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ACCOUNTING STANDARDS • THE CHARTERED ACCOUNTANTA Comprehensive Overview of Financial Guarantee ContractsBy CA. Rikin Mistry•Member of the Institute of Chartered Accountants of India•The Chartered Accountant Journal • October 2023 (Vol. 72, No. 04, pp. 70–75, Journal pp. 482–487)Corporate guarantee contracts are recently in the news due to the taxability aspects of such issuance, part of which are financial guarantee contracts which are issued to the lenders for assurance so that the lender would feel comfortable since the guarantor assures that money gets repaid to the lender in case of default by the borrower.In Accounting parlance, guarantee contracts have always been a grey area. This article attempts to comprehensively cover an overview of the financial reporting implications of Financial Guarantee Contracts ("FGC") and touch upon certain ancillary legal considerations, including analyzing industry practices.Under the current credit framework, demand for corporate guarantees by lenders is considered a default and non-negotiable part of the funding agreement, especially in the case of extended maturity projects that are executed by a particular special purpose vehicle structure, for which lenders would demand financial guarantees from promoters (i.e., the parent company).In certain cases (like a low credit rating of the borrower), the borrower would even become eligible for a loan that he would not have otherwise been qualified for only due to the guaranteed element.Apart from that, having a guarantee provision in lending arrangements may also lower your cost of borrowing; however, it is to be noted that as per RBI1 IRAC norms, guarantees are not considered security, so only guarantee-backed loans cannot be considered as secured.Attending BasicsGenerally, there are two types of guarantees prevailing in the corporate spectrum: performance guarantees and financial guarantees. In this article, we will stick to financial guarantees only.In a literary sense, a guarantee is a promise to pay another person’s debt if that other person fails to perform his or her obligation; thus, Financial Guaranty Contract FGC refers to a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.The contract of guarantee is governed mainly by the provisions of the Indian Contract Act, 1872 (Section 126).The parties to the contract are:Guarantor: one who has to perform the legal obligation by taking over the payments of the loan if the debtor is unable to perform their obligation.Lendor: one who gives a loan to a borrower and to whom the guarantee is given.Borrower: one to whom the loan is given.The contract of guarantee is considered a secondary contract to the principal contract of debt, and the extent of liability has to be explicitly provided for and can always be limited (a “limited guarantee”) or extended.Financial Reporting ImplicationsA financial guarantee contract is defined under appendix A of Ind AS 109 i.e.:“A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument”.Corporate guarantees, default support agreements, letters of credit, credit default contracts, and other structured documents may be considered as FGC. Their legal form has no bearing on how they are accounted for. Therefore, a letter of comfort2 or support can also be regarded as an FGC if the issuer is contractually obligated to make certain payments in the event that the credit holder defaults.The significant features of FGC are as follows:The holder is compensated only for the actual loss that it incurs (not compensated for more than the actual loss incurred).The reference obligation is a debt instrument.Guarantor agrees to assume financial responsibility if the debtor defaults.Other guarantees involve deposits or collateral that can be liquidated if the debtor defaults in its obligation.(Note: The term ‘debt instrument’ is neither defined in Ind AS 109, nor in Ind AS 32. The term implies a contractual right to receive cash arising on account of a debtor-creditor or lender-borrower relationship).Accounting Flow of Financial Guarantee ContractsInitial Recognition→Subsequent Measurement→Derecognition & Disclosures→Other reporting implications→IBC Case laws & Industry practicesI. Initial Recognition of Financial Guarantee ContractsFirstly, ICAI’s Expert Advisory Committee(EAC) EAC opinion3 published in October, 21 clarified that no default on part of the borrower could not be the argument for non-recognition of FGC, meaning that the extent of credit risk shall not affect the initial recognition of financial guarantee liability; however, this may be one of the factors that the company may consider for the purpose of fair valuation at the time of initial measurement.Ind AS 109 requires the guarantor to recognise the financial guarantee contract as a financial liability initially at its fair value; the fair value at initial recognition is normally the transaction price (i.e., the consideration received). However, if there is no consideration received or if the consideration received does not reflect the fair value, the fair value will be determined using the appropriate valuation method.“Ind AS 109 requires the guarantor to recognise the financial guarantee contract as a financial liability initially at its fair value; the fair value at initial recognition is normally the transaction price.”As regards the determination of the fair value of the financial guarantee, in the absence of any specific guidance on the issue in Ind AS 109 or in any other Ind AS and considering the broad principles of Ind AS 113, Fair Value Measurement, the following approaches may be considered:4One possible measure of the fair value of the financial guarantee (at initial recognition) may be the amount that an unrelated, independent third party would have charged for issuing the financial guarantee.Another possible approach is, it may be calculated as the present value of the difference between the net contractual cash flows required under a debt instrument, and the net contractual cash flows that would have been required without the guarantee.Yet another possible approach may be to estimate the fair value of the financial guarantee as the present value of the probability-weighted cash flows that may arise under the guarantee (i.e., the expected value of the liability).Note: Ind AS 109 provides principles for accounting by the issuer of the guarantee (i.e., issuer side accounting). However, it does not specifically address the accounting for financial guarantees by the beneficiary (i.e., beneficiary side accounting). In an arm’s length transaction between unrelated parties, the beneficiary of the financial guarantee would recognise the guarantee fee or premium paid as an expense. An entity needs to exercise judgement in assessing the substance of the transaction, taking into consideration relevant facts and circumstances, for example, whether any benefits are being otherwise obtained by providing a guarantee.Financial reporting treatment of initial recognition is tabulated as below.Scenario 1: Guarantee provided by Parent to ComponentScenarioIn the books of Guarantee providerIn the books of BeneficiaryScenario 1Debit-side> If consideration is charged, record as financial asset.> If consideration is not charged, as the issuer has right to future economic benefits arising from its overall investment and underlying transaction is in its capacity as shareholder, the company should recognize deemed investment.Debit-sideConsidering financial guarantee is an integral part of the arrangement for the loan taken, the unamortized ancillary cost would be debited, which needs to be netted off against underlying borrowing for which such guarantee is provided, and the amortisation charges, would form part of Effective Intrest rate (EIR).Credit-side> Recognise a liability as deferred income.Credit-side> If consideration is charged, record as financial liability> If consideration is not charged, Beneficiary will be required to recognise a Deemed equity in its financial statements for the fair value of the financial guarantee.Scenario 2: Guarantee provided by Component to parentScenarioIn the books of Guarantee providerIn the books of BeneficiaryScenario 2Debit-side> If consideration is charged, record as financial asset.> If consideration is not charged, in such case, component has effectively made a distribution to Parent. In order to reflect the substance of the transaction, the debit should be made to an appropriate head under ‘equity’.Debit-sideConsidering financial guarantee is an integral part of the arrangement for the loan taken, the unamortized ancillary cost would be debited, which needs to be netted off against underlying borrowing for which such guarantee is provided, and the amortisation charges, would form part of EIR.Credit-side> Recognise a liability as deferred income.Credit-side> If consideration is charged, record as financial liability> If consideration is not charged, credit amount should be recorded as per Ind AS 27 guidance, i.e. distribution received should be credited to profit or loss (Other income, unless the distribution clearly represents a recovery of part of the cost of the investment measured at fair value through other comprehensive income).II. Subsequent Measurement of Financial Guarantee ContractsInd AS 109 requires FGC to be subsequently measured at higher of:Loss allowance as per Expected Credit Loss Impairment modelThe amount initially recognized (i.e., fair value), less than any cumulative amount amortisation recognized in accordance with Ind AS 115The amount of unearned financial guarantee commission would be first reported as a liability and amortised throughout the guarantee’s duration if Ind AS 115 were to be applied.For the purposes of applying the impairment requirements, the date the entity becomes a party to the irrevocable commitment shall be deemed the date of initial recognition.In cases where the amount computed under expected credit loss(ECL) is higher than the closing balance derived as per amortisation, the liability (i.e. financial guarantee obligation) is adjusted to ECL amount by charge to profit and loss.Financial reporting treatment of Subsequent recognition is tabulated as below.Scenario 1: Guarantee provided by Parent to ComponentScenarioIn the books of Guarantee providerIn the books of BeneficiaryScenario 1Debit-side> If consideration is charged, receipt of commission from component would reduce financial asset.> If consideration is not charged, deemed investment as recorded initially would be permanent balance.Debit-side> Amortize the initially booked unamortized cost (netted off against borrowings) as a part of finance cost.Credit-side> the issuer will unwind the financial guarantee obligation and recognize income under other income over the tenure of components’ loan.Credit-side> If consideration is charged, payment of commission would reduce financial liability.> If consideration is not charged, other equity would be permanent balance.Scenario 2: Guarantee provided by Component to parentScenarioIn the books of Guarantee providerIn the books of BeneficiaryScenario 2Debit-side> If consideration is charged, receipt of commission from component would reduce financial asset.> If consideration is not charged, no further measurement (only unwinding would be there).Debit-side> Amortize the initially booked unamortized cost (netted off against borrowings) as a part of finance cost.Credit-side> the issuer will unwind the financial guarantee obligation and recognize income under other income over the tenure of parents’ loan.Credit-side> If consideration is charged, payment of commission would reduce financial liability.> If consideration is not charged, no further measurement.Key points to adhere to for subsequent measurementIn addition to amortising the unearned financial guarantee commission to income, at each reporting date the beneficiary is required to compare the unamortized amount of the deferred income with the amount of loss allowance determined in respect of the guarantee as at that date. In accordance with the requirements of Ind AS 109, the recognition of guarantee commission on an amortisation basis should be EIR-based and not straight-line.The discount rate for FGC would be the current risk-free rate adjusted for risks specific to the cash flows.The amount of the loss allowance at each subsequent reporting period equals the 12-month expected credit losses (Stage -1). However, where there has been a significant increase in the risk that the specified debtor will default on the contract, the calculation is for lifetime expected credit losses (Stage -2).As an alternative, the FGC may be designated at fair value through profit or loss, but only in situations where there is an accounting discrepancy or if the FGC is a component of a managed portfolio whose performance is assessed on a fair value basis.III. Derecognition of Financial Guarantee ContractsThere may be a case where the FGC were originally recognised based on the estimated term of the debt instrument, but the beneficiary prepays the entire debt, resulting in a change in the expected tenure in terms of contractual life. This would amount to changes in the accounting estimates (Ind AS 8), since no obligation exists for the guarantor after prepayment; the guarantor would reverse the amount of the outstanding obligation. The amount debited to investment upon providing a guarantee is, in substance, the consideration that the parent would have collected for providing a similar guarantee to an unrelated third party. In the case of a prepayment of a loan by an unrelated third party, the parent would generally not have refunded the consideration and would have recognised the entire unrecognised commission in profit and loss. A similar approach should be followed.Subsequent to recent amendment of Ind AS 86, whereby Ind AS 8 now defines accounting estimates, which would broadly cover curtailment in expected tenure of debt schedule, requiring prospective recognition of the effect.IV. Disclosures for Financial Guarantee ContractsCredit Risk Disclosure: In credit risk disclosure, the entity should disclose the extent of contractual liability. Inferring from Ind AS 107, the disclosure requirement is for the maximum exposure of FGC to credit risk, which is the maximum amount the entity would have to pay if the guarantee is called on, which may be significantly greater than the amount recognized as a liability.Liquidity Risk Disclosure: In liquidity risk disclosure, an entity shall disclose a maturity analysis for non-derivative financial liabilities (including FGC) that shows the remaining contractual maturities, based on the maximum amount that can be called for under FGC. Such disclosure needs to be based on contractual undiscounted cash flow, which would differ from the amount included in the balance sheet. Further, the entity needs to describe how it manages the liquidity risk.Non-Applicability of Ind AS 37: Ind AS 37 does not apply to financial instruments (including guarantees) that are within the scope of Ind AS 109. Therefore, financial guarantees, in the extant case, being governed by Ind AS 109, are not within the scope of Ind AS 37 and therefore cannot be classified as contingent liabilities.Related Party Disclosure: The gross amount of any guarantee given or received on behalf of a related party will be disclosed in the related party disclosure in accordance with the requirement of Ind AS 24.Other Financial Reporting implications for Financial Guarantee ContractsOn subsequent measurement, the beneficiary would amortize the cost under finance cost, such finance cost being an integral part of the determination of interest expense calculated using EIR, thus forming part of the borrowing costs, as defined under Ind AS 23 and can be capitalised to qualifying asset in accordance with Ind AS 23.V. IBC Case law on Financial Guarantee ContractsWith bank guarantees being out of moratorium shelter under IBC, and that being a settled legal position, we will analyze corporate guarantees from IBC spectrum and have a glance over certain case laws. As clarified earlier, corporate guarantee functions between 3 parties i.e., guarantor (let’s say holding company), borrower (let’s say subsidiary company) and lender (let’s say banker). Thus, banker would have provided funds to subsidiary, due repayment of which is guaranteed by the holding company. Now, in IBC terms the terminology would be corporate guarantor (holdco.), principal borrower (subsidiary) and financial creditor (bank).The Bankruptcy Legislative Reforms Commission report of 2015 did not touch upon the concept of secondary contract of corporate guarantee. It is imperative to note that the treatment of the guarantor of a corporate debtor facing insolvency proceedings has also been constantly changing ever since the enactment of the IBC. The central consideration would be that the guarantor’s responsibility would be co-extensive with that of the principal debtor, and thus the whole purpose of guarantee would be defeated if the creditor is compelled to delay the use of remedies against the corporate guarantor.Hon’ble Supreme Court in the matter of Laxmi Pat Surana -Vs- Union Bank of India & Anr. in Civil Appeal No. 2734 of 2020 held that the liability of the ‘Corporate Guarantor’ is ‘coextensive’ with that of the ‘Principal Borrower’ and that acknowledgment given by the ‘Principal Borrower’ also binds the ‘Corporate Guarantor’.Case study - Ferro Alloys Corporation Limited vs. Rural Electrification Corporation Limited5The case was decided by NCLAT and was appealed to Supreme Court. The case was filed by REC against ferro alloys.The point raised was IBC does not define the corporate guarantor and only defined the personal guarantor. Further, simultaneous applications of CIRP cannot be filed i.e., one against corporate guarantor and second against principal debtor, as IBC does not provide for filing such simultaneous applications, and thus the correct sequence of filing is first against the principal debtor, failing which the second must be filed against the corporate guarantor.The court held that a guarantee becomes a debt as soon as the guarantee is invoked, and in which case due to operation of law, corporate guarantor becomes a corporate debtor. Further, the courts held that IBC does not bar a financial creditor from initiating CIRP against guarantor, who comes within meaning of the corporate debtor.The court relied on the High court judgement of 2017, wherein it held that “that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety, and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt.”(Post 2018 amendment, IBC now defines corporate guarantor)Post above judgement, Insolvency Law Committee was set up to perform a thorough analysis of the IBC in light of issues related to guarantors, wherein it provided below pointers in its report:6The creditor is at liberty to proceed against either the debtor alone, or the surety alone, or jointly against both the debtor and the surety.That creditor should necessarily carry out adequate due diligence regarding the debtor’s financial position, and should not extend a loan solely by relying on a contract of guarantee without assessing the financial and technical feasibility of the respective project.VI. Industry wide Practices for FGCHere, we have only analyzed the financial statements of certain companies and this is just for the purpose of comparing practices followed by companies, and not to comment on the suitability of one over another.TATA Power Limited (TPL) – Analysis of Annual report 21-22TPL discloses guarantees given to various subsidiaries as indirect exposure under contingent liability. The exposure is to the extent of borrowing outstanding (including accrued interest), which are considered as maximum amounts TPL could be forced to settle.Oil and Natural Gas Corporation Limited (ONGC) – Analysis of Annual report 21-22The company has duly recognized guarantee obligation under other financial liability which represents the fair value of fee towards financial guarantee issued.Further Amortisation of guarantee obligation is charged as other income under other non-operating income.On related party disclosure part, ONGC has disclosed issue of guarantee as deemed equity investment (non-cash transaction) and guarantee fees in respect of such guarantee (non-cash transaction). Further outstanding balances are disclosed as Value of outstanding financial guarantees.Under Liquidity risk management disclosure, ONGC has disclosed guarantee obligation as a single line item based on maximum exposure and has not given year wise tabulation.ONGC under fair value measurement disclosure, has assessed guarantee obligation at Level 2 of Fair value hierarchy and used Interest Rate Differential Model as valuation technique (i.e., cost of debt with and without guarantee).Reliance infrastructure limited – Analysis of Annual report 21-22Guarantee obligation disclosed under FVTPL category under category wise disclosure of financial instrument as Level 3 valuation, and valuation technique used is credit default swap (CDS) having One-year CDS spread for respective entity’s credit rating as input.Auditors have also provided disclaimers of opinion pertaining to insufficient audit evidence on account of the relationship, with the recoverability and possible obligation towards the Corporate Guarantee given.List of Referenceshttps://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12281&Mode=0Microsoft Word - 18 . Final ITFG 12_CC (icai.org) (ITFG Clarification Bulletin 12, Issue 3)https://resource.cdn.icai.org/71027eac57077-p1.pdf (Query – 15, Pg188)51647indas41303.pdf (icai.org) (ITFG Clarification Bulletin 16, Issue 1)https://ibbi.gov.in/webadmin/pdf/order/2019/Jan/8th%20Jan%202019%20in%20the%20matter%20of%20Ferro%20Alloys%20Corporation%20Ltd.%20&%20Ors.%20Vs.%20Rural%20Electrication%20Corporation%20Ltd.%20CA%20(AT)%20(Insolvency)%20No.%2092,93%20&%20148-2017_2019-01-10%2012:10:07.pdfhttps://ibbi.gov.in/uploads/resources/c6cb71c9f69f66858830630da08e45b4.pdfAuthor may be reached at rikinnmistry@yahoo.com and eboard@icai.inPublished by The Institute of Chartered Accountants of India (ICAI)

SUSTAINABILITY • ESG ASSURANCEAssurance of Corporate Sustainability: A Study of BSE-SENSEX CompaniesBy CA. Anandaraj Saha & Dr. Satabdee Banerjee•Member of the Institute & Academician•The Chartered Accountant Journal • October 2023 (Vol. 72, No. 04, pp. 86–92)“The nucleus of the issue is not whether corporates publish sustainability reports, but rather the approach through which they communicate it—whether it reflects a genuine commitment or merely a marketing tool risking greenwashing. Independent assurance on sustainability reports generates credibility, trust, and confidence among stakeholders.”1. Assurance Standards & ICAI SSAE 3000Two primary global frameworks govern sustainability assurance: ISAE 3000 (Revised) (predominantly used by professional accounting firms) and AA1000AS (used by non-accounting certifiers).ICAI Standard on Sustainability Assurance Engagements (SSAE 3000): Issued by the Sustainability Reporting Standards Board (SRSB) of ICAI in January 2023; voluntary for periods ending March 31, 2023, and mandatory for assurance reports covering periods ending on or after March 31, 2024. Supplemental standard SAE 3410 governs Greenhouse Gas Statements.2. Global Trends vs. BSE-SENSEX Empirical FindingsGlobal Context (IFAC/AICPA 2022)92% of top global firms disclose ESG data; 58% obtain independent assurance.61% of global assurance is performed by audit/accounting firms.82% of global engagements provide Limited Assurance; 94% of accounting firms apply ISAE 3000.BSE-SENSEX Companies Findings83% (25 out of 30) of SENSEX firms obtained independent assurance (higher than global average).52% of assurance was conducted by Chartered Accountant audit firms.72% of engagements provided Limited Assurance; only 12% provided Reasonable Assurance.84% adhered to ISAE 3000 (Revised) standards.3. Breakdown of Assurance Practitioners (SENSEX Study)Nature of Assurance ProviderNumber of EngagementsPercentage Share (%)Accounting / Audit Firms (CAs)1352%Specialised Assurance Providers624%Testing & Certification Firms312%Engineering Firms14%Others28%Total25100%Author Contact: anandarajsaha@gmail.comPublished by ICAI

Wisdom from India’s unique heritage has insights into many of the challenges the world is facing today. A harmony between nature and human beings with respect to all that represents life, is integral to India’s rich culture. Despite the many pulls and pressures, cultural foundations such as this, will help India grow and transform into an advanced nation. "Parasparo Graho Jivanam," where life thrives upon mutual respect, support, and interdependence, is central to India’s ancient tradition. “Vasudhaiva Kutumbakam” is another simple yet important concept that conveys that the world is one family, with a shared future: One earth, one family, one future.India is charting a very different economic growth trajectory. A unique mix of tradition and modernity has equipped India to take confident strides toward becoming a developed economy. Our journey, as we look to celebrate 100 years of independence in 2047, is that of an Amrit-Kaal, an era of sustained progress and prosperity.Yes, there are and will be challenges and climate change is one of them. Countries around the world have been responding to these issues. It is almost two decades since a UN-led group of thinkers coined the term ESG. Over the years, environmental, social, and governance (ESG) aspects of investments have become increasingly mainstream. Businesses and economies are realigning themselves now to a responsible development model. There is a good consensus that sustainability is not merely an option but a fundamental necessity for the well-being of our planet and future generations. ESG thinking has helped decision-makers to look at human activity through a diverse set of lenses. The focus is slowly shifting from short-term gains to long-term returns. Close alignment with environmental and social needs is certain to help build a sustainable future.As we strive towards building prosperity for a new India, we must seek guidance from our time-tested convictions. There is a need to choose wisely and respond to the environment’s warnings and needs. At HDFC AMC, we are mindful of the risk burden that the ecosystem has and of our responsibility towards our clients, society, and the environment. Our ESG mission is to create sustainable wealth for every stakeholder by focusing on the three P’s—People, Planet & Prosperity. To reaffirm our commitment to responsible investing, we have become signatories to the internationally recognized United Nations-Supported Principles for Responsible Investment (UNPRI).Fiduciary DutyESG for us is beyond the acronym it represents. We believe that as trustees of our clients’ money, we owe a fiduciary duty to our clients and also to the community at large. Our approach is tempered by India’s rich belief systems alongside the latest and best practitioner frameworks, including ESG techniques. The motivation is to strive hard to understand changing patterns, and to harness trends with a focus on long-term returns and risks. We understand that businesses that are run in the best interests of all stakeholders, including the environment, are better positioned to create lasting value for their investors. We recognize that ESG investing frameworks provide rich inputs for practitioners to look beyond short-term financial considerations. An investee business’s environmental footprint, the impact it is creating in communities, and its governance standards are important factors that investors should consider. The financial soundness of a business, without a doubt, is an essential factor. But it is also critical to understand how sustainable and robust the financial profile is. Businesses that are able to think long-term have the foundational launchpad to deliver better risk-adjusted returns. Addressing environmental and social issues positions businesses to gain the trust of their clients, attract and retain top talent, and maintain positive relationships with regulators. In the long run, these businesses can contribute to a more stable and resilient investment portfolio. Companies focusing on the triple bottom line (people, planet, and profits) deliver sustained returns over a long period.Policy making and India’s Amrit-KaalIndia’s Amrit-Kaal journey to become a developed nation by 2047 is making good progress. Democracy, Demographics, Demand, and Digitization are powering India to take the next big step on the per-capita income ladder. Structural reforms and agile execution, best-in-class physical, virtual, and social infrastructure, and overall improvement in the quality of life are creating a roadmap for robust, sustainable, and inclusive growth. This is unlike China, where the growth model is largely state-driven and environmentally unsustainable. India’s policy thrust for equitable and sustainable growth is driven by entrepreneurship with the Government acting as a facilitator. Safeguards to avoid pollution and social tensions are important policy objectives.“Structural reforms and agile execution, best-in-class physical, virtual, and social infrastructure, and overall improvement in the quality of life are creating a roadmap for robust, sustainable, and inclusive growth.”Policymakers in India are aware of the inevitable risks that economic growth brings. Regulators are mandating as well as nudging stakeholders to adopt sustainable business practices. Capital markets regulator, SEBI (Securities and Exchange Board of India), is gradually raising the bar for listed companies’ ESG disclosures. This is a significant step forward. The regulator has specified a glide path for listed companies for core business responsibility and sustainability reporting (BRSR). SEBI’s approach is holistic with a focus on the Disclosures-Rating-Investing trinity. The proposed roadmap for enhanced BRSR disclosures including assurance with a glide path approach is aimed at addressing the need for relevant, credible, and comparable data while keeping in mind the cost of compliance. BRSR disclosures will help investors in making informed decisions. Importantly, the policy thrust will make businesses reconsider their commercial activities and the synergies as well as risks these activities have vis-à-vis the environment and the communities these businesses operate in.As a country, India has a well-deliberated pathway for addressing climate issues. At the 2021 Conference of Parties meeting on Climate Change in Glasgow (COP26), India pledged to achieve net zero emissions by 2070 as a part of its Panchamrit Action Plan and Lifestyle for Environment movement. Last year, at the COP 27 summit in Egypt, India unveiled a plan for meeting decarbonization goals.Responsible InvestingLarge institutional investors like us have a critical responsibility in helping chart a sustainable future. As a commitment towards “responsible investing”, we have furthered the definition of ESG to include Engagement, Stewardship, and ‘Good to Great’ factors. Voting goes hand in hand with engagement. Although India has a robust capital market, the current stage of economic development requires a judicious balancing of choices. Voting with one’s feet is not always a prudent option. Instead, engagement with companies is likely to create a better outcome for all stakeholders. As a part of our engagement policy, we work closely with investee companies to share our views on a variety of issues, including executive compensation, dividend distribution policies, capital allocation, and related party transactions. We also engage with investee companies to focus on environmental sustainability. In line with the regulatory requirements, we have adopted the stewardship code. We view stewardship as an important step towards improved corporate governance in our investee companies and improving the interests of investors. Rules now make it mandatory to vote on important company resolutions. We consider shareholder voting to be an important shareholder right and a valuable tool for decision-making. Our investment team endeavors to vote in an informed and pragmatic manner.“We must look beyond the three words that ESG stands for. We should strive hard to recognize the intertwined nature of risk and sustainability.”Identifying businesses that have the potential to achieve ‘Good to Great’ corporate transformations is important for us. The opportunity here is to play the role of an active partner in a business’s journey through highly constructive engagement and stewardship.ConclusionIndia’s ascent to being the world’s third-largest economy in the next decade is promising. But not only must we learn from history, we must also recalibrate the ever-changing nature of risks that could jeopardize our clients’ interests. As investors, our role is crucial; we must make informed decisions, work with companies to adopt responsible practices, and acknowledge the synergies between business, the environment, and society. Investors too need to see if companies are aligning their operations and offerings for creating sustainable value. We must look beyond the three words that ESG stands for. We should strive hard to recognize the intertwined nature of risk and sustainability. This understanding will propel us toward creating an equitable, prosperous, and resilient future.Author may be reached at: eboard@icai.in

In recent years, heightened global awareness of climate change, social equity, and ethical governance has thrust Environmental, Social, and Governance (ESG) initiatives to the forefront of corporate strategies, signifying a revolutionary shift towards sustainable and responsible business operations. Modern corporations view ESG not merely as an ethical and moral directive, but also as a pivotal strategic consideration intertwined with business risks and rewards. One salient aspect of ESG initiatives lies in the realm of transfer pricing, which governs the pricing of transactions between associated enterprises within a Multinational Enterprises group. This article delves into the transfer pricing implications stemming from ESG initiatives.IntroductionIn a rapidly evolving landscape of global business, there is an increasing awareness of environmental sustainability, social responsibility, and ethical corporate governance where enterprises are being called upon to align their operations with broader societal and environmental goals. The business practices are under unprecedented scrutiny for their impact on the environment and society. ESG considerations have risen to prominence as cornerstone of corporate strategy reflecting a profound shift in how organizations perceive their societal role. Enterprises that prioritize ESG considerations recognize that their success is no longer solely gauged by their fiscal achievements, but also by their ability to tackle global pressing challenges, foster diverse and inclusive work environments and uphold strong ethical standards. As stakeholders demand heightened transparency, ethical behaviour, and eco-consciousness, businesses are proactively assimilating ESG considerations into various dimensions of their operations, ranging from supply chain management to product design and the promotion of robust employee engagement initiatives.As global enterprises tread the evolving path defined by a heightened emphasis on sustainable and responsible business operations, they are confronting another challenge in the arena of international taxation, notably in the context of transfer pricing. While there is a pronounced obligation for companies to demonstrate transparency and accountability for their ESG initiatives to stakeholders and regulators, they simultaneously grapple with the complexities of melding these ESG commitments with the intricacies of intergroup pricing strategies. ESG commitments redefine the way Multinational Enterprises (MNE) group allocate profits and assets across borders. This article seeks to explore transfer pricing implications arising out of change in business approaches triggered by ESG commitments of global enterprises.ESG Factors: A New Dimension in Transfer PricingESG initiatives undertaken by global enterprises may impact multiple facets of their operations, such as their cost structure, valuation of intangible assets, and resource allocations. Such transformations may engender a range of transfer pricing implications arising from value creation, the introduction of new functions, assets, and associated risks. As companies strive to align their practices with sustainable values, it becomes imperative to concurrently evaluate the potential implications these initiatives may have on their transfer pricing positions. Considering the scope and specifics of transfer pricing framework, MNE group ought to evaluate the tax consequences arising from changes to the value chain driven by sustainability efforts and the reorganisation of supply chains and business models.Within the realm of transfer pricing, one of the major challenge lies in deciphering true value and cost associated with shifting to ESG compliant business operations. This transition can result in rising product and supply chain cost and may lead to creation or enhancement of intangibles assets. In the ensuing paragraphs, we highlight some of the transfer pricing issues associated with ESG transformations.ESG Driven Reorganisation of Supply ChainDrawing from the preceding discussion, it is unequivocally clear that ESG principles are carving a substantial imprint on contemporary business strategies. These principles, acting as pivotal catalysts, are ushering in transformative modifications in the realm of supply chain operations. Specifically, companies are evidencing marked transitions in their sourcing strategies, production processes, and distribution channels, underscoring a renewed commitment to sustainable and responsible business practices. For instance, to distance themselves from suppliers who brazenly flout sustainability standards, an MNE group might decide to produce certain items in-house, a decision predominantly influenced by environmental reasons. This change could bring added costs. In some scenarios, an MNE group might relocate the manufacturing operations from one subsidiary, which doesn’t align with sustainability standards, to another in a different region that is compliant with environmental guidelines. Such shifts necessitate adjustments in the transfer pricing framework. In these circumstances, determining the appropriate or ‘arm’s length’ price for these transitions becomes complex, more so when there’s an increase in costs without a corresponding rise in short-term revenues. This complexity can introduce uncertainties and might lead to conflicts with tax authorities.Another manifestation of supply chain restructuring is discernible when an MNE group opts for a strategic relocation of its production units. Centralized production often leads to increased transportation-related carbon emissions, particularly when a single global hub manages the manufacturing and then distributes to local markets. To counter this, an MNE group might consider moving away from a central production unit, instead opting for multiple manufacturing locations situated closer to their respective market jurisdictions. This strategic move aims at reducing transportation distances, subsequently curbing carbon emissions. However, this restructuring also entails reallocating manufacturing functions and leveraging specific manufacturing expertise. Determining the right remuneration for such reallocations becomes a complex task. Further complexities arise when considering the potential compensations for the original centralized manufacturing entities, especially if they are at risk of reduced profitability. It’s crucial to identify whether there’s an actual transfer of valuable assets or rights and to accurately determine the timing of such transfers, especially when the restructuring unfolds in stages.In the realm of supply chain reorganisation, another strategy that an MNE group might employ is the centralization of logistics or fleet management functions, with an aim to reduce the group’s overall carbon emission footprint. These centralized logistic hubs typically provide services to other entities within the group. From a transfer pricing perspective, the question of how to remunerate for such services arises, especially given that they often constitute an integral component of the group’s core business operations. Considering the nature and significance of the services rendered by the logistic hub, particularly in the backdrop of the group’s commitment to a net-zero policy, a pivotal question emerges: Should remuneration be based on a cost-plus model, or should it lean towards the Comparable Uncontrolled Price (CUP) as a benchmark for intergroup pricing? While the CUP method is often seen as the gold standard, any challenges in its applicability necessitate a rigorous analysis to determine the appropriate markup—a process that demands intricate and comprehensive scrutiny from a transfer pricing perspective.Tax Authorities’ Perspective on Supply Chain ReorganisationESG-driven transformation leading to significant alterations in a company’s structure or supply chain as discussed above might be termed ‘business restructure’ by tax authorities. If a change in business operations qualifies as ‘business restructure’, then from a transfer pricing perspective, it becomes imperative to ascertain if the terms surrounding the business restructuring, including specific associated transactions, adhere to the arm’s length principle. A common challenge emerges when the primary driver behind the restructuring is to garner benefits at the conglomerate or group level. While such restructuring may be justifiable when viewed from a holistic, group-centric standpoint, complications arise if it leaves specific entities within the group at a disadvantage post-restructuring. In these scenarios, even though the restructuring is backed by legitimate business reasons at the macro level, the micro-level implications can lead to potential disparities and conflicts, especially if the affected entity doesn’t see the anticipated benefits or faces detriment as a result. Consequently, as part of their compliance reporting requirements, companies bear the responsibility to meticulously elucidate and substantiate their restructuring decisions. This responsibility extends to providing comprehensive insights into the realignment of functions, the redistribution of assets, and the shifting of risks, with a special emphasis on those intricately linked to ESG endeavours.Deciphering Carbon Credit from Transfer Pricing Perspective“Within the ESG sphere, meticulous management of the carbon footprint is essential for advancing sustainability mandates.”Within the ESG sphere, meticulous management of the carbon footprint is essential for advancing sustainability mandates. A pivotal aspect of this strategy involves effectively reducing avoidable carbon emissions through proactive measures and offsetting those inherently unavoidable. Under the ESG framework, enterprises may contemplate transient investments to restructure their operations, targeting long-term emission curtailment, which could lead to the generation of carbon credits.A carbon credit represents a unit of carbon dioxide (usually a tonne) that has been reduced, prevented, or sequestered. These credits can arise from various activities that result in emission reductions or the capture of greenhouse gases. A carbon credit is a tradable intangible instrument representing quantifiable carbon dioxide equivalents that have been mitigated.If modifying business operations is unfeasible or if companies are reluctant to implement changes for strategic reasons, they might opt to purchase carbon credits as a swift alternative, offsetting their carbon emissions. Carbon offsets represent actions taken to counterbalance greenhouse gas emissions in other regions. Given the global prevalence of these gases, reductions anywhere contribute to the collective fight against climate change.When an MNE generates carbon credits, whether through its regular operations or changes in its business model, other companies, including associated enterprises, may procure these credits to either reduce their carbon impact or engage in trade. To ensure accurate tax-related income allocation from such transactions, it’s imperative to assess how each entity’s roles, assets, and risks related to carbon credits are compensated. This calls for a comprehensive understanding of the regulatory landscape governing carbon credits.Typically, asset holders reap the associated economic benefits. Given the monetizable nature of carbon credits, pinpointing their rightful owner becomes paramount. Contractual agreements often dictate ownership. However, intricate project structures, where the origin of a carbon credit can’t be attributed to a specific entity, can muddle ownership determination. This poses challenges for both tax authorities and taxpayers.When investments are made in technologies, machinery, or other assets aimed at carbon emission reduction, discerning the ownership of the associated carbon credits becomes paramount, especially when an investment is initiated by one entity and operated by another. Though the economic benefits of such investments are typically allocated based on agreements, the entity holding the carbon credit may not always be the one entitled to its economic value. This necessitates a thorough analysis of all involved entities. For instance, the economic value of these credits isn’t strictly tied to the jurisdiction where actions, like reforestation, take place. Therefore, a careful examination of all parties and their roles is essential to determine profit attribution. For intercompany transactions, income allocations should strictly adhere to arm’s length principles, fortified by comprehensive transfer pricing regulations.Projects targeting carbon emission reductions demand specific measures and significant investments. In an MNE context, this could mean collaborations among affiliated companies across countries, tapping both internal and external resources. Such initiatives often require specialized expertise, which may come from within the organization or external consultants. In such cases, companies must ensure that all participating entities, whether they contribute capital or expertise, are remunerated at arm’s length standards.For carbon credit transactions between associated enterprises, the method of transfer pricing applied can vary depending on transaction specifics. While the CUP approach might be apt in some scenarios, a cost-plus basis may suit others. In cases where intra-group transactions are highly integrated or both parties contribute valuable intangibles, a profit split may be more appropriate.“A holistic understanding of carbon credit generation and the associated value chain facilitates better insight into profit allocation among associated enterprises.”A holistic understanding of carbon credit generation and the associated value chain facilitates better insight into profit allocation among associated enterprises. Detailed documentation capturing roles, responsibilities, and remuneration is vital for compliance and risk mitigation. This documentation clarifies the value chain, highlighting where value is added, which is especially crucial considering the fungible nature of carbon credits. Judicious profit allocation is essential, as any misallocation can lead to tax scrutiny, potential double taxation, and consequently escalated costs, which could deter carbon credit generation. Given the global emphasis on sustainability, it’s imperative to prevent such scenarios to foster sustainable practices.While the carbon credit sector doesn’t inherently introduce novel transfer pricing challenges, its unique nature demands a deeper, industry-specific understanding. Factors such as the intangible and fungible nature of carbon credits, price volatility, regulatory dynamics, significant capital requirements, innovative funding mechanisms, and the overarching objective of combating climate change set the carbon credit sphere apart. Taxpayers and tax administrations must work in tandem to ensure that twin objectives of global sustainability and fiscal fairness are seamlessly achieved.Social Equity Dimension and Ethical Governance Pillar of ESGIn the pursuit of aligning with the social equity aspect of ESG objectives, MNEs are increasingly emphasizing on aspects such as workforce diversity, equitable remuneration, employee welfare programs, and fostering inclusive leadership. In the realm of ethical governance under ESG objectives, MNEs often adopt transparent business practices, leading to benefits like an enhanced reputation, improved credit ratings etc. For each of the action taken pursuant to these aspects of ESG goals, the transfer pricing analysis depends on the unique facts at hand. However, its core remains rooted in transfer pricing principles, focusing on functions, assets and risks across value chain.The Road AheadESG factors play a pivotal role in shaping a business’s performance and thereby affecting the collective value created by an MNE group. Transfer pricing fundamentally operates on the tenet that profit should be taxed in the jurisdictions where value is created. As ESG considerations recalibrate the epicentre of value creation, it’s imperative for these shifts to be reflected in transfer pricing strategies. Transfer Pricing evaluation should commence as soon as an enterprise begins to weave ESG into its strategic blueprint and operational processes. Evidently, companies embracing ESG initiatives should be allocated a higher profit allocation for taxation purposes. Regular reviews of transfer pricing policies are vital to ensure they remain aligned with contemporary ESG goals and adhere to extant regulatory stipulations. While the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the United Nations Transfer Pricing Manual do not yet explicitly prescribe how ESG principles should be integrated into transfer pricing analysis, it is prudent for enterprises to proactively integrate these tenets into their transfer pricing evaluations.ConclusionThe emergence of ESG initiatives brings into focus a fundamental truth that contemporary business practices are inextricably linked with the broader environmental and societal goals. Embedding ESG principles into corporate strategies denotes a profound transformation in the modus operandi of business affairs signifying a monumental shift in operational approaches. Transfer pricing, being at the core of international business transactions, is deeply influenced by this revolutionary shift. This shift brings about a multitude of transfer pricing implications, reflecting the fresh perspectives on value creation and Functions, Assets and Risks analysis across the value chain. This article predominantly focuses on environmental sustainability dimension of ESG principle and attempt to address only select transfer pricing consequences. As the ESG momentum continues to burgeon and its palpable effects on various enterprises is still unfolding, our discussion herein on transfer pricing in the context of ESG is by no means exhaustive.ReferenceIBFD White Paper: https://www.ibfd.org/sites/default/files/2022-04/International%20-%20ESG%20Transformation%20and%20Transfer%20Pricing%20Implications%20-%20IBFD.pdfAuthors may be reached at: eboard@icai.in

In an era defined by environmental consciousness and social responsibility, the financial world is witnessing a paradigm shift towards sustainable business practices. Environmental, Social, and Governance (ESG) considerations have emerged as vital determinants of a company’s long-term success. To align Indian corporations with this global trend, the Securities and Exchange Board of India (SEBI) has introduced the Business Responsibility and Sustainability Reporting (BRSR) framework. This article navigates through the significance of ESG, introduces the BRSR framework, delves into its principles, explores its implications, and outlines the advantages of voluntary implementation.ESG’s SignificanceESG factors represent a comprehensive assessment of a company’s non-financial performance. Organizations that actively address ESG concerns often reap benefits such as enhanced reputation, improved risk management, and access to a pool of socially conscious investors. These factors resonate with a broader vision of success that emphasizes long-term value creation and positive societal impact.Companies that demonstrate strong ESG performance are often seen as more sustainable and responsible. This can give them a competitive advantage in attracting customers, employees, and investors. In addition, ESG factors can help companies manage risks and identify opportunities. For example, companies that are taking steps to reduce their environmental impact may be less vulnerable to the effects of climate change.ESG investing is a growing trend, and many investors are now looking for companies that are committed to sustainability and social responsibility. By actively managing ESG, organizations can position themselves for long-term success and make a positive impact on the world.“प्राकृतिकं विकासं च समाजस्य च हितं यः,सहकर्माणि करोति स सर्वेषां सुखं भवेत् ॥”Which means “One who promotes environmental sustainability and societal well-being through collaborative actions, brings happiness to all.”Evolution of ESG Reporting in IndiaGlobally, there are several sustainability reporting frameworks such as Global Reporting Indicators (GRI), The Task Force on Climate-related Financial Disclosures (TCFD) etc. International Financial Reporting Standards (IFRS) has also recently issued two sustainability standards.Sustainability Reporting in India has started in the year 2009 with the Ministry of Corporate Affairs (MCA) issuing National Guidelines on Corporate Social Responsibility as the first step towards mainstreaming the concept of business responsibility. Since then the reporting concept has come a long way with the introduction of Business Responsibility Reporting (BRR), Corporate Social Responsibility (CSR), Integrated Reporting (IR), National Guidelines on Responsible Business Conduct (NGRBC) & now Business Responsibility & Sustainability Reporting (BRSR) introduces by Securities & Exchange Board of India (SEBI). Below is the depiction of how ESG factors has gained importance by the years and steps taken by regulators for compliance.Evolution Timeline of ESG Reporting in India2011 – National Voluntary Guidelines (NVGs): MCA introduced NVGs to encourage transparency, accountability, and ethical conduct in businesses.2012 – Business Responsibility Report (BRR): MCA mandated top 100 listed companies to disclose social, environmental, and governance initiatives under BRR.2015 – Extension of BRR: The scope of BRR has been extended for 100 listed companies to 500 listed companies by their Market Capitalization.2017 – Integrated Reporting (IR): SEBI introduced Integrated Reporting for top 500 listed companies on a voluntary basis.2019 – National Guidelines on Responsible Business Conduct (NGRBC): MCA provided a comprehensive framework called NGRBC applicable to all business and BRR was also extended to top 1000 listed companies.2020 – Business Responsibility and Sustainability Reporting (BRSR): SEBI introduced BRSR reporting for top 1000 listed companies emphasizing transparency and responsible business conduct.2023 – BRSR Core, Assurance: SEBI introduced BRSR core, introducing extended disclosures, assurance and KPIs for 1000 listed companies on glide path manner to enhance ESG date quality and promote sustainability.Business Responsibility & Sustainability Reporting – BRSRIn response to the growing emphasis on ESG considerations, the Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Reporting (BRSR) framework. Launched in 2021, BRSR mandates the top 1000 listed companies by their market capitalisation to disclose their ESG-related information in the prescribed format, thereby fostering transparency and accountability on the factors mentioned therein.BRSR reporting is instrumental in driving positive change within corporate practices. By mandating ESG disclosures, SEBI encourages businesses to assume responsibility for their environmental footprint, social contributions, and governance practices. This not only fosters ethical behaviour but also facilitates a culture of continuous improvement.BRSR Framework OverviewThe BRSR framework comprises a structured set of guidelines aimed at standardizing ESG reporting among Indian corporations. The nine core principles encompassed in the BRSR have been prepared in line with the National Guidance on Responsible Business Conduct (NGRBC) that encapsulate diverse aspects of business sustainability. The framework prompts companies to disclose their ESG initiatives, policies, and performance, thus allowing stakeholders to make informed decisions.Interlinked Global Foundations: National Voluntary Guidelines + Sustainable Development Goals (SDGs) + Annual Business Responsibility Reporting + Paris Agreement on Climate Change + United Nations Guiding Principles (UNGP) → National Guidance on Responsible Business Conduct (NGRBCs).“The BRSR framework seeks to drive sustainable practices across various dimensions of business operations, fostering a comprehensive approach that benefits companies, society, and the environment alike.”Exploring the Nine Principles of BRSRThe principles under the BRSR are bifurcated into Essential Indicators and Leadership indicators.Essential Indicators: These are the mandatory elements of the Business Responsibility and Sustainability Reporting (BRSR). They provide fundamental information about a company’s operations, including details about products, services, locations, and employees.Leadership Indicators: These are voluntary. Companies use these to demonstrate a higher commitment to sustainability. They include disclosures related to the value chain of the listed entities and are a way for companies to position themselves as sustainability leaders.We shall deep dive into each principle as given in the BRSR:1. Principle 1: Businesses should conduct and govern themselves with integrity, and in a manner that is ethical, transparent, and accountable.This principle emphasizes ethical conduct across a business’s operations, stressing transparent disclosures on decisions affecting stakeholders. It acknowledges businesses’ role in society and their accountability for adopting and revealing their performance. The reporting under this Principle includes the following:Fines and penalties borne by the company for breaching any of the principles or complaints related to conflict of interest.Trainings provided to Employees, KMPs/directors and value chain partners of the companies on various principles.Details on company’s Anti-corruption/anti bribery policy.2. Principle 2: Businesses should provide goods and services in a manner that is sustainable and safe.Aligned with SDG 12, this principle emphasizes the connection between sustainable production and consumption, enhancing quality of life while preserving resources. It urges businesses to prioritize safety and resource efficiency throughout the product lifecycle, minimizing environmental and societal impacts. The BRSR requires the following disclosures for monitoring compliance with this principle:Whether any R&D has been done to improve companies ESG standing or whether the company has procedures to procure Goods and services from sustainable sources and whether any recycled goods is purchased by the company.Company’s policies and procedures for waste disposal.In case Life cycle assessment, if the company comes through a potential harm to environment, whether the company has taken measures to minimize that harm.3. Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains:This principle encompasses policies and practices related to fair treatment, dignity, and well-being of employees across a business and its value chain, aligned with Sustainable Development Goal 8. It emphasizes equality, non-discrimination, and diversity. Few of the factors that are focused on by this principle are as follows:Are the employees given relevant insurance, paternity/maternity benefits and retirement benefits.Does the company give equal opportunities and fair treatment to differently-abled persons.Is there a procedure available to employees for handling their grievances.Are all the employees given trainings on ensuring best health and skill upgradation along with their career developments. Does the company have in place provisions for health and safety of their employees.4. Principle 4: Businesses should respect the interests of and be responsive to all its stakeholders:This principle acknowledges that businesses affect a broad spectrum of stakeholders and the environment. It highlights the responsibility of businesses to protect the interests of all stakeholders, especially vulnerable groups. The principle also emphasizes the need for businesses to create positive impacts and reduce negative effects on stakeholders through their operations. It involves transparent recognition of impacts, engaging stakeholders, and resolving conflicts fairly. This principle underscores businesses’ accountability to their ecosystem while aiming for positive contributions and equitable outcomes.5. Principle 5: Businesses should respect and promote human rightsThis principle upholds universal human rights without discrimination. Aligned with India’s Constitution and the International Bill of Rights, it highlights the state’s role in safeguarding rights. Guided by UN principles, businesses prevent adverse impacts, ensure awareness, establish policies, conduct due diligence, rectify harm, and offer redressal mechanisms. This encompasses employee training, wage compliance, addressing issues like child labour, forced labour, harassment, and discrimination. It emphasizes businesses’ duty to protect and uphold rights.6. Principle 6: Businesses should respect and make efforts to protect and restore the environment:This principle highlights environmental responsibility for sustainable growth and well-being. It emphasizes global and local interconnections, urging action on pollution, biodiversity, resources, and climate change. Aligned with SDGs 11, 13, 14, and 15, it promotes sustainable practices, minimizes impacts, and sets targets. Key aspects involve policies, efficiency, climate action, and innovative technologies. It underscores businesses’ role in protecting the environment for a better future. The following points are covered in this principle:Energy consumption (renewable / non-renewable) and water consumption intensity and discharge, Air emissions.Compliance with Perform, Achieve, Trade (PAT) Scheme, Zero discharge strategy, Environment laws.Quantification of Greenhouse gases and measures taken by entity for reduction of these emissions.Waste management procedures.Business continuity / disaster management plans available with company, etc.7. Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent:This principle acknowledges businesses’ adherence to legal and policy frameworks, which guide growth and engagements with governments. It legitimizes advocacy for public good, aligning with principles, and ensuring transparent, disclosed advocacy. Collective platforms and ethical standards are emphasized, promoting fairness, human rights, and society’s benefit. It underscores businesses’ responsibility in ethical advocacy that upholds societal values.8. Principle 8: Businesses should promote inclusive growth and equitable developmentThis principle acknowledges India’s development challenges and aligns with government priorities. It urges businesses to contribute to inclusive progress, particularly in disadvantaged areas, through innovation and collaboration. Key aspects involve minimizing negative impacts on society, engaging in CSR activities, assessing and addressing adverse effects, innovating for well-being, aligning with development priorities, ensuring fair compensation during displacement, and respecting intellectual property and traditional knowledge. This principle underscores businesses’ role in equitable growth and societal well-being.9. Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner:This principle emphasizes safe, valuable goods, and responsible consumption. It ensures choice, accurate info, data privacy, education, ethical ads, and accessible redressal. It highlights businesses’ commitment to consumer well-being and responsible practices.Each principle embodies a unique facet of corporate sustainability, fostering a holistic approach that spans across organizational structures, operational practices, and stakeholder interactions.Initiatives by SRSB, ICAI“SRSB has taken various initiatives in Sustainability as a partner in nation building and also building the capacity of members in sustainability arena.”The Institute of Chartered Accountants of India has formed Sustainability Reporting Standards Board (SRSB). SRSB has taken various initiatives in Sustainability as a partner in nation building and also building the capacity of members in sustainability arena. SRSB has issued Standard on Sustainability Engagement SSAE 3000 “Assurance Engagement on Sustainability Information”, Standard on Assurance Engagement SAE 3410 on “Assurance Engagements on Greenhouse Gas Statements”, several publications. SRSB has developed Sustainability Reporting Maturity Model (SRMM) Version 2.01, a self-assessment tool, for corporates & professional accounting firms assisting them in sustainability reporting, for assessing sustainability maturity of the companies, giving the recognition to the companies in BRSR compliance based on the score achieved by them.New Horizons: SEBI’s Latest Amendments and AdditionsBased on the recommendations of the ESG Advisory Committee and pursuant to public consultation, SEBI has introduced a regulatory framework for Assurance BRSR Core.Applicability of BRSR Core is as follows:Financial YearTop Listed Entities CoveredBRSR Core Applicability2023-24Top 150Initial Phase2024-25Top 250Expansion2025-26Top 500Further Expansion2026-27Top 1000Comprehensive CoverageThis has further enriched the BRSR framework. This new facet, the BRSR Core, now enhances assurance and extends ESG disclosures to a business’s value chain. This evolution responds to the ever-evolving landscape of corporate responsibility. For ease of reference, the BRSR Core contains a cross-reference to the disclosures contained in the BRSR.The BRSR Core introduces a select set of Key Performance Indicators (KPIs) and metrics aligned with the nine ESG attributes. This subset encapsulates novel aspects like job creation in smaller towns, business openness, and gross wages for women, reflecting the Indian context. Furthermore, intensity ratios based on revenue adjusted for Purchasing Power Parity (PPP) enable global comparability, emphasizing a well-rounded perspective.Expanding the canvas of transparency, the BRSR framework now extends its embrace to the value chain. This holistic approach paints a comprehensive picture, incorporating the top upstream and downstream partners that collectively contribute to 75% of purchases and sales. Further, listed entities must report the KPIs in the BRSR Core for their value chain to the extent it is attributable to their business with that value chain partner. Such reporting may be segregated for upstream and downstream partners or can be reported on an aggregate basis.A Gradual Unfolding: Adaptation and AssuranceSEBI’s strategy ensures seamless adaptation. Top 1000 entities adopt updated BRSR in FY 2023-24, setting stage for further transitions. BRSR Core assurance escalates from top 150 to 1000, reflecting careful responsibility.Guardians, listed entity boards, ensure assurance providers’ competence, integrity, and no conflicts. BRSR Core’s assurance fortified with integrity and expertise as it evolves.Assurance service creates opportunities for Chartered Accountants, aiding BRSR report with true disclosures. They assure BRSR core principles with expertise.Data Collation Method for BRSRPreparation of BRSR requires a systematic approach to collect, analyze, and present data from various departments. To achieve accurate and meaningful reporting of ESG performance, companies must adopt data-driven strategies that enable them to measure and communicate their progress effectively.Data Sources and Diversity: Companies draw data from diverse sources across their operations. For instance:Environmental Impact: Data on energy, emissions, water use, waste, and resources comes from manufacturing, supply chains, and facilities.Social Initiatives: Information on employee welfare, safety, diversity, community engagement, and philanthropy is collected from HR, CSR, and outreach.Governance Practices: Data on board diversity, compensation, compliance, and risk is gathered from legal, compliance, and executive teams.Data-Driven Strategies: Employ tools like integrated systems, automation, and KPIs to ensure accurate data collection, consistency, and efficient reporting.Inter-Departmental Collaboration: The BRSR process requires close collaboration among departments to provide a comprehensive view of the company’s ESG journey. Examples of collaboration include:Collaborating with suppliers and vendors to ensure sustainable sourcing practices and responsible supply chain management.Aligning financial data with sustainability metrics to showcase the financial impact of ESG initiatives.Collaborating with communication and PR teams to accurately convey the company’s ESG achievements to stakeholders through the BRSR report.Voluntary Implementation and its BenefitsWhile BRSR reporting is mandatory for the top 1000 listed companies, voluntary adoption by other businesses can yield substantial advantages. Voluntarily embracing the BRSR framework allows companies to proactively enhance their ESG practices, positioning them favorably in the eyes of investors, consumers, and regulators. This, in turn, can lead to improved market reputation, reduced regulatory risks, and increased access to capital.ConclusionIn conclusion, the Business Responsibility and Sustainability Reporting (BRSR) framework introduced by SEBI stands as a powerful catalyst for positive change in corporate practices. By emphasizing transparency, accountability, and a comprehensive approach to ESG considerations, BRSR guides Indian corporations toward a more responsible and sustainable future. As companies collate data, leverage data-driven strategies, and foster collaboration across departments, they not only fulfill regulatory requirements but also embrace a culture of continuous improvement. With the evolution of the BRSR framework, businesses are poised to embark on a transformative journey that aligns economic growth with societal well-being, contributing to a more ethical and sustainable world.“True leadership isn’t just about profits; it’s about making a positive impact on the world. We measure success not only by financial gains but also by the well-being of our planet and the betterment of society.”1 The SRMM version 2.0 can be accessed through - https://resource.cdn.icai.org/74106srsb59994.pdf. Various other initiatives of SRSB can be viewed at https://www.icai.org/post/sustainability-reporting-standards-board.Author may be reached at: eboard@icai.in

The global landscape of sustainability reporting has undergone significant transformation in recent years, driven by the growing recognition of the urgent need for corporate sustainability and transparency. Since the early 1990s, the need for more robust frameworks towards sustainability has gained a high demand and concern. Several reporting standards and frameworks exist to guide organizations in disclosing their sustainability performance. These frameworks provide guidelines for reporting on various ESG topics and help to ensure consistency and comparability in reporting.The primary objective of this research article is to conduct a study and analysis of the prevailing frameworks used for sustainability reporting. Sustainability reporting has emerged as a critical tool for organizations to communicate their environmental, social, and governance (ESG) performance to various stakeholders, including investors, customers, employees, and regulators. The research aims to delineate the evolution and enhancement of these frameworks, providing a holistic understanding of the current benchmarks and methodologies in the field of sustainability reporting.Literature ReviewTo achieve the objectives, a comprehensive examination of existing academic articles, industry reports, and white papers on sustainability reporting to understand the background and foundational concepts has been done. This also entails a closer look at prominent standards such as GRI, SASB, TCFD, IFRS Sustainability Disclosure Standards, and regional initiatives like SEBI’s BRSR and European Green Deal.MethodologyReports and publications from recognized global bodies and organizations, such as the World Economic Forum, United Nations, and regional regulatory entities, were delved into. An in-depth study was conducted on the guiding principles, methodologies, and criteria set by prominent standards such as GRI, SASB, TCFD, and IFRS Sustainability Disclosure Standards. This elucidated the primary goals and evaluation metrics that each framework championed.Regional InitiativesRegional forerunners in sustainability reporting were studied by exploring initiatives like SEBI’s BRSR in India and the European Green Deal. This offered insights into how different regions adapted global standards to their unique socio-economic contexts.Based on above, the authors present below the global landscape of sustainability reporting ecosystem.The inception of the Global Reporting Initiative (GRI) in 1997 marked the advent of structured sustainability reporting. Departing from mere prescriptive guidelines, GRI introduced comprehensive principles that spurred a global discourse on the essence of sustainability within corporate contexts, along with mechanisms for its quantification and explication.The establishment of the Sustainability Accounting Standards Board (SASB) in 2011 underscored the acknowledgment that diverse industries, with their unique challenges and impacts, necessitated tailored reporting standards. For instance, concerns pertinent to a technology conglomerate, such as digital waste management and energy consumption, distinctly diverge from those pertinent to an agricultural entity, which may prioritize water conservation and soil health. Further broadening the purview, the International Integrated Reporting Council (IIRC) championed integrated reporting, highlighting the intricate operational nexus of businesses, enmeshing a spectrum of capital forms ranging from financial assets to human resources. The IIRC’s initiative ensured the preservation of financial metrics’ significance while preventing the overshadowing of far-reaching consequences on society and the environment.Amid the proliferation of diverse standards, a resonant call for harmonization emerged. This aspiration materialized in the collaborative efforts of GRI and SASB in 2016, aiming to infuse greater consistency into the realm of sustainability reporting. Concurrently, as global dialogues on climate change garnered momentum, the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) by the Financial Stability Board in 2015 illuminated the economic dimensions of environmental challenges, bridging the gap between fiscal stability and sustainable practices.In parallel, the Carbon Disclosure Project (CDP) advanced the cause of corporate transparency concerning carbon emissions. Simultaneously, amidst the evolution of regulations, the hypothetical “Dodd - FrankWall Street reform” emerged, accentuating the intertwined nature of financial infrastructure and sustainability imperatives.On the international stage, the United Nations Conference on Climate Change emerged as a potent catalyst, rallying nations and businesses to take resolute actions against impending environmental perils, accentuating the collective nature of global adversities and their resolutions.The proactive stance of prominent stock exchanges, such as the London Stock Exchange and Nasdaq, stands as a noteworthy development. Their decision to integrate Environmental, Social, and Governance (ESG) disclosures into listing prerequisites signified a definitive paradigm shift within the business narrative. This strategic maneuver reinforced the notion that advocacy for sustainability transcends moral obligations and is, in fact, a sagacious business strategy.Currently, there are several frameworks available for organizations to guide their sustainability reporting practices. These frameworks provide guidelines, principles, and indicators to help organizations measure, disclose, and communicate their environmental, social, and governance (ESG) performance. Some of the widely recognized frameworks of sustainability reporting include:Global Reporting Initiative (GRI) Standards“The GRI Standards facilitate the public disclosure of an organization's major influences on the economy, environment, and society, encompassing aspects such as human rights and the organization's management of these effects.”GRI is a non-profit organization that develops sustainability reporting standards. The GRI Standards are one of the most widely used standards for sustainability reporting across the globe (more than 10,000 organisations use it). The GRI Standards facilitate the public disclosure of an organization’s major influences on the economy, environment, and society, encompassing aspects such as human rights and the organization’s management of these effects.The Standards are a set of interconnected standards that are organized into three categories:Universal Standards: The Universal Standards are the foundation of the GRI Standards and apply to all organizations.Sector Standards: The Sector Standards are tailored to specific industries and provide additional guidance on how to report on sustainability impacts.Topic Standards: The Topic Standards focus on specific topics, such as human rights or environmental impact.Sustainability Accounting Standards Board (SASB) StandardsThe Sustainability Accounting Standards Board (SASB) is a non-profit organization in the United States that was founded in 2011. Its goal is to develop sustainability accounting standards for companies to disclose material information that is helpful for investor decision-making. Table 1 summarizes the five categories of SASB standards:Table 1: Five Categories of SASB StandardsCategoryDescriptionEnvironmentFocuses on the environmental impacts of a company’s operations, such as greenhouse gas emissions, water use, and waste disposal.Social capitalFocuses on the social impacts of a company’s operations, such as employee relations, community engagement, and human rights.Human capitalFocuses on the human resources of a company, such as workforce diversity, training and development, and employee compensation.Business model and innovationFocuses on the business model and innovation of a company, such as product sustainability, supply chain management, and risk management.Leadership and governanceFocuses on the leadership and governance of a company, such as board composition, executive compensation, and internal controls.The SASB Standards are created with the objective of identifying and establishing consistent disclosure requirements for the sustainability issues that have the greatest relevance to investors when making decisions. These standards are specifically tailored to each of the 77 industries, acknowledging that different sectors may have varying ESG considerations. The aim is to enable investors to obtain consistent and comparable ESG information across companies within the same industry.The Task Force on Climate-related Financial Disclosures (TCFD)The TCFD was launched in 2015. It is an international body that develops recommendations for climate-related financial disclosures. TCFD’s recommendations are designed to help companies disclose the financial risks and opportunities that are associated with climate change.The TCFD provides a framework for companies and organizations to disclose climate-related information in their financial filings and reports. It recommends that organizations disclose information across four key areas:GovernanceStrategyRisk managementMetrics and targetsThe framework encourages organizations to consider both the physical risks associated with climate change, such as extreme weather events, as well as the transition risks arising from efforts to mitigate climate change, such as changing regulations and market shifts. This allows investors, lenders, insurers, and other stakeholders to make more informed decisions and allocate capital in a way that aligns with the goals of the Paris Agreement and the transition to a low-carbon economy.The IFRS Sustainability Disclosure StandardsThe International Sustainability Standards Board (ISSB) has been established by the International Financial Reporting Standards (IFRS) Foundation on 3 November 2021. The standards set up by ISSB builds on the foundation of other existing reporting frameworks such as SASB Standards, the Task Force on Climate-related Financial Disclosures (TCFD) etc. ISSB has recently issued 2 standards called as IFRS S1 and IFRS S2.IFRS S1 is a standard targeting the incorporation of sustainability-related financial disclosures into the reporting landscape. Slated for application in annual reporting periods starting from 1 January 2024, it aims at intertwining financial and sustainability-related reporting. While early adoption is permitted, it’s contingent upon the concurrent application of IFRS S2, which centers on climate-related disclosures. Essentially, it aims to provide insights to users of general-purpose financial reports when they are considering investing in or allocating resources to a reporting entity. The standard mandates entities to divulge information regarding any sustainability-related risks and opportunities that bear a conceivable impact on various financial aspects. These aspects span an entity’s cash flows, its financing avenues, and its cost of capital, segmented across short, medium, or long-term horizons.IFRS S1 necessitates entities to expound on several key elements related to their sustainability landscape:Governance: Entities need to shed light on the internal mechanisms – processes, controls, and oversight systems – they have instituted to supervise sustainability-associated risks and opportunities.Strategic Outlook: This involves articulating the entity’s strategic roadmap to navigate and manage the identified sustainability risks and opportunities.Identification & Assessment: IFRS S1 mandates a clear elucidation of the protocols an entity employs to pinpoint, evaluate, rank, and keep tabs on sustainability-centric risks and opportunities.Performance Metrics: Entities are required to report their performance metrics vis-à-vis sustainability-related risks and opportunities. This encompasses both the progress trajectory towards internally set benchmarks and compliance with any external legal or regulatory stipulations.IFRS S2 requires entities to disclose pertinent information about climate-related risks and opportunities. This is to furnish insights that are instrumental for users of general-purpose financial reports when they make resource allocation or investment decisions concerning the entity. IFRS S2 comes into play for reporting periods starting on or after 1 January 2024. If adopted earlier, it necessitates simultaneous application of IFRS S1, which focuses on broader sustainability-related financial disclosures. The standard requires entities to present information on climate-related risks and opportunities that might foreseeably influence the entity’s financial positions. This incorporates implications on cash flows, avenues of financing, and the overall cost of capital across various time horizons - short, medium, and long-term.IFRS S2 zeroes in on two primary domains of climate-related risks:Physical Risks: This pertains to tangible and direct threats posed by climatic changes to the entity.Transition Risks: These risks emerge from the broader transition to a low-carbon economy, encompassing regulatory, technological, and market shifts.IFRS S2 requires disclosures around the following aspects:Governance Structure: Entities should elucidate the internal systems – encompassing processes, control mechanisms, and oversight procedures – set up to manage and oversee climate-centric risks and opportunities.Strategic Blueprint: Entities are expected to provide a comprehensive strategy outlining how they intend to navigate and leverage the identified climate risks and opportunities.Risk Management Integration: Entities need to elaborate on their methodologies for spotting, evaluating, ranking, and tracking climate-related risks and opportunities. Moreover, it’s pivotal to explain how these methodologies mesh with the broader risk management framework of the entity.Performance Assessment: A critical component entails entities sharing their achievement trajectory concerning climate-related matters. This not only covers progress towards self-imposed goals but also compliance with any external regulatory benchmarks.The United Nations Conference on Trade and Development (UNCTAD)UNCTAD is a long-standing intergovernmental organization that was established by the United Nations General Assembly in 1964. As a permanent body, it serves as a forum for member countries to discuss and coordinate policies related to trade, investment, development, and other economic issues. UNCTAD has a long history of working on sustainability issues, and its work in this area is guided by the 2030 Agenda for Sustainable Development.UNCTAD’s work on sustainability is important because it helps to ensure that trade and development are carried out in a way that is compatible with the environment and social justice. UNCTAD’s work also helps to promote the implementation of the SDGs, which are a blueprint for sustainable development for the next decade.UNCTAD’s work on sustainability is ongoing, and the organization is committed to helping developing countries to achieve sustainable development through trade. UNCTAD is the Secretariat of the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR). Currently India holds ISAR 39th session chair.To assist companies in reporting their efforts towards achieving the Sustainable Development Goals (SDGs), UNCTAD initiated a project in 2016 focused on developing a set of baseline core SDG indicators. As a result of this initiative, UNCTAD created Guidance on core SDG indicators, which serves as a practical resource for governments to evaluate the private sector’s contribution to the implementation of the SDGs.The UNCTAD secretariat published a revised training manual on sustainability and SDGs impact reporting. The training manual contains 34 core indicators on the economic, environmental, social and institutional areas. It is a practical tool, intended for all kinds of users, particularly for preparers of reports by Small and Medium Sized Enterprises (SMEs) who want to start their sustainability reporting journey. The manual provides a definition, measurement methodology and potential sources of information for each indicator. It contains useful illustrative examples of indicator calculations and of how companies have provided disclosures on the indicators. It also includes self-assessment questions with solutions and a list of selected references to deepen understanding of these issues.European Sustainability Reporting Standards (ESRS)The European Commission (EC) acts as the executive force within the European Union (EU), steering legislation, policy execution, and oversight. Sustainability governance is a cornerstone of its mandate, shaping the EU’s strategies for environmental and social reform. The European Green Deal is a testament to this commitment, aiming to transition the EU to a sustainable, climate-neutral economy by 2050. This initiative encompasses sectoral changes from energy to agriculture.Equally essential is the Commission’s role in melding sustainability into the financial landscape. The EU Taxonomy Regulation exemplifies this, establishing a framework to identify green economic activities, thereby directing investments to eco-friendly projects and supporting Paris Agreement objectives.Financial reporting standardization is crucial for clarity and comparability. Instruments like the European Single Electronic Format (ESEF) and the European Single Reporting Format (ESRS) have been introduced to achieve this. Within the ESEF, the ESRS standardizes the presentation of financial data in XHTML, enhancing accessibility and analytical ease.The Corporate Sustainability Reporting Directive (CSRD) and ESRS have introduced significant innovations:Double Materiality: It evaluates both an entity’s impact on, and the impact of, sustainability factors on the entity.Prospective Information: Offers a glimpse into future sustainability strategies and expected results.Value Chain Analysis: Insight into both upstream and downstream sustainability aspects.Sustainability Due Diligence: A proactive approach to sustainability, linked with the impending Corporate Sustainability Due Diligence Directive (CS3D) which promotes global value chain sustainability.Sustainability disclosures mandated by the directive are set to undergo third-party verification: Initially, a limited assurance model will be employed, which might elevate to a reasonable assurance framework, with an EU-specific assurance standard in the pipeline.The ESRS seeks compatibility with existing standards, such as ISSB, TCFD, and GRI, aiming for global reporting cohesion. For instance, the ISSB’s IFRS Sustainability Disclosure Standards, although not mandatory in the EU, represent the global push for standardized disclosures.The journey from draft to final ESRS saw several adaptations such as:Materiality Focus: Except for the “General disclosures” standard (ESRS 2), all standards will be materiality-centric.Phased Rollout: The EC added phase-ins to acclimate businesses to the new regime.Voluntary Disclosures: Some EFRAG-recommended data points became voluntary, providing a balance between obligation and flexibility.EU Legal Alignment: The ESRS was tweaked to resonate with EU directives.Global Synchronization: Changes ensured ESRS’s alignment with global standards, focusing on financial materiality definitions.The Indian scenarioThe Securities and Exchange Board of India (SEBI), the country’s market regulator, has played a pivotal role in championing the cause of sustainability reporting. SEBI introduced the Business Responsibility and Sustainability Reporting (BRSR) framework in 2021, superseding the BRRs. This was an effort to align with international disclosure standards, making Indian businesses more globally competitive in sustainability reporting.The framework goes beyond mere regulatory compliance and emphasizes holistic engagement with stakeholders on environmental, social, and governance (ESG) parameters. With its comprehensive reporting format based on global standards, the BRSR framework provides companies with a detailed dual framework to measure, monitor, and disclose their performance in these areas.The BRSR offers two formats for varying corporate profiles. The Comprehensive format, suited for larger companies and Listing Regulations-compliant firms, is divided into three sections and nine principles, scored out of 300 points. Effective from FY 2022-23, it’s mandatory for the top 1000 listed companies by market capitalization. The Lite format, for companies new to reporting, simplifies requirements, promoting broader participation and responsible practices via an accessible entry point with gradual expansion towards comprehensive reporting.The mandatory reporting requirement for the top 1,000 listed companies by market capitalization from FY2022-23 is a pivotal moment in driving ESG-related disclosures in India. In its latest initiatives SEBI has unveiled a sophisticated evolution of the Business Responsibility and Sustainability Reporting (BRSR) guidelines. Central to this enhancement is the introduction of the BRSR Core. This focused subset of the overarching BRSR is embedded with meticulously curated Key Performance Indicators (KPIs), each falling under one of nine meticulously delineated ESG (Environmental, Social, and Governance) categories. These KPIs are architected with a keen sensitivity to nuances inherent in both Indian and broader emerging market contexts. International harmonization has been addressed by integrating intensity ratios that are adjusted leveraging the Purchasing Power Parity (PPP) concept, which is instrumental in achieving equivalency in economic indicators across regions with varying purchasing powers.SEBI has taken another path breaking step of mandating reasonable assurance of BRSR Core in a phased manner starting with top 150 companies in FY 2023-24 and going upto 1,000 companies by FY 2026-27. Moreover, there’s a stringent firewall between the assurance function and any potential conflicts of interest, disallowing them from engaging in parallel commercial endeavors with the entity they are auditing.Listed entities are mandated to align their Annual Reports with BRSR Core stipulations, encapsulating a significant 75% of their transactional volume, be it procurement or sales. This mandates a microscopic view into both upstream suppliers and downstream distributors. Transparency, again, is paramount, with firms required to delineate metrics germane to each cog in their value chain.The sustainability reporting stands board of ICAI has already issued SSAE 3000 which is the first standard in the world for ESG assurance. Contribution of ICAI in sustainability has received appreciation from across the globe in various forums for its efforts on assurance standard, capacity building, issuing sustainability reporting maturity model, issuing social impact standards and many such initiatives.ConclusionThe ever-growing importance of sustainability in the global business arena necessitates robust reporting frameworks. From the GRI Standards that emphasize wide-ranging impacts of organizations on society and environment, to the SASB Standards that specifically target investor-centric concerns, the ESG landscape is diverse in its approach. The TCFD further strengthens the foundation by prioritizing the financial implications of climate change. However, a significant leap has been the inception of the IFRS Sustainability Disclosure Standards, which emphasize intertwining financial and sustainability-related reporting. Both IFRS S1 and IFRS S2 underscore the need for clarity, specificity, and transparency in sustainability disclosures, with a particular emphasis on how these factors influence financial decision-making.The global shift towards sustainability reporting highlights an increasing awareness of business impacts on society and the environment. SEBI’s BRSR framework in India underlines a deep commitment to holistic sustainability principles, propelling Indian enterprises towards greater transparency. Similarly, UNCTAD emphasizes sustainable development, especially in developing countries, providing practical tools for SMEs to report their sustainability efforts. Europe, too, with its European Green Deal and ESRS, showcases a commitment to integrate sustainability into the financial sphere, blending innovation with initiatives like double materiality and value chain analysis. These changes, from SEBI to the European Union and UNCTAD, represent a coordinated global effort to usher in a transparent, just, and sustainable business future. This new era prioritizes long-term sustainability, ensuring businesses contribute to a future beneficial for successive generations and in this journey India and ICAI is set to play a leading role and show the path to the world.Authors may be reached at: mehra.pragati@rediffmail.com and eboard@icai.in

An astonishing 300+ million terabytes of data is generated every day in the information age that we are living in (Duarte, 2023). This data contains greater variety, arriving in increasing volumes and with more velocity. However, Big Data as well as data analytics are still buzzwords in the accounting industry (Herath & Woods, 2021). This, however, doesn’t imply that accountants must not garner knowledge and hone the skills necessary for the analysis of Big Data, and derive insightful information relevant for their domain. It has the potential to open new frontiers of practice for accountants and increase the trust of the stakeholders. However, accountants are themselves not experts on the Big Data and data analytics, which in turn entails the requirement that accountants must be equipped with the necessary skillset for Big Data analysis. Some researchers have even started to advocate that a data analytical course must become a part of the curriculum of the accounting courses. Moreover, it has also opened the frontier for accountants to partner with technical people having complex data analytical skills while performing their duty. However, the realm of Big Data is not free from challenges and risks associated with it, and accountants are expected to be aware of such challenges and risks and provide advisory services as well. An accountant might need to possess advanced data analytics skill and knowledge to thrive and well serve the clients well.Understanding Big Data (BD)BD refers to the huge volume of data that may be in any form. BD can be understood as the data that are so large in volume that traditional data processing system can’t handle its processing, and thus require new technology (Raban & Gordon, 2020). It is the collection of information that the organizations can mine for the purpose of business analytics, product design and development, and other activities through the use of machine learning, predictive modeling, and other advanced data analytics application (Phillips, 2021). Primarily, Big Data is in the raw form, and without any processing it is useless; however, if processed properly, results from the analysis of the Big Data may prove to be valuable. The sources of BD might be various digital channels such as mobile phones, internet, social media, e-commerce, search engines, etc.In the recent times, BD has proven to be a very useful data source for making various business-related decisions, and thus organizations have now started to decipher the raw data into some meaningful information using the latest tools available in the industry. Sectors like retail, banking, investment analysis, fraud detection, operational analysis, customer centric applications, etc. have witnessed huge improvement due to the application of information mined from BD (Nadikattu, 2020).The 5 Vs Characterizing Big DataBD is characterized by 5 Vs, as described below:1. Volume: It refers to the quantity of data. In the year 2016 only, the estimated volume of data generated by the global mobile traffic was 6.2 billion gigabytes (Geeksforgeeks, 2022). We can’t even imagine how this data will be gathered, analyzed, and converted into some meaningful information that will be useful for the stakeholders.2. Velocity: It is the speed at which the data is accumulating. For example, Google processes about 8.5 billion searches in a day. Tools for analyzing BD must be robust and able to analyze the data that is pouring in at a lightening velocity.3. Variety: It refers to the nature of data i.e., structured, semi-structured, or unstructured. Variety of BD is a challenge while performing any analysis.4. Veracity: It refers to inconsistencies and uncertainty in data.5. Value: BD has no value unless it is converted into meaningful information that could be used by the organizations.“Big Data impacts the business world and society at large, only when such data is analyzed and resulting information is put to use in some context.”Benefits of Big Data in the Accounting IndustryBD is not helpful unless and until it is analyzed, and some meaningful interpretation is derived from it. We must use data analytics and visualization tools in order to gain insights from the BD. Big Data impacts the business world and society at large, only when such data is analyzed and resulting information is put to use in some context. It is playing a pivotal role in data analytics, artificial intelligence, machine learning, management, and governance (Sun & Huo, 2021). It is becoming an important instrument for the decision makers subject to proper analysis and extraction of relevant information. Not only internal information like supply, production, financial data, etc. are important for making decisions in the organization; but the realm of big data like customers preferences, market trends, supply chain analysis, social media posts, etc., have also become imperative while making an informed and effective decision in the organizations. Earlier, business decisions were taken based on historical data and some human insight derived from such historical data. However, a prudent decision is now based on the historical data, output gathered from the analysis of BD, and the insights or trends such analysis shows for the forthcoming future.BD has the possibility to impact every aspect of accounting, auditing, tax, and advisory service; the following aspects of BD in the accounting services are mostly characterized as value addition work of the accountants (Boomer, 2018):Accountants can show why competitors are doing better than the client by analyzing BD instead of presenting the ratios only.BD can help the accountants see the bigger picture by predicting customer behavior, identifying red flags, and anticipating economic trends.Sampling will be an old concept, and various tools may be used to test the control against the entire population under study and analyzing the red flags thereon.Core Pillars of Big Data Utilization in AccountingDomain AreaImpact & Functional ApplicationAudit SamplingShift from selective sample testing to comprehensive population-level auditing and real-time automated exception detection.Revenue GenerationUnlocking high-value business advisory frontiers, predictive consumer intelligence, and client growth consulting.Decisions and StrategizingTransitioning from retrospective historical ratios to forward-looking trend forecasting across operations and market behavior.Risk AssessmentDetecting unidentified risks, hidden systemic vulnerabilities, and emerging transactional red flags via data pattern learning.The fusion of massive volumes of data with the latest technology like Blockchain, Machine Learning, and Artificial Intelligence can lead to the development of strong and automated accounting processes (aeologic, 2020).Further, audit has now slowly moved from sample-based technique to data driven population level audit – restructuring the ways of doing audit as well. Accountants are now expected to provide financial advisory service, offering valuable insights that would be helpful in making business decisions rather than performing repetitive accounting tasks only. It has become difficult to identify risks and implement controls to mitigate those risks due to unidentified risks which could be revealed using BD analysis. BD also helps visualize the bigger picture of a given scenario which results in better decision making. BD Analytics could enable continuous audit by identifying exceptions automatically based on the system’s ability to learn the data patterns in BD.Accountants now have access to a vast pool of data. Using the right technique and tools, accountants will be able to forecast the financial performance, sales, demand, and other business-related parameters with higher accuracy than ever before by using both financial and non-financial information available.Further, tax authorities and regulators are taking huge advantage of BD analysis in identifying tax frauds, and other types of financial frauds. They may use the data from social media, intergovernmental bodies, e-commerce activities, etc. in order to identify the fraudulent activities, and take necessary action.Risks and Challenges Associated with Big DataSince we’ve only been discussing the positive aspects of the BD and the fruits of BD analytics, it is also important to discuss some of the issues related to the privacy, storage, deliberate misuse and abuse of BD. Issues of privacy of data has led to the formulation and implementation of General Data Protection and Regulation (GDPR) in Europe, CCPA in US, Digital Data Protection Bill in India and similar laws across the world. Further, amassed with BD, various organizations providing services to the general public might be able to protect the data from outside attacks. However, there is no guarantee that they might not use it for unethical purposes or to manipulate the customer’s interest and behavior – it might alter how someone thinks and controls their behavior as well. The case of Cambridge Analytica in influencing the US presidential elections is a classic example of how organizations having access to advanced data analytical resources which can manipulate the outcome based on their preference.Similarly, one of the major risks associated with BD is that the data is not available in the traditional form which can be easily analyzed using various spreadsheet tools that most of the accountants are acquainted with. Now, the data may be in a structured, semi-structured, or unstructured form. Hence, if accountants do not get acquainted with the latest data analytics tools, there lies the risks of providing inappropriate opinion or advice, or soon they might be struggling to retain the clients or acquire more clients or satisfy the needs of the clients – thereby impairing trust of the stakeholders on the accountants. Due to the size and volume of data, one of the pertinent challenges is the storage and sorting of the colossal amounts of data that’s being generated every moment of time (Herath & Woods, 2021). Further, even if the data is stored, another challenge is related to the tools of analyzing such huge volume of data. Either the tools are not readily available or are expensive and require specialized knowledge and skillset to perform such analysis.“Data analysis has become an integral part of audit and advisory assignments due to their impact on auditing techniques and outcomes.”Tools and Skills for Big Data AnalysisThere are some generalized tools and skills that are essential for the analysis of BD, and they are described in brief in the following points:Data Visualization Tools: Tools such as Tableau, Power BI, and QlikView help accountants visualize complex data, making it easier to identify trends and patterns. These tools are imperative for presenting data-driven insights to the stakeholders and for making informed decisions.Data Analytics Software: Software like Excel, Alteryx, and KNIME are used for data cleaning, transformation, and analysis. Mastering these tools allows accountants to process and analyze large datasets efficiently.Programming Languages: Languages like Python, R, and SQL are essential for data manipulation and analysis. Python and R have extensive libraries and packages for data analysis, while SQL is vital for querying databases. Acquiring these programming skills enables accountants to automate tasks, extract insights from data, and create custom analytics solutions.Machine Learning and Artificial Intelligence: Understanding the basics of machine learning (ML) and artificial intelligence (AI) techniques, such as regression, clustering, and classification, is crucial for accountants to leverage Big Data effectively. Familiarity with ML/AI tools like TensorFlow, scikit-learn, and H2O can help accountants create predictive models, identify anomalies, and detect fraud.Cloud Computing and Big Data Platforms: Platforms like Amazon Web Services (AWS), Google Cloud Platform (GCP), and Microsoft Azure offer Big Data processing and storage capabilities. Accountants should be familiar with these platforms to handle and analyze large datasets, as well as ensure data security and privacy.Data Management and Governance: Understanding data management principles and best practices, such as data quality, data lineage, and data governance, is essential for accountants to maintain the integrity of data and ensure compliance with regulations.Soft Skills: Communication, critical thinking, and problem-solving skills are crucial for accountants working with Big Data, and its multitudes of tools don’t offset the human intelligence that accountants possess. The ability to convey complex insights to non-technical stakeholders and to collaborate effectively within interdisciplinary teams is critical to success in this field.Conclusion and RecommendationAccountants, without having adequate knowledge and skill set to perform data analysis, might lose businesses in the near future. Data analysis has become an integral part of audit and advisory assignments due to their impact on auditing techniques and outcomes. Accountants need strong cutting-edge data analytics skills in order to stay in the business in today’s rapidly changing landscape. BD helps accountants to generate insights that could be valuable to the clients. Instead of generally serving the clients in a traditional way, accountants can now become a partner and advisor to the business of the clients.Finally, it is imperative for the accountants to learn and hone the skill sets required to analyze and interpret BD. It is the role of the accountants to ensure public trust, uphold integrity, and act as a watchdog. BD is restructuring the ways accountants serve their clients. Hence, it is of paramount importance to welcome BD and be ready to analyze and interpret it by embracing the tools necessary for such analysis.Referencesaeologic. (2020, February 6). aeologic. Retrieved from aeologic: https://www.aeologic.com/blog/role-and-impact-of-big-data-in-the-accounting-industry/As Big Data Applications Expand, Accounting Pivots To Keep Up. (2022, September 2). Retrieved from Wiley Efficient Learning: https://www.efficientlearning.com/blog/big-data-accounting/Boomer, J. (2018, September 10). The Value of Big Data in an Accounting Firm. Retrieved from CPA Practice Advisor: https://www.cpapracticeadvisor.com/2018/09/10/the-value-of-big-data-in-an-accounting-firm/31045/Computer Hope. (2021, June 11). Computer Hope. Retrieved from Computer Hope: https://www.computerhope.com/jargon/d/data.htmDuarte, F. (2023, April 3). Amount of Data Created Daily (2023). Retrieved from Exploding Topics: https://explodingtopics.com/blog/data-generated-per-dayElgendy, N., & Elragal, A. (2014). Big Data Analytics: A Literature Review Paper. Springer International Publishing, 214-227.Geeksforgeeks. (2022, June 28). Retrieved from Geeksforgeeks: https://www.geeksforgeeks.org/5-vs-of-big-data/?ref=lbpHerath, S. K., & Woods, D. (2021). Impacts of big data on accounting. The Business and Management Review 12(2), 195-203.Nadikattu, R. R. (2020). RESEARCH ON DATA SCIENCE, DATA ANALYTICS AND BIG DATA. International Journal of Engineering, Science and Mathematics, 99-106.Narayanan, K. (2018, July 17). Innovation. Retrieved from Forbes: https://www.forbes.com/sites/forbestechcouncil/2018/07/17/the-evolution-of-data/?sh=1b3cdbf9c95fPhillips, A. (2021, April 1). A history and timeline of big data. Retrieved from Techtarget: https://www.techtarget.com/whatis/feature/A-history-and-timeline-of-big-dataRaban, D. R., & Gordon, A. (2020). The evolution of data science and big data research: A bibliometric analysis. Scientometrics, 1563-1581.Sun, Z., & Huo, Y. (2021). The Spectrum of Big Data Analytics. Journal of Computer Information Systems, 152-162.Vaughan, J. (2019, July). searchdatamanagement. Retrieved from TechTarget: https://www.techtarget.com/searchdatamanagement/definition/dataAuthor may be reached at: rijal255@gmail.com and eboard@icai.in

Hon’ble FM Smt. Nirmala Sitharamanji had announced setting up of Social Stock Exchange (SSE) in India during her budget speech in 2019. Based on the comprehensive analysis of the experiences, structures, and learnings from SSEs across the world, the SSE framework was launched in India by SEBI to meet the aspiration of Social Enterprises in India.SSEs framework in India has been designed so that NGOs can mobilize funds effectively and provide an additional mechanism to institutional and non-institutional philanthropist who are passionate about Social Enterprises.What is a Social Stock ExchangeSSE is an electronic fund-raising platform for Social Enterprises (both not for-profit and for-profit)A regulated platform that brings together social organizations and impact investors/donors.Facilitate funding and growth of social enterprisesIt is a separate segment on National Stock Exchange (NSE)It promotes timely disclosure and Impact assessmentEligibility of Social Enterprises17 Eligible areas have been identified for demonstrating social intent based on Schedule VII of the Companies Act, 2013, Sustainable Development Goals (SDGs) and priority areas identified by Niti Aayog.Shall target unserved or less privileged population segments or regions recording lower performance in the development priorities of central or state government.SE to have atleast 67% of its activities qualifying as eligible activities to the target population. To be established through immediately preceding three-year average of either revenue or expenditure or target population.Eligible ActivitiesList of eligible activities for demonstrating primacy of social impact:Eradicating hunger, poverty malnutrition and inequalityPromoting health care (including mental health) and sanitation; and making available safe drinking waterPromoting education, employability and livelihoodsPromoting gender equality, empowerment of women and LGBTQIA+ communitiesEnsuring environmental sustainability, addressing climate change (mitigation and adaptation), forest and wildlife conservationProtection of national heritage, art and cultureTraining to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sportsSupporting incubators of social enterprisesSupporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity buildingPromoting livelihoods for rural and urban poor, including enhancing income of small and marginal farmers and workers in the non-farm sectorSlum area development, affordable housing and other interventions to build sustainable and resilient citiesDisaster management, including relief, rehabilitation and reconstruction activitiesPromotion of financial inclusionFacilitating access to land and property assets for disadvantaged communitiesBridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protectionPromoting welfare of migrants and displaced personsAny other area as identified by the Board or Government of India from time to timeRegistration and Listing of NPO’s and FPEThe SSE framework enables Not for Profit Organisations (NPO) to register or list with recognised stock exchanges having nationwide terminal. In order to enable NPOs to raise fund, a new security Zero Coupon Zero Principal (ZCZP) has been notified by SEBI which is the first of its kind in the world and has been introduced to allow investors/donors wanting to contribute and create an impact in the Social sector.Further, For Profit Enterprises (FPE) can also mobilise funds through the SSE framework upon fulfilment of existing exchange criteria as applicable to Mainboard/SME/Innovators Growth Platform (IGP) for startups. Exchange will provide distinct identifier to such companies and these companies have to additional submit an Annual Impact Report so that the investors are able to monitor their social and environmental returns along with traditional financial returns.The launch of the SSE is seen as a significant milestone in India’s push towards a more sustainable and inclusive economy. It is expected to provide a fresh impetus to social entrepreneurship in India by attracting more investment in areas that addresses the need of the vulnerable sections.Disclosure Requirement for Social EnterprisesParticularsNPOs registered on SSENPOs with its securities listed on SSEFPSEs registered with SSEAnnual DisclosuresWithin 60 days from the end of FY (format to be specified by SEBI)As applicable under Ch. IV/V of LODRQuarterly DisclosuresNot applicableStatement of utilization of the funds raised from the end of each quarter till such funds are utilized, in the manner:• Category-wise amount of money raised & utilized;• Amount remaining unutilizedAs applicable under Ch. IV/V of LODREvent based DisclosuresNot applicableAny event that may have a material impact on the planned achievement of outputs or outcomes and steps being taken by the Social Enterprise to address the same, within 7 days from the occurrence of such eventAs applicable under Ch. IV/V of LODRPolicy for determination of materialityNot applicableTo frame policy for determination of materiality and disclose the same to Social Stock Exchange.As applicable under Ch. IV/V of LODRAnnual Impact ReportAnnual Impact Report audited by a Social Audit Firm employing Social Auditor, to SSE/ Stock Exchange (time period and format to be specified by SEBI)NSE has recently launched its SSE segment with 19 NPOs (source www.nseindia.com) being registered successfully on the platform. The platform has garnered incredible interest from various stakeholders, including social entrepreneurs, investors, and regulators, who see it as a means of achieving the Sustainable Development Goals (SDGs) set by the United Nations. Being the largest Exchange in India, NSE is committed to facilitate the social enterprises to tap the potential of this new segment and has conducted various outreach programs to build the capacity of the NPO, create awareness and enable them to register on the segment. The detailed framework and FAQ’s regarding NSE SSE is available on NSE website.The SSE framework is indeed a pioneering initiative that seeks to create a conducive ecosystem for Social Enterprises. However, to get these Social Enterprises an access to capital markets will require both market revolution along with some regulatory interventions. The ecosystem needs to be aware about the nuts and bolts of the SSE framework and will require assistance and hand holding not only from the Exchanges/SEBI but also from intermediary within them. Further, for this mechanism to flourish the investor/donors should get similar incentive akin to what they are getting today. While this step may be just the beginning to catalyze the growth of social enterprises in India, we are hopeful the entire ecosystem will evolve and become more amenable to address the needs of these enterprises.Author may be reached at: eboard@icai.in

Climate change is one of the gravest challenges facing economies and societies, in the 21st century. According to the World Economic Forum’s (WEF), Global Risks Report 2023, two of the top five most severe risks facing the planet, in the coming decade, concern, ‘failure to mitigate climate change’ and ‘failure of climate-change adaptation’. If left unaddressed, the impacts of the climate crisis can be severe and far-reaching. According to estimates by the World Bank and the World Health Organization (WHO), climate change is expected to push more than 120 million people into poverty by 2030 and cause approximately 2,50,000 additional deaths, per year from malnutrition, diseases and heat stress. If nothing is done to combat climate change, global GDP is estimated to shrink by 18% (compared to a world without global warming), according to a report by the Swiss Re Institute.India is particularly vulnerable to climate risks. Ranked amongst the countries most vulnerable to climate change, it is estimated that heat stress will force India to lose 5.8% of its working hours by 2030, putting 4.5% of the country’s GDP at risk, annually.1Need for financing climate transitionGovernments across the globe are being called upon to respond to the impending climate emergency. Over 190 countries have signed the Paris Climate Agreement, committing to limit global temperature rise, with over 33 countries (and the EU) undertaking targets to reach net zero emissions. India has also announced a target to become a net zero nation by 2070 and committed to achieve about 50 percent of its cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.Achieving these climate commitments requires the mobilization of large quantum of finances to drive climate adaptation and transition. According to a report by the World Economic Forum, an estimated USD 50 trillion in incremental investments is required by 2050 to transition the global economy to net-zero emissions and avert a climate catastrophe. These investments are required to bring-to-market breakthrough technologies in energy efficiency; carbon capture, hydrogen-based fuels, amongst others, and to decarbonize hard-to-abate sectors such as iron & steel and cement. India itself requires an estimated investment of USD 10.1 trillion to reach net zero by 2070 target, with investments of over USD 8.4 trillion needed by its power sector alone.2 While majority of this financing will have to be driven by domestic financial institutions and markets, external financial flows will be needed to plug substantive gaps in financing, in order for India to achieve its climate goals.Role of Green FinanceIt is in this context that Green Finance – structured financial flows that channelize funds to initiatives and projects, which aim to mitigate climate change and contribute to sustainable development, has been gaining momentum, globally. Green financing can take many forms such as green loans; green debt mechanisms; blended finance vehicles; and investments; that all aim to achieve climate positive outcomes. Globally, green finance has played a key role in driving much needed funding to key climate-aligned sectors such as renewable energy, clean transportation, energy efficiency, circular economy, amongst others. According to a report by TheCityUK and BNP Paribas, global green financing, grew over 100 times in the past decade, swelling to $540.6 billion in 2021 from $5.2 billion in 2012 (includes both global borrowing through green bonds & loans, and equity funding through initial public offerings targeting green projects). Despite the growth, a lot more needs to be done to generate the quantum of funding required to achieve global and national climate targets. Governments, regulators and financial institutions have a crucial role to play in mainstreaming green finance and accelerating the shift to low-carbon.Green Finance in India: Key developmentsDespite being in its nascency, green finance in India has witnessed significant traction in the last few years, thanks to several proactive measures taken by the Indian government, regulators and the banking sector.The Government of India has placed green finance at the center of its “Panchamrit” climate transition roadmap and highlighted climate action as a national priority in its 2022-23 budget. As part of its overall market borrowings in 2022-23, the government launched its first sovereign green bonds, raising INR 16,000 crore (USD 2 billion) through two issuances. The proceeds of these issuances will be deployed in public sector projects that help reduce the economy’s carbon intensity. In addition to being oversubscribed multiple times, India’s first sovereign green issuance sold at a ‘greenium’ of 6 basis point versus the benchmark 10-year and 5-year bonds, signaling a strong appetite for domestic green debt issuances.The launch of the government’s Framework for Sovereign Green Bonds and its two successful issuances are landmark initiatives in India’s burgeoning green finance landscape, which will go a long way in acting as crucial benchmarks for domestic players looking to raise rupee denominated green debt. Other initiatives by the government, such as its authorization of 100% annual Foreign direct investment (FDI) for renewable power generation and distribution projects3, and its electric vehicle subsidies, have also played a key role in bolstering flows of green finance to climate-aligned sectors.Green Bonds have emerged as a popular mechanism for raising debt and channelizing finances towards climate-aligned activities. In 2017, India’s Securities and Exchange Board of India (SEBI) was quick to recognize the potential for green bonds and formalized regulations for the issuance and listing of green debt securities. Since then India has emerged as one of the largest issuers of green bonds amongst emerging economies, raising a cumulative USD 43 billion, till date.4 In February 2015, YES BANK issued India’s maiden green bond Infrastructure bond, kickstarting the green bond market in India.The Reserve Bank of India (RBI) has incentivized lending towards green industries and projects by including renewable energy projects under its Priority Sector Lending (PSL) norms. In 2012, the central bank began by including loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-grid renewable energy solutions for households. In 2015, this was expanded to bank loans up to a limit of INR 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, windmills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. In 2020, the limit for such bank loans was further doubled to INR 30 crore. To help build awareness about climate risk and the importance of green finance, amongst financial intermediaries, the RBI published a ‘Discussion Paper on Climate Risk and Sustainable Finance’ in 2022. The banking regulator also issued a ‘Framework for acceptance of Green Deposits’ enabling banks to channelize deposits from customers, towards augmenting the flow of credit to green activities/ projects.Scaling up green financeScaling up international and domestic green finance flows is imperative to achieve India’s timely climate transition. For a thriving green finance ecosystem, 5 core enablers are of most importance – a green finance taxonomy, policy support to emerging green opportunities, capacity building of financial institutions on green products & innovative financial mechanisms, enhanced disclosures, and third-party assurance/verification.The definition of green finance in India, must take into account the Indian context as well as India’s climate ambitions and transition roadmaps. Taking cognizance of this, the Government of India and regulators have already initiated concrete steps towards developing an Indian green taxonomy. The government’s framework for Sovereign Green Bonds provides for eligible green categories, as an interim measure, bringing clarity on what constitutes “green”. With a definition to green, green financial products and mechanisms such as Green Deposits are expected to proliferate.Green finance opportunities are generally not considered on par with traditional ones, owing to their comparative nascency. Policy push and financial & technological innovations would play a key role in addressing market barriers and creating commercially viable green project pipelines, that can provide lucrative opportunities for financiers/investors. Backed by adequate policy support, large scale renewable energy generation has emerged as a commercially attractive avenue. Similar support to other sectors would definitely play a role in tapping into vast range of sunrise sectors such as roof top solar, water and waste, amongst others.Building capacity to integrate climate and environmental parameters into decision-making processes is imperative for financial institutions, to play a crucial role of intermediation and channelizing funds towards climate action in India. RBI’s ‘Discussion Paper on Climate Risk and Sustainable Finance’ has played a key role in stimulating discussions at board and other levels on this crucial subject and accentuated the need for financial institutions to rapidly build capacity, inhouse expertise and governance frameworks.Standardized climate related disclosures are important to address data gaps, being faced by the financiers and investors in assessing overall climate performance of their portfolios and clients/investees. SEBI’s mandatory Business Responsibility and Sustainability Report (BRSR) has provided a much needed comprehensive framework for disclosures, however, the coverage as well as climate related indicators are expected to be further expanded over a period of time.The availability of third-party verification/assurance and impact assessment is crucial to enhance reliability and build trust among financial institutions, investors and other stakeholders. It is equally important that the cost of third-party verification/assurance and impact assessment, does not become a hindrance. While Chartered Accountants are well-versed with financial flows, upskilling them with nuances of sustainable finance accounting could help in making verification services readily accessible for the industry, including Micro, Small and Medium Enterprises (MSMEs), at reasonable cost.Future of Green FinanceThe evolution of green finance will open numerous opportunities on a global scale. Financing of renewable energy projects and electric vehicle (EV) financing are among the many opportunities available for banks to capitalize on. For India and the global community, the path to sustainable finance necessitates a collaborative approach that combines government policy, financial sector innovation, and active participation from all stakeholders. Governments must create an enabling environment by enacting rules and regulations that favor long-term, climate-aligned, investments. Financial institutions also have a major role to play and must progressively integrate climate considerations into their lending and investments decisions to accelerate green finance.The Indian economy is at a point where it needs to grow quickly, but the challenge is to figure out how to incorporate climate considerations into commercial lending and investment decisions, while balancing the needs of credit expansion, economic growth, and social development. While proactive policy support, regulatory intervention, and innovative financial mechanisms, have given India a significant head-start, active participation of all stakeholders would be increasing the momentum and achieving India’s ambitious climate commitments.ReferencesMcKinsey. https://www.mckinsey.com/~/media/mckinsey/business%20functions/sustainability/our%20insights/will%20india%20get%20too%20hot%20to%20work/will-india-get%20too-hot-to-work-vf.pdf. November 2020Council on Energy, Environment and Water. https://www.ceew.in/cef/publications/investment-sizing-india-s-2070-net-zero-target. 18 November 2021Council on Energy, Environment and Water. https://www.ceew.in/press-releases/india-will-require-investments-worth-over-usd-10-trillion-achieve-net-zero-2070-ceew. 18 November 2021CNBC. https://www.cnbctv18.com/economy/indian-issuers-raised-nearly-43-billion-in-green-bonds-from-january-2014-to-march-2023-16859331.htm. 6 June 2023TheCityUK. https://www.thecityuk.com/media/021n0hno/green-finance-a-quantitative-assessment-of-market-trends.pdf. 31 March 2022World Economic Forum. https://www.weforum.org/reports/global-risks-report-2023/. 11 January 2023Swiss Re Institute. https://www.swissre.com/media/press-release/nr-20210422-economics-of-climate-change-risks.html. Swiss Re. 22 April 2021World Economic Forum. https://www.weforum.org/agenda/2021/09/how-will-we-fund-the-shift-to-a-more-sustainable-future-4-experts-explain/. 17 September 2021Make in India: https://www.makeinindia.com/sector/renewable-energyAuthor may be reached at: eboard@icai.in

Robotic process automation (“RPA”) refers to a set of modular software programs (or “bots”) to complete structured, repeatable, and logic-based tasks by mimicking the actions taken by human personnel.Usage of Robotic Process Automation tools has turned out to be one of the key productivity indicators for all the organizations. Finance, Sales, Marketing, Procurement, Human resource irrespective of the functional domains, Bots and other tools are major enablers in the current set up globally. Focus over RPAs governance has increased significantly over the years due to large scale usage. This is reaffirmed by Gartner projection of Worldwide spending on RPA software to reach $2.9 Billion in 2022 which is an increase of 19.5% from 2021.Benefits of Using RPA ToolsThese are some of the key benefits which has led organizations to adopt Robotic Process Automation in their critical business processes:Increased efficiency and Productivity: RPA can work continuously 24X7 without fatigue, with consistency resulting in faster turnaround times and increased productivity.Cost Effectiveness: RPA can reduce labor spends resulting in cost savings for organizations.Improved accuracy: RPA can reduce the risk of errors and improve the accuracy of tasks, as it follows predetermined/predefined rules.Enhanced customer service: RPA can help organizations to respond to customer inquiries and requests speedily leading to improved customer satisfaction.Improved compliance: RPA can help organizations to adhere to regulations and comply with industry standards, as it follows predetermined/pre-defined rules and processes.Greater scalability: RPA can be easily scaled up or down to meet the changing needs of the organization.Enhanced data security: RPA can help organizations to protect sensitive data through defined rules, standard processes and automating tasks.Increased employee satisfaction: RPA can help to alleviate the burden of strain, fatigue and inconsistency to employees, allowing them to focus on more objective and qualitative work.“RPA can help organizations to adhere to regulations and comply with industry standards, as it follows predetermined/pre-defined rules and processes.”Practical Applications across FunctionsFunctional DomainAutomated Processes & WorkflowsAccounting and FinanceOrder to Cash / AR: Credit analysis, Sales order processing, Customer MDM, Order entry, Reports by segments.Procure to Pay / AP: 3-way match, PO issuance, Invoice receipt, Vendor master, Payment process, Duplicate payment Tracking.Record to Report / R2R: Monthly close, Treasury and tax, Financial statements, General ledger, Journal entry processing, Inter-company accounting, Account reconciliations.Human Resources (HR)Master data management, Payroll Processing, Journal Entries, Updating Personnel Information.Information Technology (IT)Active Directory, File systems, FTP management, Automated installations, Server/application monitoring and alert management, Service desk management, Notification & escalation, VMware integration, Data movement, Provisioning, Configuration management, Routine maintenance.Audit and ComplianceTesting scripts / Automation Audit Tools, Continuous Monitoring Tools, Automated Reporting and Scheduling, User Provisioning and De-provisioning Controls, Data Consolidation and Upload.RPA as an Audit ToolAs organizations are embracing digitization, Auditors would have multiple opportunities to save a lot of man-hours by employing RPA and related Machine Learning and Artificial Intelligence tools and gain advantage of technologies. These would help the auditor to have deep focus and conduct more cutting-edge analysis of risks during the audit process.Risk Assessment: RPA can be used as a tool to conduct risk assessments (for both Statutory Audits/Internal Audits) to identify different types of risk (strategic, operational, financial and compliance risk). RPA can be used to design and develop Risk Assessment models which help in assessing risks objectively and help in framing risk mitigation actions.Field Work: RPA can be used to:Automate audit testsConsolidate operational dataReview supporting documentationPerform complex analytical reviewsIdentify process exceptionsPerform Continuous MonitoringRun pre-defined automated scripts to identify potential fraud transactionsBuild checks for ensuring quality of audit documentationDerive samples based on sets of rules from large population datasetsSave effort, time, and cost without compromising on quality and audit objectivesAudit Closure and Follow up: RPA can be used to automate communication and follow up of audit findings with auditees.Risks in Adopting RPAAlongside the benefits, embedded risks must be carefully evaluated and addressed while adopting Robotic Process Automation (RPA) in an organization as well as when RPA is used as an Audit tool by Auditors. Some of the key risks include:Dependency on technology: RPA relies on technology to automate tasks, which means that there is a risk of disruption if the technology fails or is not available. This can have a significant impact on the organization’s operations and may require contingency plans to be in place.Data security: RPA relies on the use of data, which means that there could be risks of data breaches or unauthorized access to sensitive data. It’s important to implement robust security measures (driven through policies) to protect against these risks.Compliance risks: RPA has to be designed to comply with regulations during implementation. It’s important to carefully assess the impact of RPA on compliance and ensure that the implementation is compliant in line with statutory requirements from time to time.Change management: RPA can significantly change the way work is done, which can be disruptive for employees, their way of working, processes to be adhered to and may involve significant change management efforts. It’s important to carefully plan and communicate the changes to stakeholders regularly to ensure that they are successful.Cost: Implementing RPA can be expensive, as it requires the purchase of software licenses, hardware infrastructure and continuous training to staff. It’s important to carefully assess the costs and benefits of RPA to ensure that it is a cost-effective solution.Overall, it’s important to carefully assess the risks and benefits of RPA and to implement robust measures to manage these risks before being adopted in any organization.“RPA can significantly change the way work is done, which can be disruptive for employees, their way of working, processes to be adhered to and may involve significant change management efforts.”Business Readiness to Adopt RPAAdvantages of using RPA tools are no doubt attractive. However, before RPA implementation, business needs to conduct proper due diligence on readiness to adopt RPA:Business Requirements: The organization should have a clear understanding of its business expectations and how RPA can help to address those expectations. This may include identifying specific processes that can be automated, as well as the potential benefits of automation. Business Environment may vary between divisions and this needs to be clearly captured as part of business requirements.Process Complexity: RPA is most effective for automating repetitive, rules-based processes. If the process is complex or involves a high degree of decision-making, it may not be suitable for automation.IT Infrastructure: The organization should have the necessary IT infrastructure in place to support RPA, including hardware and software requirements.Data Veracity: RPA requires accurate and reliable data to function effectively. The organization should ensure that the data needed for automation is available, of good quality and validated by data owners.Culture and Change Management: The organization should have a culture that is open to and supportive of change, as well as a plan in place for managing the transition to RPA.Skills and Resources: The organization should have the necessary skills and resources in place to implement and maintain an RPA solution. This may include hiring or training employees with relevant expertise.Statutory / Compliance Requirements: Specific Compliance requirements like Data Privacy which may be applicable to the organization as well as specific business process must be studied and put in place on time.Scalability: Scalability of the RPA within different internal divisions within the organization.Once decided, Organizations ready to adopt RPA typically have a clear understanding of their business needs, processes that can be automated, and the necessary IT infrastructure and resources in place to support automation and above all an effective governance process for managing of RPA.“Advantages of using RPA tools are no doubt attractive. However, before RPA implementation, business needs to conduct proper due diligence on readiness to adopt RPA.”Scoping of RPA Applications for AuditOrganizations have a plethora of RPA Bots running across different divisions of business spread across. It is not necessary that all the BOTs are relevant for audit. Nature of engagement decides on the scoping of RPA applications as well as ensuring the audit deliverables are in line with the expectation of the stakeholders.Management may engage Auditors to do specific process audit engagements which may be to evaluate existing RPA bots or RPA bots which are in various phases (Design, Implementation, Operational) or RPAs which are specific to certain processes (say HR, Accounts Reconciliations):Design Phase: Management/Stakeholder may engage Internal Audit team or Internal Controls team separately to vet controls and proper governance are included in the design of the RPA tool and environment.Implementation Phase: Management may engage Internal audit or Internal Controls team to perform an Information Technology General Controls (ITGC) readiness assessment before bots are deployed in production to specifically cover areas like security, processing integrity and change management.Operational / Active Phase: Internal Audit is well positioned to perform audit to validate that RPA BOTS are performing reliably and effectively as per the design and development in accordance with the System Development Life Cycle (SDLC) methodology.Audit Engagement Architecture: Business Expectation vs. ScopeProcess Audit PathwayAssurance PathwayFeasibility studyRPA Business case validationProcess Improvements and optimizationEffectiveness of bot operationsEfficiency of automated routinesReliability of RPA systemsKey Risk Drivers and How Auditors Need to Approach Them in RPA AuditAuditors must review RPA deployments across six critical risk driver pillars:RPA GovernanceRPA SecuritySystem in RPA ImplementationSDLC in RPA ImplementationData Management and SecurityCompliances“Good Governance is a system or process that provides systematic approach that incorporates strategic planning, risk management and performance management.”1. Establishing RPA Governance ProcessGood Governance is a system or process that provides systematic approach that incorporates strategic planning, risk management and performance management. Some of the critical aspects which require consideration in this regard are:There exists formally defined policies and procedures over the RPA strategy and implementation.Policies are reviewed and approved periodically to incorporate any changes.Updated Policies are communicated and available to all stakeholders.Individuals tasked with RPA Environment have the necessary skills, competency to sustain the RPA Program strategy. Specific Organizational training is provided to employees deployed in RPA roles.Roles and responsibilities for employees in RPA roles are defined in job descriptions.Vendor Management Program is established which covers the risks to contract and monitor RPA third party vendors.Documented policies and procedures should cover business continuity and disaster recovery plans considering RPA strategy. In this regard, Business Impact Assessment exercise should define critical RPA Processes.BCP and DRP periodic testing along with results documentation should cover critical RPA processes along with their response times. This would provide an outlook on how RPA environment is operating in case of an unplanned disruptive event taking place.In case failures are identified during the testing phase, fallback plans must be in place which provide clearly defined steps and guidelines to be followed.Incident response guidelines should be clear and precise to cover issues arising in RPA environment, ensuring they are identified, assessed and addressed in a timely manner. Escalation matrix should be clearly defined and identified which plays a key role in effective monitoring and timely resolution of issues.Change in Governance, escalation structure needs to be communicated to relevant stakeholders in a timely manner. This needs to be incorporated in standard operating procedures.“Vendor Management Program plays a key role in third party vendor related risks in this era of outsourcing.”2. RPA SecurityCorporations need to address the security needs to guard the RPA environment from external/internal threats, malware in the ever-changing scenarios. Critical Security features are listed below:Firewalls are implemented, tested, and monitored regularly.Advanced encryption standards are used for data in transit as well as data at rest.Organizations are storing their data in the cloud, which means cloud security is essential. Encrypted storage helps to maintain the privacy of that data. Users should ensure that data is encrypted in-flight, while in use, and at rest in storage.Intrusion Detection systems / Intrusion prevention systems (IDS/IPS) are implemented and monitored regularly for any breach attempts.Strong Authentication Methods (Multi-Factor Authentication - MFA) are applied for managing RPA bot access.Privilege Accounts (Super user Access) usage is minimal and restricted to few users based on specific needs. Their usage is regularly monitored.Bot password is encrypted and cannot be accessed by company personnel. Any communication performed by the robot across different networks is encrypted.Vulnerability Assessment should be done by independent third-party professionals.Access removal ensures timely and immediate removal of users who are out of system or organization.Access reviews should be conducted on a regular basis and should extensively cover access provisioning rules and permissions.Physical access to the location hosting the RPA should have restricted access.Periodic review and monitoring should be conducted on physical access logs to ensure restricted access is enforced.Physical Facility also needs to follow regulatory and other certifications (e.g., ISO, EHS). This in a way ensures that minimum/standard requirements for application of BCP and DRP will be met.Incremental backups of RPA environment need to be done regularly in line with business criticality. Backup procedures are defined and listed out in standard documentation.Monitoring tools are implemented to capture and notify critical system health issues, errors in scheduled bot runs, and performance issues affecting the RPA environment. These incidents and failures are appropriately identified, documented, escalated, and remediated in a timely manner.3. Review of System Change ManagementA review of the system change management control is a process of evaluating and analyzing the controls in place to ensure the effectiveness, efficiency, and compliance of the system change management process in an organization. This can be done to identify any areas for improvement and to ensure that the controls are aligned with the needs and goals of the organization. There are several steps that can be followed when conducting a review of the system change management control:Define the scope of the review: It’s important to clearly define the scope of the review, including the specific systems and controls that will be evaluated.Gather data: To conduct the review, it will be necessary to gather data about current system change management controls, including information about the controls themselves, tools and technologies used, and control outcomes. This can be done through interviews, surveys, and other data-gathering methods. Care must be taken to ensure authenticity of data source.Analyze data: Once data has been gathered, it’s important to analyze for its purpose, integrity, representation, and veracity. These would get reflected through identifying trends, patterns, or areas where controls are not meeting organizational needs.Develop recommendations: Based on analysis of the data, it will be necessary to develop recommendations for improving system change management controls. These recommendations should be specific, actionable, and aligned with organizational goals.Implement recommendations: Once recommendations have been developed, it will be necessary to implement them to improve system change management controls. This may involve updating policies, procedures, and tools as well as providing training to ensure that changes are successful.4. SDLC in RPA Implementation and MaintenanceManagement should have a structured way of assessing which processes are suitable for automation. The company has systems development life cycle (SDLC) policies and procedures in place that are updated on a periodic basis. The benefits of RPA may not outweigh the cost of investment, and the creation of multiple robots may lead to duplication of efforts and disjointed RPA environment.Factors to consider before RPA implementation for a process:Nature of process (Complex/simple, Priority, Structured/Unstructured)Degree of decision making involved / SubjectivityCost-benefit AnalysisHuman intervention requirementsSecurity and Confidentiality considerationsStability of the underlying processData Source QualitySDLC Implementation Controls:RPA Requirements need to be vetted and approved at appropriate levels before development of bot commences.Standard Documentation should be prepared and available for requirements, design, and implementation plans.Configurations should be as per agreed design and any changes are vetted and approved. Appropriate communication regarding changes should be made to relevant stakeholders who could be impacted.Segregation is in place with respect to Production and development environment.Segregation of duties with respect to access rights is maintained so that code changes and configuration changes are not done by the same person (i.e., person developing the code should not place the change in Production environment).Changes to the RPA after launch in production are authorized, tested, and approved by appropriate Management. Changes covered include changes to automation software and changes to key automation scripts (robots) performed by the software.Version control is maintained before and after implementation of RPA so that changes are labeled, controlled, and prevented from being erroneously used.Rollback procedures have to be considered and integrated into design to ensure minimal damages in the event of change implementation failure.Maintenance activities for RPA environment need to be planned. Checks should be in place to ensure monitoring and review activities are done pre and post completion of maintenance activities.5. Data Management and SecurityData breaches have become a regular occurrence worldwide and have serious repercussions on the running of the business. Data breach average cost increased from USD 4.24 million in 2021 to USD 4.35 million in 2022.RPA accesses, processes, stores, and disposes data to accomplish the task for which it is built and operated. It is imperative that data security is considered at the governance layer. Following aspects are critical while data is considered in RPA Environment:ConfidentialityIntegrityAvailabilityPrivacySafeguards for Sensitive Data:In case confidential/Sensitive data is used, care should be taken to ensure access is restricted and regulated, secure storage is planned (wherever possible confidential data is not stored), and after processing, data is not retained and disposed of in an apt manner.RPA environment should ensure that data integrity is maintained throughout the process. Checks and validations need to be part of design to prevent any errors or data intrusion which may impact integrity, besides ensuring data is processed completely and accurately.Availability of accurate and complete data in a timely manner is a critical factor in the success of the RPA. Data Sources need to be clearly defined.Data retention should be as per policy and compliance requirements.6. Compliance in RPA EnvironmentCompliance in relation to RPA environment can cover different facets and as more automation is happening across functions with fulcrum being data, this area has been evolving:Data Privacy: Vast sensitive information is collected from customers/vendors by businesses at different touchpoints in business operations. This collected sensitive information poses risks to both customers and companies responsible for storing and using it. Data privacy requirements prompt businesses to treat sensitive data with more caution and take proactive steps to strengthen their data management strategies/practices for any information that could be harmful to individuals if breached. The General Data Protection Regulation (GDPR), CCPA: The California Consumer Privacy Act, PCI-DSS, HIPAA, and other regional privacy legislations specifically deal with Data Privacy.Licensing of RPA Bots: In RPA environment, User access and appropriate licensing requirements should be addressed pre and post implementation. Care must be taken to ensure access is provided as per agreed licensing norms.Risk Assessment: Periodically risk assessment needs to be done for identification of potential risks. The identified risks should be evaluated for any significant deficiency in the process/functionality of the Application. Risks identified must be mitigated by way of change in process/system or through preventive/corrective measures.ConclusionWith the evolution of Machine learning and Artificial Intelligence products, opportunities are wide open (albeit risks associated with), Organisations need to gear up to the task of providing adequate risk assurance on these applications. Rise of cyber-attacks has challenged Organisations’ responsibility towards business and has increased liabilities manifold. Systems which are biased, error-prone or used for unethical purposes pose significant reputational risks to the organization that owns it.As we embark on this transformational journey, it is imperative to focus on the basic tenets of: Transparency, Integrity, Accuracy, Completeness and Reliability while evaluating the risks associated with the governance of these applications.Referenceshttps://www.gartner.com/en/newsroom/press-releases/2022-08-1-rpa-forecast-2022-2q22-press-releasehttps://www2.deloitte.com/content/dam/Deloitte/in/Documents/risk/in-ra-auditing-the-rpa-environment-noexp.pdfhttps://www.ibm.com/in-en/security/data-breachhttp://isaca-denver.org/Chapter-Resources/EYRPAAIRiskSlideDeck.pdfAuthor may be reached at: bprashant49@gmail.com and eboard@icai.in

Carbon and its impact on Environment and Natural Resources is a very big issue and concern globally. The whole world is looking towards reduction in carbon emission and have taken pledge for the same.Carbon credits are generated through a process that involves quantifying, verifying, and certifying the reduction or removal of greenhouse gas emissions.Carbon CreditsThe acknowledgment of the importance of decreasing carbon emissions originated with the signing of the Kyoto Protocol under the United Nations Framework on Climate Change (UNFCCC) in 1997. In this accord, participating nations, including India, pledged to constrain and diminish emissions of greenhouse gases (GHGs).Carbon credits are generated through a process that involves quantifying, verifying, and certifying the reduction or removal of greenhouse gas emissions. Such credits issued or received as per government guidelines can be sold to the entity who is not able to reduce the carbon emission as required under Law / Protocol.This article deals with this “New age concept” of carbon credits w.r.t Goods and Services Tax (GST).Taxability of Carbon Credits under Indirect TaxesGST is a consumption-based tax. Going by the legislative scheme of the GST laws, GST is applicable either on goods or services or both. Thus, anything which is neither “goods” nor “services” can never be subject to levy of GST. Being so it needs to be examined whether Carbon Credits are goods or services for levying GST.Section 2(52) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) defines the term “goods” as “every kind of movable property other than money and securities but includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.” Further, the term “services” has been defined under section 2(102) of the CGST Act as “anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.”It becomes evident that both money and securities have been explicitly excluded from the categories of goods and services. Consequently, if carbon credits meet the criteria of being classified as “money” or “securities,” their supply would fall beyond the purview of taxable transactions under GST.Whether Carbon Credits can be moneyAn analysis of the definition of “money” under Section 2(75) of the CGST Act suggests that Carbon Credits do not meet the criteria for being classified as money, nor do they fit into the specific instrument categories mentioned in the definition. Furthermore, it is important to highlight that the Reserve Bank of India has not acknowledged the use of such certificates as a valid method for fulfilling obligations.Whether Carbon Credits are Securities“Securities” under GST are the same as defined in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956 (“SCRA”) i.e. “Securities include-(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.;(ia) derivative;(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;(ic) security receipt as defined in clause (zg) of section 2 of the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;(id) units or any other such instrument issued to the investors under any mutual fund scheme;(ii) Government Securities;(iia) such other instruments as may be declared by the Central Government to be securities; and(iii) rights and interest in securities”Carbon Credits may be treated as “Securities” as they appear to fall under the wide term, “other marketable securities of a like nature in or of any incorporated company or other body corporate”.Whether CERs can be goods:To be classifiable as “goods”, it must be movable, marketable and must not be money or securities. These criteria have been extensively discussed by the Hon’ble Supreme Court in various cases. In Vikas Sales Corporation, Hon’ble Supreme Court dealt with the issue of taxability of “replenishment licenses or R.E.P. licences” issued under the Export Import (EXIM) policy to provide to the registered exporters the facility of importing the essential inputs required for the manufacture of the products exported. It was held that the license is not only a beneficial interest in respect of a movable property not in possession of the person but is itself a valuable right which is freely transferable. The import license, therefore, must be treated as merchandise and clearly falls within the definition of “goods”. In Yash Overseas, the Apex Court held that Duty Entitlement Pass Book (DEPB) is identical to REP licenses and qualify as goods on the basis that it is freely marketable and have an intrinsic value.From the above discussion, it can be said that Carbon Credits may qualify as “goods” as they have intrinsic value and are movable and freely transferable and tradable. Moreover, Carbon Credits always have had a market of their own.The issue pertaining to determine the nature of Carbon Credit/CERs as goods, was deliberated under the Notification No. 256/CDVAT/2009/43 dated 13.01.2010 issued by the Commissioner, Trade and Taxes, Delhi VAT under section 85 of the Delhi VAT 2004. The Commissioner analyzed the definition of “goods”, “dealer” and “sale” under the Delhi Value Added Tax (DVAT) Act, 2004. Thereafter, vide the said Notification, CERs were declared as goods under the DVAT law.Further, Carbon Credits were declared as goods under the Securities Contracts (Regulation) Act, 1956. The National Commodity & Derivative Exchange Limited (NCDEX) vide the Circular No. NCDEX/TRADING-035/2008/080 dated April 7, 2008, notified the launch of future/forwards contract pertaining to Carbon Credit. Further, pursuant to the repeal of the Forward Contracts (Regulation) Act, 1952 (FCRA) and amendment to the Securities Contracts (Regulation) Act, 1956 (SCRA), the Central Government vide Notification No. S.O.3068(E) dated September 27, 2016 notified carbon credits as goods for the purposes of clause (bc) of section 2 of SCRA. i.e. to be treated as commodity derivative which is not a security.Carbon Credits, also, appears to be alike Priority Sector Lending Certificates (PSLCs) and Renewable Energy Certificates (RECs). PSLCs are tradable certificates issued against priority sector loans of banks so as to enable banks to achieve their specified target and sub-targets for priority sector lending through purchase of these instruments in the event of a shortfall and at the same time incentivizing the surplus banks to lend more to these sectors. Therefore, it is evident that CERs, RECs and PSLCs are the certificates having intrinsic value traded in the market.A new section 194Q was introduced vide Finance Act, 2021 to Income Tax Act, 1961. It applies to any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding fifty lakh rupees in any previous year. It has been clarified vide Circular No. 13 of 2021 dt. 30.06.2021 that transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the Central Electricity Regulatory Commission (CERC) are not covered under section 194Q.This amendment also suggests that the RECs need to be considered as goods. If this view is accepted, then CERs may also need to be treated as goods only.Further, the Central Government issued the Circular No. 34/8/2018-GST dated 01.03.2018 and Circular No. 46/20/2018-GST dated 06.06.2018, whereby the applicability of GST on PSLCs and RECs has been clarified. The government vide the latter clarified that RECs, PSLCs etc. are classified under heading 4907 and will accordingly attract GST @ 12% instead of 18% under the residual head, which was earlier clarified by the Circular No. 34/8/2018-GST dated 01.03.2018. Further, Ministry of Finance, Department of Revenue vide its Notification No. 8/2021-Central Tax (Rate) dated 30.09.2021 has clarified that applicable GST rate for Heading 4907 is now 18% w.e.f. 1st October 2021.In case GST is paid on purchase of Carbon Credits, input tax credit should be available subject to the provisions of section 16 and 17 of the GST Act.Credit of GST paid on Carbon Credit purchaseThe question will arise as to whether such purchase of Carbon Credits will amount to use in manufacture and hence credit will be available?The plain reading of the provision suggests that the credit of units purchased are ultimately linked to manufacturing process only and hence, credit should be available. However, on the contrary, being in the nature of penalty, credit may be denied. In such cases clarity from Government will be essential and useful to avoid litigation in future.ConclusionGiven the objective of carbon trading, which aims to reduce greenhouse gas emissions and promote the utilization of renewable energy within industries, imposing a tax on the supply of Certified Emission Reductions (CERs) appears ill-suited.Notably, duty credit scrips such as Merchandise Exports from India Scheme (MEIS) and The Service Exports from India Scheme (SEIS), issued under the Foreign Trade Policy (FTP), have been exempted through Notification No. 34/2017-CT(R) dated 13.10.2017. In a similar vein, carbon credits deserve comparable treatment due to their contribution to addressing global warming. It is advisable for the legislative body to take proactive measures to clarify taxability under GST law, and a timely resolution would be highly beneficial.Authors may be reached at: eboard@icai.in

“Evidence shows that we do much less thinking than we believe we do—except, of course, when we think about it.”― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly ImprobableESG, standing for Environmental, Social, and Governance, constitutes a set of criteria wielded by investors to gauge a company’s sustainability and ethical influence. ESG factors have evolved beyond a mere buzzword, becoming essential criteria for investors to evaluate a company’s ethical stance and sustainability. The growing number of the investors seeking resonance between their values and investment strategies. But how precisely does ESG sway company valuation? We will deep dive into the interplay of ESG with company valuation and its consequential significance.ESG Factors’ Impact on Company ValuationThe clout of ESG factors on company valuation is considerable. Take the environmental facet, for instance, which can reverberate through a company’s reputation and enduring viability. A company with a checkered environmental history might encounter regulatory repercussions or public outcry, denting revenue and deflating valuation. Conversely, a robust environmental track record can magnetize socially conscious investors and positive media endorsement, fanning higher revenue and an elevated valuation. Thus, the companies with a strong environmental track record garner positive attention, while those with a history of environmental lapses may face regulatory penalties and reputational damage, resulting in decreased valuation.Social factors, spanning labour practices and diversity, similarly exert influence on company valuation. Companies fostering employee welfare and cultivating diverse, inclusive workforces are poised for greater productivity and innovation, translating to augmented revenue and valuation. In contrast, companies with a feeble standing in these domains confront adverse publicity, eroding revenue and a lower valuation.Governance factors, encompassing board diversity and executive compensation, also contribute to company valuation. Companies boasting transparent, accountable governance structures are more alluring to investors, positioning themselves for an elevated valuation. Inversely, companies harbouring governance frailties, like excessive executive pay or a lack of board diversity, risk regulatory actions and negative publicity, sapping revenue and valuation.ESG’s Impetus on Investor DemandThe ESG landscape equally shapes investor demand. Investors inclined towards socially responsible investing gravitate towards companies resonating with their principles. As ESG investment garners more attention, companies accentuating ESG factors are poised for heightened demand for their shares, nurturing an elevated valuation.ESG’s Role in Risk ManagementBeyond influencing valuation and investor interest, ESG factors impact risk management. ESG-oriented companies are primed to address protracted perils like climate change or societal turbulence. By pre-emptively tackling these challenges, companies mitigate vulnerability to potential losses, buttressing their longevity and strengthening their resilience over the long term.The Intersection of ESG and the Bottom Line“Companies prioritizing ESG elements stand to reap amplified share demand, curbed exposure to long-term risks, and augmented revenue, culminating in an elevated valuation.”In essence, ESG factors wield substantial impact over company valuation. Companies prioritizing ESG elements stand to reap amplified share demand, curbed exposure to long-term risks, and augmented revenue, culminating in an elevated valuation. Conversely, those disregarding ESG aspects face reputational tarnishing, dwindling revenue, and a suppressed or diminished valuation.For investors, ESG considerations during valuation offer a compass into a company’s long-term sustainability and ethical resonance. Aligning investments with values through ESG emphasis could potentially yield superior long-term gains. Companies, in parallel, can harness ESG focus to allure socially aware investors, mitigate long-term risks, and, ultimately, fortify their financial foundation.Numerous research studies underscore the strong correlation between ESG and a company’s performance. A solid ESG strategy might signal that investors’ long-term interests are being taken care of. Yet, conventional valuation methods tend to prioritize financial factors, often overlooking the profound impact of ESG on long-term value. Therefore, using an integrated valuation model that accounts for various scenarios and outcomes related to ESG could help investors make more comprehensive investment decisions and improve the balance between risk and potential returns. This may be an area for research for the valuers in the days to come.Prof. Aswath Damodaran in his blog1 observes that if the foundational proposition presented to companies through the ESG lens—that being ethically responsible equates to higher valuation—is indeed accurate, it raises a pertinent question: why is there a need for the entire ESG framework? This perspective delves into the realm of Milton Friedman, a prominent figure often opposed by ESG proponents. According to this viewpoint, if companies were to witness a positive correlation between their virtuous actions and increased profitability and overall worth, the primacy of profit-centric motivations might align with doing good, rendering moral and ethical exhortations secondary. While this perspective might be construed as cynical on my part, it is worth noting that the persistent insistence of ESG advocates on the value-enhancing aspect of being “good” implies a certain uncertainty about the underlying mechanism or truth driving this relationship.The construct for dissecting the influence of ESG factors on value adheres to a straightforward model. If ESG considerations genuinely impact value, they must inherently affect one of four pivotal variables: revenue growth, operating profit margins, reinvestment efficiency (pertaining to the returns on new capacity investments), or risk (through alterations in the cost of capital and the potential for failure). In a prior discourse from the past year, I highlighted the empirical evidence supporting a positive payoff resulting from ESG practices as being notably feeble, if not outright inconclusive. In nutshell he tabulates as under:Aswath Damodaran Model: ESG and Value (Just the Facts!)Value DriverESG EffectEmpirical Evidence SummaryRevenue GrowthFunction of size of total accessible market & market shareNeutral to NegativeThere is little evidence that “good” companies are able to grow faster than “bad” companies, but there is some evidence, albeit anecdotal, that it is more difficult for good companies, in some sectors, to scale up.Operating MarginsDetermined by pricing power and cost efficienciesNegative to PositiveStudies find that “good” companies are more profitable than “bad” companies, but have trouble showing causality, i.e., are good companies more profitable or do more profitable companies find it easier to look good?Growth/Investment EfficiencyMeasure of how much investment is needed to deliver growthNeutralThere are few studies that look at the link between ESG and investment efficiency. There are some that find that “good” companies have higher returns on equity (capital) than bad companies, but also struggle with the direction of causality.Cost of Capital / Cost of EquityRate of return that equity investors demandPositive (for subset of firms)Studies indicate that investor aversion to buying shares in “bad” companies can lead to higher costs of equity for these firms, but the evidence comes primarily from fossil fuel firms.Cost of DebtCost of borrowing money, net of tax advantagesPositive (for subset of firms)Studies indicate that “good” companies are able to borrow money at lower rates, but much of that is isolated to the “green energy” space.Failure RiskChance of grievous or catastrophic event putting business model at riskNeutral to PositiveEvidence indicates that bad companies are more likely to be exposed to crises and catastrophic risk.Source: Aswath Damodaran - The ESG Movement: The “Goodness” Gravy Train Rolls On!Approach to Integrating ESG Factors into ValuationHolistic Examination of ESG Practices: The valuation process should commence with a rigorous review of the company’s ESG practices. An in-depth analysis of the company’s Environmental, Social, and Governance policies, performance, and disclosures should be conducted. This includes a meticulous examination of documents such as the Business Responsibility and Sustainability Report (BRSR) as mandated by the SEBI to identified listed companies, enabling an assessment of the company’s commitment to sustainable and ethical practices.Identifying Materiality: Starting to integrate ESG factors into valuation involves assessing their significance. Given ESG’s subjective nature, identifying key factors is crucial for justified adjustments and clarity. Materiality varies by industry and company, necessitating case-by-case evaluation based on impact likelihood and magnitude. Non-material ESG factors, per the Chartered Financial Analyst (CFA) Institute, don’t affect finances. Some impact long-term finances. Thus, by distinguishing material ESG factors, the valuation process accurately captures the unique challenges and opportunities linked to the company’s sustainability practices. Recognizing that not all ESG factors carry equal weight across industries and sectors, materiality should be identified. This tailored approach ensures that the valuation accurately captures the unique challenges and opportunities associated with the company’s sustainability practices.Future Impact Anticipation: The assessment should extend beyond the present to anticipate the future impacts of ESG factors. An evaluation should be conducted on how evolving environmental regulations, shifting consumer preferences, and broader societal trends could influence the company’s performance, costs, and revenue streams.Risk and Opportunity Assessment: The valuation process should involve quantifying the financial risks arising from inadequate ESG practices and identifying potential opportunities resulting from enhanced sustainability efforts. By factoring in potential regulatory fines, litigation risks, and revenue prospects, the valuation provides a comprehensive view of ESG’s implications on the company’s value.Comparative Analysis: To contextualize the company’s ESG performance, benchmarking against industry peers and established standards should be undertaken. Leveraging ESG ratings and indices, an assessment should be made on how the company’s practices measure up, shedding light on its competitive positioning and appeal to investors.Quantitative Integration: When feasible, quantifiable ESG metrics that align with industry norms should be incorporated. Integration of these metrics into the valuation model addresses the financial implications of the company’s sustainability and ethical practices, enriching the depth of valuation insights.Discounted Cash Flow (DCF) Analysis Reflection: The valuation should seamlessly integrate ESG considerations into the Discounted Cash Flow (DCF) analysis. Adjustment of cash flow projections and discount rates captures the tangible effects of sustainability and ethical practices on the company’s valuation.Weighted Scoring System: To ensure a balanced assessment, deployment of a weighted scoring system that assigns appropriate weights to different ESG factors should be considered. This structured approach ensures that the valuation model encapsulates the holistic ESG landscape.Engagement for Ongoing Enhancement: Beyond the valuation process, advocating engagement with the company’s management to gain insights into their ESG strategy, targets, and action plans is encouraged. This collaboration not only enriches understanding but also cultivates an environment for continuous ESG improvement.Building relationship between ESG and business valuation“While ESG holds significant importance for corporations, asset managers, and investors, a central challenge is the absence of standardized rules for valuing ESG performance.”While ESG holds significant importance for corporations, asset managers, and investors, a central challenge is the absence of standardized rules for valuing ESG performance. The gap between ESG disclosures and financial outcomes widens as companies often keep ESG and financial reports separate, creating a perception of ESG as non-financial. This hinders the articulation of ESG’s value and assessment of its impact on long-term value.IVSC’s Perspective Paper: ESG and Business Valuation stresses seeing ESG as “Pre-financial” rather than “Non-financial” information. Recognizing the intricate link between ESG and a company’s financial strength, this analysis differs from traditional metrics like cash flows and earnings ratios. It encompasses range of factors, reflecting the intricate relationship between ESG and financial performance.For e.g. Pre-financial environmental impacts: May be Consumers’ preference for sustainable products changing the demand for a product of a company or Additional costs and risks in the face of the tightening environmental regulation.Social impact: May be Consumers’ preference for fair trade products changing the demand for a product of a company or Costs on training and development for talent retention, compensations on employee injuries.Governance lapses: May lead to Extra tax payments due to the fines imposed by regulation violation.ESG indeed wields a favourable financial influence, shaping the inherent value of a business. Neglecting this impact can lead to a disparity between financial performance and market value. Consequently, unaccounted intangible assets may accumulate, and long-term value potential may become imbalanced.ESG factors significantly influence a company’s financial performance, reputation, and risk profile, thereby impacting its valuation. Incorporating ESG into business valuation involves identifying relevant risks and opportunities for the company’s business model through ESG ratings, reports, and analyst evaluations. These factors are then quantified for each company. In valuation methods like the discounted cash flow (DCF) or income approach, existing consideration of ESG risks and opportunities in the business plan must be determined to avoid double counting. If not yet included, adjustments are made to planned cash flows. ESG-related risk premiums can also be added to discount rates. Integrating ESG into market-oriented valuations involves identifying and comparing industry-specific ESG criteria and adjusting valuation parameters to reflect the target company’s performance relative to peers. This process is compatible with traditional valuation approaches.Deep Dive into methods for valuation1. Market Approach of valuationAs we all know the market approach for valuation, wherein fair value is determined by referring to comparable companies’ price-to-earnings (P/E) ratio, Price to book and enterprise value etc. For incorporating ESG in this approach, valuers have to incorporate and assess the relevant ESG factors in selecting comparable companies since different rating agencies integrate different Scoring methodologies for ESG.Incorporating ESG scores into credit rating analyses offers a means to evaluate companies’ risk profiles and comparability. Businesses with weaker ESG credentials face elevated risk due to potential inefficiencies in resource management and talent retention compared to their peers. Just as credit risks influence a company’s enterprise value, the severity of ESG risks can also impact its spread yield and expected returns. Consequently, assessing comparable companies using ESG criteria leads to alterations in price multiples.Valuers can incorporate ESG factors into their analysis by adjusting target multiples. Common multiples like price-to-earnings (P/E) and price-to-book (P/B) ratios can be modified by applying a premium or discount to reflect ESG performance. This approach raises the question of calibrating the degree of adjustment. Examining 60 Hong Kong-listed real estate developers, those with better ESG disclosure scores tend to have higher P/B ratios, indicating positive growth prospects and lower earnings volatility. Investors are more willing to pay a premium for high ESG scores. An empirical study shows companies excelling in material ESG factors yield significant alpha returns, reinforcing investors’ inclination to pay more. Thus, a premium should be added to the target multiple for high ESG scores. Additionally, the discount for lack of marketability (DLOM) can be adjusted for private companies due to higher ESG-related risks and information asymmetry. Governance and ESG factors in private company valuation are influential. However, integrating ESG factors requires experienced valuation skills, making the process intricate robust ecosystem to capture ESG data.2. Income Approach of ValuationAs explained earlier, Income approach simply means using the DCF model and integrating ESG factors in this would mean expecting the impact on cash flows due to following / not following a particular practice in ESG. Apart from this, it is also imperative to note that companies current expectation for ESG factors will also impact the discounting factor.The way ESG factors are translated into cash flow adjustments varies based on industries and company performance. For instance, the oil and gas sector might adjust for environmental factors like carbon reduction investments to address global warming. On the other hand, the manufacturing industry could focus on labour welfare and responsible sourcing. There’s no universal solution for ESG integration, and incorporating specific value drivers helps avoid ambiguity in cash flow adjustments. This way, while valuing, all factors material to the company shall be taken into consideration and related cash flows which are expected shall be given effect to and adjusted from Free Cash flows.In addition to adjusting the projected free cash flows in income-based valuation, an alternative approach involves factoring ESG-related risks into the discount rate. When utilizing the Discounted Cash Flow (DCF) model, anticipated cash flows are discounted back to their present value. Usually, the discount rate used, such as the Weighted Average Cost of Capital (WACC), is adjusted to accommodate the uncertainties arising from future market conditions. Following the risk-return principle, higher risk corresponds to higher returns, which can be captured through a risk-adjusted discount rate. Therefore, a common method to integrate ESG considerations into the discount rate is by adding a risk premium when companies perform poorly in ESG metrics, leading to a reduced present value and valuation. Conversely, companies demonstrating strong ESG performance might see a discount applied to their valuation.However, challenges persist in determining the standardized scale of adjustments, which heavily relies on subjectivity and the discretion of valuers, thus introducing an element of arbitrariness. Moreover, ESG scores can substantially differ depending on the industry’s characteristics. For example, oil and gas firms often garner lower ESG ratings and exhibit more pronounced ESG risks compared to renewable energy companies. This raises a similar predicament for valuers in quantifying the adjustment magnitude for the discount rate. Is it 20 basis points or 50 basis points? This remains a point of contention, emphasizing the need for further international standards and guidelines to prevent over-extrapolation and confusion.3. Using other factorsa. Sensitivity to Market Risks (Beta): In the context of the Capital Asset Pricing Model (CAPM) and current low interest rates, a company’s equity return requirement is largely driven by its market risk sensitivity, known as beta. Notably, high ESG-scored firms demonstrate lower market vulnerability and reduced beta, resulting in a decreased expected rate of returns. This, in turn, leads to a lowered equity return requirement in the Weighted Average Cost of Capital (WACC) framework, ultimately yielding a reduced cost of capital and enhanced valuation.b. Firm-specific Risks (Alpha): Firms with poor ESG performance are more likely to be subject to additional risks imposed by material ESG issues, including regulatory violation, high employee turnover rate, resources mismanagement, and volatile supply chain. All of these scenarios contribute to higher firm-specific risks as compared with peers.c. Terminal Value: When applying the DCF model, the terminal value calculation and assumptions are made based on perpetual operations generating future cash flows. Industries with high ESG risk, such as coal mining, face potential value decline due to shifts towards renewable energy sources. This could reduce terminal value or bring it close to zero, impacting fair value. Additionally, the growing trend of countries aiming for net-zero emissions by 2050 requires careful consideration in terminal value calculations. Integrating ESG-related risks into the discount rate requires caution to avoid double counting. Overlapping ESG factors with other pre-financial data could already influence risk-adjusted discount rates. For instance, ESG risks in the oil and gas sector might be inherent in beta determination. Miscounting could lead to unreasonable valuation. Hence, directly adjusting the discount rate with premium or discount should account for systematic and firm-specific aspects.Challenges Faced into incorporating ESG into valuationThere are differing views on the impact and application of ESG factors in business valuation. A significant criticism revolves around the challenge of measuring ESG criteria and the lack of standardized metrics. The influence of ESG factors on enterprise value depends on whether the market has already factored in these effects, which is hard to determine due to the short observation period. Establishing a direct causal link between investment performance and ESG rating remains complex. The connection between profitability and a company’s ESG rating is under scrutiny. While it seems logical to associate higher profitability and enterprise value with a good ESG rating, it’s unclear whether “good” companies are inherently more profitable or if profitability drives better ESG ratings through increased investment in rating-improving measures. A longer analysis period is needed for conclusive answers.Integration of ESG where valuation methods are prescribed under the ActWhere a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The legislature in its wisdom has also given a formula for the computation of the fair market value which cannot be ignored. When it comes to applying the provisions of Section 56(2)(x) and Rule 11UA for valuing a company that follows or does not follow ESG principles, the valuation methodology prescribed by these provisions would still apply. However, the fair market value (FMV) of a company’s shares may not be influenced by various ESG factors.ConclusionIn conclusion, the integration of Environmental, Social, and Governance (ESG) considerations into the process of shares/business valuation represents a dynamic and multifaceted undertaking. This intricate process entails evaluating a company’s ESG practices, discerning their material significance, foreseeing potential future implications, appraising associated risks and opportunities, establishing benchmarks, quantifying tangible effects, and ultimately incorporating these multifarious aspects into valuation methodologies. While certain challenges persist, it is imperative not to disregard the undeniable correlation between ESG factors and company valuation.Acknowledging the intricate interplay between ESG dimensions and financial performance empowers valuation experts to evolve their methodologies, capturing the comprehensive influence that ESG factors wield over valuation outcomes. In the face of the growing prominence of ESG considerations, appraising companies without accounting for their ESG practices introduces the risk of overlooking a pivotal dimension of their enduring value potential. The assimilation of ESG considerations into the valuation process enriches the depth of analysis, equipping investors and stakeholders with the insights needed to make judicious decisions that harmonize with both financial objectives and ethical imperatives. To end Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable quotes that “The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds....”1 The ESG Movement: The “Goodness” Gravy Train Rolls On! https://aswathdamodaran.blogspot.com/2021/09/the-esg-movement-goodness-gravy-train.htmlAuthor may be reached at: eboard@icai.in

GST was implemented in India on 1st July, 2017 as a historical indirect tax reform with a ‘one nation one tax’ slogan. It has affected various Indian industries differently. Indian tourism industry is one of them. To evaluate GST advantages for this industry, the present study has been conducted in two phases. In the first phase, eight common GST advantages for this industry have been identified through structured open-ended interviews of twenty players of industry. In the second phase, eight such identified advantages were then analysed through Analytic Hierarchy Process (AHP) approach. The findings of the study reveals that “reduction in cascading effect of taxes”, “reduction in multiplicity of taxes”, and “clarity of distinction between goods & services” have been the most advantageous for the Indian tourism industry, whereas “administrative ease” and “easy tax compliance” have been the least advantageous for them.“Chanakya’s words summarize the whole GST process- ‘even if something is very difficult to be achieved, one can obtain it with penance and hard work’. If we take into consideration the 29 states, the 7 Union Territories, the 7 taxes of the Centre and the 8 taxes of the states, and several different taxes for different commodities, the number of taxes sum up to a figure of 500! Today all those taxes will be shred off to have ONE NATION, ONE TAX right from Ganganagar to Itanagar and from Leh to Lakshadweep.”— Narendra Modi, Prime Minister of IndiaDedicating GST to the nation - 1st July, 2017; Central Hall, Parliament of India1Introduction & National Revenue OverviewGST law in India is a comprehensive, multi-stage, destination-based tax which is levied on all forms of supply of goods and provision of services, except liquor for human consumption and petroleum products (www.cbic.gov.in).The gross GST revenue collected in June 2022 is ₹ 144,616 crore of which CGST is ₹ 25,306 crore, SGST is ₹ 32,406 crore, IGST is ₹ 75,887 crore (including ₹ 40,102 crore collected on import of goods) and cess is ₹ 11,018 crore (including ₹ 1,197 crore collected on import of goods). The gross GST collection in June 2022 is the second highest collection next to the April 2022 collection of ₹ 1,67,540 crore2.FIGURE 1: Trend of GST Revenue Collection in India (₹ in Crores)Financial YearGST Collection (INR in Crores)2017-18 (From Aug. 2017)₹ 7,19,078 Crore2018-19₹ 11,77,370 Crore2019-20₹ 12,22,117 Crore2020-21₹ 11,36,803 Crore2021-22₹ 14,83,292 CroreSource: GST Council, Department of Revenue, Ministry of Finance, Government of India.Advantages of GST Law for Tourism IndustryFollowing eight advantages of GST law have been identified for further analysis, based on structured open-ended-interview of twenty players of the industry:1. Administrative Ease (C1): GST has subsumed many state and central indirect taxes and eased the compliance with single GST and its rules and procedures. This has provided administrative ease for all players of the tourism industry.2. Clarity of Tax in Customers’ Mindset (C2): During pre GST implementation era tax payers and ultimate customers were feeling difficulty to understand various tedious provisions of excise law, VAT, service tax, etc. Under the GST regime, the customers have a single tax on their bills which provide clarity of the taxation structure besides paying for lesser taxes.3. Easy Tax Compliance (C3): GST online portal provides many online services like registration, tax payment, return filing, generating IRN and QR code etc. The taxpayer can easily comply all the legal requirements through GST common portal. So, there will be no more troubles to the taxpayers and customers at check-out time.4. Availability of ITC (C4): The tourism industry is now entitled to claim ITC on inputs. In the pre-GST era, taxes paid on inputs such as raw food grains and other consumables were difficult to match with the final product, due to this mismatch the ITC for such inputs was not available. The post-GST era has improved this situation by providing seamless ITC for maximum inputs.5. Reduction in Cascading Effect of Taxes (C5): ITC is available throughout the GST value chain, so one can use input taxes to reduce the tax he pays on output supply. Therefore, the effective GST paid by the taxpayer to the government is the difference between the GST for outbound supply and the GST already paid for inbound inputs.6. Reduction in Multiplicity of Taxes (C6): The GST has subsumed in it almost all the previous indirect taxes (Except Custom Duty) that were levied on the sale of goods and provision of services by either Central government or State government. This subsumation of large number of indirect taxes will now allow free flow of seamless tax credits.7. Exports to be Zero Rated (C7): Sec 16(1) of IGST Act provides that any supply of goods or services made by the tax payer as an export or any supply to a SEZ qualifies for zero rated supplies in GST and no tax is levied on such supplies as well.8. Differentiation between Goods & Services is no Longer Required (C8): Schedule-II of CGST Act provides vide classification of goods and services. It has covered almost all the grey areas of classification disputes of pre GST period.Demography of IntervieweesFIGURE 2 – Industry Players Demography (GST Advantages Phase 1): Accommodations (35%), Restaurants (20%), Tour Operators (20%), Shoppings (15%), Adventure (10%).FIGURE 3 – Stakeholder Demography (Pairwise Comparison Phase 2): Industry Representatives (37%), Chartered Accountants (25%), Finance Professors, and Tax Lawyers.Research Methodology: Analytic Hierarchy Process (AHP)The available literature offers several methods to analyse qualitative data including: correlation, factor analysis, multiple regression analysis, etc. In this study, AHP technique has been used for pairwise comparison. The reason for prioritizing AHP over other approaches is that the benefits of GST are based on the experience of the respondents and are very subjective in nature. AHP approach can handle both qualitative as well as quantitative data efficiently.The AHP approach as developed by Saaty, is one of the popular methods of qualitative data analysis that can be easily converted into ranked or pairwise comparisons. This method makes it easier to understand complex problems by using it. This approach breaks down the decision problem into nine levels and forms a hierarchy with a hierarchical relationship between these levels.The results in this work were analysed in two phases. In first phase, primary data was collected from twenty players of the industry across the country. To analyse perceived advantages of GST laws for them, open-ended structured interviews were conducted during June and July, 2022. Eight such common perceived advantages were selected to analyse through AHP approach. In second phase, earlier collected responses from twenty players of industry out of which 16 valid responses having less than 0.1 consistency ratio were selected for the AHP analysis. Respondents evaluated each parameter on a nine-point scale, as suggested by Saaty (1970).TABLE 1: Saaty’s 1-9 Scale of Pairwise ComparisonsIntensity of ImportanceDefinitionExplanation1Equal ImportanceTwo activities contribute equally to the objective2Weak or SlightExperience and judgment slightly favor one activity over another3Moderate ImportanceExperience and judgment slightly favor one activity over another4Moderate PlusExperience and judgment slightly favor one activity over another5Strong ImportanceExperience and judgment strongly favor one activity over another6Strong PlusExperience and judgment slightly favor one activity over another7Very StrongAn activity is favored very strongly over another8Very, very StrongExperience and judgment slightly favor one activity over another9Extreme ImportanceThe evidence favoring one activity over another is of the highest possible order of affirmationSource: Saaty, 1970Stepwise Process of AHP Execution:Step 1: Recognition of significant advantages of GST law implementation for tourism industry through open-ended, structured interviews from twenty players.Step 2: Data collection from twenty players through AHP questionnaire designed on Saaty’s 9-point qualitative scale.Step 3: Construction of a square matrix comparing advantages on a pair-by-pair basis using geometric means in MS Excel.Step 4: Calculation of relative weights (eigenvectors) for all eight identified advantages.Step 5: Calculation of Consistency Index (CI) and Consistency Ratio (CR) using formulas:CI = (λmax - n) / (n - 1)CR = CI / RIWhere RI is the Random Consistency Index, λmax is the average measurement of consistency, and n is the number of compared advantages (n = 8). For n = 8, RI = 1.41.TABLE 2: Random Consistency Index (RCI)n123456789101112RI000.580.901.121.241.321.411.451.491.511.48Source: Saaty, 1970Analysis of Data and Empirical FindingsTABLE 3: Eight Identified Perceived GST Advantages for HoteliersPerceived GST Advantages for HoteliersSymbolsAdministrative EaseC1Clarity of Tax in Customers’ MindsetC2Easy Tax ComplianceC3Availability of ITCC4Reduction in Cascading Effect of TaxesC5Reduction in Multiplicity of TaxesC6Exports to be Zero RatedC7Clarity of Distinction between Goods & ServicesC8TABLE 4: Pairwise Comparison Matrix of the GST AdvantagesCriteriaC1C2C3C4C5C6C7C8C111/41/31/71/91/811/6C241221/51/444C331/211/31/81/621/3C471/2311/31/621/4C595831184C684661183C711/41/21/21/81/811/7C861/4441/41/371Total39.0011.7524.8316.983.143.1733.0012.89TABLE 5: Normalization Matrix and Weight ComputationCriteriaC1C2C3C4C5C6C7C8AWWeights (W)λ = (AW/W)C10.030.020.010.010.040.040.030.010.200.028.41C20.100.090.080.120.060.080.120.311.220.1210.20C30.080.040.040.020.040.050.060.030.380.048.55C40.180.040.120.060.110.050.060.020.670.088.36C50.230.430.320.180.320.320.240.312.720.299.30C60.210.340.240.350.320.320.240.232.600.289.24C70.030.020.020.030.040.040.030.010.230.038.60C80.150.020.160.240.080.110.210.081.160.138.85Total Weights1.00λmax = 8.94Consistency Index (CI): {(λmax - n) / (n - 1)} = (8.94 - 8) / 7 = 0.13Random Consistency Index (RCI): 1.41 (for n = 8 from Table 2)Consistency Ratio (CR): CI / RI = 0.13 / 1.41 = 0.095(Since CR = 0.095 < 0.10, the pairwise comparisons are statistically consistent and valid).“Schedule-II of CGST Act provides vide classification of goods and services. It has covered almost all the grey areas of classification disputes of pre GST period.”Summary, Conclusion & Final Ranking HierarchyThis study empirically tests eight identified advantages of GST implementation which were identified on the basis of open ended structured interview of twenty hoteliers. To analyse the comparative importance of the advantages of GST as per hoteliers’ response, AHP method has been used.It has been found that the “reduction in cascading effect of taxes” (29%), “reduction of multiplicity of tax” (28%), and “clarity of distinction between goods & services” (13%) are the major benefits of GST for hoteliers. “Clarity of tax in customer’s mindset” (12%) and “availability of ITC” (8%) are the intermediate benefits, while “easy tax compliance” (4%), “exports to be zero rated” (3%), and “administrative ease” (2%) are the minor benefits.TABLE 6: Hierarchy of Advantages for Hotel BusinessAdvantages of GSTWeights (Percentage)Major AdvantagesC5. Reduction in Cascading Effect of Taxes29%C6. Reduction in Multiplicity of Taxes28%C8. Clarity of Distinction between Goods & Services13%Intermediary AdvantagesC2. Clarity of Tax in Customers’ Mindset12%C4. Availability of ITC8%Minor AdvantagesC3. Easy Tax Compliance4%C7. Exports to be Zero Rated3%C1. Administrative Ease2%“GST online portal provides many online services like registration, tax payment, return filing, generating IRN and QR code etc.”Evaluation of GST advantages in this study in ranking order will be beneficial for the tourism industry, its suppliers and customers, GST practitioners for taking maximum advantages of such GST provisions. GST Policy makers may also use this study to check and reassess the purpose of such provisions, whether they are achieved or not. They may also use this study to reconsider the low ranked advantages for further improvements in GST provisions for providing ease of doing business for the tourism industry.1 Source: https://gstcouncil.gov.in/sites/default/files/The-gst-saga.pdf2 Source: https://gstcouncil.gov.in/sites/default/files/gst-statistics/GST_Revenue_collection_june2022.pdfAuthors may be reached at: sanjeevkrsn@gmail.com and eboard@icai.in

Cyber-attacks now a days have become a major obstacle for corporate governance. Corporate subsistence in the current scenario is dependent on its cyber risk management strategy. Data security in the digital world is no longer the responsibility of the IT division alone. Indeed, it’s the responsibility of the top management as a part of risk management and risk transfer mechanism.Every director is needed to have a concrete awareness of the foundations of cyber security to transform India digitally by incorporating technology into corporate governance. Cyber insurance is one of the risk transfer mechanisms in the digital world. This article primarily focusses on the relationship between cyber insurance and corporate governance.IntroductionCyber risk has evolved over the long term, ensuring that more threats will persist than ever before. The majority of us identify corporate governance with company operations including financial integrity, hiring processes, legal and regulatory assurance, and corporate strategy. However, because of the growing importance and complexity of cybersecurity challenges, it is now required to be a major component of an overarching corporate governance framework. There is mounting evidence that the boards are lagging in terms of prioritising cybersecurity as critical governance problem. Traditionally, cyber security has been following the bottom-up approach which is the biggest threat in the current scenario as according to that the IT department of a company is responsible for protection of data.As per the study conducted by (Singh and Upreti, 2021) unlike other countries, India has been dozing off when it comes to cyber risks posed to well-known companies. It is necessary to protect not just the public from data exploitation, but also organisations from external hacking attacks, that is why it is a significant issue in corporate governance. If a company is subjected to a cyber-attack, it may face several consequences, including the disclosure of confidential information, the destruction of data, and the loss of credibility. With the progress of technology, the sorts of cyber hazards are becoming more sophisticated, making it imperative for businesses to have cybersecurity strategies and have their data covered through cyber insurance.Related StudiesThe expected loss due to cyber-attacks uses collective risk modelling; computing the net premium that cyber insurers will charge to indemnify losses from a cyber-attack; computing the average loss data for each malicious attack using gamma and exponential distribution, and suggesting either cyber insurance or self-insurance, or self-protection, as a strategy for organisations to minimise losses (Mukhopadhyay et. al, 2017). According to the study conducted by (Bartolini et. al, 2019) cyber-insurance is regarded as the most effective way to prevent financial losses brought on by security breaches in information technology infrastructures and practises. (Cortez and Dekker, 2022) illustrates that the companies’ underinvestment in cybersecurity solutions can be explained in part by knowledge asymmetries and the resulting agency issues between management and other corporate stakeholders. Signs of the potentially tense management-shareholder relationship regarding companies’ cybersecurity procedures include high-profile class action lawsuits brought when companies discovered privacy infringements and regulatory agencies imposed heavy fines. (Miller, 2018) elaborated that due to the frequency and size of data breaches and information theft, cybersecurity is becoming essential. Cybersecurity insurance will help the market find a solution to corporate data theft by aligning incentives for companies to keep up a strong suite of data protection measures. (Kane and Goldstein, 2017) in their study finds that in addition to running the serious risk of failing to provide a necessary oversight, the boards that fail to adequately address the growing cybersecurity threat and oversee the development of effective cybersecurity policies and programmes with accompanying corporate governance may also be in violation of the expanding body of cyber regulations.Global Data BreachesData thefts have increased significantly across the world over the past few years. They have damaged enterprises to the tune of millions of dollars, affecting businesses and organisations of all shapes, sizes, and industries.Table 1: Details of Global Data BreachesYearName of the CompanyDetails of Breach2011SonyPersonal information of 77 million members was compromised.2013Target110 million clients’ personal and financial data, as well as the banking information were stolen.2013AdobeAdobe acknowledged that extremely sensitive information of 2.9 million accounts was hacked.2014SonyA computer worm targeted Sony Pictures Entertainment. 100 terabytes of data, including a significant amount of sensitive information of 47,000 employees was stolen by the “Guardians of Peace.”2014YahooCyber-attack compromised 500 million user accounts.2015Adult Friend FinderDating site witnessed its first attack where sensitive information of 4 million accounts was made public on a forum only accessible on Tor.2016Adult Friend Finder400 million accounts were hacked during the second attack on this dating site.2016UberHackers stole the personal information of 57 million Uber users and drivers, a significant cybersecurity breach at the company.2017EquifaxVictim of a cyber-attack over a period of months that included the personal information of 143 million clients as well as 200,000 credit card numbers.2018Marriott hotels500 million guests’ personal information, including financial information, was exposed at the Marriott-owned Starwood hotel group.2021Air India4.5 million customers’ personal information was stolen because of a sophisticated hacking attempt on SITA, the operator of Air India’s passenger service system.2022NvidiaVictim of a ransomware attack. Employee login passwords and confidential company data are among the data that was pilfered.2022MicrosoftHacking incident in a security blog post. The cybercriminal group even posted a 37 GB file that contained the source code of more than 250 Microsoft projects.2022Apple Inc. and Meta Platforms Inc.Hackers posing as law enforcement officers received user data from Apple Inc. and Meta Platforms Inc., the parent company of Facebook in response to the fake “emergency data demands”.2022Cash AppData breach that affected 8.2 million users and was caused by a former employee.2022OpenSeaNFTs worth $1.7 million were allegedly taken from OpenSea customers during a phishing scam.2022TwitterTwitter has acknowledged that the platform’s zero-day vulnerability, which was first identified in January 2022, allowed for the theft of 5.4 million accounts’ phone numbers and email addresses.2022Tata PowerA cyber-attack on Tata Power’s IT infrastructure, which affected some of its systems. Hive, a ransomware gang, allegedly exposed a packet of crucial data from Tata Power servers on the dark web.Role of Board in Cyber SecurityA company’s competitiveness in the future may depend on how it responds to the effects of digitization. The board of directors may, in the future, play a significant role in helping the company adjust to shifting strategic contexts (Bankewitz et. al, 2016). It is crucial to protect any information of the businesses that manage a significant amount of sensitive consumer data. A cyber insurance coverage can be useful in this situation. (Landefeld et.al, 2015) discussed that the risk associated with cybersecurity will continue to grow, and the boards of publicly traded companies will need to exercise more control.“Cybersecurity and cyber risk have become corporate governance issues. The board plays an inimitable role in governance; therefore, it is the responsibility of the board to receive the apt cybersecurity metrics for monitoring and detection on a regular basis.”Cyber security and cyber risk are the priority agendas of the boardroom. Recent high-profile data breaches, including cyber risk events at global giants have caused many corporate crises. Cybersecurity and cyber risk have become corporate governance issues. The board plays an inimitable role in governance; therefore, it is the responsibility of the board to receive the apt cybersecurity metrics for monitoring and detection on a regular basis. The board’s desire to understand cyber threats that exist within the company and externally. The prospective roles and responsibilities of the corporate executives and the board of directors, as well as the concerns and obstacles for cyber security governance, are discussed in the study (Thuraisingham, 2019). The board should recognise cyber threats affecting the industry and certified protections. Training and awareness sessions must be organised at all levels in the company so that employees are proficient to maintain cyber hygiene. The board of directors may not have the technical proficiency to understand the intricacies of cybersecurity. However, individually, collectively, and with the help of technical experts, they must continue to find techniques to strengthen their cybersecurity efforts. (Trautman and Altenbaumer-Price, 2011) emphasise that to generate the necessary IT knowledge, each Governance and Nominating Committee must consult its current inventory of director skill sets.As part of good corporate governance, directors are responsible for protecting shareholders, employees, and stakeholders from potential legal issues arising from cyber risks. Uday Kotak Committee on Corporate Governance, 2017 proposed that “The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit. Such function shall specifically cover cyber security.” While no director can anticipate whether or not a data breach will occur, cyber insurance can assist to mitigate the impact if the worst happens. This type of unplanned, catastrophic expense is frequently ignored and not factored into a company’s budget. With cyber assaults and data breaches on the rise with no end in sight, the expenses of reacting to these disasters should be budgeted ahead of time rather than depleting balance sheet assets that could have been covered by insurance money.Need for Cyber InsuranceCyber risk is an emerging dynamic and difficult-to-quantify risk category (Eling and Zhu, 2018). Cyber risk insurance helps to minimize losses to a company, but it is not a replacement for a company’s cybersecurity strategy. Cybersecurity experts believe that the type of insurance a company is eligible for depends on its cybersecurity efforts. (Talesh 2017) demonstrated theoretical frameworks that how, in the context of cyber insurance, insurers move far beyond risk pooling and spreading to serve as compliance managers for businesses dealing with cyber security concerns. Because companies are still unprepared for cyber threats and do not comply with privacy rules, insurance sector assistance in this area is critical. All insurers first assess the strength of a company’s cybersecurity position before issuing a policy. The board of directors need to understand potential cyber threats in order to evaluate and implement appropriate plans. They must understand the legal and regulatory implications associated with cyber risk, cyber security and privacy.“The legal and regulatory environment is evolving rapidly around the world, and the boards need to keep up with new laws, law enforcement and regulatory agencies at various levels.”The legal and regulatory environment is evolving rapidly around the world, and the boards need to keep up with new laws, law enforcement and regulatory agencies at various levels. By managing claims after a cyberattack, companies can minimize losses and resume normal operations, but risks cannot be ruled out, so companies buy insurance to further mitigate losses. Directors can also review their own liability insurance policies in the event of a cyber breach. In case of data breach, immediate order for inspection against the board and company have been passed leaving no distinction between the director and manager of the IT department. For this reason, it is best for the board and companies to proactively investigate how cyber insurance can help manage cyber risk, rather than revealing cybersecurity gaps in the event of a security failure. Purchasing the right cyber insurance plays a key role in protecting a company’s bottom line, instead of spending millions of rupees as cost of damage that may have been insured.Evaluation of Cyber InsuranceSolutions focused solely on detecting and eliminating security risks are unlikely to result in a secure cyberspace Pal et. al (2014). Once a company is prepared to buy cyber insurance, it’s far more critical to cautiously compare the plethora of cyber insurance alternatives from different angles. A company has to determine the amount of insurance required and the level of risk the business can afford. Once a need is identified, a business must determine how much it can afford out of pocket before it can pay any cyber claims. Experienced and knowledgeable cyber insurance professionals can help the company to evaluate coverage options and determine which coverage is best as cyber insurance policies are not standard policies and vary widely in terms of coverage. (Nishanka, 2016) highlights that the processes for securing the data in various forms of insurance should be made possible in the insurance industry as the market demands this sort of insurance evaluation.Cyber Insurance in IndiaCyber insurance is a type of insurance that protects policyholders from the potential consequences of cyberattacks. Cyber insurance is essential in India with the surge in online fraud cases involving malware and phishing emails. During the Covid-19 outbreak, these cases saw a quantum leap since an increase in digital payments also saw an increase in digital fraud. Although the cyber insurance market is expanding in India as well as internationally, it remains tiny in comparison to other insurance lines of business. Many companies, whether in the service or manufacturing industries, are unaware of the entire magnitude of cyber risk or believe that regular insurance lines would cover them. Others, such as financial organisations, are aware of the threat but believe that cyber insurance coverage is too limited or unclear to ensure appropriate recovery in their time of need. Insurance firms, on the other hand, are stepping carefully and gradually expanding their services.ConclusionCorporate governance has undergone a revolutionary change due to issues such as increased regulatory oversight, more dynamic and enthusiastic leadership, and increasingly sophisticated environment. Cybersecurity could be the only major factor that has redesigned corporate governance in decades. Business operations can become unstable because of a cyberattack and security breach. The business interruption has a negative effect on the company’s financial profitability. A data breach incident that results in the disclosure of confidential data has a negative effect on the company’s reputation and may also cause current and potential customers to be reluctant to do business with the impacted company because they lack confidence in the security of their confidential data. An incident involving a data breach could also lead to regulatory attention from the authorities, which could lead to fines and penalties. As a result, cyberattacks and data breaches have a variety of repercussions that are not just confined to the company computer systems. (Miller, 2019) concludes by arguing that a mandatory nationwide adoption of cyber insurance coverage will motivate companies to adopt proactive cybersecurity policies.Cybersecurity has always been a never-ending exercise, but the pace of change is accelerating. Unfortunately, there is not yet enough clarity about the practical advice that corporate leaders can implement from the beginning to ensure the cyber security of data of the company. However, if cybersecurity is considered as a business problem and is not isolated as a technical problem that IT professionals solve using technical tools, the chances of success are much higher. All board obligations are governance obligations, including cybersecurity. Due to high level of cybersecurity risk and lack of knowledge compared to other areas of governance, today’s board of directors needs to pay particular attention to cybersecurity governance obligations.ReferencesBankewitz M., Aberg C. and Teuchert C. (2016) Digitalization and Boards of Directors: A New Era of Corporate Governance?, Business and Management Research, volume 5, No. 2, pp. 58-69Bartolini D. N., Benavente-Peces C. and Ahrens A. (2019) Using Risk Assessments to Assess Insurability in the Context of Cyber Insurance E-Business and Telecommunications. Communications in Computer and Information Science, volume 990. pp. 337–345Cortez E. K. and Dekker M. (2022) A Corporate Governance Approach to Cybersecurity Risk Disclosure, European Journal of Risk Regulation, first view, pp. 1-23 DOI: https://doi.org/10.1017/err.2022.10Eling M. and Zhu J. (2018) Which Insurers Write Cyber Insurance? Evidence from the U.S. Property and Casualty Insurance Industry Journal of Insurance Issues, 2018, 41 (1), pp. 22–56Kane A. T. & Goldstein P. A. (2017) Cybersecurity Is Not a Product, It’s a Process: Financial Service Regulators Hold Insurance Company Boards Responsible for Cybersecurity, 4 Emory Corporate Governance & Accountability Review, volume 4, pp. 353-362Landefeld S. M., Mejia L. R., and Handy A. C. (2015) “Board Tools for Oversight of Cybersecurity Risk” volume 23, Number 3, pp. 1-9Miller L. (2018) Cybersecurity Insurance: Incentive Alignment Solution to Weak Corporate Data Protection Available at SSRN: https://ssrn.com/abstract=3113771 or http://dx.doi.org/10.2139/ssrn.3113771Miller L. (2019) Cyber Insurance: An incentive alignment solution to corporate cyber- Insecurity, Journal of Law & Cyber Warfare, Vol. 7, No. 2, pp. 147-182Mukhopadhyay A., Chatterjee S., Bagchi K. K., Kirs P. J. and Shukla G. K. (2017) Cyber Risk Assessment and Mitigation (CRAM) Framework Using Logit and Probit Models for Cyber Insurance Inf Syst Front 21, 997–1018. https://doi.org/10.1007/s10796-017-9808-5Nishanka A. K. (2016) Evaluating Cyber Infrastructure for Cyber-Insurance in the Corporate World: An Analytical Focus available at SSRN: https://ssrn.com/abstract=2864383Pal R., Golubchik L., Psounis K. and Hui P. (2014) Will cyber-insurance improve network security? A market analysis, IEEE INFOCOM 2014 - IEEE Conference on Computer Communications, pp. 235-243Singh S. and Upreti V. (2021) Corporate Governance and Cyber Security, International Journal of Law Management & Humanities, volume 4, pp. 2808-2821Talesh S. A. (2017) Data Breach, Privacy, and Cyber Insurance: How Insurance Companies Act as “Compliance Managers” for Businesses, Law & Social Inquiry, available at https://doi.org/10.1111/lsi.12303Thuraisingham B. (2019) Cyber Security and Data Governance Roles and Responsibilities at the C-Level and the Board, IEEE International Conference on Intelligence and Security Informatics (ISI), pp. 231-236, doi: 10.1109/ISI.2019.8823534Trautman L. J. and Altenbaumer-Price K. (2011) The Board’s Responsibility for Information Technology Governance, Journal of Computer & Information Law, volume 28, pp. 313-341Author may be reached at: gunjank_cs@yahoo.com and eboard@icai.in

AI continues to disrupt global businesses in new and exciting ways, demonstrating its ability to streamline processes and reduce manual intervention, thus allowing professionals to focus on higher-priority business tasks. This is excellent news, especially for finance teams, which by their very data-driven nature are ripe for the integration of AI into their operational framework.Hyper-automation tools such as ChatGPT, BERT, RoBERTa and T5 are the new bywords in business, helping finance professionals stay ahead of the curve in an ever-changing marketplace. This digital transformation is allowing them to rethink strategies that not only improve operational efficiencies but make business enterprises future-ready. The question was never about whether or not a business enterprise should adopt Artificial Intelligence (AI) – it is about how quickly and cost-effectively a company can embed it in its operational architecture.AI continues to disrupt global businesses in new and exciting ways, demonstrating its ability to streamline processes and reduce manual intervention, thus allowing professionals to focus on higher-priority business tasks. This is excellent news, especially for finance teams, which by their very data-driven nature are ripe for the integration of AI into their operational framework.AI-powered tools are becoming increasingly sophisticated. Their ability to swiftly analyze large amounts of data and their affinity for rapid learning is now being deployed in complex functions such as risk-proofing organizations, making predictions about competitors, helping finance and accounting teams in budgeting and forecasting, and eliminating risks in regulatory compliance.A survey by Gartner reveals that 78% of the participating CFOs plan to maintain or increase enterprise-wide digital investments in the next two years – despite planning cost reductions if inflation persists.1Lessons from the pandemic: recognizing the gapsWhile the role of digitalization in finance has always been well-acknowledged, its adoption accelerated due to COVID-19. The pandemic compelled organizations to free their finance teams from paper dependencies and adopt cloud-based technologies and automation to operate efficiently from remote locations.In a survey, finance leaders looked back at their teams’ performance during the COVID-induced lockdowns and reflected on the gaps they faced in terms of their ability to execute in response to the crisis (refer Chart 1: Challenges faced by finance teams during the pandemic).2 The responses can be broadly categorized into three segments:Insights-readiness: Being decision-ready with accurate, timely data to help management assess, plan, and execute quickly in a rapidly changing environment.Automation-readiness: The ability to be automation-ready, with touchless transactions and capabilities that supported virtual work and digital commerce.Change-readiness: The need to be change-ready with the right people, technology, and analytical skill sets to manage emergencies such as the pandemic.Chart 1: Challenges Faced by Finance Teams During the PandemicDimension of ReadinessPercentageCore Operational FocusBeing decision-ready with accurate, timely data to help management assess, plan, and execute quickly45%Insights-readinessBeing automation-ready with touchless transactions and capabilities that supported virtual work and digital commerce39%Automation-readinessBeing change-ready with the right people, technology, and analytical skill sets in place to manage through the pandemic15%Change-readinessAI tools can help finance teams to bridge these gaps and make them even more future-ready.The future of organizational finance will be driven by AI tools“Finance automation has effectively eliminated the need for human intervention in repetitive tasks while ensuring process excellence.”Finance automation has effectively eliminated the need for human intervention in repetitive tasks while ensuring process excellence. The Hackett Group’s 2021 Key Issues Study found that finance and accounting functions are the most automated, with 79% of the respondents reporting that they have implemented automation in these areas. High digitalization of the finance function results from the tangible benefits that organizations achieve - automating paper-based, error-prone financial processes and digitizing financial data provide efficiencies and better visibility to help future-proof the entire organization.AI can further accelerate the quest for finance automation by providing a range of capabilities that enhance and complement existing solutions. The technology can assist finance teams in the smooth execution of tasks relating to several areas of digital transformation (refer Chart 2: Top digital transformation priorities of the finance function).3Chart 2: Top Digital Transformation Priorities of the Finance FunctionPriority AreaShare of CFO PriorityData management & analysis49%Financial close, consolidation & external reporting40%Management reporting & analysis38%Audit & risk management30%Scenario planning, budgeting & forecasting24%Order to cash10%Source to pay6%Asset management2%Here’s how:1. AutomationBy automating repetitive, manual tasks such as data entry and invoice processing through the integration of third-party software, AI can provide a strong foundation for seamless and efficient processing.AI can be used to build chatbots and virtual assistants to help finance teams automate tasks, answer common questions, and support team members by taking over mundane and repetitive tasks.2. AnalyticsBy accurately and swiftly analyzing a large amount of financial data and presenting it in an easy-to-understand format, AI assists finance teams with data insights for informed decision-making.By processing natural language data that is in an unstructured format (such as emails and feedback), AI can help finance teams gain insights into areas of the business that need improvement, identify trends, and make data-driven decisions.3. IntegrationBy deploying machine learning algorithms to analyze trends and patterns in historical data, AI tools can help finance teams make informed decisions about budgeting, forecasting, and risk-management.When integrated with finance systems such as Enterprise Resource Planning and accounting software, AI tools enhance their capabilities and improve their output efficiency.4. SecurityAI tools can identify potential cyber security risks, by identifying fraud patterns, and recommend robust cyber security measures to protect financial data and prevent cyber-attacks.By identifying potential risks to the organization, such as fraud, compliance violations, or revenue leaks, AI tools can help finance teams mitigate risks and ensure compliance with regulatory requirements.5. CustomizationFinance teams can customize AI tools for specific requirements such as developing custom models for financial forecasting or scenario planning.By providing instant messaging, cloud-based solutions, and project management tools, AI tools can facilitate seamless communication among team members regardless of location and access to critical data from anywhere.6. Support in Decision-Making“AI tools can help finance teams with the latest industry-related information to support them in decision-making.”AI tools can help finance teams with the latest industry-related information to support them in decision-making. For instance, ChatGPT can answer questions about financial regulations, tax laws and investment opportunities.However, the exact implementation and integration of AI platforms will depend on the specific requirements of the enterprise. Therefore, it is essential for finance leaders to carefully consider their goals and objectives and plan a comprehensive implementation strategy to ensure maximum benefits.With their potential to contribute to a wide array of organizational finance responsibilities – from managing cash flow to mitigating compliance risks – AI can successfully elevate the role of finance to new heights.AI technologies can bridge strategy and actionIn a survey, finance leaders identified data management and analysis as a critical priority for their teams. The second step is to convert this data into actionable insights that will lead to a business advantage.4 The increased tech investments come in the wake of expanding responsibilities and strategic challenges that finance teams are increasingly confronted with. These range from supply-chain management to risk-mitigation to ESG.Since the decisions of the finance department impact an enterprise as a whole, it needs to understand how an organization functions and its performance. It is, therefore, more important than ever for finance teams to deploy the right technologies.AI tools can assist by streamlining mission-critical processes and reducing mundane, manual work. Additionally, they can provide a fresh perspective into data, which is especially valuable as organizations face an increasing array of strategic challenges in a volatile and uncertain economy.How can organizations deploy AI models such as ChatGPT in their finance functions?While identifying the platform is the first step, integrating it successfully into the organization’s finance function is the next. I asked ChatGPT to assist with this. Here’s the response I received:Identify the business problems and use case: The first step is to identify the specific business problem that the organization wants to solve with ChatGPT. For example, it could be to improve data analysis, decision-making, or customer service. The use case will determine how ChatGPT will be trained and integrated into the organization's workflows.Data preparation and training: The next step is to prepare the data that ChatGPT will use to learn and perform its tasks. This involves identifying the relevant data sources, cleaning and preparing the data, and labeling the data to train ChatGPT. The organization may also need to hire a data scientist or machine learning expert to train and fine-tune ChatGPT for the specific use case.Integration with existing systems: Once ChatGPT is trained and ready, the organization will need to integrate it into its existing systems and workflows. This may involve working with software developers or IT teams to integrate ChatGPT with existing data analytics, decision-making, or customer service tools. The organization should also establish clear protocols for how ChatGPT will be used in conjunction with human decision-makers.Testing and evaluation: After ChatGPT is integrated into the organization's workflows, it should be tested and evaluated to ensure that it is performing as expected. This involves monitoring ChatGPT's accuracy, speed, and effectiveness in addressing the business problem. The organization should also establish key performance indicators (KPIs) to track the success of the ChatGPT integration.Maintenance and continuous improvement: Finally, the organization should plan for ongoing maintenance and continuous improvement of ChatGPT. This may involve monitoring ChatGPT's performance, retraining it as necessary, and staying up-to-date with the latest advances in natural language processing and machine learning.Overall, integrating ChatGPT into the finance function requires a multidisciplinary approach that involves data science, software development, and business strategy. By carefully planning and executing each step, organizations can leverage the power of ChatGPT to enhance their finance function and achieve better business outcomes.Demonstrating the usefulness of AI tools in finance functionsThe increasing use of AI tools by leading financial services providers is testimony to its usefulness, scalability, and expediency in the finance function. Here are some examples:Improved customer experience: Customized, AI-powered chatbots can play an important role in the overall customer experience. For instance, chatbots can answer user queries by fetching relevant information from the company’s repository almost in real time. With the right customization, these chatbots can answer thousands of queries a day with a high degree of accuracy and participate in intelligent conversations, thus enhancing the customer experience.5Increased efficiency: Intelligent automation – a combination of Robotic Process Automation and AI – can reduce manual effort and improve operational efficiency. By saving thousands of hours of manual labour, they can also result in colossal savings, annually.6Improved risk-management: Companies suffer significant losses due to fraudulent transactions, legal fees, investigation, recovery expenses and other related factors.7 Now industries such as banking and financial services are using AI technologies to detect identity fraud and lending fraud effectively, thereby helping to risk-proof the organization. They are also being successfully deployed to reduce regulatory compliance risk.Taking the AI leap costs time and money“Despite its innumerable benefits, the cost of integrating AI models into financial services tends to make finance teams hesitate before taking the plunge.”Despite its innumerable benefits, the cost of integrating AI models into financial services tends to make finance teams hesitate before taking the plunge. Studies reveal that many finance leaders believe in starting small to avoid expensive failures with technology investments. They are prepared to embrace widespread tech adaption in their day-to-day functioning only when they perceive concrete benefits.8Integrating AI models into a business can be affordable or expensive, depending on many factors. According to industry benchmarks, in 2023, companies can pay from $0 to more than $300,000 for AI software. Their options range from off-the-shelf-solutions to custom-built platforms developed by a team of in-house or freelance data scientists.9 Typically, pre-built solutions are cheaper than customized ones. Further, the cost is also impacted by the function expected from the AI solution: eg. virtual assistance, chatbots, or analysis. The management of the platform – how an organization develops, launches, and manages it – also adds not just to the cost of implementing it but also to the responsibility of keeping it running smoothly. For instance, in-house management gives the organization complete control over the solution. But the costs associated with maintaining an internal team will impact the company’s bottom line. Alternatively, an outsourced management model may cost less but this exposes the organization to the risk of sharing their confidential data with third parties.The cost also varies with the time taken to integrate AI into the company’s processes. Most AI transformations take 18 to 36 months to complete, with some taking as long as 5 years.10 The timeframe depends on the scope and complexity of use case.AI integration: Assessing the qualitative and quantitative dimensionsWhile the investments in implementing AI technologies can be significant, the potential benefits can also be substantial. To make the most of the technology’s potential, finance leaders must carefully evaluate its costs and benefits and develop a comprehensive strategy for its integration into their workflows.Quantitative AdvantagesQualitative AdvantagesCost savings through reduction in manual labourFacilitates informed decision-making by providing real-time business insightsError reduction by processing large amounts of data with greater accuracyImproved stakeholder experience by reducing response time and providing personalized supportReducing time and effort by automating and streamlining processesBetter risk-management and more innovationTime savings by computing financial data at an accelerated paceCompetitive advantage by enabling users to identify market trends and respond more quickly to industry changesTo AI or not to AI: Challenges in AI implementationAdmittedly, AI tools come with risks. It is, therefore, critical that finance leaders review them in the context of the organizational situation and assess the benefits before integrating an AI solution into their processes. Some of the risks and their mitigation strategies are listed below:Data quality: AI tools require large amounts of data to be trained properly. Often, business decision-makers underestimate the time it takes to do ‘data prep’ before a data science engineer or analyst can build an AI algorithm. This critical stage is the foundation for the entire project. Inaccurate or incomplete data can adversely impact the quality of the output.Interpretability: Given the complex technology used to analyze patterns in the large amount of data fed to AI-led platforms, it is often challenging to comprehend the logic behind their decisions and predictions. This lack of interpretability makes it difficult to identify errors or biases in the model’s output. One way of countering this challenge is by developing techniques to visualize the model’s decision-making process to explain the model’s output in more accessible terms.Cyber Security: AI tools in finance functions access large amounts of confidential and sensitive information. They are, hence, vulnerable to cyber risks such as data breaches, malicious attacks, or model poisoning – leading to financial losses for the organization. To counter these risks, finance leaders should take proactive steps. These include implementing strong access controls, encrypting sensitive data, monitoring for suspicious activity, and regularly updating software and systems to address known vulnerabilities. Additionally, organizations should have a robust incident-response plan in place to respond to potential cyber security incidents promptly.Scalability: It is often seen that while pilot projects yield small gains for organizations, teams often struggle to scale them to the company level or integrate them with legacy systems. For AI models to address business problems, improve existing processes, and deliver concrete results over the long term, they should be based on multi-perspective analysis. Hence, before investing in these programs, the implementation team should conduct exhaustive research and a detailed analysis. This will enable them to make AI a worthwhile investment for the finance function.AI cannot replace human ingenuityA note of caution: While their potential is impressive, AI tools are not a replacement for human creativity and resourcefulness. This is because:Limited context understanding: Financial decision-making involves numerical data analysis and non-numerical factors such as market trends, business strategy, and industry knowledge. While AI tools can simplify the process of calculation, organizations need to depend on their team members to make decisions based on context and experience.Lack of empathy: Finance professionals deal with sensitive information, and while dealing with this, team members have to exercise judgment, creativity, and emotional intelligence. Also, financial organizations require trust and confidentiality, something that no technology, regardless of how advanced it is, can claim to possess fully, as yet.Limitations in data quality: Another concern is the potential for bias in the algorithms used to analyze data, which could lead to unfair or discriminatory outcomes.It is vital for finance leaders to recognize that AI models can supplement human expertise and only partially replace these attributes. Therefore, organizations should deploy AI tools in conjunction with human oversight and intervention.Upskilling and reskilling are the currencies of AI-led enterprisesDespite making considerable investments in AI, many organizations are yet to report business gains from the technology. Companies must restructure their corporate frameworks and train their teams to utilize these technologies fully. In other words, any investment in technology necessitates an equal investment in human talent. Such a strategy is essential to empower employees to extract value from the data provided by advancing technologies. Once talent strategies and business goals align, organizations can utilize people data to identify critical roles and skills, and the areas that require reskilling to drive maximum value. Importantly, reskilling should be a continuous process to ensure that the workforce’s agility and competitiveness are at par with the technology deployed.AI can lend a cutting-edge advantage to the future of financeThe finance function is under constant pressure to evolve, to address the needs of the dynamic business landscape - which itself is witnessing exciting changes owing to the rapid integration of digital technologies across functions. To thrive in this environment, forward-looking CFOs must think ahead of the curve to successfully create a finance function that will proactively add value to tomorrow’s enterprises. AI tools such as ChatGPT can provide vital support towards this goal. At the same time, organizations must be mindful of the limitations of such technologies. To balance the benefits of AI against its potential risks, CFOs and CTOs must work together to implement appropriate safeguards. In addition, a collaborative effort is imperative to ensure that the use of AI is responsible and ethical.The CEO of a research company sums up the scenario aptly by stating, “We have an unprecedented, once-in-an-era opportunity to make rapid, fundamental changes to the way we design and run our businesses. This opportunity forces us to rethink our skillsets, our careers, and the places where we work. This is a time to revisit those values important to us and to challenge our appetite for learning new techniques and ways of conducting business.”Footnotes & ReferencesGartner: https://www.gartner.com/en/articles/how-your-cfo-cio-partnership-drives-digital-funding-or-notWorkday CFO Indicator Survey: https://forms.workday.com/en-us/other/cfo-indicator-survey-report-infographic/form.html?step=step1_defaultWorkday Survey Infographic on Digital Priorities: https://forms.workday.com/en-us/other/cfo-indicator-survey-report-infographic/form.html?step=step1_defaultWorkday Strategic Survey: https://forms.workday.com/en-us/other/cfo-indicator-survey-report-infographic/form.html?step=step1_defaultRevechat: https://www.revechat.com/blog/chatbot-examples/Cognizant Softvision Case Study: https://www.cognizant.com/en_us/case-studies/documents/cognizant-softvision-saves-big-4-accounting-firm-8-million-annually-codex5198.pdfRapidMiner: https://rapidminer.com/blog/3-ways-ai-transforming-risk-management-banking/Gartner CFO Mindset Shifts: https://www.gartner.com/en/finance/trends/3-cfo-mindset-shifts-autonomous-financeWebFX AI Pricing Benchmarks: https://www.webfx.com/martech/pricing/ai/Harvard Business Review: https://hbr.org/2019/07/building-the-ai-powered-organizationAuthor may be reached at: manojkalra@rediffmail.com and eboard@icai.in

The Finance Act, 2022 inserted section 194R in the Income-tax Act, 1961 (the Act) with effect from 1 July 2022. Section 194R of the Act stipulates an obligation on any person providing any ‘benefit or perquisite’ to a resident arising from their business or exercising of profession to ensure that tax is withheld at the rate of 10%.As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.Accordingly, in order to widen and deepen the tax base, Finance Bill 2022 has proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite.Accordingly, to widen and deepen the tax base, section 194R was inserted in the Act by the Finance Act, 2022.Purpose of Introducing Section 194RThe purpose of introducing the new Section 194R1 is to plug the possibility of tax revenue leakages (tax evasions) in businesses or professions.Supreme Court (SC), in the case of M/s Apex Laboratories (P) Ltd v. DCIT [2022] 442 ITR 1 (SC), dated 22 February 2022 has denied the claim of expenditure by pharmaceutical companies providing freebies to doctors by holding that the narrow interpretation of Explanation 1 to Section 37 of the IT Act relied upon by pharmaceutical companies would defeat the very purpose behind its insertion. The Court, thus, held that the actions of pharmaceutical companies were clearly ‘prohibited by law’.Similarly, in the matter of Merck Ltd Godrej One v. DCIT, ITAT Mumbai has distinguished between the distribution of free samples of pharmaceutical products to doctors and other freebies offered, such as conferences that are typically held in exotic locations. In its decision, ITAT held that expenses of nearly Rs 63 lakh incurred by the company on various conferences is covered by the Supreme Court’s order in case of Apex Laboratories Limited (Supra) and the expense will not be allowed in the hands of Merck Limited. Thus, because of such practices by pharmaceuticals companies, tax authorities have felt it necessary to introduce the provision of Section 194R.Applicability of Section 194R – few examples2Following are some of the examples of benefits/perquisites on which tax is required to be deducted under section 194R of the Act. The below examples are only illustrative, not exhaustive:When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc.When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets.When a person provides free ticket for an event.When a person gives free medicine samples to medical practitioners.Exclusions from Section 194RCBDT vide circular no. 12 of 2022 has clarified that if an employer-employee relationship exists, the tax shall be deducted under Section 192. In other words, any benefits or perks (perquisites) given by the Company to its Directors and Employees, like ESOPs, Cars, Rent Free Accommodations, Free Tours, LTCs, Mobiles, Performance Linked Incentives etc. are not covered u/s 194R, as these are already subject to TDS u/s 192 under the Salary Head, of the Income Tax Act.If the recipient is a non-resident, the tax shall be deducted under Section 195.If the benefits or perquisites do not have a connection with the business or profession of the resident recipient/deductee.If benefits or perquisites are provided to a customer who does not engage in business or exercise of a profession. For example, if a business entity gifts valuable items, cars, etc., to its resident customers, no tax shall be deducted under Section 194R if a resident customer is not carrying on any business or profession.No tax shall be deducted under this provision if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided during the financial year does not exceed Rs. 20,000.This provision shall not apply to an individual or a HUF whose total sales, gross receipts or turnover does not exceed Rs. 1 crore in case of business or, Rs. 50 lakhs in case of the profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such Individual or HUF.Computation of value of benefit or perquisite for TDS under section 194RThe CBDT has clarified that the valuation would be based on the fair market value of the benefit or perquisite except in following cases:-The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite.The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.Note: The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under Section 28(iv) of the Act. The amount could be taxable under any other section like Section 41(1) etc. Unlike Section 195, where there is a requirement to check whether the sum payable to a person is chargeable to tax under the provision of the Income-tax Act or Double Taxation Avoidance Agreement (DTAA), no such requirement is there in section 194R.Rate of TDS & threshold limit u/s 194RThe person providing the benefit or perquisite has to ensure that tax has been deducted at the rate of 10% of the value or aggregate of the value of ‘such benefit or perquisite’. The tax shall be deducted under this provision if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided during the financial year exceeds Rs. 20,000.The CBDT has clarified3 that since the threshold of Rs. 20,000 is with respect to the financial year, calculation of value or aggregate value of the benefit or perquisite triggering deduction of tax under this provision shall be counted from 1st April of the financial year. Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds Rs. 20,000 during the financial year 2022-23 (including the period up to 30th June 2022), the tax shall be required to be deducted in respect of any benefit or perquisite provided on or after 01-07-2022.Section 194R and applicability of Section 206AA, 206ABSection 206AA provides that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB of the Act shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted at the rate mentioned in the relevant provisions of the Act or, at the rate in force or at the rate of twenty per cent, whichever is higher.If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate prescribed under Section 206AA4. However, if such deductee has not furnished the return of income for a specified period, the tax shall be deducted at the rate prescribed under Section 206AB5. Where both the provision of Section 206AA and Section 206AB are applicable, i.e., the deductee has neither furnished his PAN to the deductor, nor has he furnished his return of income for the specified period, the tax shall be deducted at the rates provided in section 206AA or section 206AB, whichever is higher.Illustration assuming PAN is not available:SectionNormal rate of TDSRate of TDS as per Sec 206AA (PAN not available)Rate of TDS as per Sec 206ABApplicable Rate194R10%20%2 × 10% = 20% OR 5% Whichever is higher20%Compliance requirements for section 194RThe tax deductor must make sure that TDS at the rate of 10% is deducted before providing any such benefit or perquisite.The tax deductor must deposit6 the tax deducted, on or before the 7th day of the next month to the credit of the Central Government of India. It is to be noted that the due date will be 30th April, in the case of the month of March with the use of TAN.The deductor must File TDS Returns Online quarterly in Form 26Q, on or before the specified due date as mentioned in the Act.The Deductor has to issue a certificate in respect of the tax deducted in Form 16A, at each quarter to the deductee.“The Deductor has to issue a certificate in respect of the tax deducted in Form 16A, at each quarter to the deductee.”Consequences of Non-ComplianceSection 194R provides that TDS is required to be deducted on the benefit or perquisites arising out of business/profession. i.e., the assessee is going to claim the expenses as deductible expenses in profit and loss account, and out of the same thirty present will be disallowed if the TDS is not deducted/ not paid according to section 40 (a) (ia).If the required TDS is not deducted, or TDS is deducted but not paid within timeline, then interest7 is payable on applicable rate. If TDS is deducted late, then interest @1% per month or part of the month is to be paid, and if the TDS is deducted but not paid then 1.5% interest per month or part of the month is paid/applicable. Also, if the TDS is not deducted or, deducted and not paid till the due date of filing of return, then Section 40 (a) (ia) can come into picture and thirty percent of benefit value can be disallowed.Some Relevant Points from CBDT Circular 12/2022, dated 16 June 2022(A) TDS Implication on Transactions with Dealers, Distributors, Channel PartnersNature of Benefits or PerksApplicability of TDS u/s 194RDealer/Business Conference, where it is in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.TDS u/s 194R will be applicableExpense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference. Expenditure incurred for family members accompanying the person attending dealer/business conference. Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference.TDS u/s 194R will be applicableTrade Discounts, Cash Discounts, Rebates on MRP/Listed Price of Products or ServicesNot Applicable, as per Ques. No. 4 of CBDT Circular No. 12/2022, dated 16.6.2022Additional Quantities provided Free of Cost with the Basic Price (1 plus 1 or similar schemes)Not Applicable, as per Ques. No. 4 of CBDT Circular No. 12/2022, dated 16.6.2022Incentives in Cash or Kind given to Dealers, Distributors, Channel Partners based on Target CompletionTDS u/s 194R will be applicableLoyalty Rewards in cash (cash back)/ prepaid vouchers/ kind/ in the form of discount on future purchasesTDS u/s 194R will be applicableGifts based on quantities/ values/ timing of purchase (e.g., Early bird schemes)TDS u/s 194R will be applicableIncentives and Gifts such as Bags, Kits, Gold/Silver Coins, Watches, Mobile Phones etc. for Target CompletionTDS u/s 194R will be applicableIncentives such as Free/Company Sponsored Entertainment Tours for Target CompletionTDS u/s 194R will be applicableInsurance coverage for the dealer and his employees/ familiesTDS u/s 194R will be applicable• Display items provided free of cost (to ensure uniform customer experience across dealers)• Training to the sales personnel of the dealers/ distributors• Assistance in stabilizing the operations of the dealers (developing marketing plans, maintenance of inventories etc.)• Access to the ERP developed by manufacturer free of cost, aiding in operations/ maintaining recordsMay not be subject to any TDS as an analogy can be drawn from specific exclusion provided in Ques. No. 8 of CBDT Circular No. 12/2022, dated 16.6.2022, in respect of Dealer Conference(B) TDS Implication on Transactions with Auditors/ConsultantsNature of Benefits or PerksApplicability of TDS u/s 194RReimbursement of out-of-pocket (travelling and conveyance, boarding and lodging) expenses to the auditors/ consultants by the recipient of service (company), where the Invoice of such out of pocket expenses is not in the name of the company.TDS u/s 194R will be applicable. However, if the Invoice as raised by such travelling or boarding agency, of such out of pocket expenses is in the name of Company, then No TDS u/s 194R is applicable.Customary gifts to business/ professional associates on festive occasions, celebrating successful completion of projects, etcTDS u/s 194R will be applicable(C) TDS Implication on Transactions with Social Media Influencers/Artists/Brand AmbassadorsNature of Benefits or PerksApplicability of TDS u/s 194RIf the Social Media Influencer/Brand Ambassador/Artist retains with it the Benefit or Perquisite or Product like Car, Mobile, Outfit, Cosmetics etc, for which he is exercising his social media influence, and the said Benefits or Perks are not returned to Company.TDS @ 10% u/s 194R, on Actual Cost Basis, or on Fair Market Value of such Benefits or Perks is required to be deducted by the Company hiring such Brand Ambassador or Artist, as clarified in Ques. No. 6 of CBDT Circular No. 12/2022, dated 16.6.2022.(D) TDS Implication on Deeming Basis on Incentives given by Third Parties to Company’s Director/Employee/ConsultantNature of Benefits or PerksApplicability of TDS u/s 194RIncentives in Cash or Kind given to any Director, Employee, Associate or Consultant of the Company by any Third Party, by virtue of the employment of such Director or Employee with the Company or by virtue of professional association of such Associate or Consultant with the CompanyTDS u/s 194R will be applicableAmendment introduced in Section 194R through Finance Act 20238The Government vide Finance Act 2023 has amended Section 28(iv) and 194R to clarify that any benefit or perquisite granted in cash or in kind, partly or wholly, will be Taxable.Amendment in Section 271 of Income Tax Act through Finance Act 2023Prior to this amendment, the provisions for penalty and prosecution do not clearly mandate a penalty or prosecution for a person who does not pay or fails to ensure that tax has been paid in a situation where the benefit or perquisite is passed in kind. Therefore, to enable such penalty and prosecution, Amendments have been made in section 271C and section 276B to provide for penalty and prosecution where deductor fails to ensure that tax has been paid under Section 194R. This amendment was effective from the 1st day of April 2023.ConclusionCompanies should analyse the provisions of newly introduced section viz. applicable w.e.f 01 July 2022 and its impact assessment as there are different types of perquisites & benefits that are provided to their dealers/ distributors/agents/ channel partners etc. to avoid any penal consequences. The newly introduced provision will increase the compliance requirements for the companies. However, Circular9 issued by CBDT clarifying various open points is a welcome step. Further, In addition to the above Income Tax provision, Companies are also required to looked into GST provisions u/s 17(5) of CGST Act which states that ITC should be reversed w.r.t goods given as gift or free samples. These amendments in Finance Act 2023, section 194R and section 28(iv) of the Act expand the scope of taxable benefits or perquisites, provide clarity of intention that the provisions are now applicable in respect of benefits in cash or partly in cash and partly in kind.References & Statutory NotesSection 194R(1) of the Income-tax Act, 1961: Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite.CBDT Circular No. 12 of 2022, dated 16 June 2022.CBDT Circular No. 12 of 2022, dated 16 June 2022 (Threshold counting from 1st April).Section 206AA(1) of Income-tax Act, 1961 (Requirement to furnish PAN).Section 206AB(1) of Income-tax Act, 1961 (Special provision for deduction of tax at source for non-filers of income-tax return).Rule 30 of Income Tax Rules, 1962 (Time and mode of payment to Government account of tax deducted at source).Section 201 of Income Tax Act, 1961 (Consequences of failure to deduct or pay).Finance Act 2023, as assented by President on 31st March 2023.Supreme Court Judgment in the matter of M/s Apex Laboratories Pvt Ltd Vs. DCIT [2022] 442 ITR 1 (SC).Author may be reached at: caanshukhemka@gmail.com and eboard@icai.in

The scope and amplitude of the definition “charitable purpose” under the Income Tax Act, 1961 has engaged the attention of various courts on myriad occasions. Even after the insertion of proviso to section 2(15) vide Finance Act, 2015, it is still a subject of debates.Recent judgment of the Hon. Supreme Court in the case of “ACIT (Exemption) Vs. Ahmedabad Urban Development Authority (2022)”1 explains in depth the interpretation of the term “charitable purpose” for the trust or institutions engaged in the advancement of any “other object of general public utility”.The Income Tax Act, 1961 (hereinafter referred to as the Act”) visualizes seven kinds of charitable purposes, i.e.:Medical relief;Education;Relief for the poor;Preservation of environment;Preservation of monuments or places or objects of artistic or historic interest;Yoga; andThe advancement of any other object of general public utility.The last or the residual purpose included in the definition “advancement of any other object of general public utility”, can be described as “per se purposes”. Proviso to section 2(15)1 of the Act specifies restriction on the category of “advancement of any other object of general public utility”. It provides that the advancement of any other object of general public utility will not be considered as charitable purpose, if such an activity is undertaken in the actual carrying out of such advancement of any other object of general public utility and the aggregate receipt from such an activity during the previous year does not exceed 20% of the total receipt. The proviso is applicable only to this last category. Hence, proviso to section 2(15) regarding carrying out of trade, commerce or business activity for the fees, cess or any other consideration is not applicable to the six categories.It was held in many judicial rulings that the carrying out of any trade, commerce, or business, is not a per se bar or disqualification for claiming to fall under “the advancement of any other object of general public utility”. The only important thing is the manner of carrying out of such an activity.Before the judgment of “ACIT vs. Ahmedabad Urban Development Authority (2022), most of the judicial rulings supported a predominant objective test. Hence, if the activity of trade, commerce or business was conducted by the trust, but the predominant object of the trust was charitable in nature, such an activity was treated as “charitable” even if it was conducted for profit. But after the above judgment, the focus is shifted to the manner of conducting the activity. Hence, it is necessary to understand section 2(15) considering the impact of this judgment.History of section 2(15)The Category of “advancement of any other object of general public utility” was there in the old Income Tax Act, 1922. The dispute for section 2(15) started when a printing press claimed that the publishing of newspapers is a charitable activity as they were improving the knowledge through the publication of newspapers.Hence, the first amendment was made in the year 1939 by inserting a new clause that the income from a business will be exempt only if it’s either carried on in the course of primary purposes of the trust or carried on mainly by the beneficiaries of the trust or institution.In the Income Tax Act, 1961, the word “not involving the carrying on of any activity for profit” was added with effect from 01.04.1962 to prevent the misuse of the definition of “charitable purpose”. But these words created litigations.In the year 1980, the Hon. Supreme Court, in the case of Assistant Commissioner vs. Surat Art Silk Cloth Manufacturer’s Association (1980) 2 SCC 31, applied a predominant object test and held that if the predominant object is not to make a profit, the activity is charitable even if it is carried on for profit. The term “not involving the carrying on of any activity for profit” goes with “object of general public utility” and not with “advancement”. It is the object of general public utility, which must not involve the carrying on of any activity for profit and not its advancement or attainment. Further, the Hon. Apex Court in this case of Surat Art Silk held that “what is inhibited by these last ten words is the linking of activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object”. Moreover, it was held that the word “involve” used in this expression defines that the activity for profit must be an integral part of such a purpose of the trust or institution. Hence, there must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or in other words, the Hon. Court decided that “it must be carried on in order to advance the purpose or in the course of carrying out the purpose of the trust or institution. For the meaning of the word “activity for profit”, the Hon. Court decided in this case of Surat Art Silk that it is not enough that as a matter of fact an activity must result in profit but it must be carried on with the object of earning profit”. The predominant object of the activity must be making a profit. Hence, where an activity is carried on as a matter of advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, the predominant object of such an activity must be to subserve the charitable purpose and not to earn profit. The test to be applied is whether the dominant object of the activity is profit making or carrying out a charitable purpose. Many other judgments also supported this view.2After this judgment, the expression “not involving the carrying on of any activity for profit” was omitted by the Finance Act, 1983 w.e.f. 01.04.1984 and section 11(4A) was inserted and subsequently amended w.e.f. 01.04.1992 and continues in force. The reasons for the introduction of this new section 11(4A) is mentioned in the Memorandum of the concerned Finance Bill. It says that this section stipulates that the income of the trust or institution, being profit and gains of a business, is entitled to exemption under section 11, only if the business of the trust or institution is incidental to the attainment of the object of the trust, or institution and separate books of accounts are maintained by the trust or institution in respect of such business.In case of ACIT vs. Thanthi Trust (2001) 247 ITR 785, the trust was running a business of newspapers and applied surplus income in running a school and hostel. The Hon. Supreme Court held in this case that as the primary purpose of the trust was to carry out charitable activities, exemption under section 11 cannot be denied.Section 2(15) was further amended by the Finance Act, 2008 w.e.f. 01.04.2009 and then by the Finance Act, 2015, which is still in force. In the Finance Act, 2015, first two proviso of section 2(15) were deleted and a new proviso was inserted. This proviso provides that - the category of advancement of any other object of general public utility will not be charitable if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such an activity, unless—(i) such an activity is undertaken in the course of the actual carrying out of such an advancement of any other object of general public utility; and(ii) the aggregate receipts from such an activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such an activity or activities, of that previous year;”Hence, after the amendment, the deciding factor is:Manner of carrying out of activity; andThreshold limit of 20% of total receipt.Salient points of the case: ACIT vs. Ahmedabad Urban Development Authority (2022)In the case of ACIT vs. Ahmedabad Urban Development Authority (2022), the assessee was the development authority, which was created for the development and redevelopment of the area and for the development of road and allotment of lands after redevelopment. It has generated revenue for disposal of plots through public auction. The entirety of such a revenue was kept in a separate fund and utilized for further development and expansion activities. The Revenue treated the activity as “trade, commerce or business” and denied exemption applying section 2(15). The Assessee trust referred to the previous judicial rulings and argued that as the predominant object of the trust is “charitable” in nature and not to make profit, hence, exemption to the trust cannot be denied. The Revenue relied on the expression “in the course of actually achieving the charitable object” and limit of 20% of the total receipt. The Revenue pointed out that decisive factor is the nature of the activity and not the status of the entity.The Hon. Supreme court scrutinized the judgment of the Surat Art Silk case and held that after this judgment, there are amendments made in section 2(15). Section 2 starts with the word “In this Act, unless the context otherwise requires”. It means that in case there is anything contrary is expressed in any specific provision in the body of the Act, a different meaning can be attributed. The Hon. Supreme Court considered the history of section 2(15), speeches in the parliament while introducing amendments and circulars to decide the case and observed as under:The trust or institution advancing the category of advancement of any other object of general public utility can carry on trade, commerce or business subject to the condition that such activity of trade, commerce or business should be “connected” to achieve objects of general public utility and receipts from such business should not exceed 20% of the total receipt. The SC interpreted that the meaning of the actual carrying out of GPU objectives” means that the activity should be connected to general public utility objectives.Charging of any amount towards consideration for such an activity on cost-basis or nominally above cost cannot be considered as “trade, commerce or business.” If the amount charged is significantly above the cost, then only it will fall under “trade, commerce or business”.Requirement of maintenance of separate books of accounts is applicable to section 2(15) also. This requirement is inserted to ensure that the quantitative limit shown under section 2(15) has not been breached.Impact of the decision on section 2(15)It can be observed from the history of section 2(15) that before the amendment in section 2(15), the deciding factor was the predominant object of the activity. This test was applied to determine whether such an activity was essentially “charitable” or “for profit”. If the predominant object was not for profit but advancement of general public utility, earning of some profit would not debar it from claiming to be a trust with a charitable purpose. It was decided in many judicial rulings3 that proviso to section 2(15) only bars commercial/ business activities undertaken for profit motive and mere earning of an income from such activities is not barred by the proviso. However, if the predominant object was such that the profit motive was “enwrapped” or “intertwined” with it, the trust could not be called charitable.After the decision of the apex court, the prohibition under section 2(15) applies in four-fold:(a) engaging in trade, commerce, or business,(b) providing any service in relation to trade, commerce, or business,(c) “for a fee, cess or any other consideration”, which is the controlling phrase for both (a) and (b) (which are collectively referred to as “prohibited activities”).(d) irrespective of the application of the income derived from such ‘prohibited activities’The necessary implication is that even if the activities from such prohibited categories are not undertaken for profit motive, but it is undertaken in the course of carrying out of advancement of any other object of general public utility, then such activities will not fall under “charitable purpose”. The words “irrespective of” points out that the manner of application of such income is irrelevant. Hence, if the activity in the nature of trade, commerce, or business is completely irrelevant with the activity in the nature of general public utility, such activity will not be charitable, even if the surplus from such an activity is ploughed back and applied for charitable activity.Moreover, section 2(15) provides that the trust having the objects of GPU category cannot engage in any activity in the nature of trade, commerce, or business. Hence, it emphasized negative language. Therefore, the idea of predominant object is discarded by the Hon. Supreme Court in the judgment of “ACIT vs. Ahmedabad Urban Development Authority”.Generally, no commercial or business activity should be conducted by the general public utility category charity. But if it is conducted “in the course of” the functioning of carrying out of general public utility activity, they can do so in a limited manner subject to provisions of section 2(15).Meaning of the term “trade, commerce, or business” as explained in the judgment4As observed by the Hon. Apex Court in the case of Ahmedabad Urban Development Authority (supra), the deciding factor for the activity in the nature of “trade, commerce, or business” is arguably the cost. If the activity, in the nature of trade, commerce or business, is conducted at a cost or a marginal mark-up, such activity will fall under the definition of “charitable purpose”. But if such an activity is conducted at the amount significantly higher than the cost, it will not fall under “charitable purpose”. In other words, if any activity is rendered or fees is collected or any consideration has been received that merely covers its expenditure including administrative expenditure and other costs, including a small proportion of the provision, such amounts will not be considered towards trade, commerce, or business. However, if the amount is significantly higher than the recovery of cost, it will be treated as receipts from trade, commerce, or business. The Court observed in this case that blood bank services with fees to cover cost, providing access to low-cost hostel to weaker segments of society, where the fees are recovered to cover costs are not activities in the nature of trade, commerce, or business.Further, the Hon. Apex Court observed in the case of Ahmedabad Urban Development Authority (supra) that if a marriage hall, or shops, or offices owned by the trust are given on rent out at cost or a marginal mark-up, it will not be considered as “trade, commerce or business”. Similarly, if the fees are collected for essential services in larger public interest such as water cess, sewage cess, distribution of food grain, distribution of medicine, maintenance of road etc. by statutory corporation or bodies, it cannot be considered as “fees, cess or other consideration” and it is not trade, commerce or business.In the same manner, if the fees of cess or any other consideration” is collected for the purpose of an activity by a state department or entity, which is set up by a statute, its mandate to collect such an amount cannot be treated as consideration towards trade or commerce, as it is conducted in the course of advancing objects of general public utility.However, if paid workshops, training courses and skill development courses, renting of spaces for trade fair etc. are conducted at an amount significantly higher than the cost, it will be considered as an activity in the nature of trade, commerce, or business.The manner of calculation of the cost is not explained in the judgment. But it can be interpreted that the cost incurred to earn relevant income generated from a relevant activity should be termed as “cost” for the purpose of this section. The notable point here is that as provided in section 2(15), even if the activity is trade, commerce, or business which generated profit, but such profit is less than 20% of the total receipt, then it is charitable purpose. But separate books of accounts needs to be maintained for such activity.Effect of section 11(4A) on section 2(15)Section 11(4A) is applicable where trust carries on a business. It states that such business should be incidental to carrying on of trust objects and separate books of accounts should be maintained. The term “incidental” used in section 11(4A) to be interpreted in the light of section 2(15). Hence, activity in the nature of trade, commerce, or business should be conducted actually in the course of attaining objects of advancement of any other object of general public utility. Hence there is no conflict between the provisions of section of 2(15) and 11(4A). In other words, if provisions of section 11(4A) are not satisfied, the activity will not fall under “charitable activity” within the meaning of section 2(15) of the Act.Applicability of this judgmentThe Hon. Supreme Court in the case of “Manoj Parihar and others vs. State of Jammu and Kashmir and Others” (2022) reiterated that the law declared by a court will have retrospective effect, if not otherwise stated to be so specifically. Hence, most of the Supreme Court judgments are applicable retrospectively. It can be argued that the judgment in the case of Ahmedabad Urban Development Authority (Supra) is applicable prospectively. The reason behind the same is that when High Courts have divergent view on similar issues, the Supreme Court can give judgment with prospective effect. The Supreme Court has clarified in response to miscellaneous application no. 1849/2022 filed in the case of Ahmedabad Urban Development Authority (2022) that wherever the appeals were decided against revenue, they are to be treated as final. However, the reference to future applications has to be understood in this context, which is that for the assessment years which this court was not called upon to decide, the concerned authorities will apply the law declared in the judgment, having regard to the facts of each such assessment year.Calculation of income in case of violation of section 2(15)Section 13(10) inserted vide Finance Act, 2022, specified the manner of computation of income when provisions of section 2(15) are violated. Hence, if the trust has received income from the activity in the nature of trade, commerce, or business and such income exceeds 20% of the total receipt of the trust or institution during the year, its income will be chargeable to tax after deduction of expenditure other than capital expenditure subject to the following conditions:Such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed;Such expenditure is not from any loan or borrowing;Claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; andSuch expenditure is not in the form of any contribution or donation to any person.Key takeawayAfter the Supreme Court judgment in case of ACIT vs. Ahmedabad Urban Development Authority, (2022), the focus to define “charitable purpose” is shifted from predominant object to the manner of conducting activity. Hence, if the trust or institution having an object of advancement of any other object of general public utility will conduct any activity which will fall under the expression ”trade, commerce, or business”, it will be considered as charitable purpose, only if two conditions are satisfied. The first condition is that such activity should be conducted in the course of actual carrying out of the activity of advancement of any other object of general public utility and the receipts from such activity should be less than 20% of the total receipts. If these two conditions are not satisfied, the income from such activity will not fall under “charitable purpose” under section 2(15) and such income will be taxable in the hands of the trust or institution. Also, an application of such income for charitable purpose will not be considered. Now, not only the objects of the trust, but the actual purpose of the activity has to be considered. The actual purpose of the activity should be “advancement of any other object of general public utility”.ConclusionNow, steps to decide, whether any activity of “advancement of any other object of general public utility” is charitable in the nature or not are as under:Whether such activity is conducted for a “fees, cess, or any other consideration”? Yes / No.If yes, whether such activity is conducted at a cost or a marginal mark-up? Yes / No.If the answers to both the questions are yes, then only such activity will not be treated as “trade, commerce, or business”. If the answer to question (2) is No, such activity will be treated as “trade, commerce, or business” and in such a case, the income from carrying out of such activity should be less than 20% of the total receipt. Also, separate books of accounts shall be maintained for such activity. If the income from such activity will exceed such limit, it will not be treated as “charitable” in nature within the meaning of section 2(15). Hence, it is suggested to consider these points while conducting any activity.References & Case CitationsProviso to section 2(15) of the Income Tax Act, 1961: “Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless— (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”Supporting Case Rulings: Saurashtra Cricket Association v. Income Tax Officer (2019) 202 TTJ 409 (Guj. HC); CIT v. Federation of Indian Chamber of Commerce and Industry (1981) 130 ITR 186 (SC); India Trade Promotion Organization v. DGIT(E) (2018) 371 ITR 333 (Delhi-HC).Judicial Rulings on commercial activity: Dir. Of Supp. & Disp. v. Board of Revenue (1967) (3) SCR 778; H. Abdul Bakhi & Bros. Barendra Prasad Ray v. ITO (1981) (3) SCR 387; State of Gujarat v. Raipur Manufacturing Company Ltd. (1967) (1) SCR 618; CST v. Sai Publication Fund (2002) (2) SCR 743.Apex Court Benchmark Verdict: ACIT (Exemption) Vs. Ahmedabad Urban Development Authority (2022) 143 taxmann.com 278 (SC).Author may be reached at: chunautidholakia@gmail.com and eboard@icai.in

Section 18(6) of the Central Goods and Service Tax Act, 2017 provides that when any capital goods on which input tax credit has been availed are supplied, the person is required to pay tax. The amount payable under this section is the reduced value of the input tax credit or tax calculated on the transaction value, whichever is higher. The manner of computing the reduced value of input tax credit has been given in Central Goods and Service Tax Rules, 2017. Interestingly, two rules - rule 40(2) and rule 44(6) have been framed for this purpose and both the rules provide a different manner of computation, thereby creating an anomaly. Let’s understand through the article.IntroductionCapital goods comprise of an important part of the business assets of any person. Since a huge amount of Input tax credit is involved in such goods, stringent provisions have been kept in Central Goods and Service Tax Act, 2017 and rules framed thereunder to ensure that such goods are used in the business of the person claiming Input tax credit on the same. In case the said capital goods are supplied to any other person, tax is payable on the same. However, the provisions prescribing the manner of computation of tax payable on the supply of such capital goods are ambiguous and contradictory. This piece of articulation dives into the whereabouts of this anomaly.What are Capital Goods?Central Goods and Service Tax Act, 2017 and rules framed thereunder prescribe special provisions for capital goods. But before discussing those provisions, it is important to know which goods qualify as “Capital goods” covered in the net of those special provisions.As per section 2(19) of the Central Goods and Service Tax Act, 2017:“capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.The analysis of the above definition makes it clear that to fall in the definition of capital goods, the following conditions are to be satisfied:There should be “goods”;The value of such goods is capitalized in the books of the person claiming credit;The said goods are used or intended to be used in the course or furtherance of business.The term goods is defined in section 2(52) of the Central Goods and Service Tax Act, 2017 which states that:“goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.In view of this definition, land and building, even though capitalized, does not fall in the definition of capital goods as it is not “goods” per se. Therefore, not everything that is capitalized in the books of accounts of a person will qualify as capital goods under Goods and service tax law. Every asset of a business must be scanned under the provisions of section 2(19) to ensure whether it is capital goods or not.Admissibility of Input Tax Credit on Capital Goods under GST LawUnder the erstwhile Central Excise Act, 1944, credit in respect of capital goods was allowed to an amount not exceeding 50% of the duty paid and the balance was allowed in any financial year subsequent to the year of purchase. But Central Goods and service tax Act 2017 allows the 100% input tax credit at the time of purchase subject to the following terms and conditions:The general conditions prescribed in section 16 of the Central Goods and Service Tax Act 2017 should be satisfied.Capital goods should not be used exclusively for exempt supply.100% input tax credit is allowed on capital goods that are used exclusively for the taxable supply.However, if capital goods are used commonly for both taxable and exempt supply; then 100% credit is admissible subject to the condition that the proportionate amount of credit attributable to exempt supply shall be reversed in the manner prescribed under rule 43 of Central Goods and service tax rules, 2017. This reversal must be done in every tax period for the period of five years from the date of purchase.In the nutshell, if the capital goods are used exclusively for taxable supply or for making both taxable and exempt supply, the input tax credit is allowed. Once a credit is taken on any capital goods and the same is supplied to any other person whether or not, for a consideration, it is treated as supply and tax is payable on the same under the provisions of section 18(6) of Central Goods and Service Tax Act, 2017.“Provisions of section 18(6) are attracted only if the input tax credit was availed on any capital goods.”Section 18(6) of Central Goods and Service Tax Act, 2017When a person supplies capital goods or plant and machinery on which input tax credit has been availed, it is treated as supply and tax is payable on the same. This tax is to be paid in the manner prescribed under sub-section 6 of section 18 of the Central Goods and service tax. This sub-section reads as follows:“(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.”Thus, if capital goods or plant and machinery on which credit was availed are supplied, tax payable is computed by considering the higher of the following two figures:Input tax credit taken on said capital goods / plant & machinery reduced by prescribed percentage; orTax on the transaction value of such capital goods / plant & machinery.Thus, two figures are to be computed; the first one is the input tax credit taken on such capital goods which shall be reduced by a prescribed percentage. The manner of computing the reduced input tax credit is prescribed in the Central Goods and Service Tax Rules, 2017. Central Goods and service tax rules prescribe the manner of computing reduced input tax credit referred in section 18(6) in two rules – rule 40(2) and rule 44 of Central Goods and Service Tax Rules, 2017. Interestingly, both rules prescribe two different manners of computing the reduced input tax credit, thereby creating ambiguity.Rule 40 of Central Goods and Service Tax Rules, 2017Rule 40 prescribes the manner of claiming credit in special circumstances. Sub-rule 2 of this rule reads as follows:“The amount of credit in the case of supply of capital goods or plant and machinery, for the purposes of sub-section (6) of section 18, shall be calculated by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods.”The language of sub-rule 2 of rule 40 makes it clear that:It has been framed to provide the manner of calculating the reduced input tax credit under section 18(6).In this rule, reduced input tax credit is computed by reducing five percentage points for every quarter or part thereof.The reduced input tax credit shall be computed on a quarterly basis right from the date of issue of the invoice of such goods.The rule is simple and unambiguous. However, there is one more rule framed section 18(6) which provides a different manner of computation under the same situation.Rule 44 of Central Goods and Service Tax Rules, 2017Rule 44 provides for the manner of reversal of credit under special circumstances. Sub-rule 6 of this rule reads as follows:“The amount of input tax credit for the purposes of sub-section (6) of section 18 relating to capital goods shall be determined in the same manner as specified in clause (b) of sub-rule (1) and the amount shall be determined separately for input tax credit of Central tax, State tax, Union territory tax and integrated tax.Provided that where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in FORM GSTR-1”The analysis of sub-rule 6 makes it clear that the manner of computing reduced input tax credit for the purpose of section 18(6) shall be the same as provided in clause (b) of sub-rule 1 of rule 44. This clause reads as follows:“(b) for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as five years.Illustration:Capital goods have been in use for 4 years, 6 months and 15 days.The useful remaining life in months = 5 months ignoring a part of the month.The Input tax credit is taken on such capital goods = C.Input tax credit attributable to remaining useful life = C multiplied by 5/60.”The analysis of rule 44(6) read with rule 44(1)(b) of Central Goods and Service Tax Rules, 2017 makes it clear that, in case of a supply of capital goods, the reduced input tax credit will be computed on pro-rata basis by taking useful life of such capital goods as five years. As per the illustration given in clause (b) above, computation is to be done by taking the useful life of capital goods in months.Rule 40(2) v/s Rule 44(6) – Detailed Comparison & Practical Case IllustrationBoth the rules clearly give reference to section 18(6) of the Central Goods and Service Tax Act, 2017 and are clearly worded. There is no scope for any ambiguity so far as the language of the individual rule is concerned. However, rule 40(2) provides the manner of reducing input tax credit on a quarterly basis. On the other hand, rule 44(6) provides the manner of computing reduced input tax credit on a monthly basis taking useful life as 5 years or 60 months. In some cases, the computations made in both rules will give different results. Let us understand it with the help of an illustration.Case Facts:Suppose, X Limited purchased capital goods on 01.03.2021 for ₹ 10,00,000. Integrated tax amounting to ₹ 1,80,000 (18%) was charged on the invoice. X Limited had taken its input tax credit in the month of March, 2021. On 24.10.2022, X Limited supplied these capital goods to Y Limited for ₹ 5,50,000.Let us compute the amount of tax payable in terms of section 18(6) of the Central Goods and Service Tax Act, 2017 read with rule 40(2) as well as rule 44(6) of Central Goods and Service Tax Rules, 2017:Computation 1: Section 18(6) read with Rule 40(2) (Quarterly Basis)In terms of rule 40(2), the reduced input tax credit is to be computed on a quarterly basis. It will be calculated by reducing the amount of input tax credit attributable to quarters in which capital goods were used from the total input tax credit availed. Capital goods were purchased on 01.03.2021 and sold on 24.10.2022. It means it has been used for total of 8 quarters – starting from January to March, 2021 quarter until October to December, 2022 quarter. Thus, we will reduce the Input tax credit attributable to 8 quarters from total credit availed in order to arrive at the figure of the reduced input tax credit.ParticularsAmount (₹)(a) Reduced input tax credit computed on quarterly basis:    Total input tax credit: ₹ 1,80,000    Less: ITC attributable to 8 quarters/part of quarters in which capital goods was used [1,80,000 * 5% * 8 quarters = ₹ 72,000]1,08,000(b) Tax on transaction value [5,50,000 * 18%]99,000Tax payable under Rule 40(2) (being higher of above two figures)₹ 1,08,000Computation 2: Section 18(6) read with Rule 44(6) (Monthly Pro-rata Basis)In case of rule 44(6), amount of input tax credit to be reversed is to be calculated on monthly basis taking into consideration the remaining useful life of capital goods. Capital goods was purchased on 01.03.2021 and sold on 24.10.2022. It means it has already been used for 20 months, so its remaining useful life is 40 months (out of 60 months).ParticularsAmount (₹)(a) Input tax credit attributable to remaining useful life of capital goods [1,80,000 * 40/60]1,20,000(b) Tax on transaction value [5,50,000 * 18%]99,000Tax payable under Rule 44(6) (being higher of above two figures)₹ 1,20,000Thus, the amount of reduced input tax credit calculated under rule 40(2) comes ₹ 1,08,000 and in case of rule 44(6), it comes ₹ 1,20,000. This example is sufficient to show the huge impact of anomaly created by these two rules (a variance of ₹ 12,000 on a single transaction).While PartingProvisions of section 18(6) are attracted only if the input tax credit was availed on any capital goods. So, in case of capital goods, on which either credit is not allowed or on which no credit was availed, will not be covered by this section. For example, if any person sells used motor vehicle the credit of which is restricted under section 17(5) of the Act; its sale will not be covered in section 18(6). Tax on such motor vehicle will be paid on basis of transaction value computed under section 15.However, in all the other cases where credit was availed and such capital goods are supplied, section 18(6) will be attracted. It is worthwhile to mention here that selling used capital goods is a common phenomenon in businesses. There are number of capital goods that require huge investments which makes it non-affordable for small businesses. There are couple of other factors also which makes the trading of used capital goods a common practice; thereby attracting the provisions of section 18(6) of Central Goods and Service Tax Act, 2017. Once this section is hit, the anomaly gets automatically triggered.Though above anomaly exists, one may take a reasonable interpretation of applying Rule 44 for the purpose of section 18(6) instead of Rule 40. This is so because title of Rule 44 is worded as “Manner of reversal of credit under special circumstances” whereas title of Rule 40 is worded as “Manner of claiming credit in special circumstances”. At the time of supply of capital goods, the supplier is going to pay the tax (reverse the credit) and not claim the credit. However, one may have to litigate if the department’s intent is different.Therefore, suitable amendment for the welfare of trade can be explored in this direction.Author may be reached at: preeti.parihar@gmail.com and eboard@icai.in

The traditional approach to improve the financial performance of an enterprise, especially during business downturn situations is to cut back on costs. But the real solution lies in continuous improvement in Value Return (V R) per rupee of cost incurred. The cost spenders should consciously assess whether the Rupee they are proposing to spend would improve the company’s V R. In other words, cost spenders should sit in the seat of the customers and decide as a customer, whether they would return the value.The Core Philosophy: Adding Value vs. Returning ValueThe traditional approach to improve the financial performance of an enterprise, especially during business downturn situations is to cut back on costs. But the real solution lies in continuous improvement in Value Return (VR) per rupee of cost incurred. The cost spenders should consciously assess whether the Rupee they are proposing to spend would improve the company’s VR. In other words, cost spenders should sit in the seat of the customers and decide as a customer, whether they would return the value.The suppliers of products / services are the trustees of the customers’ money. When a product is bought, the customer returns the value to the supplier. By adding a Rupee to the cost, you are not ‘Adding Value.’ The value is added only when the value is returned by the customer.The customer may refuse to Return the Value when the Rupee cost incurred has no value to him. Why do certain companies incur losses and are not able to face even domestic competition? Why are certain corporates wary of Global Competition? The reason is simple. Over the years, they have built up costs by sacrificing customers’ interests, all of which the customer would refuse to return, when offered a choice. When there was no choice, the customers were compelled to do that. Had these companies been conscious about the costs passed on to their customers, they would have ensured that their costs are such that they would be acceptable to the customers in a Free Economy. This would have enabled them to face competition in world markets, much before the competition forced them to look at their costs.Concept of VR and Its PracticeThe distinct thing in the case of VR is that it does not simply look at Cost vs Benefit to an enterprise. It goes much beyond that. In case of VR, if a particular level of spending or particular costs do not yield desired benefits, it aims at probing further to improve the VR, even by incurring further spending of costs elsewhere.Practical Case Illustrations:Advertising Budget: If an Advertisement Budget of a company worth Rs 10 million in a three months period has not boosted the sales, an enterprise adopting VR concept would not cut back on Advertisement costs of the future months, but rather look at the alternative of further boosting the Advertisement Expenses to improve the overall VR.Discounts vs. Free Gifts: When an enterprise offering discounts on the products, costing Rs 50 million a month to improve sales, finds that there is no significant benefit under such a situation, the traditional thinking would be to discontinue discount offers to cut back on costs. However, under the VR concept, the enterprise would be looking at further spending in other cost areas like Free Gifts so as to improve the overall VR.The VR aims and finally tends to achieve a reduction in the Per Unit Cost, while traditional cost cutting measures aim to bring down costs in aggregate Per Se, which may not ultimately result in the reduction of Per Unit Cost and in some cases, it may rise.Biscuit Packaging Case: A Biscuit manufacturing company in order to cut back on costs, changed over from Glossy Paper and Printing to Ordinary Paper and Printing for its packing. No doubt, the company achieved a reduction in the Aggregate Costs Per Se, but the Sales and Production dropped to such an extent that ultimately, even with a reduction in the packing costs, the per unit cost went up. In other words, the Value Return per Rupee of cost incurred went down affecting the Profit Performance of the company.In the above situation, the practitioners of the VR concept would have spent more money on the Glossy Packing and Printing, and initiated other additional cost spending measures as may be prudent, which would boost the sales and thereby improve the VR.Strategic Turnaround Case: Professional Consultancy FirmSuppose a consultancy firm, practicing in the consultancy services, is plagued with the problem of high marketing overheads and underutilization of other managerial resources. The Value Return, in such a case, gets affected.What should the firm do?A traditional C.E.O would resort to Cost Down measures by chopping off the Marketing and Consultancy staff strength and other Marketing Expenses like Advertisement Expenses, Publicity materials, etc. The reduction in Marketing Staff and Expenses would further reduce the revenues disproportionately, and therefore cause a rise in the Per Unit Cost of Service.However, the C.E.O of the firm strongly believes in the VR concept, and found a solution to increase the VR, rather than cut the costs. The firm’s solution, therefore, was in switching over to ‘MASS CONSULTANCY SERVICES’ in order to boost its VR.The Model of Mass Consultancy Services:There are many enterprises in the Medium and Small-Scale Sector which require inputs to systematise various functional activities like Production, Material Procurement, Financial Accounting, Marketing, etc. But these enterprises lack the first step of contact with the right persons to do the job. Also, by nature and by virtue of the very size of the enterprise, they are unwilling to spend significant amounts to streamline the organisational systems. Here lies the scope for ‘Mass Consultancy Services.’ In the ‘Mass Consultancy Services,’ solutions for enterprises are readymade and standard. Each enterprise may therefore adopt it almost immediately, with or without modifications, as they deem necessary, depending upon any special features or circumstances of an enterprise.So, the Consultancy firm as a measure to provide ‘Mass Consultancy Services,’ may bring out certain standard products. These are such that they are useful to the enterprises in actual business situations for adoption, to systematise various functional activities. They are also educative to the organisational people and hence meet another requirement of such enterprises i.e., ‘Knowledge Transfer,’ thereby catering to the intellectual development of its employees.Another important factor due to the above advantages is that the enterprises are willing to pay a ‘Premium’ on the product and, at the same time, are able to get ‘Mass Consultancy Services’ at a fraction of the cost, compared to that of Tailor-Made Consultancy Services, since the Consultancy Firm could spread its total cost over a sufficient number of clients. Indeed, it is a Win-Win situation for both the Service Receiver and the Service Provider.The consultancy firm may bring out the standard products by utilising the current managerial resources, and successfully market its products by utilising the same marketing staff and by moderately increasing the expenses on publicity materials etc., but most importantly, by realising its goal of increasing the Value Return Per Rupee of Cost.“Value Return, a new concept advocated here, should not be confused with the traditional concepts like Value Engineering, Cost Control, or Cost Reduction.”Distinguishing VR from Traditional Cost ConceptsConceptCore Objective & ApproachValue EngineeringLays emphasis on cost reduction by redesigning a product, substituting with lower cost materials, or eliminating a feature without sacrificing the functional quality of a product.Cost ControlFocuses on setting standards for various elements of costs and monitoring actual costs against standard for control purposes.Cost ReductionAims to bring down Cost Per Unit either by Value Engineering or improvements in processes, methods, systems, procedures, and economies of scale.Value Return (VR)While retaining the costs, aims to make it fully effective, even by stretching a cost if necessary. It challenges managerial intellect to derive the full potential of a cost, rather than taking the ‘easy approach’ of chopping off costs by authority.“Cost Reduction aims to bring down the Cost Per Unit of a product, either by Value Engineering, or by improvements in processes, methods, environment, systems, procedures, achieving economies of scale, etc.”A country’s economy would not see recession if the government staff and corporate brains are provoked to think in the direction of making a cost a fully effective one, rather than chopping it off. Chopping a cost off has a chain reaction, triggering reactions like ‘Recession’, whereas achieving cost effectiveness would take markets and the economy forward.However, it should be distinctively understood that there could be some pockets of ‘Dead Costs’ which are to be got rid of before it stinks.Additional Business Examples of Enhancing VR:Shoe Retail Outlets: A shoe company selling other complementary brands of footwear in their retail outlets to tag on more revenue sources per rupee of retail overhead incurred.Pharma Co-Marketing: Pharmaceutical companies taking up co-marketing of products of other pharma companies to optimize field-force and licensing costs.Budgeting Role: Every organisational employee shall, at the time of budgeting an expense and its actual spending, ponder over whether the expense will be effective and how to enhance its effectiveness. Approving authorities must play a proactive role here.Mathematical Computation of Value Return (VR)VR can be computed for each cost component or sub-components, or total costs of the product or service, or a group of products or services, or an entity as a whole.VR for a Period = ∑ X ÷ ∑ YWhere:X = Aggregate Revenue for the relevant product or group of products or the whole entity.Y = Aggregate Cost Component of the relevant type for the relevant product or sub-cost components or Total Costs.Numerical Demonstration: Detergent Soap Manufacturing (October)Total Sales Revenue = Rs 30Material Cost = Rs 10 → VR of Material Costs = 30 / 10 = 3.0Direct Costs = Rs 20 → VR of Direct Costs = 30 / 20 = 1.5Total Costs = Rs 25 → VR of Total Costs = 30 / 25 = 1.2Explained:When VR of Material Costs = 3.0, the value returned by the customer is 3 times the material cost, leaving ample margin to cover other operational costs plus profit.When VR of Direct Costs = 1.5, the value returned is 1.5 times direct costs, providing margin to cover indirect costs and return.When VR of Total Costs = 1.2, the net return after covering all costs is 0.2 (20% surplus).Normative or Ideal VRThe state of an organization is reflected in its VR:Break-even: If an organization breaks even (as an entity or product line), VR = 1.0.Profitable: If an entity makes a profit, VR > 1.0.Loss-making: If an enterprise incurs losses, VR < 1.0.Normative or Ideal VR = 1 + ZWhere Z = ROI in absolute Rupees for a period ÷ Budgeted Total costs for the relevant periodIn the detergent soap example, if the entity’s required ROI for October is Rs 5 with budgeted costs of Rs 25:Ideal VR = 1 + (5 / 25) = 1.20While computing Ideal VR for each individual cost component, the absolute ROI target may be allocated in proportion to each cost component, unless circumstances dictate otherwise.“VR as a concept is not only very useful for Commercial Enterprises but also for Government Departments, Government Entities and even Professional firms/ N.G.Os.”Conclusion & Boundary LimitationsVR as a concept is not only very useful for Commercial Enterprises but also for Government Departments, Government Entities and even Professional firms / NGOs. There are several modern instances where VR is practiced unconsciously:A TV broadcasting service popping up border banner advertisements without interrupting program content.A doctor’s clinic dispensing medicines directly to its own patients.A retail petrol station operating a 24x7 convenience store selling FMCG goods.Unused land in factories utilized to cultivate agricultural crops until required for plant expansion.The Boundary Risk: The Postal Service DilemmaHowever, if VR is stretched beyond its boundaries, it could result in negative consequences. Consider Postal Services: in attempting to increase VR unconsciously, a multitude of peripheral services—passport applications, Aadhaar card enrolments, financial product sales, retail packaging—were added. This overburdened the core postal infrastructure and impacted its primary service delivery, creating negative side-effects. Nevertheless, adopting this VR strategy did allow postal services to hold their primary postage prices steady for a considerable period.To conclude, in order to turn business downturn situations to one’s advantage, the Value Return (VR) concept serves as a highly practical, strategic, and sustainable management tool.Author may be reached at: syam472001@yahoo.co.in and eboard@icai.in

While there are well-recognised Standards for accounting, audit and related services, the profession of valuation, similar to its regulation and recognition, is waking up to Standard-setting process. ICAI has been in the forefront of providing guidance to the accounting profession and true to its colour, is the first and the only Indian organization to have issued Standards on valuation as early as in 2018. Apart from the Valuation Standards issued by ICAI, there are other international bodies which have also issued standards on Valuation, the notable ones being International Valuation Standards published by International Valuation Standards Committee. This article discusses the confusions surrounding applicability of Standards related to valuations.IntroductionStandards are an important repertoire in the quiver of a professional. Standards provide guidance and clarity to users. For instance, for accounting, there are Accounting Standards 1 to 5, 7, and 9 to 29, and Indian Accounting Standards. Similarly in the field of auditing, there are Engagement Standards, Standards on Quality Control, and Statements on Auditing.Though, the profession of Valuation is an age-old profession, compared to the other professions, its regulation is relatively in the development stage. Currently, in India, the profession of Valuation is regulated by Insolvency and Bankruptcy Board of India which gives credence to a new breed of valuation professionals known as Registered Valuers (“RV”). A qualified professional can become an RV by enrolling under one of the 15 Registered Valuer Organisations (“RVO”) currently available in India as on 30 June 2023.In parallel to development of regulating the profession of valuation in India, various statutes are being amended to recognise valuations performed by RVs. Companies Act, 2013 and Insolvency and Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 are two such statutes which have made valuation, wherever required under the respective statutes to be performed by RVs and none other.Like any profession which has the flair of art and the approach of science, the practices followed for performing valuation is quite diverse. A layman user might not be conversant with the nuances of Valuations. Consequently, a user of Valuation service who is not an expert, might end up drawing conclusion which might not be what the Valuation service intended to convey. The erudite lawmakers of India having understood this reality to protect the interests of such users have ensured to see to it that statutes, wherever require valuation, also prescribe the method/methodology to be used while performing the valuation. Examples of such prescriptions are:Rule 21 of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 stipulates valuations to be performed as per internationally accepted pricing methodology for valuation.Rule 11UA(2)(b) of Income Tax Act, 1962 prescribes the Discounted Free Cash Flow (DCF) method.Rule 35(1) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 requires valuations to be done in accordance with internationally accepted valuation standards.Indian Accounting Standards require, with certain exceptions, adherence to Indian Accounting Standard 113, “Fair Value Measurement” wherever another Indian Accounting Standard requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements).Similarly, for valuations under the Companies Act, 2013, Rule 8(1) of The Companies (Registered Valuers and Valuation) Rules, 2017 (“Rules”), RVs have to comply with the Valuation Standards as notified by the Central Government. The said Rule further permits adherence to other Valuation Standards until the Standards are notified by the Central Government. Since, no Valuation Standards have yet been notified by the Central Government, today, valuations under the Companies Act, 2013 must comply with the other mandated valuation Standards.The Missing ConjunctionThe said Rule 8(1) of the Rules used to read as follows:“The registered valuer shall, while conducting a valuation, comply with the valuation standards as notified or modified under rule 18:Provided that until the valuation standards are notified or modified by the Central Government, a valuer shall make valuations as per-(a) internationally accepted valuation standards.(b) valuation standards adopted by any registered valuers’ organization.”The two sets of Standards provided in (a) and (b) above are neither connected, nor separated by any conjunction. This has led to some confusion as to whether RVs are required to comply with both the sets of Standards or any one of the Standard sets.The AmendmentTaking note of the confusion, Ministry of Corporate Affairs vide notification dated 21st November 2022 has amended the aforementioned Rule by inserting, “or” in Proviso to Rule 8(1) of the Rules.With the aforementioned amendment, it is now clear that valuations under the Companies Act, 2013 can follow either internationally accepted valuation standards, or valuation standards adopted by any RVO.Has the Amendment Cleared the Confusion?Before answering this question, let us try to understand the requirement to comply with Valuation Standards for conducting valuations under the Companies Act, 2013 at various points in time:Evolution Timeline of Valuation Standards under Companies Act, 2013Time PeriodApplicable Requirement & Governance ContextPrior to 15th July, 2017Since Companies (Registered Valuers and Valuation) Rules, 2017 became effective on 15th July 2017, prior to 15th July 2017, valuations under Companies Act, 2013 was not regulated. Consequently, there was no necessity to comply with any particular Valuation Standard-set.From 15th July 2017 up to 30th June 2018Valuations under Companies Act, 2013 needed to comply with any internationally accepted valuation standards.From 1st July 2018 up to 20th November 2022ICAI-RVO adopted India’s first Valuation Standards namely, ICAI Valuation Standards 2018 on 01st July 2018. Hence, from this date onwards, RVs could consider performing valuations required under the Companies Act, 2013 in accordance with ICAI Valuation Standards 2018. However, considering the missing conjunction in the said Rule, RVs were unsure whether RVs are required to comply with both, internationally accepted valuation standards as well as with ICAI Valuation Standards 2018, or any one of the Standard sets.From 21st November 2022 onwardsWith the amendment in the said Rule, there is clarity that, RVs could consider performing valuations required under the Companies Act, 2013 in accordance with either ICAI Valuation Standards 2018, or with internationally accepted valuation standards.Comprehensive Matrix: Types of Valuers, Engagements & StandardsType of ValuerType of EngagementPrescribed Valuation StandardsUnanswered DoubtsRV registered with an RVO other than ICAI-RVOValuation engagements under Companies Act, 2013Either internationally accepted valuation standards, or ICAI Valuation Standard, 2018NoneValuation engagements under IBBIInternationally accepted Valuation StandardsWhether choice of ICAI Valuation Standard, 2018 is also available?Valuation engagement under FEMAAny internationally accepted pricing methodology for valuationWhether choice of ICAI Valuation Standard, 2018 is available?Valuations for the purpose of Indian Accounting StandardsIndian Accounting Standard (Ind AS) 113, except for:• Share-based payment transactions within scope of Ind AS 102• Leasing transactions within scope of Ind AS 17• Measurements having similarities to fair value but not fair value, such as net realisable value in Ind AS 2 (Inventories) or value in use in Ind AS 36 (Impairment of Assets)There is disagreement as to whether valuations required for Ind AS are considered “valuations required to be made under the Companies Act, 2013”. If so considered, would RV have the option to choose between internationally accepted valuation standards or ICAI Valuation Standard, 2018, or should RV strictly limit to requirements of Ind AS?Other Valuation EngagementsAs per the terms of engagementNoneRV registered with ICAI-RVO, whether Chartered Accountant or notAny Valuation EngagementICAI Valuation Standard, 2018Can Internationally accepted Valuation Standards be used? How to handle IBBI and FEMA valuation engagements?Chartered Accountants not being RVsValuation engagements under Companies Act, 2013Not permittedNoneValuation engagements other than under Companies Act, 2013Recommendatory to use ICAI Valuation Standard, 2018Would non-usage of ICAI Valuation Standard, 2018 be deemed to be guilty of professional misconduct as per Clause 1 of Part II of Second Schedule to Chartered Accountants Act, 1949?Legal Nuances & Unresolved Professional Dilemmas1. Can RVs Registered with Other RVOs Use ICAI Valuation Standards 2018?The question which continues to bug RVs is: “Whether RVs registered under other RVOs are required to comply with ICAI Valuation Standards 2018?”In the author’s humble opinion, ICAI Valuation Standards 2018 is available for usage to all RVs irrespective of the RVO under which he/she is enrolled, since sub-clause (b) contains the words, “…any RVO.” Hence, not just an RV registered under ICAI-RVO, but also an RV enrolled under an RVO other than ICAI-RVO has the option to choose ICAI Valuation Standards, 2018. Once a particular Standard-set is chosen, it becomes mandatory to follow all the Standards prescribed under such chosen Standard-set. This particular mandate is limited to such particular engagement alone and not a blanket requirement. For other engagements, such RV may choose to use ICAI Valuation Standards 2018, or internationally accepted Valuation Standards.2. What is the Status of RVs Enrolled with ICAI-RVO?Attention is drawn to the Code of Conduct of ICAI-RVO, which inter alia prescribes that, “A valuer shall carry out professional services in accordance with the relevant technical and professional standards that may be specified from time to time.” Since members of ICAI-RVO are bound by the Code of Ethics of ICAI-RVO, and since ICAI Valuation Standards 2018 have been specified by ICAI-RVO, notwithstanding the choice provided by Rule 8, do members of ICAI-RVO have the choice to use any set of Valuation Standards other than ICAI Valuation Standard, 2018?The clarity would be rendered when the Central Government notifies the Valuation Standards on the recommendations of the Valuation Standards Committee as per Rule 18 of the Rules.3. Position for Non-RV Chartered Accountants Conducting Non-Companies Act ValuationsChartered Accountants’ attention is drawn to Clause 1 of Part II of Second Schedule to Chartered Accountants Act, 1949 which provides that:“A member of the institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he contravenes any of the provisions of this Act or the regulations made thereunder, or any guidelines issued by the council.”The said ICAI Valuation Standards, 2018 have been issued under the aegis of the Council of the Institute of Chartered Accountants of India vide its 375th meeting. Hence, if ICAI Valuation Standards, 2018 are not followed, then a Chartered Accountant might be held guilty of professional misconduct under the aforementioned clause. However, such a strict interpretation might not be suitable, since the Institute of Chartered Accountants of India itself has clarified that:“These ICAI Valuation Standards will be applicable for all valuation engagements on mandatory basis under the Companies Act 2013. In respect of Valuation engagements under other Statutes like Income Tax, SEBI, FEMA etc, it will be on recommendatory basis for the members of the Institute.”Is the Confusion a Matter of Concern?Any authority prescribing Standards undertakes research, involves wide range of stakeholders, issues drafts seeking public opinion and then issues Standards. It is these standard Standard-setting procedures which render credibility and acceptability to Standards framed by famed organisations. This being the case, most of the Valuations Standards should be uniform. Hence, one might feel that adherence to any relevant Standard-set issued by reputed valuation-regulating organisation would automatically ensure credibility and acceptability to the valuation engagements. While such an approach is mostly right, the concern would be on areas where difference exist amongst different Standard-sets owing to the purpose which each Standard-set sets to achieve.Suggested Approach Until the Dawn of ClarityAttention is drawn to para 60 of International Valuation Standards Framework published by The International Valuation Standards Council which recognises the possibilities of valuations being performed not in adherence to the valuation Standards.The said Framework permits valuations not in compliance with the Standards, provided, the non-compliance to Standard is on account of legislative, regulatory or other authoritative requirements and the nature and reason of such non-compliance is disclosed. The said Framework further provides that non-compliance with Standards for reasons other than legislative, regulatory or other authoritative requirements is not permitted.ConclusionStandards provide valuable guidance to valuers, and having clarity on which guidance to use greatly enhances the professional lives of valuers.Author may be reached at: uttampadival@gmail.com and eboard@icai.in

Our profession must continuously supplement and enhance our skills to adapt to new techniques, technologies and asset class that will be the “norm”. This will require training for our members and students, in addition to setting up a “COE” providing continuous training and skilling /reskilling to our members and students. “Disruption is the only Constant” best defines the next decade.The Tsunami of Change in India and the Global LandscapeOur members have achieved success globally and are leveraging their training and learnings in various ways across multiple industries. They have demonstrated the depth of governance, deep accounting expertise of process & procedures, financial expertise, and overall sense of interpreting & applying number to support entrepreneurs to achieve business objectives and goals. Our profession trains us to be effective in the “language of numbers and accounting” so that the story of a business can be articulated, assessed, audited, and trusted.We are now, in a Tsunami of change in India – new asset class, disruptive technologies, digital assets - that will change everything like what engines did to horses & buggies. This time, the change will happen in 5 years instead of 5 decades. The change is disruptive and not waiting for anyone. Under our current leadership and torch bearers of ICAI, we will establish the foundation to adjust and prosper in the ever-changing world of “Disruption is the new norm.”Five Key Realities Reshaping the Profession over the Next 5 YearsThe next 5 years will require our profession to evolve to support the following realities in India and globally:Rapid Digitization of Processes and Exception-Based Auditing:The ability to dynamically configure rules and workflows to manage exceptions. This may result in the elimination of “sampling” methods and move to “exception-based” methods driven by configurable rules. The ability to write rules to mine the data to identify exceptions, detect errors and frauds will be an essential skill.Data as the New Oil and Fiduciary Relevancy:Data and the “use of data” is the new oil. How do we leverage data to execute our fiduciary responsibility by identifying the right and relevant data? What data do we trust and when, especially when data is in a distributed environment? The ability to assess relevancy amongst the sea of data will be an essential skill in addition to deep analytical skills.Growth of Digital Assets as a $4 Trillion Asset Class:The growth of Digital Assets (not crypto but real assets), as a new asset class – expected to reach 4 trillion USD by 2030 based on various research reports by Citi and others – requiring establishment of new standards for this new asset class that is estimated to be 10X the Public Markets.Private / Unlisted Assets: Private assets – aka “Unlisted Assets” – will require to be audited frequently and will require the same diligence and rigor as listed companies.Regulatory Standards: Regulators and accounting bodies will set guidelines and define the guard rails that this asset class must adhere to. Accounting standards that are specific to these types of assets will have to be developed and the institute will have to play a leading role in the design and execution of the same.Cross-Jurisdiction Adoption: These assets have no borders as it relates to adoption. So, policies and standards need to support cross jurisdiction.Auditor Governance: The ongoing governance of the accounting standards will fall on the shoulders of the auditors, amongst others, requiring frequent monitoring to ensure that the statements are fair and accurate.Investor Reliance: Investors will rely on the audited financial reports to make investment decisions in these unlisted assets. The lack of reliable, frequency of information & quality of information of private assets will provide for greater reliance on the audited statements.Technology Revolution – Blockchain, DeFi, and AI:Ability to adapt to these technologies, understanding the power of it and adapting them incrementally & appropriately in carrying out fiduciary responsibility.Blockchain & Smart Contracts: The evolution of Blockchain is known to all of us and the role it plays in ensuring immutability. Familiarity and ability to leverage blockchain and the ability to audit “Smart Contracts”, will be an essential skill that our profession will have to develop for us to test the results and outputs.The DeFi World: Data will be scattered and distributed; how do we trust the data that is on the edge? How does one provide fiduciary and financial reports based on data that is not centralized but with data owners stored on their environment? The unique skill and ability to identify the appropriate techniques that assist in continuous monitoring and in detecting changes to source data and documents will be essential.The AI Phenomena: The AI phenomena has gained momentum over the recent months. How do we leverage this technology – where and how do we use it and for what purpose? Can an audit report be produced by “Chat GPT”? The answer is probably no, but the point is how do we leverage it in the generation of financial reports, while ensuring sound governance. Clear guidelines of what is acceptable and continuously updating of these as technology and trust develops is essential.Continuous Monitoring of Financial Statements:Move from “periodic reporting” to “event based”. Updating financial statements as soon as a material event occurs, i.e., moving to an “era of real time financial statements” and “Continuous Disclosure.” This is made possible today because of technologies as there is and will be continuous access to information and data in a digitized form, and rules that will identify material changes when it happens so that statements and disclosures reflect current state of the company / asset.“The CA and students of tomorrow will be spending more than 80%+ of their time on applying their ‘Knowledge & Expertise’ to solving exceptions and analyzing changes.”The DNA of a Future Chartered AccountantThe DNA of a future CA must possess two blended core pillars:Deep Accounting Capabilities: Mastery over governance, accounting standards, and business storytelling.A Technology “Power User”: Knowing how to orchestrate and deploy advanced technology to execute professional responsibilities.Continuous education will be the theme as these technologies evolve. The process of generating financial statements will be automated, digitized, better and faster. Applying technologies in carrying out their responsibility will be as critical as applying accounting knowledge and processes.The CA and students of tomorrow will be spending more than 80%+ of their time on applying their “Knowledge & Expertise” to solving exceptions and analyzing changes. Our basic expertise with the blend of technology shall be the key to the thriving journey ahead of the profession.Author may be reached at: eboard@icai.in

Net Non-performing Loans (NPLs) are a significant barrier to the growth of the banking industry. Therefore, lowering the high number of NPLs has been a major goal of India’s banking sector reforms. This study investigates How Indian banks respond to NPLs. We examine whether lending decisions made by Indian banks reflect uncertainty using panel data with 38 banks from 2006 to 2020.The findings are consistent with risky lending behavior and credit risk which contends that as the ratio of non-performing loans rises, lending becomes riskier, potentially leading to further deterioration of loan quality and instability in the financial system. The results are significant proving the existence of credit risk.IntroductionNon-performing loans (NPLs) have been a key barrier to the growth of local banks in India for a long time. Previous research has determined that NPLs are a sign of banks’ upcoming financial issues. According to Demirguc-Kunt (1989) and Barr et al. (1994), banks frequently have a high level of NPLs before failing. In the banking industry, unlike other sectors, the effects of one bank’s failure can cascade to others, creating a chain reaction that may threaten the integrity of the system locally or even internationally. The global financial crisis of 2008 demonstrated how fragile the global financial system can be and how a financial crisis started in one nation could have negative effects on both the stability of the international banking system and the growth of the small- and medium-sized banking sector and financial system. In fact, actual data shows that banking reforms and the development of India’s financial system have greatly boosted the country’s economic growth and supported community banks.Indian policymakers have been advancing more financial sector changes with the goal of creating banks that are more resilient and competitive on the world stage. A thorough knowledge of non-performing assets and their effects on the banking industry and financial stability is necessary for further attempts at banking sector reform. The type of government ownership and related soft budget limitations also probably have an impact on the risky lending issue in the Indian banking industry (Shi, 2004). Due to stringent government restrictions that separates the local financial sector from growth in the international financial sector, India’s banking industry has largely escaped the effects of financial crises. However, India being a bank-led economy and the rising issue of non-performing loans makes it necessary for the banks to be even more resilient and efficient to survive external shocks.This study aims to investigate a specific aspect of India’s banking industry, specifically the degree to which domestic banks encounter difficulties in their financing relationships and exhibit risky behavior, both of which have the potential to worsen the industry’s risky lending issue in the near future. Our research adds two new perspectives to the body of literature. To begin, we use a threshold method to investigate the function of NPLs in alerting risky lending issues. In order to test the idea that struggling banks are compelled to take unwarranted risks, which might result in greater losses and eventual collapse, we secondly apply this theory to the Indian banks. Major implications for Indian regulators dealing with large NPLs and potential risky lending issues in domestic banks are provided by our proposed method and empirical results.Literature ReviewNPL ratios for banks may rise due to unfavorable circumstances or poor management (Berger and De Young, 1997). In the former scenario, we would anticipate that the bank will often manage this process by lowering lending, which will cause the NPLs percentage to decrease. If poor management is the cause, we may anticipate a rise in the NPL ratio, which will be followed by increased risk-taking as managers try to cut their losses by increasing lending and hence by increasing risk.We may also need to draw back to Jensen and Meckling’s (1976) theory on incentives to better justify our use of a threshold model and connect NPLs with risky lending issues. Financial institution managers have strong incentives to act contrary to the interests of regulators and investors. Risky lending can encourage excessive risk-taking, which lowers asset quality and ultimately increases the likelihood that the organization will fail. When managers (agents) try to maximize their personal benefits in a way that conflicts with the interests of the shareholders, risky lending results (principles). According to Keeley (1990), the agents can fully benefit from successful results but only assume a limited amount of responsibility in the event of failure. Because the central government has implicitly guaranteed banks, particularly Indian commercial banks, there is a greater risk of risky lending. Indian bank management can afford to take excessive risks since they stand to lose little or nothing and have more to gain. According to Kahneman and Tversky’s (1979) prospect theory, agents are risk-averse when presented with certain rewards but are risk-seeking when faced with certain losses. Therefore, it makes sense to claim that the bank management has a motivation to take on more risk when the institution is in trouble.Research MethodologyA threshold prediction model is employed in this study to find risky lending issues. The threshold regression model’s purpose is to categorize distinct data into regimes (classes) based on the value of a predetermined variable. This model is based on Hansen (1999), which has been shown to be a useful tool for examining potential asymmetric effects. Recently, it has also been used to research banking practices. For instance, the earnings-smoothing hypothesis is examined by Balboa et al. (2013) in their research of a sample of US banks that takes nonlinear dynamics and threshold effects into account. In their model, management incentives drive the nonlinear link between bank profitability and loan-loss provisions.Our first variable in terms of control variables is the loan growth rate. Foos et al. (2010) demonstrates that (abnormal) loan growth might result in considerable later losses with a lag of two to four years using more than 16,000 individual banks’ data from 16 countries during the time preceding the global financial crisis of 2008. Several studies, including those by Sinkey and Greenawalt (1991) and Clair (1992), present evidence for the impact of loan growth on bank performance. In-depth analyses of the part played by loan growth in bank risk-taking and the ensuing instability may be found in Cottarelli et al. (2005) and Kraft and Jankov (2005). Based on this on a prior research, we postulate a considerable correlation between India’s NPL ratio and the growth rate of bank loans. Normal loan growth linked with typical banking operations may lower the NPLs ratio; however, abnormal loan growth would be a sign of a risky lending issue that might lead to more losses.The size of the bank is our second explanatory variable. Bank size is frequently cited as a significant factor in NPLs. For instance, Salas and Saurina (2002) contend that larger banks have greater chances for diversification and can therefore lower the proportion of bad loans. According to Rajan and Dhal’s 2003 paper, there is empirical support for this association. According to Hu et al. (2004), because they have more resources, major banks are better able to assess the quality of loans. According to Wang (2014), in Taiwan, bigger banks perform better. As a result, there is a negative correlation between bank size and NPL levels. However, due to the “too large to fail” arguments (see, for instance, Louzis et al., 2012), we expect a positive relationship between the bank size and the level of NPLs. Deposits have a significant role in a bank’s balance sheet, affecting the bank’s conduct and the caliber of its loans. Therefore, we anticipate that the deposit growth rate may have a big impact on NPLs as well.Econometric Threshold Regression SpecificationNNPLit = α + β1 ∑j=02 LGRi,t-j (NPLi,t-1 > γ) + β2 ∑j=02 LGRi,t-j (NPLi,t-1 < γ) + εit + XitWHERE: i represents different banks and t represents different years.NNPL: Net Non-Performing LoansLGR: Loan Growth Rateγ: Threshold value. The last period’s NPLs ratio level is used as the threshold variable.X: Vector containing additional explanatory variables.When banks face severe loan losses (performing beyond the threshold value), β1 rather than β2 governs the decision-making process.Data and descriptive statisticsTo enable the most observations possible, data is gathered from a variety of sources, including Bankscope, Wind Info, and several bank annual reports. All commercial banks are mandated by the Indian Banking Regulatory Committee to publish their operational information and make their financial performance data available to the public as of 2007. This aids us in gathering trustworthy data for small - and medium-sized banks that are not publicly traded. We had to exclude several banks and observations from the sample since the threshold model of Hansen (1999) needs a balanced panel. The descriptive statistics of the variables is presented in Table 1.Table 1: Descriptive statistics of key variablesVariablesNMeanMedianMinMaxStd. DevLGR (%)32218.8111.01-18.180157.5851.81NPL (%)3220.910.09019.191.19DGR (%)32218.1111.75-15.09151.5119.86ER (%)3226.16-0.0118.11.19CAR (%)32201.1601.01-01.76050.116.77Size32208.0107.7701.1911.590.88Empirical resultsWe set the cutoff variable to be the NPLs ratio from the most recent period in order to identify banks with high NPLs ratios that may act differently from those with low NPLs ratios. Losses in one bank, as was previously mentioned, can encourage bank managers to take unwarranted risks, but only if they significantly harm the bank’s financial performance (i.e., the NPLs are relatively large). Even though incentives might not be readily apparent, risky lending might be possible to discern by looking at the bank’s conduct. Additionally, by defining a threshold value, we offer regulatory agencies a helpful indication for tracking risky lending issues and developing appropriate policy initiatives to lower NPLs.This study employs four threshold models with model 1 being a standard model applied without any threshold effect. Models 2–5 are analyzed with the threshold effects. For purposes of comparison, Model 1 serves as the standard linear model with simple panel regression. The benchmark model is subjected to a Hausman test first, with a statistic of 18.09 (p-value = 0.054) favoring the fixed effects model. Model 2 sets m = 0 where m refers to the lags of the LGR, therefore model with m = 0 only contains the contemporaneous loan growth rate and excludes any loan growth rate delays (LGR). Model 3 simply features the lag LGR with m = 1, in contrast. Lastly, Models 2 and 3 are combined in Model 4. Model 5 substitutes ER with CAR to test the stability of Model 4 since the equity ratio over total asset value (ER) and capital adequacy ratio (CAR) are comparable measurements. This is done as a measure to check for the robustness of our models. Dependent variables in all equations are expressed in current NPLs ratios and the lagged values of the NNPL is used as the threshold variable.i. Threshold estimationThe first stage in our empirical research is to determine the existence of threshold effects and to determine the threshold value for each model. Table 2 shows the findings for the existence of the threshold effect in Models 2-5.Table 2: Estimation of threshold effectsModelThresholdConf IntervalRSSLR0 statsP-value22.80%[2.62%, 6.98%]227.2727.80.0231.80%[1.32%, 7.09%]282.72001.220.0242.90%[1.03%, 2.86%]277.22022.20.0251.60%[1.03%, 7.09%]219.92002.100.04The bootstrap p-values indicate that the LR1 test statistics are typically significant. In comparison to the linear model, these findings corroborate the presence of the threshold effect and thus satisfies the alternate hypothesis of no linear effects for the threshold regression model. For each model we got a different threshold value. Further, threshold regression analysis has been done using the same threshold value obtained in Table 2.ii. Regression resultsModel 2-5 examines the collective lending practices of all banks in the Indian banking sector. Model 2 examines the contemporaneous link between LGR and NPLs without using delays for LGR. Only because of the substantial p-values in model 2 has the null hypothesis in the testing for threshold effects (linear connection) been rejected. These findings therefore corroborate the theory that the threshold effect is present with k = 0, in contrast to the linear model. For other models, it is impossible to reject the null hypothesis. Table 2 lists the threshold settings for each model and the resulting p-values. We look at the characteristics of the banks that are over or below the NPL ratio threshold before examining the results of the regression. In models 2 through 5, 62.8% of the banks had NPL ratios that were below the median threshold value. As anticipated, moral hazard concerns may affect banks but very few will have a significant impact on how they behave. After confirming the existence of a nonlinear threshold effect, we now evaluate how banks act on both sides of the threshold.The regression results for the five models discussed above are shown in Table 3. Model 1 shows that the only essential elements are deposit growth and LGR with k=0 when no threshold influence is allowed. Model 2 incorporates the threshold effect and the current LGR level. We observe in model 2 that LGR has a negative immediate effect on troubled institutions. Model 2 shows that the LGR increases NPLs when banks have suffered losses in the past (NNPL ratio is higher than the threshold value) as well as when they are generally safe (NNPL ratio is less than the threshold value). The value of this rise in NNPL ratio, however, is fairly minimal when banks are secure compared to when banks are distressed, as can be seen by comparing the values (comparing the standardised values of the coefficients). These conclusions concur with empirical research by Zhang, Dickinson, and Kutan, as well as Claire (1992) (2016). These findings show that when banks have previously had significant loan losses, as opposed to when banks are reasonably safe, the loan growth ratio increases NPLs with a larger value. Given that the average yearly LGR is 12.72% and 13% for NPLs, imprudent lending by those struggling institutions might cause serious problems for banks with larger NPL percentages. The aforementioned information and findings support our hypothesis that bank managers behave poorly while under pressure from previous losses, perhaps creating a worse scenario.The threshold estimation failed to reveal the existence of a threshold effect for models 3 and 4. The only significant independent variable with a positive relationship to the NPL ratio, according to the findings of the regression analysis, is deposit growth. A bank’s NPA ratio will rise in tandem with the expansion of deposits. When we examine the combined contemporaneous and lagged impact for model 5, we find that the contemporaneous impact of LGR and the lagged effect for those troubled institutions both remain positive, but the lagged effect with k=2 is still just marginal. Clair would support this type of behaviour (1992). Banks that have previously sustained significant losses try to lessen the impact of NPLs by increasing loan amounts. In other words, the contemporaneous NPLs ratio with delayed data is the most significant because of the bigger denominator. Banks could be compelled to take excessive risks or lose caution when approving loans, which would make the issue worse in the long run.The aforementioned data supports our premise that bank managers perform badly under pressure brought on by prior losses, perhaps setting the stage for a worsening of the situation. We note that the contemporaneous effect of LGR for those struggling institutions is negative while the lagged effect stays positive and greater in value when the findings of Models 4 and 5 with the lagged effect and the contemporaneous impact are combined. This conduct is consistent with Clair (1992). In an effort to lessen the impact of NPLs, banks with recent severe losses boost their loan portfolios. In other words, the larger denominator causes the NPLs ratio for the current period to be lower.Table 3: Threshold Variable - NNPL (Net NPLs - Dependent Variable)Explanatory variables12345Intercept-0.4538(0.8428)-0.7738(0.8285)-3.5020(3.5782)-3.7242(3.7747)-2.0054(0.8448)LGR0.2487***(0.0287)----LGRt-20.0243**(0.0067)----LGRt-30.0265(0.0207)----Deposit growth0.0562***(0.0226)0.0308(0.0225)0.8602***(0.0342)0.8302***(0.0373)0.0323(0.0307)CRAR-0.0328**(0.0207)0.0387*(0.0247)0.3722**(0.2055)0.3328(0.3273)0.02587(0.0665)LGR (NNPLt-2 < γ)-0.0036**(0.0023)--0.2254***(0.0332)LGR (NNPLt-2 > γ)-2.0237***(0.0303)--0.2355***(0.0303)LGRt-1 (NNPLt-2 < γ)---0.0325(0.0438)-0.0335**(0.0247)LGRt-1 (NNPLt-2 > γ)--0.0682**(0.0334)-0.0235*(0.007)LGRt-2 (NNPLt-2 < γ)---0.0663**(0.0352)0.0060(0.0234)LGRt-2 (NNPLt-2 > γ)----0.2858***(0.0838)0.0352(0.0285)No. of Observations304343343304304R20.27020.27330.73270.68580.2726Conclusion“Deeper market changes, particularly those affecting the ownership structure of banks, have made it possible for banks to function in a contemporary corporate system setting and greatly increased bank efficiency.”The commercial banking system in India has grown dramatically during the past two decades because of its rapid economic expansion. Deeper market changes, particularly those affecting the ownership structure of banks, have made it possible for banks to function in a contemporary corporate system setting and greatly increased bank efficiency. The emergence of regional commercial banks and joint-stock banks is an excellent illustration of the extra advantages of the reforms. However, the by-product is the typical issue discussed in the literature on corporate finance: risky lending in the banking system can arise from conflict of interest and agency issues. When faced with enormous financial obstacles, managers are compelled to take unnecessary risks. Therefore, an incorrect loan growth may create further asset quality degradation and add to the banks’ financial woes. To prevent future financial instability, it is crucial from the regulator’s perspective to determine the degree of risky lending conduct in the commercial banking system.Our findings imply that Indian regulators should view the NPLs ratio as a helpful tool for identifying possible bank risky lending issues, as well as for designing transparent policy objectives and to closely monitor banks. While the Reserve Bank of India together with the Deposit Insurance Credit Guarantee Corporation (DICGC) have worked to develop a sound corporate governance framework within the banking industry, it is crucial to simultaneously monitor both the CAR and the NPLs ratio in order to minimize risky lending issues and prevent the negative effects of such incentives. More accurate threshold values triggering risky lending might be achieved when more data becomes available, particularly by incorporating more recently created rural commercial banks and city commercial banks, and this will be a helpful future study priority. Our empirical results and projected threshold values could serve as a useful benchmark for further research.ReferencesBalboa, M., Lopez-Espinosa, G., Rubia, A., 2013. Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions. Journal of Banking & Finance 37, 5186–5207.Barr, R.S., Seiford, L.M., Siems, T.F., 1994. Forecasting bank failure: a non-parametric frontier estimation approach. Recherches Economiques de Louvain/Louvain Economic Review 60(4), 417–429.Berger, A., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21(6), 849–870.Jiang, C., Yao S., Feng, G., 2013. Bank ownership, privatization, and performance: Evidence from a transition country. Journal of Banking & Finance 37, 3364-3372.Keeley, M.C., 1990. Deposit insurance, risk, and market power in banking. American Economic Review 80(5), 1183–1200.Kraft, E., Jankov, L., 2005. Does speed kill? Lending booms and their consequences in Croatia. Journal of Banking & Finance 29, 105–121.Louzis, D. P., Vouldis, A. T., Metaxas V. L., 2012. Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance 36, 1012-1027.Shi, H. Q., 2004. On the endogenous nature of the non-performing loans of the state-owned-bank of China: An analytical framework based on the dual soft-budget constraint theory. Journal of Financial Research (in Chinese), 6, 1-16.Sinkey Jr., J., Greenawalt, M., 1991. Loan-loss experience and risk-taking behavior at large commercial banks. Journal of Financial Services Research 5(1), 43–59.Authors may be reached at: jainarushi74@gmail.com and eboard@icai.in

From an economic perspective, India is thriving impressively, standing as an oasis in the global desert. Our growth is primarily driven by government infrastructure spending. Trade exports and services are also now positively contributing to GDP growth. The only sector not meeting expectations is consumption. While the rich and upper middle-class sectors are experiencing growth in consumption, the lower middle income and poor consumption remains subdued. We hope and pray that consumption will pick up, just like investment has begun to in the private sector.Macroeconomic Reality: Prudent Growth & EfficiencyToday, our fourth-quarter GDP growth number exceeded expectations. The full year FY23 growth is the fastest among major economies. This growth is not funded by injudicious and imprudent borrowing. Unlike economies which must borrow three and a half to four dollars to raise one dollar of GDP, we create a dollar of GDP by borrowing just 90 cents.The government leads in investments. An election-bound government not only allocates more money to infrastructure but also accelerates execution. As capacity utilization improves, the private sector has started to invest. The only subdued part of the economy is consumption among the lower middle income and poor sectors.“India is on track to become the world’s third-largest economy, up from the current fifth position. The IMF predicts this will happen in 2028, we predict it will occur in 2030, and British institutions forecast it for 2032.”Yet, the journey from fifth to third is universally accepted. Today, as the fifth-largest economy, we are investing over a trillion dollars in fixed asset creation. This level of investment also indicates a brighter future.The Equity Market Trinity: Flows, Sentiments & FundamentalsFrom the equity market’s perspective, three things drive it: flows, sentiments, and fundamentals. Flows and sentiments can change swiftly, while fundamentals are like oil tankers — slow to turn.1. Market FundamentalsFundamentally, Indian markets are fairly priced, roughly at about 18 times one-year forward earnings. It’s neither cheap nor expensive. They trade at a premium to all emerging markets. This earnings growth is likely to sustain.Banking & Financial Services: Banks have recorded profits exceeding two lakh crore. NPAs are low, margins are at an all-time high, profit growth is excellent, and most importantly, valuations are still reasonable. We believe Banking and Financial Services will continue to compound and outperform the market.Automobile Sector: Showing high profit margins.IT & Pharma: Subdued, slightly below expectations, but likely in the process of bottoming out unless something globally untoward occurs. As things settle down globally, order placement may resume, benefiting Indian IT and Pharma over the next six to nine months.Manufacturing, Capital Goods & Infrastructure: Capital goods, manufacturing, cement, and construction sectors are more or less in line with expectations and poised to outperform as part of global supply chains.Therefore, it’s fair to say that fundamentals are robust, in better shape than most other markets, and we are at fair valuations, which demands neutral equity allocation from investors.2. Liquidity Flows: Global Comparison & Domestic StrengthFrom a flow perspective, the market is heavily biased towards money. Foreign investors, after selling 2.5 lakh crore between October ‘21 and June ‘22, have turned buyers. Mutual funds and insurance companies are net buyers in the market every month. Retail and high-net-worth individuals (HNIs) are also buyers. Today’s environment has too much money chasing too few stocks.The government opened a divestment program recently. For the time being, it seems like flows will outstrip supply and keep the market supported. Global emerging market alternatives highlight India’s relative advantage:Country / MarketGlobal Investor OutlookRussiaAn absolute no-go.Brazil & South AfricaRelatively weaker structural fundamentals.ChinaExtremely cheap, but Bank of America research aptly summarizes: “Too cheap to short, too mediocre to go long.”TurkeyCurrency depreciation and economic policies are dreadful.India & IndonesiaThe primary destinations for global investors seeking to diversify out of developed markets.More importantly, foreign portfolio investors (FPIs) realize that in all emerging markets, entry is easy, but exit can be difficult. This is unlike in India, where entry and exit are both easy. You sold 35 billion dollars between October ‘21 and June ‘22? Be our guest, take all your money back. It’s challenging to re-enter, though: FPIs bought less than 9 to 10 billion dollars back, and markets were already well above their October ‘21 level.Given this situation, at lower market levels and cheaper valuations, FPIs, retail, HNIs, mutual funds, and insurance companies will all be buyers. This provides downside market support, maintaining stability. Thus, every market correction is an opportunity to buy.3. Market Sentiment & Asset AllocationSentiments are always influenced by events: global energy prices, the Russia-Ukraine situation, and the US Fed’s interest rate policy will have temporary effects on our markets. Domestically, the biggest sentiment driver will be the 2024 election results.It’s impossible to predict election outcomes, and it would be futile to base investment decisions on such predictions. We believe our fundamentals are robust, and while a government can influence speed, the direction is well set. We recommend maintaining disciplined allocation and using corrections as opportunities to increase equity weight.Market-Cap Preference: Valuations across large, mid, and small-caps are nearly in equilibrium. Recommendation is to be marginally overweight in large-cap and marginally underweight in small and mid-cap, using corrections to add to small and mid-caps.“Manufacturing in India is a theme that’s taking off, especially for companies that can become a part of the global supply chain.”Seven Key Structural Investment ThemesCapex Cycle Revival:India is about to embark on a multi-year journey of increased capex spending, providing a much-needed boost to the economy. Capacity utilization is high. The capex to depreciation ratio for all non-financial listed companies is at a historically low level. This means that the next phase of recovery in domestic demand will involve a significant pickup in private capex spending, helped along by healthy private balance sheets and a favorable policy mix.Govt Focus on Defence, Railways & Infrastructure:Budgetary capex allocations at both the Central and State level have increased significantly in recent years. The Centre’s allocation to roads, railways, and defence has accelerated. The government continues to focus on infrastructure growth, aiming to complete more than 50 km of highways every day.Real Estate & Home Improvement:The resurgence in residential real estate is a major multi-year driver. We are very bullish on the home improvement sector, anticipating sustained demand benefiting from both primary and secondary real estate markets.Penetrating Financial Services:The sector presents significant growth opportunities due to low banking and insurance penetration compared to other developing countries. Improving credit growth and manageable non-performing asset (NPA) levels provide a resilient foundation for long-term expansion.Rural Revival:Infrastructure push (roadways, factory expansions, new manufacturing plants) happens primarily in rural jurisdictions, directly generating local employment and boosting income levels. Additionally, increased allocation for minimum support prices (MSP) for crops will drive consumption of fast-moving consumer goods (FMCG) in rural regions.Consolidating Industry Leadership:Across telecom, banking, steel, cement, NBFCs, and aviation, larger companies are becoming bigger and strong companies stronger. This natural economic consolidation embodies the “survival of the fittest” principle.Capitalizing on Global Supply Chain Shifts:Driven by the China+1 strategy and government schemes such as the Production-Linked Incentive (PLI) program, Indian manufacturing is positioned for explosive growth. Furthermore, the “Europe+1” concept emerging from Europe’s energy crisis makes India an attractive destination due to competitive costs and economic stability.ConclusionIndian equity markets are fairly priced from a flow, sentiment, and fundamental perspective. While temporary global macro headwinds like US Fed pivots or geopolitical conflicts may create short-term volatility, the structural foundation is rock-solid. Investors are advised to maintain equal weight allocation and actively capitalize on market dips to overweight Indian equity.Author may be reached at: eboard@icai.in

Cross Border Insolvency arises when either the Creditor or Debtor or assets is in a foreign state. The Insolvency and Bankruptcy Code is good up till the matter is of domestic insolvency. In case of international or cross border insolvency, our resolution professional faces many difficulties. The UNCITRAL Model Law on Cross Border Insolvency (1997) provides solutions for cross border insolvency resolutions.The Indian government is ready with the draft law on cross border insolvency with the final law expected to be enacted soon. The expected law will be a milestone in boosting the confidence of the international stakeholders having stakes in Indian debtors and also for Indian investors having stakes in foreign debtors.India set a milestone with the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016. It is the law, which consolidates the rules relating to insolvency resolution of corporates, partnership firms, individuals, etc. It provides for a time bound manner of resolution. With effectiveness in Insolvency law, we see the timely realization of insolvent’s assets before their obsolescence.Cross Border Insolvency“Cross border insolvency is triggered in cases, in which, the insolvent debtor has assets and/or creditors in more than one state.”Cross border insolvency is triggered in cases, in which, the insolvent debtor has assets and/or creditors in more than one state. For example, an MNC having assets in another country, a creditor filing a case on an MNC having its office in another country, etc. The list of cases where Cross Border Insolvency issue arises are as follows:Indian Debtor + Indian Creditor + Foreign AssetsIndian Debtor + Foreign Creditors + Indian/Foreign AssetsForeign Debtors + Indian Creditors + Indian/Foreign AssetsIn these cases, domestic IBC provisions are not enough to resolve the IBC proceedings. We need a cross-border insolvency framework.The widely accepted cross-border insolvency framework is that of the UNCITRAL model law on cross-border insolvency. Cross-border insolvency framework incorporates new terminologies. Let us understand some of those terminologies used in Cross border insolvency:Foreign proceeding: It is a collective judicial or administrative proceeding in a foreign state, which is for the purpose of reorganization or liquidation.Foreign main proceedings: Foreign proceedings take place in the state where the corporate debtor has Centre Of Main Interest (COMI). It is also known as ‘primary proceedings’ in European Union.Foreign non-main proceedings: Foreign proceedings, other than ‘Foreign main proceedings’, take place where the corporate debtor has an establishment. EU calls it secondary proceedings.Foreign representative: An Insolvency Professional.Establishment: A place where the corporate debtor carries on non-transitory economic activity with human means and goods and services. Only assets located in a state cannot be termed as the establishment.COMI (Centre of Main Interest): In simple words, it is the habitual place of residence of the debtor. It is similar to the concept of Place Of Effective Management in international taxation and is a subjective area of discussion. It is the location of the registered office of the corporate debtor.Important factors which are to be considered while determining COMI as per UNCITRAL:Where does the central administration of the corporate debtor take place? For example, if a corporate debtor is incorporated in America by two Indians residing in UAE and all the decisions are taken in UAE the COMI is said to be UAE.Place which is readily ascertainable by the creditors: For Example – The state or place, which the creditors, reasonably believe is the place of business of the corporate debtor at the time of grant of credit.Besides these several other factors has to be taken into consideration while determining the COMI of a corporate debtor:Location of those who actually manage the debtor, the place of supervision or the general oversight and the strategic oversight of the group.The location of debtors’ primary assets.The location of most debtor’s creditors or of the majority of creditors who would be affected by the case.The jurisdiction whose laws would apply to most of the disputes.“A separate exercise for identification of COMI of all subsidiaries needs to be carried out. In other words, COMI is decided separately for each and every debtor, under UNCITRAL Model Law.”COMI of a subsidiary company is independent from the COMI of parent company. A separate exercise for identification of COMI of all subsidiaries needs to be carried out. In other words, COMI is decided separately for each and every debtor, under UNCITRAL Model Law.Theories of Cross Border InsolvencyToday, we see the presence of different theories governing cross border insolvencies. The use of theories affects the judgement by the competent authorities. The decision of courts will differ if theories would be changed. So, theories are also an important part of the international insolvency process. There are three major theories governing cross border insolvency issues. They are:The territorial approach: Whereby each country exercises own domestic insolvency laws in relation to all the debtor’s property and all of the creditors located within its jurisdiction. This approach does not recognize any extraterritorial dimension to insolvency law.The universalist approach: Whereby any cross-border insolvencies are administered pursuant to a single global insolvency regime, and all of the debtor’s assets are distributed by a single insolvency office holder, regardless of where the assets or claimants are located.The modified universalism: Whereby individual countries seek to identify the most relevant jurisdiction in which to conduct the proceedings, and all other states cooperate with and facilitate such proceedings. UNCITRAL tries to go with the last approach, i.e., the modified universalism approach, whereby it tries to identify COMI and foreign main proceedings.A brief discussion on Principles of Cross-Border InsolvencyWhat makes a cross border insolvency necessary, effective and complete is that a framework is made in such a way that it incorporates the basic principles of access, recognition, relief and cooperation in today’s global world. The same principles are highlighted by the UNCITRAL model law.UNCITRAL Model Law, which is applicable both on Corporate Debtors and personal guarantor to Corporate Debtors, has incorporated a principle based ruling framework. The major outline for the UNCITRAL model convention of 1997 can be explained in 4 principles words:1. AccessForeign creditors or their representatives such as the foreign Insolvency Professional have direct access to the domestic court/ tribunal. Direct ability is with respect to initiation and participation in a proceeding but not with respect to the administration of or control over assets of the corporate debtor. The article that deals with the same are mentioned in Chapter II. They are:Article 9: Right to Direct accessArticle 10: Limited jurisdictionArticle 11: Application by a foreign representative to commence proceeding under the laws of the enacting state relating to insolvencyArticle 12: Participation by a foreign representative in a proceeding under the laws of enacting state relating to insolvencyArticle 13: Access of foreign creditors to a proceeding under laws of the enacting State relating to insolvencyArticle 14: Notification to foreign creditors of a proceeding under laws of the enacting State relating to insolvency2. RecognitionIt is about the recognition of foreign proceedings. It is of utmost importance to recognize the proceedings going on in a foreign state, else the whole concept of cross border insolvency would go in vain. If the domestic court or tribunal determines that the COMI of the Corporate Debtor is in a foreign state say the UK, proceedings in such a foreign state will be treated as foreign main proceedings. Proceedings in all other states will be foreign non main proceedings and thus provide a way for recognition of the main proceeding by other states. Chapter III deals with recognition principles. Relevant articles under the Chapter are as follows:Article 15: Application for recognition of foreign proceedingsArticle 16: Presumptions containing recognitionArticle 17: Decision to recognize a foreign proceeding3. ReliefRelief for foreign main proceedings is automatic under the law. Whereas relief for foreign non-main proceedings is discretionary. Chapter III also talks about relief. The main articles are:Article 19: Relief that may be granted upon application for recognition of a foreign proceedingArticle 20: Effects of recognition of foreign main proceedingsArticle 21: Relief that may be granted upon recognition of a foreign proceeding.4. Cooperation and CoordinationRequires cooperation between all bodies, like:Between domestic courts and foreign courtsBetween Domestic IP and Foreign courtsBetween foreign IP and domestic courtsBetween foreign IP and domestic IPChapter IV deals with this principle. The Articles covered are:Article 25: Cooperation and direct communication between the court of the state and foreign courts or foreign representativesArticle 26: Cooperation and direct communication between the IRP and foreign courts or foreign representatives.Article 27: Forms of cooperationWhat a Cross Border Insolvency framework would look like?To understand the main provision of cross border insolvency, let us include country India inside the model law of UNCITRAL. Then, the main provisions can be read as follows:Article 5, if followed by India, authorizes the Insolvency Professional of India to act in a foreign state on behalf of the proceeding under the Indian IBC code.Article 12, if followed by India, provides a way for foreign creditors to sit in proceedings of an Indian Debtor in an Indian Court.Article 15, if followed by India, allows foreign creditors to file an application of recognition of a foreign proceeding with the NCLT.Article 20, if followed by India, states that if a foreign proceeding is recognized as a foreign main proceeding, then individual actions against debtors’ assets in India is stayed. So, it provides a way for the foreign main proceeding to inculcate the resolution plan for all assets around the world.Article 23, if followed by India, states that there should be no actions that are normally detrimental to the rights of a foreign creditor.Article 31, if followed by India, provides that debtors are considered insolvent in India if the same is proved under foreign main proceedings.Article 32, if followed by India, provides that a foreign creditor is entitled to receive payment subject to a proportionate amount of payment to all creditors of the same level. So, if a foreign creditor receives some amount from foreign assets, it is not entitled to receive an amount from India, unless all creditors of that level are paid up to that proportion as the foreign creditor has received.Thus, we see that the model framework incorporates principles of natural justice and common business practices concerning insolvency resolution.IBC and Cross-border InsolvencyIn India, we have a law that is effective for domestic insolvency resolution. We are currently lacking a law for cross-border insolvency resolution. In today’s world, globalization has created a cross-border presence of entities. So, one nation cannot alone declare the insolvency of a multinational company operating in more than one geography or jurisdiction. The concurrence with the laws of other nations is also required to dispose of the assets present in other nations. Moreover, the manner of disposal of claims among different stakeholders of different nations in accordance with the principle of natural justice and business customs requires consent between states. There cannot be an ideal cross-border insolvency regime if one nation prefers payment to their claimants over and above claims of stakeholders belonging to other nations.It is not that the Indian IBC lawmakers were not aware of cross border insolvency. While drafting the IBC, the committee were concerned about cross-border insolvency. However, they delayed it for a while to be taken up in future. The Bankruptcy Law Reforms Committee (“BLRC”), which recommended the design of the IBC, noted the following in its report in November 2015:“The Committee has taken up, and attempted to comprehensively solve, the question of bankruptcy and insolvency insofar as it is a purely domestic question. This is an important first milestone for India. [emphasis added]The next frontier lies in addressing cross-border issues. This includes Indian financial firms having claims upon defaulting firms which are global, or global financial persons having claims upon Indian defaulting firms.”Yet, the present laws still cover international aspect so far it relates to:foreign holders of corporate bonds issued in India, orborrowing abroad by an Indian firmThe Joint Parliamentary Committee which was set up in December 2015 to review the Insolvency bill were of the opinion that the Code had nothing to do with cross border insolvency and in this era of globalization, failure to incorporate cross border insolvency would result in major ineffectiveness of the law. The report of The Joint Parliamentary Committee on The IBC, 2015 presented to Parliament on 28th April, 2016 mentions:“The Committee deliberated the issue and noted that ‘The Code at present does not explicitly deal with issues and text related to cross border insolvency.’ The report warned that in the globalized world, the implications of cross border insolvency could not be ignored for too long. The failure to incorporate cross-border elements would lead to an incomplete Code.”Presently, Section 234 and 235 inculcate the elements of cross border insolvency:Section 234: gives power to the central government to enter into an agreement with a foreign country for enforcing the provisions of the Code and facilitate cross border insolvency reciprocal arrangements.Section 235: gives power to the Adjudicating Authority to issue a letter of request to a court in a country with which an agreement under Section 234 has been entered into, to deal with assets situated in that country.The above provisions give way for cross-border insolvency resolution. But, there are inherent limitations in the implementation of these provisions. The major problem with the enactment of these sections would be that they would require a separate agreement with each country or each group of countries. These agreements would make cross-border insolvency a cumbersome task and would lead to much of agreement-specific inclusion and exclusions. Moreover, these could lead to a larger issue. A multinational company could have branches elsewhere and could actually go for liquidation somewhere else based on a case filed by its creditors.The solution to this would lie in having a model code for cross-border insolvency which would be acceptable to a majority of nations of the world. We today have that model framework, as discussed earlier, in name of “UNCITRAL Model Law on Cross-Border Insolvency”, which was initiated in 1997. This model convention is adopted by more than 50 countries and that includes large and more developed countries such as the UK and the USA.India is planning to adopt this model framework. It is working on its adoption since the enactment of IBC laws in 2016. The government had set up several committees to conduct research and enact a framework for the adoption of the model law of UNCITRAL and as result bring a law on cross border insolvency.The Insolvency Law Committee in its first report released in March 2018 (accessible at page 6 of: https://ibbi.gov.in/ILRReport2603_03042018.pdf) noted the importance of adoption of UNCITRAL model law on cross border insolvency. The report highlighted the weakness of the existing two provisions (Section 234 & Section 235) for cross border insolvency matters. Their suggestion was to insert a new chapter on cross-border insolvency in existing code based on some framework developed in line with the UNCITRAL model law on Cross Border Insolvency.For enactment of the UNCITRAL model law, MCA issued an introductory note and a draft legal framework for cross-border insolvency and invited comments and views from stakeholders in June 2018. Thereafter the Insolvency Law Committee has included detailed recommendations on a legislative framework for cross-border insolvency in India, in its second report of October 2018. This draft law is popularly referred to as “part Z”. It had undertaken a clause-by-clause analysis of UNCITRAL Model Law.The present status of draft is that it is on its way to be completed into an amendment bill and to be passed by parliament. MCA had re-constituted a cross-border insolvency rules/regulations committee (“CBIRC”) in January 2020. Some modifications were made in the draft (part Z) and public views were invited on it.It is clear to all stakeholders of the IBC ecosystem that to further confidence of international investors, foreign governments and foreign stakeholders in our insolvency resolution framework, timely and robust enactment of cross-border law would be very necessary.The Existing cross-border Insolvency cases: The Jet Airways PrecedentThere is a number of examples where cross-border resolution is taking place in India. One such example is that of Jet Airways.Jet Airways is an Indian Company which has operations in other countries also. Creditors of the Netherlands filed a case against Jet Airways and the company was declared bankrupt in the Netherlands as per their Dutch law. Later, in India, the NCLT took up the Insolvency resolution admission petition for that company.NCLT denied the recognition of Dutch proceedings citing that the foreign judgement does not apply to our country. The matter moved to NCLAT. NCLAT, allowed the Dutch trustees to sit in the meetings of the committee of creditors and put in place a protocol for cooperation between the Dutch liquidator and the Indian resolution professional.Thus, for the first time, India recognized cross-border insolvency judgement under IBC laws.Jet Airways case is conclusive enough to show us that stakeholders are ready to deal with the challenges posed by the nascent stage of cross border insolvency law in India. At the same time, it shows that the need for a law on cross border insolvency is based on present reality. Stakeholders expect the same breakthrough law on cross-border IBC as the Code enacted in 2016.It’s time for us to be prepared for Cross-border Insolvency lawThe resolution professional should get ready and be prepared to act when the cross-border law is enacted. The following are dimensions relevant for our preparedness:To adopt a modern risk approachTo develop a mindset and behaviour to promote and encourage cooperation and coordinationTo develop techniques and skills to protect assets in other jurisdictionsTo develop skills to promote a viable resolution processWork to strengthen the legal framework, not to work to hinder it.ConclusionIndia is preparing for the adoption of Cross border insolvency but at the same time, it realizes that the law is at a nascent stage for India to adopt. Many developing countries are yet to adopt it and Brazil too has adopted it in the year 2020 only. So, with due precaution and analysis, along with country to country and case to case analysis, Government is ready to go for the adoption of the law on Cross Border Insolvency. The law may get delayed a bit but whenever it is enacted, it would be there with sound and supportive provisions. Insolvency professionals must be ready and willing to support effective implementation of the same.References & Resource DocumentsInsolvency Law Committee draft provisions on cross-border insolvency for insertion in the Code (“Draft Part Z”): https://www.mca.gov.in/Ministry/pdf/crossborderInnsolvencyReport_22102018.pdfUNCITRAL Model Law on Cross-Border Insolvency (1997) with Guide to Enactment and Interpretation (2013): https://uncitral.un.org/en/texts/insolvencyInsolvency and Bankruptcy Law of India (IBBI): https://ibbi.gov.in/en/legal-framework/actReport of Joint Parliamentary Committee on IBC, April 2016: https://ibbi.gov.in/16_Joint_Committee_on_Insolvency_and_Bankruptcy_Code_2015_1.pdfAuthor may be reached at: nktulsyan32@gmail.com and eboard@icai.in

While debates around gender pay gaps are ubiquitous, what is missed is conversing about the ‘gender investing gap’. A large chunk of Indian women holds a misconception that to invest, one should be an expert. Consequently, the majority of women might never develop a sense of financial independence. This article through its storytelling approach attempts to capture some of the basic dilemmas around investing. This piece is a conversation starter to address the issue of low participation of women in the investment arena.The article intends to capture the attention of professionals to address the elephant in the room. If every professional volunteers to educate women around them regarding the perks of investing and help a few get a head start, the gender investing gap will gradually become a thing of the past.The Dilemma“The stock market is the greatest opportunity machine ever created. Unfortunately, most people never learn how to harness its energy to create wealth.”— Matthew R KratterKamla, a young physiotherapist, was exploring avenues for investing her money. Kamla’s medical curriculum did not cover investment education, therefore to get a hold on a few investing concepts she began to browse the web. Instantly, she came across numerous financial terms, uncommon to her. Despite the novelty, Kamla continued her casual attempt to pick up more about the world of investing. Meanwhile, amongst various articles that appeared on her screen, one caught her attention. The article narrated a story of how a retired couple, who had invested Rs 82.8 lakh in multiple mutual funds, was defrauded by a relationship manager of a brokerage firm. Stunned to read such an instance, Kamla purposely looked up more cases of cheating. In the next moment, she was redirected to a page full of articles about the Ponzi schemes, and chit-fund scams. After skimming through a few articles, Kamla concluded that innocent investors like her, who don’t possess the right expertise to understand the financial market, are highly susceptible to falling prey to scams. Hence, naïve investors should refrain from investing. Is Kamla right in thinking this way?Shreya was delighted to see her friend Kamla standing at her doorstep. “How good you look!” remarked Shreya as she welcomed Kamla into her house. “Say hi to aunty, Siya,” said Shreya to her five-year-old. Shreya had lost her husband Raj, to COVID-19. Since then, Kamla would frequently visit Shreya and spent some time together.“Get ready Shreya, we are going to the flea market! I have already booked a cab for the three of us, it will reach anytime now!” said Kamla “And Siya, you can have your favourite strawberry ice cream there”, continued Kamla. On the way to the flea market, hesitantly, Kamla asked Shreya “Please tell me if you need anything? How are you able to manage your finances in the absence of Raj?” Shreya, with a slight smile on her face, explained “I resigned from the full-time position at the university to give more time to Siya, however, the generous dean offered me to fill in as a visiting faculty for chemistry. This position gives me decent income and ample time flexibility.”Shreya continued further, “To answer how I manage my finances, I believe Raj had prepared me well to be financially independent in case any uncertainty arises. He had developed an extensive financial plan for me and he made sure that I stick to the plan. Would you like to take a look?”“Financial plan! That sounds interesting. Please show me.”, replied Kamla. Shreya unlocked her cell phone, searched for something within, and at last presented Kamla with a picture, which was drawn by Raj.“Raj had devised a simple financial plan for me. He referred to this plan as ‘easy six’. All I had to do was to take my monthly income and allocate it to the six compartments, namely: savings, repayment of loans, insurance premiums, investments, tax planning, and retirement fund. Raj had developed thumb rules for the compartments. The rules helped us to decide what quantum of money is to be allocated to each of them. Raj used to modify the rules with changes in our age and income. I remember, the last remarkable change he made to the rules was when Siya arrived in our life.” said Shreya.Sketch 1: Components of long-term financial planning (‘Easy Six’ Plan)CompartmentDescription & InstrumentsRaj’s Thumb Rule1. SavingsLiquid bank savings accountAlways maintain at least 6 times of monthly expenses (6 × YY) as an emergency buffer.2. Loan RepaymentVehicle / Home liability managementBudgeted monthly installment for car loan / obligations.3. InsuranceLife Insurance & Health InsuranceComprehensive coverage to protect family from catastrophic medical or life events.4. InvestmentsMutual funds, Equity market, Gold/Gold bonds, Fixed Deposits20% of monthly salary to be invested consistently in combination.5. Tax PlanningStatutory deduction mechanismsClaim all eligible tax deductions under relevant tax laws.6. Retirement PlanNational Pension System (NPS), Annuity plansDedicated retirement corpus building for long-term self-sufficiency.“This is very impressive and thoughtful Shreya!” said Kamla. She further continued, “While all compartments make a lot of sense to me, I am not so sure about investments. Do you know some time back, I was keen to invest too? However, my research reflected there was tremendous risk involved! Since then, I have refrained from investing in the financial market. Aren’t you afraid of investing? How do you make sure you are not being scammed? Or what if, due to financial market failure, all your hard-earned invested money wipes out?”Shreya responded, “At first, I was worried too. I asked Raj that, with no knowledge about the financial market, how I could entrust my money in a market which has often been infamous for scams.” ‘For Financial Independence’ was Raj’s reply.”Hearing this, Kamla questioned, “As long as we are working and our bank accounts are being credited, aren’t we financially independent?” Shreya replied, “That’s the catch! The primary purpose of working is to earn income to pay our living expenses. Contemporary time has moved beyond the primeval needs for ‘roti, kapada, and makaan’. Thus, financial independence means taking care of your expenses without having to work. Every working person, whether he/she is self-employed or on the job will retire one day. Consequently, no messages reading ‘bank account credited’ will pop on your cell phone at the end of every month. As against, messages for ‘bill due’ will be constant. Thus, financial self-sufficiency is paramount. I will quote Warren Buffett here: ‘If you don’t find a way to make money while you sleep, you will work until you die.’ Therefore, having a second source of income is a must. The investments that Raj and I made in various mutual funds over the years are backing me up to meet my financial requirements now.”“This is an eye-opener! My bank FDs and the few biscuits of gold in my bank locker are not going to be enough to meet my expenses after my retirement.” said Kamla. “But there are so many investment options in the market, which one to choose?” she questioned Shreya.“Well for beginners, investing in mutual funds is a good option. Mutual funds cater to common investors like you and me, who lack the skill or experience of investing in the volatile financial market. Mutual funds engage expert fund managers who manage a diverse basket of stocks to maximize returns for investors. This helps mitigate the market risk as our money is handled by an expert.” Shreya said.Sketch 2: The Mutual Fund Wealth Creation ProcessSmall Investors (Raj, Shreya & Others) → Pool Money into Asset Management Company (AMC) → AMC Appoints Expert Fund Manager → Invests into Diversified Basket of Securities → Generates Portfolio Returns → Returns Passed Back Proportionally to InvestorsAfter reviewing the sketch Kamla remarked, “Raj was excellent at simplifying some of the complex concepts. This sketch beautifully explains the process of how I, as an investor, can create wealth by investing in mutual funds by simply pooling my money with other small investors.” With a spark in her eyes, Shreya nodded her head in agreement with Kamla’s remark. “But, how do I start investing? What all do I need?” Asked Kamla confusedly.“Aadhaar card, PAN card, and a bank account.” said Shreya. “The digital economy has made things very simple. With these three documents, I created my account online with a SEBI-registered broker. Within the next four days, my account was active and I could start trading in mutual funds.”“Oh! Opening a trading account sounds easy” said Kamla “But, how do I decide how much money I should put in? Also, there are more than two thousand mutual fund schemes in the market. How do I choose two or three out of the lot? Is there any simple checklist that I should go through? How do I make sure I am not being deceived?” Before Kamla could finish her last question, Shreya explained: “Every investor has unique financial goals, thus each individual will have a separate investment journey. However, five principles that each should remember and practice are:The 5 Core Principles of InvestingEvery investor is different: Every individual has different financial goals, and is at a different stage in life, hence no one mutual fund is fit for all.Patience is the key: Investing in a mutual fund is part of a long-term financial plan, and you will see your money growing only after three to five years of investing.The guarantee takes a back seat: Mutual funds do not guarantee to make you rich, however, it does have immense potential to grow your money.Risk can be mitigated not eliminated: Although mutual funds are regulated by the Securities and Exchange Board of India (SEBI), the risk associated with them can only be mitigated, not eliminated.Invest and follow up: Keeping a tab on how your funds are performing is pivotal.Sketch 3: Checklist for Choosing a Mutual FundPrerequisitesKey Checks to Mitigate RiskFinancial Goal: How much, where, and how long to invest?Risk-Taking Capacity: High Risk vs Low Risk.Asset Allocation: Balancing debt and equity funds.Consult SEBI-registered broker, then personally verify:• AMC track record & reputation• Fund manager track record & tenure• History of fund (consistent returns over multiple years)• Stocks in the underlying basket• Expense ratio (fund management fee)The Power of Compounding & Starting Early“Currently, I am investing ten percent of my monthly income in a ratio of 40:60 in debt fund and equity fund. Based on my financial goals, my registered broker advised me to enrol in a systematic investment scheme also referred to as SIP. It is a facility offered by mutual funds, wherein investors can invest a fixed amount of money, at pre-defined intervals. And yes, you do not need a large amount of money to start investing. Your investment can be as low as Rs 500. The pre-defined interval can be weekly/monthly/quarterly/semi-annually/annually. Regular investment in SIP for the long term brings magnified benefits because of the compounding effect. The compounding effect makes sure that investors’ income grows not only based on their actual investment, but also on the returns that they are generating over time.”Shreya elaborated further: “Let me give you my example: I started SIP, at the age of 28, and based on my current SIP, a corpus of approximately Rs. 2.76 crores will be generated by the time I retire. As against, if I had waited for five years and started SIP at age of 33, a corpus of approximately Rs. 1.54 crores would have been generated by the time I retire i.e., a difference of Rs. 1.21 crores. Hence, the earlier you start, the more financially independent you become.”Expense Ratio Explained“Simply put, the expense ratio is like a maintenance fee you pay to the AMC for managing your funds. For instance, one of my mutual funds with an investment of Rs. 20,000 has an expense ratio of 2%, meaning I pay Rs. 400 to the AMC for managing my money.”Recommended ResourcesBooks: Rich Dad, Poor Dad by Robert Kiyosaki and A Beginner’s Guide to Stock Market by Matthew Kratter.Official Portal: Association of Mutual Funds in India (AMFI) website (www.amfiindia.com) for verified investor education under SEBI oversight.Sketch 4: Shreya’s Actual Portfolio AllocationFinancial GoalRisk CapacityAsset Allocation Strategy1. Invest 10% of monthly salary2. Invest in mid cap equity & debt funds3. Horizon up to 5+ yearsMedium RiskTotal investment ratio: 40:60(40% Debt Fund : 60% Equity Fund)ReferencesMoney Mistakes Women Should Avoid │ Professional WOMAN’s Magazine. (2021, November 3). Retrieved October 21, 2022, from https://professionalwomanmag.com/2021/10/money-mistakes-women-avoid/Association of Mutual Funds in India (AMFI). Project 2016: https://www.amfiindia.com/investor-corner/knowledge-center/introduction-to-mutual-funds.htmlHow to Invest in Mutual Funds Online - 5 Easy Steps. BankBazaar: https://www.bankbazaar.com/mutual-fund/how-to-invest-in-mutual-funds.htmlZaidi, B. (2010, August 25). The third-party scam. Business Today: https://www.businesstoday.in/magazine/mutual-fund/story/the-thirdparty-scam-16554-2010-08-25Author may be reached at: virangishah3023@gmail.com and eboard@icai.in

While 90 percent of a company’s value is represented by intangible assets, these assets don’t get reflected in the financial statements, as either they cannot be valued in monetary terms or no actual expenditure has been incurred for these assets. The knowledge component within this intangible asset is the intellectual capital of a firm. Due to its high value-creating capacity, if the information regarding this asset is not provided to the stakeholders of a firm, it creates an information asymmetry which also affects the firm value.This requires accounting professionals in corporate positions to ensure that intellectual capital information is adequately disclosed in their annual reports.The role of accounting professionals is generally perceived to be limited within the financial aspect of the firms. Any component whose monetary value cannot be identified is generally ignored. In the present knowledge era, the knowledge component in the firm is getting recognized as a value-creating resource. Accordingly, professionals valuate intangible assets to recognize this component in the financial statements. Companies invest heavily in this knowledge component, also known as Intellectual Capital, such as Research and Development, advertisement, relationships with stakeholders, etc. However, the traditional accounting system has failed to recognize this knowledge asset due to the existing GAAP, which allows investment in intellectual capital to be expensed immediately. Therefore, there is an information asymmetry between the management and the users of the financial reports.This information gap has raised over the period, as the market value of the corporates relies primarily on their intangible assets. According to the Intangible Asset Market Value Study, while Intangible assets represented only 17 percent of the market value of the S&P 500 in 1975, it rose to 68 percent in 1995, 84 percent in 2015, and 90 percent in 2020. This indicates that currently, only 10 percent of a firm’s value is represented by its tangible assets. The remaining 90 percent is intangibles (Ocean Tomo, 2020). Due to their highly abstract nature, these intangible assets cannot be measured explicitly in monetary terms.What is this intellectual capital?Though there is no universal definition for Intellectual Capital, the various definitions given by researchers are similar and contain keywords like skill, knowledge, know-how, experience, technology, and good relationships that help an organization gain competitive advantage and earn corporate value. Skandia AFS gives one such definition: “Intellectual Capital is the Possession of Knowledge, applied experience, organizational technology, customer relationships, and professional skills that provide a competitive edge in the market.” Intellectual capital comprises three main components: Human Capital, Structural Capital, and Relational Capital.“Human Capital is the employees’ collective intelligence that provides the best solutions to the firm. It is the people’s innate ability and cannot be owned by the organizations.”It leaves the firm when people leave.Structural Capital: The internal framework of the firm, developed to commercialize its human value. It remains with the company even when employees leave and includes all non-human vaults of knowledge, such as databases, process manuals, routines, and intellectual property.Relational Capital: The value of a company’s relationships with its customers, suppliers, shareholders, government, and other stakeholders.It is often said that if you can measure it, you can manage it. Therefore, to assign a measurement value to this intangible asset, many attempts were made by various researchers. Accordingly, many models emerged: the balanced scorecard, Skandia navigator, value-added Intellectual Coefficient (VAIC), and the modified VAIC. However, all these models suffer from significant limitations and are currently used only by academicians and researchers.Presently, some of the intellectual assets get reflected in the financial statements in the form of intellectual property or goodwill. They appear in the balance sheet only if cash has been expensed for acquiring this asset. Other value-creating activities, like advertising, employee training, etc., get expensed in the statement of profit and loss and, therefore, do not increase the firm’s book value. However, this asset highly increases the firm’s market value. Further, other value-creating assets for which money has not been spent, like behaviour, attitude, or relationships, do not appear anywhere in the financial statements.Regulators frame these rules to avoid window dressing as it cannot be physically verified. Accountants cannot change the rules. So, what can they do about it?Accountants cannot show these assets in financial statements for sure. But they can ensure its disclosure in the annual reports of the corporates. Accounting professionals are appointed on the Board of Directors, and its committees, including the Audit Committee, for their accounting and financial expertise. The Audit Committee oversees the company’s reporting practices, both the financial and the non-financial aspects. The Board of Directors approves the annual report before presenting it in the AGM. These professionals need to ensure that not only the financial aspect is true and accurate but also the non-financial aspect, especially when this intangible asset represents most of the company’s market value.With the beginning of the 21st century, researchers started focusing on intellectual capital reporting practices. Accordingly, many frameworks were developed to identify the level of intellectual capital disclosure. In the Indian context, Kamath (2017) has developed a framework to identify the level of disclosures with 60 items within the three intellectual capital components. Globally, many frameworks have been developed (Beattie & Thomson, 2004; Bontis, 2003). The literature has found an increasing trend of reporting practices using these frameworks. In the Indian context, Mondal & Ghosh (2013) studied 30 knowledge-intensive companies for three years from 2009 to 2011, and found that the overall disclosure of the intellectual capital increased in this period. Maji & Goswami (2018) continued this trend analysis for 30 different knowledge-intensive companies for the period 2011 to 2015 and found that the overall disclosure has gradually increased from an index of 0.436 to 0.466. Although the studies show a gradually increasing trend, the firm’s intellectual capital has also increased over the years. Studies have concluded that the overall intellectual capital disclosure of Indian firms is very low (Joshi et al., 2011).What is the need to increase intellectual capital disclosure?Firstly, let us discuss the need for financial statements in brief. Financial statements provide a picture of the firm’s financial condition, giving insight into its performance and operations. They provide information about the company’s revenues, profits, expenses, assets, and liabilities to its investors and other stakeholders.However, we have seen that intangible assets represent 90% of the firm’s market value, and the gap between the firm’s book value and market value is constantly increasing. There is an information gap between the firm’s management and stakeholders, which increases the agency problem. The agency problem arises due to information asymmetry as explained by the agency theory (Jensen & Meckling, 1976). Currently, this information gap cannot be reduced by financial statements alone. So, there is a need to report this value-creating intangible asset in the annual reports and other essential reports of the firm to reduce this information asymmetry and inform the external stakeholders about the resource that provides the competitive advantage.Empirical studies have shown that disclosure of intellectual capital in annual reports reduces the information gap and increases the firm value. A study by Orens et al. (2009) in France, Germany and The Netherlands found that intellectual capital disclosure in European nations is associated with lower information asymmetry, cost of capital, and rate of interest paid. Another research by Salvi et al. (2020) studied intellectual capital in integrated reports and found a significant favourable influence on firm value. Considering the importance of intellectual capital disclosure, the IIRC framework for integrated reporting has included all three component capitals of intellectual capital as separate capitals among the eight recognized capitals of a firm.The Comprehensive Authors' Intellectual Capital FrameworkAs we have discussed, there are many frameworks with a different list of items to look into this disclosure. These frameworks vary with the number of items ranging from 26 to 128. However, many of these items are vague and synonyms of other items without properly assigned meaning. Therefore, synthesizing these frameworks, we have developed a framework by incorporating all items avoiding synonyms and providing them with meaning to ensure value addition in the intellectual capital reporting. This framework is as follows:1. Human Capital Disclosure Items (16 Items)Sl. noItem / Sub-componentDescription1Employees / Human ResourceNumber of the employees, employee breakdown by market, department, etc. The biological age of employees, employee’s breakdown by seniority. Employees’ diversity like gender, race, religion, culture, and percentage of disabled employees.2Employee’s educationEducation of the directors as well as other employees of the company.3Employee’s knowledgeIt is the knowledge related to the current job, including previous experiences and whatever is learned in the process of working in the company.4Employee skills / know-how / expertiseIt includes the directors’ and other employees’ skills, know-how, and expertise.5Employee TrainingIt includes training programs, policies, investment, the number of employees attending the training, and the result thereof.6Employee valueIt includes the importance of employees, dependence on key employees, employee satisfaction and loyalty, etc.7Employee motivationPolicies and initiatives for the motivation of directors and other employees, including awards and recognition.8Employee’s commitmentIt looks into the descriptions of employee’s commitments, like employee’s emotional attachment, or indicators like attendance of meetings.9Employee’s productivity / efficiencyValue added by the employee, customers per employee, sales per employee, output per labour hour, etc.10TeamTeamwork, working in groups, unions, expert teams, teamwork capacity, etc.11RemunerationSalary and remuneration to directors and employees.12Health and SafetyIt refers to the employee’s health, safety measures, investment in health and safety, employee insurance policies, etc.13Work environmentIt includes workplace relationships, flexible work time, job rotation, work from home, conditions of work, etc.14Retirement benefitsIt includes the retirement plans and benefits to the employees by the company.15Employee replacementIt refers to the employee turnover, the number of employees left or replaced.16Employee CapabilitiesIt includes employees’ abilities like creativity, communication skills, sensitivity, management ability, etc.2. Relational Capital Disclosure Items (14 Items)Sl. noItemsDescription1CustomersInformation about the customers, their names, types, purchase history, customer base, etc.2Market shareThe ratio of the company’s turnover to the market’s turnover, new customers acquired, new contracts, and the company’s position in relation to its competitors, including market leadership.3Customer satisfactionSatisfied customers, customer feedback, on-time deliveries, return policies, etc.4Customer loyaltyLoyalty schemes, dependence on key customers, repeat customers, renewed contracts.5Customer training and awarenessCustomer training, education, and awareness through presentations, roadshows, etc.6Company’s reputation / imageIt refers to the perception of the stakeholders about the firm. Its esteem, knowledge, and what it stands for.7BrandsInformation about brand-related strategies and activities, brand names, brand images, etc.8Distribution channelsInformation about distribution channels like agents, distributors, dealers, franchises, logistics, etc.9SuppliersIt includes information about suppliers, dependence on key suppliers, relations with them, bargaining power against suppliers, payment terms, etc.10Public relationsCompanies’ relationship with the public (other than customers, suppliers, and employees), e.g., relations with the government, competitors, and other stakeholders.11Business agreements / dealIt includes business agreements, licensing agreements, and dealings with businesses other than its consolidated group.12AwardsIt includes awards received by the company.13MarketingIt includes marketing initiatives, strategies, advertisements, etc.14Customer serviceIt includes after-sale service, tele-support service, warranties, etc.3. Structural Capital Disclosure Items (12 Items)Sl. noItemsDescription1Intellectual PropertyIt includes intangible assets protected by the law, like patents, copyrights, trademarks, trade secrets, commercial rights, etc.2Management PhilosophyHow leaders think about the firm and its employees, i.e., how it is managed.3Corporate culture / value / principlesThe set of critical values, principles, beliefs, and attitude shared by the organization’s people controls how members of the organization interact with each other and with other stakeholders.4ProcessIt is the processes, procedures, and routines which enable the company to utilize its resources efficiently.5Organizational structureHierarchies, management structure, business models, and the way the work flows through the business.6Research and Development (R&D)It includes R&D programs and progress, its budget and success, and peer-reviewed publications.7InnovationIt includes creative ideas and innovation through which something new and valuable can be introduced to the company.8Knowledge managementIt is the management of the company’s knowledge and information, including documented materials, knowledge centers, laboratories, etc.9Information TechnologyIt includes machines, hardware, software, technical methods, and techniques.10NetworkingCommunication media, internet, network, etc.11InfrastructureIt includes corporate buildings, factories, industries, office rooms, acquisitions of other firms or assets, etc.12Intellectual capitalDisclosure of companies’ intellectual or knowledge assets or intangible capital, which is not a part of the intellectual property.Source: The Authors.ConclusionIn today’s knowledge-based economy where intellectual capital plays a significant role in creating value for organizations, accounting professionals, with their financial expertise, have a vital role in ensuring the disclosure of intellectual capital information. Increased intellectual capital disclosure is essential to bridge the information gap between management and stakeholders. The need for intellectual capital disclosure arises from the fact that intangible assets represent the majority of a company’s market value, while financial statements primarily focus on tangible assets. By embracing comprehensive frameworks and meaningful itemization, accounting professionals can reduce the information gap and provide stakeholders with a more accurate representation of a company’s value-creating resources. Emphasizing on intellectual capital disclosure enhances transparency, fosters stakeholder trust, and facilitates informed decision-making in today’s knowledge-driven economy.ReferencesBeattie, V., & Thomson, S. J. (2004). A comprehensive analysis of intellectual capital components as a precursor to empirical investigation of disclosures in annual reports. 8th Annual Financial Reporting and Business Communication Conference.Bontis, N. (2003). Intellectual Capital Disclosure in Canadian Corporations. Journal of Human Resource Costing & Accounting, 7(1), 9–20.Jensen, M. C., & Meckling, W. H. (1976). Theory Of The Firm: Managerial Behavior, Agency Costs And Ownership Structure. Journal of Financial Economics, 3, 305–360.Joshi, M., Ubha, D. S., & Sidhu, J. (2011). Intellectual capital disclosures in India: A case study of information technology sector. Global Business Review, 12(1), 37–49.Kamath, B. (2017). Determinants of intellectual capital disclosure: evidence from India. Journal of Financial Reporting and Accounting, 15(3), 367–391.Maji, S. G., & Goswami, M. (2018). IC disclosure practices in India using a comprehensive disclosure framework: A study of knowledge-based companies. Journal of Indian Business Research, 10(4), 345–363.Mondal, A., & Ghosh, S. K. (2013). Intellectual capital reporting trends in India: an empirical study on selected companies. International Journal of Financial Management, 3(1), 9–18.Ocean Tomo. (2020). Intangible Asset Market Value Study. In https://www.oceantomo.com.Orens, R., Aerts, W., & Lybaert, N. (2009). Intellectual capital disclosure, cost of finance and firm value. Management Decision, 47(10), 1536–1554.Salvi, A., Vitolla, F., Giakoumelou, A., Raimo, N., & Rubino, M. (2020). Intellectual capital disclosure in integrated reports: The effect on firm value. Technological Forecasting and Social Change, 160(July), 120228. https://doi.org/10.1016/j.techfore.2020.120228Authors may be reached at: abhisecksinghania@gmail.com and eboard@icai.in

Change, they say, is the only constant in the world. And one must say that our profession has been changing right since its inception in the year 1949.I have witnessed, with fascination, how it has changed over the last five decades since I qualified in the year 1973. Pune, a city which was in the industrial backwaters in the early 70s, had just a few hundred members. Most of them were engaged in the audit of non-business entities like schools and trusts, and many were largely involved in income tax compliances. There was hardly any industrial work. There was no service industry to talk about. The change in the last five decades has been breath-taking.A Five-Decade Retrospective: Growth & Core ActivitiesNationwide, our membership has increased to over 3,50,000 from the 15,000 odd members that we had when I qualified. Not only has the number of members gone up, but the nature of the work that they perform has widened tremendously. My own town now has a large industrial base and there is a huge information technology industry. The services outsourcing industry which began with Information Technology now covers a wide gamut of services including business process outsourcing for a wide range of functions. And the scope is truly global. And I see our members deeply engaged in a wide spectrum of activities.I said earlier that change is the only constant, but it is the rate of change that we see now that is truly breath-taking. And that only seems to be increasing as days go by.And some of these changes seem to be impacting the roots or the core of our profession. While our professional education prepares us for multiple roles in a variety of social and economic endeavours, the core of our profession rests on two activities — measurement and attestation. And I believe that some of the changes that I see around us impact these core activities fundamentally. The impact is not only about how we measure but also what we measure. And finally, what is it that we attest.These changes open extraordinary doors for us, and if we do not respond proactively, they may threaten our relevance to the society in the years to come. In this connection, I would like to talk about three sweeping changes that are affecting our profession and would hugely impact it over the next two decades:DigitizationArtificial IntelligenceSustainability“While our professional education prepares us for multiple roles in a variety of social and economic endeavours, the core of our profession rests on two activities – measurement and attestation.”1. Complete Digitization & The India StackLarge scale computerization has been around in India for at least the last three decades. Since personal computers became affordable in the 90s, practically no business of any size runs on manual systems. In that sense, digitization has been around for some years now. But what is staggering now is the complete digitization of complex business systems.In a large company, it covers not only every aspect of a business such as every employee, every SKU (Stock Keeping Unit), and every machine, but also the interconnected systems for their entire eco-system including vendors, customers, dealers as well as statutory authorities. When digitization encompasses almost every facet of a business, and when the scale of the business is huge, attestation function presents some special challenges. Deep understanding of information technology then becomes the core part of our professional tools:How do we ensure that the business logic applied in the systems is correct?How do we ensure that the business logic that has been informed to us is actually implemented?How do we ensure that no exceptions are created?How do you ensure the integrity of all the functions?These are serious issues. Digitization presents opportunities for us in designing proper control systems — actually I consider this to be a forte of our profession.The Roots of Auditing: Listening vs. Technical TestingComing to the attestation of large-scale digitized systems, I believe that while we need to depend on the knowledge of technology, we also need to go back to our core or roots of the auditing function. We cannot forget that “auditing” has its roots in the Latin word “audire”, which means listening. Sometimes in our deep dive into information technology, we may forget to “listen” to the organizational vibes. I believe that it is very important for us to get a “smell” of the company whose results we are attesting. You can only get that when you “listen” to the vibes in the company. The culture of an organization trumps or overrides all its systems. Too often, we see that technically correct auditing with all IT tests and documentation misses out on the “listening or smelling” test, with dire consequences. I personally believe that these are the roots of our profession that we need to hark back to while operating in an environment of high level of digitization.The Sweep of the India Stack, ONDC & Account AggregatorsThe level of digitization is even higher when we look at the world-famous “India Stack”. This covers the interconnected systems of Jan Dhan, Aadhaar, eSign, Digilocker, UPI and Mobile, but which is now being extended to ONDC and aggregators:ONDC (Open Network for Digital Commerce): ONDC may become the platform for large-scale buyer-seller meets covering a huge part of our GDP.Account Aggregators (AA): Financial data is now being collated as part of a single platform with a set of ‘Account Aggregators’ which are authorised by accredited agencies such as RBI, IRDA, SEBI etc. AAs will help in improving the applicant’s overall experience and in turn, scale up the consumption of financial products in the marketplace.Direct Benefit Transfer (DBT): Covers tens of millions of accounts spread across the country across numerous bank accounts.As this digitization sweeps across the country, our members can play a stellar role in expanding its scope: designing control systems, assisting in cross-country roll-out by helping merchants onboard the ONDC, and assuring transactions across these massive networks.2. Artificial IntelligenceThe talk about artificial intelligence has been going on for at least a couple of decades. But, what at one point in time, seemed like a distant possibility, has now suddenly become a reality with the advent of ChatGPT. ChatGPT has broken into the scene like a colossus striding across the stage. With the presence of this technology, the entire spectrum of “digitization” that we were witnessing so far looks like a trailer to a high-impact movie.In understanding artificial intelligence, I think it is important to answer three questions: What does it mean? How does it operate? What would its potential uses be in the years to come?“Artificial intelligence clearly refers to the intelligence of the machine where the machine thinks by itself without a human being laying down the decision rules.”The current artificial intelligence products work through Large Language Models (LLMs). Essentially, they are based on scouring through billions of records currently available on the internet and using them as language models by the mechanism of “back propagation”. The software arrives at the next word in any text on the basis of the previous words, using the knowledge it has gleaned from the billions of documents on the web, building a complete cognate text. Essentially, it is combining all the knowledge inside the digital world to create a new story, picture, document, or code.This mechanism can be used for multiple cases of decision making: interpreting pictures, generating stories, or constructing automated decision-trees. One can imagine, in the times to come, banks using it to go through their huge loan portfolios to decide which of them they will carry forward, which of them they will write off or create a provision for — generated not by a hard-coded human decision-tree, but by patterns learned from past actions.The Transparency and Attestation DilemmaWhile there are many conversations about employment effects or the propagation of bias, the most critical part to me is the lack of clarity about how AI makes decisions in specific cases. This lack of transparency in decision-making can be a major issue. The usage of artificial intelligence in any financial decision-making can expose an entity to decisions where the underlying logic is unknown. This creates fundamental problems for an attesting profession like ours, and our profession will need to develop methodologies to overcome this hurdle.3. Sustainability: Beyond Financials and GDPConcerns about sustainability are a major change sweeping across the globe. This is going to impact the process of decision-making at a corporate level as well as at national level, and therefore, it is also going to change the information used for such decision-making.For long, businesses have run on the core principle of “free enterprise” — namely, that every sale to a customer is a vote that the customer is paying for value received; therefore, higher revenue and profit signify higher value created for society. The financial results of an undertaking were used to justify investments and determine societal capital allocation.We are now beginning to realize that this summation of individual value creation does not equate to societal value creation. This classical mechanism does not take into account the destruction of the environment or damage to biological diversity. Consequently, society may suffer while individual consumers and businesses gain short-term value.The world is now looking not just at revenue and profit, but at the societal and planetary footprint of an enterprise:How much CO2 does the working of an undertaking generate?What negative impact does it have on biodiversity?How much of global natural resources are consumed?How much waste is generated?Since what gets measured gets managed, collecting data on ESG (Environment, Social, and Governance) sustainability is an extraordinary opportunity for our profession. For our profession to remain relevant, we must rapidly expand beyond financial measurement and attest across comprehensive non-financial sustainability dimensions.Re-evaluating the Yardstick of National ProgressThis measurement evolution touches national progress as well. For too long, nations have relied on a single metric: growth in Gross Domestic Product (GDP). Increase in GDP has always been equated with increase in prosperity. Now, there is a growing realization that GDP is a very inadequate measure of true growth: GDP can grow when one group digs ditches today and a second group fills them up tomorrow. GDP does not give recognition to growing income disparities, nor does it recognize the immense value created by unpaid workers.New measures of national prosperity are now under active global debate, presenting a tremendous opportunity for Chartered Accountants to lead in non-financial measurement, social impact reporting, and societal attestation.ConclusionWe began this article with the theme of change and its increasing velocity. We believe that our profession is at the cusp of yet another wave of change. We have an opportunity to shape these changes and to contribute to human development.Authors may be reached at: eboard@icai.in

The post-COVID world order is defined by a disruption in traditional pathways of growth, urging countries around the world to reflect on their own growth trajectories and rethink systems of old. India finds itself in a historic era witnessing a paradigm shift to a multipolar world and a global economy establishing its locus in Asia. In this transforming global discourse, India is prioritising economic growth using a human-centric model to build an inclusive, sustainable and green growth story. Challenges lie ahead, as India must tackle multiple hurdles at the same time.Simultaneous Industrialization and DecarbonizationWhile most developed nations were faced with the question of decarbonization long after industrialization, India’s multipronged approach aims to address industrializing and decarbonizing the nation simultaneously. India’s Aatmanirbhar vision coupled with the Hon’ble Prime Minister’s Panchamrit (or Five Elements) Climate Pledge are emblematic of India’s deep commitment to this alternate vision of growth.This is an interdependent world where globalisation through land, the seas and technology, ensures that individuals and countries rely on each other on an everyday basis. India’s approach must be inward as well as external facing. The country’s economic future should strive to prioritise its people’s needs while ensuring that it becomes a voice for the Global South — leaving no one behind.“India’s multipronged approach aims to address industrializing and decarbonizing the nation simultaneously. India’s Aatmanirbhar vision coupled with the Hon’ble Prime Minister’s Panchamrit (or Five Elements) Climate Pledge are emblematic of India’s deep commitment to this alternate vision of growth.”When India took over the G20 presidency, it gained center stage among the 4.6 billion citizens of G20 member nations. India’s G20 presidency is a watershed moment in time as it provides an unparalleled opportunity to showcase to the world India’s cultural and business heritage and its true potential to become a defining force in the global economic order.Fifth Now, Soon to be ThirdThe Indian economy continues to witness impressive growth. In the current fiscal year, the Government of India has also put special emphasis on building robust capital expenditure for building infrastructure that creates new jobs, promotes private consumption and further boosts the economy.With a $122 billion outlay for building roads, highways, and first- and last-mile transport, the government aims to set the stage for a New India, well on its path to become a $5 trillion economy. India is currently the fifth largest economy in the world, soon to be the third largest after surpassing Japan.Real GDP Growth: Surpassed expectations when real GDP grew at 6.1% in Q4 FY23.IMF Outlook: The International Monetary Fund (IMF) in its World Economic Outlook (April 2023) projected India to grow at 5.9% in FY23, making it the fastest-growing major economy in the world.Growth Drivers & Structural Reforms: Pegged to grow at over 7% annually, propelled by IT, manufacturing, and agriculture, alongside landmark structural reforms: the Goods and Services Tax (GST), Real Estate Regulatory Authority (RERA) Act, and the Insolvency and Bankruptcy Code (IBC).Demographic Dividend: Having surpassed China in population, India is the world’s largest producer of human resources. By 2030, India will have over 1 billion citizens in the working-age group.“With a $122 billion outlay for building roads, highways, and first- and last-mile transport, the government aims to set India the stage for a New India, well on its path to become a $5 trillion economy.”India as the World’s Manufacturing and Export HubFor a nation’s sustainable growth, exports need to move northside for a long period of time. In India we are witnessing an annual growth of 7 to 8 percent. Maintaining this trend over decades requires huge exports which would not only provide economies of scale but also help in correcting India’s balance of payments. Therefore, the idea behind introducing the Production Linked Incentive (PLI) scheme for manufacturers is to aim big. For a growing exports sector, it is imperative for MSMEs to work in tandem with large entities.Every challenge presents a window of opportunity. When the world faced adversarial conditions, India rose to the challenge with people-centric solutions — emerging as a global supplier of COVID-19 vaccines during the pandemic. Sooner rather than later, India will become a global supplier of semiconductors. To counter global chip shortages that impacted the automotive sector, India has announced substantial central and state subsidies along with incentives to attract mega semiconductor fabrication ecosystems.Green Growth & National Green Hydrogen MissionInvestments in India’s green energy sector are a major push for manufacturing aspirations with green growth:$800 Billion Green Investment Outlook: Bank of America estimates green investments in India will reach $800 billion over the next decade:Renewable energy sector: ~$250 billionBattery storage & grid infrastructure: ~$250 billionGreen hydrogen, electrolysers & equipment: ~$300 billionNational Green Hydrogen Mission: Aims to transform India into a global export hub for green hydrogen and its derivatives. Leveraging climatic advantages, skilled talent, and policy support, India aims to reduce production costs from $4.5/kg down to $1/kg, while developing domestic manufacturing for modular electrolyser systems and balance of plant components.“India’s recently announced National Green Hydrogen Mission, also aims to make India an export hub for green hydrogen and its derivatives.”Agricultural Exports & The Nutri-Cereal Revolution (Millets)India’s agricultural sector recorded its highest-ever exports of $50.21 billion in FY 2021-2022. This boom is supported by institutional initiatives:Farmer Connect Portal: Operated by APEDA to digitally connect farmers and aggregators directly with international exporters.One District One Product – District as Export Hub (ODOP-DEH): Identifying specialized products across all 765 districts to scale manufacturing and global export.The Superfood Transition: While India is a major exporter of water-intensive crops like rice, sugar, and wheat, there is massive potential to expand millets — India’s ancient, nutrient-dense, climate-resilient nutri-cereal that requires significantly less water, promoting sustainable agriculture while meeting surging global demand.All Things Tech: Digital Public Infrastructure & StartupsIndia’s digital transformation is a cornerstone of its growth agenda. The large-scale digital intervention demonstrated by India is unmatched globally:Digital Public Infrastructure (DPI): Platforms including Aadhaar, DigiLocker, Jan Dhan Yojana, Air Suvidha, and CoWIN have empowered hundreds of millions, helping India leapfrog over forty years of development.Startup Capital of the World: Backed by the Startup India initiative and DPIIT recognition, entrepreneurs receive tax incentives, smoother compliance, and fast-track public procurement.Four Pillars of Future Growth: The next decades will be propelled by Technology, Artificial Intelligence (AI), Machine Learning (ML), and Data, engineering solutions for domestic citizens and global markets alike.“India’s digital transformation is a major component of India’s agenda for growth.”Inclusive, Sustainable & Women-Led DevelopmentTo make India’s growth trajectory truly inclusive, we must build gender-inclusive policies and business practices that encourage India’s women population to become equal participants and stakeholders in the economy. Women-led development is the only way forward if India wants to become a $5 trillion economy.While India is carving a unique pathway to industrialization, it must also aim to build an alternate global supply chain base. Our resources strongly position us to lead this alternative supply chain over the next 10 to 30 years through strategic global partnerships and multilateral leadership.Author may be reached at: eboard@icai.in

