of Transaction/AdjustmentSusceptibility to FraudControl over the account balanceAccordingly, risk can be identified and assessed by analyzing each class of transaction and adjustment through the lenses of complexity, susceptibility to fraud, and control. This will give a structure and clinical approach to the overall risk assessment process for each account balance or disclosure appearing in the financial statements.Simultaneously, risks arising from weak control management, lack of management integrity, deficiencies in the IT system affecting multiple processes, and frequent changes in accounting policies without justification may be pervasive and impact the overall financial statements. Accordingly, such risks need to be analyzed and addressed through an overall audit strategy.The identification and assessment of risks at the account balance level, discussed in this article, will further complement the risks assessed and identified at the overall financial statement level.a. ComplexityAn account balance may be affected due to an error arising from the complexity of a particular transaction. Such complexity can be assessed in respect of each of the criteria attached to the transaction, i.e., recognition, measurement, subsequent measurement and derecognition. This aligns with how accounting standards themselves are structured.Table 1.CriteriaConsiderationLess Complex Vs ComplexRecognitionIs there clarity on when to recognize a transaction?Asset Purchased from Third Party Vs Internally Constructed AssetsMeasurementIs there clarity on how to measure the value of a transaction?Asset Purchased from Third Party Vs Internally Constructed AssetsSubsequent MeasurementIs there clarity on how to subsequently measure the value of a balance?Depreciation of PPE Vs Testing Intangibles for ImpairmentDerecognitionIs there clarity on how to derecognize a balance?De-recognition of Trade Payables Vs De-recognition of Inter Company Loan on change of termsThe analysis provided in Table 1 for each class of transaction helps in identifying the complexity of the transaction and the resulting account balance. Where transactions are complex, they lead to riskier account balances that require greater focus, an increased extent of audit procedures, and a tailored audit approach.b. Susceptibility to FraudAn account balance may get impacted due to fraud and ill motive of the people responsible for processing the transaction. If the transaction is susceptible to fraud, then the consequent account balance will be riskier.To assess the susceptibility to fraud in a transaction or adjustment, three factors need to be analyzed –Stakeholders involved in the transactionPossibility of Collusion, if anyMotive(Refer to Table 2)Table 2.Transaction/ AdjustmentStakeholders InvolvedPossibility of CollusionSusceptible MotiveRevenueEntity Client/ CustomerInvestorGovernmentClient/Customer is a related party and may colludeManagement of a listed entity may want to show more than actual revenue to achieve positive sentiments in the market Management of an entity may want to show less than actual revenue to achieve less profit and consequent taxesc. ControlA transaction or account balance may turn out to be riskier in case the controls are not designed and working effectively for processing such transactions. Therefore, to assess the risk of the account balance, controls around the transactions need to be analyzed. Control over transactions at the account-balance level can be analyzed with respect to the management assertions for each account balance or class of transactions. If the management is exercising control before giving assertions for each account balance, then the account balance will be less risky and vice versa. This can be analyzed and understood as under –Line Items in FSAmount (INR in crores)Management AssertionsManagement ControlImpact on RiskRevenue50OccurrenceRevenue has been recorded based on approved sales invoices by the head of salesRiskier, if revenue is being recorded by a staff accountant without having approved sales invoicesAccuracySales have been recorded accurately as per the terms of the agreement, which is duly verified by the sales headRiskier, if revenue is being recorded by a staff accountant without any review or cross-check of the terms of agreementClassificationBefore posting the sales by the staff accountant, it is being approved by the GM – AccountsRiskier, if revenue is being recorded by a staff accountant without any approvalCut offPeriod-end entries have been tested and reviewed by the GM – AccountsRiskier, if there is no review mechanism for period-end entriesCompletenessMonthly/Annual sales are closed post approval of GST reconciliation by GM – AccountsRiskier, if sales are not getting reconciled before the monthly/annual closureSA 315, however, requires an understanding of internal control across multiple components, including the control environment, the entity’s risk assessment process, the information system (including IT) relevant to financial reporting and communication, control activities relevant to the audit, and monitoring of controls. The “control factor” in this model primarily relates to control activities at the transaction or adjustment level, evaluating how well such activities mitigate specific risks of misstatement.Each balance and disclosure in the financial statement needs to be analyzed from the perspectives of complexity, susceptibility to fraud and control effectiveness at the transactional level, to assess the risk of misstatement at the overall financial statement level.A summary of the framework for assessing and identifying the risks is presented below for ease of reference –FactorsAssessmentRisk AssessedComplexityTransactions are ComplexHighTransactions are regular and general in natureLowSusceptibility to FraudInvolvement of a related party in a transactionHighTransaction between two independent enterprisesLowControlRevenue is being recorded by the staff accountant without having any sales invoices [Incorrect Occurrence Assertions]HighMonthly/Annual sales are closed post approval of GST reconciliation by GM – Accounts [Correct Completeness assertions]LowThis structure has been developed from an accountant’s perspective of the financial statements, including the balances and disclosures presented therein. The idea was never to replace what the standard says, but to make it easier to apply. Whether someone is working in a small or big engagement, this structure ought to help in understanding the nature of risk better, assess it consistently, and most importantly, design the right audit response.Response to Assessed Risk at Assertion LevelOnce the risk is identified and assessed, the question is: How to address/respond to such a risk?SA 330, Auditor’s Response to Assessed Risk, also requires designing and performing the audit process to respond to assessed risk. To address this, it is important to plot the likely audit response against the assessed risk, along with the assertion that should be addressed.This can be understood by mapping relevant assertions against the account balance as shown below –FactsObservationFactorsRisk AssessedAudit ProcessAssertionsThe entity is involved in construction contracts. Invoices are raised as per milestone, but revenue gets booked as per Percentage Completion. So, the accounting is relatively complex.Over/Understatement of Revenue/Unbilled RevenueComplexityMediumReview of Subsequent Invoicing/ReversalsCut off, ValuationThe entity is listed on the stock exchange. Generally, sales transactions are more susceptible to fraud due to pressure to meet market expectations. Here, KPI is profitability and top line.Over/Understatement of Revenue – Trade Receivables/Unbilled RevenueSusceptibility to Fraud/ErrorHighGetting Direct Balance confirmation; Review of Subsequent ReceiptCut off, ValuationSales need to be recorded based on approved invoices by the sales head.Over/Understatement of Revenue/Unbilled RevenueControlHighIncrease in Sample Size and Extent of CheckOccurrenceFollowing the risk assessment, it becomes clearer to determine a tailored audit approach as a response to the identified risks. Additionally, the extent of testing should be appropriately increased for each relevant class of account balance.This is how risk should be assessed — by analyzing each factor affecting the account balance and related disclosures. This exercise should be carried out for every account balance and disclosure in the financial statements. It will result in a clear risk profile for each account balance and disclosure, which will, in turn, guide the audit response.Response to Assessed Risk Considering its Impact on the Extent of CheckThe assessed risk can further impact the intensity of the audit response. Higher risk should have a higher intensity of audit response. Accordingly, the extent of the check in a high-risk scenario should be more intense as compared to a standard/low-risk scenario. The standard sample size can also be adjusted for risk with more weights for riskier account balances. Therefore, the higher the risk, the higher the intensity of audit response and the higher the sample size.Risk AssessedIntensity of Audit ResponseExtent of CheckLowStandard audit processNormal ExtentMediumAbove-standard audit effortsNormal Extent × WeightsHighIntense Audit effort and an increase in the extent of checksNormal Extent × Increased WeightsIt ensures:Less time consumed over-testing low-risk areas.High-risk areas are subject to appropriate and sufficient testing.Audit effort is proportionate to actual risk.Consider the illustrations below to understand this better:Illustrative ExampleConsider an entity engaged in the provision of software development services. The entity has agreements/contracts with each of its clients, and services are delivered as per the terms of these agreements.In FY 2024-25, the entity has achieved a sales turnover of ₹25 crores, raised 750 sales invoices during the year.Considering the nature of the operation, including the control environment, the entity’s risk assessment process, the information system (including IT) relevant to financial reporting and communication, control activities relevant to the audit, and monitoring of controls, the auditors have estimated the standard sample size as 100 invoices for account balance – Revenue from Operations/Sales.Risk Assessment across ScenariosChanges in audit procedures and the extent of check/sample size can be understood as a direct response to the assessed level of risk –ScenarioAccount BalanceFactorsRisk AssessedControlComplexitySusceptibility to Fraud01Revenue from Software Development ServicesLowLowLowLow02Revenue from Software Development ServicesMediumMediumMediumMedium03Revenue from Software Development ServicesHighHighHighHighAudit Response based on Assessed RiskScenarioRisk LevelIntensity of Audit ResponseExtent of CheckResultant Sample SizeAudit Response1LowStandardNormal Extent100 InvoicesRandom testing of invoices.Limited review of contracts.Analytical review for unusual fluctuations.2MediumAbove StandardNormal Extent × Weights100 × 125%* = 125 InvoicesReview key client contracts.Vouch for selected invoices.Recalculate billed amounts.Verify timing and pattern of revenue recognition.Confirm balances with selected major customers.3HighIntense/DeepNormal Extent × Increased Weights100 × 150%** = 150 Invoices100% review of large contracts.Detailed testing of revenue recognition.Confirmations from major clients.Analytical procedures to detect anomalies.* Say for Examples Weights as 125% ** Say for Examples increased Weights as 150%ConclusionRisk assessment in audit need not be an overwhelming exercise. By following a structured, top-down approach, starting from the financial statements and drilling down to individual account balances, this allows us to bring clarity and precision to the risk assessment process.Risk-adjusted sampling ensures that our audit effort is appropriately scaled, focusing more on high-risk areas without unnecessarily over-auditing low-risk balances.This article includes a practical, scalable, and defensible method for audit risk assessment using the 3 Factor (Complexity, Susceptibility to Fraud and Control) structure. It can be implemented through simple documentation and consistent application.The goal is to help professionals develop a structured and defensible risk assessment approach, one that withstands peer reviews and regulatory inspections. The 3-Factor Structure brings clarity, consistency, and confidence to the most critical part of an audit, i.e., risk identification, risk assessment, and responding to risk.This approach not only strengthens audit quality but also enhances efficiency and defensibility. Ultimately, risk assessment ought not to be perceived as a hurdle but instead should be considered as an integral tool for reliable and effective audit.ReferencesSA 315 – Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environmenthttps://resource.cdn.icai.org/15382Link17_315SA.pdfSA 330 – The Auditor’s Responses to Assessed Riskshttps://resource.cdn.icai.org/15384Link19_330SA.pdf◆◆◆Author may be reached at praveendaga1985@gmail.com and eboard@icai.inThe Chartered Accountant | February 2026 | www.icai.org
Accounting Standards
Ep. 74 — Proposed Ind AS 118: A Milestone in Strengthening Presentation and Disclosure in Financial Reporting
CA Journal
· July 2026
00:00
--:--
Proposed Ind AS 118: A Milestone in Strengthening Presentation and Disclosure in Financial ReportingIn an evolving global economic environment, high-quality financial reporting plays a significant role. Transparent, comparable, and decision-useful financial information forms the backbone of investors’ confidence and capital-market efficiency.Recognising this, India has implemented globally accepted high-quality accounting standards, i.e., International Financial Reporting Standards converged Indian Accounting Standards (Ind AS) for large companies. Moving forward in this direction, proposed Ind AS 118, Presentation and Disclosure in Financial Statements, has been formulated by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI), a standard aimed at redefining the structure and clarity of financial statements prepared under the Ind AS framework.While in India, there is a presentation format of financial statements in the form of Schedule III to the Companies Act, 2013, notified by the Ministry of Corporate Affairs, the proposed Ind AS 118 aims to further improve the way entities communicate their financial story based on principles of relevance, faithful representation, and enhanced comparability. The proposed Standard focuses on how financial performance is presented in the statement of profit and loss. While Ind AS 118 does not change the measurement of financial performance, it introduces new requirements for its presentation and disclosure only. This Standard seeks to enhance the quality of financial reporting by introducing requirements for the presentation of defined subtotals in the statement of profit or loss, disclosures relating to management-defined performance measures, and strengthened principles for the aggregation and disaggregation of information.This Standard is converged with IFRS 18, issued by the International Accounting Standards Board (IASB), and aligns India’s financial reporting landscape with global best practices.Ind AS 118 sets out principles for companies on how to group transactions and other events within the line items of the primary financial statements and the accompanying notes.Effective Date of IFRS 18 and Global AlignmentGlobally – Accounting periods beginning on or after January 1, 2027.Proposed in India – Annual reporting periods beginning on or after April 1, 2027, as per the Exposure Draft issued by the ICAI.Main Changes for Entities in the Profit or Loss Section of the Statement of Profit and LossRequired SubtotalsEntities will be required to present ‘operating profit or loss’ and ‘profit or loss before financing and income taxes’ (unless prohibited in specific circumstances) as additional subtotals in the profit or loss section.The introduction of these subtotals establishes a consistent structure for profit or loss and enhances comparability, while leaving unchanged the measurement of financial performance and the overall profit figure.Understanding the Categories for Classifying Income and ExpensesIncome and expenses included in the profit or loss section of the statement of profit and loss will be required to be classified into the following five categories:CategoriesParticularsOperatingThe operating category provides a complete picture of an entity’s operations. It consists of all income and expenses that are not classified in the investing, financing, income taxes or discontinued operations categories.The operating category is the default category and includes all income and expenses arising from an entity’s operations, regardless of whether they are volatile or unusual. Operating profit provides a complete picture of an entity’s operations for the period.This category includes, but is not limited to, income and expenses from an entity’s main business activities. Income and expenses from other business activities, such as income and expenses from additional activities, are also classified in the operating category if those income and expenses do not meet the requirements to be classified in any of the other categories.InvestingThe investing category enables investors to analyse returns from stand-alone investments separately from an entity’s operations. The investing category includes:income and expenses from assets that generate returns separately from an entity’s business activities – for example, an entity might collect rentals from an investment property or dividends from shares in other entities; andincome and expenses from cash and cash equivalents and investments in associates and joint ventures – for example, an entity might earn its share of profits from an associate.FinancingThe financing category and the subtotal for profit before financing and income taxes enable investors to analyse entities’ performance before the effects of its financing. The financing category includes:expenses on liabilities such as bank loans and bonds (liabilities arising from pure financing transactions), for example, interest expense on debt instruments issued; and income on certain liabilities such as fair value gains on a liability designated at fair value through profit or loss; andinterest expenses on any other liability, for example, lease and pension liabilities.Income TaxesThis category consists of income tax expense (or tax income) that is included in profit or loss in accordance with Ind AS 12, Income Taxes.Discontinued OperationsThis consists of income and expenses from discontinued operations recognised in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.Presentation and Disclosure of Expenses in the Operating CategoryInd AS 1, Presentation of Financial Statements, currently requires an entity to present an analysis of expenses recognised in profit or loss using nature-wise classification of expenses. However, IAS 1 permits entities to present such expenses using either a nature-based or function-based classification.Ind AS 118 proposes that in the operating category of profit or loss, an entity shall classify and present expenses in line items in a way that provides the most useful structured summary of its expenses, using characteristics of the nature of expenses or characteristics of the function of the expenses within the entity or both these characteristics (‘mixed presentation’). In accordance with the factors set out in the Standard, an entity shall determine the appropriate classification and presentation of expenses by their nature or function or on a mixed basis, considering what line items:provide the most useful information about the important components or drivers of the entity’s profitability; andmost closely represent the way the entity is managed and how management reports internally.The requirements of proposed Ind AS 118 are based on the premise that the entity should be able to provide the most useful structured summary of its expenses. It is not a free choice to present expenses based on their nature or function. Some entities might decide that classifying some expenses by nature and other expenses by function provides the most useful structured summary of their expenses.The Standard also requires entities that present expenses classified by function to disclose the following in a single note:depreciation;amortisation;employee benefits;impairment losses and reversals of impairment losses; andwrite-downs and reversals of write-downs of inventories.In India, this is a major change from the current requirements since presently, Ind AS 1, Presentation of Financial Statements, requires only nature-wise classification of expenses.Illustrative Profit or Loss Section for CompaniesConsidering the presentation requirements of categories for classifying income and expenses, as well as the presentation and disclosure of expenses in the operating category, the profit or loss section of the Statement of Profit and Loss can be illustrated as under:ParticularsCategoryRevenueOperatingCost of salesGross ProfitOther operating incomeSelling expensesResearch and development expensesGeneral and administrative expensesGoodwill impairment lossOther operating expensesOperating profitShare of profit and gains on disposal of associates and JVsInvestingProfit before financing and income taxes Interest expense on borrowings and lease liabilitiesFinancingInterest expense on pension liabilities and provisionsProfit before income taxes Income tax expenseIncome taxesProfit from continuing operations Loss from discontinued operationsDiscontinued operationsProfit Legend: Required subtotals Examples of additional subtotalsIn the above illustrative format:It is assumed that the company presents some operating expenses by function and some by nature.Subtotals highlighted in green are required, and highlighted in blue are examples of additional subtotals. A company presents additional subtotals if necessary to provide a useful, structured summary of the company’s income and expenses.Ind AS 118 will be applied differently by companies with specific business activities, such as banks, insurers and investment property companies.Ind AS 118 proposes that in the operating category of profit or loss, an entity shall classify and present expenses in line items in a way that provides the most useful structured summary of its expenses, using characteristics of the nature of expenses or characteristics of the function of the expenses within the entity or both these characteristics (‘mixed presentation’).Entities with Specified Main Business ActivitiesThe Standard requires an entity to assess whether it has a specified main business activity, viz., investing in particular types of assets. For e.g., investment entities, investment property companies and insurers or providing financing to customers, for e.g., banks.Entities with specified main business activity classify some income and expenses in the operating category that would have been classified in the investing or financing category if the activity were not a main business activity.Management-defined Performance Measures (MPM)Entities often report their own performance measures, including subtotals of income and expenses, which they communicate externally outside the financial statements to provide insights into financial performance.Ind AS 118 requires an entity to include information about such measures in a single note to improve the transparency of those measures.The Standard prescribes that MPM is a subtotal of income and expenses that:is used in public communications outside financial statements;is used to communicate to investors management’s view of an aspect of the financial performance of the entity as a whole; andis not listed in Ind AS 118 or specifically required by Ind AS.Subtotals of Income and ExpensesOther Performance MeasuresMPMsInd AS – SpecifiedAdjusted profit, such as profit adjusted for items of income or expense that the entity does not expect to arise for several future annual reporting periods, e.g., impairment and gain (loss) on disposal of PPEAdjusted operating profitAdjusted earnings before interest, tax, depreciation and amortisationOperating profitOperating profit before depreciation, amortisation and impairments within the scope of Ind AS 36, Impairment of AssetsFree cash flowReturn on equityNet debtNumber of customersCustomer satisfactionPerformance MeasuresEnhanced Requirements for Aggregation & Disaggregation of InformationOften, companies group information in financial statements that may not always provide the information the users need for their analysis—for example, some information is not shown in enough detail, while other information is obscured with too much detail.Ind AS 118 sets out principles for companies on how to group transactions and other events within the line items of the primary financial statements and the accompanying notes. Under these principles, companies are generally required to:Aggregate items that share similar characteristics and disaggregate those that differ;Group items in a manner that does not obscure material information or compromise the clarity and understandability of the financial statements; andPresent items in the primary financial statements and notes in a way that ensures both serve their complementary roles.Consequential AmendmentsInd AS 118 will replace Ind AS 1, Presentation of Financial Statements. As a result, the requirements in Ind AS 1 will be:replaced by new requirements in Ind AS 118;transferred to Ind AS 118 with only limited wording changes; ormoved to amended Ind AS 8, Basis of Preparation of Financial Statements, or Ind AS 107, Financial Instruments: Disclosures, with only limited wording changes.There are also consequential amendments to some other Ind ASs.As part of global consequential amendments, IAS 7 has been revised to remove the presentation alternatives for cash flows related to interest and dividends paid and received.It may be worth mentioning here that as part of global consequential amendments, IAS 7 has been revised to remove the presentation alternatives for cash flows related to interest and dividends paid and received. In India, these alternatives have already been eliminated under Ind AS 7, meaning that the requirements of IAS 7 are principally aligned with those of Ind AS 7 for entities engaged in specified business activities, such as banks. The provisions of Ind AS 7 are proposed to be updated to reflect the language of the revised IAS 7, ensuring greater consistency.Preparing for ImplementationAlthough the effective date of Ind AS 118 may seem distant, entities are encouraged to assess the potential impact of the new requirements early, for which the Management needs to plan in advance.ReferencesExposure Draft of Ind AS 118 issued by the ASB, ICAI – https://resource.cdn.icai.org/83846asb67639.pdfProject summary and Effects analysis of IFRS 18 issued by the IASB – https://www.ifrs.org/content/dam/ifrs/project/primary-financial-statements/ifrs-standard/projectsummary-ifrs18-april2024.pdfhttps://www.ifrs.org/content/dam/ifrs/publications/amendments/english/2024/effect-analysis-ifrs18-april2024.pdfAuthors may be reached at eboard@icai.inThe Chartered Accountant • February 2026 • www.icai.org
Accounting Standards
Ep. 75 — The Consolidation Conundrum: Real-World Battles with Ind AS 110 That Every CA Must Win
CA Journal
· July 2026
00:00
--:--
The Consolidation Conundrum: Real-World Battles with Ind AS 110 That Every CA Must WinInd AS 110 has transformed consolidation from a mechanical exercise into a battlefield of professional judgment. This article addresses the complex challenges faced by Indian Chartered Accountants in implementing control-based consolidation, covering real-world consolidation failures and their financial impact on Indian corporates, practical frameworks for assessing control in Special Purpose Vehicles (SPVs), joint ventures, and structured entities, regulatory enforcement trends including recent SEBI penalties and NFRA quality reviews, sector-specific challenges in renewable energy, fintech, and startup ecosystems, and comprehensive documentation strategies that withstand regulatory scrutiny. With consolidation-related penalties exceeding ₹50 crores, regulatory reviews exposing widespread audit quality deficiencies, and increasing enforcement actions impacting CFOs and audit firms, mastering Ind AS 110 has become essential for career advancement and regulatory compliance in India’s evolving business environment.The ₹500 Crore Mistake: Why Consolidation Keeps CFOs AwakePicture this scenario: You are the CFO of a mid-cap infrastructure company with a board meeting scheduled for tomorrow. You have just discovered that three “independent” SPVs worth ₹500 crores should have been consolidated under your company’s financial statements. Your auditors are expressing serious concerns, SEBI is asking pointed questions, and your Managing Director is understandably furious about this revelation. Unfortunately, this scenario is becoming increasingly familiar to Indian finance teams across various sectors.This situation represents more than a fictional case study; it reflects the daily reality confronting Indian corporates since the implementation of Ind AS 110. The transition from AS 21 to Ind AS 110 has fundamentally altered the consolidation landscape, evolving from a straightforward majority ownership test to a complex web of professional judgment calls that can significantly impact careers and corporate fortunes.Consider the recent experience of a leading renewable energy company that narrowly avoided substantial consolidation penalties. The company had carefully structured fifteen solar SPVs as seemingly “independent” entities, each featuring separate boards of directors and trust-based ownership structures. These entities appeared autonomous when examined superficially, presenting all the hallmarks of independent operation. However, the underlying reality painted a starkly different picture, as the parent company maintained comprehensive control over every aspect of operations, from project financing arrangements to operations and maintenance contracts.When regulatory authorities finally conducted their detailed investigation, the company faced a ₹25 crore penalty along with a comprehensive management overhaul. This case exemplifies the fundamental transformation that Ind AS 110 has brought to consolidation practices. Where AS 21 simply required answering whether you owned fifty-one percent of an entity, Ind AS 110 demands a comprehensive analysis across three interconnected dimensions: whether you possess power over the investee, whether you face exposure to variable returns from your involvement, and whether you can utilize your power to influence those returns.This seemingly straightforward framework becomes extraordinarily complex when applied to India’s intricate corporate structures. From complex cross-holding arrangements to multilayered step-down subsidiary structures, major corporate groups now face consolidation challenges that would have been virtually unimaginable under the previous regulatory regime.The SPV Deception: When Small Entities Hide Massive RisksSpecial Purpose Vehicles represent perhaps the most significant consolidation challenge facing Indian companies today. These entities extend far beyond mere accounting conveniences; they constitute the operational backbone of critical sectors, including infrastructure development, power generation, and real estate construction. Simultaneously, they have become the primary source of the most spectacular consolidation failures witnessed in recent years.The case of a Mumbai-based infrastructure giant provides a compelling illustration of these challenges. The company had established twenty SPVs to execute a major highway project, with each SPV featuring nominal share capital of merely ₹1 lakh, independent boards populated with local directors, separate banking relationships and legal identities, and project-specific financing arrangements. These structural elements created an appearance of genuine independence that initially satisfied both management and auditors.However, deeper analysis revealed a fundamentally different operational reality. The parent company had provided ₹200 crores in subordinated debt to each SPV, creating substantial financial dependence. All significant operational decisions required explicit approval from the parent company, effectively negating the independence supposedly provided by separate boards. The parent company had guaranteed all project loans totalling ₹500 crores per SPV, creating massive contingent liabilities. Revenue flows remained subject to the parent company’s centralized cash management policies, and board meetings were consistently conducted at the parent company’s offices rather than at independent locations.The decisive evidence emerged through detailed examination of email communications, which revealed the parent company’s CEO providing direct instructions to SPV boards on matters ranging from vendor selection processes to payment scheduling decisions. When auditors finally challenged the consolidation treatment of these arrangements, the combined SPV debt of ₹10,000 crores impacted the parent company’s balance sheet with devastating effect.Chartered Accountants must develop the professional scepticism necessary to look beyond formal corporate structures and understand the true nature of control relationships.This experience demonstrates that legal independence becomes meaningless when economic dependence is comprehensive. Chartered Accountants must develop the professional scepticism necessary to look beyond formal corporate structures and understand the true nature of control relationships. The key lies in identifying who actually controls critical decisions such as board member appointments, funding decisions, cash flow management, and genuine board deliberations versus mere rubber-stamping exercises.The Forty Percent Controlling Shareholder: Understanding De Facto ControlContemporary Indian corporate structures frequently present scenarios where promoters maintain effective control despite holding minority shareholdings. This phenomenon has become increasingly common as companies seek to optimize their capital structures while maintaining operational control. A typical scenario involves a promoter group holding forty percent of shares while the remaining sixty percent remains distributed among foreign portfolio investors, retail shareholders, and mutual funds.A leading pharmaceutical company exemplifies this challenge perfectly. The promoter group held precisely forty-two percent of outstanding shares, while the remaining fifty-eight percent was distributed among foreign institutional investors holding twenty-two percent, domestic mutual funds with eighteen percent, retail investors controlling twelve percent, and employee trusts holding six percent. Despite this apparent minority position, the promoter group maintained comprehensive operational control.The promoter group’s control manifested through the appointment of six out of nine board members over a five-year period, achieving unanimous success in all shareholder resolutions without a single defeat, controlling all major strategic decisions affecting the company’s direction, and exercising unilateral authority over key management appointments and removals. The transformation occurred when a new auditor challenged the existing consolidation treatment of this purported “associate” company.Historical analysis spanning fifteen years of operations revealed that other shareholders had never successfully opposed any promoter proposal, creating a clear pattern of de facto control. Average attendance at Annual General Meetings remained consistently around forty-five percent, with most institutional shareholders demonstrating minimal active participation in corporate governance processes.The auditor’s comprehensive de facto control assessment involved detailed voting pattern analysis covering five years of AGM and EGM records, assessment of shareholder participation rates and voting outcomes, board composition history tracking director appointments and removals, evaluation of board decision-making independence, shareholder behaviour studies analysing institutional investor participation patterns, retail investor engagement level assessment, and management control reviews evaluating strategic decision-making processes and operational control mechanisms.This pharmaceutical company’s experience demonstrates the critical importance of documenting clear patterns of de facto control. The auditors’ comprehensive analysis forced consolidation of what had previously been treated as an associate investment, resulting in ₹800 crores in additional debt recognition and a fifteen percent credit rating downgrade.The Option Trap: When Future Rights Create Present ObligationsPotential voting rights provisions under Ind AS 110 have generated some of the most intellectually challenging consolidation scenarios facing modern practitioners.Potential voting rights provisions under Ind AS 110 have generated some of the most intellectually challenging consolidation scenarios facing modern practitioners. The fintech sector provides particularly complex examples of these challenges, as demonstrated by a leading Non-Banking Financial Company’s experience with a payments company investment.The NBFC acquired thirty percent of the payments company for ₹200 crores, accompanied by call options for an additional twenty-five percent exercisable at any time within eighteen months, rights to appoint three out of five board members, veto rights over key business decisions, and first refusal rights on any equity dilution. The options were attractively priced at ₹100 crores for the twenty-five percent stake, representing a significant discount to the company’s ₹2,000 crore valuation.The NBFC’s CFO initially classified this arrangement as a thirty percent associate investment, arguing that options represented “merely potential” control rather than actual control. However, this position faced a serious challenge when auditors applied the substantive rights test mandated by Ind AS 110. The analysis revealed that options were currently exercisable without restriction, exercise would be economically beneficial given the substantial discount to fair value, and no barriers existed to prevent immediate exercise.Combined with the NBFC’s practical control over key operational decisions, auditors concluded that effective control existed from the initial investment date. This determination created a massive financial statement impact, transforming a ₹200 crore investment into a consolidation of ₹800 crores in assets and ₹400 crores in liabilities.The evaluation of potential voting rights requires careful consideration of whether rights are currently exercisable or convertible, whether exercise represents economically rational decision-making, whether legal, regulatory, or contractual barriers exist, and whether the rights, when combined with existing holdings, create overall control. This framework ensures that substance takes precedence over legal form in determining appropriate consolidation treatment.The Joint Venture Masquerade: When Equal Ownership Masks Unequal ControlIndian companies frequently structure fifty-fifty joint ventures as vehicles for keeping assets off balance sheets while sharing operational risks. However, Ind AS 110 mandates that every such arrangement must first be tested for control before joint venture accounting principles can be appropriately applied.A co-lending platform established between a leading bank and an NBFC illustrates this challenge effectively. The structure appeared perfectly balanced, featuring a fifty-fifty shareholding between the partners, equal board representation ensuring balanced governance, shared investment of ₹100 crores from each party, and a comprehensive joint management agreement. These formal arrangements suggested genuine shared control consistent with joint venture treatment.However, operational reality revealed fundamental imbalances in actual control. The NBFC’s proprietary technology platform powered all operational activities, NBFC employees occupied seventy percent of key management positions, the bank’s participation remained largely limited to funding provision and regulatory compliance, and all critical operational decisions flowed through the NBFC’s established risk management framework.The decisive breakthrough emerged through detailed examination of underlying agreements, which revealed that the NBFC maintained exclusive control over technology infrastructure and customer data, possessed authority to approve all loan applications, enjoyed rights to determine pricing strategies and product features, and held the ability to hire and terminate operational staff. Despite the appearance of equal shareholding, the NBFC clearly controlled the “relevant activities” that determined financial returns.This analysis forced reclassification of the joint venture as a subsidiary requiring full consolidation, adding ₹500 crores to the NBFC’s balance sheet. The experience demonstrates that joint venture classification requires careful evaluation of who controls technology and operational platforms, where key personnel decisions are made, which party determines pricing and product strategies, and which entity bears primary operational risks.The Startup Consolidation Challenge: Modern Structures and Traditional RulesIndia’s dynamic startup ecosystem has created entirely new categories of consolidation challenges that traditional frameworks struggle to address effectively. Employee Stock Ownership Plan trusts, complex investor rights structures, and platform-based business models present unprecedented analytical challenges for consolidation specialists.A leading e-commerce platform’s ESOP trust structure exemplifies these emerging challenges. The trust held eight percent of company shares, with employees unable to vote shares directly, company funding for all trust operations, company guarantees for trust investments, and the company CFO serving as trust advisor. Initially, the company argued for trust independence, emphasizing separate legal existence and independent trustee appointments.Detailed analysis revealed a different reality. The company controlled all trustee appointments, trust operational decisions required company approval, economic risks and rewards remained with the company, and the trust could not survive without continuous company support. These factors led auditors to conclude that the trust represented merely an extension of the company requiring consolidation treatment, exposing previously hidden leverage and off-balance-sheet obligations.ESOP trust consolidation analysis must consider who controls trustee decisions, where economic risks actually reside, whether the trust can operate independently, and who ultimately benefits from trust returns. This framework ensures appropriate consolidation treatment regardless of formal legal structures.Series A and B startup investments present additional challenges. A strategic investor acquired only twenty percent of a fintech startup but obtained board control through three of five seats, veto rights over key strategic decisions, comprehensive anti-dilution protection, and exit drag-along rights. Despite minority ownership, the investor’s ability to control strategic decisions, combined with substantial economic incentives, created unexpected consolidation requirements.The Documentation Imperative: Building Defensible PositionsIn the contemporary Ind AS 110 environment, comprehensive documentation extends far beyond good professional practice to become essential survival armor. Recent regulatory reviews have consistently revealed that most consolidation failures stem from inadequate documentation rather than fundamentally flawed professional judgments.A leading audit firm’s comprehensive internal review determined that seventy percent of consolidation challenges could have been successfully avoided through better documentation practices. The most successful practitioners now maintain annual control matrices for all investee relationships, comprehensive board resolution analyses with voting pattern summaries, legal opinion files addressing complex structural arrangements, detailed economic risk and reward mapping, and quarterly reassessment triggers with established protocols.One mid-cap company successfully avoided a major regulatory penalty by producing a comprehensive 200-page control assessment file documenting every aspect of its SPV relationships. This file included detailed email trails demonstrating actual decision-making processes, comprehensive financial flow diagrams, complete board meeting minutes with detailed voting records, professional legal opinions addressing complex arrangements, and quarterly reassessment reports tracking changes in control relationships.The company’s Chartered Accountant had invested three months developing this documentation framework following a significant concern raised by their previous auditor. When SEBI investigators conducted their detailed review, the comprehensive documentation convinced them that the company’s consolidation decisions represented well-reasoned professional judgments supported by appropriate analysis.The Regulatory Environment: Consequences of Getting It WrongThe regulatory enforcement environment has become increasingly aggressive, with recent actions providing stark warnings about the consequences of consolidation failures.The regulatory enforcement environment has become increasingly aggressive, with recent actions providing stark warnings about the consequences of consolidation failures.SEBI Enforcement Scorecard 2023–24₹50 crores in consolidation-related penaltiesFifteen companies required to restate financial statementsEight CFOs facing personal penaltiesTwelve audit firms subjected to comprehensive quality reviewsThe most dramatic case involved a renewable energy company facing a ₹25 crore penalty for failing to consolidate ten SPVs. The company’s defense emphasizing legal independence of the SPVs was decisively rejected when SEBI investigators documented unified cash management across all entities, common management teams, consolidated business planning processes, and comprehensive shared guarantees and support agreements.The penalty represented only the beginning of the company’s challenges. Subsequently, the company faced credit rating downgrades, multiple investor lawsuits, significant management changes, and prolonged regulatory scrutiny, affecting all future activities. The National Financial Reporting Authority’s quality review findings reveal that forty percent of reviewed audits contained consolidation deficiencies, with over-reliance on legal form representing the most common issue, inadequate documentation ranking second, and failure to reassess control relationships completing the top three problem areas.Practical Frameworks for SuccessBased on extensive real-world experience, successful consolidation analysis requires a systematic five-step protocol. The process begins with comprehensive ecosystem mapping to document all legal and economic relationships while identifying key stakeholders and their interests. Next, practitioners must identify relevant activities by determining which decisions genuinely matter for investment returns and assessing the distinction between operational and strategic decision-making.The third step involves a comprehensive power source assessment, looking beyond formal voting arrangements to evaluate operational control mechanisms and contractual rights and obligations. Economic exposure evaluation follows, requiring practitioners to follow money and risk flows while assessing variable return mechanisms. Finally, scenario testing considers how control relationships might evolve and evaluates potential future developments.Quarterly health checks should review any new investments or arrangements, assess changes in board composition or management, evaluate new agreements or contract modifications, monitor changes in economic exposure or risk-sharing, and document any shifts in operational control. A comprehensive red flag warning system should monitor related party transactions that appear commercial but lack substance, board meetings that represent formalities rather than genuine deliberations, funding arrangements creating economic dependence, management overlap suggesting unified control, and guarantee structures shifting risks back to parent entities.Future Considerations and ConclusionESG-driven structures, impact investing, and sustainability-linked arrangements create entirely new control paradigms requiring fresh analytical approaches.The consolidation landscape continues evolving rapidly, with emerging areas requiring constant monitoring. Cryptocurrency and digital assets raise questions about consolidating decentralized autonomous organizations and assessing control over blockchain-based entities. Artificial intelligence and platform businesses create scenarios where automated systems make operational decisions, complicating traditional control assessments. ESG-driven structures, impact investing, and sustainability-linked arrangements create entirely new control paradigms requiring fresh analytical approaches.Cross-border complications through GIFT City entities and international expansion create jurisdictional complexity, while regulatory technology, including regulatory sandboxes and fintech licensing, affects consolidation considerations. These developments ensure that consolidation expertise will remain a dynamic and evolving field requiring continuous professional development.Ind AS 110 represents far more than a technical accounting standard; it has become a critical career differentiator for Indian Chartered Accountants. Practitioners who master its complexities become trusted advisors capable of navigating the most challenging business structures. Those who fail to develop this expertise risk becoming mere compliance casualties in an increasingly sophisticated business environment.The fundamental lessons from consolidation practice emphasize that substance invariably trumps form, comprehensive documentation provides the best defense against regulatory challenge, professional scepticism remains non-negotiable, regular reassessment prevents unpleasant surprises, and when genuine doubt exists, consolidation represents the prudent choice. As Indian businesses become increasingly complex and regulatory scrutiny intensifies, consolidation expertise will separate successful practitioners from those who struggle to adapt.The question facing every Chartered Accountant is not whether they will encounter complex consolidation challenges, but whether they will possess the technical knowledge, professional judgment, and documentation skills necessary to succeed when those challenges arise. Companies investing in robust consolidation frameworks today will become tomorrow’s success stories, while those failing to adapt may find themselves subject to the next wave of regulatory enforcement action.ReferencesSecurities and Exchange Board of India. (2024). Enforcement Actions Report: Consolidation and Group Reporting Violations. SEBI Annual Report 2023-24.National Financial Reporting Authority. (2024). Audit Quality Review: Consolidation Assessment Deficiencies. NFRA Technical Bulletin No. 12.Institute of Chartered Accountants of India. (2023). Ind AS 110 Implementation Challenges: A Practitioner’s Guide. ICAI Research Publication.Ministry of Corporate Affairs. (2024). Corporate Governance and Consolidation: Regulatory Perspectives. MCA Compliance Review 2023-24.Reserve Bank of India. (2023). NBFC Consolidation Guidelines: Implementation of Ind AS 110. RBI Master Circular 2023-24.Ernst & Young India. (2024). Consolidation Challenges in Digital Economy: Ind AS 110 Applications. EY Technical Update.KPMG India. (2024). SPV Consolidation: Practical Framework for Infrastructure Companies. KPMG Accounting Advisory.Deloitte India. (2023). Fintech Consolidation: Navigating Complex Investor Structures. Deloitte Insights.PricewaterhouseCoopers India. (2024). Startup Consolidation: ESOP Trusts and Investor Rights. PwC Technical Guide.Business Standard. (2024). SEBI Penalties on Consolidation Lapses Cross ₹50 Crores. January 15, 2024.Economic Times. (2024). Infrastructure Companies Face Consolidation Scrutiny. March 22, 2024.Financial Express. (2023). NFRA Audit Quality Review Highlights Group Reporting Gaps. December 8, 2023.Chartered Accountant Journal. (2024). Consolidation Best Practices: Learning from Regulatory Actions. April 2024 Issue.Indian Accounting Standards Board. (2023). Frequently Asked Questions on Ind AS 110. ICAI Technical Publication.Supreme Court of India. (2019). Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta. Civil Appeal No. 8766-67 of 2019.Author may be reached at nekzadbajan87@gmail.com and eboard@icai.inThe Chartered Accountant • February 2026 • Accounting Standards
International Taxation
Ep. 76 — Permanent Establishment: Understanding its Nuances from Leading Judicial Decisions
CA Journal
· July 2026
00:00
--:--
Permanent Establishment: Understanding its Nuances from Leading Judicial DecisionsThe recent SC judgement in the case of Hyatt International Southwest Aisa Ltd.1 (Hyatt International) has again spurred the discussion around constituting a Permanent Establishment (PE) for a foreign company in India. The Hon’ble Supreme Court has upheld the decision of Delhi High Court and has hence ruled that, Hyatt International (global hotel chain) has a fixed place PE in India and consequently, that its income derived under the Strategic Oversight Services Agreement (SOSA) entered in this respect is taxable in India.Post various landmark decisions like Formula One and E-Funds Inc., this is again an important development in the field of PE that gives rise to various questions, as to when and under what circumstances can a foreign company be said to be having a PE in India. Here, the author has analyzed the various important judgments and basis that identified the major conditions under which a PE for a foreign company can be triggered in India.Permanent Establishment in IndiaDuring the past couple of years, it has been observed that foreign companies are engaging Indian entities for outsourcing their backend operations like accounting, human resources, software services, etc. in India. In such circumstances, Indian tax authorities are worried about the fact whether by undertaking such arrangements, the foreign companies are avoiding the tax implications that may be triggered in India.Thus, whenever a foreign company plans to outsource its operations to India or undertake any business activities in India, either by setting up a subsidiary or by entering into a contract with a third-party entity, there is a risk that such subsidiary or entity may be construed as a PE of the foreign company in India. Let us understand what the meaning of PE is.The term PE is defined under Section 92F of the Income Tax Act, 1961 (‘the Act’)2, which states that PE includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. The concept of PE is elaborated in the Double Taxation Avoidance Agreements (‘DTAA’) entered into by India with various countries. Broadly speaking, the PE can be of the following types:Fixed Place PE – A place of business of the foreign company where it has a certain level of permanency and right to use it for the purposes of its business.Service PE – Furnishing of services by a foreign enterprise through its employees or other personnel, if the activities of that nature continue for a period of generally more than 183 days in any 12-month period. However, the time period may vary from treaty to treaty.Agency PE – If an agent habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts routinely concluded without material modification by the foreign company. In certain cases, an Agency PE may also arise where the agent maintains a stock of goods or merchandise in the Source state from which goods or merchandise are regularly delivered on behalf of that enterprise.The concept of PE is of considerable importance in the field of international taxation as business profits of a foreign enterprise cannot be taxed by a Source State (the country in which the said income is earned) unless it proves the existence of a PE in that State. The comparable term to PE under the Indian Income-tax Act, 1961 (‘ITA’) is “business connection”,3 which prescribes conditions under which a foreign company shall be considered as conducting business in India.Further, even if it is established that a foreign company has a business connection in India, its business profits shall be taxed in India, only if it has a PE in India as per the respective DTAA. Thus, the concept of business connection is wider than PE. If it is established that the foreign company has a PE in India, then the profits attributable to such PE are liable to tax in India.As the PE of a foreign company in India gives the Source State the right to tax, it is an important Article under the DTAA, majorly for the developing countries. Let us understand the conditions under which an entity may be considered as a PE in India.For any enterprise to be considered as a PE, the following tests are to be analyzed and, if the same are fulfilled, it is said that the foreign company has a PE in India:Location and Permanency TestDisposal TestBusiness Activity TestThus, it can be understood that if any foreign company has a place of business in India, which has some level of permanency and is available at the disposal of the foreign company from where it can conduct its business activities, such place can be considered as a PE of the foreign company in India. While analyzing PE, especially a Fixed Place PE, it has been held by the courts that any place available at the disposal of the foreign company for conducting its business activities shall be considered as a PE in India. The duration for which such place was permanently available at the disposal of the foreign company may not be relevant, if, in substance, the place was available to conduct the business activities. The Article 5(1), i.e. Fixed Place PE does not make reference to any minimum period for which a PE should be in existence in the source States. Generally, as per the UN and OECD commentaries, a Fixed Place PE is not considered to be in existence where the place of business is maintained for a period of less than six months.The Formula One JudgementThe landmark judgement passed by the Hon’ble Supreme Court in the case of Formula One4 has highlighted that, irrespective of the duration of the place of business available to the foreign company, it can constitute a Fixed Place PE in India if all the other factors are fulfilled. In the said case, the assessee being a UK based company had granted the right to host and promote Formula F-1 Race at a motor racing circuit owned by Jaypee Sports, an Indian Company.The assessee had full access to the circuit and it could dictate as to who was authorized to access it. Further, although the circuit belonged to Jaypee Sports during the said period, organizing any other event at the circuit was not permitted. Thus, based on the facts of the case, the courts observed that the assessee has a place to conduct its business activities in India that was at its disposal with a certain level of permanency. Hence, it was held that the said circuit constituted a PE of the assessee in India, irrespective of the duration of such permanency of the place of business.Further, any income attributable to such circuit would be deemed to be taxable in India. This judgement laid down a precedent that if the conditions for establishing a PE are fulfilled, then irrespective of the period of existence of such place of business, it may be construed as a Fixed Place PE in India. The Hon’ble Supreme Court, in the case of Formula One (supra), has indicated that to hold a place of business as a PE, the place should be available at the disposal of the foreign company irrespective of the time period.The Hyatt International JudgementIn the recent case of Hyatt International (supra), the Hon’ble Supreme Court has placed reliance on the abovementioned judgement of Formula One. The facts of the given case were that Hyatt International had entered into a Strategic Oversight Services Agreements (SOSA) with Asia Hotels Limited (‘AHL’) India, under which it agreed to provide strategic planning services and “know-how”. The main aim of providing such services was to ensure that the hotel was developed and operated as an efficient, high-quality, and an international full-service hotel meeting the global level of standards of Hyatt International.To undertake and implement the activities mentioned in the SOSA, executives and employees of Hyatt International made frequent and regular visits to India to oversee the hotel operations. Such employees were involved in substantive hotel operations, like recruitment of staff, formulation of policies, and other managerial functions etc. Further, as per the India-UAE DTAA, a Service PE is established if the employees provide services for a period of more than 9 months.The Delhi HC ruled in favor of the Revenue and concluded that Hyatt International had a PE in India as per the India-UAE DTAA. The decision was appealed before the Supreme Court. Upon considering the facts of the case, the Supreme Court upheld the decision of the Delhi High Court and held that the role of Hyatt International was not merely providing support advisory or auxiliary services to AHL India. Instead, the activities performed were core and essential functions, clearly establishing their control over the day-to-day operations of the hotel.Further, the agreement included terms for revenue sharing with Hyatt International based on the revenue generated by AHL in India. With respect to the duration of the employees’ stay in India, it was held that though the same was less than the prescribed time of 9 months in the DTAA, in substance, the employees were involved in the major decision-making and revenue-generating activities of the AHL. Thus, it was clearly stated that Hyatt International had a place of business at its disposal wherein business activities were being carried out, thereby resulting in the existence of a Fixed Place PE.An important factor that is common in both the above cases is that the courts have given importance to the substance over the legal form of the transactions.If the foreign companies were exercising substantial rights and undertaking/affecting business activities in India, it was held that they had a PE in India, irrespective of technical conditions such as time period, etc. The nature of the activities undertaken were given more importance as opposed to the time period for which the said activities were conducted in India.This also takes us to certain other questions such as, if a foreign company incorporates a subsidiary in India, outsources its backend activities in India, deputes some of its employees in India, or has a liaison office in India, can it be termed as a PE in India?Subsidiary as a PEThere have been some instances in the past wherein the revenue has held that an Indian subsidiary of a foreign company may be termed as a PE in India if it is established that the subsidiary is, in substance, nothing but a fixed place for the foreign company through which it is carrying out its business in India.In the case of Carpi Tech SA v. ADIT5 (International Taxation), Chennai, the ITAT Chennai held that since the assessee, a Switzerland-based company, had received a power project from NHPC, in view of fact that all correspondences relating to prospecting of clients, participation in bids, communication with customers, signing of contract documents, execution of the project, and closure of the project etc. were initiated or routed through business address of its subsidiary company in India, it would be considered as a PE in India.A similar contention was upheld in the case of Huawei Technologies Co. Ltd. v. ACIT, International Taxation6 by the ITAT Delhi, wherein a China-based company engaged in the sale of telecom equipment, supplied equipment and handsets to its Indian subsidiary. Since the assessee was conducting its business in India with the active involvement of employees of its Indian subsidiary, who jointly prepared bidding documents, negotiated, and concluded contracts on behalf of the foreign company with its Indian customers, the Indian subsidiary was held to constitute a PE of the foreign company.While there are cases where a subsidiary has been held to be a PE in India, alternative arguments have also been held by the courts of law.In the case of Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax, International-Taxation, Delhi HC7, the assessee, being a US-based company was engaged in the business of manufacturing and sale of locomotives and locomotive parts, supplied equipment directly to Railways and had a subsidiary in India. However, neither email correspondence, communication trails, nor the statement of employees could lead to conclude that the business of the assessee was managed by an Indian subsidiary. Thus, it was held that though the foreign company had a subsidiary in India, it did not result in a PE in India. Similar contentions have been upheld in respect of liaison offices in India, where it has been held that since they assist only in the exchange of information and do not conduct any business activities, they shall not constitute a PE for the foreign company in India.8Outsourcing of Backend Operations in India – Deputation of its Employees in IndiaIn many cases, it is observed that foreign companies outsource their non-core or backend operations to India. The Supreme Court, in the case of Director of Income-tax (International Taxation) v. Morgan Stanley & Co.9 analyzed different categories of PE, i.e. Fixed Place PE, Agency PE and Service PE, in quite detail in a similar arrangement where the Indian Company provided backend support services to the foreign company.As per the facts of the case, the foreign company had outsourced some of its services like information technology support, account reconciliation, research support, etc. to an Indian company related to it. Further, in order to provide some specific services, some personnel of the foreign company were also deputed to the Indian group company and worked under the supervision and control of the Indian company. Herein, the Supreme Court analyzed all three categories of the PE as follows –Fixed Place PE – In respect of Fixed Place PE, the Supreme Court observed that the Indian Company would not be considered a PE in India, as it would be performing only back-office operations, which could not be construed as business activities of the multinational enterprise. Further, such activities were of a preparatory or auxiliary character and hence fell under Article 5(3)(e) of the treaty, which excludes such activities from constituting a PE in India.Agency PE – It was concluded that no Agency PE existed, as the Indian company did not have the authority to conclude any contracts on behalf of the foreign company.Service PE – On the facts of the given case, the services were bifurcated into two activities, namely stewardship activities and work performed by employees on deputation. It was concluded that stewardship activities involved only briefing the Indian staff to ensure that the output met the global standards and that no specific or technical services were provided. Thus, a Service PE was not established due to stewardship services.Further, in respect of services provided by the employees on deputation, it was observed by the Supreme Court that the deputed employees did not become the employees of the Indian Company. The foreign company remained responsible for their work, and the employees continued to be on its payroll. Hence, a Service PE was held to be established.Thus, based on the above decisions, it can be understood that the courts have given importance to the nature of activities performed by employees of the foreign company in India and the factors determining who is to be considered as the real employer for the employees.In another case, Asstt. DIT v. E-Funds IT Solution Inc.10, employees were deputed to India and worked under the control and supervision of E-funds India, and their remuneration was borne solely by E-funds India. Further, it was observed that as no customers of the foreign company were located in India or had received any services in India, merely because auxiliary operations that facilitated such services were carried out in India, it could not be held that the foreign company was carrying out business activities in India. Accordingly, no Service PE was constituted in India.However, in Centrica India Offshore (P.) Ltd. v. CIT11, Teradata Operations Inc. v. Dy. CIT12, courts held that since the right of the seconded employees to receive salaries, other emoluments, and the right of dismissal, etc. vested with the foreign company, such employees were to be considered employees of overseas entities rendering services for their employer in India. In such cases, a Service PE may be held to be established in India.ConclusionWith the growth and development of the Indian economy and business, many foreign companies are keen to conduct business in India. In such cases, it becomes important to ensure that such transactions do not camouflage their actual nature and that taxes are rightfully received by India.From the above analysis, it can be understood that the new-age India does not necessarily focus solely on the written laws but goes beyond the words to understand the substance of the transaction undertaken.Further, if a foreign company has a place of business for a certain period that is under its control and is available at its disposal for carrying out business activities, a PE may be established. For this to happen, it is important that the foreign company is engaged in conducting its business activities in India and not merely carrying on auxiliary or support services. If the services are only in the nature of backend or support services, it may be argued that they do not lead to the constitution of a PE in India.A similar contention may be made in respect of services provided through its employees in India. If the employees are providing only stewardship services, or if their activities are controlled by the Indian employer, a Service PE may not come into existence.These are some of the common conclusions that can be drawn on the basis of the abovementioned landmark judgements held in the context of PE in previous years. However, the facts of each case must be analyzed individually, and the decision of whether a foreign company has a PE in India or not will always depend on the specific facts and circumstances of the case.◆◆◆TS-954-SC-2025Section 173 in Income-tax Act, 2025[Section 9(1)(i)] of the Income Tax Act, 1961 or section 9(2) of the Income-tax Act, 2025[2017] 80 taxmann.com 347 (SC)[2016] 76 taxmann.com 101 (Chennai - Trib.)[2023] 149 taxmann.com 77 (Delhi - Trib.)[2024] 163 taxmann.com 52 (Delhi)[2024] 169 taxmann.com 461 (Delhi), [2025] 170 taxmann.com 828 (SC), [2025] 171 taxmann.com 757 (Delhi)[2007] 162 Taxman 165 (SC)[2017] 86 taxmann.com 240/251 Taxman 280/399 ITR 34 (SC)[2014] 44 taxmann.com 300/224 Taxman 122/364 ITR 336 (Delhi)[2020] 116 taxmann.com 404 (Delhi – Trib.)Author may be reached at kmprajakta@gmail.com and eboard@icai.inwww.icai.org February 2026
MSME
Ep. 77 — The MSME Evolution: From Credit-Constrained Units to Equity-Funded Corporations
CA Journal
· July 2026
00:00
--:--
The MSME Evolution: From Credit-Constrained Units to Equity-Funded CorporationsIf you had asked a small factory owner in Ludhiana or a textile merchant in Surat ten years ago about “listing on the stock exchange,” they would have thought you were joking. For decades, the “Indian MSME” was synonymous with perseverance — “informal,” “unorganized,” and “perpetually in debt.” The dream wasn’t to go public; it was simply to get the bank manager to extend the Cash Credit (CC) limit by another five lakhs.But today, we are standing in a different India. We are witnessing a “Great Formalization.” The Indian MSME is no longer just a provider of low-cost employment; it is becoming a sophisticated, equity-funded engine. In this deep-dive, I want to pull back the curtain on the regulatory shifts of 2025, the new “Rules of the Game” for IPOs, and why your balance sheet needs a complete rethink if you want to survive the next decade.The Macro Reality – Breaking the 30% BarrierLet’s start with the hard truth of the numbers. “As a CA, I always say: ‘Emotions are for the heart, but data is for the bank.’”By the end of the 2024-25 fiscal year, the MSME sector’s contribution to India’s GDP stabilized at 30.1%. To the layman, this is just a percentage. To us, it represents a massive recovery from the pandemic low of 27.3% in 2020-21. More importantly, MSMEs are now responsible for 45.79% of India’s total exports.30.1%Contribution to India’s GDP (FY 2024-25)45.79%Share of India’s total exports6.5 croreUdyam registrations by late 2025The Udyam-GST MarriageThe secret sauce behind this growth is the Udyam Registration Portal. By late 2025, we crossed 6.5 crore registrations. But here is the technical detail most people miss: the Udyam portal is now seamlessly integrated with the GSTN and Income Tax databases.Earlier, a business would tell the bank they had a 10-crore turnover, tell the taxman it was 2 crore, and tell the labor department they only had 5 employees. Those days are dead. Today, data is transparent. While this feels like “Big Brother” is watching, it is actually the greatest gift to the sector. Why? Because transparency creates Trust. And trust is the currency of the capital market. Without that Udyam-verified data, the SME IPO boom we see today would have been impossible.The Death of “Dwarfism” – The 2025 Classification RevolutionOne of the biggest tragedies I’ve seen in my career is what economists call “Dwarfism.” This is where a company stays small on purpose. Why? Because the owner is terrified that if they cross the “Small” threshold, they will lose their subsidies, their priority sector lending, and their peace of mind.The Union Budget 2025-26 finally gave us the “Growth Headroom” we needed. Effective from April 1, 2025, the limits were pushed to levels we never thought possible.Breaking Down the New LimitsLet’s look at the “Medium” category specifically. A company can now have an investment of ₹125 crore and a turnover of ₹500 crore and still be called an MSME.Do you realize what this means? A company with a ₹400 crore turnover is a “Mid-Cap” giant in any other country! By keeping these firms under the MSME umbrella, the government is allowing them to scale up, buy global-grade machinery, and hire top-tier talent while still enjoying the protection of MSME interest rates and the Credit Guarantee Scheme (CGTMSE).The doubling of the CGTMSE guarantee ceiling to ₹10 crore is the cherry on top. It means you can now get ₹10 crore in collateral-free credit. If you aren’t using this to modernize your plant, you are leaving money on the table.The SME Exchange – From “Lottery” to “Legitimate Market”Now, let’s talk about the SME IPO market. In 2023 and 2024, the market was a “wild west.” We saw IPOs oversubscribed 500 times. We saw “shell-like” companies listing and doubling on day one. It was speculative, it was risky, and it was dangerous for the long-term health of the sector.The July 1, 2025 Reform: A Game ChangerThe regulators (SEBI and the Exchanges) stepped in with a heavy hand. On July 1, 2025, the rules changed. Here is what every entrepreneur and investor needs to know:The ₹2 Lakh Filter: The minimum application size was raised to over ₹2 lakh (minimum 2 lots). This was a masterstroke. It removed the “retail gamblers” who were looking for a quick listing gain and replaced them with “Individual Investors” who have the stomach for risk and the capital to back it.Discontinuation of “Cut-off Price”: This is a technical but vital change. You can no longer just tick a box saying, “I’ll buy at whatever price.” You must now specify your price. This forces investors to actually read the DRHP (Draft Red Herring Prospectus).No Cancellation/Modification: Once you bid, you are committed. This stopped the “fake demand” created by operators who would bid thousands of crores just to show high subscription numbers and then withdraw at the last minute.The ResultSME IPOs in late 2025 and early 2026 are more “sober.” The listing gains are 10-20% instead of 200%, but the investors who are coming in are long-term partners, not “flippers.”Case Studies – Blueprints of SuccessLet’s look at the companies that have navigated this transition successfully. These are the “graduates” of our ecosystem.1. Strategic Use of IPO Proceeds and Growth-Led ValuationA leading player in the advanced manufacturing and automation space, named as Jyoti CNC Automation Ltd, went public in early 2024. By January 2026, it had achieved a market capitalisation exceeding ₹22,000 crore. The company strategically deployed its public issue proceeds to strengthen its balance sheet while also investing in the development and launch of high-end products. Its strong profit growth trajectory underscored how consistent financial performance and innovation can significantly enhance market valuation.2. From SME Listing to Mainboard Transition: A Graduation JourneyAn enterprise named Suyog Telematics Ltd initially listed on the SME platform leveraged this phase to strengthen its operational and financial fundamentals, achieving a robust operating profit margin. After establishing scale, governance, and performance consistency, the company successfully transitioned to the Mainboard in late 2024. This progression illustrates how the SME platform can serve as a strategic launchpad for growth-oriented companies rather than a permanent endpoint.The Financial Infrastructure – CGTMSE and Digital CreditBeyond the stock market, the way we get loans is changing. We are moving from “Asset-Based Lending” (where you give your house as collateral) to “Cash-Flow Based Lending.”Because the GST data is now real-time, banks like Jana Small Finance Bank can see exactly how much you sold yesterday. They don’t need to see your balance sheet from two years ago; they see your bank statement from two hours ago. This is “Digital Credit,” and it is the only way to bridge the ₹30 lakh crore credit gap.The expansion of the Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE) is the engine behind this. By doubling the guarantee to ₹10 crore, the government has told the banks: “Don’t be afraid to lend to these guys. If they fail, we will back you up.” This is a massive psychological shift for bank managers who were previously too scared to lend without a property mortgage.The Export Promotion Mission (EPM) – Winning the WorldI often hear MSME owners say, “Manoj ji, I want to export, but the interest rates are too high, and the paperwork is too much.”The government’s ₹25,060 crore Export Promotion Mission (EPM), launched in late 2025, is the answer. It is built on two pillars:Niryat Protsahan (The Money)This focuses on trade finance. It offers interest subvention and export factoring. If you are an e-commerce exporter, there are now specialized credit cards to help you manage international working capital. This is crucial because global buyers often want 90-day credit, and a small Indian business can’t afford to have its money blocked for that long.Niryat Disha (The Method)Selling in Germany is different from selling in Gwalior. You need certifications, specialized packaging, and international branding. The EPM provides assistance for all of this. They have even mandated that 35% of all participants in international trade fairs must be MSMEs. The door to the global market is being held open for you.The “Productivity Gap” – Our Greatest ChallengeI must be honest with you, it’s not all sunshine and IPOs. We have a serious problem, which is Productivity.As of late 2025, Indian MSMEs are only 18% as productive as large-scale industries. In Germany or the US, that number is closer to 60%.Why are we lagging?Technological Lag: Many of our units are still using manual processes where AI and automation should be.The Skill Gap: We have the people, but do they have the skills for “Industry 4.0”?Delayed Payments: This is the “silent killer.” Even with the new 45-day payment rule (Section 43B(h)), billions of rupees are stuck in the accounts of large buyers. This kills innovation because the owner is too busy chasing payments to think about new products.To fix this, the government launched the “MSME-TEAM” scheme. This isn’t just about money; it’s about Trade Enablement. It helps you get onto e-commerce platforms like ONDC and adopt modern tech.The Social Impact – Inclusion and EmpowermentWe cannot talk about MSMEs without talking about the people. This sector employs 29 crore people. That is more than the population of most countries!What is heartening in 2026 is the rise of Women-owned MSMEs, which now account for 22% of rural units. Through the “Yashasvini” campaign, we are seeing a focus on “formalization with mentoring.” It’s not enough to just give a woman a loan; we must give her the digital skills and the market access to compete.Over 51% of recognized startups are now coming from Tier II and Tier III cities.The era of “Everything happens in Mumbai or Bangalore” is over. Whether it’s a food processing unit in Nagpur or a tech startup in Kochi, the Indian growth story is now truly decentralized.Preparing for the Future – The ZED StandardIf you want to be part of the global supply chain, you must understand ZED (Zero Defect, Zero Effect).By late 2025, over 2.83 lakh enterprises had been ZED certified. This is not just a fancy certificate to hang on your wall. It tells a global giant like Apple or Walmart that your factory:Produces zero defective goods (Quality).Has zero negative impact on the environment (Sustainability).In 2026, ESG (Environmental, Social, and Governance) is no longer a buzzword for big companies; it is a survival requirement for small ones. Investors on the SME Exchange are now looking for “Green MSMEs.”Checklist for EntrepreneursAs we wrap up this masterclass, I want to leave you with a concrete “Action Plan.” If you are an MSME owner, here is what your dashboard should look like for the next 12 months:Audit Your Classification: With the new ₹500 crore turnover limit, are you still calling yourself “Small”? Re-classify on Udyam to take advantage of the new “Medium” category benefits.Clean Up the Books: If you have even a 1% dream of going public, stop treating your company account like your personal wallet. Transparency is the only way to get a high valuation.Invest in Technology: Use the MSME-TEAM incentives to automate your production line. Remember, productivity is your only shield against rising labor costs.Explore Equity: Don’t be afraid to dilute your ownership. It is better to own 70% of a ₹500 crore company than 100% of a ₹5 crore company.Go Global: Check the EPM guidelines today. If your product has quality, there is a buyer in Japan, Europe, or the USA waiting for you.The evolution of the Indian MSME from a “credit-starved unit” to an “equity-funded corporation” is the most significant structural shift in our economy since 1991.Final ThoughtsThe evolution of the Indian MSME from a “credit-starved unit” to an “equity-funded corporation” is the most significant structural shift in our economy since 1991. The “Safety Net” of the new classification limits, the “Launchpad” of the SME Exchange, and the “Wind in the Sails” from the Export Mission have created a perfect storm for growth.The question is: Are you ready to stop surviving and start scaling? Keep your compliances high and your dreams higher!Author may be reached at camanojlamba@gmail.com and eboard@icai.in