Audit profession is evolving in response to the digital transformation of businesses. Automation and newer technologies are helping auditors to analyze large volumes of data. It helps in delivering not only high-quality audits but also more effective and efficient audits, allowing auditors to focus more on risk identification (assessment) and business insights.This evolution of the audit profession is leading to greater connectivity and transparency and as a result, greater stakeholder confidence. This article covers the rapid evolution of the profession on account of digitalization. It also covers newer technologies and their use in audits along with benefits and challenges in adopting digital ways of working.IntroductionThe audit profession is witnessing unprecedented changes due to increased regulatory scrutiny, talent development and retention, rising costs, changing stakeholder expectations, and the technological evolution of businesses.Currently, businesses are going through a technological revolution at lightening speed. Many industry leaders believe it is the fourth industrial revolution. Though business houses were gearing up for digital transformation for the past few years, the global pandemic acted as a ‘catalyst’ for digital transformation and has proven to the world how quickly businesses could transform when required.Using disruptive digital technology, businesses transformed with improved, complex processes, products, and services that contributed to the company’s profitability. Robotic Process Automation (RPA), Workflow Automation (WA), and Natural Language Processing (NLP) have changed human lives in shared service centers, whereas artificial intelligence (AI) is widely used in customer service. With a rise in cryptocurrency, the concept of blockchain is currently being picked up by banks and financial institutions to drive efficiency. The impact of these advanced technologies has virtually touched every industry, every organization, and every function, from marketing to financial reporting. The way in which data and transactions are processed has been completely transformed, resulting in different risks, and paving the way for newer opportunities.As the way businesses are carried out is transformed due to the digital revolution, the audit profession also needs to adopt and digitalize its ways of working to keep pace with the changing business risks and meet stakeholders’ as well as regulators’ expectations by enhancing audit quality.Benefits of adopting technologyEnhancement in the quality of auditImprovement in efficiencyRetention and development of talentDriving a culture of innovationAs organizations embark on the digital transformation journey and a lot of data becomes available, there is an increased expectation from the auditors to use the available data effectively to deliver quality audits. Technology helps to not only improve the quality of audits but also provide better insights into client businesses that add value to the clients. It also helps the auditor analyse the complete population and obtain a higher level of assurance than if he were to verify a few samples in a large population. It helps auditors move from being reactive and, post facto to proactive, forward-looking, and working on a real-time basis. It provides an opportunity to help clients by providing timely insights and increasing the ability to identify areas of heightened risk, control weaknesses, increase data coverage, and improve the ability to find anomalies and outliers.“The profession has evolved significantly in the past decade on the digital front with auditors focusing on the use of data analytics and artificial intelligence while auditing.”The profession is now moving towards 100% review of transactions, review of unusual patterns, and abnormal transactions as opposed to statistical sampling approaches.Gone are the days when financial statements were concise and short audit reports were preferred. With Revised Schedule III and CARO 2020, the trend now is clearly towards more disclosures and transparency in financial statements, and audit reports with greater details, and that too within a couple of days after the financial year-end, which puts further stress on audit firms to innovate and find effective ways of working. Technology helps auditors to effectively and efficiently complete quality audits within stringent timelines, without further increasing stress on the audit team.Technology permits more frequent or real-time audits of transactions. Auditors can benefit from being able to spread audit work throughout the year rather than only during the “busy season,” identifying potential issues earlier, and improving auditors’ ability to timely modify audit plans in response to address those issues.In today’s world, where all audit firms are facing a talent war and are finding it difficult to hire and retain talent within the firm, the wave of digitalization will not only help by automating routine activities but will also help to retain talent by providing them the opportunity to learn new and niche technologies. Using these technologies, people will need to think outside the box and come up with new, efficient, and effective ways of working. This will drive a culture of innovation in the audit profession, reshaping the future. In addition to this, automating routine and mundane tasks will reduce the stress on the audit team, and help firms help people focus on their well-being.Use of various technologies1. Data Analytics“Data analytics is widely used by audit firms. Data analytics helps firms analyse 100% of the population, find unusual patterns and transactions, and spot anomalies.”An auditor can then focus their audit procedures around those unusual transactions, which in turn improves the audit quality. Analytics allows auditors to audit large amounts of data held and processed in the IT systems for larger clients more effectively, aiding risk assessment through the identification of anomalies and trends. Analytical tools have the power to present and analyse the data in pre-structured forms and presentations, which can even help generate tailored audit programs to mitigate client-specific risks.Examples of the use of data analytics to perform audit procedures:Analysis of revenue trends by product, region, and monthComparison of client data with industry trendsNRV testing: comparison of the last selling price with inventory valueEmployee category-wise analysis of average salary cost per employeeAnalysis of inventory items with no movement during the year2. Artificial Intelligence (AI)“AI can evaluate large volume of structured and unstructured financial data and helps identify patterns and anomalies.”The term “AI” describes computing systems that exhibit some form of human intelligence. It covers several interlinked technologies, including machine learning, speech recognition, image recognition, and sentiment analysis. AI can be used in each phase of the audit.Using machine learning, AI can assess general ledger data based on in-built algorithm/logic, and segregate transactions into routine/non-routine or high and low risk. In the traditional method, the auditor would perform statistical/random sampling to test the data. The above segregation performed by AI will help the auditor to quickly identify risks, and focus and plan appropriate audit procedures to mitigate the same. AI tools can also extract predetermined information, which allows the auditor to estimate large data sets quickly and more efficiently.For example, in the case of a large number of lease contracts, machine learning tools can analyse the contracts in a shorter timeframe and more accurately as compared to traditional manual reviews.AI-powered tools can also help in automating audit processes such as expenses, which may help to spot anomalies or frauds. Most of us would agree that reviewing financial statements and ensuring completeness and accuracy of the information is extremely important in the audit of any financial statements. AI tools can be used to help in completing such procedures e.g., tying amounts on the financial statements to the audited trial balance, ensuring that the notes to the financial statements tie back to the income statement/balance sheet and disclosures wherever applicable, tracing prior period numbers with previous year financial statements.Thus, the days are not far off when AI programs will do a large portion of the execution of audits, teams will conduct audits in the metaverse, and inventory counts and asset verification will be observed using drones. In substance, the use of advanced technology has become a ‘must’ for auditors.3. Robotic Process Automation (RPA)Audit firms have also started using RPA to automate time-consuming routine work procedures. RPA is used by audit firms to verify the statutory dues of their clients, send confirmations to customers and vendors, and prepare a summary of the differences once confirmations are received.Challenges and a way forward in moving towards digital auditAdaptabilityNeed for specialised trainingInvestment in tools and technologiesRegulatory changes“The biggest challenge in moving towards the digitalization of audit is the adaptability of audit firms, and the shift in their mindset towards new and diverse ways of auditing using technology.”Many believe that automation and paperless audits tick the box for ‘digitization’. Several audit professionals believe that while the medium of communication and documentation may have changed with the adoption of technology, nothing about the audit process itself has been altered with it.Essentially, the auditors are not yet using technology optimally to enhance decision-making but more as the next step up from pen and paper. Audit professionals need a mind-shift to adapt to the changes, keep themselves updated and relevant, and develop and use tools and technology to identify and mitigate audit risks rather than relying solely on documentation.As business models grow in complexity, firms will require professionals with the ability to leverage wider specialist expertise across multiple areas of business. Further, small and medium professional firms will need to ensure that they adapt to new ways of digital auditing and keep themselves abreast with the latest technological changes.In the case of new talent, the course curriculum is required to be revisited to ensure it keeps pace with the changing technology. Simple analytical tools like Power BI should be included in the course so that the new audit generation is ready to use the same for analytical procedures. In addition to this, professionals will be expected to have multidisciplinary knowledge in areas such as cybersecurity, fraud, sustainability, and technology, which can be leveraged to provide high-quality audit services.Experienced professionals need to undertake specialized digital courses, focus on understanding new technology, and find more innovative ways of auditing. However, technological empowerment can be a double-edged sword as these skills are extremely important but are short-lived.Employers also need to reinvent themselves and train future business professionals accordingly. Ultimately, the people (and not the technology itself) will define and drive audit quality. Auditors should learn to use technology as a tool for providing them with insights on several financial and operational matters and to leverage those tools to automate time-consuming routine tasks.As professionals are trained, it becomes extremely important for audit firms to strategize and retain their talent. With a growing focus on audit quality, the firm needs to offer varied learning opportunities. Audit firms will also need to invest in tools and technologies along with investment in the training and development of their people.Further, regulators also need to revisit the auditing standards to ensure that the use of different technologies is widely acknowledged and governed by the standards. New standards should be developed to examine and regulate the adoption of modern technologies for analytic purposes (such as blockchain and artificial intelligence) in audit procedures.A key skill for auditors — at least during the coming years — will be the flexibility to adapt to a working environment and keep abreast with technological changes which will continue to evolve.Key Takeaways“In spite of the tremendous benefits and future potential of technology in auditing and assurance, it can never substitute an auditor’s knowledge, judgment, and exercise of professional skepticism.”Digital transformation is extremely critical for the future of the audit profession and to improve audit quality. However, in spite of the tremendous benefits and future potential of technology in auditing and assurance, it can never substitute an auditor’s knowledge, judgment, and exercise of professional skepticism. Advanced technologies offer great promise to audit, but it is important to remember that these can provide great insights only when the audit team is able to analyze the results appropriately. Therefore, it is extremely important that audit professionals adapt and invest in learning and embracing technology to keep themselves relevant in today’s world. The question is no longer “whether” the auditor needs to change; it is “how fast can we embrace technology?”Author may be reached at: cashraddha@yahoo.in and eboard@icai.in

India has been one of the fastest-growing economies in the world in the recent years, with the latest projections estimating it to be at 6.1%, away and ahead of all emerging markets. Over the past two decades, the country has consistently achieved a commendable GDP growth rate, outpacing many developed nations. With a growing middle class, the country offers a vast consumer market and a skilled labor force. Young, skilled labor and engineers are available aplenty, and with China slowly shifting to a consumption-based economy, labor costs there have become comparatively more expensive than in India. These factors along with increasing urbanization have propelled economic expansion and development.India’s Long-Term Growth Story IntactThe growth story of the Indian economy has been remarkable over the years. The structural transition in the Indian economy has started taking off since 1991, the year when India introduced the LPG (Liberalisation, Privatisation, and Globalisation) policy. Since then:GDP has grown by 12x from USD 0.3 trillion to now USD 3.7 trillion;Per capita income has grown by 9x;Exports have grown by 43x;Imports have grown by 47x;Forex reserves have expanded by 496x;Stock market (Sensex) has surged by 31x.Amidst the many challenges faced by the world economy over these past few years, India has remained a safe harbor in the storm. With the pandemic shutting the world down in 2020, we have seen great changes in how we live and what we seek from life. With a greater focus on the integration of technology and AI into business, and with sentiments turning against Chinese manufacturing, India finds itself in a position to leapfrog to the front of the pack.Where We Are Headed at Current JunctureIndia’s emergence as the world’s fifth-largest economy by overtaking the United Kingdom in 2022 marks the beginning of the “India era” in the global growth story. It is set to surpass Japan and Germany to become the world’s third-largest economy by 2027 as per World Bank report.The Trillion-Dollar Acceleration JourneyGDP MilestoneTime Taken1st USD Trillion58 Years (Post-Independence to 2007)2nd USD Trillion7 Years (2007 to 2014)3rd USD Trillion6 Years (2014 to 2020)4th USD Trillion (Projected)4 Years (2020 to 2024E/2026E)Source: MOSL, Bloomberg“India has been one of the fastest-growing economies in the world in the recent years, with the latest projections estimating it to be at 6.1%, away and ahead of all emerging markets. Over the past two decades, the country has consistently achieved a commendable GDP growth rate, outpacing many developed nations.”Domestic Engine & Financial Sector ResilienceThe key contribution to the growth of the economy is that India is a domestic-driven economy, less dependent on global growth. And this is the new normal now:Favourable Demographics: More than 65% of the population is below 35 years of age. A high savings rate and rise in per capita income bode well for consumption growth.Political & Policy Stability: Political stability in India is at its highest in many decades. A pragmatic government focused on policy reforms positions India favourably for global investors.Macroeconomic Stability: Strong forex reserves, stable INR currency, inflation in control, and the Reserve Bank of India’s clarity on interest rate management.Financial Sector Strength: India remained resilient through global contagion like the US regional banking crisis in April 2023. Backed by solid fundamentals and a robust loan book, the financial sector accounts for over 25% of the MSCI India Index and nearly 30% of the Nifty50.Manufacturing Decoupling: China+1 & Cost AdvantagesWhile the financial sector remains a large part of India’s appeal, there is an accelerating case in manufacturing capabilities. In May, exports from China dipped by over 7%, highlighting the world’s new direction of decoupling manufacturing dependence from the Asian giant. This trend was visible as far back as 2019, when India outpaced China’s growth in manufactured exports.Manufacturing Goods Exports Growth (% CAGR)Time PeriodIndia (% CAGR)China (% CAGR)1990–199513%23%1995–20007%12%2000–200517%26%2005–201014%16%2010–20156%8%2015–20196%2% (India Outpaces China)Manufacturing Hourly Labour Cost Comparison (2020 in USD/hr)CountryLabour Cost ($/hr)India$2 / hrChina$7 / hrJapan$27 / hrSingapore$28 / hrGermany$44 / hrUnited States$49 / hr“With India’s steady growth and firm democracy, along with the sustained low cost of manufacturing, many companies look to shift base to a far more palatable market.”Through initiatives like ‘Atmanirbhar Bharat’, Make in India, and the Production Linked Incentive (PLI) scheme, the government aims to boost manufacturing contribution from below 16% to over 25% of GDP by 2025. Global manufacturing leaders are shifting operations to India:Smartphones: Apple and Samsung have scaled massive assembly and ecosystem plants in India.Wind Energy: Vestas, the world’s leading wind turbine maker, established two new factories in Sriperumbudur in 2021.Semiconductors: Foxconn partnered with a domestic conglomerate to set up semiconductor fab capacity.Industrial Scale & Capacity: India vs. ChinaCommodity / SectorIndia Position & CapacityChina Position & CapacityCoal Production780 Mn MT (2nd Largest)4,560 Mn MTIron Ore Production254 Mn Tonnes (4th Largest)380 Mn Tonnes (3rd Largest)Crude Steel Production125 Mn Tonnes (2nd Largest)1,018 Mn Tonnes (Largest)Cement Capacity545 Mn Tonnes (2nd Largest)2,130 Mn Tonnes (Largest)Cotton Production34.2 Mn Tonnes (Largest Globally)5.9 Mn TonnesWireless Phone Subscribers1,200 Million (2nd Largest)1,575 Million (Largest)Electricity Production1.6 PWh (3rd Largest)8.5 PWh (Largest)Textile Production71.05 Bn Sq. Mtr. (2nd Largest)Leading Global PlayerDigital Transformation, Startups & Clean EnergyInternet Userbase Overtaking China: In 2022, India had 932 million internet users compared to China’s 1,040 million. By 2026, India is projected to reach 1,186 million users, overtaking China’s 1,180 million.Fintech & High-Value IT Services: Propelled by UPI, Indian tech firms now deliver high-value financial risk modeling, insurance underwriting, and disaster modeling for a global clientele.Startup Unicorn Capital: Over 100 unicorns have emerged with an aggregate valuation exceeding $350 billion. Over 70 unicorns were minted in the last 3 years alone. In 2022, startups raised $25 billion across 1,000+ funding rounds and 200+ M&As, cementing India as the 3rd largest startup ecosystem globally.Renewable & Solar Boom: In 2022, India added nearly 10% to its renewable capacity, with solar energy capacity multiplying by 25 times over the past 9 years.ConclusionIndia’s remarkable economic growth, expanding manufacturing capabilities, strategic demographic dividend, and increased ease of doing business paint a promising picture for the nation’s future. As India strengthens its position on the global stage, it is poised to become a central pillar of the world economy, embracing sustainable development, inclusive growth, and technological innovation.Disclaimer:The document is neither a general offer nor solicitation to avail the service of investment from the SEBI Registered Intermediary, and the views expressed in this document are author’s personal views and are not under the services offered by Abakkus, nor is it an offer to sell, or a generally solicit an offer to become an investor in the services offered by the Abakkus. Each reader of this document agrees to the foregoing.Author may be reached at: eboard@icai.in

As newer technologies like Artificial Intelligence (AI) enter the business space, Chartered Accountants must gear up to meet the challenges and seize the opportunities that present themselves. As businesses gear up to unleash the prowess of AI in their environment, a Chartered Accountant (CA) must understand the nature of AI and the concerns that it may bring in. He must also envision the myriad ways in which AI could be implemented in the accounting department of an entity – right from reconciliations through reporting to streamlining disclosures and even beyond, to the realm of decision-support and risk management systems in the entity.As an Auditor, a CA must look at ways to leverage AI to increase the level of assurance – by deploying AI at various stages of the audit of the process while reserving the responsibility of forming an opinion to himself. With the able guidance of the ICAI, the CAs will well be able to tide over this wave of change and emerge stronger.IntroductionThe world is ever-changing and more so, the world of technology. In the realm of accounting and auditing, we can say that the first wave of transformation happened with the introduction of computers with software that required some level of coding knowledge. The next wave came with the introduction of simple accounting software that does not require coding knowledge but is largely decentralized requiring periodical manual consolidation for making sense of the performance of the business. Different applications were used for different functions; these were operating in silos and sometimes enabled data export or import for use in other software. Then with the advent of internet and advanced networking capabilities giving rise to the possibility of centralization of data and applications, a radical transformation, rather re-engineering, happened with the introduction of enterprise resource planning (ERP) software and in the case of banking businesses, implementation of core banking solution (CBS). Now another wave of transformation is happening with the advent of technologies like big data, artificial intelligence (AI), smart contracts, radio frequency identification (RFID), Internet of Things (IoT), cloud computing, robotic process automation (RPA) and blockchain technology. Such technology comes with its own possibilities and challenges, which were hitherto unforeseen by the lawmakers. The regulators themselves are experimenting with such technology and some have already introduced them at least in the back end.Now as the world treads an untrodden path, the professionals– especially the accounting and auditing professionals are expected to be the guiding force. This article is an attempt to discuss the basic elements of AI and the various implications of AI and related technology in the areas of accounting and auditing.Decoding Artificial Intelligencei. Necessity is the Mother of Invention - Going beyond AutomationAs Billy Ocean, a famous English Singer sung in 1985 “When the going gets tough, the tough get going”, tough times call for tough decisions. During the pandemic, many businesses realized the need for infusing technology in their businesses in a bid to optimise utilisation of resources both in terms of money and manhours. One such technology which has been growing in leaps and bounds and found increasing adoption since the pandemic is Artificial Intelligence (AI). Most of us are already acquainted with some general applications of AI like natural speech recognition, advanced web search, generative tools, self-driven cars and creative tools.Towards Better Governance and Ease of Doing BusinessRegulators too have been zealous in adopting AI tools to achieve better governance and regulation of entities. For example, the Ministry of Corporate Affairs has deployed AI in the V3 version of its MCA21 portal. As the quality of data that is collected also improves on the one hand through deployment of technology like XBRL, deploying AI capabilities enables regulators to spot red flags earlier. This could also double up as an exercise towards ease of doing business the data could be pre-filled or cross-verified from earlier filings. SEBI also envisages to use it for applications like surveillance.1 In the future, regulators may establish a common database or at least inter-connectivity among the databases in such a way that cross-verification of data filed with different regulators is possible and any discrepancy could be further investigated.ii. Matters of Concern in Usage of AIThough use of AI results in a great deal of automation, AI cannot be regarded as mere automation. Automation runs on a fixed algorithm wherein the program logic is pre-defined, and when compared with AI, we can say it is almost hard-coded. However, AI, although based on algorithms and human inputs, is designed to continuously learn and improvise. It aims to mimic human thought processes and cognitive abilities. Implementation of technology, especially a technology that can think for itself or at least learn to think for itself, has its own benefits, but there are some matters of concern:iii. Enforcing the Stakeholders’ Right to Explanation“An important factor to consider before deploying an AI tool especially in decision-making settings is understanding and trust.”Explainable AI (XAI) is an attempt at enhancing the trust factor by helping us understand how a decision has been arrived at – a white-box approach instead of a black-box approach.2 This approach to AI would be better for accounting and decision-making systems as the public as well as the regulators have the right to understand. In this context, the right to explanation has been recognised by the European Union in the General Data Protection Right in the recital clause.3 Other jurisdictions like France and the US have also alluded to and recognised this right in some circumstances. However, whether enforcing this right through legislation is beneficial or possible is debated, as simpler AI systems could be amenable to this requirement, whereas AI tools that operate on much-higher level and layered-algorithms may not be able to be subject to this just as the reason why a human being takes a particular decision may not always be easily explained. Further, requiring explainability may stifle the very evolution of AI technology. However, in a larger context and in public interest, the right to explanation is an important one.An examination and review of the rightness of the decisions made by the AI systems by an information systems auditor instead of seeking an explanation is also proposed as an alternative. Under the Consumer Protection Act, 2019, Consumer Protection (E-Commerce) Rules, 2020 have been issued to address the issues arising in e-commerce.4 These Rules require an explanation of the main parameters based on which rating of sellers is made, in plain language. If a platform uses AI to rank goods or sellers, the requirements under these Rules must be factored in. It must also be understood that explainability is crucial for the developers and businesses to ensure that the AI system is working as expected, not just in terms of the decision taken but in terms of the way in which the decision is arrived at, which is necessary to build the required level of trust to deploy it for the intended purposes.iv. Ethical Concerns and Regulatory MeasuresOne of the ethical concerns in the use of AI is regarding data protection and privacy. With the deployment of AI and Big Data analytics, an entity may unintentionally or intentionally process sensitive data in an unauthorised way and that may intrude on privacy interests. The lawmakers and regulators, the world over, are still grappling with the implications of AI and the security and privacy concerns. At present, under section 43A of the Information Technology Act, 2000, which deals with compensation for failure to protect data, “Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011” have been issued. These Rules provide for procedures to handle sensitive personal data or information.5 Under the proposed Digital Personal Data Protection Bill, 2022, unauthorised use of data may constitute a “personal data breach”.6 Under the proposed Digital India Act, 2023, measures to regulate as well as to foster innovation in AI and other emerging technologies are being proposed.7 NASSCOM has also come up with Guidelines on Generative AI.8 On 14th June, 2023, the European Parliament approved its position on the world’s first AI Act under which AI systems are classified based on the risks they pose: from unacceptable risk, high risk, generative AI and limited risk, based on which obligations for providers will be imposed under the rules.9 It, inter alia, seeks to ban using of AI for purposes like biometric surveillance and recognition of emotions, and requires generative AI to disclose that the content is AI-generated.10While all these concerns still remain and are addressed to some extent with evolving laws, businesses have already started exploring the possibilities that could open a floodgate of opportunities for them by adopting AI relevant to the business context.Applications of AI in AccountingHaving discussed some basic aspects of AI, now let us look at some specific use cases of AI in accounting and compliance for businesses:i. Reconciliation ProcessA significant use case of AI in accounting is reconciliation – be it bank reconciliation or inter-company reconciliation for group entities or for creditors and debtors balance confirmation processes. If done manually as it is done at present in many businesses, it is time consuming and laborious as one witnesses the problems of duplicate entries, mismatched entries, partially-entered invoices, tax aspects, accounting errors and other inconsistencies. This can be overcome with machine learning (ML) technology that uses predefined matching rules and which learns based on the results of the datasets. This will enable more reliable and timely disclosures of related party transactions.11 Such features are now available in ERP software as well as in the form of applications that can be deployed on existing software or popular cloud-based applications.ii. Managing Related Party TransactionsAnother potential application could be in the very process of identifying and understanding complex group structures of large conglomerates. Larger businesses usually arrange their ownership and control structure, business models and transactions in the form of a complex web of group entities spread across geographies, often in layers of entities, and sometimes, wherever permitted, with cross-holdings or cross-control, formal and informal. The group structures may or may not fall strictly under the definition of related party as per the applicable laws.Hence, the regulators world over are requiring increasingly comprehensive compliance and disclosure in respect of related party transactions, as they are a significant indicator of the level of good corporate governance. In India, for instance, for listed companies, the definition of ‘related party’ and ‘related party transactions’ has been widened to a great extent under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, so much so that even transactions with third parties “the effect of which is to benefit a related party”, or transactions of the listed company or its subsidiaries on the one hand with the related parties of either on the other hand are covered.12This necessitates technological intervention both by the conglomerates for making continued sense of the strategy as well as for better risk monitoring by the various stakeholder groups of these entities, especially the lenders. For the businesses, AI tools could help in better compliance and in making complete and timely disclosures of related party transactions under the applicable laws.As far as stakeholders like the lenders are concerned, they need to be able to have the big picture of the entire group to follow the money trail and understand whether the funds have been deployed for the stated purposes or whether they are being siphoned off to benefit certain members of the promoter group. Here AI could help banks and financial institutions in understanding the overall control structure, business model and the consolidated financial strength of the borrowers with complex group structures. This will be a crucial information while evaluating funding proposals and arrangements – both initial and ongoing.iii. Screening Profiles to Manage Risks“AI tools can potentially be used for fraud risk mitigation, inter alia, by screening vendor and customer profiles from various sources and assess counter-party default risks.”AI tools can potentially be used for fraud risk mitigation, inter alia, by screening vendor and customer profiles from various sources and assess counter-party default risks. This could also ease complexities involved in some disclosure requirements under the Schedule III to the Companies Act, 2013 like tracing of transactions with defunct companies or disqualification status of directors at least to the extent of disqualification arising out of a defaulting company under sub-section (2) of section 164 of the Companies Act, 2013 by comparing them with the database of Ministry of Corporate Affairs.For financial sector entities, the efforts towards understanding the group structures and activities through AI as described in the previous para could double up towards strengthening fraud risk management and anti-money laundering measures. It could help in setting up better Early Warning Signals as required under the Reserve Bank of India’s (RBI) Master Direction on Frauds, and in better reporting of transactions required under the provisions of the Prevention of Money Laundering Act, 2002.iv. Inventory ManagementWhen it comes to inventory management, a combination of AI together with RFID could help track, manage and account for inventory on an almost real-time basis, thereby enhancing the reliability of accounting records. Use of RFID combined with smart contracts and AI can help establish a seamless trust-based supply chain management system. This will again go towards better accounting and reporting.v. Timely ReportingAI can also optimize Record-to-Report (R2R) process leading to more reliable and timely preparation of financial statements. Often delay in obtaining data at the grassroot level leads to delay in reporting. This can be overcome by introducing technologies like RFID, big data and AI, to automate and expedite recording of transactions at the point of origin of the transactions.vi. Management AccountingAI has applications not only in financial accounting but also in cost and management accounting. When it comes to better internal reporting systems and decision-making systems, AI, IoT, RFID and Big Data analytics could play a great role in culling out hidden cost behaviours, demand patterns and in making more realistic forecasts. The possibility of using the entire population for the analyses instead of only a sample is also available when AI is coupled with Big Data. Entities have been able to gather data from various sources but if they are unable to make sense of the data or they are unable to focus on the information needs, they end up in a state of being Data-Rich-Information-Poor (DRIP). Introduction of AI here will help an entity to make sense from the raw data and focus on obtaining relevant information, which can become actionable inputs to the management. Right from automating repetitive decision-making to risk mitigation, AI can be used. However, it should be remembered that periodic human intervention is necessary to evaluate and judge the reliability of such AI-based decision-making systems.Role of AI in Audit ProcessAs eloquently described in “SA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, the overall objective of an audit of financial statements is to give an opinion on whether the reporting requirements as per the applicable financial reporting framework have been met. Under the provisions of the Companies Act, 2013, the duty of the auditor here is to express an opinion on whether the financial statements present a true and fair view of the affairs of the company. The auditor while arriving at this opinion by obtaining reasonable assurance on whether the financial statements are free from material misstatements, whether due to fraud or error, is required to evaluate whether the audit evidence obtained is sufficient and appropriate. In this process of collecting and evaluating sufficient appropriate audit evidence, an auditor must be mindful of the impact of AI. Let us look at the impact of AI on auditing from two angles:Understanding an environment that uses AI and automationAI as a tool in the audit process1. Understanding an environment that uses AIAn audit of an entity involves performing risk assessment procedures to have a clear understanding of the entity and its environment, including the adequacy and effectiveness of the entity’s internal controls in place. “SA 315 – Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment” provides guidance in this regard. Further, a “Report on the Internal Financial Controls over Financial Reporting” is mandated under sub-section (3) of section 143 of the Companies Act, 2013 for prescribed classes of entities.In case of an entity using an ERP software embedded with AI/ML capabilities, it is likely that the internal control processes could involve AI components. Here it becomes imperative to understand how AI is used to enforce controls, preferably in a white-box manner, or at least an evaluation of the logic with test cases. The auditor should not only check the initial set of predefined rules, but also the logic with which the AI tool learns. Hence, the auditor must be careful here if any attempts at overriding the internal controls had been made and understand the response of the system to such attempts. The auditor must also be very much aware of who has the super-user or administrator rights in respect of such internal controls, just as he needs to be aware of it for the purpose of checking any tampering of edit log too. AI deployment in Internal Controls could be in the form of input controls, enhanced user-based access controls, processing controls and logic, and output controls. The consistency of the logic throughout the reporting period shall also be checked. It may also be relevant to insist on an audit of the AI tools and the environment from an Information Systems Auditor.After performing a test of controls to evaluate whether internal controls are operating effectively to prevent or detect material misstatements, an auditor may plan his substantive procedures – a test of details and substantive analytical procedures.For example, in the R2R process – the auditor must understand how AI processes information as part of the test of controls, and thereafter select a suitable sample and test aspects like whether the correct General Ledger (GL) Account is selected, whether taxation aspects like TDS and GST have been correctly captured, whether grouping of GL Accounts is appropriately made, and whether the schedules and disclosures generated by the AI are comprehensive and reliable. While assessing the controls in the inventory management environment that uses RFID and AI, the auditor may check how the data from RFID scanners interacts with the AI logic and how it is implemented in the ERP system. The entire audit team needs to have hands-on knowledge of AI tools which are deployed in the client entities and evaluating those in the process of audit execution.2. AI as a tool in the audit processa. AI in Statutory Audit engagements“AI can help analyse the financial information of the clients and assess the areas where the potential risk of material misstatements is the highest.”An auditor can himself / herself use AI tools in the audit process. While an audit is neither an investigation nor is it an exercise towards giving an absolute assurance, deployment of AI in auditing could help provide an even higher level of assurance than may otherwise be possible. At the elementary level, generative AI can help arrive at some useful basic checklists which can be improved to greater detailing based on the requirements of the assurance levels required.AI can help analyse the financial information of the clients and assess the areas where the potential risk of material misstatements is the highest. While the auditor may himself be subject to at least some degree of familiarity bias, the AI tool, is more likely to be free from such bias. The auditor may then apply more substantive procedures in the areas so identified.AI may also help in determining materiality and in the assessment of whether an identified misstatement is material in the context of the entity. The auditor can then come with an optimized audit strategy and plan and perform the audit in a better way. AI may also help with sampling of test cases for audit by choosing a sample free from bias thereby reducing sampling risk.AI may also help with analysing whether the evidence might be sufficient for assessing the risk of material misstatements at the assertion level by helping establish a correlation between the evidence and the assertion. It can also help assess whether an audit observation based on a sample will be true for the entire set of data.When it comes to substantive analytical procedures, AI tools combined with big data can help identify hidden patterns of behaviour of various variables and unearth and establish relationships among financial and non-financial information in a more comprehensive manner. Use of AI in analytical procedures might help identify red flags much earlier than they would otherwise be and help establish an early warning system for the use of the auditor.AI can also help the auditor and his team perform an engagement quality control review as required under “SQC 1 – Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements”, by assessing the appropriateness of the opinion arrived at based on the audit evidence collected.Specifically, the auditor will be in a better position to give his / her opinion on the various matters covered under the Companies Auditors’ Report Order, 2020, especially in respect of related party transactions, material uncertainty in respect of meeting the liabilities, and also with respect to whether the terms of the loans and guarantees provided by the company are prejudicial to the interests of the company.b. AI as a tool in other audit engagementsAI could help not only in statutory audit engagements but also has applications in internal audit, tax audit, forensic audit, etc.In tax audits, when it comes to verifying the matters of disallowances, depreciation, TDS, TCS, reconciliation, deductions, and more importantly, in determining the arm’s length nature of transactions in the Report on Transfer Pricing as required under section 92E of the Income Tax Act, 1961, use of AI as a tool comes in handy.With big data, AI analytics can greatly help the internal auditor in measuring the effectiveness of the internal controls in a comprehensive manner, although adequacy may be something that will be best left to the judgment of the internal auditor based on the results of the analysis thrown by the AI. Areas of internal control weaknesses can be identified in a much better manner.As far as forensic audit and investigations are concerned, samples could be chosen on a more scientific basis with the help of AI. Better samples would lead to better information for arriving at conclusions. In case of audit of specific transactions, AI tools can help arrive at the degree of correlation between the factors involved.c. Challenges in implementing AI and results of AI in auditingThe biggest challenge in implementing AI is understanding how the AI tool arrives at the output, so to say, how it “thinks”. Although some experts are of the view that using anthropomorphic words like “think” further reduces our understanding of the processing behind AI, it is necessary to understand how the output is arrived at. Here is where XAI as discussed earlier becomes important. No matter what human-like terms we use, AI is still not human. It does not experience emotions and thoughts like we do. It does not have a gut feeling. Hence, while AI can supplement and support an auditor, it can never substitute or supplant the auditor in the human process of forming an opinion which will always remain the dominion of the auditor.The next challenge could be empowering the employees of the enterprises and the audit team with knowledge and understanding of the potential uses and challenges involved in AI. This requires an open mind to be able to appreciate the concept of AI. The other operational challenge will be how to integrate AI tools and capabilities with existing software and hardware. These are usually mitigated by using cloud-based AI compatible with existing applications.Concluding Thoughts – Converting Challenges into Opportunities“The CAs are increasingly being looked upon to drive the process of professionalism within their domain, which ultimately leads the way towards ease of doing business.”In order to face the new world order that may be established or that already may have been established with AI, accounting and auditing professionals need to re-orient themselves away from routine areas of work that may be replaced with AI tools and equip themselves with the knowledge and skill required to work with AI and even to work on AI to stay relevant in the vastly dynamic professional world. In this process, they may need to unlearn things to transcend the clutches of routine work and learn new things to achieve mastery over AI tools. Then instead of looking at AI as a threat to their existence, the Chartered Accountants (CAs) may even take up opportunities in implementing AI for their clients or auditing the AI environment or the AI controls, or even in designing AI tools that can lead to better reporting and governance.As a fallout of AI implementation, several changes need to be made to various statutes in respect of various sectors of the economy, some of which are already in the pipeline as detailed in one of the earlier paragraphs on regulatory measures. Following this, the regulators like the RBI and SEBI also need to come out with detailed guidelines on AI-related impact on their respective sectors. The Institute of Chartered Accountants of India (ICAI) may like to come up with Guidance Notes and/or suitable updates to the Accounting and Auditing Standards, in order to guide the Members through the phase of transition to AI environment. To further pave the way for easing the future generation of CAs into this dynamic new business and professional world running and operating in the AI environment, the ICAI may consider to upgrade the curriculum itself by including therein the subjects relating to accounting and auditing in an environment enriched with AI.The CAs are increasingly being looked upon to drive the process of professionalism within their domain, which ultimately leads the way towards ease of doing business. In this context, the judicious use of AI comes in handy and CAs have a major role here. CAs must realise that the scope of application of their skills and experience goes beyond the traditional lines of audit, accounting and taxation, and it very well extends to strategic areas like implementing AI-driven business process re-engineering and supporting the top management of businesses in this transition. While section 144 of the Companies Act, 2013 prevents an auditor from rendering these services to the entities where they perform statutory audit, nothing prevents a CA from taking up those assignments in respect of other unrelated entities. A CA should boldly step into the realm of technology.Every change is borne of a storm. It requires the eyes of someone who can soar high above the storm clouds to make sense of the change. A CA, like the Eagle that represents him/her, has the foresight and the capability to soar above the clouds and guide the businesses that are caught in this storm of technological upheaval. However, to fully realise the potential, a lot more needs to be done by the CAs in terms of learning, re-learning and developing new skills as well as quickly unlearning the irrelevant skill components. The ICAI along with the regulators will need to enable this transition by providing the right framework.Footnotes & ReferencesSEBI Annual Report 2020-21: https://www.sebi.gov.in/reports-and-statistics/publications/aug-2021/annual-report-2020-21_51610.htmlExplainable Artificial Intelligence: https://en.wikipedia.org/wiki/Explainable_artificial_intelligenceRight to explanation: https://en.wikipedia.org/wiki/Right_to_explanationConsumer Protection (E-Commerce) Rules, 2020: https://consumeraffairs.nic.in/sites/default/files/E%20commerce%20rules.pdfInformation Technology Rules, 2011: https://www.meity.gov.in/writereaddata/files/GSR313E_10511(1)_0.pdfDigital Personal Data Protection Bill, 2022: https://www.meity.gov.in/writereaddata/files/The%20Digital%20Personal%20Data%20Potection%20Bill%2C%202022_0.pdfDigital India Act Presentation: https://www.meity.gov.in/writereaddata/files/DIA_Presentation%2009.03.2023%20Final.pdfNASSCOM GenAI Guidelines: https://nasscom.in/ai/responsibleai/images/GenAI-Guidelines-June2023.pdfEU AI Act First Regulation: https://www.europarl.europa.eu/news/en/headlines/society/20230601STO93804/eu-ai-act-first-regulation-on-artificial-intelligenceEU Parliament Negotiation on AI: https://www.europarl.europa.eu/news/en/press-room/20230609IPR96212/meps-ready-to-negotiate-first-ever-rules-for-safe-and-transparent-ai"Machine Learning in SAP Reconciliation: https://www.groupsoftus.com/insights/using-machine-learning-ml-in-sap-for-reconciliation/SEBI LODR Regulations, 2015: https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-february-07-2023-_69224.htmlAuthors may be reached at: cs.ushaganapathy@gmail.com, a.sekar.cs@gmail.com, ranjithk.iyer@gmail.com and eboard@icai.in

Cloud computing is significant across various industries and sectors due to its numerous benefits and transformative impact. Also, Cloud computing plays a crucial role in the emerging financial ecosystem by offering abundant aids and capabilities that empower financial institutions to innovate, streamline operations, enhance security, and deliver superior services to their customers.While evaluating cloud adoption, it is necessary to consider identified risks, control methods, safety and standard operating procedures, vendor support, and adherence to legal, technological, and institutional framework.IntroductionNational Institute of Standard & Technology (NIST) defines cloud technology as a model that enables pervasive, efficient, and on-demand connectivity to a shared collection of adaptable computing assets (e.g., channels, servers, retrieval, implementations, and systems), which can be based on growth and economic development, and is issued with little managerial or managed service communication.Cloud technology shares traits such as self-service on demand, extensive network connectivity, virtualized resources, quick flexibility, and metered service. Owing to these qualities, cloud technology offers several benefits, including lower IT expenses, adaptability, continuity planning, accessibility from wherever and on any technology, enhanced efficiency and security, rapid application development, etc. While evaluating cloud adoption, it is necessary to consider identified risks, control methods, safety and standard operating procedures, vendor support, and adherence to legal, technological, and institutional framework.Types of CloudPrivate Cloud: Private computing infrastructure is provided to be used solely by a single enterprise with several clients (e.g., business units). The facility can be controlled, administered, and directed by the enterprises. And it may be located anywhere on or off grounds.Community Cloud: The Cloud computing infrastructure is made available for exclusive usage by a particular community of customers with key problems from companies. e.g., Compliance requirements. It could be maintained, governed, and administered by one or more different communities, a person or group, or a mix of the three, and it could be located on or off-site.Public Cloud: The Public computing infrastructure is made accessible to the wider public for their usage. It could be owned, controlled, and run by an organization, educational, or public institution, or a hybrid of these entities. It is located on the lender’s facilities.Hybrid Cloud: The Hybrid cloud architecture consists of several separate cloud environments (private, communal, or public) that retain separate things, but are tied together through standardized or patented technology that allows for information and application mobility.[1]Types of Cloud Service ModelsAccording to the NIST, the following are the characteristics of the various cloud-based service models:I. Infrastructure as a Service (IaaS): The user is given the capacity to supply processor, memory, networking, and other core computational power in order to install and operate technology that might involve apps and operating systems. The customer does not directly handle or regulate the cloud platform itself but does have authority over the operating environments, data, and system software, as well as maybe partial power over some routers and switches.ii. Platform as a Service (PaaS): The capacity supplied to the consumers to install and access consumer-made or obtained products on a virtualized architecture, produced using computer languages, frameworks, and applications. The customer does not actively and easily control the virtual machines, such as the networking, machines, file system, or memory, but has authority over the production servers and perhaps infrastructure components for hosting landscape.iii. Software as a Service (SaaS): The user can use the vendor’s software operating on a cloud environment. The apps are available from a variety of serial interfaces via a thin console, including an internet browser (e.g., web-based email), or a programmed interface. The customer does not control and manage the cloud resources, such as the networking, servers, software platforms, memory, or perhaps even the programmed abilities, with the potential of exception restricted consumer customization options for the program. Google, Microsoft Office 365, etc. are some instances of SaaS. Additional capital gearing, such as Application as a Service, Security as a Service, etc., may be seen as a subset or variation of the models since they comprise IaaS, PaaS, and SaaS components.As an example, Security as a Service is a kind of SaaS that delivers specialized information security services. Conversely, Application as a Service is a sort of SaaS in which apps (such as Google sheets, Google documents, etc.) are given on-demand via the network to consumers.[1]Table 1: Types of Cloud Service ModelsLayerModel Type & User ControlSaaSSoftware as a Service (Hosted application level, thin client access)PaaSPlatform as a Service (Development environment, runtime, operating systems)IaaSInfrastructure as a Service (Hardware compute, storage, networking virtualization)Cloud Security Risks1. Cloud MisconfigurationsWhen one cloud platform or client fails to safeguard the cloud system, cloud workarounds occur, risking information security. Permitting increased access is a typical security vulnerability in cloud services. This configuration error happens whenever an administrator grants an end-user an excessive number of access privileges, culminating in a privilege’s discrepancy. Elevated privileges cause a serious security risk since they often permit cloud dumps, information leakage, and malicious insiders.2. Third-Party ThreatsThird-party risk is the risk that comes from any third party in an institution’s distribution chain. This risk is caused by SaaS services. Several degrees of danger are presented by third-party companies to the informational security of an organization. Most SaaS applications will view or retain a company’s sensitive information, particularly Personally Identifiable Information (PII) as well as other protected data. The security against cyber-attacks is only as strong as the lowest supply chain connection, regardless of the institution’s security protocols. Companies need to set up effective third-party risk assessment processes to keep track of and keep an eye on the specific cyber threats that SaaS suppliers add to the threat landscape.3. Supply Chain Attacks“Since SaaS environments run inside the cloud platform, enterprises must address the specific cybersecurity threats of cloud services.”A distribution network assault happens when hackers target a company by exploiting weaknesses in its distribution chain. This kind of vulnerability is often the result of a company’s inadequate security procedures. Cybercriminals can get to sensitive information by attacking a software platform’s program code, update systems, or design process. Organizations cannot depend simply on strong internal protection procedures to thwart distribution network assaults. Before hackers can use distribution network flaws, security professionals need to find them and fix them. To do this, they need to know everything about the provider environment.4. Zero-Day VulnerabilitiesThe Zero-day vulnerabilities are an unsecured flaw in technology that is undiscovered to the developers. Malicious hackers may leverage such weaknesses by launching cyber assaults, which often result in data intrusions and accidental deletions across impacted enterprises. Businesses need to be able to swiftly discover known vulnerabilities in their SaaS applications in order to avoid additional security risks arising due to delayed remediation.5. Inadequate Due DiligenceBefore exchanging confidential business information with a prospective vendor, an organization does vendor due diligence by conducting a comprehensive evaluation of the supplier. An extensive research evaluation evaluates a vendor’s assertions about its security and regulatory requirements. It also shows suppliers’ current security flaws, so client companies can find ways to fix them before forming relationships with them. By analyzing suppliers primarily during an induction program, many firms fail to do the necessary due diligence. If one of the SaaS suppliers experiences a cyberattack, the malicious intruders may use the affected infrastructure to get exposure to the institution’s critical information. The organization, not the vendor, is responsible for the governmental, economic, and reputational repercussions of this information’s disclosure to the community. To avoid client privacy violations as well as other severe breaches, organizations should handle SaaS suppliers with the same vigilance as other network attacks. Security teams must adopt a disciplined approach to the verification procedure via a comprehensive vendor system of internal control in order to acquire insight into the overall security of each partner at any given moment.6. Non-ComplianceRegulation and accreditation with security standards demonstrate that a company has established an appropriate quality of cybersecurity measures. Even if your firm conforms with all applicable standards and procedures internally, risk compliance is necessary in case your SaaS providers are unwilling to cooperate. The security department should track and evaluate the adherence of its SaaS providers with regulatory and industry norms on a constant schedule in order to identify and address any security vulnerabilities. Nevertheless, the firm risks the danger of security breaches, which may lead to significant penalties and harm to its brand.Data Security in Cloud ComputingUsing a multistep authentication.Encrypting a data.Regularly updating the cloud applications.Monitoring cloud infrastructure.Maintaining a proper RTO and RPO in Business continuity.Securing Cloud access control list.Cloud Security Controls & Mitigation FrameworksCloud security controls are measures and practices designed to protect data, applications, and infrastructure in cloud computing environments. These controls aim to ensure the confidentiality, integrity, and availability of information, as well as mitigate risks associated with cloud adoption.Data at rest: refers to data that is stored and inactive, residing in persistent storage mediums such as hard drives, solid-state drives, or data backups. This data is not being actively processed, transmitted, or accessed by users or applications. Protecting data at rest is essential to ensure its confidentiality and prevent unauthorized access.Data in flight: refers to data that is actively being transmitted or transferred between systems, networks, or devices. This data is in motion and is susceptible to interception or unauthorized access if not properly protected.Data in motion: means when data is being actively transmitted or transferred between systems, networks, or devices. It is the state of data while it is in transit. Protecting data in motion is crucial to prevent unauthorized interception, tampering, or disclosure.Table 2: Cloud Risks and Mitigation strategiesCloud RisksMitigations StrategiesData OwnershipsCloud ownership policy should be in place to mitigate the issues of data ownershipsRecord managementDefine e-discovery and policies for record management and proper policies to monitor the record managementService level agreements (SLA)Service level agreements need to be placed properly within the integrated systemSecurityData at rest, data in flight and data in motion Cloud data requires proper standardization of cloud security measuresTable 3: Cloud Security ControlsCloud Security Controls Focus AreasData In RestData In motionData in FlightIdentity and access controlsTable 4: Data at Rest ControlsCategorySpecific Control ImplementationData at RestStrong encryption Techniques / AlgorithmsData Accessing policiesData Storage policiesRegular System HardeningPatch Management and System Vulnerability managementTable 5: Data at Flight ControlsCategorySpecific Control ImplementationData In FlightServer-Side AuthenticationsClient-side authenticationsIP Sec or VPN Services controlsDDOS Attack protectionsSystem FirewallWeb Application firewall (WAF)Security groups creationsTable 6: Data in Motion ControlsCategorySpecific Control ImplementationData In MotionStrong authentication mechanismWeb archival and Backup PoliciesFirewall and Web application Firewall protectionAccess controls and physical controls securityCertificate managementsTable 7: Identity and Access Management ControlsCategorySpecific Control ImplementationIdentity and Access ManagementMultifactor Authentications (MFA)Proper AccessRole based access controls (RBAC)Password policiesRegular reviewing of access rightsRegular monitoringAdvantages of Incorporating Cloud Computing into Professional WorkflowsAccounting professionals can leverage cloud technology in various ways to enhance their efficiency, collaboration, and data management capabilities. Here are some key ways in which accounting professionals can benefit from cloud technology:Cloud-Based Accounting Software: Cloud-based accounting software allows accountants to access financial data from anywhere with an internet connection. This eliminates the need for physical installations and provides real-time access to financial information, facilitating better decision-making and responsiveness.Collaboration and Remote Work: Cloud technology enables accounting teams to collaborate seamlessly, even if they are geographically dispersed. Cloud-based accounting software allows multiple users to work on the same set of financial data simultaneously, facilitating real-time collaboration and reducing the need for data reconciliation. Cloud-based project management tools can also help manage tasks and workflows efficiently.Automation and Integration: Cloud-based accounting platforms often offer integration with other business tools and applications, such as CRM systems, payroll software, or expense management tools. By automating data transfers and synchronization between different software systems, accountants can save time, reduce errors, and improve overall efficiency.Data Storage and Backup: Cloud storage services offer secure and scalable data storage options. Finance professionals can store and backup financial documents, tax records, and other important files in the cloud, reducing the risk of data loss and ensuring data accessibility even in the case of hardware failures or disasters.Enhanced Security and Compliance: Cloud service providers invest heavily in security measures to protect data stored in the cloud. They typically offer robust encryption, access controls, and regular data backups, ensuring data integrity and protection against cyber threats. Cloud technology also aids in regulatory compliance, as many cloud providers adhere to industry-specific security and privacy standards.Scalability and Cost Efficiency: Cloud technology allows professionals to scale their computing resources based on their needs. They can easily adjust storage capacity, computing power, or software licenses without significant upfront investments. This scalability helps accounting firms save costs by eliminating the need for on-premises infrastructure and reducing maintenance expenses.ConclusionsCloud computing is a game-changer for the emerging financial ecosystem. It provides financial institutions with the scalability, flexibility, cost efficiency, data processing capabilities, collaboration opportunities, security, and access to advanced technologies they need to thrive in a rapidly evolving digital environment. By embracing cloud computing, financial organizations can transform their operations, and deliver enhanced services.ReferencesSEBI Framework for Adoption of Cloud Services by SEBI Regulated Entities (March 2023): https://www.sebi.gov.in/legal/circulars/mar-2023/framework-for-adoption-of-cloud-services-by-sebi-regulated-entities-res-_68740.htmlCloud Computing A Beginner's Handbook: https://www.servergigabit.com/blog/latest-articles/what-exactly-is-cloud-computing-a-beginners-handbookSaaS Services and Data Risks: https://www.upguard.com/blog/saas-security-risksCheck Point Cloud Security Hub: https://www.checkpoint.com/cyber-hub/cloud-security/what-is-cloud-security/CompTIA Cloud Security Mitigation: https://www.comptia.org/blog/cloud-security-mitigationIndusface Top 5 Cloud Security Threats: https://www.indusface.com/blog/5-top-cloud-security-threats-and-tips-to-mitigate-them/Indusface Methods to Overcome Cloud Security Issues: https://www.indusface.com/blog/5-top-cloud-security-threats-and-tips-to-mitigate-them/GetApp Security Risks of Cloud Computing: https://www.getapp.com/resources/security-risks-of-cloud-computing/Cloud Security Alliance (CSA) Cloud Controls Matrix: https://cloudsecurityalliance.org/research/cloud-controls-matrix/ICAI Resources on Cloud: https://resource.cdn.icai.org/65376daab52670cc.pdfAuthor may be reached at: Pranay.iet@gmail.com and eboard@icai.in

Computer scientist John McCarthy conceived the term “artificial intelligence” (AI) in 1955, defining it as “every aspect of learning or any other feature of intelligence can be, in principle, so precisely described that a machine can be made to simulate it.” AI is logarithmically computer programmed intelligence making the machine learn from bigdata and already available human knowledge.AI has emerged as a powerful disruptive technological landscape, providing enormous opportunities and challenges to the auditing and assurance professionals.IntroductionAI has been revolutionizing the way business is being done since its emergence, as a game changer in the domains of accounts, audit, taxation, and assurance. Auditor has no option in the digital era without getting familiar with the incipient AI auditing frameworks, software solutions and tools to competently perform the audit and assurance assignments. AI technology cannot substitute auditor’ discretion, wisdom, and judgement. AI audit services include auditing and assurance, taxation, and financial advisory. AI-enabled technology platform can provide high-quality auditing services, customized services in AI governance, risk assessment, and controls, risk management and compliance with AI ethics and regulations.What AI enables is helping to face massive structured and unstructured big data mines by leveraging AI’s big data analytics and machine learning capability to systematize and arrange data fields, and conduct data analytics to answer probing audit questions, highlighting potential risks and vulnerabilities for detailed audit scrutiny for risk assessment and management. Risk of material misstatement is critical in financial statements’ attestation audit, requiring intense data analysis of connected complete data sets and transactions. AI empowers auditor to increase audit quality in every gamut of audit profession. Auditors use risk assessment to determine material misstatement in financial statements.“AI helps the auditor to focus on more risky domains and helps using professional judgment to conduct detailed intense audit scrutiny on targeted financial statement transactions.”Auditor can analyze complete groups of data and transactions rather than relying on sampling, making audit checks complete to identify anomalies and red flags for additional scrutiny. AI helps to automate tasks hitherto were performed manually and to converge financial statement auditing with forensic auditing wherever fraud is suspected based on complete big data analytics of connected data fields. AI helps to suggest better controls for accounts payable, accounts receivable, enterprise risk management, and financial planning and analysis functions by continuous risk monitoring and assessment procedures. CAs can perform more economic, effective, and efficient tax advisory, and audit advisory services using appropriate AI apps and software to scan documents and import relevant information and data for conducting intense audit procedures and checks. When data is kept in a cloud, AI can connect that data and extract relevant data sets using AI auditing platform to conduct real-time audit probing and analysis.This article introduces AI enabled auditing landscape and cutting edge technologies that can be effectively deployed by Chartered Accountants while performing various audit, attestation, assurance and advisory functions, focusing particularly on Financial audit and Internal audits.AI Audit TechnologiesAuditors must be mindful using AI solutions. Auditors should be sensitive with corporate/client information. The audit programs with AI solutions should be reviewed and adjusted according to scope and objectives of the engagement. AI models must be re-trained with datasets to obtain desire output. AI can support internal audit functions by improving efficiency, resource optimization, knowledge, and skill development.ChatGPT a chatbot, developed by OpenAI ‘Generative Pre-training Transformer’, is a language model that can generate human link text in a conversational context. ChatGPT includes AI/ML technologies, Chatbots, Robotic Process Automation (RPA), Deep Q&A questions and probable answers from ChatGPT, Text to speech conversion, image and voice recognition, translation, automate speech, writing, unsupervised deep learning, predictive analytics, forecasts, actions, performing repetitive actions, and bigdata analytics.ChatGPT can help in audit program in access controls ensuring that only authorized persons access IT systems and data; Change management helps the auditors to review the policies and procedures in place to ensure that IT systems and data are properly authorized, tested, and implemented; system development and maintenance in a secure and controlled manner; IT systems and data are protected from disasters by putting needed physical and environmental controls; proper back up and restoration are ensured by disaster management controls, ensure network security form cyber threats and hacking, IT incident response is adequately geared up to take preventive and corrective actions.“AI audit management software facilitates in audit planning, scheduling, audit program, fieldwork, evidence gathering, reporting, and follow-up reviewing.”AI audit software must provide corrective and preventive action (CAPA) features enable companies to implement audit suggestions regarding safety and compliance to improve audit results. AI audit management software facilitates in audit planning, scheduling, audit program, fieldwork, evidence gathering, reporting, and follow-up reviewing. Central document and data storage helps auditor to streamline data collection, analyze financial statements, and reference documents, making inquiries, and prepare reports. Actionable digital checklists help auditing teams to collaborate with organizations to have better control over auditing projects. Many auditing apps help to generate audit reports. The auditing management systems leave audit trail ensuring accountability and compliance. Many audit software solutions are available for easing the audit tasks.AI regulations and Auditing FrameworksThe European Parliament has recently approved rules for artificial intelligence, known as the EU AI Act. European Parliament decided to bring generative AI tools like ChatGPT under greater restrictions. Generative AI developers Microsoft-backed OpenAI’s ChatGPT and Google’s Bard are required to submit their systems for review and approval before releasing them commercially.The General Data Protection Regulation (GDPR) in the EU regulates the organizations while using personal data with seven principles: Lawfulness, Fairness, and Transparency regulates that personal data processing must abide by the law. Data must be used only for a specific purpose. Personal data usage must be adequate, limited, and restricted. Data used should be accurate and up to date. Personal data must be stored for the specified purpose and for the period required. Personal data used must be processed securely. Data must be processed responsibly complying with the regulations.Benchmarked AI Auditing Frameworks:COBIT Framework (Control Objectives for Information and related Technology): for IT governance and management of an enterprise.IIA’s (Institute of Internal Auditors) AI Auditing Framework: to assess the design, development, and working of AI systems and their alignment with the organization’s objectives, focusing on ‘Strategy, Governance, and Human Factor’ with the following seven elements:I. Cyber ResilienceII. AI CompetenciesIII. Data QualityIV. Data Architecture & InfrastructureV. Measuring PerformanceVI. EthicsVII. The Black BoxCOSO ERM Framework: for assessing the risks for AI systems in an organization with five components for internal auditing:I. Internal Environment: Ensuring that Organization’s governance and management are managing AI risks,II. Objective Setting: Collaborating with stakeholders to make risk strategy,III. Event Identification: Identifying risks in the AI systems such as unintended biases, data breaching,IV. Risk Assessment: looking at the impact of the risks,V. Risk Response: focusing on entity’s risk situations, such as sub-optimal data quality.Risk managementCurrently, there are few precedents for handling AI audits. Issues and concerns are innumerable: lack of AI audit standards, varied AI systems/platforms, existing and evolving complex, innovative frameworks/software solutions and tools, dearth of competent data scientists, AI-specific regulations. Till auditing standards and regulations specific to AI are in place, auditors must adopt and adapt existing frameworks and regulations and communicate proactively with the stakeholders about AI systems, risks, and concerns. As there are varied AI definitions/taxonomies/systems/solutions/designs/architecture, and complexity of AI technologies, auditor must ensure transparency through iterative process, evaluation of controls, manage risks and governance issues.The COBIT 2019 framework provides process descriptions, desired outcomes, benchmarked practices, and work products across IT spheres. While auditing cloud computing and cybersecurity, auditor must assess whether the Open Systems Interconnection (OSI) layer implementation was functioning effectively and focus on the controls and governance structures to determine whether they are operating effectively to provide some assurance on the business and IT governance. To identify risks, IT auditor must use risk and control matrix (RCM) and list out all the existing risking and how to control and manage them. ISACA lists of some of the AI audit risks:1Lack of alignment between IT plans and business needsIT plans that are inconsistent with the organization’s expectations/requirementsImproper translation of IT tactical plans from the IT strategic plansIneffective governance structures that fail to ensure accountability and responsibility for IT processes related to the AI function“Auditor must be vigilant about supplier risks in AI outsourcing like clouds to third parties, and document for cross-team transparency.”Auditor must be vigilant about supplier risks in AI outsourcing like clouds to third parties, and document for cross-team transparency. AI encompasses diverse technologies, people, and processes and requires evaluation of risks and controls, policies, and governance. AI architecture generally combines ‘programming, data warehousing, stream processing platforms, machine learning tool kits, algorithms, cloud computing, cloud storage, computing clusters, compute kernels, application software testing and debugging, data process and modeling, and commercial off-the-shelf (COTS) software’. From a skills perspective, AI audits may require engagement of data scientists, data engineers, data architects and programmers. Auditor must adopt and adapt existing IT frameworks such as COBIT 2019 and regulations including the United States Health Insurance Portability and Accountability Act (HIPAA), and Fair Lending Act and the European Union’s General Data Protection Regulation (GDPR) until more specific AI standards are put in place. Algorithms require multiple rounds of tuning by data scientists and data engineers and enterprise-based commercial off-the-shelf solutions may contain components of machine learning.A) Financial AuditsFinancial audit requires mapping of all enterprise data fields connected to financial statements and collect audit evidence to form an audit opinion on whether the financial statements represent true and fair state of financial health of the entity in all material respects. AI technologies enhance efficiency, effectiveness and accuracy in the audit process but cannot replace the audit discretion, judgment, and professional opinion. Leveraging AI tools such as machine learning (ML) and natural language processing (NLP) to relevant big data sources, AI highlights potential risky fraudulent patterns to the auditor to execute intense audit probing. ML and NLP enable software to learn without being programmed to perform specific tasks to facilitate auditor to produce consistent, reliable audit outcome by identifying patterns, classifying risks and help taking mitigating and preventive controls and predicting risks.Compliance issuesAudit must focus on compliance issues of AI applications. AI auditor must assess risk related to the rights and freedoms of data subjects, understand the data privacy and data protection principles and the impact of AI applications on the rights and freedoms of data subjects. The UK’s Information Commissioner’s Office (ICO) formulated some guidelines that serve as a baseline for auditors auditing AI applications under the EU General Data Protection Regulation (GDPR). Data Protection Impact Assessments (DPIAs) is legally mandated if entities’ AI systems process personal data, to comprehend how and why organizations’ AI systems process personal data, and what are any risks. AI systems involve trade-offs between privacy and other competing rights and interests, and therefore, auditor must assess what these trade-offs are and how to manage them.Fair, lawful, and transparent processingAuditor must guard the risk of failure to comply with the legally valid data protection principles. Auditors must use personal data with appropriate levels of security against its unauthorized/ unlawful processing, accidental loss, destruction/damage and must verify that all movement and storage of personal data from different locations are secure and documented to monitor security risk controls. Under the extant data protection law and regulations, individuals have rights to their personal data. Auditors must respect individual rights of information, access, rectification, erasure, and to restriction of processing, data portability when deploying AI. Big data requires appropriate controls to ensure its proper use. Auditing in the AI landscape involves evaluation of algorithms, models, and data streams, analysis of operations, results, and even unexpected outcomes, technical and ethical aspects of AI systems and adherence to principles such as equality and privacy.Use of ML, NLP, RPA for AuditingAuditor faces massive data mines, making it cumbersome to select audit samples. AI technologies RPA, ML and NLP help to provide insights from vast sea of data. AI technologies help in reduction in data processing cycle time, reduction in oversight errors, reducing time required for evidence verification. Data checks help to detect money laundering, fraudulent transactions, and ease accounts reconciliation. Auditor will be able to make intelligent predictions and insights. While using AI tools, auditor must be aware of ethical issues and data bias while using data. Moreover, inadequate testing of AI outcomes can lead to questionable audit outcomes. Further, human logic errors might corrupt AI algorithms used for auditing. AI technologies help in document classification, text summarization, data analytics and topic analysis, statistical analysis, data aggregation, interpretation, search, and retrieval and sentiment analysis with inferences to understand author’s sentiment.The Chartered Institute of Internal Auditors (IIA) reports that data analytics enables internal auditors ‘to deliver faster and more incisive insights into fast-moving risks’ to help the board of directors to take appropriate action swiftly. As computers will not be capable to give a ‘nuanced control design opinion, internal audit will always require a human touch.B) Internal Audit (IA)IA has a critical role in maintaining the integrity of entity operations. AI assists IA in several ways: Internal Auditor is empowered to evaluate thousands of documents and contracts. ML increases audit productivity, accuracy, and timely audit execution with speed by automating audit checks by AI algorithms. AI helps in identifying relevant and reliable data aggregation and extraction and analysis, making audit reports, with useful insights, error free complete audit coverage rather than relying on samples, expediting the audit process. AI helps IA in developing audit plans, defining the audit objectives, scope, and methodology, to conduct big data analytics to analyze oceans of structured and unstructured data including sources relevant to the audit assignment including from social media to identify patterns of risky domains needing in-depth audit scrutiny and predict forecasts and trends. AI enables to save time and effort in developing audit plans, audit programs, field tests, evidence gathering, validating, testing bringing in new insights, testing procedures, and reporting techniques and methodologies.AI auditing is around the clock, with continuous real time risk assessment and monitoring, saving money, efforts, enhancing audit focus on priority areas to improve audit quality with intense assurance reviews, exception management, process development, and interpersonal interactions bringing in value addition and operational efficiency and effectiveness. AI software solutions can help smooth execution of audit, sustained upkeep, and risk reduction and better integration rather than functioning in silos between departments.Entity administration must establish a responsibility framework determining responsible persons for varied tasks and processes for automation. Standardized documentation and design review processes should also be part of a governance framework. There must be proper procedures put in place for keeping tabs on and fixing any alterations made to automated tests and processes and dealing with aberrations and impacts. Dynamic competitive corporate operations require regular around the clock risk assessment, cybersecurity checks and quality control testing. The operational and technological exceptions necessitate a testing framework and procedures to fix issues as and when emerge. Programme managers must be vigilant to regularly evaluating staff competencies to fill knowledge and expertise gaps focusing on recruitment of right personnel and role-specific training. AI helps to adapt change management process and procedures.Internal Auditors can provide assurance and add value to the company by conducting AI enabled risk assessment and management and perform more proficient internal audit advisory and assurance works. They must identify systems and processes to develop right audit process. AI apps, whether developed in-house, or procured, must ensure realization of the intended purpose, meet design specifications, and assumptions on specific monitoring to be performed, based on company’s legal compliance requirements. As Internal audit is an operational audit to evaluate risks and internal controls of operational systems for departments, units, and business functions, its goal is broader than an external audit in the achievement of organizational objectives and determines ways to improve the operations. As compliance audit is an independent evaluation to determine whether the entity is complying with the requisite regulatory standards such as corporate bylaws, controls, policies, and procedures.AI ML capabilities empower the auditor to do more audit advisory assignments such as understanding the entirety of ledgers and reporting on risks to executives and clients while enhancing quality of audit service. Use of ML improves the testing of ledger data by analyzing the entire dataset in a short time frame to identify material misstatements based on complete risk analysis. AI-based tools can flag transactional data based on variance from the standard set. AI-powered tools can help businesses to detect duplicates, out-of-policy spendings, incorrect amounts, suspicious merchants/attendees, and excessive spendings. Audit benefits include reduction in workload, cost reduction, enhanced audit quality. Many AI tools and services such as AI Consultant, AI/ML Development Services, Audit Software, Data Science/ML/AI Platform are in the market to ramp up audit productivity and efficiencies. Internal audit can effectively discharge responsibilities of regulatory compliance, monitoring risks and controls, and corporate governance. RPA and use process automation tools help even retailers, banks, global payment solution providers, manufacturers, media companies, movie advertising networks to handle seas of data from text/audio/video/social media sources. AI, ML and RPA will allow businesses and internal audit functions to rise much faster. The CACS (Commitment, Access, Capability, Skilling) Framework is comprehensive step in this direction. Adoption of proper CACS framework can be the inflection point for internal audit paving the way for AI to review volumes of unstructured data. CACS framework leads to next gen internal auditing. Internal audit teams must step up the audit delivery time in providing assurance, advice, and insights by adoption of AI enabled technologies.“AI-powered tools help zero in fraudulent transactions, waste, excessive spending, suspicious merchants, duplicates and enhance audit delivery time by proper risk assessments.”AI-powered auditing platforms can analyze the entirety of the financial transactions, identify gaps and can help recognize areas of highest risk of material misstatements with accuracy and speed. AI-powered tools help zero in fraudulent transactions, waste, excessive spending, suspicious merchants, duplicates and enhance audit delivery time by proper risk assessments. IA must embrace AI for better project scoping and Return on Investment taking care of risks including cyber threats. As corporate is outsourcing key business functions, internal audit process will extend far beyond business premises. As businesses tend to have less oversight over their contractor’s practices, IA faces a complex environment of fourth and fifth parties in completing audits. Multiple external threats add complications to the audit process including shortages of IT experts, climate change uncertainties, cyber threats, disrupted supply chains, and political/social/environmental issues. AI algorithms are suited to explore correlations between these factors and the potential risks they cause for a business by review, evaluation, and impact.AI powered audit tools e.g. AuditMap.ai for reviewing internal reports and other documents to develop a risk profile by identifying trends before they can pose a risk, allowing the organization to develop effective mitigation strategy. AuditMap works as a cloud-based internal audit function tool or in a hybrid version. AI algorithms based on state-of-the-art natural language processing is highly effective in the assessment of risks and controls. AI-powered auditing platforms help in uploading audit reports and documents to enable better work ecosystem.Overcoming AI audit challenges relies on improving the understanding of AI technology landscape and how it can transform audit profession with its inherent risks. Auditors are not data scientists. Their understanding of AI is limited. Appointing audit committees to liaise with internal audit teams is valuable step to bridge this knowledge gap.Benefits of AI in Internal AuditAI poses both risks and opportunities for internal auditors. On the one hand, the function must provide assurance their business is using these technologies appropriately, but auditors can also leverage AI and AI-adjacent systems to their advantage. AI alleviates the burden of laborious manual processes. AI can free up audit professionals for more value-added tasks. AI can offer significant risk and governance insights and strategic suggestions to the board of directors of enterprises. In the process, auditor’s assurance-based role extends to a key business advisor for the company’s future growth. Working with cutting-edge AI technologies will attract the industry’s leading professionals. AI adds audit efficiency and productivity. Generative AI tools empower IA to enhance their efficiency and productivity.AI tools help in knowledge and expertise augmentation by leveraging AI generative tools to provide insights and forecasts. AI helps in providing better consistency and standardization, helps in data-based decision-making rather than reliance on professional Judgment, though AI tools should not replace the professional judgment and expertise of internal auditors. AI platforms and software provide better security and confidentiality. Generative AI may likely to produce risk of false information, which must be safeguarded by associating with subject matter experts. Regulations relating to intellectual property rights may create reputational risk. IA should compare the tool’s responses against reliable sources, consult subject matter experts. IA should support development of policies that govern the use of AI tools. Continuously monitoring and evaluating the risks and performance help enhancing effectiveness, reliability, and value. IA professionals must receive adequate training in handling effectively AI software and tools with associated risks, and ethical considerations. While external audits are independent to certify risks and controls, IA is proactive rather than reactive to anticipate potential bugs/risks for taking corrective and preventive actions to improve objectivity, transparency, efficiency, and productivity.AI Audit ChecklistAI adoption requires clarity on business objectives and how AI is used to achieve those. AI strategy must be aligned to enterprise achieve and justifies their AI expenditures. AI audit data sources include internal, third-party, and public data sources, and auditor must assess data validity of data resources used. AI audit cannot be based on unreliable data sources because of ‘garbage in garbage out’ will be the audit outcome. Data privacy is a key concern for the implementation of privacy standards, protection of consumer rights, and legal aspects around data usage. Changes in algorithms and data might impact the accuracy of AI systems. Continuous monitoring, algorithm assessment, and checking possibilities of potential vulnerabilities constitute the core of AI audit.AI systems are prone to security attacks by hackers and therefore must be backed by appropriate security controls and standards. Therefore, responsibility of the AI auditor is to ensure data integrity, completeness, accuracy, confidentiality, and availability of data, privacy issues, legal issues like copy rights infringements of data used in the audit. Identifying and vetting the data sources, checking for data quality and cross validation of data fields are critical before beginning the audit. If AI systems use personal data, auditor must valuate that cloud services meet the information security requirements such as OWASP (Open Web Application Security Project) guidelines. AI Auditing is a continuous iterating process. AI system and risk strategy should be modified based on the feedback, usage, consequences, influence, and impact.Key Audit Checklist Questions:What is the data source?Is the source reliable and objective and the data integrity ensured?Are the data fields easily available, accessible, complete?Are the data fields relevant and complete for audit evidence to form the audit opinion?Is the ‘single version of the truth (SVOT) agreed upon’?Is the governance, risk, and compliance (GRC) properly evaluated and controlled?Are AI components available help to solve data sampling issues and related internal audit problems to derive meaningful insights?Is the audit output (the end results of the audit function) desirable and satisfactory?Is the audit quality ensured?Do the audit results justify costs?Is the audit impact as expected?How far the predictive analysis help predicting future trends?Does robotic process automation (RPA) automate auditing steps and data extraction from the data fields into Word/Excel?Does NLP, that automates repetitive tasks via voice commands validate audit checks?Do Natural language generation and ingestion/NLP-based Chatbots help in reconciliations based on checklists?Benefits of Auditing AI SystemsAuditing prevents or mitigates risks associated with AI systems.Auditing ensures that AI applications are free from inherent data bias and discrimination.Auditing AI applications ensures that the system follows legal, regulatory, ethical, and social considerations.Technology risk assessment evaluates technology capabilities, including ML, security standards, cyber security, and performance.Challenges for Auditing AI SystemsAI systems can amplify the data biases which might result in unfair decisions. Auditor must be able to prohibit discrimination in AI systems.AI systems, that employs ML, deep learning, neural networks are complex to interpret.Organizations, regulatory authorities, and auditors should keep in touch with AI advancements, realize its potential threats, and frequently revise the regulations, frameworks, and strategies to ensure fair, risk-free, and ethical use. AI and other emerging technologies can save valuable time and resources by offloading repetitive and mundane tasks from auditors. This can help auditors focus more on areas where creativity and critical thinking are important. AI solutions assists auditors help to save time, cost, and enhance knowledge, skillsets on emerging technologies.Footnotes & References1 European Commission Auditing Artificial Intelligence Guidelines: https://ec.europa.eu/futurium/en/system/files/ged/auditing-artificial-intelligence.pdfAuthor may be reached at: kps.ps2013@gmail.com and eboard@icai.in

Unlike ‘recollections’ and ‘reminiscences’ which could permit the luxury of selective remembrance, a Journey may obligate the recounting — not of disparate references that shed only favourable light on actions, but rather, a factual narrative originating in the remoteness of exoteric recall of the Past, incorporating the indisputable Present, yet culminating in the esoteric Future.The Concept of ExcellenceAmong at least five impeccable words, — ‘Outstrip’, ‘Outdo’, ‘Exceed’, ‘Surpass’, ‘Transcend’, — all of which mean to go beyond stated measure, degree, or implied limit, — Professions prefer the word ‘Excellence’ as their appellation, inter-alia because, unlike the above synonyms, which respectively may suggest merely competition, achievement, authority, superiority or rising above a limit, — ‘Excellence’ indicates a “preeminence in quality”, — which is what Chartered Accountants are all about, and this remains encapsulated in the inaugural speech by Hon. C.D. Deshmukh, the first Finance Minister of India, upon the formation of ICAI:“This structure shall house all that is noble and dignified in the profession of Chartered Accountants.”The Past: Surviving Shackles, License Raj & The Search for RelevanceThrough the early decades, the finest minds upon graduation craved Articles, enchanted by the premium CA qualification. Some of the gems who trained during those years are today leaders of many sectors in India and abroad, too numerous to recount.CAs rode the high tide of sought-after Tax expertise, following doomed attempts during the 60s & 70s by the business community to find cheer in the tax regime then extant under the FERA cum License Raj, except through the most abstruse tax planning, on a scale now hardly credible even to modern tax planners. Firms with quality to match today’s Multinationals, but squeezed by an oppressive tax regime, worked in rudimentary environments with non-existent creature comforts — the serene antithesis of the later-day CA offices modelled after five-star lounges.The License Raj also required numerous attestations — there was a boom in what was referred in vernacular as “certificate work”. Agents scouted impecunious young CAs even deep into the Moffusil to obtain ‘certifications’ of end users and consumptions of costly imports.Extensions of Practice areas like Costing, Management Accounting & Financial Management had by the 70s been popularised. The concept of accounting had changed, from one of maintenance of books & tracking asset changes, to complex resource allocations & forward-looking measurements that support decisions for the efficient maximisation of profit. These specialisms were subsumed by Management Consultancy divisions in traditional CA offices, which flourished. A generous proportion of perceived “value added” domains moved away from the core Audit & Attest function. The big scramble in Audit was for empanelment, to win Audits of Nationalised Banks, Insurance companies & PSUs.Fault lay not with the ICAI membership but in the stagnant economy, and archaic regulatory shackles, that offered little opportunity, except perhaps through emigration. Thousands went West, and as many gravitated to the Gulf. They did well, and did their country and calling proud.ICAI Council invariably included the most competent & upright professionals. But in a closed economy, an unseemly proportion of time was drained on volumes of disciplinary cases punishing puny sins — no more than tiny ads, minor indirect solicitations, and acceptance of miniscule audits without prior NOCs, mainly by members struggling for the economic necessities of life. Whether large established wrongdoers, including CAs outside professional practices, were booked, remained an enigma.Given the disability that an Auditor can neither issue summons, nor examine on oath, nor disclose on ground of confidentiality the most horrendous client sins except in a Court proceeding, Auditing is probably destined to veer towards forensic investigations. Some international firms have made commendable progress in this, even without formal Regulatory backing.The Present: Solution Providers, Capital Markets & The New OrderProvidentially, the accent on redistribution of work began to change towards an emphasis on creation of new work; ‘Tax Audit’ was a notable milestone in creation of new work. Curiously though, the more comprehending minds among the then Seniors were, at least initially, not enthused by this source of perennial new work — it was seen as too risky.Before the blossoming of other specialisms, the absorption with taxation as a discipline was near total. When established CAs of that era crossed fifty years of age, it would not have been uncommon to see their interest in the finer points of fiscal interpretations sublimated to become the principal passion of existence, replacing all other zests. 1985 broke the tax spell and ushered in Financial Services which were already waiting in the wings to come centre stage.The risks assumed by Financial Institutions in extending term loans soon brought forth a new breed of CAs to help borrowers satisfy the information needs of lenders. This work quickly extended to an appraisal of justifications for projects before committing funds. The ICAI published the Background Material on Project Evaluation in 1988, but well before that, entrepreneurs increasingly saw CAs as facilitators & procurers of much-needed finance, rather than number crunchers peering at small print while big-picture concerns went unnoticed. The evolution of a learned but backward-looking timid CA lot into a dynamic CA pack not lacking commercial nous became agreeably evident.An important lesson the profession learnt was that sectors outside traditional audit, especially industry sector, would value as advisors those professionals who were providers of Solutions, not those who stopped short of a solution after finding the root of a problem, howsoever painstakingly researched that finding may be. For some of us brought up in the ‘Past’ mould, this may have been a bitter pill to swallow. But it is important to bear in mind in dealing with the ‘Present’ that, if the perceptions of society about us professionals do not coincide with our self-perception, then it is we professionals who become irrelevant, not society, nor those ‘Opinion Makers’ who hold the purse strings that generally influence the perceptions of society.Be that as it may, in the ‘Present’ age under SEBI-sponsored arrangements (the ‘Past’ Controller of Capital having vanished), a number of adventurous souls from our CA Profession have had ample scope & recognition. This includes modern CFOs, many belonging to our own profession, who are adept at ‘selling’ Bankable Balance Sheets to Analysts & Investors, and presenting their Business plans to audiences from an ‘external perspective’, with an in-depth expertise in specialist areas like Risks, including Tax risks, Regulatory requirements, and structuring, which have become among the most rewarding areas of professional work.“A New Order has now evolved in which Professional Services Organisations, some of whom are integral parts of international networks, endeavour to offer advice using a multidisciplinary business focused approach.”To view the New Order as unwelcome would be an exercise in misinformation and prejudice. The change heralded much that was good and some of it exceptionally good:First of all, the New Order destroyed oligarchies that had existed earlier.Equality of opportunity is a principle far better served by the New Order in the first & second decade of the 21st century than was ever served during the preceding half century.Equally importantly, aspiring talented CAs unable to flourish their own practice can now join very large establishments more easily than they could ever have become part of erstwhile oligarchies.Besides, it is only the New Order that has made it possible for large numbers of CAs to receive pecuniary rewards far higher than those ever prevailing in the past.Moreover, under current dispensations, the large residue is annually shared locally with remarkable fairness and equity that contrasts favorably with the skewed slopes for profit sharing ordained in the past.The Future: The Decennial Technological DisruptionIt took the World of International Trade more than a century to move from the “cash basis” of accounting in the post-Renaissance era, to an “accrual system” in the Age of Exploration, and then on to ‘Mercantile Book-keeping’ in the Colonial period.But it may now take less than a decade to render obsolete much of what we CAs know, as we move deeper into:Data AnalyticsData ProtectionInternet of Things (IoT)Robotic Process Automation (RPA)BlockchainArtificial Intelligence (AI)CryptocurrencyCybersecurityFintech InnovationBizarre as it may seem, competition for CAs in future decades may not be from rival callings, but more generally from inroads of connectivity driven by newer technologies into all sorts of adjacent competencies. This is not an alarmist foreboding, but an exhortation to examine how our roles will be recast, and our work modalities impacted, not only in respect of concerns and benefits, but for all agenda including TECHIE and HUMIE issues.Mouse clicks already open countless doors to knowledge, Enterprise, and Commerce continents away, but what will shortly overtake us is: (i) global embrace of new-gadgetry, (ii) info-predators, (iii) electronic townhalls, and (iv) hi-tech shovels that drown us in the info-junk of a twenty-first century village marketplace exchanging information and services.There is a relentless change in: (i) How we Work, (ii) How we Learn, (iii) How we remain Connected, and (iv) How we are Regulated — and How our voices, Appeals and Representations are heard.International Taxation & The Digital RealmDigitalisation of the Economy is bringing about a fundamental shift in the very basis of:Nexus & Pillar 1: Long-held principles of how “nexus” for taxing rights of each jurisdiction gets established are undergoing major changes based on work being undertaken as part of “Pillar 1” following OECD and G20 BEPS action plans.Virtual Permanent Establishment: Traditional definitions of “Permanent Establishment” are widening from being a largely physical concept to something virtual or digital.New Domestic Mechanisms: The introduction of “Significant Economic Presence” (SEP) into the Income-tax Act, as well as the earlier introduction of the “Equalization Levy”, are notable indicators of portends.Cybersecurity: A Business Continuity ImperativeIt is not improbable that Regulators, Employers, Insurers, and Hackers could claim intrusive access to our: (i) Bank accounts, (ii) Transaction files, (iii) Confidential documents, and (iv) Customer records.“Markets have become increasingly reliant on interdependent technology systems, and the ‘Cyber Security’ risk looms even larger.”Expanded far beyond the realm of IT, ‘Cyber Security’ has become a ‘business continuity’ necessity to ensure that Shareholder Value remains intact, along with privacy of Corporate Intellectual Property. Security of our assets in an emerging digital environment is foundational to how a corporate is viewed by capital markets, lenders and other stakeholders, with increasingly higher levels of Analytics & AI.Exemplary oversight of Cyber Security Risk & Cyber Governance are fundamental to sound operations, inter-alia because, rarely does any failure happen in a vacuum. Thus, the threat of systemic disruption has taken on a menacing preponderance among the concerns of Regulators and Policymakers worldwide. Solutions need to match the pervasiveness of problems:Defences must improve when new vulnerabilities are discovered.Cyber Risks are rarely posed to a single network, but often to an entire ecosystem.Measures must be dynamic in collaborating with Law Enforcement.Information must be shared to help develop new technologies that prevent attacks.Proactive preventive ‘Cybersecurity’ will necessitate skills on interface devices going far beyond mere trackballs, styluses, microphones, and cameras — extending in a few years into the realm of: (i) Special Glasses & Helmets tracking eye and head movements, (ii) 3D Videos, (iii) Tactile impression devices, and (iv) Bodynets linking devices in cars and homes.Conclusion, The Skanda Purana Injunction & Info-FeudalismIn concluding this article, it may be sufficiently important to diverge from usual pleasantries, in order to underscore that, not just the Accounting profession, but almost all Businesses and related Ecosystems, may face future challenges beyond current pre-vision, that are both insidious and ubiquitous.So, when things go wrong elsewhere, people look to the CA fraternity and the Institute as worthy repositories of all sorts of Information. Greater therefore is the lapse, if it occurs in the portals of the Institute or the offices of its Members. This aphorism is delectably captured in a couplet from the Skanda Purana:अन्यक्षेत्रे कृतं पापं पुण्यक्षेत्रे विनश्यति ।पुण्यक्षेत्रे कृतं पापं वज्रलेपो भविष्यति ॥“Lapses that are committed in other places can be washed away in a Holy place, — but, lapses committed in a Sacred place, become indelible.”Suffice it to say that as CAs, we seem headed to live and function in a Society that may loosely be described as Info-Feudalism — perhaps yet another oligarchy, comparable to the Feudal Age, comprising broadly two classes:A few INFO-BARONSNumerous WORKSTATION-SERFSAuthor may be reached at: eboard@icai.in

Asset accounting is very important since capitalization once done will become a permanent record in the books of accounts of the entity. This paper deals with the role to be played by Chartered Accountants starting from capital investment decisions to asset accounting and related income tax provisions. The various aspects to be checked by a CA while making capital investment decisions are discussed. The paper also discusses how project internal order mechanism can be used to ensure control of Capex. The details which can be provided at the time of asset creation to ensure better control on assets in future have also been discussed. The method of capitalization has also been discussed besides procedure for asset deletion and asset transfer. The provisions of Income Tax Act relating to depreciation are examined. Measures to be taken to ensure that deductions and depreciation benefits given in Income Tax Act are availed have also been discussed. The suggestions made in this paper ensure that adequate controls are incorporated in asset accounting and asset management so that CA’s will deliver the best possible value addition. Introduction Asset accounting is very important since capitalization once done will become a permanent record in the books of accounts of the entity. Hence, capitalization needs to be done very carefully. Further, some deductions and depreciation benefits are given for some categories of assets. Hence, asset classification is very important to avail these benefits. Chartered Accountants should play a key role even when making capital investment decisions. This paper emphasises on the role of Chartered Accountants in these areas. Objectives of the Study To know the contents of a capital expenditure proposal and how to vet it properly. To understand how internal orders can be used to control expenditure incurred on the project. To gain knowledge on how capitalization need to be done properly as per best accounting practices. To know the controls which should be implemented to ensure correct asset accounting. To look into taxation related aspects of asset accounting. To study measures to be taken to ensure that tax benefits are properly availed while capitalizing the assets. Scope of the Study The focus of this paper is to review capital expenditure proposals, asset accounting and taxation related aspects of asset management. It does not cover other asset management activities like Capital expenditure MIS and reporting, Capital expenditure budget etcetera. Review of Literature Abdulazizovich (2022) stated in his study that in accounting and analysis, there are both generic and specialised methodologies. An essential core structure on which general and particular procedures are built is the conceptual framework of financial accounting and reporting. The approaches that are generated from this fundamental structure will therefore be more trustworthy and widely accepted. Khatamov Kobil Khayriyevich (2022) in the article examines the structure of Uzbekistan’s fixed asset accounting, including how it is organised in accordance with international standards, how it is maintained, and how difficulties in this area are resolved. In the context of the coronavirus pandemic, the organisation of accounting for receipts, accounting for the sale of fixed assets, and depreciation of fixed assets are explored. Muftinisa, Ginanjar, Wahyu, & Hadisukmana (2017) observed that every business has a fixed asset that it uses to conduct business. Without an automated mechanism for tracking the asset, it can be difficult to keep a fixed asset complete, correct, and up to date. Jaffey (1990) describes a technique being developed at Statistics Canada to gauge the corporate sector’s capital stock. The technique makes use of FAASM, or Fixed Asset Accounting Simulation Model. By estimating the actual service life of fixed assets and using those estimates along with price indexes to revalue assets on a constant price basis, FAASM gives estimates of the capital stock. Consequently, FAASM offers an alternative to the popular Perpetual Inventory Method. It also produces other significant outputs by inferring accounting lives from the depreciation accounts. These latter are just mentioned briefly here. FAASM’s service life and capital stock estimates may eventually, with system development and improvement in operation, approach the boundaries of possible accuracy since it utilises the available data in a thorough, systematic manner. Capital Expenditure Proposals Capital Expenditure proposals (CEP) will be raised based on the approved Capex budget. Chartered Accountants have to play a crucial role in vetting of the Capital Expenditure Proposal. The following are the points which have to be checked by a CA during the review of CEP: Budget details Cost estimate (check with quotations etc.) Checking the Fixed Asset Register for assets to be put up for asset deletion in case of replacement projects IRR analysis / Pay back analysis etc. in case of projects giving financial returns In case of multi-dimensional projects, sub-CEP wise allocation for each activity (mechanical, electrical etc.) has to be stated. In case of budget over run for any project, it should be ensured that the overrun is approved by the competent authority as per DOA (delegation of authority in the entity). In the case of unbudgeted projects, the emergency nature of such project has to be justified in the CEP. Field visits have to be done to understand the need for the project. A good understanding of the business of the company will be useful while vetting the CEP’s. The Chartered Accountant professionals need to go beyond the conventional accountant role and live-up to the management expectations of CA in modern business environment. Control on the project – through Project Internal Order Once the CEP has been approved, a separate internal order should be created for each project. This will ensure that control remains on the project and only that expenditure is incurred which is relevant to the project. The budget will be uploaded to this Internal Order. All the expenditure incurred on the project will be booked through this internal order. This includes purchase orders raised, warehouse issues, taxes ineligible for taking credit etc. The purchase requisitions raised by the projects department and the purchase orders issued by the purchase department will be capital commitments. Once the goods are received or services are rendered and the GRN has been booked or service entry has been booked, this amount will move from capital commitment to actual expenditure. The Chartered Accountant has to ensure that control is in place to ensure that the total of the commitments and the actual expenditure incurred together does not exceed the budget for the project. Once the project is completed, the internal order should be locked to ensure that further booking of expenditure to the project internal order is not possible. Capital Work in Progress / Asset Under Construction The expenditure booked into the Internal Order will be transferred to Capital work in progress at the end of each month. This will be done by creating an asset under construction (AUC) and defining the settlement rule in the internal order such that all the expense will move to the AUC. The AUC should be created under the following asset class: Civil project Plant and Machinery Office equipment / furniture and fixture etc. The class of AUC will be determined based on the main nature of the project. Usually, internal orders are settled at the end of each month so that all the expenditure will go to the relevant AUC. Capitalization of the project Once the project has been commissioned, the projects department will give a “Project Completion Report” (also called “Put to Use certificate” / “Installation Certificate” etc.) to Finance department. Then finance department will discuss with Projects department and decide on the assets which form part of the project and their classification (plant and machinery, building etc.). The CA has to ensure adequate care and due diligence at this stage to ensure that all assets are captured and that their classification is properly done. Once the above exercise is completed, the various expenses booked in the project should be downloaded from the internal order. This expense report should be given to the projects department and they will allocate the expenses to the various assets. Then, the final figure of capitalization of each asset will be arrived upon. There may be some common expenditure which cannot be allocated directly to any of the assets. This includes expenditure on design of the project, clearance of project site etc. All such common expenditure should be clubbed together. Once all other expenditure is allocated to the assets, then this common expenditure may be allocated in the same proportion as directly allocated expenditure. Creation of asset The asset classification will be decided as per Companies Act, 2013. Based on the nature of the industry, life has to be decided by the company/entity. This is in line with the requirement of adopting depreciation based on useful life as stated in Companies Act, 2013. The Companies Act, 1956 prescribed rate-based depreciation. In Companies Act, 2013 it was recommended to move to depreciation based on useful life. The following details will have to be prescribed for each asset in addition to proper description of the name of the asset: Quantity (no. of assets – example 4 chairs) Cost centre Internal order number of the project Vendor code of the main supplier Equipment number for plant and machinery Vehicle registration number for vehicles Depreciation key AUC No. Capitalization date For every asset, the photo should be attached if permitted by the ERP. Equipment number for plant and machinery is recommended to be entered so that it will be easy to identify the asset at the time of physical verification of assets. Sub Asset When there is an addition to the existing asset, if such new addition forms an integral part of the existing asset and cannot be used elsewhere, it will be ideal to create such new asset as a sub asset to the existing asset. For example, one instrument item may be purchased for a bagging machine. This instrument cannot be used anywhere else in the plant. Then capitalize this instrument as a sub asset to the bagging machine. The reason is that when the bagging machine is removed in future, this instrument can also be identified in the books easily for removal. Otherwise, the instrument may not be written off in the books along with the bagging machine, and only during the physical verification of assets it will be realized that the instrument has already been disposed of along with the bagging machine. Capitalization process Once all the assets have been created, the expenditure will be transferred from Capital Work in Progress (Asset under Construction) to the asset. Once capitalization has been completed, it is advisable to verify in the Fixed Asset Register. A screen shot/download can be taken and attached to Project Completion Report for ready reference. After capitalization is completed, the capitalization working file containing asset wise expenditure break up for all expense booked to the project can be uploaded into the internal order if permitted by the ERP, so that it will remain as a permanent record for future reference. In case of assets with a value of less than Rs.5000, they have to be fully depreciated immediately as per Companies Act, 1956. However, this requirement is not there as per the Companies Act, 2013. So, 95% of the value is being depreciated. Asset Deletion In case of replacement projects, the old asset has to be deleted from the books. The date of deletion of old asset shall be the date of capitalisation of the new asset. In case of asset deletion not linked to replacement projects, the date of approval by highest approving authority or the date of removal from the plant can be taken as the date of deletion. Asset Transfer In case of asset transfer within same unit, simply change the cost centre. In case of asset transfer between different units, the recipient location has to first create an asset. Then, the transferor location will post asset transfer into the recipient location. Depreciation for the balance life of the asset will now get charged to the recipient location. Closing of Accounts The following schedules are to be submitted for Capex audit: Asset additions schedule – for the quarter and full year Asset deletions schedule - for the quarter and full year Asset transfers schedule - for the quarter and full year Capital Work in Progress schedule Capital Work in Progress reconciliation schedule Fixed Asset Register Fixed Asset top sheet as per Schedule VI format The total loss figure shown in the asset deletions schedule should tally with the balance of the Fixed Asset Scrapped account. The total profit figure shown in the asset deletions schedule should tally with the balance of the Profit on Sale of Fixed Asset account. Capital Work in Progress (CWIP) schedule This schedule contains the break-up of the Capital Work in Progress as at the end of each month. This schedule should be prepared at the end of each month and should be reviewed along with the Projects department to identify the projects which should be capitalized. The following are the capital work in progress accounts: Capital WIP - Land & Buildings Capital WIP - Plant & Machinery Capital WIP - Furniture and Office equipment CWIP - Down Payment offset account Any advance given will get reflected into the relevant CWIP account and the corresponding negative figure will get reflected in the CWIP-Down Payment offset account. Capital Work in Progress (CWIP) reconciliation schedule This schedule shows the movement in the Capital work in progress during the financial year, that is, the opening work in progress, the additions and deletions during the year and the closing work in progress. The total deletions from capital work in progress schedule should tally with the total asset additions. Relevant provisions of Income Tax Act Depreciation is calculated under Written Down Value method in the manner specified under Section 32 of the Income Tax Act. Depreciation is calculated for each block of assets. Where an asset is put to use for less than 180 days in a year, then the depreciation on such asset for that year shall be 50% of the normal rate of depreciation allowed for such asset under Income Tax Act. Rates of depreciation under Income Tax Act are summarised below: Srl No. Nature of Asset Rate of Depreciation Part A – Tangible Assets IBuildings: 01Residential Buildings other hotels and boarding houses5% 02Buildings which are not mainly used for residential purposes (includes office building, factory building, godowns, hotels and boarding houses)10% 03i. Building acquired on or after 01st September, 2002 to install plant and machinery forming part of water supply project or water treatment system and which is used in the business of providing infrastructure facilities under Section 80-IA(4)(i)ii. Temporary erections such as wooden structures40% IIFurniture: 01Furniture and fittings including electrical fittings10% IIIPlant and Machinery: 01i. Plant and Machinery (not covered under Serial No. 2 to 4 below)ii. Motor cars (other than those used in the business of running them on hire) acquired or put to use on or after 01st April, 199015% 02i. Buses, lorries and taxies used in the business of running them on hireii. Motor cars (other than those used in the business of running them on hire) acquired and put to use between 23rd August, 2019 and 31st March, 2020iii. Moulds used in rubber and plastic goods factoriesiv. Machinery and plant used in semi-conductor industry30% 03i. Aeroplanes – aeroenginesii. Life-saving medical equipmentiii. Containers made of glass or plastic used as refillsiv. Computers including computer softwarev. Energy Saving Devices, Renewal energy devicesvi. Rollers in flour mills, iron and steel industry, sugar worksvii. Air Pollution and Water Pollution Control Equipment; Solid waste control equipment, solid waste recycling and resource recovery system;viii. Machinery acquired and installed on or after 01st September, 2002 in a water supply project or water treatment system and which is used in the business of providing infrastructure facilities under Section 80-IA(4)(i)ix. Books40% 04Buses, lorries and taxis used in the business of running them on hire provided they are acquired between 23rd August 2019 to 31st March 202045% IVShips: 01Ocean-going Ships and vessels including speed boats operating on inland waters20% Part B – Intangible assets 01Intangible Assets – Knowhow, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature not being goodwill of business or profession25% Additional depreciation under Section 32(1)(iia) Additional depreciation at 20% is allowed on new plant and machinery (other than ships and aircrafts) acquired and installed after 31st March, 2005, by an assessee engaged in manufacturing or production activity. Additional depreciation is not available in case the assessee purchases old or already used plant and machinery. Additional depreciation is not allowed for building and furniture also. In case of investment in new plant and machinery for setting up an industry in notified backward areas located in Andhra Pradesh, Telangana, West Bengal and Bihar, the rate of additional depreciation shall be 35% instead of 20%. The new plant and machinery should be acquired between 01st April 2015 to 31st March 2020. Investment allowance under Section 32AD In case a new undertaking is set up in notified backward areas in Andhra Pradesh, Telangana, West Bengal and Bihar, deduction of 15% of the cost of new plant and machinery acquired for installation in such undertaking is allowed as a deduction. Such new plant and machinery should have been acquired and installed between 01st April 2015 to 31st March 2020. Section 35(2): Capital expenditure on Scientific Research Related to Business Where the assessee incurs any capital expenditure on scientific research related to his business, the whole of such expenditure is allowed as a deduction in the same year. Where the capital expenditure on scientific research has been incurred before the commencement of business, such expenditure incurred within three years before commencement of business shall be allowed as a deduction in the year in which the business started. This will be useful for companies which design new products. Availing Income Tax benefits When the Capital Expenditure Proposal is raised, if the machinery proposed to be purchased is pollution control equipment or energy saving device etcetera, the point should be marked in the Capital expenditure report so that the company will not miss the advantage of tax benefit accruing on accelerated depreciation on such equipment as per Income Tax Act. Extra caution is required when accounting the equipment under Research & Development cost centres to avail tax benefits under Section 35 on expenditure on scientific research. When pollution control equipment or energy saving devices are capitalized, a technical note may be collected from the plant describing how the equipment controls pollution or saves energy and such note should be forwarded to the taxation section for their record. At the time of assessment by the Income tax department, invoices for all the expenditure will have to be submitted reconciling them for each plant and machinery capitalisation amount. These have to be kept ready in advance and more care should be exercised while submitting invoices for pollution control equipment or energy saving devices etcetera where higher rate of depreciation is claimed. Since depreciation rates under Companies Act and Income Tax Act are different, separate Fixed Asset schedule need to be maintained for Income tax. Suggestions Chartered Accountants should have adequate knowledge of the business of the company and also acquaint themselves with the basic technical details of the plant and operation. This will be very useful to them when reviewing the Capital Expenditure Proposals to deliver value addition. Wherever necessary, the Chartered Accountants should visit the plant so as to get a better knowledge of the project. Once the project is completed, the internal order should be promptly locked to ensure that further booking of expenditure to the project internal order is not possible. The CA should discuss with Projects department and decide on the classification of the assets which form part of the project. He should take adequate care and exercise due diligence to ensure that all assets are captured and that their classification is properly done. Equipment number for plant and machinery and vehicle registration number for vehicles should be captured in ERP when creating the asset. This information will prove to be very useful when doing physical verification of assets. It is advisable that when creating the asset in ERP, the photograph of the asset be attached if there is such a facility in the ERP. When there is an addition to the existing asset, if such new addition forms an integral part of the existing asset and cannot be used elsewhere, it will be ideal to create such new asset as a sub asset to the existing asset. The capitalization working file containing asset wise expenditure break up for all expense booked to the project can be uploaded into the internal order if there is such a facility in the ERP, so that it will remain as a permanent record for future reference. Ensure that old asset is deleted from books when it is replaced with new asset. Prepare a Capital work in Progress schedule at the end of each month and review with Projects department to ensure that all completed projects are promptly capitalized. The Chartered Accountant should take initiative to train the project department personnel on basics of asset accounting. This will ensure better co-operation between finance department and projects department. Identify pollution control equipment and energy saving devices at the time of review of the Capital Expenditure Proposal itself. They should be marked separately in MIS so that at the time of capitalization, they will be classified properly and the company does not miss the advantage of tax benefit accruing through accelerated depreciation on such equipment allowed under Income Tax Act. When pollution control equipment or energy saving devices are capitalized, a technical note may be collected from the plant describing how the equipment controls pollution or saves energy and such note should be forwarded to the taxation section for their record. Conclusion It is well known that Asset accounting requires a thorough knowledge of requirements of IndAS-16 on property, plant and equipment, Companies Act and Income Tax Act. The role of Chartered Accountant in this regard is to go beyond his domain knowledge and get a macro view of the business of the entity and the manufacturing process which enables him to justify his role and offer the best possible value addition to the enterprise. References Abdulazizovich, K. U. (2022). Improving Methodological Approaches to Financial Asset Accounting. International Journal of Research In Commerce, It, Engineering And Social Sciences ISSN: 2349-7793 Impact Factor: 6.876, 16(4), 56-62. Jaffey, M. (1990). The measurement of capital through a fixed asset accounting simulation model (FAASM). Review of Income and Wealth, 36(1), 95-110. Muftinisa, A., Ginanjar, R., Wahyu, R. B., & Hadisukmana, N. (2017, November). Development and implementation of fixed asset management system. In 2017 Second International Conference on Informatics and Computing (ICIC) (pp. 1-6). IEEE. Khatamov Kobil Khayriyevich (2022) Issues of Organization of Accounting Of Fixed Assets On The Basis Of International Standard. International Journal Of Research In Social Science, Vol. 12 Issue 01, January 2022, pp. 20–28. Authors may be reached at: vasu.nimmagadda1@gmail.com, vkmohan1958@gmail.com and eboard@icai.in

The World is moving towards becoming one large economic hub making inter-twining of national economies, a natural concomitant, even as nations tend to protect their turf. India’s economy stands tall amidst global slowdown.The international perspective of the profession cannot be isolated from the country’s world-view and it being the fastest growing large economy. An attempt is made to envisage some macro aspects that may arise and its impact.Global Economic Order & Macro ShiftsIndian Accountancy Profession is age-old but in its organized form is over nine decades old. The profession has over the years evolved systematically and holds its own, basking in the glory of its edifice, built by dedication, vision and wisdom of numerous stakeholders. The profession in India ranks second in size, vying soon to become the largest in the world. This large size is widespread, in the nook and corner of the country and has footprints in several countries of the world. The sheer size of the Indian accountancy profession enjoins upon it a high degree of responsibility with international outlook. The profession has made bold stirrings on the international scene and needs to assert its natural role of leadership on the global platform, vesting in it the ability to positively intervene in the global accounting policy making process, in keeping pace with the fast rising profile of India.India is seized with a resurgent enthusiasm in shaping the emerging world economic order, in its quest to improve the quality of governance and thereby welfare of its people. Implicit in the process, it has to look at the global environment and aim at active, cooperative and competitive participation. The economic growth and the accountancy profession move together in tandem, if not in linear proportion. The service sector has become a key-driver for economic growth, representing over one-half of the Indian GDP. Accountancy services as direct input or as part of other services is a key component of the vast service sector potential.India’s Economic Ascent: India is already the third largest economy in terms of Purchasing Power Parity (PPP) and is likely to move to the third position also in market exchange terms in the ongoing decade. The Asian region accounts for half of the global population and only over a fifth of its wealth. This is changing and the region is expected, based on trends, to account for more than a third of global output in terms of PPP, comparable in size to the economies of US and Europe and by the turn of this decade, it is expected to exceed most major industrial economies (G-7). Various reports suggest that the Indian economy in real terms will come closer to the size of USA/China in the next two to three decades.Global Reserve Currency Shifts & International Treasury: As a share of value and a reserve asset, the US$ has been the leader of financial and monetary systems for over eight decades after Pounds Sterling yielded its place. US$ is losing sheen due to US economic debt concerns and its retreating share of global economic size. Besides, shifts towards a portfolio of currencies, bilateral country-currency trade settlement mechanisms, credit swap-lines between countries, and local-currency denominated bonds are on the rise. A global professional must be adept in appreciating the contours of economic shifts and will be called upon to optimize complex multi-currency treasury operations.Mitigating Global Contagion: With the economic crisis following the pandemic, the unfolding Eurozone crisis, and US debt concerns, global stability is partly mitigated by the resilience of Asian economies, led by India and China, with Africa emerging as the next pivot of growth. Cross-border movements in capital and entrepreneurship have transformed the profession, especially for India given high-scale inbound and outbound investments and cross-border firm mergers.Multilateral Corporate Governance: Corporate governance failures rocking the developed world and India have global dimensions. Codes, standards, and observances can no longer remain confined to sovereign borders but have become multilateral matters with a clamor for public accountability and independent oversight.Restructuring International Audit Networks: International audit practices currently operate through networks of separate jurisdictional partnerships under a common brand, with limited publicly available transparency regarding their inner workings. This scenario will likely necessitate a new global body made up of regulators from major emerging economies—India being an obvious choice—to recognize, discipline, and standardize truly global practicing firms.Paradigm Shift in Services: Accountancy services now span risk management, strategic planning, PSU privatization, private financing initiatives (PFI), forensic science, data security, blockchain, Artificial Intelligence (AI), and Robotic Process Automation (RPA), requiring complete re-orientation of CA education and skill-sets.The 10 New Operational RealitiesThe global economic order demands probity in financial transactions and transparency in financial reporting. India is taking a fresh look at devolution of powers, delivery mechanisms, and public financial accountability, aligning institutional frameworks with ten new realities:Technology Disruption: Challenge of continuously evolving technology including AI, Robotic Process Automation (RPA), ChatGPT, and virtual systems.Changing Scope of Services: Rapidly evolving contours of professional practice areas.Cybersecurity Imperative: Severe systemic risks of cyber-attacks requiring mandatory Security Certifications and comprehensive cyber insurance covers.International Treasury Management: Navigating complex multi-currency operations and decentralized trade mechanisms.Decentralization of Digital & Financial Assets: Aligning distributed digital assets with real-time accessibility, transparency, and corporate governance.Convergence of Standards & Codes: Global harmonization of reporting standards, ethical codes, and practical ground-level enforcement mechanisms.Taxation Policy Re-orientation: Review of global tax architecture, cross-border digital taxation, and group taxation concepts.Public Confidence & Oversight: Restoration of investor faith through independent and transparent public oversight frameworks.Autonomy vs. Public Interest: Striking a healthy equilibrium between self-regulatory professional autonomy and overarching public interest.Continuous Knowledge Edge: Sustaining technical superiority and intellectual agility in a fast-changing world.The 16-Point Strategic Action Agenda for the Indian ProfessionTo not only measure up to evolving needs but to surpass them and assume a trailblazing global leadership mantle, the Indian accountancy profession must execute a dedicated 16-point action plan:Continual IT & Audit Systems Development: Educating and mandating adoption of IT-based audits, managing cybersecurity risk, and securing appropriate indemnity covers.Preparation for Emerging Specialties: Equipping professionals for paradigm shifts in modern practice, including complex international treasury management.Research, Innovation & Discourse: Ensuring an enduring knowledge edge through continuous research, innovation, and high-quality intellectual forums.Active Participation in Global Standard-Setting: Contributing directly to the drafting and evolution of international standards, codes, and practices, coupled with robust domestic education and review.National & Global Policy Advocacy: Playing a proactive, contributory advisory role on domestic and international economic policy-making bodies.Securing Global Leadership Mantle: Establishing formal leadership within international accountancy federations commensurate with India’s professional size and economic stature.Alignment with National Strategic Interests: Working in close synergy with India’s geopolitical and economic diplomacy on the world stage.Addressing Global Intra-Professional Disparities: Recognizing differing stages of accountancy sector development across developing and developed nations.Establishing a Multilateral Oversight Body: Championing the creation of a global supervisory council for international firm networks and seeking a governing seat on it.Cross-Border Professional Reciprocity: Accelerating bilateral and multilateral Mutual Recognition Agreements (MRAs) across key global jurisdictions.Scaling Indian Firms Globally: Encouraging domestic firms to expand capacity and scale up cross-border practices organically and inorganically.Institutional Capacity Building: Strengthening structural institutions, education systems, and technical infrastructure across the profession.Agility & Decision-Driven Governance: Transitioning the profession into an agile, highly responsive, and data-backed decision-making community.Public Awareness & Reporting: Conducting public awareness campaigns and releasing transparent public reportage on regulatory and disciplinary functions.Transparency Without Sacrificing Autonomy: Deepening operational transparency while firmly safeguarding independent professional autonomy.Restructuring Regulatory Architecture: Dynamically updating professional governance to harmonize statutory autonomy with the public interest.ConclusionThe Indian accountancy profession has, over the decades, withstood and measured up to the demands of time. Given India’s rising stature in the world economic order and the unmatched demographic size of its accountancy fraternity, the profession is poised to lead global forums from the front. The accountancy profession will grow and thrive on the strength of its innate ability to anticipate and address the evolving needs of the world at large — anchored in knowledge, integrity, value, and vision.Author may be reached at: eboard@icai.in

With the advent of technologies, it has become easier for businesses to move physical, financial and labour resources across taxation jurisdictions, at times for favourable tax positions. This makes a study of the consequences of change in taxation domicile important for taxpayers as well as tax administrations. This paper analyses issues related to the availability of tax treaty benefits in case of re-domiciliation of a corporate entity. The structure of this paper is as follows, in the first section, brief facts of the one-of-its-kind judgement on re-domiciliation in case of Asia Today Ltd. vs. Assistant Director of Income-tax (International taxation)1 along with tax department’s arguments have been discussed wherein tax departments contended that the assessee company is not eligible for the benefit of India-Mauritius DTAA as it was incorporated in British Virgin Islands (BVI) and re-domiciled in Mauritius. Thereafter, the article seeks to discuss the critical aspects evolving around the re-domicile corporate entity in the Indian context including the taxability of the re-domiciled corporate entity under the Income-tax Act, 1961. Introduction The article will also touch upon international experience in this matter. Further, this analysis takes a closer look at anti-abuse measures adopted by Organisation for Economic Cooperation and Development (after this referred to as “OECD”) and India to grab the loopholes of corporate re-domiciliation. This paper ends with key observations by Hon’ble Income Tax Appellate Tribunal (after this referred to as “ITAT”) in the above-mentioned case as well as highlights the importance of reasons for re-domiciliation which would play a very critical role in ascertaining the commercial rationale behind resorting to such a decision apart from the Tax Residency Certificate (after this referred as “TRC”) to grant the benefits under the tax treaty. Facts of the case: Background The assessee company was registered, with the name Signpost International Limited, on 15th November 1991 in the British Virgin Islands (BVI) as an ‘international business company’, which sells advertisement time and earns subscription revenue through its Indian affiliates. Afterwards, on 24th May 1992, the name of the company was changed to ‘Asia Today Limited’. Registrar of Companies issued a certificate that the company is discontinued in the British Virgin Islands, vide certificate dated 30th June 1998 that states that: “The Registrar of Companies of the British Virgin Islands hereby certifies that Asia Today Limited, an international business company incorporated under section 3 of the International Business Companies Act of the law of British Virgin Islands has discontinued its operations in the British Virgin Islands on 30th June 1998”. As a net result of these actions, a company originally incorporated in the British Virgin Islands stands migrated to and re-domiciled in Mauritius on 29th June 1998 and ceased to exist in BVI. The assessee company re-domiciled itself in Mauritius and the Register of Companies issued a certificate of incorporation by continuation which was effective from the date of deregistration of the company in its initial place of incorporation. Further, the TRC dated July 06, 1999, was issued by the Government of Mauritius stating that this company was incorporated in Mauritius on June 29, 1998. Analysis Before analyzing the tax department arguments and decision by the ITAT, it shall be imperative to first understand the concept and needs for re-domiciliation of a corporate entity and key tax aspects from the International & Indian perspective. 1.1. Understanding of re-domiciliation of a corporate entity “Corporate re-domiciliation is the process by which a company moves its place of incorporation from its original jurisdiction to another jurisdiction by changing the country under whose laws it is registered but maintains the same legal identity.” Corporate re-domiciliation is also known as ‘Continuation’. Re-domiciliation does not alter the status of the company. By virtue of corporate re-domiciliation, the company ceases to live in one jurisdiction and is deregistered in that jurisdiction, but it is alive in another jurisdiction by way of the continuation process. 1.2. Need for re-domiciliation There could be various commercial reasons for re-domiciliation such as: Statutory and regulatory environment Data privacy law Geopolitical situation of the country Due to instability of the government Opportunities to raise capital IP protection, better R&D environment Availability of skilled resources, finance, and infrastructure For the above suggested reasons and a multitude of others, the possibility of corporate re-domiciliation may be considered the preferred option. 1.3 Re-domiciliation in the international context Re-naming, re-structuring and even re-domiciliation of corporate entities in the offshore world is a fact of life, however, not all countries allow corporate re-domiciliation. There are a few countries across the globe that permit re-domiciliation either inbound or outbound or both which is subject to the fulfilment of prescribed conditions. To get the effect of corporate re-domiciliation, it is imperative that re-domiciliation is permissible under both jurisdictions viz., (a) where the company is currently registered and (b) where the company is to be continued. Once the company has been re-domiciled, it shall be subject to the prevailing corporate and other laws in the new jurisdiction. 1.4. Re-domiciliation in the Indian context Currently, Companies Act 2013, does not permit either inbound or outbound re-domiciliation. However, it is important to consider the following key aspects for a better understanding of the re-domiciliation in the Indian context: 1.4.1. Shall Re-domiciliation be considered as a transfer? As analyzed in Point no. 2.1 above, the only thing that changes due to re-domiciliation is the country of registration and it does not alter the status of the company. Once it is established that there would be no change in the assets held by the company and the shareholders, there would be no transfer of any assets taxable under section 2(47) of the Income-tax Act. 1.4.2. Whether re-domiciliation subject to capital gains tax in India? As re-domiciliation does not have any impact on the legal status of the company, it should not be treated as a transfer under section 2(47) of the Income Tax Act, 1961. Thus, there ought to be no transfer of shares attracting capital gains tax in the hands of the shareholders. 1.4.3. Re-domiciliation: Relevance of Test of tax residency The test of tax residency becomes more relevant when there is a change in the corporate seat of the company on account of re-domiciliation and there is no change in its management or business operation. Hence, it could result in dual residency case based on the place of effective management which depends upon a case of the facts. 1.4.4. Re-domiciliation: Implication under FEMA and Corporate law As analyzed in Point no. 2.4.1. above, re-domicile of a corporate entity does not consider as transfer under section 2(47) of the Income-tax Act, 1961 then there should not be any adverse implications under the corporate law or FEMA. However, there will be a reporting requirement under corporate law or FEMA such as disclosures of beneficial ownership as per section 89 of the Companies Act, 2013, change in the place of incorporation of the shareholder, etc. 1.4.5. Re-domiciliation: Anti-abuse measures adopted by India India has introduced several measures to counter or deny the tax treaty benefits/shopping in certain circumstances by way of: Introduction of the ‘Limitation of Benefits’ (LOB) article through amendments to its bilateral tax treaties. Introduction of General Anti-Avoidance Rules (‘GAAR’) provisions in the Income Tax Act, 1961. The Principal Purpose Test (‘PPT’) under the Multilateral Instrument (‘MLI’) which India adopted and deposited to OECD. 1.4.6. Re-domiciliation: Anti-abuse measures adopted by OECD via Base erosion and profit shifting (BEPS) “The OECD has also introduced various measures to counter the tax treaty benefit/shopping through the BEPS project particularly Multilateral Instrument (MLI) which are over and above the domestic anti-abuse provisions.” The OECD has also introduced various measures to counter the tax treaty benefit/shopping through the BEPS project particularly Multilateral Instrument (MLI) which are over and above the domestic anti-abuse provisions. Now, the Principal Purpose Test (PPT) and the Simplified Limitation of Benefit (SLOB) provisions of the MLI may have to be read along with the LOB provisions for the already existing bilateral tax treaties. Tax department’s objection The tax department for the first time in this case during the hearing before the Income Tax Appellate Tribunal argued that the assessee company is not eligible for the benefit of India-Mauritius DTAA as it was incorporated in BVI and re-domiciled in Mauritius. Further, the assessee company as per the licence agreement dated 1st January 1995 with El-Zee Television Pvt. Ltd. indicates, it’s a BVI company and the Indo-Mauritian tax treaty benefits cannot be extended to the assessee company. Issue before the Mumbai’s Tribunal Can the benefits of the tax treaty be denied due to re-domiciliation? ITAT’s ruling Mumbai ITAT made certain key observations that are summarized as follows: Corporate re-domiciliation also referred to as ‘Continuation’ is the process by which a company moves its place of incorporation from its original jurisdiction to another new jurisdiction while maintaining the same legal entity. Re-domiciliation is a dynamic and constantly evolving concept and there could be various commercial reasons for the re-domiciliation of corporate entities to shift their corporate seat from their country of incorporation. To get the effect of corporate re-domiciliation, it is imperative that re-domiciliation is permissible under both jurisdictions viz., (a) where the company is currently registered and (b) where the company is to be continued. Once the TRC is produced by the assessee company, it is not open to revenue authorities to doubt the tax residency of the assessee company. Revenue authorities cannot revisit foundational matters regarding the granting of the benefit of DTAA to the assessee company before the Tribunal when such benefit had been granted by the tax officer and there is no tangible ground to doubt it. The benefit of DTAA cannot be denied just because of the re-domiciliation of corporate entity and the fact of each case needs to be examined in detail whether the re-domiciled company is actually domiciled in that jurisdiction. Conclusion In the Indian tax context, there is no precedence on corporate re-domiciliation and this is a one-of-its-kind judgement wherein Mumbai ITAT provides the much-needed guidance on the way Indian Tribunals are likely to apply the re-domiciliation concept from a tax treaty perspective. Mumbai Tribunal held that re-domiciliation of corporate entity does not affect tax treaty benefit and put emphasizes that re-domiciliation may trigger detailed examination that the re-domiciled company is fiscally domiciled in that jurisdiction. However, in the current situation, a company should analyse the provisions of limitation of benefits, Principal purpose tax and General Anti-Avoidance Rule vis-à-vis its commercial reasons for the re-domiciliation as such re-domiciliation could be challenged only if the primary purpose of such an act was tax avoidance. Author may be reached at: sr1502@rediffmail.com and eboard@icai.in

“IFRS 15, Revenue from Contracts with Customers, was issued by the International Accounting Standards Board (IASB)1 in May, 2014 with the aim to improve revenue accounting by enhancing comparability, minimizing the need for interpretive guidance, and enhancing information through better disclosure requirements. It provides a comprehensive framework for revenue recognition, measurement, and disclosures. Therefore, the IASB is gathering feedback from stakeholders to gain insights into their overall perspectives on IFRS 15, including its understandability. Participation in this exercise is important for Indian stakeholders as well since Ind AS 115 has been implemented, which in India, is converged Standard with IFRS 15. “IFRS 15 establishes a core principle that revenue should reflect the transfer of goods or services to the customer in exchange for the expected consideration.” Introduction The IASB has initiated a Post-Implementation Review (PIR) of IFRS 15, few years after its issuance. The purpose of this PIR is to evaluate whether the standard is functioning as intended. PIRs do not automatically trigger standard-setting but can identify areas for improvement in requirements, the standard-setting process, or Accounting Standards’ structure. Based on the feedback received during the PIR, the IASB will determine its subsequent actions, which may involve developing educational materials or considering possible standard-setting. In this view, in June 2023, the IASB issued Request for Information (RFI) on PIR of IFRS 15 to gather the stakeholders’ perspectives on extent and challenges faced in application of requirements of IFRS 15. The last date of submission of comments on the RFI to the IASB is 27th October, 2023. In India, the Indian Accounting Standards (Ind AS) are converged with the globally recognized IFRS Standards. Ind AS 115, Revenue from Contracts with Customers, applicable in India is converged with IFRS 15. Therefore, inputs of Indian stakeholders on challenges faced in application of the Standard are very much relevant and needs to be communicated to the IASB appropriately. Therefore, the afore mentioned RFI, has been hosted on the ICAI’s and ASB’s websites also inviting public comments to be submitted by August 31, 2023. The inputs received by the Accounting Standards Board (ASB) from Indian Stakeholders will be considered and submitted to the IASB. The link for accessing the RFI and submitting the comments on ICAI website is: https://www.icai.org/post/request-asb-pir-ifrs15-180723 The questions asked in the above-mentioned RFI issued by the IASB on various areas of IFRS 15 are summarized below. IASB had also received initial feedback on the application of IFRS 15 which is also summarized below along with the relevant topic. Overall assessment of IFRS 15 Background IFRS 15 establishes a core principle that revenue should reflect the transfer of goods or services to the customer in exchange for the expected consideration. To support this principle, a five-step model is introduced: contract identification, identification of performance obligations, determination of transaction price, allocation of transaction price, and recognition of revenue upon satisfying a performance obligation. The IASB expects improved consistency in revenue accounting among entities, leading to enhanced financial reporting. While implementation of the new requirements may involve costs, the ongoing benefits are anticipated to outweigh them, with the main costs incurred during the transition from previous revenue recognition requirements. Initial Feedback Feedback suggests that IFRS 15 has been successful in achieving its objective and is generally effective, although certain challenges remain for stakeholders. The five-step revenue recognition model has been viewed as valuable, particularly for complex transactions. Stakeholders found that implementing IFRS 15 required a significant learning process, with entities seeking guidance from accounting firms to develop accounting policies. Concerns were raised about the complexity of the standard, particularly for smaller entities and those in emerging economies. However, IFRS 15 has improved comparability of revenue information, although the need for significant judgment in its application may lead to inconsistent outcomes. Implementation costs decreased over time; stakeholders find that benefits of implementing IFRS 15 outweigh costs. RFI IASB seeks to gather stakeholders’ perspectives on IFRS 15 in its entirety. IASB aims to collect evidence to evaluate whether the costs and benefits associated with preparing, auditing, enforcing, and utilizing revenue-related information align with the intention with which the standard was developed. Identifying performance obligations in a contract Background A performance obligation is defined as a promise in a contract with a customer to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Distinctness is evaluated based on the customer’s ability to benefit from the good/service alone or with available resources and the promise’s separability within the contract. Initial Feedback In certain cases, it is straightforward to identify distinct goods or services promised in a contract. However, there are situations where a more detailed analysis and judgment are necessary to make the assessment, particularly in the following scenarios: arrangements involving internally developed products or digital products; contract modifications; licensing arrangements; and arrangements in which an entity uses its judgement to determine whether it is acting as an agent or a principal. RFI IASB seeks stakeholder insights on the extent and challenges faced in identifying performance obligations and the underlying reasons for difficulty. Determining the transaction price Background Determining the transaction price is a crucial step in the IFRS 15 revenue recognition model as it represents the amount that an entity assigns to the performance obligations in a contract, which is then recognized as revenue. The transaction price, defined as the consideration expected by the entity for transferring goods or services to a customer, excludes third-party amounts. IFRS 15 also outlines requirements for determining the transaction price in cases involving variable consideration, significant financing components, or consideration payable to the customer. Initial Feedback Marketing incentives to end customers: Feedback from stakeholders raises concerns about the accounting treatment of incentives in three-way arrangements, such as digital platforms offering incentives to end customers. Diverse practices, classifying incentives as customer payments or marketing expenses, may reduce the relevance of revenue information for financial statement users. Negative revenue: Feedback highlights stakeholder uncertainty regarding the accounting treatment of consideration payable to customers exceeding expected receipts, with some presenting it as negative revenue and others as an expense. RFI IASB is gathering information on marketing incentives to end customers and negative revenue cases including accounting treatments and their impact on financial statement information. Determining when to recognise revenue Background At least one of the following conditions must be met for recognition of revenue over time: the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. Initial Feedback It appears that most entities have successfully addressed initial difficulties regarding the recognition of revenue over time or at a point in time. However, challenges persist in certain industries like software development, gaming, and construction. Stakeholders have noted that assessments based on the criterion outlined in point (c) above can be particularly challenging, especially when it comes to determining the enforceability of an entity’s right to payment. RFI IASB seeks to understand from stakeholders in what circumstances they find determining when to recognise revenue difficult and why, and how pervasive these circumstances are. Principal versus agent considerations Background An entity determines whether it is a principal or an agent by identifying the specified goods or services to be provided to the customer and then assessing whether it controls each specified good or service before it is transferred to the customer. Initial Feedback It has been indicated that entities often encounter difficulties when applying the concept of control and its associated indicators. Stakeholders have expressed concerns regarding a lack of understanding, particularly when it comes to the concept of control in relation to services. The IASB has also been informed that some entities solely rely on the indicators to determine whether they are a principal or an agent, disregarding the concept of control. Additionally, stakeholders have noted that entities face challenges when applying the indicators in cases where they lead to conflicting conclusions or when multiple parties are involved in an arrangement. RFI IASB aims to gather insights from stakeholders regarding the challenges they face when applying the concept of control and its associated indicators. IASB is seeking to understand the specific circumstances in which these difficulties arise and their extent of prevalence. Licensing Background IFRS 15 mandates assessment of Intellectual Property (IP) license contracts for distinctness and transfer of license over time or at a point in time. Standard determines license nature: (a) right to access to IP throughout license period—satisfied over time, or (b) right to use of IP at license grant—satisfied at a point in time. Standard specifies guidelines for recognizing revenue from sales-based and usage-based royalties associated with IP licenses, limiting the recognition to when the subsequent sale or usage takes place, or when the related performance obligation is fulfilled (partially or fully). This applies when the royalties exclusively pertain to an IP license or when the license is the primary component linked to the royalties. Initial Feedback Stakeholders have raised concerns about unclear and inconsistent accounting requirements for licensing arrangements. They have requested clarification: to determine whether an arrangement is a licensing arrangement if the contract refers to licensing but is in substance similar to a sale of IP or service provision. to identify performance obligations in arrangements that include an obligation to provide goods or services as well as a licence. to account for licence renewals. Stakeholders commented that some entities recognise revenue when the renewal period starts and others recognise it when the renewal is agreed. RFI IASB seeks stakeholders’ insights on the extent, challenges, and reasons for difficulty in applying licensing requirements. Disclosure requirements Background IFRS 15 includes improved disclosure requirements to provide more useful information about revenue. Entities are mandated to disclose revenue from customer contracts, impairment losses on receivables or contract assets, contract balances, reasons for significant changes in contract asset and contract liability balances, performance obligations including when the entity typically satisfies its performance obligations and how much of the transaction price it allocates to the remaining performance obligations in a contract, significant judgments made, assets recognized from costs to obtain or fulfil a contract with a customer, and the use of practical expedients. These disclosures offer stakeholders a better understanding of an entity’s revenue nature, timing, amounts, and uncertainties, enhancing transparency and decision-making. Initial Feedback Feedback on the disclosure requirements of Standard has been mostly positive. However, stakeholders have expressed concerns regarding the potential costs of meeting certain disclosure requirements, which may outweigh the benefits for financial statement users. For example, there were concerns about the expenses associated with disclosing contract assets, contract liabilities, and remaining performance obligations. Additionally, stakeholders have noted instances where entities omit the information mandated by IFRS 15, attributing this issue to a lack of specificity in the disclosure requirements. RFI The IASB is soliciting feedback on the effectiveness of disclosure requirements in IFRS 15, seeking opinions on whether they provide useful information to financial statement users. Respondents are encouraged to identify disclosures that are particularly valuable and those that lack usefulness. Additionally, the IASB is interested in understanding if any disclosure requirements result in significant ongoing costs and the reasons behind variations in the quality of disclosed revenue information, along with potential steps for improvement. Applying IFRS 15 with other IFRSs Background IFRS 15 applies to all contracts with customers, except for lease contracts under IFRS 16, Leases; contracts within the scope of IFRS 17, Insurance Contracts (unless they primarily provide services for a fixed fee); financial instruments and other contractual rights or obligations within the scope of IFRS 9, Financial Instruments, IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures; and non-monetary exchanges between entities in the same line of business for facilitating sales. For contracts that partially fall under IFRS 15 and partially under other specified IFRS standards, an entity should follow the separation and measurement requirements of those other standards if they are specified. If those standards do not specify, IFRS 15 should be applied to separate and/or initially measure the part (or parts) of the contract. Initial Feedback IFRS 3, Business Combinations: Feedback indicates that the difference between the measurement principles in IFRS 3 and IFRS 15 poses challenges for entities when measuring contract assets and liabilities acquired in a business combination. IFRS 9, Financial Instruments: Price concession versus impairment losses: Stakeholders have raised concerns about the accounting treatment when an entity accepts lower consideration from a customer due to their deteriorated financial position. They are uncertain whether this reduction should be accounted for as a contract modification under IFRS 15, treating it as a price concession that reduces revenue, or as an impairment of receivables or contract assets under IFRS 9. Liabilities arising from IFRS 15: Stakeholders are concerned regarding uncertainties in accounting for other liabilities arising from IFRS 15, particularly if these liabilities could meet the definition of a financial liability in IAS 32, Financial Instruments: Presentation. IFRS 16, Leases: Feedback indicates that entities may encounter challenges in accounting for contracts that involve both a service component and a lease component, as there are differences between the requirements in IFRS 15 and IFRS 16. IFRS 10, Consolidated Financial Statements: Stakeholders have raised inquiries about how to account for transactions involving the sale of an asset through a subsidiary entity (corporate wrapper) as part of ordinary business activities. RFI The IASB is requesting information and evidence regarding scenarios where the application of IFRS 15 along with other IFRS Accounting Standards poses uncertainty. Transition requirements IASB seeks feedback on effectiveness of transition requirements in IFRS 15. Stakeholders are encouraged to provide insights on two key aspects: (i) entities applied the modified retrospective method or the practical expedients and the reasons behind their decisions, and (ii) whether the transition requirements achieved an appropriate balance between reducing costs for preparers of financial statements and providing useful information to users of financial statements. 1 IASB is an independent standard-setting body of IFRS Foundation, responsible for developing IFRS. This article contains material from publicly available documents of the IASB. Authors may be reached at: asb@icai.in and eboard@icai.in

India’s financial inclusion is burgeoning, thanks to the ubiquitously dynamic and quick expansion of digital payments ecosystem. The JAM (Jan Dhan, Aadhaar, and Mobile) trinity, which amalgamated the sovereign initiatives of Jan Dhan and Aadhaar with low-cost mobile and data, has played a significant role in economically empowering the unserved and underserved population, especially through Government to Person (G2P) payments. The potentialities of digital payments and G2P payments were accentuated by COVID 19 pandemic crisis, bringing to the fore not only the digital financial services but also their crucial contribution to the achievement of the Sustainable Development Goals. The paper discusses the usage of G2P payments as an instrument for empowering the hitherto unserved masses, and proposes a conceptual framework in consonance with the Payments Vision of Reserve Bank of India that are adaptable and replicable by the emerging markets and developing economies (EMDEs). Introduction Payment systems enhance financial inclusion, economic growth, and financial stability. One of the key strategic objectives and goals of the Reserve Bank of India has been to ensure reliable, accessible, inexpensive, and safe payment systems. Quite a few payment systems have developed over the past ten years, all for the convenience of the average person with increased degree of confidence, thanks to numerous safety and security measures. From being a regulator, operator, and facilitator, the Reserve Bank of India’s (RBI) responsibility has evolved to include creating a framework for the planned growth of India’s payments ecosystem. Since 2001, the Payments Vision documents of the RBI have provided the strategic direction and action plan for this development. Indian payment systems process over 26 crore digital payments per day, of which the Unified Payments Interface (UPI) system handles more than two-thirds. The COVID 19 pandemic has caused a significant behavioural shift in the industry and society at large towards making, accepting, and enabling digital payments, and brought to light the innumerable advantages of Digital Financial Services (DFS) in perpetuating digital financial inclusion and advancing Sustainable Development Goals (SDGs). The steps already taken in the direction of increased outreach, customer centricity, cyber security, and digital deepening got further consolidated in the journey to realise the Payments Vision 2025 through the five pillars of integrity, inclusion, innovation, institutionalisation, and internationalisation. Utilizing India’s initiatives and building on G-20 priorities, Payments Vision 2025 aims to improve cross-border payments by not only tackling the four main issues of cost, speed, availability, and transparency, but also achieving the envisioned goal of complete financial inclusion in the economy by 2030. The paper discusses the conceptual framework that can act as modus operandi for easy adoption and replication of G2P payments in economically empowering the unserved masses of the EMDEs. “The Reserve Bank of India makes several efforts to be customer-centric in all of its initiatives, and as consumer confidence rises, these efforts become more and more important.” Theoretical background / Literature Review The Consultative Group to Assist the Poor (CGAP) has defined Digital Financial Inclusion “as digital access to and use of formal financial services by excluded and underserved populations. Such services should be suited to the customers’ needs and delivered responsibly, at a cost both affordable to customers and sustainable for providers”. Pickens, et al., (World Bank Document, CGAP-DFID, 2009) have stated that giving financial services to underprivileged G2P recipients could increase the payments’ positive development effects. An increasing amount of research demonstrates that Digital Financial Services (DFS) help the underprivileged live better, resist shocks, develop resources, and connect to larger economy as citizens that are more privileged. Breloff and Rotman (CGAP, 2011), in their study, have discussed the potentialities of G2P payment schemes in not only providing access to the financially deprived or unbanked beneficiaries, but also channelizing consistent flow of money in financial accounts, thus promoting Digital Financial Inclusion via branchless banking. Klapper & Singer (2017) and Hendriks, (2019) had clearly suggested that G2P digitalization must be supplemented by initiatives to improve the beneficiaries’ financial capacity who are new to DFS. Four core competencies that can be included by policymakers when developing effective financial education programmes to boost financial capability for adoption of digital technologies are viz.: familiarity with digital financial products and services; awareness of digital financial risks (online fraud, digital footprint, over-borrowing); and control of digital financial risks (securing PIN, account, and other personal information; avoid spam, phishing, etc.); and awareness with respect to consumer rights. A wide spectrum of audiences should be able to access these programmes via both digital and non-digital distribution methods. According to Pazarbasioglu, et al., (2020), the economic empowerment in the Indian sub-continent was championed by the development of the digital ecosystem, supported by the “India Stack,” a government-led digital infrastructure built on a collection of APIs (Application Programming Interfaces), which made it possible to make presence-free, paperless, and cashless digital payments. India Stack is unique wherein the five fundamental components of the digital infrastructure, viz., the biometric identification database, a virtual payment streamlined address, digital payments interoperability, a digital locker to securely store copies of documents to share with service providers, and an e-consent system are harmoniously interconnected and function together to enhance user experience. According to Madan, N. (2022), social protection measures had been either planned for, or put into action in 222 nations or territories, as a response to the COVID-19 pandemic as of December 2020. Various forms of social insurance, labour market policies, and social aid were among them. For East Asia and the Pacific, social assistance measures made up 55% of the measures, while in South Asia they made up 70%. Three components—a unique ID (ideally digital with biometrics), socioeconomic databases connected to the unique ID, and a digital delivery channel—are suggested as the foundation of an efficient G2P system, based on the lessons learned from the quick scale-up of G2P systems in various nations. G2P payments in India A major enabler of financial inclusion and a catalyst for the growth of the nation’s digital payments ecosystem can be found in well-designed programmes to switch social benefit transfers from cash payments to direct credit to a transaction account in the recipient’s name. (Banerjee, 2016) The Business Correspondent aided model of the Reserve Bank of India for facilitating digital payments through micro-ATMs has also led to a large increase in the Aadhaar-enabled Payment System (AePS) usage. Studies have shown that government efficiency had increased by plugging leaks and lowering operating costs when G2P payments, such as social assistance transfers, moved from cash disbursements to direct deposit into transactional accounts of the recipients (Singh, 2018; Agur et al., 2020 and Pazarbasioglu, et al., 2020). Thanks to the Aadhaar Payment Bridge System (APBS), which has more than 131 crore Aadhaar card holders, Direct Benefit Transfers (DBTs) or Government to Person (G2P payments) have been made easier to include into digital payment systems. Cook, W., & Raman, A. (2019) in their report stated that the start of a typical bulk payment transaction via APBS, such as a G2P payment, occurs when the payor’s bank sends the pertinent payment files to NPCI (Figure 1). To determine which banking institution should receive the payment, address translation is done against the mapping table. The appropriate Aadhaar-enabled account at the appropriate bank then receives the funds. Figure 1: G2P bulk payments transaction using Aadhaar Payments Bridge System (APBS) Workflow Stages: Payee List: Bulk payer prepares payee list with Aadhaar numbers and submits to Acquiring Bank. Bulk Transaction Request: Acquiring Bank sends bulk transaction request (Payee list) to NPCI. Address Translation: NPCI performs address translation using the NPCI Mapping Table to identify recipient bank accounts linked to Aadhaar. Payment Credits: NPCI transmits payment credits to Issuing Banks (Issuing Bank 1, Issuing Bank 2, Issuing Bank 3). Funds Credited: Issuing Banks credit payment into Aadhaar enabled transactional accounts of Customer 1, Customer 2, and Customer 3. Source: Cook, W., & Raman, A. (2019). National Payments Corporation of India and the remaking of payments in India. Consultative Group to Assist the Poor Working Paper. The role of G2P payments in economic empowerment – the proposed conceptual framework In order to maintain the Reserve Bank’s strategy of providing consumers with a seamless digital payment experience as this transition towards a less-cash and less-card society progresses, a concurrent expansion in the basket of digital payment choices with credibility and confidence is necessary. Additionally, this will strengthen India’s status as the world leader in the field of digital payments. The Payments Vision 2025 statement also aims to handle potential risks emerging out of any unfavourable situation that may happen, taking into account the present geopolitical trends around the world. The five anchor goals of Integrity, Inclusion, Innovation, Institutionalization, and Internationalization have been enshrined in the Payments Vision 2025 document. The key to surviving and recovering from the changing threat landscape would continue to be resilience to operational and security problems. For the sake of bolstering consumer confidence, the integrity of payment systems would be of utmost priority for designing of the E-payments framework for economic empowerment of everyone, everywhere, every-time. The Reserve Bank of India has therefore, strategically envisioned six attributes for the success of E-payments including G2P payments, ‘providing every user with Safe, Secure, Fast, Convenient, Accessible, and Affordable e-payment options.’ “The Payments Vision 2025 of the Reserve Bank of India aims to advance our payment infrastructure significantly so that customers are empowered with convenient and low-cost payment choices that are available whenever and wherever they want them.” Figure 2: Conceptual Framework of G2P payments with Goalposts of Payments Vision 2025 of RBI ECONOMIC EMPOWERMENT THROUGH E-PAYMENTS AND G2P PAYMENTS: FIVE GOALS STRATEGY FRAMEWORK SAFE | SECURE | FAST | CONVENIENT | ACCESSIBLE | AFFORDABLE 1. Integrity Usage and relevance of Legal Entity Identifier (LEI) in all payment activities Enhance scalability and resilience of payment systems Online Dispute Resolution (ODR) and Central Payments Fraud Information Registry (CFPIR) system for fraud monitoring and reporting 2. Inclusion Geo-tagging of digital payment infrastructure and transactions Enhancements to Cheque Truncation System (CTS), including One Nation One Grid clearing and settlement Regulation of Big-Techs and Fin-Techs in payments space Extend Internal Ombudsman Scheme to all Payment System Operators (PSOs) 3. Innovation Framework for IoT & context based payments Migrate all RBI-operated payment system messages to ISO 20022 standard Link credit cards to UPI and Create payment system for processing online merchant payments using internet / mobile banking Frame guidelines on payments involving Buy Now Pay Later (BNPL) services 4. Institutionalisation Payments Advisory Council (PAC) to assist Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) Active engagement and involvement in international fora (discussions of standard-setting bodies) 5. Internationalisation Global outreach of RTGS, NEFT, UPI and RuPay cards Adoption of structured Financial Messaging System (SFMS) and INFINET frameworks Introduction of Central Bank Digital Currencies (CBDCs) – Domestic and Cross-Border Two Factor Authentication (2FA) for cross-border card transactions Source: Reserve Bank of India Payments Vision 2025 and Authors Conclusion The paper has discussed the theoretical perspectives of digitizing G2P payments; a significant instrument in boosting digital financial inclusion and economic empowerment of masses, thereby progressing the charter of the Indian economy towards sustainable development. The five goals strategy conceptual framework discussed in the paper for E-payments, primarily, G2P payments can definitely act as a modus operandi for the EMDEs in scaling the frontiers of economic empowerment and digital financial inclusion of their unserved and underserved sections of the population, especially women recipients. Prima facie, this requires EMDEs to scale substantial investment in establishing a suitable physical payment infrastructure, offer proper framework for financial consumer protection, and educate their masses about the ubiquitous utility and potentiality of digital financial services, thereby achieving the most coveted UN Development goal of holistic financial inclusion and sustainable development in their economies. References Agur, I., Peria, S. M., & Rochon, C. (2020). Digital financial services and the pandemic: Opportunities and risks for emerging and developing economies. International Monetary Fund Special Series on COVID-19, Transactions, 1, 2-1. Banerjee, S. (2016). Aadhaar: Digital inclusion and public services in India. World Development Report, 81-92. Breloff, P., & Rotman, S. (2011). An overview of the G2P payments sector in India. CGAP, September. Cook, W., & Raman, A. (2019). National Payments Corporation of India and the remaking of payments in India. Consultative Group to Assist the Poor Working Paper. Hendriks, S. (2019). The role of financial inclusion in driving women’s economic empowerment. Development in Practice, 29(8), 1029-1038. Klapper, L., & Singer, D. (2017). The opportunities and challenges of digitizing government-to-person payments. The World Bank Research Observer, 32(2), 211-226. Madan, N. (2022) Enhancing Digital G2P Transfer Capacities in Asian LDCs: Findings from Afghanistan, Bangladesh, Bhutan, Cambodia, Lao People’s Democratic Republic, Myanmar, Nepal, and Timor-Leste. Pazarbasioglu, C., Mora, A. G., Uttamchandani, M., Natarajan, H., Feyen, E., & Saal, M. (2020). Digital financial services. World Bank, 54. Pickens, M., Porteous, D., & Rotman, S. (2009). Banking the Poor via G2P payments. Focus Note, 58. Singh, Charan, India since Demonetisation (2018, March 28). IIM Bangalore research paper No. 567. Author may be reached at: eboard@icai.in

“A Chartered Accountant has an important role in our economy. On CA Day, best wishes to all Chartered Accountants. May they keep working hard in furthering growth and transparency in the economy.”— Prime Minister Narendra Modi on 1st July 2022The Economy-Accountancy NexusIt is a matter of common knowledge that no economy can thrive or sustain itself without robust financial management. To build a credible economy, the facets of governance in terms of accountability, transparency and credibility must be upheld across various sectors contributing to the Gross Domestic Product. No other profession can boast of a more proximate nexus with an economy of a nation than the accountancy profession, which got chartered by the Government in 1949, even before India became a Republic. We must, therefore, play an active role in catalysing reforms and creating values so that India emerges as a strong economic power in the Comity of Nations.Transformative Growth Trends: Demographics & RolesThe profession has grown with a creamy layer of youth entering its fold, thereby bringing down the average age of the profession:Surge in Women Chartered Accountants: The entry of girl students into the CA curriculum has been accelerating over the last two decades, resulting in a sizable growth in women CAs. In 2000, the women CA population was hardly 8% of the total membership of ICAI. Whereas, now it is 29% as 1,05,275 women CAs are among the total strength of 3,67,429 members.Shift from Practice to Industry: During the 1980s, CAs holding a certificate of practice (COP) constituted over 75%, whereas those in Industry were hardly one-fourth. However, today about 58% (2,11,769) are not holding COP (in Industry / corporate roles) and those in practice are only 42% (1,55,660).C-Suite & Governance Leadership: Many of our members have risen to CFO, CEO, and top corporate leadership roles. Instead of merely playing the number-crunching role, CAs have evolved as strategic thinkers and decision-makers. Many members, both men and women, serve on Company Boards as Independent Directors and invariably head Audit Committees. Notably, the Reserve Bank of India (RBI) has mandated that only a person with a Chartered Accountant qualification can be a CFO in Banks.Knowledge and Skills: Sustained PedallingThe accountancy profession today stands on the threshold of dynamism and change. We need to be diligent in knowledge management and innovation. Any laxity in this regard on our part could be fatal. The Government, regulators, society, and clients expect the profession to take proactive measures for knowledge updating and skill upgrading.“The accountancy profession today stands on the threshold of dynamism and change. We need to be diligent in knowledge management and innovation.”In the core areas of our practice, such as the assurance function and the non-core areas, such as consultancy/advisory functions, we need to be empowered consistently. Any inaction can create a void that those outside our profession will fill. John F Kennedy once said that there are risks and costs to action, but they are far less than the long-range risks of comfortable inaction. Practising the accountancy profession is like riding a bicycle, and continuing professional education is akin to sustained pedalling. Needless to mention, that one only falls off if he stops pedalling.Quality in service delivery leads to excellence, which is a definite attribute that paves the way for the growth and development of the profession. However, there are limits to the excellence we can achieve on a narrow base. The profession must innovate and re-engineer itself to a new trajectory of divergence and efficiency, evolving new products, services, systems, procedures, and methodologies to maximise utility while minimising cost.The Digital Era: Technology Supplements, Cannot Substitute AuditorsWe need to embrace technology and use tools and gadgets to improve the quality and efficiency of our service delivery. As Charles Darwin mentioned, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” We need to stay relevant in the digital era that has come to be known for disrupting business practices. Digitisation can disrupt accountants’ routine, repetitive, and mundane tasks as automated mechanisms usurp them.“We need to embrace technology and use tools and gadgets to improve the quality and efficiency of our service delivery.”However, audits cannot be substituted by mechanised systems as technology can support and supplement audits but can’t substitute auditors. Automation cannot replace the audit function because the auditor’s scepticism, diligence, and professional judgement, duly backed by an intuitive common-sense approach, cannot be factored within artificial intelligence under any circumstances. These virtues are inevitable in ensuring comprehensive reporting and appropriate disclosures to stakeholders. Consequently, despite digitisation, the audit function will sustain itself forever.Digitisation facilitates enhanced data accuracy and seamless information flow during audit functions. Data analytics enables audit professionals to draw findings and reach conclusions with precision and speed, even across enormous volumes and geographical spreads of client operations, achieving cost competitiveness and scale.Contribution on ESG (Environmental, Social & Governance)Measuring financial results is comparatively straightforward, and so is the reporting function. But measuring contribution to and performance on ESG parameters is challenging. The intent behind ESG reporting is to ensure corporates care for the planet (environment), care for people (social), and earn profit only through good governance by adhering to regulatory and ethical frameworks.The original prescription of Business Responsibility Reporting (BRR) has evolved into Business Responsibility and Sustainability Reporting (BRSR), introduced by SEBI in 2021, grounded on the nine principles of the National Guidelines for Responsible Business Conduct (NGRBC). Internationally, standards include Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and the Taskforce on Climate-related Financial Disclosures (TCFD). CAs in corporate and internal audit roles can lead by establishing metrics, processes, and controls for verified ESG data collation.Capacity Building: Mandatory Joint Audits for Listed EntitiesAlthough Indian CA firms are growing in a calibrated manner, very few have a national presence with partner strength beyond 20. Most firms, including LLPs, are small and medium-sized (SMPs). These firms do not get exposure to handle large corporates, cannot invest in scaling infrastructure, and require support to enter sunrise services.“ICAI should focus on capacity building in the accounting profession, and one such area is empowering small and medium-sized firms and enabling the consolidation of such firms to scale up.”To achieve this, it would be prudent to enable the appointment of a small or medium-sized firm and a large firm as joint auditors for listed companies above a certain turnover threshold. In other words, the Joint Auditors’ concept prevalent in Public Sector Undertakings (PSUs) and Banks should be formally extended to listed entities. Further steps include:Providing centralized knowledge portals with checklists and templates for SMPs.Organizing intensive practical workshops in emerging specialized practice areas.Encouraging firm networking, consolidation, and mergers by eliminating statutory deficiencies.Global Reach: Creating the "Big 8" with Indian Global NetworksICAI must take initiatives to enable Indian firms to go global. Many firms are ready to expand into overseas jurisdictions directly or through network mechanisms, but regulatory shackles must be modernized to facilitate seamless establishment abroad. If an Indian firm joins a global network strictly for knowledge-sharing without capital infusion, foreign control, or profit repatriation, such affiliations must be encouraged.Furthermore, Indian firms must be empowered to pioneer and establish global accounting networks headquartered in India. As the Hon’ble Prime Minister suggested on CA Day (1st July 2017), the present BIG 4 should become BIG 8, and at least 4 Indian CA firms should emerge as global leaders.The Challenging VUCA Environment & Regulatory OversightThe business environment has transformed into a VUCA world (Volatility, Uncertainty, Complexity, and Ambiguity). The individual value system is degenerating due to greed, leading to corporate scams and flouting of governance where least expected. Society tends to believe that an audit should unearth all frauds, blurring the distinction between an investigation and an audit and widening the expectation gap.Beginning with the Satyam case, followed by Punjab National Bank (Nirav Modi) and IL&FS, auditor accountability has faced unprecedented scrutiny:Companies Act, 2013 & Class Action Suits: Section 245 empowers shareholders with class action suits against both management and auditors.Firm-Level Liability: Under Section 147(5), the entire audit firm can suffer consequences for lapses in the audit function, not just the signing partner.NFRA Scrutiny: The National Financial Reporting Authority (NFRA) aggressively penalizes audit lapses and gross negligence. While members must bridge the performance gap, ICAI must take proactive measures to close the expectation gap.Value Systems & Ethical AnchorICAI must periodically advise the Government on corporate governance policy reforms. However, law alone cannot prevent fraud — if changing laws prevented fraud, corporate scams would have ceased in the US following the Sarbanes-Oxley Act (SOX). Instead, scams continued on a massive scale.As Mahatma Gandhi said, “There is enough for everyone’s needs but not for anyone’s greed.” Fraud persists when human desire breaches sanity. Effective deterrence requires speedy investigation, fast-track trials, and stringent punishment under zero tolerance for unethical conduct.Lord T.B. Macaulay observed: “The measure of a man’s real character is what he would do if he knew he would never be found out.” Ability may take a professional to the top, but staying there requires character and integrity; otherwise, the fall is destructive. In innovation and technology, one should swim with the current, but in values and principles, one should stand like a rock.ConclusionAs we continue our glorious journey, we must adapt to unfolding socio-economic changes. As French philosopher Jean-Paul Sartre noted, we have no destinies other than those we forge. We must safeguard the goodwill our forefathers built over 75 years, actively partnering in nation-building for a credible economy. Functioning with independence, excellence, and integrity, we have the potential to emerge as the profession of the future.Author may be reached at: eboard@icai.in

Climate change is now being recognised as an issue of national importance. The urgent need to address this issue requires efforts from all sectors of the society. The Paris Agreement, UN Climate Change Conference in Glasgow, adoption of Sustainable Development Goals are some of the concrete steps towards this direction. The government and other regulatory bodies are also making strong guidelines to strengthen sustainability reporting practices followed by corporate world. CSR Policy, NGBRCs principles, BRR, BRSR, SRMM are some of the key policies and guidelines issued in this direction. The objective of this paper is to review the key initiatives taken by ICAI in the direction of strengthening sustainability reporting practices in India. Introduction Today, Climate change discussions are a central focus for governments, environmentalists, regulatory bodies, scientists across the globe as climate change is a global emergency that goes beyond national borders. The need for action on climate change has never been greater, and there is a growing recognition that addressing climate change requires a collective effort from all sectors of the society. The Paris Agreement was a landmark in the multilateral climate change process for the first time it bought all nations together into a binding agreement to combat climate change and adapt to its effects. (The Paris Agreement, 2023). It played a crucial role in addressing climate change by setting ambitious goals, encouraging participation, promoting transparency, mobilizing finance and fostering cooperation. The agreement was adopted by 196 parties at the UN Climate Change Conference (COP21) in Paris, France on 12 December 2015. India ratified the agreement on 2nd October 2016, and its commitments are called the National Determined Contributions (NDCs). (Climate Change, 2016) This was followed by another key UN Climate Change Conference in Glasgow (COP26) which bought together 120 world leaders to agree on how to step up global action and solve climate crisis. (Climate Action, 2017). This was a key moment for India as Prime Minister Shri Narendra Modi made the pledge, to achieve net zero emissions by 2070 for India. (COP26 Summit in Glasgow, n.d.) The Prime Minister of India presented the five nectar elements, Panchamrit, which will be an unprecedented contribution of India to climate action. Panchamrit: India’s Five Nectar Elements for Climate Action India will reach its non-fossil energy capacity to 500 GW by 2030. India will meet 50 percent of its energy requirements from renewable energy by 2030. India will reduce the total projected carbon emissions by one billion tonnes from now onwards till 2030. By 2030, India will reduce the carbon intensity of its economy by less than 45 percent. By the year 2070, India will achieve the target of Net Zero. The United Nations General Assembly adopted the 2030 Agenda for Sustainable Development and 17 Sustainable Development Goals (SDGs) as a universal and transformative development strategy. (Sustainable Development Goals, 2017). The 2030 Agenda commits to the global community to “achieve sustainable development in its three dimensions — economic, social and environmental—in a balanced and integrated manner”. (The SDGs in Action, n.d.) Building a sustainable and robust economy requires a shift in corporate business models, a reoriented and mobilized financial system under a regulatory system that promotes transparency and incentivizes action. Recognising the need of the hour, numerous developments have taken place in the Indian Regulatory scenario through significant policy changes to keep in line with global sustainability trends. Objective The objective of the paper is as follow: To study the evolution ESG Reporting framework in India. To review the policy guidelines and frameworks issued by SEBI and ICAI for strengthening the ESG reporting landscape. Methodology The paper presents a descriptive review of sustainability reporting practices followed in India with reference to various initiatives taken by ICAI and SEBI. It reviews the role of ICAI in the sustainability movement of India. Key Regulatory Changes in Sustainability Reporting It’s interesting to see how the ESG landscape in India is evolving at a rapid pace with the increasing awareness of environment, social, and governance aspects among Indian companies, regulators, and investors. The government and regulatory bodies have introduced various guidelines and regulations over time to address and strengthen sustainability reporting on each aspect of ESG. The Ministry of Corporate Affairs released the Voluntary Guidelines on Corporate Social Responsibility in 2009, (CSR 2009) which initiated the disclosures on CSR Projects and social aspect of ESG. Subsequently, in 2011, the Ministry released National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business to strengthen the governance structure of corporates. A significant step was taken in 2012 when SEBI mandated the Business Responsibility Report (BRR) for the top 100 listed companies as per The Listing Agreement. (SEBI, 2012). The BRR provides a comprehensive framework for companies to report on their ESG performance and was aimed at enhancing transparency and accountability. In 2015, SEBI further extended the mandate of BRR to the top 500 companies, (SEBI, 2019) thereby bringing more companies under its ambit. This move is expected to drive ESG integration and promote sustainable practices among Indian corporates. Business sustainability guidelines in India have been continuously evolving to meet the dynamic business environment in the country. All the above initiatives were important steppingstones towards strengthening of sustainability reporting. These two key Initiatives were important upgrades in building a strong foundation for sustainability reporting for corporates in India. NVG Guidelines Upgraded to NGRBC in 2019 Revisions were made in the NVG Guidelines to make them more comprehensive and of global standards into National Guidelines on Responsible Business Conduct (NGRBC). These now covered the key 9 principles for responsible business conduct and were inspired from UN Guiding Principles for Business and Human Rights (UNGP) and UN Sustainable Development Goals (SDG). BRR Revised to BRSR in 2021 In the backdrop of global developments and the increasing focus on sustainability investing, the existing BRR was radically enhanced to Business Responsibility and Sustainability Report BRSR for ESG-related reporting in May 2021. The BRSR is a notable departure from the existing BRR and set a significant step towards bringing sustainability reporting at par with financial reporting. Further, companies will be able to better demonstrate their sustainability objectives, position and performance resulting into long term value creation. Overall, the evolution of the ESG landscape in India is a positive development, and it is heartening to see the efforts being made by various stakeholders towards promoting sustainable and responsible business practices in the country. Business Responsibility and Sustainability Reporting (BRSR) – Represents a New Era of Sustainability Reporting in India As per Gazette notification no. SEBI/LAD-NRO/GN/2021/22 dated May 05, 2021, SEBI has introduced new reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report (BRSR). (SEBI, 2021). BRSR has been benchmarked and adopts the United Nations Sustainable Development Goals (UN-SDGs) and other global ESG reporting frameworks to make the reporting more comprehensive and effective for business and investor community. The National Guidelines on Responsible Business Conduct (NGRBC) suggest two versions of BRSR reporting – “Comprehensive” and “Lite”. (mca.gov.in, 2020). The Comprehensive Version of reporting is for listed organizations, while the Lite Version is for unlisted companies. The Reporting under BRSR comprises of three sections: General Disclosures (Mandatory): Focuses on the general disclosures at the company level like details of entity, products & services, operational and employee details. Management and Process Disclosures (Mandatory): Focuses on policy and governance level questions to demonstrate the structure, policies and processes put in place towards adopting the NGRBC Principles and Core Elements. Principle-wise Disclosures: Integrating Principles and Core Elements with key processes and decisions. This is divided into: Essential Indicators (Mandatory) Leadership Indicators (Voluntary) The BRSR is intended towards having quantitative and standardized disclosures on ESG parameters to enable comparability across companies, sectors and time. Such disclosures will be helpful for investors to make better investment decisions. The BRSR shall also enable companies to engage more meaningfully with their stakeholders, by encouraging them to look beyond financials and towards social and environmental impacts. SEBI Board Meeting Announcements on Balanced Framework of ESG The Securities and Exchange Board of India (SEBI) approved the Balanced framework for ESG (Environmental, Social and Governance) disclosures, ratings and investing on March 29, 2023. On ESG Disclosures, the market regulator has mandated introduction of BRSR (Business Responsibility and Sustainability Report) Core to enhance the reliability of ESG disclosures. The BRSR will contain a limited set of Key Performance Indicators (KPIs), for which listed entities will be required to obtain “reasonable assurance”, a SEBI release said. “A glide path is prescribed for applicability of BRSR Core, beginning with the top 150 listed entities (by market capitalization) from FY 2023.” (Balanced ESG Framework, 2023). A brief snapshot is shared in the table below: Table: Balanced ESG Framework (SEBI Board Meeting, March 29, 2023) Key ESG Decisions BRSR Core ESG Ratings ESG Disclosure for Value Chain Partners ESG Investing Key Objective The BRSR Core contains a limited set of Key Performance Indicators ESG Rating parameters as per India / Emerging Market Parameters ESG Disclosures & Assurance will be introduced for Value Chain of listed entities with certain thresholds To address risk of mis-selling and greenwashing and promote ESG Investing Applicability Applicable to top 150 listed entities by market cap from FY 2023-24, which will be extended to 1000 entities by FY 2026-27 ERP will offer separate category of ESG Ratings called “Core ESG Ratings” Applicable to top 250 listed entities as per market cap from FY 2024-25 and FY 25-26. Mandating ESG schemes to invest 65% of Assets under management (AUM) in listed entities where BRSR Core is Assured Assurance Reasonable Assurance Based on the assured parameters under BRSR Core On a comply or explain basis Mandatory third-party Assurance and certification by BOD on compliance Stellar Role Played by ICAI in Sustainability Movement in India ICAI has been actively promoting sustainability reporting in India through various initiatives. One of the leading initiatives was establishment of Sustainability Reporting Standards Board (SRSB) in February 2020, with the aim of formulating comprehensive, globally comparable, and understandable standards for measuring and disclosing non-financial information about an entity’s progress towards the United Nations Sustainable Development Goals (SDG) 2030. SRSB has been working relentlessly to identify and develop opportunities for Chartered Accountants in Sustainability Reporting, taking adequate steps to enhance knowledge of members and other stakeholders by conducting workshops, seminars, and courses, publish technical literature on various topics within sustainability domain. Sustainability Reporting Standards Board has been actively interacting with International and National Bodies as well as Regulators to promote policies and regulations towards achieving sustainable development. Some key initiatives taken by the Institute of Chartered Accountants of India, have been elaborated below– which will serve as a great knowledge repository for various stakeholders - corporates, regulatory bodies, social organizations, professionals who embark on the journey of Sustainability Reporting. 1. Standard on Sustainability Assurance Engagements (SSAE) 3000 This Standard on Sustainability Assurance Engagements (SSAE) 3000 deals with assurance engagements on an entity’s sustainability information. SSAE 3000 is an umbrella standard applicable to all assurance engagements on sustainability information. In case there is subject matter information to which a specific assurance standard applies (e.g. GHG emissions), SSAE 3000 will apply in addition to the subject matter specific standard (e.g. SAE 3410). This standard provides that an assurance engagement may be either a reasonable assurance engagement or a limited assurance engagement; and SSAE 3000 deals with both these types of assurance engagements. The effective date of application of SSAE 3000 is as follows: Voluntary basis: for assurance reports covering periods ending on March 31, 2023. Mandatory basis: for assurance reports covering periods ending on or after March 31, 2024. 2. 16 Social Audit Standards (SAS 100 to 1600) Since our social sector plays a significant role in social and economic development of India, a Social Audit Framework has been defined by Institute of Chartered Accountants of India. The Framework has 16 Audit Standards with the objective of defining elements of a social audit performed by social auditors and the guidance for an independent impact assessment. A social audit helps to ensure that social enterprises are fulfilling their intended purpose of contributing to social and economic development, and that they are doing so in a transparent and responsible manner. This Framework defines and describes the elements and objectives of a social audit for: Social auditors when performing social audit i.e., social impact assessment of project/program executed by social enterprises. The responsible party, the engaging party, if any, and other stakeholders who are the intended users of social audit report. Overall, this framework and the Social Audit Standards provide a valuable tool for promoting social responsibility and accountability in India’s social sector. 3. Business Responsibility and Sustainability Reporting Back Testing ICAI and SEBI collaborated on a joint initiative to back test the key performance indicators (KPIs) of the Business Responsibility and Sustainability Reporting (BRSR) Core with eight listed companies from diverse sectors. By validating the readiness of data availability against the parameters defined in the BRSR framework, this initiative helped to strengthen and standardize the information and parameters reported by companies. The analysis of sub-parameters from annual reports, integrated reports, and BRSR reports by a technical team provided valuable insights into the reporting practices of the companies involved. Such testing processes are crucial in ensuring the reliability and comparability of sustainability reports and can help to build trust with stakeholders. 4. Sustainability Reporting Maturity Model (SRMM) Framework Based on the BRSR scoring mechanism, a “Sustainability Reporting Maturity Model” has been developed which is an innovative solution and offers the possibility for each corporate complying with BRSR to individually assess its position vis a vis various sustainability reporting maturity levels and achieve its vision of sustainable business. Level 1, Level 2, Level 3 and Level 4 of Sustainability Maturity of corporates have been defined based on total range of scores obtained by a corporate in a financial year as per the BRSR scoring mechanism. Each maturity level portrays the present level of sustainability reporting and where a new cycle of reporting starts towards a higher level of sustainability reporting. Further, corporates can self-evaluate their current level of maturity on the Sustainability Reporting Maturity Model, identify areas where more focus is required, and develop a road map for upgrading to a higher level of maturity. This would include formulation of strategies/ processes for internal controls and data collection to progress towards achievement of sustainable goals and thereby moving to higher level of sustainable reporting. 5. ICAI International Sustainability Reporting Awards The ICAI International Sustainability Reporting Awards were introduced in 2020-21 to recognize entities for their outstanding contribution to Sustainable Development Goals. The objective of the awards was to encourage excellence in sustainability reporting by entities, both corporate and non-corporate, and to share best practices with investors and other stakeholders. The awards are open to entities from all over the world and aim to provide a platform for sharing initiatives and innovative practices towards the attainment of the 2030 Agenda for Sustainable Development. The awards recognize entities that have made significant efforts in sustainability reporting and have demonstrated a commitment to sustainability in their operations and practices. Sustainability reporting is a process of disclosing an organization’s economic, environmental, and social impacts, and how it is managing those impacts. Such reporting is becoming increasingly important as investors and other stakeholders are demanding more information on how organizations are addressing sustainability issues and contributing to sustainable development. Overall, the ICAI International Sustainability Reporting Awards are a significant step towards promoting sustainability reporting and encouraging entities to adopt sustainable practices, contributing towards the global efforts to achieve the Sustainable Development Goals. 6. Certificate Course on Business Responsibility and Sustainability Reporting (BRSR) Business Responsibility and Sustainability Reporting (BRSR) is an update on the existing Business Responsibility Reporting (BRR) which incorporates the current global practices in sustainability reporting based on the National Guidelines for Responsible Business Conduct (NGRBCs). Business Responsibility and Sustainability Reporting (BRSR) is becoming increasingly important as stakeholders, including investors, customers, and regulators, are placing greater emphasis on companies’ environmental, social, and governance (ESG) practices. The BRSR Certificate course focuses on global trends in corporate sustainability reporting and trains members on current BRSR requirements with examples from existing organisations and emerging best practices. 7. Training course on Social Audit for NISM: Social Auditors Certification Examination This training course has been recently launched to provide a comprehensive understanding of social audit, which is a process of evaluating and reporting on the social impact of an organization’s activities. The Course has been designed to impart knowledge on Social Audit to a potential pool of social auditors and prepare them for NISM Certification Exam who would be responsible to assess the impact of social interventions of various social enterprises. The course has case studies and illustrative examples which will be an effective way to enhance participants’ understanding of the practical applications of social audit. This course appears to be a valuable resource for anyone interested in becoming a social auditor or improving their understanding of social audit. Social audit can help social enterprises to demonstrate their impact and improve their social performance, which can lead to greater accountability and transparency. India’s path towards net zero in 2070…continues India is making a deliberate and conscious effort towards this goal, and it recognizes the importance of addressing climate change and achieving sustainability. India is fully committed to achieve Net Zero on carbon emissions by 2070 and a lot of efforts have been initiated in that direction. There are still many challenges and key decisions which are being worked upon to define a clear Road Map towards achieving Indian SDG Goals and Targets. Conclusion While there has been significant momentum in regulatory, professional, corporate, and social organizations towards sustainability reporting, there is a lot more effort that will continue to go in providing more clarity, guidance and standardization in various aspects of ESG reporting. This is important to prevent the risk of Greenwashing and ensure transparency in climate disclosures. ICAI recognizes the critical role of accountants and auditors in promoting transparency, ethical reporting, and accountability in organizations towards sustainability. As an esteemed professional body, ICAI is fully committed to contribute on the conscious path towards a sustainable future for India. Bibliography COP26 Summit in Glasgow. (n.d.). Retrieved from pib.gov.in: https://pib.gov.in/PressReleasePage.aspx?PRID=1768712 (2020, May 08). Retrieved from mca.gov.in: https://www.mca.gov.in/Ministry/pdf/BRR_11082020.pdf Balanced ESG Framework. (2023, March 29). Retrieved from livemint.com: https://www.livemint.com/market/stock-market-news/sebi-board-approves-balanced-esg-framework-prescribes-glide-path-for-top-150-listed-firms-from-fy24-11680105637131.html Climate Action. (2017). Retrieved from un.org: https://www.un.org/en/climatechange/cop26 Climate Change. (2016). Retrieved from beeindia.gov.in: https://beeindia.gov.in/en/programmesnmeee/climate-change CSR 2009. (2009, December 24). Retrieved from mca.gov.in: https://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf SEBI. (2012, November). Retrieved from sebi.gov.in: https://www.sebi.gov.in/legal/circulars/nov-2015/format-for-business-responsibility-report-brr-_30954.html SEBI. (2019, December). Retrieved from sebi.gov.in: https://www.sebi.gov.in/sebi_data/meetingfiles/dec-2019/1576469077048_1.pdf SEBI. (2021, May 06). Retrieved from sebi.gov.in: https://www.sebi.gov.in/sebi_data/attachdocs/may-2021/1620979238866.pdf Sustainable Development Goals. (2017). Retrieved from un.org: https://www.un.org/sustainabledevelopment/development-agenda-retired/ The Paris Agreement. (2023, April 27). Retrieved from unfccc.int: https://unfccc.int/process-and-meetings/the-paris-agreement The SDGs in Action. (n.d.). Retrieved from undp.org: https://www.undp.org/sustainable-development-goals Author may be reached at: mehra.pragati@rediffmail.com and eboard@icai.in

Letters of Credit are the most widely accepted tools of payment in International Trade. A key reason for its wide acceptance is that it assures the seller of “timely defined payment” and the buyer of “defined quality and quantity” of goods. This attribute makes Letters of Credit a widely accepted payment instrument in international trade because it meets the needs of both buyer and seller. Letters of credit are said to be the “lifeblood” of international sales transactions. The reason behind such an important recognition is because of its approach. In Letters of Credit sellers' objective of receiving the timely and right amount of payment is guaranteed by a financially trusted third-party bank, while the buyer's objective of receiving defined quality and quantity of goods is also guaranteed by the same third-party bank. This implies that banking channels through letters of credit assure both buyer and seller that their interests are safeguarded. The operation of a Letter of Credit provides a commitment of payment obligation to the seller if they have presented the documents as per the letter of credit. While it provides a commitment of strict documentary compliance to the buyer that payment will only be made if documents are presented as per terms of the Letter of Credit. Hence Letter of Credit enables the seller and buyer to enter into a contract with a dependable third party (bank) that assures the seller of payment and the buyer of the goods. The governing framework of letters of credit is provided by the International Chambers of commerce through its publication “Uniform customs and practise of documentary credit (UCPDC)”. Which is also referred to as UCP 600. These rules (UCP600) are comprised of 39 articles which standardise international banking practice about letters of credit. The operations of a letter of credit are based on the three core principles. 1) The principle of irrevocability 2) The principle of independence and 3) The principle of strict compliance. Hence to understand letters of credit completely in business operation as an instrument of payment, it is necessary to understand these UCP 600 rules along with three fundamental principles of letters of credit. “The working of letters of credit is governed by The Uniform Customs and Practice for Documentary Credits (UCPDC).” Introduction A certain degree of risk is involved when buying or selling anything, specifically, if you are unaware of the counterparties you are engaging with. Unanticipated circumstances might cause serious interruptions with serious financial ramifications even if you have trustworthy counterparties or associates. There are risks and options. In such circumstances facilitating the trade between counterparties', A letter of credit is often called upon to facilitate commercial transactions. Using a Letter of Credit may help both buyers and sellers save money. Using an LC, sellers and buyers may lower their risk, guarantee fast payment, and supply products or services with more security. Historians have been able to trace the use of letters of a credit back as early as ancient Egypt and Babylon. However, it was not until the eighteen and nineteen centuries that the term letter of credit became widely used and recognised. In very simple terms, a letter of credit is an irrevocable undertaking issued by an issuing bank on behalf of an applicant to a named beneficiary to make payment provided the documents stipulated in the documentary credit are presented and all of its terms and conditions are complied with. Hence a letter of credit (LC) is a document that attests to the buyer's ability to pay the seller. However, in case the buyer fails to make payment. The issuing bank will be obliged to pay the seller. These rules are prepared by the International Chamber of Commerce. These rules apply to any documentary credit or letter of credit that expressly indicates that it is subject to the rules. The first set of these rules came into force in 1933 in form of UCP 82. These rules have been revised six times to keep pace with market needs and practices, in 1951 (UCP 151), 1962 (UCP 222), 1974 (UCP 290), 1983 (UCP 400), 1993 (UCP 500) and the latest version in 2007 known as (UCP 600). Current rules UCP 600 came into effect on 1 July 2007, replacing UCP 500. These rules (UCP600) are comprised of 39 articles. These articles can be grouped into eight different categories: Scope and application of the rules (article 1) Definitions and interpretations (articles 2 and 3) Obligations and liabilities (from articles 4 to 13) Examination and dealing with documents (from articles 14 to 17) Documents including commercial invoices, transport documents and insurance documents (from articles 18 to 28) Miscellaneous Provisions (from articles 29 to 33) Disclaimers (from articles 34 to 37) Transfer and assignments (articles 38 and 39) Further, the rules under UCP 600 are binding on all parties to the documentary credit unless expressly excluded. Currently, UCP 600 is accepted by 175 countries around the world. However, these UCP 600 are rules published by the private body hence local law of land always prevail over the UCP 600 rules. The government and apex courts of all the participating countries have mandated all legal bodies to consider these rules while undertaking disputes about letters of credit. Key Principles of Letter of Credit Letters of credit derive their unique characteristics through their three key fundamental principles: 1) The Principle of irrevocability 2) The principle of independence and 3) The principle of strict compliance. 1. The principle of irrevocability This principle signifies that every letter of credit is irrevocable unless and otherwise expressively mentioned. The Irrevocability of the letter of credit stipulates that credit cannot be cancelled, nor in any way modified, except with the explicit agreement of all parties involved: the buyer, the seller, and the issuing bank. 2. The principle of independence This principle signifies that the undertaking by an issuing bank is independent and separate from the underlying contract between the buyer and the seller and also from the agreement between the buyer and the issuing bank. This principle has been cited numerous times by courts across the world to uphold the sanctity of a Letter of Credit including the US Supreme Court in the case of Sztejn v J. Henry Schroder Banking Corporation, in which the court stated that “… a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods”. 3. The principle of strict compliance Another important principle which governs documentary letters of credit is the principle of strict compliance. According to it, the documents presented under the letter of credit must strictly comply with the requirements of the credit. It is the seller who holds the responsibility of ensuring that all documents are in conformity as stipulated by the issuing bank or intermediary bank. Article 14 of the UCP 600 only strengthens the principle of strict compliance by setting a standard for the examination of documents. Fraud is also a common occurrence in documentary transactions, usually committed by the seller by presenting forged or fake documents with no underlying performance resulting in the buyer not receiving the goods. Although international courts have largely held that the obligation of the banks to honour the documentary Letter of Credit remains but in case of fraud being committed the transaction may be temporarily or permanently stopped. “The examination of the document must be done based on the documents alone, whether or not the documents appear on their face to constitute a complying presentation.” Objectives of Study To understand the letters of credit. To study the working of LC as a tool of transaction of payment. The hypothesis of the study The creditability and performance of a letter of credit significantly depend on its smooth working and applications. Research Methodology In this paper, “the researcher has adopted descriptive study methods and secondary data. The data and information which is used in the paper are drawn from reliable and creditable resources such as related books by various authors, related research papers, and various journals and articles on the Letter of Credit, Working, and Application which is available online and offline” mode. Understanding Letters of Credit It signifies that it is an obligation of issuing bank to honour the beneficiary's complying presentation as the letter of credit is issued in the form of an undertaking. On another hand, if the complying presentation is not made by a beneficiary, then his right to payment is invalid. This technical aspect creates the necessity of making the complying presentation by the seller so that buyers' needs are also addressed. To understand the letter of credit, we can divide the content of the letter of credit into various requirements and conditions. The major requirements and components can be grouped under four groups: 1) Documentary requirements 2) Shipment-related conditions 3) Payment conditions and 4) International regulatory requirements. 1. Documentary Requirements Under the letter of credit, the buyer has to frame documents which are to be presented in the letter of credit. The buyer must stipulate these required documents properly so that the required quantity and quality are very well covered through these documents. If there is an error in stipulating any documents by a buyer, then the risk of that error solely rests on the buyer and the seller will get paid even if the buyer is not satisfied. Generally stipulated documents by buyers under the letter of credit can be categorized into basic five categories: i. Financial Documents: Pro forma Invoice, Invoice, Bill of exchange etc. ii. Transport Documents: Bills of Lading, Airway Bill, Railway Receipt etc. iii. Insurance Documents: Insurance policy, Insurance certificate etc. iv. Regulatory Documents: Certificate of Origin, Licence etc. v. Testing Documents: Test certificates, Inspection certification The buyer should ensure that all the relevant documents which will enable him to prescribe the right quality and quantity of goods must be included. These documents must be specified to be presented under the letter of credit by the seller. 2. Shipment-Related Conditions Under the letter of credit, the buyer should also stipulate conditions related to the voyage of the goods from the seller's premises to the buyer's premises. The buyer must specify what type of transport is used. The general modes of transport are waterways, roadways, railways and airways. Along with modes of transport, buyers specify the port or place of shipment and the port or place of discharge or arrival. The buyer also stipulates the part shipment or full shipment of the goods. Depending upon the nature of the cargo and the requirement of buyers these shipping conditions are prescribed. The shipment-related conditions are also influenced by the political condition of the country of the buyer because local regulations in the country of the buyer may prohibit the use of ships of a certain country owing to geo-political sanctions. Hence buyers may also stipulate such restrictions on the usage of ships, shipping companies and routes of the voyage. 3. Payment Conditions Under any sales contract, payment conditions are decided on the common agreement of buyer and seller depending on the custom and practise followed in that industry. The general types of payment conditions followed in a Letter of Credit are: a. Sight payment method: Under this method buyer's bank debit, the account of the buyer and handovers the documents presented under the letter of credit simultaneously. Hence possession of goods is handed over to the buyer only after the collection of payment. b. Usance payment method: Under the usance payment method, the buyer's bank takes the acceptance on the draft from the buyer which is sent by the seller. Once the draft is accepted by the buyer than on the maturity date buyer's bank collects the payment from the account of import and remits the same to the seller's bank. Hence under usance payment method, the payment is made after an agreed period of 30 days, 60 days, 90 days or 180 days as decided between the buyer and the seller. However, there is a need to have a draft in place. c. Deferred Payment Method: Under the Deferred payment method, like the usance payment method payment is made to the seller only after the pre-agreed period. However, under this payment method, there is no requirement for the draft to be presented by the seller and accepted by the buyer. d. Payment of negotiation: Under Payment by negotiation, the seller gets immediate payment from the buyer's bank because the buyer's bank advances these funds as a loan to the seller. However, the buyer has to pay the bank only after the pre-agreed period between the buyer and seller. The interest on the loan is paid by the seller to the buyer's bank. 4. International Regulatory requirements In the current geopolitical environment very often trade relations between countries are not normal and there are sanctions imposed by various international bodies like (OSCE, EU, OFAC, FATF etc). Depending upon the location of the buyer, Seller and intermediary bodies in the letter of credit, there is always a need to insert sanction clauses in the letter of credit. These clauses prohibit the use of services of intermediaries like shipping companies, Ships, Banks etc. Hence both buyer and seller need to understand and use these sanction clauses prudently in the letter of credit. The Working of Letter of Credit “The Letter of credit is a written undertaking issued by an issuing bank on behalf of an applicant to a named beneficiary to honour the beneficiaries' complying presentation.” Any transaction using an LC involves a minimum of the following five parties: Applicant or buyer: The purchaser or buyer after having a purchase agreement in place approaches the bank to establish an LC. The applicant must provide securities in form of fixed deposits, other liquid assets, immovable assets or guarantees in favour of issuing bank. In less likely cases bank also provides an unsecured letter of credit facilities to the applicant. Applicant's bank or Issuing banks: The issuing bank after having securities in place according to the bank's internal policy examine the underlying documents and terms and condition of the letter of credit. Once the scrutiny of the application is completed banks send the letter of credit to the beneficiary through the SWIFT network in form of an MT700 message to an advising bank. Advising banks: An advising bank is one of the banks in the SWIFT network which is present in the country of the beneficiary. An advising bank checks the apparent authenticity of the received Letter of credit. After making necessary checks advising bank forwards the letter of credit to the beneficiary generally through a courier or their branch network. Advising banks also charge beneficiary with advising fees. These charges vary from bank to bank. Seller or beneficiary: The seller has to perform the obligation according to the sales contract and then prepare the documentation as per the term and conditions of the Letter of credit. Once the documentation is complete and the dispatch of goods is done. The Seller has to present the bills or documents to the seller's bank to forward them to the Letter of the credit-issuing bank. Receiving bank or beneficiary's bank: The seller's bank scrutinises the documents presented under the letter of credit. Seller bank also advised the seller if there are any apparent discrepancies present in the bills presented under the letter of credit at their counter. Once they are satisfied with the bills presented by the seller, they add the bank's covering scheduling to the bills presented. This entire set of documents is then forwarded to the Letter of the credit-issuing bank. Upon acceptance of the documents by the buyer, payment is made by Letter of the credit-issuing bank to the seller's bank. Finally, the Seller's bank credit the funds to the business account of the beneficiary. Step by Step Process of its Generation “It is the responsibility of the beneficiary to understand the terms and conditions of the letter of credit.” The seller and buyer agree on a business deal and have a sales/purchase agreement in place. A Letter of Credit is agreed upon as a payment method. The LC is requested by the buyer to his bank. Buyer's bank issues a Letter of credit to a beneficiary upon request of the buyer. Issuing bank nominates an advising bank to advise a Letter of credit to the beneficiary. Advising the bank to deliver the letter of credit to the beneficiary. Beneficiary discharges his obligation under terms of the letter of credit by generally shipping the goods or delivering mentioned services. Beneficiary/Seller presents the bills to his bank. Seller bank examines the bills and if any discrepancy advises the beneficiary about the same to be resolved. Seller bank adds a covering schedule and forwards the bills under a Letter of credit to an issuing bank. Buyer bank upon receipt of the bills examines the documents as per the terms and conditions of the letter of credit and provides discrepancies to the seller bank. Buyer bank also approaches the buyer if the discrepancies are acceptable to the buyer to provide a waiver to the seller on these discrepancies. Once discrepancies are resolved or waived by the buyer. The buyer's bank hands over the original documents to the buyer for taking possession of the goods from the shipping company and collects the payment from the buyer's business account. Letter of credit issuing bank provides reimbursement authority to the seller bank to collect funds from the account of the issuing bank or credit the NOSTRO account of the seller bank. Seller's bank credit the fund into the business account of the seller. Conclusion International commercial transactions are facilitated by utilizing letters of credit as a form of payment. This is because through the use of a letter of credit sellers' objective of receiving the timely and right amount of payment is guaranteed by a financially trusted third-party bank, while the buyer's objective of receiving defined quality and quantity of goods is also guaranteed by the same third-party bank. This implies that banking channels through letters of credit assure both buyer and seller that their interests are safeguarded. This is achieved because of three fundamental principles of a letter of credit 1) The principle of irrevocability 2) The principle of independence and 3) The principle of strict compliance. The involvement of the banking channel often makes it the least risky in terms of the guarantee of performance from both stakeholders. The banking channel also standardised the practices involved in working letters of credit through the implementation of UCP600. Such standardisation also reduces the cost of overall trade transactions. Hence using a letter of credit helps both sellers and buyers to save money. Hence it can be concluded that through the use of a Letter of credit, there will be lower risk, a guarantee of fast and secured payment, and an assured supply of products or services with more security to respective buyers and sellers. References Alavi, H. (2017). Limits of autonomy principle in documentary letters of credit; perspective of English law. Journal of legal studies, 19(33), 18-42. Dora, S. S. (2004). A nullity exception in the letter of credit transactions. Singapore Journal of Legal Studies, 6(0), 46-75. Hussain, S., Ahmed, A. A. A., Kurniullah, A. Z., Ramirez-Asis, E., Al-Awawdeh, N., Al-Shamayleh, N. J. M., & Julca-Guerrero, F. (2021). Protection against Letters of Credit Fraud. Journal of Legal, Ethical and Regulatory Issues, 24, 1-11. Mann, R. J. (1999). The role of letters of credit in payment transactions. Mich. L. Rev., 98, 2494. Mehta, R. (1999, October). Export letters of credit: eight steps to error-free compliance. In International Trade Forum (No. 4, p. 12). International Trade Centre. Vaidya, N., & Raghuvanshi, R. S. (2010). Intricacies Involved in an International Transaction by ‘Letter of Credit. Available at SSRN 1583826. Authors may be reached at: eboard@icai.in

The last two decades have posed several challenges before the auditing profession. Whenever a scam has happened, eyebrows have been raised and the role of auditors has been questioned. Somehow or the other, public perception/expectation is that once the audit has been conducted, the financial statements need to be free from the risk of any misstatement. Users of the financial statements tend to believe, though erroneously, that audit is an insurance against any accounting mishap.The Evolving Regulatory Climate & The Expectation GapOf late, the regulators have become far more demanding, and it has further enhanced the expectations gap without appreciating that so far, the Standards on Auditing expected the auditors to opine on truth and fairness of the financial statements rather than detection of frauds. But things have changed dramatically, primarily due to the increasing number of accounting scams causing huge losses to investors, lenders and other stakeholders. Needless to say, that the auditing profession is drawing flak from different quarters. Most of the times, it may be unjustified as well. Our endeavour is to highlight relevant issues / areas which need immediate attention.The Past President of our institute ICAI, CA. (Dr.) Debashis Mitra recently said:“Auditing is a serious business, stay away from it if you can’t meet expectation gap.”This statement sums up the onerous task that the auditors have in their hands. Provision of class action suits as introduced by Section 245 of the Companies Act, 2013 has further made the lives of the auditors tougher.Needless to say, that, auditing in today’s environment is significantly different from what we studied in our graduation / post-graduation and CA curriculum. We are all aware of the Kingston Cotton Mills case, wherein the Court of Appeal in England gave a landmark judgment on the role of the auditors and held the auditors to be watchful.While talking of the auditing history, how can we forget about another landmark case of “McKesson & Robbins”, which happened in the US in the year 1939, which brought about a lot of foundational changes to auditing procedures and methods:Attending physical verification of inventories;Obtaining external confirmations;Appointment of auditor to be made by shareholders;Addressing auditor’s report to shareholders;Mandating due diligence of client before accepting the assignment (i.e., Knowing Your Client - KYC);Evaluating internal controls of the company.It is difficult to believe that these procedures, which form the very basis of audit today, were not in existence prior to 1939.From Watchdog to "Barking Dog": Expanded Whistleblowing MandatesA question that we need to ask ourselves is, whether in today’s world, the position of an auditor being a watchdog holds good anymore. In our opinion, various stakeholders in the corporate and non-corporate world, including the regulators, expect the auditors to start playing a role much different from which is being played till date. They certainly expect the auditors to “Bark” to provide alarm signals at the right point of time.Section 143(12) of Companies Act, 2013: Requires an auditor to report to the Central Government any fraud and/or suspected fraudulent activity in a company which he comes across during the course of his audit.RBI Directives: Requires auditors to report any fraud observed in a branch or bank during the course of their audit. At times, the auditor may find it difficult to distinguish between a gross error and a fraud. In case of a dilemma, it would be desirable for the auditor to take a safer position for himself.Companies (Auditor’s Report) Order (CARO): Recent changes require auditors to enquire and answer on numerous matters: property plant and equipment, capital work in progress, investments, loans and advances, short-term funds diverted for long-term purposes, public issue moneys utilization, inventory data submitted to banks for working capital loans, and the ability of a company to meet current liabilities over the next 12 months. India is the only country in the world where auditors are mandated to report on such exhaustive operational matters.NOCLAR (Non-Compliance with Laws and Regulations): Code of Conduct amendments requiring auditors of Public Interest Entities (PIEs) to report on bribery, money laundering, tax evasion, and environmental protection violations make the audit function exceptionally onerous.The Performance Gap: NFRA Audit Quality Reviews (AQRs)Whereas one may argue that it may not be possible to do away with the expectation gap altogether, more worrisome is the performance gap in complying with Standards on Auditing (SAs), non-reporting of non-compliances with Accounting Standards (Ind AS), and deviations from ethical conduct.In recent times, the National Financial Reporting Authority (NFRA) has undertaken Audit Quality Reviews (AQRs) and issued disciplinary orders regarding major corporate failures (including IL&FS, IFIN, ITNL, Jaiprakash Associates Ltd, SRS Ltd, Coffee Day Group). Major findings of NFRA include:Prohibited Non-Audit Services: Providing services barred by Section 144 of the Companies Act, 2013, directly impairing auditor independence.Non-compliance with SQC 1: Systemic failures in firm-level quality control policies.Lack of Professional Skepticism: Failing to challenge aggressive management judgments which artificially inflated profits:Derivative valuations that inflated earningsReversal of contingency provisions to boost profitsNon-provision of impairment losses on investmentsIncorrect computation of Capital Adequacy RatioNon-identification of the ever-greening of loansGovernance Lapses: Non-communication of material non-adjustments to Those Charged With Governance (TCWG).Analytical & Going Concern Failures: Inadequate analytical review procedures and failure to evaluate adverse indicators regarding Going Concern.Gross Negligence in Provisions: Understatement of provisions for Trade Receivables and subsidiary investments, which masked huge corporate losses.Inappropriate Opinions: Using an Emphasis of Matter (EoM) paragraph instead of issuing a Modified / Qualified Opinion for doubtful debts.Audit Documentation Deficiencies: Tampering with audit files post-facto and failing to document planning, risk assessment, materiality, and audit evidence.Related Party Transactions (RPTs): Complete failure to exercise skepticism over promoter group transactions, allowing fraudulent fund diversion, non-verification of Arm’s Length Basis, and non-compliance with Ind AS 24 disclosures.Failure to Report under Section 143(12): Non-examination of massive asset impairments and doubtful debt spikes from a fraud angle.“Going by the number of cases filed under Insolvency and Bankruptcy Code, the role of the auditors is bound to come under greater scrutiny.”Prior to NFRA and continuing alongside it, ICAI’s Disciplinary Directorate has debarred members for varying terms and life, as well as reprimanded them. Furthermore, while the CA Act previously did not empower ICAI to penalize audit firms (only individual partners), ICAI’s demand for firm-level disciplinary powers post-Satyam was finally accepted by the government last year after a lapse of 12 years.IBC Insolvencies & Scrutiny of Key Auditing StandardsUnder the Insolvency and Bankruptcy Code (IBC), lenders are taking an average haircut of 70%. While some failures are commercial, in numerous cases, diversion of funds through related parties took place and went unreported, and auditors were found wanting in reporting on Going Concern status.Crucial Standards Requiring Revisit & Guidance:SA 505 (External Confirmations): Section 143(9) mandates compliance with SAs. At times, financial statements carry the boilerplate note: “All party balances are subject to reconciliation and confirmation.” This is directly violative of SA 505. The reliance on vague “alternate procedures” requires urgent authoritative guidance from regulators. In future, mandatory disclosures of confirmed receivables, payables, and sample selection procedures should be included in audit reports to enhance transparency.SA 240 (Auditor’s Responsibilities Relating to Fraud): Requires a comprehensive overhaul to align with the aggressive realities of modern corporate fraud.SA 550 (Related Parties): Requires significant re-examination. Auditors struggle in the absence of comparable market rates to verify Arm’s Length pricing. Regulators need to examine whether high-value RPTs should be mandated on a tender basis rather than a nomination basis.Remote Auditing, Data Analytics & Crypto: The future belongs to remote, system-based auditing using automated data analytics tools across complete transaction populations. Furthermore, ICAI must issue detailed, specialized guidance on the audit of crypto assets.Conclusions & Strategic Suggestions“Regulators need to appreciate that an auditor is as good as the system allows him to be. All those who are regulating the profession must ensure the independence of the auditors.”The Regulatory Pendulum: In India, regulation has swung from under-regulation to extreme over-regulation, creating apprehension among new entrants.True Independence: Real auditor independence can only be achieved by fundamentally altering the auditor appointment mechanism away from management control.Accountability Hierarchy: Preparers of financial statements bear primary responsibility for fraud. Regulators must ensure that corporate preparers are prosecuted and adjudged guilty rather than punishing auditors in isolation.Natural Justice: The conduct of auditors should be adjudicated primarily by qualified accounting and auditing experts.ICAI and NFRA Collaboration: NFRA and ICAI must coordinate in tandem rather than functioning in watertight compartments. NFRA’s Audit Quality Reviews (AQRs) should serve as constructive, time-bound rectification guidance rather than merely punitive exercises.“The future of the auditing profession will belong to those who would be able to handle the audits through a system on remote basis.”Despite heavy criticism, immense faith is reposed in auditors. Stakeholders expect that when all around are committing wrongs, the auditor standing at the end of the tunnel will act as a vigilant “Chowkidaar” protecting public interest. We must take a resolute pledge to never allow that faith to be shaken under any circumstances.Authors may be reached at: eboard@icai.in

“Chartered Accountants (CAs) are vital for corporate governance and compliance. They assess a company’s financial performance and competitiveness.”The Competition Commission of India (CCI) is tasked with eliminating anti-competitive practices, promoting competition, protecting consumer rights, and facilitating free trade in Indian markets. It is also responsible for offering opinions on competition-related matters referred to it by statutory authorities. Furthermore, the CCI engages in competition advocacy, raising public awareness, and providing training on competition issues. In line with its role, let’s have a look at the Chairperson’s insights on various aspects.Q 1. ICAI and the profession has come a long way and has been collaborating with all the regulators and stakeholders. Going ahead, as ICAI is entering into the 75th year of its formation, how do you foresee the role of the accountancy profession and the ways in which the profession can collaborate with the regulators to promote trust, transparency and accountability?Smt. Ravneet Kaur: The Institute of Chartered Accountants of India (ICAI) and the chartered accountancy profession have grown through working with regulators and stakeholders. As ICAI marks its 75th year, it needs to reflect on how the profession can collaborate with regulators to enhance trust, transparency, and accountability. Chartered Accountants (CAs) are vital for corporate governance and compliance. They assess a company’s financial performance and competitiveness. They also foster a culture of competition and compliance within enterprises. CAs support smooth competition compliance by providing accurate and reliable accounting information. They can help CCI analyse possible abuses like predatory pricing using their bookkeeping and costing skills. They can also help CCI calculate appropriate penalties that correct the market and ensure fair competition. CAs advise businesses on competition law compliance, anti-competitive effects, financial reports, and competition law analysis. They also ensure effective implementation of compliance programs and pro-competitive methodologies during internal audits. CCI, ICAI, and other regulators share the common goal of developing a competitive economy.Q 2. What is your outlook on India’s economic growth? What are the key challenges for Indian economy and what can be the best course of action in dealing with these challenges?Smt. Ravneet Kaur: India’s economic growth outlook is positive and resilient to global uncertainties. The country’s consumer-driven economy and investment attractiveness drives its growth. Factors such as private consumption, capital expenditure, corporate balance sheets and credit to MSMEs support India’s growth. The CCI competition regime promotes healthy competition and a level playing field, enhancing the economy’s strength and growth. The challenge is to ensure fairness in digitalisation and e-commerce markets, where anti-competitive forces may arise. To meet this challenge, CCI aims to make competition an economic way of life in India, ensuring fair market conditions and enforcing regulations while enabling new technologies and business methods. Collaboration with other regulators aims to facilitate the creation of a competitive and inclusive economic environment.Q 3. What are the key initiatives you are planning to take or taking for building India into a 5 trillion economy?Smt. Ravneet Kaur: CCI has been actively working towards fulfilling the mandate of the Competition Act, 2002. As a market-enabler, CCI focuses on competition rather than competitors. One of our key initiatives has been the Green Channel route for merger and acquisition transactions. This route provides immediate approvals for notified transactions that fall under the Green Channel scheme. This has significantly reduced the time and cost of transactions and has been a major growth-inducing factor in the Indian economy. In the past year, the Commission reviewed approximately 99 cases under its combination regulation mandate, with 25 cases falling under the Green Channel. With the recent amendment, which reduces the timeline for reviewing combinations from 210 days to 150 days, we will continue to ensure that pro-competitive business models contribute effectively to the strengthening of the economy.The concept of Leniency Plus has been introduced through the amended Act. This allows enterprises under investigation for one cartel to disclose information about another cartel, leading to penalty reductions for the disclosed cartel. This new approach aims to build a trust-based relationship between the regulator and regulated entities, reducing loopholes and distortions in the economy and making it more robust.Furthermore, the amended Act includes provisions for commitments and settlements, which help reduce the litigation burden on both state entities and the private sector. Thus, CCI aims to create a competitive environment that fosters economic growth and helps build India into a 5-trillion economy.Q 4. We all are witnessing the interplay of technology in our lives; how do you perceive its role in the regulatory paradigm. How do you feel the workplace/professional profile will evolve as we embrace technology?Smt. Ravneet Kaur: CCI is proactive in addressing the challenges posed by technology in the regulatory paradigm. We embrace emerging technologies and adapt to agile working methods. Through market studies, such as the one on e-commerce, we anticipate disruptions and ensure fair play and consumer protection. CCI closely monitors concerns like platform neutrality and deep discounting. We prioritize merit-based competition, transparency, and reduction in information asymmetry. Our focus is on fostering sustainable business relationships and taking enforcement actions against anti-competitive behavior. We encourage platforms to adopt self-regulation to avoid intervention.Q 5. Based on your experience, how do you foresee the changing profile of accountancy profession in the new economic order?Smt. Ravneet Kaur: In the changing economic order, the accountancy profession faces the challenges of ensuring fair and efficient market arrangements in the digital era. The CCI addresses issues like platform neutrality and deep discounting to prevent anti-competitive conduct. CAs have a crucial role in promoting competition compliance and need to enhance their knowledge and adopt advanced auditing methods so as to effectively play the role of strategic advisors. The accounting profession will continue to evolve with technology, globalization, and regulation, led by organizations like the ICAI.“CAs have a crucial role in promoting competition compliance and need to enhance their knowledge and adopt advanced auditing methods so as to effectively play the role of strategic advisors. The accounting profession will continue to evolve with technology, globalization, and regulation, led by organizations like the ICAI.”Q 6. Please share with us your journey, and three key learnings for the younger generation you wish to share.Smt. Ravneet Kaur: I have 34 years of rich and varied experience in the Indian Administrative Service, working with the Government of India and the Government of Punjab. My professional expertise spans the fields of finance, accountancy, budget, economic affairs, industry, business, management, and competition. I have held leadership positions in various departments and organisations at the central and state levels.The key learnings from my career are:Time management: This trait helps value and manage time efficiently. Everyone has 24 hours on their hands but being punctual gives a head start and is vital in one’s professional career.Dedication/Commitment: It is very important to have a passion for your work, which ingrains hard work and determination as a way of life and helps you achieve the desired goals.Honesty/Integrity: This is one of the important life lessons to follow. Being truthful and ethical in your work gets you to the destination.Q 7. Being in prominent and demanding positions, how do you manage your work life balance? What would be your advice to today’s generation in managing the right work-life balance?Smt. Ravneet Kaur: Finding a balance between work and life can be difficult when one has a prominent and demanding role. It is important to allocate time and energy for both professional and personal goals. One can achieve this balance by managing time and prioritising tasks effectively. Setting aside specific time for work and personal activities helps use time and energy wisely. Moreover, taking care of one’s physical and mental health is vital for maintaining a work-life balance. One needs to look after oneself to ensure their well-being and productivity. My advice to the current generation is to focus on their priorities, use their time wisely and care for their physical and mental health while handling work and life demands.Q 8. ICAI is taking a number of initiatives in the national interest and social empowerment like MSME, StartUps, Financial and Tax Literacy Drive. What are your views on a few important themes like Women Empowerment, Sustainability, Financial Literacy, and Inclusive growth?Smt. Ravneet Kaur: Economic development today encompasses sustainability, gender equality, inclusivity, and holistic indicators. As a competition regulator, we can align our laws and policies with sustainability goals and encourage businesses to adopt sustainable practices. Women empowerment is a key aspect of sustainability as the latter requires the adoption of gender-sensitive approach by incorporating women’s perspectives and needs in our analyses. We can facilitate women’s access to markets as consumers, entrepreneurs, or workers by removing barriers and creating incentives. Within our own organization, we promote a gender-equal and inclusive culture. At CCI, women hold leadership positions and excel in their roles. We believe in providing equal opportunities for all the qualified individuals. As a competition regulator, we can be objective in regulations and enforcement while promoting sustainability and social inclusivity.Q 9. As we move towards India@100, what is your vision to achieve the same and what would be the themes that would help India to become self-reliant?Smt. Ravneet Kaur: India@100 is a vision of achieving sustainable prosperity through productivity, social progress, environmental sustainability, and resilience. It requires a competitive and dynamic market that fosters innovation, efficiency, and consumer welfare. The Competition law, with its recent amendments, is a key instrument to promote and protect competition in the market and to prevent anti-competitive practices that distort the market. It also encourages market players to adopt a pro-competitive mindset and behaviour that will contribute to India’s self-reliance. Our current competition regime, with its enhanced powers and tools, is capable of addressing the challenges and opportunities of the changing economic landscape, both domestically and globally. It is aligned with international best practices and standards such as deal value-based criterion for notifying combinations, negotiated settlements and commitments, reduction in time-limits for approving combinations and a leniency plus regime. These measures will facilitate ease of doing business, facilitate market corrections and compliance with competition law. A strong and vibrant economy will enable India to achieve its goals of self-reliance and leadership in all domains.Interview published in The Chartered Accountant Journal, July 2023. Communications may be addressed to: eboard@icai.in

The Chartered Accountant professional will play a critical role in capital funding, tax planning, budgeting, and financial forecasting. Indian firms can work towards ensuring transparency, financial discipline, regulated audits, and economic balance. CA firms will be instrumental in shaping accountability and economic planning to foster equitable growth.The National Transformation: Target $5 Trillion to $10 TrillionIt is well known that India is on the cusp of a major transformation and has earned the title of the fastest growing economy in the world. The Government and its apex regulatory body face an uphill task in achieving sustained, high GDP growth. The Hon’ble PMO has set a target of becoming a $5 trillion economy by 2025 and aspires to morph into a $10 trillion economy by 2030. A clarion call has been made for New India’s development into an Atmanirbhar Bharat. To become a global leader, New India needs well-curated action and pivotal policies. It is only through the collective and collaborative actions of Indian citizens and the government that India can truly become a global superpower. It is through this active partnership that India will be able to create a conducive ecosystem and be a catalyst for change.The New India must have a shared vision for national development that is accompanied by effective strategies and priorities. Our goal is to create a self-sufficient and prosperous India. To achieve this goal, we must continuously foster cooperative federalism, recognizing that strong states lead to a strong nation. There should be policies put in place that strive to improve the quality of life, meet basic human needs, increase per capita income, and maintain a secular outlook.Economic Resilience & Mass MovementIndia’s economic resilience has been an astonishment to its global counterparts following the unprecedented COVID pandemic. The K-shaped recovery indicates improved performance in the core sectors and better utilization of capacity. The New India must adopt development as a mass movement where 1.40 billion Indians will work together to catapult India’s transformation.Four cornerstones define India’s growth story:Innovative TechnologyEntrepreneurshipSustainable DevelopmentBetter GovernanceAs the global power balance shifts, the Indian economy is expected to remain buoyant and upscale over the coming decades. Currently, India is a favored investment destination due to its conducive dynamics and well-managed geopolitical diplomatic relations. With its mega infrastructure development outlays, constant rewriting of structural policies in line with the changing market ecosystem, unified tax system, and improved ease of doing business index, global corporations are inclined to bet high on India’s future potential.“The accuracy of the balance sheets will help attract foreign direct investment and maintain trust in domestic players. Additionally, CAs play a critical role in shaping the economy by providing financial expertise to businesses and government entities.”India Inc. applauds the RBI’s corroborated measures in light of the globally adverse outlook. The Indian economy has demonstrated resilience despite complex global economic conditions and is better positioned to navigate headwinds. The strong macroeconomic fundamentals of the Indian economy require financial, bilateral, and business acumen.Chartered Accountants as Growth CogwheelsTo conclude, CA professionals are growth cogwheels and contribute to financial stability in a strong economy. They ensure that conglomerates and governments operate efficiently and effectively to safeguard investors’ interests and the interests of citizens. Furthermore, CAs can help drive economic growth by providing financial expertise to government entities:Assisting governments in managing public finances, preparing national/state budgets, and identifying additional sources of revenue.Providing strategic guidance on economic policies that promote industrial growth, capital investments, and social development.Steering capital funding, structured tax planning, financial forecasting, and disciplined audit mechanisms.Chartered Accountants Day Message:“I wish my fellow professionals and successful role models a happy Chartered Accountants Day on this special occasion. Be the change you desire!”Author may be reached at: eboard@icai.in

India’s unique, open and safe digital architecture, coupled with demographics and rising smartphone penetration, has driven a significant improvement in the penetration of financial services. Data-sharing architectures such as OCEN or Open Credit Enablement Network, and Account Aggregators, and the collaboration between banks and fintech will drive significant synergies, reduce costs, and improve productivity.Rapid and Resilient Economic GrowthIndia, an ancient land with a young population, is on the cusp of a transformative journey. It took India 60 years to become a trillion-dollar economy in 2007; it took eight years to reach two trillion and then five years to reach 3.5 trillion. In the process, it has crossed Brazil, France and the UK. Assuming the current trend of 6 per cent real, and 10 per cent nominal growth is maintained, India will be the third largest economy by 2030 at six trillion dollars.India has been the fastest-growing major economy both before and after the pandemic. Demographics provide a further runway to this:Youthful Demographic Runway: India houses a young population with a median age of 28 years. Every sixth working-age person in the world is an Indian, and the UN projects India will enjoy the largest workforce growth of any single country, accounting for 23 per cent of global workforce growth (second only to the entire African continent).Language Advantage: India represents the largest English-speaking population in the world, with some 256 million who can speak the language, boosting saving, investment, and integration into global commerce.Rising Domestic Consumption & Per Capita Income: As India transitions from a lower middle-income to an upper middle-income economy, per capita income is expected to increase from US$ 2,450 to US$ 4,000 by the end of the decade, driving a virtuous cycle of consumption and investments.Scale of Affluent Households: The number of individuals in households earning more than $40,000 a year is expected to rise three times to 169 million — about half the population of the United States.The Expanding Middle Class: The middle-income population (annual income between US$ 7,000 to US$ 40,000) increased approx. 25 per cent in 5 years, reaching 439 million by 2020-21 despite COVID-19, and is projected to surge to approx. 700 million by 2030 (representing approx. 47 per cent of the population).Office of the World Attempting to Become the Factory of the WorldIndia’s ambitious Production Linked Incentive (PLI) scheme is expected to boost its share of manufacturing in emerging technologies, such as drones and electric vehicles. The scheme will help create a robust manufacturing ecosystem, attracting domestic and foreign investments such that by 2025, India should become a global manufacturing hub, increasing manufacturing’s contribution to GDP to 25 per cent.Global multinationals have shown intense interest in investing in India given factors such as a large and stable democracy, an alternative under the China Plus One strategy, relentless focus on structural reforms, and geopolitical advantages through leadership roles in the G20 and the QUAD.Global Capability Centres (GCCs) & Services ExportsManufacturing will complement India’s pandemic-proof services exports, which rose to approx. US$ 180 billion in FY2022 (four times the FY2008 number) and is estimated to grow three times to US$ 530 billion by FY2032.A fourth of such exports originate from Global Capability Centres (GCCs) set up by multinationals attracted by India’s rich human capital.India is today home to half of all GCCs opened outside their home countries, housing over 1,500 such entities.By 2026, 500 more GCCs are expected to be added, creating over two million direct jobs.Digitisation for Inclusive GrowthEssential to this growth, and for financialization to occur in parallel, is the inclusive, publicly owned India Stack, which is interoperable, democratises data, and is decentralised. India has emerged as the most significant player in real-time payment transactions globally, commanding a share of close to 50 per cent of global real-time digital payments.OCEN & ONDC Synergy: The Open Credit Enablement Network (OCEN), supported by the Open Network for Digital Commerce (ONDC) — which offers a network-centric model connecting buyers and sellers regardless of platform — will dramatically raise credit penetration by transitioning to cash flow-based lending and seamless data sharing.Credit Growth Acceleration: This digitization and macro stability will increase lenders’ risk appetite, with research houses projecting retail/MSME loan growth to accelerate to between 16 to 19 per cent CAGR over the next decade (up from 14 per cent over the past five years).Infrastructure Development & Clean Energy TransitionInfrastructure spending has an estimated economic multiplier of three times. In the last decade, India has built thrice as much infrastructure as in the preceding 60 years, with road networks, port capacities, and airline connectivity doubling. Plans to construct 35,000 kilometres of national highways by 2025 will sharply reduce logistics costs and enhance export capabilities.Green Energy Transition:India doubled the Renewable Energy (RE) mix in electricity to 19 per cent between 2016 and 2022, while natural gas rose to 6 per cent of primary energy.Under India’s COP26 commitments, renewables are targeted for a five-fold growth over the next decade.Renewable energy in India is already among the cheapest forms of power without subsidy dependence, backed by a favorable regulatory framework.Skilling and Women’s Participation in the WorkforceIndia aims to train over three hundred million individuals by 2025 through industry-aligned skilling initiatives, providing the technical talent needed for innovation and entrepreneurship.Furthermore, promoting women’s workforce participation is pivotal for economic growth and gender equality. Increasing women’s labour force participation by ten percentage points is estimated to add US$ 770 billion to India’s GDP by 2025.Strong Financial System & Balance Sheet DeleveragingIndia possesses a robust banking system characterized by low non-performing assets (NPAs) and high capital adequacy ratios:Tax-to-GDP Expansion: Supported by GST input tax credit matching and economic formalization, the government aims to elevate the tax-to-GDP ratio from 17 per cent to 22 per cent by 2025.Corporate & Bank Deleveraging: While non-financial sector debt in most global economies expanded post-2008, India’s debt burden declined due to comprehensive banking balance sheet clean-ups and corporate deleveraging. Non-financial debt-to-GDP reduced to approx. 45 per cent from a peak of 60 per cent in FY15/16.Credit Upgrades: The ratio of credit rating upgrades to downgrades has jumped to five times.Low Household Debt: Household debt-to-GDP stands at only 37 per cent, offering substantial headroom for healthy consumer credit expansion.Financialization of Savings: Post-pandemic, the financialization of household savings exceeded physical asset savings as a share of GDP for the first time since FY2000.Financial Markets Role: Domestic and global capital pools will be crucial for funding long-term Infrastructure, Manufacturing, and Climate finance.ConclusionA vision for New India entails a comprehensive approach to economic development, driven by robust GDP growth, increased manufacturing capabilities, infrastructure development, skilling, and gender inclusivity — all supported by a healthy, resilient financial sector. With ambitious targets across renewable energy, digital infrastructure, and industrial production, India is poised to unleash its economic potential, empower its citizens, and build a brighter, sustainable future for generations to come.Author may be reached at: eboard@icai.in

The presence of women in the workplace is a widely recognized and supported concept. Instead of discussing its significance, this article focuses on the important roles played by various stakeholders in achieving gender equality.The Disparity: From Demographic Balance to Workplace Needle in a HaystackGender equality is a fundamental principle that every society strives to achieve. As of July 2022, the gender ratio in India is 1020 females per 1000 males. It’s almost 50-50. The needle must move slightly to hit a perfect balance. Yet, when it comes to gender representation at the workplace, the needle is lost in the proverbial haystack.Gender Disparity Across Stages of DevelopmentMetric / StageMenWomenDemographic Gender Ratio (National)~50%~50% (1020 per 1000)Higher Education Representation54%46%Labour Force Participation Rate70%30%Share in Managerial / Boardroom Positions185.40%14.60%The data for women in higher education vs women in board rooms highlights stark incongruence and disparity. This disparity must be challenged.My vision for women in the new and improving India is about the ratios staying constant at 50-50, whether they’re about employment statistics, pay parity, leadership roles, or the boardroom gender split. Equal gender representation mandates collaboration of the highest kind across two broad perspectives: The Environment and The Women.Part I: The Environment1. Regulatory Authorities: Enablers and ProtectorsEnablers: Regulatory authorities have a critical role to play in creating an enabling environment for women in both formal and informal economic sectors. Significant constitutional strides include:Article 16(2) of the Constitution of India: Specifically prohibits discrimination based on religion, race, caste, sex, descent, place of birth, residence, or any other factor for employment or office under the State.Article 39: Guarantees equal pay for equal work for both men and women2.Protectors: Only equal employment opportunities won’t cut it. If the workplace is unsafe or not conducive, women cannot pursue meaningful employment. Initiatives including zero tolerance towards harassment, counseling, and gender-sensitization training are vital. Key legal frameworks include the Prevention of Sexual Harassment (POSH) Act and the landmark Vishaka Guidelines laid down by the Supreme Court of India in 1997/19993.2. Workplaces Evolving to Become InclusiveOrganizations must build cultures that value diversity, implement transparent promotion criteria, foster mentorship programs, and provide platforms for women’s voices to be respected.“It is crucial for workplaces to acknowledge that women, as mothers, often have additional responsibilities at home. Very often, working moms are doing two full-time jobs on any given day!”Implementing flexible work arrangements, progressive parental leave policies, and on-site childcare facilities supports women in balancing professional and personal obligations without derailment.3. Men as AlliesAs allies and as a majority in corporate leadership, men have a decisive role to play. In settings where women are a minority — such as a boardroom or executive committee — men must actively support and advocate for female peers. Leaders must amplify female voices, challenge subtle biases, and sponsor equal opportunities: it is far easier for the majority to adapt and accommodate than for the minority to struggle alone.Part II: The WomenThe onus is on us! Be the change you want to see in the world!While the environment must evolve, women must assertively find their voices, rights, and ambitions. Women overcome tremendous hurdles to educate themselves; it is tragic if that education is left unutilized due to societal pressures or stereotypical constraints.Women must stop playing the “sacrificial mother who gives up her bowl of kheer by feigning disinterest”. If you feign disinterest, one day the bowl disappears for good! Instead, women must teach children empathy, mutual respect, and equitability at the family dining table.Women must also understand the corporate environment: when making inroads into a male-dominated workforce, one must learn to communicate effectively in their strategic business vocabulary — just as a traveler learns the local language to navigate new territories. Recognizing one’s self-worth dismantles societal stereotypes and unlocks the creative power of Yin-Yang — opposite yet interconnected complementary forces driving organizational success.The Finance Cohort: Debunking the Numbers MythThe finance function is often stereotyped as cold and solely focused on numbers. As a Chartered Accountant with close to three decades of experience, I want to debunk this myth: the finance cohort not only possesses exceptional analytical intelligence but also demonstrates remarkable empathy.Throughout my career, male colleagues have supported me wholeheartedly. I encourage all men in the profession to stand firmly by their female team members. And to all women professionals: let us continue striving for gender equality without looking back until we achieve complete 50:50 representation across every tier of corporate India.1 Women in India - Statistics & Facts | Statista2 Viewpoint: Gender Pay Gap in India - Legal Considerations (shrm.org)3 The Vishaka Guidelines: A Landmark Step Against Sexual Harassment (Supreme Court of India)Author may be reached at: eboard@icai.in

Technological developments, like automation, data analytics, cloud computing, and artificial intelligence have had a profound impact on the CA profession. CAs have adapted to these advancements in their work for better insights and highest levels of compliances.India’s Economic TransformationIndia’s economy is undergoing rapid transformation, and the role of the Chartered Accountancy (CA) profession is becoming increasingly critical. As the country charts its path toward a ‘New India’, characterized by sustainable growth, innovation, and global competitiveness, the CA profession has a pivotal role to play. This article explores the vision for New India and the evolving role of chartered accountants (CAs) in shaping the country’s economic landscape.India’s Growth Story: Key Macroeconomic MetricsThe Indian economy has demonstrated robust growth, with an average GDP growth rate of around 7% over the past decade. This growth has been driven by factors such as a young and expanding population, increasing urbanization, and rising disposable incomes:Digital Revolution: Reshaping Indian lives with over 750 million internet users and nearly 659 million smartphone users as of 2022.Digital Payments Surge: The digital payment ecosystem recorded nearly 72 billion digital transactions in FY22.Taxation & Ease of Doing Business: Goods and Services Tax (GST) implementation in 2017 streamlined the national indirect tax system.Infrastructure Push: The National Infrastructure Pipeline (NIP), with an estimated investment of $1.4 trillion over five years, aims to enhance connectivity and stimulate broad-based economic activity.Record FDI Inflows: India reached a historic high of $84.83 billion in Foreign Direct Investment (FDI) inflows in 2021-22, demonstrating global investor confidence.Capital Markets Expansion: Listed company market capitalization reached approx. $3.32 trillion as of April 2023, expanding fundraising avenues for Chief Financial Officers (CFOs).Surging ESG Investments: Sustainable investments in India shot up from $2.7 billion in 2020 to $7.9 billion in 2022, with CFOs actively integrating sustainability metrics into corporate financial reporting.Vast Professional Pool: A skilled workforce of over 3.7 lakh Chartered Accountants as of June 2023, steering corporate financial management, talent development, and upskilling.The Constant Evolution of the CA ProfessionThe traditional expectations from the CAs have been that of being the conscience keeper, financial controller, and regulatory compliance anchor of an organization. These are and will remain the pillars of this profession. However, with changing business models, regulatory revisions, and global integration, CAs are playing vital roles in new specialized domains:Preparing for the Global Stage:With increased interaction with global players, CAs must be well-versed in international accounting standards and cross-border convergence. As New India attracts foreign capital, CAs provide crucial guidance on navigating international regulatory frameworks, transfer pricing, inbound/outbound FDIs, and cross-border taxation, building transparency and competitive advantage.Expanded Scope of Services:Moving far beyond traditional audit, taxation, and statutory reporting, CAs deliver specialized financial advisory, enterprise risk management, internal controls architecture, corporate governance, and management consultancy.Embracing Technology:Technological developments like automation, data analytics, cloud computing, and artificial intelligence have fundamentally reshaped accounting workflows. CAs deploy these advancements for deeper predictive insights and uncompromising compliance.Fostering Innovation & Entrepreneurship:CAs drive New India’s startup vision by providing strategic and financial advice to startups and MSMEs — assisting in business modeling, financial projections, capital raising, regulatory adherence, and governance.ESG – Promoting Sustainable Development:Sustainable development is integral to New India. CAs assist organizations in measuring and reporting ESG performance, designing sustainable capital allocation strategies, and aligning corporate disclosures with global sustainability reporting frameworks.Elevated Focus on Corporate Governance:CAs play pivotal roles in strengthening audit committees, implementing risk management frameworks, upholding ethical standards, and sustaining institutional stakeholder confidence.Getting Ready for the Journey Ahead: Future SkillsetsDisruptive technologies, changing business dynamics, and hybrid workplaces require CAs to supplement traditional expertise with four forward-looking skills:Develop a Strategic Mindset: Move beyond transactional accounting tasks. Understand long-term organizational strategy, industry dynamics, market trends, and competitive landscapes to provide proactive, value-accretive recommendations.Embrace Continuous Learning: Technological disruptions like Artificial Intelligence (AI), Machine Learning (ML), Data Analytics, and Robotic Process Automation (RPA) are transforming finance. One need not be an engineer, but must stay abreast of disruptive innovations to amplify professional capabilities.Focus on Communication & Interpersonal Skills: Develop the ability to translate complex financial concepts into concise, actionable language for non-financial stakeholders, influencing decision-making and building organizational trust.Foster Cross-Functional Collaboration: Finance cannot operate in a silo. Actively collaborate with operations, marketing, and sales departments to gain a 360-degree perspective of business realities. Build professional networks through associations and industry forums for mentorship and career growth.ConclusionThe vision for New India presents immense opportunities and challenges for the CA profession. As the economy evolves, CAs have a pivotal role in facilitating economic growth, fostering innovation, ensuring financial stability, enabling digital transformation, promoting sustainable development, enhancing global competitiveness, and embracing continuous professional development. By upholding the highest professional standards, embracing technology, and acting as trusted advisors, CAs can contribute to the realization of India’s vision for a prosperous, inclusive, and globally competitive New India.ReferencesIndia’s GDP growth rate: https://www.macrotrends.net/countries/IND/india/gdp-growth-rateInternet users: https://www.thehindu.com/news/national/over-50-indians-are-active-internet-users-now-base-to-reach-900-million-by-2025-report/article66809522.eceSmartphone users: https://www.statista.com/statistics/748053/worldwide-top-countries-smartphone-users/Volume of Digital Transactions: https://www.statista.com/statistics/1251321/india-total-volume-of-digital-payments/National Infrastructure Pipeline: https://en.wikipedia.org/wiki/National_Infrastructure_PipelineFDI flow: https://www.india-briefing.com/news/india-fdi-inflow-2023-latest-data-analysis-on-investment-landscape-27821.html/Indian stock market Cap: https://www.ceicdata.com/en/indicator/india/market-capitalizationSustainable investments: http://bwdisrupt.businessworld.in/article/ESG-Led-Investments-Double-With-7-9-Bn-To-Reach-13-In-2022-/20-04-2023-473534Active Chartered Accountants: https://www.icai.org/post/president-icai-addressed-media-emphasizing-to-blend-new-age-thinkingAuthor may be reached at: eboard@icai.in

Technology has emerged as a game-changer in our field, disrupting traditional practices, and opening doors to innovative approaches. As Chartered Accountants, when we embrace this change and leverage technology, we can be a catalyst for growth and transformation. It is crucial for us to stay at the forefront of technological advancements, equipping ourselves with the knowledge and skills necessary to thrive in the digital era.Financing Our Futures: 75 Years of Nation BuildingFor eons, humans have been involved in trade. While trade-related practices have evolved with the ages, its pace accelerated with the advent of technology. As a result of this, having standard rules of accounting and disclosure of financial statements came into play with ICAI spearheading this movement. This is a testimonial of the impact of ICAI since we are celebrating the 75th Chartered Accountants Day. Over the decades, ICAI has partnered in Nation Building with integrity and excellence. This foundation day brings an opportunity to reflect on our achievements, recognise the evolving era of our industry and set our sights on a visionary future. It gives me immense pleasure to share with you my thoughts on how we, as chartered accountants, can reimagine our futures as well as that of our country by leveraging technology.Being a member of this premier Institute and working with India’s Top IT company TCS, has given me a ringside view of how technology can be leveraged to provide massive benefits to millions of people. All of you might have heard of or even experienced first-hand, the smooth functioning of Passport Seva Kendras (PSKs) today. Technology-driven transformation of PSKs has given India the ability to cut through bureaucracy and empowered her citizens to dream about hassle-free travel beyond boundaries. The right technology in the hands of the right people can work wonders as we have seen with the implementation of Ayushman Bharat or Jan Dhan Yojana.Believing in the Dreams of a Billion HeartsIndia’s vision for 2030 is strongly linked to multi-dimensional developmental goals. A key infrastructure foundation powering all these changes is digital technology. While multiple statistics can be used to discuss growth levels and target audiences, one correlating story we see is that of the education sector booming in non-traditional courses, serving as circumstantial evidence indicating opportunities in emerging fields.Sponsoring Stakeholders (Governments): Possess the necessary strategic vision and willingness.Executing Stakeholders (Technology Enablers & Administration): Available aplenty and ready to deliver.Consuming Stakeholders (Citizens): Ever-ready to embrace digital delivery.We have our task cut out to be the custodians of trust that these stakeholders have in each other and be valuable partners to the growth unravelling around us.Building on Numbers and Beyond: The 4 Cs FrameworkThe role of finance and chartered accountants is fast evolving to be at a strategic layer. Preparing statements, reconciliation, and even basic audits are all hygiene activities that are automated easily. With technology becoming all-pervasive, massive data is generated at various touchpoints. As professionals breathing numbers day-in and day-out, we have the logical thinking and assimilative capability required to connect the dots and draw inferences.Embracing the 4 Cs will ensure that we will be value enablers and not just bean counters:1. Cross SkillWhile we are all attuned to accounting standards and developments in the finance space, we should nurture complementary skills to contribute holistically:Know Your Business: When we go beyond bookkeeping and understand the commercial context of the businesses/enterprises that we service, we can tailor our recommendations appropriately.Keep Abreast of Technology: Technology makes our jobs easier and services easily consumable for the end-user. Subscribing to tech podcasts and knowledge portals helps expand our horizons.2. CollaborateCollaboration needs conscious, continuous effort; lack of collaboration leads teams toward conflicting goals:Network with Stakeholders: Establish strong rapport with stakeholders within and outside finance by understanding their goals and underlying operational drivers.Be Flexible When Feasible: Ensure buy-in from stakeholders while maintaining non-negotiable boundaries on financial prudence and risk management. A constructive engagement framework provides certainty when making business commitments.3. CommunicateCommunication is far more than language proficiency or MS Office skills; it is an art to be mastered diligently:Effective Articulation: Like great teaching, the measure of effective communication is taking a complex topic and making it simple. This is crucial when working with non-finance leadership.Tailored to Target Audience: Compliance is half-done if stakeholders understand the ‘why’ and ‘what’ of an action. Recognizing others’ priorities facilitates seamless collaboration.4. Change AgentIn the 4-quadrant maturity model of how a corporate function evolves, being an operator or steward comes naturally to accountants; rising to a strategist or catalyst requires deliberate upskilling:Be a Catalyst: Requires a deep organizational understanding and grounded stakeholder engagement. For example, complex valuations required under modern accounting standards can be transformed into tremendous value addition when approached with innovation and professional skepticism.Be the Enabler for Change: CAs have a panoramic view of business numbers, interpreting what is working and what is not. We can advocate for impactful change by highlighting actionable insights.Pioneering ESG Reporting: Change is not merely course correction; it is charting new frontiers. ESG reporting is data- and metrics-intensive, requiring collation across entire supplier value chains. Chartered Accountants are uniquely suited to lead this mandate.“By placing business-enablement as our core priority, and trusting technology to be our friend, we remain not only relevant but also become a crucial constituent of the growth story.”Our Future Powered by Technology: Real-World TCS Finance Case StudiesTCS Finance has brilliantly institutionalized technology-driven finance transformation across global operations:1. Day-1 Book Closure & Real-Time Performance PublishingToday, TCS is a ~$28 billion organization with 52 subsidiaries and over 6 lakh associates across 50+ countries. In earlier times, business teams were occupied with closure activities for nearly two weeks post-quarter-end, leaving only 83% of their time to execute the new quarter.By partnering with technology teams to digitize and automate closure routines:TCS institutionalized publishing internal financial performance to business units on Day 1 after month/quarter end.Business teams are fully enabled for operational and financial execution for the new quarter from Day 2.Audited quarterly results are released to the investing public within an average period of 10 days from quarter-end.2. Straight-Through Processing of Expense ReimbursementsEmployee expense claim workflows were completely revolutionized using Optical Character Recognition (OCR) to parse expense bills, coupled with Machine Learning (ML) algorithms and Neural Networks to automate verification and processing. Associates receive claim settlements in one week instead of a month, achieved entirely through intelligent automation with zero headcount addition.3. World’s First Virtual, Paperless AGM & Shareholder GovernanceLeveraging digital architecture, TCS executed the first virtual, paperless Annual General Meeting (AGM) globally. High-calibre technology integration now powers paperless board meetings, multi-billion-dollar share buybacks, and seamless dividend distributions.ConclusionBy placing business enablement as our primary mission and embracing technology as an ally, the accountancy profession will remain not only relevant but central to corporate and national growth stories. I urge all members to be open to surrounding possibilities and seize the initiative to elevate yourselves, your organizations, and the nation.Author may be reached at: eboard@icai.in

From startup to growth and expansion of international markets, CA professionals bring specialized knowledge and skills to help businesses on Financial Strategy, Planning and Management, robust capital structure, fiscal discipline, and regulatory compliances, besides playing a critical role in formulating business strategies and execution.Demographic Powerhouse & The Technology CatalystAn entrenched unequivocal fact is that CA professionals have played a pivotal role in shaping and empowering growth in industry globally. In this CA global contribution narrative, India peaks the charts with the highest number of qualified CAs. The next chapter is India paving her way to become a global economic powerhouse by envisioning an ambitious growth model through radical economic policies and strategies. Facilitating this growth aspiration, the country is focused on infrastructure development, digital transformation, ease of doing business, diversified manufacturing capabilities, and skill development.The World Bank projects the Indian population group aged 15–59 years to increase by 134.6 million between 2020 and 2040. Therefore, India’s young workforce is the fueling factor in catapulting India into a global superpower — one to be reckoned with.Aiding this empowered economic growth story, emerging technologies such as Artificial Intelligence (AI), Machine Learning (ML), Blockchain, and the Internet of Things (IoT) are revolutionizing the business landscape. Additionally, the rise of fintech has transformed financial services, enabling entrepreneurs to access funding, manage transactions, and track financial performance at will. E-commerce platforms and digital marketplaces have enabled ease of transactions and global commerce.Transitioning from Financial Experts to Business Leaders & EntrepreneursFrom early-stage startup to scaling and international expansion, CA professionals bring specialized knowledge and skills to help businesses on:Financial Strategy, Planning, and ManagementRobust Capital Structuring and Treasury ManagementFiscal Discipline and Cost GovernanceComplex Regulatory Compliances and Strategic Execution“In fact, over the years, there are several examples of CA professionals who have transitioned from their roles as financial experts to business leaders and successful entrepreneurs.”In today’s India, young entrepreneurs are altering the business landscape with cutting-edge technological innovations and agile problem-solving ability. However, young companies must navigate complex tax laws and regulatory frameworks. Minimizing tax liabilities through effective tax planning strategies and ensuring total compliance with evolving tax regulations are becoming ever more critical — a role Chartered Accountants are exceptionally trained to handle.The Strategic Pillars of Future-Ready CAs1. Core Financial Foundations as a Strategic SpringboardFinancial expertise will always be at the forefront of the value CAs bring to the table. A deep understanding of financial principles, reporting standards, and statutory requirements has no substitute. However, CAs can leverage this solid foundation to transition into corporate strategy and enterprise leadership. CAs must develop a holistic understanding of the macroeconomic business environment, industry dynamics, market trends, and competitive landscapes, providing strategic guidance aligned with long-term organizational goals.2. Data Analytics, Tech Adoption & Lifelong LearningCA professionals are trained in data analytics and problem-solving. With technology changing at a rapid pace, professionals must enhance their technological depth to drive business automation, streamline workflows, and amplify productivity. Proficiency in tech not only enhances efficiency but also unlocks data-driven predictive insights for strategic decision-making. There is an imperative need to embrace a lifelong learning mindset to stay relevant regardless of changes in standard operating procedures.3. Ethical Integrity: The Bedrock of TrustEthical integrity is a vital variable that holds the business fabric intact — a softer skill, but of paramount importance! Upholding ethical standards, maintaining strict confidentiality, and adhering to professional codes of conduct are essential traits for sustaining institutional credibility. Financial leaders are uniquely positioned to spearhead this agenda and instill the right governance culture in corporate India.Integrating Entrepreneurship Education into the CA CurriculumThe vision for future chartered accountants is a future-readiness model combining technical financial expertise with a panoramic grasp of business operations, digital technology, and innovation. Young professionals must embrace emerging technologies to play an active role in India’s journey toward global economic leadership.Entrepreneurship education in chartered accountancy programs is crucial in preparing future accountants to navigate the modern business landscape. Integrating dedicated entrepreneurship courses into the CA curriculum will equip aspiring professionals with the requisite mindset to identify untapped market opportunities, manage commercial risks, and build resilient ventures. Upskilling Chartered Accountants in line with evolving technological and capital markets is vital.A Resounding Call to ActionThe future of chartered accountancy and entrepreneurship in India hinges on the collective determination of Chartered Accountants and aspiring entrepreneurs to wholeheartedly embrace dynamic opportunities. By forging strategic collaborations, cultivating multidisciplinary partnerships, and fostering a culture of resilience and perpetual learning, CAs and entrepreneurs possess the power to shape the nation’s destiny.Embrace the boundless potential of the future.Seize the manifold opportunities that lie ahead.Unitedly construct a prosperous and sustainable business ecosystem that catapults the country into becoming an economic superpower.Author may be reached at: eboard@icai.in

While the Indian economy is on the cusp of taking off, there’s a lot of work to be done. Despite all the progress on ease of doing business, a lot more can be done to encourage startups and simplify regulations. One of the greatest blessings for India is its demographic divide, but it may also become a curse given the recent advancements in artificial intelligence (AI). Automation seemed like a distant threat for a long time, but this time it feels different.The Four-Year Market Whirlwind: A Retail SurgeIt feels like we’ve lived through a decade in the last four years in the markets. The sheer number of changes and developments in such a short period of time is stunning. I still remember February and March 2020, when we were preparing for the absolute worst at Zerodha. But what transpired was the exact opposite — something I couldn’t have predicted in my wildest dreams.Active Retail Investors: Increased from about 3 million in January 2020 to nearly 12 million in January 2022. To put that into perspective, India had 2 million active investors in January 2017 and 3 million in January 2020.Cash Market Participation: Individual investors accounted for 39% of cash market participation in 2020, which shot up to 45% in 2021.Mutual Fund SIP Flows: Surged from ₹ 8,000 crores in January 2020 to ₹ 14,750 crores as of May 2023.The Digital Enabler: This surge in activity wouldn’t have been possible without Aadhaar, DigiLocker, and UPI (India Stack). The credit goes to the government for enabling countless fintechs like Zerodha to be digital-first.Market Structure: Why Indian Markets are Among the Safest GloballyThe flip side of this sudden surge in activity was its impact on market structure. This market phase coincided with the introduction of several progressive and landmark regulations that have made Indian markets among the safest globally. I am not just saying that as the head of an Indian brokerage firm, but having seen the market structure of larger markets like the United States and Europe.ParameterUS / Developed Markets (2020–23)Indian Capital MarketsMarket ExcessesMeme stock mania, SPAC boom-and-bust, and frenzy in zero-day stock options.Resilient, regulated retail inflows without systemic intermediary defaults.Order Routing & ExecutionHeavy reliance on Payment for Order Flow (PFOF) where market makers execute trades off-exchange, raising serious transparency concerns.100% of retail orders executed directly on transparent, regulated stock exchanges.Clearing & SettlementLegacy settlement bottlenecks and broker-dealer liquidity strain.Robust, T+1 settlement cycles with full clearinghouse backing.Despite the dramatic spike in activity, Indian markets functioned without a hitch, barring the day when crude oil prices went negative and financial intermediaries faced issues — but that was a global anomaly, not an India-specific issue.Landmark SEBI Reforms Protecting Investors:Direct Demat Settlement (2019): SEBI made it mandatory for all securities to be settled directly to client demat accounts, completely eliminating the scope for broker misuse of client securities.e-DIS & TPIN Mechanisms: Depositories introduced the Electronic Delivery Instruction Slip (e-DIS) and TPIN protocols, doing away with the legacy requirement of granting physical Power of Attorney (POA) to brokers.Peak Margin Requirement (Dec 2020): Implemented to curtail excessive, unchecked intra-day leverage in the trading ecosystem.Client Funds Segregation (2023): Strict new rules governing daily reporting and upfront segregation of client funds with Clearing Corporations.Where Are We Today? The Reality of Market ShallownessThe post-pandemic idiosyncrasies disrupted many trends, but they have largely resolved themselves. The world is also a much gloomier place today. Interest rates in advanced economies are at levels unseen in 15 years: money now has a cost. As interest rates rose, the speculative euphoria of the last 3–4 years has all but disappeared. Most measures of stock market participation are slowly reverting to pre-pandemic trends, though overall participation remains substantially higher than pre-COVID levels.“Despite the post-pandemic bump in stock market participation, the biggest challenge for Indian markets is their shallowness. There are just 3.37 crore unique mutual fund investors; if you add unique demat accounts, the total number goes up to maybe 6–7 crore.”Pre-pandemic, this base was less than half. That is the true scale of the investor base in a nation of 1.4 billion people, illustrating how vast the untapped frontier remains.Where Do We Go From Here? Risks, AI & The Account Aggregator EraThe short answer is, I don’t know. Having said that, India is one of the rare bright spots in an otherwise gloomy global economy. Looking at China, despite the opportunity set, a lack of legal protections is forcing global investors to flee. While a recession in the US and advanced markets would affect India, our markets will outperform on a relative basis.Emerging Systemic Challenges:Under-Skilled Youth & AI Disruption: The Indian youth are dramatically under-skilled. Governments must operate under the default assumption that rapid advancements in Artificial Intelligence will cause massive societal and employment upheaval.Climate Change: The mother of all existential threats. Climate change is an economic, social, financial, and existential risk all rolled into one — if humanity is doomed, rising stock market indices are meaningless.Moderating Momentum: Despite markets trading at lifetime highs, underlying participation and volume momentum across most metrics are moderating. We may not see a roaring bull market in the immediate foreseeable future.The Next Bull Market Catalyst: Account Aggregators (AA)Developments in Aadhaar, UPI, and DigiLocker enabled fintechs to operate fully online without heavy physical branch footprints. One of the most exciting recent milestones in the India Stack is the operationalization of the Account Aggregator (AA) framework.Fintechs now have frictionless, consent-based access to banking, insurance, and investment data across financial institutions. This will spawn numerous innovative enterprises, deepening financial inclusion and feeding a virtuous cycle of capital market expansion.ConclusionWhen the next bull market arrives, Indian financial markets have never been more prepared to handle it. Proactive regulatory interventions over the last five years have fortified the market structure, ensuring systemic risks do not accumulate in shadow or lightly regulated corners. While unforeseen events will always occur, the robust regulatory framework ensures our capital market ecosystem is fully prepared to handle the next leg of structural growth.Author may be reached at: eboard@icai.in

As we move into this era of liberalization and globalization, all aspiring CAs will play an essential role in driving the economy forward. Also, with the government’s digitization efforts and focus on preventing tax evasion, individuals and businesses must seek expert guidance to avoid penalties and stay ahead of the game.75 Glorious Years of ICAI & Global CompetitivenessHappy 75th ‘Chartered Accountants Day’ to all the members and students of ICAI. The day is indeed special because it also marks the Institute’s Foundation Day. Witnessing the community of accountants exchange their knowledge and expertise about the profession is truly inspiring.The Institute of Chartered Accountants of India (ICAI) has had a significant impact on the accounting industry in India over the years. It is noteworthy that ICAI is recognized as one of the top accounting organizations worldwide, boasting a growing community of over 3,80,000 Chartered Accountants. As the accounting industry’s statutory regulator in India, ICAI has shown the world that it can compete with any other institution in terms of talent, competence, and competitiveness. With the rapid growth of the startup ecosystem, the demand for CA/IT consultants has reached new heights as new companies seek tax compliance and financial guidance.Nation-Building, FEMA & Cross-Border Capital FlowsIn large-scale nation-building, chartered accountants can make a significant contribution. Many issues occur as each business unit becomes worldwide, such as complying with the Foreign Exchange Management Act (FEMA) or government laws and regulations in each region where the company operates. International business involves foreign money inflows and outflows, which require the expertise of a chartered accountant to oversee and ensure compliance with regulations. A knowledgeable accountant can resolve all inquiries regarding these matters.M&A Evaluation Across Dynamic IndustriesIndustries such as automobiles, BFSI, and others have made remarkable progress by joining forces and acquiring one another. This has led to rapid growth and positive developments in these sectors. As CAs, the need here will be to evaluate and analyze startups, their business models, revenue models, distribution models, and every other aspect involving money. Companies in all industries, including telecommunications, pharmaceuticals, automobiles, BFSI, and others, have developed quickly due to their merger and acquisition strategy. Owing to the competitive environment, profitable expansion is one of the primary aims of commercial organizations in today’s society.The Semiconductor Industry Case: Capital Intensity & GestationThe semiconductor industry, for example, in which price declines are as certain as death and taxes, is particularly prone to discounting to maintain market share. Semiconductors are used in every industry, including communications, sustainable energy, information technology, and automobiles. It is a highly complex and technology-intensive industry characterized by:Large capital expenditure requirementsHigh operational and market risksLong gestation and payback periodsFast technological advances necessitating continuous, heavy capital deploymentIt is always beneficial for financial advisors to understand these deep market conditions and stay updated with emerging industrial trends.Corporate Restructuring & Auditor PerspectivesMany global businesses are drastically reorganizing their assets, operations, and contractual ties with shareholders, creditors, and other financial stakeholders. Corporate restructuring has enabled numerous firms to re-establish their competitive edge and adapt to new possibilities and unanticipated problems more swiftly and efficiently.The yearly financial statements of a corporation require assessment for accuracy and dependability by a Chartered Accountant (auditor). Our unique knowledge and comprehension surrounding financial taxation, the stock market, corporate legal matters, and FOREX provide varied perspectives when addressing complex financial concerns.Technology Tools: Software, ERP & Information IntegrityProfessionals should leverage accounting software like SAP, Tally, or Busy across various industries, factoring in operation size and transaction volume. The data obtained from these applications serves as the foundation for establishing objectives and departmental requirements, including report specifications, information security, real-time data access, and general financial management.Accurate and current information is crucial for accounting roles, providing management with the foundation to make informed decisions — leveraging assets, managing operating budgets, optimizing working capital efficiency, and maximizing investment yields. Professionals should hone skills in researching, compiling, analyzing, and interpreting data across disparate sources to engineer ethical and actionable business solutions.From Bootstrapped Startup to Global IPO: The Route Mobile JourneyWhile building Route Mobile Ltd from a bootstrapped business to a successful IPO, we have also expanded the business through mergers and acquisitions across the globe. Today, we are present in more than 23 global locations:Financial Risk Mitigation: Our approach towards identifying and mitigating financial risks is strengthened by the valuable support received from our internal and external audit and tax professionals.ERP Consolidation Strategy: We achieved significant operational efficiencies by implementing an enterprise-wide ERP consolidation strategy, enabling transparent stakeholder dialogue, benchmarking against global peers, and identifying operational improvements.BRSR Adoption: Being a responsible corporate citizen made Route Mobile one of the earliest adopters and pioneers of SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework.Empowering MSMEs: ICAI’s Strategic MentoringICAI’s new initiatives — encompassing comprehensive programs such as mentoring, the MSME scale-up checklist, and facilitation centers — will greatly impact the direction of business policies in the country. Chartered Accountants are uniquely positioned to assist small and medium enterprises (MSMEs) in:Restructuring working capital facilitiesMaking sound, risk-adjusted capital expenditure decisionsNavigating business acquisitions, asset sales, and valuation modeling“To all the aspiring CAs, remember, your role goes beyond simply auditing. As a qualified Chartered Accountant, you have the potential to be a valuable resource for anything related to finances.”Guidance for Aspiring Chartered Accountants & StudentsEmployers prioritize skills, practical experience, and adaptability. Aspiring CAs can add immediate value to their profiles by gaining proficiency in:Enterprise Resource Planning (SAP / ERP)Management Information Systems (MIS)Corporate Budgeting & ForecastingAdvanced Financial Software (Tally, etc.)Never assume you have accomplished everything. There is always room for improvement; stay updated with continuous technological disruptions and seize emerging opportunities with proactive dedication.ConclusionI commend everyone associated with the Institute of Chartered Accountants of India on 75 glorious years of accomplishments. It is truly inspiring and a credit to the commitment of our fraternity. Wishing ICAI many more great milestones and grand success in leading the global accounting landscape.Author may be reached at: eboard@icai.in

Entrepreneurship and startups have emerged as engines of innovation, job creation, and economic growth in India today. CAs are a crucial ally in this journey. The industry has undergone many changes. Big companies, unicorns, big retail chains, and more depend on accountants to compute complex numerical data and offer insights into the working of the global financial system.The CA Grind as the Foundation for EntrepreneurshipI learned many important lessons while on my path to become a CA. The skills that you develop over time come in handy while growing a company. The way we CAs interpret numbers and economics is something that can play a very important role in creating a strong foundation for a brand.Like entrepreneurship, preparing for CA requires a great amount of discipline, foresight, and focus, so pursuing the right form is crucial to success:Aspirants study for at least 8–10 hours daily; however, on exam days, they study for 12–15 hours a day.Becoming a CA requires years of intense studying, extensive preparation, and unwavering dedication.The process requires discipline, perseverance, and commitment, and today I use these learnings to set up a culture of frugality and make the most of every penny that we spend.Being adept with financial knowledge enables new entrepreneurs to look beyond the product. It helps me make informed decisions about budgeting and cash flow management.The boAt Milestone:This financial discipline has helped me build boAt into a leading audio and wearable brand. We did INR 4,000 crore in net sales in FY 2022-23 and are now valued at more than $1.5 Billion.Starting with the Numbers: A Distinct Problem-Solving PerspectiveAs a CA, when an idea comes to you, you know where to start: the numbers. Before we even come up with a proper vision for a brand, we know where to look first to get the idea going and growing.CAs are the backbone of the Indian economy and play a very crucial role in keeping up with the fast-paced global markets. Earlier, when people imagined a CA, all they could think of were taxes, balance sheets, accounting, and auditing. But CAs have a very different perspective on things:“Where most people just see numbers, we see a way out of challenges. Our problem-solving ability enables us to have an objective way of looking at the challenges faced. It helps us to get to the roots of the problem and bring about a change to solve them.”We CAs possess a strong grip on numbers and finances, which is vital for building a concrete foundation for any venture. Understanding the intricacies and being able to analyse and interpret numerical data allows entrepreneurs to make informed decisions that steer the company toward success. Effective financial management not only ensures the efficient allocation of resources, but it also helps in identifying potential risks and opportunities.Building Investor Trust & CredibilityWhen entrepreneurs can demonstrate a thorough understanding of their financials to potential investors, it builds immediate trust and credibility:Investors appreciate the ability to articulate the financial health of the business with precision.Showcasing a solid grasp of key metrics — revenue, profit margins, and cash flow — strengthens investor relations.It enhances the prospects of securing funding, optimizing valuations, and establishing long-term strategic partnerships.Ultimately, having a firm grasp on numbers and finances provides a solid launchpad for growth, sustainability, and fruitful collaborations.Empathy, Human Stories & Composure Amidst ChaosWhile becoming a CA, I not only developed a strong work ethic but also cultivated a deep sense of empathy and a sense of calm. The journey taught me the importance of understanding others’ perspectives and connecting with their experiences. It made me realize that behind every number and financial decision, there are human stories and aspirations.As I delved into the complexities of finance and accounting, I encountered countless situations where empathy played a crucial role. Whether it was assisting my organization during challenging circumstances or collaborating with team members to navigate intricate business scenarios, I learned to listen attentively, put myself in others’ shoes, and offer support beyond mere calculations. The rigorous nature of the profession also taught me the significance of maintaining composure amidst the chaos.The Startup Mindset & “Do What Floats Your boAt”Entrepreneurship is not just about starting a business; it’s about embracing a mindset of innovation, resilience, and limitless possibilities. As a Chartered Accountant, you have the power to redefine boundaries. You understand the intricacies of finance, compliance, and risk management — essential elements of any successful venture.In the realm of startups, compassion is an often-underrated attribute. However, it holds tremendous power in fostering authentic connections, building strong teams, and uncovering innovative solutions.Life Philosophy: “Do What Floats Your boAt”It’s about pursuing what genuinely interests you, because when you dedicate yourself to exploring what ignites your soul, a world of opportunities unfolds. With each new endeavor, strive to pick up the best from every experience, extracting valuable lessons and skills along the way. By combining passion, technical expertise, and continuous learning, you forge your own unique destiny.A Resounding Call to ActionTo every Chartered Accountant out there: embrace your entrepreneurial spirit, dare to dream big, and unleash your potential. The world awaits your innovation, your passion, and your unique ability to make a difference:Go forth and create.Disrupt old boundaries.Leave an indelible mark on the country’s economic growth story.Dream Big!Author may be reached at: eboard@icai.in

India is on the verge of a big change where finance and technology come together. The young people of our country, with their digital skills and creative ideas, have the opportunity to shape how India’s financial system will be in the future. Today, we will talk about the amazing impact of FinTech and how important it is for young individuals like you to be involved in shaping our nation’s financial future.“One of the recent milestones in our journey towards a digital India is the introduction of E-Rupi, a groundbreaking digital voucher-based payment system. E-Rupi facilitates the secure and transparent delivery of government subsidies and welfare benefits, minimizing leakages and ensuring efficient utilization of resources. This game-changing solution has the potential to revolutionize the way financial assistance reaches the intended beneficiaries, fostering inclusivity and transparency in our society.”The Transformation of the FinTech SectorLet’s start by acknowledging the incredible transformation taking place in India’s FinTech sector. The fusion of finance and technology has revolutionized how we access and engage with financial services. The emergence of mobile banking, digital wallets, and peer-to-peer (P2P) lending platforms has democratized finance, making it more accessible, convenient, and cost-effective for all. It’s an exciting time to be a part of this financial revolution!“Despite the initial disparity in internet penetration between urban and rural areas, the numbers reveal a promising trend. In fact, as of March 2023, the absolute number of internet users in rural areas is 44% more than that of urban areas!”This signifies the immense potential for FinTech to empower rural communities and drive financial inclusion. With time, this digital divide will continue to shrink, unlocking the vast possibilities that lie ahead.Government Initiatives for Expanding FinTech ServicesOur government deserves applause for its proactive efforts to promote digital financial services. Initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), Direct Benefit Transfer (DBT), and the Unified Payments Interface (UPI) have played a pivotal role in fostering the growth of FinTech. These initiatives, aligned with the Digital India campaign, have paved the way for a more inclusive and technologically empowered financial ecosystem.While the vision of a cashless economy may seem ambitious, we are making steady progress toward this goal. The widespread adoption of digital payment platforms, mobile wallets, and innovative payment solutions has significantly reduced our reliance on physical cash. With increased awareness, infrastructure development, and forward-thinking policies, our transition to a cashless economy will gather momentum, creating a seamless and efficient financial ecosystem for all.How the Youth Can Contribute to India’s Financial FutureIndia’s youthful and dynamic workforce is expanding by approximately 9.7 million individuals annually. This massive demographic surge will directly catalyze:Increased smartphone penetration across tiers and rural hinterlandsExponential growth in digital transactionsRising demand for formal retail and enterprise creditAccelerating growth in the total number of Demat accounts and capital market participationAs the FinTech industry adapts to cater to these evolving needs, it will flourish, bringing us countless opportunities for innovation and career success.The Youth as Digital Natives:The youth of India hold the key to shaping the country’s financial landscape. As digital natives, they possess the skills, knowledge, and enthusiasm to drive innovation and adoption of FinTech solutions. The youth can actively participate in entrepreneurship, start-ups, and technology-driven initiatives that promote financial literacy, inclusion, and responsible financial behavior. By embracing emerging technologies, advocating for digital literacy, and engaging in policy discussions, the youth can play a vital role in shaping a prosperous and inclusive financial future for all.Author may be reached at: eboard@icai.in

Sustainability is no longer a buzzword but a fundamental expectation in the society today. Families are becoming more conscious of their buying habits, often opting for reusable items over single-use ones, and embracing energy-efficient technologies. Schools are teaching children increasingly about the threats to the planet and society from unethical behaviors and about the need to embrace sustainable options, businesses and ways of life.The Surge in Sustainable Finance & Public ExpectationsAs consumers or investors, our decisions are now being driven not only by the price of products and the financial return of investments but also by the values of the companies behind those products and investments. Take the story of success of some brands that chose to build their business models around sustainability, and the severe reaction of consumers and investors against other brands that have opted to resist this necessary new ethical approach to business: both demonstrate how much sustainability has already been incorporated as a public value and a condition for financial resilience and success.The substantial growth of ESG (Environmental, Social, and Governance) investing is another indication of sustainability’s prevalence in our society today. As of June 2023, one of the world’s largest asset managers reported an increase in its ESG assets under management (AUM) to US$ 2.5 trillion, up from US$ 1.2 trillion just two years prior. This explosive growth of ESG investing underscores the robust interest from investors globally in sustainable finance.This fundamental shift towards a more sustainable economy has also spurred organizations of various sizes to promote and celebrate their sustainability efforts. Organizations communicate their “aggressive net zero goals,” “sustainable investment vehicles,” and more through data-driven reporting and vibrant advertising campaigns. In doing so, they inform the public of their commitments towards the environment, society, and their own governance. For instance, some companies are targeting, or claim that they have reached, “net zero” carbon emissions. Others claim they will be not just carbon neutral, but also carbon negative by 2030.As the pressure on companies to act more sustainably has risen, so has the imperative of timely, relevant, and trustworthy sustainability information. This new information is increasingly being used to support decisions made by investors, customers, workers, government agencies, and other stakeholders. It is therefore critical that this information is as reliable as financial information.The Skepticism Crisis: But is All This Information Trustworthy?Before taking over as Chair of the IESBA, I served as Chair of the Portuguese Securities Commission (CMVM), and a member of the Board of the International Organization of Securities Commissions (IOSCO). These positions require ample awareness of the capital markets’ needs and being conscious of the close links between high-quality, ethically prepared and presented corporate information, and well-functioning capital markets.But the demand for reliable sustainability information has gone well beyond the capital markets and is coming from all economic and social partners, including individuals, concerned about understanding the impacts of each activity on the sustainability of the system. As stakeholders clamor for more data on sustainability, the amount of available relevant information has also risen dramatically. This surge presents organizations with opportunities to cherry-pick or exaggerate, or even misrepresent their sustainability credentials to enhance their public image. This raises a significant public interest concern that sustainability credentials might be overstated or manipulated for corporate gain:Yale & George Mason University Survey (2021): Found that 71% of Americans believe companies’ claims to be sustainable even when their actions are not, showing widespread public skepticism.Global Executive Survey (2022): Revealed that two-thirds of executives expressed doubt regarding the authenticity of their own companies’ sustainability efforts.“Without strong ethics in the production, reporting, and assurance of sustainability information, there are significant risks of issues like ‘greenwashing’.”Merriam-Webster defines greenwashing as “the act or practice of making a product, policy, activity, etc., appear to be more environmentally friendly or less environmentally damaging than it is.” With widespread developments in sustainability, it is no longer only about the environment, but also encompasses societal and governance impacts.Notable Greenwashing Breaches in Corporate HistoryA classic example in recent history is the Volkswagen “Dieselgate” scandal in 2015, which led to billions of US dollars in fines and a tarnished reputation for fraudulently altering diesel emissions software while marketing vehicles as eco-friendly. But Volkswagen is not alone: accusations against famous global brands — from Deutsche Bank to IKEA, from H&M to Coca-Cola — for hiding unethical practices behind shiny green marketing show how critically trust is needed.Greenwashing undermines the progress being made daily towards sustainable solutions and damages the credibility of sustainable finance. It leads to a loss of investor and consumer confidence, which over time will cause reduced capital allocation to sustainability initiatives and eliminate incentives for corporations to change.Root Drivers of Misleading Sustainability Disclosures:Subjectivity of Metrics: Existing sustainability metrics are far more subjective than established financial and operational accounting rules, allowing underperforming entities to present results in an artificially favorable light.Excessive Narrative Pressure: Public pressure to report progress against ambitious commitments, combined with low technical understanding, pushes corporations to engineer exaggerated narratives.Lack of Standardization: Absence of overarching global statutory standards leads to arbitrary measurement and reporting practices.Ethical Behavior: Foundational to a Sustainable FutureFor sustainability efforts to be meaningful, investors and stakeholders must trust sustainability disclosures as much as they trust audited financial statements. Understanding what is being measured is only part of the challenge; verifying and validating data, and understanding sustainability’s direct impact on financial statements and forecasts, are critical components.To solve this puzzle, the global standard-setting community is erecting a cohesive Three-Pillar Architecture:Pillar 1 (Disclosure Standards): The International Sustainability Standards Board (ISSB) is developing baseline sustainability disclosure standards for global capital markets.Pillar 2 (Assurance Standards): The International Auditing and Assurance Standards Board (IAASB) is developing an overarching international sustainability assurance standard.Pillar 3 (Ethics & Independence Standards): The International Ethics Standards Board for Accountants (IESBA) is developing globally applicable ethics and independence standards for sustainability reporting and assurance.Standardization and technical regulations alone cannot prevent greenwashing — an ethical foundation is absolutely necessary to promote authentic actions within organizations. Intent matters, and organizations must demonstrate genuine accountability.“The integrity of the information provided to investors and other users is a core element of the system.”Ethics as the Cornerstone of Reliable ReportingFrom my professional experience in financial markets and corporate governance, it has always been my deep conviction that ethics forms the cornerstone of public trust in organizational reporting. Ethical behavior underpins data integrity, guiding corporate leadership to build cultures where accountability is celebrated and rewarded.The IESBA International Code of Ethics for Professional Accountants (including International Independence Standards) serves as the global “north star”:Formally adopted in over 120 jurisdictions and translated into about 40 languages.Grounded on five fundamental principles: Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behavior.Guides accountants to maintain the rigor of their analyses, exercise an inquiring mind, and actively challenge management representations.The IESBA Roadmap: Profession-Agnostic Standards by 2024In October 2022, IESBA released the landmark Q&A publication: “Ethics Consideration in Sustainability Reporting, Including Guidance to Address Concerns about Greenwashing”. In response to requests from IOSCO, IESBA has committed to creating globally applicable, profession-agnostic ethics and independence standards:Global Multi-Stakeholder Roundtables: Earlier this year, IESBA conducted roundtables in Paris, Sydney, Singapore, and New York, engaging investors, regulators, standard setters, accountancy bodies, and non-accountant assurance providers.Standard on the Use of Experts: Addressing the multidisciplinary nature of sustainability data (e.g., carbon engineers, climate scientists).Timelines: Exposure Drafts released by late 2023, with final enforceable standards issued by end-2024.Profession-Agnostic Applicability: Studies show that more than half of sustainability assurance engagements globally are conducted by independent assurance providers outside the accounting profession. To serve the public interest, IESBA’s upcoming standards will apply to all sustainability practitioners, holding accountants and non-accountants to the exact same high bar of ethical conduct.ConclusionWe have an unprecedented opportunity — and an obligation — to promulgate robust, globally applicable standards to support trustworthy sustainability reporting and assurance. Doing so will foster public trust, enable companies to develop authentic green strategies, stamp out greenwashing, and satisfy the legitimate expectations of investors, regulators, and society.Author may be reached at: eboard@icai.in

‘Audit’ is derived from the Latin word ‘audire’, or ‘to hear’. Recently, it is not the hearing ability but the smell test and the ability to observe that have been more in focus. The expectations of regulators and other stakeholders have been increasing with respect to the work performed by Independent Auditors (herein after also referred as “Statutory Auditors” or “Practice Unit”). The only common point of agreement among all stakeholders appears to be that the quality of the audit must improve. Even auditors agree & they are willing to take audit quality to the next level which would meet the expectations of various stakeholders involved in the listed or an unlisted entity. To achieve this objective, the auditing profession will need to have 360 degrees change in the audit approach while performing the audits. So, how can auditing quality be improved?The regulators and the Institute of Chartered Accountants of India (“ICAI”) have been making continuous efforts to implement certain changes related to auditing profession which will help to improve audit quality in general and it is expected that independent auditors too implement those changes in true spirit and change the traditional approach of auditing which is being followed since decades. Also, the Statutory Auditors are expected to stay updated with changes in applicable laws and to adapt usage of technologies in audit functions. The time has come to adapt CHANGE with respect to mindset, the audit approach and to accept the fact that every individual involved in auditing profession will have to adapt usage of technology instead of manual ways of doing audit which should be a distant past very soon.Let’s elaborate on the steps taken by regulators as well as ICAI along with certain steps which independent auditors are required to initiate at their end for the purpose of improving audit quality.Peer Review Phase II from 1st July, 2023The main objective of Peer Review is to ensure that in carrying out the assurance service assignments, the members of the Institute:(a) Comply with Technical, Professional and Ethical Standards as applicable including other regulatory requirements thereto; and(b) Have in place proper systems including documentation thereof, to amply demonstrate the quality of the assurance services.Thus, Peer Review is meant for the purpose of enhancing quality of professional work, transparency in technical standards used, world class procedures and techniques resulting into more reliable and useful audit and reports, and it has no relationship whatsoever with any disciplinary or any other regulatory mechanism. The review begins with the assumption that professionals discharge their responsibilities properly and the aim of review is to enhance those attributes of professionalism that serve to keep the profession of chartered accountancy in India in the forefront of the accounting and auditing profession in the world.At present in Phase I the peer review certificate issued by ICAI is mandatory for those Practice Units who are performing independent audits for listed companies and proposed to be listed companies. So technically the Practice Units which are not doing such types of audits are outside the purview of peer review currently and here the question arises “Who will audit such auditors?”. Unless you have third party review mechanism it is not possible to find out the gaps in audit procedures or to identify the areas for improvements. Therefore, the ICAI is planning to launch phase II of peer review wherein the Peer Review Certificate will be mandatory to the following Practice Units in addition to the Practice Units covered under Phase I:Practice Units which propose to undertake Statutory Audit of unlisted public companies having paid-up capital of not less than rupees 500 crores or having annual turnover of not less than rupees 1,000 crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees 500 crores as on the 31st March of immediately preceding financial year. ORPractice Units rendering attestation services and having 5 or more partners.Further, the ICAI is also planning to cover more Practice Units in Phase III & Phase IV which has been already announced under Peer Review Mandate dated 11th April, 2022.Centre for Audit Quality Directorate (CAQD) - ICAIThe purpose of an independent audit is to provide confidence to users of audited financial statements in the quality of financial reports, in particular relating to their reliability. Improving audit quality and the consistency of audit execution is essential to maintain confidence in the independent assurance provided by the auditors. It is trust that enables organizations to create long-term value and high-quality audits play a crucial role in building trust and confidence in the users of financial information and thus it is the responsibility of the auditor to ensure that the audit quality is maintained.Audit and Audit Quality has always been at the forefront at the ICAI. Accordingly, with a purpose to raise the level of awareness and understanding of various aspects of the Audit Quality, the ICAI in the year 2020 established the CAQD. It is pertinent to note that CAQD is conducting various seminars, webinars, certificate courses etc. which should be attended by the team members of Audit firms as the same will surely benefit audit teams to stay updated with the changes coming in for auditing profession and it will also help to improvise the audit quality in the long run.Audit Quality Maturity Model (AQMM)The AQMM is a capacity building measure initiated by ICAI and the objective of this Evaluation Matrix is for sole proprietors and Audit firms to be able to self-evaluate their current level of Audit Maturity, identify areas where competencies are good or lacking and then develop a road map for upgrading to a higher level of maturity.In the Council meeting held on January 9, 2021 it was decided that the both the Peer Review Board and the Centre for Audit Quality (CAQ) would need to develop the ecosystem which is acceptable to both and such collaborative approach would have the advantage of the CAQ developing the quality standards and Peer Review Board testing the said standards.Initially AQMM was kept recommendatory for one year and from 1st April, 2023 it is mandatory for the firms which are doing audits of listed entities or Banks other than co-op. banks (except multi state co-op. banks) or insurance companies, however the firms doing only branch audits are not covered at present.The scores and the level arrived at shall be subject to review by a peer reviewer alongside the peer review cycle which falls anytime on or after 1st of April 2023. However, the firm(s) may choose to get their scores reviewed by an AQMM reviewer before their peer review cycle falls due. In case of firms whose last peer review cycle has been completed and not a year has lapsed from the date of the last review, such firms may choose to get their scores reviewed before their next peer review falls due by an AQMM reviewer. This option would be beneficial for the firms that have undergone their peer review recently and will have to wait for 3 years to have their next cycle for review of their AQMM scores. The level of the firm arrived at, after being reviewed by the peer reviewer shall be hosted on the website of the ICAI alongside the details of the peer review certificate.Core Prerequisite of AQMM:The most important requirement of AQMM for audit firm is to have “Audit Manual” containing the firm’s methodology that ensures compliance with the auditing standards and implementation thereof.AQMM is a cross functional model and covers operations, HR and functional set up of the firm. It also covers engagement teams, firm leadership, IT helpdesk, audit tools, human resources team, admin department, legal cell, networking and management information system desk of the firm. Since it covers many aspects, the audit firms are advisable to refer to implementation guide on AQMM issued by ICAI explaining all aspects at length which would be helpful for accurate evaluation of audit quality maturity levels.Like peer review phase II, it appears that ICAI might cover more firms under the purview of AQMM in future to improve audit quality especially for small and medium practitioners involved in independent audit practice.Financial Reporting Review Board (FRRB) – ICAIFRRB was constituted in July 2002, which is an important wing of ICAI that works to bring improvements in financial reporting practices and thereby promote investors’ confidence in audited financial statements. The Board comprises of members of the Central Council of the ICAI including Government of India nominee with representations from the office of the SEBI, C&AG, IRDA, CBDT from time to time. The Council always endeavor’s to provide independence to the Board and keep it separate from the disciplinary mechanism of the Institute. FRRB neither has co-opted members or ex officio members including the President and Vice-president of the ICAI nor has any member of Disciplinary Committee on the Board. The members with significant expertise in the field work under confidentiality covenants.FRRB reviews the general purpose financial statements of enterprises and auditor’s report thereon with a view to determine, to the extent possible:Compliance with the generally accepted accounting principles in the preparation and presentation of financial statements.Compliance with the disclosure requirements prescribed by regulatory bodies, statutes and rules and regulations relevant to the enterprise; andCompliance with the reporting obligations of the auditor.The Board restricts its reviews to the published financial statements only and do not carry out re-audit or review how audit has been conducted by auditors concerned. The Board doesn’t carry out a detailed scrutiny. Further, the review conducted by the Board is neither a judicial proceeding nor a quasi-judicial proceeding.Criteria for Selection of Enterprises for ReviewSuo mottoSpecial cases referred by regulatory bodies.Cases where serious accounting irregularities in the financial statements are reported in mediaActions Taken by FRRB Based on ReviewTarget EntityCourse of Action Initiated by FRRBAuditorsMaterial non-compliance: Refer to Director (Discipline) of the ICAI for initiating appropriate action against the auditor.Other cases: Issues advisory to auditor to help / guide auditors towards best practices & transparency in reporting of financial statements.Management of EnterprisesInform irregularities to the regulatory body like MCA, RBI, SEBI, IRDA, EEC etc. relevant to the enterprise for appropriate action.FRRB also create awareness amongst ICAI members by releasing “Study on Compliance of Reporting Requirements” from time to time. These publications have been released on both IGAAP and IND AS financials which are available on FRRB page on ICAI website. Also, FRRB articles are published in ICAI journal to apprise the ICAI members and others about the non-compliances observed during the reviews. It is advisable for audit firms to refer to these publications, articles & guide their audit teams and auditees to take preventive measures for avoiding such errors in the financial statements audited by them & audit report thereon.Major Change in Audit Trail Requirements in Accounting SoftwaresThe Ministry of Corporate Affairs (MCA) has notified under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 that from 1st April, 2023, every company using accounting software must use software that records an audit trail of each and every transaction and creates an edit log of each change made in the books of account. The software must also ensure that the audit trail cannot be disabled.As per the amendment, the backup of the books of accounts maintained in electronic mode shall be kept in servers physically located in India daily. It may be noted that any software used to maintain books of account will be covered within the ambit of this Rule. For e.g., if sales are recorded in a standalone software and only consolidated entries are recorded monthly into the software used to maintain the general ledger, the sales software should also have the audit trail feature since sales invoices would be covered under Books of Account as defined under section 2(13) of the Companies Act, 2013. Auditors would need to evaluate whether management has also considered such software in their compliance with the Account Rules. Accordingly, any software that maintains records or transactions that fall under the definition of Books of Account as per section 2(13) of the Act will be considered as accounting software for this purpose. Therefore, any separate software used for sales, stock, payroll processing etc. shall also have the feature of audit trail (edit log) as mentioned in the Rules.In view of above, those auditee companies who have not implemented / activated audit trail (edit log) function in their accounting software from 1st April 2023 will be reported by the Statutory Auditors in their statutory audit report for the year 2023-24 because as per the above Rule the feature of recording audit trail (edit log) should be operative throughout the year. The Independent Auditors can refer to the Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 issued by ICAI which gives detailed guidance on audit approach, auditors responsibility, management responsibility, audit documentation, reporting and other related aspects.These MCA notifications are aimed at ensuring transparency and accountability in the financial sector. The use of accounting software with audit trail features will help prevent financial fraud and ensure that companies are maintaining accurate records and eventually it will give more comfort to the Statutory Auditors for performing company audits.Use of TechnologyAccording to the report by Centre for Economic Policy Research (CEPR) in March 2020, a rapid increase in the volume of data requires auditors to be equipped with the latest available technological tools to analyze a much higher volume of data in their audits than previously required.CEPR said that the business in present times is becoming larger and more complex. Also, it is becoming difficult for the auditor to really access the complete data and study the systems to achieve the in-depth examination and subsequent analysis. The limited tools to access and analyze the data and study the systems to bring out effective reports is becoming a big challenge and these limitations are across both the large and small enterprise.In today’s fast changing world, the businesses are also adapting to new technologies in business operations & other supporting functions, so it is essential for auditors to move from manual ways of doing audits towards use of technology in the form of audit automation tools for documentation, sampling techniques, data analysis, obtaining direct confirmations from third parties etc. This will surely help Independent Auditors to improve audit quality and to have better data retention systems in place as compared to having voluminous hard copies of documents that used to be kept in files.Audit Teams on Field PresenceAs all of us know, during the first and second lockdown during Covid-19 pandemic across the country, the statutory auditors were supposed to finalize the audits virtually or with very a smaller number of on filed visits & limited access to auditees premises. During the pandemic it was need for an hour to perform most of the audit procedures virtually and all of us did it by compulsion. However, post covid also it has become general practice by auditees and auditors to have virtual meetings, to share data online through various modes, to share audit queries virtually & have discussions through audio / video means of communication.There is no harm in doing audits through hybrid mode to save travelling time of audit teams, but it is very important to understand that auditors may not be able to gather sufficient and appropriate audit evidence without having field presence. The examples are difficulties to check authenticity of original documents, missing out important updates with respect to auditee business, more time involvement in virtual communication etc. Therefore, it is essential for the audit team to visit auditee’s office / premises during the audit & decide based on their expertise the extent to which physical presence is required. Audit team’s physical presence on field can surely improve audit quality & save considerable amount of man hours which would have been required in virtual mode of performing audit.Trainings for Audit TeamsAs all of us know that auditing is bread and butter for CA profession and many practitioners are engaged in this profession since very long time. Although experienced CAs are having good knowledge of auditing aspects, it is essential for signing partner / proprietor & his audit teams to keep them updated with changes happening around auditing profession due to ever demanding expectations from various stakeholders and regulators. This is possible only through internal training programmes within Audit Firms on regular basis and by attending seminars / webinars conducted by ICAI and more particularly by CAQD on the topics like Standards on Auditing, Peer Review, AQMM, Ind AS, Accounting Standards etc. These training courses can be beneficial to audit practitioners and their audit teams, which would eventually improve audit quality in the long run.ConclusionAs soon as a corporate fraud is unearthed, the auditor is the first one to face the heat and finds himself as scapegoat. Expectations from auditors are unreasonably high. With the rise in the number of cases of corporate frauds, several initiatives have been taken by ICAI, MCA, SEBI, and other regulators. Increased regulatory watch and more awareness among auditors on the recent changes in applicable laws are playing an important role in building up the quality of audit.An Auditor is required to ensure compliance with all relevant statutes applicable to entities audited by them and identify all the risk areas. Ensuring all of this while completing an audit in a short span of time is a challenging task, however it can be ensured by taking steps in the right direction as discussed in the earlier paragraphs of this article. If an auditor is conducting an audit without affecting his independence, with compliance of applicable laws & code of ethics, with proper documentation as per Standards on Auditing & Standard on Quality Control etc., there are less chances that questions would be raised on his audit quality. In nutshell, if both the auditees and auditors are performing their responsibilities by remaining within boundaries of applicable laws and regulations with clear intentions, it is possible to overcome facing challenges from regulators. Therefore, the Independent Auditors should continue performing audits with a positive mindset & they should be always ready to adapt every single CHANGE that is coming their way in future.Author may be reached at: eboard@icai.in

Audit is an independent function which includes providing an independent opinion on the financial statements in case of statutory audit and other assurance engagements. An audit is expected to be done as per the Standards of Auditing issued by the Institute of Chartered Accountants in India and in case of any other geography the local body which governs the profession of accounting and auditing. The investors, government and other stakeholders of the business are expecting more from the auditors which has also led to additional reporting responsibilities. National Financial Reporting Authority are also monitoring the mechanism of preparation of financial statements and audit.In any profession, delivering quality of service is very important. The audit profession is quite different from others; wherein the audit report is used by not only the client but also other primary users of financial statements though they may not have even appointed them. The Standard of Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements’ (SQC) issued by ICAI deals with Engagement Quality Control Review.Meaning of Engagement Quality Control ReviewAs per SQC, “It is a process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report.” The SQC of ICAI is broadly like the International Standards of Quality Control issued by IFAC.Quality review is not mere review of the audit procedures of a particular engagement, but also includes ethical requirements, client acceptance procedures, human resource aspects, monitoring engagement amongst other things. Quality of service should be engrained in every activity and every sphere of profession and not restricted to a particular audit. As they say, auditor should not also be independent but also appear to be seen as independent. Similarly, the quality in the audit should also be demonstrated by way of proper documentation.Who is eligible to do a Quality Review?Per the definition in SQC, “a partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, with sufficient and appropriate experience and authority to objectively evaluate, before the report is issued, the significant judgments the engagement team made and the conclusions they reached in formulating the report. However, in case the review is done by a team of individuals, such team should be headed by a member of the Institute.”In a Firm, a Partner can be a Quality Review Partner or ‘Engagement Quality Control Reviewer’ (‘EQCR’ / ‘QRP’) who (Para 70, SQC 1) is selected as per the Quality Control policy of the firm and not associated with the engagement. Accordingly, the EQCR is being selected in accordance with the Quality Control policy of the firm. The firm should ensure that the ECQR has enough experience in accounting, audit and assurance and updated on latest developments in auditing sphere and has ability to independently assess the quality of the engagement at all stages.In case of a sole proprietorship, they are free to use the services of another firm of CA or another CA for the purposes of quality control review of the engagement and to comply with SA 220 – Quality Control for an Audit of Financial Statements (Para 72 SQC 1).Cooling-off Period Mandate:An individual who has been appointed as responsible for the engagement quality control review can continue to do so for a period of seven cumulative years after which there would be a cooling period of three consecutive years (R540.11 – Code of Ethics – Cooling-off Period).Timing and Scope of EQRPThe scope of engagement includes all audits and reviews of historical financial information and for other assurance and related service engagements.The timing of the quality review process is an important factor to be decided. As per SQC, “It is a process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report.” Hence, it is essential to ensure that the engagement’s quality review is planned and executed in a manner that the engagement partner would have time to consider the suggestions of EQRP in the audit and complete it accordingly. The EQCR is not a concurrent function rather is to be done only when the audit function is completed or nearly completion. In certain circumstances wherein the engagement partner is of the view that certain critical decisions need to be discussed, the EQCR can be done accordingly. The timing of the QRP would depend on complexity of the audit engagement considering the size of the client, regulatory environment, listed / unlisted entity, and other factors.EQCR while reviewing the audit documentation needs to ensure that the audit has been carried out by considering the following aspects (Para 19, 20 and 21 of SA 220):1. Engagement PlanningThe EQRP should ensure that the engagement is:Well planned considering the timeline within the engagement is expected to be completed.Nature of Industry like banking, insurance, or other regulated industries may require the EQRP to ensure the specific factors are included in the audit planning stage.Ensuring engagement formalities are complied with.Risk assessment of the engagement and how the engagement has developed an audit program based on risks perceived and how the engagement team has evaluated the responsibilities relating to fraud.Review of the materiality and how the same has been re-examined over the engagement.The engagement team has been briefed about the engagement.2. Engagement ExecutionReview of work papers to ensure sufficient and appropriate audit evidence has been documented.Review of significant judgements that are made especially relating to significant risks.Review of corrected and uncorrected misstatements and its possible impact on the financial statements and audit report.Adequacy of work papers to draw conclusion on the engagement.Engagement has been supervised by a senior / partner on a routine basis.3. Engagement ReportingReview of the conclusions drawn by the engagement team and discussions with management on various issues.Review of the communication to those charged with governance.Discussions with the engagement team on critical audit observations and the judgements that the engagement partner has taken.Consultation on critical issues.Ensuring compliance with standards of auditing and other authoritative pronouncements of ICAI or any other authority.It is up to the Engagement Partner, EQCR and the Firm’s SQC Policy to decide upon the timing of the review, documentation etc., but within the framework of SQC 1. For example: for an audit of a listed entity the EQCR must review the limited review activity done by the engagement team before the review report is released hence may have to be done on quarterly basis; but for an unlisted entity the timing could differ considering whether an interim audit is done or only a final audit is done. It is not expected of EQCR to do the activity concurrently or on real time basis; however, it is advisable for the engagement team to discuss with EQP at specific phase of audit or when some crucial issue needs to be discussed and opinion needs to be solicited.Differences of Opinion (Para 57 of SQC 1)It is always possible that during an audit engagement, the engagement partner and EQRP may have differences in terms of audit planning, execution, or conclusion. In such cases, the Firm is expected to have a policy on how the differences would be resolved, including but not limited to:Discussions with other senior partners in the Firm.Soliciting an opinion from another CA, not connected with the Firm.Consulting ICAI or any other regulatory or professional body.Finally, the decision of the engagement partner shall prevail and if the decision is different from that of the EQCR; the same needs to be evidenced with adequate documentation.Documentation of the EQCR and Engagement Documentation (Para 74 – Para 85, SQC 1)The EQCR should ensure that audit documentation of the function of engagement quality control is:Done as per SQC and SA 230 and other applicable standards.The EQCR should have enough documentation to demonstrate that the EQCR has complied with all the entity level and engagement level functions including those related to resolution of differences.Suggested Documentation of EQCRName of the Firm:Period:Name of the Client:Nature of Assignment:Engagement Quality Control Review Documentation: Phase of AuditSl. No.Matters discussed with the Engagement Team (Reference to financial statements / audit report, etc.)View of the Engagement TeamView of the EQCAre there any difference of opinion?If yes, how resolved?1.     2.     Conclusion of EQC:Review Remarks from Quality Review Board of ICAIThe Quality Review Board in its review of audit engagements has observed that the audit firms have (Report on Audit Quality Review 2021-22):Not established policies and procedures requiring, an engagement quality control review procedures that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report and setting out criteria against which all other audits and reviews of historical financial information, and other assurance and related services engagements should be evaluated to determine whether an engagement quality control review should be performed.Not establishing policies and procedures setting out: (a) the nature, timing, and extent of an engagement quality control review; (b) criteria for the eligibility of engagement quality control reviewers; and (c) documentation requirements for an engagement quality control review.Review Remarks from National Financial Reporting Authority (NFRA)In the following circumstances, the NFRA was of the view that it is not in line with SQC:EQC and Engagement Partner being the same.No documentation of review done by another CA who was nominated as quality review partner.The interim execution EQR Checklist and Audit Program EQR Checklist were signed on the same date indicating that, ‘as per the firm’s policy, the EQCR’s involvement is required in all stages of planning, execution and conclusion’.Both the QRB and NFRA comments indicate that the EQCR process should be tightened and must be more robust at firm level. The whole quality of the audit would be compromised if the EQCR has not performed their duty diligently.Suggested Contents of SQC Manual about EQCRIdentifying EQCR and communication.Ensuring independence of EQCR and team.Policies and Procedures for dealing with and resolving difference of opinion within the engagement team, with an external consultant and between the engagement team and EQR Reviewer.Documentation of how the issues were resolved.Setting out the criteria what other engagements (other than audit of financial statements of listed entities) should be within the framework of EQR for example where the entity has significant public interest, regulated industry, entities having going concern issues or significant litigation etc.Consequences of Not Having EQCRThe requirement of having EQCR stems from SQC 1. Para 1 of SQC 1 mentions that the provisions must be read in conjunction with the requirements of Chartered Accountants Act, 1949, the Code of Ethics and other relevant pronouncements of the Institute. In our view the Code of Ethics will equally apply to EQCR if they fail to detect and do not act on any non-compliances of standards of auditing, violation of Code of Ethics etc., by the engagement partner.Under Section 132(2)(b) of the Companies Act 2013, requires NFRA to, inter-alia, monitor and enforce compliance with accounting standards and auditing standards in such manner as may be prescribed. Rule 8 of the NFRA Rules, 2018 provides that for the purpose of monitoring and enforcing compliance with auditing standards under the Act, NFRA may evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor and also perform such other testing of the audit, supervisory and quality control procedures of the auditor as may be considered necessary or appropriate (Source: AQRR of NFRA).If there is a breach by the engagement partner, it is also the responsibility of the EQCR to point out the same and discuss with the leadership of the firm to resolve the issue. If the EQCR also chooses to remain silent even when the engagement partner violates say Code of Ethics, etc., in our view, the EQCR is also equally guilty.ConclusionWith increased responsibilities on the audit fraternity including increase in expectations of the stakeholders from the auditor in terms of quality of reporting, discussing critical issues, regulatory checks and balances, complex business models which may require special accounting treatments etc., the role of EQCR only enhances. Where a firm has a large portfolio of clients it is imperative to have a robust, structured, and formal SQC Manual duly and the role of EQCR being monitored by the leadership of the Firm continuously. The requirement of EQCR also gives opportunity to other members in the profession to be considered as EQCR in firms who may need external consultants to comply with SQC norms. Hence, the role of EQCR cannot be undermined and is not a mere ‘fill the checklist’ activity but how actively they participate in ensuring the quality of engagement is delivered.Authors may be reached at: adityahrudhayam@gmail.com and eboard@icai.in

The concept of an audit “expectation gap” has existed for decades. In recent years, due to many corporate failures and frauds, the expectation gap has widened. These incidences have raised questions about the role and responsibility of auditors, effectiveness of corporate governance mechanism and regulatory system. These incidences have also highlighted the widening expectation gap in audit.BackgroundThe underlying objective of an audit of financial statements is to add credibility to financial statements prepared by the management of the entity. An independent audit of financial statements is a vital service to various participants of the financial reporting ecosystem e.g. shareholders, management, those charged with governance, creditors, lenders, government, regulators, investors and other stakeholders. The result of an audit is the opinion of the auditor about the truth and fairness of the financial statements audited. The auditor communicates his opinion through the audit report. However, as with any other profession, which is not an exact science, there are certain misconceptions tagged with the auditing profession especially those relating to objective and scope of an audit, responsibilities of auditors, expected outcomes of an audit etc. This results in an Expectation Gap between the various stakeholders and the auditor.What is Expectation GapThe concept of “expectation gap” has been defined and described in several ways. There is no universally accepted definition of this concept. In general terms, the expectation gap is the difference between what users of audited financial statements expect from the auditor and the financial statement audit, and the reality of what an audit is.1.1 Components of Expectation GapThere are three main components/elements of expectation gap though there can be several other elements. These components are discussed below:Knowledge Gap: There is a difference between what auditors are actually supposed to do and what the public thinks auditors do. The role and responsibilities of the auditor is misunderstood by public as well as the objective of financial statements audit is not clear to most of them. Knowledge gap is sometimes also referred to as “information gap”.Performance Gap: Most of the time, the Standards on Auditing or regulatory requirements need interpretation while applying it to practical situations. At times, these interpretations taken by regulators and auditors are different. This difference of interpretation creates the Performance Gap i.e., “what regulators expect and what auditors do”. Performance gap is sometimes also referred to as “delivery gap”.Evolution Gap: Evolution Gap occurs due to evolving technological, financial, and business environment. It relates to the areas of audit that need evolution.Examples of Components of Expectation GapExamples of Components of the Expectation Gap1Aspects that could possibly be addressed by Standard-Setting, including Support MaterialsAspects that require Further ConsiderationKnowledge GapThe nature, extent and limitations of the auditor’s responsibilities in relation to fraud and going concern may be unclear in the auditor’s report.The description of a material uncertainty in both accounting and auditing standards with regards to an entity’s ability to continue as a going concern is inconsistently understood and applied.Some users of financial statements do not understand what an audit entails (i.e., the nature, extent, and limitations of the auditor’s procedures to obtain evidence to support an audit opinion).Some may have unreasonable expectations of what auditors ought to do compared to what auditors are actually capable of doing due to the inherent limitations of an audit.The public thinks the role of the auditor is to detect fraud, including non-material fraud.Differences of view as to the meaning and implication of material uncertainties and the going concern concept.Performance GapAspects of some standards may not be clear such that there is inconsistent application or confusion as to how to apply them.There is insufficient guidance and support materials to assist with effective application.The auditor is pressured, either by management or by tight deadlines, resulting in lower quality audit work.Auditors may not be adequately trained.The firm may not have clear policies and procedures with regards to audit quality or they are not applied appropriately.The auditor is pressured to accept less transparent company disclosures and/or not to include going concern uncertainties in the auditor’s report because of fears that such disclosures/reporting will be a self-fulfilling prophecy.Evolution GapAudits may not have evolved to meet changing expectations due to developments within the environment, for example:Stakeholders seek more insight into a company’s future viability than is currently provided for in accounting and auditing standards.Environmental influences encourage more transparency from auditors which is not forthcoming because it is not required.The environment is evolving at a more rapid pace which may necessitate different, and more robust, procedures targeted at ongoing changes.Users of financial statements are looking for enhanced procedures in relation to fraud and going concern that is not currently provided by the requirements of the auditing standards.In the current environment, the auditing standards may not be robust enough when a possible fraud is identified.Shareholders are seeking more information from entities’ auditors, however, there are insufficient opportunities for the auditor to formally engage with shareholders and the public.The expectation of audit committees and those charged with governance has increased with evolving environmental influences, for example there is a greater emphasis on setting tone and monitoring culture.There is a call for a broader and more holistic view of the auditor’s role beyond what the audit delivers, for example separate engagements on an aspect of the audit where stakeholders are looking for more.1 Source: “Fraud and Going Concern in an Audit of Financial Statements: Exploring the Differences between Public Perceptions About the Role of the Auditor and the Auditor’s Responsibilities in a Financial Statement Audit” – Discussion Paper issued by the International Auditing and Assurance Standards Board (IAASB) in September 2020.1.2 Analysis of Expectation Gap Based on Participants InvolvedVarious participants of financial reporting ecosystem have their own perspective regarding expectation gap. So, the expectation gap may also be analysed based on the perspective of participants involved. This is discussed below.Expectation Gap: Perspective of Users of Audited Financial StatementsUsers generally are not aware about the auditing framework, particularly the following aspects:They do not have knowledge about the inherent limitations of audit and the concept of reasonable assurance.They believe that audited financial statements are free from all misstatements.They believe that audit is a guarantee as to the future viability of the entity.They believe that an audit is a guarantee as to the efficiency and effectiveness with which the management of the entity has managed the affairs of the entity.They are not aware about the difference between audit and special audit/ investigation/forensic audit.They believe that it is the responsibility of auditor to detect and report all frauds.Expectation Gap: Perspective of ManagementManagement generally have the following perspective w.r.t. audits and role of auditors:Auditors are responsible for preparation of financial statements with required disclosures.Auditors are responsible to detect all errors and fraud.Engagement letter and management representation letter are meant to transfer the auditor’s responsibility to management.Certain information required in the course of audit may be unnecessary and burdensome.Audit takes business time and interferes in regular functioning of the entity.Expectation Gap: Perspective of AuditorsAuditors generally quote the following challenges faced by them in conducting audits:Increasing complexity and frequent amendments in auditing standards.Frequent legislative changes in laws, regulatory requirement and accounting standards.Tight deadlines to complete audits.Non-cooperation from auditee during course of audit.Inspection and administration by multiple regulators.Increasing audit costs on staffing, training, technology etc. without corresponding increase in audit fees.1.3 Understanding Key Concepts of Standards on Auditing w.r.t. Expectation GapIn order to understand the concept of expectation gap better, it is important to understand the key concepts of Standards on Auditing (SAs) w.r.t. expectation gap e.g. purpose of audit, premise on which an audit is conducted, reasonable assurance, inherent limitations of audit. These concepts have been prescribed in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”.Purpose of AuditThe purpose of an audit of financial statements is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.The Premise on which an Audit is ConductedThe financial statements subject to audit are those of the entity, prepared and presented by management of the entity with oversight from those charged with governance. SAs do not impose responsibilities on management or those charged with governance and do not override laws and regulations that govern their responsibilities. However, an audit in accordance with SAs is conducted on the premise that management and, where appropriate, those charged with governance have responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements does not relieve management or those charged with governance of those responsibilities.Reasonable AssuranceAs the basis for the auditor’s opinion, SAs require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.Inherent Limitations of an AuditThe auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive. The inherent limitations of an audit arise from:The nature of financial reporting;The nature of audit procedures; andThe need for the audit to be conducted within a reasonable period of time and at a reasonable cost.Possible Panacea for Minimising Expectation GapThe expectation gap can be minimized through various measures listed below:Updating the Auditor’s KnowledgeEnriching and updating the auditor’s knowledge and expertise can assist in reducing the expectation gap. The auditors should keep themselves abreast with the latest developments in the field of auditing standards and techniques. For this purpose, it is necessary that they should undergo continuous training and professional development in order to improve their skills and knowledge.Effective CommunicationCommunication between auditor and auditee: An effective communication between the auditor and the auditee can act as catalyst in minimizing the expectation gap. This can be achieved by various ways like defining clearly the scope of the audit, discussion on the findings of the audit, and explaining the auditee about the limitations of the audit. The auditor should also ensure that the auditee understands the audit process and the expectations of the auditor.Communication in auditor’s report: One significant change with the Auditor Reporting Standards is the new Standard on Auditing (SA) 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”. The purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. Other significant changes include a new section in auditor’s report w.r.t. “Material Uncertainty Related to Going Concern” introduced by SA 570(Revised), “Going Concern” and a new section in auditor’s report w.r.t. “Other Information” introduced by SA 720(Revised), “The Auditor’s Responsibilities Relating to Other Information”.Educating Stakeholders on “What is an Audit”Stakeholders should be educated on the subject of audit covering aspects like importance of audit, objective and scope of audit, role of auditors. This can be done by conducting awareness campaigns and programmes. This will enable trust and confidence of stakeholders in the audit process.It is important to note that these measures can only help in minimizing the expectation gap in audit. The expectation gap cannot be completely eliminated as there will always be some level of difference between the expectations of stakeholders from audit and the actual performance of the auditor.Steps Taken by AASB to Bridge Expectation GapThe Auditing and Assurance Standards Board (AASB) of ICAI has taken various steps to bridge the expectation gap. Major steps taken by AASB are given below:Implementation Guides: AASB has been issuing various Implementation Guides on Standards on Auditing to help auditors in effective implementation of Standards on Auditing. These Implementation Guides explain the various principles of Standards on Auditing in simple language by way of FAQs, case studies, templates etc.Awareness & Professional Enhancement Programmes: AASB organises various Seminars/Workshops/Webcasts/Virtual CPE meetings/Refresher Courses (both physical and virtual mode) for awareness and professional enhancement of the members. These programmes are aimed at creating awareness among the members on, inter alia, the following aspects:Engagement and Quality Control Standards.Reporting requirements of Companies Act, 2013.Audit of banks.Industry specific auditing issues.Audits of various items of financial statements.Recent developments and emerging issues in auditing.These programmes focus on various practical aspects of auditing and provide a suitable platform to auditors to get solutions for practical challenges faced by them. During last year, AASB organized 131 programmes attended by around 1,95,000 participants.Online Panel for Bank Branch Audits: Every year, during the bank audit season, AASB constitutes an online panel of experts to address queries of bank auditors related to bank branch audits.Statutory Audit Expert Panel: AASB has constituted an expert panel for addressing auditing queries related to statutory audits of the financial year 2022-23. The panel will address queries from April 17, 2023 till September 30, 2023. This panel was also constituted by AASB in the last year.Regulatory Interaction: AASB has regular interaction with various regulators (RBI, SEBI, MCA, NFRA) to discuss matters impacting the audit profession.Guidance on Emerging Areas: AASB has been developing and issuing guidance on emerging areas in audit and assurance. Recently, AASB has issued the below cited publications:Technical Guide on Disclosure and Reporting of Key Performance Indicators (KPIs) in Offer Documents.Implementation Guide on Reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014.Technical Guide on Digital Assurance.Author may be reached at: sanjeevsinghalca1997@gmail.com and eboard@icai.in

A fraud encountered in the course of audit of financial statements may pose significant challenges to the auditor in ensuring that he is able to perform sufficient and appropriate audit procedures to mitigate the risk of material misstatement in the financial statements. Quite often, due to the complex nature of the fraud, the auditor may find himself constrained in ensuring that he has considered all possible facets in his evaluation. Read on to find out more….BackgroundAs per Standard on Auditing (SA) 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. SA 240 also states that an auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. One of the objectives of the auditor is to respond appropriately to identified or suspected fraud.In this article, we shall attempt to look at a few practical considerations in the auditor’s endeavor to respond to a fraud identified by management. The issues discussed in this article are by no means exhaustive and their applicability depends on the facts and circumstances of the company.Key Areas of FocusInvestigationScopeRobustnessDigital forensicRing fencingRemedial actionsAudit proceduresReporting implicationsA. Review of Work Performed by ManagementSA 260 para 12 and SA 200 require the auditor to maintain professional skepticism throughout the audit. Management may have been made aware of the potential fraud either via a whistleblower complaint or any other reviews or audits performed by them. In fact, the 2020 edition of the Report to the Nations on Occupational Fraud and Abuse by Association of Certified Fraud Examiners, USA (ACFE) lists down tips and internal audit as the most common modes through which potential frauds are initially detected. A likely scenario that an auditor is likely to encounter is that the management will have initiated or completed a preliminary investigation or a fact-finding review of some nature into the allegations prior to informing the auditor. This would also be a recommended procedure so that the management is able to verify the genuineness of whistle-blower complaint or is at least able to ensure the veracity of the findings from the internal review or internal audit, prior to informing this to the auditor. Discussing and highlighting the potential fraud to the auditor at the earliest would also hold good for the management so that the auditor’s valuable inputs can be obtained on the next course of action proposed by the management.From the perspective of the auditor, an active engagement with the management at key stages of the investigation would also assist the auditor to conduct a ‘no surprises’ audit whereby his concerns or otherwise can be discussed with the management at the earliest opportunity available and a mutually agreeable course of action can be arrived at. It would also do well for the auditor to go through the whistleblower complaint (if any) in detail so that he is in a position to corelate them with the findings disclosed by management. A note of caution should also be exercised here. In the context of independence of the auditor, it would be suggested that the auditor does not indulge in over involvement in the process conducted by management lest his involvement is expected to potentially impair his independence and objectivity. He should toe the thin line of guiding management with his inputs on the next steps but also maintain adequate distance.Now let’s look at a few considerations which the auditor may bear in mind while evaluating the investigative procedures performed by management.B. Investigative Report or Fact-Finding Report (‘Investigation’)SA 240 para 14 requires the auditor to investigate the inconsistencies where responses to inquiries of management or those charged with governance are inconsistent. In this pursuit, the auditor may request for documentation from the management which may broadly cover the following:Background of the matterSource (i.e. whistleblower, internal audit etc.)Scope of the reviewWork procedures conductedDetailed findings of the investigationAny additional potential matters of concerns noted during the review besides the specific matter under reviewRoot causeRemedial actions proposed to plug the gaps in processes and internal controlsSuch documentation would usually be expected to take the shape and form of a formal investigation report which will likely be shared by the management with the auditor. On some large and complex matters, the auditor may be provided with interim updates or draft reports at periodic intervals. The auditor should ensure that the final reports on all investigative procedures is shared with him by the management well in advance so as to enable the auditor to perform sufficient and appropriate audit procedures. Auditor is also encouraged to exercise professional skepticism at all stages of his review. Any findings which appear in the draft reports or interim updates and eventually dropped from the final report should be adequately explained by the management so that the auditor is satisfied that these do not impact his audit procedures in any manner.C. Review of the Scope of the InvestigationThe auditor may review the investigation report and satisfy himself that he is comfortable with the scope of the investigation. It may be helpful to specifically review the section on disclaimers / limitations / caveats as it may help him with fodder for further discussions with management. A high-level reconciliation of the scope of the investigation with the various allegations being investigated may help him obtain comfort on the completeness of the investigation scope. Any allegations or any area potentially not covered in the scope may be discussed with management and the investigation scope may be updated, if feasible.D. Robustness of the Investigative Procedures / Fact Finding ReviewSA 240 para 15 suggest that a discussion shall place within the engagement team and say particular emphasis on how and where the entity’s financial statements may be susceptible to material misstatement due to fraud, including how fraud might occur.Engaging Third Party Specialist InvestigatorsOften depending on the complexity and pervasiveness of the fraud, it is not uncommon to find management engaging third party specialist investigators (‘specialist investigator’) to assist them in conducting a fact-finding review of the potential matter. Having a specialist firm perform the investigation on behalf of management would in all probability make the auditor more comfortable on the robustness of the investigative procedures. This is due to fact that the specialist investigator would be considered more competent since he would leverage on his wide experience in dealing with similar matters for other companies. Additionally, a specialist investigator would also be perceived to be independent from the management which would lend credence to the investigation. As a side note, the auditor should also be cautious before concluding on the independence and objectivity of the specialist investigator. On one occasion, it was found that the specialist investigator team comprised of certain ex-employees of the organization thereby requiring the auditor to closely examine the arrangement to obtain comfort that the review was conducted in an unbiased manner. On another occasion, the external law firm engaged to perform the investigation appeared to be the ex-employer of someone in the position of those charged with governance. This is not to suggest that the auditor cannot rely on the work performed by such specialist firm. The only point to be made is that the auditor should not blindly assume that the investigation has been completed in an independent and objective manner because it has been performed by an external specialist entity. He should perform all appropriate audit procedures which he considers necessary in the given circumstances.Investigations Conducted by Internal Review TeamsOn occasions where the management does not engage a specialist investigator to assist them, it is not uncommon for the investigation to be performed by either of the following: (a) the company’s internal audit team; (b) group internal audit team; (c) internal team (consisting of line managers) setup specially for conducting the investigation (collectively ‘internal review teams’). In situations where an internal review team has conducted the investigation, the auditor would probably need to examine the independence and objectivity of the investigation team in more detail. On one matter, it was observed that the Group Chief People Officer (CPO) was under investigation wherein the investigation team comprised of the HR head of one of the subsidiaries among others. The HR head of the subsidiary had a dotted line reporting to the Group CPO and hence quite obviously his independence and objectivity could be potentially impaired since he would be hesitant to openly highlight concerns or findings which would not be in favor of the CPO.Internal review teams may also at times be constrained in the robustness of their work procedures due to either lack of appropriate support in the organization, lack of proper experience in conducting the investigation, inability to leverage on the usage of advanced forensic tools and lastly a relatively narrower focus on only investigating the matter at hand and thereby rendering them unable to properly ring-fence the issue. In such cases, it becomes imperative for the auditor to closely examine what was the composition of the internal review team and consider raising appropriate questions such as:i. Was the internal review team independent and objective in terms of the areas which they have reviewed?ii. To whom did the internal review team report to?iii. Could there be any perceived potential conflict of interest?iv. Did the internal review team comprise of individuals competent to investigate the relevant matter?v. Was there due representation from all relevant departments depending on the nature of the alleged fraud?vi. Was there any pressure on the internal review team to prematurely conclude their review?E. Digital Forensic / Electronic Discovery ProceduresNow what do we mean by digital forensic or electronic discovery procedures? While the terms may sound daunting, simply put it refers to examination of digital evidence in order to examine facts and support the investigation. Electronic devices have proliferated our lives in a deep manner and consequently they harbor a treasure trove of information which can be forensically mined in order to uncover facts and information which otherwise may not be available.With advent of time, while fraudsters have become smarter, technology is also finding ways and means to keep pace with them. The market is aflush with tools and technologies to assist investigators in uncovering information hidden in the deep crevices of electronic gadgets. Retrieval of deleted information from electronic devices can often provide incriminating evidence adequate to nail the fraudster. Smartphones and the data captured therein (phone call logs, messages etc.) can provide valuable evidence in establishing the identify of various perpetrators of the alleged fraud. The usage of various tools and technologies in the course of the investigation is what is referred to as digital forensic or electronic discovery procedures. These tools assist in forensically examining information stored in electronic devices such as laptops, desktops, smart phones, external storage devices etc. The topic of digital forensics is as vast as it is interesting and for the purpose of this article we shall focus on the key considerations from the perspective of the auditor:Coverage of individuals (‘custodians’): It is recommended that the auditor may obtain a good understanding of the potential fraud and the various alleged individuals so that he is able to obtain comfort that the coverage of individuals for the purpose of digital review procedures is adequate. Key personnel alleged to have been involved in the potential fraud should be covered by management and the electronic devices used by them may be sequestered in order to conduct forensic procedures on them.Coverage of electronic review: It may be helpful for the auditor to confirm with management whether all appropriate electronic devices have been scoped in for the review. In case the alleged individuals are known to use multiple electronic devices (i.e. laptops, desktops, smart phone, external hard drives, pen drives), whether all their devices have been covered under review. If they were not, management should be able to justify to the auditor the rationale for any exclusions.Search terms or key words: Due to the voluminous warehouse of information captured by electronic devices, in the interest of costs and time, rather than boiling the ocean, it is generally preferred that the investigation focusses on the specific allegations and the matter under review so that the necessary supporting information can be retrieved from these electronic sources. In order to conduct a targeted review, it is not uncommon to find that certain specialized tools are deployed over the data obtained from these devices which enable execution of certain ‘search terms’ or ‘key words’ which are devised in a manner such that they would assist in retrieving information relevant to the investigation. In case the investigative approach has relied on a search terms-based review, the auditor may inquire with management on the robustness of these search terms and evaluate whether he comfortable with the same.Depending on facts and circumstances and the nature of the potential fraud, while it may not be absolutely necessary for digital forensic procedures to be conducted, it would be worthwhile for the auditor to satisfy himself that the absence of digital forensic procedures has not compromised on the effectiveness of the investigation. Considering the importance of conducting digital evidence review, it would be recommended that the auditor obtain a rationale from management for not conducting such procedures.F. Ring Fencing of the IssuesWhile have looked at evaluating completeness of the scope in the previous section, it is equally critical to evaluate the completeness of investigative procedures. While we have looked at one element in evaluating completeness earlier namely digital evidence review procedures, another important aspect is to ensure that all appropriate investigative procedures are performed such that there are no additional areas which are impacted by the fraud other than those already identified. The auditor may review the investigation report and obtain comfort that:Establishing the ‘span of control’ of the alleged individuals and whether it has been established that there are no additional individuals who maybe potentially involved beyond those identified;Confirming that fraud does not extend beyond the period identified; andAll areas which maybe potentially impacted have been covered under the investigation;The impact of the fraud has been correctly established.G. Discussions with the Investigating TeamIt may helpful for the auditor to also engage in discussions or meetings with the investigating team either in the presence of management or otherwise, in order to supplement his audit procedures. Interaction with the investigating team may assist the auditor in clarifying any doubts on positions which have been take in the course of the investigation. Inquiries with the investigative team may also assist the auditor in obtaining corroborative evidence that there have not been any undue limitations or scope restrictions placed on the investigating team.H. Remedial Actions Taken by ManagementThe auditor may obtain an understanding of what remedial actions have been taken by management once the fraud was identified. Remedial actions may include, but not be limited to, termination of employment of the alleged employees, instituting / reinforcing internal controls over the fraud prone areas, recording additional accounting entries to account for the impact of the fraud etc. In some cases, management may even consider outsourcing the particular business process to a third party shared service centre if the company is not in a position to implement relevant internal controls in the fraud prone area.I. Additional Audit Procedures Performed by the AuditorThe auditor cannot be merely satisfied knowing that management has taken completed the investigation. The auditor may also be required to adapt and modify his audit procedures to obtain evidence that due and appropriate action for the fraud matters have been taken and the impact of which should be appropriately reflected in the financial statements, depending on materiality. The auditor may consider additional audit procedures such as more in-depth audit testing of the specific areas impact by the fraud which may involve increasing the sample sizes to be tested by him, obtaining appropriate management representations for the fraud matter, performing a review of the working papers of the investigation (if available and feasible), involving the auditor’s expert in verifying any aspect of the investigative procedures if the auditor does not have competency to do so. In summary, the auditor may invariably need to consider altering the nature timing and extent of his audit procedures in order to obtain his audit comfort.J. Assessing the Impact on the Reporting ImplicationsLastly, but also most importantly, the auditor will finally need to consider his reporting obligations for the fraud matter. Depending on the materiality, impact and pervasiveness of the issues, the auditor may have to consider either all or any of:(i) Ensuring that management discloses the matter in the notes to financial statements;(ii) Considering whether the CARO report needs to be modified;(iii) Considering whether there is a impact on the Internal Financial Controls (IFC) and whether these have been remediated in advance of the financial year end for the auditor to consider its impact on the IFC opinion;(iv) Evaluate whether the fraud matter is indicative of potential non-compliance to any laws or regulations (NOCLAR) and then ascertain the disclosure requirements;(v) Considering whether the matter also merits reporting under section 143(12) of the Companies Act, in case certain conditions are met (Refer ‘Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013’ issued by the Institute in this regard).ConclusionAs you have seen above, the road to successfully navigate a fraud matter at the entity, is strewn with potential challenges posed by various complexities and uncertainties. However, if the auditor plans his audit well and in advance, engages in constant dialogue with the management and maintains a razor sharp focus, then all of the challenges can be successfully overcome.Author may be reached at: vinayknayak@gmail.com and eboard@icai.in

In the words of William Thomson, Lord Kelvin: “If you can’t measure it, you can’t improve it.”“Quality” is one of the key factors in customer satisfaction, which in turn brings customer loyalty. While quality testing parameters for various products help to measure quality, it is not always possible to measure the quality in quantitative terms as it is subjective and a relative concept. “Audit Quality” is no exception. It cannot be quantified or measured in absolute terms. However, the development of the Audit Quality Maturity Model (AQMM) by the Centre for Audit Quality Directorate is a step in that direction. Though it does not measure the quality of audit engagements in absolute terms, it measures the level of maturity of audit quality at firm level.While the responsibility for performing quality audits of financial statements rests with the auditors, audit quality is best achieved in an environment where there is support from, and appropriate interactions among, the participants in the financial reporting supply chain. To create an environment which maximizes the likelihood that quality audits are performed on a consistent basis, the Standard on Quality Control (SQC 1) have been put in place for the firms and Quality Control for an Audit of Financial Statements (SA 220) for the quality engagements. The Audit Quality Maturity Model (AQMM) is an amalgamation of well-researched Audit Quality Indicators (AQIs), which put together helps to build up an environment supporting quality reporting.Decoding AQMMThe model comprises of a set of Audit Quality Indicators (AQIs) put together for evaluation of the level of audit quality by the firm.The model has been broadly categorized into three sections: (1) Practice Management - Operation, (2) Human Resource Management and (3) Practice Management – Strategic/Functional.Each section is divided into multiple sub-sections and further into different clauses (AQIs) against which the firm needs to evaluate itself.While scoring in most of the AQIs is for existence & full implementation of the policy/procedure, a few have proportionate scores as well.A few of the AQIs have negative marking also, thereby reducing the scores under the sub-section.Based on the scoring under each of the three sections, the level of the firm in terms of audit quality maturity is arrived.Section Wise Categorization (Table 1)Section No.Section NameNo. of Sub-sectionsMax Score1Practice Management – Operation92802Human Resource Management52403Practice Management - Strategic/Functional380Total17600Sub-Categorization of 76 AQIs (Table 2)Section No.No. of Sub-sectionsNo. of AQIsNo. of AQIs with Absolute ScoresNo. of AQIs with Proportionate ScoresNegative Marking AQIs19312452253127403314734Total177658126Section-Wise Score Breakup (Table 3)Section No.Absolute Scoring AQIsProportionate Scoring AQIsMax Negative ScoreTotal12087282802172680240356242580Total43616433600Of the 76 AQIs, the firm scores either “0” or the highest allocated score under 58 AQIs having 73% of the total weightage (436/600) while 27% (164/600) of the scores has proportionate markings.Levels of the Firms under AQMMThe AQMM lays down four (4) levels for the firms, with Level 4 being the topmost in the ladder and Level 1 being the lowest:Level 1: Lowest LevelThe firm may be assessed at Level 1 based on the score less than or equal to 25% in any of the sections.Level 2: Basic LevelThe firm is assessed at Level 2 when it scores more than 25% in each section & less than or equal to 50% in any of the sections.Level 3: Advanced Level (Substantial Progress)The firm is assessed at Level 3 when it scores more than 50% in each section & less than or equal to 75% in any of the sections.Level 4: Highest Level(Significant Adoption of standards & procedure… but the improvement continues..) The firm is assessed at Level 4 only when it scores more than 75% in each section.Every firm should try to get to the highest step of ladder to reach the highest level of competency.The firm must consistently thrive to reach the next level in the ladder of Audit Quality Maturity Model.Scoring Uniformity Rule Across Sections (Table 4)It is important for the firms to keep in mind that the scores across the sections must be uniform / within the range to be able to attain higher level of firm as poor scoring in any of the sections would pull the level of the firm down. This can be explained from the table below:FirmScores under Section 1Scores under Section 2Scores under Section 3Total ScoreLevel of Firm DeterminedRemarksA224 / 280 (80%)120 / 240 (50%)32 / 80 (40%)376 / 600Level 2Section 3 has lowest 40%B64 / 280 (23%)200 / 240 (83%)60 / 80 (75%)324 / 600Level 1Section 1 has lowest 23%C200 / 280 (71%)140 / 240 (58%)64 / 80 (80%)404 / 600Level 3Section 2 has lowest 58%In the instances above, in spite of scoring well in Individual sections, the firm remains at lower level, except for the last firm, which attains Level 3 by scoring consistent in all the three sections.Who Must Take Up AQMM Evaluation?The mandate for AQMM w.e.f. 1st April, 2023, is limited to the firms auditing:A listed entity;Banks other than cooperative banks* (*except multi-state co-operative banks; firms doing only branch audits are not covered);Insurance Companies.Evaluation Roadmap Decision TreeWhere AQMM is Mandatory:Self Score against the 3 sections of the AQMM.Determine the maturity level of the firm.Scores / Level reviewed by Peer Reviewer.Level hosted on the ICAI website.Where AQMM is Voluntary:Self Score against the 3 sections of the AQMM.Identify the focus areas (areas with less scores or no scores).Pave out the roadmap for attaining higher level of AQMM.Assess the improvement by self-scoring against the 3 sections of the AQMM.Ideally all firms providing assurance services should take up AQMM evaluation. It would help them to assess their current level of audit quality maturity and pave out a roadmap so that they can become future ready.“Quality is never an accident. It is always the result of intelligent effort.” – John RuskinScoring under AQMMThe firms which intend to climb up the ladder of the AQMM to improve the ratings, may consider focusing on the following AQIs, amongst others:Quality Control for Engagements: Requires the Engagement Quality Review of engagements as per para 60 of SQC 1, Documentation in respect of SQC 1, availability of Technical Helpdesk / Technical resources in place, Mitigation of risks through procedures etc. carries a weightage of (28.5%) 80 points of 280 in Section 1.Technology Adoption: It is important for the firms to focus on technology adoption as it is an important component of audit in these times. It would enable the firms to analyze the data faster and better. The AQI carries a score of 64 of 280 points in Section 1. Those firms which have not yet adopted technology may consider laying down the timeline for adopting the same.Human Resource Management: Human Resource is an important parameter for assessing audit quality. Section 2.3 carries a weightage of 43.3% (104/240) in Section 2 and covers the various aspects relating to Resources Turnover & Compensation Management. Further, in this section 18.33% (44/240) weightage can be availed by firms having policies pertaining to training and developing human resources.Availability of Infrastructure: Availability of Infrastructure also plays an important role. The availability of Data Analytical Tools, the physical & logical Security of information, adequate internet / intranet etc. are all critical requirements. A weightage of 60% has been given under Section 3.3 (48/80) for such infrastructure.How Does AQMM Benefit Firms?When the firm undertakes self-evaluation of its firm audit quality maturity, it scores against the given parameter. The parameters against which the firm does not score or scores proportionately less, are the areas where the firms need to improvise upon. These are the areas to focus, which when worked upon, the firm can attain a higher level of maturity in terms of audit quality.For instance, a firm does not carry out capacity planning for its assurance engagements and hence does not score under Section 1.4(i) of AQMM which requires the firm to carry out capacity planning for each engagement. The firm can therefore plan to undertake capacity planning for its engagements in the future. Capacity planning includes budgeting for time, cost, and resources for conducting audits. The firm can also lay down the date of undertaking capacity planning, say from December 2023, which would help it to chalk out a roadmap to reaching a higher level of audit quality maturity.While the AQMM gives an opportunity for the firms to improve their levels, it also gives leverage to the firms who meet the AQI parameters to attain higher level for the firm. Since the level of the firm assessed by the Peer Reviewer is made available in the public domain, it casts responsibility on the Peer Reviewer for discharging his role efficiently.What’s New with AQMM Evaluation?The firms which have undergone peer review will have most of the policies and procedures in place, but not been measured. These firms need to understand the requirement under each of the AQI as per the Implementation Guide on AQMM and accordingly score itself. The firm must maintain documentation supporting the scores allocated so that the same can be made available to the Peer Reviewer during the review. However, the firm will have to additionally pull out the information in respect of the certain clauses from their database / demonstrate the implementation of the policy for score appropriately under the AQMM.ConclusionBy attaining the highest level under AQMM a firm can set the best practices and procedures with adequate monitoring mechanism resulting in highest standards of audit quality. Stakeholders would be looking for firms who are able to demonstrate and measure their quality using AQMM. Though AQMM has been mandated recently, it would be very helpful for firms who are able to early adopt this measuring model and obtain the highest level for their firms. As has been said by Aristotle – “Quality is not an act, it is a habit.”Authors may be reached at: caq@icai.in and eboard@icai.in

The current study tries to examine the performance of MUDRA scheme in India from its inception year. The results show that there is a decrease in loan disbursement under the Shishu category of the scheme except in recent year which is a matter of high worry. The banks need to increase their reach to the poorest sections of the society by increasing loan disbursement in the above-mentioned category. Moreover, there has also been a decline in loan disbursement under the MUDRA scheme in recent years. In order to demolish poverty through this scheme, there is a need to increase the loan disbursement, especially to poor states and unfunded sections of the society by increasing the contribution of the RRBs and small financing institutions as these financial institutions have widespread reach to the such sections of the society.IntroductionIn a developing country with a sizeable population base like India, MSMEs business unit plays an indispensable role by providing employment to a large number of people. The contribution of Micro, Small, and Medium Enterprise (MSME) in India’s GDP is around 29% and the target of the government is to increase it to 50% by 2025. MSMEs face a lot of issues in acquiring finance i.e., lack of collateral securities and consultancy support, financial illiteracy, lack of information, high borrowing cost, etc. (Khatri, 2019). The main issue for them is a lack of collateral securities because small business units do not have the finance to run their business, and because of their small amount of profit they are not able to sum up financial assets during their lifetime to use them as collateral securities for getting formal loans from commercial and cooperative banks.Due to the lack of collateral securities, they have to take loans from unorganized sectors at a very high interest rate. To remove these hurdles, the Government of India has introduced the Micro Unit Development and Refinance Agency (MUDRA) scheme for funding the unfunded sections of the society. Manish and Ritesh (2017) found that the MUDRA Scheme will help the Indian government in achieving its target of financial inclusion.In order to address issues like poverty, income inequality, and underdeveloped industries in an economy, financial inclusion is a key instrument. The process of ensuring that all society segments, especially the less affluent and weaker parts, have access to financial services at a reasonable price is known as financial inclusion (Sarma, 2008). The concept of financial inclusion was first used by RBI Governor Shri Y.V. Reddy in 2005. While taking a step forward in this direction, the Government of India introduced a scheme to provide access to financial services to all segments of society called MUDRA by a statutory enactment on 8 April 2015 with a slogan of “funding the unfunded”. MUDRA will provide refinance support to MFI, banks and NBFC for providing working capital and term loans to micro business units engaged in manufacturing, trading, and service activities for up to 10 lakh rupees. MUDRA loan is provided for a variety of purposes across all bank branches in India i.e., business loan to vendor / shopkeeper, loan for working capital & equipment financing, transport vehicle used only for commercial purpose and for agri-allied activities.Review of LiteratureOver the past few decades, the value of an inclusive financial system has gained widespread recognition, and many nations have made it as a policy priority (Kempson et al., 2004). The micro finance schemes play an import role in achieving the target of financial inclusion at micro level in an economy. Kumar (2015) also found that micro finance helps in poverty alleviation, women entrepreneurship, equal distribution of wealth, financial education, financial inclusion, economic growth, and mobilization of savings. There are a lot of studies which have shown a favorable impact of micro-finance schemes on income and expenditure (Hossain, 1988; and Morris and Barnes, 2005). Mehar L (2014) has shown that with an advancement in technology in the last few years, financial inclusion has increased but there is still a need to work on it. The government must take some more innovative steps to improve the reach of finance to poor sections of society and financial literacy must be increased in rural area. Chandraiah and Vani (2014) conducted a study on problem of MSMEs sector in India. The study concluded that MSMEs sector face key challenges such as high cost of access to credit, lack of access to global capital, low technology level, requirement of collateral securities, and inadequate infrastructure facilities etc. It also examined the issues faced by MSMEs in acquiring finance due to lack of collateral & financial assets. Similarly, Roy (2016) conducted a study on the role of MUDRA scheme in providing loans to MSMEs sectors. It analyzed the role of MUDRA Yojana in developing micro units in India and concluded that MUDRA scheme plays an important role in developing micro units in India. Gupta and Sharma (2017) conducted a study on the performance of the MUDRA Yojana in India, in solving the problem of finance of new and small business units. The study concluded that the MUDRA scheme helps micro units in acquiring finance without much hurdle. They concluded that the MUDRA scheme helps the MSMEs to acquire loan without collateral security.Lall (2018) tries to analyse the performance of the MUDRA Yojana in Uttarakhand in India in uplifting the micro and small business units. The study concluded that MUDRA Yojana fulfills its objective of providing loans to the unfunded. The study concluded that the MUDRA scheme is very successful in the Uttarakhand district. Rajani et al., (2019) conducted a study regarding the constraints faced by small business entrepreneurs in attaining credit facilities under the MUDRA Yojana from commercial banks in Ernakulam district, Kerala in India. They concluded that the major problem for micro units to acquire loan is lengthy processing time for loan application, and requirement of collateral security in MUDRA scheme.Objectives of the StudyThe study has the major objective to examine the performance of MUDRA scheme at macro level in India which is segregated in following sub-objectives:To evaluate the performance of MUDRA scheme bank wise and under various product offering under MUDRA scheme.To evaluate category wise and state wise performance of MUDRA scheme.Research MethodologyThis study uses the secondary data collected from various journals, reports, magazines, and MUDRA portal. The methodology used in this study is descriptive and analytical in nature.Result and DiscussionMUDRA – Product OfferingMUDRA works as a refinancing institution, and it does not provide loans directly to micro-business owners and entrepreneurs. Under the MUDRA scheme, the borrower does not require any collateral security and any guarantor. According to the need of the borrowers, the loan is provided in three categories under the MUDRA scheme. The amount of loan varies from 50,000 to 10 lakh depending on the requirement of the borrower. The intervention has been termed as Shishu, Kishore, and Tarun according to the stage, growth and funding requirement of business unit which is shown in Table 1.Table 1: Product Offering Under MUDRA SchemeTypes of LoanAmount of LoanSHISHUUp to fifty thousandKISHOREUp to five lakhsTARUNUp to ten lakhsSource: MUDRA websiteProgress Made Under PMMYPMMY scheme has made a tremendous growth from its inception to now. In its first year, it provided 3.49 crore loans worth rupees 1.37 lakh crore. The disbursement of loan under MUDRA scheme from its inception is shown in Table 2.As depicted in the table, the MUDRA scheme has made a tremendous growth in providing loans to unfunded sections of the society by providing loans without collateral securities at affordable rates. The MUDRA scheme has made a 13.77% CAGR in loan sanctioning from its inception year to 2021-22. Moreover, the disbursement to loan sanction ratio is over 0.95 for all years which depicts that under the scheme, the government has a major focus on high-priority distribution of amounts to the entrepreneurs. Although, there is a high decrease in loan sanctions under the MUDRA scheme as indicated by a decline in growth rate. In its inception year, there was a growth rate of around 30% which decrease to 5% after the year 2021-22.Table 2: Disbursement of Loans under PMMYYearNo. of Loan SanctionAmount Sanction (in Crore)Amount Disburse (in Crore)% Disbursement% Growth in Loan Sanction2015-163,48,80,9241,37,449.271,32,954.7396.73-2016-173,97,01,0471,80,528.541,75,312.1397.1131.342017-184,81,30,5932,53,677.102,46,437.4097.1540.522018-195,98,70,3183,21,722.793,11,811.3896.9226.822019-206,22,47,6063,37,495.533,29,715.0397.694.902020-215,07,35,0463,21,759.253,11,754.4796.89-4.662021-225,37,95,5263,39,110.353,31,402.2097.735.392022-23*3,17,79,2442,37,192.812,30,687.0697.26-* Indicates current year data, which is provisional, therefore, growth rate is not calculated.Source: Author’s ComputationsCategory Wise Distribution of LoanAs explained earlier under the MUDRA scheme, the loan is provided in three categories namely Shishu, Kishore and Tarun. This division of category is done by the government on the basis of the scale and the financial requirement of the business. The disbursement of loans to these 3 categories in F.Y. 2020-21 & 2021-22 is shown in Table 3.Table 3: Category Wise Distribution of Loan Amount (in ₹ Crore)Loan Category2020-212021-22Amount SanctionAmount Disbursed%Amount SanctionAmount Disbursed%Shishu1,09,953.341,08,637.2498.801,24,747.371,23,969.0599.38Kishore1,32,516.341,27,239.5796.021,37,644.381,33,389.2496.91Tarun79,289.5775,877.6695.7076,718.6174,043.9196.51Total3,21,759.253,11,754.4796.893,39,110.363,31,402.2097.73Source: Author’s ComputationsTable 3 depicts the disbursement and sanctions of loans under various categories of the MUDRA scheme for the year 2019 to 2021. As per the table, there is a disbursement ratio of around 0.993 under the Shishu scheme which illustrates the intensity of disbursement of loans after sanction under PMMY scheme.Share Breakdown of Product Categories (Pie Diagram Analysis)% Distribution 2019-20• Shishu: 49%• Kishore: 28%• Tarun: 23%% Distribution 2020-21• Shishu: 35%• Kishore: 41%• Tarun: 24%% Distribution 2021-22• Shishu: 37%• Kishore: 40%• Tarun: 22%It is clear from the distribution that in 2020-21, 35% of loans were distributed to the Shishu category which shows a decrease in lending to this sector over the past year disbursement. The government also made a promise during the launch of this scheme to distribute more loans to the Shishu category of entrepreneurs to encourage entrepreneurship among the new generation of aspiring youth. Moreover, the result indicates that there is an increase in loan disbursement to the Shishu category in 2021-22 over the past year. Although, except for the year 2021-22, there is a decrement in loan disbursement under the Shishu category from the past few years after the inception of MUDRA scheme in India. This decrease in loan disbursement under the Shishu category is a matter of worry and there is a need to increase the same to increase the widespread reach of MUDRA scheme to the poorest sections of the society.Bank Wise PerformanceThe loan under the MUDRA scheme is provided across all the branches all over India. Anyone who wants to get a loan under this scheme can visit any branch across India. MUDRA works as a refinancer institution instead of providing loans directly to the entrepreneur.The public and private sector occupy a major share in the loan disbursement i.e., of around 65% under the MUDRA scheme (Private Sector Commercial Banks at 35%, Public Sector Commercial Banks at 30%). Moreover, Regional Rural Banks (RRBs) occupy a share of around 6% in the total loan disbursement under the MUDRA scheme which is very low. Therefore, there is a need to increase the share of RRBs, state co-operatives, micro finance institutions and small finance banks to reach out to the poor sections of the society. Similarly, Table 4 depicts the bank wise loan disbursement under the MUDRA scheme by various banking sectors in India. The results show that the disbursement to loan sanction ratio is around 0.95 for all banking sectors in India, which illustrates the intensity of the banking sector in providing loans after sanctions from the respective banks.Table 4: Bank Wise Performance of MUDRA Scheme for F.Y. 2021-22 (Amount in ₹ Crore)Type of BankShishuKishoreTarunAmt SanctionAmt. Disbursed%Amt SanctionAmt. Disbursed%Amt SanctionAmt. Disbursed%Public Sector Commercial Banks6,615.646,202.2293.7543,558.3040,785.3693.6353,908.4651,568.4195.66Private Sector Commercial Banks53,446.4053,413.4799.9352,651.7052,560.7799.8311,581.2011,432.2098.71State Co-operative Banks0.040.041000.320.32100***Regional Rural Banks1,878.321,775.8294.5414,257.3012,901.2690.494,206.854,027.7995.74Micro Finance Institutions1,806.441,806.44100******NBFC-Micro Finance Institutions37,204.4036,983.4999.4110,077.3010,045.0599.6812.9912.99100Non-Banking Financial Co.5,962.345,962.341007,452.527,452.4799.995,282.285,282.28100Small Finance Banks17,833.8017,825.2499.959,646.809,644.0199.971,726.831,720.2599.62Total1,24,747.001,23,969.0699.371,37,644.001,33,389.2496.9176,718.6174,043.9296.51Notes to Tables: Total may mismatch due to rounding off figures to their nearest values. * Indicate no disbursement and sanction of loan under MUDRA Scheme by respective banks.Source: Author’s ComputationState Wise Distribution of LoanFor evaluating the performance of the MUDRA scheme at micro level in India, the study has analyzed the loans provided by various states under the MUDRA scheme. The disbursement to various states under the MUDRA scheme is shown in Table 5.Table 5: Performance of MUDRA Scheme State WiseState NameDisbursement Amount (in ₹ Crore)Growth Rate (in %)2020-212021-22Gujarat11,313.2411,990.045.98Andhra Pradesh11,564.6611,445.42-1.03Arunachal Pradesh172.1286.51-49.74Assam7,399.664,577.28-38.14Haryana7,303.117,574.183.71Chandigarh432.22273.03-36.83Chhattisgarh6,423.075,797.46-9.74Dadra and Nagar Haveli51.0949.34-3.43Karnataka29,785.2928,374.92-4.74Delhi4,003.832,559.59-36.07Goa501.47472.87-5.70Bihar24,019.7830,725.0727.92Daman and Diu19.1118.91-1.05Himachal Pradesh2,163.832,027.43-6.30J & K5,401.945,696.545.45Madhya Pradesh17,822.8418,218.442.22Jharkhand8,177.788,615.435.35Kerala11,238.5511,549.582.77Lakshadweep22.9416.47-28.20Meghalaya402.43204.01-49.31Maharashtra24,624.0625,416.483.22Manipur406.68379.20-6.76Orissa14,919.0416,557.2710.98Mizoram211.15192.30-8.93Nagaland244.48209.49-14.31Tamil Nadu28,534.5632,262.9413.07Pondicherry606.91795.3031.04Punjab7,065.117,926.0612.19Rajasthan18,223.3918,728.942.77Sikkim193.09156.89-18.75West Bengal28,529.8633,949.8119.00Telangana6,765.036,010.47-11.15Tripura2,040.352,445.7319.87Uttar Pradesh27,875.1332,850.8017.85Uttarakhand2,953.572,939.91-0.46Andaman and Nicobar119.3276.53-35.86Source: Author’s ComputationsThe table depicts that the growth rate in states like Arunachal Pradesh (-49.74%), Chandigarh (-36.83%), Chhattisgarh (-9.74%), Delhi (-36.07%), Goa (-5.70%), Himachal Pradesh (-6.30%), Karnataka (-4.74%), Meghalaya (-49.31%), Mizoram (-8.93%), Nagaland (-14.31%), is negative. Moreover, the growth rate in UTs like Andaman and Nicobar (-35.86%), Daman and Diu (-1.05%), Dadra & Nagar Haveli (-3.43%), and Lakshadweep (-28.20%) is also negative. Some States like Rajasthan, Uttar Pradesh, and West Bengal, which consist of a large population, still have a growth rate of 2.77%, 17.85%, and 19.00% respectively. Manipur (-6.76%) and Assam (-38.14%) are amongst the poorest states of India which still have a negative growth rate in loan disbursement under the MUDRA scheme in the recent years. Although, the government has the ambition to provide financial loans to unfunded sections of the society through this scheme, this is only possible by providing more loans to poor states and small category entrepreneurs by increasing the proportion of loans disbursement under the Shishu category of the scheme. Therefore, in order to demolish poverty through this scheme, there is a need to increase the loan disbursement especially to poor states and unfunded sections of the society.ConclusionThe result of the study shows that PMMY is a great initiative taken by the government of India to provide funding to the unfunded sector of the Indian economy. This scheme plays an important function in achieving financial inclusion, and empowering women entrepreneur at micro level for establishing and increasing their businesses. This scheme also helps new entrepreneurs to get finance easily as they mostly face problems due to the absence of collateral securities. The introduction of the national plan PMMY with other types of financial inclusion initiatives yield a valuable and positive result. However, there is a huge decrease in loan disbursement under the MUDRA scheme in the recent past years. In order to demolish poverty through this scheme, there is a need to increase the loan disbursement, especially to poor states and unfunded sections of the society. There is a need to increase the participation of the RRBs and small financing institutions’ contribution for the loan disbursement under the MUDRA scheme as these financial institutions have a widespread reach to the poor sections of the society.ReferencesGhose, P. (2018). Microfinance with reference to micro units development and refinance agency banks (MUDRA banks). International Journal of Engineering and Management Research (IJEMR), 8(1), 111-113.Gupta, D. D. (2017). Micro Units Development And Refinance Agency (MUDRA): A Government Initiative For Uplifting SME’s In India. International Journal of 360 Management Review, 5(2), 15-24.Hossain, M. (1988). Credit for the alleviation of rural poverty: The Grameen Bank in Bangladesh (Vol. 65). International Food Policy Research Institute.Kempson, E., Atkinson, A., & Pilley, O. (2004). Policy level response to financial exclusion in developed economies: lessons for developing countries. Report of Personal Finance Research Centre, University of Bristol.Khatri, P. (2019). A Study of the Challenges of the Indian MSME Sector. IOSR Journal of Business and Management, 21(2), 05-13.Morris, G., & Barnes, C. (2005). An assessment of the impact of microfinance: a case study from Uganda. Journal of Microfinance/ESR Review, 7(1), 4.Reshma Raj, S. H. (2019). Problem Faced By Small Business Entrepreneur In Obtaining Credit Facilities From Commercial Bank- With Specefic Reference To MUDRA. IJITEE, 8 (6S2), 162-167.Roy, A. (2016). MUDRA Yojana-A Strategic tool for Small Business Financing. International Journal of Advance Research in Computer Science and Management Studies, 4(1), 68-72.Rudrawar, M. A. A., & Uttarwar, V. R. (2016). An Evaluatory Study of MUDRA Scheme. International Journal of Multifaceted and Multilingual Studies, 3(6).Sarma, M. (2008). Index of financial inclusion. Working paper No. 215. The World Bank.Shahid, M., & Irshad, M. (2016). A Descriptive Study on Pradhan Manthri MUDRA Yojana (Pmmy). International Journal of Latest Trends in Engineering and Technology, 121-125.Sujlana, P., & Kiran, C. (2018). A study on status of financial inclusion in India. International Journal of Management Studies, 2(3), 96-104.Authors may be reached at: Shubhamgarg1230@gmail.com, priyankarunach0803@gmail.com, karampalhsb@gmail.com and eboard@icai.in

To make an informed borrowing decision, it is essential for a borrower to understand the fees and charges associated with the loan thoroughly. Pre-payment of borrowings help in reducing financial burden and improves the credit score of the borrower. Also, when banks are struggling to do recoveries from the defaulters, should a genuine borrower be welcomed at the time of prepayment of loan ahead of time? It is an ordinary question in the minds of the borrower when they are suddenly summoned a foreclosure charge statement. Also, when lending is a commercial contract, whether repayment is done from one’s own sources or through a “takeover” by another bank should be irrelevant.However, bankers have a different view. A detailed overview of foreclosure charges is provided in this article to make the borrower aware about the trade practice followed by banks at the time of closure or exit.What is Foreclosure or Prepayment?Prepayment is the early repayment of a loan by a borrower, in part or in full, often as a result of optional refinancing to take advantage of lower interest rates. In other words when a borrower entity pays off its loan entirely or in part before the defined due date, it is termed as prepayment.Foreclosure or prepayment can be done from own funds of the borrower, or it can be in the nature of takeover of loan facility by another bank.What are Foreclosure Charges or Prepayment Penalty?Foreclosure or prepayment charges are charges on the principal value which the borrowing entity is going to prepay or shift to another bank under a balance takeover.Limit-Based FacilitiesCash Credit / Overdraft / Packing Credit / Letter of Credit / Bank GuaranteeForeclosure charges are levied on the full disbursed limit irrespective of the actual outstanding amount.Example: If a borrowing entity has a Cash Credit limit of ₹100 Lakh with a bank, however outstanding amount is ₹50 Lakh, then foreclosure charges will be applied on ₹100 Lakh, though at the time of closure the outstanding amount payable is ₹50 Lakh only.Instalment-Based FacilitiesTerm Loans / Machinery Loans / Vehicle LoansForeclosure is applicable strictly on the amount outstanding at the time of foreclosure of the loan.Example: If a firm has taken a machinery term loan of ₹100 Lakh for 5 years tenor and at the end of 3 years the principal outstanding is ₹40 Lakh, then foreclosure will be applicable on ₹40 Lakh only.How Many Percentages?Generally, in case of MSME secured finance, the foreclosure remains in the range of 2% to 4%.In case of individual loans or unsecured loans from NBFCs, the foreclosure may go up to 5% to 6%.Where is it Provided in the Document?Foreclosure charges are compulsory to be mentioned in either the sanction letter of the loan facility or the loan agreement.In many cases, the loan sanction letters are silent on pre-closure charges. The loan agreements, which are always standard format of contracts thrust on customers, invariably have the specific covenants detailing prepayment penalty clauses and conditions applicable upon exit or balance transfer.Author may be reached at: ca.nitin7989@gmail.com and eboard@icai.in