Management
Ep. 78 — Unlocking Kaizen Costing: Methods, Classifications, and AI‑Driven Strategies for Sustainable Cost Reduction
CA Journal
· July 2026
00:00
--:--
Unlocking Kaizen Costing: Methods, Classifications, and AI‑Driven Strategies for Sustainable Cost Reduction‘Kaizen’ comprises two Japanese words: Kai (change) and Zen (for the better), together meaning continuous improvement. The term Kaizen is about consistent improvement that assists with making long-term progress and doesn’t require enormous ventures. It is additionally significant for the executives and collaborators to take an interest in the progress.In today’s rapidly evolving industrial landscape, organizations are under constant pressure to reduce costs, improve efficiency, and enhance productivity. Kaizen Costing, with its foundation in continuous incremental improvement, has long served as a strategic tool for sustainable cost reduction and operational excellence. However, with the advent of advanced technologies, particularly Artificial Intelligence (AI), there is a growing opportunity to enhance the effectiveness of traditional Kaizen practices. AI helps reduce process time, automate repetitive tasks, and streamline operations through data-driven decision-making.When integrated with Kaizen, AI not only strengthens the pace and accuracy of continuous improvement but also unlocks new potential for real-time monitoring, predictive analysis, and smart optimization. This powerful combination offers organizations the dual advantage of human-centric innovation and intelligent automation, driving faster development, improved production quality, and significant cost savings. This article explores this evolving synergy, presenting a structured review of Kaizen Costing methods and examining how AI integration is reshaping its role in modern cost management.Sub-Classification of Kaizen CostingTo better understand the ideas of Kaizen/Continuous Improvement, this section provides brief explanations of the following four classifications.Figure 1: Kaizen Sub-ClassificationThe Kaizen’s Objective CategoryThe Concept of ProductivityThe Kaizen’s Result CategoryThe Concept of Just-In-TimeThe Concept of KanbanThe Kaizen’s Main CategoryThe Concept of Quality Control Circles (QCC)The Concept of Suggestion SystemThe Kaizen’s Extension CategoryThe Concept of Total Productivity Maintenance (TPM)The Concept of Total Quality Control (TQC)The Concept of Zero Defects (ZD)The Concept of Six SigmaThe Concept of Total Quality Management (TQM)Sources: Adapted from Imai (1983)I. The Kaizen’s Objective Categoryi. The Concept of ProductivityProductivity, as defined by Tangen (2002), is the ratio of output to input in manufacturing, reflecting how efficiently resources like labour, capital, materials, and energy are used. It’s often misunderstood as mere production volume; however, true productivity requires consideration of both outputs and inputs. It is relative and is evaluated through comparisons over time or against competitors.Productivity improves in five ways, such as by increasing output more than input or by reducing input while maintaining the same level of output.Over time, productivity has been confused with performance, efficiency, and effectiveness. Performance includes factors like cost and quality, efficiency means “doing things right” with minimal resources, and effectiveness means “doing the right things” to create customer value. High productivity results from a combination of both efficiency and effectiveness.The Kaizen philosophy of continuous improvement supports productivity growth by enhancing efficiency and effectiveness, especially at the shop-floor level, through incremental gains and better resource utilization. Waste reduces productivity and should be systematically eliminated to achieve sustainable improvement.AI PerspectiveThe integration of Artificial Intelligence (AI) into the Kaizen framework significantly enhances its core objective of continuous improvement. AI transforms traditional manual systems into smart, proactive processes that can detect inefficiencies, reduce waste, and drive sustainable productivity. With the use of advanced tools such as sensors, IoT devices, and AI-based analytics, organizations can now monitor operations in real time, gaining deeper visibility into performance metrics. Through predictive analytics and machine learning, AI can anticipate potential issues before they occur, enabling timely, preventive actions. Additionally, AI systems are capable of processing large volumes of data, recommending optimal solutions, and helping prioritize improvement initiatives. This not only reduces the cognitive load on human decision-makers but also ensures more consistent, accurate, and data-driven strategies to support ongoing operational excellence.The integration of Artificial Intelligence (AI) into the Kaizen framework significantly enhances its core objective of continuous improvement. AI transforms traditional manual systems into smart, proactive processes that can detect inefficiencies, reduce waste, and drive sustainable productivityII. The Kaizen’s Result CategoryThis category comprises two key concepts: Just-In-Time (JIT) and the Kanban system. These are often regarded as outcomes or by-products of Kaizen initiatives implemented during the initial stages of continuous improvement.i. The Concept of Just-In-TimeAccording to Imai (1986), Just-In-Time (JIT) ensures that each stage of production receives the exact number of units required at the right time. Ohno’s system at Toyota reduced inventory by reversing the traditional supply flow. Shingo (1981) further linked JIT to minimize the time between order and delivery through small-lot production, faster tool changes, and one-piece flow. Ishikawa and Lu (1985) emphasized that quality control is vital for JIT success, as poor quality disrupts the flow of inventory. Kaizen supports JIT by helping suppliers deliver quality products on time. JIT is also closely tied to the Kanban system (Monden, 1983), which helps synchronize production.ii. The Concept of KanbanAccording to Imai (1986), Kanban is a communication tool within the JIT production and inventory control system developed by Taiichi Ohno at Toyota Motor Corporation. A Kanban, or signboard, is attached to specific parts in the production line, signifying the delivery of a given quantity. The concept of the Kanban system was inspired by the supermarket system, as noted by Shingo (1981).Shingo (1981) and Imai (1986) further observed that Kanban coordinates the inflow of parts and components to the assembly line, minimizes process delays and enables rapid throughput. For example, an engine block brought into the plant in the morning can be assembled into a completed automobile by evening. However, the Kanban system cannot be effectively implemented in isolation; it must operate alongside other TQC components as part of an integrated production system.According to Gross and McInnis (2003), the benefits of Kanban can become a driver for creating a culture of continuous process improvement. They also offered the Kanban implementation method, which enables management to assess the existing state of the business, its goals, and the best way to get there.AI PerspectiveThe integration of AI allows JIT systems to leverage real-time data and advanced demand forecasting, enabling them to respond instantly to changing market conditions. In the context of Kanban, AI enhances efficiency by intelligently monitoring workflow signals and automatically regulating the number of work-in-progress (WIP) items. It adjusts task flow based on real-time capacity and demand patterns, an otherwise complex task to handle manually. As a result, organizations benefit from faster production cycles, reduced bottlenecks, and more efficient resource utilization, all of which reinforce Kaizen’s core principle of creating lean, adaptable, and continuously improving processes.III. The Kaizen’s Main Function CategoryUnder this category, there are two key concepts: Quality Control Circles and the Suggestion Sheet System. The details of these concepts are discussed below.i. The Concept of Quality Control Circles (QC Circles, QCC)Small Groups for Quality Improvement: QCCs are small, voluntary groups of frontline workers focused on continuously improving quality in products, services, and processes.Ideal Group Size: An effective QCC typically consists of around five members to allow better interaction and teamwork.Same Workshop Participation: Members usually belong to the same workshop or department, which enables them to address relevant, shared problems through regular communication.Based on PDCA Cycle: QCCs perform quality control tasks using the PDCA (Plan-Do-Check-Act) method, aiming at continuous process improvement rather than supervision.Voluntary Participation (Jishusei): Activities are self-initiated, internally motivated, and go beyond regular job responsibilities without formal compulsion.Part of Company-Wide QC: QCCs align with broader organizational quality goals and are supported by management to ensure strategic improvement.Personal and Social Development: Participation in QCCs helps members grow through skill development, teamwork, and increased engagement.Data-Driven Methods: QCCs rely on Statistical Quality Control (SQC) tools and logical analysis, avoiding decisions based on mere opinions or feelings.Workshop-Focused Issues Only: The topics tackled must relate directly to the circle’s work area and not to broader organizational or labour matters.Continuous Activity: QCCs are expected to operate continuously, regardless of staffing changes, supporting the Kaizen principle of ongoing improvement.Universal Staff Participation: All employees should be involved, promoting collective responsibility for quality across all organizational levels.ii. The Concept of Suggestion SystemAccording to Lillrank and Kano (1989), the suggestion system is the bottom-up channel through which improvement ideas and proposals are presented to management. Fundamentally, the suggestion system is unrelated to QCC activities. It is frequently used before circular activity, even in businesses without QCCs. The suggestion system can serve as a systematic tool within the QCC process to generate and refine workers’ ideas by integrating closely with QCC activities. Imai (1986) proposed that the suggestion system is an integral part of individual-oriented Kaizen. Additionally, when QCCs are viewed collectively as a group-oriented system of improvement suggestions, their role and function become more clearly understood.The suggestion system was historically introduced to Japan by TWI (Training Within Industries) and the U.S. Air Force following the conclusion of World War II. A Japanese-style suggestion system replaced the American-style approach.The suggestion sheet is commonly used as the primary medium through which employees communicate their ideas to management within the suggestion system. When they discover difficulties with their working procedures, employees can document them on the suggestion sheet form, develop possible remedies, and propose them to their supervisors. Direct supervisors typically review these suggestions, assessing their economic value and feasibility for implementation. Following their approval, supervisors will present the employees’ ideas to management for implementation consideration. The ideas made by the employee will be carried out if the approvals are given.To build the appropriate mindset and sustain momentum for suggestion activities, supervisors play a crucial role in sharing successful cases as best practices, encouraging wider employee participation. About half of small and medium-sized businesses and the majority of large manufacturing organisations use suggestion systems as part of their Kaizen programmes. According to Imai (1986: 112), common areas for suggestions in Japanese companies include improvements in work methods, working environments, machinery and processes, jigs and tools, office operations, product quality, and customer service.AI PerspectiveAI improves the way data is collected and analyzed by offering real-time insights, visualizing trends, and identifying root causes of problems. This helps Quality Control Circles (QCCs) make quicker and better decisions. It also allows teams from different departments or locations to work together more easily through AI-powered dashboards, removing the barriers of time and place. In the case of suggestion systems, AI can automatically gather, sort, and analyze employee ideas using natural language processing (NLP). It not only helps prioritize the most useful suggestions but also spots patterns and recommends practical actions. This makes the entire process faster, more efficient, and more impactful.In the case of suggestion systems, AI can automatically gather, sort, and analyze employee ideas using natural language processing (NLP). It not only helps prioritize the most useful suggestions but also spots patterns and recommends practical actions.IV. The Kaizen’s Extension CategoryUnder this category, there are five key concepts: TPM, TQC, ZD, Six Sigma, and TQM. The details of these concepts are discussed below.i. Concept of Total Productive Maintenance (TPM)According to Imai (1986: xxv), Total Productive Maintenance aims at maximizing equipment effectiveness throughout its entire life cycle. TPM is now used at a sizable number of Japanese manufacturing organisations, and is strongly promoted by the Japan Institute of Plant Maintenance, although it is less well known outside Japan as compared to TQC.While TPM is focused on equipment improvements, TQC’s primary goal is to raise overall management quality. TQC is more focused on software, whereas TPM is more focused on hardware. Like TQC, training is a crucial component of TPM, with emphasis placed on fundamental knowledge such as machine operations and maintenance practices at the shop-floor level.Just as organizations excelling in TQC are recognized through awards such as the Deming Prize and the Japan Quality Control Prize, the Japan Institute of Plant Maintenance honors successful TPM implementation through the PM (Plant Maintenance) Distinguished Plant Award and other recognitions.AI PerspectiveAI improves TPM by using predictive maintenance systems powered by IoT sensors and machine learning. These tools can forecast equipment failures before they occur, reducing downtime and improving machine reliability, perfectly aligning with TPM’s goal of maximizing equipment effectiveness.ii. The Concept of Total Quality Control (TQC)The concept of quality has evolved from a narrow production focus to a comprehensive management philosophy valued at all organizational levels. The most critical factor is customer satisfaction, which directly influences company profits. The idea is simple: happy customers lead to business success.A TQC (Total Quality Control) manager, it can be argued, is more concerned with customer complaints than with stock prices or return on assets. TQC covers not just product quality, but also manufacturing processes, delivery, customer support, planning, and internal practices. In this context, quality in Japan aligns with the Western idea of “excellence.”Despite much discussion, the Japanese quality movement has not reached a uniform definition of quality. Therefore, each company promotes TQC based on its unique conditions, competitive situation, and top management preferences. No single pattern fits all; TQC evolves through trial and error. It is guided by principles and tools, without which it would be a mere spiritual idea. Both management and shop-floor operations participate in TQC, with QCC (Quality Control Circles) and PDCA cycles being key elements.Most firms using TQC also implement QCCs, which are often seen as a foundation for broader TQC efforts. According to Feigenbaum, quality control must be part of a system for development, maintenance, and improvement, and should be defined by the customer.Feigenbaum stressed that if data from QC tools, like control charts and sampling, aren’t used in decision-making, they do not guarantee quality. TQC is a decision-making framework combining data processing with managerial actions. He cautioned that if quality is everyone’s responsibility, it could end up being no one’s responsibility.From a Western perspective, TQC has shifted quality from an operational to a strategic concern, gaining importance as top management becomes involved. If quality is seen only as an engineering issue, it will be ignored by top leaders. However, in competitive markets, defining product features has become essential. Related concepts like productivity, turnaround time, responsiveness, and operational effectiveness are now central to strategic thinking. Innovations like JIT (Just-in-Time) have redefined competition by boosting efficiency and quality.iii. The Concept of Zero Defects (ZD)According to Calvin (1983), Zero Defects (ZD) means producing products that perform flawlessly in the field, with zero operational failures, not necessarily zero flaws. Flaws may exist, but must not cause failures. Achieving zero faults requires “designing it right the first time” and ensuring specifications support performance, reliability, and manufacturability. Statistical methods like process capacity studies and design of experiments help, but traditional tools like control charts and sampling need re-evaluation for near-zero failure levels. Both Kaizen and Zero Defects aim to reduce defects, emphasizing continuous improvement and process excellence to minimize product failures.AI PerspectiveAI enhances TQC and ZD by enabling real-time quality monitoring using computer vision and deep learning. Defects can be detected automatically during production, and root causes can be identified quickly, helping maintain high-quality standards and achieve zero-defect goals.iv. The Concept of Six SigmaImai (1986) did not discuss the relationship between Kaizen and Six Sigma, as Six Sigma emerged as a management concept at a later stage. According to Klefsjö et al. (2001), sigma is a statistical measure of process variation, commonly referred to as the standard deviation. The term Six Sigma generally implies the occurrence of defects at a rate of 3.4 defects per million opportunities (DPMO).The sigma value indicates how often defects are likely to occur; however, according to Hahn et al (1999) and Linderman et al (2003), Six Sigma has not been carefully defined in either the practitioner or academic literature. Six Sigma uses unique metrics, including Process Sigma measurements, critical-to-quality metrics, defect measures and 10× improvement measures (Hahn et al., 1999; Harry, 1998; Hoerl, 1998). Whatever method is chosen, however, it is essential that the technique is carefully followed, and a solution should not be offered until the problem is clearly defined. Common features of Six Sigma programmes include a top-down implementation approach, a highly disciplined methodology, and a data-driven framework that makes extensive use of statistical decision-making tools. These programmes typically follow the DMAIC cycle—Measure, Analyse, Improve, and Control—to achieve sustainable process improvement.AI PerspectiveSix Sigma is supported by AI techniques like data mining and statistical learning algorithms, which enhance the Define-Measure-Analyse-Improve-Control (DMAIC) procedure. AI makes Six Sigma projects quicker and more accurate by accelerating data collection, identifying hidden patterns, and suggesting process improvements.v. The Concept of Total Quality Management (TQM)Even Total Quality Management was not mentioned by Imai (1986); however, when analysing the components and definition of this concept, we found the similarity between the concept of Kaizen and the idea of TQM. Therefore, this research provided some basic idea of the concept of Total Quality Management (TQM). Powell (1995, 16) further noted that the TQM must be capable of having a mentality of zero defects. Instead of having to check and redo the task, it needs to be able to detect defects as they happen. When comparing the TQM and Kaizen philosophies, TQM’s core idea might be considered as Kaizen. When businesses prioritise the fundamentals of Kaizen from the start, TQM implementation may produce more significant results.AI PerspectiveAI facilitates organization-wide quality improvement within the larger context of TQM by means of continuous feedback loops, real-time dashboards, and automated insights. It supports long-term quality excellence by enabling teams and management to make data-driven decisions and rapidly monitor performance metrics.Statistical methods like process capacity studies and design of experiments help, but traditional tools like control charts and sampling need re-evaluation for near-zero failure levels. Both Kaizen and Zero Defects aim to reduce defects, emphasizing continuous improvement and process excellence to minimize product failures.ConclusionTo sum up, the continuous improvement concept of Kaizen is still an essential tactic for attaining long-term cost effectiveness and operational excellence. The integration of AI into Kaizen Costing amplifies its impact by enabling real-time monitoring, predictive analytics, and process automation. Without making major expenditures, this synergy enables firms to realize considerable cost reductions, improved quality, and speedier advancements. As industries continue to evolve, leveraging both human-driven innovation and AI-driven intelligence will be key to maintaining competitiveness. In the end, the combination of AI with Kaizen is a revolutionary strategy for contemporary cost control and sustained company performance.ReferenceTangen, S. (2002, December). Understanding the concept of productivity. Proceedings of the 7th Asia-Pacific Industrial Engineering and Management Systems Conference, Taipei Tech, Taiwan (pp. 18–20)Imai, M. (1986) Kaizen: The Key to Japan’s Competitive Success. McGraw-Hill Education, New York.Shingo, S. (1981). A Study of the Toyota Production System: From an Industrial Engineering Viewpoint. Productivity Press.Ishikawa, K. (1985) What Is Total Quality Control? The Japanese Way. Translated by Lu, D.J., Prentice-Hall, Englewood Cliffs, New JerseyMonden, Y. (1983) Toyota Production System. Institute of Industrial Engineers Press, Norcross.Hahn, G., Hill, W., Hoerl, R., Zinkgraf, S., 1999. The impact of Six Sigma improvement—a glimpse into the future of statistics. The American Statistician 53 (3), 208–215Harry, M.J., 1998. Six Sigma: a breakthrough strategy for profitability. Quality Progress 31 (5), 60–64Hoerl, R.W., 1998. Six Sigma and the future of the quality profession. Quality Progress 31 (6), 35–42.Gross, J. M., & McInnis, K. R. (2003). Kanban made it simple: Demystifying and applying Toyota’s legendary manufacturing process. New York: AMACOMMcLeod, A. D. (1991). Continuous Improvement: Quality Control Circles in Japanese Industry. By Paul Lillrank and Noriaki Kano. Michigan Papers in Japanese Studies 19. Ann Arbor: The University of Michigan Center for Japanese Studies, 1989, xvi, 294 pp. $13.95. The Journal of Asian Studies, 50(2), 416–418. doi:10.2307/2057250.Powell, T. C. (1995). Total quality management as competitive advantage: A review and empirical study. Strategic Management Journal, 16(1), 15-27.Author may be reached at kananibaijul@yahoo.com and eboard@icai.in
Digital Technology
Ep. 79 — Cloud-Based Accounting: Transforming Financial Management In The Digital Era
CA Journal
· July 2026
00:00
--:--
Cloud-Based Accounting: Transforming Financial Management In The Digital EraThis paper explores the evolution, benefits, and challenges of cloud-based accounting systems in the digital economy. Cloud-based accounting offers flexibility to manage finances anytime, anywhere, enabling real-time collaboration, automation, cost savings, and regulatory compliance. Its popularity stems from mobile access, scalability, and integration with other business tools. However, issues such as cybersecurity, vendor lock-in, and internet reliance persist. Case studies highlight its impact on operational efficiency across sectors. Emerging trends point to the growing influence of AI, blockchain, and stricter regulations, underscoring the strategic importance of cloud-based accounting in modern financial management.Concept and Architecture of Cloud-Based AccountingFinancial software hosted on remote servers, as opposed to local desktop computers, is referred to as cloud-based accounting systems. These systems utilise cloud computing technologies to deliver accounting functions on a subscription basis, encompassing bookkeeping, financial reporting, invoice management, and payroll.Three layers make up the core architecture:Infrastructure-as-a-Service (IaaS): Provides foundational IT resources, including storage and servers.Platform-as-a-Service (PaaS): Provides a platform for developers to build customised applications.Software-as-a-Service (SaaS): Delivers the actual accounting applications used by end-users.The article highlights the role of cloud-based accounting in improving operational efficiency with an exhaustive list of case studies from across various industries. Future trends appear to revolve around AI and blockchain playing a larger role, with tighter regulation, underlining the influential role they play in the current financial era.Cloud vs Traditional Accounting Software: A Quick ComparisonThe basic difference lies in collaboration and accessibility. Cloud-based accounting helps people to collaborate from any location with an internet connection. It allows for multiple users to work simultaneously without any paperwork. Conventional software, in contrast, is installed on a single system, which limits access to that specific location and device.Need for Cloud-Based & Online Accounting SoftwareThe adoption of cloud-based accounting systems varies by business type and size. Online accounting software provides a centralised, real-time solution for businesses operating from multiple locations, such as retail chains, large audit firms, and multinational corporations (MNCs).Cloud-based accounting helps members to communicate easily from anywhere, unlike desktop accounting systems, which improves operational efficiency, especially in digital-first businesses. One industry expert expressed it well:“Cloud is no longer a choice; it is the default.”Outdated legacy technologies, frequently located in remote locations, can impede corporate agility and responsiveness in today’s fast-paced world. Modern company continuity requires remote access and issue resolution, which offline technologies inhibit. If their operating demands are simple and localised, a traditional configuration may work for relatively tiny enterprises or those with minimal digital infrastructure.The rise of SaaS accounting models presents an attractive cloud-based alternative to traditional systems, such as Tally, now known as Tally Prime. Due to their affordability, automation capabilities, and compliance readiness, these online platforms are popular among medium-sized firms, microenterprises, and small businesses in India.When Should a Business Adopt Cloud-Based Accounting?Businesses seeking flexibility, real-time information, and cost-effective financial administration should use cloud-based accounting. Due to their low cost and simplicity, startups and modern organisations use cloud solutions early.As small businesses grow, spreadsheets and manual bookkeeping become error-prone and inefficient. Cloud-based accounting systems automate, improve accuracy, and ensure tax and financial compliance to avoid such complications.Cloud-based accounting is a good alternative for almost every firm, regardless of size or industry, due to its scalable options.India’s Accounting Software MarketIndia’s Accounting Software Market was valued at USD 3.38 billion in 2024 and is expected to reach USD 5.75 billion by 2030, exhibiting a compound annual growth rate (CAGR) of 9.1% during the forecast period. This is fueled by increased digitisation, demand for real-time financial reporting, regulatory compliance, and operational efficiency. SMEs are increasingly adopting cloud-based accounting tools for their scalability and cost-effectiveness. Government initiatives, such as the integration of GST and digital payments, also support market expansion. Key players are innovating with AI and machine learning to enhance automation and predictive insights, positioning the market for continued growth and technological advancement.YearSpending (USD Billion)YearSpending (USD Billion)201322.3202074.1201426.4202171.8201532.2202287.7201635.72023110.6201747.42024181.09201866.12025271.5201966.8 Annual spending on Cloud IT Infrastructure worldwide from 2013 to 2025 (in billion U.S. dollars)Source: StatistaYearMarket Size2024USD 3.38 Billion2030USD 5.75 BillionIndian Accounting Software Market — forecast to grow at a CAGR of 9.1%Source: https://www.researchandmarkets.com/report/india-accounting-software-marketKey Drivers of Cloud-Based Accounting AdoptionCost Efficiency: Cloud-based accounting reduces capital expenditure on IT infrastructure and decreases operational costs associated with system upgrades and maintenance. The pay-as-you-go pricing model is particularly attractive for startups and small businesses with limited budgets. There is no more requirement for dedicated IT support staff to manage on-premise servers.Accessibility and Mobility: The ability to access financial data from any device connected to the internet enhances mobility for accountants and business owners. This feature became especially crucial during the COVID-19 pandemic, which accelerated the adoption of remote work models. Cloud-based systems facilitated remote auditing and virtual financial closing.Scalability and Flexibility: Cloud-based solutions enable businesses to scale their operations quickly without requiring significant changes to their IT infrastructure. This is very helpful for seasonal businesses or firms undergoing rapid expansion.Integration Capabilities: Cloud platforms often provide API connectivity with other business tools, such as ERP, CRM, and inventory management systems, enabling a seamless flow of information and facilitating better decision-making. Integration with banking APIs also allows automatic bank reconciliations and cash flow forecasting.Innovation and Automation: Cloud-based accounting tools aid in categorising transactions, identifying unusual activity, and generating audit trails through the use of AI. This type of automation not only reduces human errors but also saves time, enabling businesses to focus more on strategic planning and informed decision-making.Benefits to Business Performance and EfficiencyCloud-based accounting enhances the speed, accuracy, and transparency of financial data. Cloud computing in accounting enhances decision-making by providing real-time analytics and dashboards, which in turn lead to improved operational and strategic outcomes.“Businesses seeking flexibility, real-time information, and cost-effective financial administration should use cloud-based accounting. Due to their low cost and simplicity, startups and modern organisations use cloud solutions early.”Real-Time Financial Reporting: Businesses can now monitor real-time cash flows, receivables, and payables, resulting in more effective working capital management. Cloud-based tools generate interactive dashboards, scenario models, and visual financial summaries that help in quick decision-making.Enhanced Collaboration: Multiple stakeholders, such as accountants, tax advisors, and auditors, can simultaneously access financial records, and thereby reduce information asymmetry and facilitate collaboration. Cloud-based accounting fosters collaborative budgeting and planning processes, especially for multinational teams.Environmental Sustainability: By minimising the use of paper and physical infrastructure, cloud-based accounting supports corporate sustainability initiatives. Digitised invoicing, e-signatures, and electronic archiving help firms reduce their carbon footprint.Improved Auditability and Compliance: Audit trails, version histories, and permission logs in cloud systems enhance regulatory compliance. Auditors can review data remotely and conduct real-time verifications. Many platforms also issue alerts for overdue tax filings or suspicious transactions.Sectoral ApplicationsSMEs and Startups: SMEs form the largest segment of cloud-based accounting users. The low entry cost and simple user interface enable smaller firms to access sophisticated financial tools previously reserved for larger corporations. These tools help SMEs manage vendor payments, customer billing, and tax compliance efficiently.Public Sector and NGOs: Government agencies and NGOs have started using cloud systems for budget tracking, grant management, and regulatory compliance. The transparency of these platforms helps donors to check fund utilisation and support audit purposes.Educational Institutions and Research Organizations: Academic institutions use cloud-based accounting to manage grants, research funding, and payroll operations with transparency and efficiency. It also helps align educational budgets with national guidelines and reporting requirements.Healthcare and Retail Sectors: In the healthcare industry, cloud-based accounting facilitates insurance reimbursements, inventory management, and patient billing. In retail, it enables dynamic pricing, supply chain visibility, and multi-channel transaction reconciliation.Drawbacks of Cloud-Based AccountingCybersecurity and Data Privacy: Despite the numerous advantages, cloud-based accounting raises critical concerns about data security and privacy. Service Level Agreements (SLAs) must be clearly defined to protect against data breaches and ensure compliance with data protection regulations such as GDPR and India’s DPDP Act.Risk of Data Breaches: Financial information is a favourite target of hackers. Companies need to evaluate the security practices of their service providers, including encryption policies, multi-factor authentication (MFA), and zero-trust environments.Regulatory Compliance: Cloud providers are also subject to compliance and regulations across multiple jurisdictions. It is important to comply with ISO standards (such as ISO 27001) to establish trust in the system. Nations such as the US, EU members, and India have enacted strict rules for data localisation and audit.Disaster Recovery and Redundancy of Data: The majority of cloud platforms include automated backup and disaster recovery features, which keep your data safe from hardware failure and ransomware. Data availability is also guaranteed, even in worst-case scenarios, due to the geo-redundant storage.Internal Controls and Access Rights: User access permissions must be strictly followed. There should be a proper system for role-based access, audit trails and user authentication.Challenges in ImplementationInternet Dependency: A stable internet connection is a prerequisite. This can be a limiting factor in rural or underdeveloped regions. Network outages or latency issues can temporarily halt accounting operations.Resistance to Change: Old firms and traditional accountants often resist cloud-based systems due to a lack of digital literacy and concerns about job loss. Effective training and change management programs are needed.Vendor Lock-In: Firms should use platforms having data portability and open API facilities, as it is challenging to switch between cloud vendors due to different data formats.Hidden Costs: Initial installation costs for cloud-based accounting are relatively low. However, with the growth of business, renewal fees and the addition of the latest features can be costly. Businesses should do a total cost of ownership (TCO) analysis before adopting a cloud-based system.Comparative Case StudiesCase Study 1: Cloud-based accounting in South African SMEs — The examination of key drivers of cloud-based accounting in South Africa found that perceived ease of use, technological readiness, and top management support significantly influenced adoption decisions. SMEs that use cloud-based accounting report better tax compliance and operational efficiency.Case Study 2: Adoption in Manufacturing Firms — It was found that cloud server deployment resulted in significant cost savings and operational efficiency in Chinese manufacturing firms that integrated their accounting and production planning systems. AI-based scheduling further optimised inventory levels and payroll management.Case Study 3: Cloud-based accounting in the Middle East — It was found that cloud computing improved sustainability accounting practices in Jordanian companies by enhancing transparency and stakeholder engagement. It also enabled digital audits and ESG reporting for investors.Case Study 4: Non-profit Sector in the United States — U.S.-based non-profits leveraged cloud-based accounting for managing large donor networks, grant compliance, and program funding. Tools like Sage Intacct and QuickBooks enabled real-time fund tracking and audit preparation.Way ForwardAI and Machine Learning Integration: Cloud-based accounting platforms are integrated with the latest AI features, which help in early fraud detection, invoice categorisation, and predictive analytics. Chatbots are used to answer accounting queries.Blockchain for Enhanced Transparency: Blockchain-based accounting systems help eliminate double entries and provide non-alterable audit trails.Customised Solutions for Niche Industries: Businesses are now obtaining industry-specific solutions tailored to sectors such as construction, e-commerce, and healthcare from the market.Increased Regulation and Standards: International accounting bodies are releasing new standards for cloud-based accounting, which will help harmonise global practices. New guidelines on cloud-based audits, the ethical use of Artificial Intelligence, and transparent ESG (Environmental, Social, and Governance) reporting are needed in the current context.ConclusionCloud-based accounting is more than just a technological upgrade; it represents a strategic shift in how financial data is accessed, interpreted, and acted upon. It enables organisations to be more agile, data-driven, and collaborative. It is not easy to adopt cloud-based accounting, but from a cost-efficiency, real-time view, and operational scalability perspective, companies must start using cloud accounting. The power of these new advances in AI, blockchain and cybersecurity will add another layer of trust, reliability and functionality to cloud-based accounting systems in the future. As the digital transformation continues to evolve, redefining business ecosystems, the use of cloud-based accounting has become a necessity for firms to remain competitive and compliant in the ever-changing financial landscape.ReferencesBala, H., Zomaya, A. R., Omar, R., Al-Absy, M. S. M., Ya’u, A., Sani, A. U. A., & Khatoon, G. (2024). Effect of Cloud Accounting Computing on Firm Performance. In Harnessing AI, Machine Learning, and IoT for Intelligent Business: Volume 2 (pp. 593–609). Cham: Springer Nature Switzerland.Dlamini, B. (2025). Key Drivers of Cloud Accounting Utilization by Small and Medium Enterprises in Zimbabwe. International Journal of Economics and Financial Issues, 15(2), 183.Esawi, K. A. M., Shehab, L. S., & Benzerrouk, Z. S. (2025). The Impact of Cloud Computing on Achieving the Quality of Financial Reports. A Case Study of Egypt Bank. WSEAS Transactions on Business and Economics, 22, 48–57.Golec, M., Zhu, L., Hatay, E. S., Wang, H., & Gill, S. S. (2025). Music Emotion Recognition-Based Business-Oriented Visualization Framework Using AI-driven Serverless Cloud Computing. International Journal of Business Analytics (IJBAN), 12(1), 1–26.Liu, R. P., Mellou, K., Gong, E. X. Y., Li, B., Coffee, T., Pathuri, J., ... & Menache, I. (2025). Efficient Cloud Server Deployment Under Demand Uncertainty. Manufacturing & Service Operations Management.Moustakas, T., & Kolomvatsos, K. (2024). Drift-based task management in support of pervasive edge applications. Internet of Things, 27, 101277.Zamani, A. S., Jagadish, R. M., Kumar, B., Ghori, A. S., & Bhyratae, S. A. (2025). Perspectives of Machine Learning in the Convergence of Artificial Intelligence and Edge Computing. In Advances in AI for Cloud, Edge, and Mobile Computing Applications (pp. 189–211). Apple Academic Press.https://cloudcomputing.media/adoption/the-evolution-of-cloud-computing-a-comprehensive-overview/, John Connor, October 9, 2023https://dclouds.in/cloud-based-accounting-software-india/, Biplob Devhttps://www.netsuite.com/portal/resource/articles/accounting/cloud-accounting.shtml, Ian McCue, September 3, 2025https://silvermicrosystems.com/New-Digital-Ideas-Strategies-To-Accelerat-The-Business-Growth.htmlAuthor may be reached at muna.moonstar1987@gmail.com and eboard@icai.in
Work-Life Balance
Ep. 80 — Navigating the Complexities of WorkLife Balance
CA Journal
· July 2026
00:00
--:--
Navigating the Complexities of Work-Life BalanceWork-life balancing is approached differently among sportspersons, students, decision makers, politicians, researchers, artists, businesspeople, workers, office staff, etc. Different phases of life have different impacts on work-life balance. For certain persons, worktime is protected by law to avoid exploitation. Work is composed of career-related work and home-related work. Life is composed of time for recharging the body, time for family and society and time for passion.Saving time is an important component of work-life balance. Save time by reducing unproductive time, idle time and improving efficiency, from work as well as from home, and devote that saved time to quality family time or quality office work. With every work-life choice one makes, there are consequences accordingly. One wrong choice or decision can ruin your career opportunity or your life at home.IntroductionThe concept of “work-life balance” is fast becoming a cornerstone of modern discourse, a siren song promising harmony amidst the cacophony of professional and personal demands. However, the reality is often far more complex, a delicate dance between the pressure of the work, the need for a livelihood, ambition and well-being. Achieving a truly sustainable balance requires a nuanced understanding of its components and a commitment to enact meaningful change.It was during the Industrial Revolution that the concept of separation between work and home became more defined. However, the challenges we face today are vastly different from those of the previous generations.Firstly, it is crucial to dispel the misconception that work-life balance is a perfectly symmetrical division of time; neither a rigid 50/50 split is right, nor any other fixed formula like 8 hrs work is right. It also can’t be governed solely by law, but yes, law can help in some cases.Work-life balance is not a static state but a dynamic equilibrium. Work-life balance is not a destination but a journey. It is a continuous process of evolution, adaptation and adjustment. It is the ability to effectively manage, balance and prioritize responsibilities across various domains of life, including career, family, personal interests, sleep, entertainment, society time, time for daily errands, time for health, time for children, and time for knowledge updation, among others. It is about feeling content and fulfilled in each area without sacrificing one for another. Importantly, it is a subjective experience; what constitutes balance for one person may be entirely different for another.The topic of work-life balance has generated significant discussion both in India and abroad over the past decade, with varying perspectives emerging from business leaders, policymakers, and social commentators. When some industry leaders made some statements with regard to longer working hours, or working on Sundays to increase productivity, this created some controversy among some sections of people. The statement released was not well understood, as given in what context, why made, and for whom.Life is important in terms of mental, physical, social and emotional well-being. At the same time, life without a good career is a life without a purpose. Without a career, affording luxury for oneself and one’s family can remain a pipe dream. Clearly, according to little time for work, must not be paraded as work-life balance – it is, instead, a recipe for ruining one’s career.The statement made by Jack Welch, former CEO of General Electric, is very interesting and most relevant to this era of life.“There’s no such thing as work-life balance. There are work-life choices, and you make them, and they have consequences.”I have tried to analyse this statement in depth in this article.Defining the Components of “Work-Life Balance”Human beings have a limited time out of the unlimited time available in the universe. And since the time is limited for human beings, the question or discussions of work-life balance come into the picture, as we all have to make our lives purposeful. This phrase “work-life balance” is much more complex than it looks.It has two components, i.e.,WorkCareer-related workActivities undertaken for achieving the purpose or goals of life. Career-related work can be done from both the workplace and home.Home-related workWork related to household management and daily errands, such as grocery shopping, laundry, home cleaning, dropping off and picking up children from school, and providing medical care to one’s spouse and children, etc.LifeActivities undertaken to remove fatigue, or to recharge the body and mind.Recharging the body and mind through sleep, entertainment, exercise, and health is primarily possible only at home, but has its own presence at the workplace, in the form of small breaks, etc.To devote time to your family, friends and community.Time for knowledge update or personnel interest.Now, since time is limited for the human being, and life needs to have a purpose, all aspects of work life need to be managed in the best optimal manner, as all are correlated and have an impact on each other.Challenges to Work-Life Balance:Several factors contribute to the difficulty of achieving work-life balance in today’s world:Technological Intrusion: The constant connectivity because of smart phones etc., has blurred the lines between work and personal time.The “Always-On” Culture: Many workplaces foster a culture that values constant availability and responsiveness. This can lead to burnout and stress. The rising cost of living and job insecurity can force individuals to work longer hours or take on multiple jobs, leaving little time for personal pursuits.Societal Expectations: Societal norms often place unrealistic expectations on individuals to excel in both their careers and personal lives.The Rise of Remote Work: Although remote work can offer flexibility but fails in establishing boundaries between work and home.Personal Ambitions: Driven individuals may struggle to prioritize personal life over career goals.Changing Family Structures: Dual income households, single parenthood or caring for elderly relatives are responsibilities, making it difficult to manage work and family life effectively.Globalization: The globalized economy has intensified competition in the workplace, leading to longer working hours and increased pressure to perform.Infrastructural Challenges: Especially for India and in many other countries, the road, rail, or metro network is not streamlined for fast commuting. The precious working hours are lost in traffic jams, and this severely hampers work-life balance.Why the Need for Work-Life Balance?Work-life balancing means balancing the following aspects of life:* Mental, physical and emotional well-being: This involves prioritizing sleep, nutrition, and exercise. Neglecting these fundamental needs can lead to burnout, decreased productivity, and compromised overall health. It can impact physical, mental and emotional health.* Social Well-being: This encompasses nurturing relationships with family and friends, participating in community activities, and maintaining a sense of belonging. Time dedicated to family and friends strengthens bonds and provides essential social support.* Professional Well-being: This involves finding meaning and purpose in work, setting realistic goals, and maintaining healthy boundaries between work and personal life.Employer’s Role in Work-Life BalanceEmployers play a critical role in fostering a culture that supports work-life balance. This can be achieved through the following measures:Promoting a Culture of Flexibility: Offering flexible work arrangements, such as remote work, flexible hours, and compressed workweeks.Encouraging Time-off: Promoting the importance of taking vacations and time-off to recharge.Providing Employee Wellness Programs: Offering programs that support employee physical and mental well-being, such as stress management workshops and fitness classes.Leading by Example: Leaders should model healthy work-life balance practices and encourage their employees to do the same.Reducing Workload: Where possible, workloads should be reduced to prevent burnout.Providing Adequate Time for Breaks: Breaks during the day are very important for mental and physical well-being.Changing the Method of Wages: Focus on outcome-based work instead of time-based work. Instead of traditional in-time/out-time calculations, performance and deliverables become the primary basis for remuneration.Good HR policies: Clear policies are required for workers and general office staff, including defined limits on overtime hours and assured minimum wages for overtime work.However, a negative practice observed in some Indian workplaces is the expectation that subordinates should not leave the office before their seniors. Often, employees remain at work without productive tasks merely to comply with this unwritten convention, even when supervisors may be engaged in personal activities. Such unproductive time-wastage in the name of hierarchy or tradition should not be encouraged.Work-Life Balancing during Different Phases of LifeLife is fluid, and our needs fluctuate. Some weeks, work may demand more attention, while personal commitments may dominate on other days. Similarly, the phase of life also determines where the weightage of the work-life balance will lie — it will differ for students or for someone just building their career. Similarly, one with toddlers to manage will have a different equation from one at retirement age. Irrespective of any phase of life, a minimum time is needed towards life well-being, otherwise a person can get burned out and ruin the other remaining phases of life.Defining the Importance or the Role of Time in Work-Life BalancingBoth work and life are affected by:Quality or Efficiency of Doing ThingsThere is a continuous need to improve the efficiency and quality of the time spent either at work or in life.Unproductive WorkTime consumed in activities with no contribution towards one’s purpose of life, like too long commuting time between home and workplace, wasteful/excessive scrolling of social media or watching excessive TV etc need to be reduced as it is unproductive work.Idle TimeTime consumed in doing nothing, like too long sleep, etc, may be termed as idle time, and it needs to be converted into usable time.Improving efficiency, identifying and reducing unproductive time, and idle time is a continuous process, and one will always find areas of improvement. This extra time generated by improving efficiency, or by reducing unproductive time or by reducing idle time can be used for either work or for life.Explaining Work-Life Balancing among various Categories of PersonsCategory 1:For Students / Sports Persons / Self-Employed Businessmen or Professionals / Scientists or Researchers / Investors / Experts like Individual Contributors / Artists / Authors, etc.For such individuals, there is no question of an employer as they are self-employed, or career-oriented students and sportspeople. Their work is not monotonous. This category of personnel is not governed strictly by rules and law. These individuals are passionate about developing extraordinary skills and hence are self-motivated.At some point in their life, such individuals, because of the nature of their work, have to get more inclined towards work to produce outstanding results. But while achieving their goal, they are also supposed to give enough time to their health and well-being.Category 2:For Decision Makers / CEOs / Government Bureaucrats / Politicians, etc.For such individuals, there is always an employer or the voter who has elected them for a specific period. Such individuals are career-oriented, passionate and self-motivated about what they do. They are not governed strictly by the rules of the employer but rather more by deliverables and targets of performance. Their work is not monotonous; it is rather creative. They have liberty or flexibility in their working schedule. Their working hours cannot be protected by law.This class of employees are normally working at senior positions, and their decisions or work impact a large section of society. They are supposed to think about business or ways of improving service to their beneficiaries 24 hrs and are supposed to be available physically or on call at any point of time, to the service of their beneficiary. And because of the nature of their work, their work-life balance should be more inclined towards work at the cost of other activities, but not at the cost of their health and well-being.Category 3:For WorkersFor such individuals, there is always an employer. They are governed strictly by the rules of the organisation in terms of time, output and quality standards. On many occasions, these individuals do work for their living only, and the element of passion is minimal. Employers need to keep their workers motivated by providing job security and career opportunities, as their work is very monotonous.The role of the employer is highly significant here. It is critical to balance all three, i.e., (a) employees’ wellness, (b) wages and (c) efficiency, to achieve the win-win position for both employer and employee. While the employer should not exploit this category of workers or staff, the employee should also see that they give the maximum output for the time spent at the organisation. And because of the nature of their work, the work-life balance for them must be protected by law. Also, it is equally important for this class of employees that the time they get after work is well spent. Otherwise, the meaning of work-life balance would be wasted even if the law protects it.Category 4:General Office or Sales Staff / Supervisors / Jr Managers / Jr Government Employees, etc.For such individuals, there is always an employer. Normally, their working time is not regulated by law. A good number of these individuals are working only for a living. Like workers in category 3, their work is mostly monotonous, and so by giving job security, providing career opportunities can make staff motivated, which in turn can result in better output.It is this class of personnel who often talk or make noise about work-life balance. Sometimes they feel they are not paid enough, or sometimes they themselves are not career-oriented or sometimes their employer is exploiting them as they are more vulnerable.Category 5:For SpouseHow spouses can help each other in work-life balance:So, while we talk of work-life balancing, we also need to talk of sharing responsibility among spouses.When both husband and wife are workingIf the spouse is also working, then dividing the work at home between both, according to one’s expertise, would be a smart approach. Cooking, household chores, parenting responsibilities and caregiving often fall on women’s shoulders in many societies. Women who try to juggle both home and office without spouse support either over-stress themselves or fail to achieve their best at either one or both fronts. The task of striking a balance between home and office is, therefore, a more enormous challenge for the women workforce who have less support at home from their spouses.“I have so much admiration for women who are mothers, who balance family and work.”— BeyonceWhen the husband is only working, or the wife is only workingIn case one is working, and the other is staying at home, he or she who is not working should take more responsibility for work at home, as much as possible. This will generate more quality free time for each other, and chores will not feel like a burden to either partner.Summarising Work-Life BalancingWe all talk about saving the environment, emphasizing on energy, water, and soil, but hardly anyone talks about saving time. I would say, instead of talking too much about work-life balance, we should learn to save time by reducing unproductive time, minimising idle time, and improving efficiency—both at work and at home—and devote that saved time to quality family time or meaningful office work.Work-life balance is an art. Demanding fewer working hours, i.e., working 48 hrs a week, does not guarantee a better work-life balancing as one may waste it as idle time or unproductive time. Even working 70 hrs a week, you can balance your home life and achieve excellence in office work. One needs to master this art. We need to make our lives better by effectively utilizing the time we have at home, with family and to recharge ourselves. It’s not just about the quantity of time you spend with your loved ones or staying at home. It is the quality time spent that will matter to achieve the best result of work-life balancing.Let us not look at work and life as if they are opposed to each other. Let us not over-negotiate work time and ruin one’s career. Let us not stress out and burn out, while compromising health and family. Both aspects are equally important, and we need to integrate them to give a feeling of satisfaction with the time spent in each area of life. It is important to note that the debate surrounding work-life balance is complex and evolving, with varying perspectives on the optimal approach. Work-life balance is not a luxury but a necessity for thriving in today’s fast-paced world.“When you have balance in your life, work becomes an entirely different experience.”— Cara DelevingneOne may choose work with limited working hours, or one may work hard to gain expertise or financial stability; however, balancing these choices with mental, social, and physical well-being, based on one’s personal dynamics, is equally important. With every work-life choice one makes, there are consequences. A single wrong choice or decision can adversely impact one’s career opportunities or life at home.◆◆◆Author may be reached atchaplotrajeshug@gmail.com and eboard@icai.inFebruary 2026 www.icai.org
Theme
Ep. 81 — Startups and India’s Economic Transformation: The Expanding Role of Chartered Accountants
CA Journal
· July 2026
00:00
--:--
Startups and India's Economic Transformation: The Expanding Role of Chartered AccountantsStartups are no longer a buzzword; they have become a part of our daily lives. We can see why the term startup revolution feels more real today than before. A transformation is happening now. Families that once pushed children toward professions such as engineering, medicine, law or government service now celebrate risk-taking as a real career choice. The startup revolution is driving a transformation in the Indian business landscape, reflecting how families are increasingly valuing risk-taking. We can notice that discussions around seed funding, valuation, and acquisitions take place in company boardrooms, while conversations about startups are equally common in college canteens, co-working cafés, group discussions, and industry networking spaces. This goes on to show that Startups are changing the identity of the country.We can see transformation in the decisions individuals make each day. Groceries arrive at home within minutes of an order placed through a quick-commerce app. Cab services anticipate the need for mobility even before it arises. Food aggregators deliver meals at all hours.It can be seen that India today is home to one of the fastest-growing startup ecosystems in the world. The number of startups has grown rapidly, and unicorn valuations have risen at a speed that earlier seemed impossible for a developing economy with regulatory constraints. The spread of entrepreneurship beyond the cities is also noteworthy. Cities that were once unknown to venture capital firms are now places for ideas. These cities may be manufacturing hubs, college towns, or new technology clusters that get help from state incentives.Today, India proudly stands as the third-largest startup ecosystem in the world, with nearly 125 unicorns and thousands of early-stage ventures emerging not just from metros but also from Tier-2 and Tier-3 cities. More importantly, there has been a cultural shift. Young Indians are no longer asking, "Where will I get a job?" Instead, they are asking, "What problem can I solve?" In doing so, they are creating jobs for many others. For years, parents encouraged their children to get stable government or corporate jobs. That mindset is now changing. Rather than prioritizing job security, young professionals want to create job opportunities for other people, address problems in industries, and use technologies to solve challenges. This shift shows renewed confidence among the youth and highlights their aspiration to become creators instead of just consumers of global technology.Decoding the Startup Ecosystem and its DefinitionIn professional practice, especially for Chartered Accountants, clarity matters. Not every new business qualifies as a "startup" in the legal or policy sense.Under the DPIIT framework, a startup must satisfy specific conditions. It must be less than ten years old, structured as a private limited company, limited liability partnership (LLP), or registered partnership, and its turnover must not have crossed ₹100 crores in any financial year. Most importantly, it must be innovation-driven, working on a product, process, or service with scalability and the potential to generate wealth and employment.A business formed by simply splitting or restructuring an existing entity does not qualify. This distinction is crucial. Many founders often discover too late that their structure makes them ineligible for benefits they were counting on.This is where the CA's role begins, not at the time of audit, but at the very inception of the idea. One correct decision at the structuring stage can unlock years of tax benefits and government support.Government as an Enabler, Not Just a RegulatorThe Startup India initiative, launched in 2015, changed the tone of policymaking. Entrepreneurship was no longer treated as a risky deviation from stable employment but as a national priority. The government's approach rests on three pillars: funding support, regulatory ease, and digital infrastructure.Navigating the Tax Holiday: Section 80-IACSection 80-IAC offers eligible start-ups a 100% tax exemption on profits for three consecutive years out of their first ten years. On paper, it sounds straightforward, but in practice, it is not. Beyond DPIIT recognition, start-ups must clear scrutiny by the Inter-Ministerial Board (IMB), which evaluates whether the business is genuinely innovative. Documentation, audits, timely filings, and compliance discipline become non-negotiable.In order to successfully claim the deduction under Section 80-IAC, startups must follow a clear and structured process:Obtain DPIIT Recognition and Section 80-IAC Eligibility Certificate: The startup must first apply for DPIIT recognition through the official portal, submitting required documents such as the certificate of incorporation and details of its innovative business model. After DPIIT recognition, the Certificate of Eligibility must be obtained from the Inter-Ministerial Board (IMB).Tax Audit and Form 10CCB: The startup's accounts must be audited by a Chartered Accountant. The audit report must be submitted in Form 10CCB, which includes details of the profits and the calculation of the deduction under Section 80-IAC.File the Income Tax Return (ITR): The ITR should be filed by the due date, including the details of the 80-IAC deduction claimed under the Chapter VI-A deductions section.The Startup India Seed Fund Scheme (SISFS), an oxygen tank for ideation, ensures that many promising ideas do not die, not because they lack merit, but because they run out of money too early and was designed precisely to address this gap.The Startup India Seed Fund Scheme (SISFS), an oxygen tank for ideation, ensures that many promising ideas do not die, not because they lack merit, but because they run out of money too early and was designed precisely to address this gap. With an outlay of ₹945 crore, the scheme provides grants of up to ₹20 lakh for proof of concept and prototype development, and debt or convertible instruments of up to ₹50 lakh for commercialization and scaling. Eligibility conditions are strict, and funds are routed through approved incubators. Preparing a credible fund utilization plan, milestone mapping, and financial projections is essential. This is where a CA quietly adds immense value, bringing structure, realism, and credibility to the founder's vision.The CA's advisory role is paramount in confirming eligibility. The startup must be DPIIT-recognized, incorporated not more than 2 years ago at the time of application, and have at least 51% Indian ownership. Furthermore, it must not have received more than ₹10 lakhs in monetary support from other government schemes. The CA assists in crafting a compelling application, which requires detailed financial statements, a clear fund utilization plan, and a milestone roadmap. The incubators evaluate applications based on novelty, team strength, and the feasibility of the technical claims. The CA ensures the financial presentation is robust, credible, and aligns with the scheme's evaluation criteria.It can be seen that financial support comes with reforms that aim to cut the compliance burden and build trust in the ecosystem. In the past, inspection mechanisms made new businesses feel apprehensive about harassment or unexpected penalties. Now, companies can self-certify labour and environmental compliance requirements for a specified period. Insolvency and exit processes now make business closures quicker. Intellectual property laws have also been strengthened, with rebates on patent filing fees, faster procedures, and access to facilitators who help with applications. These measures encourage the founders to focus on protecting innovation. Protecting innovation attracts quality investors. The government has also provided significant non-fiscal support, which are as follows:Intellectual Property (IPR) Rebate: Startups receive an 80% rebate on patent filing fees, along with a panel of facilitators to assist in the process. Protecting intangible assets such as patents and trademarks is fundamental to a startup's valuation.Regulatory Relaxation: In the case of labour laws, no inspections will be conducted for a period of 5 years.Startups shall be allowed to self-certify compliance with 6 labour laws and 3 environmental laws through a simple online procedure.Closure/Winding up will be a quicker process, completed within just 90 days!In the case of environment laws, startups that fall under the 'white category' (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.The BHASKAR Platform: The Bharat Startup Knowledge Access Registry (BHASKAR) aims to be a single, centralized database connecting all stakeholders, including founders, investors, mentors, and policymakers. The CA guides startups to leverage this network, enhancing their credibility and access to resources.Startups receive an 80% rebate on patent filing fees, along with a panel of facilitators to assist in the process. Protecting intangible assets such as patents and trademarks is fundamental to a startup's valuation.From Compliance Agent to Growth PartnerIt can be noticed that the profession of Chartered Accountancy has grown alongside the growth of startups. In the past, the Chartered Accountant focused primarily on tax, audit, and bookkeeping. Today, the entrepreneurial world asks the Chartered Accountant to do more. The Chartered Accountant now works as an advisor for business decisions at every stage. The Chartered Accountant builds budget plans, checks cash flows, maps risks, creates models, runs audits, prepares MIS reports, performs valuation, advises on funding tools, plans cap-table structures, and designs investor communications. Many first-time founders do not know these frameworks and try to grow without guidance. Rapid scaling can bring chaos to records and also lead to governance deficiencies. Chaos in records and governance deficiencies can threaten the survival of the business even when revenue grows.Deal structuring is a part of a startup's life and requires professionals who understand both the rules and the business. Investors seek returns while also expecting transparent accounting and a fair price, whereas founders want money but want to retain control. Striking a balance requires people who know the rules and the business. Chartered Accountants who advise founders during deal structuring ensures that agreements, share issuances, convertible instruments, and funding terms follow tax rules, FEMA regulations, and long-term plans. It is advisable to startups to plan their structure carefully, as poor planning can lead to faster-than-expected dilution, which in turn reduces the founders' ability to protect their vision.The profession of Chartered Accountancy has grown alongside the growth of startups. In the past, the Chartered Accountant focused primarily on tax, audit, and bookkeeping. Today, the entrepreneurial world asks the Chartered Accountant to do more.Artificial Intelligence, machine learning platforms, predictive analytics, automation software, and cloud-based ERP solutions are tools that CAs use every day. CAs used to reconcile hundreds of entries by hand. Now, CAs use automated checks to spot anomalies. CAs used to prepare MIS by hand. Now, dashboards auto-generate real-time insights for decision-makers. These developments let CAs deliver value and move from a compliance practice to a strategic advisory role. Automation is not a threat. Instead of fearing automation, the profession is learning to embrace automation as a partner.The profession is redirecting its focus toward interpretation, planning, and governance.New areas now need advisory systems. Deep-tech ventures working in AI, machine vision, or robotics need cost plans for computer setup, data collection, model learning, and ongoing improvement. Green-tech ventures need advice for carbon tracking, reporting, subsidy utilization records, and financing. Agri-tech ventures need guidance on buying prices, supply chain grouping, FPO structuring, and taxation of primary produce. Healthcare technology ventures must also comply with service delivery models, hybrid pricing plans, and liability exposure. It can be noticed that travel technology enterprises need expertise in cross-border taxation. Travel technology enterprises also need expertise in testing pricing algorithms and managing fluctuating forex exposures.All of these developments point to one fact i.e., innovation works best when it rests on the foundation of governance, compliance, and financial discipline. Ideas alone do not build a lasting business. Trust comes from conduct, sound controls, and accurate financial disclosures. Trust grows when a CA's work is honest and well-checked. These expectations elevate the CA's role from a mere compliance agent to an integral part of the startup ecosystem.The Chartered Accountant can support this journey. The Indian CA curriculum provides knowledge in tax, finance, audit, and corporate law. When the Chartered Accountant adds the right mindset, technology skills, and sector focus, they become a guide. The Chartered Accountant must now grow both in skill and in thinking. We should stop seeing the Chartered Accountant as a watchdog or compliance enforcer. Instead, start seeing the Chartered Accountant as an architect of trust and a growth partner in the startup journey.In my view, India's economic future depends on the ability to nurture entrepreneurship and maintain honesty and responsibility. If startups fail, it is because the market did not accept the innovation, not because of governance problems. If startups succeed, they must follow the rules, not exploit regulatory loopholes. This development strengthens the economy.ConclusionIndia's journey as a startup powerhouse has only just begun. The immense potential of our youth, combined with the government's digital and financial infrastructure, promises a future brimming with opportunities. However, ideas alone do not build economies; compliant, financially disciplined execution does.The Chartered Accountant is not merely a service provider in this journey; we are the architects of trust and scalability. By mastering complex funding schemes like SISFS, navigating the tax maze of Section 80-IAC, and specializing in future-ready domains such as ESG and AI governance, CAs transform raw, high-risk ideas into stable, profitable, and global business models. It is a time for our profession to embrace innovation and move beyond the ledger to the boardroom, seizing the massive opportunity before us. Let us embody the spirit of the ecosystem and carry on with the mission "Har Har Startup! Har Ghar Startup!" (A Startup in Every Street, an Entrepreneur in Every Home).Referenceshttps://www.startupindia.gov.in/https://seedfund.startupindia.gov.in/https://economictimes.indiatimes.com/https://www.startupindia.gov.in/bhaskarAuthor may be reached at mukullamba62@gmail.com and eboard@icai.inJanuary 2026 | www.icai.org | Pages 23–26
Theme
Ep. 82 — The 21st Century Uprising of India as a Global Innovation Leader
CA Journal
· July 2026
00:00
--:--