‘Cross-examination’ also termed as ‘cross-interrogation’ means the questioning of a witness at a trial or hearing by the party opposed to the party in whose favour the witness has testified. The purpose of cross-examination is to discredit a witness before the fact-finder in any of the several ways, as by bringing out contradictions and improbabilities in earlier testimony, by suggesting doubts to the witness, and by trapping the witness into admissions that weaken the testimony. The cross-examiner is typically allowed to ask leading questions but is traditionally limited to matters covered on direct examination and to creditability issues.11 See Black’s Law Dictionary (Tenth Edition) page 458Right of Cross Examination: Part of Natural JusticeThrough a series of judgments from the Supreme Court and the High Courts it has become a settled principle of law that evidence not tested by the cross examination has no probative value and there should be opportunity provided to the opposite parties to cross examine the witnesses.2 It is a settled principle of law that if the authority wants to rely upon the statement of any witness, the opportunity of cross-examination ought to have been given to enable the party to prove its case. Non-providing of the opportunity of cross examination amounts to violation of the natural justice and in absence of natural justice, such documents cannot be relied upon. The statement against the assessee cannot be used without giving them opportunity of cross-examination. Cross-examination is a valuable right of the accused/ noticee in quasi-judicial proceeding which can have adverse consequences for them.3If any statement of a third party is to be used against the assessee, an opportunity should be given to him to cross examine the third party before any inference can be drawn from the statement. Where revenue has relied upon statement of witness while passing the order, accused is entitled to cross-examine the witness even if the material available against it in the statement of witness is too little. It is not for the authority to conclude in advance whether the cross-examination would be helpful or not or nothing fruitful would be elicited in cross-examination.4Apex Court in the case of Kishanchand Chellaram v. Commissioner of Income-tax5 held that the department is bound to give the assessee an opportunity to controvert evidence and cross examine the evidence on which the department places its reliance. A failure in providing the same can result in the order being a nullity. The Bombay High Court in H.R. Mehta vs. Asst Commissioner of Income-tax6 noted that while making addition under section 68 of the income-tax Act, the A.O. had relied upon some evidence collected in that behalf including statement on oath said to have been made on behalf of persons whose identity was not disclosed. It was held that assessee was bound to be provided with the material used against him apart from permitting him to cross-examine the deponents by the department. The denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment order and renders it vulnerable. This not having been done, the addition was not sustainable.In Andaman Timber Industries Vs. Commissioner of C.EX., Kolkata-II,7 the revenue found that the price at which goods were sold, ex-factory remained the same over a period of time, as far as sales from depots were concerned, the price increased from time to time. Investigation was carried out. Statements of two buyers were recorded and on that basis a show cause notice was served to state as to why the price at which the goods were sold to these customers from the depots may not be the basis for determining the value for excise duty. The taxpayer contested the show cause notice by furnishing its reply, wherein various defences/justifications were given. The taxpayer also questioned the correctness of the statement of the aforesaid two witnesses and demanded the right to cross examine them. The adjudicating authority as well as Tribunal did not grant the cross-examination. The Tribunal expressed the opinion that the grant of cross-examination would not help the taxpayer since the examination of the dealers would not bring out any material which would not be in the possession of the taxpayer themselves to explain as to why their ex-factory price remain static. The Supreme Court held that not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw that makes the order nullity in as much as it amounted to a violation of principles of natural justice because of which the assessee was adversely affected. It was not for the adjudicating authority or Tribunal to presuppose as to what could be subject matter of cross-examination and guess the outcome.Not only should the opportunity of cross examination be made available, but it should be one of effective cross examination, so as to meet the requirement of the principles of natural justice.8No Reason Need Be Stated for Requiring Cross-ExaminationNo reason needs to be stated by any person for requiring cross-examination. In an enquiry, a person gets two kinds of rights. The first set of right revolves around the right to peruse the documents relied upon by the department and the right to cross-examine the witnesses on whose statements, the enquiry or prosecution is based. The second set of right revolves around the right to produce the witnesses and documents in defence. If a person facing an enquiry seeks to summon some persons to be examined in his defence or seeks to summon some documents to be produced in support of his defence, it is open to the enquiry officer to ask the person to justify such a request by adducing reason. But, in so far as cross-examination is concerned, no justification need be provided in the form of reasons by the person facing enquiry or prosecution. The very fact that some statements are relied upon is good enough reason for permitting cross-examination. The very fact that the right of cross-examination is part of the most essential rights is sufficient to grant the request. The enquiry officer cannot test the request for cross-examination on the strength of the reasons.9Right of Cross Examination Is Not an Unfettered RightRight of cross examination is not an unfettered right which can be asserted irrespective of the facts and circumstances and in all inquiries. Even if there is denial of the request to cross examine the witnesses in an inquiry, without anything more, by such denial alone, it will not be enough to conclude that principles of natural justice have been violated.10Formal cross-examination is procedural justice. It is governed by rules of evidence. It is the creation of Courts and may be said not to be part of natural justice but of legal and statutory justice. The right to cross-examination is not necessarily a part of reasonable opportunity. In a particular case, whether a particular party should have the right to cross-examine or not depends upon the facts and circumstances of the case. The law does not state that the right of cross-examination of witnesses is an inalienable right, and any denial of the same would vitiate the order passed in adjudication for the proceedings before the departmental authorities.11No rights can be exercised, in a fair and just way, as per procedure and substance, to cross-examine the witnesses with recorded statements before the reply to the show cause notice gets filed and before adjudication commences. The exercise of cross-examination commences only after the proceedings for adjudication have commenced. If the Revenue chooses not to examine any witnesses in adjudication, their statements cannot be considered as evidence. However, if the Revenue chooses to rely on the statements, then in that event, the persons whose statements are relied upon have to be made available for cross examination for the evidence or statement to be considered.12It is only those persons whose statements are taken on record in the enquiry and relied upon by the department, who can be summoned for cross examination. There is no necessity to cross-examine persons who recorded such statements. Persons who gave statements and who are witnesses, alone are liable to be cross-examined by the accused.13If the sworn statements are not going to be used against the aggrieved person, it cannot be gainsaid that the persons who made the sworn statements have to be cross-examined.14 The assessing authority cannot rely on the statement of those witnesses, who have not been subjected to cross-examination, for any purpose. Even if it is used to corroborate the material collected during the course of search and seizure, it cannot be without an opportunity of cross-examination. Using the statements of those witnesses who were not made available for cross-examination by the assessee would not qualify to be evidence in the eye of law. Use of the statement even for corroboration cannot be without an opportunity of cross-examination, otherwise it cannot be termed to be admissible evidence.15Rejection of Request for Cross Examination by a Separate and Speaking Order OnlyTaxpayer has a right to be told whether his request for cross examination is being granted or refused before final order is passed. When the taxpayer prayed for cross-examination and reasonably expected that the same would be granted, they cannot be expected to participate in the adjudicating proceedings up to the final stage. In other words, without dealing with and disposing of the application for cross-examination, the adjudicating authority cannot finally adjudicate the issues. If the authority is of the opinion that the request for cross-examination is not tenable, he can reject it by giving reasons. Merely because Commissioner was of the opinion that the petitioners had made such a request somewhat belatedly, would not permit him to deal with such an application only in the final order itself.16Consequences, If Right Is Not AssertedThe laws assist those who are vigilant and not those who sleep over their rights. This principle is embodied in the well-known dictum “VIGILANTIBUS NON DORMIENTIBUS, JURA SUBVENIUNT”.17 If the taxpayer does not avail the opportunity of cross-examination, it must follow that he believed that the testimony given could not be disputed. In a matter before the ITAT, Delhi,18 the Tribunal observed that when an adverse view is to be drawn on the basis of statement of a third party, the person affected should be afforded an opportunity to rebut such statement and cross examination if asked for. Thus, if the taxpayer does not assert its right of cross-examination, revenue will proceed for assessment/adjudication assuming the material gathered to be true and trustworthy.Role of Cross Examination in Input Tax Credit DisputesSection 16(2)(c) of the CGST Act, 2017 mandates payment of tax by the supplier to the Government as pre-condition to avail input tax credit by the recipient. A registered person becomes entitled to credit of input tax on any supply of goods or services, only when he is able to demonstrate that the tax in respect of such supply has been paid to the Government either in cash or through utilization of input tax credit admissible in respect of the said supply, as per scheme of the rules.Vide Section 109 of the Finance Act, 2021, an additional condition in the form of section 16(2)(aa)19 has been inserted in the CGST Act providing that Input Tax Credit (“ITC”) based on invoice or debit note can be availed only when details of such invoice/debit note have been furnished by the supplier in his outward supplies return (GSTR-1) and such details have been communicated to the recipient of such invoice or debit note. Rule 36(4) has also been amended20 providing that no input tax credit shall be availed unless the details of such invoices or debit notes have been communicated to the registered person in Form GSTR-2B. Thus, so far as the condition of payment of tax by the supplier is concerned, the procedure is fairly formalised by virtue of reporting of relevant document in Form GSTR-2B, the recipient is reasonably assured that the tax has been/will be paid by the recipient.Other condition in the form of Section 16(2)(b) mandates receipt of goods or services by the recipient. A question of supplier’s genuineness, leading to disallowance of ITC to the recipients has been frequently faced by taxpayers. There are a number of situations where the revenue relies upon intelligence gathered from different sources, including statements of various parties in the supply chain doubting the genuineness of the flow of underlying supply of the goods or services from supplier to recipient. If the transaction is not genuine, i.e., there is no flow of goods/services from supplier to recipient, ITC cannot be allowed even though supplier might have paid tax. However, this fact requires to be established by following the established principle of law. The truth, whether transaction was genuine or not, can get established only upon providing an opportunity of cross examination.There have been instances where revenue has detained/confiscated goods in transit claiming that documentation is not genuine in as much as only invoices are being generated down the supply chain. The goods are being procured from suppliers without raising an invoice and then these are covered by fraudulent invoices generated by the non-existent firms to claim inadmissible ITC. In Shiv Enterprises v. State of Punjab and others,21 the High Court, while holding the proceedings of confiscation of goods or conveyance and levy of penalty cannot be initiated against the recipient alleging wrongful availing of Input tax credit by the supplier(s) in supply chain noted that even if a recipient wants to be prudent, there is no system in place from where he can check whether his predecessors in supply chain have paid tax or not and it is for this reason also that the claim to input tax credit has been made subject to scrutiny and assessment.The law on the issue of the right of cross-examination is clear. Even if the revenue has creditable evidence for disallowance of input tax credit, it is still under obligation to grant opportunity of cross-examination as per the law laid down above, as well as to comply with the principles of natural justice. It thus transpires that disallowing ITC without above opportunity is bad in law.The Madras High Court in case of DY Beathel Enterprises v. Sales Tax Officer22 observed that when the revenue claims that there was no movement of goods, which fact is denied by the recipient, and the recipient insists for examination of supplier, such examination is “necessary and important”. The High Court directed for the examination of supplier “as witnesses”.Presumption of Culpable Mental StateSection 132 of the CGST Act provides for “punishment for certain offences”. Clause (a) of sub section 1 deals with supply without issue of invoice “with the intention to evade tax”. Clause (b) deals with the issue of invoice or bill without underlying supply “leading to wrongful availing or utilisation of input tax credit or refund of tax”. Clause (c) talks about offence by the taxpayer who “avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill”. Phrase “with the intention to evade tax” is not there in clause (c). While first part of clause (c) talks about ITC availed based on invoice or bill issued under clause (b), second part is about fraudulent availing of ITC without invoice or bill.A “fraud” is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage.23 In the case of fraud, the person making the suggestion does not believe it to be true. Dissection of clause (c) reveals that availing of ITC using the invoice or bill without supply of goods or service may not be a fraud or wilful attempt to evade payment of tax, whereas availing of ITC without having invoice or bill is fraud. Presumption of culpable mental state cannot be invoked in case of availing of ITC without supply of goods or service.Section 135 of the CGST Act presupposes “existence of” culpable mental state “in any prosecution for an offence……..which requires a culpable mental state on the part of the accused”. First part of clause (c) of section 132(1) is not an offence which requires a culpable mental state on the part of the accused. Section 135 of the Act is really a rule of Evidence regarding existence of mens rea by drawing a presumption though rebuttable. A ‘culpable mental state’ which can be presumed under section 135 of the CGST Act would come into play only in a prosecution for any offence under the Act, when the said offence requires a ‘culpable mental state’ on the part of the accused.24Footnotes & Judicial ReferencesSee Black’s Law Dictionary (Tenth Edition) page 458Vijay S Poojary v Commissioner of Customs (Export) 2022-TIOL-965-CESTAT-Mum Single member Bench judgment dated 28.07.2022Commissioner of Central Excise v Kurele Pan Products Private Limited [2014] 307 ELT 42 (Allahabad)Sameer Shah v UOI 2022-TIOL-854-HC-MUM-CUS judgment dated 09.06.2022[1980] 125 ITR 713 (SC); [1981] 1 SCC 720 judgment dated September 16, 1980[2016] 387 ITR 561 (Bom.) (HC)2015 [324] ELT 641 (SC); 2015-TIOL-255-SC-CX - Quoted in The Commissioner of Central Excise v Kamal Singhania – 2021-TIOL-1899-HC-Mum-CXAIR 2013 SC 58Thilagarathinam Match Works v Commissioner of Central Excise, Tirunelveli [2013] 295 ELT 195 (Madras) judgment dated 29.01.2013Patel Engineering Limited v Union of India [2014] 307 ELT 862 (Bombay) judgment dated 30.06.2014See G.Sridhar and others v Collector of customs [1992] 43 ECR 95 (Tri.-Chennai) judgment dated March 07, 1992Sultan Tanneries and Leather Products v Union of India 2022-TIOL-487-HC-ALL-Cus Judgment dated April 07, 2022Thilagarathinam Match Works v Commissioner of Central Excise, Tirunelveli [2013] 295 ELT 195 (Madras) judgment dated 29.01.2013SRS Mining v The Dy Commissioner of Income-tax 2021-TIOL-2020-HC-MAD-IT judgment dated 28.09.20212022-TIOL-1112-HC-MAD-IT judgment dated 10.08.2022Mahek Glazes Private Limited v Union of India [2014] 300 ELT 25 (Gujarat) judgment dated 10.04.2013A Selection of Legal Maxims, Classified and Illustrated, by Herbert Broom, LLD, 7th American, from the 5th London Edition, T & J.W. Johnson and Co, 1874.Dy Commissioner of Income-tax v Vatika Limited 2023-TIOL-322-ITAT-Del judgment dated February 07, 2023Notified vide Notification No. 39/2021–Central Tax dated December 21, 2021, w.e.f. January 01, 2022Vide Notification No. 40/2021 – Central Tax dated December 29, 2021[2022] 135 taxmann.com 123 (Punjab and Haryana); 2022-TIOL-169-HC-P&H-GST Judgment dated 04.02.2022[2021] 127 taxmann.com 80 (Madras); 2021-TIOL-890-HC-MAD-GST judgment dated 24.02.2021S.P. Changalvaraya Naidu v. Jagannath (1994 (1) SCC 1) as quoted in Commnr. of Customs (Preventive) v Aafloat Textiles (I) Pvt.Ltd. and Ors. [2010] 1 GSTR 453 (SC); 2009 (235) ELT 587 (S.C.)See Mrs Noorjahan v The Dy Commissioner of Income-tax [2022] 445 ITR 17 (Madras); 2022-TIOL-707-HC-MAD-IT judgment dated 26.04.2022 – This judgment is in respect of section 278E of the Income-tax Act. Section 135 of the CGST Act is Pari Materia to provision under the Income-tax Act. Principle of Pari Materia, means same matter or subject. Accordingly, similar language in statutes with common purpose is to be interpreted in the same way.Author may be reached at: eboard@icai.in

Double taxation, which arises due to partial or total overlapping of jurisdiction to taxation, acts against the growth of international trade. Countries have adopted varying measures to reduce or eliminate double taxation – done either unilaterally or through tax treaties. Foreign Tax Credit (“FTC”) is the most common approach adopted. FTC has been a subject matter of debate given the dynamic nature of this concept and the issues involved. The key issues one may face while computing FTC may include determining the basis of computing foreign income, evaluating the mechanism for the conversion of foreign income into INR value, and basis of computing the proportionate tax payable which would then become a maximum threshold for allowing FTC. There is limited guidance on this matter and therefore, a thorough analysis must be undertaken to employ an appropriate method of calculating FTC and that must be supported by robust documentation. This article discusses some of the key aspects in this regard.Need for FTCThe concept of FTC came to occupy an important position in international taxation because of globalization and ease of doing business in foreign countries. Ample opportunities created greater mobility of individuals and corporate entities to diversify and expand their business portfolio in countries other than of their residence. Earning income from outside India and being subject to tax in two or more jurisdictions, led to double taxation of the same amount for a resident (known as juridical double taxation). Similarly, different persons taxed in respect of the same income also leading to double taxation (known as economic double taxation), for e.g. corporate profit is taxed in the hands of the Company and dividend is taxed in the hands of the shareholder. There are different ways to eliminate the juridical double taxation and types of methods for eliminating the same are captured below:Types of Methods for Eliminating Juridical Double TaxationExemption Method:Full ExemptionExemption with ProgressionCredit Method:Full CreditOrdinary CreditTax Sparing CreditUnderlying Tax CreditThis Article discusses the ordinary credit method for claim of FTC.International ApproachThe Organisation for Economic Co-Operation and Development (‘OECD’) and United Nation (‘UN’) Model Conventions recognize two methods for avoiding double taxation: 1. Exemption Method; and 2. Credit Method. Different variants of these methods are discussed in the Commentaries to the Models. However, they do not recommend a particular method to be applied and broadly discuss the nuances and considerations that apply to each of the methods.Countries provide relief from double taxation unilaterally through their domestic law as well as through tax treaties. The former applies to all, the latter are specific to the residents of the treaty country. The method by which a country provides relief from double taxation depends primarily on its general tax policy and the structure of its tax systems. Also, the provisions of the double taxation avoidance agreement provide for a certain method to be followed for that particular tax treaty.Approaches Adopted by Some CountriesUnited States: United States relieves international double taxation by granting an FTC, subject to conditions. In lieu of the credit, a tax deduction may be claimed, but in most cases, the deduction is not as beneficial as the credit method. A limitation applies to the amount of foreign taxes that may be claimed as an offset against US income tax liability. In general terms, the FTC may not exceed the amount of US federal income tax that would be imposed on the taxpayer’s foreign-source income.United Kingdom: In the UK, unilateral relief from foreign taxation is given by the credit method, i.e. the foreign tax paid is deducted from the UK tax payable on the same source of income. Credit relief is given strictly on a source-by-source, item-by-item basis. Relief is given only for those foreign taxes, including national, provincial and municipal taxes, which correspond to UK income or corporation tax. In case taxpayer elect that no foreign tax credit be granted, overseas tax is allowed as a deduction from the business income. The method of relief chosen by taxpayers can vary between different sources of foreign income and, in relation to a particular source, the method can be varied from year to year. Further, the bilateral relief is provided based on the provisions of a tax treaty, and the maximum credit relief granted by a treaty is calculated in the same way as for unilateral relief purposes.China: In China, resident enterprises may generally claim double taxation relief under domestic laws and under tax treaties, however, the FTC is limited to the tax payable in respect of such foreign income in China. Taxpayers may choose to calculate the FTC separately for each source state (per country) or on an overall basis (overall credit). Once the election is made, it may not be altered for 5 years. Any unused amount of credit may be carried forward for up to 5 years.Singapore: In Singapore, both unilateral and bilateral foreign tax credits are only available to persons who are Singapore residents during the relevant year of assessment. The amount of allowable foreign tax credit is limited to the lower of Singapore tax or foreign tax payable on the foreign income, after permissible deductions. The calculation of the foreign tax credit is to be made strictly on a “source-by-source and country-by-country” basis.In view of different fiscal policies and techniques across the countries, a uniform solution for the computation and allowability of FTC may not be possible. As acknowledged in both the Model Conventions (the OECD1 and the UN Model Conventions2), there may be a lot of difficulties in the universal application of the article on ‘relief of double taxation’, therefore they recommend that the domestic legislation should provide for solutions of all the difficult areas/ issues.Indian ApproachIn India, The FTC mechanism is governed by section 90 and section 91 of the Income-tax Act, 1961 (the Act). Section 90 of the Act provides relief from double taxation in India through a tax treaty3 concluded between India and another country. Section 91 of the Act provides unilateral relief in case no tax treaty exists. Central Board of Direct Taxes [“CBDT”] vide notification No. 54/2016 introduced Rule 128 in the Income Tax Rules, 1962 [“the Rules”] with effect from 1 April 2017. This Rule lays down the foundation, broad principles and conditions for the computation and claim of the foreign tax credit.It follows the principle of ordinary credit, whereby the resident’s worldwide income (including the foreign sourced income) is determined, and the tax liability thereon is computed. From the tax liability so computed, credit for foreign taxes paid is granted to the extent of tax payable on such income in India (maximum deduction). Therefore, if the tax payable in India is more than the taxes paid in a foreign country, then the resident would be liable to pay the differential tax in India. If the foreign tax exceeds the Indian tax payable on such income, the excess tax credit is forfeited and cannot be carried forward.Rule 128 provides that credit is to be computed separately for each source of income arising from a particular country or specified territory outside India. The aggregate of such credit would be considered as foreign tax credit eligible for deduction as mentioned above.It also specifies that foreign taxes paid in foreign currency needs to be converted into Indian rupees (INR value) at telegraphic transfer (TT) buying rate4 on the last day of the month immediately preceding the month in which such tax has been paid or deducted.Besides the above, there is not much guidance in Rule 128 and therefore, there are various issues still open to debate and some of the key issues are discussed below.Gross Basis v. Net Basis of TaxationRule 128 provides that where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered/ assessed to tax. However, it does not specify “how” such income needs to be determined. Determination of income as an issue is also stressed upon in the OECD commentary5 on Article 23B6 (as also mentioned in the UN Model commentary7). It states that normally, the basis for the calculation of income tax is the total net income, i.e., gross income less allowable deductions. Therefore, it is the gross income derived from the State of source less any allowable deductions (specified or proportional) connected with such income which is to be considered.In case of net income basis, one may note that there are various items of disallowances and allowances incorporated in the tax computation, post which the total income is computed. Thus, another question that arises is whether the net profits need to be considered or net income after considering such items of disallowances/ allowances need to be considered. This is further complicated by “how” the apportionment of expense and disallowance/ allowance be done in order to arrive at the net income. While this depends and differs on case-to-case basis, one may consider directly attributable expenses and apportion other expenses on a prudent and reasonable basis to arrive at net income (including adjustments for disallowances/ allowances).At this juncture, it may be noted that in certain cases, foreign taxes are deducted in a foreign country at gross basis. One can say that there is a disparity in the determination of taxable income, since, in the Source country such income is taxed on a gross basis whereas in India such income could be taxed on net basis, which is more likely the case. In this regard, it may be noted that one of the fundamentals of gross basis of taxation is that the income is normally taxed at a lower rate compared to the rate applicable for the net basis of taxation and this is done for the reason that the concerned Source jurisdiction may not want to delve into the complexities and challenges of determining the net basis of taxation (for e.g., nature and quantum of expenses, allowability of the expenses, losses, etc.). Thus, in this sense, the expenses are deemed to be allowed in the Source country (by way of a lower rate applied on the gross amount). This of course may not match with the actual expenses desired to be claimed by the taxpayer in India and it could also result in lower FTC vis-à-vis the actual foreign taxes paid.Practical Numerical Illustration: R Ltd.R Ltd., an Indian resident company receives service income of INR 100,000 from a foreign country (Country S) with which India has a tax treaty that provides an ordinary credit method. Tax is deducted at 15% on such income in Country S (Foreign Tax = INR 15,000). Let’s say the attributable expenses are INR 60,000; the net income would be INR 40,000. India’s proportionate tax on INR 40,000 at 25.168% is INR 10,067. However, R Ltd. will be eligible for a credit of only INR 10,067 and not INR 15,000 paid in Country S.Key Takeaway: The higher the expenses, the lower would be the net income on which India’s tax payable is computed. This lower Indian tax payable becomes a ceiling threshold against which foreign taxes paid are compared, effectively leading to lower allowable FTC.Judicial Precedents on Net Income & Expense AllocationFrom a judicial standpoint, while the matter is still evolving and there are not many case laws, one may refer to the decision of the Hon’ble Ahmedabad Tribunal in the case of Elitecore Technologies Private Limited v. DCIT8 wherein it was observed that the expression used is ‘income’, which essentially implied ‘income’ embedded in the gross receipt, and not the ‘gross receipt’ itself. Further, on the specific facts of the case, it noted that the assessee did not have to incur any expenses towards earning the foreign income (more so passive in nature) and therefore, no expenses should be deducted while arriving at net income. Further, for another part of foreign income where the assessee had actually presented allocation of expense, the Hon’ble Tribunal accepted the said basis to be reasonable in absence of any infirmities being pointed by the Revenue. In addition and very importantly, the Hon’ble Tribunal rejected AO’s action of allocating a share of total expense on the ratio of turnover. It further emphasized that one needs to look at different methods such as averaging on the basis of overall revenues and profits of the assessee, or on the basis of some other ratio analysis, only when the income element cannot be worked out on some other reasonable basis. Also, it observed that the allocation of proportional deductions can be justified in some situations, such as when business operations are somewhat evenly or even in a significant manner, spread over the residence and source jurisdiction.In the case of Infosys Technologies Ltd. v. JCIT,9 while the matter was regarding the validity of revisionary proceedings and not FTC computation per se, the Hon’ble Bangalore Tribunal had occasion to look at the facts and based on the same, opined that if the view adopted by assessing officer is one of the possible views for FTC computation, revision cannot be resorted to on the ground that the Commissioner do not accept such view or that necessary enquiry has not been made in this regard.Facts of the Case: Learned CIT, during the revision proceedings under Section 263 of the Act, issued a notice proposing a revision of the order passed under section 143(3) of the Act. Learned CIT was of the opinion that the credit as available under The India - Canada tax treaty and India – Thailand tax treaty was granted without properly applying the provision of the said tax treaties and this failure on the part of the assessing officer (AO) has rendered the order erroneous and prejudicial to the interest of the revenue. Thus, it directed the AO to compute the relief as per the provisions of the said tax treaties.Assessee’s Arguments: Among many other contentions, the assessee contended that Learned CIT did not demonstrate in what manner the claim of credit of taxes paid in Canada and Thailand made by the assessee and allowed by the AO was wrong. The assessee further contended that India does not have any rules in the domestic legislation governing relief from double taxation.10 In the absence of specific rules and in situations where more than one solution is possible, the adoption of one of the many alternatives should not mean, that the order passed by the AO is erroneous. The assessee also pointed out that for the years under consideration, there were six computations on the record made by different AOs and authorities at different points of time. These different alternatives, all of which appear apparently correct, suggest that more than one solution is possible and therefore, the order cannot be treated as erroneous.Tribunal’s Judgement: The Hon’ble Tribunal inter-alia observed that “in this case, originally FTC was not given. When the assessee perused the matter and submitted the details, the same was given while giving effect to the appellate order. The dispute relating to non-giving of credit for tax paid in Canada and Thailand was not raised before Commissioner (Appeals) but was pursued by the assessee before AO under section 154 of the Act. After having satisfied himself, the AO gave the credit. Once again, this credit was sought to be withdrawn by AO invoking section 154 of the Act. Once again on the reply filed by the assessee no action under section 154 was taken by AO. This means that the AO has satisfied himself that the tax credit was properly claimed and allowed. The Commissioner in revision proceedings has not given any finding that the credit is erroneously given... An order can be revised only when the order is demonstrated to be erroneous. The AO has adopted one of the possible modes of granting credit in respect of income arising in Canada and Thailand”. In conclusion, the revisionary proceedings were quashed.To appreciate what is that possible view, which assessee adopted and the assessing officer accepted, the computation of FTC as enumerated in the above case is tabulated below:ParticularsCanada (INR)Thailand (INR)A. Gross amount of billings on foreign customers3,19,65,44044,64,002B. Total turnover during the year89,04,40,27689,04,40,276C. Total profit before depreciation and tax32,23,55,52932,23,55,529D. Proportionate profits from foreign Source [C/B*A]1,15,72,06916,16,050E. Total Income from the business taxable in India2,54,28,4872,54,28,487F. Tax liability in India1,16,97,1041,16,97,104G. Proportionate India taxes attributable to foreign income [F/E*D]53,23,1527,43,383H. Actual foreign taxes paid4,794,81664,469I. FTC (minimum of G or H)4,794,81664,469From the above calculation, one can see that the proportionate income from Canada/ Thailand considered for arriving at the tax liability is the profits (before depreciation and tax) apportioned based on the gross billings from Canada/ Thailand to total turnover. Further, the total tax liability is apportioned on the basis of such net income from Canada/ Thailand to total income. In this case, the deduction of expenses or items of disallowances/ allowances, etc., was not considered. Thus, the above decisions rendered in view of the specific facts of its case could be considered as guidance only. The determination of income must be based on strong rationale, tax principles and commercial expediency that reflects the business realities of the situation which would then aid the claim of FTC.Conversion of Foreign Income into INR ValueThere could be foreign exchange rate fluctuation between the day an Indian resident derives foreign income and the day such income is realized and further, the day on which foreign taxes are paid/ deducted. A question, therefore, arises as to which exchange rate be considered for converting the foreign into INR value.Generally, it is seen that when resident entities receive foreign income in their bank account, it is already converted and credited by the Bank at a certain rate. For the purpose of books of account, the resident entities are required to apply the applicable accounting norms and guidelines to recognise this foreign income at a certain converted value.However, for the purpose of FTC, Rule 128 is silent on the conversion of foreign income to INR value. In this regard, it may be noted that Rule 115 of the Rules provides that rate of exchange for calculating INR value of any income, accruing or arising or deemed to accrue/ arise or received or deemed to be received by the assessee, in foreign currency, shall be TT buying rate as on the “specified date”.The specified date depends on the category of income and the cross application of another Rule, namely, Rule 26 of the Rules. This Rule provides that rate of exchange for the deduction of taxes on income payable in foreign currency shall be the TT buying rate as on the date on which tax is required to be deducted under the provisions of Chapter XVIIB (Indian taxes and not foreign taxes). Where Rule 26 applies, the specified date for the purpose of Rule 115 shall also be the date on which tax was required to be deducted (in other words, the same rate and date applies for Rule 115 and Rule 26 in tax deduction cases). This brings parity between the amount of INR value to be considered by the deductor and the amount of INR value to be considered by the recipient of income. However, it is to be noted that Rule 26 will apply to cases where such income is payable to an assessee outside India. Therefore, this Rule may not apply to residents receiving income in foreign currency in India. Accordingly, resident receiving income in foreign currency in India may apply the rates specified in Rule 115 itself.Unfortunately, in the case of ACIT v. Snia Fibre SPA,11 the above phrase “income is payable to an assessee outside India” was not highlighted/ discussed and the Hon’ble Delhi Tribunal upheld the assessee’s argument that Rule 26 should apply in its case since taxes have been deducted. Further, it is not clear whether such taxes deducted were Indian taxes under the provisions of Chapter XVIIB or foreign taxes deducted by the payer in a foreign country. Thus, these aspects may be evaluated before deciding on the application of Rule 26. One may note that a co-ordinate bench of the Hon’ble Delhi Tribunal in the case of Sedco Forex International Drilling Inc. v. DCIT12 upheld the claim of the assessee (non-resident company) in applying Rule 26 wherein taxes were deducted by ONGC (Indian entity).Rule 115: Specified Dates and Applicable ExceptionsCategory of IncomeSpecified DateExceptionSalariesLast day of the month immediately preceding the month in which the salary is due, or is paid in advance or in arrears-Interest income on securitiesLast day of the month immediately preceding the month in which the income is due-DividendsLast day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the company-Capital gainsLast day of the month immediately preceding the month in which the capital asset is transferred-Income from house propertyProfits and gains of business or professionIncome from other sources (except interest, dividends, etc.)Last day of the previous year (PY) of the assesseeRule 115 will not apply if the income is received in, or brought into India before last day of PYFurther, it is important to note that there is an exception carved out in Rule 115 in view of which the said Rule will not apply to cases where income is received in, or brought into India in terms of exchange control regulations by the assessee or on his behalf before the specified date and such income is chargeable under the head “house property“, “business or profession“ and “other sources except for dividends and interest on securities”. In such cases, the rate at which the bank has credited the income (foreign exchange) could be considered as INR value for the purpose of taxation.Reference in this regard can be made to the Hon’ble Supreme Court in the case of CIT v. Chowgule & Co. Ltd.,13 wherein it was observed that “if the foreign currency received by an assessee has been converted into rupees before the specified date, the question of application of Rule 115 does not arise.” Other decisions upholding this view include Snia Fibre (supra), Sedco Forex (supra) and DCIT v. Cathay Pacific Airways Ltd.14Therefore, barring the exceptions, Rule 115 may be considered for deriving the INR value of the foreign income. Further, it is a better approach to be conservative and consider a higher INR value (for taxing the income) in case the INR value realised by the Company is actually more than the converted value as per Rule 115. The corresponding Indian tax payable would also be higher and therefore, a higher threshold available to compare the actual foreign taxes paid.Computation of Proportionate TaxThe OECD commentary specifies that FTC may be computed by any of the below two ways:Formula 1: FTC = (Total Tax / Total Income) * Income for which credit is to be givenFormula 2: FTC = Income for which credit is to be given * Tax rate for total incomeThere could be other ways as well such as a normal tax rate applied on foreign income or turnover based computation instead of total income. Normally taxpayers adopt the first approach above in arriving at proportionate Indian taxes and this may be considered a reasonable basis for FTC computation. However, which way works best would depend on the facts and circumstances of each case.Other Critical AspectsHigher Foreign Taxes Paid in Source CountryWithholding taxes paid by the Indian resident in a foreign country is normally based on tax treaty provisions to the extent that the same is beneficial. However, there may be cases where withholding taxes are deducted/ paid as per the rate specified in the domestic law of the foreign country which may be higher than the tax treaty rate. A question thus arises whether such excess tax paid being the difference between domestic law rate and tax treaty rate can be claimed as FTC? In this regard, one may note that Rule 128 inter-alia provides for the meaning of foreign tax as under:“(a) in respect of a country or specified territory outside India with which India has entered into an agreement for the relief or avoidance of double taxation of income in terms of section 90 or section 90A, the tax covered under the said agreement.”Thus the Rule provides for granting of FTC in accordance with the tax treaty.In the case of Bhavin A Shah,15 the Hon’ble Ahmedabad Tribunal laid down several aspects which AO need to examine before granting FTC viz. (i) the residential status of the assessee under the treaty, (ii) whether amounts shown as dividends are actually in the nature of dividends, (iii) whether US tax withholding is in accordance with the provisions of Article 10 of the treaty and (iv) whether FTC claimed is lower of such tax withholding or Indian tax liability on such income whichever is less and in any case it cannot exceed the rate specified under Article 10.Given the above decision and the fact that the matter is not settled at the Apex Court level yet, payment of foreign taxes beyond the tax treaty rate is bound to generate a lot of conflicts. While one needs to look at the interpretational side of the issue in analysing the treaty provisions along with domestic law provisions and the reasoning for payment of higher taxes, the FTC on a general basis, may not be allowed to the extent it exceeds the tax treaty rate.Having said so, one can explore claiming a deduction of such excess FTC under section 37 of the Act (foreign taxes treated as ineligible credit). The Hon’ble Mumbai Tribunal in the case of Tata Sons Ltd. v. DCIT16 observed that: “There cannot obviously be a tax payment which is neither treated as admissible expenditure, because it is treated as an Income-tax, nor is it taken into account for tax credits, because it is not to be treated as Income-tax”.One could also refer to the decision in the case of Bank of India v. ACIT17 wherein it was held that the assessee will be eligible for deduction of taxes paid abroad on its income in respective tax jurisdiction in respect of which the assessee had not been granted any tax credit.Source of Income Is Eligible for Tax Holiday / Deduction (Section 10A / Exemptions)No tax would be payable on the foreign income earned in cases where exemption, deduction, etc. applies, however, in these cases, the taxpayer may have paid foreign taxes in the source country. A question thus arises whether FTC would be available in these cases where taxpayers do not have India tax payable. Reference in this regard can be made to the following judicial decisions which on the principle basis have upheld that FTC would be eligible even in cases where there is no Indian tax payable, provided it is in accordance with the provisions of the tax treaty and the relevant exemption/ deduction provision under the Act:Blue Star Infotech Ltd. v. ACIT:18 Revenue authorities denied FTC on the income on which the assessee was charged tax in Japan was not chargeable to tax in India being exempt under the provisions of section 10A. The Hon’ble Mumbai Tribunal allowed the FTC by observing that “after amendment by Finance Act, 2000 with effect from 1-4-2001 deduction under section 10A being from the total income leads to the conclusion that there was charge of tax in India also on the income that has been subjected to tax in Japan. The tax liability of the assessee is equal to the tax payable in India at normal rates. Accordingly assessee qualified for tax relief under para (2a) of article 23 of Double Tax Avoidance Convention between India and Japan as applicable to the assessment years under consideration.”Tata Consultancy Services Ltd. v. Addl. CIT:19 The Hon’ble Mumbai Tribunal observed that “whether where respective tax treaty provide for benefit of foreign tax paid even in respect of income on which assessee has not paid tax in India, still, it would be eligible for tax credit”.Wipro Ltd. v. DCIT:20 The Hon’ble Karnataka High Court held that “income which is exempt under section 10A is actually chargeable to Income-tax Act under section 4; exemption only suspends collection of income tax for a period of 10 years and, thus, such a case falls under section 90(1)(a)(ii) and assessee would be entitled to take credit of Income-tax paid in foreign country in respect of such income.” This decision is followed by several courts holding the matter in favour of the taxpayers.Concluding RemarksThough FTC is an effective tool to mitigate double taxation, yet the concept of FTC with respect to computation is not refined. There is limited jurisprudence and limited guidance under sections 90/ 91 of the Act and Rule 128 of the Rules, which makes it highly vulnerable to litigation. Different entities might take a different stand. There is no concrete approach or methodology. To avoid future litigation and possible outflow of cash as a consequence of such litigation, an appropriate method of calculating FTC should be employed and that must be supported by robust documentation. Also, one must bear in mind that the above aspects could interplay with other issues such as interpretational aspects, dealing with loss situations, etc.Footnotes & CitationsOrganisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (2017)United Nations Model Double Taxation Convention between developed and developing countries (2021)Double Taxation Avoidance Agreement“telegraphic transfer buying rate”, in relation to a foreign currency, means the rate or rates of exchange adopted by the State Bank of India for buying such currency having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency, where such currency is made available to that bank through a telegraphic transfer.Commentary on OECD Model Tax Convention on Income and on Capital (2017)Article 23B deals with foreign tax credit methodsCommentary on UN Model Double Taxation Convention between developed and developing countries (2021)ITA No.623/Ahd/20152006 103 ITD 399 Bang, (2006) 105 TTJ Bang 802At the relevant time, India had not introduced specific rules. However, at present, Rule 128 governs FTC claims.[1996] 55 TTJ 554 (DELHI)[2000] 72 ITD 415 (DELHI)[1996] 84 Taxman 623 (SC)[2003] 84 ITD 205 (CAL.)[TS-130-ITAT-2017(Ahd)][2011] 10 taxmann.com 87 (Mum.)[2021] 125 taxmann.com 155 (Mumbai - Trib.)[04-03-2021][2015] 57 taxmann.com 386 (Mumbai - Trib.)[2020] 121 taxmann.com 190 (Mumbai - Trib.)[2015] 62 taxmann.com 26 (Karnataka)Author may be reached at: ca.ankithajain@gmail.com and eboard@icai.in

The Indian Government was in news in last year due to imposition of Export Taxes on certain commodities. This article will give insight about the commodities on which taxes were imposed, what were the intentions of such move taken by the government, what can be the impact on the economy as well as the industries. Further, an attempt has been made to help the readers to understand the prices impact through graphical representation. This will make you understand the Global Economic scenario, what are the implications of COVID pandemic and Russia-Ukraine War on global commodities. In the time when global trade is on its peak and inter-dependencies on each other are increasing, this move of government will show why it is essential to impose such taxes to protect itself from global inflationary trap.I. Hike in Export Duty on Iron and Steel CommoditiesOn 21st May, 2022, Finance Minister made some announcements about changing the rates of custom duties on iron and Steel related products. She announced to increase the duty on the export of Iron Ore. The changes become effective from 22nd May, 2022. Further, she announced a waiver of customs duty on imports of certain raw materials, including Coking Coal and Ferronickel used by the Steel Industry.Vide notification dated 21st May, 2022, the tax on the export of Iron Ores and Concentrates has been hiked to 50 per cent, from 30 per cent, while on Iron Pellets a 45 per cent duty has been imposed. The import duty on Ferronickel, Coking coal, PCI coal has been cut from 2.5 per cent to ‘NIL’, while the duty on coke and semi-coke has been slashed from 5 per cent to ‘NIL’.Duty on Pig Iron and Spiegeleisen in Pigs, Blocks, or other primary formats; Flat-rolled products of Iron or Non-alloy Steel, of a width of 600 mm or more, hot-rolled, not clad, plated or coated; Flat-rolled products of iron or non-alloy Steel, of a width of 600 mm or more, cold-rolled (cold-reduced), not clad, plated or coated; Flat-rolled products of iron or non-alloy Steel, of a width of 600 mm or more, clad, plated or coated have been hiked to 15 per cent from ‘Nil’ currently.Summary of Duty Rates Before and After NotificationS. No.Item DescriptionOld Rate of DutyNew Rate of DutyImport Tariff Concessions1.Anthracite / Pulverized Coal Injection (PCI) coal (Non Agglomerated)2.5%NIL2.Coking coal (Non Agglomerated)2.5%NIL3.Coke and Semi Coke5%NILExport Tariff Increases4.Iron Ore and concentrates30%50%5.Iron pellets30%45%6.Flat-rolled products of stainless Steel, of a width of 600 mm or moreNIL15%7.Flat rolled products of iron or non-alloy Steel, clad, plated or coatedNIL15%8.Other bars and rods of stainless Steel; angles, shapes and sections of stainless SteelNIL15%9.Bars and rods, hot-rolled, in irregularly wound coils, of other alloy SteelNIL15%Rationale Behind the Hike in DutyThe imposition of export duty on steel and steelmaking raw materials by the Indian government is aimed at curbing inflation and increasing supply in India’s domestic market. The government has taken such a decision to facilitate greater domestic availability of Steel products, a move which will lower the cost for the domestic industry and reduce the prices. Focusing on the initiative of ‘Atmanirbhar Bharat’ (Self-Reliant India), this move will ensure that domestic demands are fulfilled first and domestic Industries that require Steel can buy it at lower prices.Earlier in the year, authorities such as The Indian Foundry Industry (IFA) demanded temporary but immediate suspension of the export of pig iron and iron ore to protect the foundry sector of the country from the current crisis of volatility in the price of raw materials. Unless export duty on both these items was raised quite high, not only the Foundry Industry, but the government also loses earnings through value added products like steel and metal castings.Due to the Russia-Ukraine War, there was a sudden increase in the prices of global commodities across the globe including Steel. Indian Companies were taking the benefits of the same by exporting Steel in place of fulfilling domestic requirements. That caused a major concern for the government where it was seen that the country’s domestic requirements remain unattended which causes an increase in prices of Steel dependent products due to a shortage of supply.Such a decision helped Automobile Sector as well which is in low pace growth currently. The necessary Steel required for the manufacturing of Vehicles can be purchased by domestic Automobile manufacturers at lower prices which in turn can cause a decline in prices of Vehicles ultimately leading to higher demand.Industry’s Comment on Government’s Action“Imposition of Export duties on Steel products will send a negative signal to investors and adversely impact capacity expansion projects under PLI scheme, India may lose the export opportunities now and this decision may also impact the overall economic activity in the country”, the Indian Steel Association (ISA) said after the release of government notification. “The imposition of export duty will help other countries to increase their share in the global market, which India will vacate. Rebuilding the lost ground may take a very long time, as the supply chain will be disrupted, while India’s credibility as a reliable exporter will take a hit”, the ISA noted.India’s Steel export came down by 40 per cent to 12 million tonnes in the ongoing fiscal year, as a result of the government’s move to hike the export duty on the raw material of Steel products according to CRISIL. The export of Finished Steel reached a record high of 13.5 million tonnes in the FY 2021-22 and the prices were at their all time high.Statistical Overview: India’s Finished Steel Exports Over Last 10 YearsYear20122013201420152016201720182019202020212022Exports (Million Tonnes)4.65.46.05.64.18.29.66.48.410.813.5From the last 4 years, we can see that exports have increased at an increasing rate and crossed 10 million tonnes in 2021 which was just double of what it was 5 years back.CRISIL further added that the duty-driven price correction will improve the availability of Steel in the domestic market as finished Steel exports will fall. This will impact India’s export volume in the current year. Steelmakers will attempt to skirt the duties by bumping up exports of alloyed Steel and billets, but that is unlikely to compensate for the loss of finished Steel exports. Imposition of higher export tax on Iron Ore and various intermediate products like pellets will raise costs for Steel mills. The latest policy will dampen fresh investments.Assessment of Impact on Iron and Steel SectorIndian Companies involved in the Mining of Iron Ore were major ones hard hitted by the Hike in export Duty. Their market narrowed down to domestic only and they are bound to sell the Iron and steel products to only domestic players. The increase in export taxes on Iron Ore, will lead to large surpluses at home, and mainly hit producers of low grade ores that depend on overseas markets. Further, companies who were involved in the production of Pig Iron and thereafter Finished Steel will had to bear a major impact because of the notification.II. Export Taxes in Petrol, Diesel and Windfall Tax on Crude OilIn another announcement, Central Government on 1st July, 2022 imposed taxes on the export of Petrol, Diesel and windfall tax on the export of Crude Oil:Petrol₹6 / LitreExport Duty HikeDiesel₹13 / LitreExport Duty HikeAviation Turbine Fuel (ATF)₹6 / LitreSpecial Additional CessDomestic Crude Oil₹23,250 / TonneWindfall Tax LevyThe government has also slapped a ₹23,250 per tonne additional tax on domestically produced Crude Oil to take away windfall gains accruing to producers from high international oil prices. But, small producers, whose annual production of crude oil in the preceding financial year is less than 2 million barrels were exempt from this additional tax. The notification came after UK Government also imposed a windfall tax on Oil and Gas producer’s profit at 25% amid rising energy bills in Britain.The speculations of imposing such taxes were going on since May this year when the UK government announced a windfall tax on profits of oil and gas companies with crude jumped over 50% in 2022 so far.Why Such Measures Were TakenThe government has taken such a move because of the following reported reasons:The world is grappling with tight gasoline and diesel supplies as Western sanctions have reduced exports from Russia while demand has surged in a post-pandemic recovery.The tax on exports follows oil refiners, particularly the private sector, reaping huge gains from exporting fuel to markets such as Europe and the US.Fuel Pumps in several states like Madhya Pradesh, Rajasthan and Gujarat ran dry due to a shortage of Petrol and Diesel.Impact on the Energy IndustryCompulsory Domestic Supplies: Will raise availability within the country.Impact on Private Refiners: Private Companies to see a fall in profits as not been able to take the benefit of increased export prices. It has been reported that some companies shall see a $40 per barrel hit.Crude Oil Prices Variation (In $ per Barrel, 2014 to 2022)Year201420152016201720182019202020212022Crude Price ($/bbl)53.4537.1353.7560.4645.1561.1448.5275.21109.78ConclusionFirstly, the COVID pandemic and thereafter Russia Ukraine War, both of these events had a devastating impact on the global economy. Sanctions imposed by the west on Russia has caused a shortage in the supply of essential commodities and an increase in its prices because of which we can observe inflation in the prices across the globe. The Indian Government through imposing export taxes has taken industry-specific steps to tackle inflation which we hope would be for the short term. Looking at the economic scenario, such a step is taken by the government to increase domestic availability. We can expect that such duty will be removed by the government in near future and again will promote the export of commodities.Referenceswww.steel.gov.inwww.steelmint.comwww.indsteel.orgwww.cbic.gov.inwww.crisil.comwww.icai.orgwww.financialservices.gov.inwww.mopng.gov.inwww.macrotrends.netwww.gov.ukAuthor may be reached at: hussainshakruwala@gmail.com and eboard@icai.in

Applying a robust Business Performance Management framework can help organisations drive better business performanceOrganisations can benefit from adopting a robust Business Performance Management framework that brings together their business strategy, operating plans, and performance measurement. By applying such a framework that is tailored to their needs, organisations can have the confidence that their actual performance, across all functions, and at all levels, is helping them achieve their strategic goals. A well-defined business strategy is not useful unless it results in a superior business performance as evidenced by creation of value. This article begins with a primer on value creation and introduces the concept of Business Performance Management. It then discusses the different frameworks available and outlines a typical process for implementing Business Performance Management. Finally, the article illustrates the practical application of a Business Performance Management framework to a typical architect firm wanting to grow and expand their business.IntroductionIt is axiomatic to say that a business exists to create value for its owners. By serving the needs of its customers in an efficient manner and adapting to an ever-changing business environment, businesses aim to generate returns to their owners. But as organisations grow larger and their operating environment becomes more competitive, the cohesiveness between organisational strategy, operating plans and business performance can come under pressure. When that happens, organisations find that their strategy, however well-defined, is no longer sufficient to drive business performance. In this article, we examine the role that a Business Performance Management framework can play in such situations to improve business performance.Value Creation in a BusinessIt would be prudent to start with a primer on value creation in a business.Every business begins with the purpose of solving a problem or meeting the needs of its customers. It aims to achieve this either by doing things differently from its competitors (e.g., innovation) or doing the same thing but in a more efficient manner than its competitors (e.g. efficiency), or in rare cases, doing both. By doing so, the business earns a profit (or return) on the capital it has employed in the business.In doing this, businesses must leverage their financial and non-financial attributes. Examples of financial attributes are access to cheaper funding and ability to command a higher selling price than competition. Examples of non-financial attributes are a good brand name, intellectual property and a quality management team.The Core Financial Axiom of Value Creation:In financial terms, a business is generating value when its Return on Capital Employed (ROCE) is higher than its Weighted Average Cost of Capital (WACC). WACC is the cost incurred by the business in acquiring its capital.Although a simple proposition in theory, the reality can be different. As Professor Aswath Damodaran points out in one of blog posts1 from January 2019, “…Globally, approximately 60% of all firms globally earn less than their cost of capital, about 12% earn their cost of capital and only 28% earn more than their cost of capital. There is no region of the world that is immune from this problem, with value destroyers outnumbering value creators in every region.”Although Professor cautions in the same post that his comparison cannot be treated as conclusive, nonetheless, it gives a perspective of the difficulty companies have in creating value.Difficulty in value generation could be due to industry factors such as a high level of maturity within the industry leaving no easy scope for growth. Or they could be caused by factors which are company-specific, such as poor strategic management. The article focuses on Business Performance Management as a possible framework to improve the quality of strategic management of a business with its consequent potential to improve business performance.Business Performance Management – Concept“Business Performance Management” is defined as “a set of performance management and analytic processes that enables the management of an organization’s performance to achieve one or more pre-selected goals”.2In early 2000s, the term “Corporate Performance Management” was coined as “an umbrella term that describes the methodologies, metrics, processes and systems used to monitor and manage the business performance of an enterprise”.3 This article uses the term “Business Performance Management” inter-changeably with “Corporate Performance Management” and “Enterprise Performance Management”.Conceptually, business performance requires three essential elements:Setting of goals with an underlying strategyImplementing the strategy to achieve those goals; andMeasuring and reporting progress against those goalsBringing harmony among the three essential elements can enable a business to improve its performance. However, in practice, achieving this harmony is difficult as organisations typically struggle to define operating plans that provide a sufficient link with their strategy or measuring the right indicators that indicate their progress.In this context, Business Performance Management can be defined as a framework that enables an organisation to:Define its goals and the strategy to achieve themCascade its strategy, cohesively, to all levels of the organisationDefine operating plans that clarify how each department contributes to the delivery of the strategyIdentify factors that are relatively more important to the achievement of the strategic goals than othersDefine targets for each department that are properly defined, relevant and measurableConsistently measure the actual progress against targets and provide feedback.Popular Frameworks & MethodologiesSome of the more common frameworks or methodologies of Business Performance Management are summarised below:i. Balanced ScorecardBalanced Scorecard4 was a framework proposed by Robert Kaplan and David Norton of the Harvard Business School in the early 1990s. The fundamental premise of this approach was to go beyond simply measuring the financial metrics of a business and to achieve a balance between short-term and long-term performance. The four perspectives proposed by Kaplan and Norton were: (a) financial, (b) customer, (c) internal, and (d) innovation and learning.ii. Total Quality Management, Six Sigma, Lean, and Theory of ConstraintsTotal Quality Management (TQM) became popular in 1980s to expand the concept of continuous improvement from the factory shopfloor to functions across the organisation. It enables an organisation to maintain a high standard of quality while being efficient with its cost. The American Society for Quality (ASQ) describes TQM as an effort where all members of an organisation participate in improving processes, products, services, and the culture in which they work.5Six Sigma is a related approach focusing on managing quality. It was made famous by Motorola in the 1980s. According to the ASQ, Six Sigma is a method “that provides organizations tools to improve the capability of their business processes.”6Lean is a framework with a similar concept that requires organisations to identify areas of ‘waste’ and eliminate them as customers should not be paying for them. The ASQ says that the distinction between Six Sigma and Lean is getting blurred.7Theory of Constraints (TOC) is a concept propounded by Dr. Eliyahu Goldratt in his 1984 book “The Goal”. The central theme of this theory is that every system has some limiting factor or constraints, and hence better utilisation of this factor is the fastest and most efficient way to profitability.8iii. Objectives and Key Results (OKR) and Value Based ManagementObjectives and Key Results (OKR) is a popular concept where “Objectives” stands for what the business is trying to achieve, and “Key Results” stands for how to achieve those objectives.9The concept of Value Based Management was introduced in 1994,10 where the authors note “an organization cannot act directly on value. It must act on things it can influence—customer satisfaction, cost, capital expenditures, and so on.” These things which management can influence are called “Value Drivers.” Value Drivers provide a critical link between an organisation’s strategy and its pursuit of value creation.Summary of Underlying BPM Goals:Bringing harmony between the strategic goals and operating plans of the organisationImproving business efficiencyImproving quality, eliminating or reducing wasteFocusing on activities that really matter for improved business performanceBusiness Performance Management: Implementation ProcessThe typical process for implementing a Business Performance Management framework consists of three sequential steps:Step 1: Strategic PlanningAnswering: Who are we? What is our purpose?Process by which a business clarifies vision, mission, and direction by analysing industry trends, customer preferences, and internal capabilities. Frameworks like Balanced Scorecard play an important role.Outcome: Vision (aspirations), Mission (purpose), and Strategic Goals (addressing all stakeholder needs).Step 2: Tactical Planning & StructureAnswering: How do we achieve our purpose?Defines clear departmental operating plans and structures resources (people, facilities, hierarchy, reporting lines). Frameworks such as OKR and Value Based Management are useful here.Outcome: Tactical annual operating plans, financial budgets, departmental resource grouping linked to strategy.Step 3: Implementation & ReportingAnswering: Are we achieving our purpose?Operating policies, day-to-day procedures, and IT/transaction systems. Measures progress via KPIs using BI and OLAP analytical software. Supported by TQM, Six Sigma, Lean, and TOC.Outcome: KPI definition, BI data extraction, actual vs. target performance measurement, feedback loops.Applying Business Performance Management to a Real-World Situation: ABC ArchitectsThis section illustrates a real-world application using the Value Based Management (VBM) framework for a mid-size professional services firm, ABC Architects.Business Situation and ContextABC Architects is a mid-size architect firm founded by two architect friends a few years ago. The firm has earned a good brand name among its clients for its quality of service. ABC Architects has performed reasonably well financially and the firm thinks it compares well to its peers in this regard. Their monthly reporting includes standard KPI reporting which the partners feel is sufficient to understand the firm’s performance.The two founders believe the firm is now at a crossroads. They can continue to perform at current levels, or they could aim for higher growth given the immense opportunities arising from a growing economy. They also find clients increasingly seeking ‘sustainable’ designs that are environment friendly. To meet this new demand, the firm may have to expand into sustainability by investing in staff with those credentials. As part of their latest Strategic Planning process, the two founders have defined their Vision, Mission and 5-year strategic goals:Vision: “to be known as the most creative architect firm in India”Mission: “to provide efficient and economic design that meet the needs of our clients and other stakeholders”Strategic Goal #1 (SG1): Superior client service with high professional standards; client retention rate of 95%Strategic Goal #2 (SG2): Rated among “best place to work”; attrition rate of less than 10%Strategic Goal #3 (SG3): Investing in and growing the ‘Sustainability’ line of service to 25% of the firm’s revenueStrategic Goal #4 (SG4): Annual revenue growth of 15% to 20%; minimum annual profit margin of 20% to 25%Applying Value Based Management: Deriving the Value Driver TreeConstructing the Value Driver Tree starts by breaking down ROCE into its 4 financial construct components: (i) Revenue, (ii) Cost of Sales, (iii) Overheads, and (iv) Capital Employed, and cascading down to actionable operational levers:Financial ConstructIntermediate DriversGranular Value Drivers (Actionable Levers)RevenueRevenue per project:• Total Contract Value• Output delivered (% complete)• Number of staff allocated (Headcount, Staff attrition)• Staff productivity (Staff satisfaction levels, Span of control, Staff skill levels)• Quality / Professional Standards (Staff training levels)Number of projects:• On-going projects• New projects• Existing customers → Client satisfaction, Future work potential• New customers → Marketing & brand promotion efforts, Lead generation, Future work potentialCost of SalesLabour cost per project:• Staff hours allocated to project• Average hourly labour cost• Salaries and benefits (₹)• Employee compensation levels• Training and development opportunities• Career growth prospectsOverheadsSelling costs• Costs to service existing customers• Costs to acquire new customers• Personnel costsAdministrative costs• Personnel costs• Facilities costs• Technology infrastructureCapital EmployedFixed Assets• Property, plant and equipmentWorking Capital• Work in progress (Invoicing frequency)• Debtors balance (Collection effectiveness, Payment terms)• Creditors balance (Credit terms)Step 3: Using Value Drivers to Define Operating Plans and KPI ReportingTactical Planning: ABC Architects can now meaningfully create tactical plans focusing on Value Drivers. For example, the founders may decide to focus on client satisfaction metric for the first-year business plan as the way to win additional work, and prioritize skills assessment and training to build required capabilities.Organisational Structure: Value Drivers provide the clarity that founders need to communicate strategic goals and operational expectations to middle and junior staff, ensuring vision and mission do not remain abstract slogans.Implementation, Measurement and Reporting: Guided by Value Drivers, ABC Architects derives holistic KPIs (e.g., customer satisfaction index, employee engagement levels, training hours) rather than just traditional lag indicators like gross and net profit margins.ConclusionThe application of a Business Performance Management framework enables organisations to better understand the factors that drive value. In doing so, they can focus on those factors and build them in the operating plans and activities, such that the daily performance of the organisation is much more aligned to the strategic direction of the organisation. By enabling this cohesiveness between the organisational strategy, operations and performance measurement, Business Performance Management can help a business consistently generate value for its owners.References & Footnoteshttps://aswathdamodaran.blogspot.com/2019/01/january-2019-data-update-6.htmlhttps://en.wikipedia.org/wiki/Business_performance_managementhttps://www.gartner.com/en/information-technology/glossary/cpm-corporate-performance-managementKaplan, Robert S. and Norton, David P. (January – February 1992), “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Reviewhttps://asq.org/quality-resources/total-quality-managementhttps://asq.org/quality-resources/six-sigmaIbidhttps://www.tocinstitute.org/theory-of-constraints.htmlhttps://www.whatmatters.com/series_entries/s1-2-how-do-okrs-workKoller, Timothy (August 1994), ‘What is value-based management?’, McKinsey QuarterlyAuthor may be reached at: venkatnarayan75@yahoo.com and eboard@icai.in

Increased capital expenditure via fiscal expansion during the period of macroeconomic crisis is a strategy adopted by the Government of India in recent years. This is done during a period when the private corporate sector is shy to invest in the economy. The Union Budget 2023-24 has made further progress in this strategy via increased capital expenditure during a time of inflation and unemployment. It attempts to bring various measures to reach what it has termed as 'Amrit Kaal' by focusing on seven priorities, termed Saptarishi. It also aims to strengthen the economy by focusing on various opportunities especially for youth, increasing employment opportunities and better and stable macro-economic environment. The budget proposes public expenditure for Rs. 45 lakh crores in the coming year, which is 14.92 per cent of the total income. This paper tries to analyse the trend and pattern of capital expenditure and how it affects the growth of the economy. By controlling the revenue deficit, the budget tries to strengthen the economy.IntroductionThe fiscal policy of the government, via increased capital expenditure, does play a major role in the economy, especially during the period of macroeconomic crisis. In the Keynesian system, fiscal expansion in an underemployment equilibrium will help the economy to increase the aggregate demand and in turn, will help the economy to attain higher economic growth. The Union budget 2023-24 is presented on the recovery stage of the Indian economy from the Covid-19 Pandemic. It tries to bring various measures to attain seven priorities1. It also aims to strengthen the economy by focusing on various opportunities especially for youth, increasing employment opportunities and better and stable macro-economic environment. The budget proposes public expenditure for Rs. 45 lakh crores in the coming year, which is 14.92 per cent of the total income2. Though the economy has shown signs of recovery during the last two years, the country experiences high inflation along with a higher unemployment rate. It is in this context the present paper attempts to analyse the growth strategy followed in the budget. The analysis of the trend and pattern of the capital expenditure and how it is likely to affect the growth of the economy in a budget point of view is the focal area of this paper. The reduction in the social sector expenditure to meet the fiscal deficit target and the corresponding impacts on the overall reflection on the growth of the economy are also analysed here.1 The seven pillars in the present budget (Saptarishi) are: Inclusive Development, Reaching the last mile, Infrastructure & Investment, Unleashing the potential, Green Growth, Youth Power and Financial Sector (Ministry of Finance 2023a, p.5).2 Out of the total expenditure, revenue expenditure is estimated to be Rs 35,02,136 crore (1.2 per cent increase) and capital expenditure is estimated to be Rs 10,00,961 crore (37.4 per cent increase). Expenditure on total capital outlay is estimated to be Rs 8,37,127 crore in 2023-24, an increase of 35 per cent over the revised estimates for 2022-23.The Role of Capital Expenditure on Development ScenarioIndia was one of the very few “growth accelerators” in the 20th century as per a well-known classification of global growth patterns (Hausmann et al. 2005). India witnessed a steady growth over the long term in output between 1960 and 1992. Between the 1950s and 1970s, India’s annual average GDP growth rate increased from about 3.5 per to 5.5 per cent during the 1980s and 1990s (Nagaraj 2023). India was a positive outlier in 1981 amongst industrialising nations with a higher manufacturing share (Kochhar et al. 2006).However, in the 2010s, the trend was reversed. The same holds for the gross domestic savings to GDP ratio. Never in the last seven decades has India experienced such a reversal of these macro aggregates (Nagaraj 2023). The world scenario in public investment shows that after the end of the Second World War, while public investment as a share of GDP increased at a steady rate together with per capita output, the trend was reversed in the 1970s and the 1980s: public investment, as well as productivity, declined during this time (Florio 2000).India’s accelerating growth path since the 1980s was derailed in the 2010s with a growth reversal along with a contraction of fixed investment rates and domestic savings (Nagaraj 2023). The impact of the fall in employment levels in the late 2010s was the rise in the rate of absolute poverty, especially in rural India and a decline in the rate of malnutrition (Subramanian 2019; Kapoor 2020; Nagaraj 2020). One of the reasons for the decline in the aggregate investment rate during the 2010s was the decline in the private corporate sector’s investment after the global financial crisis.Output recovery from the pandemic has been V-shaped and sharp (Nagaraj 2023). The need of the hour is an urgent need to increase the domestic saving rate. For achieving these objectives, infrastructure and industrial investments require low-interest, long-term, capital because these yield low rates of private return over a long period. Since the household sector and private corporate sector are not showing the animal spirit to save and invest, it’s the high time public sector or the government should come forward to make heavy investment in these sectors via increased capital expenditure.Trend of Capital ExpenditureCompensating for the private sector’s caution in capital expenditure, the government raised capital expenditure substantially. Budgeted capital expenditure rose 2.7X in the last seven years, from FY16 to FY23, re-invigorating the Capex cycle (Ministry of Finance 2023).The analysis of capital expenditure (CAPEX) shows an upward trend, especially after the liberalisation period with GDP. Still, it is seen that there exist wide variations in capital expenditure as the share of GDP. The share has declined from 5.8 per cent in 1990 to 2.9 per cent in 2023. Capital expenditure in the 2010s comparatively showed an increasing trend, rising from 1.8 per cent in 2010 to 2.9 per cent in 2023. To make moderately skewed data more normally distributed or to achieve constant variance, the natural log data have been taken.As per the Bai-Perron test conducted to find out multiple breakpoints, CAPEX has different structural breaks3 over the period between 1990 and 2023. CAPEX has three structural breaks in the years 2002, 2011 and 2019, having the highest break in the year 2011 as per the Bai-Perron test. On that basis, growth rates of CAPEX for the different periods, i.e., before and after the structural break, have been calculated and presented in Table 1.3 A structural break is an unexpected shift over time in the regression parameters, which can lead to unreliability and huge forecasting errors of the model in general (Hansen 2001).Capital formation leads to more money swirling around the economy. Sector-wise gross capital formation (at current price) shows that in 2020-21 the highest share of Gross Capital Formation was from ‘Households including Non-profit institutions serving households (NPISH)’ (38 per cent) followed by ‘Private non-financial corporations’ (32 per cent), ‘General Government’ (15 per cent) and ‘Public non-financial corporations’ (11 per cent).Econometric Analysis: Regression Models on Capital ExpenditureIn order to analyse the picture of Capital Expenditure before and after the structural break, three regression models have been applied. The pooled regression result for the period from 1990 to 2023 shows that India’s capital expenditure had been increasing at the rate of 9.6 per cent and this rate is statistically significant. It is evident from the result that capital expenditure has been increasing at the rate of 12.3 per cent in the post structural break period (2011-2023) with a significant value compared to the pre-structural break (1990-2010), that had a growth rate of 7.9 per cent. The calculated compound growth rate (CGR) of capital expenditure also confirms this result having a CGR of 10.1 per cent in the pooled regression. The post structural break period has a higher CGR (13.1 per cent) when compared to pre-structural break period (8.2 per cent) with a percentage difference of 59 points of percentage difference.Table 1: Growth Rates for Capital Expenditure (CAPEX) for Different Periods (Method: Least Squares)Period & ObservationsRegression Equation: ln CAPEXt = β1 + β2t + utStandard Errors (se)t-statisticsR²CGR (%)1990 – 2023(34 years - Pooled)ln CAPEXt = -1.707 + 0.096 t(0.075)(0.004)(-22.875)(25.828)0.95410.0851990 – 2010(21 years - Pre-break)ln CAPEXt = -1.545 + 0.079 t(0.096)(0.008)(-16.099)(10.374)0.8508.2512011 – 2023(13 years - Post-break)ln CAPEXt = 0.157 + 0.123 t(0.082)(0.010)(1.901)(11.863)0.92813.113Note: CGR - Compound Growth Rate.Source: Computed from Economic Survey (Various years)Budget Allocation for Capital Expenditure and Its ImportanceIn 2023-24, the government is estimated to spend Rs. 45,03,097.45 crore (Ministry of Finance, 2023b, p.vii). Revenue expenditure is estimated to have a 1.2 per cent increase while capital expenditure has a 37.4 per cent increase. The increase in the capital expenditure is due to the increase of 36.1 per cent increase in capital outlay of transport, while the expenditure on total capital outlay is estimated to have an increase of 35 per cent over the revised estimates for 2022-23.Rate of Growth of GDPRs 27,16,281 crore has been estimated for government receipts [Total receipts (Rs. 45,03,097 crore) - Borrowings and Other Liabilities (Rs. 17,86,816 crores)] (Ministry of Finance, 2023c, p.1) which shows an increase of 11.7 per cent over the revised estimates of the previous years. The gap between the receipts and expenditures will be adjusted by borrowings, which shows an increase of 1.8 per cent over the revised estimates of the previous year.Depending on the trajectory of political and economic developments globally, India is to witness a GDP growth rate of 6 per cent to 6.8 per cent in 2023-24. The baseline GDP growth rate is projected as 6.5 per cent in FY24. For the year 2022-23, the growth rate of the economy is expected to be 7 per cent which is lower than the previous financial year’s growth rate (8.7 per cent). The increased capital expenditure (63.4 per cent) for the FY 2023 was the growth driver of the economy in the current year.Growth StrategyAs far as a growth strategy is concerned the budget is based on the continuation of the fiscal consolidation, which was given more importance. The reduction of fiscal deficit (an indicator of borrowings by the government for financing its expenditure) ratio from 6.4 per cent in FY23 to 5.9 per cent in FY24 shows that we are on the way to the target of 4.5 per cent of GDP by 2025-26. This shows a comparatively strong basis which will be helpful for a sizable tax collection. At the same time, it has to be noted that IMF has predicted a global recession in 2023. The budget has given importance to spending commitments for welfare programs and infrastructure. Short-term borrowings and National Social Security Fund will be used to fill the fiscal deficit of Rs. 17.8 lakh crores, which reduces the pressures on the funds.The growth of capex to Rs. 10 lakh crore is fairly large (an increase from 2.7 per cent to 3.3 per cent of the GDP) for continuous growth and creating job opportunities and enhancing consumption expenditure. This will further be enhanced by the share meant for affordable housing (Rs. 79,000 crores) which comes under the revenue expenditure side. The states will also be in such a position to get interest-free long-term loans for capital expenditure needs specifically in selected sectors. It gives a big boost to capital investment, giving a push to the private sector.Expenditure on Social SectorThe Government’s spending on social services has been a rising trend since FY16 with a focus on many aspects of the social well-being of citizens of the country. The share of expenditure on social services in the total expenditure of the Government has been around 25 per cent from FY18 to FY20 (Ministry of Finance 2023d). The share of social service expenditure to the GDP has increased from 6.6 per cent in 2015-16 to 8.3 per cent in 2022-23 with a percentage difference of 26 percentage points. In almost all social variables the increasing pattern of expenditure is visible.The Education Expenditure Contraction Paradox:The share of education expenditure to the total government expenditure has reduced from 10.4 per cent in 2015-16 to 9.5 per cent in 2022-23 (a decline of 9 percentage points).The share of education expenditure to the social services expenditure has reduced sharply from 42.8 per cent in 2015-16 to 35.5 per cent in 2022-23 (a decline of 17 percentage points).It is observed that the expenditure meant for social sector development is not enough for a quick improvement. As per the New Educational Policy (NEP), a large number of children aged three years onwards come to school and this sector needs more share of the fund.ConclusionIndian economy in recent years has undertaken a Keynesian path of fiscal expansion for attaining higher economic growth. The budget 2023-24 has been taken forward is optimistic, future oriented and growth oriented. This resulted in higher capital expenditure by the Union government. But the higher interest rate as a result of the contractionary monetary policy due to higher inflation acts as an opposite effect on the investment by the private corporate section. The crowding out effect that can happen due to the higher interest rate is likely to affect the effectiveness of the fiscal expansion in the economy. The Government of India thus needs to have proper coordination between its fiscal and monetary policy for attaining investment lead growth in the economy.ReferencesFlorio, M. (2000). [Review of Public Capital Expenditure in OECD Countries: The Causes and Impact of the Decline in Public Capital Spending, by J.-E. Sturm]. The Economic Journal, 110(464), F514–F516.Hansen, B. E. (2001). The New Econometrics of Structural Change: Dating Breaks in U.S. Labor Productivity. The Journal of Economic Perspectives, 15(4), 117–128.Hausmann, R., Pritchett, L., & Rodrik, D. (2005). Growth Accelerations. Journal of Economic Growth, 10(4), 303–329.Kapoor, R. (2020): “The Unequal Effects of the Covid-19 Crisis on the Labour Market”, The India Forum, 15 July.Ministry of Finance (2023a). Budget 2023-2024: Speech of Nirmala Sitharaman, Ministry of Finance, February.Ministry of Finance (2023b). Expenditure Budget 2023-2024, Budget Division, Government of India, February.Ministry of Finance (2023c). Budget at a Glance 2023-2024, Budget Division, Government of India, February.Ministry of Finance (2023d). Economic Survey 2022-23, Department of Economic Affairs, Government of India.Nagaraj, R. (2020): “Understanding India’s Economic Slowdown: Need for Concerted Action”, The India Forum, 7 Feb.Nagaraj, R. (2023). India Derailed: A Falling Investment Rate and Deindustrialisation. The India Forum, February 21.Subramanian, S. (2019): “What is Happening to Rural Welfare, Poverty, and Inequality in India?” India Forum, 27 Nov.Authors may be reached at: tdsimon@gmail.com and eboard@icai.in

The E-way bill came into effect from 1st April 2018 onwards it is mandatory for the value of goods whose value exceeds more than Rs 50,000. On the GST portal, the E-way bill is generated. This article throws lights on the journey of E-way bill, its importance, the modes of E-way bill and its functionalities. This paper also throws light on how the E-way bill made a significant contribution to the economic activities of the country during covid 19 pandemic.IntroductionE-way bill is otherwise known as the Electronic Way Bill that came into effect from 1st April 2018. It is compulsory for Inter-state when the goods are transmitted from one place to another and whose value is more than Rs 50,000. It is generated on the GST Portal that provides a proof that movement of goods has taken place.The E-way bill has two primary components:Part-A (First Component): Encompasses the details of recipient’s GSTIN, place of delivery along with the PIN code, invoice number, date, value of goods, HSN code, the reasons for transporting the goods, transport document number (which may be either the receipt number of the goods or the railway receipt or airway bill number).Part-B (Second Component): Comprises of the transporter details like the vehicle number. It mostly comprises of the transport details that is useful for generating the e-way bill.Journey of E-way BillMilestone Evolution of the E-way Bill System (Figure 1)April 2018: Launch of E-way bill for Interstate supplies (supply of goods or services from one state to another).June 2018: Launch of E-way bill for Intrastate supplies.April 2019: Pin-to-pin distance calculation launched. Enhancements introduced:I. Distances are calculated automatically based on PIN codes to assist E-way bill generation.II. Distance between two states calculated directly using PIN codes.III. Generation of enormous / multiple E-way bills for a single invoice or document blocked.IV. Extension of E-way bill validity enabled wherever goods are in movement.V. Advance alerts list prepared for E-way bills about to expire.December 2019: Blocking of E-way bill generation for non-filers & milestone of 100 Crore E-way bills generated.March 2020: Integration with the VAHAN vehicle database system.April 2020: Launch of COVID-19 related reports for tracking essential supplies.October 2020: Integration with the electronic invoicing (e-Invoice) system.January 2021: Integration with RFID / FASTag highway toll readers.Source: https://docs.ewaybillgst.gov.in/Integration with the VAHAN SystemRecently, the government decided to incorporate the e-way bill along with the Vahan system. The main aim is to reduce the evasion of GST and to improve the operational efficiency of the nation. Ministry of Road Transport & Highways operates and uses the Vahan system since it contains the database of vehicles. With the help of the Vahan system, the verification of the vehicle number in the E-way bill is made in an easy manner.Those vehicles whose number is available in the Vahan database will have their e-way bill generated or the user will be allowed to generate the e-way bill. However, in case of vehicles whose database is not mentioned in the Vahan system, that particular individual will receive a message stating that their database is not accessible under the Vahan system and hence these vehicles will not be allowed to generate the E-way bill. In such situations, the user must update the vehicle details in the Vahan system before generation of the e-way bill becomes possible.Importance of E-way Bill During the COVID-19 PandemicThe E-way bill system played a crucial role in the economic activities of the country since it helped to monitor the movement of essential goods transported across the country. The documents and reports of medical supplies played an essential role to track the national movement of vital supplies including COVID-19 test kits, protective garments, disinfectants, oxygen therapy equipment, pulse oximeters, and medical devices to government departments nationwide.Flawless Integration with E-Invoicing SystemThe E-way bill and the E-invoice system have been integrated flawlessly. The authorization of the E-way bill system functions on the E-invoice system and Invoice Reference Portal (IRP), which is used in the process of generating the E-way bill. In the e-invoicing system, the e-way bill has been directly integrated; it depends entirely on the choice of taxpayers: either they can generate the e-way bill along with the e-invoice or at a later stage they can do so with the aid of the IRN (Invoice Registration Number) as a reference. Yet, an E-way bill is considered invalid in case there is no proper E-invoice at places wherever e-invoices are legally mandated. Time and effort can be saved if the taxpayer transmits both transportation and invoice details simultaneously to the IRP, allowing the IRP to generate the e-way bill directly on the portal.E-way Bill Integration with RFID / FASTagRFID (Radio Frequency Identification Device) identifies objects through radio waves. A transporter acquires an RFID tag which is fixed at a particular spot of the vehicle (most commonly on the windscreen). It holds details of the E-way bill, and highway RFID tag readers capture and verify the E-way bill details alongside the vehicle details automatically as the vehicle passes toll plazas, updating the government portal in real-time. Several states have made RFID tags mandatory. This tag aids organizations in tracking supply chains effortlessly and tracing missing consignments, providing massive benefits to E-commerce logistics.FASTag / RFID Movement Metrics (Figure 2):Average daily commercial vehicle movements reported from toll plazas were nearly 24 lakhs across 868 active toll plazas nationwide (Monthly movements reported: Jan-21: 3.07 Lakhs; Feb-21: 6.69 Lakhs; Mar-21: 9.44 Lakhs).Significance of the E-way Bill SystemThe e-way bill system has many advantages, foremost being that it enables tax officers to identify fraudulent taxpayers and combat GST evasion. The government risks losing substantial revenue if fraudulent taxpayers claim illicit Input Tax Credit (ITC), which can be swiftly detected through supply chain mapping. Key impact functionalities include:Pin-to-pin distance calculation: Enforces automated checks against inappropriate distance entries, preventing the circular recycling of electronic waybills.Blocking multiple e-way bills: Restricting the generation of multiple e-way bills against a single invoice prevents duplicate documentation for the same supply.Extension in transit: Enables transporters to extend validity when goods are delayed in transit or kept temporarily in transshipment godowns.Expiry notifications: Taxpayers and transporters can track the status of E-way bills expiring within 4 days.Vahan database synchronization: Alerts users to invalid or mismatched vehicle registration numbers immediately.Modes of E-way Bill GenerationThere are six distinct modes available for generating an E-way bill:I. Web-Online PortalDirect generation via browser on desktop, laptop, or mobile phone.II. Tool-Based Bulk GenerationUsed by large businesses handling multiple consignments with multiple HSN codes.III. SMS FacilityQuick generation and vehicle updates via registered mobile number.IV. GST Suvidha Provider (GSP)Third-party licensed platforms such as NSDL e-Gov providing value-added billing tools.V. Android ApplicationDedicated official mobile app for taxpayers and transport operators on the go.VI. Direct API IntegrationSystem-to-system automated generation integrated with ERP / billing software.A normal E-way bill is generated when goods belong to a single HSN code category. When multiple types of goods under multiple HSN codes are transmitted in a single consignment, the Bulk E-way bill functionality is utilized.Generation and Verification Trends (Figure 3)Metric (in Lakhs)2018-192019-202020-21Generation of E-Way Bills5,5786,2886,168Verification of E-Way Bills169.48301.90227.59Source: https://docs.ewaybillgst.gov.in/Registration Requirements: Transporter and Consignor / ConsigneeThe consignor/consignee fills Part-A details whereas Part-B is filled by the transporter. In situations where the consignor or consignee is unregistered, the transporter bears the legal responsibility to fill Part-A of the E-way bill to enable generation, followed by standard Part-B conveyance details (Second Proviso to Rule 138(3) of the CGST Rules).Transporters not possessing a GSTIN must enroll on the Electronic Way Bill portal by furnishing PAN details. Upon validation, the transporter receives a User ID, password, and a unique 15-digit Transporter ID based on the state code. Transporter ID is mandatory to generate Part-A of the E-way bill.2023–2024 Budget Highlights for E-Way Bills: Proposed Section 158AA new Section 158A in the CGST Act is proposed to be inserted, empowering the Government to share information contained in the following statutory documents on the common portal, subject to obtaining consent from suppliers and recipients:Particulars furnished in the application for registration under Section 25Details in GSTR-3B filed under Section 39Details in Annual Returns filed under Section 44E-invoices and E-way particulars uploaded on the common portal for generation of documents under Section 68ConclusionThe E-way bill ensures that goods transportation strictly complies with GST statutes while serving as an effective tracking and anti-evasion mechanism. Synergistic integration with the Vahan database, FASTag/RFID highway infrastructure, and electronic invoicing enhances nationwide operational transparency. Ultimately, the E-way bill system empowers the logistics sector by extending average daily vehicular transit distances, eliminating transit bottlenecks, and curtailing overall supply chain costs.Referenceshttps://docs.ewaybillgst.gov.in/Basics of GST, Taxmann, 1st Edition; Girish Garg, Basic Concepts and Features of Good and Service Tax In India, International Journal of Scientific Research and Management (IJSRM), 2016 Aug 2.Datey VS, GST Ready Reckoner, Taxmann, 4th Edition, 2017.Alam, M. (2021). GST: A game changer of the Indian economic system with special focus to E-way bill in India. International Journal of Civil Law and Legal Research, 1(2), 53-57.https://taxguru.in/wp-content/uploads/2018/01/Modes-of-Generation-of-E-way-Bills-1.jpghttps://taxguru.in/goods-and-service-tax/summary-gst-proposals-finance-bill-2023.htmlAuthor may be reached at: rajipsm22@gmail.com and eboard@icai.in

According to the latest clarifications issued by Central Board of Indirect Taxes & Customs (CBIC), a need for understanding the implication of GST on mandatory food facilities within the organisation rises.The section 46 of the Factories Act mandates provision of canteen facility where in more than 250 workers are ordinarily employed. This article attempts to provide an insight on various issues related to GST with respect to canteen facility provided by employer to their workers. GST implication with respect to output liability and input tax credit will depend upon the factor that whether the facility provided to employees are part of their employment contract or not.Employers, especially manufacturers, provide canteen facility to workers working under them. Generally, these canteen facilities are arranged by the corporates for their employees which is either run by a third-party vendor and these expenses are borne by the employer or is completely arranged by the employer himself for the benefit and welfare of the employees. In both the cases, that is outsourced canteen or home run canteen, employer incurs various costs on which GST is paid by him. With the clarification issued by CBIC on 06.07.2022 through Circular No. 172/04/2022-GST about proviso in clause (b) of sub section (5) of section 17, a need for understanding the implications of GST on Food Facilities within the organisation rises.Let us understand the practical aspects related to the same in detail.Taxability Under CGST Act: Scope of SupplyThe first and foremost question which rises in mind is that whether food services provided by employer will be taxable under the CGST Act? Again, what would be the answer in case full amount is recovered or nominal value is recovered or no value is recovered?As per the CGST Act, 2017, those transactions which are covered under “supply” will be liable to GST and the scope of supply is defined under Section 7 of the CGST Act, 2017:As per clause (a) of sub section (1) of section 7 of the CGST Act, 2017: “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.Also, clause (b) of entry 6 stated under schedule II of the CGST Act, 2017 categorises the supply of goods being food or any other article for human consumption as supply of service. So, where any consideration is charged by the employer from employee the said transaction will be covered under supply.Further, clause (c) of sub-section 1 of section 7 of CGST Act, 2017, reads with entry 2 of schedule I: supply of goods or services or both between related persons or between distinct persons as specified in section 25, made or agreed to be made without a consideration will be considered as supply, when made in the course or furtherance of business. As per explanation to section 15 of the CGST Act, 2017, the person shall be deemed to be a related person if they are employer and employee.Thus, we can say that any goods or services provided by employer to employee will be taxable under GST whether any consideration is charged or not.The CBIC Press Release of 10th July 2017However, CBIC issued a press release on 10th of July 2017 to provide clarity on taxation of perquisites provided by the employer to the employees. In the press release it was stated that supply by the employer to the employee in terms of contractual agreement entered between the employer and the employee (part of salary / CTC), will not be subjected to GST.Further, as it is immaterial that whether any amount is charged or not as discussed earlier, the above analysis holds good in all cases i.e., where full amount is recovered or nominal value is recovered or no value is recovered.Summary: Treatment of Goods or Services Provided by Employer to EmployeePart of Salary / CTCAs per the Press release this is not subject to GST. Also, as per proviso to entry 2 of schedule I, it is not supply if canteen supply value per year per employee is ₹ 50,000 or less.Not part of Salary / CTCAs per proviso to entry 2 of schedule I, it is not a supply if canteen supply value per year per employee is ₹ 50,000 or less. In case it is more than ₹ 50,000 then the same is taxable.Valuation of Supply: Application of Rule 28Now the question comes that if food facility given by the employer is not covered under employee’s CTC and value of the same is more than ₹ 50,000 per year then it is taxable. But on what value the tax liability will be discharged? Again what would be the answer in case if full amount is recovered or nominal value is recovered or no value is recovered?Generally, as per sub section (1) of section 15, the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or is payable for the said supply, but this will be the scenario, where the supplier and recipient are not related and the price charged is the sole consideration.However, as employer and employees are related as per explanation to section 15, transaction value will not be considered as the value of supply of goods or services, hence, the value of supply of goods or services in such case will be derived in accordance with Rule 28 of CGST Rules, 2017:As per Rule 28, the value of the supply between related or distinct persons shall be:Open market value of such supply;If the open market value is not available, be the value of supply of goods or services of like kind and quality;If the value is not determinable under clause (1) or (2), be the value as determined by the application of rule 30 or rule 31, in that order:Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to 90% of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person.Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.In the above case, the second proviso is not applicable since the employees would be unregistered and they will not be able to take input tax credit.Thus, the Open Market Value will be the value of supply.It is immaterial whether the employer is charging from the employees at such amount which is equal to his cost or plus margin or at concessional rate; the applicable value for GST shall be the open market value as per Rule 28. Hence, an employer shall ensure that tax is discharged at open market value.Applicable GST Rate: 5% Restaurant ServicesIn terms of Notification No. 20/2019-CT (Rate) dated 30th Sep, 2019, restaurant services are taxed at the rate of 5%. As per the notification, restaurant service:“means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied”Canteen food supplies are meant for human consumption. Hence, the same is classified under Restaurant services and is taxable at 5%. However, one of the conditions prescribed under this entry is that input tax charged on goods or services shall not be taken.Therefore, an employer discharging tax under this entry shall ensure that input tax credit on canteen expenses has not been availed.Also, one needs to go through Explanation 4 of the notification which specifies that:(a) Credit of input tax charged on goods or services used exclusively in supplying this food service has not been taken; and(b) Credit of input tax charged on goods or services used partly for supplying food service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of food service is an exempt supply and attracts provisions of sub section (2) of section 17 of the CGST Act, 2017 and the rules made thereunder.ITC Availability & CBIC Circular No. 172/04/2022As per the clarification received from CBIC in Circular No. 172/04/2022-GST, it is clarified that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act. It implies that input tax credit in respect of such goods or services or both which are blocked under clause (b) of sub-section (5) of section 17 shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.Hence, if canteen facility is required to be provided under obligation of any act like Section 46 of the Factories Act, 1948, then credit on providing such facility shall be available to the employer.However, as discussed above in the section of rate applicability, the condition for charging GST at the rate of 5% is not to take input tax credit on goods or services used exclusively in supplying this food service. Moreover, common credit like credit on admin expenses, etc. which is used partly for supplying food service and partly for effecting other taxable supplies eligible for input tax credits, needs to be reversed as if supply of food service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the CGST Act, 2017 and the rules made thereunder.Hence, even when it appears that the scope of input tax credit has been widened and it would now be made available in respect of goods or services that are obligatory for an employer to provide to its employees under any law for the time being in force, input tax credit with respect to canteen would not be available when canteen facility is provided to employees not as a part of employment contract as in such case employer needs to discharge his output tax liability as per Notification No. 20/2019 dated 30th September 2019 at concessional rate of 5% which restricts claim of input tax credit.Comprehensive Summary Across ScenariosParticularsIf Canteen Recovery is a Part of Employment Contract (CTC)If Canteen Recovery is NOT a Part of Employment Contract (CTC)GST Taxability on RecoveryNo(However, employer will be required to evaluate implications from direct tax perspective)*YesRate of GSTNot Applicable5%Input Tax Credit (ITC) AvailabilityYes(Yes, if facility is required to be maintained under law, e.g. Factories Act; otherwise no)No(Moreover, common ITC needs to be reversed)*Direct Tax Perquisite Valuation under Section 17(2) of the Income Tax Act:The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:Exemption threshold: Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof in either case does not exceed fifty rupees per meal (₹50/meal) or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.Section 115BAC Restriction: Provided further that the exemption provided in the first proviso in respect of free food and non-alcoholic beverage provided by such employer through paid voucher shall not apply to an employee, being an assessee, who has exercised option under sub-section (5) of section 115BAC (new tax regime).ConclusionIt is evident from the above analysis that food facility to employees if not forming part of their salary would bring a cost burden on the assessee as Goods and Service Tax charged on goods or services or both used in supplying such services will not be available to the assessee and additionally employer would be liable to pay output tax on market value of food supplied to employees at the rate of 5%.Author may be reached at: shubham22ag23@yahoo.com and eboard@icai.in

Gold, iron, lead, copper, cobalt, silver, mercury, beryllium, cadmium and PCB. No! I am not randomly reading the chemical elements from the Periodic table. Some of these metals can be considered precious after factoring in the cost required to extract them and they can be found in most of the products which make our life easier and productive. But there are always two sides to a coin. What if I told you that 70% of heavy metals found in landfills are accounted for by e-waste. This waste has four very definitive characteristics of toxicity, reactivity, ignitability and corrosivity. Also the percentage of the population owning a mobile phone is set to grow multi-fold in India with the advent of newer technology like 5G, cheaper cell phones, better batteries, cheaper data as well as it’s penetration of in rural India. It’s time we took a deep dive into the heap of ticking time-bomb we call e-waste.The Unseen Ground RealityBefore we begin, let’s play a game. Get up and look around your house. List down the electronic items which you don’t use anymore. It can be a cell phone or a tablet that is ancient in comparison to the newer product you just ordered. It can be a television or a washing machine or a refrigerator or anything that your parents bought when they got married. Now from that list, mark the items which you are going to sell to kabbadiwala. If you end up marking even one item, you have discovered the first problem.About 95% of e-waste in India is collected and treated by unorganized sectors. Seelampur in North-East Delhi is the largest e-waste hub of unorganized workers going through the mountains of waste. Now, before you give the argument that by selling waste to these workers you are helping them earn a living, think again! Treating e-waste without proper safeguards like PPE kits, training, etc. could lead to fatal damage to the nervous system, blood system, brain development, skin disorder, lung cancer, heart, liver and spleen damage. Around 80% of e-waste workers in India suffer from respiratory ailments like breathing, irritation, coughing and choking. Not to mention the fact that if this waste becomes part of the landfill, it seeps into groundwater, contaminates it and makes it dangerous to those who are dependent on it either for drinking or agriculture leading it to become a part of our food chain.Global Projections: The Ticking Time-BombIt is estimated that globally the amount of e-waste generated will exceed 74 Mt (million metric tonnes) in 2030.Projections for Global E-Waste Generated by Year (Global E-Waste Monitor 2020)YearTotal E-Waste (Million Metric Tonnes - Mt)E-Waste Per Capita (kg)201444.46.4201546.46.6201648.26.8201750.06.9201851.87.1201953.67.3202055.57.5202157.47.6202259.47.8202361.38.0202463.38.2202565.38.3202667.28.5202769.28.8202871.18.8202972.98.9203074.79.0The Indian Scenario: Scale of the ChallengeBy 2047 total waste is estimated to be about 260 million tonnes per day. Therefore, if we are unable to reach a proper systematic and scientific method to dispose of our e-waste by 2047, we would require a landmass equivalent to the size of Delhi to dump and dispose of the same. As per the Global E-Waste Monitor Report 2020, India is the third largest contributor to e-waste with 3.2 million tonnes. It also ranks among the top countries in the Asia region in terms of e-waste produced. Cities like Mumbai, Delhi and Bangalore are the top e-waste producers contributing to the cause. Only 5% of e-waste produced is processed through institutional channels which are either further reused or recycled.As per 2020 EPI (Environmental Performance Index) results, India ranked at about 168 out of 180 countries. Our EPI score for Lead exposure is 21 where a score of 100 indicates a country is among the lowest daily rates for lead exposure in the world and a score of 0 indicates a country is among the highest (0 is bad and 100 is good). What’s worse is the fact that a major chunk of e-waste currently is coming from the urban areas but with increasing digital penetration in rural areas and an equal if not more unawareness about the harm of e-waste, drastic consequences are inevitable.Composition & Regulatory Framework (E-Waste Rules, 2016)Of the major components of e-waste, computers account for 70% and telecommunication equipment accounts for 12%. With more than 1 billion mobile phones in circulation, 25% more or less are destined to end up as e-waste annually more often than not as a landfill.However, the picture is not all gloomy. India is among the few countries especially in Asia to have E-Waste Management Rules, 2016. But like all rules the implementation is sluggish. Through these rules, EPR (Extended Producer Responsibility) was established giving significant responsibility to the producer to collect and recycle/reuse/dispose of their product from the end consumers extending from 30% to 70% in the next 7 years. But as said, due to the domination of the unorganized sector as a collection point the targets are more frequently underachieved. With 51 registered PROs (Producer Responsibility Organizations) with Central Pollution Control Board, we are still lagging behind in our targets. What has been the consistent problem with such rules is first they are heavily incentivising the treatment of e-waste rather than shifting to the producer-pay principle and secondly treatment of e-waste has been shifted to the organised sector without giving any consideration to the largest player in the game, the kabbadiwalas.Proposed Multi-Pronged Policy InterventionsCollaborating with the Unorganised Sector: Provide job security, formal training, and equipment to kabbadiwalas to enhance their role as recognized collection agents and grassroots educators.Fiscal Incentives: Introduce tax cuts for organisations that not only achieve recycling targets but also proactively design out e-waste at the production stage (e.g. using biodegradable alternatives instead of time-triggered toxic materials).R&D and Technology Scaling: Invest in green technological breakthroughs such as Acid-Free Magnet Recycling to achieve cost-efficient large-scale commercialization.The Electric Vehicle (EV) Transition & Battery LifecycleTo produce more electronic vehicles, we need more electrical components. Thus, dependency on e-raw material is only going to increase. One such case is batteries which make up somewhere between 40% to 50% of the cost of an EV. For a long time, there was not much improvement in battery technology apart from LIBs (Lithium-Ion batteries). But the current uptrend in electric mobility has again pushed the demand for better batteries that can not only run longer but have less idle discharge. This is an opportunity in disguise. Simply put, a deeper analysis of the life cycle of a car battery should be done before they are used.Currently, India imports most of its components for EVs including batteries; thus a more efficient network of infrastructure should be built around their procurement, development and disposal. A pan-India platform for recycling and reuse laws should be clearly established and communicated by governments to avoid a landfill-like situation. Traditionally, battery recycling has been a costly affair but can be tackled by battery standardisation and institutionalising the collection and recycling process by implementing a nationwide monitoring and regulatory framework.The Trap of GreenwashingSeveral companies advertise products as greener alternatives without strong evidence to support the claim. Greenwashing tricks consumers into buying items they do not need, exacerbating premature discard rates. Countering this requires strict advertising standards in the automobile industry, proportional public transport investment on sustainable fuels, and public discussions at the grassroots level.Another major reform could happen by funding or allocating appropriate financial resources for start-ups that work in the areas of e-waste management. Original Equipment Manufacturer (OEM) initiatives and organisational alliances (such as the STAR programme and Greentek alliances) can manufacture products with detachable, upgradable, and repairable modules.International Best Practices & Global StandardsFor our government, a start could be to observe and study international methods adopted abroad:Seoul Resource Centre (South Korea): Seoul is recognized as a premier zero-waste city model for e-waste recycling and material recovery.European Union WEEE Regulations: The Waste Electrical and Electronic Equipment directive clearly stipulates a minimum collection, recovery, and recycling target of 4 kg per capita per year on its member nations.UNU-SCYCLE Programme: Implementing international standard measurement methodologies created under United Nations University Sustainable Cycles.Academic Specialization: Introducing dedicated university course streams to build an educated workforce for e-waste management.Combatting Illegal Transboundary Movements: Using technologies like GPS tracking and geotagging to counter illegal foreign e-waste imports and unrecorded dumping in developing nations like India and China.The Power of the Consumer & The Right to RepairWith everything said and done, the ace up our sleeves is that we are the consumer. How about segregating our waste for easy disposal or buying only the products which you need? Repair what can be repaired instead of exchanging it for a newer one. The Right to Repair can be a huge step in this direction. A simple step to replace incandescent bulbs with a more energy-efficient bulb could be a huge greener step. Question companies for employing tricks like planned-obsolescence to push consumers to buy new and buy more.“Yes!!, technology is exciting. It does make our life simpler and easier. But answer me this, what would you rather have: the latest cell phone or fresh air to breathe?”ReferencesState of India’s Environment 2020 by CSEE-Waste Management in India- A study of current scenarioGlobal E-Waste Monitor Report 2020E-Waste Management Rules, 2016Environmental Performance Index 2020Author may be reached at: Kainth100@gmail.com and eboard@icai.in

The role of a sound PFM system in implementing policy decisions, establishing fiscal discipline, ensuring results from the spending of public resources, and improving service delivery has been getting increasing attention in India. The reforms undertaken intermittently over the years, though did not deliver the anticipated results in all areas, provide opportunities to build upon already existing institutional framework.Public Financial Management: An IntroductoryA sound public financial management (PFM) system emphasizing institutional efficiency assumes significance while designing appropriate polices and implementing them to achieve the desired results. PFM system is based on the principles of fiscal discipline, strategic resource allocation, and a result oriented operational management. While the PFM system conventionally related more to the public expenditure and thereby to the budgeting system, it has evolved over the years by incorporating management of all facets of public funds. A robust PFM system helps in successful deployment of fiscal policy instruments to achieve macroeconomic goals.1The institutional strengthening process involves improving the environment of the budgeting system, establishing rule based fiscal management, determining resources and expenditure composition through a broad macro framework, instilling comprehensiveness and transparency, putting a hard budget constraint to address populist demands and control aggregate spending level, improving prioritization for allocative efficiency, and improving technical efficiency in the government organizations.2Key Components of a Good PFM System: PEFA 2016 FrameworkThe Public Expenditure and Financial Accountability Report (PEFA) framework for assessing PFM sets out the following as key components needed for desirable fiscal and budgetary outcomes (PEFA 2016):The budget is credible - it is realistic and is implemented as planned.Information on PFM is comprehensive, consistent, and accessible to users.Effective management of assets and liabilities ensures that public investments provide value for money, assets are recorded and managed, fiscal risks are identified, and debts and guarantees are prudently planned, approved, and monitored.The fiscal strategy and the budget are prepared with due regard to government fiscal policies, strategic plans, and adequate macroeconomic and fiscal projections.The budget is implemented within a system of effective standards, processes, and internal controls, ensuring that resources are obtained and used as intended.Accurate and reliable records are maintained, and information is produced and disseminated at appropriate times to meet decision-making, management, and reporting needs.Public finances are independently reviewed and there is external follow-up on the implementation of recommendations for improvement by the executive.Reform Initiatives in IndiaThe PFM system in India with established institutional structure like budgeting, accounting, audit and legislative control systems has its root in the constitutional provisions.3 The initiatives to improve the PFM systems and processes over the years, although yielded some enduring changes, there were discontinuities and indifferent implementations.4 The expansion of Government programs at both the Central and the State levels makes imperative to identify areas to strengthen the PFM systems and processes. Establishing a performance oriented management structure stretched over levels of Governments in the Indian federation should be the key objective.Major Historical Interventions Influencing PFM ReformsThe 14th Report of Second Administrative Reforms Commission (SARC 2009): The SARC emphasized on effectiveness of the public spending and suggested several institutional reform measures.Report of the High Level Expert Committee on Public Expenditure Management (2011): The recommendations of the committee played crucial role in removal of plan-non-plan distinction and strengthening of Central Plan Scheme Monitoring System (CPSMS), which further evolved into PFMS platform in later years.Recommendations of Central Finance Commissions: The Central Finance Commissions particularly the FC-XII, FC-XIII, and FC-XIV made recommendations that have far reaching consequences towards institutional development in the PFM system.PEFA Report (PEFA 2010): The report measured performance of PFM institutions at the Union level and provided areas in need for reforms.Fiscal federal nature of the country and constitutional assignment relating to finances and functions in which State and local governments bear large functional responsibilities assumes significance in PFM reforms. The tendency of expanding budget size, spreading resources thinly, and inadequacies in designing and implementing the programs persists in budget management process. Positive developments like adopting fiscal responsibility legislations (FRLs) and advances made in utilization of information technology, however, has enhanced capacity to take appropriate decisions. It is increasingly becoming apparent, particularly after the distortions created by Covid-19 pandemic in the public finances, that a sound PFM system is crucial in fiscal management.Some of the important developments in recent decades in PFM system in the country have been elaborated here.Outcome Budget and Output Outcome Framework (OOF)To improve the performance orientation in the budgeting system, the Union government introduced outcome budget, a revised form of the already existing performance budget, in 2005. As a supplemental device, it evinced similar problems like predecessor. The outcome budget, although prepared and presented by all the spending departments regularly since the adoption, proved fragile and its ability to influence the budgetary decisions in both program formulation and resource allocation was limited. The ambitious plan to estimate quantifiable outcomes, inadequacies in costing the outputs/outcomes for planning the expenditure, stretched performance chain with gaps in information with regard to Central schemes, absence of an effective monitoring system to evaluate the results proved to be stumbling blocks.5The government adopted Output Outcome Framework (OOF) from the year 2017-18 as a unified framework by discontinuing preparation of ministry wise outcome budget and NITI Aayog was assigned the responsibility of preparing this assigned document in consultation with the implementing Ministries and Departments. The OOF covers major Central Sector (CS) Schemes and Centrally Sponsored Schemes (CSS) with an outlay of Rs. 500 crore or more. The OOF has the unique advantage of being a unified document of high value CS and CSS prepared by a professional body like NITI Aayog. However, some of the basic issues relating to formulation of performance indicators for the schemes, the costing basis, determining the quality of public services, lack of public scrutiny relating to its impact on budget decisions more or less remain there.Performance Monitoring and Evaluation System (PMES)The Government introduced PMES in 2009 to provide a framework in the form of result framework document (RFD) to measure performance of all schemes and projects run by the departments. While outcome budget was already there, the utility of similar type of instrument was doubtful. It was given up after few years of paperwork.Medium Term Perspective in Expenditure Planning (MTEF)Medium term expenditure framework (MTEF) is considered as one of the most popular budget innovation in recent times and has many takers both in developed and developing countries. Implementation of MTEF is aimed at providing a perspective of government programs spreading over number of years and adjusting expenditure priorities and links policy making, planning and budget implementation.6Medium term expenditure framework (MTEF) was introduced in India in 2012 as part of the revision of Fiscal Responsibility and Budget Management Act (FRBM Act). The process, however, failed in engaging the spending departments for preparing a medium-term sector plans, negotiate for resources for the budget based on this plan, and prioritize the programmes based on the spending limit. The MTEF process needs to be strengthened to provide robust indication of resource allocation to the ministries and departments and enable them to prioritize their spending plans.Fiscal Responsibility and Budget Management Act (FRBM Act)The fiscal rule was adopted in India in 2003 in response to severe deterioration of public finance both at central and state levels. While the country achieved significant fiscal correction during 2001-02 to 2007-08 riding high on higher growth, subsequent fiscal problems due to the financial crisis of 2008-09 derailed the process. The fiscal rules were redesigned with a longer time horizon and were amended in 2012. Since then the timeline to achieve the target remained elusive and the Act has been amended several times. The Covid-19 pandemic brought disruptions in the public finances of the country and the FRBM Act got further extended until 2025-26.Modified Cash Management SystemTo reduce unevenness in expenditure pattern during the year and rush of expenditure in the last quarter of the financial year, the Government has introduced a modified cash management system. The system is aimed at reducing the tendency of parking of funds, effective monitoring, and better planning of indicative market borrowing.Efforts to Change the Budget and Accounting ClassificationThe existing budget and accounts classification (Chart of Accounts) has problems with regard to providing reports on comprehensive view of central transfers to the states, translating accounting information into plan schemes, showing clarity in functional classification of expenditure, reporting costs incurred by the Government in providing services to facilitate preparation of outcome budget, and finding uniform accounting codes for plan schemes across the States.The Committee constituted to review the List of Major and Minor Heads of Accounts (LMMHA) in 2010 recommended rationalization and reorganization of the existing account classification and proposed a multidimensional classification framework. Following the recommendations of the Expenditure Management Committee in 2015-16, Government of India has initiated actions to revise the recommendations of the LMMHA Committee. As the Chart of Accounts assumes significance in accounting and reporting structure, there is need to take urgent action.Efforts to Adopt Accrual AccountingMost government accounts are kept on cash basis in India. The cash based accounting system is found to be deficient in not being able to provide the complete picture of the financial position of the Government due to lack of complete information on assets and liabilities, which makes it difficult to ascertain the total cost of services provided by the Government departments.The Government of India has accepted in principle the recommendations of the FC-XII to make a gradual transition to accrual based accounting system. The Government Accounting Standards Advisory Board (GASAB) was entrusted with the responsibility to prepare a detailed roadmap and an operational framework. Despite positive intents and building up institutional structure, much still needs to be done in this direction. Unanimity has not been achieved at political and administrative level due to apprehensions regarding risks and likely costs involved, and requirement of administrative capacity. FC-XIV and FC-XV in their recommendations reiterated the need to adopt the accrual accounting system. The Government needs to lay down the targets considering the administrative capacity and skills required for bringing about such a major reform.Internal and External Audit ReformsInternal Audit Modernisation: The internal audit system in India has not been updated responding to changing times and modern standards emphasizing its role as a management tool and an integral part of both management controls and communication processes. Report of the Task Force constituted to provide roadmap to improve the internal audit in 2006 has not been considered yet.7External Audit: The external audit by the Comptroller and Auditor General of India (CAG) has played crucial role in India and assisted the Parliament in exercising financial control over the executive. While external audit has been a strong element of Indian PFM system, the follow-up process needs improvement to enable the external audit system to play its desired role.Digital PFM Systems: PFMS and State-Level IFMISWeb-Based PFMS System: The Public Financial Management System (PFMS) is a web-based online software application implemented by the Government to facilitate payment & exchequer control, accounting of receipts, accounting and reporting, and integration with financial management systems of states. The primary function of PFMS today is to facilitate sound PFM system for Government of India by establishing an efficient fund flow system as well as a payment cum accounting network.Integrated Financial Management Information System (IFMIS) at State Level: State Governments in India, aided and encouraged by the Central Government, made considerable progress in adopting IT enabled IFMIS to facilitate improved accounting and budgeting system and manage payment processing, spending, reporting activities. Starting from initial treasury computerisation states have made progress in developing IFMIS, which has improved their information base on financial management and program implementation.Crosscutting IssuesThere were attempts to improve institutional framework of PFM systems that needs to be taken to their logical end:Debt Management Office (DMO): The Government’s attempt to delink debt and cash management from monetary management controlled by the Reserve Bank of India by establishing a Debt Management Office in the Ministry of Finance is an ongoing effort to change the existing debt management system.Fiscal Council: The practicality and usefulness of creating an independent Fiscal Council to pursue sustained dialogue on fiscal policy and independent review and monitoring of the implementation of various measures as recommended by the Central Finance Commissions is another issue which needs to be considered at policy making level.Public Procurement Regulation: In the area of procurement by various ministries and departments, reforms were initiated including a legislation to regulate public procurement. The recommendations given by FC-XV to create strong institutional support for PFM system in India needs to be considered while taking reform decisions.Concluding RemarksThe initiatives undertaken to strengthen PFM institutions over the decades provides opportunities to build upon them. The contemporary PFM system in the country continues to face challenges to maintain sustainable fiscal position, undertake effective allocation of resources, and provide public services effectively. As the PFM system is complex by nature and individual processes are interlinked, a framework treating them comprehensively will lead to achieving outcomes from intents. Given the challenges faced by the Indian economy in recent years, there is a need to inculcate economy, efficiency and effectiveness (the 3 Es) in Government operations to achieve value for money. There are supportive recommendations by various expert bodies based on the analysis of the performance of the PFM institutions, which should be considered. The involvement of all the stakeholders including the politicians in PFM reform process depends on effective communication with them regarding the benefits of changes that would accrue to the development programmes pursued by the government.ReferencesCampos Ed, and Sanjay Pradhan (1996), “Budgetary Institutions and Expenditure Outcomes: Binding Governments to Fiscal Performance.” Policy Research Working Paper 1646, World Bank, Washington, DC.Government of India, Comptroller & Auditor General of India (2006), Report of the task Force for Benchmarking the Status of Internal Audit in the Central Government.Government of India, (2020), Report of the Fifteenth Finance Commission.Hemming Richard (2013), “The Macroeconomic Framework for Managing Public Finances”, in (eds.) Richard Allen, Richard Hemming and Barry H. Potter, The International Handbook of Public Financial Management, Palgrave Macmillan, pp. 219-236.Jena, Pratap Ranjan (2013), “Improving Public Financial Management in India: Opportunities to Move Forward” Working Paper 123, National Institute of Public Finance and Policy.Jena, Pratap Ranjan (2016), “Reform Initiatives in the Budgeting System in India”, Public Budgeting & Finance, Wiley-Blackwell, spring, 36(1), pp.PEFA (2016). Public Financial Management Performance Measurement Framework. PEFA Secretariat. Washington DC.Premchand, A. (2008), Trapped in the Comfort Zone of Denial: 50 Years of Expenditure Management in India, National Institute of Public Finance and Policy, New Delhi.Swarup, D (1990), “India: development in Government Accounting and Financial management”, in A. Premchand (ed) Government Financial Management: Issues and Country Studies, International Monetary Fund.World Bank (1998) Public Expenditure Management Hand Book, Washington, D.C.Author may be reached at: pratap.jena@nipfp.org.in and eboard@icai.in

Upto the financial year (FY) 2007-08, all the Urban Local Bodies (ULBs) in Chhattisgarh were maintaining their accounts on single entry or cash based accounting system. In that accounting system, ULBs were not able to determine their own financial position on a particular date or financial performance for a particular period accurately. There was no or inadequate financial reports were generated for fund and resource management in cash based accounting system.Background & Statutory FrameworkAfter 74th Amendment to the Constitution of India and launch of various schemes like Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Urban Infrastructure Development Scheme for Small and Medium Towns Scheme (UIDSSMT), Integrated Houses And Slum Development Program (IHSDP), Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the role of ULBs in urban infrastructure has become important and as a result need arose for better financial practices in ULBs. Also as per the recommendations of 13th Finance Commission, Accrual Based Double Entry System is needed for getting the Performance based grants.The Chhattisgarh Municipal Corporation Amendment Act 2011 and Chhattisgarh Municipalities Amendment Act 2011 mandate the preparation of Municipal Accounting Manual (MAM) and all the ULBs to follow the double entry accrual based accounting prescribed in the MAM. The state MAM was prepared but is yet to get the consent of the State Government. The MAM has been prepared on accrual based accounting principles.Process Followed for ABDEAS ImplementationPhase 1: FY 2007-08 to 2010-11Initially State Government had appointed 10 field CA Firms as Financial Consultants and one Project Management Consultant (PMC) to implement Accrual Based Double Entry Accounting System (ABDEAS) in Urban Local Bodies of Chhattisgarh for the FYs 2007-08 to 2010-11. The work of ABDEAS for that period was carried on the accounting software provided by Centre for Good Governance, Hyderabad.Phase 2: Cluster-Based Rollout (FY 2011-12 to 2018-19)After that, to prepare Accrual Based Financial Statements of ULBs for FYs 2011-12 to 2018-19, all the ULBs of Chhattisgarh were divided into five clusters namely:Raipur ClusterBilaspur ClusterAmbikapur ClusterDurg ClusterJagdalpur ClusterFive CA Firms (one for each cluster) were appointed as Financial Consultants in the year 2015-16. The State Government also appointed one CA Firm as PMC to supervise all the financial consultants and ABDEAS project Implementation. PMC reviewed the report submitted by the field level financial consultants and supported to resolve the issues faced in every stage of the implementation of the project. The Financial Consultants supported the ULBs in the conversion of the accounts maintained on cash basis to accrual using ERP software for the FYs 2011-12 to 2018-19.Brief Scope of Work of Financial ConsultantsPreparation of Opening Balance Sheet;Identification, verification, listing of all tangible and intangible fixed assets (including infrastructure assets) of the ULB (either owned or under title of use or both);Preparation / Updating of fixed assets register for ULBs and passing on the same to ULBs for approval and acceptance;Data feeding of transactions of ULBs, Offices and Authorities in the Cluster in Tally ERP software;Generation of financial statements including updating of all books of accounts & registers for the financial year along with all the schedules and sub-schedules based on the principles of double entry accounting system;Generation of Bank reconciliations statements and other reconciliations required, of ULBs in the cluster;Generation of Budget statement;Digitization of the Demand Register for each head of Income and Liability register & for each head of expenditure.Brief Scope of Work of PMC (Project Management Consultant)Conduct theoretical and practical trainings for accountants, and other related staffs of ULBs for sustainable implementation of Double Entry Accounting System (DEAS);Study the documentation and archive need of every ULBs and recommend suitable suggestion for effective physical documentation and if required for e-documentation also;Provide necessary technical support to Financial Consultants, ULBs;Monitor performance of financial consultants and assure quality of their deliverables;Compile all needed information required for State and Central Finance Commission, Department of Urban Administration and Development (DUAD) / State Urban Development Agency (SUDA) and other stakeholders under its jurisdiction;Suggest and implement best practices to enable live accounting with the best use of software and e-technology so that requirement to maintain manual register and books of accounts may be dispensed with to a maximum extent.Key Deliverables by Financial ConsultantsOpening Balance Sheet as on 1st April 2011 along with Fixed Assets Register (FAR), Investment Register, Liabilities Register and Bank reconciliation statements.Complete Financial Statements comprising Balance Sheet, Income & Expenditure Account, Receipts and Payments account, Cash Flow statements, Notes to Accounts and Significant Accounting Policy along with schedule and sub schedules of all the ULBs.Fixed Assets Register (FAR), Bank Reconciliation Statements (BRS) and other statements.Annual Budgets.Benefits Achieved by ULBsImproved Municipal Governance: DEAS helped ULBs to improve their governance, as the financial information provided by DEAS is more accurate and transparent, and promoted accountability resulting in better decision making and better compliances of law and regulations.Reliable Financial Statements: DEAS provided a higher level of accuracy and reliability in Financial reporting of ULBs.Transparency and Accountability: Transactions and their accounts are being traced easily in DEAS. DEAS also helps in ensuring accountability and makes it easier for ULBs to track the flow of Funds.Better Recording and Tracking of Fixed Assets: The financial consultants appointed by SUDA prepared the opening Fixed Assets Register (FAR) of ULBs and also updated the FAR year-wise with all the relevant details. FAR helped ULBs in tracking and better utilization of Fixed Assets.Better Recording and Tracking of Financial Assets/Liabilities: DEAS helped ULBs to record and track Financial Assets like Trade Receivables efficiently that ultimately resulted in timely collection of taxes. Also, DEAS helped ULBs in better recording and tracking of Financial Liabilities like Trade Payables and that ultimately resulted in timely payment of dues.Better Knowledge of Financial Position and Performance: By adopting DEAS, ULBs are able to determine their financial position on a particular date. Also DEAS helped ULBs to determine their financial performance for a particular period more accurately.Better Decision Making: Accuracy in Information generated from DEAS and Different types of MIS, Exception Reports and other information generated from DEAS helped ULBs in better decision making.Facilitate in Timely and Efficient Audit: Adoption of DEAS helped ULBs in timely and efficient Audit. Financial Statements and Information generated from DEAS was presented to various audit parties (e.g., CAG, Local Fund Audit, Internal Audit).Facilitation in Getting Finance Commission Performance Grants: Financial Statements generated from DEAS are being used by ULBs for getting Finance Commission Performance Grants as submission of Financial Statements is one of the criteria for getting performance grants.Helps in Prudent and Realistic Budgeting: Every ULB prepares and presents their Annual Budget every year. Information generated from DEAS is more accurate than Single Entry Accounting System. So DEAS helps ULBs in prudent and realistic planning and budgeting.Rewards and Recognition for Good Financial Reporting: Chhattisgarh State received several rewards and recognition for implementation of DEAS in ULBs. Chhattisgarh State received HUDCO best practices award for FY 2017-18 in Financial Reporting.Way ForwardThe intention of Ministry of Urban Development, Government of Chhattisgarh is to implement real time Double Entry Accounting on accrual basis in all ULBs in Chhattisgarh and develop capacity in finance and accounts personnel and personnel of other departments in ULBs so that they can run DEAS on their own without any external support and for that an ERP software has been developed by a software agency appointed by SUDA.Also, a Firm of Chartered Accountants has been engaged by SUDA as Consultant for Implementation of accounting assignments in Chhattisgarh. Initially, the financial consultant will do the work on the ERP software and after that financial consultant will provide handholding support to ULBs in relation to ABDEAS on ERP Software. The final goal is capacity building of ULBs’ accounting personnel, so that they can carry out the accounting work on double entry system independently.Authors may be reached at: suda.mission@gmail.com and eboard@icai.in

The ICAI has developed a complete suite of Accounting Standards for Local Bodies (ASLBs) that could be applied to basically Urban Local Bodies (ULBs). The PRIs or the Rural Local Bodies follow cash system of accounting based on ‘Formats for Maintenance of Accounts by PRIs’ prescribed by the CAG in 2002, and are out of the accrual accounting fold. The ASLBs are yet to be mandated for ULBs. From 1.04.2022, ICAI has mandated two1 ASLBs for the Chartered Accountants who conduct the audit of ULBs. ICAI has released 31 ASLBs (refer Table A) and three technical notes to help implement the standards. Some of the standards contain detailed guidelines for implementation also. With this backdrop, this paper looks at the purpose of accounting standards, the benefits they will bring for the ULBs and issues in the implementation of the same.1 ASLB 2 Cash Flow Statements and ASLB 5 Borrowing Costs for financial statements w.e.f. 1.04.2022 (https://resource.cdn.icai.org/60819cpfgm49453.pdf)Purpose of Accounting StandardsStandards are meant to ensure uniformity and quality in performing a function. Accounting standards provide a basic minimum standard in accounting so that various quality parameters relating to accounting and disclosure are fulfilled.“Accounting standards specify how transactions and other events are to be recognized, measured, presented and disclosed in financial statements. Their objective is to provide financial information to investors, lenders, creditors, contributors, and others that is useful in making decisions about providing resources to the entity”2ICAI has developed the ASLBs based on International Public Sector Accounting Standards (IPSASs) normalising them to Indian conditions and requirements. ASLBs provide a consistent framework for financial reporting that can be used to improve transparency, accountability, and comparability of financial information of local bodies.Accounting Standards in Local GovernmentsAccording to IFAC, many governments have started moving to accrual accounting and are applying the IPSAS.4 The results paint a positive picture of accrual adoption efforts globally, with 30% of jurisdictions reporting on accrual in 2020 – up 6% since 2018.5 With every such migration to accrual accounting, the use of accounting standards becomes essential. To catalyse the transition process, IPSAS Board has also issued a cash basis accounting standard, on the basis of which ICAI has also issued a similar Standard.Depending on the setup of the governmental system and hierarchy, countries have two or three-tier systems of governance. In India, it is a three-tier system with Central, State, and Local Governments. In all three tiers accounting takes place and there is a need for accounting standards. In India, like most other countries, the Central and the State governments follow the cash basis of accounting, however, in the third tier ULBs have migrated to accrual accounting.The Preface to the Accounting Standards for Local Bodies defines ‘Local Body’ as local self-government at the third tier of governance in an administrative and geographical vicinity, e.g., a municipal corporation, a municipality or a panchayat. The preface also gives an inclusive definition of the term to include bodies to whom the local bodies delegate their functions, whether the local bodies control them or not e.g. development authorities, boards, and parastatals.Significance of IPSASThe International Public Sector Accounting Standards Board (IPSASB) is an independent standard-setting board that develops and promotes high-quality financial reporting standards for governments. IPSASB develops International Public Sector Accounting Standards (IPSASs) which are designed to improve the quality and comparability of financial reporting by Governments, including local governments. The IPSASs provide a comprehensive set of financial reporting requirements that cover areas such as presentation of financial statements, recognition and measurement of assets and liabilities, and inclusion of budget information in financial reporting. By adopting IPSASs, local governments can improve their financial management, and enhance their ability to attract investment.Need for ASLBsThe ICAI believes that the adoption of the ASLBs, together with disclosure of compliance with them will lead to a significant improvement in the quality of general-purpose financial reporting by Local Bodies, thereby increasing transparency and accountability. Moreover, there are specific benefits that would accrue to local bodies by the adoption of the ASLBs:Accountability: ASLBs provide a framework for transparent and accurate financial reporting, which is essential for local governments to demonstrate accountability and credibility to their stakeholders, including taxpayers, citizens, and bondholders.Consistency: Without ASLBs, each local government may use different accounting methods, making it difficult to compare the financial statements of different local governments. Accounting standards provide a consistent set of rules and procedures that enable comparability.Efficiency: ASLBs can simplify the financial reporting process, reducing the time and resources needed to produce financial statements. This can lead to more efficient use of resources and improved financial management.Compliance: ASLBs ensure that local governments comply with relevant laws and regulations, including generally accepted accounting principles and other reporting requirements. Compliance with these standards can help local governments avoid regulatory action and financial penalties.Budgeting: ASLBs help local governments to prepare and manage their budgets effectively. By providing clear rules and guidelines for financial reporting, accounting standards enable local governments to accurately project their revenue and expenses and make informed decisions about resource allocation.Investment decisions: ASLBs provide investors (e.g. municipal bond subscribers, lenders) with reliable and transparent financial information about local governments, which can help them make informed decisions. This can lead to more efficient capital markets and lower borrowing costs for local governments.Oversight: ASLBs provide a framework for oversight and accountability, enabling regulators and auditors to monitor local governments and ensure compliance with relevant laws and regulations.Clarity during the transition to accrual: During the process of transition from cash basis to accrual accounting, following the ASLBs will provide clarity to the local governments to formulate accounting policies, a basis for formulating accounting entries, and disclosure methods.Applicability of ASLBsThe Accounting Standards for Local Bodies are intended to apply only to items which are material. Any limitations with regard to the applicability of a specific Accounting Standard will be made clear by the ICAI from time to time. The Committee on Public and Government Financial Management (CPGFM)6 of ICAI addresses various issues that may arise from time to time with regard to ASLBs and their implementation.The CPGFM has made it clear that in the formulation of ASLBs, the emphasis would be on laying down accounting principles and not detailed rules for application and implementation thereof. This provides flexibility for practitioners to adapt the ASLBs to the requirements of the ULBs without compromising on the overarching principles laid out.The ASLBs are not yet mandatory for ULBs, hence there is no obligation on their part to implement them. ASLBs will become mandatory from the date specified in this regard by the State Government concerned. The ULBs in India are required to follow the accounting manuals prescribed by the State Government based on the National Municipal Accounting Manual (NMAM) which came out in 2005. But increasingly chartered accountants are being engaged for certification or audit of the ULB financial statements. Hence, when an ICAI member certifies the financial statements of ULBs, he would be required to report on compliance with these standards, particularly ASLB 2 and ASLB 5.Adoption and Implementation of ASLBsThe implementation of the ASLBs is ideally taken up in three phases:Phase 1: When creating the opening balance sheet and implementing the accrual accounting until the accounting system stabilises along with adopting a few ASLBs. This could take about two to three years considering various operational factors at the ULBs.Phase 2: Follows after Phase 1, once the ULB staff get comfortable with the basic ASLBs.Phase 3: Advanced ASLBs are implemented once the ULB gains organizational and systems maturity.The ASLB adoption matrix given in Table A has been suggested for a ULB that has already adopted accrual accounting with software like Tally. There could be other ULBs which are still in manual operations without the use of technology or those larger ULBs which have migrated to ERP or are in the process of doing the same. So accordingly the adoption matrix needs to be reworked.Table A – ASLB Adoption MatrixASLB No.ASLB TitleEase of AdoptionKey ContentKey Links to Other ASLBsRemarksPhase 1Phase 2Phase 31Presentation of Financial StatementsXPurpose, Responsibility, Components2, 14, 18, 19, 20, 24, 33-2Cash Flow StatementsXOperating, Investing, Financing aspects1To link with Receipts and Payments Account3Accounting Policies, changes in Accounting Estimates and ErrorsXAccounting policies, changes in estimatesALLTo introduce accounting policies first4The Effects of Changes in Foreign Exchange RatesXInvolving foreign exchange transactions-May be applicable for few large municipal corporations5Borrowing CostsXRecognition, capitalisation17To link to accounting policies9Revenue from Exchange TransactionsXRevenue measurement (with exclusions)-To link to Demand Collection Balance (DCB) book11Construction ContractsXDifferent types of construction contracts17To link to accounting policies12InventoriesXInventory accounting and valuation--13LeasesXClassification, treatment in books of lessor, lessee16The accounting processes must be sensitive to identify such transactions14Events After the Reporting DateXImpact of events after the reporting date1The accounting processes must be sensitive to identify such transactions16Investment PropertyXRented properties and revenue recognition13, 17To link DCB, asset register, rent register17Property, Plant and EquipmentXRecognition, costing models, implementation guidelines5, 11, 16To link to accounting policies and Asset Register18Segment ReportingXSegment structuring, reporting, implementation guidelines1Could involve non-financial data also, processes need to capture such data19Provision, Contingent Liabilities and Contingent AssetsXProvision, contingent liability, contingent asset-To set up processes to identify such transactions20Related Party DisclosuresXRelated party, Key managerial personnel1May need a government policy on definitions21Impairment of Non-Cash-Generating AssetsXIdentification of assets and impairment-To have processes to identify assets and quantify impairment23Revenue from Non-Exchange Transaction (Taxes and Transfers)XTaxes and Transfers primary source for ULBs1To link to Demand Collection Balance book24Presentation of Budget Information in Financial StatementsXComparison of budget and actual info-Accounting software to link budgets26Impairment of Cash-Generating AssetsXIdentification of impairment and losses-To have processes to identify assets and quantify impairment31Intangible AssetsXGoodwill, R&D-To link to accounting policies and systems32Service Concession Arrangements: GrantorXService concession asset, contract-To link to accounting policies and systems33First-Time Adoption of Accrual Basis Accounting Standards for Local BodiesXOpening balance sheet and related matters1To be considered while preparing the opening balance sheet34Separate Financial StatementsXInvestment in controlled entities, Joint Ventures (JVs), etc.-ULBs may need more time to implement this35Consolidated Financial StatementsXEntity with one or more controlled entities-May not be applicable for all ULBs36Investment in Associates and Joint VenturesXWhen ULB has associate or JVs37, 38, 40ULBs may need more time to implement this37Joint ArrangementsXFinancial reporting of ULBs with joint arrangements36, 38, 40ULBs may need more time to implement this38Disclosure of Interests in Other EntitiesXDisclosure in case of joint arrangements etc36, 37, 40ULBs may need more time to implement this39Employee BenefitsXRecognition, measurement, disclosure of employee benefits-May require consultations with state and union government40Entity CombinationsXULB combines with another ULB or entity36, 37, 38Accounting policies may be aligned to this42Social BenefitsXDirect benefit transfer-To link to accounting policies and systems-Financial Reporting under Cash Basis of AccountingXApplicable to ULBs in transition to accrual-ULBs that are not fully on accrual yet may consider implementing this to begin withImplementation of ASLBs – Key Issues & StrategiesSeveral issues can arise in the implementation of accounting standards in local governments. Some of the key issues and the strategies to handle them include:Lack of Capacity and Resources: Local governments may not have the necessary resources, including trained personnel, to implement ASLBs effectively. This can result in inaccurate or incomplete financial reporting and may impact the ability of local governments to make informed financial decisions.Strategy: Local governments can invest in building the capacity of their personnel to implement accounting standards effectively. This can involve a combination of providing training, engaging professionals, recruiting experienced personnel, and leveraging technology to simplify financial reporting processes.The Complexity of ASLBs: ASLBs can be complex, and local governments may find it difficult to understand and implement them effectively. This can result in errors or misrepresentations in financial reporting, which may impact the accuracy and reliability of financial information.Strategy: ASLBs could be simplified to make them more understandable and easier to implement. Local governments can work with ICAI to advocate for the simplification of accounting standards. Providing implementation checklists and using ICAI members in the implementation can demystify the seemingly complex ASLBs.Limited Stakeholder Engagement: Local governments may not engage effectively with stakeholders, such as citizens, civil society organizations, auditors, governments, and other interested parties, in the implementation of ASLBs. This can result in a lack of transparency and accountability in financial reporting and may impact public trust in local government.Strategy: Local governments need to engage extensively with stakeholders (accounting staff, auditors, ICAI, and so on) to promote transparency and accountability in the implementation process.Limited Enforcement Mechanisms: Local governments may not have effective enforcement mechanisms in place to ensure compliance with ASLBs. This can result in non-compliance or incomplete compliance, which may impact the accuracy and reliability of financial reporting.Strategy: While it is expected the audit would identify any ASLB-related non-compliance, it may be advisable to take this process as a project at the state level so that expected benefits are obtained within a planned time. Enforcement mechanisms can involve establishing deterrents for non-compliance, providing incentives for compliance, and conducting regular reviews to detect and deter improper implementation of ASLBs.ConclusionIn the last two decades, ICAI has undertaken enormous efforts to develop ASLBs. This is a positive move towards the 74th Constitutional Amendment Act’s goals of establishing ULBs as autonomous self-reliant local governance institutions. Although the ICAI has issued over 31 ASLBs, they are yet to be mandated for ULBs by the State government. This paper is an attempt to sensitize the reader to some of the implementation issues in this regard. The approach to adopting the ASLBs in phases needs to be understood by the implementers and specific strategies to handle the key issues highlighted need to be formulated.ReferencesASB, C. (2023, April 5). Retrieved from https://www.frascanada.ca/en/acsb/about/what-are-accounting-standardsIFAC. (n.d.). Retrieved from https://www.ifac.org/knowledge-gateway/supporting-international-standards/discussion/international-public-sector-financial-accountability-index-2020ICAI. (n.d.). Retrieved from https://resource.cdn.icai.org/8574announ862.pdfAuthor may be reached at: eboard@icai.in

Public Finance Be ready to ride the Municipal bond wave Author: CA. K R Praveena • Member of the Institute • Contact: eboard@icai.in • The Chartered Accountant | May 2023 (pp. 35–39 / Journal pp. 1211–1215) “Municipal Bond (Muni-bond) is expected to be a lucrative funding source that can help ULBs improve the urban infrastructure to achieve India’s economic goals. In India, although Muni-bonds have existed for nearly a decade, the Muni-bond market is still in a nascent stage. Thankfully, in recent times there is a push from both policymakers and regulators to encourage more ULBs to enter the market. While the advantages of this source are compelling, ULBs struggle to tap the Muni-bond market due to a variety of factors like accounting backlogs, audit backlogs, and lack of in-house expertise. They require extensive handholding and support to succeed in their endeavour to float Muni-bonds. This article discusses some of these requirements. Being nation-building partners and with core competency in multiple areas, Chartered Accountants are well-positioned to handhold the ULBs to succeed in the Muni-bond market.” ULBs’ role in India’s ambitions India is gearing up to be a $7 trillion economy by 2030. This ambition will require accelerated investment in cities, which contribute 60% of the country’s GDP. Urban Local Bodies (ULBs) are responsible for developing and maintaining city infrastructure. Although the State Governments have conceded autonomy to ULBs pursuant to the 74th Constitutional Amendment Act, ULBs heavily rely on Central and State Government grants to meet their funding requirements. While banks and financial institutions have been catering to ULB needs, a considerable financing gap exists in achieving the country’s urban investment needs. Municipal Bonds (Muni-bond) offer promise in bridging this funding gap. About Muni-bonds Muni-bonds are non-convertible debt securities issued by any municipality, Statutory Body, Board, Corporation, Authority, Trust, Agency, or any Special Purpose Vehicle established or notified by a State Government or Central Government. From the ULB Perspective Muni-bonds are a valuable funding source as they enable – raising large amounts in one go, pegging the coupon rate (fixed interest payouts hedging against potential inflation) for the bond’s term, and are available for a long term. Also, if ULBs manage a good credit track record, the subsequent Muni-bond raises are faster and at better coupon rates. From the Investor’s Perspective Muni-bonds are an attractive investment as they are – credit-rated obtained following a transparent credit rating process (preferred rating is AA and above), less risky as they are equivalent to government securities, and liquid securities as they are listed. The Indian Muni-bond market & its regulation Although Muni-bonds have existed for nearly a decade, the Muni-bond market in India is still in a nascent stage. To date, 13 city corporations have raised close to Rs 2,200 crores through Muni-bonds. The average issue size has been about Rs 150 crores, with coupon rates ranging between 7% to 10% and tenure between 3 to 10 years. Muni-bonds may be privately placed or offered to the public (retail investor). In either case, they are governed by SEBI regulations and must be listed on an Indian Stock Exchange. In India, Muni-bonds issues are predominantly privately placed. Indore Municipal Corporation’s Feb 2023 bond issue was the first public issue of Muni-bonds. Market readiness & policy push SEBI has issued regulations and a guidance note for ‘Issue and Listing of Municipal Debt Securities’. The regulator is actively encouraging Muni-bond issues through its outreach programs. With increasing market demand for environmentally responsible investment opportunities, SEBI has introduced the concept of ‘Blue’ and ‘Yellow’ bonds in addition to existing Green bonds: 🌱 Green Bonds1 Relate to raising debt to fund ‘green’ projects, assets or activities with an environmental benefit such as renewable energy, low carbon transport etc. 💧 Blue Bonds Relate to fundraising for sustainable water management and ocean energy-related projects. ☀️ Yellow Bonds Relate to fundraising for solar power-related projects. 1 Indore Municipal Corporation is the first city in India that issued green bonds in Feb 2023. These colourful options are very relevant to most projects undertaken by ULBs. In Feb 2023, NSE launched the ‘Nifty India Municipal Bond Index’ – a unique index to measure the performance of municipal bonds portfolio. This index will help in examining how the Muni-bond market is faring. “Blue bonds relate to fundraising for sustainable water management and ocean energy-related projects. Yellow bonds relate to fundraising for solar power-related projects.” On the one hand, these market trends point to the readiness of regulators and stock exchanges to encourage more ULBs to raise debt from the Muni-bond market. On the other hand, strong reform pushes are focused on making Muni-bonds attractive for investors. There is a reform incentive for Muni-bond issuance announced by the MoHUA under the mission AMRUT. One of the other notable indications was in the Union Budget speech 2023 when the Hon’ble Finance Minister highlighted that governance reforms would be undertaken “to improve their [ULBs’] credit worthiness for municipal bonds”. As the President of G20 nations, India is seeking to encourage more than 30 cities to enter the Muni-bond market. There is no denying the onset of the Muni-bond wave! Public Finance Objectives Managing Public Needs Economic Development Removes Inequality Maintaining Price Stability Why are ULBs cautious? While the advantages of this source are compelling, ULBs struggle to enter the Muni-bond market due to a variety of factors. The process for issuing Muni-bonds is similar to the listing process for corporate debt securities. It involves satisfying certain eligibility criteria, preparing an offer document, appointing Merchant Banker & Debenture Trustee, obtaining a credit rating, undergoing due diligence, trust deed & depository arrangements, and finally satisfying the listing formalities of the stock exchange. The market regulator’s broad expectations from ULBs are initial disclosures, audited financial statements which reflect the true & fair position, compliance with SEBI regulations & Stock exchange requirements, meeting continuing obligations on time (no defaults in paying interest or repaying principal), and periodic disclosures post listing. SEBI Mandatory Eligibility Criteria for ULBs (Rule 4): To be eligible to raise funds under its governing Act. To have prepared their accounts as per the National Municipal Accounts Manual (NMAM) or equivalent State Manual and been adopted by State Government in the preceding three financial years. To have a surplus of income over expenditure in the preceding three financial years. To not have defaulted in repayment of borrowings in the past year. To not be debarred or restrained by SEBI; and Key management personnel to not be a willful defaulters. These criteria straightaway eliminate ULBs with negative net worth and poor credit history. ULBs particularly struggle to adhere to the requirement of three preceding years’ accounts. While most municipal acts mandate an annual audit of accounts and submission to State Government, this is not adhered by all ULBs. Additional Concerns and Institutional Hesitations: Apart from their inability to meet the eligibility criteria, ULBs are cautious about entering the market due to other concerns like: Risk of opting for Muni-bonds when Banks and Financial Institutions offer comparable debt with lesser compliance requirements. Fear of fiscal discipline demands such as continuing to produce timely audited financial statements. Increase in compliance burden. Overheads due to the need to liaise with several stakeholders such as Debenture Trustees, Stock Exchange, SEBI, etc. Increase in transaction complexity – like transactions need to get routed through Debenture Trustees when using escrow funds. Stress on already stretched human resources. Transformative Value: Reputation Earned Through Successful Listing While these are current issues faced by ULBs, the Muni-bond market offers an opportunity for ULBs to evolve into trusted public entities. ULBs managing to get their bonds successfully listed will gain the reputation of being: ● Transparent As they are regularly publishing accounts detailing the utilization of funds. ● Creditworthy As credit rating agencies will be rating the ULB’s bond (this is periodically re-assessed as well). ● Compliant As they must adhere to all applicable regulations to remain listed. ● Well-managed As streamlined information flows and robust internal controls are required to ensure continued compliance with SEBI requirements. Areas where ULBs require assistance To be able to navigate the varied requirements and to successfully raise money through Muni-bonds, ULBs require extensive handholding and support. Some of the critical areas of support are discussed herewith: 1. Preparedness study & roadmap The first step for a ULB considering the Muni-bond route is determining where it stands. It then needs to undertake a preparedness study and establish a roadmap to complete the Muni-bond issue with the support of external consultants. The study should assess whether the ULB satisfies the eligibility criteria and, if not, how the ULB can work towards satisfying them. Satisfying criteria may require a detailed roadmap to complete accounting and audit backlogs, get State Government permission for fundraising, identify a feasible project, determine fund requirement, etc. 2. Accrual accounting While it’s been nearly two decades since ULBs were mandated to follow accrual basis of accounting and model NMAM laid down (2004), to date, most ULBs struggle to comply with NMAM or the respective State’s Municipal Accounting Manual (SMAM). They also face severe accounting backlogs. The primary cause for this is the shortage of skilled accountants who can record transactions on accrual basis. A joint study by Niti Aayog & ICAI recommends that a ‘Right balance of external expertise and internal capacities’ is imperative for sustaining accrual accounting in ULBs. Accordingly, ULBs keen to enter the Muni-bond market and facing internal resource constraints must seek the support of accounting service providers to complete their financial accounting and bring their books up to date. 3. Preparation of Financial Statements Closing accounts and preparing financial statements that comply with the prescribed formats requires expertise. On top of this, when entering the Muni-bond market, the expectation is that financial statements should be easy to understand and comparable with other ULBs. However, the financial statements produced by ULBs presently are delayed and non-standard. ULBs require support translating their accounts from the accounting software into the prescribed format (as per NMAM or the respective SMAM). 4. Audit of accounts ULBs are audited by the respective state’s Local Fund Auditor (LFA). LFA is typically a department or directorate under the Finance Department of the respective State2. LFAs suffer from similar capacity constraints as ULBs, i.e. they are often understaffed. As a result of delays and backlogs in accounting coupled with low LFA capacities, there is substantial audit backlog amongst ULBs. Readying audited financials of the past three years is an eligibility criterion for listing Muni-bonds. Therefore, it follows that ULBs need to complete any backlogs in audit and be ready with audited financial statements for due diligence during the listing process. Currently, to overcome this problem when complying with the scheme requirements of 15th Finance Commission and AMRUT, ULBs appoint CA firms to audit the financial statements. It can be expected that ULBs will follow the same route to ensure readiness for listing. 2 The only exception is West Bengal where Examiner of Local Accounts (ELA) is under the State’s CAG. “Muni-bonds are raised to fund specific projects. ULBs require support and advice in preparing the Detailed Project Report and examining the project’s viability.” 5. Viability Studies & Detailed Project Report (DPR) Muni-bonds are raised to fund specific projects. ULBs require support and advice in preparing the Detailed Project Report and examining the project’s viability. Apart from the apparent technical support required in planning the project, they need help in compiling and analyzing the financial aspects of the project. Some of the tasks include - determining the cost of the project to arrive at overall fund requirement, stating how the funds will be used over the project period, undertaking financial and economic analysis using project financial projections, planning cash flows for repayment, undertaking sensitivity analysis, etc. 6. Continued compliance The issue of Muni-bonds is not the end of the road but the beginning of a ULB’s Muni-bond journey. Issuers need to remain compliant with SEBI guidelines, ensure timely payment of interest and tranches, and make periodic disclosures as prescribed. Disclosure requirements include – Annual audited financial statements, half-yearly certified utilization reports, a certificate for timely servicing of bonds, etc. Throughout the Muni-bond journey, ULBs require expert advisors to help define the scope of work of different stakeholders, understand applicable regulations and compliance requirements, and liaise with other parties to the process (like a lead banker, legal advisors, credit rating agency, SEBI, debenture trustee, stock exchange, depository, etc.). Concluding Remarks Notwithstanding the difficulties, it is reasonable to anticipate a significant surge in Municipal bond issuances, primarily driven by the colossal demand for urban infrastructure. On an average, the Muni-bond fundraising has been about INR 150 crores per issue. Assuming one round of raise by 30 cities, we are looking at a potential fundraise of INR 4,500 crores soon! This does not include the subsequent rounds of fundraises by other cities. Clearly, the Muni-bond market is expected to see an uptick in activity. Given that this field is emerging, the support of the Chartered Accountants profession is imperative. Being nation-building partners and equipped with core competency in multiple areas where ULBs require assistance, Chartered Accountants are well-positioned to handhold the ULBs to succeed in the Muni-bond market. References Article in Business Today – 31 Jan 2023: https://www.businesstoday.in/latest/economy/story/india-likely-to-become-a-7-trillion-economy-by-2030-says-cea-nageswaran-368315-2023-01-31 Niti Aayog & ADB report on ‘Cities as Engines of Growth’ - May 2022 : https://www.niti.gov.in/sites/default/files/2022-05/Mod_CEOG_Executive_Summary_18052022.pdf SEBI Statistics on Muni-bonds: https://www.sebi.gov.in/statistics/municipalbonds.html NSE announcement: https://www.nseindia.com/products-services/municipal-bond-index AMRUT Operational Guidelines: https://mohua.gov.in/upload/uploadfiles/files/AMRUT-Operational-Guidelines.pdf Economic Times Article – 28 Mar 2023: https://bfsi.economictimes.indiatimes.com/news/industry/india-readies-big-municipal-bond-push-eyes-issues-for-about-30-cities/99041061 Rule 4 of SEBI (Issue & Listing of Debt Securities by Municipalities) Regulations, 2015 Report on ‘Transition to accrual accounting: Models and learnings for Urban Local Bodies’: https://www.niti.gov.in/sites/default/files/2023-01/transition-to-accrual-accounting_0.pdf Observed in several CAG local bodies report of states & Annual Technical Inspection Reports - https://cag.gov.in/en/audit-report/details/117039, and ‘Municipal Accounting Reforms in India’ – ADB working paper - https://www.adb.org/sites/default/files/publication/31149/south-asia-wp-020.pdf

Public Finance Public Account – A Continuing Conundrum Author: Dr. Govinda Bhattacharjee • Professor of Practice, Arun Jaitley National Institute of Financial Management • Contact: govind100@hotmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 40–47 / Journal pp. 1216–1223) “Public account by its very structure has created a lot of distortions in the government accounting system. Being inseparable from the cash balances and also allowing the government to use these funds at their discretion, such distortions have jeopardized the management of public finances in India. This also has serious repercussions on the fiscal deficit as many of the public accounts are interest bearing and interest is always paid from the revenue account of the Government. Efficient management of public finances demands separation of public account from cash balances of the Government. That will be possible only when the public account is separated from government accounts, freed from government controls and their management is entrusted to independent professional trusts. Apart from making these funds self-sustaining, this would also enforce much greater discipline in the management of fiscal deficits and public debt.” Part XII of the Indian Constitution deals with government finance which is organized under three funds: Consolidated Fund of India or of the StateUnder Article 266 (1) Public Account of India or of the StatesUnder Article 266 (2) Contingency FundUnder Article 267 All revenues received by the Government of India or any state, all loans raised by the issue of treasury bills, loans or ways and means advances, and all moneys received by the Government in repayment of loans. All other public moneys received by, or on behalf of the Government of India or of a State. Fixed corpus to enable the Government to make unforeseen expenditure without prior legislative approval (e.g., expenditure on relief after a natural calamity). Control: Article 266 (3) states that no moneys out of any Consolidated Fund shall be appropriated except with legislative approval, that is from the budget, under articles 112 to 117 for the centre and articles 202 to 206 for the states. Control: No such approval has been prescribed for withdrawing any money from the Public Account, which involves other public moneys that do not belong to the Government as such. Later to be recouped from the Consolidated Fund under the usual legislative approval procedures. Indeed, we are continuing with the public account as a legacy from the colonial rule; outside the subcontinent, no other country in the world allows such distortion in the public financial system. It is also important to note that Public Account stands merged with the cash balance of the government which creates its own problems for the management of cash balances. Government accounts, recording all transactions of the above three funds, are maintained in three parts as per provisions of the Government Accounting Rules, 1990: Part-I deals with the Consolidated Fund Part II deals with Contingency Fund Part III deals with Public Account Divided into Revenue and Capital Accounts. Transactions are grouped into Sectors depending on the nature of receipts or expenditure. Transactions are grouped into Sectors depending on the nature of receipts or expenditure. Its constituents are clubbed with the cash balance of the government in the government account. Public account balances are practically inseparable from the cash balances. Further, the public account balances, which are the accruals in the public account net of withdrawals, are automatically available to the government to borrow regardless of need. When the net public debt or net borrowing in the consolidated fund falls short of the fiscal deficit requirements, public account balances are utilised to bridge the gap, and if they still fall short, then the cash balance is utilised. As we shall see, this arrangement creates serious problems in cash management, sometimes leading to over-borrowing while having surplus and idle cash balances. Structure of Public Account Public Account comprises funds that do not belong to the Government, but which the government holds in trust and manages on behalf of their owners who can be ordinary people or government contractors or anyone, and sometimes even the Government itself when it holds taxpayers’ money outside of Consolidated Fund. There are five major heads of accounts under the Public Account: (i) Small Savings, Provident Fund & Other Accounts (ii) Reserve Funds (iii) Deposits and Advances (iv) Suspense and Miscellaneous (v) Remittances • Government is liable to repay the moneys received or has a claim to recover the amounts paid. • Government acts as a banker, receiving amounts which it later repays and paying out advances which it subsequently recovers. • Constitute a part of the overall financial liabilities of the Government. Used only for adjustment purposes; all initial debits or credits to these accounts are made pending final adjustments and cleared eventually by mutual adjustments once their final destinations are traced. All governmental / inter-governmental / departmental transactions pending availability of the requisite details in corresponding vouchers / challans that would identify their final destinations. It also includes temporary investments of cash balances in short term loans or Government securities at nominal rates of interest. Intra- and inter-Governmental cash remittances between its various departments / ministries and also between the Reserve Bank of India (RBI) and various governments and government departments. Provident Funds: Include the Public Provident Fund (PPF) and State Provident Funds which include GPF, CPF, Defence, Railways and Other Provident Funds. Small Savings: Include National Savings Deposit, Post Office Savings and Recurring, Post Office Time Deposits, Post Office Monthly Income Account, Senior Citizen Savings Scheme, Sukanya Samriddhi Account, National Savings Certificates, National Development Bonds, Defence Savings Certificates, Post Office Certificates, etc. All these are put together into the National Small Savings Fund (NSSF) from which investments are made by way of issuing securities to the central and state governments. Other Accounts: Include Special deposits by retirement funds with the Central Government and Insurance and Pension Funds like Family Pension, CGEGIS, State Government Employees’ Group Insurance Scheme, Post Office Insurance Funds, etc. They also include securities issued in lieu of subsidies to the Oil Marketing Companies, FCI and fertiliser companies, as well as some other special deposits and accounts. Reserve Funds: Created by debit to the Consolidated Fund to create reserves which are assets, some of which are interest bearing. “Reserve Funds are created by debit to the Consolidated Fund to create reserves which are assets, some of which are interest bearing.” Interest bearing funds Non-interest-bearing funds Depreciation Reserve Funds of PSUs, Sinking Funds for amortization of loans raised by the Government and for other purposes, Hindu Religious and Charitable Endowment Fund, Various Development and Welfare Funds, State Roads and Bridges Fund, etc. Famine Relief Fund, National/ State Disaster Response Fund (SDRF), Guarantee Redemption Fund, Railway Safety Fund, Rural Employment Guarantee Fund, etc. The Consolidated Sinking Fund (CSF) and Guarantee Redemption Funds (GRF) are maintained by the States with the Reserve Bank as buffer for repayment of their liabilities. “The Consolidated Sinking Fund (CSF) and Guarantee Redemption Funds (GRF) are maintained by the States with the Reserve Bank as buffer for repayment of their liabilities.” The Government creates these funds out of taxpayers’ money and then pays interest to these funds again by using taxpayers’ money; it also controls the use of these funds through its administrators who are its own bureaucrats, but without any accountability to the Legislature, as these funds are maintained outside the Consolidated Fund. Many of these funds also remain inoperative for a number of years; CAG had pointed out earlier that Rs 1,674.75 crore was lying in 48 dormant reserve funds of the Government of India by the end of 2014-15. The number of such funds lying with the states run into hundreds. The Deposit head under ‘Deposits and Advances’ includes sums deposited with Government in the daily course of business by members of the public: Interest bearing deposits Non-interest-bearing deposits Deposits made in connection with revenue administration, deposits made in civil and criminal courts, security deposits taken from government servants/ contractors when required, public works and earnest money deposits, deposits made by electoral candidates, deposits of local funds of municipalities and panchayats, electricity boards, housing boards, universities, etc. They are mostly in the nature of security deposits or earnest money deposits for public works. Civil Advances: Relate to interest free temporary advances including advances of a permanent nature held by Government officers to enable them to incur contingent expenditure in the day-to-day administration like the Permanent Cash Imprest. They also include the Departmental Advances given to the Departments of Forest, Telecom, Railways, Defence, etc. Analysis As mentioned earlier, there is a problem in the way the government accounts are presented. In the government accounts, Part III - Public Account has Cash Balance in addition to the 5 major heads of account mentioned above. So, it would appear that all individual components of Public Account stand merged with the cash balance of the Government. But the cash balance is actually a balancing item, and is affected by all the three accounts: Consolidated Fund, Contingency Fund and Public Account. Public Account balances, being shown to be merged with the cash balances of the Government, thus inflate them and also make the cash management of the Government fraught with risks. It may be mentioned that balances in Suspense and Remittances are transitional in nature pending their final identification and clearance and do not actually constitute a liability of the Government; the FRBMA 2003 also recognises this and does not consider these as part of the “Other Liabilities” of the Government of India. It would thus stand to reason to club the Suspense and Remittances balances along with Cash Balance and treat this as a separate balancing item, instead of treating these as part of the Public Account. The way these accounts are maintained, especially the interest-bearing ones, defies all logic. For example, there was one fund created in April 1999 under the Small Savings called the National Small Savings Fund (NSSF) to which all public deposits under the Central Government’s small savings schemes (PPF, NSC, KVP, etc.) are credited. States were obliged to borrow 80 percent from this fund initially (and hence pay interest to the Centre), with the option to go up to 100 percent. This borrowing, strangely, was based on availability rather than requirement. Since 2002-03, the net collections were being invested only in State Govt. Securities and thus States are forced to borrow the entire proceeds. But the responsibility to repay to the investors lies with the Centre and these schemes are linked to tax deductions under sec 80 C of the Income Tax Act 1961. They carry interest higher than the market rates and these rates are administered by the Centre. Securities issued to NSSF used to be a major source of financing the GFD of the States till 2006-07 when the interest rates became more favourable to the market loans and the NSSF share had dwindled; excess NSSF flows before that were also responsible for the subsequent build-up of surplus cash with the State governments.1 Following the recommendations of 14th Finance Commission, since 2016-17, save Madhya Pradesh, Kerala, Arunachal Pradesh and the Union Territory of Delhi, all other states and Union Territories have opted out of the scope of borrowings through NSSF investments and hence, NSSF no longer finances their GFD. For the Central Government, however, borrowing from NSSF continues to be a source of financing its fiscal deficit and such borrowing was shown under public debt as these were part of the Consolidated Fund; these borrowings comprised the investments in Central Government Special Securities against collections net of withdrawals and reinvestment of proceeds of such investments therein.2 The remaining liabilities, (i.e. total liabilities of NSSF – such investments) are treated as Public Account Liabilities of the Centre in the Union Budget.3 Total liability of Central Govt. on account of NSSF as on 31st March 2021 = Rs 14.27 lakh crore Rs 4.16 lakh crore Rs 1.26 lakh crore Rs 78,524 crore Rs 92,178 crore Rs 7.15 lakh crore Invested in Special State Government Securities Invested in various Government Undertakings Accumulated deficit of NSSF Investment related to Post Office Insurance Fund made through Private Fund Managers Net outstanding liability under Small Savings, Provident Funds etc. “Provident funds, the most important constituent of the Public Accounts of the states, are unfunded debt of the State Governments carrying higher than market rate of interest.” Provident funds, the most important constituent of the Public Accounts of the states, are unfunded debt of the State Governments carrying higher than market rate of interest. The net proceeds are entirely available to the states and though the Centre has the ultimate responsibility to repay the amounts to the depositors, it has no control over the loans taken by the states or their ability to repay the same. Also, prior to 2009-10, the balances under Small Savings, Provident Fund and Other Accounts used to be in the total outstanding liability of the state governments and other public account balances were excluded as they had the effect of distorting the actual liability carried by the States. These balances often did not represent any real liability; further, their effect would show up in higher cash balances of the state governments leading to a position where most states have surplus cash balances and yet resort to heavy borrowings, the surplus cash being invested under Cash Balance Investment Accounts. Many of these Public Account funds are created by transferring taxpayers’ money from the Consolidated Fund, and kept at the disposal of the Government. The license to do so freely often allows the Government to devise ingenious ways to defeat the normal accountability controls. One such control is the “Rule of Lapse”4 of funds. One mechanism the Governments often use to defeat such statutory control is to withdraw these savings from the Consolidated Fund and park them in the so-called Personal Ledger Accounts (also sometimes called Personal Deposit or PD Accounts) maintained under the Public Account so that the funds can remain there at the disposal of the Government without any legislative scrutiny - an aberration made possible by the nature of the Public Account. Table 1: Number of Personal Deposit Accounts in States State Total Number of PD Accounts as on March 31, 2020 Balance as on March 31, 2020 (₹ Crore) Nature of Balance (Dr/ Cr). Andhra Pradesh149125476Cr. Bihar2523811.3Cr. Chhattisgarh (2019-20)2231585Cr. GujaratNA1004Cr. Haryana1641871Cr. Himachal Pradesh (2019-20)1123Cr. Karnataka713989Cr. Kerala815166Cr. Madhya Pradesh8164963Cr. MaharashtraNA10806Cr. Odisha8117047Cr. Punjab16143Cr. Rajasthan192814383Cr. Tamil Nadu681153Cr. Telangana198177Cr. Uttar Pradesh1210Cr. West Bengal1603465Cr. Source: CAG Audit Reports on State Finance of individual states Table 1 shows the number and balances of such accounts lying with the states, which are substantial and distort our public finances and internal control mechanisms in these states. The interest liability of the Government of India during 2020-21 on its public account balances was Rs 58,419 crore, or 8.2 percent of its total interest liability. In all other countries, similar funds are managed by professional bodies that determine their investment in appropriate assets so as to earn commercial interests to make these funds self-sustainable, without forcing the taxpayers to foot their interest bills. Problems Associated with Public Account 1. Paradox of Surplus Cash and Over-Borrowing The Gross Fiscal Deficit (GFD) of the Government- the total resource gap in the economy- can be computed as the sum total of its revenue deficit, capital outlay and net lending which is equal to the total expenditure (revenue plus capital) minus revenue and non-debt capital receipts. It is financed partly by raising public debt through borrowing under the Consolidated Fund, partly by using the Public Account resources and the rest by drawing down the cash balances. The entire resources under the Public Account are available to the Government and often the Government is forced to resort to over-borrowing – such over-borrowing leads to building up of idle cash balances that earn very little from their investments in low-earning Treasury Bills, while the Government continues to pay much higher rate of interest on the borrowed funds. Most state governments resort to over-borrowing despite having substantial surplus cash balances that could otherwise be economically utilised to finance their fiscal deficits. RBI is the banker to any Government and besides the State’s deposits with RBI, the cash balance of the State also comprises the investments held in the Cash Balance Investments Account, cash and permanent advances for contingent expenditure with Departmental officers plus the investments of Earmarked Funds under the Reserve Funds. Under agreements with the RBI, every State Government has to maintain a minimum cash balance with it (about Rs 2-3 crore). If the actual cash balance falls below the agreed minimum on any day, the deficiency is made good by taking normal and special ways and means advances/overdrafts and if there is any surplus above the specified minimum, it is automatically invested in 14-day Intermediate Treasury Bills (ITBs) of the Government of India. RBI also conducts weekly / fortnightly auctions of treasury bills for maturity periods of 91 days, 182 days or 364 days (Auction Treasury Bills or ATBs) that carry slightly higher rates of interest. Negative Carry: But whether for ITBs or ATBs, the interest rate is significantly lower than that paid on the market borrowings by the governments and hence the interest paid constitutes a negative carry for them. Since surplus can be invested cash only in ITBs or ATBs, particularly for the states, they earn lower returns on these investments compared to the interest they pay on their market borrowings; ideally, they should then use their surplus cash balances to meet their GFD financing requirement and thereby curtail their market borrowings. The surplus cash balance is the difference between the total financing raised by the government (net of all repayments and disbursements) through borrowing under the Consolidated Fund plus the surplus in the Public Account less their GFD requirements. While the borrowing under Consolidated Fund can be adjusted according to the needs, the surplus in Public Account is totally beyond Government’s control, and this is what leads to over-borrowing. In 2016-17, the over-borrowing by the Central Government was almost Rs 9000 crore, on which the annual average interest liability was Rs 620 crore calculated at the weighted rate of 6.9 percent, which was avoidable. However, the over-borrowing has come down in the succeeding years, and in 2020-21, it stood at Rs 7000 crore, significant considering the interest liability it imposes. Over-borrowing by the States as a whole, however, were not significant, through there would be individual variations within the states. Use of the Single Nodal Agency is expected to improve the cash management by taking a holistic view of the government transactions spread over many accounts. 2. Impact of Overborrowing Over-borrowing will crowd out the private borrowers from the debt market whose cost of borrowing would necessarily increase resulting in higher prices for goods and services produced by them, besides carrying inflationary potential to the detriment of the economy. But the most perilous and unpredictable consequence of this cash surplus would be its impact on the Union finances, because all cash surpluses from the States invested in treasury bills are automatically available to the Central Government and constitute part of its total financial liability. This is a huge reservoir of resources and temptation to indulge in populism at the cost of these funds is often irresistible, even if we have to ignore their inflationary potential. If these surpluses could be utilized pragmatically to finance the fiscal deficits of the States, the public finances in our country then would be a different story altogether. 3. Fictitious Liability By its very structure, the Public Account creates a large number of distortions and anomalies in Government accounts. Its balances are included as Other Liabilities of the government besides Public Debt while computing the total Outstanding liabilities of the government. But some of these liabilities are fictitious rather than real in the sense that they do not represent taxpayers’ money but funds which the government receives as a banker, returnable after some time as, for example, in the case of earnest money deposits. These artificially inflates the government’s liabilities. 4. Loss to Government Merging of the public accounts into the cash balance creates further distortions; these balances get invested in Treasury Bills with the RBI, earning nominal interest while the actual interest liability of the State Government on these accounts is much more, hence the Government loses money on that account. It is to be noted that interest liability is paid from the Consolidated Funds, even on public account balances in respect of all interest-bearing accounts. Hence public account creates a liability for the exchequer even though the legislature has no control over it, neither in respect of the balances nor in respect of the interest. It exercises very limited oversight in respect of utilisation of some of these funds. 5. Lack of Oversight Often, funds are transferred out of the Consolidated Funds and kept in the Public Account, outside the constant watch of the auditor and the legislature. Thus, funds transferred from the Consolidated Fund to the Personal Deposit accounts in the Public Account avoid lapse, funds transferred to various reserve funds – many of whom bear interest, balances in numerous deposit accounts, many of which become inoperative over a period of time, continue to distort not only the accounts but also the public finances. No country outside the subcontinent has such a convoluted system of public accounting. These reserve funds are administered by Secretaries of concerned departments and are vulnerable to misuse also. Recommendations The above anomalies will continue to distort the Government account and public finances of the State as well as Union Governments until the public account is completely separated from the Government account. It is high time the Public Account funds are separated from the cash balances and their management entrusted to professional managers relatively free from Government control. That would need appropriate institutional and administrative mechanisms to be set up for the purpose, without perhaps any Constitutional amendment to be made for the purpose. For this, the CAG, CGA, RBI must arrive at a convergence, in consultation with the Union and State Governments to consider separation of public accounts and taking it outside of Government control in a phased manner. This will make these funds self-sustaining and would not create any additional burden for the taxpayers. It is important to appreciate that efficient debt management requires equally effective cash management which will not be possible till the time the cash balances are separated from public account. At the same time, since on many public account heads, the Government carries an interest liability, it is imperative that these funds be deployed in such manner so as earn the maximum return without compromising the safety of money that belongs to the public. Since these funds are not taxpayers’ funds, it is improper to make the taxpayers shoulder the burden of paying interest on these funds. These funds should be deployed in such a manner so as to make them self-sustaining in discharging their interest and other obligations. Footnotes & References Report of the committee on comprehensive review of the NSSF - MoF, GOI, June 2011, http://finmin.nic.in/reports/report_committee_comprehensive_review_nssf.pdf Also includes securities which were issued after inception of the NSSF in April 1999 against the outstanding balances under various small savings schemes at the close of March 31, 1999. This also include the borrowings by States from the NSSF against special securities and loans given to public agencies from the NSSF which should be netted out to reflect solely the Central Government liabilities to NSSF. At the end of every financial year, unspent funds under any budget grant for which the legislature had voted, must be surrendered back, to be included in the fresh budgetary appropriations next year if needed and cannot be carried over to the next year.

Public Finance Climate Budgeting powered by Climate Budget Tagging: An Effective PFM Tool in the Fight Against Climate Change Author: CA. Ashok Rao • Member of the Institute • Contact: eboard@icai.in • The Chartered Accountant | May 2023 (pp. 48–51 / Journal pp. 1224–1227) “Without doubt, climate change is the largest crisis facing humanity till date. Each of us has witnessed some form of visible damage that climate change is causing – extreme weather patterns being one of the common signs. Recognizing the need for bold and quick action, governments worldwide have taken the pledge to transition to less carbon-intensive economies and have committed to timelines to reach “net zero.” India has set 2070 as the target year to achieve net zero emissions. Furthermore, the union government has announced stiff climate goals for the nation to achieve by 2030¹.” Climate investment needs The Synthesis Report (Sixth Assessment Report) of the Intergovernmental Panel on Climate Change (IPCC), released in March 2023, states that the pace and scale of current climate action are insufficient1. Huge investments are needed to achieve the transition, and countries don’t have the luxury of time to mobilize them. The Report states that the climate investment need is 3 to 6 times the current investment level. There is a silver lining though amongst the dark clouds - the Report states that sufficient global finance and financing options are available to rapidly reduce emissions. Appropriate policies and financing products are needed to direct the capital to eligible climate projects. ‘Greenwashing’ – the practice of posing investments as climate-friendly when they are not so actually, poses a serious threat in efforts to mainstream climate finance. To counter this threat, public finance management (PFM) tools, that can ensure accountability of end-use of capital deployed for climate action, are required. Climate Budgeting One such effective PFM tool is Climate Budgeting. Climate Budgeting attempts to quantify and track government budgets directed towards furthering climate objectives. Regardless of the level at which it is applied – national, state, or local – Climate Budgeting helps the government understand the quantum of its budget that is oriented towards policies and programs that further its climate agenda2. At the core of Climate Budgeting, is the technique of Climate Budget Tagging (CBT). Just like how a baggage tag of every piece of baggage at the airport mentions details of its owner, flight and so on, CBT entails attaching a ‘climate tag’ to every line item of the government budget. The Annual Budget is an important policy document in government. In addition to its inherent function of ensuring fiscal prudence, the budget operates as a tool of administrative control as well. The budget tagging technique has been in use in government for many years now. National and State Governments in India prepare thematic budgets (covering themes like gender, child, nutrition, pro-poor and so on). Thematic budgeting is getting more attention as governments increasingly align their policies and strategies to the Sustainable Development Goals (SDG) 2030 agenda3. Although CBT presents certain unique challenges, in several ways, it is an extension of the budget tagging technique to climate action. Benefits Climate budgeting promises several benefits: Mainstreaming: It helps mainstream climate concerns into economic policy making, multi-year and annual planning, and budgeting. Impact Assessment: It allows government to assess the climate relevance and/or climate impact of development spending. Sustainability Perspective: It helps imbibe the sustainability and climate perspective into budget proposals submitted by line departments to the finance department. Transparent Communication: It helps government in communicating its policy intentions and budget allocations towards the fight against climate change, and reporting performance against climate action plans. Credibility for Capital Raising: Clearly defined climate goals backed by budget intent impart credibility to the government’s fund-raising pitch to the investment community. Traceability of Climate Finance: Currently tracked ‘green finance’ is less than one fourth of India’s climate investment requirements. CBT is an effective technique to introduce traceability into climate investments. “Climate Budgeting is gaining popularity in recent years, thanks to increased attention being given to climate change - globally as well as in India.” Adoption Climate Budgeting is gaining popularity in recent years, thanks to increased attention being given to climate change - globally as well as in India. In India, the union government does not prepare a climate budget. Odisha (Pioneer State) First State to formulate a Climate Budget for fiscal year 2020-21 and has been doing it every year thereafter4. Covers 11 departments using a nuanced methodology based on Climate Change Relevance Share and Sensitivity Share. Assam (‘Green Budget’) Introduced its first ever ‘Green Budget’ for fiscal 2023-245, covering 14 departments and tagging schemes across vulnerable sectors and three broad domains of climate action. Bihar (‘Green Budget’) Presented a ‘Green Budget’ for 2021-22 and 2022-236, covering 19 departments using a linear rating scale aligned with national and state climate action plans. While a ‘Green Budget’ and ‘Climate Budget’ are different in the true sense, their objectives and methodology intersect, since both rely on variants of the CBT methodology. Internationally, several countries have adopted Climate Budgeting including Bangladesh, Nepal, Pakistan, Indonesia, Thailand, and some African countries. Methodology CBT essentially involves tagging the climate-relevance of government programs, schemes, or budget lines, and determining the budget allocated towards climate, using a defined weightage system. Governments may choose to build different levels of complexity into their CBT system: 1. Categorical Tagging Tags programs as Directly (green tag), Partially (orange/yellow tag), or Not at all (brown tag) relevant. Discloses allocations under each category (e.g., Assam Green Budget 2023-24). Presumption is to maximize green and avoid brown tags. 2. Linear Scale Rating Rates programs/schemes on a linear numerical scale depending on their extent of alignment to national, state, and local climate action plans (e.g., Bihar Green Budget 2022-23). 3. Advanced Multidimensional Evaluates Climate Change Relevance Share and Sensitivity Share via Impact Appraisal (e.g., Odisha). Extends to adverse climate impacts with negative weights (e.g., France). Most governments would opt to start with a basic tagging methodology and progressively move to more sophisticated ones. Variants also exist in the breadth of coverage. Governments may decide to limit the CBT exercise to key departments considered strategically important from a climate action standpoint or extend it to the entire budget. Here again, governments are most likely to prefer to start with few departments and cover all departments over time. For instance, the Assam Green Budget 2023-24, Bihar Green Budget 2022-23, and Odisha Climate Budget 2023-24 cover 14, 19, and 11 departments respectively. A Government may decide to introduce additional dimensions into its CBT system for a finer analysis of climate actions and budgets. For instance, the Assam Green Budget 2023-24 tags schemes to vulnerable sectors as well as three broad domains of climate action; the Odisha Climate Budget 2023-24 uses a more nuanced methodology to classify sectors based on Climate Change Relevance Share and a Climate Change Sensitivity Share determined through a Climate Change Impact Appraisal. Internationally, France is the only country to tag budgets on activities that have an adverse climate impact by assigning them negative weights. Pre-requisites For successfully implementing CBT, and to be able to produce climate budgets, the following enabling factors must be in place: 1. Climate budgeting mandate This is best achieved by ensuring that the climate budget exercise is initiated in the annual budget circular7 itself. 2. CBT Guidelines Presently, there are no CBT standards in place in India8. It is, therefore, important to develop a Guideline document that prescribes the tagging methodology, and the weightage system along with climate budget templates. This can ensure that the CBT system is uniformly followed and attempts at greenwashing are discouraged. 3. Project team Developing the CBT system initially and producing the climate budgets for each year would require climate experts, PFM experts, and IT experts to collaborate. The government should constitute a multi-disciplinary team for this purpose, if required drawing upon external experts to plug internal capacity gaps. 4. Sensitization and training CBT requires estimates and subjective assessments to be made on the climate impact of programs. To ensure that CBT is implemented uniformly, there is a need to sensitize officials of the Finance Department as well as line departments. Additionally, it is important to impart training to staff on procedural and documentation aspects of CBT. 5. CBT functionality in IFMIS The IFMIS9 must be customized to enable climate-tagging of programs, schemes, and budget lines. Necessary modifications in the Chart of Accounts need to be incorporated. Climate budget reports also need to be developed. Although CBT requirements from IFMIS are not complex, the customization exercise must start in advance so that the CBT system is tested and ready for rollout during the annual budget exercise. 6. CBT must track actual expenditure as well Restricting CBT to budget allocations only would render the entire climate budgeting exercise academic. It must extend to tagging actual expenditure incurred during budget execution. Only then it becomes a powerful climate accountability and performance monitoring tool. This is best achieved by introducing climate tags in the Chart of Accounts itself. Where does one begin? Governments planning to introduce climate budgeting can start by first listing all budget lines along with their allocations that are directly oriented towards furthering the state’s climate goals. This list should form part of the annual budget publication. Phase 1: Listing & Disclosure Compile and publish all budget lines and allocations directly oriented towards furthering state climate goals in the annual budget. Phase 2: Scientific Weightage Categorize schemes based on CBT Guidelines, apply defined weights, and compile an independent climate budget document. Phase 3: Comprehensive System Full CBT rollout capturing positive and negative climate impacts, integrated into Chart of Accounts for budget execution tracking. “Governments planning to introduce climate budgeting can start by first listing all budget lines along with their allocations that are directly oriented towards furthering the state’s climate goals.” Conclusion It pays to keep the Climate Budgeting exercise simple to begin with. More important than the sophistication of the CBT technique, and the resources devoted to the exercise, is the intention of the government to embrace Climate Budgeting and its attempt to produce a climate budget. This is where the front-runners - Assam, Bihar, and Odisha - have shown the path to other Indian states. “With the help of climate experts and finance professionals, and necessary enhancements in the IFMIS, implementing Climate Budgeting is not difficult. Chartered Accountants (CAs) are well-positioned to help governments in embarking upon this initiative.” With the help of climate experts and finance professionals, and necessary enhancements in the IFMIS, implementing Climate Budgeting is not difficult. Chartered Accountants (CAs) are well-positioned to help governments in embarking upon this initiative. Knowledge of PFM systems (government budgeting in particular) and IFMIS systems would be essential. The post-qualification Certificate course of ICAI on Public Finance & Government Accounting equips CAs with such knowledge. In addition, CAs would be expected to possess a reasonable understanding of climate change and climate action topics to be able to meaningfully engage with climate experts and appreciate the nuances of the CBT methodology. Footnotes & References The IPCC Synthesis Report can be accessed at: https://www.ipcc.ch/report/ar6/syr/ Key pronouncements that define the climate agenda in India are the Nationally Determined Contributions (NDCs) and the National Action Plan on Climate Change (NAPCC) of the union government, the State Action Plan on Climate Change (SAPCC) of each state, and City Climate Action Plans (CCAP) at the city level. The SDG 2030 Agenda was signed by 193 countries in 2015. It outlines 17 goals with 169 targets to be achieved by 2030, that together aim to deliver social, economic, and environmental sustainability, with a “leave no one behind” vision. Government of Odisha Climate Budget 2023-24: https://finance.odisha.gov.in/sites/default/files/2023-02/Climate%20Budget%20final_0.pdf Government of Assam Green Budget 2023-24: https://finance.assam.gov.in/sites/default/files/swf_utility_folder/departments/agriculture_com_oid_2/portlet/level_1/files/goa_green_budget_2023-24.pdf Government of Bihar Green Budget 2022-23: https://state.bihar.gov.in/cache/12/Budget/Budget/Green%20Budget%20Final%202022-23%20English%2006.12.pdf Annual Budget Circular: A circular that is sent out by the Finance Department to all line departments at the commencement of the annual budget preparation exercise that lays down the key priorities for the ensuing year and the preparation process along with responsibilities and timelines. The same is true globally as well. There is no single, universally accepted international standard for tagging climate expenditure (see How to Make the Management of Public Finances Climate-Sensitive - “Green PFM” - IMF Green PFM Note). One of the popular international frameworks is the Climate Public Expenditure and Institutional Review (CPEIR) - UNDP CPEIR Methodological Guidebook. IFMIS: The Integrated Financial Management Information System (IFMIS) is the generic name given to the electronic accounting, budgeting, and financial reporting system used by a government.

Public Finance Jharkhand Urban Local Bodies Journey of Financial Sustainability: Nirbhar to Atmanirbhar Authors: Amit Kumar, IAS & CA Pankaj Goel • Director, SUDA & Team Leader, PMU Revenue Augmentation, Jharkhand • Contact: suda.goj@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 52–58 / Journal pp. 1228–1234) “15th FC requires that increase in Property tax collection of cities over previous year shall be in tandem with the State Gross State Domestic Product”1 Urban Local Bodies, considered as engines of growth, are one of the most important pillars of our national economy and they need to be financially smart to play catalyst role in development of economy. However, due to its existence as government bodies, financial viability is often considered secondary, by putting forward its claim of fulfillment of social responsibility through better service delivery. However, this cannot be allowed to go on forever and local bodies need to generate enough funds to sustain their operations. Hence, it is time that these urban local bodies play important role in development of State and eventually to the Nation. Recently, Government of India guidelines like Smart City/AMRUT/National financial ranking and various Finance Commissions (FC) have advocated the robustness of urban local bodies own revenue. Strong municipal finances and urban infrastructure could be catalytic in unlocking growth and employment potential in public service sectors like transportation, healthcare, education, and others and will provide access to capital market through Muni Bonds. Healthy finances of ULBs are vital for provisioning of basic infrastructure to the citizens and for improving the quality of these services2. This article has been written to highlight the importance of self-generated revenue for cities with innovative interventions initiated by Government of Jharkhand to make its urban local bodies financially smart and sustainable. Introduction Robust finances of urban local bodies (ULBs) are crucial for realizing the vision of ULBs as a viable third tier of Government and capitalising on the potential that cities represent for growth and development. Currently, ULBs in India are highly dependent on inter-governmental transfers, municipal revenues are <1% of the Gross Domestic Product and own revenues accounting for <50% of the total revenue of ULBs. This is reflected in the chronic deficits that ULBs run and, also among other things, in their inability to fund infrastructural demand or even meet the Operation and Maintenance (O&M) requirements. Atma Nirbhar — The Conceptual Framework ULBs in India are mandated to undertake certain basic civic functions such as water supply, roads, drains, street lighting and sanitation as per 74th Constitutional Amendment Act (CAA). However, to discharge these expected 18 functions mandated by 74th CAA, ULBs need robust governance backed up by strong financial base. Even though the State and Central government support in provision of capital funding for the urban infrastructure, the onus of operations and maintenance and debt servicing is on the local government. The financial health of the city is determined by its ability to generate sufficient revenues to meet its ongoing expenses and have surplus to fund the future projects. Hence, to sustain and finance the urban services, it is important for the local governments to have reliable sources and plan to enhance own revenue income as fiscal sustainability is contingent on resource generation from own sources of revenue. “Atmanirbhar, as the phrase depicts, is the capability to produce money, i.e., the ability to generate enough surplus to survive.” Atmanirbhartha objective in this context measures not the maximum surplus the ULB can produce but the ‘minimum’ is the rate of revenue required to meet its revenue expenses. Need of augmented Self-Generated Revenue in National Policies Several reports have appeared over the past few years drawing attention to the persisting fragility of the municipal system and made important suggestions for its revamping, like: The Thirteenth Finance Commission (FC) (December 2009): Emphasizes on the need to refurbish property taxation as a key step to strengthening municipal finance and suggests, as a part of its many recommendations, the establishment of state-level Property Tax Boards to impart uniformity in the system of property assessment. 14th FC (December 2014): For gram panchayats, the ratio between the unconditional basic and conditional performance grant was 90:10 and for municipalities the ratio was 80:20. To be eligible for performance grants, the local governments would have to show an increase in own source of revenue and submit audited annual accounts. 15th FC (October 2021) Tied Grants: Mandated Ministry of Housing and Urban Affairs (MoHUA) to develop city-wise and year-wise targets, in consultation with the State Governments, for 2020-25 and recommend disbursal of grants. Accordingly, this marking scheme has been prepared: Sl No. Marking Parameter Criteria 1 Increase in Property tax collection over previous year in tandem with the State GSDP Yes/No 2 Increase in property tax collection over previous year (in %) Percentage Metric 3 Increase in GSDP over previous year (in %) Percentage Metric The High-Powered Expert Committee on Indian Urban Infrastructure and Services (HPEC, March 2011): On estimating urban infrastructure investment requirements, set out standard expenditure norms for municipal infrastructure and services, estimated financial requirements, and proposed a pattern of financing them with a pivotal role for municipalities. World Bank Study on India (October 2011): Developing a Regulatory Framework for Municipal Borrowing examines supply-side constraints to municipal borrowing and emphasizes simplification of local government frameworks and elimination of ambiguities in regulations that govern municipal borrowing. Smart City Guidelines (MoHUA, 2015): Requires ULBs’ own resources from collection of user fees, beneficiary charges and impact fees, land monetization, debt, loans etc. to contribute not only in meeting Smart City Capex but also its operation and maintenance (O&M). AMRUT Guidelines (MoHUA, 2015): In Reforms Milestones and Timelines section for AMRUT Cities, requires Municipal tax and fees improvement and Improvement in levy and collection of user charges as precondition for claiming reform incentive. Thus, it is evident from various reports that financial robustness of own revenue of ULB is the need of the hour. Self-Generated Revenue Self-generated revenue implies revenue generated by ULB from its own sources from taxes, user charges and fees, interest etc. either directly or through shared revenue from State Government in the form of assigned revenue. In common parlance, Own Source Revenue (OSR) indicates that revenue which has been generated by ULBs without depending on external aids. It is also known as Internally Generated Revenue (IGR) or Self-Generated Revenue (SGR). As per National Municipal Accounting Manual (NMAM), Own Revenue covers items as listed below, alongside grants from Government, Finance Commissions, and schemes: Code No. Particulars 1-10Tax Revenue 1-20Assigned Revenue & Compensation 1-30Rental Income from Municipal Properties 1-40Fees & User Charges 1-50Sales & Hire Charges 1-70Income From Investments 1-71Interest Earned 1-80Other Income self-generated by ULBs ATotal - Own Source Revenue Constitutional Foundation: Entry 243X of Constitution of India The Legislature of a State may, by law— Authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits; Assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government; Provide for making such grants-in-aid to the Municipalities from the Consolidated Fund of the State. In the above backdrop, Section 151 of Jharkhand Municipal Act, 2011 provides power to local bodies to collect revenue from taxes, fees and user charges as self-generated revenue. To become Atmanirbhar, ULBs need to augment above sources primarily collection from property tax which is part of tax revenue as it accounts for more than 50% of own revenue of any ULB, followed by rental income from municipal properties and fees & user charges. One of the preconditions for grants, put in by both 15th FC and AMRUT, is that collection from Property Tax shall be more than State GDP and State shall migrate to Capital value / Guidance value so that there is auto increase in property tax demand annually. Genesis of Reforms in Jharkhand: Pre-Reform Cities of Jharkhand were feeling the heat of archaic governance, lack of skilled manpower, absence of digital records, low coverage, low collection of property tax (Rs 23 Cr in 2013-14). This problem got aggravated leading to the 3U’s problem: Large number of Unassessed, Underassessed and Unpaid properties. Deficiencies in the existing system of property taxation did not allow for full exploitation of the revenue generation. To make ULBs financially empowered, urgent need for financial reform was felt: a) Archaic Governance: Tax rates were very low and have not been changed for many years. Further, for many taxes, user charges and fees, rules and regulations required for executing the collection of Taxes and Fees were missing. b) Limited Manpower: To collect taxes, user charges and fees from more than potential 8,50,000 Households (HH) of Jharkhand, more than 400–500 Tax Collectors were required in ULBs of Jharkhand but present strength till 31 March 2016 was on an average 100 tax collectors, which is 70%–80% less than expected strength. c) Absence of IT tools and Technology in collection: Collection of taxes, user charges and fees were done by ULBs manually which led to cases of incomplete Demand, Collection and Balance (DCB) register, short deposit of cash due to instances of collusion among household and tax collector, and lack of timely MIS reports led to delay in taking preventive actions. About the reform Government of Jharkhand (GoJ) did pilot testing of Public Private Partnership (PPP) based revenue sharing model in capital city, Ranchi in 2013-14. Jharkhand armed its cities with power of governance by implementation of Property Tax Rules as per Municipal Act. State of Jharkhand has introduced the scheme of Web based Self-Assessment of Property Tax through Self-Assessment form under ‘Trust and Verify’ which leads to involvement of people. The objective behind the introduction of Self-Assessment scheme is to ensure complete transparency and openness in the levy and collection of Property Tax and to enable citizens/taxpayers to understand the basis of taxation so as to calculate the tax by themselves. Key Reform Measures Undertaken: a) Governance / Statutory Reform Replaced old provisions of Bihar Orissa Municipal Act 1922 with the Jharkhand Municipal Act 2011 and Holding Tax Rules 2013. In line with 15th FC and AMRUT 2.0 guidelines, amendments were made for implementing the capital value method. Water User Charges Rules were notified allowing metered volumetric tariff. A policy on maintenance of Municipal Parks was notified whereby ULBs can outsource park maintenance on PPP mode or under CSR. • Migration from Annual Rental Value (ARV) to Capital Value Method (w.e.f. 1 April 2022): Under ARV, no periodic rate increase was possible and equity was absent. Under capital value: Periodic increase in property tax in line with growth of State GDP. Balance of equity among all sections of society via differentiated tax rates. Additional rebate of 5% to owners of residential households (Women, Senior Citizens, Armed Forces officers, Divyang, Transgender). Complete exemption for households having built-up area up to 350 sq. ft. (benefiting poor needy people and PMAY beneficiaries). Allows citizens to claim total rebate up to 15% (including 5% early bird rebate and 5% online payment rebate). b) Financial Management Reform ULBs of Jharkhand prepare annual financial statements on time as required by 15th FC, on an accrual based double entry system as per Jharkhand Municipal Accounting Manual (based on NMAM). Every ULB has a full-fledged accountant to carry out day-to-day accounting and internal pre-audit of transactions. c) Administrative Reforms: Privatization via PPP Backed by Professional PMU Tax Collection Agencies (TCAs): Three agencies selected via open tender currently operate across all 49 ULBs of Jharkhand. Project Management Unit (PMU - Revenue Augmentation): Monitors TCAs and ULBs, formulates rules and policies, applies ABC analysis to target high-demand properties and reduce unpaid balances, issues default notices, and acts as a operational bridge between TCAs, ULBs, and the State Government. Key Benefits of PPP Model: Digital records made readily available; Property Tax Management System (PTMS) custom developed; Real-time Property tax demand notice generated using PoS machines for transparency; Army of trained Tax collectors deployed in all cities; Doorstep tax collection introduced with on-the-spot digital payment facility; Jan Suvidha Kendras (JSK) established across all cities as citizen collection centers; Wide array of digital payment gateways enabled with a 5% special rebate. Presently, more than 20% property tax is collected online. d) Use of IT Tools and Technology A comprehensive Property Tax Management System was deployed to generate Demands and 15-digit Unique Property IDs for individual surveyed houses, which is mandatory for all property registrations in Jharkhand. Functionalities include: IT-enabled Property Tax Calculator on Self-Assessment Form (SAF) based on category, construction year, zone, and built-up area; e-Payment facilities with digital rebate; Automated SMS reminders for pending dues; e-Generation of legal notices to defaulters under Sections 184 and 187 of Jharkhand Municipal Act, 2011; Web-based tax inquiry and “Know Your Tax Collector” portal; Online system operating with an accuracy up to 99.97%. e) Cross Mapping Technique To resolve the 3U’s issue, property tax records were cross-mapped with building bye-laws, Water User Charges, Solid Waste User Charges, and Municipal Trade Licenses. Property Tax ID was made mandatory for property registration. f) Increased IEC Activities Deployed extensive awareness drives: public camps, miking, nukkad nataks, cinema hall slides, cable TV, pamphlets, wall writings, school classroom sessions, and catchy rhymes to appeal directly to taxpayers. Figure 1: Success Story : Jharkhand Revenue Augmentation No. of Assessed Property: Increased from 4.37 Lakh (2016-17) to 8.48 Lakh (31 Mar 2022). Unassessed Coverage: Unassessed Households decreased by 35%. Arrears Recovery: Decrease in arrears by 20% and non-responsive demand deactivated. Digitization: 100% digitization of legacy records and web-based application rollout. Digital Payments: Citizens pay via portal with 5% online rebate; >20% collected digitally. IT Precision: PT collection accuracy reached unprecedented 99.97%. National Benchmark: Coverage and collection exceed 90% (AMRUT and JnNURM benchmark). 15th FC Recognition: Recognized as one of the best practices in self-sustainability in 15th FC Report. Pioneer State: Jharkhand became the 1st State to initiate Capital Value based property tax in line with 15th FC. Government of Jharkhand is committed to continue this reform journey to make its cities engines of growth, Atmanirbhar and financially sustainable. References India, Government of, Ministry of Urban Development (2005). Jawaharlal Nehru National Urban Renewal Mission (JnNURM). December. India, Government of, Ministry of Urban Development (2015). Smart City Guidelines, June 2015. India, Government of, Ministry of Urban Development (2015). Atal Mission for Rejuvenation and Urban Transformation (AMRUT). June 2015. India, Government of, (2021). The Report of the Fifteenth Finance Commission (2022-2026). India, Government of, Ministry of Housing & Urban Affairs (2022). Reform Toolkit for AMRUT 2.0; 2022. India, Government of, Ministry of Housing & Urban Affairs (2022). Draft City Financial ranking Guidelines; 2022. India, The High Powered Expert Committee (HPEC); Report on Indian Urban Infrastructure and Services, 2011. India, Assessment of Revenue And Expenditure Patterns In Urban Local Bodies Of Maharashtra, Department Of Economics, University of Mumbai, 2005. Annual Financial Statements of Selected Municipalities.

Public Finance Inroads made for Chartered Accountants in Public Financial Management Authors: CA. Kemisha Soni & CA. Prasanna Kumar D • Members of the Institute • Contact: kemishasoni288@gmail.com, prasanna@icai.in & cpf.aslb@icai.in • The Chartered Accountant | May 2023 (pp. 59–61 / Journal pp. 1235–1237) “Government plays an important role in a country’s progress and economy. Its proper accounting & financial reporting is essential for enhancing transparency and accountability in financial operations of the Government and quality decision making.” “As a partner in nation building, the Institute of Chartered Accountants in India (ICAI) through its one of the Non-standing Committee namely Committee on Public and Government Financial Management (CP&GFM) is contributing to support the Government of India (GoI) to improve their accounting, financial reporting and public financial management system in India.” Continuous Dialogue with stakeholders ICAI is in continuous dialogue with the Ministry of Housing & Urban Affairs, Ministry of Panchayati Raj, Ministry of Rural Development, O/o Controller General of Accounts (CGA), O/o Comptroller & Auditor General (C&AG) of India, relevant State Government Departments and other stakeholders to offer them organisational support to strengthen accounting, financial reporting and management in Government in India. Accounting Standard setting i. For Central and State Government(s) President, ICAI is a Member of the Government Accounting Standards Advisory Board (GASAB), constituted by the C&AG of India, that formulates Accounting Standards for Central & State Governments and Union Territories. ICAI actively participates in their meetings and submits technical inputs on draft Standards and various other documents of GASAB from time to time. Currently, the focus of GASAB is to adapt cash based International Public Sector Accounting Standards (IPSASs) to Government Accounts for which ICAI is providing technical support. ii. For Local-self Government / Local Bodies ICAI through CP&GFM is formulating Accounting Standards for Local Bodies (ASLBs)1 to harmonise diverse accounting practices that are being followed in Local Bodies. ASLBs are based on international benchmark IPSASs, modified considering peculiar operations of Local Bodies and Indian conditions. A total of 31 ASLBs have been issued till date2 including one cash based ASLB to facilitate transitioning from cash to accrual accounting. ASLBs issued by the Council of ICAI are recommendatory in nature and become mandatory from dates specified by respective State Governments. Uttarakhand has incorporated implementation of ASLBs in their State Municipal Accounts Manual. “ICAI through CP&GFM has prepared and submitted a suggested roadmap for phased implementation of ASLBs in Urban Local Bodies (ULBs).” CP&GFM has also submitted representations to the States suggesting suitable amendments required in respective State Municipal Acts to enable smooth implementation of accounting reforms. ICAI is pursuing State Urban Departments to undertake research studies to understand the impact of ASLB implementation on accrual based Financial Statements in local bodies. Historically, ICAI through the ICAI Accounting Research Foundation (ICAI ARF) had assisted the Municipal Corporation of Delhi (MCD) and Kolkata Municipal Corporation (KMC) in implementing accounting and financial management reforms, which opened this pioneering practice area for Chartered Accountants. ICAI has released several publications on various aspects of Public Finance and Government Accounting3. Recently, ICAI (through CP&GFM & ICAI ARF) and NITI Aayog released a joint Research Study on “Transition to Accrual Accounting: Models and Learnings for ULBs” covering the reform journey of selected States with an indicative 18-month transition timeline and key milestones. Strategic Collaboration: MoU with NIRD&PR, Hyderabad A Memorandum of Understanding (MoU) was signed between ICAI (CP&GFM) and the National Institute of Rural Development and Panchayati Raj (NIRD&PR), Hyderabad to collaborate for: development of accounting/auditing standards for rural local bodies; ensuring accountability and transparency through social audit; maintenance of proper books of Accounts & Finance by rural development functionaries; better systems of internal audit and control through data mining; and preparation of detailed project reports (DPR) by rural micro and small entrepreneurs. Capacity Building Exercise The Committee is actively involved in capacity building of accounts and finance staff across all tiers of Government in India and Public Sector Undertakings (PSUs) through webinars4, workshops, training programmes, and e-learning modules5 on: Implementation of accrual accounting systems including sustenance; Financial management reforms and capital market access for municipal bonds; Revenue augmentation to support Local Bodies in becoming self-reliant and self-sustainable; e-GramSwaraj and overview of Audit Online; and other contemporary public finance topics. Institutional Partnership with Government of Tamil Nadu An MoU has been signed between ICAI (CP&GFM) and the Commissioner of Treasuries and Accounts, Government of Tamil Nadu for knowledge transfer and skill development of their officials. In pursuance of the same, multiple training sessions have been organized with more in the planning stage. Certificate Course on Public Finance & Government Accounting (14 Modules)6 CP&GFM conducts this landmark Certificate Course to equip ICAI members and Government officials, having already trained around 2,500 participants: 1. Public Finance 2. Public Revenue & Taxation 3. Public Debt 4. Public Expenditure 5. Government Accounting 6. Accounting Rules & Processes (General & Specific Ministries) 7. Union Accounts 8. State Accounts 9. Accounting/Auditing of Constitutional, Statutory, Autonomous & Regulatory Bodies 10. Accounting in Local Bodies (Urban and Rural) 11. Internal Control and Risk Management 12. Public Financial Management (PFM) 13. Panchayati Raj Institutions (PRIs) 14. Professional Opportunities for CAs in Public Finance & Govt. Accounting Professional Opportunities for Members Chartered Accountants can play an eminent role in Government across diverse domains: improving accounting, financial reporting & management, auditing, budgeting, drafting, implementation & audit of various Government schemes, and enabling efficient and smooth functioning of day-to-day operations of the Government for better service delivery and optimal resource utilization. ICAI is actively pursuing Government Organisations to explore the possibility of establishing a separate accounts and finance cadre in Government including Local Bodies, and engaging Professionals in Accounts, Audit and Finance Departments either on permanent roles, contractual basis, or as advisors. “Certificate Course on Public Finance & Government Accounting organised by CP&GFM has been recognised by the O/o C&AG for allotment of marks in empanelment criteria of CA firms.” The course is also given preference by multiple Government Departments and Municipal Corporations in tender allotments and project assignments. Conclusion Accounts prepared based on Accounting Standards ensure transparency and accountability in financial operations of the Government and quality decision making. Government is the biggest spender of Indian economy. Therefore, there is an urgent need to standardise Government Accounts. ICAI is pursuing Government to adopt Accounting Standards (that are converged IPSASs) across all levels of Government. The involvement of professionals in the Public Finance and Government Accounting domain is scarce as of now. Therefore, the ICAI is focussing on creating awareness amongst Chartered Accountants to develop this one of the least explored practice areas and exploring possibilities of engaging more members in this field. Footnotes & Official References Text of ASLBs is available at: https://www.icai.org/post.html?post_id=1527 Two ASLBs (ASLB 2 Cash Flow Statements and ASLB 5 Borrowing Costs) and “Guidance Note on Accounting for Investments” for Local Bodies have been mandated by Council of ICAI for Members of ICAI w.e.f. 1st April 2022 to comply with while auditing financial statements of ULBs. Publications issued by CP&GFM are available at: https://www.icai.org/post/icai-publications-cpgfm Recordings of webinars are available at: https://icaitv.com/category.php?cat_id=22 E-learning modules are available at: https://icaitv.com/category.php?cat_id=21 Details about Certificate Course are available at: https://www.icai.org/post/certificate-course-cpgfm. CP&GFM also launched online self-paced courses available at: https://www.icai.org/post/cpgfm-self-paced-courses

Corporate Finance Project Management: Finance Perspective Author: CA. Sumti Bhadani • Member of the Institute • Contact: sumti.bhadani29@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 62–69 / Journal pp. 1238–1245) The success of any organisation depends on how well it can deliver its products & services to customer. However, before it can deliver its product which meets customer expectations, it needs to undertake certain projects to develop the products or services or innovate to meet the customer expectations. Some Organisation in fact are in the long-term infrastructure business where the business itself is a combination of individual projects which they need to deliver to their customer. Thus, Project Management is very crucial for any organization as the success of the delivered projects (internal or external) will ensure the success and growth of the organization. Post-COVID, all the major governments have pushed for infrastructure spending which is important to boost & revive the economy from the impact of COVID-19. India too is not an exception and has started pushing for infrastructure projects. The same was also seen in Union Budget 2021, 2022 and 2023 where the government has allocated Rs. 5.54 Lacs Crore, Rs. 7.54 Lacs Crore and Rs. 10 Lacs Crore respectively (Note 1) as capital expenditure. Further as per Indian Infrastructure Sector in India Industry Report, India plans to spend US$ 1.4 trillion on infrastructure between 2019 to 2023. With so much amount being spent on infrastructure projects, project management becomes very crucial to ensure the projects are completed not only on time but with the right quality and cost. However, in our current & past projects, we have seen that there are lot of delays and cost overrun. Below is the data from Ministry of Statistics and Program Implementation, Government of India (MoSPI) for ~1,718 projects in India which shows only 17% of the projects are either on schedule or ahead of schedule. Further due to delays and other factors there is an anticipated cost overrun of INR 4.4 trillion (as per report in Aug 2021). Running Late: MoSPI Infrastructure Project Monitoring (~1,718 Projects) MoSPI monitors central infrastructure projects of ₹150 crore and above (Report: August 2021 | Image Source: Livemint Newspaper) Delayed Projects: 560 Projects No Date of Commissioning: 871 Projects On Schedule: 275 Projects Ahead of Schedule: 12 Projects Original Cost Anticipated Completion Cost Cost Overrun (19.9%) Cumulative Expenditure (47.49%) Cost Overrun Projects Both Cost & Time Overrun ₹ 22.0 Trillion ₹ 26.4 Trillion ₹ 4.4 Trillion ₹ 12.5 Trillion 470 214 The above data clearly shows that most of the projects are delayed and there is a cost overrun. In this case, it is very important to implement robust Project Management plans to ensure organization achieves the three critical goals of any project i.e. Cost, Time and Quality. In this article, the major terms & process of Project Management is discussed. Key Terms A. What is Project Management? Project Management can be defined as the process of leading the resources and using specific tools, knowledge, and techniques to achieve the project objectives. A Project can be of anything i.e. infrastructure projects (Construction of roads, buildings etc), development of new processes to improve the organization’s profitability, venturing into new businesses etc. Project Management focuses on: How to bring & take together the different cross-functional resources. Ensure that there is full coordination and corporation within them. It also involves handling the disputes between people. Making a trade-off between various projects objectives esp. Time, Cost & Quality. “One of the distinguishing features of project management is that it has a finite timespan as all the projects have a start and endpoint. Any delay in the closure of the Project has a bigger repercussion in terms of an unsatisfied customer, additional cost, reduced quality etc. Thus, it becomes more crucial for the Project Managers to have a greater understanding of the various Project Management tools & techniques to successfully complete the projects.” B. What is Project Team? The Project Team includes the people from various cross-functional teams who join the projects and once it is completed move back to their functional team. The critical players in the project teams depend upon the type of projects, for e.g. in the case of infrastructure projects it will be: 1. Project Sponsor / Project Director: Funds the projects and is the key leader of the project. 2. Project Manager: Responsible for overall project management and ensuring project achieves objectives. 3. Project Operation Manager: Responsible for day to day operations; ensures no breakdown or operational hindrance. 4. Project Engineer: Responsible for design of the product and its functioning per objectives. 5. Project Supply Chain Manager: Manages overall supply chain, including timely availability of material. 6. Project Sourcing Manager: Responsible for procurement of material & services at right quality and cost. 7. Project Contract Manager: Ensures execution within purview of contract agreed between contractor and customer. 8. Project Controller: Responsible for monitoring and control of the financials of the projects. 9. Project Production Manager: Responsible to produce products at right quality, cost & time. 10. Project Planning Manager: Tracks project progress and ensures project completion on time. There can be a few additional roles based on the requirement of the project. C. What is Project Life Cycle? 1. What is Life Cycle: A Project life cycle covers the phases through which each project goes from start to completion. In general, there are 4 phases: a. Conceptualization Phase b. Planning Phase c. Execution Phase d. Termination Phase 2. What are Gate Reviews: Gate Reviews in simple terms are checkpoints to ensure project progress is in line with objectives without surprises. It helps project managers track: Understand current status and readiness to move forward; Time, quality, and cost tracking; Identify variances against the plan and take corrective actions; Identify risks in the project and develop mitigation plans. The number of gate reviews and timing are defined at the beginning of the project and cannot be changed without prior approval of senior management. Each review highlights bottlenecks and establishes reviewed action plans. Sample Gate Reviews Flow: Project Initiation ➔ Initial Design ➔ Detailed Design ➔ Proto Build ➔ Validation ➔ Serial Production ➔ Early Life Support ➔ Project Closure Project Management: Key Processes from a Finance perspective A. Project Reviews Critical to have regular reviews with the cross-functional team to detect issues early and avoid surprises: 1. Weekly: Track open items, operational conflicts, and detailed line-by-line review of milestones. 2. Quarterly / Yearly: Broad status presented to Senior Management with intensive focus on the financial performance of the project. B. Controlling & Monitoring 1. Work Breakdown Structure (WBS): Divide the entire project into a hierarchical WBS and assign KPIs (Quality, Cost, Time) and dedicated ownership to each element. Project XYZ (Budget ₹80 Cr) Activity A (Budget ₹30 Cr) • WBS A1: Budget INR 10 Cr• WBS A2: Budget INR 20 Cr Activity B (Budget ₹35 Cr) • WBS B1: Budget ₹15 Cr• WBS B2: Budget ₹20 Cr Activity C (Budget ₹15 Cr) • WBS C1: Budget ₹5 Cr• WBS C2: Budget ₹10 Cr 2. Physical Progress vs Actual Cost Incurred: For long-term projects, tracking actual expenditure against physical progress is vital. Any variance indicates slippage or cost overrun: S-Curve Analysis at Cut-Off Date (June 2021): Planned Activities (Original Plan): 80% (Scheduled target) Actual Work Completion: 40% (40% delay slippage) Actual Cost Incurred: 45% (Additional 5% cost overrun over physical progress) C. Risk Register A Risk Register records risks and mitigation plans. Key components: 1. Identification: Defines risk and source of occurrence. 2. Quantification: Quantifies financial impact into: (a) Maximum / Risk Before Mitigation, and (b) Most Likely / Risk After Mitigation (residual risk + mitigation cost). 3. Classification: Categorized into technical, commercial, contractual, etc. 4. Mitigation Plan & Tracking: Actions, ownership, and tracking status. 5. Probability: Likelihood of occurrence; high probable risks demand immediate management action. S.No. Particulars Considered in Forecast Probability PIC Closure Date Mitigation Action Max Potential Most Likely 1 Increase in the Raw Material price No High xx Dec-21 To negotiate with suppliers 1000 100 2 Delay in the project by xx months No Medium xx Feb-22 Pull addl. resource to meet current timeline XX XX 3 Change of Design xx to xx No Low xx Feb-22 XXXX XX XX D. Savings Register Records all cost-saving opportunities to enhance project margins: 1. Identification: Defines ideas and application. 2. Quantification: Evaluates Maximum Potential and Most Likely savings. 3. Review Progress & Realization: Action items, PIC, and implementation tracking. S.No. Particulars PIC Date Action Max Potential Most Likely 1 Common validation with xx project xx Dec-21 Commanization of resource 1000 100 2 Negotiation Savings xx Feb-22 Negotiation on going with supplier XX XX E. Opportunity Management 1. Variation Orders: Additional activities requested by customers outside original scope offer opportunities to earn extra work and augment margins. Contract clauses defining calculation methodologies must be adhered to. 2. Options: Contracts with options allowing procurement increases at agreed prices. Exercising deadlines must be monitored and highlighted to customers proactively. F. Working Capital Management 1. Billing & Collection: Invoices with supporting documents must be raised promptly upon achieving contract billing milestones. 2. Cash-Outs: Classified into: a. Capex: One-time expenditures for capability/capacity. Split into (i) Project Specific Capex (used exclusively, then scrapped/handed over), and (ii) Common Capex (used across projects). b. Operational: Revenue expenditures for day-to-day project activities (travel, salary, rent). 3. Cash Performance Indicator (CPI): CPI = Current Cash Status – Planned Cash Status Where: Cash Status = Cash Received – Cash Out. Positive CPI signifies a healthier cash position than budget; negative CPI warrants immediate root-cause remediation. G. Contract Management: Essential Financial Clauses a. Payment Terms: Days for payment, required attachments, advance recovery clauses. b. Bonds & Guarantees: Types required and conditions for progressive reduction. c. Retention Money: Percentage retained and milestone release schedule. d. Statutory Schemes: Project Import Scheme, Advance Licenses, Duty Drawback. e. Reimbursements: Direct reimbursable expenses outside fixed contract price. f. Change in Law: Protections and price escalation guidelines for statutory shifts. g. Price Variation Clause (PVC): Formulas compensating commodity and FX fluctuations. h. Claim Management: Procedures for customer-induced delays, site access failures, or data gaps. i. Dispute Resolution: Escalation tiers, timelines, and formal dispute notice protocols. H. Change in the Contract Schedule: Acceleration vs Delay 1. Acceleration: When customer requests completion prior to original schedule. Project Managers must deploy added resources, evaluate cost/quality impacts, negotiate compensation and revised quality metrics before proceeding. 2. Delay: a. Customer Delay: Late inputs or site access. Costs are fully claimable subject to contractual notice and detailed documentary proof. b. Contractor Delay: Execution/recruitment delays. Costs are unclaimable; customers may levy liquidated damages. Remedies: add resources, negotiate time extensions without cost claims, outsource work packages, or uncover savings in the savings register. I. Sharing of Project Learnings (Post-Mortem Knowledge Transfer) J. What Went Wrong: Examines deviations impacting time, cost, or quality. Document: (i) Root cause, (ii) Identification trigger, (iii) Mitigation applied. K. What Went Well: Captures positive achievements exceeding plan. Document: (i) Improvement ideas, (ii) Identification & implementation method. Conclusion Project Management is a complex process, however, if done right, it can ensure that the objectives of projects are achieved. Above are some of the processes which must be deployed by the project managers to identify risks in the project and mitigate the same or find additional savings. Notes & References Note 1: Business Today News dated 6th Feb 2022: Budget 2022: How the capex push through infrastructure is likely to play out; and The Economic Times dated 4th Feb 2023: Budget 2023: Infrastructure-led economic growth to benefit all.

Corporate Finance Valuation of Start-Ups – A deep dive Author: CA. Rahul Goel • Member of the Institute • Contact: ca.goelrahul@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 70–74 / Journal pp. 1246–1250) Outside/third-party funding is a low-cost mechanism for Start-ups to raise funds for their businesses. In view of the same and exponential rise and growth of Start-up ecosystem in India has led to increased funding requirements from Start-ups, whether on private placement basis or through capital markets. Accordingly, the mechanism for valuation of Start-ups has gained prominence over the past few years. Indian regulators are also taking keen interest in this exercise and creating conducive policy environment by appointing nodal authorities and/or making relevant policy changes under various Indian laws to regularize this field. In this article, I have discussed few aspects that are relevant and should be kept in mind while valuing a Start-up. I have also discussed few common approaches and methods that are generally used for valuation of Start-ups in India and around the world. ‘Start-ups’ has been a buzz word for some time now. This has been possible due to the much-needed impetus provided by the policy makers especially by Government of India. In 2016, the Government of India announced its flagship initiative for building start-ups (‘Start-Up Scheme’) and nurturing innovation with the main objective to boost entrepreneurship, economic growth and employment across India. Under the Start-Up Scheme, several benefits were granted to start-ups from legal perspective, funding support, fast tracking of patent applications at lower costs, benefits under Income-tax Act, 1961 etc. This policy initiative had a favourable impact on the entire Start-Up ecosystem and as a result number of start-ups were set-up in India. As on December 24, 2022, more than 86,350 start-ups have been recognised under Start-Up Scheme and around 993 Start-Ups have been granted income tax related exemptions. Further, as per data available on Start-Up India website more than 3,260 start-ups have been funded by SIDBI Funds of funds1. India currently houses the 3rd largest start-up ecosystem in the world after US and China. As per media reports, as at July, 2022 India had 105 start-ups with valuation of over $1 billion or having the coveted ‘Unicorn status’2. In past few months, entities from start-up community like Zomato, Paytm, Policybazaar, Nykaa etc. have raised capital from Indian stock markets. Many others like Ola, OYO, Flipkart etc. are said to be in process of getting their equity shares listed on Indian Stock Exchanges. These facts prove India’s potential in becoming the Start-Up capital of the world and also lays emphasis on their valuation. What is a Start-Up Under the Start-Up Scheme, a Start-Up has been defined as an entity incorporated or registered in India which: a) Is a private limited company or registered partnership firm or a limited liability partnership; b) Has not yet completed a period of ten years from the date of incorporation/registration; c) Has an annual turnover not exceeding Rs. 100 crores for any of the financial years since incorporation/registration; d) Is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation; and e) It is not formed by splitting up or reconstructing a business already in existence. Valuation aspects to be kept in mind for valuing Start-Ups 1) Subjectivity and Non-Exact Nature Valuations of start-ups or new-age businesses are integral to the business ecosystem, aiding strategic decision-making and governance. However, business valuation is not an exact science; although it uses data, facts, and reports, it is prone to subjectivity based on user interpretation, underlying assumptions, and valuation purpose. 2) Early-Stage Complexity & Market Volatility Start-ups often raise funding early when cash flows and future visibility are not streamlined and depend heavily on regulations, competition, and market shifts. A notable example is the sharp post-listing fall in equity prices of start-ups in capital markets vis-à-vis their issue price due to shifting investor expectations. 3) Pre-Revenue Valuation Considerations In cases where only a working prototype exists without commercialization, valuation relies significantly on qualitative factors: promoter pedigree, strength of the business model, and business execution plans. 4) Maximizing Observable vs Minimizing Unobservable Inputs To curtail subjectivity, valuers must maximize observable inputs (publicly available market transaction data, active market quoted prices) and minimize unobservable inputs (internal entity-level cash flow forecasts). 5) Pricing Sensitivity and Dilution Impact Because start-ups prefer raising equity capital with minimal operating history, valuation precision is vital: Valued Below Fair Value: Causes excessive, unnecessary equity dilution of promoter stake. Valued Above Fair Value: Deters potential investors, leading to fundraise failure. Approaches and methods for valuation of Start-ups 1. Market Approach The most preferred approach for early-stage start-ups when recent transactions in similar business models exist. Minimizes unobservable inputs and reflects market expectations. Computed via two primary methods: a) Comparable Public Company Method: Identifies a comparable listed peer and makes necessary adjustments for size, liquidity, and operational divergence. b) Precedent Transactions Method: Benchmarks recent public acquisition/funding transactions in similar entities, applying appropriate valuation adjustments. “Market Approach is the most preferred vis-à-vis other approaches especially in case of early-stage start-ups especially in a scenario where transactions have happened in recent past in entities with similar business models and size.” 2. Income Approach (Discounted Cash Flow) Applied when the start-up can project future free cash flows with reasonable certainty, discounted by a risk-adjusted rate reflecting the premium over risk-free investments. Regulatory Scrutiny Warning: Tax authorities in India actively compare valuation DCF projections against actual post-investment performance during Income-tax audits (e.g., Angel Tax assessments under Section 56(2)(viib)), sparking widespread litigation currently pending across various appellate forums. 3. Cost Approach (Asset-Based Approach) Estimates the reproduction/replacement cost of business assets adjusted for obsolescence. Rarely suitable for start-ups, as their primary value lies in intellectual property, growth potential, and network effects rather than physical asset accumulation. Primarily used in capital-heavy entities or liquidations. Other Specific Methods for Start-Ups a) Exit Multiple / Venture Capital Method Designed for VC investors aiming for a medium-term liquidity exit rather than permanent holding. Follows 3 steps: Step 1: Compute expected terminal exit selling price of the venture investment at exit horizon. Step 2: Determine target ROI hurdle rate (e.g., 2x, 3x, 5x, 10x). Step 3: Discount terminal value by target ROI to arrive at post-money valuation, deducting investment capital to derive pre-money valuation. b) Score Card Method Compares a pre-revenue target start-up against funded peers across weighted strategic criteria (team, market size, competition, funding need, marketing approach): Table b: Score Card Valuation Framework Criteria Score (A)# Weight (B)# Factor (A * B) Strength of the team120%0.300.360 Size of market80%0.150.120 Competitive environment100%0.250.250 Need for additional investment100%0.150.150 Strength of marketing approach150%0.150.225 Total Factor (X)1.105 Value of comparable Start-up (Y)1,00,000 Value of Start-up under discussion (X * Y)1,10,500 Note # - Weight can be decided by the valuer basis the facts of the case and its comparable(s). Further, Score needs to be determined considering the relative performance of the Start-up with its comparable on a given set of criteria. c) Berkus Method (Dave Berkus Model) Named after American angel investor Dave Berkus, valuing early pre-revenue start-ups by assigning discrete monetary values across five building blocks: Table c: Berkus Method Valuation Framework Criteria Range* Value assigned Sound idea0 to 3,50,0003,00,000 Technology0 to 3,50,0002,50,000 Management team0 to 3,50,0002,75,000 Strategic relationships0 to 3,50,0002,25,000 Production and subsequent sales0 to 3,50,0002,50,000 Final value of Start-up under discussion13,00,000 Note * - Range can be decided by the valuer basis the facts of the case, its comparable(s) and after considering the maximum value that he is willing to allocate to a particular criterion. d) Risk Factor Summation Method Takes an initial computed base value and applies quantitative monetary additions or deductions based on risk profile across management, reputation, competition, capital, technology, legal, and political exposures. “The Risk Factor Summation Approach values a startup by taking into quantitative consideration all risks associated with the business that can affect the return on investment.” Table d: Risk Factor Summation Valuation Framework Criteria Level of risk Value assigned* Initial computed value-10,00,000 Risk related to the managementLow+50,000 Reputation riskNormal- Competition riskHigh-75,000 Funding/ capital riskNormal- Technology related riskHigh-75,000 Legal riskHigh-50,000 Political riskLow+75,000 Final value of Start-up under discussion9,25,000 Note * - Value is assigned to each risk basis the facts of the case and its comparable(s). Conclusion As can be seen from above, there are a number of methods that can be used for valuation of Start-ups. There is no right or wrong method and any of the above methods can be used considering the facts and circumstances of the case including but not limited to nature of business, stage of start-up (i.e. whether pre-revenue, revenue commencement stage, post revenue), availability of listed peers, recent market transactions in similar space etc. The approach and method to be selected for valuation of Start-up should be such that use of observable inputs should be maximized to arrive at the valuation. Footnotes & References Start-Up Scheme Portal: https://www.startupindia.gov.in/content/sih/en/startup-scheme.html Invest India Unicorn Landscape (July 2022, 105 unicorns with $338.50 Bn total valuation): Invest India Unicorn Landscape

Corporate Finance Foreign Direct Investment – Key considerations and practical aspects Author: CA Anshul Kumar • Member of the Institute • Contact: eboard@icai.in • The Chartered Accountant | May 2023 (pp. 75–79 / Journal pp. 1251–1255) Foreign Direct Investment (‘FDI’) has been one of the most crucial components of India’s economic growth story in recent years. FDI, in addition to being a key driver of economic growth, has been a significant non-debt financial resource for India’s economic development. Foreign investors can invest directly in India, either on their own or through joint ventures in virtually all the sectors except in a very small list of activities where foreign investment is prohibited. FDI has been coming into India because of the Government’s supportive policy framework, vibrant business climate, rising global competitiveness and economic influence. Since 1991, the regulatory environment and the process to get FDI has consistently been eased to make it investor-friendly, catapulting India into the position of one of the fastest-growing economies of the world. India has emerged as one of the top destinations for FDI globally. As per the Economic Survey 2023, India has received the highest ever FDI amounting to USD 84.84 billion in the financial year 2021-22. UNCTAD World Investment Report (WIR) 2022 has ranked India at the 7th rank among the top 20 host economies for 2021, in terms of FDI. Mauritius has traditionally been the leading country from where investments were made into Indian companies. As per the FDI data available on Department for Promotion of Industry and Internal Trade (DPIIT) website, Mauritius still ranks number one in terms of cumulative FDI received from April 2000 till December 2022, with a total FDI equity inflow of USD 162.5 billion which constitutes more than one-fourth of the total FDI equity inflow in India during this period. However, after the amendment in the Double Taxation Avoidance Agreement with Mauritius, where the capital gains exemption was removed from April 2017, the FDI inflows from Mauritius have reduced significantly and now Singapore and USA are leading the pack (considering the last three-year data of FDI inflow). Top Investing Countries: FDI Inflows (Amount in USD billions) Country 2020-21 (April–March) 2021-22 (April–March) 2022-23 (April–Dec.) Cumulative Equity Inflow (Apr 2000–Dec 2022) Mauritius 5.6 9.4 4.7 162.5 Singapore 17.4 15.9 13.1 144.0 U.S.A. 13.8 10.5 5.0 59.1 Netherlands 2.8 4.6 2.2 43.4 Japan 2.0 1.5 1.4 38.4 FDI in India is governed by the Foreign Exchange Management Act (‘FEMA’) and the regulations of the Reserve Bank of India (‘RBI’). FDI is considered as a Capital Account transaction as per the provisions of FEMA, because it is an investment in the share capital of an Indian company. Capital Account transactions are generally allowed only to the extent it is specifically permitted. FDI is governed by the Consolidated FDI Policy of India which is reviewed and amended from time to time. Department for Promotion of Industry and Internal Trade (DPIIT) is the nodal department of Government which reviews and revises the FDI policy. Who can invest? The Foreign Direct Investment (FDI) policy in India allows for investment from eligible investors who are either individuals, entities, or governments located outside of India: i) Non-Resident Indians (NRIs): Indian citizens who reside outside of India can invest in Indian companies through the FDI route. ii) Foreign Individuals: Foreign nationals who are not of Indian origin can also invest in Indian companies through the FDI route. iii) Foreign Institutional Investors (FIIs): Foreign pension funds, mutual funds, and hedge funds registered with SEBI to invest in Indian stock markets. iv) Foreign Venture Capital Investors (FVCIs): SEBI-registered foreign entities investing in specialized sectors: technology, biotechnology, and R&D. v) Foreign Companies: Can establish subsidiaries/JVs or make strategic equity investments in Indian start-ups and established companies. vi) Sovereign Wealth Funds: Government-owned investment funds eligible to invest in Indian companies subject to specific conditions. vii) Multilateral & Bilateral DFIs: Institutions like World Bank, Asian Development Bank (ADB), and IFC are eligible to invest via FDI. Restrictions on FDI from Land-Border Countries (Government Approval Route) An entity of a country that shares a land border with India (Afghanistan, Bangladesh, Bhutan, China, Nepal, and Pakistan), or where the indirect beneficial owner of an investment is situated in or is a citizen of any such country, can make investment only under the Government Approval route. Example: If a company based in Canada wishes to make an investment in an Indian company, but the Canadian entity is ultimately held by a Chinese company, prior approval from the Government of India is mandatory. Who can receive investment? FDI is allowed in most sectors, with a few exceptions. Investment can be made either through the automatic route or the approval route: (i) Prohibited Sectors / Activities Lottery Business including Government/private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Chit funds. Nidhi company. Trading in Transferable Development Rights (TDRs). Real Estate Business or Construction of Farm Houses. (Note: ‘Real estate business’ does not include development of townships, construction of residential/commercial premises, roads, bridges, and SEBI-registered REITs). Manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes. Activities/sectors not open to private sector investment: (I) Atomic Energy and (II) Railway operations (other than permitted activities per para 5.2). Note: Foreign technology collaboration in any form (franchise, trademark, brand name, management contract) is strictly prohibited for Lottery Business, Gambling and Betting. (ii) Approval Route Subject to prior approval from Government of India or RBI. Applicable to sensitive sectors like telecom services, media, civil aviation, and brownfield pharmaceuticals. (iii) Automatic Route Permitted in all sectors not listed under prohibited or approval routes without prior clearance, subject to post-inflow reporting. Note: Certain sectors have statutory equity caps under automatic route (e.g., 49% in Power Exchanges and Insurance Companies). (iv) Eligible Recipient Entities Indian Companies: Eligible to receive FDI up to prescribed sectoral caps. Limited Liability Partnerships (LLPs): Eligible only in sectors where 100% FDI is allowed under automatic route without FDI-linked performance conditions. Proprietorships & Partnerships: Generally ineligible. NRIs may invest on a non-repatriable basis (excluding agriculture/plantation, real estate, or print media). NRIs and non-residents may invest on a repatriable basis under Government Approval. Trusts: FDI is prohibited in trusts, except in SEBI-registered Venture Capital Funds and Investment Vehicles (e.g., InvITs/REITs). Modes of FDI in India Foreign investors can invest in India through three recognized eligible instruments: (i) Equity Investments Subscription to new equity shares or acquisition of existing equity shares. Can include partly paid equity shares. (ii) Compulsorily Convertible Preference Shares (CCPS) Must be fully paid-up and mandatorily convertible into equity shares at a specified date/event to qualify as FDI. (iii) Compulsorily Convertible Debentures (CCDs) Treated at par with equity for FDI purposes provided they are fully paid-up and mandatorily convertible into equity shares. Vital Legal Distinction: While equity shares may be partly paid, CCPS and CCDs must be fully paid-up and mandatorily/fully convertible. Any non-convertible or optionally convertible preference shares or debentures are treated as debt and must strictly comply with External Commercial Borrowings (ECB) guidelines. Compliance Requirements All foreign investments are regulated by FEMA and RBI guidelines and must be reported on the RBI online portal: (i) At the time of receiving the money: Separate Bank Account: Mandatory separate bank account for inward private placement remittances. Banking Channels & FIRC: Inward remittance received through RBI-approved channels (preferably SWIFT) to secure Foreign Inward Remittance Certificate (FIRC) and investor KYC. 30-Day Reporting: Inflow reporting to RBI within 30 days of receipt via the online FIRMS portal (https://firms.rbi.org.in). (ii) Valuation of shares: Valuation must be certified by a Registered Valuer per Companies Act 2013 and RBI regulations. Conducted per internationally accepted pricing methodology on arm’s length basis (unlisted: Discounted Cash Flow / DCF method; listed: SEBI ICDR Regulations). Valuation report submitted to RBI along with investment reporting forms. (iii) Allotment of shares & Form FC-GPR: Allotment must be completed within 180 days from the receipt of inward remittance. Shares cannot be allotted below the minimum fair value floor price determined under RBI pricing guidelines. Allotment reported to RBI using Form FC-GPR within 30 days of allotment via the online FIRMS portal. (iv) Annual Filing of Foreign Liabilities and Assets (FLA) Return: Mandatory annual filing for all Indian companies and LLPs that have received foreign investment. Filed online on the RBI FLAIR portal (https://flair.rbi.org.in/fla/) by July 15 every year for the previous fiscal year ending March 31. Mandatory even if there is no fresh foreign investment or zero outstanding foreign assets/liabilities during the year. Angel tax provisions on FDI (Finance Act, 2023 Amendment) The recent Finance Act 2023 brought in taxation provisions under Section 56(2)(viib) on the share premium received by Indian companies from non-resident shareholders as well (where share premium received exceeds fair market value computed per Indian Income-tax Rules). Previously, Section 56(2)(viib) was confined solely to resident investors. Extending Angel Tax to foreign investors introduces potential tax friction and unwarranted litigation risks across large FDI inflows entering Indian ventures. Conclusion In conclusion, India’s FDI regulations have undergone significant reforms in recent years to attract more foreign investment into the country. The Government has taken several measures to liberalize the FDI regime and make it more investor-friendly by simplifying procedures, easing restrictions, and increasing transparency. However, investors should be aware of the sectoral caps, entry routes, and other regulatory requirements before investing in India. It is recommended to seek professional advice and due diligence before making any investment decisions. Overall, India offers significant opportunities for foreign investors, and the country’s growing economy, vast market, and skilled workforce makes it an attractive destination for FDI.

International Taxation Supreme Court of France upholds a novel view on beneficial ownership of income from Royalties Author: CA. Aniket Barve • Member of the Institute • Contact: aniketbarve164@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 80–84 / Journal pp. 1256–1260) Beneficial ownership has been one of the most debated topics in international taxation. Most of the Double Taxation Avoidance Agreements have incorporated the concept of ‘beneficial owner’ condition for availing the advantageous provisions of the tax treaties. We have seen tax authorities and Courts denying treaty benefits since the recipient of certain income is not a beneficial owner. Due to this tax as per domestic provisions of respective jurisdictions needs to be discharged. But, in a recent case of Planet Fitness, the judicial authorities of France have applied the tax treaty provisions of the true beneficial owner of such income. Introduction The situs of taxation resulting from the ‘beneficial ownership’ of income has been a vexed issue under the Income tax laws. Beneficial ownership is significant from an international tax perspective since it is one of the conditions to claim relief under the double taxation avoidance agreements (‘tax treaties’ or ‘DTAA’). What complicates things is the absence of a definition of the term beneficial owner in the tax treaties. As a result, beneficial ownership has been construed in a general sense along with certain International judicial precedents and tax commentaries like Organisation for Economic Co-operation and Development (OECD): In a general sense1: A ‘beneficial owner’ is a person who enjoys the benefits of ownership even though the title to some form of property is in another name. As per OECD2: Beneficial owners are always natural persons who ultimately own or control a legal entity or arrangement, such as a company, a trust, a foundation, etc. This provision is primarily used in various tax treaties to prevent treaty abuse i.e. claiming unintended benefits under tax treaties by resorting to tax avoidance strategies or routing transactions through intermediaries or conduits. Indian Jurisprudence Benchmark: The Bharti Airtel Ruling3 In the ruling of Bharti Airtel, Bharti Airtel availed foreign credit from a Swedish Bank for the purchase of equipment. The Bank later novated the terms of the loan and transferred the liabilities to 5 different parties, thereby acting as an arranger/intermediary of this loan. Bharati Airtel had obtained a declaration and a certificate of residence from the Swedish bank that their income is not taxable in India. Accordingly, Bharati Airtel paid interest to the Swedish bank, believing that they are not liable to tax in India as per the India-Sweden tax treaty. The Revenue held that to avail the treaty benefits on interest, Swedish Bank needs to be a beneficial owner of such interest. An arranger of the loan was not considered a beneficial owner of interest but a mere conduit or facilitator since the Swedish bank had transferred the liability to 5 other parties. Accordingly, the beneficial provisions of the tax treaty were denied. Taxes were required to be withheld by Bharati Airtel on interest paid to the Swedish Bank as per Indian domestic income tax rules. As it can be observed from the example above, favourable provisions under the tax treaty were denied since beneficial ownership of the underlying interest income was not established. Ordinarily, when tax authorities encounter such a case where the recipient of income is not the beneficial owner, treaty benefits are sought to be denied and taxes as per domestic laws are required to be discharged. But, the French tax authorities went a step ahead in a similar case which has led to an interesting judgment of the Supreme Court of France - the Conseil d’État, on the concept of ‘beneficial owner’. In the case of Planet Fitness Group (20th May 2022, # 444451, Société Planet; concl. C. Guibé)4, the Supreme Court of France recently passed a ruling on beneficial ownership of royalty income earned by the French company Planet Fitness Group (Planet). The Supreme Court of France has ruled that where a treaty benefit is denied on account of the conditions of beneficial ownership not being satisfied, the tax authorities may apply the tax treaty provisions of the jurisdiction which is the true beneficial owner of such income. So, this is going further than the usual course of action of applying for beneficial ownership only as an anti-abuse tool. Brief facts of the case5 Planet is a French company involved in the fitness and wellness sector. Planet entered into an agency agreement with a New Zealand-based company (NZ Company) and acquired distribution rights to fitness programs initially owned and developed by the NZ Company. Planet paid a royalty to the NZ Company as a consideration. Further, Planet distributed this program to local fitness groups in France against a license fee. Original Contractual Structure: NZ Company: Owned and developed fitness programs. Planet (France): Acquired distribution rights directly from NZ Company and paid Royalty. Local French Entities: Planet distributed program to fitness groups in France against License Fees. Revised Triangular Sub-Distribution Scheme: Two group companies under common control of Planet in Belgium and Malta entered into distribution agreement with NZ Company. Belgium Co & Malta Co entered into sub-distribution agreement with Planet (France). Planet paid Royalty to Belgium Co and Malta Co. Planet sub-licensed to local French entities against License Fees. View of the French tax authorities The French tax authorities held that Belgium and Malta are mere conduits, and the ultimate beneficial owner of this royalty is the NZ Company. The authorities stated that since Belgium and Malta are not the beneficial owners, the rates of tax on royalty as per these Double Tax Avoidance Agreements cannot be applied while withholding taxes on the royalty by Planet to their group entities under the sub-distribution agreement. But the French tax authorities contended that in the present case, since the jurisdiction of the beneficial owner is known, the tax rate as per France - New Zealand Treaty might as well be used for withholding of taxes. Accordingly, for the royalty paid to Belgium and Malta, the tax rates as per France - New Zealand Treaty was applied by the French tax authorities. Issues under consideration before the French Court: Will the treaty benefit on royalty under France - Belgium DTAA and France - Malta DTAA be denied based on beneficial ownership test not being satisfied? Further, is the France - New Zealand Treaty application for the payments made to Belgium and Malta valid? Whether NZ Company qualified as the beneficial owner of the royalty? The Ruling of the French Court On the first question: It was held that the provisions of the France - New Zealand DTAA were applicable to the royalty, the beneficial owner of which is a resident of New Zealand, even though these royalties have been paid to an intermediary established in a third State. On the second question: The Supreme Court of France remanded the matter back to the subordinate authority to consider afresh whether the NZ Company can be considered a beneficial owner of the royalty. Analysis: Affirmative Interpretation of a Negative Provision For the first time, the Supreme Court has upheld such a treatment that where the treaty with the recipient country does not apply for lack of beneficial ownership, the tax treaty of the actual beneficial owner is to be considered for withholding taxes. This indicates an affirmative interpretation of a negative provision. In the revised arrangement of sub-distribution, Planet’s rights of distribution of the fitness program were indirectly acquired by back-to-back arrangements. It was contended that the primary purpose behind this arrangement was to carry out some tax arbitrage on the royalty tax rates by establishing a triangular structure with the group entities. Comparative analysis of royalty tax rates across DTAAs in question Jurisdiction / Treaty Royalty Withholding Rate Article 12 Treaty Provision French Domestic Law 26.5% Standard statutory domestic withholding required on royalties paid to non-residents. France - Belgium DTAA6 0% (Exempt) Taxable only in the state of residence of recipient. Exemption on withholding of taxes on royalties paid/attributed. France - New Zealand DTAA7 10% May be taxed in source state, but if recipient is beneficial owner, tax shall not exceed 10%. France - Malta DTAA 10% Provisions mirror the New Zealand treaty (concessional 10% rate). From the above treaty analysis, it is evident that routing royalties through Belgium where there is no withholding requirement is more beneficial to Planet than the first arrangement from a tax perspective. Where Belgium is not considered a beneficial owner, Planet would have had to withhold taxes on such royalty paid at 26.5% on denial of treaty benefits. Even with Malta, the tax is at a concessional rate of 10%, hence Planet is better off in this case. But, the French tax authorities extended the benefit of the alleged beneficial owner of the royalty and reduced the incentive in this strategy to some extent. A purposive interpretation of the term beneficial owner in line with OECD guidelines is said to have been made by the Supreme Court of France while upholding this treatment. OECD Commentary on Beneficial Ownership (Article 12, Paragraph 1)8: “The requirement of beneficial ownership was introduced in paragraph 1 of Article 12 to clarify how the Article applies in relation to payments made to intermediaries. It makes plain that the State of source is not obliged to give up taxing rights over royalty income merely because that income was immediately received by paid direct to a resident of a State with which the State of source had concluded a convention. The term “beneficial owner” is therefore not used in a narrow technical sense (such as the meaning that it has under the trust law of many common law countries), rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance. Subject to other conditions imposed by the Article, the limitation of tax in the State of source remains available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, in those cases where the beneficial owner is a resident of the other Contracting State (the text of the Model was amended in 1995 to clarify this point, which has been the consistent position of all member countries). States which wish to make this more explicit are free to do so during bilateral negotiations.” Reference was drawn to the part where the Commentary refers to an intermediary, such as an agent or nominee, interposed between the beneficiary and the payer. Since it is stated that limitation of tax in the State of source (i.e., France in the present case) is available even when an intermediary (Belgium and Malta) is interposed, the Supreme Court went ahead with the provisions of France - New Zealand DTAA to the payments made to Belgium and Malta. The other interesting aspect is the words “paid to a resident” in the France - New Zealand tax treaty. If interpreted strictly, the said treaty will not apply since the royalty is not paid to a resident of New Zealand. But, the expression “paid to a resident” is interpreted liberally, to provide a benefit to the assessee. The PURC Matrix: 4 Factors to Determine Beneficial Ownership The second question, i.e., whether in the scheme of arrangement of sub-distribution, New Zealand can be regarded as the beneficial owner of Royalty, has been remanded back to the French tax authorities to carry out a detailed factual analysis. For this determination, available facts are analysed based on 4 factors—Possession, Use, Risk and Control (PURC Matrix)9, derived from international and domestic court decisions: 1. Possession10 Ownership, control, or occupancy of any object or asset. Possession of income is established by receipt of income or exercise of dominion in one’s own right. Precedent: Pune ITAT in Imerys Asia Pacific (P.) Ltd Vs DDIT [2016] 69 taxmann.com 454 held: recipient must receive interest and royalty in its own right and not act as a mere conduit. 2. Use The recipient must have the right to benefit directly from the income and be free to decide its utilization (e.g., expansion, dividend distribution, saving) without any contractual or legal obligation to pass on such income. 3. Risk Apart from enjoying returns, the recipient must bear economic and business risks. Any contractual agreement passing on risk or loss indicates an absence of risk borne by the intermediary. 4. Control Refers to who has the ultimate authority to influence decisions and actions. The true beneficial owner must retain full, unhindered control over the income. PURC Matrix Applied to Belgium & Malta Intermediaries: Whether Belgium and Malta companies are receiving royalty in their own right (possession) must be deliberated. One view is that they are merely sub-distributing rights to French counterpart Planet without outside commercial engagement, acting as mere intermediaries rather than direct possessors. Regarding Use and Control, because contractual back-to-back obligations existed to pay royalty to NZ Company against distribution rights, Belgium and Malta companies cannot be said to directly benefit from or retain full control over the income. Conclusion To sum up, determining the beneficial ownership is heavily a fact-specific exercise. Factors like the ultimate control and use and risks being borne determine the beneficial ownership of any income stream. For the lack of a proper definition, beneficial ownership remains a significant aspect of tax controversy. It will be interesting to see how the French tax authorities interpret this arrangement from the lens of beneficial ownership. Nevertheless, the Supreme Court ruling should be considered a welcome step in the beneficial ownership jurisprudence. This will also impact other income streams like interest and fees for technical services (FTS) and royalty. References & Case Citations Beneficial owner definition: https://www.investopedia.com/terms/b/beneficialowner.asp OECD Beneficial owner definition: https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf TS 141 ITAT 2014 (Del) (Bharti Airtel ruling on conduit loan arranger). French Court Ruling: Conseil d’État, 20 May 2022, No. 444451, Société Planet; concl. C. Guibé Lexology tax update: https://www.lexology.com/library/detail.aspx?g=f2906da5-21f7-4e93-8e00-bfa70d281cd6 France - Belgium tax treaty: https://treaties.un.org/doc/Publication/UNTS/Volume%20557/volume-557-I-8127-English.pdf France - New Zealand tax treaty: https://taxpolicy.ird.govt.nz/en/tax-treaties/france OECD Commentary on Model Tax Convention: https://www.oecd.org/tax/treaties/47643872.pdf Beneficial Ownership Saga: Article by CA Vijaykumar Puri in The Chartered Accountant Journal January 2022 issue. Possession definition: https://www.law.cornell.edu/wex/possession

Capital Market “Algorithm Trading”- A Path of Trading with Technology Author: CA Shubham Dosi • Member of the Institute • Contact: shubham.mng@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 85–91 / Journal pp. 1261–1267) Algorithm-based stock trading (Algo-Trading) now become a preferential approach to building substantial wealth for potential traders or investors in the financial market. Trading with technology and automation makes revolutionary transformation in the financial market which gives ample opportunity to get high returns on financial market assets and financial instruments via following accurate approaches. Financial market assets include equities, shares, securities, currency or commodities, etc. Algo trading is a way to generate real cash in a portfolio with zero errors and extensive accuracy. In this ongoing “FIN-TECH” era, everybody looks chance to achieve financial growth and make a sight to accomplish the values of Algo trading strategies on which the entire world can believe. Retail traders make trading based on technical research and short-term market trends which are thoroughly distinct from fundamental research and long-term trend. Simultaneously high net worth investors always focus on long-term growth and value addition in wealth. Algorithm-based Investing is a strategy to build a healthy investment portfolio with the help of combined techniques defined under technical as well fundamental research which generate higher returns because of its significant research on various short terms as well long-term trading or investing methodologies. For instance, a trader has a strategy to buy 100 stocks when its 75 days simple moving average price goes above 360 days’ moving average price (A moving average is an average of previous prices for a defined timeline). Global Market Scale: The global market size of algorithm-based trading was valued at around USD 12.14 billion in 2020 and is expected to reach USD 31.54 billion by 2028 with a Compounded Annual Growth Rate (CAGR) of around 12.67%. What is Algorithmic Trading Algorithmic Trading is also termed Algo-based trading or black box trading or automated trading. Via using the supervised learning approaches in computer programming where algorithms have been trained by providing the diversified large size data set of the financial market to determine trends, patterns, and structure of data. Based on the outcomes derived through the trained data system can recognize relations in various parameters like volume, order size, price, time, frequency, or any ideal model of the data set, build logic, understand the limitation, and focus on giving the best results with least errors. With the help of tremendous research on historical data or on trained data, we can set logic or build a command which helps us to execute the next trade as and when fulfilling the defined criteria or logic. Algo-based and logic-based trading increase the chances and probability of arising high profit in every trade. It’s impossible for a human being to compete with the speed and accuracy of trade executed with the support of a computer program. The benefit of Algo trading is not restricted to only high-profit opportunities but also renders wider options to execute trade systematically in large market size. In a simple term, we can say that Algo trading is trading via a pre-defined trading ideology to execute the trade with at most high frequency in the share market. Trading ideology needs to be set in a computer through coding or algorithms to execute the trade as and when the defined instructions meet all the criteria depending on order size, price, time, volume, or any other mathematical strategy. Illustrative Rule-Based Logic: Illustration 1 (Breakout Rule): User has set an algorithm like as and when any share or security breaks 52 weeks low record then automatically order of buy 75 shares at new lowest 52 weeks low price should trigger. Illustration 2 (Relative Momentum Rule): The User has set a program if the share price of XYZ Limited changed more than their industry average change (in terms of percentage) then trade should execute. Illustration 3 (Moving Average Crossover Rule): Buy 50 Shares of XYZ Limited if its 25-day moving average goes above the mark of the 200-day moving average before 3 PM. How does Algorithmic Trading differ from Traditional Trading In a traditional trading approach, traders or investors always have to focus on market trends and wait till their expected outcome which may arise or not to execute a trade deal of specific share or securities at a specific rate and volume. The understanding of market trends is not just limited to understanding macro factors but includes understanding industry, segment, and micro factors. The trader has to place manual orders and wait until the actual level is reached. If the price fails to touch that level, the trader must modify orders manually, necessitating continuous, time-consuming monitoring. In algorithmic trading, traders or investors are much more competent to trade without human intervention at a pre-defined rate and volume and it takes less than a fraction of second timing to execute an accurate deal. The entire trading process systematically executes entire trades and realized real-time gain (loss). With the support of supervised or unsupervised learning techniques in machine learning1, programmers build logical code modules based on historical data research, cross-correlating multiple quantifiable factors (volume, rate, frequency). Algorithmic Trading (Technology-Driven) Real-time automated monitoring and trade execution Sub-second execution speed (fraction of a second) 100% execution accuracy (zero human error) Zero emotional bias or fatigue Cost-effective and scalable across multiple asset classes Traditional Trading (Manual) Heavy reliance on continuous manual screen monitoring Slow, prone to execution delays and missed price levels High risk of manual errors and erroneous inputs Vulnerable to emotional obstruction (fear/greed) High recurring time and opportunity costs Process Flow Comparison: Algorithmic vs Traditional Trading Stage Algorithmic Trading Route (Technology) Traditional Trading Route (Manual) Initial Phase Define Trading Strategy ➔ Programmer Formulates Algorithm ➔ Coding & Logic Configuration. Understand Financial Markets ➔ Analyze Market & Stock/Share Trends Manually. Order Placement Automated order routing with pre-set volume, limit rates, and trigger conditions. Manually place Buy/Sell order with specified volume & rate. Trading Execution Conditions fulfilled? ➔ Instant Automatic Trade Execution in milliseconds. Wait & review till expected level touched. If reached ➔ Manually execute trade; If not ➔ Manual order modification. Result & Impact Realized Profit & Loss with systematic execution, cost reduction, and zero emotional bias. Realized Profit & Loss burdened by high execution risk, time consumption, and human intervention limits. Strategies for Algorithmic Trading Algorithmic trading requires patience, calmness, discipline, and emotional detachment to perform flawlessly. It’s necessary not to obstruct strategies when under execution. Time availability is also critical. Below are the five prominent algorithmic trading strategies: 1. Arbitrage Trading Strategy Trades or invests in two different markets to exploit real-time price discrepancies. For instance, if a security trades simultaneously on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), the algorithm buys where the price is lower and sells where higher in microseconds, capitalizing on minute price spreads multiplied by large trading volumes. 2. Momentum & Trend-Based Strategy The simplest and most popular strategy, following mathematical moving average crossovers. E.g., system buys 50 shares of XYZ Ltd if its 45-day moving average crosses above its 200-day simple moving average, or sells 100 shares of ABC Ltd when its 60-day moving average drops below the 200-day moving average. 3. Statistical Arbitrage Strategy An intensive short-term quantitative approach identifying price inexpediencies and misquotations between highly correlated peers in the same sector. E.g., between TCS and Infosys: if TCS rallies with the IT sector but Infosys lags, the algorithm purchases Infosys expecting a mean-reversion catch-up rally, exiting once parity is restored. 4. Options Trading Strategy Aims to capture bid-ask spread variations and swap differences. Extensively utilized in Foreign Exchange (Forex) risk hedging, where algorithms continuously monitor real-time forward rate premiums to execute, roll over, or cancel forward covers at points of highest profit, lowest risk, or optimal breakeven before maturity. 5. Valuation Strategy Scans all listed securities on exchanges using key valuation multiples (Price-to-Book / P/B, Price-to-Earnings / P/E, Forward P/E) to pinpoint mispriced assets. For example, if a company with a Book Value of ₹160 trades at ₹95, the algorithm identifies the discount and executes purchases, selling once market valuation converges to book value. Advantages of Algorithmic Trading Algorithmic trading is an entirely technology-enabled process absolutely free from human emotions, delivering speed, discipline, and accuracy: Technology Enabler & Machine Learning: Logically back-tested across technical and fundamental data. Immense historical data research empowers algorithms to apply sophisticated analytical skills. Artificial Neural Networks: Under Deep Learning, Artificial Neural Networks (ANN)2 model the human brain’s neural processing to analyze complex data sets and generate optimal trading decisions. Uncompromising Accuracy: Eliminates human error (fat-finger inputs, latency errors, emotional hesitations). Permanent Cost & Time Reduction: Significantly curtails per-transaction overheads and eliminates hours spent in manual chart watching. Multi-Asset Exposure: Traders can participate across diverse sectors, geographies, and instruments without in-depth individual asset expertise, leveraging quantitative developer models. Superior Returns (Alpha Generation): Generates high returns with minimized risk, delivering excess returns above market expectations known as Alpha. Core Pillars of Algorithmic Trading Technology Enabler Time Saver Accuracy Secured Return Permanent Cost Reduction Think Like Human Disadvantages and Risks of Algorithmic Trading Uncontrollable Black-Swan Factors: No algorithm can achieve 100% forecasting precision. Macro shocks—such as inflation spikes, sudden Foreign Institutional Investor (FII) disinvestments, global federal interest rate hikes, unexpected tax law modifications, and geopolitical governance uncertainties—cannot be fully anticipated or coded into algorithms. Overfitting & Execution Vulnerability: Algorithmic rules built upon historical market datasets may perform disastrously in unprecedented or hostile market environments. High Infrastructure Costs: Successful deployment requires significant capital investments in programmer fees, quantitative research costs, specialized data feeds, robust hardware, and ongoing system maintenance. Conclusive Opinion: “Trading with Technology” Over the past many years, we have seen extreme revolutionary reforms and decisions taken in favor to amplify ample opportunities in the Fin-Tech era whose preliminary objective is to enhance the capability to make high profits and build an effective portfolio with the support of technology enablers. Trading or investing with an algorithm is in huge demand nowadays and rapidly increasing every day. Algorithm Trading can give the opportunity to get high returns and high performance provided the trader or investor has to keep patience and follows the adequate approach. Footnotes & Industry References ICAI Journal Technical Reference on Machine Learning: https://resource.cdn.icai.org/61382cajournal-oct2020-13.pdf Allied Market Research Algorithmic Trading Market Report: https://www.alliedmarketresearch.com/algorithmic-trading-market MarketsandMarkets Algorithmic Trading Market Analysis: https://www.marketsandmarkets.com/Market-Reports/algorithmic-trading-market MyFinDoc Algorithmic Trading Strategies: https://www.myfindoc.com/blog/5-algorithmic-trading-strategies

Corporate Governance Corporate governance: Analysing the role of Stewardship Code in India Author: Agrima Aron • Law Scholar • Contact: agrimaaron@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 92–98 / Journal pp. 1268–1274) The Indian Stewardship Code was introduced by the Securities and Exchange Board of India (SEBI) in 2017, with the aim of promoting good corporate governance practices and enhancing transparency and accountability among Indian companies. This research paper aims to analyse the impact and effectiveness of the Stewardship Code in promoting responsible stewardship and investor protection. The research begins by providing an overview of the Stewardship Code and its key provisions, including its principles, disclosure requirements, and reporting mechanisms. It then examines the role of institutional investors and Indian companies, analysing their behaviour and their significance in corporate governance practices. The research also explores the benefits and challenges of the Stewardship Code. However, the study also identifies certain challenges in the effective implementation of the Code, such as the lack of enforcement mechanisms, limited awareness among investors, and the need for greater standardization of reporting. Overall, the research concludes that the Indian Stewardship Code represents a positive step towards promoting good corporate governance practices and protecting investor interests in India. However, to fully realize its potential, there is a need for greater awareness and education among stakeholders, stronger enforcement mechanisms, and a more coordinated approach to implementing the Code. Introduction One could argue that in the modern world, corporations increasingly only have capitalist objectives. Today’s economy and various facets of business life have begun to move towards capitalism. However, this capitalism needs to be kept in control. In a globalised world, maintaining ethical and just business practises is just as crucial as maximising earnings. All company stakeholders anticipate good governance in this situation, more specifically, effective corporate governance. While it is the responsibility of businesses to abide by the standards of recognised governance principles, it is equally crucial for key stakeholders to maintain checks in order to bring about maximum efficiency. Every business stakeholder, including customers, employees, and shareholders, is involved in this, albeit to varying degrees and capacities. Significant institutional investors include mutual funds and insurance companies. These investors made investments in publicly traded companies and now retain those investments as custodians for the holders of those investments, or stewards. The institutional investors must make sure that the investee company will keep high levels of corporate governance standards because the state of governance is a crucial factor. Therefore, it is believed that this Institutional company should participate actively in the general meetings of investee companies and interact with the managements at a high level to improve their governance in order to safeguard the interests of the Client/beneficiary. This results in the client’s interests being protected. For institutional investments in India, SEBI released the Stewardship Code 2019, which took effect on April 1st, 2020. In order to increase investor involvement and transparency, this Code places a number of obligations on institutional investors who invest in listed companies in the form of principles. This Principle helps institutional investors carry out their stewardship obligations and raise the Beneficiary’s worth. “The institutional investors must make sure that the investee company will keep high levels of corporate governance standards because the state of governance is a crucial factor.” Indian Stewardship Initiatives & Institutional Landscape The need for a specialised stewardship code has only recently been acknowledged, despite regulatory efforts over the past ten years in India having allowed for greater shareholder involvement and participation. The need for such a rule in India was highlighted in 2016 by the Financial Stability and Development Council (FSDC), an organisation that works to harmonise different financial authorities. Several committees and working groups have vehemently urged SEBI to release a uniform stewardship rule for India’s financial markets in the interim. It is obvious that the UK Stewardship Code had an effect on the procedure. The India-UK Financial Partnership recommended in November 2016 that the Indian regulators adopt an “Indian Stewardship Code,” which “will strengthen the ability of Indian shareholders to perform their fiduciary duties, improve the relationship between the boards of Indian companies and their shareholders, and help foster shareholder loyalty.” In March 2017, the IRDAI released a list of governance code suggestions for Indian insurance companies. In accordance with these regulations, insurers are expected to put in place specific stewardship standards that operate on a comply-or-explain basis. The Stewardship Code finally went into force in July 2020. SEBI Alternative Investment Funds (AIF) Classification (2012 Regulations)1: Category I: Venture Capital, Small and Medium Enterprises (SMEs), Infrastructure, Social Ventures, Angel funds, etc. Category II: Private Equity (PE) funds, debt funds. Category III: Hedge funds, funds trading to make short-term returns. Landmark Judicial Anchor: Life Insurance Corporation v. Escorts Ltd. (1986)2 The Supreme Court of India held that LIC, as an institutional investor, can call for an extraordinary general meeting (EGM) to vote on the removal and replacement of directors in the interest of insurance policyholders. This historic judgment recognized the active fiduciary responsibility of institutional investors in corporate governance in India. “Comply or Else” vs. “Comply or Explain”: The Indian corporate governance paradigm has traditionally been anchored in the American “comply or else” model, where legal mandates enforce adherence and impose stringent statutory penalties for non-compliance due to historical instances of corporate fraud. Conversely, the UK and OECD nations rely upon “comply and explain” frameworks tailored to institutional structures. The 2019 Stewardship Code marks a distinctive hybrid transition towards codified fiduciary standards. Influence from the UK Stewardship Code At least 10 stewardship codes are currently in use globally, primarily rooted in the UK model. The UK Financial Reporting Council (FRC) issued the first Stewardship Code in 2010 in response to the 2008 global financial crisis. It requires institutional investors to: Publicly publish their policy on how they will carry out their stewardship responsibilities. Maintain and publicly disclose a robust conflict of interest management policy. Systematically monitor investee companies. Establish precise escalation criteria to protect and enhance shareholder value. Collaborate with other institutional investors when necessary. Regularly report on stewardship actions and maintain a clear, disclosed voting policy. The 6 Principles of the Indian Stewardship Code Principle 1: Stewardship Policy Formulation3 Institutional investors must formulate a comprehensive stewardship policy, approved by the Board of Directors, and publicly disclosed online. Covers monitoring, risk control, capital structure, and value creation. Reviewed within 3 months of circular (dated 17.02.2020). Principle 2: Managing Conflicts of Interest4 Identify conflict zones and establish a detailed policy prioritizing client/beneficiary interests. Mandates separation of Conflict of Interest Committees, voting functions, and client relations, with blanket investment bans where severe conflicts exist. Principle 3: Monitoring Investee Companies5 Continuous monitoring proportionate to company size, covering financial performance, board leadership, management quality, related party transactions, ESG risks, and shareholder grievances, while strictly adhering to insider trading regulations. Principle 4: Active Intervention & Collaboration6 Clear triggers for intervention: poor performance, governance failures, excessive remuneration, leadership issues, and ESG non-compliance. Establishes regular board dialogues and collaboration mechanisms with peer institutional investors. Principle 5: Voting Rights & Disclosure7 Exercising voting rights actively rather than showing blind faith in management. Mandates comprehensive public disclosure of voting policies and detailed records of all actual proxy votes cast on company websites and annual reports. Principle 6: Periodic Reporting of Stewardship8 Periodic reporting to clients and public disclosures on stewardship actions implemented by investment committees and equity teams, ensuring transparency and institutional accountability. Behaviour of Institutional Investors in Indian Companies While promoters maintain near-100% attendance, institutional investor participation has seen steady gradients. In 2019, ITC recorded the highest institutional participation rate (93.61%). The vast majority of resolutions pass with little resistance, indicating investor loyalty. Active institutional “voice” is predominantly focused on the appointment/reappointment and remuneration of directors and auditors: TABLE: Data on Institutional Investors from Top Companies9 Name of the Company Number of Institutional Investors That Cast Their Votes Decision on Appointment / Reappointment & Remuneration of Directors Decision Regarding Dividends 2019 2020 2019 2020 2019 2020 HDFC Bank 86.089 86.379 0.148 0.251 0.00 0.00 Infosys 70.235 77.844 0.536 0.079 0.00 0.00 ITC 92.241 89.130 0.713 0.122 0.00 0.129 Hindustan Unilever 75.478 80.975 17.291 0.250 0.00 0.00 Critical Drawbacks in the Indian Stewardship Code 1. Absence of Specific Enforcement Mechanisms While SEBI rules impose stewardship obligations on mutual funds and AIFs, they stop short of defining concrete penal consequences for breaches. Without explicit punitive deterrence, there is significant risk of compliance deteriorating into superficial box-ticking. 2. International Proxy Advisories Remain Unregulated Indian regulations regulate domestic proxy firms but fail to exercise jurisdiction over influential global proxy advisors like Institutional Shareholder Services (ISS) and Glass Lewis & Co. For instance, their aggressive opposition to the appointment of industry veterans Deepak Parekh, Dr. Bimal Jalan, and Bansi Mehta to the HDFC Board led to two resignations prior to voting. Such foreign proxy firms frequently impose rigid Western corporate governance templates that ignore the contextual nuances of Indian enterprise structures. 3. Limitations of the “Comply-or-Explain” Strategy IRDAI’s comply-or-explain regime presumes high shareholder monitoring capacity and transparency. However, empirical studies (e.g., Arcot & Bruno, LSE 2006) revealed that in the UK, over 50% of companies violated governance codes without providing precise justifications, and 15% provided no explanation at all10. In developing markets like India, soft comply-or-explain structures prove ineffective without rigorous administrative enforcement. Conclusion: Transitioning to “Apply and Explain” The Stewardship Code represents a vital catalyst in strengthening corporate governance, enhancing investor confidence, and disciplining investee managements. However, the current framework exhibits notable gaps: lack of formal dispute resolution mechanisms and an excessively narrow scope limited solely to listed equities (excluding diversified alternative holdings). The Way Forward: India must progressively transition from “comply-or-explain” to an “apply-and-explain” model—demanding institutional investors disclose empirical actions taken and recorded outcomes achieved, rather than merely stating forward-looking intentions. Footnotes & References SEBI (Alternative Investment Funds) Regulations, 2012. Life Insurance Corporation v. Escorts Ltd., 1986 AIR 1370 (Supreme Court of India). Indian Stewardship Code, 2019 (Principle 1). Indian Stewardship Code, 2019 (Principle 2). Indian Stewardship Code, 2019 (Principle 3). Indian Stewardship Code, 2019 (Principle 4). Indian Stewardship Code, 2019 (Principle 5). Indian Stewardship Code, 2019 (Principle 6). BSE India Corporate Governance & Shareholder Voting Data: https://www.bseindia.com/ Arcot, S.R. and V.G. Bruno, ‘In Letter but not in Spirit: An Analysis of Corporate Governance in the UK’ (2006), London School of Economics.

Technology Is the Efficiency of Blockchain Technology from an Accounting Perspective Adequate or 4- Dimensional Customized Entry and Reporting System Required? Author: Dr. Asha Sharma • Academician • Contact: drashasharma.sharma07@gmail.com / eboard@icai.in • The Chartered Accountant | May 2023 (pp. 99–105 / Journal pp. 1275–1281) The paper aims to understand the chronological changes and dimensions in accounting. The paper is focused on presenting the relationship among modern technology i. e Accounting 4.0. The paper aims to analyze the efficiency of Blockchain technology from accounting, reporting, and governance perspectives. Also, an attempt has been made to present a more efficient 4-Dimensional Customized Entry and Reporting System to improve the efficiency of Blockchain Technology from various accounting perspectives. Data has been collected through a structured questionnaire to know the efficiency of blockchain technology from an Accounting Perspective. Kruskal Wallis test has been used to test the hypotheses. The adequacy of efficiency of blockchain technology from an accounting and auditing perspective is found adequate, but it is not found a significant technique to present financial reporting and to maintain corporate governance. The demand for more specified, robotic, trustworthy, and customized accounting has been generated. A new ideology was evaluated to make accounting and financial reporting more trustworthy among stakeholders in form of four-dimensional accounting technology in the area of accounting. Introduction According to a global forecasting report “Market size of the blockchain is forecasted to USD 67.4 billion by 2026 from USD 4.9 in the year 2021, at a Compound Annual Growth Rate (CAGR) of 68.4% by 2026.” It shows that the emergence of this technology has made a revolutionary change in market size and growth in the area of Accounting. Changing scenarios and dynamic development in techniques have transformed the traditional bookkeeping and accounting system and replaced it with a more secure triple accounting system. Accounting is now assembled with technology. So this is the time to join technology with accounting and focus on Acco-tech. For providing optimum services accounting has turned towards machine learning. The emerging blockchain technology, according to the chairman of the Wall Street Blockchain Alliance, “now gives us a powerful method to share and access value.” The application of blockchain accounting in presenting financial reports has increased, as it has the potential to reduce fraud and increase transparency and trust. Blockchain is expected to transform the present accounting system and potential applications that can strengthen the timeliness, quality, and accuracy of accounting information. There is a need to study the applicability of blockchain technology to the normal accounting cycle in emerging economies. Changing time keeps the business away from the technique applied in the last six centuries, the traditional accounting system. Blockchain can improve financial reporting, transparency, and monitoring aspects of corporate governance. The demand for more specified, robotic, trustworthy, and customized accounting has been generated. There is the requirement for a dynamic 4-dimensional Customized Entry and Reporting System. Review of Literature Based on the review of the literature, it is tried to present the need for triple entry that goes to blockchain technology and to measure the efficiency of the disruptive technology: Pappalardo et al. (2018): Inefficiencies of the Bitcoin system demonstrate that when a large fraction of transactions is not processed timely, severe issues arise regarding dependable time-stamping applications and incentive structures. Ojo PhD (2019): Highlights that in financial reporting, the combination of Artificial Intelligence (AI), vertical integration, and blockchain systems will inevitably expand. Sharma (2020): Discusses how blockchain enhances supply chain collaboration, trust, inventory turnover, productivity, and eliminates reliance on paper-intensive manual methods. Rahmawati et al. (2021): Blockchain reduces fraud, simplifies reconciliations, enhances audit efficiency, and improves statutory compliance across accounting functions. Supriadi (2020): Demonstrates how blockchain enables auditors to conduct seamless audit traces, asset ownership verification, and transaction authentication. Kolesnikov et al. (2020): Evaluates cyber-physical systems integrating multi-agent frameworks, IoT, Big Data, and blockchain to solve complex logistic and operational problems. Pignatti (2020): Analyzes blockchain applicability in e-identities, asset registries, tax compliance, and public administration smart contracts. Pedreño, Gelashvili, and Nebreda (2021): Concludes that blockchain will radically transform traditional accounting paradigms following ongoing technological advances. Core Research Questions: Is blockchain technology adequately efficient and effective in accounting, auditing, financial reporting, and corporate governance perspectives in comparison to traditional accounting systems? Is there any need to improve this three-layer-based blockchain technology to make it more efficient from various perspectives? Research Methodology & Hypotheses I. Research Design: Exploratory research design based on literature review and empirical survey. II. Data Collection: Primary data via structured questionnaire covering accounting, auditing, reporting, and governance. III. Sample Size: 220 questionnaires sent; 132 fully completed and utilized. Analyzed using Likert 5-point scale. IV. Statistical Tool: Kolmogorov–Smirnov normality test (non-normal data); Kruskal-Wallis Test applied for hypotheses. Hypotheses Formulated: H01: There is no significant difference between the efficiency of traditional and Blockchain technology of a firm from an accounting perspective. H02: There is no significant difference between the efficiency of traditional and Blockchain technology of a firm from an auditing perspective. H03: There is no significant difference between the efficiency of traditional and Blockchain technology of a firm from a financial reporting perspective. H04: There is no significant difference between the efficiency of traditional and Blockchain technology of a firm from a corporate governance perspective. Result and Discussion (Kruskal-Wallis Test Results) Table 1: Test Statistics – Accounting Perspective (H01)a,b a. Kruskal Wallis Test | b. Grouping Variable: 2D TO 3D Statistic AC1 AC2 AC3 AC4 Chi-Square15.11712.2187.6137.867 df3333 Asymp. Sig. (p).002.007.055.049 Result: Since p < 0.05 across most variables, null hypothesis H01 is REJECTED. A statistically significant difference exists between traditional and blockchain accounting. Blockchain significantly improves efficiency, reduces time, reduces errors, and strengthens security and integrity, though transparency remains questionable. Table 2: Test Statistics – Auditing Perspective (H02)a,b a. Kruskal Wallis Test | b. Grouping Variable: 2D TO 3D Statistic AD1 AD2 AD3 AD4 AD5 Chi-Square16.35916.98917.1892.38415.652 df33333 Asymp. Sig. (p).001.001.001.497.001 Result: Since p < 0.05, null hypothesis H02 is REJECTED. Significant difference observed; blockchain provides superior audit trails and fraud mitigation, though respondents note perceived operational risks remain high. Table 3: Test Statistics – Financial Reporting Perspective (H03)a,b a. Kruskal Wallis Test | b. Grouping Variable: 2D TO 3D Statistic FR1 FR2 FR3 FR5 FR4 Chi-Square7.61310.1647.9232.8284.802 df33333 Asymp. Sig. (p).055.017.048.419.187 Result: Since p > 0.05 in most cases, null hypothesis H03 is ACCEPTED. Blockchain does not show a statistically significant advantage over traditional systems for presenting financial reports to diverse stakeholders, establishing the necessity for a customized 4D reporting framework. Table 4: Test Statistics – Corporate Governance Perspective (H04)a,b a. Kruskal Wallis Test | b. Grouping Variable: 2D TO 3D Statistic GV1 GV2 GV3 GV4 GV5 Chi-Square10.501.358.5912.8284.146 df33333 Asymp. Sig. (p).015.949.899.419.246 Result: With p > 0.05 across majority indicators, null hypothesis H04 is ACCEPTED. Blockchain’s three-layer structure lacks the necessary standardized governance frameworks, clear guidance, and behavioral flexibility. Proposed 4-Layer Accounting System: 4-Dimensional Customized Entry & Reporting (2022) The empirical results prove that while 3-layer blockchain technology is adequate for basic bookkeeping and auditing verification, it falls short in financial reporting and governance. To resolve this, a 4-Dimensional (4D) Customized Entry and Reporting System is evaluated (Sharma A., 2022). 1. Debit Traditional entry side capturing destination/application of economic resources. 2. Credit Traditional entry side capturing origin/source of economic obligations. 3. Trebit (Digital Authorization) Digitalized authorization of the transaction via cryptographic digital signatures ensuring immutable provenance. 4. Foreit (Customized Reporting) Auto-generated customized reporting and stakeholder communication structured dynamically based on user role and regulatory needs. “The system will work beyond the traditional accounting system of debit and credit recording of the transaction. Trebit is digitalised authorisation of the transaction. And foreit is relating to auto generated customized reporting system and communication on the basis of nature and role of the stakeholders” Conclusion The complexity of transaction recording has been increasing day by day in the time of changing scenarios and disruptive technologies era. Blockchain technology has to be one of the biggest innovations of the era of industry 4.0. Blockchain’s implementation makes the presentation of financial statements and reporting a significant manner. Blockchain technology is going to become a need of the era to maintain the accounting system. It can be concluded that Blockchain technology is more efficient in comparison to traditional accounting systems adopted in a firm from an accounting and auditing perspective but it is not found a significant technique to present financial reporting and to maintain corporate governance. Due to the unsuitability of the three-layer-based blockchain technology, there is a need to improve the accounting and reporting system. It is suggested that new innovative four-fold customized accounting can be applied to manage and present proper financial reporting purposes. It will prove better and more efficient in financial reporting and corporate governance area, where the present model of blockchain technology does not seem much suitable. It will help in creating transparency among all the stakeholders. This technique will take care of the requirement of recording as per standard and also fulfilling the customized need of stakeholders. References Cai, C. W. (2021). Triple-entry accounting with blockchain: How far have we come? Accounting and Finance, 61(1), 71–93. Faccia, Alessio, and Pythagoras Petratos. (2021). Blockchain, enterprise resource planning (ERP) and accounting information systems (AIS): Research on e-procurement and system integration. Ojo PhD, Marianne. (2019). Facilitating Artificial Intelligence and Blockchain Systems, Partnerships and Technologies: Emerging Global Actors and Players in the Financial Reporting Framework. SSRN Electronic. Pappalardo, G., Di Matteo, T., Caldarelli, G., & Aste, T. (2018). Blockchain inefficiency in the bitcoin peers network. EPJ Data Science, 7(1). https://doi.org/10.1140/epjds/s13688-018-0159-3 Pignatti, M. P. (2020). The digital currency and the challenges beyond the new global World’s blockchain paradigm: A financial and tax overview of the virtual currency efficiency. PQDT – Global. Rahmawati, Ika, M., Sukoharsono, E. G., Rahman, A. F., & Prihatiningtias, Y. W. (2021). From blockchain to accounting profession: Evidence from Indonesia, 48. Sharma, A. (2020). Analyzing the applicability of blockchain accounting and its impact on financial reporting. Sumedha Journal of Management, 9(2). https://doi.org/10.46454/SUMEDHA/9.2.2020.1 Supriadi, I. (2020). The effect of applying blockchain to accounting and auditing. Ilomata International Journal of Tax and Accounting, 1(3), 161–169. https://doi.org/10.52728/ijtc.v1i3.101 Zheng, Z., Xie, Shaoan, Dai, H., Chen, X., & Wang, Huaimin. (2017). An overview of blockchain technology: Architecture, consensus, and future trends. In Proceedings 6th International Congress on Big Data, Big Data Congress, 2017 (pp. 557–564). IEEE Publications. https://doi.org/10.1109/BigDataCongress.2017.85 Fortune Business Insights: Blockchain Market Size, Share & COVID-19 Impact Analysis. https://www.fortunebusinessinsights.com/industry-reports/blockchain-market-100072

From the President | Presidential Communication The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 6–9 From the President: India as the Global Growth Engine, Profession@100 & Landmark Initiatives AT CA. Aniket Sunil Talati President, The Institute of Chartered Accountants of India (ICAI) | New Delhi, 25th March, 2023 Dear Professional Colleagues, The global economy is facing headwinds, and it is envisaged that India shall be emerging as the global growth engine with its strong economic performance as the fastest growing economy and a bright spot amidst the global economic uncertainties. India due to its strong prudential norms and regulatory policies has largely remained resilient from the global economic crisis of the past. As per IMF, the emerging markets and developing economies are expected to contribute 80 percent of the global growth in next few years and Indian economy is expected to make a contribution of 15 percent in this global growth. The meteoric rise is fuelled by a push to the regulatory reforms that has strengthened the financial ecosystem to improve governance and transparency which has not only enabled the economy to withstand the pandemic but also navigated the revival of the economy. As the economies are grappling from global challenges, India looks ahead to build itself into a Self-reliant economy by 2047. To realise and achieve this vision it is essential to build a resilient financial ecosystem to anchor the growth as well as augmenting trust, transparency and inclusion amongst the stakeholders. Our profession has an onerous role to play in this journey by adding credence and consistency to ensure the holistic development of the nation. The profession realises the expectations of the stakeholders and will go a long way in enhancing its skills and expertise to lead the path ahead to be a catalyst to reforms creating value while upholding public confidence. “India has to be transformed into a developed nation, a prosperous nation and a healthy nation, with a value system.” — Dr. APJ Abdul Kalam Foundation of Professional Ethics Our profession since its inception has been and will continue to protect the public trust and interest with our strong ideals, principles and Ethics. At this point I recall the words of our past President CA. R. C. Cooper as he mentioned 60 years back in 1963: “Ethics is a state of the mind, and there may be some act which, though it may not strictly fall under one of the items of the Schedule, may be one which may not be proper by any moral or ethical standards. In the larger interests of the Institute, the Council exhorts all members to search their hearts and conscience whenever in doubt, and thereby assist towards the maintenance of high principles of professional conduct established by the Council.” — CA. R. C. Cooper, Past President, ICAI (1963) I would urge you all to follow the ethics in all spheres of life. This will bring you the most coveted currency at all times i.e. Trust and Goodwill and will also keep on building profession’s legacy. Let’s have a look at some of the recent activities related to the profession since our last communication: 🏛️ Strategy Meeting: Postulating Vision Profession@100 We had the occasion to organize a Strategy Meeting on 10th March 2023 at Hyderabad to review the journey of ICAI during its last 75 years in terms of changing expectations, evolving economic environment and regulatory requirements, advancement in technology and resources. During the course of the meeting deliberations were held on key focus areas & strategic matters and it was discussed to postulate future strategy of ICAI to develop our vision for the next 25 years i.e. Profession@100 so as to keep pace with the economic developments of the country and also meet the aspirations and expectations of the stakeholders from ICAI. Partnering in Nation’s Development • ICAI as a Prime Partner for B20 (Business 20 Dialogue) Taking forward India’s economic growth story, the ICAI has become a prime partner with B20 dialogue. The partnership of ICAI with B20 as a Prime Partner reflects our commitment to support the Government in making India a Vishwaguru. Today the global economy requires transparent, robust accounting standards and practices for sustainable development to provide for a better future. You will be pleased to know that Business 20 (B20) is the official G20 dialogue forum with the global business community. Established in 2010, B20 is among the most prominent engagement Groups in G20, with companies and business organizations as participants. The B20 leads the process of galvanizing global business leaders for their views on global economic and trade governance issues and speaks in a single voice for the entire G20 business community. • High-Level Meetings with National Leaders & Financial Literacy Drive I along with CA. Ranjeet Kumar Agarwal - Vice President, ICAI met Dr. Bhagwat K. Karad, Hon’ble Union Minister of State for Finance, Shri Rao Inderjit Singh, Hon’ble Union Minister of State, Ministry of Corporate Affairs and Shri Tejasvi Surya - Hon’ble Member of Parliament, Lok Sabha during March 2023. Discussions were held on empowering the nation by making the common man and MSMEs financially literate and tax-savvy through the ICAI’s Financial & Tax Literacy Drive Vitiyagyan - ICAI ka Abhiyaan to strengthen the economy. With these steps ICAI is joining hands with Government and other constituents to harness India’s full potential. • KARTAVYA – Tax Awareness Initiative in J&K The Institute, as a measure of its responsibility towards national development had collaborated with the State Taxes Department of J&K Government, in organising Tax Awareness initiative - KARTAVYA (Kar Yogdaan, Rashtra Nirmaan), a GST symposium for industries, traders association & other stakeholders to further stimulate the rate of compliance and productive Capacity in the state. On the occasion Chief Guest Shri Manoj Sinha, Hon’ble Lieutenant Governor, J&K applauded the role of ICAI in nation building. 🤝 All India Managing Committee Members Meet (AIM) 2023 As it is said ‘If you want to go fast, go alone. If you want to go far, go together.’ The All India Managing Committee Members Meet (AIM) was organized on 13-14 March, 2023 in Mumbai. The objective was to work with a common vision for the profession by leveraging our leadership network and outreach amongst the stakeholders across the country to build the brand equity for the profession and make impactful contribution in the social economic development of the society. Close to 1000 elected representatives of different Branches and Regional Councils of ICAI attended the meet. The meet provided an apt forum to come together and work towards the common vision of making ICAI the leading accounting body. I am sure together we can take the profession to newer heights and partnering with the country to achieve its vision of New India. International Engagements 🇴🇲 Visit to Muscat, Oman I along with CA. Ranjeet Kumar Agarwal, Vice President, ICAI visited Muscat, Oman on March 15, 2023 met with H.E. Mr. Amit Narang, Ambassador of India to the Sultanate of Oman; H.E. Qais bin Mohammed Al Yousef, Minister of Commerce, Industry and Investment Promotion, Government of Oman; H.E. Faisal Al Rawas, Chairman of Oman Chamber of Commerce and Industry (OCCI); and H.E. Mr. Pankaj Khimji, Advisor to Minister of Commerce, Industry & Investment Promotion. During the meeting, various issues concerning the profession were discussed. We also attended the event by College of Banking and Financial Studies (CBFS), Oman. 🌍 IFAC Board Meeting (New York) I along with CA. Atul Kumar Gupta, IFAC Board member and Past President, ICAI attended the IFAC Board Meeting on March 3-4, 2023 at New York. The meeting focused on sustainability as well as attracting and retaining talent and provided an apt forum to discuss issues relevant to the profession. IFAC Board appreciated the efforts made by ICAI in hosting the WCOA 2022. 🇬🇧 Delegation from the ICAEW I along with CA. Ranjeet Kumar Agarwal, Vice President, ICAI met with Mr. John Boulton, Director Policy and Ms. Vandana Saxena Poria, from the Institute of Chartered Accountants of England and Wales (ICAEW) on 16th March 2023 at ICAI, New Delhi. During the meeting, the two Institutes agreed to partner and collaborate with each other in the areas of mutual interest. 🏦 Bank Audit & Central Statutory Auditors (CSAs) Meet An Annual Interactive Meet of Central Statutory Auditors of Banks was organized on 14th March 2023 in Mumbai wherein more than 100 participants attended in person and 50 attended through virtual mode. During the Interactive meet, the ICAI shared that the role of the CSAs has enhanced significantly in ensuring the sound health of the banking and the financial system of the country. The Chief General Manager, Department of Supervision, Reserve Bank of India, Shri Sivakumar Bose graced the session and shared his views on the topic “RBI’s perspective and Expectations from the Central Statutory Auditors and Supervisory Assessment on Divergences observed”. Prior to this, a virtual interaction with CSAs of public sector banks was conducted on 6th March 2023 wherein discussions were held on the Circular released by RBI regarding (i) Revised Guidelines for Appointment/Re-appointment of Statutory Branch Auditors of Public Sector Banks; (ii) Norms on Business Coverage under Statutory Branch Audit of Public Sector Banks. During the meeting, ICAI shared its outlook on the coverage of the branches and the expected audit quality from the professionals. Additionally, ICAI emphasized that the CSAs should make sure that the financial reporting requirements are benchmarked internationally in addition to ensuring that banks are in the pink of their health. 📊 Post-Budget Webinar on Financial Sector A post-budget webinar on Financial Sector was held on 7th March, 2023 wherein the honourable Prime Minister of India Shri Narendra Modi had addressed the dignitaries from the Financial Sector and said that today India is moving towards Financial Discipline, Transparency and Inclusive approach and emerging as the bright spot in global economy. Myself and Vice-President attended the webinar and later on I also participated in a Panel Discussion on ‘Ease of Doing Business’. 💻 Technology Initiatives for Profession 🌐 Unique Digital Identity: mail.ca.in In another initiative towards building and leveraging brand CA, the ICAI has brought in domain ‘mail.ca.in’ to build unique digital identity for the profession which is paramount to succeed its presence in the digital environment. The members and students could build their unique digital identity empowering the brand ‘CA’ in digital marketplace. 📋 Online Process of Know Your Members (KYM) With a view to collect member’s information and related documents for meeting the requirements for regulatory functions, ICAI has simplified the process and launched “Know Your Member (KYM)” Application Form which is to be filed annually through the Self-Service Portal (SSP) of the ICAI during the sidelines of AIM 2023. All the Members are required to submit the KYM Application Form mandatorily through the Self-Service Portal. In case of any difficulty, please contact cromemfee@icai.in or ICAI Call Sahayataa. 📊 Excel Utility for Bank Audit To help the members in smooth conduct of branch audits of banks, the Centre for Audit Quality of ICAI has released an Excel Utility which is based on the procedures outlined in the Guidance Note on Audit of Banks and the Technical Guide on the Long Form Audit Report (LFAR). Some Recent Decisions of the Council It is always endeavour of the ICAI to provide best services and newer opportunities to be members and students at their doorstep. In this regard: New Overseas Chapters: The Council decided to open 3 new Chapters in USA at Ohio, Seattle, and Arizona. New Branch: To broaden national coverage, a new branch of WIRC at Gandhinagar has been approved. Tax Invoices with Firm GSTIN: It was also decided that Tax invoice for the Membership Fee and CoP fee of members in practice and paid assistants containing information about the Firm/LLP and the GSTIN may be issued based on the declaration given by the member. FAIS & Peer Review Implementation Date: Further, to create more awareness it has been decided that Forensic Accounting and Investigation Standards (FAIS) and 2nd phase of Peer Review mandate will now be made mandatory from 1st July, 2023 instead of April 1, 2023. 🏆 Recognizing Young Leaders - First CA 40 under 40 Awards Recently, ICAI organised First CA 40 under 40 Awards to recognise the onerous contributions of young and dynamic Chartered Accountants under the age of 40 who are visibly and gradually driving economic change across the industry by emerging as leaders. In all, 40 Young business leaders were felicitated during the awards ceremony held on 16th March, 2023 at New Delhi. These awards shall further inspire the young Chartered Accountants to keep up the exemplary work and bring glory to the profession. 🎓 57th Campus Placement Programme The 57th Campus Placement of freshly qualified CA’s is in process and has been successfully conducted at 9 major centres in which around 10,149 newly qualified Chartered Accountants participated and 4,466 job offers were made by 111 organisations. As the Campus interviews will commence at 18 remaining small centres from 13th to 25th April, 2023, we shall have more offers for our newly qualified members. With this placement drive, the young members shall join the industry and I would advise all of them to work with a growth mindset and be a learner life-long to succeed professionally. At this juncture, I would suggest my young colleagues to ponder about entrepreneurship and practice as with the expansion of the economy the opportunities are enormous and it also provides satisfaction to contribute to the nation’s growth. ⚖️ Landmark Delhi High Court Ruling: ICAI Acronym & Trademark Protection In a civil suit filed by the Institute of Chartered Accountants of India (ICAI) for the infringement of its Trademark ‘ICAI’, the Hon’ble High Court of Delhi in interlocutory injunction has restrained the Institute of Cost Accountants of India from using ‘ICAI’ as an acronym for its Institution or for the services provided by it. The Hon’ble High Court has further directed that the Institute of Cost Accountants of India shall also take steps to ensure that the acronym ‘ICAI’ is removed from all physical and virtual media/websites where the Institute of Cost Accountants of India has its presence including all websites on the Internet as well as its social media platforms within 3 months. Conclusion & New Financial Year Perspective In the last few years, the two major shifts which shall continue to redefine the profession are Technology and Sustainability, providing newer professional avenues of growth in the future. As I see back in hindsight, the core strength of our profession is its ability to make meaningful impact in the society as we grow and evolve. I believe that our profession with its ability to reinvent itself with the changing time, shall work towards enhancing not only the Income but also the Social Capital of the country. Our role is transcending beyond the defined boundaries to be a catalyst for change as we work with all strata of society. As a professional, we shall continue to raise our bar to meet the challenges and criticality of our times by being more resilient, innovative and development centric. To conclude, I exhort you all to identify an idea for the betterment of the society and work towards its implementation. “Keep your words positive, because your words become your behaviours. Keep your behaviours positive, because your behaviours become your habits. Keep your habits positive, because your habits become your values. Keep your values positive, because your values become your destiny.” — Mahatma Gandhi Let me extend my best wishes to you all for the new financial year. Jai Hind, Jai ICAI CA. Aniket Sunil Talati President, ICAI New Delhi, 25th March, 2023 Azadi Ka Amrit Mahotsav

Theme | Capital Markets & Debt Securities The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 36–40 SEBI’s regulatory framework for Online Bond platforms PR Pradeep Ramakrishnan General Manager, Department of Debt and Hybrid Securities, SEBI | Contact: pradeepr@sebi.gov.in, eboard@icai.in “In the recent years, the interest rate scenario, more so due to the COVID pandemic, has been one that has been fluctuating with low rates resulting in lower returns on investment avenues like fixed deposits. The other options of big ticket investments are real estate and gold. In this setting, corporate bonds seem to be a reasonable fit as they are instruments which can generate higher returns with a reasonably lower risk compared to equities. Additionally, fixed income brokers who have been engaging with retail investors for quite some time with respect to corporate bonds fairly acknowledge this requirement.” Technology as a Disruptive Force To fill a gap, there is generally a disruptive force, particularly a technological one. Similarly, the last two/three years have seen the emergence of many online platforms, generally stock broker driven. These platforms were not using the stock exchange platforms for price discovery but some prefer using stock exchange platforms for reporting and settlement, while creating a parallel infrastructure for rest of the processes viz. investor registration, Know Your Client (KYC) verification, availability of bonds, deal execution, etc. Thus, the opportunity for overall bond market development for retail investors using infrastructure of stock exchanges, which is governed by SEBI’s regulatory framework arose. Modus Operandi & Business Models Fintech Promoters & Backing: Most of these platforms are managed by Fintech companies with promoters who are group of individuals. Some of these companies mention about having backing of top investors of India and some of the companies also mention about having partnerships with leading brokers and financial institutions including large bond institutions as suppliers. Two Primary Operating Models: Broadly, there are two types of business models which are being used by these platform providers: Fee-Based Platform Provider: In one model, they only play the role of platform provider where they empanel brokers who provide inventory on the platform and platform provider charges fee for offering platform and any other services. Principal Proprietary Model: In the other model, platform provider himself procures bonds either from primary or secondary market and then further sell to participants by adding spread/ margin on the price of the bond. This spread/ margin on the price of the bond may provide additional incentivization to the firm. Aggregators: Some platforms are aggregators, allowing various sellers with some conditions to sell bonds on their platform. They earn through charging fee to sellers for using their platform and services. Some others act as aggregators showing the inventory of other sellers which can be viewed/ selected by buyers. Spread / Margin Earnings: Some of them had their own inventory and were earning through spread/ margin on the price of the bonds. Surge in Demat Accounts: The pandemic resulted in a number of people opening demat accounts. Presently there are 10 crore plus demat accounts in the country (nearly 108 million demat accounts recorded by December 2022). 📜 Type of Bonds Offered Pre-Regulation Most of the platforms offered both listed and unlisted public/ privately placed bonds across ratings. Some of the platforms also offered Sovereign Gold Bonds (SGBs) and Debt ETFs. Some offered mutual funds and Unit Linked Insurance Plans (ULIPs) also to go with bonds. 🌐 Internet Penetration & Digitalization With the rise of digitalization and increasing penetration of the internet, there has been a consequential growth in the technological temper of investors, making them more tech-savvy. Offering of debt securities by online bond platforms provides an attractive and alternative investment option to non-institutional investors. Bond platforms enable easy access to non-institutional investors as they provide an interface similar to that of online shopping websites. Issues Concerning Unregulated Bond Platforms Prior to SEBI’s intervention, the rapid rise of unmonitored online bond portals posed several severe systemic and investor-protection risks: 1. Absence of Regulatory Framework The platforms were not governed by any regulatory framework. Thus, investors stood to lose in case of any infirmity in any transaction on the platforms. 2. Listed vs. Unlisted Opacity Both listed and unlisted securities were offered and an investor had to be really discerning to distinguish between the two risk profiles. 3. Non-Compliant KYC Norms Each platform had its own KYC norms, some not aligning with the Prevention of Money Laundering Act, 2002 (PMLA) guidelines or SEBI KYC requirements. 4. Grievance Redressal Gaps There were serious concerns as to how investor complaints and grievances were being handled without regulatory escalation paths. 5. Conflict of Interest & Mis-Selling Issues related to conflict of interest, product bundling, asymmetric information availability, and possible aggressive mis-selling. 6. Unstreamlined Trade Reporting There was an incentive in including bond platforms under the regulatory ambit to ensure centralized and streamlined trade reporting. 7. Settlement & Counterparty Risk There was a critical need to ensure clearing and settlement of trades through official clearing corporations for investor protection. SEBI Consultation Paper & Regulatory Formulation After preliminary discussions with the industry and market participants, SEBI decided to take public comments on the concept and modus operandi of the bond platforms through a Consultation Paper in July 2022. An alternative was proposed to register the platforms with SEBI as stock brokers for the purpose of bringing them under the regulatory ambit. The consultation paper stated that only listed debt securities would be allowed on the platforms and that the stock exchange mechanism would be used for transactions on the online bond platforms. After considering public comments and approval by the Board of the proposals to: Register Online Bond Platform Providers with SEBI as Stock Brokers under the debt segment of the Stock Exchanges; and Issue a procedural circular detailing the specifics and mechanics of the operations of the online bond platform provider. SEBI came out with a detailed framework in November 2022, introducing the new Regulation 51A in the SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021. This regulation provided a period of three months for existing online bond platform providers to apply for registration as stockbrokers. “…..with the bond market offering tremendous scope for development, particularly in the non-institutional space, there is a need to provide checks and balances in the form of transparency and disclosures to the investors dealing with such OBPs, measures for mitigation of payment and settlement risk, availability of redress mechanism in case of complaints, etc. Thus, in order to streamline the operations of these OBPs and to facilitate the participation of investors in the corporate bond market, there is a need to provide a regulatory framework for the working of such OBPs…” — SEBI Circular on Registration and Regulatory Framework for OBPPs (November 2022) Salient Features of the Regulatory Framework 1. Applicability & Mandatory Stock Broker Registration The regulatory framework is applicable to entities desirous of operating online bond platforms, designated as Online Bond Platform Providers (OBPPs). An OBPP has to be mandatorily registered as a stock broker with SEBI under the debt segment of recognized stock exchanges. 2. Permissible Products on OBP An entity acting as an OBPP cannot offer products, services, or securities on its OBP other than the following: 1.1.1. Listed debt securities; and 1.1.2. Debt securities proposed to be listed through a public offering. 3. Compliance Officer & Key Managerial Personnel (KMP) The entity must appoint a qualified Company Secretary (CS) as a Compliance Officer. The entity must appoint at least two qualified Key Managerial Personnel with experience of at least three years in the securities market. 4. SCORES Authentication & Grievance Redressal The OBPP should obtain SEBI Complaints Redress System (SCORES) authentication and shall put in place a well-defined mechanism to address grievances that may arise or are likely to arise while carrying out OBP operations. 5. Robust Technology Infrastructure & Data Security (a) Reliability & Scalability: Ensure robust technology infrastructure with high degree of reliability, availability, scalability and security in respect of systems, data, and network. (b) Real-Time Dissemination: Adequate systems in place to disseminate transaction information on a real-time or near real-time basis. (c) Privacy Safeguards: Organizational capabilities, technology, systems and safeguards for maintaining data privacy and preventing unauthorized sharing of data. (d) Data Integrity: Absolute commitment to ensuring data integrity and confidentiality. 6. Know Your Client (KYC) Requirements & Inter-se Agreements The entity shall, before taking up an assignment of offering eligible securities on its OBP, enter into an agreement in writing with sellers clearly defining inter-se relationships, rights, liabilities, and obligations. The entity shall strictly comply with KYC requirements and verify the identity of investors and sellers by requiring requisite documentation under PMLA and SEBI standards. 7. Mandatory Routing via Stock Exchange RFQ Platform The core objective of an online bond platform is transparency. The OBPP shall ensure that all orders with respect to listed debt securities placed on OBP shall be mandatorily routed through the Request for Quote platform (RFQ) of the recognised Stock Exchange(s) and settled through the respective Clearing Corporations. The official Stock Exchange mechanism shall be used to execute all orders. 8. Comprehensive Client Risk Profiling OBPPs must evaluate, through a structured set of questionnaires accompanied by appropriate risk factors and disclaimers, the optimum level of investment risk an investor or seller is willing to take, factoring in age, risk appetite, and investment horizon. 9. Order Receipt, Deal Sheet & Quote Receipt (a) Order Receipt: On placement of order by an investor, issued without delay, stating date, time, counter-parties, quantity, and amount proposed. (b) Deal Sheet: Forthwith issued upon execution to both investors and sellers, containing date and time of order and settlement, counter-party details, quantity, and amount transacted. (c) Quote Receipt: Issued without delay upon quotation by a seller, containing date, time, counter-parties, quantity, and quoted amount. Mandatory Minimum Disclosures to Investors SEBI is a disclosure-based regulator and mandates that every OBPP disclose the following ten parameters for every bond on its portal: # Disclosure Parameter Regulatory Specification 1 Issuer & Security Identification Name of the Issuer, Security Name, and International Securities Identification Number (ISIN) 2 Nature of Instrument Listed Secured / Listed Unsecured status 3 Seniority Senior / Non-Senior claim hierarchy 4 Mode & Date of Issue Original Mode of Issue (Public Issue / Private Placement) and Date of Issue 5 Credit Rating Outstanding Rating, Date of Rating, Rating Agency, and Latest Rating Rationale (PDF download required) 6 Pricing Metrics Face Value, Clean Price, and Dirty Price (incorporating accrued interest) 7 Coupon Terms Fixed / Floating coupon, Rate/Value, and Payment Frequency 8 Maturity & Tenor Date of Maturity and exact Tenor remaining 9 Fiduciary Oversight Name of Debenture Trustee 10 Yield Computations Yield to Maturity (YTM) and exact mathematical calculation methodology Code for Advertisements (10 Regulatory Tenets) Advertisements represent the primary medium for attracting retail investors across TV, print, digital media, or directly on the OBP. Drawing from established equity and debt issuer frameworks, SEBI has enacted a stringent 10-point Advertisement Code: Veracity & Clarity: Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise. Prohibition of Misleading Statements: Advertisements shall not contain statements which are false, misleading, etc. Anti-Deception Design: Advertisements shall not be so designed as likely to be misunderstood. Slogan Restrictions: Advertisements shall not carry any slogan that is exaggerated or unrelated to the nature and risk-and-return profile of the product being advertised. Celebrity Endorsement Ban: No celebrities shall endorse the products. Protection Against Exploitation: Advertisements shall not be so framed as to exploit the investors. Simplicity of Language: The language used in the advertisements shall be simple. Fair Competition: No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons. Mandatory Risk Warning: All advertisements shall be accompanied by a standard warning in legible font stating: “Investments in debt securities are subject to risks. Read all the offer related documents carefully.” Vernacular Language Compliance: Advertisements in regional languages shall contain the standard risk warning in such respective languages. Graphical Depiction of OBPP Operating Architecture 👤 Investor Regulated KYC Registration & Order Placement 🏛️ Exchange Grievance Redress Integrated SEBI SCORES Portal ⬇️ Registration Info Updated in Exchange KYC Database | Trade Flow ⬇️ 💻 Online Platform (Registered Broker) Risk Profiling, Order Receipts & Deal Sheets 📈 Stock Exchange RFQ Platform Mandatory Screen-Based Order Matching & Execution ⬇️ Automated Trade Reporting & Funds / Securities Settlement ⬇️ 🛡️ Settlement through Clearing Corporation Guaranteed Delivery vs. Payment (DvP), Trade Settlement, and Liquidity Oversight Reporting of Information and Supervisory Monitoring The Stock Exchange(s) may require OBPPs to disclose information as and when required, including: (a) Particulars regarding the transactions executed on the OBP; (b) Particulars regarding the securities offered on the OBP; and (c) Any change in the information or particulars previously furnished which have a bearing on the certificate of registration granted. An OBPP shall keep Stock Exchange(s) informed of events resulting in disruption of activities or market abuse without undue delay. Recognized Stock Exchanges are entrusted with the continuous statutory task of monitoring the activities of the OBPPs, including disclosures. Conclusion: Strategic Regulatory Outcomes SEBI believes that this calibrated regulatory framework for Online Bond Platform Providers achieves the ideal equilibrium between investor protection and capital market dynamism, ensuring: ✔ Robust Risk Management: Framework and active surveillance mechanism. ✔ Fair & Transparent Pricing: Competitive bid-ask through the RFQ engine. ✔ Guaranteed Settlement: Eliminating counterparty and default risks. ✔ Exit Opportunity: Enhanced secondary market liquidity for retail investors. ✔ Augmented Market Making: Institutional depth and bid liquidity. ✔ Grievance Redressal: Well-defined, statutory SCORES mechanism. ✔ Preserved Commercial Potential: Safeguarding fintech growth opportunities. ✔ Efficient Non-Institutional Access: Seamless shopping-style UX for bonds. Author: Pradeep Ramakrishnan, General Manager, SEBI ■ ■ ■ The Chartered Accountant | April 2023

Theme | Capital Markets & Macroeconomic Vision The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 34–35 Indian Capital Markets: Entering into its Amrut Kaal NM CA. Navneet Munot Member of the Institute | Reachable at: eboard@icai.in “Over the last couple of decades, the term ‘demographic dividend’ has been synonymous with 2 countries viz. India and China. Demographic dividend refers to the economic growth potential that can result from working age population of a country exceeding its non-working age population. While in China, the trend seems to be reversing recently, India still remains well poised to reap the demographic dividends of its young population, with more than 60% of population below the age of 35 years.” Historic Parallels: The US in the 1980s and India Today In light of this, some interesting parallels can be drawn between the recent developments in India and those witnessed in US in 1980s. In the 1980s, due to the Baby Boomer effect, the U.S. reaped the demographic dividend of a comparatively young population. During the period runaway inflation was reined in by Paul Volcker’s decisive actions. Speaking of economy, one cannot look back in U.S. history without a mention of Reagan’s famous words, “Government has no business to be in business.” Reduction of government spending, lowering of tax rates, deregulation, and reduced government intrusion in business were the pillars of economic policy during that period. All of this led to the U.S. enjoying a prolonged period of NICE (non-inflationary continuous expansion). About the same time, the extensive rollout of 401(k)s transformed the way Americans saved for retirement. This also ensured a huge source of patient capital promoting massive innovation and growth in private equity, venture capital, high yielding bonds, securitization, muni bonds, REITs, etc. India, too, may be on the cusp of a similar era. India has been maintaining constant focus on structural reforms. The privatisation of India’s national carrier Air India was a historic moment. RBI on its part, has used a potent combination of traditional and progressive measures to support growth, without losing sight of inflation control. On the demographic front, India would like to emulate the U.S. of the 80s to reap demographic dividends of its young populace. Focus on developing the social security net makes India’s growth more inclusive. Further, just like 401(k) fueled a culture of long-term investment amongst Americans; in the Indian context, growing acceptability of SIPs (Systematic Investment Plans), which allow individuals to invest fixed amounts at regular intervals in Mutual Funds, has brought a disciplined long-term approach to investing to the fore. Macro Comparison: U.S. Economic Surge (1980s) vs. India’s Amrut Kaal (2020s) Economic Pillar United States (1980s) India Today (Amrut Kaal) Demographics Baby Boomers entering productive workforce >60% of population under 35 years of age Monetary Stance Paul Volcker tamed runaway inflation RBI balanced growth support with inflation anchoring Structural Reforms Reaganomics: Deregulation, tax cuts, spending curbs Privatisation (Air India), FDI easing, formalisation Institutional Savings 401(k) retirement rollout providing patient capital SIP revolution in Mutual Funds driving monthly inflows Capital Market Outcome Prolonged NICE era; boom in PE, VC, REITs 7th most valued stock market globally; domestic resilience The Hour of Reckoning: Evolution & SEBI’s Foundation Goes without saying that one of the key ingredients to reap rich demographic dividend happens to be efficient allocation of capital / robustness of a country’s capital markets. Over the years, Capital markets in India have certainly come across a long journey. With the 7th most valued stock market in the world, Indian capital markets have traversed quite a journey. While the history of Indian capital market is quite long, its proverbial ‘hour of reckoning’ happened in the 1990s, when the focus shifted to its development and regulation. Liberalisation and the goal of giving markets a greater role in capital allocation triggered a series of reforms in the Indian securities market. However, the biggest of them was the emergence of a strong regulator in the form of SEBI (formed in 1988 but accorded statutory powers only in 1992). SEBI has played a critical role in protecting the interest of investors over the years. Financial Inclusion: The Powerful JAM Trinity While the 90s broadened the horizon of India’s economy, 2014 ushered in a new era of financial inclusion. The Government initiated the Pradhan Mantri Jan Dhan Yojana in August 2014 on the guiding principle of: Banking the Unbanked Securing the Unsecured Funding the Unfunded Serving Underserved Areas The powerful trinity of Jan Dhan Yojana, Aadhaar, and Mobile number (JAM) has truly ushered in an era of deep, irreversible financial inclusion in India. Financialization of Savings: Demat & SIP Revolution Not only have more Indians started entering mainstream finance, but over the past few years, Indians have also started investing more. Direct participation in equities and mutual funds has reached historic highs: ~11 Crore Demat Accounts in Jan 2023 (up ~3x from ~3.6 Cr in FY19) ~14.42 Crore Mutual Fund Folios (All-Time High in Feb 2023) 6.28 Crore Active SIP Folios (February 2023) >₹1,40,000 Cr SIP Annual Contribution in FY23 (vs ₹43,921 Cr in FY17) SIP contribution has increased exponentially from Rs 43,921 Crore in FY17 to Rs 1,24,566 Crore in FY22; and has already crossed ~Rs 1,40,000 Crore in FY23 (till Feb’23). Over the years, with varied product offerings catering to different financial needs, Indian Mutual Funds have given investors a viable avenue to channelize their savings effectively. The ‘Mutual Funds Sahi Hai’ campaign run by AMFI, along with tireless efforts of distributors, has played a key role in making Mutual Funds a preferred choice of investment for investors. 🏙️ GIFT City: India’s Global Financial Gateway India’s endeavour to come out as a global financial hub too received a push with setting up of International Financial Service Centre (IFSC) in the form of Gujarat International Finance Tec-City (GIFT City). IFSC is already gaining popularity amongst AIFs (Alternative Investment Funds) as it provides world-class infrastructure, tax efficient structure and convenient access to multiple markets. ⚖️ Domestic Counterbalance to FPI Outflows Increasing financialization of savings bodes well for the depth of capital markets. Flows from domestic investors have robustly counterbalanced significant outflows from Foreign Portfolio Investors (FPIs). That said, India has been a preferred destination for FPIs over the years, with net flows (Equity + Debt) being positive in 24 out of the last 30 fiscal years. This structural trend is expected to continue. Amrut Kaal (2022–2047): An Oasis of Global Hope Looking forward, as India marches on in its Amrut Kaal (2022-2047), it continues to remain an oasis of hope for the global economy, owing to a large domestic market, democracy, demographic advantage, skilled labour force, push for digitization, impetus to manufacturing, and the global China+1 diversification strategy. India’s fundamentals have largely been resilient even in the midst of global recessionary trends. India is not only steadfast in its focus on growth but is also committed to sustainable and inclusive development. Further, the focus on growth hasn’t distracted the policy makers from the overarching goal of ensuring dignified living for the masses. This focus on robust, sustainable, inclusive growth along with an emphasis on physical and social infrastructure can certainly help India tick the right boxes in its Amrut Kaal. The Four Powerful Engines Propelling India Forward 1. Democracy Stable governance, rule of law, and institutional strength 2. Demographics >60% under 35 years fueling productivity and innovation 3. Demand Vast domestic consumption market and rising aspirational middle class 4. Digitisation Digital public infrastructure, JAM, fintech, and UPI scale Conclusion: The Pivotal Role of Chartered Accountants While global cues are likely to keep volatility at heightened levels; with powerful forces of Democracy, Demographics, Demand and Digitisation on its side, India’s economy and its capital market are well poised to go from strength to strength and Chartered Accountants will play a pivotal role in this journey. Author: CA. Navneet Munot, Member of the Institute ■ ■ ■ The Chartered Accountant | April 2023

Theme | Sustainable Finance & Corporate Governance The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 41–45 Emerging Landscape of ESG Investments in India AS A Sekar Corporate Law Expert | a.sekar.cs@gmail.com RK Dr. Ranjith Krishnan Head, Academic Program Unit, NISM | eboard@icai.in “The greatest threat to our planet is the belief that someone else will save it” — Robert Swan “A buoyant stock exchange is the barometer of a country’s growth sentiments. As a part of the capital market, the stock exchange caters to all kinds of investors who apart from their motivation for financial returns are also looking at long term sustainability. This is where non-financial aspects of the investments become important and these days the theme of ESG investing is fast catching the attention of not just institutional investors but also the average retail investor who is also looking at investing for long term sustainability. The article gives a basic overview of the subject including the recent regulatory changes in the disclosure regime prescribed by SEBI for listed entities with respect to ESG parameters and looks at the potential opportunity for the Chartered Accountants.” ESG – An Overview Three powerful words make up ESG namely “Environment (E)”, “Social (S)” and “Governance (G)”. The concept of ESG globally is a natural result arising out of the shift of emphasis from “shareholders” to “stakeholders”. It has changed the way investors and fund managers globally as well as in India evaluate and decide upon investments focussing more on long term sustainability, which is the essence of ESG. Nowadays, non-financial metrics in the form of ESG are also given due weightage by the investors in addition to the financial metrics. Thus, ESG has evolved into a proactive framework integrating the three pillars (ESG) with the objective of maximising stakeholder well-being instead of just the shareholder well-being which the financial metrics considers. It is when the financial and non-financial metrics of ESG are connected as well as integrated and embedded with focus on Strategy and Sustainability, they become even more powerful. Analysing the Three Pillars of ESG Individually 🌿 1. Environmental Pillar Refers to the environmental impacts that an entity creates through its functions, operations and activities along with the risk management practices followed by it. Examples are direct as well as indirect Greenhouse Gas (GHG) emissions, the way natural resources are utilised by the entity, and the ability of the entity to absorb various environmental risks such as Climate Change, fires, flooding, pollution, etc. 🤝 2. Social Pillar Refers to the relationship of the entity with stakeholders including interactions with communities, value chain partners, respecting the supremacy of human rights, well-being of its employees, occupational health and safety, and gender equality. ⚖️ 3. Governance Pillar Refers to how an entity is led, managed, and controlled, including alignment to stakeholder expectations, board composition, diversity, board processes, anti-corruption safeguards, and the effectiveness of internal controls that promote transparency and accountability at the highest level of management. Snapshot of Scope and Key Concerns Across ESG Pillars Environmental (E) Social (S) Governance (G) Greenhouse Gas (GHG) Emissions, Air/Water Pollution Social Well-Being, Health, Security and Safety Business Ethics and Ethical Standards Climate Change Working Conditions Composition of Board, Board Process, Diversity and Governance Water Management Employee benefits Structures of Board Committees Recycling Process Gender Diversity and Inclusion Risk Management Systems Deforestation Respect for Human Rights Stakeholder engagement Emergency Preparedness and Disaster Management Impact on Local communities Anti-Corruption and Anti-Bribery policies Source: Compiled by the authors ESG Maturity & Conceptual Progression Every business entity interested in travelling the path of excellence with focus on sustainability will have to carry out a self-assessment as to where they stand regarding ESG Maturity. This calls for steps towards better integration of ESG parameters and Key Performance Indicators (KPIs) with the strategic management process, risk management systems, corporate culture and governance systems to lead the entity towards long-term sustainability. Based on such a self-assessment, with external help from ESG professionals wherever required, a business entity would be in a better position to determine the stage of its maturity level with respect to ESG. Stage Maturity Level Brief Description 1 Entry level maturity ESG is regarded as an inevitable responsibility and merely a compliance requirement. Most large organisations are expected to have crossed this stage. 2 Slightly more sustained and shared process Some importance is given to ESG metrics wherever considered useful but not a great deal important strategically. Due importance is given to sustainability risk to the extent that impacts the “Going Concern”, but not all key ESG metrics. 3 Strategic Agenda Management starts appreciating the strategic importance of proper mapping of the primary ESG-related interests and priorities of the entity’s stakeholders against those of the business and the related stakeholders. Due emphasis is given for analysing those ESG metrics, which if not well managed, will negatively impact the enterprise value of the entity. 4 Brand Building The entity has established appropriate documentation demonstrating a good understanding of where they need to strategize with respect to leading in addressing the ESG perspectives of all stakeholders. These are followed rigorously with the conscious objective of brand building. 5 Leadership Position The business leads the ESG agenda in the industry or even across industries. They set trends and have established processes that integrate the financial and non-financial reporting using ESG related KPIs that are also updated from time to time. Source: Conceptualised by the authors Each stage above represents a progression from one level of maturity to the next higher level of maturity. The level of maturity with respect to ESG directly as well as positively influences the ESG ratings, which in turn enhances the reputation of the business to be perceived as more sustainable than it would have been otherwise. ESG Investing Dynamics & Economic Stakes Typically, every rational investor be it Institutional Investor, HNI Investor or Retail Investor carries out a comprehensive analysis of a company’s performance across various parameters and seeks to achieve a diversified and balanced portfolio. In doing so, the current tendency of investors is to give due weightage to long term sustainability of their investments as they seek to pursue their goal of maximising financial returns. However, over the last two decades, the concept of “Sustainability” has evolved with increasing importance being given to environmental and social aspects. And this is where “ESG Investing” bringing into a single umbrella concepts like “Sustainable Investing”, “Responsible Investing”, “Impact Investing” or “Socially Responsible Investing” (SRI) comes in, wherein investors prefer investments which duly addresses the concerns of Society and Environment in addition to financial returns. > $9 Trillion Estimated Global Physical Asset Investment Needed for Net Zero Carbon by 2050 (Morgan Stanley) ₹7.14 Lakh Crore Projected Loss for Indian Companies Without Climate Risk Mitigation (CDP 2022 Report) ₹2.90 Lakh Crore Potential Economic Gain for Indian Companies Taking Prompt Climate Mitigation Action ⚠️ Ecological Disaster Wake-Up Call: Brahmapuram Fire (March 2, 2023) A very recent eye opener is the fire at Brahmapuram in Kochi in the State of Kerala on March 02, 2023 as a result of which a large part of the city got gutted by toxic waste. Though reportedly, the fire has been contained, environmental experts have opined that the environmental and social consequences of this fire incident may remain for many years to follow. These and similar catastrophes are a constant reminder that due attention and highest priority must be accorded for environmental and social issues with zero-tolerance. ESG Ratings vs. Credit Ratings: A Vital Distinction According to CRISIL Sustainability Year Book 2022, ESG Ratings is a relative evaluation and assessment of an entity’s exposure and capacity to manage, mitigate or absorb risks related to ESG as well as convert such exposures to opportunities. Globally, the requirements for ESG ratings are driven by the need of investors looking to make ESG related investments. These investors are guided by models that have the capacity to pinpoint areas in the management of the entity that can have an adverse impact on its performance arising out of its ESG exposure. Key Distinction: ESG Rating ≠ Credit Rating Credit Rating: Measures the creditworthiness of a borrower or specific debt instrument (ability and willingness to make timely debt service payments). ESG Rating: Evaluates the company’s enterprise exposure to long-term environmental, social, and governance risks and strategic mitigation capacity. Independence of Ratings: A high ESG rating does not necessarily result in a high credit rating, and vice versa, even though certain operational and risk-management inputs may overlap. Globally, the ESG rating industry has been largely unregulated, but regulatory frameworks are rapidly evolving: Japan: Financial Service Agency released a draft Code of Conduct in 2022 for ESG Rating and Data Providers. United Kingdom: Formed a voluntary group for best practices code with a view to bring providers under the Financial Conduct Authority (FCA). India: The Securities and Exchange Board of India (SEBI) issued a public Consultation Paper on the regulation of ESG Rating Providers in February 2023. ESG Reporting Architecture: From BRR to Mandatory BRSR Global Reporting Frameworks Value Reporting Foundation: Formed in 2021 through the merger of the International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB), evolving 77 industry-specific sustainability standards. Global Reporting Initiative (GRI): Guidelines utilized across ~100 countries covering climate, human rights, diversity, and corruption. Specialized Boundary Frameworks: Task Force on Climate-Related Financial Disclosures (TCFD), Carbon Disclosure Standards Board (CDSB), Global Real Estate Industry Benchmark (GRESB), and Dow Jones Sustainability Indices. SEBI’s Regulatory Trajectory in India 2012 (BRR Launch): SEBI introduced the Business Responsibility Report (BRR) for the top 100 listed entities by market capitalization for FY ending 31st December 2012. Extension to Top 1000: Mandatory BRR coverage progressively expanded to encompass the top 1000 listed entities up to FY 2021-22. May 10, 2021 Circular (BRSR Introduction): SEBI notified the new Business Responsibility & Sustainability Report (BRSR) format—voluntary for FY 2021-22 and mandatorily effective from FY 2022-23 for the top 1000 listed companies by market capitalization. One of the governing principles of BRSR is that it serves as “a single comprehensive source of non-financial sustainability information relevant to all business stakeholders – investors, shareholders, regulators, and the public at large.” BRSR contains more than 100 granular data points across ESG parameters. Reporting mandates a robust internal MIS, deep Board-level involvement, and policy realignment. Notably, more than 175 listed companies voluntarily adopted BRSR ahead of mandate. The BRSR framework draws upon the National Guidelines on Responsible Business Conduct (NGRBC) issued by the Ministry of Corporate Affairs (MCA), which directly map to the 17 UN Sustainable Development Goals (SDGs) committed to by India and 192 other nations. G20 Presidency in 2023: India’s Strategic Multilateral Platform As India assumed the G20 presidency for the year 2023, it secured a unique opportunity to demonstrate leadership in connecting the world’s major developed and emerging economies. G20 members represent 85% of global GDP, 75% of international trade, and two-thirds of the world’s population. India’s G20 leadership focuses global and domestic attention on inclusive development strategies and capital market modernization. Indian corporates, as imposing regional anchors and global players, hold a vital responsibility to lead the sustainability and ESG transition during this historic presidency. Section 166(2) Fiduciary Mandate & Role of Chartered Accountants It is worth noting that Section 166(2) of the Companies Act, 2013 imposes a statutory duty on directors to act in good faith to promote the objects of the company for the benefit of and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment. Failure to comprehensively monitor ESG impacts could be construed as negligence in fiduciary duty. 📈 ESG Investing & Strategy Integrating non-financial ESG parameters into core portfolio allocation. 🔍 ESG Due Diligence Evaluating climate liabilities, greenwashing risks, and supply-chain exposure in M&A. 📊 ESG Ratings & Metrics Benchmarking and auditing corporate ESG data models. 🛡️ ESG Assurance (Internal/External) Independent third-party verification of BRSR disclosures. Though in the PPP model (People, Planet, Profit), Profit is the third priority with People and Planet preceding it, businesses remain hesitant without tangible economic returns. It is here that Chartered Accountants, equipped with rigor in financial and management accounting, bridge the gap by synthesizing financial returns with sustainability outcomes. The scenario provides an unprecedented opportunity for CAs to shift focus from conventional compliance to Strategic Management and multidisciplinary ESG leadership. Where there is a will, there is a way—and the accounting profession is primed to show the sustainable way. Note: The views expressed are the personal views of the authors and do not reflect the views of their associated organisations. ■ ■ ■ The Chartered Accountant | April 2023

Theme | Equity Valuation & Fundamental Analysis The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 46–49 PE VS PEG Ratio: A better tool for Investors in the Modern Era HG CA. (Dr.) Hemant Kumar Gupta Academician | hemantgupta2002@yahoo.com RS Rattandeep Singh Financial Research Associate | deeprattan32@gmail.com “India is one of the top emerging market economies in the world with a GDP of 2.8 trillion dollars (MOSPI, 2022). Going forward, India aspires to achieve a GDP of 5 trillion dollars. For this transformation, capital markets and in particular the stock market will have a major role to play. But only a very small proportion of India’s population invests actively in the stock markets. The reason for this phenomenon is that majority of these investors are small retail investors who lack the basic information and awareness to make well-informed investment decisions. Further, these investors make improper use of various approaches or certain factors and take investment decisions without properly understanding such approaches or factors.” These factors or approaches include fundamental factors, technical factors, and environmental-social factors. The present study deals with only the fundamental factors. The fundamental approach believes in predicting the intrinsic value of a company and then comparing its prevailing market price. In this approach, various ratios are used to analyse the company’s prospects. This study will discuss the pros and cons of P/E and PEG ratios only and will shed light on their use cases. Introduction The stock markets are a never-ending mystery. To stay on top of the market, investors should endeavor to keep learning about the main tenets of market analysis and valuation. What’s more important is that in a world where the economic environment faces unprecedented shifts, one should revisit these concepts to revise and refine one’s understanding of such tenets to reflect the existing and future market conditions. This article aims to critically examine one of the most popular measures of financial ratio analysis i.e., the PE ratio concerning the current circumstances, and suggest alternatives that an investor can use in their investment analysis to make better judgments and investing decisions. Understanding the PE Ratio The Price to Earnings ratio, which is obtained by dividing the price of a stock by the Earnings per Share of that company, is by far one of the most popular tools of ratio analysis. Theoretically speaking, it symbolises the amount of money that the market is ready to pay for every rupee of profits that the company generates. P/E Ratio = Market Price per Share / Earnings per Share (EPS) The PE ratio has numerous types depending upon the metrics used in its calculation: Trailing PE: Uses earnings of the past and the present stock price to calculate the ratio. Trailing Twelve Month (TTM) PE: Uses earnings of the last 12 months. Forward PE: Earnings of the future are estimated mainly through growth projections from either the company’s management or from brokerages and research houses. The PE standardises the stock prices of various companies and helps to compare them with either the market benchmark or the industry group. A low PE in this way will mean that the company is undervalued compared to its peers while a high PE will mean that the company is overvalued in contrast to its peer group. Another factor that contributes to different PEs for different sectors is the cyclical nature of the business cycle. Certain companies tend to perform better in certain conditions, conditions that vary by the ups and downs of business cycles. Fatal Flaws and Pitfalls of the PE Ratio Even though the PE ratio is very good for judging the market’s expectations from the stock, it has some fatal flaws. Most of these pertain to different aspects of earnings (EPS which forms the denominator of the PE ratio): 1. Vulnerability to Window Dressing & Earnings Quality Distortions Companies can easily window dress quarterly earnings, boosting positive news while sweeping negative outcomes under the rug: Credit vs. Cash Sales: Booking aggressive credit sales artificially elevates EPS, ignoring the risk of bad debts and failing to reward cash-generative firms. One-Time Exceptional Items: Non-recurring gains or losses distort the EPS denominator. Non-Operating Other Income: Booking profits on non-core investment liquidations to conceal operating losses in the core business. Capital Expenditure & Leverage Distortions: A capital-intensive business (e.g., a power utility) requiring massive debt-funded capex may post the exact same EPS and PE multiple as an asset-light, high-growth trading company. 2. Historical Lag vs. Precarious Analyst Projections Trailing PE relies on backward-looking historical numbers that fail to capture sudden shifts in dynamic business environments. Conversely, Forward PE is captive to analysts’ subjective earnings projections, which carry no guarantee and introduce grave forecasting errors. 3. Complete Indifference Towards Growth The PE ratio is blind to growth rates. Consider Company A with a PE of 45 versus an industry average PE of 20. On pure PE terms, Company A appears overpriced. But if Company A is compounding earnings at 40% annually while the industry grows at only 10%, Company A is actually a vastly superior investment that deserves its premium multiple. The Successor: Price Earnings to Growth (PEG) Ratio The PEG ratio, popularised by legendary Magellan fund manager Peter Lynch, aims to establish a coherent relationship between a company’s stock price, earnings, and expected growth: PEG Ratio = PE Multiple / Expected Growth Rate Enables forward-looking, cross-sectoral apples-to-apples valuation This ratio takes the PE multiple and divides it by the short-to-medium term expected earnings growth rate, neutralizing sector-specific PE variations. Numerical Demonstration: Automobile vs. Petrochemicals Company Sector P/E Multiple Growth Rate PEG Ratio True Valuation Conclusion Company A Automobile 35 30% 1.16 Attractively priced relative to growth Company B Petrochemicals 22 14% 1.57 Overvalued despite lower apparent PE Conclusion: Company B, despite displaying an optical low PE of 22, is actually 35% more expensive per unit of growth than Company A with a PE of 35. PEG < 1.0 Undervalued Stock (Margin of Safety) PEG = 1.0 Fairly Priced (Multiple Matches Growth) PEG > 1.0 Overvalued (Trading at Excessive Premium) Pitfalls of the PEG Ratio & The Cyclicality Trap Despite its elegance, PEG has notable structural limitations: Extrapolation Fallacy: PEG inherently assumes historical growth trends will persist into dynamic future environments. Cyclical Sector Distortions: Highly cyclical stocks (e.g., steel, commodities, mining) break conventional PEG rules. Case Study: Steel Industry Cyclical Dynamics 1. Cycle Peak (e.g., Steel in 2021): Earnings grow exponentially, suppressing trailing PE and resulting in an artificially low PEG that misleads unsophisticated investors into buying at the exact cyclical top. 2. Trough / Bear Cycle: Earnings collapse during down-cycles, while stock prices stabilize anticipating recovery. Subdued growth produces an optical high PEG, falsely signaling overvaluation when the stock is actually prime for turnaround accumulation. Usefulness: Practical 4-Step Investment Framework (EV Sector Application) How should an investor bullish on an emerging theme (such as Electric Vehicles – EV) synthesize PE and PEG effectively? Step 1: Sectoral PE Screen Identify medium-to-large cap players in the sector, compute their PE multiples, and benchmark them against sectoral averages. Top-tier franchise businesses typically trade at a justifiable premium. Step 2: Accounting Quality & Window-Dressing Audit Scrutinize the P&L and balance sheet for one-off gains, non-core profits, uncollected trade receivables, and capex-debt intensity. Eliminate companies aggressively dressing books. Filter down an initial pool of 10 companies to the top 50% (5 cleanest candidates). Step 3: Multi-Dimensional Growth & PEG Computation Calculate CAGR over 5 years across EPS, Sales, and Operating Margins. Compute PEG multiples to synthesize stock price, profitability, and operational expansion into a unified measure. Step 4: Management Commentary & Execution Audit Cross-examine management guidance against historical execution track record to fine-tune forward growth inputs and prevent over-optimistic valuation multiples. Conclusion & Valuation of High-Flying Technology Firms Tools like PE are wholly unsuitable for high-flying, technology-centric companies where product innovation cycles and regulatory uncertainties cause dramatic earnings volatility. In such cases, PEG should be deployed through scenario modeling (Base, Bear, and Bullish cases), assigning tailored target multiples to each trajectory. Ultimately, PE and PEG represent two tools among hundreds of financial ratios and technical indicators. Sophisticated investors must integrate these ratios into a comprehensive, holistic fundamental research framework. References Arak, M., & Foster, R. W. (2003). PEG ratios: What makes sense? The Journal of Investing, 12(2), 19-24. Easton, P. D. (2004). PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital. The Accounting Review, 79(1), 73-95. Estrada, J. (2004). Adjusting P/E Ratios by Growth and Risk: A Note. Finance Letters, 2(5), 4-10. Hodgskiss, D. L. (2012). Does the PEG ratio add value? (Doctoral dissertation, University of Pretoria). Ministry of Statistics and Programme Implementation (MOSPI). (2022). Government of India. https://www.mospi.gov.in Jones, C. P. (2007). Investments: Analysis and Management. John Wiley & Sons. Lajevardi, S. (2014). A study on the effect of P/E and PEG ratios on stock returns: Evidence from Tehran Stock Exchange. Management Science Letters, 4(7), 1401-1410. Namazi, M. (2006). The relationship between financial ratios with firms’ return. Accounting & Auditing Reviews, 44. Peters, D. J. (1991). Valuing a growth stock. The Journal of Portfolio Management, 17(3), 49-51. Schwartzberg, J. D., & Vora, G. (2009). PEG investing strategy: A revisit. Quarterly Journal of Finance and Accounting, 5-22. Trombley, M. A. (2008). Understanding the PEG ratio. The Journal of Investing, 17(1), 22-25. Authors: CA. (Dr.) Hemant Kumar Gupta & Rattandeep Singh ■ ■ ■ The Chartered Accountant | April 2023

Theme | Capital Markets & Machine Learning in Finance The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 50–55 Nifty Index Determinants: Sensitivity Analysis through Artificial Neural Network AM Arup Bramha Mohapatra Academician | Contact: mohapatra02ab@gmail.com, eboard@icai.in “In order to ascertain the relative variable influence between variables as stated by financial theory, this study uses an Artificial Neural Network (ANN) approach, as variables are not normal. The Dow Jones Industrial Average, WTI crude oil, gold, the US bond yield and the dollar index are all discussed in relation to the nifty fifty in this paper. Using the sensitivity technique, ANNs are being utilised with time series data to rank the aforementioned variable in relation to quality. This study demonstrates that, in terms of sensitivity to the nifty, the Dow Jones index is the most significant. This study adds to the body of evidence showing the effectiveness of ANNs in finance theory. The data used in this paper is secondary in nature.” Introduction The idea of an Artificial Neural Network (ANN) has gained widespread importance in the modern world due to the development of information technology. ANNs are now widely employed in the fields of medicine, research, technology, engineering, finance, etc. The biological neural networks present in the human brain served as the inspiration for ANNs. Neurons and intricate nerve networks make up the human brain. The axons and dendrites in this intricate nerve network are utilised to deliver and receive signals from other neurons, respectively. Researchers in the discipline of computer science use the human brain as a model to try and replicate how the brain performs computational processes (Chima & Duroha, 2019). Architectural Classifications of Neural Networks 1) Feed Forward Neural Network: In a feed forward neural network, data flow is strictly in one direction, from the input unit or node through the hidden unit to the output unit. These elements make up the feed forward neural network. a) Single-Layer Network: Consists of one input unit, one hidden unit, and one output unit. b) Multi-Layer Network: Has multiple intermediate hidden nodes situated between the input and output nodes. 2) Recurrent Neural Networks (RNN): Due to the feedback-loop concept they adhere to, recurrent neural networks differ structurally from feed-forward networks. In this research paper, the author deployed a feed-forward neural network with backpropagation to determine which macroeconomic variable exhibits the highest sensitivity for the NIFTY 50. Review of Literature & Variable Theoretical Background The neuron is the foundation of neural network theory. Non-linear boundaries are used for enclosed regions of a specific class and multilayer neural networks are used for these boundaries. The input from each neuron is merged linearly with varying weights in ANN. A non-linear activation unit, which can be a threshold unit in its most basic form, is then fed the outcome of this combination. Input-output mapping, fault tolerance and non-linearity are all features of neural networks. Strong fault tolerance is preferably provided by the network’s high connection, which ensures that the impact of error in a few terms will be minimised (Bhardwaj et al., 2015). Since univariate time series predictions are what linear models like ARIMA do, they are unable to discover underlying dynamics in a variety of non-linear financial time series (Hiransha et al., 2018). The fact that the ANN model typically outperforms general linear and non-linear econometric models like OLS and GARCH is particularly fascinating. Statistical models are outperformed by ANN models due to significantly lower prediction errors (Kumar & Murugan, 2013). One of the key characteristics of neural networks is their ability to handle both normal and non-normal data. Freitas et al. (2009) demonstrated that it is possible to obtain normal prediction errors with non-normal time series of stock returns, proving that prediction-based portfolio optimization took advantage of short-term opportunities, outperforming the Markowitz mean-variance model and beating the market benchmark. 📊 NIFTY 50 & Dow Jones Industrial Average (DJIA) The word “Nifty” is a portmanteau of “National Stock Exchange” and “fifty”, representing the 50 top-performing equity firms. Charles Dow established the DJIA on May 26, 1896, tracking 30 blue-chip US corporations. Roy & Sen (2019) demonstrated that the Nifty and Dow Jones are co-integrated, eliminating long-term cross-market diversification benefits for portfolio managers. 🛢️ West Texas Intermediate (WTI) Crude Oil Along with Brent and Dubai Crude, WTI serves as the primary high-quality benchmark traded on NYMEX. Sultana & Reddy (2017) discovered significant empirical relationships between crude oil prices, exchange rates, FII flows, SLR, CRR, interest rates, and the NIFTY index. 🥇 Gold (XAU/USD) The world’s most prized monetary and inflation-hedge asset. Patel (2013) proved that gold exerts a considerable impact on the Nifty index. Bouri et al. (2017) established co-integration and non-linear positive volatility spillovers connecting Indian stock markets with implied volatility in gold and oil. 📈 US 10-Year Treasury Bond Yield Bond yield is the annualized coupon return relative to market price. Higher yields indicate rising capital costs or sovereign risk (Jape & Ambhore, 2019). During economic recessions and equity drawdowns, bond yields exhibit sharp inversely correlated shifts (Venkateshwarlu & Ramesh Babu, 2011). 💵 US Dollar Index (USDX) Established by the US Federal Reserve in 1973 following the breakdown of the Bretton Woods Agreement, the USDX measures the greenback against a basket of six major global currencies. Ilalan & Pirgaip (2019) and Victor et al. (2021) demonstrated negative Granger-causality between the USD index and emerging equity benchmarks. Research Methodology & Hypotheses Null Hypothesis (H0): ANN is quite capable of disclosing the sensitivity of selected variables towards nifty. Alternate Hypothesis (H1): ANN is not capable of disclosing the sensitivity of selected variables towards nifty. The empirical dataset spans weekly time-series observations from November 5, 1995 to April 3, 2021 (totalling 1,379 observations). The dependent target variable is the NIFTY 50 Index, and the independent predictor variables are: WTI Crude Oil (in US dollars) Dow Jones Industrial Average (DJIA) US Dollar Index (USDX) US 10-Year Bond Rate Gold (in US dollars per ounce) The computations were executed using SPSS 20 software utilizing Multilayer Perceptron (MLP) feed-forward architecture. The structural configuration of the model consists of: Input Layer: 5 predictor neurons (goldusa, wtioil, dollarindex, ustenyrbond, dowjones) plus 1 bias node. Hidden Layer: 3 hidden neurons [H(1:1), H(1:2), H(1:3)] plus 1 bias node, utilizing the Hyperbolic Tangent activation function. Output Layer: 1 target node (nifty), utilizing the Identity activation function. Partitioning & Cross-Validation: Data was partitioned into 70% training and 30% testing, verified across a 10-fold cross-validation scheme to prevent overfitting. Model Predictive Fit: R² = 0.990 (Linear Correlation = 99.0%) Accepts the Null Hypothesis (H0) confirming superior predictive validity. Empirical Data Analysis Table 1: Descriptive Statistics & Non-Normality Test (Jarque-Bera) Statistic NIFTY US BOND YIELD WTI OIL GOLD USA DOW JONES DOLLAR INDEX Mean 5,264.676 3.627 54.894 928.686 14,544.220 91.721 Median 4,711.700 3.596 52.370 926.600 11,392.110 91.950 Maximum 18,338.550 7.056 145.290 2,073.000 36,338.300 119.900 Minimum 808.190 0.533 10.790 253.900 4,870.370 71.660 Std. Dev. 4,239.142 1.605 28.316 547.147 7,268.099 10.587 Skewness 0.949 0.189 0.436 0.182 1.271 0.457 Kurtosis 3.247 1.999 2.303 1.562 3.789 2.820 Jarque-Bera 210.334 65.809 71.543 126.410 406.847 49.945 p-value 0.000 0.000 0.000 0.000 0.000 0.000 Source: Compiled by author. Probability p < 0.001 confirms significant non-normality across all variables. Table 2: Bivariate Pearson Correlation with NIFTY 50 Independent Predictor Variable Correlation Coefficient with NIFTY Direction & Statistical Significance DOW JONES (DJIA) +0.95956 Extremely Strong Positive Association GOLD USA +0.86789 Strong Positive Association WTI CRUDE OIL +0.43340 Moderate Positive Association DOLLAR INDEX (USDX) -0.12051 Weak Negative Association US 10-YEAR BOND YIELD -0.79789 Strong Negative (Inverse) Association Source: Compiled by author. 10-Fold Cross Validation & Error Convergence (Table 3 & 4) Table 3: Sum of Squares Error (SSE) & RMSE Across 10 Iterations Iter Train SSE Train RMSE Test SSE Test RMSE 14.6360.06962.2490.0730 24.1080.06521.9840.0693 34.6730.07001.1880.0529 43.3340.05841.1830.0542 54.5950.06881.8120.0666 69.6560.09954.1870.1018 74.2700.06611.9160.0690 85.4410.07511.9610.0687 94.1160.06481.7980.0672 109.4090.09831.6140.0631 Mean5.42380.07361.98920.0686 Std2.23120.01400.84360.0134 Table 4: Partitioned Sample Distribution (Total N = 1,379) Iteration Training (70%) Testing (30%) Total Items Network 19574221379 Network 29664131379 Network 39554241379 Network 49774021379 Network 59714081379 Network 69754041379 Network 79764031379 Network 89644151379 Network 99813981379 Network 109734061379 Table 5: Sensitivity Analysis & Relative Normalized Importance The sensitivity analysis was executed across the 10 neural network iterations to determine the normalized importance of each input neuron relative to the maximum predictor (Karaca et al., 2019): Variable Iter 1 Iter 2 Iter 3 Iter 4 Iter 5 Iter 6 Iter 7 Iter 8 Iter 9 Iter 10 Average Rank DOW JONES 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1 GOLD USA 30.0% 32.9% 41.3% 39.2% 21.6% 29.9% 41.6% 37.8% 34.8% 24.9% 33.4% 2 WTI CRUDE OIL 20.6% 16.8% 26.5% 20.4% 6.8% 24.3% 18.7% 8.6% 21.3% 6.7% 17.1% 3 US 10-YR BOND 7.1% 7.6% 12.1% 18.0% 9.1% 17.8% 20.4% 2.8% 7.3% 8.2% 11.0% 4 DOLLAR INDEX 2.3% 4.4% 3.9% 5.2% 1.5% 6.7% 11.7% 7.8% 8.4% 5.5% 5.7% 5 Source: Compiled by author. Conclusion & Research Limitations Sensitivity analysis demonstrates that the Dow Jones Industrial Average (DJIA) has the single largest impact on the Nifty Index (100% normalized importance), followed in descending rank order by: Dow Jones Industrial Average (DJIA) – Rank 1 (100.0% Sensitivity, r = +0.9596) Gold (USA) – Rank 2 (33.4% Sensitivity, r = +0.8679) WTI Crude Oil – Rank 3 (17.1% Sensitivity, r = +0.4334) US 10-Year Bond Yield – Rank 4 (11.0% Sensitivity, r = -0.7979) US Dollar Index (USDX) – Rank 5 (5.7% Sensitivity, r = -0.1205) The correlation findings reinforce this sensitivity hierarchy: the US Dollar Index and US 10-Year Bond Rate exhibit inverse (negative) relationships with the Nifty, while the Dow Jones, Gold, and Crude Oil are positively correlated. Study Limitations: The primary limitation of this study is that additional macroeconomic and systemic variables (e.g., domestic inflation, FII/DII liquidity, interest rate differentials) could be integrated into future iterations of the ANN model to further refine non-linear multi-factor sensitivity analysis and forecasting precision for the Indian capital market. References Bhardwaj, A., Narayan, Y., Vanraj, Pawan, & Dutta, M. (2015). Sentiment Analysis for Indian Stock Market Prediction Using Sensex and Nifty. Procedia Computer Science, 70, 85–91. https://doi.org/10.1016/j.procs.2015.10.043 Chima, A. N., & Duroha, A. E. (2019). Artificial Neural Network Application in Prediction-A Review. African Journal of Computing & ICT, 12(4), 75–85. https://afrjcict.net Hiransha, M., Gopalakrishnan, E. A., Menon, V. K., & Soman, K. P. (2018). NSE Stock Market Prediction Using Deep-Learning Models. Procedia Computer Science, 132(Iccids), 1351–1362. https://doi.org/10.1016/j.procs.2018.05.050 Idriss, T. El, Idri, A., Abnane, I., & Bakkoury, Z. (2019). Predicting blood glucose using an LSTM neural network. Proceedings of the 2019 Federated Conference on Computer Science and Information Systems (FedCSIS), 18, 35–41. https://doi.org/10.15439/2019F159 Ilalan, D., & Pirgaip, B. (2019). The impact of us dollar index on emerging stock markets: A simultaneous granger causality and rolling correlation analysis. Research in Finance, 35, 145–154. https://doi.org/10.1108/S0196-382120190000035007 JAPE, S., & AMBHORE, M. (2019). Study of Rising Benchmark 10-Year Bond Yield and Its Relevance To Economic Factors. Journal of Management, 6(1), 21–30. https://doi.org/10.34218/jom.6.1.2019.003 Sharma, S. K., Sharma, H., & Dwivedi, Y. K. (2019). A Hybrid SEM-Neural Network Model for Predicting Determinants of Mobile Payment Services. Information Systems Management, 36(3), 243–261. https://doi.org/10.1080/10580530.2019.1620504 Taneja, A., & Arora, A. (2019). Modeling user preferences using neural networks and tensor factorization model. International Journal of Information Management, 45(October 2018), 132–148. https://doi.org/10.1016/j.ijinfomgt.2018.10.010 Teo, A.-C., Tan, G. W.-H., Keng-Boon, O., Hew Teck-Soon, & Yew, K.-T. (2015). Industrial Management & Data Systems. Industrial Management & Data Systems, 115(2), 311–331. Victor, V., K K, D., Bhaskar, M., & Naz, F. (2021). Investigating the Dynamic Interlinkages between Exchange Rates and the NSE NIFTY Index. Journal of Risk and Financial Management, 14(1), 20. https://doi.org/10.3390/jrfm14010020 Author: Arup Bramha Mohapatra, Academician ■ ■ ■ The Chartered Accountant | April 2023

Theme | Empirical Asset Pricing & Market Anomalies The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 56–61 An Empirical Study on Small Firm Effect in Indian Stock Market NS Nemani Satish Research Scholar | satishnemani05@gmail.com BG Dr. Bheemanagouda Academician | eboard@icai.in GB Gangadhara B Research Scholar | eboard@icai.in “Recent empirical studies identified the presence of a small firm effect in the Indian stock market. This study was undertaken to examine the existence of a small firm effect, the presence of autocorrelation and illiquidity, and the impact of seasonality on returns of stocks in the Indian stock market. For this purpose, closing prices of the Nifty Small-cap 100 and Nifty 100 indices for the period of January 2011 through December 2021 was collected. The risk-return for different holding periods was analysed to identify the autocorrelation effect. Further, it is verified with the Durbin-Watson test statistics. The result is that there is a presence of negligible autocorrelation in both indices. There is no presence of the Monday effect and tax loss selling effects in the indices. Furthermore, we tested illiquidity with the help of the Amihud Illiquidity measure, and the results showed that there is no liquidity risk in both the indices.” Introduction & Theoretical Background Size effect in financial literature refers to a phenomenon, where stocks of small-sized firms outperform the stocks of large-sized firms over a long time. It is believed that market forces set the stocks of smaller firms at less price compared to stocks of larger firms due to the high risk involved in them even though all other things are the same. When both firms earn the same profit, smaller firm stock investor gets more profit because they pay less to acquire them. The size effect was first observed by Banz (1981). He examined the relationship between the return and market value of a firm by observing NYSE stocks and found that the returns of small-sized firms are greater than that of the larger firms even after adjusting the risk. This effect has been in existence for at least 40 years and stated that the Capital Asset Pricing Model (CAPM) was misspecified. Further, he concluded that this effect was because of size itself or size may be one of the proxies for risk. Some researchers identified autocorrelation, liquidity (see Amihud, 2002; Liu, 2006) and information uncertainty (Zhang, 2006) as a proxy for risk. As there is no clear understanding of the cause for such an effect, the factors underlying this phenomenon are not conclusive. As time varies further, studies documented the disappearance of the size effect after 1980 (see Barry et al., 2002; Fama & French, 2011). Mainly due to increased academic literature on the size effect after Banz (1981), an announcement of small firm effect along with the introduction of small-cap stock funds in the US made it easier for investors to buy these securities, and increased demand caused a rise in small stock prices. Some studies documented seasonality in small firm effect returns, where the size effect observed in the U.S. majorly has its presence in the beginning of the year (January) and has little or no effect during the remaining months (see Easterday et al., 2009). Surprisingly, some studies reported no such seasonality effect in the UK (see Dimson). In the Indian context, various studies have been undertaken pertaining to the size effect, and most identified the presence of the size effect (Sharma & Jain, 2020; Vasishth et al., 2021). By observing the literature, it is obvious that there is no clarity on whether the size anomaly is a separate phenomenon or a manifestation of other known market anomalies. Objectives of the Study & Methodology Objective 1: To examine the existence of the small firm effect in the Indian stock market. Objective 2: To examine the presence of autocorrelation effect and illiquidity in index returns. Objective 3: To assess the impact of seasonality (Monday, January, and April effects) on the small firm effect. Methodology: To achieve these objectives, setting portfolios based on individual market capitalisation involves a cumbersome procedure. Fortunately, well-constructed benchmark indices are readily available: Small-Cap Benchmark: Nifty Smallcap 100 Index. Large-Cap Benchmark: Nifty 100 Index. Time Horizon: 10-year period from January 1, 2011 to December 31, 2021 obtained from the National Stock Exchange (NSE) website. COVID-19 Outlier Exclusion: Returns from 1st January 2020 to 31st December 2020 were deliberately excluded due to extreme macroeconomic distortions and statistical outliers caused by the pandemic. Statistical Toolkit: Pearson correlation, Durbin-Watson autocorrelation tests, Amihud Illiquidity ratio, Student’s t-test for equality of means, and Fisher’s F-test for equality of variances. Risk-Return Profile Across Holding Periods The data is classified into different holding periods in order to verify the existence of an autocorrelation effect and analyse the risk-return trade-off. Autocorrelation measures the current stock price in relation to its past prices. A high autocorrelation indicates more influence of past prices on present prices, whereas low autocorrelation indicates price independence. It is believed that small firm stock prices exhibit higher autocorrelation due to infrequent trading. If small stocks are traded less frequently, risk measures from short-interval return data seriously understate the actual holding risk. Table 1: Risk-Return Data on Small-Cap and Large-Cap Indices (2011–2021) Holding Period (Trading Days) Sample Size (N) Annualised Mean Return Difference (Small - Large) % Simple Correlation Between Returns SD_S / SD_L Ratio (%) 1 (Daily) 2,471 -1.29% (8.43% - 9.72%) 0.7873 1.30 (23.86 / 18.29) 5 (Weekly) 521 -1.14% (9.13% - 10.27%) 0.7676 1.46 (22.02 / 15.07) 21 (Monthly) 119 -1.04% (9.94% - 10.98%) 0.8049 1.58 (23.54 / 14.89) 63 (Quarterly) 40 -1.04% (9.94% - 10.98%) 0.8006 2.16 (26.72 / 12.37) 126 (Semi-Annual) 20 -1.04% (9.94% - 10.98%) 0.8324 2.27 (29.40 / 12.91) *SD_S / SD_L: Ratio of standard deviations of returns, Small-Cap to Large-Cap. Table 2: Statistical Significance Tests (F-test for Variance & t-test for Means) Metric Daily Weekly Monthly Quarterly Semi-Annual S L S L S L S L S L N 2471 2471 521 521 119 119 40 40 20 20 SD (%) 1.25 0.96 3.05 2.09 6.79 4.30 13.36 6.19 20.79 9.13 F-stat 1.70 10.18 50.38 194.78 471.53 P-value (F) 0.00 0.00 0.00 0.00 0.00 Mean (%) 0.04 0.04 0.21 0.21 1.03 0.97 3.20 2.82 6.71 5.74 t-stat -0.0491 0.0296 0.0794 0.1629 0.1908 P-value (t) 0.9608 0.9764 0.9368 0.8712 0.8501 Key Takeaway: The F-test rejects the null hypothesis ($p = 0.00$), confirming that Small-Caps carry statistically higher standard deviation (1.5x to 2x). However, the t-test ($p approx 0.85 - 0.97$) accepts the null hypothesis of equal mean returns. Small-cap investors bear significantly higher risk without earning any statistically significant return premium. Autocorrelation & Illiquidity Analysis (Table 3) The Durbin-Watson statistic tests for residual autocorrelation (value of 2 represents zero autocorrelation; values < 2 indicate positive autocorrelation). Illiquidity is measured through the Amihud Illiquidity measure: Statistical Tool Small-Cap (Nifty Smallcap 100) Large-Cap (Nifty 100) Interpretation Durbin-Watson Stat (2011–2021) 1.611123 1.825269 Both near 2.0; negligible to moderate autocorrelation Amihud Illiquidity (2016–2018) 0.00% 0.00% Zero illiquidity; absence of liquidity risk Testing Seasonality: Monday / Weekend Effect (Tables 4 & 5) The Monday (weekend) effect posits that stocks close lower on Mondays due to weekend investor negativity or Friday post-market bad news dumps. Table 4: Weekday Average Returns (%) Weekday Small-Cap (%) Large-Cap (%) Monday+0.06+0.04 Tuesday+0.07+0.06 Wednesday+0.06+0.05 Thursday+0.02+0.02 Friday-0.02+0.04 Weekly Avg+0.04+0.04 Weekend Anomaly Findings Contrary to the traditional Monday effect, Mondays show positive returns for both Small-Caps (+0.06%) and Large-Caps (+0.04%). Peak weekday performance occurs on Tuesday (+0.07% and +0.06%). In Small-Caps, Friday returns are negative (-0.02%), directly contradicting the premise of Friday rallies. Table 5: Statistical Analysis of Weekday Returns (2011–2021) Day Mean % Variance N F-stat p-value (F) SD % DF t-stat p-value (t) Small-Cap Friday-0.0170.015%4891.130.0450.06%791-1.090.2782 Monday0.0600.021%4941.520.0000.07%7200.090.9269 Other days0.0530.013%1490— Large-Cap Friday0.0420.010%4891.310.0000.05%747-0.020.9863 Monday0.0410.011%4941.330.0000.05%754-0.030.9781 Other days0.0430.008%1490— Conclusion: While Friday and Monday returns exhibit statistically higher variance (p < 0.05), mean returns show no significant difference from other days (p > 0.27). No weekend effect exists. Testing January, April & Tax-Loss Selling Effects (Tables 6 & 7) In western markets, the January Effect is linked to December tax-loss harvesting. In India, because the fiscal year closes on March 31, the equivalent tax-loss selling dynamic would manifest across March and April. Table 6: Monthly Average Returns (2011–2021) Month Small-Cap (%) Large-Cap (%) Month Small-Cap (%) Large-Cap (%) January-0.05+0.03July+0.01+0.04 February-0.04-0.02August-0.11-0.02 March+0.17+0.14September-0.01+0.05 April+0.20+0.05October+0.21+0.13 May+0.05+0.08November-0.03-0.04 June+0.03+0.05December+0.08+0.01 Table 7: Statistical Analysis of Monthly Returns (January/December & March/April) Category / Month Mean (%) Variance (%) N F-stat p-value (F) SD (%) t-stat p-value (t) SMALL-CAP (Calendar Year Turn) JAN-0.050.01552150.970.60440.09-1.130.2599 DEC0.080.01232120.770.99230.080.370.7081 Other Months0.050.01592046— LARGE-CAP (Calendar Year Turn) JAN0.030.08702150.940.73400.07-0.320.7480 DEC0.010.07902120.850.94270.06-0.610.5410 Other Months0.050.09302046— SMALL-CAP (Financial Year Turn) MAR0.170.01372060.860.91140.091.860.0646 APR0.200.01391880.870.88720.092.050.0412 Other Months0.010.01592079— LARGE-CAP (Financial Year Turn) MAR0.140.00982061.060.26610.071.490.1374 APR0.050.00761880.820.96300.070.350.7272 Other Months0.030.00922079— In Table 7, it is statistically proven that there is no presence of the January effect in either index ($p > 0.25$). Small-Cap average returns in April (+0.20%) are statistically higher than other months ($t = 2.05, p = 0.0412$). However, because March returns were positive (+0.17%) rather than depressed, the April surge cannot be attributed to tax-loss selling recovery. Conclusion 1. Absence of Small Firm Premium: Small-cap stocks failed to outperform large-cap stocks over the 10-year period (annualized returns were ~1% lower for Small-Caps), despite carrying 1.5x to 2x higher standard deviation. 2. Negligible Autocorrelation: Durbin-Watson tests revealed values near 2.0 (1.61 for Small-Cap, 1.83 for Large-Cap), ruling out structural autocorrelation as a source of mispriced risk. 3. Zero Illiquidity: Amihud measure recorded 0.00% across both indices, confirming that liquidity risk does not explain index behavior. 4. Rejection of Calendar Anomalies: Empirical evidence rejected the Monday (weekend) effect, the January effect, and tax-loss harvesting dynamics in the Indian market. References Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets, 5(1), 31–56. https://doi.org/10.1016/S1386-4181(01)00024-6 Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3–18. https://doi.org/10.1016/0304-405X(81)90018-0 Barry, C. B., Goldreyer, E., Lockwood, L., & Rodriguez, M. (2002). Robustness of size and value effects in emerging equity markets, 1985–2000. Emerging Markets Review, 3, 1–30. https://linkinghub.elsevier.com/retrieve/pii/S1566014101000280 Dimson, E., Marsh, P., & Staunton, M. (2011). Credit Suisse Global Investment Returns Sourcebook 2011. Easterday, K. E., Sen, P. K., & Stephan, J. A. (2009). The persistence of the small firm/ January effect: Is it consistent with investors’ learning and arbitrage efforts? The Quarterly Review of Economics and Finance, 49(3), 1172–1193. https://doi.org/10.1016/j.qref.2008.07.001 Fama, E. F., & French, K. R. (2012). Size, value, and momentum in international stock returns. Journal of Financial Economics, 105(3), 457–472. https://doi.org/10.1016/j.jfineco.2012.05.011 Liu, W. (2006). A liquidity-augmented capital asset pricing model. Journal of Financial Economics, 82(3), 631–671. https://doi.org/10.1016/j.jfineco.2005.10.001 Sharma, M., & Jain, A. (2020). Role of size and risk effects in value anomaly: Evidence from the Indian stock market. Cogent Economics & Finance, 8(1), 1838694. https://doi.org/10.1080/23322039.2020.1838694 Vasishth, V., Sehgal, S., & Sharma, G. (2021). Size Effect in Indian Equity Market: Myth or Reality? Asia-Pacific Financial Markets, 28(1), 101–119. https://doi.org/10.1007/s10690-020-09318-0 Zhang, X. F. (2006). Information uncertainty and stock returns. Journal of Finance, 61(1), 105–137. https://doi.org/10.1111/j.1540-6261.2006.00831.x Authors: Nemani Satish, Dr. Bheemanagouda & Gangadhara B ■ ■ ■ The Chartered Accountant | April 2023

Theme | Behavioural Finance & Investor Decision-Making The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 62–66 Learning from experience and Investment decisions: A conceptual study of individual Investor Behaviour RS Renuka S Research Scholar | sreerenuka94@gmail.com KR Dr. K V Raju Academician | eboard@icai.in “The learning dimension of experience has attracted the attention of researchers across academic disciplines. Discussion on the role of experience in personal financial decisions, and large investment decisions, have emerged in the empirical realm of behavioural economics/finance over the last two decades. This conceptual paper attempts to synthesize the concept of learning from investment experience, its preconditions, process, and implications on the investment decisions of individual investors. Knowing about how and in what ways individual investors experience affects their decision is relevant in creating experiential learning opportunities through investor education.” Introduction: The Retail Surge in Indian Equities The equity market in India is witnessing an upsurge in retail investor participation in recent times, more so from the onset of the COVID-19 pandemic in 2020. For instance, retail investor participation, measured using the number of Demat accounts in the country, increased from 359 lakh in 2018-19 to 551 lakh in 2020-21 (Ministry of Finance, PIB, Delhi, 2021), and to 10 crores in August 2022 (The Economic Times, September 2022). However, low levels of financial literacy and adverse effects from market downturns on investor sentiments and behavioural biases pose a serious challenge to sustaining their growth in the stock market (OECD, 2017). The increasing number of first-time investors further creates a challenge to widen the spread and scope of investor education. In this relation, the Government of India has been taking initiatives under the aegis of the Investor Education and Protection Fund Authority (IEPA) and the Securities and Exchange Board of India (SEBI) to educate and improve awareness to help individual investors make better decisions. Aside from formal methods of learning, individuals depend on informal sources such as learning from family and peers, media, and personal experience. A study conducted by Hogarth and Hilgert (2002) among the US population found personal experience to be the most chosen means for learning financial management. Recently, international organizations like the OECD emphasized boosting investor education through experiential learning using digital technology. Two Strands of Academic Debate on Investor Learning Strand 1 (Investors Learn & Improve): Studies suggest investors do learn from their experience, progressively improving their trading behaviour and portfolio returns (e.g., Chen et al., 2004; Nicolosi et al., 2004; Seru et al., 2009). Strand 2 (Experience Fails to De-bias in High Stakes): Proponents like Nobel Laureate Richard Thaler (2016) argue that individuals do not necessarily learn from experience, especially in high-stakes, volatile stock market environments. In this context, by drawing evidence from existing literature, this paper addresses: (1) the concept of learning from experience in investment decisions; (2) the preconditions and processes that facilitate experiential learning; and (3) the concrete impact of experience on investor behaviour, risk perception, and portfolio returns. Review of Literature & Psychological Theories One of the foremost theoretical explanations for learning from experience is Kolb’s Experiential Learning Theory (ELT) (1984) in educational psychology. The theory considers experience as a source of knowledge and explains the cyclical process of experiential learning. Although ELT has historically seen limited application in financial economics, other psychological frameworks—such as Reinforcement Learning Theory, Social Cognitive Theory, and Transformative Learning Theory—are increasingly employed to model investor behaviour (Kaustia & Knüpfer, 2008; Shantha et al., 2018). Most empirical investigations analyze trading account histories from major brokerage houses: Koestner et al. (2017): Observed that as investors become experienced in trading, they achieve higher portfolio returns by learning from trading mistakes. Korniotis and Kumar (2009): Found older, seasoned investors exhibit lower behavioral biases and higher fundamental investment knowledge. Brozynski et al. (2004): Documented that herding bias among mutual fund managers declines with professional tenure. Chen et al. (2002): Conversely reported that among Chinese retail investors, trading errors like the disposition effect and representativeness bias actually intensified with experience. Primary Field Surveys (Hon-Snir et al., 2012; Shantha et al., 2018; Shantha, 2019): Disclosed that raw trading tenure alone does not directly eliminate psychological biases; rather, learning occurs only when mediated by conscious self-reflection. Typology of Investment Learning (Figure 1) In economics, Kenneth Arrow’s seminal ‘Learning by Doing’ (1962) views learning as a direct product of experience. In financial markets, Andrew Lo’s Adaptive Market Hypothesis (AMH) (2004) frames investors as evolving agents adapting to market feedback. Literature identifies three dichotomous learning channels: Figure 1: Sequence & Types of Experiential Learning in Financial Markets Learning from Experience Personal Experience Learning to Trade: 🔴 Irrational / Naive: Feedback Learning (Outcome bias) 🟢 Rational Learning: Mistake Learning & Skill Acquisition Social Experience Learning about (In)ability: Observing peers, advisors, common crashes $ ightarrow$ Recognition of ineptness $ ightarrow$ Exit Stock Market Source: Compiled by authors from literature review 1. Individual vs. Social Learning: Individual learning is direct, conscious self-learning based on personal trades without external imitation. Social learning involves assimilating experiences of peers, colleagues, advisors, or collective macro-shocks (market panics). 2. Learning to Trade vs. Learning About Ability: In learning about ability, investors discover their unsuitability for active speculation after incurring losses and prudently exit. In learning to trade, surviving participants refine execution, reduce heuristics, and improve portfolio alpha. 3. Rational vs. Naive Reinforcement Learning: Rational learning systematically builds analytic prowess. Naive reinforcement learning blindly repeats winning trades and shuns loss-making actions irrespective of underlying fundamental logic—a behavior documented heavily in IPO flipping (Anagol et al., 2015). Preconditions for Learning from Investment Experience Learning is highly subjective and contingent upon four prerequisite foundations: 📚 Financial Knowledge Serves as the essential cognitive antecedent. Enhances the investor’s capacity to navigate complex instruments and determines learning preferences (Hogarth & Hilgert, 2002). ⏳ Prior Trading Experience Sophisticated investors recognize cognitive pitfalls and achieve superior returns compared to novices (Campbell et al., 2014; Raut & Kumar, 2018). 📊 Past Performance Awareness Accurate knowledge of realized portfolio returns is required to diagnose mistakes; oblivious investors cannot learn (Glaser & Weber, 2007). 💰 Investor Wealth Wealthier investors engage in self-directed individual learning, whereas less affluent retail investors rely on social crowd-following (Yamamoto, 2005). The Process of Learning & The Role of Memory Bias (Figure 2) Mere years of market exposure do not guarantee de-biasing. What transforms raw experience into actionable wisdom is systematic self-reflection. However, self-reflection is bounded by human recall: investors exhibit a pronounced memory bias, recalling profitable trades while repressing losing positions (Gödker et al., 2021). Figure 2: Cognitive Architecture of Experiential Learning in Investment Decisions Past Investment Experiences ➔ Self-Reflection(Shantha et al., 2018) ➔ Future Investment Decisions & Returns ⚠️ Memory Bias (Gödker et al., 2019) Selective positive recall distorts objective retrospective evaluation Internalized Cognitive Upgrades: • Ability (Nicolosi et al., 2004) • Beliefs (Hoffman & Post, 2013) • Attitude (Raut, 2020) Source: Compiled by authors from literature review Impact of Experiential Learning on Investment Outcomes 1. Rationalising Role on Biases Hon-Snir et al. (2012) showed experience moderates disposition effect, overconfidence, and excessive trading frequency, driving greater rationality in portfolio allocation. 2. Asymmetric Risk Perception Direct experience of market busts induces persistent risk aversion, whereas boom-period market entry creates aggressive risk-seeking attitudes (Anderson et al., 2019; Lejarraga et al., 2016). 3. Alpha & Return Enhancement Experience enhances stock-selection skills, macro forecasting, and geographic diversification outside domestic markets (Abreu et al., 2011; Campbell et al., 2014; Seru et al., 2010). Contradictory Empirical Realities Learning is not universally linear. Xiao (2015) documented inconsistent return enhancements; Baber et al. (2020) demonstrated that chronic loss-makers frequently refuse to exit due to sunk-cost traps; and Chiang et al. (2009) confirmed that raw tenure without structured education fails to eliminate heuristic errors. Conclusion & Policy Implications for Investor Education Experience plays a decisive role in shaping individual investor attitudes, cognitive abilities, and portfolio health, but its benefits are not automatic. Experiential learning requires four essential preconditions: financial literacy, prior exposure, performance tracking, and capital adequacy. Recognizing these mechanisms enables regulators (SEBI, IEPFA) and financial advisors to transition from dry classroom financial literacy to interactive, digital simulator-driven experiential education that accelerates self-reflection while insulating retail investors from catastrophic financial fallouts. References Anagol, S., Balasubramaniam, V., & Ramadorai, T. (2015). The effects of experience on investor behavior: Evidence from India’s IPO lotteries. Available at SSRN, 2568748. Glaser, M., & Weber, M. (2007). Why inexperienced investors do not learn: they do not know their past portfolio performance. Finance Research Letters, 4(4), 203–216. Gödker, K., Jiao, P., & Smeets, P. (2021). Investor memory. Discussion Paper No. 07-2019-042, Network for Studies on Pension, Aging and Retirement. https://ssrn.com/abstract=3348315 Hoffman, A. O., & Post, T. (2013). How does investor confidence lead to trading? Theory and evidence on the links between investor return experiences, confidence, and investment belief. Available at SSRN: https://ssrn.com/abstract=2361352 Koestner, M., Loos, B., Meyer, S., & Hackethal, A. (2017). Do individual investors learn from their mistakes? Journal of Business Economics, 87(5), 669–703. Nicolosi, G., Peng, L., & Zhu, N. (2004). Do individual investors learn from their trading experience? Yale ICF Working Paper No. 03-32. https://dx.doi.org/10.2139/ssrn.468720 Raut, R. K. (2020). Past behaviour, financial literacy and investment decision-making process of individual investors. International Journal of Emerging Markets, 15(6), 1243–1263. Seru, A., Shumway, T., & Stoffman, N. (2010). Learning by trading. The Review of Financial Studies, 23(2), 705–739. Shantha, K. V. A., Xiaofang, C., & Gamini, L. P. S. (2018). A conceptual framework on individual investors’ learning behavior in the context of stock trading: An integrated perspective. Cogent Economics & Finance, 6(1), 1544062. Shantha, K. V. A. (2019). Individual investors’ learning behavior and its impact on their herd bias: An integrated analysis in the context of stock trading. Sustainability, 11(5), 1448. Authors: Renuka S & Dr. K V Raju ■ ■ ■ The Chartered Accountant | April 2023

Financial Reporting | Municipal Accounting & Public Finance The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 67–71 Common Mistakes in Annual Financial Statements of Urban Local Bodies Time for auditor of urban local bodies to rethink their methodology PG CA. Pankaj Goel Member of the Institute | Contact: eboard@icai.in “Personnel preparing the accounts and eventually Annual Financial Statements (AFS) from accounts under any accounting package shall ensure that financial statements shall not mislead users of AFS. This can be done by satisfying that accounts have been drawn up with reference to entries in the books of account and information conveyed by statements is clear and unambiguous. Audited Financial Statements of any Urban Local Body (ULB) can be found on the Urban Department portal of any State as publishing of audited financial statements has become a mandatory condition for claiming grants under 15th finance commission as ‘Audited accounts to be published for all ULBs on State/ULB website for the year before the preceding year w.r.t the award year’.” After examining the AFS of many cities including Smart cities, it has been observed that there are many mistakes in Annual Financial Statements of Urban Local bodies which surprisingly most city accountants, and third parties preparing or auditing these Annual Financial Statements generally can not determine. The prime reason could be a lack of understanding about guidelines applicable to Urban Local Bodies or due to limited time or value of the project under which these AFS have been prepared or audited. This article has been written to highlight these mistakes without mentioning any ULB so that policy makers may decide to revamp the guidelines if required and conduct training sessions for both ULB accountants and third parties preparing and auditing these AFS. Article addresses the rationale for a transition from old archaic way of preparation and presentation that is in the interest of all stakeholders. Introduction: Auditing Logic & Constitutional Governance Accounting and Auditing are closely related to each other as auditing reviews financial statements which are nothing but a result of the overall accounting process. Thus, it is expected that the auditor is aware of not only generally accepted accounting principles but also of the actual working of the organization with applicable guidelines and statutes. Auditing itself is based on the concept of logic and everything done in auditing must be bound by the rule of logic. Auditing has close relation with the law and thus it is expected that the auditor carrying out the audit must have sound knowledge of governance applicable to an entity for urban local bodies Municipal Acts, National Municipal Accounting Manual (NMAM) / State Municipal Accounting Manual (SMAM) Guidelines, Rules/Byelaws and it must be adhered. The 74th Constitutional Amendment Act had entrusted additional powers and responsibilities to Local Self Governments in India through 18 functions to be discharged by ULBs. In this changed scenario, the financial reporting quality of local bodies assumes great importance as it is a means towards ensuring achieving two most significant objectives i.e., transparency and accountability. AFS shall help the user to assess liquidity, the solvency of the entity and its requirement for additional financing and paves the way to access market financing (such as Municipal Bonds). However, the financial information provided by the financial statements of ULBs at present loses its value if it is not as per applicable guidelines or lacks relevant annexures or has fundamental mistakes. These AFS are the basis for making financial projections for resource generation by cities to fund infrastructure which is part of the City Development Plan (CDP) of the city or revenue improvement plans prepared using information about receipts and payments in AFS. AFS having mistakes will lead to a fundamental misinterpretation of facts and false projections. Core Mandate: In today’s era of Atma Nirbhar visioned cities, we must have mistake-free, fully governance-compiled financial information. Financial Reporting: Governance Disparity & Historical Initiatives When we can have rigorous guidelines for the corporate sector like Accounting Standards, Auditing Standards, The Companies Act 2013, and other related provisions updated periodically, why can we not have similar binding frameworks for Urban Local Bodies—the primary delivery arms of Government citizen services? Except NMAM and SMAM, no comprehensive statutory manuals exist. Table 1: Key Regulatory Initiatives Taken to Improve Municipal Financial Reporting # Stakeholder Initiative Details 1 Ministry of Urban Development Issued the National Municipal Accounts Manual (NMAM) in November 2004. 2 National Institute of Urban Affairs (NIUA) & MoUD Formulated the Model National Municipal Asset Valuation Methodology Manual (MNMAVMM) in 2009. 3 Institute of Chartered Accountants of India (ICAI) • Pronouncement on “Framework for the Preparation of Financial Statements under Indian Accounting Standards” (2020). • In 2015, issued Compendium of Accounting Standards for Local Bodies (ASLBs) (e.g., ASLB 1, 5, 9, 11, 12, 14, 17). Total 31 ASLBs issued including one cash-based standard. • Mandate: 2 ASLBs (ASLB 2 & ASLB 5) have been made mandatory by ICAI for members auditing Local Bodies w.e.f. April 1, 2022. 4 15th Finance Commission Audited accounts to be mandatorily published on State/ULB website for the year before preceding year w.r.t. award year (e.g., FY 2019-20 accounts published to qualify for 2021-22 grants). 5 AMRUT Mission Complete migration to double-entry accrual accounting system with publication of AFS on website and audit certification from FY 2012-13 onwards. Critical Observation: The NMAM was drafted over 18 years ago and has never been systematically reviewed against ground-level AFS. Currently, ULBs treat AFS as a mere box-ticking exercise to claim grants without independent validation of the accounts. Common Mistakes in Municipal Financial Statements An accounting mistake in a municipal entry or grouping arises from a lack of accounting knowledge, misinterpretation of guidelines, or silence in the NMAM/SMAM manuals. A. Omission in Mandatory Reporting Components Chapter 31 of NMAM (“Financial Statements”, Para 31.4) mandates that the Annual Report shall comprise: Balance Sheet Income and Expenditure Statement Statement of Cash Flows Receipts and Payments Account (detailed by account heads) Notes to Accounts Financial Performance Indicators Defect: In practice, almost no ULB or State prepares or audits Financial Performance Indicators. B. Improper Valuation of Fixed Assets (The Re. 1 Token Trap) While cities are accessing debt markets through Municipal Bonds where rating agencies demand realistic asset backing, prime municipal lands and infrastructure with immense value continue to be recorded at token values of Re. 1 under legacy MNMAVMM provisions, ignoring the revaluation model. This severely depresses municipal balance sheets and artificially constrains borrowing borrowing power. C. Fundamental Accounting Entries Violations Example 1: Booking Property Tax Receipts Directly Without Raising DEMAND Under Para 3.6(a) of NMAM, revenue from Property and Other Taxes must be recognized on an accrual basis in the period when they become due and demands are ascertainable. In practice, software packages directly credit tax revenue upon cash receipt without establishing demand. Current Defective Process NMAM Statutory Provision (Chapter 6) Receipts are directly booked under: Code 11001-01 (Tax Revenue) 1. First, raise Demand under Code 431 (Property Tax Receivable): Dr. 431 - Property Tax Receivable     To 110 - Tax Revenue 2. Upon collection, route through Code 431: Dr. 450 - Bank A/c Dr. 240 - Rebate on Property Tax     To 431 - Property Tax Receivable     To 180 - Other Income: Fines     To 350 - Income in Advance Example 2: Misclassifying Advertisement Fee (14040-01) as Advertisement Tax (11011-01) Post-GST implementation in July 2017, Entry 55 of the State List (Advertisement Tax) was subsumed under GST. State Municipal Acts should have been amended to reclassify hoarding charges as non-tax regulatory fees (Code 14040-01). Because many States failed to amend rules, ULBs misclassify hoarding fees under Advertisement Tax (11011-01), artificially underassessing non-tax revenues. Example 3: Wrongly Booking Grant Bank Interest as ULB Own Source Income Interest earned on unspent balances of tied Central/State grants (PMAY, SBM, AMRUT, 15th FC) is erroneously booked under Code 17110-01 (Interest from Bank Accounts), artificially inflating the ULB’s self-generated Own Source Revenue. Under Fund-Based Accounting principles (AS 12 & NMAM Chapter 17), interest earned on grants belongs to the grantor and must be credited directly to the grant corpus. Current Defective Booking NMAM Chapter 17 Mandate (Fund Accounting) Dr. Bank A/c     To 17110-01 Interest from Bank Account Distorts Own Source Revenue Dr. Bank A/c     To 32010-01 Grants/Contribution for Specific Purposes Credited directly to Grant Liability Example 4: Booking Expenditures Under Erroneous Accounting Heads (Table 4) Current Error NMAM Chapter 14–16 Correct Code Independence Day / Republic Day celebration expenses booked under Code 22011 (Office Expenses) Must be booked under Code 25020 (Own Programmes) Daily sanitation wages (Saf Safai) lumped together with Contractual staff salary under Code 21010 (Salary & Wages) Separate distinct ledgers required for Wages versus Salary to Contractual Staff under Code 21010 Example 5: Non-Recording of Opening Arrears of Property Tax Receivables Uncollected property tax from prior years is not brought forward as Opening Receivables. Consequently, when arrears are collected, they are recorded as current revenue without adjusting receivables, producing pervasive distortion in municipal liquidity and recovery ratios. Way Forward: 8 Fundamental Questions for Policy Makers When listed companies face stringent disclosures because they utilize public equity, why should Urban Local Bodies—which deploy immense public tax funds for civic service delivery—remain exempt from rigorous compliance? The path to reform requires confronting eight critical governance questions: a) Standard Format: Is there a standardized statutory format of AFS comparable to Schedule III of The Companies Act 2013? b) Strict Timelines & Penalties: Are statutory timelines enforced with penal consequences for delayed AFS compilation? c) Strict NMAM Adherence: Are NMAM accounting and demand provisions strictly audited and enforced? d) Qualitative Reliability: Do municipal statements satisfy qualitative standards of understandability and faithful representation? e) Institutional Capacity: Has accounting capacity been institutionalized within ULBs to eliminate total reliance on external consultants? f) Consolidated State Reporting: Does the State prepare a Consolidated Annual Financial Report for all ULBs like a corporate holding group? g) Fund Segregation: Does the AFS cleanly segregate receipts and disbursements between owned funds and tied external grants? h) Error-Free Integrity: Are financial statements rigorously vetted for mathematical and structural integrity? Recommendations for ICAI & Decision Makers Develop a standardized digital portal and financial dashboard for all ULBs integrated with an automated audit verification checklist. Constitute an expert ICAI review group to scrutinize sample city accounts, identify recurring accounting errors, and publish comprehensive Guidance FAQs. Mandate transparent public disclosure of Significant Accounting Policies (SAP) and municipal asset registers. References Government of India, Ministry of Urban Development (2005). Jawaharlal Nehru National Urban Renewal Mission (JnNURM). December. YASHADA (2009). Report on Best Practices in the Financial Management of Urban Local Bodies in India. Submitted to Ministry of Housing and Urban Poverty Alleviation, Government of India. June. Pune: Yashwantrao Chavan Academy of Development Administration. Government of India, Ministry of Urban Development (2015). Smart City Guidelines, June 2015. Government of India, Ministry of Urban Development (2015). Atal Mission for Rejuvenation and Urban Transformation (AMRUT). June 2015. Government of India (2021). The Report of the Fifteenth Finance Commission (2022–2026). Government of India, Ministry of Housing & Urban Affairs (2022). Reform Toolkit for AMRUT 2.0; 2022. Annual Financial Statements of Selected Municipalities. Author: CA. Pankaj Goel, Member of the Institute ■ ■ ■ The Chartered Accountant | April 2023

Indirect Tax | Finance Bill 2023 Analysis The Chartered Accountant Journal | April 2023 (Vol. 71, No. 10) | pp. 72–77 Analysis of Indirect Tax provisions in new Finance Bill NJ CA. Neha Jain D Member of the Institute | Contact: nehajain1180@gmail.com, eboard@icai.in “Being the first budget in the Amrit Kaal, India has laid its foundation to steer the economy for India@100. The ‘Sabka saath, sabka prayas’ moto of the government has driven the economy despite the global slowdown on account of the war and Covid-19. As it is rightly said, ‘A step in the right direction is better than 100 years thinking about it’. With the key vision, India@100, the Budget 2023 is set on 7 priorities ‘the Saptarishi’– Inclusive Development, Reaching the Last Mile, Infrastructure and Investment, Unleashing the Potential, Green Growth, Youth Power, and Financial Sector. On the indirect tax front, the Finance Bill 2023 focuses on consistency, certainty and proposes radical changes around various aspects such as ease of doing business, rationalization of duties and taxes, review of existing exemptions, speedier clearance of litigation, stronger compliance and trade facilitation measures.” Part A: Important Changes Proposed in Customs vide Finance Bill 2023 The proposed amendments in the Customs laws are based on the key intent of ‘Make in India’ and to make India a global brand. It focuses on enhancing the ease of doing business by providing a level playing field to MSMEs, boosting domestic manufacturing, enhancing domestic value addition, and encouraging green energy mobility. Also, measures have been taken to boost key sectors such as chemicals, marine products, lab-grown diamonds, and electronics. 1. Removing the 2-Year Validity Sunset on Conditional Customs Exemptions (Section 25) In line with the budget intent, Section 25 of the Customs Act, 1962 has been amended to remove the rigid 2-year statutory validity review clause under Section 25(4A) for specific strategic imports/exports. Excluded from Automatic Expiry: Bilateral/multilateral Free Trade Agreements (FTAs), temporary imports or re-imports, and Foreign Trade Policy schemes (such as EPCG and Advance Authorisation). Scope of Review: The mandatory 2-year review is now restricted exclusively to Basic Customs Duty (BCD). Other levies—such as safeguard duties, anti-dumping duties, and IGST—are exempt from mandatory 2-year expiry, providing policy certainty for long-term industrial investment. 2. Swifter Dispute Resolution under Customs Settlement Commission (Section 127B) To eliminate protracted litigation delays, an amendment fixes a strict time limit of nine months from the last day of the month in which an application under Section 127B is made. If proceedings are not completed within 9 months, the settlement process abates and the case stands referred back to the adjudicating authority as if no application had been filed. 3. Strategic Rationalisation of Duties Across Key Growth Sectors Make in India Raw Materials: Removal of redundant exemptions to eliminate inverted duty structures and incentivize domestic value addition. Lab-Grown Diamonds: Basic customs duty reduced on seeds used in manufacture to establish global leadership and offset natural diamond depletion. Marine Products: Duty reductions on key imported feed inputs to support coastal aquaculture farmers and augment marine export competitiveness. Green Mobility & Energy: Complete exemption extended on import of capital goods and machinery for manufacturing lithium-ion cells for electric vehicle (EV) batteries. 4. Anti-Dumping & Countervailing Duty Determinations (Sections 9, 9A, 9C) Amendments recognize the ‘determination’ or ‘review’ by the designated authority as valid for extending CVD or anti-dumping levies. Crucially, orders and determinations of the designated authority are made appealable before the CESTAT with retrospective effect from 1st January 1995. Part B: Important Changes Proposed in GST vide Finance Bill 2023 Goods and Services Tax was introduced to fulfill the ‘One Nation One Tax’ vision. While value addition across supply chains has accelerated, the Finance Bill 2023 introduces targeted statutory realignments and compliance guardrails: 1. Restriction of Input Tax Credit on CSR Expenditures [Section 17(5)(fa)] Under Section 135 of the Companies Act, 2013, companies meeting statutory thresholds (Net Worth $ge$ ₹500 Cr, Turnover $ge$ ₹1,000 Cr, or Net Profit $ge$ ₹5 Cr) must mandatorily spend at least 2% of average net profits on Corporate Social Responsibility (CSR). Statutory Insertion: Insertion of clause (fa) in Section 17(5) of the CGST Act, 2017 explicitly classifies goods or services used or intended to be used for activities relating to CSR obligations under Section 135 as ineligible blocked credit. Tax Implication: Disperses judicial divergence comparing CSR to mandatory canteen expenses. Because this amendment is prospective, taxpayers maintain a tenable legal position that ITC on CSR incurred prior to this amendment remains legally allowable. 2. Realignment of 180-Day ITC Reversal & Interest Mechanism [Section 16(2)] The second proviso to Section 16(2) has been amended to remove the earlier anomaly requiring unpaid vendor ITC (beyond 180 days) to be added to output tax liability. It is now aligned with GSTR-3B disclosure as an explicit ITC reversal. Furthermore, interest liability under Section 50 applies only where such availed credit was actually utilized by the taxpayer. 3. High-Sea Sales & Warehoused Goods: Retrospective Exclusion vs. ITC Reversal Section 17(3) Amendment: Explanation to Section 17(3) incorporates transactions covered by Paragraph 8 of Schedule III (supply of warehoused goods before customs clearance and high-sea sales) as ‘exempt supplies’, mandating proportionate reversal of common input tax credits. Retrospective Exemption w.e.f. 1st July 2017: High-sea sales, merchant trade transactions, and bonded warehouse supplies are deemed non-supplies under Schedule III retrospectively from GST inception. No refunds are allowed for taxes already deposited, but open departmental audit notices on such past transactions stand regularized. 4. Strict Three-Year Outer Time Limit for Filing GST Returns Taxpayers (including non-resident taxable persons, composition dealers, and e-commerce operators) are barred from furnishing monthly/quarterly returns (GSTR-1, GSTR-3B, GSTR-4, GSTR-8) and Annual Returns (GSTR-9/9C) after the expiry of a maximum period of three years from the statutory due date. 5. Overhaul of OIDAR Services & Non-Taxable Online Recipient (NTOR) The scope of Online Information Database Access and Retrieval (OIDAR) services has been substantially expanded: Removal of Automation Threshold: The statutory clause requiring delivery to be “essentially automated and involving minimal human intervention” has been omitted. Consequently, services mediated via IT networks (such as live webinars, online coaching, and interactive digital lectures) fall under OIDAR taxability. Redefining NTOR: The condition that services received by an unregistered individual must be “for purposes other than commerce, industry or business” has been deleted. Any unregistered recipient (including persons registered solely for TDS under Section 24(vi)) qualifies as an NTOR, requiring overseas suppliers to discharge IGST in India under simplified registration. 6. Enabling E-Commerce Access for Composition Taxpayers Small businesses registered under the composition levy (Section 10) are now permitted to supply goods intra-State through electronic commerce operators (ECOs). ECO Penalties: E-commerce operators permitting ineligible inter-State supplies by composition dealers or unregistered persons face a statutory penalty of ₹10,000 or the tax involved, whichever is higher. 7. Decriminalisation of GST Offences & Compounding Rationalisation Decriminalised Offences: Obstruction of investigating officers, failure to supply information, and tampering with material evidence are omitted from criminal prosecution under Section 132. Higher Prosecution Threshold: The monetary floor for launching criminal prosecution is doubled from ₹1 Crore to ₹2 Crore (except for fake invoice generation without actual supply). Compounding Slabs Reduced: Compounding fees under Section 138 are substantially lowered from 50%–150% down to 25%–100% of tax involved, eliminating the ₹1 Crore restriction. 8. Place of Supply, Refund Interest & Portal Data Sharing Overriding Non-Registration (Section 23 vs 24): Section 23 is granted overriding effect over Section 24, exempting persons engaged exclusively in exempt supplies from mandatory registration even if receiving RCM supplies. Transportation Place of Supply: Section 12(8) proviso omitted; place of supply for transportation of goods outside India is location of recipient (if registered) or location where goods are handed over (if unregistered). Refund Interest Computation (Section 56): Interest on delayed refunds is explicitly computed for the period of delay exceeding sixty days from application receipt. Inter-Agency Data Sharing (Section 158A): Authorizes common portal sharing of registration, return, and e-way bill data with other government authorities. CESTAT Tribunal Succession: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) is formally appointed to succeed the Authority for Advance Rulings and Central Sales Tax Appellate Authority. Conclusion: Balancing Trade Facilitation with Fiscal Vigilance The Finance Bill 2023 solidifies India’s economic momentum in the first year of Amrit Kaal to achieve the vision of India@100. Buoyant and progressive GST collections demonstrate that government facilitation of entrepreneurship and ease of compliance is delivering robust results. The inter-agency fungibility of portal information under Section 158A curbs fraudulent practices, while the calibrated rationalisation of Customs duties provides domestic manufacturing with the impetus needed for AtmaNirbhar Bharat. The indirect tax proposals represent a balanced yardstick for sustainable macroeconomic growth. Author: CA. Neha Jain D, Member of the Institute ■ ■ ■ The Chartered Accountant | April 2023

Management The Prospect of Corporate Governance in the Social Media Age Authors: CA Vibha Pandey and Dr.(CA) Durgesh Pandey • Members of the Institute • Contact: eboard@icai.in • The Chartered Accountant | April 2023 (pp. 78–84 / Journal pp. 1138–1144) Executive Governance Summary Corporate governance in the social media age is crucial for organisations to safeguard their reputation and maintain the trust of their stakeholders. Social media is now a potent instrument for establishing and preserving a good reputation since it has transformed how businesses interact and communicate with their clients. However, it also exposes the companies to a range of risks, including misinformation, negative comments, and privacy breaches. To mitigate these risks, organisations must have strong social media management practices, including clear policies and guidelines, regular monitoring, and a plan for addressing negative feedback. Additionally, while engaging on social media, businesses need to be cognizant of cultural diversity and sensitivities and transparent in responding to customer concerns and queries. Effective social media governance is necessary for businesses to uphold a favourable reputation and foster trust among their stakeholders in the digital age. “Social Media is a double-edged sword; it has the power to do real good, but also the power to hurt.” 1. Introduction Social media has altered the world as it has made people more connected to one another and created countless new opportunities. Even though social media has been around for almost 20 years, how it is utilised today differs from how it was at the outset. Face-to-face interactions have virtually been overtaken by technology due to how far it has advanced, particularly during the global pandemic phase. Since the epidemic, the potential for technology, especially social media, has increased significantly. Tasks could be completed at work without relocating or commuting as businesses started interacting with clients worldwide without taking long travels. Since the internet expanded its wings and captured majority of the world’s population, all of these have evolved into daily norms. Social media has many beneficial effects on business, allowing brands to connect with their customers, build a wide audience for their products, market themselves in a unique way and even generate revenue through consumer engagement more effectively. Over the past few years, there has been a growth in demand for social media management services and solutions. While we mainly focus on the positive aspects of Web technology, numerous underlying issues with social media could jeopardise a long-standing legacy. Many organisations are increasingly choosing to work with public relations (PR) agencies because they can bring together people, research, and modern technologies to help their clients reach new audiences and accomplish business objectives. The following graph illustrates how businesses are increasingly interacting and engaging with stakeholders on social media. This is notably true in emerging markets, where firms are more likely to use social media than in many developed countries. 2. Number of Social Network Users in Selected Countries (2022 vs. 2027 Projected) Source: Statista (2022). Internet users who use a social network site at least once a month (figures in millions). Rank Country 2022 (Millions) 2027* Projected (Millions) 1 China 1,021.96 1,212.38 2 India 755.47 1,177.50 3 United States 302.25 327.22 4 Indonesia 217.53 261.70 5 Brazil 165.45 188.35 6 Russia 115.05 126.37 7 Japan 101.98 113.03 8 Mexico 98.21 122.07 9 Philippines 84.07 92.68 10 Vietnam 72.29 81.63 11 Turkey 67.11 76.58 12 United Kingdom 61.67 65.23 13 Germany 60.88 73.15 14 Thailand 56.27 59.32 15 France 48.71 56.62 16 South Korea 46.09 47.61 17 Italy 43.18 46.89 18 Nigeria 38.47 91.55 19 Canada 34.47 38.93 20 Bangladesh 24.49 33.60 3. Why Social Media Governance Matters: The Tesla Precedent Before diving into the ripples created by social media in the business world, it is essential to understand how it matters. How the companies perform is defined by their profit on the books, and the profit comes majorly from how a company gains. It is determined by its connection with the consumers and the positive facade it has in public. The Tesla & SEC Case Study (2018) Consider Tesla, Inc., which experienced several controversies in 2018 as a result of the CEO’s tweets. In one instance, the CEO stated that he had secured funding to take the company private at $420 per share, which caused the company’s stock price to spike. Later, it was discovered that the funding had not been guaranteed and the claim was untrue. The Securities and Exchange Commission (SEC) filed a complaint following the incident, accusing the CEO of engaging in securities fraud. The CEO was compelled to forfeit his position as company chairman and pay a $20 million penalty as a consequence. The business also had to pay a $20 million fine and incorporate governance procedures in place to stop future events of such nature. The incident involving Tesla had a big financial impact on the business because it not only led to penalties but also tarnished the company’s reputation and affected the value of its stock. As a defined set of members decides major decisions about an establishment, it is crucial to define certain rules and practices to govern the social media aspects of a corporate establishment. These members constitute a board of directors and stakeholders who determine what is best for a corporation’s future. This act of management is termed ‘Corporate Governance.’ 4. Foundations and Evolution of Corporate Governance The early 21st century is anticipated to be more concerned with governance than the 20th century, which may be thought of as the age of management. While both phrases refer to controlling organisations, governance has always needed a closer look at underlying goals and principles. The structure and relationships that affect an organisation’s direction and effectiveness are referred to as corporate governance. Corporate governance includes engaging with all the stakeholders, namely consumers, vendors, employees, and creditors, to balance their goals of financial success and social responsibility, with the board of directors playing a key role in both decision-making and governance. Robert Ian Tricker’s Foundational Definition (1984) The book “Corporate Governance” was written in 1984 by corporate governance specialist Robert Ian Tricker. He goes on to define it as: “The way trust is shown, power exercised, and accountability achieved in corporate entities, for the benefit of their members, other stakeholders, and society.” What exactly constitutes Corporate Governance has changed over the years, and it is a subject which is continually growing in scope. The institutional, legal, regulatory, and ethical atmosphere of society has an impact on the corporate governance system, and the current emphasis is on how social media impacts it. When most of the corporate codes were crafted, social media tools were still in their infancy and were not part business setup. However, social media is now making a marked impact on business and has also seen a rise in academic articles addressing the topic. After gaining a fundamental understanding of what corporate governance entails, let’s continue learning more about social media. 5. The Mighty Social Media & Industry Impact Metrics The Information Systems Audit and Control Association® (ISACA) defines social media technology as: “Involving the creation and dissemination of content through social networks via the internet and is defined by the level of interaction and interactivity available to the consumer.” Social media is more diverse and deeper than it seems to be. The effects it has can directly impact individuals, celebrities, and even massive corporations. Statistics from Sprout Social demonstrate the value of social media marketing for organisations of all sizes: 55% of consumers learn about new brands on social media. 78% of consumers are willing to buy from a company after having a positive experience with them on social media. 91% of executives will increase social media marketing budgets in the next three years. 72% of companies use social media data to inform business decisions. 58% of B2C companies reported that social media had had a more positive influence on revenue and sales. With all the definitions and examples presented so far, it is clear that the consumer or end-user plays a crucial role. As a result, businesses must take proactive measures to deal with any user-generated comments or content. 6. Effects of Social Media and Social Media Strategy on Governance: Real-World Incidents Technological advancements have had a profound influence on governance, and firms can no longer disregard the implications of user-generated opinions, which may have a disastrous impact on the bottom line as well as reputation: 1. $4.6 Billion Market Value Collapse in 11 Minutes (Engadget Incident): One of the largest Companies in the world into mobile handset manufacturing Inc lost $4.6 billion in market value in 11 minutes in May 2007 because of a false article on the well-known online site Engadget. 2. Female Empowerment Hashtag Campaign Backlash: A well known global brand to glorify the female asked its users to share hashtags on their experiences on being girl, and few users did share are their experiences stating when they were offered seats or when they were complimented on their dressing or accessories which they adorned, there was a backlash on social media stating that the campaign is discriminatory, archaic and is trivialising women experiences. 3. Cab Aggregator & Celebrity Endorsement Authenticity: A large cab aggregator was trolled for getting on board famous cricketer wherein the users questioned the brand whether such personality uses the taxi app. Infact this is the question in most of celebrity endorsement wherein there is an undertone of criticism as to whether such celebrities use the brands they are endorsing. However, the problem has started getting traction in the social media age. 4. Handyman Aggregator Accidental CC Email Blunder: Another handyman aggregator company found itself in crisis when the senior management accidentally marked the concerned consumer in an internal email, asking his team to ignore him. 5. Traditional & Wedding Wear Ad Religious Backlash: A famous Indian brand in traditional and wedding wear attempted to highlight the age-old tradition of girls leaving their parents’ house after wedding and the burden associated with that but the brand faced backlash on social media wherein some users had adverse comments that the brand is endorsing against popular sentiments and had religious undertones. 6. Global QSR Political Tweet & Hacking Disavowal: Few years ago, A famous global QSR (Quick Service Restaurant) Company tweeted a direct political post from its official account and briefly pinned it to the top of its page. It was swiftly removed, but not before amassing more than thousands likes and retweets, as well as replies from irate backers of the political leader who rallied around the transient #Boycott hashtags. The Company apologised and claimed that their account was hacked and disowned the tweet. 7. Pandemic Retail Investing Surge & Finfluencers: During the pandemic surge in the stock market, millions poured their savings into equities on advice from authorised financial advisors and social media gurus to help identify the next big tickets. ISACA Research & Web 2.0 Financial Performance Impact To understand the pervasiveness of social media, studies by ISACA in their report Social Media: Business Benefits and Security, Governance and Assurance Perspectives (2010) revealed that 65% of the Fortune 100 world global companies have Twitter accounts, 54% have Facebook pages, 50% have YouTube video channels and 33% have corporate blogs. Furthermore, the researchers discovered a strong link between excellent financial success and firms that actively adopt social media as part of their strategy. According to an analysis in 2012, “Firms that adopt Web 2.0 (social technologies) are more likely to be market leaders, have their market share rise, and utilise management approaches that lead to greater margins.” While another study in 2012 by consultants found that the top 100 most valuable global businesses with any social media participation reported an 18% gain in sales over the previous year, those with the least active reported a similar 6% revenue drop. It is evident that the widespread usage of social media has the ability to change corporate goals. 7. Vulnerabilities Addressed by Corporate Governance Strategy in Social Media Litigation & Organized Protests Addresses the problems that arise when individuals utilise social media to organise protests and collect data that may be relevant to litigation; chances of lawsuits based on social media will less likely to emerge. Whistleblower Allegations Reduce the impact of a whistleblower allegation once it is made, as the whistleblower begins sharing information in channels like Twitter as a tweet that may result in threats of public hearings or legislative changes. Insider Trading Risk Prevent allegations of insider trading where an employee may intentionally or mistakenly post facts to a post that could trigger a sell-off or an abrupt increase in price and buying activity that triggers an investigation. Legislative & Brand Blockades Avoid situations which could lead to legislation that halts a company’s proposed project in its tracks and further preventing from any other reputational or brand risks. 8. The Social Media-Inclusive Corporate Governance & Operational Controls It is critical for an organisation to manage its social media sites properly, which begins with excellent account management to prevent hacking and hijacking. Auditors frequently discover that sites are not updated on a regular basis, that users do not log out after each session, that users exchange credentials with other team members, and that users link with unknown parties freely. Operational Vulnerabilities: Inadequate credential management leads to hacking, oversharing leads to phishing, thoughtless link clicking might introduce malware, and contentious posts inevitably lead to activists assaulting the enterprise’s reputation. Further, outsourcing social media management without proper monitoring is the epitome of ignorance. Further, unforeseen events on social media can inevitably occur at any time. The stakeholders would be able to call for openness and discussion, acting as ad hoc raters of the corporation’s efforts to resolve the issue, with “like” against “dislike” being the only alternatives. Additionally, everyone with internet access will have access to the same social media tools as the business and will be able to sway public opinion through direct interactions. There must be clarity on what may and cannot be posted, which necessitates a stringent corporate policy that covers the following governance matrix: Governance Dimension Policy & Operational Directives What • Define what is allowed and not. • Set the boundaries of content clearly. Who • Allow only trained and approved staff to post on social media channels. Why • Have a transpicuous idea behind the social media content. How • Build a mechanism to report any inappropriate use of social media by employees, third parties or the public. Five Strategic Inquiries for Corporate Boards & Internal Auditors These policies must be supported by a governance framework that can and should be audited. Furthermore, it is equally important to consider how social media affects a company internally. The board should, for instance, inquire as follows: 1) Customer Service Delivery: Is the business actively using digital platforms, such as to provide exceptional customer service, as opposed to only responding to complaints? 2) Staff Culture Alignment: Does the business use social media to connect with staff members and match interests with corporate culture? 3) Co-Creation Ethos: Is social media-driven co-creation mentality having an impact on the organisational ethos and culture? 4) Stakeholder & Critic Listening: Does the business pay attention to stakeholders, critics or customers who use digital platforms? 5) Board Leadership & Internet Engagement: What impact will forthcoming boards and executives’ engagement to the Internet have on their ability to lead? 9. Guidelines for Corporate Citizens to Effectively Utilise Social Media (Do’s and Don’ts) The direct access to a larger audience makes it essential for companies to have a robust governance framework in place to ensure that their social media activities align with their values and goals. The following are some of the general do’s and don’ts of using social media for corporate citizen users: ✓ DO’S Have a proper social media account and content governance in place. Clearly define and communicate social media policies and the risks to employees. Have a plan in place to address negative comments or complaints on social media in a timely and professional manner. Be transparent in sharing company-related information on social media. Utilise social media not just for advertisement but also for customer engagement by being a social citizen. Match social media updates to the company’s official releases. ✗ DON’TS Ignore/delete critical comments without addressing them. Post misleading/wrong information. Ignore inquiries or service requests of customers when there is a channel in place, such as chatbots. Comment on the accounts of rival companies or other organisations unless absolutely necessary. Comment on sensitive issues without considering cultural differences. Have outdated information in the social media accounts. 10. Conclusion, Regulatory Shifts & Reputational Imperative Many social media breaches are widely acknowledged, but many more occur behind the scenes. Every company owes to its stakeholders to educate them on how to use social media responsibly; doing otherwise could have fatal consequences. A company must have a well-thought-out strategy for social media; they must understand why they are utilising it and adjust controls accordingly. For many reasons, social media is a tough sector to audit, yet auditors may provide value, and prior history shows that firms will be highly interested in the outcomes. Proposed IT Intermediary Rules & Accountability Mandates There are some amendments proposed in which power to the government will be given to overturn the decision of social media giants to suspend, block, and remove accounts of the users on various violations. As per the new proposed IT rules, companies will be put responsible for tackling illegal content instead of refuging under an immunity shield. No matter how one feels, social media has its own benefits and drawbacks, and social media governance equates to eliminating risk. In the end, everything hinges on a corporation’s ability to influence social media to work for it rather than against it. About half the world can own at least one account on social media and have the freedom of speech to express themselves about anything and everything. Due to the scarce information and less research available in this space, it is important to stay more vigilant than ever. After all, having a sound social media governance strategy might make all the difference between handling the consequences of a corporate error and adequately apologising for it or making the problem worse. “It takes 20 years to build a reputation and five minutes to ruin it.” — Warren Buffett References https://www.ifc.org/wps/wcm/connect/eeeb7747-042d-4b97-91f6-afc26cd8ff01/PSO_27_Social_Media.pdf?MOD=AJPERES&CVID=jwlZsCs https://sproutsocial.com/insights/importance-of-social-media-marketing-in-business/ https://www.corpgov.net/library/corporate-governance-defined/ https://www.academia.edu/8863014/Corporate_Governance_in_a_Social_Media_Era_A_systematic_Literature_Review https://www.isaca.org/resources/news-and-trends/isaca-podcast-library/how-do-organizations-control-their-use-of-social-media https://www.isaca.org/resources/isaca-journal/issues/2021/volume-4/how-do-organizations-control-their-use-of-social-media-part-1 https://pronto-core-cdn.prontomarketing.com/2/wp-content/uploads/sites/3404/2015/12/Social-Media-and-Security-Risks37.pdf https://www.academia.edu/8076073/SOCIAL_MEDIA_NEW_CHALLENGES_FOR_CORPORATE_GOVERNANCE https://www.cbinsights.com/research/corporate-social-media-fails/ https://www.firstpost.com/india/from-fabindia-to-tanishq-a-look-at-brands-that-faced-backlash-on-social-media-for-their-ads-10086071.html https://www.lipsindia.com/blog/ https://timesofindia.indiatimes.com/india/new-it-rules-socail-media https://www.aljazeera.com/economy/2022/7/28/social-media-gurus-prey-on-indias-small-retail-investors https://www.sec.gov/news/press-release/2018-226 https://www.cnbc.com/2018/08/07/elon-musk-announcement-to-take-tesla-private.html https://www.meity.gov.in/writereaddata/files/Social%20Media%20Framework%20and%20Guidelines.pdf

Commercial Laws Business Succession Author: P N Kumar • Expert in Legal Issues • Contact: pnk2001@gmail.com / eboard@icai.in • The Chartered Accountant | April 2023 (pp. 85–89 / Journal pp. 1145–1149) Legal Overview & Fundamental Concept Every person who is born is destined to die. Whatever money or material he accumulates in his lifetime is left for his nears and dears, after his death. This type of transfer of his ownership rights is called Succession. It is different thing that during his life, he assigns the rights to someone through a “Will” Otherwise the property will be distributed by court among heirs as per the rules of his religion. If a man has established a business with his own funds or in association of other persons’ fund, or has associated with a Corporate Entity, which is an artificial person, as a shareholder, he has still the right of succession of his business. In this article, we will discuss about the rules of succession of each type of business, and how the successors can possess the rights of running the business and transfer of ownership, without any hassle and fear of payment of tax / stamp duty, as is the law governing the transfer of property of an individual. 1. What is Succession The word succession is a word of technical meaning. It refers to act of vesting of rights of ownership of properties of a person in the name of his heirs and successors, after his death. “Person” herein above include an individual, and other juristic person namely business entities including of course, firms, partnership, companies, incorporated or not. The “vesting” is synonymous of word “transferring,” but these have different interpretations in different contexts and laws. Broadly, vesting means the passing the right of ownership, by mutation of the name of successor in the official BOOKS of the Govt. records and registers. Successor is an apt word for those to whom the property is vested, being the heirs or administrators, or any other beneficiaries. The successors exclude those who by any deed, grant, gift, or any other mode of purchase or contract, get the property of the deceased, during the life time of the person. Key Principles Governing Property Vesting and Business Effects: Inheritance and Accumulation: A person possesses a property inherited by his father or forefathers, and later he keeps on adding more properties by utilisation of savings out of his income. The properties may be immovable like land and building, and movables like deposits, shares, units of mutual funds, LIC policies, and other schemes, so that he is able to face and avoid the hardships of his life and also his family after his death. Some enterprising person invest in business, or setting of own profession, so that he protects the life of those heirs also, who have diverse interests in life. His investment in business is in the form of premises, plant and machinery, capital assets, raw material, and keeping money in banks for working capital etc. These are called the business properties. Scope of Property & Inseparable Liabilities: Property is a wide enough to include other personal and business effects, intangible assets like goodwill, licenses, permits, franchise rights, royalties etc. Some of the properties of individual and of business also have some pending liabilities. In case of succession of individual, the net value of assets gets transmitted officially, whereas in business, net worth of all assets move along with all liabilities, in one bag, to the successor. In a running business, the assets and liabilities are inseparable. Succession vs. Inter-Vivos Transfer: The succession process has different process and advantages over the process of transfer of properties and goods, from the view of passing consideration and giving delivery to other. In the case of individual’s succession, the transfer is executed after death, whereas, the transfer of property by the individual is, by real delivery or contract, or mortgage, during his own life time, which is sheer transfer. 2. Individual’s Succession Under Hindu Succession Act, 1956 It is necessary to view the process of succession of individual before jumping to our interesting topic of “Business Succession”. The succession of individual person takes place as per the law governing his religion and traditions. Hindu succession Act which applies on Hindus, Sikhs, Jains, and Buddhas, is different from Muslim law and Parsi law. Here below, we concentrate on Hindu Succession Act 1956 only. According to this law, there are two ways of Succession viz.: 1. Testamentary Succession In the first process, a wise person, by virtue of knowledge and practical wisdom, writes his Last Will, with his sound mind and without any pressure or influence wherein, he proposes to distribute his assets, legitimately acquired or earned, to his heirs and others, (which not his relatives, necessarily) in such proportions, as rightly justified. He writes his Letter of Mandate, so that on the question of distribution of assets on his death, there is no dispute or litigation. This mandate is witnessed by two persons, and for execution of mandate, the Executor is appointed also. It is not mandatory, though desirable to get that registered under Indian Registration Act. This mandate can be modified to add or delete any part, or revised fully as and when circumstances warranted. 2. Succession by Law Courts If the individual has not written any will or has left some assets, in the Will, or he meets his death, before awareness of the advantages, the succession of his properties is done thru Court procedures and final issue of order of Heirship / survivorship. Who constitute heirs? This is provided in the Act. In old days, only the male heirs were counted but as per Act of 1956, male and female children, spouse and parents have been entitled to their share in distribution of assets. Naturally and normally, after marriage, every person leaves behind, more than two heirs. Therefore, every asset has to be divided and partitioned in many parts, unless and until all, reach a family compromise, or agree to sell and distribute the net value, in proportion to the individual’s entitlement or agree to keep the assets under common custody till the heir finally agree to sell on any later time. Notwithstanding anything, the business of the individual is succeeded in the manner as enumerated in the following discussion of Business Succession. 3. Basic Differences and the Stamp Duty Debate (Hindustan Lever Ruling) On the subject of business succession, there are two schools of thoughts: First School of Thought (Supreme Court in Hindustan Lever, 2004): One who agree with the opinion held by Supreme Court, in its order on amalgamation, in the matter of Hindustan Lever in 2004. According to this, Amalgamation, sanctioned by the court would be a transfer inter-vivos and would be different from succession or device and so shall be subject to levy of stamp duty on the value of assets. Second School of Thought (Single Unitary Asset by Operation of Law): The second school opined that in amalgamation of business, the whole running business gets transferred, lock, stock and barrel, therefore, it needs to be looked as one asset. Transfer of asset in business, is by operation of law, and it does not fall in the definition of conveyance. So stamp duty is not chargeable. They further opine that business of natural persons and artificial persons (Corporate) have like entitlement of Succession, and none of these should be treated differently, despite the fact that characters of business are different from the individual. The asset value of a running business and value of liabilities cannot be separated unit-wise so, it is not exactly determinable value, hence imposition of stamp duty, on asset, category-wise is impossible. Therefore, neither logically nor practically, it is a useful exercise. Distinctive Differences: Individual Succession vs. Business Succession No. Individual’s Succession Business Succession 1 There can be succession of individual without there being the succession of his business. Business succession involves the entire operating entity and cannot be detached from commercial continuity. 2 Operates via two modes: Testamentary (Will/Mandate) or Court proceedings (Heirship/Survivorship). Succession of business is executed through law courts (Civil or High Court / NCLT) sanctioning the scheme. 3 Distribution of assets of the deceased person takes place strictly only after actual death. Starts even while business is alive and ongoing, pursuant to partnership deeds, MOA/AOA, and relevant statutes. 4 Transfer of assets goes into hands of successors after an inevitable gap of time. Practically no time gap, as management and assets move simultaneously in seamless commercial continuity. 5 Enriches the successor’s property, but sometimes weakens family ties due to partition disputes. Strengthens family ties and brings collective prosperity to everyone when the business grows and enlarges. 4. Business and Income Tax Implications (Sections 56 & 47) All business fall under the ambit of Income Tax act. All profits and gains arising out of that business become liable to tax (subject to exemptions, applicable on various types of business or even single man’s business. It has already been explained that no income is generated unless some goods and services are transferred or exchanged between the two. Transfer is therefore, cradle on which business moves and money is received. Thus, profits are derived by calculating difference of receipts/income and expenditure. There are some transactions, which are exempted from the computation of income, and thus raising profits of business. Similarly, there are certain transactions of transfer of capital assets, from which the business gets extra income and then increases the tax liabilities. In some cases of transfer of capital assets, the gains of receipt over cost, are taxable under heading of capital gain tax. Section 56(1) and Section 47 Tax Exemptions: Provisions of Section 56 (1) list out the receipts, exempted from computation of Tax liability of individual/ business: - The receipts from relatives, on the occasion of marriage, or other ceremonies, or by way of inheritance / succession, among other reasons. The relatives include spouse, children, parents, brothers and sisters, which fall in the category of lineal ascendants or descendants, as per Hindu Succession Act. Therefore, a Hindu person becomes happier when he gets any money or fund by way of inheritance / successor, vis-à-vis getting money transferred through any other source. Similarly, an individual gets exemption from payment of capital gain tax, if capital is transferred to him from his predecessors in the nature of inheritance. (For details, refer section 56 and section 47 of Income Tax Act.) 5. Succession in Sole Proprietorships & Corporate Conversion It is a business where an individual is the owner of all immovable assets, capital assets, working capital, skill and intangible assets, owned by him in his name or in the name of the firm, given by him. He is equally liable to clear all obligation relating to that business. On his death, there is an option of closing the business by sale and to distribute the consideration received. If this option is not agreed, then alternative is to start process of Succession. After the death of the owner of the proprietorship firm, if there is no concurrence of all heirs, to appoint only one to succeed as successor, then other option is to keep the business in joint ownership, each one to be reckoned as a partner. Further, understanding that in practice and reality in view, that for long there cannot survive friendly and amicable relations, for one reason or other, the heirs may consider converting proprietorship in to a public limited or private limited company., keeping their vigil that they get all possible exemptions from the income / capital gain tax computations. Statutory Conditions for Tax-Free Conversion [Section 47(xiv) & Section 47A]: All the assets and liabilities of proprietorship firm become the assets and liabilities of the company. All the heirs become shareholders of the company, keeping fixed their share capital, as existed in the firm. The aggregate shareholding of the heirs, becoming part of company, is not less than 50 percent of total capital. The heirs do not get any benefit other than the shares allotted to them in place of their part of capital. (Read section 47(xiv) and section 47A of the Act - for details). 6. Succession in Partnership Firms & Amalgamation Provisions It is a form of business establishment incorporated under Indian Partnership Act 1932. It is a voluntary contract between Two to Twenty competent persons, to place their monies, personal effects, labour, skills, some or all of them, in a lawful commerce / business activity, with the understanding that there shall be a communion of profits and loss, in certain proportion. All the terms and conditions are mentioned in Partnership deed and business has to run in prescribed manner, in the name of firm and not in the name of any partner. Their obligations are all joint and indivisible. The purpose of succession of Partnership business is to give useful engagement to all the heirs of all the partners, and to ensure that profit share of every family grows over the time. Therefore, while planning for growth of business growth, there is need of expanding the size, territory, and capital base. The succession of partnership be planned in such a manner that if any of the families want to quit, then they conveniently do so , without breaking or killing the continuity of business . The number of partners cannot exceed 20, so the partners should consider converting to Private or Public Ltd. Company. Which gives growth. While vesting the business in other running business, or changing to company, opportunity to avail exemptions under relevant provisions of section 47 and 56 , should be prime considerations: Partnership Conversion & Amalgamation Requirements: All partners become shareholders of company. Partners do not receive any other money in consideration. The aggregate of capital of partners in company should be not less than 50 percent of total voting power. Provisions of section 47A should be kept in mind also. Partnership firm can convert itself in Company or alternatively can amalgamated in to another existing company. Therefore, procedures of Amalgamation will have to be followed strictly. Partnership firm would be taken as an unregistered company u/s 582(b) of the Companies Act. 7. Succession in Companies: Merger & Amalgamation Framework Company means a company incorporated under the provisions of Indian Company Act., as a private limited or a public limited company, or in any other manner. A private can extend its shareholders between 2 to 50. On the other hand, a public limited company can extend shareholders no. from 7 to unlimited number. To achieve the advantages of consolidation of two or more companies of the same parent company, or. holding company and subsidiary company, so that stake holders of both companies get advantages of economies of scale, Savings of functional and administration expenses, and pushing the company for better marketing and brand image, may agree with each other, prepare a scheme of merger of companies and proceed for amalgamation of companies pursuant to rules made in section 391-395 of Companies Act, and relevant provisions of income tax and capital gain tax. Exemption Conditions Under Section 47(iv) Inter-Alia: Any transfer of capital asset by a company to its subsidiary company, and if the parent company holds the whole of the share capital of subsidiary company. Any transfer of capital asset by a subsidiary company to a holding company, if the capital of subsidiary company is held by the holding company. Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company. Any transfer of shares of the amalgamating company with the shares of amalgamated company, and company is an Indian company. The crux of the whole issue is that entities need to follow all the procedures and compliances, as per section 391-394 of companies act 1956 or relevant provisions under new amended Act of 2013. Definition of Amalgamation Under Income Tax Act [Section 2(1B)]: Amalgamation in relation to companies means that they merged in such a manner that: All the property of amalgamating company become the property of the amalgamated company; All the liabilities also become liabilities of the amalgamated company; Shareholders holding not less than three fourth in value, other than shares held in new company before they become shareholders of the amalgamated company. This implies that if there is complete compliance of section 391-394 of the companies act as well, procedure is satisfying the conditions of section 2(1B) of Income Tax, then it implies that amalgamation of companies is deemed as succession of two companies. 8. Conclusion: ITAT Pune Precedent (Capgemini Case) & Total Succession ITAT Pune Landmark Ruling: Cap Gemini Tech v/s ACIT (Appeal No. 1857/PUN/2017 - August 2022) This final conclusion and view has been fully supported by a recent judgement of ITAT (Pune) in appeal no 1857: Pune / 2017, in the case of Cap Gemini Tech v/s ACIT, issued in August 2022. It clarified that scheme of amalgamation approved by High Court is a binding order on all, to consider that the transferee company / amalgamated company enjoys all benefits to which the amalgamating was entitled before amalgamation. In other words, successor company is full representation of the predecessor company as far as the ownership of all assets and obligations of liabilities and also all rights, benefits and privileges. This makes us to infer that orders of High court and order issued by Registrar of Companies, deleting the name of amalgamating company (without formal winding) and joining the file of the amalgamating company with in the file of amalgamated company is sufficient process of Succession of one company to other. Thus the transfer of one company/business, after its exit, into other, is not a case of Transfer, it is 100 percent case of Succession of company/business of a company. If the decision of ITAT continues to hold water, and is accepted by all authorities dealing with matters of Transfer of Properties, then on transaction of business succession by virtue of Sanction of Scheme of Amalgamation, will not attract the stamp duty or other taxes. The successor company will stand strongly in the shoes of the predecessor company. Hundreds of business entities who have not got immunity so far from the burden of levy of tax on their mind will get relief.

Technology Emerging Technological Trends in Banking and Financial Ecosystem Authors: CA. Amit Gupta and Ankur Khairwal • Deputy Secretary & Executive Officer in the Institute • Contact: eboard@icai.in • The Chartered Accountant | April 2023 (pp. 90–94 / Journal pp. 1150–1154) Executive Transformation Summary The digital revolution has twisted the game on its head for nearly all sectors that comprise our everyday existence. With a boatload of prospects on the horizon, businesses today have enormous potential for expansion. This crucial advantage derives from simple and focused client access. In terms of digitization, technology has therefore produced a revolutionary offspring. Financial sector is also one of the earliest industries to experience the digitization storm. In financial services, computer vision aids in fraud detection, and internet transactions are far more efficient than before. Up until recently, most of these organisations were lagging. However, digitization has opened new opportunities for the banking industry and its consumers. The banking sector is experiencing a tremendous period of digitalization as new technologies profoundly alter the way financial services organisation’s function. “The financial sector is undergoing a fast transformation. Robotic process automation and open banking-driven digital disruptors are compelling banks to reinvent their operational structures.” 1. Introduction & The Speed of Banking Transformation Organizations must incorporate and respond to this transformation in order to stay up with the fast-paced business climate. However, many businesses, especially smaller organisations, are suspicious about the real worth of such a commitment. To better comprehend the long-term worth of digitalization in banking to these companies and their consumers, they should examine and evaluate its many advantages. [1] The financial sector is undergoing a fast transformation. Robotic process automation and open banking-driven digital disruptors are compelling banks to reinvent their operational structures. Customers of modern banks want a greater quality of service and meta merchandise and services. As financial technology, large technology companies, and merchants advance on their turf, they must maintain their relevance and prevent creative destruction. Most next-generation technologies are Intelligence and will include blockchain and cryptocurrency gradually. They will advocate for educated, pre-emptive financial management and lifestyle decisions, as well as openness on the environmental consequences of such decisions. In furthermore, a growing emphasis on governance and Sustainability will raise the pressure placed on banks. The technology behind digital payment business concepts is quite diverse. These capabilities incorporate digital currency, cognitive computing, machine learning, and autonomous processing efficiency.[2] With use scenario is distinct, but the essential element is a concerted attempt to deconsolidate the industry of financial services that has traditionally had a heavily secured position thanks to extensive regulatory oversight. Digitalisation in financial services refers to the incorporation of different FinTech innovations to streamline, optimise, and digitise banking sector activities. 2. Financial Services That Digitalization Offers: Eight Structural Benefits Digitalization is reshaping nearly every industry, but here are eight ways financial institutions can benefit from implementing digital technology in their infrastructure: 1. Enhanced Business Model: Digitization is required to increase the number of customers and compete in any industry in today’s tech-driven society, where people expect increasingly rapid results. These heightened requirements include clients who prefer online banking alternatives to sluggish and burdensome conventional banking. 2. Effective Banking System: In a culture where speed and precision are highly valued, efficiency is crucial. Advanced digital analytics have greatly simplified and accelerated banking procedures. [3] The digital transformation has impacted the following day-to-day banking activities: Mobile Solutions Exchanges and settlements using mobile technology solutions Paperless Verification Digital signatures that eliminate the need for printing On-The-Go Lending Lending approvals on-the-go, without entering a loan office Automated Payments Automated bill payment to guarantee consumers fulfil their commitments on time Figure 1: Effective Banking System Touchpoints 3. More Decisions Driven by Data: The more information a management team can gather, the greater its ability to make sound judgments. The most important decisions are data-driven, and digitalization enables financial institutions to make these difficult (but well-informed) decisions based on accurate and real-time customer data. 4. Funding with Centralised Control: Decentralised financing is a comparatively recent consumer banking innovation that explains the reluctance of banking firms to embrace this approach. Nevertheless, while authorities work on regulations to regulate transactions inside this conceptual platform, finance titans are now developing first plans for decentralised architecture. 5. Minimal Transactional Expenses: Digital transformation increases long-term cost effectiveness by necessitating fewer continuing financial investments than traditional money exchange procedures. For instance, digitization has made online payment systems more accessible and simpler, lowering the amount of money spent on intermediate channels to transport physical currency through one party location to location. 6. Increased Adaptability and Versatility: In the FinTech services businesses of the present day, mergers and acquisitions are almost ubiquitous. Cloud-based solutions eliminate the need for local systems, allowing for a more seamless digital merger of company units. 7. Integrated Data and Procedures: Digital transformation enables banks to transition from their legacy systems, which are frequently a mishmash of disparate advanced technologies that do not communicate information accurately, to a more consumer-centric, centrally managed system. This change delivers five core structural advantages: Tinier & more streamlined bank technology stacks Less costly & time-consuming upkeep Data standardisation within the institution Enhanced information reliability Fewer or no time-intensive data transformations Figure 2: Integrated Data and Procedures 8. Enhanced Reporting Procedures & Automated Compliance: The rapid availability of real-time, integrated data considerably improves the speed and accuracy with which banks can provide reports. Financial organisations can monitor shifting patterns, respond swiftly, and identify issues early in the process. These additional insights enable upper leadership to generate reports that would have previously required IT’s reserves to collate and format. Because the generation of these findings requires fewer time and labour, banks can reassign employees formerly responsible for gathering this relevant data to analysis roles with a greater impact on the business.[4][5] Compliance-Automated Features: Electronic financial planning platforms also offer advanced certification and accreditation capabilities to banking firms. Consequently, banks may reduce their auditing expenditures. Information from existing applications can be instantly normalised and supplied to the digital platform, reducing the risks associated with manual data entry. In addition, the institution will not have to handle any new or changed rules since these digitalized and virtualized systems get frequent compliance upgrades. 3. Primary Factors Driving Banking’s Digital Transition The movement toward business innovation, which brings financial products to consumers’ doorsteps, is primarily driven by rising connected device use, rising connectivity, and rising end-user engagement expectation. Six crucial criteria also have a major role in the success of online payments in addition to these characteristics: Composite Working Model Businesses now need a composite approach, one that combines convenience and quickness with a positive interaction to the offering. Emerging Infrastructure & Edge Processing As it was already established, achieving successful digital transformation requires more than simply the use of contemporary technology. Based to the supporting technology that makes data accessible into the front activities, the digitalization of financial products has improved today. Revamping the outdated infrastructure has thus been the most important aspect in advancing the banking industry’s technological change. The banks have started with creating a thorough plan to redesign their operational models, improve consumer offerings, and build an edge data is processed when the notion of digitalization in banking and finance was introduced. The financial sector must adopt digital revolution technology for such a method to be successful in order to create value for institutions and their clients. 4. Core Technology Stacks & Applications in Modern Banking Some of the most popular technologies and applications used by the electronic banking industry are detailed below: A. Artificial Intelligence (AI) and Machine Learning (ML) Digital chatbots and avatars in financial services use AI to fix consumer difficulties by delivering important details. In addition, machine intelligence is employed for data implementation and evaluation, data protection, and customer interaction improvement. By evaluating information about customers in a matter of seconds, AI can spot correlations, for example. Reinforcement learning is yet another tool that banks may employ to collect, analyse, and analyse consumer information in real time. Detecting fraud is among the greatest benefits of employing Advanced Analytics in the financial sector. With machine learning, it is simpler to notice any change in user behaviour and take prompt preventative action. B. Cloud Computing Architecture Cloud technology shares traits such as self-service on demand, extensive network connectivity, virtualized resources, quick flexibility, and metered service. Owing to these qualities, cloud technology offers several benefits, including lower IT expenses, adaptability, continuity planning, accessibility from wherever and on any technology, enhanced efficiency and security, rapid application development, etc. While evaluating cloud adoption, it is necessary to consider identified risks, control methods, safety and standard operating procedures, vendor support, and adherence to legal, technological, and institutional framework. Types of Cloud Services in Banking: Public Cloud Private Cloud Hybrid Cloud C. Distributed Ledgers – Blockchain Technology Without block chain technology, little if any concept of reconfiguration in financial is adequate. The use of distributed ledger technology into the finance business has resulted in protected data exchanges, increased precision, and an improved user experience. Modern clients have unwavering faith in blockchain technology and think that it has improved the transparency and convenience of transactions and other financial processes. The combination of the internet of things has emerged as one of the most significant technological advances in digital financing. D. Frontier Exploration: Banking in the Metaverse (Table 1) Banks Country Metaverse Partner Movement / Work JPMorgan Chase & Co. USA Decentraland Metaverse Lounge VISA USA Cryptopunks NFT Purchase Bank of America USA STRIVR VR Training programs Union Bank of India India The SANDBOX Virtual lounge Mastercard USA Not defined Trademarks HSBC The SANDBOX Virtual land E. Virtualized Technology and Open Banking APIs Virtualization is unquestionably the most widespread technology used by banks and other financial institutions. A cloud-based solution leads in enhanced processes, increased productivity, and immediate delivery process. With both the incorporation of the internet, companies have become more receptive to the use of financial APIs to facilitate data interchange and improve the overall customer journey. F. Big Data Analytics & Connectivity Apps Businesses no longer see banks in the same manner they were a decade ago. Big data technology assists organizations in assessing client spending, evaluating risks, and handling feedback from customers to strengthen customer confidence. Business intelligence technologies have ushered in new opportunities for banking growth and have acted swiftly to meet rising market needs.[6] By using technologies for digitisation. Businesses that use cutting-edge digital technology instantly get a competitive benefit. Modernization offers your organisation complete command over front- and back-end processes, as well as uniformity and accessibility. Here are some instances: Digital Connectivity Apps: Native apps are meant to assist businesses in several ways. With financial services apps, one has access to their financial information, customised alternatives, bank connectivity, and individual economic administration. Nevertheless, this is not only confined towards the banking industry; every marketplace helps a company comprehend its clients and provide individualised service. Business Intelligence Techniques: The key to achieving success is extracting optimum output from company data. If the firm processes vast volumes of data from many streams, business intelligence products and services may assist businesses in transforming your daily data into actionable analytics techniques. 5. Strategic Mindset, Governance & Conclusion Simply the best reason to maintain active in today’s modern marketplace is to be inventive and provide clients with a memorable qualitative and efficiency experiences. Financial institutions are crucial participants in this game, providing businesses with unrivalled financing apps and resources that allow them to remain competitive. Due to an ever-growing dependence on digitalisation across all industries, failing to capitalise on this trend may result in several company issues, and long-term success is virtually unreachable. FinTech services give corporations and monetary providers the freedom to move beyond the limits of conventional approaches. Soon, advanced technologies and their extent will be vast. It is impossible to comprehend the limits of technology since it cannot be confined and is infinite. If we were to summarise all the trends and technologies, we might conclude that technology is only a mentality; it relies on the bank’s aims and objectives. The technology suppliers should really be business associates in respect of strengthening cost and productivity stability, and they should have a proactive attitude and visibility by providing solutions and assistance as needed. While developing technological and digital transformation initiatives, the considerations must be considered. References https://bank.caknowledge.com/need-technology-banking/ https://www.insiderintelligence.com/insights/future-of-banking-technology/ https://iide.co/blog/digital-transformation-banking-sector/ https://appinventiv.com/blog/digital-transformation-in-banking/ https://www.fiftyfivetech.io/bank-technology-inclusion-making-the-banking-sector-ahead-of-the-curve/ https://technostacks.com/blog/advantages-of-digitization-in-banking/ https://www.idfcfirstbank.com/finfirst-blogs/beyond-banking/what-is-the-impact-of-it-on-the-banking-sector https://www.rbi.org.in/scripts/FS_Speeches.aspx?Id=1311&fn=9

Banking A study on the impact of merger on Financial Performance of Public Sector Banks in India Authors: CA Sk Shakeel and Dr. Sukamal Datta • Member of the Institute & Academician • Contact: CASKL2013@GMAIL.COM / eboard@icai.in • The Chartered Accountant | April 2023 (pp. 95–103 / Journal pp. 1155–1163) Empirical Study Synopsis & Key Findings Finance Minister Smt. Nirmala Sitharaman announced the merger of 13 public sector banks vide circular RBI/ 2019-20/197 FIDD.CO.LBS. BC.No.22/02.01.001/ 2019-20 dated 30.03.2020 for the merger of 10 public sector banks and vide press release 2018-2019/2329 dated 30.03.2019 for the amalgamation of Vijaya Bank, Dena Bank with Bank of Baroda, and this banking reform has reduced the total number of public sector banks from 27 to 12. In this paper a study has been carried out to show the impact of merger on the financial performance of public sector banks in India and also to make a comparative analysis before and after merger to evaluate the effectiveness of this merger. Five financial variables are taken namely Capital Adequacy ratio (CAR), Earnings per Share (EPS), Return on Assets (ROA), percentage of gross NPA to advances and percentage of net NPA to advances. We have taken data for twelve quarters, six quarters from pre-merger period and six quarters from post-merger period. Data are analyzed through paired t–test. We have found from the research that there is a significant impact of merger on the financial performance with respect to variables such as Capital Adequacy, percentage of gross NPA to advances and percentage of net NPA to advances, while no significant impact of merger on EPS and ROA. 1. Introduction In India, the banking system has started in 1770 with the Bank of Hindustan and since then the banking system started its operation in various fields or aspects. Indian banking system is one of the important parts of the Indian financial system. It can be said that the banking system is the backbone of the Indian financial system as the monetary transactions are done through the banking system, regulated by RBI. However, since many years the merger of banks has been taking place for better growth, better returns to stakeholders, future prospect etc. However presently when there were twenty-seven public sector banks the finance minister put a decision on merger of thirteen banks on 17th September 2018 and 30th August 2019 and as a result of which there are twelve public sector banks in India after this merger. Table 1: List of Merged Banks in Recent Times with Business Size Date of Announcement of Merger Anchor Bank Amalgamating Bank Business Size (in ₹) Rank by Size 17th September 2018 Bank of Baroda (BOB) ✓ Vijaya Bank✓ Dena Bank 16.13 lakh cr 3rd 30th August 2019 Canara Bank ✓ Syndicate Bank 15.20 lakh cr 4th 30th August 2019 Indian Bank ✓ Allahabad Bank 8.08 lakh cr 7th 30th August 2019 Punjab National Bank (PNB) ✓ Oriental Bank of Commerce✓ United Bank of India 17.94 lakh cr 2nd 30th August 2019 Union Bank of India ✓ Andhra Bank✓ Corporation Bank 14.59 lakh cr 5th 2. Research Design, Objectives, Hypothesis & Methodology Research Objectives: To find out the impact of merger on the financial performance of public sector banks in India. To make a comparative analysis of financial performance of banks in the pre-merger and post-merger period. Tested Hypotheses: H0: µ1 = µ2: There is no significant difference in the financial performance of public sector banks before and after merger with respect to Capital Adequacy, EPS, ROA, percentage of gross NPA to advances and percentage of net NPA to advances. H1: µ1 ≠ µ2: There is a significant difference in the financial performance of public sector banks before and after merger with respect to Capital Adequacy, EPS, ROA, percentage of gross NPA to advances and percentage of net NPA to advances. Research Methodology & Econometric Setup: In this study, data for the period of six quarters has been collected i.e., six quarters before merger and six quarters post-merger. Statistical tool like paired t-test has been applied and for each test statistic a 0.05 level of significance has been considered and an analysis have been done to prove the hypothesis. Five financial variables are taken namely Capital Adequacy ratio (CAR), Earnings per Share (EPS), Return on Assets (ROA), percentage of gross NPA to advances and percentage of net NPA to advances. Population of the study: The sample consists of five banks from banking sector. These banks are the anchor banks after merger of banks: Bank of Baroda (BOB), Canara Bank, Indian Bank, Punjab National Bank (PNB), and Union Bank of India. Data Source: The study has been carried out with secondary data only. The data has been collected from audited annual reports and financial results of respective banks. The announcement of Bank of Baroda merger was made on 17th September 2018 and the bank started its functioning as a merged entity with effect from 1st April, 2019 and therefore data for the six quarters before 1st April, 2019 and six quarters after 1st April, 2019 has been taken for comparison of the financial performance, while for the other four bank mergers the date of announcement of merger was 30th August 2019 and the merged entity started its operation with effect from 1st April, 2020 and therefore data for these banks has been taken for six quarters before 1st April, 2020 and six quarters after 1st April, 2020. So, a pre-merger and post-merger comparative study on the financial performance of merged public sector banks in India has been done comparing the quarterly results in which the first quarter in pre-merger period is compared with first quarter in the post-merger period and similarly for the next five quarters. 3. Bank of Baroda (BOB): Quarterly Data & Paired t-Test Performance Table 2: Data of Five Ratios of Bank of Baroda for Twelve Quarters SR Quarter Before Merger CAR EPS ROA % Gross NPA % Net NPA Quarter After Merger CAR EPS ROA % Gross NPA % Net NPA 1 Dec 2017 11.55 0.49 0.07 11.31 4.97 June 2019 11.50 2.04 0.49 10.28 3.95 2 March 2018 12.13 -13.44 -1.77 12.26 5.49 Sept 2019 12.98 2.01 0.28 10.25 3.91 3 June 2018 12.13 2.00 0.29 12.46 5.40 Dec 2019 13.48 -3.70 -0.52 10.43 4.05 4 Sept 2018 11.88 1.61 0.23 11.78 4.86 March 2020 13.30 1.26 0.18 9.40 3.13 5 Dec 2018 11.67 1.78 0.25 11.01 4.26 June 2020 12.84 -1.87 -0.30 9.39 2.83 6 March 2019 13.42 -3.75 -0.52 9.61 3.33 Sept 2020 13.26 3.63 0.59 9.14 2.51 Table 3: Financial Performance of Bank of Baroda Before and After Merger No. Ratios Period Mean Standard Deviation Sig-Value Alpha Hypothesis Decision 1 CAR Pre-merger 12.1300 0.67448 0.045 0.05 Reject null hypothesis Post-merger 12.8933 0.72052 2 EPS Pre-merger -1.8850 6.05603 0.478 0.05 Accept null hypothesis Post-merger 0.5617 2.76624 3 ROA Pre-merger -0.2417 0.80713 0.448 0.05 Accept null hypothesis Post-merger 0.1200 0.44113 4 % of Gross NPA to Advances Pre-merger 11.4050 1.03651 0.003 0.05 Reject null hypothesis Post-merger 9.8150 0.56430 5 % of Net NPA to Advances Pre-merger 4.7183 0.81007 0.000 0.05 Reject null hypothesis Post-merger 3.3967 0.65954 Interpretation: From Table 3 it can be observed that there is a significant impact of merger on CAR, percentage of gross NPA to advances and percentage of net NPA to advances of Bank of Baroda as significance value is less than 0.05 and it is also found that there is no significant impact of merger on EPS and ROA. The mean value of EPS improved as it arrived to a positive value from -1.8850 to 0.5617, ROA has also improved after merger with -0.2417 to 0.12 showing a better performance and also the mean value of percentage of gross NPA to advances and percentage of net NPA to advances has reduced after merger signifying a better performance. 4. Canara Bank: Quarterly Data & Paired t-Test Performance Table 4: Data of Five Ratios of Canara Bank for Twelve Quarters SR Quarter Before Merger CAR EPS ROA % Gross NPA % Net NPA Quarter After Merger CAR EPS ROA % Gross NPA % Net NPA 1 Dec 2018 12.21 4.33 0.21 10.25 6.37 June 2020 12.77 2.79 0.16 8.84 3.95 2 March 2019 11.90 -7.40 -0.36 8.83 5.37 Sept 2020 12.77 3.06 0.16 8.23 3.42 3 June 2019 11.70 4.37 0.19 8.77 5.35 Dec 2020 13.69 4.65 0.24 7.46 2.64 4 Sept 2019 13.99 4.84 0.21 8.68 5.15 March 2021 13.18 6.14 0.36 8.93 3.82 5 Dec 2019 13.86 4.22 0.19 8.36 5.05 June 2021 13.36 7.15 0.41 8.50 3.46 6 March 2020 13.65 -31.64 -1.85 8.21 4.22 Sept 2021 14.37 7.77 0.46 8.42 3.21 Table 5: Financial Performance of Canara Bank Before and After Merger No. Ratios Period Mean Standard Deviation Sig-Value Alpha Hypothesis Decision 1 CAR Pre-merger 12.8850 1.05707 0.305 0.05 Accept null hypothesis Post-merger 13.3567 0.60951 2 EPS Pre-merger -3.5467 14.55649 0.224 0.05 Accept null hypothesis Post-merger 5.2600 2.09569 3 ROA Pre-merger -0.2350 0.82233 0.203 0.05 Accept null hypothesis Post-merger 0.2983 0.12968 4 % of Gross NPA to Advances Pre-merger 8.8500 0.72738 0.208 0.05 Accept null hypothesis Post-merger 8.3967 0.52865 5 % of Net NPA to Advances Pre-merger 5.2517 0.69133 0.001 0.05 Reject null hypothesis Post-merger 3.4167 0.46796 Interpretation: From Table 5 it can be observed that there is a significant impact of merger on percentage of net NPA to advances of Canara Bank as significance value is less than 0.05 and it is also found that there is no significant impact of merger on CAR, EPS, ROA, and percentage of gross NPA to advances. The mean value of EPS has improved from -3.5467 to 5.2600. ROA has become positive after merger from -0.2350 to 0.2983 showing a better performance after merger and also the mean values of percentage of net NPA to advances has fallen significantly from 5.5217 to 3.4167 which shows a better performance. 5. Indian Bank: Quarterly Data & Paired t-Test Performance Table 6: Data of Five Ratios of Indian Bank for Twelve Quarters SR Quarter Before Merger CAR EPS ROA % Gross NPA % Net NPA Quarter After Merger CAR EPS ROA % Gross NPA % Net NPA 1 Dec 2018 12.67 3.17 0.23 7.46 4.42 June 2020 13.45 3.27 0.25 10.90 3.76 2 March 2019 13.21 -3.95 -0.28 7.11 3.75 Sept 2020 13.64 3.65 0.28 9.89 2.96 3 June 2019 13.62 7.53 0.52 7.33 3.84 Dec 2020 14.06 4.55 0.35 9.04 2.35 4 Sept 2019 14.52 7.29 0.50 7.20 3.54 March 2021 15.71 15.13 1.09 9.85 3.37 5 Dec 2019 15.00 4.77 0.33 7.20 3.50 June 2021 15.92 10.39 0.75 9.69 3.47 6 March 2020 14.12 -3.58 -0.28 6.87 3.13 Sept 2021 15.88 8.75 0.69 9.56 3.26 Table 7: Financial Performance of Indian Bank Before and After Merger No. Ratios Period Mean Standard Deviation Sig-Value Alpha Hypothesis Decision 1 CAR Pre-merger 13.8567 0.86011 0.007 0.05 Reject null hypothesis Post-merger 14.7767 1.17994 2 EPS Pre-merger 2.5383 5.14601 0.077 0.05 Accept null hypothesis Post-merger 7.6233 4.67885 3 ROA Pre-merger 0.1700 0.36486 0.065 0.05 Accept null hypothesis Post-merger 0.5683 0.33229 4 % of Gross NPA to Advances Pre-merger 7.1950 0.20067 0.000 0.05 Reject null hypothesis Post-merger 9.8217 0.61075 5 % of Net NPA to Advances Pre-merger 3.6967 0.43149 0.097 0.05 Accept null hypothesis Post-merger 3.1950 0.48968 Interpretation: From Table 7 it can be observed that there is a significant impact of merger on CAR and percentage of gross NPA to advances of Indian Bank as significance value is less than 0.05 and it is also found that there is no significant impact of merger on EPS, ROA, and percentage of net NPA. The mean value of EPS has increased significantly from 2.5383 to 7.6233 showing greater earnings, ROA has increased from 0.17 to 0.5683 showing a better performance after merger and the mean value of percentage of gross NPA to advances has increased for Indian bank while percentage of net NPA to advances has reduced after merger signifying a better performance. 6. Punjab National Bank (PNB): Quarterly Data & Paired t-Test Performance Table 8: Data of Five Ratios of Punjab National Bank for Twelve Quarters SR Quarter Before Merger CAR EPS ROA % Gross NPA % Net NPA Quarter After Merger CAR EPS ROA % Gross NPA % Net NPA 1 Dec 2018 10.52 0.70 0.12 16.33 8.22 June 2020 12.63 0.33 0.09 14.11 5.39 2 March 2019 9.73 -12.38 -2.33 15.50 6.56 Sept 2020 12.84 0.66 0.19 13.43 4.75 3 June 2019 9.77 2.21 0.50 16.49 7.17 Dec 2020 13.88 0.53 0.15 12.99 4.03 4 Sept 2019 14.07 1.10 0.24 16.76 7.65 March 2021 14.32 0.56 0.18 14.12 5.73 5 Dec 2019 14.04 -0.83 -0.23 16.30 7.18 June 2021 15.19 0.95 0.30 14.33 5.84 6 March 2020 14.14 -1.03 0.31 14.21 5.78 Sept 2021 15.20 1.00 0.33 13.63 5.49 Table 9: Financial Performance of Punjab National Bank Before and After Merger No. Ratios Period Mean Standard Deviation Sig-Value Alpha Hypothesis Decision 1 CAR Pre-merger 12.0450 2.25078 0.020 0.05 Reject null hypothesis Post-merger 14.0100 1.11309 2 EPS Pre-merger -1.7050 5.36947 0.332 0.05 Accept null hypothesis Post-merger 0.6717 0.25872 3 ROA Pre-merger -0.2317 1.05621 0.357 0.05 Accept null hypothesis Post-merger 0.2067 0.09136 4 % of Gross NPA to Advances Pre-merger 15.9317 0.94262 0.003 0.05 Reject null hypothesis Post-merger 13.7683 0.50898 5 % of Net NPA to Advances Pre-merger 7.0933 0.84876 0.006 0.05 Reject null hypothesis Post-merger 5.2050 0.69021 Interpretation: From Table 9 it can be observed that there is a significant impact of merger on CAR, percentage of Gross NPA to advances and percentage of net NPA to advances of Punjab National Bank as significance value is less than 0.05 and it is also found that there is no significant impact of merger on EPS and ROA. The mean value of CAR has increased from 12.0450 to 14.01 after merger. EPS became positive after merger from -1.7050 to 0.6717 a huge improvement in earnings, ROA also arrived at positive values from -0.2317 to 0.2067 showing a better performance after merger and the mean value of percentage of gross NPA to advances and percentage of net NPA to advances has reduced after merger signifying a better performance. 7. Union Bank of India: Quarterly Data & Paired t-Test Performance Table 10: Data of Five Ratios of Union Bank of India for Twelve Quarters SR Quarter Before Merger CAR EPS ROA % Gross NPA % Net NPA Quarter After Merger CAR EPS ROA % Gross NPA % Net NPA 1 Dec 2018 11.43 1.31 0.12 15.66 8.27 June 2020 11.62 0.52 0.12 14.95 4.97 2 March 2019 11.78 -28.19 -2.71 14.98 6.85 Sept 2020 12.38 0.81 0.19 14.71 4.13 3 June 2019 11.43 1.27 0.17 15.18 7.23 Dec 2020 12.98 1.13 0.28 13.49 3.27 4 Sept 2019 15.14 -6.77 -0.87 15.24 6.98 March 2021 12.56 2.08 0.49 13.74 4.62 5 Dec 2019 14.71 2.46 0.41 14.86 6.99 June 2021 13.32 1.79 0.43 13.60 4.69 6 March 2020 12.81 -7.31 -1.76 14.15 5.49 Sept 2021 13.64 2.23 0.56 12.64 4.61 Table 11: Financial Performance of Union Bank of India Before and After Merger No. Ratios Period Mean Standard Deviation Sig-Value Alpha Hypothesis Decision 1 CAR Pre-merger 12.8833 1.66591 0.841 0.05 Accept null hypothesis Post-merger 12.7500 0.72385 2 EPS Pre-merger -6.2050 11.59581 0.165 0.05 Accept null hypothesis Post-merger 1.4267 0.70633 3 ROA Pre-merger -0.7733 1.25074 0.085 0.05 Accept null hypothesis Post-merger 0.3450 0.17513 4 % of Gross NPA to Advances Pre-merger 15.0117 0.50344 0.004 0.05 Reject null hypothesis Post-merger 13.8550 0.85062 5 % of Net NPA to Advances Pre-merger 6.9683 0.89027 0.002 0.05 Reject null hypothesis Post-merger 4.3817 0.60816 Interpretation: From Table 11 it can be observed that there is a significant impact of merger on percentage of gross NPA to advances and percentage of net NPA to advances of Union Bank of India as significance value is less than 0.05 and it is also found that there is no significant impact of merger on CAR, EPS, and ROA. However, we have observed that the mean value of EPS has improved after merger i.e., from -6.2050 (pre-merger) to 1.4267 (post-merger period) which signifies a greater profitability for the bank and we also found that Return on Assets has improved after merger from a mean value of -0.7733 (pre-merger) to 0.3450 (post-merger) and it is also found that the mean value of percentage of gross NPA to advances and percentage of net NPA to advances have decreased after merger signifying a better performance of the bank. 8. Comparative Analysis Across Merged Anchor Banks Table 12: Comparative Analysis of Merged Banks Before and After Merger Sr. Ratios Period BOB Canara Bank Indian Bank PNB Union Bank Avg. of All Banks 1 CAR Pre-merger 12.1300 12.8850 13.8567 12.0450 12.8833 12.7600 Post-merger 12.8933 13.3567 14.7767 14.0100 12.7500 13.55734 2 EPS Pre-merger -1.8850 -3.5467 2.5383 -1.7050 -6.2050 -2.16068 Post-merger 0.5617 5.2600 7.6233 0.6717 1.4267 3.10868 3 ROA Pre-merger -0.2417 -0.2350 0.1700 -0.2317 -0.7733 -0.26234 Post-merger 0.1200 0.2983 0.5683 0.2067 0.3450 0.30766 4 % of Gross NPA to Advances Pre-merger 11.4050 8.8500 7.1950 15.9317 15.0117 11.67868 Post-merger 9.8150 8.3967 9.8217 13.7683 13.8550 11.13134 5 % of Net NPA to Advances Pre-merger 4.7183 5.2517 3.6967 7.0933 6.9683 5.54566 Post-merger 3.3967 3.4167 3.1950 5.2050 4.3817 3.91902 Comparative Interpretation: Canara Bank has the highest rise in EPS from -3.54 to 5.26 followed by Union Bank of India and Indian Bank. PNB has a lowest rise in EPS. On the overall we can see that there is a rise in EPS as well. Union Bank of India has the highest rise in Return on Assets from -0.7733 to 0.3450 followed by Canara bank, PNB, Indian Bank and BOB that means the returns are good, assets are effectively utilized. All the banks had negative ROA in pre period except Indian Bank but after merger they had a positive ROA. We can see that there is decrease in the percentage of gross NPA to advances of all banks except Indian Bank which has a rise in the percentage of gross NPA to advances. The percentage of net NPA to advances has reduced in the case of all banks. We can see a positive impact of merger on performance of banks as we can see there is a growth in Capital Adequacy, EPS and ROA taking the average of all the banks and there is also a fall in the percentage of gross NPA to advances and percentage of net NPA to advances for all banks. Empirical Synthesis: Significant Impact Matrix Across Variables Sector Company Significant Impact of Merger on Variables (p < 0.05) CAR EPS ROA % Gross NPA % Net NPA Banking Sector BOB Yes No No Yes Yes Canara Bank No No No No Yes Indian Bank Yes No No Yes No PNB Yes No No Yes Yes Union Bank of India No No No Yes Yes 9. Strategic Role of Chartered Accountants (CAs) in Bank Mergers A CA can carry out the functions of merger and acquisition of banks. A CA can measure the financial performance of banks and provide necessary solutions for better performance. A CA can make the valuations process in respect of mergers and acquisition. A CA can comply with all the legal formalities that are applicable to merger and acquisitions. 10. Conclusion In this study we analyzed the impact of merger on financial performance of public sector banks in India and it is found from the analysis that merger has a significant effect on financial performance with regard to Capital Adequacy, gross NPA to advances and net NPA to advances but there is no significant impact of merger on Earnings per Share and Return on Assets. From the study it can be said the merger was effective as it enhanced the performance of all banks taken in the study. There is a huge scope for banks in the future as these banks have become bigger banks after the merger. References Ritesh Patel, “Pre & Post-Merger Financial Performance: An Indian Perspective”, Journal of Central Banking Theory and Practice, 2018, 3, pp. 181-200 Received: 25 July 2017. Sk Shakeel & Dr Sukamal Datta, “A Study on The Merger of Public Sector Banks In Recent Times”, The Management Accountant, January 2020, pg-58-61. www.moneycontrol.com www.rbi.org.in https://canarabank.com/ https://www.unionbankofindia.co.in/ https://www.pnbindia.in/financials-current.html https://www.bankofbaroda.in/shareholders-corner/financial-reports https://indianbank.in/departments/financial-results https://www.thesisbusiness.com/history-of-banking-in-india.html https://www.insightsonindia.com/2019/08/31/merger-of-banks/ https://www.thehindu.com https://www.guidely.in https://www.thehindu.com https://m.economictimes.com

Union Budget Union Budget 2023-24: A way forward for Inclusive and Sustainable Development Author: Dr. Rajeev Kumar • Academician • Contact: eboard@icai.in • The Chartered Accountant | March 2023 (pp. 33–39 / Journal pp. 977–983) Macroeconomic Synopsis & Growth Resurgence After a sharp recovery from COVID-19 Indian economy is estimated to grow at 7 percent rate in the current fiscal year according to the advance estimates of the Central Statistics Office. It shows the strength and resilience of the economy. It has sharply escalated to become the fifth largest economy in the world. Apart from that it is evident from different global indices that India has significantly improved its governance and ease of doing business. The G20 presidency for the year 2023 is a matter of pride for the country. 1. Introduction: Vision for Amrit Kaal The Union budget for the fiscal year 2023-24 has come with a vision of a prosperous and inclusive India. It aims to prioritise infrastructure development, investment, green growth, empowerment of youth, the financial sector, fiscal management, and unleashing the potentials of Indian economy. The budget highlights the need to continue wide-ranging reforms and implement sound policies, along with the efforts of all and inclusion of all in the process of development. In the direction of sabka saath sabka prayas the budget proposes to create opportunities for youth, create jobs, and provide stimulus to economic growth with macroeconomic stability. Budget announcements show that government is committed to provide better quality of life and dignified life for all. The budget is in consonance with the vision for Amrit Kaal wherein economic growth must be technology driven with strong public finances and a robust financial sector. 2. Priorities of the Budget 2023-24 (The Saptarishi Framework) The first budget of the Amrit Kaal sets priorities for seven mutually complimentary activities: Inclusive development Reaching the last mile Infrastructure and investment Unleashing the Potential Green growth Youth power Financial sector 2.1 Inclusive Development While the economy is growing at a fast pace after the pandemic, it is proposed that the fruits of development must reach all sections of society and all regions of the country. In this direction, the budget places priority on inclusive development to transmit the benefits of developments to farmers, women, youth, Scheduled Castes (SCs), Scheduled Tribes (STs), Other Backward Castes (OBCs), persons with disabilities, and the economically weaker section. Apart from that, regions like Jammu and Kashmir, Ladakh, and the North East have been given special attention. Food Security Gesture: As one of the positive gestures, the scheme of free foodgrain distribution has been extended for all Antyodaya and priority households for the budgeted year without requiring any contribution from States. 2.2 Reaching the Last Mile In this direction, the Union Budget emphasises the development of the North-Eastern states, tribal areas, drought-prone areas, and providing financial assistance to poor prisoners. Assistance under the Aspirational Districts and Blocks Programme, which was launched in 2018, will be extended for the saturation of essential public services such as health, education, nutrition, water resources, agriculture, financial inclusion, skill development, and basic infrastructure. Targeted Social & Tribal Disbursements: Vulnerable Tribal Groups: The budget proposes Rs. 15,000 crores over the next three years to implement development action plans for particularly vulnerable tribal groups to provide them access to safe housing, clean drinking water, education, sanitation, sustainable livelihood opportunities, and better connectivity. Eklavya Model Residential Schools: Further, 38,800 teaching and non-teaching staff will be recruited over the next three years for the existing 740 Eklavya Model Residential Schools, which serve tribal children. PM Awas Yojana: Another remarkable disbursement is an increase of 66 percent to over Rs 79,000 crore under the PM Awas Yojana, which will benefit poor people across the country for their housing needs. Support for Incarcerated Poor: As a novel gesture, poor prisoners who are incarcerated due to a lack of funds will be given financial assistance to meet their requirement of a penalty or bail surety amount. 2.3 Infrastructure and Investment India has witnessed fast infrastructure development in the last few years, except during the pandemic phase. This budget carries forward this trend in infrastructure development. Investment for infrastructure development is coming from the public as well as the private sectors. Public-private partnerships (PPP) have gotten a boost under the leadership of the current government, which has transformed the physical infrastructure of the country. As a matter of fact, infrastructure is an essential requirement of economic development and modernization. Investment in infrastructure boosts economic activities, production, and supply, and at the same time creates employment, income, and demand. The budget hikes capital expenditure by 37 percent to an amount of Rs. 10 lakh crores over the revised estimates of capital expenditure in the budget of 2022-23 and 33 percent over the budget estimates of 2022-23, which is estimated to be a huge 3.3 percent of GDP. It shows the commitment of the government towards high economic growth, job creation, and the creation of a conducive environment for private investment. Apart from its own capital expenditure, the central government gives grants to state governments for the creation of capital assets. Thus, the total central capital expenditure and grants for the creation of capital assets, which is called effective capital expenditure, is going to increase to 4.5 percent of GDP. Massive developments in roads, railways, urban infrastructure, power, logistics, regional connectivity, urban sanitation, and sustainable cities will be achieved through PPP. In line with one of the recommendations of the fourteenth finance commission, the budget proposes to prepare cities to improve their creditworthiness so that they can raise funds from the financial markets through municipal bonds. Except for the massive municipal corporations of a few major metropolitan cities, it appears to be a difficult task in the near term. However, the proposed Urban Infrastructure Development Fund, which is like the existing Rural Infrastructure Fund, is likely to be an effective mechanism for urban infrastructure development in Tier 2 and Tier 3 cities. 2.4 Unleashing the Potential The budget emphasises the commitment of the government to provide good, transparent, and accountable governance in the country. In this direction, furtherance of existing Mission Karmayogi for capacity building plans for civil servants, setting up of three Centres of Excellence for Artificial Intelligence towards the vision of “Make AI in India”, preparation of National Data Governance Policy, simplification of know your customer (KYC) policy, common business identifier through Permanent Account Number (PAN) for enhancing ease of doing business, unified return filing process for various tax authorities, upgradation of E-court system are some of the major policies and proposals in the budget. Vivad se Vishwas I and II are two interventions to provide major relief to MSMEs. 2.5 Green Growth India has continuously shown its commitment to green growth, and serious steps are being taken to achieve net zero carbon emissions by the year 2070. This budget also envisages an environmentally conscious lifestyle under the vision for LiFE. The green hydrogen mission is a very important step in this direction to achieve low carbon intensity and decrease fossil fuel consumption. This will also reduce our dependence on imported petroleum products and thus help reduce the burgeoning size of our current account deficit. An allocation of Rs. 35,000 crores has been proposed for capital investment in energy transition, energy security, and net-zero carbon objectives. Renewable energy, energy storage systems, the extension of vehicle replacement policy for government vehicles, green credit programs, and renewable energy evacuation are some of the major policies and programmes being initiated towards green growth. PM-PRANAM, GOBARdhan scheme, Bhartiya Prakritik Kheti Bio-Input Resource Centers, MISHTI and Amrit Dharohar, circular economy, are other programmes, policies, and actions to encourage natural and organic farming systems. Environmentally sustainable and responsive actions by individuals and companies are expected. 2.6 Youth Power The budget takes forward the National Apprenticeship Promotion Scheme, and envisages Pradhan Mantri Kaushal Vikas Yojana 4.0 and Skill India Digital Platform towards the empowerment of youth in the country. 2.7 Financial Sector The processes of financial inclusion, faster and better delivery of services, easy access to credit, and enhanced participation in financial markets have been going on at a fast pace over the last few years. In this direction, the budget announces the implementation of a revamped credit guarantee for MSMEs, the setting up of a National Financial Information Registry to serve as a central source of financial information, a comprehensive review of financial sector regulations, capacity building in securities markets, and the development of digital public infrastructure, etc. 3. Fiscal Aspects of the Union Budget 2023-24 Budget for 2023-24 projects total receipts of Rs. 45,03,097 crores out of which Rs. 17,86,816 crores are estimated to be from borrowing and other liabilities. Total budgeted expenditure for the year 2023-24 is 45,03,097 crores. Total capital expenditure is estimated to be Rs. 10,00,961 crores, which is about 22 percent of total size of the budgeted expenditure. FIGURE 1: SOURCES OF RECEIPTS OF CENTRAL GOVERNMENT (BUDGET OF 2023-24) Figure 1 shows the sources of income for the central government. It shows that borrowing and other liabilities are about 34 percent of total budgeted receipts while non-debt capital receipts are only 2 percent of total. All other income comes from revenue receipts, which include tax receipts and non-tax receipts. Thus, corporation income tax and personal income tax each has a projected share of 15 percent, while GST and other consumption taxes have a 17 percent share. Union excise duties and customs duties also have significant contributions of 7 and 4 percent, respectively. Receipt Source / Component Share in Total Receipts (%) Borrowing & Other Liabilities 34% Goods and Services Tax (GST) 17% Corporation Tax 15% Income Tax (Personal) 15% Union Excise Duties 7% Non-tax Receipts 6% Customs Duty 4% Non-debt Capital Receipts 2% Total Budgeted Receipts 100% FIGURE 2: ITEMS OF EXPENDITURE OF CENTRAL GOVERNMENT (BUDGET OF 2023-24) On the expenditure side, Figure 2 shows that in the estimates of the budget, the largest item of expenditure for the central government is interest payments. It alone will consume 20 percent of total budgeted expenditures in the coming fiscal year. Expenditure on central sector schemes and centrally sponsored schemes will be 17 and 9 percent of total expenditure, respectively. It is to be noted that many of the central schemes are concentrated in a select few central ministries like the Ministry of Health & Family Welfare, Ministry of Agriculture, Ministry of Education, Ministry of Rural Development and Ministry of Women & Child Development. An enhanced expenditure on central schemes has a direct impact on the welfare of people across the country. So, a high fraction of total expenditure on central schemes reflects the commitment to inclusive development in the budget. Expenditure Item Share in Total Expenditure (%) Interest Payments 20% States’ Share of Taxes & Duties 18% Central Sector Schemes (Excluding Capex on Defence and Subsidy) 17% Centrally Sponsored Schemes 9% Finance Commission and Other Transfers 9% Defence 8% Other Expenditures 8% Subsidies 7% Pensions 4% Total Budgeted Expenditure 100% 4. Subsidies Rationalisation & Social Welfare Implications About seven percent of total expenditure and 19.7 percent of revenue expenditure will be incurred on subsidies (Figure 7). Major subsidy expenditure of the government is incurred on food, fertilizer, and fuel. The government has been trying to reduce the subsidy bill to create scope for capital expenditure within the overall fiscal space while being committed to achieving sustainable fiscal targets. In the budget of 2022-23 total expenditure on food, fuel, fertilizer, and agriculture subsidies was reduced to Rs. 3,17,866 crores. However, in the revised estimates, it has reached Rs. 5,97,864 crores. For the year 2023-24, the subsidy bill is pruned to Rs. 3,74,707 crores which is a drastic cut in subsidies. The cut in subsidy is across food, fuel, fertilizer, and agriculture. It may affect the welfare of people adversely. We need to be mindful that agriculture and allied activities proved to be very resilient during the pandemic phase, and Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) effectively helped poor people in fighting pandemic phase. A drastic cut in subsidies to agriculture and allied activities is a cause of concern. Despite substantial reduction in food subsidies, continuation of free food under Antyodaya and priority households under the PM Garib Kalyan Anna Yojana for one more year is a welcome move. It will really help billions of people in the country who are still facing hardships created by the pandemic. FIGURE 7: TRENDS IN THREE MAJOR SUBSIDIES (% OF REVENUE EXPENDITURE) Subsidy Component 2021-22 (Actuals) 2022-23 (Revised Estimates) 2023-24 (Budget / RE) Food Subsidy ~ 13.0% ~ 12.0% ~ 8.0% Fertiliser Subsidy ~ 4.9% ~ 7.8% ~ 6.0% Petroleum Subsidy ~ 0.1% ~ 0.8% ~ 0.1% Agriculture & Allied Activities ~ 4.5% ~ 4.0% ~ 4.0% 5. Sectoral Expenditure: Health, Education & CBGA Social Ministry Analysis As far as health sector expenditure is concerned, it has been marginally hiked from 1.96 percent of revised estimates for 2022-23 to 2.02 percent of budget estimates of 2023-24 but a meagre 0.31 percent of GDP allocation, that too in the post pandemic phase, when the country should consider developing a robust health infrastructure to deal with any health crisis, is worth pondering (Figure 3). Within health sector, allocations have been increased under National Health Mission, Ayushman Bharat (Pradhan Mantri Jan Arogya Yojana), Pradhan Mantri Ayushman Bharat Health Infrastructure Mission and National Digital Health Mission but funds have been drastically cut for the Pradhan Mantri Swasthya Suraksha Yojana. Relative to 2022-23 (Revised estimates), higher allocations have been given for social welfare, education, urban development, and transport, while allocations have been reduced for rural development. FIGURE 3: TRENDS OF MAJOR ITEMS OF CENTRAL GOVT. EXPENDITURE (in Rs. Lakh Cr.) Source: Union Budget 2023-24 Documents Major Sector / Item 2021-22 (Actuals) RE 2022-23 BE 2023-24 Social Welfare 0.41 0.47 0.55 Urban Development 1.07 0.75 0.76 Health 0.84 0.77 0.89 Education 0.80 0.99 1.13 Agriculture and Allied Activities 1.43 1.36 1.44 Rural Development 2.29 2.43 2.38 Transport 3.32 3.90 5.17 CBGA Analysis: The 15 Social Sector Ministries Centre for Budget and Governance Accountability (CBGA) in its analysis of the budget of 2023-24 has sorted fifteen ministries, which can broadly be referred to as the social sector ministries. These ministries include Ministries of Culture, Jal Shakti, Health and Family Welfare (including AYUSH), Human Resource Development, Labour and Employment, Minority Affairs, Social Justice and Empowerment, Tribal Affairs, Housing and Urban Affairs, Women and Child Development, Youth Affairs and Sports, Agriculture and Farmers Welfare, Environment, Forest and Climate Change, Rural Development, Consumer Affairs, Food and Public Distribution (includes food subsidy). On the basis of budgetary allocations to these fifteen ministries it has been shown that share of these ministries in total budget has been falling since 2020-21 barring the year 2022-23 when it was raised marginally. In comparison to revised estimates of 2022-23 this share has been reduced from 24 percent of total budget of 2022-23 to 21.2 percent of the budget of 2023-24 which is a drastic reduction (‘walking the tightrope An Analysis of Union Budget 2023-24’, CBGA Delhi, 2023). This analysis casts a doubt over the claims of budget promising inclusive development. Nevertheless, we need to be very cautious before reaching any conclusion. A careful assessment of detailed expenditure within these ministries is required to assess its social welfare implications. 6. Capital Expenditure Surge & Infrastructure Roadmap Figure 4 shows trends in the capital expenditure of the central government in absolute values. Capital expenditure has been rising very steeply since 2019-20, which is a very positive indication and a healthy change in the fiscal profile of the central government. As a share of budget, it is estimated to be about 22 percent, while as a share of GDP it is going to be over 3.3 percent. In the last five years, capex has gone up by more than 160 percent. It clearly shows the commitment of the government to achieve high economic growth and a $5 trillion economy target through capital expenditure and infrastructural development. FIGURE 4: TRENDS IN CAPITAL EXPENDITURE OF CENTRAL GOVERNMENT (in Rs. Lakh Cr.) Year Capital Expenditure (Rs. Lakh Cr.) Grant in Aid for Capital Assets (Rs. Lakh Cr.) Effective Capital Expenditure (Rs. Lakh Cr.) 2015-16 2.5 1.3 3.8 2016-17 2.8 1.7 4.5 2017-18 2.6 1.9 4.5 2018-19 3.1 1.9 5.0 2019-20 3.4 1.9 5.2 2020-21 4.1 2.3 6.4 2021-22 5.9 2.4 8.4 RE 2022-23 7.3 3.3 10.5 BE 2023-24 10.0 3.7 13.7 In view of the rising proportion of capital expenditure, it is obvious that revenue expenditure is falling. Government is committed to reduce revenue deficit and fiscal deficit to reduce the burden of public debt as mandated under the Fiscal Responsibility and Budgetary Management (FRBM) rules. Hence, the government is constrained financially, and raising the proportion of capital expenditure without reducing the share of revenue expenditure is not possible. However, it is to be seen that the cut in revenue expenditure should largely come from a reduction in non-developmental types of revenue expenditure. 7. Trends in Deficits & FRBM Fiscal Consolidation Trajectory Figure 5 shows trends in the four types of deficits (fiscal deficit, revenue deficit, effective revenue deficit, and primary deficit) of the central government. The trend lines show that deficits were being consistently reduced along the lines of the FRBM Act until the onslaught of the COVID-19 pandemic, due to which expansionary fiscal policies were followed and deficits, government borrowings, and public debt increased. Sharp peaks in the trend lines are visible in the Figure 5 over the year 2020–21, and beyond that a reverse trend is also visible. Post pandemic government has been trying to reduce its deficits to bring them down to the levels recommended in FRBM rules. According to the targets of the FRBM Act, 2003, as revised by the Fifteenth Finance Commission, the central government should reduce the fiscal deficit to 4% of GDP by the year 2025-26. With this, the Commission noted that Center’s overall liabilities will decrease from 62.9% of GDP in 2020–21 to 56.6% in 2025–26 through a fiscal consolidation route. Unfortunately, due to the pandemic the goal is still distant. Even amidst the anxiety and anticipation of recession, the budget has proposed a reduction in the fiscal deficit from 6.4 (2022-23 RE) to 5.9 (2023-24 BE) through a sharp reduction in revenue deficit and effective revenue deficit. This is a right move. FIGURE 5: TRENDS IN THE DEFICITS OF CENTRAL GOVERNMENT (% OF GDP) Source: Union Budget 2023-24 Documents Financial Year Fiscal Deficit Revenue Deficit Effective Revenue Deficit Primary Deficit 2013-14 4.5% 3.2% 1.9% 1.1% 2014-15 4.1% 2.9% 1.9% 0.9% 2015-16 3.9% 2.5% 1.5% 0.7% 2016-17 3.5% 2.1% 1.4% 0.4% 2017-18 3.5% 2.6% 1.5% 0.4% 2018-19 3.4% 2.4% 1.4% 0.4% 2019-20 4.6% 3.3% 2.4% 1.6% 2020-21 (Pandemic Peak) 9.2% 7.3% 5.8% 5.8% 2021-22 6.7% 4.4% 3.4% 3.3% RE 2022-23 6.4% 4.1% 2.8% 3.0% BE 2023-24 5.9% 2.9% 1.7% 2.3% 8. Sources of Deficit Financing & Federal Fiscal Rules The government has reaffirmed its seriousness about achieving a fiscal deficit of 4.5 percent of GDP by the year 2025-26. A corrected fiscal stance will create scope for fiscal expansion if a recession strikes. Further, with a decrease in government borrowing as a proportion of GDP, debt GDP ratio will fall and reduced burden of interest payments will lessen pressure on the revenue account. States governments will be allowed to incur a fiscal deficit up to 3.5 percent of Gross State Domestic Product, of which 0.5 percent will be meant for power sector reforms. Figure 6 shows the deficit financing pattern of central government. Market borrowing is the largest source of financing followed by securities against small savings and provident fund. Net market borrowing of Rs. 11.8 lakh crores will be raised through dated securities, while gross market borrowings of Rs. 15.4 lakh crores are estimated. Drawing down of cash balances is proposed to be negative for 2023–24. FIGURE 6: SOURCES OF DEFICIT FINANCING OF CENTRAL GOVERNMENT (Rs. Crore) Source: Union Budget 2023-24 Documents Market Borrowings (Dated Securities): Dominant primary source of deficit financing. Gross market borrowings estimated at Rs. 15.4 lakh crores; Net market borrowings budgeted at Rs. 11.8 lakh crores. Securities Against Small Savings: Second largest contributor to deficit financing. State Provident Fund: Consistent institutional contributor across 2015-16 through 2023-24 BE. Other Receipts (Internal Debt and Public Account): Complementary funding mechanism. External Debt: Minor proportion of overall deficit financing portfolio. Draw Down of Cash Balance: Maintained at controlled levels, proposed to be negative for 2023–24. 9. Conclusion: Roadmap for a $5 Trillion Economy India has witnessed a sharp recovery from the pandemic, and the upcoming year is likely to witness robust domestic demand and a spurt in crowding of private investment through enhanced government capital expenditure. The government is committed to carrying out reforms in various spheres of the economy. High rate of inflation, widening current account deficits, exchange rate depreciation, and unemployment are some of the challenges the economy is currently facing. On the positive side, Indian economy has bright prospects for economic growth and employment creation. The budget for 2023–24 provides a roadmap for India to become a $5 trillion economy while ensuring inclusive development. The continued emphasis on capital expenditure is critical to achieving the $5 trillion economy goal. The budget goes well with the vision for Amrit Kaal. It sets seven priorities that will steer the economy into a phase of high and inclusive growth through massive expenditure on infrastructure and enhanced expenditure for poor and marginalised sections. It also prioritises the empowerment of youth, green growth through environmentally friendly behaviour of individuals and firms, and natural and organic agricultural practices. The saptrishi priorities are set in the budget without compromising fiscal prudence. Overall, the budget for 2023-24 is very well designed to further strengthen the economy. The Union Budget 2023-24 strikes a judicious balance between aggressive growth-inducing capital investments (3.3% of GDP, rising to 4.5% effective capex) and rigorous fiscal deficit glidepath targets (5.9% in 2023-24 towards 4.5% by 2025-26 under FRBM guidelines), cementing India’s economic trajectory during Amrit Kaal.

Union Budget Comments / Views on the (some specific Provisions) Finance Bill 2023 Authors: CA. R T Goel and CA. Vijaykumar Chhallani • Members of the Institute • Contact: rtgoelpune@gmail.com / eboard@icai.in • The Chartered Accountant | March 2023 (pp. 40–45 / Journal pp. 984–989) Scope & Macro-Fiscal Context This note is on few selected clauses of Finance Bill 2023 in respect of Income Tax Act 1961 (excluding the Income from Business/ Profession). The Finance Bill 2023 / Budget presented by the Hon Finance Minister demonstrated the efforts taken by the Government in balancing the Inflation and Growth is commendable. Similarly, the Saptarishi theme of the Budget to reflect Inclusive Development, Developing Infrastructure in all segments of economy with an eye on Centenary Year of Independence will go a long way during the Amrit Kaal in making the Strong Economy having Global recognition. Some Highlights out of Budget of 2023-24 are discussed hereunder: 1) Tax Rates and New Tax Regime 1.1 Re-vamping of New Tax Regime under Section 115BAC Finance bill make changes in new regime under section 115 BAC was introduced from AY 21-22. The basic exemption limit of Rs. 2,50,000 has been enhanced to Rs. 3,00,000 and income tax rates have been revised under sub section 1A to Section 115 BAC is inserted with a from AY 2024-25 for new regime: Total Income Slab (New Regime u/s 115BAC(1A)) Rate of Income Tax Basic Up to rupees 3,00,000 Nil Rs. 3,00,001 to Rs. 6,00,000 5% Rs. 6,00,001 to Rs. 9,00,000 10% Rs. 9,00,001 to Rs. 12,00,000 15% Rs. 12,00,001 to Rs. 15,00,000 20% Above Rs. 15,00,000 30% Applicability: The above-mentioned rates mentioned are applicable to all Individuals, HUF, BOI whether incorporated or not (AOP other than co-operative society). The Education Cess continues at unchanged rate of 4%. Surcharge Rationalisation: The surcharge liability on Total Income exceeding rupees 5 Crores has been reduced to 25% from 37 % effective from AY 24-25. However reduced surcharge liability is applicable only if one is opting for new regime. Old Regime Unchanged: There is no change either in basic exemption limit or tax rates for opting existing / old tax regime. Default Status: The new regime shall become by default from AY 24-25. The option for old regime will be required to be selected every year before due date of filing the IT return. Policy Implication: It appears that the Government desires to switch over fully to new regime in coming years. 1.2 Tax on Income of Certain New Manufacturing Co-operative Societies (Section 115BAE) This budget has introduced a new section 115 BAE which is in line with section 115 BAB introduced in October 2019, which is applicable to new manufacturing domestic companies. A newly set up and registered co-operative society on or after 01.04.2023 has commenced manufacturing or production of an article or thing on or before 31.03.2024, shall be taxed @ 15% without any deductions under chapter VIA (other than 80JJA) and certain provisions of section 32 to section 35. Mandatory Qualifying Conditions: New manufacturing business should not be formed by splitting any existing business. New business does not use any plant and machinery, previously used for any purpose. New business should manufacture a new article or thing and will not include activities like mining, software development, bottling of gas cylinders, conversion of marble block, etc or any other business as may be notified by the Government. In case of income derived from other manufacturing businesses will be taxed at the rate of 22% and income from other activities will be taxed at the rate of 30%. 2) Exemptions And Deductions 2.1 Expansion of Rebate under Section 87A The rebate under section 87A was allowed maximum to the extent of Rs. 12,500/- of income tax liability on income up to Rs. 5,00,000/-. Now the above rebate is increased to Rs. 25,000/- and income of Rs. 7,00,000/- respectively w.e.f., from AY 24-25 and is applicable for new regime as provided in newly inserted sub section (1A) of section 115BAC. The rebate u/s 87A for old regime is unchanged to the maximum of Rs. 12,500/-. 2.2 Taxation of High-Premium Life Insurance Policies (Section 10(10D)) The clause 10D of Section 10 is proposed to be amended as under: The amount received will be exempted on the maturity of any insurance policy/ policies issued after 01.04.23 along with bonus allocated on such policy provided the annual premium paid during the term does not exceeds Rs. Five lakhs. This provision shall not apply for Unit linked insurance policies and also the sum received at the time of death. It appears from the proposals in bill, that in case the insurance premium paid during any of the financial year on one or more policies, is more than Rs. 5 lakhs, then the amount received at the maturity (including bonus) will be taxable income in the year of receipt. In case the annual insurance premium is up to Rs. 5 lakhs, then the amount received on maturity along with bonus will continue to be exempted, as earlier. Critical Practical Note: Hence if this proposal becomes Act, it will be a harsh provision for the income tax payer and may result in diminution of interest in Insurance Policies, as a mode of investments. 2.3 Exemption for Payments from Agniveer Corpus Fund (Section 10(12C)) The new clause (12C) of section 10 is proposed to be inserted to exempt the amount paid from the Agniveer Corpus Fund to the person enrolled under Agni path Scheme or to his/ her nominees. The contribution by the Central Government to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme shall be considered as a salary under Section 17. This is welcome and justifiable exemption proposed in the Budget. 2.4 Withdrawal of Exemption for Non-Notified News Agencies (Section 10(22B)) The exemption given under clause (22B) of Section 10 shall not be applicable to the income of News Agency other than notified News agency, w.e.f. 01.04.2024 (printed as 01.04.20204). It appears that income of notified news agencies like PTI, etc shall be taxable from AY 24-25. 2.5 Exemption to Development Authorities / Boards (Section 10(46A)) A new clause 46A to section 10 has been inserted to exempt the income of any Body or Authority or Board or Trust established or constituted by / under a Central or State Act having object of planning, development or improvement of Cities, Towns, villages, housing accommodation, etc, which also includes regulating/ developing any activity for the benefit of general public. 2.6 Tighter Realisation & Return Filing Norms for SEZ Units (Section 10AA) The income of SEZ units as specified u/s 10AA, shall continue to be exempted provided the proceeds from sale of goods or services are realised in convertible foreign exchange, within 6 months from end of previous year or in such extended period as may be approved by Competent authority, i. e. RBI or Authorised Dealer. Further it is provided that for claiming exemption u/s 10AA such unit has to file Return of Income on or before due date u/s 139(1). 2.7 Offshore Derivative Instruments & NDF Contracts in IFSC (Section 10(4E)) It is proposed to substitute clause (4E) of the section 10, w.e.f. AY 24-25 to exempt any income accrued or arisen to, or received by a non-resident as a result of– (i) transfer of non-deliverable forward contracts or offshore derivative instruments or over-the-counter derivatives; or (ii) distribution of income on offshore derivative instruments, entered into with an offshore banking unit of an IFSC referred to in subsection (1A) of section 80LA, which fulfils such conditions as may be prescribed. 2.8 Deductions for Agnipath Scheme (Section 80CCH) The new section 80CCH is proposed to be inserted for deduction of an amount paid to a person called Agniveer as referred in “Agnipath Scheme” to allow deduction for amount contributed by the Government to the individual account of Agniveer Corpus Fund as well as Contribution from Agniveer Corpus Fund to such account. This will be applicable from AY 23-24. The deductions for contributions made to the Agniveer Corpus Fund shall be allowed under Section 80CCH in both existing and new tax regimes. 2.9 Rationalisation of Provisions Governing Charitable or Religious Trusts Corpus & Loan Repayments: Application of funds by a charitable or religious trust before 01-04-2021, out of corpus, loans or borrowings shall not be considered an application when such amount is deposited back or invested in the corpus, or the loan or borrowing is repaid. Repayment of loan or investment/depositing back into corpus shall be considered an application for charitable or religious purposes only within 5 years of application from the corpus or loan. Inter-Trust Donations (85% Cap): The donations by a trust or institution to another trust or institution shall be treated as the application of up to 85% of such donations. Removal of Specific Named Funds from Section 80G: Three name-based funds (Jawaharlal Nehru Memorial Fund, Indira Gandhi Memorial Trust, and Rajiv Gandhi Foundation) have been removed from the list of eligible funds for a deduction under Section 80G. Direct Regular Registration: The trusts and institutions that have commenced the activities shall make the application directly for regular registration instead of provisional registration. Cancellation for False Information: The submission of an application for registration containing false or incorrect information, or if it is incomplete, shall be considered a specified violation and result in the cancellation of the registration of trusts or institutions by PCIT/CIT. Accreted Tax u/s 115TD: The provisions of accreted tax under Section 115TD are extended to trusts or institutions if they fail to apply for re-registration. Timelines for Form 9A & Form 10: To claim accumulation of income, the trusts or institutions shall file Form 9A and Form 10 at least 2 months before the due date of filing of return of income i.e. in the current context on or before 31st August. No Exemption via Updated Return: The trusts or institutions cannot claim the benefit of exemption provisions by filing an updated return of income, it means whatever amount is claimed in the original Return of Income that only will be considered for exemption. 3) Capital Gains 3.1 Scope of “Consideration Received” in Joint Development Agreements (Section 45(5A)): The scope of “consideration received” in section 45 (5A) is modified to include “any consideration received in cash or by a cheque or draft or by any other mode” w.e.f. AY24-25. It appears that it is expansion of mode of consideration received for working of Capital Gain. This will be applicable mainly to Joint Development agreement. 3.2 Conversion of Physical Gold into Electronic Gold Receipts (Section 47): A new clause u/s 47 is inserted to clarify that Conversion of physical gold into Electronic Gold Receipts and vice-versa by a SEBI-registered Vault manager shall not be considered a transfer for capital gains. 3.3 Double Deduction Avoidance on Housing Loan Interest (Section 48): The proposed insertion of clause (ii) to the section 48 so as to provide that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA of the Act. It appears that it is a clarificatory provision with object of avoiding double deduction, which is logical amendment. 3.4 Offshore Fund Relocation to IFSC Extended (Section 47(viiad)): The transfer of capital assets due to the relocation of an offshore fund to IFSC, will not be treated as transfer of capital asset, in respect of such relocation up to 31-03-2025. 3.5 Market Linked Debentures Deemed as Short-Term Capital Assets (Section 50AA): In respect of “Market Linked Debentures”, a new section 50AA is inserted to treat the full value of the consideration received or accruing as a result of the transfer or redemption or maturity of the “Market Linked Debentures” as reduced by the cost of acquisition of the debenture and the expenditure incurred wholly or exclusively in connection with transfer or redemption of such debenture, as capital gains arising from the transfer of a short-term capital asset. It is important to note that no deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax. 3.6 Restriction of Exemption u/s 54 up to Rs. 10 Crores: It is proposed to restrict the exemption on investment of Capital gain on acquisition/ purchase/ construction of new residential house to the extent of Rs. 10 crores, irrespective of the actual value of investment in new house. Similarly, there will be restriction on the amount deposited in Capital Gain Deposit Scheme 1988 to the extent of Rs. 10 crores. The proposed restriction will attract Capital Gain Tax liability on Capital Gain which is in excess of Rs. 10 crores, even if total capital gain is invested in new asset. 3.7 Restriction of Exemption u/s 54F up to Rs. 10 Crores & Pro-Rata Computation Capital gain arising from transfer of any capital asset (other than Residential house) u/s 54F in respect of investment in Residential House: It is proposed to restrict the exemption on investment of Capital gain on acquisition/ purchase/ construction of new residential house to the extent of Rs. 10 crores, irrespective of the actual value of investment in new house. Similarly, there will be restriction on the amount deposited in Capital Gain Deposit Scheme 1988 to the extent of Rs. 10 crores. The proposed restriction will attract Capital Gain Tax liability on excess of over Rs. 10 crores, even if total capital gain is invested in the new asset. The section 54F is also proposed to amend in similar lines of section 54, by proposing restriction of Rs. 10 crores on investment in new asset (residential house). In short it is proposed to insert a proviso to provide that the amount of net consideration in excess of rupees ten crores will not be taken into account for the purposes of sub-section (4) of 54F, i. e. for computing Capital Gain. As we are aware that for claiming deduction/exemption of Capital Gain under this section exemption will be available only in the proportion of total investment in new asset divided by consideration received. This can be illustrated simply as under: Particulars Amount / Calculation Net Consideration on sale of plot Rs. 15 crores Capital gain (after indexation) Rs. 8 crores Investment in new residential house Rs. 12 crores New restriction proposed for investment in new asset Rs. 10 crores Capital Gain exempted (8 / 15 × 10) Rs. 5.33 crores (pro-rata) Balance capital gain taxable (8 - 5.33) Rs. 2.67 crores 3.8 Consequential Amendments to Sections 54EA, 54EB, 54EC, 54ED: The sections 54EA, 54EB, 54EC, 54ED have been amended by omission of sub section (3) clause (a) in all the sections mentioned above. It appears that in all the sections mentioned above clause 3 or 3(a)(b) says that if any cost to acquire is capitalised then again such shall not be allowed as deduction u/s 88. By virtue of omission of section 88, this is consequential amendment. 4) Income from Other Sources 4.1 Angel Tax Extended to Non-Resident Investors (Section 56(2)(viib)): The Private Ltd company and closely held Public Company (Companies in which Public is not substantially interested) which receives value of shares more than face value, the aggregate consideration in excess of fair market value of such shares from any person (the word “being a resident” is omitted) shall be taxable u/s 56(2) w.e.f. 01.04.2023. Accordingly, it will cover all investors including non-resident. 4.2 Taxation of Distributions / Repayments by Business Trusts (Section 56(2)(xii)): If the unit holder having units in business trust receives any sum (other than interest, dividend from special purpose vehicle) from the Business Trust, the same shall be taxable w.e.f. AY 24-25. So also, any redemption amount is received by unit holder from Business Trust, the same shall be taxable after reducing the cost of acquisition, subject to condition that cost does not exceed the sum received. 4.3 Taxation of Sums Received under High-Premium Life Insurance Policies (Section 56(2)(xiii)): The clause (xiii) sub section (2) of section 56 is proposed to be inserted as under: Amount received (in excess of aggregate amount of insurance premium paid) will be taxable on the maturity of any insurance policy/ policies issued after 01.04.23 along with bonus allocated on such policy/ policies of which the annual premium is paid during the term of such policy/ policies exceeds Rs. Five lakhs. This provision shall not apply for Unit linked insurance policies and also the sum received at the time of death. 5) Set Off and Carry Forward of Losses 5.1 Strategic Disinvestment Definition Amended (Section 72A): The definition of “strategic disinvestment” in Section 72A is amended w.e.f. AY 23-24 to provide that the sale of shareholding by the Central or State Governments, or a public sector company in another public sector company or a company which results in the reduction of its shareholding below 51%, and transfer of control to the buyer. It is further explained that requirement of transfer of control referred to in sub-clause (b) may be carried out by the Central Government or the State Government or the public sector company or any two of them or all of them. 5.2 Loss Carry Forward in Banking Mergers Post Strategic Disinvestment (Section 72AA): Section 72AA is amended to allow the carry forward of accumulated losses and unabsorbed depreciation in the event of the merger of a banking company with another banking company within 5 years of the strategic disinvestment, w.e.f. AY 24-25. 5.3 Relaxation for Eligible Start-ups from 7 to 10 Years (Section 79): As per proposed amendment to Section 79, the Eligible start-ups can set off and carry forward the losses incurred during the 7 years of incorporation even in case of a change in shareholding, provided 100% of shareholders continue during the relevant period. The time limit of 7 years is increased to 10 years. It reveals that in case of eligible start up as referred to in section 80IAC, additional 3 years period is given for carry forward of losses. 6) Miscellaneous Provisions Deemed Accrual for Payments to RNOR (Section 9(1)(viii)): The clause (viii) of Section 9(1) is proposed to substitute so as to also include person not ordinarily resident in India. In short, any resident pays an amount outside India, to NRI or not ordinary Resident the same shall be treated as income accruing or arising in India. Perquisite Valuation of Rent-Free/Concessional Accommodation (Section 17(2)): The Rent-free or concessional accommodation provided by an employer to an employee will be taxable in case valuation of accommodation provided as per prescribed method of valuation of such accommodation is in excess of amount recovered / recoverable from the employee. It appears that the Rent Free or Concessional Accommodation, hereinafter will be charged at fair value. Creation of Joint Commissioner (Appeals) Authority (Sections 2(19B) & 117): The new income tax authority under section 2(19B) and Section 117 of IT Act, named as Joint Commissioner of Income Tax (Appeals) is added and the authority of Additional Commissioner of Income Tax (Appeals) has been omitted. Specified Domestic Transactions with Co-operatives (Section 92BA): Bill seeks to amend section 92BA of the Income-tax Act relating to meaning of “specified domestic transaction”. It is proposed to insert a new clause (vb) to the said section to include the transaction between the cooperative society and the other person with close connection within the meaning of “specified domestic transaction”. This is consequential to the insertion of new section 115 BAE, which relates to newly incorporated Co-operative Societies conducting manufacturing activities. Transfer Pricing Documentation Timeline Reduced (Section 92D(3)): In section 92D of the Income-tax Act, in sub-section (3), for the words “period of thirty days”, the words “period of ten days” shall be substituted. It is proposed to amend the said sub-section (3) and the proviso to reduce the said period from thirty days to ten days for furnishing any information or document, extendable by a further period of not exceeding thirty days. TDS on Lottery/Gambling Winnings Threshold Aggregation (Sections 115BB, 194B, 194BB): Section 115BB of the Act provides for the rate of tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature. It is seen that deductors are deducting tax under section 194B and 194BB of the Act by applying the threshold of Rs 10,000/- per transaction and avoiding tax deduction by splitting a winning into multiple transactions each below Rs 10,000/-. It is amended to include the aggregate amount of winning in a financial year and not to each instance. Similarly for Section 115BB shall not apply for any winnings from any online games. Special Tax Regime for Online Game Winnings @ 30% (Section 115BBJ): The new section 115BBJ is proposed to be inserted relating to tax on winnings from online games, to provide that, where the total income of an assessee includes any income by way of winnings from any online game, the income-tax payable shall be the aggregate of— (i) the amount of income-tax calculated on net winnings from such online games during the previous year, computed in the manner as may be provided by rules, shall be taxed @30%. (ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the net winnings referred to in clause (i). This amendment will be applicable from AY 24-25. Cash Loan & Deposit Threshold Hike for PACS & PCARD (Sections 269SS & 269T): As per amended section 269SS and 269T, Primary Agricultural Credit Societies (PACS) and Primary Co-Operative Agricultural and Rural Development Banks (PCARD) are allowed to accept deposits or grant loans to their members in cash up to Rs. 2 lakhs. This increased limit of Rs. 2 lakhs also apply to the repayment of such loans or deposits.

Union Budget Budget Analysis – Sections 115 onwards except NRI taxation Author: CA. Kusai Goawala • Member of the Institute • Contact: eboard@icai.in • The Chartered Accountant | March 2023 (pp. 46–54 / Journal pp. 990–998) Macro Shift: New Tax Scheme as Default Regime Earlier, The New Tax Scheme (NTS) was to be opted by Individual or HUF. In case of an assessee having business income, this scheme once opted cannot be changed. In other cases, the same could be changed every year at the option of the Assessee. However, under the proposed amendment in Finance Bill 2023, NTS has been made the default scheme. An Assessee will now have to specifically opt for the old Tax scheme if it desires to go for the same. 1. Special Tax Regimes & Concessional Provisions (Sections 115BAC to 115UB) Section 115BAC – New Regime: Changes in Slab and Tax Rates Sr. No. Total Income Slab Tax Rate 1 Up to 3,00,000 Nil 2 From 3,00,001 to 6,00,000 5% 3 From 6,00,001 to 9,00,000 10% 4 From 9,00,001 to 12,00,000 15% 5 From 12,00,001 to 15,00,000 20% 6 Above 15,00,000 30% Default Tax Regime: New Tax regime will be the default tax regime from AY 2024-25. Standard Deduction: Earlier under NTS, Standard Deduction was not available to the assessee. However, now Standard deduction from salary of Rs. 50,000 is extended to the new tax regime. Surcharge Reduction: Under the new tax regime, the highest surcharge rate of 37% on income above Rs. 5 Crores has been reduced to 25%. Expanded Entity Coverage: The alternate tax regime of section 115BAC is now applicable to Association of Persons (AOP) (other than co-operative society), Body of Individuals (BOI), and Artificial Juridical Person (AJP). Section 115BAD – Tax on Co-operative Societies This section applies to Co-operative Societies. The tax is applicable at 22% subject to fulfillment of prescribed conditions and option exercised by the assessee. However, under Finance Bill 2023, for manufacturing Cooperative Societies: In section 115BAD of the Income-tax Act, in sub-section (1), after the words “provisions of this Chapter,”, the words, figures and letters “other than those mentioned under section 115BAE,” shall be inserted. Section 115BAE – Insertion of New Provision: Concessional Tax Regime for New Manufacturing Co-operative Societies Tax on income of certain new manufacturing co-operative societies set up and registered on or after 01.04.2023: Tax rate is 15% subject to fulfillment of certain conditions. For Short Term Capital Gains on assets on which no depreciation is allowed, the applicable rate is 22%. Section 115BB – Exclusion of Online Gaming Income Since separate provision is provided (Section 115BBJ) for Online Gaming Income, online gaming is excluded from this section. Section 115BB continues to deal with income from winnings from lotteries, crossword puzzles, races including horse racing, card games and other games of any sort or gambling or betting. Under Finance Bill 2023, Online Gaming is removed from Section 115BB and carved into Section 115BBJ. Section 115BBJ – Dedicated Tax on Online Game Winnings Inserted specifically for taxing income from online gaming: Amount of income-tax calculated on net winnings from such online games during the previous year shall be taxed flat at the rate of 30% (thirty per cent). Section 115JD – Alternate Minimum Tax (AMT) Non-Applicability Sub-section (7) of Section 115JD has been substituted to provide that the provisions of Alternate Minimum Tax shall not apply to a person where: (i) such person has exercised the option referred to in sub-section (5) of section 115BAC or sub-section (5) of section 115BAD or sub-section (5) of section 115BAE; or (ii) income-tax payable in respect of the total income of such person is computed under sub-section (1A) of section 115BAC. Impact: Non-applicability of AMT is formally extended to persons exercising option u/s 115BAE and those assessed under default regime u/s 115BAC(1A). Section 115UA – Taxation of Business Trust Distributions Sub section 3A has been inserted to exclude the unit holder from its purview whose tax liability is determined as per the newly inserted provision of section 56(2)(xii) (governing distribution of repayment of debt or redemption). Section 115UB – Investment Funds in IFSC Scope expanded by adding investment funds regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022. 2. Search, Seizure, Assessment & Rectification Procedures (Sections 132 to 155) Section 132 – Comprehensive Search and Seizure Overhaul Sub-section (2) – Requisition of Technical & Financial Experts: In the newly added sub-clause, the authorized officer may requisition the services of any person or entity as may be approved by Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, in accordance with the prescribed procedure. Earlier, such requisition was strictly limited to police officers or officers of the Central Government. Sub-section (9D) – Reference to Registered Valuers & Outside Entities: The authorized officer may, during search or seizure or within 60 days from the date on which the last authorization for search was executed, make a reference to any approved person, entity, or registered valuer under any law for the time being in force. Earlier, valuation references were limited to Departmental Valuation Officers referred to in Section 142A. Explanation 1 – Deemed Date of Execution of Last Authorization (w.e.f. 01.04.2022): For the purposes of sub-sections (9A), (9B), and (9D), the last authorization for search shall be deemed to have been executed: (a) In search cases: on the conclusion of search as recorded in the last panchnama drawn in relation to any person named in the warrant; or (b) In requisition cases u/s 132A: on actual receipt of books of account, documents, or assets by the authorized officer. (Previously, reference for deemed execution was linked to Section 153B(2)). Assessment, Reassessment & Notice Procedures (Sections 135A to 153) Section 135A – Faceless Collection of Information: Proviso added empowering Central Government to amend any direction issued under sub-section (1) on or before 31st March 2022 by Official Gazette notification. Section 140B(4) – Updated Return Clarifications: Words “as the case may be” omitted in opening paragraph, and word “if any” added in clause (a)(ii). Section 142(2A) – Departmental Audit Extended to Inventory: Scope of special audit extended to inventory. Assessing Officer can now direct valuation of inventory by a Cost Accountant. Section 148 – Reassessment Notice Timelines: Return in response to notice u/s 148 must be filed within 3 months from the end of the month in which notice is issued or within extended period allowed by the AO. Proviso added: Any return furnished beyond the allowed period shall not be deemed to be a return under Section 139. Section 149 – Exclusion of 15 Days for Limitation: Where limitation period for issuing notice u/s 148 expires on 31st March, a period of 15 days is excluded in computing limitation for search u/s 132 or requisition u/s 132A conducted after 15th March. Section 151 – Sanction for Notice: The phrase “where there is no Principal Chief Commissioner or Principal Director General” is omitted. Section 153 – Completion Period: Time limit for completion of assessment u/s 143 or 144 has been substituted to 9 months. Section 155 – Special Amendments & Rectification Mechanisms Sub-Section 11(A) – Foreign Exchange Realisation Relief Extended to Section 10AA (w.e.f. 01.04.2024) Where SEZ deduction u/s 10AA was disallowed on the ground that export proceeds were not received in convertible foreign exchange in India, and proceeds are subsequently brought into India within permitted time, the AO shall amend the assessment order to allow deduction under Section 10AA, in line with Section 10A, 10B, and 10BA. Sub-Section (19) – Disallowance Relief for Sugar Manufacturing Co-operatives Where deduction for sugarcane purchase expenditure claimed by a sugar manufacturing co-operative was disallowed wholly or partly for any PY on or before 01.04.2014, the AO shall recompute total income upon application, allowing deduction up to the Government-fixed or approved price. Section 154 applies, with the 4-year limitation period running from the end of the previous year commencing on 1st April 2022 (i.e. up to 31st March 2027). Sequential Steps: Disallowed sugarcane expense in PY <= 01.04.2014 ➔ Assessee makes application ➔ AO recomputes income allowing expenditure up to Government-approved price ➔ Section 154 applies with 4-year time limit expiring on 31.03.2027. Sub-Section (20) – Rectification for Subsequent-Year TDS Deduction (w.e.f. 01.10.2023) Where income was included in return filed u/s 139 for a relevant assessment year, but TDS was deducted and deposited in a subsequent financial year, the AO shall amend assessment or intimation to grant credit in the relevant year, upon application made within 2 years from the end of the FY of deduction. Limitation of 4 years u/s 154(7) runs from the end of the FY in which tax was deducted. Credit shall not be allowed in any other assessment year. 3. Business Reorganisation & Successor Assessment (Section 170A) Section 170A Substituted – Streamlining Post-Order Modified Returns Modified Return Filing (Sub-section 1): In cases of business reorganisation approved by High Court, Tribunal, or IBC Adjudicating Authority, where prior return was filed u/s 139, the successor entity shall furnish a modified return within 6 months from the end of the month of the sanction order. Completed Assessments (Sub-section 2a): Where proceedings are already complete on the date of modified return, the AO shall pass an order modifying total income taking into account the modified return. Pending Assessments (Sub-section 2b): Where proceedings are pending, the AO shall assess or reassess taking into account the modified return. Scope & Definitions: General Act provisions and applicable tax rates apply. Defines “business reorganisation” (amalgamation, demerger, merger) and “successor” (all resulting entities). 4. Rationalisation of TDS and TCS Provisions (Sections 192A to 206CCA) Section 192A – Premature EPF Withdrawal Second proviso omitted. Earlier, failure to furnish PAN attracted TDS at Maximum Marginal Rate (MMR). With this removal, tax without PAN is deducted at 20% instead of MMR. Section 193 – Listed Demat Securities Interest Clause (ix) in proviso omitted. Interest on dematerialized securities listed on a recognized stock exchange in India is now subject to TDS. Sections 194B & 194BA – Lottery & Net Online Game Winnings Section 194B & 194BB Threshold Aggregation: Threshold amended from individual winnings exceeding Rs. 10,000 to aggregate winnings exceeding Rs. 10,000 during the financial year to curb split transactions. Online games excluded w.e.f. 01.07.2023. New Section 194BA – Net Online Gaming Winnings (w.e.f. 01.07.2023): TDS to be deducted on net winnings in user account at the end of the financial year at rates in force (30%). In case of withdrawal during the year, tax is deducted on withdrawn net winnings. Where winnings are wholly or partly in kind, payer must ensure tax is paid prior to releasing winnings. Key Operational Amendments across Sections 194N to 206CCA Section 194N: Cash withdrawal TDS threshold for co-operative societies raised from Rs. 1 Crore to Rs. 3 Crores. Section 194R: Explanation 2 inserted clarifying that Section 194R applies to any benefit or perquisite whether in cash or in kind or partly in cash and partly in kind. Section 196A: Treaty benefit (lower DTAA tax rate) extended to non-resident payees receiving mutual fund income on furnishing Tax Residency Certificate (TRC). Section 197: Section 194LBA included for obtaining lower/nil deduction certificates for business trust distributions. Sections 206AB & 206CCA: Specified persons subject to higher deduction/collection excluded non-residents without PE in India and notified persons. Section 206C(1G): TCS rate under Liberalised Remittance Scheme (LRS) and overseas tour packages increased from 5% to 20% w.e.f. 01.07.2023 (excluding medical and education remittances). 5. Refunds, Interest & Dispute Resolution (Sections 241A to 245R) Section 241A Sunset & Section 245 Substitution: Section 241A shall not apply from 01.04.2023. Under substituted Section 245, the AO may set off refunds against outstanding demands after intimation, or withhold refunds during pending assessment/reassessment with approval of Pr. CIT/CIT if adverse revenue impact is anticipated. Section 244A: Interest @ 0.5% per month on refunds arising from Section 155(20) applications; period of withholding u/s 245(2) is excluded in computing additional interest. Section 245D(9): Settlement Commission rectification application time limit expiring between 01.02.2021 and 01.02.2022 extended to 30th September 2023. Sections 245MA & 245R: Window to amend directions issued on or before 31.03.2023 by notification. 6. Cash Transactions, Penalties, Prosecutions & Rules (Sections 269SS to 295) Sections 269SS & 269T: Cash acceptance of deposits and grant/repayment of loans for members of Primary Agricultural Credit Societies (PACS) and Primary Co-operative Agricultural and Rural Development Banks (PCARD) increased from Rs. 20,000 to Rs. 2 Lakhs. Section 271C: Penalty for failure to pay or ensure payment of tax under Section 194R, 194S, and 194BA w.e.f. 01.07.2023. Section 276A: Immunity for liquidators; no prosecution proceedings to be initiated under Section 276A on or after 01.04.2023. Section 276B: Prosecutions amended to cover failure to pay or ensure payment under Section 115-O(2), 194B, 194R, 194S, and 194BA. Section 295(2)(eec): Rule-making power amended to prescribe guidelines for inventory valuation. 7. Institutional Reform – Introduction of Joint Commissioner (Appeals) In the following Sections of the Income-tax Act, 1961, instead of the word ‘Commissioner (Appeals)’, the word ‘Joint Commissioner (Appeals)’ has been substituted / powers extended to expedite first appellate disposal: Sr. No. Statutory Section Nature of Power / Jurisdiction Conferred 1 Section 116 Power extended to Joint Commissioner as Income Tax Authority. 2 Section 119 Power extended to Joint Commissioner (Appeals) regarding CBDT instructions. 3 Section 131 Power regarding discovery, production of evidence, etc. extended to JCIT (Appeals). 4 Section 133 Power to call for information extended to Joint Commissioner (Appeals). 5 Section 134 Power to inspect register of companies extended to Joint Commissioner (Appeals). 6 Section 154 Rectification of mistake apparent from record extended to Joint Commissioner (Appeals). 7 Section 158A Procedure when identical question of law is pending before High Court/Supreme Court. 8 Section 158AB Deferral of appeal filing when identical question of law is pending. 9 Section 177 Assessment of dissolved association of persons / firm extended to JCIT (Appeals). 10 Section 189 Firm dissolved or business discontinued powers extended to Joint Commissioner (Appeals). 11 Section 249 Form of appeal and limitation for filing appeal before Joint Commissioner (Appeals). 12 Section 250 Procedure in appeal before Joint Commissioner (Appeals). 13 Section 251 Appellate powers of disposal, confirming, reducing or enhancing assessment. 14 Section 264 Revision of other orders by Principal Commissioner or Commissioner. 15 Section 267 Amendment of assessment order on appeal extended to Joint Commissioner (Appeals). 16 Section 270A Penalty for under-reporting and misreporting of income extended to JCIT (Appeals). 17 Section 270AA Immunity from imposition of penalty, etc. powers extended to JCIT (Appeals). 18 Section 271 General penalty powers for failure to comply extended to Joint Commissioner (Appeals). 19 Section 271A Penalty for failure to keep, maintain or retain books of account. 20 Section 271AAC Penalty in respect of income referred to in section 68, 69, 69A, 69B, 69C, 69D. 21 Section 271AAD Penalty for false entry, etc. in books of account extended to JCIT (Appeals). 22 Section 271J Penalty on professionals for furnishing incorrect information in reports/certificates. 23 Section 275 Bar of limitation for imposing penalties under Clause (a) and (b). 24 Section 279 Prosecution to be at instance of Principal Commissioner / Commissioner / JCIT (Appeals). 25 Section 287 Publication of information respecting assessees in certain cases. 26 Section 295 In clause (mm), rule-making power extended to Joint Commissioner (Appeals).

Union Budget Business Income and Business Income Taxation Author: CA. Chandrashekhar V. Chitale • Member of the Institute • Contact: eboard@icai.in • The Chartered Accountant | March 2023 (pp. 55–62 / Journal pp. 999–1006) Macro-Economic Context & Fiscal Consolidation The last full budget of the government prior to the parliamentary elections is fuelled with proposals towards populism, as the experience goes. However, it is because the PM and FM appreciate that good economics is also good politics, it has eschewed this and instead, focuses on giving the long-term interest of citizens primacy. Sustained improvement in people’s fortunes rather than small giveaways aimed at each identifiable group that wins votes is good economics. The Union Budget pursues a disciplined course on fiscal consolidation. While the fiscal deficit in 2022-23 is estimated to have come down to 6.4% of GDP from 6.7% the earlier year, this budget proposes to bring it further down to 5.9%. Moreover, the FM has announced the Government’s intention to bring the deficit down to 4.5% by 2025-26. The budget has committed to raising capital expenditure (capex) to 3.3% of GDP from its estimated level of 2.9% during the previous year. These are good news for trade, commerce and industry, with contained inflation, value of money will not erode, and capex brings more demand. Statutory Timeline & Applicability Framework No retrospective amendments that are taxing, provides comfort to taxpayers. Important proposals for income from business or profession are discussed in this article. All the proposals from the Finance Bill, 2023, unless expressly stated otherwise, when enacted, are proposed to take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years. 1. Benefit or Perquisite in Business or Profession (Sections 28(iv) & 194R) Statutory Background & Circular 20D of 1964 Section 28 provides a list of items of income that are expressly chargeable to income-tax under the head “Profits and gains of business or profession.” Clause (iv) of section 28 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is chargeable under this head. Circular no. 20D dated 7th July 1964 was issued to explain the provisions of the Act, stating clearly that the benefit could be in cash or in kind. Therefore, the intention of the legislature while introducing this provision was to include benefit or perquisite whether in cash or in kind. However, Courts have interpreted that if the benefit or perquisite is in cash, it is not covered within the scope of clause (iv) of section 28 of the Act. To align the provision with legislative intent, clause (iv) of section 28 has been proposed to be amended as follows: “(iv) the value of any benefit or perquisite arising from business or the exercise of a profession, whether–– (a) convertible into money or not; or (b) in cash or in kind or partly in cash and partly in kind;”. Consequential TDS Clarification under Section 194R: Deduction of tax on benefit or perquisite in respect of business or profession was introduced by insertion of section 194R by the Finance Act 2022. In section 194R, Explanation 2 has been inserted to clarify that the benefit or perquisite shall also apply whether in cash or in kind or partly in cash and partly in kind. This amendment takes effect from 1st April, 2023. Judicial Precedents & Overriding Effect Interpreting the meaning of ‘perquisite’, the Supreme Court in the case of Commissioner vs. Mahindra and Mahindra Ltd. (93 taxmann.com 32 (SC)) held that perquisite received in the form of waiver of loan cannot be taxed under Section 28(iv) of the Income Tax Act, 1961, if the receipts are in cash or money. Because, for invoking Section 28(iv), the benefit received had to be in some other form rather than in the shape of money. It is believed that this statutory amendment shall override the aforesaid judgment. However, one further test remains: whether a loan waiver qualifies as “any benefit or perquisite arising from business or the exercise of a profession”. Black’s Law Dictionary Definition & Supreme Court Authority: Perquisites: Emoluments, privileges, fringe benefits, or other incidental profits or benefits attaching to an office or employment position in addition to regular salary or wages. Shortened term — Perks is used with reference to such extraordinary benefits afforded to business executives (e.g. free cars, club memberships, insurance, etc.). In Commissioner of Income Tax, Bombay v. M/s. Mafatlal Gansabhai & Co. (P) Ltd. (1996 SCC (7) 569), the Supreme Court held that cash payments do not fall within the ambit of Section 40(a)(v) or 40-A(5)(a)(ii), agreeing with consistent rulings from Karnataka, Delhi, Calcutta, Bombay, Andhra Pradesh, Madras, and Gujarat High Courts. Trade & Cash Discounts: Of course, trade or cash discount is not a perquisite, as it represents remission for not enjoying credit period or abatement of sales price, respectively. 2. MSME Purchases & Section 43B(h) Payment Disallowance Core Mechanism of Section 43B(h) & Exception to the Proviso Section 43B mandates that deductions for specified expenses (taxes, statutory funds, bank/NBFC loan interest, leave encashment, etc.) are allowed only upon actual payment, irrespective of the method of accounting regularly employed. Insertion of Clause (h): Clause 13 of the Finance Bill 2023 inserts clause (h) into Section 43B to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) shall be allowed as a deduction only on actual payment. Crucial Exception to Section 43B Proviso: Under the general proviso to Section 43B, deductions are allowable if paid on or before the due date for filing return of income u/s 139(1). This proviso has been expressly amended so that it DOES NOT apply to clause (h). Hence, year-end outstanding dues to micro/small enterprises paid after the close of the financial year (even if paid before return filing due date) will be disallowed in that year if paid beyond the MSMED Act credit period! MSMED Act Thresholds & Statutory Payment Timeline (Section 15) Enterprise Category Manufacturing (Plant & Machinery) Services (Equipment) Section 43B(h) Covered? Micro Enterprise Investment does not exceed Rs. 25 Lakhs Investment does not exceed Rs. 10 Lakhs YES Small Enterprise Investment > Rs. 25 Lakhs up to Rs. 5 Crores Investment > Rs. 10 Lakhs up to Rs. 2 Crores YES Medium Enterprise Investment > Rs. 5 Crores up to Rs. 10 Crores Investment > Rs. 2 Crores up to Rs. 5 Crores NO (Excluded) Section 15 of MSMED Act – Mandatory Credit Periods: • With Written Agreement: Payment must be made on or before the agreed date, but in no case can the credit period exceed 45 days from the day of acceptance or deemed acceptance. • Without Written Agreement: Payment must be made before the Appointed Day, which is the day immediately following the expiry of 15 days from the day of acceptance or deemed acceptance. Comprehensive Practical Illustrations on Section 43B(h) Illustration 1: Purchase on 1st July 2023 with 45 Days Credit (Due Date of Return: 30th Sept 2024) Case Payment Date AY for Deduction Statutory Rationale & Treatment (i) 31 July, 2023 AY 2024-25 Paid within MSMED Act agreed time (within 45 days). Sec. 43B inapplicable. (ii) 31 August, 2023 AY 2024-25 Paid beyond MSMED due date, Sec. 43B applicable; but paid before close of PY. Deduction available. (iii) 31 March, 2024 AY 2024-25 Paid before end of previous year. Deduction allowed in AY 2024-25. (iv) 30 April, 2024 AY 2025-26 Paid beyond MSMED date & after close of PY. Disallowed in AY 2024-25, deductible in AY 2025-26. (v) 30 Sept, 2024 AY 2025-26 Paid before return due date but after close of PY. Disallowed in AY 2024-25, deductible in AY 2025-26. (vi) 50% on 31 Mar 202450% on 31 May 2024 50% in AY 2024-2550% in AY 2025-26 Paid before end of PY allowed in AY 2024-25; amount paid after close of PY disallowed and shifted to AY 2025-26. Illustration 2 – Treatment of GST: On purchases of Rs. 20 Lakhs + GST Rs. 3.60 Lakhs (Total dues Rs. 23.60 Lakhs) paid on 30.04.2024: Disallowance is strictly restricted to Rs. 20 Lakhs. Since input tax credit is availed on GST, it does not form part of ‘a deduction otherwise allowable under this Act’. Illustration 3 – March Purchases: Purchases of Rs. 20 Lakhs made on 21st March with 40 days credit, paid on 10th April. Since payment is made within the agreed MSMED timeline (before 30th April), Section 43B is inapplicable and deduction is allowed in AY 2024-25. Illustration 4 – Conversion of Dues into Loan / Debentures: Dues of Rs. 50 Lakhs converted into an interest-bearing loan on 01.01.2024. As held by the Supreme Court in M.M. Aqua Technologies Pvt Ltd. v. CIT (Civil Appeal Nos. 4742-4743 of 2021), discharging liability through debentures/loan novation extinguishes the trade liability and amounts to actual discharge, qualifying for deduction in AY 2024-25. Audit Fee Provisions: For audit fee provision as at 31st March, liability arises upon completion and issuance of bill. Under Section 2(b) of MSMED Act, time begins from acceptance/deemed acceptance of services, hence year-end provisions cannot be treated as overdue. 3. Alignment of NBFC Classification (Sections 43B & 43D) Sections 43B and 43D currently refer to two erstwhile categories of NBFCs: “Deposit taking Non-Banking Financial Company” and “Systemically Important Non-Deposit taking Non-Banking Financial Company”. This terminology is no longer followed by the Reserve Bank of India for asset classification following the adoption of Scale-Based Regulation. To align with regulatory frameworks, Section 43B clause (da) and Section 43D are amended to substitute those categories with: “such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf”. 4. Presumptive Taxation Schemes (Sections 44AD, 44ADA, 44AB, 44BB, 44BBB) Threshold Enhancement for Small Businesses & Professionals Section & Eligible Assessee Existing Limit Enhanced Limit Mandatory Condition Section 44ADResident Individual, HUF, Partnership (excl. LLP) Rs. 2 Crores Rs. 3 Crores Aggregate cash receipts during previous year do not exceed 5% of total turnover/gross receipts. Section 44ADASpecified Professionals u/s 44AA(1) Rs. 50 Lakhs Rs. 75 Lakhs Aggregate cash receipts during previous year do not exceed 5% of total gross receipts. Deemed Cash Receipts: Non-account payee cheques or drafts are deemed to be receipts in cash. The percentage is calculated solely on turnover/receipts and does not apply to capital receipts or non-business income. Section 44AB Tax Audit Exemption: To grant relief, tax audit under Section 44AB shall not apply to an assessee declaring profits under Section 44AD or 44ADA within the enhanced thresholds. Curbs on Selective Opt-In / Opt-Out under Sections 44BB & 44BBB Sections 44BB (mineral oil extraction services) and 44BBB (turnkey power projects civil construction) offer a 10% presumptive profit rate. Taxpayers selectively claimed actual losses with audit in loss years, carried them forward, and switched back to the 10% presumptive rate in profit years to set off past losses. Anti-Abuse Amendment: Unabsorbed depreciation u/s 32 and business losses u/s 72 cannot be set off against presumptive income declared under Section 44BB or 44BBB. 5. Amortisation of Preliminary Expenses (Section 35D) Section 35D allows deduction of 1/5th of eligible preliminary expenses over five successive years for Indian companies and resident non-corporates (for feasibility reports, project reports, market surveys, or engineering services). Removal of Restrictive Proviso: The proviso requiring that such services must be carried out by the assessee or by a concern approved by the Board is omitted. Instead, the assessee is required to furnish a statement containing particulars of the expenditure in the prescribed form and manner to the income-tax authority within the prescribed period. 6. Incentives for Start-ups & Angel Tax Expansion (Sections 80-IAC, 79, 56(2)(viib)) Extension of Tax Holiday & Loss Carry Forward Relief India is the 3rd largest startup ecosystem in the world with over 75,000 startups (49% in tier-2/3 cities) and 105 unicorns. Section 80-IAC Incorporation Window: Period of incorporation for eligible start-ups entitled to a 3-year 100% tax holiday out of 10 years is extended by one year to 1st April, 2024. Section 79 Loss Carry Forward: The relaxation allowing carry forward of losses despite changes in shareholding (provided 100% original shareholders continue) is extended from 7 years to 10 years from incorporation, aligning with Section 80-IAC. Both concessions apply from AY 2023-24 onwards. Angel Tax Extended to Non-Resident Investors (Section 56(2)(viib)) Section 56(2)(viib) taxes share premium received by closely held companies in excess of Fair Market Value (FMV) as income from other sources. While eligible DPIIT-notified start-ups remain exempt, the Finance Bill 2023 omits the words “being a resident”, bringing investments from non-resident investors under the Angel Tax ambit. Regulatory Conflict (FEMA vs. Income Tax): FEMA regulations mandate a minimum floor price for bringing in Foreign Direct Investment (FDI), whereas the Income Tax Act prescribes a maximum ceiling price based on FMV, creating significant valuation friction for unlisted corporate fundraising. 7. Inventory Valuation Audit (142(2A)) & Business Reorganisation (170A) Section 142(2A) – Inventory Valuation by Cost Accountant AO empowered to direct inventory valuation by a nominated Cost Accountant (Cost and Works Accountants Act, 1959). Expenses determined by Commissioner and paid by Central Government. Section 153 limitation period excludes inventory valuation time. Effective from 01.04.2023. Section 170A – Successor Modified Return Assessment Following court/tribunal orders, successor entity files modified return within 6 months. AO must pass an order modifying total income if assessment is complete, or complete assessment/reassessment taking into account the modified return if pending. 8. Sugar Co-operatives Relief & Concessional Manufacturing Tax Sugarcane Purchase Price Disallowance Resolved (Section 155(19)) Payment of Final Cane Price (FCP) over Statutory Minimum Price (SMP) was previously disallowed as profit appropriation, locking thousands of crores in litigation. Finance Bill 2023 allows deduction up to Government-approved prices for previous years on or before 01.04.2014, with Section 154 rectification available for 4 years from 31.03.2023 (ending 31.03.2027). Additionally, new manufacturing co-operative societies are granted an optional concessional tax rate of 15% under Section 115BAE for AY 2024-25 onwards, creating fiscal parity with new manufacturing domestic companies.

Union Budget Direct Tax Proposals relating to Co-operative Societies Author: CA. Sanjay Madhukar Vhanbatte • Member of the Institute • Contact: smvcok@gmail.com / eboard@icai.in • The Chartered Accountant | March 2023 (pp. 63–66 / Journal pp. 1007–1010) Importance of Co-operative Sector in the Indian Economy Importance of the co-operative sector in the Indian Economy needs no emphasis. The rural economy in particular thrives on the co-operative sector to a great extent. The co-operative sector has been successful in creating its own footprints in banking, milk, sugar, housing, water-supply, etc., while competing effectively with the private and corporate sectors. The Union Government, realizing the paramount importance of the co-operative movement, created a separate ministry—the Ministry of Co-operation in June 2021—to provide a dedicated administrative, legal, and policy framework for further strengthening the sector. The Direct Tax proposals announced by the Hon’ble Finance Minister on 1st February 2023 relating to the co-operative sector provide significant impetus to the movement by settling longstanding litigation and establishing parity with corporate entities. 15% Section 115BAE Concessional tax rate for new manufacturing co-operatives ₹10,000 Cr Section 155(19) Relief for past sugarcane purchase price additions ₹3 Crores Section 194N Enhanced threshold for TDS on cash withdrawals ₹2 Lakhs Sections 269SS/T Cash deposit/loan limits for PACS and PCARD 1. Concessional Tax Rate of 15% under Section 115BAE for Manufacturing Background & Parity with Corporate Tax Regime (Section 115BAB) The Taxation Laws Amendment Act, 2019 (effective AY 2020-21) provided for the lowest tax regime in Indian corporate history by introducing a concessional tax rate of 15% for newly incorporated domestic companies exclusively engaged in manufacture or production of any article or thing and research/distribution related thereto, via Section 115BAB. Exactly on the same lines, the Finance Bill, 2023 introduces Section 115BAE providing a concessional tax rate of 15%* for newly set up co-operative societies in the manufacturing sector. *(The effective tax rate is 17.16%, including a 10% surcharge and 4% Health & Education Cess). A. Qualifying Conditions for Section 115BAE Incorporation Window: The co-operative society must be set up or registered on or after 01.04.2023. Commencement Date: It must commence manufacturing before 31.03.2024 (Note: The Notes on Clauses mentions the date as 31.03.2025). Exclusive Manufacturing Object: It must be exclusively engaged in the manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it. Inclusions: Includes the business of generation of electricity. Negative List (Non-Manufacturing Businesses): Development of computer software in any form or media; Mining activities; Conversion of marble blocks or similar items into slabs; Bottling of gas into cylinders; Printing of books or production of cinematograph films; or Any other business as may be notified by the Central Government. No Reconstruction: It must not be formed by splitting up or reconstruction of an existing business. Prohibition on Past Hotel/Convention Centre Buildings: It does not use any building which was previously used as a hotel or a convention centre. New Plant & Machinery (80/20 Rule): It must not use machinery or plant previously used for any purpose. Imported Machinery: Plant and machinery used outside India by any other person is treated as new if imported into India. 20% Allowance: Second-hand machinery up to 20% of the total value of plant and machinery is permitted. B. Applicable Rates on Special Incomes Short-term capital gains on non-depreciable assets are taxed @ 30%. Capital gains covered u/s 111A, 112, and 112A are taxed at their respective special statutory rates. Net business profit is taxed at the base rate of 15% (effective 17.16%). C. Procedural Requirements The option to avail of Section 115BAE must be exercised on or before the due date specified under Section 139(1) for furnishing the first return of income in the prescribed manner. This option, once exercised for any previous year, cannot be withdrawn subsequently for that or any other previous year. D. Forgone Deductions, Exemptions & Incentives Total income must be computed without claiming the following deductions or exemptions: Exemption under Section 10AA (SEZ units); Additional Depreciation under Section 32(1)(iia); Deductions under Section 33AB (Tea/Coffee/Rubber development) or Section 33ABA (Site Restoration Fund); Deductions for scientific research under Section 35(1)(ii), (iia), (iii) or Section 35(2AA); Capital expenditure on specified businesses under Section 35AD or agricultural extension projects under Section 35CCC; Deductions under Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” (other than Section 80JJAA for new employment); No set-off of carried-forward losses or unabsorbed depreciation from any earlier assessment year if attributable to any of the deductions listed above. E. Safeguard against Artificial Profit Shifting Safeguards have been introduced under sub-section (4) to curb artificial inflation of profits arising from close business connections with related entities. Any excess business profits determined by the Assessing Officer will be taxed at the maximum rate of 30% rather than 15%. 2. Dispute regarding Sugarcane Purchase Price Resolved [Section 155(19)] Background of Decades-Old Litigation: FCP vs. SMP It has been typical of sugar manufacturing co-operative societies to determine and pay a Final Cane Price (FCP) to cane-growers after taking into account various end-of-season factors such as total crushing, recovery percentage, and expenditure incurred. Because of this methodology, the Income Tax Department consistently took the stand that the portion of FCP paid over and above the Statutory Minimum Price (SMP) fixed by the Central Government under the Sugarcane Control Order, 1996 constituted a distribution or appropriation of profits rather than a charge on profit. Disallowance of this final installment resulted in massive tax demands and decades of litigation all the way to the Supreme Court. Recognizing this hardship, the Government had introduced clause (xvii) in Section 36(1) prospectively with effect from AY 2016-17, providing deduction for sugarcane expenditure incurred at a price equal to or less than the price fixed or approved by the Government. However, disputes for earlier assessment years remained locked in litigation. New Rectification Mechanism under Section 155(19) To provide conclusive closure, a new sub-section (19) has been inserted in Section 155. This introduces a statutory rectification mechanism granting relief from disallowances pertaining to Assessment Year 2014-15 and all earlier assessment years: Application by Assessee: Affected sugar co-operatives can file a formal rectification application before their respective Assessing Officer. Recomputation by AO: The AO shall recompute total income for such previous year, allowing deduction to the extent expenditure was incurred at a price equal to or less than the price fixed or approved by the Government for that previous year. Applicability of Section 154: The provisions of Section 154 apply, and the 4-year limitation period specified in Section 154(7) is reckoned from the end of the previous year commencing on 1st April 2022 (i.e. applications and orders can be made up to 31st March 2027). Quantum of Relief: According to the Hon’ble Finance Minister, this historic retrospective relief absolves the co-operative sugar sector from protracted litigation and injects liquidity of approximately Rs. 10,000 Crores back into the rural economy. 3. Section 194N: Enhancement in Cash Withdrawal Threshold to ₹3 Crores Section 194N (introduced w.e.f. 01.07.2020) provides for deduction of tax at source on cash withdrawals from banks (including co-operative banks) and post offices exceeding specified limits during a financial year. Category of Deductee Standard Threshold TDS Rate Special Co-operative Threshold (Finance Bill 2023) Filer of Income Tax Return Rs. 1,00,00,000 (1 Crore) 2% Substituted with Rs. 3,00,00,000 (3 Crores) where the recipient is a co-operative society (w.e.f. 01.04.2023). Non-Filer**Not filed returns u/s 139(1) for all 3 preceding PYs Rs. 20,00,000 to Rs. 1,00,00,000Above Rs. 1,00,00,000 2%5% Operational Significance for Rural Co-operatives: In rural areas, where substantial numbers of primary milk co-operative societies and credit co-operative societies operate, large cash volumes are required to make immediate payments to small milk suppliers or facilitate cash withdrawals by rural depositors. Because a majority of their income is eligible for 100% deduction under Section 80P, TDS under Section 194N locked up vital working capital for months. The enhancement to Rs. 3 Crores prevents working capital blockage and provides immediate operational liquidity. 4. Sections 269SS & 269T: Tenfold Hike in Cash Limits for PACS & PCARD Section 269SS prohibits acceptance of loans or deposits of Rs. 20,000 or more in cash, with contravention attracting a 100% penalty under Section 271D. Similarly, Section 269T prohibits repayment of loans or deposits of Rs. 20,000 or more in cash, attracting a 100% penalty under Section 271E. Finance Bill 2023 increases this limit from Rs. 20,000 to Rs. 2,00,000 (Two Lakh Rupees) in respect of two specific classes of co-operative entities: Primary Agricultural Credit Societies (PACS) Primary Co-operative Agricultural and Rural Development Banks (PCARD) Two Essential Qualifying Conditions: I. Member Restriction: The enhanced limit of Rs. 2,00,000 applies strictly to transactions between the society and its members (not with third parties). II. Nature of Transaction: The enhancement applies strictly to acceptance or repayment of deposits and loans. Author’s Critical Perspective: PACS and rural co-operative banks are the backbone of the rural economy, freeing persons of small means from the clutches of unscrupulous private money lenders. While the hike to Rs. 2 Lakhs is commendable, it would have been highly advisable to extend this relief across the platform to all co-operative credit societies. 5. Unaddressed Concerns & Conclusion Inadequate Setup Window under Section 115BAE: The one-year time window provided under Section 115BAE (incorporation from 01.04.2023 and commencement of manufacturing by 31.03.2024) is excessively narrow for establishing greenfield manufacturing units. An extension of this window is urgently needed so that deserving co-operatives can realistically avail of the 15% rate. Unresolved Interest Deduction Controversy under Section 80P(2)(a)(i) / 80P(2)(d): The author notes that the sector was expecting statutory clarity on the allowability of deduction on interest received by co-operative societies from co-operative banks. Assessing officers continue to apply the controversial ruling of the Karnataka High Court in Pr. CIT v. Totagars Co-operative Sales Society [2017] 83 taxmann.com 140 / 395 ITR 611 (Kar.) to create massive demands, despite the judgment having been distinguished by several other High Courts and appellate tribunals. Conclusion: The direct tax proposals in Finance Bill 2023 represent a landmark recognition of the co-operative sector, resolving generational disputes in sugar manufacturing, providing tax rate parity with corporates, and easing cash transaction norms in rural India.

UNION BUDGET 2023 The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 67–69 (Journal pp. 1011–1013) Analysis of Budget 2023- Certain sections related withholding taxes and Transfer Pricing NJ CA. Narendra V. Joshi Member of the Institute • Contact: narendra.vjoshi@gmail.com / eboard@icai.in Context & Statutory Background: Chapter XVIII of the Income Tax Act, 1961 Chapter XVIII of the Income Tax Act 1961 (‘the Act’) deals with various provisions related to Tax Deduction at source. Over the period, the scope of these provisions has been expanded to include transactions from multiple sources or origin. The person who has suffered tax while receiving or accepting income or payment will be entitled to credit at the time of filing Income Tax Return on the basis of information available in Form 26AS and Annual Information Statement. The Finance Bill, 2023 has made proposals to amend provisions the Act relating to TDS and TCS. The proposals are dealt with in this article. 1 Winning from online games (Section 194BA) Section 194BA widens the scope of tax deduction at source on the transaction involving online gaming intermediaries who are offering one or more games on internet, and which is accessible by the user through a computer resource including any telecommunication device, to the user. The tax shall be deducted on the net winnings paid in wholly in kind or cash or as well as on the remaining amount of net winnings in the user account, computed in the manner as may be prescribed, at the end of the financial year 30% as increased by surcharge and cess as applicable. Section 194BA starts with a non obstante clause which will override the other provisions of the Act. This section will not only provide certainty in terms of tax deduction but also seeks to identify to online gaming companies from a taxation point of view. Key Architectural Features of Section 194BA: Non-Obstante Clause Overrides general TDS provisions under Chapter XVII, establishing a distinct, stand-alone withholding code specifically for online games. Withholding Rate: Flat 30% Deducted at 30% (plus applicable surcharge & health and education cess) on net winnings at withdrawal or at financial year-end. Cash & In-Kind Coverage Applies to net winnings whether paid wholly in cash, wholly in kind, or partly in cash and partly in kind, as well as remaining balances in user accounts. Regulatory Identification Explicitly defines and brings online gaming intermediaries into the tax net, eliminating reporting ambiguity. 2 Payment of certain amounts in cash (Section 194N) “Section 194N requires banking Company, cooperative society engaged in banking business or post office to deduct tax at source at 2% on payments in cash exceeding one crore rupees.” Section 194N requires banking Company, cooperative society engaged in banking business or post office to deduct tax at source at 2% on payments in cash exceeding one crore rupees. The said limit is proposed to be increased to three crore rupees from one crore rupees where the recipient is a cooperative society. Those cooperatives who primarily work in rural area and have low-income groups as their members will benefit from this provision. Targeted Relief for Primary Cooperatives: Rural primary agricultural credit societies (PACS), primary cooperative banks, and rural marketing/milk societies rely heavily on liquid cash disbursements to member farmers. Raising the cash withdrawal threshold from ₹1 Crore to ₹3 Crores eliminates unfair TDS blockage for rural co-operatives whose members fall largely below basic taxable exemption thresholds. 3 Extending scope of tax deduction at source (Section 197) Scope of section 197, lower or nil withholding tax application to the jurisdictional office, has been expanded to include payments where deduction may be required to be reduced due to some exemption, for example exemption under section 10(23FE) of the Act allowed to notified Sovereign Wealth Funds and Pension Funds. Hitherto, section 194LBA required business trusts to deduct tax at source at the rate of 5% on interest income of the non-resident unit holders. This will benefit business trust unit holders who are eligible for exemption under section 10(23FE) of the Act. Prior Position u/s 194LBA: Business trusts (REITs / InvITs) were obligated to mandatorily deduct TDS @ 5% on interest distributions paid to non-resident unit holders without any statutory window for lower/nil withholding certificate u/s 197. Amended Scope u/s 197: Eligible institutional non-resident unit holders enjoying tax exemption u/s 10(23FE) (notified Sovereign Wealth Funds and Pension Funds) can now apply for and obtain lower/nil withholding tax certificates from the Assessing Officer. 4 Removal of exemption from TDS on payment of interest on listed debentures to a resident (Section 193) As per clause (ix) to the proviso to section 193 of the Act, no tax was deductible in the case of any interest payable on any security issued by a company, where such security is in dematerialized form and is listed on a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (32 of 1956) and the rules made thereunder. Clause (ix) of the proviso to section 193 provides for the exemption from tax deduction on interest on listed debentures issued to the resident investors. Now it is proposed to omit clause (ix) of the proviso to section 193 and hence tax will be deductible on interest on listed debentures. Impact of Clause (ix) Omission: Hitherto, resident investors received interest on demat listed debentures gross without withholding, leading to substantial tax revenue leakages and under-reporting in ITRs. With this omission, companies issuing listed debentures must deduct TDS u/s 193, ensuring real-time reporting via Form 26AS/AIS. 5 Tax treaty relief at the time of TDS under section 196A of the Act “Section 196A of the Act provides for TDS on payment of certain income to a non-resident (not being a company) or to a foreign company, at the rate of 20%.” Section 196A of the Act provides for TDS on payment of certain income to a non-resident (not being a company) or to a foreign company, at the rate of 20%. The income is required to be in respect of units of a Mutual Fund specified under clause (23D) of section 10 of the Act or from the specified company referred to in the Explanation to clause (35) of section 10 of the Act. Based on the representations received now it is proposed to provide option to choose tax rate as per tax treaty or 20% whichever is lower provided the payee to whom such tax treaty applies has provided tax residency certificate to the payer. Now non resident investors who are in receipt of dividend from mutual funds can seek tax treaty benefit at the time of deduction of tax at source. This brings section 196A at par with section 195 when it comes to tax treaty benefit. Prerequisite for Treaty Benefit: Payee must furnish a valid Tax Residency Certificate (TRC) issued by the tax authority of their home jurisdiction along with Form 10F (where required). Where treaty rate is lower (e.g., 10% or 15% under specific DTAAs), the deductor can apply the lower treaty rate directly at source instead of standard domestic rate of 20%. 6 TDS on payment of accumulated balance due to an employee (Section 192A) Section 192A of the Act provides for TDS on payment of accumulated balance due to an employee under the Employees’ Provident Fund Scheme, 1952. The existing provisions of section 192A of the Act, inter-alia, provide for deduction of tax at the rate of 10% of the taxable component of the lump sum payment due to an employee or at maximum marginal rate (‘MMR’) in case the payee does not have a PAN. Now it is proposed to omit the second proviso to section 192A which provides for tax deduction at source at MMR. This brings section 192A at par with the other sections where in case of non-availability of PAN tax is deducted at 20% under section 206AA of the Act. Pre-Amendment (Second Proviso): If employee failed to furnish PAN, tax was deducted at the Maximum Marginal Rate (MMR) (i.e., up to 39%–42.74%), causing severe cash-flow distress to low-salary workers. Post-Amendment (Rationalised): Second proviso omitted. In case of non-furnishing of PAN, withholding is governed by default section 206AA, capping the deduction at 20%. 7 Relief from special provision for higher rate of TDS/TCS for non-filers of income-tax returns “Section 206AB and 206CCA provides for higher tax rate for TDS and TCS respectively in case of specified persons.” Section 206AB and 206CCA provides for higher tax rate for TDS and TCS respectively in case of specified persons. Higher rate can be as high as twice the rate of tax applicable under the section or rates in force. This section does not apply to payments under section 192, 192A, 194B, 194BB, 194IA, 194IB, 194LBC, 194M or 194N of the Act. Definition of “Specified Person” under Sections 206AB & 206CCA: These sections define “Specified person to mean a person who has not furnished the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted or collected (as the case may be)- (i) for which the time limit for furnishing the return of income under sub-section (1) of section 139 has expired; and (ii) the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in the said previous year. Now it is proposed to provide relief to certain persons who are not required to furnish the return of income for the assessment year relevant to the said previous year and who is notified by the Central Government in the Official Gazette in this behalf. Comprehensive Overview of Withholding Tax Amendments (Finance Bill, 2023) Section Nature of Payment Pre-Amendment Position Proposed Amendment Statutory Objective & Impact 194BA Winnings from online games Governed generally u/s 194B with ₹10,000 threshold per transaction Dedicated regime with non-obstante clause; 30% TDS on net winnings at withdrawal/year-end Tax certainty and bringing online gaming platforms into formal compliance framework 194N Cash withdrawal by Co-operative Societies 2% TDS on cash withdrawals exceeding ₹1 Crore Threshold enhanced to ₹3 Crores for co-operative societies Substantial liquidity relief to rural, agricultural, and credit cooperatives 197 Lower / Nil withholding certificate Did not explicitly cover payments subject to section 10(23FE) exemptions u/s 194LBA Scope widened to allow nil/lower TDS certificates on income covered u/s 10(23FE) Protects cash flow of notified Sovereign Wealth Funds & Pension Funds investing in trusts 193 Interest on listed demat debentures to residents Exempt from TDS under clause (ix) of proviso to section 193 Clause (ix) of proviso omitted; TDS now mandatory Plugs reporting gaps and prevents under-reporting of debenture interest 196A Income from Mutual Funds paid to non-residents Flat 20% withholding rate without direct treaty benefit at source Option to apply DTAA treaty rate or 20%, whichever is lower, upon providing TRC Brings section 196A on par with section 195; eliminates refund-seeking delays 192A EPF premature withdrawal without PAN TDS at Maximum Marginal Rate (MMR) (~39%–42.74%) if PAN not furnished Second proviso omitted; tax deducted at standard 20% u/s 206AA Substantial relief to low-income employees withdrawing accumulated PF 206AB & 206CCA Higher TDS/TCS rates for non-filers Higher rate applied broadly to all specified non-filers with TDS/TCS ≥ ₹50,000 Exemption carved out for persons not required to file ITR and notified by Central Govt Prevents unintended punitive withholding on legitimately exempt categories Transfer Pricing Proposals in Finance Bill, 2023 The budget has provided for only two changes in the provisions related to transfer pricing in the Act. 1. Introduction of concessional tax regime to promote new manufacturing co-operative society (Section 115BAE) The Taxation Laws (Amendment) Act, 2019, inter-alia, inserted section 115BAB in the Act which provides that new manufacturing domestic companies set up on or after 01.10.2019, which commence manufacturing or production by 31.03.2023 and do not avail of any specified incentive or deductions, may opt to pay tax at a concessional rate of 15 per cent. Time limit to commence manufacturing or production is extended upto 31.03.2024. However, no concessional tax rate was provided for any other entity except a domestic company engaged into manufacturing. To provide a level playing field between new manufacturing co-operative societies and new manufacturing companies, 15% concessional tax rate benefit is proposed to be extended to the new manufacturing co-operative societies as well by inserting a new section 115BAE. The section 115BAE also provides that if any transactions with the co-operative society eligible for concessional tax rate are arranged in a such a manner which produces more than ordinary profits involving specified domestic transactions referred to in section 92BA of the Act, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F. In other words, new cooperative societies claiming concessional tax rate regime under section 115BAE will have to maintain transfer pricing documentation as mentioned in Rule 10D if they have transactions with any person which may produce more than ordinary profits. Typically, this provision would be invoked in case of transactions between related parties in which one of the parties is eligible for concessional tax rate or exemption under the special provisions of the Act. Statutory Transfer Pricing Ramifications for Co-operatives: Transactions between a Section 115BAE co-operative society and any related person/entity now fall under Specified Domestic Transactions (SDT) within Section 92BA. Consequently: Profits exceeding ordinary commercial margins will be recomputed having regard to the Arm’s Length Price (ALP) under section 92F(ii). Eligible co-operatives must mandatorily maintain detailed Rule 10D transfer pricing documentation and obtain an accountant’s report in Form 3CEB. 2. Reducing the time provided for furnishing TP report (Section 92D(3) & Rule 10D) Section 92D of the Act, inter-alia, provides that every person who has entered an international transaction or a specified domestic transaction shall keep and maintain the information and documents as provided under rule 10D of the Income-tax Rules, 1962 (the Rules). Further, as per sub-section (3) of section 92D of the Act, the Assessing Officer (AOs) or the Commissioner (Appeals) may during any proceedings under the Act require such person to furnish any information or document, as provided under rule 10D of the Rules, within a period of 30 days from the date of receipt of a notice issued in this regard. It has been further provided that on an application made by the assessee the time of 30 days may be extended by an additional period of 30 days. It is proposed now to reduce the time period for submission of any information or document, as provided in Rule 10D of the Rules (Transfer Pricing Study report), from 30 days to 10 days from the date of receipt of notice. Now, the person who is required to keep and maintain documentation under Rule 10D for domestic and international transactions must keep transfer pricing benchmarking study report ready as the time provided to submit the information/document is now reduced to 10 days only. Critical Procedural Shift: 30 Days Reduced to 10 Days Pre-Budget 2023 Timeline 30 Days Assessee had a full month to compile local file, search databases, and finalize TP study reports upon notice receipt. Amended Finance Bill 2023 Timeline 10 Days Only Drastic reduction necessitating that documentation under Rule 10D be fully prepared and benchmarked contemporaneous with return filing. Actionable Compliance Takeaways for Chartered Accountants & Corporate Taxpayers Immediate Preparation of Transfer Pricing Study (Rule 10D): Taxpayers with international transactions or specified domestic transactions can no longer adopt a reactive approach. With the notice response window shrunk to 10 days, contemporaneous documentation must be finalized before the due date of Form 3CEB. Procurement of Tax Residency Certificates (TRC) u/s 196A: Non-resident investors seeking treaty benefit on mutual fund distributions must submit a valid TRC and Form 10F in advance to allow payers to withhold at treaty rates (typically 10%–15%) instead of the statutory 20%. Audit and Review of Listed Debenture Interest (Section 193): Finance and treasury departments of issuing companies must establish automated TDS deduction workflows on demat listed debentures following the deletion of clause (ix). Cash Withdrawal Management for Co-operatives (Section 194N): Primary agricultural and rural credit cooperatives should coordinate with their principal bankers to adjust their annual cash withdrawal ceilings from ₹1 Crore to ₹3 Crores without attracting 2% withholding. Rationalisation of EPF Payouts (Section 192A): PF trust administrators and EPFO offices must update their withholding systems to limit TDS to 20% u/s 206AA when PAN is not provided, eliminating the penal MMR deduction.

UNION BUDGET 2023-24 • INDIRECT TAXES The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 70–77 (Journal pp. 1014–1021) Analysis of Union Budget 2023-24 : Proposals on Indirect Taxes VC CA. Virender Chauhan Member of the Institute SK CA. Shubham Khaitan Member of the Institute Contact: eboard@icai.in Scope of Analysis & Legislative Charter This article aims at making an analysis of the proposals made in the Union Finance Bill, 2023, being presented in the Parliament on 1st February, 2023 by the Hon’ble Union Finance Minister of India, Smt. Nirmala Sitharaman. This analysis is limited to amendments proposed under the indirect tax laws. Since there is no amendment proposed under the Central Excise Law, we are restricting our discussion to the extent of amendment proposals made in the Customs Act, 1962, Customs Tariff Act, 1975, Central Goods and Services Act, 2017 and Integrated Goods and Services Tax Act, 2017. [A] AMENDMENTS IN THE CUSTOMS ACT, 1962 1. Clause 123 amending section 25(4A): Power to grant exemption from duty Section 25(4A) of the Customs Act is proposed to be amended to insert a proviso to the effect that the validity period of two years shall not apply to exemption notifications issued in relation to multilateral or bilateral trade agreements; obligations under international agreements, treaties, conventions or such other obligations including with respect to UN agencies, diplomats, international organizations; privileges of constitutional authorities; schemes under Foreign Trade Policy; Central Government schemes having validity of more than two years; re-imports, temporary imports, goods imported as gifts or personal baggage; any duty of customs under any law for the time being in force including integrated tax leviable under sub-section (7) of section 3 of the Customs Tariff Act, 1975, other than duty of customs leviable under section 12. Exclusions from 2-Year Exemption Sunset: • Multilateral / Bilateral trade agreements (FTAs/PTAs) • International obligations (UN agencies, diplomats, etc.) • Constitutional authorities’ privileges • Foreign Trade Policy (FTP) export schemes • Central Government schemes valid for > 2 years • Re-imports, temporary imports, gifts & baggage • Duties under other laws including IGST u/s 3(7) of CTA 2. Clause 124 amending section 127C: Procedure on receipt of an application under section 127B A new sub-section (8A) is proposed to be inserted in section 127C so as to specify a time limit of 9 months from the last day of the month in which the application is made, for disposal of the application filed before the Settlement Commission. “A new sub-section (8A) is proposed to be inserted in section 127C so as to specify a time limit of 9 months from the last day of the month in which the application is made, for disposal of the application filed before the Settlement Commission.” [B] AMENDMENTS IN THE CUSTOMS TARIFF ACT, 1975 Retrospective w.e.f. 01.01.1995 3. Clause 125 amending sub-sections (6) & (7) of section 9: Countervailing duty on subsidized articles Sub-sections (6) & (7) of section 9 of the Customs Tariff Act, 1975 are proposed to be amended to remove ambiguity and clarify that determination and review for countervailing duty refers to determination and review of countervailing duty in a manner prescribed by rules under the Act. 4. Clause 125 amending sub-sections (5) & (6) of section 9A: Anti-dumping duty on dumped articles Sub-sections (5) & (6) of section 9A of the Customs Tariff Act, 1975 are proposed to be amended to remove ambiguity and clarify that determination and review for anti-dumping duty refers to determination and review in a manner prescribed by rules under the Act. 5. Clause 125 amending section 9C: Appeal Section 9C of the Customs Tariff Act, 1975 is proposed to be amended to remove ambiguity and clarify that appeals under this section lie against the determination or review thereof made by an authority in a manner as specified by rules notified under sections 8B, 9, 9A and 9B of the Act. An explanation is also proposed to be inserted to provide the meaning of determination or review thereof. Legal Impact: Overcoming judicial disputes over whether administrative reviews conducted under subordinate rules constitute appealable orders before CESTAT. The retrospective validation back to 1995 firmly anchors administrative reviews within the statutory appellate framework. [C] AMENDMENTS IN THE CGST ACT, 2017 (It seems that there is an inadvertent mistake in the Bill of not mentioning the date of effectiveness of the proposed amendments. However, the Memorandum to the Bill has made a mention of the effectiveness of the proposed amendments.) 6. Clause 128 amending sub-sections (2) & (2A) of section 10: Composition levy Sections 10(2)(d) and 10(2A)(c) of the CGST Act are proposed to be amended so as to remove the restriction imposed on registered persons engaged in supplying goods through electronic commerce operators from opting to pay tax under the Composition Levy. Authors’ Comments: (i) The amendment indicates that the restrictions in the case of supply of service remain intact as earlier for availing the benefit of composition scheme. (ii) This amendment means that only intra-State supplies can be made through ECO’s by a composition taxpayer. This may make the proposed amendment to be merely an academic proposition. (iii) Further, the ECO’s may face penal action under proposed section 122(1B) wherein a sum of Rs. 10,000/- or an amount equivalent to the amount of tax involved may be imposed as a penalty in case it allows inter-state supply by an unregistered person or by a composition taxpayer. 7. Clause 129 amending section 16(2): Eligibility and condition for taking input tax credit Second and third provisos to section 16(2) of the CGST Act are proposed to be amended to align the said sub-section with the return filing system provided in the said Act. Authors’ Comments: (i) As per the current provisions, if a recipient does not make the payment of the value of supply to the supplier within 180 days, he would be required to add the ITC availed to his output tax liability. To align with the return filing system, the amended proviso to section 16(2) of the CGST Act 2017 provides for ITC reversal along with interest u/s 50 in such cases. The respective change in the corresponding rule 37 had already been carried out vide Notification No. 19/2022 - CT dated 28.09.2022 w.e.f 1st October 2022. (ii) Further, after making payment of such amount, one can re-avail the credit without any time limit. To clarify further, it has been provided that re-availment would only be allowed if the said value of supply has been paid to the supplier. This may bring into question cases where a recipient makes the payment of the value of supply to any other person other than the supplier (e.g., disputed rent paid under the Rent Control law, direct payment to the Government instead of the creditor as part of recovery provisions under section 79 etc.) 8. Clause 130 amending sub-sections (3) & (5) of section 17: Apportionment of credit and blocked credits Explanation to section 17(3) of the CGST Act is proposed to be amended so as to restrict availment of input tax credit in respect of certain transactions specified in Para 8(a) of Schedule III of the said Act, (supply of warehoused goods to any person before clearance for home consumption is neither supply of goods nor supply of services) as may be prescribed, by including the value of such transactions in the value of exempt supply. Further, section 17(5) is also proposed to be amended so as to provide that input tax credit shall not be available in respect of goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility (CSR) referred to in section 135 of the Companies Act, 2013. Authors’ Comments: (i) Warehoused Goods ITC Overturn: It seems that the explanation to section 17(3) is proposed to be amended to overturn the decisions of Sandeep Patil v. UOI [2019(31) GSTL 398-Mum] and CIAL Duty Free [2020(42) GSTL 481-Kerala], wherein it was held that supply of warehoused goods before clearance for home consumption would not preclude the supplier’s claim of ITC. (ii) Retrospective vs Prospective Litigation Risk: However, the amendment may give rise to litigation as to whether the same will have prospective or retrospective effect. In the case of Commissioner v. Prakash Shree Processing [2017 (345) ELT 178 (SC)], the Hon’ble Apex Court held that amendment made by way of insertion of explanation seeks to clarify the existing provision of law and thereby construed as being applicable retrospectively. However, in this case, the amendment increases the scope of the provision and is not merely clarifying the existing provision. (iii) High Sea Sales Distinction: It may be worth mentioning that high sea sales (i.e., goods sold after dispatch from the port of origin outside India before clearance for home consumption) would still not be treated as an exempt supply for the purpose of ITC reversal. (iv) CSR Historical Debate: It has always been a matter of debate whether ITC would be eligible to companies in respect of goods or services or both used for meeting the obligations of Corporate Social Responsibility under section 135 of the Companies Act 2013. It was argued that the same not be considered as a gift which is gratuitous and without any contractual obligations and hence, the disallowance under section 17(5)(h) could not be attracted. (v) Final CSR Dispute Resolution: However, all such dispute have been put to rest by the proposed amendment which provides that such obligations met by eligible companies as part of their CSR would not be eligible to avail ITC. Since this amendment is prospective, one can take a stand that ITC on such expenses would be eligible before this amendment stands notified. It may also be noted that only the companies mandated for CSR under section 135 of the Companies Act, 2013 would be affected by this amendment. 9. Clause 131 amending sub-section (1) & (2) of section 23: Persons not liable for registration Sub-section (1) & (2) of section 23 of the CGST Act are proposed to be amended, with retrospective effect from 1st July, 2017, to provide that persons eligible for registration in terms of section 22(1) and compulsory registration under section 24 need not register, if exempt under section 23. Authors’ Comments: Section 23 provides for exemption from registration under the GST law. On the other hand, Section 24 provides for compulsory registration under the GST law. There was a great deal of confusion about whether a person would require registration under the GST law if he fall under both of the above provisions. For example, a person is making wholly exempt supplies and also falls under the reverse charge liability notification. Now, section 23 (persons not liable for registration) is proposed to be amended, to prevail over Section 22 (turnover-based registration limits) and Section 24 (persons liable for compulsory registration). Hence, a person exempt from registration under Section 23 would not be required to take registration irrespective of coverage under other registration provisions. 10. Clauses 132, 133, 134 & 135 amending sections 37(5), 39(11), 44(2) & 52(15): Furnishing of returns in Forms GSTR-1, GSTR-3B, GSTR-9/9C & GSTR-8 These sections of the CGST Act are proposed to be inserted so as to provide a time limit upto which the details of supplies under such sections can be furnished by a registered person. Further, it also seeks to provide an enabling provision for extension of the said time limit, subject to certain conditions and restrictions, for a registered person or a class of registered persons. Authors’ Comments: While the law prescribes late fees for delayed filing of return, there is no outer time limit prescribed up to which the returns could be filed. Through the proposed amendment in Section 37, 39, 44 and 52, it is provided that GSTRs-1, 3B, 9, 9C and 8 would not be allowed to be filed after 3 years from the due date of furnishing of the respective returns/statements for that financial year. For a certain class of registered persons (yet to be prescribed), this outer time limit may be extended by the Government. 11. Clause 136 amending section 54(6): Refund of tax Section 54(6) of the CGST Act is proposed to be amended to remove the reference to the provisionally accepted input tax credit to align the same with the present scheme of availment of self-assessed input tax credit as per section 41(1) of the said Act. “Section 54(6) of the CGST Act is proposed to be amended to remove the reference to the provisionally accepted input tax credit to align the same with the present scheme of availment of self-assessed input tax credit as per section 41(1) of the said Act.” Authors’ Comments: (i) During the introduction of GST, there was a concept of provisional ITC till the same stood matched and accepted by the recipient. Since the one to one matching of ITC by recipient in GSTR-2 was never implemented, this only remained a theoretical concept under the law. Hence, this provision was altered, and the concept of provisional ITC was scrapped at multiple places through Finance Act, 2022. However, it was omitted to be removed from the provisional refund provisions in section 54(6). (ii) To streamline this, the provisional refund provisions allowing 90% of claimable refunds have been modified to exclude the concept of provisional ITC therefrom. This will remove the anomaly which existed in the law as explained above. 12. Clause 137 amending section 56: Interest on delayed refunds Section 56 of the CGST Act is proposed to be amended so as to provide for an enabling provision to prescribe manner of computation of period of delay for calculation of interest on delayed refunds. Authors’ Comments: (i) Section 56 of the CGST Act, 2017 provides for interest on delayed refund where the amount is not received within 60 days from the date of receipt of application. Currently, the law does not provide any specific manner of computation of interest and conditions / restrictions, if any, for this purpose. (ii) Section 56 is proposed to be amended to provide an enabling provision for manner of computation of such interest on delayed refunds along with the relevant conditions and restrictions. Hence, one can expect the rules prescribing the manner and conditions/restrictions for computing the interest on delayed refund to be inserted after such provision gets notified. 13. Clause 138 amending section 122(1B): Penalty for certain offences A new section 122(1B) of the CGST Act is proposed to be inserted to provide penal provisions applicable to Electronic Commerce Operators in case of contravention of provisions relating to supplies of goods made through them by unregistered persons or composition taxpayers. Authors’ Comments: (i) The responsibility has now been cast upon such electronic commerce operators to ensure that only eligible persons are allowed to supply through their portals. (ii) In the following cases, the said electronic commerce operator would be liable to a penalty of a higher of Rs. 10,000 or the tax amount involved: A. Any unregistered person who was liable to be registered and not exempted by way of notification, is allowed to make the supply of goods or services through the website of such electronic commerce operators. B. A composition dealer (not otherwise permitted to make inter-state supply under GST) is allowed to make inter-state supply through the website of such electronic commerce operators. C. Fails to furnish information regarding supplies made by an unregistered person through its website in GSTR-8. (iii) The tax amount involved in point (ii) would be computed assuming that the supply been made by a regular tax payer. 14. Clause 139 amending section 132(1): Punishment for certain offences Section 132(1) of the CGST Act is proposed to be amended to decriminalize offences specified in clause (g), (j) and (k) of the said sub-section and to increase the monetary threshold for launching prosecution for the offences under the said Act from one hundred lakh rupees to two hundred lakh rupees, except for the offences related to issuance of invoices without supply of goods or services or both. Authors’ Comments: (i) Decriminalized Offences: Through the proposed amendment in section 132 of the CGST Act 2017, the following offences would be decriminalized and no prosecution would be launched against them: a) Obstruction or prevention of an officer in discharge of his duties; b) Tampering with or destroying any material evidence or documents; c) Failure to supply information or supplying false information required under the law. (ii) Monetary Prosecution Threshold: Further, the limit for prosecution is proposed to be increased from Rs. 1 crore to Rs. 2 crores for all the offences except if the person is engaged in the issuance of fake invoices without actual supply of goods or services. Only for the issuance of fake invoices, the limit of Rs. 1 crore would still continue for the purpose of prosecution. 15. Clause 140 amending section 138(1): Compounding of offences First proviso to section 138(1) of the CGST Act is proposed to be amended to simplify the language of clause (a), to omit clause (b) and to substitute the clause (c) of said proviso to exclude the offences relating to issuance of invoices without supply of goods or services or both from the scope of compounding as provided under the said Act. It further seeks to amend sub-section (2) to rationalize the amount for compounding of various offences by reducing the minimum as well as maximum amount for compounding. Authors’ Comments: (i) Procedural Relaxation: Section 138 of the CGST Act 2017 allows for the compounding of certain offences upon payment of the applicable amount and offers protection from further proceedings under the GST law. The following amendments have been proposed to such provisions: a) Value limit of Rs. 1 crore for supply in respect of compounding of certain offences is proposed to be removed. b) Earlier, a person accused of committing an offence under any other law could not apply for compounding. This restriction is proposed to be removed. (ii) Alignment with Prosecution: Certain offences are proposed to be removed from prosecution provisions (as provided in point no. 14 above). Therefore, there would not be compounding for such offences for which prosecution is not provided under law. (iii) Revised limits for compounding amount: Section 138(2) of the CGST Act 2017 provides the minimum and maximum limit for compounding of offences. The limit for compounding is proposed to be revised as below: Nature Current Revised Minimum Limit Higher of Rs. 10,000 or 50% of tax involved 25% of the tax involved Maximum Limit Higher of Rs. 30,000 or 150% of tax involved 100% of the tax involved 16. Clause 141 amending section 158A: Sharing of information by GST portal with other systems A new section 158A is proposed to be inserted in the CGST Act to prescribe the manner and conditions for sharing of the information furnished by the registered person in his return or in his application of registration or in his statement of outward supplies, or the details uploaded by him for generation of electronic invoice or e-way bill or any other details, as may be prescribed, on the common portal with such other systems, as may be notified. Authors’ Comments: The Government is planning sharing the following information with other systems after obtaining the consent of the relevant supplier/recipient: a) Application for registration; b) GSTR-1, GSTR-3B and GSTR-9 / 9C; c) Invoices uploaded on the GST portal for e-invoice; d) E-waybill particulars; e) Other prescribed details. 17. Clause 142 amending Schedule III of CGST Act Schedule III of the CGST Act is proposed to be amended to give retrospective applicability to Para 7, 8(a) and 8(b) of the said Schedule, with effect from 1st July, 2017, so as to treat the activities/ transactions mentioned in the said paragraphs as neither supply of goods nor supply of services. It is also being clarified that where the tax has already been paid in respect of such transactions/ activities during the period from 1st July, 2017 to 31st January, 2019, no refund of such tax paid shall be available. Authors’ Comments: (i) Serial No. 7 and 8 of Schedule III of the CGST Act 2017 has been proposed to be applicable retrospectively from 1st July 2017. These entries are as follows: 7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India. 8. (a) Supply of warehoused goods to any person before clearance for home consumption; (b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption. [High Sea Sale] (ii) The aforesaid transactions are popularly called as high sea sales, sales from customs bonded warehouses and merchant trading sales i.e. where sales take place before clearance for home consumption. Such supplies have been considered as neither a supply of goods nor a supply of services under Schedule III of the CGST Act 2017 effective from 1st February 2019. Due to persisting debates and doubts for the earlier period i.e., 1st July 2017 to 31st January 2019, Schedule III is proposed to be amended to provide that this amendment would be applicable for the said period also. [D] AMENDMENTS IN THE IGST ACT, 2017 18. Clause 143 amending section 2(16) & 2(17): Non-taxable online recipient & OIDAR Section 2(16) of the IGST Act is proposed to be amended so as to revise the definition of “non-taxable online recipient” by removing the condition of receipt of online information and database access or retrieval services (OIDAR) for purposes other than commerce, industry or any other business or profession to provide for taxability of OIDAR service provided by any person located in non-taxable territory to an unregistered person receiving the said services and located in the taxable territory. Further, it also seeks to clarify that the persons registered solely in terms of clause (vi) of Section 24 of CGST Act shall be treated as unregistered person for the purpose of the said clause. Also, clause (17) of the said section is proposed to be amended to revise the definition of “online information and database access or retrieval services” by removing the condition of rendering of the said supply being essentially automated and involving minimal human intervention. Authors’ Comments: (i) General Definition: The OIDAR services are defined under section 2(17) of the IGST Act to mean services such as, advertising on the internet, providing cloud services, e-books, movie, music, software, gaming, etc. (ii) Significant Expansion of OIDAR Scope: The scope of OIDAR services was restricted to cases which were essentially automated and not involving human intervention and were impossible to ensure in absence of information technology. The definition of online information and database access or retrieval services has been amended to omit the condition that the supply should be essentially automated and involving minimal human intervention. After the amendment, the only condition would be that the supplies are impossible to ensure in absence of IT. Without checking for automation or minimum human intervention, the supplies would be classified as OIDAR if they cannot be supplied without the assistance of information technology. Thereby, the scope of such OIDAR services seems to have been significantly expanded. (iii) Non-taxable online recipient (NTOR): Where services are provided in the nature of ‘online information and database access or retrieval services’ (like internet ads, cloud services, online e-books/music/movie/software/digital content/gaming etc.) and the same are received by a non-taxable online recipient for purposes other than commerce, industry or business, the tax is liable to be paid by the supplier even if located outside India. (iv) Elimination of Commerce/Industry Filter: Further, the condition that it should not be for business purposes is proposed to be removed. Therefore, any unregistered person taking such services for business purposes would not be liable to register under GST and pay taxes under RCM. Such taxes would continue to be discharged by the foreign supplier. 19. Clause 144 amending section 12(8): Place of supply of services by way of transportation of goods Proviso to section 12(8) of the IGST Act is proposed to be omitted so as to specify the place of supply, irrespective of destination of the goods, in cases where the supplier of services and recipient of services are located in India. Authors’ Comments: (i) Historical Background: With effect from 1st February 2019, proviso to section 12(8) was inserted to provide the place of supply in case of transportation of goods as the destination of goods where the location of the supplier and recipient were in India and the destination of goods was outside India. (ii) Billing Issues & Circular 184: Therefore, the logistics company taking goods out of India have been invoicing with IGST by showing the place of supply as ‘Other territory’ or ‘Foreign Country’. Thus, the revenue from such supply has not been accruing in the favor of the state where the recipient is located. In such cases, these have been disputes with regard to ITC. Recently a clarification has been issued vide Circular no. 184/16/2022-GST dated 27th December 2022 that the ITC would be fully available in such cases. (iii) Revenue Shift & Anomaly Removal: Despite this clarification, the recipient state (i.e. where the exporter is located) would be incurring a loss because it would not receive the revenue directly from the original supply but still provide ITC benefit to the exporter. To remove this anomaly and confusion regarding ITC availability, the place of supply provisions has been amended. (iv) Reformed Place of Supply Rules for Export Freight: The place of supply even where the destination of goods is outside India would be as follows for the transportation of goods: a) Supply to registered person: Location of the registered person (State of Exponent/Recipient). b) Supply to unregistered person: Location at which such goods are handed over for transport. Comprehensive Master Matrix of Indirect Tax Amendments (Clauses 123 to 144) Clause Act & Section Subject Matter Key Legislative Change Practical Implications 123 Customs Act, Sec 25(4A) Duty exemption validity 2-year sunset not applicable to trade pacts, treaties, FTP schemes, IGST, etc. Prevents automatic expiry of vital trade agreement exemptions 124 Customs Act, Sec 127C Settlement Commission New sub-sec (8A) mandating 9 months disposal time limit Expedites dispute settlement timelines 125 Customs Tariff Act, Sec 9 & 9A CVD & Anti-dumping Retrospective w.e.f. 01.01.1995: review as prescribed by rules Resolves litigation on scope of administrative review 125 Customs Tariff Act, Sec 9C Appeals in Tariff Cases Retrospective w.e.f. 01.01.1995: appeals against rule determinations Provides legal certainty for CESTAT appellate remedies 128 CGST Act, Sec 10(2) & (2A) Composition Levy via ECOs Removes restriction on supplying goods through ECOs Allows intra-state e-commerce supplies; service restriction stays 129 CGST Act, Sec 16(2) 180-Day Rule for ITC ITC reversal with interest u/s 50; re-availment upon payment to supplier Aligns statutory language with revised Rule 37 return system 130 CGST Act, Sec 17(3) & (5) Blocked Credit (Warehoused & CSR) Warehoused goods in exempt supply; express block on CSR expenditure ITC Overturns Sandeep Patil / CIAL; ends corporate debate on CSR ITC 131 CGST Act, Sec 23 Registration Overriding Effect Retrospective from 01.07.2017: Sec 23 overrides Sec 22(1) and Sec 24 Entities making exempt supplies need not register even if facing RCM 132-135 CGST Act, Sec 37, 39, 44, 52 Outer Return Filing Cap Forms GSTR-1, 3B, 9, 9C & 8 barred after 3 years from due date Prevents indefinite delayed filings and closes stale tax periods 136 CGST Act, Sec 54(6) Provisional Refund Anomaly Removes obsolete reference to provisionally accepted ITC in 90% refund Aligns refund mechanisms with self-assessed ITC u/s 41(1) 137 CGST Act, Sec 56 Interest on Delayed Refunds Enabling provision to prescribe calculation manner for 60-day delay Empowers Government to frame detailed interest calculation rules 138 CGST Act, Sec 122(1B) Penalties on E-Commerce Platforms Penalty of higher of ₹10,000 or tax involved on illegal supplies/failures Makes ECOs statutory gatekeepers against unregistered interstate sales 139 CGST Act, Sec 132(1) Decriminalisation & Thresholds Decriminalizes clauses (g),(j),(k); threshold raised to ₹2 Cr (except fake bills) Major ease of doing business; criminal prosecution spared for obstruction 140 CGST Act, Sec 138 Compounding Rationalisation Min limit cut to 25% (from 50%); Max limit cut to 100% (from 150%) Substantially reduces financial cost of compounding tax offences 141 CGST Act, Sec 158A Inter-System Data Sharing Consent-based sharing of GST registration, returns, e-invoices, and e-waybills Facilitates MSME credit underwriting and trade facilitation ecosystems 142 CGST Act, Schedule III Merchant Trading & High Sea Sales Retrospective from 01.07.2017: Paras 7, 8(a), 8(b) non-supplies; no tax refund Ends multi-year uncertainty for merchant trading from 01.07.2017 to 31.01.2019 143 IGST Act, Sec 2(16) & 2(17) OIDAR & NTOR Redefinition Removes automated/minimal human intervention condition & non-business filter Massive expansion of tax net over overseas digital service providers 144 IGST Act, Sec 12(8) Export Transportation Place of Supply Proviso omitted; place of supply is location of registered recipient Eliminates revenue loss for exporter states and cures freight ITC anomalies

UNION BUDGET 2023 • INTERNATIONAL TAXATION The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 78–82 (Journal pp. 1022–1026) Proposed Amendments In Respect of International Taxation Under Union Budget 2023 SP CA. Smita Patni Member of the Institute • Contact: eboard@icai.in Macroeconomic Context & International Tax Posture This article highlights the major Budget proposals in the area of international taxation. On an international taxation front, the Budget of Amrit Kaal as envisaged by our FM has the advantage of delivering no shocks. While the budget is silent on taxation of digital economy as well as India’s roadmap for implementing the Pillar 2 solution of the Global Anti base Erosion (GloBE) Rules of the OECD and G-20, the Government continues to push its pet project of a specially designated zone - IFSC Gift City. However there is a dampener in the provisions of section 56 being extended to issue of shares to non -residents which will cause additional hurdles for investments coming into India. 1 Deemed accrual of gift made to Not Ordinarily Resident (RNOR) Taxation of gift by way of sum of money without consideration exceeding Rupees 50,000/- from Resident to Non-Resident was specifically brought into deeming fiction under Section 9 (1)(viii) of the Income Tax Act (The Act) and the same was made taxable u/s 56(2)(x) under the head Income from other sources. Since, this section was limited to Non-Residents and there was no reference of Resident and Not-ordinarily Residents (RNOR), section 9(1)(viii) of the IT Act is now proposed to be amended to extend the ambit of taxation under Section 56(2)(x) of the IT Act to bring not-ordinarily residents defined under Section 6(6) of the IT Act w.e.f. 1st April, 2024. Continuation of Relative & Other Exemptions: However, the exemption for gifts/ property received by a not-ordinarily resident from his/ her relatives as well as other exemptions as provided shall continue. 2 Preventing misuse of presumption tax schemes (Sections 44BB & 44BBB) Currently the presumptive tax schemes under section 44BB and 44 BBB of the Act allow for – taxation of a non-resident at 10% on receipts from providing services, machinery, etc. used in prospecting for, extraction or production of mineral oils (Section 44BB of the IT Act); and taxation of a foreign company at 10% on receipts from civil construction, erection, etc. for approved turnkey power projects (Section 44 BBB of the Act). Both sections provide that Non-resident Assessee may claim lower profits and gains if he keeps and maintains such books of account and other documents as required under section 44AA(2) of the Act and gets his accounts audited and furnishes a report of such audit as required under section 44AB of the Act. In such a case, the assessee is also allowed to carry forward of loss and unabsorbed depreciation to next years and may set it off from the profits of the next year -either from the presumptive income or from income declared under Normal Taxation. Double Dip Strategy Curtailed: This often leads to taxpayers doing a double dip and opting in and out from the scheme in different years assessment years. In the year of losses, the actual losses were claimed and carried forward as per regular books of accounts and conducting Audits. Whereas, in the year of higher profits, the profits were sought to be restricted to 10% and brought forward losses and unabsorbed depreciation are set off from the earlier years. With a view to curb this option, it is proposed to amend both section 44BB and section 44BBB of the Act to provide that where an assessee declares profits and gains of business for any previous year in accordance with the provisions of presumptive taxation then no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year. This is applicable from 1st April, 2024. 3 Non- resident investors now covered under Angel Tax (Section 56(2)(viib)) “Foreign investors and private equity funds which are not registered as well as various unregistered start-ups and smaller private companies which want to raise funds may fall under the rigors of section 56(2)(viib) of the Act.” The existing provision of section 56(2)(viib) of the Act which is applicable since April 1,2013 provide for taxation of any receipt of any consideration for issue of shares in excess of FMV(Fair Market Value) of the shares by the resident investors .Any additional consideration received in excess of the FMV is taxable in the hands of the closely held companies under the head Income from other sources (IFOS). For this purpose, the valuation of the unquoted shares is prescribed under Rule 11UA of the IT Rules,1962 and is determined by the Merchant Banker. These provisions were introduced to prevent circulation of unaccounted money through share premium received from resident shareholders. It is proposed to extend the applicability of this section to non-resident investors with effect from 1st April,2024. The exemption in respect of investments from Venture Capital Undertaking from a Venture Capital Company or a VCF and specified funds as well as notified certain classes of persons will continue Therefore start-ups registered under DPIIT and notified by the Ministry Of Commerce And Industry to be exempt. Valuation Friction: Income Tax Act vs. FEMA Regulations This proposal could lead to litigation. as there could be valuation disputes as different methodologies are prescribed under FEMA and The Act. FEMA regulations mandate that issue of a capital instrument by an Indian company shall not happen at any value less than FMV computed as per FEMA laws. Whereas, under the Income tax Act, tax will be levied on any excess price recovered over and above FMV on issuing shares to a non-resident. Foreign investors and private equity funds which are not registered as well as various unregistered start-ups and smaller private companies which want to raise funds may fall under the rigors of section 56(2)(viib) of the Act. 4 TCS on overseas remittances (Section 206C(1G)) “The Finance Act, 2020 had introduced a Tax Collection at Source (TCS) u/s 206(C)(1G) requirement on foreign remittances in order to widen and deepen the tax net.” The Finance Act, 2020 had introduced a Tax Collection at Source (TCS) u/s 206(C)(1G) requirement on foreign remittances in order to widen and deepen the tax net . The obligation of the said TCS is on the Authorised Dealer Bank (AD Bank) through which the remittances are made under liberalized remittance scheme (LRS). In case of an overseas tour, the seller of such package shall be liable to collect TCS. The proposal seeks to increase the rate of TCS and extend its applicability. This amendment will take effect from July 1, 2023. S. No Type of remittance under LRS Present rate Proposed rate 1. For the purpose of any education, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E. 0.5% of the amount or the aggregate of the amounts in excess of Rs.7 lakh. No change 2. For the purpose of education, other than (i) or for the purpose of medical treatment. 5% of the amount or the aggregate of the amounts in excess of Rs. 7 lakh. No change 3. Overseas tour package 5% without any threshold limit. 20% without any threshold limit. 4. Any other case 5% of the amount or the aggregate of the amounts in excess of Rs.7 lakh. 20% without any threshold limit. 5 Treaty benefits on income from Mutual Funds (Section 196A) “Section 196A (1) provides for TDS @ 20% in respect to certain income from units of a Mutual Fund of a Non-Resident.” Section 196A (1) provides for TDS @ 20% in respect to certain income from units of a Mutual Fund of a Non-Resident . In such a case, TDS cannot be deducted at a rate specified under a tax treaty unless specifically mentioned in the provision of the relevant section. Its proposed to obviate this hardship by inserting a proviso to section 196A (1) to deduct TDS at the rate of 20% or Rates provided in DTAA u/s 90(1) or 90A(1), subject to furnishing of TRC u/s 90(4) or 90A(4) ,whichever is lower, effective from April 1,2023. 6 Concessional tax Rate on certain interest income to expire this year (Sections 194LC / 194LD) Section 194LC /194LD of the Act provided a concessional tax regime at the rate of 5% to its overseas lender or debt investor or Foreign Portfolio Investors (FPI) on the interest income earned by them in India. The overseas lender/Debt Investor could claim Foreign tax credit in their home country or country of its domicile while filing their Income tax Returns. Sunset Date: 30th June, 2023 In absence of any further extension, the concessional tax rate is valid only up to 30th June, 2023 and going forward, the same shall be taxable under the normal tax regime. 7. Proposed Provisions Relating to Taxation of Business Trust (REITs / InvITs) a) Extending benefit of lower or NIL Rate of TDS to Business Trusts (Section 194LBA & Section 197) “Section 194LBA of the IT Act requires business trusts(REIT/InvIT) to deduct TDS at the rate of 5% on interest income and 10% on dividend income on distribution to non-resident unitholders.” Section 194LBA of the Act requires business trusts(REIT/InvIT) to deduct TDS at the rate of 5% on interest income and 10% on dividend income on distribution to non-resident unitholders. Whilst a more beneficial tax rate may be available to certain non-resident taxpayers under relevant DTAA, Section 197 of The Act didn’t provide grant of certificate for nil or lower rate of TDS on income received by unit holder referred to in u/s 115UA. Hence, under the extant tax laws, TDS was required to be applied at the rates provided u/s 194LBA and income distributed by a REIT / InvIT to its non-resident unitholders was subject to withholding tax at prescribed rates. To enable Non-resident unitholders who are entitled to certain prescribed exemptions under the Act (such as pension funds and sovereign wealth funds having a tax exempt status in India) and to receive distributions from the business trusts (REIT/InvIT) without any taxes being withheld , its proposed to provide such non-resident unitholders on income earned from units of business trust to apply for a ‘NIL or a lower withholding’ certificate w.e.f. April 1,2023. b) Taxation of Distributions from Business Trust (Section 115UA & IFOS) The Act contains special provisions u/s 115UA for taxation of Real Estate Infrastructure Trusts (“REIT”) and Infrastructure Investment Trusts (“InvIT”) (referred to as “Business Trusts” u/s 2(13A of The Act)). The provisions provide a pass-through status to Business Trusts in respect of – (a) interest income, dividend income received by the Business Trust(i.e. both REIT/InvIT) from a special purpose vehicle (SPV) and (b) rental income in case of a REIT. At present, the above income is taxable in the hands of the unit holders. Any other distributions (by way of repayment of debt) from a Business Trust to its unit holders is neither taxable in hands business trust or in the hands of unit holder. The budget has proposed to tax any sum received (shown as by way of repayment of debt) by the unit holder of a Business Trust which is not in nature of interest, dividend or rental as Income under head other sources (IFOS) in hands of the unit holder. A provision is also proposed for a situation when the sum received by unit holder represents redemption of unit held by him. In such a case, cost of acquisition (COA) of such units will be reduced from the total redemption amount. The above provisions are applicable from April1,2024. Ramifications on Overseas Unitholders: Characterization Dispute: Characterization issue may arise as repayment of loan may be considered as income from Capital Gain as against income from other sources ( IFOS) . TDS Void u/s 194LBA vs Sec 195: As laid down, if such sum is taxable in hands of unit holders as IFOS, a corresponding withholding obligation has been missed out on the Business Trust u/s 194LBA. In such a case, Business Trusts may have to withhold tax u/s 195 on distribution of sum to its Non-Resident investors. 8 Proposed Provisions Relating to International Financial Services Centre (IFSC) As part of the government’s initiatives to promote Gujarat Infrastructure Finance Tech City (“GIFT City”), the Budget proposes several regulatory measures and further tax incentives to boost Foreign Investments. They are as follows– Existing Amendment / Regime Proposed Amendment Relocation of Offshore Funds (Section 47(viiad)): Section 47(viiad) provides for tax neutral transfer in case of relocation of fund located outside India to IFSC was exempt till 31st March,2023. The Budget proposes extension of period for tax neutrality of tax benefits for relocation of funds from foreign jurisdictions to IFSC GIFT City up to March 31, 2025 as against the current sunset date of March 31, 2023. Regulatory Approvals: Two separate registration/ approvals required for setting-up business in IFSC gift city-SEZ & IFSCA. Setting up a single window IT system for registration and approval from IFSCA, Special Economic Zone (SEZ) authorities, Goods and Services Tax Network (GSTN), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDAI). ODI Distributions (Section 10(4E)): Section 10(4E) provides exemption to Non-Resident on income from transfer of Non-deliverable Forwards or Off-shore Derivative instruments (ODI) or over the counter derivatives(OCD) entered into with an IFSC banking Unit(IBU) as referred to in 80LA(1A) subject to such condition as may be prescribed. The IFSC Banking Unit (issuer of the ODI to non-resident investors) pays tax on the income earned in the form of interest, dividend etc. through its investments and the same income is again taxed in the hands of the ODI holders at the time of its post-tax distribution receipts. Under the existing regime, exemption is available to non-resident investors only on the transfer of ODIs but not on the distributions made to them. In order to address this anomaly and remove double taxation, the budget proposes to provide additional exemption u/s 10(4E) on distribution of income by IBU to NR ODI holders subject to the condition that such income is already taxed in the hand of IBU u/s 115AD.This is applicable from April1,2024. Tax Holiday under New Regime (Section 80LA): Deduction u/s 80LA is available to a person having unit in IFSC who has opted for taxation u/s 115BAC(1) r.w115BAC(4)/(5) on and after 1stApril,2021. The time line of deduction u/s 80LA is limited upto 31st march, 2024 to the assessee opting for the new regime. 9 Interest Deduction Limitations: Extension of exemption to non-banking financial companies (NBFCs) (Section 94B) Thin capitalization rules were introduced by the Finance Act, 2017 as a measure of BEPS (Base erosion and Profit shifting) Action Plan -4 to restrict excess deductions claimed by way of higher interest payments to foreign associated enterprises (AE) by a borrower , being a domestic company or PE of a Foreign Company . Computation Rule under Section 94B: Section 94B of the Act provides the amount of deduction in excess of Rupees one crore in respect of payment of interest to a foreign lender which is also AE of the borrower which is limited to the lower of the– a) 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) of the borrower in the previous year; or b) interest paid or payable to AE for that previous year. At present, section 94B(1) of the Act had carved out an exception to Indian Company or Permanent Establishment( PE) of foreign Company engaged in business of banking or insurance. An Additional carve out is now provided to such class of NBFCs w.e.f. April 1, 2024, which are engaged in the business of financing as they undertake similar functions and are now being subject to similar regulations and compliances in respect of those functions, as may be notified by the CG in the Official Gazette. Statutory Definition of NBFC: In the above context, NBFC shall have the same meaning as assigned to as per Section 45-I (f) of the RBI Act. Reference of the same is made in clause (vii) of the Explanation to Section 36(1)(viia) of the Act. 10 Time limit of furnishing information under TP Provisions (Section 92D & Rule 10D) “Section 92D of the Act requires every person who has entered an international transaction or a specified domestic transaction to keep and maintain the information and documents as provided under rule 10D of the Income-tax Rules, 1962.” Section 92D of the Act requires every person who has entered an international transaction or a specified domestic transaction to keep and maintain the information and documents as provided under rule 10D of the Income-tax Rules, 1962 . The Assessee is required to furnish any information /documents requires within 30 days from the date of receipt of notice by the Assessing Officer (AOs) or the Commissioner (Appeals) (CIT(A)) u/s 92D(3) of the Act . An additional period of 30 days is provided to an assessee who makes an application requesting to grant extension of the time period . Reduction of Notice Response Window to 10 Days: With a view to reduce the time given for furnishing information, it has been proposed to reduce the time limit of furnishing the same from 30 days to 10 days of the date of receipt of notice by AO or CIT (Appeals). The provision for application for extension by an assessee for a further period not exceeding 30 days will continue. The amendment is applicable w.e.f. April 1, 2023. Conclusion To summarize, while there are no radical changes in the Finance Bill, there are some benefits for the taxpayer as well as some to protect the interests of the revenue. The one jarring note is the provision in relation to the issue of shares to non-residents which could only lead to unnecessary harassment on the matters of valuation as startups raise bulk of capital from foreign investors and which may impact the ease of doing business in India.

BANK AUDIT SPECIAL The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 83–89 (Journal pp. 1027–1033) Statutory Branch Auditing of Banks: Using CBS Reports IC CA. Ishwar Chandra Author is member of the Institute • Contact: ca.ishwarchandra@gmail.com / eboard@icai.in Regulatory Mandate & Revised LFAR Framework Statutory auditors of banks evaluate adherence of laws and regulations and policies / procedures / guidelines of the banks. RBI’s new directions on financial statements preparation and presentation vide circular DOR.ACC.REC.No.45/21.04.018/2021-22 dated August 30, 2021 fosters stringent financial reporting discipline amongst banks and enhance auditors’ responsibilities of evaluations of relevant controls. Long Form Audit Report (LFAR) provides a detailed analytical view of such adherence in banks’ systems and processes. Particularly, new LFAR provides auditors an opportunity to report on more financial and operational controls and also provides a best basis to approach the statutory branch auditing. In current exceptions-based CBS control environment, audit evidences are preserved in the form of audit exceptions. Banks have their customized exceptions handing systems and analytical reports based on their MIS needs and legal/regulatory requirements. Article attempts to delve upon such audit exceptions / system generated analytical reports crucial for branch auditing that would help auditors meet their statutory audit obligations effectively. 1 Overview of CBS Environment & Core Applications Currently, in public sector banks, following CBS applications are used: 1. Finacle (Infosys) Users: Bank of Baroda, Bank of India, Indian Overseas Bank, Punjab National Bank, Punjab & Sind Bank, UCO Bank and Union Bank of India. 2. B@NCS (TCS) Users: Bank of Maharashtra, Central Bank of India, Indian Bank and State Bank of India. 3. Flexcube (I-Flex) Users: Canara Bank. “Various audit exceptions/ system generated reports and their nomenclature and software menus are not uniform across the CBS environments and across the banks.” Audit Exceptions / System Generated Reports Architecture: Various audit exceptions/ system generated reports and their nomenclature and software menus are not uniform across the CBS environments and across the banks. In addition to the menu-driven CBS reports, different customized monitoring / exception handling systems are being followed by the banks and various audit exceptions/ monitoring reports are available on their specialized exceptions handling / monitoring portals. For example, Finacle Environment: Generally reports are menu-driven, however, various monitoring/ exceptions/ analytical reports have been customized and are on specialized portals. For example, in Bank of Baroda, most monitoring reports relevant for LFAR are available on CEMU (Centralized Exception Monitoring Unit) portal. In Punjab National Bank, such reports have been customized on MIS portals. In Union Bank of India, large number of such reports are available on credit monitoring and credit compliance (CMCC) portal. B@NCS Environment: Generally, for all daily exceptions / analytical reports, an ‘All in One’ daily folder is created and placed on users’ desktop. Flexcube Environment: Such exceptions/ analytical reports are largely available as periodical reports (e.g. daily, monthly, quarterly) for monitoring purposes. Auditor’s Guidance: No standard and exhaustive list of menus/ reports could be provided here. Some reports are available in live environment while others on DR environment. Auditors should obtain information from the bank on the audit exceptions/ system generated analytical reports available and relevant for branch auditing. FINACLE 10 Reports: Comprehensive Menu Directory for Branch Audit S. No. Information required for audit / Reports Menus I BALANCE SHEET Assets 1 Shroff Cash Report: (Denomination-wise cash balance report for physical verification of cash) HSCWRPT Cash Balance Report: (To check average cash holdings and cash in excess of cash retention limit) HCBR 2 Advances Appraisal: New Accounts opened during the period (For selection of sample of loan and deposit accounts) HACSP Loan Account Master Print (To verify the interest rate, DP and other items) HLAMP Asset Classification Reports (To check asset classification history of the accounts) HASSET / HASSCR Interest Table History (To check interest rates and their modifications) HINTTM Account Limit History (To check DP calculation and for frequent /renewal of limits, if any, in the system) HACLHM Review / Monitoring / Supervision: Limit Accounts Review Overdue Report HLAROR Stock Statements Submitted Position STKSTMT NPA Reports HNPARPT Accounts restructured/re-phased HLARA Loan Balancing Reports/ Jotting Reports HBR / JOTRPT TOD/Excess/ Ad hoc Allowed HTODRPT Debit Balances In SB/CD HBR Insurances Expired INSEXPD Loan Accounts Overdue Position Inquiry /Stressed /PNPA HLAOPI Loan Accounts Repayment Schedule HLARSH Account Turnover Report (CC-OD accounts) HATOR Bills Purchased/Discounted HBPR 3 Non-Fund Based Business Guarantee Issued & Liability Register HGILR Guarantee Expired But Not Reversed HGENR Guarantee Invoked But Not Paid HGIPNP Documentary Credits Liability Register HDCLIABR / DCREG / DCSTMT / DCLIABRG Documentary Credit General Purpose Report HDCGPR 4 Other Assets Minor Sub-Group Office Items Report: For age-wise and entry-wise break up of outstanding in following GL sub-heads/ accounts: Sundry Assets Suspense Debits Inter-Branch accounts etc. HMSGOIRP II LIABILITIES 1 Other liabilities Minor Sub-Group Office Items Report: For age-wise and entry-wise break up of outstanding in following GL sub-heads/accounts: Sundry Deposits Sundry Credits Other Liabilities Suspense Credits etc. HMSGOIRP Inward Bills For Collection (IBC) HBRCR Outward Bills For Collection (OBC) HBRCR III PROFIT & LOSS ACCOUNT 1 Interest Applied Interest Report: (To test-check the interest rates fed and to check whether interest have been applied in standard accounts only) HAINTRPT Income Accounts Debited : Debits - Incomes GL-Subhead: (To check manual alteration/unauthorized reversals, if any) HFTR Interest Adjustment Record /Report IARMREP Manual Interest Applied Report HMINTRPT Interest Provision INTPRO IV GENERAL 1 Gold / Bullion & Security Items Inventory Status Report: To physically verify the inventories of sensitive stationary/ security Items, e.g. cheque Books, FDRs, obtain reports for all locations / custodians: Double lock (dual custody) inventories Single lock (single custody) inventories HISRA 2 Books & Records Exceptional Transactions Reports (ETRs): Financial Exceptions Non financial Exceptions HEXCPRPT 3 Other Reports General Reports (Balance sheet, Profit & Loss, GLB, Weekly etc.) HGR1 / MISRPT Financial Transactions Reports HFTR Inquiry on GL transactions HIOGLT / HIOT Customer Accounts Statements HPSP Office Accounts Statements: (For GL/PL accounts, e.g. sundries, suspense, incomes and expenditures accounts) HACLPOA TDS Reports HTDSIP / HTDSREP TDS Amount Slab Table Inquiry HASTI 4 FOREX Business Packing Credit- Party Wise Pre Shipment Credit RPODPC Overdue Pre-shipment Credit Report GOPCR Export and Outward Bills Report HEOBR Statement of Overdue Import/Inward Bills HOIIB Foreign Bills Balancing Register HFBBR Bills to be Delinked Statement HBDS B@NCS Reports: Critical Files & Audit Workflows (SBI, Indian Bank, CBI, BOM) S. No. Information required for audit/ Reports Menus / Reports 1 Closing GLBs / Trial Balances OGL- detailed trial balance / BALSHT as on date / weekly as on date (Detailed trial balance for March could help identify March month transactions) 2 Balances / Jottings Reports Loan balance file 3 Financial Transactions Inquiry / GL / Impersonal Accounts Transactions Audit BGL reports / Flabby_AC_Report, System_suspense_report, agewise break up and GL outstanding accounts report. Transfer_supplementary_report Supplementary_control / GL Day book / GL-Outstanding-Accnts 4 Impersonal (Office) Accounts - Outstanding Items Report Audit BGL reports / Flabby_AC_Report, System_suspense_report, agewise break up and GL outstanding accounts report 5 SMA / Potential NPA accounts Reports PNPA / SMA Reports, / Irregular Excess drawing / Standard Accounts irregular excess drawal, SMA-0, SMA-1, SMA-2 reports 6 Asset Classification / Non- performing Assets (NPA) Reports NPA_report 7 Restructurings / modifications in Limits (e.g. changes in repayment schedule) Reports DL/TL-A&S-Loan Processing-Generate Repayment Schedule- Action – E 8 Sensitive stationary / security items - Valuable Paper Inventory System VPIS 9 Various day-end reports EoD, BoD reports / user maintenance / Exceptional_transactions_report 10 TDS / Customer-wise TDS report Customer-wise tax deduction report 11 Other Useful Reports / EOD Reports • Credit Monitoring & Recovery: SMA Reports NPA/PNPA Linked deposit accounts NPA movement Likely NPA Daily NPA/PNPA/Out of Order Report • Loan Reports: Advances sheet-all accounts TL/DL account opened-product wise Pri/Coll security details Loan Disbursement (during the period) Branch-wise/ account-wise loan disbursement Flexcube Reports: Critical Monitoring & Periodical Directories (Canara Bank) S. No. Information required for audit/Reports Menus / Reports 1 Closing GLBs / Trial Balances GL Report, GL Tally Report, Day book cum trial balance (GL Alert Report indicates the entries, if any, outstanding unadjusted) 2 Balances / Jottings Reports Balances reports (scheme-wise) 3 Financial Transactions Inquiry / GL / Impersonal Accounts Transactions EOD reports- General Ledger Statement- SA 4 Impersonal (Office) Accounts - Outstanding Items Report General Ledger Statement- SA (Sundry Assets) 5 SMA / Potential NPA accounts Reports Periodical Reports- List of NPA accounts/ Consolidated NPA position SMA-0, SMA-1, SMA-2 reports SWL (Special Watch List) 6 Asset Classification / Non- performing Assets (NPA) Reports Periodical Reports- List of NPA accounts/ Consolidated NPA position 7 Inventory Status Report (Sensitive stationary/ security items/Valuable Paper Inventory System) Branch Inventory Report 8 Various day-end reports EOD Reports 9 Other Useful Reports / EOD Reports Insurance policy renewal Pending BAR (Branch Adjustment Reconciliation) Large Transactions Report Savings Overdraft Report Cheques Purchased Report Customer Accounts Balances (NPA) Day Book, Trail Balance/ GL Restricted Transaction EOD Report General Ledger Report Non Performing Loans Arrears Aging Analysis Summary/ Loan Arrear Details Loan account with credit balance Cheques Pending Clearing Listing Transaction Journal Special Audit Considerations: Detecting Window-Dressing & Ever-Greening Malpractices RBI Master Direction on Financial Statements (dated 30 August 2021, Para 23 ‘Window-Dressing’): “Banks shall ensure that balance sheet and profit and loss account reflects true and fair picture of its financial position. Instances of window dressing of financials, short provisioning, misclassification of NPAs, under-reporting/ incorrect computation of exposure/risk weight, incorrect capitalization of expenses, capitalization of interest on NPAs, deliberate inflation of asset and liabilities at the end of the financial year and subsequent reversal immediately in next financial year, etc. shall be viewed seriously and appropriate penal action in terms of the provisions of the Banking Regulation Act, 1949 shall be considered”. Following are few of the critical Finacle system reports that would help evaluate potential window-dressing / ever-greening malpractices and non-compliance, if any: • HFTR (Financial Transactions Reports) HFTR “HFTR menu in Finacle 10 provides different Types of entries (viz. Cash, Clearing and Transfer) – Bank- Induced and Customer-Induced.” HFTR menu in Finacle 10 provides different Types of entries (viz. Cash, Clearing and Transfer) – Bank-Induced and Customer-Induced. It provides reports at GL heads / GL subheads /account levels. It provides reports for different amount ranges and account ranges and for the periods. Particularly, Bank Induced (BI) Transfer entries would help indicate potential fictitious (merely book-entries), if any, routed through these accounts. For example: Ever-Greening of NPAs / Weak Accounts: HFTR report on ‘Bank-Induced (BI) Transfer type Credit’ entries in CC/OD GL subheads for March could help identify merely book-entries, if any, with corresponding Debit entries in impersonal accounts (e.g. sundry deposits, sundry credits) and subsequent reversal thereof, in ‘No Turnover’ / ‘Poor Turnover’ CC/OD accounts to evergreen NPAs /week credit facilities. Year-End Balance Sheet Inflation (Window-Dressing): HFTR report on ‘Bank-Induced (BI) Transfer type Debit’ entries in CC/OD GL subheads at year-end could help identify entries, if any, in unutilized CC / OD limits with corresponding Credit entries in deposit accounts and subsequent reversal thereof after year-end, and could help indicate potential window-dressing, if any. • HLARA (Loan Accounts Restructured) & HACI Inquiry HLARA / HACI “In HACI, menu, E option, would also help provide repayment rephasements Details- for individual inquiry. This is an account specific menu, hence auditors could use this for top -5 / large/SMA accounts.” This report provides information on number of times a loan account has been rescheduled / restructured. ‘Schedule No.’ shown indicates the number of times, limit /repayments have been reschedule / restructured. For example, inquiring information, such as, for top 10 accounts appearing in SMA-2 of December would help identify the accounts, if any, wherein repayments have been re-phased frequently/ irregularly to evergreen the loan accounts. In HACI, menu, E option, would also help provide repayment rephasements Details- for individual inquiry. This is an account specific menu, hence auditors could use this for top -5 / large/SMA accounts. • HMSGOIRP (Minor Sub-Group Office Items Reports) HMSGOIRP This report provides age-wise details of outstanding entities in office/ impersonal accounts (e.g. Sundry Deposits, Sundry Credits, Suspense, inter-branch) and would help obtain age-wise and entry-wise details of entries outstanding in such accounts and auditors could ascertain reasons for such long outstanding. • HTDSIP / HTDSREP (TDS Reports) & HASTI Slab Inquiry HTDSIP / HASTI This menu provides various TDS reports including ‘TDS Summary’ enabling verification of TDS deduction and remittance on eligible amounts. To obtain TDS information for a specific constitution code (i.e. companies, individuals), HASTI menu report would help provide such information to check and determine non-compliance, if any. • HEXCPRPT (Exceptional Transactions Reports - ETRs) HEXCPRPT This provides exceptions (financial and non financial) encountered At a SOL/By a SOL/Of a SOL (Service OutLet) during the day. Generation and scrutiny of exceptional transactions reports (ETRs) by the branch, recording the post-facto authorizations for exceptions, is mandatory in terms of RBI Circular No. DBS. CO.FrMC. BC.No.10 /23.04.001/2010-11 dated May 31, 2011 ‘Findings of Forensic Scrutiny- Guidelines for prevention of frauds’. Mandatory Audit Reporting: Non-generation/ scrutiny of such reports by the branch daily could potentially result in non-detection of errors/ irregularities/ frauds, if any, timely. Auditors should specifically comment if such reports are not generated / scrutinized by the branch. Word of Care for Branch Auditors: It is quite possible that exact menu / nomenclature of the report might be different than mentioned here. Therefore, it is strongly suggested that auditors should check with the bank for CBS application used and obtain the relevant reports available in the CBS environment. While using Finacle 10 generally ‘H’ is prefixed with the menu. Of the menu options mentioned above, some might work in DC (Finacle Core) environment while others may work in DR environment. In ‘SEARCH’ menu, any report, which is not specified in the menu list, could be searched by putting key words in search field. In B@NCS: TL = Term Loan, DL = Demand Loan, A&S = Accounts and Services, L = Long, E = Enquiry. Conclusion While using such audit exceptions / system generated reports, auditors need to apply heightened professional skepticism. Some of the reports might need no further validation/ confirmation, while many of the system generated reports posing risk of manual intervention, need further validation by the auditors for their completeness and correctness such as, NPA, SMA, restructuring, stock statements pending, reviews /renewals overdue and inspections overdue reports. No standard and exhaustive list of menus/ reports could be provided here and cannot be a panacea for auditing of all bank branches. Overall, above are some of the generally available various audit exceptions/ system generated CBS reports providing a basis for auditing could work as a beginner’ guide.

BANK AUDIT The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 90–95 (Journal pp. 1034–1039) Income Recognition and Asset Classification (IRAC) Norms DG CA. Dhananjay J. Gokhale Author is member of the Institute • Contact: dhan_gokhale@hotmail.com / eboard@icai.in “The audit of advances has always remained epicentre of statutory bank audit. Though the adoption of technological advancement changed banking practices over the years, the recent regulatory push for automation of income recognition, asset classification and provisioning process, triggered compulsive adoption of technology for automation of IRAC norms in banking sector. However, as an auditor, one needs keep professional scepticism alive as regards such automations, instead of blind reliance on it, especially considering ample examples around us wherein at times automations may lack factoring artistry in human behaviour.” Thus, one needs to be well versed with the regulatory guidelines related to Income Recognition, Asset Classification and Provisioning, besides being equally envisage about the accounting aspects related thereto. 1 Foundations of IRAC Norms & Mandatory Automated Systems The classification of assets of banks has to be done on the basis of objective criteria, which would ensure a uniform and consistent application of the norms. The provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof. RBI Mandate on System-Based Asset Classification (June 30, 2021 Deadline): The Reserve Bank of India directed the banks to ensure the completeness and integrity of the automated Asset Classification (classification of advances/investments as NPA/NPI and their upgradation), Provisioning calculation and Income Recognition Processes, advised the banks to put in place / upgrade their systems to conform to the guidelines latest by June 30, 2021. The System based asset classification is expected to be an ongoing exercise for both down-gradation and up-gradation of accounts and is required to be made part of day end process, whereby classification status report can be generated through system at any given point of time with actual date of classification of assets as NPAs/NPIs. Standard Asset An asset which does not carry risk more than normal banking risk. It continues to perform and service interest/principal regularly. Non-Performing Asset (NPA) An asset which either carries risk more than normal banking risk or ceases to generate income for the bank. RBI has issued Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances on April 01, 2022 consolidating instructions on the said matters issued upto March 31, 2022. 2 Objective Criteria for Classification of Advances Across Facility Types The RBI has defined various objective criteria as regards classification of advances across credit facility types: 1. Term Loans: Overdue Mechanics & Repayment Calendar > 90 Days Overdue A Term Loan is classified as NPA if Interest and/or installment remains overdue for a period of more than 90 days. The exception to the above criteria would be Term Loans with moratorium period granted for interest as well as principal wherein the interest would be accrued and due only after the completion of the moratorium period. “If an amount due to bank under any credit facility is not paid on the due date fixed by the bank, such amount would be called as Overdue.” Thus, it is vital to understand the meaning of the term ‘overdue’. The Master Circular defines ‘Overdue’ – ‘If an amount due to bank under any credit facility is not paid on the due date fixed by the bank, such amount would be called as Overdue.’ The exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest are required to be clearly specified in the loan agreement and the borrower should be apprised of the same at the time of loan sanction and also at the time of subsequent changes, if any, to the sanction terms/loan agreement till full repayment of the loan. Accordingly, a Term Loan borrower is provided with a repayment calendar which contains the above referred details and an inference of ideal outstanding balance as on any date can be drawn by referring to such repayment calendar. Thus, amount overdue for a term loan is nothing but an adverse difference between the amount demanded by (due to) the bank (which is EMI plus any other amount as per the terms of sanction) and amount received from the borrower. In other words, overdue amount as on a particular date is an adverse difference between ideal drawing power (i.e., ideal balance in term loan account if the repayment is made exactly on the respective due dates) and ledger balance as on that date. Two Possible Additional Demands in Term Loans: Additional Interest for delayed repayment: which arises due to delay in payment of the predefined repayment amount. Penal Interest levied on the overdue amount: as per terms of sanction. These additional amounts are immediately due as and when are debited in the term loan account (and not at the end of tenor of the term loan) and are required to be paid by the borrower in addition to the predefined repayment amounts. If unpaid, they qualify as ‘overdue’. Thus, the simple yardstick to analyse if an account has an amount which is overdue is to verify if there is an adverse difference between ideal drawing power and ledger balance (ledger balance being more than ideal drawing power as on a cut-off date). Inseparable Nature of Interest: Once an interest is debited to an account, it forms an inseparable part of the ledger balance for the purpose of calculation of overdue amount and as such the realisation / servicing of interest in a term loan account is redundant from the perspective of classification of an account. Differential Banking Treatments for Advance Repayments in Term Loans: Treatment (i): Bank does not credit advance received in the Term Loan account and parks the same under the head ‘Other Liabilities’ and recovers the instalments / EMI therefrom on respective due dates, or, Treatment (ii): Bank credits the said amount to the credit of the Term Loan account and either the remaining tenor of the loan is reduced and / or subsequent EMI is reduced accordingly, or, Treatment (iii): Bank considers that such prepayments do not amount to change in subsequent EMI amounts and / or tenor of loan and are thus, adjusted against the outstanding balance in Term Loan accounts immediately on the date such amounts are received, thereby the borrower being benefitted with reduced interest due to reduction in balance outstanding in Term Loan Account. * An auditor is required to verify the treatment of the advance repayment vis-à-vis sanction terms and accounting treatment related thereto. 2. Bills Purchased / Discounted > 90 Days Overdue If such Bill remains overdue for a period of more than 90 days. 3. Agricultural Advances: Crop Season Framework Crop Seasons If Interest or installment remains overdue for: Short Duration Crop: Two crop seasons. Long Duration Crop: One crop season (where crop season is more than 12 months). A crop season is defined as ‘period up to harvesting of crops raised’ as determined by State Level Bankers’ Committee (SLBC). Natural Calamities: Banks have discretion of rescheduling agricultural advances in case of natural calamities which impair repaying capacity (refer Master Direction dated October 17, 2018, by RBI on Relief Measures by banks in areas affected by Natural Calamities Directions 2018 - SCBs). 4. Derivative Transactions Overdue receivables representing positive mark-to-market value of a derivative contract remaining unpaid for a period of 90 days from specified due date. 5. Liquidity Facility If it remains outstanding for more than 90 days in respect of a Securitization transaction. 6. Credit Card Dues If the minimum amount payable is not paid fully within 90 days from the next statement date. 7. Cash Credit / Overdraft (CC/OD): ‘Out of Order’ Norms Out of Order A CC/OD account is treated as NPA if the same is ‘Out of Order’. The account is called as out of order if any one of the following conditions is fulfilled: Condition (a): Outstanding Balance remains continuously in excess of sanctioned limit / drawing power (whichever is lower) for more than 90 days; or Condition (b): No credit continuously for 90 days; or, credits in the account are not enough to cover interest debited during the previous 90 days. “‘Previous 90 days period’ shall be inclusive of the day for which the day-end process is being run.” Classification Qua-Borrower Rule: The classification of advances would be qua borrower unless otherwise stated. Thus, all facilities granted to a borrower shall be treated as NPA and not only that facility which has become irregular. 3 Statutory Clarifications & Exceptions to IRAC Norms The RBI has clarified specific exceptions, special circumstances, and detailed procedures: 1. Non-submission / Non-availability of Stock Statement: Outstanding Balance in account based on the drawing power calculated from stock statements older than 3 months would be deemed as irregular and if such irregular drawing is permitted for a period of more than 90 days, account needs to be classified as NPA. However, it would be pertinent to note that the relaxation so given by RBI is ‘considering the difficulties of large borrowers’, thus, limiting its applicability to large borrowers only and thus should not be construed as generic. 2. Non-renewal / Non-regularization of Regular / Adhoc Limit: If the review/renewal of regular or ad-hoc limit is not done within 180 days from the due date, the account would be classified as NPA. 3. Advances Against Term Deposits, NSCs, IVPs, KVPs & Life Insurance Policies: Need not be treated as NPAs, till security cover is sufficient to cover outstanding balance, provided Income is recognized subject to availability of margin. 4. Central Government Guaranteed Advances: Classified as NPA only if Central Government repudiates the guarantee when invoked. However, income from such accounts is required to be recognized on ‘Cash’ (realization) basis. 5. LCBD Facilities (Letter of Credit Backed Discounting): The Bill discounted against accepted LC would be treated as Performing Asset (PA) even though rest of the facilities of the borrower are treated as NPA (since the exposure of the bank in such cases would be on the LC issuing bank and not on the borrower), except in the instances wherein the LC issuing bank is itself. 6. Consortium Banking Arrangements: Each member bank shall classify the accounts according to their own record of recovery. 7. Potential Threat of Recovery (Straightway Classification): Doubtful Asset Straightaway: Where realisable value of security is less than 50% of the value assessed (by bank or value accepted in last RBI Inspection). Loss Asset Straightaway: Where realisable value (as assessed by Bank / Valuator / RBI Inspector) of security is less than 10% of the outstanding balance. 8. Fraud Accounts Provisioning: In case of Fraud Accounts, 100% provision is to be made irrespective of security, spread over 4 quarters commencing from the quarter in which fraud has been detected wherein the same is reported to RBI. In cases wherein the fraud cases are not reported to RBI, 100% to be provided instantly. 9. Solitary or Few Credit Entries Recorded Before Balance Sheet Date: If the account is exhibiting signs of inherent weakness, such account is required to be marked as NPA. In other cases, the bank needs to evidence the auditors about manner of regularisation of account; in absence of such evidence, such accounts should be marked as NPA. Regularisation of the account either at year-end or otherwise needs to be out of genuine sources of funds, such as from income generating activities of the borrower and not by way of availing additional credit facilities / loans either from the bank or any other resources to regularize existent credit facilities. 10. Mandatory Valuation of Securities in NPAs: In case of NPAs wherein the outstanding balance is more than Rs. 5 crores, it is mandatory to conduct stock audit by external agencies. As regards immovable properties taken as securities, the valuation is required to be carried out at least once in three years by approved valuer. As regards other securities, auditors need to verify appropriateness in valuation methodology and consistency. 11. Regularisation & Upgradation of Accounts (Partial Regularisation & Post Balance Sheet Date): In case if an account is a NPA, irrespective of whether the account is marked by the bank as NPA or not, the upgradation of the account would be subject to the condition that the entire arrears of interest and principal are recovered (in case of Term Loan Accounts) or the working capital accounts are regularised out of genuine business credits. The regularisation of the account subsequent to the Balance Sheet date does not affect the assets classification as the upgradation of the account would be effected only prospectively on the date of regularisation. Further, regularisation of the account by ensuring repayment of entire arrears needs to be at borrower level, and not at account level. “The loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower across all credit facilities.” 4 Project Loans: DCCO Deferment, Restructuring & Asset Classification The change in repayment schedule is permitted without change in asset classification if the same is caused due to increase in project outlay on account of increase in scope and size of the project, subject conditions stipulated in Para 4.2.15.6.2 of the Master Circular. The usual classification norms apply before the commencement of commercial operations. However, in case of accounts wherein the borrower fails to commence commercial operations within two years and within one year from the date of commencement of commercial operations (DCCO) w.r.t. Infrastructure and non-infrastructure sectors respectively, the account needs to be classified as NPA, unless eligible to be restructured and classified as standard asset. Particulars Infrastructure Sector Non-Infrastructure Sector Revised DCCO is within Two years from original DCCO One year from original DCCO Revision due to Court Case 2 + 2 Years from original DCCO 1 + 1 Years from original DCCO Revision due to any other reasons beyond control of promoters 2 + 1 Years from original DCCO 1 + 1 Years from original DCCO Additional Extension & Standby Facilities: An additional extension of DCCO is permitted for a further period of two years due to change of ownership of borrower entity, provided the conditions stipulated in Para 4.2.15.3 of the Master Circular are complied with. Further, Financing of Cost Overruns is permitted by way of Standby Credit Facilities, with retention of class of asset subject to compliance of stipulated conditions. 5 Income Recognition & Mandatory Reversal of Unrealised Income The income on Standard Assets is recognised on Accrual basis and the same on NPAs is recognised on Cash (realisation) basis. Para 3.2 of RBI Master Circular — Mandatory Reversal Mandate: “If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. This will apply to Government guaranteed accounts also. Similarly, in respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected.” “Partial recovery of arrears in NPAs and / or regularisation after the balance sheet date w.r.t. NPAs will not affect the asset classification as on balance sheet.” ‘Cover’ vs. ‘Realisation’ Distinctions in Automated Core Banking: It would be significant to note that reversal of income is required to be applied once an account is marked as NPA to the extent of income and fees / commission, etc., which has remained unrealised. Thus, the concept of ‘unrealised’ interest is applicable post an account being marked as NPA and does not form part of various criteria specified for classifying an account as NPA as per Para 2 of the Master Circular; e.g.: Distinction in CC/OD Accounts: The second criteria for treating a CC/OD account as ‘out of order’ is related to whether the credit summation in previous 90 days ‘cover’ the interest debited in the same period. Thus, the concept of ‘cover’ and ‘realisation’ are distinct and needs to be considered appropriately for respective purposes. Distinction in Term Loans: In case of a Term Loan, if an advance instalment received is credited to the loan ledger account, the same results in reduction in ledger balance and accordingly effects the calculation of ‘overdue amount’ but would not amount to realisation of interest debited to the said term loan account subsequently. Test of Realisation: The interest / fees / commission would be considered as realised only when there is a subsequent credit received in the account or, the ledger balance as on EoD of interest application is an adverse balance (credit balance). Thus, any credits received (whether as advance payment of instalment or otherwise) prior to debiting of interest would not be facilitative for considering interest as realised, unless the same are accounted for categorically as ‘Advance income received’ instead of crediting against outstanding loan balance. Practical Illustration: CC / OD Account (Drawing Power & Sanctioned Limit = Rs. 10,00,000/-) Date Narration Dr (Rs.) Cr (Rs.) Balance (Rs.) 01.Oct.2022 Disbursal 10,00,000.00 - 10,00,000.00 05.Oct.2022 Receipt - 20,000.00 9,80,000.00 31.Oct.2022 Interest 10,00,000.00 - 9,90,000.00 30.Nov.2022 Interest 10,000.00 - 10,00,000.00 31.Dec.2022 Interest 10,000.00 - 10,10,000.00 Analysis of Illustration: In the instant case, the account will be marked as NPA on 31.Dec.2022 as the credits in ‘previous (i.e. lookback period) 90 days’ (of Rs. 20,000/-) are not enough to cover the interest debited during the same period (of Rs. 30,000/-). The amount of interest unrealised will be Rs. 30,000/- and not Rs. 10,000/-. “Concept of realisation of interest (income) needs to be tested at the time of classification of an account as NPA for reversal of unrealised income.” Similarly, in case of a Term Loan account, interest debited in the account cannot be said to be realised out of prior credits received in the account (whether as prepayment or otherwise). Thus, to summarise, when an account is marked as NPA, the interest / fees / commission / bank charges debited to the account, which are not realised as on the date of NPA are required to derecognised and subsequently needs to be recognised on realisation basis. It would be preeminent for the auditor to review the behaviour of the software to ensure allegiance to the concept of realisation. Additional Finance in NPAs: Interest on additional finance in NPAs should be recognised on cash basis. Conversion into Equity / FITL: If interest due is converted into unlisted equity / FITL, the same should be fully provided for; if converted into a listed instrument, interest should be recognised to the extent of market value of such security on the date of conversion. Order of Recovery: In case of recoveries in NPAs, in the absence of clear agreement between the Bank and the Borrower, an appropriate policy to be followed in uniform and consistent manner as regards order of recovery of outstanding interest and principal amount. 6 Asset Classification Categories & Provisioning Requirements Matrix Type of NPA Criteria Secured Portion* Provision Unsecured Portion Provision Sub-Standard (SSA) First 12 months from date of NPA Secured SSA: 15%$ Unsecured SSA: 25% Infrastructure SSA: 20% Doubtful – I (DA-I) Subsequent one year after SSA 25% 100% Doubtful – II (DA-II) Subsequent two years after DA-I 40% 100% Doubtful – III (DA-III) After two years in DA-II 100% 100% Loss Asset Identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off 100% 100% $ Without making any allowance to ECGC guarantee cover and securities available. * Intangible Security is considered only if backed by legally enforceable and recoverable right over collection and rest of intangibles like rights, licenses, etc. are considered as ‘Unsecured.’ Prudential Provisioning on Standard Assets: The prudential provision on Standard Assets has remained unchanged as provided in Para 5.5.1 of the Master Circular.

TECHNOLOGY & AUDIT The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 96–99 (Journal pp. 1040–1043) Automating Audit KG CA. Kypa Gowtham Sai Krishna Author is member of the Institute • Contact: kypagowtham@gmail.com / eboard@icai.in “Chartered Accountants—Popularly known as auditors, earn their bread from auditing the financial information of organisations. Chartered Accountants are legally equipped to issue audit reports on the financial information which enhances the trust of many stakeholders. In simple words Chartered Accountant sign a statement which is largely accepted as credible without second thought on it. This is the level of trust built by the CA fraternity over the years and it owes responsibility on each of us to uphold the same. Can we do this in a better way with the help of modern age technology?” “We have performed audits in an automated environment. Can we automate the audit itself?” 1 From Clay Styli to Autonomous Digital Ledger Recording Over the decades we have witnessed a drastic shift in the way the accounting profession records, processes and reports a transaction. Some research indicates that the book keeping in 2600 BCE used to happen with the help of styli on small slabs of clay. Now the digitalized systems not only processes and reports the transaction recorded by the accountant but it can also record the transaction by itself and eliminates the entire manual intervention. “We all know that the audit is an iterative process and now the upskilling for performing audits is also an iterative one.” In this everchanging world the auditor’s had learnt a lot about system automations and how to perform an effective and efficient audit in an automated environment. But it is not the end of great technological learnings, rather it is the beginning for the next gen learning where an auditor needs to learn how to automate the audit process itself. Core Dividends of Audit Automation: The automation can provide greater efficiency, reliability, accuracy, flexibility, timeliness of information, expand capacity, boost quality, enable greater audit coverage and can even provide cost advantage over the long run. The modern machines not only match humans but really do even more than a human. The talented workforce can be directed towards more complex and judgemental areas and excel in their core activity. Hence as an auditor why don’t we take the advantage of automating the audit itself? 2 Artificial Intelligence & Robotic Process Automation: The Technological Enablers Artificial Intelligence (AI) & Robotic Process Automation (RPA) – “It is as complex as converting a machine into human”. A technology which enables the machines to perform tasks of repetitive nature which are generally performed with human intelligence (i.e., in simple words the computing system is enabled with human intelligence). The best examples which we are most familiar with are search recommendations by Google & Amazon, self-driving cars, etc. This technology is so powerful that it enables the systems to even compose music, analyse human voice, capable of talking back (Siri, Alexa, Google Voice Assistant), identify the images and take informed decisions which are rule based. Yes, the AI can make decisions on its own & even capable of expressing opinion on financial information. • Robotic Process Automation (RPA) A robot that executes repetitive, rule-based tasks based on a predefined computer script. • Cloud Computing Remote centralized and scalable servers that store, process, and secure client financial data and audit software. • Natural Language Generation (NLG) Writes coherent structured text and draft audit commentaries based on underlying structured financial data according to defined parameters. • Blockchain A technology that allows immutable information storage and transmission in a transparent and secure way without central intermediary control. • Intelligent Content Recognition (ICR) Understanding a string of handwritten or typed characters in invoices/vouchers and transforming them into structured, searchable audit data. • Intelligent Chatbots (Virtual Assistants) A group of systems that react to oral or written queries according to a pre-defined decision tree; data repositories providing instant answers to client and team audit queries. • Predictive Modelling A advanced analytical process relying on data mining and probability algorithms to forecast future operational events, going concern stress, and default risks. One needs to have a good understanding about these new gen tools as they may become equally important as a technical standard to perform audits. 3 Practical Audit Use-Cases & CARO Automation Following are eight illustrative audit workflows ripe for full automation: I. Automated Newsfeeds & Market Intelligence: Use automated newsfeeds to pull information about entity (market data, regulatory filings, financial and non-financial news articles). II. Algorithmic Materiality Determination: Materiality can be determined by pulling out the numbers from last audited financials and applying the percentages as per the firm’s methodologies. III. Rule-Based Compliance Checking under CARO 2020: The auditor can use this technology to automate compliance checking processes which are rule based. Illustrative areas under Companies (Auditor’s Report) Order (CARO): Title Deeds of Immovable Properties (Clause 3(i)(c)): If a company holds a large portfolio of immovable properties, it requires an auditor to manually examine each title deed. With RPA, optical verification is executed in fractions of a second: the system parses all scanned title deeds, compares entity ownership with land records, and outputs exception registers. Undisputed Statutory Dues Deposited (Clause 3(vii)(a)): RPA reads monthly and state-wise returns and automatically maps them against electronic tax challans w.r.t. TDS, GST, PF, PT, ESI, etc. The script detects payment delays and pinpoints statutory dues overdue for more than six months from the date they became payable with 100% accuracy. IV. Complete Journal Entry Testing & Visual Analytics: It can read through each and every entry passed throughout the period under consideration by the clients and provide most valuable pictorial representations of huge transaction volumes. This adds value not only to auditors in identifying audit risks, but also provides valuable inputs to clients regarding business trends. V. 100% Population Testing & Sampling Risk Elimination: Examines the full population of data and identifies anomalies and patterns useful in risk identification. Checking the full population eliminates sampling risk, leading to superior audit quality and reducing overall audit risk to the maximum extent possible. VI. Independent Calculations & Auditor Point Estimates: Runs independent re-computations for depreciation, amortisation, interest schedules, etc., delivering an objective auditor point estimate for audit evaluations. VII. Drone-Assisted Physical Stock Verification: Unmanned Aerial Vehicles (drones) deployed across large warehouses, yards, and remote project sites to execute high-speed volumetric counts and physical inventory verification. VIII. Continuous Real-Time Auditing: Auditing transformed into an instantaneous, real-time activity powered by AI tools that continuously analyse, test, and flag anomalies the moment a transaction occurs. 4 Factors, Motivations & Practical Limitations of Automation Factors Affecting Automation: Identifying the areas susceptible for automation Technical feasibility Cost of development, implementation and sustainability Adoptive work culture Time taking process Government Regulations Confidentiality considerations Benefit from automation realized over the long run Motivations for Audit Automation: Modernisation at client organisations leaves no option for auditors but to emerge as tech-savvy firms providing enhanced real-time assurance. Eliminating routine tasks opens new revenue streams. Automated Data Ingestion: The tedious initial task of gathering unstructured data from unstructured sources is streamlined by predetermining required schedules and auto-triggering scheduled requests for recurring audits. Operational Limitations & Security Roadblocks: Cost, adoptability, and confidentiality of information obtained remain key limiting factors. Real-time automated testing requires continuous access to sensitive client servers, which clients are often unwilling to link to audit firm platforms. Investment Recovery Risks: Heavy upfront development and recurring re-skilling costs take years to recover. To recover investments, audit firms may face perverse incentives to onboard high-risk clients at the cost of audit quality. 5 Will AI Replace Auditors? Research Insights, Co-bots & The Luddite Fallacy Historical Context: Will the Luddite Fallacy Come True This Time? A Luddite describes people who oppose new technology. In the 19th century, English textile workers were displaced by automated power looms producing cheaper cloth. Unemployed workers launched campaigns to destroy machines. While displaced workers suffered in the short term, over time society benefitted immensely from cheaper clothes, lower prices, and massive new employment opportunities across expanding economic sectors. Global Empirical Research on Automation & Financial Job Losses: McKinsey Global Institute Reports that less than 5% of occupations can be fully automated, while 60% of all occupations contain approximately 30% automatable activities. PIAAC (OECD Data) Projects that the financial services industry faces almost 30% risk of potential job displacement in this decade—the highest among all industries. U.S. GAO Estimates Researchers at the U.S. Government Accountability Office estimate that anywhere from 9% to 47% of jobs could be automated in the near future. From “Robots” to “Co-Bots” (Collaborative Bots): New age technologies are best viewed as “co-bots” rather than “robots”; they will not steal our jobs, but will work alongside us as co-employees. Historically, only physical muscle power was mechanised; today, the human brain itself is being mechanised. Market Disruption Precedents: Online tax return preparation tools have largely replaced manual tax return preparers. Similarly, GST authorities decided to remove the compliance mechanism of GST audit because the entire transaction trail has become automated. Conclusion: Professional Scepticism Remains Irreplaceable The automated world equips the new generation auditor with the capacity to test 100% of the data population. This elevates stakeholder expectations from traditional reasonable assurance to near-absolute assurance. “Technology is an enabler and we must embrace it in the environment that we are working in to ensure accuracy and completeness of the information analysed.” While routine tasks are readily automated, predetermined rule-based systems can be bypassed by fraudsters employing sophisticated techniques. Therefore, human professional scepticism, deep experience, and contextual judgement remain irreplaceable, particularly as novel fraud methodologies evolve even faster in an automated environment.

TAXATION The Chartered Accountant • March 2023 • Vol. 71 • No. 09 • pp. 100–104 (Journal pp. 1044–1048) Section 194R- TDS on Benefits or Perquisites: Emerging Facts and Issues VG/AK CA. Vishal Gupta and CA. Alok Kaushik Authors are members of the Institute • Contact: eboard@icai.in As per clause (iv) of Section 28 of the Income-tax Act, 1961, the value of benefits or perquisites, whether convertible into money or not, arising from business or exercise of profession is chargeable to tax as business income. However, in some cases, the recipient of benefits or perquisites is not including it in their taxable income. Therefore, in order to catch hold of such cases and simultaneously widen the tax base, Section 194R is inserted through Finance Act, 2022 by our Honourable Finance Minister Smt. Nirmala Sitharaman. The provisions of Section 194R are applicable from July 01, 2022. Efforts have been made to cover provisions of this section in the form of a questionnaire to the maximum extent as per our best understanding in this article which may prove to be beneficial for the readers. Q&A Comprehensive Practical Questionnaire on Section 194R 1. What is the scope of Section 194R? Sec. 194R provides for deduction of tax at source on providing benefits or perquisites to a resident if such benefits or perquisites arise from carrying on of business or exercise of the profession. This section is applicable from July 01, 2022. 2. To whom Section 194R is applicable? Section 194R is applicable to every person who is providing benefits or perquisites whether resident or non-resident (‘provider’) in excess of the threshold limit except specified individuals and HUFs exempted by the third proviso to section 194R. Exemption for Individuals & HUFs: Individuals or HUF carrying on any business or profession having total sales/gross receipts/turnover of up to INR one crore (business) or INR fifty lakhs (profession) respectively in the immediately preceding financial year are not required to deduct TDS under this section. 3. Where the benefits or perquisites are provided to a Government Entity, is this section applicable? This section is not applicable where the benefits or perquisites are provided to a Government entity, like a government hospital, not carrying on any business or profession. 4. What is the meaning of benefits or perquisites? ‘Benefits’ has not been defined under the Income-tax Act, 1961. The dictionary meaning of benefits is the advantage or profit or anything which is contributing to the improvement of existing conditions as decided in CIT v. Smt. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj.). ‘Perquisites’ has been defined under section 17(2) of Income-tax Act, 1961. Since it is an inclusive definition as defined under this section, it only lists down the items that should be covered in the form of perquisites under the head ‘Salary’. The literal meaning of perquisites as per Oxford’s dictionary is ‘something to which someone has a special right because of their social position’. Therefore, from this definition, it may be inferred perquisite denotes an income in addition to the main source of income. 5. What is the meaning of provider for the applicability of this section? The term provider has not been defined either under section 194R or in guidelines issued by CBDT. However, in our view, ‘Provider’ in the restricted sense of section 194R should include a person who provides some benefit or perquisite to other people not being an employee either by himself or through a third party. 6. What is the meaning of recipient for the applicability of this section? The term recipient has also not been defined neither under section 194R nor in guidelines issued by CBDT. However, in our view, ‘Recipient’ means a person who is not an employee since section 192 comes into play in the case of an employee. Further, he must be carrying on a business or exercising a profession and should have a business or professional relationship with the provider. 7. At which rate TDS is required to be deducted? TDS is required to be deducted at the rate of 10% subject to sections 206AA and 206AB of the Income-tax Act, 1961. 8. At what rate, TDS will be deducted if the recipient has not furnished his PAN or has not furnished his return of income for a specified period as per section 206AB? Section 194R has been introduced under Chapter XVIIB of the Income-tax Act, 1961 which covers all the sections pertaining to TDS. Since, section 206AA is applicable to the whole of Chapter XVIIB, hence Section 194R will also fall under the ambit of section 206AA. Therefore, in case of non-availability of PAN, TDS is required to be deducted at 20%. Similarly, Section 206AB is applicable to the whole of Chapter XVIIB, and this section has not specifically excluded section 194R, hence Section 194R will also fall under the ambit of section 206AB. Therefore, in case of non-furnishing of return of income, TDS is required to be deducted at 20%. 9. Whether the recipient can apply for Low Deduction Certificate (‘LDC’) or No Deduction Certificate (‘NDC’) for Section 194R? Section 197 provides that if the assessing officer is satisfied that the total income of the recipient justifies the deduction of income tax at any lower rate or no deduction of income tax, as the case may be, the officer shall on an application made by the assessee in this behalf, give to him such certificate as may be appropriate. Section 197 includes an inclusive list of sections for which the recipient can apply for LDC or NDC. Since section 197 for issuance of LDC or NDC has not been amended to include section 194R, it is inferred that recipient cannot apply for LDC or NDC. 10. At which time, TDS is required to be deducted on benefits or perquisites by the provider? Section 194R provides that, before releasing the benefits or perquisites, the provider shall ensure that tax has been deducted in respect of such benefits or perquisites. Practical Illustration: A company provides a foreign tour to its distributors. It will include provisioning of expenses in books of accounts, intimating and getting approval from distributors, booking tour and making payment to the vendor, handover tickets to distributors. In our view, the company should deduct TDS at the time of booking of expenses in books of accounts or payment to vendor whichever is earlier subject to eventual availing of the benefit by the recipient. However, the timing of the deduction of TDS has not been explicitly clarified in department notification and clarifications provided so far, and is still a subjective matter depending on the facts and circumstances of each case. 11. What is the threshold limit for the deduction of TDS? TDS is required to be deducted only if the value or aggregate value of benefits or perquisites provided to each beneficiary during the financial year exceeds INR 20,000. 12. Whether benefits or perquisites provided during Apr-Jun’ 22 will be considered for threshold limit? Benefits or perquisites provided during Apr-Jun’ 22 will be considered for the threshold limit but such benefits or perquisites will not be subjected to TDS. 13. Whether TDS is required to be deducted from benefits or perquisites provided to non-residents? Section 195 provides for the deduction of tax at source if the income of non-resident is chargeable to tax in India. If the benefits or perquisites provided to non-resident is chargeable to tax, then, TDS under section 195 is required to be deducted. 14. What type of benefits or perquisites are covered under this section? Benefits or Perquisites may be in cash or in kind or partly in cash and partly in kind whether convertible into money or not. There were divergent views on the same however the same has been clarified vide Finance Bill 2023 which clearly stated that TDS is applicable irrespective of whether the benefit or perquisite is in cash or in kind or partly in cash and partly in kind. 15. How the provider will deduct the TDS where the benefits or perquisites provided are in kind? Where the benefits or perquisites provided are in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the tax liability, then, the provider shall before releasing such benefits or perquisites ensure that the tax required to be deducted has been paid in respect of such benefits or perquisites. Option A (Advance Tax Challan): The provider may rely on a declaration along with an advance tax payment challan provided by the recipient confirming that the tax required to be deducted on such benefits or perquisites has been deposited. Challan details provided by recipient have to be reported in Form 26Q by the provider. Option B (Grossing-Up): Alternatively, the provider may also bear the burden of TDS by applying the principle of grossing up in such a situation. 16. Whether the provider is required to check benefits or perquisites are taxable in the hands of the recipient? No, the Provider is not required to check whether the benefits or perquisites are taxable in the hands of the recipient and under which head of income it is taxable. Provider shall deduct TDS irrespective of the fact that benefits or perquisites are taxable or not. 17. Whether TDS will be applicable to providing benefits or perquisites to an employee? Section 194R will be applicable only where benefits or perquisites are received in the course of business or exercise of the profession. Therefore, TDS under section 194R will not be applicable. However, TDS will be deducted under section 192 on benefits or perquisites provided to an employee. 18. What if benefits or perquisites are provided to customers who are end users? TDS under section 194R will not be applicable as Section 194R provides for deduction of TDS only if benefits or perquisites arise from carrying on business or exercise of the profession. Since, end users are purchasing the product for their personal consumption and not for any business purpose, therefore in our view any benefits or perquisites received in lieu of that will not be covered under the purview of section 194R. 19. Benefits or Perquisites received are in the form of capital assets. Is this section applicable? Yes, CBDT vide Circular No. 12 of 2022 dated June 16, 2022 has clarified that this section is applicable even if Benefits or Perquisites received are in the form of capital assets. 20. How is the valuation of benefits or perquisites carried out? Section 194R is silent on valuation. However, CBDT vide Circular No. 12 of 2022 dated June 16, 2022 provides for the valuation of benefits of perquisites. GST will not be included for the purpose of valuation. Valuation will be based on fair market value (FMV) except in the following cases: If the provider has purchased benefits or perquisites, then purchase price shall be the value of benefits or perquisites. If the provider manufactures them, then the price it charges to its customers. 21. What is the meaning of ‘Fair Market Value’ (FMV) for the purpose of Section 194R? Section 194R and Circular No. 12/2022 issued by CBDT have not defined FMV. It is defined under section 2(22B) of the Income-tax Act, 1961. In short, the FMV of a Capital Asset is: The price that a capital asset will fetch on sale in the open market. If it is not feasible to determine FMV from the above mentioned method, it will be determined with the rules made under Income-tax Act, 1961. * To determine FMV of items other than capital assets, there is no defined procedure under Income-tax Act, 1961. 22. Whether sales discount, cash discount or rebates allowed to customers are benefits or perquisites? No, it is clarified that sales discount, cash discount or rebates from listed retail prices allowed to customers are not benefits or perquisites since the cost of free items sold is already built in the cost of the sold article for which the price is charged. There are schemes like Buy 1 and Get 1 Free which are also not covered as benefits or perquisites. Additional free items of the same item which is sold will be treated as a discount. 23. Whether free samples are benefits or perquisites? Yes, free samples provided are covered benefits or perquisites. 24. What are the examples of benefits or perquisites liable for the deduction of TDS? (i) Incentives in the form of cash or kind such as car, TV, computer, gold, mobile phones etc. (ii) Sponsorship of a trip for the recipient and his/her relative upon achieving the target. (iii) Free tickets for an event. 25. What if benefits or perquisites are provided to an entity and used by the owner, employees or directors of the recipient entity? Sometimes, the benefits or perquisites are provided to an entity which are used by the owner, employees or director of the recipient entity, in their individual capacity who may not be carrying on any business or profession. In such cases, the provider shall deduct TDS in the name of the entity. 26. Where the products are given to social media influencers for advertisement, will it amount to benefits or perquisites? Where the products are given to social media influencers for advertisement and the said product is returned by him/her after rendering the services, then it will not amount to benefit or perquisites. But if the product is retained after rendering services, it will amount to benefit or perquisites and TDS under section 194R will be applicable. 27. Whether free samples of medicines provided to doctors is in the ambit of section 194R? Where free samples are provided to doctors, the following three scenarios apply: Doctor employed in hospital: Pharma company will deduct TDS in the name of the hospital under section 194R; further, the hospital will deduct TDS of the doctor under section 192. Doctor consultant in hospital: Pharma company will deduct TDS in the name of the hospital under section 194R; further, the hospital will deduct TDS of the doctor under section 194R. Doctor runs own clinic: Pharma company will deduct TDS directly in the name of the doctor under section 194R. 28. Where gifts are given to brand ambassadors, will they come under the ambit of section 194R? Gifts received by brand ambassadors are received by him/her in the course of the exercise of his/her profession and are taxable under section 28(iv). TDS will be deducted under section 194R. 29. Whether reimbursement of out-of-pocket expenses falls within the purview of section 194R? There are two distinct scenarios for reimbursement of out-of-pocket expenses: Invoice in name of service provider: Where the service provider receives the invoice in his name and payment is done by the recipient directly or reimbursed, then such reimbursement will be considered as benefits or perquisites and TDS will be deducted under section 194R. Invoice in name of service receiver (Pure Agent): Where the invoice is in the name of the service receiver and he has reimbursed the same to the service provider (in case service provider has made the payment), the reimbursement made by the service recipient will not be considered as benefit/perquisite. 30. Whether expenditure incurred by an entity on dealer or customer conference falls within the purview of section 194R? CBDT vide Circular No. 12 of 2022 dated June 16, 2022 has clarified that expenditure incurred by an entity on conferences would be considered as benefits or perquisites only if the conference is arranged for selected customers or dealers. Always Treated as Benefits/Perquisites: Expenses incurred on leisure trips even if incidental to the conference. Expenses incurred for family members accompanying the person attending the conference. Expenditure on prior stay and overstay. 31. Whether non-monetary benefits given to a partner fall within the purview of section 194R? In the case of Perizad Zorabian Irani v. PCIT [2022], Bombay High Court has held that income earned from a partnership firm as a working partner cannot be said to be from carrying on the business. Hence, it is clear that the partner is not engaged in business; only the firm is engaged in business. Therefore, TDS under this section is not applicable to benefits given to the partner. * However, in the case of professional firms, partners are always having a certificate from a recognised professional body; in our view, it is advisable to deduct TDS under section 194R. 32. What are the challenges that India Inc. will face in the practical implementation of this section? Accounting & Inventory Overhead: Earlier, industries providing gifts, free samples or incentives recorded all expenses under the single heading of business promotion expenses. Under Section 194R, the provider must maintain detailed records of every recipient for tax deduction purposes and maintain complete inventories of receipt and distribution of goods. Operational Gridlock in Kind Benefits: Where benefits/perquisites are provided in kind, the recipient must pay tax as advance tax and provide a copy of the challan and declaration to the provider. It is practically not feasible to obtain challans and declarations from all recipients. Furthermore, uncertainty persists regarding the tax treatment where the recipient has carried-forward business losses or is an un-assessed loss-making entity. 33. What are the changes proposed in Finance Bill 2023? The Bill proposes to clarify by way of insertion of an Explanation to Section 194R to provide that TDS provisions will be applicable irrespective of whether benefit or perquisite is in cash or in kind or partly in cash and partly in kind. 34. Is there any penalty introduced under the Income Tax Act for non-deposition of TDS to be paid by the provider of benefit or perquisite? The Bill proposes to amend Section 271C by inserting a new sub-clause under sub-section (1)(b) to enable penalty on the provider of benefit or perquisite in case he fails to pay TDS where he is required to pay in case cash is not sufficient to meet the liability of TDS as provided in the first proviso of Section 194R(1). Conclusion: Balancing Transparency with Operational Feasibility In a nutshell, it appears that section 194R has both pros and cons. On the pros side, Section 194R will bring transparency in the tax eco-system wherein the person providing benefits or perquisites will deduct TDS and file the TDS return which will bring more and more people under the tax net as the tax so deducted will reflect in 26AS of the recipient. Section 194R will curb the non-disclosure of benefits or perquisites income arising in the course of business or profession. On the cons side, this section will create a huge burden on entities from an accounting and taxation point of view. Moreover, there are numerous questions which are still not answered, though the department has made an attempt to answer some questions by way of a circular which was published on June 16, 2022 still a lot is yet to be answered. “In our view, the government should come up with an exhaustive definition of benefits or perquisites so that concept of taxing benefits or perquisites arising from business or profession will become practically feasible and is beneficial for both tax payer as well as exchequer.”

TAXATION The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 45–49 (Journal pp. 873–877) The Saga of Reassessment SA CA. Shubham Agarwal Author is member of the Institute • Contact: shubhamvimal473@gmail.com / eboard@icai.in The Apex Court in its recent judgment of Union of India vs Ashish Agarwal overruled the order of various High Courts in setting aside the reassessment notice issued u/s. 148 after 01.04.2021. This order will decide the fate of approximately 90,000 reassessment notices issued after 01.04.2021 out of which about 9,000 notices were subject to litigation before various High Courts. The Apex Court held that revenue cannot be made remediless, and the object and purpose of reassessment cannot be defeated. It was held that it was a bonafide mistake on the part of revenue to issue the impugned notices under the unamended law. Therefore, High Courts instead of quashing the impugned notices ought to pass the order constructing them as notices issued under the amended law. This also allows the revenue to proceed with the reassessment proceedings as per the substituted law. 1 Introduction: The “Brahmastra” of Revenue and Historic Friction Reassessment Provisions (Sec. 147 to 153 of IT Act 1961) give extensive power to revenue to tax any income chargeable to tax which has escaped assessment. Thus, it was like a Brahmastra with revenue to tax the escaped income. However, reassessment proceedings were always subject to litigation, since the very inception and there is a plethora of litigation pending at various appellate forums. Key Drivers of Reassessment Litigation Under Pre-Amended Law: i. No valid reason to believe. ii. No tangible information/material in possession of revenue to show that income chargeable to tax has escaped assessment. iii. Change in opinion of the assessing officer. iv. No inquiry is conducted by the Assessing Officer before initiation of reassessment proceedings. v. Mandatory procedure as laid down by the Apex Court in the case of GKN Driveshafts was not being followed. 2 Twist to Reassessment: Paradigm Shift Under Finance Act 2021 Vide Finance Act 2021, Parliament made radical and reformative changes in the reassessment procedure and substituted sections 147 to 153 of the Act in order to simplify administration, ease compliance, and reduce litigation. Salient provisions of the substituted provisions are as follows: a. Procedure to be Followed: GKN Driveshafts vs. Newly Inserted Section 148A Under the pre-amended law: The judgment of the Apex Court in the case of GKN Driveshafts (India) Ltd v. ITO (259 ITR 19 / 1 SCC 72) provided detailed guidance as to the procedure to be followed for reassessment viz., providing copy of reasons recorded, raising of objections against the reasons recorded by an assessee, and passing a speaking order to dispose of the objections by the assessing officer. Under the amended law: The procedure as given u/s 148A (newly added section) must be followed before issuing any notice u/s 148: Assessing Officer shall conduct an inquiry after obtaining necessary prior approval about information available suggesting income has escaped assessment. Provide an opportunity of being heard to the assessee by issuing a show-cause notice u/s 148A(b) as to why notice u/s 148 should not be issued on the basis of available information and results of inquiry. Pass an order u/s 148A(d) after necessary approvals and considering the submissions of the assessee deciding whether it is a fit case for issuance of notice u/s 148. Notice issued u/s 148 shall be accompanied (if required) by the copy of the order passed u/s 148A. b. Time Period for Issuance of Notice: Unamended vs. Amended Law Unamended Law Amended Law (Finance Act 2021) Four years from the end of relevant Assessment Year. Three years from the end of relevant assessment year. Six years from the end of relevant assessment year where the income escaping assessment exceeds ₹ 1 lakh. Ten years from the end of relevant assessment year where: Income is represented in the form of an asset; Amount of Income escaped is ₹ 50 lakhs or more; Assessing Officer is in possession of books, documents or other evidence. Sixteen years from the end of relevant assessment year where income in relation to any asset located outside India has escaped assessment. Meaning of Asset: Immovable Property being land and buildings, shares and securities, loans and advances, and deposits in Bank Account. c. Information with Assessing Officer vs. “Reasons to Believe” Under the previous law: Assessing Officer could proceed to reassessment proceedings if he had “reasons to believe” that any income chargeable to tax had escaped assessment. The phrase “reasons to believe” was constantly subject to litigation; High Courts repeatedly held that there must be existence of tangible material to safeguard against arbitrary exercise of power (e.g., Aventis Pharma Ltd vs ACIT [323 ITR 570 Bom HC]). Under the amended law: There is no requirement of subjective “reasons to believe”. The sole requirement is that the Assessing Officer must have information in his possession suggesting that income chargeable to tax has escaped assessment, followed by strict adherence to the procedure laid down u/s 148A. 3 Why Dispute? The Intersection of TOLA Extensions and Finance Act 2021 In March 2020, India witnessed the outbreak of the Covid-19 pandemic followed by nationwide lockdowns, making statutory compliance difficult for both citizens and the government. Government of India enacted the Taxation and Other Laws (Relaxation of certain Provisions) Ordinance 2020 (TOLA) and issued notifications extending time limits under various statutes. In exercise of powers under TOLA, the revenue extended the time limit for issuance of notice u/s 148 (original deadlines 31.03.2020 and 31.03.2021) up to 30.06.2021. Simultaneously, Parliament amended the law of reassessment vide Finance Act 2021, applicable from 01.04.2021. The Controversial CBDT Notification of 27.04.2021: Parliament/CBDT issued a notification on 27.04.2021 containing an Explanation stating that provisions of sections 148, 149 and 150 as they stood as on 31.03.2021 before the commencement of Finance Act 2021 (unamended law) shall apply to proceedings initiated under the said notification. In exercise of this power, revenue issued approximately 90,000 reassessment notices u/s 148 between 01.04.2021 and 30.06.2021 under the old unamended procedure. The Core Question of Law: “Whether the Substituted Procedure of reassessment is required to be followed by revenue in respect of notices issued after 01.04.2021 within the extended time limit?” Example: For Assessment Year 2013-14, the time limit for issuance of notice u/s 148 (assuming escaped income > ₹ 1 lakh) was 31.03.2020. TOLA extended it to 30.06.2021. The dispute was: which procedure must be applied—the earlier law or the amended Section 148A procedure? Contentions of Assessees Across 9,000 High Court Writ Petitions: a. Substituted Law Governs Post 01.04.2021: Finance Act 2021 took effect on 01.04.2021, and reassessments initiated after that date must strictly adhere to the amended provisions. b. Mandatory Section 148A Inquiry: Assessing Officers ought to have followed the new procedure: conducting inquiry, providing show cause, and passing speaking orders u/s 148A. c. Ultra Vires Delegation: The Relaxation Act (TOLA) conferred specific and limited powers to extend compliance time limits; it never delegated power to defer statutory provisions or resurrect repealed procedures. d. Subordinate Legislation Subordinate to Parliament: Executive notifications cannot override Parliamentary legislation (Finance Act 2021). Hence, all such notices are illegal, bad in law, and liable to be quashed. 4 Judicial Split: Delhi High Court vs. Chhattisgarh High Court Delhi High Court: Mon Mohan Kohli vs ACIT [WP(C) 6176/2021] Ruled decisively in favour of the assessee and quashed the reassessment notices. Key holdings: Explanation to notification is ultra vires TOLA and Finance Act 2021. Section 3(1) of TOLA extends compliance dates; it does not authorize deferring newly enacted statutory provisions. Revenue cannot invoke Covid-19: Parliament was fully conscious of the pandemic when enacting Finance Act 2021. Executive cannot undermine parliamentary supremacy. Similar rulings delivered by Bombay, Calcutta, Rajasthan, and Madras High Courts. Chhattisgarh High Court: Palak Khatuja vs UOI [438 ITR 622] Took a conflicting view, ruling in favour of the revenue and upholding the reassessment notices: Covid-19 lockdowns justified granting relief to citizens and preserving departmental rights. The individual identity of Section 148 prevailing prior to amendment was insulated and saved till 30.06.2021. Delegation to Ministry of Finance ensured flexibility and administrative efficiency. Dismissed the writ petitions and allowed reassessments to proceed. 5 The Apex Court: Balancing Stakeholders Under Article 142 Union of India vs Ashish Agarwal [Civil Appeal No. 3005 of 2022 / 444 ITR 1 (SC)] Supreme Court invoked plenary powers under Article 142 of the Constitution of India to deliver complete justice and balance revenue protection with taxpayers’ rights. Key Rulings of the Supreme Court: Statutory Safeguards: All procedural safeguards have been provided under the amended law (inquiry, prior approvals, show-cause opportunities, and reduced time limits of 3 years and 10 years). Remedial Nature: The substituted law is remedial in nature, enacted to protect taxpayers’ rights and public interest. New Law Applies Post-01.04.2021: High Courts rightly held that the benefit of newly substituted law must be made available for reassessments initiated after 01.04.2021. Public Revenue Hazard: However, outright quashing of 90,000 notices would result in complete non-assessment, severely harming public revenue. Revenue Cannot Be Made Remediless: The object and purpose of reassessment proceedings cannot be frustrated due to technicalities. Bonafide Mistake: It was a bonafide mistake on the part of the revenue in issuing notices under unamended law. Deemed Notice Under Section 148A: High Courts ought not to have quashed the notices, but rather construed them as show-cause notices issued under Section 148A(b). Procedural Roadmap: The Supreme Court formulated comprehensive transitional guidelines for revenue and assessees. Pan-India Operation: The verdict operates across India; all conflicting High Court orders stand modified in terms of this judgment. Way Forward: Step-by-Step Directions Ordered by the Apex Court Step 1: Impugned notices u/s 148 deemed to be show-cause notices issued u/s 148A(b). Step 2: Assessing Officer shall, within 30 days of the Supreme Court order, provide the information and material relied upon to the assessee. Step 3: Requirement of conducting preliminary inquiry u/s 148A(a) with prior approval waived off as a one-time measure. Step 4: Assessee granted opportunity to respond; AO to pass a speaking order u/s 148A(d) deciding if it is a fit case for reassessment. Step 5: If fit, AO may thereafter issue notice u/s 148 under the amended law. Step 6: All statutory defenses under Section 149 and Finance Act 2021 continue to remain fully available to the assessee. CBDT Instruction No. 1/2022 (Dated 11.05.2022): Issued under Section 119 to operationalize the Supreme Court ruling. CBDT clarified that the Supreme Court order applies to ALL cases where reassessment notices were issued post-01.04.2021, whether challenged in court or not. Furthermore, CBDT emphasized that the time limit as per Section 149 as amended by Finance Act 2021 as on 01.04.2021 shall apply to determine whether reassessment notices can be issued or not. Conclusion: A New Chapter of Tax Litigation The series of amendments in reassessment law via Finance Act 2021 was introduced with the specific purpose of reducing litigation and doing away with the dual assessment regime for search and seizure. However, its intersection with pandemic-era TOLA extensions triggered nationwide legal battles. While the Supreme Court invoked Article 142 to strike an equitable balance, the ruling has itself unleashed a new chapter of conflicting interpretations, limitation disputes, and ongoing courtroom debates. Key Judicial & Administrative References: Order of Apex Court in Union of India vs Ashish Agarwal [Civil Appeal No. 3005 of 2022] / 444 ITR 1 / 286 Taxman 183 (SC). Order of Delhi High Court in Mon Mohan Kohli vs ACIT [WP(C) 6176/2021]. Order of Chhattisgarh High Court in Palak Khatuja vs UOI [WP(T) 149 of 2021] / 438 ITR 622 / 284 Taxman 27. CBDT Instruction No. 1 of 2022 dated 11.05.2022 issued u/s 119 of the Income-tax Act, 1961.

INTERNATIONAL TAXATION The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 50–55 (Journal pp. 878–883) BEPS 2.0 – Two Pillar Inclusive Framework VR CA. Vivek Raju P Author is member of the Institute • Contact: vivekrajup@yahoo.co.in / eboard@icai.in “The advent of internet and globalisation enabled large Multi-National Companies (MNCs) to devise innovative structures for minimising tax liabilities. Currently all the functions from starting a business to selling products/services and remittances, are digitally managed without any need for physical presence. Thus, it is imperative that the current international tax laws be reformed to address how the digital economy is taxed.” Nations across the globe worked on the inclusive framework. On 12 October 2020, OECD issued a blueprint on the two-pillar approach to address the current gaps. In July 2021 approximately 130 nations signified their consent to the approach. Though a lot of work is still pending on how these pillars can be made operational, this article explains the two-pillar inclusive framework approach and its far-reaching consequences for developing nations. 1 Historical Context & The Two-Pillar Mandate The current international tax framework is built over rules conceptualised nearly a hundred years ago.1 The business models have evolved over time, and with the advent of internet and consequent digitalisation, avenues have opened up for large Multi-National Enterprises (MNEs) to devise innovative structures for minimising tax liabilities. 1. Historical Note: It has been nearly 100 years since The League of Nations (predecessor organization to the United Nations) worked on and published a draft model for international tax treaties, which formed the bedrock for both the OECD and US model tax conventions. Today all functions—from starting a business to selling products/services and repatriating sales proceeds—are digitally managed without any need for physical presence. In 2015, the OECD issued its first set of Base Erosion and Profit Shifting (BEPS) reports, notably Action Plan 1: “Addressing the Tax Challenges of the Digital Economy”. On 12 October 2020, OECD released the two-pillar blueprint, and by July 2021, approximately 130 countries joined the consensus to ensure fair taxing rights. Pillar One: Re-allocation of Taxing Rights Applies to roughly the top 100 biggest and most profitable MNEs (revenue > €20bn, PBT > 10%). It re-allocates a share of their non-routine profits to market jurisdictions where goods/services are consumed, replacing traditional physical PE requirements with an economic nexus. Pillar Two: Global Minimum Tax (15% GMT) Creates a level playing field by establishing a Global Minimum Tax rate of 15% for MNE groups with annual revenues of at least €750 million. Operates via the Income Inclusion Rule (IIR), Untaxed Payments Rule (UTPR), and Subject to Tax Rule (STTR). 2 Pillar One Architecture: Amount A & Amount B Mechanics Pillar One addresses the tax challenges arising from extremely large business groups capable of creating complex multinational structures to avoid or defer taxes under traditional source/residence rules. It introduces two foundational concepts: Amount A: A formulaic share of residual/non-routine profits allocated to market jurisdictions where revenues are generated, irrespective of whether the MNE has a physical presence or Permanent Establishment (PE). Amount B: A standardized safe-harbour remuneration model for related-party distributors performing “Baseline Marketing and Distribution Activities” (BMDA), benchmarked against arm’s length principles. Fundamental Principles Underpinning Pillar One: Group-Level Taxable Profits: Taxable profits are determined at a consolidated MNE group level rather than separate entity-by-entity accounting, eliminating internal transfer pricing distortions. Source State Taxing Rights Without PE: Direct allocation of taxing rights to market states irrespective of physical PE. End-Customer Nexus: Sourcing is tied to the location of the end-consumer rather than the payer entity. Formulaic Apportionment: Amount A uses formulaic profit-splitting, while other income relies on traditional Transfer Pricing (TP). Inbuilt Dispute Prevention: Mandatory binding dispute resolution mechanism (with limited opt-out flexibility for developing countries strictly on TP and PE matters). 3 Determination of Amount A: Five-Step Allocation Framework The 5-Step Process to Determine Amount A: Determine the size of the business based on the revenue threshold. Apply nexus and revenue sourcing rules to identify eligible market countries. Determine the consolidated adjusted Profit Before Tax (PBT). Allocate Amount A profits to eligible market jurisdictions via formula. Eliminate double taxation across participating states. Activity Test Business must fall under Automated Digital Services (ADS) (online ads, social media, search engines, OTT content) or Customer Facing Business (CFB). Extractive industries and regulated financial services are excluded. Dual Threshold Test MNE must satisfy: (i) Gross revenues > €20 billion (to be reduced to €10bn after 7 years around 2030), AND (ii) Profitability > 10% (PBT/Revenue) in at least 2 of 4 prior periods and on average across the 4 periods. Quantitative Nexus Thresholds: Jurisdictions with GDP > €40 billion: Revenue from jurisdiction must exceed €1 million per annum. Jurisdictions with GDP ≤ €40 billion: Revenue from jurisdiction must exceed €250,000 per annum. Sourcing Rules: Revenue is sourced to the end-market jurisdiction where goods or services are ultimately consumed. Allocation keys apply during a 3-year transitional phase, alongside a back-stop rule to ensure no revenue remains unallocated. Numerical Illustration: Amount A Profit Split Formula Step 1: Determine PBT ratio. Normal / Routine Profit is pegged at 10% of revenue (retained exclusively by the residence jurisdiction). Step 2: Residual / Non-Routine Profit is any profit margin exceeding 10%. Step 3: 25% of the residual profit represents “Amount A” to be allocated among qualifying market jurisdictions based on relative local revenue. Particulars USD Bn % Remarks Revenue 40 - Revenue exceeds EUR 20bn (USD 22bn) Profit before Tax (PBT) (A) 9 23% Profitability exceeds 10% Split of Profits: Routine Profits % (B) 4 10% Exclusively for residence jurisdiction Non Routine Profits % (C) 5 13% Base for determining Amount A (25% of $5B = $1.25B allocable) Loss Carry-Forward: Unabsorbed losses arising after implementation and during the 3 years preceding implementation can be carried forward for 10 years to offset future PBT. 4 Amount B Benchmarking & Mandatory Dispute Resolution Amount B: Baseline Marketing & Distribution Activities (BMDA) Amount B seeks to standardize and simplify transfer pricing rules for routine distribution entities. Key features: Methodology: The Transactional Net Margin Method (TNMM) is designated as the most appropriate TP method, using net profit indicators like Return on Sales adjusted for geography and industry. Preservation of Existing Rulings: Amount B does not override prior Advance Pricing Agreements (APAs) or MAP settlements. Unresolved Consensus: No consensus yet exists regarding sales agents or commissionaires whose functional profiles differ from baseline marketing and distribution. Capacity Building: Substantially aids developing economies by reducing complex transfer pricing audits and litigation. Mandatory Dispute Prevention and Resolution Mechanism: Pillar One mandates an early certainty framework. The lead tax administration (ultimate parent jurisdiction) forms a Review Panel of 6 to 8 interested tax administrations. If consensus fails, a second Determination Panel is constituted, whose decision is binding on all participating states. * Limited opt-out flexibility is available to certain developing countries solely for TP and PE disputes, but NOT for Amount A issues. 5 Critical Strategic Considerations & Reservations for India 1. Forfeiture of Equalisation Levy (₹ 4,000 Crores): India currently collects approximately ₹ 4,000 crores annually from its unilateral 2% Equalisation Levy on e-commerce operators. Under the multilateral convention, all unilateral digital taxes must be withdrawn, while revenue accruals under Pillar One remain uncertain and subject to volatility. 2. The Amazon Paradox & 10% Profit Margin Filter: The 10% global profit threshold is unreasonably high. For example, Amazon—with a market capitalization of $1.7 trillion—failed to meet the 10% profitability test for FY 2021 on a consolidated basis (retail low-margin drag), completely escaping Amount A despite reaping enormous profits from its Indian user base. In years where it exceeds 10% (e.g. 19.6% PBT), only 2.4% of total revenue is pooled across all global market states. 3. Dissent of Developing Countries: Developing economies including Nigeria, Kenya, Pakistan, and Sri Lanka withdrew from the Inclusive Framework citing inequitable profit distribution that disproportionately favours residence states over consumption nations. 4. 7-Year Review Period Is Unreasonably Protracted: Waiting 7 years (until 2030) to lower the revenue threshold from €20bn to €10bn is far too distant. Emerging economies like India must negotiate to reduce this review window to 3 years to prevent base erosion. 5. Consolidated Accounting Dilution Risk: Because Amount A is based on global consolidated financial statements, losses suffered by an MNE in unsuccessful business ventures or unprofitable foreign markets dilute global PBT, reducing India’s tax share even when Indian operations are highly profitable. Next Steps, Tentative Timelines & Conclusion November 2022 Text of MLC & Explanatory Statement for Amount A First Half 2023 Formal Signatures to Multilateral Convention (MLC) 2024 Expected Entry into Force following Domestic Ratifications Conclusion: While the initiative of bringing certainty to tax challenges in the digital economy is a commendable move, the complexities involved and the determination and allocation of profits to member jurisdictions appear questionable. Given that unilateral measures like Equalisation Levy must be surrendered, it is only fair that India and fellow developing nations ensure robust safeguards so that there is no net loss to the national exchequer.

BANKING The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 56–60 (Journal pp. 884–888) Critical Success Factors of Risk Management in Banks: An Analysis in light of best Risk Management Practices DC/AM Dr. D. D. Chaturvedi and Dr. Arun Mittal Authors are Academicians • Contact: eboard@icai.in The banking sector is exposed to an array of risks; therefore lessening these risks is a serious concern for the banking industry. The banking sector needs a properly laid-out risk management strategy for achieving its organisational goals while eradicating the risk factors. Successful risk management is possible when a well-drafted plan is implemented. In the era of competitiveness, Financial Institutions (FIs) also want to play aggressively to generate wealth for their stakeholders. Hence, to maintain higher earnings they must expose themselves to higher risks. At the same time, safety, solvency and financial soundness of the banks can never be compromised. As a result, effective risk management is the only way out which can help banks to earn efficiently, and minimises various types of risks that they are exposed to. There is a wide variety of risk management services that the banking industry in India has been following. 1 Concept of Risk, Risk Management & Core Risk Typologies The general definition of risk states that any organisation could face undesirable occurrences based on the actions taken with respect to the business processes. In the banking sector, it’s believed if the firm is taking more risks than expected, it may lead itself into difficult and undesirable situations. Risk management is an umbrella term that imbibes a wide variety of strategies that banks implement to minimize their risk. The basic function of banks is to accept deposits and give loans to those individuals and businesses who need them. Hence, the most important strategy for minimizing risk for banks is to choose an appropriate borrower. “Risk management is an umbrella term that imbibes a wide variety of strategies that banks implement to minimize their risk.” • Credit Risk One of the most common risks. Hefty loans turning into Non-Performing Assets (NPAs), delayed payments, or deterioration in investment quality push banks towards insolvency. Banks must rigorously evaluate customer creditworthiness before sanctioning facilities. • Liquidity Risk The inability of financial institutions to meet their debt and depositor obligations. Because banks operate primarily on borrowed funds, they must hold high-quality liquid assets readily convertible into cash to navigate recessions without capital depletion. • Market Risk Exposure arising from stock market deviations affecting equity portfolios and trading books. Connects instability and liquidity. Inability to properly monitor and adjust the market portfolio is treated as an operational risk. • Interest Rate Risk Fluctuations impacting mismatched asset and liability maturity profiles. Rising rates allow investment in high-yielding funds, while falling rates expand loan demand. Unhedged maturity transformations can cause insolvency. • Country Risk & Sovereign Risk Risk of borrower default across foreign borders. Comprises: (i) Sovereign Risk—default by a foreign sovereign government on foreign currency commitments, and (ii) foreign government interventions impairing local firms’ ability to transfer funds. • Solvency Risk Occurs when accumulated losses exceed available capital reserves, compromising bank survival. Capital serves as the ultimate buffer of last resort; risk-weighted assets must be strictly backed by adequate capital funds. 2 Proactive Risk Management & Contemporary Best Practices Every business has the possibility of facing risky situations. The factors which contribute to risky circumstances can be closely monitored and minimized with the help of strategic moves that prevent cost overruns. The process of risk management entails determining root causes, evaluating risk factors, and responding through the best course of action. “The stability of a bank is highly necessary and if a bank does not hold enough capital, it might be at risk of losing its stability by falling prey to solvency risk situations.” Key Best Practices Emerging in Modern Banking: Mandatory formulation and periodic calibration of Board-approved Risk-Appetite Statements. Continuous evaluation and verification of underlying credit information sources. Consistent validation and recalibration of scorecard and credit-rating models. Optimization of available customer behavioral data for early warning signals. Deployment of Artificial Intelligence (AI) and Machine Learning (ML) algorithms to detect transactional frauds and combat financial crime. 3 Critical Success Factors (CSFs) for Sustainable Risk Culture The implementation of Critical Success Factors (CSF) supports organizational objectives and equips banks to tackle both short-term shocks and long-term vulnerabilities. Muller and Ralf (2009) highlighted seven indispensable CSFs for financial institutions: 1. Top Management Support: Uncompromising commitment from executive leadership. 2. Communication: Transparent multi-directional risk reporting. 3. Culture: Organization-wide ethical and risk-aware mindset. 4. Information Tech (IT): Robust automated CBS and risk-analytics platforms. 5. Organisation Structure: Independent risk governance units with clear hierarchy. 6. Training: Continuous upskilling of human talent on evolving threats. 7. Trust: Mutual confidence among teams, regulators, and depositors. Implementation Steps: Top management must define the risk appetite in clear, unambiguous terms; map accountabilities for risk-adjusted decisions; reinforce behavior via incentive/reward structures; integrate administrative checks with risk architecture; and continually invest in employee skill sets. 4 Comprehensive Risk Management Model & Empirical Case Studies Figure 1: Comprehensive Risk Management Model for Banking Industry (Source: Authors) 1. Guidance Pillar Banking Regulations • Capital Adequacy Norms • Basel III Norms • RBI Policy Directions 2. Risk Management Premise Identification • Observation • Real-time Monitoring 3. Types of Risks Evaluated Credit Risk • Market Risk • Liquidity Risk • Operational Risk • Solvency Risk 4. Action Continuum Measure • Assess • Manage & Mitigate 5. Continuous Improvement Cycle Review • Analysis • Dynamic Strategy Revision Case 1: State Bank of India (SBI) — Pandemic Resilience During the Covid-19 pandemic, SBI minimized operational risk by securing uninterrupted services via 100% ATM uptime, robust internet banking, mobile banking, and the flagship YONO platform (SBI Annual Report 2019-20). Case 2: Bank of Baroda (BoB) — Trading Book VaR Bank of Baroda proactively monitors market and interest rate risks on a daily basis by computing Value at Risk (VaR) across its trading book, ensuring agile realignment of portfolio durations (BoB Annual Report 2020-21). 5 Evolution of Basel Accords (Basel 1 to Basel 3) & ICAAP The Basel norms have been instrumental in establishing international standards for banking stability: Basel 1: Focused on establishing minimum capital adequacy ratios pegged to credit risk-weighted assets. Basel 2: Introduced the Three-Pillar framework, prominently featuring supervisory review and ICAAP (Internal Capital Adequacy Assessment Process) under Pillar 2. Basel 3: Strengthened capital quality, mandated capital conservation and countercyclical buffers, instituted liquidity ratios (LCR & NSFR), and enhanced stress-testing standards under BCBS guidance (Moody’s Analytics, 2019). Capital Alone Insufficient: Capital by itself does not guarantee a bank’s financial security. Regulations must ensure that the institutional culture, internal governance, and best risk management practices are actively operationalized. Conclusion: Building an Agile and Sustainable Risk Architecture Risk management in banking is a continuous, iterative cycle. Accomplishing an effective risk-appetite culture requires balancing commercial wealth generation with depositors’ safety and long-term solvency. By leveraging CSFs, avoiding uncalculated threats, accepting tolerable exposures, and deploying modern predictive technologies, Indian banks can secure sustained institutional resilience in volatile economic environments. References: Annual Report of State Bank of India, 2019-20. Annual Report of Bank of Baroda, 2020-21. Moody’s Analytics: Essential Guides Serving Financial Markets, Regulation Guide: An Introduction, 2019. Muller, Ralf (2009): Critical Success Factors for Effective Risk Management Procedures in Financial Industries: A Study from the Perspectives of the Financial Institutions in Thailand, Master Thesis, Umeå School of Business, Umeå University.

INTERNATIONAL TRADE The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 62–66 (Journal pp. 890–894) Framework for Export Promotion Capital Goods- EPCG NA CA. Neeraj Agarwal Author is member of the Institute • Contact: agarwalneeraj22@gmail.com / eboard@icai.in Core Statutory Purpose & Negative List Regulation Govt of India, to increase export of services/goods from India to foreign countries, has started this scheme in which the custom duty to be paid on import of certain capital goods shall be charged at zero rate if the importer of such goods manages to fulfil certain export obligations. Directorate General of Foreign Trade (DGFT) vide Public Notice No. 47/2015-2020 issued on 6th December 2017 have put certain capital goods on the negative list i.e., these goods cannot be imported under the EPCG scheme. Examples being construction materials, airport ground handling equipment etc. The importer of capital goods shall have to commit to a revenue generation in foreign currency at least 6 times of the Duty saved within a span of 6 years from the issue of the EPCG license. In case license holders are not able to fulfil their obligations (both Block Obligation (BO) or Export Obligation (EO)) then they have the option of applying of extension also. ❖ EPCG Scheme End-to-End Operational Lifecycle The entire procedural flow from authorization, duty exemption, block monitoring, extension, to redemption or adjudication is illustrated in the structural diagram below: Apply for EPCG scheme ↓ Authorisation given Import Good on zero duty Import not done:Authorisation fails after 18 months / validity window ↓ Fulfill Block Obligation (BO) [50% of EO within 4 Years] ✔ YES Inform local RA with requisite documents Fulfill Export Obligation (EO) [100% within 6 Years] EO Met: Submit requisite documents with RA & close the license (Redemption) EO Not Met: Apply for EO extension ✖ NO Apply for BO extension (Pay composite fees) Complete BO and EO together by 6th year Post Extension Outcomes: EO fulfilled post extension:Apply for formal closure of license EO not fulfilled post extension: • Pay Duty with 15% interest p.a. • OR Apply to EPCG Committee (PRC) Authorisation not given ↓ Pay Standard Import Duty at Customs 1. What is EPCG? Concept & Regulatory Aegis As the name suggests, it’s a scheme to promote export, but what is the meaning of the next two words i.e. Capital Goods in relation to Export promotion? Well, the Government of India, to increase export of services and goods from India to foreign countries, has started this scheme in which the custom duty to be paid on import of certain capital goods shall be waived off if the importer of such goods manages to fulfil certain export obligations. The scheme is formulated and maintained by the Directorate General of Foreign Trade (DGFT) under the aegis of the Union Ministry of Commerce & Industry. Statutory Validity Period for Import: EPCG authorization shall be valid for import for 24 months from the date of issue of authorization i.e., post the authorisation to import the goods under EPCG scheme, the applicant needs to purchase and import the same within 24 months of the authorisation date. 2. How Does the Scheme Work? Export Obligation & Block Obligation The importer of capital goods shall have to commit to a revenue generation in foreign currency at least 6 times of the Duty saved within a span of 6 years from the issue of the EPCG license. This 6 times obligation is called Export Obligation (EO). The importer also has to at least satisfy 50 percent of the EO by the end of 4th year. This first period of 4 years is designated as the first block and hence this 50 percent obligation is called Block Obligation (BO). The remaining two years are called the second block. First Block (End of Year 4): The importer at the end of first block needs to submit necessary documents to the local Regional Authority (RA) to support his claim of fulfilling the BO (at least 50% of total EO). Second Block (End of Year 6): Similarly, he has to submit necessary documentation for the complete 100% fulfilment of EO at the end of 6 years. ★ Special Concession for North Eastern States & UT of Jammu and Kashmir The Central Government has in recent years provided many benefits to the North Eastern regions/states of India to promote and aid their economic development. In line with that vision, the requirement for fulfilment of specific EO has been reduced to 25 percent for all North Eastern States. The exact same benefit has also been made applicable for all eligible units situated in the Union Territory of Jammu and Kashmir. 3. Pre-Requisites and Process for Applying EPCG The primary document requirement for applying for EPCG licenses is the holding of an Import Export Code (IEC) issued by the DGFT to the importer. After the issuance of the IEC to an importer, his digital profile is created on the DGFT portal through which he can submit applications for EPCG licenses. All submissions must be made via the official DGFT portal (https://www.dgft.gov.in) using the login credentials created during the IEC application. The application is examined and processed by the local Regional Authorities (RA). Key Document Checklist for E-Filing: • Permanent Account Number (PAN) Card: Self-certified copy • Digital Authentication: Digital Signature Certificate (DSC) or Aadhaar OTP • Import Export Code (IEC) • GST Registration Certificate • Registration cum Membership Certificate (RCMC) • Proforma Invoice of the capital goods to be imported • Company Brochure & operational profile • Chartered Accountant Certificate: Along with original copy for verification • Chartered Engineer Certificate: Along with original copy for verification Statutory Application E-Form: Submission of the formal application shall be executed online via E-Form Ayat Niryat Form 5B (ANF 5B). 4. Dual Economic Value: Benefits to Importers vs. Indian Government How the Scheme Benefits the Importer EPCG is a boon for businesses requiring heavy or large numbers of capital goods that are unavailable in the domestic market or more feasible to import from outside India (chiefly manufacturing industries, but also trading and service industries relying on heavy machinery) where a large volume of sales is targeted for export. Most businesses require capital goods at the inception of their lives—precisely when they are shortest of liquid funds and dependent on promoter capital infusions. Waiving customs duty preserves substantial cash, allowing it to be channeled immediately to meet vital working capital requirements. How the Scheme Benefits the Indian Government The Indian Government requires massive inflows of foreign currencies to finance critical national imports, such as crude oil and defence equipment. By offering complete customs duty waivers, the government leverages importers to generate 6 times the duty saved in foreign currency revenues, creating a powerful multiplier for foreign currency reserves. Furthermore, if an importer fails to meet the Export Obligation, the entire duty saved must be paid back with statutory penal interest. Therefore, the exchequer is fully safeguarded against loss of revenue. 5. Methods Through Which Foreign Income is Realised Under EPCG regulations, export obligations can only be satisfied through validly documented international payment inflows against exporter invoices. The 4 principal routes and their acceptability are: 1) Direct Bank Credit (Most Preferred Route) This is the most desired way to receive funds, as it entails obtaining Foreign Inward Remittance Certificates (FIRC) or Bank Realisation Certificates (BRC / E-BRC) and corresponding documentation directly from the banking channel. These provide ironclad verification to produce to the DGFT / RA during license closure. 2) Forex Credit Card (Common in Medical Tourism) Where foreign recipients are in India (e.g., international patients travelling to India for medical tourism) and swipe foreign credit cards at the entity’s terminal. While a direct Forex Realisation Certificate is not issued, entities can procure a specific certificate from their acquiring bank proving that an inward foreign exchange transaction occurred. This is accepted by DGFT / Local RA to approve the EO claim. 3) Payment via Cash / INR (Highly Discouraged / Complex) If foreign buyers pay in INR, documentation is required proving that the INR was officially converted through an Authorised Dealer (AD) before disbursement. Proving this to authorities is exceptionally difficult because ADs frequently claim benefits under other DGFT incentive licenses, and DGFT prohibits double benefit claims on the same transaction. Importers should avoid accepting direct cash under EPCG. 4) Transfers via Local Agents / Relatives / Acquaintances (Strictly Ineligible) Domestic receipts transferred through local agents or relatives must be strictly avoided. It is nearly impossible to substantiate a legitimate inward foreign exchange remittance against the commercial invoice, and such transactions will not be counted toward EO fulfilment. Strategic Recommendation: Full Fledged Money Changer (FFMC) License For units handling substantial volumes of walk-in foreign clients who prefer cash or local currency exchange (such as multispeciality hospitals treating international medical tourists), the business should secure an FFMC License from the Reserve Bank of India (RBI). An FFMC is authorized by the RBI to purchase foreign exchange from NRIs and foreign nationals in exchange for INR, and sell foreign currency for travel purposes to visitors abroad. Entities can obtain their own direct FFMC license or associate with an existing Authorised Dealer (AD) to facilitate verified foreign currency collection directly on-site. 6. EO & BO Extensions: Framework & Practical Illustrated Case Study Where authorization holders are unable to fulfill their Block Obligation or final Export Obligation within statutory periods, the Foreign Trade Policy provides formal relief mechanisms through extension applications. PRACTICAL CASE STUDY: MR. ANANT (LEATHER EXPORTER, SURAT, GUJARAT) Import Date: Sept 4, 2015 Machinery Value: ₹ 10 Crores Custom Duty Rate: 7.5% Duty Saved: ₹ 75 Lakhs Allotting Authority: RA Ahmedabad Primary Export Product: Leather Goods (Bangladesh, Vietnam) Phase 1: Block Obligation (BO) at End of Year 4 (Sept 3, 2019) Total EO = ₹ 75 Lakhs × 6 = ₹ 4.5 Crores. Statutory BO Due (50% of total EO) = ₹ 2.25 Crores by Sept 3, 2019. Actual foreign revenue generated = ₹ 1.5 Crores (Shortfall of ₹ 75 Lakhs in BO). Resolution: Mr. Anant applies for BO extension. Upon paying the composite fee of 2% on unfulfilled duty saved, RA Ahmedabad extends his BO timeline to the end of Year 6, allowing him to fulfill total BO and EO concurrently. Phase 2: Final EO Position in Sept 2021 (Year 6) & Covid-19 Disruption Due to pandemic disruptions, Mr. Anant generated cumulative forex revenue of ₹ 3.5 Crores against the required ₹ 4.5 Crores (Shortfall: ₹ 1.0 Crore). Mr. Anant has two options: Pay the entire duty saved (₹ 75 Lakhs) plus applicable interest; OR Apply for an Export Obligation (EO) Extension. Mr. Anant opts for Option 2 and prepares his submission. Mandatory Documents Submitted by Mr. Anant for EO Extension: Bill of Entry of the imported machinery Copy of original EPCG license issued Installation certificate issued by Chartered Engineer Composition Fee & Extension Options (Amended via Public Notice No. 3/2015-20 dt 13.04.2022) Mr. Anant can choose between a 1-year or 2-year extension. Under the amended composition fee framework, the applicant may elect either: Choice A: Monetary Fee Pay composition fee equal to 2% of proportionate duty saved amount on unfulfilled export obligation for each year of extension sought. Choice B: EO Enhancement Agree to an enhancement in export obligation to the extent of 10% of total export obligation imposed under authorization for each year of extension sought. This choice is selected directly within the online application form. Online payments are remitted via the Bharatkosh payment portal (Receipt Portal maintained by the Government of India). Timeline Limits & Late Fee Provisions: The request for extension in the EO period must be submitted to the RA within 6 months from the date of expiry of the original EO period. However, the RA may consider late extension requests received after 6 months but within 8 years of original EO expiry, subject to payment of an additional late fee of ₹ 10,000 (over and above the composite fees). Penalties for Final Non-Compliance If, even after the expiration of allowable EO extensions, the importer is unable to fulfill the required Export Obligation, the entire duty saved must be remitted back to customs authorities accompanied by mandatory penal interest of 15 percent per annum. This interest is chargeable retrospectively from the original date of duty deferral (the date of capital goods import). 7. Redemption of EPCG License (Closure / EODC) Post completion of the 6th year (or 7th/8th year if extensions were secured), the authorization holder must apply for formal redemption (closure) of the license. This involves providing the jurisdictional RA with comprehensive certified statements of foreign revenue earned during the license tenure. Fundamental Principle — Realised vs. Booked Revenue: The EPCG scheme operates strictly on revenue realised and not revenue booked. In the event of customer default, bad debts, or non-realisation of funds prior to license completion, such unrealized amounts cannot be counted towards EO discharge. The redemption application is submitted electronically via E-Form ANF-5B. Key statutory enclosures required for verification include: 1) Installation Certificate: Original certificate from a Chartered Engineer or official acknowledgment verifying that the imported capital goods were duly installed at the registered factory / premises. 2) Bill of Entry: Evidencing exact descriptions, serial numbers, and custom duty values of the capital goods imported. 3) Shipping Bills & E-BRCs: Complete copies of shipping bills mapped with electronic Bank Realisation Certificates (E-BRC) issued by authorized dealer banks confirming forex inflows from license issuance date. 4) Commercial Shipping Documents: Certified copies of export invoices, Bill of Lading (BL) / Airway Bills (AWB), and packing lists. 5) Corroborating Inward Records: Any additional bank advices, FIRCs, or statutory evidence proving realization of convertible foreign currency. When the Dealing Hand (DH) at the local RA is satisfied with all documentation, the authority formally issues the Export Obligation Discharge Certificate (EODC) and closes the license. 8. EPCG Policy Relaxation Committee (PRC / EPP) The EPCG Policy Relaxation Committee (PRC), also styled as Exemption from Policy/Procedures (EPP), is an empowered statutory body. In public interest, the DGFT may pass orders or grant exemptions, relaxations, or relief as deemed fit on grounds of genuine hardship and adverse impact on trade to any person or class of persons from any provision of the Foreign Trade Policy (FTP) or Handbooks of Procedure. The PRC is based at DGFT Headquarters (New Delhi) and advises the DGFT on specific individual hardship requests or matters of general public interest relating to Capital Goods and EPCG schemes. Application & Form Applications to the PRC are filed online via Form Ayat Niryat Form -2D (ANF-2D). If satisfied, the PRC passes an affirmative order directing the local RA to grant procedural relaxation. Infinite Reviews & Personal Hearing If aggrieved, applicants can file review applications without numerical limit (infinite times). Applicants may opt for a personal hearing to represent their case, though personal hearings are entirely optional. PRC Statutory Fee Schedule Fresh Application: ₹ 2,000 Review Application: ₹ 5,000 (payable per review filed) Facility of Policy Clubbing An applicant may also apply to the PRC for relaxation to enable clubbing of different licenses to fulfill composite EO targets. As per DGFT guidelines, policy clubbing refers to combining two or more EPCG authorisations issued to the same authorisation holder through a regularized institutional process. Conclusion: Strategic Role in India’s Export Architecture EPCG licenses represent one of the most beneficial instruments issued by the Government of India to promote exports and international trade competitiveness. It relieves capital constraints for emerging and modernizing enterprises while anchoring foreign exchange inflows. Substantial refinements and modernizations are expected as the government rolls out its long-awaited new Foreign Trade Policy (FTP). While the earlier FTP covered 2015–2020, its operational span was extended up to 31st March 2022 in light of Covid-19 disruptions and dynamic global trade developments.

INTEGRATED REPORTING The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 67–71 (Journal pp. 895–899) Non-financial Information -A Journey towards Integrated Reporting AG CA. Ashim Kumar Ghosh Author is member of the Institute • Contact: ashim742@yahoo.co.in / eboard@icai.in The Genesis of Integrated Reporting “Integrated Reporting is making of a wholesome report combining both financial information as well as non-financial information of a company. In other words, reporting of non-financial information along with financial information gives birth to the model of ‘Integrated Reporting’. Financial information is the data about the monetary transactions of a company that demonstrate the financial performance and financial position of a company. Financial statements generally include the Balance sheet or Statement of affairs, Statement of profit and loss or Income statement, and Cash flow statement. On the other hand, non-financial information is the data about some things which are generally not recorded in the books of account, or it is impossible to quantify them but is very much present in and around the company that exhibit the manner in which a company operates its business activities.” 1. What is Non-financial Information (NFI)? NFI speaks about other relationship issues in qualitative terms regarding how the company is running and will run. A company’s activities have significant impact on the life of the general public of the present as well as future generations. NFI is often defined as Environmental, Social, and Governance (ESG) information, referring to the three central components in measuring the sustainability and societal impact of a company. It is referred to as the information about society and the environment and is considered by stakeholders relevant to evaluating the company’s long-term ability to survive and succeed. Key Qualitative Facets of Non-financial Disclosures: • Social Information: Contributions to the betterment of society, customer/supplier satisfaction, and community engagement. • Environmental Information: Energy and emissions, water consumption, resource efficiency, combating climate change, preservation of biodiversity, and environmental pollution mitigation. • Corporate Social Responsibility (CSR): Contributions towards social programmes and projects addressing poverty, health, education, environmental sustainability, and rural/community development. • Sustainability Disclosures: Product/service sustainability, sustainable procurement practices, and natural resources sustainability. • Governance Parameters: Transparency, integrity, discipline, commitment, internal control systems, shareholders’ rights, business outlook, and future strategic plans. • Employee-Related Disclosures: Employee satisfaction, occupational safety and health protection, human capital development, training, and equal opportunity policies. • Human Rights & Business Ethics: Human rights protection, anti-corruption and anti-bribery mechanisms, and prompt payment of government taxes. • Research & Development (R&D): Investments in sustainable technologies, process innovation, and green operational solutions. 2. What is the Significance of Integrated Reporting? When an annual report of a company includes both financial information as well as non-financial information, we may address the same as an Integrated Report. Integrated Reporting is a process of data collection and formal disclosure on non-financial aspects of corporate activities along with its financial aspects that helps the company measure, understand, and communicate its impacts. Risk Management & Competitiveness Non-financial reporting is a vital mechanism to improve risk management and long-term social, environmental, and financial performance and market competitiveness. It provides an effective framework for identifying and navigating future threats and opportunities. Public Accountability & Trust Disclosure of non-financial information empowers communities and citizens affected by corporate operations to assert their rights, restore trust in businesses, and hold corporations accountable. This is essential for building societal trust, enhancing reputation, and cementing brand loyalty. Multi-Stakeholder Paradigm Shift Present circumstances require a fundamental change in corporate reporting where the focus shifts from serving only financial capital providers to addressing all stakeholders who have an interest in or are affected by operations: communities, employees, suppliers, customers, regulators, Government, and society at large. Holistic Value Creation Non-financial reporting makes sense because qualitative ESG factors are equally co-responsible with financial factors for sustainable value addition. Traditional financial information is no longer sufficient on its own to give investors and markets a holistic overview of business performance. 3. Global Scenario Towards Integrated Reporting Several reporting standards and frameworks have emerged globally for integrated reporting by companies worldwide. Enterprises may utilize these standards individually or in hybrid combinations to articulate their non-financial performance. Prominent global architectures include: UN Global Compact UN Guiding Principles on Business and Human Rights (UNGPs) OECD Guidelines for Multinational Enterprises Global Reporting Initiative (GRI) ISO 26000 International Integrated Reporting Council (IIRC) Sustainability Accounting Standards Board (SASB) Task Force on Climate-related Financial Disclosures (TCFD) Carbon Disclosure Project (CDP) Carbon Disclosure Standards Board (CDSB) Here, the three guidelines, frameworks, and standards mostly used by companies globally are analyzed in detail: A. Global Reporting Initiative (GRI) Established 1997 • Ceres & Tellus Institute • UNEP The GRI was formed in 1997 by United States-based non-profits Ceres (formerly the Coalition for Environmentally Responsible Economies) and the Tellus Institute, with the support of the United Nations Environment Programme (UNEP). It is an independent international organisation that helps businesses take responsibility for their impacts by providing a global common language to communicate those impacts across environmental, social, and economic factors for all stakeholders. GRI Standards help organisations understand their outward impacts on the economy, environment, and society, enabling third parties to assess environmental and societal impacts from corporate activities and supply chains. Structure of GRI Standards: (a) Universal Standards: Foundation, General Disclosures, and Management Approach. (b) Topic-Specified Standards: Economic, Environmental, and Social disclosures. Standardized guidelines concerning the environment are contained within the GRI Indicator Protocol Set, covering ESG issues from employee safety and human rights to environmental management. The GRI offers 30 environmental performance indicators across 9 primary categories: 1. Materials 2. Energy 3. Water 4. Biodiversity 5. Emissions 6. Effluents & Waste 7. Products & Services 8. Compliance 9. Transport & Overall B. International Integrated Reporting Council (IIRC) Founded 2009 • <IR> Framework 2013 • Prince of Wales A4S & IFAC The IIRC was founded in 2009 by the Prince of Wales Accounting for Sustainability Project (A4S), the Global Reporting Initiative, the International Federation of Accountants (IFAC), and others. It published the landmark Integrated Reporting <IR> Framework in 2013, seeking to communicate how an organization’s strategy, governance, performance, and prospects—in the context of its external environment—create short, medium, and long-term value. The <IR> Framework operates through a process that starts with integrated thinking, aligning organizational functions in communicating value creation. It is anchored by three structural pillars: 7 Guiding Principles: Strategic focus & future orientation Connectivity of information Stakeholder relationships Materiality Conciseness Reliability & completeness Consistency & comparability 8 Key Content Elements: Organisational overview & external environment Governance Business model Risks and opportunities Strategy and resource allocation Performance Outlook Basis of preparation and presentation The 6 Distinct but Interrelated Capitals: 1. Financial Capital 2. Manufactured Capital 3. Natural Capital 4. Human Capital 5. Intellectual Capital 6. Social & Relationship Capital C. Sustainability Accounting Standards Board (SASB) Founded 2011 • 77 Industry-Specific Standards across 11 Sectors The SASB is a non-profit organisation founded in 2011 to develop sustainability accounting standards. It developed unique standards for seventy-seven (77) industries across eleven (11) sectors, recognizing that sustainability issues manifest differently from one industry to another due to differences in business models, resource dependencies, and operating profiles. SASB is an ESG guidance framework setting standards for the disclosure of financially material sustainability information by companies to their investors. It identifies issues reasonably likely to impact the financial performance or condition of a company, defining sustainability as corporate activities that maintain or enhance the ability to create long-term shareholder value. 5 Sustainability Dimensions Grouping Corporate Activities: 1. Environment 2. Human Capital 3. Social Capital 4. Business Model & Innovation 5. Leadership & Governance Enterprise Judgment & Principle-Based Adaptation: Organizations face the practical challenge of deciding what to communicate, to whom, and which framework to deploy. Because GRI, IIRC, and SASB are principle-based frameworks, management possesses the legitimate flexibility to adjust reporting tools in accordance with their decisive operating context, stakeholder prominence, and material impacts on the world. 4. Indian Scenario Towards Integrated Reporting: A Decade of Evolution In India, non-financial reporting began long ago through statutory inclusions such as the Directors’ Report, Management Discussion & Analysis (MD&A) Report, and Corporate Governance Report in corporate Annual Reports, alongside voluntary disclosures. To establish formal regulatory governance over ESG parameters, the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) spearheaded a structured decadal evolution: December 2009 CSR Voluntary Guidelines 2009: MCA releases the first voluntary framework encouraging businesses to partake in social and sustainable development. July 2011 National Voluntary Guidelines (NVGs): MCA issues the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business—refining the 2009 framework into a structured set of nine (9) core principles and elements for responsible business conduct. August 2012 SEBI Mandates BRR (Top 100): SEBI mandates the top 100 listed companies by market capitalization to furnish an annual Business Responsibility Report (BRR) based on the NVG framework alongside their annual reports. 2014 Companies Act, 2013 Enactment: Repeals the Companies Act, 1956 and introduces statutory Corporate Social Responsibility (CSR) obligations under Section 135, mandating formal disclosures on CSR expenditures directed towards the UN Sustainable Development Goals (SDGs). November 2015 BRR Expansion (Top 500): SEBI broadens mandatory BRR filing coverage to the top 500 listed companies by market capitalization. February 2017 SEBI Circular on <IR> Framework: SEBI advises the top 500 listed companies to voluntarily adopt the Integrated Reporting <IR> Framework prescribed by the IIRC to improve disclosure standards. Companies are permitted to integrate disclosures within MD&A, as a separate chapter in the Annual Report, or as a standalone report. March 2019 National Guidelines on Responsible Business Conduct (NGRBC): MCA revises the NVGs to align with global commitments including the UN Sustainable Development Goals (SDGs), Paris Agreement on Climate Change, and UN Guiding Principles on Business and Human Rights (UNGPs). May 2021 & FY 2022-23 BRSR Mandate (Top 1000): SEBI replaces BRR with the rigorous Business Responsibility and Sustainability Report (BRSR), mandating filing for the top 1000 listed entities from FY 2022-23 (voluntary in FY 2021-22). Technical Architecture of the BRSR Framework: The BRSR is structured around disclosures on the nine (9) principles laid down by the NGRBC, accompanied by a comprehensive Guidance Note enabling companies to interpret the scope of disclosures under each principle. Disclosure requirements under each of the 9 principles are bifurcated into two distinct operational categories: 1. Essential Indicators (Mandatory): Must be reported compulsorily by all mandated entities, capturing baseline ESG performance metrics. 2. Leadership Indicators (Voluntary): Advanced disclosures showcasing aspirational sustainability leadership, broader supply chain stewardship, and deeper societal impact. Conclusion: A Continuous Journey Towards Global Sustainable Development Disclosure of non-financial information in integrated reporting by companies in India has significantly increased over time. In fact, it is an ongoing developmental journey that will continue to evolve in line with emerging international circumstances and regulatory standards. By aligning corporate transparency with international frameworks, Indian businesses are becoming increasingly responsible, proactive, and resilient corporate citizens committed to achieving the UN Sustainable Development Goals (SDGs).