The 21st Century Uprising of India as a Global Innovation LeaderGone are the times when there used to be underdog stories about India rising to the global stage and becoming a leader. Gone are the times when “The Great Indian Dream” was just an aspiration, or at best, a projection. Today, we are living in the era of Indian excellence, and that too across a number of sectors. India leads the bandwagon of innovation in technology, manufacturing, logistics, and a number of services.While it's still a bit away for India to be on the absolute top in everything, no matter what industry you consider, India would be in the top 5, or even top 3, to watch out more often than not.Indian enterprises are no longer here only for participation; they are here to win and that too, with domination. Today, they are playing a key role in shaping global markets and paving the way for the future. What is actually interesting, or rather almost shocking, is not the speed at which India has grown, but the nature of that growth. If you think about it, post-independence India has never had a huge chunk of capital, bankable inherited privileges, or even a pre-existing pool of talent. What it did have was sheer discipline in entrepreneurship, effortless problem-solving ability, and the biggest difference maker in the Indian success story — efficiency that the West could only dream of achieving.Amidst this phase of transformation, there’s a whole new generation of entrepreneurs in India who are building sustainable systems. They understand that this game is not to be won by building corporations, chasing trends, or mirroring an existing success model. Instead, they are identifying gaps in systems that have been taxing for decades, and fixing the real problem — the system itself. At the heart of it all is technology. They are combining their sectoral expertise with next generation technology and, gradually, they have stopped playing by the textbook and created innovative solutions that the world, today, banks heavily upon.While it may sound a little over the top, India has defied odds with its success in systems like UPI (United Payment Interface), Aadhaar Cards, and world class pharmaceutical manufacturing that is exported all across the globe. Not only that, with moves like global tech giants shifting their manufacturing to India, ISRO’s historic success with Chandrayan, the unprecedented growth of quick commerce, and their rising EV-ecosystem, the world is well-aware of India’s arrival at the leadership table.What is staggering about all of this is how efficiently it was built. Limited capital, price-sensitive markets, market fragmentation, and a complex regulatory structure — all of these obstacles didn’t bring the Indian entrepreneurs down. Instead, they thrived under pressure, only to use these conditions to their advantage later. Because of these constraints, Indian businesses and brands today ensure clarity, transparency, and efficiency. Today, you cannot get away with selling a substandard product to an Indian consumer. Businesses need to provide incredible value, quick delivery, and justify their price tag every step of the way. If a business can create a buyer’s haven, it can also create an entrepreneur’s haven. This has become a mindset today, rather than a consequence of the system. That is exactly why the Indian growth story includes contributions from both private startups as well as government backed infrastructure.At a times when global markets are becoming increasingly unstable, the Indian model has proved to be quite solid and sustainable. Indian entrepreneurship is perfectly aligned with the needs of the global economy, and it is pushing qualities like scalability, efficiency, and result-driven solutions.Especially over the last decade and a half, India’s startup ecosystem has grown manifold. The focus is shifting from products and marketplaces to infrastructure and platforms. This shift is part of the “build systems, not companies” mindset. Indian businesses are continuously boosting the growth of platforms that enable better planning, execution, analysis and optimization, ultimately allowing the entire industry to function better.“ At a times when global markets are becoming increasingly unstable, the Indian model has proved to be quite solid and sustainable. Indian entrepreneurship is perfectly aligned with the needs of the global economy, and it is pushing qualities like scalability, efficiency, and result-driven solutions. ”This shift is not merely an observational analysis. It is quite evident across a number of sectors such as finance, logistics, education, media, and commerce. This is a major reason why not only local markets, but also other consumer bases are leaning towards solutions from Indian enterprises owing to their global relevance. They are not really trying to be global. They are global by design. This is because India is spearheading the growth wagon.Artificial Intelligence is another term that rarely misses a conversation in the Indian context. Afterall, it has played a significant role in the country’s current success and will continue to power Indian innovations in the future too. Today, AI is no longer a buzzword or something that we are supposed to prepare ourselves for. It’s not going to arrive. It has arrived, and it has changed everything. It impacts decision-making in nearly every major industry today. Whether it is prediction, personalization, optimization, learning, executing, or analyzing, AI is everywhere and undeniably so.Image 1This is quite a significant development, especially when it comes to India. This is one of the first major waves in the past few decades that has not originated in the West first, but has spread across the world simultaneously. It could turn into either a catastrophe or an opportunity, depending on what you make of it. As far as India is concerned, it is the beginning of a golden age. A market that had mastered affordability, now also possesses unparalleled intelligence. How powerful is that combination?Moreover, it is taking the game to the next level by providing high-quality products and services at highly competitive prices. As a result, Indian startups have today become the number one choice for global clients.However, this age of innovation in India is also focusing more and more on decentralization. Entrepreneurship is not limited to Tier 1 metros. Founders from Tier 2 & Tier 3 areas are rising to global standards just as strongly. That is what the development of technology and the internet has given us over the last few years. It has enabled possibilities that were unimaginable for rural residents just a couple of decades ago. Geography is no longer a catalyst for success.At its heart, Indian entrepreneurship is rooted in a deep understanding of human behavior. We don’t say “Unity in diversity” for nothing. It requires incredible empathy, adaptability, and research to understand the diversity of Indian culture. And once that cultural understanding comes together with machine intelligence, magic happens!Having the right balance is what fuels the sustainability of this system. Only businesses that gain and maintain that balance will lead the future. AI is meant to enhance humans, not replace them. This is the philosophy at the core of brands that are making it big during this era of AI adoption.Another significant theme of the era we live in today is sustainability. Growth without discipline brings chaos. Therefore, it is very important that value governance, transparency, and long term planning remain at the core of our near future. Great technology combined with strong ethics is what earns global credibility.This firm belief in building systems is something that I have experienced personally. Over a decade ago, outdoor advertising in India was highly fragmented. It lacked structure, transparency, and effective ways to measure the performance of campaigns. Over time, we realized that our business would not find success merely by running campaigns, but by organizing them and creating an ecosystem. That belief has been at the centre of everything we have built.“ The next ten to twelve years are not going to be about catching up to speed, but about setting new benchmarks for building businesses. They will have to be future-ready, sustainable, efficient, and of course, value conscious. ”Today, we are focused on creating platforms that allow brands to plan, execute, and measure the success of their campaigns with a single tap. The lower the dependency, the better the experience.To add more structure and flexibility in the advertising field, we also developed an artificial intelligence based media planner where brands can develop their own media plans irrespective of location. As the owner of an advertising firm, my biggest dream is for advertisements to move beyond the limitations of location, network, and scalability, and reach people who are ready to grow and develop.Our AI media planner enables brands to independently investigate and choose the media they would like to advertise on, and our AI media optimizer smartly helps the brand to optimize the media mix. Brands can now view the options, weigh their choices, and plan their campaigns depending on their needs, without any manual intervention.It does not substitute strategic thinking; in fact, it reinforces it. It enables brands to make informed decisions about planning and entering the advertising ecosystem because of its simplicity and the absence of entry barriers.Another crucial aspect of the ‘Digital India’ campaign is the ability to make use of fragmented public knowledge in terms of intelligence within minutes. This is because AI-based applications can now assist businesses in understanding who exactly they are communicating with. Through the development of ‘Know Your Customer’ by Excellent Publicity, we are now capable of understanding who we are engaging with, including their professional background, organizational role, and industry perspective, long before the conversation has even commenced. This is achieved through the use of 5 LLMs and 2 search engines.Image 2It also becomes a great ice-breaker and a statement of intentions. It reveals that we are truly interested in the business, that we have taken time to learn about the person behind the position, and that we value a two-way communication process rather than merely listening to elevator pitches.Know Your Customer is an improvement to human judgment and not a substitute for it. This allows our teams to focus on strategy, relevance, and relationship building, so that meetings become informed conversations and opportunities become partnerships.What happens next, in my opinion, depends on three key factors.First, constrained innovation. By constrained, I mean the constraints that encourage you to find creative and efficient solutions without suppressing the idea.Second, intelligence powered by AI but not dependent solely on it.And third, ethical management.Indian founders understand this complex scenario better than most, having faced a lot of these challenges themselves. Now, with AI as their thinking partner, India absolutely can and will become the next global leader.Let me share a recent experience of mine that reinforced this belief. I was travelling to Ranchi for a meeting when my bag suddenly tore. After the initial few moments of habitual panic, I took out my phone and looked up some bags on a quick commerce app. Ten minutes later, all my stuff was in a brand new bag. This is what I mean when I say that India is bringing together cultural understanding with advanced technology. And it’s all instant. There’s no waiting in lines or filling up forms or describing your problems to an expert anymore. One tap, and voila! It’s almost a norm today in India and soon will be in the rest of the world.The next ten to twelve years are not going to be about catching up to speed, but about setting new benchmarks for building businesses. They will have to be future-ready, sustainable, efficient, and of course, value conscious. The world is more connected than ever today, and India is undeniably rising as the leader of this new age. And that, more than anything else, is what will define India’s global leadership.◆◆◆Author may be reached ateboard@icai.inJanuary 2026 | www.icai.org | 29
Theme
Ep. 83 — India’s Startup Ecosystem: Advancing Towards the Milestone of ‘VIKSIT BHARAT@2047’
CA Journal
· July 2026
00:00
--:--
India's Startup Ecosystem: Advancing Towards the Milestone of ‘Viksit Bharat@2047’Over the years, with transformations motivated by the entire development and upsurge of an enthusiastic professional workforce, the ‘Startup Ecosystem of India’ has grown rapidly. Now, it is documented as the third-largest startup ecosystem in the world. When India is striving to realize the vision of ‘Viksit Bharat’, this ecosystem stands out as an important milestone. This article outlines the key components and shining signals of India's startup ecosystem, highlights cutting-edge initiatives taken by the Central Government, and discusses the major challenges faced by Indian startups.IntroductionWhat a startup ecosystem is, and why India's is growingThe term ‘startup ecosystem’ refers to a physical or virtual network of individuals and organizations that work collectively through shared events, mentorship and interactions to create and nurture a new model of business, i.e., ‘Startups’. These organizations may be in the form of educational institutions, funding firms, legal and financial service organizations, research groups, private corporations, government agencies, media, etc. In addition, incubators, accelerators and angel investors are also essential components of a startup ecosystem.India's startup ecosystem has experienced remarkable growth since 2016, driven by the country's rapidly booming business environment. During the last nine-year period (2016–2024), some metropolises of India like Mumbai, Bengaluru, Hyderabad and Delhi-NCR have arisen as epicenters of startup companies. However, this ecosystem is now witnessing a significant shift towards Tier II and III cities. These cities offer abundant opportunities, along with a young and skilled workforce and a supportive environment. With the help of dynamic employees, government initiatives, and affordable internet access, India has firmly recognized itself as the third-largest vibrant startup ecosystem in the world.In the present wave of tech-based developments, India's startup ecosystem serves as a driver of technological advancement and innovations. It plays a transformative role in mounting economic growth, generating extensive employment opportunities, encouraging digital adoption, boosting GDP growth, stimulating climate financing, providing an R&D environment, etc. Rural-focused startups are improving the living standards of people by addressing critical gaps in agriculture, education and healthcare. Additionally, startup companies in India attract substantial investments in the form of Foreign Direct Investment (FDI), Private Equity (PE), Angel Investor and Venture Capital.When India initiated its journey towards becoming a ‘Viksit Bharat’ (developed country) by 2047, the importance of the startup ecosystem became self-evident. This ecosystem has a great transformative capacity to become a milestone for developed India. It can provide a strong foundation along with practical opportunities to achieve the ambitious goals outlined in the ‘Approach Paper’ on ‘Vision for Viksit Bharat@2047’, released by NITI Aayog on July 27, 2024. This paper underlines that, “As for the economy, to become a developed nation, we need to strive to be a USD 30 trillion economy by 2047 with a per capita income of USD 18,000 per annum. The GDP would have to grow nine times from today's USD 3.36 trillion and the per capita income would need to rise 8 times from today's USD 2,392 per annum.” In the pursuit of these significant targets, India's startup ecosystem has consistently played a vital role.As on 9th December 2025, 2,03,463 startups in 779 districts of the country have been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). In these startups, over a hundred unicorn companies play a vital role in boosting domestic progress through their innovations and resilience. A ‘unicorn startup’ is a privately owned company having a scalable business model valued at over USD 1 billion. It is estimated that the number of unicorns in India will reach 250 by 2030.2,03,463DPIIT-recognized startups (9 Dec 2025)779Districts covered100+Unicorn companies today250Unicorns projected by 2030Fig. 1Startup Ecosystem Value to Gross Domestic Product in 2024 (in %)U.S.14.1U.K.13.8India10.8South Korea9.8Canada8.6France5.9Brazil5.8Australia5.7Germany5.2China4.0Indonesia3.8Argentina2.1Turkey1.8Japan1.7Mexico1.6South Africa1.2Russia1.2Saudi Arabia1.0Italy0.802468 10121416SEV to GDP (in %)Source: Startup Genome, 2024Key Components of the Startup EcosystemCutting-edge government initiativesTo support and nurture the startup ecosystem, the Central Government has introduced a series of advanced initiatives. Some contemporary initiatives may be pointed out as below:Under the Credit Guarantee Scheme for Startups (CGSS), 2022, INR 555.24 crores in loans were granted to 235 startups, including INR 24.60 crores to 18 women-led startups as of October 31, 2024 (data released by DPIIT on January 15, 2025).Fund of Funds Scheme (FFS), 2022, for startups having a corpus of INR 10,000 crores managed by SIDBI.Mentorship, Advisory, Assistance, Resilience and Growth (MAARG) Portal, 2022, a one-stop platform to provide personalized, efficient and expert guidance along with customizable mentorship for startups across diverse sectors and stages.National Deep-Tech Startup Policy, 2023, aims to thrive and address the exclusive and multifaceted challenges faced by deep-tech startup companies. It also provides guidelines to these companies regarding innovations, research and development.To establish a seamless business regulatory framework across India, the Business Reforms Action Plan-2024 was introduced.To empower student entrepreneurs by facilitating their meeting with capital providers, policy makers and big business houses, ‘UDYAMOTSAV 2025’ was organized by the Ministry of Education's Innovation Cell and AICTE in January 2025. As part of ‘National Startup Week, 2025’, it was held across 14 cities in India.National Startup Day is celebrated on January 16th every year. On the 9th Startup Day celebration, major DPIIT (Startup India) initiatives were launched, i.e., Bharat Startup Grand Challenge and PRABHAAV Factbook (Powering a Resilient and Agile Bharat for the Advancement of Visionary Startups), to mobilize private capital, particularly to support startups in Tier-II and Tier-III cities.Launched BHASKAR (Bharat Startup Knowledge Access Registry), 2024, a digital platform which brings entrepreneurs, mentors, investors, service providers and government bodies onto a unified platform. Through unique BHASKAR IDs and personalized dashboards, the platform enhances visibility, networking and discoverability. As on 9th December 2025, 6,49,482 BHASKAR users are registered with Startup India.The DPIIT organized the 2nd Edition of ‘Startup Mahakumbh-2025’ — India's largest startup showcase with 2,923 exhibitors, 103,349 exclusive attendees and over 2.5 lakh exhibition footfall, with the involvement of 60 countries. ‘Startup Mahakumbh – 2026’ will take place on March 9–10, 2026, at the Yashobhoomi Convention Centre in New Delhi. Additionally, the DPIIT is organizing a “Startup Mahakumbh Road Show”, scheduled from December 5, 2025 to January 23, 2026, across 7 cities like Mumbai, Kolkata, Bangalore, etc.The Central Government has reduced compliance burdens and relaxed norms for startups by offering:Tax exemptions on capital gains and investments above market value.“White Category Startups” can self-certify compliance in respect of three environmental Acts.Startups Intellectual Property Rights Protection (SIPP) Scheme for facilitating fast-track filing of patents, trademarks, designs and other IPRs, with an 80% reduction in the cost of filing patents.Simplification of reverse flipping standards (September 2024).Abolishing the Angel Tax from FY 2025-26.Self-certification (through the Startup mobile app) with 9 Labour Laws and 3 Environment Laws.Income Tax Exemption on profits under Section 80-IAC of the Income Tax Act.Atal Innovation Mission (AIM) — this mission includes ‘Atal Tinkering Labs’ at the school level to foster creativity, ‘Atal Incubation Centers’ to build a robust startup system, and ‘Atal Community Innovation Centers’ to serve unserved and underserved regions.Budget (2025-26) Proposals, projected on 1st February 2025 by Finance Minister Smt. Nirmala Sitharaman in her eighth consecutive Union Budget:Extension of the time limit by another five years u/s 80-IAC for eligible startups incorporated before 1st April 2030.A ‘Deep Tech Fund of Funds’ will be explored to catalyze the next generation of startups.A new ‘Fund of Funds’ with a fresh contribution of another Rs. 10,000 crores will be set up.The credit guarantee cover for startups will be enhanced from Rs. 10 to 20 crores.Fig. 2Major Components of the Startup EcosystemMajor Components of Startup EcosystemEducational InstitutionsPrivate CorporationsIncubators & AcceleratorsAngel Investors & Fund ProvidersGovernment Agencies & MediaService OrganizationsSource: Department for Promotion of Industry and Internal Trade (DPIIT)Emerging TrendsHow the ecosystem has transformed over nine yearsIncreasing number of tech-driven startup firms Startup companies have leveraged emerging technologies such as Artificial Intelligence (AI), blockchain, Language Models (LM) and the Internet of Things (IoT) to provide solutions to domestic and global problems. These technologies are transforming healthcare, e-commerce, q-commerce, finance and logistics. Data shared by the Press Information Bureau, Delhi (press release — 29th May 2025) confirms that 10 cutting-edge Indian startups have been selected under MeitY for the prestigious AI Accelerator Program in Paris (France) — a four-month program providing global market expansion, mentorship and investor networks. India AI Mission's partnership with Station F and HEC Paris marks a significant step in strengthening India's innovation ecosystem.Recognizing women leadership The Government of India is executing schemes such as the Women Capacity Development Program (WING), Virtual Incubation Program, Super Stree podcast, State Workshops for Women Entrepreneurship and Startup India Hub. As a result, as of 30th June 2025, 87,285 startup companies with at least one woman director/partner are contributing to the economy — nearly half of the 1,80,683 startups of India.Becoming a job provider podium India's startup landscape is becoming a new platform for jobs. It provides employment opportunities for IP/Patent Executives, data analysts, project managers, machine-learning engineers, robotics programmers, software architects, content creators, growth hackers, customer relationship managers, design managers, user researchers, visual designers and mobile app developers (Android/iOS). According to DPIIT data, recognized Indian startups have created 17,69,605 direct jobs since 2016, growing at over 25% year-on-year. In 2023, startups provided 3,92,181 jobs compared to 2,74,920 in 2022; in 2024, 3,51,921 jobs were provided. It is estimated that they could employ over 50 million people by 2047.Watching towards stock exchanges Favourable stock market sentiment attracts startup companies for collection of funds. In 2024, INR 29,000 crores were collected through Initial Public Offers (IPOs) by 13 startup companies. As of October 2025, 10 startups have been listed on the stock exchanges — a shining signal of the maturity of India's startup ecosystem.Accrescent role as wealth creators Startups give shares through an Employee Stock Option Plan (ESOP) to uplift the economic standard of employees, generating a sense of proprietorship. In 2024, shares valued at INR 1,470 crores were distributed by 23 startups to nearly three thousand employees.Attracting domestic investment Earlier, global venture capitalists were the main source of financing. Startups now have outstanding funding from domestic investors, including Qualified Institutional Buyers (QIBs), nationalised banks and State Finance Corporations. At present, more than 80% of funds are collected through domestic investors. Schemes like CGSS (implemented by NCGTC), the Atal Innovation Mission (launched by NITI Aayog) and the Startup India Seed Fund Scheme (SISFS) play a vital role here.Strengthening the arena of regional startups Capacity-building workshops are organized year-round in Tier-II and Tier-III cities under the ‘States Startup Ranking Framework’. These workshops assist States in developing local ecosystems for young entrepreneurs, with special handholding sessions for incubators.Stepping up towards sustainable solutions Prominent startups are moving towards waste management, renewable and clean energy, green-tech and organic farming — playing a vital role in sustainable development, an essential element for Viksit Bharat.Fig. 3Industry-wise job creation in Indian startups (as of 31st January 2025)2.10 LakhsIT services1.51 LakhsHealth care and Life sciences96,474Professional and Commercial services94,311EducationSource: Press Release by PIB, Ministry of Commerce and Industry, GOI, on 31st January 2025.New roles of women entrepreneurs are emerging regularly in the corporate sector, including startups. The Government of India is executing specific schemes and programs like the Women Capacity Development Program (WING), Virtual Incubation Program, Super Stree podcast, State Workshops for Women Entrepreneurship and Startup India Hub, which are supporting women-led startups.Major ChallengesOperational barriers on the growth pathDespite remarkable growth, India's startup ecosystem faces many operational challenges/problems, some of which are:Selection of appropriate business structure Due to the involvement of so many factors like the nature of business, regulatory attentions, growth strategies, cost of operation, peripheral capital need and plans for profit sharing, founders/owners cannot make the right decision easily.Compliance with rules and regulations Complex rules governed by different laws and Acts are a key challenge. Time-consuming activities like obtaining permits, approvals and licenses, acquiring land and buildings and purchasing foreign machinery create a depressing atmosphere for many budding entrepreneurs. Obedience to SDGs, CSR and ESG also needs attention. The State Single Window Clearance Portal should contain all 200 services, like Tamil Nadu.Protection of Intellectual Property Rights (IPRs) Due to lesser knowledge and ignorance, protection of high-tech uniqueness and innovation in the form of IPRs is a significant problem for startups.Problems in respect of employment agreements Unclear terms and conditions regarding job profile, compensation, benefits, participatory management, operation of competing business and claiming of IPRs can create conflicts with employees, which sometimes end in legal battles. Founder's agreements and third-party agreements also create obstacles.Challenge of fund management Due to a shortage of working and fixed capital, Indian startup companies frequently encounter funding issues. It is more challenging for early-stage startups, because VCFs, angel investors and other capitalists consider the degree of high risk involved. New startups don't have credit platforms and sufficient security properties for obtaining required funds. Nationalised banks should fund these startups.Shortage of skilled personnel force Startups cannot attract trained and efficient employees due to a lack of competitive pay and incentive plans, an absence of sufficient training facilities, uncertainty of future growth and a lack of job security. There is still a deficiency of AI professionals, data scientists and cybersecurity experts. State Skill Development Corporations should train them accordingly.Worrying about intense competition Thousands of startup companies are stressed to overcome the severe consequences of competition, which increases due to superior offerings, brand recognition, strategic alliances, changing technologies, innovative marketing methods, AI and ML-based production procedures and rising customer expectations. Startups should make use of the Government e-Marketplace to get more orders.As per data shared by the Ministry of Commerce & Industry, GOI, on July 25, 2025, 6,019 recognized startups have been categorized as closed and 59 recognized startups have been categorized as dormant. For this unfortunate situation, common reasons like insufficient funding, an unsustainable business model framework and a mismatch between the offerings and genuine market demands are held responsible. Nationalised banks should intervene and provide sufficient working capital.ConclusionIndia's startup ecosystem emerged as a catalyst for the nation's journey towards ‘Viksit Bharat’. It contributes to industrial growth, technological advancements, socio-economic transformation, sectoral innovations and employment. Moreover, it also adopts sustainable business practices to align with the SDGs of the UN as well as the key pillars of the vision of developed India.Despite achieving 3rd position at a global level, India's startup ecosystem is in its investigational stage, and so many financial and operational problems create barriers in the growing path of this landscape. To make India a global leader in the arena of startups, emerging opportunities should be explored, and existing challenges must be addressed through effective measures and long-term strategies. Continued contribution and the rapidly changing trends of this ecosystem will certainly lead the efforts towards accomplishing the goals of ‘Viksit Bharat’ by 2047.India's startup ecosystem emerged as a catalyst for the nation's journey towards ‘Viksit Bharat’. It contributes to industrial growth, technological advancements, socio-economic transformation, sectoral innovations and employment.ReferencesFinance Minister's Budget 2025-26 speech, Ministry of Finance, GOI.https://static.pib.gov.in (Press releases — December 25, 2024; February 1, 2025; May 29, 2025 and August 1, 2025)Financial Express, 16th January 2025, P-21 and 21st January 2025, P-8Business Standard (Hindi), 16th January 2025, P-10The Economic Times, 17th January 2025, P-14The Indian Express, 16th January 2025https://sansad.inhttps://startupmahakumb.co.inhttps://startupgenome.com/report/apexe-report-2024/introductionAuthors may be reached at sharmafalna1961@gmail.com and eboard@icai.inThe Chartered Accountant · January 2026 www.icai.org · Pages 886–891
Theme
Ep. 84 — IPO Surge and Public Market Evolution in Indian Startups: Structural Transformation of India’s Capital Markets
CA Journal
· July 2026
00:00
--:--
IPO Surge and Public Market Evolution in Indian Startups:Structural Transformation of India's Capital MarketsThe landscape of India's first public offering has radically changed since 2021, shifting towards a less niche exit path of established companies and toward an overall mainstream capital-raising strategy of high-growth startups. This article is a study that explores the IPO boom based on market dynamics, investor participation, as well as development of regulations. Based on the empirical data of India's 80 mainboard IPOs in fiscal 2025, which raised ₹1.63 trillion, this article concludes that the IPO boom in India signifies a structural change because of three forces, including the emergence of a domestically rooted investor base, increased financial discipline amongst startups, and active regulatory reforms by SEBI. Viewing case studies of some of the unicorns, it can be seen that the investor expectations on profitability and sustainable business models have changed drastically as compared to the growth-at-any-cost mindset of 2021.IntroductionThe global rise of the Indian startup ecosystem has been widely covered, but its development as a market destination has not been properly studied. During the 2010s, Indian entrepreneurs perceived foreign markets, especially those in the United States, as natural destinations of venture-backed exits. In 2021, an online platform for food ordering, restaurant discovery, and dining-out services named Zomato became the first unicorn to seek a domestic IPO; however, the story took a very different turn. The implications of this shift in the domestic market fundamentally altered how the Indian public market was perceived.The change is indisputable five years down the line. In the fiscal year 2025, 80 mainboard IPOs were done in India with a raise of ₹1.63 trillion, which was the strongest capital mobilization cycle in the country. Most importantly, investors within the domestic market are providing 75% of IPO funds, compared with 25% ten years ago. This reversal is an indication of the development of a self-perpetuating, self-determined capital market, not reliant on foreign flows to be authenticated or liquidated.The 2021 Inflection PointIn July 2021, Zomato's IPO of ₹9,375 crores at ₹76 per share (NSE) had 52.63% first-day listing returns, to ₹116 (opening price). This premium indicated that homegrown investors had gained confidence in the unprofitable technology firms, an impressive change. This was followed by an Indian omnichannel retail company, Nykaa, in November 2021, which shot up 79.4% between ₹1,125 and ₹2,018, achieving aspirational profitability. Another leading digital payment company, Paytm, which collected ₹18,300 crore at ₹2,150 per share, listed at ₹1,950 (NSE), a 9.3% loss, an indicator that investors' enthusiasm had definite boundaries.These three products were important firsts: home investors were able to value technology businesses with global-level multiples; investor interest in startup IPOs was real but discriminating; and valuations without profitability vehicles were still at risk. The fact that Paytm fell by 9.3% in the short run proved that market discipline had certain limits and that size alone was not going to make investors gung-ho.Table 1: Major Indian Startup IPOs (2021) – Inaugural Offerings Establishing Market DisciplineCompanyIPO YearIssue Price (₹)Listing Price (₹)IPO Size (₹ Cr)First Day Return (%)Zomato202176116.009,37552.63Nykaa20211,1252,018.005,349.7279.38Paytm20212,1501,950.0018,300-9.3Source: NSE/BSE Official Records, Goldman Sachs IPO Track Record, SEBI-registered data providersThe Profitability Pivot: Financial Discipline as Entry FeeBetween 2022 and 2023, with Paytm stock crashing and startup funding halting, investor hopes were summarized in profitability timelines. By 2024, this wisdom, which was established with difficulty, had percolated into the ecosystem. Businesses that were planning their 2024–2025 listings — Swiggy, Ola Electric, FirstCry — had their explicit focus on unit economics and path-to-profitability stories.Swiggy showed cyclic expansion in EBITDA margins; food delivery was profitable; FirstCry had unit economics, although it incurred losses; even Ola Electric had a runway to profitability, despite cash burn. This openness was a stark contrast to the 2021 growth-at-all-costs positioning. Regulatory adjustments by SEBI strengthened the expectations by introducing higher expectations of profitability of SME IPOs, which indicated that there was a market where profitable or near-profitable businesses could be floated in the public markets as opposed to an open cash burn subsidization.The Domestic Investor RevolutionThe biggest structural transformation regards the inversion of investor identity. As of 2020, 75% of IPO capital came as a result of foreign portfolio investors; by 2025, 75% was domestically sourced, i.e., retail investors, mutual funds, insurance companies, and pension funds.This change indicates a trend of several forces: the number of demat account holders has grown by 18.5 crore (December 2024) over 4 crore (2020); the young investor, less than 30, forms 48% of the base; 25% of NSE investors are women. The assets being managed by mutual funds grew by ₹68.5 lakh crore (Oct 2024), by comparison to ₹12 lakh crore (2020), and this generated efficient aggregation mechanisms.The numerical scale of such a base transformation of investors is impressive. The recent change in the IPO capital sourcing structure over the past six years demonstrates the shift in the dominance of foreign portfolio investors over domestic investors.Case Study Analysis: Divergent 2024 TrajectoriesProfitability Pathway to a Leading Online Food Ordering and Delivery CompanyAn online food ordering and delivery company, Swiggy, went public in November 2024, debuting with a modest first-day listing premium of 7.7% at ₹390 and attracting an oversubscription of 3.59 times. The depressed performance indicated by the scales of investor discrimination alone was no longer charged with premiums. Most importantly, the food delivery segment had become profitable in terms of EBITDA, and the losses were accumulated in experimental sections. The 34% year-on-year revenue growth and the reduction of the losses gave apparent profitability highway maps.Growth vs. Reality CheckIn August 2024, in the IPO that Ola Electric conducted at ₹76 at a 19.97% premium, the pre-profit company was valued at ₹73,000 crores by a valuation of ₹6,146 crores. The projections of electric two-wheelers hitting 60–70% of the market by 2030 by a multinational strategy and management consulting firm were an excuse to become a real enthusiast in the long term. However, an increase in losses despite 88% revenue growth casts some concerns on execution. This was followed by trading below the opening prices in the following weeks, indicating that investors were not homogeneous; there was retail trading fuelled by narrative and institutional investors who were disciplined in their analysis.Brand-Driven MoatsIn August 2024, an Indian multinational retail company, FirstCry, held an IPO at ₹465 which soared 40% to ₹651 and raised ₹4,194 crore. Even after incurring losses of ₹321.51 crore, unit economics increased, and 1,063 physical retail touchpoints served as competitive moats worth the ₹43,000 crore market cap. Shareholders were aware of true business excellence and not the speculative enthusiasm.The following three case studies demonstrate the non-uniform investment by investors in mega 2024 IPOs. The correlation between the size of the IPO and the enthusiasm of the investors shows that bigger offerings do not necessarily result in higher first-day returns and shows a higher level of discriminating investor behavior.Table 2: Major Indian Startup IPOs (2024) – Profitability-Focused Offerings with Market MaturityCompanyIPO YearIssue Price (₹)Listing Price (₹)IPO Size (₹ Cr)Listing Returns (%)Swiggy202439042011,3277.69Ola Electric20247691.186,14619.97FirstCry20244656514,19440Source: NSE/BSE Official Records, SEBI-registered data providers, IPOJIRegulatory Framework EvolutionThe regulatory direction of SEBI during 2021–2025 was becoming more and more sensitive to the idea that active IPO markets must have their balance between investor protection and issuer accessibility. In response to the recognition that deep capital markets do not need large floats to be efficient, the September 2025 amendments reduced minimum public float requirements by a factor of two to 2.5% of ultra-large caps.The December 2024 reforms of SME IPO proposed explicit profitability requirements (operating profit of ₹1 crore in two of three previous years), tightened the offer-for-sale rule, and increased disclosures. These are the calibrated guardrails which avoid abuses and do not eliminate access to capital to really growing businesses. The provisions of expanded anchor investors now incorporate insurance companies and pension funds whose long-term obligations provide inbuilt basic value-investment incentives.Market Evolution: Quantified TransformationThe development of the market is an expression of maturity that goes through various stages of development and redemption. The curve shows a movement from the sporadic extravagance of speculation to a rigorous tightening to a steady expansion.Capital Mobilization Through Mainboard IPOs: India's IPO market developed during a specific cycle that lasted between FY2020 and FY2025. Activity level in FY2020–21 was low and was ₹31,000–31,300 crore per annum. The inflection point came in FY2021–22, when 47 mainboard IPOs mobilised ₹1,09,900 crore, the highest ever in a single year, reflecting heightened domestic investor participation and several high-profile market debuts — Zomato, Nykaa and Paytm. Activity was reduced in FY2022–23 by valuation corrections, which included 37 IPOs raising ₹52,116 crore. Nonetheless, starting with FY2023–24, the market showed a strong recovery: 76 IPOs raised ₹61,915 crore in FY24, and record activity in FY2024–25: 80 IPOs raised ₹1,63,000 crore, the highest amount of capital raised in any given financial year. This path is the process of maturation out of speculative excess (FY22) to disciplined correction (FY23) to sustainable growth on the basis of better issuer profitability and investor selectivity (FY24–25).Transaction Volume: Having fallen to 32 IPOs (FY2021) and then 25 (FY2023), followed by 76 (FY2024) and 80 (FY2025), suggests that the market is coming to be dominated by smaller offerings and purely random mega-caps.Domestic Participation: To be changed to 75% (FY2025) versus 25% (FY2020) and closer to or more mature market ratios.Subscription Metrics: Unsubscriptions have been normalized with high ratios (25x–30x) in 2021 and brought within 3–4x healthy ratios, which translate to sensible investor positioning and pricing discipline.Table 3: IPO Market Evolution in India (2020–2025) – Structural Transformation MetricsFinancial YearNumber of Mainboard IPOsTotal Capital Raised (₹ Crore)Total Capital Raised (₹ Billion)Average Issue Size (₹ Crore)NotesFY 2019–2030₹ 31,512₹ 315~₹1,050Pre-pandemic baselineFY 2020–2135₹ 31,268₹ 313~₹893Limited activity during COVID-19FY 2021–2253₹ 1,11,547₹ 1,115~₹2,104All-time high: Zomato, Nykaa, Paytm IPOs; strong domestic investor appetiteFY 2022–2337₹ 52,116₹ 521~₹1,408Correction phase; LIC mega-IPO (₹20,557 Cr) drove aggregateFY 2023–2476₹ 61,915₹ 619~₹815Recovery begins; 76 IPOs (highest count); diversified sectorsFY 2024–2580₹ 1,63,000₹ 1,630~₹2,038Record capital mobilization: Ola Electric, Swiggy, FirstCry; PE-backed IPOs (₹562 Bn) prominentSource: KPMG India (2025). IPOs in India – FY 2025, based on final offer documents filed with ROC, NSE, BSE. PRIME Database Group (2023, 2024) press releases on FY22, FY23, FY24 capital mobilization. All figures in Indian Rupees (₹); financial year = 1 April – 31 March.Venture Capital Pipeline and IPO ReadinessThe Indian venture capital ecosystem had become symbiotic with the maturity of the IPO markets. In 2024, total VC/growth equity funding had increased to ₹1,19,437 crore (USD 13.7 billion), and the number of transactions (1,270) showed 43% year-over-year growth, a 45% growth that indicates it has been widely participated in.Those firms that successfully oriented through the 2022–2023 funding downturn did so having gained a better ability to manage their finances and established profitability roadmaps.Small and medium-ticket transactions of 95% dealings formed pipelines of hundreds of high-growth companies with enhanced unit economics; exactly what the public market was gaining greater and greater favor.The various government policy efforts, such as the abolition of angel taxes, reduction of long-term capital gains taxes, simplification of foreign VC registration, etc., have further boosted the attractiveness of venture investing and minimized the cost of friction.The Convergence Thesis: Why 2024–2025Record IPO activity reflected multiple converging forces:Retail Investor Maturation: By 2024, pandemic-era account openings had created experienced investor cohorts with 2–3 years of market experience and rational valuation frameworks, contrasting with 2021's less sophisticated participants.Profitability Achievement: The 2018–2020 venture groups to go to IPO by 2024–2025 had many companies that had already achieved profitability or had been operating at near-profitability; as compared to 2021, when most startups were burning cash as long as they were open.Regulatory Clarity: Cumulative SEBI developments created increased transparency in IPO procedures, disclosure standards, and investor protections, reducing uncertainty costs for both issuers and investors.Global Capital Reorientation: The global markets changed to focus on profitable-growth models instead of growth-at-any-cost models. When the revaluation of public technology became apparent throughout 2022, Indian startups that had been showing better performance in profitability worked to their advantage, as the valuation of global technology began to stabilize.Remaining ChallengesA number of issues are to be addressed in order to have sustainable growth. The sustainability of post-IPO performance is based on the ability of companies to fulfill profitability promises, but the level of shortfalls would instantly kill retail confidence and limit subsequent issues. Some of the 2024–2025 products are still trading at valuations based on heroic growth assumptions, most notably in quick commerce and electric mobility.Although the shift in domestic capital is an actual type of strength, there may be some global institutional involvement that can add depth to the market and offer stabilizing large-block investors. The participation of lower-tier cities is still limited; the geographical expansion to smaller areas will further diversify the domestic capital base and will democratize investment.ConclusionThe IPO boom in India through 2024–2025 will embody structural development to the prevalence of local-investor control, enhanced issuer financial discipline, and regulatory regulations in consonance with fresh market best practices. The progression from an initial breakthrough phase to sustained record performance reflects a broader maturation process, where early enthusiasm gives way to valuation discipline, eventually evolving into a more stable and advanced market equilibrium.The present IPO market, with features of healthy subscription multiples, better profitability profile, capital mobilization by domestic sources, and a regulatory environment, can be viewed as being on the path of long-term growth and not the cyclical fluctuations. To the greater Indian economy, thriving domestic IPO markets decrease reliance on foreign capital, allow venture-funded entrepreneurs to find domestic liquidity, and introduce congruence amid start-up development and capital formation.Mega-technology firms such as PhonePe, Flipkart India, and Reliance Jio Infocomm are possible future products that may easily surpass the existing records, further pushing the boundaries of the Indian market and institutional maturity. The 2024–2025 experience offers the assurance that the capital markets of India have the infrastructure and investment savvy to take such transformational capital raises in a disciplined and well-judged way.ReferencesIndian Private Equity and Venture Capital Association (IVCA) & Bain & Company. (2025). Indian Venture Capital and Growth Equity Report 2024.National Stock Exchange of India (NSE). (2025). Indian Stock Market Infrastructure Report: Investor Participation and Market Evolution.Prime Database. (2025). Capital Mobilization and Investor Composition in Indian IPOs 2020–2025.Securities and Exchange Board of India (SEBI). (2025). IPO Regulatory Framework Amendments and Market Impact Analysis.EY & IVCA. (2025). H1 2025 PE/VC Investment Report: India as Asia-Pacific Growth Hub.Inc42. (2025). Indian Startup IPO Tracker and Pipeline Analysis 2025.KPMG Assurance and Consulting Services LLP (2025). IPOs in India – FY 2025. Analysis based on final offer documents filed with ROC, NSE, BSE. Data: 80 mainboard IPOs; ₹1,630 billion (₹1,63,000 crore) raised in FY25.Forbes India (2024, 4 April). IPO boom is here to stay: Prime Database Group MD. Quotes Pranav Haldea on FY21 data: ₹31,268 crore.AMFI (Association of Mutual Funds in India). (2024). AMFI Monthly Note – December 2024. Data on total mutual fund assets under management, folio count, and industry composition. https://www.amfiindia.com/Themes/Theme1/downloads/AMFIMonthlyNote_December2024.pdfSEBI, National Securities Depository Limited (NSDL), and Central Depository Services Limited (CDSL). (2024). Demat Account Statistics – December 2024. Total demat accounts reached 18.5 crore comprising CDSL (14.65 crore) and NSDL (3.95 crore).SEBI Monthly Bulletin (December 2024) and NSDL/CDSL combined data showing total demat accounts at 18.5 crores by end of December 2024, with CDSL maintaining 16.8 crore and NSDL maintaining 3.95 crore accounts.Authors may be reached at harsh.goel@mail.ca.in and eboard@icai.inThe Chartered Accountant · Theme January 2026 · www.icai.org · Pages 36–40
Theme
Ep. 85 — From MSMEs to Markets: Strengthening India’s Growth Pipeline
CA Journal
· July 2026
00:00
--:--
From MSMEs to Markets: Strengthening India’s Growth PipelineIndia is an entrepreneurial powerhouse with tens of millions of micro, small, and medium enterprises (MSMEs), and a swelling base of growth-ready companies. Yet, only a vanishing fraction reaches institutional scale or the public market. This persistent “graduation gap” is at once a challenge and an opportunity. Closing it by improving governance and market readiness will deliver a governance dividend: lower cost of capital, formalisation of business practices, higher valuations, deeper capital markets, and stronger global competitiveness. The Small and Medium Enterprise (SME) segment’s recent listing surge suggests India is at an inflection point. But the funnel remains narrow and leaky, underscoring the urgency for systemic reforms.“ Firms with audited accounts, transparent disclosures, and independent boards secure better borrowing terms and higher valuations in initial public offerings (IPOs). ”The Numbers: The FunnelThe entrepreneurial pyramid is steep and unforgiving:Micro, Small and Medium Enterprises (MSMEs): ~6.33 crore registered enterprises (NSSO 73rd Round, Udyam 2024–25). This makes India one of the three largest MSME ecosystems globally, alongside China and Indonesia.Small and Medium Enterprises (SMEs, ₹10–500 crore turnover): ~3.3 lakh enterprises, which is just 0.5% of the total MSME base. This tiny fraction reflects the difficulty of scaling beyond the micro-enterprise level.Listed SMEs: ~1,231 on BSE SME and NSE Emerge (as of mid 2025), just 0.4% of the SME pool.By contrast, India’s ~25,000 large enterprises (>₹500 crore turnover) include ~6,000 listed companies – a listing ratio of ~25%. This gulf shows how few Indian businesses successfully move from micro → SME → listed entity.In developed economies, 20–25% of micro-enterprises graduate into the SME band. In India and other developing markets, the figure is closer to 0.5% – a gap of 40–50x. The “funnel” is simply too narrow, with leakage at every stage.Why This Gap MattersMSMEs are not a fringe sector – they are the backbone of the Indian economy:Gross Domestic Product (GDP) contribution by MSMEs: 30–35%.Exports by MSMEs: ~45%.Employment generated by MSMEs: 12–20 crore people, second only to agriculture.Yet most MSMEs remain undercapitalised and informal, unable to transition into high-growth SMEs or listed entities. This has several consequences:Shallow capital markets – A handful of large firms dominate indices, while SMEs remain excluded from equity financing.Constrained job creation – SMEs that scale are the true engines of formal employment; their underdevelopment caps India’s job potential.Export competitiveness – While MSMEs contribute significantly, their fragmented scale limits global competitiveness.Governance trap – Without strong disclosure, board, and control structures, SMEs face high borrowing costs and limited investor trust.In short, India’s economic promise is tied to whether this vast entrepreneurial base can graduate and integrate into capital markets.Snapshot: SME IPO Activity (2012–2025)The evolution of SME Initial Public Offerings (IPOs) over the past decade highlights why governance readiness is now urgent:2012–2014: SME IPOs were experimental and modest. Average issue size was <₹10 crore, largely restricted to a few regional industrial clusters. Investor appetite was thin, and awareness was minimal.2015–2019: Listings gained momentum, though still concentrated in selected states. Average issue sizes rose gradually, signalling deeper acceptance of the SME platform.2020–2022: The COVID-19 pandemic briefly disrupted momentum. However, liquidity support measures, lower interest rates, and rapid digital adoption gave SMEs renewed growth trajectories. By late 2021, the rebound was visible.2023: A breakout year. ~175 listings raised ~₹4,600 crore, with average issue size climbing to ~₹27–28 crore. Investor participation expanded beyond regional circles, and SME IPOs began drawing pan-India attention.2024: A record year. ~240–246 listings raised ~₹8,700–9,500 crore. Average issue size rose further to ~₹36–37 crore. The market witnessed an average of one IPO every working day – a milestone signalling scale and regularity.2025 (till August): Already ~87 listings raising ~₹4,000 crore, with average issue size crossing ~₹45–46 crore. This indicates not just higher volumes but larger, more ambitious SMEs accessing the market.Cumulative ImpactFunds raised since inception: ₹28,000+ crore.Market value generated: ~₹4 lakh crore.One-third of SME-listed companies have migrated to the main board, validating the SME platform as a proven gateway for scaling.Trendlines reveal that average issue size has quadrupled within a decade. A present-day SME IPO of ₹40–50 crore resembles the scale of mid-cap fundraising a decade earlier. The trajectory is unmistakable: SMEs are scaling larger, faster, and with growing investor interest. Yet, when viewed against the universe of ~3.3 lakh SMEs, the listed pool of ~1,231 remains a drop in the ocean.India at an Inflection PointTwo truths emerge clearly: (i) SME listings are finally achieving scale and visibility, and (ii) the graduation rate remains negligible compared to the massive MSME universe. This is the defining inflection point. Governance through better disclosures, stronger boards, and professional management is the multiplier that can bridge the gap. Without it, India risks falling into an “SME trap”: a vast pool of entrepreneurial energy unable to cross the formalisation threshold.Why So Few Graduate? The Scale BottleneckDespite 6.3 crore Micro, Small, and Medium Enterprises (MSMEs), only ~3.3 lakh qualify as Small and Medium Enterprises (SMEs). Of those, barely ~1,231 are listed. Why do so few firms climb the growth ladder? The answers lie in a combination of structural, operational, and market frictions.Graduation rate: In India, only 0.5% of MSMEs evolve into SMEs. In developed economies, 20–25% of micro firms manage the transition. This stark contrast highlights the scale bottleneck and explains why India lags 40–50 times behind advanced peers in terms of enterprise graduation.Comparison with large enterprises: Around 25,000 enterprises in India qualify as large (turnover >₹500 crore). Nearly 6,000 of them are listed, translating to ~25%. Compare this with SMEs, where the ratio is only 0.4%. Clearly, barriers are not about the market alone, but about readiness to scale and comply with governance norms.Structural Barriers: Finance & Market LinkagesAccess to finance is the single largest bottleneck:Credit gap: International Finance Corporation (IFC) and Reserve Bank of India (RBI) estimates that MSMEs face a documented credit gap of ₹20–25 lakh crore. Banks remain hesitant, citing limited collateral and weak balance sheets.Informality: Many SMEs remain half-informal, with unreported revenue or cash transactions. This reduces their ability to present auditable, reliable accounts for lenders or investors.High cost of capital: Borrowing costs for SMEs can be 300–500 basis points higher than for large corporates, reflecting perceived governance and disclosure risk.Market access is equally challenging:SMEs struggle to secure steady buyer relationships, particularly in export markets, due to size, certification gaps, and inability to meet scale requirements.Value chains remain dominated by large corporates, with SMEs often squeezed on margins, preventing long-term growth planning.Operational Barriers: Governance, Audit & ComplianceScaling requires not just more revenue, but more robust systems:Governance culture: Many SMEs are promoter-driven, with family-style management and minimal delegation. Independent directors are rare; boards often function informally, leading to limited accountability.Financial reporting: Delays in audited financials, non-standardised disclosures, and inconsistent internal controls are common. For investors, this translates into heightened risk perception.Tax & regulatory compliance: Frequent Goods and Services Tax (GST) disputes, labour compliance lapses, and Registrar of Companies (ROC) penalties deter SMEs from engaging with formal equity markets.Succession planning: Family succession without formal governance structures creates uncertainty for investors and disrupts continuity.Market Barriers: Liquidity & Investor ConfidenceEven when SMEs are listed, challenges persist:Liquidity issues: SME shares are thinly traded. Retail investors dominate, while institutional investors remain cautious due to research coverage gaps and small free floats.Analyst coverage: Very few brokerage houses provide research on SME stocks, which limits visibility and valuation discovery.Volatility: Thin liquidity magnifies volatility, reinforcing the perception of risk and making long-term institutional participation rare.Why Governance is the MultiplierGovernance is not just a compliance cost, it is a growth enabler:Lower cost of capital: Firms with audited accounts, transparent disclosures, and independent boards secure better borrowing terms and higher valuations in initial public offerings (IPOs).Investor trust: Disclosure discipline and credible governance practices widen the pool of investors, including institutions.Migration pathway: Of the ~1,231 SMEs listed, one-third migrated to the main board. These firms are typically those that invested in governance early – better boards, stronger financial reporting, and internal controls.Global BenchmarksComparisons underscore India’s challenges:UK AIM (Alternative Investment Market): Hosts more than 800 growth companies, with average deal size far larger than India’s SME IPOs. AIM’s success is built on strong disclosure standards and an active investor-analyst ecosystem.Hong Kong GEM (Growth Enterprise Market): Provides a structured pathway for SMEs to graduate into the main board, but requires strict governance practices upfront.Taiwan & Korea SME boards: Heavily supported by state-backed credit guarantees and investor education, ensuring liquidity and trust in the SME equity segment.India’s SME exchanges have achieved rapid growth in listings, but the governance ecosystem still lags these global counterparts, limiting scalability and investor confidence.Case Evidence: The SME ChallengeSome SMEs that fail to build robust governance structures often stall after IPO. Thin liquidity, compliance lapses, or promoter disputes lead to erosion of investor trust and long-term value.By contrast, SMEs that prioritise governance – regular disclosures, professional management, and transparent reporting – secure higher valuations and sustained investor interest.“ As India aims to quadruple its Gross Domestic Product (GDP) in the coming decades, the burden cannot be borne only by large corporations. SMEs must be empowered to scale. The key lever is governance: from promoter-led informality to professionalised, transparent, and investor-ready enterprises. ”Fixing the BottleneckThe graduation bottleneck is not just about finance – it is fundamentally about governance. Without reliable disclosures, institutional investor participation will remain limited, and the listing funnel will stay narrow. As India aims to quadruple its Gross Domestic Product (GDP) in the coming decades, the burden cannot be borne only by large corporations. SMEs must be empowered to scale. The key lever is governance: from promoter-led informality to professionalised, transparent, and investor-ready enterprises.Policy and Regulatory SignalsIndia’s Small and Medium Enterprise (SME) ecosystem is at a critical inflection point, shaped by reforms and regulatory nudges:Securities and Exchange Board of India (SEBI) reforms: Streamlined disclosure norms, more flexibility in migration, and stricter eligibility criteria for main board listing. Migration requirement was extended from 2 years to 3 years, ensuring SMEs demonstrate robust governance before scaling.Exchange initiatives: National Stock Exchange (NSE) Emerge and Bombay Stock Exchange (BSE) SME actively run awareness programs, regional investor connect sessions, and SME indices to boost visibility.Government policy: Schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the Fund of Funds for Startups, and the Production Linked Incentive (PLI) scheme indirectly strengthen SME capital bases, making them stronger IPO candidates. In addition, some state governments directly incentivise listing. For example, Kerala offers a subsidy of up to ₹1 crore to eligible SMEs to cover SME IPO issue expenses, while Rajasthan provides a subsidy of up to ₹30 lakh for the same purpose. These state-level measures encourage more SMEs to enter the capital markets and offset initial listing costs.Financing Corridors: New Channels EmergingBeyond traditional bank finance and SME IPOs, several new financing corridors are opening up:Institutional participation: The interest of mutual funds and Alternative Investment Funds (AIFs) is increasing in the SME space. Dedicated SME-focused funds are being established.Green/Impact capital: Environmental, Social, and Governance (ESG)-focused funds are targeting SMEs in renewable energy, manufacturing efficiency, and social enterprises. Governance upgrades make such SMEs prime beneficiaries.Private equity/venture debt: Though concentrated in start-ups, there is a growing appetite for established SMEs with revenues between ₹50–200 crore, especially export-oriented firms.Migration Playbook: From SME Board to Main BoardThe SME platform is not the destination, but a gateway. The migration journey offers important lessons:Track record: Roughly one-third of SME-listed companies have successfully migrated to the main board.Timeframe: Migration can occur after 3 years of listing, after satisfying several criteria of stock exchanges – governance, profitability, and compliance standards are consistently met.Valuation uplift: Migration often results in significant re-rating, as institutional investors gain access.Governance requirement: Migration-ready SMEs typically display timely disclosures, professional boards, internal audit frameworks, and consistent dividend and earnings records.India’s Opportunity WindowIndia is projected to be the world’s third-largest economy by 2030. For this ambition to materialise, scaling SMEs is indispensable:Employment: To absorb ~10 million annual workforce entrants, SMEs must expand faster and formalise jobs.Exports: India’s target of US$1 trillion exports by 2030 rests significantly on SME competitiveness and integration into global supply chains.Capital markets: Deepening beyond ~6,000 listed large companies into tens of thousands of SMEs would make Indian markets more representative and resilient.If even 2% of SMEs (~6,000 firms) list over the next decade, India could see:Fund mobilisation of ₹3–4 lakh crore.Market capitalisation creation exceeding ₹15–20 lakh crore.Millions of new formal jobs in urban and semi-urban India.Conclusion – The Governance DividendIndia’s ~6.3 crore Micro, Small, and Medium Enterprises (MSMEs) prove that it is a land of entrepreneurs. But only ~3.3 lakh SMEs and ~1,231 listed firms highlight the scale barrier. Bridging this gap requires more than finance, it demands governance: transparent disclosures, professional management, and investor trust. The SME platform is now validated as a powerful gateway, but its true potential lies in pulling thousands more firms into the formal capital market fold.The next decade will decide whether India leverages its entrepreneurial base to build global champions or remains constrained by informality. By focusing on governance as the key multiplier, SMEs can unlock lower capital costs, stronger valuations, and integration into global supply chains. That is the governance dividend and it is India’s next big growth lever.ReferencesMinistry of Micro, Small and Medium Enterprises (MSME) – Annual Report 2023–24.Press Information Bureau (PIB) / Udyam registration counts (2024–25 releases).India Brand Equity Foundation (IBEF) MSME sector overview.BSE SME & NSE Emerge exchange statistics (listings, funds raised, migration).NSE Emerge factsheets and listings page.Reserve Bank of India (RBI) – Report on Trends and Progress of Banking (2023–24).Securities and Exchange Board of India (SEBI) – SME Platform consultation papers (2012–2024).Organisation for Economic Co-operation and Development (OECD), World Bank reports on SME boards (UK AIM, GEM Hong Kong, Korea, Taiwan).SEBI circulars on SME listing and migration (2012–2024).Ministry of Finance & Ministry of MSME policy updates (PLI, CGTMSE, taxation).India Brand Equity Foundation (IBEF) projections for India’s GDP and export growth.◆◆◆Author may be reached ateboard@icai.inJanuary 2026 | www.icai.org 41–44
Internal Audit
Ep. 86 — Real-Time Impact: RBI’s Concurrent Audit Framework Driving Accountability and Risk Mitigation in Indian Banks
CA Journal
· July 2026
00:00
--:--
Real-Time Impact: RBI's Concurrent Audit Framework Driving Accountability and Risk Mitigation in Indian BanksThe RBI's Concurrent Audit Framework ensures real-time or near real-time examination of banking transactions to proactively detect irregularities, manage risks, and enhance compliance. Introduced in the 1990s, it has evolved to cover key areas like loans, forex, KYC/AML, and treasury operations across public, private, and cooperative banks. Unlike traditional audits, concurrent audits offer immediate feedback, deter fraud, and strengthen operational efficiency. With rising digitization, banks are leveraging automation, AI, and analytics to enhance audit effectiveness. Concurrent audits not only ensure regulatory adherence but also provide critical business insights, supporting strategic decision-making and reinforcing trust in India's banking ecosystem.Introduction: The Essence of Concurrent AuditIn the dynamic landscape of India's banking sector, Concurrent Audit stands out as a powerful mechanism for near real-time vigilance and proactive risk control. Mandated by the Reserve Bank of India (RBI), the concurrent audit is a system of simultaneous examination of transactions and procedures as they occur, ensuring that any deviations, inefficiencies, or non-compliance issues are flagged immediately.Unlike conventional audits that are conducted post-facto, concurrent audits operate in parallel with the day-to-day operations of a bank, thereby serving as a near-instant feedback loop on operational integrity and compliance adherence.Genesis and Regulatory EvolutionThe concept of concurrent auditing emerged in India during the early 1990s as the banking sector was undergoing liberalization. As private and foreign banks entered the market, the volume of financial transactions increased, financial products expanded, and the risk of fraud and non-compliance grew.To address fraud and malpractices in banks, the RBI formed a High-Level Committee in 1992, led by Shri A. Ghosh, the then Deputy Governor of RBI. Among other measures, the Ghosh Committee recommended introducing concurrent audits in commercial banks to improve internal controls, support administrative functions, ensure adherence to systems and procedures, and detect lapses and irregularities. Consequently, all scheduled and primary (urban) cooperative banks with deposits over Rs. 50 crores were required to adopt the concurrent audit system.Thereafter, the Concurrent Audit Regulatory Framework has evolved as below:1996–1997: Defined scope, coverage, reporting systems and remunerations.2001–2007: Enhanced scope and responsibilities under concurrent audit, including mandatory coverage of sensitive and high-value branches.2015: Revised guidelines on concurrent audit system, including the requirement to have at least 50% of their business under concurrent audit coverage, along with a detailed minimum audit program.2019 and onwards: Scope of work and sampling coverage to be at the discretion of the internal audit team of the bank, with broad minimum areas of coverage defined. Specific regulations issued by the RBI from time to time mandate coverage of certain areas under concurrent audit review.Scope and ApplicabilityScope of Concurrent AuditThe RBI has laid down broad guidelines for minimum areas of coverage under Concurrent Audit in its circular on Concurrent Audit System dated September 18, 2019 (DBS.CO.ARS.No.BC.01/08.91.021/2019-20). However, banks are expected to define the specific scope based on their risk profile and business complexity. Minimum areas of coverage include loans and advances, treasury operations and foreign exchange transactions, Know Your Customer / Anti-Money Laundering guidelines, Remittances, Trade Finance, Branches, SWIFT transactions, Internal Accounts and as per regulatory guidelines issued from time to time.ApplicabilityScheduled Commercial Banks (including Public and Private Sector Banks and Foreign Banks)Small Finance BanksPayments BanksLocal Area BanksMethodology: How Concurrent Audit is ConductedAppointment of Concurrent AuditorsCan be conducted by internal teams or external Chartered Accountant firms empanelled with the bank, at the discretion of the individual banks.In case of outsourced concurrent audit function, the Internal Audit team should participate in the selection process, and the auditors should be rotated every 3 years to ensure independence.Typical Concurrent Audit Lifecycle / Process FlowConcurrent audit in Indian banks is a cyclical and continuous process, aimed at ensuring real-time transaction scrutiny, regulatory compliance, and operational risk control. Fig. 1 shows a breakdown of the concurrent lifecycle / process flow.Fig 1. Concurrent audit lifecycleActivities during initial set up stage for external concurrent audit teamEmpanelment of external concurrent auditors by the BankFinalization of scope of review, sampling criteria and review frequencyBank to provide concurrent audit team with system access to Bank's domainConcurrent Audit team to conduct process walkthroughs with Bank stakeholdersConcurrent audit team to prepare checklist in line with regulations and internal policiesBreakdown of the concurrent lifecycle, typically followed on a monthly rolling basis1. Transaction TestingData for the review period is extracted from the Bank's system (where feasible) for conducting review. Samples are selected as per methodology defined in scope. Review is conducted on daily / weekly / monthly frequency in line with the checklist.2. Query IssuanceBased on the review conducted, exceptions / outliers are flagged as queries immediately upon identification to the Bank stakeholders for clarification.3. Query ResponsesStakeholders provide responses on the queries raised. The additional evidence submitted may either result in queries being dropped or an observation arising as an outcome.4. Observation and MAPFor exceptions which are agreed as observations, root cause assessment and management action plan is sought from the bank stakeholder along with action owner and timelines.5. ReportingObservations are issued as a draft report for concurrence from stakeholders. The final report is issued post concurrence received.6. Tracking of Open IssuesAction plans for open issues are tracked for closure in line with the target date provided by the management.Concurrent audit is a near real-time review with a monthly reporting cycle. Quarterly reporting (minimum) of observations noted during Concurrent Audit review is to be placed before the Audit Committee of the Bank.Benefits of Near Real-Time AuditingConcurrent audits offer a multitude of advantages, especially when compared to traditional, retrospective audit frameworks:Proactive Risk Management: Irregularities are flagged at the time of occurrence or shortly thereafter, enabling early intervention and damage control.Deterrent to Frauds: Employees are aware that transactions are under continuous scrutiny, reducing the likelihood of fraudulent behaviour.Faster Decision Making: Audit insights help in real-time correction, improving efficiency and reducing customer grievance redressal time.Improved Regulatory Compliance: Banks can ensure ongoing alignment with RBI norms, reducing the risk of regulatory action or penalties.Enhanced Customer Confidence: A robust audit framework instills trust among stakeholders, reinforcing the credibility of the banking system.Uniqueness of Concurrent Audit in the Indian ContextUnlike many global internal audit practices that are periodic in nature, concurrent audit in India is real-time or near real-time, offering a continuous assurance mechanism. This model reflects India's regulatory expectations and the need for robust internal control in a rapidly evolving financial ecosystem.Concurrent audit in India holds a distinct and critical role in the country's financial system, especially in the banking sector.Volumes and Scale: India's banking ecosystem is vast, with a high volume of transactions occurring across both urban and rural branches daily. Concurrent audits are uniquely designed to handle this scale, including review of branches at multiple locations.Mandatory Oversight and Effectiveness Review by Audit Committee of the Bank: Regulation mandates annual review of the effectiveness of the concurrent audit system as well as the performance of the concurrent auditors, with a performance memo issued by the bank.Accountability: Empanelled concurrent auditors are expected to maintain high standards of integrity and independence, failing which their appointment may be cancelled in case of any serious acts of omission or commission. Material irregularities, fraud indicators, and non-compliance cases are expected to be reported immediately to higher management and, if necessary, the regulator.Direct Interactions with Regulators: Regulators in India place strong reliance on concurrent audits as a frontline defense mechanism. In some cases, regulators / inspectors have direct interactions with concurrent auditors during their annual inspections and other calendarized inspections.Adaptability to Change: The environment in which concurrent audit operates is dynamic, with shifts in business models, regulatory framework and technology landscapes constantly triggering the need for concurrent audits to evolve.Policy & Process Changes: Organizations frequently revise internal policies and standard operating procedures due to changing business objectives, risk appetite, or external market dynamics. Auditors must quickly adapt to revised process flows and control points and update their checklists and test procedures accordingly.Regulatory Change: India's financial regulatory environment is dynamic, with frequent updates to KYC norms, provisioning rules, credit assessment frameworks, and digital compliance. Regulatory change management is important to ensure audit checklists remain current and aligned with the latest regulatory circulars. Concurrent auditors are usually among the first to validate implementation of regulatory changes at the operational level.Technology and System Changes: Introduction of new systems (e.g., CBS, ERP), automation tools, digital platforms, or data analytics engines requires auditors to review data sources, test procedures and existing checklists.People and Organizational Changes: Changes in organizational structure, staff turnover, or shifts in roles and responsibilities can alter how processes are executed, and it is critical to manage these changes by way of adequate training.Access to Banks' Systems: One of the defining features of concurrent audit is the direct access granted to auditors to banking systems, enabling auditors to view real-time transactions, customer profiles, sanction notes, loan documents, and exception reports.Integration with Third Line of Defense: Concurrent audit acts as a support to the Third Line of Defense (Internal Audit), and findings from concurrent audits are directly reviewed and acted upon by the internal audit department, which is considered the independent assurance provider to the board and audit committee.How Concurrent Audit Can Deliver Business Insights Beyond AssuranceIn today's fast-paced business environment, the role of audits has evolved significantly. No longer confined to a backward-looking assessment of compliance and control, concurrent audits, conducted in real-time or near real-time, have the potential to deliver deep, actionable insights that drive operational efficiency, strategic planning, and business innovation.Real-Time Process Monitoring and Optimization: Auditors often identify inefficiencies, delays, or deviations from standard procedures in near real time. Management can use these observations to reengineer processes, reduce turnaround time, or eliminate redundant workflows, ultimately improving service delivery and cost efficiency.Early Detection of Trends: By consistently monitoring transactions, concurrent auditors are uniquely positioned to detect patterns and anomalies early, long before they escalate into larger issues. A surge in certain types of customer complaints, an increase in unauthorized overrides, or a shift in transaction volumes may signal underlying operational or market trends, which can enable organizations to be proactive rather than reactive.Enhanced Risk Management: While concurrent audits naturally contribute to risk mitigation, their data-rich findings can significantly enhance enterprise risk intelligence. Frequent breaches of specific controls, recurring procedural lapses, or concentration of risk in certain branches or segments can all be captured and analyzed.Assessing Efficiency of Operations: Concurrent audits can help identify areas of repeat operational errors, such as delays in processing, frequent manual interventions, or high error percentages. Management can use these insights to improve staff training, redesign workflows, or invest in automation where needed.Support for Strategic Decision-Making: Over time, concurrent audits produce a wealth of data that goes beyond compliance. Aggregated findings on process performance, risk exposure, and operational gaps create a real-time snapshot of business health. Such insights can inform digital transformation plans, mergers and acquisitions evaluations, and long-term policy revisions.How Automation is Reshaping Concurrent Audit PracticesAs banking operations shift toward digital and real-time environments, concurrent audits have embraced technology for enhanced efficiency and scope. The following are the trends in technology adoption in the concurrent audit space:Real-time dashboards and audit planning tools.Automation for routine audit checks; for example, automation of daily SWIFT reconciliation, regulatory reporting checks, etc.System Generated Exception Reports (SGERs) to reduce manual errors.Data analytics to identify trends, outliers, red flags and anomalies.API-based data extraction from source systems.Centralized monitoring for tracking audit findings, open issues, etc., in real time across multiple locations.Leveraging Optical Character Recognition (OCR) technology for converting scanned documents, such as account opening forms, into machine-readable text format.Note: The above are applicable for private sector banks and foreign banks, where all the data is available centrally at the HO and not fragmented across branches.Potential of Artificial IntelligenceIntelligent Anomaly Detection: AI models, especially those based on machine learning, can detect outliers and anomalies far beyond the capability of traditional rule-based systems. For example, an AI model monitoring transactions can flag deviations in amount, frequency, or timing that don't match the user's historical behaviour, even if the transaction is technically within the policy limits.Natural Language Processing (NLP) for Document Review: NLP can be used to scan and interpret policy documents, contracts, or communication logs, identifying risk keywords or non-compliance issues.Risk Scoring and Prioritization: AI can score transactions or business units based on their risk levels, enabling auditors to focus on high-risk areas — for example, auto-prioritizing branches or departments for deeper review based on fraud likelihood, previous audit scores, or transaction volume anomalies.Continuous Control Monitoring (CCM): AI-driven systems can monitor key controls 24/7, sending alerts in real time when thresholds are breached — for example, detecting unauthorized access attempts, changes in vendor bank details, or back-dated entries immediately.Predictive Risk Intelligence: Using historical data, AI can predict where future breaches or compliance failures are likely to occur based on past trends.Challenges and Key Considerations for Using AIData Quality: AI is only as good as the data it learns from. Poor data can lead to inaccurate results.Change Management: Auditors must be trained to trust and interpret AI outputs.Ethical Use: Clear governance must be in place to avoid bias or misuse of AI tools.Integration: Aligning AI tools with legacy systems and existing audit workflows can be complex.ConclusionThe RBI-mandated concurrent audit system is one of the most comprehensive and unique real-time audit frameworks in the Indian banking ecosystem. It not only enhances transparency and governance but also acts as an early warning system to detect serious errors and irregularities.As banks move deeper into digital transformation, the concurrent audit mechanism will continue to evolve, blending human expertise with machine intelligence to build a more resilient, secure, and compliant financial system.ReferencesRBI's circular on Concurrent Audit System dated September 18, 2019 — rbi.org.inRBI's circular on Concurrent Audit System in Commercial Banks – Revision of RBI's Guidelines dated July 16, 2015 — rbi.org.inRBI's circular on Concurrent Audit in Banks dated January 30, 2003 — rbi.org.inRBI's Master Circular – Inspection and Audit Systems in Primary (Urban) Co-operative Banks dated July 1, 2009 — rbi.org.inICAI's Manual on Concurrent Audit of Banks (2023 Edition) — icai.orgAuthor may be reached at artithakar1589@gmail.com and eboard@icai.inThe Chartered Accountant — Internal Audit January 2026 | www.icai.org | 45–49
GST
Ep. 87 — Fuelling the Future: Landscape, Challenges, and Tax Optimisation in the Oil and Gas Industry
CA Journal
· July 2026
00:00
--:--