CAPITAL MARKET The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 73–79 (Journal pp. 901–907) The weak-form efficiency of the Indian stock market: Fresh Evidence AB/KD Animesh Bhattacharjee and Kuntal Dutta Authors are Academicians • Contact: eboard@icai.in Research Synopsis & Key Empirical Discovery The primary goal of the present research initiative is to determine if the Indian stock market follows a random walk or not. The data on eight NIFTY sectoral indices’ daily opening, closing, high and low values are investigated from 3 January 2012 to 31 December 2021. The Augmented Dickey–Fuller (ADF) test and the Phillips–Perron (PP) test are used to assess the stationarity of the selected eight sectoral indices. The Variance ratio test is used to check for auto-correlation between the returns and the Runs test is performed to examine if the stock market followed a random walk or not. The unit root tests show that the returns from the eight selected sectoral indices are integrated of order 1. According to the variance ratio test, future stock prices can be forecasted by prior stock prices in the Indian stock market. The Runs test results indicate that the returns are not random throughout the studied time frame—confirming that the Indian stock market is weak-form inefficient. 1. Introduction & The Efficient Market Hypothesis (EMH) Numerous types of research have been done ever since the efficient market hypothesis notion was created to support or, in some cases, refute the theory. It is practically hard to predict future prices and turn a profit from them when it is clear that prices move randomly or drunkenly. On the other hand, if the outcome is the opposite, there is a potential to profit simply by looking at a security price’s historical behaviour. Because of this, economists and the general investing community are particularly interested in this topic. The Efficient Market Hypothesis (EMH) was first proposed in financial literature by Samuelson (1965) and Fama (1965). According to EMH, share prices adjust swiftly in reaction to new information; therefore, current prices should fully reflect all available information and follow a random walk, which means that subsequent stock price changes (returns) should be distributed independently and equally. EMH described an efficient market as one in which prices always entirely reflect available information. Fama’s (1970) Three Levels of Financial Market Efficiency: 1. Weak-Form Efficiency: Current stock prices reflect all historical market information, including past price movements, investment returns, trading volumes, and related technical data. Under this form, trading strategies to buy or sell securities based on historical trends or technical analysis yield no risk-adjusted excess returns. 2. Semi-Strong Form Efficiency: Security prices adjust instantaneously to all publicly available information (financial statements, news announcements, macro indicators). Investors cannot generate abnormal returns by trading on public information once released. 3. Strong-Form Efficiency (Most Stringent): Security prices fully reflect all public and private/insider information. No participant has monopolistic access to price-sensitive information, rendering consistent excess risk-adjusted returns impossible. Dynamic Transformation of the Indian Financial Market (2012–2021): GDP Expansion: India’s GDP surged from USD 1.83 trillion to USD 2.66 trillion (World Bank, 2022). Market Appreciation: The Nifty Broad Index expanded by more than three times during the study period. Exponential Retail Investor Demat Growth: Demat accounts climbed from 16.8 million in 2009 to 39.3 million in 2019. Digital & Information Democratization: Rapid expansion of low-cost internet and ubiquitous online trading systems allowed anyone to trade shares seamlessly from anywhere in the world. 2. Comprehensive Literature Review Empirical literature on weak-form market efficiency presents contradictory findings across global and Indian markets, motivating this granular sectoral inquiry: Studies Supporting Weak-Form Efficiency: Hong (1978): Analyzed daily data (1973–1976) across Australia, Japan, Hong Kong, and Singapore; discovered Japanese stocks were more efficient and larger stock exchanges exhibited higher efficiency. Chan et al. (1992): Investigated 18 national stock markets individually and collectively, supporting weak-form efficiency alongside a contagion effect. Indian Context: Chavannavar and Patel (2016), Jain and Jain (2013), and Asiri and Asiri (2008) documented weak-form efficiency in Indian equities. Studies Refuting Weak-Form Efficiency (Inefficient): Panas (1990): Athens stock market rejected weak-form efficiency using autocorrelation, Kolmogorov-Smirnov, runs, and Von Neumann tests. Worthington & Higgs (2003): In European markets, only Hungary (emerging) and the UK (developed) satisfied strict random walk criteria; Germany, Ireland, Portugal, and Sweden failed. Hamid et al. (2010): Examined 14 Asia-Pacific nations (2004–2009); none followed a random walk. Rahman et al. (2021): DSE General and Broad Indices in Bangladesh rejected the random walk hypothesis. Li & Li (2016): Examined India, China, Malaysia, and Korea; Runs tests showed random walk, but variance ratio tests proved weak-form inefficiency across all four. Khoj & Akeel (2020): Saudi Tadawul All Share Index (TASI) was weak-form inefficient (2012–2019). Indian Context: Gupta and Basu (2007) [Sensex & Nifty], Mishra (2009) [BSE 18-year study], Sarkar (2019), Patel et al. (2018), and Elangovan et al. (2022) established Indian stock market inefficiency. Research Gap & Departure: Most prior studies relied solely on broad composite indices (Sensex, NIFTY 50). This study uniquely examines eight individual sectoral indices to capture industry-level pricing dynamics and asymmetry. 3. Data and Methodology The empirical dataset spans 10 calendar years from 3 January 2012 to 31 December 2021 (2,475 daily observations) across eight key NIFTY sectoral indices: 1. NIFTY Auto 2. NIFTY Financial Services 3. NIFTY FMCG 4. NIFTY IT 5. NIFTY Media 6. NIFTY Metal 7. NIFTY Pharma 8. NIFTY Realty Price Averaging Technique: Rather than relying solely on closing prices, this study utilizes the average of daily Open, High, Low, and Closing prices: $$ ext{Price}_t = frac{ ext{Open}_t + ext{High}_t + ext{Low}_t + ext{Close}_t}{4}$$ This average price is selected because it eliminates intra-day outlier variations and effectively controls for market volatility. Econometric Equations & Test Specifications: Equation 1: Jarque-Bera (JB) Goodness-of-Fit Test $$JB = frac{n}{6} left[ S^2 + frac{1}{4}(K - 3)^2 ight]$$ Where: n = number of observations / degrees of freedom; S = sample skewness; K = sample kurtosis. The statistic is non-negative; values departing from zero reject normal distribution. Equations 2, 3 & 4: Non-Parametric Runs Test for Randomness $$Z = frac{R - ar{R}}{sigma_R} quad ext{(Equation 2)}$$ $$ar{R} = frac{2n_1 n_2}{n_1 + n_2} + 1 quad ext{(Equation 3: Expected Runs)}$$ $$sigma_R = sqrt{frac{2n_1 n_2 (2n_1 n_2 - n_1 - n_2)}{(n_1 + n_2)^2 (n_1 + n_2 - 1)}} quad ext{(Equation 4: Standard Deviation)}$$ Where: R = observed runs; $ar{R}$ = expected runs; $sigma_R$ = standard deviation; $n_1, n_2$ = count of negative and positive values relative to the mean. Unit Root & Variance Ratio Specifications • ADF & PP Unit Root Tests: Evaluate stationarity under constant and constant + trend specifications. Optimal lag length selected via Schwarz Information Criterion (SIC). • Lo and MacKinlay (1987) Variance Ratio Test: Assesses whether return variance scales linearly with holding interval $k in {2, 4, 8, 16}$. Statistically significant departures indicate serial autocorrelation. The Three Foundational Null Hypotheses: H₀1: The indices follow a normal distribution. H₀2: The indices have a unit root (non-stationary / random walk). H₀3: The indices are generated in a random manner. 4. Empirical Findings and Statistical Results Table 1: Summary Statistics of NIFTY Sectoral Indices Returns Statistic NIFTY Auto NIFTY Fin Serv NIFTY FMCG NIFTY IT NIFTY Media NIFTY Metal NIFTY Pharma NIFTY Realty Mean 4.605642 4.605830 4.605696 4.605912 4.605447 4.605491 4.605628 4.605562 Maximum 4.678504 4.695831 4.663530 4.671236 4.707923 4.681303 4.697768 4.692914 Minimum 4.504085 4.494494 4.533239 4.514328 4.513863 4.515734 4.534105 4.468306 Skewness -0.597523 -0.314476 -0.098561 -0.791404 -0.201148 -0.278971 0.050117 -0.542413 Kurtosis 10.94469 11.99347 11.01797 12.18418 8.740368 5.270998 9.124951 6.769017 Jarque-Bera 6656.334 8381.807 6633.693 8956.857 3414.846 563.9631 3869.773 1586.304 Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 Observations 2475 2475 2475 2475 2475 2475 2475 2475 Source: Authors’ Calculation. Note: All indices except NIFTY Pharma exhibit negative skewness; kurtosis indicates non-normal distribution across all series. Table 2: Unit Root Tests (ADF & Phillips-Perron) Variables Augmented Dickey-Fuller (ADF) Phillips-Perron (PP) Constant (at level) Constant + Trend (at level) Constant (at level) Constant + Trend (at level) NIFTY Auto -31.7076* -31.7271* -36.5958* -36.5864* NIFTY Financial Services -11.3633* -11.3590* -38.4550* -38.4474* NIFTY FMCG -13.9775* -14.0172* -37.5352* -37.5428* NIFTY IT -26.3877* -26.4283* -38.1131* -38.1168* NIFTY Media -12.6184* -12.6441* -35.0492* -35.0567* NIFTY Metal -14.3538* -14.3995* -36.6527* -36.5838* NIFTY Pharma -24.7461* -24.7501* -35.2525* -35.2497* NIFTY Realty -25.3372* -25.3453* -33.9717* -34.3440* Source: Authors’ Calculation. Note: * represents statistical significance at the 1% level. All indices reject the unit root null hypothesis at level, confirming stationarity. Table 3: Runs Test for Randomness of Sectoral Indices Sectoral Index Mean n₀ (< Mean) n₁ (≥ Mean) n₀ + n₁ Observed Runs Expected Runs Z-Statistic NIFTY Auto Index 4.605642344 1199 1276 2475 955 1237.302 -11.362* NIFTY Financial Services Index 4.605829977 1215 1260 2475 953 1238.090 -11.467* NIFTY FMCG Index 4.605696286 1221 1254 2475 973 1238.280 -10.668* NIFTY IT Index 4.605911804 1218 1257 2475 969 1238.192 -10.826* NIFTY Media Index 4.605447334 1220 1255 2475 947 1238.252 -11.713* NIFTY Metal Index 4.605491194 1223 1252 2475 939 1238.330 -12.037* NIFTY Pharma Index 4.605627868 1196 1279 2475 937 1237.108 -12.080* NIFTY Realty Index 4.605561983 1166 1309 2475 895 1234.368 -13.691* Source: Authors’ Computation. * represents statistical significance at the 1% level. Across all sectors, actual runs are substantially lower than expected runs, firmly rejecting the null hypothesis of randomness (H₀3). Table 4: Lo & MacKinlay Variance Ratio Test Results (Periods 2, 4, 8, 16) Sectoral Index Period (k) Variance Ratio Std. Error z-Statistic Probability NIFTY Auto 2 0.694805 0.050407 -6.054591 0.0000 4 0.348964 0.087459 -7.443935 0.0000 8 0.167209 0.127321 -6.540863 0.0000 16 0.087152 0.179133 -5.095925 0.0000 NIFTY Financial Services 2 0.683415 0.053586 -5.908031 0.0000 4 0.328281 0.092384 -7.270909 0.0000 8 0.156902 0.136190 -6.190614 0.0000 16 0.084363 0.192835 -4.748295 0.0000 NIFTY FMCG 2 0.674431 0.066712 -4.880197 0.0000 4 0.333729 0.110485 -6.030425 0.0000 8 0.172468 0.149749 -5.526113 0.0000 16 0.089940 0.198970 -4.573860 0.0000 NIFTY IT 2 0.674004 0.056075 -5.813550 0.0000 4 0.333777 0.093216 -7.147091 0.0000 8 0.170296 0.125491 -6.611665 0.0000 16 0.083725 0.166586 -5.500301 0.0000 NIFTY Media 2 0.674004 0.056075 -5.813550 0.0000 4 0.333777 0.093216 -7.147091 0.0000 8 0.170296 0.125491 -6.611665 0.0000 16 0.083725 0.166586 -5.500301 0.0000 NIFTY Metal 2 0.741403 0.039309 -6.578596 0.0000 4 0.373448 0.069291 -9.042347 0.0000 8 0.183463 0.101275 -8.062605 0.0000 16 0.094028 0.140654 -6.441126 0.0000 NIFTY Pharma 2 0.697493 0.038135 -7.932508 0.0000 4 0.351637 0.065310 -9.927541 0.0000 8 0.168811 0.092991 -8.938344 0.0000 16 0.089111 0.130718 -6.968339 0.0000 NIFTY Realty 2 0.712179 0.045345 -6.347315 0.0000 4 0.367637 0.078010 -8.106157 0.0000 8 0.182512 0.114054 -7.167568 0.0000 16 0.096686 0.159495 -5.663569 0.0000 Source: Authors’ Computation. Note: Computed z-statistics are negative and significant at the 1% level across all intervals (p = 0.0000), conclusively demonstrating serial correlation in return series. 5. Discussion, Behavioral Explanations & Practical Implications The empirical results across all econometric models lead to unambiguous conclusions: Rejection of H₀1: Jarque-Bera tests show that none of the return series are normally distributed; skewness and kurtosis deviate significantly from normal parameters, demonstrating asymmetric distribution. Rejection of H₀2: ADF and PP unit root tests indicate that returns are stationary at level (integrated of order 1 in price levels), meaning future returns can be forecasted based on past returns. Rejection of H₀3: Runs tests and Variance Ratio tests confirm the absence of randomness and presence of strong auto-correlation across all holding periods. Why Does the Indian Stock Market Exhibit Weak-Form Inefficiency? Behavioural finance asserts that market participants are guided more by psychology rather than textbook rationality and efficiency. The underlying drivers of weak-form inefficiency in India include: • Investor Emotions: Fear, greed, and herd behavior. • Cognitive Errors: Anchoring, overconfidence, and recency bias. • Market Shocks & Illiquidity: Episodic liquidity constraints in sectoral counters. • Speculative Bubbles: Sectoral thematic hypes creating price deviations. Strategic Investment Takeaway: The Value of Technical Analysis Because price returns do not follow a random walk and exhibit serial dependency, Technical Analysis—which examines previous stock price movements and volume patterns to predict future price trends—serves as an actionable, significant technique for Indian stock market investors and portfolio managers to generate consistent excess risk-adjusted returns (alpha). Avenues for Future Research: Partitioning the decade into sub-periods (e.g. pre-COVID, crisis, post-COVID) to evaluate the time-varying nature of market efficiency. Deploying advanced mathematical methods, such as wavelet analysis, to isolate frequency-dependent market dynamics. Utilizing high-frequency intra-day tick data to examine microsecond price adjustment processes. References: Ahmed, F. (2021). Assessment of capital market efficiency in COVID-19. European Journal of Business and Management Research, 6(3), 42-46. doi:10.24018/ejbmr.2021.6.3.839 Angelovska, J. (2018). Testing weak form of stock market efficiency at the Macedonian stock exchange. UTMS Journal of Economics, 9(2), 133-144. Asiri, B., & Asiri, B. (2008). Testing weak-form efficiency in the Bahrain stock market. International Journal of Emerging Markets, 3(1), 38-53. doi:10.1108/17468800810849213 Bouri, E., Chang, T., & Gupta, R. (2017). Testing the efficiency of the wine market using unit root tests with sharp and smooth breaks. Wine Economics and Policy, 6(2), 80-87. doi:10.1016/j.wep.2017.06.001 Chan, K. C., Gup, B. E., & Pan, M.-S. (1997). International stock market efficiency and integration: A study of eighteen nations. Journal of Business Finance & Accounting, 24(6), 803-813. doi:10.1111/1468-5957.00134 Chavannavar, P. B., & Patel, P. V. (2016). Efficiency of Indian stock market: A study from National Stock Exchange. International Journal of Latest Technology in Engineering, Management & Applied Science, V(XI), 48-52. Elangovan, R., Irudayasamy, F. G., & Parayitam, S. (2022). Testing the market efficiency in Indian stock market: evidence from Bombay Stock Exchange broad market indices. Journal of Economics, Finance and Administrative Science, 1-15. doi:10.1108/JEFAS-04-2021-0040 Fama, E. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34-105. doi:10.2307/2325486 Fama, E. F. (1970). Efficient capital market: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417. Gupta, R., & Basu, P. K. (2007). Weak form efficiency in Indian stock markets. International Business & Economics Research Journal, 6(3), 57-64. doi:10.19030/iber.v6i3.3353

CAPITAL MARKET The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 80–86 (Journal pp. 908–914) Earnings before Interest, Taxes, Depreciation, and Amortisation (EBITDA ): An Overview IT CA. Ishan Tulsian Author is member of the Institute • Contact: eboard@icai.in Executive Synopsis & Valuation Scope This article provides the meaning and significance of Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) and its Normalisation, from the practical perspective of business valuation. The Normalisation of EBITDA is a process of streamlining historical EBITDA by eliminating non-recurring and extraordinary nature of income and expenses to ensure that the resulting Normalised EBITDA metric shall be an adequate representation of the future earning capacity of the business. Further, a comprehensive analysis of significant Normalisation Adjustments has been provided along with references being made to short practical case studies and examples. Lastly, a practical illustration is provided, wherein Business Valuation is derived using the EBITDA Multiple Relative Valuation methodology by using the Normalised/Adjusted EBITDA, which has been computed by taking into consideration the effect of and adjusting 22 different Normalisation Adjustments to Historical EBITDA. 1. Foundations: Meaning & Significance of EBITDA and its Normalisation Meaning and Significance of EBITDA EBITDA means Earnings Before Interest, Taxes, Depreciation and Amortisation and is a useful measure of operating performance by allowing evaluation of productivity, efficiency, and return on capital, without considering the impacts of interest expenses, asset base, tax expenses, and other operating costs. EBITDA is used by analysts and other professionals to compare companies across and within the same industry. The most widely used and comparable measure of cash flow is EBITDA as it represents a business’s cash-generating ability before the impact of burden by capital assets, debt, and taxes. Therefore, businesses with varying levels of debt, capital assets, or even subject to different tax rates may be compared with each other since there are no such impacts on EBITDA. Meaning and Significance of Normalisation of EBITDA Normalisation of EBITDA is the process of eliminating non-recurring, extraordinary, and irregular or non-core expenses or income which after adjustments represent the true future earning capacity expected from the business by the buyer. Normalised or Adjusted EBITDA is an effective valuation tool useful during corporate acquisitions since it eliminates deviations and regularises historical streams of cash flows. It is suggested to calculate EBITDA from the most recent trailing 12 months (TTM) financial statements, after which the buyer and seller apply normalising adjustments and “add-backs”. The Strategic M&A Tension: Buyer vs. Seller Motivation Amongst popular valuation methods, applying a multiple to the company’s normalised EBITDA is an easy and effective method for valuing a company (e.g., 6x or 8x TTM EBITDA). Usually, normalising EBITDA leads to a higher figure by adding back non-recurring and extraordinary expenses. Consequently, sellers and their investment bankers are motivated to obtain a higher EBITDA to maximize business valuation. On the contrary, buyers are alert to ensure normalisation does not overstate EBITDA, ensuring they do not overpay for earnings that will not materialize post-closing. Buyers must also proactively estimate negative adjustments—new expense items required post-acquisition that will reduce going-forward EBITDA. 2. Formula for Standard and Normalised / Adjusted EBITDA Standard EBITDA Formulation: Standard EBITDA = Net Income + Income Tax + Interest Expense + Depreciation and Amortisation Normalised / Adjusted EBITDA Formulation: Normalised EBITDA = Standard EBITDA (+ / -) Normalisation Adjustments 3. Detailed Analysis of the 10 Key Categories of Normalising Adjustments Adjustments made to EBITDA vary widely across industries, business life cycles, and deal structures. The 10 primary operational dimensions comprise: 1) Owner’s and Related Party’s Remuneration and Compensation A. Owner’s Discretion: Business owners of private companies, having control over compensation, frequently remunerate themselves with salaries higher or lower than independent professional managers. B. Removal of Owner’s Bias: Remuneration may reek of owner’s bias—inflated as a tax mitigation strategy or deflated below fair market value (FMV) to present inflated net earnings. C. Discretionary Bonuses: Owners may declare extraordinary year-end bonuses to managerial personnel to minimize corporate taxable income. D. Normalisation Mechanism: Valuers add back superfluous owner remuneration and deduct the fair market remuneration payable to a professional third-party manager for equivalent operational or intellectual leadership. E. Discretionary Personal Expenses: Personal expenses charged to the company that will not continue post-acquisition must be added back: personal vehicles, health/life/auto insurance, Keyman insurance, inordinately high travel, lodging, entertainment, and golf/club memberships. F. Inactive Family Members: Excess salaries paid to family members not actively involved in operations are added back, replaced by the market salary of competent third-party personnel. 2) Non-Arm’s-Length Revenue or Expenses A. Restating to Arm’s-Length Pricing: Related-party transactions transacted above or below market rates must be modified to reflect pricing between independent, unrelated parties. B. Typical Scenarios: Selling products/services to sister entities at marked-up or discounted rates, and cross-utilization of employees without adequate arm’s-length cost reimbursement. C. Inflated Subsidiary Sales: If a subsidiary under valuation sells goods to its holding company at above-market prices, EBITDA must be adjusted downward by eliminating inflated profits to reflect fair market value. D. Inflated Related-Party Purchases: If a company purchases supplies at above-market rates from an entity owned by a director or major shareholder, historical EBITDA is adjusted upward by eliminating the artificial cost inflation. E. Non-Transferable Rebates/Discounts: Volume rebates or special supplier concessions tied to the departing owner that will not pass to the buyer must be deducted from historical EBITDA. 3) Revenue or Expenses Generated by Redundant Assets A. Add-Back of Redundant Expenses: Expenses incurred on non-productive assets that do not contribute to core revenue-generating operations are added back to historical EBITDA. B. Elimination of Non-Core Income: Income produced by non-operating redundant assets is deducted from historical EBITDA. C. Practical Example (Corporate Guest House): A company maintains an executive guest house for employee welfare, performance perks, or pandemic isolation. Because the guest house is non-essential to core operations, ongoing maintenance expenses are added back. 4) Rent of Facilities at Prices Above or Below Fair Market Value A. Real Estate Lease Alignment: When premises are leased from an owner-affiliated entity, the contractual rent must be adjusted to reflect prevailing commercial market rates. B. Inflated Owner Rent: If office rent paid to the owner-director exceeds market rates, EBITDA is adjusted upward by adding back the inflated rent and subtracting true market rent. C. Below-Market PSU / Subsidized Rent: Public Sector Undertakings or long-tenured entities often pay rents substantially below market rates. Valuers must adjust EBITDA downward by substituting actual low rent with prevailing commercial market rent, while reviewing lease expiry clauses. 5) Lawsuits, Arbitrations, Insurance Claim Recoveries & One-Time Disputes A. Unusual Lawsuits: Extraordinary legal dispute expenses that will not recur are added back. Ongoing legal costs and regular provisions are not added back. B. Normal vs. Extraordinary Claims: Provisions for expected credit losses (ECL) on receivables represent recurring operational items. In contrast, one-time arbitration settlements or dispute resolutions are adjusted. C. Deduction of Extraordinary Insurance Inflows: One-time insurance recoveries—such as keyman insurance payouts on the death of an MD, cyclone stock losses, or natural calamity property demolition claims—must be deducted from EBITDA. 6) Valuation of Inventories A. Demand Surges & Inventory Piling: Unusual stock accumulations resulting from transient spikes (such as FMCG supply chain hoarding during COVID-19 followed by demand normalization) require adjustment. B. Volatile Commodity Inventories: For businesses dealing in precious metals, gold, and gems, inventory swings driven by price spikes require normalisation based on forecasted future price paths. C. Obsolete & Slow-Moving Stock: Unusable inventory that should be written off or sold as scrap must be eliminated from inventory balances so historical earnings are not distorted. 7) One-Time Professional Fees A. New Vertical Rollout Costs: Professional consulting, R&D, staff training, and marketing fees incurred specifically to establish a new vertical or branch are non-recurring and added back. B. Dispute-Related Advisory Fees: Non-recurring legal, accounting, and engineering expert witness fees triggered by an isolated lawsuit are added back. C. Ongoing Legal Costs Retained: Regular retainer fees and routine compliance expenses are operational and not added back. D. Acquirer Synergy Savings: When the buyer possesses in-house accounting, legal, HR, or engineering infrastructure, third-party professional costs previously borne by the target become redundant and are added back. 8) One-Time Start-Up or Setting Up Costs A. Sunk Costs: Setup and incubation costs that will not recur going forward are treated as sunk costs and added back. B. Startup Expansion Example: If a food-delivery startup launches an ancillary grocery delivery arm, the one-time launch and infrastructure setup costs are added back, provided such launches are infrequent. 9) Gaps in Management Organisation A. Key Executive Departures: In owner-managed enterprises, departing founders must be replaced by hiring senior executives, requiring a negative adjustment to EBITDA for new compensation packages. B. Professionalization of Finance Function: Replacing an entry-level bookkeeper with a seasoned Chartered Accountant, Financial Controller, or Virtual CFO to support scale represents an incremental recurring cost that reduces going-forward EBITDA. 10) Other One-Time Income and Expenses A. Deferred Maintenance: Abnormally low historical maintenance costs must be adjusted downward by forecasting realistic ongoing maintenance required by asset condition. B. Aggressive Expensing of CapEx: Expensing capital asset purchases directly instead of capitalizing and depreciating them overstates expenses; EBITDA must be adjusted upward to correct this distortion. C. Structural Cost Adjustments: Impending insurance premium spikes, statutory wage increases, building renovations, non-Ind AS accounting treatments, and deferred capital expenditures. D. Miscellaneous Anomalies: Non-recurring fraud/theft/misfeasance, strike and lockout losses, abnormal gains/losses on asset disposal, office relocation expenses, goodwill impairments, and abnormal foreign exchange swings. 4. Practical Illustration: 22 Normalisation Adjustments & Valuation Model The complete normalization process and its valuation impact are modeled below, beginning with a Historical EBITDA of Rs. 10,50,75,250 and applying 22 specific adjustments across revenue, operating costs, and synergies: S. No. Particulars of Normalisation Adjustment Effect on EBITDA Amount (in Rs.) — Historical EBITDA Base 10,50,75,250 a) Incremental remuneration paid to owner versus marked-to-market remuneration of third-party manager i.e., adjustment for owner’s bias (+) 15,75,000 b) Incremental remuneration paid to inactive owner’s relatives versus marked-to-market remuneration of similar third-party manager i.e., adjustment for owner’s bias (+) 6,45,000 c) Inordinately high owner-specific expenses including health, auto and life insurance, club memberships and travelling expenses not to be incurred post acquisition transaction by the buyer. (+) 7,15,000 d) Incremental income due to related party transactions at Non-Arms-Length prices. (-) 25,75,000 e) Remuneration not charged to group entities on cross-use of manpower services (+) 5,85,000 f) Expenses incurred on Redundant Assets (+) 5,25,000 g) Incremental rental expenditure due to Rent of facilities at prices above the Fair Market Value (+) 8,85,000 h) Lawsuits, Arbitrations and One-time disputes (+) 12,45,250 i) One-time professional fees (+) 3,50,000 j) One-time Start-up or setting up costs (+) 17,89,000 k) Remuneration of new key managerial personnel hired to fill the role of the owner (-) 25,85,000 l) One-time extraordinary bonus to KMPs (+) 7,75,000 m) Loss on damage to P&M due to Amphan cyclone (+) 4,25,000 n) Non-recurring Insurance claim received on loss of inventory due to fire- breakout (-) 2,50,000 o) One-time Special donation expense (+) 1,50,000 p) Expensing of acquisition of fixed asset instead of capitalisation (Adjustment net of depreciation) (+) 12,75,000 q) Loss due to non-recurring fraud and misfeasance by company staff (+) 3,50,000 r) Unusual gain on disposal of fixed asset (-) 4,50,000 s) EBITDA overstated due to adoption of inappropriate accounting policies and practices now adjusted (-) 3,65,000 t) One-time expenses on relocation of registered office (+) 4,25,000 u) Unusual gain due to foreign exchange fluctuations. (-) 6,45,000 v) No requirement of expenses of third-party professional services due to presence of buyer’s support infrastructure. (+) 9,65,000 Normalised EBITDA Result 11,08,84,500 Comparative Relative Valuation Impact (Using 8x EBITDA Multiple): In case the Registered Valuer adopts an EBITDA multiple of 8x as the valuation methodology, the comparative valuation demonstrates the massive financial significance of normalisation: Valuation based on Standard EBITDA: Rs. 84,06,02,000 (Rs. 10,50,75,250 × 8) Valuation based on Normalised EBITDA: Rs. 88,70,76,000 (Rs. 11,08,84,500 × 8) Incremental Business Valuation: Rs. 4,64,74,000 (Incremental EBITDA Rs. 58,09,250 × 8) Therefore, an incremental amount of Rs. 4,64,74,000 is to be paid by the buyer, since the valuer—while adopting any valuation methodology including the EBITDA multiple method of relative valuation—considers the parameter of Normalised EBITDA instead of Standard EBITDA as being far more reflective of the true, recurring earning capability of the business. References: Article on “Adjusted EBITDA” written by Will Kenton and published on Investopedia.com Article on “True Value of your Business- Normalised EBITDA and synergies” published on cafafinance.com Article on “Adjusted EBITDA” written by CFI Team and published on corporatefinanceinstitute.com Article on “Understanding EBITDA and Normalising Adjustments when selling a business” written by Michael Hannon and published on wasteadvantagemag.com Article on “Adjusted EBITDA” written by Dan and published on strategiccfo.com

TECHNOLOGY The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 87–90 (Journal pp. 915–918) Technology - Preparing for the Next Wave RM CA. Raghuvir Mukherji Author is member of the Institute • Contact: raghuvir.mukherji@gmail.com / eboard@icai.in The March of Human Civilisation Through Four Great Technological Revolutions The history of human civilisation is often marked by technological milestones. Whether it be individuals, economies or participants in warfare, those with access to the latest / more advanced technology are usually the winners. If we look at the march of human civilisation, there have been four great technological revolutions: Wave 1: Mechanical Learning leverage and simple tools (wheels, catapults) to ease human labor. Wave 2: Power (18th Century) Steam power to internal combustion engines (motor cars), unlocking mass industrial production and reducing manufacturing costs manifold. Wave 3: Electrification (20th Century) Electrification transformed society; from computers to cinema, power drove modern life. Wave 4: Computers & Internet (21st Century) “Geography is History.” Remote work, IT/ITeS lifting millions from poverty, and mobile devices unifying computing, internet, and communication. Now entering Industrial Revolution 4.5 & 5.0: The comprehensive digitisation of content, services, cognition, and physical systems. This article maps out the emerging technologies that India must strategically focus on. ❖ Strategic Mapping of Emerging Technologies for India 1. Big Data and Artificial Intelligence (The 5th Industrial Revolution) Some designate AI as the 5th Industrial Revolution already upon us. While creating dystopian visions (“Rise of the Machines”), algorithms and robotics are currently omnipresent across daily enterprise operations: Algorithmic high-frequency stock trading and capital market analytics. Automated credit risk decisions in Fintech firms. Predictive search cues, auto-spellcheck in mobile operating systems. Cybernetic (self-correcting) load-balancing systems in modern power generation plants. Tax administration systems that automatically generate audit alerts when an individual’s observed lifestyle and asset purchases do not reconcile with reported tax returns. Telematics in modern vehicles calculating exact travel radius based on current fuel reserves. Personalized social media algorithmic feeds and targeted online programmatic advertising. Machine Learning systems and Neural Networks identify complex patterns and learn iteratively from past experience to refine algorithms, behaving analogously to human learning. When Persian mathematician Al-Khwarizmi solved his first quadratic equations 1,200 years ago, little did he know that mathematical procedures named after him (algorithms) would govern 21st-century civilization. Combined with the Internet of Things (IoT)—deploying web-enabled microchips and sensors into domestic white goods and automobiles—these networks create extraordinarily powerful diagnostic and autonomous self-correcting systems. The Problem of Algorithmic Bias: Prediction systems inevitably reinforce systemic historical biases present in training data. For example, an unsupervised AI hiring tool might systematically favor white male executive candidates simply because historical Fortune 500 CEOs were predominantly white men due to socio-economic barriers, not inherent ability. Similarly, social media algorithms trap users in echo chambers of confirmed biases. AI/ML must therefore be interrogated constantly to verify whether conclusions are logical, balanced, and fair. 2. Quantum Computing & Domestic Semiconductor Fabrication Processing colossal petabytes of data to simulate probabilistic outcomes, train neural networks, and govern real-time automated infrastructure demands exponentially greater computing power than classical binary architecture can deliver. Quantum computing represents the definitive paradigm leap (demonstrated by Google achieving quantum supremacy in 2019). Prerequisite for India: Before India can lead in quantum computing, the country must urgently establish indigenous semiconductor chip fabrication plants (fabs) to produce integrated circuits locally rather than depending entirely on foreign supply chains. 3. Augmented Reality (AR), Virtual Reality (VR) and the Metaverse Beyond gaming and entertainment, immersive AI-powered AR and VR technologies provide transformative applications in training simulations, surgical preparation, engineering mock-ups, and interactive pedagogic teaching aids. Imagine history students experiencing an immersive 360-degree reconstruction of the Dandi March or the Revolt of 1857 unfolding around them. The Metaverse initiative reflects this trajectory, with global corporations actively acquiring virtual experiential “real estate” to pioneer next-generation digital customer engagements. 4. Cyber-Security and Data Protection As personal data generated by smartphones, wearable fitness trackers, IoT appliances, and social media platforms migrates to cloud servers, safeguarding confidential information from malicious actors is of paramount importance. With financial transactions shifting almost entirely online, the imperative for robust cryptographic protection is urgent. Author’s Policy Critique on Indian Data Protection Laws: While it is commendable that India is instituting statutory data protection frameworks, the current exclusion of the Government and state agencies from the regulatory ambit is neither fair nor desirable from a civil liberties and fiduciary oversight perspective. 5. Communication and Bandwidth Infrastructure The COVID-19 pandemic highlighted the critical role of network bandwidth, with corporate operations and global board meetings migrating to teleconferencing tools like Microsoft Teams and Zoom. Rapid digitization mandates the aggressive deployment of 5G spectrum and high-capacity fibre optic cabling. Global Benchmark (Germany 2019): Fibre optic transmission reached speeds of 500 Gigabytes per second. Indian Reality: Average mobile internet bandwidth in India was around 12 MBPS (ranking 131 out of 138 globally, below Iraq). 6. Healthcare Systems: Wonderdrugs, Gene Therapy, Bionics and Vaccines AI Drug Discovery: AI algorithms are revolutionizing molecular design to combat chronic non-communicable diseases: Hypertension, Diabetes, Depression, Oncology (Cancer), and Alzheimer’s disease. Gene Editing: Breakthrough tools like CRISPR/Cas9 enable targeted gene therapies to eliminate hereditary genetic defects in unborn children and enhance human resilience. Vaccines: The COVID-19 pandemic established rapid mRNA and platform vaccine R&D as essential national security infrastructure. Bionics (Three Pillars): Wearables: Non-invasive continuous vital sign and biometric monitoring. Implants: Devices augmenting failing bodily functions (e.g. cardiac pacemakers). Artificial Organs: Bionic electronic vision for the blind, combined with stem cell biology to regenerate natural organs. 7. Uber-isation and the Platform Aggregator Economy Pioneering platforms have transformed common language (e.g., “Ubering to office” joining Xerox, Coke, and Google). The structural anomaly of modern business: the world’s largest taxi company (Uber) owns no taxis; the largest accommodation provider (Airbnb) owns no real estate; and Amazon dominates global commerce as a hyper-efficient marketplace aggregator. “Why buy the cow when you can just buy the milk?” 8. Cloud Technologies Enterprises have transitioned away from heavy capital investments in proprietary server rooms, dedicated hardware, and costly on-premise software licenses. In their place, scalable, utility-based cloud storage and Software-as-a-Service (SaaS) architectures allow businesses to pay strictly for server compute time used or on a per-transaction basis. 9 & 10. Blockchain Distributed Ledgers and Cryptocurrencies Blockchain as the “Cloud Service of the Ledger”: Blockchain is a distributed, cryptographically self-validating ledger system that eliminates reconciliation costs and ownership friction. Rather than maintaining isolated ledgers, multiple parties interact on a single tamper-evident shared network. It offers an ideal solution for Government accounting and banking networks with geographically dispersed functionaries—an innovation especially close to the heart of the accounting profession. Cryptocurrencies (Bitcoin, Ethereum): Operating as decentralized alternatives to sovereign fiat currency. Following the RBI circular ban and its subsequent overturn by the Supreme Court, legislative proposals have aimed to prohibit domestic usage. Author’s Regulatory Recommendation: Acknowledging the extreme volatility and monetary sovereignty challenges of cryptocurrencies, the optimal regulatory path is not an outright prohibition, but strictly classifying and regulating cryptocurrencies as investment assets while prohibiting their use as legal tender. 11. Renewable Energy Transition Global economic progress necessitates substituting finite, polluting fossil fuels with solar, wind, and hydroelectric energy. The sun represents a virtually inexhaustible clean power source. India’s Energy Mix: Approximately 24.2% of India’s installed power capacity is renewable. However, solar power constitutes only about 10% (amounting to 37.4 GW). Massive headroom exists to expand large-scale utility solar farms and domestic rooftop solar arrays. 12. Battery-Operated Vehicles and Next-Generation Mobility The obsolescence of the internal combustion engine is approaching. Battery-electric vehicles (EVs) and hydrogen fuel cell technologies recharged through solar power will dominate. Future mass transit requires electrifying public bus fleets, 100% electrification of rail lines, introducing high-speed bullet trains for inter-city travel, and developing futuristic ultra-high-speed transit like Hyperloop. 13. Water Conservation, Desalination and Recycling Although 70% of the Earth’s surface is covered with water, only 3.5% of it is potable (USGS). As global warming melts glaciers and strains freshwater tables, rainwater harvesting, industrial wastewater recycling, and seawater desalination technologies become critical survival infrastructure. 14. Space Colonization and Scientific Planetary Defense Pioneered by initiatives like Elon Musk’s SpaceX vision to establish multi-planetary human colonies on Mars, outer space exploration is entering a renaissance. Beyond technological posturing, space exploration serves to advance fundamental planetary physics, extract off-world minerals, and secure an existential “Plan B” for human civilization against catastrophic terrestrial impacts (such as dinosaur-eradicating meteors). India’s world-class ISRO space programme provides a robust launching pad. 15 & 16. Defence Indigenisation and Intelligent Policing Networks Defence Technology Indigenisation: While a borderless world remains a philosophical ideal, geopolitical realities mandate strong deterrence. As the world’s largest importer of armaments, India must prioritize reverse-engineering and technology transfers, fostering private sector defence manufacturing, establishing R&D centers in the IITs, and paying competitive market salaries to scientists. Intelligence & Policing Systems: A centralized National Crime Reporting Network integrating police stations, street CCTV networks, and facial recognition databases is essential. However, strict judicial oversight is necessary to prevent an Orwellian surveillance apparatus. Wearable tracking devices could also be deployed for undertrials accused of minor offenses to safely decongest India’s overcrowded prisons. 2. Paving the Way to the Future: Innovation Ecosystem & Harari’s 4 Cs Technological leadership cannot be achieved through ad-hoc governmental projects alone; it requires a four-pillar innovation ecosystem: 1. World-Class Education: Elite institutions (IITs, BITS, DCE, NITs) recruiting top global faculty in AI, data science, and materials science. 2. Public Research Funding: Expanding state budgets for blue-sky basic and applied sciences. 3. Private Venture Capital: Risk capital to commercialize scientific breakthroughs and take them to market. 4. Stable Socio-Political Climate: Transparent, predictable legal institutions that attract long-term global investment. Future-Proofing Human Skills: Yuval Noah Harari’s 4 Cs Framework In 21 Lessons for the 21st Century, historian Yuval Noah Harari observes that as the pace of technological obsolescence accelerates and life expectancy increases, it is impossible to predict the exact vocational skills children will need decades into the future. Today’s computer programming languages will be completely obsolete by the time children join the workforce. Instead of rote technical knowledge, students must master the 4 Cs: 1. Critical Thinking Evaluating truth and distinguishing signal from algorithmic noise. 2. Communication Articulating insights transparently across multidisciplinary teams. 3. Collaboration Co-creating value with diverse human and AI co-pilots globally. 4. Creativity Albert Einstein: “Imagination is more important than knowledge.” The Strategic Imperative for Chartered Accountants These technological disruptions directly transform the accounting and finance professions. Chartered Accountants will increasingly audit smart contracts on decentralized Blockchains, evaluate and account for digital Cryptocurrencies, and govern real-time cloud-based ERP architectures. As trusted advisors occupying a vital role in corporate governance and enterprise finance, Chartered Accountants must continually upskill to remain at the forefront of digital transformation. Notes and References: CNN Business (2019): Google achieves Quantum Supremacy. https://edition.cnn.com/2019/10/23/tech/google-quantum-supremacy-scn/index.html The Economic Times: India ranks 131 out of 138 countries in mobile internet speed. Article link Mercom India: Solar power share in India’s renewable energy mix. https://mercomindia.com/solar-share-in-india-2/ USGS Water Science School: How much water is there on Earth? https://www.usgs.gov/special-topic/water-science-school/science/how-much-water-there-earth

FINANCE The Chartered Accountant • February 2023 • Vol. 71 • No. 08 • pp. 91–94 (Journal pp. 919–922) Why Do We Need One More Form of Digital Money- e₹ in Financial Markets? SD Sunil Dasari Author is an expert in Banking and Finance services • Contact: sunildasari755@gmail.com / eboard@icai.in Digital Forms of Money Today: The Missing Central Bank Digital Link There are various ‘Digital Forms of Money’ available to the public today for ‘Store of Value and for Payments’, including Regular Bank Deposits of Commercial Banks accessed through Banking Apps and Debit Cards. Another widespread arrangement is payment transactions through ‘Credit Cards’ or ‘Closed Systems’ such as PhonePe, Google Pay, Paytm, Amazon Pay, BHIM, FreeCharge, JioMoney, Mobikwik, Airtel Money, and Pockets by ICICI Bank. Furthermore, commercial banks, financial market utilities, and institutional participants have digital access to central bank reserves (such as Cash Reserve Ratio account maintenance with the RBI). Key Rationale: One primary purpose of a Central Bank Digital Currency (CBDC) is to provide a method of speedy digital payments directly with ‘Central Bank Money’, aligned with modern commerce. Prior to CBDC, there was NO equivalent form of digital central bank money available directly to the public. 1. Present Payment Systems, Network Effects & Systemic Risk Payment network effects increase the value of the network exponentially for participants and the public as adoption expands. However, these powerful network effects have generated severe market concentration and vulnerabilities: Monopoly Power & Barriers to Entry Network consolidation creates significant barriers to entry for newer fintech entities, even when they possess superior technology. Merging payment networks concentrates monopoly power, resulting in higher transaction costs imposed on small merchants and individuals. Systemic Risk in Closed Private Systems Concentration of the national payment rail in a handful of private enterprises heightens systemic risk. If a private payment giant experiences operational insolvency or technical failure, citizens and commerce face severe disruption. CBDC provides a resilient public alternative independent of private failures. Friction in Cross-Border Remittances Global supply chain integration and massive inbound remittances require efficient cross-border settlement. Current systems rely on correspondent banking (Nostro accounts) and multi-layered messaging, resulting in friction, delays, and exorbitant fees. CBDC simplifies and expedites cross-border flows. RBI FRAMEWORK Payments Vision 2025: Strategic Objectives Payment systems underpin economic development, financial stability, and financial inclusion. Ensuring safe, secure, reliable, accessible, affordable, and efficient payment systems remains a core strategic goal of the Reserve Bank of India (RBI). Over the past decade, India has engineered one of the most modern payment infrastructures globally across retail, fast, and wholesale segments. In doing so, the role of the RBI has transformed from being purely a regulator, operator, and facilitator to becoming the proactive creator of an environment for the structured development of India’s digital payments ecosystem. 2. Architecture, Process & Pilot Launch of the Digital Rupee (e₹) The Central Bank Digital Currency is designed to coexist alongside all other forms of physical and electronic fiat currency for the short to medium term. Programmable money allows dynamic interest rate setting and advanced smart settlement features. 1. Retail CBDC: e₹-R (General Purpose) Available to non-financial consumers, private sector enterprises, merchants, and the general public for daily retail commerce, P2P money transfers, and P2M consumer payments. 2. Wholesale CBDC: e₹-W Restricted to selected financial institutions for high-value interbank transfers, call money market operations, short-term money markets, and government securities (G-Sec) market settlements. RBI Phase-Wise e₹ (R) Pilot Implementation (Commenced 1st December 2022) Phase 1 Launch Banks (4 Banks): State Bank of India (SBI) ICICI Bank Yes Bank IDFC First Bank (4 additional banks join in Phase 2) Phase 1 Launch Cities (4 Cities): Mumbai New Delhi Bengaluru Bhubaneswar Operational Mechanics of e₹ (R) Transactions: Closed User Group (CUG): The pilot operates within a CUG comprising selected participating merchants and customers across designated geographic locations. Exact Denomination Parity: e-Rupee tokens are issued in the exact same denominations as physical currency notes and coins (₹1 to ₹2,000 denominations). Two-Tier Intermediated Distribution: The RBI issues digital tokens, while commercial banks act as intermediary distribution points. Bank-Provided Digital Wallets: Users store and transact e₹ via specialized smartphone or laptop wallet applications hosted by participating banks. P2P & P2M Transaction Modalities: Supports Person-to-Person (P2P) transfers and Person-to-Merchant (P2M) retail checkouts using merchant QR codes displayed at shops and malls. 3. Value Proposition and Direct Benefits to the Public Cash-Like Features: Retains safety, instant settlement finality, sovereign backing, and inherent public trust identical to physical fiat cash. Universal Legal Tender: Flexible legal tender usable even by unbanked individuals without requiring a commercial bank account, fostering true financial inclusion. Physical Durability: Immune to physical degradation; cannot be torn, burnt, soiled, or subjected to environmental wear and tear. Direct Sovereign Governance: Unlike volatile private cryptocurrencies, CBDC is governed directly by the RBI, eliminating speculative volatility and credit risk. Seamless Convertibility: Freely convertible into physical cash or commercial bank deposits at a guaranteed 1:1 par value (though e₹ itself does not earn interest). Irreplaceable Sovereign Digital Token: Private wallet balances and electronic commercial credits cannot legally or operationally replace sovereign CBDC digital money. 4. Comprehensive Risk Analysis of CBDC Deployment 1. Privacy Concerns & Anonymity vs. Cash The central bank could potentially handle enormous databases of individual transaction footprints. Digital currencies cannot natively replicate the complete anonymity and privacy of physical cash transactions. Compromise of user credentials poses another severe institutional risk. 2. Disintermediation of Commercial Banks A broad-based consumer shift to CBDC could significantly undermine commercial banks’ deposit base, restricting their ability to plough back funds into productive credit intermediation. If e-cash expands without regulatory holding limits on mobile wallets, weaker banks will struggle to retain low-cost CASA (Current Account Savings Account) deposits. 3. Operational, Cybersecurity & Obsolescence Risks Rapid Technology Obsolescence: Accelerating technological change threatens CBDC architecture, demanding continuous high-cost capital upgrades. Operational Retraining: Intermediary bank staff must be groomed, certified, and retrained to operate securely in the CBDC ecosystem. Elevated Cyber Vulnerabilities: Demands perpetual penetration testing, firewall defenses, and cryptographic safeguards against sovereign cyber warfare. Central Bank Operational Burden: Substantial administrative, maintenance, and technical costs incurred by the RBI in managing CBDC issuance and clearing infrastructure. 5. Efficacy of Monetary Policy Implementation Widespread migration of citizens to private digital currencies or stablecoins (cryptocurrencies pegged to external assets) threatens central banks with loss of monetary sovereignty and policy control. A sovereign CBDC establishes an essential direct transmission channel: BIS CPMI-MC Report (2018) Insights: Central Bank Digital Currency does not alter the fundamental system of monetary policy; rather, it facilitates the timely, friction-free transmission of policy actions across economic agents. By introducing CBDC, the central bank can break through the ‘Zero Lower Bound’ constraint of physical cash during economic slumps, or curb inflationary pressures via positive policy interest rates. Three Foundational Policy Design Dimensions for Central Banks: Remuneration Structure: Whether CBDC is Non-remunerated (bearing 0% interest, akin to cash) or Remunerated (bearing variable policy interest rates). Accessibility Horizon: Whether extensively accessible to the retail public like physical cash, or restricted to wholesale financial institutions like bank reserves. Anonymity vs. Identifiability: Whether unnamed/anonymous like physical bank notes, or identity-tracked with an immutable audit trail of account entries. Tail-Risk: Acceleration of Systemic Bank Runs & Credit Costs In normal economic conditions, economic agents (households, businesses, governments) prefer interest-bearing bank deposits over non-remunerated CBDC. However, during systemic tail-risk events or bank distress, CBDC serves as a risk-free safe haven guaranteed by the central bank. The seamless digital transfer from bank deposits to CBDC could dramatically accelerate bank runs. If commercial banks lose durable liquidity to CBDC, they must compete aggressively for deposits by hiking deposit rates. This forces an increase in retail lending rates and a contraction in aggregate credit availability, impacting macroeconomic supply and demand. Regulatory Mitigation: Setting quantitative caps on individual CBDC wallet holdings and transaction volumes, alongside regular proactive injections of durable liquidity by the RBI. 6. Summary Impact of CBDC on Key Monetary Variables Monetary Variable Non-Remunerated CBDCs Remunerated CBDCs Reserve Money Yes / No Yes Money Supply No Yes Velocity No Yes Money Multiplier Yes / No Yes Liquidity Conditions / LAF Yes / No Yes Monetary Policy (Repo Rate) No Yes 7. Conclusion & The Road Ahead The Reserve Bank of India’s pilot launch of the Central Bank Digital Currency marks a historic milestone in India’s monetary evolution. CBDC holds immense promise by ensuring complete transparency, low transaction costs, and expanding digital financial access to a wider populace. “While the intent of Central Bank Digital Currency and the expected benefits are well understood, in the absence of global precedence, extensive stakeholder consultation along with iterative technology design must take place. It is imperative to identify innovative methods and compelling use cases that will make Central Bank Digital Currency as attractive as cash, if not more.” References: Reserve Bank of India (RBI) Concept Note on Central Bank Digital Currency (CBDC). Guidelines on Central Bank Digital Currencies (CBDC) - Bank for International Settlements (BIS). BIS Committee on Payments and Market Infrastructures & Markets Committee (CPMI-MC) Report (2018).

STARTUP The Chartered Accountant • January 2023 • Vol. 71 • pp. 22–24 (Journal pp. 734–736) Startups in India: The engines of innovation, the drivers of a revolution A brief study of the entrepreneurial ecosystem from 2015 – 2022 AG Aastha Grover Vice President, Invest India • aastha.grover@investindia.org.in RK Radhika Kohli Associate at Startup India, Invest India • radhika.kohli@investindia.org.in The Rise of the World’s Third Largest Startup Ecosystem The Indian startup ecosystem has been central to the country’s growth story in the last few years and especially in the re-emergence of the economy post-pandemic. With Indian unicorns crossing a century in May 2022 and more than 85,000 startups being recognized by DPIIT (Department for Promotion of Industry and Internal Trade) as of date, the Indian startup ecosystem has come of age and is now considered the third largest in the world. The citizens of the country are rapidly turning to entrepreneurship is a fact well established, but what often goes unrecognised are the continued and focussed engagements undertaken by the Government to support and promote this ecosystem. To catalyse a strong startup culture and build an inclusive ecosystem for innovation and entrepreneurship in India, Startup India was launched on 16th January 2016, as a flagship initiative of the Government of India by Prime Minister Shri Narendra Modi. DPIIT acts as the nodal Department for the Startup ecosystem. ❖ Seven-Year Transformation: 2015 vs. 2022 Ecosystem Scorecard To holistically understand the ecosystem overview, it is important to draw a relative analysis. A good starting point is 2015, immediately prior to the rollout of Startup India. Over the last seven years, the entrepreneurial wave in India has witnessed an unprecedented rise of immense magnitude: DPIIT Recognized Startups 448 → 85,000+ Massive 190x exponential expansion District Reach Across India 120 → 662+ Districts At least 1 startup in over 662 districts Direct Job Opportunities 44,000 → 7.8 Lakh+ 1,73,103 jobs added in Apr–Nov 2022 alone Unicorn Count 8 → 108 Unicorns Valuation exceeding USD 240.79 Billion State Startup Policies 4 → 31 States Supported by 53 regulatory reforms Women-Led Startups 29.5% → 47% 38,620+ startups with 390,000+ jobs 1. Disruptive Inclusivity: Women Entrepreneurship & Tier 2/3 Expansion What makes this journey one for the books is its inclusive, sector-agnostic, and disruptive nature. In 2017, only 29.5% of all startups registered with DPIIT had at least one-woman director. As of November 2022, that ratio has surged to 47%, with 38,620+ startups proudly led by women, responsible for creating over 390,000+ jobs across India. Furthermore, out of India’s 107 unicorns (as of Nov 2022), 20 unicorns have been founded by female entrepreneurs. Emerging Cities (Tier 2 & Tier 3) Over 47% of all recognized startups are located in emerging Tier 2 and Tier 3 cities across at least 56 industries. Digital adoption accelerated during the pandemic, bridging the historical technology divide between rural and urban India and enabling regional entrepreneurs to scale rapidly. North-East Startup Renaissance All 8 North-Eastern State Governments are proactively executing dedicated policies. The North-East region boasts over 850 DPIIT-recognized startups that have created more than 8,000 local jobs, unlocking immense regional wealth creation. 2. Industrial Diversity: Spread Over 56 Industries Rather than being confined to narrow technology verticals, Indian startups span across 56 recognized industries. The top 5 sectors driving innovation and job generation are: 1. IT Services Software, SaaS, cloud & enterprise tools 2. Healthcare & Lifesciences Medtech, biotech & diagnostics 3. Professional Services Commercial, legal & business advisory 4. Education EdTech, skill development & pedagogy 5. Agriculture AgriTech, precision farming & supply chain 3. Institutional Support & Flagship Funding Architecture Startup India provides recognized startups with tax holidays, public procurement relaxations, patent fast-tracking, and massive capital pools: CORPUS: INR 10,000 CRORE Fund of Funds for Startups (FFS) Operated through SIDBI (Small Industries Development Bank of India), FFS provides risk capital to SEBI-registered Alternative Investment Funds (AIFs), which invest directly in high-growth Indian startups. OVERLAY: INR 945 CRORE Startup India Seed Fund Scheme (SISFS) Announced by Prime Minister Narendra Modi on 16th January 2021 and officially launched by Minister Piyush Goyal on 19th April 2021. Designed to provide early-stage capital for proof of concept, prototype development, product trials, and commercialization, impacting 3,600 startups through 300 incubators over 4 years. IPR & Patent Fast-Tracking: Substantial rebates on patent filing fees (up to 80%) and trademark fees (50%), along with dedicated patent facilitation panels to secure intellectual property rights rapidly. 4. Cross-Ministerial Schemes Propagating Entrepreneurship Beyond DPIIT, multiple Central Ministries and Departments drive dedicated entrepreneurship and technological incubation programmes: Atal Innovation Mission (AIM): Launched in 2016 by NITI Aayog to foster innovation culture, establish world-class Atal Incubation Centres (AICs), and facilitate international networking and mentor networks. ASPIRE (Ministry of MSME): Scheme for Promotion of Innovation, Rural Industries and Entrepreneurship. Sets up Technology Business Incubators (TBIs) and Livelihood Business Incubators (LBIs) with an emphasis on agro-rural enterprises. MeitY Startup Hub (MSH): Under the Ministry of Electronics and IT, MSH coordinates incubation centres, supports IPR, patent filing, funding, and export-import mechanisms for software and electronics hardware startups. DST-NIDHI PRAYAS: Department of Science and Technology’s National Initiative for Developing and Harnessing Innovations. The PRAYAS (PRomoting and Accelerating Young and ASpiring technology entrepreneurs) component funds young innovators to convert ideas into viable prototypes. Targeted Sectoral Support Programs: Agriculture & Allied Sectors: RKVY-RAFTAAR (Remunerative Approaches for Agriculture and Allied Sector Rejuvenation), Small Farmers Agribusiness Consortium (SFAC), ICAR UPAYA (Unleashing Potentials in Agriculture for Young Agripreneurs), and NABARD’s Nabventures fund. Animal Husbandry, Dairying & Fisheries: Animal Husbandry Infrastructure Development Fund, Dairy Entrepreneurship Development Scheme (DEDS), Dairy Processing & Infrastructure Development Fund, Pradhan Mantri Matsya Sampada Yojana, and the National Livestock Mission. Biotechnology & Deep Tech: BIRAC’s Biotechnology Ignition Scheme (BIG), Biotechnology Industry Partnership Programme (BIPP), and Small Business Innovation Research Initiative (SBIRI). Space & Defence Technologies: Technology Development Fund (TDF) to seed advanced domestic capabilities. 5. Vision for India 2.0 & Atmanirbhar Bharat As India envisions India 2.0 and marches toward becoming a developed nation, its entrepreneurs constitute one of its most remarkable national resources. However, future sustainability demands equitable opportunities across all states, demographics, ethnicities, and genders. “Along with the Government’s support and the collective efforts of our innovators, the country’s entrepreneurial ecosystem is a solid pillar of Atmanirbhar Bharat and has the potential to grow at an exponential rate. And the journey of the revolution has only begun.” References & Web Resources: Startup India Hub: Official Portal of the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry. India Brand Equity Foundation (IBEF): Indian Startup Ecosystem Reports. Inc42 Unicorn Data Tracker: Indian Unicorn Valuation and Job Creation Metrics. Department of Science & Technology (DST): Support for Startups Offering Indigenous Solutions/Products to Tackle COVID-19: https://dst.gov.in/ MeitY Startup Hub (MSH), Ministry of Electronics & IT: https://www.meitystartuphub.in/ Atal Innovation Mission (AIM), NITI Aayog: Atal Incubation Centres: https://aim.gov.in/ ASPIRE Scheme Portal, Ministry of Micro, Small and Medium Enterprises (MSME): https://aspire.msme.gov.in/

STARTUP • TAX & REGULATORY INSIGHT The Chartered Accountant • January 2023 • Vol. 71 • pp. 25–32 (Journal pp. 737–744) Startups in India - Tax and Regulatory Insight ES CA. Eshank M Shah Author is member of the Institute • Contact: eshankshah2903@gmail.com / eboard@icai.in Navigating India’s Next “Tech-ade” in the World’s 3rd Largest Startup Eco-system India is home to the 3rd largest eco-system for startups in the world. With a tough economic period that the world and India has traversed, the moment for our startups to shine is here! Turning this time into an opportunity can be the best outcome for our startups. Business is gaining buoyancy and with increasing aatma-nirbhar markets, the question is whether Indian Startups are equipped with an accommodative, flexible, and easy tax and regulatory landscape to take on this new challenge and deliver for India in its next “tech-ade”. 1. Defining “Eligible Startup” / “DPIIT Recognised Startup” A Startup is an “Entity” fulfilling the conditions as laid down in Notification No. G.S.R. 127(E) dated 19.02.2019 issued by the Department for Promotion of Industry and Internal Trade (DPIIT). The entity must be incorporated as a Private Limited Company, a Limited Liability Partnership (LLP), or registered as a Partnership Firm in India, and must satisfy all three following criteria: (a) Period of Existence: Less than ten years from the date of its incorporation/registration. (b) Turnover Threshold: Turnover [as defined in Section 2(91) of Companies Act, 2013] for any financial year since incorporation has not exceeded INR 100 Crore. (c) Innovation & Scalability: Working towards innovation, development or improvement of products/processes/services, or a scalable business model with high employment generation or wealth creation potential. Negative Covenant: A startup ceases to be an Eligible Startup if it breaches any of the above criteria, or if the entity is formed by splitting up or reconstruction of a business already in existence. Step-by-Step Process for DPIIT Startup Recognition: Register on www.startupindia.gov.in as a “Startup”. Initiate an online application for recognition as an “Eligible Startup” on the portal. Submit a write-up highlighting how the business is working towards innovation, development, or improvement of products/services or scalability in terms of employment generation or wealth creation. Submit the online application along with the Certificate of Incorporation/Registration and other relevant corporate details. Receive the DPIIT Recognition Certificate over registered email ID (or rejection letter providing detailed reasons). Ecosystem Data: As on 15th December 2022, exactly 85,769 startups have been granted “Eligible Startup” recognition by DPIIT. (Refer also to further guidelines issued on 5th July 2021). 2. Comprehensive Analysis of Income Tax Benefits 1. Angel Tax Exemption [Section 56(2)(viib)] DPIIT Notification G.S.R. 127(E) “Angel Tax” is levied on consideration received by unlisted closely held companies from resident investors towards the issue of shares exceeding the fair market value (taxable as income from other sources). Under CBDT rules, an Eligible Startup is granted exemption from Section 56(2)(viib) provided: “The aggregate amount of paid-up share capital and share premium of the Eligible Startup after the issue or proposed issue of shares, if any, does not exceed Twenty-Five Crore Rupees (INR 25 Crores).” Exclusions from the INR 25 Crore Limit (Shares issued to following persons are excluded): Non-resident investors; Venture Capital Company (VCC) or Venture Capital Fund (VCF); Specified Company: A company whose shares are frequently traded [under SEBI (SAST) Regulations, 2011] and whose Net Worth on the last date of the preceding FY exceeds INR 100 Crores, or Turnover exceeds INR 250 Crores. Process to Obtain Angel Tax Exemption: Obtain DPIIT Recognition. Submit self-declaration in Form-2 on the Startup India portal. Receive Angel Tax Exemption Letter over registered email ID. (As on Feb 2021, 3,625 startups granted exemption by CBDT). CBDT Circular No. 16 dated 7th August 2019 & 9th August 2019 Clarifications: Assessing Officers cannot initiate limited/complete scrutiny under Sec 56(2)(viib) without prior written approval from supervisory officers. Additions under Sec 56(2)(viib) are not pressed in further appeal, and outstanding tax demands are not pursued. 2. 100% Tax Holiday on Profits [Section 80-IAC] Eligible Startups can claim a deduction of 100% of profits and gains derived from an eligible business involving innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or IP. Incorporation Window: Incorporated on or after 01.04.2016 but before 01.04.2022. Deduction Tenure: Any 3 consecutive years out of a block of 10 years at startup’s option. Inter-Ministerial Board (IMB) Certification Process (Form 1): Startups must file Form 1 with MOA, 3 years’ audited financials and tax returns, pitch deck, and video link. As on 15th December 2022, 990 startups have been granted 80-IAC IMB Certification. 3. Set-Off & Carry Forward of Losses [Section 79] For 80-IAC startups, unabsorbed business losses incurred during the first 7 years from incorporation can be carried forward and set off even if shareholding changes, provided all shareholders holding voting power on the last day of the loss year continue to hold those shares on the last day of the previous year. 4. LTCG Exemption on Residential Property [Section 54GB] Individuals or HUFs selling residential property can claim long-term capital gain exemption by investing net consideration into equity shares of an 80-IAC startup. The startup must utilize the funds to purchase specified new assets within 1 year; equity shares are subject to a 5-year lock-in. 5. Deferment of Tax Liability on ESOPs [Sec 156, 191 & 192] For 80-IAC startups, perquisite tax and TDS on ESOP exercise are deferred to within 14 days of the earliest of: (i) Expiry of 48 months from end of relevant AY; (ii) Date of sale of ESOP shares; or (iii) Date employee leaves the company. 6. Exemption for Investing in Fund Units [Section 54EE] Exemption of capital gains arising from transfer of long-term capital assets up to INR 50 Lakh invested in units of specified funds notified by the Central Government. (Notification of funds awaited). 7. Additional Employee Cost Deduction [Section 80JJAA] Profitable startups subject to tax audit can claim a deduction of 30% of additional employee cost for 3 consecutive years for new employees whose total monthly emoluments do not exceed INR 25,000 (subject to PF compliance). 8. CBDT Dedicated Start-up Grievance Cell Constituted on 30.08.2019 under Member (IT&C), CBDT, to promptly redress startup tax grievances and resolve scrutiny disputes online via startupcell.cbdt@gov.in. 3. Corporate, FEMA, Labour & Environmental Relaxations (A) Companies Act, 2013 Statutory Exemptions: Cash Flow Statement Exemption: Exempted from preparing cash flow statements as part of annual financial statements (G.S.R. 583(E) dated 13.06.2017). Board Meetings Frequency: Need hold only one Board Meeting in each half of a calendar year with a minimum gap of 90 days between meetings, rather than quarterly meetings (G.S.R. 583(E)). Acceptance of Member Deposits: Allowed to accept deposits from members without complying with stringent limits under Section 73(2) (G.S.R. 639(E) dated 29.06.2016). Convertible Notes: Under Rule 2(c)(xvii) of Companies (Acceptance of Deposits) Rules, 2014, an instrument receiving minimum INR 25,00,000 in a single tranche from a single person repayable/convertible within 10 years is not treated as a deposit. Sweat Equity Limit: Can issue sweat equity shares up to 50% of paid-up capital for up to 10 years from incorporation (normal limit is 25%) under Rule 8(4). ESOPs to Promoters: Permitted to issue ESOPs to promoters and director-shareholders holding >10% equity during their first 10 years of existence (G.S.R. 704(E) & G.S.R. dated 16.08.2019). Annual Return (MGT-7) Certification: No certification by a Practicing Company Secretary (PCS) is required; signature of directors is sufficient compliance under Section 92. (B) Foreign Exchange Management Act (FEMA) & RBI Relaxations: Optionally Convertible Notes (FEMA NDI Rules 2019): Eligible startups can issue convertible notes for INR 25 Lakhs or more in a single tranche to foreign investors with a 10-year repayment/conversion period. No company valuation is required at the time of note issuance, avoiding immediate dilution of control. Relaxed ECB Guidelines (RBI Circular No. 13 dated 27.10.2016): No all-in-cost ceiling: Cost of borrowing mutually agreed between parties. No end-use restrictions on funds raised via ECB. Minimum Average Maturity Period is 3 years for all purposes. Can borrow from any recognized lender in a FATF-compliant country. Removal of restrictions on borrowing solely from Foreign Equity Holders and removal of debt-to-equity ratio caps. Overseas Foreign Currency Accounts (RBI Circular No. 77 dated 23.06.2016): Startups with overseas subsidiaries may open bank accounts abroad to credit export proceeds, with export earnings repatriated to India, and permissible foreign currency credits into domestic EEFC accounts. SEBI Registered FVCI Investments: FVCIs permitted to invest in Indian startups regardless of industry vertical (RBI Circular No. 7 dated 20.10.2016). Labour Laws: 5-Year Self-Certification Self-certification across 9 central labour laws (Industrial Disputes, Trade Unions, BOCW, Standing Orders, Inter-State Migrant, Gratuity, Contract Labour, EPF, and ESI, plus Apprentices Act). No physical inspection for 5 years unless a credible written complaint is approved by an officer senior to the inspector. Online returns filed via the Shram Suvidha Portal. (28 states offer self-certification under 6 laws). SEBI Differential Voting Rights (DVR) Founders can issue Superior Voting Rights (SR) shares to retain executive control while issuing ordinary shares in an IPO on the Main Board under SEBI ICDR Regulations. Total voting rights of SR shareholders post-listing cannot exceed 74%. Environment Laws: CPCB White Category Startups falling under the Central Pollution Control Board (CPCB) “White Category” can self-certify environmental compliance under Water Act 1974, Water Cess Act 2003, and Air Act 1981, with only random checks conducted. Insolvency & Bankruptcy Code (IBC 2016) Fast-track insolvency resolution process under IBC applies to Eligible Startups, requiring resolution within 90 days (compared to 180 days for other corporate entities). 4. IPR Protection, Public Procurement & SIDBI Fund of Funds Intellectual Property (SIPP Scheme) Fast-tracking of startup patent examination. Facilitator Fees Paid by Government: Central Government bears 100% facilitator fees; startups pay statutory fees only. 80% Patent Fee Rebate: Cost reduced from INR 8,000 to INR 1,600. 50% Trademark Fee Rebate: Cost reduced from INR 10,000 to INR 5,000. As on 4th February 2021, 5,977 startups received statutory IP fee benefits. Public Procurement (GeM Portal) Direct listing as verified sellers on Government e-Marketplace (gem.gov.in). EMD Exemption: Exempted from submitting Earnest Money Deposit (EMD) / Bid Security under GFR Rule 170(i) OM dated 25.07.2017. Prior Turnover & Experience Exemption: Manufacturing startups exempted from “prior experience/turnover” criteria subject to quality compliance (DPE OM dated 08.11.2016). SIDBI Fund of Funds for Startups (FFS) — INR 10,000 Crore Corpus Managed by the Small Industries Development Bank of India (SIDBI), the government contributes capital to SEBI-registered Alternative Investment Funds (AIFs), which deploy venture equity into high-growth innovation startups. Statutory Notifications, Circulars & Legal Citations: Notification No. G.S.R. 127 (E) dated 19.02.2019 issued by Department for Promotion of Industry and Internal Trade (DPIIT). “Turnover” shall have the meaning assigned to it in clause (91) Section 2 of the Companies Act, 2013. “Frequently Traded Shares” as defined in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. CBDT Circular No. 16 dated 7th August 2019. Inter-Ministerial Board of Certification: Joint Secretary DPIIT (Convener), Representative of Dept. of Biotechnology, Representative of DST. Companies Act Exemption: G.S.R. 583(E) dated June 13, 2017 (Cash Flow Statement). Companies Act Exemption: G.S.R. 583(E) dated June 13, 2017 (Board Meetings frequency). Companies Act Exemption: G.S.R. 639(E) dated June 29, 2016 (Member Deposits). Companies (Share Capital and Debentures) Rules, 2014: G.S.R. 704(E) dated July 19, 2016 (Sweat Equity). ESOP Rules: G.S.R. 704(E) dated July 19, 2016 read with G.S.R. (E) dated 16th August 2019. Companies (Acceptance of Deposits) Rules, 2014: G.S.R. 639(E) dated June 29, 2016 (Convertible Notes). Companies Act Section 92 Exemption: G.S.R. 583(E) dated June 13, 2017 (MGT-7 Annual Return). FEMA (Non-debt Instruments) Rules, 2019: G.S.R. 3732(E) dated October 17, 2019; Earlier FEMA 20(R) dated November 7, 2017. RBI/2016-17/103 A.P. (DIR Series) Circular No. 13 dated October 27, 2016 (ECB Guidelines). RBI/2015-16/430 A.P. (DIR Series) Circular No. 77 [(2)/10(R)] dated June 23, 2016 (Foreign Bank Accounts). RBI/2016-17/89 A.P. (DIR Series) Circular No. 7 dated October 20, 2016 (FVCI Investments). Ministry of Labour D.O. No Z-13025/39/2015-LR Cell dated April 6, 2017. Ministry of Skill Development D.O. MSDE-6(1)/2016-AP dated January 15, 2016. SEBI (Issue of Capital and Disclosure Requirements) Regulations: Differential Voting Rights framework. DPIIT Order No. 12(30)/2015-IPR-III (Part file 2) dated April 30, 2017 (SIPP Scheme). IP India Scheme for Facilitating Start-ups: http://www.ipindia.nic.in/writereaddata/Portal/News/323_1_Scheme_for_facilitating_start-ups.pdf IP India Trademark Rebate: http://www.ipindia.nic.in/writereaddata/Portal/News/323_1_Scheme_for_facilitating_start-ups.pdf Startup India Kit 2021: https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Startup%20India%20Kit_2021_V2.pdf Ministry of Finance OM No. F.20/2/2014-PPD(Pt.) dated July 25, 2017 (Rule 170(i) GFR 2017 EMD Exemption). Department of Public Enterprises OM No. DPE/7(4)/2007-Fin dated November 8, 2016 (Prior Turnover/Experience Exemption).

STARTUP • VENTURE CAPITAL & FUNDRAISING The Chartered Accountant • January 2023 • Vol. 71 • pp. 34–37 (Journal pp. 746–749) Fundraising is an extreme Sport, Be Cautious! TC CA. Tarun Chaurasia Author is member of the Institute • Contact: tarun@pepartners.in / eboard@icai.in The Maturation of Indian Venture Capital & The Capital Deployment Landscape India is an emerging market for startups and entrepreneurs as witnessed by its extraordinary trajectory over the last six years. From a mere 471 startups in 2016 to nearly 73,000 startups in 2022, venture capital has meaningfully transformed the startup ecosystem. In its early years, venture capital was a very small industry, but today it has grown into one of the financial market’s most significant and widely recognized asset classes. 2021 Peak Deployment: $38.5 Billion deployed (3.8x growth over 2020) across 1,500+ deals (2x volume vs. 809 in 2020). Unicorn Milestone: India minted 44 unicorns in 2021, surpassing China (42) for the first time, surpassing a total count of 100+ unicorns. SEBI-Registered AIFs: Over 900 Alternate Investment Funds (AIFs) registered with SEBI as of May 2022 holding record dry powder. Record Dry Powder: Nearly US$9 Billion raised by India-focused funds in the 12 months ending August 2022 waiting to be deployed. ❖ The Harsh Reality of Fundraising: The 97% Rejection Dynamic Despite record dry powder in the hands of institutional investors, funding does not come easily. Over 90% of pitch proposals received by investors are rejected at the very first glance. The harsh truth is that wanting to raise venture capital does not guarantee success: Over 97% of All Companies Seeking Equity Funding Fail to Raise It More than 90% of startups fail. In most cases, the short answer to funding queries is simply “you don’t”. The safest place for any VC to park its money is in selected mature startups or Investible Businesses possessing a proven, scalable business model, demonstrable traction, unit economics, a clear path to profitability, and the realistic potential to list on public equity markets within a few years. A. Pitfall 1: Raising “Too Early” & The Primacy of Traction At any point in time, thousands of entrepreneurs look to raise funds at the pure idea stage or when a Minimal Viable Product (MVP) has barely been developed and market traction is entirely missing. Founders frequently spray cold emails across hundreds of investors in the futile hope that someone will write a cheque. What Constitutes Real Traction in Today’s Market? Traction and scale are paramount. Traction represents the measurable velocity and progression a startup achieves during its initial operations. It proves: That products and services are commercially viable; That the business has achieved genuine Product-Market Fit (PMF); That brand pull is growing organically; Tangible financial and operational numbers: recurring revenue, gross margins, active user retention, and executed key commercial agreements. The Fallacy of Pre-Concept Funding: While exceptional founders who have led multiple successful exits may raise capital on a napkin, this is a rare exception and must not be misconstrued as an industry standard. “Too early for us” is the single most frequent rejection reason. Early-stage founders must resist the urge to ask for capital prematurely. B. Pitfall 2: Targeting the Wrong Audience & Misreading the Investment Thesis Circulating pitch decks blindly to investors whose mandate does not fit your company guarantees immediate rejection or complete radio silence. The institutional investor universe is highly heterogeneous: • Angel Networks & HNIs • Accelerators & Incubators • Family Offices & CVCs • Institutional VC Funds • Sovereign Wealth & Pensions • DFIs & Insurance Funds An Investment Thesis is a binding set of rules, parameters, and principles embedded within a fund’s constitutional documents (such as its Limited Partnership Agreement). Regardless of how brilliant a pitch may be, any proposal lying outside their thesis is rejected upfront. The 9 Core Dimensions of an Investor’s Thesis: Sector Preference: Dedicated sector-focused fund (e.g. Fintech, Healthtech, Agritech) vs. Sector-agnostic fund. Cheque / Deal Size: Prescribed minimum and maximum capital deployment per transaction. Role Mandate: Lead Investor (setting valuation and term sheets) vs. Co-Investor / Follower. Life-Cycle Focus: Early-stage seed capital vs. Growth-stage Private Equity. Specific Round Classification: Idea, Pre-Seed, Seed, Bridge Round, Pre-Series A, Series A, Series B, C, D, etc. Transaction Type: Primary growth capital vs. Secondary transactions (buying out early angel investors or employee ESOPs on the cap table). Buyout vs. Minority: Growth minority equity investor vs. Majority control/buyout fund. Negative / Exclusion List: Hard exclusions where funds cannot invest (e.g. alcohol, gambling, tobacco, adult entertainment, speculative trade). Strategic Theme: Distinct operational themes such as B2B enterprise software, direct-to-consumer (D2C), financial inclusion, or ESG/impact investment. Foreign-Domiciled Funds Context: In 2021–2022, many global funds invested in India solely by co-investing alongside an established local lead fund. Chasing foreign funds that do not have an on-ground team or independent direct evaluation mandate is an exercise in futility. C. Professional Help is Key: “Fundraising is an Extreme Sport” Fundraising is an extreme sport—don’t try it yourself. An average funding campaign lasts anywhere between three to six months, demanding the equivalent of a gruelling full-time job. While founders possess infectious optimism and prefer getting their hands dirty across every function, raising capital requires specialized investment banking expertise. 8 Critical Tasks Where Professional Advisors Add Decisive Value: 1. Timing & Readiness: Assessing whether it is the right stage to raise capital. 2. Capital Structure: Evaluating venture debt vs. equity dilution tradeoffs. 3. Financial Modeling: Building dynamic models with built-in scenario and sensitivity analysis. 4. Collateral Creation: Preparing executive Teasers and high-impact Pitch Decks. 5. Valuation Benchmarking: Establishing realistic, defensible company valuations. 6. Thesis Due Diligence: Vetting investor profiles and sweet spots to avoid dead-ends. 7. Curated Outreach: Generating warm introductions to senior partners and IC members. 8. Deal Execution: Guiding term sheet negotiations, due diligence, and closing. D. The Investment Teaser: Grabbing Attention in a Crowded Market With investment teams inundated with hundreds of decks weekly, an executive Investment Teaser serves as the critical introductory hook. What Makes an Effective Investment Teaser? Concise Length: Strictly 1 to 2 pages presenting a crisp, high-level summary of the business opportunity. No Fluff or Overly Fancy Design: Focus on hard facts, unit economics, traction metrics, market size, and competitive moat. Transparency: Never withhold basic or relevant financial metrics; transparency establishes credibility immediately. Audience Qualifier: Acts as an efficient preliminary filter to identify genuine interest before circulating confidential data rooms or full pitch decks. Note: Readers seeking a proven institutional Teaser format may contact the author at tarun@pepartners.in. E. Technology Focus: Why VCs Demand Tech-Enabled Scalability A review of modern VC investment theses reveals that institutional venture capital almost exclusively targets Technology Businesses or Tech-Enabled Ventures, while traditional small- and mid-cap businesses reliant on conventional bank credit are largely overlooked as non-investible: Traditional Businesses Proven business models where success depends strictly on execution, linear capex investment, and localized scale. Due to high competition, revenue growth and margins are linear and predictable. Technology-Based Ventures High-risk, unproven markets featuring intellectual property (IP) creation, zero marginal cost of distribution, disruptive network effects, and exponential scalability. The Power Law of Venture Capital: 10X to 50X Value Multipliers Venture capitalists invest on the principle of the Power Law: they accept that a substantial portion of their portfolio will fail, but the few breakout winners generating 10X to 50X value multipliers will easily return the entire fund and drive superior alpha. Verdict: If a startup is not a pure Technology company or a Tech-Enabled venture capable of hyper-scale disruption, it will be rejected upfront by institutional VCs. Conclusion: Equipping Founders for the Journey Venture capital has evolved from a niche activity into a dominant global asset class. While unprecedented dry powder sits ready for deployment, founders must replace naive spray-and-pray tactics with rigorous preparation—verifying timing, mastering investor theses, enlisting experienced advisors, crafting concise teasers, and building technology-driven moats.

STARTUP • FINANCIAL OPERATIONS The Chartered Accountant • January 2023 • Vol. 71 • pp. 38–40 (Journal pp. 750–752) Working Capital Management for Startups DG CA. Deepak Gupta Author is member of the Institute • Contact: eboard@icai.in The 6:30 AM Dilemma: Caught Between Tactical Survival and Strategic Growth “It was 6:30am on Friday, I called my friend, Ravi – founder of a fintech company. I was apprehensive, he would be occupied with his daily chores and might not be available. Fortunately, Ravi picked up the call. Among zillion things hounding attention, he was logging into his company’s bank account portal. He informed me that he has an investor’s call lined up, an upcoming board meeting needs to be managed for essential matters, and a couple of investors are seeking his time for some critical product updates and need to take certain important calls about insourcing tech and sales functions. I could understand the situation of Ravi, he is stuck in a quandary of balancing between managing tactical problems and working on strategic growth areas. He is a sample of a larger cohort of founders.” The Double Whammy: Creditors refuse to give leeway in payment deadlines, while debtors take their own sweet time to settle invoices regardless of agreed terms. Trapped with unsold inventories, the liquidity squeeze becomes acute. ❖ Working Capital: The Core Equation & Ingredients Working capital management requires hawkish scrutiny of every constituent item. The working capital may be positive or negative depending on the company’s operating model, but both extremes require precise tactical navigation: Current Assets Receivables, Inventory, Short-term Assets − Current Liabilities Trade Payables, Customer Advances, Short-term Dues = Working Capital Operational Cash Flow & Fuel 1. Trade Receivables Management: From Hygiene to Supply Chain Finance Trade receivables represent outstanding amounts due against goods or services supplied in the normal course of business. Startup struggles with timely collections generally stem from operational hygiene breakdowns and lack of financing integration: Common Operational Invoicing Hygiene Defects: Failure to raise invoices on time immediately post-delivery. Incorrect invoicing in terms of quantity, item descriptions, or pricing formulas. Omission of necessary supporting documentation and signed proofs of delivery. Invoices submitted to the incorrect department, function, or person. Contractual Terms & MSME Act Protection Contracts must clearly define invoice submission patterns, pricing calculations, and dispute escalation matrices. Crucially, the Micro, Small and Medium Enterprises (MSMED) Act empowers registered startups to charge compound interest @ 2% per month (three times the bank rate) on payments delayed beyond 45 days—a clause frequently missing in startup contracts. Factoring & Bill Discounting Facilities Banks and NBFCs offer innovative factoring and invoice discounting facilities structured as non-fund-based limits against fractional cash collateral. Effectively discounting validated invoices curtails long cash turnaround cycles and provides liquidity to lubricate daily operations. Out-of-the-Box Collection Models & Leakage Risks: SaaS startups excel by collecting monthly fees in advance or offering upfront discounts for quarterly/annual subscriptions. Consumer fintech models employ Buy Now Pay Later (BNPL), zero-cost EMI, and revenue-based financing against monthly sales. Caveat: If invoice-to-collection workflows and reconciliation processes lack internal controls, high operational leakage will severely worsen the cash shortfall. 2. Inventory Management & The Sales on Return (SOR) Trap Startups running inventory-based models—particularly e-commerce platforms and Direct-to-Consumer (D2C) brands—face the persistent threat of illiquid, unsold stock and high customer returns: Demand Forecasting Software Optimizing back-end supply chains requires automated off-the-shelf software integrating order streams from various marketplace channels to forecast demand and eliminate stock-outs without over-purchasing. The Sales on Return (SOR) Trap D2C brands stocking goods on an SOR basis with e-commerce giants risk massive liquidity blockage if goods remain unsold and are returned damaged or outdated. Robust planning and weekly audit reviews are essential to mitigate this exposure. 3. Trade Payables Management & Vendor Credit Alignments Payables management requires granular purchase order (PO) authorization and strict adherence to procurement budgets. Deviations dilute vendor bargaining power and force startups to pay premium input prices: The Raw Material Order Optimization Dilemma: Ordering Enormous Quantities: Locks up valuable liquid capital in warehouse stock, increasing holding costs and spoilage risks. Ordering Fragmented Quantities: Eliminates volume discounts and inflates inward freight, logistics, and handling expenses. Strategic Solution: Long-term supply agreements with vendors coupled with Vendor Credit Lines, where established suppliers extend credit facilities to startups, allowing deferred payments in alignment with sales realization cycles. 4. The “Three Steps Mantra” for Optimal Working Capital Achieving a balanced cash-flow cycle is not a one-time project; it requires an institutionalized operational discipline: MANTRA STEP 1 Continuous Rigour Avoid the “steroid shot effect”—where founders react with panic during a cash crunch, but revert to lax operational habits as soon as liquidity improves. Demand permanent finance rigour: scrutinize every cash advance, actively monitor aged debtors to reduce Days Sales Outstanding (DSO), and ruthlessly liquidate slow-moving stock. MANTRA STEP 2 Sharp Metrics & Review “What is not measured does not improve.” Break down departmental information silos. Capture clean operational data to construct dependable dashboards tracking cash conversion cycles, debtor ageing brackets, and inventory velocity across recurring cross-functional reviews. MANTRA STEP 3 Quick Action Review without decisive action is useless. Founders must intervene immediately when cash flows deteriorate. In bill discounting arrangements, if a buyer delays settlement, the startup must immediately fund the gap to prevent default penalties and protect bank credit limits. 5. Resolving the Fund Utilization Conundrum The Peril of Diverting Long-Term Growth Capital into Working Capital Startups frequently stumble into a fatal trap: when operational cash runs dry, founders deploy equity growth capital raised for product development and market expansion into plugging working capital deficits. Once growth capital is trapped in working capital, business expansion stalls, and the trapped liquidity is never released. Conversely, utilizing short-term operational credit to acquire long-term illiquid assets creates a dangerous asset-liability mismatch, precipitating insolvency. Founders must establish clear structural boundaries between short-term working capital facilities and long-term expansion funds. Conclusion: Balancing the Working Capital Fulcrum Startups exist in a perpetual sandwich between suppliers demanding instant settlement on one side and customers postponing payment on the other. This negative gap causes liquidity crunches that force founders into suboptimal, panic-driven compromises. By continuously linking operational business activities to working capital drivers, founders can master the working capital fulcrum and secure sustainable growth.

STARTUP • BUSINESS VALUATION The Chartered Accountant • January 2023 • Vol. 71 • pp. 41–46 (Journal pp. 753–758) The ABC of valuing startups VP CA. Vijaykumar Puri Author is member of the Institute • Contact: vkrpuri@gmail.com / eboard@icai.in The New Paradigm: Profitability is No Longer the Core Value Driver The traditional approaches to valuation are inadequate for the valuation of new-age startups. The business model has undergone a fundamental transformation in the 21st century. Profitability is no longer a key value driver for new-age startups. Listed tech entities like Paytm openly submit that profitability is not their goal in the foreseeable future. By its very nature, valuation is highly subjective—like the world-famous Mona Lisa painting, worth billions to some and considered average by others. In startups, where historical financials do not exist, a good valuer understands that actual value lies less in the numbers and more in the story of the startup. 1. The Three Traditional Valuation Approaches & Why They Fail for Startups Traditional methods pre-suppose an established, profitable business with tangible assets, established competitors, and predictable cash flows. Startups, by definition, disrupt industries and burn cash on customer acquisition. Method Traditional Description Why It Fails for New-Age Startups Income Approach (DCF) Discounted Cash Flow method: estimated future cash flows discounted to present value. A vast majority of startups operate under the premise of negative cash flows in the foreseeable future. Since there are minimal/no positive cash flows, DCF cannot compute intrinsic value reliably. Asset Approach Used during liquidation/distress: net realisable value of physical assets and liabilities. 1. Startups have negligible tangible assets; their value resides in intellectual property and code.2. Startups are going concerns; their enterprise value cannot be reduced to today’s asset liquidation price. Market Approach Assigns value based on trading/transaction multiples of listed comparable peers. Startups create novel, unproven markets without established listed competitors. Comps are other nascent peers with skewed metrics (though useful in later-stage growth rounds). The Major Roadblock: Absence of Past Performance Indicators: Valuing a startup can be equated to “founders walking in the dark and making investors believe they are wearing night vision goggles.” The role of the professional valuer is to help investors navigate the dark using rigorous facts, rather than fairy tales. 2. The 7 Core Value Drivers for Startups Since historical financial statements cannot guide valuation, professional valuers assess 7 critical qualitative and operational value drivers: 1. Product Readiness & Uniqueness: A functional product or working MVP commands significantly higher valuation than a conceptual idea. Market validation and customer feedback are vital sub-drivers. 2. Management Team Pedigree: Over half of Indian unicorn founders hail from IITs or IIMs. A balanced team combining software engineers, finance professionals, and MBA graduates commands premium pricing. 3. Quantifiable Traction: Empirical evidence that customer demand exists (active user growth, engagement retention, cohort progression). The stronger the traction, the higher the valuation. 4. Revenue Streams: While profitability is not mandatory, tangible top-line monetization provides concrete proof of customer willingness to pay beyond vanity usage metrics. 5. Industry Attractiveness: Macro tailwinds, TAM (Total Addressable Market), supply chain scalability, and regulatory stability. (e.g. tourism tech depressed during pandemic lockdowns). 6. Demand - Supply Dynamics: When an industry enjoys immense venture capital attention and high dry powder, fierce investor competition elevates individual startup valuations. 7. Competitiveness & Moat: First-mover advantage vs. fast followers. While existing global models ease validation (e.g. Ola pitching Uber’s model), startups must demonstrate sustainable differentiation. Note on Unicorn Terminology: “Unicorn” was coined in 2013 by venture capitalist Aileen Lee (founder of Cowboy Ventures, Palo Alto) to designate privately held startups valued at over $1 Billion. 3. Six Innovative Startup Valuation Methods 1. The Berkus Approach Developed by Dave Berkus (Angel Investor & VC) Assigns up to $500,000 across 5 quantitative success factors: (1) Sound basic value/idea, (2) Functional prototype/tech, (3) Quality management execution, (4) Strategic core relationships, (5) Production rollout and sales. Caps: Pre-revenue capped at $2 Million; Post-revenue capped at $2.5 Million. 2. Cost-to-Duplicate Approach Historical Replacement Costing Calculates all historical expenses incurred to build the product, software architecture, and physical assets from scratch. Limitation: Heavily criticised for ignoring future revenue potential, market size, and intangible moats. 3. Comparable Transactions Method Precedent M&A Multiples Uses unit multiples from comparable acquisition deals. E.g., if XYZ Ltd. is acquired for Rs 560 Crores with 24 Crore active users (Rs 23.33/user), target ABC Ltd. with 1.75 Crore users is valued at ~Rs 40 Crores, adjusted for proprietary tech and geography. 4. Scorecard Valuation Method Bill Payne Method (Pre-Revenue) Adjusts average sector pre-money valuations by weighting key factors: Team Strength (0–30%), Market Opportunity (0–25%), Product/Service (0–15%), Competition (0–10%), Marketing/Channels (0–10%), Investment Need (0–5%), Others (0–5%). Weighted comparison factors are multiplied against the benchmark. 5. First Chicago Method Scenario-Based Hybrid (DCF + Multiples) Constructs three distinct operating scenarios—Worst-Case, Normal-Case, and Best-Case. Cash flows and terminal values are computed for each and weighted by probability factors to establish an expected intrinsic value. 6. Venture Capital (VC) Method Target Multiple & Hurdle Rate Back-Solving Back-solves from expected terminal exit valuation at a future date (e.g. 5–7 years). Discounts terminal value by the VC’s targeted multiple of money (e.g. 10x, 20x, 30x) or required IRR to determine current post-money valuation. 4. Rising Above Numbers: Narrative & Numbers (Aswath Damodaran Framework) “If all you have are numbers on a spreadsheet, you don’t have valuation. You just have a collection of numbers.” — Professor Aswath Damodaran (Stern School of Business, NYU) The Rolex Valuation Case Study: Numbers vs. Story vs. The Synthesis Scenario 1: Pure Numbers Earnings grow at 9.5% for 8 years, then drop to GDP rate; Operating Margin is 43%; Net Margin is 16%; generates Rs 2.54 per rupee invested. Result: Cold figures that fail to inspire conviction. Scenario 2: Pure Story Rolex manufactures luxury watches charging astronomical prices and generating vast margins due to scarcity among the ultra-wealthy. Result: Exciting narrative, but impossible to price. Scenario 3: Narrative-Tied Numbers (The Synthesis) Because Rolex strictly limits supply to maintain exclusivity, revenue grows at a modest 9.5% for 5 years. That very exclusivity sustains a 43% operating margin insulated from economic recessions. Result: The true hallmark of sound valuation. Prof. Aswath Damodaran’s 5-Step Process for Integrating Story into Numbers: Step 1: Develop a Narrative for the Business Being Valued: Construct a clear, logical story about how the business model evolves, expands, and monetizes over time. Step 2: Test the Narrative: Possible, Plausible, and Probable: Many narratives are possible; only a fraction are plausible; and very few are truly probable. Filter out corporate fiction. Step 3: Convert the Narrative into Drivers of Value: Deconstruct the story into valuation inputs: potential market size, revenue growth rate, operating margins, reinvestment needs, and cost of capital. Step 4: Connect Value Drivers to a Valuation Model: Build an intrinsic financial model linking these narrative-driven inputs into a definitive enterprise end-value. Step 5: Keep the Feedback Loop Open: Actively solicit critical feedback from operators and industry specialists who know the market intimately, iteratively updating the narrative. Conclusion: Valuation as a “Scientific Art” Valuation is universally recognized as a blend of art and science. The author’s unique thesis is that valuation is a scientific art: an art constructed by the valuer, yet grounded in definite method within the madness. Its sanctity is preserved when every quantitative projection is anchored by rational operational facts. Final Verdict: A sound startup valuation is an elegant cocktail of the narrative and the numbers, empowering investors and founders to navigate the uncertainty of the future.

STARTUP • CORPORATE VENTURE CAPITAL The Chartered Accountant • January 2023 • Vol. 71 • pp. 47–48 (Journal pp. 759–760) Corporate innovation through Startups NK CA. Ninad Karpe Author is member of the Institute • Contact: eboard@icai.in The Limits of Internal R&D & The Rise of Corporate Venture Capital Isn’t corporate innovation essential to keeping up with the competition? But what happens when a company becomes too large to rely solely on its internal R&D team? Should the CEO identify external sources of innovation independent from the corporation itself? McKinsey & Company Global Survey (2018): Approximately 40% of large corporations partner with one or more external startups to accelerate corporate growth. Fortune Magazine Benchmark: More than 83% of Fortune 500 firms have at least one VC-backed startup in their investment portfolio. ❖ Startup Agility vs. Corporate Scale: A Win-Win Symbiosis Startups provide large corporations with a cost-effective vehicle to access novel products, cutting-edge technologies, and top-tier entrepreneurial talent. Startups iterate business models significantly faster than incumbents, operate with greater organizational flexibility, and are unburdened by corporate bureaucracy. What Startups Gain from Corporates: Access to institutional capital and balance sheet strength; Established distribution networks and manufacturing infrastructure; Immediate access to large enterprise customer bases; Corporate brand validation and reputational signaling. What Corporates Gain from Startups: De-risked external R&D pipelines; Immersion in disruptive technologies (AI, Web3, Biotech); Portfolio diversification into high-growth verticals; Injection of agile, entrepreneurial problem-solving talent. 1. Developing the CVC Framework: Two Foundational Pillars Before initiating investments, an enterprise must construct a rigorous Corporate Venture Capital (CVC) Thesis resting on two distinct pillars: PILLAR 1 Investment Objective Strategic vs. Financial: Strategic: Primary intent is increasing corporate sales, defending against disruption, and bolstering core business profits. Financial: Seeking superior ROI and capital gains, leveraging the corporate’s market insight, balance sheet patience, and brand endorsement. PILLAR 2 Operational Linkages Exploiting Venture Value: Measures the degree to which portfolio startups leverage the investing company’s resources—manufacturing plants, logistics, software stacks, or brand. For example, a pharmaceutical giant investing in an early-stage oncology startup to accelerate drug development pipelines. 2. Four Corporate Investment Structures Depending on capital commitment and risk tolerance, corporations select from four distinct structural engagement options: OPTION 1 Single Direct Investment Purchasing equity or convertible instruments in a single startup. Often the initial entry step into venture capital, evaluated through traditional corporate M&A processes. OPTION 2 Multiple Direct Investments Opportunistically backing multiple startups to augment internal R&D without altering corporate organizational structures, tracking progress until maturity. OPTION 3 Portfolio Strategy Formalizing direct investments with dedicated long-term capital commitments, backing 2 to 5 curated deals annually guided by a strategic thesis. OPTION 4 LP in Independent VC Funds Investing as a Limited Partner (LP) in established VC funds. Secures startup deal access, technology pipelines, and exit advisory, with limited operational management burden. 3. Deal Sourcing Architecture: Internal CVC Team vs. External VC Funds Identifying high-potential startups demands specialized domain infrastructure. Corporations navigate between two operating models: 1. Dedicated Internal CVC Team Housed directly within the enterprise, the internal team conducts market research and monitors emerging industry trends against the company’s internal product pipeline. Directly connected to top executive management, ensuring seamless strategic alignment with core business units. 2. Partnering with External VC Funds Larger corporates partner with seasoned venture capitalists to gain first-hand venture market expertise while outsourcing due diligence. Crucially, professional VC firms solve the single most decisive bottleneck in corporate venturing: high-quality, proprietary deal flow. Conclusion: The Inevitable Imperative for Corporate Survival It is time for every corporate enterprise to evaluate startup investing. Until internal venture skill sets are fully cultivated, partnering with external venture funds provides the ideal launching pad. “Eventually, only the most innovative companies will survive, and the ones that possess a well-structured CVC model of investing in startups will remain decisively ahead of the rest.”

SPECIAL WRITE-UP • MACROECONOMIC PERSPECTIVE The Chartered Accountant • January 2023 • Vol. 71 • pp. 50–51 (Journal pp. 762–763) India – An Oasis in the desert! NS CA. Nilesh Shah Group President & Managing Director, Kotak Mahindra AMC • Contact: eboard@icai.in The 8-Year Leap: Doing in 8 Years What Took 75 Years to Accomplish The Indian economy has grown tremendously over the past few decades, and there is no sign of it slowing down anytime soon. In 1990, the economy was worth only 200 billion dollars. Fast forward to 2021, and it is now worth 3 trillion dollars. If this trajectory continues, by 2030 the economy is expected to reach 6 trillion dollars. Strategic Mandate: This presents an immense opportunity for businesses and entrepreneurs alike. India must take advantage of this macro momentum and accomplish in the next 8 years what took 75 years since Independence to achieve. 1. Thriving in “Rahu Kaal”: India’s Structural Resilience Many believe that Rahu Kaal is a time when everything goes wrong, but this has not been the case for India. In macro terms, India’s Rahu was crude oil prices and Ketu was COVID-19. Between 2014 and 2021, crude oil crossed $100 twice, accompanied by the global pandemic. Yet, right through this period, India’s economic ascent remained relentless: Global GDP Ranking 10th → 5th Largest Overtook the United Kingdom Share of Global GDP 2.6% → 3.2% Substantial market share expansion Global FDI Share 2% → 7% Over 3.5x rise in foreign direct capital Forex Reserves Status Top 5 in World From pledging gold in 1991 to fortress reserves Overcoming Historical Paradoxes: Inflation Decoupling: While India experienced its highest domestic inflation in 8 years, it remained lower than US inflation rates for 14 consecutive months—reversing a 30-year historical paradigm where Indian inflation consistently exceeded US levels. Physical Connectivity: Traveling from Mumbai to Pune used to require an arduous overnight journey; today it is completed in under 4 hours. Capital Democratization: Decades ago, brilliant business ideas languished without capital. Today, domestic and international PE/VC ecosystems aggressively fund promising entrepreneurs. 2. The Domestic Investor Revolution: Neutralizing FII Outflows For decades, Indian capital markets longed for the day when Foreign Institutional Investors (FIIs) could dump equities without triggering a catastrophic market collapse. Thanks to the rise of domestic retail investors and Domestic Institutional Investors (DIIs), that milestone has arrived: March 2020 Crash (Past Vulnerability) FIIs sold approximately Rs 48,000 Crore, causing the Nifty index to plummet from 12,500 down to 7,500 (a steep ~40% crash) due to inadequate domestic counter-buying. Oct 2021 – June 2022 (Domestic Dominance) FIIs sold a colossal Rs 2,50,000 Crore. Yet, the markets barely declined 10% to 12%, absorbed completely by steady domestic retail and institutional inflows. Domestic War Chest: Supported by a monthly Systematic Investment Plan (SIP) book exceeding Rs 13,000 Crore and over Rs 45,000 Crore in cash reserves held by Balanced Advantage Funds ready to deploy on dips. 3. The “3G” Investment Framework: Growth, Governance & Green India’s superior positioning relative to global emerging market peers is encapsulated by the 3G Framework, making the country an irresistible investment hub for global and local capital: 1. Growth Projected to remain the fastest-growing major economy worldwide, supported by massive demographic dividends, urbanization, and digital productivity. 2. Governance Dramatically improved corporate governance, minority shareholder protection, regulatory transparency, and structural institutional reforms. 3. Green Heightened environmental consciousness, massive renewable energy capital commitments, and ESG compliance outperforming emerging market peers. 4. Key Growth Engines for the Next 20–25 Years 1. Banking and Financial Services Bank credit typically expands at 1.5 to 2 times the rate of GDP growth. The sector is undergoing rapid consolidation, with deposits and advances concentrated among five to six mega-institutions. Non-Performing Assets (NPAs) are fully provided for, balance sheets are exceptionally clean, net interest margins (NIMs) are expanding on interest rate cycles, and equity valuations remain highly attractive. 2. Manufacturing Renaissance & China+1 Realignment The global China+1 sourcing policy coupled with Europe’s acute energy crisis presents Indian manufacturers with historic market opportunities. Sectors such as technical fibres, electronics assembly, and auto components are poised to replicate the multi-decade compounding witnessed in Indian IT services, generic pharmaceuticals, and two-wheeler manufacturing. 3. Capital Goods & The Three-Engine Capex Cycle Industrial order books have surged, with manufacturing capacity utilization crossing pre-COVID thresholds. For the first time, all three demand engines are firing simultaneously: Government Capex: Strong direct and indirect tax buoyancy leaves the government sitting on Rs 3 to 4 Lakh Crore of cash reserves to deploy into national infrastructure. Private Sector Capex: Robust revival in commodities, green hydrogen, solar, and renewables. Global Export Markets: Multinationals actively shifting capital goods procurement from China to India. The Investor’s Compass: Four Golden Rules for Compounding 1. Regular Investor Small regular contributions compound exponentially over time. 2. Long-Term Horizon Wealth creation takes time; stay anchored across short-term cycles. 3. Disciplined Execution Resist emotional panics during global macro headwinds. 4. Asset Allocation Diversify prudently; never put all your eggs in one basket.

TAXATION • DIRECT TAXES The Chartered Accountant • January 2023 • Vol. 71 • pp. 55–58 (Journal pp. 767–770) Overview of Section 194R SR CA. Sandeep Raghavan Member of the Institute • Contacts: sandeep.raghavan31@gmail.com | eboard@icai.in Section 194R: Deduction of Tax on Benefit or Perquisite in Respect of Business or Profession Section 194R was introduced by the Finance Act, 2022 and is applicable with effect from 1st July 2022. Before deep diving into Section 194R, we need to understand foundational legal concepts useful for interpreting Section 194R. For the purpose of understanding, we examine dictionary definitions, jurisprudence, and statutory definitions of the terms “Benefit” and “Perquisite” used in Section 194R. Effective Date: Applicable on benefits or perquisites provided on or after 1st July 2022. Rate of TDS: 10% of the value or aggregate of the value of such benefit or perquisite. 1. Conceptual Foundations: “Benefit” and “Perquisite” The Scope of “Benefit” “‘Benefit’ is not limited to pecuniary gains, nor any particular kind of advantage; it refers to what is advantageous, whatever promotes prosperity or happiness, and what enhances the value of the property or rights of citizens as contradistinguished from what is injurious.” The word benefit has a very wide import. It is not only connected with monetary, financial, or economic gains, but encompasses advantages and any kind of non-monetary gains. The Scope of “Perquisite” “‘Perquisite’ – Emoluments or incidental profits attached to an office or official position, beyond salary or regular fees.” A perquisite is always connected to an office or official position. It represents something conferred in addition to regular salary or standard fees. Perquisites Under Section 17(2) of the Income-tax Act (Inclusive Definition): Section 17(2) provides an inclusive definition of perquisite in the context of employment: (i) Value of any rent-free accommodation provided to the employee; (ii) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer; (iii) Value of any benefit or amenity granted or provided free of cost or at a concessional rate to an employee; (iv) Sum paid in respect of any obligation payable by the employee; (v) Sum payable to a fund (other than a recognised provident fund or an approved superannuation fund) to effect an assurance on the life of the employee or to effect a contract for an annuity; (vi) Value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at a concessional rate to the assessee; (vii) The amount or aggregate of amounts of any contribution made to the account of the assessee by the employer: (a) In a recognised provident fund; (b) In the scheme referred to in sub-section (1) of Section 80CCD; and (c) In an approved superannuation fund, To the extent it exceeds seven lakh and fifty thousand rupees (Rs 7,50,000) in a previous year; (viii) The annual accretion by way of interest, dividend, or any other amount to the balance at the credit of the fund or scheme referred to in sub-clause (vii); and (ix) Value of any other fringe benefit or amenity as may be prescribed. Rule 3 of Income-tax Rules: Prescribed Valuation of Benefits and Amenities (i) Interest-Free / Concessional Loans: Loans extended to the employee or any member of his household. (ii) Holiday Travel & Accommodation: Travelling, touring, accommodation, and related expenses paid, borne, or reimbursed by the employer. (iii) Food & Beverages: Value of free food and non-alcoholic beverages provided by the employer to an employee. (iv) Ceremonial Gifts & Vouchers: Value of any gift, voucher, or token provided on ceremonial or festive occasions. (v) Credit Card Expenses: Expenses including membership fees and annual fees incurred by the employee/household on company-provided credit cards. (vi) Club Expenditure: Payment or reimbursement of expenditure incurred in a club by an employee or member of his household. (vii) Use of Movable Assets: Benefit resulting from use of movable assets (other than specified assets and other than laptops/computers). (viii) Transfer of Movable Assets: Benefit arising from transfer of movable assets belonging to the employer directly or indirectly. (ix) Residual Amenities: Value of any other benefit, amenity, service, right, or privilege determined based on cost to the employer. Key Takeaway: Any emoluments or benefits included under Section 17(2) provided by an employer to employees are considered as Salary and subject to TDS under Section 192. 2. Legislative Rationale & Statutory Characterization as “Income” Rationale from Finance Minister’s Budget Speech 2022-23: “It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds ₹ 20,000 during the financial year.” Statutory Clauses of Section 2(24): Benefits and Perquisites as “Income” Under Section 2(24) of the Income-tax Act, the terms benefit or perquisite are integrated across multiple clauses: Section 2(24)(iii): The value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of Section 17. Section 2(24)(iiia): Any special allowance or benefit (other than perquisite included under sub-clause (iii)) specifically granted to the assessee to meet expenses, necessarily and exclusively for the performance of the duties of an office or employment of profit. Section 2(24)(iv): The value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by the director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid. Section 2(24)(iva): The value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of Section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (the “beneficiary”) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary. Section 2(24)(vd): Explicitly incorporates “the value of any benefit or perquisite taxable under clause (iv) of Section 28.” Section 28(iv) of the Income-tax Act: “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.” as income chargeable to income tax under the head “Profits and gains of business or profession”. Legal Conclusion: Benefit or perquisite is unconditionally recognized as “Income” under Section 2(24) and is chargeable to tax under Section 28(iv). Section 194R operates as the statutory withholding machinery to capture and track this income before it is received or enjoyed by the beneficiary. 3. Perquisite Demarcation: Section 192 vs. Section 194R A critical practical question arises: When benefits or perquisites are provided, under which section must tax be deducted—Section 192 (Salaries) or Section 194R (Business/Profession)? Section 192 (Employment Purview) Perquisites defined in Section 17(2) (clauses i to viii) provided by an employer to employees constitute “Salaries”. The employer is liable to deduct TDS under Section 192 based on applicable individual slab rates. Scope: Restricted strictly to the employer-employee relationship and statutory items enumerated within Section 17(2). Section 194R (Business / Partner Purview) Benefits or perquisites provided to dealers, channel partners, distributors, or professionals outside the employer-employee nexus are governed exclusively by Section 194R at a flat withholding rate of 10%. Crucial Nuance: Also covers emoluments outside Section 17(2) provided to valuable employees (e.g., luxury hotel stays booked as general business expenses where not treated as monetary salary). 4. Decoding Section 194R: Clause-by-Clause Analysis Section 194R(1): The Primary Charging Mandate “Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten percent of the value or aggregate of the value of such benefit or perquisite.” Recipient: Must be a Resident individual/entity. Nature: Convertible into money or not (purely non-monetary included). Nexus: Arising from business or exercise of profession. Rate of TDS: 10% of the value or aggregate value. First Proviso to Section 194R(1): Benefits Wholly or Partly in Kind “Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite.” Statutory Responsibility Cast: The First Proviso explicitly casts responsibility upon the person responsible for providing such benefit, not upon the recipient providing services. The provider must obtain proof of Advance Tax / Challan payment from the recipient, or alternatively bear and gross up the tax itself, before releasing the benefit. Second Proviso to Section 194R(1): The ₹20,000 Annual Exemption Threshold “Provided further that the provisions of this section shall not apply in case of a resident where the aggregate value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees.” Provides a statutory de minimis safe harbour: No TDS applies if the aggregate value of benefit/perquisite provided or likely to be provided to a resident does not exceed Rs. 20,000 in a financial year. Once this threshold is crossed, TDS applies on the entire value. Third Proviso to Section 194R(1): Business / Professional Turnover Limits for Individuals & HUFs “Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.” Individual / HUF in Business: Turnover/Gross receipts must exceed Rs. 1 Crore in the preceding financial year. Individual / HUF in Profession: Gross receipts must exceed Rs. 50 Lakhs in the preceding financial year. Corporate Entity Rule: In the case of a Company, LLP, or Firm, there are no turnover thresholds! Every corporate transaction satisfying the conditions of Section 194R is mandatorily subject to TDS. Section 194R(2) & 194R(3): CBDT Powers to Remove Difficulties Section 194R(2): Grants the Central Board of Direct Taxes (CBDT) statutory powers to issue guidelines (with prior Central Government approval) for the purpose of removing any difficulty arising in giving effect to the provisions of Section 194R. Section 194R(3): Mandates that every guideline issued by the Board under sub-section (2) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on both the income-tax authorities and the person providing such benefit or perquisite. 5. Timing of Deduction: “Before Releasing” & Dual TDS Operation Standard TDS provisions (such as Section 194J, 194C, 194H) mandate deduction “at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier”. In stark contrast, Section 194R introduces a structural shift: tax must be deducted “before releasing the benefit or perquisite”. This distinction leads to unique situations where two distinct TDS provisions apply to the same underlying commercial arrangement. PRACTICAL CASE STUDY Automobile Manufacturer ‘Company A’ Dealer Incentive Scheme Suppose Company ‘A’, an automobile manufacturer, achieves its desired sales targets and decides to pass benefits to its successful dealers in a non-monetary manner. Stage 1: Hotel Booking in September Company ‘A’ books hotel rooms in its own name in September for Christmas week holiday packages. At this stage, when Company ‘A’ makes payments or credits the hotel in its books of account, it is legally obligated to deduct TDS under Section 194C (Contractor) or Section 194I (Rent). Stage 2: Passing on Benefits to Dealers in November In November, Company ‘A’ officially informs dealers that they have been selected for the Christmas week holidays. The benefit is effectively passed in November. Therefore, TDS under Section 194R must be deducted again in November before releasing the benefit. Stage 3: Bearing Non-Monetary Tax Liability Because the benefit is purely non-monetary (holiday stay), the dealer does not receive cash from which tax can be deducted. Hence, under the First Proviso, Company ‘A’ must ensure TDS is deposited (either recovered from dealer or borne by Company ‘A’ itself and grossed up). Alternative Scenario: In-House Hotel Asset If Company ‘A’ already owned the hotel resort and permitted its dealers to enjoy stay privileges, there would be no intermediate payment to third-party hotels (no Section 194C/194I). In that case, only Section 194R would apply upon conferring the benefit. 6. Cross-Border Scenarios: Non-Resident vs. Resident Interactions The author resolves two vital cross-border tax withholding dilemmas arising under Section 194R: (i) Benefit Provided by a Non-Resident to a Resident Section 194R applies to “Any person responsible for providing to a resident…”. The text does not restrict the provider to being an Indian tax resident. Verdict: Section 194R is fully applicable. A non-resident providing business benefits to an Indian resident dealer/consultant is liable to comply with Section 194R withholding requirements. (ii) Benefit Provided by a Resident to a Non-Resident Because Section 194R(1) strictly covers benefits provided “to a resident”, it has no application when the recipient/beneficiary is a non-resident. Verdict: Section 194R is NOT applicable. However, the resident provider must examine taxability under the Act / DTAA and deduct TDS under Section 195 on the value of the benefit provided if chargeable to tax in India. Quick Reference Summary: Section 194R Compliance Matrix Parameter Rule / Statutory Provision Legal Reference Effective Date 1st July 2022 Finance Act, 2022 Rate of TDS 10% of value / aggregate value Section 194R(1) De Minimis Exemption Rs. 20,000 per financial year per resident Second Proviso to 194R(1) Individual / HUF Thresholds Preceding FY Turnover > Rs. 1 Cr (Business) / Rs. 50 Lacs (Profession) Third Proviso to 194R(1) Corporate Providers No turnover threshold; liable on all qualified transactions Section 194R(1) Timing of TDS Before releasing the benefit or perquisite Section 194R(1) & 1st Proviso Non-Resident Beneficiary Section 194R not applicable; subject to Section 195 if taxable Section 195

INTERNATIONAL TAXATION • BEPS 2.0 The Chartered Accountant • January 2023 • Vol. 71 • pp. 59–63 (Journal pp. 771–775) New Era of Taxation – GloBE Rules under Pillar 2 SG CA. Sachin Goyal Member of the Institute • Contacts: sachingoyal0805@gmail.com | eboard@icai.in The Digital Tax Transformation & The Two-Pillar Architecture Digitalisation of world economies has made it imperative for tax authorities to introduce new concepts of taxation so that taxes are paid where economic activities are carried out and value is created. Current prevailing principles of taxation based on physical presence or Permanent Establishment (PE) are no longer appropriate for businesses that carry out substantial economic activities in a country via digital technologies without physical presence. Pillar 1 (Nexus & Profit Allocation): Rewrites profit allocation and nexus rules so MNEs pay taxes where consumers are located, allocating 20% to 30% of non-routine/residual profit to market jurisdictions via a revenue-based allocation key without requiring a PE. Pillar 2 (Global Minimum Tax / GloBE): Establishes a global minimum tax rate of 15% (Top-up Tax) on the income of low-taxed constituent entities, ensuring MNE groups pay an agreed minimum level of tax across all operating jurisdictions. 1. Regulatory Architecture, Milestones & Scope of Application Following the release of the Pillar 2 Blueprint in October 2020, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) published the draft Global Anti-base Erosion (GloBE) Model Rules in December 2021, providing the fine print of Pillar 2. A comprehensive Commentary was subsequently released in March 2022 to provide detailed guidance and nuance on statutory interpretations. Common Approach (Not Mandatory Harmonization) GloBE rules do not compel any jurisdiction to adopt domestic minimum taxes. However, where a jurisdiction’s Effective Tax Rate (ETR) is below the 15% minimum agreed rate, the rules empower other jurisdictions in the ownership chain to levy and collect a Top-up Tax on the low-taxed income. €750 Million Revenue Applicability Threshold GloBE Rules apply strictly to MNE Groups having total consolidated group revenue of €750 million or above in at least two of the four fiscal years immediately preceding the tested fiscal year (aligned with CbCR thresholds). The Two Core GloBE Interlocking Mechanisms: 1. Income Inclusion Rule (IIR) – Primary Mechanism IIR brings the income of Low-Tax Constituent Entities (LTCE) up to the agreed 15% minimum rate by requiring the parent entity (predominantly the Ultimate Parent Entity (UPE)) to pay tax on its allocable share of the top-up tax of the LTCE. 2. Undertaxed Payment Rule (UTPR) – Backstop Mechanism Operates as a secondary backstop rule where the IIR is not sufficient to recover top-up taxes (e.g., where the UPE is located in a non-implementing jurisdiction). Top-up tax is allocated to jurisdictions adopting UTPR through denial of deductions or equivalent domestic adjustments based on relative employee headcount and tangible asset values. 2. Operational Flowchart: The 7-Step IIR Computation Framework The application of the Income Inclusion Rule follows a rigorous seven-stage sequential process as formulated in the GloBE Model Rules: Step 1: Identification of Constituent Entities (CEs) of MNE Group SCOPING Define MNE Group, Constituent Entities (CE), Ultimate Parent Entity (UPE), and Fiscal Year. Determine whether entities qualify as Excluded Entities: Governmental Entities, International Organisations, Non-profit Organisations, Pension Funds, Investment Funds that are UPEs, or Real Estate Investment Vehicles that are UPEs. Special Consideration for India: Under Article 10.1, Governmental Entities must not carry on trade or business; hence Indian Public Sector Undertakings (PSUs) engaged in commercial business must be carefully evaluated to ascertain eligibility. Step 2: Computation of GloBE Income or GloBE Loss of CEs TAX BASE Financial accounting net income/loss prepared under acceptable accounting standards, subject to specific GloBE adjustments (Article 3.2). Mandatory adjustments include: Excluded Dividends, asymmetric foreign currency gains/losses, intragroup financing arrangements, and accrued pension costs. Elections available: Election to spread capital gains over five years. Exclusion: Complete carve-out for International Shipping Income (Article 3.3). Step 3: Computation of Adjusted Covered Taxes of CEs TAXES BORNE Determine Covered Taxes (Article 4.2): Income taxes recorded in financial accounts, withholding taxes on distributions, taxes in lieu of income taxes. Calculate Adjusted Covered Taxes: Add/deduct deferred tax adjustments, temporary difference recaptures, uncertain tax positions, and post-filing adjustments. Step 4: Calculate Effective Tax Rate (ETR) & Top-up Tax Percentage BLENDED RATE ETR = Sum of Adjusted Covered Taxes of each CE in Jurisdiction / Net GloBE Income of Jurisdiction Top-up Tax Percentage = Minimum Rate (15%) – Effective Tax Rate (ETR) *Investment entities are excluded from jurisdictional ETR determination. Blending occurs on a jurisdictional basis across all CEs located in that country. Step 5: Computation of Excess Profit for a Jurisdiction SUBSTANCE CARVE-OUT Excess Profit = Net GloBE Income – Substance-Based Income Exclusion (SBIE) Substance-Based Income Exclusion (SBIE): Sum of the payroll carve-out and the tangible asset carve-out (Article 5.3). This protects genuine, active business operations and permits countries to offer targeted tax incentives on normal routine returns from real economic substance without triggering GloBE top-up tax. Step 6: Computation of Jurisdictional Top-up Tax & CE Allocation TOP-UP TAX Jurisdictional Top-up Tax = (Top-up Tax % × Excess Profit) + Additional Current Top-up Tax – Qualified Domestic Minimum Top-up Tax (QDMTT) Top-up Tax of a CE = Jurisdictional Top-up Tax × (GloBE Income of CE / Aggregate GloBE Income of all CEs) De Minimis Safe Harbour: Where average revenue is less than €10 million and average profit is less than €1 million in a jurisdiction (over 3 fiscal years), the Top-up Tax shall be deemed ZERO. Step 7: Allocation of Top-up Taxes in Parent Entities’ Inclusion Ratios TOP-DOWN ALLOCATION Top-down implementation: Tax is allocated to the Ultimate Parent Entity (UPE). If UPE is in a non-IIR jurisdiction, tax drops to the next Intermediate Parent Entity (IPE) in the ownership chain. Determine Parent Entity’s Inclusion Ratio based on pro-rata economic ownership interest. Apply the IIR Offset Mechanism to eliminate multi-tier double taxation across parent tiers. 3. Undertaxed Payment Rule (UTPR): Mechanics & Allocation Formula The UTPR serves as the essential secondary backstop mechanism when low-taxed profits cannot be taxed under an IIR (e.g., where the UPE is situated in a low-tax jurisdiction that has not adopted IIR). The total top-up tax calculated under UTPR uses identical computational rules as IIR, but is apportioned among implementing UTPR jurisdictions based on substance: UTPR Jurisdictional Allocation Factor: UTPR Allocation % = [ 50% × (No. of Employees in Jurisdiction / Total Employees in all UTPR Jurisdictions) ]                    + [ 50% × (Total Tangible Assets in Jurisdiction / Total Tangible Assets in all UTPR Jurisdictions) ] Enforcement Method: Implementing jurisdictions give effect to this top-up allocation by either denying tax deductions for local group entities or requiring an equivalent balance-sheet adjustment under domestic laws. 4. Comprehensive Numerical Case Study: ABC Group Corporate Structure & Jurisdictional Baseline: Country A: A Co is the Ultimate Parent Entity (UPE). Country A has NOT implemented GloBE Rules. Country B: A Co owns 100% of B Co 1 and 100% of B Co 2. Country B HAS implemented a Qualified IIR. Country C: B Co 1 owns 100% of C Co 1, C Co 2, and C Co 3. Country C has NOT implemented GloBE Rules. Country D: B Co 2 owns 100% of D Co 1, D Co 2, and D Co 3. Country D has NOT implemented GloBE Rules. Assumptions: Tested fiscal year is Year 5. No Excluded Entities; no International Shipping income. 1. Consolidated Group Revenue Test (€ Million): Year Year 1 Year 2 (≥ €750M) Year 3 Year 4 (≥ €750M) Year 5 (Tested) Revenue (€M) 500 800 400 900 300 Scoping Result: In Year 2 (€800M) and Year 4 (€900M), consolidated group revenue exceeds €750 million in at least 2 of the 4 preceding fiscal years. Therefore, ABC Group is fully covered under the GloBE Rules for Year 5. 2. Country C Computation & Jurisdictional Blending: Particulars C Co 1 C Co 2 C Co 3 Jurisdictional Total Covered Taxes (A) [€M] 300 400 200 900 GloBE Income (B) [€M] 1,500 2,000 2,400 5,900 Effective Tax Rate (ETR %) 20.00% 20.00% 8.33% 15.25% Analysis: The jurisdictional ETR for Country C is 15.25%, which exceeds the 15% minimum agreed rate. Consequently, Country C is not a low-taxed jurisdiction. Even though individual entity C Co 3 has an ETR of 8.33% (well below 15%), under GloBE rules, blending occurs at the jurisdictional level. Hence, Top-up Tax liability for Country C = Nil. 3. Country D Computation & Top-Down IIR Allocation: Particulars D Co 1 D Co 2 D Co 3 Jurisdictional Total Covered Taxes (A) [€M] 100 200 130 430 GloBE Income (B) [€M] 1,000 1,200 1,500 3,700 Effective Tax Rate (ETR %) 10.00% 16.67% 8.67% 11.62% Jurisdictional ETR: 430 / 3,700 = 11.62% (less than the agreed 15% minimum rate). Country D is a low-taxed jurisdiction. Top-up Tax Percentage: 15% – 11.62% = 3.38%. Jurisdictional Top-up Tax Liability: 3.38% × €3,700 Million = €125.06 Million. Critical Nuance: Top-up tax is payable even in respect of the income of D Co 2, despite its individual standalone ETR being 16.67%, because calculations are strictly performed on a blended jurisdictional basis. Application of Top-Down Approach: A Co (the UPE located in Country A) has not implemented IIR. Under the statutory top-down hierarchy, priority drops down to the next Intermediate Parent Entity in the ownership chain that is subject to a Qualified IIR. Here, B Co 2 located in Country B holds 100% completed ownership interests in D Co 1, D Co 2, and D Co 3. Therefore, B Co 2 is legally required to pay the entire €125.06 Million Top-up Tax liability to Country B. 5. Complementary Treaty Rules: Switch-Over Rule (SOR) & Subject to Tax Rule (STTR) Switch-Over Rule (SOR) Where a Parent Entity jurisdiction has entered into a Double Tax Avoidance Agreement (DTAA) adopting the exemption method (rather than the credit method) to eliminate double taxation on profits of a Permanent Establishment (PE), concerns arise that treaty obligations might block the domestic application of IIR. Function: SOR acts as a treaty safeguard. It switches the treaty method from exemption to credit, permitting the residence state to tax low-tax profits of the foreign PE up to the agreed 15% minimum rate using the identical test as IIR. Subject to Tax Rule (STTR) A treaty-based rule specifically targeting base erosion risks in source countries arising from intragroup cross-border payments (such as interest, royalties, and service fees) that exploit low nominal tax rates in the payee’s jurisdiction. Priority Mechanism: Allows source jurisdictions to impose additional withholding tax on covered payments up to the agreed minimum rate. STTR operates as a priority rule, applied before GloBE rules, with STTR taxes credited under GloBE. 6. Key Open Implementation Points & Concluding Remarks 1. Interaction with Controlled Foreign Corporation (CFC) Rules: Countries with established CFC regimes (e.g., US GILTI, UK CFC) implementing Qualified Domestic Minimum Top-up Tax (QDMTT) rules face complex technical choices regarding whether domestic top-up rules should credit CFC taxes and vice versa. 2. Development of GloBE Safe Harbours: To mitigate heavy compliance and administrative burdens on MNEs and revenue bodies, the GloBE Implementation Framework is formulating transitional and permanent Safe Harbours. These allow MNEs to avoid detailed ETR and Top-up Tax calculations where operations clearly meet or exceed 15% ETR thresholds. 3. Standardised GloBE Information Return (GIR): A standardised reporting template under Article 8.1.4 is undergoing finalization to enable seamless exchange of information across inclusive framework revenue authorities. 4. India Domestic Legislative Outlook: While no specific provisions on GloBE were enacted under Finance Act 2022, India is expected to introduce enabling legislation by way of an ordinance or upcoming budget provisions to align with global adoption timelines from 2023 onwards. Indian MNEs and outbound conglomerates must proactively model their corporate hierarchies and tax exposures. Statutory Notes & Citations: Organisation for Economic Co-operation and Development (OECD). Pillar 1 residual profit allocation percentage: between 20% and 30%. Top-up tax is computed for the jurisdiction or Constituent Entity pursuant to Article 5.2 of the GloBE Rules. OECD (2021), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, OECD, Paris. OECD (2022), Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two), OECD, Paris. Low-Taxed Constituent Entity (LTCE) means a Constituent Entity of the MNE Group located in a Low-Tax Jurisdiction or a Stateless Constituent Entity that, in respect of a Fiscal Year, has GloBE Income and is subject to an ETR lower than the 15% Minimum Rate. Ultimate Parent Entity (UPE) is an entity that owns a controlling interest in any other entity and is not owned, with a controlling interest, by another entity (Article 1.4 of GloBE Rules). An MNE Group means any Group that includes at least one Entity or PE that is not located in the jurisdiction of the UPE. A Constituent Entity (CE) is any Entity included in a Group, and any PE of such Main Entity. Fiscal Year means an accounting period with respect to which the UPE prepares its Consolidated Financial Statements. Covered Taxes: Defined under Article 4.2 of the GloBE Model Rules. GloBE Implementation Framework provides guidance and processes agreed by the Inclusive Framework to facilitate coordinated implementation, including common allocation methodology for specific national tax regimes. GloBE Information Return (GIR) means the standardised return developed in accordance with the GloBE Implementation Framework containing information described in Article 8.1.4.

INTERNATIONAL TAXATION • TREATY INTERPRETATION The Chartered Accountant • January 2023 • Vol. 71 • pp. 65–70 (Journal pp. 777–782) Apposite of Article 3(2) of OECD model tax convention AR CA. Amit Rustagi Member of the Institute • Contact: eboard@icai.in Historical Genesis & Legislative Intent of Article 3(2) Organisation for Economic Co-operation and Development (OECD) commentary on the Article 3(2) provision and its history is very illuminating. Language similar to Article 3(2) first appeared in U.S. Treasury Regulations issued in 1940, and its first operational appearance in a bilateral tax treaty occurred in the landmark US–UK Double Tax Treaty of 1945. Paragraph 2 of Article 3 of the OECD Model Convention, 2017 provides that, for the convention, any terms that are not defined in it have the meaning it had at that time under that state’s law unless the context requires otherwise. Paragraph 2 of Article 3 of the OECD MTC, therefore, provides leverage to domestic legislation, but is conditioned on the context. 1. Article 3(2) of OECD MTC: Verbatim Extract from OECD MTC, 2017 “As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a different meaning pursuant to the provisions of Article 25, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.” 2. Undefined Treaty Terms: The Six Core Interpretive Conundrums Judicial interpretation of tax treaties (Robert Thornton Smith, p. 878) encounters six pivotal questions regarding undefined terms under Article 3(2): Question 1: Nature of Undefined Terms Does the reference to undefined terms refer only to single words, or does it extend to clauses, expressions, and legal concepts? Question 2: Identity vs. Similarity of Terms Does the provision direct reference only to internal tax law terms that are strictly identical, or does it permit reference to analogous or similar terms? Question 3: Internal Concepts in Treaty Definitions Does this clause direct the use of internal law concepts to provide meaning to undefined terms that are used within treaty definitions themselves? Question 4: Standard for Contextual Requirement When does the treaty’s context “require” the use of a contextually derived meaning rather than a reference to internal tax law? Question 5: Temporal Meaning (Static vs. Ambulatory) When internal law concepts are appropriately used, is it the law at the time the treaty was concluded, or does it incorporate post-execution amendments? Question 6: Jurisdictional Choice of Internal Law Whose internal tax law definition should be used—the law of the State of residence or the law of the State of source? 3. Relevance & Classification of “Context” The term “context” as used in Article 3(2) of the OECD MTC has a broader meaning than the context mentioned in Article 31(1) of the Vienna Convention on the Law of Treaties (VCLT). Two-Step Analytical Protocol under OECD Commentary (Para 12): Step 1: If the term has been defined in the DTAA itself, that treaty definition must be followed exclusively. Step 2: If the term is NOT defined in the DTAA, the interpreter must first look at the context. The context is determined based on the intention of the contracting states while signing the convention. Reference to domestic law is required unless the context requires otherwise; where the context requires otherwise, we follow the context as per the VCLT. Domestic law definitions apply only when context does not mandate an alternate interpretation. The Three Tiers of Context under International Law: Type of Context VCLT Article Scope & Practical Coverage The Intrinsic Context Article 31(2) Covers all textual elements inextricably linked to the treaty, including treaty text, preamble, annexures, protocols, subsequent agreements concluded by the contracting states, and materials prepared in connection with the convention. The Primary Extrinsic Context Article 31(3) Evidenced in mutual agreement procedures (MAP), subsequent administrative practices followed by the states in connection to the treaty, and similar treaties (covering other tax and non-tax treaties). The Secondary Extrinsic Context Article 32 The broadest of the three tiers: includes third-state court rulings, Model Convention Commentaries, travaux préparatoires (preparatory works), unilateral statements of intent, and all surrounding facts and circumstances at the signing of the treaty. 4. Special Rule vs. General Rule: Article 3(2) vs. VCLT Articles 31 & 32 A fundamental jurisprudential debate centers on the hierarchy between the lex specialis of Article 3(2) and the customary international law codified in the VCLT: Special Rule Priority Subject to General Rule: As a special rule of interpretation, Article 3(2) of OECD MTC may have priority over the general rule. However, the words used within Article 3(2) itself must be interpreted in accordance with the principles set out in Article 31 of the VCLT. Thus, the special rule remains structurally subordinate to the general rule of good faith and the object and purpose of the treaty. Mandatory Character of “Shall” vs. Permissive “May”: Throughout the OECD MTC, the words ‘shall’ and ‘may’ are used deliberately to distinguish mandatory duties from permissive authorities. The use of the word ‘shall’ in Article 3(2) establishes a mandatory requirement to apply domestic law in the case of undefined terms unless the context otherwise requires. Threshold for Contextual Departure (Klaus Vogel Standard): The word “required” in the qualifying clause ‘unless the context otherwise requires’ sets a strict evidentiary bar: “all possibly reasonable interpretations from the context should not give rise to a deviation from the rule of Article 3(2) of OECD MTC but only those backed by particularly robust arguments.” (Professor Klaus Vogel, 1983). 5. Interplay with India’s Income-tax Act, 1961 (Section 90 Dynamics) 5.1. Salient Features in OECD Commentary on Article 3(2): Article / Provision Para OECD Statutory Explanation Article 3(2) Para 13.1 Where there is both a tax definition and a non-tax definition of that term in multiple branches of domestic law, the tax definition will be preferred. Article 3(2) Para 13.2 If an agreement has been reached by the competent authority under Article 25 (MAP) regarding the meaning of the term, then the domestic law meaning shall not apply. Introduction of OECD MTC Para 35 An ambulatory (dynamic) approach to the interpretation of undefined terms will apply, incorporating post-treaty domestic amendments. 5.2. Approaches in Interpretation: Static vs. Ambulatory (Dynamic) When domestic law changes subsequent to treaty signing, two competing interpretive doctrines emerge: (a) Static Interpretation: Assigns the meaning prevailing in domestic law on the date the treaty was concluded/signed. Freezes definitions in time. (b) Ambulatory (Dynamic) Interpretation: Assigns the meaning prevailing in domestic law on the date of treaty application. Explicitly endorsed by OECD Commentary where context does not require otherwise. Limit on Ambulatory Approach: The ambulatory approach cannot be applied when an underlying domestic amendment alters the fundamental sum and substance of the term, as this would allow a contracting state to unilaterally override the DTAA. Disagreements require Mutual Agreement Procedure (MAP). 5.3. Indian Statutory Mechanisms: Section 90(3) and Explanations 3 & 4 Section 90(3): Mandates that any term used but not defined in the Act or in the DTAA shall have the meaning assigned to it in notifications issued by the Central Government, provided it is consistent with the context and the DTAA. Explanation 3 to Section 90: Clarifies that terms notified by Government notification take effect retrospectively from the date on which the relevant DTAA entered into force. Treaty Conflict Note: Tax treaties signed by India with countries such as Armenia, Sudan, Hungary, Kazakhstan, Portugal, and South Africa specifically prescribe the ambulatory approach (terms defined by domestic law prevalent at the relevant time). Hence, domestic retrospective amendments under Section 90(3) can conflict with bilateral treaty text! Explanation 4 to Section 90: Clarifies that: Where a term is defined in the DTAA, the treaty definition strictly controls; and Where a term is not defined in the DTAA but defined in the Act, the domestic definition and administrative explanations apply. 5.4. International Context vs. Domestic Definition Where a term in a DTAA conflicts with domestic legal systems, its meaning must be ascertained with reference to its international fiscal meaning rather than a parochial meaning peculiar to one state’s domestic law, preserving mutual consensus between contracting parties. 6. The Great Jurisdictional Debate: Whose Internal Law Applies? The statutory phrase “application of the Convention” creates an intense scholarly controversy: Does Article 3(2) refer to the internal tax law of the Source State or the Residence State? Particulars Source State Stance Residence State Stance Leading Scholars John Avery Jones Professor Klaus Vogel & Dr. Rainer G. Prokisch Core Contention Only the source jurisdiction is actively “applying” the distributive rule; the residence jurisdiction merely applies Article 23 relief provisions “as it affects itself”. Residence jurisdiction must itself apply treaty provisions to determine whether the source jurisdiction’s taxation was truly “in accordance with” the DTAA. 1. Purposive View Favoring Source State: Limits the Residence State’s Article 23 inquiry strictly to verifying whether the source jurisdiction had the primary right to tax. 2. Purposive View Favoring Residence State: Permits the residence jurisdiction to independently characterize income to preserve its own sovereign understanding of the DTAA. Judicial Precedent (Boulez v. Commissioner, 83 T.C. 584 [1984]): The US Tax Court held that there is no reasoned basis for favoring the source jurisdiction’s characterization at the expense of the residence jurisdiction’s characterization. Article 3(2) cannot arbitrate bilateral divergences. Resolution requires recourse to Article 25(3) MAP or the customary interpretation rules of Article 31 VCLT. 7. Hierarchy of Literature & Extrinsic Aids in Treaty Interpretation 7.1. Primary Aids: Vienna Convention on the Law of Treaties (VCLT, 1969) Article 31 VCLT: General rule of interpretation (good faith, ordinary meaning in context, object and purpose). Article 32 VCLT: Supplementary means of interpretation (preparatory works, circumstances of conclusion). Article 33 VCLT: Interpretation of treaties authenticated in two or more official languages. 7.2. Secondary Extrinsic Aids: Evidentiary Status & Legal Weight No. Extrinsic Material Legal Status, Evidentiary Weight & Judicial References 8.2.1 OECD Model Commentary Neither binding nor has force of law; falls under Article 32 VCLT supplementary means; highly persuasive. 8.2.2 Treaty Protocol Integral part of the tax treaty with identical binding force as the main clauses (Sumitomo Corporation vs. DCIT [2017] 110 TTJ 302 [Delhi]). 8.2.3 International Articles & Expert Opinions Valuable material for interpretation; purely persuasive (ITC Ltd. vs. DCIT [2003] 85 ITD 162 [Kol.]). 8.2.4 Treaty Preamble Guides interpretation of object and purpose under Article 31(2) intrinsic context. 8.2.5 Parallel Treaties Aids to interpretation; evidentiary value generally subordinate (Raymond Ltd. vs. DCIT 80 TTJ 120 [Mum.]). 8.2.6 Unilateral Explanatory Memoranda Does not satisfy Article 31(2)(b) VCLT; falls outside treaty context and Article 32 accompanying materials. 8.2.7 Domestic Law Definition Invoked via Article 3(2) where term is undefined and context does not require an alternate meaning. 8.2.8 Foreign Court Rulings Persuasive; evaluated in the context of treaty object and purpose, mutual state consensus, and judicial hierarchy. Comprehensive Judicial & Academic References: T.D. 4975, 1940-2 C.B. 43, 52 (US Treasury Regulations, 1940). John F. Avery Jones, The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model, supra note 18, at 18n. 14. Robert Thornton Smith, Tax Treaty Interpretation by the Judiciary, 35 Tax Lawyer 878. Professor Klaus Vogel, Double Taxation Conventions, 17(1983) (introduction); supra note 13, at 139–142. John F. Avery Jones, United Kingdom: The Interpretation of Tax Treaties, supra note 189, at 609. Klaus Vogel & Rainer G. Prokisch, Interpretation of Double Taxation Conventions, IFA Cahiers de Droit Fiscal International, Vol. 78a (1993), at 77–79. Pierre Boulez v. Commissioner, 83 T.C. 584 (1984) (US Tax Court). Kees van Raad, OECD Commentary on Scope of Article 25 (Mutual Agreement Procedure), Materials on International & EC Tax Law (2016/17), p. 537. Sumitomo Corporation vs. DCIT (2017) 110 TTJ 302 (ITAT Delhi). ITC Ltd. vs. DCIT (2003) 85 ITD 162 (ITAT Kolkata). Raymond Ltd. vs. DCIT (2003) 80 TTJ 120 (ITAT Mumbai).

INTERNATIONAL TAXATION • DIGITAL BUSINESSES The Chartered Accountant • January 2023 • Vol. 71 • pp. 71–75 (Journal pp. 783–787) Digital Economy Taxation in India PD CA. Pushpendra Kumar Dixit Member of the Institute • Contacts: pkdixit2005@yahoo.co.in | eboard@icai.in The Digital Disruption & New Economic Realities Before plunging right into technicalities, it is worthwhile to understand modern terminology. The New Economy, Digital Economy, or Internet/Web Economy—through which e-commerce transactions are facilitated over electronic platforms—carries one and the same message for taxation. An online commercial transaction executed using computers, smartphones, and Information and Communication Technologies (ICT) with minimum or virtually negligible human intervention characterizes the digital or new economy. The 10X Digital Surge: India’s consumer digital economy is projected to become a US$800 billion market by 2030 (a 10-fold growth from current levels), with over 70% of enterprises switching to digital models across fintech, edtech, online gaming, and SaaS. 1. Cross-Border Taxation: Traditional Framework vs. Digital Presence Today, practically every aspect of business operates online. Global giants dominate cab aggregations, hotel hospitality, and food logistics without owning traditional brick-and-mortar physical assets, controlling billions in turnover through digital interfaces. The traditional international tax framework operates on distinct jurisdictional boundaries: Domestic Scope (Sections 5, 6 & 9) Residents: Taxed on worldwide global income. Non-Residents: Taxed strictly on income received, accruing, or deemed to accrue/arise in India. Corporate Residence: Determined by Indian incorporation or Place of Effective Management (POEM) in India. DTAA Rules & Tax Rates Business Profits: Taxable only if the non-resident maintains a Permanent Establishment (PE) under Article 5 read with Article 7, taxed at 40% on net basis. Royalties / FTS: Taxed at 10% on gross basis. Section 90(2): Non-resident can claim beneficial treaty provisions over domestic law. Three Core Structural Dilemmas in Digital Economy Taxation: Characterisation of Income: Demarcating active business profits from passive streams (royalties, fees for technical services). Business Nexus: Establishing a tax nexus in the absence of traditional physical presence or physical PE. Profit Allocation: Formulating an equitable formula to allocate business income to market jurisdictions where data and consumers reside. 2. India’s Unilateral Digital Tax Regime: EL, Section 194-O & SEP Following OECD BEPS Action Plan 1 (2015), which recognized that multilateral consensus would take 4 to 5 years, India took the lead by rolling out three distinct domestic measures: A. Equalization Levy (EL 1.0 & EL 2.0) FINANCE ACT 2016 & 2020 EL was recommended by the CBDT Committee on E-Commerce because it avoided amending existing bilateral tax treaties. Enacted under Chapter VIII of Finance Act 2016, EL sits outside the Income-tax Act, 1961. EL 1.0 (Effective 1st June 2016): Levied @ 6% on online advertising, digital advertising space, and related services. Deducted and deposited by the resident payer (threshold: payments exceeding INR 1 Lakh per financial year). EL 2.0 (Effective 1st April 2020): Levied @ 2% on e-commerce supply or services facilitated by a non-resident e-commerce operator. Liability is cast directly on the non-resident operator (threshold: turnover > ₹2 Crores per financial year). Mutual Exclusivity: If a transaction attracts EL @ 6%, EL 2.0 @ 2% shall not apply. Section 10(50) Exemption: Income subject to EL is exempt from income tax; therefore TDS under Section 195 does not apply. Treaty Position: Because EL is outside the Income-tax Act, foreign non-residents cannot directly claim foreign tax credits (FTC) under DTAAs. If the operator has an Indian PE, normal domestic income-tax rules and DTAAs apply. B. TDS on e-Commerce Transactions (Section 194-O) EFFECTIVE 1ST OCT 2020 Mandates that every e-commerce operator facilitating sales of goods or provision of services of an e-commerce participant through digital platforms must deduct tax at source at the rate of 1% of the gross amount of sales/services at the time of credit or payment, whichever is earlier. Rate Without PAN: TDS rate escalates to 5% under Section 206AA if PAN/Aadhaar is not furnished. Exclusivity Rule: No other TDS section applies (e.g. 194C, 194J) if tax has been deducted under Section 194-O. Threshold Exemption: No threshold for corporate participants; individual/HUF participants exempt up to ₹5 Lakhs annually. C. Significant Economic Presence (SEP) – Explanation 2A to Section 9(1)(i) APPLICABLE AY 2022-23 SEP redefines business connection in India, establishing tax nexus irrespective of whether agreements are entered in India, whether the non-resident has a place of business/residence in India, or whether services are rendered in India. Limb (i) – Transaction Threshold: Aggregate payments arising from transactions in goods, services, or property (including download of data/software in India) exceeding Rs. 20 Million (₹2 Crores) during the financial year. Limb (ii) – User Threshold: Systematic and continuous soliciting of business activities or engaging in interaction with 300,000 (3 Lakhs) or more users in India. 3. Practical Challenges in Unilateral Measures 1. Unintended Coverage: The broad wording under SEP can capture traditional physical goods or intangible transfers that were never intended to be taxed as digital commerce. 2. Overlap Between EL and SEP: Businesses face acute dilemmas categorizing income between EL (2%) and SEP (40% net tax plus TDS u/s 195), especially for non-treaty countries. 3. Definitional Ambiguities: Key terms like ‘systematic’, ‘continuous’, and ‘soliciting’ remain undefined. The term ‘user’ is ambiguous (does it include passive click-viewers, subscribers, or only paid active accounts?). Furthermore, the disjunctive ‘Or’ between clauses creates disparate compliance burdens. 4. Treaty Shield (Section 90(2)): Unilateral domestic measures cannot override DTAA provisions unless reflected in bilateral treaties. Non-residents can invoke Article 5/7 protection where no physical PE exists. 5. Data Protection & Localization Impact: Mandated local data storage under upcoming data protection legislation may inadvertently trigger physical PE status for multinational cloud and data providers. 4. OECD/G20 Two-Pillar Solution & Pillar 1 Amount A Model On October 8, 2021, over 135 member jurisdictions of the OECD/G20 Inclusive Framework reached a consensus on the Two-Pillar Solution to overhaul international taxation: Pillar One: Reallocating Residual Profits Applies to MNE groups with global turnover exceeding €20 Billion and Profit Before Tax (PBT) profitability in excess of 10%. The turnover threshold is scheduled to reduce to €10 Billion after seven years. Amount A (Formulaic Reallocation): 25% of residual profit (profit above 10% PBT) allocated to market jurisdictions where the MNE derives at least €1 Million in revenue (reduced to €250,000 for jurisdictions with GDP < €40 Billion). Depart from arm’s-length pricing. Amount B (Baseline Distribution): Standardized remuneration for routine baseline marketing and distribution activities performed in source countries. Practical Numerical Illustration: Amount A Residual Profit Allocation Facts: Multinational Group ‘A Inc.’ has a subsidiary S Co 1 in Market 1 (tax-efficient jurisdiction) supplying services digitally into Market 2 and Market 3 without physical presence. Total Group Revenue exceeds €20Bn; treated as one segment with PBT of €7,000 Million. Market Jurisdiction Revenue (€ Million) Revenue Share (%) Market-1 (Domestic / Base) 2,000 7.14% Market-2 (Digital Export) 20,000 71.43% Market-3 (Digital Export) 6,000 21.43% Total Consolidated Group 28,000 100.00% Step 1: Determine Residual Profit (W) by Subtracting 10% Routine Threshold: W = PBT – (Total Revenue × 10%) = 7,000 – (28,000 × 10%) = 7,000 – 2,800 = €4,200 Million Step 2: Calculate Allocable Quantum of Residual Profit (25% of W): Allocable Amount A = €4,200 Million × 25% = €1,050 Million Step 3: Apportion Amount A Across Market Jurisdictions: Allocation Formula = (€1,050 Million / €28,000 Million) × Jurisdiction Revenue Market Jurisdiction Local Revenue (€M) Allocation Calculation Amount A Taxable Profit (€M) Market-1 2,000 (1,050 / 28,000) × 2,000 75 Market-2 20,000 (1,050 / 28,000) × 20,000 750 Market-3 6,000 (1,050 / 28,000) × 6,000 225 Total Allocated 28,000 100% of Amount A 1,050 5. Pillar Two: Global Minimum Tax (GloBE) & STTR Released on December 20, 2021, the Model GloBE Rules apply to MNE groups with consolidated revenues above €750 Million in at least two of the four preceding fiscal years (aligned with CbCR). Pillar Two revolves around three primary mechanisms: 1. Income Inclusion Rule (IIR): Imposes a top-up tax on the parent entity in respect of foreign constituent entities taxed at an effective tax rate (ETR) below the agreed 15% minimum rate. 2. Undertaxed Payment Rule (UTPR): Denies tax deductions or mandates equivalent balance sheet adjustments where a low-taxed constituent entity is not brought within the charge of an IIR in the parent entity jurisdiction. 3. Subject to Tax Rule (STTR): A treaty-based rule allowing source states to impose additional withholding tax on related-party payments (interest, royalties, service fees) that are subject to a nominal tax rate below 9% in the recipient jurisdiction. STTR takes priority and is credited as a covered tax under IIR/UTPR. 6. The Road Ahead: Transition from Unilateral Measures to Pillar Architecture Taxation is continuously evolving with changes in business models. Complexity escalates when economic value is derived via algorithms, digital platforms, and cloud interfaces with neither a local server, database, nor human presence in India. Strategic Recommendations for Tax Professionals & Multinationals: Consensus Pre-Condition: The OECD Two-Pillar initiative will succeed only when multilateral consensus resolves income characterization and threshold disputes. India has committed to withdraw Equalization Levy upon implementation of Pillar 1. Understand the Underlying Business Model: Tax professionals must look beyond legal contracts to examine real digital value chains—one size does not fit all. Dual-Track Compliance: Until the Multilateral Convention (MLC) comes into effect, enterprises must rigorously comply with Indian unilateral provisions (EL 2.0, Section 194-O, SEP) while preparing data pipelines for Pillar 1 Amount A and Pillar 2 GloBE reporting. Statutory Sources & Citations: Digital Economy Concepts: Terminology encompassing internet/web economy and automated e-commerce transactions. GlobeNewswire: Global Economic Outlook Report 2022 – Digital Economy Pervasiveness. EY Report: India’s consumer digital economy projected to reach US$800 billion market by 2030 (10X growth). Income Tax Department, Government of India: Equalisation Levy Provisions under Chapter VIII of Finance Act 2016 & 2020. Income Tax Department: Section 9(1)(i) and Explanation 2A (Significant Economic Presence). OECD (October 2021): Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. OECD (December 2021): Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two).

GST • INDIRECT TAXATION The Chartered Accountant • January 2023 • Vol. 71 • pp. 77–80 (Journal pp. 789–792) Intricacies revolving around liquidated damages taxability under GST SV CA. Shilpa Verma Author is member of the Institute. She may be reached at verma.shilpa05@gmail.com and eboard@icai.in Editorial Commentary & Core Controversy “Damages awarded pursuant to a contract are quite prevalent in day-to-day transactions undertaken by business entities. Since the quantum of damage borne by defaulting party may be huge, one has to be mindful of the tax controversies revolving around the taxability under the Goods and Services tax Act. There is a plethora of contradictory judgements on the tax implications in the erstwhile Service tax regime and GST law. It is evident from the Advance rulings pronounced under the GST that the authority has not taken into consideration the fact whether the damages paid pursuant to a contract would qualify as a ‘supply’ under GST which is the taxing event.” 1. Contractual Background & Concepts of Damage In common parlance of trade, before executing any transaction, parties enter into a legal contract wherein the rights and obligations of both the parties are clearly laid down. The basic structure of the contract is governed by the Indian Contract Act, 1872 which highlights the provisions relating to performance, non-performance and the breach of contract. Going by the literal understanding of the word ‘damage’, it is a remedy in the form of monetary reward paid to a claimant as compensation to loss or injury. Black’s Law Dictionary defines damage as under: “A pecuniary compensation or indemnity, which may be recovered in the courts by any person who has suffered loss, detriment, or injury, whether to his person, property, or rights, through the unlawful act or omission or negligence of another.” Indian Contract Act clearly provides for compensation1 for loss or damage caused by breach of contract to the affected party. Such damages may be a pre-estimated damage which the parties agree while making the contract or may be left to be decided by court on basis of assessment of loss or injury. The Black’s Law Dictionary defines the terms as under: Liquidated Damages “An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches; also if the parties to a contract have agreed on Liquidated Damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages.” Unliquidated Damages “Damages that cannot be determined by a fixed formula and must be established by a judge or jury.” Having set the context of the importance of the term damage, its significance in the contract, let us deep dive into the intricacies which revolve around taxability of such damages under the indirect tax laws. 2. Provisions under the Central Goods and Services Tax Act, 2017 (‘the CGST Act’) • With effect from 1 July 2017, GST is applicable on supply of goods or services or both. The term “Supply” has been defined2 as under: “(1) For the purposes of this Act, the expression “supply” includes–– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; …….. (1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.” • Schedule II to the CGST Act which lists out certain activities to be treated as supply of goods or supply of services specifically provides in Para 5(e) as under: “(5) The following shall be treated as supply of services, namely: (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;” • The aforementioned terms have not been defined under the CGST Act, however, same were explained in detail by Maharashtra Appellate Authority for Advance Ruling3 as under: • Refrain from act: An agreement for non-compete with each other. For example: Sale of brand name by X to Y where X agree that he will not sell similar product under any other brand in the market for a specified number of years. In this case, as per the contract, X specifically refrain himself from acting (selling) the product. • Tolerate an act or situation: The person or institution may agree to tolerate an act of others. Toleration is defined in Black’s Law Dictionary (Tenth Edition) as: “The act or practice of permitting or enduring something not wholly approved of; the act or practice of allowing something in a way that does not hinder.” For example: In a society, for work to be permitted to be carried in the lift during a particular time etc., society charges the person carrying out the repair for the inconvenience caused to other members. This, in commercial term, is known as “hardship amount”. In such situation, the members agree to tolerate the act carried out by other person. This benefits the society in the form of certain considerations. • To do an act: Service provider may sometimes agree for doing a particular act for which he receives payment. For example: The retailers enter into agreement with the companies that they will sell the cold drink of particular brand of the Company, and he will not sell the cold drink of other company. In such case, retailers agree to act in a particular manner for which he is paid the amount. • Since supply is undertaken for a consideration, one may refer to the definition of ‘Consideration’ which in relation to supply of goods or services includes: “(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government” • In terms of Notification no. 12/2017 – CT (Rate), exemption is provided on the ‘Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union territory or local authority under such contract’. • The above notification exempts taxability of damages in case of government contracts, opening a pandora box of interpretation for usual contract between business entities. • There is a plethora of advance rulings under GST which held liquidated damages to be taxable under GST. However, it would be worthwhile to analyse the guidelines and precedence set in the erstwhile Service tax law since the similar provision existed under earlier laws as well. 3. Analysis of Provisions of the Erstwhile Law and Judicial Precedents • Service law was leviable on provision of service, which means an activity for consideration carried out by one person for another. The term was explained in “Taxation of Services: An Education Guide”4 as under: “The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’ even though such an activity may lead to accrual of gains to the person carrying out the activity.” • It is a well settled law that mere flow of money cannot be a subject matter of service tax and consideration should have ‘nexus’ with an identified supply of service. • Reliance may be placed to decision of Hon’ble CESTAT in the case of Cricket Club of India v. Commissioner of Service Tax5 wherein such nexus was clearly laid down. A relevant extract is enumerated below: ‘......Neither can monetary contribution of the individuals that is not attributable to an identifiable activity be deemed to be a consideration that is liable to be taxed merely because club or association is the recipient of that contribution.’ • Similar view on the consideration was taken in the matter of Mormugao Port Trust v. Commissioner of Customs, Central Excise and Service Tax, Goa6: “…In our view, in order to render a transaction liable for service tax, the nexus between the consideration agreed and the services activity to be undertaken should be direct and clear. Unless, it can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity by a partner, it cannot be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service.” • Given aforementioned legal provisions and judicial precedents, it is evident that it is a well settled law that mere receipt of money would not tantamount to consideration. Unless and until consideration is flowing at the desire of the party for undertaking a particular activity, same would not qualify as consideration. Judicial Precedents under Service Tax Denying Taxability of Liquidated Damages: In the Service laws, various judgements have held that liquidated damages shall not be taxable. Some of these are given below: • In M/S South Eastern Coalfields Ltd. Versus Commissioner of Central Excise and Service Tax, Raipur7: Hon’ble CESTAT took the following grounds while deciding penalties paid by defaulting parties on account of breach of contract would not be taxable: There is a marked distinction between ‘conditions to a contract’ and ‘consideration for the contract’. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services provided. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards ‘toleration’ of the defaulting party. • In M/S K.N. Food Industries Pvt. Ltd. Versus The Commissioner Of CGST & Central Excise, Kanpur8: Hon’ble CESTAT held that: “liquidated damages were received to make good the losses or injuries from ‘unintended’ events and does not arise from any obligation on part of any of the parties. Hence, the same cannot be considered as the payments for any service.” • In Commissioner of Service Tax Vs. M/s. Repco Home Finance Ltd.9: It was held: “Damages are to compensate for disruption of a service and not towards performance of the service. They should not be viewed as alternative mode of performance and accordingly, should not be subject to tax.” On similar lines, we will come across multiple rulings decided in the favour of taxpayers denying taxability under Service tax. 4. Relevant Judgement under GST Regime & The Landmark Bai Mamubai Trust Ruling Under GST law, multiple Authority for Advance rulings while pronouncing their decision on taxability of liquidated damages under GST held: “The empowerment to levy liquidated damages is for the reason that there had been a delay and the same would be tolerated, but for a price or damages. The income though presented in the form of a deduction from the payments to be made to the contractor was the income of the applicant and would be a supply of ‘service’ by the applicant in terms of clause (e) of Para 5 of Schedule II appended to the Central Goods and Services Tax Act, 2017” However, it is worthwhile to refer the judgement of Bombay High Court in the matter of Bai Mamubai Trust and Ors. Vs. Suchitra10 which laid the basic ground rules for attracting GST on damages: “The nature of “damages” for the purpose of GST held that compensation paid as damages for a violation of a legal obligation was not a supply under GST. The legal doctrine of supply did not include wrongful unilateral acts that resulted in the payment of damages. The reciprocal obligations are essential to constitute supply and accordingly any payment in the nature of damages to balance equities between parties, in the absence of enforceable reciprocal obligations, would not constitute supply and would not attract GST.” “The purpose of imposing compensation or penalty is governed by the provisions of Indian Contract Act to ensure the defaulting act is not undertaken or repeated. Same cannot be equated as receipt of consideration on account of toleration of an act.” 5. Global Precedence: Australian GST and UK VAT One may take reference of the Global tax laws to understand the positions taken therein. Australian GST Law (ATO Ruling GSTR 2006/9) Under Australian GST law, different rulings issued by the Australian Tax Office11 clarified damage or loss or injury does not constitute a supply. UK VAT Law (HMRC VAT Notice 708 & VATSC35600) Likewise, UK VAT instruction Manual12 clarifies liquidated damages not to be a consideration for supplies and are outside the scope of VAT. Entry 22.3 of VAT notice 708 issued by HM Revenue and Customs, UK highlights: ‘Liquidated damages are agreed pre-estimated sums to be paid in the event of breach of a contract by one of the parties. If you receive liquidated damages, you are not receiving payment for a supply by you and no VAT is due on that amount.’ 6. Conclusion Aforementioned rulings clearly outline recovery of liquidated damages or penalty from other party cannot be said to be supply of service, as neither the receiving party is carrying on any activity to receive compensation nor there is any intention of the defaulting party to breach or violate the contract and suffer the loss. The purpose of imposing compensation or penalty is governed by the provisions of Indian Contract Act to ensure the defaulting act is not undertaken or repeated. Same cannot be equated as receipt of consideration on account of toleration of an act. Further, taking reference from the global tax laws, one may infer that the Indian GST provisions should be read in line with the positions taken across various countries as well as erstwhile Service tax law. The need of the hour is to streamline the provision relating to taxability of liquidated damages as it constitutes a significant amount of cost for industries engaged in the supply of exempted goods or services and hampering their ease of doing business. ❖❖❖ Footnotes & References: Section 73 and 74 of the Indian Contract Act Section 7 of the CGST Act Order No.MAH/AAAR/SS-RJ/09/2018-19 Para 2.3 of Education Guide issued by CBEC 2015-VIL-549-CESTAT-MUM-ST 2015-VIL-607-CESTAT-MUM-ST 2020 (12) TMI 912 - CESTAT NEW DELHI 2020 (1) TMI 6 - CESTAT ALLAHABAD 2020 (7) TMI 472 - CESTAT CHENNAI [2019] 109 taxmann.com 200/31 GSTL 193 (Bom.) Australian Taxation Office, ‘Goods and Services Tax: Supplies’, Goods and Services Tax Ruling GSTR 2006/9 VATSC35600

GST • INDIRECT TAXATION The Chartered Accountant • January 2023 • Vol. 71 • pp. 82–86 (Journal pp. 794–798) Export of Carbon Credit : Procedural disconnect in Refund Application SS CA. Shruti Singhal Author is member of the Institute. She may be reached at shrutisinghal28@yahoo.com and eboard@icai.in Core Controversy & Procedural Barrier “Talks on Carbon credits have recently gained more importance as our Prime Minister Shri Narendra Modi has set an ambitious target of making India a net zero emitter by 2070. To achieve net zero carbon emission target, Indian government has introduced and passed the Energy Conversation (Amendment) Bill, 2022 in Lok Sabha on 8th August 2022. Currently, Indian companies are exporting UNFCCC-approved carbon credits which are sold through third-party regulator such as CDM formed under UNFCCC. On analysing the status of Carbon Credits as a supply of goods or services, scale is tilting towards the arguments that it’s supply should be considered as supply of goods. But there lies a procedural disconnect while filing refund application as supply of such certificates is taking place electronically.” On 1st November 2021, the Prime Minister while delivering the National Statement at the COP26 Summit, in Glasgow, Scotland, set an ambitious target for India to attain net zero carbon emission by 2070. This was a big news getting high publicity. Let us look at the brief history of this development and try to understand the key words which are of importance before we proceed to discuss the main topic of procedural disconnect during filing refund application on export of Carbon Credit. 1. Key Concepts & Statutory Terminologies a) United Nations Framework Convention on Climate Change (UNFCCC) With 197 Parties, the UNFCCC has near universal membership and is the parent treaty of the 2015 Paris Climate Change Agreement. The UNFCCC is also the parent treaty of the 1997 Kyoto Protocol. The ultimate objective of all agreements under the UNFCCC is to stabilise greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system, in a time frame which allows ecosystems to adapt naturally and enables sustainable development.1 b) Kyoto Protocol The Kyoto Protocol operationalises the United Nations Framework Convention on Climate Change (UNFCCC) by committing industrialised countries and economies in transition to limit and reduce greenhouse gases (GHG) emissions in accordance with agreed individual targets.2 a. The Kyoto Protocol was adopted in Kyoto, Japan on 11 December 1997. Owing to a complex ratification process, it entered into force on 16 February 2005. Currently, there are 192 Parties to the Kyoto Protocol. Kyoto Protocol bounded only industrialised nations to act. c) Paris Climate Agreement The main aim of the Paris Agreement is to keep the global average temperature rise in this century well below 2 degree Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels.1 With the adoption of the Paris Agreement, most countries in the world have committed to climate action. d) Clean Development Mechanism (CDM) The CDM was developed under the Kyoto Protocol. The CDM allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialised countries to meet a part of their emission reduction targets under the Kyoto Protocol. a. The mechanism stimulates sustainable development and emission reductions, while giving industrialised countries some flexibility in how they meet their emission reduction limitation targets.3 e) Carbon Credit A carbon credit is a tradable certificate stating the credits earned by the holder of the certificate. Each credit is equivalent to 1 tonne of CO2 emission-reduction. These carbon credits can be used towards meeting Kyoto targets or used for voluntary purposes. f) Carbon Markets – Compliance & Voluntary Markets There are two types of carbon markets – the compliance market and the voluntary market. • Compliance Markets: The compliance carbon markets are developed as part of a nation’s obligation to cut their emission or bring it under a defined gap. The limit has been set up through global treaties like Kyoto Protocol. Under this, developed countries that are signatory to treaties like Kyoto Protocol must take steps to lower their emissions. This can be accomplished either through imposing carbon tax or setting up a mandatory carbon market. The allowances or permits that form the core of these markets are termed as Certified Emission Reduction (CER) credits. • Voluntary Markets: Voluntary markets are those in which companies and other entities like government, NGOs, etc. take measures to reduce their carbon footprint as part of their own initiatives as a part of their CSR activities or to improve their reputation, etc. The credits in these markets are termed as Voluntary Emission Reduction (VER) credits. 2. India’s Commitments & Domestic Carbon Credit Framework India was a signatory to the Kyoto Protocol which bound only the industrialised nations to reduce greenhouse gases (GHG) emission and it provided targets for only the developed nations. Kyoto agreement was subsequently replaced by the Paris Agreement whereby almost all the nations of the world committed to reduce the GHG emission. In 26th Conference of Parties at UNFCCC i.e. COP26, India committed itself voluntarily to be net zero carbon emitter by 2070. To achieve net zero carbon emission target, Indian government has introduced and passed the Energy Conversation (Amendment) Bill, 2022 in Lok Sabha on 8th August, 2022. The bill seeks to establish Carbon Credit Market in India to issue Carbon Credit Certificates by Indian Government. Since this bill has not become an Act till date, we are not going to discuss the future of trading in Carbon Credit Certificates through Carbon Credit Markets. Currently, Indian companies are exporting UNFCCC-approved carbon credits which are sold through third-party regulator such as CDM formed under UNFCCC. Let us look at the various issues and discuss the possible solutions in current scenario of trading of Carbon Credit Certificates. 3. Tradable Certificates vs. Regulatory Certificates & Applicable GST Rates Difference between tradable certificates and certificates issued by Authorities? There are different types of certificates being issued by various Authorities. All the certificates issued are not termed as tradable certificates. Regulatory/Pollution Certificates (Supply of Services): In the case of Venkatesh Automobiles, AAR Goa, the appellant was carrying out the Pollution testing and issuing Pollution Under Control (PUC) Certificate on payment of prescribed fees fixed by the Government. This issuance of certificate is supply of services unlike the tradable certificates like Renewable Energy Certificates (RECs) and Priority Sector Lending Certificates (PSLCs) which are held by CBIC as per circular no. 46/20/2018-GST, dt. 6th June, 2018 as goods. Rate of GST on Tradable Certificates (Circular No. 46/20/2018-GST) Circular no. 46/20/2018-GST, dt. 6th June 2018 has further provided the rate of GST on Tradable certificates and duty paying scrips like MEIS, SEIS, etc. Circular has also clarified that RECs, PSLCs are classifiable under following part of the entry having heading 4907 and attracting 12% GST: “Stock, share or bond certificates and similar documents of title [other than Duty Credit Scrips]” Though duty paying scrips like MEIS, SEIS, etc. are classifiable under the same heading, it will attract Nil GST {under S. No. 122A of Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017, as amended vide Notification No. 35/2017-Central Tax (Rate) dated 13.10.2017}. 4. Whether Carbon Credits/Certified Emission Reduction (CER) credits will be termed as supply of goods? a) Statutory Definition under Section 2(52) of the CGST Act, 2017: “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply; b) Key elements to be confirmed if a property is to be considered as goods under the GST Act are: It should be a movable property It should not be money or securities Actionable claims are also good. Note: Actionable claims, other than lottery, betting and gambling are considered as neither supply of goods nor a supply of services as per Schedule III of the CGST Act, 2017 and thus are outside the scope of GST. Meaning thereby that if CERs are termed as actionable claims, then it will be outside the scope of GST. c) Marketability in Sales Tax & Excise Jurisprudence: It should be noted that both in erstwhile Sales Tax Laws and Excise Laws, another element i.e. Whether property is marketable was to be considered while determining whether a property is goods or not. Let us check these key elements one by one - 1. Whether CERs are movable property? Concept of Movability was discussed in Municipal Corporation of Greater Mumbai-1996-SC and “test of permanency” was laid down which said – (a) Whether the article is movable to another place of use in the same condition; or (b) Is it liable to be dismantled and re-erected at another place? If answer to the former is affirmative, it must be a movable property. But if the answer to the latter is positive, then it would be treated as immovable property. There is no doubt that certificates can be moved from one place to another in the same condition. Thus, CERs will be termed as movable property. 2. Whether carbon credits can be excluded from the definition of goods altogether by treating them as supply of securities or supply of money? Whether Securities? Let us read Section 2(h) of Securities Contract (Regulation) Act, 1956 (SCRA)(relevant portion only), “securities” include – (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;….. Analysts considering CERs as securities are including CERs within the scope of “other marketable securities of a like nature in or of any incorporated company or other body corporate” and stating that CERs can be considered as securities. Also, to get judicial precedence for this argument, it is relevant to highlight here that renewable power companies have moved to Delhi High Court contending that RECs fall under the definition of securities, arguing that “These scrips are traded on IEX (Indian Energy Exchange) and PXIL (Power Exchange India Limited) and are electricity derivatives,” and notices have been issued to the relevant parties.4 Whether Money? As per Section 2(75) of the CGST Act, 2017, “Money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value; Since CERs does not come under any other instrument recognised by the RBI which can be used as a consideration to settle an obligation, thus CERs cannot come within the purview of Money. 3. Whether CERs can be considered as actionable claims? Hon’ble Supreme Court in the case of M/s Vikas Sales Corporation (2) (1996) 4 SCC 433 while discussing whether REP Licence can be covered under Actionable claims, observed that: “When these licences/scrips are being bought and sold freely in the market as goods and when they have a value of their own unrelated to the goods which can be imported thereunder, it is idle to contend that they are in the nature of actionable claims. It was assumed that actionable claims are not transferable for value and that was the difference between “actionable claims” and those other goods which are covered by the definition of “goods” in the Sales of Goods Act, 1930, and the sale tax laws. The assumption was fallacious and the conclusion in so far as it was based on this erroneous perception, equally wrong”. Since CERs like REP Licences are being brought and sold freely in the market as goods and have a value of their own unrelated to any other goods, thus it cannot be considered as actionable claims. 4. Whether CERs are marketable? In this respect, case laws of honourable Supreme Court and various high courts can be read to analyse whether CERs can be termed as marketable. The courts have not discussed whether CERs are marketable but have discussed whether other intangibles goods which are similar to CERs like, for example, copyright, patents, REP Licence, etc. It is relevant to read the judgement of the Hon’ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh wherein, it was, inter alia, held that:- “A “goods” may be tangible property or an intangible on. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods”. Further, Hon’ble Supreme Court in the case of Yash Overseas vs. Commissioner of Sales Tax and Others (Civil Appeal No. 2155 of 2000), while discussing whether REP Licence was marketable or not, held that: “REP licences had always a market. There were people willing to sell and others willing to buy REP licences at all times. Their innate value coupled with free transferability made REP licences into a marketable commodity. They were “goods” properly so called, having innate value and a ready market. Under the Duty Entitlement Passbook (DEPB) Scheme, an exporter is eligible to claim credit as a specified percentage of the job value of exports made in freely convertible currency. The credit is available against such export products and at such rates as may be specified by the Director General of Foreign Trade by a public notice issued in this behalf. The DEPB is exactly the same as REP licence. Like the REP licence, it has an innate value which makes it a marketable commodity. The DEPB credit is also clearly “goods” within the meaning of the sales tax laws”. Notification under DVAT Act (Notification No. 256/CDVAT/2009/43 dated 13-1-2010): Discussed the levy of DVAT on CERs and after discussing the aforesaid mentioned rulings the department has concluded in the notification that the CERs will be considered as goods and will be taxable under DVAT Act, 2004. The DVAT Act has been replaced by SGST Act for all goods excluding alcoholic liquor for human consumption and 5 petroleum products i.e. Petroleum Crude, High Speed Diesel, Motor Spirit (commonly known as Petrol), Natural Gas and Aviation Turbine Fuel. Conclusion on Classification: Considering all the points discussed above we can conclude that the scale is tilting in the favour of the argument that sale of CERs will be considered as supply of goods under the GST as there is no judicial precedence to classify CERs and like tradable certificates as securities. 5. Export of Carbon Credits – Procedural Aspects & Disconnect in Refund Processing Since at present Indian market for exchange of carbon credits is not operating, in Indian scenario CERs can only be exported to industrialised countries. What are certified emission reductions or CERs? Certified emission reductions or CERs are electronic certificates issued for greenhouse gas emission reductions from clean development mechanism (CDM) project activities or programmes of activities (PoAs) in accordance with the CDM rules and requirements. Each CER is equivalent to one metric tonne of carbon dioxide (CO2) avoided or removed from the atmosphere. The environmental benefit of CERs can be claimed to offset or compensate your own greenhouse gas emissions, among other uses.5 What does “voluntary cancellation” or “cancellation” of CERs mean? CERs are recorded and tracked in electronic databases know as emissions registries. The CERs offered on this platform are recorded and tracked in the clean development mechanism (CDM) registry operated by the UN Climate Change secretariat. Voluntary cancellation, also referred to as cancellation, is the process in the CDM registry by which CERs are taken out of circulation, preventing any further use. It is similar to destroying them or marking them so they can no longer be used.5 Certified emission reductions or CERs are electronic certificates issued for greenhouse gas emission reductions from clean development mechanism (CDM) project activities or programmes of activities (PoAs) in accordance with the CDM rules and requirements. Each CER is equivalent to one metric tonne of carbon dioxide (CO2e) avoided or removed from the atmosphere.5 The Acute Procedural Disconnect in Export Refund Applications: The situation as it stands is that since trade of these certificates is done over the internet, it does not provide appropriate supporting documents to shipping bill like courier slip, bill of lading or an Airway bill but the export of CERs is considered as export of goods (as per aforesaid discussed judicial precedence), thus there is a procedural disconnect when we analyse the export of CERs while processing refund application under GST. Author’s Suggested Solution: Amend Rule 89(2) on Lines of Electricity Export Author suggests that the government may amend sub-rule (2) of Rule 89 of CGST Rules, 2017 suitably like it is recently done for export of electricity through Notification No. 14/2022-CT, dated 5-7-2022 and provide alternate supporting document to substantiate the refund claim while filing refund application. ❖❖❖ Notes & References: https://unfccc.int/news/cop26-reaches-consensus-on-key-actions-to-address-climate-change https://unfccc.int/kyoto_protocol https://cdm.unfccc.int/about/index.html https://www.business-standard.com/article/economy-policy/12-gst-on-recs-renewable-power-companies-move-delhi-high-court-119041700080_1.html https://offset.climateneutralnow.org/faq

VALUATION STANDARDS The Chartered Accountant • January 2023 • Vol. 71 • pp. 88–91 (Journal pp. 800–803) Valuation Implications of Control IS CA. Inderpreet Singh Author is member of the Institute. He may be reached at ca.matharu@gmail.com and eboard@icai.in Core Valuation Principle & Objective “During the current start-up landscape of India, valuation has obtained a significant stronghold than it had in the past. Valuation is an intricate exercise, often involving the consideration of multiple factors to arrive at a fair value of a particular asset. One of the factors to consider during the valuation exercise is the impact of controlling interest the acquirer is positioned to gain if any during the acquisition. The article aims to demystify the key mechanics of control and its nuances on the valuation of equity.” 1. Historical Attempts at “Control” & The “Cobra Effect” During the days of the “British Raj”, The British Colonial Government was plagued by the venomous cobras terrorizing the inhabitants of Delhi. In an attempt to control the vile creatures, the government put up a bounty on cobras, wherein for every dead cobra the people brought, they would be rewarded by the administration officials. Consequently, over time, the population of cobras in the city started diminishing & the scheme appeared successful. However, little to the knowledge of the British, the opportunist people of Delhi started breeding cobras, which resulted in the population of cobras becoming higher than it was before the initiation of the scheme. Soon the Raj realised that they had backfired and scrapped the whole idea. The cobra breeders set the snakes free, further contributing to the original problem at hand. This came to be known as the “Cobra Effect”, wherein the solution to the problem made the situation worse. While attempting to control is difficult, valuing it is significantly challenging. 2. Conceptual Framework: What is Control? Control concerning any company or firm means the real decision-making power available to any party. In layman’s terms, it means voting power available to move resolutions or decisions. Control can be exercised directly or indirectly through cross-holding or pyramid structures. Control has always been apex in determining value and acquisitions. It is not unnatural for acquirers to often pay a premium for substantial control. During the present start-up ecosystem in India, control is paramount. With multiple founders, investors and other stakeholders all steering in multiple directions and moulding their start-up along the way, controlling power is all the more coveted. Prerogatives Encompassed by Control: Control includes the ability to choose management, its compensation, acquisition and liquidation policy, recapitalization of the company and registration of the company’s stock for an initial public offering. Illustrative Example: Minority Interest vs. 51% Majority Control For the sake of simplicity, let’s consider the valuation of equity shares of an investor holding only 10 shares out of 100 equity shares in a company, i.e. 10% of the total equity capital and each share carries only a single vote. Since the investor is holding only 10% equity, he can’t propose and pass a special resolution on his motion. Therefore, the shares are not entitling him to any controlling power in the company. He has a vote, but not a powerful one to move the entire resolution on his own. Accordingly, it is not wise to value shares held by this investor with the shares held by promoters holding 51% of the equity capital or more. The amount by which the valuation of these shares differs is the control discount for the investor. Viewing the same from the opposite angle, the price differential for acquiring majority shares is known as the control premium. 3. Valuation Nuances & Judicial Rationale Valuation, not only controls valuation itself, but involves consideration of many inputs and judgement which can lead to a whole spectrum of valuation for a specific financial asset. Control’s valuation depends on many factors including– 1. Quality of Management: Poorly managed vs. well-managed company. 2. Industry & Maturity: Industry and maturity stage of the business. 3. Shareholding Distribution: Number of voting shares about total shares. To value control, the first input is to arrive at the fair value of the financial asset using any of the suitable approaches. After arriving at the equity value, a control discount/premium is applied. Judicial Recognition in United States Courts: “The minority discount is recognized because the holder of a minority interest lacks control over corporate policy, cannot direct the payment of dividends, and cannot compel a liquidation of corporate assets.” 4. Valuation Methodology & Mathematical Relationship Although there are only a few approaches to value control, the simplest method is to arrive at a specific percentage to account for a discount for lack of control. The comparable method helps in arriving at a control premium by comparing the excess price paid concerning the market capitalization of the company. The excess percentage over and above the market capitalization is the control premium. Value of 100% Control ▲ Add: Control Premium ▼ Less: Minority Discount Minority Interest Value Formula for Conversion of Control Premium to Minority Discount: Minority Discount = 1 – [1 / (1 + Control Premium)] It is suggested to incorporate multiple companies in a particular industry if available to ensure that a wide range of values and discounts are considered to ensure that the discount rate applied is representative of a wider population of data. 5. Empirical Evidence of Discount for Lack of Control (1998–2006) The table below compiles buyout transaction data highlighting mean and median premiums paid and their mathematically implied minority discounts: Year of Buyout Without Negatives (Mean) Without Negatives (Median) With Negatives (Mean) With Negatives (Median) Mean Premium (%) Implied Discount (%) Median Premium (%) Implied Discount (%) Mean Premium (%) Implied Discount (%) Median Premium (%) Implied Discount (%) 1998 35.9 26.4 29.3 22.7 23.6 19.1 22.7 18.5 1999 46.5 31.7 32.4 24.5 40.0 28.6 28.7 22.3 2000 48.7 32.8 37.1 27.1 35.3 26.1 28.9 22.4 2001 52.1 34.3 35.9 26.4 34.0 25.4 25.9 20.6 2002 49.1 32.9 34.0 25.4 33.1 24.9 24.6 19.7 2003 53.9 35.0 37.7 27.4 46.2 31.6 33.3 25.0 2004 36.4 26.7 26.2 20.8 28.6 22.2 22.5 18.4 2005 33.1 24.9 24.3 19.5 23.1 18.8 16.7 14.3 2006 29.0 22.5 20.5 17.0 23.5 19.0 17.2 14.7 * Without negatives does not include public company sale transactions at discounts from their previous trading prices. * Source: Extract from Valuing a Business: The Analysis and Appraisal of Closely Held Companies and Compiled from Mergerstat®/Shannon Pratt’s Control Premium Study.™ Santa Monica: FactSet Mergerstat LLC, 2006. Key Empirical Boundaries: A. Highest Mean Premium Paid [Without Negatives]: 53.9% Implied Minority Discount: 35.0% = [1 / (1 + 53.9%)] B. Lowest Mean Premium Paid [Without Negatives]: 29.0% Implied Minority Discount: 22.5% = [1 / (1 + 29.0%)] Accordingly, the range of control premium is estimated at ~29.0%-53.9%, and the range of implied minority discount arrives at ~22.5% to 35.0%. Control premium as computed above is also known as acquisition premium. Acquisition premium is a combination of control premium and synergies. It is appropriate to account for synergies to ensure that the whole acquisition premium is misapplied as a control premium. Empirical discounts and premiums can serve as a necessary yardstick for the valuation. For the valuations to be done for Indian companies, comparable companies’ data must be relevant. It is recommended to use publically available market information of companies engaged in the same industry as that of the company being valued. 6. Application of Control Premium and Minority Discount Across Approaches 1. Cost Approach – Net Asset Value The cost approach is used for the valuation of investment and real estate companies/REITs and other asset-heavy industries. If listed comparable companies are used to arrive at a fair value of controlling interest, the control premium is required to be adjusted since the comparable companies listed in the market are being traded at minority pricing and are indicative of minority discounts. 2. Income Approach (Discounted Cash Flow) Valuation of non-controlling or controlling interests can be arrived at by considering cash flows that the business is expected to generate under each of the cases. Valuation is done based on Discounted Cash Flow method. There is no need to account for minority discount/control premium since the cash flows are already adjusted and need no further adjustment. In case cash flows are not adjusted for controlling interests, then the valuation exercise is to be conducted based on cash flows on a 100% controlling level. Accordingly, a lack of control discount is applied on a pro-rata basis from the enterprise value. 3. Market Approach (Comparable Companies Method) In the case of the Market Approach/Comparable Companies Method, the valuation must be undertaken based on the appropriate comparable and proper adjustment has to be made. The subject company’s ownership interest must be compared with the comparable company’s controlling/non-controlling interests. For Example: In case of valuation has to be done for acquiring a 100% subsidiary and the comparable is listed as having minority public ownership, a control premium must be applied to the fair value computed from the market approach to ensure that the ownership interests are aligned. This must be applied on an individual basis to all the comparable companies in the dataset. Further, the Market approach entails consideration of risk and marketability discount as appropriate in every comparable used. The fair market values of non-controlling ownership interests in closely held companies typically cluster between 35 per cent to 50 per cent less than prices of comparative non-controlling equity interests in liquid, publicly traded companies, all other things being equal.6 7. Landmark Judicial Decisions Involving Control Valuation I. Rapid-American Corp. v. Harris, 603 A.2d 796 (Del. 1992) In the United States State Supreme Court of Delaware, the court held that control premium is to be applied wherein the subject company was a controlled subsidiary. II. Lane v. Cancer Treatment Centres of America Inc. & Montgomery Cellular Holdings Co. Inc. v. Dobler Control Premium is not to be applied in case valuation is arrived at expressly using the DCF method. III. Bomarko Inc. v. International Telecharge, Inc. Control Premium is not to be applied in case valuation is arrived at expressly using the DCF method. The Court of Chancery affirmed the application of control premium in the case where the guideline public company method is followed. The court acknowledged that the market approach produced a minority value. IV. Cases Involving Rejection of Discounts by State Courts: U. S. Inspect, Inc. v. McGreevy, 57 Va. Cir. (2000) First Western Bank of Wall v. Kenneth Olsen, et al., 2001 SD 16 (2001) Cavalier Oil Corp v. Harnett, Civ. A Nos 7959-60 7967-68, 1988 WL 15816 at *8 (Dl. Ch. Feb. 22, 1988) Blitch v. People’s Bank, 264 Ga. App. 453, 540 S.E. 2d 667 (2000) Katherine B. Arnaud, et al. v. Stockgrowers State Bank of Ashland Kansas and Stockgrowers Banc Corp., 992 P.2d 216 (Kan. 1999) 8. Conclusion A careful examination of the key mechanics of the transaction and deep-dive into the control aspects of the transaction is necessary for the Valuer to arrive at appropriate methods for ascertaining its impact in the valuation exercise. Therefore, control premium as well as minority discount form an integral part of the valuation exercise and should not be overlooked. It should also not be the case that the application of incorrect values or aspirational premiums is added to the fair value that ends in crippling the valuation exercise and leaves it worse than the non-application of the aforesaid discount/premiums, thereon giving precedence to the cobra effect. If all aspects of the transaction are kept in mind while constructing a valuation model and choosing the appropriate valuation approach, valuations with strong reasoning and mental models are to be expected. ❖❖❖ References: The Value of Control - Aswath Damodaran The Value of Control: Some General Propositions - Aswath Damodaran Financial Valuation, Application and Models by James R. Hitchner Valuing a Business: The Analysis and Appraisal of Closely Held Companies, Fifth Edition by Shannon P. Pratt Standards of Value: Theory and Applications by Jay E. Fishman, Shannon P. Pratt and William J Morrison As per Shannon P. Pratt in Valuing a Business, The Analysis and Appraisal of Closely Held Companies

CAPITAL MARKET • INVESTMENT ANALYSIS The Chartered Accountant • January 2023 • Vol. 71 • pp. 92–98 (Journal pp. 804–810) Understanding the Company beyond Balance Sheet OB CA. Omprakash Bagdia Author is member of the Institute. He may be reached at o_bagdia@hotmail.com and eboard@icai.in Executive Overview & Research Premise “Information on the state of the economy, the industry outlook, competitiveness, market forces, technological change, the quality of management and human resources are not directly reflected in a company’s financial statements. Many qualitative and quantitative factors that influence a company may not be obvious from its financial statements, which only shows how the company performed in the past. Many factors must be reviewed to gain a comprehensive understanding of the strength of a company. Therefore, it is necessary to look beyond the financial figures to value the company. This article is an attempt to look those factors, internal and external, which may be necessary to understand the intrinsic value of the company.” 1. Introduction: Limitations of Historical Financial Statements Every company at its Annual General Meeting furnishes audited financial statements of the company showing its financial performance and financial position. These financial statements include the balance sheet, profit and loss accounts, cash flow statement and notes to accounts: i) The Balance Sheet: Reflects the historical value of assets, liability and net worth of the company at particular point of time. ii) Profitability Statements: Reveals the revenue and the details of the various expenses and the net surplus/loss. iii) Cash Flow Statement: Shows the cash, which is generated from the operating activities, investment activities and from financing activities under various heads. iv) Notes to the Accounts: Forms part of the Balance Sheet and Profit & Loss Accounts, revealing the accounting policies, accounting standards and accounting practices adopted by the company. Assessing the quality of a company’s strength and performance is a complex process. It requires looking beyond the financial statements and further analysis of various qualitative and quantitative information to understand the company. Information on the state of the economy, the industry outlook, competitiveness, market forces, technological change, quality of management and human resources are not directly reflected in a company’s financial statements. Board Report, Management Discussion Analysis and Corporate Governance Report does disclose certain information on business outlook, internal control systems, business opportunities, threats, risk management policy, research and development, management structure and shareholding pattern are useful in understanding the company beyond the financial figures. However, there are many more factors which needs to be considered to understand the intrinsic value of the company from the perspective of future sustainability and growth. Concept of Intrinsic Value: Understanding the intrinsic value of the company shall be of utmost important for the investors, mutual funds, private equity, venture capital, merchant bankers and high net worth individuals who take long term investment decisions. Here, intrinsic value means that ability of the company to remain viable, earn profits and continue to achieve growth in the future. Normally, the company is never valued based on the assets it holds but valued on the basis of its prospects for economic growth, future earning, competitiveness, technological upgradation and capacity to meet market threat. However the companies engaged in the reality sector and rental business, may be valued on the assets it holds. Many qualitative and quantitative factors that influence a company may not be obvious from its financial statements, which only shows how the company performed in the past. Further, the biggest drawback of today’s financial statement is that it lacks quantitative information. Earlier, the financial statements use to disclose many quantitative information on installed capacity, actual production and sales and raw material consumption to understand the performance well. However, over a period of time, these disclosures were discontinued from the financial statements in the name of business confidentiality. 2. Classification of Beyond-Balance-Sheet Evaluation Many factors must be reviewed to gain a comprehensive understanding of the strength of a company. Therefore, it is necessary to look beyond the financial figures to value the company. There is no single yardstick to understand the company beyond its financial statements. There are many factors which are important to achieve this objective and it may be classified in two parts: Part A: Internal Factors (15 Dimensions) Factors originating within the enterprise encompassing operating capacity, human capital, governance, off-balance liabilities, restructuring, R&D, and promoter alignment. Part B: External Factors (6 Dimensions) Macroeconomic forces, brand premiums, rating agencies, credit/forex/market risks, raw material security, regulatory licensing, and product approvals. 3. Part A: Comprehensive Analysis of Internal Factors 1. Installed Capacity and Utilisation The installed capacity and understanding at what capacity utilisation the company functioning is important to understand the growth prospect. No company would like to keep its production capacity idle if it has good business operations. It is always considered good to work with full capacity. However, the company which is utilising its full capacity, offer little or no scope for growth at its present capacity. Any spurt in the demand of the products, the company which is utilising its full capacity will not be able to participate in additional business, where the company which is having surplus capacity, will benefit from the spurt in demand. Projects like cement, steel, textile, speciality chemicals etc. require large investments and time to create additional capacity. Therefore, companies having surplus capacity get immediate benefits in the boom period. 2. Human/Industrial Relation Human capital is now one of the most invisible assets of any company and difficult to be assessed. It is very difficult to understand human behaviour and their competency. However, studies on employee training, reward and recognition policy, performance appraisal methodology, employee turnover and attrition rate, Stock Option Scheme, etc. may be helpful to understand the HR Policy of the company. These are very important for the valuation of the companies engaged specially in IT Sector as they are assessed and valued based on employee strength and their quality. Markets do take cognizance of the HR policies for the companies like Infosys, Wipro, TCS etc. Similarly industrial relations are also the judge on the history of the lock outs, strikes and labour unrest occurred in the company during past periods. 3. Reading Notes to Accounts The Notes to accounts forms part of the balance sheet and profit and loss accounts. Apart from the statutory disclosure as required under the schedule II of the Companies Act 2013, the Notes to accounts makes many disclaimers and disclosures, which may be necessary to understand the company performance and position. The size of these notes to accounts are many times larger than the size of the financial statements and thus there is a possibility that the important disclosures or contingent liabilities affecting the company may remain unnoticed. Pending court cases and litigations, huge demands from revenue authority, any legal proceeding taken under the Insolvency and Bankruptcy Code, etc, as disclosed in the note to the accounts, may affect the working or survival of many companies as going concern. Off-Balance-Sheet Financing: Further, there are various off-balance-sheet financing options which include special-purpose entities, leasing transactions, debt guarantees, co-borrowing arrangements, securitisations, and other contingent obligations that may not require recognition on the balance sheet. An analysis of these off-balance sheet items is necessary to understand its effect on the company’s ability to continue. 4. Chairman Statement Though it is not mandatory, Chairmen of many companies share the vision of the company in their statement to investors. This statement is sometimes given along with the annual report or it may be published in prominent newspapers. This is a forward-looking statement on the current performance of the company and its future business outlook and strategy as well. This is widely read by the well-informed investors. 5. Segment-wise Performance / Product Diversification If the company is operating in more than one segment, segment wise reporting is provided in the annual report. This will facilitate to understand the contribution of each segment in the revenue and growth of the company and help the investor make a better analysis of the risk and returns of the organisation. Many companies also adopt the route of the subsidiary company for the different and diversified activities/products and many times it is also noticed that companies go for demerger for different segments for better management. As per the market report, Mahindra & Mahindra is initiating a restructuring plan to trifurcate its flagship automobiles business into electric vehicle, tractor and passenger vehicle business into three independent companies via a demerger process. The evaluation of the performance of these subsidiaries are equally important to understand the performance of the holding company. 6. Events Occurred after Balance Sheet Date The economic and political situations keep changing at national and international levels and it may have a favourable or adverse effect. The situation may be: Government of any country may put restrictions on exports/imports. Imposition of anti-dumping duty by the importing country. Banning of use of any products, like ban on use of certain plastic products in India. Any major break down due to nature calamity, fire or labour unrest. Any major legal actions or proceeding against the company. Occurrence of pandemics like COVID. A prudent investor should always keep an eye on such events which may affect the business of the company. 7. Captive Power Plant Power is an important input for many industries and forms the major cost of production, especially in aluminium and steel industries, power cost is substantial. It is observed that if the power is produced in house for captive consumption, it is much cheaper than the purchasing the power from outside. Further, captive power plant reduces the dependency on the outside supply and ensures uninterrupted power supply. Solar power is much cheaper now and many companies are installing solar power and opting net metering arrangement to reduce the power cost. Also they are selling surplus power to stakeholders outside. Almost all the business houses like Tata Steel, Hindalco, M&M, Reliance, etc have power plants for captive consumption and also installing green energy plants to save power cost and reduce the load on the environment as well. 8. Family / Professional Management / Governance In India, family managed companies play a vital role and influences the vision and mission of the company. Some groups control the management through the holding company and give the subsidiary sufficient autonomy for day-to-day functioning. In case of family managed company, people look at the succession management planning for sustainability. There are professionally managed companies also which are very successful without being associated to any business family, like Larsen & Toubro (L&T). For listed companies, the appointment of independent directors are mandatory and the composition of Board of these companies also affect the market perception. Hence corporate governance is becoming prominent in the corporate world. 9. Collaborations The nature and type of collaborations, the company have entered also decide their superiority in terms of technology, finance, marketing, etc. Looking at these collaborations shall help in understanding the strength of the company. For example the Japanese subsidiary of Mahindra & Mahindra, Mitsubishi Mahindra Agricultural Machinery Co., Japan and Kubota Co., Japan have entered into a business collaboration arrangement for the Japanese market. Similarly, severance of the collaboration agreement may happen affecting the business as occurred in the case of Hero group and Honda group. 10. Out-Licensing Out-licensing is a relatively new phenomenon in the Indian market. Due to lack of required in-house facilities to develop patented products, companies are adopting out-licensing strategy for production. As it becomes more expensive to develop new products, out-licensing collaborations are fast becoming a favoured option specially for pharmaceutical companies to save on research and development investments. 11. Research & Development (R & D) Research and development is a continuous process which keeps the company ahead of competitors in terms of technology and innovation. Through R & D, the company may: Develop new products, Modify/change product design, Design new process to improve quality, Reduce operating cost by substituting the cheaper raw material, Reduce production cycle time, Develop/explore new markets etc. The company which has in house R & D facility finds preference, since it ensures confidentiality and continuity. 12. Incentives & Production Linked Incentive (PLI) Scheme Government of India (GOI) and many state governments offer various incentives for the development of certain sectors and undeveloped areas. These incentives play a very vital role for the growth and economic viability of the company. Central Government offers incentives for agro-processing sector, horticulture sector, development of North-Eastern region, etc. Similarly, state governments offer incentives to MSME, large, and mega units to attract investments in their states. Availability of such incentives shall be studied to understand the benefits to the company. Flagship PLI Scheme: Recently, GOI has declared Production Linked Incentive Scheme (PLI Scheme) to encourage local production and to create employment. The Central government’s flagship PLI scheme, was announced in March 2020, is operational for 15 sectors such as electronics and mobile manufacturing, solar equipment, pharmaceuticals, medical devices, automobiles and auto components, among others. These schemes increase the profitability of the eligible companies. 13. Merger / Amalgamation / Acquisition The value of the company changes with the change in the management. These changes may have occurred due to merger, amalgamation or acquisition. Such developments should also be kept in mind. It helps companies gain access to a larger market and customer base, reduce competition, and achieve economies of scale in a shorter time. Illustrative M&A Precedents: For example, L&T has acquired Mindtree, Patanjali Ayurveda Ltd. acquired Ruchi Soya, Godrej Agrovet acquired stakes in Astec Life Science Ltd., Tata Steel acquired Bhushan Steel, etc. leading to more value creation in the market through these mergers, amalgamations and acquisitions. 14. Shareholding Pattern and Pledging of Promoters’ Holding The shareholding patterns and any change therein is also given in the annual report under Corporate Governance Report. This should also be studied to know the promoters holding in the company and any change that took place during the year. The higher the promoters holding, the larger is their commitment in the company and viewed as positive. Risk of Pledged Shares: It is also observed that some of the promoters keep their holding in the company as pledge with financial institution or banks as security for taking loans or for some obligations. This aspect is also requires observation. If due to default, the pledged shares are sold in the open market, it may affect the existing management. For example in Eveready Industries India Ltd., lenders had to sell pledged shares due to promoter group default on repayment. 15. Replacement Cost The present cost of replacement of setting up of the similar units is sometimes considered by the market forces. However, with the technological development and innovation, replacement cost theory is losing its relevance as new technology has reduced the operating cost substantially with improvement in quality and functional utility. 4. Part B: Comprehensive Analysis of External Factors 1. Brand Value Branding is important when trying to generate future business. A strongly established brand increases the business value by giving the company more leverage in the industry. Many times brands enjoy more independent value than the name of the company manufacturing the branded products. In the apparel market, brands like Van Heusen, Louis Phillipe, Allen Solly, Peter England, Pantaloons are owned by Aditya Birla Fashions Ltd. Arrow is owned by Arvind Fashions Ltd. Park Avenue, ColorPlus, Parx, are owned by Raymond Ltd. These brands are recognised by the public by their brand name rather than the name of the company owning the brands. Also, manufacturers push the brand name rather their company name. These brands are independently sold in the market at premium and the acquirers capture the market immediately. 2. External Credit Rating The credit rating assigned by the external rating agencies like CRISIL, CARE, ICRA, FITCH, etc. is important to understand safety of the investment. They evaluate the project according to their strength and do SWOT analysis and assign the rating according to risk perception. The higher the rating, the safer is the investment and such companies can obtain loans at lower interest rates. Especially regarding the debt instruments, rating plays a vital role for the investors’ safety. The ratings are assigned for long term loans and short term loan facilities separately. The ratings assigned signify as under: Long Term Rating Short Term Rating Rating (Long Term) Degree of Safety / Default Rating (Short Term) Degree of Safety / Default AAA Highest safety A 1 Very strong AA High safety A 2 Strong A Adequate safety A 3 Moderate BBB Moderate safety A 4 Minimal BB Moderate risk of default D Defaulter or expected to be defaulter B High risk of default — C Very high risk of default D Defaulter or expected to be defaulter 3. Risk Analysis Understanding the nature of a company’s business and the inherent risks is important when analysing financial position. The nature of a company’s business depends on many factors, including the size of the company, where the company is in its life cycle, the geographic areas it operates in, and the competitive landscape in which it operates. Risks are inherent in the business. The risk may be market risk, credit risk, environment risk, Forex risk, etc. Management Discussion Analysis make a special mention about risk management policy and should be read carefully. Few examples are: Credit & Leverage Risk: A highly leveraged company may be exposed to a great credit risk in terms of timely repayment obligation. The enactment of Insolvency and Bankruptcy Code and the right conferred to the secured and unsecured, has made the situation more vulnerable which are not meeting their financial obligations in time. There are many companies which change hands in management and NCLT has ordered for liquidation. Geopolitical & Country Risk: Companies operating international trade are subject to country risk. The recent war between the Russia and Ukraine and the involvement of many other countries in the war has affected the international trade and both importing and exporting countries are facing lot of problems. The automobile sector is facing a dramatic shortage of microchips and components globally. Forex & Unhedged Borrowing Risk: External commercial borrowings in foreign currency may subject to currency fluctuation risk, if not hedged. The impact may be positive or negative. Market & Customer Concentration Risk: Market risk may cover the client concentration, distribution channel and policy, product life cycle, change in customers choice, development of substitutes with improved features. etc. The companies engaged in consumer products are more prone to market risk due to change in customer behaviour. Environmental & Regulatory Lease Risk: The Government has begun stipulating stringent norms and regulations to control environmental regulations and many times it is observed that working of the companies are suspended due to non-compliances of these norms. Many mining companies are also facing the same environmental problems in their operation or renewal of lease from the Government. The various risk factors should be analysed properly for long term sustainability of the company. 4. Control over the Raw Materials Uninterrupted availability of raw material is vital for the running of units of the company. Companies having in-house supply of raw materials will be more valuable than the company sourcing from outside. Captive Sourcing Precedents: For example, there are many steel making companies like JSW, Tata Steel, etc which have their own mines for the supply of raw materials like iron ore, manganese, coal etc. Such companies which have captive arrangement for supply of raw materials are less dependent on the market for the supply and they command the premium in the market. 5. Patent / Licence / Entry Barrier The points to be considered are: Patents: The companies that have patented their products or process, restrict the entry of others till the validity of patent period. The unexpired period of the patent is important to understand its long-term impact. Operating Licences: There are sectors like banking, telecom, Airlines etc which require licence to operate. It is a time-consuming process to get the new licence. Therefore acquisition routs are adopted to enter into these fields. Recently Tata has acquired Air India from the GOI. FDA Approvals: Pharmaceutical companies require approval from the FDA, in India or abroad, before launching the product for commercial application. Capital Intensity as Entry Barrier: The requirement of large investment and innovation creates entry barrier for new-comers. Projects like refinery, semiconductors, integrated steel plant, etc. fall under this category. The investors should take cognisance of the companies having the above advantage. 6. Product Approvals There are products which require prior approval from the competent authority before its commercial production. The process may take a long time to get the required approvals. For example, for making supply for defence use, products are to go through the stringent safety and quality norms of the Defence Procurement Policy of Ministry of Defence, Government of India. Similarly in the pharma sector, approval process takes a long time and on approval, market capitalisation increases. 5. Conclusion From the above it is evident that quality of the financial position and strength of any company are to be viewed from various internal and external parameters. One has to move and look beyond the balance sheet. The evaluation and analysis of the performance are carried out taking into consideration the above points which is an illustrative way to understand and evaluate the company. Each criteria has its own comparative advantage and limitation. Depending upon the object of the study, these parameters can be used obtain a clearer understanding of the financial position and strength of any company. ❖❖❖ “Quality of the financial position and strength of any company are to be viewed from various internal and external parameters. One has to move and look beyond the balance sheet.”

THEME • CORPORATE INSOLVENCY & RESTRUCTURING The Chartered Accountant • December 2022 • Vol. 71 • pp. 55–58 (Journal pp. 635–638) A journey of Insolvency and Bankruptcy Code (IBC) AM CA. (Dr.) Ashok Kumar Mishra Author is Technical Member of the National Company Law Appellate Tribunal (NCLAT). He may be reached at drakmishra1956@gmail.com and eboard@icai.in Preamble & Legislative Intent of the Code “It is an undisputed fact that Insolvency and Bankruptcy Code, 2016 (‘Code’) was enacted to remove critical building block of Non-Performing Assets involving lacs of crore to a mature market economy. The Preamble of the Code provides Insolvency Resolution of Corporate Persons etc & its reorganization in a time bound manner for maximization of value of assets of such organizations and to promote entrepreneurship apart from releasing dead capital to working capital.” 1. Journey Process & Its Result It reveals that there are still multiple options to get the amount realized from such Non-Performing Assets of Scheduled Commercial Banks. A look at the data available on the Web reveals that the mechanisms are Lok Adalats, DRT’s, SARFAESI Act, Civil Procedure Code & IBC. Although the purpose of each one of this channels has different goal; in terms of number of cases referred to Lok Adalat is number one but in terms of value IBC is number one. Comparative Recovery Performance (FY 2019–2020): Lok Adalat vs. IBC Recovery Mechanism Cases Referred Amount Involved (₹) Amount Recovered (₹) Recovery (%) Lok Adalat 59,86,790 ₹ 67,800 Crore ₹ 4,211 Crore 6% Insolvency and Bankruptcy Code (IBC) 1,986 ₹ 2,24,935 Crore ₹ 1,04,117 Crore 46% * Note: The percentage of recovery in IBC or in any channel will vary from year to year basis. Overall Ease of Doing Business Rank 63 (Up from 142 in 2015) Enactment and implementation of the IBC brought India’s overall ranking in the World Bank’s “Doing Business” Report from 142 to 63. Insolvency Resolution Ranking Rank 52 (Up from 137 earlier) Significant leap of 85 positions in the specific sub-index of “Resolving Insolvency” under the World Bank framework. IBBI Cumulative Resolution Statistics (Till June 2022): Total Cases Commenced: 5,636 cases. Cases Closed: Closure has been achieved in 3,637 cases. Rescue Rate: 53% of total closed cases got rescued. Liquidation Value vs. Realization: Under approved Resolution Plans, creditors realized ₹ 2.35 lakh crore against a liquidation value of only ₹ 1.31 lakh crore (while the Corporate Debtors owed ₹ 7.67 lakh crore). Recovery Efficiency: Although creditors realized 30% of total admitted claims, they achieved more than 178% of the liquidation value! We all speak and that’s what the approach of the Code is from the ‘Debtor in possession’ regime under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA, already repealed) to the ‘Creditor in control’ regime under IBC making the Insolvency system with the intention of strengthening creditor control. This is in line with the UK Insolvency Law. Implementation of the Code through Tribunal system is tried with the objective of faster resolution; However, the composition of the Tribunal continued with the Judicial Members and Technical Members. In the Court system where the Hon’ble High Courts & District Courts are manned by the Judicial Officers alone and perhaps pendency in these courts moved the legislature to consider Tribunal format. Now the system has been settled by the judicial hierarchy of the Constitutional Courts. No doubt, it puts more pressure on the Technical Members for getting the arithmetical figure of disposal with the cooperation of Presiding Officer of the Bench. The Technical Members are equally responsible for disposal with highest grade of integrity. 2. Law Settled on IBC: Comprehensive Legal Propositions Certain propositions of law which have been developed in the Code in the last five years of judicial interpretation and rulings by the Hon’ble Supreme Court and NCLAT are as follows: 1. Not a Debt Enforcement Procedure: IBC is not “Debt Enforcement Procedure”. 2. Not Meant for Chasing Payments: IBC is not meant for chasing payments. 3. Non-Adversarial Character: IBC is not an adversarial litigation. 4. Summary Nature of Proceedings: The proceedings under IBC are summary in nature and it is not a money claim or recovery to be made in a civil suit. 5. Bar on Trial Issues: No trial issue can be adjudicated under the IBC. 6. Scrutiny of Pre-Existing Disputes for Operational Creditors: If any operational creditor is filing a claim with spurious or moonshine defence for a dispute existing in the claim then the Tribunals are required to investigate details whether dispute is substantial, tangible, real or not. 7. Initiation Criteria for Financial Creditors (Section 7): Existence of ‘Debt’ due & payable under law and existence of ‘Default’ with compliance of the Limitation Act, 1963 then only the Adjudicating Authority under IBC can permit initiation of Corporate Insolvency Resolution Process (CIRP), in case of Financial Creditor. 8. Initiation Criteria for Operational Creditors (Section 9): Similarly, in case of Operational Creditor, existence of Debt & Default must be there along with the reasoning for being undisputed in real sense then only the Adjudicating Authority under the IBC can permit initiation of CIRP. 9. Balance Sheet as Acknowledgement of Liability: Balance Sheet is also a way for acknowledgement of liability subject to that it is unqualified by the management & the auditors. 10. Real Estate Allottees as Financial Creditors: Outstanding amounts to allottees in Real Estate Projects are statutorily regarded as Financial Debts. 11. Recovery Certificate and Law of Limitation: On issue of recovery certification, right to sue commences, then the Bar of Limitation in terms of the provisions of the Limitation Act will commence. 12. Applicability to Government Companies: The CIRP process can be initiated against the Government company also. 13. Non-Justiciability of Commercial Wisdom: Commercial wisdom of Committee of Creditors is non-justiciable. 14. Rights of Suspended Board of Directors: Suspended Board of Directors are entitled for a copy of Resolution Plan, so that their participation in the CoC meetings can be meaningful. 15. Triggering Point for Insolvency Resolution: Mere filing of the petition cannot be taken as triggering point for insolvency resolution. 16. Moratorium on ITAT Proceedings: A moratorium order under IBC will apply to the order of Income Tax Appellate Tribunal. 17. Absolute Bar on Withdrawal of Resolution Plan: No provisions for withdrawal of Resolution Plan exist in the Code and such withdrawal cannot be allowed through judicial interpretation. 18. Binding Contractual Effect of CoC-Approved Plan: Once Resolution Plan of Resolution Applicant is approved by CoC it becomes a binding contract even if it is not approved by that time by Adjudicating Authority under the IBC. 19. Speed and the 330-Day Outer Limit: Speed is the gist of the Code, and it has to be completed within the laid down period of 330 days except in the exceptional circumstances. 20. Guarantee Invalidation vs Principal Borrower Default (Section 7): The NPA classification only regarding the Principal Borrower. Section 7 of the IBC envisages provisions primarily for default from NPA/Date of Default meant for Principal Borrowers while in case of contract of guarantee, Section 7 of the IBC presumes to be enforceable from the date of invocation of the Bank Guarantee and when the demand is made from the Guarantor to pay back the amount and the Guarantor acknowledges the debt of the Principal Borrower. It will accrue even if the guarantor asked the Banker to approach the Borrower. 21. Consequence of Failure to Approve Resolution Plan (Section 33(1)(a)): If no resolution plan is approved within 330 days as envisaged under section 12 or such extended period, as approved by the Adjudicating Authority then only course open is to initiate the liquidation proceedings under Section 33(1)(a) of the Code. 22. Rejection of Arbitration in Non-Arbitral Insolvency Disputes: As far as Arbitration is concerned, the Application for initiating CIRP cannot be converted into arbitration proceedings where the dispute is non-Arbitral. The Tribunal should refuse to refer the parties to Arbitration despite the fact the parties have agreed for Arbitration as the forum of settlement of dispute. 3. Committee of Creditors (CoC) vs. MSME/SME What is being observed in general that Committee of Creditors (CoC) who are the Financial Creditors decides the distribution of realized amount amongst themselves and employees of the Corporate Debtor and least concerned for the other Operational Creditors primarily the suppliers who are MSME/SME who have less bargaining power while accepting a purchase order from the Corporate Debtor. Corporate Debtors when they are large business houses; these suppliers mostly MSME and SME’s have zero bargaining power and have to enter into an unilateral contract where the Debts are not secured. The CoC As Supreme Authority: “The large suppliers always ask for letter of credit payment term even in indigenous payment. Committee of Creditors have become the King as their collective wisdom is not justiciable and thereby the approved Resolution Plan and realization there from after meeting the CIRP costs etc get distributed amongst themselves. Lot of talks are going on for developing professional Code of conduct for the CoC. However, as it looks apparently that developing such Code may not have much impact rather it will act as a leap sympathy to these (MSME/SME) operational creditors.” Case Illustration: The MSME Supplier Dilemma in the Aircraft Manufacturing Industry A view has also cropped up why these MSME/SME continue to supply to these organizations when they failed to get the amount realized in earlier supplies. In the Aircraft Industry where lot of items are developed by these (MSME/SME) vendors at much lower costs and they become the permanent suppliers for that particular programme. In order to reduce their costs, they always procure materials for the full programme which reduces their average costs and they can beat obsolescence also in the large manufacturing programme. So even if they stopped the supply, all these material costs will become redundant and at the same time they have to pay their employees as the employees are having high skill set so they cannot dispensed with them also. Need for Legislative Safeguards: All these requires that Insolvency and Bankruptcy Board of India (IBBI) to conduct an impact evaluation study to ascertain the impact of IBC on MSME / SME which is perceived as wiped out to some extent. Hence, there is a need for incorporation of appropriate provisions under the IBC to protect MSME/SME. 4. Reorganization of Corporate Debtor (CD): Restructuring vs. Liquidation The other area requiring focus is on restructuring the CD / the Company under Corporate Insolvency Resolution Process (CIRP). What is being seen amongst the Financial Creditors / banks that they follow the mechanical system of highest bidder rather than assessing the Operational, Technical & Managerial Competence of the firm in greater details like always purchasing on Lower bidder (L1) basis will not result into lower operational costs if L1 with reference to higher technical feature is not compared. No format in general can provide answer for optimizing the objective function. The other thing involved is that the Bank officials avoid operational risks, if they are allowed restructuring of loans based on their wisdom rather than opting for IBC. A view that’s why emerged that the IBC is more successful in liquidation than restructuring which laid to the amendment of the Code in the year 2018 which came on 06th June, 2018 by Ministry of Corporate Affairs. The voting threshold was reduced to 66% from 75% for all important actions like approval of Resolution Plan, extension of CIRP period and so on and so forth and for routine decision, it was reduced to 51%. Liquidation Statistics (IBBI Dec 2021) The data available with Insolvency and Bankruptcy Board of India (IBBI) / Web reveals that as of December, 2021 out of 3,247 CIRP cases that were closed, 46% have ended in orders for liquidation, and out of that 77% were already ordered for resolution under BIFR. Regulation 37 Restructuring Tools Regulation 37 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 allows Resolution Professional multiple mechanisms for restructuring the Corporate Debtor including but not limited to sale of a part of assets or transfer of part of assets or through merger or consolidation of Corporate Debtor. Judicial Pioneers in Group Resolutions & Cross-Border Insolvency: Although the provisions for ‘group resolutions’ are awaited into the IBC, the judicial side has permitted such resolution in case of Jet Airways and Videocon Group Resolution Process. In Jet Airways it even involved marginally cross border Bankruptcy and Insolvency. 5. Startup & IBC: Paradigm Shift from Moral Stigma to Risk Mitigation Legislative Framework as were existing from time to time prior to the IBC are as follows: Companies Act, 2013 Chapter XIX (Revival & Rehabilitation of Sick Companies – omitted by I&B Code w.e.f. 15.11.2016) & Chapter XX (Winding Up by the Tribunal). RDDBFI Act, 1993 (Repealed) Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Granted special rights to unsecured/secured creditors for recovery of defaulted debts. SICA, 1985 (Now Repealed) Sick Industrial Companies Act, 1985 for revival of sick companies (applicable to industrial companies only). Moratorium provision under SICA was misused by defaulters to keep creditors at bay. Colonial Insolvency Acts (Repealed) The Presidency Towns Insolvency Act, 1909 and The Provincial Insolvency Act, 1920. Mostly it was understood under the above framework that it is the moral failure of the promoters along with ulterior motive. Now as we want to give impetus to start ups and we have understood that 90% of startup’s fail even in western countries, the time has come to think differently in the years to come. These failed entrepreneurs are being given lot of weights by the European Countries, if the failure is honest and then it is appreciated. We have to give some leverages to these startup for timely exit. Real-Life Precedent before NCLAT: The IIT Tech Startup Exit In a case, few IITan’s wanted to develop certain technology in electronics fields which were not available worldwide and the fund was given by the Government of India to these promoters and later on they could not develop the technology and wanted to ease out, they didn’t have even money to engage lawyers and appeared as “Party in Persons”. It was perceived by the Bench that they were high integrity people, technically most competent but failure has cropped up in certain process of technical development which was demonstrated by them even before the Bench. The Respondent side also didn’t object and finally the exit was permitted. Whenever such cases are coming even within the provisions of IBC through Section 10 and if the Hon’ble Judges perceive that it is an honest failure, they appropriately consider and resolve the case. Hence, the startup has to bring “Atma Nirbhar Bharat” without fear of misuse of IBC rather to consider to use the IBC. The Hon’ble Judges with the experience in District Courts/ High Courts, they are well equipped to grasp whether it is an honest failure or the proposal has come with ulterior motive. This helps the Bench to dispose of within the framework of the IBC. “However, the time has come to consider Insolvency as an integral part of risk mitigation for a failed organization with more leverages and easy access for startups for adopting voluntary adoption of Bankruptcy Process and not to taint these startups entrepreneur.”

THEME • INSOLVENCY JURISPRUDENCE & STATUTORY ATTACHMENTS The Chartered Accountant • December 2022 • Vol. 71 • pp. 59–62 (Journal pp. 639–642) Treatment of Attachment Orders under the Indian Insolvency Regime IA CA. Vijaykumar Iyer & Amritam Anand Authors are Insolvency Professionals. They may be reached at eboard@icai.in Core Conflict: Statutory Attachment vs. Custodial Mandate of Resolution Professional “The Insolvency and Bankruptcy Code (“IBC” or “Code”) requires the Resolution Professional (“RP”) to take control of the assets of the corporate debtor. Amongst other reasons, the RP has been entrusted with this duty for safeguarding the assets from being disposed off by erring promoters or by creditors and to enlarge the pool of assets that are available for maximization of value. While exercising this power given under the Code for taking control and custody of the assets of the corporate debtor, the RP on multiple occasions has to face the issue of attachment of the assets of corporate debtor by regulatory/statutory authorities. The issue gets further complicated when the authorities while exercising their power of attachment, take control of the assets prior to the insolvency commencement date (“ICD”). Consequentially, the conflict arises in respect of the power of attachment with the authority and the power of control and custody of the RP under the Code.” 1. The Non-Obstante Clause (Section 238) and the Three Regulatory Spheres Judicial pronouncements of various Courts and Tribunals as discussed in the current write-up have mostly relied on the non-obstante clause in section 238 of the Code. Section 238 of the Code states that the provisions of the Code shall have the effect, notwithstanding anything inconsistent therewith contained in any other law for time being in force or any instrument. Supreme Court Precedent in K. Kishan: Further, Hon’ble Supreme Court in K. Kishan V. Vijay Nirmal Company (p) ltd (2018) 146 CLA 1 (SC) has held that section 238 of the Code would prevail in case there is an inconsistency between the Code and consequent statute which is in question under the dispute in the immediate case. In light of the above context, this article has mainly dealt with the act of attachments by three statutory/regulatory authorities, namely: Category 1 Customs Authority Central Board of Indirect Taxes and Customs under the Customs Act, 1962. Category 2 Enforcement Directorate Under the Prevention of Money Laundering Act (PMLA), 2002. Category 3 PF Commissioner Under the Employees’ Provident Funds and Miscellaneous Provisions Act (EPF Act), 1952. The following sections review recent pronouncements by the judicial authorities that have established the current law and practice. 2. Customs Authority: Central Board of Indirect Taxes and Customs (Customs Act, 1962) The Milestone Dispute: Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC (Supreme Court of India) In the matter of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (Civil Appeal No. 7667 of 2021), the customs authorities had seized the goods of the corporate debtor. The seizure in question had taken place prior to the ICD. On commencement of the liquidation, the liquidator filed an interlocutory application (I.A.) under section 60(5) of the Code seeking a direction from the Hon’ble NCLT against the custom authorities to release the goods which belonged to the corporate debtor. In the immediate I.A., the Hon’ble NCLT allowed the prayer of the liquidator and directed the customs authority to release the goods of the corporate debtor which were seized by the customs authority. The Hon’ble NCLT reached the said conclusion by virtue of section 238 of IBC having an overriding effect on the Customs Act, 1962 due to the IBC, 2016 being enacted later in time than the Customs Act, 1962. NCLT’s Doctrine of Subsequent Enactment: The reason for a later enactment having an overriding effect over an earlier enactment is that the legislature while passing the Code in the year 2016 is deemed to be aware of the earlier legislations passed such as Customs Act, 1962 along with the conflict that might arise due to interplay of Customs Act, 1962 and the Code. Being cognizant of the said conflict, the legislature had put the non-obstante clause in form of section 238 of IBC from which legislative intent of giving an overriding effect to the subsequent law may be inferred. NCLAT’s Reversal and the Relinquishment Theory under Section 48: The order of NCLT was challenged before NCLAT (Appeal No. M.A. 1280/2018 in C.P. 405/2018). The Hon’ble NCLAT set aside the NCLT order by deciding whether the assets that the liquidator was seeking control over were assets of the corporate debtor or not. The issue raised was that if ownership of assets had passed to the customs authority, the power of the liquidator to take control and custody of “assets of corporate debtor” becomes redundant; thus no question of inconsistency between the Customs Act and the Code survives to be dealt via Section 238. NCLAT referred to Section 48 of the Customs Act, 1962, which grants thirty days’ time from the date of unloading at the customs station for clearing imported goods (home consumption, warehousing, or transshipping). If goods are not cleared, after notice, the customs authority may sell off the goods seized. NCLAT held that title over the seized goods was deemed relinquished by the corporate debtor’s failure to remove the goods from customs custody. Furthermore, customs duty was held not to be a liability, but a consequence of importing the goods, so title could not pass without paying customs duty. Hon’ble Supreme Court Ruling: Section 142A & Constitutional Property Rights (Article 300A): The primary issues before the Hon’ble Supreme Court were twofold: (1) The overruling effect of the Code over the Customs Act, 1962, and (2) The relinquishment of title to the goods by the corporate debtor in favour of customs authorities. Subordination under Section 142A: The Supreme Court referred to section 142A of The Customs Act, 1962, which provides that the Customs Authority shall have first charge on any amount of duty, penalty, or sum payable except as otherwise provided in section 529A of Companies Act, 1956, RDDBFI Act, SARFAESI Act, and the IBC. Thus, the Customs Act itself statutorily yields priority to the IBC! No Automatic Abandonment: Regarding relinquishment of title over seized goods, the Supreme Court held that goods cannot be held to be abandoned without such declaration being passed by an authority after giving a reasonable opportunity of being heard to the aggrieved. Article 300A of the Constitution of India: The Supreme Court relied on Article 300A to hold that the right to property is a constitutional right and cannot be taken away without hearing or adjudication. Consequentially, the matter was definitively held in favour of the liquidator acting on behalf of the corporate debtor. 3. Enforcement Directorate (ED): Prevention of Money Laundering Act (PMLA), 2002 1. Sterling SEZ and Infrastructure Limited Vs. Deputy Directorate of Enforcement (NCLT Mumbai) In Sterling SEZ (Appeal No. M.A. 1280/2018 in C.P. 405/2018), Hon’ble NCLT Mumbai by order dated February 12, 2019, held that considering Section 14(1)(a), Section 63, and Section 238 of IBC, the order of the PMLA Court passed for attachment of assets of the corporate debtor is null, and the RP was allowed to take charge of the assets which were under attachment of ED prior to ICD. 2. Deputy Director, Directorate of Enforcement Delhi V. Axis Bank & Ors. (Delhi High Court) In Axis Bank (Appeal No. CRL.A. 143/2018), the Hon’ble Delhi High Court vide order dated April 2, 2019, held that as the objects of the two pieces of legislation are different, the question of inconsistency between PMLA, 2002 and the Code does not arise. Hence IBC does not prevail over PMLA, 2002. The Court also held that any contrary view would defeat the objective of PMLA, 2002 by opening an escape route for money launderers. 3. Mr. Anil Goel (Liquidator of Varsana Ispat Limited) Vs. Deputy Director, ED (NCLT Kolkata) In Varsana Ispat Limited (C.P.(IB) No. 543/KB/2017), an order of attachment passed under PMLA was challenged by the RP before NCLT Kolkata, which was dismissed because the attachment was made prior to initiation of CIRP. The appeal before NCLAT and Supreme Court was also dismissed. Thus, the liquidator filed another I.A. before NCLT Kolkata pleading relief under Section 32-A(2) of the Code for the sale of assets without seeking any detachment orders against ED. The liquidator argued that no detachment is required because by virtue of Section 32-A(2), immunity is provided to assets of CD undergoing CIRP or liquidation. Once sold in liquidation, Section 32-A(2) applies, and the buyer who purchases the attached assets can plead detachment. NCLT Order (August 9, 2020): NCLT held that Section 32-A(2) (inserted on 28 December 2019) applies to both CIRP and Liquidation proceedings. The Tribunal concurred with the liquidator and allowed the sale to proceed without passing any specific directions in respect of the detachment. 4. Nitin Jain (PSL Ltd.) and Rajiv Chakraborty (EIFL): Harmonization of Separate Spheres In Nitin Jain Liquidator PSL Ltd. Vs. Enforcement Directorate (W.P. (c) 3261/2021, dated Dec 15, 2021), the Hon’ble Delhi High Court held that there is no inconsistency between PMLA, 2002 and the Code as both operate in separate spheres that do not coincide. The legislative intent of Section 32-A is that a resolution applicant and the property acquired are insulated from prosecution for pre-CIRP offences of the corporate debtor. This view was reaffirmed in Rajiv Chakraborty RP of EIFL Vs. Directorate of Enforcement (2022/DHC/004739), holding that: “PMLA would cease to have the power to attach or confiscate only when a Resolution Plan had been approved or where a measure towards liquidation had been adopted.” The Jurisprudential Distinction: Debt Recovery vs. Penal Confiscation The judicial pronouncements make it clear that the question of overriding effect arises when consequent statutory enactments are acting in the same sphere. Such was the dispute in Sundaresh Bhatt (ABG Shipyard) where the object of section 48 of the Customs Act is to recover pending dues by selling seized assets (debt recovery conflict), and thus Section 238 resolved which law overrides the other. Further, one may suggest that PMLA, 2002 is not a debt recovery act and the Enforcement Directorate is not an authority whose objective is to set off their own dues by selling attached assets. The ED does not provide any services to the corporate debtor in respect of which unpaid dues would accrue. Thus, PMLA and IBC do not necessarily operate in the same sphere. Moreover, relinquishment of title does not arise under PMLA. Under PMLA, the corporate debtor does not have the option to take back assets from ED by paying off embezzled proceeds within a timeline failing which title transfers to ED. PMLA is a criminal legislation enacted to prevent money laundering, whereas the Customs Act, 1962 is a revenue legislation. Note: As on date, the Enforcement Directorate has challenged orders of NCLT passed on grounds of Section 32-A. The finality of the interpretation of Section 32-A vis-à-vis PMLA remains to be settled by the Hon’ble Supreme Court. 4. Provident Fund Commissioner: Employees’ Provident Funds Act, 1952 1. Regional P.F. Commissioner Vs. T.V. Balasubramanian (RP) (Sholingur Textiles Ltd) (NCLAT) In Sholingur Textiles Ltd (Company Appeal (AT) (Insolvency) No. 1521 of 2019), an attachment order was passed by the Regional Provident Fund Commissioner and post initiation of CIRP, detachment was prayed for by the Resolution Professional. The Hon’ble NCLAT rejected the RP’s prayer and reversed the order of the Hon’ble NCLT (which had cancelled the attachment). The ground for reversal was that the order of attachment under the EPF Act, 1952 was passed much prior to the initiation of CIRP. 2. RPFC Ahmedabad Vs Ramchandra D. Chaudhary affirmed in Kushal Limited (Supreme Court) In Regional Provident Fund Commissioner-1, Ahmedabad Vs Ramchandra D. Chaudhary (Company Appeal No. 1001 of 2019), the Hon’ble NCLAT held that the EPF Act, 1952 is not in conflict with IBC. The order of Hon’ble NCLAT was thereafter affirmed by the Hon’ble Supreme Court in Kushal Limited vs The Regional Provident Fund Commissioner and others (Civil Appeal No. 1920 of 2020). Though NCLAT in the immediate case was not ruling on attachment of assets but ruling on there being no conflict between the acts, this ruling is critical for future disputes arising from EPF attachment orders. 5. Comparative Statutory Synthesis & Conclusion Statutory Authority Governing Statute Judicial Position on Attachment Legal Rationale Customs Authority Customs Act, 1962 (Sec 48, 142A) IBC prevails; attachment subordinated to RP/Liquidator custody Operates in same debt-recovery sphere; Sec 142A yields priority to IBC; Art 300A bars automatic title loss. Enforcement Directorate PMLA, 2002 (Sec 5, 8) & IBC Sec 32-A PMLA power ceases upon approval of Resolution Plan or Liquidation sale Different spheres (penal vs resolution); Sec 32-A(2) insulates new buyers/resolution applicants from tainted past. PF Commissioner EPF Act, 1952 (Sec 8B-8G, 11) Pre-ICD attachment upheld; no conflict with IBC moratorium PF dues do not form assets belonging to Corporate Debtor; held in trust for vulnerable workmen/employees. In the case of PMLA, 2002, the explicit legislative amendment of section 32-A (2) of the Code has helped the cause of the successful resolution of the corporate debtor and ensured value maximization, as Courts prior to the amendment had ruled against the overriding effect of section 238 of Code over PMLA, 2002. In the case of attachment by the Provident Fund authorities, there is no such similar legislative enactment till date. Further, an attachment is made to recover the provident fund dues which have time and again been held as assets not belonging to the corporate debtor. Thus, any such recovery by the PF authorities through attachments per se is not conflicting with the provisions of moratorium under the Code, particularly in cases wherein attachments were made prior to the ICD. “To conclude, while the aim of the Code and the above judicial rulings is value maximization, there is also a reminder to all to necessarily balance the priorities of other stakeholders, particularly the vulnerable class of employees and workmen and their legitimate dues.”

THEME • INSOLVENCY RESOLUTION & GOING CONCERN REVIVAL The Chartered Accountant • December 2022 • Vol. 71 • pp. 63–70 (Journal pp. 643–650) Demystifying Going Concern Revival under Insolvency and Bankruptcy Code, 2016 - CIRP vs Liquidation Process BM CA. S. Badri Narayanan & CA. Ojass Modi Authors are members of the Institute. They may be reached at badri2k3@gmail.com, caojasmodi@gmail.com and eboard@icai.in Legislative Paradigm Shift & The BLRC Foundation “Prior to enactment of the Insolvency and Bankruptcy Code, 2016 (‘the Code’), there were multiple legislations operating parallelly, like Presidency-Towns Insolvency Act, 1909, The Provincial Insolvency Act 1920, The Recovery of Debts due to Banks and Financial Institutions and Bankruptcy Act, 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 etc. with a similar objective of recovery of outstanding dues from the borrowers. However, to optimize and harmonize the insolvency resolution framework with the intent of revival and resolution of the debtor in a time bound manner, a committee was set up under the chairmanship of Dr. T.K. Viswanathan, namely the Bankruptcy Law Reforms Committee (“BLRC”), which submitted its Report (“BLRC Report”) in 2015 which is the foundation on which the Code was framed and legislated. The Code envisages a change from an existing ‘debtor in possession’ to a ‘creditor in control’ regime.” 1. Introduction, The Preamble Mandate & Defining “Going Concern” The enactment of the Code has been considered as a paradigm shift in the insolvency resolution framework in India enabling the re-organization and consolidation of various ‘not so effective laws’ under the existing insolvency resolution framework and creating comprehensive legislation aimed at a time-bound resolution process under the supervision of Adjudicating Authority. Apex Court in Swiss Ribbons Pvt. Ltd. & Another Vs. UoI & Other (2019): “the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors.... maximization of the value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code..... What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern.” Even though Going Concern is not defined in the Code, however, reference to the same was made in the Report of Insolvency Law Committee dated 26th March 2018 (“ILC Report”) which states that: “the phrase ‘as a going concern’ implies that the corporate debtor would be functional as it would have been prior to initiation of CIRP, other than the restrictions put by the code”. Further, the Discussion Paper on the Corporate Liquidation Process dated 27.04.2019 (“Discussion Paper”) stated that going concern means: “all such assets and the liabilities, which constitute an integral business or the CD, that must be transferred together, and the consideration must be for the business or the CD. The buyer of the assets and liabilities should be able to run business without any disruption. The business or the CD must be a running one, and it must be transferred along with its employees. In case of sale of the CD as a going concern, the equity shareholding of the CD must be transferred, and the buyer must take over the CD, its business, affairs and operations, including its licenses, assets, entitlements, beneficial interests, trademarks, brand, government approvals, etc. via a going concern sale, the company survives and all the assets remain vested in the company, with the transfer of ownership from the Liquidator to the Acquirer.” CIRP Architecture Section 5(26): Defines resolution plan as “a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern..”. Section 20: Mandates IRP/RP to protect/preserve CD property and manage operations as a going concern (raising interim finance, entering contracts, instructing personnel). Regulation 39C: Mandates CoC to assess going concern sale under liquidation if CIRP fails. Liquidation Architecture Section 35(1)(e) & (n): Empowers liquidator to carry on CD business for beneficial liquidation and seek AA directions. Regulation 32(e) & 32A: Enables liquidator to sell corporate debtor or business of corporate debtor as a going concern. Origin in Gujarat NRE Coke: First judicial direction by NCLT (01.11.2018), subsequently codified by IBBI on 27.03.2018. Empirical Revival Metrics (IBBI Published Data as on June 2022): Approximately 517 Corporate Debtors have been revived pursuant to receipt of successful Resolution Plans under CIRP, and 18 Corporate Debtors have been revived under liquidation by way of sale as a going concern. These 18 Corporate Debtors helped in the recovery of INR 600.84 Crores during liquidation as against their liquidation value of INR 527.69 Crores (>113.8% realization). 2. Judicial Evolution: Topworth, Visisth Services & AAR AAR Technoplast 1. Gaurav Jain v. Sanjay Gupta (“Topworth Judgement”, NCLT Mumbai, 09.03.2021) Hon’ble NCLT observed that the crux of the sale as ‘going concern’ is that the equity shareholding of the Corporate Debtor was extinguished and the acquirer would take over the undertaking (including business, assets, properties, licenses, and rights, excluding liabilities). NCLT drew a sharp distinction: In normal parlance, a going concern sale is a transfer of assets along with liabilities. However, in liquidation, only assets are transferred and liabilities are settled strictly under Section 53 of the IBC. Hence, the applicant takes over assets without encumbrance or charge, free from creditor actions. Four Inherent Advantages in Liquidation Going Concern Sale: The corporate debtor itself would be transferred. The equity shareholding would be transferred or extinguished and new shares would be issued. The purchaser would be expected to carry on the business of the corporate debtor after the sale is confirmed. The existing employees would have a chance to continue in their employment. 2. M/s. Visisth Services Limited v. SV Ramani (NCLAT, 11.01.2022) Assessing whether sale of Corporate Debtor as a going concern includes liabilities, Hon’ble NCLAT referred to the Liquidation Regulations, ILC Report, and Discussion Paper, holding that: “Sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities…… We conclude that Sale of a Company as a ‘Going Concern’ means sale of both assets and liabilities, if it is stated on ‘as is where is basis’”. 3. HSIIDC Vs. M/s. AAR AAR Technoplast Pvt. Ltd. (NCLAT, 06.09.2022) Hon’ble NCLAT held that the principle of clean slate propounded for resolution applicants in CIRP applies equally to the purchaser in liquidation, as the scope and purpose of the Code is to be interpreted in its truest sense. 3. Statutory Disparities: Resolution under CIRP vs. Liquidation Going Concern Sale Noticeable differences in the legal and regulatory framework available for Resolution under CIRP vis-à-vis a going concern sale under Liquidation across 8 key statutes: S.No. Statute Resolution under CIRP Going Concern Sale under Liquidation 1 The Insolvency and Bankruptcy Code, 2016 Section 32A protects successful resolution applicant and property of CD from prosecution/liability for pre-CIRP offences pursuant to change in management. Section 29A Exemption: Acquisition of NPA CD/subsidiary does not make applicant ineligible under Section 29A to participate in other CIRPs for 3 years from plan approval date. Similar relief has not been laid down in the Code for going concern sale under liquidation. Hence, risk of additional liability/prosecution on CD w.r.t past non-compliances/offences exists. Such waiver is not available; bidders attract Section 29A ineligibility for other acquisitions if connected persons are classified as NPA. 2 CIRP Regulations & Liquidation Regulations Explanation to S.5(26) allows restructuring via merger, amalgamation, and demerger. Regulation 37 (CIRP Regulations): Enables transfer of assets, modification of security interest, extension of maturity/terms of debt, delisting/cancellation of shares, issuing securities, and statutory approvals. Sale is generally conducted on “As is Where is” basis. Liquidation Regulations do not explicitly allow submission of any plan/scheme for acquisition/bidding; terms of auction notice are binding as such. 3 Income Tax Act, 1961 While Section 79(1) bars carry-forward of business losses on shareholding change, Section 79(2) explicitly protects CD’s right to carry forward business losses where shareholding changes pursuant to an approved resolution plan under IBC. Benefit of carry forward of previous year losses under Section 79(2) is not available to a Corporate Debtor whose shareholding changes on account of going concern sale under liquidation. 4 SEBI (Delisting of Equity Shares) Regulations SEBI has relaxed delisting regulations for listed companies delisted pursuant to Section 31 approved plan, provided the plan lays down delisting terms or an exit opportunity to public shareholders at specified price. No such relaxation has been provided for listed companies sold on a going concern basis under liquidation. 5 SEBI (SAST) Regulations (Takeover Code) SEBI relaxed limits for substantial acquisition of shares/voting rights and granted blanket exemption from open offer obligations for acquisitions pursuant to approved resolution plan. No open offer relaxation is available for listed companies sold on a going concern basis under liquidation. 6 SEBI (ICDR) Regulations Relaxed applicability of provisions regarding preferential issue of shares (except lock-in restrictions) for listed companies acquired under approved resolution plan. No such relaxation is available for listed companies sold on a going concern basis under liquidation. 7 Securities Contracts (Regulation) Rules Relaxations provided to listed companies acquired under approved resolution plan to meet Minimum Public Shareholding (MPS) requirements over an extended glide path. No such relaxation is available for listed companies sold on a going concern basis under liquidation. 8 Companies Act, 2013 MCA clarified that approval of shareholders/members for actions requiring such approval under the Companies Act, 2013 shall be deemed granted upon plan approval by the Adjudicating Authority. No such blanket approval is available for companies sold on a going concern basis under liquidation. 4. Condition Precedents (CPs), Reliefs & Concessions: The Regulatory Vacuum A resolution plan cannot be conditional as upheld by the Hon’ble Supreme Court in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited & Anr. (2021). However, RFRPs often allow Condition Precedents (CPs) necessary for implementation. Apart from CPs, applicants pray for extensive reliefs, concessions, and waivers. Even though the commercial wisdom of CoC is sacrosanct, CoC cannot usurp statutory jurisdiction; applicants must pray before the Adjudicating Authority. In liquidation going concern auctions, successful bidders similarly pray for Part II benefits, creating a significant grey area and regulatory vacuum. The Milestone Jurisprudence in Nitin Jain (Liquidator of PSL Ltd) vs Lucky Holdings Pvt Ltd (NCLT Ahmedabad, 2021) Referencing orders in V.K Global Vs M/s SMAAT India, Dr. Devaiah Pagidipati Vs Southern Online Bio Technologies (SBTL), and Topworth, the Liquidator argued that being akin to a resolution plan, a going concern buyer is naturally entitled to consequential reliefs. The Adjudicating Authority applied Supreme Court rulings in Arun Kumar Jagatramka (sale under resolution plan and liquidation Reg 32(e)/32(f) r.w. 32A share similar nature and object), Gujarat Urja Vikas Nigam, and Embassy Property Developments (Section 60(5) jurisdiction confined to issues central to insolvency/liquidation). “there still remains a vacuum as neither the basic provisions under the Code nor regulations made so far prescribe as to what reliefs and concessions can be granted to a Successful Auction Bidder who takes over a Corporate Debtor as a going concern like a resolution applicant so as to enable such person to run the affairs of the Corporate Debtor as a going concern in a smooth manner without any hiccups.” NCLT concluded that reliefs and concessions on parallel lines of an approved resolution plan can be granted subject to the sole condition that such reliefs/concessions must be central issues arising out of liquidation proceedings under Section 60(5)(c) of the IBC. 5. Catalog of Reliefs Granted: CIRP Resolution vs. Liquidation Going Concern Sale Read with the landmark Supreme Court ruling in Ghanshyam Mishra and Sons v. Edelweiss Asset Reconstruction Co. (2021) and Embassy Judgement, the Adjudicating Authorities have granted extensive reliefs in both channels: A. Reliefs Granted in CIRP Resolutions (Cura Healthcare, Sai Wardha Power, Shri Ram Cement, Essar Power MP, Omni Auto Tech, Jhabua Power): Exhaustive list of 23 waivers, concessions, and statutory protections granted to Resolution Applicants: 1) Extinguishment of debts, liabilities & de-recognition in P&L Account. 2) Restatement of carrying value of assets & write-off non-realizable amounts to P&L. 3) Board dissolution, new directors, amending constitutional docs, share transfer at nil consideration. 4) Renegotiation / termination of third-party contracts. 5) Renewal / extension of licenses and government approvals. 6) Accrual of cash balance benefit up to plan approval by CoC. 7) Vesting of assets / properties with resolution applicant. 8) Discretion to utilize security premium account under Companies Act. 9) Waiving past non-compliances by Government Authorities. 10) Bar on ED/SFIO from attaching assets or continuing criminal proceedings against CD. 11) Regularization of Corporate Debtor’s bank accounts. 12) Termination of onerous related-party contracts. 13) Freezing of amounts payable to Customs for SEZ de-notification. 14) Termination of all captive PPAs without any financial liability. 15) Complete extinguishment of all claims, whether lodged in CIRP or not. 16) Power supply restoration subject to connection charge/security deposit. 17) Uninterrupted water supply and land use for 12 months. 18) MoEF waiver of past non-compliance and extension for emission norms. 19) Stamp duty and transaction tax exemptions under resolution plan. 20) Abatement of pending winding-up proceedings. 21) Bar on guarantors enforcing subrogation rights against CD. 22) Mandatory withdrawal of all creditor legal proceedings against CD. 23) Income Tax exemption on exceptional gains from debt waivers and receipt of income without TDS under IT Act, 1961 for 10 years from effective date. B. Reliefs Granted in Liquidation Going Concern Sales (PSL, Topworth, SBTL, VNR Infrastructures): Exhaustive list of 14 waivers and concessions granted to Successful Auction Bidders: 1) Transfer of licenses, consents, and statutory approvals. 2) Complete settlement and ring-fencing of past liabilities. 3) Extinguishment of existing shares of the Corporate Debtor. 4) Vacation of office by existing board directors. 5) Change of CD status to “Active” by Registrar of Companies (ROC). 6) Corporate Debtor allowed to review and terminate contracts. 7) Vesting of all CD assets with the successful auction acquirer. 8) Satisfaction and release of all existing charges. 9) Authorities to waive non-compliances prior to approval date. 10) Withdrawal of all civil and criminal inquiries/investigations. 11) Removal of company’s name from DGFT ‘Denied Entity List’. 12) Income Tax benefit for carry forward of business loss & depreciation. 13) 100% equity shareholding of CD to be allotted to successful bidder. 14) Exemption from registration fees, stamp duty, and waiver of tax penalties. 6. Conclusion & Future Legislative Roadmap Undoubtedly, based on the above in-depth analysis of provisions of the Code and judicial precedents available as on date, the revival of Corporate Debtor, whether in CIRP or Liquidation can be touted as the ultimate object of the Code and such revival may not be practically viable unless and until certain waivers, reliefs and concessions are granted to the resolution applicant under CIRP and the successful bidder under liquidation. In absence of specific legal provisions, the judiciary has attempted to extend the required assistance to the acquirers within the framework of The Code. In time to come, these judicial precedents may become the guiding light for the legislature to enact necessary amendments to the Code and Regulations to bring in specific provisions for the treatment of such reliefs/concessions/waivers, and for defining the powers of CoC and AA to consider the same, to mitigate post-acquisition complications and enable the acquirer to proceed based on the clean slate theory propounded by the Apex Court and operate the Corporate Debtor as an ongoing concern. “Such an amendment will surely be aligned with the essence of The Preamble of the Code.” ❖❖❖

THEME • SECTION 7 CIRP & CO-BORROWER JURISPRUDENCE The Chartered Accountant • December 2022 • Vol. 71 • pp. 73–75 (Journal pp. 653–655) Even proceedings under section 7 can be initiated against Corporate Debtor and co-borrowers though the recovery cannot be more than its total outstanding put together DM CA. Dinesh Gopal Mundada Author is member of the Institute. He may be reached at mundada2007@gmail.com and eboard@icai.in Core Judicial Thesis: Dual CIRP Permissible, Double Recovery Strictly Barred “The issue arises when there are two borrowers and/or two corporate bodies that fall within the ambit of corporate debtors, proceedings under Section 7 of the IBC can be initiated against both Corporate Debtors. Though the proceedings can be initiated against both persons, the amount cannot be realised from both Corporate Debtors. Total recovery of dues can never exceed the outstanding in the books of the lender. Yes, there are chances that part payment can be realised from one borrower and the remaining part from another borrower Corporate Debtor being the co-borrower. Therefore, the question of double recovery does not arise.” 1. Background of the IBC & The Statutory Framework On 28th May 2016, the Insolvency and Bankruptcy Code (IBC) was published in the Official Gazette after its passage in the Parliament. It has been hailed as a major economic measure, aimed at aligning insolvency laws with international standards. Part II: Corporate Insolvency Resolution Titled ‘Insolvency Resolution and Liquidation for Corporate Persons’, it applies to matters relating to insolvency and liquidation of corporate debtors where the minimum amount of default as of today is ₹ 1 Crore. A corporate debtor refers to a company, a limited liability partnership or any corporate person who owes a debt to its creditors. Financial Creditors, Operational Creditors, the Corporate Debtor itself or Directors of Corporate Debtors can initiate CIRP when the Corporate Person is in default. Part II has been notified since inception. Part III: Individuals & Partnership Firms Deals with provisions relating to Insolvency and Bankruptcy for Individuals and Partnership Firms. The provisions of this Part are yet to be notified except for personal guarantors of corporate debtors. Central Government issued a Notification on 15th Nov 2019 making Part III effective from 1st December 2019 in so far as it relates to Personal Guarantors to Corporate Debtors. This notification was challenged, but the Hon’ble Supreme Court rejected the challenge in the landmark case of Lalit Kumar Jain Vs Union of India & Ors. (judgement dated 21st May 2021). Perspective of Financial Institutions & Judicial Restraint on Excess Recovery It is indeed noticeable that the Insolvency and Bankruptcy Code brought new energy into the veins of financial institutions. Before IBC, Financial Institutions had a very long route to recover money, and at times due to elapse of time, recovery was quite less or negligible. In the IBC era, which is a time-bound process, resolution is faster and revival is happening on a going concern basis. Even though this created a positive vibe, a few financial institutions started looking at recovering more than their outstanding dues, requiring the Adjudicating Authority and Constitutional Courts to intervene for the betterment of stakeholders. Supreme Court in Invent Asset Securitisation and Reconstruction Pvt. Ltd. Vs Girnar Fibres Ltd.: “Time and again, it has been expressed and explained by this Court that the provisions of the Code are essentially intended to bring the corporate debtor to its feet and are not of money recovery proceedings as such. The intent of the appellant had only been to invoke the provisions of the Code so as to enforce recovery against the corporate debtor. We find no fault in the Tribunal and the Appellate Tribunal having declined the prayer of the appellant. However, in the interest of justice, it does appear appropriate and hence observed that if any other proceedings have been or are taken up by the appellant, the same shall be dealt with and proceeded on their own merits and in accordance with law.” 2. Case Study: Maitreya Doshi vs. Anand Rathi Global Finance Ltd. & Anr. (Supreme Court, Sep 2022) Factual Matrix of the Dispute: Financial Creditor (Anand Rathi Global Finance Limited, “FC”) disbursed loans to the tune of ₹ 6 Crores to M/s Premier Limited (“Premier”) under three separate Loan-cum-Pledge Agreements. M/s Doshi Holdings Pvt. Ltd. (“Doshi Holdings”) pledged shares held by it in Premier in favour of the FC by way of security for the loan. The Appellant (Maitreya Doshi) was a common director of both Premier and Doshi Holdings. Premier defaulted on payments. On non-payment, the FC called upon both Premier and Doshi Holdings to repay the entire outstanding loan amount. Upon communication of inability to pay dues by Premier, the FC filed two separate Section 7 CIRP petitions—one against Premier and one against Doshi Holdings—for the same set of loans arising out of the same loan documents in NCLT Mumbai. NCLT Mumbai admitted both petitions. The Appellant appealed under Section 61 to NCLAT, which dismissed the appeal. An appeal was then preferred before the Supreme Court under Section 62 of the IBC. Contentions of the Appellant (Maitreya Doshi): Two Distinct Transactions: The Agreements contemplated two distinct transactions under one document: (1) grant of loan to Premier, and (2) creation of pledge by Doshi Holdings. No Disbursement / Financial Debt: Loan was disbursed solely to Premier and never utilised by Doshi Holdings. Reference to Doshi Holdings as ‘borrower’ was only done for convenience. Since no disbursement was made, no financial debt was owed by Doshi Holdings. Pledge vs. Guarantee: Distinguishing Contract of Indemnity, Guarantee, and Pledge under the Indian Contract Act, 1872, creation of a share pledge does not amount to a guarantee or indemnity under Section 5(8) of IBC. Reliance on Phoenix ARC: In Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel, the Supreme Court held that where a CD had only extended security by pledging shares, the applicant was at best a secured debtor qua security, but not a Financial Creditor under Section 5(7) & 5(8). Conflicting Benches: When one bench of NCLT admitted CIRP against Premier, it observed that “for the same set of loans, arising under the same loan documents, the same debt/claim against Doshi will not be permissible”; hence a subsequent bench admitting CIRP against Doshi Holdings disregarded the previous bench order. Contentions of the Respondent (Anand Rathi FC): Dual Capacity: Doshi Holdings was a party to the Agreements in its dual capacity as both co-borrower and pledger. Signatures by Common Director: The Appellant, as common director of both entities, signed the loan documents on behalf of Doshi Holdings specifically in its capacity as co-borrower. Loan Receipts & Promissory Notes: Doshi Holdings had expressly acknowledged receipt of monies disbursed under the Agreements by executing loan receipts and had issued promissory notes promising repayment to the FC. Demand Notice: Following default by Premier, demand notice was issued to Doshi Holdings to repay the loan in its capacity as co-borrower. Legal Definition of Corporate Debtor: The sine qua non for an entity to be a Corporate Debtor is that such person/entity should owe a debt to any person; it is not necessary that disbursal has to be made directly to that specific person. Doshi Holdings fully satisfied this criteria. 3. Supreme Court Verdict: The Plausibility Test & The Rule Against Double Recovery Judicial Findings of the Apex Court: Prima facie, it appears that Doshi Holdings was a party to the Agreements in its dual capacity of borrower and pledgor of shares. The Hon’ble NCLT found that Doshi Holdings was also a borrower under the Agreements, which is a plausible interpretation and shall not be interfered with in an appeal under Section 62 of the IBC. The Court relied on its earlier landmark judgement in Lalit Kumar Jain v. Union of India to rule that the approval of a resolution plan in respect of one borrower cannot discharge a co-borrower. “Thus, when there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors.” However, the Court explicitly circumscribed this right with the doctrine against unjust enrichment / double recovery: Absolute Prohibition on Double Recovery: “However, the same amount cannot be realised from both the Corporate Debtors. If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. And once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over.” 4. Analytical Takeaways & Conclusion The Code is essentially intended to bring the corporate debtor to its feet and is not of money recovery proceedings as such. The Proceedings under IBC can be initiated against Borrowers, Co-borrowers and Personal Guarantors to Corporate Debtor. Having possibilities of initiating IBC proceedings against each of the above persons does not mean recovering the same amount from all the persons put together. The recovery of amount cannot be more than the outstanding dues from all the parties put together. “The Proceedings under IBC can be initiated against Borrowers, Co-borrowers and Personal Guarantor to Corporate Debtor. Having possibilities of initiating IBC proceedings against each of the above person, it does not mean to recover the same amount from all the persons put together. The recovery of amount cannot be more than outstanding dues from all the parties put together.” ❖❖❖

THEME • VALUATION JURISPRUDENCE & IBC FRAMEWORK The Chartered Accountant • December 2022 • Vol. 71 • pp. 77–82 (Journal pp. 657–662) Valuation: The Fulcrum of IBC KS CA. Mangesh Pandurang Kinare & CA. Sarika Singhal CA. Mangesh Pandurang Kinare is a member of the Institute. CA. Sarika Singhal is Deputy Secretary in the Institute. They may be reached at eboard@icai.in Core Axiom: Valuation as the Foundation of the Insolvency Regime “Valuation is the foundation on which entire stake and structure of IBC is dependent. The Insolvency and Bankruptcy Process as defined under IBC, 2016 determines whether a business will continue its life cycle or not as Insolvency Process aims at saving the businesses that are viable and enables the exit of those that are not. With the globalisation and ever-increasing competition in the market, many corporates have entered into various business segments. In this journey of their business life cycle, we all have witnessed numerous companies going into either Merger and Amalgamation (M&A) or Sale of Businesses or Liquidation or Voluntary Liquidation or Insolvency process for Corporates, Pre-package etc. every day. All these strategic business decisions impact each and every stakeholder including the smallest investor/stakeholder to a great extent.” 1. The Insolvency Process & The Primacy of Asset Valuation This whole process of insolvency involves various steps and procedures and necessitates the need of many professionals and their expertise. This process starts broadly with Application to NCLT for commencement of insolvency resolution process, acceptance of which leads to appointment of IRP and then the Moratorium period begins (a calm period) during which the Insolvency Resolution Professional (IRP) will call for claims, analyse and verify them, also a Committee of Creditors (CoC) is formed to whom the Resolution Plan is presented (at first) for approval and thereafter to NCLT. Non-approval of the same may lead to Liquidation: the end of business life cycle. Further, there are many intricate processes that are being involved and undertaken, such as estimating the value of the assets, preparation of Asset Memorandum etc. The key objective under this process of IBC is to maximize the value of assets of the Corporate Debtor and consequently value for its stakeholders. This value is a critical element towards achieving the transparent and credible determination of the value of the assets to enable comparison and informed decision making by the CoC. The Benchmark for Commercial Decisions & Haircut Assessment: The decision by the CoC and the NCLT w.r.t. approval of the Resolution Plan is dependent upon the fair value and liquidation value ascertained by the Registered Valuers which enables the comparison of both i.e., the value of the assets of the company as per the Registered Valuer and the haircut as envisaged in the Resolution Plan. The Valuation Report of the Valuer becomes a fundamental basis on which crucial decisions of the Committee of Creditors are dependent such as continuation with the resolution process or liquidation of the Corporate Debtor. Moreover, it also facilitates the resolution professional to invite prospective resolution plans and the inaccuracies in determining the liquidation value could undermine the resolution plan that may be approved on the basis of an incorrect liquidation value. Therefore, the future of the corporate debtor and its stakeholders hinge on an accurate valuation of assets. 2. Statutory Framework: Section 247, Valuation Rules & CIRP Regulations The Code read with the Regulations has been framed in a way that it mandates the valuations required under the Code and the Regulations made thereunder shall be conducted by a Registered Valuer. The Valuation acts as the steering wheel which runs the entire process of resolution process in its desired direction. So, it becomes extremely crucial to arrive at a correct valuation by the Valuer due to the reason that a faulty valuation may lead to incorrect comparison and consequently erroneous decision on the part of CoC leading to disruption of the business and the economy. Section 247 & Valuation Rules, 2017 Owing to the huge importance of Valuation in resolution process and uniqueness involved in the nature of every valuation assignment, the need of a special class of professional was emphasised and made effective from 1st February 2019 through Section 247 of the Companies Act, 2013. It mandates valuation by a person having necessary qualifications and experience, who is a member of a Registered Valuer Organisation (RVO). The Central Government notified the Companies (Registered Valuers and Valuation) Rules, 2017, delegating regulatory authority to the Insolvency and Bankruptcy Board of India (IBBI). Regulations 27 & 35 of CIRP Regulations Regulation 27 read with Regulation 35 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 mandates that valuation must be conducted by two Registered Valuers appointed by the RP to determine the ‘fair value’ and ‘liquidation value’ of the Corporate Debtor. Where the RP is not satisfied with the two Valuation Reports and where the variance between these values is significant, the RP may require a third valuer to be appointed. Primary Aim Maximise Asset Value ➔ Core Task Assets to be Valued ➔ Designated Authority Registered Valuer (RV) 3. Professional Guidelines, Standards & Conduct for Registered Valuers The valuation report is developed and prepared by exercising judicious discretion by the Registered Valuer, considering relevant factors such as management capability, present and prospective competition, yield on comparable securities, and market sentiment, which may not be apparent from the Balance Sheet. Valuers must adhere strictly to the following professional code and principles: 1. Adherence to IBC Objectives & Absolute Objectivity: The Valuer must be guided by the objective of the IBC and the intent of the process. Decisions and dealings must be rational and as per the Code/Act. In no case should position be compromised due to bias, conflict of interest, coercion, or undue influence from anyone. 2. Determination of Fair Value & Liquidation Value: Valuer is required to determine “Fair Value” and/or “Liquidation Value” in compliance with recognized Valuation Standards. 3. Articulation of Underlying Assumptions: The underlying assumptions for both fair value and liquidation value should be clearly articulated by the valuer in the report to enable users in taking informed decisions. 4. Three Standard Valuation Approaches: Valuation should be carried out using well-accepted approaches: Income Approach, Market Approach, and Asset / Cost Approach, as deemed appropriate. 5. Compliance with Technical Standards: The Valuer must comply with technical and professional standards like Valuation Standards adopted by respective RVO, Guidelines, Circulars, and Advisories issued by RVO, IBBI, and MCA. 6. Highlighting Data Constraints: Completeness and veracity of data do not reside on the valuer. Significant limitations and constraints faced must be appropriately pointed out to the RP and highlighted in the valuation report. 7. Treatment of Intervening & Subsequent Events: The valuer is not required to conduct independent investigation into corporate debtor affairs; however, any significant event coming to notice between valuation date and report issuance should not be ignored and must be clearly spelt out. 8. Responsibility over Caveats & Disclaimers: Use of caveats, limitations, and disclaimers must accord with guidelines. The valuer takes responsibility for information provided and must not disclaim liability through sweeping disclaimers. 9. Prohibition on Success Fees: Fees of the Registered Valuer must NOT be dependent on enterprise value. It should be a fixed fee based on the assignment. A valuer must never charge a success fee as it represents an inherent conflict of interest. 10. Strict Confidentiality & Legal Disclosures: The RV must not disclose confidential information to any third party, except with the consent of relevant parties or as strictly required under any law in force. 4. Comprehensive Practical Challenges Faced by Registered Valuers under CIRP The process of valuing an asset may seem simple on the surface, but involves huge intricacies and real-world bottlenecks: Data & Financial Challenges Historical Reference Date: Fair and liquidation values are computed as on the Insolvency Commencement Date (ICD), which is historical, making reliable market data collection challenging. Absence of Audited Financials: Non-availability of audited balance sheets as on the date of CIRP initiation. Specific Financial Assets (SFA) Gaps: Outdated data on receivables, borrower correspondence addresses, loans and advances, and investments. Erosion of Ind AS Fair Values: While balance sheets are drawn under Ind AS at fair values, massive erosion occurs immediately once CIRP begins. Inventory & Debtors: Special complexities in valuing Raw Materials, Work-in-Progress (WIP), Finished Goods, and disputed Trade Debtors. Operational & Structural Challenges Management Non-Cooperation: Former promoters and management frequently refuse cooperation; lack of access to phone numbers and incumbents. Preconceived Notions of Value: Stakeholders often carry preconceived valuation figures before the valuation begins. Strict Timeline Pressures: Valuations are demanded without authenticated inputs; substantial time gap between draft and final report. Mandatory Appointment Irony: RP must mandatorily appoint valuers even when assets have negligible value. Access & Site Visits: Opportunity to visit client factories/sites is often denied for smaller companies; absence of a proper Point of Contact (PoC). Fee Realization & Scope: Difficulty in realizing assignment fees; quotations requested without clearly defined scope of work. 5. Multi-Statutory Scope & Judicial Deference to Valuation Experts The requirement of valuation extends across other IBC tracks and Indian corporate statutes: Liquidation under IBC Fresh valuation if CIRP valuation is deemed no longer relevant by liquidator. Voluntary Liquidation Valuation of company assets entering voluntary winding up under IBC. Undervalued Transactions Determination of benchmark value in avoidance and preferential transaction scrutiny. Fast Track & PPIRP Ascertainment of Fair and Liquidation value by two Registered Valuers in Pre-packs. Companies Act, 2013 M&A schemes, winding up, share issues (other than rights/ESOP), sweat equity pricing. Ind AS Framework Revaluation of PPE, ESOP/SAR accounting, business combinations (Ind AS 103). Income Tax Act, 1961 Fair value determination in slump sales, specified security, and sweat equity valuations. FEMA Mandates Buyback of shares from foreign shareholders, inbound FDI in unlisted entities. SEBI Regulations Preferential debt-to-equity conversions, valuation of IP, know-how, and technical value addition. Judicial Deference to Valuers: Miheer H. Mafatlal Doctrine & Supervisory Jurisdiction The Supreme Court has consistently held that valuation in its entirety is the most decisive aspect of corporate decision-making. The valuation report is developed by exercising judicious discretion by the Registered Valuer. Hence, the sanctioning court has no power or jurisdiction to exercise appellate functions over the valuation or scheme. The Court is not a Valuer and does not possess the requisite technical skills or expertise; it cannot substitute its own opinion for that of the experts or shareholders. Its jurisdiction is strictly peripheral and supervisory, not appellate. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., the Apex Court affirmed that the valuation of shares is a technical and complex problem appropriately left to the consideration of experts in the field of accountancy, as so many imponderables enter the exercise of valuation. 6. The De Facto Fifth Pillar: Valuation as the “Salt in the Dish” The statutory scheme of the Insolvency and Bankruptcy Code, 2016 explicitly provides for four (4) pillars upon which its architecture rests: Pillar 1 Insolvency Professionals (IPs) Pillar 2 Adjudicating Authority (AA) Pillar 3 Information Utility (IU) Pillar 4 IBBI (The Regulator) Recognizing Valuation as the Inseparable Fifth Pillar: However, if we dive deep and give thoughtful consideration to the importance of Valuation under IBC, it can be firmly construed that “Valuation is also one of the key pillars of IBC”. “The position of ‘Valuation’ in an Insolvency Resolution Process seems similar to that of ‘Salt’ in the dish whose significance may not be clearly evident but is actually the most important element in the whole process. Eliminating the valuation conducted by a Registered Valuer will disturb and tremble the entire process of IBC.” ❖❖❖

THEME • INSOLVENCY & CORPORATE RESTRUCTURING The Chartered Accountant • December 2022 • Vol. 71 • pp. 84–88 (Journal pp. 664–668) IBC- the much talked about Legislation and the road built towards Resolution and certainty DK CA. Durgesh Kumar Kabra & CA. Sripriya Kumar Authors are members of the Institute. They may be reached at eboard@icai.in Executive Overview & Statutory Objective “The Insolvency and Bankruptcy Code, 2016 (IBC or the Code) which is one of the significant reforms being implemented in the economic landscape of the country has set up a decisive and strong regime in the insolvency resolution arena. IBC since its inception over the years has been much talked about and discussed subject by several experts, professionals, academicians, columnists etc. The wide deliberations and immense interest are understandable as the main purpose of the Code includes implementation of the insolvency resolution process in a time bound manner, maximization of value of assets of stakeholders, promote entrepreneurship, increase availability of credit and balance the interest of all stakeholders. The primary objective under IBC remains to revive the businesses through resolution of insolvency but under certain circumstances when it does not happen then orderly exit is available in the Code.” 1. The Institutional Architecture & Judicial Repository The country is witnessing today the results of the successful implementation of IBC which has been possible because of the establishment of effective institutional set-up and the various judgements pronounced by Supreme Court, High Courts, NCLAT and NCLT benches. The judicial pronouncements are an important repository to understand the aspects in operationalization and in providing clarification on important provisions and issues under IBC. The Journey of this Code includes many developments, amendments and achievements and recently a number of amendments have also been brought out in the Regulations under the Code. Before discussing on the recent changes, it is pertinent to mention that the salient features of the Code have brought to the fore important phrases/words which are often and commonly used in various platforms like Corporate Debtor (CD), Financial Creditor (FC), Operational Creditor (OC), Committee of Creditors (CoC), Personal Guarantor, Resolution Applicant, Resolution plan, Default, Moratorium, Interim Resolution Professional (IRP), Resolution Professional (RP) and so on. One should know about the significant developments for which a recapitulation of the same is being made here. 2. Corporate Insolvency Resolution Process (CIRP) – The Journey So Far If we look at statistics, since the inception of the Code in December 2016, a total of 5893 CIRPs have commenced by the end of September, 2022 as per IBBI data. Out of these, 3946 have been closed. The Code has rescued 553 Corporate Debtors (CDs) as on September, 2022 through resolution plans. They owed Rs. 7.91 lakh crore to creditors under the Code and the creditors have realised Rs. 2.43 lakh crore which is about 178% of the liquidation value of the assets of the CDs. Realisation by financial creditors in comparison to their claims is around 33%. The Realisation for all classes of creditors, as compared to their claims, is around 30.8%. Total CIRPs Commenced 5,893 Dec 2016 – Sept 2022 CIRPs Closed 3,946 Resolved, Liquidated, Settled Rescued CDs 553 Through Resolution Plans Creditor Realisation Rs. 2.43 Lakh Cr 178% of Liquidation Value Table 1: Sector-Wise Distribution of CIRP Admissions (as on September 2022) Maximum admission of CIRPs has taken place in the Manufacturing Sector followed by the Real Estate Sector: Sr. No. Sector / Industry Classification Percentage Share of Admissions (%) 1 Manufacturing 39% 2 Real Estate, Renting & Business Activities 21% 3 Construction 11% 4 Wholesale & Retail Trade 10% 5 Electricity & Others 3% 6 Transport, Storage & Communications 3% 7 Hotels & Restaurants 2% 8 Others 11% – Total Admitted CIRPs 100% Table 2: Initiation of CIRP – Stakeholder Wise Initiating Stakeholder Exact Share Rounded Operational Creditors (OCs) 51.08% 51% Financial Creditors (FCs) 42.98% 43% Corporate Debtors (CDs) 5.94% 6% Total 100.00% 100% Table 3: Mode of Closure of CIRPs (as on 30th Sept 2022) Mode of Closure Percentage Share Commencement of Liquidation 46% Appeal / Review / Settled 21% Withdrawal under Section 12A 19% Approval of Resolution Plan 14% Total Closed CIRPs 100% Note: All statistical charts and distributions are prepared based on official data published by the Insolvency and Bankruptcy Board of India (IBBI). 3. Economic Survey Report on IBC – Birth of Two Professions & Behavioral Change of Debtors The Report of Economic Survey 2021-2022 has highlighted the birth of two professions due to enactment of IBC and further emphasised the profound change of behaviour of debtors due to the statutory discipline imposed by the Code. Institutional Birth: The Insolvency Profession and The Valuation Profession “The Insolvency and Bankruptcy Code (IBC) has created a cohesive and comprehensive insolvency ecosystem. With the enactment of IBC, India has witnessed the birth of two professions, namely, the insolvency profession and the valuation profession that have professionalised insolvency services. The Code has opened possibilities of the resolution, including merger, amalgamation and restructuring of any kind, which often requires professional help. This has created markets for services of Insolvency Professionals, Registered Valuers, Insolvency Professional Entities and expanded the scope of services of Advocates, Accountants and other professionals.” Behavioral Transformation of Borrowers: Deterrence & Pre-emptive Resolution “Distressed assets have a life cycle and their value gradually declines with time. The fact that a CD may change hands has changed the behaviour of debtors. Thousands of debtors are resolving distress in the early stages of distress, either when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application, and making best effort to avoid consequences of the resolution process.” 4. Insolvency Professionals – Key to Resolution Process & ICAI Leadership The Insolvency Professionals (IPs) as we know play a key role under IBC on which rests the effective and timely mechanism of the insolvency resolution process. IBBI Registration Metrics & Dominance of ICAI Members (as on 30th September 2022): 4,225 Total Registered IPs: As on date as per IBBI data, a total of 4,225 Insolvency Professionals have been registered with the Insolvency and Bankruptcy Board of India. 2,665 Enrolled with IIIPI (>63%): Out of the total registered IPs, 2,665 Insolvency Professionals are enrolled with the Indian Institute of Insolvency Professionals of ICAI (IIIPI) — demonstrating that more than 63% of all registered Insolvency Professionals in India are members of IIIPI. Over 55% are Chartered Accountants: Looking at the distribution of Insolvency Professionals as per their primary professional eligibility as on 30th September 2022, over 55% of all IPs are members of the Institute of Chartered Accountants of India (ICAI). 5. Six Major Legislative Amendments – Improving and Extending the Scope of the Code The Code has been amended six times after its enactment to address emerging structural challenges, plug loopholes, protect vulnerable stakeholders, and fine-tune operational efficiency. Highlights of major amendments include: 1. Section 29A Disqualification Regime New Section 29A was inserted to prescribe comprehensive disqualifications, barring persons (such as wilful defaulters, promoters of NPA accounts over one year, and disqualified persons) from submitting a resolution plan to regain control of the debtor. 2. MSME Special Dispensation MSME Sector provided with a special dispensation under Section 240A. It exempts promoters of micro, small, and medium enterprises undergoing CIRP from disqualification under clauses (c) and (h) of Section 29A, permitting them to bid for their enterprise provided they are not wilful defaulters. 3. Homebuyers Recognized as Financial Creditors Homebuyers in real estate projects were expressly included within the definition of Financial Creditors under Section 5(8)(f), securing their seat and statutory voting representation in the Committee of Creditors (CoC) via authorized representatives. 4. Section 12A Post-Admission Withdrawal New Section 12A inserted wherein withdrawal of an application admitted under Section 7, 9, or 10 is permissible only with the stringent supermajority approval of the Committee of Creditors with 90% of the voting share. 5. Rationalized Voting Thresholds Voting threshold in the CoC brought down from 75% to 66% for the approval of resolution plans, appointment of RP, and extensions. Routine commercial decisions require a simple majority of 51%. 6. Moratorium Inapplicable to Guarantors Clarification enacted under Section 14(3) that the statutory moratorium does not apply to a surety or guarantor in a contract of guarantee to a Corporate Debtor, permitting concurrent enforcement against corporate and personal guarantors. 7. Mandatory 330-Day Outer Process Limit Mandatory outer time limit under Section 12(3) restricting the corporate insolvency resolution process to 330 days, explicitly encompassing the time taken in legal proceedings and litigation. 8. Binding Effect on Government Authorities Amendment to Section 31(1) making the approved resolution plan binding on the Central Government, any State Government, or any local authority to whom a debt in respect of payment of dues arising under any law is owed. 9. Pre-Packaged Insolvency Process (PPIRP) Introduction of Chapter III-A enacting the Pre-Packaged Insolvency Resolution Process (PPIRP) under IBC for MSMEs only, mandating full completion within a swift statutory timeline of 120 days from commencement. 6. COVID-19 Pandemic – Relief Measures Undertaken in Insolvency Sphere To safeguard people, business enterprises, and all stakeholders during the unprecedented disruptions caused by the COVID-19 pandemic, concerted actions were undertaken by the Hon’ble Courts, the Central Government, and the Regulator (IBBI). Notable amongst those actions were: Revision of Default Threshold to Rs. 1 Crore: The Central Government by notification dated 24th March 2020 revised the minimum amount of default to trigger insolvency under Section 4 of the Code to Rs. 1 crore (elevated from the earlier Rs. 1 lakh threshold). This provided immediate immunity to the MSME sector from being dragged into insolvency for pandemic-induced temporary distress. Suspension of Fresh CIRP Initiation for One Full Year: Insertion of Section 10A suspended the initiation of corporate insolvency resolution process under Sections 7, 9, and 10 for defaults arising on or after 25th March 2020 to 24th March 2021, establishing an absolute statutory shielding period. Enactment of IBC (Amendment) Act, 2021: The Parliament enacted the Insolvency and Bankruptcy Code (Amendment) Act, 2021, repealing the earlier Ordinance to provide a codified, alternative resolution framework known as the Pre-packaged Insolvency Resolution Process (PPIRP) specifically targeted at corporate MSMEs. 7. Alternative Resolution Mechanism for MSMEs – Pre-Packaged Insolvency (PPIRP) “Micro, small and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population.” The fundamental legislative purpose behind introducing a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises includes: Mitigating Pandemic Distress: To mitigate the distress caused by the COVID-19 pandemic which heavily impacted the business operations of micro, small and medium enterprises and exposed many of them to financial distress. Quicker, Cost-Effective & Non-Disruptive Resolution: To provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the IBC, ensuring quicker, cost-effective and value maximising outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs. 8. Recent Regulatory Overhaul – Amendments in IBBI Regulations The Insolvency and Bankruptcy Board of India (IBBI) notified substantial regulatory amendments across the CIRP Regulations, Liquidation Process Regulations, and Insolvency Professional Regulations towards effective and streamlined implementation: PART A Amendments to IBBI (Insolvency Resolution Process for Corporate Persons) Regulations Mandatory GST Extracts for Operational Creditors: Operational Creditors registered under Goods and Services Tax must provide relevant extracts of GSTR-1 (contains detailed information of all outward goods and services of a business) and GSTR-3B (simplified summary return declaring GST liabilities for a tax period) with the CIRP application as indisputable evidence of default. Mandatory PAN & Email ID: Financial Creditors and Operational Creditors, while filing a CIRP application before the Adjudicating Authority (NCLT), must mandatorily furnish their PAN and email ID. Regulatory Fee to IBBI (Reg. 31A): Under Regulation 31A, regulatory fees payable to IBBI at the rate of 0.25% of the realisable value to creditors under the approved resolution plan shall form part of the Insolvency Resolution Process Cost (IRPC). Re-issuance of RFRP for Part Assets: If a resolution plan is not received for the Corporate Debtor as a whole from any Resolution Applicant, the RP and CoC are empowered to re-issue the Request for Resolution Plan (RFRP) for the sale of part of the assets of the CD. Prescribed Minimum Monthly Fee for Resolution Professionals: A statutory minimum fee is prescribed for an Insolvency Professional performing as an RP during CIRP, scaling from Rs. 1 lakh to Rs. 5 lakh per month depending upon the quantum of admitted claims. Performance-Linked Incentive Fee (Cap of Rs. 5 Crore): For resolution plans approved by the CoC on or after 1st October 2022, the committee may decide, at its discretion, to pay a performance-linked incentive fee not exceeding Rs. 5 crore to the Resolution Professional for achieving Value Maximisation and Timely Resolution. PART B Amendments to IBBI (Liquidation Process) Regulations CoC Functioning as SCC for First 60 Days: The Committee of Creditors (CoC) constituted during CIRP shall function as the Stakeholders Consultation Committee (SCC) during the first 60 days from the Liquidation Commencement Date. After claim adjudication and within 60 days of initiation, the SCC shall be reconstituted based upon admitted claims. Fixation of Liquidator Fees by SCC: The Stakeholders Consultation Committee may fix the fees of the liquidator if the CoC failed to fix the same under Regulation 39D of the CIRP Regulations during its first meeting. Deemed Claims Submission under Section 38: If any claim is not filed during the liquidation process, claims collated during CIRP shall be deemed to have been submitted for the purpose of Section 38 of the Code. The Liquidator is obligated to verify all claims — i.e., claims submitted during liquidation as well as claims collated during CIRP. Replacement of Liquidator by 66% SCC Vote: Whereas previously there was no provision for replacing a liquidator, the SCC may now propose to replace the liquidator by a vote of not less than 66% of voting share, followed by an application before the Adjudicating Authority (NCLT). Going Concern Asset Sale Restricted to First Auction: The liquidator may sell the assets of the corporate debtor as a going concern exclusively only at the first auction. PART C Amendments to IBBI (Insolvency Professionals) Regulations Registration of Insolvency Professional Entities (IPEs) as IPs: Earlier, only individual professionals could take registration as an Insolvency Professional (IP). Under the amended regulations, an Insolvency Professional Entity (IPE) can also seek institutional registration as an IP with the Board (IBBI), by making an application in the specified form accompanied by a non-refundable application fee of Rs. 2 lakh. 9. Important Reforms Envisioned for the Future Cross Border Insolvency Framework & UNCITRAL Model Law The Insolvency Law Committee (ILC) constituted by the Ministry of Corporate Affairs submitted its comprehensive Report on Cross Border Insolvency in October 2018. Earlier, in its March 2018 report, the Committee observed that the existing bilateral treaty mechanism under Section 234 and Section 235 of the IBC does not provide an adequate or comprehensive framework for complex cross-border insolvency matters. The ILC recommended the adoption of the UNCITRAL Model Law on Cross Border Insolvency, 1997 with necessary carve-outs to preserve harmony with the domestic insolvency framework. The Model Law has been adopted in as many as 44 countries, forming international best practice. Key Strategic Advantages of Adopting the Model Law: Increasing Foreign Investment Flexibility Protection of Domestic Interest Priority to Domestic Proceedings Mechanism for Cross-Border Cooperation The Model Law deals with four major principles of cross-border insolvency: Direct Access: Foreign insolvency professionals and foreign creditors have direct access to participate in or commence domestic insolvency proceedings against a defaulting debtor. Recognition of Foreign Proceedings: Structured judicial recognition of foreign main and non-main proceedings and provision of appropriate interim and permanent remedies. Judicial & Administrative Cooperation: Transparent cooperation between domestic and foreign courts, and between domestic and foreign insolvency practitioners. Coordination of Concurrent Proceedings: Seamless coordination between two or more concurrent insolvency proceedings in different jurisdictions. The main proceeding is determined by the concept of Centre of Main Interests (COMI). The necessity arises because Indian companies operate with a global footprint, and foreign corporations maintain multi-jurisdictional presences in India. Enacting this chapter will bring Indian insolvency law on par with mature global jurisdictions. Group Insolvency Framework The Group Insolvency Framework is anticipated to be introduced under the IBC. The Code presently provides a detailed framework to deal with the insolvency of a company in distress on a standalone basis. It currently lacks a statutory framework to resolve insolvency proceedings of different corporate debtors in a corporate group or resolve their insolvencies together, though the judiciary has permitted group consolidation and coordination in select cases. In this regard, the Insolvency and Bankruptcy Board of India (IBBI) constituted a dedicated Working Group to recommend a comprehensive statutory framework facilitating the insolvency resolution and liquidation of corporate debtors in a group. The Working Group submitted its Report in September 2019, laying down principles for procedural coordination, substantive consolidation, and group committee dynamics. 10. Conclusion & The Pioneering Role of ICAI IBC has contributed towards building a strong ecosystem in the country. For the effective and smooth implementation of the Code, amendments have been brought out in the Code regularly and amendments in Regulations too were brought by the Regulator. The Code is evolving constantly and has built a robust insolvency regime which included various developments and achievements. For taking forward the unitary codified legislation — The Insolvency and Bankruptcy Code, 2016 — and being an important Partner in Nation Building, The Institute of Chartered Accountants of India (ICAI) has constituted a dedicated Committee to give specific focus on Insolvency and Bankruptcy Laws and to bring in awareness among members at large about the new area of practice in the insolvency resolution sphere under the Insolvency and Bankruptcy Code, 2016 and to facilitate in educating the members on the practical aspects and procedures of the law. “ICAI has the distinction to form the first Insolvency Professional Agency (IPA) in the country, which as on date has more than 63% of Insolvency Professionals (IPs) as its members. ICAI is continuously playing a key role in the implementation of IBC and its journey towards resolution and certainty.” ■■■

SPECIAL WRITE-UP • SUSTAINABILITY & ESG COMPETENCY The Chartered Accountant • December 2022 • Vol. 71 • pp. 93–96 (Journal pp. 673–676) A “Day in the Life” of a Sustainability Reporting Senior Manager Professional accountants’ competencies transfer from financial reporting to sustainability reporting AV Anne-Marie Vitale Author is Chair of the International Panel on Accountancy Education. She may be reached at anne-marie.vitale@pwc.com and eboard@icai.in The Professional Accountant’s Evolution in ESG “Professional accountants are confronted daily with a myriad of sustainability related terms and concepts. What does this mean for you, the professional accountant? Alison, a Sustainability Reporting senior manager will show us.” Core Sustainability & Financial Reporting Vocabulary Climate Change Net Zero ESG Reporting ISSB Standards Scope 1 Emissions Scope 2 Electricity Scope 3 Value Chain Non-Financial Information Internal Controls & ITGC Materiality & Cash Flows Limited Assurance ICT Competencies 1. Monday Morning: The Role of a Sustainability Reporting Senior Manager It’s Monday. Alison, the senior manager in the Sustainability Reporting Group at a consumer products company, Klutch, is looking at her calendar. She briefly muses over the past several years and the ways in which her role has grown. Alison is responsible for executing Klutch’s data collection that underpins its annual corporate Environmental, Social and Governance (ESG) report. Developing preliminary data collection processes, training operational specialists on gathering data, supporting other functional areas in their role, and gathering complete, accurate and reliable data are several of her many responsibilities. Departmental Mission Statement “Provide investment grade material information on sustainability risks and opportunities, which assists users in predicting value, timing, and certainty of Klutch’s future cash flows.”1 Alison takes a moment to reflect on her meaningful role — she feels fortunate that she can combine her accountancy skills and her desire to make a difference through effective measurement and reporting on Klutch’s climate impact and its goals to reduce its impact on the environment. The rapidly evolving standards, industry leading practices, approaches and changing regulations do not deter her. Alison understands her path to success is focusing on what can be controlled and the quality of her work. She was pleased that the Senior Director of Sustainability, Hahn, allowed her to present on current International Sustainability Standards Board (ISSB) work projects during a recent company all hands meeting. These presentations are a great way to build on her communication skills and stay abreast of industry changes while sharing her knowledge with others that can be useful in performing their job responsibilities. 2. Alison’s Calendar is Jam Packed: Scoping, Internal Audit & Concurrent Disclosures Before meeting with Sameer, the Director of Internal Audit, to discuss their scoping and testing approach on Klutch’s non-assured externally reported metrics, Alison refreshes herself on Klutch’s prior year sustainability disclosure. As a member of the review team, Alison recalled the need to remind the communications team that the sustainability disclosure should be a complete, neutral and accurate depiction of Klutch’s significant sustainability risks and opportunities.2 Alison believes reading disclosures with this mindset isn’t significantly different from her previous role as a financial reporting manager. Alison is confident in her ability to gather and present quantitative and qualitative narrative disclosures. Understanding Non-Financial Metrics: The Operational Energy Footprint Klutch’s operational energy footprint was 23,491 megawatt hours (MWh), of which 71% was from electricity. Alison remembers the first time she encountered these metrics, wondering what it all meant. The “Ah Ha” Moment: Hahn had described that 1 MWh is equivalent to the amount of electricity used by about 330 homes for one hour. This translated abstract physical parameters into relatable, tangible business realities. Alison joins the video call with Sameer. His team plays an important role in testing externally reported metrics that are not subject to third party assurance. Alison and Sameer congratulate each other when Helen, the Chief Financial Officer (CFO), agreed to their recommendation to issue the financial statements and ESG information at the same time. Strategic Advantage of Concurrent Reporting “While it makes for a busy time, the approach to issue the financial statements and ESG report at the same time can be much more effective from a project management perspective — using the same framework and timeline for reporting. And Klutch is moving towards providing users with information to understand the connections, dependencies and trade-offs that may apply between sustainability-related financial disclosures and its financial reporting.”3 3. Alison’s Experience Tells Her This Information Complements Each Other Sameer updates Alison on the new job requisitions that will increase his team so more financial related operational audits can be performed and his team can provide increased value to Klutch by conducting an initial evaluation of sustainability risks. Alison agrees that professional accountants have the baseline requirements to fill these roles, including their business acumen and understanding of controls. She jokingly reminds Sameer that “effective internal controls are good for business!” After a few hours, Alison is back at her desk working on planning for data gathering that will underpin Klutch’s ESG report. Data accuracy is always top of mind — factual, precise descriptions; estimates and approximations and forecasts are clearly identified.4 Key Tenets of Accuracy in Sustainability-Related Financial Disclosures (TRWG Paragraph D19): (a) Freedom from Error: Factual information is free from material error. (b) Precision: Descriptions and narrative details are precise. (c) Identification of Estimates: Estimates, approximations, and forecasts are clearly identified as such. (d) Methodological Rigor: No material errors in selecting and applying processes; inputs are reasonable and supportable. (e) Reasonable Assertions: Assertions are based on information of sufficient quality and quantity. (f) Faithful Depiction: Management’s judgements about the future faithfully reflect judgements and underlying data. Klutch’s progress in implementing IT general controls (ITGC) and manual controls on the gathering of sustainability-related financial disclosures is going well. Alison reminds herself to send an email to the project team who is leveraging their knowledge of Klutch’s financial statement preparation and reporting to support the accuracy and effectiveness in gathering sustainability-related financial information. An update on the project team’s status will be helpful in managing deadlines. Alison couldn’t imagine being in charge of data accuracy without the skills she developed as a financial reporting manager. One thing she understands is the importance of using accurate data when preparing information on which external users rely. Alison also understands that staying alert to changes in Klutch’s business is needed to evaluate the impact on data accumulation and accuracy. 4. Scope 1 Emissions: FP&A Expansion, Analytical Review & Utility Accrual Models Alison opens an email from the Financial Planning and Analysis (FP&A) director, Yoon. Klutch’s planned expansion for the current year includes opening several new office facilities. Alison affirmatively nods her head to the importance of understanding Klutch’s business and her satisfaction in reaching out early to the FP&A department to inquire about changes in the business. She makes a note to herself to consider these changes when evaluating the data output accuracy — a change when developing her expectations for the year-over-year data comparisons. Her analytical analysis of the data will assist in evaluating the completeness of the facilities data used in Klutch’s Scope 1 emissions. Alison muses to herself: “Let’s see… electricity usage, natural gas, waste and refrigerants are a few of areas where a change is expected.” Using her ability to apply well-reasoned professional judgment, a skill honed during her early years as the financial reporting manager, Alison considers whether the new facilities will materially impact Klutch’s metrics, which are based on its sustainability risks and opportunities — a point for discussion with Hahn for their afternoon call. Auditor Planning with ‘KD and Company’ & Electricity Accrual Estimation After a planning call with Klutch’s external auditors, ‘KD and Company’, Alison turns her attention to the data obtained to estimate the impact of all its office facilities, a Scope 1 emission. Data from meter readings, utility bills, and on-site renewables are presented in a report on a disaggregated basis — this is a great start! Alison will follow-up with her team to discuss the process to assess the report’s completeness and accuracy. Klutch’s IT change management controls have historically operated effectively; however, it is a good practice to discuss any possible changes to the report. Alison now turns to the task of evaluating the assumptions used in estimating the electricity. The electricity bills show usage through December 15. Since Klutch’s year-end is December 31, Alison evaluates whether using an average for October, November and the first 15 days in December to estimate the remaining period is reasonable. It doesn’t make sense to include the summer months. And this is consistent with Klutch’s accrual approach for financial reporting.5 Consistent with the prior year, the electricity estimate isn’t considered a significant source of estimation uncertainty, and while prices are increasing, these are verifiable through third party data. This makes sense to Alison — Klutch has never disclosed the electricity accrual as a significant estimate in its financial statements. 5. Leased Facilities: Landlord Allocations, Reporting Methodology & End-to-End Controls Moving onto leased facilities where Klutch occupies a portion of the building — that calculation will require a bit more work. Alison evaluates the Leased Space Allocation report on her screen and notes that the data source is from a third party. Total square footage of the occupied space hasn’t changed from the prior year and with the expected 10% increase in utility costs, the estimate looks reasonable. But wait! There is a new landlord, and while the landlord reports the estimate of energy consumption for the building, Alison isn’t sure about the procedures performed by others at Klutch to evaluate the landlord’s reporting methodology. Alison sends a follow-up email to the Facilities Manager to find out more. Alison expects that if the data is reliable, extrapolations to Klutch’s occupied space will continue to be appropriate. Alison knows she can work through these changes without too much difficulty. She has started planning early, her project management responsibilities are aligned with the financial reporting team, and Internal Audit’s work on documenting the end-to-end process from origination of the information source through Klutch’s reported sustainability related information is instrumental in understanding the sources of underlying data. Klutch’s business often changes, and Alison is confident the Sustainability Reporting Group is well positioned to proactively incorporate those changes into its reporting. 6. Priority of the Day: Scope 3 Value Chain Accounting & Supplier Due Diligence After a quick tea break, Alison turns her attention to the priority of the day — whether a new supplier, ‘R. Materials’, can be included in Klutch’s Scope 3 emissions reporting. A few items she is considering: Data Completeness & Accuracy: How comfortable are we that the information provided by R. Materials is complete and accurate? GHG Standard Compliance: How do we know if R. Materials follows the GHG Corporate Value Chain Accounting and Reporting Standard? Supplier-Specific vs. Secondary Estimation Methods: If the data is incomplete or not reliable, using the supplier-specific method may not be appropriate under technical guidance.6 7. Career Reflections & Information and Communications Technologies (ICT) Competencies After many hours, Alison is ready to call it a day. She reflects on her two years as the Sustainability Reporting senior manager and her path to this highly rewarding role. Was it only seven years ago she was an aspiring professional accountant? She reflects upon Information and Communications Technologies (ICT)7 and how her bi-annual self-assessment is linked to her core competencies. Alison shakes her head — even as a professional accountant, there are learning outcomes she considers applicable to any subject, and she incorporates these into her self-assessments: Core ICT Technical Learning Outcomes (IAESB IES 2 Framework):8 Explaining how ICT supports data analysis and decision making Using ICT to analyze data and information Analyzing the adequacy of ICT processes and controls Applying critical thinking skills to solve problems, inform judgments, make decisions, and reach well-reasoned conclusions 8. Peer Benchmarking & Independent External Assurance: The Salesforce Model Alison puts down her nighttime reading, Salesforce’s Impact Report. Like Klutch, Salesforce discloses that its legal and financial reporting teams reviewed the report, and that the data can be traced back to internal and external records.9 Salesforce also obtains limited assurance from an independent accounting firm on its Schedules of Selected Environmental, Equality, and Social Value Metrics. These metrics include emissions from its operations and value chain, and employees by gender.10 Alison learns from reading these types of reports and it helps her think about what might be possible at Klutch. Before turning out the light, Alison reflects on the next several months and the contributions she plans to make to the continuous improvement of gathering, evaluating, and disclosing significant sustainability-related financial information at Klutch. Obtaining third party assurance is only one of the ways — time to schedule a meeting with KD and Company. 9. Late-Night Epiphany: Operational Transformation & Future Cash Flow Impact Against her better judgment, Alison looks at her email one last time. What’s this? A sustainability team meeting first thing in the morning to discuss a potential change proposed by Klutch’s Chief Operating Officer (COO), Jesus, to move away from single use plastic in its Hair Products business unit. Jesus is seeking input about how this may impact Klutch’s material financial statement and corporate ESG related data and assumptions. “Alison is excited — another opportunity to demonstrate her critical thinking, team with the financial reporting group, and leverage her skills in evaluating and assessing the timing and certainty of Klutch’s Hair Products business unit’s future cash flows over the short, medium, and long-term.” ■■■ Footnotes & Authoritative References: See Technical Readiness Working Group, IFRS Foundation, “General Requirements for Disclosure of Sustainability-related Financial Information Prototype” (November 2021), paragraph 3: “An entity’s general purpose financial reporting shall include a complete, neutral and accurate depiction of an entity’s significant sustainability risks and opportunities to assist users of the general purpose financial reporting in predicting the value, timing and certainty of the entity’s future cash flows, over the short, medium and long term and therefore inform users’ assessment of enterprise value. A complete depiction shall include all material information about significant sustainability-related risks and opportunities.” [emphasis in original] Ibid., paragraph 3. See Technical Readiness Working Group, IFRS Foundation, “General Requirements for Disclosure of Sustainability-related Financial Information Prototype” (November 2021), paragraph 21: “A complete set of sustainability-related financial disclosures is provided so that users can understand the connections, dependencies and trade-offs that may apply between sustainability-related financial disclosures and other information in general purpose financial reporting. Some sustainability-related financial information could be positioned in the relevant sections of a general purpose financial report together with information from the financial statements to provide users a complete depiction of the entity’s business. Specific required metrics and targets could be disclosed together with information on governance, strategy and risk management where these metrics and targets support such disclosures.” See Technical Readiness Working Group, IFRS Foundation, “General Requirements for Disclosure of Sustainability-related Financial Information Prototype” (November 2021), paragraph D19: “Sustainability-related financial disclosures shall be accurate. Information can be accurate without being perfectly precise in all respects. The precision needed and attainable, and factors that make information accurate, depend on the nature of the information and the nature of the matters it addresses. For example, accuracy requires that: (a) factual information is free from material error; (b) descriptions are precise; (c) estimates, approximations and forecasts are clearly identified as such; (d) no material errors have been made in selecting and applying an appropriate process for developing an estimate, approximation or forecast, and the inputs to that process are reasonable and supportable; (e) assertions are reasonable and based on information of sufficient quality and quantity; and (f) information about management’s judgements about the future faithfully reflects both those judgements and the information on which they are based.” Technical Readiness Working Group, IFRS Foundation, “General Requirements for Disclosure of Sustainability-related Financial Information Prototype” (November 2021), Paragraph 65: “When sustainability-related financial disclosures include financial data and assumptions, such financial data and assumptions shall be consistent with the corresponding financial data and assumptions included in the entity’s financial statements.” See Greenhouse Gas Protocol, “Technical Guidance for Calculating Scope 3 Emissions, Supplement to the Corporate Value Chain (Scope 3) Accounting & Reporting Standard.” (2013). International Accounting Education Standards Board, “Glossary of Terms (2021),” ICT definition: “Information and communications technologies (ICT) — Established and emerging technologies, techniques, and processes used to capture, manage, transform, or communicate data and information.” See International Accounting Education Standards Board, “IES 2, Initial Professional Development – Technical Competence (2021)”. Salesforce, Inc., FY22 Salesforce Stakeholder Impact Report, Reporting Scope and Methodology. See Salesforce, Inc., FY22 Salesforce Stakeholder Impact Report, Schedules of Selected Environmental, Equality, and Social Value Metrics.

TAXATION • DIRECT TAX POLICY & SLAB ANALYSIS The Chartered Accountant • December 2022 • Vol. 71 • pp. 99–101 (Journal pp. 679–681) The Income Tax Slabs Conundrum SS CA. Sagar Shah Author is member of the Institute. He may be reached at sagi2786@gmail.com and eboard@icai.in The Illusion of Simplicity in India’s Tax Slabs “The Income Tax Slabs in India at times may appear to be simple but aren’t, especially after the amendments made in last year’s budget on 01st Feb 2021, where new rates of Income Tax u/s 115BAC were introduced subject to no allowance of standard deductions for Salary and deductions u/s 80C, 80D etc. As per the new scheme, If Total Income of an individual assessee is Rs 15 lakh, Tax Payable is Rs 195000 as per the new rates and tax payable as per old rates is Rs 257400. Benefits arising to the taxpayer here is Rs 62400. However, this benefit is only achievable if assessee is in the Rs 13 -15 lakh bracket and has no real deductions under 80C/80D. Frankly, which salaried Employee in this income bracket would not have deductions like school fees, LIC, repayment of principal and interest on housing loans, Mediclaim and how many such assesses actually get the tax benefit remains to be seen. But if one were to closely analyse the tax slabs in India, a lot of other interesting, confusing and heart-breaking facts come out.” 1. Comparative Slab Structures: Old Scheme vs. Section 115BAC New Scheme Currently the Income Tax slabs structure under the old scheme is as follows. Let us look at the old scheme first, as a majority of assessees have not opted for the new scheme: Income Tax Slab (Old Scheme) Rate in Percentage (%) Upto Rs 2,50,000 0% (Nil) Rs 2,50,000 – Rs 5,00,000 5% (with rebate u/s 87A upto Rs 12,500 for income upto Rs 5 lakh) Rs 5,00,000 – Rs 10,00,000 20% Above Rs 10,00,000 30% With the rebate given u/s 87A, income up to Rs 5 lakh will have no tax liability. Now, let us look at the new scheme introduced u/s 115BAC: Income Tax Slab (New Scheme u/s 115BAC) Rate in Percentage (%) Upto Rs 2,50,000 0% (Nil) Rs 2,50,000 – Rs 5,00,000 5% (with rebate u/s 87A upto Rs 12,500 for income upto Rs 5 lakh) Rs 5,00,000 – Rs 7,50,000 10% Rs 7,50,000 – Rs 10,00,000 15% Rs 10,00,000 – Rs 12,50,000 20% Rs 12,50,000 – Rs 15,00,000 25% Above Rs 15,00,000 30% The Section 87A Rebate Cliff: Earning Less Leaves You Richer For example: If an individual assessee’s Total income is Rs 5,02,000, his tax liability will be Rs 12,900 plus 4% education cess, thereby leaving him with Rs 4,88,500 approx in his pocket. Whereas if an individual assessee has total income of Rs 4,95,000, his tax liability will be Nil. It effectively means that a person earning Rs 4,95,000 ends up richer than a person earning Rs 5,02,000. 2. Stagnation in Tax Returns: F.Y. 2016-17 vs. F.Y. 2020-21 Data In F.Y 2016-17, the data released by the Income Tax Department showed that out of 3.6 crore people that had filed tax returns, nearly 1 crore reported an income less than the income tax exemption limit of 2.5 lakhs at the time. Five years later, the situation in F.Y 2020-21 has not changed much either. Interestingly, nowhere in the budget speech on 1st Feb 2022, the number of returns filed for F.Y 2020-21 and the gross income tax receipts from these returns were mentioned. It is obvious that because of the pandemic, these numbers are way lower than the estimates despite taxing Dividend at highest rates in the hands of the recipient and bringing tax on Long Term capital gains at the rate of 10% a couple of years back. 3. Economic Survey Findings: 7 Taxpayers Per 100 Voters The Economic Survey produced by the Chief Economic Adviser Arvind Subramanian in F.Y 2016-17 substantiated that India had only 7 income tax payers out of every 100 voters, among the lowest of all G20 democracies. Less than 3 percent Indians pay Income tax is an established common parlance and this percentage unfortunately has not changed much in the last 5 years. “Instead of having 7 taxpayers out of every 100 voters, India with this change in tax slabs can easily have 25-30 taxpayers for every 100 voter in the next 3-5 years.” India is an extremely poor country with a per capita GDP of less than Rs 1.5 lakh (i.e. an average Indian earns Rs 1.5 lakh per year which is sadly even lesser than that of Bangladesh), whereas the income tax threshold for paying income tax is Rs 5 lakh considering the rebate given u/s 87A for income between 2.5 lakh–5 lakh. Which means people earning Rs 5 lakh or below need not pay any income tax. While the average Indian earns Rs 1.5 lakh, an income tax exemption of Rs 5 lakh removes a sizeable majority of the population from the requirement of paying any income tax. If lowering the income tax rate to 5% would have been coupled with lowering income tax exemption, we would have added more taxpayers. But sadly, that is not the case and there is absolutely no indication from the government that this precarious scenario will change in the near future. 4. The Rs 2.5–5 Lakh Bracket: Over 75% of India’s Working Population Legally Exempt This bracket of Rs (2.5 - 5 lakh) comprises more than 75 percent of India’s entire working population, consisting of: Factory Workers Health Workers Construction Workers Teachers Dabbawalas Bank Employees Security Staff Fruits & Vegetables Vendors Electricians Plumbers Small Shop Owners Processed Food Vendors If we would be able to get them under the tax net by removing the rebate u/s 87A at a nominal rate of 5%, we can double the nation’s income tax collections within 3-5 years. This will not only lead to parity or rationalization in tax laws but increased compliance and increased participation from taxpayers at large. Instead of having 7 taxpayers out of every 100 voters, India with this change in tax slabs can easily have 25-30 taxpayers for every 100 voters in the next 3-5 years. This could be one kind of financial inclusion in a true sense which the government over the last 7 years has been bragging about. Having said that, it is imperative to bear in mind that taxation, if levied to lower income class cannot be at the benefit of the super-rich class because that will not justify social distribution. 5. Global Comparison: Exemption Threshold vs. Per Capita GDP Ratio It is interesting to note here that the average ratio across 20 developed and developing countries is 0.5 — i.e., the income tax exemption threshold is only half of its per capita GDP. The Indian Inversion Paradox: Whereas back home, it’s the reverse. It is more than 3 times that of per capita GDP, which means even if the per capita GDP were to double or triple in the next 3-5 years, it will still be less than the income tax exemption limit, and doubling or tripling of per capita income will lead to no increase in the amount of income tax collected. China Benchmark: An average person in China earns 50,000–60,000 yuan, but anyone earning more than 18,000 yuan will be required to pay income tax. In India, a person earning more than triple the average income still pays zero tax. 6. Salaried Case Study: How an Annual Income of Rs 7.2 Lakh Pays Zero Tax Let us compare that with India where say for example, a person earning a salary of Rs 60,000 per month would have an annual income of Rs 7,20,000. Assuming he or she has no other income and his savings bank interest of less than Rs 10,000 is already deducted u/s 80TTA, his total income is Rs 7,20,000. Computation Component / Deductions Claimed Amount in Rs Gross Annual Salary Income (Rs 60,000 × 12) 7,20,000 Less: Deduction u/s 80C (LIC premium, housing loan principal, school fees for 2 kids) (1,50,000) Less: Deduction u/s 80D (Mediclaim premium for self/family) (25,000) Less: Deduction u/s 80CCD(1B) (National Pension System - NPS) (50,000) Total Deductions Claimed (2,25,000) Net Total Taxable Income 4,95,000 Tax Payable after Section 87A Rebate NIL (Rs 0) School fees of two children in a metro area in India in today’s time itself easily exceeds Rs 1,50,000. Therefore, his net total income comes to Rs 4,95,000 because of which he is liable to pay zero tax. A person earning up to Rs 60,000 per month is not required to legally pay any income tax in India. That accounts for more than 75% of the working population. The law itself, which was originally meant to help small taxpayers reduce the burden of tax, automatically and legally exempts more than 75% of the country’s working population from paying income tax. 7. The Vicious Economic Cycle: Under-Collected Direct Tax vs. Exorbitant Fuel Taxes Another way of looking at this: India collects Income Tax roughly about less than half of its potential and this automatically puts pressure on the Government in terms of borrowings and managing fiscal deficits. It then leads to them increasing indirect taxes on oil and various other commodities, thus ever rising exorbitant fuel prices which lead to: Food Inflation Spiraling freight and distribution costs Reduced Middle Class Savings Erosion of real disposable income Compressed Spending Depressed aggregate consumer demand Macro Fiscal Deficit Heavy sovereign debt and market borrowings It is like a vicious cycle. So much so that fuel in India as on today is dearer than some of the underdeveloped Asian Economies and it does not look like we are going to be out of this situation any time soon. 8. The Public Value Trade-off: Rs 12,250 Tax vs. Rs 20,000–25,000 Inflation Savings From both examples given earlier, when an assessee earning Rs 4,95,000 directly or indirectly (Rs 7,20,000 less deduction of Rs 2,25,000), the tax liability which would have been a meager Rs 12,250 plus 4% education cess is as per the current slab rates Nil. Rs 12,250 of tax is effectively only 2.47% of total income of Rs 4,95,000, which people in today’s day and age wouldn’t mind paying for the nation’s progress. Sadly, more than half of India’s working population falls under this (2.5 lakh - 5 lakh bracket) and India loses at least a few lakhs of crores of Rupees of tax if not more. The Rational Economic Trade-Off: If by paying Rs 12,250 of tax, a middle-class person in India earning Rs 60,000 per month can contribute to the country’s welfare schemes which in turn will lead to savings of Rs 20,000–25,000 approx in terms of fuel prices and consequently food and other essential commodity prices, why will he not pay? Also, in today’s day and age, with so much technology at the government’s disposal as well as the taxpayer’s disposal — with the help of Form 26AS, stringent TDS compliances, and AIS / TIS reflecting on the Income Tax Portal — there is no question of too much hardship to be faced by the lower and middle class taxpayer. The whole perception that India is largely a non-tax-compliant state ironically has very little to do with the fact that people don’t pay taxes truthfully, but more to do with the fact that a large chunk of the population is itself legally exempt from paying any Income Tax due to the current income tax slabs. 9. Thomas Piketty’s Prediction & The Section 10(1) Agricultural Exemption Economists Thomas Piketty and Nancy Qian did a research back in 2009 that accurately predicted that India’s income tax base is likely to stagnate between 2-3 percent of the working population, driven by a very high income tax exemption threshold. 13 years later, as on today, their research appears to be spot on and there is nothing to suggest that this statistic will change in the coming years. The Agrarian Exemption Loophole: Section 10(1) Also, the problem does not stop at the income tax threshold. India is largely an agrarian economy with about 60% or more of its population living in villages. Of this rural population, a vast majority is farmers. However, it is a known fact that while many farmers are small and marginal, there is a section of farmers in different parts of the country who have income above Rs 10 lakh through basic farming, rental incomes from land given to other small farmers etc. The blanket exemption given to Agricultural income u/s 10(1) in the Income-tax Act leads to zero tax collection from any farmer and transfers the burden of taxes onto the urban taxpayer in terms of exorbitant surcharges. 10. Policy Reflection: Why Keeping Both Regimes Alive Defeats the Purpose Before we advocate or justify complex policy measures such as demonetization or taxing agriculture income to widen India’s direct tax base, surely the fact that a large majority of Indians are anyways legally exempt from paying income tax is to be pondered over. To overcome this facet, the Indian Government has already adopted the New Scheme where there is denial of exemption and taxation was charged at a lower rate. But by keeping both the old and new regime live, the benefit of both purposes — taxing at a lower rate in the lower bracket as well as maintaining socio-economic incentives — is lost by the government. “By keeping the old and new regimes running simultaneously, the policy goal of expanding the direct tax base while preserving socio-economic welfare is undermined. Reforming the exemption threshold and rationalizing Section 87A rebate remains the single most effective path towards genuine financial inclusion and fiscal sustainability.” ■■■

TECHNOLOGY & BANKING • VIRTUAL REALITY & FINTECH The Chartered Accountant • December 2022 • Vol. 71 • pp. 103–106 (Journal pp. 683–686) Banking in the Metaverse – How Banks can Prepare for the Future MB Esha Joshi & M V Ram Prasad Esha Joshi is Research Scholar • M V Ram Prasad is Academician. They may be reached at eesha.joshi@gmail.com and eboard@icai.in Study Focus & Strategic Impetus “Virtual Reality and Augmented Reality have led to the creation of the digitally stimulated world called the Metaverse. This rapidly evolving digital world is often believed to soon become even larger than the physical world. This new world is filled with immense opportunities for companies to provide innovative solutions to their customers. In times to come, metaverse will influence all sectors, including the financial sector as the rapid change in technology will have an effect on customer behavior and expectations. Companies will have to have a clear metaverse strategy to meet the needs of consumers in the metaverse. The aim of this study is to understand how the metaverse will have effect on banks and the strategies that these banks can adopt to thrive in the meta universe.” 1. Introduction to the Metaverse: Beyond the Physical Dimension Metaverse is a digital universe that is created by combining virtual reality (VR) and augmented reality (AR). The word metaverse is a combination of the words ‘meta’, which means beyond, and ‘universe’. Metaverse thus represents a ‘virtual world’ of alternate reality where consumers, companies, societies and entrepreneurs interact digitally. It is a place where people can interact, study, play and share life experiences with others virtually. It is a realistic society that minimizes ideas of race, gender, and even handicap while allowing for more direct and physical relationships. Although Metaverse is still in the early phases of development, this immersive 3D virtual world has received a lot of attention in recent years. Top level executives of companies like Microsoft, Facebook (now Meta), and Walmart have started integrating augmented reality features and AI tools into their platforms in order to get ready for foraying into the metaverse space. According to a global company, the metaverse is an evolution of the internet, it is more immersive than Web 2.0. Metaverse offers marketers an array of opportunities to innovatively engage with their consumers. It gives brands a chance for brand innovation and growth. According to a report, by 2026, 25% of people will spend at least one hour a day in the metaverse for work, shopping, education, social media and/or entertainment. Some of the popular Metaverse Platforms are Sandbox, Decentraland, Microsoft Mesh, Roblox, Second Life, and Horizon. In a metaverse, users in the form of avatars interact with other users and share experiences. Some of these immersive virtual worlds have their own fundamental economies and currencies. Such a Metaverse is often referred to as a Crypto metaverse. These crypto metaverses use blockchain technology in their virtual economies. Crypto assets such as Non-fungible Tokens (NFTs) are readily bought, sold and exchanged making them very similar to the real-world. All these happenings are subject to approval from the various countries’ Government policy. 2. Metaverse & Banking: An $8–13 Trillion Frontier The rise of crypto metaverses with their NFTs and crypto currencies has led to the creation of a virtual economy. New assets like virtual real estate, virtual art etc. are gaining popularity in the metaverse. According to a global bank, the global metaverse revenue opportunity could grow to somewhere between $8-13 trillion USD by 2030. This has made metaverse a very attractive destination for many financial institutions and banks. Traditional banks need to realize that metaverse is extremely popular amongst their future clientele, the Gen Z. Gen Z have an extremely positive outlook for the metaverse and since they are extremely tech-savvy, they have been one of the early adopters of the meta universe. Banks need to embrace this opportunity and find innovative ways of connecting with these customers in the virtual world. 3. Strategies for Banks in the Metaverse To establish a viable foothold and unlock commercial value, banks must pursue eight strategic pillars: 1. Establish Bank Branch In order to establish their identity in the metaverse, banks need to start by finding the perfect location for their bank branch. E.g., Foreign Banks have already bought their virtual lands. In India, Union Bank of India has already launched its virtual lounge ‘Uni-verse’ in Sandbox in 2022. 2. Attract Gen Z & Millennial Segments Gen Z and Millennials are early adopters attracted to pioneers. Banks can engage them through gamification, hosting contests to earn NFTs, delivering immersive educational experiences, and providing tailored virtual financial services. 3. Existing Customer Awareness & Demo Sessions Banks must create awareness among existing demographics: doctors, industrialists, traders, public servants, professors, teachers, housewives, and students. Conducting interactive demo sessions on transacting converts them into active brand ambassadors. 4. Provide Better Than Real-World Service Overcoming traditional banking’s detached image, avatar bank employees provide personalized, real-time advice. Banks can host interactive events for virtual transactions and conduct future financial planning sessions in immersive spaces. 5. Plan for Inherent Data Security Risks As operations evolve from promotional marketing to actual financial transactions, banks must invest in cybersecurity infrastructure designed to protect digital identity, cryptographic keys, and sensitive customer data against sophisticated cyber threats. 6. Establish Institutional Trust Trust remains paramount. Banks should adopt hybrid interaction models combining virtual avatar environments with verified real-time video feeds during high-value credit sanctions, legal undertakings, and delicate commercial negotiations. 7. Build a Strong In-House Team Staff competence determines institutional success. Banks must build dedicated cross-functional teams of digital engineers, 3D spatial architects, blockchain consultants, and financial product specialists to spearhead metaverse initiatives. 8. Introduce New Meta Financial Modes Banks must engineer novel transaction rails including metaverse credit and debit cards, seamless fiat-to-meta currency liquidity bridges, digital asset custody, and virtual wealth management advisory for clients’ digital holdings. “Banks will have to focus on creating awareness of Metaverse among all types of customers including the existing customers... Banks would need to understand the inherent security and data risks of the metaverse. They would have to invest in technology which can protect customer identity and sensitive customer data.” 4. Innovative Products & Operational Verticals for Metaverse Banking Banks will have to establish a separate dedicated vertical for developing new products and services and making them available to customers. Intensive training programs for all cadres of staff inclusive of controlling officers have to be chalked out in a systematic manner to upskill personnel involved in marketing, implementing, and monitoring metaverse activities. “Proper research and mock run drills should be carried out to ensure that the system becomes fool proof and does not leave any loose end for the fraudulent persons or hackers to infiltrate. This exercise must be done before the Banking sector enters into Metaverse operations.” A Deposits Mobilization Accounts for Artificial Persons: Opening new bank accounts for corporate entities, Limited Companies, Societies, Trusts, and Government departments along with comprehensive digital KYC verifications. Complete onboarding procedures can be demonstrated virtually to authorized signatories. Needs Analysis & Advisory: Deeply understanding prospect requirements, offering personalized financial counseling, resolving doubts regarding banking products, and ensuring complete transactional transparency. B Loans and Advances Convenient Multi-Tier Appraisals: Field officers, credit processing officers, branch managers, and higher sanctioning authorities can interface simultaneously in virtual reality with borrower entrepreneurs and project teams. End-Use Monitoring: Rigorous tracking to guarantee loan funds are deployed exclusively for sanctioned capital expenditure and prevent fund diversion. Remote Security Inspections & Audit Review: Virtual inspection of collateral and factory facilities located far away from brick-and-mortar branches, facilitating effortless review by internal and statutory bank auditors. C Third Party Products Distribution Insurance Cross-Selling: Seamless marketing and consultation for Life Insurance and General Insurance at the client’s convenience, addressing underwriting queries directly in virtual lounges. Mutual Funds & Wealth Selection: Helping retail investors navigate complicated mutual fund schemes through guided portfolio counseling and customized family wealth allocation models. D Specialized Advisory Functions Allied Agriculture Guidance: Advising rural farmer cohorts on allied activities (dairy farming, floriculture, sericulture, beekeeping, fish farming, poultry) to supplement earnings during slack seasons via bankable project credit. Global Merchant Banking: Guiding overseas or remote corporate promoters on IPO structuring, debenture issuances, and capital raising. Taxation Advisory: Advising pensioners, merchant associations, and salaried cohorts on tax-saving investments, healthcare coverage, and home loans to expand non-interest fee income. 5. Innovative Meta Marketing Strategies The virtual metaverse is fundamentally a place of sharing, immersion, and interaction among users. Banks and financial institutions foraying into the metaverse must be equipped to host virtual community events, financial literacy hackathons, gaming contests, and reward competitions to accelerate customer engagement and build lasting brand recall. Banking institutions entering the metaverse at this formative stage enjoy the rare opportunity to establish themselves as first-mover pioneers. They can test experimental customer interaction workflows and pilot boundary-pushing strategies that will anchor their competitive advantage in the future digital economy. 6. The Need for an Enforceable Legal & Statutory Framework It is essential that a robust legal framework is established by sovereign regulators defining products, financial instruments, and digital service parameters delivered in virtual worlds. “It is essential that a legal framework has to be put in place through the regulators in the country by defining the product and services. Suitable amendments to existing laws like the Negotiable Instruments Act and Information Technology Act will have to be carried out stating the rights, liabilities and duties of the various parties to the transactions carried out and services delivered in the metaverse environment.” 7. Cost-Benefit Analysis & Concluding Feasibility Indeed, there is no doubt that banks will have to commit substantial funds towards the capital expenditure required for acquiring advanced spatial technologies, establishing secure blockchain/server nodes, and setting up proprietary metaverse banking platforms. Furthermore, this transition demands extensive institutional expenditure on upskilling administrative and branch staff across all cadres. “However the additional capital expenditure incurred by banks for setting up and providing metaverse banking platform will easily get recovered through interest earnings on additional loans, non-interest income generated by banks on sale of third party products and through reduction in operating expenses and efficient utilization of resources viz, manpower.” ■■■

ACCOUNTING STANDARDS • LEASE CAPITALISATION The Chartered Accountant • December 2022 • Vol. 71 • pp. 107–111 (Journal pp. 687–691) Impact of Ind AS 116 on Aviation sector: A case study of Indigo Airlines IA Saumya Jain & Prof. C.P Gupta Authors are academicians in University of Delhi. They may be reached at eboard@icai.in Executive Summary & Research Highlights “This article provides a brief overview of Ind AS 116 (Leases) introduced in India w.e.f 1st Apr, 2019 and its impact on the market leader of the aviation industry i.e InterGlobe Aviation Ltd. (Indigo Airlines). Ind AS 116 introduces a single lease accounting model doing away with the traditional classification of Operating & Finance Lease for the lessee. This standard is expected to have a significant impact on companies that have sizeable proportion of operating leases and hence, this study presents an analysis of the impact of this standard on key financial statement items & ratios of Indigo Airlines for the first-year post adoption of this standard i.e financial year (fy) 2019-20. The results show substantial impact on financial metrics with EBITDA rising by 398% & EBIT by 345% from previous financial year (pfy). Amongst the ratios analysed, the highest impact is found on Debt-Equity Ratio (284%) followed by Return on Equity (-288%).” 1. Introduction to Ind AS 116 (Leases) Lease refers to a contract where one party (lessor) grants another party (lessee) the right to use an asset for a specific period of time in return for some consideration. Leasing is a commonly used financing solution which offers users flexibility in using assets without actually owning them. Lessees account for leases in their financial statements in accordance with the applicable accounting standard. Till 31st March, 2019, the applicable accounting standard for lease accounting in India was Ind AS 17, which required companies to classify leases as Operating or Finance, with the former being recognised in the financial statements of the lessee as lease rentals and the latter being capitalised. The Ministry of Corporate Affairs (MCA) notified Ind AS 116, the new lease accounting standard, and certain other amendments to Indian Accounting Standards (Ind AS) on 30th March 2019, coming into force on 1st April 2019. This standard is aligned with IFRS 16 and replaces the previous guidance under Ind AS 17 (Leases). Ind AS 116 defines a lease as “a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.” Crucially, Ind AS 116 eliminates the distinction between an operating lease and a finance lease for a lessee. Under Ind AS 116, lessees are required to recognise: A Lease Liability: Reflecting the present value of future lease payments on the Balance Sheet. A ‘Right-of-Use’ (ROU) Asset: Representing the right to use the underlying leased asset over the lease term. This is a profound departure from Ind AS 17, under which lessees maintained operating leases completely off the Balance Sheet. In the Statement of Profit and Loss, lessees must now present depreciation on the ROU asset and interest expense on the lease liability, replacing the former single line item of operating lease rent expense. In the Cash Flow Statement, cash payments for the principal portion of the lease liability and its related interest are classified within financing activities. Ind AS 116 does not substantially alter lessor accounting, retaining the operating versus finance classification. It also provides optional recognition exemptions for short-term leases (tenure of 12 months or less) and leases of low-value items. 2. Comparative Differences: Ind AS 116 vs. Ind AS 17 The following comparative framework outlines the core structural differences between Ind AS 116 and Ind AS 17: Basis Ind AS 116 (Current Standard) Ind AS 17 (Superseded Standard) Lessee Accounting Ind AS 116 does away with the distinction of operating & finance lease. It requires all leases with a lease term of more than 12 months to be recognised as ‘right of use’ asset and lease liability representing corresponding lease obligations. Ind AS 17 requires leases to be classified as operating or finance lease based on transfer of risk & rewards incidental to ownership of the leased asset. Recognition of Expenses Under Ind AS 116, the lessee recognises depreciation on ROU assets & interest on lease liability in the Statement of Profit & Loss. Under Ind AS 17, a lessee recognises lease rentals on operating leases on straight line basis in the Statement of Profit & Loss. Disclosure for Lessees Ind AS 116 requires detailed disclosure for lessees as compared to Ind AS 17. Ind AS 17 requires less disclosure for lessees as compared to Ind AS 116. Lessor Accounting Requirements for lessor accounting are similar to guidance contained in Ind AS 17. A lessor continues to classify leases as operating lease and finance lease. A lessor continues to classify leases as operating lease and finance lease. Disclosure for Lessors Ind AS 116 contains detailed disclosure requirements for lessor such as selling profit or loss, lease income on finance lease & additional qualitative & quantitative information about leasing activities. Ind AS 17 required less disclosure for lessors. Global Macro Impact: It is estimated that listed companies worldwide using IFRS or US GAAP had almost US$3 trillion of off-Balance Sheet lease commitments. The need for this standard was felt owing to acute concerns relating to lack of transparency and disclosures. Capitalization enables investors and analysts to directly compare companies utilizing leasing models against those borrowing funds to acquire assets. Figure 1: Lease Identification Procedure under Ind AS 116 (MCA Appendix B) Identified Asset Check: Is there an identified asset? If No → Contract does not contain a lease. If Yes → Proceed to benefit check. Economic Benefits Check: Does the customer have the right to obtain substantially all economic benefits from use throughout the period? If No → Contract does not contain a lease. If Yes → Proceed to direction check. Right to Direct Use: Who has the right to direct how and for what purpose the asset is used throughout the period? If Customer → Contract contains a lease. If Supplier → Contract does not contain a lease. If Neither (predetermined) → Does customer operate the asset or did customer design the asset? If Yes → Contract contains a lease; if No → Contract does not contain a lease. 3. Aviation Sector Dynamics & Profile of InterGlobe Aviation Ltd. (IndiGo) The global initiative to develop a new leases standard famously dates back to the statement by Sir David Tweedie, former Chairman of the International Accounting Standards Board (IASB), who quipped that “he wanted to fly in an aircraft that actually existed on an airline’s Balance Sheet.” In the airline industry, financing aircraft through off-Balance Sheet operating lease structures was an entrenched, universal practice. In addition, airport facilities essential to daily flight operations are typically leased from airport operators. Under Ind AS 116, substantially all lease contracts must be brought onto the Balance Sheet. Furthermore, because many airline lease commitments are denominated in foreign currency (principally US-Dollars), airlines are exposed to significant foreign exchange volatility directly within their Profit and Loss statements. Profile of Case Candidate: InterGlobe Aviation Ltd. (IndiGo) Market Dominance: Domestic low-cost carrier operating since 2006; holds a commanding 53.5% passenger market share (as of October 2021). Fleet Size: India’s largest airline with 279 aircraft as of August 2022. Brand Standing: Ranked 33rd amongst India’s top 100 brands in FY 2021 by Campaign India. Market Capitalization: Went public in 2015; free float market capitalization stood at Rs. 19,428.55 crore as on December 31, 2021. Liquidity Buffer: Maintained a strong cash position of Rs. 1,70,679 million (including Rs. 56,207 million in free cash) as on June 30, 2021. Pandemic Turbulence: Reported net loss of Rs. 31,742 million and negative EBITDAR of Rs. 13,602 million for the quarter ended June 2021 due to the second wave of COVID-19. 4. Standalone Balance Sheet & Profit & Loss Impact on IndiGo (FY 2019-20) The company’s leased assets primarily encompass aircraft, spare engines, ground handling equipment, leasehold land, and corporate buildings. First-time adoption in FY 2019-20 triggered immediate structural shifts: Standalone Balance Sheet Adjustments Additional Lease Liabilities: Rs. 1,46,320.72 million recognized (an 81% surge from previous year). New Right of Use (ROU) Assets: Rs. 93,942.04 million recognized on balance sheet (a 38% increase in total assets from PY). Retained Earnings Hit: Reduced by Rs. 6,180.47 million representing the cumulative retrospective transition adjustment. Standalone Statement of Profit & Loss Adjustments Depreciation & Amortization: Increased by Rs. 32,140.33 million (a massive 423% increase from PY). Finance Costs: Increased by Rs. 12,677.43 million due to interest accrued on lease liabilities (a 249% increase from PY). Forex Revaluation Loss: Recognized Rs. 15,296.92 million loss on foreign-currency-denominated lease liabilities. Operating Rental Savings: Aircraft, engine, and other rental expense dropped by Rs. 43,222.68 million due to capitalization. Net Loss Before Tax Impact: Stood at Rs. 15,934.17 million directly attributable to Ind AS 116 (a 249% rise in pre-tax loss). 5. Empirical Findings: Key Variables & Ratios (FY 2018-19 to FY 2019-20) The complete empirical dataset demonstrating the percentage changes in key financial variables and operational ratios from FY 2018-19 to FY 2019-20 is set out below: Financial Statement Item / Ratio FY 2019-20 (Rs. Mn) FY 2018-19 (Rs. Mn) Percentage Change (%) EBIT 16,007.82 3,599.16 +345% EBITDA 55,743.95 11,194.96 +398% Depreciation & Amortization (D&A) 39,736.13 7,595.80 +423% Interest Expense 18,545.55 4,933.18 +276% Capital Employed 2,48,270.13 1,25,263.52 +98% Total Assets 4,20,484.56 2,50,117.34 +68% Current Liabilities 1,64,105.12 79,984.43 +105% Non-Current Liabilities 1,97,755.05 1,00,685.02 +96% Net Worth 58,624.39 69,447.89 -16% Operating Cash Flows 69,433.01 31,599.97 +120% Financing Cash Flows -24,074.84 -5,921.58 +307% (outflow) Current Ratio 1.37 2.26 -40% Interest Coverage Ratio 0.86316232 0.729582136 +18% Debt-Equity Ratio 3.23492901 0.843108264 +284% Return on Assets (ROA) 0.03806994 0.014389886 +165% Return on Equity (ROE) -0.0423303 0.022482325 -288% Return on Capital Employed (ROCE) 0.06447743 0.028732707 +124% Asset Turnover Ratio 0.85035229 1.139336121 -25% 6. In-Depth Analysis of Metric & Ratio Drivers EBITDA & Operating Profit: EBITDA rose 398% and EBIT rose 345% due to the reclassification of erstwhile operating lease rentals into depreciation (non-operating) and finance costs. Debt-Equity Ratio (+284%): Jumped from 0.84 to 3.23. Recognition of Rs. 1,46,320.72 million in lease liabilities combined with retrospective equity reduction inflated leverage dramatically. Return on Equity (-288%): Plunged from +2.25% into negative territory (-4.23%) driven by elevated net losses after tax caused by front-loaded interest and forex revaluation charges. Operating vs Financing Cash Flows: Operating cash flows rose 120% as lease rental outflows were moved to financing activities, causing financing cash outflows to expand by 307%. Current Ratio (-40%): Declined from 2.26 to 1.37 due to the inclusion of current lease liabilities payable within 12 months in current liabilities. Asset Turnover (-25%): Fell from 1.14 to 0.85 as total assets expanded by 68% following the on-balance-sheet capitalization of ROU assets. 7. Conclusion & Key Industry Takeaways As evidenced by the analysis, Ind AS 116 fundamentally altered the balance sheet and profit and loss profile of Indigo Airlines. In FY 2018-19, prior to transition, operating lease aircraft rentals recognized in P&L stood at Rs. 49,994.49 million, representing 17% of total company expenses, while aircraft on finance lease recognized on the Balance Sheet amounted to Rs. 31,984.71 million (13% of Total Assets). Following the mandatory adoption of Ind AS 116: Right of Use Assets: Now constitute approximately 34% of Total Assets of the company. Financial Liabilities Expansion: The proportion of financial liabilities to total liabilities escalated from 31% in 2018-19 to 52% in 2019-20. Equity Depletion: Transition adjustments resulted in a 23% reduction in retained earnings. “Thus, the analysis shows that capitalization of erstwhile operating leases changed the face of the balance sheet of the airlines which is the market leader in the aviation sector in India. The users of financial statements can now appreciate the full extent of future commitments of the company and compare it with other companies in the same sector irrespective of their financing structure for aircrafts and other facilities.” ■■■ References: (2016). Effects Analysis: IFRS 16 Leases. International Financial Reporting Standards Board (IASB). (2019). A study on the impact of lease capitalisation. PricewaterhouseCoopers (PwC). (2019). Ind AS 116: Leases. Ministry of Corporate Affairs (MCA), Government of India. (2016). Ind AS 17: Leases. Ministry of Corporate Affairs (MCA), Government of India. IndiGo Investor Relations Reports & Official Annual Reports (FY 2018-19 & FY 2019-20).

CORPORATE FINANCE • INFRASTRUCTURE & ECONOMETRICS The Chartered Accountant • December 2022 • Vol. 71 • pp. 112–118 (Journal pp. 692–698) Factors Influencing Capital Structure of Power Sector Companies in India CP Chandrasekhar Pillai & Dr. Radhanath Pyne Chandrasekhar Pillai is Research Scholar (pillaics2008@gmail.com) • Dr. Radhanath Pyne is Academician (radhanathp@yahoo.com). They may be reached at eboard@icai.in Study Focus & Core Empirical Findings “This paper aims to conduct an analysis of the factors influencing capital structure of selected power sector companies in India, during the eleven and twelve plan periods i.e. 01.04.2007 to 31.03.2017. The study suggests that some of the insights from modern finance theory of capital structure are relevant for explaining capital structure in an emerging economy like India. The results of the study conclude that factors such as asset tangibility, profitability, growth, size, cost of debt, tax rate and debt serving capacity have significant impact on capital structure of an organisation in India.” 1. Introduction & The Capital Structure Debate The growth of corporate sector is crucial for economic development and the pattern of corporate finance plays an important role for the financial well-being of companies in any sector. The issue of corporate capital structure is debatable; some arguments are in favour of its relevance and some are against. All organisations constantly encounter critical questions — e.g. decisions in relation to the reinvestment of retained earnings, dividend decisions, and financing decisions for new ventures by equity or debt funds. The decisions of corporate finance directly or indirectly affect the various facets of corporate management, which ultimately determines the wealth of investors. In the Indian corporate sector, finance decisions and accomplishments not only affect the financial stability of the concerned private equity but also the financial health of the nation as a whole. In infrastructure industries such as power, these represent public investment decisions by the government and a number of government agencies involved in the planning process. “In Indian corporate sector, finance decisions and accomplishments not only affect the financial stability of the concerned private equity but also the financial health of the nation as a whole.” Mainly, there are three conflicting theories of capital structure that have developed following the pioneering work of Modigliani and Miller (1958): static or dynamic trade-off theory, agency cost theory, and pecking order theory. While extensive empirical studies have examined capital structure in developed economies — such as Rajan and Zingales (1995) across G-7 nations, Burgman (1996) in the US, Antonious, Guney and Paudyal (2002), Bevan and Danbolt (2002) in the UK, Akhtar (2005) in Australia, and Akhtar and Oliver (2009) in Japan — developing country evidence remains constrained (e.g. Wiwattanakantang, 1999 in Thailand; Booth et al., 2001 in India; Pandey, 2001 in Malaysia; Chen, 2004 in China; Prahalathan, 2010 in India; Sheikh and Wang, 2011 in Pakistan). As Joshua Abor (2008) emphasized, corporate financing decisions encompass a broad gamut of policy dimensions. 2. Literature Review, Evolution of Theories & Research Gap Modigliani & Miller Foundations (1958, 1963, 1977): MM (1958) demonstrated capital structure irrelevance in perfect markets without tax. MM (1963) incorporated corporate taxes, establishing that the tax shield on debt increases levered firm value. MM (1977) introduced personal taxes on shares versus debt, identifying cases where leverage gain tends to zero, suggesting optimal capital structure exists at the macro but not micro level. Agency Cost Theory & Managerial Incentives: Jensen & Meckling (1976) identified agency conflicts between managers and outside shareholders when managerial ownership is under 100%. Jensen (1986) and Stulz (1990) proved debt mitigates agency costs by reducing free cash flow available to managers. Dybvig & Zender (1989) showed convertible debt eliminates agency conflicts. Trade-Off Theory & Bankruptcy Cost Realities: Kraus & Litzenberger (1973) balanced tax shields against bankruptcy costs. Haugen & Senbet (1978, 1995) argued rational markets eliminate bankruptcy penalties, while Correia, Flynn, Uliana & Wrmaid (2000) noted bankruptcy costs erode tax shield benefits. Industrial Organization & Stakeholder Models: Titman (1984) linked liquidation to customer costs; Brander & Lewis (1986) analyzed oligopoly debt choices; Maksimovic (1988) tied debt capacity to demand elasticity; Sarig (1988) showed transferable employee skills support higher debt; Diamond (1989) proved older firms enjoy lower borrowing costs. “If market prices are determined by rational investors then bankruptcy costs would not be required. This was argued in a study conducted by Haugen and Senbet (1978) supported by another study conducted by Ronn and Senbet (1995).” Research Gap: Empirical studies by Bradley, Jarrell and Kim (1984) and Titman and Wessels (1988) confirmed that leverage varies systematically with asset structure, size, and profitability. However, existing research has rarely evaluated the specialized regulated capital structure of the power sector in emerging economies, particularly covering the 11th and 12th Plan periods in India. 3. Research Objectives, Sample & Econometric Model Specifications The primary objective is to investigate the determinants of capital structure of 20 selected Indian power sector companies across a ten-year horizon (01.04.2007 to 31.03.2017), bridging the 11th and 12th Five-Year Plan periods. Data was retrieved from corporate annual reports and the Accord FinTech database. Variable Category Variable Name & Abbreviation Operational Definition & Measurement Ratio Dependent Variables (Debt Ratios) Short-Term Debt Ratio (STDR) Short-Term Debt / Total Assets; indicates capacity to satisfy immediate obligations. Long-Term Debt Ratio (LTDR) Long-Term Debt / Total Assets; measures permanent debt leverage. Total Debt Ratio (TDR) Total Debt / Total Assets; reflects aggregate leverage of the organisation. Independent Variables (Firm-Specific Factors) Asset Tangibility (AT) Net Fixed Assets / Total Assets; proxy for collateralizable asset security. Profitability (PROF) EBIT / Total Assets; measures operating efficiency and internal funds generation. Growth (GROW) Percentage change in Total Assets year-over-year. Firm Size (SIZE) Logarithm of total assets; reflects shock-absorption capacity and scale. Cost of Debt (COD) Interest before tax / Long-Term Debt. Tax Rate (TAXR) Tax Provision / Profit Before Tax. Debt Serving Capacity (DSC) EBITDA / Total Interest Expense. Liquidity (LIQ) Total Current Assets / Total Current Liabilities. Financial Distress (FINDIST) Cash flow volatility proxying bankruptcy vulnerability (Rao & Jijo, 2001). Hypotheses Formulation across Models 1, 2, and 3: Testing null hypotheses H011–H019 for Model 1 (STDR), H021–H029 for Model 2 (LTDR), and H031–H039 for Model 3 (TDR) asserting no significant relationship between each of the nine independent variables and the respective debt ratio at 5% significance level (α = 0.05). 4. Empirical Regression Results across Models 1, 2, and 3 Table 1: Coefficients and ‘t’ Values for Model 1 (Dependent Variable: STDR) Variable B (Unstandardized) Std. Error Beta ‘t’ Value Sig. (p-value) Null Hypothesis Decision (Constant) -.040 .031 – -1.286 .200 – Asset Tangibility (AT) .060 .018 .232 3.374 .001 Rejected (H011) Profitability (PROF) -.118 .041 -.201 -2.870 .005 Rejected (H012) Growth (GROW) -.001 .001 -.084 -1.302 .195 Not rejected Firm Size (SIZE) .013 .003 .280 4.317 .000 Rejected (H014) Cost of Debt (COD) -.006 .004 -.088 -1.375 .171 Not rejected Tax Rate (TAXR) .000 .000 -.101 -1.560 .120 Not rejected Debt Serving Capacity (DSC) .000 .000 -.098 -1.482 .140 Not rejected Liquidity (LIQ) .005 .000 -.111 -1.732 .085 Not rejected Financial Distress (FINDIST) .000 .000 .083 1.283 .201 Not rejected Table 2: Coefficients and ‘t’ Values for Model 2 (Dependent Variable: LTDR) Variable B (Unstandardized) Std. Error Beta ‘t’ Value Sig. (p-value) Null Hypothesis Decision (Constant) -.094 .043 – -2.174 .031 – Asset Tangibility (AT) .146 .024 .379 6.004 .000 Rejected (H021) Profitability (PROF) -.190 .056 -.217 -3.370 .001 Rejected (H022) Growth (GROW) -.002 .002 -.081 -1.379 .170 Not rejected Firm Size (SIZE) .022 .004 .311 5.225 .000 Rejected (H024) Cost of Debt (COD) -.009 .006 -.093 -1.589 .114 Not rejected Tax Rate (TAXR) .000 .000 -.111 -1.867 .063 Not rejected Debt Serving Capacity (DSC) .000 .000 -.107 -1.760 .080 Not rejected Liquidity (LIQ) -.005 .000 -.103 -1.747 .082 Not rejected Financial Distress (FINDIST) .000 .000 .077 1.294 .197 Not rejected Table 3: Coefficients and ‘t’ Values for Model 3 (Dependent Variable: TDR) Variable B (Unstandardized) Std. Error Beta ‘t’ Value Sig. (p-value) Null Hypothesis Decision (Constant) -.146 .070 – -2.084 .039 – Asset Tangibility (AT) .214 .039 .345 5.420 .000 Rejected (H031) Profitability (PROF) -.307 .092 -.218 -3.350 .001 Rejected (H032) Growth (GROW) -.004 .002 -.087 -1.460 .146 Not rejected Firm Size (SIZE) .037 .007 .321 5.340 .000 Rejected (H034) Cost of Debt (COD) -.016 .010 -.096 -1.628 .105 Not rejected Tax Rate (TAXR) .000 .000 -.115 -1.903 .059 Not rejected Debt Serving Capacity (DSC) .000 .000 -.109 -1.774 .078 Not rejected Liquidity (LIQ) -.005 .000 -.111 -1.865 .064 Not rejected Financial Distress (FINDIST) .000 .000 .080 1.340 .182 Not rejected 5. Detailed Discussion of Regression Results 1. Asset Tangibility (AT) – Highly Positive: AT exhibits positive and statistically significant coefficients across all three models: STDR (t = 3.374, p = 0.001), LTDR (t = 6.004, p = 0.000), and TDR (t = 5.420, p = 0.000). Highly tangible fixed assets provide strong collateral security to lenders, lowering borrowing friction in heavy power projects and confirming static trade-off theory. 2. Profitability (PROF) – Strongly Negative: PROF is consistently negative and statistically significant: STDR (t = -2.870, p = 0.005), LTDR (t = -3.370, p = 0.001), and TDR (t = -3.350, p = 0.001). This strongly validates the Pecking Order Theory: profitable power firms prioritize internally generated retained earnings over debt financing. 3. Firm Size (SIZE) – Highly Positive: SIZE shows a robust positive influence across STDR (t = 4.317, p = 0.000), LTDR (t = 5.225, p = 0.000), and TDR (t = 5.340, p = 0.000). Larger power utilities possess superior credit ratings, diversified asset bases, and enhanced capacity to absorb financial distress shocks, granting greater debt market access. “Short-term debt raising is greatly influenced by asset tangibility, profitability, growth, cost of debt, tax rate and debt serving capacity whereas long term debt raising is also influenced by size in addition to short-term debt influencer while considering total debt for designing capital structure decisions of the selected Indian power sector companies.” 6. Macroeconomic Dynamics & Policy Implications Beyond firm-level regressors, the study emphasizes the critical role of systemic macroeconomic determinants: Key Macroeconomic Regulators of Capital Structure: Capital Formulation Rate Stock Market Development Financial Stability of the Nation Corporate Tax Regime Terrorism Threat & Sovereign Risk Foreign Direct Investment (FDI) “There are several macro-economic factors like capital formulation, stock market development, financial instability of country, corporate tax, terrorism threat, foreign direct investment, and so on in influencing capital structure decisions.” (a) Academic Implications: Contributes to the microeconomic and financial economics knowledge base of infrastructure utilities, establishing empirical benchmarks for regulated network industries. (b) Policy Implications: Provides actionable empirical insights for ministries and statutory regulators to structure sustainable debt guidelines and credit guarantees in a sector still developing 75 years post-independence. (c) Research Implications: Lays an econometric framework for future researchers to examine extended time horizons and additional firm-specific variables such as product uniqueness, carry forwards, and quality spreads. 7. Conclusion & Future Research Agenda The findings confirm that traditional capital structure determinants play a decisive role in shaping the financing architecture of Indian power sector companies during the 11th and 12th Plan periods. Asset tangibility, profitability, and size are the definitive drivers of short-term, long-term, and total debt leverage, reflecting an interplay between collateral capacity (Trade-off theory) and internal cash accumulation (Pecking order theory). Future studies should incorporate longer timeline datasets and evaluate specialized micro-variables — including product uniqueness, collateral liquidation value, carry-forward tax losses, discount rates, and quality yield spreads — to further elucidate financial structure choices across India’s core infrastructure landscape. ■■■ References: Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001), Capital structure in developing countries, Journal of Finance, 56, pp. 87–130. Brander, J., & Lewis, T. (1986), Oligopoly and financial structure: the limited liability effect, American Economic Review, 76(5), pp. 956–970. Diamond, D. (1989), Reputation acquisition in debt markets, Journal of Political Economy, 97(4), pp. 828–862. Handoo, A. & Sharma, K. (2014), A study on determinants of capital structure in India, IIMB Management Review, pp. 170–182. Kraus, A., & Litzenberger, R. H. (1973), A state preference model of optimal financial leverage, The Journal of Finance, 28(4), pp. 911–922. Maksimovic, V. (1988), Capital structure in repeated oligopolies, Rand Journal of Economics, 19(3), pp. 389–407. Modigliani, F., & Miller, M. (1958), The cost of capital, corporation finance, and the theory of investment, American Economic Review, 48(3), pp. 261–297. Modigliani, F., & Miller, M. (1963), Corporate income taxes and the cost of capital, a correction, American Economic Review, 53(3), pp. 433–443. Modigliani, F., & Miller, M. (1977), Debt and taxes, Journal of Finance, 32(2), pp. 261–276. Rajan, R., & Zingales, L. (1995), What do we know about capital structure? Some evidence from international data, Journal of Finance, 50(5), pp. 1421–1460. Sarig, O. (1988), Bargaining with a corporation and the capital structure of the bargaining firm, Working Paper, Tel Aviv University. Titman, S. (1984), The effect of capital structure on a firm’s liquidation decision, Journal of Financial Economics, 13(1), pp. 137–151.