Fuelling the Future: Landscape, Challenges, and Tax Optimisation in the Oil and Gas IndustryIndia’s oil and gas sector, a prospective $8.6 trillion GDP market, fuels the economy but grapples with tax inefficiencies. Exclusion from GST denies utilisation of ITC, leading to a cascading tax burden and ultimately an increase in the cost of fuel. Additionally, states’ reliance on petroleum tax revenue makes them reluctant to transition to GST. Considering the uncertainty of GST integration and the unavailability of ITC, the industry must leverage the exemptions and concessions available under GST to structure transactions efficiently. While concerns over revenue loss exist, a balanced approach of integrating tax reforms with fiscal incentives can transform the sector. Proactive reforms today will ensure a resilient energy future tomorrow.IntroductionAmidst a rapidly evolving global landscape, one sector has emerged as a linchpin of India’s economic framework. An industry that not only fuels the ambitions of a growing nation but also positions itself as a critical player on the global stage. The industry, which is expected to reach $8.6 trillion GDP by 2040, exported 64.7 MMT of products while producing 264 MMT domestically. Drawing $8.22 billion in cumulative FDI inflows since 2000, this sector underpins the nation’s foreign reserves and industrial backbone as one of the eight core industries. The Oil and Gas Exploration Industry drives India’s energy future in every aspect of growth, right from revenue to returns, investments to international trade and from forex to fiscal contributions.The industry operates across three interconnected sectors.The upstream sectorThe midstream sectorThe downstream sectorO&G’s Three Primary StagesUpstreamExplorationDrilling, andProduction of crude oil and natural gasMidstreamTransportationStorage of crude oil and natural gasDownstreamRefiningProcessingDistribution of crude oil and natural gas into a wide range of end productsThe industry, being heavily regulated, also requires massive capex in exploration and infrastructure development. However, the pressing concern of the industry is upon the taxation policies implemented on them. With varied taxes and duties imposed without adequate benefits, especially under Indirect taxes, the members consistently urge the ministries to consider their hardships.Levy of Indirect Taxes in the IndustryUntil the implementation of the Goods and Services Tax Act, 2017 (hereinafter referred to as “The CGST Act, 2017” or “The Act”), multiple indirect taxes were levied by both the Central and State governments, leading to inefficiencies and cascading effects. The CGST Act, 2017, unified varied taxes as one single tax. However, vide Article 279A (5) of the Constitution and Section 9(2) of the Act, the Central Board of Indirect Taxes and Customs (hereinafter referred to as “CBIC”) deferred petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel from GST.Further, Article 246 of the Constitution grants power to the Parliament and the Legislatures of States to make laws with respect to matters under the Seventh Schedule. While entry no. 84 of the Union List empowers the Central Government to levy excise duty, entry no. 54 of the State List allows the State Government to impose VAT on the aforementioned goods. This has resulted in a situation wherein petroleum products are taxed separately through different taxes, and that too at different rates.This exclusion of petroleum products from the ambit of GST has deferred the Government’s vision of implementing the “One Nation, One Tax” policy. The introduction of GST aimed to unify taxation, reduce the cascading effect, and establish an efficient tax collection system, which currently seems to be defeated.Since inputs required for production are taxed under GST while outputs are excluded, the break in the Input Tax Credit (hereinafter referred to as “ITC”) chain adds a significant cost burden. As of 2025, India, the third-largest oil consumer, faces higher fuel prices due to this cascading tax effect. One of the key reasons for inflated fuel costs is the inability to offset input taxes, increasing the overall financial strain on the industry and consumers. To illustrate this, a detailed cost breakup of petrol and diesel as applicable in the State of Maharashtra is provided in Table 1.Table 1ParticularsPetrol PriceDiesel PriceCrude Oil (from Brent Crude + Russian Import + Other Crude Import)Rs. 40Rs. 40OMC Processing Cost (Freight + Refinery Processing + OMC Margin + Logistics Operational Costs)Rs. 7.35Rs. 8.15Buffer for Future Inflationary Aspect etcRs. 10Rs. 8Fuel Price after processing (A)Rs. 57.35Rs. 56.15Central Government Taxes and Dealer CommissionExcise Duty (all inclusive) + Road Cess as Charged by Central GovernmentRs. 19.9Rs. 15.8Commission to Petrol Pump DealersRs. 3.8Rs. 2.6Fuel Cost Before VATRs. 81.05Rs. 74.55State Taxes (Maharashtra)VAT @ 25% on petrol / VAT @ 21% on dieselRs. 20.26Rs. 15.65Additional taxRs. 5.12–Final Retail Price in Mumbai (B)Rs. 106.43Rs. 90.60Proportion of Total Tax to Final Cost42.5%34.71%Cost per litreGiven that the petroleum product prices are generally determined by global benchmarks such as Brent Crude and WTI, the cost of the products cannot be increased arbitrarily, ultimately leading to the cost of input taxes being absorbed by the industry.The Federation of Indian Petroleum Industry (FIPI) has been actively advocating for the industry’s concerns regarding GST exclusion. FIPI, a society representing hydrocarbon sector entities, serves as an interface with the government.The Federation of Indian Petroleum Industry (FIPI) has been actively advocating for the industry’s concerns regarding GST exclusion. FIPI, a society representing hydrocarbon sector entities, serves as an interface with the government. According to a report for F.Y. 2021-22, “exclusion from the GST regime and dealing with multiple taxes has resulted in a cascading tax effect, reversal of ITC, leaving the industry stranded with taxes as high as 60%.” Given the uncertainty surrounding GST inclusion, the industry must thoroughly assess contracts, meticulously examine invoices, and accurately determine tax rates to minimize procurement costs effectively.Tax Optimisation StrategiesIndustry relies heavily on specialised services and complex equipment, making cost and financial liquidity the foremost deciding factor. Industry’s versatile landscape requires services like Front End Engineering Design Services, also known as FEED services in the upstream sector, pipeline construction and maintenance in the midstream sector and product distribution in the downstream sector. Given its capital-intensive nature and the unavailability of ITC, optimizing taxes becomes a key consideration.Relaxation of IGST for Goods Imported under LeaseCertain goods integral to exploration operations are required to be imported, often incurring significant costs in the form of customs duties. CBIC vide NN 50/2017-Customs introduced entry 557A and 557B, levying a Nil rate of IGST for specified goods. This exemption applies to rigs imported for oil or gas exploration and production under lease agreements.However, the exemption is conditional. The importer must re-export the goods within three months from the expiry of the lease. Failure to comply would result in the payment of applicable duties as if the goods were imported under normal circumstances. Therefore, strict adherence to these conditions is essential to retain the benefits.Maintenance, Repair or Overhaul services (MRO) for ships and vesselsThe industry often ensures that imported vessels are ready for use by maintaining and repairing them before shipping, reducing reliance on local repair services and affecting domestic sales and tax revenues. Usually, such services are exigible at a rate of 18%, thereby increasing the industry’s cost burden. To create a level playing field, CBIC issued NN.02/2021-CTR, establishing a concessional 5% rate on MRO services for ships, vessels, engines, etc. Vessels such as drillships, anchor handling tug vessels, and FPSO units can benefit from this notification. However, it is important to determine whether the goods qualify as “vessels”.Furthermore, NN. 03/2021-CTR clarified that the POS for these services shall be the location of the recipient. This allows suppliers to benefit from export provisions under the IGST Act where the recipient is a foreign entity. This ultimately benefits both the service providers and recipients of services provided to incoming foreign vessels.Destiny Redefined: The Industry TransformationThe industry significantly contributes to the exchequer through royalty and cess over and above the direct and indirect taxes. With continued performance and persistent representation, CBIC provided certain reliefs; however, all such reliefs have now been snatched away from the industry — thanks to the government’s decision to expel the 12% tax rate. This decision has not only added to the cost burden for the companies operating in this sector but also increased the intricacies, which are outlined below:As GST is a destination-based tax, the inclusion would shift revenue from oil-producing states to consuming states, creating concerns about revenue distribution.Concessional Rate on Specified GoodsWith petroleum exploration requiring a range of goods, CBIC offered a concessional tax rate on specified goods that are integral to exploration projects, vide NN. 03/2017-CTR. The said notification set a concessional rate of 5% on goods essential for petroleum operations, which were later amended to 12% vide NN 08/2022-CTR effective from 18.07.2022. Further, vide NN.11/2025-CTR, the tax rate has been amended to 18% w.e.f 22.09.2025.While the previous rate benefited a wide array of equipment from technical drawings and jack-up rigs, the updated tax rate provides no comfort to the industry. The changes in tax rate shall also impact the IGST payable on imports made under Sr No. 404 of NN.50/2017-Customs, which shall also increase from 12% to 18%.One of the questions arises as to how one should proceed when the same commodity is subject to varying tax rates. Consider helicopters. As per NN. 09/2025-CTR, these goods attract a 5% tax rate under Sr No. 463 in Schedule I. However, vide NN. 11/2025-CTR, the same goods carry a 18% rate. This presents a dilemma: should the industry follow the general notification with a lower rate or the specific exemption notification, which imposes additional conditions and a higher rate? Additionally, it is essential to examine the legal basis for such notifications. NN. 03/2017-CTR, issued under Section 11(1) of the CGST Act, grants CBIC the power to exempt goods or services. However, instead of providing relief, the tax rates have been increased and that too under conditional circumstances, which include obtaining an Essentiality Certificate issued by the DGH. Navigating these complexities requires a precise understanding of both legislative intent and practical application, elements that can be easily misinterpreted without specialized expertise.Offshore Works Contract ServicesBefore understanding the change, it is important to distinguish between offshore and onshore services. Offshore activities refer to operations that are carried out in the water bodies, typically in deep water, which include services like exploration, drilling, extraction, etc. Onshore activities, on the other hand, are conducted on land. Depending on the location of oil fields, both onshore and offshore exploration may be conducted.During exploration, certain equipment cannot be purchased directly from vendors, necessitating specialized engineers for the manufacturing and fabrication of goods. These services, which involve the supply of goods, may result in the construction of immovable property, potentially qualifying as works contracts under Section 2(119) of the Act. To address this, CBIC issued NN. 39/2017-ITR, providing a concessional tax rate of 12% on the composite supply of offshore works contracts relating to oil and gas exploration in the area beyond 12 nautical miles, thereby providing a significant relief from the standard 18% rate. However, vide NN.15/2025-CTR, the tax rate has been increased to 18% w.e.f. 22.09.2025.Upon perusal of Para 25.1 to 25.2 of minutes of the 22nd GST Council, one can find the logic behind the change of rate on the aforesaid services from 18% to 12%. One of the reasons was the taxability of such services at 12% in the pre-GST regime. Further, the area beyond 12 nautical miles was beyond the jurisdiction of States, and therefore, VAT was not applicable, and only the Service Tax of 6% was charged. It was recommended to apply a tax rate of 12% instead of 18%. However, it seems that the new tax rate is contrary to the discussion held during the meeting.With the offshore works contract services involving costly activities like construction and installation of wellhead platforms, derricks, etc, rather than shifting it to the 5% tax rate, the burden has been shifted onto the industry. The government must reconsider this, given petroleum’s GST exclusion and the resulting cascading tax impact.Support Services to the IndustryTo facilitate operations across the upstream sectors, CBIC vide NN 20/2019-CTR introduced a 12% concessional rate for professional, technical and support services provided to the industry. However, the said rate has also been amended to 18% vide NN. 15/2025-CTR. One of the important concessions provided to the industry has now been snatched away. The government shall not just reconsider this decision but also provide clarity on the word “support services”. At first glance, one might assume that all services in this industry qualify as “support services.” However, Circular No. 114/33/2019-GST clarifies the services that can be brought under the umbrella to avail the concessional rate of tax. The circular provides two explanatory notes to determine the eligibility of services for the concessional benefit. Although the explanatory notes use the term ‘includes’ to define the list of services, the list itself is ‘restrictive’, thereby creating a dilemma for the industry. Misinterpretation has led to being prey of litigation and payment of taxes at a higher rate. CBIC should clarify the restriction or inclusiveness of the term “Includes” to avoid disputes.RecommendationsThe exclusion of petroleum products from GST has sparked concerns due to its impact on production costs and consumer prices. The interplay of various taxes has increased the tax burden, while geopolitical factors further escalate production costs. Since fuel prices directly affect inflation and economic stability, government intervention often prevents companies from transferring the full tax burden to consumers. Subsuming these taxes under GST could streamline the tax structure and reduce inefficiencies.The 45th GST Council Meeting acknowledged the industry’s cost burden but deferred the proposal, citing that “this is not the right time to bring Petrol and Diesel within the ambit of GST.” The decision stems from the significant revenue reliance on petroleum products by both the central and certain state governments. Taxes on fuel have been a major source of revenue, which is why the Council would not bring it under GST. Further, the recent changes have pushed all the tax rates relevant to the industry into the 18% tax bracket, which further adds to their grievances. As GST is a destination-based tax, the inclusion would shift revenue from oil-producing states to consuming states, creating concerns about revenue distribution. As per a report by Petroleum Planning and Analysis Cell (PPPAC), tax collected on petroleum products contributed Rs. 4,14,244 crore to the Central exchequer, whereas Rs. 3,25,583.5 crore to the State in F.Y. 2024-25. Additionally, the top-ranked states specifically with respect to revenue from taxes are provided in Table 2.Table 2Sr. NoStateSales Tax/VATSGST/UTGSTTotalState wise Collection of State Tax/VAT/GST on Petroleum, Oil and Lubricants1Maharashtra36,992.171,653.9038,646.072Uttar Pradesh31,214.11909.7232,123.833Tamil Nadu24,861.32712.9625,574.284Gujarat24,586.232,980.2427,566.475Karnataka23,427.58410.0923,837.67Amount in CroresThe revenue dynamics in the petroleum industry highlight a stark difference between state taxes on goods and GST collected on sales by the downstream industry. In the meantime, CBIC could provide the industry with temporary relief, discussion about which is as discussed below:Refund of Input Tax CreditThe inclusion of petroleum products under GST is likely to take time as states work toward a consensus. Meanwhile, what interim measures can the government implement to support the industry? Under Section 55 of the Act, the CBIC, through NN. 06/2017-CTR, granted a 50% refund of tax paid on all inward supplies of goods received by the Canteen Stores Department (hereinafter referred to as “CSD”) to compensate for the pre-GST exemptions and to ensure that essential goods remain affordable for the armed forces.A similar approach could be applied to the industry. The government could identify key goods and services and introduce a partial refund mechanism, allowing businesses to claim refunds up to a specified limit.A structured mechanism may also be instituted whereby a fixed percentage of the total input cost can be utilized against tax liabilities such as import duties or excise duty on crude, similar to the duty credit framework presently extended to exporters.Shifting of tax rate for all goods and servicesCurrently, the GST rate of 18% applies to all necessary goods and services affecting not only companies but also consumers of petroleum products like diesel and petroleum. While other sectors received tax relief, the emerging oil and gas exploration industry is being ignored. It’s crucial to address this by reducing the GST rate to 5% to stabilize the sector.ConclusionExcluding petroleum products is not just a taxation issue but an economic roadblock that increases costs and distorts market dynamics. Without GST, fuel prices remain artificially inflated due to multiple embedded taxes, ultimately increasing the costs of end products.The industry constantly urges the ministries to include petroleum products into GST, but will this resolve all the issues? While to some extent, yes and to some, the issues still persist. Excluding petroleum products is not just a taxation issue but an economic roadblock that increases costs and distorts market dynamics. Without GST, fuel prices remain artificially inflated due to multiple embedded taxes, which translates into increased costs for the end products. Integrating petroleum into GST would eliminate these inefficiencies and ensure a seamless credit mechanism in the supply chain.A key justification for inclusion under GST is to utilize ITC, which is currently blocked, adding financial strain on the industry. Businesses could offset input taxes against output liability, reducing cascading effects. However, concerns remain that several critical inputs will still be ineligible for ITC under Section 17(5)(c) of the Act, as it disallows ITC on immovable property (except plant and machinery), impacting works contract services. Since “plant and machinery” excludes civil structures, ITC on infrastructure such as wellhead platforms may remain ineligible. While GST inclusion lowers tax costs, ITC restrictions will still inflate expenses, thereby raising consumer prices.On the other hand, where petrol and diesel are taxed at approximately 42% and 34% of their final cost, respectively, alongside the imperative for states to sustain their revenue streams, if brought under GST, the rate would likely be no less than 28%.Now, consider energy-intensive industries, particularly the fertilizer industry. According to an industry consumption report by the Petroleum Planning and Analysis Cell, the industrial sector, driven by the steel and cement industries, remains the largest energy consumer of natural gas, by consuming 31% share between the period April 2025 to August 2025.Natural Gas Sectoral Consumption, Apr – Aug 2025 Fertilizer 8,109 · 31%CGD 6,711 · 25%Others 4,156 · 16%Power 3,797 · 14%Refinery 2,120 · 8%Petrochem 1,705 · 6%Also, the logistics and transport industry, where petroleum products constitute a major component of inputs and output services, capped at 5% or 18%, including petroleum under GST, would create an inverted duty structure, with input taxes exceeding the output taxes. This issue extends beyond transport and logistics to telecommunications, aviation, and other fuel-intensive industries. Further, with recent changes in the tax rates, the question of the inverted duty structure and refunds in relation to the same remains to be answered.Additionally, the refund of ITC due to an inverted duty structure creates dual financial strain of reducing state revenue and an additional refund burden. CBIC must ensure inclusion is a comprehensive reform benefiting consumers, industries, and the economy.Countries like New Zealand, Canada, and Saudi Arabia have successfully adopted a unified tax system for petroleum products. India, too, stands to gain from such a reform. The 55th GST Council meeting had initiated discussions on including natural gas, considering its role in fuel and fertilizers. However, prioritizing the inclusion of other petroleum products is equally essential. While concerns over revenue distribution persist, strategic and equitable tax allocation could address these challenges. The government must prioritize long-term economic stability over short-term revenue concerns. Delays in reform will hurt industrial competitiveness and global standing, while this reform is inevitable. It is now a question of when and how the government will make this historic transition.Author may be reached at akshay.sharma@bathiya.com and eboard@icai.in The Chartered Accountant · January 2026
GST
Ep. 88 — Interpreting ‘Own Account’ and ‘Plant and Machinery’: A Practitioner’s Guide to ITC on Civil Structures
CA Journal
· July 2026
00:00
--:--
Interpreting ‘Own Account’ and ‘Plant and Machinery’: A Practitioner’s Guide to ITC on Civil StructuresThe article critically examines the evolving interpretation of Section 17(5)(d) of the CGST Act concerning Input Tax Credit (ITC) on immovable property. It discusses the Safari Retreats judgment, which introduced the functionality test, and contrasts it with the retrospective amendment in Finance Act 2025 aligning clause (d) with clause (c). It also analyzes the Bharti Airtel ruling’s six-fold test for movability. Through practical tests and case law, the article argues for a harmonized reading of exclusions and emphasizes that if an asset serves as a business tool, it may still qualify as “plant and machinery,” allowing ITC eligibility.IntroductionAlthough the Safari Retreats judgment has a significant impact by introducing the functionality test to determine whether a building qualifies as a Plant, its influence has been short-lived due to a recent retrospective amendment proposed in the Union Budget 2025–26. Acting on the recommendations of the 55th GST Council Meeting, “plant or machinery” in Section 17(5)(d) has been replaced with “plant and machinery” to ensure consistency with the language used in Section 17(5)(c). Consequently, the explanation to Section 17(5), which defines “plant and machinery,” will now also apply to the provisions under Section 17(5)(d).Kindly note that retrospective amendment has not yet been effective.The Safari Retreats judgment also underscored that the phrase “on his own account” in clause (d) of Section 17(5) should be interpreted with a purpose, rather than a narrow or literal approach. Notably, this interpretation remains untouched by the Finance Bill, 2025.In contrast, the Bharti Airtel judgment has had a lasting impact on the availability of CENVAT credit on Telecommunication towers. The ruling provided a comprehensive analysis by laying down six guiding principles for determining whether a property qualifies as movable or immovable. These principles include: (i) the nature of annexation, (ii) the object of annexation, (iii) the degree of permanency, (iv) the intention of the parties, (v) the functionality test, and (vi) the marketability test. Based on these criteria, the classification of a property as movable or immovable is to be assessed.Assessment of Input Tax Credit Eligibility on Inputs and/or Services Used for Construction of Immovable Property — Section 17(5)(d)In this case, the restriction applies to the project owner or the end user, and more importantly, for determining the eligibility of Input Tax Credit, the assessment must be made from the perspective of the recipient of the taxable supply — commonly referred to as the recipient’s test.Given the restriction under clause (d), input tax credit (ITC) is not available on goods or services (or both) received by a taxable person for the construction of an immovable property on their own account. However, there are two key exceptions to this restriction:Where the construction relates to plant and machinery; andWhere the construction is not on the taxpayer’s own account.In light of the above, a three-step test should be applied to determine the eligibility of ITC on inputs and/or services used in the construction of immovable property.The goods and/or services are received by a taxable person for the construction of immovable property or movable property.The goods and/or services are received by a taxable person for the construction of immovable property, whether for his own account or otherwise.The goods and/or services are received by a taxable person for the construction of immovable property, whether such property qualifies as “plant and machinery” or not.Test 1Immovable Property or NotThe first test is to examine whether the inputs and/or services received are used for the construction of an immovable property or movable property. As the term immovable property is not defined under the GST law, its interpretation must be drawn from the General Clauses Act and the Transfer of Property Act.Notably, the recent Supreme Court judgment in the case of Bharti Airtel Limited has set out six guiding principles for determining whether a property qualifies as movable or immovable. In light of these principles, the nature of the property must be assessed. If, upon such assessment, the property is found to be movable, input tax credit (ITC) on goods and/or services used for its construction would be admissible.Notably, in the explanation for the purposes of clauses (c) and (d) of Section 17(5), the following items are outside the purview of the definition of Plant and Machinery:Land, building or any other civil structureTelecommunication towersPipelines laid outside the factory premisesThe restriction on Input Tax Credit (ITC) in relation to the above three items applies specifically to the construction of immovable property. The exclusion of certain items from the definition of “plant and machinery” does not automatically render those items immovable in nature. Therefore, if an article qualifies as movable property based on the criteria laid down by the Supreme Court in Bharti Airtel Limited, ITC on such goods or services would remain admissible.ExamplesTo assess the credit eligibility of a solar power plant, the first step is to determine whether it qualifies as immovable property, based on the six principles established in the Bharti Airtel judgement.Degree and Object of Annexation – It is essential to analyze the degree of attachment, which may differ depending on whether the installation is ground-mounted (suggesting a more permanent setup) or rooftop-mounted. However, even where solar modules are affixed to a civil foundation which is embedded in the earth, such attachment would render the structure immovable only if the modules are installed for the permanent and beneficial enjoyment of the civil foundation itself. Conversely, if the civil foundation is embedded in the earth solely to facilitate the effective and enduring functioning of the solar power generating system, and not the other way around, then the system cannot be regarded as immovable property.The Degree of Permanency – It is essential to assess whether the plant can be dismantled and reinstalled at another location. The mere fact that the plant is fixed to a foundation using nuts and bolts does not, by itself, render it permanently attached to the earth, particularly if such a foundation is required solely to ensure stable and vibration-free operation of the machinery.The owner’s intention is key i.e., if the structure serves a temporary, project-specific purpose, it indicates movability; if intended to become a permanent part of the land or building, it is deemed immovable.The Object of Annexation – Even if a solar power plant is fixed to a civil foundation for operational efficiency, that will not make the power plant an item of immovable property, and it may also happen that some of the items may be assembled on site. That too will not make any difference to the principle. The test is whether the installed solar power plant can be sold in the market. In case it can be sold in the market, then the solar power plant must be a movable property.The Intention of the Parties – The solar power plant, when affixed to a civil structure using nuts and bolts, does not become permanently integrated with the land or building. This attachment is merely to provide structural stability and ensure a wobble-free installation, enabling the plant to operate effectively. The purpose of such affixation is not for the permanent beneficial enjoyment of the land or building but to support the plant’s optimal functioning and ensure uninterrupted service delivery.The Functionality Test – If a solar power plant remains operational after being dismantled and is not location-dependent, it is considered movable. Conversely, if dismantling renders it non-functional or unfit for use elsewhere, it is treated as immovable.The Marketability Test – A structure is considered movable if it can be disassembled and sold or transferred, either wholly or in parts, without losing its utility. However, if it cannot be marketed without being damaged or destroyed in the process, it is regarded as immovable.If a solar power plant remains operational after being dismantled and is not location-dependent, it is considered movable. Conversely, if dismantling renders it non-functional or unfit for use elsewhere, it is treated as immovable.Test 2Receipt of Goods/Services for Construction of Immovable Property on His Own Account or NotA new line of jurisprudence has emerged through the Safari Retreats judgment concerning the interpretation of the phrase “on his own account.” The judgment emphasized that this phrase should be read down and interpreted with a purposive approach rather than a narrow or literal one. In essence, if a person constructs a property and subsequently uses it for taxable outward supplies, such as leasing the premises and charging GST, such construction cannot be regarded as being undertaken on his own account. Consequently, Input Tax Credit (ITC) in such cases should be permitted.Construction is said to be on a taxable person’s “own account” in two scenarios –Made for personal use and not for provision of service.When used as a setting for carrying out own business.On the other hand, construction cannot be said to be on a taxable person’s “own account”, if it is intended to be sold or given on lease or license.Let’s now explore the meaning of the phrase on his own account with the help of some examples.ExamplesXYZ Ltd. received various goods and/or services for construction of an office building or factory buildingScenario 1: XYZ Limited further leases out whole units in the office/factory building to customers and discharges output GST on the rental income. In such a case, it cannot be construed that the construction of the immovable property is undertaken on its own account. Accordingly, Input Tax Credit on goods and/or services received for the construction of such immovable property shall be allowable.Scenario 2: XYZ Limited uses the office/factory building for its own purpose and in this case, no further GST on the sale/lease of such a building occurs and accordingly the embargo under Section 17(5)(d) on ITC will apply as it is construed on his own account.XYZ Ltd. received various goods and/or services for construction of a DATA warehouse which is to be used as a cloud serviceIn this case, the data warehouse is intended to be used for storing client data, meaning the immovable property is directly utilized for providing taxable supplies on which GST is payable. Consequently, the restriction under Section 17(5)(d) on availing Input Tax Credit (ITC) would apply, as the construction is deemed to be undertaken on the taxpayer’s own account.Test 3Whether the Property Qualifies as “Plant and Machinery” or NotThe third test involves examining whether the resulting immovable property falls within the scope of “plant and machinery” as defined in the Explanation to clauses (c) and (d) of Section 17(5) of the CGST Act.As stated in the supra, the retrospective amendment substituting the term “plant or machinery” with “plant & machinery” in Section 17(5)(d) of the CGST Act, 2017 has been introduced vide Section 124 of the Finance Act, 2025, and the said amendment has come into force w.e.f. 01-10-2025.Input Tax Credit (ITC) is not barred in respect of goods or services used for the construction of an immovable property, which qualifies as plant and machinery as so defined in the explanation to clauses Section 17(5)(c). According to the definition, “plant and machinery” refers to an apparatus, equipment, or machinery that is fixed to the earth by means of a foundation or structural support and is used for making outward supplies of goods or services or both. It also includes such foundation or support structures. However, it explicitly excludes:land, buildings or any other civil structures,telecommunication towers, andpipelines laid outside the factory premises.Input Tax Credit (ITC) is not barred in respect of goods or services used for the construction of an immovable property, which qualifies as plant and machinery as so defined in explanation to clauses Section 17(5)(c).Following the retrospective amendment introduced by the Finance Act 2025, substituting the expression “plant or machinery” with “plant and machinery” in Section 17(5)(d) of the CGST Act, 2017, the core issue that now arises is whether, in light of the functionality test propounded in the Safari Retreats judgment, buildings can still be regarded as falling within the ambit of “plant.” To examine this proposition more closely, a few illustrative examples may be construed.Data Warehouse as Cloud Service: Since the building has been specifically planned and constructed for the purpose of storing client data, it can be classified as a “plant” by applying the principle laid down in the Karnataka Power Corporation [(2002) 9 SCC 571] judgment, which held that a building which has been planned and constructed so as to serve special technical requirements of the assessee may be treated as a plant.Power Generating Station: The Hon’ble Apex Court held in the case of Karnataka Power Corporation that the assessee’s power generating station building is an integral part of its generating system, and therefore, the same could be treated as a plant.Installation of Sanitary Fitting and Pipelines in a Hotel: The Apex Court held in the case of Andhra Pradesh vs. Taj Mahal Hotel [(1971) 82 ITR 44] that the installation of sanitary fitting and pipelines in a hotel constitutes “plant”.Cold Storage Building: The Calcutta High Court in the case of Commissioner of Income-Tax vs. Shree Gopikishan Industries Pvt. Ltd. on 11 June, 2003, held that the building of a cold storage is a plant.Even after the amendment, it can still be contended that the aforementioned buildings or immovable properties, being an essential tool of trade with which business is carried on, may qualify as “plant and machinery,” thereby reinforcing the relevance of the functionality test.As evident from the above, applying the functionality test, as laid down by the Hon’ble Supreme Court in the Safari Retreats judgment, structures such as data warehouses, power generating stations, and installations like sanitary fittings may fall within the scope of “plant.” However, this interpretation appears to be at conflict with the explicit exclusion of “land, buildings, or any other civil structures” from the definition of “plant and machinery” under the Explanation to Section 17(5) of the CGST Act, 2017.It is a well-settled principle of statutory interpretation that when two or more provisions of a statute appear to be in conflict, they must be read harmoniously. The aim is to interpret them in a way that gives effect to each provision, ensuring that none is rendered redundant or ineffective.Applying this principle, the exclusion of “building” or “civil structure” should be interpreted to apply only to those structures that merely provide the backdrop or setting for business activities, and not to those that function as essential means or tools for carrying on the business itself.Post Bharti Airtel Judgement EraIn the case of Sterling & Wilson Private Limited [Writ Petition No. 20096 of 2020], the primary issue was classification of the supply and installation of a solar power generating system. The tax authority held the transaction to be a “works contract” (immovable property) and levied a tax of 18%, whereas the petitioner objected to the same on the ground that the activities of the petitioner would have to be treated as composite supply. The Hon’ble High Court of Andhra Pradesh had observed that the solar power generating system, while attached to the ground, was not embedded for permanent beneficial enjoyment of the land but rather, the foundation served the system. Therefore, the supply is not a “works contract” but a “composite supply” as defined under GST law.Relying on the similar ratio of the Bharti Airtel judgement, in the present case, it was held that the installation of a solar power generating system would qualify as movable property and thus the said supply is not a works contract, but composite supply, as a works contract requires the involvement of an immovable property.Post Safari Retreats Judgement EraIn the case of Shibaura Machine India Pvt. Ltd. [Advance Ruling No. 36/ARA/2025 dated 02-09-2025], the Advance Ruling Authority of Tamil Nadu has ruled that structural supports erected specifically for the overhead crane and HVAC machinery fall within the extended definition of “plant and machinery.” Accordingly, the proportionate Input Tax Credit (ITC) attributable exclusively to the secondary steel structural supports associated with the overhead crane’s movement and the HVAC system is not excluded under Section 17(5) of the CGST Act, 2017, and is therefore eligible for the applicant to claim.Although the aforesaid ruling refrained from employing the functionality test when classifying the structural supports specifically erected for the overhead crane and HVAC equipment as “plant and machinery,” it nonetheless adopted a comprehensive and expansive construction of the term “plant and machinery.”ConclusionThe interpretation and application of Section 17(5) of the CGST Act, 2017, particularly clause (d), continue to be complex and evolving. The Safari Retreats judgment brought to light a purposive interpretation of the phrase “on his own account” and reaffirmed the relevance of the functionality test in determining whether an immovable property can be treated as “plant.” Subsequent to the Supreme Court’s dismissal of the Review Petition filed by the Revenue [Review Petition (Civil) Diary No(s). 1188/2025 in C.A. No. 2948/2023], the issue has become final and conclusive.However, the retrospective amendment introduced through the Finance Act, 2025, substituting “plant or machinery” with “plant and machinery” in clause (d), has introduced new interpretational challenges. While it brings clause (d) in line with clause (c), it also reinforces the statutory exclusion of “land, buildings, or any other civil structures” from the definition of plant and machinery.Nonetheless, the consistent judicial emphasis on the functionality and purpose of the asset, as seen in the Safari Retreats case, suggests that if an immovable structure functions as an integral tool of trade, beyond serving as a mere location, it may still be contended to fall within the scope of “plant and machinery”.In this context, the principle of harmonious construction becomes essential. Rather than allowing the exclusion clause to override the entirety of the definition, the courts may adopt an interpretation that preserves the legislative intent while ensuring that structures genuinely functioning as tools of business are not unfairly denied Input Tax Credit.As jurisprudence continues to develop and the retrospective amendment awaits notification, taxpayers, particularly those in infrastructure-heavy sectors like IT, telecom, and commercial real estate, must carefully evaluate the purpose, design, and use of constructed assets to determine ITC eligibility. Until further clarity emerges through judicial or legislative intervention, a case-specific, functionality-driven assessment remains the most prudent approach.◆ ◆ ◆Author may be reached atsabya.chakraborty@gmail.com and eboard@icai.inThe Chartered Accountant — GST January 2026 | www.icai.org | Pages 56–60
Accounting Standards
Ep. 89 — Lack of Exchangeability – What is Changing?
CA Journal
· July 2026
00:00
--:--
Lack of Exchangeability – What is Changing?Ind AS 21 (The Effects of Changes in Foreign Exchange Rates) – inter alia – sets out the exchange rate that an entity uses when it reports foreign currency transactions or balances in the functional currency, translates the results and financial position of a foreign operation in a different currency, or translates its own results and financial position into a presentation currency.Until the recent amendment in May 2025, paragraph 26 of Ind AS 21 specified the exchange rate to be used when exchangeability between two currencies is temporarily lacking; however, it didn't provide specific guidance for situations where lack of exchangeability was not temporary.This article seeks to provide an insight on what has changed after the recent amendment to Ind AS 21 and how the revised Standard helps entities (a) assess whether a given currency is exchangeable into another currency, and (b) determine the spot exchange rate when exchangeability is lacking. The article also sheds light on the key disclosure requirements arising from the amendment.Introduction and BackgroundAt the outset, it may be recalled that IAS 21 The Effects of Changes in Foreign Exchange Rates and the corresponding converged Indian Accounting Standard (Ind AS 21) provide guidance on the exchange rate that an entity uses, when:it reports foreign currency transactions or balances in the functional currency;it translates the results and financial position of a foreign operation in a different currency; andit translates its results and financial position into a presentation currency.Before the recent amendment, these Standard provided guidance on the exchange rate to be used when exchangeability between two currencies was temporarily lacking. However, there was no explicit guidance on the determination of the exchange rate when the lack of exchangeability was not temporary. Accordingly, this led to diversity in practice.Genesis of the IssueThe genesis of the amendment lies in a submission received by the IFRS Interpretations Committee regarding how to determine the exchange rate when there is a long-term lack of exchangeability. The question before the IFRS IC arose from a specific situation faced by an entity in the context of its operations in Venezuela.Accordingly, the IFRS IC recommended that the International Accounting Standards Board (IASB) develop a narrow-scope amendment to IAS 21 to address this issue.Fig. 1 – The exchangeability questionVenezuelan Bolivar (Bs)⇄ exchange ⇄Say, Euro (€)Source: Self-compiledDevelopments at the Standard-Setting BodiesFollowing the above recommendation, the IASB issued amendments to IAS 21 in August 2023, specifically addressing the issue of lack of exchangeability. Subsequently, corresponding amendments to Ind AS 21 were considered and formally issued by the Ministry of Corporate Affairs (MCA) on 7th May 2025. These amendments reflect the standard-setters' response to extensive feedback from users of financial statements, who had raised concerns regarding the inconsistency in accounting practices in situations involving a lack of exchangeability between currencies, as illustrated in Fig. 2.Fig. 2 – Exchangeability between two currenciesCurrency A⇄ exchange ⇄Currency BSource: Self-compiledMoreover, the amendment requires an entity to provide more useful information in their financial statements when a currency cannot be exchanged into another currency.Key Requirement under the AmendmentThe amendments mainly require an entity to:assess (i) when a currency is exchangeable into another currency; andestimate the spot exchange rate when a currency is not exchangeable into another currency.This is illustrated in Fig. 3.The amendment also includes application guidance to (i) assist entities in assessing whether a currency is exchangeable into another currency, and (ii) support the estimation of the spot exchange rate when a currency is determined to be not exchangeable. In addition, the amendment requires entities to provide specific disclosures in cases where the spot exchange rate is estimated due to a lack of exchangeability between currencies.Fig. 3 – The two-step approachStep 1 – Determining whether the currency is exchangeablePara 8, 8A & 8BWhether the currency is exchangeable into another currencyat the measurement datefor the specified purposeYes → Apply the applicable requirements under Ind AS 21No ↓Step 2 – Estimating the spot exchange rate when a currency is not exchangeableEstimate the spot exchange rate that meets the objective of Ind AS 21 in Para 19A:Either by using "an observable exchange rate without adjustment" (Para A11 to A16)Or by using "another estimation technique" (Para A17)Source: Self-compiledHow to Apply the Two-step Approach under the Amendment – a Deep DiveStep 1: Determining whether the currency is exchangeable into another currencyWhen evaluating whether a currency is exchangeable into another currency, the entity must assess its ability to obtain the other currency, rather than its intention or decision to do so.The amendment introduces a definition of the term 'exchangeable' in paragraph 8. According to the requirements of paragraph 8, a currency is considered exchangeable into another currency when the entity is:able to obtain the other currency;within a timeframe that reflects a normal administrative delay;through a market or exchange mechanism; andwhere the exchange transaction results in enforceable rights and obligations.Paragraph 8A further clarifies that the assessment of exchangeability must be performed (i) at the measurement date and (ii) for a specified purpose.In addition, paragraph 8B states that a currency is not considered exchangeable into another currency if, at the measurement date and for the specified purpose, the entity can obtain no more than an insignificant amount of the other currency. For example, if an entity with the Venezuelan Bolívar as its functional currency has liabilities denominated in euros, it must assess whether the 'total amount of euros obtainable for the purpose of settling those liabilities' is no more than an insignificant amount relative to the 'aggregate amount of its euro-denominated liabilities'.In this regard, it is relevant to note that paragraphs A3 to A10 of Appendix A provide application guidance to assist entities in evaluating whether a currency is exchangeable into another currency.Fig. 4 summarises the key requirements outlining how an entity can assess the exchangeability of a currency.Fig. 4 – Factors in assessing exchangeabilityStep 1 – Determining whether the currency is exchangeableAssess the exchangeability between two currencies @ the measurement dateFactors to be considered by an entity in assessing the exchangeability between two currenciesPara A3Timeframe to obtain the other currencyA4Ability (and not, the intention per se) to obtain the other currencyA5Market mechanism (or other mechanisms) – resulting in enforceable rights and obligationsA6Purpose of obtaining the other currencyA10A currency is not exchangeable into another currency if the entity is able to obtain no more than an insignificant amount of the other currencySource: Self-compiledAs can be appreciated from the above, an entity takes into account the following factors when assessing exchangeability of a currency:Time Frame to Obtain the Other CurrencyParagraph 8 defines a spot exchange rate as the exchange rate applicable to immediate delivery.The amendment clarifies that the existence of a normal administrative delay in obtaining the other currency does not, in itself, prevent a currency from being considered exchangeable into that other currency.Further, the determination of what constitutes a normal administrative delay is based on the specific facts and circumstances.Ability to Obtain the Other CurrencyWhen evaluating whether a currency is exchangeable into another currency, the entity must assess its ability to obtain the other currency, rather than its intention or decision to do so.Additionally, the amendment clarifies that a currency is considered exchangeable into another currency if the entity is able to obtain the other currency, whether directly or indirectly.Market (or Other Mechanisms) Resulting in Enforceable Rights and ObligationsThe amendment clarifies that, in assessing whether a currency is exchangeable into another currency, an entity must consider only those markets or exchange mechanisms in which a transaction to exchange the currency for the other currency would result in enforceable rights and obligations.Furthermore, as enforceability is a legal matter, the determination of whether an exchange transaction in a particular market or exchange mechanism gives rise to enforceable rights and obligations depends on the specific facts and circumstances.Purpose of Obtaining the Other CurrencyThe amendment clarifies that multiple exchange rates may exist for different uses of a currency. As a result, a currency may be exchangeable into another currency for certain purposes, but not for others.Consequently, when assessing exchangeability, the entity is required to determine its purpose in obtaining the other currency, based on the nature of the underlying transaction, as illustrated in Table 1.Also, an entity is required to assess exchangeability of a currency into another currency separately for each purpose.Type of TransactionPurpose in Obtaining the Other CurrencyReporting foreign currency transactions in the entity's functional currencyTo realise or settle individual foreign currency transactions, assets, or liabilitiesTranslation to a presentation currency other than the entity's functional currencyTo realise or settle individual foreign currency transactions, assets, or liabilitiesTranslation of the results and financial position of a foreign operation into the presentation currencyTo realise or settle its net investment in the foreign operationTable 1 – Purpose in obtaining the other currencyAbility to Obtain Only Limited Amounts of the Other CurrencyThe amendment clarifies that a currency is not considered exchangeable into another currency if, for a specified purpose (e.g., paying dividends), the entity is able to obtain no more than an insignificant amount of the other currency.For this assessment, the significance of the amount obtained is evaluated by comparing that amount with the total amount of the other currency required for the specified purpose.Step 2: Estimating the Spot Exchange Rate when a Currency is not Exchangeable into AnotherWhen a currency is determined to be not exchangeable into another currency at the measurement date for a specified purpose, paragraph 19A of the amended standard mandates that the entity must estimate the spot exchange rate as at the measurement date.Further, the newly inserted paragraph 19A specifies the objective in estimating the spot exchange rate as follows (emphasis added):'…. An entity's objective in estimating the spot exchange rate is to reflect the rate at which an orderly exchange transaction would take place at the measurement date between market participants under prevailing economic conditions.'However, the standard does not prescribe detailed requirements for how an entity should estimate the spot exchange rate to meet the objective outlined in paragraph 19A. Instead, it establishes a framework that enables the entity to determine the spot exchange rate as at the measurement date.Accordingly, paragraph A11 of the application guidance in Appendix A specifies that an entity can use:an observable exchange rate without adjustment — e.g. (i) spot exchange rate for a purpose other than that for which an entity assesses exchangeability or (ii) the first exchange rate at which an entity is able to obtain the other currency for the specified purpose after exchangeability of the currency is restored; oranother estimation technique — say, any observable exchange rate adjusted as necessary to meet the objective of paragraph 19A.Fig. 5 – Estimating the spot exchange rateStep 2 – Estimate the spot exchange rateFor estimating the spot exchange rate an entity may use … (Para A11)Para A12 to A16 Observable Exchange Rate (without adjustment)Spot exchange rate for a purpose other than that for which the entity assesses exchangeability (say, import of goods vs dividend payment)Or, the first subsequent exchange rateif that observable exchange rate meets the objectives in Para 19APara A17 Another Estimation TechniqueAny observable exchange rate, andadjust that rate to meet the estimation objective in Para 19ASource: Self-compiledFig. 5 summarises the key requirements on how an entity can go about estimating the spot exchange rate when a currency is not exchangeable into another.In jurisdictions experiencing a prolonged lack of exchangeability, it is important to recognize that certain markets or exchange mechanisms such as unofficial or parallel markets may exist without creating enforceable rights and obligations. When assessing whether a currency is exchangeable under Step 1, entities must disregard the availability of the currency in such unofficial markets or mechanisms.However, if an entity determines under Step 1 that the currency is not exchangeable at the measurement date for a specific purpose and therefore proceeds to Step 2 to estimate the spot exchange rate at that date and for that purpose, it may then refer to observable exchange rates from transactions in unofficial markets or mechanisms that do not establish enforceable rights and obligations. Such observable rates may be used, with appropriate adjustments.Additionally, in formulating the amendments, the standard-setters have deliberately chosen not to prescribe a hierarchy of observable exchange rates for estimating the spot exchange rate. Although a hierarchy could enhance consistency, it was considered that doing so might introduce unnecessary costs without yielding more useful information.Consequently, while the amendments define a clear objective for estimating the exchange rate, they allow entities discretion in selecting an appropriate approach, based on their specific circumstances.Key Disclosure RequirementsThe amendment has introduced additional disclosure requirements when an entity estimates a spot exchange rate because a currency is not exchangeable into another currency. The overarching objective of the new disclosure requirements (as stipulated in paragraph 57A) is 'to enable users of its financial statements to understand how the currency not being exchangeable into the other currency affects, or is expected to affect, the entity's financial performance, financial position and cash flows'.Put differently, the new disclosure requirements under the amended standard seek to help investors in better understanding the effects, risks and estimated rates and techniques used when a currency is not exchangeable.Fig. 6 summarises the key disclosure requirements under the amended standard (as contemplated under paragraphs A19 and A20 of Appendix A, containing the application guidance).Fig. 6 – Key disclosure requirementsDisclosure objective (Para 57A) – to help investors understand the (a) effects, (b) risks, (c) estimated rates and (d) techniques used when a currency is not exchangeableKey disclosure requirements include the following (Para A19)aDetails of the currency and description of the restrictionbDescription of the affected transactioncCarrying amount of the affected assets and liabilitiesdThe spot rate(s) used and whether they are observable rates without adjustment or estimated rateseDescription of the estimation technique used, and qualitative & quantitative information about inputs and assumptions usedfQualitative information about the risk to which an entity is exposed because of the currency's lack of exchangeability, and the nature and carrying amount of assets and liabilities exposed to riskPara A20Additional disclosures will apply when a foreign operation's functional currency lacks exchangeabilitySource: Self-compiledEffective Date and TransitionFrom an IFRS perspective, an entity shall apply the amendments for annual reporting periods beginning on or after 1st January 2025 (with earlier application permitted). However, preparers of financial statements applying Ind AS 21 shall apply the amendments for annual reporting periods beginning on or after 1st April 2025 (no provision for earlier application). The date of initial application is the beginning of the annual reporting period in which an entity first applies those amendments and in applying the amendments, an entity is not permitted to restate comparative information.Key Impact and ConclusionThe amendment provides helpful guidance on accounting for a lack of exchangeability and is expected to reduce existing diversity in practice, especially in countries facing currency controls or hyperinflation. While applying the requirements of the amended standard, entities will need to make significant judgement and have a good understanding of the facts and circumstances relating to currencies that suffer from a lack of exchangeability. This will also require entities to evaluate the changes required in their systems and processes to comply with the requirements of the revised standard (including the disclosure requirements).Since entities are expected to exercise significant judgement, both in assessing exchangeability and in estimating exchange rates, a robust documentation of assumptions, data sources, and rationale will be critical for auditability and regulatory scrutiny. Entities will be required to use a consistent approach when assessing whether a currency can be exchanged into another currency. If this is not possible, entities will be under obligation to provide the required disclosures explaining how the alternative exchange rate was determined, within the framework provided under the amended standard. The amendment provides guidance that will increase the comparability between financial statements and provide more useful information to the user.◆◆◆Author may be reached at anjanikhetan@gmail.com and eboard@icai.inThe Chartered Accountant — Accounting Standards January 2026 | www.icai.org | Pages 62–66
GST
Ep. 90 — Reversal and Re-availment of Input Tax Credit (ITC) under GST: Legal Provisions and Practical Disclosure in GSTR-3B
CA Journal
· July 2026
00:00
--:--
The Chartered Accountant ▸ GST | August 2026Reversal and Re-availment of Input Tax Credit (ITC) under GST: Legal Provisions and Practical Disclosure in GSTR-3BInput Tax Credit (ITC) under the GST regime is a conditional benefit, governed by statutory restrictions and compliance requirements under the CGST Act, 2017. This article examines the legal framework relating to reversal and re-availment of ITC, with a clear distinction between permanent reversals arising from inherent ineligibility, and temporary reversals triggered by procedural or compliance-related lapses. It provides a consolidated analysis of key provisions such as Sections 16 and 17, relevant rules, and their practical implications in GSTR-3B reporting. The article further explains the mechanism for disclosure, reversal, and subsequent re-claim of ITC in GSTR-3B, enabling taxpayers to ensure accurate compliance, reduce litigation risk, and maintain audit transparency.IntroductionInput Tax Credit (ITC) is one of the fundamental features of the Goods and Services Tax (GST) regime, aimed at avoiding cascading of taxes. However, the entitlement to ITC under GST is not absolute and is subject to conditions, restrictions, and procedural compliances as prescribed under the CGST Act, 2017 and the rules made thereunder. Where such conditions are not satisfied, ITC is required to be reversed, either permanently or temporarily. The GST law also provides mechanisms for re-availment of ITC in certain situations, depending upon the nature of such reversal.Types of Reversal of ITC under GSTUnder GST law, ITC reversals can broadly be classified into two categories, based on the nature of ineligibility and the possibility of future compliance:(i) Permanent Reversal of ITCPermanent reversal refers to such ITC which is not eligible under the provisions of the GST law itself. The ineligibility arises due to statutory restrictions, and therefore, once such ITC is reversed, it can never be re-availed, irrespective of future events, usage or compliance. These reversals result in a permanent loss of credit to the registered person.Permanent reversal refers to such ITC which is not eligible under the provisions of the GST law itself. The ineligibility arises due to statutory restrictions, and therefore, once such ITC is reversed, it can never be re-availed, irrespective of future events, usage or compliance.(ii) Temporary Reversal of ITCTemporary reversal refers to ITC which is otherwise eligible in principle, but is temporarily restricted due to non-fulfilment of certain prescribed conditions under the GST law. Such reversals are compliance-based or procedural in nature, and once the relevant conditions are fulfilled, the ITC can be re-availed in a subsequent tax period in the manner prescribed.Temporary reversal refers to ITC which is otherwise eligible in principle, but is temporarily restricted due to non-fulfilment of certain prescribed conditions under the GST law. Such reversals are compliance-based or procedural in nature, and once the relevant conditions are fulfilled, the ITC can be re-availed in a subsequent tax period in the manner prescribed.Legal ProvisionsSection 17(4) CGST Act, 2017 read with Rule 38 of the CGST Rules, 2017 provides a special optional scheme for banking companies and financial institutions, including NBFCs, engaged in accepting deposits or extending loans or advances. Such entities may opt to avail ITC equal to 50% of the eligible ITC on inputs, capital goods, and input services every tax period, in lieu of proportionate reversal under Section 17(2). The remaining 50% of eligible ITC shall lapse permanently and cannot be reclaimed. The option, once exercised, is irrevocable for the remainder of the financial year. However, this restriction does not apply to tax paid on supplies received from another registered person having the same PAN. Rule 38 prescribes the detailed mechanism for availing and reversing ITC under this scheme.Section 17(1) and 17(2) of the CGST Act, 2017 read with Rules 42 and 43 of the CGST Rules, 2017 restrict input tax credit to the extent attributable to taxable supplies and business purposes where goods or services are used partly for exempt supplies or non-business use. For inputs and input services, Rule 42 prescribes a formula-based monthly attribution and reversal of common credit, with annual final adjustment before the September return of the succeeding financial year. For capital goods, Rule 43 mandates proportionate reversal of ITC over a deemed useful life of five years where such goods are commonly used for taxable and exempt supplies. The ITC attributable to exempt supplies or non-business use is required to be reversed periodically and constitutes a permanent reversal, with no provision for re-claim once reversed.Section 17(5) of the CGST Act, 2017 overrides Sections 16(1) and 18(1) and specifies categories of blocked input tax credit, which are permanently ineligible under GST law. ITC is not available on motor vehicles for transportation of persons (with limited exceptions), vessels and aircraft, related insurance and maintenance services, food and beverages, outdoor catering, health and insurance services, club memberships, employee travel benefits, works contract services for construction of immovable property (other than plant and machinery), and goods or services used for own construction. Further, ITC is blocked on supplies taxed under the composition scheme, CSR-related activities, personal consumption, goods lost or disposed of as gifts or free samples, and tax paid under Section 74 of the CGST Act up to FY 2023–24 (Section 74A is applicable from FY 2024–25). Such blocked credits are absolute and non-reclaimable.The second proviso to Section 16(2) of the CGST Act, 2017, read with Rule 37 of the CGST Rules, 2017 mandates that where a registered recipient fails to pay the supplier, other than in reverse charge cases, the value of supply along with applicable tax within 180 days from the date of invoice, the ITC availed shall be reversed or paid back along with interest under Section 50, in the prescribed manner. Such reversal is required to be effected in the return for the tax period immediately following the expiry of 180 days and is applicable on a full or proportionate basis. Upon subsequent payment to the supplier, the recipient is entitled to re-avail the reversed ITC, and the time limit under Section 16(4) does not apply to such re-availment.Section 16(2)(c) read with Section 41 CGST Act, 2017 and Rule 37A of the CGST Rules, 2017 provides that ITC may be availed by a registered person on a self-assessment basis, subject to the condition that the tax charged on the supply is actually paid to the Government by the supplier. Where ITC has been availed on the basis of invoices furnished in FORM GSTR-1 but the supplier fails to furnish FORM GSTR-3B and discharge the tax liability by 30th September following the end of the relevant financial year, such ITC is required to be reversed by the recipient in FORM GSTR-3B on or before 30th November, along with applicable interest if delayed. The reversed ITC may be re-availed once the supplier subsequently furnishes FORM GSTR-3B and pays the tax.Section 16(6) of the CGST Act, 2017 provides relief to a registered person whose registration was cancelled under Section 29 and subsequently revoked under Section 30 or pursuant to an order of the Appellate Authority, Appellate Tribunal, or a court. Where ITC in respect of an invoice or debit note was otherwise eligible and not barred under Section 16(4) as on the date of cancellation, such registered person is entitled to avail the said ITC in a return furnished under Section 39. The credit may be claimed up to the later of (i) 30th November following the end of the relevant financial year or the date of furnishing the annual return, whichever is earlier, or (ii) within thirty days from the date of the order revoking the cancellation, for the period during which the registration remained cancelled.The First Proviso to Section 16(2) of the CGST Act, 2017 stipulates that where goods covered by a tax invoice are received in lots or instalments, ITC shall be available to the registered person only upon receipt of the last lot or instalment of such goods. Accordingly, ITC cannot be availed proportionately or on receipt of partial consignments, even if the tax invoice has been issued for the entire quantity. This provision operates as a timing restriction and not as a permanent disallowance of credit. Once the final lot or instalment is received, ITC may be availed in the return furnished under Section 39, subject to fulfilment of other conditions prescribed under Section 16, including the time limit specified under Section 16(4).Detailed Analysis of ITC Reversal and Re-claim ProvisionsS. No.Nature of ITC ReversalSection*Rule**Re-Claim Allowed?RemarksType of ReversalWhen ITC can be Re-claimed / Re-availed1ITC under special scheme for banks / financial institutionsSection 17(4)Rule 38NoBanking companies or financial institutions opting for the 50% ITC scheme cannot claim the remaining ITC at any later stage.PermanentNot Applicable2ITC attributable to exempt supplies / non-business use (Inputs & Input Services)Section 17(1) & 17(2)Rule 42NoITC attributable to exempt supplies or non-business use is required to be reversed for every tax period.PermanentNot Applicable3ITC attributable to exempt supplies / non-business use (Capital Goods)Section 17(1) & 17(2)Rule 43NoProportionate ITC on capital goods used for exempt supplies is required to be reversed for every tax period.PermanentNot Applicable4Blocked CreditsSection 17(5)—NoITC on motor vehicles, food & beverages, works contract services, personal consumption, etc., is completely ineligible under law.PermanentNot Applicable5Non-payment of consideration to supplier within 180 daysSecond Proviso to Section 16(2)Rule 37YesITC reversed along with applicable interest; re-availment permitted upon payment to supplier.TemporaryOn actual payment to supplier (full or proportionate), no time limit prescribed.6Supplier failed to pay tax / file GSTR-3BSection 16(2)(c) read with Section 41Rule 37AYesITC initially availed on self-assessment basis; reversed if supplier defaults; re-availed once supplier furnishes GSTR-3B and discharges tax liability.TemporaryNo specific time limit prescribed; upon supplier filing GSTR-3B and payment of tax, subject to sub-section 11 of Section 39 which restricts the furnishing of return after the expiry of three years from the due date of furnishing the said return.7Cancellation of registration and later revokedSection 16(6)—YesITC reversed / not claimed during cancellation; can be re-claimed / claimed after revocation, subject to prescribed conditions.TemporaryITC may be claimed in a return under Section 39 up to 30th November of the following financial year or furnishing of the annual return, whichever is earlier, or for the cancellation period if the return is filed within 30 days from the revocation order, whichever is later.8Goods received in lots / instalmentsFirst Proviso to Section 16(2)—YesITC can be availed only upon receipt of the last lot or instalment.TemporaryOn receipt of last lot / instalment and subject to Section 16(4).Consolidated table of reversal scenarios* Sections referred to above relate to the Central Goods and Services Tax Act, 2017.** Rules referred to above relate to the Central Goods and Services Tax (CGST) Rules, 2017.(Note: The above provisions are summarized for understanding purposes; please refer to the relevant section and rule for detail.)Disclosure of ITC Reversal in GSTR-3BThe reversal of Input Tax Credit (ITC) is required to be appropriately disclosed in Part B of Table 4 of GSTR-3B to ensure correct reflection of eligible credit in the electronic credit ledger. Table 4B(1) is meant for reporting permanent reversals of ITC, i.e. credit which is ineligible under the GST law itself and cannot be re-availed in the future, such as blocked credits or ITC attributable to exempt supplies. In contrast, Table 4B(2) is intended for reporting temporary reversals of ITC, where the credit is otherwise eligible but reversed due to non-fulfilment of prescribed conditions, such as non-payment to suppliers within 180 days or supplier default in payment of tax. This segregation ensures a clear distinction between permanent reversal and temporary reversal. The ITC reversed in Table 4B(2) will be reflected in the “Electronic Credit Reversal and Re-claimed Statement” on the GST portal and the same can be re-availed in the future.DetailsIntegrated TaxCentral TaxState/UT TaxCasesA. ITC Available (whether in full or part)(1) Import of goods0.000.000.000.00(2) Import of services0.000.000.000.00(3) Inward supplies liable to reverse charge (other than 1 & 2 above)0.000.000.000.00(4) Inward supplies from ISD0.000.000.000.00(5) All other ITC0.000.000.000.00B. ITC Reversed(1) As per rules 38, 42 & 43 of CGST Rules and section 17(5)0.000.000.000.00(2) Others0.000.000.000.00C. Net ITC available (A-B)0.000.000.000.00D. Other Details0.000.000.000.00(1) ITC reclaimed which was reversed under Table 4(B)(2) in earlier tax period0.000.000.000.00(2) Ineligible ITC under section 16(4) & ITC restricted due to PoS rules0.000.000.000.004. Eligible ITCPermanent reversal — cannot be re-claimed / re-availed in future.Temporary reversal — can be re-claimed / re-availed in future.Re-claim / Re-availment of ITC in GSTR-3BWhere ITC has been temporarily reversed in an earlier tax period and disclosed in Table 4B(2) of GSTR-3B, and the prescribed conditions are subsequently fulfilled, the registered person becomes eligible to re-avail such ITC. The re-claim or re-availment of ITC is required to be reported in Table 4D(1) and Table 4A(5) of GSTR-3B, which captures ITC reclaimed that was earlier reversed. This mechanism ensures that only eligible credit is restored to the electronic credit ledger and provides a clear audit trail linking the earlier reversal with its subsequent re-availment, thereby ensuring consistency and transparency in ITC reporting.ConclusionThe provisions relating to the reversal and re-claim of Input Tax Credit (ITC) under GST underscore the principle that while ITC is a substantive benefit, it is strictly governed by statutory conditions and compliance requirements. A clear distinction between permanent reversals and temporary reversals is crucial, as permanent reversals result in an irreversible loss of credit due to inherent ineligibility under the law, whereas temporary reversals merely represent timing or compliance-related restrictions, allowing re-availment once the prescribed conditions are fulfilled. Proper classification, accurate disclosure in Table 4B(1) and 4B(2) of GSTR-3B, and timely re-claim through Table 4D(1) are essential to ensure correctness of the electronic credit ledger, avoid litigation, and maintain audit transparency. A sound understanding of these provisions enables registered persons to optimize eligible ITC, ensure robust compliance, and effectively manage GST risks.ReferencesCentral Goods and Services Tax (CGST) Act, 2017Central Goods and Services Tax (CGST) Rules, 2017GST portal — https://www.gst.gov.in/Author may be reached at cachanderkumar@gmail.com and eboard@icai.inThe Chartered Accountant | August 2026 | www.icai.org
Ep. 91 — Post-Retirement Medical Benefits (PRMB): Actuarial Valuation and Accounting Challenges
CA Journal
· July 2026
00:00
--:--