SPECIAL WRITE-UP • IFAC GLOBAL THOUGHT LEADERSHIP The Chartered Accountant • November 2022 • Vol. 71 • pp. 25–27 (Journal pp. 489–491) The Accountancy Profession: Building Trust and Enabling Sustainability KD AJ Kevin Dancey & Alan Johnson Kevin Dancey is CEO of IFAC • Alan Johnson is President of IFAC. They may be reached at eboard@icai.in A Truly Pivotal Moment for the Global Accountancy Profession “We are at a truly pivotal moment for the global accountancy profession. Sustainability reporting is finally taking its rightful place within the corporate reporting ecosystem through global and jurisdiction-specific initiatives. These disclosures are needed to bring together financial and non-financial information that provides a comprehensive picture of enterprise value and environmental, social and governance (ESG) impacts for all stakeholders.” “Sustainability information is already integral to doing business in many countries; in others, the gap is closing. These developments are causing ripple effects around the world as firms in those jurisdictions examine the ESG risk in their supply chains. Organizations everywhere will have to think beyond their borders and join the sustainability movement.” 1. Sustainability as a Mandate and an Opportunity Our profession needs to meet the huge demand – and an important need – for the professional accountant’s skillset in gathering data, developing systems and processes, and ensuring that information is actionable and relevant to strategies and business models. And of course, at the end of the day, someone needs to ensure there is confidence in the reporting of this information. IFAC spent much of the past two years campaigning among all our stakeholders and partners for the establishment of the new International Sustainability Standards Board (ISSB) under the auspices of the IFRS Foundation. Its formation in November 2021 was an important step towards meeting stakeholder demand, and supporting the United Nations 2030 Agenda for Sustainable Development, notably the implementation of the Sustainable Development Goals (SDGs). Just as IFAC supported the Board’s formation, we welcome its initial activities. Now it is critical to maintain momentum. For the ISSB’s standards to have a truly global reach, jurisdiction-level adoption and implementation is key. November 2021 Formation Establishment of the International Sustainability Standards Board (ISSB) under the IFRS Foundation to create a comprehensive global baseline of high-quality disclosure standards. UN 2030 Agenda Alignment Direct alignment with the United Nations Sustainable Development Goals (SDGs), delivering corporate transparency necessary for global capital reallocation towards sustainability. Jurisdictional Implementation Crucial shift from global standard-setting to domestic adoption across individual sovereign jurisdictions to achieve widespread, harmonized regulatory enforcement. 2. Independent Assurance of ESG Information: IFAC’s State of Play Findings The assurance of sustainability information has also emerged as a crucial factor in climate action and sustainable development. In July, IFAC released an update to our State of Play study of global trends in the reporting and assurance of sustainability information. % Global ESG Assurance Benchmarks (IFAC State of Play Study) 51% → 58% Assurance Penetration Global companies obtaining independent assurance on ESG factors increased from 51% in 2019 to 58% in 2020. ~60% Professional Accountants Around 60 percent of global ESG assurance engagements were conducted by licensed professional accountants. ~40% Unregulated Consultants Rest conducted by service providers lacking formal assurance training, public oversight, or ethical codes. “Professionally qualified and licensed accountants have the requisite expertise, objectivity, integrity, commitment to professional standards, and oversight that are essential for instilling trust in ESG reporting.” There is an important public interest element to these issues. Professionally qualified and licensed accountants have the requisite expertise, objectivity, integrity, commitment to professional standards, and oversight that are essential for instilling trust in ESG reporting. And trust in sustainability assurance engagements – which leads to trust and confidence in sustainability information – is too important to be left to unregulated entities. Of course, there is also an enormous opportunity for our profession in the market for these services. But speed is essential. The market will reward early adapters to new demands and new opportunities in the sustainability space. 3. The Importance of Trust & The Institutional Deficit “Trust takes years to build but can be lost in seconds.” We see the importance of trust and confidence in corporate disclosures and their assurance; in the close relationship between small- and medium-sized enterprises (SMEs) and small- and medium-sized practices (SMPs); and in public financial management (PFM). The public sector is pivotal to effective responses to the many overlapping global crises: Covid, inflation, disrupted supply chains, the food shortages gripping the world, and, of course, climate change. Citizens everywhere are looking for their governments to respond to their current and future needs and bring about a more sustainable, inclusive and equitable future. In a time of extraordinarily low trust in institutions, it is critical that the public sector rises to the occasion with strong PFM. Poor governance has eroded the reputation of social institutions and may threaten their legitimacy. We can see this in data from Edelman, the global communications firm, which releases annual global surveys of public perceptions of business, governments, not-for-profits, and the media. Public Perception & Institutional Mistrust (Edelman Global Survey Findings): Two-Thirds Feel Misled: Roughly two-thirds of respondents feel deliberately misled by the media, government, and business – a metric that has increased sharply from 2021. 44% Leadership Confidence: On average, only 44 percent of people believe their government to be an effective leader in solving societal problems. 42% Execution Confidence: Only 42 percent believe their government can plan and execute strategies that get results. The question for our profession is how we can help to rebuild and maintain trust across society. We are a public interest profession with a history, stretching back well over 100 years, with the mandate, the skills, and the strong reputation to do exactly this. 4. Public Financial Management, Corruption & The SDG Financing Gap “IFAC has made public trust a pillar of our thought leadership and advocacy, as part of our broader work on PFM – specifically, on the fight against corruption and related economic crimes.” The United Nations estimates that USD 5 to 7 trillion in investment is needed annually to achieve the Sustainable Development Goals, or SDGs. At the same time, about half that amount is lost to corruption each year. Society could not afford this massive leakage before the pandemic, and certainly cannot afford that cost now. The global accountancy profession has a very important role to play here. We are uniquely placed within, and as advisors to, business and government. And we are uniquely placed to support an ecosystem of other public policy actors at the global, regional and national levels – all in the public interest. 5. Public Trust in Tax: Global Perspectives & Anti-Corruption Action Plan In September, IFAC – in partnership with the Association of Chartered Certified Accountants (ACCA) – launched the comprehensive report titled “Public Trust in Tax: Global Perspectives,” marking the inaugural initiative under IFAC’s new Anti-Corruption Action Plan. Since 2017, IFAC has gathered empirical data across the G20 on public attitudes and opinions towards tax systems and the stakeholders operating within them. The latest research expanded to 14 non-G20 countries, surveying 5,600 citizens regarding institutional trust, key concerns, and expert insights from accounting practitioners, academics, and revenue authority officials. Empirical Evidence from 5,600 Respondents Across 14 Non-G20 Countries: 67% High Trust in Accountants Trust or highly trust professional tax accountants – the most trusted actor in the tax ecosystem. 72% System Efficiency Affirmed that professional accountants contribute directly to more efficient tax systems. ~72% Fairness & Equity Similar share indicated accountants make tax systems fairer and more equitable. “In every country we studied, we heard that distrust of tax systems depends greatly on how tax money is used. Trust in the system is lower when taxpayers perceive higher levels of corruption and the diversion of public funds. As one expert told us, ‘The apathy of taxpayers is driven by corruption across the public sector, which in turn drives poor service delivery.’” Regardless of the true reasons behind poor delivery of public services, this apathy or distrust will discourage compliant taxpayers from continuing to pay their share. Compliance depends on a perception of fairness in the system, and the effective and efficient use of taxes paid for the benefit of society. The good news is that the profession has the skills, expertise, and the credibility to do something about this. No one was more trusted than professional accountants. And this has been the case for every country and every iteration of our Trust in Tax work, going back to 2017. Our profession needs to speak out, speak up, and lead on trust – not just trust in tax, but across the public sector and among all organizations, including businesses. We must ensure that our stakeholders in government know when to call on us. As technical experts with a strong ethical foundation, we can help public authorities to implement policies effectively and efficiently – and with accountability. As professionals, we will bring greater transparency and integrity to public finances. As servants of the public interest, we will advocate for policies that create a better world. 6. Trust in the Ecosystem of Corporate Governance Our profession cannot rebuild trust alone. Achieving high-quality assurance – a requirement for trust and confidence in corporate disclosures – requires a well-functioning ecosystem of corporate governance built upon ethics and independence. Core Pillars of the Governance and Assurance Ecosystem: Right People for the Job: Licensed professionals trained in rigorous auditing standards, technical competencies, and professional skepticism. Right Governance Structures: Independent boards, proactive audit committees, and objective internal oversight frameworks. Right Regulation & Quality Metrics: Enforceable public oversight, robust standard-setting, and objective measurements of audit quality. These elements must all work together to produce the right assurance process. In the absence of any of these components, the engagement may not meet the expectations of stakeholders. While assurance has historically focused on enhancing the confidence of investors and other providers of capital, other stakeholders also benefit, including directors, management, employees, analysts, regulators, rating agencies, customers, suppliers and the public. “All participants in the ecosystem – auditors, management, boards, audit committees, regulators, and many more – must act to improve the audit process. For the best results, they need to act together.” 7. Accountants Will Save the World: Competencies, Reach & Action With so many profound and truly global challenges, professional accountants might wonder, “Why me? I cannot save the world.” But there are very good reasons to believe that professional accountants will save the world. Epicenter of Information At the center of information flows and decision making – uniquely positioned to capture, analyze, report on, and assure sustainability information. Connecting Finance & ESG Possess skills critical for bridging financial and non-financial data to meet stakeholder demands and maintain trust. Unrivaled Global Reach Global reach like no other profession, spanning businesses, advisory firms, public sectors, and transnational bodies. Public Interest Mandate A strict ethical foundation and an unyielding commitment to act as stewards and servants of the public interest. Our profession is the critical element for success. We are the ones who will enable sustainability. There will be more to learn, new competencies to acquire, and new roles to fill as ESG factors increasingly guide the decisions of organizations and stakeholders. We need to be ready to seize the opportunities that come with climate action and broader sustainability efforts – especially through roles within organizations supporting senior management and Boards of Directors, through advisory roles, and by assuring sustainability information. There is no question that we are the right professionals for the job. ■■■

SPECIAL WRITE-UP • ISSB GLOBAL SUSTAINABILITY BASELINE The Chartered Accountant • November 2022 • Vol. 71 • pp. 28–30 (Journal pp. 492–494) Better information enables better decision-making SL Sue Lloyd Vice-Chair, International Sustainability Standards Board (ISSB) • Former Vice-Chair, IASB. She may be reached at eboard@icai.in Core Principle & Foundational Role of Financial Reporting “By establishing rigour and consistency in financial statements, the accountancy profession and accounting standards play an essential part in investor decision-making. As global markets, regulators, and world leaders turn their attention to addressing climate change, financial reporting once again has a foundational role to play.” 1. The Role of the IFRS Foundation & Dual-Board Architecture At the heart of the IFRS Foundation is the belief that the provision of rigorous, reliable and comparable information enables informed economic decisions. This in turn promotes the proper functioning of capital markets, building trust, resilience, efficiency, transparency and accountability. This belief formed the backbone of the International Accounting Standards Board (IASB). The same belief sits at the core of the International Sustainability Standards Board (ISSB), and it has a very similar goal. In the first two decades of its existence, the IFRS Foundation (through its independent standard-setting board, the IASB) transformed the global landscape of financial information by introducing IFRS Accounting Standards. The Standards have become the de facto global language of financial statements – trusted by investors worldwide and required for use by more than 140 jurisdictions. Today, economic and investment decisions are increasingly incorporating sustainability information. There is strong international demand for high-quality, globally comparable information from companies on sustainability-related risks and opportunities. Responding to the need for such information, in 2021 the IFRS Foundation established the ISSB as a sister board to the IASB – responsible for developing a truly global baseline of sustainability disclosures to further inform economic and investment decisions. Connectivity & Procedural Rigour Between Sister Boards: Identical Transparent Due Process: IFRS Accounting Standards and IFRS Sustainability Disclosure Standards are developed using the same rigorous, inclusive, and transparent due process – ensuring public consultation, accountability, and international stakeholder legitimacy. Institutional Connectivity: The two boards coordinate their technical agendas to enable accounting standards and sustainability disclosures to work seamlessly together, avoiding silos and ensuring coherence across corporate reporting. Globally there is also a desire for change to support important transitions to address risks such as climate change. And more broadly, to achieve the public policy changes that governments desire, the financial markets have a crucial role to play. This was reflected in the commitments made about private sector investment at COP26 – notably, the Glasgow Financial Alliance for Net Zero (GFANZ). 2. Filling the Information Gap Using Accounting Methodology “One aspect of the ISSB’s work is the role of sustainability information in meeting broader public policy objectives.” The IASB notes in its conceptual framework that while the objective of its work is to meet the information needs of investors, lenders and other creditors, others may also find the information useful. In my former role on the IASB, parties beyond primary users were actively interested in financial statement disclosures – for example, prudential regulators maintain a keen interest in the reporting of expected credit losses as a complement to prudential capital requirements. However, in the case of the ISSB, the level of interest is higher given the current state of reporting on sustainability matters. Essentially, many diverse stakeholders are relying on the ISSB’s work to fill an urgent information gap. The accountancy profession has a crucial part to play in ensuring this information gap is met. In establishing our requirements, we looked to build on methods and systems established by accountants to ensure sustainability information is provided with the same rigour as financial information. The nascent nature of sustainability reporting means that some of the very important factors that are necessary to support high quality reporting are still developing and being put in place – such as determining the appropriate level of assurance and ensuring that the appropriate supporting requirements are in place to support assurance. Whilst assurance requirements are determined at a jurisdictional level, the ISSB is working closely with the International Auditing and Assurance Standards Board (IAASB) and others to ensure its Standards are assurable, resulting in high-quality information to users. Repurposing Well-Established IASB Concepts in Draft IFRS S1 (General Requirements): Identical Reporting Entity Boundary: The entity providing sustainability reporting must be the exact same reporting entity providing the financial statements. Identical Primary User Focus: Directly targeted at existing and potential investors, lenders, and other creditors assessing enterprise value. Unified Materiality Definition: Applies the exact definition of materiality as the IASB, allowing practitioners to leverage the IASB’s Materiality Practice Statement. Standard-Setting Precedents: Repurposes established guidance on interim reporting, comparative information, and a hierarchy to guide preparers when specific disclosures are absent. All these proposals were modelled on similar requirements in IFRS Accounting Standards with as little change in wording as possible, ensuring that known concepts could be repurposed. With this common approach established, accountants are well placed to build on their current work and integrate new practices to support companies as they make the transition to ISSB standards. “Accountants have a critical role to play in ensuring high-quality sustainability information is provided, which will form the basis of decision-making globally, enabling preparers and investors to respond to climate change.” 3. Rapid Rate of Progress & Recent Board Decisions The ISSB was established only a year ago (November 2021). The rapid rate of progress maintained over the last twelve months, in keeping with urgent demands from global stakeholders, means that we are already making decisions to refine our standards and produce foundational work, with the intention of finalising our first Standards in 2023. We follow a truly transparent and inclusive standard-setting process and encourage stakeholders to follow board meetings or listen to the official podcast. At our most recent board meeting, several significant decisions were approved: Alignment on ‘Materiality’ & Terminology Refinements Reconfirmed alignment with the IASB definition of “material”. Voted to remove references to the term ‘enterprise value’ – using the Integrated Reporting framework to support the concept’s articulation (a change in terminology, not approach). Voted to remove the term ‘significant’ and develop clear process guidance for identifying sustainability risks, opportunities, and disclosures. Mandatory Scope 1, 2, and 3 GHG Disclosures Confirmed that standards will require Scope 1, Scope 2, and Scope 3 Greenhouse Gas emissions disclosures under the GHG Protocol Corporate Standard. The board will deliver appropriate reliefs and guidance to support preparers with Scope 3 value chain calculations, ensuring feasibility across both developing and developed economies. Global Baseline Toolkit & Proportionality Evaluated a proportionality toolkit discussed at the September meeting to ensure the baseline remains truly global and adaptable to diverse institutional capabilities, preventing disproportionate burdens on smaller entities or emerging markets. Partnership with ICAI & Indian Professionals Committed to multi-organization capacity building and education. Specifically highlighted that the continued support of The Institute of Chartered Accountants of India (ICAI) will be invaluable to leverage the extensive knowledge, insight, and expertise of Indian professionals. “Accountants have a critical role to play in ensuring high-quality sustainability information is provided, which will form the basis of decision-making globally, enabling preparers and investors to respond to climate change.” ■■■ ICAI Official Announcement • Professional Development Committee November 2022 Extension of Last Date for Submitting MEF 2022-23 from October 28 to November 9, 2022 The Multipurpose Empanelment Form (MEF) for the year 2022-23 is live at https://meficai.org. Considering the various requests received from the members of ICAI, it has been decided by the Professional Development Committee to extend the last date for submission of Multipurpose Empanelment Form for the year 2022-23 from 28th October 2022 to 9th November 2022. Important Note: NO FURTHER EXTENSION WOULD BE GIVEN for filing MEF 2022-23. Members may refer to the “Advisory” while filling MEF 2022-23. However, MEF Applicants can write to the committee at the Complaint Module of MEF (available at https://app.meficai.org/complaints) or via email at mefpdc@icai.in for any clarification, if required. — Professional Development Committee, ICAI

SPECIAL WRITE-UP • FUTURE OF WORK & DIGITAL UPSKILLING The Chartered Accountant • November 2022 • Vol. 71 • pp. 32–34 (Journal pp. 496–498) A future-fit accountancy profession for a rapidly changing and technology advanced world AP KK Alta Prinsloo & Kerryn Kohl Alta Prinsloo is CEO, Pan African Federation of Accountants (altap@pafa.org.za) • Kerryn Kohl is CEO, Life Online Pty Ltd (kerryn@life-online.com.au). They may be reached at eboard@icai.in The Future-Fit Question & World Economic Forum Projections WEF Report 2020 “As the world changes and technology advances, it is becoming increasingly important to ask ourselves: ‘What can we do to make sure we are fit for the future?’” According to the World Economic Forum – Future of Jobs Report 20201, by 2025 the time spent on current tasks at work by humans and machines will be equal. 85 million jobs may be displaced, while 97 million new roles which are more adapted to the new division of labour between humans and machines, may emerge. The accountant and auditor job roles, as we know them today, are fourth on the list of the Top 20 decreasing in-demand roles. 1. The Evolutionary Triad: From CFO to Chief Value Officer (CVO) As business models change, so must professional accountants – evolving from doing the same things to doing the same things differently to doing different things. Professional accountants doing different things will have an interconnected focus on people, planet and prosperity. In the words of Prof Mervyn King, chief financial officers need to be the chief value officers (CVOs) in their organisations2. This year alone, we have seen significant developments in sustainability reporting and assurance. Professional accountants have both a public interest responsibility and a transformative opportunity to lead changes in corporate reporting. Nevertheless, as said by Kevin Dancey, CEO of IFAC: “… if we don’t rise quickly to the occasion, demonstrate our competencies, and seize this significant opportunity, someone else will.”3 The stakes are at an all-time high, and uncertainty is the name of the game, which is why the question “What makes future-fit?” has become so essential. The answer lies in becoming a life-long learner. This sentiment is echoed by many, and sounds simple enough, considering the unfettered access to information and experts at our fingertips. Except that becoming lifelong learners is proving to not be that simple. 2. The Online Learning Paradox & Cognitive Attention Deficit Organisations around the globe have made significant investments in learning technology, but the rate of adoption is slow, and the drop-off rate remains alarmingly high4. Research shows an average engagement rate of only 15% for online learning5 and an alarming drop-off rate of up to 80%6. Thus, the question of how we make sure we are fit for the future becomes increasingly complex. The technology and connectedness required may exist, but our adaptation to this hyper-connected world may need a fair amount of thoughtful fine-tuning. 15% Online Engagement Rate Average active engagement rate recorded across digital and virtual corporate learning programs. Up to 80% Alarming Drop-Off Rate Learners who enroll in digital upskilling courses fail to complete or drop out prior to certification. < 400 Words Attention Span Threshold Modern cognitive fatigue prevents focus for longer than a few minutes or a maximum of 400 words. “The technology and connectedness required may exist, but our adaptation to this hyper-connected world may need a fair amount of thoughtful fine-tuning.” Yes, the Internet has significantly changed us. Nevertheless, by being caught up in this revolutionary stream of information and hyper-connection, have we taken the time to reflect on our adaptive response? This information superhighway, which has been designed around short-form content and in the hands of marketing marvels where every click counts, often leads us down several rabbit holes keeping our extended yet mindless attention. This has impacted our ability to consume long-form content; we simply no longer have the mental muscle to stay focused for longer than a few minutes or a maximum of 400 words7. All this knowledge at our fingertips coupled with the democratisation of information through channels such as YouTube, where anyone and everyone is a self-proclaimed expert, has served only to transform us into overwhelmed, passive consumers of information, but only if it is short. Nevertheless, learning remains an active process that requires time, effort and direction. 3. Evolving into Modern Virtual Learners & The Four Hindering Barriers “To embrace our future, rise to the occasion and seize the opportunities will take more than the simple consumption of information that has come to characterise our virtual world.” To become lifelong learners requires first that we evolve into Modern Virtual Learners. The Association for Talent Development (ATD) defines a modern learner as someone in a fast-changing environment where content evolves quickly and learning needs to keep pace8. With the rate of change and complexity we are facing, it is more important than ever to be able to learn quickly and adapt to new situations. Modern learners need to be able to find answers quickly and assimilate knowledge from many different sources. The Covid-19 Pandemic accelerated our shift to digital, resulting in most learning now taking place in a virtual environment. In other words, almost everyone today is or should be striving to become a modern virtual learner. Surely our transition should be effortless – we have both the conditions and the tools, so what then is holding us back? We still have a narrow understanding of the behavioural drivers of modern learners in the context of their environment, contributing to the slow rate of adoption, high drop-off rate, and low rate of return on investment in learning technologies. Research indicates four main factors hindering our learning evolution: 1. Time Management: Many learners find it difficult to manage time with full-time employment and family commitments. Worsened by employee-employer tension: employees feel organisations should provide dedicated learning hours during workdays, whereas employers often believe lifelong learning should be pursued outside working hours. 2. Self-Motivation: Many learners fail to complete courses due to diminishing motivation. After enrolling, the actual reality of effort, time, and intellectual dedication exceeds initial expectations, causing individuals to drop out or delay course completion indefinitely. 3. Structural Support: Learners lack financial, institutional, and emotional support. Bombarded by conflicting messages regarding necessary future-proofing skills, they struggle to determine where to start, frequently selecting non-fit-for-purpose courses that erode completion desire. 4. Learning Culture: Hindered by the dominant organizational learning culture. Regardless of slogans displayed on office walls, true culture is manifested in the physical structures, processes, technologies, time allocations, and performance incentives made available to support learning. 4. Re-engineering Learning Culture & Critical Competencies As the world continues to change, the knock-on effect on business models and the accountancy profession presents an opportunity for organisations, along with Professional Accountancy Organisations (PAOs), to help evolve or rather revolutionise the accountant’s transition into the modern world of learning. By using diagnostics, deeper insight can be gained into the cultural transformation required to embed and sustain a modern learning ecosystem, develop a contextual understanding of learners’ behavioural drivers, and take steps to appropriately re-engineer the learning culture and environment to support accountants to upskill themselves rapidly and continuously. “It is increasingly important for accountants to develop competencies that will allow them to stay ahead of the curve.” Concurrently, it is increasingly important for accountants to develop competencies that will allow them to stay ahead of the curve. One way to do this is by understanding themselves in the context of the new world and identifying the areas in which they need to grow and develop. Four core competencies stand out: Digital Savviness: Navigating the virtual world with ease, understanding automation, AI systems, data pipelines, and cyber ecosystems. Critical Thinking: Cutting through the deluge of online noise, filtering misinformation, and analyzing multi-dimensional strategic problems. Agility & Discernment: Rapidly adapting to volatile business landscapes and executing discerning responses to emerging regulatory and technological shocks. Deep Interpersonal Skills: Cultivating high-trust stakeholder relationships, ethical empathy, and leadership needed to fully transition to value creators. With these skills, accountants will be able to navigate the virtual world with ease, cut through the noise online, be agile and discerning in their response to changes, and build the relationships needed to fully transition to value creators. ■■■ References & Source Citations: The Future of Jobs Report 2020 | World Economic Forum (weforum.org) CFO South Africa – Prof Mervyn King: CFOs need to be the chief value officers in their organisations Kevin Dancey – Corporate and Sustainability Reporting – A Look Ahead Papia Bawa – Retention in Online Courses: Exploring Issues and Solutions—A Literature Review Nakarin Pinpathomrat, Lester Gilbert and Dr Gary B Wills – A MODEL OF E-LEARNING UPTAKE AND CONTINUED USE IN HIGHER EDUCATION INSTITUTIONS Elearning Statistics The Art of Smart Brevity - Write Less, Say More | TED Talk The World’s Largest Talent Development Association | ATD ICAI Official Course Announcement • Internal Audit Standards Board November 2022 Batches Virtual Certificate Course on Concurrent Audit of Banks The concurrent audit system of banks has become very crucial and important for banks. The main objective of the system is to ensure compliance with the audit systems in banks as per the guidelines of the Reserve Bank of India and importantly, to ensure timely detection of lapses/ irregularities. In view of the core competence of the chartered accountants in the area of finance and accounting, risk management, understanding of the internal functioning and controls of banks, etc., the banking sector has been relying extensively on them to comply with these requirements of the regulator. The Internal Audit Standards Board of ICAI conducts 11 days Certificate Course on Concurrent Audit of Banks through Digital Learning Hub. The purpose of the Certificate Course on Concurrent Audit of Banks is to provide an opportunity to the members to understand the intricacies of concurrent audit of banks thereby improving the effectiveness of concurrent audit system in banks, and also the quality and coverage of concurrent audit reports. The course is open for the members of the Institute of Chartered Accountants of India. FEES DETAILS: Rs. 5,900/- (including GST) Course Details Link: https://www.icai.org/post.html?post_id=15262 Forthcoming Batches Schedule (Digital Learning Hub): Location / Batch Scheduled Dates & Timings Course Structure and Other Details BATCH 81 November 4–15, 2022(3:00 to 6:00 PM) Structured_IASB_Certificate Course Concurrent Audit of Banks BATCH - 81 BATCH 82 November 18–28, 2022(3:00 to 6:00 PM) Structured_IASB_Certificate Course Concurrent Audit of Banks BATCH - 82 Organized by: Internal Audit Standards Board, ICAI Contact: Chairman, Internal Audit Standards Board, ICAI • Email: cia@icai.in

SPECIAL WRITE-UP • SUSTAINABLE ENTERPRISE VALUE The Chartered Accountant • November 2022 • Vol. 71 • pp. 36–38 (Journal pp. 500–502) The global accounting profession – driving sustainable value creation MK Merran Kelsall President and Chairman of the Board, CPA Australia (Merran.Kelsall@cpaaustralia.com.au). She may be reached at eboard@icai.in Navigating the VUCA Environment: Pressures on Value Perception “Never has the analogy of the VUCA — volatile, uncertain, complex, and ambiguous — world been more poignant. A global rise in the cost of living, coupled with geo-political uncertainties, is providing a very challenging landscape for governments, businesses, and society at large to negotiate. Within these sizeable variables the pressure on and perception of value is becoming increasingly complex.” 1. Redefining Value Creation: Beyond Profit to Stakeholder Impact In trying to pin down a definition of value, it is important to recognise a shift away from a focus on merely financial profits to the broader impacts on, and dependencies of, an organisation within the society in which it operates. This fundamental shift has led to a more diverse expectation of value being required from a broad range of stakeholders1. The balance that needs to be struck between an organisation’s impact and its inputs has led to the rise of the field of ESG (environmental, social and governance) as a framework to determine impact and guide value creation. Consumers, and society, are increasingly demanding that products and services are delivered in a way that would result in the least amount of reasonable impact on the societies in which organisations operate2. An often-used piece of terminology defines this relationship between organisations and their stakeholders as being the bedrock of their social licence to operate. Organisations ignore this fundamental shift in demand at their own peril. “In the pursuit of good corporate governance, organisations are expected to address the needs of a broad range of stakeholders.” Admittedly not all stakeholders have an equal level of power or influence over an organisation. This may lead to lesser consideration being paid to some stakeholders. As we have seen in the recent past, this may be a dangerous approach as collective action could galvanise the efforts of otherwise less powerful stakeholders into a much more impactful whole3. The challenge therefore is in striking an appropriate balance. Organisations need to balance the changing demands of consumers and other external parties with the requirements of the providers of capital. Even member-based organisations (such as professional accounting bodies) and for-purpose entities (such as not-for-profits and charities) need to carefully consider the demands of their members and beneficiaries. Equity Capital & Institutional Investors: Shareholders have historically valued stable earnings, long-term growth, and cash stability. While true for individual investors, large institutional asset managers increasingly mandate ESG parameters4, placing pressure on entities to evidence credentials to attract and retain capital. Debt Providers & Green Lending Margins: Debt providers adapt pricing to risk profiles. Global commercial and investment banks now offer cheaper borrowing rates where projects are verifiable and tied to robust ESG metrics, earning more from green finance than traditional fossil fuel loans5. For professional accounting bodies, members are increasingly expecting their organisations to be leaders and to provide contemporary education and professional development to assist them on their respective ESG journeys. Ultimately, the challenge is to avoid having a myriad of value propositions tailored for each individual stakeholder, that could ultimately cause internal confusion through a lack of clear vision. The primary goal is to ensure that the overarching value proposition is robust enough to address the needs of most stakeholders. 2. Pressure, Opportunity & The Accountant Talent Crunch Against this challenging backdrop it is important to note that the accounting profession has a critical role to play. Accountants establish systems and processes to gather, measure, report, and obtain independent assurance on organisations’ data and their value creation journeys. Accountants also act as business partners and valued advisors to organisations in terms of their respective strategies, business operations and the underlying value propositions that would best support executing on their vision6. With the broadening expectation of value and how this may potentially be defined by organisations, the way that performance is reported would stretch beyond what is shown on the traditional set of financial statements. In some instances, the impacts and value delivered would consist of both financial and non-financial outcomes. Accountants understand the need for and importance of both financial and non-financial information to cohesively articulate how organisations deliver value to a range of stakeholders. “The definition of value is rapidly changing, to encompass more than steady profit margins and to include a broader set of considerations, often through the lens of ESG.” Accountants are subsequently under increased pressure to understand, implement and report on a range of additional sustainability-related dimensions. They need to continue to act confidently in their advisory capacity to organisations, whether this includes considerations around climate, modern slavery, inclusion and diversity, etc. It would be naïve to expect that with all the additional considerations that organisations are facing, the workload on finance teams would remain unaffected. We are aware of the increasing regulatory and reporting burden that accountants face. In the first instance any approach adopted by an organisation should seek to find an optimal balance and seek synergy between financial and non-financial reporting — or extended external reporting — providing an aligned approach to the management of an organisation’s reporting requirements. Ultimately, finance leaders should seek to create a mechanism through which reporting can aid and potentially leverage a myriad of jurisdictional specific regulatory requirements. Apart from the regulatory and reporting burden, a further consideration is the increased expectation for external assurance, particularly as jurisdictions move towards limited assurance being obtained on sustainability-related disclosures. Although auditors have been obtaining assurance on non-financial information for a long time, the technical nature of certain sustainability-related disclosures (carbon emissions and scenario analysis, for example) would require multi-disciplinary teams that harness skills that fall outside of the traditional accounting sphere. In turn, this would require audit managers to lead teams from a variety of backgrounds, heightening the focus on key aspects of team management, communication, and other soft skills. Exacerbating Factor: Global Shortage of Professional Accountants The above challenges are exacerbated by a global shortage of accountants7,8 more broadly, and specifically those who possess the skills required by a raft of new sustainability-related dimensions9. Given this, capacity building is key to safeguarding the future of the profession and to allow accountants to thrive in their careers as they face an ever-evolving landscape10. 3. CPA Australia’s Response & The IFAC Four Pillars In aligning the role of the accounting profession to the needs of a fast-evolving landscape, the International Federation of Accountants (IFAC) proposes a response based on four distinct pillars: 1. Strategic Advocacy: Advocating on behalf of members and the public interest for regulatory alignment across global jurisdictions. 2. Skills Development: Building future academic curricula and flexible contemporary CPD to bridge technical and soft skill deficits. 3. Proactive Reporting: Supporting early adoption of comprehensive sustainability reporting and independent external assurance. 4. Integrated Mindset: Championing integrated thinking to connect strategy, governance, performance, and stakeholder value creation. CPA Australia believes that professional accounting bodies are ideally placed to support IFAC’s pillars. This is in part due to their ability to advocate on behalf of members and in the broader public interest. Secondly, professional accounting bodies can translate changes to the sustainability landscape and how these impact business operations, reporting, and assurance into educational offerings. Our advocacy focuses on alignment between the various regulatory frameworks and legislative instruments used by governments — in particular, how these would best align with the intent of sustainability and support businesses to report on their responses to sustainability-related risks and opportunities. With a view towards alignment, we endorse the work of the International Sustainability Standards Board (ISSB) in setting the global baseline for sustainability-related financial disclosures. It is our belief that the ISSB’s work will aid clarity and create effective synergies as it consolidates legacy frameworks into a cohesive whole. We believe that professional accounting bodies, such as CPA Australia and the ICAI, are best placed to address the uplift required in both the technical skills and competencies of accountants through two focal strategies: • A View to the Future (Academic Offerings): Adjusting academic offerings for future members to ensure that they are equipped with the relevant sustainability, digital, and governance skills from the very onset of their careers. • A Focus on the Now (Anytime, Anywhere, Anyhow CPD): Providing continuing professional development in a timely, easily digestible, and technologically adept format: learning “anytime” (flexible hours), “anywhere” (home, office, or travelling), and “anyhow” (mobile micro-credentials)11. 4. Reporting, Assurance & The Power of Integrated Thinking The importance of reporting and assurance is undeniably clear. We are, however, mindful that by way of a logical sequence, organisations would benefit from considering the resilience of their business models and strategies to a range of sustainability-related considerations in the first instance. Reporting would then aid the articulation of their response to the risks and opportunities that they face. In turn, reporting would benefit from external assurance, as this would lend impartial credibility to the claims that organisations make to a range of stakeholders through their disclosures. Assurance also reduces the risk of greenwashing. As we have already mentioned, the reporting and regulatory burden that organisations, and indeed accountants, face is substantial. It is our view that as organisations progress in maturity along their respective sustainability journeys, they will grow more adept at understanding the inter-related nature of sustainability considerations, and how best to provide a succinct and useful narrative to the users of such information. Integrated Thinking as the Core Enabler of Resilience: It is our opinion that integrated thinking is best placed to support such an approach, enabling cross-functional communication and understanding, unlocking value, and ultimately supporting resilience in operations. CPA Australia firmly believes in the value of Integrated Reporting, founded on integrated thinking, to communicate how an organisation’s strategy, governance, performance, and prospects, in the context of its external environment, create, preserve, or erode value in the short, medium, and long term. Our commitment to this belief is demonstrated in no better way than through the preparation and publication of our award-winning annual Integrated Report12. ■■■ References & Regulatory Sources: RIAA, From Values to Riches 2020, March 2020. European Union Sustainable Finance Disclosure Regulation (SFDR): https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019R2088 Dutch Supreme Court landmark ruling demanding climate action (Urgenda Foundation): https://www.theguardian.com/world/2019/dec/20/dutch-supreme-court-upholds-landmark-ruling-demanding-climate-action APRA, Understanding and managing the financial risks of climate change, February 2020. Australian Financial Review, Banks earn more from green finance than from fossil loans, 2022: https://www.afr.com/companies/financial-services/banks-earn-more-from-green-finance-than-from-fossil-loans-20220106-p59mfm IFAC, Time for Action on Sustainability: https://www.ifac.org/system/files/publications/files/IFAC-Time-for-Action-on-Sustainability.pdf Accountants Daily, Where have all the accountants gone?: https://www.accountantsdaily.com.au/appointments/17488-where-have-all-the-accountants-gone Bloomberg Tax, Accountant shortage, resignations fuel financial reporting risks: https://news.bloombergtax.com/financial-accounting/accountant-shortage-resignations-fuel-financial-reporting-risks NASBA, The role of accountants in the rise of ESG reporting: https://nasba.org/blog/2022/09/15/the-role-of-accountants-in-the-rise-of-esg-reporting/ In The Black (CPA Australia), Investor calls for ESG reporting heat up: https://intheblack.cpaaustralia.com.au/environment-and-sustainability/investor-calls-for-esg-reporting-heat-up CPA Australia Career Development – Micro-credentials: https://www.cpaaustralia.com.au/career-development/courses-and-events/courses-and-online-learning/micro-credentials CPA Australia Annual Integrated Report: https://annualreport.cpaaustralia.com.au

SPECIAL WRITE-UP • DIGITAL TRANSFORMATION & TECHNOLOGY The Chartered Accountant • November 2022 • Vol. 71 • pp. 40–42 (Journal pp. 504–506) The Digital Age Profession and the Role of Technology JP Julia Penny President, Institute of Chartered Accountants in England and Wales (ICAEW). She may be reached at julia@jspenny.co.uk and eboard@icai.in Permanent Post-Pandemic Transformation & Structural Shift 10–15 Year Horizon “The technological make-up of the office has permanently transformed post-pandemic. It has created a foundation from which more advanced technologies, such as automation and AI will be adopted across the board, including within audit practices and the finance function.” Within 10–15 years, around 30–40% of the typical jobs within finance and accountancy will disappear. These will mostly comprise lower level, transaction-heavy roles, but it is a major change. Professionals need to be aware that the way we work is going through a massive, transformative change. This is a global trend; ICAEW receives delegations from professional accountancy bodies across the world. All are seeing these changes taking place across the profession. 1. Post-Pandemic Acceleration & The Adoption Chasm We’ve made some great strides in the last few years. The pandemic accelerated the adoption of a lot of technology that has been available, but people had not been comfortable with using them. Some parts of the profession have historically been quite slow to adopt some technological advances that you might have expected to see. That’s hugely accelerated throughout the pandemic. This change is happening at different paces across the profession. As with any transformation, some people and organisations are faster at adopting change than others. Newer businesses set themselves up with change at the heart of what they do, while legacy businesses are trying to adapt. We have this very odd landscape between those that are really getting the need to go digital, concentrating on app stacks and making sure that they can serve their clients effectively in a digital-first way. Then you have others that are slower to adoption, and some technologies, such as data analytics, are not being adopted as quickly outside of the biggest firms. At whatever stage in technology adoption, digital technology is a huge opportunity for accountants, and something they can no longer ignore. Digital-First Practitioners: Focusing proactively on integrated cloud app stacks, automated workflows, and serving clients seamlessly in a digital-first environment with continuous client touchpoints. Legacy & Slower-Adopting Entities: Hindered by legacy inertia where advanced technologies like big data analytics, automated testing, and machine learning models are lagging behind outside the largest tier firms. 2. Current Trends: Cloud Collaboration, Agile Work & Audit Evolution More than anything, the pandemic has driven a mindset change when it comes to technology. As we all had to find new ways of working remotely, organisations have adopted tools such as cloud technology to facilitate this change effectively. “Cloud technologies make it much easier for people to collaborate and access information from different locations, and work together on it. It allows businesses to be just a little bit more responsive to changing situations.” — Ian Pay, Head of Data Analytics and Tech, ICAEW Larger organisations may have adopted cloud technology already, but it’s certainly more ubiquitous now. People are more open to embracing technology, partly because they have no choice, says Esther Mallowah, ICAEW’s Head of Tech Policy: “Going forward, I think that will remain. I think people are just generally more open to tech and incorporating that into their day to day lives, including work.” People have embraced agile ways of working more as well, Mallowah says. Having worked in an internal audit team prior to her current role, she saw this firsthand – doing more stand-up meetings, for example, which is easier to execute in the virtual space: “Before, you would be trying to organise diaries and spaces for people to meet, but as long as the time slot is sensible, you could pretty much get everybody together quite quickly. This has, in some ways, made the audit process faster and more efficient. It also improves the quality of deliverables, because everybody is pitching in along the way.” There is also a much greater emphasis on the way that audit practices obtain information from clients, says Pay. During the pandemic, auditors couldn’t sit in a client’s office for weeks, sorting through paper records. New methods needed to be developed: “That’s a combination of using sort of document repositories – such as SharePoint – or the use of more in-house or custom developed tools to manage requests and exchanges of information. As the data businesses can collect becomes deeper and more complex, auditors need the tools to allow their clients to provide a large volume of information in a consistent and repeatable way. That again, doesn’t require you to be in the same room. It’s really focused people’s minds on this ability to get information from clients in a better, more consistent and more digitised way.” — Ian Pay, Head of Data Analytics and Tech, ICAEW 3. The Acceleration of AI, Real-Time Analytics & Cybersecurity The past two years have also seen accelerated movement towards Machine Learning and AI. These trends existed before the pandemic, but are being adopted at a faster pace, Mallowah explains. “Automation is being applied to day-to-day transactional activities. It means that accountants in practice and business have had to become more strategic within their roles, using these tools to provide better advice to the wider organisation.” This is particularly helpful when the reports prepared by accountants are shifting to include more than just typical financial data. “We’re using more data around things such as sustainability and net zero. There’s been more of a need to curate different types of data from different systems than before.” “Machine learning and AI have a significant role in scenario planning, which has been a huge priority over the past few years, where the global economic environment has been uncertain and unpredictable.” “You can use data tools to plan out a much broader range of scenarios than would be possible through more traditional modelling techniques,” says Pay. “People are starting to embrace the technology to help them with their scenario planning and be able to be prepared. There’s certainly a shift in accountancy from being backward looking to being more real time and looking to the future.” Another trend driven by technology adoption has put cybersecurity to the front of mind for many organisations. With more critical data stored on the internet and employees accessing it from workspaces at home, entities face heightened cybersecurity vulnerabilities. Heightened Cloud Cybersecurity Perimeter: “Using secure communication channels and VPNs that a lot of people didn’t really understand before. A lot more people have a better base understanding of some of these basic security principles. The move towards the cloud is one of the big considerations. You don’t have that physical data centre that you can keep under lock and key in your head office anymore.” — Ian Pay, ICAEW Head of Data Analytics and Tech 4. Preparing for Change: Data Literacy, AI Ethics & Human Differentiation All of these trends have a considerable impact on the work that accountancy professionals do, and inevitably, it will change the skills and talent need for the profession. Mallowah says that as a starting point, professionals need an understanding of the tools available and how they apply to their roles: “A lot of their roles are now going to be done digitally and through those tools, so depending on their role, accountants might need to get a bit more technical in their understanding of tools. For example, if they’re auditors and they need to rely on AI or machine learning. They need to understand things such as ethics around AI, for example. They need to be aware of what the risks are and how to address that.” It is advisable for professionals to acquire skills that allow them to become more strategic – being able to extract insights from data and discern what it means for an organisation. Chartered Accountants should seek to do things that machines cannot do. That means getting involved with management, strategy, negotiations, etcetera. Essentially, anything that involves human interaction. Emotional Intelligence & Advisory: The compliance roles in your company will not be there in the same way. But clients and stakeholders will want our expertise applied in deeper, more strategic ways. We can look at data and analyse it and advise on how to make improvements. Emotional intelligence and being able to communicate clearly with people will become even more important as we continue to transition to this more technology-oriented way of doing things. Common Data Platforms (Engine B): While deepening data and the growing need for data literacy could prove a challenge for accountants, organisations are developing tools to ease the transition. For example, Engine B is developing a common data platform to allow accountants to map data in a quick, easy and efficient way, meaning they can focus on what they are good at. We know the technology is there, but we also need the tools to realise the benefits. Business leaders need straightforward, practical advice in the current climate, and Chartered Accountants are well placed to deliver it. During the pandemic, professionals in advisory and non-executive director roles have been pivotal in ensuring that organisations were able to weather difficult storms. This short-term thinking, plus long-term leadership, will be the critical work of the profession. Chartered Accountants will see an increase in the volume of technology across their organisations. More activities across various departments will be more interconnected. The demand for Chief Technology Officers (CTOs) within organisations will only keep increasing. And accountants will be at the heart of business, driving strategy in a technologically savvy way. The Strategic Imperative: Digitalise Practice or Risk Obsolescence “If the pandemic has shown us anything, it’s that it’s vital to embrace new technology. Legislation is driving the digitalisation of business, and if business is digitalised, then practice needs to be digitalised. Chartered Accountants need to look at the steps they need to make to keep up with the rate of change. You constantly have to look at what new tools and technologies are available and the advantages they can offer.” — Julia Penny, President, ICAEW ■■■

SPECIAL WRITE-UP • ECONOMIC PHILOSOPHY & ETHICS The Chartered Accountant • November 2022 • Vol. 71 • pp. 44–46 (Journal pp. 508–510) Market Economy, Prisoner’s Dilemma, and Accountants IJ In-Ki Joo Immediate Past President of IFAC • Professor Emeritus, Yonsei University (inkijoo@gmail.com). He may be reached at eboard@icai.in Adam Smith, John Nash & The Dilemma of Trust The market economic theory is well known across the world. Adam Smith, the author of The Wealth of Nations, said that if everyone works for themselves to maximize their own profit, society will most effectively and efficiently create wealth through the invisible hand. For example, when each baker works to produce the best bread to win the competition against other bakers, society will have the best quality bread at the lowest possible price as a result of the competition. Before Adam Smith’s work, the dominating perception was that people were supposed to work to serve God, the king, or the great cause. The message that people’s behavior of maximizing their own benefits would eventually lead to society’s maximum prosperity was shocking news and a breakthrough concept at that time. Over the last 200 years, many countries that followed the market economy as their central economic policy have created more wealth than other countries that pursued other economic models. 1. The Prisoner’s Dilemma: Why the Invisible Hand Breaks Down However, we have also observed that the market economy can also create many social problems. For example, what happens to the losers if the winners take all the benefits? Do they lose everything? In fact, we also need losers to survive and for them to be able to participate in the next round of competition. Therefore, the winners should share the spoils with the losers to maximize society’s long-term benefits. The competition must continue to keep the market productive. We want to encourage winners enough to continue their hard work, but we also don’t want losers to lose motivation and want them to survive for the next competition. The market economy is expected to be a long-term, almost endless repetitive game. There is another theory that the market economy does not guarantee the maximum benefits for society. The Nobel Laureate John Nash introduced the “Prisoner’s Dilemma” in his famous game theory. When one party is not sure that the other party will keep to the rules in the competition, each party’s decision to maximize their own benefits does not guarantee the best results for society. First-Best vs. Second-Best Equilibrium in the Absence of Mutual Trust: Suppose competitors have no trust that their counterparts will follow certain rules established by the authorities. In that case, competitors will not make a decision that will produce win-win results (the first-best solution). They will make decisions that create less than maximum benefits but are more guaranteed results for themselves (the second-best solution) at the expense of the competitors’ trust. In other words, if you are not sure that the counterparts will keep to the rules agreed upon by rule makers, everyone in the competition will end up making the second-best decisions. As a result, society in aggregate will suffer the cost of not making the first best results. In this situation, the invisible hand will not function as well as predicted by Adam Smith. 2. Corruption, Social Contract & The Three OECD Typologies For Adam Smith’s competition to produce its best results for society, everyone in the market should believe that every participant will observe the rules. In this context, the government has a role in establishing the rules that every participant should follow. As Thomas Hobbes argued in his social contract theory, the state should be responsible for maintaining order and establishing trust among constituents that everyone will observe the rules. A corrupted government means a government that destroys social trust. According to the OECD definition, there are three types of corruption: 1. Petty Corruption: Occurs between low-level (frontline) government officials and civil petitioners. Petty corruption is the easiest to detect and punish, but its aggregate macroeconomic effects are comparatively limited. 2. Grand Corruption: Occurs between high-level government officials and particular persons or enterprises. Includes granting privileges to participate in state projects (such as airports or highways) without fair and proper competition. 3. Political Corruption (Most Harmful): Includes launching a less urgent state project over the most urgent one, or mislocating bridges/airports to curry constituent favors. Causes the most severe societal damage but is extraordinarily difficult and costly to legally prove. “Grand Corruption includes granting a specific individual or an organization the privilege to participate in a state project, such as the construction of an airport or highway, without going through a fair and proper competition.” Even though constituents of a society know that political corruption occurs, they can’t do anything about the crime because it is too risky and costly to prove its existence. Where political and grand corruption occurs without punishment, the government’s efforts to detect and punish petty corruption only cause cynicism in society. In this environment, society does not trust the government’s genuine efforts to keep rules and order for the market to function well. Therefore, the market mechanism is not guaranteed to produce the first-best results. “It is not about accounting – it is about improving people’s lives by holding governments to account to deliver on their obligations without hiding the facts about who will pay for them.” — Thomas Muller-Marques Berger, EY Partner and IPSASB CAG Chair (2014 World Congress, Rome) Empirical Correlation: Public Sector Corruption (CPI) vs. GDP Per Capita: Correlation = 79% An empirical examination of the perceived levels of the Corruption Perceptions Index (CPI) published by Transparency International (TI) against the rank of GDP per capita across market economies reveals an overall correlation of 79%1. It demonstrates that the more corrupted an economy is, the less effective the market mechanism is at generating societal wealth. 1 The correlation among top 30 GDP countries is 45%, and 65% for the top 50 GDP countries. Transparency (social trust) is a necessary prerequisite for economic growth, while factors like innovation and creativity sustain momentum as economies advance. 3. Citizenship in Leadership & The Limits of State Machinery Governments have a certain responsibility to set up rules and ensure all participants follow them. But as Peter Drucker observed in Post-Capitalist Society, the government’s role is very limited and inefficient in a modern, complicated, fast-moving society. Leaders and individuals equipped with citizenship are essential to build and maintain market trust. The True Meaning of Citizenship: Citizenship means that people – especially leaders – let the public interest take precedence over individual interest when personal interest conflicts with the public cause. Individuals can maximize their own benefits as long as it promotes the public interest or causes no harm. For corporations, this citizenship is manifested as corporate social responsibility (CSR). 4. Accountants Should Play a Key Role to Build Trust & AI Reality When AlphaGo won one-sidedly against world champions in 2015 and 2016, many predicted accounting would be among the first professions replaced by Artificial Intelligence. Over the past decade, that prediction has proven completely false. Rather than being replaced, the profession has embraced technology to alleviate routine, lower-value tasks and transitioned toward strategic value creation. “Artificial Intelligence will not replace human creativity yet and it certainly can’t deploy ethics, judgement or professional skepticism. In the era of Artificial Intelligence, professional accountants become more essential and valuable constituents in the market economy.” IFAC comprises 172 members and associates across 129 countries and jurisdictions, representing approximately 2.5 million professional accountants in public practice, education, government service, industry, and commerce. The Crucial Role of PAIBs (Professional Accountants in Business) & IESBA Code Part 2: Among the 2.5 million accountants globally, more than 60% work in business and the public sector (PAIBs). They shoulder direct institutional responsibility for cultivating societal trust, yet their contributions are often less visible than those of external auditors. The International Ethics Standards Board for Accountants (IESBA) issued the International Code of Ethics, where Part 2 is explicitly dedicated to PAIBs. Unfortunately, most PAIBs remain unaware of Part 2, and many countries fail to translate it into local languages. To remain indispensable, PAIBs must champion public confidence, uphold professional responsibilities, and safeguard the public interest. 5. Conclusion: Accountants as Moral Linchpins of the Economy The market economy is based on the premise that participants act with integrity by observing rules and putting the public interest before maximum private benefits. Although the government is the designated agent responsible for establishing trust in the market, society’s leaders are getting to play a more critical role in upholding that trust. Professional accountants, who have the code of ethics to observe, are still essential in the era of Artificial Intelligence for the market economy. As they stand for the public interest when the organization is in conflict with the public interest, they will be a key element to lead the market economy to be successful. ■■■ CA ANZ Education Pathway Feature • WCOA 2022 Proud Gold Plus Sponsors Chartered Accountants ANZ Two Accounting Qualifications with One Study Pathway The CA Masters pathway allows students who undertake a Master of Professional Accounting in select universities in Australia or New Zealand to complete the CA Program modules in the final year of their degree – with no extra tuition fees, study, or certification. Learn more about the CA Masters pathway at the CA ANZ Stand at WCOA 2022. “At the end, you graduate with a Master’s degree from a leading university and an internationally recognised qualification from one of the leading professional bodies in the world.” “... be recognised in different countries without further loss of time or further qualifications required.” Professor Rahat Munir FCA, Head of Department of Accounting and Corporate Governance, Macquarie University, Australia Difference Makers ™

SPECIAL WRITE-UP • NATIONAL ECONOMIC TRANSFORMATION The Chartered Accountant • November 2022 • Vol. 71 • pp. 48–51 (Journal pp. 512–515) India: A Land of Opportunities DB Deepak Bagla MD & CEO, Invest India • Reachable at deepak.bagla@investindia.org.in and eboard@icai.in Post-Pandemic Beacon of Stability & Sharpest Economic Turnaround In the post-pandemic world, India has emerged as a beacon of stability and growth. The fastest-growing large economy, India saw the highest turnaround among large economies with GDP growth making a swift and sharp rebound, expanding by 8.7% in FY 2022. Merchandise Exports Breakout > USD 400 Billion Breached the USD 400 Bn mark for the first time in FY22 with a 45% jump, surpassing growth in Canada (31%), USA (28%), and China (24%). Services Exports Milestone USD 250 Billion While global services exports suffered severe pandemic impacts, India achieved its target of USD 250 Bn in FY 2021–22, registering 21.3% growth over the previous year. 1. In its 75th Year of Independence: Surpassing the UK to Rank 5th Globally In its 75th year of Independence, India recently surpassed the United Kingdom to become the 5th largest economy in the world at USD 3.1 Trillion real GDP, climbing from the 11th position in 2014. While it took India 60 years to become a Trillion-dollar economy and another 7 years to reach the second Trillion, the pace and scale of transformation taking place in India is ensuring that subsequent milestones arrive with ever-shortening durations. As per IMF estimates, the Indian economy is expected to jump another two trillion in less than 5 years to breach the USD 5.5 Trillion mark, surpassing Germany to become the 4th largest economy. With sustained momentum in real GDP growth, India is likely to become a USD 10 Trillion economy by 2030, firmly cementing its global position as an economic powerhouse. India’s Accelerating Trillion-Dollar Trajectory: 1st Trillion 60 Years Post-Independence to 2007 → 2nd Trillion 7 Years Achieved 2014 → USD 5.5 Trillion < 5 Years Surpassing Germany (#4) → USD 10 Trillion By 2030 Global Economic Powerhouse 2. Make in India for the World: Historic FDI & Industrial Schemes India has been witnessing an unprecedented amount of capital flowing into the country from prominent investors worldwide, with FDI inflows growing consistently since 2014–15. As we celebrate 8 years of the launch of the ‘Make in India’ initiative, annual FDI inflows have reached a record USD 83.6 Billion. These investments have arrived from 101 countries across 57 sectors and 30 states, with nearly all states in the country receiving a share of FDI over the last year. Capitalizing on the window presented by the pandemic, India has liberalized even its hitherto sensitive sectors such as defence, space, and mining. India today is one of the most open economies for FDI in the world, with most sectors open to 100% under the automatic route. With a revamped Viability Gap Funding (VGF) scheme boosting private investments in social infrastructure, there is tremendous scope for companies to expand investments in critical sectors such as health, education, and sports. Production-Linked Incentive (PLI) Scheme (USD 26 Bn Package) Introduced across 14 core manufacturing sectors – including electronics, pharmaceuticals, automotive, Advanced Chemistry Cell (ACC) batteries, solar PV modules, and white goods (home appliances). Expected fresh investment infusion: nearly USD 50 Billion Estimated production surge: ~USD 520 Billion over the next five years Multiplier effect: doubling employment and empowering MSME supplier networks Semiconductor & Display Ecosystem (USD 10 Bn Scheme) A dedicated USD 10 Billion incentive scheme launched to build a world-class semiconductor fabrication and display-design ecosystem in India. Ensures globally competitive, cutting-edge technology products are engineered and manufactured as authentic ‘Made in India’ hardware. Building on outcome-centered policy reforms and a massive domestic consumer base, India is now second only to China as a preferred manufacturing destination. Several new Free Trade Agreements (FTAs) – including agreements with the United Arab Emirates (UAE), Australia, Canada, and the European Union (EU) – are integrating India into global supply chains, unlocking a new window of opportunity to ‘Make in India’ and ‘Make for the World’. 3. Transforming India: EoDB Leap, Tax Rationalization & Institutional Governance Dedicated government efforts enabled India to jump 79 places in the World Bank Ease of Doing Business (EoDB) rankings between 2014 and 2019, leaping from 142nd to 63rd position. With over 30,000 compliances already reduced or decriminalized, mission-mode initiatives are actively underway to break into the global top 50. Key structural interventions include: Taxation & Labour Code Reforms: Corporate tax slashed from 34% down to 15% for new manufacturing units. 29 complex central labour enactments consolidated into 4 streamlined Labour Codes providing hiring and retrenchment flexibility. Streamlined Intellectual Property Rights (IPR) regime. GST & Insolvency Bankruptcy Code (IBC): GST created unified nationwide logistics and warehousing efficiencies. The Insolvency and Bankruptcy Code (IBC 2016) established smooth exit pathways, allowing institutional investors to acquire world-class distressed assets via time-bound liquidation processes. RoDTEP, ODOP & District Export Hubs: RoDTEP Scheme and Custom Bonded Warehouse Scheme refund embedded exporter duties. One District One Product (ODOP) supports 700+ local products across all districts; District Export Hubs (DEH) have helped over 16 states attain record export figures. Digital Institutional Handholding Platforms: Project Development Cells (PDCs): Operational across 29 central Ministries and Departments to handhold investors, monitored under an overarching Empowered Group of Secretaries (EGoS). National Single-Window System (NSWS): Soft-launched in September 2021, integrating Central and State clearance mechanisms into a unified digital portal to eliminate duplicate applications. India Industrial Land Bank (IILB): GIS-enabled interactive mapping portal allowing investors to view and select industrial land parcels across 4,500+ industrial parks nationwide. Measurable Dividends of Focused Governance: • Mobile Manufacturing: Leaped from just 2 units in 2014 to over 200 units, making India the #2 mobile handset manufacturer globally. Apple now assembles flagship iPhones via Foxconn under PLI. • M&A Surge: 200% increase in cross-border merger and acquisition transactions compared to 2017 levels. • PE / VC Investment: Surged by 55% since 2019, hitting an all-time record of USD 70 Billion in 2021. 4. Infrastructure as a Pillar of Growth: PM Gati Shakti, NIP, NMP & Logistics Another key pillar of the Hon’ble Prime Minister’s vision of an Atmanirbhar (self-reliant) ‘New India’ is holistic and sustainable infrastructure development. The multi-modal master plans currently driving development comprise: PM Gati Shakti (USD 1.4 Trillion): National Infrastructure Master Plan coordinating 16 Ministries and States for synchronized execution across Roads, Railways, Airports, Ports, Mass Transport, Waterways, and Logistics. National Logistics Policy (NLP): Targets slashing domestic logistics costs from 14% of GDP to below 10% and elevating India into the top 25 nations in the World Bank Logistics Performance Index (LPI). National Infrastructure Pipeline (NIP): Identifies over USD 1.4 Trillion in investment opportunities across clean energy, drinking water, healthcare, modern rail hubs, airports, and world-class educational institutions for 1.4 billion citizens. National Monetization Pipeline (NMP): Unlocks private investments by recycling operational brownfield public assets with an aggregate estimated potential of USD 80 Billion. A robust secondary market has emerged for Indian infrastructure assets. Global Sovereign Wealth Funds, Pension Funds, and Private Equity consortiums are actively acquiring National Highway concessions, airport assets, telecommunications towers, gas pipelines, and commercial real estate. Simultaneously, Infrastructure Investment Trusts (InvITs) have democratized access, allowing domestic retail investors to participate in infrastructure wealth generation. 5. Innovation Fuelling Growth: Patents, R&D Hubs & The Startup Ecosystem India is rapidly transitioning into a top-tier global Innovation and R&D hub. In the Global Innovation Index (GII) 2022, India ascended to 40th rank, soaring 41 spots up from 81st position in 2015. Over the last 7 years, regulatory IPR reforms powered a remarkable 572% growth in patent grants, while patent filings surged by over 50%. Asia’s Premier R&D Destination: India hosts 27% of Asia’s New Innovation Centers, with 55+ global unicorns operating dedicated Indian R&D centers. R&D exports have more than doubled in three years, making India a net exporter of R&D across sunrise domains: AI, geospatial systems, drones, semiconductors, space economy, genomics, pharmaceuticals, green hydrogen, and clean mobility. World-Leading Mobile Data Consumption: With over 1 billion mobile phone users, India boasts the highest per capita mobile data consumption globally – greater than the United States and China combined – up from rank 122 five years ago. Rural users generate 45% of total data consumption, while the broader Internet economy is headed toward USD 1 Trillion by 2030. Startup India (Launched January 2016): World’s 3rd Largest Startup Ecosystem • Global Rank: #3 in unicorns, #2 in total startups, and #1 globally in new startups added daily. • Scale & Breadth: Over 74,500 government-recognized startups across all 36 States & UTs in 650+ districts across 56 industries. • Decentralized Dynamism: 47% of startups emerge from tier-2 and non-metro cities. • Unicorn Explosion: Created a record 44 unicorns in 2021; added 22 unicorns (worth USD 24.67 Bn) in 2022. 1 in every 10 unicorns globally is born in India. • Capital Inflows: Secured USD 9.3 Billion from venture capital and risk investors even at the height of the COVID-19 pandemic. • STEM Leadership: Powered by the world’s second highest number of STEM graduates, backed by the New Education Policy (NEP) and the Prime Minister’s mantra: “Skill, Re-skill and Up-skill” for the “Indian Techade”. 6. The Digital Revolution: India Stack, JAM, UPI & ONDC Democratization The India Opportunity story is anchored by the India Stack – an open API digital public infrastructure that enables presence-less, paperless, and cashless service delivery across governments, private enterprise, startups, and developers. The JAM Trinity Foundation: Jan Dhan: World’s largest financial inclusion program with 450+ Million accounts. Aadhaar: World’s largest biometric system covering 99.7% of citizens. Mobile: 920 Million Aadhaar numbers linked to 900 Million mobile devices, constituting the largest economic inclusion marketplace on Earth. UPI & Digital Payments (USD 10 Tn Ecosystem): India’s fintech adoption rate is 23% higher than the global average. In August 2022 alone, Unified Payments Interface (UPI) processed 6.57 Billion transactions valued at ₹ 10.73 Trillion. Annual digital payment values will jump from USD 300 Bn in FY 2021 to USD 1 Trillion by FY 2026. Democratizing E-Commerce via ONDC & Infrastructure Status for Data Centres: The Open Network for Digital Commerce (ONDC) is a pioneer facilitator-driven, open-protocol decentralized network designed to eliminate platform monopolies and onboard local mom-and-pop stores and MSMEs onto digital commerce. ONDC is projected to increase e-commerce penetration from 10% of retail to 40–50%, driving a Gross Merchandise Value (GMV) of USD 48 Billion over the next five years. Furthermore, granting Infrastructure Status to Data Centres in the Union Budget has unlocked preferential long-term credit, catalyzing hyperscale cloud and edge investments across India. 7. Vision 2047: Amrit Kaal & The Journey to a USD 30 Trillion Superpower As India marches into the Amrit Kaal – the 25-year countdown to the centenary of Independence in 2047 – the blueprint for our long-term destiny is clearly defined. Guided by the principle of “Minimum Government, Maximum Governance”, India provides global industry with an unmatched proposition: one of the largest consumer markets, an open and democratic society, the world’s youngest workforce, simplified taxation, judicial strength, a free press, and stable, investor-friendly policy frameworks. Vision 2047 Economic Benchmarks: • Nominal GDP: USD 30 Trillion (World’s #2 Economy) • Per Capita GDP: USD 30,000 (13X increase over USD 2,300 in 2022) As the Hon’ble Prime Minister Narendra Modi declared: “Yehi samay hai, sahi samay hai” (Now is the time, the right time). Indeed, there has never been a more compelling opportunity to invest in India. Today, India – represented by Invest India – proudly holds the Presidency of the World Association of Investment Promotion Agencies (WAIPA). As India hosts the World Congress of Accountants (WCOA 2022) for the very first time, this prestigious convention serves as an indispensable platform for fostering global collaborations, expanding industrial partnerships, and accelerating investments across the subcontinent. ■■■

SPECIAL WRITE-UP • SUSTAINABILITY & VALUE ARCHITECTURE The Chartered Accountant • November 2022 • Vol. 71 • pp. 53–56 (Journal pp. 517–520) Chief Value Officer: Agenda for Sustainability and Integrated Value Chain SM CA. Sanjiv Mehta CEO & Managing Director, Hindustan Unilever Limited • President, Unilever South Asia • Member, Unilever Leadership Executive (Global Executive Board) • Sanjiv.Mehta@unilever.com • eboard@icai.in Navigating the BANI World: Leadership, Digital & Sustainability at Inflection Point Businesses and corporations are fast evolving, in tandem with the BANI1 environment that we live in. In this journey, there are a few major themes that are at their inflection point. In my view, they are: Leadership for the future, Digital, and Sustainability. I am delighted to see that these themes are on top of the agenda of ICAI as they host the World Congress of Accountants for the first time in India. 1 BANI: Brittle, Anxious, Non-linear, and Incomprehensible. 1. Sustainability: The Global Imperative & Climate Commitments We live in a world where volatility and uncertainty have become commonplace. The COVID-19 pandemic has shown in sharp contrast the fragility of our ecosystem and its rippling effects across the world – loss of lives, livelihoods, and economic hardships, to name a few. Social inequality is on the rise – an estimated 70 million people globally have been pushed into extreme poverty just in 2020. This is not the first and will not be the last crisis that humanity will experience. Years of abuse and unsustainable consumption have ravaged nature and adversely impacted climate, leading to depletion of biodiversity and a high risk of zoonotic diseases. Climate change, by far, is the biggest concern looming over humanity and the cost of inaction will exceed the cost of action. The only way to avoid the worst possible climate outcomes is to accelerate our efforts now and stop procrastinating. Since the adoption of the landmark Paris Agreement on climate change in 2015, global momentum to tackle the climate crisis has been building. Individuals, organisations, and governments are making real progress in battling the climate crisis. India’s Decarbonisation Pledges & The Trillion-Dollar Sustainable Finance Need: Emission Intensity Target (2030) 45% Reduction Committed to reducing the emission intensity of India’s GDP by 45% compared to 2005 levels by the year 2030. COP26 Net-Zero Pledge (2070) Net-Zero Emissions Prime Minister Narendra Modi pledged at COP26 to achieve complete net-zero greenhouse gas emissions by 2070. India’s sustainable funding requirements will be in trillions of dollars. This calls for new ways to consider financing and investing in ESG initiatives. This also means that sustainable finance will be the mainstay of business in the future. 2. Not Just Capitalism, But Multi-Stakeholder Capitalism For any business to survive and thrive, the focus must always be on a multi-stakeholder model. We need to look at these from a different vantage point and over a different horizon. It is rightly said: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” We must share the blessings of capitalism to take away the miseries of society and collectively win. The world needs growth and so do businesses. And this growth needs to be good for all – consumers, communities, the economy, the planet, and shareholders. Businesses need to create value not just for shareholders but for every stakeholder across its value chain. “Stakeholder capitalism is about the values of the company, and the way it operates, to reflect the interests of multiple stakeholders all the time.” In August 2019, more than 180 U.S.-based CEOs as part of the Business Roundtable Statement on the Purpose of a Corporation, stated that while individual companies serve their corporate purpose, they share a fundamental commitment to all stakeholders: deliver value to their customers, invest in employees, deal fairly with suppliers, and support the communities in which they operate. The Hindustan Unilever Experience: From USLP to ‘Compass’ At Hindustan Unilever, we have always held the belief that being a responsible, sustainable business makes us a stronger, better business. In fact, we believe it is our only way of doing business. The focus on ‘Doing Well by Doing Good’ goes all the way back to our founder William Lever. Unilever Sustainable Living Plan (USLP - 2010): Codified sustainability ahead of industry. Over 10 years, purpose-led brands consistently outgrew the portfolio, achieved operational eco-efficiencies, and positioned HUL as the number-one employer of choice for talent. The ‘Compass’ Sustainable Business Strategy: Purpose: “To Make Sustainable Living Commonplace”. Vision: leader in sustainable business. Drives consistent, competitive, profitable, and responsible growth through time-bound goals for planetary health, personal wellbeing, and social inclusion. 3. Role of Finance Professionals as Value Architect: The Twin Mandate The evolution of business and taking an integrated approach to business strategy and sustainability is fundamentally altering the role of the CFO and their finance and accounting teams. The CFO is the chief value architect for any organisation and plays a pivotal role in building sustainable businesses. CFOs must help the business recognise the risks and opportunities associated with sustainability and be able to craft a sustainable business model that not only helps achieve better financial returns but also generates positive value for the planet and society. The Core Twin Elements of the Chief Value Officer Mandate: 1. Creating Value: Ingraining sustainability in core business strategy, orchestrating cross-functional execution, linking quantitative performance KPIs, and driving extended value-chain collaboration. 2. Protecting Value: Mitigating material ESG risks, leading global reporting standardization (BRSR, ISSB, TCFD, GRI, SASB), establishing internal controls over non-financial data, and proactive investor engagement. A. Creating Value: Unlocking Sustainable Commercial Advantage Ensuring sustainability is ingrained in the business strategy: CFOs who champion sustainable business practices and build an integrated strategic approach across the value chain will drive superior financial performance. ESG cannot be run by a central team alone; functions such as supply chain, marketing, and procurement must collaborate, with finance teams orchestrating the organisation-wide roadmap. Linking sustainable business performance measurements to value: Finance teams must establish performance management routines and enforce accountability. Like any commercial business plan, finance must set tangible, quantitative performance indicators and hold respective teams accountable for deliverables. Collaborating across an integrated value chain: Amplifying impact requires looking beyond enterprise boundaries – forming coalitions with industry peers, advocating regulatory and policy shifts, and structuring innovative supplier/vendor partnerships across the extended value network. B. Protecting Value: Safeguarding Enterprise Resilience & Trust ESG has become the focal point for governments, investors, society, and regulators. The accounting and finance profession must be at the forefront of bringing transparency, reliability, and auditability to ESG reporting – achieving the same quality as financial reporting without impeding the ease of doing business. 1. ESG Risk Management: Climate disruption and social inequity pose material financial and reputational risks. ESG is now an existential strategic risk requiring immediate leadership from the CFO and Enterprise Risk Management (ERM) functions to design robust mitigation protocols. 2. Reporting Standards & Convergence: Harmonizing the reporting landscape across ISSB, GRI, TCFD, and SASB. In India, SEBI’s Business Responsibility and Sustainability Report (BRSR) leads the way. Indian accountants must spearhead global alignment to ensure uniform disclosure methodologies for capital markets. 3. Internal Controls & Auditing Standards: Evolving auditing standards to enable robust third-party assurance over ESG data. Creating rigorous internal control frameworks over non-financial information to ensure precision, reliability, and audit readiness. 4. Proactive Investor Engagement: Institutional investors actively integrate ESG parameters into capital allocation. CFOs and Investor Relations (IR) teams must proactively engage with analysts, funds, and ESG rating agencies to clearly articulate sustainability progress and risk governance. 4. Building Organisation-Wide Capabilities & Technology Infrastructure A. Demystifying the ESG Alphabet Soup: The myriad ESG acronyms, frameworks, and expanding data requirements can initially feel overwhelming. Finance professionals must first master these guidelines internally and subsequently educate, guide, and upskill the broader enterprise to embrace sustainability. B. Next-Gen Tech Architecture for Non-Financial Disclosures: While ERP systems for financial reporting are mature, technology must now evolve to track non-financial metrics – such as Scope 1, 2, and 3 emissions, effluent water discharge, and renewable power consumption. Enterprise tech solutions must create automated audit trails and internal control frameworks to preclude greenwashing and misreporting. 5. Conclusion: India’s Time to Shine & ICAI’s Foundation for the Future I strongly believe this is India’s time to shine; we have all the elements needed to win in this new era. But we should not forget the old saying: a building is only as strong as its foundation. We as accountants need to provide a strong foundation to build our sustainability programs and lead the digital revolution. As one of the most eminent professional bodies in this country, the Institute of Chartered Accountants of India (ICAI), with its Sustainability Reporting Standards Board (SRSB), should be the torchbearer in building expertise, capabilities, and setting golden standards for the world to emulate. ■■■ Corporate Sustainability Feature • Olam Agri olamagri.com Transforming Food, Feed & Fibre: For a More Sustainable Future We are a market-leading agri-business, focused on high-growth markets, with a global origination footprint, processing capabilities, and deep understanding of market needs built over 33+ years. Driven by our Purpose and guided by our core values: Entrepreneurial Collaborative Sustainable Resourceful Agile Learn more about building resilient and sustainable agricultural supply chains at olamagri.com.

SPECIAL WRITE-UP • ENTREPRENEURSHIP & INNOVATION The Chartered Accountant • November 2022 • Vol. 71 • pp. 58–62 (Journal pp. 522–526) Enhancing the Startup Eco-System in India ST CA. Sunil H Talati Chairman, Services Export Promotion Council (SEPC) • Former President, ICAI • Reachable at talatisunil23@gmail.com and eboard@icai.in “Startup” as a State of Mind & Innovation Culture “Startup” is a global buzzword that in recent years has captured intense focus across the world. An aspirational nation with the largest youth population globally, India cannot be left behind in enabling an agile ecosystem for startup expansion. There are no rigid parameters restricting what type of entity qualifies as a startup. Policymakers and industry leaders characterize a startup as spanning from “a state of mind” to “a culture and mentality of innovating on existing ideas to offer solutions”. Startups are high-growth-fuelled businesses marked by high uncertainty and risk. In terms of business models, firms with unconventional approaches offering new products or services at a nascent stage with scalable revenue streams qualify as startups. Innovation, creativity, and agility distinguish them from traditional enterprises. 1. The 11 Startup Hurdles & The 7 Constituents of a Collaborative Ecosystem Early-stage ventures navigate acute operational, regulatory, and market hurdles. A well-structured national ecosystem must address these systemic friction points: Key Startup Challenges Encountered: Lack of seed and growth funding Scarcity of experienced, talented professionals Technological obsolescence and integration costs Accessing domestic and international customer markets Complex and burdensome regulatory frameworks Lack of affordable legal, accounting, and advisory service providers Inadequate initial government handholding Market congestion and intense competitor crowding Lack of affordable local technical talent Protracted testing, validation, and quality certifications Regulatory risk-averseness across administrative tiers The 7 Collaborative Ecosystem Constituents: Start-ups & Entrepreneurs: Frontline innovators taking calculated risks. Institutes & Academia: R&D crucibles generating patents and scientific breakthroughs. Government Organisations & Agencies: Enablers framing progressive policy and incentives. Investors: Angel investors, venture capitalists, and private equity funds. Mentors: Industry veterans guiding corporate strategy and operational scaling. Incubators & Accelerators: Infrastructure providers offering seed capital and labs. Multinational Organisations: Corporate partners facilitating market entry and procurement. 2. Role of Government of India: Genesis of Startup India Initiative Laying down the roadmap for New India’s economic growth, the Hon’ble Prime Minister in his address on 15th August 2015 from the ramparts of Red Fort announced the Startup India Initiative to unleash the entrepreneurial spirit of India’s youth. On 16th January 2016, the Government of India formally launched the ‘Startup India’ program with the stated mission “to convert India into a nation of job creators from a nation of job-seekers”. “Startup India Initiative is a vision that would enable the talent of India to dream of ideas, put them into action, and convert them into game-changing ventures.” The Startup India Action Plan (19 Action Items across 3 Pillars): 1. Simplification & Handholding 2. Funding Support & Incentives 3. Industry-Academia Partnerships & Incubation The Three-Pronged Operational Strategy: To facilitate a common platform connecting the entire ecosystem while eradicating information asymmetry. To deliver comprehensive fiscal benefits, tax holidays, and handholding support. To engage regional entrepreneurs beyond Tier-1 metros, transforming grassroots ideas into commercially viable ventures (crucial for Vision 2047). 3. Evolution of DPIIT Regulatory Criteria (2016–2019) To broaden institutional support, the Department for Promotion of Industry and Internal Trade (DPIIT) systematically relaxed the legal definition of a startup across three successive Gazette notifications: 1st Notification • 17 Feb 2016 G.S.R. 180 (E) Age: Up to 5 years from incorporation/registration. Turnover: Not exceeding ₹ 25 Crore in any financial year. Nature: Innovation, development, deployment, or commercialisation of new products/processes driven by technology or IP. 2nd Notification • 23 May 2017 G.S.R. 501 (E) Entity Structure: Private Limited (Companies Act 2013), Registered Partnership (Sec 59, Partnership Act 1932), or LLP (LLP Act 2008). Age: Up to 7 years (extended up to 10 years for Biotech startups). Turnover: Not exceeding ₹ 25 Crore in any FY since inception. Condition: Must not be formed by splitting up or reconstruction of an existing business. Present Standard • 19 Feb 2019 G.S.R. 127 (E) (Current Law) Age: Up to 10 years from incorporation/registration across all sectors. Turnover Limit: Substantially enhanced to ₹ 100 Crore in any FY since incorporation. Business Scope: Innovation, improvement of products/services, or scalable model with high wealth/employment generation. Integrity: Non-reconstruction clause strictly preserved. 4. Macro Metrics: India as the 3rd Largest Global Startup Hub As per Invest-India data, India has firmly established itself as the 3rd largest startup ecosystem globally, housing over 77,000 DPIIT-recognized startups across 656 districts (as of 29th August 2022). India ranks 2nd globally in innovation quality among middle-income economies, leading in the quality of scientific publications and top-tier universities. Sectoral Diversification Across 56 Recognized Industrial Sectors: IT Services: 13% Healthcare & Life Sciences: 9% Education (EdTech): 7% Professional & Commercial Services: 5% Agriculture (AgriTech): 5% Food & Beverages: 5% 7-Year Exponential Leap (2015–2022): 15-fold increase in total startup funding volume 9-fold surge in active venture and angel investors 7-fold expansion in physical and university incubators The Unicorn Surge ($340.79 Bn Total Value): Prior to FY 2016–17, India added ~1 unicorn annually. Since FY 2017–18, unicorn additions surged by 66% YoY. As of 7th September 2022, India hosts 107 unicorns valued at $340.79 Billion (44 born in 2021 valued at $93 Bn; 21 born in 2022 valued at $26.99 Bn). 5. Operational Enablers: Startup India Hub, Global Bridges & State Schemes The Government of India institutionalized dedicated physical, financial, and digital architectures to sustain enterprise growth: A. Startup India Hub by DPIIT (Launched April 2016): A central one-stop digital aggregator designed to eliminate friction across the startup lifecycle, providing: • Startup Recognition: Online DPIIT self-certification for Section 80-IAC tax exemptions and public procurement relaxation. • Application Management System: Single gateway for incubators, accelerators, mentors, and corporate challenges. • Partnered Services: Subsidized and free cloud credits, legal advisory, banking services, and patent/trademark facilitation. • Free Online Courses: Structured curricula covering coding, enterprise management, and venture finance. • Knowledge Bank & Templates: Comprehensive guides on company registration, operational legal documents, and HR policies. • Government Schemes Repository: Over 68+ active Central and State schemes filterable by sector and Ministry. • Query Resolution & Handholding: 1-on-1 advisory desk monitored by dedicated Startup India relationship managers. • Blockchain-Based Certification: Verifiable digital certificate validation platform launched on 6th October 2020. International Startup Bridges (>10 Countries): Dedicated cross-border soft-landing corridors with Finland, Russia, United Kingdom, Singapore, Israel, Portugal, Sweden, South Korea, Japan, and Germany to facilitate market entry, capital access, and technological transfer. Flagship Incubation Platforms: Pioneering institutions translating academic research into scalable enterprises, including Atal Incubation Centres (AICs), Indian Angel Network (IAN) Incubator, iCreate Incubator, and Amity Innovation Incubator. 6. Role of SEPC: Catalyzing Services Startups via i-RISE & Global Access The Services Export Promotion Council (SEPC), established by the Ministry of Commerce and Industry, is the apex nodal body mandated to accelerate exports across the entire services spectrum, including the 12 Champion Services Sectors. SEPC operates across four core pillars: Trade Intelligence, Export Development, Export Promotion, and Enabling Business Environment. SEPC Strategic Action Plan for Startups: Launch of i-RISE Programme: Conceptualized as Ideas, Resources, Incubation, Strategies for Exports (i-RISE) to bring all ecosystem stakeholders together for services startups. Global Market Access & Standards Recognition: Overcoming cross-border hurdles (international taxation, compliance, foreign certifications) by lobbying for Indian standards recognition abroad in high-potential verticals: Healthcare, Fintech, Engineering Consulting, Bookkeeping & Accounting, and Architectural Services. VC & Agency Stakeholder Matchmaking: Facilitating structured linkages between venture capitalists, accelerators, and domestic/international trade bodies. Targeted Upskilling Programmes: Designing tailored curricula to meet technical talent acquisition needs for fast-scaling startups. Industry-Institute Partnerships: Bridging academia and commercial industry. Structured Mentorship: Direct knowledge transfer between established industry leaders and young founders. End-to-End Funding Support: Coaching grant applicants, hosting tech roadshows for VCs, streamlining bureaucratic grant applications, and providing institutional tools for startup valuation. “SEPC can play a significant role in connecting venture capitalists, incubators, tech firms and various government agencies-national and international to provide need-based opportunities and solutions.” 7. Conclusion & Authoritative Citations Over the last five years, the rise of Indian entrepreneurship has been nothing short of remarkable. The ecosystem at large has collaborated in unprecedented ways in preparation for the next development phase under Atmanirbhar Bharat. The guidelines outlined in Startup India: The Way Forward will enable the Indian startup scene to expand even faster, serving as powerful catalysts to achieve the common goal of making India the undisputed global startup hub. ■■■ References & Bibliographic Citations: Start-up India Portal (startupindia.gov.in) Invest India Portal (investindia.gov.in) Kirchhoff, Bruce A. and Spencer, Aron. (2008), “New High Tech Firm Contributions to Economic Growth”, ICSB World Conference Proceedings, Washington, International Council for Small Business (ICSB), pp. 1–21. Global Startup Ecosystem Report (2012), Startup Genome (startupgenome.com/reports/global-startup-ecosystem-report-2012). Bailetti, T. (2012), “Technology Innovation Management Review – Technology Entrepreneurship: Overview, Definition, and Distinctive Aspects”, timreview.ca. NASSCOM Productive Conclave (2019), “Indian Start-up Ecosystem” (nasscom.in).

SPECIAL WRITE-UP • PUBLIC SECTOR FINANCE & GOVERNANCE The Chartered Accountant • November 2022 • Vol. 71 • pp. 64–67 (Journal pp. 528–531) Public Financial Management reforms for Trust, Sustainability and Accountability SG CA. Srinivas Gurazada Global Lead, Public Financial Management & Head of PEFA, World Bank • Reachable at sgurazada@pefa.org and eboard@icai.in Transparent Public Reporting as the Bedrock of Governance Transparent and high-quality accounting and financial reporting plays a key role in ensuring trust, sustainability, and accountability in the public sector. Today, accounting can be seen in a wider connotation to cover the entire range of services that the accounting profession provides to the public sector. Often, the breadth, depth, and impact of the accounting profession on governments’ financial operations are not well-understood. This article, on the occasion of the World Congress of Accountants 2022 in Mumbai (WCOA 2022), attempts to unpack global trends in public financial management (PFM) and the impactful role the accounting profession plays in PFM. It makes an urgent call for closer collaboration between accountants, economists, and policymakers to strengthen a whole-of-government approach towards public finances. 1. Public Financial Management & The PEFA Global Diagnostic Governments’ policies are implemented through public financial management (PFM) institutions, systems, and processes. They cover the entire budget cycle from budget preparation, budget execution, to budget evaluation. Sound PFM systems contribute to three fundamental fiscal and budgetary outcomes: (i) Aggregate Fiscal Discipline: Effective and robust control over total budget aggregates and institutional management of sovereign fiscal risks. (ii) Strategic Allocation of Resources: Planning, budgeting, and deploying public funds strictly in alignment with identified national and developmental priorities. (iii) Efficient Service Delivery: Delivering high-impact, transparent, and timely public goods and administrative services to all citizens. The PEFA1 Framework: Gold Standard for Measuring PFM Worldwide PFM systems are measured by the Public Expenditure and Financial Accountability (PEFA) framework, utilized by sovereign governments across 155 countries. PEFA assesses 31 PFM Performance Indicators structured across 7 core pillars on a calibrated grading scale from ‘A’ to ‘D’ (where ‘A’ reflects highest consistency with international good practices and ‘D’ represents lowest performance): 1. Budget Reliability 2. Transparency of Public Finances 3. Management of Assets & Liabilities 4. Policy-Based Fiscal Strategy & Budgeting 5. Predictability & Control in Budget Execution 6. Accounting & Reporting 7. External Scrutiny & Audit 1 PEFA is an international partnership program of the European Commission, International Monetary Fund (IMF), World Bank, and the governments of France, Luxembourg, Norway, Slovak Republic, Switzerland, and the United Kingdom. 2. Global Trends in PFM: 7 Empirical Findings from 80 Countries The 2022 Global Report on Public Financial Management (PEFA Secretariat) synthesized data across national-level assessment reports from 80 countries2, identifying systemic strengths and critical vulnerabilities: 1. Baseline Execution Strengths: Most governments perform consistently well at accounting for revenue, maintaining basic internal controls, and restricting unauthorized expenditures from contingency reserves. 2. Spending Composition Disconnect: While aggregate spending variance between budgeted and actual figures is generally low, deviations at individual ministry/department levels are substantial, undermining strategic allocation. 3. Service Delivery & Asset Monitoring Deficits: Governments struggle to evaluate public service delivery performance, track holdings in nonfinancial public assets, and maintain budget consistency with forward multi-year estimates. 4. Severe Delays in External Audit Submission (80%): As many as 80% of nations fail to submit financial reports for external audit within 3 months of fiscal year-end. Only one country achieved the top score for completeness, timeliness, and consistency. 5. Capital Investment Life-Cycle Deficiencies (80%): 80% of countries omit total life-cycle cost projections or multi-year breakdowns for major capital projects in budget documentation, crippling public investment oversight. 6. Pervasive Non-Competitive Procurement (63%): Nearly 63% of countries awarded contracts valued at over 40% of total procurement value via non-competitive single-source methods, severely compromising cost-efficiency and public value. 7. Crisis Resilience & PFM Elasticity: The COVID-19 shock exposed structural fragility, demonstrating that emergency PFM systems must strike an agile equilibrium between rapid operational flexibility and strict fiduciary accountability. 2 Analysis based on 80 sovereign nations with recent national-level PEFA assessment reports. 3. Interdisciplinary PFM & The Three Pillars of Accounting Impact PFM is an interdisciplinary profession operating at the vibrant intersection of public policy, public administration, economics, and accountancy. There are no cookie-cutter solutions; reforms must reflect specific institutional and legal contexts. To maximize impact, the accounting profession acts as both a core fulcrum and catalyst across three domains: “The global trends on PFM indicate that there are huge opportunities to enable government policies to yield the intended objectives through an interdisciplinary convergence of ideas of experts.” 1. Migration from Cash to Accrual Basis: A Potential Game Changer Public sector accounting is often viewed as the most technical and least political dimension of PFM, yet financial data integrity and timely reporting lag across developing nations. The global shift from pure cash accounting to International Public Sector Accounting Standards (IPSAS) Accrual is spearheaded by IFAC, the IPSAS Board, and the World Bank. Accrual Adoption Trajectory (Index 2021)3: 30% of global jurisdictions report on an accrual basis today, projected to leap to 50% by 2025. Sovereign Debt Distress & Hidden Liabilities4: World Bank-IMF LIC-DSA reveals 44% of Low-Income Debt Countries (LIDCs) face high external debt distress risk; 12% are already in default/distress. Accrual reveals hidden off-balance-sheet debt. 3 IFAC International Public Sector Financial Accountability Index. 4 World Bank-IMF Low-Income Country Debt Sustainability Assessment (LIC-DSA). 2. Internal Controls & SAIs: Halting the $1 Trillion Annual Procurement Waste Accountants serve as guardians of integrity across public spending chains. Governments globally deploy an estimated $13 Trillion annually on public contracts for goods, infrastructure, and services. According to World Bank findings5, up to 25% (a quarter) of this expenditure is lost to inefficiencies, corruption, and uncompetitive practices. The $1 Trillion Fiscal Dividend: Halting public procurement waste through rigorous internal audit systems, independent Supreme Audit Institutions (SAIs), and open competitive bidding would release at least $1 Trillion every year to finance green, resilient, and inclusive global development. 5 World Bank Governance Global Practice: Halting Waste in Public Procurement. 3. Cross-Cutting Catalytic Influence on Economic Development From budget drafting to parliamentary oversight, the accounting function is all-pervasive. A transparent, credible public financial system directly catalyzes private capital formation, lowering borrowing risk premiums and expanding sovereign creditworthiness. 4. Five-Point Action Agenda & The MOSAIC Global Alliance To bridge institutional silos between economists, accountants, and policymakers, five strategic priorities must be operationalized: Curricular Integration: Substantially expand public financial management and public sector accounting modules within professional accountancy bodies and university degrees. Accelerated Accrual Transition: Scale international support for cash-to-accrual migration to create a robust, transparent balance-sheet baseline for national fiscal policymaking. Responsive Public Reporting: Modernize government budgets and financial statements to incorporate performance/outcome budgeting, gender-responsive budgeting, climate risk, and ESG sustainability metrics. Interdisciplinary Alignment: Deepen accountants’ understanding of economic models and executive administrative realities to ensure financial outputs seamlessly serve a whole-of-government mandate. Communicating Public Value: Elevate civic and governmental appreciation of the indispensable value that professional accountants contribute to national anti-corruption, efficiency, and good governance. The MOSAIC Global Partnership IFAC & Donor Alliance International efforts to develop and strengthen professional accountancy organizations (PAOs) and public sector finance through the IFAC/donor collaboration operating under the name MOSAIC (Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration) have become a major global influencer on PFM development. This surge in demand is reflected in rising accountant recruitment within Ministries of Finance, Supreme Audit Institutions, and sub-national treasuries. The convening of WCOA 2022 in Mumbai presents a historic turning point for accountants, economists, and administrators to forge a unified coalition for global PFM acceleration. ■■■ Note: Views expressed in this article are the author’s personal views.

SPECIAL WRITE-UP • ACCOUNTING PHILOSOPHY & GOVERNANCE The Chartered Accountant • November 2022 • Vol. 71 • pp. 69–71 (Journal pp. 533–535) Can Accountants be Trusted with the Future of Accounting? VN CA. V. G. Narayanan Professor of Business Administration & Chair MBA Elective Curriculum, Harvard Business School • vnarayanan@hbs.edu • eboard@icai.in The Origins of Accounting: From Medieval Ledgers to Modern Valuation Browsing one of the few surviving copies of the first edition of Luca Pacioli’s 1494 Summa de Arithmetica describing 15th-century double-entry bookkeeping is a giddy feeling. This book, and the even older Medici family ledger books in the historic collections of accounting records at Harvard Business School’s Baker Library, prompt deep contemplation of the origins of our discipline. The earliest use of accounting in business was probably to record executory contracts, receivables, and payables, while the corresponding use in government was to record tax dues, collections, inventory, and expenditures. The inventions of paper and paper currency in China, Hindu numerals in India, and the transfer of this technology by the Arabs to Europe gave accounting its biggest boost. Accounting subsequently evolved in medieval Europe to facilitate delegation, decentralization, and the separation of ownership from management. 1. Delegation, Joint-Stock Enterprise & The Beacon of Capital Allocation Whenever there is delegation of power or separation of management from ownership, it necessitates rigorous performance evaluation. Whether with Venetian merchants in the fourteenth century or English East India Company managers in the eighteenth century, accounting played a crucial role in measuring and driving performance. “What gets measured gets managed” – accounting ushered in the rise of joint-stock companies owned by dispersed shareholders and streamlined performance for massive organizational hierarchies. When shares in those corporations had to be traded, the valuation role of accounting information came to the fore. The best and brightest minds were attracted to newly formed joint-stock companies, striving to make fortunes through energy and enterprise. Risk capital flooded into these ventures because of their operational productivity and the liquidity of their shares. Accounting reports were the beacons that directed capital and hardworking talent to the most productive enterprises of society. 2. The Emergence of Auditing, Information Asymmetry & The Role of Trust As soon as accounting numbers were used for performance evaluation and valuation, they were inevitably “managed” to dress up performance. Auditing emerged on the heels of accounting reports specifically to enhance the credibility of accounting figures. The explosive power of credible information to facilitate commerce in products, services, and complex financial instruments is foundational to capitalism. George Akerlof’s Information Asymmetry Paradigm: The Nobel laureate George Akerlof demonstrated a powerful thesis using a simple economic model: When the seller of a product possesses superior private information and the prospective buyer is conscious of this information asymmetry, it can destroy the market entirely. If the buyer is privately informed, a symmetrical market breakdown occurs. Reducing information asymmetry causes markets to explode, economies to boom, and delivers prosperity across society. The Alibaba vs. eBay Case Study in Trust Architecture: The story of Alibaba’s success in China illustrates the economic power of reducing information asymmetry. Alibaba entered Chinese e-commerce late, trailing eBay. Yet Alibaba recognized that buyers and sellers did not trust one another due to institutional and legal voids (buyers feared defective goods; sellers feared payment default). Alibaba systematically instituted innovations in escrow payments (Alipay), seller ratings, and merchant certifications. Result: Alibaba became the world’s largest and most profitable e-commerce company, while eBay languished. Today, with over 40% of product reviews on popular e-commerce sites suspected of being fake, independent auditing of e-commerce algorithms to detect and deter fake reviews represents a natural frontier for our profession! 3. Capital Markets: Insider Trading & The Relevance-Reliability Dual Mandate The same dynamic governs capital markets. Insider trading by privately informed buyers and sellers elevates a firm’s cost of capital and chokes productive investment – insider trading is far from a victimless crime. Independent audits and periodic financial reporting dismantle insider advantage, provided financial statements are informative. Relevance & Professional Judgment: For financial statements to be relevant, accountants and auditors must be exceptionally trained, competent, and empowered to exercise deep professional judgment reflecting the economic substance of complex, evolving transactions. Reliability & Objective Independence: Reliability stems from integrity, objectivity, and fierce independence, enforced by strict professional codes of conduct and bolstered by legal sanctions from regulatory bodies and courts against deviant behavior. The Decennial Scandal and Rule-Tightening Cycle: Whenever complex business models fail during market downturns, outsiders cannot differentiate between honest bad luck and executive accounting shenanigans. In response, regulators impose tighter, rigid accounting rules to restrict “professional judgment”. Audit and litigation costs temporarily drop. But as rigid compliance stifles economic growth, rules are relaxed, clever accountants engineer new loopholes, scandals re-emerge, and the cycle repeats with even more suffocating rulebooks. 4. Are We Losing the Plot? The Soviet Union Analogy & Loss of Talent The Peril of Rigid Rule-Based Accounting: If tighter, mechanical rules were the genuine solution to our woes, the old Soviet Union should be our role model. In that system, centralized accounting rules mandated the exact useful lives all enterprises were required to use for calculating asset depreciation. There was zero accounting fraud and zero room for professional judgment – but there was also zero relevance. In such a world, why would ambitious, talented youth ever join the profession? Financial statements would be 100% reliable arithmetic exercises, but completely irrelevant to capital allocation. Financial statements reduce information asymmetry and compress the cost of capital only when they reflect professional judgment rather than the mechanical application of arithmetic rules that disregard economic reality. If accounting standards cannot differentiate between expenditures that generate long-term intangible value (such as R&D) and those that do not, innovative firms will choose to delist and go private rather than endure public market short-termism. The Paradox of Self-Defeat: Why Do Auditors Lobby for Stifling Rules? This strange behavior stems from fear – auditors dread being perceived as in cahoots with clients and fear having their reputations destroyed when a client misstates financials. Because auditors are compensated by the very clients they audit, perception and reality of independence collide. To break this impasse, global experiments must be evaluated and embraced: Mandatory audit partner and audit firm rotation. Strict prohibitions on non-audit advisory services. Eliminating financial conflicts of interest among partners and employees. Empowered independent audit committees setting audit fees. Rotating Regulatory Re-Audits: Appointing independent audit firms to re-audit a sample of public companies (similar to the Audit Bureau of Circulation / ABC). The threat of re-audit exposure would powerfully bolster auditor objectivity and independence. 5. The Future of Accounting: ESG Assurance & Distributed Ledger Technology If we design accounting standards that prioritize relevance and informativeness while ensuring genuine auditor independence, the future is extraordinarily bright. The frontier opportunities awaiting the profession are profound: ESG Non-Financial Assurance: Providing independent verification across Environment, Society, and Governance (ESG) disclosures – an arena ripe for professional credibility. Distributed Ledger Technology (DLT): Leveraging blockchain and distributed ledgers to make transaction authentication substantially cheaper, faster, and immune to retroactive alteration. The fundamental choices before us are stark: Do we want to attract the best minds to our profession or do we want to certify that we have mechanically checked that stifling rules have been followed? Do we want to enhance the credibility of information in all walks of society or are we content to play a passive role, simply surviving on the statutory monopoly our profession enjoys in financial accounting? The answer, my friends, is in our collective hands. ■■■

INTERNAL AUDIT • ENTERPRISE RISK MANAGEMENT & GOVERNANCE The Chartered Accountant • October 2022 • Vol. 71 • pp. 22–25 (Journal pp. 370–373) Looking at Risk Management in the context of Internal Audit NK CA. Nikhil Kenjale Author is member of the Institute • Reach at: nukenjale@gmail.com & eboard@icai.in Core Thesis: Managing Volatility in an Era of Disruption Largely people seek stability, growth and security. Forces beyond their control bring change to their expectations about the future. In common parlance, we call these forces as “Risk”. In pursuit of maximization of wealth, individuals / organizations invest their hard-earned money into the entities. Therefore, those entities assume a larger role in ensuring that the investors get desired return and value over a period. Risks which are applicable to individuals take a multifold, wider, and deeper form when it comes to dealing with them at an entity level. Therefore, these are to be managed. This is nothing but what we call – Risk Management. It is not at all a new topic for discussion, but it is worth having a fresh look and embedding the risk concepts into an internal audit using modern tools. 1. The Context: Imperfect Sciences & Three Foundational Anchors Risk Management falls within the ambit of behavioural sciences i.e. imperfect sciences. Hence, unlike perfect science (say concept of gravitational force is universal in terms of its application), risk management applies differently to each organization. Therefore, it is essential to put a context to the discussion. Our context is based on three foundational anchors: 1. Corporate Governance A mechanism that directs and controls the entities. A Committee on Corporate Governance emphasized on enhancement of shareholder’s value keeping in view the interests of other stakeholders.1 2. Ethics and Values It is nothing but a set of Do’s and Don’ts adopted by an entity considering applicable rules and regulations. E.g. an engineering product manufacturing company decides not to participate in tendering process floated by an entity which belongs to a country with the very high level of corruption. So, it is essentially making a choice considering established principles and regulations. Entities assign a particular value to particular objectives – say undertaking research in medicine that can change your DNA. They feel that it will give them a competitive advantage. Accordingly, they set objectives and try to achieve those. Whether changing DNA is ethical or not could be a point of discussion. But for that entity undertaking that research is valuable. (There are multiple theories around ethics like “Axiology” which deals with what elements can contribute to the intrinsic value of state of affairs). 3. Definition of Internal Audit As per Framework Governing Internal Audits, Internal Audit is defined as follows: “Internal audit provides independent assurance on the effectiveness of internal controls and risk management processes to enhance governance and achieve organisational objectives.” It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. Summary Principle: So, when we think about “Risk” with respect to any entity, at minimum, we need to consider how Corporate Governance, Ethics and Internal Audit function are positioned and how they are practiced. 2. Risk Management: Evolution, Scoping & Governance Boundaries Before we jump to the management level it is important to spend some time in comprehending what is risk? Essential problem is, it means different areas, severity, and significance for every individual. Somebody may be easily jumping from a high cliff into the waters and another one may choose to keep himself always away from waters. That means everybody’s definition of risk is different. Therefore, our discussion is focused on how entities deal with risks and not on how individuals perceive and manage risks. COSO ERM Definition “Risk is defined by COSO as ‘the possibility that events will occur and affect the achievement of strategy and business objectives.’ Risks considered in this definition include those relating to all business objectives, including compliance.”2 Shift to Conscious Risk Taking Usually, the term risk has a negative connotation. However, if we see risk management evolution, more emphasis is now being put on the upside of risks, i.e. risk of losing an opportunity. In a way, conscious risk taking is gaining importance in contrast to interpreting Risk Management as almost equal to Risk Avoidance. So anything that brings volatility to the decided business strategy can be called as a risk event. Do refer to Standard on Internal Audit (SIA) 130 Risk Management for definition of Risk Management. ⚠️ A Word of Caution for Internal Auditors – Boundaries of Ownership Risk Management is to be owned by the senior management and the Board. Internal Auditors are supposed to be an independent agency in the evaluation and enabling the Risk Management. For a big, complex entity operating in multiple geographies, it would be ideal to have “Top down” approach to Risk Assessment compared to the “Bottom Up” approach where there is a chance that too many trivial nature risks might get identified. 3. Capturing “Relevant” Risks vs. Common “Cough and Cold” Disruptions If Risk is “what may go wrong”, then many things may be going wrong in an organization or getting practiced as the way they should be – e.g. employees coming late, one TDS payment being delayed by one day, customer deliverable deadline not met, one provision pertaining to branch office expenses was missed out in quarter 2 and so on. But an entity would be interested in capturing “Relevant” risks and not the ones which can be called as common “cough and cold” type risks. Conceptual Framework for Financial Reporting under Ind AS “Relevance – Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources.”3 It is interesting to note that IFRS/Ind AS Frameworks on financial reporting use word “Relevance” and not “Accuracy”. Relevance is defined to include “nature” and “materiality”. The relevance can be better understood if the objectives of Risk Management are well understood. Broadly any entity is interested in ensuring: 01 Safeguarding Assets Preservation and protection of organizational resources and assets from unauthorized use or loss. 02 Reliable Reporting Integrity, timeliness, and reliability of financial and operational management reporting. 03 Operational Effectiveness Effectiveness and operational efficiency across core business processes and resources. 04 Statutory & Policy Compliance Adherence to applicable statutory laws, industry regulations, and internal corporate policies. Statutory Anchor: These principles/objectives are laid down by the COSO internal control framework and are also embedded in the definition of “internal financial controls” as given in Section 134 of The Companies Act, 2013. So, with these broader objectives, one can reasonably assess the risks which are applicable to an entity. 4. Actual Process of Risk Identification: Entity Level vs. Process Level The lifespan of entities has drastically come down in the last few years. This contrasts with good old days entities where one could see that they are being in existence for decades. Except the few global giants, companies have seen/experienced transformations through sales, mergers, acquisitions, diversifications and so on. Since continuous disruption is inevitable, context of Risk Management keeps ever changing. Risk Identification ideally should happen at two levels – Entity and Business Processes: Dimension Entity Level Risks Process Level Risks Strategic Nexus Close nexus with overall business strategy, sustainable growth, and long-term going concern viability. Directly tied to the non-achievement of specific operational unit and process objectives. Scope & Impact Broad, pervasive, and enterprise-wide; affects whether the entity will remain in business or suffer severe impairment. Localized, departmental, and transactional; affects daily workflows, controls, and outputs. Illustrative Examples Succession planning inadequacy, foreign currency exchange rate fluctuations, cyber-attacks, customer concentration, non-compliance with regulations, employee attrition, litigation risks, pandemic disruptions (COVID-19 in MD&A), inability to innovate. Inappropriate financial reporting, procedural non-compliances, operational delays, scrap/rework, machine breakdowns, deviation from approved purchase policy, delayed expense recording. Data Gathering & Complexity Requires aggregative data, cross-functional correlation, high-level inferences, exception spotting, and environmental scanning. Relatively easy to identify, see, gather, and analyze directly from source documents (cut-off records, invoices, logs). Nature of Conclusion Professional Judgment / “View”: Deciding if risk is higher, if fraud risk exists, or if Audit Committee oversight is warranted. More of a seasoned “view” than an absolute certainty. “Black and White” Conclusion: Binary evaluation of whether transaction-level control rules were followed or violated. Mandatory Professional Standard – ICAI SIA 220 ICAI Standard on Internal Audit (SIA) 220 – Conducting overall internal audit planning: “A risk based planning exercise shall form the basis of the overall internal audit plan. The Internal Auditor shall undertake an independent risk assessment exercise to prioritise and focus the audit work on high-risk areas, with due attention to matters of importance, complexity and sensitivity.” 5. Modern Evolution: The Paradigm Shift to “Fact-Based Risk Assessment” Risk Management being an evolutionary subject, is witnessing a paradigm shift in terms of scoping, rolling out and monitoring. The earlier approach was more towards seeing risk management as compliance, it was person dependent and handled by very few people in the organization. Now with technology enablement, many aspects can be based on actual data and statistical models. Internal auditors are therefore required to learn how to do risk assessment using various data inputs i.e. facts. A concept which is widely gaining importance is “Fact Based Risk Assessment”. Case Example Assessing “High Employee Attrition” Risk Through Fact-Based Modeling Suppose “high employee attrition” is a risk and an internal auditor is assessing the risk as a part of his scope. By traditional means the person will recollect his own understanding of the risk, previous high-level issues reported to the board/audit committee, etc. There are logical steps that are relevant in current times as well. Additional refinement can be achieved by looking at multiple data sets, patterns like: Past 5 years of attrition data: Classified using parameters like employee level wise attrition, root causes/reasons, periods, peer company’s information, and the industry average. Company countermeasures: Specific retention and engagement measures taken by the company and their quantifiable benefits. Bench capacity: Level and competency of people maintained on the bench to absorb sudden turnover. Work culture metrics: Employee morale, exit interview trends, and organizational climate. Salary structures: Market compensation parity, band-wise salary competitiveness, and variable incentives... and so on. Various tools can be used to analyze, comprehend, correlate, and infer the above data. It is a common experience that data speaks differently than our understanding of the related process or area. Detailed data analysis is possible using simple Excel spreadsheets and it can pinpoint the exact root cause which is causing the change in the risk levels. Once analyzed, data can be effectively presented using dashboarding tools (e.g. PowerBI). One should finally link the “Relevance” to the identified data inferences: See if the likelihood is really high, underlying account balances are really material, if the market would react negatively to the risk if materialized, and what is the level of attrition envisaged by the business while putting the strategy in place, etc. Litmus Test for Internal Audit Scoping Internal auditors should ask a question to themselves: Are all audit scopes supported by the fact-based risk assessment? If the answer is “No” or if there is a struggle to gather the data, then possibly it is time to revisit the audit scope – i.e. whether the audit is required on an annual basis, level of efforts to be put in, etc. 6. A Wise Man’s Job & The Four Elements of Indian Classical Tabla One needs to keep in mind that doing risk assessment is a wise man’s job. The person doing risk assessment should have knowledge of the entity, human behavior, micro-macro economic factors relevant to the entity. Applying these things to a given risk context requires experience and good level of professional judgment. Philosophers say that complete scepticism is an impossible attitude in life. Therefore, an internal auditor should be reasonably sceptical in doing risk assessment. This is beneficial to the internal auditors as well as the entity which is served by them. The Classical Analogy: Synthesizing Shastra, Tantra, Vidya, and Kala A very senior Indian Classical Tabla player has said that while learning anything there are four elements – Shastra (Science which explains “Why?”), Tantra (Technique, i.e. “How?”), Vidya (Syllabus, i.e. “What?”), and Kala (an art element to pull the other three things together in a given context). This profound matrix maps directly onto enterprise risk management: 1. Shastra (Science) Explains “Why?” Corporate Governance, Ethics, and the Internal Audit charter telling us why an entity must have Risk Management. 2. Tantra (Technique) Explains “How?” Fact-finding data measures, statistical modeling, Excel correlation, and interactive PowerBI dashboard analytics. 3. Vidya (Syllabus) Explains “What?” Established global frameworks (COSO), Companies Act 2013 provisions, and Standards on Internal Audit (SIA 130, SIA 220). 4. Kala (The Art) Harmonizing Synthesis The art element to pull the other three together in a given corporate context through seasoned professional judgment and skepticism. Now it is up to the internal auditors as to how they learn the “Art” of Risk Assessment and enhance the value of their internal audits. Statutory Citations & Institutional References SEBI Committee on Corporate Governance Report: https://www.sebi.gov.in/sebi_data/commondocs/corpgov1_p.pdf COSO Enterprise Risk Management Framework: https://www.coso.org ICAI Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS): https://resource.cdn.icai.org/60915asb49580.pdf Additional References: ICAI Guide on Risk-based Internal Audit: https://kb.icai.org/pdfs/20997guide_risbbasedIA.pdf The Institute of Internal Auditors (IIA) Supplemental Guidance on Assessing the Risk Management Process (IPPF-PG): IPPF-PG-Assessing-the-Risk-Management-Process.pdf (iia-p.org)

INTERNAL AUDIT • FRAUD RISK MANAGEMENT & GOVERNANCE The Chartered Accountant • October 2022 • Vol. 71 • pp. 29–33 (Journal pp. 377–381) Role of internal auditor in fraud detection & mitigation PD CA. Prashant Daftary Author is member of the Institute • Reach at: prashant.daftary@gmail.com & eboard@icai.in Revisiting the Maxim: “Auditor is Watchdog and Not Bloodhound” “AUDITOR IS WATCHDOG AND NOT BLOODHOUND” is a well known saying. This is something which is ingrained in the mind of all auditors. Recent events and backlash against the auditing community make us wonder whether this thought is still valid or not. There seems to be a gap between the expectations of the stakeholders and the regulators and what is being delivered. This may be a perception but as it is famously said that perception is reality. The role of internal auditors has also been under the radar. 1. The Realities of Fraud: Process Breakdown & The Fraud Triangle A few days back there was a news item as regards a van loaded with cash that was stolen by the driver of the Van. Upon investigation, it was identified that the driver had recently joined the organization and the police verification process was not carried out. This directly indicates a process failure that if detected/controlled could have avoided the fraud. This is just one example and if we do a deep dive into most of the cases, fraud is an outcome of what we call a fraud triangle theory which consists of three elements i.e. incentive, rationalization, and opportunity. Standard on Internal Audit (SIA-11) – Consideration of Fraud in Internal Audit The standard though not mandatory especially requires the internal auditor to consider the fraud risk and ensure due care is taken to address the fraud risk during the course of the internal audit. The role of the internal auditor would be to identify potential fraud indicators or red flags and communicate the same to those charged with governance. Fraud Triangle Pillar Underlying Contributory Factors & Pressures Opportunity Vulnerabilities in System Architecture Weakness in internal control Concentration of control Lack of segregation of duties Lack of management oversight Lack of documentation Incentive / Pressure Financial, Operational & Market Drivers Personal incentives Sales/Profit driven incentives (these create immense pressure to report numbers) Expectations from the stock market, investors, analysts, etc. Rationalization Psychological Self-Justification Personal problems and financial strains Grievances with management or questionable practices followed by senior management Poor tone at the top and cynical corporate culture 2. Changing Expectations: How Internal Auditors Must Prepare In addition to providing value addition and assurance to the management, the internal auditors are now expected to contribute to identifying fraud risk and helping the organization in mitigating & detecting fraud. The internal auditors are required to be more alert and more conscious efforts are needed in those directions. The regulators and the public have constantly questioned the role of the auditors and their inability to prevent and detect fraud. These changing expectations also result in more opportunities. The internal auditors would have to prepare themselves to face these challenges through the following strategic initiatives: 1. Understanding Technology & Robotic Automation Technology is changing very rapidly and along with the ease of doing business it also brings about newer risks. Take an example of online payments which are very common now: the auditing procedures and methodology which is required are substantially different as compared to the traditional payment system. Essential audit steps must evaluate risks from modifying bank account numbers, phishing attacks, compromise of passwords, and use of authorized devices. Many organizations have moved towards robotic process automation (RPA) and AI; internal auditors must upgrade their technical knowledge accordingly. 2. Investing & Auditing “Through the System” Modern auditing requires auditing through the system and not around the system. Audit firms need to invest substantially in new technologies which provide them with an edge in performing internal audits and meeting stakeholder expectations. The time has come when it will no longer be possible to perform audits in a conventional manner; utilizing data analytic tools and specialized auditing software will become mandatory. 3. Big Data Mastery & Trend Recognition The buzzword today is big data. Auditors need to develop an eye to understand voluminous data and identify abnormal trends or patterns to draw robust audit conclusions. Audit firms must establish formal training programs to train staff on how to process, sanitize, and analyze large datasets as a specialized core competency. 4. Understanding Cyber Risk in All Entities Internal auditors need not be technical cybersecurity experts, but they must understand potential threats emanating from digital systems. Internal audit programs and checklists must incorporate cyber risk steps. External expert assistance should be sought where appropriate. Crucially, cyber risks are not confined to large conglomerates; they are equally lethal to small and medium enterprises (SMEs). 5. Heightened Risk Consciousness & Scoping Being alert and consciously aware of potential threats enables internal auditors to design a sharper audit scope and robust plan. Setting this foundation early ensures that audit engagements focus efforts on vulnerability zones rather than low-impact routines. 6. Regulatory Guidance & International Standards Auditors must track ICAI auditing standards on auditor’s responsibilities relating to fraud in financial statements (which statutory auditors rely on), ICAI recommendatory Internal Audit Framework on risk management, and international fraud risk management guidance and practice guides issued by The Institute of Internal Auditors (IIA). 3. Fraud Defined & Key Areas Where Internal Auditors Act as Extended Arm of Management Definition of Fraud: Fraud is generally understood to mean the risk of unexpected financial, material or reputational loss as a result of fraudulent actions of persons internal or external to the organization. This also includes the risk of misstatements in financial statements. Though the ultimate responsibility of managing the fraud risk is of the management, the internal auditors with their in-depth understanding of the systems, process risk & controls are best suited to support the companies mitigate and detect fraud risk. “A stitch in time saves nine” applies directly to risk management principles. Internal auditors serve as an extended arm of management across six key operational areas: A. Create a Framework for Fraud Risk Management Internal auditors can help entities architect a comprehensive fraud risk charter document presented to the Audit Committee and Board for formal approval. Core framework components include: • Tone at the top and management philosophy • Guidelines for fraud risk assessment • Prevention and detection protocols • Monitoring and incident reporting • Substantiality thresholds • Responsibilities and accountability matrix B. Fraud Risk Assessment – Proactive 4-Step Methodology Fraud risk assessment proactively addresses vulnerabilities against threats from internal and external sources (embezzlement of funds, misappropriation of assets, theft of proprietary information). It executes across four sequential steps: Creation of Risk Universe: The internal auditor conducts interactive walkthroughs with senior management, business heads, and process owners to review ERP workflows, standard operating procedures (SOPs), and operational reality to systematically identify and document all possible risk vectors. Quantify Potential Risk & Rate High/Medium/Low: Detailed evaluation of internal system controls mitigating the identified risk: Maker-checker controls and Segregation of Duties Concentration of power in individual actors Inherent controls vs. residual exposure Classification of controls as manual vs. automated Stress-testing system behaviors under varying scenarios Risks with both high frequency and high impact are mapped as High Risk. Creation of Fraud Risk Register & Risk Treatment: Risks are formally recorded and treated via four standard methodologies: Avoid or Terminate: Eliminating high-risk activities. Transfer: Third-party insurance or indemnification. Treat: Implementing mitigating controls to bring exposure to an acceptable tolerance. Assume: Retaining residual risk within organizational risk appetite. Integrate Fraud Risk Register with Internal Audit Plan: Audit plan focuses directly on the operating effectiveness of controls mitigating fraud risk. Function / Activity Identified Risk Risk Rating Mitigating Control Design Payment Processing Risk of unauthorized payment High • Multiple checks and approval at different hierarchical levels • Systematic automated linkage between Purchase Order (PO) and payment • Payments strictly permitted only to pre-authorized vendors • Online payments restricted to specific whitelisted devices and IP addresses C. Drafting Code of Conduct & Policies Supporting the organization in structuring robust governance policies that eliminate ambiguity: Policy on acceptance of gifts from vendors, customers, etc. Anti-Bribery policies and operational guidelines Corporate gifting to customers and dealers Conflict of interest disclosure guidelines Once documented, compliance is audited systematically during internal audit reviews. D. Fraud Awareness Training Programs Heightened awareness creates collective defense. When employees are conscious of fraud risks and red flags, they exercise greater diligence in daily operations. Internal auditors play a critical proactive role in creating a structured training calendar and conducting interactive fraud awareness training sessions across operational departments. E. Fraud Risk Detection – Professional Red Flags Though internal audit is legally distinct from forensic audit, internal auditors are uniquely positioned to spot early red flags and system vulnerabilities. Key Auditor Tips & Execution Guidance: Planning: Internal audit plans and checklists must embed fraud risk considerations; sample population selection must be guided by fraud risk density. Professional Skepticism: Maintain an inquiring mind and rigorously corroborate assertions. Alertness to Anomalies: Vigilantly track unusual transactions, sudden volume spikes, and disproportionately large expenses. Observation & Inquiry: Keep an open mind and actively observe operational behaviors and office dynamics. Holistic Perspective: Look at the entire organizational architecture rather than getting lost in isolated sample vouchers. Category of Vulnerability Concrete Red Flags & Field Examples Deficiencies in System Design (Opportunities to Perpetrate Fraud) The person handling physical cash also has access to write entries into the accounting system Absence of any documented system for price discovery mechanism during procurement Procurement personnel also responsible for bill passing and payment processing approvals No segregation of duties or maker-checker authorization controls Modifications to vendor master files or employee payroll masters made without independent review Lack of Operating Effectiveness of Controls (Breakdown in Execution) Recurring instances of unapproved payments released outside authorization limits Bank reconciliations not performed on a regular, timely basis Frequent and unexplained deviations from Standard Operating Procedures (SOPs) Recurring data errors in MIS or management reporting submitted to senior leadership Pervasive deficiencies, missing invoices, or alterations in supporting audit documents F. Setting Up Fraud Prevention & Detection Software Systems Various automated tools flag unusual transactions and trigger real-time alerts for immediate human verification. A prominent industry benchmark is credit card fraud detection: software systems monitor transaction streams in real-time, flag high-value payments or anomalies occurring during non-business hours, and automatically trigger confirmation calls to account holders. Internal auditors can play a vital strategic role in assisting corporate management in identifying, evaluating, configuring, and implementing automated fraud detection software. 4. The Horizon: Continuous Upskilling & The Start-up Era Consultative Role As we conclude, there are numerous opportunities for internal auditors in the mitigation and detection of fraud. However, the auditing fraternity would have to continuously upgrade their skills and make investments in terms of time as well as money in modern technologies. In a start-up era, the promoters and investors would look upon the internal auditors with greater responsibilities and expect them to play a more consultative role in setting up the systems which pave way for future business growth. ■■■ Virtual Certificate Course on Concurrent Audit of Banks Internal Audit Standards Board (IASB), ICAI The concurrent audit system of banks has become very crucial and important for banks. The main objective of the system is to ensure compliance with the audit systems in banks as per the guidelines of the Reserve Bank of India and importantly, to ensure timely detection of lapses/irregularities. In view of the core competence of chartered accountants in finance, accounting, risk management, and banking internal controls, the banking sector relies extensively on them to comply with regulatory requirements. The Internal Audit Standards Board of ICAI conducts an 11-day Certificate Course on Concurrent Audit of Banks through the Digital Learning Hub. The purpose is to provide members with deep exposure to concurrent audit intricacies, thereby improving audit quality and report coverage. Course Details: https://www.icai.org/post.html?post_id=15262 Course Fees: Rs. 5,900/- (including GST) Eligibility: Open for Members of ICAI Batch Scheduled Dates & Timings Course Structure & Details BATCH 80 October 10–20, 2022 (3:00 to 6:00 PM) Structured_IASB_Certificate Course Concurrent Audit of Banks BATCH - 80 BATCH 81 November 4–15, 2022 (3:00 to 6:00 PM) Structured_IASB_Certificate Course Concurrent Audit of Banks BATCH - 81 BATCH 82 November 18–28, 2022 (3:00 to 6:00 PM) Structured_IASB_Certificate Course Concurrent Audit of Banks BATCH - 82 Authority: Chairman, Internal Audit Standards Board, ICAI Inquiries: cia@icai.in

FORENSIC ACCOUNTING • INVESTIGATION STANDARDS & ENGAGEMENT MANDATE The Chartered Accountant • October 2022 • Vol. 71 • pp. 34–37 (Journal pp. 382–385) Understanding the Forensic Mandate HD CA. Harish Dua Author is member of the Institute • Reach at: harish.dua.advisor@gmail.com & eboard@icai.in Demystifying the Buzzword: Why “Forensic Audit” is a Misnomer Forensics is now a new buzzword in this era of high-profile frauds which has found many headlines these days. The term forensics has become so popular that the media (and some others) have coined a new term called “Forensic Audit” to indicate a fraud investigation. Forensic Accounting, in its classical sense, refers to the activity of gathering facts and evidence in the accounting domain to support legal cases. However, now it has become more of a generic term to indicate a particular type of “detailed audit” designed to unearth fraudulent activity. This stems primarily from the fact that forensics is seen as an extension of a typical audit and Chartered Accountants (CAs) are generally best placed to also undertake Forensic Accounting and Investigation work. In this article, we will look at the fundamentals of forensics, especially in so far as it applies to the auditing domain, with which it gets confused so often. But first, we need to explore this term a little and make a clear distinction between what it is, and why it’s actually not an audit. 1. Correcting the Terminology: Four Distinct Professional Domains Before we talk about forensic fundamentals and the mandate, we need to make sure we are speaking a standard “forensic language” so that we are all on the same wavelength. This is very important since so much of the terminology in different domains gets interchanged and causes unnecessary confusion, added to the fact that new terms like “Forensic Audit” mentioned above, get used quite casually and cause misuse of technical terms. There are actually four domains where aspects of forensics come into play – Statutory Audit, Internal Audit, Forensic Accounting and Investigations. However, this is more by accident, and not by design. In fact, if you look at it closely, all four domains are absolutely different by design. Hence, it’s inappropriate to mix-up the terms, or use them interchangeably, especially by the professional conducting an assignment in any one of the domains. It’s risky not only for the professional but also for clients and other stakeholders, as the receiver of the output has to be absolutely clear as to the nature of the outcome of the assignment. Mixing them up can also result in a confusing approach and sub-standard execution of the assignment. Hence the term “Forensic Audit” should be avoided, as it mixes up the two domains. Dimension Statutory Audit Internal Audit Forensic Accounting Investigation Legal Mandate & Eligibility • Strict legal mandate • Conducted only by a CA • As per ICAI Auditing Standards • Partial legal mandate • Non-CAs permitted • ICAI Mandatory Standards (imminent) • To support legal cases • Non-CAs permitted • ICAI Mandatory Standards (imminent) • Primarily fraud/irregularity related • Anyone can conduct (may involve law enforcement) • ICAI Mandatory Standards (imminent) Objective True and Fair Picture Strengthen Internal Controls Discover Facts and Evidence Discover Potential Fraud (and, if possible, the Culprit) Focus Very General – overall review of books of account General – review of system, processes & operations Narrow – validate transactions and balances Very Specific – check for fraudulent “intent” (to deceive) Approach Control tests of transactions & substantive tests of balances Broad based testing for compliance Focused testing to confirm suspicion / allegation Formulate and test hypothesis Target Identify material misstatements in financial statements Identify root cause of control breakdown / violation Identify / confirm nature of violation Confirm the modus-operandi Skills Deployed Testing & checking, analysis, inquiry & observation Testing & checking, inquiry & observation + process evaluation Scrutiny & analysis, fact-finding, interviews Probing & admission seeking interviews (interrogation) Working Presumption Professional skepticism, due professional care Honest (innocent) mistake, unless proven otherwise Neutrality Predication – probability of fraud / irregularity Deliverable / Outcome Audit Report Opinion (Qualification – Subject to/Except for) Summary of Findings – with fraud indicators (red flags) Present Evidence to a Court of Law – They Shall Judge! Summary of Findings & Conclusions – No opinion on guilt/innocence *NOTE: This matrix is an analytical creation based on author’s infographics to clarify structural distinctions across the four domains and is not directly part of the FAIS literature text. 2. ICAI’s Milestone: 20 Forensic Accounting and Investigation Standards (FAIS) The Institute of Chartered Accountants of India (ICAI) has recently issued a full set of new 20 Standards covering the two domains of Forensic Accounting and Investigations. These are referred to as the “Forensic Accounting and Investigation Standards” (or FAIS) and, sometime in the future, will become mandatory for all members of the ICAI when conducting assignments in these two domains. It’s also probable that these may eventually apply to all professionals operating in the area of forensics and investigations. It would be prudent for all professionals engaged in forensic accounting or investigations to be conversant with the FAIS as they will be able to conduct high-quality assignments based on these Standards. Compendium of FAIS Standards (Digital Reference): https://resource.cdn.icai.org/66387daab53640.pdf 3. Role Boundaries & The Lethal Danger of “Domain Drift” Practising CAs must ensure clear engagement communication to confirm their mandate. However, many times this is not crystal clear, especially for CAs working in industry (e.g., as an Internal Auditor). A promoter may believe the mandate is very broad (incorporating forensics or investigations), while operational management may think it is narrow. Part of this confusion stems from organizational culture, but also from the personal credibility of the CA, who is expected to deliver beyond the mandate! ⚠️ Why Auditors Must Not Drift into Ad-Hoc Investigations When an auditor encounters “red flags”, the standard procedure is to report them to management to be addressed with urgency. Technically, the Auditor is not expected to go beyond this scope or undertake forensic or investigative work to confirm or deny suspicions. It is neither his mandate nor may he possess the requisite investigative skillset. If the auditor undertakes rogue procedures on his own to validate suspicions, he runs the grave danger of creating irreparable problems for the FAIS professional who comes later. The culprit may be prematurely alerted, cover their trail, and destroy vital documentary or digital evidence! Exception: Where the Internal Audit Department (IAD) has a formal, standing mandate to conduct fraud investigations, the Chief Audit Executive must ensure the team is fully prepared, equipped, and specifically trained in forensic investigation techniques. 4. Forensic Fundamentals & Core Performance Principles FAIS literature requires five basic personal principles to establish professional credibility, and five performance-related principles to establish the reliability of forensic work. The performance-related principles require strict adherence: (a) Predications No forensic or investigation assignment is to commence without a clear trigger. Violations, red flags, allegations, and fraud indicators form the predications. While audit searches for the “unknown” (material misstatements or control deficiencies), forensic investigations seek evidence for something that is “known” (specific code violations or fraud allegations). (b) Primacy of Truth The ultimate objective is to unearth the truth supported by compelling evidence that speaks for itself and withstands vigorous cross-examination in a court of law. Truth is established solely through facts, figures, and reliable evidential matter. (c) Facts vs. Opinions Personal perspectives must be strictly segregated from professional judgment – especially during witness or suspect interviews. Unlike audit, where professionals express an opinion on financial statements, forensic reports must scrupulously avoid personal opinions. 5. Mandate Discipline, Legal Subpoena & Application of Hypotheses Key Tenets of the Engagement Mandate: Forensic accounting acts as a legal vehicle to establish the presence or absence of fraud and irregularities as per law. It cannot be confused with financial examination (audit) and demands specialized techniques. Clarity of operational domain: Internal Audit vs. Forensic Accounting vs. Investigation. Avoid confusion between the role “assigned” vs. role “assumed”, verifying if the assumed posture is legally defensible. Risk Assessment & Subpoena Exposure Forensic assignments carry high inherent probability of suspicious arrangements and fraudulent maneuvers. These risks must be factored into engagement planning. Legal Realities: The work papers and reports of the investigator may be subject to court subpoena. The forensic accountant must be as conversant with applicable statutes, evidence laws, and procedural rules as a lawyer! Application of Hypotheses: The Jigsaw Puzzle Forensic investigations require formulating and rigorously testing hypotheses that prove or disprove a modus operandi, thereby confirming or refuting the original predication. It is analogous to assembling a jigsaw puzzle: each hypothesis represents a piece that must not only fit the right position but must genuinely belong to the puzzle. 6. Two-Phase Execution, Digital Evidence & Chain of Custody Phase 1: Behind-the-Scenes Evidence Assembly Collecting documents, transaction records, emails, accounting logs, and digital footprints without tipping off potential perpetrators, preserving integrity. Phase 2: Confrontational Validating Interviews Conducting structured, face-to-face corroborative and admission-seeking interviews with witnesses and suspects based on compiled preliminary evidence. Digital Evidence & Legal Chain of Custody A substantial portion of modern evidence is discovered in digital form. Forensic extraction demands specialized imaging, hashing, and analysis expertise. Crucially, digital evidence must comply strictly with statutory legal standards, specifically maintaining an unbroken Chain of Custody to ensure admissibility in a court of law. 7. Reporting Mandate: Why Investigators Must Never Express Guilt or Innocence Judicial Separation: The Investigator is Not the Judge It is not the job of the professional to identify the suspect as “guilty or innocent”. Doing so constitutes a severe role conflict and usurps the constitutional function of the judicial authority (the judge). The role of the forensic professional is strictly limited to reporting the objective evidence discovered and, at most, articulating the factual inferences and conclusions that can be drawn from such evidence. 8. Conclusion: Professional Mandate Adherence under FAIS When undertaking Forensic or Investigation assignments, the CA professional has to be absolutely clear regarding the mandate given and how well this aligns with their expertise. If working in Industry, it is possible that the mandate may require the professional to assume a role which is different from the role assigned (e.g., Internal Auditor). Consistent with this new role, the professional needs to execute forensic assignments to allow delivery in line with the agreed mandate, which will NOT be an Audit. Assignments in this domain are now expected to comply with the new Forensic Accounting and Investigation Standards (FAIS). Hence, the report issued must be consistent with the FAIS – it will not be an audit report or an opinion over guilt or innocence, but an airtight presentation of evidences that prove or disprove predications. If evidence indicates a fraudulent modus operandi, it must be presented strictly as such. ■■■

FORENSIC ACCOUNTING • CYBERSECURITY & BANKING RISK DEFENSE The Chartered Accountant • October 2022 • Vol. 71 • pp. 38–45 (Journal pp. 386–393) Defensive Solutions against Cyber Threats in Indian Banking Ecosystem AK Ankur Khairwal Executive Officer, The Institute of Chartered Accountants of India (ICAI) • eboard@icai.in HB Dr. Haresh Barot Associate Dean, School of Management Studies (SMS), NFSU • eboard@icai.in The Threat Landscape: Digitization as a Double-Edged Sword In the current tech era, one of the most destructive crimes is cyber fraud. With time, they are growing rapidly, and the banking sector is most prone and always remains top on the hit list. Improved digitization in the banking sector has given a fillip to cyber frauds globally. Fraudsters targeting the financial sector have grown very rapidly in past years. Bank frauds such as unauthorized access to credit/debit card details, phishing, identity theft, vishing and smishing followed by QR code/UPI scams are growing rapidly. Considering possible approaches in thought, this paper explores concrete channels and defensive prevention strategies against such cyber threats. 1. Escalating Crisis: The 24-Month Detection Lag & Value Surges Fraud, committed with either a small or big amount, puts the banks’ reputation at stake. Fraud detection is a set of tasks and activities undertaken to prevent/safeguard money or property from being obtained illegally and by false means. In this situation, early detection of fraud can save the bank, its reputation, the trust of common people and the economy to a better extent. For this, the bank authorities should be trained in this area. 159% Surge Fraud Value Growth in FY 2020 In financial year 2020, fraud percentage by value increased by 159% compared to FY 2019.[1] ~24 Months Average Lag to Detection The average lag between cyber fraud execution and detection is about 24 months, severely compromising recovery.[1] Zero Borders Globalized Offender Reach Fraudsters sitting across sovereign borders commit remote attacks; undetected getaways make extradition and tracing exceedingly complex. Early detection of fraud will help maximize the recovery amount. It will further warn the fraudulent indirectly about the robustness and high security of the banking system. Governing bodies have warned banks about following proper norms and compliance. Increasing cyber awareness and fraud awareness in staff and training them regularly will help in early fraud detection. The weak implementation of Early Warning Signals (EWS) is the key challenge in early fraud detection. If challenges are overcome, and a monitoring system is made, robust fraud detection can be easier and earlier. Lately, it shatters the banking system’s security and eventually affects the economy. Timely inspection, monitoring and its reporting play a vital role. Focus should be on proper compliance with KYC, norms for releasing funds, ensuring the safety of customers’ funds. There should be a proper monitoring system and robust appraisal cycle, which monitors the release and proper recovery of the amount from time to time. For the auditing authority to report and identify the frauds, proper incentives should be announced. Sometimes when the fraudulent getaway is undetected, it becomes difficult for agencies to track and bring them back. Due to this, the case is prolonged and recovery is delayed. It is high time that we should use all safe technology advancements in the banking sector to detect suspicious activities going on with bank systems and accounts. [1,2] 2. Defensive Approach: RBI Cybersecurity Framework & Core Prevention Strategies RBI Guidelines on Cybersecurity Framework The RBI Guidelines on Cybersecurity Framework allow banks to establish and implement a comprehensive cyber-security policy as well as a cyber-crisis management strategy. The necessity to exchange information about cybersecurity events with the RBI aids significantly in proactive threat detection and systemic mitigation.[3] Five Strategic Pillars to Mitigate Fraudulent Activities: 1. Anti-Fraud Environment Establishment of an anti-fraud mindset as a way of life by bank administration, making integrity the organizational bedrock. 2. Historic Fraud Assessment Operating an efficient risk incident response plan that integrates lessons learned from past fraud incidents to fine-tune control architecture. 3. Proactive Fraud Risk Evaluation Cornerstone of risk mitigation: periodic evaluation of fraud scenarios and stress-testing organizational readiness against complex attack vectors. 4. Continuous Monitoring Deploying automated tools and methodologies for real-time and near-real-time surveillance of network traffic and transaction patterns. 5. Whistleblowing Architecture Implementing airtight non-retribution policies, safe reporting structures, unattended grievance mailboxes, and responsive escalation channels. Core Analytical Assessment Methodologies Deployed by Banks: Rule-Based Assessment: Applies historical data to match known signatures and patterns of fraudulent behavior. Anomaly-Based Assessment: Flags statistical outliers and abnormal behaviors that deviate from baseline user activity. Advanced Predictive Analytics: Determines the propensity of specific entities, geographic nodes, or operational channels to engage in fraud based on historical crime correlations. Linkage Assessment: Synthesizes relationships across disparate data points (identities, IP addresses, emails, credit card tokens, employment histories) for rapid network discovery. Textual Assessment: Natural language processing (NLP) analysis of transaction narratives, emails, and documentation to detect fraud terminology and suspicious syntax.[3,4] 3. Institutional Awareness Training & High-Profile Cyber Intrusion Case Studies With the proliferation of sophisticated threats, education across customers, staff, and boards of directors is mandatory. Training must cover definition of cyber fraud, advanced attack vectors (phishing, ransomware, malware, Advanced Persistent Threats [APT], social engineering), understanding fraudster motives, identifying Red Flag Accounts (RFA) involving abnormal transfers or suspicious loans, establishing clear reporting lines, and exercising incident response drills. Figure 1.1: Spreading Awareness Through Integrated Communication Channels Newsletters for Employees ➔ SMS Broadcasts ➔ Employee Awareness Training (Quarterly) ➔ Brochures for Customers ➔ Automated Phone Calls for Customers Case 1: The Cosmos Bank Cyber-Heist ATM Switch Hack Hackers breached the bank’s core ATM switch infrastructure, cloned card details, and coordinated simultaneous cash withdrawals across 28 countries. The syndicates executed immediate withdrawals totaling ₹13.92 crore via malicious SWIFT transfers before defensive countermeasures could be triggered. Figure 1.2 Overview: Central Switch Compromise ➔ Card Cloning ➔ Multi-Country Cashout (28 Countries) ➔ ₹13.92 Cr SWIFT Exfiltration. Case 2: UIDAI Software Compromise Data Breach By compromising Aadhaar software interfaces, threat actors gained unauthorized access to sensitive financial records including PAN numbers, bank account numbers, IFSC codes, and confidential personally identifiable information (PII), exposing banking systems to widespread identity impersonation. 4. Implementing Risk Management Service (RMS) & ISO Global Standards Risk Management is the process of analyzing, assessing, identifying and planning to prevent frauds and losses. If a bank advances credit or issues loans, it exposes itself to immediate credit and cyber risk. A comprehensive Risk Management Model (RMS) detects fraud at the first instance, responds instantly, and structures punitive and recovery actions. The International Organization for Standardization (ISO) establishes global frameworks that all banks must adhere to. An effective banking RMS model integrates five primary domains: 1. Analytics Tools: Technology & data analytics tools 2. ISMS: Information Security Management Systems 3. People & Culture: People, culture & organizational interest 4. Strategy: Planning, strategy & governance 5. Compliance: Process compliance & controls strategy Table 1.1: Internal Control for Fraud Risk Management Activities Control Mechanism Fraud Risk Management Activities Fraud Risk Management • Establishing a structured cyber fraud risk assessment process. • Involving appropriate personnel in the information security fraud risk assessment workflow. • Performing an overall enterprise fraud risk assessment on a regular, institutionalized basis. System Monitoring • Continuous network and server performance and traffic monitoring. • Continuous IT infrastructure surveillance. • Providing periodic evaluation of operational anti-fraud controls. • Utilizing independent evaluation in banks through internal audit programs. • Implementing advanced technology tools in continuous monitoring programs. Anti-Fraud Control Activities • Defining and documenting mitigating controls and directly linking them to identified fraud risks. • Modifying existing controls, designing and deploying new preventive controls, and enforcing prevention strategies. Information and Communication • Promoting the strategic importance of fraud risk management programs through corporate communication channels. • Designing and rolling out information security awareness training programs across all business tiers. 5. Fraud Response Architecture: Figure 1.3 Suspicious Transaction Lifecycle Fraud risk management is not a one-time event; as an institution grows, threat vectors evolve. Managing suspicious transactions requires a continuous, closed-loop lifecycle as illustrated in Figure 1.3: Step 01 Baseline Delineation: Set baselines for controlling fraud risk by clearly delineating operational roles, access limits, and administrative duties. Step 02 Active Monitoring & Mining: Continuous surveillance gathering transaction data across multiple systems, mining it for anomalies, inconsistencies, and strange trends.[10] Step 03 Employee Red Flag Training: Ethical problem workshops teaching staff to recognize red flags in core banking systems, directing them to counsel, and showing leadership commitment. Step 04 Whistleblower & Grievance Mailbox: Establishing a formal whistleblower policy encouraging employees to report violations freely without fear of retribution, including unattended grievance mailboxes. Step 05 Safe & Anonymous Reporting: Providing secure, encrypted channels that guarantee whistleblower anonymity and accelerate forensic investigation while reducing false positives. 6. Appropriate IT-Audits, Regulatory Compliance & Insider Threat Detection With data distributed across cloud ecosystems, branch servers, and portable devices, bank networks face massive attack surfaces.[5] Internal IT auditors must identify the hallmarks of fraud, evaluate procedures, and enforce three foundational pillars illustrated in Figure 1.4 (Audit Functions): Audit Function 1: Risk Management and Governance Audit Function 2: Review of Compliance with Laws & Regulations Audit Function 3: Monitoring of Internal Control Insider Threat Detection & Employee Monitoring Checklist: Irregular Account Access: Repeated log-ins for no valid business reason; accessing accounts from IP addresses outside the bank’s authorized geographic region. Target Evaluation & Return Visits: Repeated browsing of high-balance or vulnerable accounts; insider fraudsters returning post-fraud to verify if unauthorized transactions were spotted.[6] Off-Hour Activity: Transacting outside office hours or hours after a client branch visitation. Unusual General Ledger (GL) Postings: GL entries transferring funds directly to an employee’s personal bank account.[8,9] Vulnerable Account Exploitation: Irregular transfers originating from dormant accounts, senior citizen accounts, or affluent high-net-worth accounts. Non-Overruleable Rules: System controls must be engineered so that authorization rules cannot be overruled without cryptographic multi-party authorization.[11] 7. Advanced Vigilance Tools: Machine Learning & Leading AI Platforms Machine learning-based fraud detection allows banks to instrument surveillance across multiple data channels simultaneously, learning to identify complex fraud across diverse payment instruments and customer programs at the exact moment of occurrence. Figure 1.5: Best Practices for AI-Driven Fraud Detection 1. AI & Advanced Technologies ➔ 2. AML & Suspicious Activity Reporting ➔ 3. Data-Driven Fraud Risk Profiles ➔ 4. Profiling Fraudster Attributes ➔ 5. Continuous Auditing & Monitoring Table 1.2: Core Use Cases of Advanced Vigilance Tools in Financial Institutions • Risk Management • Anti-Money Laundering (AML) • Fraud Detection • Real-Time Monitoring • Financial Fraud Prevention • Regulatory Reporting • Early Identification Comparative Benchmark of Advanced Fraud Prevention Platforms: 1. ClearSale A complete fraud protection system integrating artificial intelligence, complex statistical methodologies, and specialized human fraud analysts to deliver zero false-positive precision. 2. Signifyd Employs AI and machine learning across massive commerce networks to expose actionable risk insights and automate checkout trust verification. 3. Sift A holistic digital trust and safety suite utilizing real-time ML to defend transactions, account integrity, and customer interactions while driving growth. 4. Riskified An e-commerce and banking fraud solution that prevents fraud seamlessly from the algorithmic logic to checkout execution while maximizing legitimate conversion rates. 8. Conclusion: Multi-Layered Defense & The Primacy of Robust IT Audits Fraud has far-reaching consequences that go beyond monetary loss, directly impacting individuals, businesses, organizations, and the broader economic environment. Whether perpetrated by opportunistic individuals or organized crime syndicates, cyber fraud demands dynamic, interdependent security ecosystems. Combining comprehensive risk assessments, aggressive fraud reporting, and multi-layered defense architectures is indispensable. The key solution is a robust, continuous IT audit. Keeping software continually patched and updated is an foundational requirement. Post-fraud, rapid capture and forensic inspection must be initiated immediately. Dedicated teamwork across technical, operational, and audit teams is essential to safeguard the integrity of India’s banking ecosystem. ■■■ Academic, Regulatory & Industry Citations Statista: Bank fraud cases in India – https://www.statista.com/statistics/1012729/india-number-of-bank-fraud-cases G2 Fraud Detection Methodologies – https://www.g2.com/categories/fraud-detection RBI Master Directions on Frauds – https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10477 SEBI Report on Audit Control Mechanism – https://www.sebi.gov.in/sebi_data/commondocs/cirmrddms13ann_p.pdf Deloitte: Cybersecurity in the Indian Banking Industry – Deloitte Report on Banking Cybersecurity Financial Express: Fraud Detection in Fintech & Lending – Financial Express Report Deloitte India Banking Fraud Survey Edition III – Deloitte India Banking Fraud Survey ACFE Report on Cyber Fraud Detection – Association of Certified Fraud Examiners (ACFE) CAI: Secrets a Cybersecurity Audit Can Reveal – CAI Cybersecurity Article Brookings Institution: Using AI and Machine Learning to Reduce Fraud – Brookings Research Consultancy-me: Fraudulent Activity Spirals Due to Digitisation & Remote Working – Consultancy-me Report Schneider Downs: Internal Audit’s Critical Role in Mitigating Cybersecurity Risks – Schneider Downs Insights

TECHNOLOGY • BLOCKCHAIN IN ACCOUNTING & EMPIRICAL RESEARCH The Chartered Accountant • October 2022 • Vol. 71 • pp. 49–58 (Journal pp. 397–406) Potential Risk and Challenges on Implementation of Blockchain Technology in Accounting SV Dr. Shilpa Vardia Academician & Researcher • Reach at: shilpa.vardia@gmail.com & eboard@icai.in SB Dr. Shurveer Singh Bhanawat Academician & Professor • Reach at: shurveer@gmail.com & eboard@icai.in Executive Summary & Empirical Findings Blockchain technology is regarded as another pioneering technology after cloud computing, internet of things and big data. Blockchain’s unique characteristics which are immutability, transparency, and reliability were found to be useful not only in cryptocurrencies but also in accounting. However, blockchain in accounting is still in its early stages and has many challenges and potential risks to make it more reliable. In order to explore the challenges and potential risks of implementation of blockchain technology in the field of accounting, an opinion survey of professionals has been made in this study. Major Findings: Major challenge of concern by respondents is lack of skilled manpower followed by low data performance. Transformational risk (moving the existing framework to the blockchain based methodology) is the major potential risk identified by the respondents followed by system risk. Results also reveal that opinion of the respondents of different profession-groups are not significantly different for various statements. Factor analysis was also applied to 14 items of risk and extracts 5 principal risk dimensions: operational risk, system related risk, legal risk, security risk and processing risk. 1. Introduction: The Promise & Disruptive Mechanics of Blockchain Technological advancements and their adoption in the accounting profession have been more effective to date than in other professions. Blockchain is an emerging technology introduced in 2008. Blockchain technology (BT) is regarded as another pioneering technology after cloud computing, internet of things and big data, which has garnered concern from financial institutions, governments and technology enterprises (Yang, Li, Wu & Zhao, 2017). It is regarded as one of the most disruptive technologies since the internet (Yermack, 2017) or even “a game changer” (Andersen, 2016). It was first used as a peer-to-peer ledger for registering the transactions of Bitcoin cryptocurrency. As it is being used in a decentralised manner, it removes the need for “trusted third parties” (Cachin, 2016). None of the participating entities can change an approved and registered activity without involving the other participating entities. Its content and all transactions are secure and cannot be altered after being added. Since no one can individually alter any of the recorded transactions, it is nearly impossible to fake records or repudiates an agreement. This feature is well suited for conducting different business activities like accounting. Blockchain technology may represent the next step for accounting. Blockchain is very useful for accounting as the technology is based on transparency, decentralisation and immutability (Tapscott & Tapscott, 2017). Blockchain technology has the potential to impact all recordkeeping processes, including the way transactions are initiated, processed, authorised, recorded and reported. Blockchain technology may provide new opportunities to reduce transaction costs dramatically and decrease transaction settlement time. It also brings changes in business models and business processes that may impact back-office activities such as financial reporting, tax preparation and could bring new challenges and opportunities to the audit and assurance profession. The function of accounting has been enhanced by blockchain (Ducas & Wilner 2017) as this technology helps to eliminate reconciliations and ensures transaction history. The importance of blockchain technology in business and accounting is increasing day by day, as blockchain is a highly secure and calculable system which provides peer-to-peer transactions without third party involvement. Besides, once the information of the transaction is recorded, the system stores multiple copies of it, so there is a rare probability to change or delete it from the system; which means the blockchain ledger would remain unaffected by unexpected events (Coyne and McMickle, 2017). Furthermore, the quality of data is exhaustive, reliable and widely available (Kiviat, 2015). Moreover, important advantages of blockchain technology are immutability, decentralisation, transparency visibility, traceability and verification. These are considerable advantages that cannot be ignored, but blockchain still has many challenges and the potential risk to making it more reliable. It is a complex and new technology as non-technical persons or people from earlier generations are not familiar with it. Size and storage are also challenges for accounting with blockchain. Blockchain provides remarkable savings in transaction costs and time, but the high initial capital cost could be the limitation (Golosova & Romanovs, 2018). On the other hand, the most important challenges of BT (blockchain technology) are related to scalability, energy consumption, latency and low data performance (Dai and Vasarhelyi, 2017). Once the information is coded in BT, it is accessible to all of the network participants. Therefore, it could harm users’ privacy (Tan and Low, 2019) but also becomes attractive to hackers (Moll and Yigitbasioglu, 2019). That is, only adding new blocks of data into a blockchain does not guarantee that the transaction actually took place in real life (Schmitz and Leoni, 2019). Another challenge for BT is the auditing, accounting and corporate reporting regulatory framework, which is extremely strict. This technology also might expose firms to risks that they have not encountered before like transformational risk (moving the existing framework to the blockchain based methodology), cyber security risk, legal risk, value transfer risk, privacy risk and policy and regulatory risk. This new business model also exposes the interacting parties to new risks which were previously managed by central intermediaries. 2. Literature Review, Research Gap, Questions & Hypotheses Review of Previous Research Literature: Zheng et al. (2021): Comprehensive overview highlighting scalability constraints, privacy leakage, and selfish mining. As transaction volume surges, servers become bulky; public key visibility fails to guarantee transactional privacy and exposes networks to colluding selfish miners. Zhang et al. (2021): Feasibility of combining blockchain with AI, identifying challenges across scalability, security, privacy, and data collaboration between on-chain and off-chain storage. Tiron-Tudor et al. (2021): SWOT analysis for accounting/auditing firms implementing BT. Highlighted weaknesses: scalability, complexity, low performance, large energy consumption, cyber vulnerability, absence of intermediaries in credential loss, lack of standards, and corporate governance gaps. Atanasovski, Trpeska & Lazarevska (2020): Assessed disruptive impact on accounting information systems; identified scalability, interoperability, confidentiality, and security hurdles. Todorova (2020): Emphasized regulatory uncertainties, smart contract enforceability, territoriality, liability, and the urgent need for globally approved standards covering terminology, privacy, and security. Weered (2019): Information risk management; demonstrated that internal IT control environments are no longer sufficient and organizations must oversee the entire blockchain network ecosystem. Bansal, Batra, & Jain (2018): Explored blockchain as a new platform reshaping business transactions and transforming accounting mechanisms. Yu, Lin and Tang (2018): Investigated impacts on independent auditors and accountants; noted constraints due to data processing capacity, confidentiality, and regulatory hurdles. Iuon-Chang & Tzu-Chun (2017): Investigated components of blockchain advancements for robust administration and addressing inventive security issues. Research Gap & Questions No previous comprehensive survey explored stakeholder opinions on both challenges and potential risks of blockchain accounting. RQ1: What are the challenges that emerged on the implementation of blockchain technology in accounting? RQ2: What are the potential risks related to the implementation of blockchain technology in accounting? Formulated Hypotheses H01: There is no significant difference among the opinions of various professionals regarding challenges on implementation of blockchain technology in accounting. H02: There is no significant difference among the opinions of various professionals about potential risk on implementation of blockchain technology in accounting. 3. Research Methodology, Statistical Tests & Sample Demographics Sampling & Instrument: Data was collected via judgmental sampling using a structured Google Forms questionnaire circulated nationwide across e-mail, WhatsApp, Facebook, LinkedIn, Instagram, and WhatsApp Status Stories. A total of 56 responses were received from CA/CS/ICWA practitioners, academicians, and IT experts. The questionnaire used a 5-point Likert scale (5 = Strongly Agree to 1 = Strongly Disagree) evaluating 8 challenges and 14 potential risks. Reliability & Normality Diagnostics: • Cronbach’s Alpha: Demonstrated high internal consistency: 0.770 for the 8 challenge statements and 0.850 for the 14 risk statements. • Kolmogorov-Smirnov (K-S) Normality Test: Yielded significant values across all items (p < 0.05), rejecting data normality and confirming the methodological necessity of non-parametric tests (Kruskal-Wallis H Test). Table 1: Respondents Demographic Profile (N = 56) (A) Gender Wise (B) Profession Wise (C) Age Wise (D) Experience Wise Male Female CA/CS/ICWA Academicians IT Experts <25 years 25–40 years >40 years <5 years 5–10 years >10 years 25 (44.6%) 31 (55.4%) 21 (37.5%) 12 (21.4%) 23 (41.1%) 8 (19.6%) 30 (53.6%) 18 (26.8%) 18 (32.1%) 29 (51.8%) 9 (16.1%) 4. Empirical Analysis of Challenges (Tables 2 & 3) Table 2: Descriptive Statistics of Opinion Regarding Challenges Challenges Mean Score Coeff. of Variation (C.V.) Rank Lack of skilled manpower 3.87 30.39% I Low data performance 3.80 32.29% II Lack of government regulations 3.71 31.56% III Lack of standardisation 3.54 37.32% IV High initial capital cost 3.50 35.31% V High energy consumption 3.43 39.65% VI Still an underdeveloped technology 3.21 41.46% VII Data privacy and security 2.57 49.69% VIII Table 3: Hypothesis Testing of Challenges (Kruskal-Wallis H Test Across Professions) Challenges Chi-Square P Value Hypothesis Decision High initial capital cost .695 .706 Accepted Lack of skilled manpower .880 .644 Accepted Lack of Government regulations 4.413 .110 Accepted Still an Underdeveloped technology .402 .818 Accepted Lack of Standardisation .923 .630 Accepted High energy consumption 6.851 .033* Rejected Data privacy and security 3.703 .157 Accepted Lack of Awareness 6.487 .039* Rejected *Significant at 5% level. Results show that profession groups differ significantly only on 2 of 8 statements (“High energy consumption” and “Lack of Awareness”). Thus, professional discipline does not broadly bias perceptions of technological challenges. 5. Potential Risk Ranking (Table 4) Blockchain in accounting transforms business models from human-based trust to algorithm-based trust. Respondents evaluated 14 distinct risk items: Potential Risk Item Mean Score C.V. (%) Rank Transformational risk (moving the existing framework to the blockchain based methodology) 3.86 29.40% I System risk (continuously updating the system) 3.73 28.23% II Legal risk (laws vary from country to country) 3.57 36.55% III Volatility risk (related to crypto currency) 3.55 35.18% IV Key management risk (in case of accidental loss or private key theft) 3.43 34.66% V Divergence risk (inconsistency of transactions) 3.34 35.78% VI Operational and IT risk (lower transaction processing rate during congestion) 3.34 35.78% VII Policy & regulatory risk (lack of governance) 3.29 38.75% VIII Privacy risk (if using public blockchain) 3.09 40.13% IX Smart contract risk (error in creation and operation of smart contracts) 2.96 39.70% X Value transfer risk (due to the absence of intermediary) 2.87 43.10% XI Authentication risk (related to public and private key combination) 2.86 42.78% XII Standard risk (of doing business) 2.82 43.87% XIII Information security risk 2.73 45.42% XIV 6. Exploratory Factor Analysis: KMO, Bartlett’s & Rotated Matrix Table 5: KMO and Bartlett’s Test of Sphericity Kaiser-Meyer-Olkin Sampling Adequacy: .751 (Good Adequacy > 0.5) Bartlett Approx. Chi-Square: 287.925 Degrees of Freedom (df) & Significance: df = 91, p = .000 Principal Component Analysis using Varimax rotation extracted 5 factors with eigenvalues > 1, explaining a robust 72.69% cumulative variance. Table 6: Factor and Factor Loading (Rotated Component Matrix) Risk Items F1: Operational F2: System F3: Legal F4: Security F5: Processing Divergence risk (inconsistency of transactions) .797 – – – – Volatility risk (related to crypto currency) .796 – – – – Smart contract risk (error in creation and operation) .738 – – – – Value transfer risk (due to absence of intermediary) .700 – – – – Transformational risk (moving to blockchain methodology) – .868 – – – System risk (continuously updating the system) – .678 – – – Standard risk (of doing business) – .609 – – – Legal risk (laws vary from country to country) – – .854 – – Policy & regulatory risk (lack of governance) – – .821 – – Information security risk – – – .832 – Privacy risk (if using public blockchain) – – – .629 – Operational and IT risk (lower processing rate) – – – – .872 Key management risk (accidental loss or private key theft) – – – – .719 Factor 1: Operational Risk Aggregates Divergence risk, Volatility risk, Smart contract risk, and Value transfer risk. Consistency of transactions and monetary measurement are inherent accounting pillars; without standardized stabilization across these risks, successful blockchain accounting remains untenable. Factor 2: System Risk Encompasses Transformational risk, System updating risk, and Standard business risk. Continuous system upgrading is paramount but significantly escalates operational costs for adopting enterprises. Factor 3: Legal Risk Captures cross-border legal variance and policy/governance absence. Example: In India, RBI banned cryptocurrency transactions but the Supreme Court subsequently set aside the ban, creating regulatory volatility. Factor 4: Security Risk Covers information security and public ledger privacy risks. Shows the highest C.V. (45.42%), indicating substantial volatility and diversity of opinion regarding public key encryption and consensus security. Factor 5: Processing Risk Combines network congestion latency and private key management theft. Every transaction consumes significant processing time and heavy electricity, making computational throughput a primary operational concern. 7. Hypothesis Testing of Risks (Table 7: Kruskal-Wallis H Test) Testing H02 across CA/CS/ICWA, Academicians, and IT experts: Potential Risks Chi-Square P Value Decision Key management risk (in case of accidental loss or private key theft) .984 .611 Accepted Operational and IT risk (lower transaction processing rate during congestion) 1.737 .419 Accepted Transformational risk (moving the existing framework to blockchain) .390 .823 Accepted System risk (continuously updating the system) .903 .637 Accepted Information security risk 3.346 .188 Accepted Standard Risk (of doing business) 3.221 .200 Accepted Smart contract risk (error in creation and operation of smart contracts) 3.806 .149 Accepted Value transfer risk (due to absence of intermediary) 2.003 .367 Accepted Privacy risk (if using public blockchain) .503 .778 Accepted Policy & regulatory risk (lack of governance) 9.263 .010* Rejected Divergence risk (inconsistency of transactions) 1.331 .514 Accepted Legal Risk (Laws vary from country to country) 6.190 .045* Rejected Volatility Risk (related to cryptocurrency) .975 .614 Accepted Authentication risk (related to public/private key combination) 1.923 .382 Accepted *Significant at 5% level. Table 7 reveals that professional affiliations cause significant divergence on only 2 out of 14 risk variables: Policy & regulatory risk (p = .010) and Legal risk (p = .045). For the remaining 12 risk variables, consensus is uniform across professions. 8. Conclusion & Future Research Agenda Blockchain guarantees trust, assures immutability, transparency, decentralisation, visibility, traceability and verification, and supports disintermediation in addition to providing extra security for transactions executed over the internet. These are considerable advantages that cannot be ignored, but the application of blockchain to accounting is still in its early stages. The study proves that lack of skilled manpower, low data performance, regulatory voids, and lack of standardisation constitute the prime barriers. Overcoming these barriers requires establishing a comprehensive risk management strategy, corporate governance protocols, and internal controls framework. Just as the internet evolved through rapid continuous upgradation, blockchain technology will mature, solving scalability bottlenecks and drastically reducing transactional overhead. Future work will focus on operationalizing standardized governance and internal control mechanisms to make blockchain-based triple-entry accounting a corporate reality. ■■■ Scholarly References Atanasovski, A., Trpeska, M., & Lazarevska, Z. B. (2020). The Block chain technology and its limitations for true disruptiveness of accounting and assurance. Journal of Applied Economic Sciences, 15, 738-748. Bansal, S. K., Batra, R., & Jain, N. (2018). Blockchain the future of accounting. The Management Accountant, 53. Bizarro, P. A., Garcia, A., & Moore, Z. (2019). Blockchain explained and implications for accountancy. ISACA Journal, https://www.isaca.org/resources/isaca-journal/issues/2019/volume-1/blockchain-explained-and-implications-for-accountant Coyne, J.G. and McMickle, P.L. (2017), “Can Blockchains serve an accounting purpose”, Journal of Emerging Technologies in Accounting, Vol. 14 No. 2, pp. 101-111. Eleonora P. Stancheva-Todorova, 2020. “Blockchain applications in the accounting domain,” Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 14(1), pages 183-201. Iuon-Chang Lin and Tzu-Chun Liao (2017) “A survey of blockchain security issues and challenges”, International Journal of Network Security, Vol.19, No.5, PP.653-659, Sept. 2017 (DOI: 10.6633/IJNS.201709.19(5)). Moll, J. and Yigitbasioglu, O. (2019), “The role of internet-related technologies in shaping the work of accountants: new directions for accounting research”, The British Accounting Review, Vol. 51 No. 6, doi: 10.1016/j.bar.2019.04.002. Schmitz, J. and Leoni, G. (2019), “Accounting and auditing at the time of Blockchain technology: a research agenda”, The Management Accountant Journal, Vol. 29 No. 2, pp. 331-342, doi: 10.1111/auar.12286. Tan, B.S. and Low, K.Y. (2019), “Blockchain as the database engine in the accounting system”, Australian Accounting Review, Vol. 29 No. 2, pp. 312-318. Zhang Z; Song X; Liu L; Yin, j; Wang, Y; Lan, D; (2021) Recent advances in blockchain and artificial intelligence integration: feasibility analysis, research issues, applications, challenges, and future work, Security and Communication Networks, https://www.hindawi.com/journals/scn/2021/9991535/

CSR • CORPORATE SOCIAL RESPONSIBILITY & REGULATORY POLICY The Chartered Accountant • October 2022 • Vol. 71 • pp. 60–65 (Journal pp. 408–413) CSR and COVID-19: Changing Regulatory Landscape, Insights, and Implications RS Dr. Ramroop K. Sharma Academician & Researcher • Reach at: eboard@icai.in Executive Summary & Overview Corporate Social Responsibility (CSR) has grown manifold. CSR has become a national priority. It has evolved from “philanthropy” to the “comply or explain” approach to “comply only”. Emerging dimensions of CSR comprise its changing regulatory landscape, CSR Accounting and Social Audit perspectives, and COVID-19 implications. COVID-19 had been a catalyst and impacted CSR practices further. Traditionally, the maximum amount of CSR had been spent on education. However, post the outbreak of COVID-19, the amount spent on healthcare had improved substantially. Evidence has indicated the emergence of need-based, focused, strategic, and sustainable CSR practices. In addition, the COVID-19 disruptions led to lower CSR spending. This conceptual article is based on secondary data for the period 2014-15 to 2020-21 retrieved from the national CSR portal of the Government of India. It provides pertinent CSR implications for stakeholders, regulators and professionals. 1. Introduction: Historical Evolution and Conceptual Foundations CSR is a historical concept. It has become popular since the American economist questioned the operational framework of companies (Bowen, 1953). Business must be conducted in the desired manner to protect the interests of stakeholders. Later on, CSR developments led to an active discourse on companies’ attitudes toward the protection of the interests of stakeholders’ (Davis, 1960; Frederick, 1960; Walton, 1967; Carroll, 1979). In the Indian context, the Report of the Social Audit Committee by Tata Steel in the 1980s reflected the objective clause in the Articles of Association as an indication of the company’s social and moral commitments toward stakeholders. The stakeholder theory (Freeman, 1984) supports the notion of the protection of the interests of stakeholders unlike the classical school of thought. Further, management experts have been accentuating needs and concerns to engage in an active dialogue that fosters the well-being of the stakeholders. Developments in CSR are contextualised. Compliance with CSR has increased in India since the enactment of the Companies Act, 2013. CSR aids to execute context-specific organisational actions and policies. It considers the protection of the interests of stakeholders aligned with the environmental, social, and governance (ESG) parameters. CSR activities also improve environmental, political, and transnational relationships. CSR enhances business competitiveness, and ensures the resilience and going concern ability of firms. Firms have increasingly realised that they can better compete in the markets by making a significant contribution to society and the surrounding environment. The enforcement of CSR activities becomes crucial to achieving the social and economic goals of firms. A move from conventional CSR to a more focused, resilient and sustainable CSR approach in VUCA (volatility, uncertainty, complexity, and ambiguity) world delivers better valuation. 2. Need for Corporate Social Responsibility CSR is the commitment by businesses for improvements and developments in the life of the social community. Protecting stakeholders’ interests while doing business is a challenge (Freeman, 1984). Simultaneously, the business is expected to earn profits without violating legal, societal, and ethical norms (Friedman, 1970). In this context, CSR is bolstered by the notion that companies can work in coherence with societies henceforth they need to make sufficient contributions toward social development. Therefore, CSR as a concept has emerged as an important tool of corporate reporting leading to enhanced disclosures facilitating the attainment of the sustainable development goal (SDG) of inclusiveness and cohesiveness in the national, societal, and developmental interests of emerging nations. To boost the growth and development process in these countries, governments expect businesses as partners to support sustainable development goals. This can become possible by inculcating CSR culture. CSR reporting facilitates the investor community by empowering informed and proper decision making. Compliance with CSR yields myriad social and economic benefits. The managers need to decide how much to spend on CSR in consonance with the CSR policy. To support stakeholders’ perspectives and to integrate CSR as a part of corporate culture, a commendable policy framework is legislated by the regulators to achieve the sustainable development goals and sustain profits for the planet and the people. “CSR aids to execute context-specific organisational actions and policies. It considers the protection of the interests of stakeholders aligned with the environmental, social, and governance (ESG) parameters.” 3. Changing Regulatory Landscape: From “Comply or Explain” to “Comply Only” Though CSR has been practised since the ancient era albeit informally, the concept earned formal recognition on the implementation of CSR provisions of the Companies Act, 2013. In India, CSR has evolved as a growing area of interest for companies, professionals, academics, and researchers. Before the finalisation of the Companies Act 2013, many CSR initiatives were taken which laid the foundation to legislate CSR. § Statutory Mandate under Section 135 of the Companies Act, 2013: Every company satisfying any of the following criteria in any financial year must constitute a CSR Committee and formulate a CSR policy: Net Worth: Rs. 500 crores or more; OR Turnover: Rs. 1,000 crores or more; OR Net Profit: Rs. 5 crores or more. Mandatory Minimum Expenditure: Spending at least 2% of the average net profit of the preceding three financial years. Profits are calculated pursuant to Section 198 and Section 381 of the Act. The CSR Committee must comprise a minimum of three directors, of whom at least one must be an Independent Director. Qualifying expenditures must strictly fall within the activities enumerated in Schedule VII (such as eliminating hunger and poverty, promoting education, combating disease, and encouraging gender equality). CSR is entirely a Board-driven process. The Board approves the recommendations of the CSR Committee and ensures full execution. Evolutionary Timeline of CSR Regulation in India (2007–2014): 2007 Adoption of Inclusive Growth in 11th Five Year Plan 2009 Voluntary Guidelines on Corporate Social Responsibility 2010 Parliamentary Standing Committee on Finance 21st Report 2011 National Voluntary Guidelines (NVGs) on Responsibilities 2012 Business Responsibility Reporting (BRR Framework) 2014 Mandatory Section 135 in force from 01.04.2014 CSR Rules 2014 to 2016 guide the proper implementation of CSR provisions. To enhance monitoring mechanisms of CSR, the government has recently mandated CSR compliance. The regulatory landscape of CSR is having a paradigm shift from a “Comply or Explain” to a “Comply” approach. Earlier, CSR was based on the “Comply or Explain” approach which implied that either company should comply with CSR norms or else they need to explain non-compliance of CSR in the Board’s report with reasons. Default concerning CSR norms now will attract a penalty. 4. CSR Accounting Perspectives & Social Audit Mandate To enrich CSR practices, the Institute of Chartered Accountants of India (ICAI, 2020) has issued a comprehensive Technical Guide / Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities. It elaborates on accounting aspects of CSR expenditure which may be in cash or kind or both as per Generally Accepted Accounting Principles (GAAP) and Accounting Standards. Unspent CSR Account Treatment If the CSR amount remains unspent on an ongoing project, it must be transferred to “the Unspent Corporate Social Responsibility Account” within 30 days from the closure of the financial year. This amount must be spent within three financial years. In case of failure, the balance shall be transferred to a Fund specified in Schedule VII within 30 days from the end of the three financial years. Asset Recognition & Set-Off Rights Measurement and recognition criteria require creating provisions and liabilities for CSR expenditure. If a company spends excess over the statutory obligation, an asset is recognized in the books of accounts. This excess CSR spend can be set off against the CSR obligation of succeeding financial years. Indirect Taxes & Surplus Income Indirect taxes on CSR contributions are recognized as part of CSR expenditure. Any surplus or gain arising out of CSR activities shall be recognized in the Statement of Profit and Loss as non-business profit, treated as a liability in the balance sheet, and simultaneously recognized as a charge against profits. Statutory Reporting & MCA21 Registry The Board is empowered to plan and execute CSR activities. CSR disclosure is an integral component of the Board’s report and must be mandatorily filed in the MCA21 registry. Independent financial audit, Board accountability, and committee oversight ensure strict compliance. Emergence of Mandatory Social Audit: To account for CSR practices, the ICAI has issued a guidance note prescribing accounting treatment. Accounting for CSR provides an opportunity to comprehend it like any other business transaction. It enhances the responsibility of supervisors managing the entities. Guidance note on accounting for CSR has laid another cornerstone in its successful implementation. In addition, regulators are contemplating bringing in a mandatory “Social Audit” (Shukla, 2022). It can be used for a comprehensive impact assessment of CSR spending. It will ensure efficient and effective CSR spending and justified use of CSR funds. This initiative is expected to further stiffen the CSR regulations. Initially, the Social Audit is to be made applicable to public sector undertakings (PSUs), later on it might cover all companies. In this context, the Securities and Exchange Board of India (SEBI) has already given a direction to the ICAI to devise a suitable standard. The introduction of “Social Audit” will enlarge the scope for accounting professionals. It is expected to benefit various sections of society in true spirit. It will ensure that needy people get an advantage of CSR spending at the national level in addition to the extant practice of spending CSR wherein preference is given to the local community. 5. CSR Disclosures: Strategy, Risk Mitigation, and Value Creation Quality CSR disclosures by firms increase their investment efficiency and valuation. CSR compliant and resilient companies are better suited to recover from business shocks and environmental threats. Companies with a good level of CSR compliance make more sales, earn better profits, and gain brand image. In addition, stakeholders support these companies in times of crisis, and such companies remain sustainable. The idea of strategic CSR was first introduced by Baron (2001). Over the past years, a paradigm shift had been observed from philanthropy to strategic CSR. The spirit of strategic CSR points out the competitive advantages of compliance with CSR. Strategic CSR activities make social good by enhancing prestige, increased stakeholder participation, lowering risks and making business innovations. The reputation enhancing property of strategic CSR triggers positive attributes for extant and future stakeholders’ perspectives. Firms should form a strategy to align their CSR activities to attain business objectives. Suitable integration of CSR strategy in business operations leads to better social and financial performance which promotes business resilience. The moderating impact of CSR reporting on the relationship between related party transactions and firm value imply reduced managerial opportunism (Hendratama & Barokah, 2020). Henceforth, resilient companies should regard CSR as an essential component of their innovations and transformations in tough times (COVID-19). Eloquent disclosure of sustainability information in CSR reports proves advantageous for firms. The dynamic business environment requires a sustainable approach to achieve ESG goals. Business objectives need to be aligned with the United Nations’ goal of sustainable development to make the world a better place to live in the ensuing years. Empirical Evidence on CSR as a Risk Mitigation and Performance Driver: Stock Crash Resilience: CSR practices reduce compliance risk, provide a positive reflection in terms of stock prices, and reduce the probability of a stock price crash (Ding et al., 2021). Financial Performance: CSR spending exhibits a statistically significant positive effect on stock market reflections across Indian enterprises (Basak, Mondal & Rakshit, 2020). Crisis Outperformance: During the 2008–2009 global financial crisis, firms with high CSR intensity generated higher profitability, greater sales, and 4% to 7% higher stock returns relative to firms with low social capital (Lins et al., 2017). Enterprise Expansion: International reporting standards (sustainability, integrated reporting, and ESG frameworks) systematically mitigate expansion risks and safeguard long-term enterprise value. 6. CSR and COVID-19: Empirical Trends & Sectoral Reallocation The COVID-19 pandemic caused many business disruptions. It has brought myriad transformations in areas such as technology, logistics and supply chains, digital banking, and digital healthcare to name a few. It had posed various challenges in deciding on marketing strategies, patterns of consumption, ways of advertising and making communication, supply patterns, spending on CSR and its relevant implications. The organisational understanding in transforming crisis (COVID-19) to core capabilities by optimum use of resources can add value to enhance the rational, heuristic, and dynamical capability of firms as a core competency (Biswas, et al. 2021). Firms with better CSR and environmental performance are less prone to the adverse impact of COVID-19. As every crisis has opportunities as well as challenges, the companies planned to spend more on healthcare as a CSR expenditure. COVID-19 has provided unparalleled stress, testing time and simultaneous opportunities in the domain of CSR. Spending CSR on healthcare was a great gesture and a golden opportunity to unite with the social and business communities. The government clarified that all expenditures incurred toward COVID-19 relief are qualifying CSR expenditures. CSR spending on healthcare catalyzed telemedicine, mobile health (m-Health), and digital health (d-Health) infrastructures across emerging markets. Table 1: CSR Spent in India, INR Crores (% of Total CSR) [2014-15 to 2020-21] CSR Area 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 (COVID) Education 3,188.09(31.67%) 4,921.06(33.90%) 5,559.17(38.76%) 7,281.54(42.59%) 7,977.65(39.59%) 9,531.63(38.61%) 2,954.17(33.46%) Healthcare 2,525.92(25.09%) 4,633.46(31.92%) 3,669.46(25.58%) 4,269.68(24.97%) 5,527.37(27.43%) 6,734.30(27.28%) 2,961.97(33.55%) Total CSR Spent 10,065.93 14,517.20 14,344.40 17,097.66 20,150.27 24,688.66 8,828.11 Source: National CSR Portal, Ministry of Corporate Affairs (https://www.csr.gov.in) Note: Percentage fractions are rounded off. Key Empirical Takeaways from 7-Year National CSR Data: A glimpse of CSR data has revealed that a popular category of spending on CSR had been “education”. CSR spending on education has been 31.67% in 2014-15 to 33.46% in 2020-21, a trend since the enforcement of CSR. Spending on education is great for the growth, and development of human resources for an emerging economy. However, post-outbreak of COVID-19, in the year 2020-21, the focus of CSR spending shifted from “education” to “healthcare”. Therefore, a drastic positive change in healthcare expenditure from 25.09% in 2014-15 to 33.55% in 2020-21 had been observed. This evidence indicates the emergence of need-based, focused, strategic, and sustainable CSR practices. In addition, though the CSR spending in India from 2014-15 to 2019-20 had indicated an overall increasing trend (INR 10,065.93 Crores to INR 24,688.66 Crores), in 2020-21, CSR spending reduced dramatically to INR 8,828.11 Crores. So, the intervention of COVID-19 in CSR spending is apparent. Lower CSR spending in disrupted operating conditions will increase CSR reserves, entailing an extended commitment of companies toward more socially responsible behaviour in the days to come. 7. The Stepwise Implementation Model for Corporate Managers CSR practices can be fruitful for the attainment of Sustainable Development Goals (SDGs). Managers need to understand a few steps to realise the true spirit of contributing to society by way of spending on CSR. A stepwise CSR process can be followed for adherence to CSR norms: Step 1: Internalize the True Spirit: Understand the true spirit of CSR, distinguishing statutory compliance from genuine societal value creation, and assess tangible and intangible stakeholder benefits. Step 2: Strategic Policy Integration: Design an appropriate CSR policy and inculcate CSR as an indispensable core component of corporate business strategy while executing routine enterprise operations. Step 3: Target High-Impact Domains: Choose specific target areas of spending under Schedule VII and ensure that capital allocations generate shared, measurable, and enduring value for all beneficiaries. Step 4: Robust Execution Channels: Implement CSR projects directly or through seasoned implementation agencies and collaborative partnerships, ensuring full tracking and accountability. Step 5: Mandatory Social Audit & Impact Assessment: Conduct independent Social Audits to certify efficacy, verify transparent resource utilization, and validate on-ground socio-economic transformation. 8. Conclusion & Future Outlook The journey of CSR as a historical concept from philanthropy to comply or explain to the comply approach has been successful. CSR is the need of the hour and a national priority for India. The regulatory landscape has guided us about CSR provisions and its rules. The monitoring mechanism of CSR is expected to ensure better compliance. CSR practices lead to tangible and intangible benefits to stakeholders in terms of social inclusion. Developments such as CSR Accounting and Social Audit can bring efficient, effective and impactful results in the ensuing years. CSR spending in prominent areas of education and health augurs well. During the pandemic, governments are pursuing the aim of implementing widespread healthcare measures in emerging economies. There had been a reduction in CSR spending during the period of COVID-19. The major shift in spending on CSR from the education to health category during the pandemic period was apparent. COVID-19 has intervened in spending on CSR. Data on CSR have indicated the emergence of need-based, focused, strategic, and sustainable CSR practices. CSR spending can facilitate resolving myriad societal issues and it provides support for protecting People, Planet and Profit (Triple Bottom Line). Under CSR, part of the profit made by corporations is spent on society in a meaningful manner. The government or regulator’s understanding to allow broad-based CSR activities deserves appreciation. CSR Accounting and Social Audit provide ample scope of engagement for professionals. CSR is expected to be an ever-green corporate phenomenon. Its importance cannot be undermined until business entities continue as going concerns. ■■■ Scholarly References Baron, D. P. (2001). “Private politics, corporate social responsibility, and integrated strategy”, Journal of Economics & Management Strategy, 10, pp. 7–45. Basak, R., Mondal, A., & Rakshit, D. (2020, December). “CSR contribution and financial performance: A study on select Indian companies”, The Chartered Accountant, pp. 76–82. Carroll, A. B. (1979). “A three-dimensional conceptual model of corporate performance”, Academy of Management Review, 4(4), pp. 497–505. Companies Act, 2013. Available at: http://www.mca.gov.in/ CSR Portal, Government of India. Available at: https://www.csr.gov.in ICAI, (2020). “Technical guide on accounting for expenditure on corporate social responsibility activities”, available at: https://www.icai.org/post/csr-announcement-06072020 Ding, W., Levine, R., Lin, C., & Xie, W. (2021, February 3). Corporate immunity to COVID-19 pandemic. Journal of Financial Economics, forthcoming. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3578585 Frederick, W. C. (1960). “The growing concern over business responsibility”, California Management Review, 2(4), pp. 54–61. Friedman, M. (1970, September 13). “The social responsibility of business is to increase its profit”, The New York Times Magazine. Shukla, A. (2022, April 05). “Social audit of CSR spend may become must”, The Economic Times. Available at: https://economictimes.indiatimes.com/news/economy/policy/social-audit-of-csr-spend-may-become-must/articleshow/90650199.cms

INTERNATIONAL TAXATION • TAX TREATY ENTITLEMENT & FTES The Chartered Accountant • October 2022 • Vol. 71 • pp. 67–72 (Journal pp. 415–420) Fiscally Transparent Entities - Tax Treaty Benefits NJ CA. Nidhi Jain Member of the Institute (ICAI) • Reach at: nidhijaincosting@gmail.com & eboard@icai.in Executive Summary & Core Debates Tax treaty entitlement to fiscally transparent entities (FTEs) has been a matter of debate in the arena of international tax. The crux of this complexity lies in the divergent principles and tax practices by various nations in relation to entity characterisation rules, i.e., tax treatment of an entity as “taxable entity” or “fiscally transparent”. This article attempts to explore and highlight few issues about claiming treaty benefits by FTE. 1. What are Fiscally Transparent Entities (FTE)? Characterisation of any entity and how a state recognises such entity is important as it may have an impact on who pays tax on the source of income – entity or owners of the entity and eventually determine who is eligible to tax treaty benefits. Depending upon the extent of taxation, entities can be classified under two classes: i. Single Entities / Non-Transparent (Opaque) Entities Entities which are taxed as separate individual bodies. Tax is levied directly at the level of the entity itself. The entity is treated as a distinct taxpayer under domestic tax law. ii. Transparent / See-Through / Flow-Through Entities (FTE) Entities which are taxed only at the level of owners and not at the entity level. The entity’s income flows through to its owners and is assessed directly in the hands of the owners. Some countries tax the entity as separate entities wherein tax is levied at the level of entity, such entities are referred to as single/ non transparent/ opaque entities. Whereas fiscal transparency is a concept wherein, the entity’s income flows through to its owners and is taxed in the hands of the owners. Applicability of tax treaty benefits to a fiscally transparent entity has been a matter of debate as it is not a taxable entity. OECD issued a report in 1999, “The Application of the OECD Model Tax Convention to Partnerships” (OECD report on partnership) wherein the Committee then examined the following approach to taxation of partnerships wherein partnership is not liable to tax, instead tax payable on the income of the partnership is determined at each partner’s level. Countries where tax laws provide that income derived by a partnership from a particular source must be computed first at the partnership level as if the partnership was a distinct taxpayer. Each partner is then allocated his share of that income which retains its character and is added to his personal income for purposes of determining his taxable income. His taxable income, including his share of the partnership’s income is then reduced by the personal allowances and deductions to which he is entitled and tax is then determined, assessed and paid at the partner’s level. Therefore, the partnership is not itself liable to tax. The fact that an “entity” is transparent for tax purposes does not mean that it is transparent for other legal purposes. Normally the entity has legal standing in respect of making contracts. Partnerships, trusts and some other body corporates such as investment funds, real estate investment trusts, Limited Liability Corporations (LLCs) etc. may be examples of fiscally transparent entities. Illustration: Cross-Border Conflict in Partnership Characterisation Let us understand the tax impact of partnership firms and its partners through following illustration: Entity & Jurisdiction: P is a partnership established in State B. Partners: X and Y are P’s partners who are resident of State B. State B Treatment: State B treats P as a transparent entity (taxes X and Y on their shares). Source Income: P derives royalty income from State A that is not attributable to a permanent establishment in State A. State A Treatment: State A treats the partnership as a taxable (opaque) entity. The Conflict: Under State A domestic law, the taxpayer will be partnership P. State A could then argue that since partnership P is not a “person liable to tax” in State B (therefore not resident as per tax treaty), partnership P is not entitled to the benefits of the treaty. Therefore, State A would tax income derived by P regardless of the tax treaty between State A and B. This would mean that the income on which X and Y are liable to tax in State B would be subjected to tax in State A regardless of the tax treaty. 2. Where are These FTEs Prevalent? Partnership and partnership-like structures are quite popular business forms in the United States (US). US tax laws also provide for an elective system, called “Check-the-Box” rule. Under this rule, all domestic and foreign entities, which are not stock companies, can elect to be a partnership or corporation or are treated as disregarded entity for tax purposes. They can take legal forms such as C-Corporation, S-corporations, Limited Liability Company (LLC), Partnerships, etc. Apart from the US, other countries such as Singapore, the Netherlands, the UK, Sweden etc. consider partnerships / similar entities as fiscally transparent. The Indian Position on Partnerships & LLPs: In India, both partnership firms and Limited Liability Partnerships (LLPs) are treated as separate taxable entities (taxed at the entity level at flat rates), and the share of profit/income from the same is exempt in the hands of partners under Section 10(2A) of the Income-tax Act, 1961. 3. FTE – Entitled to Tax Treaty Benefits? The legal and tax structure of an entity determines its entitlement to tax treaty benefits based on the various conditions specified in a particular tax treaty. Considering that partnership is the prominent form of FTEs globally, the focal point of this discussion is surrounded around partnerships. Let us analyse the logical flow of the articles of the OECD Model Tax Convention on Income and on Capital, 2017 (OECD MTC). Entitlement to tax treaty benefits is dependent on whether the entity is a “person” and qualifies to be a “resident” of a contracting state as per the relevant tax treaty. Article 1 Persons Covered Applies to persons who are residents of one or both of the Contracting States. Article 2 Taxes Covered Specifies the taxes on income and capital to which the Convention applies. Article 3 General Definitions “Person” includes an individual, a company and any other body of persons. Article 4 Resident Definition Any person liable to tax by domicile, residence, place of management, or similar criterion. Step-by-Step Treaty Eligibility Criteria: Step A: Is a partnership a “person”? As per OECD MTC Commentary on Article 3, partnerships will also be considered to be “persons” either because they fall within the definition of “company” or, where this is not the case, because they constitute other bodies of persons. Step B: Is a partnership a “resident of a Contracting State or liable to tax”? After the recommendation of the OECD report on partnership and post BEPS, Action 2, “Neutralising the Effects of Hybrid Mismatch Arrangements”, the OECD commentary was amended in 2017 to specifically address the issues in claiming tax treaty benefits by fiscally transparent entities. Paragraph 2 was inserted in Article 1: “income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be an income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State”. Further, the objective of including the requirement, ‘liable to tax’, is to ensure that only those persons who are potentially exposed to double taxation should be given treaty protection. Since, strictly speaking, a fiscally transparent entity is not ‘liable to tax’ in its own capacity and its owners are taxed, it may be argued that a fiscally transparent entity does not meet the criteria of “resident” of the contracting state. Thereby, treaty benefits would be extended to only those owners or FTEs who qualify to be resident of that state and to the extent are liable to tax on such income. Solution to Illustration: State A can consider the entitlement to treaty benefits to X and Y, both residents of State B, who should also be considered to be the beneficial owners of such income as these are the persons liable to tax on such income in State B. 4. India’s Position on the Eligibility of Treaty Benefits to FTE Strict Stance & MLI Reservation: India is of the view that when a partnership is denied treaty benefit on the grounds that it is a fiscally transparent entity, the partners are also denied treaty benefits unless there is an express provision in a tax treaty to the contrary. It may be noted that India has reserved its right for the entirety of Article 3 of the Multilateral Instrument (MLI) not to apply to its Covered Tax Agreements; thereby, it has refuted to include paragraph 2 of Article 1 of the OECD MTC in its tax treaties. Only very few Indian tax treaties, with the US, UK, and Sweden, contain specific provisions allowing for the granting of treaty benefits to a fiscally transparent entity through Article 4. However, countries like Austria, Singapore, Switzerland, the Netherlands, etc., where partnerships are considered as FTEs, may continue to face difficulties in claiming benefits under the Double Tax Avoidance Agreement (DTAA) with India, in the absence of express provisions for granting treaty benefits. 5. Comparative Analysis of Key Indian Double Tax Avoidance Agreements Analysis of Articles 1, 3, and 4 across Indian tax treaties with the US, UK, Singapore, and Sweden: Particulars India and US India and UK India and Singapore India and Sweden Article 1:Persons Covered Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention. Convention shall apply to persons who are residents of one or both of the Contracting States. Agreement shall apply to persons who are residents of one or both of the Contracting States. Convention shall apply to persons who are residents of one or both the Contracting States. Article 3:Definition of Person The term “person” includes an individual, an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity. The term “person” includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States. The term “person” includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States. The term “person” includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States. Article 4:Definition of Resident The term “resident of a Contracting State” means in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. The term “resident of a Contracting State” means in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. The term “resident of a Contracting State” means any person who is a resident of a Contracting State in accordance with the taxation laws of that State. The term “resident of a Contracting State” means - In the case of a partnership or estate, the term applies only to the extent that the income derived by such partnership or estate is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. Analysis & Entitlement Tax treaty benefits extended to FTE or owners of FTE vide Article 4(1)(b). Tax treaty benefits extended to FTE or owners of FTE vide Article 4(1)(b). Article 4 does not explicitly specify that tax treaty benefit will also apply to FTE or owners of FTE. Tax treaty benefits extended to FTE or owners of FTE vide Article 4(1). As evident from above, as far as India is concerned, a partnership (wholly or fiscally transparent) shall be eligible (either partnership or its partners) for relief under DTAA only if Article 1 and 4 specifically prescribes such relief. 6. Key Judicial Precedents: Global Rulings & Indian Jurisprudence 1. Anson (formerly Swift) v HMRC [2015] UKSC 44 (United Kingdom Supreme Court) The case concerns an individual member, Mr. Anson, of a Delaware LLC. The issue was whether he was entitled to double tax relief for US tax paid on the profits of the LLC. He was taxed personally on his share of the LLC profits in the US as the US viewed the company as a transparent entity. However, HMRC in the UK viewed the LLC as a corporate entity, which had merely paid the member the equivalent of a dividend. Therefore, from the UK perspective he had not personally been taxed on the same income and so did not qualify for double tax relief. However, the UK Supreme Court allowed the treaty relief to Mr. Anson since the profits of LLC were directly taxed in his hands and LLC was treated as transparent in the US. 2. Japanese Taxation of Delaware Limited Partnership (Supreme Court of Japan, 2013 (Gyo-Hi) No. 166 – July 2015) Taxpayers invested in a business managed by a Delaware LP which leased and ran apartments in the US. On the point whether Delaware LP was, for Japanese tax law, a separate entity or was fiscally transparent so that its income was taxable directly in the hands of the investors, the Supreme Court of Japan set out two clear criteria: First Test: Determine whether or not it was clear (beyond doubt) under the laws of the foreign country that the entity had a legal status equivalent to a corporation under Japanese law. Second Test: If unable to decide, examine the attributes of the entity to consider whether it possessed separate rights and obligations. Contrast with Anson: In Anson, the UK Supreme Court purely relied on entity classification made in the US (country of residence), whereas the Supreme Court of Japan based its determination on entity classification in Japan (country of source). 3. Calcutta High Court in P&O Nedlloyd Ltd & Others v ADIT (WP Nos. 457 and 458 of 2005) The taxpayer was a UK partnership between P&O Containers Ltd of the UK and Nedlloyd Lines BV of the Netherlands, operating ships in international traffic including India. Although income derived from India was taxable on non-residents under Indian domestic law, the partnership claimed exemption under Article 9 of the 1993 India-UK treaty. Tax authorities asserted that the partnership was not entitled to treaty benefits because it was not liable to UK tax. However, Article 3(2) of the 1993 treaty includes a partnership as a person if treated as a taxable entity under the Indian Income-tax Act, 1961. The Calcutta High Court regarded the partnership as a person entitled to treaty benefits under Article 9, although the decision did not address the Article 4(1) requirement of being liable to UK tax. 4. Mumbai ITAT in Linklaters LLP v ITO [2010] 40 SOT 51 (Mum) Examined whether treaty benefits under the India-UK treaty were available to the partners of a partnership firm which had income sourced from India. The Tribunal adopted an objective approach in granting treaty benefits, ruling that benefits cannot be denied as long as the profits are taxed in the UK. 5 & 6. Statutory Resolution in India-UK Treaty & CBDT Circular No. 2/2016 With effect from 27.12.2013, the India-UK treaty addressed this problem through Article 4(1)(b), specifically granting treaty benefits to income derived by a partnership to the extent that it is taxed in the partner’s hands in the UK. Furthermore, Indian Income-tax authorities issued Circular No. 2/2016 (dated 25.02.2016) clarifying that the India-UK DTAA applies to a partnership resident in either India or the UK, to the extent that income derived by the partnership is taxed in the UK in the hands of its partners. 7. Mumbai ITAT in A.P. Møller–Mærsk (2015) 235 Taxmann 513 The Mumbai Tribunal held that the “taxability of the income” in the resident State should govern eligibility for treaty benefits. Therefore, even though a partnership firm may be a fiscally transparent entity, as long as its profits are taxed in the hands of its partners in the resident country, benefits of the tax treaty cannot be denied to the partnership. 8. Authority for Advance Rulings (AAR) in Schellenberg Wittmer The AAR examined whether Swiss partnerships are treated as residents of Switzerland under the India-Switzerland DTAA. The AAR held that since the partnership is not a taxable entity in Switzerland, it does not qualify to be a ‘person’ as per Article 3 of the treaty. Rebutting the Applicant’s reliance on the OECD MTC, the AAR observed that since India is not a member of the OECD, any recommendation of the OECD could be relevant to India tax treaties only if such provision is agreed to be included by both contracting states. 7. Conclusion & Unresolved Cross-Border Landscape The OECD partnership report, OECD MTC, tax practices in each state and principles emanating out of judicial precedents have developed numerous divergent tax rules when it comes to the taxation of FTEs. While the adoption of Article 3 of MLI – Transparent entities may resolve few issues for countries who have agreed to apply Article 1(2) of the OECD MTC, the same remains unresolved as far as India is concerned, as India has refrained from applying the same to its tax treaties. ■■■ Statutory & International Reference Materials OECD Model Tax Convention on Income and on Capital, 2017. OECD Report of 1999, “The Application of the OECD Model Tax Convention to Partnerships”. Base Erosion and Profit Shifting (BEPS) – Action 2: “Neutralising the Effects of Hybrid Mismatch Arrangements”.

SUSTAINABILITY • GREEN DEBT & ESG CAPITAL MARKETS The Chartered Accountant • October 2022 • Vol. 71 • pp. 73–78 (Journal pp. 421–426) Green Bonds: A Step towards Sustainable Future KJ Karishma Jain Research Scholar, Institute of Management Studies, BHU • Reach at: eboard@icai.in PT Prof. P. S. Tripathi Academician & Professor, Institute of Management Studies, BHU • Reach at: eboard@icai.in Executive Summary & Core Policy Vision The green bond market has grown rapidly in recent years. In Budget 2022, the Union Finance Minister proposed to issue green bonds as a part of the government’s total market borrowing in 2022-23, these resources will be mobilised for developing the green infrastructure. This is a significant step towards the nation’s commitment to reducing carbon intensity and achieving net-zero emission target by 2070. This article highlighted the significance of green bonds and ESG investing. Further, it discussed the factors to consider for green bond issuers as well as suggestions for green bond market participants. 1. Introduction: ESG Investing & The Sovereign Green Mandate Environmental, Social and Governance (ESG) investing also known as “sustainable investing”, “Socially Responsible Investing”, or “impact investing” refers to the integration of Environmental, Social, and Governance factors alongside financial performance factors in investment decision-making. ESG are the non-financial aspects for evaluating the sustainability and societal impact of the companies, which are further assessed by the socially conscious investors for making investment decisions. Responsible investors or socially conscious investors are those that consider non-financial factors as a part of their investment evaluation process to identify the material risks and growth opportunities apart from the financial factors. Such investors generally avoid making investments in “sin” stocks, such as firms involved in tobacco, gambling, and alcohol business. Green bonds are a part of ESG investing (Outlook India, 2022). These are the fixed-income debt instruments intended primarily to raise funds for the environmental and climate-related projects. The first-ever green bond i.e., “Climate Awareness Bond” was issued in 2007 by European Investment Bank and World Bank (EIB, 2007). Recently in Budget 2022-23, the Union Finance Minister mentioned energy transition and climate action as one of the visions of the government during the “Amrit Kaal”, the 25-year period leading up to India @100. She announced to issue sovereign “green bonds” as a part of the government’s total market borrowing and that resources will be mobilised for developing green infrastructure. The proceeds will be used to fund public-sector initiatives aimed at lowering the economy’s carbon intensity (Government of India, 2022). The issuance of green bonds is a great step in the direction of the government’s commitment towards net-zero and becoming green economy. The Green bonds and ESG bonds are becoming attractive for the investors as it is based on the practice of Socially Responsible Investing which is regarded as valuable in the bond market in recent times. As our Indian corporates are adopting more sustainable business practices, the issuance of green bonds has increased significantly in 2021. From January 2021 to November 2021 more than a dozen companies issued green bonds and raised around $6.11 billion as shown in Figure 1, which is the highest from 2015 since the green bonds were first issued. Companies like JSW Hydro, Greenko, Adani Green are the large issuers of green bonds while Axis bank AT1, Ultratech Cement, Adani Electricity Mumbai are the larger fundraisers through ESG bonds in 2021. 2. Growth Trajectory & Regulatory Taxonomy Figure 1: Volume of Indian Green Bond Issuance (US$ Billion) [2017–2021] FY 2017 $4.28 B FY 2018 $0.70 B FY 2019 $3.14 B FY 2020 $1.09 B 2021 YTD* $6.11 B Source: Climate Bonds Initiative / S&P Global Market Intelligence (2022). Data compiled Nov. 30, 2021 (*Represents data up to Nov. 28, 2021). Green bonds are limited to those for which at least 95% of proceeds are designated for green projects aligned with Climate Bonds Taxonomy. Green bonds are the debt securities issued by any sovereign organisations, inter-governmental groups or alliances, and corporates to raise funds for projects that are environmental and climate-related. Apart from government and companies, World Bank also issues green bonds for various projects in India from time to time. With a growing emphasis on environmentally sustainable and green infrastructure, investors are increasingly viewing investments in the industry as a kind of social and corporate responsibility. SEBI Definition of Green Debt Securities (SEBI, 2017): Securities and Exchange Board of India (SEBI, 2017) has defined green bonds as “debt securities in which the funds raised will be used for the project(s) and/or asset(s) that fall into the following categories”: a. Renewable & Sustainable Energy: Wind, solar, and other clean energy sources. b. Environmentally Friendly Transport: Mass / public transportation infrastructure. c. Sustainable Water Management: Clean water supply and conservation. d. Climate Change Adaptation: Ecosystem defense and resilient infrastructure. e. Energy Efficiency: Efficient systems, green buildings, and retrofit measures. f. Sustainable Waste Management: Recycling, efficient waste disposal, etc. 3. Catalytic Benefits of Green Bonds (Figure 2 Analysis) The most important feature of green bonds is that they are focused on having a positive impact on sustainable development goals (SDGs) and environmental protection. Furthermore, because these bonds are issued for ‘green’ projects, their credentials have the potential to attract a bigger pool of global investors, given the fast incorporation of ESG indicators into the investment analysis process. 1. Additional Source of Financing Given immense green investment needs, bonds are an appropriate financing instrument to fund such projects. As a new instrument, green bonds can leverage a wider investor base including institutional investors (such as pension funds, insurance companies and sovereign wealth funds) which can help channel funds to such long term projects. 2. Addressing Maturity Mismatch Many countries, including India are constrained in their ability to provide long term finance due to liability maturity issues and lack of hedging duration risks. Funds of long term nature, from varying class of investors, can be channelled through long term bonds issuances, to mitigate this issue. 3. Lower Cost of Funding It is expected that with the need to encourage investment in Green initiatives, a larger pool of capital and investments may be made available to fund the same. Like is seen in the infra debt space in Indian infrastructure industry, there may be possibilities of regulatory tax benefits which may be given to green businesses, due to which the cost of such funding may reduce. 4. Expanding Green Investment Products Pension funds, insurance companies, sovereign wealth funds and other institutional investors looking for new financial instruments can achieve investment targets. Green bonds provide portfolio diversification while global multilateral championing mitigates geopolitical risks for cross-border investors. Source: Vivro Financial Services (2018) 4. Current Trends in India: 2nd Largest Emerging Green Bond Market India started green bonds in 2015. Looking at Figure 3 (IFC, 2021), India has the second-largest burgeoning green bond market among emerging markets after China. Yes Bank issued the first green bond in India in February 2015 to raise around 1,000 crores with a tenure of 10 years for renewable energy projects. In the same year, the Export-Import Bank of India (EXIM Bank), CLP Wind Farms, ReNew Power Ventures, and IDBI Bank all issued Green Bonds in the country. In 2021, more than $6.11 billion was raised through green bonds by more than a dozen companies, which is the highest since its inception in 2015. Exponential Expansion of ESG & Sustainable Capital in India (2019–2021): UN-PRI Signatories: The number of Indian signatories in UN Principles for Responsible Investment (UN-PRI) tripled in 2020. ESG Mutual Funds: Rose to 10 ESG mutual funds in 2021, up from only two ESG mutual funds in 2019. Carbon Disclosures: Approximately 220 Indian companies actively disclose emissions reports through the Carbon Disclosure Project (CDP). ESG Fund Inflows: Surged 76% from Rs. 2,094 crores in 2019-20 to Rs. 3,686 crores in 2020-21 (Economic Times, 2021). Assets Under Management (AUM): Total AUM of ESG funds reached Rs. 12,320 crores as of November 2021, expanding 4.7 times from November 2019. Market Projection: CRISIL (2021) projects ESG assets in India to rise at least 15% annually to reach $60 billion by 2025. Domestic ESG Rating Pioneers: Acuité launched ESG Risk AI in January 2021 assessing the top 1,000 companies; CRISIL launched comprehensive ESG scores for 225 companies across 8 sectors in June 2021. 5. Critical Considerations for Green Bond Issuers & Verification Green bonds significantly differ from other forms of bonds, as they are specifically created to meet the requirements of environment-friendly projects (Bhutta et al., 2022). The bond issuer raises a fixed sum from investors over a specified period of time, returns the investment when the bond matures and pays a set amount of interest (coupons) along the way. Issuers must evaluate three structural parameters (Bhutta et al., 2022; Park, 2019): a. Labelling Decision (Costs vs. Investor Access) Provides access to a wider range of global ESG investors and improves corporate reputation. However, operating costs are higher than conventional bonds due to upfront criteria design, ongoing monitoring, reporting tracking, and the risk of penalties for green defaults. b. Selection of Green Criteria Must align transparently with Green Bond Principles (GBP), Climate Bond Standards, and SEBI (2017) project definitions. Alignment with investor expectations (credit rating, environmental objective, pricing, and overall business ethics) is imperative. c. Post-Issuance Periodic Reporting Issuers must report on environmental and social value generated at least once a year during the bond life, incorporating data collection mechanisms and Key Performance Indicators (KPIs) to track sustainability milestones. External Assessment & Assurance Mechanisms: Second-Party Consultation (“Second Opinion”) An environmental expert provides an assessment of the green credentials and project selection criteria proposed by the issuer prior to issuance. External Third-Party Assurance (ISAE 3000) Performed by audit professionals under International Standard on Assurance Engagement (ISAE) 3000 (revised 2013 by IAASB). Third-party assurance verifies fund allocation, prevents fund diversion, and solidifies institutional investor trust. Mitigating “Greenwashing” Risks: Greenwashing accusations emerge when core operations are unsustainable, proceeds are diverted to non-green assets, or tracking is deficient. Issuers avoid reputational damage through transparent reporting, rigorous metric tracking, and mandatory third-party assurance. 6. Recommendations for Stakeholders & Crucial Role of Chartered Accountants Market Regulator (SEBI): Defines categories, disclosure standards, and mandatory offer document reporting. Bond Issuers: Ring-fence proceeds strictly for declared green purposes and publish annual utilization audits. Investors (Retail & Inst.): Channel capital into accredited green debt instruments with robust third-party verification. Third-Party Assurers: Provide objective ISAE 3000 assurance validating impact metrics and fund deployment. The Professional Role of Chartered Accountants: Chartered Accountants play a crucial role in ensuring compliance with laws and regulations. The auditors of the report are required to gather pertinent and appropriate audit evidence concerning compliance with laws and regulations that are known to directly affect the material amount and disclosures in reporting. Chartered Accountants audit these reports related to green bonds to determine whether the information provided by the green bonds’ issuers is accurate. They verify the internal tracking approach of the issuer and disbursement of funds from green bonds proceeds to the project. They assist the entity in achieving its sustainability objectives and integrating it with business strategy and decision making. An External auditor’s assessment improves the reliability of the report and increases the investors’ confidence. 7. Concluding Remarks: CoP 26 Glasgow Pledges & National Trajectory In recent years, sustainability and climate change have become significant global challenges. India is among one of the fastest developing economies; therefore, its efforts towards sustainability and climate change are going to have a major impact on the world’s sustainable development. At the 26th Conference of Parties (CoP 26) in Glasgow, the Prime Minister of India pledged: Achieve net-zero emission by 2070; Reduce carbon emissions by one billion tonnes by 2030; Increase renewable energy’s share of the energy mix to 50%; and Proclaimed LIFE – “Lifestyle for Environment” as a watchword for sustainable development. Around 56 Indian companies have already set targets for net-zero emissions by the beginning of the 2030s. The Finance Minister’s announcement for the issuance of sovereign green bonds represents a landmark stride toward attaining these net-zero targets and bolstering India’s ESG investment landscape. ■■■ Scholarly References Bhutta, U. S., Tariq, A., Farrukh, M., Raza, A., & Iqbal, M. K. (2022). Technological Forecasting & Social Change Green bonds for sustainable development: Review of literature on development and impact of green bonds. Technological Forecasting & Social Change, 175. https://doi.org/10.1016/j.techfore.2021.121378 CRISIL. (2021). ESG Gauge: CRISIL ESG Compendium. Available at: CRISIL ESG India Leadership Summit Report Economic Times. (2021). Inflows of sustainable funds surge 76% to Rs 3,686 cr in FY21. Economic Times. Available at: ET Inflows Report Ernst & Young. (2021). Can ESG help future proof your business? (Issue August). ET Times. (2021). ESG fund assets jump 4.7 times in 2 years, may grow further. Economic Times. Available at: ET Fund Assets Report European Investment Bank. (2007). Climate Awareness Bonds. Available at: https://www.eib.org/en/investor-relations/cab/index.htm Government of India. (2022). Budget 2022-2023 Speech. Available at: https://www.indiabudget.gov.in/doc/budget_speech.pdf International Finance Corporation. (2021). Emerging Market Green Bonds Report 2020 On the Road to Green Recovery. KPMG. (2015). Sustainable Insights: Gearing up for green bonds. Available at: KPMG Gearing Up for Green Bonds Outlook India. (2022). Union Budget Pushes Green Bonds: What’s The Need and What’s In It For the Investors? Available at: Outlook India Report Park, S. K. (2019). Green Bonds and Beyond Debt Financing as a Sustainability Driver. In B. Sjåfjell & C. M. Bruner (Eds.), The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability (pp. 596–610). Cambridge University Press. https://doi.org/10.1017/9781108658386.049 S&P Global Market Intelligence. (2022). India sets sights on record green bond issuance entering 2022. Available at: S&P Global Intelligence Report SEBI. (2017). Disclosure Requirements for Issuance and Listing of Green Debt Securities. Securities and Exchange Board of India. Vivro. (2018). Green Bonds-Financing Sustainable Development. Available at: Vivro Sustainable Development Blog

TECHNOLOGY • VIRTUAL BANKING & METAVERSE FINANCE The Chartered Accountant • October 2022 • Vol. 71 • pp. 84–88 (Journal pp. 432–436) How the Metaverse will impact the world of finance MK CA. Manoj Kalra Member of the Institute (ICAI) • Reach at: manojkalra@rediffmail.com & eboard@icai.in Executive Summary & Overview At its most basic, the metaverse is a three-dimensional virtual universe that combines augmented and virtual reality with social media to create a simulated digital environment. The technology offers users a greater sense of participation, autonomy, and boundlessness. For businesses, it is an opportunity to engage with stakeholders beyond the brick & mortar storefront and smartphone-based apps. With the acceleration of digital-based economies, the metaverse is expected to be a crucial digital platform for financial transactions. Consequently, major financial institutions around the world are exploring the platform in different ways. In this article, we explore the many ways in which the metaverse will impact the world of finance. Although yet developing, the technology undoubtedly holds the potential to reshape the future of the industry to make it better connected, insights-led, and purpose-driven. But only time will tell if and how well the industry is able to harness the potential of this promising technology. 1. Introduction: Global Financial Institutions Enter the Metaverse In November last year, KB Kookmin Bank, one of South Korea’s largest financial institutions, announced that it has developed the metaverse VR Branch Testbed [1]. It termed the initiative as an experiment that would allow customers to access its services in the metaverse. Likewise, earlier this year, JPMorgan, the largest bank in the US, unveiled the bank’s suite of Ethereum-based services and released a report exploring how businesses can find opportunities in the metaverse [2]. At its most basic, the metaverse is a three-dimensional virtual universe that combines augmented and virtual reality with social media to create a simulated digital environment. The technology offers users a greater sense of participation, autonomy, and boundlessness. For businesses, it is an opportunity to engage with stakeholders beyond the brick & mortar storefront and smartphone-based apps. For financial services, the metaverse holds the potential to transform the sector as we know it today. It offers a whole new reality by making financial transactions seamless, accessible and more secure than ever before. Executive Perceptions on Banking in the Metaverse [3]: 67% of global banking executives agree the metaverse will positively impact their organizations. 38% stated that the metaverse will be a breakthrough or transformational force for banking. 92% agreed future platforms must enable unified data interoperability across spaces. 2. Impact on Stakeholder Experience in Financial Services As the examples cited above show, major financial institutions around the world are exploring the platform in different ways: Financial Services in the Metaverse: The elementary technology ecosystems of the metaverse – comprising of blockchain, cryptocurrencies, non-fungible tokens (NFTs) and decentralized finance (DeFi) – are all geared toward an open, decentralized and permissionless internet. Traditional financial products and services will be reinvented by these evolving technologies. For instance, DeFi-enabled insurance and cryptocurrencies will reshape real-time data collection and claims automation. Another example would be that of banks – they can identify potential customers, onboard them through crypto wallets, and provide payments, lending and custody services. Cryptocurrencies and NFTs as the Currency of the Metaverse: A cryptocurrency is a digital or virtual currency that is secured by cryptography—an encrypted data string denoting a unit of currency monitored and organized by blockchains. On the other hand, NFTs are a special kind of digital file representing a single unit of value. They earn uniqueness from verifiable assets with identifiers and attributes giving them worth. They are an individualized digital commodity that cannot be exchanged for another asset, but only for themselves. Given their inimitability, NFTs are one of the most promising payment solutions for the metaverse. The advent of cryptocurrencies and NFTs could enable monetization in the virtual world. For example, virtual real estate is likely to have profound consequences on the future of the tangible property market. The drastic increase in digital land trading has prompted a number of companies to plan virtual cities in the metaverse. 3. Blockchain Foundations for Metaverse Financial Security Blockchain technology refers to a system in which a record of transactions is maintained across several computers that are linked in a peer-to-peer network. The technology duplicates and distributes the digital ledger of transactions across the entire network of computer systems – making it difficult to change, hack or cheat the system. Five core characteristics add great value to the metaverse: i. Security Decentralized storage and data processing nodes enable safe storage, transmission, and instant synchronized transactions. ii. Accessibility Synchronizing thousands of independent nodes allows all users to experience the same virtual world simultaneously. iii. Tokens Secure storage devices transmitting virtual content, personal data, and authorization keys in encrypted form. iv. Governance Smart contracts regulate economic, legal, and social interactions seamlessly without central intermediary failure. v. Interoperability Facilitates frictionless operation across different interfaces, paramount for cross-metaverse NFT valuation. Driving the Next Wave of Commercial Innovation: By creating virtual points of presence, the metaverse enables financial institutions to connect with a new generation of customers, partner with new-age service providers, and tap into unexplored talent pools through new channels, services, experiences, digital goods, and assets. The technology will disrupt payment solutions, custodial services, forex, and liquidity management. Regulatory solutions relating to tax, compliance, and accounting—including cross-border and cross-currency transactions—will also be profoundly impacted. Need for Caution: Given that it is an evolving technology, some key elements to support commerce and the meta-economy still need to be determined and scaled—specifically technology infrastructure, cyber security, and an overarching governing framework. 4. Ahead-of-the-Curve Thinkers: Institutional Virtual Deployments KB Kookmin Bank (South Korea) Simple transactions like remittances are managed at virtual teller windows. Employee avatars inside the virtual VIP lounge assist clients in analyzing risk-return profiles or designing investment portfolios. In the main hall, customers browse personalized financial data using head-mounted VR devices. The bank also uses its virtual branch to educate youth and train staff. JPMorgan Chase & Onyx Lounge The largest US bank unveiled its Ethereum-based Onyx lounge in Decentraland, releasing comprehensive research on commercial meta-economy opportunities [4]. JPMorgan emphasizes understanding client demand and establishing infrastructure to maximize virtual economic life. Acorns & Westpac Banking Corporation Fintech leader Acorns launched debit cards with smartphone-based Augmented Reality (AR) engagement. Australia’s Westpac Banking Corporation introduced AR-powered financial data visualization and budgeting interfaces directly via smartphones [5]. Diffusion Timelines: From Internet to Mobile to Web 3.0: It took the internet 15 to 20 years to diffuse into mainstream banking. The mobile phone took 5 to 6 years. Now, as the world prepares for Web 3.0, 47% of bankers believe that customers will use AR/VR as an alternative transaction channel by 2030 [6]. “Supply and demand dynamics are driving people into the meta-economy. Over time, the market for metaverse real estate could evolve in a similar way as the real estate market in the analogue world. In time, the virtual real estate market could start seeing services much like in the physical world, including credit, mortgages, and rental agreements.” — JPMorgan Report [7] 5. Gauging a Brand’s Preparedness: The 6 Strategic Questions Before investing in the metaverse, financial institutions will need to introspect on the technology’s strategic needs and potential benefits in the context of their brand. It would be prudent for financial institutions to remember that not everything in the metaverse will be relevant for every business. The six vital introspective questions include: 1. Strategic Objectives: What are the precise goals of your enterprise metaverse strategy? 2. Capital Budgeting: What is your implementation plan and financial budget to navigate the metaverse? 3. Novel Service Experience: Which services, when rendered in the metaverse, can offer customers a never-before experience? 4. Stakeholder Value Addition: What tangible and intangible value will the metaverse add to stakeholder experience? 5. Magnitude of Accrued Value: Given that the technology is in nascent stages, what is the potential magnitude of value accrued for the brand? 6. Differential Advantage: How will the strategy benefit the brand differently from physical and traditional on-screen versions of the business? 6. The Bottomline: The Path Ahead The metaverse holds the potential to revolutionize the financial services industry. It offers immense benefits by collaborating with people, spaces, and services in both the virtual and real worlds. Although yet developing, the technology undoubtedly holds the potential to reshape the future of the industry to make it better connected, insights-led, and purpose-driven. Progressive organizations that keep up with advances in technology and deliver to rising customer expectations will become leaders of the new digital reality. Leading financial organizations across the world have begun to acknowledge that creating a strong digital asset and meta presence early on will be critical to their relevance in the future. This recognition is translating into huge investments in the metaverse by global brands. But only time will tell if and how effectively and efficiently the industry is able to harness the potential of this promising technology. ■■■ Reference Citations & Industry Reports Forkast News: South Korea KB Kookmin Bank Presents Metaverse VR Bank Testbed. Available at: Forkast KB Kookmin Report Business Today: JPMorgan becomes world’s first bank to arrive on metaverse. Available at: Business Today JPMorgan Report Accenture Banking Blog: The Ultimate Guide to Banking in the Metaverse. Available at: Accenture Banking in Metaverse Guide Business Today: JPMorgan Metaverse Client Demand & Future Architecture Analysis. Available at: Business Today Report UXDA: Augmented Reality in Digital Banking Maximizes UX Possibilities (Acorns & Westpac Case Analysis). Available at: UXDA AR Banking Study Accenture Banking Blog: Banking in the Metaverse – The Next Frontier. Available at: Accenture Next Frontier Report JPMorgan Treasury Services: Opportunities in the Metaverse. Available at: JPMorgan Opportunities in the Metaverse Whitepaper

The Chartered Accountant • Journal of ICAI October 2022 • Vol. 71 • No. 4 • pp. 90–95 (Journal pp. 438–443) IMPACT INVESTING Impact Investing in India: An Environmental Analysis *Kajal Tolani Research Scholar, Institute of Management Studies, Banaras Hindu University (BHU) **Prof. H.P Mathur Dean & Head, Institute of Management Studies, Banaras Hindu University (BHU) Official Correspondence: eboard@icai.in 💡 Executive Summary & Research Orientation While traditional corporate finance offers numerous established frameworks, financing mechanisms tailored for the third sector (social enterprises, hybrid entities, and non-profit organizations) remain markedly under-researched. Impact Investment has emerged as a groundbreaking financial mechanism recognized across global capital markets as a formidable vehicle to capitalize social ventures. This research investigates the operational and institutional hurdles confronting Impact Investors in India, deploying the comprehensive PESTLE analytical framework to assess external macro-environmental opportunities and vulnerabilities, providing vital strategic perspectives for finance and accounting professionals. 1. Introduction & Theoretical Foundations Impact Investment represents an innovative paradigm designed to reallocate global capital market liquidity toward solving pressing socio-economic and environmental challenges (Clarkin & Cangioni, 2016). The terminology was formally coined by the Rockefeller Foundation in 2007. According to the foundational definition promulgated by the Global Impact Investing Network (GIIN), impact investments are formally characterized as: “Investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.” Unlike purely commercial capital or conventional philanthropy, Impact Investors actively pursue a blended dual objective of measurable societal improvement alongside sustainable financial yields. As underscored by Block et al. (2021), investors deploy rigorous screening criteria when evaluating prospective social enterprises, centered upon three critical pillars: Pillar 1: Team Authenticity Verifying the genuine commitment, governance integrity, and execution capability of the founding leadership. Pillar 2: Societal Criticality Assessing the scale, severity, and urgency of the target community problem addressed by the business model. Pillar 3: Financial Viability Confirming operational self-sustainability, unit economics, and long-term capital preservation of the venture. The global impact capital pool is experiencing rapid expansion in both fund count and structural complexity, leveraging diverse equity, debt, and mezzanine financing structures (Alijani & Karyotis, 2019). Sectors absorbing the largest proportion of global impact capital include affordable housing, microfinance and financial inclusion, renewable energy, agriculture, clean water, sanitation, and healthcare (Roth, 2020). Scholarly inquiry into impact investing is transitioning from an exploratory pre-paradigm phase into an established paradigm stage, wherein definitional demarcations and terminological boundaries are being actively formalized. Nevertheless, academic research continues to lag practitioner innovation, creating an information asymmetry that amplifies risks for both capital allocators and recipient enterprises (Agrawal & Hockerts, 2021). To bridge this void, this study investigates core operational bottlenecks and conducts an exhaustive macro-environmental scan across the Indian landscape. “What we have done for ourselves alone dies with us; what we have done for others and the world remains and is immortal.” — Albert Pike a. Impact Investors and Capital Instruments Impact investors distinguish themselves from traditional commercial capital providers by embedding explicit social and environmental benchmarks into their core investment mandates (Chowdhry et al., 2019). Furthermore, they maintain deeply active engagement in strategic corporate governance, organizational scaling, and operational capacity building (Ravi et al., 2019). The investor universe spans private family foundations, bilateral/multilateral development finance institutions (DFIs), institutional fund managers, pension trusts, family offices, insurance conglomerates, individual angel investors, non-governmental organizations, and faith-based endowments. As classified by Freireich & Fulton (2009), the impact investing community is bifurcated into two primary operational segments based on targeted financial return hurdles: 1. ‘Impact First’ Investors ‘Impact first’ allocators prioritize the maximization of social or environmental value creation, accepting nominal, concessionary, or below-market financial returns provided principal preservation is achieved. Philanthropic trusts and family offices predominantly adopt this modality (Thornley & Dailey, 2010). 2. ‘Financial First’ Investors ‘Financial first’ allocators target commercial, market-rate financial yields comparable to conventional risk-adjusted benchmarks, treating measurable positive impact as an essential concurrent objective. Pension funds, commercial banks, and sovereign wealth vehicles typify this category. b. Investee Enterprises (The Demand Side) On the demand side of the capital spectrum, investee organizations encompass both non-profit and for-profit entities requiring capital infusions to address socio-economic deficits (Mittal et al., 2021). Eligible impact investees include registered charities, Community Interest Companies (CICs), community benefit societies, Section 8 companies, cooperative societies, and commercial enterprises operating with dedicated social charters or statutory dividend distribution constraints (Agrawal & Hockerts, 2019; Brown & Swersky, 2012). Fig. 1: Impact Investment Asset Class / Return Rate Spectrum ASSET CLASS SPECTRUM: FROM CONCESSIONARY TO COMMERCIAL YIELDS ▼ Below-Market / Concessionary Investments (‘Impact First’) Grant Support Concessionary Equity Subordinated Loans Senior Debt Patient Cash ▲ Market-Rate Commercial Investments (‘Financial First’) Credit Guarantees Liquidity Cash Fixed Income Bonds Public Equity Private Equity AIFs Source: Adapted from Impact Investment Council (IIC) Architecture 2. Literature Review & Theoretical Gaps Scholarly literature on impact investing has grown exponentially (Höchstädter & Scheck, 2015), initially concentrating upon clarifying operational taxonomies and definitional contours. However, academic inquiry has notably trailed practical capital market developments, demonstrating a pronounced necessity to investigate multi-stakeholder governance, socio-economic frictions, and regulatory hurdles (Agrawal & Hockerts, 2021; Alijani & Karyotis, 2019). “Research on impact investing is evolving from a pre-paradigm to a paradigm stage, where establishing rigorous terminological boundaries and standardizing impact verification forms the central focus for contemporary scholars.” In an extensive systematic analysis encompassing 114 academic articles, Islam (2021) concluded that the practical operational impediments confronted by Impact Investors represent the foremost unanswered theme in contemporary research. Quinn & Munir (2021) observed that insufficient attention has examined how market participants strategically leverage hybrid organizational categories. Correspondingly, Clarkin & Cangioni (2016) demonstrated that establishing a transparent statutory and legal infrastructure is paramount to ingraining investor confidence, standardizing disclosures, and mitigating agency risks. Within the Indian economy, impact capital momentum is expanding swiftly. Given India’s profound developmental deficit across basic services, impact investing serves as a catalytic financing mechanism capable of bridging massive socio-economic disparities (Mittal et al., 2021). Core Research Objectives To delineate the current empirical trajectory, market size, and operational challenges confronting Impact Investment in India. To systematically scan external environmental determinants utilizing the multidimensional PESTLE framework. Methodological Design The study synthesized secondary empirical literature from globally recognized indexing databases including Google Scholar, Scopus, Web of Science, and ProQuest. The investigation is partitioned into dual analytical stages: first, examining ecosystem scale and operational impediments; second, applying the PESTLE matrix across political, economic, social, technological, legal, and environmental axes. 3. The Indian Impact Investing Ecosystem Capital allocation for societal welfare possesses deep historical precedents in India, reflected in the institutionalized industrial philanthropy of visionary pioneers including Jamshedji Tata, G.D. Birla, and Sir Edulji Dinshaw. In modern corporate finance, Impact Investing re-engineers this philanthropic foundation into a sustainable commercial framework. The formal inception of India’s commercial impact landscape occurred in 2001 with the establishment of Aavishkaar Capital, recognized as the nation’s first for-profit social venture fund (Mittal et al., 2021). 📊 Key Market Metrics (IIC Report: 2021 in Retrospect) ~$6.8 Billion Cumulative equity capital deployed in 2021 294 Ventures Financed across 3,451 deal transactions +135% Growth Capital expansion over 2020 (+5% deal count) >60% Volume Capital concentrated within top 14 firms Leading fund managers shaping the Indian impact landscape include Aavishkaar Capital, Lok Capital, Acumen Capital, and Asha Impact. Industry governance and ecosystem development are championed by the Impact Investors Council (IIC), the apex national industry body. Because emerging economies experience severe resource constraints (Zahra et al., 2009) and institutional credit voids (Kistruck et al., 2011), the demand elasticity for impact funding significantly surpasses that observed in developed markets. “Beyond catalyzing grassroots participation in the innovation ecosystem, the emergence of social enterprises actively accelerates macro-economic expansion and social equity.” “Institutional allocators are demonstrating increasing consciousness toward environmental sustainability and social well-being concurrently with commercial yields.” 4. Structural Challenges Confronting Impact Capital 1. Definitional & Conceptual Ambiguity The sector suffers from recurring ambiguities regarding nomenclature. Literature frequently conflates impact investing with venture philanthropy, socially responsible investing (SRI), and traditional early-stage venture capital (Agrawal & Hockerts, 2021). Establishing standardized taxonomies is critical to expanding investor awareness. 2. Return Uncertainty & Return Perception Mainstream investor participation remains restricted due to widespread skepticism regarding financial returns. Early historical associations with philanthropy entrenched the misperception that impact vehicles inherently deliver concessionary, sub-commercial profitability (Iarossi et al., 2019). 3. Impact Measurement & Audit Hurdles Assessing non-financial outcomes across highly diverse sectors (health, schooling, sanitation, climate) presents substantial methodological hurdles. Developing standardized, industry-wide verification metrics remains an ongoing imperative for market credibility (Mittal et al., 2021). 4. Impact Washing & Dilution Risks “Impact Washing” denotes opportunistic marketing practices wherein entities adopt impact terminology to enhance corporate reputation or secure funding without creating substantive solutions to social or ecological problems, eroding investor trust (Busch et al., 2021). 5. External Macro-Environmental Scan: PESTLE Framework Originally formulated at Washington State University as an analytical toolkit to track macro-environmental drivers impacting organizational ecosystems, the PESTLE framework examines external forces across six interdependent domains: Political, Economic, Social, Technological, Legal, and Environmental. Figure 2: The Six Dimensions of PESTLE Macro-Environmental Analysis POLITICAL ECONOMIC SOCIAL TECHNOLOGICAL LEGAL ENVIRONMENTAL Source: Conceptual Framework adapted from Washington State University & Industry Literature 1. Political Environment To achieve national developmental targets, the Government of India has increasingly forged structured partnerships with the private sector. Exemplary policy initiatives include: (i) The Aspirational Districts Programme, which actively mobilizes CSR outlays and impact capital into underdeveloped districts via the Small Industries Development Bank of India (SIDBI) fund-of-funds mechanism targeting high-impact social enterprises; and (ii) The formal policy announcement to institute a Social Stock Exchange (SSE) (Mittal et al., 2021). However, scholars identify a political vulnerability: hybrid organizational structures can be co-opted as political instruments, enabling stakeholders to utilize hybrid categorization as a shield to secure narrow interests (Quinn, 2017). 2. Economic Environment Social enterprises foster grassroots economic resilience, technological innovation, and shared prosperity. Structural barriers impeding sustainable macro-economic expansion—including youth underemployment, climate risk, aging populations, and community tensions—require targeted social innovations to resolve (Han & Shah, 2020). The Indian impact ecosystem provides critical growth capital enabling social enterprises to achieve financial self-sustainability and operational scale. 3. Social Environment Global development multilateral bodies actively champion impact investing for its demonstrated capacity to address poverty, inclusion, and climate resilience (Iarossi et al., 2019; Busch et al., 2021). In developing markets, social businesses confront critical challenges such as women’s empowerment, sanitation, and marginalized livelihoods through market-oriented, commercially viable frameworks (Yunus et al., 2010; Agrawal, 2018). These ventures require patient, long-horizon capital, though fears of impact washing continue to deter risk-averse institutional allocators. “Climate-tech startups in India are predominantly capitalized by angel syndicates, specialized impact funds, venture capital firms, bilateral development institutions, and private equity vehicles.” 4. Technological Environment The proliferation of tech-enabled delivery models among social enterprises demands substantial capital to engineer scalable platforms reaching underserved populations (S. Ravi et al., 2019). Concurrently, digital technology has enabled advanced impact measurement frameworks, including IRIS+ (GIIN), B Lab’s Global Impact Investing Rating System (GIIRS), and Acumen Fund’s Lean Data Methodology (Reisman et al., 2018). Nonetheless, data integration complexity and reporting overhead continue to present adoption barriers for resource-constrained ventures (Phillips & Johnson, 2021). 5. Environmental Environment Driven by rapid industrialization and urban expansion, India’s aggregate carbon footprint has doubled over the past two decades. India ranks as the 7th most vulnerable nation on the Global Climate Risk Index 2021, compounded by extreme monsoon dependency, extensive coastlines, and fragile safety nets. Consequently, India’s climate-tech startup ecosystem is expanding rapidly across emissions mitigation, ecological resilience, and resource circularity. However, these ventures struggle with fragmented sectoral classifications and early-stage capital deficits (Early-Stage Climate-Tech Startups in India, 2021). 6. Legal & Regulatory Environment Due to the novelty and definitional fluidness of the sector, India currently lacks dedicated, unified statutory legislation governing impact investments. Instead, operations are regulated under a composite web of general statutes: Foreign Exchange Management Act (FEMA 1999), Companies Act 2013 (including Section 135 CSR & Section 8 rules), Limited Liability Partnership Act 2008, Income-tax Act 1961, SEBI (Alternative Investment Funds) Regulations 2012 (Category I Social Venture Funds), and periodic circulars from the Reserve Bank of India (RBI). Enacting dedicated statutory architecture for social enterprises and impact vehicles remains an essential legislative imperative. Fig. 3: PESTLE Analysis at Glance (Comprehensive Matrix of Opportunities & Threats) 1. Political • Opportunities: Increasing government interest in private investment collaborations. Government actively formulating framework for Social Stock Exchange. • Threats: Stakeholders can use hybrid categories as a veil to achieve narrow interests. 2. Economic • Opportunities: Reduces government’s fiscal expenditure burden through private capital. Catalyzes long-term economic productivity and shared grassroots growth. • Threats: Unstable exchange rates and inflation demotivate foreign investors in third sector. 3. Social • Opportunities: Global development community actively promoting Impact Investment. Environmental and social factors becoming primary determinants in finance. • Threats: Majority of institutional investors remain rigidly focused on traditional returns. 4. Technological • Opportunities: Increasing pace of tech-enabled social innovations. Development of sophisticated digital tools for impact assessment. • Threats: Adoption rate of impact assessment tools remains low among early ventures. Specific measurement tools tailored for non-profit entities are insufficient. 5. Legal • Opportunities: Entities can register under multiple vehicles: Company, LLP, Section 8, Trust. SEBI instituted formalized regulations for Social Venture Funds. • Threats: Absence of unified statutory legislation framed specially for Impact Investment. Foreign investors face complex compliance under FEMA, FCRA, and SEBI rules. 6. Environmental • Opportunities: Rapid proliferation of climate-tech startups across India. International investor momentum targeting carbon abatement and resilience. • Threats: Deficits in localized stakeholder awareness regarding climate risks. Absence of granular, localized climate action plans across state levels. 6. Conclusion & Policy Recommendations The financing disparity between capital requirements and current allocations needed to realize the Sustainable Development Goals (SDGs) remains expansive. Resolving complex societal challenges necessitates pioneering financing models anchored by a balanced pursuit of social progress and financial returns. Impact Investment presents a proven mechanism to narrow this systemic capital deficit. However, for the sector to thrive and mature, it requires a robust, supportive ecosystem. As a high-growth emerging economy grappling with multi-dimensional social challenges, India offers fertile ground for impact capital. To unlock its full potential, decisive reforms across legislative codification, fiscal incentives, and institutional assurance frameworks must be enacted. “Innovative solutions to social challenges demand innovative funding instruments offering dual alignment with social impact and financial viability. Impact Investment stands out as an indispensable catalyst to bridge this developmental gap.” References Agrawal, A. (2018). Effectiveness of impact-investing at the base of the pyramid: An empirical study from India. In Social Entrepreneurship and Sustainable Business Models: The Case of India. https://doi.org/10.1007/978-3-319-74488-9_9 Agrawal, A., & Hockerts, K. (2021). Impact investing: review and research agenda. Journal of Small Business and Entrepreneurship, 33(2), 153–181. https://doi.org/10.1080/08276331.2018.1551457 Alijani, S., & Karyotis, C. (2019). Coping with impact investing antagonistic objectives: A multistakeholder approach. Research in International Business and Finance, 47 (March 2018), 10–17. https://doi.org/10.1016/j.ribaf.2018.04.002 Clarkin, J. E., & Cangioni, C. L. (2016). Impact investing: A primer and review of the literature. Entrepreneurship Research Journal, 6(2), 135–173. https://doi.org/10.1515/erj-2014-0011 Mittal, R. K., Sinha, N., & A. M. K. (2021). Evolutionary Issues in Social Impact Investment: A Literature Review. Review of Professional Management, 19(1), 24. 10.20968/rpm/2021/v19/i/164385 Quinn, Q. C. (2017). Hybrid Categories as political devices: The case of impact investing in frontier markets. Research in the Sociology of Organizations, 51, 113–150. https://doi.org/10.1108/S0733-558X20170000051002 Roth, B. (2020). Impact Investing: A Theory of Financing Social Enterprises. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3535731

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 20–23 (Journal pp. 252–255) GST LAW & JURISPRUDENCE No custody, No confiscation-GST Perspective CA. A. Jatin Christopher Member of the Institute of Chartered Accountants of India Contact Author: jatin.christopher@gmail.com | eboard@icai.in ⚖️ Crucial Statutory Re-alignment (Post 1 Jan 2022) A telling example of what the removal of non obstante clause can do to a provision is the amendment to section 129(1) of the Central GST Act which was given effect from 1 Jan 2022. And another amendment in section 129(6) has excluded confiscation proceedings from section 129 of Central GST Act. These two amendments have brought back into focus the need to understand ‘confiscatory’ powers in GST. Confiscation cannot be done of ‘anything’ belonging to offender While anything can be seized in section 67(2), it’s not true of confiscation in section 130(1) of Central GST Act. Power of confiscation is circumscribed by “where” that has now come to substitute the more potent “notwithstanding anything contained in this Act, if”, in the opening words of section 130(1) of Central GST Act. So now, confiscation must operate in harmony, and not in derogation of, other provisions of the Central GST Act. Section 130(1) of Central GST Act contains five ‘situations’ and only “where” any of these situations are shown to exist, will the consequences spelt out “then” can be pressed into service. Situations ‘found to exist’ must be ‘shown to’ exist It is not an unusual satisfaction of the Proper Officer about the existence of any of the situations listed in section 130(1) of Central GST Act but only when material brought on record establishes all the ‘ingredients’ listed in each situation, can the exceptional power of confiscation be invoked. Unlike seizure, there is nothing sudden about confiscation. Confiscation is the result of adjudication. And adjudication takes time, it: (i) requires Party to be ‘put at notice’ along with evidence to support the allegations that the ingredients exist; and (ii) Party is allowed opportunity to make a reasonable defence (principle of natural justice). Process of adjudication entails opportunity to appeal. And all these remedies take time. Taxpayers need to recognise that confiscation is therefore vastly different from seizure. And clearly confiscation cannot be carried out ‘suddenly’. One key ‘ingredient’ for confiscation “Confiscation is not a form of penalty imposed for committing an offence. It is to deny the Party ‘title’ to the offending articles.” It is for this reason that great care is to be exercised in identifying the offending articles and establish the offenders’ title to those articles. Confiscation results in the ‘passing of title’ in offending articles in favour of the State. When title is to be passed, custody must first be held by the State or on behalf of the State by any bailee. The Core Rule: ‘No Custody, No Confiscation’ Illustrative Case Scenario: Let’s say a person ‘X’ has supplied certain articles with intent to evade payment of tax and the articles so supplied have reached the recipient ‘Y’ who has consumed them in their own business. And if, confiscation proceedings were to be initiated against ‘X’ (the offending taxpayer), he could simply withdraw all defence and let the Proper Officer proceed with confiscation. What will the Proper Officer confiscate? Where are the (offending) articles for the State to receive title? Since the title is no longer with ‘X’, confiscation would be effective against ‘Y’ who is not the offender in these proceedings at all. Therefore, where custody is lost, confiscation is barred, that is, ‘no custody, no confiscation’. In order to confiscate, the key ingredient is to gain physical custody over articles (allegedly) involved in the said offence. All other ingredients listed in section 130(1) of Central GST Act may be shown to exist but nothing further needs to be done if physical custody is lost. Gaining physical custody, even contrary to taxpayer’s wishes, is ‘seizure’. Pre-requisites for seizure “Seizure is not limited to ‘goods liable to confiscation’ in Central GST Act. Seizure is permitted in section 67 and in section 129 of Central GST Act.” Pre-requisites to seize any offending articles, are contained in section 67(2) of Central GST Act where: Proper Officer must have ‘reasons to believe’ that offending articles ‘are secreted’; and Must issue an authorisation in INS-01 Part C to conduct a search. During the search, if (i) offending articles are found (ii) secreted in the premises identified in the authorisation issued, then either actual seizure can be done and INS-02 issued or constructive seizure done by issuing prohibitory orders in INS-03. For purposes of section 67(2) of Central GST Act, ‘offending articles’ are (a) goods liable to confiscation and (ii) documents, books or things that may be useful for or relevant to any proceedings, and no others. And either of these to be liable to confiscation “must be secreted”. But confiscation is only of articles that are liable to such confiscation although seizure is permitted of more. Judicial Understanding of ‘Secreted’: ‘Secreted’ is the employment of an artificial device or a step that does not have any commercial necessity to exist but does exist only to elude simple observation. For example, accounting records containing incriminating information / documents found in the cupboard in the accounting department is not ‘secreted’, but it would be, if those records were found in the cupboard of the marketing department. Other more ingenious devices for concealment would include all electronic drives or cloud storage spaces that are intended to evade detection by a person of ordinary prudence. Detention or seizure of goods under section 129 of Central GST Act are limited to ‘deviations in documents’ prescribed in Rule 138A of Central GST Rules. With the current amendment, proceedings under section 129 operate as a self-contained code independent of section 130 of Central GST Act. Therefore, the ‘statutory twins’ for lawful seizure and confiscation can be found conjointly in section 67 and then 130 of Central GST Act. It would therefore be safe to say that confiscation is not permissible without proceedings being initiated under section 67(2) of Central GST Act. Provisional release of seized articles Where offending articles are seized, taxpayer is permitted provisional release under section 67(6) of Central GST Act on execution of bond. Provisional release does not result in loss of custody by the State over the offending articles. It only permits better care and protection by taxpayer without altering constructive custody held by State. Provisional release under section 67(6) is no longer a part of the due process in section 129 of Central GST Act. Release of detained goods vide order in MOV-05 is not provisional but actual release subject to continuation of proceedings against consignor / consignee / transporter under section 129 of Central GST Act, secured by the execution of bond in MOV-08. Time to issue notice on seizure Going back to seizure of offending articles, where certain offending articles are seized, Proper Officer is on a clock to complete investigation and issue show cause notice under section 74(1) of Central GST Act. It is not permissible for INS-02/INS-03 to be issued and proceedings left inconclusive. Statutory Deadline & Abatement: Where ‘goods’ are seized, show cause notice must be issued within the time permitted in section 74(2) failing which, the demand will abate as provided in section 75(10) of Central GST Act. And once the show cause notice is issued, seized goods being ‘documents, books or things’, which have not been relied upon for issue of such notice, must be released within 30 days as mandated in section 67(3) of Central GST Act. And where show cause notice is not issued within six months from date of seizure, the seized goods being ‘goods liable to confiscation’ must be released as per section 67(7) of Central GST Act. Situations when confiscation can occur To understand when goods are liable to confiscation, it is specified that they must be where: (i) supplies (outward or inward) of goods have been made in contravention of Act with intent to evade payment of tax; (ii) goods which are liable to tax are left unaccounted; (iii) supplies are made without obtaining registration; (iv) any other form of contravention of the Act with intent to evade payment of tax; or (v) by the use of conveyance to transport goods in contravention of Act. Unless these situations are shown to exist, Proper Officer’s actions will suffer from lack of jurisdiction. Jurisdiction is the bulwark against confiscation as an ‘after thought’ in any other proceeding even when discrepancies are noticed during audit under section 65 of Central GST Act. Seizure v. Confiscation: Comparative Legal Framework A quick overview would help lay out the salient features to better appreciate the gulf that lies between seizure and confiscation, namely: Description Seizure Confiscation Authority for action 67(2) or 129(3) 130(1) Pre-condition Authorization by JC in INS-01 Part C Seizure under 67(2) Object involved Secreted articles Goods listed in 130(1) Result of action Custody only with State Title vests with State Exercise of authority Exceptional and sudden exercise without adjudication After issue of SCN and due adjudication Appellate remedy Not allowed Allowed Alternate remedy None Mandatory option to pay ‘redemption fine’ Release of articles On issuance of SCN On payment of redemption fine Rejection of alternate remedy by Taxpayer Not applicable Confiscation on finality of order of adjudication Discovery of comparable situations in audit During the course of audit under section 65 of Central GST Act, Proper Officer discovers that there is a shortfall in the stock of finished goods. As per section 35(6) of Central GST Act, presumption operates in favour of supply to evade payment of tax. Proper Officer issues DRC-1A under section 74(5) of Central GST Act demanding payment of tax along with interest and 15 per cent penalty on the (i) quantity of short-fall (ii) at their open market value (iii) on the prescribed rate and (iv) time and place of supply permitted in law. And then, the taxpayer discharges the same. This ends the proceedings as well as the demand. If the Proper Officer were to then proceed to issue a show cause notice, proposing action under section 130(1) of Central GST Act, the taxpayer could withdraw from resisting this action and leave the Proper Officer wondering how to go about adjudicating this notice and then execute the order confirming confiscations. Therefore, just because the situation exists, Proper Officer cannot proceed with confiscation. Nature of redemption fine Taxpayer is allowed, as a matter of right, an option to pay fine “in lieu of” confiscation in section 130(2) of Central GST Act. The expression ‘in lieu of’ can be construed as – option to pay fine – is a ‘substitute’ for confiscation. When taxpayer avails this option, Proper Officer must allow it as there are no exclusions provided in section 130(2) of Central GST Act. After all, State is not a hoarder and if the fine matches the NRV (net realisable value) of the offending articles, the purpose stands served. Therefore, taxpayer must document this ‘election’ to pay fine in lieu of confiscation and prevent haste in conducting auction. Once the election is documented, Proper Officer will carry the burden of safekeeping until restoration of possession. Thus, option to pay fine will ‘redeem’ the offending articles and halt confiscation action. Leniency in imposing fine Fine, by its very nature, cannot be nominal and the taxpayer must focus on establishing ‘Net Realizable Value’ during adjudication and not beg for leniency. In fact, State will expect the Proper Officer to impose and collect no less than its NRV when taxpayer elects to pay fine. Proviso to section 130(2) of Central GST Act specifies the ‘maximum fine’ that may be imposed on taxpayer and herein lies the limit. And unless it is financially prudent to secure release of offending articles (on payment of fine), taxpayer would consider forfeiting the offending articles. If the experience in Customs law is anything to go by, which holds the grandfather provisions in respect of confiscation in section 111, 113 and 115 of Customs Act, taxpayers have shown a proclivity to avail this option and appeal the quantum of fine imposed. Finality of provisional release and payment of fine Where offending articles are provisionally released, once taxpayer’s election to pay redemption fine is accepted by Proper Officer, it will become final. However, Proper Officer is allowed up to three (3) months after adjudicating the notice for confiscation to collect fine and only then unequivocally discharge the offending articles from actual or constructive custody. When taxpayer avails the option – to pay redemption fine – but resiles from actually making payment, section 130(6) of Central GST Act permits Proper Officer to withdraw the order of release and repossess the offending articles and proceed with their confiscation. Conclusion Having accepted that when power to do a particular thing is permitted in law, then that thing must be done in that manner only or not at all, Proper Officer cannot rely on ‘secret information’ gathered to proceed with confiscation. Confiscation does not survive without seizure. And with detention on interception of conveyance being separated from confiscation proceedings by the amendment in section 129(6) of Central GST Act, all confiscation proceedings must be traceable to any lawful seizure of offending articles. And lawful seizure is permitted only of ‘offending articles’ which ‘are secreted’, for valid reasons that pre-exist and pre-date the authorisation issued in Form GST INS-01-Part C. In the light of these statutory safeguards, taxpayers will resist any and all unlawful confiscation proceedings attempted in haste or due to misplaced enthusiasm. “If for any reason custody is lost, confiscation will remain only a wish!”

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 24–27 (Journal pp. 256–259) GST & INDIRECT TAXES Ambit of tolerance and refrain under GST CA. S. Thirumalai Member of the Institute of Chartered Accountants of India Contact Author: sampaththirumalai@gmail.com | eboard@icai.in ⚖️ Statutory Framework: Section 7(1A) & Schedule II Entry 5(e) Sec 7(1) of the CGST Act defines “supply” in an inclusive manner and Sec 7(1A) which is relevant for the present purpose states that where certain activities or transactions, constitute a supply in accordance with the provisions of Section 7(1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. There is a deeming principle involved since, the expression employed is that “they shall be treated…..” Sl. No 5(e) to Schedule II reads thus: “Agreeing to obligation to refrain from an act, or to tolerate an act or situation, or to do an act”. The nature of supply will be one of supply of services. Evolution and Legislative Background Under the erstwhile Finance Act, 1994 (which administered Service Tax) with the introduction of the negative list, certain services were designated as “declared services” with effect from July 1, 2012. This measure was adopted to remove ambiguity with regard to certain activities and transactions and the applicability of service tax on the same. Schedule II to the CGST Act now incorporates the enumeration of certain transactions and activities with respect to their nature of supply either as goods or as services. The entry in Schedule II through Sl. No 5(e) provided scope for roping in any and every activity or transaction even in the absence of a ‘supply’ in the first place. This had led to dispute under the GST regime (period after 01 July 2017). The issue has been addressed after insertion of Section 7(1A) which states that Schedule II will come into operation only after an activity or transaction qualifies as ‘supply’ under Section 7(1). Some of the other disputes have had their origin in the service tax regime (period prior to 01 July 2017) wherein more or less similar entry was laid down as part of the declared services for purpose of service tax. At this stage, it may be useful to take stock of the view taken in this context in VAT/GST jurisdictions in UK and Australia and under the erstwhile service tax regime. There are rulings of the Authority for Advance Ruling (AAR) and there is a recent circular of the Central Board of Indirect Taxes and Customs (CBIC) under the GST regime. Consideration and the ‘Money Flow’ Test The concept of “money flow” or pure transaction in money has been adopted in the recent CBIC Circular to show that there is no consideration as defined in Section 2(31) of the CGST Act. It must be noticed that the words employed in the Model GST Law under Section 2(28) was: (28) “consideration” in relation to the supply of goods and/or services to any person, includes….. The words “to any person” are singularly absent in the current definition of “consideration” in the CGST Act. Overseas Jurisprudence: Australia, UK & European Court of Justice With this background, we may notice the Australian High Court decision in A.P. Group Ltd versus FC of T Federal Court (18-9-2013) where in the context of dealer incentives being received from the manufacturer, it was held as follows: ‘The fact that the dealer receives a payment as an incentive when certain thresholds associated with running the business in this way does not mean that the dealer is supplying a service to the manufacturer for consideration. If the incentive payment were not available there is no basis to infer that the dealer would not behave in the same way for free. For these reasons there cannot be said to be any supply for consideration in these arrangements’ Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] ATC 20-028 In the matter of Reliance Carpet Co Pty Ltd (Reliance Carpet) the facts were that Reliance Carpet entered into a contract of sale to sell a commercial property. Reliance Carpet and the purchaser under the contract were both registered for GST. The purchaser paid a deposit of $297,500 but failed to pay the balance of the purchase price when required. Because of this default, the contract was rescinded. The Commissioner assessed Reliance Carpet for GST on the forfeited deposit. The Federal Court held in favour of Reliance Carpet. When the matter reached the High Court, it held that the payment of the deposit by the purchaser was “in connection with” a supply by Reliance Carpet and was within the meaning of the definition of “consideration” in section 9-15(1)(a) of the GST Act. The payment by the purchaser of the deposit was to be treated as “consideration” for a “supply” only if and when the deposit was forfeited because of the failure by the purchaser to perform its obligation to complete the Contract. The High Court held that this followed from section 99-5 of the GST Act. Qantas Airways High Court Ruling ([2012] HCA 41) In the case of Qantas the dealings between Qantas and passengers were such that there was no more than one projected “taxable supply”, namely the supply of air travel; this supply did not come to pass; and it was claimed that no GST was exigible. On the other hand, the Commissioner argued that the unused fares were received pursuant to the making of a contract between the airline and the customer under which the airline supplied rights, obligations, and services in addition to the proposed flight and that these rights, obligations etc. comprised a payment in connection with a supply. The majority of the High Court agreed with the Commissioner. In doing so, they first examined the contractual arrangement between Qantas and its passengers (which emphasized that Qantas would “take all reasonable measures necessary to carry you and your baggage and to avoid delay in doing so”) and the definition of “supply” in the GST Act as including, inter alia, “a supply of services”, “a creation of any right”, and “an entry into an obligation”. They then concluded that the contractual arrangement “did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavors to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This was a ‘taxable supply’ for which the consideration, being the fare, was received.” The view of not considering Liquidated Damages as supply for tolerating an act has also been supported by ruling GSTR 2001/4 (GSTR 2003/11) issued by the Australian Tax Office, where it has been clarified that damage or loss or injury does not constitute a supply under the provisions of Australian GST. The European Court of Justice in the case of Societe Thermale v. Ministere de l’Economie [2007] S.T.I 1866, Celex No. 650J0277 has held that where the client exercises the cancellation option available to him as compensation for the loss suffered and which has no direct connection with the supply of any service for consideration, the same would not be subject to tax. The Court of Appeal (UK) in the case of Vehicle Control Services Limited (2013) EWCA Civ 186, has said that payment in the form of damages/penalty for parking in wrong places/wrong manner is not a consideration for services as the same arises out of breach of contract with the parking manager. A contract is usually entered for performance and to benefit the parties involved. Situation in India: Service Tax & GST Precedents Under the erstwhile law in India, the Hon’ble CESTAT Allahabad in the case of KN FOOD INDUSTRIES PRIVATE LIMITED V. COMM OF CGST - 2019-VIL-731-CESTAT-ALH-ST dealt with a case involving delay in delivery of project or breach of any other terms of the contract, which were expected to cause some damage or loss to the appellant. The contract itself provided for compensation to make good the possible damages owing to delay, or breach, as the case may be, by way of payment of liquidated damages by the contractor to the appellant. The ex-gratia charges paid to the appellant were towards making good the damages, losses or injuries arising from “unintended” events and does not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be the payments for any services. Advance Rulings under GST: There are Advance rulings under GST law on liquidated damages for delay in commissioning the plant; amounts forfeited in tenders; penal charges in terms of the loan agreements; notice pay recovery under employment contracts; cheque dishonor fees etc. These rulings have upheld the recovery of tax employing Schedule II Entry 5(e) as a supply for purpose of GST. The recent Circular of the CBIC No. 178/10/2022 dated 03.08.2022 has clarified with regard to liquidated damages, compensation, penalty, cancellation charges, late payment surcharge etc. It has also provided some examples of where the entry could be attracted such as in non-compete agreements; restraint from construction in building contracts; etc. Is Every Act or Forbearance a Supply? Comparative Tests Is every act or forbearance of any kind, a supply? The decisions from the other jurisdictions show that UK treats the issue of supply as a question of law. Australia treats the same as one of fact. UK emphasises terms of the contract (Refer Secret Hotels [2014 UKSC 16]). EU and Australia stress commercial and economic reality. In UK/EU, it is necessary that there must be consumption to qualify as a supply (Refer Mohr [VAT SC 06344]). There must be reciprocity (Refer Tolsma [C-16/93 (1994 STC 509)]). EU has a policy agenda in the preamble of the VAT Directives to guide them. In Australia, there is less policy guidance and a wide view taken, just making an agreement to supply can be a supply (Refer Qantas). In AP Group by Federal Appeal Court, recognition was shown that some limits are required to be placed against this wide view. The Three Pillars of a True GST/VAT System: 1. Concept of Supply 2. Concept of Consideration 3. Input Tax Deduction These, and especially the last, are the hallmarks of a true GST/VAT system. But they can and do differ in their application from one country to the next. The boundary between paying for a supply and paying money to someone other than for a supply can be uncertain. UK/EU requires a ‘direct link’ between the payment and the supply. This excludes payments made for uncertain descriptions of goods or for activities that cannot really be measured, or things actually described as ‘free’. There has to be reciprocity (See Tolsma). Australia has a looser link and less stress on reciprocity: for or in connection with. The nexus can be indirect. “In most systems, there needs to be a consideration before a ‘supply’ can exist. Australia is an exception (save for financial services). Consideration can be in cash or kind, in all systems.” Tests Evolved to Interpret Complex Multi-Element Transactions Various tests have been evolved in other jurisdictions to make meaning of transactions combining disparate elements. Some of these are: Necessity test Top-down test: overall label, no analysis of detail Bottom-up test: look at the basic elements, ask how they interact, and slowly build a model going upwards from detailed level to see which elements dominate over others, and which elements simply function in parallel to others. Dominant elements impose their GST status onto the ancillary ones. All elements coalesce into a unique and different whole. Historic trend towards taxing every element separately, more recently replaced by trend to seek to find unity and/or coalescence. No one test is absolute. In India under the erstwhile law, the CESTAT in Repco Finance Ltd 2020 (117) taxmann.com 755 (LB) dealt with the question whether the foreclosure charges collected by banks from customers would be subjected to service tax under the category of banking and other financial services. Reference was made to the European Court of Justice in the case of C-277/2005 in Societe Thermale d’Eugenie-les-Bains (supra). The other decision of the CESTAT is in South Eastern Coal fields (2021) 124 taxmann.com 174 (Delhi) where it was held that compensation or penalty from contractors for material breach was not taxable under provisions of the service tax law namely Sec 66E(e) which is similar to Entry at Sl No 5(e) of Sch II to CGST Act. Crucial Distinction: “Condition of the Contract” vs. “Consideration for Supply” What emerges from the above and the recent Circular No 178 (supra) is that there is a distinction between “condition of the contract” and consideration for the supply. This is referred to as the “event” in the recent circular No 178. This principle has been adopted in the context of examination of the contractual terms under the Central Excise Law in Racold Appliances [1994 (69) ELT 312] upheld by the Supreme Court in 1998 (100) ELT A64 (SC). This principle was also applied by the CESTAT in McDonalds India Private Ltd [2019 (9) TMI 1141 (Delhi)] in the context of whether there is consideration flowing from the franchisee to the franchisor when the franchisee is conditioned to incur certain expenses to mainly augment his business. It was held that such a condition shall not constitute consideration for purpose of service tax. Specific Disputed Areas Outside the Scope of Circular 178 1. Holding of Shares by Holding Company – Tolerate an Act? There are cases outside the instances covered by the CBIC circular (supra) such as the holding of shares by the overseas holding company in the Indian subsidiary being treated as an act of tolerance by the subsidiary for tax under reverse charge in the hands of the subsidiary invoking Sl No 5(e). (Service Code 997171). Given the reasoning in the Circular that there is requirement for an independent contract the mere holding of shares in the subsidiary should not attract tax. 2. Reward Schemes, Reward Points & Forfeiture of ESOPs Next would be with regard to reward schemes and reward points held as actionable claims which are in any case neither supply of services nor supply of goods under Schedule III to the Act. The forfeiture of such points in the event of non-redemption should also not attract any tax since the principal supply itself is not taxable. Similarly in the case of forfeiture of ESOPs issued to an employee pursuant to the employment contract, the same principle applies. The payment towards employment being covered by Schedule III, the principal supply itself is non-taxable and hence the same follows for forfeited ESOPs. 3. Arbitration Amounts and Court Decrees Another area is whether amounts awarded pursuant to arbitration proceedings enforceable in court could be taxed under GST. Held taxable by AAR in North American Coal Corporation India [(2018) 98 taxmann.com 331 AAR – Mah]. But given that this is a contractual term without separate compromise, there is no tax where there is no independent contract. However, where an independent compromise arrangement withdraws pending civil/criminal litigation for payments, this may give rise to an independent supply, except where a decree is passed after filing a memo of compromise in court. Conclusion From a survey of the judgments in other jurisdictions and under the erstwhile indirect tax law and the clarification in Circular No 178, it could be said that as long as there is an independent and identifiable supply the amounts paid in respect of the same may amount to consideration and be subjected to tax. However, the nagging question that will of course evolve in terms of an answer would be as to what the line of demarcation is when the payment made under a contract would be treated as for an ancillary or an incidental supply to the principal supply. And the real ambit of this entry at Sl No 5(e) of Schedule II is yet to come. “As long as there is an independent and identifiable supply, amounts paid may amount to consideration; but the line of demarcation between ancillary supply and independent tolerance remains the evolving frontier of GST jurisprudence.”

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 28–31 (Journal pp. 260–263) GST & INDIRECT TAXES Classification under GST: Role of HSN CA. Rajendra Kumar P Member of the Institute of Chartered Accountants of India Contact Author: rk@icai.in | eboard@icai.in ⚠️ Pitfall in Practice: Classification vs. Tax Rate Since the introduction of GST many WhatsApp groups have been created by all and sundry and the most common query that one would find in such groups is “what is the rate of GST for such and such product” and you find as many answers as are the rates in the law. Little does the querist know about the huge risk involved in converting a classification question into a mere question of rate of tax. What is classification? There are thousands of tradable commodities chargeable to different rates of tax. Then how does one ascertain the applicable rate of tax on a particular product? The answer to this question is by classifying goods in different groups and sub-groups according to their nature, composition etc. and then specifying rate for each such group of commodities. One may think that it would take some logical understanding and trade knowledge to classify goods, but this is easier said than done. For example, how would a gold pen be classified — as an item of gold or as a pen? The HS comes to rescue here by providing a uniform and standardized system of classification. The HS Code and the description of the commodity may not always be in tandem with the general commercial parlance and may throw surprises e.g., a commodity which should be charged at 5% as per general understanding, may either be exempted or charged at a higher rate given the HS code and the Chapter under which the same is found. What is HS? The Harmonized Commodity Description and Coding System generally referred to as “Harmonised System” or “HS” is an international product nomenclature developed by the World Customs Organization (WCO) to ensure uniform classification of goods in international trade. In addition to its use in customs, HS is also used by Governments across the globe as a statistical tool in economic research and devising trade policies. HS comprises of more than 5,000 commodities grouped under Sections and then Chapters, which are arranged in a logical structure. Under a chapter, each commodity is identified by a 6-digit code and a uniform classification is ensured by way of well-defined rules to read and interpret the HS. Historical Timeline & Global Governance of the HS Convention: Entry into Force (1 January 1988): India adopted the Convention as one of the founder-Contracting Parties. With 13 countries on board, 4 more countries were required by September 30, 1987. On September 22, 1987, 15 new countries joined, enabling the global rollout on January 1, 1988. Today, more than 200 countries have adopted HS in formulating customs tariffs. Governing Treaty: “The International Convention on the Harmonized Commodity Description and Coding System” governs the HS. The Explanatory Notes published by WCO provide the official interpretation of the HS. Harmonized System Committee: Entrusted with providing uniform interpretation and updating the HS every 5–6 years to keep pace with technological developments and trade patterns, deciding classification questions, settling disputes, and preparing amendments. Periodic Amendments: In May 2019, WCO held the 1st ever public consultation on the revision of HS. Since 1996, HS has been amended 7 times; the 7th amended version became applicable from January 1, 2022. Contracting parties are obligated to amend Tariff Schedules in alignment with HS, using correlation tables for transitions. How HS Facilitates Global Trade & Its Adoption in India The WCO Preamble to HS: “Desiring to facilitate International Trade Desiring to facilitate the collection, comparison and analysis of statistics, in particular those on international trade Desiring to reduce the expense by re-describing, reclassifying and recoding of goods as they move from one classification system to another in the course of international trade and to facilitate the standardization of trade documentation and the transmission of data” The HS aims to establish a taxonomy system for goods with a standardized hierarchy across member nations (e.g., a balloon, being a toy, is uniformly classified under HSN 9503 across all member countries). How is HS adopted in India? In India, the classification of imported and export goods is governed by the Customs Tariff forming part of the Customs Tariff Act, 1975. The Customs Tariff is divided into two Schedules: First Schedule: Import Tariff (specifying goods liable to import duty). Second Schedule: Export Tariff (specifying goods liable to export duty). Initially, the Import Tariff was based on the Customs Co-operation Council Nomenclature, also known as the “Brussels Tariff Nomenclature”. However, with effect from 28.2.1986, the Tariff was revised basis the HS adopted by WCO (which came into force globally on 01.01.1988). Transition to 8-Digit Classification (1 February 2003) WCO codes commodities up to 4 digits (Heading) and 6 digits (Sub-heading), allowing member countries flexibility to extend digits for statistical tracking provided codes at 4 and 6 digits remain unchanged. Until 31 January 2003, the Indian Customs Tariff consisted of 6-digit codes. With effect from 1.2.2003, India adopted an 8-digit level classification to monitor trade data and provide statistical codes for domestic products. Architecture of the Indian Customs Tariff: 21 Sections Group classes of goods 98 Chapters Detailed product categories Section & Chapter Notes Binding legal definitions In each Chapter, commodities are arranged in an increasing order of manufacture: first natural products, then raw materials, then semi-finished goods, and lastly fully finished goods / articles / machinery. Digits denote: 4 digits: Heading 6 digits: Sub-heading 8 digits: Tariff item The titles of Sections and Chapters are solely for ease of reference and do not have legal authority. Legally correct classification is determined using the texts of Section Notes, Chapter Notes, Headings, Subheadings, and the General Rules for Interpretation of Import Tariff (GIR). The 6 rules in the GIR must be applied sequentially. Why is HS Applicable to GST in India? Notification No. 1/2017-CT (Rate) dated 28.6.2017 (GST Rate Notification) contains the schedules of tax rates levied on goods supplied under GST. Originally there were 6 schedules; the 7th was added with effect from July 18, 2022. Notification No. 2/2017-CT (Rate) dated 28.6.2017 enlists goods exempt from GST. In both notifications, goods are classified basis Chapter / Heading / Sub-heading / Tariff Item. Explanations (iii) and (iv) to GST Rate Notifications: (iii) “Tariff item”, “sub-heading”, “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975). (iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification. This establishes the primacy of the Customs Tariff Act in classifying goods under GST. The 8-digit HS code forms the basis of the codes in the GST Rate Notification. Whenever there arises a need to find the rate of GST, the Customs Tariff Act should first be referred to, and the result compared with the GST Rate Notification. If there is a difference, the GST Rate Notification prevails; however, the anomaly should be reported to the Fitment Committee. Without reconciliation, an imported commodity falls under the Customs HSN while domestic supply merits classification under the GST notification entry, creating potential rate disparities between IGST and domestic supply. Manufacturing Processes and Ingredient Differentiation The process that goods pass through and the concept of manufacture from excise jurisprudence remain highly relevant: Ingredients added: Flavoured milk in plain form is differentiated from flavoured milk with nuts. Preparation stage: Commodities differentiated by whether they are ‘ready-to-cook’ versus ‘ready-to-eat’. Omissions / Mismatches: Mango pulp is specifically mentioned in Customs HS, but was missing in the GST rate notification, creating taxability disputes. Professionals should visit the place of production, review technical literature, packaging, and marketing strategies, and consult past judicial precedents to establish proper heading classification. How are Services Classified in GST? GST is levied on the supply of both goods and services. Once an activity falls within the four corners of ‘supply’, the taxpayer classifies it as goods or services using section 2 definitions and Schedule II of the CGST Act. While goods are classified under Chapters 1 to 98 of the Customs Tariff, the Customs Tariff provides no aid for services as it contains no chapters for services (there is no Chapter 99 in the Customs Tariff). Scheme of Classification of Services (Notification No. 11/2017-CT (Rate)): Service codes (tariff) are provided by way of a ‘Scheme of Classification of Services’ as an Annexure to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. The Annexure contains entries under Chapter 99 and Explanatory Notes based on the United Nations Central Product Classification (UN CPC). Rule of Specificity: The Preface lays down that where a service is capable of differential treatment based on description, the most specific description shall be preferred over a more general description. Exemption & Reverse Charge Alignment: Notification No. 12/2017-CT (Rate) (exempt services) and Notification No. 13/2017-CT (Rate) (reverse charge services) both utilize these service codes. Conclusion Accurate classification of goods and services is vital for determining the correct GST liability. Classification can be done accurately by following the General Rules of Interpretation in case of goods and the Explanatory Notes to the Scheme of Classification in case of services; logical understanding, common sense, or experience alone will not suffice. Classification is not only relevant for ascertaining tax rates, but also determines the availability of exemptions and applicability of reverse charge. Appropriate classification is a sine qua non to avoid legal disputes and demands from tax authorities. “Accurate classification of goods and services is vital for determining correct GST liability — appropriate classification is sine qua non to avoid legal disputes and tax demands.”

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 32–35 (Journal pp. 264–267) GST & INDIRECT TAXES Is levy of GST guaranteed on Corporate Guarantee? CA. Aditya Dhanuka Member of the Institute of Chartered Accountants of India Contact Author: caadityadhanuka@gmail.com | eboard@icai.in 💡 Commercial Context & Taxability Dilemma A corporate guarantee is an agreement between a borrower, lender and guarantor, whereby the guarantor takes on the responsibilities of debt repayment, if the borrower defaults. While providing corporate guarantee is a routine business activity among corporates to support and sustain their subsidiary / associate companies by guaranteeing their funding requirements, from the perspective of GST, the same is open to interpretation regarding its taxability. Black’s Law Dictionary definition: “The assurance that a contract or legal act will be duly carried out”; “To assume a suretyship obligation; to agree to answer for a debt or default.” Legal Character & Framework of Corporate Guarantee In simpler terms, a guarantee means the promise for doing of something or a promise to make payment of certain debt or performance of certain duty of another person’s contractual obligation if that other person fails to make good the performance or pay his debt or fulfil his obligation, as the case may be. The term “guarantee” or to be precise “contract of guarantee” has been defined in section 126 of the Indian Contract Act, 1872, which provides that a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third party in case of his default. The Three Parties to a Guarantee Contract: Surety The person who gives the guarantee Principal Debtor The person in respect of whom guarantee is given Creditor The person to whom guarantee is given Note: A contract of guarantee may be either oral or written. As per section 2(11) of The Companies Act, 2013 a “body corporate” or ‘corporation’ includes a company incorporated outside India but does not include: (i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in this Act) which the Central Government may, by notification in the official Gazette, specify in this behalf. On a joint reading of section 126 of the Indian Contract Act, 1872 and section 2(11) of The Companies Act, 2013, a Corporate Guarantee can be inferred as an affirmation usually made by a larger company (flagship, related or holding company), on behalf of another business entity which usually would be a smaller company. It is a guarantee to a lender that a loan will be repaid, guaranteed by a company other than the one who took the loan. Further, Companies Act, 2013, allows for inter-corporate guarantees among related parties subject to specified conditions. As such nature of transactions do not have any financial implication on the surety / guarantor assuming that no fees / commission has been charged for providing the said guarantee (unless of course the guarantee is invoked) they do not have any consequential impact. It is a usual presumption in case of related party transactions that the said transaction has not been carried out at arm’s length price. This brings in the provisions in law which specify that transactions between related persons when undertaken at the market value are based on the common commercial terms, and thus, will be considered as a transaction made with an unrelated party. GST Perspective: Supply, Service Element & Related Persons From the perspective of GST, it becomes relevant to examine the transaction from the point of view of supply & its consequential taxability. The term “supply” is defined under section 7 of the CGST Act to include all forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal of goods or services or both, made or agreed to be made in the course or furtherance of business and for a consideration and includes activities mentioned in Schedule I to the Act which are made or agreed to be made without consideration. The term “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged. By providing guarantee against any loan / credit facility, the guarantor basically assists the principal debtor in availing such facility, which has an element of service. Principles of Valuation & Statutory Definition of Related Persons The principle of valuation in case of GST is that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. When such supply is between related persons, its value will be determined by the valuation rules as prescribed. From the perspective of GST Law, two key terms are relevant in this context being – “distinct persons” and “related persons”, where a person having multiple registrations across the same state or multiple states is classified as a distinct person, and the following shall be deemed to be related persons, if: Deemed Related Persons under GST (Explanation to Section 15): such persons are officers or directors of one another’s businesses; such persons are legally recognised partners in business; such persons are employer and employee; any person directly or indirectly owns, controls or holds twenty-five percent. or more of the outstanding voting stock or shares of both of them; one of them directly or indirectly controls the other; both of them are directly or indirectly controlled by a third person; together they directly or indirectly control a third person; or they are members of the same family; persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other. The term “person” also includes legal persons. Valuation Hierarchy between Distinct or Related Persons Specific provisions are in place for determining the value of supply of goods or services or both between distinct or related persons, which provides that the value of supply shall: a) be the open market value of such supply; b) if the open market value is not available, value of supply of goods or services shall be of like kind and quality; (c) if the value is not determinable as above, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services, and thereafter the same shall be determined using reasonable means consistent with the principles and the general provisions of GST Law. Key Statutory Provisos: Further Supply at 90%: Where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer, not being a related person. Full ITC Invoice Value Rule: Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services. Judicial Precedents & Government Circulars Sterlite Industries India Ltd. Vs Commissioner of GST & Central Excise, Tirunelveli (CESTAT Chennai, 19 Feb 2019) Chennai CESTAT held that providing corporate guarantee is not a taxable service in relation to bank and other financial services and since the issue of corporate guarantee by the appellants was only to facilitate issue of bank guarantee by the bank, the activity by the appellant is nothing but a service in relation to issue of banking and other financial services. The activity of issue of corporate guarantees by the appellant from their associate / subsidiary companies in India and also the procurement / receipt of corporate guarantee from their parent / associate company abroad will not come within the fold of section 65(12)(a) and in particular sub-clause (ix) of that provision of Service Tax law. It is noteworthy to observe that this judgment was given from the viewpoint of Banking and Other Financial Services. However, the decision could have been different had the point of view of taxation been from the perspective of Business Auxiliary Services or Business Support Services. Olam Agro India Ltd. Vs Commissioner of Central Excise (CESTAT Delhi) CESTAT Delhi recorded that a corporate guarantee is used when a corporation agrees to be held responsible for completing the duties and obligations of debtor to a lender, in case the debtor fails to comply with the terms of the debtor-lender contract and a bank guarantee is a promise from a bank that the liability of the debtor will be met in the event the debtor fails to favour his contractual obligations. Therefore, the nature of corporate guarantee as well as of bank guarantee is one and the same i.e., for facilitation of the lending facilities. Merely because the name of the guarantee has been changed from ‘Bank’ to ‘Corporate’, it cannot be said that it will not fall under ‘Business Auxiliary Service’ as defined under section 65 (105) of the Finance Act, 1994 and upheld the demand of Service Tax on the Corporate Guarantee Commission. Government Guarantees: CBIC Circulars 34/8/2018 & 154/10/2021 It is pertinent to note that the Ministry of Finance (CBIC) vide Circular No. 34/8/2018-GST, dated 1st March 2018 had already clarified that the services provided by Central/State Government to any business entity including PSUs by way of guaranteeing the loan taken from financial institutions against consideration in any form including guarantee commission, is taxable. However, later on, services supplied by Central/State Government/Union territory to their undertakings/PSUs by way of guaranteeing the loans taken by such undertakings/PSUs from the banking company and financial institution were exempted from GST. The Ministry of Finance (CBIC) has issued another Circular No. 154/10/2021-GST, dated 17th June, 2021 to re-iterate that guaranteeing of loans by Central or State Government for their undertaking or PSU is specifically exempt. Core Inference: Hence, it supports the view that transaction of guaranteeing loan with consideration qualifies as supply and therefore, is leviable to GST. The Consideration Nuance & Schedule I Para 2 Further, meaning of the term “consideration” under section 2(31) of the CGST Act, 2017, in relation to supply of goods or services or both includes: (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government. Thus, in respect of providing guarantee, consideration in the form of commission may or may not be charged. In cases, where any consideration in the form of commission is charged by the guarantor against the guarantee provided to the creditor for loan provided to the borrower, the said activity being an agreement to the obligation to do an act, qualifies as a service. Deemed Supply Without Consideration (Schedule I Para 2) It is also pertinent to note and understand that merely by not charging any “consideration”, shelter cannot be taken to escape the chargeability, as parallelly para 2 of Schedule I also comes into play for this given supply, which specifically covers that supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business, are to be treated as supply even if made without consideration. A holding and a subsidiary company are regarded as related parties under GST. Therefore, any supply of goods or services by the holding to the subsidiary or vice-versa will be taxable according to Schedule I para 2, even in cases where there is no consideration between the two of them for the said supply. Conclusion & Classification under HSN 9971 Therefore, to conclude, the service of provision of guarantee is understandably a service falling under HSN 9971 – Financial and related services, and is exigible to GST. Such service is covered under para 2 of Schedule I, if made without any consideration between related or distinct persons. “Provision of corporate guarantee constitutes a taxable financial service classified under HSN 9971, and by operation of Schedule I Para 2, attracts GST liability even when executed without consideration between related holding and subsidiary entities.” References Used: The Central Goods and Services Tax (CGST) Act, 2017 The Central Goods and Services Tax (CGST) Rules, 2017 Circulars & Notifications issued under the GST Law Indian Kanoon The Economic Times

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 46–48 (Journal pp. 278–280) ACCOUNTING STANDARDS Revaluation Model of PPE under Indian Accounting Standard 16 “Property, Plant and Equipment” CA. Abhishek Agarwal Member of the Institute of Chartered Accountants of India (ICAI) Contact Author: eboard@icai.in 💡 Scope & Statutory Background This article enumerates the accounting aspects in the event of revaluation of “Property, Plant and Equipment” (PPE). The relevant Ind AS and Indian GAAP both prescribe revaluation of PPE for subsequent measurement. As per paragraph 36 of Ind AS 16 and paragraph 39 of AS 10 on “Property, Plant & Equipment”, if an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs needs to be revalued. Roadmap for Implementation of Ind AS in India Indian Accounting Standards (Ind ASs) were introduced in India with effect from 01st April 2016 on a mandatory basis to converge with high quality Global Financial Reporting Standards, i.e. IFRS Standards. These Ind ASs have been implemented by the class of companies as per the roadmap issued by the Ministry of Corporate Affairs (MCA). MCA has issued the Companies (Indian Accounting Standards) Rules, 2015 vide Notification dated February 16, 2015 including the roadmap of implementation of Ind ASs for companies other than Banking companies, Insurance companies and Non-banking financial corporations (NBFCs). As per the said Notification, Ind ASs converged with IFRS may be implemented on voluntary basis from 1st April, 2015 and shall mandatorily be applicable from 1st April, 2016. Further, the MCA on March 30, 2016, had also notified the Roadmap for implementation of Ind ASs for Scheduled Commercial banks, Insurance companies and NBFCs from 1st April, 2018 onwards. NBFCs had started phase-wise implementation of Ind AS beginning, April 1, 2018 but banks and Insurance companies are yet to implement Ind AS. Introduction: Cost Model vs. Revaluation Model An entity has an option to either choose ‘revaluation model’ or the ‘cost model’ as its accounting policy in terms of Ind AS 16. If an entity chooses to adopt the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Ind AS 113 “Fair Value Measurement” shall be used for arriving at the fair value of PPE. Fair value as defined in Paragraph 9 of Ind AS 113 is: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The frequency of revaluation would largely depend on the changes in fair value of items of PPE being revalued. Paragraph 31 of Ind AS 16 states: “Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.” Cost Model Revaluation Model Cost: XXXXX Fair Value on Revaluation: XXXXX Less : Depreciation: XXXXX Less : Depreciation: XXXXX Less : Impairment: XXXXX Less : Impairment: XXXXX Carrying Amount: XXXXX Carrying Amount: XXXXX Revaluation of Entire Class of PPE (Paragraphs 29, 36 & 37) As mentioned earlier, in terms of Paragraph 29, 36 and 37 of Ind AS 16, when an item of PPE is revalued, the entire class of PPE to which that asset belongs needs to be revalued. This is done to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. Some examples of separate classes are as follows: • Land • Land and buildings • Machinery • Ships • Aircraft • Motor Vehicles • Furniture and Fixtures • Office Equipment The aforementioned is a broad illustration of the classes of assets and it is possible that there may be other classes of assets as well based on their similar nature and use. It is a matter of judgement in the context of the specific operations of an individual entity. However, the entity needs to provide the disclosures as required by paragraph 73 of Ind AS 16 for each class of property, plant and equipment. Accounting Treatment of Revaluation (Ind AS 16, Paras 39 & 40) Upward Revaluation (Paragraph 39): In terms of paragraph 39 of Ind AS 16, if an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. Downward Revaluation (Paragraph 40): In terms of paragraph 40 of Ind AS 16, if an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. First Time Revaluation Matrix Movement Accounting Recognition ⬆️ Revaluation Profit Revaluation Profit to be recognised in Other Comprehensive Income (OCI) ⬇️ Revaluation Loss Revaluation Loss to be recognised in the Statement of Profit or Loss Subsequent Revaluation Matrix Initial Position Current Year Position Accounting Treatment Initially there was revaluation profit (⬆️) Current year also there is a revaluation Profit (⬆️) Revaluation Profit to be recognised in OCI Initially there was revaluation profit (⬆️) Current year there is a revaluation Loss (⬇️) First the earlier profit recognised in OCI shall be reversed, and then excess if any shall be charged to Profit and Loss Initially there was revaluation loss (⬇️) Current year also there is a revaluation Loss (⬇️) Revaluation Loss shall be charged to Profit & Loss Initially there was revaluation loss (⬇️) Current year there is a revaluation profit (⬆️) First the earlier loss recognised in P&L shall be reversed, and then excess if any shall be accounted for through OCI Methods of Revaluation: Restatement vs. Elimination (Paragraph 35) In terms of paragraph 35 of Ind AS 16, when an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following two ways: Option (a): Proportionate Restatement The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. For example, the gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses. Option (b): Elimination of Accumulated Depreciation The accumulated depreciation is eliminated against the gross carrying amount of the asset. The net carrying amount is then restated to the revalued amount (fair value) of the asset. Practical Comprehensive Example: SA Private Limited Let us understand the concept and accounting of revaluation model of PPE through the following example: Case Profile: SA Private Limited decided to revalue its plant and machinery at 31st March 2020. The useful life of machinery is 10 years and the company uses straight line method (SLM) of depreciation. The revaluation was performed at the end of 4 years. Particulars Amount in ‘000 (₹) Gross Carrying Amount 5,000 Accumulated Depreciation (SLM) [4 years @ 10% p.a.] 2,000 Net Carrying Amount (Carrying Amount before Revaluation) 3,000 Fair Value (Determined as on 31.03.2020) 4,500 Treatment Under Option (a): Adjusting the Gross Value (Proportionate Restatement) If the company opts for the treatment as per option (a) above i.e. adjusting the gross value, the calculation of the revised carrying amount of the machinery is: Particulars Computation Formula Amount in ‘000 (₹) Revised Gross Carrying Amount (Gross Carrying Amount / Net Carrying Amount) * Fair Value = 5,000 / 3,000 * 4,500 7,500 Accumulated Depreciation Revised Gross Amount – Fair Value = 7,500 – 4,500 3,000 Net Carrying Amount (Revalued Amount) Revised Gross Carrying Amount – Accumulated Depreciation 4,500 Journal Entries in the year of revaluation (FY 2019-20) under Option (a): 1. Fixed Assets (Gross Block) a/c Dr              ₹ 25,00,000      To Accumulated Depreciation a/c Cr            ₹ 10,00,000      To Revaluation Reserve a/c Cr                ₹ 15,00,000 (Being plant and machinery gross block and accumulated depreciation restated proportionately to reflect fair value of ₹ 45,00,000, surplus credited to revaluation reserve) Treatment Under Option (b): Eliminating Accumulated Depreciation If the company opts for the treatment as per option (b) above i.e. eliminating accumulated depreciation against the gross carrying amount, the revised carrying amount of the machinery is recorded through the following journal entries: Journal Entries in the year of revaluation (FY 2019-20) under Option (b): 1. Accumulated Depreciation a/c Dr               ₹ 20,00,000      To Fixed Assets (Gross Block) a/c Cr           ₹ 20,00,000 (Being accumulated depreciation eliminated against the gross carrying amount) 2. Fixed Assets (Gross Block) a/c Dr              ₹ 15,00,000      To Revaluation Reserve a/c Cr                ₹ 15,00,000 (Being the net carrying amount restated to fair value of ₹ 45,00,000 by crediting revaluation reserve) Depreciation after Revaluation & Transfer of Revaluation Surplus Subsequent Years’ Depreciation Charge: In subsequent years, depreciation charged to the Statement of Profit & Loss over the remaining useful life of 6 years shall be: Depreciation per annum = ₹ 45,00,000 / 6 years = ₹ 7,50,000 per year Transfer of Revaluation Surplus to Retained Earnings (Paragraph 41): In terms of paragraph 41 of Ind AS 16, the amount of surplus transferred is the difference between depreciation based on the revalued carrying amount and depreciation based on the asset’s original cost. Hence, for each of the remaining 6 years under usual circumstances: Annual Surplus Transfer = (₹ 15,00,000* / 6) = ₹ 2,50,000 per annum *₹ 15,00,000 being the difference between Fair Value (₹ 45,00,000) and Net Carrying Amount (₹ 30,00,000). ₹ 2,50,000 shall be transferred from revaluation reserve to retained earnings in order to avoid the revaluation reserve being maintained indefinitely even after the asset ceases to exist. However, this transfer is not mandatory. The company may choose to make the entire transfer at the end of the useful life or when the asset is sold. Depreciation Rules & Derecognition / Sale of Revalued PPE: Depreciation on Revalued Amount: On revaluation of assets, depreciation has to be charged on the revalued amount as per Ind AS 16. Additional depreciation arising due to revaluation shall not be retrieved from the revaluation reserve. Gain or Loss on Disposal: On sale of revalued PPE, profit or loss on sale is calculated as the difference between net sale consideration and the revalued carrying amount. No Recycling to P&L: On sale of PPE, the revaluation surplus originally recognised in OCI cannot be transferred / recycled to Profit & Loss. It may only be transferred directly to retained earnings. Statutory Disclosure Requirements (Ind AS 16, Paragraph 77 & Ind AS 113) In terms of paragraph 77 of Ind AS 16, following are the mandatory disclosure requirements in Financial Statements in addition to the disclosures required by Ind AS 113 “Fair Value Measurement”: Effective Date: The effective date of the revaluation; Involvement of Independent Valuer: Whether an independent valuer was involved; Historical Cost Benchmark: For each revalued class of property, plant and equipment, the carrying amount that would have been recognised had the assets been carried under the cost model; and Revaluation Surplus Movements & Restrictions: The revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 36–44 (Journal pp. 268–276) TAXATION Analysis of new provision allowing filing of Updated Tax Return CA. Ved Jain Author is past President of the Institute. He may be reached at jainved@gmail.com and eboard@icai.in 📌 Section 139(8A), Rule 12AC & Form ITR-U Overview The Finance Act, 2022 has introduced a new provision in the Income Tax Act, 1961 viz. section 139(8A) allowing the taxpayers who have failed to file the return within the outer limit of 3 months prior to the end of the assessment year to file return on payment of additional tax (over and above the normal tax applicable) within an extended period of 2 years from the end of the assessment years which means 27 months from the outer limit to file tax return. Similarly, the new provision allows a taxpayer to correct the return already filed within the above extended period if it notices any understatement of income upon payment of additional tax. CBDT vide notification no 48/2022 dated 29th April, 2022 has notified Rule 12AC and Form ITR-U for filing the ‘Updated’ income tax return under this newly inserted Section 139(8A). The intent of the present write up is to analyse the nitty-gritty of this new provision. Updated return can now be filed for AY 2020-21 and subsequent assessment years The new provision has been made applicable w.e.f 01.04.2022. Accordingly, the Taxpayers who have missed to file ITRs for Financial Year 2019-20 (Assessment Year 2020-21) and Financial Year 2020-21 (Assessment Year 2021-22) can now file ITR for such years by paying additional tax. Also, taxpayers can file Updated Returns for these years if they have omitted to include any income or to declare any income by paying additional tax. However, the updated return can’t be filed for earlier assessment years as availability of this window is only for two years from the end of the relevant assessment year. Requirement to pay ‘additional tax’ In order to file an updated return, payment of additional tax is also required. An amount equal to 25 per cent of the tax and interest due on the additional income reported is required to be paid where the updated return is being filed within 12 months from the expiry of the assessment year. In case the updated return is being filed after expiry of 12 months from expiry of the relevant assessment year but before 24 months from expiry of the assessment year, then an amount equal to 50 per cent on the tax and interest due on the additional income reported is required to be paid. Thus, such taxpayers filing returns for FY 2020-21 (AY 2021-22) will need to pay the balance tax due after taking credit of taxes already paid by way of advance tax, tax deducted at source, Minimum Alternate Tax (MAT) credit and any relief under section 89 or under Double Taxation Avoidance Treaty (DTAA) together with interest there on till date and late fee along with an additional amount of 25 per cent of such balance tax and interest before filing updated return. For FY 2019-20 (AY 2020-21), the additional amount will be 50 per cent of the tax payable and interest. The additional tax also with balance tax and interest there on and late fee is to be deposited before filing the return. The entire tax liability along with additional tax is to be paid before filing the updated return. Further per the Updated Return Form ITR-U, taxpayers filing the Updated Return need to specify any one of the following reasons for filing Updated Return: Return previously not filed Income not reported correctly Wrong heads of income chosen Wrong rate of tax Reduction of carried forward losses or unabsorbed depreciation Reduction of Minimum Alternate Tax Others Updated return can be filed whether or not a return has been filed earlier The objective of introducing this new provision is to give opportunity not only to the taxpayers who have failed to file the return but also an opportunity to those taxpayers who having filed the return, later on notices understatement of income consequent to data being collected and uploaded by Income tax department on the portal by way of 26AS, AIS or TIS. A taxpayer having filed the return, in case later on notice any such information, then he can update his return. However, such updation is possible only once for that assessment year. Having updated the return for an assessment year, the same can’t be updated again. Immunity from penal consequences By filing this updated return along with payment of additional tax, the taxpayers will get immunity from prosecution under section 276CC for failure to furnish return of income. Though the amendment doesn’t explicitly provide for immunity from levy of penalty under section 270A in respect of under reporting and misreporting of income in the original return filed, however, considering the provisions of sub section (2) of Section 270A, it can be inferred that no penalty shall be leviable under this Section 270A as well. This assumption gets corroborated from perusal of the Memorandum explaining the introduction of this provision whereby the amendment has been captured under the heading ‘promoting voluntary tax compliance and reducing compliance’ and itself states that the existing timeline provided in Section 139 for filing a revised/belated return is not adequate considering utilisation of huge information and data available coupled with the “nudge approach” that motivates the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns. As regards immunity from prosecution under section 276C for wilful evasion of taxes, again, there is no explicit provision providing for any such immunity. However, based on the intent of introduction of the provision (as noted above) and considering the fact that taxes, interest along with additional tax liability already stands paid, one may argue that there should be no consequences under section 276C of the Act as well. It would be ideal if CBDT issues a clarification that there shall be no penal consequences under section 270A or section 276C in case the income is declared in updated return under section 139(8A) to allay any kind of apprehensions of taxpayer. This will help encourage more taxpayers to opt for such new scheme. High rate of additional tax of 25%/50% for filing updated return may not encourage taxpayers to file updated return where income inadvertently not declared is in the nature of under-reporting and not mis-reporting It may be relevant to point out that in case the updation of return is in respect of an income which falls within the meaning of ‘under-reporting’ but do not fall within the meaning of ‘mis-reporting’ of income, the total liability on account of tax and interest and additional tax in case of updation of return may be higher than the tax which otherwise may be payable in consequence of assessment/reassessment where such addition or disallowance is made. In this regard, it may be relevant to point out that under section 270AA of the Act, where there is under-reporting of income, a taxpayer is given complete immunity from penalty and prosecution in case the taxpayer pays the demand as per the notice of demand issued in consequence of the assessment order and files declaration in prescribed formation that it shall not challenge the assessment order in appeal. It may be further relevant to highlight that such immunity is granted without the taxpayer having to pay any additional tax or fee. The taxpayer is only required to pay tax and interest in such cases and is entitled to immunity from penal consequences. As against this, in case an updation of return is sought, then in addition to the normal tax and interest, there is a requirement to pay additional tax of 25% or 50% as the case may be. To explain the above by way of an example, take a case of a company which has opted for 115BAA and had declared income of Rs. 50 lakh in the return filed under section 139(1) of the Act. Say subsequently, the company notices that inadvertently, the amount of disallowance under section 14A to the tune of Rs. 20 lakh was not made in the return filed earlier. In such a case, the total liability arising in consequence of disallowance being made in reassessment proceedings, total liability arising in case updated return is filed within 12 months from expiry of relevant assessment year and tax liability arising in case updated return is filed after 12 but before 24 months from expiry of relevant assessment year shall be as under: Particulars Details Reassessment (under-reporting) Reassessment (mis-reporting) Updated return – 12 months Updated return – 24 months Income returned by the Company A 50,00,000 50,00,000 50,00,000 50,00,000 Tax rate (assumed that company has opted for 115BAA) B 25.17% 25.17% 25.17% 25.17% Tax amount C = A*B 12,58,500 12,58,500 12,58,500 12,58,500 Additional income of Company D 20,00,000 20,00,000 20,00,000 20,00,000 Tax on the above (assumed @ 25.17%) E = D*B 5,03,400 5,03,400 5,03,400 5,03,400 Months for computing S. 234B interest (assuming 3 yr. limitation for reassessment notice, exclusion for enquiry under 148A and 1 year for completion of assessment) - 72 months 72 months 24 months 36 months Interest under Section 234B F = C*1% for each month 3,62,448 3,62,448 1,20,816 1,81,224 Interest under Section 234C G - - 25,422 25,422 Total tax liability H = E + F + G 8,65,848 8,65,848 6,49,638 7,10,046 Additional tax for updated return I = H *25% or 50% - - 1,62,409 3,55,023 Total liability including additional tax J = H+I 8,65,848 8,65,848 8,12,047 10,65,069 Penalty u/s 270A@ 50% on under-reporting@ 200% on misreporting K = I*50%K = I*200% 2,51,700NA NA10,06,800 -- -- Total tax payment with Addl. Tax/penalty L= J+K 11,17,548 18,72,648 8,12,047 10,65,069 • It has been assumed that the updated return is filed on the last date falling as per 12 month window or 24 month window, as the case may be • It has been assumed that advance tax has been appropriately paid as per the original return of income On going through the above table, it may be noted that total liability (ignoring penalty) arising pursuant to reassessment shall be Rs. 8.65 lakhs. As against the same, the total liability (including additional taxes) arising upon filing the updated return under section 139(8A) shall be Rs. 8.12 lakhs in case the updated return is filed within 12 months from expiry of the relevant assessment year and Rs. 10.65 lakhs in case updated return is filed after 12 months but within 24 months from expiry of the relevant assessment year. Keeping in view the same, it appears that where a taxpayer furnishes the updated return within 12 months, the taxpayer may have a lower tax liability vis-à-vis the liability arising in case tax is required to be paid in consequence of disallowance being made in the reassessment proceedings. As against this, in case the taxpayer is not able to file the updated return within 12 months from the expiry of the relevant assessment year, then the taxpayer is worse off under the updated return option and in fact has to pay lesser amount in consequence of reassessment proceedings. Thus, in such cases where nature of additional income left to be declared in the original return falls within the meaning of under-reporting for which immunity from penalty under section 270AA can be sought and 12 months have already elapsed (AY 2020-21 as on date), then the taxpayer may not be encouraged to file the updated return. However, in case it is not possible to claim immunity on account of say multiple additions having been made in reassessment which warrants the order to be challenged further in appeal, then the tax liability under the updated return shall be lower as the total liability (including penalty) arising in consequence of reassessment shall then be Rs. 11.17 lakhs (as against Rs. 8.12 lakhs payable in case the updated return is filed within 12 months from expiry of the relevant assessment year and Rs. 10.65 lakhs payable in case updated return is filed after 12 months but within 24 months from expiry of the relevant assessment year). Similarly, in case the nature of income not declared is in the nature of mis-reporting, then the total liability being substantially higher i.e. Rs. 18.72 lakhs, the filing of updated return shall be beneficial. In view of the above, in some situations, a taxpayer may be better off paying taxes after assessment proceedings than by disclosing the same by way of filing Updated Return whereas in some situations, the taxpayer may be better off by filing the updated return. The impact will depend upon the facts of each case. However, it may be noted that filing updated return may also be beneficial in cases where multiple issues are involved and the taxpayer wishes to accept liability on some issues while choosing to litigate on the rest. It may be also be relevant to highlight that the above said immunity is available only in case of under-reporting of income and not in cases of mis-reporting of income. As per provisions of section 270A of the Act, any difference between income determined under intimation under section 143(1) and income assessed is treated as under reporting. Such under-reporting is said to constitute ‘mis-reporting’ in the following cases: misrepresentation or suppression of facts; failure to record investments in the books of account; claim of expenditure not substantiated by any evidence; recording of any false entry in the books of account; failure to record any receipt in books of account having a bearing on total income; and failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply. In the above stated cases, the benefit of immunity under section 270AA is not available. However, it may be noted that in the following cases, penalty even for under reporting of income is not leviable in terms of section 270A(6): the amount of income in respect of which the assessee offers an explanation and the AO or CIT(A) or CIT or Pr. CIT, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered; the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom; the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and the amount of undisclosed income referred to in section 271AAB. Thus, if the penalty is not leviable on any of above grounds, then too, a taxpayer may find filing updated return voluntarily costlier as compared to total additional liability arising on addition made consequent to assessment or reassessment. Benefit of filing updated return is available to all category of taxpayers It may be noted this facility of updation is open for all taxpayers whether an individual, HUF, AOP, Firm, Company or A Cooperative Society. Restriction on filing updated return in certain circumstances In certain circumstances, there is a bar that a taxpayer shall not be entitled to file an updated return. These are as under: i. Restriction on filing updated return in case of search/survey As per the second proviso to section 139(8A) of the Act, updated return cannot be filed: Where a Search has been initiated under Section 132 or Section 132A or a survey has been conducted under section 133A other than survey for verifying TDS/TCS compliance under sub section( 2A) then such taxpayer is prohibited from filing updated return of search year and any earlier assessment year. Where a notice has been issued to the effect that money, bullion, valuable article, books of accounts or documents seized or requisitioned in a search of another person belongs to or relates to or pertains to the taxpayer, then such taxpayer is prohibited from filing updated return for the search year and earlier assessment year. In the above cases, the taxpayer is not eligible to file updated return for the search year/year of requisition as well as for any earlier assessment years. On-going through this restriction, it will be important to note that a person who gets searched or surveyed immediately becomes ineligible to file updated return. As against this, if any money, bullion or valuable article or thing or books of accounts or documents are found belonging to another person in such search or survey, then ineligibility of such other person is only after a ‘notice’ has been issued to such other person. Accordingly, such other person post search or survey on the first mentioned person can file an updated return of current assessment year and last two assessment years so as to declare or include income likely to be taxed in his income consequent to money, bullion, valuable article, books of accounts or documents belonging to him being found in the search or survey of the first mentioned person. ii. Updated return can only be filed once for relevant assessment year Another restriction is that updated return cannot be filed for the relevant assessment year by any person if an updated has been filed earlier for such assessment year. Thus, once an updated return is filed for any assessment year, the taxpayer is barred from filing another updated return for the same year even if time for filing the updated return is still available for that assessment year. iii. Updated return cannot be filed where information available with the AO under certain Acts and the same has been communicated to the taxpayer Updated return cannot also be filed for the relevant assessment year by any person if;- The AO has information in his possession in respect of such person for the relevant assessment year under PMLA, 2002, SAFEMA, 1976, Black Money Act, 2015 or Prohibition of Benami Property Transactions Act, 1988 and such information has been communicated to such person, prior to the date of furnishing this updated return. Information has been received under Section 90 or 90A (DTAA/Exchange of Information) for the relevant assessment year in respect of such person and the same has been communicated to such person prior to filing of this updated return. On going through the above restriction, it may again be relevant to point out that the restriction gets triggered only when such information has been communicated to the taxpayer, prior to the date of furnishing this updated return. Thus, the person can file updated return in respect of income likely to be taxed in current assessment year and preceding two assessment years consequent to information under SAFEMA, 1976, PMLA, 2002, Black Money Act, 2015, Prohibition of Benami Property Transactions Act, 1988 or under section 90/90A of Income Tax Act before the same is communicated by the AO to such person. It may be further noted that the restriction triggers as and when the information is ‘communicated’ to the taxpayer. Normally, under the new reassessment regime, communication may take place when a notice under section 148A(b) is issued on the basis of such information to conduct enquiry for reassessment proceedings. However, there may be other instances of ‘communication’ as well such as where notice under section 133(6) is issued in pursuance to receipt of information. Before communication of the information for the relevant assessment year, the taxpayer is eligible to file updated return. iv. Assessment/reassessment/re-computation/revision is pending or completed Another restriction is that an updated return cannot be filed for the relevant assessment year by any person if any proceeding for assessment or reassessment or re-computation or revision is pending or completed for that assessment year. Thus, where return has been filed earlier, the taxpayer will not be eligible to file updated return once the notice under section 143(2) has been issued. As against this, a taxpayer who has not filed the return, its eligibility to file updated return shall continue to be available till notice under section 148 is issued for assessment. Another issue may arise as to whether issuance of notice under section 148A(b) under the new reassessment regime may said to constitute ‘pendency’ of assessment/reassessment proceedings thereby triggering the restriction to file updated return. The said issue may be debatable. Legally the reassessment proceedings get initiated only upon issuance of notice under section 148 and thus, a person on receipt of notice under section 148A(b) may be eligible to file updated return provided the assessment year for which such notice has been issued is falling within 24 months from the end of that assessment year and the information provided in such notice is not relating to restricted matters such as search, survey, Black Money, Benami etc. As noted earlier, in prescribed cases where the restriction triggers upon communication of information such as in matters pertaining to Black Money, Benami, etc, issuance of notice under section 148A(b) may itself trigger the restriction as the communication may said to have taken place. v. Updated return cannot be filed where prosecution has been initiated Another restriction is that updated return cannot be filed for the relevant assessment year by any person if any prosecution proceedings, under Chapter XXII of the Income Tax Act, have been initiated for the relevant assessment year in respect of such person prior to filing of updated return. It is to be noted that the taxpayer shall not be eligible to file an updated return for a relevant assessment year in a case where prosecution has been initiated under Chapter XXII of the Income Tax Act in respect of such year even if the grounds on which prosecution has been initiated has no relation with income/evasion of taxes (such as prosecution for technical breach, delay in payment of taxes deducted at source, etc). Updated return cannot be a return of loss It is important to point out that this updated return cannot be filed if it is a return of loss. Accordingly, if a person has earlier filed a return declaring loss, such person cannot file an updated return reducing such loss, in case it has missed to include certain income or loss has been computed in excess. A loss return can be updated only if it gets converted to a return of positive income meaning thereby entire loss should get wiped out and thereafter there should be some positive income. Updated return to be filed for subsequent years where there is reduction in losses/unabsorbed depreciation/MAT credit If by virtue of filing an updated return under the new provision, losses/unabsorbed depreciation/MAT Credit carried forward is to be reduced for any subsequent previous year, then it is mandatory that an updated return shall be furnished for each such subsequent previous year. Consequently, there is a requirement to pay additional tax in respect of each such subsequent year also. In a case where return for subsequent year has been filed whereby enhanced losses have been claimed (which are required to be reduced as a result of filing updated return for any preceding year) and time limit to file revised return under section 139(5) is available, then there may be an issue as to whether filing of updated return for such subsequent year shall still be mandatory or not; or whether the same can be corrected by way of filing revised return. However, in case time period for filing original return for subsequent year is yet to expire, return for such subsequent year has not been filed and consequently, enhanced losses have not yet been claimed in such return for subsequent year, then it may not be necessary to file an updated return and the taxpayer may claim reduced losses in the original return for such subsequent year itself. Updated return cannot result in decrease in tax liability or increase in refund It may be important to point out that an updated return cannot be filed to decrease the tax liability as per the return already filed for the relevant assessment year. So one cannot reduce income while filing updated return. Similarly, updated return cannot be filed for claiming refund and also for claiming increased refund as compared to the refund as per the return already filed. Accordingly, in case a taxpayer has paid excessive tax by way of advance tax or TDS and his liability of tax on the income actually earned is less than the tax paid by way of advance tax and/or TDS, he will not be eligible to file this updated return for the relevant assessment year unless the income is increased to such a level where there is an additional tax liability over and above the taxes paid by way of advance tax and TDS. From the above prohibition imposed on filing Updated Return, it is interesting to note that a taxpayer is allowed to file updated return of past years only in case there is an additional Tax liability and not in case where there is a claim for refund. A taxpayer having deposited tax much more than its liability is ineligible to file updated return, whereas a taxpayer who is in arrear of paying taxes on income earned by him, is eligible to file updated return and get immunity under the Act. A taxpayer can update the return if he has omitted to declare or under declared any income but he can’t revise and file an update the Return, if he has overstated its income or by mistake included any income which either was not to be included or was exempt or where a taxpayer has omitted to claim any deduction permissible under the law. This apparently is not fair and equitable to the taxpayers. Set off of losses permissible against additional income declared in updated return Another issue may arise as to whether setting off losses against additional income is permitted or not. In this regard, it may be relevant to mention that the same is not specifically barred. Thus, the taxpayers may be able claim set off losses while declaring additional income in the updated return, subject to the rider that the set off should not result in decrease in tax liability or increase in refund. Filing of updated return should be allowed even where there is decrease in tax liability The apparent objective of this new provision is additional revenue, then only one is eligible otherwise the person is not eligible. Though one may appreciate this objective, however, law should be fair and equitable to both tax administration as well as taxpayers. The law today give authority to tax administration to rectify, revise and reassess any under assessment and that too with limitation going up to as much as 10 years from the end of the relevant assessment years. As against this, the law gives option to a taxpayer to rectify or revise its return within a period ranging from merely 5 months to just 1 month. It may be relevant to point out that the time limit for filing a revised return (whereby a claim for deduction omitted to be made in the original return may be claimed) used to be two year from the end of relevant assessment year and was reduced to one year from the end of relevant assessment year. This period of one year was initially reduced by Finance Act, 2017 from expiry of 1 year from end of relevant assessment year to end of assessment year itself. Subsequently, this time limit was further reduced by Finance Act, 2021 from expiry of assessment year to 3 months before the expiry of relevant assessment year. Thus, a taxpayer who is required to file the return by 31st October can furnish the revised return only by 31st December i.e. within 2 months. Not only that, a taxpayer to whom Transfer Pricing provisions are applicable, is required to file return by 30th November, get only 1 month to file revised return, if any. Thus, the period to file revised return within 5 months to 1 month is too low. In fact, in the Memorandum Explaining the introduction of new provision, it has been acknowledged that this period of 5 months to 1 months may not be adequate and hence the new provision for filing updated return is being introduced. Relevant extract reads as under: “3. This provision provides an additional time of approximately 5 months to an individual assessee, 2 months to a company/auditable case and 1 month to an assessee who enters into an international transaction or specified domestic transaction respectively, in a financial year to file belated or revised return. This additional timeline for filing a revised/belated return may not be adequate when we factor in utilization of huge information and data available coupled with the “nudge approach” that motivates the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns. 4. Hence, it is proposed to introduce a new provision in section 139 of the Act for filing an updated return of income by any person, whether he has filed a return previously for the relevant assessment year, or not. The proposal for updated return over a period longer than that is provided in the existing provisions of Income-tax Act would on the one hand bring use of huge data with the IT Department to a logical conclusion resulting in additional revenue realization and on the other hand, it will facilitate ease of compliance to the taxpayer in a litigation free environment.” Once the legalisation itself acknowledges that the time period for filing revised return may not be adequate, there is no reason as to why only additional taxes should be a criteria for eligibility to file the updated (revised) return and why one should not be eligible to file updated (revised) return to claim deduction inadvertently not claimed earlier. After all, the mandate of Article 265 of Constitution of India is to bring to tax correct income. Nobody can dispute the fact that tax laws are quite complex and there is bound to be some mistakes and omissions here or there both by tax administration as well as taxpayers. More so when every day judgements are being delivered by various courts interpreting this complex income tax law. The administration has the authority under the law to use these interpretations to its advantage, to revise and/or reassess the income but the taxpayer has no right to seek advantage of such interpretation as time period for filing revised return is too short. Even during assessment proceedings, a taxpayer is denied the right to make a legitimate claim of deduction or exemption before the assessing officer on the ground that the same can’t be entertained without return being revised and time period of revision stands expired by that time. Considering the above, it would have been ideal if this option of updating return had been provided for the benefit of taxpayers as well. To protect the interest of the Revenue, a similar condition may have been imposed that in case a deduction is being claimed in the updated return for the first time, then 25% of tax benefit will have to be forgone in case the tax return is being filed within 12 months and 50% of the tax benefit will have to be forgone in case the updated return is being filed after 12 months. Need to allow filing of updated return beyond two assessment years The objective of introducing this new provision is to encourage voluntary compliance, to promote ease of doing business in India and to reduce litigation. Hence the restriction of updating return within two years from the end of the assessment years should also be relaxed. It would be ideal that time period for filing updated return be further increased with a requirement to pay higher amount of additional tax. This will help encourage more voluntary compliance and also ensure increased collection of taxes which otherwise is a challenge even for the tax administration with best of enforcement machinery. To ensure that taxpayers don’t take undue advantage of such relaxation, the additional tax to be paid may be increased in proportion for each year, may be 75% in case updated return it is filed beyond 2 years but within 3 years from the end of relevant assessment year and 100% in case it is filed beyond 3 years and before 4 years from the end of relevant assessment year and so on. The eligibility criteria for filing updated return of assessment not being pending and/or assessment not being made at the time when updated return is filed with heavy additional taxes (more than the penalty otherwise leviable) will ensure that only bonafide cases of omissions and errors will be able to file the updated returns and hence, there shouldn’t be any apprehension that it may lead to misuse by the taxpayer. Condonation of delay under section 119 in cases involving genuine hardships Under section 119 of the Income Tax Act, CBDT has the power to condone the delay in filing return to avoid genuine hardships. Prior to insertion of section 139(8A), in cases involving genuine hardships, the taxpayers used to approach CBDT to seek condonation of delay in filing return beyond the due date prescribed under section 139(1) of the Act. Even after insertion of section 139(8A), in cases involving genuine hardships, one may consider approaching CBDT under Section 119 for condonation of delay in filing the ITR rather than filing updated return.

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 49–55 (Journal pp. 281–287) INTERNATIONAL TAXATION Corporate Guarantee and Transfer Pricing *SP Singh Author is Ex-IRS Officer. He may be reached at spsingh54@gmail.com and eboard@icai.in **CA. Ankit Arora Chartered Accountant. He may be reached at eboard@icai.in 📌 Overview & Economic Context Business entities raise additional fund for expanding their existing business and/or adding new business venture. Debt financing has certain advantages. While extending loans lenders want a third party guarantee to safeguard their interest. When this guarantee is provided by a group company, it is required to be established that it is at arm’s length. The chapter added by the OECD in the 2022 Guidelines on transfer pricing provides much required guidance on this issue. Transfer pricing of guarantee has been a matter of controversy due to lack of proper appreciation of factors influencing the determination of the arm’s length price. To determine the arm’s length price of corporate guarantee taxpayers as well as tax administration should carry out detailed analysis of the transaction. The article discusses various aspects of transfer pricing of corporate guarantee including controversies in India. Need for credit and Financial Guarantees Need for credit: For the purpose of growth as well as for day-to-day running of operations, businesses need regular flow of fund/cash. For this, an enterprise may prefer to borrow fund from external sources, rather than use its internal resources. Debt has certain advantages compared to equity financing. It has a lower financing cost as it is finite and has to be paid off at some point of time allowing owners to retain full control over company, further, it allows tax breaks and is much less formal in organising1. Due to various reasons, such as capital base, profitability, perceived capacity to pay debt by the company, lenders ask for guarantee. Financial guarantees include bank guarantee, corporate guarantee, personal guarantee etc., the first two being more common. Further, the guarantee can be implicit or explicit. Implicit guarantee refers to the situation when the credit rating of a company that is part of a Multinational Enterprise (“MNE”) group may be considered higher (and interest rate there for lower) than its stand-alone rating. In such a situation, a bank or rating agency believes that associated enterprises would support the company in a period of financial stress even in the absence of an explicit guarantee.2 On the other hand, explicit guarantees are formally documented with required parameters expressed clearly and comprehensively. Normally, bank guarantees are explicit while, corporate guarantees can be implicit or explicit. The other difference between bank guarantee and a corporate guarantee is that while in the former, the bank is the responsible party for repayment in case of default; in a corporate guarantee, “the company which agreed to repay the loan has the responsibility in the situation of repayment”.3 A bank guarantee is an assurance provided by a lending institution that the liabilities of a borrower will be paid back in time. It offers the lender the surety that if the borrower fails to clear the debt, the bank will make the payment or their client. On the other hand, in the corporate guarantee indemnity is granted by the corporate guarantor in favour of the lender. It means an irrevocable and unconditional guarantee given or, as the context may require, to be given by a corporate guarantor in form and substance satisfactory to the Bank as a security for the outstanding Indebtedness and any and all other obligations of the borrower. In a way corporate guarantee is an irrevocable and unconditional guarantee given or, as the context may require, to be given by the corporate guarantor in form and substance satisfactory to the lender as security for the outstanding indebtedness and any and all other obligations of the borrowers.4 The corporate guarantee benefits the borrower as it enables it to get loan, at the same time it benefits the lender as it provides assurance that the loan is secured. In the absence of the guarantee the borrower might not have got the loan or might have got at a much higher cost. This applies more to the borrowers with low credit ratings. As a guarantee is a legal promise made by a third party (guarantor) to cover a borrower’s debt or other types of liability in case of the borrower’s default it serves as additional protection in a loan, making a loan more attractive to potential lenders. The lenders would be more willing to provide guaranteed loans even to borrowers with a poor credit profile, as the presence of a guarantor diminishes the probability of a lender of not being repaid.5 In this article transfer pricing ramifications of explicit corporate guarantee are discussed. Perspectives of Borrower and Lender From the perspective of borrower, a financial guarantee may affect the terms of borrowing. It reduces the cost of debt-funding for the borrower and hence it may be inclined to pay for that guarantee. On the other hand, from the perspective of lender, “the consequence of one or more explicit guarantees is that the guarantor(s) are legally committed; the lender’s risk would be expected to be reduced by having access to the assets of the guarantor(s) in the event of the borrower’s default. Effectively, this may mean that the guarantee allows the borrower to borrow on the terms that would be applicable if it had the credit rating of the guarantor rather than the terms it could obtain based on its own, non-guaranteed, rating.”6 The entities involved in a corporate guarantee The entities involved in a corporate guarantee are: The borrower: who seeks and receives credit and who is responsible for repaying the loan, also called the guaranteed party; The lender: who extends the credit; The guarantor: who agrees to repay the loan extended by the lender to the borrower, if the latter fails to repay the loan. Cross-guarantee in MNE Groups In an MNE group, normally the parent stands as corporate guarantor for its subsidiaries. There may be cases where two or more entities in the group guarantee each other’s obligations. This is referred as cross-guarantee. From the lender’s perspective, it has access to the assets of every cross-guaranteeing entity in the event of a default by a guaranteed borrower. This potentially gives the lender greater comfort than a single guarantee as it can choose where within the cross-guaranteeing MNE group it seeks, if necessary, to make its recoveries. The effect of a cross-guarantee from a borrower’s perspective is that it now has multiple guarantees on its borrowings and may stand as guarantor for multiple borrowings itself.7 OECD on Financial Guarantee On 20 January 2020 the Committee on Fiscal Affairs approved “Transfer Pricing Guidance on Financial Transactions – Inclusive Framework on BEPS: Actions 4, 8-10”. This was incorporated in Chapter X8 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which was released in January 2022 (herein after referred to as OECD 2022). It observes that to determine the transfer pricing consequences of a financial guarantee, it is first necessary to understand the nature and extent of the obligations guaranteed and the consequences for all parties in accordance with the general principles of arm’s length. As for any transaction, for determining the arm’s length price of a financial guarantee the selection of the most appropriate method should be consistent with the actual transaction as actually delineated, particular through functional analysis. The methods discussed in OECD 2022 are the Comparable Uncontrolled Price (“CUP”) method, Yield approach, Cost approach, Valuation of expected loss approach and Capital support method. 1. The Comparable Uncontrolled Price (“CUP”) Method The CUP method can be used where there are either internal or external comparables; independent guarantors providing guarantees in respect of comparable loans to other borrowers or where the same borrower has other comparable loans which are independently guaranteed. While applying this method, factors which should be kept in mind are: the risk profile of the borrower, terms and conditions of the guarantee, term and conditions of the underlying loan (amount, currency, maturity, seniority etc.), credit rating differential between guarantor and guaranteed party, market conditions, etc. When available, uncontrolled guarantee transactions are the most reliable comparable for determining arm’s length guarantee fees.9 The problem in applying this method is that publicly available information about a sufficiently similar guarantee is unlikely to be found between unrelated parties given that unrelated party guarantees of bank loans are uncommon. 2. The Yield Approach In the Yield approach the benefit that the guaranteed party receives from the guarantee in terms of lower interest rates is quantified. The method calculates the spread between the interest rate that would have been payable by the borrower without the guarantee and the interest rate payable with the guarantee. This is carried out in two steps: Step 1: The interest rate that would have been payable by the borrower on its own merits, taking into account the impact of implicit support as a result of its group membership is determined. Step 2: To determine, by a similar process (unless directly observable in the case of a loan from a third party), the interest rate payable with the benefit of the explicit guarantee. The interest spread can be used in quantifying the benefit gained by the borrower as a result of the guarantee. In determining the extent of the benefit provided by the guarantee, it is important to distinguish the impact of an explicit guarantee from the effects of any implicit support as a result of group membership. The benefit of implicit support will be the difference between the borrowing terms attainable by the borrowing entity based on its credit rating as a member of the MNE group and those attainable on the basis of the stand-alone credit rating it would have had if it were an entirely unaffiliated enterprise. If the borrower has its own independent credit rating from an unrelated credit rating agency, this will usually reflect its membership of the MNE group and so ordinarily no adjustment would be needed to this credit rating to reflect implicit support. The result of this analysis sets a maximum fee for the guarantee (the maximum amount that the recipient of the guarantee will be willing to pay), namely, the difference between the interest rate with the guarantee and the interest rate without the guarantee but with the benefit of implicit support (and taking into account any costs). The borrower would have no incentive to enter into the guarantee arrangement if, in total, it pays the same to the bank in interest and to the guarantor in fees as it would have paid to the bank in interest without the guarantee. Therefore this maximum fee does not of itself necessarily reflect the outcome of a bargain made at arm’s length but represents the maximum that the borrower would be prepared to pay. 3. The Cost Method The Cost method aims to quantify the additional risk borne by the guarantor by estimating the value of the expected loss that the guarantor incurs by providing the guarantee (loss given default). Alternatively, the expected cost could be determined by reference to the capital required to support the risks assumed by the guarantor. Various possible models are used for estimating the expected loss and capital requirements. Pricing under each model will be sensitive to the assumptions made in the modelling process. Whatever valuation model is used, the evaluation of cost method sets a minimum fee for the guarantee (the minimum amount that the provider of the guarantee will be willing to accept) and does not of itself necessarily reflect the outcome of a bargain made at arm’s length. The arm’s length amount should be derived from a consideration of the perspectives (taking into account options realistically available) of the borrower and guarantor. 4. Valuation of expected loss approach The Valuation of expected loss method would estimate the value of a guarantee on the basis of calculating the probability of default and making adjustments to account for the expected recovery rate in the event of default. This would then be applied to the nominal amount guaranteed to arrive at a cost of providing the guarantee. The guarantee could then be priced based on an expected return on this amount of capital based on commercial pricing models such as the Capital Asset Pricing Model (CAPM). 5. Capital support method The capital support method may be suitable where the difference between the guarantor’s and borrower’s risk profiles could be addressed by introducing more capital to the borrower’s balance sheet. It would be first necessary to determine the credit rating for the borrower without the guarantee (but with implicit support) and then to identify the amount of additional notional capital required to bring the borrower up to the credit rating of the guarantor. The guarantee could then be priced based on an expected return on this amount of capital to the extent that the expected return so used appropriately reflects only the results or consequences of the provision of the guarantee rather than the overall activities of the guarantor-enterprise. OECD Illustrative Examples (OECD 2022, pp. 440–441) The OECD 2022 (page 440-441) explains the application of the arm’s length methods with the following examples: Example 1 Company M, the parent entity of an MNE group, maintains an AAA credit rating based on the strength of the MNE group’s consolidated balance sheet. Company D, a member of the same MNE group, has a credit rating of only BBB on a stand-alone basis, and needs to borrow EUR 10 million from an independent lender. Assume that the accurate delineation of the actual transaction shows that the effect of passive association raises Company D’s credit standing from BBB to A, and that the provision of the explicit guarantee additionally enhances the credit standing of Company D to AAA. Assume further that independent lenders charge an interest rate of 8% to entities with a credit rating of A, and of 6% to entities with a credit rating of AAA. Assume further that Company M charges Company D a fee of 3% for the provision of the guarantee so the guarantee fee more than completely offsets the benefit of Company D’s enhanced credit standing derived from the provision of such guarantee. In that situation, the analysis under Chapter I may indicate that an independent enterprise borrowing under the same conditions as Company D would not be expected to pay a guarantee fee of 3% to Company M for the provision of the explicit guarantee since Company D is better off in the absence of the guarantee. Example 2 Consider the same fact pattern as described in Example 1, but in this case assume that under the guidance in Section D.2, comparable uncontrolled transactions can be identified showing that the arm’s length price of a comparable guarantee would be in the range of 1% to 1.5%. The accurate delineation of the actual transaction indicates that the enhancement of Company D’s credit standing from A to AAA is attributable to a deliberate concerted group action, i.e. the guarantee provided by Company M. Company D would be expected to be willing to pay an arm’s length guarantee fee to Company M for the provision of the explicit guarantee since Company D is better off than in the absence of the guarantee. UN Practical Manual on Transfer Pricing (2021) In the UN Practical Manual on Transfer Pricing (2021) (herein after referred to as UN 2021) discussion on financial guarantee in para 9.13.2 (pages 387-393) is very similar to that in the OECD 2022, discussed above. Inter alia, it suggests that the following economically relevant factors may be considered while determining the arm’s length nature of an explicit financial guarantee: The contractual terms of the financial guarantee (including terms and conditions of the guaranteed instrument), as supported by the conduct of the parties; The risk profile of the borrower, after accounting for the impact of any implicit support, by considering the functions performed, and assets used (any available external credit rating of the borrower or of the guaranteed instrument and/or information on the probability of default of the borrower may be relevant in this regard); The risk profile and financial capacity of the guarantor; The characteristics of the financial guarantee (including benefits provided by the financial guarantee, if any); The economic circumstances of both the guarantor and the guaranteed entity and of the market(s) in which they operate; and The business strategies pursued by the guarantor and guaranteed entity. Disallowance of Intra-Group Guarantee Fees under UN 2021 The UN 2021 is of the view that an intra group financial guarantee fee is likely to be disallowed to the extent that: The guaranteed entity is perceived as having a better creditworthiness solely because of its group affiliation (so-called ‘implicit support’), i.e. the financial guarantee does not improve the creditworthiness of the borrower beyond any benefits it already receives through implicit support; The debtor has no debt capacity or credit status and, therefore, would not be able to access the capital market without the financial guarantee. That is, a third party would never provide a loan to this debtor absent the guarantee, for example due to its insufficient debt capacity. In situations like this, an accurate delineation of the transaction might lead to the conclusion that the guarantee provided by the parent company is a function performed in its own interest and that the parent company, by providing the guarantee, essentially and substantively is the borrower; and The financial guarantee has been requested by the creditor for the sole purpose of ensuring that the parent company does not divert the funds of the borrower, i.e., moral hazard issues (although in this situation there may be some benefit to the borrower to the extent it obtains a better credit rating). Transfer Pricing Approaches in a few countries regarding corporate guarantee Financial guarantee has been one of the major focus areas for tax authorities around the globe. While countries vary in form and scope of their approaches in determining the arm’s length nature of the transactions, most of the countries recommend examining the following factors while examining guarantee transactions: Benefit received; Whether a third party be willing to pay guarantee fees; Shareholder services; Risk profile of the guarantor; Nature of guarantee fees; The salient features of the treatment of corporate guarantee in some of the countries are discussed hereunder: USA COVID 19 has seen a surge in financial guarantee and intercompany loan transactions in USA.10 Though US transfer pricing regulations under section 482 of the Internal Revenue Code specifies financing (intercompany loans, guarantees) as one of the categorises of intercompany transactions, it does not adequately address elements and process of transfer pricing of financial guarantees provided by a company to its Associated Enterprise. Japan Japanese tax authorities i.e. National Tax Agency (“NTA”) also focus aggressively on Japanese headquartered companies which do not charge guarantee fees from its affiliates abroad. Usually, yield approach which requires split of benefit received because of guarantee is more prevalent. Korea The regulations on financial guarantees were introduced in the domestic law in year 2012. Under the Korean law the arm’s length price of financial guarantee transaction may either be determined based on a) respective risk or expenses of guarantor or b) expected benefit derived by guarantee or c) a mix of the both. Korean law also provides for safe harbour provisions wherein, fee determined based on interest rate differential or computed in accordance with conditions prescribed by National Tax Service (“NTS”) are deemed to be at arm’s length. Australia The Australian Taxation Office (ATO) has in recent years issued a range of guidance concerning intra group financing transactions and related issues following its win in the landmark transfer pricing case against Chevron. However, there is no specific guidance on transfer pricing of financial guarantees. As, Australian transfer pricing rules generally follows the OECD guidelines where possible, so taxpayers with related party financial arrangements are advised to take into account the new OECD guidance where relevant.11 Singapore On 10 August 2021 Singapore has issued Transfer Pricing Guidelines12 which provides guidance on the various aspects of transfer pricing. It specifies that TP documents should be prepared if guarantee fees paid/received by a taxpayer exceeds 1 million Singapore Dollar. The Guidelines does not prescribe any specific method or approach for the financial guarantee fees. It may be presumed that as Singapore normally follows OECD guidelines, to benchmark guarantee transactions the guidelines provided by the OECD would be followed by the tax authorities. Transfer pricing approach regarding corporate guarantee in India and controversies In India transfer pricing of payment and receipt of corporate guarantee has been a matter of controversies. Prior to 2012 as there was no explicit provision covering guarantee, it was argued by taxpayers that corporate guarantees were not in the nature of “international transactions” and hence outside the scope of transfer pricing regulations. The Finance Act, 2012 introduced Explanation in section 92B of the Income-tax Act, 1961, clarifying that the expression “international transaction” includes “lending or guarantee”. This was necessitated to address the rulings where it was held that financial guarantees were not in the nature of international transaction and hence outside the scope of transfer pricing regulations. With introduction of the amendment mentioned above, this controversy stands resolved. SBS Transpole Logistics Pvt. Ltd. (Delhi ITAT) In a case, decided by the Delhi Bench of Income Tax Appellate Tribunal (ITAT)13 an Indian company had provided guarantee to enable a Singapore based branch of an Indian bank to lend working capital loan to its subsidiary in Singapore. In the TP Report it was stated that this transaction had no impact on the profits, income, loss or asset of either of the company on account of providing guarantee. This was not accepted by the Transfer Pricing Officer (TPO), who obtained rates of Bank Guarantee from various banks and then applied ad-hoc rate for making addition. Before the ITAT, the company initially argued that guarantee given by the company was not an international transaction as it did not impact profit, income, loss or asset of either of the company. However, subsequently this was not pursued. On the basis of several decisions,14 where guarantee of 0.5% was considered reasonable, it was argued that the rate adopted by the TPO was higher. The ITAT observed as follows: “We find that there has been consistent view by various Benches of the Tribunal and Hon’ble Bombay High Court in the case of Everest Kanto Cylinders 58 taxmann.com 254 and Glenmark Pharmaceuticals Ltd. 43 taxmann.com 191 wherein 0.5% of the guarantee commission has been held to be at arm’s length. Accordingly, respectfully following the aforesaid decisions ……., we hold that the guarantee commission of 0.5% will be at arm’s length….” Axis Clinicals Limited (Hyderabad ITAT) & Redington India (Madras High Court) In another case, the Hyderabad Bench of the ITAT15 followed the decision of Madras high court16 where it was held that Explanation to Section 92B inserted vide the Finance Act, 2012 with retrospective effect from 01-04-2002 has settled the law that a corporate guarantee indeed forms an international transaction. So far as the quantification of the corporate guarantee is concerned the ITAT relied on the decision of the same Bench in another case17 and decided that the rate of the guarantee fees would be 0.6% (with a rider that it cannot be taken as benchmark in other cases). It is important to observe that in India the determination of the arm’s length consideration has not been examined at any level in accordance with the process mentioned by the OECD and the approach has been ad hoc in nature based on estimation. Conclusion Financial transactions are integral and important part of any business organization. To expand operations as well as to add new ventures and activities companies borrow fund. However, many a times lenders insist for guarantee from a third party. The OECD observes that a financial guarantee provides for the guarantor to meet specified financial obligations in the event of a failure to do so by the guaranteed party. This provides benefits to the borrower as well as the lender. In multinational set up one company, with higher credit worthiness, provides the required guarantee for the benefit of another company of the group. The transfer pricing aspect of this transaction has drawn attention of the tax authorities in many countries. Unfortunately, there are no clear and detailed guidelines issued by tax authorities. Hence, one should use the guidance by the OECD. To determine the arm’s length price of a financial guarantee fees it is imperative that proper study of the entities, nature of the transaction and the impact on the entities should be carried out as outlined by the OECD. In India a study of the decisions by various Benches of ITAT and High Courts lead to infer that corporate guarantee fees of 0.5% is considered adequate. However, this conclusion is, at most, the second best solution. It would be better if taxpayers and tax administration carry out detailed analysis of all aspects of the transaction for arriving at the arm’s length price. Maintenance of detailed documentation by taxpayer would enable it to justify the process of determination of the arm’s length price and enable it to avoid penalty. References & Footnotes “The Advantage of Using Debt as Capital Structure” by Jay Way, updated January 28, 2019, https://smallbusiness.chron.com/ (accessed in June 2022) OECD 2022, Chapter X, paragraph 10.186 “Difference Between Bank Guarantee and Corporate Guarantee” by Piyush Yadav, January 20, 2022, https://askanydifference.com/difference-between-bank-guarantee-and-corporate-guarantee/ (accessed in May 2022) https://www.lawinsider.com/dictionary https://corporatefinanceinstitute.com/resources/knowledge/finance/guarantee (accessed in June 2022) Para 10.158, Chapter X (Page 434), OECD Transfer Pricing Guidelines, 2022 (hereinafter referred to as OECD 2022) Para 10.165, page 436, ibid This section depends extensively on this chapter. Para 10.171, page 438, ibid “United States - Transfer Pricing Analysis – Guarantees” by Radhi Iyer; 2021 IJCRT | Volume 9, Issue 6 June 2021 | ISSN: 2320-2882; www.ijcrt.org (accessed in June 2022) “Transfer pricing of financial transactions – New OECD guidance: What will it mean for Australian taxpayers?” 10 March 2020; Natalya Marenina, https://www.bdo.com.au/ (accessed in June 2022) IRAS e-Tax Guide Transfer Pricing Guidelines (Sixth Edition); 10 August 2021, Published by Inland Revenue Authority of Singapore SBS Transpole Logistics Pvt. Ltd. Vs. ACIT, ITA No. 6166/Del./2017, Dated 06.05.2022 Decisions referred included Dabur India Ltd, [TS-82-ITAT-2021 (Del)-TP (0.30%)], Manugraph India Ltd [TS-113-ITAT-2015 (MUM) -TP (0.50%)], Asia Paints Ltd, [TS-297-ITAT-2013(MUM)-TP) (0.20%)] (upheld by Mum High Court); Thomas Cook (India) Ltd, [69 taxmann.com 443(MUM Tribunal) (0.50%)] Axis Clinicals Limited [TS-717-ITAT-2021(HYD)-TP] dated 20.12.2021 Pr.CIT Vs. M/s.Redington (India) Limited, dt.10-12-2020 Tax Case Appeal Nos.590 & 591 of 2019 ITA No.1950/Hyd/2017 in Rain Industries Limited Vs. DCIT decided on 24.08.2021

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 56–62 (Journal pp. 288–294) FRAUDS AND BANKS Red Flags Identification and Mapping against Loan Frauds Cases in Indian Banks CA. Amit Gupta Author is Deputy Secretary in the Institute. He can be reached at eboard@icai.in 🚨 Research Background & Problem Statement Frauds, a word that scares everyone from a common person to the banking system. In past years, the financial sector has faced multiple frauds challenges. Due to a surge in the number of committed frauds, financial institutions, particularly public sector banks, are experiencing growing losses and a spike in NPAs. The impacts of such frauds are catastrophic on the bank involved as well as in the economy. In terms of amount/value involved in frauds, public sector banks have faced a huge loss as compared to the private sector banks. Loan related frauds are more frequent with public sector banks, The purpose of this study is to identify possible red flags in loan fraud cases. Introduction to Financial Fraud in Indian banks Bank fraud involves stealing one’s wealth or else damaging overall performance by deceitful, dishonest, or unlawful methods. This may be accomplished via several means, including fraudulent activity and orders to manage the risks. Lending corruption is defined as any criminal conduct committed with the goal of obtaining monetary gain through credit intermediaries. Financial theft may be reduced, but it cannot be eliminated. Banking crime’s genesis and communication are two closely related concepts. Gaps in engineering management, governance, nullifying of regulation, connivance with clients and stakeholders, low employee morale, independent oversight, integration of polity, compliance to moral principle and development of the employees, and awareness campaigns program are all elements of the banknote. [1] Among such components are combined factors: technological advancement, managerial negation of regulation, connivance with customers, employees, and distributors, and staff turnover; the remaining four different factors are preventive measures: properly accounted and effectiveness of internal with legislation, moral qualities, and safety training. [2] To prevent a financial gap, administrators should combine these factors. Financial services program managers communicate to avoid fraud after determining the likelihood and landscape. Loan Frauds In recent years, the financial sector has faced tax evasion challenges. Due to a surge in the number of committed frauds, financial institutions, particularly State-owned banks, are experiencing growing losses and a spike in NPAs. In several situations, top-level management plays a crucial role in halting banking operations. The sector has suffered because of the similar trial of Nirav Modi, in which a credit was approved for a development task. Allegations of illegalities and dishonesty were made against several of the company’s senior leaders. Internal control and ethics are questioned as a result. The global economic downturn has been blamed on the threat of growing non-performing assets (NPAs). The stability of a country’s economic banking markets may be gauged by its output and spending levels. For any country, if its monetary sector is riddled with deception and has a significant percentage of non-performing loans, it should be a reason for concern. These problems have been affecting economic growth for a long time. The table below indicates the loan fraud cases doubling in the past years.[2] Table 1.1: Loan fraud cases in past years Year 2016 2017 2018 2020 Loan Frauds double in past years 5,076 5,919 6,801 8,200 Source: RBI Reports on frauds 2021 [2]. Showing an alarming surge from 5,076 cases in 2016 to 8,200 cases in 2020. Even though the financial sector is governed by laws such as the Banking Act of 1949, RBI Act, SBI Act, and Bankruptcy Act, fraudsters and unethical behaviour by account holders and personnel continue to plague the industry. [2] Although various restrictions have been put in place to prevent action or activity by persons who use public funds for their gain, business is still going bankrupt because of it. With this, economic markets have several weaknesses and tax loopholes that allow fraudsters to take advantage of customers’ funds. That’s an effort to shed light on the various problems that lead to an increase in non-performing assets (NPAs) and bank failures.[1][2] Economic strain, chance, and reasoning all play a role in a person’s willingness to pursue deception. It’s very uncommon for downturns to worsen such concerns, since profits are limited and revenue is just a difficulty. According to the research, individuals and interested stakeholders are colluding to defraud people due to a major lack of monitoring by subordinates or supervisory board; a lack of entrepreneurial incentive to fulfil objectives; and collaboration among staff and key organisations. [3] Red Flags Identifications The existence of one or maybe more Early Warning Signals (EWS) raises suspicions of fraudulent transactions on a Red Flagged Account (RFA). If the bank notices any of these warning signs in a principal amount, it should be on high alert for possible fraud. Rather than ignoring these early earing signals, an institution should use them as a reason to conduct a thorough examination of any red flag accounts.[5] The financial institution pointed out that banks’ poor implementation of leading indicators (EWS) and organisational inspections’ failure to identify EWS were also the primary reasons for the delay in uncovering fraudulent activities. These findings support the urgent requirement for banks to put in comprehensive EWS processes that detect red flags in the early phases of fraud. Regulators have issued new guidelines for banks to follow when it comes to red flags. If you see a red light, it means there’s something wrong with your personal or corporate loan account. As of 2015, the RBI has enforced a strict approach to systems and procedures, which includes EWS compliance.[4] Multiple signals were listed by the banking system and banking sector administration as part of a complete framework for effective EWS systems.[2, 5] The following are some examples of the many types of signals: Accountancy Warning Signs: The absence of audited banking statements, inappropriate or unaccountable money transfers, and irresolvable bank account reports are among the accountancy red flags. Compliance with corporate rules and regulations concerns: Some instances of corporate governance include exorbitant pay schemes, regulation evasion, poor or non-existent compliance requirements, and excess leadership mobility. These are warning signs. Organisation Red Flags: Transactions with unidentified parties, the presence of shell corporations, and historical memory of frauds are all examples of suspicious activity.[5] Individuals responsible for red flags: such as unexpected significant purchases, lacking KYC papers, stacking debt, numerous credit lines, and so on, are also included in the general category of red flags. Social Media & Mainstream Intelligence: On social media or in the mainstream, any unfavourable remarks about a company or its leadership might be considered a red flag. Based on our proposed research after analysing multiple loan fraud case studies the following red flags are identified as presented in Table 1.2 which indicates the possible red flags in loan frauds. Detail analysis and major key findings of possible loan frauds tactics, while red flags tactics (RFT) are assigned based on tactics numbers and probability of occurrence are cast-off based on case studies analysis. Red flag tactics numbers are assigned, while probability of occurrence is on low to extreme scale. Table 1.2: Proposed mapping of red flags tactics (rft) and probability of occurrence Tactic Possible Red Flags Details Probability of Occurrence RFT-1 Fake KYC documents Fake documents were created for committing fraud. High RFT-2 Forged accounts. Forged bank accounts were created in the name of servants, family members and other known persons. Medium RFT-3 Forged and fake documents produced. Tampered documents were produced for loan credit Extreme RFT-4 Bogus Company Bogus address was produced with bogus company which exists only in papers. Low RFT-5 Fake Invoices Fake Invoices were created. Medium RFT-6 Spoof Bills produced Spoof bills were produced. Low RFT-7 Fake Assets Fake assets were shown for loan credits. Extreme RFT-8 Absence of whistle-blower policy Whistle-blower policy sometimes work for all major banks. High RFT-9 Bank Employees misused his/her duty /job/position. Mostly bank employees were involved in such frauds. Medium RFT-10 Failure of duty segregation. Failure of duty segregation was seen. Medium RFT-11 Lack of employee’s awareness. Employee’s awareness missing in fraud. Extreme RFT-12 Tempting offers to bank employees. (Root cause: [poor appraisal system) Tempting offers and bribe offers to bank employees because of a poor appraisal system. Medium RFT-13 Early red signals Information not disclosed on time. Bank failed in reporting incident on time. High RFT-14 Heavy Loan sanctions. Heavy loan sanctions without proper verification. High RFT-15 Big transactions were not highlighted. Big transactions were not recorded on time. Low RFT-16 Supplementary favoured for specific companies. Favour done to specific company without proper document verifications Medium RFT-17 Suspicious entries not detected. Suspicious payment/ truncation was not detected/ reported on time High RFT-18 Vague borrowing process. Unclear borrowing process. Medium RFT-19 Non-cooperation of borrowers during forensic audits. No cooperation during forensics audit process. High RFT-20 Huge diversification of money. Money diversified into multiple accounts and also converted into multiple assets. Medium RFT-21 Failure of risk management. Risk Management system was not active and missing. High RFT-22 Failure of Risk identification Risk identification system failed completely. Medium RFT-23 Auditor cheated/ auditor training skills Auditor cheated with tactics and techniques; main reason is audit were not trained to perform such audits. Medium RFT-24 Unsuitable Audit process. Audit process was not done in a systematic manner. Low RFT-25 Inconclusive audit reports. Inconclusive audit reports. Low RFT-26 Unsuitable Audit process. Document analysis was not done in a proper manner and an unstable audit process followed. Medium RFT-27 Infrequent audit process. Infrequent audit process. Medium RFT-28 Politician support Support from politician in borrowing and lending. Extreme RFT-29 Cross border transactions Huge and heavy transactions in cross border accounts. Low RFT-30 Overpriced invoices. Invoices were overpriced and not monitored properly Medium RFT-31 Fake email ID created. Fake email ID was used Low RFT-32 MIS used of advanced technology MIS used of advanced technology in bypassing account details information Medium RFT-33 Misuse of fund Fund misused by banks Medium RFT-34 Weak enforcement of law in the country Weak Low RFT-35 Attention to early red signals No attention was given to early red signals High RFT-36 No fear in committing fraud The long and elaborate judicial process is another major concern. High Risk Matrices: Likelihood, Consequences & Tactic Mapping Based on the above red flags, Table 1.3 demonstrates consequences and likelihood of occurrence, while colour codes are used for bifurcation purpose. Below Table 1.3 shows sample scale of Red Flags Consequences, Likelihood and occurrence using Risk Matrix. Table: 1.3: Sample scale: consequences, likelihood and probability of red flags tactics occurrence using risk matrix Likelihood Consequences Minor Moderate Significant Unlikely Low Low Medium Possible Low Medium High Likely Medium High High Table 1.4: Mapping of Consequences, Likelihood and Probability of Red Flag’s occurrence using risk matrix Likelihood Consequences Insignificant Minor Moderate Major Critical Rare LowRFT-29, RFT-34 LowRFT-31 LowRFT-25 MediumRFT-2 HighRFT-36 Unlikely LowRFT-15 LowRFT-24 MediumRFT-2, RFT-5 MediumRFT-9, RFT-10 HighRFT-35 Possible LowRFT-4, RFT-6 MediumRFT-10, RFT-12, RFT-16 MediumRFT-10, RFT-18, RFT-20 HighRFT-8 HighRFT-19 Likely MediumRFT-2, RFT-5, RFT-9, RFT-10, RFT-32 MediumRFT-33 HighRFT-14 HighRFT-21 ExtremeRFT-28 Almost Certain MediumRFT-22, RFT-23, RFT-26 MediumRFT-27, RFT-30, RFT-32 HighRFT-1, RFT-13, RFT-17 HighRFT-3, RFT-7 HighRFT-11 Prevention: Possible Methods for preventing loan frauds When it comes to fraud protection, the most significant safeguard banking must take is to incorporate developing technology into its legacy infrastructure. Numerous conventional banks in the nation have failed to take advantage of the emerging transformation that is taking place. A mere few years ago, acquiring and presenting fake paperwork was more challenging than it is now, as the number of technologies for those documents has grown dramatically. To avoid fraud, digitised authentication of the paperwork via the use of interconnected technology is required. Computing and Advanced Analytics-enabled technological tools have become a key differentiator for global companies, and viable banks will only benefit from incorporating these technologies into their operations. An added dimension to the safety precautions that organisations can implement is the examination of the issuers or individual player’s business history and correlations. Tax filings, whether they be ITR or GST filings, are a strong measure of the effectiveness and legitimacy of a company entity’s operations. Invalid ITR information, on the other hand, should raise red flags for every mortgage lender since it may be an indication of improper purpose or activity. Upon receiving this information, the next precautionary action that institutions may take is to examine the organisations for any unfavourable information that may have been released about the respondent over a certain period. Financial institutions may get crucial data from organisations to determine the legitimacy of applications. The absence of bad news allows one to proceed to a new phase in investigative work; on the other hand, bad publicity raises red flags and prompts a more in-depth investigation into the individual’s economic and corporate safety. Figure 1 indicates the possible methods for loan fraud prevention. Figure: 1: Possible methods for loan fraud preventions Fraud Risk Assessment framework. Possible Indicators (red flags) identification of loan frauds. Auditing and Continuous monitoring. Fraud Awareness training and analysis methods. Use of Advanced Technology. Forensics accounting and fraud detections. Fraud reporting mechanism. Learn to adapt and repeat the process. Organisations need to make use of recent breakthroughs in advanced technologies to anticipate trends and learn from experiences. [7] Incorporating digital into financial transactions without providing useful viewpoints and data analysed through these procedures is indeed an unsatisfactory use of restricted resources in this case. The best thing for bankers to do is to make or use sophisticated models that can predict how likely it is that someone will be dishonest.[8] Risk assessment models can play an important role in all fraud identification and early detection of frauds. Conclusion Multiple factors contribute towards fraud, including a faulty legislative framework, negligent personnel, overall shortage of oversight just at the headquarters level, erroneous application of technologies, and often a failure to communicate between customers and staff. It is essential that institutions observe the infrastructure that periodically evaluates or verifies transactions that could be vulnerable to scams to avoid such concerns. To combat this rising problem in banks, authorities have to enact increasingly strict anti-corruption regulations. Financial services, including cross activities, mortgages, withdrawals, and other money transfers, must be much protected. References Impact of Frauds on the Indian Banking Sector Ainsley Granville Andre Jorge Bernard, Brahma Edwin Barreto, Rodney D’Silva RBI Reports on frauds 2021. Deloitte Survey: Indian Banking Fraud Survey, Business Standard Loan frauds https://sdk.finance/detecting-and-preventing-loan-application-fraud-with-ai-powered-online-document-verification/ Frauds in the Indian Banking Industry - IIMB-WP N0. 505 Types of banking frauds report https://www.stpaulschambers.com/types-of-banking-fraud/ Financial fraud aspects detail analysis of financial fraud available at https://www.ukfinance.org.uk/system/files/Fraud%20The%20Facts%202021-%20FINAL.pdf Report by Insight partners, available at helpnet security, jan 2022.