Post-Retirement Medical Benefits (PRMB): Actuarial Valuation and Accounting ChallengesPost-Retirement Medical Benefits (PRMB) is one of the most complex defined benefit plans in large Indian organisations, especially public sector undertakings.Unlike other defined benefit plans, PRMB is not a formula-based plan but depends on various factors such as medical inflation and longevity. As medical costs continue to rise and life expectancy improves, these obligations have become material and sensitive to actuarial assumptions.This article examines the actuarial valuation and accounting treatment of PRMB under Ind AS 19, with particular attention on the consideration of assumptions, projection of medical cost per beneficiary, accounting treatment of employee contributions, and the tax and regulatory framework of PRMB Trusts. The article also highlights differences in accounting treatment between Ind AS 19 and AS 15, especially in recognition of actuarial gains and losses.BackgroundIn many large Indian corporates, particularly public sector undertakings, Post-Retirement Medical Benefits (PRMB) is one of the most complex and judgement-based employee benefit obligations. Unlike gratuity, PRMB does not operate on a predetermined benefit formula. The ultimate liability depends on uncertain future medical costs and longevity. As healthcare costs have increased and life expectancy has improved considerably in recent years, PRMB liabilities are becoming material and more sensitive to changes in assumptions. As a result, even slight changes in assumptions such as medical inflation or discount rate can materially affect the defined benefit obligation (DBO) as on the reporting date.Under Ind AS 19 – Employee Benefits, PRMB schemes are in the nature of defined benefit plans, because the employer bears both actuarial (longevity, medical inflation) and investment risks (in case of a funded scheme). The obligation therefore represents the present value of expected future post-retirement medical expenses that the company expects to incur, which will include benefits extended to eligible dependents of the employee.One practical challenge observed in typical PRMB schemes is behavioural, when benefits are fully reimbursable and there is co-sharing of medical expenses by retirees. The way beneficiaries use medical benefits in such schemes may be very different from schemes that have co-sharing or spending caps.Typical PRMB StructureGenerally, PRMB schemes usually have the following features:Coverage: Benefits are given to retired employees and, in many cases, to their eligible dependents.Nature of Benefit: Medical expenses may be reimbursed on submission of claims by the retiree and/or provided through a cashless facility.Duration: Benefits are generally available until death for the retiree and his/her eligible dependents.Funding Arrangement:Unfunded (the company meets medical expenses as and when they arise), orFunded through a separate Trust, where contributions are made based on the actuarial gap (difference between PRMB obligation and Fund Assets) calculated through actuarial valuation at each year end.Employee Contributions:Lump-sum contribution at the time of retirement, and/orPeriodic contributions during active service.Actuarial Valuation under Ind AS 19As per para 67, Ind AS 19 requires that an entity shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. Under this method, each period of service gives rise to an additional unit of benefit entitlement (para 70–74) and measures each unit separately to build up the final obligation (para 75–98). Even though medical benefits are only paid after retirement, the liability builds up year by year during active service. In practice, the expected benefit payable after retirement is spread across the employee's total service tenure.PRMB obligation is typically long term, often extending well beyond the maturity range of actively traded government securities. As per para 86 of Ind AS 19, in such situations there may not be a deep market in bonds matching the full term of projected benefit cash outflows.The actuarial valuation includes the following steps:Identification of eligible beneficiaries.Calculation of medical cost per beneficiary.Projection of future medical costs by applying the medical inflation rate on current medical cost per beneficiary.Estimation of the benefit payment period for each beneficiary based on applicable mortality tables.Discounting the projected cash flows to arrive at the present value of the defined benefit obligation using the discount rate.Spreading the expected total benefit payout across the employee's service tenure using the PUC method.Allocation of PRMB Obligation under the Projected Unit Credit MethodTo understand the allocation of PRMB obligation under the Projected Unit Credit (PUC) method, the following simple example may be considered:Employee A joins Company X on 1 April 2025 and is expected to retire after 30 years of service, i.e., in the year 2055. Based on the applicable mortality table, Employee A is expected to avail post-retirement medical benefits for 20 years after retirement as on the reporting date.Although medical benefits will be utilised only during the 20-year post-retirement period, the total projected medical cost is required to be allocated over the 30 years of service under the PUC method during the service tenure of Employee A.Accordingly, the actuarially projected total post-retirement medical benefit is first estimated. This total expected cost is then attributed proportionately over the employee's entire service period of 30 years. After completion of one year of service, 1/30th of the total projected benefit (discounted) needs to be recognised as the defined benefit obligation (DBO) in Company X's books.Fig 1: Actuarial valuation of PRMB schemes under Ind AS 19Total expected cost to be allocated against total service tenure proportionallyTotal expected cost to be considered for this periodTotal number of years of service — 30 yearsMedical facility availment — Post-Retirement (20 years)1 Apr 2025Employee A joined31 Mar 2026Reporting date2055Retirement year2075Expected survival per actuarial assumptionsFig. 1 shows the fundamental principle underlying actuarial valuation of PRMB schemes under Ind AS 19. Although medical benefits are expected to be paid only after retirement, the obligation accrues progressively in line with an employee's service tenure.The actuarial valuation first considers estimating the total expected post-retirement medical cost based on current medical cost per beneficiary and actuarial assumptions relating to medical inflation, discount rate, attrition rate and longevity. This total obligation is then allocated proportionately over the employee's entire service period using the PUC method.The portion attributable to service rendered up to the reporting date is recognised as the defined benefit obligation (DBO) as on the reporting date, while the balance relates to future service. This approach ensures that PRMB costs are recognised in tandem with service provided by the employee.Information Requirements for PRMB Actuarial ValuationCompared to other defined benefit plans like gratuity, PRMB requires more detailed and specific data which typically includes the following:Details of active employees and retirees including date of birth, date of joining and expected retirement date.Details of eligible dependents.Medical claims data for past years to calculate the medical inflation rate.Current medical costs per beneficiary based on medical cost incurred on retired employees.Employee contribution details, if any (periodic or lump-sum).Fair value of plan assets as at the reporting date and movement during the year (where the scheme is funded).Scheme features such as monetary ceilings and cost sharing by employee clause (if applicable).Changes in the scheme over time — such as the introduction of or changes in co-pay clauses or monetary caps — can make past claims data less reliable for current actuarial valuation. In addition, abnormal years, such as the COVID period, may distort average medical costs and therefore need necessary adjustments before being used for estimation of future medical costs and the medical inflation rate.Key Actuarial Assumptions(a) Discount RateAs per para 83 of Ind AS 19, the rate for discounting post-employment benefit obligations, whether funded or unfunded, is determined with reference to market yields on government bonds at the reporting date.PRMB obligation is typically long term, often extending well beyond the maturity range of actively traded government securities. As per para 86 of Ind AS 19, in such situations there may not be a deep market in bonds matching the full term of projected benefit cash outflows. Accordingly, organisations discount shorter-term cash flows using observable market yields and estimate rates for longer maturities by extrapolating the yield curve.Therefore, selection of the discount rate in PRMB valuation needs careful judgement, particularly in determining the extrapolation methodology and ensuring consistency from year to year.(b) Medical Cost Inflation RateMedical cost inflation is the most sensitive assumption in PRMB actuarial valuation. Medical inflation is influenced by factors such as new medical technology, more advanced treatments involving increased medical costs, and higher usage of medical benefits, especially in schemes where there is no cost sharing of medical treatment expense by the beneficiary.Ideally, the medical inflation assumption should be based on the company's own past claims experience, after necessary adjustments for unusual years or changes in scheme design. Since PRMB obligations are long term in nature, the assumption should consider a long-term period rather than short-term fluctuations.(c) Medical Cost per BeneficiaryMedical cost per beneficiary forms the basis for projecting future medical expenses. In existing PRMB schemes, sufficient past claims information is generally available to analyse and calculate annual medical cost per retiree. Using actual past data strengthens the reliability of the actuarial valuation.(d) Mortality AssumptionsDifferent mortality tables are generally used for the pre-retirement and post-retirement periods, as the risk profile changes once an employee retires. Actuaries often refer to the Indian Assured Lives Mortality (2012–14) table for active employees and the Indian Individual Annuitant's Mortality (2012–15) table for retired employees.(e) Employee Turnover AssumptionsEmployee turnover assumptions represent the probability of employees leaving the organisation before retirement and, therefore, not qualifying for post-retirement medical benefits. Turnover rates are generally based on the company's historical experience.Interdependence of Actuarial AssumptionsWhile individual actuarial assumptions are analysed separately, their interdependence in PRMB valuation should also be recognised. For example, an increase in medical inflation combined with a reduction in the discount rate can have a cumulative effect on the defined benefit obligation, thereby significantly increasing actuarial losses.Accounting professionals and actuaries should therefore review assumption changes collectively and ensure that they remain consistent with broader economic and demographic conditions. Appropriate disclosure of key assumptions and sensitivity analysis, as required under para 144 and 145 of Ind AS 19, helps users understand the potential volatility in PRMB obligations.Sensitivity Analysis of PRMB ObligationThe sensitivity analysis (as depicted in Table 01) is indicative and has been prepared with reference to sensitivity disclosures made by large public sector enterprises in India in their annual reports. Actual sensitivities may vary depending on the specific scheme design applicable to the organisation.It may be noted that the above sensitivities are based on isolated changes in individual assumptions while keeping other assumptions constant. Generally, assumptions may change simultaneously, and the combined impact may not be a simple addition of individual sensitivities as shown in the above table.AssumptionChangeImpact on DBODiscount rateDecrease by 1%Increase by 15–20%Discount rateIncrease by 1%Decrease by 12–16%Medical cost inflationIncrease by 1%Increase by 10–15%Medical cost inflationDecrease by 1%Decrease by 8–12%Table 01. Sensitivity AnalysisActuarial Gains and Losses: Drivers and Accounting TreatmentActuarial gains and losses arise when there are changes in assumptions or when actual experience differs from what was previously considered in assumptions. In PRMB schemes, such gains and losses can be significant because the liabilities are long-term and highly sensitive to healthcare-related factors.As per para 76–79 of Ind AS 19, actuarial assumptions represent an entity's best estimates of the variables that determine the ultimate cost of post-employment benefits. These assumptions comprise both demographic factors (such as mortality and employee turnover) and financial factors (such as discount rate and future medical costs). The Standard further requires such assumptions to be unbiased and realistic.Actuarial gains and losses typically arise from:(a) Financial Assumption ChangesChanges in discount rate and medical cost inflation rate have a material impact on PRMB obligations. A decline in discount rate or an upward revision in medical inflation generally results in actuarial losses.(b) Demographic Assumption ChangesImprovements in post-retirement life expectancy increase the benefit payment period, resulting in a higher obligation.(c) Experience AdjustmentsIf actual medical claims, retirements or mortality differ from earlier assumptions, the difference gives rise to actuarial gains or losses on account of experience adjustments.Under Ind AS 19, remeasurements comprising actuarial gains and losses are recognised in Other Comprehensive Income (OCI) in accordance with para 120(c). Introduction of the OCI concept in the Ind AS framework prevents assumption-driven volatility from directly affecting operating performance.In contrast, under AS 15, actuarial gains and losses are recognised immediately in the Statement of Profit and Loss as required by para 92. The differing accounting treatment can result in significant variation in reported profit trends between entities applying Ind AS and those following AS 15.In existing PRMB schemes, cumulative actuarial losses arising from sustained medical inflation may exceed the annual service cost, highlighting the importance of governance over selection of assumptions.Case Study: PRMB Actuarial ValuationEmployee Profile & AssumptionsJoined Company X1 Apr 2025Age at joining30 yearsSuperannuation age60 yearsDate of superannuation31 Mar 2055Eligible membersEmployee & spousePost-retirement survival20 yearsAnnual medical cost / beneficiary₹50,000Medical cost increase rate7% p.a.Discount rate7% p.a.For easy understanding, medical inflation and discount rates are considered equal, and attrition rate and mortality rate during service are ignored. The total projected post-retirement medical benefit is spread evenly over the 30-year service period under the Projected Unit Credit method. Contribution from the employee is not considered in this example.Table 02: PRMB Actuarial ValuationYear 1 — As on 31.03.2026Step 1 · Annual medical cost₹50,000 × 2 beneficiaries = ₹1,00,000Step 2 · Total projected PR medical cost₹1,00,000 × 20 years = ₹20,00,000Step 3 · PUC over 30 years (Service Cost)₹20,00,000 ÷ 30 = ₹66,667Step 4 · DBO at end of Year 1₹66,667Note: In Year 1, there is no interest cost and no actuarial loss/gain against Employee A in the books of Company X.Year 2 — As on 31.03.2027Revised annual medical cost per beneficiary: ₹60,000Step 1 · Annual medical cost₹60,000 × 2 beneficiaries = ₹1,20,000Step 2 · Total expected PR medical cost₹1,20,000 × 20 years = ₹24,00,000Step 3 · Service Cost & InterestService Cost = ₹24,00,000 ÷ 30 = ₹80,000Net interest = ₹66,667 × 7% = ₹4,667Step 4 · Closing DBO & Actuarial LossClosing DBO = ₹24,00,000 × (2 ÷ 30) = ₹1,60,000Actuarial loss (OCI) = ₹1,60,000 − (₹66,667 + ₹80,000 + ₹4,667) = ₹8,666Impact on Profit & Loss — Year 1Under Ind AS 19P&L · Current Service Cost₹66,667OCI · RemeasurementNilTotal P&L impact₹66,667Under AS 15P&L · Service Cost₹66,667OCI conceptDoes not existTotal P&L impact₹66,667For the year ended 31 March 2026, the impact is the same under both standards.Impact on Profit & Loss — Year 2Under Ind AS 19P&L · Current Service Cost₹80,000P&L · Net Interest Cost₹4,667Total P&L impact₹84,667OCI · Actuarial Loss₹8,666Under AS 15Service Cost₹80,000Interest Cost₹4,667Actuarial Loss₹8,666Total P&L impact₹93,333It is clear from the given example that changes in medical cost assumptions give rise to actuarial gains and losses. Further comparative analysis of Ind AS 19 and AS 15 shows that although total liability remains the same under both standards, accounting treatment in Profit & Loss is different in both regimes. While under Ind AS 19, actuarial losses and gains are shown in Other Comprehensive Income (OCI), as per AS 15 they are shown as expense in the Profit and Loss, which may lead to greater volatility in reported earnings for Company X while comparing with the previous year's earnings.Funding Arrangements and Plan AssetsPRMB schemes may be either unfunded (pay-as-you-go) or funded through a separate trust. In funded schemes, contributions are invested in a mix of debt and equity instruments with the objective of meeting future medical obligations.In funded schemes, companies contribute to the trust annually based on actuarial gap funding — which is the difference between the defined benefit obligation (DBO) and the fair value of plan assets as at the reporting date.In funded schemes, the investment performance of plan assets directly affects contributions required to be made by the company. Mismatch between asset returns and medical cost escalation may widen the funding gap, requiring additional contributions.In contrast, unfunded schemes expose the entity directly to future cash flow volatility, as benefit payments are met by operating cash flows.Accounting Treatment of Employee ContributionsEmployee contributions under PRMB schemes may be periodic during the service period and/or made as a lump sum at retirement.As per para 92 and 93 of Ind AS 19, where employee contributions are linked to service and payable during the service period, such contributions reduce current service cost. If the contribution depends on years of service, it is attributed over the service period; if it is independent of service length, it may be recognised as a reduction of service cost in the period in which the related service is rendered, as further clarified in Appendix A to Ind AS 19. This treatment reflects the economic substance that employees bear part of the cost of benefits earned during service.Where the employee contribution is not linked — for example, taken for reduction in deficit arising from losses on plan asset or from actuarial losses — they will form part of remeasurement of the net defined benefit liability, in accordance with para 93.In contrast, under AS 15, employee contributions are generally recognised as a reduction of service costs in the Statement of Profit and Loss, and the Standard does not distinguish between service-linked and non-service-linked contributions in the same manner as provided in Ind AS 19. Further, the concept of recognition of remeasurements in Other Comprehensive Income (OCI) is not provided in AS 15.Tax and Regulatory Framework for PRMB TrustsPRMB trusts seeking income-tax exemption must comply with Section 10(23AAA) of the Income-tax Act, 1961, along with Rule 16C of the Income-tax Rules, 1962. One important requirement under Rule 16C(2) is that employees contribute to the fund through regular subscriptions. This makes the structure and timing of employee contributions significant not only from an actuarial and accounting perspective but also from a regulatory requirement. Trusts that rely on a single contribution at the time of retirement may need to consider whether such an arrangement truly meets the "periodical subscription" requirement for tax exemption status.Role of Professional Judgement and DisclosureDue to the complex and long-term nature of PRMB schemes, professional judgement plays a crucial role in actuarial valuation as well as in accounting.At the same time, the disclosure of these issues also assumes equal importance. Transparent communication of key assumptions, sensitivity analyses, and funding policies help users of financial statements understand the risks and uncertainties inherent in PRMB schemes.Strong disclosures, supported by consistent application of assumptions, not only strengthen the credibility of financial reporting but also enable stakeholders to make better-informed decisions.Conclusion and Way ForwardPRMB schemes are a long-term obligation requiring disciplined actuarial valuations, transparent accounting and disclosure. Transparent accounting and reporting practices demand reasonable assumptions and strict adherence to tax and regulatory laws.With rising medical costs, organisations need to take a more thoughtful approach in managing these schemes. This includes aligning actuarial assessments with scheme design, funding and governance so that the benefits remain sustainable over time while continuing to support the health and well-being of employees' post-retirement.The Chartered Accountant · August 2026 · www.icai.org Author may be reached at eboard@icai.in
Ep. 92 — IPR Violations in Cyberspace
CA Journal
· July 2026
00:00
--:--
IPR Violations in CyberspaceThe rapid growth of cyberspace has reshaped the enforcement of Intellectual Property Rights (IPR), exposing creators and businesses to new risks of piracy, counterfeiting, and misappropriation. Copyright violations through illegal downloads, trademark misuse via domain squatting, and online patent theft exemplify the challenges of a borderless digital world. Indian courts have responded by adapting traditional legal principles to cyberspace. This article examines these developments, highlights emerging concerns like NFTs and AI, and underscores the need for balanced regulation to safeguard innovation while ensuring access and fair use in the digital era.IntroductionThe digital revolution has created unprecedented opportunities for the creation and dissemination of intellectual works, while simultaneously generating novel challenges for the protection of Intellectual Property Rights (IPR). Cyberspace, the virtual and borderless realm of the internet and global computer network, where electronic communication and data exchange occur, enables the effortless duplication and distribution of creative and technical works/contents, posing threats to copyright, trademark, patent, and trade-secret protection. This article highlights the principal forms of IPR infringement, analyses key case laws dealing with such violations in India, addresses the issue and extracts strategic lessons for internet users in this fast-changing arena of cyberspace and digitalization.Brief on IPR Laws in IndiaIPRs primarily refer to rights attributed to creations of the mind, such as inventions, literary and artistic works, designs, and symbols. India has had a legal framework for its protection for over a decade, with the oldest act being the Act VI of 1856 on the protection of inventions. Over the years, India has aligned its intellectual property regime with global commitments under international agreements and conventions, such as the WTO’s TRIPS Agreement and various WIPO treaties, and has shaped its robust legal framework for patents, trademarks, copyrights, and industrial designs. The following laws are key to IPR protection in India:The Patents Act, 1970, which governs the protection of inventions, granting exclusive rights to inventors, for a certain and limited period.The Copyright Act, 1957, which protects original works of authorship, including literary, dramatic, musical, and artistic creations.The Trademarks Act, 1999, which deals with the registration and protection of trademarks, which are symbols, names, or logos used to identify goods and services.The Designs Act, 2000, which protects the visual appearance or design of a product.The Geographical Indications of Goods (Registration and Protection) Act, 1999, to protect products that have a specific geographical origin and possess qualities or a reputation due to that origin.The Protection of Plant Varieties and Farmers’ Rights Act, 2001, for the protection of new plant varieties developed by farmers, andThe Semiconductor Integrated Circuits Layout-Design Act, 2000, protects the layout design of integrated circuits.While ensuring global commitments are met, these legislations have been designed, keeping in view India’s IPR policy that is focused on its national interests, public health, and socio-economic development. Moreover, judicial interpretations have been pivotal in clarifying the contours of IPR infringement. IPR protection in virtual cyberspace is more complicated than in the physical world due to the lack of traditional geographic boundaries. Even establishing jurisdiction can be challenging for online actions that can originate from one place, be directed at another, and have effects felt in a third location. Besides, once things are on the World Wide Web, after-effects and consequences cannot be easily controlled, and the scale of infringement can be very large. Since the challenges in cyberspace are different, another Act that is instrumental in IPR protection is the Information Technology Act, 2000 (IT Act). It protects IPRs by providing legal recognition for digital signatures and electronic transactions. It also directly contains provisions deterring copyright infringement through sections like Section 66B of the IT Act, which penalizes the possession of pirated content and ensures data protection and helps in safeguarding the confidentiality and integrity of digital IP assets like trade secrets. It is also pertinent to note that even though the IT Act primarily applies to cyber offences and contraventions in India, Section 75 of this Act makes it applicable to offences or actions committed outside India also, if such contravention is in respect of a computer programme, system or network in India.Copyright Infringement in CyberspaceWe often come across instances where original videos online are reposted by someone else on their own YouTube channel, without permission and without giving due credit to the creator of the original work or an audio version of the copyrighted book is published illegally on YouTube. These are cases of copyright infringement u/s 51 of the Copyright Act, 1957. Copyright infringement is the unauthorized use of copyrighted work, without permission of the author/copyright holder, thereby violating the exclusive rights of the copyright holder to display, distribute or reproduce the copyrighted work. When such an infringement occurs on a mass level, it is called as piracy. We normally understand that literary, dramatic, artistic or musical works are subject matter of copyright, so there is infringement of copyright, where portions of books, movies, songs, etc. are circulated online without the permission of the author, and some revenue is generated out of it. Besides, websites and webpages also have copyright, which is owned by the creator of the webpage or the owner of the website. So, if a webpage of a website is copied, the owner can sue others for infringement. In cyberspace, the process of infringement can be designed in multiple complicated ways, for instance:torrent sites and cyber-lockers can be used for unauthorized streaming or downloading of music and films,unlicensed uploads of songs or video clips to social-media platforms,derivative works such as remixes or AI-generated content that reproduce substantial parts of the protected work,software piracy and distribution of cracked programmes.Also, normally, in the case of webpages and websites, the traffic or number of visits to a webpage determines its commercial value. However, infringers may use a process called Linking, in which the user is directly connected from one website to another through hyperlinks, without having to type in the URLs. This diverts the traffic from one website to another. Linking affects the rights of the actual owner of the website, as the linked site lose their revenue, which depends upon the number of people visiting the website.a) Legal testIndian courts apply the “idea–expression” dichotomy and the “substantial similarity” or “material part” test. The core question is whether the infringing work reproduces protectable expression and whether the copying is substantial enough to give the ordinary observer an unmistakable impression of reproduction. The principle is that while abstract ideas are not protected by copyright, the specific way those ideas are expressed is protected.Copyright infringement is the unauthorized use of copyrighted work, without permission of the author/copyright holder, thereby violating the exclusive rights of the copyright holder to display, distribute or reproduce the copyrighted work.b) Key casesThe Supreme Court in R. G. Anand v. Deluxe Films1 held that copyright does not protect ideas or general plots; protection extends only to the expression of those ideas. The test is whether a viewer would obtain an “unmistakable impression” that the subsequent work is a copy of the earlier one. This principle remains the touchstone for film-script disputes and is equally applicable to digital adaptations and AI-generated derivatives. This judgment provided a crucial framework for distinguishing between unprotected ideas and protected expression and helped define the limits of intellectual property rights, ensuring that while creators’ works are protected, the free flow of ideas and artistic innovation remains possible.In Gramophone Co of India Ltd v. Super Cassettes Industries Ltd2, the Delhi High Court examined remix recordings and clarified that making a “version recording” of a copyrighted song, without a proper license, constitutes infringement, unless it falls within statutory exceptions. The decision illustrates that transformation or remixing of sound recordings does not automatically escape liability. Subsequently, a new Section 31C was introduced through the Copyright (Amendment) Act, 2012, which provides a statutory license to create a cover version, with the consent of the owner of the work.Online enforcement is complicated by the anonymity of uploaders and the transnational location of servers. Courts increasingly orders to block infringing websites, requiring Internet Service Providers (ISPs) to disable access to specified URLs.c) Intermediary Liability: Platforms as GatekeepersAnother issue that arises in the digital arena is that, as most digital infringement occurs through platforms like YouTube, Facebook, Spotify, Kindle, etc., the question of liability of such intermediaries is crucial. To protect such intermediaries, Section 79 of the Information Technology Act, 2000, read with Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 grants “safe harbour” to intermediaries that observe due diligence and act expeditiously on takedown notices.In Super Cassettes Industries Ltd v Myspace Inc3, the Delhi High Court examined whether a social-media platform could claim safe harbour for user-uploaded infringing content. The judgment clarified that intermediaries are not liable for copyright infringement if they lack “actual knowledge” of the infringing content, provided they promptly remove it upon receiving proper notice. The decision underscores the need for robust content-management systems.Trademark Infringement and CybersquattingA trademark is a symbol, word, or phrase that legally identifies a brand’s goods or services and distinguishes them from those of competitors, which can include logos, names, slogans, sounds, and even specific colors, and once registered, they are legally protected against unauthorized use.a. Digital formsForms of trademark infringement in cyberspace include:Cybersquatting: It is a specific form of infringement, where a person registers a domain name identical or confusingly similar to a trademark with malicious intent, to profit from the trademark’s goodwill. For instance, the well-known organization People for the Ethical Treatment of Animals (PETA) sued Michael Doughney for registering the domain peta.org and using it to promote “People Eating Tasty Animals,” a message directly opposed to PETA’s mission.Typosquatting: It is also a kind of cybersquatting where infringers register domain names that are common misspellings, variations, or alternative top-level domains of legitimate websites to trick users into visiting malicious or fraudulent sites. For instance, a user might mistype “google.com” as “gogle.com” or “googgle.com”.Keyword Advertising: When a person uses the trademarked name of a competitor as a keyword to display sponsored ads on search engines like Google, aiming to divert customers, it may be regarded as infringement. While not all usage is infringement, Indian courts have ruled that using a rival’s trademark, as a keyword, can be infringement if it causes consumer confusion and deceit regarding the source of goods or services. The Court held that third-party bidding on trademarks as sponsored keywords, for use by internet search engines, is ‘misrepresentation’ and thus constituted an infringement. However, using the trademark without confusing may not be deemed infringement.Meta-tagging: Meta-tags are hidden code that describes a page and are not visible to users. Meta-tag trademark infringement occurs when someone uses another company’s registered trademark in their website’s meta-tags without authorization, aiming to divert traffic or gain an unfair advantage by misleading consumers and appearing in search results. Courts view this practice as a serious violation of trademark law, especially under Section 29 of India’s Trade Marks Act, 1999.Social Media Misuse: It involves using brand names, logos, or other protected elements without authorization, leading to consumer confusion, brand dilution, and potential financial losses. It is not uncommon to see local shoemakers selling shoes with Nike’s tick logo, or counterfeited watches, handbags, and clothes being sold using Facebook, WhatsApp, X, etc. These are all forms of infringement, and addressing these issues requires proactive monitoring of online activity, reporting violations to social media platforms, issuing cease and desist letters to infringers, and staying informed about evolving intellectual property laws.Each method exploits a trademark’s goodwill for unauthorized gain, leading to consumer confusion and economic harm.b. Legal TestUnder Section 29 of the Trade Marks Act, infringement occurs where the impugned mark is identical or deceptively similar and likely to confuse as to origin or sponsorship.c. Leading Case LawsYahoo! Inc v Akash Arora4, the first ever case of cybersquatting in India, way back in 1999, the Delhi High Court held that domain names are entitled to the same protection as trademarks and restrained the defendant from using the domain “yahooindia.com,” which was confusingly similar to the plaintiff’s well-known trademark “Yahoo!”. This early decision set the foundation for Indian jurisprudence on cybersquatting and remains widely cited till date.In Consim Info Pvt. Ltd. v. Google India5, the appellant, being involved in an online matrimonial service, was the registered trademark owner for terms like Bharat matrimony, Tamil matrimony, Telugu matrimony, etc., and prayed for a permanent injunction against the defendants from using these trademarks or the likes in AdWords or as keywords for internet search. It was argued by the respondents (a common contention by the advertisers) that the usage of the trademark as a keyword did not constitute ‘use in course of trade’—an important element for trademark infringement under the Act, as the usage did not involve using the trademark over goods or services as provided in the Act. Further, the use conformed with honest business practice and also the words ‘matrimony’, ‘Tamil’ or “bharat” are generic words. The Madras High Court held that the use of registered trademarks as keywords in the advertisement did fall under Section 2(2)(c)(ii) and Section 29(6)(d) of the Trademark Act, 1999 and though such words when used independently did not constitute a trade marks infringement, but when used conjunctively, with or without a space, constitutes an infringement.The Delhi High Court’s ruling in Titan Company Limited v. Lenskart Solutions Pvt. Ltd6, has underscored a vital principle that invisibility does not shield illegality. Using a competitor’s trademark in website meta-tags, even if invisible to users, amounts to trademark infringement under the Trade Marks Act, 1999.On the other hand, the Supreme Court of India dismissed a trademark infringement case by Make My Trip (MMT) filed against Booking.com and Google for use of words “MakeMyTrip” as a Google Ads keyword as it held there is no likelihood of confusion because MakeMyTrip and Booking.com are both well-known, distinct platforms in the travel industry, and a user searching for one is unlikely to confuse the other’s services.Patent Infringement in the Digital WorldPatents are legal rights issued to inventors to protect their inventions from anyone else claiming or using them for a certain time. Patent infringement may occur when someone unauthorizedly makes, uses, sells, or imports a patented invention, often a computer-related process or software feature, through digital means like the internet, apps, or software-as-a-service (SaaS) platforms. This can involve the unlawful use of a company’s proprietary algorithms, unique features, or other patented aspects of their SaaS offering by a competitor.Another form of infringement can happen due to the advent of 3-dimensional printing, which, if users are allowed to download patented designs or create them from existing ones and then print physical copies. A patent holder can sue for direct or indirect infringement for actions like making, using, or selling the infringing item, though enforcement can be difficult, due to the distributed nature of file sharing and 3D printing.Patent infringement in the digital realm has given rise to newer problems. Key challenges in identifying and stopping such infringements include the global nature of the internet, making it difficult to pinpoint the infringer’s location and apply jurisdiction, and the ease with which digital content can be copied and distributed. The Patent Act of 1970 provide penalties, but issues arise in applying these laws to digital inventions and thus Indian case laws on purely digital patents remain sparse. However, injunction standards from conventional patent disputes, like prima facie case, balance of convenience and irreparable harm would guide courts in deciding the matters.Emerging Challenges in IPR Protection in the Era of NFTs and Artificial IntelligenceNon-Fungible Tokens (NFTs) are unique digital assets, like digital art or collectables, that act as a verifiable certificate of ownership recorded on a blockchain. They provide proof of authenticity and ownership for digital items, allowing creators to monetize their work and enabling collectors to own unique digital property. The rise of NFTs has introduced new disputes as artists have found their works “minted” as NFTs without their consent. Courts will apply standard copyright and trademark principles, but questions of jurisdiction and blockchain anonymity complicate enforcement.Generative artificial intelligence (AI) raises additional concerns. Training large language or image models on copyrighted datasets, without a license, may infringe reproduction rights, while the originality and ownership of AI-generated outputs remain unsettled. In a very short period, companies like Microsoft and OpenAI are facing numerous litigations for IPR violations. Policymakers globally are debating exceptions for text-and-data mining and mechanisms for collective licensing.Remedies and EnforcementRights-holders can pursue a mix of civil and criminal remedies:a. Civil RemediesInjunctions: temporary or perpetual orders to stop the infringing activity.Damages: monetary compensation for losses.An account of profits: repaying profits made by the infringer.The seizure and destruction of infringing goods.Besides, pre-trial remedies can also be obtained for evidence gathering and to prevent asset disposal by the infringer.b. Criminal RemediesSection 63 of the Indian Copyright Act 1957 imposes criminal liability for knowingly infringing copyright, with penalties of 6 months to 3 years imprisonment and a fine of Rs. 50,000 to Rs. 2,00,000.Sections 65A and 65B of the Indian Copyright Act, 1957 address digital copyright issues, providing criminal penalties for those who illegally circumvent technological protection measures (TPMs) and for those who alter or remove rights management information (RMI), and offenders can face imprisonment for up to 2 years and a monetary fine.Under India’s Trademark Act, 1999, penalties for trademark infringement can include imprisonment for a term not less than 6 months and up to 3 years, a fine not less than Rs. 50,000 and up to Rs. 2,00,000, or both. For second or subsequent offences under Sections 103 or 104, the penalty is enhanced, with imprisonment not less than one year and up to three years and a fine not less than Rs. 1,00,000 and up to Rs. 2,00,000.c. EnforcementEffective enforcement requires preservation of electronic evidence (server logs, timestamps, screenshots), use of blockchain or digital fingerprinting to prove ownership, and cross-border cooperation for servers located overseas.ConclusionCyberspace amplifies both the value of intellectual property and the risk of misappropriation. Indian jurisprudence has begun to chart the boundaries of online IPR enforcement by adapting classic principles such as the idea–expression dichotomy and the tests for substantial similarity, while recognising new doctrines for intermediary liability and domain-name protection. In India, there is still a lack of awareness among creators about proactive measures—watermarking, contractual safeguards and timely registration of rights. Moreover, rapid technological change—from blockchain to generative AI—demands continuous legislative and judicial evolution. Statutes need to be updated to address AI-generated works and data use for training AI. Intermediaries should be encouraged to adopt automated detection tools and transparent takedown processes.A coordinated strategy combining legal vigilance, technical safeguards and international collaboration will be essential to ensure that innovation and access do not come at the expense of creators’ rights. The legislature and its interpretation need to evolve very fast to keep pace with the ever-changing digital world.ReferencesWIPO, Understanding Copyright and Related Rights (2nd edn, 2016)The Copyright Act 1957The Trade Marks Act 1999The Patents Act 1970Information Technology Act 2000 (India)Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021.1. R.G. Anand v. Delux Films AIR 1978 SC 1613. ↩2. Gramophone Co of India Ltd v Super Cassettes Industries Ltd 2010 SCC Online Del 4743. ↩3. Super Cassettes Industries Ltd v MySpace Inc FAO(OS) 540/2011. ↩4. 1999 IIAD (DELHI) 229, 78 (1999) DLT 285. ↩5. 2013 (54) PTC 578 (Mad). ↩6. CS(COMM) 589/2025. ↩Author may be reached at rashmivika10@yahoo.co.in and eboard@icai.inThe Chartered Accountant ▸ Growth Strategies August 2026 | www.icai.org
Ep. 93 — The Future of Accounting in the Age of Artifi cial Intelligence and Automation
CA Journal
· July 2026
00:00
--:--
The Future of Accounting in the Age of Artificial Intelligence and AutomationArtificial Intelligence (AI) and automation are transforming the accounting profession by redefining how financial data is processed, analysed, and interpreted. Advances in machine learning, deep learning, natural language processing, robotic process automation, and optical character recognition have significantly improved efficiency, accuracy, and decision-making across accounting functions. This article examines the role of AI in accounting, the key enabling technologies, integrated automation frameworks, applications in financial processes, challenges to adoption, and the evolving role of accounting professionals. While AI enhances operational capabilities and strategic insight, human judgment remains essential in professional reasoning, ethical oversight, regulatory interpretation, and advisory services. The article concludes that AI will not replace accountants but will fundamentally reshape the profession and require new skills and competencies.IntroductionThe speed and accuracy with which data entry, error detection, and compliance monitoring are performed today would have been unimaginable to accounting professionals only a few years ago. The emergence of artificial intelligence (AI) has fundamentally altered accounting practices by automating routine processes and enabling advanced analytical capabilities. AI-driven systems can process large volumes of structured and unstructured financial data, identify anomalies, and generate predictive insights that support managerial and regulatory decision-making.Accountants have always pursued accuracy, efficiency, speed, and consistency, yet achieving all these objectives simultaneously has traditionally been difficult. This constraint has been substantially reduced through the introduction of AI. By relieving professionals of repetitive and labour-intensive tasks, AI has enabled accountants to focus more on analysis, interpretation, and advisory functions. From transactional automation to AI-assisted auditing, the profession is undergoing unprecedented transformation. Hence, in response, the roles of accountants and auditors are evolving rapidly.Literature ReviewThe integration of AI into accounting has attracted increasing scholarly attention. Vasarhelyi et al. (2015) argue that continuous auditing systems enabled by advanced analytics will transform assurance services by allowing real-time monitoring of financial transactions. Sutton et al. (2016) highlight the role of analytics and AI in enhancing decision-making and improving the quality of financial reporting. Kokina and Davenport (2017) discuss the potential of cognitive technologies to augment accountants' capabilities and shift their roles towards advisory services.Bhimani and Willcocks (2014) emphasise that digital technologies are reshaping management accounting by enabling real-time performance measurement and predictive analytics. Brynjolfsson and McAfee (2017) suggest that AI-driven automation will transform knowledge-intensive professions, including accounting, by augmenting rather than wholly replacing human capabilities. IFAC (2020) similarly stresses the need for accountants to develop digital and analytical competencies to remain relevant in an evolving business environment.Recent industry reports from professional firms indicate that AI-enabled accounting platforms can automate transactional tasks, strengthen fraud detection, and generate strategic insights. At the same time, these reports emphasise persistent concerns regarding data governance, cybersecurity, regulatory compliance, and ethical accountability.Overall, the literature suggests that AI will significantly impact accounting processes, professional roles, and accounting education. However, much of the existing research focuses on specific applications or individual technologies. There remains a need for integrated conceptual frameworks that explain how AI and automation technologies interact within accounting systems. This article contributes to that discussion by proposing a holistic model of human–AI hybrid accounting systems.What is Artificial Intelligence?Artificial intelligence refers to the ability of systems to perform cognitive functions such as pattern recognition, inference, prediction, and decision optimisation by processing data and adapting to outcomes (Russell & Norvig, 2020). In accounting, AI systems mimic cognitive tasks traditionally performed by professionals, including transaction classification, anomaly detection, forecasting, and audit analytics.Although AI is often conflated with automation, the two concepts are distinct. Automation refers to the execution of predefined, rule-based, repetitive tasks. Automated tools require manual updates when processes change as they do not learn from experience. AI systems, by contrast, learn from historical data, adapt to changing conditions, and generate insights that support judgment-based decisions. Understanding this distinction is essential when evaluating the impact of AI on accounting practice.This article examines the major technologies driving AI in accounting, their integration into unified automation frameworks, their practical applications, the challenges associated with adoption, and the future role of accounting professionals.Artificial Intelligence in AccountingAI in accounting refers to the deployment of intelligent systems capable of analysing financial data, identifying patterns, detecting irregularities, and generating predictive insights. Its applications span transactional processing, financial analysis, audit and compliance, and advisory services.In transactional processing, AI automates workflows such as invoice processing, bank reconciliations, and expense validation. In financial analysis, AI supports forecasting, budgeting, and variance analysis. In audit and compliance, AI strengthens fraud detection, continuous auditing, and regulatory monitoring. In advisory services, AI assists with data-driven decision-making and financial communication. The integration of AI into accounting systems, therefore, enables organisations to reduce manual effort, improve accuracy, and enhance the timeliness and relevance of financial information.Key Technologies Driving AI in AccountingThe major technologies underlying AI in accounting include machine learning (ML), deep learning (DL), robotic process automation (RPA), natural language processing (NLP), and optical character recognition (OCR). Together, these technologies are reshaping the way financial data is captured, processed, analysed, and audited.Machine LearningMachine learning is a subset of AI that enables systems to learn patterns from historical data and make predictions or decisions without explicit programming. ML models are particularly effective for structured financial data and typically require feature engineering to identify relevant variables (Bishop, 2006).In accounting, ML is used for automated reconciliation, credit risk assessment, cash flow forecasting, fraud detection, and expense classification. By learning from historical transactions, ML systems improve their performance over time and can replicate consistent accounting judgments.Deep LearningDeep learning is an advanced form of ML that uses multi-layer neural networks to analyse complex and unstructured data such as scanned invoices, receipts, and bank statements (Goodfellow et al., 2016). Unlike traditional ML approaches, DL models can automatically extract features from data, thereby reducing the need for manual feature engineering.In accounting, DL enables template-free document processing, handwriting recognition, and intelligent extraction of data from complex financial documents. Hence, it significantly reduces manual data entry and supports sophisticated document automation.Robotic Process AutomationRobotic process automation automates repetitive, rule-based tasks by mimicking human interactions with software systems. Unlike AI, RPA does not learn from data; rather, it follows predefined rules and workflows (Lacity & Willcocks, 2016).In accounting, RPA is commonly used to download bank statements, post journal entries, onboard vendors, prepare tax returns, and generate management reports. Its value lies primarily in improving efficiency, consistency, and speed while reducing operational cost.Natural Language ProcessingNatural language processing enables systems to interpret and analyse textual data such as contracts, invoices, emails, and policy documents (Jurafsky & Martin, 2023). NLP supports tasks including sentiment analysis, compliance review, narrative financial reporting, and audit documentation analysis.This technology is particularly valuable in accounting because a large proportion of relevant information exists in textual form. Contracts, invoices, financial statement notes, and audit reports all contain texts that must be interpreted rather than merely recorded.Optical Character RecognitionOptical character recognition converts scanned documents into machine-readable text and structured fields such as dates, amounts, and vendor names. Traditional OCR systems are largely rule-based, whereas modern DL-powered OCR systems can interpret complex layouts and even handwriting.In accounting workflows, OCR serves as the data-capture layer, digitising paper-based or image-based financial documents and preparing them for further processing.Comparison of Core TechnologiesA clearer distinction among AI, ML, DL, RPA, OCR, and NLP is useful for understanding their respective roles in accounting. Table 1 summarises the major differences.Table 1 Comparative Overview of AI, ML, DL, NLP, OCR and RPA in AccountingAttributeAIMLDLNLPOCRRPANatureUmbrella conceptSubset of AISubset of MLDomain of AIEnabling technologyAutomation toolLearns from dataYesYesYes (advanced level)YesNoNoHandles unstructured dataModerateGoodExcellentExcellent (text-focused)Limited (image to text only)Very limitedPrimary useDecision support and intelligent analysisPattern recognition and predictionComplex pattern detection and deep analysisInterpretation of textual dataData extraction from documentsRule-based task executionExamples of accounting applicationsFraud detection, predictive analytics, smart validationAuto-categorisation, cash flow forecasting, anomaly detectionAdvanced fraud detection, document classificationInvoice interpretation, contract analysis, narrative reportingInvoice data captureFile downloads, journal postings, report generationNote. AI is used here as an umbrella term, while ML and DL represent increasingly specialised forms of intelligent data processing. RPA is included for comparison as a non-learning automation technology frequently deployed alongside AI in accounting systems.Unified Intelligent Automation FrameworkModern accounting automation increasingly relies on integrating OCR (often enhanced by deep learning), NLP, ML, and RPA into a unified intelligent automation framework. Within this framework, each technology performs a distinct but complementary function. OCR digitises documents, NLP interprets textual meaning, ML generates predictions and detects anomalies, and RPA executes actions within enterprise systems.This layered architecture enables end-to-end automation of accounting workflows, reduces manual intervention, accelerates month-end close processes, and improves the visibility of financial information. It also enhances scalability by processing higher transaction volumes without proportionate increases in staffing requirements.Table 2 Unified Intelligent Automation Framework for AccountingLayerTechnologyPurposeOutputData captureOCRExtract text and fields from financial documentsClean, digitised dataUnderstandingNLPInterpret meaning, context, and language patternsCategorised and contextualised informationIntelligenceMLLearn patterns, detect anomalies, and generate predictionsForecasts, classifications, and risk indicatorsExecutionRPAPerform actions in accounting and ERP systemsCompleted accounting tasks and workflow executionIllustrative Workflow ScenariosThe interaction between these technologies is evident clearly in practical accounting workflows.In an invoice-to-pay process, OCR first extracts relevant information from invoices. NLP then interprets line items, descriptions, and tax terms. ML classifies the expense, identifies the vendor, and checks for anomalies. Finally, RPA enters the invoice into the enterprise resource planning (ERP) system and routes it for approval.In bank reconciliation, OCR captures transaction lines from scanned or PDF bank statements, while NLP analyses descriptive narration fields. ML predicts the appropriate general ledger entry, often using fuzzy matching techniques, and RPA completes the posting, matching, and adjustment process.In audit and compliance workflows, OCR digitises invoices, contracts, and supporting records. NLP identifies unusual clauses, non-standard terms, or policy deviations. ML highlights anomalies and potential fraud indicators, after which RPA prepares working papers or initiates confirmation requests.A similar pattern can be observed in TDS reconciliation and related compliance activities. RPA downloads forms or vendor files and extracts the data into Excel; OCR reads certificates where required, ML helps identify discrepancies; and RPA compares datasets and flags differences for review. These examples show that the value of AI in accounting lies not only in individual tools but in the coordinated interaction of multiple technologies.AI Applications in AccountingTransaction ProcessingAI automates routine accounting tasks such as invoice processing, bank reconciliations, and expense validation. These automated workflows reduce processing time, improve accuracy, and minimise human error in high-volume environments.Financial Analysis and ForecastingAI systems can analyse historical financial data to predict cash flows, revenues, and expenses. Predictive analytics supports budgeting, scenario analysis, and strategic planning. AI also enables real-time variance analysis and benchmarking, thereby improving managerial responsiveness.Audit and ComplianceAI strengthens auditing by enabling continuous audit procedures, full-population testing, and anomaly detection. Instead of relying solely on sample-based procedures, auditors can examine complete datasets and identify suspicious transactions or fraud indicators more effectively.Advisory and CommunicationAI also supports advisory functions by generating narrative financial reports, summarising performance, and assisting in stakeholder communication. In this way, AI goes beyond back-office efficiency to support decision-making and create value.Conceptual Framework: Human–AI Hybrid Accounting ModelThis article proposes a conceptual framework for intelligent accounting systems that integrate AI and automation technologies with human judgment. The framework consists of four layers: data acquisition, intelligence, automation, and human oversight.Data Acquisition LayerThe data acquisition layer involves collecting information from internal and external sources, including enterprise systems, bank feeds, invoices, and regulatory databases. OCR and related data integration tools transform unstructured documents into structured datasets suitable for further analysis.Intelligence LayerThe intelligence layer comprises ML, DL, and NLP models that analyse financial data, detect anomalies, generate forecasts, and interpret textual information. This layer produces insights, predictions, and risk indicators that trigger actual decisions and actions.Automation LayerThe automation layer uses RPA to execute downstream tasks such as posting transactions, generating reports, and initiating compliance workflows based on outputs produced by the intelligence layer.Human Oversight LayerThe human oversight layer includes accountants, auditors, managers, and regulators who interpret AI-generated outputs, apply professional judgment, ensure ethical and regulatory compliance, and make strategic decisions. A feedback loop between human reviewers and intelligent systems supports continuous learning and improvement. The model can therefore be understood as a layered architecture in which data inputs form the base, AI analytics provide interpretive and predictive capabilities, automation processes translate these outputs into operational action, and human oversight at the top, connected by feedback loops, remains the final control mechanism.Challenges to AI AdoptionDespite its benefits, AI adoption in accounting faces several important challenges. High implementation costs and data infrastructure requirements may hinder adoption, especially among small and medium-sized enterprises. Data security and privacy concerns also require robust governance frameworks and strong cybersecurity controls.Regulatory uncertainty poses another challenge, as AI systems must comply with evolving accounting, audit, tax, and data protection standards. Ethical concerns are equally significant, particularly regarding transparency, bias, explainability, and accountability. Workforce readiness is also critical. Accounting professionals must acquire new skills in analytics, systems understanding, and technology governance to use AI effectively and responsibly.Selecting AI Tools for AccountingOrganisations should evaluate a range of factors when selecting AI tools for accounting. These include the intended use case, the availability and quality of historical data, integration with existing accounting or ERP systems, user capabilities, governance requirements, and cost of ownership.For example, the appropriate solution may differ depending on whether the primary need is reconciliation, forecasting, invoice processing, or fraud detection. Machine learning systems generally require sufficient historical data for training, whereas RPA tools may be deployed more quickly for repetitive tasks. Integration is also crucial, since the effectiveness of AI tools depends heavily on their ability to connect with systems such as SAP, NetSuite, Tally, or QuickBooks. In addition, organisations must consider whether end users possess technical expertise or whether no-code and low-code solutions are more suitable. Governance and security issues also need careful evaluation, including financial data handling, version control, model monitoring, and auditability. Finally, licensing, implementation, and maintenance costs must be assessed against expected benefits.Future Trends in AI-Driven AccountingAI is expected to support the emergence of real-time accounting, self-driven accounting systems, AI-generated narrative reporting, voice-enabled accounting tools, AI-driven audits, integrated accounts payable and receivable workflows, and predictive tax engines. These developments will continue to shift accountants' roles away from transaction processing to strategic advising.Human Judgment and Ethical ConsiderationsAlthough AI can automate many accounting tasks, human judgment remains indispensable. Accounting standards, tax laws, and regulatory requirements often require interpretation rather than simple application. Professional assessment, ethical oversight, client communication, and strategic judgment cannot be fully automated. Hence, the future of accounting should be understood not as the replacement of professionals by machines, but as a reconfiguration of professional work in which intelligent systems extend human capability.ConclusionArtificial intelligence and automation are reshaping the accounting profession by enhancing efficiency, accuracy, and analytical capability. AI systems can automate routine tasks, generate predictive insights, and support strategic decision-making across a range of accounting functions. However, human judgment remains central in regulatory interpretation, ethical oversight, and advisory services. The future accountant will increasingly operate as a technology-enabled strategic advisor. To remain relevant, accounting professionals must develop skills in data analytics, technology management, and strategic thinking. As AI adoption accelerates, the profession will continue to evolve, creating new opportunities for innovation and value creation.ReferencesBhimani, A. and Willcocks, L. (2014), “Digitisation, ‘Big Data’ and the transformation of accounting information”, Accounting and Business Research, Vol. 44, No. 4, pp. 469–490.Bishop, C. M. (2006). Pattern recognition and machine learning. Springer.Brynjolfsson, E. and McAfee, A. (2017), “The business of artificial intelligence”, Harvard Business Review, July.Deloitte. (2021). The AI-driven finance function.Goodfellow, I., Bengio, Y., & Courville, A. (2016). Deep learning. MIT Press.International Federation of Accountants. (2020). Artificial intelligence and the future of accountancy.Issa, H., Sun, T., & Vasarhelyi, M. A. (2016). Research ideas for artificial intelligence in auditing. Journal of Emerging Technologies in Accounting, 13(2), 1–20.Jurafsky, D., & Martin, J. H. (2023). Speech and language processing. Stanford University.Kokina, J., & Davenport, T. H. (2017). The emergence of artificial intelligence: How automation is changing auditing. Journal of Emerging Technologies in Accounting, 14(1), 115–122.KPMG. (2020). The future of audit with AI.Lacity, M., & Willcocks, L. (2016). Service automation: Robots and the future of work. SB Publishing.PwC. (2022). AI in finance: The next frontier.Richins, G., Stapleton, A., Stratopoulos, T., & Wong, C. (2017). Big data analytics: Opportunity or threat for the accounting profession? Journal of Information Systems, 31(3), 63–79.Russell, S., & Norvig, P. (2020). Artificial intelligence: A modern approach (4th ed.). Pearson.Sutton, S.G., Holt, M. and Arnold, V. (2016), “The reports of my death are greatly exaggerated—Artificial intelligence research in accounting”, International Journal of Accounting Information Systems, Vol. 22, pp. 60–73.Vasarhelyi, M.A., Kogan, A. and Tuttle, B.M. (2015), “Big data in accounting: An overview”, Accounting Horizons, Vol. 29, No. 2, pp. 381–396.Author may be reached at madhabi_sinha@yahoo.comThe Chartered Accountant · www.icai.org · August 2026
Ep. 94 — Towards a Unifi ed Public Financial Management System (UPFMS) for States
CA Journal
· July 2026
00:00
--:--
Towards a Unified Public Financial Management System (UPFMS) for StatesState governments manage a wide and evolving set of public accounting and public financial management functions covering planning, budgeting, revenue generation, and expenditure oversight, including capital infrastructure spending, alongside the delivery of social welfare services. This mandate further extends to human resource management, asset and inventory control, public fund investment, debt and guarantee management, safeguarding long-term fiscal sustainability, etc.Over the last two decades, most States have progressively implemented digital systems to support budgeting, treasury operations, procurement, human resource management, accounting, audit, revenue administration and project monitoring. These initiatives have led to measurable improvements in transactional efficiency, transparency and compliance within individual functional domains. However, as the scale, diversity and velocity of public expenditure have expanded, the limitations of a fragmented and reporting-driven public financial management approach have become more apparent. In this evolving environment, the next phase of reform lies in deep integration, complete automation, use of Artificial Intelligence (AI) and Generative Artificial Intelligence (Gen AI), and transaction-driven governance.Keeping the above in mind, a Unified Public Financial Management System (UPFMS) is therefore envisaged as a comprehensive reform framework for States. The UPFMS would integrate all accounting, financial and administrative functions into a single source of truth, ensure that transactions are captured at the point of origin, and enable transaction/event-driven data flows across the entire accounting and public financial management lifecycle.The overall objective is to make UPFMS from accounting and reconciliation activities to real financial management system.Need for Stronger, Efficient State-level UPFMSMost of the States currently operate a diverse ecosystem of digital applications covering planning, budgeting, revenue management, expenditure management, treasury operations, procurement, Human Resource Management System (including processes relating to recruitment to retirement), accounting, audit, project monitoring, inventory management, asset registers, Personal Deposit Accounts, debt and guarantee management. These application systems were introduced mostly in an incremental manner (rather than in a transformational manner) to meet specific functional or compliance needs, and each initiative has delivered tangible benefits within its defined scope. However, this incremental approach has resulted in fragmented data landscapes. Budgeting may take time from collection of data till presentation for review and approval.As a result, in many cases, states' focus remains on accounting of transactions and reconciliation, rather than on proactive fund management, fiscal responsibility and timely utilisation of resources. This is due to the absence of a unified, transaction-driven system that automatically transforms transactions into auto-developed management information reports and present them in the form of informed decisions.This context presents a clear and timely opportunity for States to evolve from a report-driven public financial management framework to a transaction-driven, self-governing Unified Public Financial Management System (UPFMS).Conceptual Framework for UPFMSThe UPFMS would be founded on the following clear and explicit governance doctrines which are not incidental design choices rather they are the core drivers of the proposed reform:The UPFMS would prioritise self-governance over repetitive reporting — Functionaries at all levels, particularly at the Drawing and Disbursing Officer (DDO) and Budget Controlling Officer (BCO) levels, would be empowered to operate independently within clearly defined, system-enforced rules. Compliance, checks and balances would be embedded within workflows, approvals and validations, reducing dependence on manual supervision, inspections and repeated submission of returns.The UPFMS would be based on the core philosophy of single source of truth for all public accounting and financial data of the State. Financial and operational information would be created once, at the point of transaction, and reused seamlessly across planning, budgeting, execution, accounting, audit and reporting.The UPFMS would be transaction-driven and event-based. This means transactions would be captured at the time of their occurrence, rather than capturing them in a consolidated form or on a periodic basis. Financial intelligence would thus emerge as a direct by-product of operational activity.The UPFMS would enable drill-down analysis to the lowest operational level. This would enable decision-makers to move seamlessly from State-level aggregates to department-wise, scheme-wise, project-wise, DDO-wise, BCO-wise, vendor-wise or asset-wise views without requiring any additional data calls, manual compilation or even any MIS report.The UPFMS would enable a fundamental shift from gathering data to analysing results and taking informed decisions. A systematic automation and integration would free administrative capacity which is currently spent on data collection and reconciliation. This would allow greater focus on outcomes, fiscal risks and strategic fund management.The UPFMS should leverage AI/Gen AI and have the latest IT technologies to automate workflows, provide intelligent insights, and provide personalized user experiences. The system should be built with scalable microservices.The whole purpose of the above approach is to ensure that accounting within the UPFMS is treated as a by-product of integrated operations, not as the primary driver of financial management. With transactions captured at the time of their first occurrence, to a great extent, accounting entries are envisaged to be generated automatically and continuously, enabling finance leadership to focus on fiscal responsibility rather than reconciliation.The UPFMS is also intended to ensure that financial classification, data structures and accounting flows are aligned with the extended codification frameworks as finalised by the Central Government. This alignment would strengthen standardisation, auditability and inter-State comparability.Intended OutcomesThe proposed UPFMS is expected to deliver tangible improvements in governance outcomes. These would include faster budgeting exercise, smoother and need based utilisation of funds across the financial year, improved management of capital expenditure, enhanced accountability at the DDO and BCO levels, early identification of abnormal financial and operational trends, stronger automated controls over Personal Deposit Accounts (PD Accounts), and improved fiscal discipline.The overall impact of these changes would be a decisive shift from accounting and reconciliation-centric practices to real financial management, with efficient utilisation of public funds, strengthened fiscal responsibility and greater public confidence in State financial governance.Functional ModulesThe UPFMS would comprise several functional modules. These functional modules have been grouped in a very logical and scientific manner and discussed in subsequent paragraphs.Planning and Budget ManagementPlanning and Budget Management Module would operate as the central governance and control layer of the Unified Public Financial Management System. The objective of this module is not merely to prepare and publish an annual budget, but to convert legislative authorisation into an operational, continuously managed financial plan that supports timely execution and fiscal discipline.The UPFMS would enable budgeting within a very short span of time. Annual allocations would be operationalised through monthly and need-based releases, particularly for capital expenditure, aligned with execution readiness, procurement status and verified project milestones.The UPFMS would enable budgeting within a very short span of time. Annual allocations would be operationalised through monthly and need-based releases, particularly for capital expenditure, aligned with execution readiness, procurement status and verified project milestones. This approach would ensure that funds are available when they are to be utilised, rather than being front-loaded or bunched towards the end of the financial year. This would also ensure timely utilisation of funds and improved quality of expenditure.The module would be inherently transaction-driven. Every sanction, commitment, procurement approval and payment would update budget utilisation in real time, creating a single source of truth for budget status across the State. This would eliminate parallel tracking, manual registers and post-facto consolidation.This would also facilitate quick, routine and well-informed decisions on budget revision, re-appropriation and surrender. These would no longer be treated as exceptional or end-year exercises. Instead, the system would continuously analyse utilisation patterns, commitments, physical progress and cash position, enabling decision-makers to redirect funds to priority areas, release additional resources where required, or surrender unutilised provisions in time.Program, Project and Scheme ManagementThe Program, Project and Scheme Management Module is designed to serve as a foundation for the Planning and Budget Management Module.Under this module, the programs, projects and schemes would be arranged with distinctly specified objectives, landmarks, timeframes and expected outcomes. The material development would be taken at the initiation stage, using geotagged and time-marked indications wherever appropriate. Every individual confirmed milestone would create an entry in the computing system that routinely flows into fund accessibility, administration of expenses, asset development and accounting. This module would ascertain that fiscal choices are securely rooted in tangible development and intended results, instead of being determined solely by expenses.This occurrence and transaction-oriented correlation between material and monetary progress is focal to the governance philosophy of the UPFMS. It would allow the initial identification of anomalous trends, such as slow implementation, inflation in prices, or irregular spending habits, much before they become crucial. Decision-makers would be able to closely examine from State-level aggregates to individual projects, locations and implementing units, enabling timely and evidence-based interventions.To efficiently manage program, project, and scheme, an Evidence-Based Project Management System (EBPMS) is required in place. This module would assist in the management of empirical project, where financial reports, sustained funding, and resolutions related to re-orientation are determined based on validated implementation data instead of recurrent accounts of narratives. This would enable a decrease in the encumbrance of intermittent reporting and divert focus towards findings and conclusions.By securely incorporating program implementation with funds and expense control, the module would strengthen financial prudence while also enhancing the efficacy of delivery.Revenue ManagementThe Revenue Management Module within the UPFMS would surpass a limited focus on information gathering to evolve into becoming a crucial element of vigorous management of funds. The system would furnish near real-time discernibility of tax and non-tax revenue inflows, assimilated effortlessly with treasury, budgeting and cash management function.Income transactions would get recorded at the outset and displayed instantaneously in the unified financial view of the State. This would allow high-ranking officers across state departments to consistently evaluate the accessibility of resources and regulate the rate of expenditure consequently. Seasonal patterns, systematic transformations and potential risks impacting revenue streams would be recognizable at the initial level through system-generated metrics.Additionally, this would assist in making sound decisions related to borrowing, funding and spending allocation, enhancing broad budgetary management. Essentially, financial metrics would not remain as a distinct reporting stream but instead belong to the same primary source of truth that aid all monetary decisions.Expenditure ManagementExpenditure Management Module would be tightly integrated with Planning and Budget Management Module. By ensuring that expenditure is always aligned with budget availability and verified execution, this module would directly support timely utilisation of funds and improved expenditure quality. This module would operate entirely on transaction-driven, system-enforced controls, replacing manual oversight with embedded governance. Sanctions, commitments and payments would be processed only against available budget and validated system events.A key feature of this module would be the upfront recording of financial commitments, providing full visibility of future obligations. This would prevent inadvertent over-commitment and allow finance departments to manage cash flows and liabilities proactively.The design would enable DDO-centric self-governance, where officers operate independently within system-defined limits. Automated validations, alerts and controls would reduce the need for repetitive reporting and manual approvals, while strengthening accountability through audit trail/traceable transactions.Human Resource Management System (HRMS)The HRMS Module would be deeply integrated with the financial architecture of the UPFMS, covering the entire employee lifecycle from recruitment to retirement — thus covering both, monetary and non-monetary transactions/events.Recruitment actions, payroll processing, pension disbursements and retirement benefits would be aligned with real-time budget availability. Transactions would be captured at source and reflected immediately in budget utilisation, cash management and accounting records. This would eliminate delays, mismatches and reconciliation issues associated with parallel systems.Transaction-driven human resource data would facilitate effective trend analysis and forecasting of salary and pension liabilities, supporting medium-term and long-term fiscal planning. Decision-makers would be able to assess the financial implications of staffing policies, cadre strength and retirement patterns without relying on manual consolidation.Inventory ManagementInventory Management Module would move from being a peripheral store-keeping function to a core instrument of financial control and operational governance. Inventory often represents a significant component of working capital in public programs and capital projects, yet it is traditionally managed outside the mainstream financial decision framework.Under the UPFMS, all inventory transactions such as receipt, storage, issue, transfer, consumption and write-off would be captured at the point of occurrence and integrated with procurement, program execution, expenditure management and accounting. Inventory would no longer be tracked through parallel registers or periodic returns. Instead, each movement of material would generate a transaction that updates the single source of truth in real time.Further, inventory consumption linked to capital works would automatically flow into asset creation records, eliminating reconciliation gaps between material usage, project costs and asset valuation. This tight integration would strengthen fiscal discipline, improve cost accuracy and reinforce self-governance at the operational level by embedding controls directly into system workflows rather than relying on post-facto inspections.Assets ManagementAssets Management Module would provide end-to-end lifecycle governance of public assets, shifting the focus from mere asset creation to asset sustainability, utilisation and service outcomes. Public assets represent a substantial portion of the State's accounts, yet their financial and physical dimensions are often managed in silos.Within the UPFMS, assets would be created upon verified completion of capital works, based on transaction-driven data from the Program, Project and Scheme Management module. Physical assets would be geotagged to establish existence and location, ensuring transparency and reducing the risk of ghost or duplicate assets.Within the UPFMS, assets would be created upon verified completion of capital works, based on transaction-driven data from the Program, Project and Scheme Management module. Physical assets would be geotagged to establish existence and location, ensuring transparency and reducing the risk of ghost or duplicate assets. Financial valuation would flow directly from expenditure and inventory consumption records, ensuring accuracy and consistency.This module would also support maintenance planning, depreciation and eventual disposal within the same integrated framework. This would allow decision-makers to assess not only the creation of assets, but also their ongoing financial implications and utilisation patterns. Drill-down analysis would enable movement from aggregated asset values to individual assets and locations, strengthening accountability at all levels.Investment ManagementInvestment Management Module would cover the entire lifecycle of public investments, covering planning, approval, deployment, monitoring of returns, maturity management, reinvestment and closure. Investments of public funds would no longer be monitored through static registers or periodic statements, but through continuous, transaction-driven oversight.Each investment transaction would be captured at source and reflected immediately in the State's unified financial position. Returns, maturities and reinvestment decisions would be tracked automatically, providing real-time visibility of liquidity and performance on need-to-know basis. This would support treasury operations and ensure that idle funds are optimally used in accordance with policy objectives.Borrowing and Guarantee ManagementBorrowing and Guarantee Management Module would operate as a lifecycle-based fiscal control mechanism, providing continuous visibility of the State's liabilities and contingent exposures. Borrowings would be managed from proposal and approval through drawdown, servicing, refinancing and closure, with each stage captured as a transaction at source.Guarantees extended by the State would be recorded at occurrence of event(s) and tracked as contingent liabilities, with exposure monitoring and early warning indicators to flag potential risks of invocation.This integrated, transaction-driven approach would allow borrowing and guarantee decisions to be aligned with budget availability, revenue performance and long-term fiscal strategy, strengthening overall fiscal responsibility.Accounting ManagementAccounting Management Module would represent a fundamental shift in philosophy. Accounting would no longer drive financial management; instead, it would emerge as a by-product of integrated operations.With transactions captured at source across all modules and events driving system updates, accounting entries would be largely generated automatically and continuously. This would eliminate extensive reconciliation exercises and reduce dependence on manual adjustments.With transactions captured at source across all modules and events driving system updates, accounting entries would be largely generated automatically and continuously. This would eliminate extensive reconciliation exercises and reduce dependence on manual adjustments. Financial statements would be produced from the same single source of truth that supports planning, budgeting and execution.By freeing finance personnel from reconciliation-centric workloads, the UPFMS would enable a decisive shift towards proactive and real financial management, fiscal analysis and strategic oversight.Audit ManagementTo facilitate Internal and External Auditors as well, Audit Management Module would transition from episodic verification to continuous assurance. This would facilitate audit through innovative computer aided audit techniques.Auditors would have access to transaction-level data across planning, budgeting, procurement, inventory, assets, borrowings and guarantees within a unified system environment.By embedding audit readiness into system design, the UPFMS would enhance accountability while reducing audit cycle time and administrative burden.Financial Management, Analytics and Decision SupportFinancial Management Module would facilitate real financial management and thus a shift from 'accounting & reconciliation' to 'proactive' financial management. Financial Management Module would focus squarely on fiscal responsibility, fund optimisation and proactive decision-making. Advanced analytics would continuously analyse transaction-driven data to identify abnormal trends, emerging risks and performance deviations.AI and Gen AI tools would support predictive insights, scenario analysis and fraud analytics, enabling early identification of anomalies across planning & budgeting, revenue, expenditure, procurement, payroll, asset management, etc.Decision-makers would be able to drill down rapidly from high-level indicators to the underlying transactions driving those trends. Management Information System and Reporting would thus become an outcome of system activity rather than an administrative burden, reinforcing the principle of self-governance.This capability would transform financial governance from reactive oversight to anticipatory management.Fiscal Impact and Governance OutcomesThe cumulative impact of the UPFMS would extend beyond efficiency gains. By enabling rapid availability of budget, timely revision, re-appropriation and surrender, strong automated controls including over PD Accounts, early identification of abnormal trends and a decisive shift from accounting and reconciliation to real financial management, the UPFMS would materially improve utilisation of public funds.Taken together, the above reforms could result in a notional efficiency gain in the range of 0.5 percent to 1.0 percent of the State budget, while strengthening fiscal discipline, accountability and public trust.The administration of public finance in states is at a crucial stage. The intricacies of governance require a transition from a non-integrated data-driven framework to a harmonized, transaction-oriented and autonomous structure.Implementation Strategy and the Way ForwardUPFMS may be developed by the Centre Government and a developed application may be made available to States for the use at their will or this document (as a base document) may be shared with States for developing their own System. Development may be done through open tender or inhouse with the help of Centre's or State's Nodal Agencies. Ideally, the development may take around 9-15 months depending on the team's strength to be deployed for this work.ConclusionThe administration of public finance in states is at a crucial stage. The intricacies of governance require a transition from a non-integrated data-driven framework to a harmonized, transaction-oriented and autonomous structure. UPFMS would empower this shift by recording transactions at the outset, creating event-triggered data and incorporating organization, resource allocation, implementation, supplies, possessions, investments, credits, accounting and audit into a distinct and systematic architecture.By transitioning from accounting and harmonization to robust fiscal management, supporting financial accountability and facilitating timely, substantiated decisions, the UPFMS would encourage responsible, honest and ethical governance for states.Author may be reached atsanjaydelindia@rediffmail.com and eboard@icai.inThe Chartered Accountant · Public Finance · August 2026 · www.icai.org