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 64–71 (Journal pp. 296–303) FORENSIC ACCOUNTING Forensic Accounting; the ‘Knight in Shining Armour’ for Regulators against Fraudulent Shells CA. Durgesh Pandey Author is member of the Institute. He may be reached at durgesh.pandey@gmail.com and eboard@icai.in 🛡️ Regulatory Imperative & Problem Statement With the Government putting efforts to weed out shell companies that are perceived as two-edged incorporations, there is a high perception of fraud in the post-pandemic period. As the nations undergo recovery, identifying fraudulent establishments is of utmost importance to rebound to a full-fledged economy. Forensic accounting, being considered a niche tool for fraud prevention and deterrence, has increased with the many financial frauds cropping up worldwide. The emergence of advanced technological innovations has not only contributed significantly to humanity in various forms of life but also in committing fraud. This article attempts to decode shell companies, their history and legitimacy, and the scope of forensic accounting as a tool for identifying fraudulent shell corporations. An Overview of Fraud through Shell Companies The pandemic triggered an increased perception of fraud worldwide in various sectors as businesses saw a slowdown in activities. A report titled, ‘Rethinking Fraud and Economic Crime,’ predicted that some companies might resort to round-tripping, fund diversion, and evergreening of loans in a desperate attempt to stay afloat to overcome the economic consequences of Covid-19 due to a lack of liquidity. The report further stated that volatile cash flows, insufficient reserves, and a limited capacity to get supplementary debt or equity funding might put enormous pressure on enterprises to transfer funds between corporations for illegal or covert purposes. Fast forward to 2022, the instances of fund diversion are rampant in the country, with industry giants resorting to shell companies to route money to raise loans fraudulently. Accordingly, the Enforcement Directorate (ED) probed a notable real estate developer for round-tripping of funds through businesses acting as fronts to record bogus costs, write-off project expenses, advance interest-free loans to sister concerns, and fabrication of assets within and outside the country. Following an inquiry into one of the country’s largest scams, the CBI claimed that the accused incorporated over 98 businesses to siphon cash to generate personal possessions and for the sole intention of evergreening loans. The fraud was mostly due to the company making huge transactions to related parties and then creating adjustment entries. It was also claimed that huge sums of money were invested in its foreign company by diverting bank loans, which were declared fraud accounts by multiple financial institutions following forensic investigations. Apart from the above instances, as part of a countrywide crackdown on shell firms with sham Indian directors and a Foreign link (particular to countries having rocky relationship with India), the Registrar of Companies (ROC) filed multiple FIRs in January 2022. The sham corporations were involved in a variety of crimes, including bank fraud, money laundering, tax evasion, and crypto fraud, according to the investigation. In these instances, complaints were being filed under the FEMA (Foreign Exchange Management Act) and RBI guidelines if the fund is channelled outside India through hawala methods, apart from the Prevention of Money Laundering Act (PMLA), Prohibition of Benami Transactions Act, 2016, etc. Historical perspective of Shell Companies in India In India, running shell corporations used to be a large industry in and around large metros. The emergence of the shell company was not an isolated incident or a parallel economy as misconstrued. These shell companies emerged as a solution to remove money from the books of accounts, probably which did not have a legitimate explanation e.g., greasing the bureaucratic or political machinery for business. Contrary to belief, these company coexist with legitimate companies and supplement each other commercially and economically. However the good old wisdom was tossed and these have become a thorn in the business scheme. The tale of how this sector grew and supplied entry points for tax avoidance has been told anecdotally by certain attorneys and accountants in the industry. In a nutshell, the shell companies prospered during the year 2010, and they were managed by entry operators who were well-versed in accounting and taxation. In the years leading up to 2010, entry operators offering “accommodation entry” through shell businesses sprung up all throughout the country, with the eastern city being the epicentre of such shell businesses. “Shell companies are known in India typically as investment companies, and jamakharchi companies and have established themselves as a well-organised corporation in eastern India.” The legitimacy of Shell Companies In theory, ‘shell company’ is not defined by either the Companies Act, 1956 or 2013. When a legislative commission approached the Ministry of Corporate Affairs for proposals on how to define ‘shell companies,’ the one suggested by the Organization for Economic Co-operation and Development (OECD) was determined to be the most acceptable. According to the definition: “The term shell is used to refer to a company that is formally registered, incorporated, or otherwise legally organised in an economy but which does not conduct any operations in that economy other than in a pass-through capacity.” Furthermore, SEBI has established certain criteria for identifying shell companies, including: 🏢 Operational Inactivity Absence of any substantial operational activity 📉 Asset Absence Absence of any significant assets 🔄 Conduit Structure Activities in a pass-through capacity Other authorities have also established specific guidelines for identifying such businesses. However, being a shell corporation by itself is not an offense, the High Court stated emphatically. Shell corporations are a type of Special Purpose Company (SPCS) that are necessary for legitimate business purposes such as asset ring-fencing (a virtual barrier separating a portion of an individual’s or company’s financial assets from the others), fundraising, effective and optimal asset management with multiple owners, facilitating mergers, acquisitions, and demergers, enabling investments in on-shore and off-shore projects, and so on. Any organisation formed for a specific reason usually starts out as a shell corporation. According to the Company Law Committee Report of April 2022, the concept of Special Purpose Acquisition Companies (SPAC) permits a shell company to launch an Initial Public Offering (IPO) without doing any business. In circumstances of unlawful activity, the most the Registrar of Companies can do is strike the incorporation’s name from the company register. As per a press release from the Ministry of Corporate Affairs, 3,82,875 shell companies were struck off in the three years leading up to the financial year 2020 for failing to file Financial Statements (FS) for two years or more. Therefore, if, unfortunately, the shell corporation is involved in money laundering, tax evasion, or other unlawful activities, applicable sections of the Prevention of Money Laundering Act, 2002, the Prohibition of Benami Transactions Act, 2016, the Income-tax Act, 1961, and the Companies Act, 2013 would be invoked. In recent years, the volume of shell companies that have been floated around the country has increased. As per the press release by Press Information Bureau (PIB), the Ministry of Corporate Affairs (MCA) tabled a list of 2,38,223 companies struck off u/s 248 of the Companies Act, 2013. The share of companies out of the total number is categorised into State/ UT as under: NUMBER OF STRUCK OFF COMPANIES (2018 TO JUNE 2021) BY REGISTRAR OF COMPANIES (RoC) Data compiled from Press Information Bureau (PIB) / MCA filings across 26 RoC Jurisdictions. Total struck off u/s 248 of the Companies Act, 2013: 2,38,223 companies. RoC Jurisdiction Volume Range & Geographic Concentration RoC-Delhi Highest Concentration (~50,000+ companies struck off) RoC-Mumbai Very High Concentration (~48,000+ companies struck off) RoC-Kolkata Major Eastern Hub (~28,000+ companies struck off; primary epicentre of jamakharchi entities) RoC-Hyderabad Significant Volume (~18,000+ companies struck off) RoC-Bangalore Significant Volume (~15,000+ companies struck off) RoC-Chennai Substantial Volume (~14,000+ companies struck off) RoC-Ahmedabad Substantial Volume (~12,000+ companies struck off) RoC-Pune Moderate Volume (~9,000+ companies struck off) RoC-Kanpur Moderate Volume (~8,500+ companies struck off) RoC-Jaipur Moderate Volume (~7,500+ companies struck off) RoC-Chandigarh Moderate Volume (~6,500+ companies struck off) RoC-Ernakulam Moderate Volume (~6,000+ companies struck off) Other RoCs (14 Jurisdictions) RoC-Vijayawada, RoC-Uttarakhand, RoC-Shillong, RoC-Pondicherry, RoC-Patna, RoC-Jharkhand, RoC-Jammu, RoC-Himachal Pradesh, RoC-Gwalior, RoC-Goa, RoC-Cuttack, RoC-Coimbatore, RoC-Chhattisgarh, RoC-Andaman (Ranging from under 500 to ~4,500 companies each) The Mechanics of Money Laundering through Shell Companies The campaign against black money would be incomplete as there are several possibilities for laundering illicit money through shell businesses. The basic steps in the process of diversion of unaccounted money through shell companies typically follow the placement of illicit funds, layering, and integration. 1 Placement Placing the accumulated illicit fund into the financial system. 2 Layering Multiple transfer of the funds to hide the source. 3 Integration Using the laundered fund to purchase legitimate wealth. With reference to the Indian scenario, there are two types of shell companies; on-shore and off-shore. Shell companies are known in India typically as investment companies, and jamakharchi companies. However the unlayering of the transaction is easier said than done. It is a nightmare for the regulatory or law enforcement agencies to uncover the trail of transactions or to find the money trail. Evidence discovery is a challenge due to all transactions done in cash mode through parallel channel with no audit evidence or money trail. The Indian scenario is witness to several cases of shell companies. In almost most of the cases of large frauds one of the allegations levelled in the chargesheet is diversion and siphoning of funds using shell company. These shell companies may either be incorporated in India or abroad. It is in the public domain based on the regulatory filing by SFIO that Bhushan Steel used about 155 shell companies controlled directly or indirectly by the promoters to remove money from the books. The classic modus operandi in such cases is incorporation of a Company where the owner has pseudo control through one of his stooges. Then the newly incorporated company issues an invoice to the principal company for some goods or services which are not provided or at the best provided only for namesake. Once the money is transferred to the shell company then the promotor has unrestricted access to the money. There are global multinational corporations that may or may not be registered in India but are responsible for publicly reporting every rupee of earnings to their overseas headquarters. As stated earlier, every company has to remove some money from the books to run the business effectively and pay marginal legal payments. This is the reason why shells started in the first place. Further, these shady contributions are intended to resolve disputes and other agreements, which generally are in the form of cash or other types of black money. Off-shore shell corporations, on the other hand, are a staple of money laundering schemes, which are corporations, trusts, joint ventures, enterprises, and other entities formed outside of the jurisdiction of India (or their native nation) for the sole purpose of channelling money from one location to another. These businesses are typically formed in countries where taxes are either non-existent or minimal, anti-money laundering procedures are either non-existent or only exist on paper, and banking systems have the ability to wire transfer any amount of funds anywhere in the world through existing financial arrangements. Importantly, the off-shore shell corporations are not usually illegal, but they can be used to exploit gaps in tax legislation and tax treaties between nations. The unlawful element arises when the holding company obtains funds through Trade-Based Money Laundering (TBML) or an Informal Remittance System, such as Hawala (Hindi word for informal and parallel money transfer). Off-shore shell corporations and tax havens have earned respectable names as a result of innovative money laundering operations; they are now known as International Business Corporations (IBCs) and Offshore Financial Centres (OFCs), respectively, located in over 70 locations across the world, such as Monaco, Panama, Mauritius, Marshal Islands, Aruba, and more. Elements and Red Flags of Illegal Shell Corporations Forensic Professionals are expected to recognise significant signs of fraud when offering consulting or assurance services, according to the technical requirements of the local region or governing bodies including Governments. A study of red flags could assist investigators of all sorts in spotting a discrepancy when it crosses them and lands right under their noses in everyday operations. Shell companies normally charge for a service, and reputable businesses rarely utilise tools like ‘spreadsheets’ as their invoicing system. This red flag might be used in a variety of scenarios, but the bottom line is that investigators should have a high likelihood of spotting an evident red flag if they come across one. Some of the common elements of a fund diversion strategy in a shell company would be channelising payments from one company to another in multiple layers. Meanwhile, some of the shells may also be held by multiple other shell corporations such that the ownership structure of the immediate business appears complicated. Having termed as beneficial ownership, it is one of the typical cases of an Anti-Money Laundering (AML) issue in an off-shore context. Subsequently, there may be a holding company structure between the two shells, with the holding company overseeing the transfer of funds in a series of transactions between many interconnected and networked organisations. They may have various directors, but the entry operator would be the same. Another scenario of a shell corporation is fake directors and locations where the directors are typically name-lenders with no genuine business experience, and each director is a director of several businesses. Any physical verification would reveal that the directors are either benamis or are untraceable. For Know Your Customer compliance, the entry operator who manages multiple companies from a single address purchases their identity for a low fee. Additionally, incorporations in a bunch are also a suspicious pattern that arises in the identification of a shell corporation. In order to supply accommodation entries, the entry operator requires a large number of businesses. As a result, he/she applies for registration of companies in bulk for several companies for commercial convenience, and many entities with identical directors and addresses are formed on the same day. Considering the proactive feature of the Ministry of Corporate Affairs (MCA), finding such commonality has become easier in India and the website itself offers multiple searches like number of business registered on an address, no of directorships held, cross directorships, etc. All the above information is available in the public domain for a small fee. There are many companies that also use this data to prepare intelligible reports which can directly be used by professionals. Evidently, the layering aspect of a shell company also makes use of entry operators to pass multiple entries in order to hide the source of funds, which raises suspicion in a bank account. For instance, high-value transactions are received via RTGS and sent out the same day with back-to-back entries indicating multiple clients requesting accommodations at the same time. For kickback payments, shell companies act as intermediaries to facilitate the conversion of black and white money to parties through entry operators, who earn commission from both parties. Apart from the above-mentioned elements of shell companies which are often categorised as red flags, another suspicious component is the billing scheme. In a shell company, false invoicing is identified as one of the major red flags of diversion of funds, according to the ACFE Report to the Nations in respect of asset misappropriation. Elements such as sequential invoicing, limited or unintelligible details on the invoice, purchases of unusual items, etc., can be observed in red flags related to invoicing in a shell company. “Elements such as sequential invoicing, limited or unintelligible details on the invoice, purchases of unusual items, etc., can be observed in red flags related to invoicing in a shell company.” Scope of Forensic Accounting in Identifying Shell Companies Core Triad of Forensic Investigation Methodologies 01. Enhanced Due Diligence Analyse fund diversion, fictitious expense and focuses on data analysis at transactional level. 02. Fraud Data Analytics Utilising business intelligence and data science to extract a data-pattern. 03. Digital Forensic Tools Use of AI to generate 360-degree client profile, extraction of web-based fragments and representing it through graphical interface, and other computer, memory, and network forensic tools. 1. Enhanced Due Diligence Screening for contradictions and defects is an important part of research and analysis. If the forensic professional has suspicions about the deal’s motivations or suspects that a beneficial owner is a different person and that the person claiming to be the beneficial owner is a frontman, enhanced due diligence and investigation procedures might be used. The investigation is based on the utilisation, analysis, and cross-checking of a variety of sources in the respective jurisdictions, both documented and qualitative. These must take into consideration the various commercial and legal settings that exist in different countries and sectors. Case Study: Uncovering Beneficial Ownership in Healthcare Enterprise Network In the case of a German-based company, it was able to identify the beneficial ownership of a complicated network of health-care enterprises, including cross-ownership and shareholdings linked to off-shore entities. Several of the entities were linked to one German corporation, which was ultimately managed by an off-shore entity incorporated in another country, according to first-level due diligence that included searches and analysis of corporate data. Forensic analysis was used to establish this case of beneficial ownership by demonstrating a conflict of interest and anti-competitive behaviour. Unique investigative research approaches were utilised not only to comply with several legislative responsibilities, but also to obtain a complete understanding of the target, the companies, and to actually get to know the customer and organisation they are dealing with. Although determining beneficial ownership of businesses and trust arrangements can be complex, this case study demonstrated how innovative research and investigation tactics spanning many jurisdictions could help solve even the most difficult problems. 2. Digital Forensic Tools By utilising online tools such as conducting global research in various databases and corporate registrations, ownership identification and information on shell firms can be obtained. Affiliation for shells with suspicious fund transfers may also be established using various AML-specific software. In order to detect shells, even a simple web history analysis yields results. A fundamental search on the world wide web may identify the organisation’s ownership. Several corporations disclose the contact information of their CEOs and boards of directors on their websites in order to appear accountable and reputable. In contrast, shell companies may be missing out on this information, and many illegal businesses lack websites by leaving a paper trail. Forensic accountants may also utilise knowledge graphs to create 360-degree client profiles for risk assessment utilising modern AI technology. The knowledge graph is made up of interconnected descriptions of items such as objects, events, and concepts, and new data can be retrieved instantly from the original sources as required. 3. Fraud Data Analytics Fraud data analysis is the method of analysing data for red flags related to a certain fraud-risk claim using data mining. The approach developed by Leonard W. Vona, author of Fraud Analytics Methodology and CEO of Fraud Auditing Inc., begins with a fraud-risk statement rather than an allegation when investigating fraud. To begin, the fraud examiner or investigator may compile a list of suspicious vendors who could be involved in a shell company operation. The professional can then choose suppliers for inquiry using data-pattern analysis and fraud-testing processes. Based on the fraud-risk statement, the professional should comprehend and develop a fraud data analytics approach. Two of the approaches that can be used to figure out how each business transaction relates to the data are the master-file which is the vendors’ data identity, and transaction-file, pertaining to the data identity of purchase orders, invoices, and corresponding payments. In order to analyse a transaction-file data, key elements such as sequencing pattern of invoices, order of transactions, invoice amount below control level, anomalies inline description, and a detailed analysis of general-ledger account can reveal red flags related to shell companies. In the master-file data, Leonard, a Certified Fraud Examiner states unique approaches to fraud analytics using five different categories of shell companies. The approach can be summarised as follows: Five Categories of Shell Companies: Meaning & Mode of Detection TYPE MEANING MODE OF DETECTION Created shell company To perpetuate a false-billing or pass-through fraud, an insider adds a shell entity to the accounts payable system. Identification of missing vendor information as the culprit may attempt to regulate who may contact the shell entity. Correlation of contact details with bank accounts in HR database to identify anomalies. Assumed shell company A dormant vendor existing on the master file or an actual marketplace supplier, not on the master file represented by an insider. Identification of changes in contact address of the vendors and bank accounts. Repeat the procedure of the created shell entity for identifying the real vendor. Hidden shell company Multiple names are used by an actual entity wherein the first business is the actual one, while the others are just shells. This strategy aims to get around control levels or give the impression of competitive procurement. Identification of data duplication between service providers in respect of contact details and business details. Conflict-of-interest shell company Uses a legally formed corporation to sell products or services; however, the vendor only has one customer. This corporation might be owned by an internal employee or someone linked to the employee. Same procedure as the created shell company. Temporary shell company The fraudster employs temporary shell entities for a short number of transactions and might be made up or assumed identity or exist just in name. This fraud frequently targets businesses with one-time payment methods. Identification of a limited volume of transactions with a single vendor that is associated with a single cost centre. Conclusion Shell companies have frequently become the subject of criminal investigations and enforcement actions, with lists of suspected shell companies being compiled by the Financial Intelligence Unit (FIU) and the Serious Fraud Investigation Office (SFIO). Based on that, SEBI has even suspended trading of 331 listed companies alleged to be shell corporations. In light of regulatory authorities’ assault on shell corporations, forensic accountants should look for and disclose probable activities of their subject with shell companies using various techniques. However, a comprehensive formulation of shell companies with an acceptable scope and a consistent structure is required to address all difficulties of shell corporations. At the same time, the recent measures implemented by the MCA, the Income Tax Department, and the Task Force to shut down shell companies with illegal goals can be considered one of the first steps toward reducing the use of shell companies as a means of negatively affecting the Indian economy. References Forensic Investigations and Fraud Reporting in India by Deepa Agarwal and Sandeep Baldava. The Curious Case of Black Money and White Money by Varun Chandna. Loophole Games by Smarak Swain. Ministry of Corporate Affairs: MCA Struck Off Companies Notification. Ahmedabad Mirror: FIR against 4 shady Chinese firms used Indians as front. The Economic Times: ABG Shipyard Ltd scam: 98 companies were floated by the accused to divert funds, says CBI. The Times of India: ED grills Karvy CMD over fund diversion 14 shell cos. The Wire: After ED Chargesheet in IREO Scam: A Look Back at the Red Flags that Were Raised. PwC Global: PwC Global Economic Crime Survey Report. TaxGuru: Critical Analysis of Shell Company. PIB Delhi: Government crack-down against Shell Companies (PRID 1703455). Fraud Conference 28th Annual: Fraud Conference 28th Virtual Presentation Materials. Fraud Magazine: ACFE Fraud Magazine Analysis. STIEM Repository: Fraud Auditing and Forensic Accounting Monograph. FinTech Futures: How AI can help identify front and shell companies. PIB Delhi: Measures Taken by Government to Curb Shell Companies (PRID 1739583). The Economic Times: Income Tax Appellate Tribunal order about jama-kharchi leaves traders in a limbo.

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 72–75 (Journal pp. 304–307) BANKING Digital Rupee, CBDC - India steps towards Monetary Freedom CA. Binny Agarwal Singhal Author is member of the Institute. She may be reached at cabinnyagarwalsinghal@gmail.com and eboard@icai.in 🪙 Executive Context & Monetary Horizon The article discusses India’s recent steps towards creating a digital rupee, which would be a form of Central Bank Digital Currency (CBDC). This would allow for more monetary freedom in India, as it would move away from the current system in which the government controls the circulation of money. The article cites initial questions asked about the launch and impact of the digital rupee in the economy. Introduction & Union Budget Announcement Union Finance Minister Nirmala Sitharaman announced on February 1 that the Reserve Bank of India (RBI) would establish a central bank digital currency (CBDC) in 2022-23, the first formal declaration by the Union government of the much-anticipated digital currency’s introduction. The FM stated that the implementation of CBDC will be built on blockchain technology which will strengthen the digital economy. The Reserve Bank of India (RBI) previously indicated that CBDC is possible, notwithstanding the central bank’s opposition to private virtual currencies. The FM stated that the adoption of CBDC will bolster India’s standing as a digital economy further, owing to the country’s world-class digital payment infrastructure. The debate over regularising cryptocurrencies in India The debate over the regularisation of cryptocurrency in India revolves around the fact that cryptocurrencies are not legal tender. The argument against legalisation is that it can be used for illicit purposes. Another argument against legalisation is that it is speculative and unstable. Despite these arguments, some argue that legalising cryptocurrencies will help to promote financial inclusion in India since many don’t have access to banking services. In 2018, the Reserve Bank of India (‘RBI’) barred the use of virtual currencies, including Bitcoins, and directed banks and financial institutions to refrain from dealing in virtual currencies or providing services to facilitate the use or settlement of virtual currencies. The Supreme Court of India, however, lifted the prohibition in March 2020 in response to a plea filed in the case of Internet and Mobile Association of India v. Reserve Bank of India. The Government was scheduled to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 (Bill) during the Parliament’s 2021 Budget Session. A major aim of the Bill is to establish a state-backed digital currency issued by the RBI while prohibiting private digital currencies, such as Bitcoin, Ethereum, and Litecoin. However, the law is yet to be introduced. Schedule III Disclosure Mandate for Corporate Virtual Currency Holdings: The Ministry of Corporate Affairs has revised Schedule III of the Companies Act, 2013 through a notification dated 24 March 2021 (the ‘Notification’), which took effect on 1 April 2021. The amendments establish general guidelines for the preparation of a company’s balance sheet and statement of profit and loss, requiring businesses that deal in virtual currencies to disclose the amount of virtual currencies they hold in their balance sheets, as well as the profit or loss incurred on their transactions. Additionally, this amendment establishes virtual assets as a distinct asset class. Despite the prospect of a ban and the current uncertainty surrounding cryptocurrencies in the Indian market, the crypto business is thriving in India, with massive transaction volumes and investments being made by Indian investors. Ban or no-ban, stakeholders have been closely monitoring the Government’s every action regarding the regularisation of digital currencies in India. Regardless, with this Notification, cryptocurrencies in India and their stakeholders finally appear to see the light at the end of the tunnel. Ten Important Questions About the Digital Rupee That One Must Know 1 What is CBDC? Central Bank Digital Currency (CBDC) will be the central banks’ new digital money. The technology in CBDC will be designed in such a way that users can deposit money with the Central Bank (CB) in exchange for cash in circulation. An example of this is Hong Kong’s RMB-based CBDC, which is run by the HKMA and HSBC Holdings plc. The CBDC would be a method of paperless, government-backed money that could be used in both online and offline transactions. This plan is being considered to reduce the amount of cash in circulation and increase the efficiency of the financial system. 2 How does Digital Rupee work? Digital Rupee, the digital form of fiat currency, has taken India by storm. With a population of 1.3 billion people, India is an emerging market that offers enormous potential for growth. The country is home to over 21% of the world’s unbanked population and offers a huge untapped market for Digital Rupee with its vast reach across most regions of the country. A CBDC will facilitate transactions. The RBI previously described the CBDC as a secure, robust, and convenient alternative to physical cash. The RBI report stated that it could also take on the complex form of a financial instrument. 3 Is CBDC a cryptocurrency like Bitcoin? No. CBDCs are not private cryptocurrencies. It is a digital representation of legal tender, whereas private virtual currencies are quite distinct. Private digital currencies are diametrically opposed to the traditional concept of money. Because they lack intrinsic value, they are not commodities or claims on commodities. 4 What is RBI’s response to claims that private cryptos are assets like gold? RBI responded to claims that private cryptos are assets like gold by saying— “No buyer of crypto can be fully certain about the nature of the crypto being bought. No underlying values have been ascribed to these currencies. Also, there is no legal recognition of crypto as property or asset.” According to the RBI, private virtual currencies do not represent any individual’s debt or liability. “There is no issuing entity. They are not money (certainly not currency) in the historical sense of the term.” On July 22, RBI Deputy Governor T Rabi Sankar stated. This effectively means that no banking entity, according to the RBI, may treat private virtual currencies as assets or liabilities for transaction purposes. 5 What is RBI’s view on CBDC? The Reserve Bank of India (RBI) has weighed in on the issue of central bank digital currency (CBDC) with goals to increase financial inclusion, maintain macroeconomic stability, and manage market risks, among other objectives. The RBI’s primary concerns revolve around regulation, non-transparent transactions (e.g., money laundering), data security, technical feasibility, and scalability. RBI wants to reduce the number of people who have no access to formal banking. 6 Can the RBI express an opinion on CBDC vis-a-vis private cryptocurrencies? The Reserve Bank of India (RBI) has taken a strict stance against the use of private cryptocurrencies and has also prohibited entities regulated by them from dealing with them. This is primarily because the RBI views cryptocurrencies as a risk to consumers and investors alike and does not want cryptocurrency trading to become an avenue for inappropriate transactions such as money laundering or terrorism financing. Another reason why CBDCs may be essential, is the rise of private cryptocurrencies. 7 Which risks do CBDCs pose, according to the RBI? Risks associated with CBDCs given by RBI are mainly related to the stability of the system. The Central Bank’s ability to issue other currency hence there can be a need for more liquidity too. Bank runs could also happen if people think that the currency is unstable. Finally, digitalisation can make central agencies vulnerable. 8 When is RBI planning to introduce CBDC? The finance minister explained the launch of the Digital Rupee in the Budget speech. Following Cabinet approval, the Government will request that the central bank begin preparations for the launch. Indeed, the RBI has already started laying the groundwork. According to government and RBI statements, the Digital Rupee is expected to launch this year. 9 What is the future of private virtual currencies in India? The future of private virtual currencies in India is completely unknown. The Mumbai high court, has set a precedent of prohibiting financial institutions from dealing with cryptocurrencies. However, this was invalidated by the Supreme Court because the Government failed to provide coherent evidence to substantiate their claim that there is any benefit in banning virtual currencies. The Government has stated that private virtual currency should not be used as a substitute for legal tender and that it will take measures to eradicate its use. 10 The Government announced a 30% crypto tax. What does it mean? The Government announced a cryptocurrency tax. As a result, a 30% tax will be applied to the profits of investors and traders of the cryptocurrency. This means if you are trading cryptocurrencies in your own country, you may be liable to pay taxes on your trade profits. This is because cryptocurrency is an asset, not a currency, and must be taxed as any other capital asset. Impact of Digital Rupee on the Indian Economy Private virtual currencies are completely different from how money is thought of in the traditional sense. They aren’t real things or claims on real things because they don’t have value on their own. Some claims that they are similar to gold seem to be purely speculative. They don’t usually show anyone’s debt or obligation unless they meet certain rules in the countries where they are used. If both countries in a currency transaction have CBDCs, the benefits of global settlements may be realised. The benefits of issuing a CBDC may be enough for India to issue one. Cash is still the most common way to pay and get money for regular expenses. A study by RBI analyses cash, payment system enablers, and electronic payment measures over the last five years to determine if India has shifted from cash to digital payments. India continues to have a strong bias for cash payments which increased to 10.70% in 2017-18 and 11.20% in 2018-19 but remains below the pre-demonetisation level of 12.1% in 2015-16. Slower growth indicates a cash shift. Depending on how much they use them, CBDCs may cut down on the number of transactions that people do with their bank deposits. This is important to know. Because transactions in CBDCs have less risk of being settled, they also have fewer liquidity needs, like intra-day liquidity. As a result, offering a truly risk-free alternative to bank savings could make people move away from bank deposits, which could cut down on the need for government deposit insurance. Banking Disintermediation & Liquidity Dynamics Reduced bank disintermediation, on the other hand, entails its own set of institutional dangers. If banks gradually lose deposits, their ability to extend loans is harmed. In India, since central banks are unable to lend to the private sector, the impact on bank lending must be carefully analysed. Additionally, when banks lose significant quantities of low-cost transaction deposits, their interest margins may be squeezed, resulting in an increase in lending rates that might have a negative effect on the Indian economy as a whole. Due to the potential costs of disintermediation, it is necessary to design and administer CBDC so that demand is manageable compared to bank deposits. CBDC’s accessibility enables depositors to easily withdraw funds whenever a bank encounters issues. Deposits can be made significantly faster than cash withdrawals. On the other hand, the availability of CBDCs may help minimize panic “runs,” as depositors are aware they can withdraw fast. One possible impact is that banks may be compelled to maintain a higher level of liquidity, which results in lower profitability for commercial banks with diminished lending capability. In conclusion, the digital rupee will be a more cost-effective way to transact in the Indian economy. It can help save transaction fees and reach rural areas that may not have access to banks and credit cards. The digital rupee has the potential to be a major economic asset for India. It can also positively impact other countries that have strong economic ties with India. Economic experts believe that this will be a good way to battle harmful counterfeiting and reduce black money, which is a problem in both India and other countries. The digital rupee offers many benefits to Indian citizens as well as those from other countries. Conclusion In the new financial system, the Rupee will be replaced with a digital rupee. This is a significant step for India in terms of its economic development and fiscal objectives. The Rupee to be augmented with a digital Rupee will allow global markets to easily trade Indian rupees in real time on their own local currency exchanges around the world. This provides greater transparency and accountability on Indian money globally. It will also enable Indian financial institutions to gain greater control over their money flow through international remittances and foreign exchange transactions. The use of digital rupees will help reduce corruption, as people will not have to pay bribes when entering into an agreement with a foreign entity. This disables those who wish to abuse power utilising our current financial system, which is already riddled with corruption for their own benefit. It additionally reduces our fiscal deficit by facilitating remittances that have shifted from cash-based systems internationally into electronic formats thus decreasing our reliance on external financing mechanisms such as debt service payments and foreign direct investment (FDI) inflows. The use of digital rupees would also be beneficial for retail investors in India who are currently unable to access international markets due to high transaction costs or where they cannot access services due to lack of knowledge or ability or because they do not have access to adequate information about these markets (e.g., how much risk protection is available or what are the requisite minimum account balances). Allowing retail investors in India access to international markets without having to pay excessive transaction fees would help end this barrier. This hinders many individuals from investing in international equity markets given that it is still very much an untapped market globally (therefore providing more opportunities for Indian retail investors). There may be additional value-added benefits arising from various trading platforms available on Digital Rupee, such as blockchain technology, which may facilitate cross-border transactions. This will significantly contribute to promoting financial inclusion among low income households across India as well as expanding e-commerce opportunities within the country through increased business volumes and more efficient international trade flows.

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 76–81 (Journal pp. 308–313) MANAGEMENT / INDUSTRY Exploring the linkage between constructive deviance and organisational performance in insurance companies Prof. (Dr.) Anuradha Jain & Dr. Isha Rawal Authors are academicians. They can be reached at anuradhajain3@gmail.com, dr.isharawal@gmail.com and eboard@icai.in 📊 Research Summary & Empirical Focus Constructive deviance is voluntary behaviour of employees that violate significant organisational standards and in doing so promotes the well-being of an organisation, its members, or both. The present study explores six constructs deviant behaviour (Issue selling, whistle blowing, extra-role, pro-social rule breaking, creative performance and Organisational Citizenship Behaviour) in the Indian Insurance Industry. The data collected for the study is primary data with a structured questionnaire. The study found empirical evidence in support of positive association between constructive deviance and perceived organisational performance and managerial effectiveness. Further practical contributions, limitations and scope of future researchers are also discussed. Introduction Constructive deviance has been defined by scholars in various ways. According to spritzer and Sonenshein (2004) constructive deviance is “intentional behaviours that depart from the norms of a referent group in honourable ways”. Galperin (2003) defined constructive deviance as “voluntary behaviour that violates significant organisational norms and in doing so contributes to the well-being of an organisation, its members, or both”. Constructive deviance as “behaviour that deviates from the reference group norms but conforms to hyper norms” (Warren, 2003). It has been regarded as honourable deviance in desirable ways (Garg and Saxena, 2020). Other scholars like Saxena et al. (2020), Garg et al. (2020), Sarkar and Garg (2020) have also studied constructive deviance in Indian context, and they elaborated that constructive deviance facilitates achievement of organisational goals. The most common characteristics of constructively deviant behaviours are—deviation from an established norm of the reference group, confirmation to commonly held beliefs and values which leads to welfare of the society. “The most common characteristics of constructively deviant behaviours are—deviation from an established norm of the reference group, confirmation to commonly held beliefs and values which leads to welfare of the society.” Warren (2003) reported that the constructive deviance is an umbrella term that comprises of several different types of behaviours. These different types of behaviour also considered as constructs of constructive deviance. Jain (2020) summarised different forms of constructive deviance as pro-social rule breaking (Morrison, 2006), extra-role behaviours (Van Dyne et al. 1995), issue selling (Dutton and Ashford, 1993), Creative performance (Baer, lenders, Oldham, & Vadera, 2010), principled organisational dissent (Graham, 1983), whistle-blowing (Near and Miceli, 1985), tempered radicalism (Meyerson and Scully, 1995), and counter-role behaviour (stow and Boettger, 1990). Core Constructs of Constructive Deviance: Creative Performance: Defined as the process of generation of news and useful ideas or solutions to organisational problems and challenges (Oldham and Cummings, 1996). Issue Selling: Voluntary behaviour which organisational members use to impact the organisational agenda by getting those above them to pay attention to an issue (Dutton and Ashford, 1993). Extra-Role Behaviour: Defined as the behaviour which aids the organisation and/or is intended to benefit the organisation, which is unrestricted, and which goes beyond the existing role expectations (Van Dyne et al., 1995). Pro-Social Rule Breaking: Defined as intentional violation of a formal organisational policy, regulation, or prohibition with the primary intention of promoting the well-being of the organisation or one of its stakeholder (Morrison, 2006). Pro-Active Behaviour: Defined as taking initiative in improving present circumstances or creating new ones; it involves challenging the status-quo rather than inactively adapting to present conditions (Crank, 2000). Organisation Citizenship Behaviour (OCB): Defined as individual behaviour which is flexible, not directly or overtly recognised by the official reward system, and taken together promotes the effective functioning of the organisation (Bateman and Organ, 1983). Whistleblowing: Well-defined as revelation by organisational members of unlawful, corrupt, or prohibited practices under the control of their employers to persons or organisations who may be able to take effective action (Near and Miceli, 1985). Literature Review Insurance Industry and HR challenges The service activities witnessed are an outstanding development and the Indian insurance industry has also seen noteworthy growth and penetration in recent times. It is a known and recognised fact that the service sector is a human resource intensive industry. In this era of throat-cut competition in the insurance sector, only human resource can act as a probable source of competitive advantage. Hence, insurance companies have begun strengthening Human Resource Management (HRM) practices. A well-defined and established structure of high-performance work practices aids not only the business but similarly the workers. Human Resource policies of an organisation assist the employees by providing opportunities for progress in terms of higher pay packages, training and development and career management, in turn leading to job satisfaction and self-fulfilment. The most challenging hurdles are related to attrition, low morale and employee engagement level, high level of organisational stress and lesser mutual trust and esteem. Liberalisation in the Indian insurance industry has unlocked the sector to private competition. A number of overseas insurance companies have set up typical offices in India and have also associated with various asset management companies (AMCs). All these advances have forced the insurance companies to be more competitively advanced. Existing companies must seek ways to become more efficient, productive, flexible and innovative (Kundu and Makhan, 2009). The customary ways of gaining competitive advantage must be appended with organisational capability and the firm’s ability to manage people (Ulrich and Lake, 1990). With utmost pressure on employees of the Indian insurance industry the frequency and magnitude of constructive deviance has arisen in recent times. Modern insurance companies do not only accept deviances which are for betterment of organisations but there is a growing trend towards appreciating and rewarding positive deviance at the workplace. Constructive Deviance and HR issues Indian insurance industry faces serious HR challenges on all three fronts i.e., perceived organisational performance, managerial effectiveness and job satisfaction. With the increasing pressure, HR manager of the insurance industry needs to constantly respond to such pressures initiating timely and effective changes in HR policies of the organisation. These organisational challenges check their ability to adapt to the changing business environment, improve work efficiency and capitalise on growth in the sector. HR needs to analyse, innovate and reconstruct existing policies in order to keep up with the frequent changes. With rapid, unpredictable and profound transformation underway in the insurance industry, the issues HR must face have increased multiple folds and calls for rapid involvement. There is a need for creating new models and strategies, to adapt and evolve to such changes by the HR. One such highly appreciated model is the effective use of constructive deviance at workplace. Theoretical model hints at a probable association between constructive deviance and organisational outcome. The present paper tends to investigate the proposed linkage through empiricism and the following hypotheses are formulated: Ho1: There does not exist a positive linkage between constructive deviance and perceived organisational performance. H1: There exists a positive linkage between constructive deviance and perceived organisational performance. Ho2: There exists a positive linkage between constructive deviance and managerial performance. H2: There exists a positive linkage between constructive deviance and managerial performance. Methodology The primary aim of this study is to identify and establish the causal relationship between constructive deviance and perceived organisational performance. It also intends to study causal relationship between constructive deviance and perceived managerial effectiveness. The paper intends to investigate whether constructive deviance provides an effective solution to the most challenging and most prevalent issues of Indian insurance companies. The issues that challenge the HR department of every insurance company are work managerial effectiveness (at supervisory level) and perceived organisational performance (at organisational level). In other words, the paper tends to find a suitable and efficient answer to some crucial questions that keeps every HR manager on its feet. It is pertinent to find amicable solutions to these burning issues. The research setting for the present study is offices of insurance companies. Data is procured with the help of a structured questionnaire ensuring that data is collected from all categories including gender and different levels of experience—aged personnel to fresh recruits, etc. Sample size of the present study is 510 employees. Primary data is collected through a structured questionnaire: Part A: Captured the respondents’ demography such as age, gender, work experience, department and educational qualification. Part B: Investigated managerial effectiveness with the help of scale developed by Gupta (1996). The scale comprises of 45 items rated on a five-point rating scale, with 1 indicating disagreement and 5 indicating agreement with the statement. Part C: Comprises of 10 statements that measures constructive deviance. The instrument is from Galperin (2012). Part D: Measured perceived organisational performance which was accessed with the help of scale developed by Singh (2004). Result and Discussion Table-1: Descriptive Statistics Variable Category N Mean SD Creative Performance Constructive Deviance 510 3.45 0.67 Issue Selling Constructive Deviance 510 3.29 0.78 Extra-role behaviour Constructive Deviance 510 3.40 0.83 Pro-social rule breaking Constructive Deviance 510 3.14 0.32 Whistle blowing Constructive Deviance 510 3.85 1.47 Organisation Citizenship Behaviour Constructive Deviance 510 4.04 0.94 Perceived Organisational Performance Organisational level Outcome 510 2.87 0.55 Managerial Effectiveness Managerial level Outcome 510 2.90 0.63 Table-1 enlisted descriptive statistics in terms of mean values and standard deviations. Among six constructs of constructive deviance, Organisation Citizenship Behaviour featured the highest mean value of 4.04 and lowest mean of 3.14 was reported for Pro-social rule breaking. Standard deviation reflected that the views of respondents varied across the sample. The findings revealed that job satisfaction is a matter of great concern for the Indian insurance industry as mean value of job satisfaction is only 1.82. Further perceived organisational performance and managerial effectiveness needs to be addressed in insurance company. Table-2: Correlation Matrix and Cronbach’s Alpha Values Variable CP IS ER PR WB OCB OP ME CP (.81) IS .42 (.77) ER .33 .28 (.71) PR .27 .36 .11 (.88) WB .19 .31 .27 .44* (.73) OCB .38 .22 .48* .31 .37 (.81) OP .67* .50** .85* .47* .44* .39** (.79) ME .29* .18 .61* .79* .11 .26* .87* (.70) Source : Primary Data, * Sig. at .01, ** Sig. at .05. Bracketed values indicate Cronbach’s alpha. Abbreviations: CP- Creative Performance, IS- Issue Selling, ER- Extra-role behaviour, PR- Pro-social rule breaking, WB- Whistle Blowing, OCB- Organization Citizenship Behaviour, OP- Organisational Performance, ME- Managerial Effectiveness, JS- Job Satisfaction, PE- Psychological Empowerment, PJ- Procedural Justice. Table-2 represented correlation matrix and Cronbach’s alpha values which was used to investigate reliability of the data. According to Field, value of Cronbach’s alpha should be greater than 0.70. Bracketed values indicate Cronbach’s value and all bracketed values are greater than 0.70 which means data is reliable and could be subjected to further statistical investigation. It has been observed that six constructs of constructive deviance do not have statistically significant correlation amongst themselves. It means that six constructs of the study are different from each other and hence selection of these constructs is a statistically appropriate decision. Further, statistically significant correlation was observed between independent variables (six measures of constructive deviance) and dependent variables. It concluded that the constructive deviance was significantly associated with job satisfaction, managerial effectiveness and perceived organisational performance. It was also reported that independent variables (six constructs of constructive deviance) have positive significance with both mediating variable (psychological empowerment and procedural justice). Table-3: Multiple Regression Analysis Results (Constructive Deviance and Perceived Organisational Performance) Predictor Variables Unstandardised β Standardised β t-value Sig. Constant 1.134 — — — Creative Performance 0.71 0.68 4.76 .045* Issue Selling 0.57 0.55 4.98 .040* Extra-role behaviour 0.83 0.78 6.87 .048* Pro-social rule breaking 0.52 0.49 3.60 .038* Whistle blowing 0.48 0.43 0.96 2.55 Organisation Citizenship Behaviour 0.43 0.37 2.82 .030* Source: Primary Data, * Significant at .005 Table-3 describes the results of multiple regression analysis for six constructs of constructive deviance and perceived organisational performance. It was observed that five constructs of constructive deviance (creative performance, issue selling, extra-role behaviour, Pro-social rule breaking and Organisation Citizenship Behaviour) were positively and significantly regressed with perceived organisational performance. Value of VIF confirms that there is no problem of multi-colinearity in the data. The regression equation presented below is derived from the result of the above table. The equation provides a mathematical model of the relationship between perceived organisational performance and five constructs of constructive deviance. HR manager could use following equation to bring about desired changes in organisational performance: OP = 1.134 + 0.68 CP + 0.55 IS + 0.78 EB + 0.49 PB + 0.37 OCB Table-4: Model Summary and Result of ANOVA (Constructive Deviance and Perceived Organisational Performance) Regression Model Summary ANOVA R R Square Std Error of Estimate F-Value Sig. 0.81 0.64 .989 10.98 .039* Source: Primary Data, * Significant at .005 Table-4 concludes that the five constructs of constructive deviance explain 64% (coefficient of determination = .64) of variations in perceived organisational performance. The variation caused by constructive variance is reported to be statistically significant by F-value. Table-5: Multiple Regression Analysis Results (Constructive Deviance and Managerial Effectiveness) Predictor Variables Unstandardised β Standardised β t-value Sig. Constant 1.84 — — — Creative Performance 0.32 0.26 0.95 1.93 Issue Selling 0.23 0.18 1.82 .098 Extra-role behaviour 0.68 0.62 6.94 .029* Pro-social rule breaking 0.78 0.70 4.71 .037* Whistle blowing 0.27 0.11 3.08 .055 Organisation Citizenship Behaviour — — — — Source: Primary Data, * Significant at .005 Table-5 describes the results of multiple regression analysis for six constructs of constructive deviance and Managerial Effectiveness. It was observed that only two constructs of constructive deviance (extra-role behaviour and Pro-social rule breaking) were positively and significantly regressed with managerial effectiveness. Value of VIF confirms that there is no problem of multi-colinearity in the data. The following regression equation is derived from the result of the above table. The equation provides a mathematical model of the relationship between managerial effectiveness and two constructs of constructive deviance. Managers could use the following equation to bring about desired changes in managerial effectiveness: ME = 1.84 + 0.62 EB + 0.70 PB Table-6: Model Summary and Result of ANOVA (Constructive Deviance and Managerial Effectiveness) Regression Model Summary ANOVA R R Square Std Error of Estimate F-Value Sig. 0.72 0.50 .33 3.94 .004* Source: Primary Data, * Significant at .005 Table-6 illustrates that the two practices explain 50% (coefficient of determination = .50) of variations in managerial effectiveness. The variation caused by managerial effectiveness is reported to be statistically significant by F-value. Discussion and Conclusion One of the most important duties of the HR manager is optimum and efficient application of available human resources of the organisation. Active, flexible, proactive and pro-employee personnel policies and practices provides one of the ways of ensuring performance optimisation. HRM does not only comprise of personnel management, but it represents a broader perspective of managing employees’ skill, knowledge, values, ethics, experience, attitude and work behaviour (Jain, 2020). A dynamic and unstable work environment along with change in the attitude of employees towards work are amongst the major cause of this impact. “One of the most important duties of the HR manager is optimum and efficient application of available human resources of the organisation.” A turbulence in environment which is referred to as unpredictability directly affects an organisation’s productivity and profitability. The long-term planning of an organisation gets obstructed by unexpected and uncalculated alterations rising out due to uncertain situations. Organisations usually are under continuous competitive pressure to improve their organisation structure to get employees to perform better. To have a committed and dedicated team is definitely a valuable asset which contributes in attaining a competitive edge for the organisation. “A turbulence in environment which is referred to as unpredictability directly affects an organisation’s productivity and profitability.” There are many practical implications of the results of the present study for the Indian insurance industry. It tends to highlight the importance of different forms of constructive deviance for ensuring higher levels of organisational performance. Top management of Indian insurance companies can purposefully promote different facets of constructive deviance like creative deviance, issue-selling, organisational citizenship behaviour to facilitate organisational transition towards a more flexible, enriching and fulfilling workplace. This leads to enhanced performance, reduced absenteeism, and turnover. Management of Indian insurance industry could explore various awareness building initiatives like seminars, lectures, workshops, cross-industry training, etc. to strengthen employees’ and managers acceptability for constructive deviance. “Top management of Indian insurance companies can purposefully promote different facets of constructive deviance.” Given the introductory nature of this study, future researchers need to explore further the field of constructive deviance and their relationship with organisational goal. Future studies have the scope to investigate the association of other forms of constructive deviance like pro-social rule breaking, extra-role behaviours, principled organisational, tempered radicalism and counter-role behaviour. The study has several limitations too. First, the data was collected from Indian firms only, thus given the cultural diversities of the eastern and western world, the results could not be generalised from the perspective of a western population. Second, the sample comprised of 510 people, a larger sample size would provide for better visualisation of the results. Further, a longitudinal study will make the results of the study more reliable and valid. In conclusion, institutionalised and top management support for constructive deviance will help in addressing issues related to human resources of Indian insurance companies. References Baer, M., Leenders, R. T. A., Oldham, G. R., & Vadera, A. K. (2010). Win or lose the battle for creativity: The power and perils of intergroup competition. Academy of Management Journal, 53(4), 827-845. Dutton, J. E., & Ashford, S. J. 1993. Selling issues to top management. Academy of Management Review, 18: 397-428. Galperin, B. L. (2003). Can workplace deviance be constructive?. In Misbehaviour and dysfunctional attitudes in organizations (pp. 154-170). Palgrave Macmillan, London. Meyerson, D. E., & Scully, M. A. (1995). Crossroads tempered radicalism and the politics of ambivalence and change. Organization Science, 6(5), 585-600. Morrison, E. W. (2006). Doing the job well: An investigation of pro-social rule breaking. Journal of Management, 32(1), 5-28. Near, J. P., & Miceli, M. P. (1985). Organizational dissidence: The case of whistle-blowing. Journal of business ethics, 4(1), 1-16. Oldham, G. R., & Cummings, A. (1996). Employee creativity: Personal and contextual factors at work. Academy of management journal, 39(3), 607-634. Spreitzer, G. M., & Sonenshein, S. (2004). Toward the construct definition of positive deviance. American behavioral scientist, 47(6), 828-847. Ulrich, D., & Lake, D. G. (1990). Organizational capability: Competing from the inside out. John Wiley & Sons. Warren, D. E. (2003). Constructive and destructive deviance in organizations. Academy of Management Review, 28(4), 622-632.

The Chartered Accountant • Journal of ICAI September 2022 • Vol. 71 • No. 3 • pp. 82–86 (Journal pp. 314–318) CAPITAL MARKET American Depository Receipts: An Innovative Tool for Global Investing *Aditya Keshari & **Amit Gautam *Author is Research Scholar, Institute of Management Studies, BHU. **Author is Academician, Institute of Management Studies, BHU. They can be reached at eboard@icai.in 🌐 Research Summary & Investment Context Indian ADRs are an innovative tool for global investing due to their lucrative return over the past few years and their efficiency in the global markets. After the liberalisation of the economy, many companies took the advantage to raise capital from the developed market of the United States. ADRs also allow investors for global portfolio diversification and some of the Indian ADRs performed well in the global market by giving good returns. The primary purpose of the paper is to ascertain the efficiency of the Indian ADRs and identify it as an innovative global investing tool. For this, the ADR’s data have been analysed by employing mean, variance, covariance, EPS, P/E ratio and beta calculation. The findings of the study indicate that automobile, software and banking sectors have given higher return making them a very lucrative asset in global investing. These sectors are having beta more than one, making them risky as well as give investors a chance for higher returns than the market. Health care sector having the highest P/E ratio compared to other companies’ ADRs, indicates that the investor’s expectations are much higher for this company. Also, ADRs are a safe and innovative instrument for global investing and they could act as an alternative instrument for the investors for the portfolio diversification. Introduction American Depository Receipts (ADRs) are financial instruments that enable investors to own overseas assets without actually acquiring them. Depositories in the US issue ADRs. These banks or depositories take actual possession of foreign securities and then issue receipts via their subsidiaries abroad or custodians. The receipts are agreements between the bank and the holder that a specific number of foreign shares has indeed been placed with the bank’s overseas branch or custodian and will be held on deposit for the duration of the ADRs. ADRs are traded similarly to domestic securities since they are traded on national stock markets or the over-the-counter market. On-demand, ADRs can be converted into the underlying shares, and foreign stocks can be traded for ADRs. For its services, the depository bank charges a fee typically. Types of ADR Sponsored ADR When international firm issues sponsored ADRs, it hires a bank to mediate between the corporation and the ADR holders. The ADRs, in this case, have been properly registered with the Securities and Market Commission (SEC) and are available for trading on a stock exchange. The foreign firm pays the banks’ fees. Unsponsored ADR Unsponsored ADRs are produced at the request of American brokerage companies, with no involvement from foreign corporations. They trade on the over-the-counter market and are not registered with the Securities and Exchange Commission. In this case, the investor pays the banks’ charges. Issuance of Indian ADRs: Regulatory Framework The Indian government allowed Indian enterprises to raise capital from foreign stock markets as Depository Receipts in result of the economic liberalisation programme in 1992. The DRs can be traded on any worldwide stock exchange and allowed to freely convert in denominated currency. Several multinational corporations seek this opportunity to their advantage and raised a huge amount of capital in the form of equity from foreign markets by issuing DRs on international markets. The subsequent selling of ADRs in international stock markets is not taxed in India as capital gains taxes. Arbitration involving the DRs is prohibited by law. Two options are essential if a foreign investor wants to invest in Indian shares. One option is to register as a foreign holding company (FH) and purchase and sell stocks in the Indian stock market; the other is to buy ADRs of Indian companies in foreign markets. Literature Review Whether to invest in the ADRs or not is a concern area for scholars, professionals, investors, and advisors, but the answer to this question is still not provided systematically. As in today’s time when the cross-border trade is increasing day by day, the cross-listing of assets also plays a remarkable role in this, which allows the investors to go global and also helps the investors from the emerging stock market like India to go to the developed stock exchange, i.e., U.S. stock market which is less volatile, more stable and securities also give an excellent return (Xuechun et al., 2020). The study conducted by Saxena, (2006) supports the investment in Indian ADRs by giving the risk premia reward and trend for political and reasons for investment. The studies conducted by Amary & Ottoni (2005); Bhatnagar & Khan, (2015); Hansda & Ray, (2003); M.Punitham, (2015); Schaub & Simmons, (2020) also support the idea of investment in ADRs due to its high return and stability of developed stock markets. The global equity ADR report also stated returns as a key factor for attracting the investors to the ADRs investing (Harding Loevner, 2020). However, on the other hand, the research conducted by several past researchers like Beckmann & Ngo, (2020), Dania & Verma, (2007); Foerster & Karolyi, (1999); Raj, (2012); Samant & Korth, (1999); Visalakshmi et al., (2016) showed a significant adverse risk associated with the investment in ADRs like political risk, integration of stock markets, price diffusion and, exchange rate risks. Tong et al., (2022) in their study examined the importance of dividend yields and stock repurchase ratio at the time of investing in the ADRs and also compared the performance of ADR firms to the non- ADR issuing firms. It was observed that the previous studies gave confusing results and did not explain much about positive aspects of investment in ADRs in a detailed manner. While most of the research provides the negative aspects of the ADRs (Dollani, 2019; Grossmann & Ngo, 2020), there is a positive side to investing in ADRs. Thus, the study has been undertaken to ascertain the movement of ADRs concerning the market and the earning efficiency of their shares and to bridge the gap between positive aspects of ADRs in terms of returns and fundamentals of the companies. The present study undertakes the following objectives: To ascertain the efficiency of the shares of selected ADRs. To identify Indian ADRs as an innovative global investing tool. To examine the movements of selected Indian ADRs concerning the US market. Data and Methodology Data Type and Source: The present study is based on secondary data. The ADRs listing information is collected from NASDAQ, NYSE, and investing.com. The financial data of companies taken from their respective annual reports, and the Prowess database has been used to extract the information. Relevant books have been consulted to build the conceptual framework, and research articles were also consulted to make the theoretical background for the study. Sample Selection: The study sample comprises level 2 and 3 ADRs of 7 major Indian companies listed on NYSE and NASDAQ. The companies have been selected based on their market capitalisation because they influence investors’ decisions. Thus these 7 companies are chosen based on their market capitalisation displayed in NYSE and NASDAQ exchanges retrieved on 26/01/2022. Sample Period: Data for Earning per share is collected for the financial year 2020-2021 because the investors decide based on the latest EPS. The ADR price data for the return calculation is taken from 2020 to 2021 for 1-year return and years ranging from 2018-2019 to 2020-2021 to analyse 3-year return. Data Analysis Tool: The data have been analysed using different financial tools like ratio and, percentage. Further, the statistical tools mean, variance and, covariance are also used. The daily closing price of the ADRs is used to calculate the return as it is assumed that the closing price is the sensation of the complete day. Earnings per share, price to earnings ratio and a beta of the ADRs are considered, which are factors that help the investors decide on investment. Methodology: In the present study, the beta value is calculated for the ADRs of each selected country to ascertain the movement of ADRs in terms of markets. EPS and P/E Ratio are calculated to check the stability of these ADR in a long time to help the investors in decision making. Results and Discussion The relevant data of selected companies have been analysed, keeping the study’s objective in mind. First of all, market capitalisation of the selected ADRs have been calculated to ascertain the company’s worth determined by the stock market. Market Capitalisation of Company = Market Price of the share × Shares Outstanding Market capitalisation is a helpful statistic in choosing which companies you are interested in and diversifying your portfolio with firms of various sizes. Companies are classified based on their market capitalisation as: Large-cap Firms: $10 billion or more Mid-cap Firms: $2 billion to $10 billion Small-cap Firms: $300 million to $2 billion Table 1. Major Indian ADRs with a market capitalisation (as on 26/01/2022) Name of ADRs Market Capitalisation (in billion) Infosys Ltd. 96.25 ICICI Bank Ltd. 74.00 Wipro Ltd. 41.20 HDFC Bank Ltd. 108.45 Tata Motors Ltd. 12.33 Reddy’s labs Ltd. 9.72 (Mid-cap) Vedanta Ltd 51.59 Source: ADR prices (nasdaq.com) Table 2. Major Indian ADRs with Revenue (as on 31/03/2021) Name of ADRs Revenue (in billion) Infosys Ltd. 15.540 ICICI Bank Ltd. 10.040 Wipro Ltd. 10.010 HDFC Bank Ltd. 10.450 Reddy’s labs Ltd. 2.730 Vedanta Ltd 5.370 Source: Annual report of companies (2021) Table 1 shows the mid-cap and large-cap firms based on their market capitalisation. Among the mentioned firms, all except one are large-cap where the value of market capitalisation lies between 9.72 to 108.45 billion. Table 2 lists the companies based on their revenues, 15.540 billion being the highest and 2.730 billion being the lowest. Valuation Efficiency: EPS and P/E Ratio Analysis For checking the efficiency of the ADRs for these companies, the EPS and P/E ratio is calculated: EPS = Net Income - (Preferred Dividend) / Shares Outstanding P/E Ratio = Market Price of the Share / EPS EPS and P/E ratios are the two most essential tools for a stock’s valuation and help investors in deciding the valuation of stocks in terms of overvalued and undervalued. Earnings per share is an important metric to look at when assessing a company’s financial performance on an absolute scale. It is also a big aspect of figuring out the price-to-earnings (P/E) ratio. A stock’s worth may be computed by dividing its stock price by its profits per share to see how much the market is willing to pay for each dollar of earnings. Because it reflects how much money a company makes for each share of its stock, EPS is an often-used measure for determining corporate value. If investors feel a company’s profits are greater than its share price, they will pay more for its stock; hence, a higher EPS indicates better value. Table 3 shows that the highest EPS is 3.9 followed by 2.38 indicating that these companies are attractive to investors and show these firms’ better value. A higher Price-to-earnings ratio indicates that a company’s stock is overvalued or that investors anticipate higher future growth rates. A low P/E ratio might suggest that its present stock price is undervalued compared to earnings. The highest P/E ratio belongs to the health care sector which when compared to other companies’ ADRs, shows that the investor’s expectations are higher from this company. Covid-19 can also be one of the reasons for the higher P/E ratio for this company. Despite of the highest EPS, the automobile sector has the lowest P/E ratio which shows the lower expectation of investors to the future growth of ADRs in this segment. Table 3. Major Indian ADRs earning per share (as on 26/01/2022) Name of ADRs EPS P/E Ratio Infosys Ltd. 0.68 32.12 ICICI Bank Ltd. 0.81 24.81 Wipro Ltd. 0.30 24.05 HDFC Bank Ltd. 2.38 27.39 Tata Motors 3.90 8.43 Reddy’s Labs Ltd. 1.57 35.42 Vedanta Ltd 1.63 10.13 Source: Prowess Database (retrieved on 26/01/2022) Return Analysis: 1-Year and 3-Year Horizons The next objective focus is on ADRs as an innovative investment tool. The last year’s return and the return for the past three years are being calculated. Returns for all the companies have been positive in the past three years, showing excellent returns, which show why the ADRs are one of the most innovative tools for global investment. Table 4. Major Indian ADRs returns (on 31/12/2021) Name of ADRs 1 Year Return 3 Year Return Infosys Ltd. 28.52% 117.44% ICICI Bank Ltd. 41.83% 111.96% Wipro Ltd. 17.59% 86.31% HDFC Bank Ltd. -7.34% 36.34% Tata Motors 70.79% 154.73% Reddy’s labs Ltd. 14.01% 57.36% Vedanta Ltd 83.54% 49.05% Source: ADR prices (nasdaq.com) Market Movements & Beta Evaluation To explore the movement between Indian ADRs regarding the U.S. market, we have calculated the beta value for each ADR. Here, the beta is calculated as: βi = Covariance(ri, rm) / Variance(rm) Where: ri = return on an asset i, rm = average rate of return on the market. Covariance measures how the stock moves together, while variance measures the relative movement of the stock from its mean. The stock whose movement is more than the market has a greater beta of more than 1, while stocks that move less than the market have less than 1. High beta stocks are riskier and provide better and higher returns while stock with low beta poses less risk and gives a lower return. That is why the beta is an essential measure while examining the risk-return ratio because it helps investors to determine the balance. Table 5. shows the beta value of ADRs in terms of the U.S. market. Tata Motors has the highest beta value, i.e., 1.9, which shows that Tata Motors poses a higher return in terms of the market. It is observed with the return table, followed by Vedanta Ltd. and ICICI Bank, whose Beta value is also greater than 1 representing higher volatility and better return compared to the market. Reddy’s Lab has the lowest beta among all i.e., 0.56 showing that the stock is less volatile concerning the market and possesses a lower return. Table 5. Beta Value of ADRs (as on 26/01/2022) Name of ADRs Beta Infosys Ltd. 0.95 ICICI Bank Ltd. 1.06 Wipro Ltd. 0.84 HDFC Bank Ltd. 0.73 Tata Motors 1.90 Reddy’s labs Ltd. 0.56 Vedanta Ltd 1.80 Source: Prowess Database (retrieved on 26/01/2022) Conclusion The present study finds the ADRs to be an innovative instrument for global investing. The returns of the ADRs are significantly positive and gave an excellent return in the past one year and the past three years despite the stock market shock due to Covid-19. In the past three years, Tata Motors, Infosys, and ICICI Bank ADRs had given exceptional returns, making it a lucrative asset in global investing. The movement of ADRs concerning the US market is also an essential criterion for knowing the volatility. Beta value helps the investors to make an alignment between the risk and reward. ADRs having more than one beta, are risky and gives investors a chance for higher returns than the market. “ADRs are a safe and innovative investment avenue for the investors for global investing.” In contrast, ADRs having a less beta are less volatile and gives safer and likely low returns. While diversifying the portfolio, investors also decide whether to invest in Large-Cap, Mid-Cap, or Small-Cap companies. Apart from Reddy’s Labs Ltd., a mid-cap firm based on its market capitalisation, all other companies are large-cap. EPS and P/E ratios are essential criteria for the company’s stock valuation and profitability measurement and help the investors decide whether to invest in a particular company. It is found in the study that Tata Motors and HDFC Bank have the highest EPS, i.e., 3.9 and 2.38, respectively, showing that these companies are attractive to investors and shows the better value of these firms. Reddy’s Lab has the highest P/E ratio compared to other companies’ ADRs, indicating that the investor’s expectations are very much higher from this company. Covid-19 can also be one of the reasons for the higher P/E ratio for this company, followed by Infosys, ICICI Bank, Wipro and HDFC Bank. Tata Motors has the lowest P/E ratio despite the highest EPS, showing the lower expectation of investors to the future growth of ADRs as the company deals with Automobile’s segment. Thus, it can be concluded with the analysis and above discussion that the ADRs are a safe and innovative investment avenue for the investors for global investing. As in the study, the included variables are Market Capitalisation, Revenue, EPS, P/E ratio, and Beta value, which are important criteria for deciding while investing in a particular asset. But some limitations of the present study, without which the discussion is incomplete, must also be reported. There are many factors apart from the companies’ financials and market fluctuations responsible for volatility in ADRs, i.e., exchange rate fluctuations, political risk, and underlying stock prices movements. Thus, addressing these issues will help to further improve the results. References ADR Prices 2022. National Association of Securities Dealers Automated Quotations, Retrieved on 26/01/2022, from https://www.nasdaq.com/. Amary, B., & Ottoni, O. (2005). ADR Arbitrage Opportunities for Dummies. BEATRIZ AMARY OTAVIO OTTONI ADREATRIZ AMARY OTAVIO OTTONI, 29. Beckmann, K. S., & Ngo, T. (2020). ADR and Domestic Equity Offer Performance of Identical Firms. Journal of Accounting and Finance, 20(3). Bhatnagar, V. K., & Khan, J. (2015). Effect of Foreign Exchange Rate on ADR Returns: An Indian Evidence. Pacific Business Review International, 7(9), 59–64. Foerster, S. R., & Karolyi, G. A. (1999). The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the United States. Journal of Finance, 54(3), 981–1013. https://doi.org/10.1111/0022-1082.00134. Grossmann, A., & Ngo, T. (2020). Economic policy uncertainty and ADR mispricing. Journal of Multinational Financial Management, 55, 100627. https://doi.org/10.1016/j.mulfin.2020.100627. M.Punitham. (2015). A Study on Cross Co Integration of Indian ADRs Between BSE & NYSE. Review of Research, 4(11–5), 2015. http://ror.isrj.org/UploadedData/1797.pdf. Saxena, S. (2006). PREMIA IN THE INDIAN ADR MARKET: An Analysis of Trends and Causes. Glucksman Institute for Research in Securities Markets. Visalakshmi, S., Lakshmi, P., Shanmugam, K., & Prasad, K. K. (2016). A cointegration analysis of price diffusion amid ADRs and dually listed Indian stocks. International Journal of Business Innovation and Research, 11(3), 345–362. https://doi.org/10.1504/IJBIR.2016.078871. Xuechun, Z., Ruihui, X., & Xue, L. (2020). AH and A-ADR Premiums (2020/9; The People’s Bank of China Working Paper Series).

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 22–25 (Journal pp. 138–141) SUSTAINABILITY Green Finance – Ushering in a new era in the world of finance and investment Injeti Srinivas Author is Chairperson, International Financial Services Centres Authority (IFSCA). He may be reached at chairperson@ifsca.gov.in and eboard@icai.in 🌱 Climate Imperative & Green Transition The unprecedented and alarming scale of the risks posed by climate change has brought green finance into the spotlight, which is being seen as an effective tool to tackle the environmental crisis. As per the sixth assessment report of the Intergovernmental Panel on Climate Change, global warming is escalating ever since the industrial revolution began. Significance of Green Finance It is estimated that global surface temperature will continue to increase until 2050 and the target of curtailing it within 1.5°C to 2°C of pre-industrial levels would be hard to achieve unless deep reductions in carbon dioxide (CO2) and other greenhouse gas emissions occur from now onwards. Also, as per the Global Assessment Report on Disaster Risk Reduction (GAR), about 700 million people are at a risk of being displaced as a result of drought by 2030 and approximately two thirds of the world would be water stressed by 2025. In this context, nations across the world need to act in unity and with utmost urgency. The need for green financing thus, is an existential necessity today. The global response to climate change has gathered momentum in recent years. The CoP 26 held in Glasgow in 2021, aims to limit global warming to well below 2°C above pre-industrial levels by 2050, as agreed under the 2015 Paris Agreement and cut the global greenhouse gas emissions by 45 per cent by 2030 and to zero overall by 2050. India’s ‘Panchamrits’ Action Plan at CoP 26 Summit: During the CoP 26 summit, India outlined its strategy and action plan to tackle climate change in the form of ‘Panchamrits’, that outline five climate related national commitments to be achieved in the coming decades: Achieving net-zero emissions by 2070. Raising non-fossil energy capacity to 500 GW by 2030. Meeting 50 per cent of its energy demand through renewables by 2030. Reducing 1 billion tonnes of projected emissions by 2030. Achieving carbon intensity reduction of 45 per cent over 2005 levels by 2030. Meeting these commitments would require massive financing of environment friendly projects, both from public and private sector, and this is where green financing assumes significance. Growth of Green Finance and its challenges in the Indian context As per Climate Bonds Initiative, a champion organisation for green finance, the annual green investment is projected to reach $5 trillion by 2025, globally. The issuances of green bonds in India, though are very low compared to other markets with only USD 18.8 billion during the years 2015 - 2021. Nevertheless, the green bond issuances in India are increasing, with USD 6.8 billion in the year 2021 as compared with only USD 1.1 billion in the year 2020. Over 75% of this has been raised through primary or parallel listing in GIFT IFSC exchanges. Green Bonds (Amount in USD Billion) - India (2015 to 2021) Source: Climate Bonds Initiative (Cumulative Issuance: USD 18.8 Billion) Year 2015 2016 2017 2018 2019 2020 2021 Issuance ($ Bn) 1.2 1.6 4.3 0.7 3.1 1.1 6.8 Surge in 2021 was heavily catalyzed by primary and parallel listings on GIFT IFSC exchanges (>75% share). The challenges of green finance in the Indian context are multi-pronged. The supply side constraints exist in the form of a lack of properly green labeled projects. A well-developed taxonomy will ensure uniformity, consistency and standardisation in terms of “what is considered as green?”. The demand side challenges include non-availability of cost-efficient capital due to lower credit rating and higher risk perception by the global investors. The adoption of non-financial disclosures by companies can boost the investor’s confidence and developing a robust ecosystem for identifying, measuring and tracking green projects would attract global financial capital into the green sectors. “The adoption of non-financial disclosures by companies can boost the investor confidence and developing a robust ecosystem for identifying, measuring and tracking green projects would attract global financial capital into the green sectors.” Currently, there is lesser awareness and technical know-how with respect to green finance. There is also some shortage of talent and expertise in certification, disclosure and reporting requirements in the ESG landscape. At present, it is only the large sized companies that possess the requisite training and capacity to develop a robust ESG ecosystem. The market infrastructure in the ESG space is still evolving and is a work in progress. Other challenges in the green financing space include, inter alia, risks relating to ‘greenwashing’, potential maturity mismatches between long-term green investment and relatively short-term interests of investors, lack of adequate private sector investments etc. As per a report by the Council on Energy, Environment and Water (CEEW), the net-zero transition in India will require funding to the tune of USD 10 trillion. Out of this, US $8.4 trillion would be required to significantly scale up generation from renewable energy (and associated distribution and transmission infrastructure), and US $1.5 trillion would be required to decarbonise the industrial sector (with the remainder for the mobility transition). The study also estimates that there is a high chance that India could face a substantial investment deficit of US $3.5 trillion. In view of resource gap, there is a need to mobilise global capital in the green sector from both domestic and global funds in order to comprehensively address environmental challenges. The role of GIFT IFSC in India becomes very important in acting as a platform to India’s green and sustainable projects for accessing foreign investments. IFSCA - envisioning GIFT IFSC to emerge as a global hub for Green Finance Gujarat International Finance Tec-City (GIFT) IFSC, Gandhinagar, set up as India’s maiden IFSC and regulated by IFSCA, can act as a global gateway that caters to both domestic and international green financing requirements. IFSCA, established under the IFSCA Act, 2019, is a unified authority for the development and regulation of financial products, financial services and financial institutions in the IFSCs in India. IFSCA is an associate member of the International Organization of Securities Commissions (IOSCO). IFSCA has also joined the International Network of Financial Centres of Sustainability (FC4S) to work along with other international financial centres for achieving the SDGs and the Paris Agreement commitments. IFSCA has taken several initiatives to provide access to world class financial services at GIFT IFSC with enhanced focus on ease of doing business and principles of innovation and sustainability. The GIFT IFSC has certain distinct advantages that include the existence well-functioning capital market ecosystem coupled with cost competitiveness and tax incentives (reduced withholding tax of only 4%). The Government has been providing crucial support to develop GIFT IFSC as a gateway for global green finance. The Finance Minister of India in the Union Budget 2022-23 announced that - “Services for global capital for sustainable & climate finance in the country will be facilitated in the GIFT City.” IFSCA endeavours to develop GIFT IFSC as a global hub for green and sustainable financing facilitating India and developing nations meet their NDCs and net-zero commitments, particularly in the South Asian region. IFSCA, through its regulations and policies, is focused on development of green finance products such as green bonds, green loans, green funds etc. Regulatory Framework for Green Finance by IFSCA IFSCA has notified the regulatory framework for listing of various ESG debt securities (green bonds, social bonds, sustainability bonds and sustainability linked bonds) aligned with international standards [1]. The listing regulations also mandate large IFSC listed companies to submit an annual sustainability report with respect to ESG aspects. Further, IFSCA has specified the regulatory framework for fund management in IFSC requiring large Fund Management Entities to incorporate sustainability-related risks and opportunities in investment-decision making. Sustainable Banking Framework & 5% Mandatory Lending Target: On the banking front, IFSCA has issued a framework [2] to promote sustainable lending by IFSC Banking Units (“IBUs”) and Finance Companies (“FCs”). The framework mandates IBUs and FCs to develop a comprehensive Board approved framework on sustainable financing. Further, such entities are required to have at least 5 per cent of their loan assets in the form of lending to green/ social/ sustainable/ sustainability-linked sectors/facilities, starting from financial year 2023-24. IFSCA has also constituted an Expert Committee comprising of global leaders in climate action to provide a roadmap and key recommendations to IFSCA for development of international sustainable finance hub at IFSC. Listing of green and sustainable finance products in GIFT IFSC The two recognised stock exchanges at GIFT IFSC namely India International Exchange (IFSC) Limited (“India INX”) and NSE IFSC are taking several steps to promote green finance in IFSC. India INX has signed a cooperation agreement with Luxembourg Stock Exchange with the objective to strengthen cross-border cooperation in sustainable finance. NSE IFSC has recently launched a dedicated platform i.e., International Sustainability Platform for listing of various categories of ESG related products. These efforts led to a total listing of ESG labelled debt securities on IFSC exchanges amounting to USD 7.3 Billion with different labelled debt securities such as green, social, sustainable, and sustainability-linked bonds gaining prominence. ESG Debt Securities listed at IFSC (Till March 2022) Total Listed: USD 7.3 Billion (Breakdown across 4 ESG Debt Categories) Category of ESG Debt Amount Issued (USD Million) Volume in USD Billion Share (%) Green Bonds 4,200 $4.2 Bn 57.5% Social Bonds 1,800 $1.8 Bn 24.7% Sustainable Bonds 600 $0.6 Bn 8.2% Sustainability Linked Bonds 700 $0.7 Bn 9.6% Total ESG Debt Listed at IFSC 7,300 $7.3 Bn 100.0% Way Forward: The 3Ps Strategy (Products, Policies, People) Transitioning to net zero by 2070 would need massive funding in sectors such as solar power, green hydrogen, sustainable urban development, green transport, disaster resilient infrastructure and other projects related to climate adaptation and mitigation. For emerging economies such as India, the shift towards green needs to be balanced with the developmental requirements of the aspiring nation. The developed countries, in turn, have the responsibility to provide low-cost capital for meeting the transitional needs of India and developing nations. IFSC can play a major role in bringing together the supply and demand for green financing. To achieve the aim of making IFSC a global hub for sustainable finance, there is need to focus on 3Ps – Products, Policies and People. 1. Products For efficient and low-cost financing of green projects, there is a need to encourage products such as green bonds and green funds which have gained prominence based on international standards. Innovative products such as transition bonds and voluntary carbon credits can facilitate India’s transition towards low carbon economy. Mechanisms such as blended finance and risk sharing facilities can catalyse large private capital inflows into India and developing nations. IFSCA is actively engaged with multiple stakeholders to facilitate growth of new products that drives capital towards green financing. 2. Policies Regulations and policies are important in development of efficient markets and maintenance of financial integrity. Disclosures and reporting are critical components in boosting investor confidence while raising capital for green projects. Regulations at IFSC are focused on adherence to international standards and provide increased disclosures for products related to green financing. New frameworks are being designed to encourage the development of new products and increase the proportion of financing into green categories. 3. People There is a growing need for accredited professionals, for rating, certification and ESG reporting, to mitigate the risk of greenwashing. Large scale awareness programs and capacity building is necessary to develop the ecosystem of financial services related to green financing. There is a need for various stakeholder educational institutions, research organisations, international forums and networks to actively collaborate and develop the professional capacity of people in the area of green finance. The Role of ICAI & Sustainability Reporting Standards Board: ICAI can also play an active role in developing the capacity for sustainability reporting, and it is indeed encouraging to note that ICAI has set up a Sustainability Reporting Standards Board to help companies achieve their sustainability goals. A thriving ecosystem needs policy makers, investors, issuers, rating agencies, financial intermediaries etc. to work in a concerted manner towards facilitating and promoting green finance. Green finance needs a sustained and a sincere effort and IFSCA is actively focused on facilitating its growth that would usher in a paradigm shift in the world of investment to achieve the common goal of mitigating climate change. Official References & Regulatory Publications IFSCA Consultation Paper on Issuance and Listing of Securities Regulations: IFSCA Issuance and Listing Regulations. IFSCA Framework on Sustainable Financing for Banking Units and Finance Companies: IFSCA Sustainable Financing Framework (Report & Publication No. 28).

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 26–32 (Journal pp. 142–148) SUSTAINABILITY Natural Resource Accounting – A step towards meeting our Commitments made under Sustainable Development Goals Work done by GASAB under the aegis of CAG of India (July 2022) CA. Ram Mohan Johri Author is Additional Deputy Comptroller and Auditor General, CAG Office. He may be reached at johrirm@gmail.com and eboard@icai.in Co-authored by: Shri Sudipto Biswas, Senior Audit Officer (Sr AO), GASAB. “Earth provides enough to satisfy every man’s needs, but not every man’s greed” — Mahatma Gandhi 1. Background 1.1 Natural resources play a crucial role for economic development of a country and are crucial for their inbuilt value of inter-generational equity and sustenance. 1.2 The need for accounting for natural resources took its first step at the United Nations (UN) conference on Human Environment in 1970 when the relationship between economic development and environmental degradation was discussed for the first time. The Brundtland Commission, set up by the UN, articulated the idea of close association between the environment and economic activities in 1987 which was followed up by environmental accounting and the Earth Summit at Rio de Janeiro in 1992. 1.3 Mankind, in its quest to rapid economic development has harmed nature and used natural resources indiscriminately. This paradigm of resource-led economic development is not sustainable and hence it has become necessary to strike a balance between uses of natural resources vis-à-vis economic growth giving birth to the concept of Sustainable Economic Development (SED) by amalgamating the economic and environmental accounting. The concept has emerged to capture the intimate interplay between the various components of the natural environment and the economic progress of a country. Conceptual Interplay: Economy and Natural Environment The Economy Sectors: Industries, Households, Government Economic Outputs: Products (Goods and services) produced and consumed in the economy Economic Goals: Growth, welfare, and productivity The Environment Natural Inputs: Mineral resources, timber resources, aquatic and water resources Residuals & Discharges: Air emissions, solid waste, and return flows of water Natural Capital: Finite assets requiring inter-generational conservation Core Guiding Premise: “Measurement of a resource leads to its better management.” 1.4 With continued efforts for two decades, the UN brought out the System of Economic and Environmental Accounting – Central Framework (SEEA – CF) in August 2012 – which is the latest internationally accepted and adopted framework for resource accounting. The framework, inter-alia, prescribes for a four-stage implementation strategy as follows: Stage 1: Asset Accounts Asset Account for individual asset in physical and monetary terms showing stock changes. Stage 2: Supply and Use Tables Supply and use tables in physical and monetary terms showing flow of inputs, products and residuals. Stage 3: Sequence of Economic Accounts A sequence of economic accounts highlighting depletion adjusted economic aggregates. Stage 4: Functional Accounts Functional accounts which records transactions and other information about economic activities undertaken for environmental purposes. Environmental Degradation Over Time (1978 vs 2012): Over the decades from 1978 to 2012, satellite observation has clearly depicted the escalating degradation of the Earth’s natural systems under unrestricted resource depletion. SEEA – CF represents the vital global framework designed to reverse this trajectory. 1.5 While developing the framework, the SEEA – CF acknowledged initial problems and constraints to be faced by the countries and thus allowed flexibility and country specific needs to be prioritised. 1.6 Government of India is a signatory (25th September 2016) to the UN General Assembly resolution on adoption of SDGs titled, “transforming our world; the 2030 agenda for sustainable development.” NRA has deep inter-linkage to sustainable development; and 10 of the 17 goals (Sustainable Development Goals or commonly known as the SDGs, 2030) directly or indirectly relate to management of natural resources and their accounting. Direct & Indirect Interlinkage of Natural Resource Accounting with UN SDGs (2030): Out of the 17 Sustainable Development Goals, 10 goals fundamentally depend on the robust accounting, management, and conservation of natural resources: Goal 6: Clean Water & Sanitation Goal 7: Affordable & Clean Energy Goal 8: Decent Work & Economic Growth Goal 9: Industry, Innovation & Infrastructure Goal 11: Sustainable Cities & Communities Goal 12: Responsible Consumption & Production Goal 13: Climate Action Goal 14: Life Below Water Goal 15: Life on Land Goal 17: Partnerships for the Goals 1.7 Under the leadership of the United Nations, many nations like Australia, Canada, China, France, and Germany have attained various degrees of environmental accounting while many others are contemplating to catch up. 2. Endeavour of GASAB, India About GASAB 2.1 Government Accounting Standards Advisory Board (GASAB), constituted by the CAG of India is a representative body of the major accounting services of Government of India, regulating bodies like RBI, ICAI etc and State Governments with the responsibility of formulating, proposing and improving standards of government accounting and financial reporting. GASAB has decided in its meeting in 2018-19 to help the cause of NRA in the country. Endeavour in preparing the Concept Paper 2.2 International Organisation of Supreme Audit Institutions (INTOSAI), of which, CAG of India is a member, has recommended in 2010 that in countries where NRA has not been developed, SAIs should get involved in the process and help the country in: Developing the NRA; Identifying challenges in applying environmental accounting; Recommending strategies to overcoming challenges; Identifying best practices in NRA. 2.3 Keeping the above in view, GASAB initiated (2019) the efforts in furthering the efforts by preparing a roadmap for implementation of NRA in India through a Concept paper on NRA. 2.4 The paper finalised by the GASAB Secretariat was digitally launched by the then Hon’ble Minister of State for Environment, Forest and Climate Change on 28 July 2020. The Hon’ble MoS had shared the paper, demi-officially, with the Hon’ble Prime Minister of India. The PMO has appreciated the endeavour of GASAB in taking up such a huge work. Electronic version is available at http://gasab.gov.in/gasab/pdf/NR-Accounting-final.pdf. 2.5 The paper, besides discussing the concept of NRA, includes related issues like the SDGs and Climate Change, endeavour of UN in bringing out the latest framework, progresses made around the world including those in India – inter-alia, envisaged short, medium and long term goals in consonance with the four stage strategy suggested by the System of Environmental and Economic Accounting (SEEA) Framework of the United Nations, as mentioned below: Short term goals(2019-20 to 2021-22) Mid-term goals(2022-23 to 2024-25) Long term goals(2025 - 26 onwards) Preparation of Asset Accounts on mineral and energy resources in States. Initiation and preparation of disclosure statement on revenues and expenditure related to NRA. Preparation of National Asset Accounts on mineral and energy resources. Preparation of Asset Accounts in respect of other three resources namely water, land and forest resources in the States. Preparation of supply and use tables in physical and monetary terms showing flow of natural resource inputs, products and residuals. Preparation of the economic accounts highlighting depletion adjusted economic aggregates; and Preparation of functional accounts recording transactions and other information about economic activities undertaken for environmental purposes. 2.6 GASAB, with its innovative approach has applied the concepts of NRA to visualize the three-pronged goals to implement the whole concept of economic and environmental accounting in India in a span of 10 years to converge with the target date of SDGs, i.e. 2030. Acknowledging the constraints due to the vastness of the country, magnitude of resources and the reliability of available data coupled with the federal structure of governance typical in India, GASAB has envisioned starting the process with the States. The Action Plans — Unique Features of Our Framework SEEA compliant — plus country specific info embedded 1. Flexibility Cut-off of Asset A/c year — (enable correlation and authenticity of stock). States collaborated to select the minerals to start with important minerals — to be expanded to cover all (SEEA allows). Riverine resources covered separately. 2. Country Specific Needs Sustainability of resources. Comparison between revenues and market prices. Analyse production losses — revenue yields. System driven to plug loopholes, if any. 3. Others Map supply and use of resources. Incorporate ancillary data like DMF, NMET etc. to make the datasets complete. Data required for monitoring national declaration at COP 26 — carbon emission and generation of renewable energy. 2.7 In addition, the paper also delved deep into the issues involved, discussed possible challenges and provided comprehensive guidelines for the entities to prepare the Asset Accounts with vivid examples including sample Accounts and source of information for the Asset Accounts on Mineral & Energy Resources. Stakeholder Consultation Process 2.8 In order to take the stakeholders, subject experts and academia onboard, GASAB has constituted a broad based Consultative Committee consisting of representatives of stakeholder ministries in Government of India like MoMines, MoEFCC, MoSPI, MoPNG, MNRE, MoJal Shakti, Department of Land Resources, specialist agencies like Indian Bureau of Mines, ICAI, ICoAI, TERI, NRSC among others and five State Governments and Accountants General in these five States (Gujarat, Karnataka, Meghalaya, Jharkhand and Uttarakhand) and eminent environmentalist and retired bureaucrat Shri Mukul Sanwal, IAS 1971, to continuously get the works vetted and additional suggestions/comments to make the process inclusive and robust. 2.9 Two meetings of the Committee had been held in September 2021 and June 2022 besides continuous vetting of the documents like the Concept Paper, booklet on templates and Guidelines/ SOPs etc. by the Committee. (Second Consultative Committee was held in CAG’s Office in June 2022). 2.10 In addition to the Consultative Committee of NRA Cell as stated above, GASAB Secretariat has formed NRA Cells in the States consisting of the Audit, A&E and State Government Departments to enable co-ordination between the Accountants General Offices in the States with the local State Governments to enable closer coordination and steer the project at the state level. 2.11 The Chief Secretaries of the States were demi-officially informed (July 2021) about the project by the Deputy CAG & Chairperson, GASAB and presentations were made to all the State Governments regarding the concept, resources to be covered initially, the formats, approach of the work and expectations from the State Governments and their Departments. Seven meetings were held (August – September 2021) in which 28 States and 2 UTs (Delhi and J&K) were covered. The States welcomed the project and agreed to extend all co-operation. Short-listing of Resources 2.12 Out of seven resources listed by the SEEA framework, the Concept Paper has identified and suggested commencing with five major resources, namely Mineral & Non-Renewable Energy Resources, Water Resources, Forestry & Wildlife Resources and Land Resources, of which, Mineral & Non-Renewable Energy Resources has been prioritised mainly due to their finiteness/non-renewability and sustainability for future generations as well as their contribution towards growing concerns on climate change. Testing the Draft Templates in States 2.13 In order to test the draft templates of Asset Accounts on Mineral & Energy Resources included in the Concept Paper (Chapter XI of the Paper refers), pilot studies were carried out between July 2020 and March 2021 and successfully completed in three States, namely Goa, Meghalaya and Rajasthan. The pilot studies were conducted in coordination with the State Government Departments of Geology & Mining, Finance and Statistics and the reports were validated by both, the department of Geology & Mines and also the Audit Office. Finalisation of the Templates 2.14 The concept visualization, detailed actionable plans, preparation of model templates and their successful test run in the pilot states coupled with extensive consultative processes and continuous trainings/capacity building has culminated into the final templates on Mineral & Non-Renewable Energy Resources and was released in the form of a booklet. The book contains the overall processes involved, works done, the templates of the Asset Accounts and mechanisms suggested for further streamlining the control mechanism on mining and allied activities in the States and ensuring regular flow of information to ease out the building up of Asset Accounts in future years. Electronic version is available at http://gasab.gov.in/gasab/pdf/TemplateAssetAc.pdf. 2.15 The books have been circulated to the Chief Secretaries, State Government Departments, Accountants General for preparation of the first draft of the Asset Accounts on Mineral & Non-Renewable Energy Resources in the States for the year 2020-21 by March 2022 with the aim of developing a well-defined methodology for preparation of Asset Accounts, including identification of underlying assumptions. Trainings, Capacity Building and Continuous Hand Holding 2.16 Parallel to the above efforts, GASAB Secretariat has been holding workshops under the aegis of Knowledge Center at Regional Training Institute, Prayagraj to update the knowledge base of the Officers in the field Offices, both Audit and A&E Offices including the Group Officers to handle preparation of the Asset Accounts. 2.17 GASAB Secretariat has also conducted State specific workshops involving the concerned Departments besides participation from the State AsG Offices. These workshops were planned to onboard the States which are crucial in implementing the project and to convey the idea of NRA, our expectations from States besides assessing the preparedness and constraints of the States. On the other hand, these workshops helped us instill confidence in the State Governments about our endeavour mooted as a handholding exercise to enable the country to become compliant to the SEEA – CF framework. The State Accountants General Offices are continuously holding meetings and organising workshops/trainings for the State Government departments. 2.18 In order to hand hold and guide the States, monthly meetings are being held with the States since October 2021 to monitor the progresses and clarify/mitigate the queries/challenges. Along with the State Accountants General Offices, the State Government departments are also participating in these meetings. As on date 8 such meetings were held with all the states. National Declaration at COP–26 – Inclusion in the Asset Accounting Framework 2.19 Consequent upon the national declaration on Panchamrits (five points) at COP-26 at Glasgow, the necessity of gathering information/data on reducing the carbon emissions and generation of renewable energy resources to continuously monitor the progresses towards the international commitment also became a necessity. The commitments were: India will take its non-fossil energy capacity to 500 GW by 2030. India will meet 50 percent of its energy requirements from renewable energy by 2030. India will reduce the total projected carbon emissions by one billion tonnes from now till 2030. By 2030, India will reduce the carbon intensity of its economy by more than 45 percent. By the year 2070, India will achieve the target of Net Zero. 2.20 GASAB quickly comprehended the need to lay down a system of monitoring at the State level and developed templates for capturing the details of generation/progress in generation of renewable energy resources in States vis-à-vis the total need and how the surplus/shortfall are being managed. Achievement of Short-Term Action Plans 2.21 The State Government Departments in 28 States and 1 UT (J&K) prepared the first draft of Asset Accounts in the States for the year 2020-21 with the active assistance of Accountants General Offices as per the guidance of GASAB. Further works to compile the Asset Accounts for 2021-22 is also underway. GASAB was continuously in the loop, handholding the States in achieving this crucial milestone of attaining the first and most vital stage of preparation of Asset Accounts showing the physical flows of resources. 2.22 The joint effort bore results. As on date (July 2022), Asset Accounts on Mineral and Energy Resources in all 28 States and 1 UT (J&K) stand completed and are being validated by the State Governments and cross verified by CAG field offices. As per the reports available as on date, roughly, 34 major minerals, 58 minor minerals and all fossil fuels (coal, crude oil, natural gas and lignite) are being covered in the Asset Accounts. To ensure uniformity in reporting, these Asset Accounts are being presented in the shape of a Report outlined and circulated by GASAB. Status of Preparation of Asset Accounts in States Status of Preparation of Asset Accounts in UTs Remarks Prepared in all 28 States: Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Punjab, Rajasthan, Sikkim, Tamil Nadu, Telangana, Tripura, Uttar Pradesh, Uttarakhand, and West Bengal. Prepared in 1 UT: Jammu and Kashmir Remaining 1 UT: Delhi — As reported by the State Government Department, no mineral is endowed within the State jurisdiction. This is being cross-referenced and verified with records of Indian Bureau of Mines. 3. Continuing the Process 3.1 In order to ensure that the work is carried on unhindered in the States with continuous generation and flow of information/data from the district units through the Directorates to the Accountants General Offices periodically, preparation of a set of Guidelines/SOPs were felt necessary guiding the States to develop systems and processes and watch their compliance closely. “Let us pledge to collectively work towards conserving precious environment resources. Let us live in harmony and keep our beloved earth clean and green.” — Shri Narendra Modi, Prime Minister of India 3.2 Accordingly, GASAB has prepared the Guidelines/SOPs amalgamating the non-renewable as well as renewable resources which has been continuously run through the Consultative Committee and also the State Governments as these evolved between December 2021 and March 2022. Electronic version of the Guidelines is at http://gasab.gov.in/gasab/pdf/Guidelines_June2022.pdf. 3.3 Besides the dataflow, the Guidelines/SOPs also suggest several recommendations for end-to-end mapping of supply and use of resources. The framework designed by GASAB envisages collecting information from the exporting, consuming, using points of resources within the States to compare with the resource extractions and dispatch to identify illegal mining which is expected to help the States in mopping up due revenues from exploitation of resources and plugging the leakage and wastage of invaluable natural resources aiding in better resource management and sustainability for the future generations. End-to-End Mapping & Reconciliation Framework (Anti-Illegal Mining System) 1 District offices submit mineral extraction and royalty reports to Directorates. 2 Directorates add additional info and build/update the database of Asset Accounts with copy to AsG Offices. 3 CAG field offices assist the State Governments in the preparation, audit, and validation of Asset Accounts. Vehicle GPS & Special FASTags Mandatorily pre-register all mineral-carrying vehicles enabled with GPS real-time tracking and specialized RFID/FASTags to prevent unrecorded transport. Electronic / App-Based Data Centers Enable departmental authorities, check posts, user agencies, and customs stations to feed data electronically on a daily/quarterly reconciliation basis. Integrated Cross-Verification Network: Directorates of Mining District Mining Offices Check-posts Enforcement Wings User Agencies Industries Customs Stations GST Network (GSTN) 4. Key Takeaways for the States – Once Asset Accounts are Completed 4.1 The Asset Accounts, once compiled, are designed to aid in evidence-based decision-making and good governance by providing the following inputs for the policy makers: Preparation of NRA and meet the commitment made to meeting SDGs: Fulfilling national and international climate & environmental reporting targets. Resources at a glance: A comprehensive one-pager executive document on State-wise resource stocks and reserves. Compilation of physical and monetary values: Enables cross verification of actual extractions against recorded fiscal revenues. Pace of exploitation: Provides scientific metrics on how rapidly finite natural endowments are being extracted. Analysis of revenue vis-à-vis market value/export value: Makes it easier to assess and review royalty rates, arrest windfall gains by concessionaires, and protect the State’s revenue interest. Sustainability of resources in years: Estimates remaining resource lifespans based on proven reserves and annual extraction trajectories. Enable assessment of revenue streams for the future: Facilitates long-term budget modeling and sovereign fiscal planning. Enabler of identification of alternate resources: Identifies viable substitutions across economic commodities and green energy transitions. Close monitoring on illegal mining: Bridges discrepancies between extraction points, processing factories, transport corridors, and tax declarations. Progresses on commitments made at COP 26: Systematically tracks progress towards the Panchamrits non-fossil and renewable goals. 4.2 Thus, achievement of the short and mid-term goals by 2024-25 would not only help the entities with a consolidated database on availability, usage and sustainability of resources vis-a-vis revenues generated and the costs involved, but also will be a major breakthrough towards attaining first two out of four stage implementations of NRA as envisioned in the SEEA - CF. Also, this will help India to get into the elite list of countries where Asset Accounts on natural resources (importantly non-renewable resources) are being generated. 4.3 Besides the inputs to the policy makers, the Asset Accounts will help with an outline of resource bases across the States adding immense value towards the planning for resource exploitation and policy framing for the present as well as sustainability of resources for the future generations. 4.4 Successful implementation of Asset Accounts on Mineral & Energy Resources in the States would mean that India not only meets the first of the four-stage implementation strategy prescribed by the SEEA - CF but will also get into the elite list of countries where Asset Accounts on natural resources (importantly non-renewable resources) are being generated. 4.5 Undoubtedly, NRA would also help in attaining other pressing commitments like the sustainable development goals and targets for reduction in green-house gases to mitigate the devastation caused by climate change. The efforts may then be taken forward with the aim of achieving the remaining two stages by 2030 - the indicative target of achievement of Sustainable Development Goals set by the United Nations. Official Publications & Electronic Portals (GASAB / CAG) GASAB Concept Paper on Natural Resource Accounting: http://gasab.gov.in/gasab/pdf/NR-Accounting-final.pdf GASAB Model Templates of Asset Accounts on Mineral & Non-Renewable Energy Resources: http://gasab.gov.in/gasab/pdf/TemplateAssetAc.pdf GASAB Guidelines and SOPs for Natural Resource Accounting (June 2022): http://gasab.gov.in/gasab/pdf/Guidelines_June2022.pdf

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 33–38 (Journal pp. 149–154) SUSTAINABILITY Sustainability and how quick companies can start implementation CA. Shailesh Haribhakti and CA. Suyash Agrawal Authors are members of the Institute of Chartered Accountants of India (ICAI). They may be reached at eboard@icai.in 💡 Conscious Capitalism & The Driving Forces of ESG Justice Environmental, Social, and Governance (ESG) is a mindset, a tool or framework to deliver on the promise of “Conscious Capitalism”. An attempt to refocus on stakeholder primacy over shareholder value, to think long-term value over short-term profits, to drive equitable distribution of opportunities and to restore the ecological balance. In current scenario, our strengths of pillar and forces that will drive ESG justice are collaboration, change of mindset, adaption of exponential, converging technologies, and rapid high skill innovation. A Generational Reflection and Urgent Call to Action Reflecting Across Generations: Hold on for a minute. Close your eyes. Think. For baby boomers (born 1946-1964) and generation X (born 1965-1980), take this minute to reflect on your childhood and adolescence. What was the world, nature and the climate, like when you were growing up? Now think about what happened between now and then. Is this the world one wants to leave behind for our future generation? For millennials (born 1981-1996) and generation Z (born 1997-2012), what is the climate impact of our fast-internet, fast-fashion, fast-food, fast-travel, fast-gratification, and fast-life? Is this sustainable? Is this the world our parents brought us in? Where are we headed? Are we so lost in social media that we have forgotten the sounds of birds chirping, the warm embrace of a tree and the ocean breeze? Through this piece, we want to elicit a response from our decision makers and a call for immediate action from our generation of movers and shakers. We have been presented an unprecedented opportunity to change the course of humanity. The Multi-Trillion Dollar Sustainable Opportunity: Massive economic growth, profitability and job creation lies at the heart of this evolution. According to the World Business Council for Sustainable Development (WBCSD), the sustainable economy has the potential to unlock USD 12 trillion in economic value and 380 million jobs by 2030. What we need is collaboration, change in mindsets, technology, and innovation. Setting this as our prologue, let’s take a deep dive into the world of sustainability and ESG: Net Zero • ESG • Climate-technology • 1.5 degrees target of the Paris Agreement • Carbon credits • GHG emissions • Green finance • GRI • SASB • BRSR • Integrated Report The aforementioned are a few terms, most people are hearing these days. Before we get into specific actions to be taken by companies to set themselves on the path of sustainability, it is imperative to understand, how the world economy evolved, what happened to our climate and how we got here. Evolution of the World Economy and the Social Contract International trade continued to evolve in the 19th century. Colonialisation was at its peak. Powerful countries from the west exerted their force on weaker ones, exploiting their resources, leaving them with pittance. This started unravelling in the 20th century. This century was marked by two world wars, liberation of several erstwhile colonies, massive post-world war industrialisation, rise of corporations and an unending race to establish supremacy between the Americans and Soviets. Evolution of the World Economy Business models, population and rising temperatures are all interlinked Parameter / Metric Up to the 19th Century 20th Century 21st Century Dominant Business Model Colonialism Capitalism Entrepreneurialism / Consumerism Key Drivers Countries and Dynasties Corporations Citizens Metrics Power Profits Purpose Population Figures 1850 – 1.2 Bn 1900 – 1.6 Bn 1950 – 2.5 Bn 2000 – 6.1 Bn 2010 – 6.9 Bn 2020 – 7.8 Bn (7x growth) Global Emissions (CO2) 1850 – 196.9 Mn Tons 1900 – 1.95 Bn Tons 1950 – 6 Bn Tons 2000 – 25.23 Bn Tons 2010 – 31.61 Bn Tons 2020 – 34.91 Bn Tons (176x growth) Global Mean Annual Temperature 1880s – 13.73°C 1900s – 13.74°C 1960s – 13.99°C 1990s – 14.31°C 2020s – 14.91°C As we complete, over 70 years since the end of World War II and the formation of United Nations, the 21st century is seeing unprecedented nuclear stockpiles, global warming, mass pandemics and a failing economic agenda. As per the Global Risks Report 2022 by the World Economic Forum, the top 5 risks are either environmental or social. The answers to most of our questions lie in the evolution of the social contract. The social contract is an implicit agreement on which all societies rest. It is an accord that balances the roles and responsibilities of corporations and states with that of individuals. While the exact terms keep evolving based on the law of a society, the larger idea is to keep humanity harmonised. This contract, in one way or the other is breaking globally. While every country faces its individual problems, the premise has remained the same. In the “so-called” liberalised economies, corporations started to write rules, making way for monopolies. On one hand, China seemed to have combined top-down authoritarianism with the efficiency of capitalism. The world has never been so polarised before. As corporations grew bigger, governments in liberalised economies ceded control. Focused on shareholder value, corporations failed to deliver on environmental and social agendas. What we are left with is global warming, unbridled consumer price inflation, fear of constant surveillance, human rights’ violations and mass wealth disparity. Having failed to deliver on its promise of equitable growth, it is time to reform capitalism. India must lead this reformed and more equitable model of “Conscious Capitalism”. This is where ESG comes in. ESG stands for: • E – Environmental Stewardship • S – Social Responsibility • G – Purposeful Governance ESG, sustainability, climate action, impact investing, PRI (Principles of Responsible Investing), called by several names, have multiple overlaps. ESG is a mindset, a tool or framework to deliver on the promise of “Conscious Capitalism”. An attempt to refocus on stakeholder primacy over shareholder value, to think long-term value over short-term profits, to drive equitable distribution of opportunities and to restore the ecological balance. What Must Companies Do, How Must They Implement, How Must They Report? We believe, that the most important for companies is to STOP seeing ESG as an additional burden or cost. It is an opportunity to rethink supply chains, business models and processes, to make them more eco-friendly and future proof. What you see below is our Standard Model of ESG. While we have tried to incorporate everything relevant on one image, the model is continuously evolving. THE STANDARD MODEL OF ESG: A Journey Beyond Net Zero Journey Beyond Net Zero ➔ CO2 Net Zero Target ➔ Value Accretion via Sustainable Solutions ➔ Green Finance ➔ Better Ratings Collaboration Mindset Technology Innovation Five Exercising Economic Interests: Customers • Governments Around the World • Investors • Bankers • People & Planet Environmental Stewardship (E) Energy Transition: Carbon capture, carbon sequestration and conversion to energy. Circularity: Reduce, reuse, recycle, and replace. GHG Elimination: Eliminating carbon dioxide, methane, CFCs, and neutralizing nauseous toxic gases at source. Biodiversity Preservation: Reforestation using fruit trees, cleaning air, and rejuvenating water bodies. Mapped SDGs: 7, 11, 12, 13, 14, 15 Social Responsibility (S) Human Rights: High-quality health, telehealth, mapping genome/microbiome, cloud blood markers & DNA. Basic Services: Education, clean water, sanitation, data privacy, and legal access with minimum latency. DEI: Zero discrimination across caste, creed, religion, ethnicity, gender, sexual orientation. Financial Inclusion: Universal Basic Income (UBI) and Universal Basic Services (UBS). Policy Orientation: POSH, whistleblowing, ethical conduct, workplace neutrality, and lifework balance. Mapped SDGs: 1, 2, 3, 4, 5, 6, 10 Purposeful Governance (G) Accountability & Auditing: Independent auditing, blockchained accounting, RPA, bot/AI-driven audit, quantum computing. Transparency: Zero latency information transmission across high-power internet networks. Integrated Reporting: ISSB, TCFD, CDP, GRI, VRF, and SEBI BRSR alignment. Anti-Greenwashing: Rigorous heuristics and defined deviation thresholds for credible investor assurance. Conflict Mitigation: Tracing, monitoring, and eliminating Related Party Transactions (RPT) conflicts. Mapped SDGs: 8, 9, 16, 17 Learning & Info: dial ESG by YOW Communication: TEDx Talks of ESG Comm. ERP & Procurement: SAP Carbon Accounting Impact Showcase: Netflix of Outcomes Our research across multiple sectors has shown that globally companies that have adopted sustainability with a defined net zero target have managed to attract green finance and better ratings. They implement sustainable solutions that drive enterprise value accretion and report transparently. We call our model “A Journey Beyond Net Zero”. We are moving towards more natural disasters if we do not change course immediately. Critically important is for all organisations to make their net zero commitments taking into account Scopes 1, 2 and 3. Companies must believe that a change in their business model will lead to better unit economics. Therefore, ESG will take route only by lowering cost of operation. Once you have the definition of your journey it becomes important as a validation to seek green finance and to have objective assessments of your activity through an external rating of credibility. Risk, Reporting, and Disclosures: The Six Capitals & Global Frameworks Following the growing support for ESG and Stakeholder capitalism, a whole new era of corporate reporting is emerging with a focus on 6 capitals: Financial, Environmental, Human, Physical, Relationship, and Innovation. The Five Forces: Planet, People, Customers, Governments, and Investors will operate on Innovation, changed mindsets, and a commitment to a better tomorrow. Unless all of us pull together we won’t achieve the exponential results that we are capable of delivering. The evolving model of Reporting will have Integrated thinking and love for the Planet reflected fully! Companies must adopt risk management tools that can help: Evaluate gaps between companies’ risk management initiatives and global best practices and implement enhancing actions; Assess materiality and review of priorities; Effectively capture and measure data sets; Commit to science-based commitments and targets; Produce accurate and reliable outcomes and end reports. Evolution of ESG Reporting in India: NVG (2009) to BRSR As for India, the transition to ESG reporting started in 2009 with the MCA issuing National Voluntary Guidelines (NVGs) on Corporate Social Responsibility, our first step towards mainstreaming ESG. Since then, ESG reporting in India has continuously evolved. A decade of several iterations has got us to the Business Responsibility and Sustainability Reporting (BRSR) today. Drawing inspiration from GRI, the BRSR is a comprehensive extension of BRR. Continuous efforts by the SEBI and MCA have demonstrated their intent and commitment towards ESG. Corporates must invest in accurate AI/ML-led data capture to enable reliable reporting. Dedicated efforts to embed ESG in the organisational purpose and culture will create long-term value. Global Regulations & TCFD Thematic Pillars: Globally, the UK and US are recognising climate risks and mandating climate reporting like never before. While the UK has gone with data driven disclosures, the US has proposed to draw heavily from the “four pillar” disclosure framework of the Task Force on Climate-related Financial Disclosures (TCFD) and Greenhouse Gas Protocols (GHG): 1. Governance 2. Strategy 3. Risk Management 4. Metrics and Targets Corporations Must Act: The Case of Unilever While regulators are doing their bit, laws and guidelines mean nothing without honest and committed enforcement. Corporates must implement ESG through the virtuous cycle of measuring, mitigating, monitoring and transparent reporting. This will be enabled by engaging experts, exponential technology solutions and collaborative partnerships. Future CEOs and Board Members must understand that companies driven by societal purpose have delivered long-term value across key drivers such as sales, brand and reputation, capital access and market value, operational efficiency, talent retention and risk mitigation. Case Benchmark — Unilever: Integrating sustainability in its organisational purpose, deep stakeholder engagement and prioritising long term value has delivered profitability, stable shareholder returns and deep penetration in competitive emerging markets. Focused Implementation: 10 Critical Targets to Eradicate for India at 100 in 2047 While our Standard Model, reporting frameworks and regulations push for adoption of sustainable practices, actual change has to come from within the organisation. Focused efforts on implementing sustainable technologies and solutions that will help decarbonise are the need of the hour. With the commitments at the COP26, the Prime Minister has set the tone at the top; corporates must now absorb, implement, and decarbonise. To see India becoming great at 100 in 2047, our efforts must be realigned to eradicate the following 10 challenges: 1. Eradicate Construction Waste Stop construction waste being sent to landfills; enable precision construction using 3D printing and green cement at scale. 2. Eradicate Coal, Oil and Gas India must transition to become the world’s first completely fossil fuel-free economy at 100. 3. Eradicate Virgin Steel Production Completely eliminate the production of virgin steel by 2050 through circular metallurgy and green hydrogen. 4. Eradicate Water-Guzzling Crops Phase out low-margin, water-guzzling crops and reallocate agricultural land to fruit trees at scale. 5. Eradicate Illegal Delays & Transform Jails Eliminate systemic judicial delays, restore human rights, and transform the prison and correctional apparatus. 6. Eradicate Lack of Access to Education Deploy digital and high-skill learning infrastructure ubiquitously to eliminate educational deficits. 7. Eradicate Low-Quality Healthcare Access Eliminate deficient healthcare access through telemedicine, digitized diagnostics, and cloud genomics. 8. Eradicate Newsprint Import Eliminate timber dependency and newsprint imports through digital publishing and indigenous agro-fibres. 9. Eradicate Lack of Care for Biodiversity Eradicate neglect of animals, aquatic life, forests, and living ecosystems across all urban and rural spheres. 10. Eradicate Suspicion & Build Mutual Trust Eliminate societal suspicion among fellow citizens and forge unwavering mutual trust across communities. Extinction is Closer Than It Seems, Our Time to Act Is Now or Never A garbage patch thrice the size of France is floating in the Pacific, Australia is reeling under one its worst floods in history and constant drilling in Siberia is causing temperatures to soar. Imminent Water & Climate Crisis in India: India faces the probability of one of the worst water crises ever: 35 million people will face coastal flooding and 40% of the population is to face water scarcity [1]. Concentrated efforts to push for fast adoption of sustainable technologies is the only way forward. Governments, corporates (large and small), non-profit organisations (NPOs), professionals, and citizens, must all take note, our planet is on the brink of extinction, an event that happened 65 million years ago. All governments must immediately push for mass clean-ups of water bodies, zero waste to landfill, waste segregation at source and incentives for full-scale circularity initiatives. At companies and NPOs, from the board to the last employee in the organisation, all must speak only one language of sustainability and climate action. Only policy formulation will not make the cut anymore. Implementation is the need of the hour. Progress on implementation must be measured, monitored and reported adequately, accurately and communicated transparently. Data and analytics must be available for the world to see in real-time. We have no time, we can’t take pride and relief in committing to net zero by 2050. While we should have taken action yesterday, all we have now is today and every day. Conscious Capitalism, Spiritual Heritage & India’s Soft Power “Conscious Capitalism” is built on a greener planet, far-reaching and inclusive community development and transparent tech-enabled governance. Technology and ESG must fuse together in the context of our innate spiritual teachings to see India rise as the nation with a maximum quantum of soft power. Official References & Citations Forbes India / IPCC Report Analysis on Global Warming Economic Impacts: India can face 92% GDP loss by 2100 due to global warming (IPCC Report)

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 39–43 (Journal pp. 155–159) SUSTAINABILITY Carbon Neutrality – Towards a Sustainable Future CA. (Dr.) Sanjeev Kumar Singhal and CA. Priti Savla Authors are members of the Institute of Chartered Accountants of India (ICAI). They may be reached at sanjeevsinghalca1997@gmail.com and eboard@icai.in 🌍 Climate Crisis & Macro-Financial Vulnerability According to the findings of the World Economic Forum’s Global Risks Report 2022, participants in the Global Risks Perception Survey (GRPS) identified climate action failure as the single most existential peril confronting the planet over both medium and long-term horizons. With global surface warming reaching 1.2°C above pre-industrial levels in 2020, heightened frequencies of devastating tropical cyclones, unprecedented precipitation swings, and prolonged droughts are severely eroding socioeconomic capital and critical infrastructure worldwide. The Scientific and Institutional Imperative for Carbon Neutrality Reversing catastrophic climate change requires aggressive, worldwide reductions in atmospheric greenhouse gas (GHG) concentrations to achieve global net-zero emissions by mid-century. Nevertheless, findings from the United Nations Environment Programme (UNEP) Emissions Gap Report 2019 reveal persistent shortfalls between current sovereign commitments and the decarbonisation trajectories necessary to limit global warming within the 1.5°C threshold. Under the historic United Nations Paris Agreement concluded on 12 December 2015, signatories collectively pledged to contain global warming to well below 2.0°C over pre-industrial averages while actively pursuing aggressive measures to restrict the rise within 1.5°C through worldwide carbon neutrality by 2050. Box 1: The Paris Agreement Architecture & Cooperation Mechanisms The regulatory machinery of the Paris Agreement obligates every participating sovereign state to formulate, communicate, and consistently maintain progressive Nationally Determined Contributions (NDCs) aimed at curbing global emissions. These commitments undergo structured revisions every five years alongside a multilateral review mechanism. The UNFCCC Secretariat issues an overarching synthesis report evaluating newly submitted NDCs in advance of each Conference of the Parties (COP). This cyclical review is underpinned by a formal Global Stocktake scheduled for 2023, coupled with biennial progress assessments under the Enhanced Transparency Framework commencing in the 2022–2024 implementation cycle. To facilitate cost-effective NDC attainment, Article 6 of the Paris Agreement operationalizes multilateral cooperation mechanisms enabling cross-border transfer of mitigation outcomes, capacity enhancement, clean technology deployment, and concessional climate finance for emerging economies, including provisions for utilizing certified carbon credits originating from the Kyoto Protocol framework as transitioned at COP26 in Glasgow. Reference: OECD Report — A Framework to Decarbonise the Economy (2022) In practical terms, carbon neutrality requires balancing all anthropogenic carbon dioxide emissions with equivalent volumes of carbon capture, utilization, storage, and geological conversion over a defined accounting horizon, thereby realizing net-zero GHG emissions. Initially conceptualized and demonstrated on Samsø Island in Denmark in 1997, the model has evolved from local renewable experimentation into an overarching global paradigm adopted across major industrial sectors. Pursuing carbon neutrality yields dual ecological dividends: systematically lowering greenhouse gas atmospheric build-up while concurrently slashing criteria air pollutants, thus revitalizing urban air quality. Achieving net zero relies on the compounded synergies of renewable electrification, energy efficiency, circular material stewardship, and biogenic carbon sequestration. Recognizing the financial stability implications of physical and transition hazards, the Network for Greening the Financial System (NGFS) published its standardized supervisory climate scenarios in 2021. The NGFS emphasized that global financial systems face vastly diverging futures: ranging from an orderly, managed transition toward net zero by 2050, to severe economic disruption under disorderly adjustments, or an extreme “Hot House World” where unchecked emissions escalate temperatures by 3°C or higher by 2100. NGFS Climate Scenarios Matrix for Central Banks and Financial Supervisors (2021) Macro-Financial Risk Stratification across Physical and Transition Parameters Category Scenario Physical Risk Dynamics Transition Risk Parameters Macro-Financial Risk Policy Ambition Policy Reaction Technology Change Carbon Removal Regional Variation Orderly Net Zero 2050 1.5°C Immediate & Smooth Fast Pace Medium Deployment Medium Variation Lower Risk Below 2°C 1.7°C Immediate & Smooth Moderate Pace Medium Deployment Low Variation Lower Risk Disorderly Divergent Net Zero 1.5°C Immediate but Divergent Fast Pace Low Deployment Medium Variation Moderate Risk Delayed Transition 1.8°C Delayed Response Slow then Abrupt Low Deployment High Variation Higher Risk Hot House World Current NDCs Only >2.5°C Delayed NDCs Track Slow Pace Low Deployment Low Variation Higher Risk Current Policies Track 3°C+ No New Policies Slow Pace Low Deployment Low Variation Higher Risk Source: NGFS Climate Scenarios for Central Banks and Supervisors (2021) Global Decarbonisation Frameworks & India’s National Commitments Following the 2015 Paris Accord, numerous countries legislated aggressive emission reduction objectives, establishing mid-century net-zero mandates alongside interim 2030–2040 milestones. Even so, aggregate global ambitions remain insufficient to establish a downward emissions curve prior to 2030 (UNFCCC, 2021). The United Nations Environment Programme projects that global greenhouse gas output must decrease by more than 7% annually through 2030 to remain consistent with the 1.5°C stabilization trajectory. European Union: European Green Deal Promulgated on 11 December 2019 and formalized in the European Climate Law, the European Green Deal targets carbon neutrality and the absolute decoupling of resource use from GDP growth by 2050. Under the EU 2050 Low Carbon Economy Roadmap, the bloc committed to reduce domestic GHG emissions by 40% by 2030, 60% by 2040, and 80% by 2050, with 78% of European municipalities setting carbon targets and 25% actively pursuing net zero. United States: Clean Energy Revolution Upon re-entering the Paris Agreement on 20 January 2021, the United States administration established aggressive federal directives under the Plan for a Clean Energy Revolution and Environmental Justice. The policy dictates achieving a 100% carbon-free electricity grid by 2035 and transitioning the entire domestic economy to net-zero GHG emissions by 2050. Glasgow Climate Pact (COP26) The COP26 summit requested 153 nations to enhance their 2030 NDCs, doubled adaptation financing mechanisms, and laid down institutional mechanisms to reallocate trillions in private institutional capital and sovereign reserves towards verifiable net-zero financing. India’s ‘Panchamrit’ – The Five Nectar Commitments of Climate Action Announced by Prime Minister Narendra Modi at the COP26 Summit in Glasgow and reaffirmed at the World Economic Forum Davos Summit, India’s national strategy outlines five foundational pillars to guarantee green, inclusive, resilient, and reliable economic expansion over the 25-year Amrit Kaal period: Non-Fossil Capacity: Expanding India’s non-fossil fuel power generation capacity to 500 GW by 2030. Renewable Energy Mix: Sourcing 50% of total national energy requirements from renewable resources by 2030. Absolute Emissions Abatement: Reducing aggregate projected national carbon emissions by one billion tonnes from now until 2030. Carbon Intensity Reduction: Lowering the emissions intensity of India’s Gross Domestic Product by more than 45% over 2005 baselines by 2030. Long-Term Net Zero: Achieving complete sovereign Net Zero Carbon Emissions by 2070. OECD 4-Pillar Decarbonisation Assessment Methodology (2022) The OECD framework “A Framework to Decarbonise the Economy” outlines four systematic measurement pillars to benchmark sovereign and industry decarbonisation pathways: Macroeconomic Metrics: Aggregating historical emissions data and evaluating carbon intensity trends relative to macro targets; Sectoral Benchmarking: Tracking sector-specific performance indicators to detect technological inefficiencies and identify industry best practices; Scenario Modeling: Projecting long-range trajectories under diverse policy scenarios using models such as the IEA World Energy Outlook and OECD Environmental Outlook 2050; Uncertainty Mitigation: Pinpointing economic and technological uncertainties to insulate transition roadmaps against structural shocks. Building Corporate Net Zero Transition Strategies Mounting climate volatility confirms that transition risks and physical hazards are pressing operational realities rather than distant contingencies. Commercial entities must proactively evaluate their exposure to supply chain vulnerabilities, regional water and power shortages, asset stranding, and shifts in consumer and regulatory preferences. Corporate Risk Governance Triad: Corporate governing boards must systematically categorize climate vulnerabilities across three distinct operational responses: 1. Risk Abatement (Reduce): Redesigning operating models, phasing out wasteful energy use, and transitioning to circular supply inputs. 2. Risk Transfer: Hedging severe weather hazards and physical damages through bespoke insurance and catastrophe risk instruments. 3. Risk Retention (Bear): Pricing residual transition exposure directly into capital expenditure hurdles and balance sheet reserves. Coupled Systems Architecture: Climate, Ecosystems & Human Society Interaction Dynamics between Climate Hazards, Biodiversity, and Economic Resilience (a) Hazard Compounding Dynamics Rising global temperatures exacerbate physical hazards that directly disrupt natural habitats and fragile ecosystems, precipitating catastrophic resource bottlenecks, infrastructure decay, and commercial losses across human society. (b) Resilient Transition Pathways Deploying responsive governance, sustainable capital allocation, and advanced technologies enables simultaneous system transitions: decarbonising human energy and urban infrastructure while actively conserving terrestrial and aquatic biodiversity. The Strategic Role of Accountants & ISSB Global Disclosure Standards Global capital markets, institutional lenders, underwriters, and rating agencies increasingly demand granular, audited disclosures regarding corporate climate exposures and governance. To harmonize cross-border reporting fragmentation, the International Sustainability Standards Board (ISSB) established under the IFRS Foundation released Exposure Drafts for general sustainability disclosures and climate-specific reporting. Anchored in the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), the ISSB standards create a unified global baseline utilizing a building-block architecture interoperable with domestic statutory frameworks. Financial Modeling & Forecasting Integrating physical and transition risks into cash-flow models, long-term capital expenditure budgets, impairment tests, and contingency reserves. Strategic Decision Support Advising executive leadership on sustainable revenue opportunities, resource productivity improvements, and circular supply transformations. Assurance Against Greenwashing Performing rigorous third-party verification on reported GHG metrics and sustainability assertions, guaranteeing veracity for capital allocators. ICAI SRSB: Pioneering the Indian Sustainability & Assurance Ecosystem The Institute of Chartered Accountants of India (ICAI), operating through its specialized Sustainability Reporting Standards Board (SRSB), has spearheaded extensive technical, regulatory, and pedagogical interventions to establish a world-class sustainability assurance architecture in India: Technical Guidance & Auditing Standards BRSR Guidance: Comprehensive background material and technical guidance on SEBI’s Business Responsibility and Sustainability Reporting framework. Standard on Assurance Engagements (SAE) 3410: Codified auditing framework titled “Assurance Engagements on Greenhouse Gas Statements”. SRMM Version 1.0: Sustainability Reporting Maturity Model, an objective self-assessment and scoring tool across four maturity tiers. SDGs Monograph Series: Three-volume publication series titled “Sustainable Development Goals (SDGs) - Accountants Creating Sustainable World”. Pedagogical Capacity Building & Awards Certificate Course: Structured online certificate program on Business Responsibility and Sustainability Reporting. Excellence Awards: Annual ICAI Sustainability Reporting Awards and International Sustainability Reporting Awards recognizing transparent ESG reporting. Social Stock Exchanges: Formulating Social Audit Standards and developing Certification Courses for Social Auditors in collaboration with SEBI. Outreach & Multilateral Leadership Public Engagement: ICAI Sustainability Challenge, Carbon Footprint Challenge, and nationwide Sustainability Literacy Drives. Multimedia Literacy: Educational corporate films, Champions of SDGs campaign, and video dissemination series. Strategic Convenings: High-level ESG Roundtables for Board Members, ESG Talk shows, and international webinars. From Extractive Linear Models to Regenerative Circularity The Institute of Chartered Accountants of India affirms its steadfast commitment to accelerating the transition toward a decarbonised, regenerative, and inclusive economy. Achieving this historic transformation demands coordinated multilateral partnerships to fundamentally restructure global capital flows—replacing extractive, linear industrial practices with circular, value-accretive economic systems. Key References U.S. Commodity Futures Trading Commission, Managing Climate Risk in the U.S. Financial System (2020): CFTC Climate Risk Report OECD, A Framework to Decarbonise The Economy (2022): OECD Decarbonisation Framework European Commission, Roadmap for Moving to a Competitive Low Carbon Economy in 2050: EU Low Carbon Economy Roadmap The Biden Plan for a Clean Energy Revolution and Environmental Justice: Biden Clean Energy Plan Ministry of External Affairs, National Statement by Prime Minister Shri Narendra Modi at COP26 Summit in Glasgow (2021): PM Modi COP26 Statement ACCA, Climate Action and the Accountancy Profession: Building A Sustainable Future (2021): ACCA Climate Action Report IFAC, Corporate Reporting: Climate Change Information and the 2021 Reporting Cycle (2021): IFAC Climate Reporting Cycle

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 44–49 (Journal pp. 160–165) SUSTAINABILITY Business Responsibility and Sustainability Reporting (BRSR) – A challenge as well as opportunity *CA. Raj Mullick and **Ms. Mitika Bajpai *Author is member of the Institute. Authors may be reached at eboard@icai.in 🌱 Strategic Preamble: The ESG Megatrend The accounting world is going through a transformation to keep pace with the changing requirements of business and economy. Sustainability or Environment, Social and Governance (ESG) performance is one such megatrend to prepare for. Currently stakeholders including investors, governments, and advocacy groups have started emphasising on non-financial disclosures, for evaluation of a company’s sustainable business model. Accordingly, as a good corporate citizen companies are required to give disclosure on energy consumption, carbon emission and other key Sustainability indicators. Introduction & Reporting Landscape Historically, in order to disclose non-financial data companies were expected to refer to global frameworks and benchmarks, like GRI, SASB, ISO and CDP. However with a push from the Indian regulatory bodies, companies now have frameworks like IR and BRSR that cater to an India-focused reporting landscape. Frameworks encouraged by SEBI, like Integrated Reporting (IR) in 2017-18 and Business Responsibility and Sustainability Reporting (BRSR) in 2022-23 for the top 1000 listed Indian companies help all report readers and stakeholders get the right information, understand the company’s story/ business model/ performance holistically while seamlessly integrating the environmental, social and governance laws that are applicable within India. Evolution of Reporting: from BRR to BRSR While it is important for a company to have effective sustainability strategies and policies in place, it is equally important to communicate these to all the stakeholders. The Company’s annual report and Investors/ Analysts meets provide a good platform to communicate the company’s efforts to a wider audience. Until this financial year 2021-22, companies were disclosing limited non-financial data to SEBI through the Business Responsibility Report (BRR). From the next financial year 2022-23, the top 1000 Indian listed companies will be expected to publish the Business Responsibility and Sustainability Reporting (BRSR) which is certainly a more comprehensive framework for non-financial data reporting - one that was created by incorporating the best case practices from multiple globally relevant frameworks. Milestones in the Evolution of BRR to BRSR July 2011: Ministry of Corporate Affairs, Government of India introduced the National Voluntary Guidelines (NVG) which focused on principles of Social, Environmental and Economic responsibilities of businesses. August 2012: Business Responsibility Reporting (BRR) was mandated by SEBI for Top 100 listed companies for disclosure on ESG parameters in the annual report. The reports were to be prepared in line with NVG principles. December 2015 & November 2019: In December 2015, the mandate was extended to top 500 listed companies of India, and finally in November 2019 the mandate was extended to top 1,000 listed companies of India by market capitalisation. To comply with the mandate, companies were to disclose information on the ESG parameters in the format prescribed by SEBI as part of the annual report or sustainability report. March 2019: In order to align the National Voluntary Guidelines (NVGs) with the emerging global concerns, the NVGs were revised and released as National Guidelines on Responsible Business Conduct (NGRBCs). March 2021: SEBI board decided to introduce new requirements for sustainability reporting by listed entities i.e., Business Responsibility and Sustainability Reporting (BRSR) which shall replace the BRR. May 2021: SEBI issued a circular noting departure from BRR to BRSR for top 1000 listed entities (by market capitalization) and mandated reporting BRSR w.e.f FY 2022-23. Over time the BRSR will be integrated with filings made on the MCA21 portal. This information captured through BRSR filings could be used to develop a Business Responsibility-Sustainability Index for companies. About the BRSR Architecture The BRSR comprises of about 140 questions across 3 sections. The third section comprises of the 9 NGRBC principles. Across the 9 Principles, BRSR asks for 122 indicators. Each Principle has Essential (i.e. mandatory) and Leadership (i.e. voluntary) Indicators. The table below shows the 122 indicators split between Essential and Leadership. It also shows the new indicators that have been added by Principle (compared to the BRR) which makes the BRSR more comprehensive than its predecessor. Principle Description Essential indicators Leadership indicators New indicators added (as % of total indicators) Old indicators (part of BRR) New indicators Old indicators (part of BRR) New indicators Principle 1 Businesses Should and Govern themselves with integrity, and in a manner that is ethical, transparent and accountable 2 6 0 2 78% Principle 2 Businesses should provide good and services in a manner that is sustainable and safe 2 2 2 3 56% Principle 3 Businesses should respect and promote the well – being of all employees, including those in their value chains 2 14 0 6 91% Principle 4 Businesses should respect the interests of and be responsive to all its stakeholders 2 0 0 3 60% Principle 5 Businesses should respect and promote human rights 1 9 2 3 80% Principle 6 Businesses should respect and make efforts to protect and restore the environment 2 13 1 8 88% Principle 7 Businesses, when engaging in influencing public and regulatory policy should do so in a manner that is responsible and transparent 2 1 0 1 50% Principle 8 Businesses should promote inclusive growth and equitable development 3 2 2 5 58% Principle 9 Businesses should engage with and provide value to their consumers in a responsible manner 4 3 1 4 58% Cross-Referencing BRSR with Integrated Reporting (<IR>) 6 Capitals The questions and disclosure requirements for the BRSR also integrates seamlessly with the Integrated Reporting (IR) format – wherein most of the disclosure requirements can be mapped or cross-referenced with the 6 Capitals recognised by the International Integrated Reporting (<IR>) Framework. For this article we have cross-referenced 8 essential indicators with 3 capitals to show the correlation: IR - Capitals BRSR – Essential indicators (sample) Natural Capital Energy and water consumption Air emissions (Permissible limit and actual value) Liquid discharges for top 3 major facilities Solid waste generated Human Capital Employee and workmen representation (permanent and non-permanent) in total workforce Women representation (no. and %) in board and key managerial positions Safety related data like injuries, fatalities, injury rate, etc. Social & Relationship Capital Grievance mechanisms and complaints for each stakeholder group i.e., communities, business partners, investors, shareholders, customers, value chain partners The BRSR can similarly also be cross-referenced or mapped with the existing and established global reporting frameworks like Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Taskforce of Climate-related Financial Disclosures (TCFD). In doing so, a company can understand where they stand in their existing sustainability journey, and can easily adapt to this new reporting requirement. This essentially means that if a company already has certain sustainability/ ESG practices in place, they will not need to start again from scratch, instead they now have an opportunity to showcase their sustainability/ ESG practices in a standard and structured format. Detailed Analysis: Four Core BRSR Essential Indicators across ESG We can elaborate on this further by discussing a few sample questions of the BRSR. Below are 4 BRSR essential indicators covering an aspect each of Environment, Social and Governance: 1. Principle 3 – Question on Safety indicators Q 11: Details of safety related incidents, in the following format: Safety Incident/Number Category Financial Year Current Financial Year Previous Lost Time Injury Frequency Rate (LTIFR) (per one million-person hours worked) Employees Workers Total recordable work-related injuries Employees Workers No. of fatalities Employees Workers High consequence work-related injury or ill-health (excluding fatalities) Employees Workers The above question asks about the company’s Safety performance in the current and previous year. If a company has an internal Safety team, this data will be readily available, and hence requires no new systems to be introduced. Disclosing this data externally serves as an added incentive for companies to improve their safety performance and hence offer a safer workplace to its entire workforce. Since the national peers will also be disclosing this data in the same format through the BRSR, the companies can now easily benchmark their performance against their national peers and possibly share and adopt best case practices across the industry. 2. Principle 5 – Question on median remuneration across hierarchy Q 3: Details of remuneration/salary/wages, in the following format: Category Male Female No. Median remuneration/ salary/ wages of respective category No. Median remuneration/ salary/ wages of respective category Board of Directors Key Managerial Personnel Employees other than BoD and KMP Workers Governance related questions are introduced across the BRSR within Section A and B, and through mostly Leadership indicators within Principles. Under Principle 5, the framework asks for more transparency when discussing Human Rights. The question above is mandatory and asks for the median remuneration of Board members, Key managerial leaders, Employees and Workers – all categories split by gender. This is a major step in the direction of bridging the wealth divide across classes and genders (where relevant) within the country. Strong governance is important across the organisation for all financial and non-financial disclosures. Questions such as this help us see the correlation between social measures/ impact and responsible financial capital. 3. Principle 6 – Question on greenhouse gas (GHG) emissions Q 6: Provide details of greenhouse gas emissions (Scope 1 and Scope 2 emissions) & its intensity, in the following format: Parameter Unit Current Financial Year Previous Financial Year CO2 Metric tonnes of CO2 equivalent CH4 Metric tonnes of CO2 equivalent N2O Metric tonnes of CO2 equivalent Flare emissions Metric tonnes of CO2 equivalent Total Scope 1 emissions (Break-up of the GHG into CO2, CH4, N2O, HFCs, PFCs, SF6, NF3, if available) Metric tonnes of CO2 equivalent Total Scope 2 emissions (Break-up of the GHG into CO2, CH4, N2O, HFCs, PFCs, SF6, NF3, if available) Metric tonnes of CO2 equivalent Turnover (INR in crore) INR in crore Total Scope 1 and Scope 2 emissions per rupee of turnover kgCO2/Rs. Indicate if any independent assessment/ evaluation/assurance has been carried out by an external agency? (Y/N) If yes, name of the external agency. Global leaders through the Paris Agreement and the more recently concluded COP 26 have pledged to keep a global temperature rise this century well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C. Earlier this year, India also committed to achieving Net Zero emissions by 2070. In order to achieve such targets and mitigate the global risk of climate change, it is crucial to monitor our GHG emission performance and work actively towards reducing the emissions. Question 6 in BRSR Principle 6 does exactly that. It helps monitor the listed companies’ emissions and understand the emission trend in absolute values and as an intensity. This GHG data is becoming more and more crucial globally. Everyone, right from investors to regulatory authorities are asking for the same. Having these questions in a structured format helps communicate the emission performance effectively and transparently. Auditing the same helps add credibility and ensure that the data is more reliable. Monitoring and mitigation is a strong step toward achieving our national emission reduction goals. 4. Principle 6, 8 – Questions on Impact Assessments Q 1 - Principle 8: Details of Social Impact Assessments (SIA) of projects undertaken by the entity based on applicable laws, in the current financial year: Name and brief details of project SIA Notification No. Date of notification Whether conducted by independent external agency (Yes / No) Results communicated in public domain (Yes / No) Relevant Web link   A few essential indicators in Principle 6 and Principle 8 include questions regarding the Environment Impact Assessment (EIA) and Social Impact Assessment (SIA) conducted by the company. A leadership indicator in Principle 2 also asks about a Life Cycle Assessment (LCA). These studies are intended to help a company understand the impact of their business on the environment, on society and on their value chain; and (hopefully) create a more positive impact overtime. Such questions encourage companies to delve deeper into their sustainability performance and offer tools to help understand their performance or areas of improvement better. If companies don’t already conduct these studies, they can initiate such science-based studies easily within a reporting cycle. Role of Chartered Accountants We are almost certain that Chartered Accountants will be playing an important role in the adoption of sustainability-based reporting by Indian corporates. The chartered accountants will play a key role in the following areas: Strategic Stewardship & the CFO as Custodian: Sustainability is a philosophy and approach that the corporates should pursue and it will definitely be a top-driven approach. The CFO will play a dominant role in guiding the corporates in the journey of sustainability. Policies are required to be framed and adhered to and the CFOs will be a custodian of the same. In my opinion CFOs will be the key stakeholder in the emergence of sustainability based reporting. Systemic Maintenance & Non-Financial Data Depositories: One of the challenges that corporates face across the globe today is systemic maintenance of Sustainability data. Sustainability has a wide coverage from HR and Energy, to governance and accounting. Data is required to be extracted not only from financial systems but also from HR, manufacturing, marketing and various other systems, thus this poses a key challenge in having a depository and ownership. Our experience is that corporates in India as well as in matured economies like US, Europe, Australia, etc. are struggling to fix this issue. This is both a challenge and opportunity for the chartered accountants. They can play a huge role in the corporates in creating a system-based depository of data and ensure its credibility. Assurance as a Process of Governance & Firm Revenue Frontier: ESG reporting will result in humungous amount of data to be reported. This means the corporates, as a process of governance, will require assurances before reporting the data. This opens up a new avenue to the practising chartered accountants, which would be exciting as well as challenging. I will not be surprised if this constitutes a significant chunk of revenue to the firms in days to come. In Conclusion With the advent of the BRSR, we will see a significant increase in transparent disclosures regarding a company’s sustainability or ESG performance. With non-financial disclosure gaining as much traction as financial disclosures, it is important for us finance professionals to understand, comply and contribute meaningfully to this transition. Chartered accountants are well poised to play a dominating role in the emergence of the sustainability reporting era. Official SEBI References & Regulatory Links SEBI’s circular from May 2021: https://www.sebi.gov.in/media/press-releases/may-2021/sebi-issues-circular-on-business-responsibility-and-sustainability-reporting-by-listed-entities-_50097.html Annexure 1 of the circular with BRSR format: https://www.sebi.gov.in/sebi_data/commondocs/may-2021/Business%20responsibility%20and%20sustainability%20reporting%20by%20listed%20entitiesAnnexure1_p.PDF

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 53–64 (Journal pp. 169–180) SUSTAINABILITY Sustainability Reporting in case of Oil and Gas Industry: An Empirical Analysis in the context of GRI Sustainability Reporting Standards, 2016 Dr. Shikha Gupta Author is Associate Professor, Department of Commerce, Shaheed Bhagat Singh College, University of Delhi (DU). She may be reached at shikha.gupta1@sbs.du.ac.in and eboard@icai.in 🛢️ Sectoral Empirical Overview & Key Findings This empirical study investigates the sustainability disclosure practices of India’s strategically vital oil and gas sector under the Global Reporting Initiative (GRI) Standards 2016 across a three-year longitudinal window (2017-18 to 2019-20). Utilizing content analysis and unweighted binary scoring across 20 discrete indicators (economic, environmental, and social), the findings demonstrate robust awareness regarding operational impacts, led by ONGC Ltd. (95% disclosure index) and GAIL (India) Ltd. (91.67%). However, substantial transparency deficits persist in critical domains including tax transparency (GRI 207), supplier environmental screening (GRI 308), biodiversity conservation (GRI 304), labour disputes (GRI 402), and workforce diversity (GRI 405). 1. Introduction & Evolution of the Sustainability Paradigm Sustainability has emerged as an indispensable cornerstone of modern corporate governance. While its operational definitions remain multifaceted, the conceptual foundation traces back to the 1987 Brundtland Report, Our Common Future, published by the United Nations World Commission on Environment and Development (WCED). The commission defined sustainable development as progress that fulfills present human needs without compromising the capacity of future generations to meet their own requirements, resting upon three intertwined dimensions: economic viability, environmental stewardship, and social equity. From Milton Friedman’s Shareholder Primacy to Freeman’s Stakeholder Theory Classical Shareholder Primacy Model Historically enshrined in the landmark 1919 ruling Dodge v. Ford Motor Company and later championed by Nobel Laureate Milton Friedman (1970), classical agency theory asserted that the exclusive social responsibility of enterprise is profit maximization for equity owners. Expenditures on societal welfare or environmental conservation were seen as illegitimate agency costs eroding net earnings. Modern Stakeholder Primacy Paradigm Escalating externalities—climate volatility, pollution, resource exhaustion, and wealth inequality—prompted a doctrinal re-evaluation. R. Edward Freeman (1984) formulated Stakeholder Theory, defining stakeholders as any constituency affected by or affecting corporate pursuits. Long-term commercial survival demands harmonizing the rights of regulators, workers, suppliers, and communities alongside shareholders. Subsequent empirical literature (e.g., Andersen & Dejoy 2011; Laskar & Maji 2017) corroborates that rigorous sustainability disclosure enhances corporate reputational capital, mitigates class-action litigation risks, reduces capital costs, and protects long-run operating margins. The Global Reporting Initiative (GRI, 2011) defines sustainability reporting as the institutional practice of measuring, disclosing, and assuming accountability toward internal and external stakeholders regarding organizational contributions toward sustainable development. This comprehensive communication architecture encompasses three distinct communicative pillars: Environmental Communication: Disclosures detailing organizational footprints on terrestrial ecosystems, atmospheric emissions, freshwater withdrawal, biodiversity reserves, and hazardous effluents (GRI, 2012). Social Communication: Reporting regarding operational effects on human systems, including occupational safety, human capital development, fair compensation, supplier labor standards, and community engagement. Economic Communication: Disclosing macroeconomic value generation, distributed cash flows, procurement localization, capital expenditure, and regional development spillovers. 2. Global Reporting Initiative (GRI) & Institutional Evolution Headquartered in Amsterdam, Netherlands, the Global Reporting Initiative (GRI) is an independent international standard-setter providing the most widely adopted universal disclosure language for organizational sustainability impacts. Approximately 94% of the world’s 340 largest corporations across more than 100 countries utilize the GRI Standards for non-financial accountability (GRI Standards, 2021). Figure 1: Chronological Evolution of GRI Frameworks (1997–2021) 1997: GRI founded in Boston, USA. 2000: 1st version of GRI Guidelines launched. 2002: GRI G2 launched; HQ relocated to Amsterdam. 2003: Formal Organizational Stakeholder Membership launched. 2006: GRI G3 Guidelines released. 2008: Certified Training Partner Program established. 2012: Rio+20 UN Conference on Sustainable Development endorsement. 2013: GRI G4 Guidelines promulgated. 2015: UN SDGs adopted; Target 12.6 mandates reporting. 2016: Modular GRI Sustainability Reporting Standards published. 2017: Corporate reporting on SDGs with UN Global Compact. 2019: Sector Program initiated; GRI 207 (Tax) launched. 2020: GRI 306 (Waste) Standard published. 2021: Comprehensive Revised Universal Standards published. Source: Adapted from GRI Mission and History Archives (globalreporting.org) Evolution of Sustainability Reporting in India India’s regulatory landscape has systematically transitioned from voluntary guidance to enforceable statutory mandates over the past decade and a half: 2007 (RBI Advisory): The Reserve Bank of India advised scheduled commercial banks to formally account for and disclose non-financial CSR and sustainable initiatives. 2011 (MCA NVGs): The Ministry of Corporate Affairs released the voluntary National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business. 2012 (SEBI BRR Mandate): SEBI mandated mandatory Business Responsibility Reporting (BRR) for the top 100 listed entities by market capitalization. 2014 (Companies Act Amendment): Section 135 made India the first nation to mandate a statutory 2% CSR expenditure allocation for qualifying corporate entities. 2015 (BRR Expansion): SEBI expanded mandatory BRR filing obligations to the top 500 listed firms. 2021 (SEBI BRSR Framework): In May 2021, SEBI instituted the comprehensive Business Responsibility and Sustainability Report (BRSR), mandating audited ESG disclosures for the top 1,000 listed entities from FY 2022–23. While Indian participation in global reporting expanded from 34 companies in 2011 to 80 in 2012 (Times of India, 2012) and reached 334 entities by December 2020 (GRI Standards, 2021), corporate sustainability communications have historically exhibited considerable narrative divergence and lacked uniform cross-sector standardization. 3. Literature Review & Strategic Role of the Oil and Gas Sector Global academic inquiries into corporate disclosure trends indicate that organizational size, industry risk profile, regulatory scrutiny, and geographic maturity significantly dictate reporting thoroughness: Kelly (1981): Evaluated 50 Australian enterprises, confirming that market capitalization and corporate scale positively correlate with disclosure volumes. Guthrie & Parker (1990): Examined 146 annual reports across Australia, the UK, and the USA, identifying marked cross-jurisdictional disparities in disclosure scope. Bewley & Li (2000): Established that environmental disclosure volume in Canadian manufacturing firms is heavily influenced by pollution propensity, media visibility, and audit scrutiny. KPMG International Survey (2011): Revealed that while 95% of the world’s 250 largest corporations disclose sustainability information, significant reporting asymmetries exist between advanced and emerging economies. Strategic Economic Weight and Environmental Exposure: The petroleum sector represents the energetic engine of the Indian macroeconomy. Beyond providing transportation fuels and power generation inputs, its petrochemical derivatives feed pharmaceuticals, agrochemicals, polymers, textiles, construction, and electronics. According to the International Energy Agency’s India Energy Outlook 2021, India’s primary energy demand will expand to 1,123 million tonnes of oil equivalent (Mtoe) as GDP scales to USD 8.6 trillion by 2040. With 100% Foreign Direct Investment (FDI) permitted across multiple sub-segments, this extractive, carbon-intensive sector faces unmatched societal, investor, and regulatory scrutiny. 4. Research Methodology & Analytical Framework Sample Selection: The empirical study evaluates seven leading oil and gas companies listed on the National Stock Exchange (NSE 100 index): 1. Bharat Petroleum Corporation Ltd. (BPCL) 2. GAIL (India) Ltd. 3. Indian Oil Corporation Ltd. (IOCL) 4. Reliance Industries Ltd. (RIL) 5. Oil and Natural Gas Corporation Ltd. (ONGC) 6. Oil India Ltd. (OIL) 7. Hindustan Petroleum Corporation Ltd. (HPCL) Data Collection & Coding Protocol: Data was hand-collected from audited annual reports, standalone sustainability reports, and official corporate investor portals spanning three consecutive fiscal years: 2017-18, 2018-19, and 2019-20. In accordance with established content analysis conventions (Cyriac, 2013), an unweighted binary coding scheme was employed: assigning a score of 1 where a specific GRI indicator is disclosed, and 0 where absent. Table 1: Operational Parameters Contained in GRI Standards (2016) Classification Across Economic, Environmental, and Social Dimensions GRI Standard Disclosure Topic Information Scope & Core Metrics I. Economic Disclosures (GRI 200 Series) GRI 201Economic PerformanceDirect economic value generated and distributed, revenues, operating costs, employee wages, taxes paid. GRI 202Market PresenceRatios of standard entry-level wage compared to local minimum wage; proportion of senior management hired locally. GRI 203Indirect Economic ImpactsInfrastructure investments, public utility support, community transport links, healthcare facilities, technology adoption. GRI 204Procurement PracticesProportion of spending on local suppliers, micro/small/medium enterprises, and vulnerable vendor groups. GRI 205Anti-CorruptionOperations assessed for corruption risks, employee anti-corruption training, confirmed incidents and corrective actions. GRI 206Anti-Competitive BehaviourLegal actions and litigation pending regarding anti-competitive practices, cartelization, and monopoly abuses. GRI 207Tax StrategyApproach to tax governance, tax planning transparency, stakeholder engagement, transfer pricing, and incentives. II. Environmental Disclosures (GRI 300 Series) GRI 301MaterialsWeight or volume of raw materials utilized, renewable versus non-renewable components, and recycled inputs. GRI 302EnergyInternal and external energy consumption (electricity, heating, steam), energy intensity, and reduction initiatives. GRI 303Water and EffluentsTotal water withdrawal by source, water recycled, consumption intensity, and effluent discharge management. GRI 304BiodiversityOperational sites adjacent to protected biodiversity areas, ecological impact assessments, and species restoration. GRI 305EmissionsDirect Scope 1, indirect Scope 2 and Scope 3 GHG emissions, emissions intensity, and ozone-depleting substances. GRI 306WasteGeneration of hazardous and non-hazardous wastes, disposal methodologies, recycling volumes, and spill prevention. GRI 307Environmental ComplianceMonetary sanctions and non-monetary penalties for non-compliance with national environmental statutory laws. GRI 308Supplier Environmental AssessmentPercentage of new vendors screened using ecological criteria, negative screening mechanisms, and audit impacts. III. Social Disclosures: Workforce Focus (GRI 400 Series) GRI 401EmploymentTotal workforce headcounts, recruitment rates, employee turnover by age/gender, and full-time employee benefits. GRI 402Labour Management RelationsMandatory notice periods regarding operational restructuring, collective bargaining agreements, strikes, and lockouts. GRI 403Occupational Health & SafetyOccupational health management systems, incident rates, lost days, work-related fatalities, and health insurance. GRI 404Training and EducationAverage training hours per employee per annum, technical reskilling initiatives, and transition assistance schemes. GRI 405Diversity & Equal OpportunityDemographic breakdown of governance bodies and workforce (gender, age, minorities) and zero child/forced labour codes. 5. Empirical Findings: Parameter-Wise Disclosure Performance (i) Economic Dimension Performance (GRI 201 – GRI 207) Narrative Disclosure Scores (NDS) reveal that sample corporations universally disclose core Economic Performance (GRI 201: 100% compliance across all three fiscal cycles) and place prominent emphasis on Anti-Corruption governance (GRI 205: rising from 85.71% in 2017-18 to 100% in 2019-20). Conversely, Tax Strategy reporting (GRI 207) remains profoundly neglected, registering a dismal 28.57% disclosure rate in 2019-20 and only 14.28% in preceding years. Disclosure Standard 2019-20 2018-19 2017-18 NDS%Rank NDS%Rank NDS%Rank Economic Performance (201)7100.0017100.0017100.001 Market Presence (202)457.144457.144114.286 Indirect Economic Impacts (203)571.423571.423571.423 Procurement Practices (204)457.144457.144457.144 Anti-Corruption (205)7100.001685.712685.712 Anti-Competitive Behaviour (206)685.712571.423342.865 Tax Strategy (207)228.575114.285114.286 GRI Standard N Minimum (%) Maximum (%) Mean (%) Std. Error Std. Deviation 2013100.00100.00100.000.000.00 202314.0057.0042.8514.2924.75 203371.0071.0071.420.000.00 204357.0057.0057.140.000.00 205386.00100.0090.474.768.25 206343.0086.0066.6612.6021.82 207314.0029.0019.044.768.25 (ii) Environmental Dimension Performance (GRI 301 – GRI 308) Given that oil and gas extraction carries immense pollution propensity, entities exhibited near-perfect disclosure across Energy management (GRI 302: 100% mean across all years), Water and Effluents (GRI 303: 95.24% mean), and Environmental Compliance (GRI 307: 95.24% mean). Nevertheless, deep institutional blind spots remain in Supplier Environmental Screening (GRI 308: mean of only 38.10%) and Biodiversity protection (GRI 304: 66.67% mean). Disclosure Standard 2019-20 2018-19 2017-18 NDS%Rank NDS%Rank NDS%Rank Materials (301)7100.001571.433571.433 Energy (302)7100.0017100.0017100.001 Water and Effluents (303)7100.001685.7127100.001 Biodiversity (304)571.433571.433457.144 Emissions (305)685.712685.712685.712 Waste (306)685.712685.712571.433 Environmental Compliance (307)685.7127100.0017100.001 Supplier Environmental Assessment (308)457.144342.864114.295 GRI Standard N Minimum (%) Maximum (%) Mean (%) Std. Error Std. Deviation 301371.00100.0080.9511.6616.50 3023100.00100.00100.000.000.00 303386.00100.0095.245.838.25 304357.0071.0066.675.838.25 305386.0086.0085.710.000.00 306386.0071.0080.955.838.25 307386.00100.0095.245.838.25 308314.0054.0038.1015.4321.82 (iii) Social Dimension Performance: Human Capital Focus (GRI 401 – GRI 405) Within the social sphere, Occupational Health and Safety (GRI 403) achieved top ranking across all evaluated fiscal years (95.24% mean), followed closely by Employment benefits and headcount reporting (GRI 401: 90.47% mean, reaching 100% in 2019-20). Conversely, companies showed significant reluctance in disclosing sensitive Labour Management Relations indicators (GRI 402: 52.38% mean)—such as operational strike days, employee lockouts, and union dispute mechanisms—as well as workforce Diversity and Equal Opportunity (GRI 405: 38.09% mean). Disclosure Standard 2019-20 2018-19 2017-18 NDS%Rank NDS%Rank NDS%Rank Employment (401)7100.001685.711685.712 Labour Management Relations (402)571.433342.863342.863 Occupational Health & Safety (403)7100.001685.7117100.001 Training and Education (404)685.712571.432685.712 Diversity & Equal Opportunity (405)457.144228.574228.574 GRI Standard N Minimum (%) Maximum (%) Mean (%) Std. Error Std. Deviation 401386.00100.0090.475.838.25 402343.0071.0052.3811.6616.49 403386.00100.0095.245.838.25 404371.0086.0080.955.838.24 405329.0057.0038.0911.6616.49 6. Company-Wise Comparative Performance & Sectoral Rankings Aggregate disclosure scores demonstrate marked variance in sustainability reporting maturity across the peer group. Public sector upstream behemoths demonstrated substantially greater transparency and rigorous adherence to the GRI framework than their refining or downstream counterparts. Company Name Aggregate NDS Disclosure % Rank Oil and Natural Gas Corporation Ltd. (ONGC) 57 95.00% 1 GAIL (India) Ltd. 55 91.67% 2 Indian Oil Corporation Ltd. (IOCL) 51 85.00% 3 Bharat Petroleum Corporation Ltd. (BPCL) 43 71.67% 4 Oil India Ltd. (OIL) 43 71.67% 4 Reliance Industries Ltd. (RIL) 35 58.33% 5 Hindustan Petroleum Corporation Ltd. (HPCL) 22 36.67% 6 Diagnostic Evaluation of Corporate Leaders and Laggards: ONGC Ltd. secured the premier sectoral position with a 95% disclosure score, demonstrating systematic and consistent disclosure across almost all GRI topic indicators throughout the 3-year study period. GAIL (India) Ltd. followed closely in second position at 91.67%, and IOCL ranked third at 85.00%. Conversely, HPCL trailed at the bottom of the ladder with only 36.67%, exhibiting acute reporting omissions despite claiming adherence to GRI guidelines. Reliance Industries Ltd. also exhibited extensive disclosure gaps, securing fifth position with 58.33%. 7. Critical Policy Recommendations, Conclusion & Study Limitations The empirical investigation concludes that while Indian oil and gas corporations demonstrate commendable transparency regarding direct operational impacts (energy consumption, water withdrawal, basic employment figures, and code of conduct), disclosures are frequently passive, qualitative, and self-laudatory in high-risk governance domains. To establish world-class ESG credibility, corporate boards and policymakers must address five structural gaps: 1. Decoupling Energy from Output Metrics Companies must link gross energy and water consumption directly to physical output volumes to establish process efficiency ratios and publish tangible decarbonisation milestones. 2. Mandatory Tax Transparency (GRI 207) Regulatory authorities must mandate country-by-country tax reporting, transfer pricing documentation, and disclosures of fiscal incentives availed to eradicate aggressive tax dodging. 3. Upstream & Downstream Supply Screening Enterprises must implement formal negative and positive environmental screening for vendor onboarding (GRI 308) rather than confining audits exclusively to direct facilities. 4. Biodiversity Impact Accounting (GRI 304) Given the proximity of offshore drilling and refinery facilities to ecologically fragile marine and forest habitats, rigorous biodiversity restoration data must be reported. 5. Unflinching Labour Relations Disclosures Corporations must promptly report industrial disputes, operational strikes, lockouts, formal grievance redressal mechanisms, and affirmative child/forced labour audit certifications. Limitations of the Study: The study evaluates disclosure completeness based strictly on the presence or absence of disclosures under the GRI Standards 2016 framework via binary content analysis. It assesses disclosure compliance rather than independently auditing the underlying technical veracity or performance quality of the reported environmental data. Future empirical research should expand evaluations across international benchmarking frameworks including SASB, TCFD, and SEBI BRSR. Scholarly & Regulatory References Andersen, M. L., & Dejoy, J. S. (2011). Corporate social and financial performance: the role of size, industry, risk, R&D, and advertising expenses as control variables. Business and Society Review, 116(2), 237–256. Bebbington, J., & Gray, R. (2001). An account of sustainability: failure, success and a reconceptualization. Critical Perspectives on Accounting, 12(5), 557–587. Bewley, K., & Li, Y. (2000). Disclosure of Environmental Information by Canadian Manufacturing Companies: A Voluntary Disclosure Perspective. Advances in Environmental Accounting & Management, 201–226. Brundtland, G. H. (1987). Report of the World Commission on Environment and Development: Our Common Future. United Nations. Global Reporting Initiative. (2021). Consolidated Set of GRI Standards, 2021. Available at: https://www.globalreporting.org/standards/ Global Reporting Initiative. (2016). Consolidated Set of GRI Sustainability Reporting Standards, 2016. Available at: GRI Standards 2016 Archive Cyriac, S. (2013). Corporate sustainability reporting practices: a comparative study of practices by Indian and European companies. The Macrotheme Review, 2(6), 38–46. Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Pitman, Boston. Global Reporting Initiative. (2021). GRI Mission and History. Available at: https://globalreporting.org/about-gri/mission-history/ Global Reporting Initiative. (2011). G3.1 Sustainability Reporting Guidelines. GRI: Amsterdam. International Energy Agency. (2021). India Energy Outlook 2021. Available at: https://www.iea.org/reports/india-energy-outlook-2021 Global Reporting Initiative. (2012). Global Reporting Initiative Overview. Available at: https://www.globalreporting.org/Pages/default.aspx John, S. (2012, December 11). 80 Indian companies are now doing sustainability reporting. The Times of India. Kelly, G. J. (1981). Australian social responsibility disclosure: some insights into contemporary measurement. Accounting & Finance, 21(2), 97–107. Laskar, N., & Maji, S. G. (2017). Corporate sustainability performance and firm performance: evidence from India and South Korea. International Journal of Corporate Strategy and Social Responsibility, 1(2), 118–140. KPMG. (2011). KPMG International Survey of Corporate Responsibility Reporting 2011. KPMG International, Publication No. 110973.

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 70–72 (Journal pp. 186–188) COMMUNICATION How to Become a Global Thought Leader – Speaker and Writer CA. (Dr.) Rajkumar S. Adukia Author is member of the Institute. He may be reached at drrajkumarsadukia@gmail.com and eboard@icai.in Literary Epigraph “We know what we are but know not what we may be.” — Hamlet Core Philosophy Our thoughts are very powerful as they shape who we become and who we are. A powerful idea and motivation can lead a person to achieve their goals. That is what exactly a thought leader does. What is Thought Leadership? Every day we hear a lot about thought leader in the TV, magazines, social media. What does this buzzword actually mean? It is nothing but a simple thing. A thought leader is one who works for passion, in the field of their expertise. Having knowledge and expertise is one thing and sharing them among fellow aspirants is another thing. When we share our knowledge, it helps to deepen our knowledge and ingrains what we know. “Thought leadership is the expression of ideas that demonstrate you have expertise in a particular field, area, or topic. Thought leaders share their thoughts.” A thought leader drops an idea into a mind to learn more about a particular interest, then, conducts thorough research and gathers in-depth information. After getting the knowledge, he shares that idea with the public by becoming a speaker or writer or express those ideas with the help of social media platforms. What is Thought? & The Growth Mindset The Mechanism of Thoughts Our thoughts shape our life. According to research conducted around 80% of our thoughts are negative. And we have around 12,000 - 50,000 thoughts daily. Growth Mindset How to become a Global and most powerful thought leader? For knowledge may be power but it is much more powerful when it is shared! Hence yet again we impressed upon the thought that if we know something we should aggressively share our knowledge. “If your actions inspire others to dream more, learn more, do more and become more, you are a leader.” Eleven Action Steps to Become an Effective and Powerful Thought Leader The following are the sequential and strategic steps to establish oneself as an effective and powerful thought leader: 1. Understanding our area of passion: Practicing an activity that brings us joy can benefit our professional and personal life. If we are enthusiastic about a concept or exercise, then we may have discovered our passion. A passion is something that holds significant value for you or an activity that we enjoy doing. 2. Get professional expertise: Focus on what we know best and how we can get best from the experts. 3. Create content: There are ideas and matter to create content all around us. We must enjoy while creating the content. We must disrupt our space with something new and innovative. Every good content-marketing strategy begins with a plan. It can be flexible and take minutes to create, but it exists. 4. Speaking in public like on TV and seminars, etc.: Preparation and practice are key. We must start speaking in front of audience. A thought leader is one who expresses their ideas by way of public speaking. 6. Start writing and publish a book: It is another mode of expressing views or what we call thoughts. 6. Start online publication: It can be done through social media platforms, magazines and join various online groups. 7. Always provide high-quality content. High standards and rigor ensure enduring credibility and reader loyalty. 8. Understand how videos can be used: We can reach out to people with the help of videos that convey the knowledge. 9. Don’t limit ourselves: We must not limit ourselves. In fact, we must explore our ideas and spread it to people at large. 10. Create a good team: Only good teamwork can make us possible to become a thought leader. For any successful business or entrepreneur, good teamwork is required. 11. Create networking: Networking is also equally important for reaching out our ideas and thought to the public at large. Suppose we started writing or we want to become speaker, it is important for the public to know about us. It can be possible with networking which can be enhanced with the use of social media, which is discussed in the article. Become a Speaker: Principles of Engagement & Influence Speaking has its own importance. It requires various skills and knowledge before speaking in public. Becoming an effective public speaker is not rocket science. Anyone can become a speaker if they have the passion to become that. Not only for speaker, in fact, in any work once we have a passion to become anything, we can become that. An effective speaker needs to be able to get his or her information across while also keeping the audience entertained and engaged. LOVE + COMMITMENT + PASSION = DESIRE Connecting Through the Audience’s Interest Talking in terms of the other person’s interest is very important when we want to make people like us. Always try to ask what he or she may be more interested in. Most of the people open up when we start our conversation in terms of their interest. In fact, those who talk less, started participating in the conversation when we talk in their area of interest. The royal road to a person’s heart is to talk about the things he or she treasures most. In order to get other people involvement, we need to first arouse some excitement and enthusiasm in them. Which can be developed by talking in terms of their interest. Practical Illustration: For example—when our audiences are factory owners, we should talk more about labour, environment, production capacity. Then we may ask some questions like how they are managing productivity, about the machines. Then we can suggest some ideas to cost cutting, tax savings etc. Become an Expert Writer Writing is an art which anyone can learn by practicing it with dedication and discipline. The translation of human experience into an artful literary presentation is the art of writing. In order to become a writer, one must first realise their passionate area about which they want to write. 1. Personal Enjoyment Writers: Writers who write simply for personal enjoyment and expression of inner sentiments. 2. Professional Writers: Writers who write professionally to impart authoritative insight, establish leadership, and solve industry problems. We must figure out what we want to write. In fact, we must write what we want to read. We must understand what our reader wants to read. The James Bond Metaphor We are the James Bond of our life. Just as he has luxurious equipment and vehicles in his films, we too are given all the high-profile gadgets in our life - our human existence, our brain; our sense of imagination; our emotions; our abilities - to achieve whatever we desire. However, these gadgets are worthless unless we know what we desire. Marketing Strategies for Writer – Selling Yourself Market ourself well. How we perceive ourself to the outside world will determine how people perceive us, our idea, our belief in our idea and the success of it. Our first impression will make a lasting impression. To be successful we have to market our idea, our dream, our unwavering confidence in our goal, our personal services. The Multiplier Power of Knowledge Sharing Having knowledge and expertise is one thing and sharing them among fellow aspirants is another thing. When we share our knowledge, it helps to deepen our knowledge and engrains what we know. Powerful social media tools such as Facebook, Linked-in, Gmail, YouTube, Blogs, websites, Twitter, WhatsApp, Instagram, e-articles, etc. allow us to share our knowledge and expertise and helps in connecting to people even though they are living miles apart. “For knowledge may be a power but it’s much more powerful when it is shared! Hence yet again we impressed upon the thought that if we know something we should aggressively share our knowledge.” Expanding Horizons: Global, National & State Non-Traditional Practice Areas To truly establish global thought leadership, Chartered Accountants and finance professionals must look beyond conventional compliance and expand their expertise across non-traditional practice frontiers at global, national, and state levels: A. Global Non-Traditional Areas of Practice 22 Domains Internal Control measures: Design, testing, and operational evaluation of robust internal controls. Forensic services: Financial forensics, fraud investigations, and litigation support. Enterprise Risk management: Comprehensive enterprise-wide risk assessment and mitigation framework. Human Resource Management: Strategic talent structures, compensation models, and HR governance. Cyber security, Digital economy and data protection services: Data privacy advisory, GDPR/DPDP readiness, and digital security audits. E-commerce and Start-ups: Structuring, unit economics, regulatory roadmaps, and venture advisory. Global funding: Cross-border fundraising, debt syndication, private equity, and venture capital. Recovery mechanism guidance: Insolvency and Bankruptcy, SARFAESI, Criminal Actions, TORT etc. Drafting of business and legal documents: Contracts, joint venture agreements, shareholder agreements, and master service agreements. Outsourcing: Accounting, drafting, and cross-border knowledge process outsourcing. IFRS and country specific GAAPs, IPSAS: International financial reporting convergence and public sector standards. Opportunities under financial crimes and laws: PMLA (Prevention of Money Laundering Act), Benami transactions, Black money, and Fugitive Economic Offenders Act. Competition laws: Anti-trust compliance, market dominance advisory, and CCI proceedings. Corporate Governance & Independent Director: Board advisory, stewardship roles, and compliance oversight. CSR (Corporate Social Responsibility): Policy formulation, project evaluation, impact monitoring, and reporting. Climate change mitigation - carbon credit: Carbon accounting, sustainability audits, and emission credit trading. Industry specific specialisation: Accelerating and architecting business growth within specialized industry sectors. ADR – Arbitration, Mediation: Alternative Dispute Resolution mechanisms, conciliation, and settlement facilitation. Valuation services: Business, equity, intangible assets, and statutory valuations. IPR Advisory Services: Intellectual Property Rights protection, patents, trademarks, and copyright monetization. International trade - Global import–export services: Customs advisory, EXIM policy, transfer pricing, and supply chain trade compliance. Professional Coaching & Motivational Speaking: Coach for self development, motivational speaker for topics like time management, emotion management, and personality development. B. Non-Traditional National Areas 16 Domains Presentation before Tribunals: Dedicated business tribunal practice spanning 30 plus tribunals across India. A to Z of MSME, non-MSME: Registration, enterprise classification, delayed payment remedies, and statutory benefits. Mergers and Amalgamation: Corporate restructuring, demergers, arrangements, and NCLT approval schemes. Opportunities under Succession Laws: Estate planning, family trusts, will drafting, and wealth transmission. Hindu laws, family laws: HUF matters, partitions, settlements, and family property arrangements. NBFCs, Nidhi company: Registration, prudential norms, RBI compliance, and operational governance. Aatma Nirbhar Bharat projects: Advisory on self-reliant India initiatives, PLI schemes, and industrial incentives. Social Media consultancy services: Digital brand building, outreach strategy, and online professional communication. Subsidies schemes of nation: Central government capital subsidies, interest subvention, and export incentives. Coaching: Mentoring CA, CS, CMA, and law students for professional excellence. Finance for non-finance executives: Tailored executive education and capacity building programs. Virtual legal counsel / CFO: Fractional executive leadership, outsourced CFO services, and board guidance. Agriculture and rural development: Agritech, FPOs (Farmer Producer Organizations), rural credit, and agro-processing schemes. Sustainable economic development: Sustainable business modeling and ESG alignments. Opportunities under Company law: Oppression and mismanagement litigation, winding up, Liquidation, and corporate revival. C. Non-Traditional State Areas 7 Domains Cooperative Societies: Registration, governance, state cooperative audits, and elections. Labour laws: State-specific welfare fund compliances, standing orders, and occupational safety codes. Stamp Duty: State stamp acts, adjudication, property deed duties, and merger stampings. Real Estate- RERA: Real Estate Regulatory Authority project registrations, quarterly filings, audits, and homebuyer dispute representation. Charitable Laws: State public trust acts, registration with Charity Commissioner, and charitable governance. Chit funds State laws: State chit fund regulations, licensing, and compliance oversight. Subsidies schemes of states: State industrial policies, SGST reimbursements, power tariff concessions, and stamp duty exemptions. Summary Takeaway Becoming a global thought leader, public speaker, and authoritative author is rooted in deep passion, disciplined writing, and selfless knowledge sharing. By viewing ourselves through the lens of boundless capability, learning to speak in terms of our audience’s deepest interests, and aggressively exploring these emerging global, national, and state non-traditional practice domains, professionals can transform their careers and inspire countless others to dream, learn, do, and become more.

The Chartered Accountant • Journal of ICAI August 2022 • Vol. 71 • No. 2 • pp. 73–75 (Journal pp. 189–191) MSME Visualising the MSMEs of today into Unicorns of tomorrow CA. Alka Adatia Author is a member of the Institute of Chartered Accountants of India (ICAI). She may be reached at alkaadatia@gmail.com and eboard@icai.in 🚀 Catalyzing India’s Micro, Small & Medium Enterprises India’s small entities—popularly known as Micro, Small and Medium Enterprises (MSMEs)—have intensified their recognition in recent times through their expansive geographic diversity, production scale, and wide-ranging goods and services meeting both domestic and international market needs. Serving as vital ancillary suppliers to major industries, MSMEs represent the backbone of employment generation and inclusive economic progress. 1. Macroeconomic Significance & Udyam Registration Dynamics According to Ministry of MSME data as of 16 May 2021, India hosts approximately 6.3 crore MSMEs spanning both manufacturing and services segments. This dynamic sector delivers immense macroeconomic value across several foundational pillars: ~30% Contribution to India’s GDP Through domestic and international trade flows. 45% Manufacturing Output Supplying components, tools, and industrial goods. 48% Share of National Exports Integral merchandise and export earnings generator. 11 Crore Citizens Employed Hired across nearly 6.33 crore enterprise units. Udyam Registration Metrics & Gender Disparity: Under the Ease of Doing Business initiatives, 78.16 lakh MSMEs had registered on the centralized government Udyam portal since its inception on 1 July 2020. However, parliamentary data presented by MSME Minister Narayan Rane in the Rajya Sabha (as of 22 March 2022) revealed an acute gender gap: only 13.68 lakh MSMEs were women-led, compared to 63.77 lakh enterprises led by men, underscoring the urgent imperative for targeted gender inclusion in entrepreneurial credit. 2. MSMEs in a New Avatar: The Revised Composite Classification (2020) The original classification framework enacted under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, rested strictly on investment thresholds in plant, machinery, or equipment, maintaining an artificial bifurcation between manufacturing and service units. To eliminate disincentives against business expansion and align with changing economic realities, the Government of India overhauled this framework under the Aatma Nirbhar Bharat package on 13 May 2020. Effective from 1 July 2020, a unified composite criterion combining Investment in Plant & Machinery/Equipment and Annual Turnover was notified, eliminating the distinction between manufacturing and services: Enterprise Classification Micro Enterprise Small Enterprise Medium Enterprise Investment Limit Investment < Rs. 1 Crore Investment < Rs. 10 Crore Investment < Rs. 50 Crore Turnover Limit Turnover < Rs. 5 Crore Turnover < Rs. 50 Crore Turnover < Rs. 250 Crore Applicable Sector Composite Framework: Unified Across Both Manufacturing & Services Notwithstanding these structural enhancements and pandemic relief interventions (including sovereign credit guarantees, concessional liquidity facilities, and statutory moratoria), MSMEs suffered severe disruptions through inventory lockdowns, working capital exhaustion, and payment logjams. These vulnerabilities brought two long-standing systemic barriers into sharp relief: Financial Illiteracy and the Acute Credit Gap. 3. The Dual Structural Bottlenecks: Financial Illiteracy & The $380 Billion Credit Gap (A) Financial Illiteracy & Capital Misallocation Financial literacy represents the essential cognitive competence and intellectual capacity required to execute sound budgeting, working capital management, financial forecasting, and investment decisions. Conversely, financial illiteracy is the inability to navigate commercial capital structures. Early-stage entrepreneurs typically concentrate their limited bandwidth on production, marketing, and vendor acquisition while paying negligible attention to unit economics or debt service capabilities. Numerical Case Study: The Lethal Cost-of-Debt Trap (Company A) Year 1 Baseline: Sales revenue = Rs. 25 Lakh; Cost of raw materials, direct labour, and expenses = Rs. 20 Lakh. Profitability Profile: Gross Margin = 20% (Rs. 5 Lakh); Profit Before Interest & Tax (PBIT) = 10% (Rs. 2.5 Lakh). Growth Phase: Sales expanded at a consistent 5% year-on-year trajectory for three consecutive financial years. Year 4 Financing Decision: To fuel continued expansion, the enterprise secured working capital debt from an NBFC at an annual interest rate of 24%. Fatal Outcome: Because the cost of borrowed finance (24%) drastically exceeded the operating return on capital (10% PBIT), the enterprise suffered compounding cash losses every subsequent year despite rising top-line sales. Empirical startup research (Forbes / Yohn, 2019) corroborates this vulnerability: 29% of startups collapse due to cash depletion, and 18% fail due to improper product costing and pricing—meaning that 47% of all enterprise failures stem directly from the founders’ inability to manage financial flows. (B) The $380 Billion Credit Gap: Demand vs. Supply Frictions The MSME credit gap represents the structural deficit between the total borrowing demand of creditworthy enterprises and the actual formal credit deployed by institutional financiers. The World Bank estimates India’s MSME credit gap at a staggering USD 380 Billion, driven by severe friction across both demand and supply channels: Demand-Side Impediments (Borrowers) Informal Operations: High reliance on unrecorded cash transactions without audited balance sheets. Tax Non-Filing: Substantial proportions of sole proprietorships lack formal current accounts and fail to file ITR or GST returns. Excessive Documentation: Intimidating paperwork, multiple branch visits, and prolonged credit approval turnaround times. Under-Sanctioning: Approved loan limits consistently fall far below actual working capital requirements. Supply-Side Impediments (Bankers) Information Asymmetry: Absence of verifiable accounting trails, structured credit histories, and tax documentation. Collateral Deficit: Inability of micro-units to pledge unencumbered immovable property or third-party guarantees. High Risk Perception: Formal commercial banks categorize small enterprises as high-risk, non-viable underwriting exposures. Underwriting Inefficiencies: Traditional underwriting processes are too costly to originate small ticket-size business loans. 4. Digital Inclusion, Neo Banks & The Phygital Lending Revolution Demonetisation, the post-pandemic digital migration, and near-universal penetration of 4G-enabled smartphones have fundamentally transformed credit delivery across India. This technological evolution has birthed the Phygital or Hybrid (Physical + Digital) financial intermediation model, blending human trust with algorithmic speed. Neo Banks & FinTech Integration: Bridging the Credit Abyss Neo banks—digital-only financial technology entities operating without brick-and-mortar branch overheads—partner with scheduled commercial banks to distribute banking services through low-cost, automated platforms. Coupled with specialized Non-Banking Financial Companies (NBFCs), these agile lenders are dismantling underwriting bottlenecks by leveraging cash-flow-based lending algorithms, electronic invoicing verification, and instantaneous digital KYC. Omni-Channel Customer Experience: Seamless credit access requires multi-channel availability—combining rapid mobile app approvals with relationship-driven contact via telephone or localized touchpoints for complex transactions. 5. Fraud Risk Management & Continuous Alternative Data Monitoring While emergency pandemic credit relief and digital lending expansions delivered vital liquidity, they simultaneously introduced severe systemic credit and operational hazards. Findings from the Deloitte India Banking Fraud Survey (Edition IV, 2021) revealed an alarming supervisory lapse: approximately 51% of surveyed banks did not examine MSME loans in their continuous post-disbursement monitoring processes. The Peril of Unchecked Digital Credit: Unmonitored credit lines expose lending institutions to catastrophic fraud risks arising from borrower non-willingness to repay, fund diversion, and fraudulent enterprise closures. Without ongoing surveillance, frictionless, paperless, and non-collateralized loans risk rapidly deteriorating into Non-Performing Assets (NPAs). Intelligent Credit Surveillance via Alternative Data Integration Pioneering Continuous Post-Disbursement Fraud Risk Assessment Governance & Independent Fraud Auditing Instituting specialized, independent fraud risk assessment units across four core operational pillars: comprehensive governance, proactive prevention, early automated detection, and rigorous regulatory reporting. Alternative Data Streams for Real-Time Underwriting Continuously analyzing non-traditional datasets including: utility bill payment regularity, commercial lease consistency, insurance premium histories, logistics and travel movements, real estate filings, GST return matching, and e-commerce merchant rating behaviors. 6. Conclusion: From Micro Enterprises to Tomorrow’s Unicorns India’s journey toward becoming a multi-trillion-dollar economic superpower depends fundamentally on converting today’s promising MSMEs into high-growth, high-valuation enterprises. Small businesses possess an inherent agility that allows them to pivot and innovate far faster than legacy corporate conglomerates. The Formula for Exponential MSME Scaling: By mastering financial literacy, maintaining rigorous unit economics, adopting digital bookkeeping, and leveraging alternative-data credit mechanisms through neo banks and progressive lenders, India’s micro, small, and medium enterprises can overcome historical capital shortages and proudly emerge as the next unicorns leading India’s global economic resurgence. Key References The Economic Times (2020), MSME sector created 11 crore jobs in India: Nitin Gadkari: Economic Times MSME Report Financial Express (2022), MSME EoDB: Govt MSME registrations on Udyam portal to touch 1-crore mark soon: Financial Express Udyam Milestone Press Information Bureau (2020), Upward Revision of MSME Definition under Aatma Nirbhar Bharat: PIB Press Release PRID 1628925 Ministry of Micro, Small and Medium Enterprises, Know About MSME: https://msme.gov.in/know-about-msme Forbes (2019), Denise Lee Yohn, Why Start-Ups Fail: Forbes Startup Failure Analysis Financial Express (2020), India’s answer to its $380 billion MSME credit gap lies in these type of lenders: Financial Express Credit Gap Report PricewaterhouseCoopers (PwC India, 2019), FinTech for the Underserved: PwC FinTech Report CNBC-TV18 (2018), Disruptive digital tech threat keeps me awake: Uday Kotak: CNBC-TV18 Digital Disruption The Economic Times (2021), Explained: Neo banks, the next evolution of banking: Economic Times Neo Banks Analysis Deloitte Touche Tohmatsu India (2021), India Banking Fraud Survey - Edition IV: Deloitte Banking Fraud Survey IV

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 27–32 Special Write-Up Building a self-reliant and globally competitive nation – Pandemic and beyond Dr. V. Anantha Nageswaran Chief Economic Advisor, Ministry of Finance, Government of India Correspondence: anantha.n@nic.in and eboard@icai.in 🌐 Strategic Vision & Macroeconomic Policy Direction The ongoing geopolitical crisis has heightened the uncertainty clouding the global macroeconomic and financial landscape even as the world economy struggles to recover from the debilitating impact of the pandemic. The Indian economy too is not immune to global disturbances and global growth slowdown in the near term. However, our preparedness to handle the challenge through self-reliance, resilience, innovation, and transformation places us in a relatively better position. 1. Pre-Pandemic Baseline & Calibrated Crisis Response Prior to the outbreak of the pandemic, India’s growth trajectory over the six-year period from 2014-15 to 2019-20 had been characterised by robust macroeconomic stability, with real GDP growth averaging 6.8 per cent. This sustained expansion was significantly higher than that achieved by any comparable peer group, across both advanced economies and emerging markets. Since early 2020, the COVID-19 pandemic thrust economies across the globe, including India, into deep contraction. Faced with unprecedented uncertainty at the onset of the health crisis, policymakers were left with no historical template or manual to navigate the shock. During the acute phases of the crisis, both national healthcare infrastructures and human endeavours were stretched to their outer limits. -6.6% FY 2020-21 Contraction Substantially narrower than initial pessimistic projections. +8.9% FY 2021-22 Rebound Growth Completed full recovery beyond pre-pandemic FY 2019-20 output. 7.2% – 8.2% FY 2022-23 Growth Forecast Consensus range projected by the RBI and the IMF. US $596 Bn Foreign Exchange Reserves Formidable cushion shielding external sector against shocks. The overall sharp rebound and recovery of the Indian economy is deeply reflective of the nation’s innate structural resilience. High-frequency economic indicators consistently confirm a moderately strong, broad-based recovery. India continues to preserve its status as one of the world’s most compelling investment destinations. Looking ahead, growth prospects for the decade up to 2030, anchored by the Government’s strategic roadmap under Vision India@2047, offer profound reassurance. 2. Phase 1: Protecting Lives, Emergency Safety Nets & The Vaccination Miracle When the initial viral waves struck in early 2020, the immediate governmental priority centred uncompromisingly on preserving human lives through emergency policy interventions and expansive, targeted social safety nets: Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY): Constituted the world’s largest food security operation, providing free food grains to over 80 crore vulnerable citizens to eradicate pandemic hunger. Targeted Direct Cash Transfers: Immediate liquidity support deposited directly into bank accounts, notably empowering female account holders under the Pradhan Mantri Jan Dhan Yojana (PMJDY) and destitute populations. Emergency Credit Line Guarantee Scheme (ECLGS): Extended 100% sovereign credit guarantees on collateral-free emergency loans to Micro, Small, and Medium Enterprises (MSMEs), protecting viable businesses from insolvency and mass layoffs. Insolvency & Bankruptcy Code (IBC) Moratorium: Proactively suspended Sections 7, 9, and 10 of the IBC to shield corporate debtors and small enterprises from being forced into liquidation amidst temporary operational paralysis. The Decisive Role of the National Vaccination Programme Over and above fiscal liquidity, India’s domestic vaccination initiative played the critical role in minimising loss of human lives, restoring public confidence, facilitating the seamless resumption of commerce, and containing sequential output contractions during recurrent waves. It is easy to overlook the counterfactual: what economic devastation would have ensued had India’s vaccination drive failed? India’s vaccination execution stands as an extraordinary public administration triumph that deserves systematic documentation and international study for future global crisis management. 3. Phase 2: Supply-Side Architecture vs. Unchecked Demand Management The defining philosophical hallmark of India’s economic management during the pandemic was its steadfast refusal to adopt indiscriminate, debt-fueled consumption pump-priming. While many advanced nations engaged in excessive monetary expansion that subsequently triggered multi-decade high inflation, India centred its strategy on AatmaNirbhar Bharat—anchored in structural supply-side reforms and public investment: The Double-Barrelled Supply-Side Stimulus Infrastructure & Industrial Capacity Launch of PM Gati Shakti National Master Plan for multimodal connectivity, transformative Production Linked Incentive (PLI) schemes across 14 manufacturing sectors, and aggressive public capital expenditure outlays. Privatisation & Market Rationalisation Landmark privatization of Air India, notification of the New Public Sector Enterprise (PSE) Policy, execution of the National Asset Monetisation Pipeline (NMP), and progressive labour law codification. Fiscal Benchmark Budgeted Capital Outlay Capex-to-GDP Ratio FY 2019-20 (Pre-Pandemic Baseline) ~Rs. 3.36 Lakh Crore ~1.6% of GDP FY 2021-22 (Rebound Year) Rs. 5.54 Lakh Crore ~2.5% of GDP FY 2022-23 (Post-Pandemic Acceleration) Rs. 7.50 Lakh Crore 2.9% of GDP (Nearly 2x FY20) Capital expenditure delivers a substantial multiplier effect across industrial ecosystems. As the Chief Economic Advisor notes, "Economic growth, in the end, is the best guarantor of fiscal health." Concurrently, tax rate rationalization and compliance reforms generated record gross tax collections of Rs. 27 lakh crore in FY ending March 2022, demonstrating that tax buoyancy follows formalization and growth. 4. Structural Deregulation, Ease of Doing Business & The Audit Paradigm Prior to the pandemic, foundational reforms such as the Goods and Services Tax (GST) had unified fragmented state markets into a seamless national market, while the Insolvency and Bankruptcy Code (IBC) provided an orderly mechanism for unviable capital reallocation. Building on these foundations, the Government executed extensive micro-level process deregulations: Key Administrative & Statutory Process Reforms: Public Procurement & Drones Liberalisation: Sweeping liberalization of geospatial and drone technologies, paired with transparent, digital public e-procurement through the GeM portal. Decriminalisation of Minor Offences: Comprehensive decriminalisation of technical, non-fraudulent company law defaults to foster an environment of commercial trust. Faceless Tax Administration: Expansion of faceless assessments and appeals to eliminate discretion, administrative friction, and physical compliance burdens. Income Tax Audit Threshold Expansion: Significantly raised the turnover threshold for compulsory tax audit under Section 44AB for small and medium enterprises, freeing small entrepreneurs from procedural friction. Transition from Mandatory GST Audits to Self-Certification: Abolished the mandatory requirement of chartered accountant-certified annual GST audits (Form GSTR-9C) for enterprises with turnover above Rs. 2 crore, substituting it with self-certification by businesses with turnover above Rs. 5 crore. Contextual Analysis on GST Self-Certification and ICAI Representations: Addressing the policy shift directly in the ICAI journal, Dr. Nageswaran observes: "Notwithstanding the objection to this move raised by ICAI, this recourse to self-certification and declaration by businesses will go a long way in simplifying GST processes, encouraging GST compliance resulting in easier business conditions and automation." This underscores the overarching government thrust toward trust-based governance, digital self-verification, and systemic compliance automation. 5. The Twin Balance Sheet Turnaround & Private Credit Rebound Throughout the previous decade (2010-2020), India’s economic growth was constrained by the twin balance sheet problem—overleveraged corporate conglomerates on one side, and distressed bank balance sheets impaired by legacy Non-Performing Assets (NPAs) on the other. A systematic second-half decade recapitalisation drive and resolution process transformed this structural drag into an engine of growth: Corporate Sector Deleveraging Indian corporates systematically retired high-cost debt, repaired debt-equity ratios, and accumulated substantial retained earnings. Today, corporates possess pristine balance sheets and are willing and ready to borrow for capacity expansion. Banking System Clean-Up & Solvency Aggressive NPA provisioning, public sector bank recapitalisation, and IBC resolutions restored capital adequacy ratios. Commercial banks now possess strong capital buffers and are willing and eager to lend. This turnaround is already evident in high-frequency financial indicators: domestic bank credit growth accelerated to 9.6 per cent at end March 2022, compared to 5.6 per cent at end March 2021. Managing Global Tightening & Preventing Private Sector Crowding-Out: As central banks across advanced economies aggressively hike interest rates, External Commercial Borrowings (ECBs) now carry severe interest rate and exchange rate risks. Consequently, Indian corporations are pivoting back to domestic bank credit. In this environment, the Government will maintain vigilant surveillance over sovereign market borrowings in FY 2022-23 and beyond to prevent crowding out private sector capital expenditure plans. Furthermore, fiscal integrity has been reinforced through strict conservatism and transparency: "What you see is what you get with India’s fiscal estimates now." 6. Digital Public Infrastructure, Direct Benefit Transfers & The FinTech Unicorn Boom India’s low-cost, population-scale digitalisation has become the foundational bedrock of a modern, egalitarian economy, fundamentally improving the ease of living for citizens across all income strata: 1. Aadhaar (Launched 2010) World’s Largest Digital Identity Platform First digital public good authenticating individual legal identity at population scale. 2. UPI (Launched 2016) World’s Largest Digital Payments Rails Revolutionised instant, low-cost retail payments across every corner of India. 3. Co-WIN Platform World’s Largest Vaccination Platform Orchestrated billions of digitized doses, verifiable certifications, and logistics. Pradhan Mantri Jan Dhan Yojana (PMJDY) & Direct Benefit Transfer (DBT) Metrics: Rs. 21.7 Lakh Cr Cumulative DBT Transferred Directly to beneficiaries up to 31 March 2022. >45 Crore Jan Dhan Accounts Opened 85% currently active and operative. Rs. 1.68 Lakh Cr Total Deposit Balances Average deposit Rs. 3,723 (3x since 2015). 31.64 Crore RuPay Cards Issued Issued to PMJDY holders till April 2022. Global FinTech Dominance & The Unicorn Milestone India commands the highest FinTech adoption rate in the world at 87%, towering above the global average of 64%. Bolstered by more than 68,000 DPIIT-recognised startups, India has converted digital innovation into commercial scale: Unicorn Birth Rate: Today, 1 out of every 10 unicorns globally is born in India. Century of Unicorns: As of 5 May 2022, India reached a milestone of 100 unicorns with a cumulative valuation of $332.7 Billion. Post-Pandemic Acceleration: 44 unicorns were minted in 2021 alone (valued at $93 Billion), followed by 14 unicorns in the early months of 2022 (valued at $18.9 Billion). FinTech accounts for ~20 unicorns, with ~43% created post-COVID. Democratizing E-Commerce: ONDC & The India Stack The next digital frontier is the Open Network for Digital Commerce (ONDC), an open-source, community-led protocol designed to break monopolistic digital commerce silos. By digitally unbundling platforms, ONDC empowers millions of MSMEs, neighborhood kiranas, and consumers to transact across neutral digital rails. Central to this transformation is India Stack, which returns data sovereignty to consumers. In the absence of open public rails, digital footprints become monopolized by proprietary closed ecosystems. India Stack equips citizens and small businesses to securely share verifiable personal data, dismantle information asymmetries, establish creditworthiness without physical collateral, and access affordable financial services. 7. Navigating Global Headwinds, Inflation Expectations & Energy Transition Notwithstanding domestic structural strength, the macroeconomic task ahead remains formidable. The global economy faces synchronised stagflationary pressures. The International Monetary Fund (IMF), in its April 2022 World Economic Outlook, downgraded global growth forecasts from 6.1% in 2021 to 3.6% in 2022 and 2023, observing: “The economic effects of the war are spreading far and wide – like seismic waves that emanate from the epicentre of an earthquake – mainly through commodity markets, trade, and financial linkages.” As Dr. Nageswaran cautions, "India is not an island in this globally connected world." Policymakers must confront critical macroeconomic sensitivities: Anchoring Inflation Expectations Persistently elevated crude oil, gas, and edible oil prices create collateral risks of de-anchoring domestic inflation expectations. Once de-anchored, inflation becomes self-fulfilling and destructive to capital formation, requiring synchronized monetary and fiscal vigilance. Energy Security & Import Substitution Accelerated substitution of imported crude oil by transitioning to a gas-based economy, aggressive scaling of 20% ethanol petrol blending, compressed biogas (CBG), biodiesel, refinery efficiency optimization, and green hydrogen financing. 8. Conclusion & The Road to 2047: Transcending Silos & Embracing Competition Reflecting on India’s post-millennium macroeconomic trajectory, Dr. Nageswaran provides a vital historical perspective: the high growth achieved in the first decade of the 2000s proved unsustainable because it was built on an artificial investment and credit boom. Consequently, the second half of the 2010s had to be spent painfully cleaning up financial and corporate balance sheets. Today, macroeconomic and financial stability has been painstakingly reconstructed. Preserving this hard-won stability requires active stewardship not merely from the government, but across every professional and commercial constituency: A Call to Professionals: Chartered Accountants, Lawyers & Industry Leaders The responsibility for securing India’s economic future rests heavily upon commercial leaders and professionals—accountants, lawyers, resolution professionals, and medical practitioners. They must abandon narrow siloed thinking and immediate self-interest to align with long-term national priorities. There is no higher purpose in short-term gratification; temporary pain and adjustment are the indispensable prerequisites for enduring long-term prosperity. The Peril of Stifling Competition: Professionals and commercial entities must recognize that eliminating open competition is the equivalent of signing one’s own eventual death warrant. As demonstrated by recent geopolitical disruptions and social polarization in advanced societies, vibrant competitive dynamics are essential for long-term survival and vitality. Fulfilling India’s Tryst with Destiny (1947–2047) This is India’s moment, born both of our hard-won macroeconomic stability and the formidable headwinds confronting competing nations. This is no time for complacency or short-sighted opportunism. If we conceive bold strategic visions and execute them with unyielding discipline, then India’s tryst with destiny, proclaimed in 1947, will reach its triumphant fulfillment in 2047.

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 34–38 Special Write-Up Emerging Paradigm of Corporate Governance and Sustainability CA. Keki Mistry Vice Chairman & CEO, HDFC Ltd. Correspondence: eboard@icai.in 🏛️ The Governance Premium in Corporate Leadership Corporate governance is often looked upon as a means to measure how well companies are run. Investors use corporate governance as an indicator to judge the quality of a company’s management and the effectiveness of its board. It is now widely accepted by companies that sound principles of governance are a necessary tool for their long-term development and sustainability. 1. The Indian Regulatory Journey & The Governance Premium Over the past decade in India, corporate entities have progressively strived to implement robust internal controls, transparency policies, and ethical processes as mandated by statutory statutes and regulatory guidelines: The Companies Act, 2013: Codified fiduciary duties of directors, established statutory audit committees, mandated independent directorships, formalized corporate social responsibility (CSR), and instituted structured vigil mechanisms. SEBI (LODR) Regulations, 2015: Brought unified listing obligations and disclosure requirements, standardizing reporting timelines, material related-party transaction approvals, and shareholder grievance resolution frameworks. Kotak Committee Recommendations (2017) & SEBI Amendments: Landmark recommendations aimed at enhancing fairness and transparency, strengthening the independence of independent directors, ensuring active board participation, enhancing board diversity, rectifying accounting/auditing vulnerabilities, and upgrading overall corporate disclosure standards. Companies and independent directors are taking sharp notice of escalating stakeholder demands for accountability. Instead of viewing compliance as a mere check-the-box exercise, leadership teams are actively aligning with the true spirit of the law. In the contemporary market, proactive compliance oversight is decisive for sustaining the elevated governance benchmarks that capital allocators demand. The Global Capital Market Perspective: Global institutional investors exercise extreme vigilance when screening prospective investee companies. Good governance serves as their primary investment filter. Global allocators are consistently willing to pay a massive valuation premium to corporations whose governance practices are demonstrably rock-solid. Conversely, enterprises whose ethical practices or board oversight falter face immediate valuation discounts, acute reputational contagion, and catastrophic business collapse. 2. The Board as a Stewardship Body in Black Swan Events The governing board functions as the supreme stewardship organ of the corporation—simultaneously guiding, questioning, and bolstering executive management in executing mission-critical decisions, particularly during operational distress. A catastrophic black swan shock like the COVID-19 pandemic served as a transformative stress test. When the crisis originally erupted, very few corporate boards had predefined playbooks or contingency answers. Yet, empirical evidence clearly established that organisations built upon robust corporate governance and high ethical standards adapted rapidly and weathered the storm with remarkable resilience. Governance quality was the primary differentiator between survival and distress. Navigating the 2022 Complex Operating Environment: The ongoing confluence of evolving COVID-19 variants, fractured supply chains, geopolitical hostilities, and multi-decade inflationary pressures ensures that corporate boards will face sustained friction. Boards must spearhead organizational recovery by systematically reviewing systemic weaknesses with executive leadership and recalibrating operating models for the new normal. 3. Five Key Corporate Governance Themes Gaining Traction CA. Keki Mistry elaborates on five pivotal governance themes that have attained profound momentum across the Indian corporate landscape: THEME 1 Risk Management & Balance Sheet Fortification The pandemic forcefully demonstrated that black swan disasters are concrete operational hazards rather than theoretical tail risks. Boards and executive leadership must thoroughly evaluate whether existing crisis management blueprints are genuinely fit for purpose. Risk management is fundamentally about preparing for structural uncertainty and determining which recent operating distortions are permanent. Post-Pandemic Board Priorities: Key considerations for modern boards now prominently include cybersecurity defenses, data privacy and protection architectures, and rigorous statutory and regulatory compliance. The crisis validated the timeless financial axiom: The best risk management framework is one that fortifies the balance sheet in good times so as to create sufficient ammunition to tackle an unexpected downturn. Boards lacking forward-looking fiscal modeling were caught completely off-guard when the economic tide abruptly turned. THEME 2 Shareholder Activism & Proxy Advisory Influence Institutional and retail shareholders have become immensely more assertive, demanding concrete accountability and expanded disclosures across broader governance vectors. Reluctance or failure to address these expectations increasingly culminates in proxy advisory firms issuing negative recommendations and activists voting down management resolutions or individual directors at shareholder meetings. Unilever / GSK Healthcare (USD $68 Billion Bid) Trian Partners and allied institutional investors aggressively challenged and successfully forced Unilever to abandon its proposed USD $68 billion takeover bid for GlaxoSmithKline’s consumer healthcare division, citing capital allocation risks. ExxonMobil Historic Proxy Contest (2021) In the most celebrated governance contest of 2021, tiny first-time activist fund Engine No. 1 secured three board seats at ExxonMobil despite holding merely a 0.02% equity stake, campaigning on climate strategy and capital discipline. Common proxy demands encompass director appointments, board reconstitution, excessive CEO compensation packages, and strategic corporate alternatives. Going forward, boards must institutionalize active shareholder engagement, monitor proxy disclosure criteria, identify strategic vulnerabilities, and track abrupt shifts in equity ownership structures. THEME 3 ESG Integration & Value Creation Dynamics Environmental, Social, and Governance (ESG) criteria have transformed from a peripheral public relations concept into an indispensable pillar of corporate strategy and enterprise valuation. A seminal research study by McKinsey & Company identified five distinct pathways through which robust ESG performance creates tangible corporate value: Top-Line Growth: Facilitating entry into new markets and securing commercial approvals with sustainability-conscious clients. Cost Reductions: Optimizing raw material usage, reducing energy consumption, and curtailing waste processing expenditures. Regulatory & Legal Intervention Relief: Mitigating risks of government intervention, fines, sanctions, and regulatory pushback. Productivity Uplift: Attracting top-tier talent, boosting employee morale, and significantly enhancing workforce retention. Investment & Capital Optimization: Allocating capital toward sustainable, long-term assets while avoiding carbon-heavy stranded assets. Institutional titans are proactively holding leadership accountable. As BlackRock Chairman Larry Fink articulated in his 2022 Annual Letter to CEOs: “most stakeholders now expect companies to play a role in decarbonising the global economy.” In India, regulatory mandates have accelerated rapidly: while SEBI has made the Business Responsibility and Sustainability Report (BRSR) mandatory for the top 1,000 listed entities from FY 2022-23, progressive Indian corporations had already adopted voluntary BRSR reporting. THEME 4 Board Diversity & Cognitive Independence Board diversity—spanning gender, race, ethnicity, technical skills, and professional backgrounds—has emerged as a focal priority for institutional investors seeking diversity of thought and experience to improve risk identification and governance outcomes. Jurisdiction / Benchmark Female Board Representation (%) Comparative Insight India (2014 Baseline) ~6% Prior to mandatory Companies Act 2013 implementation. India (2021 Current) >17% Exceeds emerging market peers as per MSCI Survey. Brazil 14% Emerging market peer below India. China 13% Emerging market peer below India. Russia 10% Emerging market peer below India. Mexico 9% Emerging market peer below India. United Kingdom & United States ~33% (One-Third) Mature capital markets target benchmark. Harvard Business Review (HBR) Independence Findings: Crucially, appointments of women on Indian boards are substantive rather than cosmetic. According to research by the Harvard Business Review, 70.4% of women appointed to Indian corporate boards are classified as truly independent, possessing zero familial or commercial ties to the promoter group. By contrast, Western markets have witnessed escalating shareholder derivative litigation accusing non-diverse boards of breaching their fiduciary duties. THEME 5 Board Effectiveness, Evaluation & Agenda Management Robust board composition, planned refreshment, and objective evaluation directly improve operating performance and compress enterprise risk. According to Institutional Shareholder Services (ISS), continuous board refreshment is achieved most constructively through rigorous individual director peer evaluations that detect emerging capability gaps and onboard new skill sets. Actionable Evaluation: To be meaningful, annual board assessments must be completely honest, thorough, and translate into concrete structural changes or committee reallocations. Universal Competency Across Evolving Domains: Modern directors can no longer retreat into narrow departmental expertise. Directors are expected to contribute intelligently across the entire strategic agenda, necessitating continuous training in cybersecurity threats, climate transitions, and geopolitical dynamics. Overcoming the Administrative Quagmire: With ever-expanding regulatory obligations, CSR compliance, ESG tracking, and crisis response, board agendas have become overloaded. Directors struggle to protect time for core business strategy. Strategic Solution: Agenda Bifurcation Protocol To resolve agenda congestion, the board agenda should be systematically bifurcated into two distinct tranches: (i) Routine administrative and statutory compliances (addressed via consent agendas or expedited review), and (ii) Core policy issues and substantive strategy (allocated the majority of meeting time for deep debate, challenge, and consensus-building). 4. Conclusion: The Bar Continues to Rise for India Inc. The expectations placed upon Indian boards and corporate stewards continue to escalate rapidly. Encouragingly, corporate India is proceeding along the correct trajectory in institutionalizing global governance best practices. Governance as an Enduring Competitive Advantage An uncompromised commitment to sound corporate governance delivers a distinct, durable competitive edge, elevating corporate standing, securing stakeholder trust, and unlocking long-term sustainability. Enterprises must maintain fiscal prudence and strategic long-term vision regardless of temporary macro economic cycles. As Indian corporate governance practices continue their upward march, domestic enterprises will enjoy frictionless access to global pools of capital and achieve unprecedented operational transparency.

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 39–42 VISION - GLOBAL LEADERS Meeting our stakeholders’ needs Andreas Barckow Author is Chair of the International Accounting Standards Board (IASB). He can be reached at abarckow@ifrs.org and eboard@icai.in 🏛️ Special ICAI Anniversary Commendation It is an honour to be marking the anniversary of the ICAI and the celebration of chartered accountants in India this month. Accountants have an integral role to play in society as the world becomes more and more complex. We help a heterogenous set of stakeholders navigate these intricacies and enable society to respond to new challenges. To do this, we must be accomplished technicians and critical thinkers which is why continuing education and development are necessary for practitioners to refresh their knowledge on a regular basis. Bodies such as the ICAI have been essential in training our profession to drive improvements to professional practices. They have a good track record in underpinning the profession as well as the regulatory and governance framework in India. IFRS Accounting Standards: Driving Global Transparency and Comparability In an increasingly interconnected world, the accounting profession’s role in providing high-quality, comparable financial information across different capital markets becomes even more important. IFRS Accounting Standards issued by the International Accounting Standards Board (IASB) bring transparency to capital markets, and improve the international comparability and quality of financial information—thus benefitting investors, jurisdictions, companies and society. The IASB’s Standards enable domestic and foreign investors, and other market participants, to make informed economic decisions and help countries to secure cross border investment. Investments from global players have been critical to economic activity in many countries, including in India. At present, more than 140 jurisdictions in the world have adopted our reporting standards. The principles-based nature of the standards accommodates different settings, practices and systems through a single coherent framework of high-quality global standards. Transparent and Open Standard-Setting Architecture Stakeholders have confidence in IFRS Accounting Standards because the IASB conducts an open and transparent standard-setting process where we encourage and consider input from multiple perspectives from around the world through public consultations. Everything related to the standard-setting process—exposure drafts, comment letters from stakeholders, and meeting papers—are published on our website. The development of an IFRS Accounting Standard is carried out during IASB meetings which are broadcast live and are available on our website for later viewings. India has been actively engaged with all of our standard-setting activities by participating in the consultation exercises and outreach events. Moreover, we receive valuable contributions from our Indian stakeholders through our wide network of advisory committees and groups. Indian Accounting Standards (Ind-AS): Convergence, Carve-Outs and Full Alignment Some countries have fully adopted the IASB’s Standards. India has opted to converge its Indian Accounting Standards (Ind-AS) with IFRS Accounting Standards. This convergence framework provided companies in India the time and space to adapt to the international set of accounting standards. We recognise that there is significant learning, the potential redesigning of existing systems and for the expedient coordination between multiple institutions to embed the changes in the system. Nevertheless, India has substantially converged to IFRS Accounting Standards which underscores India’s commitment to best practice. It is also a testament to the important work undertaken by the ICAI, the Ministry of Corporate Affairs and the National Financial Reporting Authority to align the Ind-AS closely with the IFRS Accounting Standards. The IASB Perspective on Carve-Outs India is coming close to a full alignment with global accounting standards notwithstanding the existing carve-outs. In our view, carve-outs would ideally offer temporary relief only. Our position on carve-outs is that they may impact the level of comparability for companies and investors across jurisdictions. The IASB remains hopeful that in due course these carve-outs can be removed so that companies in India can harness the full benefits of IFRS Accounting Standards. For a country like India with diverse industries, practices and interests, the principles-based IFRS Accounting Standards are the most appropriate regime. India is widely recognised as an economy with strong growth and the full adoption of IFRS Accounting Standards will help to further enhance its reputation as a country with a robust business environment. “India is widely recognised as an economy with strong growth and the full adoption of IFRS Accounting Standards will help to further enhance its reputation as a country with a robust business environment.” The IASB Five-Year Work Plan (2022–2026) Let me now turn to the IASB’s work plan priorities. Last year, the IASB conducted a public consultation and asked our stakeholders around the world for their input into the strategic direction and the balance of the IASB’s activities for the five-year period from 2022 to 2026. This is an exercise the IASB undertakes every five years. We obtained valuable input from our stakeholders — including from the ICAI — through comment letters, webinars and outreach events to decide on new projects. The IASB has been analysing the feedback and we are expecting to publish a feedback statement on this project soon. But I can share with you that we have decided to add three accounting technical projects to our future work plan. 1. Comprehensive Review of Intangible Assets Standard (IAS 38) Major Project The first project will be a comprehensive review of our intangible assets Standard, IAS 38, which is more than twenty years old. This project would start with research to determine the scope of the project and how to sequence possible stages for such a project. This is one project where we expect to work closely with the recently established International Sustainability Standards Board (ISSB) in the areas that overlap both boards’ remits. 2. Statement of Cash Flows and Related Matters (IAS 7) Comprehensive / Targeted Review The second project is the statement of cash flows and related matters. Here, we will initially consider the scope of the project should be to comprehensively review the statement of cash flows Standard, IAS 7, or to make more targeted improvements. It is worth noting that the existing IFRS Accounting Standard for cash flow statements is even older than the one for intangible assets. 3. Accounting for Climate-Related Risks in Financial Statements Narrow-Scoped Standard-Setting The third project is accounting for climate-related risks in financial statements. As climate-related risks will primarily be for the ISSB to consider, we expect to work closely with our colleagues on any work that we do in this project. Our primary objective will be to investigate whether any narrow-scope amendments might be needed at our side to facilitate connected standards in that area. Intangible assets and cash flow statements could develop into large standard-setting projects while the climate-related risks in financial statements might be addressed as a narrow-scoped standard-setting project. Reserve List of Projects Further to these three projects, the IASB has decided to create a reserve list of projects that would be added to the work plan only if additional capacity becomes available. For example, further IASB resources may be at our disposal if current projects on the work plan are completed sooner than envisaged. These projects include operating segments and pollutant pricing mechanisms. Prioritising Active Consultations Overall, consistent with our stakeholder feedback, we will prioritise existing projects before starting new ones. We are progressing several projects that have already been out for consultation and are now in the current work plan—projects such as Primary Financial Statements (PFS) and Goodwill and Impairment. Primary Financial Statements (PFS): The objective of the PFS is to improve how information is communicated in financial statements with an emphasis on information about performance in the statement of profit and loss. Goodwill and Impairment: Goodwill and Impairment explores whether companies can, at a reasonable cost, provide investors with more useful information about the acquisitions those companies make. You can find further information on these projects on our website. We remain committed to finishing our existing projects. I hope you will stay tuned to, and engage with, further developments from us on all these projects. The International Sustainability Standards Board (ISSB) & Connected Reporting I have mentioned our sister board, the ISSB, several times. You will know that the ISSB was established late last year, built on the same model as the IASB. International investors and others with global portfolios have been calling for high quality, transparent, reliable and comparable company reports on sustainability matters. The creation of the ISSB was a response to this and is a significant development for all of us. At the end of March, they issued two exposure drafts on climate and general sustainability-related disclosures and are soliciting input from a wide range of market participants on these. Seamless Standard Connectivity: IASB and ISSB Alignment Meanwhile, stakeholders have told us that they would like to see connectivity between the standards set by the IASB and those set by the ISSB. Both boards agree that there should be no gaps or unnecessary overlap between the two sets of requirements. Thus, it is important for the boards to interact frequently, not only between the leadership of the two boards but also between the technical staff. We will work in close cooperation to ensure the compatibility and connectivity between our IFRS Accounting Standards and the ISSB’s IFRS Sustainability Disclosure Standards. Each board is independent, and our standards will complement each other to provide investors and other capital market participants with comprehensive information to meet their needs. In fact, this is one of the key benefits of having the two boards within the same organisation. I encourage you to follow further developments on this. Conclusion: The Vital Role of Accountants in Building Trust Our stakeholders in India have been active supporters of IFRS Accounting Standards. We have an established relationship with them and we hope that they will continue to engage with us and make their voices heard through our consultative groups and processes. I started this piece stressing the important role that accountants play in society. We have always appreciated the participation of accounting professionals in our work. Accountants have much to contribute to foster trust and confidence not just in the world of business and finance but in society at large. You are the driving force of changes in organisations, to make them fit for purpose for the world we live in and to prepare them for the world that is to come. “I will finish by congratulating the ICAI on this special issue and send you the IASB’s best wishes.” — Andreas Barckow, Chair, International Accounting Standards Board (IASB)

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 43–45 Vision- Global Leaders Assurance in the Digital Age Tom Seidenstein Chair, International Auditing and Assurance Standards Board (IAASB) Contact: TomSeidenstein@IAASB.org and eboard@icai.in Danielle Davies IAASB Fellow Contact: DanielleDavies@iaasb.org and eboard@icai.in ⚡ Transforming Assurance in the Fourth Industrial Revolution The Fourth Industrial Revolution is reshaping the world we live and work in. This revolution presents significant opportunities for audit and assurance too. The ever-growing availability of data combined with emerging technologies offer new ways for assurance professionals to enhance trust and confidence in their work. For the audit and broader assurance profession, the emergence of new digital tools represents a real opportunity to attract a new generation of professionals to this noble profession. 1. Digital Transformation & The IAASB Standard-Setting Imperative In many ways, the accounting and auditing world is catching up to the digital transformation that countless global industries have already undergone. Sectors such as retail, hospitality, transportation, entertainment, and energy have experienced profound structural disruption via innovative new market entrants who fundamentally elevated customer experience. In the modern economic paradigm, it is harder to identify an industry that has escaped technological disruption than one that has; if an industry has not yet been disrupted, it is solely a matter of time. At the International Auditing and Assurance Standards Board (IAASB), standard-setters are determined to ensure that international auditing standards keep pace and adapt proactively to disruptive innovations. This strategic adaptation is executed without compromising the IAASB’s core mandate: promulgating high-quality global standards that fortify public confidence in statutory audits and independent assurance engagements. Three Core Objectives of the IAASB Technology Initiative: Build Internal Structures & Processes: Establish robust institutional processes and advisory structures to sustain and operationalize the IAASB’s disruption agenda. Deepen Technological Knowledge & Public Interest Analysis: Continuously maintain and expand the IAASB’s sophisticated understanding of disruption trends and their implications for international standard-setting and public interest protection. Multi-Stakeholder Collaboration & Reporting Quality: Share knowledge, insights, and strategic roadmaps with stakeholders across the global reporting ecosystem to systematically elevate audit, assurance, and corporate reporting quality. 2. Empirical Technology Research & The Four Foundational Disruption Themes Staying closely aligned with emerging technological frontiers is essential to anticipating future market realities. In 2020, the IAASB commissioned an extensive research project supported by Founders Intelligence, a premier technology consultancy. This global investigation involved deep-dive analyses of over 100 technology innovator companies and extensive interviews with more than 20 organizations across the audit and assurance landscape—including practitioners, national standard setters, regulatory authorities, professional accounting organizations (PAOs), and startup founders. Dual Categorization of Disruptive Technologies: The study categorized emerging technologies into two primary operational dimensions: (1) Technologies impacting how corporate information is accessed, verified, and protected, and (2) Technologies transforming procedures related to evaluating internal controls. The study yielded vital projections regarding the timing of widespread adoption across firms of varying sizes. From this comprehensive research, the IAASB identified four common themes defining the contemporary and future disruption of audit and assurance: Theme 1 Continuous & Real-Time Auditing Transitioning from periodic, retrospective post-closing reviews to continuous, automated verification performed on an ongoing, near real-time operational basis. Theme 2 AI & Advanced Analytics-Driven Engagements anchored in deep data analytics, harnessing Artificial Intelligence (AI) and Machine Learning (ML) to analyze entire populations rather than relying on sampling. Theme 3 Remote Engagement Execution Audits increasingly conducted in distributed, virtual environments utilizing secure cloud repositories, video evidence capture, and decentralized digital collaboration tools. Theme 4 Technology-Enabled Profession A workforce where assurance practitioners intuitively understand, deploy, and leverage advanced technological capabilities within daily professional workflows. 3. Consultative Mechanisms: Roundtables, Upskilling & Market Scans The IAASB thoroughly deliberated the findings of this research in January 2021. To maintain direct dialogue with technology innovators, the Board convened two dedicated consultative roundtables—in November 2020 and February 2022. At these international roundtables, innovators pioneering advanced audit technologies presented live demonstrations and engaged in extensive Q&A sessions with leaders representing the global audit and assurance ecosystem. Ongoing Institutional Initiatives: Continuous Horizon Watching: Committing permanent staff and research resources to monitor emergent technological developments that could alter assurance methodologies. Internal Staff & Board Upskilling: Systematically training IAASB board members and technical staff to evaluate advanced technologies, integrating digital considerations into active standard-setting projects. Bi-Monthly Market Scan Publications: Releasing a regular publication series where each edition unpacks a specific emerging technology, analyzing industry and startup-driven use cases, practical adoption challenges, and standard-setting implications. 4. The Digital Advisory Group & Future Standard-Setting Architecture To institutionalize external innovation, the IAASB established a specialized Digital Advisory Group (DAG) comprising a select cohort of technology entrepreneurs, data scientists, and business leaders. Uniquely, the DAG is composed primarily of experts from outside the traditional accounting and auditing profession. This deliberate architecture ensures that the IAASB receives unvarnished, disruptive viewpoints that challenge conventional orthodoxy and enrich standard-setting deliberations. Embedding Technology into Active Standard-Setting Projects Over the coming years, the IAASB will translate research insights into concrete international auditing standards. Critical active projects directly incorporating technological impacts include: Audit Evidence (ISA 500 Revision) Modernizing rules regarding the relevance and reliability of digital audit evidence, automated extraction tools, and external datasets. Fraud (ISA 240 Revision) Leveraging AI pattern recognition, continuous anomaly detection, and forensic analytics to uncover sophisticated corporate fraud and manipulation. Going Concern (ISA 570 Revision) Employing predictive algorithms, dynamic stress-testing, and real-time cash flow surveillance to assess financial viability under volatile macroeconomic conditions. The Crucial Standard-Setting Dilemma: Scalability of Digital Norms As technological tools proliferate, standard-setters confront a fundamental strategic question: Should the use of advanced automated tools become the mandatory norm in fulfilling audit requirements? Crucially, the IAASB must evaluate how this expectation affects the scalability of standards. Standards must remain robust and enforceable for global network firms auditing multinational conglomerates, while remaining proportionate, cost-effective, and practical for Small and Medium Practices (SMPs) auditing small and medium enterprises (SMEs). 5. Collective Responsibility & The Future of the Assurance Profession Extensive outreach activities confirm that national standard setters, regulators, accounting firms, and professional accounting organizations (PAOs) worldwide are dedicating substantial resources to evaluate technology’s impact on auditing standards. This collective mobilization is essential: all industry participants share a professional duty to continuously upskill, actively participate in technology dialogues, and share transparent insights regarding implementation successes and hurdles. Our Guiding Purpose in the Digital Era It is only through our collective commitment to digital transformation that we will be able to move forward as a profession and continue to fulfil the valuable societal role that is our guiding purpose, as well as creating an exciting, vibrant future for the next generation of assurance professionals.

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 46–47 Vision- Global Leaders The IPSASB Launches Global Consultation on Public-Sector Sustainability Reporting Ian Carruthers Chair, International Public Sector Accounting Standards Board (IPSASB) Correspondence: ian@iancarruthers.org and eboard@icai.in 🌍 The Sovereign Climate Imperative Investor interest in sustainability has risen markedly in recent years. In 2020, sustainable investments accounted for more than a quarter of professionally managed assets across global markets at $22.89 trillion. Growing interest in those investments has not been confined to the private sector—the European Union experienced record demand from prospective investors when it launched its maiden green bond. However, while the private sector has focused heavily on sustainability reporting to attract investors, public sector sustainability reporting has lagged. Closing that information gap has never been more urgent. 1. The High Sovereign Stakes: Fiscal Exposure & Sovereign Debt Downgrades The financial and economic threat posed by climate change to the sovereign public sector is well-documented. An authoritative 2021 study revealed that sovereign credit rating downgrades among nations that fail to achieve their greenhouse gas emissions reduction targets by 2030 could cost national treasuries between $137 billion and $205 billion in elevated borrowing costs. $137B – $205B Sovereign Downgrade Penalty Cost to national treasuries failing 2030 climate goals. >40% of GDP OECD Government Spending Public expenditure share across OECD economies. ~20% Total Workforce Employed Public sector workforce share in developed economies. $22.89 Trillion Global Sustainable Assets Representing over 25% of professionally managed assets. Yet, despite the public sector’s decisive economic weight and regulatory authority, prevailing international sustainability reporting frameworks remain almost entirely corporate-centric. They are not engineered to capture or evaluate the wide spectrum of sovereign interventions—including carbon taxation, green subsidies, environmental regulations, public capital investments, and national procurement policies—that dictate whether global net-zero targets can be achieved. 2. The Urgent Imperative for Standardized Sovereign Reporting To date, the United Nations Sustainable Development Goals (UN SDGs) have served as an overarching, high-level policy umbrella for governments designing sustainable development initiatives. However, absent common accounting rules, various national and municipal public bodies have begun formulating disconnected, bespoke sustainability goals and performance metrics of their own. Overcoming Fragmentation through a Unified Global Public Framework: To arrest this mounting fragmentation and ensure worldwide consistency, comparability, and verifiability of sustainability data, the International Public Sector Accounting Standards Board (IPSASB) has identified the imperative for an authoritative, globally standardized public sector reporting framework. Three Core Sovereign Governance Benefits: Enhance Fiscal Transparency: Providing citizens, parliaments, and capital markets with verifiable data on public resource allocations. Institutional Accountability: Enabling taxpayers and civil society to hold governments directly accountable for the actual environmental impacts of public policy interventions. Evidence-Based Decision-Making: Empowering economic policymakers and state treasuries with rigorous data to navigate climate adaptation, green capital budgeting, and just transition pathways. 3. The IPSASB Global Consultation: World Bank Catalyst & 25-Year Heritage Spurred by a direct invitation and call to action from the World Bank, the IPSASB has stepped forward to eliminate this sovereign information deficit. The Board has formally released a comprehensive global consultation paper detailing its strategic proposals to pioneer international public-sector sustainability reporting. Why IPSASB is Uniquely Positioned to Lead: For over 25 years, the IPSASB has stood as the premier international standard-setter dedicated to developing accrual-based public sector financial reporting frameworks (IPSAS). Through this quarter-century heritage, IPSASB has established: Battle-tested, transparent international due-process and consultation mechanisms; Deep institutional relationships with ministries of finance, national standard-setters, multilateral development banks, and supreme audit institutions globally; An established body of non-financial reporting literature, including Recommended Practice Guidelines (RPGs) on service performance and long-term fiscal sustainability. 4. The Consultation Architecture: Five Key Strategic Themes The 4-month worldwide consultation period is designed to assess overall global stakeholder demand, clarify the boundaries of public-sector sustainability guidance, and prioritize international standard-setting actions. The consultation document seeks worldwide stakeholder feedback across five core thematic areas: Topic 1 Public Sector Guidance Drivers Evaluating sovereign sustainability drivers, including capital market pressures on green bonds, fiscal resilience, and citizen demand for climate accountability. Topic 2 IPSASB Readiness & Existing Guidance Assessing the Board’s institutional capability, standard-setting infrastructure, and existing guidance (such as RPGs on reporting service performance) as a baseline. Topic 3 Public Sector-Specific Issues Addressing unique governmental dimensions: non-exchange transactions, taxation levers, regulatory mandates, sovereign natural heritage assets, and social transfer programs. Topic 4 Key Enablers for Successful Delivery Identifying essential governance structures, long-term funding models, technical staffing resources, and multi-disciplinary advisory committees required to execute the mandate. Topic 5 Initial Outline Work Plan Drafting a phased standard-setting roadmap prioritizing overarching sustainability disclosure standards followed by targeted climate disclosure guidance. 5. Alignment with ISSB Frameworks & Work Plan Phasing A central tenet of the IPSASB proposal is avoiding duplication and standard-setting fragmentation. If the IPSASB moves forward following stakeholder consultation, it plans to draw directly upon existing international sustainability frameworks, specifically those promulgated by the International Sustainability Standards Board (ISSB) of the IFRS Foundation, adapting them appropriately for public sector nuances. Two-Stage Phased Guidance Strategy: Phase 1: General Requirements: Developing baseline disclosure standards for sustainability-related financial information across all public sector reporting entities. Phase 2: Climate-Related Disclosures: Crafting granular, public sector-adapted standards addressing sovereign greenhouse gas inventories, mitigation expenditures, adaptation strategies, and fiscal climate vulnerability assessments. 6. Stakeholder Engagement & Response Deadline: 9th September 2022 The resulting consultation feedback will be instrumental in enabling the IPSASB to draw definitive conclusions regarding its future role in establishing global public-sector sustainability reporting standards. The Board is actively conducting outreach across global jurisdictions to maximize input from national treasuries, audit institutions, accountants, and citizens. Public Response Deadline: 9th September 2022 Stakeholders worldwide are urged to review the consultation paper and submit formal comments before the 9th September deadline to ensure their jurisdictions’ public finance realities are embedded in future global standards. Note: This article first appeared in Public Finance magazine, the official journal of the Chartered Institute of Public Finance and Accountancy (CIPFA).

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 48–51 VISION - GLOBAL LEADERS Accountancy revolutions: How the profession needs to respond to technology and sustainability Jelena Misita Author is Chair of Professional Accountancy Organization Development & Advisory Group, IFAC. She can be reached at jelena.misita@revicon.info and eboard@icai.in 🌐 Strategic Imperative for Global PAOs Technology and sustainability are two of the biggest challenges (and opportunities) professional accountancy organisations (PAOs) around the globe are facing today. Both are particularly pervasive in developing and emerging economies. The Dual Catalysts: Technological Acceleration & Sustainability Mandates On technology, the COVID-19 pandemic and resulting current environment has accelerated the need for PAOs use of digital technologies to create new, or modify existing, business processes, including member and student experiences. On sustainability, the recent establishment of the International Sustainability Standards Board (ISSB) has accelerated the need for the profession to lead on services related to climate reporting and other material environmental, social and governance disclosures—contributing to strong and sustainable financial markets and economies and enabling the United Nation’s (UN’s) Sustainable Development Goals (SDGs). The Imperative to Adapt Accountancy Education But PAOs also need to consider how they are equipping current and future members with the competence and subject matter expertise required for the digital world and sustainability-related services. Accountancy education needs to adapt. Even where strong educational infrastructure is in place, the maintenance of that infrastructure is a resource intensive activity. PAOs, together with the various role-players in accountancy education, face a significant burden to maintain educational resources while upskilling qualified professionals in emerging competency areas such as technology and sustainability. Technology and Digitalization: From Tools to Institutional Transformation Our daily life has become a digital life. Business increasingly means digital business. Governments increasingly deliver services through e-government solutions. Many PAOs have invested in information technology solutions to support them to find efficiency in their traditional ways of delivering member-services. But having adequate technology is only one part of the story. “Digital transformation should be the long-term objective and endeavour for all PAOs. For the PAO, investment in digitalisation is necessary because, at a minimum, it will permit continuity of core activities and increase efficiency, effectiveness, and quality of member services.” It requires organisational leadership support and buy-in, building workforce capabilities, empowering people to work in new ways, and increasing effective communication throughout the transformation. IFAC & cloudThing PAO Digital Readiness Assessment Tool Given the importance of digital transformation to PAOs’ long-term sustainability and resilience, IFAC has partnered with cloudThing to create a PAO Digital Readiness Assessment Tool. The PAO Digital Readiness Assessment Tool has been designed to measure how digitally ‘mature’ an organisation is or where they already are on their digital transformation journey. This tool is not only an instrument to help PAOs develop their strategy and plans, but it is also an educational resource to help PAOs continue their journeys. Fostering a Bottom-Up Cultural Shift Digitalisation presents an opportunity to adopt a bottom-up culture whereby staff and members are equally enthusiastic about driving change as senior management and leadership. Getting feedback and ideas from staff and members will build confidence and trust, ensure investments benefit a PAO’s primary audiences, and communicate the PAO’s longer-term vision and strategy. Key Findings: IFAC & cloudThing Digital Readiness Report This transformation is most needed in the context of accountancy education. In a new, soon-to-be-released report from IFAC and cloudThing on the digital readiness of PAOs, it has been found that: 66% of PAOs are still trying to define an approach to online learning (including online examinations): This means that most PAOs are still offering education through traditional classroom channels, and exams are predominantly paper-based. But the pandemic has highlighted the urgency for PAOs to leverage technology in their approaches to accountancy education. This is important for the PAO to remain relevant and to reach a wider audience, including those outside of major urban areas. A significant global divide exists in how technology is covered in accountancy education: While developed PAOs have been able to fully integrate technology competencies into their curricula and assessments, PAOs in less developed markets need more support and involvement in making this transition on how to enhance the professional competence and development and application of the knowledge, skills, and behaviours needed in ICT by aspiring and qualified professional accountants. All involved in accountancy education are encouraged to utilise this valuable resource. Sustainability: The UN 2030 Agenda & Emerging PAO Challenges The UN 2030 Agenda for the SDGs is the clearest and most comprehensive framework to address the issues of sustainability and is quite clear when it says the SDGs are “integrated and indivisible and balance the three dimensions of sustainable development: the economic, social, and environmental.” Sustainability reporting and related services are critical pillars in the fight against climate change, social inequity, and the achievement of the SDGs. These services also represent a great opportunity for the profession to contribute to the public interest. Sustainability reporting, as well as the assurance of sustainability reports, is quickly becoming an essential function for the accountancy profession. Outside of the profession, an increasing number of companies, development agencies, and governments are starting to embrace sustainability goals. Still, there are several challenges for less-developed PAOs that must be acknowledged: 1. Curriculum & Competence Building: Work is needed to equip existing and future members with the subject matter expertise they need for sustainability-related services. 2. National Advocacy & Standard Adoption: PAOs need to advocate in their countries to support the adoption and implementation of international sustainability standards and to demonstrate why accountants are best placed to provide sustainability-related services. 3. Empowering Small and Medium-Sized Practices (SMPs): While the larger accountancy firms are already upskilling their network firms across the globe, local small and medium-sized practices (SMPs) will find it particularly challenging to take hold of the opportunity presented by sustainability reporting. Less-developed PAOs need support to in turn, support their SMP members in this area, including: Convincing them of the opportunities that exist. Helping them to upskill themselves to be able to offer relevant services. Positioning their practices to respond to the market demand for sustainability-related services. The time for action on sustainability is now: IFAC recently issued a call to action for the profession which delineates the actions the profession must take, why and how the profession must lead on the path of sustainability. The Multidisciplinary Future & Our Ethical Comparative Advantage In closing, technology and sustainability are areas where there is much opportunity for the profession. The accountancy profession is becoming more multidisciplinary as the expertise of non-traditional contributors becomes essential to our daily work. This is an opportunity as these developments will create a need for trusted advisors with wide skillsets and collaborative abilities. The Ultimate Comparative Advantage “The integrity and professional ethics of an accountant remain our comparative advantage. Wherever economic growth is sustainable, these qualities will be prized.” IFAC Global Resources, EdExchange Series & PAO Advisory Group Mission For more information on these topics, IFAC has dedicated webpages for technology and sustainability. For those interested in exploring further, the impact of these topics on accountancy education, IFAC has published a series of presentations by experts through its EdExchange Video Series, several of which relate to technology and sustainability. As the PAO Development & Advisory Group, we are actively contributing to these agendas and supporting PAOs through advising IFAC, enabling access to relevant resources and expertise, assisting and mentoring developing PAOs, and advocating for the strengthening of PAOs in support of the profession. Official Global References & IFAC Knowledge Gateways IAESB ICT Learning Outcomes: Information and Communications Technologies Non-Authoritative Learning Outcomes IFAC Global Standards: How Global Standards Become Local Sustainability Action Plan: Time for Action on Sustainability: Next Steps for the Accountancy Profession Technology Gateway: IFAC Dedicated Technology Gateway Sustainability Standards Gateway: IFAC Sustainability Standards Discussion EdExchange Video Series: IFAC EdExchange Video Series on Future-Ready Professionals PAO Development Advisory Group: Professional Accountancy Organization Development & Advisory Group

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 52–57 VISION - GLOBAL LEADERS The Essential Role of Ethics to Public Trust and a More Sustainable World Gabriela Figueiredo Dias Author is Chair of International Ethics Standards Board for Accountants (IESBA). She can be reached at GabrielaDias@ethicsboard.org and eboard@icai.in ⚖️ The Anatomy of the Global Trust Crisis Over the last two decades, we have witnessed an unfortunate number of corporate scandals and collapses. Beyond the direct and severe impact on the viability of the companies, these events have had dramatic impacts on workers and their ability to meet personal and financial goals and responsibilities, customers, the supply and credit chains, the broader economic and social ecosystem, and ultimately, on the social balance and the welfare of the people. Furthermore, these collapses also translate into colossal losses for investors (both retail and institutional) and can represent the loss of lifetime savings for the former, or a retreat from the capital markets for the latter. The Trust Crisis & The Role of Ethics in Fair and Efficient Systems What goes around comes around. The ultimate consequence of these scandals and collapses has been a growing, pervasive, and devastating erosion of trust and confidence, which are critical for the sound functioning of corporations, financial markets, and the whole economic system. We are, indeed, going through a trust crisis. Once trust is lost, it is extremely hard to regain. That is why we need to constantly work to protect and build trust. Reflecting on the facts and circumstances of recent corporate collapses and scandals, we easily come to the assessment that most, if not all of them, involved alleged or actual unethical or non-professional behaviour by people acting within or on behalf of a corporation, where false or inappropriate accounting of some sort played an important role. Accounting and corporate reporting, as well as audit and assurance to which they are subject, are the most essential pillars of the stakeholder community’s trust and confidence in companies. It is what allows all the interested parties to see and understand how financially healthy the company is, how sustainable it looks, and how likely it will generate quality for customers, returns for creditors and investors, profits for shareholders, and value for the economy and the citizens. “Corporate reporting is the most relevant element supporting the economic decisions of all stakeholders.” Over time, many reasons have been identified as being causal to the scandals and collapses. The most frequent situations refer to widespread and persistent inadequate corporate practices and conduct. But, at the end of the day, all the individual causes reveal ethics and corporate culture failures as a root cause, from poor risk management and short-termism all the way to pure fraud. Hence, it is imperative to advance an urgent process of changing business cultures towards more ethical, values-based, and sustainable models, preventing negative impacts on the integrity of the economic system and the social balance. Ethics, corporate culture, and professionalism need to be high on the agenda for the development of fair, efficient, and competitive economic systems, solidly grounded in transparent and sustainable business models and governance practices. Professional Accountants, Standard Setters & Corporate Culture Professional accountants play a critical role in changing the corporate culture, avoiding reputational issues, and restoring trust. Likewise, ethics standard setters contribute decisively to those goals by setting up a standard-setting approach focused on the conduct, behaviour, and culture of accountants and of the companies in which they work or to which they provide services. Ensuring reliable, transparent, and high-quality corporate reporting, audited or assured according to stringent ethics, independence, and quality criteria, is one of the most relevant and effective ways of restoring public trust and confidence in corporate reporting. This represents the greater contribution from international standard setters to economic growth, social balance, and value creation. Since its inception as a global standard-setting Board, the IESBA has had ethics at the core of its mandate, by definition and by conviction. Living in an Age of Transparency We have watched as the call for companies to adopt ethical behaviours has increased dramatically recently. The rapid and pervasive growth of sustainability goals, framed by the United Nations Sustainable Development Goals (SDG), has been pushing this trend. More widely, though, there is an increasing scrutiny among stakeholders regarding self-interested management, biased and short-term-focused results (namely to serve management remuneration purposes), and corruption, bribery, and fraud in the business and financial sector. The systematic need for governments and the state budget to bail out the losses also rebounds negatively on citizens as taxpayers, users and beneficiaries of public goods and services. We are living in an age of transparency and the public is becoming more aware of the high (short and long-term) costs of wrongdoing in the corporate sector, for the individual citizen, and the entire system. Ethics in Accountancy as a Cornerstone Financial and non-financial information, as crucial pillars of a stable, orderly, and productive economic system, is where this call for ethics and values echoes the most. Companies and organisations must ensure that the preparation and assurance of corporate reporting are performed according to the strongest ethical principles, reflecting adherence to universal values. Ethics in accountancy is what will restore confidence in corporate reporting, in corporations, and the market. The relevance of ethics in the profession is the main connection to the public interest. Subjectivity of Ethics & The Role of Guideposts Ethics is mostly an individual choice, and subjective in nature, even when there are some indisputable ethical principles, inherent to the basic organization of the companies, economy, and society. The natural subjectivity of ethical values, therefore, requires the guideposts of robust ethics standards by which all professional accountants must abide. Companies per se do not make choices or distinguish between right and wrong, nor are they able to make ethical judgments and assessments. Companies’ actions and culture are by nature defined by the ethical or unethical choices and decisions of those individuals responsible for the companies’ operations, management, or governance. But the individual ethical or unethical performance of accountants is strongly influenced by the culture of the companies and firms in which they work. Accountants are at the same time important transformation agents of the companies and firms culture. Reputational Risks Hovering Over Accounting Firms The trust crisis has also been affecting accounting firms. There is a concerning reputational risk hovering over the firms, with concerning impacts also on their ability to be, and be seen to be, stimulating and dynamic places to work for the purpose-driven younger generations. The IESBA Code: Architecture of Fundamental Principles & Dilemma Resolution The IESBA, through its International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code), has always been at the forefront of ethics standard-setting for professional accountants in business and in public practice, providing them with a robust, comprehensive and dynamic set of ethical standards aimed at a consistent alignment of values and approaches to the performance of accountancy services. The Five Fundamental Principles of the Code Integrity: Being straightforward and honest in all professional and business relationships. Objectivity: Not compromising professional or business judgments because of bias, conflict of interest, or undue influence. Professional Competence and Due Care: Attaining and maintaining professional knowledge and skill, and acting diligently in accordance with applicable standards. Confidentiality: Respecting the confidentiality of information acquired as a result of professional and business relationships. Professional Behaviour: Complying with relevant laws and regulations and avoiding any conduct that the accountant knows or should know might discredit the profession. Navigating Everyday Decisions and Acute Ethical Dilemmas The fundamental principles provide a robust framework against which professional accountants may and should make decisions: Day-to-day decisions: The rigor of analysis, the inquiring mind applied, the search for additional information, and the courageous challenge of management-provided information. Confidentiality vs. Public Duty: Balancing the professional duty of confidentiality against the ethical duty to report suspected illegal actions by the company or client (subject to applicable law). The Decision to Quit: Deciding to resign or withdraw after having exhausted all avenues to resolve an acute ethical dilemma. Tax Planning Perplexities: Navigating complex tax planning services against the public interest dimension of clients paying tax dues according to the law’s intent. Auditor Independence: Resolving independence dilemmas in firm governance, work organisation, or in providing Non-Assurance Services (NAS) to audit clients. Over the last few years, the IESBA has worked diligently to develop globally applicable standards that serve as the grounds for sound, ethically-based professional judgment and decisions by accountants, in ways that allow the recognition of the standards as ethically valid constructs irrespective of the jurisdiction, the sector, or the companies where the work is performed―in other words, truly global ethics standards. Remaining Agile: The Landmark NOCLAR Standard An example of the improvements in the Code is the NOCLAR standard (Non-compliance with Laws and Regulations). NOCLAR is a ground-breaking response by IESBA to provide auditors and other professional accountants with a robust framework to guide them in what actions to take in the public interest when they become aware of a suspected NOCLAR committed by a client or employer. The IESBA is also working resolutely to “future-proof” the Code. The rapid and deep transformations in the external environment can’t be disregarded. The remaining relevant situation requires IESBA to respond appropriately and in a timely fashion to the changing needs and demands of the end-users of financial and non-financial information. Innovative Strategic Focus Areas: Technology, Sustainability & Tax Planning Beyond the foundational Code, the IESBA is leading innovative projects looking for those areas where ethics and innovation create, change, and establish public trust: 1. Technology & Digital Innovation AI, Blockchain, Crypto Advances in the use of digital and technological innovations across the financial sector (e.g., artificial intelligence, blockchain, crypto-assets, digital reporting) are already impacting financial reporting and approaches to accounting. Emerging technologies are changing the financial reporting environment substantially, creating great opportunities, but also new risks and responsibilities in preparing and assuring financial information, namely on the ethical dimension of the work. Being conscious of the need to respond to the challenges arising from technology, IESBA is working on a project to address the ethical implications of technological innovations on the accounting, assurance and finance functions. Important revisions to the Code are being considered to address many of these developments, including in the areas of professional competence and due care, confidentiality, dealing with complex circumstances involving technology, using or relying on the output of technology, and auditor independence. Specifically, about the latter, some areas such as Non-Assurance Services (NAS), close business relationships, and data hosting are under analysis. 2. Sustainability Reporting & Assurance ESG & Capital Allocation Sustainability is another critical element of challenge and transformation for the accountancy profession. In recent years, investors have been increasingly focused on information that provides a better understanding of a company’s long-term value creation and enables them to allocate capital to businesses perceived as more sustainable. As a response, financial markets have seen accelerated growth in the disclosure of sustainability information, a demand-driven regulatory euphoria in this respect, and an increasing call for assurance to be provided. As this information is increasingly used in capital allocation decisions, it must be as reliable as existing financial information, so that there can be justifiable public confidence in what is reported. Responding to the rapidly changing landscape and recent developments, as well as to the need to promote trust through a robust and unequivocal ethical approach, the IESBA has identified sustainability reporting and assurance as a strategic and urgent focus area. Alongside awareness-raising activities to explain how extant provisions in the Code apply when preparing, presenting, or assuring sustainability information, the IESBA is already addressing deeper ethical implications arising from the production, reporting, and assurance of sustainability information, anticipating a likely need for standard-setting in this area in the near future. 3. Ethics in Tax Planning: Curbing Aggressive Avoidance G20 & Public Interest Another innovative area of focus for the IESBA is tax planning. While it is not a new topic, heightened public attention in recent years―including discussions on the G20 agenda―has focused on the topic of “aggressive” tax avoidance in the light of revelations of stark tax avoidance cases linked to alleged or actual unethical tax planning services, with strong negative impacts on the reputation of professional accountants and in the trust of the community in businesses. At the same time, there is a significant shift in investor concerns, as well as societal expectations, for companies to pursue more sustainable business models, and an increasing recognition that there is greater value in the notion of companies pursuing “profitable solutions for the people and the planet” than in serving exclusively the interests of shareholders. In this regard, tax planning has become an important part of the increasing focus among investors and other stakeholders regarding the impact of businesses on the environment and the citizens. Additionally, there is both a greater awareness among stakeholders as well as a shift in perceptions regarding what it means for a professional accountant to act in the public interest. What may have been regarded as creative and skilful tax planning in the past may now be perceived differently. The IESBA is sensitive to these changes and is working on a new ethics standard in tax planning to provide accountants with a strong baseline of ethical principles to perform tax planning services, set against the backdrop of evolving societal perceptions and novel thought-leadership proposals for companies not to make profit at the cost of the citizens. The existence and continued improvement of robust ethics standards, namely the IESBA’s international Code of Ethics, provides the accounting firms with the necessary support to ensure an ethical approach to accountancy and assurance performance, fostering confidence in their work. Conclusion: The Code as the Profession’s Shield, Armour and Beacon It is urgent to restore confidence and trust in corporate reporting, in companies and in the work of those entitled to prepare and assure the corporate disclosures aimed at providing stakeholders with transparent, integral and reliable information on the companies’ financial and sustainability performance. The Unmistakable Ensign of Public Trust “Ultimately, the IESBA’s International Code of Ethics is the profession’s reputational shield and armour, a beacon to capturing and retaining the valuable talent that will sustain its growth and vitality, and the unmistakable ensign of the public trust it has laboriously earned throughout its existence and must continue to reinforce and protect.” — Gabriela Figueiredo Dias, Chair, IESBA

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 58–59 Vision- Global Leaders New Age Professional – Transformation from CFO to CEO Sanjay Rughani Chair, Professional Accountants in Business (PAIB) Advisory Group, IFAC Correspondence: Sanjay.C.Rughani@sc.com and eboard@icai.in 💡 The Modern Executive Philosophy: The Chief Enabling Officer As a CEO I prefer to think of myself as the “Chief Enabling Officer”. It’s all about achieving big, driving for a bigger purpose, creating success, and delivering value creation as well as protection. My role involves inspiring and enabling things that have not yet been done. This involves thought leadership, creativity, and innovation, including testing out appetite for risk to maximise organisational, team, and individual potential. I have to connect three critical areas: vision, performance, and operations. 1. Sustainable Value Creation & The Corporate Purpose The Chief Executive Officer’s role is fundamentally about driving and articulating an inspiring strategic vision oriented toward long-term organizational success and sustainable value creation. A timeless corporate principle governs this reality: When you create value for society, you become valuable. Fulfilling sustainability commitments within an increasingly digitized global economy demands dynamic organizational transition and transformation. This entails harnessing technological innovation, unlocking innovative green financing, nurturing adaptive human talent, and fostering multi-stakeholder partnerships. Embedding Sustainability Across Enterprise Decision-Making: Sustainability is not an ancillary initiative—it is a core priority within corporate strategy, directly steering how executive leadership evaluates opportunities, makes capital allocation decisions, and manages operational and community risks. By deeply integrating sustainability across the enterprise, the CEO ensures a unified understanding of organizational objectives and verifiable outcome metrics, allowing the company to deliver enduring prosperity and uphold its foundational brand promise to be ‘here for good.’ 2. Operational Excellence & Driving the People Agenda A CEO must sustain a rigorous focus on commercial performance—not merely in terms of top-line revenue and bottom-line profit, but by driving operational efficiency and ensuring that authentic value is delivered to all stakeholder groups. Leadership entails aligning every discrete business unit, establishing clear benchmarks for what “best” means in practice, and orchestrating flawless operational execution for shareholders, clients, and society. The Primary CEO Mandate: You Are in the People Business The primary responsibility of a chief executive is spearheading the people and culture agenda. As a CEO, you are fundamentally in the people business: you lead the people, and they drive the organisation. This requires breaking down corporate silos, ensuring cross-functional collaboration, and assembling a high-functioning executive committee defined by complementary technical expertise, interpersonal chemistry, and cognitive diversity. 3. The CFO as Strategic Co-Pilot vs. The Expanded CEO Mandate Finance leadership provides an extraordinary launchpad for corporate stewardship. In modern business architectures, the Chief Financial Officer serves as the CEO’s indispensable strategic partner: The CFO Dimension The Strategic Co-Pilot Partnering with the CEO to develop and execute business model strategy. Interpreting economic cycles, competitive dynamics, and financial dashboards through the purposeful lens of numbers. Delivering quantitative insights to the board across financial performance and non-financial value drivers (staff engagement, customer retention, ESG metrics). Guarding internal controls, regulatory compliance, and reporting integrity. The CEO Dimension The Buck Stops With You Operating comfortably in deep strategic ambiguity and charting decisive directions. Making the final, painful decisions that cannot be delegated. Overcoming executive isolation by forging deep emotional connections with staff, clients, and shareholders. Connecting macro visionary goals with granular operational execution. Reflecting on his personal trajectory as a qualified accountant and former Head of Shared Services for Standard Chartered’s Africa and Global Operations, Sanjay Rughani highlights the enduring strengths that finance professionals carry into the corner office: deep analytical precision, disciplined performance measurement, thorough knowledge of risk controls and regulatory standards, professional objectivity, and relentless intellectual curiosity. 4. Authentic Leadership, Gen Z Engagement & Intrapreneurship It is vital for the chief executive to lead by personal example, upholding the highest standards of professional ethics and integrity. Because accountants are trained in fiduciary stewardship, they naturally infuse personal integrity and governance discipline into the CEO role, fostering deep trust among both internal employees and external stakeholders. Empowering Gen Z and Cultivating Intrapreneurial Agility Authentic leadership requires cultivating a transparent, participatory organizational culture that values the voices of all team members. This is particularly crucial when leading Gen Z professionals, who insist on purpose-driven work and having their viewpoints heard. The Intrapreneurship Imperative: “It is important that employees feel they can bring their entrepreneurial thinking and capabilities to fruition within the relative safety of an organisation.” In an era of constant market disruption, leadership must encourage teams to think and act like disruptors, reimagining corporate operating models to serve evolving societal needs. 5. Global Competitiveness, Continuous Learning & The IFAC Perspective In an interconnected global economy, competition is intense and unforgiving. Global executive experience reinforces a fundamental truth: there are no shortcuts in life or business. Thriving across multicultural markets requires total comfort with diversity, proactive inclusion, and cross-border agility. Serving as Chair of the IFAC Professional Accountants in Business (PAIB) Advisory Group, along with active involvement in the Young Presidents’ Organization (YPO), the CEO Roundtable, and Bankers Associations, provides vital international exposure. Engaging across global peer networks continually enriches strategic creativity, exposes emerging megatrends, and stimulates organizational innovation. From Scorekeeper to Strategic Value Partner From an accountancy perspective, remaining relevant in the modern economy demands an irrevocable transition from historical reporting to an active value partnering role. Today’s business environment places primary emphasis on the ability of finance professionals to: 1. Provide Strategic Insights Interpreting trends to shape competitive advantage. 2. Turn Risk into Opportunity Anticipating disruptions to pioneer new solutions. 3. Deep Stakeholder Engagement Building trust with clients, talent, and investors. 6. Conclusion: The Blueprint for New-Age Executive Leadership To succeed as a CEO in a disrupted global marketplace, leaders must remain constantly cognizant of macroeconomic and technological megatrends, ensuring that technological investments and digital tools directly support the core business model. The Winning Leadership Formula The key to performing as a CEO lies in lifelong learning and taking forward a bold strategic vision backed up with operational excellence and great people—especially empowering dynamic youth to achieve their highest potential.

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 60–64 Perspective Building Excellence with Integrity, Trust and Transparency CA. Y H Malegam Past President, The Institute of Chartered Accountants of India (ICAI) Correspondence: ymalegam@gmail.com and eboard@icai.in 🏛️ The Noble Heritage of the Indian Accountancy Profession The profession can take legitimate pride in the contribution it has made to the industrial and economic development of the country, not just in the 73 years since the Institute was formed but over the longer period since the profession was established in the country almost 150 years ago. As auditors, we have provided the necessary confidence to the investing public and the banking system regarding the financial statements of companies, enabling them to garner resources to finance industrial activities creating goods and services for the nation. 1. The Frontier of Non-Financial Information: Sustainability & Viability Reporting While taking legitimate pride in its heritage, the accountancy profession both in India and globally confronts profound structural challenges that demand urgent, deliberate solutions. Chief among these is the escalating emphasis on corporate non-financial reporting and the demand for independent assurance regarding its veracity and strategic relevance. Dimension A Sustainability Reporting & Assurance Parity Evaluating how entities interact with and protect the natural environment. The European Commission, via the European Financial Reporting Advisory Group (EFRAG), has issued draft standards designed to bring sustainability disclosures on an equal footing with statutory financial statements, encompassing standardized reporting frameworks, assurance scopes, and sustainability assurance standards. Dimension B Three-Tier Viability Reporting (U.K. Model) Proposals requiring company directors to assess long-term commercial prospects across three distinct timeframes: Short-Term (1 Year): Analogous to the existing “going concern” assessment. Medium-Term (5 Years): Mandatory scenario planning with at least two reverse-testing stress scenarios. Long-Term (>5 Years): Setting out strategic resilience against structural headwinds. Auditors must examine these models for probability and severity. 2. Fraud Detection as the Core Pivot of Future Audit Reform The detection of material corporate fraud has emerged as the central battleground of contemporary audit regulation. Capital market participants and regulatory oversight bodies increasingly demand that the primary onus of detecting material fraud through all reasonable means must reside with the statutory auditor. Reconciling Fiduciary Responsibilities: Management vs. Auditor It remains universally acknowledged that the primary responsibility for establishing internal controls to prevent and detect material fraud rests with executive management, the board of directors, and internal audit, and directors must formally report the actions taken in this regard. The Expanding Expectation Gap: However, the investing public rightfully expects that whenever auditors suspect irregularities or fraudulent conduct, they must take immediate, proactive investigative measures. Furthermore, auditors must issue clear evaluative opinions reporting whether the directors’ assertions regarding anti-fraud controls are authentic and accurate. 3. Client Automation: Big Data Analytics vs. Professional Judgment The rapid proliferation of enterprise automation among clients requires audit practitioners to commit substantial capital expenditures toward modern hardware, automated software, and continuous staff reskilling. This digital evolution presents a dual reality of vast opportunity and subtle peril: The Analytics Opportunity Machine-based risk assessments grant auditors direct access to 100% of client transactional data. Advanced big data analytics enables full-population testing, rendering obsolete random sampling techniques and dramatically boosting statistical assurance confidence. The Essential Caveat Rigorous care must be exercised to ensure that algorithmic, machine-based audit routines never supplant human professional skepticism, qualitative intuition, and seasoned judgment—the indispensable pillars of any authentic audit exercise. 4. Root Causes of Audit Failure & A 5-Point Remedial Plan for Audit Quality Review Drawing upon decades of empirical and anecdotal experience, CA. Y H Malegam pinpoints the primary root cause of modern audit breakdowns: inadequate time available to the auditor between the completion of field audit procedures and the submission of the draft audit opinion. This chronic compression severely curtails the depth and effectiveness of the Audit Quality Review (AQR). A 5-Point Structural Plan to Protect Audit Quality: Binding Timeframe Program: Establishing a mutually agreed, inviolable audit program setting a realistic timeline after final, completed accounts are handed over. Subsequent alterations must never encroach upon the auditor’s review time, and auditors must resolutely insist on this boundary. Early Resolution of Contentious Issues: Complex, contentious accounting disputes must be formally identified by management and auditors well before scheduled completion, ensuring every critical debate is minuted and fully documented. Adequate Implementation Lead Time: Regulators and standard-setters must provide sufficient transitional time before new standards take effect, preventing hurried and superficial compliance. Resisting Corporate Peer Pressure: Inter-corporate peer pressure to publish financial results prematurely must never be permitted to compress the time necessary for thorough audit examination. Elevating AQR to Senior Leadership: The Audit Quality Review must never degenerate into a perfunctory, checklist-driven compliance routine; it must be executed with the highest rigor by senior partners in the audit firm. 5. External Oversight Institutions: Principles of Constructive Governance The emergence and expanding statutory authority of independent audit oversight bodies (such as NFRA in India and PCAOB/FRC globally) represents a major contemporary transition. While independent oversight is necessary and must be welcomed, the early zeal of such institutions requires temperance governed by four essential principles: (a) Strengthen Rather Than Supplant The statutory objective of an oversight body must be to strengthen the self-regulatory professional institution, not usurp its executive functions. If the oversight body absorbs those functions, no independent check remains to oversee the discharge of those very duties. (b) Differentiate Business Failure from Audit Failure A corporate insolvency or commercial collapse is not automatically an audit failure. Companies frequently collapse from internal incompetence, reckless debt-fueled expansion, or external economic recessions and disruptive competition. (c) The Role of Peer Inquiries Disciplinary inquiries have historically been entrusted to professional peers who appreciate ground realities and operational constraints. Non-peer bodies risk reducing scrutiny into sterile, checklist-oriented exercises contaminated by hindsight bias. (d) Proportionality & Preventing Talent Flight Penalties must distinguish strictly between innocent error, negligence, gross negligence, and wilful default. Disproportionate sanctions threaten to drive the brightest qualifying CAs away from auditing into less litigious streams, triggering a severe secular decline in audit quality. 6. Preserving Public Trust: The Mathematical Trust Equation & Four Responsibilities Overriding every technical and regulatory hurdle, the paramount challenge remains safeguarding public trust. Every commercial failure or banking fraud erodes confidence in the audit profession, regardless of actual auditor culpability. Public trust is the foundational bedrock upon which the profession’s legal franchise rests: if that trust is betrayed, its very existence is threatened. The Professional Trust Equation (David Maister / David Mathews) Trust = (Credibility × Reliability × Intimacy) / Self-Interest Trust expands with every increase in the numerator (technical competence, dependable delivery, empathetic understanding) and every compression in the denominator (self-interest). Conversely, any elevation in perceived self-interest destroys trust exponentially. The Four-Fold Fiduciary Responsibilities of a Chartered Accountant: 1. Responsibility to Ourselves Moving beyond the ancient master-apprentice guild model: because knowledge boundaries expand ceaselessly, each CA must self-police their continuing competence. “True knowledge is ourselves to know.” 2. Responsibility to Clients Upholding uncompromising integrity. It is not enough for the auditor to be ethical; the auditor must insist that the client remains ethical. If significant illegalities persist, disassociation is mandatory. Services must be rendered solely to satisfy genuine client need, never merely to generate billing fees. 3. Responsibility to Colleagues No practitioner is an island. The title “Chartered Accountant” is a shared brand: anything that dilutes the brand harms every member. Preservation of the brand rests not on the brilliance of the few, but on the competence of the many. Inspiring humility: “Do not hesitate to overtake me. Many of my students have already done so.” 4. Responsibility to Society Chartered Accountants are the conscience keepers of the business world. Functioning both within corporations as management and without as auditors, no professional class is better equipped to guide commercial conduct toward ethical practices, fraud eradication, and environmental preservation. 7. Conclusion: Transparent Self-Correction & The Measure of Respect Preserving public trust demands absolute institutional transparency. When public expectations exceed realistic statutory boundaries, the profession must educate stakeholders on absent preconditions. Where failures occur, they must be acknowledged honestly, rectified swiftly, and communicated with clarity. The Ultimate Yardstick of Professional Excellence In the final analysis, trust will be maintained and even enhanced, if we accept, both as individuals and as an Institute, that success cannot be measured by mere size, whether of membership, practice or profits. It can only be measured by the respect we command.

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 65–70 PERSPECTIVE Emerging Realms of Reporting – Aligning Profession for Future CA. T. N. Manoharan Author is Non-Executive Chairman, IDBI Bank and Past President, ICAI. He may be reached at tnmanoharan@gmail.com and eboard@icai.in 🛡️ Solemn Entrustment of Statutory Audit Audit is the core area of competence of a Chartered Accountant in public practice. Audit of financial statements both under the Companies Act, 2013 and few other laws is exclusively entrusted only to Chartered Accountants. The underlying trust in assigning this responsibility to the members and firms registered with ICAI needs to be preserved by diligent discharge of duties associated with such a responsibility. This would in turn ensure credibility of the financial statements attested by a CA. Especially in the case of audit of a public interest entity such as listed companies, Government companies, Banks and Insurance companies, the profession should shoulder the responsibility with a sense of pride of serving the nation by safeguarding the stakeholder’s interest. In this article, the emerging realms of reporting is deliberated upon together with the emphasis to align the profession for future in the backdrop of significant developments in the recent past. Challenging Environment & The Stakeholders’ Ecosystem With the advent of a digital era and technological evolution, business practices are undergoing a paradigm shift. The pandemic situation that engulfed the globe for the last two years has changed the manner in which businesses are run. The physical world has been significantly subsumed by a virtually operating world. Besides, there have been instances of corporate frauds surfacing in the past which exposed lack of credibility of the financial statements. Beginning with the Satyam computers case, followed by a few other scams, including Nirav Modi’s case associated with Punjab National Bank, and the case of IL&FS group, the accountability of auditor has been subject matter of scrutiny. This has enhanced the expectation gap of the stakeholders. The Multi-Tiered Stakeholder Ecosystem The stakeholders’ ecosystem comprises of the Shareholders, Audit Committee and the Board of Directors, Lenders, Regulators, Customers, Investors, Creditors and Employees. At the macro level, even the public should be perceived as a stakeholder. There is an imminent need to continue to reinforce credibility in financial reporting in order to rebuild public confidence and continue to bestow trust of stakeholders among the stakeholders on the independence, integrity and competence of the profession. Quality of Audit & Expanded Regulatory Accountability “Audit quality is about delivering an appropriate professional opinion in an independent and reliable manner duly supported by adequate audit evidence and objective judgements.” Corporate failures can lead to class action suits by shareholders and audit failure can attract disciplinary proceedings on the auditor. Audit quality oversight is administered through the Peer Review mechanism of ICAI and Quality Review process of SEBI. ICAI and NFRA exercise their respective jurisdictions on monitoring the audit quality and consequential actions triggered by lapses captured. Statutory Amendment: Firm Liability for Professional Negligence Earlier, only the signing audit partner was liable for action through disciplinary proceedings but now, with the amendment in the Chartered Accountant Act, even the firm of which the member is/was a partner can also be proceeded with and made liable in the matter of professional negligence. Changes in Audit Reporting: Standards & Regulatory Shifts There has been a significant shift in the content and components of the auditor’s report in the case of companies in general and more so in the case of listed entities. These have been triggered by amendments in the Companies Act, more particularly in Schedule III, changes in SEBI regulations, especially as part of LODR and on the basis of enhanced reporting requirements in CARO 2020. The reporting requirements and the corresponding responsibility of the auditor has undoubtedly grown multifold. 1. Standard on Auditing SA 700 (Revised) – Restructured Audit Report Architecture Applicable to audit of financial statements for periods beginning on or after April 1, 2018. The standard requires combining the introductory para and opinion para in the audit report for reporting under the caption ‘Opinion’ at the beginning of the report. Not only basis of opinion needs to be reported but a statement of independence and ethical requirements should be included. Emphasis of Matter (EoM) is another component of the audit report. Additional matters that get reported are assessment of ‘going concern’ and management responsibility for oversight of the financial reporting process. 2. SA 701 – Key Audit Matters (KAM) Reporting on “Key Audit Matters”, introduced through SA 701, offers additional information to users of the financial statements to enable them to understand those matters which, in the professional judgement of the auditor, were of most significance in the audit for the relevant period. Key audit matters are directly related to areas of significant management judgment in preparing the financial statements. Besides, these are significant from among the matters communicated by the auditors with those charged with governance. 3. SA 720 (Revised) – Other Information & Material Inconsistencies Yet another reporting requirement that needs special mention is introduced by SA 720 (Revised) wherein Auditor is required to report on material inconsistency of any information, both financial or non-financial included in the annual report, with the financial statements. 4. CARO 2020 – Working Capital Verification (> ₹5 Crore Limits) Further in CARO 2020 there is a reporting requirement in the context of trade receivables and inventory statements submitted to the Banks by the auditee. Auditor must report on whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets. Further, whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company should also be verified and reported. If it is not in agreement, then details must be furnished as part of the report. Emerging Audit Landscape: Technology as Supplement, Not Substitute With the emergence of technological disruption occurring in the way in which businesses operate, an auditor needs to re-orient the manner in which audit is carried out. Businesses are greatly influenced by Internet of Things (IoT), Robotic Process Automation (RPA), Blockchain Technology, Cognitive Computing and Advanced Analytics. Due to automation in all spheres evolving on a faster pace, a question on whether audit as a function would survive is asked. Any amount of automation, deployment of tools and software cannot substitute an auditor or audit function. These can supplement and support in the carrying out the audit function. The Irreplaceable Auditor “No machine, process or system can replace an auditor because the experience-based knowledge, ability to exercise professional skepticism and the capability to arrive at the most appropriate professional judgement during the course of audit is vested only with an Auditor.” The Auditor, no doubt, should evolve as a tech savvy professional and is expected to deploy appropriate tools including software so as to effectively discharge his responsibility in the digital environment. An auditor can improve upon the quality of audit, efficiency of audit, cost of execution of audit and expeditious delivery of audit services through technological devices and gadgets. Data Analytics plays a critical role in this endeavor. Technological Frontiers in Audit Execution Robotic technology: Automating confirmation processes. Drones: Physical inventory and asset verification across expansive sites. Big Data & Data Mining: Extracting transaction trends and uncovering hidden correlations. Machine Learning: Intelligent pattern matching and anomaly detection. Outlier Focus & Predictive Analytics: Adopting a predictive approach focusing on outliers in data analytics to throw meaningful findings during an audit. Robotic Process Automation (RPA) & Blockchain Technology Robotic Process Automation (RPA) in Practice & Auditing RPA As part of the ‘Fourth Industrial Revolution’, Industry 4.0, automation enabled by advanced technologies like machine learning, artificial intelligence and robotic process automation (RPA) have crept into business operations. RPA is a software program which, by means of easy programming language and recorders, imitates human execution of applications which are generally repetitive in nature. RPA has the ability to improve accuracy, manage controls, enhance efficiency and achieve cost reduction by avoiding execution of repetitive monotonous tasks by humans. It has the ability to improve customer experience besides upgrading skills of personnel. RPA can make a difference in many business segments, more especially in HR management, customer services delivery, finance and accounting (handling customer order management, procurement and sourcing, billing management, records to report function, invoice processing and accounts receivable). RPA in Audit Firms: An Audit firm can, in turn, use RPA to automate their process in order to deliver client services in an expeditious, efficient and error free manner. RPA can be effectively used for client reminder mailers, MIS reporting, tax filing related works and GST compliance and reconciliation. RPA automation in businesses provides opportunities to render services on automation, digitization of operations, and to audit the Robotic Process Automation itself. In order to effectively carry out audit of RPA, an auditor must understand the governance process of RPA. Auditor must review the system blueprint, RPA transaction log and the system of exceptional handling log. An auditor would do well to perform testing of edit, validation check, error check configured in RPA and examine if the results are consistent by re-performing certain calculations and transactions. Blockchain Technology: Transforming Financial Recording & Audit Verification Blockchain technology is evolving and is impactful among business entities and professional firms. Instead of recording or storing transactions in a centralized system, this technology enables recording and storage of transactions in a decentralized network on a real-time basis in a secured and efficient manner. Just as the internet revolutionized information dissemination, Blockchain is expected to revolutionize the recording of transactions and smart contracts in replicated ledger using cryptography with the consensus of all parties supported by business logic. In Blockchain, it will not be easy to change historical records and therefore reliability and authenticity is ensured. Blockchain technology brings with it a few distinct advantages such as efficiency, security and privacy to transactions, transparency to enable real-time view and reinforces governance and trust through the validation of the transaction by all parties concerned. Blockchain technology can improve the efficiency and effectiveness of audit methodology and financial reporting service delivery. When a client organization uses Blockchain technology, the auditor can use more automation, data analytics and machine learning capabilities for the purpose of audit. Verification of audit evidence in the nature of transaction supporting documentation such as purchase orders, invoices, agreements and other contracts originating the transactions, encrypted and stored in Blockchain, can be accessed and examined by the auditor. Real-Time Verification Without External Confirmation: The verification of such documents can be on real-time basis and as these cannot be tampered with, the authenticity gets validated without any need for external confirmation. This would also improve the pace of execution of audit and the process of financial reporting. As Blockchain further evolves and is resorted to by more business entities and corporates, there would be multiple opportunities for the profession in this field. The profession can contribute in establishing new financial services infrastructure and processes in blockchain innovation landscape. There will be room for CA firms to do cost benefit analysis for each of the clients wanting to join Blockchain and provide suitable advisory services. ICAI or the member firms can take lead in crafting necessary regulations governing Blockchain and the standards to be followed by all players concerned. Triple Bottomline Reporting & The ESG Paradigm The world is concerned about global warming and depletion of resources. Countries and companies must evaluate their sustainability through proper mechanism. The buzzword in this regard in the current global scenario is ESG meaning Environmental, Social and Governance practices. 1. Planet (Environmental) Environmental concerns and prescriptions intended to preserve the planet and mitigate climate change. 2. People (Social) Quality of life influenced by securing basic needs, sustenance, and holistic CSR traversing boundaries to achieve social equity. 3. Profit (Governance) Best practices followed to ensure economic viability and ensure profits within an ethical and legal framework. The order of sequencing in terms of significance is Planet, People and Profit. Globally, sustainability reporting is assuming significance. Listed entities are already preparing and disclosing sustainability reports based on internationally accepted reporting frameworks such as GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board) and TCFD (Taskforce on Climate-related Financial Disclosures). SEBI Mandate: From BRR to BRSR In India, SEBI has mandated top 1000 companies (by market capitalization) to present Business Responsibility and Sustainability Reporting (BRSR) with effect from financial year 2022-23. However, all companies are encouraged to be early adopters of the BRSR voluntarily. What was hitherto BRR has transformed into BRSR as ESG-driven sustainability is the need of the hour. The BRSR is an initiative towards ensuring that investors have access to standardized disclosures on ESG parameters. Access to relevant and comparable information will enable investors to make better investment decisions. Higher standards of ESG practices and disclosures will attract increased and sustained flow of capital and investment. So far, the profession has been empowered to report on the financial statements. However, CAs should familiarize with the concept of Triple Bottomline Reporting which covers environmental, social and financial segments. Unlike financial performance, where measurement for reporting is relatively easier, measurement of performance on environmental and social segments could be challenging. Every such challenge must be perceived as an exciting opportunity by the profession and an auditor would do well to gear up and get empowered in this arena of practice. Sunrise Services: Diversifying Beyond Compliance into Consultancy Verticals The profession needs to embrace technology in every facet of functioning and that is bound to bring about accuracy, quality, speed, scaling and cost optimization. There are many sunrise services for which the profession must gear up and adapt to stay relevant: Digital Transformation & Business Support Services: Guiding client organisations through process automation and digital architecture. Virtual CFO Retainership for MSMEs: Huge opportunities in the MSME segment who may not be able to hire a full-time CFO, providing steady, non-seasonal retainership revenue. New Consultancy Verticals: Moving beyond seasonal compliance practice into year-round, high-reward advisory spheres. Investment Advisory & Wealth Management: Sourcing business funding options, architecting family arrangements, and succession planning for High Net-Worth Individuals (HNIs). Insolvency & Bankruptcy Code (IBC): Acting as Resolution Professionals (RPs), liquidators, and process advisors. Forensic Accounting & Systems Audits: Expanding specialization in Forensic Accounting and Investigation, Internal Financial Controls (IFC) audit, Risk-based Audit, and Systems Audit on account of escalating corporate frauds and cybercrimes. Conclusion: Sustaining the Profession of the Future A profession like ours owes it to the society to possess the courage of conviction to perform the role as an auditor in the best interest of the stakeholders in order to establish unblemished track record for the posterity to inherit. “We must not forget that the reputation and goodwill of the profession would be better sustained not by the brilliance of a few but the competence of many and ethics of all the members governed by ICAI.” Let us be proud of our profession and continue to contribute in all the conventional and emerging spheres with a view to effectively align the profession with the future. If this is ensured, then we need not worry about the future of our profession and instead, our profession will be recognized as the profession of the future. Nation Building Mandate “No other profession can claim of having as proximate a role and relevant interconnection as ours with the economic development of our country. Let us reinvent the significance of our role in partnering, participating and partaking in the task of building a credible economy in our incredible India.” — CA. T. N. Manoharan, Past President, ICAI

The Chartered Accountant • Journal of ICAI July 2022 • Vol. 71 • No. 1 • pp. 71–77 Perspective Audit and Assurance – Manifestation of Trust CA. Amarjit Chopra Past President, The Institute of Chartered Accountants of India (ICAI) Contact: ajc@icai.org and eboard@icai.in CA. Krishan Kant Tulshan Member, The Institute of Chartered Accountants of India (ICAI) Contact: eboard@icai.in ⚖️ The Core Anchor: Audit as the Keystone of Financial Trust The audit is the process of evaluating the accounting entries presented in financial statements. The audit checks the accuracy of financial information and reporting thereof, ensuring that financial information presented is true and fair and complies with sound accounting principles and prescribed accounting standards. Also, the information is presented objectively and ethically. Audit serves as a check against any misuse of funds, fraud, and possible fraudulent activities done in an entity either on the entity or by the entity. For any audit to be effective, internal or external, independence is the key. 1. Conceptual Foundations: Differentiating Audit, Assurance, Manifestation and Trust To appreciate the contemporary crisis of faith surrounding corporate accountability, it is foundational to unpack the distinct legal and operational definitions underpinning audit engagements: Audit vs. Assurance An audit is the systematic examination of books of accounts and supporting vouchers to express an opinion on whether financial statements reflect a true and fair view. In contrast, assurance is broader—it evaluates operating processes, systems, and non-financial data to assess and improve information quality for organizational decision-making. Assurance may be positive (reasonable or limited) or negative (nothing material has come to attention). Manifestation & The Anatomy of Trust A manifestation is an embodiment or visible sign of an abstract principle. Trust is an assured reliance on the character, ability, and integrity of another, leading one to put oneself on the line at personal risk. Without trust, innovation and collaboration collapse, and economic actors waste immense resources defensively guarding their self-interests. 2. The Crisis of Faith: High-Profile Indian Collapses & The Banking NPA Scourge In recent years, the Indian financial landscape has been rocked by catastrophic corporate failures stemming from financial irregularities and governance breakdowns. Prominent casualties include Global Trust Bank, Satyam Computer Services, Infrastructure Leasing & Financial Services (IL&FS), Dewan Housing Finance Corporation Ltd (DHFL), and Reliance Home & Finance Ltd. Concurrently, repeated banking frauds across public and private sector banks have intensified public indignation. The Staggering Magnitude of the Banking NPA Crisis: Persistent Non-Performing Assets: The Indian banking sector remains burdened with an NPA mountain hovering at Rs. 8 Lakh Crore. Massive Write-Offs: This staggering NPA load exists despite banks writing off more than Rs. 8 Lakh Crore in bad loans over the preceding six to seven years. Latent Stressed Assets: Enormous volumes of stressed loans remain unclassified, hovering on the brink of default. Severe Haircuts under IBC: Under the Insolvency and Bankruptcy Code (IBC), lending institutions are enduring an alarming average haircut of 70 percent on resolution. These systemic failures have placed the statutory audit function under intense regulatory and public crosshairs, sparking contentious debates on why auditors failed to sound the alarm before catastrophic collapse occurred. 3. The Watchdog Fallacy: Challenging the 1896 Kingston Cotton Defense When faced with criticism following corporate implosions, the audit profession frequently retreats behind the century-old British court ruling in In re Kingston Cotton Mills Co. (1896), which famously held that “an auditor is a watchdog, but not a bloodhound.” Defending the Indefensible? “But it can hardly be denied that even a watchdog would bark, if the need be, to send timely alarms to various stakeholders... Should we take shelter in a decision that is over a century old? Are we trying to defend the indefensible? Are we sailing against the current?” The authors confront the uncomfortable reality: when small depositors lose their lifetime savings in bankrupt banks or NBFCs, or when institutional lenders absorb thousands of crores in write-offs, legalistic defenses ring hollow. The profession cannot insulate itself behind obsolete Victorian jurisprudence. It must proactively evolve to align with modern public expectations. The Technical Spectrum: Limited Review vs. Audit vs. Forensic Audit A fundamental driver of public disillusionment is the widespread confusion regarding the technical scope of different assurance engagements: 1. Limited Review Narrow in scope, relies primarily on management inquiries and analytical reviews; provides moderate/negative assurance; less reliable than an audit. 2. Statutory Audit (The Midpoint) A horizontal examination using sampling based on risk assessments evaluated against materiality. Governed by civil jurisprudence to establish a true and fair view. 3. Forensic Audit (The Extreme) Deep vertical post-fraud probe on identified areas to uncover root causes and charge culprits. Akin to a criminal inquiry governed by criminal jurisprudence. Crucially, the layman investor possesses zero appreciation of terms like “sampling” or “materiality.” To the public, every audit is assumed to be a forensic evaluation verifying every single transaction. The profession’s vocabulary migrated from “true and correct” to “true and fair” and now to “fair and reasonable,” but stakeholder vocabulary remains anchored in expectations of total correctness. 4. Overcoming Reporting Bloat & Enhancing Public Understanding A few decades ago, statutory audit reports were crisp, one-page documents. Today, an unmodified report for a listed entity frequently spans 15 to 20 pages loaded with technical jargon that provides negligible practical takeaway for an ordinary shareholder. Reforming the Architecture of the Audit Report: Cutting Boilerplate Verbiage: Lengthy recitations of management and auditor responsibilities can be substituted with direct references to relevant statutes, notifications, or circulars, making reports concise and environmentally friendly. Legalities vs. Public Manifestation: Current reporting is heavily skewed toward limiting legal liability rather than communicating clear economic realities to the public. This balance must be recalibrated. Demystifying Technical Opinions: Ordinary readers fail to comprehend nuances between Qualified opinions, Adverse opinions, Disclaimers, Key Audit Matters (KAMs), and Emphasis of Matters (EoMs). These must be articulated in transparent, user-friendly language. Eliminating Obscure Fine-Print: Critical financial details must not be buried in fine-print schedules that act as a nightmare for users. Auditors and management cannot escape accountability merely by burying disclosures in dense annexures. 5. The True Record of “Audit India” & Statutory Safeguards The authors vigorously refute the blanket narrative that “Audit India” is failing. Indian auditing standards are fully converged with international standards, and countless Indian audits benchmark against the finest global practices: Macroeconomic Manifestation: The Tax Collection Surge A tangible, incontrovertible manifestation that “Audit India” is effectively executing its mandate is the historic surge in national tax collections, across both Direct Taxes and GST. Robust audit compliance directly underpins state revenue mobilization and macroeconomic formalization. The Indian ecosystem maintains extensive structural safeguards under the Companies Act, 2013 and ICAI regulations—including mandatory Peer Review for listed entity auditors, oversight by QRB, FRRB, and NFRA, strict auditor appointment disqualifications, mandatory auditor rotation, prohibition of non-audit services (Section 144), government permission required for auditor removal, and stringent time-bound fraud reporting under Section 143(12). Empowering NFRA Against Corporate Managements: When trust is breached, culpable parties must face exemplary punishment. Encouragingly, the Company Law Committee (Ministry of Corporate Affairs) has recommended empowering NFRA to take action against corporate managements as well, rather than concentrating punitive enforcement exclusively on statutory auditors. 6. Blueprint for Structural Audit Reform: Transparency, Joint Audits & Fair Fees To rebuild enduring public confidence, CA. Chopra and CA. Tulshan outline decisive structural interventions across six key dimensions: 1. Segregation of Audit & Non-Audit Services Structural segregation of audit and non-audit practices within accounting firms to eliminate inherent conflicts of interest and foster specialized audit institutions. 2. Mandatory Audit Transparency Disclosures Requiring auditors to disclose: (i) numerical materiality thresholds adopted, (ii) sampling methodology and sample size picked, and (iii) extent of external confirmations circulated and received in percentage and absolute terms. 3. Institutionalising Joint Audits Implementing mandatory joint audits for large entities above a threshold. Replicating the successful PSU/bank model brings fresh checks and balances, auto-review via rotation of work, and builds capacity, as already mandated by the RBI for Banks and NBFCs. 4. Mergers, Networks & Capacity Scaling Encouraging domestic Indian firms to merge and form nationwide networks to pool physical, human, and technological resources, enabling large-scale tech adoption. 5. Fair Audit Pricing & Refusing Low Fees “If a quality audit is required, then it must be paid for.” Indian audit fees remain an unacceptably low “poor cousin” of global fees. Firms must have the courage to reject unremunerative engagements to fund staff training and tech tools. 6. Expanding Peer Review & Periodic Audits Broadening peer reviews across all professional practice units, alongside mandatory 5-yearly reviews of all listed entities by FRRB, QRB, or NFRA. 7. Conclusion: “Awake Even in Our Sleep” – Partners in Nation Building In an unforgiving corporate landscape defined by hyper-accelerated product lifecycles, complex multi-layered corporate structures, and quarterly earnings pressures, trust cannot be claimed as an entitlement—it must be demonstrated continuously through visible forthrightness and technical excellence. Trust Must Be Earned by Relentless Demonstration “We certainly need to demonstrate that we are awake even in our sleep. The sooner we demonstrate it, the better it would be for the profession. It is said that ‘Trust is a dicey subject; everyone wants to be trusted but only few people are willing to put in the work to show themselves as trustworthy.’” The Indian Chartered Accountancy profession possesses the agility, competence, and integrity to rise above momentary aberrations, uphold public trust with complete transparency, and march forward as proud, indispensable “Partners in Nation Building.”

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 22–26 (Journal pp. 1458–1462) MSME MSME-Samadhaan CA. Maheshwar Marathe The author is member of the Institute. He may be reached at eboard@icai.in 💡 Critical Awareness for MSME Sustainability Lack of awareness amongst the MSMEs about their rights make them suffer on many fronts. Updating oneself by devoting a small amount of time on regular basis and quick decisions will help MSMEs greatly in running a profitable enterprise. With various economic reforms unfolding, with many e-enablers such as GeM and TReDS showing remarkable performance, there is a need for the MSMEs to be more organised and systematic in their day-to-day business. A stitch in time saves nine, fast changing economic scenarios have given everyone a chance rethink about their business strategies, modify them suitably and proceed towards transparency. Working Capital Management: The Lifeline of MSMEs One such area where greater awareness is the need of the hour and a major area of concern for the MSMEs is ‘working capital management’. Extreme delays in customer recovery, disputed receivables, overdue receivables turning into bad debts and write offs literally destroys the working capital cycle of the business. If not controlled on time, this problem impacts the liquidity of the business adversely and starts eroding the profits. What are the solutions? It’s simple, know your rights, be aware about the tools which are available for tackling this problem. There is a solution to every problem, need is to have a resolve and fight with confidence. The most robust solution is The Micro, Small and Medium Enterprises Development (MSMED) Act, a welfare legislation for the MSMEs and Samadhaan Portal, e-initiative of Ministry of MSME, www.samadhaan.msme.gov.in. Structural Scope of Analysis For better understanding, the topic can be discussed in 3 different sections: Salient provisions of the MSMED Act. Complete dispute resolution ecosystem. The SAMADHAAN - Step-by-process of filing the claim online. Salient Provisions of the MSMED Act Manufacturers & Service Providers MICRO SMALL MEDIUM Investments in Plant & Machinery or Equipment Upto Rs. 1 cr Upto Rs. 10 cr Upto Rs. 50 cr Turnover Upto Rs. 5 cr Upto Rs. 50 cr Upto Rs. 250 cr 45 Days Mandatory Credit Period: The act provides for a maximum time limit of 45 days as credit period to the buyer for all purchases made from Micro and Small Enterprises (MSEs). Only MSE Covered: Yes, this benefit is available to Micro and Small Enterprises only; Medium enterprises are not covered. No Trader: The benefit is available only to manufacturing and service entities and not to trading entities. Penal Compound Interest at 3 Times Bank Rate: If the payment is not made within 45 days, the buyer has to pay the MSE supplier interest at 3 times the bank rate (i.e., 13.95%, as present bank rate is 4.65%), compounded with monthly rests. MSE Facilitation Council (MSEFC): If the MSE is neither getting the payment nor the interest despite satisfactory delivery of goods/services, MSE need not go to any court but has to go to the MSE Facilitation Council (MSEFC). MSEFC is formed by each state government and sits at each District/block head quarter in every state. Strict 90-Day Resolution Time Limit: MSEFC decides the matter as a conciliator as per the provisions of Arbitration and Conciliation Act 1996 and has the mandate to resolve the dispute within 90 days from the date of reference. Udyam Registration Pre-requisite: Supplier (MSE) should be registered under Udyam Registration at udyamregistration.gov.in. Income Tax Angle (Non-Deductible Expense): The interest paid by buyer cannot be claimed as expense from his business income, (Non-deductible expense) under the Income-tax Act. Overall Dispute Resolution Ecosystem In business, maintaining healthy relation with all stakeholders is top priority, especially the customer supplier relations which are very crucial as well as complex. A trust driven, fair and equitable relation between the supplier and customer are the key to success for both the parties. It’s a quid-pro-quo relation, however precaution is necessary. Any supplier highly dependent on one single customer is highly avoidable. At the same time, having a nurturing attitude towards all suppliers even a small one, is a welcome corporate policy. In cases when the supplier ultimately decides that there seems to be no option other than approaching a legal forum for recovery of its long outstanding dues, he needs to approach dispute resolution ecosystem created by MSMED Act. Step-by-Step Claim Escalation Workflow (Pic-1 Architecture) Existence of Dispute: When an MSE concludes that there is something wrong with the buyer and time has come to go legal, it has to first approach the buyer through a simple letter on its own letter head, mentioning the basic provisions of MSMED Act. Samadhaan Portal: If the buyer pays, all is well and good, else the online petition must be filed on Samadhaan Portal, www.samadhaan.msme.gov.in. Instant Notice: As soon as the petition is filed, the buyer gets an auto generated notice from Ministry of MSME requiring him to pay the dues to his MSE supplier within 15 days, else proceedings of the MSEFC are initiated. Hearing: If the buyer still doesn’t pay the dues, he gets the notice for hearing in MSEFC. Mutual Settlement: At first hearing, the council asks the buyer and supplier to sit together and try to resolve the dispute mutually. If parties decide to mutually settle the matter, a signed MOU has to be filed so that the case can be disposed of by the MSEFC and updated online. Conciliation: If mutual settlement is not possible, then the council can provide a third party conciliator who guides the parties to come to some conclusion. Arbitration: If conciliation fails then the case is taken up for arbitration by the council and award is passed based on the merits of the case. Award: It is a speaking order of the MSEFC to pay the dues along with interest within a time bound manner. Appeal (Mandatory 75% Pre-Deposit): Buyer may challenge the award of the council but before that he is required to deposit 75% of the disputed amount in the court and part of such deposited amount is passed on to the MSE supplier. Execution of Award: If the buyer still doesn’t pay as per the award, then the supplier has to resort to execution of award with the help of a local court. Through executive petition, the supplier can get the assets of the buyer attached for recovery of dues. He can also get the buyer arrested till the dues are fully paid. The SAMADHAAN: Step-by-Step Online Filing Process www.samadhaan.msme.gov.in: Completely online, hassle free, cost effective and time saving method of dispute resolution and recovery of dues, specifically designed for the MSEs. The procedure of filing the case is very simple. This platform can be used by any MSE supplier, Pan-India. Prior to the launch of this online platform in October 2017, the entire filing process was offline and had a lot of manual intervention. Hard copy submission, manual scrutiny, decision on claim validity, sending manual notice to respondent, this entire manual process is now abolished and is replaced by the SAMADHAAN Portal. Ease of Process (6+ Months Saved) The initiative has established itself as the best tool to resolve disputed receivables, in a time bound manner and has created real ease in filing as well as resolution of dispute by saving a time of close to 6+ months in the entire resolution process. Minimal Filing Documentation Only PO and invoices required for filing of case. If there is no PO, an affidavit to that effect is also sufficient to file the case. Online Processing, Scrutiny & Real-Time Tracking Processing: Application gets converted to case on scrutiny by the concerned authority and hard copy submission is called for. Case can also be rejected at this stage with sufficient reasons. Response: Buyer may respond by paying the entire dues or he may choose to fight the same by responding to the notice. Settlement: If parties decide to mutually settle the matter, a signed MOU has to be filed so that the case can be disposed of by the MSEFC and updated online. Tracking: Real time tracking of case status is possible through the 9-stage digital lifecycle (Application filed > Online Intimation > Mutual Settlement Option > Council Case Conversion > Council Rejection check > SMS/Email alerts > Online Case Entry > Hearing Schedule updates > Final Disposal Status). Table - 1: Samadhaan Portal Performance & Case Disposal Statistics Details Appl Filed Appl Pending Cases Pending Appl Rejected Mutually Settled Appl Disposed No of Cases 108,990 30,502 29,493 23,856 10,579 14,560 100% 28% 27% 22% 10% 13% Amt Involved (Rs. in Crores) 28,161 6,775 10,383 5,146 1,465 4,392 100% 24% 37% 18% 5% 16% Five Actionable Commandments for MSEs & Enabling Government Initiatives LIQUIDITY = PROFIT Strengthen your working capital position with these five simple actionable steps: 1. Register Online: Register yourself as an MSME online at udyamregistration.gov.in. 2. Print Udyam Registration: Print the MSE registration number on each PO, INVOICE, and Delivery Challan (DC). 3. Insist on 45 Days Credit Limit: Insist for a credit period of not more than 45 days from the delivery of goods/services. 4. Demand Statutory Interest: Know that you are legally entitled to penal compound interest @ 13.95% (3 times bank rate) on delayed payments. 5. Escalate to MSEFC: Approach the MSE Facilitation Council through MSME-SAMADHAAN for quick dispute resolution and recovery of dues. Government Enabling Initiatives & Statutory Audit Disclosures A lot of enabling provisions have been enacted in the recent past which strengthen the cause of the MSMED Act directly and build awareness across corporate buyers, MSEs, and statutory auditors: Section 22 of MSMED Act: Mandatory reporting of purchases from MSEs and overdue amounts/interest by every entity to which audit is applicable under any statute in India. Mandatory TReDS Registration: Companies with turnover exceeding Rs. 500 Crore must register on the TReDS platform to ensure instant payment to MSE suppliers (MSME Notification No. 5621 dated 2nd Nov 2018). Half-Yearly Form MSME-1 Filings: Mandatory reporting of outstanding dues to MSEs beyond 45 days by every ‘Specified Company’ through Form MSME-1 (MSME Notification No. 5622 dated 2nd Nov 2018 & MCA Notification No. 368 dated Jan 2019). 3 TReDS Platforms: Establishment of 3 operational TReDS platforms for quick and cost-effective bill discounting. Consequent Auditor Responsibility: Enhanced responsibility of statutory auditors in verifying dues to MSEs, verifying payments within 45 days, and reporting non-compliances. Still a Long Way to Go: Five Strategic Reform Recommendations Though the overall awareness about the importance of liquidity and initiatives of the government is growing and empowering the MSEs to a great extent, these developments are at their growing stage and require impetus. The following five critical suggestions should be implemented: 1. Fulltime Member with Judicial Background: MSE Facilitation Council should have at least one fulltime member with judicial background. This will give a boost to the entire process, as being a quasi-judicial forum, it needs a judicial touch and consistency in the final awards. The rest of the composition is seamless. 2. Council to Hear Cases on Daily Basis: Presently, by and large, hearings at the council are not held at regular intervals. Hearings happen once a month, and in a few places, only a few times a year. Considering the growing volume of cases getting filed, it would be ideal if the council hears cases preferably on a daily basis, round the year. 3. Direct Execution/Recovery Powers at Council Level: Presently, for execution of the council’s award, the MSE has to approach the local court. Due to inherent delays in the present judicial system, execution and recovery takes years together, thereby defeating the purpose of SAMADHAAN. Creating a separate execution mechanism directly at the MSEFC level will speed up recovery dramatically. 4. PAN-Based Search of Supplier Status on Udyam Portal: The Udyam Registration portal (udyamregistration.gov.in) should enable searching the MSE status of any entity based on PAN. This will help in two ways: buyers can check the status of all suppliers and classify them into eligible MSEs to facilitate timely payments; and statutory auditors of buyer entities can verify the status of all suppliers to form an informed opinion on MSMED Act compliance. 5. Amendment to MSMED Act Definition of ‘Supplier’: The current ‘Supplier’ definition makes it compulsory for the MSE to have Udyam registration prior to making supplies. However, registration under the MSMED Act is discretionary for Micro and Small Enterprises. Due to this contradiction, many MSEs are losing the statutory benefits of resolving disputed dues for supplies made prior to registration—which contradicts the true intent of the MSMED Act as a welfare legislation. Conclusion: Nation Building & The Role of the CA Fraternity The MSMED Act is here to protect the interest of MSMEs who are the backbone of our economy. Thin margins, stretched credit periods on one hand and lack of awareness about MSMED Act and MSME-SAMADHAAN on the other, it’s high time that MSMEs create an organised work culture. At the same time, different regulatory requirements discussed in the earlier paras make it necessary for the auditors of buyers to report whether all MSE suppliers have been properly classified or not, amount paid within 45 days or not and whether interest is paid to them or not. Partners in Nation Building “As partners in nation building, continued participation of CA fraternity, in all welcome reforms, will certainly help the nation achieve all its ambitious goals in days to come.” — CA. Maheshwar Marathe

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 27–31 (Journal pp. 1463–1467) MSME Digital Transformation: SMPs and MSME - What, Why and How? CA. Varsha Jain Member, The Institute of Chartered Accountants of India (ICAI) Correspondence: jainvarsha82@gmail.com and eboard@icai.in 🚀 Empowering India’s Economic Growth Engine Over the last couple of years, technology is playing a major role in changing the ways businesses are conducted. All businesses are riding the technology revolution by adopting it. MSMEs are an important part of our economy, and it is paramount for them to adopt technology and transform themselves to reap the benefits. Our Small and Medium Practitioners (SMPs) are transforming themselves by leveraging technology and, with their skills and knowledge, are well placed to play the role of change agent for MSMEs. 1. What is Digital Transformation? Concept & Common Myths “Digital Transformation” is an industry buzzword whose roots trace back to the initial emergence of electronic data interchange and digital communication. Over time, the core dimensions of “What”, “Why”, and “How” have evolved dynamically: Defining Digital Transformation: Digital Transformation is the strategic rearrangement of technology, business models, and operational processes to deliver new, superior value propositions for customers and employees in a constantly developing digital economy. Crucially, transformation is an ongoing, continuous journey rather than a finite, one-time project. Myth 1: It is “Technology-Led” Reality: Most successful transformations originate from a clearly defined business “vision” and are led by commercial imperatives. It represents a fundamental switch from reactive survival to proactive market leadership. Myth 2: It is Only for Large Corporates Reality: While large conglomerates command deeper capital budgets, organizations of every scale have successfully re-engineered their models. The national JAM (Jan Dhan, Aadhaar, Mobile) trinity has provided micro-units an equitable, low-cost platform to unlock exponential growth. 2. Macroeconomic Significance of Indian MSMEs & The Urgency to Transform Micro, Small and Medium Enterprises spanning manufacturing, agro-processing, packaging, chemicals, infrastructure, and IT/ITeS represent the vibrant backbone of India’s economic and social evolution: 33.4% Manufacturing Output Contribution to India’s total manufacturing. 30.74% Total GDP Share 6.11% manufacturing + 24.63% services (IBEF). >120 Million Citizens Employed 2nd largest employer in rural India post-agriculture. 40% Target FY 2024-25 GDP Goal Up from 28.77% (FY16) and 30.5% (FY19) (PIB). Why MSMEs Must Accelerate Transformation: Erosion of Captive Boundaries: Small businesses historically survived on niche localized offerings and price competitiveness. As global and domestic e-commerce dissolves geographic moats, MSMEs face existential competition. Supply Chain Cascading Mandates: Large corporates are legally bound to audit non-financial ESG metrics down their vendor tiers. Concurrently, mandatory GST e-invoicing, digital e-way bills, and automated tax matching require micro-enterprises to ditch manual logbooks. Leveling the Competitive Playing Field: Cloud infrastructure, big data analytics, and Artificial Intelligence allow agile small businesses to deliver consumer experiences rivaling multinational corporations. 3. Four Functional Pillars of Operational Transformation Digitalization and automation can be executed across four core functional areas of an enterprise: 1. Core Processes Production lines represent primary cost centers. Automation solves poor quality control, low labor productivity, machine downtime, safety risks, and monotonous toil through sensor retrofitting, CNC machining, automated welding, and robotics. 2. Operations & Supply Chain Real-time visibility across end-to-end supply chains. Digitizing order processing, cash-flow pipelines, raw material inventory, dispatch logistics, and accounts receivables to optimize working capital turnover. 3. Customer Experience Mantra: “Deliver to the customer, when and how they want it.” Transitioning from physical counter memory (like traditional kiranas) to omni-channel customer portals, mobile tracking, and personalized digital service. 4. Accounts & Finance Eliminating error-prone manual bookkeeping through automated bank statement scraping, integrated cloud accounting software, automated GST reconciliation, and seamless forward-backward ERP integration. 4. The 5-Pillar Digital Transformation Framework: People, Process, Technology, Data & Vision The journey of digital transformation requires a structured architecture stitched together by an overarching strategic Vision: 1. Vision: Clarity of leadership roadmap accelerates execution, prevents disorientation, and anchors the transformation around core business objectives. 2. People: The single most vital element. “A strong leader and a talented team may not always guarantee success, but the lack of it almost guarantees failure.” Transformation must be driven top-down, upgrading internal skill sets and closing talent gaps. 3. Process: Transitioning from disconnected, ad-hoc activities to defined, repeatable, and quantifiable standard operating procedures (SOPs). 4. Technology: Deploying cost-effective Software-as-a-Service (SaaS), cloud infrastructure (AWS, Google Cloud), and affordable CRMs (Zoho, Salesforce) without over-investing in superfluous systems. 5. Data: Recognizing that “data is the new oil.” Converting routine operational and sales data into predictive managerial intelligence. Dynamic Component Interactions: People + Process = Scale Standardized procedures enable one person to match the output of ten uncoordinated workers (e.g., QSR food franchise models). People + Technology = Innovation Equipping workers with digital tools sparks creative operating solutions. Process + Technology = Automation Eliminates repetitive manual friction and slashes operational costs. Layering Data onto these interactions prioritizes scaling vectors, commercializes innovations, and maximizes operating productivity. 5. External Ecosystem Enablers: Public Infrastructure & CRISIL Insights India’s digital ecosystem provides powerful catalytic enablers supporting small business modernization: Governmental Push Targeted capital access schemes including MUDRA loans, Stand-Up India, Start Up India, alongside unified registration via Udyam / Udyog Aadhaar and technology acquisition subsidies. Digital Public Rails High-velocity rails including UPI (Unified Payments Interface), RBI’s Account Aggregator (AA) framework for cash-flow credit underwriting, and the open e-commerce protocol ONDC (Open Network for Digital Commerce). CRISIL Digital Adoption Findings: According to an authoritative report by CRISIL, digital adoption among Indian small businesses has crossed the tipping point: 47% of micro-enterprises and 53% of SMEs have already established digital sales channels, leveraging social commerce platforms (WhatsApp Business, Instagram, Facebook) to connect with customers nationwide. 6. The Role of SMPs: The “Outside-In” Strategic Advisor & Implementation Roadmap Small enterprises cannot afford the prohibitive fee structures of global strategy consultancies. Herein lies the immense opportunity for Small and Medium Practitioners (SMPs). Chartered Accountants possess deep institutional knowledge of client financials and enjoy trusted advisor status. It is time for CAs to expand beyond routine book finalization and become catalytic technology-enablers: A Pragmatic 3-Step Advisory Roadmap: “Keep it Simple” Define “AS-IS” Process: Most MSMEs possess zero written operating manuals. The SMP must first document and sign off the baseline “AS-IS” manual workflow. Architect “TO-BE” Future State: Design the optimized, automated workflow expected post-technology implementation. Execute on “Input → Process → Output”: Input: Historical data, automated API entries, and portal feeds. Process: Robust validation and segregation of input-specific processing. Output: Strategic dashboards delivering value across leadership, operational, and managerial tiers. Change Management: Alleviating Workforce Fears Transformation fundamentally demands a cultural mindset change. SMPs must handhold clients, conducting structured training to reassure workers that automation is introduced to augment human productivity, not eliminate jobs. Real-World Case Studies of Indian MSME Transformation: Panipat Handloom Artisan Leveraging Flipkart and Amazon marketplaces to sell handloom textiles directly across India, bypassing middlemen. Uttar Pradesh Agri-Unit Using agritech platforms for online mandi sales, bulk input purchasing, and precision weather/soil analytics. Woodland Omni-Channel Interlinking over 500 retail stores into an integrated omni-channel system for unified customer shopping. Urban Cloud Kitchens Executing hub-and-spoke delivery models to service entire metro populations with zero brick-and-mortar storefront costs. 7. Conclusion: Seizing the V-Shaped Recovery Window As India navigates an aggressive V-shaped post-pandemic economic recovery, the commercial growth opportunities for MSMEs are unprecedented. However, seizing these opportunities requires transcending legacy budget deficiencies, cybersecurity hesitations, and resource gaps. SMPs as Trusted Navigators of MSME Transformation SMPs must up their game. By guiding MSME clients across supply chain integration, digital working capital, cash-flow lending, and automated tax compliance, Chartered Accountants can cement their position as indispensable strategic advisors—catapulting India’s small enterprises into resilient, globally competitive powerhouses.

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 32–35 (Journal pp. 1468–1471) WEALTH MANAGEMENT Beyond Balance Sheet – A Wealth Maximiser approach for Chartered Accountants *CA. (Dr.) Amit Bagga and **Sh. Jitender Kumar *Author is member of the Institute. **Financial expert. Authors can be reached at baggaip@gmail.com, jkumar0110@gmail.com and eboard@icai.in 🌱 Emerging Play for Chartered Accountants The Chartered Accountants are well versed with various concepts of finance and taxation. In fact the profession is sought after for its expertise in these areas. The article revolves around and explores the application of these skills and knowledge beyond the traditional field to new and emerging play of Wealth Management. The Chartered Accountancy profession is well poised to delve in this area and develop it as a practicing avenue for the future. Recording Other People’s Money V/s Managing Other People’s Money The profession of Chartered Accountancy is known for their financial acumen and knowledge about taxation and accountancy. It is their ability to apply knowledge to real-time that sets them apart. They are known as taxation and financial experts and it’s time that profession should think about value creation by applying these skills in the emerging field of wealth creation. As a student of commerce in high school, my favourite subject was Accountancy (no doubt it is today too!) and nothing other than the CA course was my dream. Because if you love accounting, you ought to be a Chartered Accountant! When we look at a Balance Sheet or a Profit and Loss account there are three aspects: one from the perspective of the preparer, second from the perspective of the user and, third from the perspective of an auditor or a regulator. All of them use the same terminologies: Assets, liabilities etc., but in a different manner. In the course of time, I became a portfolio manager and I am still using the same accounting training but in a different way. The Mindset Shift: From Historical Numbers to Future Value While we prepare the balance sheet, we have to record all assets, cash flows, expenses and income of our client. As auditors, we dig deeper into those numbers just to find out if some errors of omission or some real mismatches that must be reported to the shareholders. For us as Chartered Accountants, they are numbers, and we never try to think beyond because that is what our job is. We cannot believe in any future projections and are trained to always be conservative and ethical in our approach. This is a typical concept of recording another’s money. Times are changing and so are we. A Chartered Accountant now has to look beyond only the balance sheet and start thinking of managing money as well. The client’s and Balance Sheets will be same but our solutions will be way forward and more future oriented. A Client’s Life Balance Sheet Approach: Human Capital & Core Capital To better comprehend the financial position of an individual and to manage the associated risks by that individual—an economic balance sheet (or holistic balance sheet) can be used. A wealth manager will always see an individual’s assets that are made up of mainly two components - human capital and financial capital, which has its own risks to manage. 1. Human Capital Human capital is the net present value of an investor’s future expected income weighted by the probability of surviving to each future age. For young professionals, human capital is vastly larger than all other balance sheet assets combined. 2. Financial Capital Financial capital includes tangible and intangible assets owned by an individual or household—such as residential property, vehicles, equities, fixed income investments, and bank deposits. The Wilcox, Horvitz and Di Bartolomeo Model (2006) In 2006, famous authors Wilcox, Horvitz and Di Bartolomeo developed the notion of a life balance sheet, which is a comprehensive accounting of an investor’s assets and liabilities, both explicit and implied: Explicit Assets: Readily marketable financial assets (stocks, bonds, liquid funds) and real estate. Implied Assets: Present value of employment earnings (human capital or net employment capital) and expected guaranteed pension benefits which provide distinct economic value. Explicit Liabilities: Readily identifiable debt obligations, mortgages, and personal loans. Implied Liabilities & Core Capital: Capitalised value of desired future life goals—funding children’s college education, funding a secure retirement, emergency safety reserves, and seed capital for business ventures. The capital required to maintain a given lifestyle, fund these goals, and provide reserves is designated as Core Capital. Excess Capital: An investor with more assets than liabilities on the life balance sheet has more capital than necessary to fund lifestyle and reserves; this surplus is Excess Capital that can be safely transferred to others or invested aggressively without jeopardising lifestyle. That is where accounting ends and wealth maximisation starts! Exhibit 1: Structure of a Hypothetical Life Balance Sheet Assets (Portion % in Total) Liabilities & Equities (Portion % in Total) Net Employment Capital (Human Capital): ~60% Other Investments: ~5% Fixed Investments (Bonds, Deposits): ~5% Equity Investments: ~10% Residential House Property: ~20% Mortgage Loan (Explicit Liability): ~5% College Education Fund (Implied Liability): ~10% Current Lifestyle Maintenance (Core Capital): ~25% Retirement Spending Reserve (Implied Liability): ~35% Excess Capital (Wealth Maximisation Equity): ~25% Practical Case: The Young IIM Graduate Entering an MNC Let’s take the example of an individual who has just joined a large MNC firm after completing MBA from IIM and looking for advice about his taxation and current level of savings. The person should be guided to have a goal-driven approach rather than a consumption-driven approach, and informed about the life balance sheet approach and how his present level of assets and liabilities will keep evolving further with time. This enlightenment will encourage him to talk more about savings and investments rather than only focusing on his current level of taxation and earnings. A traditional Balance Sheet approach enables us to understand marketable assets that exist today; however, it offers limited insights on how to optimally utilize these assets to maximise the expected lifetime value of the individual (a concept economists call “utility”). An accountant with a wealth maximisation objective can use the economic balance sheet approach to support his clients to comprehend how available resources can be put to use in funding life goals over the remaining lifetime. When we actually showcase the significance of human capital and other assets through the balance sheet approach, the attitude of the client shifts towards considering the Chartered Accountant as their primary guide for managing wealth. Think Future: The Investment Policy Statement (IPS) A Chartered Accountant generally advises clients regarding investments with respect to tax planning under Chapter VIA (Sections 80C to 80U). Besides taxation, he needs to address short-term, medium-term, and long-term goals of the client and map financial instruments based on cash flows, risk, return, loan repayments, insurance, retirement, and different financial needs in sync with tax planning—i.e., through an Investment Policy Statement (IPS). “Financial Planning and wealth creation starts with IPS. It’s a transcript guide prepared between an advisor and the client that defines general rules for investment goals which meets the goals of a client and describes the plans that should be engaged to meet these goals.” As an adviser, they should counsel the client by addressing priorities of goals to generate wealth. This counselling and discussion must include (but is not limited to) three core factors: I) Required Rate of Return: Calculated based on time horizon, the target amount required for a goal, and its present value. II) Risk Taking Ability: Determined objectively by client’s age, time horizon, financial resources, and balance sheet risk capacity. III) Behavioural Loss Tolerance: Subjective risk preference and emotional perception of market fluctuations and drawdown pain. Investor Risk Profiling: The Traffic Signal Approach A wealth manager should describe and identify acceptance for risk while designing an investment policy statement. He must acknowledge that portfolios are subject to risk. A structured diagnostic questionnaire should be administered to identify client behaviour: Diagnostic Questionnaire Dimensions: In case of investment erosion due to a stock market crash, what action will the investor take? What is the investor’s practical experience with investment products? What is the investor’s preference towards holding volatile/risky assets? What is the investor’s depth of knowledge about capital and stock markets? 🟢 Green Light Profile (High Ability & High Tolerance) Data is adequate to take decisive action. The advisor can recommend a highly volatile growth portfolio (equities) for clients who maintain both high risk-taking ability and high loss tolerance, even if their risk need is moderate or low. Conversely, a low volatile portfolio is allocated when both risk ability and behavioural tolerance are low. 🟡 Yellow Light Profile (Ability > Loss Tolerance) Indicates that the investor’s financial risk-taking ability is greater than their behavioural loss tolerance. This means investor education is required. The advisor must guide and impart market knowledge so that discussions address the client’s emotional attitude to become consistent with their objective risk-taking capacity. 🔴 Red Light Profile (Return Need > Risk Ability) Triggered when the required rate of return to accomplish the desired goals exceeds the investor’s risk-taking ability. This situation requires revaluating goals and re-establishing realistic expectations. Actionable recommendations are only possible once target aspirations and return requirements are adjusted downwards. Client Requirements & The Indispensable Portfolio Approach A Wealth Manager must talk with his client about their financial planning, life goals and share insights about wealth creation to make them aware about managing their assets to live a financially independent life. The solution is investing early to create wealth across three fundamental pillars: 1. Regular Income Generation Investments in growing assets (equities, mutual funds, debt instruments) create alternate income through dividends and interest, securing financial independence. 2. Retirement Planning Corpus Building an independent retirement corpus enables a stress-free, healthy retirement where past savings work tirelessly for the individual. 3. Goal-Based Investing Establishing separate dedicated investment funds for specific future milestones ensures focused discipline and prevents goal cannibalisation. The Diversification Maxim “I can break a single pencil, but I cannot break 50 pencils tied together.” A portfolio consists of many uncorrelated assets, like equities, bonds, real estate etc. Clients often arrive with strong behavioural biases tilted towards a single asset class like real estate or speculative equities. We must educate them on the grave risks of putting all their money in highly correlated assets. Real-World Case Study: The Crypto Fallacy One of my friends made good money in equities over the long term, but all his money invested in the crypto market plunged by 50%. When I showed him that his combined portfolio return (equities + crypto) failed to even match fixed deposit returns, he finally understood the essence of the portfolio approach and embraced structured advice. Conclusion: A Triple Growth Opportunity for Chartered Accountants Wealth creation is simple when done right and advised right. Behaviour control, discipline and commitment to investing is the key to create wealth. The power of compounding can help in multiplying returns if the time horizon is long term. With various investment opportunities available in the market, it is essential to pick the right one that helps in wealth creation. Moreover, wealth creation aligned with life goals or financial goals, will help investors stay motivated. “As a wealth advisor to the client, a Chartered Accountant can act as a guide to wealth creation. Providing financial education to your clients will not only help their growth, but for a professional accountant, it represents an unparalleled opportunity for financial, professional, and intellectual growth.” — CA. (Dr.) Amit Bagga & Sh. Jitender Kumar

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 37–40 (Journal pp. 1473–1476) SMP Perspective Practice Management Solution – a necessity for New age CA. Adarsh Madrecha Member, The Institute of Chartered Accountants of India (ICAI) Contact: psjain91@gmail.com and eboard@icai.in CA. Priya Madrecha Member, The Institute of Chartered Accountants of India (ICAI) Contact: psjain91@gmail.com and eboard@icai.in ⚙️ Adapting to Digital Realities in Professional Practice In the post-COVID scenario, technology advancement and digital boom has changed the working pattern of each one of us. It has opened a profusion of opportunities for professionals like Chartered Accountants. We have a wide stream of avenues now which were not even heard before. These opportunities have come with their own set of challenges. To meet those challenges, reforming changes are expected in the way a practice is managed. As Kent Beck has rightly mentioned: “The business changes. The technology changes. The team changes. The problem is not change per se, because change is going to happen; the problem rather is the inability to cope with change when it comes.” 1. The Modern CA Landscape & The Technology Paradox Establishing the necessary IT infrastructure and maintaining fluency with cutting-edge tools is vital for every modern professional practice. Technology improves operating efficiency, eliminates geographical boundaries, and drives cross-border professional services. Firms embracing proactive digital transformation set the definitive foundation for long-term competitiveness. The Curious Paradox of Chartered Accountancy: Chartered Accountants possess an extraordinary intellectual capability to master complex statutes, intricate tax codes, and regulatory notifications in a matter of days. Yet, many find it arduous to implement modern technology across their own firms. This friction stems not from the technical complexity of software, but from the historical reality that operational practice technology has rarely been treated as a core strategic concern. Earlier, comprehensive Practice Management Solutions were regarded as the exclusive domain of large multi-partner firms. Today, however, they have become an absolute operational necessity for Small and Medium Practitioners (SMPs). SMPs form the bedrock of economic expansion in developing nations like India. Facing fierce marketplace competition and the constant pressure of statutory due dates, modern office automation is indispensable. 2. Beyond Timesheets: Defining the Modern Practice Architecture With initiatives like Make in India revitalizing manufacturing and entrepreneurship, the demand for CAs has escalated dramatically. Emerging MSMEs rely heavily on SMPs for end-to-end guidance—from entity incorporation and regulatory licensing to ongoing tax filings, financial reporting, and management consulting. A Unified Single Source of Truth Historically, the phrase “Practice Management” evoked thoughts solely of “Task Management and Timesheets.” While task allocation remains vital, a true modern solution serves as a comprehensive operational operating system. It synchronizes staff performance tracking, elevates client engagement, orchestrates billing and collections, streamlines internal communication, and establishes an authoritative single source of truth powered by actionable business intelligence. 3. Core Functional Pillars of Modern Practice Management CA. Adarsh Madrecha and CA. Priya Madrecha unpack eight indispensable modules transforming daily operations in progressive CA firms: 1. Client Portal & Dedicated Mobile App Accustomed to instant e-commerce tracking, clients expect on-demand visibility. Portals provide: Real-time task tracking (in progress, completed, stuck). Secure cloud downloads of final deliverables and filings. Digital Inward/Outward Document Registers. Direct document uploads from mobile cameras. Live billing statements, invoices, and payment balances. 2. Objective, Data-Driven Leave Management Abolishing subjective approvals based on vague notions of workload. Systems integrate with staff task calendars, evaluating pending deliverables before approving leaves, thereby ensuring seamless client coverage and supporting authentic work-life balance. 3. Geo-Location Based Attendance When audit teams and articled assistants work on-site at client premises, GPS-tagged check-ins log exact arrival and departure times, eliminating “buddy punching” and time theft, while reassuring clients of rigorous professionalism. 4. Dedicated Office Communication Channels Overcoming the chaos of WhatsApp groups. Segregates personal chats from office communications, protects confidential client data, and links chat discussions directly with engagement tasks and documents. 5. Automated Password Access Vault Sharing all client statutory passwords (Income Tax, GST, MCA, TRACES) across all staff exposes firms to catastrophic liability. Automated password managers grant access strictly to assigned personnel and revoke credentials automatically upon task completion. 6. Actionable Executive Dashboards Distilling massive volumes of operational data onto a single screen. Equips managing partners with an instant bird’s-eye view to detect overdue bottlenecks and allocate resources before deadlines breach. 7. Timesheet-Driven Fee Revisions Combating unremunerative rock-bottom fees. Precise timesheets log all hours spent by partners and assistants. When client operations surge, firms have incontrovertible data to justify necessary fee increases while maintaining competitive pricing. 8. Right Person on the Right Job Allocating a senior manager to routine work budgeted for an articled assistant destroys engagement margins. Smart delegation tools align task complexity with staff competence, current workloads, and past turnaround times. 4. Critical Implementation Considerations: Security, Pricing & Support When evaluating prospective software platforms, SMP leadership must navigate three decisive factors: Cloud Security & Live Threat Monitoring Dispelling the conservative myth that local desktop servers are safer than the cloud. Leading cloud providers (AWS, Azure, Google Cloud) deploy world-class encryption, multi-factor authentication, and 24/7 security monitoring far superior to vulnerability-prone in-house computers. SaaS OpEx Economics vs. Legacy CapEx Transitioning from one-time capital expenditures on depreciating software to monthly/annual Software-as-a-Service (SaaS) subscriptions. Ensures automated real-time statutory updates without manual patching. After-Sales Support & Domain Expertise Selecting vendors with proven longevity in the accounting sector who understand CA office workflows and provide responsive Service Level Agreements (SLAs) to troubleshoot glitches instantly. 5. Debunking the Budget Myth: Less Than 2% of Monthly Staff Salaries Debunking the Cost Myth: The 2% Rule It is an old wives’ tale that implementing a practice management solution demands enormous budgets and disrupts daily client service. In truth, most modern solutions are implementable at less than 2% of a firm’s monthly staff salary expense. The billable hours captured, unbilled out-of-scope tasks monetized, and penalty avoidance derived in the long run massively outweigh the nominal subscription fee. By identifying designated internal champions to spearhead deployment and standard operating procedures (SOPs), an SMP can transition smoothly without missing client deadlines. Culture as the Enduring Competitive Edge “It takes years to build a culture, but once we have the right culture we are already a step ahead of our competitors. By optimizing day-to-day office activities, it is possible to save a great deal of time and resources which enhances capabilities to the maximum.” A robust practice management system empowers CA professionals to navigate the complex web of regulations with total peace of mind, transforming SMPs into agile, high-performing digital enterprises.

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 51–55 (Journal pp. 1487–1491) INTERNATIONAL TAXATION Corporate Guarantee – No Guarantee of Classification as an International Transaction? CA. Raj Satish Maniyar Member of the Institute of Chartered Accountants of India (ICAI) Correspondence: maniyarraj28@gmail.com and eboard@icai.in 📌 Overview & Executive Summary There is some ambiguity when it comes to determination of transactions of provision of corporate guarantee (“the transaction”) as an international transaction under the provisions of the Income-tax Act, 1961 (“the Act”) and subsequent benchmarking of the same for transfer pricing purposes. In this article, conditions where the transaction may or may not be considered as an International Transaction as per the Act and methods of benchmarking in case the same has been held to be an international transaction are discussed. Apart from the provisions of the Act, the views of the ‘Organization for Economic Co-operation and Development’ (OECD) are also discussed. Read on... 1. Definition of Corporate Guarantee A ‘Corporate Guarantee’ (CG, henceforth) is a legal tripartite agreement entered into between a borrower, lender, and guarantor, whereby the guarantor takes full legal responsibility for the debt repayment of the borrower in the event that the borrower defaults on the repayment of the loan. Statutory Definition under Rule 10TA of the Income-tax Rules, 1962 As per Rule 10TA of the Income tax Rules, 1962 (“the Rules”), CG means an explicit corporate guarantee extended by a company to its Non-resident (NR) wholly owned subsidiary (WOS). However, as per Rule 10TA, CG does not include implicit CG, performance guarantee, or any other guarantee of similar nature. It is imperative to note that the said statutory meaning of CG is strictly limited to the application of ‘Safe Harbour’ Rules as prescribed in Section 92CB of the Act. The Typology of Corporate Guarantees In cross-border commercial and financial transactions, guarantees manifest across three primary categories: a. Explicit Corporate Guarantee An Explicit CG represents a formally executed, legally binding contract under which the lender acquires an enforceable right to compel debt repayment from the guarantor in the event of default by the primary borrower. Commercial Feature: Guarantee fees or commissions are charged by the guarantor from the borrower in this case. b. Implicit Corporate Guarantee An Implicit CG arises when financial and economic benefits are enjoyed by the borrower solely on account of external perceptions regarding the guarantor’s standing—such as corporate reputation, global standing, parental lineage, and overall creditworthiness. In this scenario, the guarantor does not execute any legally binding instrument nor play a direct active role in providing security to the lender. Commercial Feature: This is not legally binding. Guarantee fees are not charged by the guarantor from the borrower. c. Performance Guarantee A Performance Guarantee means an agreement entered into between a client and a contractor (or backed by a parent entity) designed to assure the client that the contractor’s underlying contractual, operational, or procurement obligations will be fully executed in conformity with the principal contract. 2. Classification of Corporate Guarantee as an International Transaction Over the years, the classification of CG as an International transaction has been a very contentious issue, both pre and post Finance Act (FA, henceforth), 2012 amendment to Section 92B of the Act. Amendment made to ‘Meaning of International Transaction’ u/s 92B vide Finance Act, 2012 Finance Act, 2012 inserted an Explanation to Section 92B wherein it was stated that certain transactions would be included in the expression “international transaction” with retrospective effect from April 1, 2002. The legislative intent was expressed as a clarificatory amendment, and under orthodox principles of statutory construction, clarificatory amendments normally have retrospective application. Judicial Check on Retrospectivity: Siro Clinpharm Private Limited [TS-144-ITAT-2016(Mum)-TP] Notwithstanding the statutory wording, the Hon’ble Mumbai Income Tax Appellate Tribunal (ITAT) in the landmark case of Siro Clinpharm Private Limited held that the said amendment could not apply retrospectively. The Tribunal held that imposing a transfer pricing obligation retrospectively on completed corporate transactions was impermissible. Therefore, in cases pertaining to the period prior to the amendment made by the FA, 2012, in the majority of judicial decisions, it was held that the amendment was substantive or could have only a prospective application. Contentions of Taxpayers after Finance Act, 2012 Amendment Vide Finance Act, 2012 amendment, the transaction of provision of guarantee was specifically included in the Act [see Explanation (i)(c) to Section 92B]. Therefore, the contention of taxpayers that explicit corporate guarantees were not international transactions as per the legal position prior to the FA, 2012 amendment would not hold good for subsequent periods. However, significant controversies remain regarding implicit guarantees and performance guarantees: Absence of Bearing on Profits, Income, Losses, or Assets In cases of implicit CG and performance guarantees, the guarantor plays merely a passive role and, in ordinary commercial practice, does not charge any guarantee fee from the borrower. Furthermore, the amount guaranteed on behalf of the borrower is universally reflected merely as a ‘Contingent Liability’ in the notes to accounts of the guarantor’s financial statements, without impacting the balance sheet asset base or profit and loss statement. Under Section 92B(1), an essential statutory ingredient of an international transaction is that it must possess a “bearing on the profits, income, losses or assets of such enterprises”. Inasmuch as implicit and performance guarantees do not create any immediate financial outlay or impact on the guarantor’s earnings or asset value, it can be legitimately contended that the same is not an international transaction. Judicial Precedent: The Delhi ITAT in Bharti Airtel Ltd. vs ACIT [2014] 43 taxmann.com 150 (Delhi – Trib.) accepted this exact proposition, ruling that in the absence of any bearing on profits, income, losses, or assets, a corporate guarantee does not constitute an international transaction. The ‘Shareholder Activity’ and ‘Quasi Capital’ Doctrine In Micro Ink Limited [TS-568-ITAT-2015(Ahd)-TP] and subsequently affirmed in Adani Enterprises Limited [TS-193-ITAT-2019(Ahd)-TP], the Ahmedabad ITAT established the pioneering doctrine that the issuance of corporate guarantees by a parent company for its subsidiary is in the nature of ‘shareholder activities’ or ‘quasi capital’. It represents an owner’s commitment to protect and nurture its capital investment, rather than a commercial ‘provision of services’ under Section 92B. Although these landmark cases pertained to Assessment Years prior to the Finance Act, 2012 amendment, the underlying juridical premise—that such transactions have no direct bearing on the enterprise’s profits, income, losses, or assets—continues to be vigorously canvassed by taxpayers in post-amendment proceedings. 3. Benchmarking of Corporate Guarantee in Cases Held as International Transactions Apart from the fundamental controversy of classification of CG as an international transaction, the other controversy that merits equal consideration, if not more, is the benchmarking of fees charged by the guarantor to the borrower for guarantying the loan amount. A. Rejection of Naked Bank Quotes: Everest Kento Cylinders Ltd. [TS-200-HC-2015(BOM)-TP] In the absence of reliable external empirical sources to benchmark the guarantee fees charged, the Revenue authorities have routinely adopted “naked external quotes”—i.e., standard commercial rates advertised by commercial banks on their websites for bank guarantees (often ranging from 1.5% to 3.0%)—as the arm’s length range to be applied on corporate guarantees issued to Associated Enterprises (AEs). The Hon’ble Bombay High Court in the landmark decision of CIT vs. Everest Kento Cylinders Ltd. decisively rejected this methodology, delineating the fundamental differences between bank guarantees obtained from commercial banks and corporate guarantees issued by a parent holding company for its AE: Immediate Encashability: In cases where bank guarantees are obtained from commercial banks, the higher commission charged is economically justified because bank guarantee contracts are easily and unconditionally encashable by the beneficiary in the event of default without litigating the underlying debt. Non-Comparability of Institutions: The comparison is not between comparable uncontrolled transactions, but between guarantees issued by commercial banking corporations operating for retail profit versus a corporate guarantee issued by a parent company for the mutual commercial benefit of its subsidiary AE. Distinct Commercial Considerations: The business considerations, credit evaluation frameworks, risk allocations, and collateral requirements applicable to corporate guarantees are entirely distinct and separate from those governing bank guarantees. Holding: The Hon’ble Bombay High Court firmly rejected the External Comparable Uncontrolled Price (CUP) method based on naked bank quotes for benchmarking corporate guarantee transactions. B. Primacy of Internal CUP: Asian Paints Ltd. [TS-297-ITAT-2013(Mum)-TP] In Asian Paints Ltd., the Hon’ble Mumbai ITAT deleted the transfer pricing addition made by the Transfer Pricing Officer (TPO) and held that: Whenever an Internal CUP is available within the taxpayer’s own financial transactions, it must be analysed, examined, and prioritized over external data. Guarantee commission rates obtained by merely relying on third-party market data, without conducting an exhaustive comparability analysis of actual transactional parameters, cannot be applied in a blanket, mechanical manner. Holding: The ITAT upheld the primacy of the Internal CUP method for transfer pricing benchmarking of corporate guarantee transactions. C. Indian Safe Harbour Rules (SHR) Framework (Section 92CB & Rule 10TA / 10TD) Under the Indian Safe Harbour regime, a taxpayer providing a corporate guarantee to an AE may opt for declared safe harbour rates to eliminate transfer pricing scrutiny and protracted litigation. As per the SHR definition: “Corporate guarantee” means explicit corporate guarantee extended by a company to its owned subsidiary being a non-resident in respect of any short-term or long-term borrowing. As per the Explanation to the definition under Rule 10TA, explicit CG does not include letters of comfort, implicit corporate guarantees, performance guarantees, or any other guarantee of similar nature. Guaranteed Sum Category Eligibility & Credit Rating Condition Minimum Arm’s Length Commission / Fee Sum Guaranteed ≤ INR 100 Crore Explicit guarantee to owned NR subsidiary; no mandatory external credit rating stipulated. Not less than 1.00% p.a. of the amount guaranteed Sum Guaranteed > INR 100 Crore Credit rating of the AE, as undertaken by an agency registered with SEBI, must be of adequate to highest safety. Not less than 1.75% p.a. of the amount guaranteed 4. OECD Approach on Determination of Arm’s Length Price of Guarantees The Organization for Economic Co-operation and Development (OECD) released a comprehensive report on the pricing of financial transactions in its ‘Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8–10’ (hereinafter referred to as “the Report”), subsequently incorporated into Chapter X of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD 2022). Salient Distinctions under the OECD Framework Explicit vs. Implicit Distinction: The Report fundamentally distinguishes between explicit legal guarantees and passive implicit support. Scope of Explicit Guarantees: An explicit guarantee confers tangible economic benefits on the borrower, such as securing an increased quantum of borrowing and/or achieving a tangible reduction in the applicable interest rate coupon on the underlying loan. Exclusion of Letters of Comfort: The Report explicitly notes that a ‘letter of comfort’ or any other lesser form of credit support involves no explicit assumption of legal risk by the parent entity, and therefore cannot be characterized or priced as an explicit corporate guarantee. The Five OECD Methods for Pricing Financial Guarantees a. Comparable Uncontrolled Price (CUP) Method The CUP method may be deployed where reliable internal or external comparables exist—such as independent commercial guarantors providing guarantees in respect of comparable credit facilities to other borrowers, or where the identical borrower has other comparable credit facilities that are independently guaranteed by unrelated third parties. Practical Limitation: When available, uncontrolled guarantees represent the most reliable comparable to determine arm’s length guarantee fees. However, the Report openly acknowledges that publicly available empirical data on sufficiently similar credit-enhancing guarantees between unrelated parties is exceptionally rare and difficult to identify in commercial reality. b. The Yield Approach Under the Yield Approach, the transfer pricing analysis quantifies the net interest spread between the borrowing cost payable by the subsidiary without the explicit guarantee and the interest rate payable with the guarantee. Mandatory Bifurcation of Implicit Support: The methodology strictly mandates a two-step calculation: first, determining the standalone borrowing rate after incorporating the passive rating enhancement attributable solely to group membership (the “halo effect”); and second, determining the interest rate payable with the explicit guarantee. The arm’s length fee cannot exceed the net benefit resulting exclusively from the explicit guarantee after stripping out the implicit support already available to the borrower. The benefit of implicit support is defined as the difference between the borrowing terms attainable on the credit rating of the MNE group vis-à-vis the borrower’s own standalone credit rating. c. The Cost Approach The Cost Approach seeks to quantify the incremental economic risk assumed by the guarantor by estimating the expected loss incurred by extending the guarantee (loss given default). Alternatively, the cost is calculated by referencing the economic capital required to support the default risks assumed by the guarantor. Modeling Techniques: Recognized quantitative financial models include treating the guarantee as a put option on the borrower’s assets, or utilizing Credit Default Swap (CDS) pricing frameworks to establish the minimum fee a rational guarantor would require. d. Valuation of Expected Credit Loss Approach This methodology estimates the actuarial and market value of the guarantee by calculating the Probability of Default (PD) and the Loss Given Default (LGD), making rigorous statistical adjustments to account for expected recovery rates in the event of liquidation or default on the underlying facility. e. Capital Support Method The Capital Support Method is appropriate where the credit and risk disparity between the guarantor and borrower could alternatively be bridged by injecting additional equity capital into the borrower’s balance sheet. The credit rating of the borrower with and without the guarantee is evaluated to determine the notional capital injection required to elevate the subsidiary to the credit standing of the parent. The guarantee fee is then priced based on the expected commercial return on that quantum of additional equity capital. Core Principle: “Generally, performance guarantees are entered into by entities with third parties, i.e., end customers. The same not being AEs, the same would not be an international transaction and hence question of benchmarking would not arise.” 5. Exhaustive Analysis and Conclusion Synthesizing the statutory provisions of the Income-tax Act, 1961, domestic judicial jurisprudence, and international OECD guidance, the author sets forth actionable conclusions across the three types of guarantees: A. Explicit Guarantees Subsequent to the specific legislative insertion of Explanation (i)(c) to Section 92B of the Act vide Finance Act, 2012, it is extraordinarily challenging for assessees to maintain that the provision of an explicit corporate guarantee by an Indian parent to its non-resident AE does not constitute an international transaction. While taxpayers may continue to raise the jurisprudential contention that such guarantees constitute a ‘shareholder activity’ or ‘quasi capital’ injection outside the scope of ‘provision of services’, this position carries substantial litigation risk before appellate authorities. Benchmarking Roadmap: When benchmarking explicit guarantees, taxpayers should first examine if an Internal CUP is available. Alternatively, taxpayers may opt for the statutory certainty of the Safe Harbour Rules (SHR) (1.00% for guarantees up to INR 100 Crore, and 1.75% with SEBI-accredited safety rating above INR 100 Crore). Furthermore, taxpayers can substantiate their pricing using the OECD Report’s five benchmarking methodologies, selecting the method most closely aligned with the transactional realities and risk allocations of the borrower. B. Implicit Guarantees In cases involving implicit guarantees, the core substantive argument that the arrangement entails no explicit commitment, creates zero legal exposure, and has no bearing on the profits, income, losses, or assets of the enterprise remains legally robust. Consequently, it can be cogently argued that an implicit guarantee does not satisfy the statutory threshold of Section 92B(1), and hence is not an international transaction. Once established as non-qualifying, the question of transfer pricing benchmarking does not arise. However, since the Income Tax Department frequently contests this position, taxpayers must anticipate scrutiny and potential litigation. C. Performance Guarantees Performance guarantees require a nuanced, case-by-case factual examination: (i) Guarantees to Independent Third Parties: In the vast majority of commercial contracts, performance guarantees are furnished directly to third-party clients or end customers. Because these beneficiaries are unrelated commercial entities (not Associated Enterprises), the transaction does not fall within the definition of Section 92B, and no transfer pricing benchmarking is required. (ii) Guarantees Provided on Behalf of an AE: Where a parent provides a performance guarantee to secure the contractual obligations of an overseas AE, a rigorous functional and economic analysis is required to determine whether the transaction possesses any direct bearing on the profits, income, losses, or assets of the Indian assessee: If the answer is in the affirmative, the transaction constitutes an international transaction and must be benchmarked at arm’s length. If it does not bear upon the profits, income, losses, or assets of the assessee, it does not constitute an international transaction and no benchmarking is mandated. Strategic Professional Takeaway Corporate guarantee transactions cannot be approached through one-size-fits-all assumptions. Tax professionals and multinational corporations must meticulously dissect the precise legal nature of the guarantee (explicit, implicit, or performance), evaluate the applicability of Section 92B post-2012, maintain robust documentation demonstrating whether assets or profits are impacted, and apply justifiable benchmarking methodologies (Internal CUP, Safe Harbour, or OECD Yield/Cost approaches) to successfully withstand transfer pricing audits. Table of Authorities & Statutory Footnotes Ref Case Citation / Legal Provision Judicial Body / Forum Core Principle & Transfer Pricing Ratio 1 Siro Clinpharm Private Limited[TS-144-ITAT-2016(Mum)-TP] Hon’ble Mumbai ITAT Held that the retrospective amendment to Section 92B introduced by Finance Act, 2012 could not apply retrospectively to completed assessment years. 2 Bharti Airtel Ltd. vs. ACIT[2014] 43 taxmann.com 150 (Delhi – Trib.) Hon’ble Delhi ITAT Held that where a guarantee has no bearing on profits, income, losses, or assets of the enterprise, it cannot be categorized as an international transaction. 3 Micro Ink Limited[TS-568-ITAT-2015(Ahd)-TP] Hon’ble Ahmedabad ITAT Established that the issuance of corporate guarantee by a parent entity constitutes ‘shareholder activity’ / ‘quasi capital’, rather than provision of services. 4 Adani Enterprises Limited[TS-193-ITAT-2019(Ahd)-TP] Hon’ble Ahmedabad ITAT Reiterated the Micro Ink doctrine regarding shareholder activities and contingent liabilities having no immediate bearing on profits or assets. 5 CIT vs. Everest Kento Cylinders Ltd.[TS-200-HC-2015(BOM)-TP] / 58 taxmann.com 254 Hon’ble Bombay High Court Rejected external CUP based on naked bank guarantee quotes, holding commercial bank guarantees distinct from parent-subsidiary corporate guarantees. 6 Asian Paints Ltd.[TS-297-ITAT-2013(Mum)-TP] Hon’ble Mumbai ITAT Held that Internal CUP must be prioritized over third-party market data, and that external rates cannot be applied in a blanket manner without comparability analysis.