Ep. 95 — Growth Strategies for CA Firms: Harnessing Global Outsourcing for Strategic Expansion
CA Journal
· July 2026
00:00
--:--
Growth Strategies for CA Firms: Harnessing Global Outsourcing for Strategic ExpansionThe Indian Chartered Accountancy profession stands at a pivotal juncture. With over four lakh members and more than 90,000 practising firms registered under ICAI1, the landscape is increasingly competitive, particularly for small and mid-sized practices. Traditional models of organic growth are no longer sufficient in a market shaped by technology disruption, client sophistication, and globalisation.This article explores practical growth strategies for CA firms, with a focus on global outsourcing partnerships. It examines how Indian CA firms can leverage cost efficiencies, regulatory alignment, and sectoral expertise to expand their professional footprint, while adhering to ICAI's Code of Ethics and applicable foreign jurisdiction rules.Introduction: The Evolving Landscape of CA FirmsThe profession has undergone a remarkable transformation over the past three decades. From a largely compliance-driven practice in the 1980s and 1990s, Chartered Accountants today are engaged across audit, taxation, valuations, transaction advisory, insolvency, risk consulting, and forensic work.A striking reality, however, remains that a majority of Indian CA firms are small or mid-sized practices. While a handful of large players dominate high-value assignments, smaller firms form the backbone of the profession, servicing SMEs, start-ups, family-owned businesses, and, increasingly, global clients.In this environment, growth is not optional, it is a matter of long-term sustainability. Effective strategies must combine time-tested approaches with newer models built around technology, collaboration, and internationalisation.Traditional Growth StrategiesOrganic Growth through Client Relationships Building deep trust, delivering timely solutions, and cross-selling services remain fundamental. A tax client, well-served, can be a natural referral to assurance or advisory work. Firms that invest in structured relationship management consistently outperform those relying on reactive service delivery.Sectoral Specialisation Firms are increasingly recognising the value of industry focus. Positioning as a sector specialist allows firms to command better pricing and differentiate from generalist competitors. Key areas include:Infrastructure and renewable energy, requiring expertise in long-term project finance and regulatory compliance.BFSI clients, demanding deep knowledge of RBI guidelines, Basel norms, and risk management frameworks.Start-ups and technology companies, needing support in valuation, ESOP accounting, and international tax structuring.Domestic Alliances and Networks Joining national-level alliances allows firms to pool expertise, share resources, and collectively pursue larger mandates. In multi-state GST audits, for instance, an alliance enables firms to handle cross-geography assignments without relinquishing client control.Firms considering formal aggregation or network arrangements should refer to ICAI's Guidelines on Networking of CA Firms and the regulatory framework governing firm aggregation and associations, which set out the permissible structures and disclosure requirements applicable to such arrangements.New-age and Technology-led Growth StrategiesAdoption of cloud-based audit tools, AI-powered analytics, and blockchain-assisted reconciliations is no longer a luxury but a competitive necessity. Firms investing in digital capabilities can deliver faster, more reliable, and value-added services, strengthening both client retention and new business prospects.Beyond tools, technology-led growth involves re-designing workflows so that routine, repetitive tasks are automated, freeing professionals for higher-value analysis, advisory, and client engagement. Firms that make this transition early will have a structural advantage over those that do not.Adoption of cloud-based audit tools, AI-powered analytics, and blockchain-assisted reconciliations is no longer a luxury but a competitive necessity. Firms investing in digital capabilities can deliver faster, more reliable, and value-added services, strengthening both client retention and new business prospects.Global Integration and Outsourcing: A Strategic LeverIndia as a Professional Services HubIndia has emerged as a preferred destination for professional services outsourcing. Several structural factors underpin this:AdvantageDetailCost efficiencyAudit professionals in the US and UK typically cost USD 70–100 per hour; comparably skilled Indian professionals are available at USD 20–25 per hour2Talent availabilityIndia produces over 20,000 new Chartered Accountants annually3, alongside a large pool of finance graduates and MBAsTime-zone benefitIndian teams can work overnight to deliver for US and UK clients, enabling near-continuous service modelsRegulatory alignmentInd-AS is substantially converged with IFRS; ICAI's Standards on Auditing are aligned with ISA; and ICAI's Code of Ethics mirrors IFAC guidelinesStructural advantages of India as an outsourcing hubAn Illustrative Example4Consider a hypothetical scenario: a mid-sized Mumbai firm with renewable energy expertise partners with a UK-based financial advisory firm advising on a solar infrastructure project. The Indian firm provides IFRS-compliant financial modelling, valuation analysis, and regulatory review. The UK firm retains the client relationship and issues all final opinions and sign-offs, as required under UK regulations. The Indian firm earns a fee in foreign currency at rates well above domestic equivalents, improves its team's exposure to global valuation methodologies, and builds a track record for future international work.This model — where the Indian firm focuses on execution and technical support, and the overseas partner manages the client relationship and formal sign-off — is the appropriate structure for cross-border professional collaboration and is the one firms should seek to replicate.Regulatory, Legal, and Ethical ConsiderationsOne of the strongest advantages Indian firms enjoy in international collaborations is the alignment of professional and regulatory standards. At the same time, it is essential that firms structure such arrangements carefully and in full compliance with applicable rules.Standards AlignmentAccounting standards: Ind-AS is largely converged with IFRS, making Indian professionals readily adaptable to Western financial reporting requirements.Auditing standards: ICAI's Standards on Auditing (SAs) are aligned with the International Standards on Auditing (ISA).Tax frameworks: GST has structural parallels with VAT systems, and Indian tax professionals are increasingly proficient in cross-border compliance.Professional ethics: ICAI's Code of Ethics mirrors IFAC guidelines, ensuring consistency with global professional standards.Ethical and Regulatory Compliance in OutsourcingFirms entering into international outsourcing or collaboration arrangements must observe the following:Scope of work Indian firms should limit their role to execution and technical support. Final client opinions, audit sign-offs, and regulated deliverables must remain with the licensed overseas partner. This is not merely a commercial arrangement; it is a regulatory requirement in most jurisdictions, including the US and UK.No surrogate practice Indian firms must not represent themselves as practising in foreign jurisdictions or allow their name or brand to be used in ways that imply direct practice overseas. Any arrangement that creates this impression, even inadvertently, would raise serious ethical and regulatory concerns.ICAI Code of Ethics Firms are directed to the following ICAI reference materials when structuring international arrangements:ICAI Code of Ethics, 2020 (aligned with IFAC's Code of Ethics for Professional Accountants) — in particular, Part 4B on independence and Part 1 on the fundamental principles of integrity and professional behaviour.ICAI Council Guidelines on Outsourcing of Accounting/Finance Functions (where applicable).ICAI's Ethical Standards Board pronouncements on confidentiality and third-party arrangements.Members may also refer to the ICAI–ICAEW and ICAI–CPA Australia Mutual Recognition Agreements for guidance on permissible cross-border professional activity.Foreign jurisdiction rules Before entering any arrangement, firms should seek legal advice on the rules of the relevant foreign jurisdiction to confirm the structure is compliant.Advantages of Global CollaborationBenefitWhat It Means in PracticeAccess to wider client basePartnerships open doors to multinational assignments, cross-border M&A, infrastructure, and ESG that are difficult to secure independentlyRevenue diversificationEarnings in foreign currency improve profitability and offset domestic fee compressionSkill and knowledge upgradeExposure to IFRS, US GAAP, global valuation methods, and advanced audit technology strengthens professional competenceReputation buildingA track record of international work attracts both global clients and larger domestic mandatesTalent retentionYoung professionals value international exposure; global assignments help firms retain their best peopleFuture readinessFirms with international linkages are better positioned as global standards in accounting, tax, and ESG continue to convergeChallenges and MitigationRegulatory and Licensing Restrictions Many countries restrict foreign firms from directly practising regulated services such as statutory audit. In the US, CPA firms cannot outsource audit opinions; in the UK, only registered firms may sign statutory audits. Indian firms must structure collaborations carefully, focusing on execution and technical support, while leaving final opinions and client-facing sign-offs to the overseas partner.Brand and Perception Gap Global clients may be unfamiliar with Indian firms relative to established international networks. Building credibility requires a demonstrated track record, robust quality assurance processes, and, where appropriate, affiliations with recognised foreign professional bodies. Investing in case studies and testimonials from early international engagements can accelerate this process.Talent Retention and Training International exposure raises expectations. Professionals who gain global skills are in demand. Continuous training in IFRS, US GAAP, valuation methodologies, and emerging areas such as sustainability reporting (under ISSB standards) is essential. Firms should consider structured pathways for dual qualifications such as ACCA, CPA, or CFA alongside the CA as a retention tool as much as a quality measure.Technology and Cybersecurity Cross-border work requires secure data sharing, which brings obligations around data confidentiality, GDPR compliance (where EU clients are involved), and broader cybersecurity governance. Firms should:Deploy encrypted communication channels and secure cloud platforms approved for client data.Adopt a written data protection policy aligned with international standards (ISO 27001 provides a useful framework).Ensure engagement letters with overseas partners explicitly address data handling and confidentiality obligations.Conduct periodic IT security reviews and staff training on data protection protocols.Pricing Discipline While India's cost advantage is real, competing purely on price commoditises services and erodes firm value. Firms should anchor pricing to the expertise and outcomes they deliver, not just the labour cost differential. Tiered pricing models — where execution-only support is priced differently from specialised analytical work — allow firms to capture value more effectively.Strategic Roadmap for FirmsThe following roadmap provides a structured approach to internationalisation for small and mid-sized CA firms:Step 1Build Targeted Global AlliancesRather than waiting for a merger opportunity, firms should proactively approach overseas firms in sectors where they have genuine expertise. A firm with renewable energy or infrastructure knowledge, for example, could approach US or UK advisory firms needing execution support on IFRS valuations or ESG compliance work. These alliances create clear win-win structures: the foreign firm retains the client; the Indian firm earns forex revenues and builds a track record.Step 2Invest in Technology and Workflow SystemsOverseas clients expect seamless digital collaboration. Firms should invest in audit analytics tools, AI-assisted valuation models, cloud-based reporting platforms, and secure data rooms. Real-time dashboards and automated workflows are not differentiators abroad; they are baseline expectations.Step 3Specialise as a DifferentiatorCompeting on generic services against established global networks is not a viable strategy. Firms should identify two or three domains where they can genuinely be an expert: infrastructure valuations, transfer pricing, forensic accounting, green finance, or ESG reporting are all areas of growing global demand. Depth in a niche is more valuable and more defensible than breadth across many areas.Step 4Strengthen Quality ManagementGlobal clients expect work that meets international standards. Firms should implement ISQM (International Standard on Quality Management) frameworks, conduct regular peer reviews, and maintain strong engagement documentation. The ICAI's own quality review programme provides a useful internal benchmark. Developing dual-qualified professional CAs with CPA, CFA, or ACCA credentials adds credibility and reassures overseas partners.Step 5Apply a Considered Pricing StrategyThe foreign exchange benefit means that even moderately priced international work is typically more profitable than comparable domestic engagements. Firms should use this margin to invest in quality and specialisation, rather than simply competing at the lowest price point. A tiered model, where basic execution support is priced at a lower rate but specialised analysis commands a premium, reflects the actual value delivered.With Ind-AS aligned to IFRS and ICAI actively deepening its relationships with global bodies, including through memoranda of understanding with CPA Australia, CPA Ireland, and ICAEW, the regulatory barriers to cross-border collaboration are steadily reducing. This trend is likely to continue as international standard-setters push for greater harmonisation.Future OutlookThe projections and trajectories outlined in this section are indicative of directional trends rather than definitive forecasts; actual outcomes will depend on regulatory developments, market conditions, and the pace of adoption by firms and clients alike.Global Demand for Cost-efficient Professional ServicesInflationary pressures in Western economies have accelerated interest in outsourcing. Industry surveys indicate that a significant proportion of mid-tier US firms are actively exploring outsourcing arrangements to manage costs. This demand is structural, not cyclical, and Indian firms are well-positioned to serve it.Regulatory ConvergenceWith Ind-AS aligned to IFRS and ICAI actively deepening its relationships with global bodies, including through memoranda of understanding with CPA Australia, CPA Ireland, and ICAEW, the regulatory barriers to cross-border collaboration are steadily reducing. This trend is likely to continue as international standard-setters push for greater harmonisation.ESG and Sustainability Reporting: A Realistic Growth PathGlobal investors are demanding disclosures aligned with IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), issued by the International Sustainability Standards Board (ISSB). In the Indian context, SEBI's Business Responsibility and Sustainability Reporting (BRSR) framework — mandatory for the top 1,000 listed companies by market capitalisation — provides an immediate domestic reference point. CA firms advising listed clients should be conversant with BRSR Core requirements and their alignment with IFRS S1/S2, as convergence between the two frameworks is actively progressing. A practical path involves:Training two or three team members in ISSB standards and climate risk frameworks in the near term.Offering ESG data assurance or gap analysis to existing clients as a starting point, before moving to full assurance engagements.Partnering with overseas firms on ESG-related assignments to gain exposure to international reporting expectations before building an independent practice.Over time, this incremental approach allows firms to develop credible ESG capability without over-investing before the market matures domestically.Renewable Energy and Infrastructure AdvisoryWith the US, EU, and major economies targeting net-zero emissions by 2050, there is a substantial pipeline of renewable energy projects requiring valuations, financial modelling, and compliance reviews. Indian firms with sector expertise in solar, wind, battery storage, or green hydrogen are well-placed to support global demand in these areas.India's Emerging Role in Professional ServicesJust as India became a global hub for IT outsourcing in the 1990s, there is a credible case that the next two decades will see Indian firms play a meaningful role in global professional services delivery. ICAI's international recognition, combined with India's large and growing CA community of over four lakh members and more than 8.5 lakh students as of 20255, provides the talent base for this shift.ConclusionGrowth for CA firms today requires a balanced approach: strengthening domestic practice while building selective international capability. For small and mid-sized firms, outsourcing partnerships with overseas firms represent a genuine and realisable opportunity, provided they are structured correctly, ethically, and with a clear focus on the value the Indian firm brings.The combination of regulatory alignment, cost efficiency, growing sectoral expertise, and an expanding talent base positions Indian CA firms favourably for this transition. The journey demands vision and sustained investment, but the potential rewards for firms, their teams, and the profession as a whole are substantial.Author may be reached atdsrhtr@gmail.com and eboard@icai.inNotesICAI membership and firm registration data as per ICAI website. ↩Audit professionals in the US and UK typically cost USD 70–100 per hour; comparably skilled Indian professionals are generally available at USD 20–25 per hour — a differential widely cited in professional services outsourcing literature, including reports by NASSCOM and Deloitte's Global Outsourcing Survey. These figures are indicative only and subject to variation by engagement type, firm size, seniority, and jurisdiction; they should not be treated as definitive market rates for any specific arrangement. ↩ICAI Exam passing data press release. ↩The India–UK solar valuation example in the section is a constructed hypothetical scenario provided for clarity and does not represent any specific actual engagement. ↩ICAI student and member figures as of 2025, per ICAI public disclosures. ↩The Chartered Accountant · Profession August 2026 · www.icai.org
Ep. 96 — Green Intent, Red Flags: Assurance over Sustainability and the Risks that Matters
CA Journal
· July 2026
00:00
--:--
Green Intent,Red Flags Assurance over Sustainability and the Risks that MattersThis article highlights the growing importance of sustainability assurance in strengthening the credibility of corporate sustainability disclosures amid increasing stakeholder expectations and evolving regulatory requirements. It explains the significance of ESG reporting, the value of independent assurance in mitigating greenwashing risks, and the role of reliable sustainability information in enhancing trust, compliance, governance, and informed decision-making. It further outlines the key risk areas that Assurance Practitioners should evaluate — industry-specific sustainability risks, governance culture, reporting boundaries, data integrity, indicator selection, technical expertise, and external factors — and underscores the need for professional skepticism, transparent reporting, and alignment with emerging global frameworks such as ISSA 5000. Serving as a practical guide, it equips practitioners with a structured approach to identifying, assessing, and responding to sustainability assurance risks.The starting pointLooking beyond the green claimsAs companies commit to Net Zero, carbon neutrality, and make ambitious sustainability claims, stakeholders increasingly demand independent validation and a clear view on the green claims.To meet this expectation, Assurance Practitioners look beyond the disclosures, beyond the claims, beyond the bold statements. This article provides a brief guide to analyse the risk behind the green intents.DefinitionsWhat is sustainability?Things which can be sustained over a period without impacting on the people, environment and so on. As per the United Nations, it is defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” In practice, it means balancing three dimensions — the three pillars of sustainability recognised by the UN:EnvironmentalUse resources responsibly and judiciously, cut pollution and greenhouse gases, and protect ecosystems and biodiversity.SocialTreat people fairly and safely, support communities, and uphold human rights, inclusion, and equity.EconomicRun activities and businesses in ways that are resilient, ethical, and create long-term value.The UN’s five pillars — 17 SDGs link to thesePeople Planet Prosperity Peace PartnershipFrameworkSustainability and ESGSustainability is the broad goal and set of practices. The UN developed the Sustainable Development Goals (SDGs) — 17 goals interlinked to the pillars above. Sustainability is a broad term, and the need for reporting on it arose for companies. The Organization for Economic Co-operation and Development (OECD) suggested companies report and communicate their practices under the ESG criteria — the three keys shaping the sustainability reporting landscape.ESG criteriaEnvironment Social GovernanceIt is a way a company reports its performance, against which investors, regulators, and stakeholders assess it.Why sustainability / ESG reporting mattersThe essence of ESG reporting is to disclose how companies are being responsible under the categories of E, S and G, how they are managing the risk, and how it is being reflected upon. It is a way of building trust in society, ensuring regulatory norms are met, and providing a sense of comfort and confidence to stakeholders about preserving the future and having a system we all can rely on.The essence of ESG reporting is to disclose how companies are being responsible under these categories of E, S and G, how they are managing the risk and how it’s being reflected upon.— On why reporting mattersThe case for assuranceWhy it matters to get assurance over sustainabilityStakeholders increasingly require third-party validation of the claims companies make. When sustainability data sets — KPIs, metrics, disclosures — are assured, customers, investors, employees, value-chain partners, regulators, and stakeholders gain greater confidence. TrustCustomers get comfort that the products they invest in or buy are not harming the environment.Assurance on sustainable data sets reduces the risk of greenwashing / whitewashing / social washing, giving investors and stakeholders confidence that the offerings are genuine.It strengthens the brand reputation of the company and supports investors’ outlook towards it.It improves the credibility and clarity of public communications. ComplianceMany jurisdictions now expect assurance over sustainability reporting against defined frameworks, enhancing comparability between peers, sectors, and industry standards and helping readers — including regulators — understand a company’s standards and governance.In India, listed companies report through the Business Responsibility and Sustainability Report (BRSR), with mandatory assurance introduced.In the EU, the CSRD mandates limited assurance over ESRS disclosures, including GHG.In Australia, the Australian Sustainability Reporting Standards (ASRS) require phased auditing of climate reports.In Singapore, listed companies must obtain external limited assurance on Scope 1 and Scope 2 GHG emissions two years after they begin reporting — and other geographies are marching in similar ways. AccessibilitySustainability data sets are becoming a critical factor in financial decision-making. Lenders, insurers, investors, and customers use them to evaluate the overall risk and potential performance of a company or asset.Banks use verified ESG data to assess a borrower’s long-term viability and default potential; strong ESG practices can lead to better loan terms or access to green financing.Insurers use ESG metrics to determine coverage and premiums — poor ESG performance signals higher operational and liability risk, and higher insurance costs.Investors use verified data to identify sustainable, resilient investments, avoid greenwashing and social washing, and allocate capital in line with financial goals and sustainability values.Customers require audited supplier ESG data to meet their own targets and due-diligence obligations. Better risk management, governance and integration with financialsGetting data audited surfaces design gaps and control gaps for management, enabling stronger footing over data collection, methodology, and oversight.It helps the company put discipline in place, driving stronger policies, internal controls, and oversight — like financial reporting.It helps identify risks, opportunities, and the financial impact or provisioning that may be required. For example, if an asset emits high emissions and an alternate asset is assessed, that decision affects the asset’s useful life or impairment — no longer seen in isolation, but mapped onto financial impacts.In essence, verifiable sustainability data is transforming into a standard financial metric — moving beyond a niche ethical consideration to an essential component of mainstream risk assessment, and helping stakeholders assess decisions on investment and partnership.Table 1 — The red flagsRisks and measures for the Assurance PractitionerThe risks below guide the Assurance Practitioner in determining the red flags and the areas to be more mindful about. They help in determining the nature, timing, and extent of procedures across the entire engagement lifecycle — planning, execution, and completion. Foundational parameters must be clarified first: the rationale for the assurance, the required level (limited or reasonable), the purpose of the engagement, the intended users of the report, and the planned distribution. Compliance with the applicable framework is a must, and it is necessary to keep professional antennas up to smell the reds and apply professional skepticism throughout.7 risk areas What to evaluateR1Industry / Sector in which the Client belongsThe client’s industry and sector define the material topics of that specific business — sustainability impacts differ sharply by sector. There could be water and land-use concerns in agriculture; child labour, modern slavery, and human-rights concerns in manufacturing; human health, plastic pollution, waste, and water scarcity in beverages; land-clearance concerns when siting a plant far from a city; or cotton supply-chain risk in clothing.Geography also defines risk — climate risks such as flood, heat, and water stress depend on where the site is located, affecting the company’s strategy and KPIs. Industry knowledge is foundational to assessing sustainability risk at the start.This helps the practitioner evaluate whether the client is including the right information, whether the statement addresses the key risks, and whether material information is likely being omitted — enabling appropriate challenge of management and better-designed procedures.R2Knowledge about the Client and its governanceAssess how governance is structured and the tone set by senior leadership. When top management is genuinely committed to the sustainability roadmap, that mindset cascades through the organisation and aligns everyone toward shared targets — and drives the internal controls management wants for reporting.Conversely, if sustainability is treated mainly as a tick-in-the-box exercise, management may pursue targets differently, with reluctance to implement sufficient internal control or to address weaknesses and deficiencies.Assess how inclined clients are to achieve objectives — whether targets are over-ambitious, whether incentives are linked to compensation, and how much pressure exists. Where such pressures exist, the risk to management objectivity and fraud risk increases and should be assessed accordingly. To summarise, the tone at the top is pivotal.R3Reporting boundariesWhere clients have multiple branches, factories, units, or offices, understand the scope of the reporting boundaries used — and management’s rationale for scoping certain boundaries in and others out. Assess whether the boundaries not assured give rise to greenwashing or social-washing risk, and whether the residual risk would mislead the reader if the report covers only the scoped-in boundaries.Companies may try to limit scope to a narrow set that reflects positive impacts while ignoring material negative impacts.ExampleA manufacturing unit has 5 sites and has implemented emissions-reduction measures at only 3 — and considers only those 3 for reporting. At this juncture it is critical to evaluate:Is management clearly defining the reporting boundary in the Statement?What does the applicable regulation say — does it let management pick and choose boundaries?How will readers perceive the report — will the conclusion be read as substance over form even for sites outside scope?What is the risk of not assuring those sites — are they high-emission assets or subject to labour issues management would rather not report?Does cherry-picking fewer units misrepresent the sustainability reporting?There is significant risk that management may use assurance symbolically to boost reputation while engaging in greenwashing or social washing. Practitioners must apply professional skepticism to mitigate this.R4Synchronization of financial and sustainability data setsCompleteness and data accuracy are key. Unlike financial systems, record-keeping for sustainable transactions is less mature — so sustainability metrics and KPIs should speak to financial data to ensure completeness and accuracy. It is important that the finance department is involved in sustainability reporting to eliminate omissions that could lead to a misleading or incomplete opinion.For example, the property, plant and equipment schedule in the balance sheet details leased assets, manufacturing sites, freehold property, guest houses and so on. Tying sustainability data back to these financial parameters ensures completeness of the data captured.Management’s decisions also need integration across the sustainability report and financial statements. For a high-emission asset with a planned replacement addressed in the MD&A, the finance team may need to make provision or capex, and analyse remaining useful life or impairment. Without synchronisation, the risk of omission and inaccuracy is challenged.R5Indicators called for assurance and their selection processUnderstand the indicators presented, the indicators on which assurance is called for, and the rationale for those selected — and those not scoped in. Scoped-in indicators may be linked to measuring material topics, to public statements about achieving a desired level, or represent significant impacts, risks, and opportunities across the value chain.Assess that indicators called for assurance meet the following:Measurable and reliable: quantitative or semi-quantitative, accurate, robust, and consistent over time, allowing objective verification.Complete sets: a comprehensive picture across environmental, social, and economic dimensions, avoiding “cherry-picking” of only positive information.Comparable: clear, easy to understand, and comparable across time and, ideally, across similar entities or benchmarks.Subjectivity and estimates: many metrics involve significant judgment, forward-looking statements, and complex estimation (e.g. scenario analysis for climate risk).Scope limitations: management may scope only a narrow set of positive indicators — assess the total presented versus those assured, and the residual risk of the remainder.R6Technical nature of the metricThe assurance team may lack the specific expertise (e.g. in environmental science or social-impact assessment) required to adequately evaluate certain claims. Some environmental or social issues may need specialised experts, creating a need for multidisciplinary expertise.The Assurance Practitioner may assess the need for assembling a multi-disciplinary team with the expertise necessary to address the various risks envisaged.R7External factorsIt is important to check for external factors throughout the process:Any adverse media news.Any allegations against the company by stakeholders.The client’s ESG rating versus peers — whether it has been upgraded or downgraded, and the rating agency’s rationale.Market controversies in that sector.While it is important to understand the sector and the governance within the organisation, it is equally important to evaluate and assess the factors present outside it.As this domain matures, the future of assurance reports on sustainability reporting will see the inclusion of robust internal-controls reporting, other information paragraphs, and, potentially, the evolution of a concept similar to Key Audit Matters (KAMs) adapted for sustainability.— What’s nextWhat’s nextISSA 5000 and a single global baselineSustainability Assurance 5000 (ISSA 5000) is coming to provide a single, global baseline for assuring sustainability reports — driven by strong demand from investors and regulators for consistent, high-quality, comparable ESG data across sectors, industries, and locations. It aims to offer a unified, framework-neutral standard applicable to all topics and practitioners, moving beyond fragmented guidance to support decision-making with reliable information. Framework-agnostic, profession-agnostic, and scalable to both reasonable and limited assurance, it is designed for combatting the reds — a single stringent framework to build trust, improve comparability, and prevent greenwashing, social washing, and faulty decision-making based on unreliable data.All these standards aim to provide the highest level of trust to stakeholders. However, the responsibility of the Assurance Practitioner remains the same: to apply the highest level of professional skepticism to smell the reds, analyse inherent and potential risk, and apply appropriate measures and safeguards.ConclusionGuide light, not an exhaustive listThis article provides guide light to the Assurance Practitioner. It is not an exhaustive list of envisaged risks — there could be many more that a professional considers based on experience. The hope is that it helps professionals identify such risks, detect them, engage in constant dialogue with management, and address them — enabling green assurance without being in grey, and flagging off the red.Author may be reached at eboard@icai.inThe Chartered Accountant · Sustainability · August 2026 · www.icai.org
Ep. 97 — Biochar & Climate Finance: A New Playing Field for CAs
CA Journal
· July 2026
00:00
--:--
Biochar & Climate Finance: a new playing field for CAsBiochar — the oxygen-free, carbon-rich substance formed when biomass is heated — is much more than a scientific footnote. It promises real financial prospects with real environmental value. For Chartered Accountants, it opens access to carbon accounting, financial modelling, project assurance, and governance that were niche only a few years ago. India has vast farm waste and is acting on climate change, and CAs are well positioned to inject financial discipline, transparency, and credibility into this emerging arena.IntroductionSustainability is now a business strategySustainability is no longer confined to conference rooms. Enter any business boardroom and you will hear discussions about ESG goals, carbon neutrality, and climate plans. Biochar is one of the climate solutions that has gained significant traction. In simple terms, it is produced when agricultural or forestry waste is heated in a low-oxygen environment — a process known as pyrolysis — converting short-lived plant carbon into a stable form that can remain in soil for hundreds of years.Biochar is typically applied where crop residues would otherwise be burned or left to decay, releasing carbon dioxide into the atmosphere. It is pursued because it locks carbon away permanently, improves soil health, and creates a measurable, financeable climate benefit.Researchers discuss soil health and carbon storage. These matter. But there is another facet that is equally important, and it concerns the professionals in finance and accounting — namely, the financial potential of biochar.For Chartered Accountants, biochar is not merely an environmental concept; it is a professional opportunity. The space involves reporting and verification systems, carbon credit trading, frameworks, and financial structures. Real work. Real complexity. A biochar project offers a new professional footing on which CAs can actually add value as India transitions to the low-carbon development phase.Most organizations getting into biochar do not have the financial infrastructure or accounting skills. They know the environmental narrative and are ecstatic about carbon credits — but they lack mechanisms to measure, report, and verify claims. They have no financial models to present investors with returns, and no governance frameworks to ensure everything is done right. This is the gap that CAs fit perfectly.Beyond the ScienceAn emerging financial storyBiochar is produced when biomass such as crop residues, agri-waste, and forestry by-products are heated through pyrolysis, converting unstable organic carbon into a stable form suitable for long-term soil storage. Once deposited in soil it lasts hundreds of years, which is why it has become one of the most persistent carbon sequestration practices in the current market — and why it is so highly regarded by global carbon markets.But beyond the science lies an emerging financial story. Biochar projects can tap into:Voluntary carbon marketsGreen financing instrumentsESG-linked fundingCorporate sustainability budgetsIndian government climate incentivesAll of these demand transparent accounting, verification, due diligence, and strategic financial planning — the very things Chartered Accountants have in abundance.The Value ChainBiochar production process01Biomass CollectionCrop waste & residues02Drying & PreparationMoisture reduction & shredding03PyrolysisHeating in low oxygen04Cooling & CollectionBiochar collection05Soil ApplicationImproving soil health06Credit VerificationMRV & carbon credits07Revenue & Co-BenefitsBiochar sales & energyPyrolysis yields Biochar Bio-Oil SyngasWhy CAs Should Pay AttentionFive places where CAs add valueBiochar presents unique opportunities for Chartered Accountants. Companies are on the lookout for accountants who can help them navigate this emerging field.01 / Carbon accountingMeasuring sequestrationThe carbon sequestered in soil is what lets biochar projects earn credits — and unless projects are measured properly, they have no strong financial foundation. CAs can build carbon accounting systems that trace the flow of carbon: measuring baseline emissions, projecting emissions under different scenarios, and quantifying the differences.Quality of biochar, soil condition, application rate, and decomposition all matter, as does adherence to international methodology. Checks on carbon-benefit calculations are what draw the line between credible and questionable projects. A third-party CA review provides the credibility investors require, and adherence to standards like Verra and Gold Standard enhances market confidence — because buyers demand assurance, and credibility earns superior prices.02 / Financial modellingModels that reveal the truthBiochar initiatives can be capital-intensive: pyrolysis equipment, feedstock supply chains, storage infrastructure, and monitoring systems. Initial projects can require capital of several crores. Shareholders want comprehensive forecasts — payback period, projected ROI, and what happens if carbon prices fall.The best CAs build realistic models that chart cash flows across the project lifespan, run payback analysis, and stress-test sensitivity to carbon prices and biochar cost. Grounded in biochar markets, past prices, feedstock dynamics, seasonality, and policy, they make conservative assumptions. Predicting carbon-credit revenue accurately is the difference between success and failure — and that is where CAs show their value.03 / GovernanceGovernance and internal controlsCarbon credits are now financial assets that must be governed and controlled, with audit trails that guard against fraud and error. CAs build control measures for generating and tracing credits: documenting biomass collection, monitoring processes, validating results, recording storage conditions, and logging credit generation and sales.The biomass purchase audit trail matters because buyers want to know the source of the biomass. Checkpoint-based approval workflows prevent errors and fraud such as duplicate claims or unauthorized sales. Strong safeguards are required to prevent double counting. Most biochar enterprises are technically capable but operate without dedicated finance or compliance leadership — CAs bridge that gap by designing audit-ready systems from the outset.04 / AssuranceAssurance of ESG claimsFirms seeking biochar offsets for their ESG commitments require independent verification. Some companies have genuine intentions but inadequate documentation; others may overstate benefits. An independent CA review can reveal both, and can check that carbon-credit valuations are fair and accurate.Reviewing valuation methodologies and scrutinizing environmental claims helps spot greenwashing before it becomes a reputational problem. As expectations around sustainability reporting keep rising, assurance from CAs gives organisations credible, standards-based confidence in their disclosures.05 / AdvisoryTransaction advisory & due diligenceInvestors need thorough due diligence. CAs develop realistic carbon-revenue projections based on actual project conditions, give an honest assessment of output versus competitors, and evaluate policy risks — including whether new regulation might add value or whether withdrawn support could hurt the project.They also scrutinize the fairness and enforceability of carbon-credit sales agreements, assess the financial health of technology providers, and surface hidden liabilities such as remediation costs, regulatory penalties, and contractual disputes — uncovering these risks early, before any investment is made.“As expectations around sustainability reporting continue to increase, assurance provided by CAs offers organisations credible, standards-based confidence in their environmental disclosures.”The India OpportunityThe emerging biochar carbon-credit ecosystemMillions of tons of agri-residue, every yearThe real challenge isn't sourcing biomass — it's converting it into verifiable creditsAt present, a significant part of this residue is burned. Stubble burning causes enormous air pollution — one of the country's major environmental problems. Burning is quick and cheap, but the residue can instead be collected and converted into biochar: once collected, it can be converted, sold, and used to generate credits. This is the point in the value chain where timing becomes critical.Biochar projects are typically initiated during post-harvest periods, when large quantities of crop residue are generated. If those residues are not collected and processed immediately, they are burned or decompose — releasing carbon back into the atmosphere. Converting the biomass at this stage ensures emissions are avoided and long-term carbon storage is achieved.This benefits farmers financially and offers multiple revenue streams. Selling biochar to industries and farmers generates product revenue and improves soil health; carbon credits add further income. Co-benefits such as higher crop yields, lower fertilizer needs, and greater water retention deliver still more return. It is a revenue model that supports India's climate commitment, increases farmers' earnings, and reduces stubble burning — cutting emissions in turn.To work efficiently here, CAs can draw on emerging accounting standards for carbon credits in financial statements, Ind AS guidance on recognizing, measuring, and valuing credits, and sustainability reporting frames that involve biochar. It would also help to fix standards of assurance for environmental claims — areas where ICAI can take the lead in influencing national structures, as it did in adopting IFRS-based practices.The CA's Unique AdvantageA blend few professions can matchCAs are not limited to a single field. They combine an understanding of complex technical standards, a working knowledge of law, and financial shrewdness — then translate the technical into something businesses can actually use. Engineers hold the tech; lawyers hold the regulation; CAs blend all three.They excel at financial modelling, having built countless models across industries. They are good at detecting when numbers fail to add up and at narrating financial stories that resonate with investors and boards. Compliance, for a CA, is not box-ticking but understanding why the rules exist — and every sign-off is a direct reflection of their credibility, integrity, and reputation. That credibility is built over decades of maintaining standards under the threat of real penalties for cutting corners — exactly what carbon markets need, where greenwashing and exaggerated claims are real-world problems.Governance and risk management are areas where CAs have deep experience: they serve on audit committees, encounter real control failures, and have learned what works rather than what merely looks good on paper. They take part in all stages of project development — installing accounting systems early, building fraud controls, designing models that survive scrutiny, offering audit-ready verification, and conducting due diligence that catches issues before they become serious. That full value-chain coverage, combining financial expertise, regulatory acumen, auditing credibility, governance experience, and a cross-industry viewpoint, is uncommon in professional services.In the biochar sector, projects must address financial modelling, assurance, compliance with carbon-market standards, and professional accountability. CAs are specifically trained in financial analysis, assurance frameworks, internal controls, and statutory responsibility — which lets them bring structure, reliability, and traceability to these engagements. This is not a marketing claim, but a reflection of how the profession is formally structured to support high-integrity climate and carbon-market projects.“Biochar is not simply an innovation in the environment, but a gateway to a new form of work, a new market, and new responsibilities of our profession as we begin to look into the future.”ConclusionA new chapter for climate-aligned financeBiochar is a rare case where environmental impact and financial value overlap. On its path to low-carbon development, India will see more industries entering carbon markets, diversifying revenues, and improving their ESG reputation — and Chartered Accountants are uniquely positioned to guide them.The profession can play a decisive role in biochar project implementation and monetization, whether through carbon accounting, assurance, due diligence, or financial modelling. More significantly, CAs can help ensure that climate-positive projects are built on integrity, transparency, and sound financial judgement.Approached thoughtfully, biochar can be one of the many means through which Chartered Accountants contribute to economic development and environmental responsibility.The Chartered Accountant · Sustainability · August 2026Author may be reached at eboard@icai.in
Ep. 98 — Integrating Sustainability in Banking and Strengthening Disclosures with the BRSR Mandate
CA Journal
· July 2026
00:00
--:--
Integrating Sustainability in Banking and Strengthening Disclosures with the BRSR MandateThe world over, with increased focus on responsible business conduct, sustainability reporting has become crucial. SEBI has mandated the Business Responsibility and Sustainability Report (BRSR) for India's top-listed entities, including banks. This article explores how the banking sector can promote sustainability and use BRSR to catalyse the integration of sustainability with strategy. It also examines the significance of ensuring credibility to BRSR disclosures and the role of Chartered Accountants in adding credibility to the disclosures.IntroductionRealisation of the gravity of climate change and social inequalities has led to international initiatives such as the United Nations' Sustainable Development Goals (SDGs) and the Paris Agreement. These initiatives have pushed governments and businesses to look beyond economic growth and profits. Investors increasingly scrutinise environmental, social, and governance (ESG) performance as closely as financial performance. Meanwhile, businesses need significant financing to transition to more sustainable business models and processes.Banks, as conduits of credit flow and doubling as institutional investors, can give sustainability measures a real head start. Further, the present environment requires that banks must introspect their own strategy and operations, aligning themselves with sustainability principles, and making disclosures that depict their contributions to sustainability more accurately.Sustainability and the Banking SectorBanks can promote sustainability in two major ways:Ways to Promote SustainabilityThrough responsible lending and investment practicesAdopting sustainability in strategy and risk management(i) Responsible Lending and Investment PracticesPSL Norms: At the basic level, banks can serve the ends of sustainability by ensuring that funds reach the places where they are most needed. One of India's regulatory mechanisms to that end is the Priority Sector Lending (PSL) norms of the RBI. PSL focuses on areas like agriculture, MSMEs (Micro, Small and Medium Enterprises), export credit, education, housing, social infrastructure, and renewable energy. Banks must lend 40% of Adjusted Net Bank Credit or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher, to the priority sectors.1 However, PSL is only the starting point.Sustainability-conscious Criteria for Evaluating Loan Proposals: Worldwide, banks increasingly adopt more sustainability-conscious criteria for evaluating loan applications. For instance, they may recalibrate their exposure to heavy-polluting industries or those with unverifiable labour practices as a matter of policy. Beyond applying ESG criteria in standard credit evaluation, structured sustainable lending products have evolved that go further. The Green Loan Principles issued by the Loan Market Association (LMA) describe green loans as instruments where proceeds are exclusively applied to finance or refinance eligible green projects, with requirements for project evaluation, management of proceeds, and reporting.2 Separately, LMA describes Sustainability-Linked Loans (SLLs) as loans where the use of proceeds is unrestricted, but the pricing (interest rate) is tied to the borrower's performance against pre-agreed, measurable sustainability performance targets (SPTs) such as reduction in carbon emissions, improvement in energy efficiency ratings and so on.3 In the EU, disclosure mandates like the Sustainable Finance Disclosure Regulation (SFDR)4 require financial institutions to disclose how sustainability is integrated into their investment and lending decisions. Indian banks that proactively build green and sustainability-linked loan portfolios will be better placed when these become regulatory mandates.Responsible Investment Decisions: The investments made by banks, due to the sheer volume, are closely followed by markets and regulators. Hence, it becomes important that they consider sustainability criteria in their investment decisions along with financial performance. To signal sustainable investing more explicitly, banks can subscribe to green bonds issued by corporates, municipalities, and sovereigns. Green bonds are fixed-income instruments where proceeds are earmarked exclusively for financing or refinancing eligible green projects.Discharging Stewardship Responsibilities: Though they may not have significant influence in the boards of investees, as institutional investors, they can hold the boards accountable. As stewards of public money, banks must discharge their stewardship responsibilities as envisaged by the OECD (Organisation for Economic Cooperation and Development).5 They can foster respect for sustainability and better governance by actively engaging with the boards of their investees on sustainability concerns.Besides responsible lending and investment practices, banks must focus on their own strategy and operations aligning with sustainability.(ii) Integrating Sustainability with Strategy and Risk ManagementInterweaving Sustainability and Strategy: Banks' strategy must be aligned with the opportunities and threats associated with long-term environmental and social changes. This will include refining and redefining their business model, products and services, operations, pricing and presence.Immediate Measures: At a more immediate level, some of the measures that banks can take include developing green financial products, investing in sustainable infrastructure, housing branches in green buildings, setting up inclusive workspaces with improved accessibility, using green materials for interiors, adopting energy efficient practices, implementing effective waste management, and so on.Sustainability and Risk Management: While there is already a strong risk management framework with the Basel-III norms6 and RBI's supervision, identifying and addressing climate risks has become a priority. The Basel Committee on Banking Supervision has released principles for addressing climate-related financial risks.7 RBI has also issued a Discussion Paper on Climate Risk and Sustainable Finance in 2022,8 and a Draft Disclosure framework on Climate-Related Financial Risks in 2024.9 Climate risks need to be considered both at an entity level and at an individual loan or investment level. In credit risk analysis, performing scenario analyses on the impact of extreme weather events on specific loan portfolios like real estate or agriculture will help integrate climate risks.Banks' strategy must be aligned with the opportunities and threats associated with long-term environmental and social changes. This will include refining and redefining their business model, products and services, operations, pricing and presence.This process of reinforcing strategy, operations and risk management with sustainability has the added benefit of improving efficiency, reducing wastages, and enhancing goodwill of the bank in the process in the short run, while ensuring the bank's survival and success in the long run. Adopting a good sustainability reporting framework can provide a structured and goal-oriented way to achieve this integration of sustainability with strategy.The BRSR MandateThe National Guidelines for Responsible Business Conduct (NGRBC) were issued by the Ministry of Corporate Affairs in 2019. The NGRBC evolved a framework of nine principles aimed at responsible business conduct and mapped them to the UN's SDGs.10 Modelled on this, SEBI has mandated the Business Responsibility and Sustainability Report (BRSR) as part of the Annual Report for the Top 1,000 listed entities by market capitalization, which includes several banks as well. The updated version is applicable from 2023-24.11(i) The Anatomy of BRSRThe BRSR consists of three sections:Section AGeneral DisclosuresSection BManagement and Process DisclosuresSection CPrinciple-wise Performance DisclosureSection A of BRSR – General Disclosures: This section requires basic disclosures on the details of the listed entity, its products/services, its operations, employees, group entities and joint ventures, corporate social responsibility (CSR) and compliance with transparency and disclosure requirements.Section B of BRSR – Management and Process Disclosures: It contains disclosures relating to the existence of policy and management processes surrounding principles and questions about governance, leadership and oversight.Section C of BRSR – Principle-wise Performance Disclosures: The nine principles outlined in the NGRBC and adopted by BRSR are as follows:P1Ethics, transparency and accountabilityP2Sustainable and safe goods and servicesP3Promoting well-being of all employeesP4Being respectful of and responsive to stakeholdersP5Promoting human rightsP6Protecting and restoring the environmentP7Responsible and transparent manner of influencing public and regulatory policyP8Promoting inclusive growth and equitable developmentP9Providing value to consumers in a responsible mannerThis section requires disclosures under the nine principles, measured in terms of:Essential indicators — matters that are expected of an entity as a basic level of responsible business conduct, andLeadership indicators — matters that demonstrate taking leadership towards sustainable practices in the ecosystem in which the business operates. Usually these involve extending the actions required under essential indicators to value chain partners (like customers and suppliers).(ii) Strengths of BRSR FrameworkGranularity and Specificity of Disclosures: BRSR prioritises in-depth data more than vague, open-ended, or subjective statements. Granularity and specificity render measurability, comparability, and tangibility to the disclosures.Judicious mix of Quantitative and Qualitative Disclosures: The most information requirement is volume-based/quantitative instead of in monetary terms, for example, metric tonnes of waste generated, energy consumption in joules, etc. To render comparability, sometimes, monetary units are also used, for instance, greenhouse gas emissions per rupee of turnover. To put things into perspective, qualitative disclosures like details of public policy positions advocated by the entity, mechanisms to prevent adverse consequences to the complainant in discrimination and harassment cases, etc. also form part of the report.Fixed and Simple Disclosures: The disclosures are not customizable or open-ended like in other disclosure frameworks. This makes the exercise apt for nascent stages of sustainability reporting. This also makes it less susceptible to 'creative' reporting. There are no complex introspective exercises necessitated before making disclosures as in other frameworks. Here, the entity can dive into disclosures right away and the lessons on sustainability are learnt on-the-go.Forces Robust Data Collection Systems: The very exercise of filling BRSR forces identification of information gaps and blind spots. This in turn forces developing robust reporting mechanisms, and better discipline not just in reporting but also in operations.While the BRSR framework provides a strong foundation, its current scope leaves certain critical areas, particularly financed emissions, to voluntary initiative. The following approaches can help banks go beyond the minimum.(iii) Expanding the Impact of BRSR for BanksMeasuring Financed Emissions: Among the various sustainability metrics, the most consequential one for banks is financed emissions, which tells how much emission is being financed by the bank. The Partnership for Carbon Accounting Financials (PCAF) has evolved a framework to measure financed emissions to help financial institutions measure and report the climate impact of their lending and investment operations.12 PCAF uses the framework of the GHG Protocol, that is, Scope 1 (direct emissions from operations), Scope 2 (indirect emissions from energy consumed), and Scope 3 emissions (encompassing all value chain emissions). Financed emissions come under Scope 3. Banks, being in the service sector, have relatively lower Scope 1 and 2 emissions; however, financed emissions could far overshadow them. As per the report 'The Time to Green Finance' by CDP, a global not-for-profit organisation, in 2020, out of 332 financial institutions worldwide having a combined asset size of USD 109 trillion that self-reported that time, only 25% reported portfolio emissions.13,14 The Report observes that the emissions that could be attributed to the investing, lending and underwriting activities were almost 700 times more than their direct emissions. This underlines the urgent need to measure financed emissions for achieving real impact.It must be noted that BRSR requires disclosures of only Scope 1 and Scope 2 emissions and leaves voluntary disclosure of Scope 3 emissions to the bank's discretion. A 2025 study by Climate Risk Horizons assessing 35 Indian banks found that only about eight reported emissions across all three scopes, while the majority disclosed only Scope 1 and 2, leaving financed emissions largely unaccounted for.15However, measuring financed emissions is not straightforward. A bank can only know its financed emissions if its borrowers and investees measure and disclose their own emissions. Large listed entities would be disclosing emissions through their sustainability disclosures under mandates like the BRSR. For other borrowers, emissions may be estimated only using emission factors and broad assumptions. PCAF itself acknowledges this through its Data Quality Score (on a scale of 1 to 5, where 1 represents the highest quality), which allows banks to transparently communicate the reliability of the data underlying their financed emissions estimates.Even the EU, where sustainability disclosure mandates such as the Sustainable Finance Disclosure Regulation (SFDR)16 and the Corporate Sustainability Reporting Directive (CSRD)17 are in place, is still refining how financial institutions should disclose financed emissions in response to practical challenges.18However, the data gap and regulatory pause are still not reasons to defer the exercise. Banks may use PCAF's methodology as a starting point, disclosing financed emissions by asset class alongside the applicable Data Quality Score, so that readers can assess the reliability of the estimates. It is also worth noting that RBI's Draft Disclosure Framework on Climate-Related Financial Risks19 also signals that the regulatory environment is clearly moving towards disclosure of Scope 3 emissions. Also, IFRS S2, a much-relied-upon global framework, does require Scope 3 disclosures including financed emissions. Banks that begin this exercise now, even with estimated data, will be better positioned when stricter regulatory mandates arrive and as borrower-level data improves over time through India's evolving sustainability disclosure ecosystem.To signal sustainable investing more explicitly, banks can subscribe to green bonds issued by corporates, municipalities, and sovereigns. Green bonds are fixed-income instruments where proceeds are earmarked exclusively for financing or refinancing eligible green projects.Alignment with Global Reporting Frameworks: BRSR has conceptual overlaps with sustainability frameworks like the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), IFRS S1 (General Requirements for Sustainability-Related Disclosures) and IFRS S2 (Climate-Related Disclosures). Adopting these provide global comparability.Leveraging Technology and Data: Enterprise-wide collection of data is required to ensure reliable reporting and to track ESG performance.Integrating Sustainability in CBS: The Core Banking System (CBS) may be equipped with sustainability-related modules and additional input fields at transaction level to capture sustainability parameters like units of electricity consumed or wastes disposed in kilogrammes and so on.Dedicated ESG Platforms and AI-driven Insights: Dedicated ESG platforms may provide dashboards, AI-driven alerts, and real-time advanced analytics. The entire ERP/CBS platform may be integrated with the platform and fitted with AI that can sift through the data and point to inconsistencies, study patterns and raise alerts.AI, Automation and IoT: Smart meters or remote sensors that use technologies like RFID, IoT, etc. can capture real-time data from physical objects and convert into executable actions like entries in ERP/CBS.The Core Banking System (CBS) may be equipped with sustainability-related modules and additional input fields at transaction level to capture sustainability parameters like units of electricity consumed or wastes disposed in kilogrammes and so on.(iv) How can Boards use BRSR to leapfrog into Sustainability?Active Board-level Engagement: BRSR, with introspection, can potentially transform how Boards look at their strategy. Having ESG experts on the Board is ideal. Tracking BRSR parameters should be a regular agenda matter in the board meetings.Takeaways from Section B of BRSR: Boards must assess the adequacy of the structures, policies, and processes they have put in place to adopt sustainability. They must also ensure that policies are translated into procedures and actual implementation happens.Board Performance: Including sustainability parameters in board performance evaluation criteria will demonstrate the seriousness with which Boards approach sustainability.Dedicated ESG Committee: Having a dedicated committee for ESG/Sustainability will enable holistic discussions and decisions on sustainability measures.Risk Management Committee: The Risk Management Committee's terms of reference must specifically include addressing ESG risks.Internal Controls and Monitoring Mechanisms: For continuous and sustained improvements in ESG performance, monitoring mechanisms are necessary. The adequacy and effectiveness of the structures, internal controls and processes, as well as the quality of data must be regularly monitored.(v) Building Awareness at Grassroots-levelAwareness at Branches: Branch personnel should be given awareness on sustainability both at macro-level and at micro-level. They should be made aware on how the loans advanced by them could impact the environment and society depending on where the money flows. Through suitable manuals, they may be instructed to include sustainability parameters in loan proposals. They must also be incentivized to meet ESG targets at the branch-level like reducing carbon footprint of the branch, achieving energy efficiency, and so on.Stakeholder Engagement: A participative approach should be adopted as each branch will face different constraints. Inputs of ground-level employees, branch managers, customers and vendors must be taken regularly.BRSR Assurance / Assessment(i) The need for Assurance / Assessment ExercisesESG-themed funds manage trillions of dollars under their fold.20 As more money backs ESG-themed instruments and entities, regulators are wary of greenwashing attempts, where entities make ESG disclosures only to "seem" sustainable rather than being so in reality. Hence, just as how financial statements require statutory audits for credibility, ESG disclosures too require independent scrutiny. Further, since BRSR contains data that may be fragmented across different branches and departments, robust assurance or assessment procedures are required. In a nutshell, third-party assurance on ESG reporting is required for the following reasons:Identifying inconsistencies or incomplete data.Strengthening internal controls and reporting processes.Preventing 'greenwashing' attempts.Enhancing trust among regulators, investors, and other stakeholders.(ii) SEBI's Assurance / Assessment MandateReasonable Assurance for BRSR Core, now reframed as Assessment or Assurance: BRSR Core refers to a specific subset of BRSR composed of select parameters from various principles. SEBI's July 2023 circular originally mandated independent reasonable assurance of the BRSR Core on a phased basis starting with the Top 150 companies from FY 2023-24, extending to all Top 1,000 by FY 2026-27.21 Pursuant to the Expert Committee's recommendations, SEBI, vide its March 2025 circular (since consolidated in the 2026 Master Circular)22,23, has since replaced this rigid assurance requirement with the option of "Assessment or Assurance." This move came as a result of discussions with stakeholders by SEBI and in the spirit of ease of doing business, as "assurance" has specific connotations in the field of audit. Without diluting the intent to prevent greenwashing, assessments will also be third-party assessment undertaken as per standards to be developed by the Industry Standards Forum (ISF) in consultation with SEBI.24 Considering India is not yet a mature ecosystem for sustainability disclosures, this move may spur more enthusiastic adoption of third-party assessment.Limited Assurance for Value-chain Disclosures: Originally, the top 250 listed entities were required to make ESG disclosures for the value chain on a comply-or-explain basis from FY 2024-25 with limited assurance of these disclosures from FY 2025-26. Now, for value chain ESG disclosures, SEBI's March 2025 circular has gone further, making both the disclosure itself and its assessment or assurance entirely voluntary: disclosure on a voluntary basis from FY 2025-26, and assessment or assurance of that disclosure on a voluntary basis from FY 2026-27.Industry Standards Forum: SEBI has constituted an Industry Standards Forum to recommend uniform standards for certain matters.25 The ISF has already come up with a reporting standard on BRSR Core. Among others, the document contains a provisional spend-based methodology allowing entities lacking quantity-based fuel and electricity data to estimate Scope 1 and 2 emissions from financial spend data, while recommending migration to quantity-based measurement as soon as practicable.26 While this is a reporting standard, whether separate standards on the exact process of assessment would be released remains to be seen.Who can conduct Assessment or Assurance: SEBI has not mandated any professional qualifications or affiliations for carrying out the assurance or assessment exercise. SEBI's circular only requires that the assurance or assessment provider has the necessary expertise and has no conflict of interest. Towards this, SEBI's Expert Committee has referenced IOSCO's Guiding Principle that third-party assessment of sustainability-related corporate disclosures should remain independent of any specific profession.27 The Committee has also mentioned the overarching goal of maintaining professional agnosticism.ICAI's Framework for Assurance Engagements and SSAE 3000: Chartered Accountants (CAs) in Practice and CA firms are governed by ICAI's Framework for Assurance Engagements and other applicable Standards while providing BRSR Core assurance. The Sustainability Reporting Standards Board (SRSB) of the ICAI has issued the Standard on Sustainability Assurance Engagements (SSAE) 3000 Assurance Engagements on Sustainability Information.28 It is mandated for assurance reports covering periods ending on or after March 31, 2024. The Standard on Assurance Engagements (SAE) 3410 Assurance Engagements on Greenhouse Gas Statements has also been issued.29 Recently, the SRSB has also issued an Exposure Draft of Standard on Sustainability Assurance SSA-5000 – General Requirements for Sustainability Assurance Engagements.30The very exercise of filling BRSR forces identification of information gaps and blind spots. This in turn forces developing robust reporting mechanisms, and better discipline not just in reporting but also in operations.Role of Chartered Accountants in Furthering the Impact of BRSRCAs can play a meaningful role in furthering sustainability by undertaking BRSR assurance or assessment engagements.Experience: CAs' experience in auditing and assurance frameworks, evaluation of internal controls, performing substantive procedures both at entity-level and branch-level, techniques of sampling, application of materiality, and most importantly, in exercise of professional skepticism and professional judgment, can play an effective role in preventing greenwashing. Further, in the context of BRSR of banks, CAs may have experience in bank audits and can leverage their familiarity with the banking environment.Adherence to Audit Standards and Code of Ethics: When there is a well-defined audit reporting framework, there is clarity in approach. CAs are required to perform their engagements in accordance with the applicable engagement standards and Code of Ethics issued by ICAI. This naturally renders credibility to the process as well as ensures independence of the professional.Assessing Financial Impact of ESG Metrics: Where statutory auditors undertake the assurance or assessment exercise, it may have the added benefit of parallel evaluation of evidence for both the exercises, and unearthing errors and misstatements may be easier.CAs are required to perform their engagements in accordance with the applicable engagement standards and Code of Ethics issued by ICAI. This naturally renders credibility to the process as well as ensures independence of the professional.Concluding ThoughtsThe BRSR framework can serve as a starting point for implementing sustainability measures. The disclosures made should be a natural consequence of embracing responsible business conduct, and not merely a tick-box response. When banks demonstrate their commitment to environment, social equity and good governance through their sustainability disclosures, businesses will turn to them as a trusted partner for their sustainable financing needs. And in this age when stakeholders stand by "Trust but verify," Chartered Accountants could add credibility to disclosures and valuable insights to the process, and guide banks in their journey towards sustainability.Referenceshttps://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12799Loan Market Association (2018). Green Loan Principles. LinkLoan Market Association, Asia Pacific Loan Market Association, Loan Syndications & Trading Association (2019). Sustainability Linked Loan Principles. Linkhttps://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_enhttps://www.oecd.org/en/publications/g20-oecd-principles-of-corporate-governance-2023_ed750b30-en/full-report.htmlhttps://www.bis.org/publ/bcbs189.pdfhttps://www.bis.org/bcbs/publ/d532.htmhttps://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CLIMATERISK46CEE62999A4424BB731066765009961.PDFhttps://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4393https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdfhttps://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.htmlPCAF (2022). The Global GHG Accounting and Reporting Standard Part A: Financed Emissions. Second Edition. LinkCDP, 2020. The Time to Green Finance. Linkhttps://www.cdp.net/en/press-releases/finance-sectors-funded-emissions-over-700-times-greater-than-its-ownClimate Risk Horizons, Unprepared: India's Banks Moving Too Slowly in the Face of Climate Crisis (2025). Linkhttps://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_enhttps://finance.ec.europa.eu/financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_enhttps://ec.europa.eu/commission/presscorner/detail/en/ip_25_614https://fidcindia.org.in/wp-content/uploads/2024/02/RBI-DRAFT-CLIMATE-RELATED-FINANCIAL-RISKS-28-02-24.pdfhttps://www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030...https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.htmlSEBI Master Circular (Jan 2026)SEBI Circular (Mar 2025)https://www.sebi.gov.in/media-and-notifications/press-releases/dec-2024/sebi-board-meeting_90042.htmlIndustry Standards Forum press release (Aug 2023)Industry Standards Note on BRSR with AnnexureBRSR Recommendations by Expert Committee (May 2024)https://resource.cdn.icai.org/72628aasb58538.pdfhttps://www.icai.org/post/srsb-sae-ggsExposure Draft on SSA-5000Authors may be reached at eboard@icai.inThe Chartered Accountant · August 2026 · www.icai.org
Ep. 99 — Depreciation of the Indian Rupee: A Deep Cut or an Opportunity?
CA Journal
· July 2026
00:00
--:--
Depreciation of the Indian Rupee: A Deep Cut or an Opportunity?The Indian Rupee is passing through a tough time, becoming one of the weaker-performing Asian currencies this year. What is interesting is that this depreciation has taken place despite strong GDP growth which actually raises concerns about the real health of the economy.A common assumption is that if the Indian economy is growing faster than most countries, the rupee should automatically appreciate against the dollar.Economic growth is a key indicator, but currency markets react to far more variables than GDP alone. Currency health is directly affected by inflation, trade balances, fiscal deficits, interest rate differentials, geopolitical risks, commodity prices and global investor sentiment.So, the nose diving of the Indian currency vs the US dollar is the final outcome of many interconnected forces operating simultaneously across the global economy.Challenges of a Weaker RupeePotential AdvantagesImports become more expensive, especially crude oil and gas.Indian exports become cheaper and more competitive globally.Inflation rises due to higher import costs.IT companies earn higher rupee revenues from dollar income.Foreign education and overseas travel become costlier.Merchandise exports such as textiles, leather and agricultural products gain price competitiveness.Companies with dollar-denominated debt face higher repayment costs.Tourism and services become more attractive for foreign visitors.Government’s import bill increases, widening the fiscal burden.Higher export earnings improve foreign exchange inflows over time.Rupee Depreciation: Costs and OpportunitiesSource: Author’s CompilationLet’s peel the layers that has made the rupee so weak against the US Dollar.The rupee’s depreciation against the dollar suggests a deeper stress in India’s external sector. India is facing a chronic trade deficit1 as India’s imports have consistently outweighed its exports for decades. We are importing more and exporting less goods. In simple terms, it indicates more flow of capital than inflows of capital, putting direct pressure on the rupee.Official data showed that the trade deficit increased to $119.3 billion in financial year 2025-2026, compared with $94.6 billion in the previous financial year of 2024-2025.2 A big jump in the deficit with the oil crises has been compounding India’s economic woes.FactorImpact on the RupeeHow it Affects the CurrencyPersistent Trade DeficitHighIndia imports far more than it exports, increasing the demand for US dollars.Heavy Crude Oil ImportsVery HighNearly 89% of India’s crude oil is imported and paid for in dollars, putting constant pressure on the rupee.Foreign Investor Outflows (FIIs)HighInvestors convert rupees into dollars before exiting Indian markets, weakening the currency.Higher US Interest RatesHighAttractive returns in US bonds pull global capital away from emerging markets like India.Strong US DollarHighA globally stronger dollar automatically weakens most emerging market currencies.Geopolitical UncertaintyModerate to HighGlobal conflicts trigger a flight to safer dollar assets.Import Dependence on Electronics, Fertilisers & MachineryModerateLarge import bills increase dollar demand throughout the year.RBI InterventionStabilisingThe RBI sells dollars to reduce excessive volatility but cannot permanently reverse market forces.Why is the Rupee Under Pressure?Source: Author’s CompilationEconomic growth is a key indicator, but currency markets react to far more variables than GDP alone. Currency health is directly affected by inflation, trade balances, fiscal deficits, interest rate differentials, geopolitical risks, commodity prices and global investor sentiment.The Rupee’s Slide in over 75 YearsLet us look through the historical lens to understand the issues that led the Indian currency to the current tight spot. During independence, the rupee was valued at 4 rupees against a dollar. It was precisely four rupees and 76 paisa per dollar in August 1947.The rate continued till 1966 when wars, drought, and falling foreign reserves made India devalue its currency under difficult circumstances. There were oil shocks in the 1970s coupled with rising external debt, pushing the rupee lower. Our currency slid to 17 rupees and 50 paise per dollar by the 1990’s. The 1991 balance of payments crisis marked a turning point. India adopted economic liberalization that further devalued the rupee. It also marked a transition to a market determined exchange rate by 1993. By the late 1990s, the rupee depreciated further touching about 43 rupees against a dollar. The next decade saw economic gains in the 2000s due to strong IT exports and capital inflows.The growth rose but India’s dependence on oil imports kept the rupee volatile. The 2008 global financial crisis led to heavy outflows of capital, weakening the currency again. By 2014, the rupee crossed 60 rupees per dollar and over the last decade, we’ve seen the story unfold to where it is.The Role of Crude Oil and ImportsToday, India is the world’s third-largest consumer of crude oil. India imports nearly 89% of its crude oil requirement from other countries making the economy vulnerable. In the financial year 2025, India imported around 242 million tons of crude oil with the oil bill rising to nearly $161 billion.34India, with its burgeoning population, has massive energy needs, and when millions of barrels of oil are imported every day, oil marketing companies need to shell out billions of dollars from the foreign exchange market. The higher the demand for the dollar, the greater the pressure on the rupee.Apart from crude oil, India imports a sizeable chunk of edible oils and fertilisers for domestic consumption. From liquefied natural gas, semiconductor components, sophisticated machinery, medical equipment, pharma API’s and a large share of electronic goods, the huge import bill is partly responsible for weakening the Indian currency over the years.India, with its burgeoning population, has massive energy needs, and when millions of barrels of oil are imported every day, oil marketing companies need to shell out billions of dollars from the foreign exchange market. The higher the demand for the dollar, the greater the pressure on the rupee.FII’s Outflow from IndiaThe other side of the story has been that the FDI portfolio inflows into India’s equity markets have slowed in the last couple of years. A significant reason for the rupee losing sheen has been the big pullout by foreign investors from the financial markets of India since last year. Many foreign institutional investors have taken billions of dollars out of India to safer havens with lesser risk. These global investors became nervous because of global uncertainty, rising US interest rates or geopolitical tensions, and started selling Indian assets. They convert their rupees back into dollars before taking the money out of the country. This has led to the Balance of Payments or the BoP deficit, touching over $30 billion last year. It was more than a six-fold increase over 2024-25. Notably, the Balance of Payments (BoP) had remained in surplus as recently as 2023-24. This financial year, some experts believe that the BoP is expected to hover around $60 billion.India’s outward FDI has increased significantly in recent years. In 2023-24 and 2025-26, Indian firms invested nearly $65 billion outside India.Global HeadwindsA stronger US dollar and high US interest rates have further upped the ante on the Indian Rupee. The hegemony of the US dollar in global trade has been unchallenged. According to the International Monetary Fund, nearly 58% of global foreign exchange reserves are held in dollars. Close to 90% of all foreign exchange transactions worldwide involve the US dollar in one leg of the trade. From crude oil and natural gas to aircraft and defence equipment, a vast share of international trade is priced in US dollars, making it the world’s dominant reserve and settlement currency.The importance of US interest rates also needs to be factored in while assessing the downward pressure on the Indian Rupee. For a long time in the last decade or more, interest rates in countries like the US remained close to zero. Financial investors flocked to countries like India that were promising and showed potential.But the scales tilted back in favour of the US following an increase in interest rates by the US Federal Reserve. This made the US government bonds offer attractive returns with very low risk. As a result, global investors began pulling their money out of emerging economies to earn higher yields.This straight away boosts the value of the US dollar and weakens emerging-market currencies like the rupee simultaneously. In other words, currents in the US economy directly impact the flight of capital in and out of India.The Role of RBI in Currency ValuationThe story remains incomplete without examining the role of the Reserve Bank of India in the picture. The Reserve Bank of India holds one of the world’s largest stockpiles of foreign currency. As of July 10, 2026, India’s foreign exchange reserves stood at $675.16 billion.5 Therefore, whether the RBI should simply intervene to stem this free fall of the rupee against the US dollar remains a big question.The Central Bank acts not just when the rupee is depreciating but also when it appreciates. When depreciation happens, the RBI intervenes by selling dollars from its foreign exchange reserves. This increases the supply of dollars in the market, slowing down the pace of depreciation.On the other hand, when there is an influx of dollars via exports, foreign investments or overseas borrowing, the RBI often purchases those dollars. This holds the rupee against sharp appreciation as otherwise it would hurt Indian exporters.History has taught some lessons in the exchange rate management to India. In 1991, India’s foreign exchange reserves had bottomed out so much that the country had barely enough dollars to finance about two weeks of imports. It was a precarious situation, forcing the government to airlift nearly 67 tonnes of gold to secure emergency loans from overseas lenders.That moment was a watershed moment in India’s economic thinking.The liberalisation that happened post 1991 was also aimed at preventing such a severe foreign exchange crisis in the future. The goal has been met fairly, with India today holding foreign exchange reserves comfortably above $650 billion, making it one of the largest reserve holders in the world. These reserves include US dollars, euros, pounds, yen and gold.It signals to international players that India has the financial strength to absorb external shocks. These forex reserves also act as the country’s emergency savings account which is used judiciously by the RBI to handle genuine crises while allowing the rupee to calibrate itself in the changing economic conditions.So, when we say why the RBI cannot completely stop the depreciation of the rupee, the answer is rooted in the economic reality of the day. The RBI has no control over global economic pressures. If it keeps reacting to the rupee’s depreciation by pumping more dollars, the reserves might be seriously depleted without any certainty that this would plug the fall.This is precisely the reason why central bankers rarely describe the rupee as “weak” or “strong.” Instead, they underline the importance of an orderly market.The Positive Side of a Weak RupeeLet’s flip the issue of a weaker rupee hurting the economy.Necessarily, a weaker rupee doesn’t always mean doom for the economy. It can be a boon for exports if the currency becomes moderately weak. Export goods and services become competitive in global markets, with foreign buyers having to spend fewer dollars to buy our products. Food, agro-based products, merchandise, leather etc., are some of the few sectors that experience the positive side of a weaker rupee on the export front.₹The dominance of the dollar & the road ahead for the rupeeAnother issue that needs to be analysed in this context is the “dominance of the DOLLAR”. This is one subject that has begun to feature prominently in the corridors of power of central banks, finance ministries, and boardrooms around the world. Can the world finally move beyond the US dollar?America’s currency has become the de facto world’s currency. Be it crude oil, gold, aircraft and defence equipment, or any other international purchases, countries have traditionally been billed in dollars. This is one of the reasons why the USA holds unprecedented clout through measures such as economic sanctions on non-compliant regimes. After all, banks, corporations, and governments cannot afford to be shut out of that ecosystem.De-Dollarisation: A Reality or Noise?Fingers are being raised as to whether the dollar can be allowed to dominate forever. This thought has been accelerated by geopolitical events. When Russia’s forex reserves were frozen following the Ukraine conflict, the shockwaves were felt in many countries.This has given traction to conversations around de-dollarisation. De-dollarisation does not seek to eliminate the dollar from global trade. It simply means countries are trying to reduce their dependence on the dollar by finding alternative ways to transact in their own currencies. India has already joined this bandwagon.India has inked agreements with many countries, including Russia, that facilitate trade in rupees rather than dollars. The Reserve Bank of India has introduced mechanisms that enable international trade to be processed and encashed in Indian rupees.This is a welcome development, but it does not suggest that the dollar is going to weaken because many countries are opting to trade in their local currencies with their international partners. China is a befitting example here.China understood the need to decrease its reliance on the dollar in the long term for international trade and has therefore actively promoted the international use of its currency, the yuan. For over a decade, it has established currency swap arrangements, encouraged yuan-based trade, and expanded cross-border payment systems.Though China is the world’s second-largest economy, its currency still does not come anywhere near challenging the dollar’s dominance. The Chinese currency still accounts for only a small part of global reserves and international payments.China’s system is tightly controlled. It is viewed as lacking transparency that is heavily valued by investors. Be it independent institutions or freely functioning financial markets, all need the confidence that capital will not face sudden restrictions.The Road AheadThis is where India has an advantage. A rare demographic opportunity that India possesses is a young workforce. This, along with a swiftly expanding digital economy, one of the world’s most sophisticated payment infrastructures through UPI, a thriving services sector, and increasing manufacturing ambitions under initiatives such as Make in India, offers an opportunity to build export competitiveness.If we can raise the bar by giving a strong push to manufacturing and expanding our exports, the demand for our products and services will grow manifold. From semiconductors to green energy technologies, defence manufacturing, pharmaceuticals, artificial intelligence, advanced engineering and high-value services, demand for the rupee will naturally increase over time if we can produce for the world.A currency strengthens when a country’s economic capabilities flourish. If we have to arrest the depreciation of the Indian rupee, we should focus on making the Indian economy so productive, innovative, and trusted that the world chooses to buy from India.This is why the argument of the rupee crossing ₹95 or hitting ₹100 against the dollar often misses the larger picture. The reality is that there are no shortcuts to arresting the depreciation of the rupee in the short term. The solution is long term and lies in boosting our manufacturing, exports, and quality standards to earn more dollars through exports than are spent on imports.Author may be reached at richajainkallra@gmail.com and eboard@icai.inhttps://www.macrotrends.net/global-metrics/countries/ind/india/trade-balance-deficit ↩https://www.cnbctv18.com/economy/india-trade-deficit-data-march-widens-gold-silver-price-import-export-ws-el-19887138.htm ↩https://www.mospi.gov.in/uploads/publications_reports/...Energy_Statistics_India_2026_Final.pdf ↩https://www.newindianexpress.com/business/2025/Apr/18/crude-oil-import-up-by-42-to-242-mt-in-fy25-yoy-bill-falls-by-24-bn ↩https://m.economictimes.com/news/economy/indicators/indias-forex-reserves-rise-964-million-to-675-16-billion-for-week-ended-july-10/articleshow/132460094.cms ↩The Chartered Accountant · International Economics · August 2026 · www.icai.org
Ep. 100 — Impact of Artificial Intelligence (AI) on Procure-to-Pay (P2P): Transforming Financial Operations and Risk Management
CA Journal
· August 2026
00:00
--:--
Impact of Artificial Intelligence (AI) on Procure-to-Pay (P2P)The procure-to-pay (P2P) cycle covers the full payment operation, starting with requisitioning, purchasing, invoicing, and payment. This function is central to corporate financial management and governance. Despite its importance, this function is affected by many issues such as manual errors, invoice fraud, and lengthy approval processes. Artificial Intelligence (AI) is currently one of the most powerful tools to revolutionize this function by assisting in automation, predictive analysis, fraud detection, and ensuring compliance.In this article, we discuss the application of AI in various stages of the P2P cycle, showcasing its benefits, challenges, and impact on finance professionals. While AI can help with cost efficiencies, speed of execution, and enhanced risk management capabilities, it also raises concerns regarding algorithm bias, data privacy, and regulatory frameworks. Finance professionals will play a key role in maintaining a balance between automation and professional judgement, shepherding its ethical adoption and guiding organizations through this major shift.Introduction The procure-to-pay is a back-office function and one of the most critical operations in any enterprise. Starting from the initial purchase requisitions to vendor selection, purchase order creation, invoice verification, and payment processing, P2P represents the backbone of organizational spending and cash flow control. For finance stakeholders including accountants, internal auditors, and CFOs, the effectiveness of P2P directly influences financial accuracy, supports effective working capital management, and ensures compliance with tax and regulatory/statutory requirements.Despite being such an important function, P2P has historically been infected with inefficiencies. Manual invoice processing has many problems like delays, errors in applying discounts, and it even leads to duplicate payments. Studies indicate that manual or paper-based invoice processing costs an organization much more than automated processing. Moreover, fraud by suppliers such as false invoices or collusion with employees always remains a high risk.1In the last decade, organizations have focused a lot on digitizing the P2P process through the implementation of Enterprise Resource Planning (ERP) systems and building e-procurement platforms. While these systems help in bringing more visibility into the system, they are developed on rule-based workflows that could fail in complex scenarios or fail to detect an emerging fraud pattern. This is where AI appears as the next frontier, ensuring that P2P becomes intelligent and not just a digital tool.AI is best suited for procurement and accounts payable because of its ability to process unstructured data, learn from past transactions, and make real-time predictions. AI is bringing a shift from reactive to proactive financial operation through different measures like invoice data capturing using natural language processing, and fraud detection through anomaly detection algorithms. This article explains how AI is redefining the P2P function, the benefits it has, the risks it may bring, and the impact on finance professionals.Historical Evolution of P2P As time has gone by, the P2P process has evolved in phases, showing technological development and progress in corporate finance.Pre-digital era Manual Operations Procurement & payables were completely manual functions. Invoices and purchase orders were paper-based and circulated for manual approval, mainly through signatures, making the process slow and error-prone.1990s – 2000s ERP Systems SAP and Oracle integrated procurement and finance. Automation helped standardize workflows, but these systems operated largely deterministically on pre-established rules. Manual intervention was needed for exceptions, which limited scalability.2010 Robotic Process Automation (RPA) Bots came with the capability to mimic human actions. Very useful for repetitive tasks, but they lacked cognitive ability — not very helpful in recognizing fraudulent invoices or negotiating supplier terms.Now AI Revolution Machine learning and natural language processing have reshaped the P2P function. Unlike ERP and RPA, AI continuously updates itself on data patterns, improves over time, and adapts to handle exceptions — an intelligent decision-making tool, not just an automation initiative.For example, when AI processes invoices, it continuously learns from different patterns and can identify suspicious entries far better than rule-based systems, proving that AI is an intelligent decision-making tool, not just an automation initiative.AI Applications in the P2P Cycle As per a 2023 survey conducted by a renowned global consulting firm, procurement leaders across over 40 countries are increasingly adopting digital transformation and advanced technologies, such as analytics and automation, to bring more efficiency and create value within the procure-to-pay function.2Enterprises are adopting AI and related technologies rapidly. According to a press release by a leading global research and advisory company, AI spending is projected to reach about USD 2.5 trillion by 2026, driven by growth in AI software, services, and infrastructure investment across the industry.3 As per another global management consulting firm, AI systems are redefining the procurement functions by automating routine activities and allowing teams to unlock more value and efficiency, thereby enabling strategic decision-making.4Applications of AI in the following stages of the Procure-to-Pay (P2P) cycle deliver both operational efficiency and strategic insights.Purchase Requisition and Supplier SelectionAI-enabled forecasting analytics can estimate demand based on historical liquidation or consumption patterns, seasonality, and market trends, and assist organizations in preventing stockout situations and minimizing excess inventory. Supplier selection can be done through an automated assessment that includes AI models evaluating a supplier's financial stability, past performance, credit score, and perhaps even news sentiments. For example, an AI system can bring the declining revenue or negative media coverage of a supplier to the forefront of the risk management process, reducing risk prior to contracting.Purchase Order ProcessingAI can be used to streamline the process of generating a purchase order by automating the clearing of low-risk transactions, thereby minimizing the need for human intervention. Current ERP systems also work very well when it comes to automating purchase order creation; the only difference AI makes is by suggesting which transaction can be automated based on their risk profile.Invoice ProcessingWith the help of Optical Character Recognition (OCR), in combination with Natural Language Processing (NLP), AI enables the automatic extraction of invoice data from PDFs, scanned images, or emails, even in different languages and formats. AI ensures accuracy by matching the invoice to the purchase order and goods/service receipt in an automatic environment and helps reduce errors and manual interventions. Anomaly detection algorithms can prevent duplicate invoice accounting, inflated amounts, and abnormal discrepancies, thereby preventing payment errors.Fraud Detection and CompliancePublicly available data highlights the rising risk of payment fraud in financial operations. According to the Federal Bureau of Investigation's Internet Crime Complaint Center (IC3) 2024 report, reported losses from internet-enabled financial crimes in the United States increased to approximately USD 16.6 billion in 2024, compared to USD 6.9 billion in 2021 (~140% increase).52024 by the numbersSource: FBI / IC3 Annual Report 2024859,532Total complaints in 2024$16.6BLosses in 202433%Increase in losses from 2023256,256Complaints with actual loss$19,372Average lossThis figure and growth show why continuous monitoring of transactions is a critical part of the P2P cycle for identifying fraud or collusion. However, when performed manually, this task is often time-consuming and monotonous, which makes it vulnerable to fraud. This is where AI can play an important role in preventing corporate fraud by analyzing patterns such as repeated invoice submission from shell vendors or unusual payments. AI also helps ensure compliance by matching invoices with tax filing authorities such as GST (India) and VAT (EU). AI can keep track of a real-time audit trail, thereby providing regulators and auditors with transparent documentation and approvals for all exceptions.Payments and Working Capital OptimizationAI analyzes the payment schedule, working capital requirements, and recommends early payment discount opportunities, extending supplier payment terms, and aligning with the organization's liquidity needs. Machine learning models can be used to accurately forecast an organization's cash requirements, enabling CFOs to maintain liquidity and optimize working capital requirements. Multinational companies use AI to ensure compliance in cross-border transactions and simulate currency exposures.User SupportAI chatbots can provide real-time information on procurement queries like invoice status, purchase order approval hierarchy, and supplier information. Conversational AI can also assist suppliers in monitoring the status of payments for greater transparency and relationship-building. In fact, this reduces the reliance on finance staff for day-to-day queries and enables them to concentrate on strategic tasks.Benefits of AI-Enabled P2P Operational EfficiencyThe introduction of AI and automation in invoice processing has shown significant improvements in operational efficiency, reducing manual effort, and lowering processing costs compared to manual methods. Companies that incorporate AI-powered automation have better data extraction and validation capabilities, resulting in higher throughput and better accuracy in accounts payable processes.6,7,8,9Accuracy and ComplianceAutomatic data capture helps reduce errors in invoice matching, accounting, and purchase order validation. AI can ensure compliance with several regulatory and statutory requirements like GST, VAT, or SOX, ensuring strong internal controls.For instance, under the GST framework, validation of e-invoices must be done through the Invoice Registration Portal (IRP) and linked to the Input Tax Credit (ITC) reconciliation process via GSTR-2A/2B. AI can significantly automate this process by:Extracting invoice metadata and validating the Invoice Reference Number (IRN), QR code, and HSN/SAC accuracy.Identifying mismatches between vendor-reported details on the IRP and purchaser-recorded invoices in GSTR-2A/2B on various fields such as GSTIN, invoice number, GST amount, invoice date, etc.Flagging ineligible ITC items, including blocked credits under Section 17(5) (e.g. personal consumption, food, club memberships), reverse-charge transactions where credit is deferred until tax payment, and exempt or non-GST supplies.Risk ManagementContinuous monitoring through AI helps identify potential duplicate payments, fictitious vendors, or unusual transactions. Predictive analysis can estimate supplier risk and mitigate insolvency or default risks well ahead of time.Supplier Relationship ManagementAccelerated transaction processing with minimum errors results in faster invoice approval, processing, and timely payments. This enhances supplier trust, which is especially important for MSMEs reliant on predictable cash flow. Improved communication and faster response times through AI chatbots help build strong strategic partnerships.Strategic InsightsAnalytics through AI caters to the CFOs' need for predictive insights on cash flow, working capital optimization, and procurement trends, enabling data-backed decisions rather than reactive management.The figure below presents an anonymized case example based on aggregated performance metrics consistent with commonly reported procure-to-pay process outcomes.AI-Driven Transformation in Accounts PayablePre-AI baselineInvoice posting cycle time~8 daysDuplicate payment rate~0.30%Exception rate~18%DPO42 daysManual touchpoints / invoice4–612 months post-AIInvoice posting cycle time~30–48 hoursDuplicate payment rate~0.05%Exception rate~7%DPO~48 daysManual touchpoints / invoice~1–2Enabled by: AI/OCR + NLP invoice data extraction, ML-based 3-way match engine, anomaly detection for duplicate/fraud payments, payment scheduling optimization, and vendor master data deduplication & risk scoring.Challenges and Risks Data Privacy and SecurityAI systems work mainly on datasets that mostly contain supplier and employee information. Ensuring compliance with different regulations like India's Digital Personal Data Protection Act (DPDP)10, GDPR (EU)11 and state-level privacy laws to protect the privacy of stakeholders is critical. Mishandling data could lead to penalties from these regulators, and at the same time, it can also damage the organization's reputation.For instance, the DPDP Act, 2023 requires companies to ensure that vendor KYC and banking verification data are processed:Legally and with consent for a specific procurement purpose.Following data minimization and purpose limitation principles.With clear retention and deletion policies.With protection against cross-border data transfer risks in case of a global AP platform.Incorporation of DPDP compliance logic, including masking, encryption, and access control audits, is a must in AI-based KYC and vendor risk screening.Algorithmic BiasTraining AI models with historical data might result in inadvertently penalizing certain suppliers; specifically those MSMEs with limited transaction history. Bias in risk scoring or invoice prioritization may lead to unfair exclusions.To prevent algorithm bias in the case of MSMEs, organizations should:Use alternate data sources (on-time delivery score, dispute ratio, GST compliance track record).Wherever possible, provide human review for avoidance of MSME risk.Monitor invoice ageing and adjust payment rules to prioritize MSME suppliers' payment on time to preserve their working capital flow.Ensure alignment with MSME payment guidelines as per the MSME Development Act, 2006, which mandates payment to MSME suppliers within 45 days.This ensures that MSMEs are getting equal or prioritized supply chain treatment, consistent with India's economic and inclusion priorities.Cybersecurity ThreatsAI systems are vulnerable to attacks such as data poisoning, model theft, or adversarial inputs. A compromised system could approve fraudulent payments at scale, creating operational and financial risks. Table 1 summarizes the key threats along with mitigation controls and audit test procedures.Integration and Digital MaturityIn the case of smaller organizations, AI may not seamlessly integrate with their legacy ERP systems (e.g., SAP ECC, Oracle E-Business Suite, Tally ERP) as these organizations often lack digital maturity, making adoption technically challenging and costly.Auditability and GovernanceIt is very well possible that AI-driven decisions can function as "black boxes", which can create complications when it comes to internal or statutory audits and regulatory reporting. Having explainable AI and a strong governance framework is critical to satisfy auditors, the board, and regulators.Table 1Key cybersecurity threats with mitigation controls and auditor testing procedures.ThreatMitigation ControlsAuditor Testing ProceduresData Poisoning (fraudulent or manipulated invoice data used for training)Input validation and automated checks on source invoice data integrityTraining data provenance logs capturing the source and timestamp of all data usedSegregation of duties ensuring model trainers do not have vendor creation or AP posting rightsModel drift monitoring to detect unexpected behavior shiftsInspect data lineage documentation and sample training datasets to confirm approved sourcesVerify access controls to training and confirm SoD enforcementReview drift monitoring logs and follow up on anomalies and remediation evidenceAdversarial Inputs (manipulated invoice or abnormal character sequences bypassing fraud detection)Robust document parsing with multi-engine NLP validationAnomaly scoring for unusual vendor behavior, invoice structures, or tax patternsEnsemble validation comparing system results with rule-based checksRejection thresholds that require human review for out-of-pattern invoicesValidate algorithm rule thresholds and exception escalation workflowReperform sample invoice testing to confirm anomalies are flaggedReview AI model explainability logs documenting why high-risk invoices were flagged or clearedImplementation / Practitioner Checklist for Finance Professionals The following checklist can help finance professionals operationalize AI in the P2P process. Each section summarizes key procedures and controls for ensuring compliance, accuracy, and audit readiness.Table 2 · (i) P2P Control MatrixControl ObjectiveAI Feature / ControlKey CheckpointsExample ParametersThree-Way MatchAutomated matching of PO, GRN, and InvoiceValidate logic for tolerance levels; review exceptions flagged±2% price variance or ±3 quantity tolerance, combined with a value limitDuplicate DetectionAnomaly detection / pattern recognitionConfirm that the training dataset includes duplicate casesThreshold: same vendor + same PO + same amount, or same vendor + same invoice + same amountVendor Fraud PreventionPredictive risk scoringValidate that the vendor risk model uses independent data sourcesRed flag on inactive or mismatched bank details, weak financial health, or promoter background, using third-party platforms such as LexisNexis, IDfy, SignalXPayment AuthorizationWorkflow automationConfirm that multi-level approval is triggered for high-value invoices> USD 50,000 requires dual authorization, and ensure segregation of duties between the initiator and approver of the paymentTable 3 · (ii) Model Validation Steps — A Practical ApproachStepObjectivePractical Action1. Data Integrity CheckEnsure training and transactional data are complete, accurate, and recentReconcile source data (invoices, vendor master) with ERP extracts; remove duplicates and incomplete records2. Model Accuracy TestingConfirm that AI output (e.g., fraud flag, duplicate detection) is reliableRun historical transactions through the model; compare results with known outcomes; document accuracy percentage3. Threshold & Rule ValidationEnsure AI parameters align with the business risk appetiteReview risk-scoring thresholds (e.g., duplicate detection >95% confidence) with the finance/controls owner4. Bias & Exception ReviewDetect unintended discrimination or false positivesSample flagged and non-flagged transactions across suppliers and geographies; analyze any bias-related trends5. Periodic Re-ValidationConfirm ongoing model performance and explainabilityRe-test the model quarterly or after major data updates; maintain a validation log with sign-off by the finance leadTable 4 · (iii) Audit Trail RequirementsEnsuring traceability, accountability, and SOX compliance in AI-P2P systems. Financial integrity is the backbone of a strong financial system; a robust, verifiable audit trail is essential to comply with SOX Sections 302 and 404 and to support both internal and statutory audits.12Audit Trail AreaControl RequirementPractical ExampleSOX / SOC ReferenceInput Data TraceabilityEvery data element (invoice, PO, GRN, vendor master) must be traceable to its source with date/time stampsRecord source document ID, import timestamp, and file hash in AI system logSOX 404 — Data integrity in financial reportingOutcome LoggingMaintain details of all AI-generated outcomes with reasoning or algorithmic parametersStore fraud scores, duplicate detection logic, and reviewer IDSOC 1 / SOX 302 — Transparency in automated control logicManual Override RecordRequire mandatory justification for every human override of AI suggestionsFinance users enter reasons for approval when overriding flagged invoicesSOX 404 — Management assessment of control effectivenessApproval & Exception Workflow HistoryTime-stamped records of all approvals, rejections, and escalationsApproval chain with names, roles, and timestamps stored in a read-only database to avoid alterationSOX 404 — Evidence of approval hierarchy and segregation of dutiesSystem Access & Security LogsTrack logins, admin changes, and data exports to detect unauthorized accessGenerate user ID, activity type, and timestamp reports for auditSOC 2 / SOX 404 — IT general controls (logical access)Retention and Archival PolicyPreserve audit logs as per statutory or corporate retention periods (typically 7–10 years)Secure read-only archival in compliance repository (e.g., SAP GRC)SOX 404 — Record retention for audit supportPolicy and Professional Implications For RegulatorsAccounting standard setters and tax authorities should modify the rules for AI-powered P2P interchange. For instance, as part of e-invoicing reconciliation requirements, AI systems may need to keep an audit trail to meet GST or SOX audit requirements.For Finance ProfessionalsTheir role must expand to assume additional responsibilities for auditing AI models, validating outputs, and providing recommendations on governance frameworks. They must ensure that controls are in place to enable ethical AI adoption, remove algorithm biases, and ensure compliance with corporate, tax, and payment regulations.For OrganizationsCFOs and finance leaders must drive AI adoption and manage risks through a robust internal control system and by establishing AI governance policies (e.g., risk registers, exception reporting, and exception oversight committees).For SuppliersIt helps improve supplier trust and engagement when organizations have transparent AI-driven P2P processes. It ensures fair treatment across the supply chain through ethical and compliant AI usage.Conclusion AI has transformed the P2P function and has taken it from being just a back-office process to a strategic tool for driving value, compliance, and trust. By improving efficiency, reducing fraud risks, and ensuring compliance, AI becomes an anchor of financial governance for P2P. But the change is not without risk. Governance framework issues related to cybersecurity threats, algorithmic bias, and auditability challenges highlight the importance of strong governance practices.In the case of India, where economic priorities are crucial for tax compliance, MSME supplier ecosystems, and digitization, the adoption of AI will have to be tailored and managed appropriately. Ultimately, finance professionals will continue to play a key role, making sure that AI-powered finance isn't just innovative but also ethical, transparent, and accountable.Author may be reached atskamber_2@outlook.com and eboard@icai.inReferencesU.S. Bank, Manual AP Process Inefficiencies: Risks and Solutions — manual AP increases fraud risk and inefficiencies, while automation strengthens controls. usbank.com ↩Deloitte, 2023 Global Chief Procurement Officer (CPO) Survey. deloitte.com ↩Gartner Press Release, 2024 — worldwide AI spending will total USD 2.5 trillion in 2026. gartner.com ↩McKinsey & Company, The future of procurement in the digital age, McKinsey Insights. mckinsey.com ↩Federal Bureau of Investigation (2025). 2024 Internet Crime Report. Internet Crime Complaint Center (IC3). ic3.gov ↩Onteddu, K. R. (2025). AI-Powered Invoice Automation in ERP Systems: Revolutionizing Accounts Payable, Journal of Computer Science and Technology Studies. researchgate.net ↩Accounts Payable Automation Trends 2024 Report — automated AP processes can reduce processing times and improve accuracy. acarp-edu.org2025 Accounts Payable Automation Trends, Concur Insights. concur.comAP Automation: Benefits to the Accounts Payable Process, JPMorgan Insights. jpmorgan.comMinistry of Electronics and Information Technology, Government of India, Digital Personal Data Protection Act, 2023. meity.gov.in ↩European Union, Regulation (EU) 2016/679 — General Data Protection Regulation (GDPR). eur-lex.europa.eu ↩Sarbanes–Oxley Act of 2002, Sections 302 and 404. govinfo.gov ↩The Chartered Accountant · Artificial Intelligence · August 2026 · www.icai.org
Ep. 101 — Transforming India’s Financial Sector and Capital Markets to Power a $30 Trillion Economy
CA Journal
· August 2026
00:00
--:--
Transforming India's Financial Sector and Capital Markets to Power a $30 Trillion EconomyA vibrant, thriving financial sector is core to India's GDP growth ambitions.GDP — Nominal ($ Tn)1.2'08 → 3.9'24 → 302047 PFinancial Assets ($ Tn)1.8'08 → 6.9'24 → 1202047 PFinancial Assets to GDP1.5×'08 → 1.9×'24 → 4×2047 PBank Assets to GDP0.9×'08 → 0.9×'24 → 1.5×2047 PWhere India stands — 2024 snapshot vs. peersEconomyGDP ($Tn)Fin. Assets ($Tn)Fin. Assets / GDPBank Assets / GDPUSA291444.9×1.1×China19774.1×2.5×Germany4.7224.7×2.5×Brazil2.262.7×1.0×India3.96.91.9×0.9×Financial assets cover banks, central banks, financial auxiliaries, insurance corporations, OFIs, pension funds & public financial institutions. All values are on a CY basis except India's GDP, financial assets and banking assets, which are on an FY basis. Source: Financial Stability Board; BCG analysis.A defining economic transformation shapes every generation. For India, that transformation is already underway. Over the past decade, India has moved from a relatively closed economy to one of the world's fastest-growing major economies, with rapid digital infrastructure, vibrant democracy, and a rising demographic boon, fuelled by domestic consumption. A strong culture of entrepreneurship, favourable demographics and deeper integration with the global economy have significantly altered the country's economic trajectory.As India works towards becoming a $30 trillion developed economy by 2047, the next phase of Viksit Bharat development will require more than sustained growth in national income. It will demand a financial system that is deeper, more efficient, more resilient and more inclusive. The experience of advanced and rapidly developing economies offers a clear lesson: durable economic progress depends on the strength of the institutions that mobilise, allocate and manage capital.As economies expand from the current $4 trillion to $8 trillion over the next 6–8 years, their growth becomes increasingly capital-intensive. Infrastructure, manufacturing, urban development, clean energy, healthcare, technology and innovation require substantial pools of long-term finance. Meeting these requirements depends on a financial architecture capable of converting household savings into productive investment while supporting enterprises at every stage of their development. India has already established a strong foundation. Following years of balance-sheet repair, regulatory reform and improvements in governance, the banking sector is better positioned to support economic growth. The country's capital markets have also developed into some of the most dynamic among emerging economies, supported by stronger regulation, improved transparency, better corporate governance and increasing participation from domestic investors.These developments have strengthened investor confidence and enhanced the resilience of the financial system. However, the scale of India's ambitions will require a further and more fundamental transformation. Over the next two decades, India will need unprecedented levels of investment. Significant capital will be required for transportation networks, urban infrastructure, renewable energy, semiconductor manufacturing, defence production, logistics, digital connectivity and advanced industrial capacity.This investment cannot be financed through bank lending alone. Banks will remain central to financial intermediation, but they must increasingly be complemented by deep and well-functioning capital markets capable of providing long-term funding, absorbing risk, and supporting innovation-led businesses.Capital Markets as InstitutionsCapital markets must therefore assume a more strategic role in India's development. Equity markets are not merely venues for trading securities or raising funds. They are institutions through which entrepreneurs can convert ideas into scalable enterprises, companies can finance expansion, and investors can participate in long-term wealth creation.At the same time, the development of corporate bond markets, Infrastructure Investment Trusts, Real Estate Investment Trusts, Alternative Investment Funds and private credit is broadening the range of financing available to businesses and infrastructure projects. These instruments can reduce excessive dependence on bank balance sheets and provide capital better suited to long-duration investments.An equally important change is taking place in the composition of household savings.For many decades, Indian households preferred physical assets, particularly gold and real estate. That pattern is gradually changing. Mutual funds, equities, insurance products, pension schemes and fixed-income securities are becoming a larger component of household wealth.The expansion of systematic investment plans, the rise in retail participation in equity markets and the growing acceptance of long-term financial investing indicate increasing confidence in formal financial institutions. This financialization of savings is among the most consequential structural shifts in India's economy.A stable domestic pool of financial savings can provide the capital required to fund infrastructure, enterprise and innovation while reducing dependence on volatile external flows.“The next phase of financial inclusion must move beyond account ownership. It must focus on improving the quality, affordability and relevance of financial services available to households.The New-Age Growth EnginesThe next stage of India's economic development will also be shaped by sectors that had little commercial significance a generation ago. Cotton, textiles, real estate, IT services, and consumption have driven the journey to date. However, the journey for Viksit Bharat will be driven by new-age sectors like artificial intelligence, semiconductor manufacturing, financial technology, biotechnology, renewable energy, electric mobility, defence, aerospace, robotics, and space technology, which are creating new areas of economic activity.These industries can improve productivity, generate high-skilled employment and strengthen India's position in global value chains. However, many of them require long development cycles, substantial research expenditure and a high tolerance for risk. Their growth will depend on access to patient capital through venture funds, private equity, institutional investors and deep public markets.Artificial intelligence, in particular, may become one of the most important drivers of productivity in the coming decades. Unlike earlier waves of automation, such as banking and railway offices, which were largely focused on replacing repetitive tasks, AI has the capacity to augment judgement, improve decision-making, and enhance efficiency across a wide range of sectors.Within the banking and financial services industry, AI has already shown use cases for better loan assessment, enhanced fraud detection, better tax compliance, regulatory compliance, risk management, customer service, and investment analysis. In manufacturing, it can improve production planning, quality control and supply-chain management. Its wider adoption could generate productivity gains across the economy and contribute meaningfully to India's long-term growth. We haven't spent money on developing AI, but for a capital-hungry country, it can unlock significant savings in our day-to-day functions.India also possesses a distinctive institutional advantage in the form of its Digital Public Infrastructure. The largest NBFC recently announced that, through the use of AI, it is listening to almost 2 crore customer calls and has disbursed about INR 2000 crore in additional loan book. These kinds of changes are a real example of the efficiency AI brings. Many manufacturing companies, hospitals, and pharma companies are already using technology across various processes to achieve process cost efficiencies.A Digital Foundation for InclusionPlatforms such as Aadhaar (India's social security number), the Unified Payments Interface (UPI), DigiLocker, and the Account Aggregator framework have transformed the delivery of financial services to millions at low cost. They have lowered transaction costs, improved identity verification, expanded access and enabled financial innovation at exceptional scale.This digital foundation allows banks, insurers, wealth managers, fintech companies and asset managers to serve hundreds of millions of individuals more efficiently. India has the highest per capita data usage and has recently crossed the 1 billion broadband connection mark, which shows that it has also created the basis for one of the world's most extensive and scalable digital financial ecosystems.India has succeeded in bringing a large proportion of its population into the formal banking system. Yet access to a bank account does not automatically provide access to finance. Many individuals still lack affordable credit, adequate insurance, retirement products and suitable long-term investment options. There is a huge opportunity for companies with these tools available at their disposal.The next phase of financial inclusion must therefore move beyond account ownership. It must focus on improving the quality, affordability and relevance of financial services available to households.This challenge is particularly acute for Micro, Small and Medium Enterprises, which are central to employment generation, local economic activity and entrepreneurship.Technology can materially improve this situation. Future lending models are likely to rely increasingly on digital payment histories, GST filings, banking patterns, transaction data and cash-flow analysis.Expanding access to credit for individuals and enterprises would have effects far beyond financial inclusion. It would support education, home ownership, business formation, investment, job creation and productivity growth.A More Specialised EcosystemAs the economy develops, the role of financial institutions will also become more specialised.Banks will increasingly provide sophisticated financial, insurance and advisory services over and above the traditional deposit and credit lending functions. Asset management and wealth management companies will play a greater role in mobilising household savings.Insurance companies and pension funds can emerge as important sources of long-term capital. Fintech firms will continue to improve accessibility, efficiency and customer experience.A mature financial system will depend not on any single category of institution, but on the interaction of banks, markets, insurers, pension funds, asset managers, fintech companies and regulators within a coherent and well-governed ecosystem.“India's ambition to become a developed economy is beyond a higher level of GDP; it includes more jobs, a stronger manufacturing sector, savings mobilised into productive assets, and an economy that is more productive, innovative, resilient, and globally competitive.Realising that ambition will require sustained investment, technological advancement, strong institutions and a disciplined approach to capital allocation. Funds must flow towards the sectors, enterprises and infrastructure that can generate durable economic and social value.The financial sector, represented by over 30% weight in the index, will be the bridge between household savings and its financialization, leading to national development. Across banking, investments, access to credit, insurance, and other products, we are deeply underpenetrated. Technology will improve efficiency and inclusion, while artificial intelligence will reshape the design and delivery of financial services.Together, these forces can create a virtuous cycle in which savings are converted into investment, investment raises productivity, and higher productivity supports broad-based prosperity.If manufacturing builds the productive capacity of the nation, the financial system will provide the capital required to sustain it.The coming decades may therefore be remembered not only for the scale of India's economic expansion, but also for the emergence of a sophisticated, inclusive and technology-enabled financial system capable of converting domestic savings into innovation, enterprise and enduring national progress.Author may be reached at eboard@icai.in The Chartered Accountant · August 2026
Ep. 102 — Viksit Bharat@2047: Through the Lens of AI and Global Capability Centers
CA Journal
· August 2026
00:00
--:--
Viksit Bharat@2047: Through the Lens of AI and Global Capability CentersAsk most people in major cities in India what “Viksit Bharat” means, and you’ll get a version of the same answer: a developed India by 2047, the hundredth year of independence. It’s a big, almost audacious target — a $30–40 trillion economy, built on inclusive growth, technological self-reliance, and a much louder voice on the world stage.The government has organised the vision around four groups it wants to lift: youth (Yuva), the poor (Garib), women (Mahila), and farmers (Kisan). Underneath all of it sits Atmanirbhar Bharat, the push for self-reliance, paired with an equally strong appetite for global partnerships and leadership in innovation and governance.Two things keep coming up whenever this vision gets discussed in policy circles: artificial intelligence and the explosive growth of Global Capability Centers, or GCCs. Together they’re doing a lot of the heavy lifting — creating high-value jobs, seeding indigenous innovation, and pulling India deeper into global supply and value chains. Prime Minister Shri Narendra Modi has said more than once that he wants India among the world’s top three AI powers — and not merely as a consumer of AI built elsewhere, but as a creator of sovereign, inclusive AI built on Indian terms.What follows is a look at how this vision came to be, where AI and GCCs fit into it (with examples), and what stands in the way between now and 2047.Where This Ambition Comes FromIt is worth reflecting on how far the journey has come from its humble beginnings. India in 1947 was a low-income economy just beginning to find its footing; today it’s the world’s fifth largest. That arc runs through the 1991 liberalization reforms, the Digital India push that took off around 2015, and more recently the production-linked incentive (PLI) schemes that tried to pull manufacturing back onshore.Getting to Viksit Bharat means sustaining something close to 8% annual GDP growth for two decades — a shift away from an economy driven mostly by domestic consumption toward one driven by manufacturing and innovation. That requires infrastructure most people take for granted in richer countries: better roads and ports, yes, but also the quieter digital plumbing — UPI, Aadhaar — that already underpins daily transactions for hundreds of millions of Indians. It requires skilling at a scale the National Education Policy 2020 is only beginning to attempt, and a genuine push toward net-zero, including a renewed bet on nuclear power.AI and GCCs matter here because they act as multipliers. They stretch the value of human capital further than it would otherwise go, and they pull in foreign direct investment that infrastructure alone can’t. India’s tech sector, GCCs included, is already a meaningful slice of GDP, and under an aggressive-adoption scenario, AI alone could add close to $1.7 trillion to the economy by 2035.Technology as the Connective TissueBeyond the four social pillars, there are strategic ones too: economic competitiveness, national security, global partnerships, strong legal and regulatory frameworks. Technology threads through all of them — semiconductors, quantum computing, supercomputing, and AI aren’t separate initiatives so much as the backbone that makes self-reliance possible at all.AI and GCCs matter here because they act as multipliers. They stretch the value of human capital further than it would otherwise go, and they pull in foreign direct investment that infrastructure alone can’t.The youth cohort — sometimes called Amrit Peedhi — is where a lot of this energy is concentrated. India already has the world’s third-largest startup ecosystem, and GCCs plus AI are turning what used to be described somewhat abstractly as a “demographic dividend” into actual jobs. Women-led enterprises are growing. Farmers are getting access, however unevenly, to precision agriculture tools built on AI. None of this is evenly distributed yet, but the direction is consistent.AI as the EngineIndia’s official framing is clear, concise, and impactful: “Make AI in India, Make AI Work for India.” The IndiaAI Mission, launched in March 2024 with an outlay of ₹10,372 crore, organizes the work around seven areas — compute infrastructure, foundational models, datasets, applications, entrepreneurship, skilling, and safe AI.On the compute side, capacity has grown fast — from around 10,000 GPUs to more than 38,000, made available to researchers and startups at subsidized rates of roughly ₹65 an hour. The stated goal is 100,000-plus publicly accessible GPUs, with private capacity pushing the national total well past 200,000.The more interesting story, though, is on the model side. Sarvam AI, a Bengaluru startup, was selected to build a sovereign large language model — one trained on Indian data, tuned to Indian languages and cultural context rather than adapted after the fact from a Western model. BHASHINI, the government’s multilingual AI initiative, supports similar work for public services. NITI Aayog has projected that AI could help push growth toward 8% annually, potentially lifting GDP to around $21 trillion by 2047, well above baseline projections without it.The sector-by-sector picture is wide: crop monitoring and yield prediction in agriculture, diagnostics and drug discovery in healthcare, personalized learning tools in education, predictive maintenance in manufacturing, fraud detection in finance. NITI Aayog’s roadmap singles out financial services, pharmaceuticals, manufacturing, and automobiles as priority sectors. The employment numbers being floated are large — up to 4 million new “AI-first” jobs by around 2030, with demand for AI talent expected to climb from roughly 800,000–850,000 today to over 1.25 million.Case · Sovereign AISarvam AI and the Case for Sovereign ModelsSarvam is a useful example of what “sovereign AI” actually looks like in practice. It’s building large language models trained on Indian datasets, capable across more than 20 languages, designed for voice-first use — which matters enormously in a country where a large share of the population is more comfortable speaking than typing. Access to IndiaAI Mission compute lets Sarvam train these models domestically rather than renting capacity or IP from abroad.The output feeds into “BharatGen,” aimed at public-service applications: a government chatbot that responds in a local dialect, for instance, isn’t a novelty here — it’s a genuine attempt to narrow the digital divide, and potentially something India could eventually export to other countries in the Global South facing similar language diversity.Case · Education & HealthMicrosoft and the ClassroomMicrosoft’s Bengaluru R&D team built AI tools that help Karnataka’s teachers generate personalized lesson plans, now integrated with the government’s DIKSHA education platform. In healthcare, a similar partnership with Apollo Hospitals produced a clinical AI assistant that reportedly saves doctors about 20% of the time they’d otherwise spend on data entry and record-keeping — time that goes back into seeing patients. Small efficiency gains like these, multiplied across a system serving over a billion people, add up.None of this is without friction. Data quality remains inconsistent. Talent retention is a real worry given how aggressively global firms compete for the same AI engineers. Compute-hungry training runs carry a real energy cost. The responses so far — responsible AI guidelines, large-scale reskilling programs like FutureSkills PRIME (which has already reskilled over 300,000 people), and deeper public-private collaboration — are reasonable starts, but nobody would call the problem solved.GCCs — No Longer the Back OfficeGlobal Capability Centers are, in essence, offshore units that multinational companies set up and fully own, rather than outsourcing to a third party, covering IT, R&D, analytics, finance, and increasingly, core product development. India now hosts the largest concentration of these centers anywhere in the world: roughly 2,100+ centers spread across 3,600+ individual units as of FY26, employing 2.2 million+ people and generating close to $98 billion+ in value. The ecosystem has grown 32% in size since FY21, with more than 500 new centers opening in recent years.What’s changed isn’t just the scale, it’s the nature of the work. Nearly half of these centers — 46% — now function as genuine “portfolio” or “transformation” hubs rather than cost-saving back offices, a marked shift from where things stood even a few years ago. AI and machine learning now run through more than 1,200 GCCs, supported by over 250 dedicated AI centers of excellence and more than 250,000 AI professionals — roughly 28% of the entire global GCC AI workforce sits in India. Hiring reflects this: an estimated 510,000 jobs are expected in 2026 alone, and 64% of them will require AI or data skills. Bengaluru remains the anchor, with around 1,080 units, followed by Hyderabad and the National Capital Region, while Tier-2 cities are now the fastest-growing segment of the map.The roster of companies setting up shop keeps widening too: Forbes Global 2000 firms, private-equity-backed companies, and newer entrants like Anthropic and Marriott. Increasingly, the innovation flow runs in both directions — products and solutions built in Indian GCCs are shipped out globally, not just adapted from headquarters.Case · Enterprise SoftwareSAP Labs and JouleSAP’s Bengaluru center built Joule, a generative AI copilot that sits across SAP’s enterprise software suite, letting users automate tasks and pull insights through natural-language queries. It was conceived and built in India, then rolled out globally — a fairly clean example of a GCC moving from support function to genuine product owner, which is exactly the kind of IP-building Atmanirbhar Bharat is meant to encourage.Case · RetailWalmart and Retail IntelligenceWalmart Global Tech India uses machine learning out of its Bengaluru hub for inventory forecasting, real-time product substitutions, and personalized recommendations — work that ultimately optimizes supply chains at global scale and cuts waste. There’s a sustainability angle too, in more efficient logistics. The savings run into the billions, and there’s an obvious path for these techniques to filter into Indian retail through Walmart’s stake in Flipkart, potentially pulling local small businesses into more sophisticated supply networks.Case · Pharma & HealthcarePharma and Healthcare GCCsNovo Nordisk’s India operation leverages AI across drug development support, regulatory documentation, and personalized diabetes care. Amgen’s Hyderabad center focuses on precision oncology analytics, backed by an investment north of $200 million. Siemens Healthineers uses AI in diagnostic imaging and radiology. Collectively, this work shortens R&D timelines and lowers costs, which matters directly for India’s stated goal of $350 billion in pharmaceutical exports by 2047.Case · Manufacturing & EnergyManufacturing and EnergyIn steel and energy, GCCs are using computer vision for defect detection and predictive maintenance, and for optimizing things like waste-heat recovery. At least one center reported a meaningful drop in downtime and carbon footprint as a result. Applied more broadly, this kind of work supports both the green transition and the manufacturing self-reliance that PLI schemes are trying to build.Beyond the direct economic output, GCCs are quietly building India’s digital sovereignty, cybersecurity capability, data localization practices, and a deep bench of trained talent that didn’t exist at this scale a decade ago. Many now work closely with local startups and universities, which is arguably where the longer-term payoff lies.Where AI and GCCs Reinforce Each OtherThe connection between the two isn’t incidental. Indigenous AI models reduce reliance on imported technology; GCC-driven R&D feeds into the broader push around semiconductors and AI hardware under Semicon India. Together they generate millions of jobs, give youth a reason to stay and build rather than emigrate, open doors for women in tech, and modernize agriculture and healthcare from the ground up.GCCs are turning India into more of an innovation exporter than an outsourcing destination — and combined with digital public infrastructure like UPI and the Open Network for Digital Commerce (ONDC), India is increasingly exporting its governance models, not just its labour.There’s a global dimension too. That said, geopolitical friction and global competition for talent means policy must stay nimble, especially around data protection law and IP frameworks.Closing ThoughtsViksit Bharat@2047 isn’t just an economic target, it’s closer to a national reinvention — and AI and GCCs are two of its clearest working examples. Sarvam’s sovereign models, SAP’s and Walmart’s product innovations, and the healthcare breakthroughs coming out of pharma GCCs all point to something concrete rather than aspirational: this is already happening, unevenly but genuinely.Whether India actually gets there by 2047 depends less on any single technology and more on follow-through — largely around policy continuity, sustained investment in skills, and enough patience to let institutions mature. If it works, the result won’t just be a bigger economy; it’ll be a different kind of development story, one built as much on indigenous capability as on capital. That’s the harder version of the bet India has placed, and the next two decades will show whether it pays off.The Chartered Accountant · August 2026 Author may be reached at eboard@icai.in
Ep. 103 — From Vision to Execution: The Leadership Imperative for India @2047
CA Journal
· August 2026
00:00
--:--
From Vision to Execution: The Leadership Imperative for India @2047India's ambition to become a developed nation by 2047 is both timely and demanding. The country enters this period with considerable strengths: a large domestic market, a young population, an expanding digital economy, a growing entrepreneurial base and greater influence in global affairs. Yet none of these advantages will automatically produce a developed India. Demographic potential can become demographic pressure. Technology can widen inequality instead of reducing it. Economic growth can coexist with inadequate public services, weak institutions and limited employment opportunities. The real test of Viksit Bharat is not the scale of the vision but the discipline of its execution.India has never lacked ideas, policies or programmes. The more persistent difficulty has been converting national intent into consistent outcomes across ministries, states, districts and institutions. A policy announced in New Delhi may be understood differently in different states and may encounter an entirely different reality when it reaches a municipal office, a village, a school or a small enterprise. The journey to 2047 must close this distance between policy and performance.This makes leadership central to the development process. Leadership in this context does not refer only to political authority. It includes administrative leadership, business leadership, institutional leadership and professional leadership. It must also extend beyond a few individuals. India will need a system in which thousands of people, working at different levels, can make sound decisions, accept responsibility and remain focused on long-term national goals.Turning 2047 into a sequence of achievable commitmentsA date as distant as 2047 can inspire, but it can also create a false sense that there is sufficient time. In public policy, twenty-one years is not a long period. A child entering school today will be part of the workforce before 2047. Infrastructure commissioned during the next few years may remain in use well beyond the centenary of Independence. Similarly, weaknesses in health, education and urban planning that are ignored today will become far more expensive to correct later. The first responsibility of leadership is, therefore, to translate the national vision into measurable intermediate commitments. India needs clear milestones for 2030, 2035 and 2040, supported by annual targets and public reporting. The World Bank estimates that India's gross national income per person would need to rise nearly eightfold from prevailing levels for the country to attain high-income status by 2047.Building institutions that can deliverOne of the common misinterpretations of strong leadership is that it denotes an over-centralised decision-making process. Central direction, however, must be exercised judiciously during a crisis or at the launch of a significant mission. But the management of a country as large as India cannot be done through central control. Local conditions are too different, and the search space too large. District officials should have room to adapt programmes to local needs, while remaining accountable for results. Municipal bodies, which will manage much of India's future urban growth, cannot continue to function with limited revenue, inadequate staff and fragmented authority. The quality of routine administration will matter as much as the quality of flagship projects. For a citizen, the state is experienced through an application processed on time, a functioning hospital, a safe road, a reliable water supply or a dispute resolved without years of delay. Viksit Bharat will become credible when these ordinary interactions become predictable.Institutional reform must also reduce the cost of compliance. The Economic Survey 2024–25 placed considerable emphasis on deregulation and argued that the next phase of reform must include systematic action by the states (Government of India, 2025). The objective should not be the absence of regulation. India requires firm standards in areas such as financial integrity, competition, labour protection, consumer safety and the environment. The need is for regulation that is clear, proportionate and consistently applied. Frequent changes, overlapping approvals and uncertain interpretation penalise honest businesses while creating room for discretion. Trust is an economic asset. When rules are stable and public institutions act within predictable timeframes, businesses invest with greater confidence and citizens are more willing to comply. Building such trust will be one of the most important, though less visible, leadership tasks of the coming decades.Making employment the centre of the growth strategyIndia cannot be the developed nation it aspires to be if its economic growth generates only a fraction of the quality jobs required. Employment links dignity with growth, and consumption with tax revenue and social stability. It should be regarded as a policy objective in its own right, rather than as an automatically expected by-product of economic policies. Growth is required in manufacturing, modern services, construction, tourism, care work, logistics and food processing. India also needs stronger small and medium enterprises, which provide jobs outside a few big companies. Access to credit remains vital for these firms, but finance is not sufficient by itself. They need:PowerSkilled workersTimely paymentBetter logisticsAccessible technologySimpler complianceEmployment growth will depend to a very large extent on the quality of education and training.While institutions need to be incentivised to innovate, there must also be accountability in terms of outcomes. Instead of grumbling about skill shortfalls, industry should help with curriculum design, apprenticeships and faculty development.We should focus on women's economic participation in India. Improved transport, secure jobs, childcare and flexible working hours are rights, not just welfare. They dictate the extent to which the nation makes the most of its talent. No country can attain developed status with a major portion of its educated populace outside the formal economy.❝ India needs clear milestones for 2030, 2035 and 2040, supported by annual targets and public reporting. The World Bank estimates that India's gross national income per person would need to rise nearly eightfold from prevailing levels for the country to attain high-income status by 2047. ❞Using technology without surrendering judgementIndia's digital public infrastructure has shown that technology can deliver services at a scale that was previously difficult to imagine. The next phase may use artificial intelligence and data systems in health, agriculture, taxation, education and urban management. NITI Aayog has also identified digital public infrastructure as an important means of achieving inclusive and scalable growth (NITI Aayog, 2026).Technology, however, should not be confused with reform itself. A poorly designed process does not become efficient merely because it is moved online. Digitisation can reproduce old confusion in a new format. The flip side is that it may also rule out those who do not have connectivity, language support or digital confidence.Prior to employing any new system, leadership must answer two simple questions. Does it work for a regular citizen without an intermediary? Is there an equitable means of redressing a mistake?Accountable government must therefore go hand in hand with data-driven government. Automated decisions, especially those affecting benefits, tax, access to credit or public services, should be reviewable. Cybersecurity and privacy need to be seen as an essential public good. A developed India should embrace technology to enhance human judgement rather than shy away from responsibility for decisions.Atmanirbharta should not be seen as looking inwards and shutting oneself away from the world. India will rely on foreign engagement in international trade, investment, technological partnerships and critical minerals supply chains. The capacity for self-reliance, consequently, should be based on domestic productive capability: designing, making and funding products or services in ways that let them compete in international markets.Protection sometimes provides a new industry with breathing space, but permanent protection dulls the incentive to get ahead. Public support must therefore be performance-, innovation- and export-linked. Indian firms need to aim for global standards on quality, cost, sustainability and corporate behaviour.This same principle will apply to research and innovation. India requires far more money for scientific research, and far greater independence for institutions and consequential scrutiny. Closer collaboration is needed between universities, public laboratories, start-ups and established firms. Innovation hardly ever comes from one initiative; it emerges from a culture that allows for questioning, embraces calculated risk and has an appetite to learn via failure.Ultimately, how India fares will depend on the strength of its institutions and actors. India's reputation will depend on whether contracts are fulfilled, disclosures are accurate, standards are met and disputes are settled fairly. A reputation lost is costly to earn back.Leadership through financial and professional integrityThe transition to a developed economy will require enormous public and private investment. Infrastructure, energy transition, urban development, health, education and technological capacity will all compete for financial resources. The quality of investment will matter as much as its quantity.Independent evaluation, reliable statistics, legislative scrutiny, professional audit and public consultation all improve the quality of decisions. They also protect long-term goals from short-term enthusiasm. Evidence may sometimes be inconvenient, but a country cannot manage a transformation of this scale by rewarding only favourable information.Most long-term programmes diverge from the original plan. India's trajectory will be shaped by economic shocks, climate events, technological disruptions and geopolitical ripples. That said, leadership needs to balance persistence of purpose with flexibility of method.Governments and organisations need to periodically re-examine major programmes and reveal what has worked, what has not and how they will change moving forward. The admission of a mistaken policy course should be considered responsible administration and not failure.The leadership testViksit Bharat is a shared horizon for India, which makes it valuable. But talking alone will not see us to 2047. Over the next twenty years, it will be determined by choices made in budgets, classrooms, boardrooms, laboratories, courtrooms and municipal offices.India does not require theatrical leadership; the focus should be on the practical side instead. It creates incentives, allocates accountability and is responsive to evidence. It gives capable individuals space to operate yet expects results and accountability. Even when inconvenient, it preserves the integrity of institutions. Most importantly, it understands that national rankings are not how citizens experience development; they experience it as opportunity, security, dignity and a belief in the future.India is ambitious in its vision. The challenge now is whether the nation can develop the habits of execution demanded by this vision. If it can, 2047 will be much more than just one hundred years after Independence. It will signify the coming of age of a country that learnt how to transform aspiration into enduring public value.ReferencesGovernment of India (2025), Economic Survey 2024–25, Ministry of Finance, New Delhi. https://www.indiabudget.gov.in/budget2025-26/economicsurvey/index.phpNITI Aayog (2025), India's Path to Global Leadership: Strategic Imperatives for Viksit Bharat @2047, Government of India, New Delhi. https://www.niti.gov.in/node/1630NITI Aayog (2026), DPI@2047 for Viksit Bharat: A Strategic Roadmap to Enable Non-linear Inclusive Socio-economic Growth, Government of India, New Delhi. https://niti.gov.in/sites/default/files/2026-04/DPI-2047-for-Viksit-Bharat-A-Strategic-Roadmap-to-Enable-Non-linear-Inclusive-Socio-economic-Growth.pdfVirmani, A. (2024), Viksit Bharat: Unshackling Job Creators and Empowering Growth Drivers, NITI Aayog, New Delhi. https://www.niti.gov.in/sites/default/files/2024-07/WP_Viksit_Bharat_2024-July-19.pdfWorld Bank (2025), India Country Economic Memorandum: Becoming a High-Income Economy in a Generation, World Bank, Washington, DC. https://openknowledge.worldbank.org/entities/publication/79e6a188-2329-42d4-91cf-b11c1b3cb8beAuthor may be reached at rudreshpandey@gmail.com and eboard@icai.inThe Chartered Accountant August 2026 / www.icai.org
Ep. 104 — Performance over Privilege: The 16th Finance Commission’s New Fiscal Formula
CA Journal
· August 2026
00:00
--:--
Performance over Privilege: The 16th Finance Commission's New Fiscal FormulaIntroductionThe President of India constituted the extant 16th (XVI Finance Commission) Finance Commission in accordance with Article 280 of the Indian Constitution under the Chairmanship of renowned economist Sri. Arvind Panagariya, former vice-chairman of NITI Aayog. Its primary mandate is to define the financial relationship between the Central Government and the States for a five-year "award period." This committee had submitted its report on 17th November, 2025, and the same was placed in Parliament on 1st February 2026, on the same day as Budget 2026-27.Like the 15th Finance Commission, it has also recommended transferring 41% of the Centre's Gross Tax Revenue (GTR) to the states. Unlike the 13th and 14th Finance Commissions, which employed only four parameters, both the 15th and 16th Finance Commissions have used six criteria for distributing central taxes among states, but with a twist. This commission has dropped the state's tax effort criteria and introduced, for the first time, a new criterion — contribution by a state to the country's GDP with a weight of 10%.Among all the parameters, the most dominant one is the income distance criterion. The commission has reduced the weightage by 2.5% (from 45% to 42.5%). This parameter spells out how far a state's average per capita income is below the per capita income computed by taking the three best-performing states. As this parameter is enjoying a greater share, it helps the poor states to get a better share. Other parameters that have seen a reduction in their weights are demographic performance by 2.5% and area by 5%. The Commission has assigned 10% weightage to the new criteria by reducing the weightage of the above three parameters.The weightage for the population criterion was enhanced by 2.5%, effectively replacing the 2.5% weightage previously assigned to the states' tax effort criterion, which had been introduced by its predecessor. Of these six criteria, it is the forest criterion that alone has enjoyed the same weightage under both the 15th and 16th Finance Commissions as depicted in table no. 01.Considering the contribution by a state to national GDP, it has helped almost all better-performing states as their share in the devolution has increased a little, including Karnataka.Taxes to be sharedThe following are the Central taxes divided among the states:Corporation TaxPersonal Income TaxCentral Goods and Services TaxCenter's share of IGSTTable No. 01: Criteria for distribution of the center's taxes among states in the 16th Finance CommissionCriteria15th FC Weight16th FC WeightChange in %Income Distance45%42.50%-2.5Population (2011)15%17.50%2.5Area15%10%-5Forest & Ecology10%10%0Tax Effort2.50%0%-2.5Contribution to GDP0%10%10Demographic Performance12.50%10%-2.5Total100%100% Source: 16th Finance Commission ReportThe divisible pool forms about 81% of the Center's Gross Total Revenue for 2025-26 after excluding cesses and surcharges.States that have gained and declined their share in the 16th Finance CommissionThe 16th Finance Commission has tweaked the formula of horizontal distribution; as a result, 14 states have gained marginally in their share of the divisible pool of taxes, and the other 14 states have witnessed a decline in their share.The above table no. 02 depicts that among all the states that witnessed a gain in their share, Karnataka is the biggest gainer. Its share has been increased to 4.131%, up from 3.647% under the 15th Finance Commission. This hike in its share is likely to increase around Rs. 12,248 crore annually to the state's exchequer.Together, these states receive a higher tax share by 2.41% points. The commission would like to recognize the contribution made by these states in enhancing the nation's GDP.Table No. 02: List of states that have witnessed a slight increase in their shareSl. No.StatesShare in Central taxes in RE of FY 2026 (%)Share in Central taxes in BE of FY 2027 (%)Increase (%)1Andhra Pradesh4.0474.2170.172Assam3.1283.2580.133Gujarat3.4783.7550.2774Haryana1.0931.3610.2685Himachal Pradesh0.830.9140.0846Jharkhand3.3073.3570.057Karnataka3.6474.1310.4848Kerala1.9252.3820.4579Maharashtra6.3176.4410.12410Mizoram0.50.5640.06411Punjab1.8071.9960.18912Tamil Nadu4.0794.0970.01813Telangana2.1022.1740.07214Uttarakhand1.1181.1410.023 Total37.37839.7882.41Source: Budget FY 2026-27Table no. 3 shows that among all the states, the share of Madhya Pradesh has witnessed a huge decline of 0.503%. The marginal decline in their share is because the "needs-based" criteria (poverty/income gap) were diluted to reward "growth-based" criteria.Table No. 03: States that have witnessed a decline in their shareSl. No.StateShare in Central taxes in RE of FY 2026 (%)Share in Central taxes in BE of FY 2027 (%)Difference (%)1Arunachal Pradesh1.7571.354-0.4032Bihar10.0589.948-0.113Chhattisgarh3.4073.304-0.1034Goa0.3860.365-0.0215Madhya Pradesh7.857.347-0.5036Manipur0.7160.626-0.097Meghalaya0.7670.631-0.1368Nagaland0.5690.481-0.0889Odisha4.5284.42-0.10810Rajasthan6.0265.926-0.111Sikkim0.3880.335-0.05312Tripura0.7080.641-0.06713Uttar Pradesh17.93917.619-0.3214West Bengal7.5237.215-0.308 Total62.62260.212-2.41Source: Budget FY 2026-27States bargainMany states have demanded a larger share. Around 18 states have demanded an enhancement of the state's share of distributable tax from 41% to 50%. Besides, they also demanded the inclusion of cess and surcharge in the divisible tax pool. Of course, the cess and taxes collected and retained by the central Government have been declining from the FY 2024-25 as depicted in table no. 04.However, the commission has a different version and views that "states already account for more than 2/3rd of the nation's non-debt revenue" and any further increase would adversely hinder the Government's fiscal space and its ability to meet national obligations.Further, the Commission suggests that if both the center and states would like to have an efficient and broad based tax system, they should come to a mutual Consensus in which case the center would forgo a large part of the revenue from cesses and surcharges into divisible pool of taxes and state would also agree to forgo a small share of this increased center's divisible pool of taxes, that protects interest of both the parties.Table No. 04: Reduction in Cess and Surcharge (Rs. in Cr)5,29,342 2024-254,93,550 2025-26 (RE)4,49,720 2026-27 (BE)Source: 16th Finance Commission Report and Union BudgetMajor discontinued grants in the 16th Finance CommissionThe Commission explicitly stated that it would not recommend three specific types of grants that were provided during the previous Finance Commission's tenure:Revenue Deficit Grants (RDG): The Commission has scrapped this grant to encourage states to achieve fiscal self-reliance and improve their own tax-to-GSDP ratios, and rationalize the expenditures.State-specific Grants: Grants previously pegged for specific sectors like health, education, or agriculture have been discontinued. These sectors are better funded through Centrally Sponsored Schemes (CSS) or the state's own increased tax shares.Sector Specific Grants: Specialized grants for specific projects within a single state, like building a specific bridge or university, have been scrapped to prevent political subjectivity and ensure a uniform formula-based distribution.Recommendations to bring fiscal discipline to the State and the CenterMost defining feature of the 16th Finance Commission report is its aggressive stance on Off-Budget Borrowing (OBB) by the States. The Finance Commission's report mandates that all OBB must be brought onto the books to ensure investors and the Union have a clear picture of India's debt-to-GDP ratio.The Finance Commission has established a clear fiscal roadmap to ensure long-term stability and debt sustainability for both the Union and the states. Deficit target for the state is 3% of its SGDP and the center 3.5% of GDP by the end of the award period (March 2031).Strategic Roadmap for the Next Finance CommissionWith a view to bringing financial discipline among the states, this Finance Commission has recommended the discontinuation of the Revenue Deficit Grants (RDG) to the states.The table no. 05 shows Revenue Deficit Grants provided during the last four Finance Commissions and the number of states benefited from the grants.In contrast to the prevailing practice of earlier Finance Commissions, this Commission explicitly mentioned in Para 9.48 of its report that it will no longer undertake assessments of post-devolution revenue needs for each state, nor will it recommend grants on this basis.Keeping in view the revenue-generating potential of some states and hill states like Himachal Pradesh and Uttarakhand, where tax collection potential is limited, the Commission could have proposed a gradual phasing out of the RDG instead of discontinuing it abruptly.To bring transparency into the devolution of taxes, the 16th Finance Commission has recommended that the center unveil financial data pertaining to the net proceeds, as certified by the Comptroller and Auditor General under Article 279 of the Constitution. It is also advisable on the part of the center to certify that the rate of vertical devolution of the tax pool is in tune with the rate of devolution as recommended by the Finance Commission.Table 06 illustrates that throughout the 15th Finance Commission's tenure, the effective rate of devolution consistently fell short of the recommended 41% target.Currently, the center collects cesses and surcharges that do not form part of the divisible pool of taxes. These now account for more than 10% of the Government of India's gross tax revenue (Table 4). Given that almost all states are demanding their inclusion in the divisible pool, future Finance Commissions should give serious attention to this issue.Keeping in view the FRBM Act, the Finance Commission advises both the center and the state governments to bring the combined debt from 77.3% in 2026-27 to 73.1% of GDP by 2030-31. This trajectory aims to instill fiscal discipline and eliminate hidden liabilities, ensuring a transparent reflection of India's sub-national debt. Consequently, both the center and the states should strictly adhere to these recommendations.Horizontal tax devolution currently relies on six criteria, where need-based factors like equity, population, and area carry over more than two-thirds of the weight. Performance-based criteria, such as demographic performance, contribution to GDP, and forest account for only one-third. Many performing states argue that this distribution is skewed and penalizes efficiency. To ensure fairness, the future Finance Commission should reassess the weightage assigned to various parameters rationally.The newly introduced GDP contribution criteria employ the "Square Root" formula to determine a state's share in horizontal distribution. The square root formula was meant to protect smaller states, but it creates a diminishing incentive. The square root function flattens the curve. A state that is 100 times larger than another in terms of GDP only receives a 10-fold reward. This ensures that the 10% weight doesn't lead to a catastrophic drop in funds for smaller or mid-sized states.Consequently, the core objective of the efficiency-based criterion is largely undermined by 'neutralizing' the reward. The formula fails to provide a meaningful fiscal incentive for states to maximize their economic contribution. The Finance Commission should guarantee an evenhanded relationship between performance and fiscal payoff.Table No. 05: Revenue Deficit Grants provided during the four Finance CommissionsCommissionsAmount provided (Rs in Cr)No. of States Benefited12th FC56,8561513th FC51,800814th FC1,94,8211115th FC2,94,51417Source: Finance Commission reports of 12th, 13th, 14th and 15thTable No. 06: Devolution of Taxes among StatesYearStates Share (in Cr)Divisible Pool (in Cr)Share (in %)2021-228,83,10022,17,73739.82022-239,48,98225,48,72337.22023-2411,29,49429,55,29638.22024-2512,86,88532,57,51339.52025-26 (RE)13,92,97135,74,60039.02026-27 (BE)15,26,25539,44,11038.7Source: 15th and 16th FC Reports and Union BudgetConclusionThe 16th Finance Commission marks a historic pivot in India's fiscal architecture. By introducing a 10% weightage for "Contribution to GDP", the Commission has finally addressed the long-standing grievance of industrial states, moving away from a purely redistributive model. While it maintained the vertical devolution at 41%, the real impact lies in its demand for fiscal discipline, specifically the strict ban on off-budget borrowings. Ultimately, the 16th FC serves as a financial manifesto for "Viksit Bharat 2047," signaling that the next phase of India's growth will be driven by efficiency, transparency, and urban transformation.ReferencesSixteenth Finance Commission — asset/doc/commission-reports/16th-FC/reports/Vol1-Main-Report.pdfUnion Budget of IndiaAuthor may be reached at mallikarjunbalit@gmail.com and eboard@icai.in
Ep. 105 — Accounting for Tomorrow: Mastering the Shift to Universal Sustainability Standards
CA Journal
· August 2026
00:00
--:--
Accounting for Tomorrow: Mastering the Shift to Universal Sustainability StandardsThis article provides a clear overview of global sustainability and climate-related reporting frameworks, tracing the evolution from the Task Force on Climate-related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), Climate Disclosure Standards Board (CDSB) and Global Reporting Initiative (GRI) to the consolidated IFRS Sustainability Standards — IFRS S1 and IFRS S2 — issued by the ISSB. It explains how these standards integrate financial and sustainability disclosures, emphasizing concepts such as enterprise value, materiality, and climate-related risks. With SEBI's Business Responsibility and Sustainability Reporting (BRSR) and ICAI's sustainability assurance initiatives, the landscape in India is rapidly evolving. The article highlights emerging opportunities for Chartered Accountants in sustainability reporting, assurance, and strategic advisory as ESG disclosures become mainstream and globally aligned, and positions Indian Chartered Accountants as the natural leaders of this capital-market transformation, drawing on their successful Ind AS convergence experience.Sustainability, climate change, and climate finance are among the recent buzzwords echoing through geo-politics, national politics and are even impacting the business landscapes. Even ICAI and SEBI have foreseen this trend, which is evident in their recent steps like SEBI's 2025 circular that revised the BRSR norms — including a tiered implementation for the top 1,000 listed companies and "BRSR Core" adoption with assured KPIs for the top 250 companies — and the launching of initiatives like SAE 5000 by ICAI.Even the IFRS Foundation has come out with IFRS S1 — General Requirements for Disclosure of Sustainability-related Financial Information — and IFRS S2 — Climate-related Disclosures — in June 2023, introducing the first global standards for the disclosure of investor-focused sustainability information.However, these recent standards are not pioneer efforts to establish globally accepted frameworks for sustainability. Multiple earlier initiatives have paved the way, as detailed in Table 01 below.Table 01 · Initiatives for Sustainability StandardsSr. No.ParticularsIssued byYear1Task Force for Climate-related Financial Disclosure (TCFD)FSB20152Sustainability Accounting Standards Board StandardsSASB20183Climate Disclosure Standards Board FrameworkCDSBMultiple4Global Reporting Initiative (GRI) FrameworkGRIF2016This multiplicity of standards can lead to confusion among professionals as to their application in a given scenario. This article aims to resolve these concerns of Indian Chartered Accountants. It emphasizes a brief account of the standards and where they can be used. It is also important to note that the IFRS Foundation, via the ISSB, has subsumed some of the above-mentioned bodies and attempted to integrate their disclosures in IFRS S1 and S2.Task Force for Climate-related Financial Disclosure (TCFD)It was established in 2015 by the Financial Stability Board (FSB). It focused on improving climate-related financial disclosures, with an emphasis on transparency and comparability. It classified risks into physical (e.g., extreme weather) and transition (e.g., policy shifts to low-carbon economies). Disclosures were structured around four pillars: Governance, Strategy, Risk Management, and Metrics & Targets. TCFD has been fully integrated into ISSB standards.Sustainability Accounting Standards Board Standards (SASB)It is a not-for-profit organisation focused on financially material ESG disclosures. SASB provided 77 industry-specific standards across five dimensions (Environment, Social Capital, Human Capital, Business Model & Innovation, Leadership & Governance). Emphasizing financial materiality, it was merged into the IFRS Foundation in 2022 and serves as guidance in ISSB standards.Climate Disclosure Standards Board (CDSB)Aiming at integrating environmental reporting with financial statements, CDSB targeted investors by equating natural and financial capital. It featured guiding principles (e.g., relevance, verifiability, forward-looking) and reporting requirements aligned with TCFD pillars. CDSB's content has been consolidated into ISSB standards.The Global Reporting Initiative (GRI) StandardsTill date it is widely used for stakeholder accountability. GRI emphasizes impact materiality (effects on economy, environment, and people), which is a combination of financial and non-financial factors. Its modular structure includes Universal Standards (foundation, general disclosures, material topics), Sector Standards (industry-specific), and Topic Standards (detailed ESG issues). While not fully subsumed, GRI complements ISSB by focusing on broader impacts.All these diverse standards overwhelm business owners and even professionals providing assurance on their statements. Further, with the addition of the EU's CBAM (Carbon Border Adjustment Mechanism), EUDR (European Union's Deforestation Regulation) and other similar statutes, one can only expect ESG and sustainability reporting to further expand.However, this plethora of standards and disclosures exhibits a silver lining for Chartered Accountants and other professionals in India. CAs are at the forefront of Financial Reporting and Auditing in India. This, coupled with the ongoing drive for incorporating sustainability and ESG reporting, provides a great opportunity for Chartered Accountants to reap maximum benefit from this integration movement.Another blessing in disguise came in the form of the establishment of the International Sustainability Standards Board (ISSB) by the IFRS Foundation. The above-mentioned CDSB, TCFD, SASB Standards and even the Integrated Reporting framework have been subsumed in ISSB. The IFRS Foundation is a not-for-profit organization which sets the reporting standards globally. Indian Accounting Standards (Ind AS) represent an adopted version of standards issued by IFRS. These were further finetuned by ICAI to suit domestic requirements by carve-ins and carve-outs.It is imperative to view IFRS S1 and S2 not merely as reporting checklists, but as foundational capital-market infrastructure. This represents a structural shift from voluntary ESG 'storytelling' to investor-focused enterprise value reporting, where sustainability risks are priced directly into the cost of capital, as depicted in Table 02 below.The consolidation of Financial Reporting Standards and Sustainability Reporting Standards under the same issuing body is highly significant, suggesting a future where many concepts and terminologies will overlap or be directly applicable across both domains. This is a considerable advantage for Chartered Accountants (CAs). The journey toward global sustainability benchmarks mirrors the profession's successful transition from Indian GAAP to Ind AS. Having already mastered the complexities of global financial convergence and local 'carve-ins/outs,' Indian CAs are the most qualified architects to lead the integration of non-financial data into mainstream corporate reporting. The profession that delivered Ind AS will now deliver the next-generation sustainability standards. Let's delve into IFRS S1 and S2 briefly.Table 02 · How Legacy Frameworks Map to IFRS Sustainability StandardsFormer InitiativeRole in IFRS Sustainability StandardsISSB Standard(s) ImpactedTCFD RecommendationsProvided the four core pillars of disclosure structure.IFRS S1 and IFRS S2 (Fully Integrated)SASB StandardsProvided the industry-specific disclosure topics and metrics.IFRS S1 and IFRS S2 (Integrated as guidance)Integrated Reporting FrameworkProvided the concept of value creation and integrated thinking.IFRS S1 (Foundational Concept)CDSB FrameworkProvided technical guidance on climate and environmental disclosures.IFRS S1 and IFRS S2 (Consolidated Content)IFRS S1 — General Requirements for Disclosure of Sustainability-related Financial InformationIt is the fundamental standard for all sustainability disclosures, comparable to IAS 1 / Ind AS 1 for Financial Reporting. Its primary objective is to assist reporting entities to disclose information regarding their sustainability-related risks and opportunities in a manner useful to the general user of financial statements, to assist them in their decision making.The standard also focuses on the "Enterprise Value" concept — i.e., factors affecting the entity's cash flows, access to finance, and/or cost of capital over the short/medium/long term are considered. Additionally, the coverage is not limited to climate; the entire ESG spectrum is included.The four core content areas: IFRS S1 requires disclosures over four core content areas. These areas are consistent with the recommendations of the Task Force on Climate-related Disclosures (TCFD), i.e., Governance, Strategy, Risk Management and Metrics & Targets.Key Principles and Requirements: IFRS S1 introduces several requirements to ensure usefulness and quality of disclosures. These are majorly consistent with IAS 1 / Ind AS 1.Connected Information: The user should be able to connect information in financial reports with the facts and figures presented in the sustainability report. For example, impairment of assets in a flood-prone area due to flood risk.Reporting Entity: The sustainability-related disclosures must pertain to the same entity/group to which the financial reports are referred. For example, a standalone sustainability report of a subsidiary can't be referred to in the Group's Financial Statements.Fair Presentation: The disclosure should provide a complete, neutral, and accurate depiction of the sustainability-related risks and opportunities.Reference to Other Standards: An entity is required to consider SASB Standards to identify industry-specific sustainability-related risks and opportunities and the corresponding metrics; and in case of unavailability of a standard, SASB / other standards are to be referred.IFRS S2 — Climate-related DisclosuresIFRS S2: Climate-related Disclosure is the first theme-based standard issued by the ISSB. It applies to one of the most discussed and debated topics of climate change. It effectively bridges the gap between the principles of IFRS S1 and detailed, mandatory disclosures about climate.The standard covers three categories of climate-related risk and opportunities:Climate-related Physical Risks: Risks related to the physical impacts of climate change.Acute: Event-driven (e.g., floods, wildfires).Chronic: Longer-term shifts (e.g., rising sea levels, sustained heat waves).Climate-related Transition Risks: Risks associated with the transition to a lower-carbon economy.Policy & Legal: New regulations (e.g., carbon pricing, emissions limits).Technology: Replacement of existing technologies (e.g., shift to electric vehicles).Market: Changes in supply and demand (e.g., consumer preference for low-carbon products).Reputation: Loss of reputation due to climate performance.Climate-related Opportunities: Potential benefits from adapting to or mitigating climate change (e.g., new product development, energy efficiency savings).Apart from the above, the standard also requires climate-specific disclosures structured around TCFD recommendations, i.e., Governance, Strategy, Risk Management and Metrics & Targets. However, it is also pertinent to note there are some critical requirements under Metrics & Targets in IFRS S2:Greenhouse Gas Emissions: Here, an entity is required to disclose its absolute GHG emissions for Scope 1, Scope 2 and Scope 3.Measurement: GHG emissions must be measured in accordance with the Greenhouse Gas Protocol Corporate Standard.Scope 1: Direct emissions from owned or controlled sources (e.g., company vehicles, owned facilities).Scope 2: Indirect emissions from the generation of purchased electricity, steam, heat, or cooling.Scope 3: All other indirect emissions in the value chain (e.g., purchased goods, business travel, use of sold products).Capital Deployment and Internal Carbon Pricing: IFRS S2 requires disclosures about the amount and percentage of assets susceptible to climate-related physical and vulnerable risk, and also those which can benefit from climate-related opportunities. Further, disclosures regarding the amount of capital expenditure towards climate-related risk and opportunities, and whether the company is using internal carbon pricing in its decision making, and how.Climate Targets: Disclosure regarding quantitative and qualitative climate-related targets (e.g., Net-Zero commitments, renewable energy goals) and the progress made toward achieving them. If a net GHG emissions target is set, the entity must also disclose the corresponding gross target.“The ICAI has already issued the Standard on Sustainability Assurance Engagements (SAE) 3000 and SAE 3410 (for GHG statements), providing the technical framework for practitioners to deliver these services.Alignment with India's SEBI BRSR CoreWhile IFRS standards provide a global benchmark, India has decided to come out with its own regulatory and reporting leadership by mandating one of the most descriptive and comprehensive frameworks in the global south. In 2021, SEBI replaced the narrative-based Business Responsibility Report (BRR) with BRSR. It was further evolved with the introduction of BRSR Core in 2023.SEBI's BRSR and BRSR Core align closely with IFRS S1 and S2. BRSR Core mandates assured KPIs on ESG metrics like GHG emissions (Scopes 1–3), water usage, and supply chain sustainability, mirroring IFRS S2's climate disclosures. While IFRS emphasizes investor-driven materiality tied to financial impacts, BRSR integrates broader stakeholder considerations but increasingly converges on enterprise value through value-chain reporting. This alignment facilitates Indian companies' compliance with global standards like EU CBAM, positioning CAs to advise on integrated reporting under both regimes. ICAI's SSA 5000 further supports assurance, ensuring BRSR disclosures are reliable and comparable.A key conceptual distinction runs through the global landscape. GRI follows impact materiality (double materiality): what the company does to the economy, environment and society. IFRS S1/S2 follow financial materiality (single materiality): what sustainability issues do to the company's cash flows, cost of capital and enterprise value.India sits at the perfect intersection. SEBI's BRSR began with a stakeholder lens (closer to GRI) but BRSR Core is rapidly converging toward financial materiality through assured KPIs and value-chain reporting, as depicted in Table 03. This dual approach gives Indian companies and CAs a natural advantage — we can speak both languages fluently when dealing with global investors and domestic regulators.The report is divided into three sections:Section A — General Disclosures: Details regarding size, location, and workforce.Section B — Management and Process Disclosures: Governance, leadership oversight, and policy implementation.Section C — Principle-wise Performance Disclosures: Granular reporting on indicators such as energy consumption, water withdrawal, and employee well-being.Table 03 · GRI vs. IFRS S1/S2 vs. SEBI BRSRFeatureGlobal Reporting Initiative (GRI)IFRS S1/S2 (ISSB)SEBI BRSR (India)Primary ObjectiveTo communicate organizational impact on society, economy, and environment.To provide information for assessing enterprise value and financial performance.To ensure regulatory compliance and responsible business conduct in the Indian market.Primary UsersMulti-stakeholder focus (investors, NGOs, employees, communities).Investors, lenders, and other financial creditors (capital providers).Regulators (SEBI/MCA) and a broad range of domestic stakeholders.Materiality LensImpact Materiality (double materiality: financial and societal impact).Financial Materiality (single materiality: impact on cash flows/risk).Compliance-based indicators / moving toward financial materiality via BRSR Core.Reporting ScopeOrganizations of any size, sector, or geography.Publicly listed entities and organizations raising capital.Top 1,000 listed companies by market capitalization in India.Assurance StatusHistorically voluntary; variable market practice.Integrated into audited annual reports (jurisdiction dependent).Mandatory reasonable assurance for BRSR Core KPIs (phased glide path).While the regulatory mandate begins with the top 1,000 listed companies, the ripple effects will reach far wider. Banks and large corporates are already demanding BRSR-aligned sustainability data from their suppliers and borrowers. Mid-sized companies seeking foreign funding, credit facilities, or participation in global value chains will face de-facto pressure to report under IFRS S1/S2 principles by 2027–28.For Small and Medium Practitioners (SMPs), this creates a significant new practice area: helping clients build basic sustainability data systems, conduct materiality assessments, and prepare for voluntary or bank-mandated disclosures. Early movers among SMPs will be able to offer high-value advisory services at a fraction of major multinational accounting firms' costs, expanding their relevance and revenue streams.The Global Convergence: How Legacy Standards Built the IFRS Foundation1 · The "DNA" Building Blocks (Legacy Frameworks) 2 · The "Engine Room" (Current IFRS Standards) 3 · The India Anchor & Local ContextTCFD — The Architecture4 pillars: Governance, Strategy, Risk, Metrics & Targets. Universal structure.SASB — The Industry Lens77 sector-specific standards. Financial-materiality focus.CDSB — The Environmental RigorIntegrating natural capital into mainstream financial reports.GRI — The Impact PartnerGlobal standard for impact materiality. Complementary "double materiality".→IFRS S1 — General RequirementsThe "general ledger" of ESG. All sustainability-related financial risks.IFRS S2 — Climate-related DisclosuresThe "climate specialist". Scope 1, 2, 3 & scenario analysis.→SEBI BRSR CoreQuantitative proof points. 9 key ESG attributes (GHG, energy, water, etc.).The CA's Role — Reasonable AssuranceGatekeepers verifying data meets SEBI & global IFRS baseline.Global Trade (CBAM)Non-compliance = export penalties.Cost of CapitalBetter IFRS/BRSR reporting = lower interest rates.Data IntegrityERP-integrated ESG data = audit-ready reports.“With the convergence of IFRS S1/S2 and India's BRSR framework, Chartered Accountants are uniquely positioned to lead this transition.Where do CAs fit in?The advent of these new sustainability standards and the integration of ESG data into mainstream reporting frameworks creates a multi-dimensional opportunity for Chartered Accountants. Chartered Accountants' pre-existing and thoroughly trained expertise in data integrity, audit aspects and methodology, and strategic financial and cost planning can be directly imported into the sustainability domain.Sustainability Assurance and the Audit of Non-Financial Information: This is the most immediate opportunity and a natural, almost inevitable, extension of a Chartered Accountant's traditional skill set. As sustainability data becomes mandatory and impacts the financial position, investors require independent assurance (audit) over the reported figures. The ICAI has already issued the Standard on Sustainability Assurance Engagements (SAE) 3000 and SAE 3410 (for GHG statements), providing the technical framework for practitioners to deliver these services.Preparation & Advisory Services: CAs can assist in preparation of the annual sustainability report (BRSR in India), advising on materiality, framework selection, etc. CAs can also assist in the prevention of greenwashing — i.e., when companies show themselves as more environmentally sound than they actually are.Corporate Strategy and Integration: These roles bridge the gap between finance, risk management, and sustainability, positioning the CA in a strategic leadership role. Mitigation of environment-based risks puts strain on the financial stability of companies. Usually demanding heavy upfront capital allocations, CAs can assist in the evaluation of Environmental-Risk-adjusted IRR/NPV and also in pricing of the end product by valuing the "Greenium" — amalgamating the concepts of carbon pricing in capital budgeting.Internal Controls over Sustainability Reporting (ICSR): Among the fundamental challenges in sustainability reporting is the reliability of underlying data. As non-financial data is often kept in fragmented form and is rarely linked to existing ERP applications, CAs can participate by providing some degree of assurance over completeness, accuracy and traceability of data.Sustainability reporting is no longer peripheral — it has become central to capital allocation, risk pricing, and regulatory compliance in global markets. With the convergence of IFRS S1/S2 and India's BRSR framework, Chartered Accountants are uniquely positioned to lead this transition.The same professionals who mastered Ind AS and built robust internal financial controls will now design internal controls over sustainability data (ICSR), assure GHG emissions and ESG metrics, price climate-adjusted risk into investment decisions, and advise boards on capital deployment that creates long-term enterprise value.The opportunity is clear: upskill in ESG assurance and advisory today, and Chartered Accountants will not only protect India Inc. against climate and regulatory risks — they will actively shape the future of responsible capital markets. The time to act is now.ReferencesIFRS S1 & IFRS S2 (Official Standards)IFRS S1 — General Requirements for Disclosure of Sustainability-related Financial Informationifrs.org/issued-standards/ifrs-sustainability-standards-navigatorIFRS S2 — Climate-related Disclosuresifrs.org/issued-standards/ifrs-sustainability-standards-navigatorSEBI — BRSR Format (Original 2021 Circular)Mandatory BRSR for top 1,000 listed companiessebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.htmlTCFD Overview (Official Website — Now part of ISSB)TCFD Knowledge Hubfsb-tcfd.orgSASB Standards (77 Industry-Specific Standards)Official SASB Standards Librarysasb.ifrs.org/standardsCDSB Framework for Reporting Environmental & Climate InformationCDSB Frameworkcdsb.net/resources/cdsb-publicationsGRI Universal Standards (2021 Update)GRI Standards Databaseglobalreporting.org/standardsThe Chartered Accountant · August 2026 · www.icai.orgAuthor may be reached at cagauravyadav@hotmail.com
Ep. 106 — Contract of Service vs Contract for Service
CA Journal
· August 2026
00:00
--:--
Contract of Service vs Contract for ServiceThe recent judgement of Bombay High Court in CIT vs Dr Balabhai Nanavati Hospital (2025) brings back into focus one of the longest-standing disputes in the healthcare sector: whether doctors in hospitals should be treated as “employees” or as “independent consultants”? This distinction is important because it impacts the TDS section. “Salary payments” fall u/s 192 of the Income-tax Act, 1961 / section 392 of the Income-tax Act, 2025, while “professional fees” fall u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025. TDS officers check whether hospitals are wrongly treating the doctors as “consultants”. This has resulted in TDS litigation. The controversy is relevant not only for the healthcare sector but also for educational institutions. This is demonstrated by the latest decision in Brilliant Study Centre Pvt Ltd vs ITO (2026). If TDS u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025 is applied by the payer, then it is important to demonstrate that the individual (payee) is a “consultant” (non-employee) in both ‘form’ and ‘substance’. The article discusses these issues in detail, including for the entertainment & media industry. The article also discusses the expectations from practising Chartered Accountants in relation to the “Tax Audit Report”.IntroductionThe distinction between a “contract of service” (employment) and a “contract for service” (independent professional arrangement) has been one of the most debated issues in the income-tax law.These phrases differ only by a single word (“of” vs “for”). However, this small difference is not mere wordplay; it determines the character of the income and the related TDS obligations.Healthcare IndustryThis issue is relevant for the healthcare industry where Senior Doctors examine patients in private hospitals for part of the day and practice independently at their own clinics for the balance day.In this connection, a question arises:Are these doctors “employees” of the hospital?Or are they “independent consultants” to the hospital?Why the distinction mattersThe classification of the doctor affects the TDS rates:If a doctor is treated as an “employee”, TDS must be deducted u/s 192 of the Income-tax Act, 1961 / section 392 of the Income-tax Act, 2025. TDS on salary is to be applied based on the “average rate of income-tax” computed on the basis of the “rates in force for the concerned financial year”.On the other hand, if the doctor is treated as a “consultant”, then TDS is deductible u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025 at the rate of 10%.Incorrect classification of the doctor may lead to demands on the hospital for short-deduction of tax, interest and penalty.CBDT Instructions to its field officersThe issue has been the subject matter of heightened scrutiny of hospitals by the “TDS Wing” of the Income-Tax Department. This is evident from the following:CBDT Action Plan for 2014-15The action plan states as follows:“In the cases of professionals, e.g., doctors etc., salary payments are misclassified as professional payments and tax is deducted by applying lower rates. This aspect needs to be examined.”The Publication (July 2019) of the Income-tax Department titled “Techniques of Investigation for Assessment” discusses the controversy in detail.The ‘Nanavati Hospital’ CaseOne such hospital under scrutiny was Nanavati Hospital, Mumbai.In its TDS assessment, the Revenue alleged as follows:Honorary Doctors should be treated as “employees”.TDS u/s 192 of the Income-tax Act, 1961 ought to have been applied by the hospital instead of section 194J of the Income-tax Act, 1961.However, the Bombay High Court [CIT v. Dr Balabhai Nanavati Hospital (2025)] rejected the Revenue’s position. The High Court held as follows:There was no “employer-employee” relationship between the hospital & the honorary doctors.Payments to doctors represented “professional fees”, not “salary”.Hence, TDS u/s 194J of the Income-tax Act, 1961 was correctly applied by the hospital.Judicial Tests: Whether doctors are “consultant” or “employee” of hospitals?The Bombay High Court applied the following yardsticks to hold that the doctors were “independent professionals”:Variable remuneration: The doctor’s income depended on actual consultations or procedures performed — not on a “fixed monthly salary”.Revenue-sharing model: The hospital retained a percentage of billing to cover infrastructure, facilities and administrative support.Professional autonomy: Doctors were free to practise at other hospitals or run their own clinics.No employee benefits: Hospitals did not provide PF, ESIC or perquisites normally associated with employment.Flexible schedule: Doctors were not bound by fixed working hours; their availability depended on patient requirements.No control: Hospitals did not exercise “real supervisory control” in respect of the work entrusted to the doctors.Disclosure in income-tax return of doctors: Doctors disclosed their income under the head “Profits and Gains of Business or Profession”, not “Salaries”.What should hospitals do?Considering the TDS disputes, it is advisable for the hospitals to ensure the following:The hospitals should review contractual arrangements with doctors.The hospitals should align its TDS position with the substance of the relationship with the doctors — and not merely with the nomenclature of the agreement with the doctors.The hospitals should maintain factual evidence of the “judicial tests” discussed above.A proactive approach can reduce litigation risk for the hospitals.Is the TDS controversy restricted to hospitals?The short answer is “No”. The reasons are as under:Briefly speaking, whilst the doctor is subject to TDS rate of 10% u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025, the TDS rate can be reduced to 2% if the “consultant” does not provide “professional services” but, inter alia, provides “management services, technical services, and consultancy services”.Further, if an individual treats himself or herself as a “consultant” as opposed to an “employee”, then he or she can claim a tax deduction for expenses, presumptive taxation et al. As opposed to this, a “salaried employee” hardly gets any tax deductions.Hence, the general temptation may be to “call” people as “consultants / freelancers / contractor” and to treat their remuneration as “non-salary”.However, there is a need for caution in light of below discussion.Educational InstitutionsThe publication (July 2019) of the Income-Tax Department titled “Techniques of Investigation for Assessment” highlights the advance ruling of Max Muller (2004) for payments by educational institutes to honorary part-time teachers.In Max Mueller, an “educational institute” (EI) engaged “part-time teachers” on a “contract basis”. EI controlled the teachers as under:EI prescribed the syllabus.EI fixed the teaching period.EI fixed responsibility on teachers for completion of their assignment to the satisfaction of EI.EI required the teachers to be punctual and regular in their duty.EI mandated the teachers not to be absent without its permission.EI reviewed the work of teachers.In this backdrop, the “Authority for Advance Rulings” held that the teachers were “employees” of EI. This was in spite of the following facts:The agreement described the teachers as a “part-time casual honorary teacher”.The agreement provided that the teachers would not have the status of an “employee” and shall not be entitled to avail the benefits of the “regular employees”.The teachers were paid “honorarium” by EI for each semester.The teachers were entitled to work simultaneously for other establishments, while working with EI.However, in Brilliant Study Centre Pvt Ltd vs ITO (2026), the Cochin Tribunal held that the teachers were not “employees”. In this decision, the teachers were initially treated as “salaried employees” but were shifted to “professional category” based on market considerations. There was only a verbal agreement between the teachers and the coaching centre. The teachers were paid on hourly basis and had to take classes for 5 to 7 hours daily. During this time, they were not allowed to take classes in any other coaching centre. Further, the teachers were supposed to be available for extra lectures. An attendance register was maintained. The teachers were free to teach in their own way subject to curriculum. The coaching centre did not exercise any control, intervention or direction over the exercise of duties by the teachers. The teachers were paid monthly and promised a yearly increase in the remuneration of 10%. The teachers were supposed to intimate their leave, one day prior to the date of leave. The coaching centre provided medical insurance and transport facility to the teachers. However, the teachers were not entitled to the benefits of PF, gratuity, bonus, medical reimbursement, leave encashment etc. The teachers filed their income-tax return disclosing the remuneration as “professional fees” (and not as “salary”). These returns were accepted by the Revenue. In this backdrop, the Tribunal rejected the Revenue’s allegation that the teachers were “employees” of the coaching centre. The Tribunal held that the teachers did not cease to be “consultants” merely because the coaching centre had exercised some degree of control over the administrative and logistical functioning of the teachers.Thus, there exists contrary jurisprudence in the educational sector.Entertainment & Media IndustryTDS litigation has also arisen in the entertainment sector on account of unique arrangements with artists etc.In ITO vs Entertainment Network (I) Ltd (2017), it was held that the “radio jockeys” (RJs) were earning “professional fees” (and not “salary”) from a FM Radio broadcasting company (FMR). This was on account of the following facts:RJs were not required to provide services in compliance with the internal codes of FMR, unlike in the case of its employees.RJs were not required to report as per “duty hours for the employees”.RJs were not required to sign the muster.RJs were not governed by the leave rules of FMR.RJs were incentivised based on their popularity.RJs did not have any “probation period”.RJs were solely responsible for their acts.There was a full indemnification by RJs for injuries to FMR.FMR’s liability was limited for any damages.RJ’s compensation was not broken into basic allowances etc.RJs were not entitled to provident fund, gratuity, retirement benefits etc.The agreements with RJs were for a specific period and FMR was not bound to renew the same.RJs were free to take assignments from any company (except with any other radio broadcasting company). The individuals were not bound to act solely as RJs.RJs had shown their remuneration as “professional fees” in their respective returns, which had been accepted as such by the Revenue.RJs were liable to pay service tax.Post this decision, the publication (July 2019) of the Income-Tax Department titled “Techniques of Investigation for Assessment” (see page 333) raised an alarm for the film fraternity. This was because of the Tax Tribunal’s decision in Red Chillies Entertainment Pvt Ltd vs ACIT (2025).In this case, ‘retainership fees’ were paid by a film production company (FPC) to an individual who was appointed as a “production manager” (PM). The payer classified the payment as a “consultancy fee” and applied TDS u/s 194J of the Income-tax Act, 1961. However, the Income-Tax Department alleged that there was an “employer-employee relationship”. The Tribunal sided with the Revenue. This was due to the following facts:The individual was designated as a “production manager”.PM was required to perform the duties that were assigned to him by FPC from time to time.The remuneration was payable monthly and was of a ‘fixed amount’ (like a “salary”).PM was provided with a company car and mobile phone.PM was required to attend office daily to perform his duties as may be assigned to him by FPC from time to time.PM was provided with leaves of 30 days in a year. In other words, PM was required to attend office mandatorily for remaining days of the year.There was a clause in the contract for “termination of employment”.Identical contract was signed with other individuals who were designated as “production executive” and “production assistant”.The Tribunal was not influenced by the fact that PM was not paid PF, ESI, Gratuity & Bonus.Thus, there exists contrary jurisprudence in the entertainment & media industry.Tax Audit Report1The Tax Auditor is required to report the following:“Whether the assessee is required to deduct or collect tax……, if yes please furnish:Column 1: Tax deduction and collection Account Number (TAN)Column 2: SectionColumn 3: Nature of paymentColumn 4: Total amount of payment or receipt of the nature specified in column (3)Column 5: Total amount on which tax was required to be deducted or collected out of (4)Column 6: Total amount on which tax was deducted or collected at specified rate out of (5)Column 7: Amount of tax deducted or collected out of (6)Column 8: Total amount on which tax was deducted or collected at less than specified rate out of (7)Column 9: Amount of tax deducted or collected on (8)Column 10: Amount of tax deducted or collected not deposited to the credit of the Central Government out of (6) and (8)”.For this article, column (8) is relevant. In this connection, The Guidance Note on Tax Audit issued by The Institute of Chartered Accountants of India (2025 edition, para 66.11) states as follows:“……column (8) requires furnishing of the total amount, out of the amount deductible or collectible as mentioned in column (5), at which the tax was deducted or collected at the rate less than the specified rate out of Column (7). The lesser deduction is required to be reported in this clause. This will include deduction at a lower rate than what is prescribed, application of wrong section for deduction of tax at source, etc.…… In case, there is difference of opinion with regard to rate of deduction or applicability of a particular section, the auditor may appropriately report the difference of opinion…… giving both the views”.Consequently, if the Tax Auditor finds that TDS u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025 has been applied (2% or 10%), but the Chartered Accountant believes that the TDS u/s 192 of the Income-tax Act, 1961 / section 392 of the Income-tax Act, 2025 ought to have been applied, then the aforesaid guidance of The Institute of Chartered Accountants of India would be relevant (presuming that the “Effective TDS rate on Salaries” is higher than “TDS rate for Consultants”).In light of the above, the Tax Auditor is required to evaluate on whether the individual is in “employment” or is a “consultant”. Now, can the nature of the relationship be determined solely based on the contract or agreement?In Vijay Mariappan Austin Prakash vs ACIT (2026) an individual assessee (VM) was a “salaried employee” with a company, ZBL, till 30.09.2020. After termination of employment, VM was appointed by ZB as a “consultant”. For this purpose, a “consultancy agreement” was entered into between VM and ZBL from 01.10.2020 to 30.09.2022. The nature of services provided by VM as an “employee on salary basis” and VM’s “services as per the consultancy agreement” remain the same. Hence, the Revenue alleged that VM had changed the source of income from “salary” to “consultancy fees” w.e.f 01.10.2020, to avoid paying tax in India. However, the Tribunal did not accept Revenue’s contentions. It held as under:“…observations of……AO do not have any merit due to the fact that change of the employment to consultant is with regard to the agreement between the concerned parties. However, we find from the records, assessee has been appointed as a consultant based on the agreement for the period from 01.10.2020 to 30.09.2022”.With due respect, the agreement, by itself, may not be determinative of the nature of the relationship (“employment” or “independent professional engagement”). Ideally, the Tax Auditor must go beyond the contract (form). The following questions can be asked by the Tax Auditor to the company (payer):Is the individual acting as an “independent contractor” on a principal-to-principal basis?Is there a “master-servant relationship”?Who controls the “work to be done” by the individual?Who controls the “manner in which such work should be done” by the individual?Who determines the “place and time of the performance of the services”?Who provides the “tools and other resources” to the individual, for the performance of the services?To what extent does the individual have “professional autonomy”?Are the “intricacies of the services” to be performed by an individual, “specified in advance”? Or are the individual assigned duties that are not feasible to be defined in specific terms in advance?Does the individual have “formal designation”?Is the remuneration “fixed” or “variable”? Does the “monthly remuneration” vary (increase or decrease) depending upon the “quantum of work”?Is the individual entitled to “social security benefits”?Does the individual get the “perquisites” (eg, company car or mobile) that are normally associated with an employment?Does the individual have to undergo “annual or bi-annual evaluation of performance”?Is the individual entitled to “annual increments and bonus”?Is the individual required to attend office on a “daily basis”?Does the individual have a “flexible schedule”? Is the individual bound by a “fixed number of working hours” in a day?Is the individual, “full-time” or “part-time”?Is the individual entitled to “annual leaves / national holidays”?Can the individual be absent “without permission”?Can “disciplinary sanctions” be imposed on the individual?Is there a “right to suspend or dismiss” the individual?Who bears the “risk and rewards” of the services? Is the individual “liable for damages”?What stand has the individual taken in the ITR (“Income from Salary” or “Profits and Gains from Business or Profession”)?Is the individual liable to pay GST?Does “Labour Laws” apply to the individual?These are indicative questions which may vary depending upon the industry.“ The hospitals should align its TDS position with the substance of the relationship with the doctors — and not merely with the nomenclature of the agreement with the doctors. ”ConclusionThere is no set formula to decide whether a relationship is a “contract of service” (employment) or a “contract for service” (independent professional engagement). Everything turns on facts. The contract has to be read as a whole. The circumstances have to be looked at in totality. The “real relationship” matters more than the “label” used in the agreement. Lastly, but equally importantly, every organisation & individual must ensure that its arrangements & tax position pass the “basic smell test”.ReferencesCIT vs Dr Balabhai Nanavati Hospital (2025) 178 taxmann.com 437 (Bombay) / IT Appeal Nos 2166, 2448, 2451, 2612, 2758 of 2018 and 605 of 2020: https://indiankanoon.org/doc/158154550/Brilliant Study Centre Pvt Ltd vs ITO (2026) 187 taxmann.com 816 (Cochin-Tribunal) / ITA No 545/Coch/2026: https://indiankanoon.org/doc/114480815/CBDT Action Plan for 2014-15: https://www.scribd.com/document/1060341438/2014-15Publication (July 2019) of the Income-tax Department titled “Techniques of Investigation for Assessment” (pages 332-333): https://www.scribd.com/document/811247308/Techniques-of-Investigation-for-Assessment-Vol1Max Muller (2004) 138 Taxman 113 (AAR) / AAR No 597 of 2002: https://indiankanoon.org/doc/830507/ITO vs Entertainment Network (I) Ltd (2017) 88 taxmann.com 843 (Mumbai-Tribunal) / IT Appeal Nos 1352 & 5227 (Mum) of 2014: https://indiankanoon.org/doc/140431337/Red Chillies Entertainment Pvt Ltd vs ACIT (2025) 181 taxmann.com 282 / IT Appeal Nos. 6655, 6656 & 6657 (Mum) of 2014 and 92 & 93 (Mum) of 2015: https://indiankanoon.org/doc/57040157/The Guidance Note on Tax Audit issued by The Institute of Chartered Accountants of India (2025 edition): https://resource.cdn.icai.org/87317dtc-aps1808gn-tax-audit2025.pdfVijay Mariappan Austin Prakash vs ACIT (2026) 182 taxmann.com 285 (Visakhapatnam-Tribunal) / IT Appeal No.89 (VIZ) of 2025: https://itat.gov.in/public/files/upload/1767073619-DkKP5F-1-TO.pdf1 See Form 3CD of Income-Tax Rules, 1962 (similar to Form 26 of Income-Tax Rules, 2026).Author may be reached at modinileshrajkumar@mail.ca.in and eboard@icai.in