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 41–50 (Journal pp. 1477–1486) ACCOUNTING • EMPIRICAL RESEARCH Financial Position and Performance of the Indian Companies Pre & Post Adoption of Indian Accounting Standards *Raj Kumar Sah, **Dr. Harpreet Kaur and ***Dr. Sumanjeet *Raj Kumar Sah is a Research Scholar at Punjabi University, Patiala, and Assistant Professor at Shri Ram College of Commerce (SRCC), Delhi University. **Dr. Harpreet Kaur is Associate Professor at Punjabi University, Patiala. ***Dr. Sumanjeet is Associate Professor at Ramjas College, Delhi University. Authors can be reached at rajkumarsah42@yahoo.com, Harpreet.pbiuniv@gmail.com, sumanjeetsingh@gmail.com, and eboard@icai.in. 📑 Executive Synopsis & Core Proposition Indian Accounting Standards (referred to as ‘Ind ASs’ in short) which have been converged with International Financial Reporting Standards (referred to as ‘IFRSs’ in short) have now become a reality. The transition from existing accounting standards notified for companies to Ind ASs is a historic and landmark change. By making National Accounting Standards at par with IFRSs, the companies and accounting professionals in India enjoy the benefits of global accounting standards. In spite of many challenges, implementation of Ind ASs will result into a significant improvement in the corporate financial reporting including global comparability mainly because of the Ind ASs being principle-based standards, besides their being more transparent and containing more disclosures. Read on… The aim of present study is to analyse and compare the financial position and performance of IT and FMCG companies in India in the pre and post adoption of Indian Accounting Standards. The data for the study conducted were collected from 10 IT and 20 FMCG companies listed on National Stock Exchange (NSE) in India. The finding indicates that there is a significant improvement in the financial performance (operating profit) of these companies after adopting Indian Accounting Standards. It is suggested that the successful implementation of Ind ASs will keep on producing more useful information in comparison to Accounting Standards (ASs). 1. Introduction A globally accepted set of accounting standards results into relevant and reliable information for the stakeholders for their economic decisions because of their being transparent and principles-based standards. Multinational businesses, business combinations and other aspects including the need of global comparability of financial reports of corporate organizations are some of the reasons that people all over the world agree that there should be a single set of financial reporting standards for the whole world. However, it is definitely a huge challenge to have one set of financial reporting standards for the whole world and this may remain a challenge in the time to come. The basic objective of formulation and implementation of Ind ASs is to improve the two main qualities i.e., the relevance and reliability and thereby the global comparability of the financial reports of the Indian companies. In this backdrop, the present study aims at exploring impact of Ind ASs adoption on the financial position and financial performance of Indian IT and FMCG sector companies. 2. Indian Accounting Standards (Ind ASs): Institutional Framework & Global Convergence “Ind ASs are formulated by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) under the authority of the Council of the ICAI and are issued by the Ministry of Corporate Affairs (MCA) in consultation with the National Financial Reporting Authority (NFRA).” Ind ASs are formulated by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) under the authority of the Council of the ICAI and are issued by the Ministry of Corporate Affairs (MCA) in consultation with the National Financial Reporting Authority (NFRA). The ASB of the ICAI finalizes these Ind ASs after following a detailed procedure including wide consultation with various stakeholders including representatives from all the areas including government departments, academicians, other professional bodies viz. the Institute of Company Secretaries of India (ICSI), representatives from the Associated Chambers of Commerce and Industry of India (ASSOCHAM), the Confederation of Indian Industry (CII), the Federation of Indian Chambers of Commerce and Industry (FICCI), etc. Ind ASs are named exactly in the same way as the IFRSs and they are also numbered broadly in the same way as the IFRSs. As on date, 39 Ind ASs are applicable as notified by MCA. Ind ASs are applied to the companies mandated under the roadmap issued by the MCA for the financial year commencing on or after 01.04.2016 on a mandatory basis. Much discussion was made throughout the world regarding the adoption of/convergence with the IFRSs. As a result, many issues were found regarding the adoption of/convergence with the IFRSs and the main issues were found related to the huge differences in the laws of the different countries of the world. Comparative Legal Traditions in Global Standardisation: The former chairperson of the International Accounting Standards Board (IASB) provided just one example of difficulty in the achievement of goal of convergence with IFRSs in Europe: “In the UK, what is not prohibited is permitted. In Germany, what is not permitted is prohibited. In the Netherlands, what is permitted is simultaneously prohibited even, and in France, what is prohibited is simultaneously permitted even. It becomes very difficult to meet the needs of the countries like, Japan, the USA and China.” (Kieso, Weygandt, & Warfield, 2016). IASB is the main Accounting Standard body on global level which formulates and issues the IFRSs. The basic objective behind formulation and issue of IFRSs is to enhance uniformity and fairness in the financial reporting by establishing principles and minimizing the number of alternative accounting principles for the financial transactions and other events to the extent possible even though the complete elimination of the said alternative accounting treatments is not possible. Some countries have adopted IFRSs whereas other countries, instead of adopting, are trying to converge their accounting standards with IFRSs. India has converged its accounting standards with IFRSs. There are many reasons that there has arisen a need to have a single set of financial reporting standards on global level. These reasons include the companies of one country doing businesses in other countries of the world (for example, Wal-Mart Stores, Royal Dutch Shell, etc.), the huge spread of e-commerce business, international financial transactions, listing of companies of one country over foreign stock exchanges, among others. The ICAI constituted the ASB. ASB follows the due process for standard setting activities. The huge pace of change in the Indian economy attracted foreign investment in the country. Indian companies are required to follow Ind ASs which are based on IASs and IFRSs. Ind ASs have been applied in the different phases to different types of companies. Professional bodies in the country are taking the implementation of Ind ASs very seriously by means of organizing training sessions and seminars to equip the stakeholders with the adequate knowledge to assist in making the smooth implementation of Ind ASs and also to find out what challenges and opportunities IFRSs may pose and provide respectively. 3. Financial Position: Balance Sheet Architecture & Conceptual Definitions “The financial condition of an entity can be understood by examining the information contained in its Balance Sheet and its comparative financial condition can be understood by comparing the information contained in its balance sheet with those contained in the balance sheet of another entity.” Financial position of an entity is reflected by its Balance Sheet. The financial condition of an entity can be understood by examining the information contained in its Balance Sheet and its comparative financial condition can be understood by comparing the information contained in its balance sheet with those contained in the balance sheet of another entity. The relevant comparison can be made by calculation of relevant financial ratios and trends of various items of entities in the same industry. Financial position of an entity is reflected by its leverage, solvency and the level of its working capital. This financial position indicates the ability of an entity to survive and this applies equally whether entity is large or small. It is a necessity for a business to maintain a proper amount and composition of various assets. Paragraph 4.3 of the Conceptual Framework for Ind AS defines an asset as “A present economic resource controlled by an entity as a result of past events”. It goes without saying that a business cannot survive without resources. Examples of assets include trade receivables etc. and property, plant and equipment etc. which come under the category of current assets and non-current assets respectively. So far as the liabilities are concerned, an entity should have neither excessive liabilities nor very less liabilities i.e., it should have adequate amount of liabilities to grow the assets it holds. Excessive liabilities position called over leveraged may result into financial failure whereas very less liabilities may result into under growth of the assets of the company. Paragraph 4.26 of the Conceptual Framework for Ind AS defines a liability as “A present obligation of an entity to transfer an economic resource as a result of past events” because of past events if the said obligation is a present obligation. Examples of liabilities include current liabilities such as trade payables etc., non-current liabilities such as long-term borrowings etc. Paragraph 4.63 of the Conceptual Framework for Ind AS defines equity as “the residual interest in the asset of an entity after deducting all its liabilities”. Examples of equity include equity shares, preference shares not classified as a liability, reserves and surplus such as general reserve, balance in profit and loss statement etc. Equity belongs to the owners of the entity. Asset (Ind AS Framework Para 4.3) “A present economic resource controlled by an entity as a result of past events.” Represents current assets (e.g., trade receivables) and non-current assets (e.g., PPE). Liability (Ind AS Framework Para 4.26) “A present obligation of an entity to transfer an economic resource as a result of past events.” Covers current liabilities (trade payables) and non-current liabilities (borrowings). Equity (Ind AS Framework Para 4.63) “The residual interest in the asset of an entity after deducting all its liabilities.” Encompasses equity shares, qualifying preference shares, and reserves and surplus. 4. Comprehensive Review of Literature Extensive scholarly and institutional literature examines the transition to converged accounting standards in India and abroad, establishing key empirical benchmarks: Achalapathi. K.V and Bhanu Sireesha. P (2015) Found that there was a statistically significant increase in terms of profitability, liquidity and valuation ratios. They also found that the voluntary adoption of IFRSs led to the optimization of ROA (Return on Assets) and ROE (Return on Equity) of Indian companies. They also found no significant impact of convergence on profitability and liquidity of the companies selected by him. Sambaru M. and Kavita N.V. (2014) Found that the adoption of Ind ASs in India will be challenging but will be rewarding because of enhanced disclosures. They have found that Ind ASs based financial reporting will be transparent and will be a faithful representation to all the stakeholders. They found that the ultimate impact of Ind ASs will be the enhancement of reliance and trust of the stakeholders in the financial reporting of the companies related to presentation of financial position and performance in a better way by means of Ind ASs. CRISIL Study (2016) – “Ind AS Impact” A study (2016) was made on “Ind AS Impact”. The report found that there were a lot of changes in the financial statements. But it did not forecast any rating or criteria changes because the fundamentals remained the same. The report found that the Ind ASs would improve the quality of financial reporting. Further, the financial statements would be impacted by some of the Ind ASs, especially the revenue recognition and fair valuation. It could also impact many other aspects such as valuation of Assets, Employee Share Based Payments etc. BSE Top 100 Companies Study (2016) A study conducted in 2016 made an effort to understand the experience of Indian companies in the process of implementation of Ind ASs. For this purpose, they reviewed the financial results of 60 companies, which are in BSE’s top 100 list. These companies were covered in phase 1 of the Ind AS roadmap issued by MCA. They found the impact of Ind AS on companies as a mixed trend. They found that the companies needed some more time for the purpose of detailed reporting based on Ind ASs. 125-Company Cross-Sector Study (FY 2017) Further financial results of around 125 companies were studied under a study in the FY 2017 for a period of the first three months. It was found that the companies belonging to the manufacturing and information technology sectors required to make the highest number of adjustments as compared to other sector companies. The other sector companies that followed belong to mining/metals, energy and telecommunications sectors. As per the report, the sample companies are required to make around 10 adjustments, on an average to the reported profit for the quarter ended June 30, 2015. Shyam, Ashutosh (2016) Shyam, Ashutosh (2016) opined that the Ind ASs transition will have a significant impact on the computation of many figures, especially the computation of operating profit, net profit, net worth and revenue of the companies. However, they found that the maximum impact of Ind ASs will be there on the sectors like metal, real estate, telecoms, oil & gas etc. They found that the Ind ASs transition will result into increase in revenue by 4-5% and decrease in EBITDA by 2-3%. Top 5 Financial Statement Impact Areas Survey (2016) A survey conducted in 2016 found that the top five areas to impact the financial statements after adoption of Ind ASs are leases (including embedded leases), operating segments, taxes, financial instruments (including derivatives) and revenue recognition. Goyal, Neha (2018) Goyal (2018) found that the impact of Ind ASs would depend on the company concerned and the industry concerned. He found that all the areas including equity, liabilities, assets expenses, and revenues would be impacted. He also found that the fair valuation of assets and financial instruments contained in the Ind ASs aimed at transparency between carrying value and fair value. However, he pointed out that this would require the corporate organizations to do a hectic work. ICAI Research Study (2018) ICAI (2018) found in its study that Ind ASs implementation provides better transparency and disclosures into the state of affairs of the companies. In addition to this, Ind ASs based financial statements display the economic reality of the transactions and other events rather than merely their legal form. This is fair and more transparent for the stakeholders. As per them, Ind ASs have made possible the comparability of financial statements of Indian companies with those of foreign companies in the same industry and has also brought accessibility of Indian companies to global capital markets. Kirtan P. Raval (2017) Kirtan P. Raval (2017) in his study discussed all kinds of outcomes, whether positive or negative, of convergence of Indian GAAP with IFRSs. Easy comparability and understandability of financial statements for investors, attraction of foreign capital, global exposure to accounting professionals is discussed as positive outcomes of convergence. On the other hand, more cost and time of convergence for companies, complexities of newly introduced concepts and convergence effect on medium enterprises are considered as negative outcomes of convergence. He opined that the convergence with IFRSs is beneficial to the country even though there are certain negative outcomes associated with convergence. Manoj Kumara N V, Sowmya Erappa K and Abhilasha N (2016) Manoj Kumara N V, Sowmya Erappa K and Abhilasha N (2016) in their study explored by collecting response from 30 Chartered Accountants, 20 Accounting Professors, 20 Research Scholars and 30 Accounting Students concluded that the main reason for adopting the IFRSs in India is the better comparability of financial statements. The study also explored that investor are the major beneficiaries of implementation of Ind AS followed by companies and national regulatory bodies. It also highlights and suggests that there is a need for proper training to academicians, chief financial officers, auditors and accountants in order to achieve smooth as well as suggests amending the laws and regulations as soon as possible in order to meet the requirement of IFRSs. Sushma Vishnani, Saumya Gupta & Hemendra Gupta (2021) Sushma Vishnani, Saumya Gupta & Hemendra Gupta (2021) analysed the effect of adopting Ind ASs by Indian companies. They analysed the impact of Ind ASs in respect of some specific aspects such as value relevance, earnings management and earnings persistence of the reported financials. The study also found that there would be quality improvement in the quality of financial reporting as a result of Ind ASs adoption. Besides, it would lead to enhancement in market-based measures. Accounting standards (ASs) are the generally accepted principles, rules and procedures that are followed while preparing, reporting and maintaining the financial statements of an enterprise. These ASs are implemented all over the world. In India, National Accounting standards have been converged with IFRSs resulting into Ind ASs to bring the status of the Ind ASs at par with the global standards. Now, it is the question whether the Ind ASs are being followed in India, and what the current implementation status of Ind ASs is. 5. Objectives & Research Methodology 5.1 Objectives of the Study The present study aims at achieving the following two objectives: To assess the impact of adoption of Ind ASs on the financial position and financial performance of Indian companies in the FMCG and I.T. sectors. To have a comparative view of the companies in FMCG and I.T. sectors because of adoption of Ind ASs on the financial position and financial performance of such companies. 5.2 Data Source Financial data were extracted from audited annual reports which were published for the financial years 2010-2011 to 2019-20 of 10 IT industry and 20 FMCG companies. In respect of companies other than three kinds of companies i.e., banking companies, insurance companies and non-banking financial companies, MCA notified the mandatory implementation of Ind ASs to all listed and unlisted Indian companies having net worth of Rs. 500 crores or more from the financial year commencing on or after 01.04.2016 and for other listed and unlisted companies having net worth of Rs.250 crores or more from the financial year commencing on or after 01.04.2017. It may be stated that non-banking financial companies have also been mandated by MCA to apply Ind ASs from the financial years commencing on or after 01.04.2018 or 01.04.2019, as the case may be, depending on the listing and net worth criteria. In addition to this, the Ind ASs will also apply to the parents, subsidiaries, associates and joint ventures of such companies mandatorily required to apply Ind ASs. Such companies, to which Ind ASs are applicable as stated above, are also required to prepare “Reconciliation of Equity” and “Reconciliation of total comprehensive income” for the respective previous year as per the provisions of Ind AS 101 “First Time Adoption of Indian Accounting Standards” to understand the factors contributing to the change from ASs to Ind ASs. 5.3 Determination of Sample Size and Sampling The selection of the companies has been made on simple random basis taking into account the qualifying conditions. Finally, a list of 30 companies were selected comprising of 10 companies from IT sector and 20 companies from FMCG sector. 5.4 Statistical Tools To compare and interpret the financial position and financial performance of the selected companies for the purpose of study, independent sample t-test and paired sample t-test have been applied. 6. Analysis & Empirical Findings 6.1 Financial Position of the FMCG and IT Sector Companies Pre & Post Adoption of the Ind ASs For measuring the financial position of the companies pre and post adoption of the Ind ASs, the present study has compared the financial position of the companies for the period of pre and post adoption of the Ind ASs. It has been hypothesized that, “there is no significant change in the financial position of the companies under FMCG and IT sectors in pre and post adoption of Ind AS.” To test the above hypothesis, t-statistics has been applied and alpha level has been set at 5 percent. Outcomes of the test are reveled in table 1 and 2 respectively. Table 1: Group Statistics of T-Test on Financial Position Variable IndASs N Mean Std. Deviation Std. Error Mean FPOS Pre Ind AS 105 203108.2712 286142.27702 27924.62690 Post Ind AS 105 201500.6833 282465.18833 27565.77979 (Source: Calculation and compilation done by authors based on secondary data) Table 2: Independent Samples T-Test on Financial Position Model Condition Levene’s Test for Equality of Variances t-test for Equality of Means F Sig. t df Sig. (2-tailed) Mean Difference Std. Error Difference 95% CI Lower 95% CI Upper FPOS Equal variances assumed .008 .930 .041 208 .967 1607.58790 39238.46331 -75748.47861 78963.65442 Equal variances not assumed — — .041 207.965 .967 1607.58790 39238.46331 -75748.55433 78963.73014 (Source: Calculation and compilation done by authors based on secondary data) Table 1 shows the group statistics of the test. Table 1 revealed that the financial position of the companies post adoption of Ind AS is slightly decreasing (201500.6833) as compared to the financial position pre adoption (203108.2712) of the Ind ASs (post FPOS < Pre FPOS). As shown by table 2, the mean difference is not statistically significant (t=0.041, p=0.967). Outcomes of the test indicate that there is no significant difference in financial position of the companies listed in NSE Nifty. Results could not reject our null hypothesis. 6.2 Financial Performance of the Companies Pre & Post Adoption of the Indian Accounting Standards The present study has compared the financial performance (operating profit) of the companies for pre and post adoption of the Ind ASs. The basic purpose was to find if there is any change in the operating profit after implementation of Ind ASs. It has been hypothesized that, “there is no significant change in the operating profit of the companies under FMCG and IT sectors for pre and post adoption of Ind ASs.” To test the above hypothesis, t-statistics has been applied and alpha level has been set at 5 percent. Outcomes of the test are reveled in table 3 and 4 respectively. Table 3: Group Statistics for T-Test on Operating Profit Variable Ind_AS N Mean Std. Deviation Std. Error Mean OPBT Pre Ind AS 105 5634.52 8337.65 813.67117 Post Ind AS 105 9180.16 12616.98 1231.29134 (Source: Calculation and compilation done by authors based on secondary data) Table 4: Independent Samples t – Test for Operating Profit Model Condition Levene’s Test for Equality of Variances t-test for Equality of Means F Sig. t df Sig. (2-tailed) Mean Difference Std. Error Difference 95% CI Lower 95% CI Upper OPBT Equal variances assumed 14.983 .000 -2.40 208 .017 -3545.65 1475.85 -6455.19 -636.14 Equal variances not assumed — — -2.40 180.28 .017 -3545.65 1475.85 -6457.81 -633.48 (Source: Calculation and compilation done by authors based on secondary data) Table 3 shows the group statistics of the test. The table revealed that the operating profit of the companies taken into the study, for their post adoption of Ind AS is higher than that of pre adoption period (post profit 9180.16 > Pre-Profit 5634.52) but the variability in profitability is found higher in the post implementation period (Post standard deviation 12616.98 > Pre standard deviation 8337.65). As displayed in table 4, the mean difference is statistically significant (t = -2.40, p = 0.017). Outcomes of the test indicate that there is a significant difference in operating profit of the companies listed on NSE for pre and post adoption of Ind ASs. Results displayed in table 3 and 4 together reject our null hypothesis. 6.3 Financial Position and Performance of the FMCG Companies Pre & Post Adoption of the Indian Accounting Standards (Ind ASs) To measure the financial position of the FMCG companies for pre and post adoption of the Ind ASs, the present study has compared their financial position and performance. It has been hypothesized that, “there is no significant change in the financial position and performance of the FMCG companies for pre and post adoption of Ind AS.” To test the above hypothesis, paired sample t-statistics has been applied and alpha level has been set at 5 percent. Outcomes of the test are reveled in table 5 and table 6 respectively. Table 5: Paired Samples Statistics of FMCG Profitability and Financial Position Pair Variable Condition Mean N Std. Deviation Std. Error Mean Pair 1 FMCG Pre FPOS 160600.31 45 164978.15 24593.49 FMCG Post FPOS 158970.33 45 158426.70 23616.86 Pair 2 FMCG Pre OPBT 4285.94 45 5068.87 755.62 FMCG Post OPBT 6279.90 45 7177.56 1069.97 (Source: Calculation and compilation done by authors based on secondary data) Table 6: Paired Samples Test of FMCG Profitability and Financial Position Pair Comparison Paired Differences t df Sig. (2-tailed) Mean Std. Deviation Std. Error Mean 95% CI Lower 95% CI Upper Pair 1: FMCG Pre FPOS – FMCG Post FPOS 1629.97 8451.52 1259.88 -909.15 4169.09 1.294 44 .203 Pair 2: FMCG Pre OPBT – FMCG Post OPBT -1993.96 2276.05 339.29 -2677.76 -1310.15 -5.877 44 .000 (Source: Calculation and compilation done by authors based on secondary data) Table 5 displayed that the financial position of the FMCG companies has declined post adoption of the Ind ASs. Before adoption of the Ind ASs, the financial position of the FMCG companies listed on NSE was 160600.31, which has gone down to 158970.33 for the post adoption period. Though the difference was not found statistically significant in the test, yet the outcomes displayed in table 6 (t = 1.294, p = 0.203). Hence, results could not reject our null hypothesis. The performance, taken as operating profit, for these FMCG companies for post adoption has shown remarkable changes. It has increased from 4285.94 in pre-adoption to 6279.90 in post adoption period. That change was found statistically highly significant, as shown in table 6 (t = -5.877 and p = 0.000). Results rejected our null hypothesis for comparison of the profitability during pre and post adoption of the Ind ASs by the FMCG companies listed on NSE. 6.4 Financial Position and Performance of the IT Companies Pre & Post Adoption of the Ind ASs The present study has further compared the financial position and profitability of IT companies listed on NSE. The data for this purpose on financial position and profitability have been divided into pre and post period of implementation of Ind ASs. It has been hypothesized that, “there is no significant change in the financial position and profitability of the IT companies for pre and post adoption of Ind ASs.” To test the above hypothesis, paired sample t-statistics has been applied and alpha level has been set at 5 percent. Outcomes of the test are reveled in tables 7 and 8 respectively. Table 7: Paired Samples Statistics of IT Profitability and Financial Position Pair Variable Condition Mean N Std. Deviation Std. Error Mean Pair 1 IT Pre FPOS 234989.24 60 348735.53 45021.56 IT Post FPOS 233398.44 60 345700.03 44629.68 Pair 2 IT Pre OPBT 6645.94 60 10047.32 1297.10 IT Post OPBT 11355.36 60 15197.23 1961.95 (Source: Calculation and compilation done by authors based on secondary data) Table 8: Paired Samples Test of IT Profitability and Financial Position Pair Comparison Paired Differences t df Sig. (2-tailed) Mean Diff Std. Deviation Std. Error Mean 95% CI Lower 95% CI Upper Pair 1: IT Pre FPOS – IT Post FPOS 1590.80 6590.27 850.80 -111.64 3293.25 1.87 59 .066 Pair 2: IT Pre OPBT – IT Post OPBT -4709.42 5914.09 763.50 -6237.19 -3181.65 -6.17 59 .000 (Source: Calculation and compilation done by authors based on secondary data) Table 7 displayed that the financial position of the IT companies has slightly declined post adoption of the Ind ASs. Though the difference was not found statistically significant at 5 percent in the test, yet the outcomes displayed in table 8 (t = 1.87, p = 0.066). Hence, results could not reject our null hypothesis. On the basis of the outcomes displayed in table 7 and 8, this study inferred that the financial position of the IT companies has not improved after adoption of the Ind ASs. The profitability, at the same time, for these IT companies, for post adoption of Ind ASs has shown remarkable changes. It has increased from 6645.94 in pre-adoption period to 11355.36 in post adoption period. That change was found statistically highly significant, as shown in table 8 (t = -6.17 and p = 0.000). Results rejected the null hypothesis for comparison of the profitability during pre and post adoption of the Ind ASs by the IT companies listed on NSE. The study revealed that there is a remarkable improvement in the profitability of the Indian IT companies since the implementation of the Ind ASs. 7. Summary and Conclusion The present study conducted on the IT and FMCG companies listed on NSE revealed the significant finding on their financial position and performance. Companies taken together into the study revealed that unanimously there is a significant increment in the operating profit of these companies. For financial position, there is no evidence of any significant positive change, as expected, after the implementation of the Ind ASs. It is interesting to observe that the profitability of both the sectors, IT and FMCG, individually has shown a significant improvement post adoption of the Ind ASs. The Ind ASs have already been converged with IFRSs. The converged Ind ASs is landmark change in the history of accounting standards of the country. By making National Accounting Standards at par with IFRSs, the companies and accounting professionals in India enjoy the benefits of global accounting standards. In spite of many challenges, implementation of Ind ASs will result into a significant improvement in the corporate financial reporting including global comparability mainly because of the Ind ASs being principle-based standards, besides their being more transparent and containing more disclosures. “For the effective implementation of Ind ASs, there is a need of a systematic and step-by-step plan, the integration of resources and appropriate training to all the stakeholders, especially those involved in preparation and presentation of the financial statements involving the application of Ind ASs and those involved in auditing such financial statements.” For the effective implementation of Ind ASs, there is a need of a systematic and step-by-step plan, the integration of resources and appropriate training to all the stakeholders, especially those involved in preparation and presentation of the financial statements involving the application of Ind ASs and those involved in auditing such financial statements. Entities have already implemented the Ind ASs as well as the changes into the systems. Ind ASs have already been implemented in a phased manner. Thus, the financial statements prepared on the basis of Ind ASs will continue to provide useful information to the users of financial statements, especially the primary users of the financial statements. 8. Implications and Limitations of the Study Theoretical Rationale: Income/Expense Reclassification & Ind AS 113 Fair Valuation The increase in the financial performance (in terms of operating profit) of the Manufacturing sector and I.T. sector companies may be because of the reason that either some elements of financial statements related to income which were not recognized as income under the ASs are now being recognized as income under the Ind ASs or some elements of financial statements related to expenses which were recognized as expenses under ASs are not being recognized as expenses under the Ind ASs or both might have happened. Further, the deterioration in the financial position of the Manufacturing sector and I.T. sector companies may be because of the fair valuation of assets and liabilities (especially with reference to Ind AS 113 “Fair Value Measurement”) implying that the fair value of assets might have gone down or the fair value of liabilities might have gone up or both might have happened in contradiction of the permission of the valuation of assets and liabilities on historical cost basis under ASs. However, the authors are of the view that application of Ind ASs may yield a lot of benefits to the companies belonging to both these sectors in terms of global comparability of financial statements, listing on international stock exchanges, borrowing from foreign counties at a lower rate of interest etc. Sample Horizon & Future Research Scope However, it is important to note that the conclusions and implications of the present study are based on the financial statements of 20 companies belonging to FMCG sector and 10 companies belonging to I.T. sector over a period of 10 years from 2010-11 to 2019-20. Hence, the future researchers may undertake a further study taking a larger number of companies including those from other sectors also and over a longer number of years to explore more. References Kieso, D.E., Weygandt, J.J. and Warfield, T.D. (2016) Intermediate Accounting. 16th Edition, John Wiley & Sons, Inc., Hoboken. Srivastava, Anubha and Bhutani, Prerna, IFRS in India: Challenges and Opportunities (October 12, 2012). The IUP Journal of Accounting Research & Audit Practices, Vol. XI, No. 2, April 2012, pp. 6-32, Available at SSRN: https://ssrn.com/abstract=2160631 Achalapathi.K.V., & BhanuSireesha.P. (2015). Impact of IFRS adoption on financial statements of select Indian companies. Osmania Journal of International Business Studies, 10(1), 21-34. CRISIL, 2016, “Ind AS Impact” https://www.crisil.com/content/dam/crisil/our-analysis/.../CRISILInd-AS-Impact.pdf. Goyal, Neha (2018) “Indian Accounting Standard (Ind AS) - Brief Study” https://taxguru.in/chartered.../indian-accounting-standard-indas-brief-study.html. Kirtan P. Raval, Indian Accounting Standards (Ind.-As): An Overview, International Journal of Research in Humanities & Soc. Sciences, Vol. 5, Issue: 3, March: 2017, ISSN: (P) 2347-5404 ISSN: (O)2320 771X Manoj Kumara N V, Sowmya Erappa K and Abhilasha N, “Ind-AS: Evolution or Revolution (Major beneficiaries of IND-AS)”, National Seminar on “IND-AS: A Road Map for IFRS in India”, March 18 & 19, 2016 Protiviti (2016) “Decoding the Ind AS Impact for Indian Companies” Available at www.protivitiglobal.in. Sambaru, Meenu, N.V. Kavita (2014). A Study on IFRS in India, International Journal of Innovative Research, Vol:3/Issue:12/November Shyam, Ashutosh (2016) “How new accounting standards will impact Indian companies” https://economictimes.indiatimes.com › Markets › Stocks › Policy. Sushma Vishnani, Saumya Gupta & Hemendra Gupta (2021) International Journal of Managerial and Financial Accounting, 13 (1), 1-24 - July 2021 https://doi.org/10.1504/ijmfa.2021.116205 The Institute of Chartered Accountants of India (2018) “Indian Accounting Standards (IFRS converged): Successful Implementation Impact Analysis and Industry Experience” https://www.iasplus.com/en/news/2018/07/ind-as-impact).

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 62–69 (Journal pp. 1498–1505) CAPITAL MARKET • ECONOMETRIC RESEARCH Impact of COVID 19 on Global Capital Markets *Dr. Mitrendu Narayan Roy and **Prof. (Dr.) Siddhartha Sankar Saha *Dr. Mitrendu Narayan Roy is an academician and financial researcher specializing in capital markets and financial economics. **Prof. (Dr.) Siddhartha Sankar Saha is Professor and academician in financial markets and econometric modeling. Authors can be reached at mitrenduroy@gmail.com, drsiddharthasxc@gmail.com, and eboard@icai.in. 🌐 Executive Synopsis & Key Findings The study attempts to explore the correlation between stock market returns and growth in number of cases and deaths in COVID-19 in five major economies across the globe (i.e., USA, China, Japan, Germany and India) based on the data collected from WHO COVID-19 dashboard and Yahoo Finance for the study period from 01 February 2020 to 30 April 2020. It is observed that among all the five countries that the stock return of SENSEX (India) is significantly influenced by the growth in COVID cases. However, in other countries, growths in COVID cases or death do not have significant association with stock returns. Read on… In majority of the countries, growth in number of cases negatively influenced the stock returns. It is significant to note that a few policy measures have been undertaken by the Indian Government to ensure economic turnaround amid this scenario. However, those measures are required to be implemented appropriately to gain more productive outcome. 1. Background of the Research A few notable epidemics/pandemics to date that have shaken the world are ‘The Black Death’ plague (1347–1351); bleeding fever (Mexico - 1545–1548); cholera (1899–1923); Acute Immune Deficiency Syndrome (AIDS) (Cameroon – 1908); Spanish flu (1908); Severe Acute Respiratory Syndrome (SARS) (Asia and Canada – 2002-03), etc. A new addition to the list is the COVID-19 coronavirus pandemic (2019-nCov). It first appeared in December 2019 in Wuhan city of Hubei province, China (Estrada et al., 2020). The first death from the virus was reported on 11 January 2020 (Pharmaceutical Technology, 2020). On 12 March 2020, the World Health Organisation (WHO) declared it a pandemic. By then the number of deaths from COVID-19 had crossed 20000. There was a serious increase in the number of cases in Italy, the United Kingdom (UK), Germany and a few other European countries due to initial laxity from the Government and citizens. Later, the United States (US) had drawn the world’s attention in terms of the number of cases and deaths as well. On the other hand, the outbreak started much later in India (end-March 2020). However, the number of confirmed cases rose to a considerable extent within no time due to a high population density. As a measure of a solution, the Governments of different countries had immediately cancelled all international flights, postponed all forms of international meets, prohibited any form of social congregations and set a complete quarantine in motion. Some countries even had declared a state of emergency to manage the situation (Ayittey et al., 2020). 2. Research Problem “Due to COVID-19, stock returns across the world started projecting a declining trend since February 2020. Naturally, the question arises whether stock returns of major global economies have responded negatively to COVID-19.” Though containment achieved its desired effect of capping number of cases, the pandemic and subsequent lockdown completely stalled global trade and productions (John Hopkins University, 2020). Transportation and tourism business took a major hit which also caused decline in exchange rate. Manufacturing sectors had to stop production due to absence of labour. The only sector that thrived was public health and pharmaceuticals due to an absolute desire of a vaccine at the earliest. All these unfortunate yet unavoidable circumstances ultimately started to reflect in the stock market performances. Truly speaking, stock market returns is considered to be a barometer of economic growth and is influenced by other macro-economic variables (Saha, 2021). However, due to COVID-19, stock returns across the world started projecting a declining trend since February 2020. Naturally, the question arises whether stock returns of major global economies have responded negatively to COVID-19. 3. Review of Literature With a view to addressing the problem identified above, a few research studies are reviewed here: Ahmar and Val (2020) Ahmar and Val (2020) predicted the movement of returns of IBEX (Spain) in the back of COVID-19 using the Sutte ARIMA method. Al-Awadhi, et al. (2020) Al-Awadhi, et al. (2020) investigated the impact of COVID-19 on Chinese stock market returns using panel data regressions. The results indicated a significant relationship between COVID-19 and stock market returns. Baker et al. (2020a) Baker et al. (2020a) analysed the impact of natural disasters, terrorist attacks and political stocks on stock market performance using panel data regression. The results suggested a robust short-term impact on stock market growth. Baker et al. (2020b) Baker et al. (2020b) explained the unprecedented stock market reaction to the COVID-19 pandemic by considering stock market volatilities since 1985. The evidence suggested that Government restrictions amid this pandemic were possibly the main reason behind such reaction. Baker et al. (2020c) Baker et al. (2020c) assessed the macroeconomic impacts of the COVID-19 pandemic based on three uncertainty measures (stock market volatility, newspaper-based uncertainty and subjective uncertainty in business expectation surveys). The results implied that half of the total contraction in the US-GDP was made due to the COVID-19 pandemic. Dietrich et al. (2020) Dietrich et al. (2020) documented the consumers’ perception of the US stock markets’ reaction to the COVID-19 pandemic. The results suggested that the rise in consumers’ uncertainty accounted for 2/3rd of the total GDP drop. Liu et al. (2020) Liu et al. (2020) evaluated the impact of COVID-19 on the stock market returns of select affected countries, like Japan, Korea, the US, Germany, Singapore, and the UK using the event study method and panel fixed effect regressions. The results indicated high abnormal returns in the Asian market due to pessimistic investor sentiments. Liu and Hu (2020) Liu and Hu (2020) used the neoclassical economic growth model in explaining how COVID-19 promoted China’s savings rate leading to long term growth in their GDP. Sansa (2020) Sansa (2020) investigated the impact of COVID-19 on the stock markets of China (Shanghai Stock Exchange) and the USA (Dow Jones) based on the data from 1 – 25 March 2020 using the simple regression technique. The study revealed a positive significant relationship between COVID-19 confirmed cases and stock market growth. Zeren and Hizarci (2020) Zeren and Hizarci (2020) revealed the possible reaction of confirmed cases and deaths from COVID-19 on major stock market returns using Maki’s cointegration test. Confirmed cases of infection and deaths in China, Korea and Spain had a cointegrating relationship with their stock market returns. 4. Research Gap & Objectives 4.1 Research Gap None of the studies reviewed, so far, had taken an attempt to explore the correlation between confirmed cases of infection and deaths from COVID-19 with stock market returns in the top five economies in the globe. Keeping this gap in view, the current study attempts to address the following objectives. 4.2 Objectives of the Study The objectives of the current study are as follows: To enquire into the growth of confirmed cases and deaths from COVID-19 and stock market returns in five major economies in the Globe during the study period (Refer to Section 5.1); To measure the underlying characteristic of the data representing the growth of confirmed cases and deaths from COVID-19 and stock market returns (Refer to Section 5.2); To explore the impact of the growth of confirmed cases and deaths from COVID-19 on stock market returns (Refer to Section 5.3). 5. Data and Methodology 5.1 Sample Selection With a view to analysing the correlation between stock market returns and COVID-19, stock markets representing the top five developed and developing economies across the globe based on their nominal gross domestic product (GDP) by the International Monetary Fund (IMF) (IMF, 2019) have been sampled out. They are USA, China, Japan, Germany and India. Now, the largest stock exchange in each country has been selected based on its market capitalisation (World Federation of Exchanges (WEF), 2019). Accordingly, New York Stock Exchange (NYSE) in the US; Shanghai Stock Exchange (SSE) in China; Tokyo Stock Exchange (TSE) in Japan; Frankfurt Stock Exchange (FSE) in Germany; and Bombay Stock Exchange (BSE) in India are selected. One representative stock index having worldwide recognition and prominence has then been selected for the study. Thus, Standard & Poor’s (S&P) 500 (NYSE, USA); SSE Composite Index (SSE, China); Nikkei 225 (Nikkei) (TSE, Japan); DAX 30 (DAX) (FSE, Germany); and Sensitivity Index (SENSEX) (BSE, India) are the stock indices, which are selected for the calculation of stock returns. 5.2 Period of Study To capture this entire recession in the stock market that was caused due to the first wave of COVID-19, the study considers it appropriate to consider the period of study from 1 February 2020 to 30 April 2020. 5.3 Collection of Data and Data Mining The data on indices values of five select stock indices during the study period have been collected from Yahoo Finance, while data on daily cases of infection and death from COVID-19 in five select countries during the study period are collected from the World Health Organisation (WHO) COVID dashboard. Since all the select stock markets do not perform on the same dates due to weekends or public holidays in different countries, the index with the least number of days of operation has been considered as a base and data on additional days of operation of other stock indices have been removed until all the stock indices conform to exactly same operational dates. Finally, the study is made with 50 observations uniform for all the markets. It is significant to note that while the data related to the number of cases and deaths due to COVID-19 are available in each day from 1 February 2020 to 30 April 2020, data related to stock indices of all five countries in each day from 1 February 2020 to 30 April 2020 are not available because of non-operation of the markets. Hence, with a view to bring uniformity to the data related to the variables, like number of cases, number of deaths and value of stock indices of all the five countries, appropriate data mining technique has been applied and the study has been conducted with comparable data of number of cases, number of deaths and stock market indices on uniform dates in all the five countries. 5.4 Analytical Tools & Mathematical Formulations The returns of stock indices values and growth in the number of daily cases and deaths from COVID-19 on final selected dates have been calculated. The country-specific data is, then, graphically represented using a line chart plotting the values on the vertical axis and time on the horizontal axis. The descriptive statistics comprise varied statistical measures in understanding the nature of the data. It includes: Mean: [ 1/n × ∑ Yt ] (from t=1 to n) Median: Positional middle value of ordered observations Extreme Values: Maximum and Minimum recorded values Standard Deviation (S.D.): [ √( 1/(n-1) × ∑ (Yt - Ȳ)2 ) ] (from t=1 to n) Sum of Squared Deviation (SS): [ ∑ (Yt - Ȳ)2 ] (from t=1 to n) Skewness: Degree of distortion from a symmetrical normal distribution. While a normal distribution has skewness ranging between -0.5 to 0.5, skewness greater than 0.5 represents a positively skewed distribution and vice versa. If skewness is greater than 1, the distribution is highly positively skewed and vice versa. Kurtosis: Measure of outliers present in the distribution. A distribution with kurtosis equal to 3, less than 3, and greater than 3 are Mesokurtic (normal), Platykurtic (low on outliers), and Leptokurtic (high on outliers) respectively. Jarque-Bera (JB) Normality Test Null hypothesis (H0): JB statistic = 0 Alternate hypothesis (H1): JB statistic ≠ 0 Formula: JB = [(n - k + 1) / 6] × [S2 + ¼ (C - 3)2], where n = number of observations (50); k = number of regressors (1); S = sample skewness; C = sample kurtosis. At n degrees of freedom and 5% level of significance, if p < 0.05, H0 is rejected. Pearson’s Correlation Coefficient (r) & t-Test Null hypothesis (H0): r = 0 Alternate hypothesis (H1): r ≠ 0 The correlation among stock returns, growth of COVID cases, and growth of COVID deaths is tested at (n - 2) = 48 degrees of freedom at 5% significance level. If p < 0.05, the correlation is statistically significant. 6. Results and Analysis 6.1 Growth of Confirmed Cases and Death from COVID-19 and Stock Market Returns “Growth of cases and deaths due to COVID-19 in all the five countries were more volatile than their stock market returns. Stock markets in almost all the countries projected negative returns in early-February.” It has been observed (Chart 1) that growth of cases and deaths due to COVID-19 in all the five countries were more volatile than their stock market returns. Stock markets in almost all the countries projected negative returns in early-February. However, it became volatile when the spread began to rise in mid-February. By the end of February, the volatility was tamed to some extent. The curve representing growth of deaths moved coherently to the curve representing growth of cases in all the five countries. In the USA, growth in the number of daily cases surged in the beginning of March followed by sudden growth of deaths. Chart 1: Movement of Stock Returns with Growth of New Cases and New Deaths Panel A: Stock Return of S&P 500 (SP_R), Growth of New Cases in the US (USCC_G) and Growth of New Deaths in the US (USCD_G) Panel B: Stock Return of SSE Composite Index (SSE_R), Growth of New Cases in China (CHINACC_G) and Growth of New Deaths in China (CHINACD_G) Panel C: Stock Return of NIKKEI (NIKKEI_R), Growth of New Cases in Japan (JAPANCC_G) and Growth of New Deaths in Japan (JAPANCD_G) Panel D: Stock Return of DAX (DAX_R), Growth of New Cases in Germany (GERMANYCC_G) and Growth of New Deaths in Germany (GERMANYCD_G) Panel E: Stock Return of BSE SENSEX (SENSEX_R), Growth of New Cases in India (INDIACC_G) and Growth of New Deaths in India (INDIACD_G) (Source: Compiled based on Secondary Data using MS Excel) In China, the growth of daily cases and deaths suddenly jumped in mid-February 2020. However, after that, for quite some time, it projected negative growth. The growth of cases and deaths in China rose again in mid-March 2020 and once again in end-April 2020. Growth in number of cases in Japan was higher from mid-February to mid-March 2020. Death rate in Japan followed the rate of cases. In early-March 2020, growth of new cases and deaths were negative in Germany. It mainly surged at the end-February followed by an increase in death rate. However, towards the end of April 2020, it is again showing a negative growth. In India, growth of cases were almost nil till the beginning of March, 2020. It started to increase from middle of the month. In the beginning of April 2020, growth of new deaths has reached an exorbitant level. 6.2 Underlying Characteristics of the Data Underlying characteristics of the data representing growth of confirmed cases and deaths from COVID-19 and stock market returns are represented through descriptive statistics. It is observed that barring SSE Composite Index, all other indices reported negative returns during the period (Table 1). Among them, the SENSEX projected the lowest return. In terms of median return too, the SSE was at the top position followed by the DAX, while the SENSEX was at the bottom of the chart. In terms of maximum and minimum values, SD and sum of squared deviation, the S&P 500 and the DAX were the two most volatile indices during the period. Table 1: Descriptive Statistics of Stock Market Indices Parameters S&P 500 SSE Composite Nikkei DAX SENSEX Mean -0.161688 0.055849 -0.259846 -0.310276 -0.372426 Median 0.065206 0.180931 -0.592039 0.101501 -0.382140 Maximum 9.382774 3.146437 8.038101 10.97590 8.974906 Minimum -11.98406 -3.711597 -6.080833 -12.23861 -8.177789 Std. Dev. 4.273521 1.439420 2.863170 3.691717 3.469425 Skewness -0.285601 -0.361952 0.695388 -0.206920 -0.053876 Kurtosis 3.742767 3.351235 4.114851 5.681452 3.679801 Jarque-Bera 1.829115 1.348753 6.619059 15.33635 0.986959 Sig. 0.400694 0.509474 0.036533 0.000467 0.610498 Sum -8.084422 2.792457 -12.99229 -15.51382 -18.62131 Sum Sq. Dev. 894.8860 101.5246 401.6895 667.8101 589.8085 (Source: Compilation based on Secondary Data using EViews 9.0) However, the SSE was comparatively less volatile during the period. From the results of skewness, it is observed that distributions of all the stock returns barring that of Nikkei were negatively skewed (skewness < 0.5). Results of kurtosis (kurtosis > 3) denote the presence of outliers in all the distributions. Results of the JB test proved that apart from the Nikkei and the DAX, returns of other stock indices followed a normal distribution. Table 2: Descriptive Statistics of Growth of Individual Cases of COVID-19 Parameters USA China Japan Germany India Mean 45.92422 22.01844 181.8661 18.27986 18.89092 Median 0.000000 -11.15196 0.000000 0.000000 0.000000 Maximum 2100.000 649.3571 2800.000 520.0000 228.5714 Minimum -100.0000 -95.45455 -100.0000 -100.0000 -100.0000 Std. Dev. 309.6745 136.0987 618.7303 87.64985 66.32218 Skewness 6.039869 3.626223 3.182397 3.833781 1.113106 Kurtosis 40.36334 16.47938 11.72502 22.84267 4.514488 Jarque-Bera 3212.374 488.1079 242.9928 942.7563 15.10352 Probability 0.000000 0.000000 0.000000 0.000000 0.000525 Sum 2296.211 1100.922 9093.305 913.9931 944.5462 Sum Sq. Dev. 4699016. 907620.2 18758535 376442.3 215532.9 (Source: Compilation based on Secondary Data using EViews 9.0) It is evident (Table 2) that the average growth of daily cases during the period was highest for Japan and least for Germany. However, the median growth of new cases in all the countries was zero except China. In terms of volatility in the growth of new cases, Japan topped the list while India was at the bottom of the chart. The distributions representing growths of new cases in five countries were highly positively skewed (skewness > 1) and leptokurtic. The skewness and kurtosis were highest for USA and least for India. Results of the JB test showed that none of the distribution follows normality. Table 3: Descriptive Statistics of Growth of Individual Cases of Deaths Parameters USA China Japan Germany India Mean 24.67507 3.827105 49.80059 9.037145 20.45881 Median 0.000000 -3.786816 0.000000 0.000000 0.000000 Maximum 700.0000 653.8462 733.3333 237.5000 600.0000 Minimum -100.0000 -100.0000 -100.0000 -100.0000 -100.0000 Std. Dev. 118.9114 105.3595 175.4768 47.11002 103.8822 Skewness 3.973858 4.825637 2.667706 2.349935 3.990197 Kurtosis 22.48121 30.39871 9.933605 13.18018 21.58198 Jarque-Bera 922.2576 1757.992 159.4614 261.9267 852.0347 Probability 0.000000 0.000000 0.000000 0.000000 0.000000 Sum 1233.753 191.3553 2490.030 451.8572 1022.941 Sum Sq. Dev. 692856.1 543930.2 1508814. 108748.4 528783.9 (Source: Compilation based on Secondary Data using EViews 9.0) Corresponding to the results of the growth of new cases, the average growth of new deaths in Japan was the highest, while it was the least for Germany (Table 3). The median growth of new deaths was zero in all the countries barring China. While growth deaths were highly volatile in Japan, it was not all so in Germany. All the distributions were high on the right tail (positively skewed) and with a high number of outliers (leptokurtic). Skewness and kurtosis were highest in China, while it was least in Japan. Results of JB tests suggest that the growth of new deaths in none of the countries followed a normal distribution. 6.3 Correlation between Stock Market Returns and Growth of COVID Cases and Deaths In this section, an attempt has been made to calculate the Pearson’s correlation coefficient (r) and its relative significance among the stock returns, growth of new cases and growth of new deaths in the countries under consideration (Table 4). Country / Variable Pearson’s Correlation Coefficient (r) Significance of r (p-Value) New Cases New Deaths New Cases New Deaths USA (S&P 500) New Deaths -0.151419 1.000000 0.2939 — Stock Return -0.186437 0.170571 0.1949 0.2363 CHINA (SSE Composite Index) New Deaths 0.141105 1.000000 0.3284 — Stock Return -0.092245 0.078779 0.5240 0.5866 JAPAN (Nikkei 225) New Deaths -0.082640 1.000000 0.5683 — Stock Return -0.063942 -0.119488 0.6591 0.4085 GERMANY (DAX 30) New Deaths -0.068132 1.000000 0.6383 — Stock Return 0.217533 0.128658 0.1291 0.3732 INDIA (BSE SENSEX) • Statistically Significant New Deaths 0.360650 1.000000 0.0101* — Stock Return -0.350003 -0.087035 0.0127* 0.5478 (Source: Compilation of the Secondary Data using EViews 9.0; * denotes statistically significant correlation at 5% level) Based on the results obtained, it may be inferred that only in India, the stock return had significant correlation (P-value < 0.05) with growth in COVID cases. However, in other countries, the association between stock return, growth of new cases and deaths were not significant (P-value > 0.05). For all the countries under consideration barring Germany, the stock return was negatively correlated with growth of new cases (r < 0). However, apart from Japan and India, the stock return was positively correlated (r > 0) with the growth in number of deaths. Out of all the five countries, only in India stock market returns responded significantly to the growth in number of cases due to COVID-19. It is important to note that the Indian stock market was projecting positive growth in the pre-pandemic era. However, the pandemic and its far-reaching impacts on the US and European economies had made the foreign investors pull out funds from the Indian market which perhaps resulted in a sudden drop in Indian stock market returns. 7. Conclusion “India was the worst sufferer of the shock in terms of average stock market return. However, the market significantly responded to the growth in number of cases in India. While the mortality of the disease was comparatively low, it posed a great threat to the economic stability and stock market growth.” While the outbreak of COVID-19 began at different points of time in different countries, it mainly loomed across the five countries under the current study during mid-February 2020 to early-April 2020. Out of the five countries, the average growth and volatility in terms of number of cases and deaths from COVID-19 was highest in Japan. While the mortality of the disease was comparatively low, it posed a great threat to the economic stability and stock market growth. The recession in stock market began since early-February 2020 in all the countries. Moreover, the market started to correct itself from mid-April 2020. While the outbreak first started in China, its stocks seem to have been least affected by this unprecedented shock as evidenced from the average return. India was the worst sufferer of the shock in terms of average stock market return. However, the market significantly responded to the growth in number of cases in India, while the relationship between COVID-19 and stock market return became negative but was not significant in other countries. References Ahmar, A., and Val, E. (2020). SutteARIMA: Short-term forecasting method, a case: Covid-19 and stock market in Spain. Science of the Total Environment, 729, 138883. Al-Awadhi, A., Alsaifi, K., Al-Awadhi and A. Alhammadi, S. (2020). Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 7, 100326. Ayittey, F., Ayittey, M., Chiwero, N., Dzuvor, C. (2020). Economic Impacts of Wuhan 2019-nCov on China and the World. Journal of Medical Virology, 1-3. Baker, S., Bloom, N. and Terry, S. (2020a). Using disasters to estimate the impact of uncertainty. Available at: http://people.bu.edu/stephent/files/BBT.pdf. Baker, S., Bloom, N., Davis, R., Kost, K., Sammon, M. and Viratyosin, T. (2020b). The unprecedented stock market impact of COVID-19. Working paper 26945. National Bureau of Economic Research, Cambridge, MA. Baker, S., Bloom, N., Davis, S. and Terry, S. (2020c). Covid-induced economic uncertainty. Working paper 26983. National Bureau of Economic Research, Cambridge, MA. Dietrich, A., Kuester, K., Muller, G. and Schoenle, R. (2020). News and uncertainty about COVID-19: Survey evidence and short run economic impact. Working Paper 20-12. Federal Reserve Bank of Cleveland. Enders, W. (2004). Applied Econometric Time Series (2nd Ed.). USA: John Wiley and Sons. Estra, M., Park, D., Koutronous, E., Khan, A. and Tahir, M. (2020). The Impact of Massive Infections, and Contagious Diseases and its Impact on the Economic Performance. Available at: http://dx.doi.org/10.2139/ssrn.3527330. IMF (2019). World economic outlook. 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The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 56–61 (Journal pp. 1492–1497) INVESTMENT Behavioural Biases in Investing – A Conceptual Study of Six Common Biases Kaundinya Bose Author and Researcher in Behavioural Finance. Correspondence: bosekaundinya@gmail.com and eboard@icai.in Dr. Rajiv V. Shah Academician & Capital Markets Researcher. Correspondence: rajivshah13@gmail.com and eboard@icai.in 📌 Overview & Executive Summary The study of behavioural biases emanates from the criticism of traditional economic theories which assume the investor to be a rational human. Biases can make humans less rational, thus lead to deviations in investing behaviour and ideal portfolio values. Six common biases, namely: loss aversion, anchoring, availability, mental accounting, gamblers’ fallacy, and herd behaviour are conceptually discussed here, which can help investors and advisors understand the rationale behind certain decisions and how these biases can affect the portfolio value. It encourages financial advisors to study biases in their clients from the initial stage of the advisory rather than when the portfolio value is reducing, and urgent action needs to be taken. It also suggests that different biases can lead to varied investing behaviour which can reduce portfolio returns and create a behavioural gap. Read on... 1. Introduction: From Rational Finance to Behavioural Realities Behavioural Finance helps study the role of human emotions in making choices and decisions relating to financial investments. It incorporates diverse disciplines ranging from clinical psychology and psychiatry, to economics, accounting, organisational behaviour, and management. Traditional finance theories rest upon the bedrock premise that all investors behave rationally—that is, they target an optimal mean-variance portfolio that balances their risk and return preferences (Markowitz modern portfolio theory). This classical paradigm inherently assumes three fundamental pillars: Perfect Rationality: Investors consistently process data logically without cognitive distortion. Perfect Information: All market participants have instantaneous and frictionless access to all relevant information. Perfect Self-Interest: Investors always maximize expected utility in their own financial best interest. In empirical reality, none of these three assumptions exist in totality. Consequently, human decisions frequently deviate from optimal outcomes and appear sub-optimal. The psychological predispositions and systematic errors that precipitate these sub-optimal decisions are defined as biases. The Behaviour Gap (Richards, 2012) At times, it is observed that there is a significant disparity between what an investor could potentially earn and what he actually earns over an investment horizon. This quantified difference, driven largely by the irrational behaviour of the client himself, is recognized as the Behaviour Gap (Richards, 2012). The behaviour gap is understood as the spread between the ideal portfolio return (the benchmark compound return of the asset class) and the actual return realized by the investor due to emotional timing, panic selling, and chasing trends. Behavioural finance aims to understand this gap and systematically reduce it to the maximum extent possible. Classification of Biases: Cognitive vs. Emotional Behavioural biases are broadly classified into two distinct operational categories: Cognitive Biases Arise from incorrect reasoning due to basic statistical, information processing, or memory retrieval errors. These biases stem from the physiological and neurological process of how the brain perceives information, organizes heuristics, and exercises judgment. Advisory Strategy: Can be moderated and modified through information, education, objective data, and structured presentation. Emotional Biases Related to feelings, attitudes, intuition, and impulsive reactions. They are rooted in deep psychological experiences that seek to maximize immediate pleasure and avoid emotional trauma or pain. Advisory Strategy: Harder to modify through logic; requires adaptation on the part of the wealth manager by structuring portfolio allocations around them. The Pompian and Longo (2005) Advisory Matrix Pompian and Longo (2005) demonstrated that financial advisors should either moderate or adapt to biases based on two essential criteria: Type of Bias: Cognitive biases can be modified with education, whereas emotional biases necessitate portfolio adaptation. Wealth Level: Biases of high-income clients can be adapted to (as their substantial capital cushion can absorb sub-optimal trade-offs), whereas biases of low-income or vulnerable clients must be actively moderated, because any significant loss could critically jeopardize their livelihood. Because clients often exhibit a complex combination of both cognitive and emotional biases, advisors must accurately diagnose each bias to formulate effective client-specific strategies. 2. Literature Review: Evolution of Behavioural Economics The foundational literature on behavioural biases commenced with the formulation of Prospect Theory by Kahneman and Tversky (1979), which explored how humans manage risk and evaluate choices under uncertainty. This broke groundbreaking ground alongside the investigation of cognitive heuristics (Tversky and Kahneman, 1974), the formalization of Mental Accounting by Thaler (1999), and the comprehensive synthesis of investor biases by Shleifer (2000) and Pompian (2011). Study & Author(s) Domain / Focus Key Empirical Insights & Market Findings Kahneman & Tversky (1979) Prospect Theory & Risk Established that individuals evaluate gains and losses asymmetrically; psychological disutility of a loss is more than double the utility of an equivalent gain. Gill & Bajwa (2018) Investment Decisions Demonstrated that behavioural biases directly lead investors to make inefficient allocation choices, distort trading frequency, and mistime entry/exit points. Bailey et al. (2011) Mutual Fund Chasing Showed that biased investors consistently indulge in trend-chasing, paying high transaction costs and suffering sub-optimal returns. Hoppe & Kusterer (2011); Massa & Simonov (2005) Cognitive Reflection & Earnings Large-sample empirical testing confirmed that biased behaviour in decision making consistently causes reduced earnings, portfolio drawdowns, and persistent underperformance. Korniotis & Kumar (2011) Macroeconomic Spillover Proved that behavioural biases ripple beyond individual micro-portfolios into the macro-economy by impairing aggregate income risk sharing. Feldman (2011) Bias Combinations Anchoring bias is largely responsible for individual investor underperformance; loss aversion triggers excessive trading. Combining both dramatically amplifies trading activity and capital destruction. Baker, Kumar, Goyal & Gaur (2019) Literacy & Demographics Discovered an inverse relationship between financial literacy and the disposition effect and herding bias; demographic variables (age, gender, experience) strongly modulate bias severity. Kaustia, Alho & Puttonen (2008) Anchoring in Experts Studied long-term stock return expectations across students and finance professionals; both cohorts suffered from severe anchoring, where return expectations were arbitrarily pinned to initial values. Major Typologies of Investors in Behavioural Literature Scholars have categorized investor personalities to better diagnose and treat their biases: Bailey et al. (2011) Typology Classifies investors into 5 behavioural archetypes: Gamblers, Smart, Overconfident, Narrow Framers, and Mature. Pompian (2011) BIT Framework Categorizes investors into 4 Behavioural Investor Types (BITs): Passive Preservers, Friendly Followers, Independent Individualists, and Active Accumulators. Bailard, Biehl & Kaiser (BB&K, 1986) Plots confidence vs. anxiousness across 5 classes: Adventurer, Celebrity, Individualist, Guardian, and Straight Arrow. While literature has examined individual traits, there is vital scope to understand how differing biases exert opposing forces on portfolios—e.g., one bias causing paralysis and under-trading, while another triggers hyperactive churning—yet both systematically destroy long-term compound wealth. The authors select six common biases from Pompian’s 20-bias framework for in-depth conceptual study. 3. Conceptual Study of Six Common Biases in Investing Each bias is analysed across its behavioural definition, empirical manifestations, real-world examples, diagnostic advisor tests, portfolio ramifications, and actionable remediation techniques: Bias 1: Loss Aversion Emotional Bias Conceptual Rationale: The overarching goal of many investors is to protect their principal amount in the event of a depressed financial environment. Due to the psychological fear of loss, they tend to lock in profits prematurely, even if the market is rising and there are strong prospects of future appreciation. Conversely, in bear markets, they hold on for excessively long periods to depreciating investments in the desperate hope that the price will recover to break-even. This feeling is prevalent among conservative, passive investors who give far more credence to their fear of short-term losses over their intellectual awareness of long-term asset class returns. The 2.25 to 1 Law: Tversky and Kahneman (1979) established that the psychological satisfaction gained from a financial gain of $2.25 is required to counterbalance the emotional disappointment of a loss of just $1.00. Practical Illustration: An investor hears from his financial advisor about the historical risk of equity volatility and immediately shifts his funds into fixed deposits. Here, the substantial potential long-term compound wealth from equities is discarded because it is insufficient to overcome the investor’s acute visceral fear of nominal short-term loss. Advisor Diagnostic Test: Ask the client to hypothetically allocate a sum of Rs. 1,00,000 between two distinct choices: Option A: The client receives back the entire principal intact even if the portfolio suffers a downturn (zero loss guarantee). Option B: A 50% probability that the portfolio depreciates to Rs. 75,000, paired with a 50% probability that it appreciates to Rs. 1,25,000, with the client bearing the profit or loss. If the client chooses Option A, there is an exceptionally high probability that loss aversion bias governs his investment psyche. Portfolio Detriment: Prompts the client into revenge-trading or frantic switching to recoup a previous paper loss, escalating brokerage/transaction costs and severely eroding portfolio terminal value. Remediation Strategy: Help the client re-anchor onto pre-established long-term financial goals. Present the empirical compounding risks of succumbing to the bias, even if it creates temporary emotional discomfort. Use the 2.25/1 ratio to demonstrate that emotional distress during drawdowns is natural human wiring, and teach clients to perceive market volatility as “speed breakers instead of roadblocks”. Bias 2: Anchoring Bias Cognitive Bias Conceptual Rationale: Manifests when investors, uncomfortable with unknown quantities and complex probabilistic distributions, anchor their opinion upon an arbitrary initial reference point or immediate piece of data, filtering all subsequent facts exclusively through this biased lens. Even when fundamental conditions deteriorate and the stock loses value, the investor stubbornly refuses to sell because he remains mentally pinned to the imagined target price. Advisor Diagnostic Test: Construct a hypothetical scenario: A client purchases a share for Rs. 1,000 based on analyst consensus that it will reach Rs. 1,500. The share reaches Rs. 1,200 in the first three months, but subsequently plummets to Rs. 800 over the next two months due to structural headwinds. The market is anticipated to remain depressed at these levels. If the client insists on remaining fully invested despite deteriorating fundamentals purely in the hope of reaching the original Rs. 1,500 target, he is acutely anchored. Portfolio Detriment: Induces investors to hold onto decaying, high-risk assets or buy into declining companies based on past historical peaks, even though historical numbers bear zero relevance to forward operating cash flows. Remediation Strategy: Continually update the client with revised financial models, earnings multiples, and current forward-looking valuation metrics. Because anchoring is a cognitive information-processing error, structured quantitative data, revised target bands, and regular scenario stress-testing can successfully unseat outdated cognitive anchors. Bias 3: Availability Bias Cognitive Bias Conceptual Rationale: Arises when investors make capital allocation decisions based upon the ease with which information or examples are recalled from memory, relying on familiarity rather than objective, comprehensive research. It is intrinsically tied to heuristics (mental shortcuts). The Four Systematic Variations of Availability Bias: i) Retrievability: Decisions heavily swayed by whatever information is most sensational or immediate—such as aggressive TV advertisements, news headlines, or recent dinner discussions with friends. ii) Categorisation: Perceiving an entire industry as inherently lucrative because of personal daily familiarity with it, while ignoring unfamiliar sectors that offer superior risk-adjusted yields. iii) Narrow Frame of Reference: Restricting investment universes to the narrow confines of one’s personal life experience or local geography, ignoring global diversification. iv) Resonance: Choosing companies whose brand personality or corporate imagery resonates emotionally with the investor’s own self-image, rather than financial fundamentals. Practical Illustration: A banking executive insisting on allocating 70% of his equity portfolio to banking and NBFC stocks simply because he feels comfortable working in the sector, entirely overlooking technology or manufacturing sectors with much stronger growth prospects. Advisor Diagnostic Test: Request the client to narrate his historical investment selection process. If his historical decisions were dictated by recent advertising campaigns, media blitzes, or casual social endorsements rather than audited balance sheets and valuation reports, availability bias is present. Remediation Strategy: Utilize the power of structured storytelling and grounded metaphors (e.g., “nothing is ever as good or as bad as it seems”). Sensitize the client to the psychological triggers of mental recall, such as surrogate advertising and media sensationalism. Mandate multi-source data collection to ensure the client is never captivated by paid or single-source information. Bias 4: Mental Accounting Cognitive Bias Conceptual Rationale (Thaler, 1999): Violates the economic axiom that money is strictly fungible. Investors segregate funds into arbitrary mental compartments based on the origin of the money or its intended destination. For example, monthly salary income is safeguarded cautiously, whereas an annual corporate bonus or inheritance windfall is treated as “house money” and gambled away in highly speculative, high-risk assets—even if the overall portfolio does not warrant speculative exposure. Conversely, funds earmarked for “retirement planning” or “children’s education” are often invested with extreme over-caution in debt instruments yielding negative real post-tax returns, causing purchasing power to decay over decades. In doing so, the investor completely loses sight of the integrated relationship between expected returns, duration, and asset classes. Advisor Diagnostic Test: Examine whether the client manages his wealth through a holistic balance sheet view or fragments capital into disconnected silos. Ask the client: “How exactly did you allocate your last annual bonus or ancestral windfall?” If windfalls are treated with cavalier abandon while salaries are hoarded, mental accounting is actively fracturing the portfolio. Portfolio Detriment: Creates a bifurcated, highly imbalanced portfolio with severe asset-liability mismatches, inadequate terminal wealth accumulation, and uncompensated volatility. Remediation Strategy: Rather than attempting to eradicate this psychological predisposition, harness it constructively. Structure goal-based investing buckets: an explicit “Capital Preservation Bucket” for emergency liquidity, a “Growth Bucket” for inflation-beating long-term goals, and a disciplined, capped “Aspirational Bucket” for calculated tactical trades. Bias 5: Gambler’s Fallacy (Monte Carlo Fallacy) Cognitive Bias Conceptual Rationale: Manifests when an investor hallucinates non-existent cyclical patterns in purely random, independent past occurrences, mistakenly believing that past sequences must balance out to predict immediate future probabilities. Also known as the Monte Carlo Fallacy. Real-World Metaphor: Consider a job applicant who has been rejected across five consecutive interviews. He convinces himself that the sixth interview will definitely be his “lucky break” because he is “due for a win”, oblivious to the statistical reality that each interview is an independent event with identical unconditional probabilities. Advisor Diagnostic Test: Present the classic statistical coin toss test: “If a fair, unbiased coin is tossed five times and yields ‘Tails’ on all five occasions, does the probability of obtaining ‘Heads’ increase on the sixth toss?” If the client answers “Yes”, he suffers from the gambler’s fallacy, falsely believing that probability has a self-correcting memory. Portfolio Detriment: Investors double down on sinking securities or prematurely dump high-performing assets assuming a reversal is “due”, triggering excessive portfolio churning, heavy tax drag, and severe return erosion. Remediation Strategy: Educate the investor on the mathematical reality of independent probability distributions and stochastic randomness. Show that apparent short-term market streaks are mere noise rather than predictable patterns, and enforce rigorous systematic investment rules where each transaction is treated on its own standalone investment merit. Bias 6: Herd Behaviour Emotional / Social Bias Conceptual Rationale: Manifests when market participants abandon their independent analysis and blindly copy the investment choices of a larger crowd or high-profile group. Driven by the primal psychological need for social belonging, fear of missing out (FOMO), and the comforting illusion that “the majority cannot be wrong”, investors mimic peers even when the move directly contradicts their own rational assessments. Social Analogy: Parents pressuring their children into specific engineering or medical careers simply because all their neighbours are doing so, regardless of whether the child possesses aptitude or inclination for that path. Advisor Diagnostic Test: Hypothetical test: A speculative stock is exhibiting parabolic, abnormally high price surges; the client’s friends, colleagues, and social media influencers are aggressively buying it. The client’s existing, well-diversified portfolio is already delivering healthy, consistent returns that comfortably meet his long-term milestones. The advisor asks: “Would you liquidate a portion of your stable portfolio to jump into this trending stock?” If the client agrees, herd mentality dominates his decision framework. Portfolio Detriment: Chasing speculative bubbles at market tops, extreme turnover, inflated transaction costs, and catastrophic losses when the momentum bubble inevitably pops. Remediation Strategy: Ground the client in the philosophy of value-based investing, margin of safety, and long-term goal tracking. Reiterate that market pricing reflects temporary popular sentiment, whereas long-term wealth depends strictly on company earnings power and disciplined asset allocation. 4. Opposing Biases and Compound Detriment to Portfolios A key contribution of this conceptual study is demonstrating how differing biases can exert opposing operational forces on investor behavior, yet lead to the identical destructive outcome: long-term portfolio underperformance. Behavioural Bias Bias Nature Direct Impact on Trading Ultimate Portfolio Consequence Loss Aversion Emotional Paralysis / Under-trading or Panic revenge trading Locks in modest gains too early; holds deep losers; misses compounding bull runs. Anchoring Bias Cognitive Inflexibility / Delayed exit Holds onto value traps waiting for arbitrary price recovery; severe opportunity cost. Availability Bias Cognitive Narrow, skewed allocation Under-diversified portfolios dominated by familiar or heavily advertised securities. Mental Accounting Cognitive Compartmentalized risk Reckless speculation with bonuses; inflation-eroding conservatism with core savings. Gambler’s Fallacy Cognitive Excessive Churning Frequent market timing based on random streaks; massive frictional fee leakage. Herd Behaviour Emotional / Social Hyperactive Trend Chasing Buys at euphoria tops, panics at cycle troughs; creates massive Behaviour Gaps. Thus, while loss aversion and anchoring often suppress trading activity, gambler’s fallacy and herd behaviour trigger frantic hyper-trading. When experienced simultaneously, an investor may hold losing stocks for years while frantically churning hot theme funds—a fatal combination that decimates wealth. 5. Conclusion: Institutionalizing Behavioural Coaching in Wealth Advisory Behavioural characteristics, which are frequently ignored by financial advisors and wealth managers in favour of technical charting and balance sheet analysis, exert a profound bearing on investment decisions. Technical indicators and fundamental ratios are exhaustively discussed at the heavy cost of ignoring behavioural coaching, which has the potential to be equally crucial and vital to the sustainable health of an investment portfolio. Just because an investor appears happy to execute a trade at the “right” time does not necessarily signify that he is free of biases. It could very well be that an underlying bias pushed him into a trade that happened to succeed by coincidence—the very same bias that will cause him catastrophic losses when market conditions require holding firm. The Proactive Advisory Imperative Financial advisors and wealth managers must proactively study and identify investor biases at the very beginning of the advisory relationship—during onboarding and initial profiling—rather than waiting until the portfolio value is collapsing and panic has set in. By continuously monitoring psychological tendencies at every stage of the market cycle, advisors can bridge the Behaviour Gap, preserve discipline, and successfully build, increase, and protect their clients’ long-term wealth. Academic References & Bibliography Bailard, T. E., Biehl, D. L., & Kaiser, R. W. (1986). Personal Money Management. Chicago: Science Research Associates. Bailey, W., Kumar, A., & Ng, D. (2011). Behavioral biases of mutual fund investors. Journal of Financial Economics, 102(1), 1–27. https://doi.org/10.1016/j.jfineco.2011.05.002 Baker, H. K., Kumar, S., Goyal, N., & Gaur, V. (2019). How financial literacy and demographic variables relate to behavioral biases. Managerial Finance, 45(1), 124–146. https://doi.org/10.1108/MF-01-2018-0003 Feldman, T. (2011). Behavioral biases and investor performance. Algorithmic Finance, 1(1), 45–55. https://doi.org/10.3233/AF-2011-005 Gill, R. K., & Bajwa, R. (2018). Study on Behavioral Finance, Behavioral Biases and Investment Decisions. International Journal of Accounting and Financial Management Research (IJAFMR), 8(3), 1–14. Hoppe, E. I., & Kusterer, D. J. (2011). Behavioral biases and cognitive reflection. Economics Letters, 110(2), 97–100. https://doi.org/10.1016/j.econlet.2010.11.015 Jain, R., Jain, P., & Jain, C. (2015). Behavioral Biases in the Decision Making of Individual Investors. IUP Journal of Management Research, 14(3), 7–27. Kahneman, D., & Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47(2), 264–291. Kaustia, M., Alho, E., & Puttonen, V. (2008). How much does expertise reduce behavioral biases? The case of anchoring effects in stock return estimates. Financial Management, 37(3), 391–412. https://doi.org/10.1111/j.1755-053X.2008.00018.x Korniotis, G. M., & Kumar, A. (2011). Do older investors make better investment decisions? Review of Economics and Statistics, 93(1), 244–265. https://doi.org/10.1162/REST_a_00053 Massa, M., & Simonov, A. (2005). Behavioral Biases and Investment. Review of Finance, 9(4), 483–507. https://doi.org/10.1007/s10679-005-4998-y Pompian, M. M., & Longo, J. M. (2005). Incorporating Behavioral Finance into Your Practice. Journal of Financial Planning, 18(3), 58–63. Pompian, M. M. (2011). Behavioral finance and wealth management: how to build investment strategies that account for investor biases. John Wiley & Sons. Richards, C. (2012). The behavior gap: Simple ways to stop doing dumb things with money. Penguin. Schleifer, A. (2000). Inefficient Markets: An Introduction to Behavioral Finance. OUP Oxford. Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12(3), 183–206. https://doi.org/10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. 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The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 77–83 (Journal pp. 1513–1519) DIGITAL ACCOUNTING • FINTECH & PAYMENTS Resilience in Digital Payments Landscape in India in The Backdrop of COVID-19 Pandemic Sudipta Majumdar Author is a research scholar specializing in electronic payments, digital banking infrastructure, and financial technology regulation. He may be reached at sudiptamajumdar523@gmail.com and eboard@icai.in. 📱 Executive Synopsis & Strategic Overview The digital payment market has witnessed a sharp decline due to COVID-19 pandemic and subsequently it has regained momentum with the gradual relaxation in lockdown. Several payment categories like Cards, Wallets, ATM, UPI and others have experienced differently and distinctly as a result of pandemic. RBI has undertaken several agenda to strengthen the digital banking experience, boost confidence, ensure data privacy and healthy competition among the consumers. The paper seeks to analyse the digital payment statistics and trends in the backdrop of COVID-19, its impact on payment categories with possible reasons, and discuss the digital payment from feature phone with Data Protection Bill, 2021 and Interoperability and RBI’s agenda to strengthen digital banking including FinTech-related activities. Read on… 1. Introduction and Objective of the Study Digital India Program, Jan Dhan Yojna, Demonetization and other government initiatives have propelled the growth trajectory for digital payments and also paved way for some innovative payment modes like United Payments Interface, Bharat Interface for Money and so on. The digital payments market is expected to experience CAGR of around 21.74 per cent during the FY 2020 -FY 2024 period (E-payment Solutions Market in India 2020 (Part-I), Netscribes, January 2020). But the market has witnessed a sharp decline of around 30 per cent due to COVID-19 pandemic involving lockdown and decline in economic activities. After relaxing lockdown, such journey towards “Less-cash” has observed rapid growth. The department of Payment and Settlement Systems (DPSS), Reserve Bank of India (RBI) has undertaken various initiatives to ensure safety, efficiency, innovation, competition, customer protection and financial inclusion in payment landscape focusing more on digital penetration through greater infrastructure and innovation in payment options. RBI also campaigns for spreading awareness on digital payments and ensure redressal of customer grievance in a timebound manner. “To bring the excluded section of the society and gain the trust of public on digital payment, RBI has facilitated digital payment from feature phone without internet connectivity, introduced Data Protection Bill, 2021 to ensure privacy of sensitive data and also made Interoperability of multiple apps to reduce complexity and boost digital payments.” In this backdrop, the paper has attempted to analyse: Trends of digital payment statistics for FY 2018-19 to FY 2020-21; Digital payment from feature phone without internet connectivity in the backdrop of Data Protection Bill, 2021 and Interoperability; Impact of COVID-19 on payment categories with possible reasons; and RBI’s agenda to strengthen digital banking including FinTech-related activities. 2. Trends of Digital Payment Statistics in India The nationwide lockdown triggered an initial contraction in digital payments, which subsequently experienced a V-shaped recovery with gradual relaxations. Table 1 details the volume and value trajectory across settlement systems, large-value transfers, retail credit transfers, debits, cards, PPIs, and paper instruments. Table 1: Digital Payment Statistics (Volume in Lakh; Value in ₹ Crore) Payment Segment / Mode FY 2018-19 FY 2019-20 FY 2020-21 Volume Value Volume Value Volume Value A. Settlement Systems CCIL Operated Systems 36 116551038 36 134150192 28 161943141 B. Payment Systems 1. Large Value Credit Transfers - RTGS 1366 135688187 1507 131156475 1592 105599849 Retail Segment 2. Credit Transfers 118481 26090471 206506 28562857 317852 33522150 2.1 AePS (Fund Transfers) 11 501 10 469 11 623 2.2 APBS 14949 86226 16766 99179 14373 112747 2.3 ECS Cr 54 13235 18 5145 - - 2.4 IMPS 17529 1590257 25792 2337541 32783 2941500 2.5 NACH Cr 8834 729673 11290 1043212 16450 1232714 2.6 NEFT 23189 22793608 27445 22945580 30928 25130910 2.7 UPI 53915 876971 125186 2131730 223307 4103658 3. Debit Transfers and Direct Debits 4913 524556 7525 719708 10441 872399 3.1 BHIM Aadhaar Pay 68 815 91 1303 161 2580 3.2 ECS Dr 9 1260 1 39 - - 3.3 NACH Dr 4830 522461 7340 718166 9630 868906 3.4 NETC (linked to bank account) 6 20 93 200 650 913 4. Card Payments 61769 1196888 72384 1434813 57787 1291799 4.1 Credit Cards 17626 603413 21773 730894 17641 630414 4.2 Debit Cards 44143 593475 50611 703920 40146 661385 5. Prepaid Payment Instruments (PPIs) 46072 213323 53318 215558 49392 197695 6. Paper-based Instruments 11238 8246065 10414 7824822 6704 5627189 Total - Retail Payments (2+3+4+5+6) 242473 36271303 350147 38757759 442229 41512514 Total Payments (1+2+3+4+5+6) 243839 171959490 351654 169914234 443821 147112363 Total Digital Payments (1+2+3+4+5) 232601 163713425 341240 162089413 437118 141485173 Source: RBI (2021) 2.1 Macroeconomic Trends & Channel Dynamics The effect of nationwide lockdown due to COVID-19 was initially prominent through decline in payments, but both the value and volume of payments subsequently improved with gradual relaxations in lockdown. During FY 2020-21, although the total payment experienced a robust growth (26.2%) in terms volume, but contractionary trend (-13.4% as against -1.2% in FY 2019-20) has been found in terms of value, due to declining trends in the value of Real Time Gross Settlement (RTGS), the large payment system and in transactions of paper-based instruments. So far as digital or electronic payments modes are concerned, the declining tends of RTGS value (-19.5%, although 5.7% increase in volume) can largely be attributed to dampened economic activity caused by large reduction in corporate transactions on account of slowdown in economic activities due to COVID-19 pandemic, while the digital transactions in the non-cash retail payments (in volume) constitute 98.5% during 2020-21 as against 97% in FY 2019-20. Transactions by National Electronic Funds Transfer (NEFT) system increased by 12.7% while transactions through Debit Card, Credit Card and Prepaid Payment Instruments (PPIs) have declined by 19%, 20.6% and 7.4% respectively. By the end of 2020-21, RTGS and NEFT facility was available in 175947 branches of 227 banks and 175283 branches of 225 banks respectively. In addition, ATM facility has also increased marginally from 2.34 lakh (in FY 2019-20) to 2.38 lakh at the end of FY 2020-21. 3. Digital Payment from Feature Phone & Data Protection Bill 2021 In order to bring the section of the society who are excluded from experiencing digital payment facility under the main umbrella, RBI along with the National Payment Corporation of India (NPCI) introduced two landmark initiatives on 9th March, 2022: (a) UPI 123Pay: Allows feature phones without internet connectivity to use UPI to facilitate payments; (b) DigiSaathi: A 24-7 helpline addressing the customers’ query on digital payments in two languages: Hindi and English. Such initiatives will ensure the trust of customers and reliability of digital payments leading a step ahead towards cashless economy and financial inclusion. Core Statutory Dimensions: Data Protection Bill 2021 Data Protection Bill 2021 will ensure the reliability of digital payment options, promote the growth and innovation of the digital economy and also protect the privacy of the personal data of citizens. Clause 1 (Implementation Horizon): Provides a timeline of approximately 24 months for implementation of the provision(s) of the Act in the concerned policies, infrastructures and processes. Clause 2 (Broadened Definition of Data): Broadens the scope of “data” by incorporating non-personal data under the same umbrella. Clause 34 (Cross-Border Data Restrictions): Prevents cross-border sharing of data without prior approval from the government. Clause 35 (Government Exemptions): Exempts the government agencies from the provisions of the law. Despite having several drawbacks, the bill will strengthen India in the domain of data protection and privacy and due compliance with the provisions by the companies. 4. Role of Interoperability of Multiple Apps in Reducing Complexity “Payment through UPI is expected to be convenient that will facilitate interoperability and lead to better adoption. Interoperability facilitates fund transfer between the wallets of the companies, individual bank accounts, etc.” Payment through UPI is expected to be convenient that will facilitate interoperability and lead to better adoption. Interoperability facilitates fund transfer between the wallets of the companies, individual bank accounts, etc. RBI has made it mandatory on payment acceptance side along with QR codes in all payment modes w.e.f. 31st March, 2022. This facilitates fund transfer from one digital mobile wallet to another. RBI also advised such digital wallets companies (officially known as Prepaid payment instruments) to implement a formal and publicly disclosed customer cell for redressal of their grievances in a time-bound manner. 5. Impact of COVID-19 on Payment Categories The nation-wide lockdown caused by the COVID-19 pandemic has raised significant uncertainty in payment decision making of consumers with respect to the quantum and timing of spending. In addition, several sectors like E-commerce, Online Education, Online payment of Utility bills have experienced in a positive way, while Travel & Tourism, Hospitality, Hotels & Restaurants, Jewellery have faced negative impact as result of pandemic. In this backdrop, various payment modes have responded differently. Such responses are summarised in Table 2 along with probable reasons behind. Table 2: Impact of COVID-19 on Payment Categories Payment Category Payment Mode Relative Impact Possible Reasons Issuance Cards Favourable Surge in cards usage due to increased online transactions, health and safety concern. Wallets Favourable Surge in the transaction volume (mainly P2P transfers and P2M payments) and users due to online payment, safety mode of payment and significant shift in consumer behaviour and habits owing to lockdown and restrictions. Bank Accounts Favourable Cash gets substituted with Digital transfers and more fund transfers. Acquiring ATM Moderate ATM Transactions decrease due to fear of virus transmission through exchange of currency notes. Point of Sale (PoS) Adverse Increase in stores dealing essential items, but major decline at other stores due to restricted access. Payment gateways Favourable Surge in online transactions and tie up with small stores selling essentials lead to increased usage of Payment gateways. Payment Infrastructure UPI Favourable Massive increase in UPI transactions (driven by P2P and P2M payment transactions) including QR based payments due to less usage of cash and fear of virus transmission. IMPS Favourable Increased transactions through IMPS due to shift to digital. BBPS Favourable Relatively high volume of transactions with more adoption rate without any physical connection. NETC Adverse Restrictions in travelling lead to decline in tourism and travel sector, adversely impact toll usage and subsequently NETC. Source: Compiled by the Author (2022) 6. RBI’s Agenda and FinTech Activities to Strengthen Digital Banking RBI has undertaken the following agendas under ‘Payment and Settlement Systems in India: Vision 2019-2021’ in FY 2020-21 and FY 2021-22 to boost digital payment eco-system by promoting financial innovation leveraging on technology to achieve operational excellence through better security, reliability, cost efficiency, resilience, and integrity. Table 3: RBI’s Strategic Agenda (Vision 2019-2021) Agenda for FY 2020-21 Agenda for FY 2021-22 A. Encouraging Healthy Competition Conducting Offline Payment Systems using mobile phone, cards or wallets to encourage digital payments and technological innovations. Developing a Settlement Risk Management Framework to ensure more participation of non-bank organisations; Membership to Centralised Payment Systems is reviewed. B. Improving Customer Convenience Implementing Online Dispute Resolution (ODR) system, for technologically resolving customer grievances and disputes. Implementing Offline Payment Solutions in the country based on pilot project experience. Self-Regulatory Organisation (SRO) to set and enforce rules and standards on the conduct of member entities in the industry, to protect the customer and promoting ethical and professional standards. National Settlement Services for Card Schemes to explore the possibility of facilitating settlement of card transactions processed by various card payment networks. Operationalising Pan-India Cheque Truncation System (CTS) and participation of all bank branches in image-based CTS to leverage the availability of CTS and provide uniform customer experience irrespective of bank branch location. Augmentation and Modernisation of Infrastructure Security Layer by implementing secure remote access capability to access RBI’s applications from outside of office premises through multifactor and endpoint authentication. C. Ensuring Affordable Cost Legal Entity Identifier (LEI) to facilitate unique identification of the parties involved in financial transactions worldwide, improving quality, accuracy and better risk management. Review of Corridors and Charges for Inbound Cross-Border Remittances to examine the role of the payment services providers (PSPs) to ensure friction free remittances at lower cost. D. Increasing Confidence In order to understand the present position of digitisation of payments in the country, Digital Payments Index (DPI) has been created and published. Geo-tagging of Payment System Touch Points to capture the location and business details of commercial bank branches, ATMs and business correspondents. Positive Pay System for Cheque Truncation System (CTS) to reduce instances of cheque related frauds by ensuring customer safety in cheque payments. Third Party Risk Management and System-wide Security for examining the need to have distinct regulation dedicated for outsourcing arrangements service rendered by non-bank organisations. Source: Compiled by the Author (2022) 6.1 RBI’s FinTech-Related Activities a. Reserve Bank Innovation Hub (RBIH) This is set up for promoting innovation across financial sector with advanced technology and creating an eco-system facilitating idea generation, development and innovation through collaboration. b. Regulatory Sandbox (RS) Cohorts This is to foster retail payments, cross-border payments, MSME lending and to strengthen the fraud governance minimising the time-lag between the occurrence and detection of frauds. c. RegTech Solutions for Effective and Focused Regulations RBI is in cooperation agreement (CoA) with International Finance Corporation (IFC) to get knowledge or advisory related support on RegTech or SupTech from IFC. Also, RBI joined the Global Financial Innovation Network (GFIN), a network of over 50 organisations committed to support financial innovation to enhance the FinTech related activities in the countries. d. Inter - Regulatory Technical Group on FinTech (IRTG on FinTech) This has been constituted for coordination among financial sector regulators (like SEBI, IRDAI, IFSCA and PFRDA) and information sharing among members on innovation initiatives. During first meeting in March, 2021, members agreed on the above issues and suggested models on Inter-Operable RS mechanism for hybrid products/services to facilitate framing of standard operating procedure (SOP). 7. Conclusive Opinion and Scope for Further Research COVID-19 pandemic has compelled businesses and individuals to reconsider their payment framework to include digital payment in lieu of physical cash transaction. Although, initially the pandemic affected the growth of digital payments, it, subsequently, displayed resilience and bounced back. For example, AePS mechanism has found unprecedented growth post lockdown. “Amidst difficulties caused by COVID-19, RBI continues its efforts to ensure adequate data privacy, safety and smooth functioning while enhancing the digital payment experience.” While the banking regulator has also undertaken several agenda and initiatives to enhance IT infrastructure contributing to efficiency, strengthening payment ecosystem and its data privacy, and enhancing awareness across the country, there are some sort of negative concerns for the payment gateways due to frequent changes in compliance procedure and stringent guidelines and implementing fees on transactions. These may directly hamper the profitability of payment gateways and customer base through shifting to card payments and direct banking. In this backdrop, the banks and other agencies involved in payment activities should invest in data analytics and artificial intelligence for bringing efficiency in policy formulation, data privacy, improving profitability and customer base, and largely on detection and prevention of frauds. The study could have been further improved by analysing the payment statistics for FY 2021-22 and concerned policies of RBI to further strengthen the digital banking system in India, but not due to non-availability of necessary data. References & Web-Links Official Publications: RBI. (2021). “Payment and Settlement Systems and Information Technology”. Web-Links (Lastly Visited on 06-05-2022): https://iapp.org/news/a/a-look-at-proposed-changes-to-indias-personal-data-protection-bill/ https://www.livemint.com/money/personal-finance/upi-set-to-be-more-convenient-facilitate-more-interoperability/amp-11596987965418.html https://inc42.com/buzz/wallet-interoperability-to-be-enabled-via-upi-rbi/ https://thepaypers.com/online-payments/rbi-launches-upi-for-feature-phones-and-digital-payments-helpline--1255192 https://m.economictimes.com/wealth/save/rbi-launches-upi123pay-how-to-use-upi123pay-in-feature-phones/articleshow/90072479.cms

The Chartered Accountant • Journal of ICAI June 2022 • Vol. 70 • No. 12 • pp. 84–96 (Journal pp. 1520–1532) AUDIT Practical Aspects – Inventory and Receivables Audit for Borrowers availing Working Capital Finance CA. Kaushal Paresh Baxi Member of the Institute of Chartered Accountants of India (ICAI) Correspondence: kaushal.baxi87@gmail.com and eboard@icai.in 📌 Overview & Practical Purpose In recent times, businesses are increasingly becoming dependent on the banking system to cater to their short to medium term funds requirements. Such dependency has led to a significant increase in working capital finance facilities provided by the banks towards medium to large businesses. The primary securities which the banks require for such financing are the Inventories and Receivables of the borrower. Therefore, these two factors have become very important areas requiring careful attention of Auditors during audit of borrowers availing such financial assistance. This Article will elaborate the practical aspects to be considered during audit of borrowers availing working capital finance. Read on… 1. Meaning and Structure of Working Capital Finance Working capital finance represents the specialized financial assistance extended by commercial banks to business entities to meet their short-to-medium-term fund requirements for daily and routine operating cycles. It accelerates liquidity and boosts the availability of working capital to sustain the operational turnover of an enterprise. Credit facilities sanctioned by commercial banks are classified into two broad operational categories: Fund-Based Credit Facilities Facilities that involve an immediate, actual outflow of funds from the banking system to the borrower. Cash Credit (CC): Sanctioned against the primary hypothecation of Inventories and Receivables. Secured / Unsecured Overdraft (OD): Running facility against financial securities or clean limits. Export Packing Credit (EPC): Pre-shipment credit to finance purchase/processing of export goods. Non-Fund Based Credit Facilities Facilities where there is no immediate cash outflow from the bank. The bank provides a contingent credit undertaking to pay a third party in the event of default or non-performance by the borrower. Bank Guarantee (BG): Financial and performance guarantees issued on behalf of clients. Letter of Credit (LC): Documentary credit ensuring payment to suppliers upon compliant shipping documents. In this article, the audit methodologies, statutory standards, Reserve Bank of India (RBI) prudential guidelines, and ICAI pronouncements governing fund-based working capital finance secured by hypothecation of current assets (inventories and receivables) are examined in practical operational depth. 2. Background of Working Capital Norms: The Tandon Committee Framework In July 1974, the Reserve Bank of India constituted a high-powered study group under the chairmanship of Shri Prakash L. Tandon, the then Chairman of Punjab National Bank, alongside senior banking dignitaries and industrial representatives. The study group was tasked with reviewing the entire gamut of commercial bank financing for working capital and formulating rules for the optimum allocation and utilization of bank credit. Major Weaknesses in Traditional Bank Lending Identified by the Committee Absence of Credit Appraisal: Banks lacked systematic credit appraisal and planning mechanisms; the quantum of borrowing was determined unilaterally by the borrower rather than assessed by credit needs. Diversion of Short-Term Funds: The pure security-based approach led borrowers to divert short-term bank credit to fund long-term capital assets (maturity mismatch). Bank Credit as Primary Source: Bank borrowing was treated by corporate borrowers as the first source of finance rather than as a supplementary resource to internal accruals and promoter equity. Evergreen Inventory Hoarding: Working capital was extended on an open-ended basis without tenure caps, enabling industry to hoard excessive inventories for speculative gain. The Tandon Committee submitted its historic report on 9th August 1975, creating a watershed paradigm for working capital financing across four comprehensive pillars: Pillar 1: Inventory and Receivable Norms for 15 Major Industries Borrowers are entitled to maintain only reasonable levels of current assets. Bank finance is restricted to normal operating levels based on Economic Order Quantity (EOQ) principles plus an essential safety cushion. Bank credit cannot be extended for speculative holding or hoarding. Trade receivables financed must conform strictly to established industry trade credit cycles. Sr. Industry Classification Raw Materials (Months) Stock-in-Process (Months) Finished Goods (Months) Receivables (Months) 1 Cotton & Synthetic Textiles 2.00 to 3.00 0.33 to 0.75 2.50 2.50 2 Man-made Fibres 1.50 0.50 1.75 1.75 3 Jute Textiles 2.50 0.25 1.00 to 1.50 1.50 4 Rubber Products 2.00 0.25 1.75 1.75 5 Fertilizers 0.75 to 3.00 — 1.00 to 1.50 1.25 6 Pharmaceuticals 2.75 0.50 2.00 1.25 7 Dyes & Dyestuffs 2.25 1.00 0.75 2.25 8 Basic Industrial Chemicals 2.75 0.25 1.00 1.75 9 Vegetable Hydrogenated Oils (Vanaspati) 1.00 — 0.75 0.75 10 Paper: (a) Bamboo & Wood | (b) Chemicals (a) 2.0 to 6.0 | (b) 2.25 — — — 11 Cement 0.75 to 2.25 0.25 1.00 1.00 12 Engineering – Automobiles & Ancillaries 2.25 0.75 2.50 2.50 13 Engineering & Consumable Durables 2.00 0.75 2.50 2.50 14 Engineering Ancillaries & Component Supplies 2.00 0.75 2.50 2.50 15 Engineering Machinery Mfrs. & Major Suppliers 2.75 1.25 3.50 3.50 Mathematical Verification of Holding Levels (in Months) Raw Material (RM) Holding: = (Average Stock of RM / Annual RM Consumed) × 12 Work-in-Process (WIP) Holding: = (Average Stock of WIP / Cost of Production) × 12 Finished Goods (FG) Holding: = (Average Stock of FG / Cost of Sales) × 12 (Cost of Sales = Cost of Production + Opening FG – Closing FG) Receivables Holding (Debtors Turnover): = (Average Receivables / Gross Sales) × 12 Pillar 2: Three Alternative Methods of Maximum Permissible Bank Finance (MPBF) The Tandon Committee introduced the concept of MPBF to ensure banks only supplement the borrower’s internal resources. Each progressive method demands a higher promoter contribution, reducing bank reliance and enhancing solvency: Particulars First Method of Lending Second Method (Standard) Third Method (Conservative) MPBF Formula 75% × (Current Assets – Other Current Liabilities) (75% × Current Assets) – Other Current Liabilities [75% × (Current Assets – Core Current Assets)] – OCL Borrower Margin (Own Long-Term Funds) 25% of Working Capital Gap (Current Assets – OCL) 25% of Total Current Assets 100% of Core Current Assets + 25% of remaining Current Assets Minimum Current Ratio Mandated 1.00 : 1 1.33 : 1 1.50 : 1 Operational Reality: The Second Method has become universally accepted by commercial banks because it requires a 25% margin on gross current assets, providing a substantially larger safety cushion compared to the first method. Pillar 3: Bifurcation of Credit Style (Loan vs. Demand Cash Credit) The Committee recommended that sanctioned MPBF must be bifurcated into two distinct operational components: Loan Component: Represents the stable, core minimum borrowing required throughout the year. Demand Cash Credit Component: Caters to seasonal or fluctuating operating peaks, reviewed periodically. The cash credit component should bear a slightly higher interest rate than the loan component to financially incentivize rigorous cash budgeting. Pillar 4: Information and Reporting System (QIS & Stock Statements) To prevent unplanned credit usage, the committee instituted mandatory periodic submissions: Annual Audited Financial Statements; Annual Projected Financial Statements along with Funds Flow Statements for the ensuing fiscal year; Quarterly Budgeting-cum-Reporting Statements (Quarterly Information System - QIS); Monthly Stock Statements evidencing eligible paid stock and age-wise book debts. 3. Accounting Framework: Meaning of Inventories and Receivables Meaning of Inventories (AS 2 & Ind AS 2) Under AS 2 and Ind AS 2, inventories are defined as tangible assets: Held for sale in the ordinary course of business (Finished Goods); In the process of production for such sale (Work-in-Process); OR In the form of materials or supplies to be consumed in the production process or in rendering services. Comprises: Raw Materials & Packing Materials, WIP, Finished Goods (including by-products), and Stores, Spares & Components. Meaning of Receivables (Sundry Debtors) A receivable represents a legally enforceable monetary claim due to an enterprise for goods sold or services delivered in the ordinary course of trade. Crucial Audit Reality: Unlike physical inventory, trade receivables have no physical substance; they exist exclusively as documentary and ledger evidence (contracts, purchase orders, delivery challans, invoices, and e-way bills). Consequently, they demand rigorous evidentiary corroboration. 4. Five Stages of Stock and Receivables Audit Mapped to ICAI Standards on Auditing Inventory and Receivables audits must be conducted strictly within the framework of ICAI’s Technical Guide on Stock and Receivables Audit and applicable Standards on Auditing (SAs) across five distinct operational phases: Audit Stage Standard on Auditing Standard Title Operational Audit Mandate & Auditor Responsibility Stage 1: Pre-Commencement SA 210 Agreeing the Terms of Audit Engagement The auditor and the appointing bank must formally execute and agree upon the terms, scope, and reporting formats of the engagement. Stage 2: Understanding the Entity SA 315 & SA 330 Assessing Risks & Responses to Assessed Risks Identify risks of material misstatement in inventories and book debts through understanding entity internal controls and deploying targeted procedures. SA 250 Laws & Regulations in an Audit Document and report any borrower non-compliance with applicable commercial, environmental, or banking regulations. SA 550 Related Parties Gather sufficient evidence regarding transactions, transfers, and balances with related parties to prevent artificial inflation of turnover or Drawing Power. Stage 3: Audit Planning SA 200 Overall Objectives of the Auditor Define audit boundaries based on terms of appointment, relevant statutory provisions, and ICAI pronouncements. SA 300 Planning an Audit of Financial Statements Develop an operational audit plan based on the borrower’s specific industry cycle to ensure efficient and timely execution. SA 530 Audit Sampling Design stratified representative samples for physical stock counts, sales invoice tracing, and debtor ledger scrutiny. SA 570 Going Concern Evaluate the operational viability of the enterprise; severe stock obsolescence or uncollectible debts directly threaten going concern status. SA 220 Quality Control for an Audit Establish rigorous supervisory and review protocols over engagement teams conducting site inspections. Stage 4: Substantive Procedures SA 200 & SA 230 Audit Principles & Documentation Maintain complete, indexed working papers substantiating physical stock count sheets, valuation workings, and variance analyses. SA 240 Responsibilities Relating to Fraud Approach audit with heightened professional scepticism to uncover deliberate inflation of stock statements, ghost inventories, and circular invoicing. SA 500 Audit Evidence Obtain corroborative third-party evidence before arriving at findings on valuation or drawing capacity. SA 620 Using the Work of an Expert Engage independent technical specialists (e.g., metallurgists, gemmologists, chemical engineers) where inventory valuation demands specialized technical grading. SA 580 Written Representations Obtain formal management representation letters covering unencumbered ownership of stock, debtor aging, and slow-moving provisions. SA 520 Analytical Procedures Compute inventory turnover ratios, gross profit margins, and monthly sales trends against industry benchmarks to pinpoint anomalies. SA 505 External Confirmations Circulate independent balance confirmation requests to major sundry debtors and third-party custodians holding inventory on job work. SA 501 Specific Considerations for Inventory Mandatory physical attendance during physical inventory count to inspect condition, test counting accuracy, and verify cut-off procedures. Stage 5: Reporting SA 260 Communication with Governance Issue structured audit report communicating all material irregularities, Drawing Power shortfalls, and control deficiencies to bank executives. 5. Detailed Field Audit Procedures A. Comprehensive Audit Procedures for Inventories Operating Flow & ERP Controls: Understand business operating flow; verify perpetual inventory records (stores ledgers) and ensure real-time documentation of Receipts (GRNs), Issues, and Consumption entries. Physical Verification & Test Counting: Carry out independent physical verification, test checks, count reconciliation against book stock, and investigate unexplained variances. Storage Facilities & Access Controls: Inspect storage infrastructure, stacking patterns, temperature/humidity controls, and physical access security. Damaged, Non-Moving & Obsolete Stocks: Identify scrap, slow-moving items, and unserviceable stock; ascertain root causes and verify that adequate write-offs/provisions are made. Valuation Compliance (AS 2 / Ind AS 2): Ensure inventory is valued at lower of cost or net realizable value (NRV): Raw Materials: Invoice price including non-refundable taxes, freight, and direct acquisition costs, less trade discounts (Actual or Weighted Average cost). Work-in-Process (WIP): Cost of raw material plus proportionate conversion costs based on scientific percentage of completion. Finished Goods: Direct materials, labour, plus systematic absorption of fixed and variable production overheads based on normal operating capacity. Inventory Turnover Ratio Analysis: Compute COGS / Average Inventory and evaluate rotation frequency against historical and peer industry norms. Adequacy of Insurance: Verify that the insurance policy contains the mandatory Bank Clause (Agreed Bank Clause), covers all relevant perils (fire, flood, earthquake, burglary), and that Sum Insured adequately covers peak stock holding. Safeguards & Asset Protection: Verify 24×7 deployment of security personnel, complete CCTV perimeter coverage, firefighting equipment fitness, and strict gate-pass controls. Segregation of Third-Party Stocks: Ensure goods received for job work or belonging to related entities are strictly physically segregated with distinct demarcations to prevent fraudulent inclusion in the borrower’s stock statements. B. Comprehensive Audit Procedures for Trade Receivables Debtors Ledger vs. Age-Wise Trial Balance: Reconcile the age-wise debtors report against general ledger control accounts to detect suppression or manipulated classification. Genuineness of Debt: Scrutinize sales ledgers and invoices to ensure balances represent genuine commercial sales and services rather than accommodation entries or financial advances. Credit Appraisal Framework: Evaluate customer credit vetting procedures, credit limits, and approved credit periods. Ageing Bifurcation (90-Day Rule): Rigorously classify receivables into short-term (≤ 90 days) and long-term (> 90 days). If overdue receivables (> 90/120 days) form a substantial portion, highlight prominently to alert the lending bank. Related Party Debts: Scrutinize all receivables from group entities, verify adherence to arm’s length pricing, and ensure non-eligible related party debts are excluded from Drawing Power as per sanction terms. Doubtful Debt Red Flags: Identify red-flag indicators including: Chronic violation of sanctioned credit periods; Continuously mounting ledger balances without periodic clearance; Frequent cheque or NACH/ECS dishonours; Debts under legal dispute or arbitration (consult legal counsel); Insolvency or bankruptcy proceedings against the customer. External Confirmations (SA 505): Directly obtain external written balance confirmations for large and long-outstanding debtor balances. 6. Drawing Power (DP) Computation Mechanics The Drawing Power represents the maximum permissible operating limit a borrower is authorized to draw from the Cash Credit account at any given point in time. It is governed strictly by the quantum of eligible paid inventory and eligible book debts after deducting statutory margins: Standard Proforma for Drawing Power Computation Particulars of Current Assets Amount (₹) Sub-Total (₹) Total Stock (Raw Materials, WIP, Finished Goods, Stores & Spares) XXX,XX,XXX Less: Creditors for Goods (Net of Advances paid to Creditors) (XX,XX,XXX) Paid Stock Available for Financing XXX,XX,XXX Less: Margin on Inventory as per Sanction Terms (e.g., 25%) (XX,XX,XXX) Eligible Drawing Power on Inventory (A) XXX,XX,XXX Total Trade Receivables (Book Debts) XXX,XX,XXX Less: Receivables against Letters of Credit / Bills Discounted (XX,XX,XXX) Less: Ineligible Overdue Receivables (> 90 / 120 days) (XX,XX,XXX) Less: Receivables from Related Parties / Associate Concerns (XX,XX,XXX) Less: Advances Received from Debtors / Customers (XX,XX,XXX) Eligible Receivables for Drawing Power XXX,XX,XXX Less: Margin on Receivables as per Sanction Terms (e.g., 40%) (XX,XX,XXX) Eligible Drawing Power on Receivables (B) XXX,XX,XXX TOTAL DRAWING POWER (C = A + B) XXX,XX,XXX Bank Sanctioned Limit YYY,YY,YYY MAXIMUM PERMISSIBLE UTILIZATION (Lower of Sanction Limit or DP) MIN(C, Limit) 7. Cash Credit Operations & RBI Prudential NPA Guidelines Auditors must scrutinize operational bank account statements to ensure the Cash Credit account functions as an active clearing mechanism for genuine commercial turnover, rather than a conduit for financial manipulation. Mandatory Operational Verifications in CC Accounts Exclusive Business Routing: Day-to-day trade receipts from sale of goods/services and payments for operational purchases must be routed directly through the CC account. Debit-Credit Summation & Genuine Velocity: The total summation of credits over a given period must reflect satisfactory velocity commensurate with the sanctioned limit and gross sales turnover. Detection of Fund Diversion: Scrutinize for round-tripping, circular fund transfers, and frequent transfers to related parties, directors, or personal family accounts designed to artificially inflate account turnover. Maturity Transformation: Detect instances where short-term working capital funds are siphoned off to finance capital expenditures, buy fixed assets, or make long-term inter-corporate investments. Overdrawing Controls: Check whether instances of overdrawing above sanctioned limits or Drawing Power were authorized under the bank’s Approved Authority Matrix; report any unauthorized excess drawings. RBI Prudential Norms on “Out of Order” Status (Master Circular dated April 1, 2022) As per the Reserve Bank of India Master Circular ref. no. RBI/2022-23/15 DOR STR. REC. 4/21.04.048/2022-23 dated April 1, 2022 (Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances), a Cash Credit / Overdraft facility will be classified as a Non-Performing Asset (NPA) if it remains “Out of Order”. An active CC/OD account will be treated as “Out of Order” if: Condition 1: Continuous Excess Outstanding The outstanding balance remains continuously in excess of the sanctioned limit or Drawing Power for 90 consecutive days; — OR — Condition 2: Insufficient Credits to Cover Interest The outstanding balance is within the sanctioned limit / Drawing Power, but there are no credits continuously for 90 days, or the cumulative credits during the previous 90-day period are insufficient to cover the total interest debited during that period. 8. RBI Discipline on Current Accounts and Permitted Exempted Accounts To prevent the siphoning of loan funds through unmonitored multiple banking channels, the RBI issued landmark circulars on “Opening of Current Accounts by Banks – Need for Discipline”: Circular Ref. No. BP.BC/7/21.04.048/2020-21 dated 06.08.2020; Circular Ref. No. DOR.No.BP.BC.30/21.04.048/2020-21 dated 14.12.2020; Circular Ref. No. DOR.CRE.REC.63/21.04.048/2021-22 dated 29.10.2021. The Three-Tier Operational Framework Banking Exposure < ₹5 Crore: No restriction on opening current accounts, subject to obtaining a formal written undertaking that the borrower shall notify the bank(s) as and when aggregate banking credit reaches ₹5 Crore or more. Banking Exposure ≥ ₹5 Crore: Borrowers can maintain operational current accounts only with banks extending CC/OD facilities, provided that specific lending bank holds at least 10% of total banking system exposure. Other lending banks may open only Collection Accounts, where funds must be fully remitted within two working days to the CC/OD account. Non-lending banks cannot open current accounts. Specific Permitted Exemptions: The circulars permit opening designated special-purpose accounts without exposure restrictions, provided they are used strictly for mandated transactions and flagged in the Core Banking Solution (CBS): RERA Escrow Accounts: Mandated under Section 4(2)(l)(D) of Real Estate (Regulation and Development) Act, 2016 (70% homebuyer advance deposit). Payment Aggregator / PPI Escrow: Nodal/escrow accounts permitted by RBI DPSS under Payment and Settlement Systems Act, 2007. Card Settlement Accounts: For settlement of debit, ATM, and credit card issuers and acquirers. FEMA Permitted Accounts: Accounts authorized under Foreign Exchange Management Act, 1999. Statutory Capital Market Accounts: IPO / NFO / FPO subscription accounts, share buyback, dividend distribution, commercial paper issuance, and debenture/gratuity accounts mandated by regulators. Tax Collection Accounts: Dedicated accounts for tax and customs duty payments. White-Label ATM Operators: Cash replenishment sourcing accounts. 9. Compliance with ICAI Guidance Note on Special Purpose Reports (Revised 2016) In executing stock and receivables assurance engagements, the auditor must strictly adhere to ICAI’s “Guidance Note on Reports or Certificates for Special Purposes (Revised 2016)”. The Guidance Note governs assurance engagements ‘other than audits or reviews of historical financial information’ across ten critical procedural requirements: 1. Engagement Conduct: Perform assurance strictly in accordance with ICAI Guidance Note standards. 2. Preconditions for Assurance: Ensure criteria and scope are suitable and accessible to the practitioner. 3. Acceptance & Continuance: Verify independence, professional competence, and absence of conflicts. 4. Agreeing Terms of Engagement: Execute formal tripartite or bipartite engagement contracts with lending banks. 5. Limitation on Scope: Clearly delineate boundaries where physical access or documents were withheld. 6. Professional Scepticism & Judgement: Maintain critical inquiry regarding representations and valuation methodologies. 7. Obtaining Evidence: Corroborate borrower records through independent confirmations and test counting. 8. Assurance Report Preparation: Draft report adhering to the prescribed format with clear statement of responsibility. 9. Forming Conclusions: Express unambiguous opinion on stock adequacy, Drawing Power, and compliance. 10. Comprehensive Documentation: Archive all audit working papers in conformity with SA 230 guidelines. 10. Audit Report Inclusions & Concluding Early Warning Signposts Mandatory Inclusions in the Stock and Receivables Audit Report Executive Summary: Borrower business profile, major irregularities, breaches of sanction covenants, and urgent banker attention signposts. Physical Verification & Inventory Quality: Specific comments on physical count findings, storage conditions, stacking safety, and obsolete/damaged goods. Receivables Soundness: Detailed evaluation of book debts aging, proportion of debts > 90/120 days, disputes, and recoverability. Review of Latest Audited Financials: Incorporate statutory auditor qualifications, Key Audit Matters (KAM), Emphasis of Matter (EoM), and sales/profit trend fluctuations. Cash Credit Account Behavior: Rigorous reporting on debit/credit summation, transaction genuineness, turnover velocity, and fund diversion indicators. Insurance & Collaterals: Verification of peak stock insurance cover, Agreed Bank Clause, and existence/perfection of collateral security charges (ROC and CERSAI). The Early Warning Sentinel of Banking Solvency Working capital investment is the lifeblood of a commercial enterprise, without which operations cease. In executing inventory and receivables audits, the Chartered Accountant’s duty extends far beyond mechanical checklist compliance. Stock and receivables audits serve as the critical early warning radar for the banking system—detecting diversion of funds, identifying incipient distress before accounts lapse into Non-Performing Assets (NPAs), plugging structural control loopholes, and safeguarding the financial stability of the nation’s banking architecture.

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 33–38 (Journal pp. 1337–1342) THEME Decrypting Crypto Tax CA. Husain Ujjainwala Member of the Institute of Chartered Accountants of India (ICAI) Correspondence: husainujjainwala786@gmail.com and eboard@icai.in 📌 Overview & Economic Context The rapidly growing crypto industry is one with an investment of more than $6 billion in India. Around 30 million Indians have invested in such an industry whose assets are in the portfolio of many investors. The Crypto Industry contributes significantly to the country in the form of providing employment, bringing in FDI Investments, GST payments, and Income tax revenues to the government. The government took a huge step by bringing the income generated from Virtual Digital Assets into the ambit of income tax by taxing such income at the rate of 30% in Budget 2022. Read on… 1. Introduction: Dawn of the “Crypto Budget” The introduction of Tax Deducted at Source (TDS) of 1% on consideration paid for the purchase of Virtual Digital Assets (VDAs) equips tax authorities with granular, real-time transaction information regarding every person dealing in or holding such assets. Consequently, commentators and financial analysts widely termed the Union Budget 2022 as the “Crypto Budget”, which marked the formal birth of an explicit statutory Crypto Tax regime in India. Prior to Finance Bill, 2022, income arising from cryptocurrency transactions was already subject to general taxation under residuary provisions; however, total ambiguity prevailed regarding tax categorization, applicable slabs, deductibility of expenses, and treatment of losses—creating friction for investors and assessing officers alike. Budget 2022 instituted decisive statutory clarity. Magnitude of the Crypto Ecosystem 106 Million Global Crypto Users (Crypto.com, Nov 2021) 30 Million Active Indian Crypto Investors $6 Billion Crypto Assets Held by Indian Residents “There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.” — Smt. Nirmala Sitharaman, Hon’ble Union Finance Minister (Budget Speech 2022) Concurrently, the government announced the issuance of India’s sovereign Central Bank Digital Currency (CBDC), the Digital Rupee, by the Reserve Bank of India in FY 2022-23 to foster the digital economy, while legislating strict fiscal parameters around private, unbacked virtual tokens. 2. Statutory Definition of Virtual Digital Asset (Section 2(47A)) Finance Bill, 2022 inserted clause (47A) into Section 2 of the Income-tax Act, 1961, formulating an expansive legal definition for “Virtual Digital Asset” (VDA): Three-Pronged Statutory Scope under Section 2(47A) Cryptographic Tokens & Codes: Any information, code, number, or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functioning as a store of value or unit of account, including its use in financial transactions or investments (but not limited to investment schemes), capable of being transferred, stored, or traded electronically. Non-Fungible Tokens (NFTs): A non-fungible token or any other digital asset of similar nature, as notified by the Central Government in the Official Gazette. Government Notified Digital Assets: Any other digital asset specified by the Central Government by notification. The Central Government is also empowered to selectively exclude any digital asset from this definition subject to specified conditions. Statutory Explanation: The terms “currency”, “foreign currency”, and “Indian currency” carry the meanings assigned to them in clauses (h), (m), and (q) of Section 2 of the Foreign Exchange Management Act, 1999 (FEMA). Scope & Exclusions: Section 2(47A) encompasses cryptocurrencies (Bitcoin, Ethereum, Solana, etc.), decentralized finance (DeFi) tokens, and NFTs. Prima facie, it excludes traditional digital assets like digital gold, sovereign CBDC (Digital Rupee), and traditional electronic banking balances, intentionally concentrating its tax drag upon speculative private crypto assets. 3. Section 115BBH: Special Tax Rate, Computation & Loss Restrictions Finance Bill, 2022 inserted Section 115BBH, prescribing a special charging regime for income derived from the transfer of virtual digital assets: Statutory Text of Section 115BBH(1) “Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of– (a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent.; and (b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).” Flat 30% Base Tax Rate Income from transfer of VDAs is taxed at a flat rate of 30%. Surcharge (as applicable) and Health & Education Cess @ 4% apply over and above, resulting in an effective tax rate of 31.20% (without surcharge). No Basic Exemption Threshold Even if an assessee has zero other taxable income, no deduction or basic exemption limit benefit (₹2,50,000) can be adjusted against VDA gains. Tax is payable on the gross gain from the first rupee. Rules of Computation & Inadmissibility of Expenses Income from VDAs is treated at par with speculative / lottery income. Under Section 115BBH(2)(a), no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act in computing income from VDA transfers. Practical Numerical Illustration: Sale of Ethereum (ETH) Gross Sale Consideration of ETH INR 3,24,000 Less: Cost of Acquisition of ETH (INR 2,10,000) Taxable Net VDA Income INR 1,14,000 Base Income-tax @ 30% INR 34,200 Add: Health & Education Cess @ 4% INR 1,368 Total Tax Payable (Effective 31.20%) INR 35,568 Cost of Acquisition Dilemma & Disallowance of Ancillary Expenses The term “Cost of Acquisition” has not been explicitly defined in Finance Bill, 2022 with respect to VDAs. Routinely incurred ancillary transactional expenses—such as crypto exchange trading fees, deposit/withdrawal fees, blockchain gas fees, smart contract execution costs, and custodial wallet charges—are strictly non-deductible. Taxpayers can claim only the actual price paid to purchase the token. Total Prohibition on Set-off and Carry-Forward of Losses No Inter-Head Set-off: Loss arising from the transfer of a VDA cannot be set off against income under any other head (Salaries, House Property, Profits from Business, or Capital Gains). No Intra-VDA Set-off across Tokens: As clarified by parliamentary amendments, loss incurred on one cryptocurrency (e.g., Bitcoin) cannot be set off against profit made on another cryptocurrency (e.g., Ethereum). No Carry-Forward: Crypto losses cannot be carried forward to subsequent assessment years. The entire loss lapses in the year of occurrence. 4. Section 194S: 1% Tax Deduction at Source (TDS) on VDA Transfers Clause 59 of Finance Bill, 2022 introduced Section 194S into the Income-tax Act, effective from 1st July, 2022, to establish an end-to-end digital transaction audit trail: Key Provisions of Section 194S Rate of TDS: Any person responsible for paying to a resident consideration for transfer of a VDA must deduct TDS equal to 1% of such gross consideration. Timing of Deduction: Deduction must occur at the time of payment or at the time of credit to the resident payee’s account (including credit to a “Suspense Account” or ledger), whichever is earlier. KYC & Non-Resident Exclusion: The buyer must obtain the Permanent Account Number (PAN) of the seller, enforcing mandatory KYC and curbing anonymous p2p trading. If the buyer is a non-resident, Section 194S does not apply. Transactions Wholly or Partly in Kind (Crypto-to-Crypto Swaps): Where consideration is wholly in kind (e.g., swapping BTC for ETH) or partly in kind where the cash component is inadequate to meet the TDS liability, the payer must, before releasing consideration, ensure that tax has been paid by the seller via advance tax challan and obtain verifiable proof. Monetary Threshold Limits for Section 194S Category of Deductor Statutory Criteria & Eligibility Exemption Threshold Specified Person (a) An Individual or HUF not having any income under Profits & Gains of Business or Profession (PGBP); OR (b) An Individual or HUF having business turnover ≤ ₹1 Crore, or professional gross receipts ≤ ₹50 Lakhs during the preceding financial year. ₹50,000per Financial Year Non-Specified Person All other entities including Companies, Partnership Firms, LLPs, AOPs, and Individuals/HUFs with business turnover exceeding ₹1 Crore or professional receipts exceeding ₹50 Lakhs. ₹10,000per Financial Year Practical Application Scenarios Scenario 1 (Specified Person Seller): Mr. Maneesh purchases Solana (SOL) from Mrs. Anuradha for ₹10,00,000. Mrs. Anuradha is an individual with no business income (Specified Person). The threshold is ₹50,000. Mr. Maneesh must deduct TDS @ 1% on consideration exceeding ₹50,000 (₹9,50,000), yielding a net TDS of ₹9,500. Scenario 2 (Corporate / Non-Specified Seller): If Mr. Maneesh purchases SOL for ₹10,00,000 from CTS Ltd (a corporate entity, hence Non-Specified Person), the monetary threshold is ₹10,000. Mr. Maneesh must deduct TDS @ 1% on consideration exceeding ₹10,000 (₹9,90,000), resulting in a net TDS of ₹9,900. Decision Logic Flowchart: TDS under Section 194S Step 1: Payment or Credit on Purchase of VDA to a Resident To Specified Person Threshold: ₹50,000 If Consideration > ₹50,000 → Deduct TDS @ 1% If Consideration ≤ ₹50,000 → NO TDS To Non-Specified Person Threshold: ₹10,000 If Consideration > ₹10,000 → Deduct TDS @ 1% If Consideration ≤ ₹10,000 → NO TDS 5. Crypto Gift Tax, Return Filing Mandate & Past Incomes Taxation of Crypto Gifts (Section 56(2)(x)) Finance Bill, 2022 amended Section 56(2)(x) to include Virtual Digital Assets within the definition of “property”. Consequently, gifts of VDAs received without consideration or for inadequate consideration are fully taxable in the hands of the recipient based on Fair Market Value (FMV) on the date of transfer: Numerical Example: Mr. A gifts Bitcoin (BTC) worth ₹1,000 to Mr. B on 5th February 2022. The BTC value of ₹1,000 is taxable in the hands of recipient Mr. B as income from other sources, attracting tax of ₹312 (31.2% effective rate). Cost of acquisition for the recipient in subsequent transfers will be deemed to be the Fair Market Value taxed under Section 56(2)(x). Return Filing Obligations under Section 139(1) Under Section 139(1), non-corporate assessees are required to file income tax returns only if their total income exceeds the basic exemption limit. The Act does not contain a specific clause mandating return filing solely on account of possessing or trading VDA if total income remains below basic exemption. However, because Section 194S TDS flows directly into the Annual Information Statement (AIS) and Form 26AS, tax authorities possess 100% visibility. Future ITR forms will incorporate dedicated schedules for VDA income reporting. Treatment of VDA Income Earned Prior to 1st April 2022 Because Section 115BBH operates prospectively with effect from 1st April 2022 (AY 2023-24), income earned on or before 31st March 2022 is governed by pre-existing general principles: Treated as normal income under the head “Income from Other Sources” (IFOS) or capital gains / business income based on investor facts, taxable at applicable slab rates; Past losses incurred on VDAs on or before 31st March 2022 cannot be set off against other heads nor carried forward to subsequent assessment years unless clarified by the CBDT. 6. Crypto Mining Tax Ambiguity & MCA Schedule III Disclosures Taxation of Crypto Mining Crypto-mining is the process of generating new cryptocurrency units by solving complex cryptographic proof-of-work algorithms using high-performance computing hardware (ASIC/GPU rigs), validating data blocks, and securing distributed blockchain ledgers. The Mining Cost Deductibility Conflict Finance Bill, 2022 fails to provide a dedicated mechanism for miners. Section 115BBH permits only the “cost of acquisition” as a deduction. In mining, the primary cost is not a purchase price, but substantial operational expenditures: electricity/power consumption, specialized hardware depreciation, server hosting, and cooling infrastructure. Under the strict text of Section 115BBH(2)(a), these operational costs are denied deduction, effectively taxing miners on gross revenues. Urgent clarification from the Central Board of Direct Taxes (CBDT) is required. Mandatory Disclosures under Schedule III of the Companies Act, 2013 To enforce complete corporate transparency, the Ministry of Corporate Affairs (MCA) vide notification dated 24.03.2021 amended Schedule III to the Companies Act, 2013 effective from 01st April 2021. Every company that has traded or invested in cryptocurrency or virtual currency during the financial year must disclose: Profit or Loss: Net profit or loss on transactions involving Cryptocurrency or Virtual Currency; Holding at Balance Sheet Date: Aggregate quantity and book value of currency held as at the reporting date; Third-Party Advances: Deposits or advances received from any person for the purpose of trading or investing in Crypto Currency / Virtual Currency. 7. Crypto Taxation Across the Globe: A Comparative Analysis Globally, sovereign nations have adopted divergent fiscal and regulatory approaches toward digital assets: Jurisdiction Asset Classification Taxation Framework & Relief Thresholds United States Property / Capital Asset (IRS) Held < 12 months: Short-term capital gains taxed at ordinary marginal income brackets. Capital losses offset ordinary income up to $3,000/year with indefinite carry-forward. Held ≥ 12 months: Long-term capital gains taxed at preferential rates (0%, 15%, or 20%). United Kingdom Capital Asset (HMRC) Taxed under Capital Gains Tax rules. Individuals enjoy an annual tax-free capital gains allowance of GBP 12,300 before tax triggers. Germany Private Money (Privates Geld) Held > 12 months: 100% tax-free. Held < 12 months: Gains up to EUR 600 per year are completely exempt. If gains exceed EUR 600, entire gain is taxed at ordinary progressive rates. Bermuda Digital Asset Haven Imposes zero income tax, capital gains tax, withholding tax, or transaction taxes on digital assets and transfers. India Virtual Digital Asset (VDA) Flat 30% (+ 4% cess = 31.20%) special tax under Section 115BBH. Zero basic exemption, no expense deduction except acquisition cost, zero loss set-off, zero carry-forward. 1% TDS under Section 194S. 8. Legality, Supreme Court Jurisprudence & Regulatory Outlook A fundamental tenet of Indian taxation is that taxing an activity does not confer legality upon it. Under the Income-tax Act, income earned from unlawful activities (such as smuggling or extortion) is fully chargeable to tax. Judicial & Regulatory Timeline in India April 2018 (RBI Banking Ban): The RBI issued a circular prohibiting all regulated commercial banks from providing banking access to cryptocurrency exchanges and traders. 4th March 2020 (Supreme Court Landmark Judgment): In Internet and Mobile Association of India (IMAI) vs. Reserve Bank of India, the Hon’ble Supreme Court quashed the RBI circular on grounds of proportionality, restoring commercial banking access. 31st May 2021 (RBI Advisory to Banks): The RBI formally directed banks not to cite its quashed 2018 circular to deny banking facilities to crypto investors and exchanges. Legal Tender Position: As clarified by Finance Secretary T.V. Somanathan, India will never designate private cryptocurrencies as legal tender. Only the RBI-issued Digital Rupee (CBDC) constitutes legal tender in India. The Cryptocurrency and Regulation of Official Digital Currency Bill As outlined in the Lok Sabha Bulletin, the purpose of proposed crypto legislation is two-fold: (i) create a facilitative architecture for the sovereign Central Bank Digital Currency (CBDC), and (ii) regulate or prohibit private cryptocurrencies while permitting underlying distributed ledger technology (DLT) applications. With over 12,000 cryptocurrencies globally, classifying tokens as “private” or “public” presents unique governance paradoxes: while 99.9% are created by private entities, foundational networks like Bitcoin and Ethereum operate without centralized corporate ownership, yet control remains concentrated among core developers and mining pools. 9. Concluding Remarks & Policy Horizon The introduction of an explicit statutory scheme for the taxation of virtual digital assets is an undeniable milestone that establishes clarity, dispels ambiguity, and officially integrates the crypto economy into India’s fiscal architecture. However, taxing virtual digital assets at a punitive 31.2% rate akin to speculative gambling winnings underscores the government’s intent to discourage speculative retail participation. Immediate Action Items & Policy Gaps CBDT Guidelines under Section 194S: Issuance of comprehensive circulars to address practical operational hurdles in exchange-based and p2p TDS deductions. GST Classification: The GST Council must urgently clarify whether crypto transactions constitute supply of goods, services, or actionable claims, and define applicable valuation rules. Banking Normalization: Removing informal banking friction so that domestic cryptocurrency platforms can access reliable fiat banking rails. Strategic Balance: Taxation vs. Technological Innovation While Budget 2022 successfully eliminated tax evasion ambiguity, the long-term vitality of India’s Web3, DeFi, and blockchain ecosystem hinges upon establishing balanced regulatory legislation. By pairing prudent investor protection and anti-money laundering vigilance with progressive technology-friendly guidelines, India can harness the transformative potential of blockchain innovation while safeguarding its macro-financial stability. Official Government References Finance Bill, 2022 – Ministry of Finance, Government of India: https://www.indiabudget.gov.in/doc/Finance_Bill.pdf Budget Speech, 2022 – Union Finance Minister Smt. Nirmala Sitharaman: https://www.indiabudget.gov.in/doc/budget_speech.pdf MCA Schedule III Amendment Notification dated 24.03.2021 – Ministry of Corporate Affairs: https://www.mca.gov.in/Ministry/pdf/endment_Notification_24032021.pdf

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 22–32 (Journal pp. 1326–1336) THEME • RETIREMENT PLANNING & PENSION REFORMS Risk and Return Analysis of National Pension Scheme for Retirement Planning *CA. Amit Nath, #Dr. Kavita Chordiya and #Dr. Purna Prasad Arcot *CA. Amit Nath is a member of the Institute of Chartered Accountants of India. He can be reached at ca.amitnath@gmail.com. #Dr. Kavita Chordiya and #Dr. Purna Prasad Arcot are academicians and researchers in financial planning and portfolio economics. Authors can be reached at eboard@icai.in. 💰 Executive Synopsis & Core Proposition An individual always saves a portion of his earnings for his future and wants to invest his money in a profitable scheme that would fetch good returns to secure his life after retirement as he wants good corpus and regular income to live a smooth life after his retirement. The National Pension Scheme is a retirement planning scheme which is a pension system where the contribution is being made voluntarily by Indian citizens. Read on… The main objective of this study is to identify the return and risk involved in investments in NPS and whether it is a safe retirement scheme for Indian citizens? Which is the best mix of investment in NPS to invest in the age group of 40-50? Which is the best fund manager to invest in? Primary data for the analysis was collected from discussions with retirees and young investors who have invested in this scheme, tax consultants, and financial consultants providing NPS service. Secondary data includes Newspapers, Websites, Magazines and journals. Data of the past 10 years shows that NPS has given good returns which are pretty high compared to FD/PPF/EPF because it is linked with equity but then, the risk is also comparatively high with others. But the risk is low as compared to equity and mutual funds investments as it is very well managed and invested in high caps and also the charges are comparatively low/ negligible. It is therefore concluded that NPS is a low-risk investment with high returns. It also provides tax benefits. So, NPS can be considered as a good long-term retirement planning scheme. 1. Introduction & Evolution of NPS An individual always saves a portion of his earnings for his future and wants to invest his money in a profitable scheme that would fetch good returns to secure his life after retirement as he wants both good corpus and regular income to live a smooth life after his retirement. So, one requires good retirement planning. An individual always, therefore, prefers a government job that not only gives job security but also a guaranteed pension after retirement. The private companies, therefore, pay handsome salaries and have introduced many retirement benefits to attract employees. On 1 April 2004, the Government of India stopped the pensions for all its employees who joined the government organisations after 1 April 2004 and initiated NPS which was later made available for all Indian Individual citizens from 2009 onwards. Investors between the ages of 18 years to 75 years can invest in this scheme. National Pension Scheme is a retirement planning scheme which is a pension system where the contribution is being made voluntarily by Indian citizens. Where the contribution towards NPS is mandatory for all government employees, it is optional for other individuals (whether salaried person or self-employed person). Here, an employee and his employer both can contribute to his retirement account. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It can be opened either physical mode through bank or online mode. 2. Investment Choices, Account Tiers & Fund Managers 2.1 Active Choice (Asset Classes E, C, G, A) The individual can opt for investment either fully or in the mixture in four types of investment schemes which are being offered by the pension fund managers. These are called active choice which is: Scheme E (Equity): Where a maximum of 75% can be invested in stocks and risk is high. Scheme C (Corporate Debt): Where a maximum of 100% can be invested in high-quality corporate bonds and risk is Moderate. Scheme G (Government Bonds): Where a maximum of 100% can be invested and risk is Low. Scheme A (Alternative Investment): Like real estates, piece of art, where a maximum of 5% can be invested and risk is very High. After the age of 50 years, the equity allocation starts to reduce and after the age of 60 years, the subscriber cannot have more than 50% of his portfolio into an equity fund. 2.2 Auto Choice (Lifecycle Funds: LC75, LC50, LC30) Also, the subscriber can choose the default scheme (auto choice), which is classified as follows: LC75 – Aggressive Lifecycle Fund: Where a maximum of 75% can be invested in stocks up to the maximum age of 35. LC50 – Moderate Lifecycle Fund: Where a maximum of 50% can be invested in stocks up to the maximum age of 35. LC30 – Conservative Lifecycle Fund: Where a maximum of 25% can be invested in stocks up to the maximum age of 35. After the age of 35, the subscriber’s equity and corporate debt allocation start to reduce while allocation to government debt securities increases. 2.3 Registered Pension Fund Managers At present, there are 7 pension fund managers in the country out of which anyone can be chosen by the investors: UTI Retirement Solutions Limited. SBI Pension Funds Private Limited. LIC Pension Fund. ICICI Prudential Pension Funds Management Company Limited. Kotak Mahindra Pension Fund Limited. Aditya Birla Sun Life Pension Management Limited. HDFC Pension Management Company Limited. The pension fund manager (only once in a year) and types of investment (four times in a year) can be changed any time in a year. 2.4 Tier I vs Tier II Account Structure Tier I Account (Retirement Pension Account) Meant for retirement savings. Account opening charge ranges from Rs. 200 (minimum) to Rs. 400 (maximum). Minimum one contribution per year of at least Rs. 500 per transaction and Rs. 1,000 p.a., with no upper investment ceiling. Lock-in & Withdrawal at Age 60: Subscriber can withdraw up to 60% of the corpus in a lump sum. The remaining 40% must be invested into an immediate annuity plan. If the total corpus is ≤ Rs. 5 lakh, 100% lump-sum withdrawal is permitted. Premature Exit (before 60): Allowed only after 10 years of account opening; subscriber can withdraw only 20% in lump sum, and 80% must be invested in annuity. If corpus is ≤ Rs. 2.5 lakh, 100% lump sum is permitted. All tax benefits apply to Tier I only. Tier II Account (Voluntary Savings Facility) Only Tier 1 members are allowed to open this account. Investors can choose not to invest in any given year. No Lock-in Period: Subscribers can deposit and withdraw funds anytime without restriction or exit load. Operates identically to an open-ended mutual fund with zero distributor commission and negligible fund management charges. However, no tax deductions apply to Tier II contributions. 3. Statement of Problem & Research Objectives Statement of Problem: Among many retirement schemes available in the market, NPS is one of them. But like any other securities, it has also its own risks and returns. So, the problem lies in whether the individuals should invest or not in this scheme for better returns and a bright future. Research Objectives: The main objective of this study is to identify the Return and risk involved in investments in NPS and whether it is a safe retirement scheme for Indian citizens. To find out the best debt equity mix of investment in NPS in the age group of 40-50. To find out the oldest fund manager. To know which fund manager has maximum subscribers. To find out the fund manager which gives the highest return in the corporate bond scheme, government bond scheme and equity scheme of Tier I. To analyse the best fund manager to invest in. 4. Comprehensive Review of Literature Aruna Kapoor (2016) Conducted a study using primary and secondary data; the analysis showed that NPS provides transparency and a reasonable return to the investors. They provided suggestions to investors, asset management companies, and the government. The conclusion of their study shows that NPS is the most low-cost pension plan in India. Ananth S. and Balanaga Gurunathan K. (2016) Studied three years of data of NPS scheme for their research study. The Sharpe Index, Treynor Index, and Jensen Alpha are used to measure the comparative performance of the NPS scheme. The comparison of Tier-I and Tier-II of NPS schemes is also done in this study. The result showed that variances are existing in the return of the different schemes of Tier-I and Tier-II. The study suggested more government incentives and minimum pension support for the investors. Bijaya Kumar Barik (2015) Scrutinized the mutual fund pension schemes with the National Pension Scheme-citizen model. He studied various retirement fund schemes and estimated the returns on mutual fund pension schemes and National Pension Scheme. Neeti Hooda and Dr. Kuldip Singh Chhikara (2018) Concluded that the role of NPS in the economy and capital market can be scrutinised in terms of accumulation of institutional capital, support to improve financial market research, development of the capital market through the creation of demand for financial instruments, risk rating standard, corporate governance, etc. which not only gives momentum to growth but also lead towards economic development of the country. It has been perceived from the study that the Indian debt market showed a continued deterioration in terms of investment purpose which was only 3.2% in 2007, in GDP terms but gained a lead with the introduction of pension reforms i.e., NPS. Sukhen Kali and Subrata Jana (2017) Conducted a study to evaluate the old pension scheme and new pension schemes in India. The old pension and new pension periods data were collected for 12 years. They used a t-test to compare the old pension and NPS and concluded that the employee benefited more from the NPS. Dr. Kamnath Vani and Dr. Patil Roopali (2017) Used a case study method for their research paper. A comparison of NPS and other Investment Schemes has been conducted for this study. Various age groups of investors (25-55 years), periods of investment, government taxation policies, and processing fees are used for this study. The finding shows that NPS is an exceptional pension policy that provides multiple benefits and assures market-linked returns to the investors. Anita and Pankaj Kumar (2014) Investigated the important features of this newly declared pension scheme (NPS Swavalamban). It also pointed out the difficulties that the scheme is facing. Subhro Sen Gupta, Neha Gupta and Komal Garg (2017) Explored that there is a significant relationship between equities, corporate, and government securities within the New Pension Scheme. In their paper, they used 5 years of secondary data collected from the NPS website. The rank correlation method is used for assessing the relative performance of corporate bonds, equity, and government security within SBIPF, LICPF, and UTRSL in Tier-I and Tier-II. The conclusion of the study is investors have more faith in government bonds irrespective of the NPS scheme in Tier I and Tier II. Dr. Alpa A Thaker, Dr. Mahendra H. Maisuria, and Dr. Prashant T. Jariwala (2018) Analysed the Tier I-NPS performance by using five years of data across 7 National Pension Schemes. Analytical tools like mean, standard deviation, and ANOVA were deployed. Levene Statistics was used to test homogeneity of variances among the different schemes of Tier-I. It found that lack of awareness and low commission structure for advisory kept many investors away from NPS. Recommended that for long-term horizons, NPS may offer 12% to 15% return and is highly advantageous for early-age investors. Justice B.N. Srikrishna (2013) – FSLRC Suggested that to provide for various protections against misleading conduct by sales agents, the PFRDA is required to consider the Indian Financial Code as a benchmark standard. The suitability study needs to be conducted by the PFRDA before embarking on a full-fledged policy initiative at improving the distribution of the NPS. Ayanendu Sanyal, K. Gayithri, and S. Erappa (2011) Stated that pension reforms in India in the last decade have seen three major initiatives – a paradigmatic shift in the civil servants’ pension scheme, the National Pension Scheme for all citizens, and the New Pension System Lite for the frugally underprivileged sections with small savings. The NPS has seen a lukewarm response so far, with a majority of subscribers being central and state government employees, for whom the scheme is mandatory. An analysis of the auto choice option under the NPS and the demographic transition reveals potential future imbalances in the investment structure among the asset classes. Moreover, the NPS does not even guarantee a minimum pension, thus defeating its “welfare” orientation. Dr. Mahesh Kumar Kurmi, Dr. Baneswar Kapasi, and Mr. Ranjit Kumar Paswan (2020) Described in their study the comparative performance of various schemes of NPS from the viewpoint of its risk and return. The study uses secondary data from 2015 to 2020 and discloses that NPS is performing well in comparison to the stock market at least during this study period. Besides, the performance of funds under Tier II is best than funds under Tier-I. However, the performance of various funds and fund managers under the same Tier is closely homogeneous. 5. Statutory Tax Architecture & Exemptions “NPS is a quasi-EET instrument in India where the investment attracts exemption from taxes, the income accrued on the investment is exempt from taxes and finally, at maturity, 60% of the corpus is tax-exempt.” Section 80CCD(1) & Section 80CCE Deduction from gross total income limited to 10% of basic salary + DA for salaried individuals, and 20% of gross total income for self-employed individuals, capped at Rs. 1.5 lakh under Section 80CCE. Section 80CCD(1B) Exclusive Deduction Exclusive additional tax deduction of up to Rs. 50,000 over and above the Rs. 1.5 lakh Section 80CCE ceiling, providing total deductions of up to Rs. 2.0 lakh. Section 80CCD(2) & Section 17(1)(viii) Employer contribution deductible up to 10% of salary (14% for Central Government employees). Employer contribution exceeding Rs. 7.5 lakh across PF, NPS, and superannuation is taxable under Section 17(1)(viii). Available under the new tax regime. Employer Business Expense Employer’s contribution towards NPS can be claimed as a deductible business expense under “Profits and gains from business and profession” up to 10% of employee salary (Basic + DA). Maturity Taxation & Annuity Streams NPS is a quasi-EET instrument in India where the investment attracts exemption from taxes, the income accrued on the investment is exempt from taxes and finally, at maturity, 60% of the corpus is tax-exempt, and the remaining 40% which has to be compulsorily used to purchase an annuity is also tax exempt but the annuity income earned thereof will be taxable as “Income from other sources” as per income tax slab rates prevailing at the time of retirement. In case of pre-mature exit (before 60 years of age) where you can withdraw only 20% of the corpus, that 20% amount will not be taxable, and the remaining 80% which has to be compulsorily used to purchase an annuity, the annuity income earned thereof will be taxable. Risks and Cons Attached with NPS Liquidity Risk: The lock-in period is too long which discourages young investors to invest in. It is not possible to withdraw the amount before the age of 60 except in certain emergency conditions where the full amount cannot be withdrawn. Equity Cap Limitation: The maximum ceiling limit of only 75% investment in equity discourages many aggressive investors to invest in who are ready to take risks. Mandatory Annuity Purchase: 40% of the maturity amount needs to be compulsorily invested in annuity. So, if one needs a complete 100% lump sum amount, he cannot withdraw the same. Also, in premature exit, one can withdraw only 20%, and the remaining 80% needs to be compulsorily invested in annuity. So, if anyone wants to invest this 40% maturity amount in some other profitable schemes of his/her own choice, he/she can’t do so. Subdued Annuity Returns: The annuities are giving very less returns (normally 5%-6%) after retirement and pension income is also taxable. This makes it a less profitable scheme. Market Volatility Exposure: As it is linked with equity, the returns are not sure. At the time of withdrawal, if the market crashes, then the money invested in equity may end in a great loss. Allocation Decision Complexity: The decision of choosing the best fund manager and the best mixture of investment is a big challenge. 6. Comparative Empirical Analysis Across Schemes (E, C, G, A) 6.1 Tier-I Scheme E (Equity) Performance Analysis Table 1: Tier-I Scheme E (Equity) Returns & Metrics across Pension Fund Managers (as on 09/07/2021) Metric Aditya Birla Sun Life HDFC Pension ICICI Pru Pension Kotak Mahindra LIC Pension SBI Pension UTI Retirement Benchmark Inception Date 9-May-17 1-Aug-13 18-May-09 15-May-09 23-Jul-13 15-May-09 21-May-09 09/07/2021 AUM (Rs Crs) 135.83 8,282.40 3,415.01 672.89 1,686.02 6,258.54 974.09 — Subscribers 16,410 816,002 365,241 51,922 206,913 832,560 91,015 — NAV 16.7647 31.2529 41.1918 37.9495 26.0821 34.2281 40.7394 — Returns 1 Year 41.41% 48.11% 49.22% 46.18% 49.33% 44.38% 49.58% 48.85% Returns 3 Years 12.42% 14.19% 13.55% 14.29% 12.78% 12.25% 12.98% 14.31% Returns 5 Years NA 15.01% 13.67% 13.70% 12.45% 13.13% 13.52% 14.80% Returns 7 Years NA 12.52% 11.66% 11.76% 10.68% 11.33% 12.06% 12.26% Returns 10 Years NA NA 11.88% 11.73% NA 11.50% 11.62% 11.72% Returns Inception 13.19% 15.43% 12.36% 11.59% 12.79% 10.65% 12.26% — Sources: Published by NPS Trust 6.2 Tier-I Scheme C (Corporate Bonds) Performance Analysis Table 2: Tier-I Scheme C (Corporate Bonds) Returns & Metrics (as on 09/07/2021) Metric Aditya Birla Sun Life HDFC Pension ICICI Pru Pension Kotak Mahindra LIC Pension SBI Pension UTI Retirement Benchmark Inception Date 9-May-17 1-Aug-13 18-May-09 15-May-09 23-Jul-13 15-May-09 21-May-09 09/07/2021 AUM (Rs Crs) 59.45 3724.96 1780.42 335.09 937.96 3495.67 491.14 — Subscribers 16,211 805,000 363,685 51,195 207,163 829,876 90,186 — NAV 14.2796 21.9007 33.3072 32.0209 21.6255 33.4514 29.7066 — Returns 1 Year 6.24% 7.10% 6.77% 5.68% 6.50% 6.39% 5.41% 8.77% Returns 3 Years 10.61% 11.16% 10.66% 9.40% 10.91% 10.79% 10.13% 11.66% Returns 5 Years NA 9.50% 9.30% 8.52% 9.08% 9.27% 8.78% 9.56% Returns 7 Years NA 10.12% 10.11% 9.43% 9.86% 9.89% 9.53% 10.20% Returns 10 Years NA NA 10.47% 9.98% NA 10.29% 9.95% 10.12% Returns Inception 8.92% 10.37% 10.41% 10.04% 10.16% 10.44% 9.38% — Sources: Published by NPS Trust 6.3 Tier-I Scheme G (Government Securities) Performance Analysis Table 3: Tier-I Scheme G (Government Securities) Returns & Metrics (as on 09/07/2021) Metric Aditya Birla Sun Life HDFC Pension ICICI Pru Pension Kotak Mahindra LIC Pension SBI Pension UTI Retirement Benchmark Inception Date 9-May-17 1-Aug-13 18-May-09 15-May-09 23-Jul-13 15-May-09 21-May-09 09/07/2021 AUM (Rs Crs) 92.76 6006.96 2849.00 541.72 1621.00 6836.49 873.31 — Subscribers 15,992 803,019 359,965 51,256 211,132 832,241 87,300 — NAV 14.2228 21.3482 28.6270 28.3788 23.0097 30.8435 27.3471 — Returns 1 Year 2.85% 2.84% 3.09% 2.66% 3.05% 2.63% 1.70% 1.59% Returns 3 Years 11.39% 11.69% 11.34% 11.42% 12.35% 11.37% 10.79% 10.73% Returns 5 Years NA 9.15% 9.03% 8.99% 10.17% 9.07% 8.41% 8.32% Returns 7 Years NA 10.20% 10.14% 10.11% 10.88% 10.25% 9.64% 9.52% Returns 10 Years NA NA 9.71% 9.59% NA 9.63% 9.22% 9.04% Returns Inception 8.81% 10.02% 9.04% 8.96% 11.03% 9.71% 8.64% — Sources: Published by NPS Trust 6.4 Tier-I Scheme A (Alternate Assets) Performance Analysis Table 4: Tier-I Scheme A (Alternate Assets) Returns & Metrics across Pension Fund Managers Metric Aditya Birla Sun Life HDFC Pension ICICI Pru Pension Kotak Mahindra LIC Pension SBI Pension UTI Retirement Inception Date 15-May-17 10-Oct-16 21-Nov-16 14-Oct-16 13-Oct-16 13-Oct-16 14-Oct-16 AUM (Rs Crs) 1.43 44.67 10.61 3.63 4.51 20.91 3.57 Subscribers 1,673 59,320 13,318 3,898 10,681 40,691 4,841 NAV 12.6779 14.6505 13.7071 13.9961 14.3454 15.5119 13.3267 Returns 1 Year 4.36% 9.57% 8.48% 5.57% 10.32% 7.74% 4.82% Returns 3 Years 5.50% 9.22% 7.64% 8.95% 8.71% 11.19% 5.96% Returns 5 Years NA NA NA NA NA NA NA Returns 7 Years NA NA NA NA NA NA NA Returns 10 Years NA NA NA NA NA NA NA Returns Inception 5.88% 8.38% 7.04% 7.36% 7.91% 9.71% 6.25% Sources: Published by NPS Trust 7. Core Research Findings Oldest Fund Managers: The analysis of 7 fund managers showed that SBI Pension Funds Pvt. Ltd, Kotak Mahindra Pension Fund Ltd., ICICI Prudential Pension Fund Management Co. Ltd. and UTI Retirement Solutions Ltd. are the oldest fund managers since 2009. Subscriber Leadership: SBI Pension Funds Pvt. Ltd is having maximum subscribers in all three schemes of Tier I. Corporate Bond Outperformance: In the case of the corporate bond scheme of Tier I, HDFC Pension Management Co. Ltd is having the highest returns for 1 year (7.10%), 3 years (11.16%), 5 years (9.50%), and 7 years (10.12%) period compared to other fund managers. Alternate Assets Leadership: In the case of Scheme A-Alternate assets of Tier I, HDFC Pension Management Co. Ltd. showed maximum subscribers (59,320), NAV (14.6505), and AUM (Rs. 44.67 crores) as compared with other fund managers. Best Overall Fund Manager: From the analysis of the 4 schemes, it is found that though the returns generated by all the fund managers are very close to each other, among all, the best fund manager can be taken as “HDFC Pension Management Company Limited” to invest in as it has given the higher returns on equity (which is the highest return generating asset class) from inception (15.43%) and is also consistent in giving returns since inception. 8. Conclusion & Policy Recommendations “NPS is a low-risk investment with high returns compared to other retirement investments schemes as the portfolio is a mixture of various kinds of debt equity investments which are invested in high caps and are managed by some of the best fund managers of India and the charges of managing the fund are very low/negligible.” It can be concluded that NPS is a low-risk investment with high returns compared to other retirement investments schemes as the portfolio is a mixture of various kinds of debt equity investments which are invested in high caps and are managed by some of the best fund managers of India and the charges of managing the fund are very low/negligible. So, it is a low-cost product. As the choice remains with the investor, he can choose less risky assets if he is very conservative and he has the flexibility to change his decisions every year. But as it is said that if there is no risk, then there are no returns, so, high returns can be reaped only if one invests in risky assets like shares which has the ability to defeat inflation and so returns on NPS investments depend upon the amount of investments in equity which can for sure generate a high return as it is a long-term investment. But choosing the right fund manager and right fund allocation is very important. There is a long lock in period here but then NPS is meant for retirement planning only where investors get both lump sum amount and pension every month after retirement till their death. Investor gets 60% of maturity amount and 40% of corpus is utilised in annuity for payment of pension. Returns can be reaped only when there are long term investments only. It also provides tax benefits. So, NPS can be considered as a good long-term retirement planning scheme. Optimal Debt-Equity Portfolio for Age 40–50: The mix of debt-equity in a portfolio depends upon the age of investors and risk-taking capacity. But as per the data collected, it can be concluded that the best debt-equity mix can be taken as Equity-50%, Corporate bonds-25% and Government securities-25% in the age group of 40-50, where high risk is mitigated with low risk. As the returns generated by all the fund manager are very close to each other but among all, the best fund manager can be taken as “HDFC Pension Management Company Limited” as they have generated good returns on equity (which is the highest return generating asset class) and overall funds from inception and consistent in their returns because they used to invest in five holdings of top companies which are Reliance Industries, Infosys, ICICI Bank, Kotak Mahindra Bank, Tata Consultancy Services. The right time to invest the lump sum amount in NPS is when the Sensex is low, if the investment contains a good percentage of equity in it. Actionable Recommendations for Subscribers & PFRDA Market Timing & Deferment at Age 60: At the time of retirement, if the market is in a poor situation, the subscriber should extend the withdrawal of the corpus to the next 15 years as he can extend up to 75 years of age and can withdraw anytime, whenever the Sensex is high. He/she can also withdraw in 10 instalments (maximum). Also one can defer the annuity investment for 3 years from retirement age. By this process, one can cover the market risk. Alternative Investments for 40% Corpus: The PFRDA should implement policies to invest 40% in some other schemes which give more returns than annuities. Voluntary Annuity Choice: The investors should get the option to voluntarily invest in any other profitable schemes instead of a compulsory contribution of 40% of the maturity amount in an annuity. Enhancement of 100% Lump-Sum Ceilings: The government should increase the limit for 100% withdrawal from 5 lakhs to 10 lakhs and from 2.5 lakhs to 5 lakhs in case of premature exit. Auto Choice for Asset Allocation Dilemma: If the investors find difficulty in choosing a mixture of investments, they can simply opt for auto mode. Annuity Selection Strategy: The investor must choose such annuity plan where he gets monthly pension with return of purchase price on death of subscriber. References Ananth, S. and Balanaga Gurunathan, K. (2016), “Performance of National Pension Scheme In India”, International Journal of Research In Commerce, IT & Management, Volume No. 6 (2016), Page no. 13-16, Issue No. 07 (July) ISSN 2231-5756. Anita and Pankaj Kumar (2014), “National Pension System Swavalamban Scheme”, Asian Journal of Multidisciplinary Studies, Volume-2, Issue 7, July 2014. Ayanendu Sanyal, K. Gayithri and S. Erappa, Economic and Political Weekly, Vol. 46, No. 8 (February 19-25, 2011), (Pgs. 17-19). Bijaya Kumar Barik (2015), “Analysis of Mutual Fund Pension Schemes & National Pension Scheme (NPS) for Retirement Planning”, International Journal of Business and Administration Research Review, Volume-3, Issue 11, July - Sep 2015 (Pgs. 108). Dr. Vani Kamath and Dr. Roopali Patil (2017), “Cost-Benefit Analysis of National Pension Scheme”, International Journal of Management, Volume-8, Issue 3, May–June 2017, (Pgs. 156–158). Gupta Sen Subhro, Gupta Neha and Garg Komal (2017) “An Empirical Study of National Pension Scheme concerning Corporate Bond, Equity & Government Securities”, International Journal of Engineering Technology Science and Research, Volume 4, Issue 10 October 2017. Kali Sukhen, Jana Subrata (2017), “Pension Reform in India with Reference of New Pension Scheme”, IJRDO-Journal of Business Management, Vol. 3, Issue 17, 2017.

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 39–42 (Journal pp. 1343–1346) THEME Investor Awareness: Achieving a shield by perception CA. Anuj Goyal Member of the Institute of Chartered Accountants of India (ICAI) Email: anujgoyal@icai.org • eboard@icai.in The spectacular performance of all three major indices, namely the S & P 500, the Dow Jones Industrial Average, and the Nasdaq demonstrated that 2021 was a tremendously beneficial year for stock market investing. But first, let’s get some perspective. As the economy returns to full capacity, there is still a lot of uncertainty. First, a new coronavirus strain, the Omicron mutant, has shattered hopes for a global economic recovery. Secondly, high inflation is still on the roll, and finally, the US Fed’s interest rate movements are yet to be determined. The main concern is how these uncertainties will impact future stock markets. What kind of economic environment will we have in 2022? How can investors earn profit from the stock market? “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” — Warren Buffett Three Core Areas for Investor Scrutiny in 2022 To achieve a protective shield through rational perception rather than impulsive reaction, every investor should carefully evaluate three pivotal dimensions: Pillar 1 Impact of High Interest Rates Assessing Fed rate hike trajectories, bond yield dynamics, and their asymmetrical impact on growth versus value equities. Pillar 2 Slow Economic Growth Navigating deceleration in post-lockdown GDP growth, persistent supply chain disruptions, and the triple threat to corporate profitability. Pillar 3 How to Invest in Stocks Deploying strategic asset allocation, pricing power filtering, non-US equity diversification, and the timeless Four M’s framework. 1. Impact of High Interest Rates on the Stock Market According to CME FedWatch data for the month of March 2022, the market is 80% likely to begin hiking rates by mid-2022 and 87% likely to have several rate rises by the end of the year. Now that inflation is a concern, the Fed is under pressure to raise interest rates, but the decision will ultimately be determined by the strength of the economic recovery in 2022. The stock market will certainly get affected by an increase in interest rates. It does not, however, inevitably contradict the demand for stock investing. Rather, it may have an impact on the performance of various segments of the market, particularly the mature level that prefers value-oriented brands. Market Asymmetry: Growth vs. Value Equities Under Monetary Tightening The interest rate is a headwind for growth stocks, but not all stocks react the same way. Growth-oriented enterprises are traded as much as high, in relation to income, and require more stress than low, discounting valuable precious items such as property and energy. The Federal Reserve may also recognise that, while it may decide to raise interest rates from near-zero levels in 2022, the scenario due to COVID-19 may call that decision into doubt. Interest rates, on the other hand, might “take off slowly”. For the time being, interest rates do not appear to be rising immediately, giving the market time to respond. We anticipate market turbulence when the Federal Reserve boosts interest rates. 2. Slow Economic Growth in 2022 & The Triple Threat The US economy grew well throughout 2021, with an emphasis on economic recovery following the severe turmoil of 2020. GDP grew at an annual rate of 6.4% in the first quarter of 2021, and by 6.7% in the second quarter. However, after a strong first half, growth slowed to 2.1% in the third quarter. This drop was caused by low consumer spending and supply chain constraints. The economic situation in 2021 was also shaken by the surge in inflation. Inflation can be triggered by: Supply chain disruptions: Persistent bottlenecks across shipping lanes, raw material inputs, and manufacturing components. Imminent labour shortages: Tightening labor markets driving wage-push inflation across sectors. Sustained demand for goods and services: Post-lockdown pent-up demand outpacing aggregate industrial output. These combinations put upward pressure on prices. The fastest economic recovery rate is likely to have already occurred and investors can expect continued economic growth in the United States, but it may not be the same growth rate as in 2021. Many of these challenges that exist today will not disappear quickly in the United States, so investors need to be aware of these challenges in order to navigate the stock market. The Triple Threat Facing Investors in 2022 Investors will face a triple threat in 2022. The real problem for investors in 2022 is the need to weigh the risks to growth, inflation, and interest rates simultaneously. 1. Growth Risk Decelerating GDP velocity & margin compression 2. Inflation Risk Supply bottlenecks & wage-price spirals 3. Interest Rate Risk Fed tightening & equity multiple derating US companies are expected to grow this year, but it may not be at the same pace as in 2021. However, given the high expectations of economic growth abroad, investors need to expand their exposure to the global economy. Looking at economic growth forecasts, economies outside the United States will also grow further. 3. How to Invest in Stocks in 2022? Tactical & Structural Playbook What does this mean for stocks, and where should investors search for opportunities? According to the experts, investors should seek for long-term companies with good returns and cash flow. These are the businesses who have the greatest tools to deal with the particular risk concerns of 2022. Investors should align their portfolio with successful companies that possess distinct operating strengths: Companies that can expand profit margins: Retaining strong operational leverage even under macroeconomic cost pressure. Companies that are highly leveraged (in operating assets) / robust balance sheets: Deploying productive capital to capture market share. Companies that can pass on price increases to consumers via the supply chain: Demonstrating inelastic customer demand and superior pricing power. Suitable Sector Strategic Economic Rationale Key Investor Criteria Finance Expands Net Interest Margins (NIM) as benchmark interest rates climb from zero levels. Sound credit underwriting, low NPA ratios, prudent asset-liability management. Energy Natural inflation hedge; strong commodity pricing supports robust free cash flow yields and shareholder dividends. Low extraction costs, high cash conversion, disciplined capital expenditure. Healthcare Defensive revenue stability; consumer demand for essential medications and medical procedures is highly inelastic. Strong patent portfolios, steady R&D pipeline, impeccable institutional reputation. Looking at the 2022 hurdles, diversification is a timeless investment strategy for investors and is more important than ever. It is important for investors to diversify their portfolios to manage market risk and benefit from growth from different areas of the market. 1. Broadening Beyond the S & P 500 & Mega-Caps Investors should consider diversifying beyond the S & P 500 as the size and market share of the largest US companies have grown disproportionately during the economic recovery, creating significant concentration risk. 2. Small and Medium Enterprises (SMEs) Investors should consider SMEs to manage the risk of making large investments in a small number of selected companies. SMEs tend to be more risky than large companies, but they can provide investors with higher long-term returns. 3. Non-US International Equities (20%–30% Discount) Non-US stock is another market segment that investors are looking at. US stocks were solid all year, but the S & P 500 surged more than 20%, and US equities outpaced non-US equities. Experts think it is time to enhance their exposure to overseas shares after a decade of gains in equities. Investing outside the US stocks not only helps diversify your portfolio, but also gives you the opportunity to buy at a discounted price. Non-US equities are valued more attractively and have greater potential for economic growth. Ratings in these markets are discounted by 20% to 30% against US stock counterparts. 4. The Philosophy of Real Investment vs. Speculation The idea of real investment helps us learn a lot about money and investment. The most basic question you need to ask yourself before you start is: ‘Why do you need to invest?’ And the very simple answer to that is: the process of strategically allocating resources to achieve a particular goal. It is very simple, but it is very difficult to follow. Sometimes people get confused between investment and speculation. Understanding psychology is important for controlling investment behaviour and avoiding speculation. It also helps to understand the behaviour of the crowd, including the market. The market is like a crowd and has a collective mindset. Sometimes it is rewarded to oppose collective thinking. Companies, as well as markets, can experience the wrong expectations. Contrarian Insight: Breaking Away from the Herd If you believe in the same thing that everyone believes, your return will be more or less the same as those around you. It needs another way of thinking that allows you to be better. Successful investors always strike a delicate balance between optimism and pessimism. It helps them navigate the whims of the bullish and bearish markets. 5. What Makes an Investor Successful? The Behavioural Advantage Unlike others, investing requires very different skills, some of which are very counter-intuitive. There is a simple motto about the same thing: “We don’t have to be smarter than others. We need to be more disciplined than others.” There are three distinct types of benefits when investing in financial markets: 1 Benefits of Information With the internet, information is ubiquitous and commoditized across all retail and institutional market participants. 2 Benefits of Analysis With widespread quantitative tools and screening algorithms, analytical output is largely a standardized product available to everyone. 3 Benefits of Action (Behavioural Edge) The true differentiator. Emotional fortitude, avoiding panic in drawdowns, and executing disciplined buying when sentiment is pessimistic. Historical Empirical Proof: The 2008 Indian Market Collapse When the market collapsed in 2008, the Indian market collapsed 60% in a single year. Most investment trusts and stocks had fallen drastically. Investors who remained invested across that stage and continued systematically allocating capital achieved significant, compounding benefits in the coming years. It is necessary to return the risk, but it is more important to understand it. Money does not have to be used only to enjoy life. 6. Navigating Market Manic-Depression & The Four M’s Framework “Note that the stock market is manic-depressive.” This is true for consumers of daily financial news. Every day, the stock market sways with the smallest news, gathering emotions and plunging, celebrating and blaming the stupidest data points. It is important not to get caught up in madness. Instead, stick to your homework. Before making any investment allocation, investors should consistently evaluate the Four M’s: 1. Meaning Purpose & Comprehension Finding the right investment begins with purpose and takes time. Before becoming an expert with prospective investment possibilities, it is always best to learn meticulously. Do you truly understand how the business functions, its customers, and revenue drivers? 2. Moat Competitive Durability A sustainable competitive advantage that shields the enterprise from encroaching competitors. Moats stem from brand equity, network effects, cost leadership, high switching costs, or statutory licenses. 3. Management Leadership & Governance Learn as much as you can about the organisation. Check to discover whether the organisation has a coherent plan for future growth and if management is led by an honest, capable, and visionary guide. 4. Margin of Safety Valuation Cushion Safety margins protect capital against forecasting errors and macro shocks. Buying significantly below conservatively estimated intrinsic value ensures a protective buffer against capital impairment. 7. Developing an Independent Investment Philosophy & Avoiding Imitation Did you have a place to invest? Investing may be challenging at times. Different investors utilise various framework conditions. What you actually need to figure out is which structure will work once each investor has formed their own philosophy. It is great to be inspired by successful investors, but it is not a good idea to immediately imitate them. ‘Check Before You Invest’ Initiative Check Before You Invest is an investor awareness initiative designed to improve investor awareness and deliver information using resources supplied by state, federal, and private entities. It is now more crucial than ever to make educated investing decisions and undertake thorough background investigations to prevent fraud and asset destruction. 8. Hazards of Trading Without Consciousness: F&O and Herd Mentality Diversification is only required if investors don’t know what they are doing. Because the persons participating in the transaction fall into a variety of categories, investors have varying degrees of expectations in terms of percentage returns. Refrain from trading since we were unable to confirm or anticipate the market’s direction. There is also a lack of Trading Consciousness and expertise in the accessible trade function. Critical Regulatory Warning: Derivatives & Social Media Hype There is a significant absence of knowledge regarding complex financial products such as futures and options (F&O) transactions. Market analysis is not something that most retail investors do on their own; instead, they rely on social media influencers and trust unverified word-of-mouth tips. In order to properly make investment decisions, a suitable proposal must be made. Market participants and regulators must investigate the underlying elements that influence the decisions of investors. Conclusion: The Shield of Knowledge, Patience, and Discipline It is important to understand that investing in the stock market necessitates knowledge, patience, and discipline. To achieve good returns from the stock market, investors must gain more knowledge of financial products, refrain from speculative noise, and develop the necessary financial expertise. Perception formed through thorough homework, psychological control, and adherence to foundational principles provides the ultimate shield in turbulent markets. Journal Corrigendum Reference: Please read name of the author of the article “Input Tax Credit – Amendments proposed in Finance Bill, 2022” as CA. N K Bharath Kumar in March issue of CA journal. Please note: At page 84, 4th paragraph, 2nd sentence, the words and expression, “, which has been removed recently” be ignored. Omission is regretted. Author may be reached at: anujgoyal@icai.org and eboard@icai.in The Chartered Accountant • May 2022

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 49–54 (Journal pp. 1353–1358) TAXATION • DIRECT TAX POLICY & START-UP ECOSYSTEM Start-Ups and Indian Income tax laws CA. Rahul Goel The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at ca.goelrahul@gmail.com and eboard@icai.in. 🚀 Executive Synopsis & Strategic Context A perfect evaluation of any jurisdiction as a business-friendly destination is by evaluating the ease with which the incumbent businesses can do their business and new businesses can be set up. The Government of India has time and again emphasised that they want to bring in “ease of doing business in India” and have also taken a number of steps towards achieving the same. Some of these steps undertaken have also been acknowledged by the World Bank and accordingly India’s ranking improved from 142 to 63 as per the latest report on ease of doing business across the countries of the globe[1]. Read on… 1. Demographic Dividend, Youth Capital & The Startup India Scheme India is the second most populated country and houses nearly 20 per cent of the world’s population. As per the World Bank, the population of India stood at approx. 138 crores in the year 2020[2]. It is estimated that out of this, nearly 65% of India’s population is below the age of 35 years which makes it possibly the youngest population in the world. This could become a huge strategic resource for India if this population is skilled and handled carefully. As per a recent report, the unemployment in India was 7.75% in October, 2021[3]. Therefore, to capitalise on this resource, proper planning is very important and the entire ecosystem should be created right from primary education to secondary education and then professional skilling according to needs to the region/ community and country at large. Needless to say, there is also a need to promote industries and entrepreneurs to produce enough jobs to harness true potential of this valuable resource. There is a need to mobilise and leverage this strategic resource to improve productivity, innovation and thereby entrepreneurship and employment generation. But many people out of this target population may lack the necessary resources, to capitalise and commercialise their ideas, techniques, capabilities etc. Acknowledging the same and understanding that the start-ups have a great potential to generate employment, the Government of India announced its flagship initiative for building start-ups and nurturing innovation in the year 2016 (“the Scheme”), with the main objective to boost entrepreneurship, economic growth and employment across India. Under the Scheme, several benefits were promised to start-ups including simplification of compliances including self-certification, funding support, legal support, fast tracking of patent applications at lower costs, benefits under provisions of Income-tax Act, 1961 (“the Act”) etc. with a view to provide ease of setting up and doing business and statutory compliances to start-ups. Considering these benefits, a number of start-ups were set-up which subsequently came forward to get themselves registered under the Scheme. As per data available on Start-up India website, as on December 4, 2021, more than 59,730 have been recognised by the Government of India and 405 approx. start-ups have been granted income tax related exemptions[4]. 2. The Unicorn Boom & Capital Market Transition As per Economic Survey 2020-21 (“the Survey”) tabled in Parliament of India, India currently houses 3rd largest start-up ecosystem in the world with 38 firms being valued at over $1 billion or having the coveted “Unicorn status”. In 2020 alone, 12 new unicorns were added by India[5]. Further, another 38 start-ups entered the unicorn club in first 11 months of 2021[6]. Just recently, few of the entities which form part of the start-up ecosystem like Zomato, Paytm, Policybazaar, Nykaa etc. approached Indian capital markets and have also got their equity shares listed on National Stock Exchange and Bombay Stock Exchange in India. Further, as per media reports, many others like Ola, Oyo, Flipkart, Byju’s etc. are in process of approaching/ have already approached capital markets regulator (Securities and Exchange Board of India) to obtain approval for floating their IPO’s (Initial Public Offering) and getting their equity shares listed on Indian Stock Exchanges. These companies are testament to the potential that Indian start-ups hold, if among other things, provided with conducive tax and regulatory environment. In view of the above and their growing importance, start-ups have off late been receiving special attention from governments around the world including in India. In this article, we will focus on the benefits available to start-ups under the Act and what more can be done to make life smooth for start-ups and provide them impetus to realise their true potential. 3. Statutory Definition of “Start-Up” under the Act Under the Income-tax Act, 1961, a start-up has been defined as an entity which satisfies the following cumulative criteria: a) Legal Constitution: Is a private limited company or registered as a partnership firm or a limited liability partnership; b) Age of Entity: Has not yet completed a period of ten years from the date of incorporation/registration; c) Turnover Ceiling: Has an annual turnover not exceeding Rs. 100 crores for any of the financial years since incorporation/registration; d) Innovation & Scalability: Is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation; and e) Organic Formation: It is not formed by splitting up or reconstructing a business already in existence. 4. Existing Direct Tax Benefits under the Income-tax Act, 1961 Start-ups have been given several benefits under the Income-tax Act, 1961. These benefits can be broadly clubbed under the following four distinct heads: a) Tax Holiday (Section 80-IAC) “100% profits of a start-up from eligible business are exempt from income-tax provided it is incorporated between 1 April 2016 till 31st March 2022. This exemption can be claimed for any 3 consecutive years out of a period of ten years from date of its incorporation.” 100% profits of a start-up from eligible business are exempt from income-tax provided it is incorporated between 1 April 2016 till 31st March 2022. This exemption can be claimed for any 3 consecutive years out of a period of ten years from date of its incorporation. The option to choose 3 consecutive years out of 10 years has been provided given that generally start-ups take time to turn profitable. b) Exemption from Angel Taxation (Section 56(2)(viib)) Under provisions of the Act, where any company receives any consideration for issuance of shares to resident investors which exceeded its fair market value (FMV) basis the mechanism prescribed under the Act, such excess amount is taxable in hands of such recipient company. These provisions were introduced as anti-abuse provisions to prevent malpractices like money laundering, use and investment of unaccounted money etc. However, given that during initial phase of their life, the start-ups rarely earn profits commensurate to their size, traditional valuation methods like return on assets, return on capital employed, free cash flow-based models cannot be used and / or have lot of subjectivity around them and generally cannot be used straightaway for valuation of Start-Ups. Eventually hybrid models are generally used for computing their valuation wherein lot of weightage is given to the business idea of the start-up, its scalability and commercial feasibility. Given the same and subjectivity around valuation methodology, it used to be a matter of intense litigation between the taxpayers and Indian tax authorities. Further, since in case of start-ups, these provisions used to impact investments received from angel investors (generally wealthy individuals), it came to be known as “Angel Tax”. In the past years, a lot of notices were issued by Indian tax authorities to investigate valuation methodology and/ or FMV of shares issued. According to a report, nearly 73 per cent of the start-ups received one or more Angel Tax notices[7]. Therefore, this matter received a lot of media attention and bought unwarranted adverse publicity to India as an investment destination. Accordingly, the matter was taken up at the level of Prime Minister and Finance Minister and it was decided to provide relief to recognised start-ups from the provisions of “Angel Tax”. As a result of the same, investments received by such start-ups were taken out of the purview of “Angel Tax” subject to satisfaction of specified conditions. c) Tax Exemption to Individual/HUF on Investment of Long-Term Capital Gains in Equity Shares of Start-ups (Section 54GB) “The start-up needs to use the amount invested to purchase assets and should not transfer such assets within 5 years from the date of its purchase.” 100% tax exemption is available to individuals/ HUF in relation to long term capital gains income on sale of residential property wherein subject to prescribed conditions, the net consideration received on sale is invested in equity shares of a start-up. The start-up needs to use the amount invested to purchase assets and should not transfer such assets within 5 years from the date of its purchase. This exemption was provided to channelise and allow young entrepreneurs to utilise proceeds from sale of residential property to fund acquisition and capital needs of the start-up without worrying about income tax related consequences. d) Relaxation in Relation to Set-off and Carry Forward of Losses Even in Case of Change of Shareholding (Section 79 Amendment) As stated above, start-ups generally take time to break-even and turn profitable. Majority of the companies from start-up ecosystem that have made it big and have got their shares listed on stock exchanges in India are still not profitable (including Zomato, Paytm, Policybazaar etc.). In the early phase of their life, start-ups generally incur losses and to carry on, sustain and scale-up their business operations, raise funding by diluting the stake of the promoters. Due to such change in shareholding, the losses incurred in previous years were not available for set-off in subsequent year(s) to start-ups due to application of section 79 of the Act. In view of the same, the Act was amended to allow the start-ups to carry forward and set-off earlier year losses, if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward/ set-off. 5. Critical Scope for Reform & Actionable Policy Suggestions “Start-ups have been a focus area for the Government of India and lot of demands of the start-up industry have been considered and also been met. However, there is always scope for more and accordingly, few suggestions in this respect have been stated hereunder.” Proposal A: Rationalisation of Section 194-O E-Commerce TDS In the recent years, new provisions in relation to tax deduction have been included under the Act. Under provisions of section 194-O, an e-commerce operator is obliged to withhold tax at 1% on payments to be made to e-commerce participants (vendors) for the sale of goods/provisions of services facilitated through the portal. Such a deduction also needs to be made in cases where the purchaser directly makes payment to the e-commerce participant for sale of goods/ provision of services facilitated through e-commerce platform. Although the stated objective has been to report the transactions and thus increase compliance by the taxpayers, however the same has adversely impacted ease of doing business for start-ups by increasing compliance burden. It has led to increase in administrative costs and puts e-commerce participants/ vendors in a disadvantageous position vis-à-vis traditional business given that TDS to be deducted by e-commerce platform creates working capital issues in terms of blocked TDS credit (which is akin to cash) for such vendors and thus increases cost of doing business. To ease these problems being faced by businesses including start-ups, the Government of India should consider easing the rigours of this section and/ or compliance burden especially for start-up sector. To provide relief to start-up sector, here are some suggestions: Specific Circumstances & Extended Thresholds: Make these provisions applicable only in specified circumstances or with some thresholds in case complete withdrawal of these provisions is not an option (threshold of INR 500,000 already exists in relation to individuals and HUF and this may be extended to other forms of businesses like partnership, companies as well); or Direct Payment Exemption: The section should not be applicable in cases where the buyer makes the payment directly to e-commerce participants/ vendors for the sale of goods/ provisions of services facilitated through the portal given that it involves lot of administrative efforts to track such payments; or Periodic AIS Reporting in Lieu of TDS Withholding: Alternatively, introduce a reporting mechanism (wherein reporting needs to be made at adequate intervals say quarterly) instead of tax withholding provisions. Such data may be collected and reported in Annual Information Statement (AIS) being provided to taxpayers by the Income tax department. This would serve the purpose of collecting relevant information/ relevant data and at same time not have any working capital issues on the start-ups. Proposal B: Incentives to Channelise Resources from General Public “Start-ups are generally set-up by the people who possess the ideas, techniques, capabilities etc. but lack the necessary resources, to capitalise and commercialise them.” As discussed above, start-ups are generally set-up by the people who possess the ideas, techniques, capabilities etc. but lack the necessary resources, to capitalise and commercialise them. Lack of resources is another factor why lot of people do not want to venture into this area. It is also been seen that lot of start-up entrepreneurs shelve their ideas mid-way for want of resources to fund the same. To meet the funding requirements of start-ups, the Government of India has set-up various schemes/ funds and also allowed them to raise external commercial borrowings. Further, as already discussed above, provisions have been introduced under the Act whereby the long-term capital gains earned by individuals/ HUF are exempted from income tax on making investment in equity shares of start-ups. However, more needs to be done specially to channelise resources from general public. In this respect, Government of India may evaluate following propositions to incentivise and channelise resources from general public towards start-ups: Upfront Tax Deduction on Investment: Providing upfront tax relief on making investments in start-ups directly or through some specialised investment funds set-up to fund start-ups with adequate lock-in period; and/ or Concessional Capital Gains Tax Rate: Taxing the capital gains earned by investors on sale of shares of such start-ups/ units of investment funds investing in start-ups at concessional rate of 5% or 10% like in case of sale of listed shares. Proposal C: Dedicated Nodal Ministry for Start-ups Government may also evaluate and create a separate nodal ministry to investigate the issues being faced by start-ups. This would streamline and fasten the process of resolution of issues being faced by the start-ups by reducing the time taken by various government departments. 6. Conclusion & Future Outlook for Indian Start-ups “Start Up India Scheme provides several benefits to start-ups including simplification of compliances, self-certification, funding support, legal support and fast tracking of patent applications at lower costs, benefits under provisions of Income-tax Act, 1961 etc.” According to a survey, the Indian start-up ecosystem has the potential to be the engine of growth for India in the medium to long term. The Survey further provides that the start-ups are even coming up in technically complex fields like space and satellite projects. In view of the same and given that the Government of India recognises their potential, it is necessary that every effort should be made to provide conducive and enabling eco-system to help start-ups realise their potential and become front-runners in Indian Growth story. Start Up India Scheme provides several benefits to start-ups including simplification of compliances, self-certification, funding support, legal support and fast tracking of patent applications at lower costs, benefits under provisions of Income-tax Act, 1961 etc. with a view to provide ease of setting up and doing business. As per data available on Start-up India website, as on December 4, 2021, more than 59,730 start-ups have been recognised by the Government of India and 405 approx. start-ups have been granted income tax related exemptions. In view of the above and to promote start-ups in India, the Government of India has provided specific benefits to start-ups under the Income-tax Act, 1961 including tax holiday to eligible start-ups, exemption from Angel taxation in specified circumstances, Income tax exemption to Individuals/HUF on investment of long-term capital gains in equity shares of start-ups etc. These have been very well received by start-up community and also reflected in the growing clout of start-ups in India. However, there is always a scope of improvement and certain provisions like introduction of TDS provisions on e-commerce operators are creating compliance and working capital issues. Further, there is also a need to channelise more resources/ open new avenues for start-ups to raise funds easily and at minimum costs. In this article, we have analysed all the above issues in detail from the perspective of start-ups. Footnotes & Citations Business Standard, India jumps 14 places on World Bank’s ease of doing business list: https://www.business-standard.com/article/pti-stories/india-jumps-14-places-on-world-bank-s-ease-of-doing-business-list-119102401534_1.html World Bank Open Data, Population Total for India: https://data.worldbank.org/indicator/SP.POP.TOTL?locations=IN Bloomberg, India Unemployment Rate Rises in October on Rural Joblessness: https://www.bloomberg.com/news/articles/2021-11-01/india-unemployment-rate-rises-in-october-on-rural-joblessness Startup India, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry, Startup Scheme: https://www.startupindia.gov.in/content/sih/en/startup-scheme.html Economic Times, What Economic Survey 2020-21 says about India’s startup ecosystem: https://economictimes.indiatimes.com/tech/startups/what-economic-survey-2020-21-says-about-indias-startup-ecosystem/articleshow/80586774.cms?from=mdr Inc42, Indian Startups That Entered The Unicorn Club In 2021 In India: https://inc42.com/buzz/indian-startups-that-entered-the-unicorn-club-in-2021-in-india/ YourStory, Indian Startups Angel Tax Notice Survey: https://yourstory.com/2019/02/indian-startups-angel-tax-notice/amp

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 55–59 (Journal pp. 1359–1363) TAXATION Bringing the curtains down on Retrospective Taxation Laws – An Insight CA. A. S. Gopica Member of the Institute of Chartered Accountants of India (ICAI) Email: a.s.gopica@gmail.com • eboard@icai.in A sigh of relief was heaved by corporates and government sector, when one of the most awaited legislations was passed in the Parliament in the September 2021 session, effectively repealing the retrospective taxation amendment laws. Even before the retrospective taxation was given statutory backing, discontent had begun simmering in the minds of international investors willing to invest in India due to the lack of legal certainty. After much representation in domestic and international dispute resolution avenues, the arbitrary clause is finally buried. The initiation of confiscation proceedings on Indian assets abroad by one of the petitioners was the last straw. As India is on the cusp of another economic recovery process, let us see the measures taken so far to accelerate the same. Read on… Introduction: The End of an Era of Cross-Border Tax Friction The most closely watched income tax litigations, Vodafone International Holdings v. Union of India (popularly referred to as the ‘Vodafone case’) and Cairn Energy Plc and Cairn UK Holdings Limited v. Union of India (also known as the ‘Cairn Energy case’) finally seem to have reached the end of the tunnel, thanks to the scrapping of the contentious Retrospective Taxation law in the September 2021 session of the Parliament. A litigation saga which began circa 2007 led to a significant churn within international and domestic business circles alike. It will hopefully put to rest the series of legal battles being fought by the Indian Income-tax Department and multinational business houses in various courts and tribunals across the world, with the passage of the Taxation Laws (Amendment) Act, 2021 [hereinafter referred to as the TLAA], effectively repealing the amendments introduced via Finance Act 2012 and subsequent amendments to the Income-tax Act, 1961. The Vodafone Case Imbroglio & The 2012 Retrospective Amendment When Vodafone Plc decided to acquire a controlling stake to the extent of 67% in Hutchison Whampoa back in May of 2007, it probably was clueless on the Pandora’s box it was set to open. The transaction was undertaken in Cayman Islands where shares of Hutchison India were acquired beneath a facade of multiple intermediary companies. In September the same year, the Indian Income-tax Department (hereafter referred to as ‘IT Department’) served a tax demand notice worth $2 billion to Vodafone citing non-deduction of tax at source (TDS) on the capital gains earned on the sale of shares. The IT Department contended that the shares derived substantial value through underlying assets located in India and had evaded tax by not paying the dues on the multi-million-dollar sale. Supreme Court Verdict & Legislative Overrule via Finance Act 2012 When the litigation ultimately landed before the Supreme Court of India, the verdict favoured Vodafone Plc, in line with the tax laws prevalent at that time which did not contain any statutory provisions to impose tax on the given nature of transaction of sale on capital assets deriving substantial value from Indian assets. Consequently, in the Union Budget of 2012, the Finance Minister introduced the retrospective taxation amendment, giving legislative backing to the IT Department’s actions to tax similar sale transactions undertaken even prior to the passage of the amendment. In 2014, Vodafone Group challenged the tax amendment and filed an appeal with the Permanent Court of Arbitration in Hague, Netherlands against the ginormous tax demands being raised by the IT Department, now armed with a retrospective taxation amendment law in their defence. Vodafone Group approached the Tribunal by invoking the relevant clause (Clause No. 9) from the Bilateral Investment Treaty (BIT) signed between India and the Netherlands to protect investments made in each other’s jurisdictions. Vodafone contested that by passing arbitrary retrospective legislations, India was violating the treaty clause which stated that companies operating in both countries would “at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other”. The Hague Tribunal pronounced an emphatic verdict in favour of Vodafone Group after establishing that India had indeed violated the terms of the signed BIT and should thereby put on hold the efforts to demand tax, interest, and penalties to the tune of Rs. 22,100 crores from the company. Instead, the IT Department got charged with dues to be returned to Vodafone India, inflated with interest and penalty components. The Cairn Energy Quagmire & Attachment of Overseas Sovereign Assets All efforts at negotiation between the Indian government and Vodafone could not lead to any remarkable breakthroughs. Meanwhile, matters reached fever pitch when Cairn Energy Plc, also stuck in a similar tax demand quagmire and stalemate on negotiations regarding the indirect transfer of Indian assets, pursued aggressive international enforcement. The Tipping Point: French Tribunal Orders Confiscation of Air India Assets Cairn Energy obtained an order from the French Tribunal to allow freezing Indian assets located abroad and recover the dues owed by the IT Department to the tune of $1.2 billion. The assets allowed to be confiscated included some of the then national carrier Air India’s prime real estate properties located in Paris. This unprecedented move prompted the Indian government to act on a war-footing, and therein, the Taxation Laws (Amendment) Act, 2021 (TLAA) was born. Government’s Argument before Tribunals and its Constitutional & Jurisprudential Validity The main reason for the tax demands raised was due to the belief that the government of a state has the sovereign right to taxation within its jurisdiction. In fact, this sovereign right to tax has also been recognised by various Investor-State Dispute Settlement (ISDS) tribunals, including in Argentina and Spain, and affirmed as a ‘bona fide exercise of a state’s public powers’ (notably in Renta 4 v. Russia). “The main reason for the tax demands raised was due to the belief that the government of a state has the sovereign right to taxation within its jurisdiction.” However, it has to be noted that this sovereign right to tax is not an absolute one. It has certain concomitant limitations in its application: Non-Discriminatory: The right to tax must not be imposed in an unfair or selective manner targeting specific nationalities or corporations. Non-Confiscatory: Statutory levies must not wipe out the economic substance of an underlying investment. Non-Arbitrary & Bona Fide: Tax legislations in a civilized jurisdiction should not be arbitrary, punitive, or mala fide in nature. Legal Certainty & Proportionality: Investors committing men, material, and money in a host nation expect reasonable legal certainty. Punitive actions must be proportionate to non-compliance. In the given scenario, the retrospective legal amendment passed by the Indian government in 2012 failed to satisfy the fundamental test of Fair and Equitable Treatment (FET). Ultimately, a responsible sovereign state must strike a delicate balance between its inherent right to enact tax amendments and the legitimate expectations of investors. Any statutory change must be justifiable in its intent, especially when applied retrospectively, prompting the inevitable legal critique: why could the amendment not be implemented with prospective effect instead? Corrective Measures Undertaken: The Taxation Laws (Amendment) Act, 2021 Through the TLAA, the Government of India decided to decisively undo the problematic provisions enacted in 2012, marking a fresh beginning for global investors seeking to channel Foreign Direct Investment (FDI) into India. The retrospective tax provisions had created an international furore, severely denting India’s standing as an investor-friendly destination. The critical statutory modifications introduced via the TLAA comprise: 1. Statutory Nullification The Act nullifies the 2012 amendment wherein shares of companies incorporated in India or outside India were deemed to have always been situated in India if they derived substantial value from underlying Indian assets. Consequently, past sales of foreign company shares under this category are no longer taxable retrospectively. 2. Refund of Principal Tax Demands The TLAA provides for a full refund of the principal tax demand collected from affected corporate entities, on the express condition that the concerned petitioners withdraw all domestic and international litigations initiated against the Indian tax department. 3. Absolute Closure & Indemnity Acceptance of the settlement offer requires a complete waiver of rights to claim damages, costs, or attachment of Indian assets abroad. The government provides an assurance that no assessment will ever be reopened for the same transaction, while taxpayers submit explicit undertakings to indemnify the government against third-party claims. Quantifying the Settlement: Foregoing ₹1.1 Lakh Crore in Tax Demands With the passage of the TLAA, the Government agreed to forego approximately ₹1.1 lakh crore ($14.7 billion) in retrospective tax demands pending across various multinational companies. Multinational corporations welcomed the initiative. Cairn Energy (renamed Capricorn Energy) proceeded to drop its legal suits filed against India across global jurisdictions one court at a time. In return, India agreed to refund $1.02 billion. The high-stakes French lawsuit involving asset attachments was formally brought to closure in December 2021, followed by litigation withdrawals in Mauritius, the Netherlands, Singapore, Canada, and the United Kingdom. An Unintended Consequence: The Overhaul of India’s Bilateral Investment Treaties (BITs) Apart from highlighting domestic taxation loopholes, the Vodafone and Cairn sagas triggered a dramatic ripple effect across India’s international trade architecture, specifically its network of Bilateral Investment Treaties (BITs). As corporate litigants repeatedly triumphed before arbitral tribunals by invoking bilateral treaty protections, India realised that adverse rulings in international fora imposed insurmountable economic liabilities. In addition to the Dutch and UK disputes, India faced several unfavourable arbitral awards, including: Australia: Arbitral award rendered against Coal India Limited. Germany: Landmark tribunal ruling in favour of Deutsche Telekom. Russia: Binding award pronounced in favour of Tenoch Holdings. Faced with these compounding exposures, India adopted a radical strategic reset: Unilateral Treaty Termination: India served unilateral termination notices to nearly 57 countries whose pre-2016 BITs were expiring. Joint Interpretative Statements (JIS): India initiated bilateral discussions requesting JIS to clarify and restrict ambiguous clauses in surviving agreements. Promulgation of the 2016 Model BIT: Establishing a stringent, sovereignty-focused template for all future international investment pacts. Model BIT Clause Key Provision & Mechanism Strategic Legal Objective ‘Enterprise-Based’ Investment Definition Narrowed definition where an enterprise is evaluated together with its physical assets, replacing broad asset-based models. Restricts treaty protection exclusively to enterprises genuinely constituted and operating under Indian laws, eliminating shell company treaty shopping. Exclusion of Most Favoured Nation (MFN) Complete omission of the MFN clause across treaty templates. Prevents investors from borrowing more advantageous procedural or substantive clauses from third-party treaties signed with other nations. Replacement of FET with ‘Treatment of Investments’ Deletes broad Fair and Equitable Treatment; replaces it with limited protections against denial of justice, fundamental breach of due process, or targeted malice. Prevents international tribunals from expansively interpreting regulatory shifts or domestic statutory amendments as treaty breaches. Exhaustion of Local Remedies (5 Years) Foreign claimants must actively pursue and exhaust domestic judicial and administrative remedies for at least 5 years. Shields sovereign dispute resolution; ensures Indian domestic courts have primary jurisdiction before matters escalate to ISDS tribunals. Total Carve-Out of Taxation & Compulsory Licensing Express stipulation that the treaty shall not apply to taxation measures, fiscal enforcement, or compulsory licensing. Completely immunizes domestic tax policies and intellectual property safeguards from challenge in international arbitration. While this robust framework insulates India from international liabilities, critics argue it projects an overly protectionist stance, creating frictions during ongoing negotiations such as the Broad-based Trade and Investment Agreement (‘BTIA’) with the United Kingdom, where sticking points include automotive and alcohol market access, along with environmental and labour norms. Looking Ahead & Beyond: Transitioning from ‘Tax Terrorism’ to ‘Tax Transparency’ Tax implications apart, India’s decade-long experience demonstrates remarkable policy resilience, flexibility, and sovereign commitment to international investors. The Government proved willing to retrace a faulty course to restore trust and capital inflows. Decisive Shift from ‘Tax Terrorism’ to ‘Tax Transparency’ During the protracted dispute, concerns mounted over ‘tax terrorism’—a term describing arbitrary tax demands, adversarial audits, denied refunds, and unjustified reopening of assessments. The official commitment to dismantling this friction was reaffirmed in the Prime Minister’s address at the inauguration of the Income-tax Appellate Tribunal (ITAT) premises in Cuttack, heralding a decisive shift from tax coercion to faceless tax assessments, digital compliance, and institutional transparency. Four Pillars Catalyzing Post-Pandemic Investment Inflows Pillar 1 Production Linked Incentive (PLI) Scheme Spanning 13 core sectors, inviting global manufacturers to establish value-adding units with performance incentives ranging between 4% to 8% on incremental sales over a base year. Pillar 2 National Single Window System (NSWS) A digital one-stop shop eliminating departmental bureaucracy, streamlining registrations, centralizing clearances, and enhancing accountability for prospective investors. Pillar 3 Virtual Judicial Infrastructure Adoption of virtual hearings across courts and tribunals to expedite case disposals, break the judicial rigmarole, and ensure accessible, swift justice at minimal cost. Pillar 4 OECD Global Minimum Tax (BEPS Pillar 2) India was among the earliest adopters backing the uniform 15% Global Minimum Tax framework to eliminate base erosion, ensuring a fair global tax playing field. Conclusion: Capturing the Global Supply Chain Relocation Wave Through these evolving multi-faceted measures, India is striving hard to regain global confidence in its economy and policy stability. By bringing much-needed closure to high-stakes, pocket-heavy litigations, India has unlocked vast opportunities to leverage its demographic dividend, untapped natural resources, thriving consumer market, and booming startup ecosystem. “India has taken the plunge at the right time when global supply chains are having significant diversification and relocation plans and now India can portray itself to be ready to welcome investors with a stable tax regime.” References & Statutory Citations Think-Asia Research Repository: https://think-asia.org/handle/11540/8569 The Economic Times – Vodafone confirms filing for retro tax dispute settlement with India: https://economictimes.indiatimes.com/news/economy/policy/vodafone-confirms-filing-for-retro-tax-dispute-settlement-with-india/articleshow/88082563.cms Kluwer Arbitration Blog – The Cairn Energy v. India Saga: A Case of Retrospective Tax and Sovereign Resistance: http://arbitrationblog.kluwerarbitration.com/2021/07/02/the-cairn-energy-v-india-saga-a-case-of-retrospective-tax-and-sovereign-resistance-against-investor-state-awards/ The Indian Express – Cairn Energy CEO FinSecy meet: Tax dispute case explained: https://indianexpress.com/article/explained/cairn-energy-ceo-finsecy-meet-today-tax-dispute-case-explained-7194012/ The Hindu Business Line – India-UK putting in place building blocks for trade pact: https://www.thehindubusinessline.com/news/world/india-uk-putting-in-place-building-blocks-for-trade-pact-says-uk-high-commissioner/article30694644.ece Livemint – Cairn Energy settles tax dispute with India: https://www.livemint.com/companies/news/cairn-energy-settles-tax-dispute-with-india-11635951109566.html The Hindu – The sovereign right to tax is not absolute: https://www.thehindu.com/opinion/op-ed/the-sovereign-right-to-tax-is-not-absolute/article35803397.ece The Indian Express – Retrospective taxation: The Vodafone case and The Hague court ruling: https://indianexpress.com/article/explained/retrospective-taxation-the-vodafone-case-and-the-hague-court-ruling-6613799/ The Times of India – Retro tax law: What were the liabilities of Vodafone and Cairn Energy: https://timesofindia.indiatimes.com/business/india-business/retro-tax-law-what-were-the-liabilities-of-vodafone-cairn-energy/articleshow/85071972.cms Periodical Literature: Competition Success Review, January 2022 Issue. Author may be reached at: a.s.gopica@gmail.com and eboard@icai.in The Chartered Accountant • May 2022

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 60–65 (Journal pp. 1364–1369) TAXATION • DIRECT TAX COMPLIANCE & TDS ENFORCEMENT Higher rate of TDS for non filer of ITR – All About Section 206AB CA. Anuj Khemka Author is a member of the Institute of Chartered Accountants of India (ICAI). He may be reached at anuj.khemka@icai.org and eboard@icai.in. ⚖️ Statutory Premise & Legislative Intent Effective from 1-7-2021, Tax deduction at higher rate for non-filers of return of income whose aggregate amount of tax deducted or collected exceeds Rs. 50,000 referred to as “specified person” in the law. This is provided in section 206AB of the Income-tax Act, 1961 (Act). A similar provision is inserted in the statute as section 206CCA for tax collection at source (TCS) at a higher rate than the prescribed rates of TCS for a “specified person” who is a non-filer of return of income for the preceding two assessment years* and his aggregate amount of TCS exceeds Rs. 50,000 in each of these two assessment years*. It is further provided that in case of non-availability of PAN then the rate of TDS as per section 206AA or rate of TDS as per section 206AB whichever is higher shall prevail. 1. Objectives Behind Introduction of Section 206AB Finance Act, 2021 had inserted a new provision with an objective to ensure filing of return of income by those persons, who have suffered a reasonable amount of TDS/TCS. Section 206AA of the Act provides for a higher rate of TDS for non-furnishing of PAN. Similarly, section 206CC of the Act provides for a higher rate of TCS for non-furnishing of PAN. It is seen that while these provisions have served their purpose in ensuring obtaining and furnishing of PAN by various persons, there is a need to have similar provisions to ensure filing of return of income by those persons who have suffered a reasonable amount of TDS/TCS. “Section 206AA of the Act provides for a higher rate of TDS for non-furnishing of PAN. Similarly, section 206CC of the Act provides for a higher rate of TCS for non-furnishing of PAN.” Hence, a new section 206AB in the Act is inserted in the Finance Act 2021 as a special provision providing for a higher rate for TDS for the non-filers of the income tax return. Similarly, section 206CCA is inserted in the Act as a special provision for providing for a higher rate of TCS for non-filers of the income tax returns. 2. Higher Rate of TDS under Section 206AB Rate of TDS under section 206AB shall be the higher of the following three rates: (a) Twice the specified rate of TDS in the provision; (b) Twice the rate of TDS in force; (c) At the rate of 5%. Illustration: Comparative Applicable Rates Illustration: M/s. ABC is a non-filer as per section 206AB and thus any person making any payment which is subject to TDS shall attract a higher rate of TDS as per section 206AB as illustrated below: Payment under section Normal rate of TDS Higher rate of TDS as prescribed in Section 206AB Applicable Rate Sec 194C 2% 2 X 2% = 4%, 5% 5% Sec. 194A 10% 2 X 10% = 20%, 5% 20% Sec. 194H 5% 2 X 5% = 10%, 5% 10% Sec. 194J (JB) 10% 2 X 10% = 20%, 5% 20% 3. Specified Person as per Section 206AB (As Amended by Finance Bill 2022) Finance Bill, 2022 proposes to further rationalise the provision and proposed to reduce the condition of two financial years to one FY immediately preceding the FY in which tax is to be deducted or collected for non-filers of income tax returns. Therefore the 2-year time limit is reduced to 1 year. Post amendment, the new provision reads as under: (i) A person who has not furnished the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted, for which the time limit for furnishing the return of income under sub-section (1) of section 139 has expired; and (ii) The aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in the said previous year. The provision is effective from 01.04.2022 and accordingly will apply to credits/payments made after 01.04.2022. As per proposed provisions, return of preceding previous year should be filed before the due date applicable for such assessment year. Or else, the provisions of section 206AB will be applicable. 4. Statutory Exclusions from Applicability of Section 206AB The provisions of section 206AB related to deduction of tax at a higher rate for a non-filer of return of income shall not apply in the following cases (amended by Finance Bill 2022): Section Provision & Nature of Transaction Sec 192 TDS from Salary Sec. 192A TDS on premature withdrawal of EPF balance Sec. 194B TDS from Winnings from lottery or crossword puzzle Sec 194 BB TDS from Winnings from horse race Sec 194LBC TDS on Income in respect of investment in securitization trust Sec 194N TDS on Cash Withdrawals Sec 194M Payment of commission brokerage, contractual fee, professional fee to a resident person by an Individual or a HUF who are not liable to deduct TDS under section 194C, 194H, or 194J. 5. Applicability on Non-Residents & Section 194P Relief for Senior Citizens 5.1 Applicability of Section 206AB on Non-residents “Section 206AB nowhere states that the higher rate of TDS shall apply only to a resident non-filer of ITR. In fact, it refers to a specified person which covers both the resident and non-resident person.” Section 206AB nowhere states that the higher rate of TDS shall apply only to a resident non-filer of ITR. In fact, it refers to a specified person which covers both the resident and non-resident person. However, section 206AB (3) expressly excludes only those non-residents who do not have a permanent establishment in India. Hence, non-residents having a permanent establishment in India are covered by the provisions of section 206AB. It is further clarified that the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. The provisions of section 206AB don’t apply to a non-resident who does not have a PE in India. 5.2 Section 194P and Applicability of Section 206AB Section 194P is inserted in the statute by the Finance Act, 2021 in order to provide relief to senior citizens who are of the age of 75 years or above and to reduce compliance for them. The new section 194P provides relaxation from filing the return of income if the following conditions are satisfied: (i) The senior citizen is resident in India and of the age of 75 or more during the previous year; (ii) He has pension income and no other income. However, in addition to such pension income he may also have interest income from the same bank in which he is receiving his pension income; (iii) This bank is a specified bank. The Government will be notifying a few banks, which are banking company, to be the specified bank; and (iv) He shall be required to furnish a declaration to the specified bank. The declaration shall be containing such particulars, in such form and verified in such manner, as may be prescribed. Once the declaration is furnished, the specified bank would be required to compute the income of such senior citizen after giving effect to the deduction allowable under Chapter VI-A and rebate allowable under section 87A of the Act, for the relevant assessment year and deduct income tax on the basis of rates in force. Once this is done, there will not be any requirement of furnishing return of income by such senior citizens for the assessment year. Hence, section 194P expressly provides for exemption from filing of return of income if the conditions mentioned therein are satisfied. 6. Interplay of Section 206AB with Section 206AA & Threshold Limits 6.1 Section 206AB vis-a-vis Section 206AA (Non-Furnishing of PAN) Section 206AA provides that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB of the Act shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted at the rate mentioned in the relevant provisions of the Act or at the rate in force or at the rate of twenty per cent, whichever is higher. If a person does not provide his PAN to the deductor then it will not be possible to know whether he has furnished his return or not. Further, in this case, the rate of TDS shall be 20% under section 206AA. In case, the rate of tax is more than 20%, then such a higher rate will prevail. Hence when PAN of the deductee is not available or is invalid then the deductor has to compare the rate of TDS under section 206AA and section 206AB and then apply the highest rate of TDS on the amount of payment or credit. Illustration assuming PAN is not available: Nature of Payment Applicable Section Normal rate of TDS Rate of TDS as per Section 206AA (PAN is not available) Rate of TDS as per Section 206AB Applicable Rate Contract 194C 2% 20% 2 X 2% = 4% OR 5%, whichever is higher 20% Commission 194H 5% 20% 2 X 5% = 10% OR 5%, whichever is higher 20% 6.2 Applicability where Payment is Below Statutory Threshold Limit “Section 206AB is not a provision to cast an obligation to deduct TDS. Rather, this provision only substitutes the rate of TDS with a higher rate in the case of a specified person.” It should be noted that section 206AB is not a provision to cast an obligation to deduct TDS. Rather, this provision only substitutes the rate of TDS with a higher rate in the case of a specified person. Hence, section 206AB will come into play only when the deductor is required to deduct TDS under any of the provisions contained in Chapter XVIIB of the Act. For example, if a person makes any payment to a contractor which is subject to TDS under section 194C and the amount of TDS is less than the threshold limit of Rs. 30,000, then no tax is required to be deducted under section 194C and thus the provisions of section 206AB will not apply even if the deductee/contractor is a non-filer in terms of section 206AB. This is because section 206AB expressly provides that the provisions of section 206AB shall apply where tax is required to be deducted at source under the provisions of Chapter XVII B. 7. Form 26Q/27Q Return Tagging & Interplay with Section 197 Lower TDS Certificates 7.1 Amendments in Quarterly TDS Returns/Statements in Form 26Q/27Q CBDT vide Notification No. 71/2021 dated 8.6.2021 and through Income-tax (17th Amendment) Rules, 2021 has amended Form 26Q and Form 27Q to incorporate the changes introduced by section 206AB for TDS. In this context, a new tagging code “U” is specified for section 206AB in Form No. 26Q/27Q. Thus, if the deduction is on a higher rate in view of section 206AB for non-filing of return of income (applicable from 1-7-21), the deductor shall tag the record with “U” in the specified column. As stated earlier, there is no change in the nature of deduction i.e., tax will be deducted under the respective section, but the rate will be applied as per section 206AB if the deductee is a non-filer. However, such a record will be tagged with ‘U’ in Form 26Q/27Q. In Form 27Q, the equivalent code is ‘J’ where the TDS rate is applied as per section 206AB. 7.2 Applicability of TDS Rate as per Section 206AB when Certificate under Section 197 is Issued “When a certificate is issued under section 197 authorizing a deductor to deduct tax at a rate specified in the certificate, then the deductor is under obligation to apply the lower TDS rate as per the certificate issued under section 197.” “Section 206AB is inserted to encourage the voluntary filing of returns in case aggregate TDS is Rs. 50,000/- or more.” When a certificate is issued under section 197 authorizing a deductor to deduct tax at a rate specified in the certificate, then the deductor is under obligation to apply the lower TDS rate as per the certificate issued under section 197. Thus, irrespective of the rate specified in any provision or rates in force, the lower TDS rate as specified in the certificate shall prevail over such prescribed rates. Section 197 is a special provision that provides relief from a higher tax deduction in case deduction of tax at such higher rates is not justified by the total income of the deductee. But section 206AB is a non-obstante provision that has an overriding effect over section 197. In this, the deductor has to check the status of the deductee as per section 206AB. There is no corresponding amendment in section 197 which prohibits or restricts the income-tax department to issue any lower/Nil TDS certificates under section 197. Thus it is not necessary that if the lower rate of TDS is so authorized the deductee cannot be a non-filer. Section 206AB is inserted to encourage the voluntary filing of returns in case aggregate TDS is Rs. 50,000/- or more. Thus, if the aggregate amount of TDS of the deductee is Rs. 50,000/- or more even after applying the lower TDS rate and he is a non-filer as per section 206AB, then the provisions of section 206AB shall apply to him. In this case, the higher rate shall be double the lower rate of TDS as specified in the certificate u/s 197 or 5% whichever is higher. Section 197 overrides the prescribed rate of TDS with the lower rate of TDS as specified in the certificate so issued under section 197. Hence, a higher rate of TDS as per section 206AB shall apply to a case where a lower TDS certificate u/s 197 is issued. 8. CBDT Online Compliance Functionality & Higher TCS under Section 206CCA 8.1 Online Functionality to Check Compliance u/s 206AB In order to ensure compliance under section 206AB and section 206CCA, the government has released an online tool for compliance check under Section 206AB and section 206CCA. In this context, CBDT issued an order u/s 138(1)(a)(i) of the Income-tax Act, 1961 (“Act”) on 21.06.2021 for the purposes of the launch of Compliance Check Functionality for Section 206AB and section 206CCA related to deduction/collection of tax (TDS/TCS) at a higher rate for non-filers of ITR. Further, on 21st June 2021, CBDT issued Circular No. 11/2021 regarding the use of the functionality under sections 206AB and 206CCA of the Act. Thereafter, on 22nd June 2021, the Directorate of Systems notified the procedure for Compliance Check for Section 206AB & 206CCA functionality on the reporting portal. Features of Online Functionality Based on PAN of the deductees/collectees on the portal, a response sheet is generated that shows whether the deductee/collectee is a “specified person” or not. There are two types of search options available on the portal: Single PAN Search: Where you can check and verify only a single PAN; and Bulk Search: Where you can search Multiple PANs in one go. All you need to do is upload all the PAN numbers in a CSV file. After this, an output CSV file will be generated containing the list of all the “specified persons”. 8.2 Higher Rate of TCS as per Section 206CCA for Non-Filers In line with the provision of section 206AB, similar provisions for the collection of tax at a higher rate are introduced by section 206CCA. Thus, in case of a non-filer of return of income for the last two assessment years where the aggregate amount of TDS or TCS is Rs. 50,000 or more, a higher rate of TCS shall apply. Rate of TCS under section 206CCA shall be the higher of the following two rates: i) Twice the Rate of TCS specified in the relevant provision; ii) 5%. Apart from the above, all the provisions of TDS as per section 206AB shall be applicable for section 206CCA. 9. Conclusion & Key Takeaways “Section 206AB of the Income-tax Act is introduced for the collection and deduction of TDS at higher rates in case a sum is payable or paid to a particular individual who didn’t file the ITR as required under this section.” After introduction of Section 206AB, Filing of Income tax return is more important to avoid any higher deduction of TDS. Section 206AB of the Income-tax Act is introduced for the collection and deduction of TDS at higher rates in case a sum is payable or paid to a particular individual who didn’t file the ITR as required under this section. The online functionality introduced by CBDT helps the TDS deductors in ensuring compliance under the provision of Section 206AB and 206CCA. References Finance Bill 2022 introduced on 01 Feb 2022. Section 206AB of Income-tax Act regarding Special provision for deduction of tax at source for non-filers of income-tax return as introduced by Finance Act 2021. Section 206CCA Special provision for collection of tax at source for non-filers of income-tax return as introduced by Finance Act 2021. Section 194P of Income-tax Act as introduced by Finance Act 2021. CBDT Notification No. 71/2021 dated 8.6.2021. Section 206AA of Income-tax Act 1961. CBDT order u/s 138(1)(a)(i) of Income-tax Act. CBDT Circular 11/2021, dated 21 June 2021.

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 67–72 (Journal pp. 1371–1376) INTERNATIONAL TAXATION Lunge of Significant Economic Presence CA. Jaya Krishna Kapoor Member of the Institute of Chartered Accountants of India (ICAI) Email: jkapoor728@gmail.com • eboard@icai.in The global economy has been evolving rapidly and digital businesses are predominantly the backbone of this development. Digitalisation is fundamentally reshaping the manner of doing business by shifting physical businesses to digital platforms. These changes have brought with them challenges in taxing international business income and have created opportunities for shifting profits to low-tax jurisdictions, thereby requiring bold moves by policymakers in order to curb such practices. Read on… Background: The Evolution from Physical PE to Significant Economic Presence The Finance Bill of 2018 introduced the concept of Significant Economic Presence (“SEP”) into Indian direct tax legislation. Significant Economic Presence is a statutory spin-off of the traditional concept of Permanent Establishment (“PE”), developed under the furtherance of OECD BEPS Action Plan 1: Tax Challenges Arising from Digitalisation. Conventional international tax laws were originally framed for a physical brick-and-mortar environment. However, with dynamic technological advances—particularly accelerated during the global pandemic—these conventional frameworks have become obsolete. Contemporary enterprises operate seamlessly across borders via digital platforms, disregarding geographic boundaries and facilitating aggressive profit shifting into low-tax havens. BEPS Action Plan 1 pinpointed the central challenge: how to identify tax nexus and attribute digital transaction income in source jurisdictions without physical presence. OECD Public Consultation Document: Defining Digital Nexus The concept of Significant Economic Presence was specifically articulated in the OECD Public Consultation Document on Addressing the Tax Challenges of the Digitalisation of the Economy. The document emphasized that technological advances allow non-resident MNEs to be heavily involved in the economic fabric of a market jurisdiction without maintaining any physical footprint. Under this framework, taxable nexus is established through factors evidencing purposeful and sustained interaction with a country via digital technology and automated algorithms. While revenue generated on a sustained basis serves as the foundational factor, revenue alone is not considered in isolation. Rather, when integrated with user engagement and technological metrics, sustained economic interaction constitutes a taxable nexus in the form of Significant Economic Presence. India’s Tryst with Digital Taxation: EQL 1.0, Budget 2018 & Explanation 2A Prior to 2016, Indian tax legislation strictly adhered to physical nexus criteria to bring foreign entities into the domestic tax net. In 2016, India took its first unilateral leap by introducing the Equalisation Levy (“EQL 1.0”) under Chapter VIII of Finance Act, 2016, imposing a 6% levy on gross payments received by non-residents for specified online advertisement services. While pioneering, EQL 1.0 had an extremely narrow scope. Subsequently, aligning with OECD/G-20 initiatives to expand source taxation jurisdiction, the Indian Parliament enacted the SEP framework via Finance Act 2018 by inserting Explanation 2A to Section 9(1)(i) of the Income-tax Act, 1961, radically expanding the domestic definition of “Business Connection”. Statutory Definition of SEP under Explanation 2A to Section 9(1)(i) Significant Economic Presence of a non-resident in India constitutes a business connection and is defined to mean: Clause (a) – Transaction-Based Limb: Any transaction in respect of any goods, services, or property carried out by a non-resident with any person in India, including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the prescribed amount; OR Clause (b) – User-Based Limb: Systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed in India. Operational Thresholds: CBDT Notification of Rule 11UD Although enacted in 2018, the operationalization of SEP was kept in abeyance pending multilateral consensus. Finally, on May 03, 2021, the Central Board of Direct Taxes (CBDT) notified the statutory threshold limits under Rule 11UD of the Income Tax Rules, 1962, making SEP fully functional with effect from Assessment Year 2022-23 (Financial Year 2021-22): Condition (a) • Monetary Threshold INR 20 Million (₹2 Crores) Triggered when aggregate payments arising to a non-resident exceed INR 20,000,000 during the previous year from transactions with any person in India pertaining to any goods, services, property, or download of data/software. Condition (b) • User Engagement Threshold 300,000 Users Triggered where the number of Indian users with whom the non-resident engages in systematic and continuous solicitation of business activities or digital interaction reaches 300,000 or more during the previous year. Legislative Intent vs. Statutory Wording: Physical vs. Digital Goods The Memorandum to Finance Bill 2018 clearly indicated the legislature’s intent to tax purely digital transactions. However, the verbatim statutory text of Condition (a) covers “any goods, services, or property” without qualifying them as digital. Consequently, under a literal interpretation, conventional cross-border sales of physical goods and off-line services also fall squarely within the net of SEP if aggregate Indian receipts cross ₹2 Crores. Furthermore, regarding Condition (b), the statute fails to define what constitutes “solicitation” (whether general social media brand awareness or targeted commercial offers), who qualifies as a “user” (registered accounts, active IP addresses, or casual web visitors), and how multi-device users should be aggregated. Core Characteristics & Applicability Mechanics of SEP The quiddity of the SEP concept lies in the complete decoupling of tax nexus from physical infrastructure. Explanation 2A expressly establishes that an enterprise constitutes an SEP in India irrespective of whether: The agreement for such transactions or activities is entered in India; The non-resident has a residence or physical place of business in India; or The non-resident renders services in India. “The provisions stress upon ‘amount paid’ and not ‘income earned’ and as such any amount paid in relation to any goods or services or property or software shall be covered by the provision of this definition.” Aggregation across Customers: The ₹20 million threshold must be evaluated in aggregate across all customers and entities in India, rather than on a customer-specific basis. This makes the provision swingeing for multinational corporations with diverse revenue streams. Treatment of Cost Reimbursements: Because the statute refers to the gross “amount paid” rather than net taxable income, pure cost-to-cost reimbursements received by non-residents must technically be included when computing the ₹20 million threshold, creating substantial compliance exposure. Impact of SEP on Double Taxation Avoidance Agreements (DTAA) Under Section 90(2) of the Income-tax Act, 1961, where India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country, the provisions of the Act apply only to the extent they are more beneficial to the taxpayer. Currently, Bilateral Tax Treaties signed by India do not recognize the domestic concept of Significant Economic Presence. The treaties still define taxable business presence under the conventional Permanent Establishment (PE) threshold (Article 5 & Article 7), requiring a fixed place of business, dependent agency, or physical service presence. Treaty Shield vs. The ‘Paper Tiger’ Documentation Trap Until existing bilateral treaties are formally renegotiated or amended via multilateral conventions, non-residents hailing from treaty partner jurisdictions can successfully claim treaty protection: in the absence of a conventional PE in India, business profits cannot be taxed in India despite triggering SEP thresholds under domestic law. The Documentation Prerequisite: However, treaty protection is a “paper tiger” unless the non-resident vendor furnishes rigorous statutory documentation, including a valid Tax Residency Certificate (TRC) issued by the home country government, Form 10F, and an explicit No-PE Declaration. Non-residents unable to furnish these documents, as well as entities resident in non-treaty jurisdictions, bear the immediate, full brunt of Indian SEP taxation. Compliance Obligations, Tax Rates & Minimum Alternate Tax (MAT) Compliance Area Statutory Provision & Requirement Practical Impact on Foreign Entities Tax Rates Foreign Companies: 40% plus surcharge & cess (effective up to 43.68%). Non-Resident Individuals: Applicable progressive slab rates. Applies strictly to net profits attributable to the Indian SEP. Profit Attribution Dilemma Explanation 1(a) to Section 9(1)(i) apportions profits based on physical operations in India. The Act currently contains no digital profit attribution rules, leading to acute administrative ambiguity and aggressive subjective assessments. ITR Filing under Section 139(1) Mandatory return filing for all companies having business nexus. Exemption under Chapter XII applies only to passive royalty/FTS/interest. Foreign entities with SEP are conservatively required to file Indian ITRs, even when claiming treaty exemption under Article 7. Transfer Pricing under Section 92 Applicable to international transactions between Associated Enterprises (AEs). All cross-border transactions involving Indian SEP and foreign affiliates require arm’s length benchmarking and Form 3CEB filing. MAT Exemption under Section 115JB Explanation 4 to Section 115JB exempts foreign companies lacking a permanent establishment in India. Foreign companies resident in treaty nations who trigger SEP but have no physical PE are completely exempt from MAT. Statutory Hierarchy: SEP vs. Equalisation Levy and Royalty/FTS 1. Royalty & FTS vs. SEP: ‘Lex Specialis Derogat Legi Generali’ Section 9(1)(i) governs general business connections and SEP, whereas Section 9(1)(vi) and Section 9(1)(vii) specifically govern Royalty and Fees for Technical Services (FTS). By application of the established legal maxim “lex specialis derogat legi generali” (special law overrides general law), where income qualifies as Royalty or FTS taxable under Section 115A at gross rates, those specific provisions supersede the general business income rules of SEP. 2. Equalisation Levy (EQL 1.0 & 2.0) vs. SEP: Section 10(50) Exemption To prevent double taxation between Equalisation Levy (2% on e-commerce operators / 6% on digital ads) and direct income tax under SEP, Parliament introduced Section 10(50) of the Act. Income arising from any e-commerce supply or service that is subject to Equalisation Levy is exempt from income tax, provided the transaction is not taxable as Royalty or FTS. Tax Withholding (TDS) under Section 195 & The Retrospective Notification Dilemma Under Section 195 of the Income-tax Act, 1961, any person responsible for making a payment to a non-resident must deduct tax at source at the time of credit or payment, whichever is earlier, if the sum is chargeable to tax in India. Acute Hardship: TDS Deduction Without Profit Attribution Rules In the absence of statutory profit attribution guidelines for digital presence, an Indian payer cannot easily determine what portion of the payment represents taxable net income attributable to the Indian SEP. To avoid liability under Section 201 (interest and penalty) and Section 40(a)(i) (disallowance of expenditure), payers often conservatively deduct withholding tax at the peak rate of 40% (plus surcharge and cess) on the gross remittance, or seek an order under Section 195(2) from the Assessing Officer, inflicting immense financial distress on non-resident vendors. The Gap Period Dilemma (April 1 to May 2, 2021) & Supreme Court Precedent While CBDT notified Rule 11UD threshold limits on May 03, 2021, the rules were applied retrospectively from April 01, 2021. Indian payers faced penal exposure for short-deduction during this 33-day gap period. Taxpayers can successfully defend against non-compliance by relying on the landmark Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. (2021) LL 2021 SC 124, which upheld the timeless legal maxim “lex non cogit ad impossibilia”—a person cannot be compelled to perform the impossible and comply with statutory provisions before they were brought into legal existence. Global Minimum Tax (OECD Pillar Two) & The Inevitable Sunsetting of SEP On 5 June 2021, G7 Finance Ministers reached a historic accord on a Global Minimum Corporate Tax of at least 15% under OECD/G20 Pillar Two, aimed at ending the race-to-the-bottom tax competition and preventing multinational tech giants from siphoning profits to tax havens. Currently, 136 countries, including India, have formally joined this landmark global tax framework. A central condition of the multilateral agreement is that signatory nations must commit to withdrawing unilateral digital services taxes (such as Equalisation Levy and Significant Economic Presence) and agree not to introduce such unilateral levies in the future once the multilateral consensus is implemented. In the backdrop of these international developments, India will eventually need to phase out its unilateral SEP regime. In the interim, managing the intricate intersection of Section 9(1)(i), Rule 11UD, tax treaties, MAT provisions, and withholding obligations remains one of the most critical operational challenges in modern international corporate taxation. Author may be reached at: jkapoor728@gmail.com and eboard@icai.in The Chartered Accountant • May 2022

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 73–78 (Journal pp. 1377–1382) DIGITAL ACCOUNTING • FINTECH, REGULATORY ARCHITECTURE & DIGITAL PAYMENTS Prepaid Payment Instrument replacing cash to digital money in Pocket: New Digital Pocket to All CA. Subash Thakuri The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at thakurisubash2017@gmail.com and eboard@icai.in. 💳 Executive Overview & Fundamental Concept Prepaid Payment Instrument (PPI) is substitute of physical cash among others. Cash signify the monetary value, as pure form of exchange for transaction. It facilitates the regular and smaller amount of payment for consumption of any goods or services or financial services, remittance etc. Physical cash on paper form or coin, do have risk of loss, theft, damage and so on however by introduction of PPI remove such issue with given security of value stored on such PPI. Read on… 1. Operational Security & Current Industry Status Various security form is built to protect it from loss or mis-use to the extent possible but threat is universal, do remain. It’s just about comparative leverage of secured and safety measures to proceed the transaction fairly across the terminal and PPI has proved fair enough at security and safety point in comparison to other means and modes of financial transaction point. Highlights & Current Status Statistically 37 entities are operating as non-bank Payment Service Provider with its unique Prepaid Payment Instrument in forms of Card, Webpage or Mobile App licensed under flagship Payment and Settlement System Act, 2007 read with regulation, 2008 and monitored, managed and guided by Department of Payment and Settlement Systems (secretary office of Board for Regulation and Supervision of Payment and Settlement Systems) under Reserve Bank of India (RBI). Beside this, 57 Banks has license to issue, manage and operate Prepaid Payment Instrument for public at large which include almost all type of Banks available in India like public sector bank, private commercial bank, foreign bank, payments bank, Cooperative Bank, Small Finance Bank. 2. Historical Evolution: Early Birds & Recent Non-Bank Entrants Table 1: Early Bird License Holders (Existing till date) The early bird license holder and exist till date as Prepaid Payment Instrument license holder are: S. No Name of Entity PPI Remarks 1 GI Technology Pvt Ltd Chennai I-Cash (in Card Form) Prepaid Card used by various individual to consume travel services, mobile re-charge and Utility Bill Payments. 2 Ebix Payment Service Pvt Ltd (formerly Itz Cash Card Pvt Ltd) Mumbai EBIXCASH Co-branded prepaid card 3@ Muthoot Vehicle & Asset Finance Ltd Kochi Muthoot Money (in Wallet Form) Web and mobile wallet to store money value 4 Sodexo SVC India Pvt Ltd Mumbai Sodexo Card Meal Voucher, Gift Card 5 Unimoni Financial Services Limited (formerly UAE Exchange & Financial Services Ltd) Unimoni (In Mobile Wallet form) Money Transfer Services via Mobile Wallet Unimoni and other retail payment solution provider @ Muthoot Vehicle & Asset Finance Ltd, PPI license is ceased by RBI since December 31, 2021 along with Eko India Financial Services Private Limited. Note: Few early birds in this space as PPI are not included on above table, as these players has now enhanced themselves as Payment Bank. For example, One97 Communication Limited (Paytm), Airtel M Commerce Services Ltd (Airtel Money), Fino Paytech Ltd (Fino Pay), Idea Mobile Commerce Services Ltd (Idea Money), Reliance Payment Solution Limited (Jio Money). Paytm being first entrant in PPI, has also been first Payment Bank in India. ZipCash Card Services Private Limited has received the license in early bird space as per my write up in 2009 though not included on above table due to the company been later on acquired and run by Ola Financial Services Pvt Ltd. Then the product zipcash coupon is replaced by PPI “Ola Money”. Table 2: Latest Non-Bank Entrants as Prepaid Payment Instrument License Holders Further the latest entry on this segment as non-bank Payment Service Provider as Prepaid Payment Instrument license holder are: S. No Name of Entity PPI License Date Remarks 1 Bajaj Finance Ltd Pune 04.05.2021 Voluntary surrender on 20th Feb, 2018 and again applied for Authorization for Issuance and Operation of PPIs. Prepaid Card Business for Shopping. The license is approved on perpetual basis without any cut off/renewal date. 2 Eroute Technologies Pvt Ltd Noida 10.05.2021 Prepaid Card business “OmniCard” and offline payment solution provider with “HindPay” – UPI based Solution. The license is approved on perpetual basis without any cut-off or renewal date. 3 Euronet Services India Pvt Ltd Thane 03.08.2021 Wallet business – PPI, working primarily on money transfer business across globe under brand of Euronet Worldwide, as India entity. The license is approved on perpetual basis without any cut-off or renewal date. 4 Razorpay Technologies Private Limited 25.10.2021 PPI Sources: a) Non-bank operator list: https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12043 b) Bank operator list: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2491 3. Market Capture & Payment Service Provider Leader Chart Moving ahead, as far as market capture and payment service provider leader chart, commonly we can find the following information at market popular, more users and good market capture on this vertical: Rank Name of Entity Brand Business Lines Users 1 Phonepe Private India (Formerly FX Mart Pvt Ltd) PhonePe Digital Mobile App Wallet for Payment Solution 10 Cr + 2 Amazon Pay (India) Private Limited (Formerly Amazon Online Distribution Services Pvt Ltd) Amazon Pay Balance: Money Retail Payment Solution via Mobile App 10 Cr + 3 One Mobikwik Systems Pvt Ltd Mobikwik Wallet Retail Payment Solution Mobile App 5 Cr + 4# PayU Payments Pvt Ltd PayU Retail Payment Solution Provider in addition to Gateway 5 L + 5# Pine Labs Pvt Ltd Pine Labs POS Machine/Card Business 1 L + 4# Entity is known for Gateway business; PPI platform is less exploring but popular in users and entity is expanding the PPI slowly gradually in the year to come. 5# Entity is known more for Point of Sale (POS) terminal set up (last mile transaction) with good merchant user base in addition to card business however on presence of digital app users, entity is expanding slowly and gradually. 4. Regulatory Evolution & Decoding Master Direction on PPI (27th Aug, 2021) Before development of policy guidelines by regulator are just brain storming session of all available intellects in country as far as the adoption of technology-based payment facilitation in country or not, participating the various stakeholders to participate and provide the inputs on drafting and development of regulatory framework as far as implantation phases are concerned. So, to harmonized the capitalization of timeline on development of PPI as far as regulatory framework is subject, the cut-off date can be taken off from the first cut of master direction issued dated 29th April, 2009. The implemented direction is named as “Guidelines for issuance and operation of Prepaid Payment Instruments in India” is first stone on the development of PPI segment in Country. The very initial stone on the development of PPI is placed on this day. And over time, via experience and experiment, the first guidelines are been drastically revamped and redrafted altogether and during phase, the Reserve Bank of India on very recent publication issued Master Direction on Prepaid Payment Instruments (PPIs) dated 27th Aug, 2021. The recent direction has drastically changed the entire orientation and approach of PPI in comparison to earlier one. Slowly gradually regulator is making all PPI to participate in main stream of Banking Channel in India, precisely Payment Facilitation is Concern. Over decades timeframe, in light of development in the field of PPI, Digital e-commerce, experience gained and with a view to foster innovation and competition, ensure safety and security, customer protection etc. state has got commendable state of art for payment facilitation as on date. Decoding the Fresh Master Direction on PPI (dated 27th Aug, 2021) Since 2009 to 2020, been decades above with wide range of experience and experiment, regulator RBI come up with new fresh Master Direction on Prepaid Payment Instrument (PPI) dated 27th Aug, 2021 with immediate effect. Extract of Key Transformations: a) Definition and category of name with earlier one is changed; b) Widen the scope/function/features of PPI; c) Consolidated till date circular in one master direction for PPI; d) Emphasis on interoperability of PPI; e) Enhance and improvised security, fraud prevention and risk management framework implementation; f) More focused on customer grievance and its handling on time; g) Know Your Customer (KYC) is centre point; h) Mandate of implementation on interoperability of PPI using NPCI Hero Product UPI Interface. 5. Categories, Definitions & Scope Comparison: Small PPI vs. Full-KYC PPI a) Closed PPI PPI which does not required approval/authorization from Reserve Bank of India (RBI). It is instrument issued by an entity or organization for facilitating the purchase of goods and services of that entity or organization only i.e. no involvement of third party in transaction. It does not permit cash withdrawal. For example, Rapido App, Big bazar Card etc. b) Small PPI It is instrument used for payment or settlement for third party services. It can be issued by banks and non-banks entity after obtaining minimum details of PPI holder, is choice of applicant either to go for Small PPI or Full KYC PPI. It is used only for purchase of goods and services. Fund transfer and cash withdrawal is not permitted from it. For Say, Amazon pay balance. c) Full KYC PPI It is more advanced PPI in comparison to earlier two, due its more features and speciality. It can be issued by banks and non-bank entity. PPI holder first complete the Know Your Customer (KYC) with minimum details to activate the PPI, only after PPI holder can use such instrument for purchase of goods and services, fund transfer or cash withdrawal. Comprehensive Scope Comparison: Small PPI vs. Full KYC PPI This is not differentiating factor of both PPIs in fact, its scope of PPIs presented in tabular format with similarities and differences altogether: Feature / Dimension Small PPI Full KYC PPI Permitted Usage Use for purchase of Goods and Services. Use for Purchase of Goods and Services, fund transfer or cash withdrawal. Verification / KYC Requirements Minimum details of PPI holder i.e. mobile number verified with one-time password and self-declaration of name and unique identity number of any officially valid document (OVD). Video-based Customer Identification Process (V-CIP) with minimum details in addition to OVD is required to open PPI by holder. Types / Loading Classification Small PPI is of two types on the basis of loading facility i.e. Small PPI with cash loading facility (i.e. Bank and Cash, both acceptable) and with no cash loading facility (i.e. Loading/reloading from Bank Account, credit card, full KYC PPI). No further classification on Full KYC PPI unlike Small PPI. Loading/reloading of PPI is from any source either cash, bank account, credit card etc. Reloadability & Issuance Form Reloadable in nature and issued only in electronic form. Reloadable in Nature and Issued only in Electronic Form. Amount Loading & Balance Caps Amount Loading Cap in this PPI: a) It shall not exceed INR 10K during any month and 120k annually in financial year; b) Amount outstanding at any point of time in such PPI shall not exceed INR 10K; c) Total amount debited from such PPI during any month shall not exceed INR 10K. Amount Loading Cap: Amount outstanding shall not exceed INR 200K at any point of time. Conversion Period & Re-issuance Such PPI shall be converted into Full KYC PPIs within a period of 24 Months from date of issue. Failure to do so, fail entity to add more users however existing user can use the value stored on PPI. PPI shall not be issued to the same user in future using the same mobile number and same minimum details. Concept of pre-registered beneficiaries is there with addition of bank account details, details of PPIs of same issuer etc of it in order to facilitate such beneficiaries with fund transfer not exceeding INR 200K per month per beneficiary. In case of other scenario fund transfer limit shall be restricted to INR 10K per month. As special features unlike earlier fund transfer is permitted to other PPIs, Debit and Credit Cards as per limits given above. Cash Withdrawal Limits Not Permitted. Talking about cash withdrawal limit then first set to check is either the PPI issued by Bank or Non-Bank: • Bank Issued PPI: Cash withdrawal at PoS device is subject to limit of INR 2K per transaction within an overall monthly limit of INR 10K across all locations. • Non-Bank Issued PPIs: Cash withdrawal shall be permitted up to maximum limit of INR 2K per transaction within an overall monthly limit of INR 10K per PPI across all channels either its agents, ATMs or PoS devices. Closure & Transfer of Proceeds Option to close PPI is always available to User and amount shall transfer to source account. In other way closure proceeds, if any can be transferred to Bank Account after complying with KYC requirements of PPI holder. Option to close PPI is always available and balance transfer to pre-designated bank account of PPI holder. Feature Communication to Holder Features of PPI shall be communicated to PPI holder by SMS/e-mail at the time of issuance of the PPI before the first loading of funds. Features of PPI shall be communicated to PPI holder before first loading of funds. Over and above, Regulator Reserve Bank of India (RBI) read with Payment and Settlement System Act, 2007 (amended from time to time) acknowledge the other two special category PPI i.e. Gift Card and Mass Transit System. 6. Authorization Process & Regulatory Compliance Architecture 6.1 Authorization Process Every eligible entity should make an application to Department of Payment and Settlement System (DPSS), Central Office, RBI, Mumbai. If applicant company is already regulated by any existing regulator then no objection certificate is most to obtain and attach with the application for authorization. “If applicant company is already regulated by any existing regulator, then no objection certificate is a must to obtain and attach with the application for authorisation.” Applicant shall be company incorporated in India and registered under the Companies Act, 2013/1956 which is required to maintain net owned fund of INR 5 Cr at the time of application and thereafter within closure of three financial year, the minimum net owned fund has to be INR 15 Cr. Objective of applicant entity should foster the objectives of PPI issuance. 6.2 Key Regulatory Mandates for PPIs AML/CFT Framework: Adoption of Know Your Customer (KYC) guidelines under the Anti-Money Laundering (AML)/Combating Financing of Terrorism (CFT) as per the provision of Prevention of Money Laundering Act, 2002 (PMLA) guided by RBI Master Direction on KYC. 10-Year Log Maintenance & FIU-IND Reporting: As a PPI issuer, it is required to keep a log of all transactions involving PPIs for at least ten years. It would also submit Suspicious Transaction Reports (STRs) to India’s Financial Intelligence Unit (FIU-IND). Co-Branding Approvals: Non-bank PPI issuer shall seek one-time approval from Department if desirous of issuing co-branded PPIs. Annual System Audit Report (SAR): Non-bank PPI issuer shall submit a System Audit Report (SAR), including cyber security audit conducted by Computer Emergency Response Team (CERT)-IN empanelled auditor, within two months of the close of its financial year. 7. Cross-Border Transactions & Regulatory Reporting Requirements 7.1 PPIs as Cross-Border Transaction Instruments “PPIs are not allowed to make or facilitate or transfer any cross-border outward fund under Liberalised Remittances Schemes.” Participation of PPIs on cross border transaction is very limited and prohibited. As far as outward transaction is concern, first up all PPI is required to be full KYC and same been issued by Banks having AD-I License permitted only for permissible current account transaction under Foreign Exchange Management Act, 1999 viz. purchase of goods and services. PPI issuer shall enable the facility of cross-border outward transaction only on explicit request of PPI holder and shall apply per transaction limit not exceeding INR 10k, while per month limit shall not exceed INR 50K. PPIs are not allowed to make or facilitate or transfer any cross-border outward fund under Liberalised Remittances Schemes. However, under the RBI’s Money Transfer Service Scheme (MTSS), banks and non-bank PPI issuers engaged as Indian agents of licenced overseas principals would be permitted to issue complete KYC PPIs to beneficiaries of inbound remittance. Such PPIs will be issued as per MTSS guidelines established by the Foreign Exchange Department (FED) of RBI. Even for inward remittances, only up to INR 50k from an individual can be loaded/reloaded in complete KYC PPIs issued to beneficiaries. Amounts in excess of INR 50k must be credited to the beneficiary’s bank account. 7.2 Comprehensive Reporting Requirements “PPI issue has responsibility and prescribed set of reporting and format given on guidelines. Precisely PPI issuer has to submit the Net-worth certificate and PPI statistics.” PPI issue has responsibility and prescribed set of reporting and format given on guidelines. Precisely PPI issuer has to submit the Net-worth certificate and PPI statistics. Further PPI has to submit the auditor certificate on maintenance of balance in Escrow Account. In addition to above, the PPI issuer shall maintain and report PPI customer grievance report. These are RBI’s specific reporting requirement on given interval however over and above of it, the entity is required to submit its audited financial statement and auditor report thereon. 8. Conclusion & The Future of Indian Digital Payments “PPI is making huge presence as far as finger tips payment is concern and making country less cash based and more digital cash carry model with ground base of India’s Banking and Financial Service Industry.” PPI has its decades long history with ups and down, complexities, failure and improvisation day in day out to become state of an art for making payment to various vendor on finger tips. In quite advance and appreciated instruments as on date in order to promote with better user experience as far as payment is concern to fulfil the buyer obligation to make payment on purchase of goods and services, remittance and financial services. More appreciated news on PPI segment is altogether inclusion of PPI issuer in Centralized Payment System of India i.e. RTGS and NEFT as well as providing the cash withdrawal facility at location either its from PoS, agents or else. In fact, PPI is making huge presence as far as finger tips payment is concern and making country less cash based and more digital cash carry model with ground base of India’s Banking and Financial Service Industry. It is worthy to understand and explore the India’s Banking System in your pocket/mobile friendly instrument to leverage the speedy cash deliver unlike any others in earlier scenario. Further new and innovative idea and technology are been working to explore more on more in this segment with supervision of RBI either its retail payments, cross border transaction or MSME lending, the process is ongoing and in near future there will much more enhancing mode of instrument for multiple payment facilitation and so on with an app, web or offline or card based.

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 79–83 (Journal pp. 1383–1387) ACCOUNTING STANDARDS Dividend Income under Ind AS 109 – not so simple after all CA. S. Sairam Member of the Institute of Chartered Accountants of India (ICAI) Email: subramaniansairam@yahoo.com • eboard@icai.in Dividend income recognition has been an apparently straightforward area in accounting. But with Ind AS 109 permitting certain qualifying investments in equity instruments to be measured at fair value through other comprehensive income (FVOCI), the accounting for dividends gets a little complex. This article takes a look at how the discriminatory accounting of dividend income (through profit or loss) and other fair value changes (through OCI) may impact the entity’s decision to opt for the FVOCI measurement. There is a need for entities to apply suitable accounting policies to distributions received as dividends based on their economic substance and user needs. Read on… 1. Dividend vs. Fair Value Increases: The Irrevocable FVOCI Election Ind AS 109 permits certain investments in equity instruments to be measured at fair value through other comprehensive income (FVOCI) by way of an irrevocable election at very initial recognition. Under paragraph 5.7.5 of Ind AS 109, the two mandatory negative eligibility criteria are: The equity instrument must not be held for trading; and The equity instrument must not be contingent consideration arising from a business combination accounted under Ind AS 103. Crucially, any cumulative gains or losses recognised in OCI are never to be recycled to profit or loss (P&L) upon disposal or derecognition of such instruments. They may only be transferred directly within equity (e.g., to retained earnings). Opting for FVOCI represents a formal choice of accounting policy. Basis for Conclusions: Why IFRS 9 Decoupled Dividends from OCI (Paragraph BC5.25) “The exposure draft proposed that dividends on equity instruments measured at fair value with changes recognised in other comprehensive income would also be recognised in other comprehensive income. Nearly all respondents objected to that proposal. They argued that dividends are a form of income that should be presented in profit or loss in accordance with IAS 18 Revenue [BC5.25] and noted that those equity investments are sometimes funded with debt instruments whose interest expense is recognised in profit or loss. As a result, presenting dividends in other comprehensive income would create a ‘mismatch’. Some listed investment funds stated that without recognising dividend income in profit or loss their financial statements would become meaningless to their investors. The Board agreed with those arguments.” The IASB’s perspective alludes to an inherent synonymity between fair value gains and dividends relating to an equity instrument. For this reason, their accounting treatments were initially proposed to be consistent (both in OCI). However, due to persuasive feedback from leveraged entities (facing interest-expense mismatch) and investment holding companies, the final standard mandated that regular dividends must bypass OCI and flow directly into profit or loss. 2. The Decision-Making Paradox: User Perceptions & Ind AS 8 Compliance As per paragraph 10(a) of Ind AS 8, an accounting policy selected by management should result in information that is relevant to the economic decision-making needs of users. While presenting dividends in P&L while parking capital gains in OCI is justifiable for investment funds and leveraged holding companies, for general operating entities it creates a significant cognitive mismatch. When an entity discloses that an equity holding is measured at FVOCI, financial statement users reasonably assume that the financial effects of that investment will have no significant impact on operating profit or loss. However, because dividend income is excluded from the OCI bucket under paragraph 5.7.1A, this perception is compromised. Illustrative Dilemma: Static Cost Measurement under Paragraph B5.2.3 Consider a situation where management determines that cost is the appropriate measure of fair value as per paragraph B5.2.3 of Ind AS 109 for an unlisted equity investment. The investment is intended to be held for a short horizon (say, two years), and there are no indicators under paragraph B5.2.4 compelling fair value remeasurement. The investee is expected to distribute substantial dividends during this holding period. In this scenario, electing FVOCI is potentially misleading: all economic gains impact P&L in the form of dividends, while OCI remains entirely static at zero change. If an entity expects to receive all fair value gains as distributions, the FVOCI election becomes economically meaningless. Best Practice Recommendation: As hinted in paragraph BC5.25, entities making the FVOCI election should disclose the detailed judgments involved, including the expected dividend yield, holding period horizon, and anticipated P&L impacts. Thankfully, paragraph B5.7.1 of Ind AS 109 permits an entity to make this election on an instrument-by-instrument basis. 3. The Statutory Dichotomy: ‘Return on Investment’ vs. ‘Return of Investment’ Under Ind AS 109, dividend is defined as “distributions of profits to holders of equity instruments in proportion to their holdings of a particular class of capital”. Dividend has historically been interpreted as a ‘return on investment’, establishing the default rule that dividends belong in P&L: Paragraph 5.7.1A of Ind AS 109: Dividends are recognized in P&L only when: (a) the entity’s right to receive payment is established; (b) it is probable that economic benefits will flow; and (c) the amount can be measured reliably. Paragraph 12 of Ind AS 27: In separate financial statements (SFS), dividends from subsidiaries, joint ventures, or associates must be recognized in P&L when the right to receive is established, even if the parent elects Ind AS 109 measurement. The Exception in Paragraph B5.7.1: Recovery of the Cost of Investment Paragraph B5.7.1 of Ind AS 109 carves out an explicit exception: dividends that “clearly represent a recovery of part of the cost of the investment” are strictly prohibited from being recognised in profit or loss. Unfortunately, this statutory phrase is not explicitly defined in the standard. Deconstructing its legal and accounting elements reveals: ‘Clearly’: Requires an evidentiary standard beyond reasonable doubt, ideally backed by objective documentation. ‘Cost’: While Ind AS 16 defines historical cost, equity investments under Ind AS 109 and Ind AS 113 are measured at fair value. Hence, ‘cost’ in this context must logically be interpreted as the fair value (carrying amount) on the distribution date. ‘Part of the Cost’: Purposive interpretation requires that this encompasses the recovery of the whole cost, not merely a fractional slice. 4. Two Specific Scenarios Governing Recovery of Cost Scenario I: Distribution of Pre-Acquisition Profits Any dividends distributed from reserves that existed on the date of acquisition represent a recovery of the investment, economically subsidizing the purchase consideration. These represent amounts generated before ownership was transferred. While old AS-13 (paragraph 12) strictly mandated the allocation between pre- and post-acquisition profits, Ind AS 109 omits specific rules. Entities applying Ind AS may still adopt an accounting policy aligned with AS-13 principles. (However, under Ind AS 27 paragraph 12, requiring all dividends in a parent’s SFS to hit P&L represents a recognized statutory aberration.) Scenario II: Distributions Received During Winding Up of the Investee In market practice, some entities treat capital distributions in winding up as regular dividends credited to P&L. This stems from perceived difficulty in applying derecognition under paragraph 3.2.3 of Ind AS 109, since equity instruments carry no contractual cash flows with a stated expiry. Four Compelling Arguments Why Winding Up Distributions Must Bypass P&L: Investor Intent: The investor is liquidating and exiting the relationship entirely, seeking return of capital rather than recurring yield. Economic Substance: Accounting policies must portray economic reality. Return of capital must be distinguished from return on capital in presentation, not merely footnotes. AASB 132 / Ind AS 32 Definition: Dividend strictly denotes distribution of profits, not liquidating distributions of capital. Integrity of the FVOCI Election: Liquidating distributions of accumulated fair value gains represent historic OCI amounts. Crediting them to P&L directly violates the core Ind AS 109 prohibition against recycling OCI gains to profit or loss! 5. Accounting Mechanics: Erroneous Practice vs. Recommended Journal Entries Flawed Market Practice Erroneous P&L Recycling Approach (a) On receipt of distributions: Dr Asset / Cash Cr Dividend Income – P&L (b) Subsequent ex-dividend revaluation: Dr Investment Revaluation Reserve (OCI) Cr Investment in Equity Shares Critique: Indirectly recycles OCI fair value gains into P&L via dividend income, contravening paragraph 5.7.5. Standard-Compliant Treatment Economic Substance under Paragraph B5.7.1 (a) On receipt of capital distributions: Dr Asset / Cash Cr Investment in Equity Shares* (b) Reclassification of OCI reserve: Dr Investment Revaluation Reserve Cr Equity (Retained Earnings)** *Treated as derecognition / recovery of cost. **Never recycled to P&L. 6. The Frontier: Puttable Financial Instruments under IAS 32 / Ind AS 32 As the international accounting framework stands, the IASB has established that puttable financial instruments accounted as equity under paragraphs 16A–16B of IAS 32 / Ind AS 32 are ineligible for the FVOCI election (as affirmed in the IFRIC Agenda Decision of May 2017). Consequently, paragraph B5.7.1 formally applies only to genuine investments in equity instruments. The Derecognition Void in Puttable Redemptions The underlying policy reasons for carving out recovery of investment in BC5.25 apply with equal force to equity-accounted puttable instruments. In the event of their redemption, conventional derecognition criteria cannot technically apply because there are no contractual cash flows that ‘expire’ (their equity classification arises because cash flows depend on net assets rather than contractual terms). Therefore, it remains a critical moot point for standard-setters whether it would be more rational, consistent, and objective to extend the paragraph B5.7.1 recovery-of-cost framework to redemptions of all equity-accounted puttable financial instruments. Conclusion: Upholding Economic Substance Over Form Accounting for dividends under Ind AS 109 is deceptively complex. Preparers of financial statements must move beyond mechanical assumptions that all dividends represent operational return on investment. By carefully evaluating the economic substance of distributions—especially pre-acquisition reserves and winding up proceeds—and applying the paragraph B5.7.1 carve-out, preparers ensure robust transparency, prevent improper recycling of OCI gains, and safeguard financial reporting integrity. Author may be reached at: subramaniansairam@yahoo.com and eboard@icai.in The Chartered Accountant • May 2022

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 85–91 (Journal pp. 1389–1395) TECHNOLOGY • ENTERPRISE DATA ARCHITECTURE & GOVERNANCE Mastering Your Master Data CA. Jayaram Vengayil The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at vjayaram2002@hotmail.com and eboard@icai.in. 📊 Executive Synopsis & Strategic Value Master data in an organisation’s systems plays a key role in the efficiency and effectiveness of its processes and has a direct impact on its business outcomes. However, master data management (MDM) has not received due importance for various reasons that are elaborated here. The article reiterates the importance of master data and examines the problems that affect its quality and integrity. It goes on to identify some practical tips for improving and transforming master data and its management to make it a lever for profitable growth. The author provides the rationale for a master data management (MDM) function and studies the impact of emerging trends on the evolution of master data. Read on… 1. The Strategic Imperative: Why Clean Master Data is Essential It is useful to remind ourselves why clean master data is so important across modern enterprise systems: • A Single Source of Truth Master data is the common thread that binds various functions in an organisation. If it is compromised, the one single source of truth will be affected leading to lack of confidence and individual departments going back to their own data silos to avoid mistakes. On the other hand, one source of master information puts everyone on the same page and ensures business processes operate seamlessly across functions. • Foundation for Complete, Accurate Transactional Data Transactional data is based on the master data that it draws from. Inaccurate master data will affect the integrity of every single business transaction that depends on it. A stitch in time saves nine is an old adage that is appropriate in these circumstances. • Tangible Business Impact Imagine a business that doesn’t have an accurate database of its customers and their contact details. If reaching out to your business associates is a struggle, how do you expect to do business? Especially in the times that we live in, when everyone is rushing for a share of the customers’ attention and wallet. If you don’t get there fast, someone else will, thanks to their accurate customer master data. This can be the case in every area of your business, vendors, materials, employees and fixed and current assets. Imagine the cascading losses that could arise from multiple errors in master data in every area of your business. The consequences could even include direct cash leakages through erroneous or duplicate payments, non-availing of discounts or rebates, picking of the wrong item codes or price masters and whole gamut of discrepancies. • Operational Efficiency The cost of re-work when the foundation is faulty can be colossal. Since master data is the starting point of all transactional activity, it has an adverse effect on every downstream activity. However efficient manual and system processes may be, they will continue to be sub-optimal if the base of the master data is not strong. • Enterprise Uniformity Standardisation sets a common understanding for all stakeholders. It is a pre-requisite for all the other benefits of master data to flow through to the business. Master data creates a common vocabulary for the entire business and ensures that there is no misunderstanding due to lack of a standard framework. This facilitates cross-functional interaction and builds synergy within the organisation. “Master data creates a common vocabulary for the entire business and ensures that there is no misunderstanding due to lack of a standard framework. This facilitates cross-functional interaction and builds synergy within the organisation.” 2. Root Causes: Why Master Data is Not in Good Shape But then, if master data is so crucial for an organisation’s processes why is it that it is not in good shape more often than not? Some of the key reasons for this appear to be: 1. Urgency Transactional activity usually happens in a hurry, an urgent invoice to be raised. A vendor to be paid. In the heat of the moment, there is a tendency to cut corners and save time. Clerical errors, short forms, duplicates, incomplete fields, non-standard terms etc can lead to headaches at a later date. This short time saved now can end up in a lot of time and money lost later. 2. Rigidity Very often masters are prepared by people who do not have visibility into the future. Therefore, there could be limiting factors causing rigidity in the structure of the masters which limit their full functionality. For example, if one type of material is only allocated two digits’ space, there would a constraint if the number of items were to exceed 99. So, masters need to be structured with an eye on future possibilities. 3. No Single Owner Till recently, it used to be the responsibility of staff handling transactions to create the master record. This was replete with issues. These individuals were handling routine, time-bound work and did not always have a cross-functional understanding of the implications of their actions on other functions. Of late, organisations have started making a centralised team responsible for master data management. However, just bringing everything under one roof doesn’t solve the problem if the mindset and approach remains the same. 4. Disparate Stakeholder Needs If the master template is created or updated by a particular function there is always a likelihood that the information contained will be limited to only what is important or relevant for that function. The chances are that the requirements of other stakeholders will be omitted. For example, if the purchase department creates the item master, only the purchasing unit of measure (UOM) may be allotted to that item. If an item is purchased in kilograms but sold by numbers only the former UOM may be allotted to that item instead of both. 5. Creator Unaware of Consequences As we can see from the above example, such an omission is not deliberate but arises due to the ignorance of the originator about the consequences of his actions on other functions. Therefore, it is essential that the master creation is centralised with a team that has full visibility and responsibility for all the upstream and downstream effects of the master’s contents. 6. Workarounds for Errors/Limitations Today various systems have to integrate with each other to complete an end-to-end action. For example, a vendor master creation would involve validating the GST number from the government portal or setting up vendor bank account for bank’s payment transfers. Certain limitations from external systems or risk of human errors may lead to work arounds in the master creations. For instance, certain ERP systems will not allow more than one bank account for a vendor. So, if the company is dealing with two divisions of the same vendor with different bank accounts, there would be a need to create two vendor codes though the entity is the same. Similarly, some companies create separate codes for the same vendor for services and goods as the former are subject to tax deduction at source. If there is one vendor code for both types of transactions, the selection of type is left to the operator. This leaves a risk of erroneous transactions which is avoided by creating two vendor codes. 7. Low Importance Accorded to the Activity As the repercussions of errors and omissions in the master are not immediately seen, there is a tendency to accord it low priority and treat it casually. This makes the activity prone to careless errors and quick fixes. 3. Guiding Principles for Maximising Master Data Quality How then can a business ensure its master data is comprehensive and complete? To start with, keeping the following set of principles would be helpful in maximising the quality of master data: 1. Design with the Future in Mind While creating the master data strategy and individual contents, the team responsible should have a clear understanding of the business’ strategy and critical performance drivers. These should always be central to the master data model. An organisation with multiple branches all dealing in the same products would, for instance, have one material master but location would have a key place in all its masters with an ability to roll up to the corporate level. A common flaw with master designs is that they are not future-ready and don’t provide the flexibility or space for growth. A simple example is providing only a limited number of digits, say XXXX for a set of codes. Once the number exceeds “9999”, even the most sophisticated systems will have no way to fix it. Having one eye on the future while setting the ground rules for master data will help avoid the risk of hitting a dead end later. 2. Make Data Hygiene an Ongoing Activity One of the mistakes organisations make is to treat master data hygiene as a spring-cleaning activity that operates in short bursts. Such an approach tends to be ad hoc, discretionary and prone to delays. Integrity of the masters should be an ongoing responsibility of the teams owning the master data viz. process/function owner. Allowing slipshod quality with a promise to come back and clean up the mess later should be strictly avoided. 3. Identify Explicit Ownership Having a dedicated central Master Data Management (MDM) team attached to the Shared Service Centre or the head office helps to pinpoint responsibility for master integrity. While creation of the masters can be decentralised if needed, the review and confirmation should invariably be with one central entity for accountability to be established. 4. Standardise at Point of Entry Setting some ground rules at inception will help create a framework which will prevent careless data errors. For example, just ensuring that one standardises on prefixes (With or without “The”, “Mr.” etc.) or spelling conventions and abbreviations (St. or Street?) will go a long way to ensure silly errors are weeded out. 5. Online Validation of Data Entry Errors Ensuring that ERP systems or vendor/customer on-boarding platforms have validation rules to prevent typo or rule-flouting errors will ensure elimination of some common mistakes that litter master data. For example, mobile numbers should necessarily be ten digits, Income Tax Permanent Account Number entries without proper sequencing would be rejected i.e., alphabets in the first five spaces, four numeric and one alphabet with a total of length of ten. Reasonableness checks for details like age, date of birth etc. are other means of preventing garbage from seeping into the system. 6. Capture Data from Source It is obvious that every time data changes hands it runs a risk of unintended corruption. A fool-proof way to ensure that master data doesn’t undergo modifications is to draw it right from source. For example, the item master can be linked to the HSN coding system or the Vendor/customer master can obtain tax information directly from the GST/Income tax portals. 4. Developing a Comprehensive MDM Function: Business Drivers & Economic Cost A major hurdle that businesses face while creating a central MDM function and implementing an MDM tool is to justify it financially. MDM activity can be clubbed with other roles if volumes are not significant. However, it is important to clearly identify the team members and their individual and collective responsibilities and to communicate this within the organisation. Compelling Business Justifications: Ease of operations: It is apparent that a clean master will enable smooth transactions through the system thus improving customer experience and interface (UI/UX) for all stakeholders. Speed of response: When the eco-system is able to communicate faster and seamlessly it leads to quicker decision making and conclusive action. Data integration across the organisation: By integrating data throughout the organisation, all players are equally informed and enabled to act responsibly and collectively. This enhances the image of the organisation and prevents inadvertent errors from defective data quality. Cross functional initiatives are dependent on a common platform of master data. Business insights: Today, data is everywhere and is the source for a multitude of business insights. Flawed master data can be fatal for an organisation that wants to build a data-driven decision-making culture. Data privacy: There is growing emphasis on data privacy from governments and law enforcers. Leakage of data or dissemination of inaccurate data could lead to unfortunate consequences for organisations. Master data in particular contains immense amounts of personal information like mobile numbers and emails. Proper encryption and secure storage and transfer of master data is a prerequisite which can be achieved only by identifying responsibility. The Multi-Trillion Dollar Cost of Defective Data (Empirical Studies) It is evident that in today’s increasingly data-driven world, the importance of master data and its management is paramount. Organisations that ignore this fact are destined to do so at their own peril. IBM 2016 Report: Estimates that approximately $ 3.1 trillion is the yearly cost of poor quality of data to the US economy, of which a significant element is master data. A stunning figure indeed. McKinsey & Company Survey (June 26, 2020): In “Designing Data Governance that Delivers Value” (by Brian Petzold et al, McKinsey Digital), it is revealed that on an average, employees spend approximately 30% of their time in non-value-added tasks due to lack of data quality and availability. In firms that have implemented effective data governance, it drops to between 5% and 10%, which is a sizable saving. 5. Emerging Trends & Next-Generation Master Data Architecture Master Data Management initially focussed on governance to ensure data quality and consistency. This primarily took the form of rules and policies that were enforced through a governing team. Definitions, workflows and roles and responsibilities were created to build a framework for clean and accurate data. However, these frameworks tend to be static and able to cope only with one-dimensional text data that resides in individual silos within on-premise systems. The changing business trends especially due to the impact of Covid require master data management to transform itself to take them head-on. There is an increasing dependence on contact-free business and omni-channel sales. These have fuelled hyper-personalisation so that the customer is able to replicate the physical buying experience online. Other established trends are remote work and the Internet of Things (IoT). Master data management has to shape up by adopting a flexible and customisable structure that is truly multi-domain. This would mean that different masters like employees, vendors, customers and materials are able to make connections and not end up in silos. This will drive innovative actions and enable quick decision-making. The proliferation of unstructured data is another challenge in today’s world. Social media, voice and video calls etc. play a key role in profiling customers, vendors and other subject matter of master data. The system needs to be flexible enough to accommodate not just text data but unstructured data as well to be truly comprehensive. 6. Cloud Migration, Cloud-Native MDM & Machine Learning A trend that cannot be ignored is the shift to the cloud. This brings with it a host of new challenges and a cloud-native MDM platform would become a necessity quite soon to cope with them. Some of the typical issues that organisations moving to the cloud face with their master data are: Data Privacy and Security With increasing digitalisation, identity and personal information including biometrics are being stored on virtual machines. This greatly increases the risk of data theft and leaks. Organisations can be crippled, both financially and reputationally, for inadvertently allowing breach of personal information. Therefore, it is essential that the cloud service provider is not only reputed but is contractually bound to comply with the increasing regulations in this area for example, the EU’s General Data Protection Regulation (GDPR) and other similar statutes. Multiple Data Types In the past, data necessarily meant text or numerical information systematically placed in a record form with labels and names for each field. Today, data could take any form over the cloud. Images e.g., scanned photos or documents, biometric information like fingerprints and iris scans, confidential medical records etc. Storing these disparate forms of data securely and retrieving them speedily is a challenge that organisations are learning to deal with in the world of virtual infrastructure. Remote Working & Metadata With the trend of remote working getting accelerated, there is an increasing use of mobile devices where the lines between personal and work-related data are increasingly blurred. This results in increased vulnerabilities that need to be managed. Use of security features like traffic monitoring, incident management tools etc. help to prevent, detect and mitigate the possibilities and consequences of a data breach. The growing importance of metadata, or the data that gives information about other data, cannot be ignored in this context. Software-as-a-Service (SaaS) Risks Coupled with the shift to cloud, organisations are freeing themselves from the burden of owning, maintaining and upgrading expensive software licenses. The trend towards using “Software-as-a-Service” brings with it the concomitant risk of the service provider’s environment. It is essential that the application software complies with stringent security requirements that safeguard confidential master data and the provider is held contractually liable for breaches. Benefits of Leveraging a Cloud-Based MDM Tool A sensible approach to the risk of managing master data on the cloud is to leverage the power of an MDM solution that is itself based on the cloud. Some of the benefits of using a cloud-based MDM tool are: Speed and Scale: Virtual infrastructure can be put up at short notice and the features and capacity scaled up quickly to be in line with growth. This crashes the time required to start realising value from the MDM application unlike on-premise solutions. Enhanced Security: Cloud-based MDM systems come equipped with security features that ensure compliance with the most stringent privacy legislations and are continuously enhanced with advances in technology. The in-house team is freed from the need to continuously monitor for breaches and incidents. Lower Cost: The total cost of ownership would be significantly lower if the sizing is done to optimise the performance. Inherent cloud features like “Pay-as-You-Go” enable reduced initial investment and spend in line with value realised. Machine Learning (ML) De-duplication: Machine learning is another major development that can be leveraged better on the cloud to ensure accurate master data with reduced governance. A typical area where machine learning enhances master data management is in identifying suspect duplicate master records. While traditional systems will identify exact duplicate records, with ML one can use supervised ML techniques to identify potential duplicate records using pre-defined rules. Thus, ML can enable the MDM system to take some decisions which would require human intervention in a traditional system. 7. The Future of Master Data: Ecosystems, Identity & Blockchain So, will master data remain just a housekeeping requirement for organisations to enable their internal processes or will it evolve into a “single source of truth” not just for individual organisations but an entire end-to-end supply chain ecosystem? The start has already been made, organisations today can seamlessly interact on platforms that leverage common and publicly available information like a company’s CIN number or an individual’s national id or mobile number to obtain valuable information that enables informed decision making. Consumers of goods and services get a constant feed of information based on their past behaviours and interests. Individuals are being assigned “unique” master records across systems that use IP addresses and “cookies” to track online and offline activity like physical movement on Maps across multiple networks. “As technologies like block-chain get more robust, the time is not far when supply chains will be connected using unique, secure master data available in the public domain and transactions executed and validated in real-time without intermediaries.” Master data, in new and diverse forms is taking on a pivotal position in the data strategy of any business. It is time for organisations to think of its management as not just a necessary activity but a powerful source of competitive advantage.

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 92–97 (Journal pp. 1396–1401) TECHNOLOGY Blockchain Accounting: Applications and Implications CA. Anima Chordia & Prof. Shurveer S. Bhanawat Chartered Accountant & Academic Scholar / Professor Emails: animac4@gmail.com • shurveer@gmail.com • eboard@icai.in Blockchain is the technological talk of the decade and being termed as the technological revolution after the internet by the experts. We often hear this term in relation to cryptocurrencies. However, the world of blockchain is far beyond cryptocurrencies and now spreading its wings in changing almost every field. It is expected to be a transformation and would impact various industries like supply chain, health, education, logistics, food, banking, insurance, automobile, and many more. However, it is being said that blockchain is going to be the biggest disruptor in the area of traditional accounting practices. This paper aims to give insights about the concept of blockchain technology, understand the application of blockchain in the area of accounting, its advantages and challenges, information about early adopters of blockchain accounting, and the concept of triple entry accounting. Finally, we discuss the potential of including blockchain accounting as a part of academic education curriculum. Read on… Technical Definition & Foundational Mechanics of Blockchain A Blockchain is a decentralised, distributed and digital public ledger used to record transactions across many computers (participants known as nodes) in an immutable and non-amendable manner such that no record once added can be altered or deleted. As stated in (Dutta, 2020), if a transaction needs to be removed for any legitimate reasons, a new transaction has to be recorded which reverses the previous transaction. Any verified transaction recorded on one computer/ledger is subsequently recorded on all other copies of the ledger across all participant nodes simultaneously. A transaction is requested by any user on the network, leading to the creation of a block. This block is broadcast to all nodes across the network, validated through consensus mechanisms, added to the permanent chain, and updated synchronously on every participant’s ledger via direct peer-to-peer (P2P) communication. Blockchain possesses the capability to record an infinite number of transactions, with records strictly confined to participants within the ecosystem. Figure 1: Transaction Lifecycle over Blockchain (Euromoney Learning Framework) Step 1: Request Transaction initiated and authenticated by party. Step 2: Block Creation Block representing digital transaction is generated. Step 3: Broadcast Block sent to every participant node in network. Step 4: Validation Nodes validate via Proof of Work (PoW) rewards. Step 5: Chain Append Block appended to chain; distributed ledger updated. Pioneering Enterprise Adopters of Blockchain Accounting Several forward-thinking multinational institutions and software initiatives have launched practical applications demonstrating the viability of blockchain accounting: IBM Secure Cloud Blockchain Enterprise supply chain platform enabling corporations to track high-value physical assets and inventory movements with immutable provenance. Ethereum Foundation (Balanc3) Pioneering software platform engineered exclusively for triple entry accounting, smart contract invoicing, and automated digital ledger reconciliation. Tierion Cloud Receipts Blockchain-anchored cloud service enabling organizations to issue immutable, cryptographically timestamped digital receipts and audit logs (Sarkar, 2018). Factom Notary Architecture Utilizes notary chains to provide proof-of-existence and proof-of-process verification layers for corporate recordkeeping (Karajovic, Kim, & Laskowski, 2017). Lukka Tax & Verady Specialized digital asset accounting and tax software proving enterprise durability and institutional reporting readiness (Kunselman, 2021). Big Four Accounting Firms PwC, EY, Deloitte, and KPMG regularly deploy research and proprietary platforms to automate audit procedures and enhance assurance quality. Core Applications of Blockchain in Accounting Blockchain alters traditional accounting techniques for invoicing, recordkeeping, documentation, and reconciliation. It mechanises physically performed tasks and assignments, simplifying book-keeping and establishing quick, non-amendable records (ICAI, 2018). “Blockchain is a foundational change in how financial transactions are recorded, maintained, and updated. In blockchain, records are shared with all the users on the network rather than having a single owner like in traditional recordkeeping. A single identical and agreed-upon version of the truth propagates to all users as part of a permanent record which highlights the decentralised and distributed feature of blockchain which is also immutable” — ICAEW (2018). Blockchain creates a shared junction of permanent accounting records rather than disconnected, proprietary ledgers. Transactions are shared and cryptographically sealed, making post-facto concealment or fraudulent destruction of records practically impossible (ICAI, 2018). By eliminating the time-consuming and expensive reconciliation of disparate accounting registers, accountants gain substantial operational capacity to pivot toward financial planning, valuation, and capital allocation (Pugna & Dutescu, 2020). Triple Entry Accounting: Deconstructing the Paradigm Shift Blockchain technology integrates accounting and underlying business operations through Triple Entry Accounting. Instead of maintaining two separate proprietary books (double entry), triple entry maintains three ledgers: one by the seller, one by the buyer, and a third public, cryptographically authorized ledger that represents undeniable, shared evidence of the transaction (Pascal A. Bizzaro, 2019). Dimension Current Double Entry Practices Potential Blockchain Triple Entry Practices Ledger Architecture Separate, isolated ledgers maintained independently by buyer and seller. Shared distributed ledger acting as an immutable public receipt between trading entities. Reconciliation Periodic, labour-intensive matching of bank statements, supplier accounts, and receivables. Continuous, automated reconciliation cryptographically authenticated at transaction inception. Audit Methodology Post-mortem periodic sampling conducted months after the fiscal period closes. Continuous real-time audit where auditors access an unalterable read-only auditor node. Fraud Resistance Vulnerable to unilateral ledger manipulation, backdated entries, and fictitious billing. Cryptographically sealed via digital signatures and hash pointers, eliminating backdating. Figure 3 & 4: Payment Transaction Mechanics (Alice & Bob Case Study) In Cai’s (2019) seminal model, traditional payment requires checks and bilateral reconciliations between Alice and Bob. In Triple Entry Accounting: Alice’s Cash Account: Credit $100 (Outflow) Validated by Alice’s Digital Private Key Signature. Bob’s Cash Account: Debit $100 (Inflow) Validated by Bob’s Digital Private Key Signature. Public Ledger (The 3rd Entry): Digital receipt recording Alice -$100 and Bob +$100, verified by network consensus and accessible directly to independent auditors. Five Defining Features of Triple Entry Accounting (Febrero, 2018; Vijai et al., 2019): Tamper-Proof Record: Distributed immutability prevents alteration or deletion. Permissioned Distributed Ledger: Enterprise-grade access control ensuring confidential corporate operations. Double Entry + Cryptography: Traditional debits and credits augmented with asymmetric cryptographic keys. Validated, Secure & Private: Transaction validation occurs without exposing proprietary strategic data. Digitally Signed Receipts: Time-stamped cryptographic receipts serving as irrefragable legal evidence. Figure 5: Accounting Information System (AIS) Based on the BC-IoT Model (Wu, Xiong, & Li, 2017) The BC-IoT model illustrates how physical economic events (purchasing intentions, delivery confirmations via IoT sensors) trigger automated smart contracts. The smart contract validates conditions, creates a timestamped block in the economic event ledger, automatically generates accounting event entries (Accounts Payable / Accounts Receivable), and compiles real-time general financial reports, historical cost schedules, and individualized management accounting reports without human intervention. Implications of Blockchain in Accounting: Exhaustive Analysis Nine Strategic Advantages Error Reduction: Exponential increase in available, validated accounting information with drastic error reduction. Role Elevation: Accountants pivot from clerical bookkeeping toward smart contract verification and document validation. Real-Time Access: Instantaneous visibility into enterprise financial health and liquidity positions. Resource Reallocation: Freeing manpower for high-margin strategic advisory, mergers, and corporate planning. Continuous Reporting: Elimination of month-end closing lags through real-time ledger compilation. Reduced Follow-up Costs: Automated workflows drastically lower transactional chase-up and dispute overhead. System Advisory Roles: Accountants position themselves as trusted advisers guiding enterprise blockchain architecture. Substantial Audit Cost Savings: Audit time and fees decline considerably as core financial records are verified algorithmically. Tax Fraud Mitigation: Inherent transparency curtails fictitious invoicing, circular trading, and tax evasion. Nine Operational Challenges Confidentiality Vulnerability: Recording massive transaction volumes poses acute risks to proprietary corporate data. Managerial Judgment Persistence: Complex accounting estimates (impairment, fair valuation, useful lives) cannot be automated by code. Professional Inertia: Conventional accountants risk obsolescence by failing to lead blockchain solution design. Infrastructure & Security Deficits: High capital expenditure requirements for IT infrastructure and cybersecurity. Regulatory Rigidity: Smart contracts require high architectural flexibility to absorb rapid real-time statutory amendments. Nascent Enterprise Maturity: Enterprise blockchain platforms remain in early stages with limited real-world production testing. Inability to Prevent Physical Theft: Blockchain cannot prevent physical misappropriation of assets, mathematical calculation mistakes, or biased estimates. Accounting Verification Limits: Cryptographic authentication confirms data transfer, but cannot independently verify substantive payment economic rationale. Skill Gaps: Severe deficit in multidisciplinary accounting professionals combining book knowledge with technical prowess. Reforming the Academic Accounting Curriculum Educational institutions must adapt to maintain trust, efficiency, and relevance in the information era (Kaur & Oswal, 2020). Triple entry accounting has the potential to fundamentally alter accounting education and replace outdated textbook formulas (Samaduzzaman, 2020). From Routine Bookkeepers to Analytical Professionals For centuries, accounting curricula have taught double entry bookkeeping exclusively. However, future Chartered Accountants and auditors will examine transactions recorded on distributed networks. If students are not trained in triple entry accounting, smart contract auditing, and consensus protocols, they will be incapable of conducting statutory audits of modern enterprises. Universities and professional bodies should introduce specialized diploma courses, undergraduate/postgraduate practical labs, workshops, and webinars focused on blockchain accounting, forecasting, resource planning, and IT governance. Conclusion: The Transformational Horizon Blockchain is an opportunity rather than a disruptor to accounting and audit services. While realism is essential—as Pascal A. Bizzaro (2019) astutely observes, benefits are often oversold while implementation costs and hurdles are undersold—the long-term trajectory is undeniable. Blockchain will not eliminate accountants; it will eliminate mechanical drudgery, elevating professionals into critical thinkers and strategic facilitators (Kunselman, 2021). “This technology opens up new opportunities. Accountants and auditors’ skills will need to expand to include an understanding of principle features, functions, and implications of blockchain technology. But sadly, some auditors and accountants who fail to understand and adopt this technology may lose his/her career” — Samaduzzaman (2020). Scholarly References & Literature Citations Euromoney Learning (2020 / 2021): How transactions get into the blockchain. Available at: https://www.euromoney.com/learning/blockchain-explained/how-transactions-get-into-the-blockchain ACCA (2020): Blockchain features and implications for accountancy. Available at: https://www.accaglobal.com/pk/en/student/sa/features/blockchain.html ALSaqa, Z. H., Hussein, A. I., & Mahmood, S. M. (2019): The Impact of Blockchain on Accounting Information Systems. Journal of Information Technology Management, 63–80. Bizzaro, P. A., Garcia, A., & Moore, Z. (2019): Blockchain Explained and Implications for Accountancy. ISACA Journal, Vol. 1, 1–10. Cai, C. W. (2019): Triple-Entry Accounting with Blockchain: How Far Have We Come? Accounting and Finance. HighRadius Corporation (n.d.): How blockchain fills the gaps in A/R processes. Blockchain: A Game-Changer in Accounts Receivable. Coyne, J. G., & McMickle, P. (2017): Can Blockchains Serve an Accounting Purpose? Journal of Emerging Technologies in Accounting. Dutta, T. (2020): Blockchain fundamentals, immutability and transactional reversal principles. Karajovic, M., Kim, H. M., & Laskowski, M. (2017): Thinking Outside the Block: Factom and Proof-of-Process Layers. Kaur, S., & Oswal, N. (2020): Technology and Education Revolution in Accounting. Kunselman, J. (2021): Blockchain in Accounting: Transforming Financial Records. Pascal A. Bizzaro (2019): The Economics of Blockchain in Professional Accountancy. Potekhina, A., & Riumkin, I. (2017): Blockchain and the Future of Audit and Verification. Pugna, I. B., & Dutescu, A. (2020): Blockchain Technology Applications in Accounting. Samaduzzaman, M. (2020): Triple-entry accounting and educational curriculum reform. Wang, Y. (2017): Designing Privacy-Preserving Blockchain-Based Accounting Information Systems. Wang, Y., & Kogan, A. (2018): Designing Confidentiality in Enterprise Distributed Ledgers. Wu, H., Xiong, K., & Li, C. (2017): Application of Internet of Things and Blockchain Technologies to Improve Accounting Information Quality. Authors may be reached at: animac4@gmail.com, shurveer@gmail.com and eboard@icai.in The Chartered Accountant • May 2022

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 99–102 (Journal pp. 1403–1406) GST • INDIRECT TAX LITIGATION & EMPLOYEE BENEFIT RECOVERIES GST liability on employee recovery: Is it the beginning of the end? CA. Karan Rajvir The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at karanrajvir18@gmail.com and eboard@icai.in. 📑 Executive Synopsis & Industry Dilemma With implementation of Goods and Service Tax (“GST”) completing more than four years, it has introduced quite a few new concepts and litigations across industries. One such issue which has been common among all the industries is the applicability of GST on various recoveries made by the business from its employees in lieu of facilities provided in the course of employment. Read on… 1. Introduction: Commercial Dynamics of Perquisite Recoveries Employers often arrange for various facilities such as transportation, canteen, healthcare, insurance etc. for their employees. Such facilities are usually procured by the employer from third party vendors on payment of tax and made available for use by the employees. These facilities which are supposed to be utilised by the employee during the course or furtherance of employment are provided either free of charge, or employer recovers a very nominal amount from his employees towards the said facility. “Employers often arrange for various facilities such as transportation, canteen, healthcare, insurance etc. for their employees. Such facilities are usually procured by the employer from third party vendors on payment of tax and made available for use by the employees.” The cases in which employer recovers nominal amount (or for that matter even full amount), department has often raised issues on taxability of cost recoveries made by the employer from the employees for providing the said facilities. While the matter is yet to have any official conclusion from GST council, Hon’ble High Courts and advance ruling authorities have provided their views which are discussed in this article. 2. Notice Pay Recovery under Service Tax Regime: High Court & Appeal Rulings While there have been many orders for and against the levy of service tax on notice pay recovery, there have been recent decisions post July 2017 where order against levy of service tax on notice recovery has been pronounced: Commissioner (Appeals) Ahmedabad – M/s QX KPO Services Private Limited (29 September 2017) Referred to “education guide” issued by CBEC in June 2012. Para 2.9.3 of the said guide states that “such amounts paid by employer to employee for premature termination of a contract of employment are treatable as amount paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax”. The learned Commissioner was of the view that any payment made by either of the party to the other would not be chargeable to service tax and hence service tax may not be levied on notice pay recovery. Hon’ble Madras High Court – GE T&D India Limited v. Deputy Commissioner of Central Excise, Chennai (7 November 2019) Also referred to above mentioned guide notes. Hon’ble Madras High Court has laid down that the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit and therefore will not attract levy of service tax. CESTAT Allahabad – HCL Learning Limited v. CCE, Noida (25 November 2019) CESTAT Allahabad has passed an order against the levy of service tax on notice pay recovery, aligning with the principle that employer-employee contractual exits do not constitute a taxable service. 3. GST Statutory Framework: Schedule III & CBIC Press Release Taxpayers have often taken recourse of press release dated 10 July 2017 issued by CBIC while arguing against taxability of employee recoveries. The press release clarified that: “It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.” Schedule III to CGST Act, 2017 provides for activities or transactions which shall be treated neither as a supply of goods nor supply of services. Entry 1 of Schedule III covers services by an employee to the employer in the course of or in relation to his employment. 4. Initial Advance Rulings in Favour of Levying GST on Employee Recoveries In light of queries raised by department and lack of complete clarity in the above stated press release, various applicants in different states have sought rulings from Authority of Advance Ruling to get an authoritative ruling. Notable among them are discussed as under: Caltech Polymers Pvt. Ltd., Kerala (AAR Order: 26 March 2018; AAAR Order: 25 September 2018) Engaged in the business of footwear, provides canteen facility to its employees as the same was mandatory under provisions of Factory Act, 1948. Canteen facility is entirely managed by the company. Company recovers cost of the food items from its employees without making any profit. Authority of Advance Ruling (“AAR”) Kerala laid down that the said activity falls within definition of supply provided in section 7 of the CGST Act, 2017 (“the act”) and hence company may be liable to GST on recovery of food expenses from employees. The view was upheld by Appellate Authority of Advance Ruling (“AAAR”), Kerala. Musashi Auto Parts Private Limited (Haryana AAR Order: 4 February 2020) Engaged in the business of manufacturing auto parts. Company under provisions of Factory Act, 1948 provides canteen facility to employees at their factory premises. Company recovers nominal amount from employees as reimbursement of canteen expenses without any commercial objective but to maintain discipline and avoid food wastage. AAR Haryana has laid down that the transaction will be covered under definition of supply provided in section 7 of the Act and will not fall under entry 1 of Schedule III of the act. Hence, Company may be liable to GST on canteen recovery made from employees. M/s Beumer India Private Ltd (Haryana AAR Order: 29 October 2020) Similarly, AAR Haryana in case of M/s Beumer India Private Ltd has laid down that the transport facilities provided by employer to employee either free of cost or upon collection of a nominal amount, would be a taxable service under GST and for valuation of such services, provision under Section 15 shall be applicable. 5. Recent Advance Rulings Against Levy of GST on Employee Recoveries While the above advance rulings favoured levy of GST on employee recoveries, recently there have been quite a few rulings in favour of taxpayers i.e., GST liability is not required to be discharged on various employee recoveries: Tata Motors Limited (Maharashtra AAR Order: 25 August 2020) One of the early rulings against payment of GST on transport recovery from employees. AAR Maharashtra laid down that GST is not applicable on nominal amount recovered by applicant from employees for usage of employee bus transportation facility in non air-conditioned bus. The authority is of the view that transport services provided by employee will be covered under entry 1 of Schedule III of the act and accordingly GST is not applicable on nominal amount recovered from employees. Amneal Pharmaceuticals (Gujarat AAAR Order: 8 March 2021) Pronounced order against levy of GST on canteen recovery. The Company has appointed a caterer who provides food to the employees of the company. Partial cost of caterer was borne by the company and partial amount was borne by employees. However, the partial amount borne by employees was paid to the Company who in-turn paid the same to caterer without any profit. The Company had argued that it is collecting the portion of employee cost from salary and paying to third party i.e., canteen service provider. In the view of AAAR and Company, this is nothing but a facility provided to employees without making any profit. Company is working as mediator between employees and contractor / canteen service provider, therefore no Goods and Services Tax would be payable by employees to company on the subsidised value of food. Multi-Perquisite Non-Levy Decisions: Bharat Oman & Emcure Pharmaceuticals In the above two rulings, only one type of employee recovery has been discussed. However, in the case of M/s Bharat Oman Refineries Limited and M/s Emcure Pharmaceuticals Limited, multiple type of employee recoveries were discussed and ruling against levy of GST has been passed. Order for non-levy of GST against below mentioned recoveries has been passed: M/s Bharat Oman Refineries Limited(Madhya Pradesh AAAR order dated 8-Nov-2021) M/s Emcure Pharmaceuticals Limited(Maharashtra AAR order dated 4-Jan-2022) ✓ Notice pay recovery ✓ Insurance recovery ✓ Canteen recovery ✓ Telephone charges recovery ✓ Canteen recovery ✓ Transport recovery ✓ Notice pay recovery In both the orders, reliance has been placed on order of Hon’ble Madras High Court in case of GE T&D India Limited v. Deputy Commissioner of Central Excise, Chennai while allowing non-levy of GST on notice pay recovery. 6. Chronological Ruling Timeline & Questions of Fact and Law The above advance rulings can be plotted on the chronological timeline illustrating the decisive jurisprudential transition: Chronological Trajectory of Advance Rulings (2018–2022) Orders in Favour of Levying GST (Pro-Revenue Phase) March 2018 Caltech Polymers Pvt. Ltd. (Kerala AAR/AAAR) February 2020 Musashi Auto Parts Private Limited (Haryana AAR) October 2020 Beumer India Private Ltd (Haryana AAR) Orders Against Levying GST (Pro-Taxpayer Phase) August 2020 Tata Motors Limited (Maharashtra AAR) March 2021 Amneal Pharmaceuticals (Gujarat AAAR) November 2021 Bharat Oman Refineries (Madhya Pradesh AAAR) January 2022 Emcure Pharmaceuticals (Maharashtra AAR) “GST law is comparatively new and is continuously evolving. There have been number of decisions in favour and against payment of GST liability and hence, it may be too early to arrive at any definitive conclusion.” GST law is comparatively new and is continuously evolving. From the above pattern, it can be observed that recently AARs and AAARs are passing order in favour of taxpayers. However, we understand that there have been number of decisions in favour and against payment of GST liability and hence, it may be too early to arrive at any definitive conclusion. While passing the orders, the authorities have analysed various question of facts and laws which are summarised as under: Question of Facts Analysed by Authorities Whether taxpayer is earning any profit while making recovery from employee? What are the conditions stipulated in contract between taxpayer and third-party service provider? Whether taxpayer has documented employee recoveries in employment letter issued to its employees? Whether taxpayer is merely acting as agent while collecting amount on behalf of third-party service provider from employees. Question of Law Analysed by Authorities Whether amount collected from employees fall within definition of “Consideration” as defined in section 2(31) of CGST Act, 2017? Whether transaction between employer and employee falls within scope of “Supply” defined in section 7 of CGST Act, 2017? Whether transaction can fall under entry 1 of Schedule III to CGST Act, 2017 and thereby consider the activity neither as supply of goods neither as supply of services. While passing orders in favour of taxpayers, Hon’ble AAR and AAAR have either considered that employee recoveries do not fall within the scope of “Supply” or fall within ambit of entry 1 of Schedule III to CGST Act, 2017, depending upon facts of the case. 7. Conclusion & Key Industry Takeaways • Apex Court Adjudication Pending: While recent advance rulings have been good news for the taxpayers, the matter is yet to be confirmed by the Apex court. • Third-Party vs Self-Managed Canteen Distinction: In case of canteen recovery, all the above-mentioned favourable rulings have been passed in case where appellant has appointed a third-party service. In cases where appellant themselves maintain and provide canteen facility (as in case of Caltech Polymers Pvt. Ltd.), author is yet to come across order in favour of taxpayer. • Notice Pay Precedent: In case of notice pay recovery, order passed by Hon’ble Madras High Court in case of GE T&D India Limited v. Deputy Commissioner of Central Excise, Chennai under service tax regime may be considered crucial for the taxpayers. • Urgent Need for CBIC / GST Council Clarification: Since it may not be possible for all the taxpayers to file advance rulings, CBIC or GST council may provide much needed clarity on the matter to avoid unnecessary litigations on the issue that concerns taxpayers across various industries. PS: There are various other judicial pronouncements / advance rulings related to aforesaid matter. Author has tried to cover key rulings of recent time in the article. All the details mentioned in article are for information only and may not be considered as tax advisory.

The Chartered Accountant • Journal of ICAI May 2022 • Vol. 70 • No. 11 • pp. 103–109 (Journal pp. 1407–1413) CORPORATE SOCIAL RESPONSIBILITY Evaluation of Corporate Social Responsibility Performance and Approach of Some Select Indian Firms Sumit Kumar Dutta & Radhagobinda Basak Researchers & Academic Scholars in Accounting and CSR Policy Emails: sumitdutta654@gmail.com • rgbasak85@gmail.com • eboard@icai.in The present study endeavours to evaluate the corporate social responsibility performance and approach of a few leading firms belonging to the oil drilling and exploration industry in India. For measuring CSR performance, two parameters based on CSR expenditure of the firms have been used. For finding out the focus areas of CSR practice, the CSR activities of the companies have been categorised under some major expenditure heads. Some parametric and non-parametric tests like ANOVA, Kruskal-Wallis, Mann-Whitney, etc. have been performed to analyse the data. Majority of the sample companies were found to be unable to spend their budgeted amount on CSR. Significant difference was also followed among the companies in respect of their CSR performance. While implementing their CSR projects, the companies did not focus much on the environment sector which is in contrary to the expectation from the companies in the chosen industry. Read on… Introduction: The Statutory CSR Mandate in India Following the enforcement of the Companies (Corporate Social Responsibility Policy) Rules, 2014, effective from 1st April 2014 under Section 135 of the Companies Act, 2013, qualifying Indian companies were placed under legal compulsion to spend at least 2% of their average net profits earned during the three immediately preceding financial years on specified CSR initiatives. The rules also prescribed designated thematic activities eligible for CSR expenditure under Schedule VII of the Act, alongside standardized annual reporting disclosure formats. While prior academic literature has examined CSR compliance trends (Singh & Verma, 2014; Shyam, 2016; Sai, 2017), substantial gaps remain regarding sector-specific capital deployment in environmentally intensive industries. This study bridges that gap by investigating the extractive oil drilling and exploration industry in India. Objectives, Sample Selection & Empirical Methodology The primary objectives of this empirical investigation are twofold: To analyse the CSR performance of sample companies with respect to selected expenditure metrics; and To identify and evaluate the specific focus areas of the sample companies in implementing their CSR portfolios. Sample & Horizon: The study evaluates secondary financial data from annual reports across a six-year period from 2014-15 to 2019-20. Five market-leading public and private entities were selected on the basis of market capitalization on the Bombay Stock Exchange (BSE): OIL: Oil India Limited ONGC: Oil and Natural Gas Corporation Limited GAIL: GAIL (India) Limited IGL: Indraprastha Gas Limited Petronet: Petronet LNG Limited The Extractive Industry Paradox The oil drilling and exploration sector is an extractive industry that heavily exploits, depletes, and disrupts natural environmental resources. Societal stakeholders and regulatory frameworks naturally expect these firms to prioritize environmental restoration, eco-conservation, and green sustainability within their Schedule VII CSR allocations. Analytical Parameters: Two quantitative parameters evaluate CSR spending: Parameter 1: Percentage of actual CSR expenditure on budgeted CSR expenditure (budget utilization). Parameter 2: Percentage of actual CSR expenditure on Profit After Tax (PAT). Content analysis categorized company CSR initiatives into seven major expenditure heads: Health & Hygiene, Education & Skill Development, Community & Rural Development, Women Empowerment & Gender Equality, Environment, Other Schedule VII Expenses, and Administrative Capacity Building. Parameter 1: Actual CSR Spending vs. Budgeted Obligation Table 1 ranks the sample companies based on their aggregate percentage of actual CSR expenditure against the mandatory budgeted amount across 2014-15 to 2019-20. Company Percentage during Study Period (2014-15 to 2019-20) Empirical Ranking Oil India Limited (OIL) 159.04% Rank I GAIL (India) Limited 118.47% Rank II ONGC 95.08% Rank III Petronet LNG 71.77% Rank IV Indraprastha Gas Limited (IGL) 68.72% Rank V Source: Authors’ computation from annual reports. Table 2: Normality & Homogeneity Tests for Parameter 1 Company Kolmogorov-Smirnov Shapiro-Wilk Levene’s Homogeneity Statistic Sig. Statistic Sig. Statistic Sig. OIL.207.200.913.4582.8190.050 ONGC.191.200.937.638 GAIL.260.200.887.305 IGL.219.200.944.690 Petronet.323.050.745.018 Table 3: One-Way ANOVA Results for Parameter 1 Source of Variation Sum of Squares df Mean Square F-Statistic Sig. (p-value) Between Groups70388.418417597.10414.792.000 Within Groups29740.747251189.630 Total100129.16529— Table 4: Bonferroni Post Hoc Pairwise Comparisons Company (I) Company (J) Mean Difference (I - J) Sig. (p-value) Statistical Inferences OILONGC71.25333.015Statistically Significant GAIL45.17333.322Not Significant IGL106.02500.000Statistically Significant (p < .001) Petronet140.34500.000Statistically Significant (p < .001) ONGCGAIL26.080001.000Not Significant IGL34.77167.931Not Significant Petronet69.09167.019Statistically Significant GAILIGL60.85167.053Marginal / Not Significant Petronet95.17167.001Statistically Significant IGLPetronet34.32000.972Not Significant Parameter 2: Actual CSR Expenditure as a Percentage of Profit After Tax (PAT) Table 5 reflects the actual percentage of CSR spend relative to annual corporate PAT over the 6-year period. Company CSR Spend as % of PAT (2014-15 to 2019-20) Empirical Ranking Oil India Limited (OIL)4.87%Rank I ONGC2.83%Rank II GAIL (India) Limited2.16%Rank III Indraprastha Gas Limited (IGL)1.45%Rank IV Petronet LNG1.42%Rank V Table 6: Normality & Homogeneity Tests for Parameter 2 Company Kolmogorov-Smirnov Shapiro-Wilk Levene’s Homogeneity Statistic Sig. Statistic Sig. Statistic Sig. OIL.230.200.915.4690.7500.567 ONGC (Non-Normal).337.032.760.025 GAIL.267.200.859.186 IGL.264.200.867.214 Petronet (Non-Normal).440.001.574.000 Table 7: Kruskal-Wallis Test on % of PAT Oil India Limited (OIL)Mean Rank: 26.17 ONGCMean Rank: 19.50 GAILMean Rank: 15.83 IGLMean Rank: 8.67 Petronet LNGMean Rank: 7.33 Chi-Square: 18.839Asymp. Sig.: .001 Table 8: Pair-Wise Mann-Whitney U Test (OIL vs. Others) OIL vs. ONGCMean: (9.17, 3.83)U=2.000 (p=.010) OIL vs. GAILMean: (8.83, 4.17)U=4.000 (p=.025) OIL vs. IGLMean: (9.50, 3.50)U=0.000 (p=.004) OIL vs. PetronetMean: (9.17, 3.83)U=2.000 (p=.010) Every pairwise test is asymptotically significant (p < .05), confirming OIL’s unchallengeable supremacy in PAT commitment. Focus Areas Analysis: The Paradox of Environmental Neglect Table 9 groups total CSR expenditures across all five firms over 2014-15 to 2019-20 into seven functional categories: Focus Area (Schedule VII Head) Percentage of Total CSR Spend Overall Ranking Other Schedule VII Expenses (Disaster Relief, Armed Forces, Heritage)28.51%Rank I Education & Skill Development (Top Individual Head)25.93%Rank II Health & Hygiene (Sanitation, Healthcare)18.80%Rank III Community & Rural Development15.52%Rank IV Environment (Flora/Fauna, Ecological Balance, Agroforestry)6.54%Rank V Women Empowerment & Gender Equality3.30%Rank VI Capacity Building1.40%Rank VII Statistical Validation Across Heads (Tables 10 & 11) Levene’s test across the seven heads yielded Statistic = 5.152, Sig = 0.001, proving severe heterogeneity of variance and mandating the non-parametric Kruskal-Wallis test (Table 11). Education: Mean Rank 26.40 Other S-VII: Mean Rank 24.20 Health: Mean Rank 24.00 Rural Dev: Mean Rank 21.80 Environment: Mean Rank 15.20 Women Emp: Mean Rank 7.80 Capacity: Mean Rank 6.60 Chi-Square: 19.109 • Asymp. Sig.: .004 (Statistically Significant Disparity) Table 12: Pair-Wise Mann-Whitney U Tests Across Heads Pairwise Focus Comparison Mean Ranks Mann-Whitney U Asymp. Sig. Empirical Conclusion Education vs. Health(6.00, 5.00)10.000.602No Significant Difference Education vs. Rural Development(6.60, 4.40)7.000.251No Significant Difference Education vs. Women Empowerment(7.60, 3.40)2.000.028Statistically Significant Education vs. Environment(7.40, 3.60)3.000.047Statistically Significant (p < .05) Education vs. Other Schedule VII(5.80, 5.20)11.000.754No Significant Difference Health vs. Women Empowerment(7.60, 3.40)2.000.028Statistically Significant “Environment sector was not found to be a focus sector for the companies. The difference between environment sector and the prime focus sector education in attracting CSR expenditure was huge and statistically significant.” Synthesis & Conclusion: Policy Implications The empirical findings paint an unsatisfactory picture of CSR compliance within India’s oil drilling and exploration sector: Absence of Parity: Despite a uniform statutory obligation under Section 135 to spend 2% of profits, there is severe, statistically significant disparity in CSR spending patterns across firms. Chronic Under-spending: Three out of the five sample entities (ONGC, Petronet LNG, and IGL) failed to meet 100% of their budgeted CSR obligations across the six-year observation window. Extremes of Performance: Oil India Limited (OIL) emerged as the undisputed benchmark, spending 159.04% of budget and 4.87% of PAT, whereas Petronet LNG lagged severely at 71.77% of budget and 1.42% of PAT. Environmental Blindspot: Despite depleting and extracting fossil fuels, environmental projects received a meager 6.54% of total CSR funds, representing a statistically significant neglect compared to education (25.93%) and health (18.80%). These findings highlight the urgent necessity for regulatory oversight to ensure that companies operating in environmentally intrusive industries actively replenish the natural capital they consume. References & Empirical Sources Journal Articles: Shyam, R. (2016): An analysis of corporate social responsibility in India. International Journal of Research – Granthaalayah, Vol. 4, No. 5, pp. 56–64. Arevalo, J. A., & Aravind, D. (2011): Corporate social responsibility practices in India: approach, drivers, and barriers. Corporate Governance International Journal of Business in Society, Vol. 11, No. 4, pp. 399–414. Das, C. D. (2013): Corporate Social Reporting and Human Resource Disclosures: Experiences from Insurance Companies in India. Social Responsibility Journal, Vol. 9, No. 1, pp. 19–32. Hodges, N., & Gupta, M. (2012): Corporate Social Responsibility in the Apparel Industry. Journal of Fashion Marketing and Management, Vol. 16, No. 2, pp. 216–233. Kumar, N. (2014): Corporate Social Responsibility: An Analysis of Impact and Challenges in India. Abhinav International Monthly Refereed Journal of Research in Management & Technology, Vol. 3, No. 5. Narwal, M. (2007): CSR Initiatives of Indian Banking Industry. Social Responsibility Journal, Vol. 3, No. 4, pp. 49–60. Gautam, R., & Singh, A. (2010): Corporate Social Responsibility Practices in India: A Study of Top 500 Companies. Global Business and Management Research: An International Journal, Vol. 2, No. 1, pp. 41–56. Sai, P. V. S. (2017): A comparative study of CSR practice in India before and after 2013. Asian Journal of Management Research, Vol. 7, No. 3. Verma, P., & Singh, A. (2014): CSR@2%: A New Model of Corporate Social Responsibility in India. International Journal of Academic Research in Business and Social Sciences, Vol. 4, No. 10. Srivastava, A. K., Negi, G., Mishra, V., & Pandey, S. (2012): Corporate Social Responsibility: A Case Study of TATA Group. IOSR Journal of Business and Management, Vol. 3, No. 5, pp. 17–27. Corporate & Regulatory Data Sources: BSE Oil Drilling & Exploration Market Capitalisation Database: https://www.moneycontrol.com Oil India Limited Annual Reports & Financial Disclosures: https://www.oil-india.com GAIL (India) Limited Corporate Disclosures: http://gailonline.com Oil and Natural Gas Corporation (ONGC) Reports: https://www.ongcindia.com Petronet LNG Limited CSR Disclosures: https://www.petronetlng.com Indraprastha Gas Limited Annual Reports: https://iglonline.net Ministry of Corporate Affairs (MCA) CSR FAQ Guidance: http://www.mca.gov.in Authors may be reached at: sumitdutta654@gmail.com, rgbasak85@gmail.com and eboard@icai.in The Chartered Accountant • May 2022

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 23–28 (Journal pp. 1195–1200) THEME • NEXT GENERATION ACCOUNTING FIRMS & DIGITAL DISRUPTION The Future of Accounting: Emerging need to build the next generation accounting firms CA. K. Raghu The author is past President, ICAI and former Board Member, International Federation of Accountants. He can be reached at eboard@icai.in. 🌐 Strategic Overview & Technological Disruption The Digital Revolution sweeping across the globe has transformed the accounting sector and we have seen disruptions in the way accounting information is captured, stored and retrieved online by using emerging technologies. The accounting profession has moved beyond mere book-keeping and payroll and is currently playing an important role in helping organisations to take strategic business decisions by moving to Cloud technologies, Process Automation and Advanced Analytics. Read on… 1. The New Generation Accounting Firm The traditional accounting firms in India have been focussing on providing Audit and Assurance services, consultation on Direct and Indirect Taxes, Compliance related services and other Business Consulting services to clients since many decades. Our profession is moving into an era of specialisation and there is a need for the modern day accountants to up skill constantly by embracing technology and explore new opportunities opening up for the profession. “The new generation CA firms should leverage on emerging technologies and provide world class services by building new delivery systems to clients across the globe.” Traditional accounting firms have to re-invent and build the next generation accounting firms and move forward. The new generation CA firms can offer services in new areas such as Forensic Accounting and Fraud Detection, Valuation, Insolvency and Bankruptcy, Cyber Risk Management, Mergers and Acquisitions, Investment Advisory, Start-up support services and provide a host of Business Advisory Services to clients. The new generation CA firms should leverage on emerging technologies and provide world class services by building new delivery systems to clients across the globe. 2. Implementation Strategy to Build the Next-Gen CA Firm A. Embrace Technology Chartered Accountants need to analyse the size and nature of their organizations to decide the level of investment in technology. For instance, smaller firms having smaller teams require basic VPN and firewall facilities to enable remote working. Applications like Google Meet, Microsoft Teams, WebEx, etc. can be used for holding virtual meetings. “The firms need to invest in Technology and develop go-to-market strategy to enhance clients’ execution of relevant business technology.” However, larger organizations require a larger amount of investment in technology. The firms need to invest in Technology and develop go-to-market strategy to enhance clients’ execution of relevant business technology. The firms should also invest in Drone technology for Stocktaking. B. Engage with IT Companies and Professionals Once the firms tech appetite has been decided, we need to engage IT companies or professionals who can provide their expertise after carefully evaluating the needs of our profession. Professionals need to work closely with Business Process Consultants to create a detailed blue-print and build a suitable digital infrastructure. The firm should develop Data Warehouse Architecture competencies to support clients Business Intelligence. The firms should also continuously work with technology companies to develop AI tools. C. Up-skilling of Partners and Staff The CA’s of today need to equip themselves with such skills and training that would enable them to up-skill themselves to deal with the complexities in today’s business dynamics. Once the digital infrastructure is implemented, the next most important step is to train and up skill the staff with the emerging technologies and this can be achieved by conducting continuous training programs. The most visible impact of the pandemic was the shift from “Work from Office” to “Work from Home”. Remote working and virtual meetings are here to stay, although less intensely. Offices have started working with less than 100% workforce while continuing to practice working remotely. Chartered Accountants need to adopt a hybrid system of working so as to significantly reduce the cost of workspaces. D. Inducting New Partners and Hiring New Staff Once the CA firm decides to offer services in new areas it has to decide on building the new service verticals by inducting young partners who have specialized Knowledge in emerging areas of the profession and hire competent staff who can work with new technologies. E. Building Broader Client Base During the pandemic, there has been a dramatic shift by consumers towards online channels and businesses have succeeded in responding digitally. Businesses have refocused their attention to existing business processes and industries have witnessed a dramatic change in their operations. Professionals need to look at this shift as an opportunity and seek to broaden their client base beyond geographical boundaries. Example: The Start-up ecosystem provides an excellent opportunity for our profession to broaden our client base and work with the Next Generation businesses. F. Pricing of Services & Risk Coverage The new generation CA firms need to consider pricing their services keeping in view their increased infrastructure and HR costs. If the firms are still using an hourly rate model, they need to consider shifting to value-based pricing. Also, as the firms expand their business they have to evaluate their professional indemnity coverage since they have a greater potential liability depending on the services they offer. G. Networking with Other CA Firms “The firm should network with other CA firms around the world and have networking relationships as per ICAI guidelines and this would facilitate the firms to grow fast.” The firm should network with other CA firms around the world and have networking relationships as per ICAI guidelines and this would facilitate the firms to grow fast. The firms can also have informal networking arrangements with other firms and work with them on a collaborative mode in emerging areas. H. Automating the Office by Using an Office Automation Software The new generation firms should automate their office by using a good Office Automation Software to ensure that there is seamless flow of work in the office. The Software should assist in allocation of work to staff, review of work by partners, mapping time spend on each assignment, billing and also Client Relationship Management. 3. New Services Offerings for the Next-Gen CA Firms 1. Business Consulting Services Business Consulting Services includes providing end to end services to clients in various areas such as Mergers and Acquisition, Demergers, Analysis of Financial Statements, Evaluation and testing of Corporate Strategy, Evaluating investment decisions in R&D, Capital Investments, Preparation of Project Reports & Project Expenditure Monitoring Control and Evaluation, Cash Flow Analysis & Working Capital Management, Deal Structuring and Financing including Valuations for the purpose of bidding, Business Set-up Services, Domestic and International Tax Advisory, Transaction Support, Compensation Structuring, Corporate Finance, Investment Planning, Ind AS/ IFRS Advisory, Private Equity and IPO Support services, Financial Modeling and Due-diligence reviews. 2. Valuation Services The demand for Valuation Experts is increasing due to the need for Valuation by enterprises who are keen on raising capital from Foreign Institutional Investors, Venture Capitalists and other investors. These enterprises need to engage Valuation Experts to arrive at the value of the enterprise. Business Valuation requires specialize skills and competence and Chartered Accountants with specialized knowledge of Valuation can provide Valuation services. Under the IFRS regime, enterprises have to recognize their Assets and Liabilities at their fair market values. CA’s with expertise in valuation can assist enterprises in arriving at the fair market values properly. 3. Forensic Audit and Fraud Detection Forensic Accounting is a triage of accounting, auditing and investigative skills. As a forensic accountant, you are a bloodhound and not a passive watchdog; you work with the thought that there is a fraud lurking around the corner. No domain is spared from misconduct, fraudulence and injustice. The complicated nature of modern fraud has driven the growth of forensic accounting. Further, auditors and their firm would be jointly liable for frauds in the books of accounts and many auditors are likely to become forensic accountants in the days to come to avoid being caught on the wrong foot. With the increase in the complexities in the business dynamics there are a lot of loopholes that are being exploited by organizations to their advantage and also other kinds of frauds that are deterrent to the economical growth of the country. There is a huge demand for Chartered Accountants having specialized knowledge in Forensic audit and Fraud Detection. 4. Information Systems Audit (IS Audit) IS Audit is the future of the accounting profession, in the emerging economic scenario; it has risen from a business enabler to business driver as internal controls today are implemented through Information systems. For the IS Auditor, the canvas is broad. It involves assessing risks including, reputational risks, and understanding the impact of data loss (theft, leak). The IS Auditor assists in investigating fraud. He works with the security team and with certified fraud examiners to establish the root cause of these frauds. 5. Insolvency and Bankruptcy Chartered Accountants form a large part of the Insolvency Professionals fraternity. The Code provides for a specialized forum to oversee all insolvency and liquidation proceedings for individuals, SMEs and corporate. Introduction of the Code has led to improvement in recoveries by banks. Balance sheets of banks are being cleansed through higher write-offs, contributing to low GNPA ratios. 6. Cyber Risk Services Chartered Accountants possess professional strengths and qualifications that make them ideal for Cyber Risk Management. Chartered Accountants, as Technology Consultants, can help businessmen in re-aligning their business to the dynamic economic conditions. Chartered Accountants are well-placed to step into the role of proactively guarding the interests of their clients and organizations in an era when rapid technological change is creating ever greater risk. Cyber Risk Services which include Cyber Strategy Management, Cyber Intelligence and Cyber Analytics are gaining ground due to advent of mobile technology, Cloud Computing and Social Media. Chartered Accountants as Technology Consultants are in demand as they can help businessmen in re-aligning their business to the dynamic economic conditions. 7. IFRS Implementation “Increasing complexity of business operations and globalization of capital markets make it mandatory to have a single set of high quality reporting standards. IFRS is a single set of high quality, understandable and enforceable global accounting standards.” Increasing complexity of business operations and globalization of capital markets make it mandatory to have a single set of high quality reporting standards. IFRS is a single set of high quality, understandable and enforceable global accounting standards. Chartered Accountants with the knowledge of IFRS can offer their services in implementing IFRS in various organizations. IFRS specialists are in great demand around the world. 4. Emerging Technologies to Be Embraced by Next-Gen CA Firms I. Block Chain Technology Block Chain is a distributed ledger system that allows each participant (or node) to see clearly where information has come from and gone to - in essence, Block Chain is an innovation in record keeping, a cryptographic chain of proofs. To alter the Block chain without being obvious, anyone wanting to create a false record would supposedly have to modify every subsequent block, which generally requires everyone using the block chain to agree to the fraudulent transaction. Therefore, in a Block chain environment it is extremely difficult to alter data or insert false information. Block Chain alters the conventional techniques for invoicing, reconciliation, documentation, contract preparation and mechanizes the physically performed. Block Chain can streamline financial reporting and audit processes. Chartered Accountants can also assist organizations in help implementing Block chain solutions effectively. With the kind of confidential and important sensitive information that Chartered Accountancy firm deals with it is important that it remains safe and confidential, Block Chain will enable sensitive information from being leaked and causing a serious threat to organizations and save them from financial and reputational embarrassment that they might have to face had the information been leaked. Accounting professionals who understand and can use (and teach others about!) distributed ledger technologies will be in high demand for process development, auditing and records management and more. II. Cloud Accounting “Cloud Computing is gaining acceptance around the world. Mid to large size companies are embracing Cloud based technologies to leverage on lower costs.” Storing accounting data on remote servers will make geography unimportant. Cloud Computing enables you to work seamlessly from multiple locations without huge investments your office, your home, at the airport. It provides flexible, on demand, and dynamically scalable computing infrastructure. Cloud Computing is gaining acceptance around the world. Mid to large size companies are embracing Cloud based technologies to leverage on lower costs. III. Big Data and Analytics Traditional data processing applications are inadequate for Large or Complex Data sets. Challenges like analysis, capture, search, sharing, storage, transfer, visualization, and information privacy could be resolved by use of Big Data Analytics. It provides new opportunities for growth from research and development to sales and marketing. Companies have started using Analytics to reduce costs. Accounting professionals can analyze financial information for effective decision making. IV. Robotic Process Automation (RPA) “RPA imitates human execution of applications. It focuses on automation of repetitive tasks and plays a significant role in bringing in process efficiencies. RPA drives improvements in quality, scalability, and resiliency in a cost effective way.” RPA imitates human execution of applications. It focuses on automation of repetitive tasks and plays a significant role in bringing in process efficiencies. RPA drives improvements in quality, scalability, and resiliency in a cost effective way. There is a huge opportunity for existing finance and accounting functions to optimize their processes through RPA. V. Artificial Intelligence (AI) Accountants, for example, can put their uniquely human skills to work transforming the insights extracted from high-quality data into more effective financial planning and reporting. In an integrated environment, they can collaborate with peers from other business units to leverage financial data to drive innovation, build more resilient and agile supply chains and develop business management plans that promote growth while ensuring continuity. 5. Conclusion: Tomorrow’s Accountant — More Strategic and Creative Than Ever With diverse skill sets and greater technical acumen, accountants can bring their own expertise to teams in other business units, providing crucial financial intelligence, refining budgets or ensuring compliance. As a function, accounting may become less about refining one’s skill set through certifications and more about core competencies that grow over time, with a focus on lifelong education and skill development required to take on a complex, ever-changing business environment. The current generation of CA’s need to adapt to changes happening around the globe and explore new opportunities that looks attractive and exciting. We are in a period of rapid change and in the next few years, the role of many Chartered Accountants will be to keep pace with the gradual digitization of clients and help them navigate technologies, systems and data digitisation. The CA curriculum must offer students an insight into digitisation trends, technological developments and new business models, and value chains as well as new types of risk, transformation processes, etc. affecting accountancy activities. They must learn how to apply new business models (including models based on information technology, business procedures, analytics, risk, strategy, value chain analytics, processors and product development, the blurring of sectoral boundaries, etc. Tomorrow’s Chartered Accountant will spend a greater portion of his or her time giving advice to clients about data infrastructure and analytical setup and accordingly will need new competencies within computer science, computer engineering, etc. Moreover, he will need communicative competencies to be able to translate big data volumes to output like pie charts, heat maps and geo charts that are easily comprehensible for enterprise management. “Lifelong learning is critical to future-proofing the profession - incorporating both technology itself as well as its effective application and implementation. This learning will showcase to the world that we the CA profession is a future ready profession. The way forward for the profession looks exciting.” Official ICAI Notification Announcement for Members and Students Survey for seeking preference for learning foreign language through virtual mode from ICAI Members and Students LAST DATE: 15th April, 2022 Committee for Development of International Trade, Services & WTO (CDITSWTO) of ICAI is taking forward the Action Plan for Champion Sector in which promoting foreign language amongst members and students is one of the mandates by Government of India. With an aim to overcome language barrier and thereby to have enhanced professional opportunities overseas, ICAI, under the aegis of the Committee had initiated online batches of German, French, Spanish, Japanese and Business English Languages for its members and students through German, French, Spanish, Japanese Embassies and British Council and is working to initiate batches for Chinese, Arabic and Dutch languages in next few months based on the demand for said foreign languages. Interested members/students are requested to kindly express their interest for the preferred foreign language which would facilitate ICAI to open up future batches of foreign languages. The expression of interest can be provided by visiting https://www.icai.org/post/survey-learning-foreign-language-through-virtual-mode latest by 15th April 2022. Chairman Committee for Development of International Trade, Services & WTO Email: cditswto@icai.in

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 29–32 (Journal pp. 1201–1204) Theme Article Empowering the Profession: Building Excellence and Strengthening Stakeholder’s Confidence MF CA. Manoj Fadnis Past President, The Institute of Chartered Accountants of India (ICAI) & Past President, Confederation of Asian and Pacific Accountants (CAPA) • Contact: eboard@icai.in Executive Synopsis & The Speed of Acceleration The speed at which changes are occurring all across society is ever accelerating. Unless one adopts these changes at the same pace, redundancy is bound to increase. This principle applies equally to professionals. For an individual professional, continuous learning of technical matters and updating technological skills is inevitable. At the same time, delivering professional services at competitive pricing is essential in the modern commercial world. The Institute of Chartered Accountants of India (ICAI) has been playing a proactive role in empowering the profession and simultaneously strengthening stakeholders’ confidence. 1 Advertisement & Code of Ethics: Evolution from Strict Prohibition to Regulated Empowerment “A man must stand erect, and not be kept erect by others.” — Marcus Aurelius Considering the age-old basic differences between business and profession, the Code of Ethics has always been more rigidly applied to professionals. Advertisements and solicitations have traditionally been looked down upon for a professional. However, the changing dynamics of the social environment and the increasing complexities of trade and commerce required re-thinking on the subject. Statutory Milestones in Professional Advertisement Chartered Accountants (Amendment) Act, 2006 (w.e.f. 17th November 2006): A landmark milestone was achieved when lawmakers inserted a proviso to Clause (7) of Part 1 of the First Schedule to the Chartered Accountants Act, 1949 (which deals with professional misconduct regarding advertisement). Under this proviso, a member in practice may advertise through a write-up setting out the services provided by him or his firm and particulars of his firm, subject to guidelines issued by the Council of the ICAI. Strengthening Service Sector Competitiveness: The importance of advertisement must be appreciated within the broader macroeconomic architecture. Because the service sector contributes a significant share of India’s GDP, the competitiveness of the sector needed strengthening. Consequently, while the law permitted limited, dignified advertisement, the Council simultaneously deleted provisions prohibiting undercutting of fees. Guidelines Evolution (2008 to 2020) & Social Media Integration: The first set of comprehensive advertisement guidelines was issued in 2008 and subsequently revised in 2020. The current guidelines formally recognize the ubiquitous effect and impact of social media, extending pragmatic relaxations to practicing members. The Council maintains vigilant oversight: while practices once prohibited may become essential tomorrow, any practice found to be misleading or detrimental to professional standing is sternly discarded. 2 Multi-Disciplinary Firms (MDFs): Legislative Evolution & Corporate Re-engineering The strategic imperative of multi-disciplinary firms is universally acknowledged. The concept originally took root as part of the Capacity Building Measures adopted by the Council of the ICAI in 2004. However, comprehensive operational guidelines were finalized only in 2021, following extensive legislative and regulatory overhauls across corporate and professional statutes. Statute / Provision Historical Position Modern Liberalized Position Companies Act Framework Section 226(1) of Companies Act, 1956: Mandated that for a firm to be appointed as auditor, all the partners practising in India had to be qualified Chartered Accountants. Section 141(1) of Companies Act, 2013: Provides that a firm whereof a majority of partners practising in India are qualified CAs may be appointed as auditor by its firm name. This statutory shift paved the legal pathway for Multi-Disciplinary Firms. Chartered Accountants Act, 1949 Section 2(2) (Original): A member was deemed to be in practice only when practicing individually or in partnership exclusively with chartered accountants. Multi-disciplinary practice was completely unrecognized. Chartered Accountants (Amendment) Act, 2011 (w.e.f. 01.02.2012): Inserted the phrase “or in partnership with members of such other recognised professions as may be prescribed,” formally authorizing cross-professional partnerships. Regulatory Guidelines Capacity Building concept formulated in 2004, but held in abeyance pending statutory harmonization. Comprehensive MDF Guidelines issued by ICAI in 2021; parallel guidelines from companion statutory professional bodies are under active formulation. Catalysts Driving Multi-Disciplinary Practice in the Corporate Ecosystem Far-reaching developments have reshaped corporate legislation since the turn of the century: Modern Statutory Frameworks: The Competition Act, 2002, the Limited Liability Partnership (LLP) Act, 2008, the Companies Act, 2013, and the Insolvency and Bankruptcy Code (IBC), 2016. Registered Valuers Regime: Institutionalized through Section 247 of the Companies Act, 2013 (notified w.e.f. 18th October 2017), requiring specialized technical and financial valuation expertise. Insolvency & Restructuring: IBC processes mandate multi-disciplinary teams uniting accountants, legal luminaries, engineers, and operational turnaround specialists to manage corporate insolvency resolution. Banking NPAs & Forensic Audits: Escalating non-performing assets (NPAs) across the banking system, accompanied by alleged rampant diversion of funds to related parties, have spurred unprecedented demand for multi-disciplinary forensic investigations. Structural Shift in Firm Composition: Professional demand is shifting dynamically from pure compliance audit toward holistic consultancy. It is widely acknowledged globally that future accounting firms will employ a greater proportion of non-accountants than traditional accountants. 3 Non-Audit Services (NAS): Section 144 Rigidity vs. International Independence Architecture While advisory and consultancy services expand rapidly, statutory audit remains under sharp, vigilant focus—and rightly so. Public and stakeholder trust in the audit profession must be continuously reinforced. A primary arena of intense scrutiny is the provision of Non-Audit Services (NAS) by statutory auditors. ICAI’s Proactive Pre-emptive Response (2002) In the immediate wake of the global Enron collapse in 2001–02, ICAI responded swiftly. In 2002, the Council issued a binding notification capping non-audit fees, prohibiting audit firms from accepting non-audit fees in excess of statutory audit fees in the case of listed and other specified entities. This regulatory action preceded the statutory codification of Section 144 in the Companies Act, 2013 by more than a decade. Critical Comparative Analysis: Section 144 vs. International Code of Ethics Rigidities of Section 144 (Companies Act, 2013) Blanket Applicability: Prohibits specified services to all audit clients without distinguishing between Public Interest Entities (PIEs/listed firms) and small, closely-held private companies. Prohibited List: Accounting/bookkeeping, internal audit, financial information systems design/implementation, actuarial, investment advisory, investment banking, outsourced financial services, and undefined “management services”. Ambiguity: The term “management services” remains undefined in statute, generating regulatory hesitation. International Code of Ethics (IESBA / Global) Principle-Based Distinction: Prohibits assuming “management responsibility”, but permits service provision if decision-making and operational responsibility remain strictly with the auditee. Developed Economy Precedents: Routine processing (e.g., payroll processing, recording mechanical accounting entries) is permissible if the firm exercises no independent decision-making authority. Proportionality: Tailors restrictions to whether public interest is affected. Administrative Services (Feb 2020) & The Two-Pronged Harmonization Proposal In February 2020, the Council notified “Administrative Services” under Management Consultancy and Other Services as a permissible service that can be rendered by practicing CAs. Because ICAI adopted the International Code of Ethics, such services are currently permissible for non-company audit clients, while strictly banned for corporate clients under Section 144. To resolve this dilemma, CA. Manoj Fadnis puts forward a coherent reform agenda: Statutory Primacy & Universal Ethical Standards: Recognizing that the law formulated by Parliament is supreme, the Council should consider extending the prohibition on management services to non-company audit clients as well. Professional ethical standards should govern substance uniformly and not vary arbitrarily based on the client’s legal constitution. Carve-Out for Small Entities: Simultaneously, a policy debate should be initiated to exempt small companies (as defined in the Companies Act) from the stringent blanket prohibitions of Section 144. Where no public interest is at stake, banning routine, non-conflicting administrative and accounting support services serves no economic or governance logic. 4 Auditor Rotation: Dual Mandate (Firm vs. Partner) & Case for Rationalization The Companies Act, 2013 enacted mandatory firm rotation for listed companies and prescribed classes of companies (maximum tenure of two terms of five consecutive years, followed by a mandatory five-year cooling-off period). Similarly, statutory auditor rotation is prescribed for Public Sector Banks (PSBs), Public Sector Undertakings (PSUs), and financial institutions. The Ethical Rationale for Partner Rotation (ICAI Code of Ethics Vol. I) “A self-interest threat might be created as a result of an individual’s concern about losing a longstanding client or an interest in maintaining a close personal relationship with a member of senior management or those charged with governance. Such a threat might influence the individual’s judgment inappropriately.” Rotation of firms and partners improves auditor independence and strengthens public perception. Independence is fundamentally a state of mind, but objective regulatory safeguards enhance stakeholder faith. The Case for Regulatory Relaxation in Partner Rotation It is vital to recognize that the International Code of Ethics does not mandate firm rotation; its safeguards are strictly confined to partner rotation. The Indian regulatory framework is thus far more stringent, simultaneously imposing statutory firm rotation within a maximum 10-year horizon alongside internal partner rotation. Logical Redundancy: The fundamental ethical premise justifying partner rotation—mitigating the self-interest threat of losing an audit client—becomes inapplicable when the entire firm is statutorily mandated to rotate out. Therefore, relaxing partner rotation where firm rotation already exists is a viable area for Council review. 5 Networking of CA Firms: Overcoming Bottlenecks & SMP Empowerment Networking among CA firms was conceptualized as a cornerstone policy to empower Small and Medium Practitioners (SMPs), elevating their collective capacity to execute multi-location engagements and deliver specialized multi-disciplinary services. However, networking in India has not achieved its intended scale. Core Bottleneck in Networking Under both ICAI Networking Guidelines and Section 144 of the Companies Act, if one networked firm is appointed as statutory auditor, all other network affiliates are disqualified from undertaking internal audits or providing consultancy services for that corporate client. This rigid restriction discourages ambitious firms from joining formal networks. Proposed Tender Scoring Incentive To make networking commercially attractive, public procurement authorities and institutional tender bodies should award additional scoring points to networked firms during bid evaluations. As multi-disciplinary consultancy assignments multiply, this will incentivize SMPs to amalgamate and form resilient networks. Pragmatic International Affiliations: In an interconnected global economy, networking guidelines for affiliations with firms outside India must be pragmatic. While full compliance with domestic Indian statutes remains paramount, domestic firms must adopt global best practices to seize overseas opportunities and compete effectively on the international stage. 6 Investing in Technology: ICAI Digital Maturity Model & Software Subsidies Indian CA firms must substantially augment their investments in technology. Advanced automated audit tools and data analytics platforms are capital-intensive and historically remained out of reach for small and medium practices. DMM ICAI Digital Maturity Model (DMM) & Software Democratization The Digital Maturity Model (DMM) formulated by ICAI provides a structured self-evaluation benchmark for firms to measure digital adoption across audit documentation, workflow management, and client communication. To resolve cost barriers, ICAI has launched strategic initiatives to centrally procure high-end automated audit tools and license them affordably to practicing firms. This democratization of audit technology will directly enhance audit quality, rigor, and documentation standards across SMPs. Conclusion: Collective Reputation and Stakeholder Confidence Each one of us as a member of the ICAI must bear in mind that the image of the profession is the reflection of the sum total of the image of what each one of us does individually. Excelling in whichever area we practice or serve is the minimum contribution that can be rendered in increasing the stakeholders’ confidence in the profession. The Chartered Accountant • April 2022 Empowering the Profession • Journal pp. 1201–1204

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 38–40 (Journal pp. 1210–1212) Theme Article Role of FRRB as Improving Financial Reporting Practices DK CA. Durgesh Kumar Kabra Central Council Member, ICAI • durgeshkabra@gmail.com AC CA. Abhay Chhajed Central Council Member, ICAI • abhay.chhajed@icai.in Executive Synopsis & Genesis of FRRB (July 2002) The Institute of Chartered Accountants of India (ICAI), in light of the changing global scenario and experience gained therefrom, felt the acute need for a separate, dedicated, and independent wing that could undertake the review of general-purpose financial statements of enterprises with the objective of examining financial reporting non-compliances. The core idea was to guarantee the quality of financial reporting. Therefore, the Council of the Institute established the Financial Reporting Review Board (FRRB / Board) in July 2002 with an objective to develop and maintain an environment of sound financial reporting practices and to improve transparency in reporting, which is paramount to promoting investor confidence in audited financial statements. 1 Composition and Institutional Independence of the Board FRRB comprises members from the Central Council of the ICAI, Government nominees, and high-level representatives from major national regulatory and statutory oversight authorities from time to time: SEBI Securities and Exchange Board of India representation ensuring capital market and public securities oversight. C&AGI Office of Comptroller and Auditor General of India, bringing public sector audit rigor and sovereign reporting scrutiny. IRDAI Insurance Regulatory and Development Authority of India, supervising solvency, actuarial disclosures, and insurer compliance. CBDT Central Board of Direct Taxes, ensuring alignment with fiscal statutory compliances and tax accounting principles. Unique Institutional Safeguards of Independence The composition of the Board represents a broad spectrum of professional and regulatory experience. The Board comprises members with significant expertise in the field, and they work strictly under confidentiality covenants. With the view to maintain the uncompromised independence of the Board, it neither co-opts members nor are the President, ICAI and Vice-President, ICAI appointed as ex-officio members to the Board, unlike other standing committees of the ICAI. 2 Scope of Work and Clear Operational Boundaries FRRB reviews the general-purpose financial statements of enterprises and the auditor’s report thereon with a view to determine, to the extent possible: Compliance with GAAP: Compliance with the generally accepted accounting principles (GAAP, Accounting Standards, and Ind AS) in the preparation and presentation of financial statements. Compliance with Statutory Disclosures: Compliance with the disclosure requirements prescribed by regulatory bodies, statutes, and rules and regulations relevant to the enterprise (such as the Companies Act, SEBI LODR Regulations, RBI Prudential Norms, IRDAI Regulations). Compliance with Auditor Reporting Obligations: Compliance with the statutory and professional reporting obligations of the auditor under Standards on Auditing (SAs) and legislative mandates. Operational Boundaries and Non-Judicial Nature Published Financial Statements Only: The Board restricts its reviews exclusively to published financial statements and does not carry out a re-audit or review how the audit has been conducted by the auditors concerned (i.e., it does not inspect working papers or audit files). Non-Judicial Character: The review conducted by the Board is neither a judicial proceeding nor a quasi-judicial proceeding; rather, it functions as a technical and professional compliance assessment mechanism. 3 Dual Selection Methodology for Review of Enterprises The Board reviews general-purpose financial statements and auditor’s reports selected through two distinct channels: i. Suo Moto Selection For suo moto reviews, enterprises are shortlisted on the basis of criteria formulated and decided by the Board from time to time. The required number of enterprises is selected using a scientific random sampling method to ensure objective, unbiased coverage across diverse industries and market capitalizations. ii. Special Cases Selection Regulatory References: On the basis of formal references made by external regulatory authorities, including the Ministry of Corporate Affairs (MCA), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Reserve Bank of India (RBI), Election Commission of India (ECI), etc. Media Reports: Specific cases where serious accounting irregularities and financial reporting failures in the financial statements are widely reported in the media. 4 The Robust Three-Tier Review Process To guarantee the utmost technical accuracy, objectivity, and procedural rigor, the Board deploys a structured Three-Tier Review Mechanism: T1 Stage 1: Preliminary Review by Independent Technical Reviewer Preliminary review is undertaken by an independent Technical Reviewer (TR) empanelled with the Board. The Technical Reviewer meticulously examines published financial statements against relevant GAAP, statutory disclosure mandates, and auditing standards, compiling an in-depth preliminary review report. T2 Stage 2: Scrutiny by Financial Reporting Review Groups (FRRGs) The preliminary report prepared by the Technical Reviewer is submitted to a Financial Reporting Review Group (FRRG). The group critically examines the observations, verifies the statutory interpretations, evaluates the materiality of observations, and prepares an integrated review group report. T3 Stage 3: Final Adjudication by Financial Reporting Review Board (FRRB) Finally, the report of the Financial Reporting Review Group along with the preliminary review report of the Technical Reviewer is placed before the apex Financial Reporting Review Board (FRRB). The Board deliberates upon the findings to take final institutional decisions. 5 Actions Taken by FRRB on Review Findings Based on the outcome of the three-tier review, the Board initiates calibrated, targeted actions with respect to both statutory auditors and corporate management: Actions with Respect to Auditors Material Non-Compliances (Affecting True & Fair View) In cases of material non-compliance that affect the true and fair view of the financial statements, such matters are formally referred to the Director (Discipline) of the ICAI for initiating appropriate disciplinary proceedings against the auditor under the Chartered Accountants Act, 1949. Non-Material Non-Compliances (Corrective Advisories) Where the Board observes that the non-compliances are not material and do not affect the true and fair view of financial statements, it brings such issues to the attention of the concerned auditor as a corrective measure. These advisories motivate auditors to follow quality practices and uphold the highest sense of professionalism. Actions with Respect to Enterprise Management In cases of material non-compliances, the Board informs irregularities to the concerned external statutory and sector regulatory bodies relevant to the enterprise for initiating appropriate administrative, civil, or penal action: Ministry of Corporate Affairs (MCA) Reserve Bank of India (RBI) Securities and Exchange Board of India (SEBI) Insurance Regulatory and Development Authority (IRDA) Election Commission of India (ECI) and other relevant bodies 6 Statistics of Review of General-Purpose Financial Statements Till date, the Financial Reporting Review Board has conducted exhaustive reviews of 986 Financial Statements of various enterprises, yielding substantial regulatory outcomes: 986 Total Statements Reviewed 757 Suo Moto • 229 Special Cases 165 Referred to Director (Discipline) Material Non-Compliances 158 Sent to Regulators MCA, SEBI, IRDA, RBI, etc. 618 Corrective Advisories Issued Non-Material Disclosures Performance Indicator / Metric Head Cumulative Statistics Suo Moto Reviews (Selected via Random Sampling) 757 cases Special Cases Reviews (Regulatory References & Media Reports) 229 cases Total Financial Statements Reviewed 986 cases Cases Referred to Director (Discipline) of ICAI 165 cases Cases Referred to External Statutory Regulators (MCA, SEBI, IRDA, RBI, etc.) 158 cases Advisories Issued to Auditors to Exercise Greater Care in Future Engagements 618 cases 7 The Impact FRRB is Making: Capacity Building & Publications FRRB has been playing a vital role in strengthening best accounting and auditing practices amongst members and other stakeholders. Beyond referral to disciplinary bodies and statutory regulators, the Board acts as a proactive educational engine for the profession through multifaceted knowledge dissemination initiatives: Direct Member Advisories & Seminars The Board sends personalized advisories to members on specific non-compliances observed in financial statements audited by them. These advisories directly assist members in implementing corrective quality safeguards in their subsequent engagements. The Board regularly conducts interactive Awareness Programmes, Seminars, and Technical Workshops nationwide on emerging nuances of financial reporting, standard interpretations, and disclosure rigor. Digital Outreach: ‘Did You Know’ Series To broaden professional awareness in the digital age, the Board on a regular basis posts commonly observed financial reporting and disclosure non-compliances under the popular ‘Did You Know’ series on its Twitter handle. This initiative provides rapid, bite-sized updates for statutory auditors as well as corporate preparers of financial statements. Authoritative Publications of the Board The Board systematically compiles non-compliances observed during the course of reviews and releases them to the public in the form of authoritative research publications: Three Volumes: ‘Study on Compliance of Financial Reporting Requirements’ (covering traditional Accounting Standards and statutory framework requirements). One Dedicated Volume: ‘Study on Compliance of Financial Reporting Requirements (Ind AS Framework)’ (analyzing complex compliance nuances under Indian Accounting Standards converged with IFRS). Conclusion: Twenty Years of Proactive Self-Regulation FRRB is a proactive self-regulatory mechanism within the ICAI to strengthen financial reporting practices. After functioning for more than twenty years, the FRRB is firmly established as an important and influential tool to bring transparency to financial reporting. Its presence has been acknowledged across various quarters of society, including members of the Institute and statutory regulatory authorities. The ongoing task of undertaking rigorous reviews by the Board will definitely continue to strengthen the accounting and financial reporting ecosystem across the country. The Chartered Accountant • April 2022 Financial Reporting Review Board • Journal pp. 1210–1212

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 45–52 (Journal pp. 1217–1224) DIGITAL ACCOUNTING • INDUSTRY 4.0 & DISTRIBUTED LEDGER TECHNOLOGY Potentiality of Blockchain Technology in Accounting, Auditing and Corporate Governance Dr. Rakesh Kumar Manjhi The author is an academician. He can be reached at eboard@icai.in. 🔗 Industry 4.0 & The Transformative Power of Distributed Ledgers Blockchain is potential technology that can reform the practices of accounting, auditing and corporate governance across industries in India. Artificial intelligence, advanced robotics, big data and blockchain technology are the different dimensions of the Fourth Industrial Revolution, popularly referred as ‘Industry 4.0’. Blockchain technology could be a solution to successful digital business processes that would be based on reliability, uniformity and authenticity of financial data recording. Industries must be ready to embrace the opportunities and challenges being hurled by prevalent technology. Read on…. 1. Introduction: From Double-Entry to Triple-Entry Paradigm The COVID-19 pandemic has upended the manual system of business process and people have commenced working digitally. When it comes to digitalization, blockchain technology cannot be ignored. This technology is storming in cryptocurrencies; there is no doubt that it may be adopted by many sectors. Especially, the finance sector may undergo transformation with this technology drastically. “Blockchain technology may shape accounting from double entry to triple entry system. It is a foundational change in how records of financial transactions are maintained and updated.” Blockchain technology may shape accounting from double entry to triple entry system. It is a foundational change in how records of financial transactions are maintained and updated. Rather than having one person access, blockchain records are accessible to every participant and stakeholder. A distributed ledger is a decentralised system that spreads the ownership of a ledger across multiple parties, instead of being held centrally, each with its own copy. This paper will explore some new areas where accounting records are tamper-proof, audit is reliable and consequently good corporate governance is established with blockchain technology. 2. Review of Literature & Research Objectives Kaushal & Tyle (2016) Examines that blockchain technology is not confined to Bitcoin, it may ignite to the content of blockchain to the height that it is in use today. Blockchain, as a technology on its own, is a more remarkable and wise innovation than that of Bitcoin. Piscini (2017) Propounded that there could be two main types of the blockchain accounting across the globe including public blockchains where every person has the access to the network and no permission is required to participate in the blockchain transactions; and private blockchains that are non-public and a complex form of accounting in which the permission must be permitted to an external person in order to access the network. Private Blockchains may be formed by the organisations working in a particular industry and authentication may be required. Orcutt (2018) Stated that blockchain was introduced to the world in 2008, and over the subsequent years it begun to fetch popularity in use due to its high level of security. The sophisticated math and innovative software technologies do not allow information to be altered in a blockchain. Al-Jaroodi & Mohamed (2019) Concluded that blockchain is decentralised ledger and has no central control, it has great potential benefits for many industries in terms of accounting, auditing and corporate governance. Perera, Nanayakkara, Rodrigo, Senaratne, and Weinand (2020) Suggested that private blockchain networks could provide reliable business software solutions to the construction industry as construction industry works with sensitive data. Sebahattin Demirkan, Irem Demirkan & Andrew McKee (2021) Attempted his study on “Blockchain technology in the future of business cyber security and accounting” and concluded that blockchain technology has appealing uses not only for a security system in the future with challenging threats to cyber security, but also as part of an accounting system based on its ability to be secure and transparent, and providing trust in a financial world. Legislative & Regulatory Context: Recently, Finance Minister has also realised the safety of blockchain technology and committed to introduce ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’. This may extend the use of blockchain technology to many business processes. Objectives of the Study To understand the blockchain technology and its mechanism. To analyse the potentiality of blockchain in accounting, auditing and corporate governance. To examine the current issues and challenges of blockchain technology in respect to recent developments. 3. What is Blockchain? Mechanism & Taxonomy Blockchain is a chain of blocks and distributed database which runs on many devices simultaneously through internet. Every record of transactions is accessible to all participants and one cannot alter any data without the consensus of 51% of users (Nodes). Transactions are cryptographically recorded in the blocks. Blocks are in chronological order and connected like a chain, the resulting ledger is accessed by all servers of participants. Blockchain is a ‘Chronological Distributed Immutable Ledger’ and not centralized which means it does not have a single owner. Any information added to a blockchain is stored into block form and connected together to form a chain. It securely transfers the data from one block to another block while recording any transaction without any need to rely on another intermediary. Let’s understand the blockchain coding information of transactions: Fig. 1: Blockchain is a chain of blocks that contains information Block 1 (Genesis Block) Data: Transaction Data Hash: 11AA2k Previous Hash: 000000 (Nil) Block 2 Data: Transaction Data Hash: 22BB3p Previous Hash: 11AA2k Block 3 Data: Transaction Data Hash: 33CC4t Previous Hash: 22BB3p The first block is always known as genesis block where the previous hash would be ‘Nil’. There are three things to be stored in each block. First in the form of information regarding supplier, receiver, amount, date, time etc., second is a hash, it is a unique number of blocks (similar to biometric number that one can have on Aadhar Card) and third is the hash of the previous block that links two blocks with each other. Bitcoin with blockchain is secure because every user has a copy of the database, and no one can tamper the data of any block. Similarly, accounting transactions of business concerns can also be recorded with the help of blockchain technology. Adding and verifying new transactions is done by a group of computers known as ‘Miners’. Digital contracts that execute the predefined terms and conditions are known as ‘Smart Contracts’. Mechanism of Blockchain Technology The following steps are derived from crypto currency mechanism to complete a transaction: Step – 1: A transaction is requested through internet. Step – 2: Transaction is broadcasted to a peer-to-peer (P2P) network that consists of computers (otherwise known as nodes). Step – 3: The network of nodes uses known algorithms to validate the transaction and user’s status. Step – 4: A verified transaction can involve crypto currency, contracts, and records of other information. Step – 5: The transaction is combined with other transactions, once verified, to create a new block of data for the ledger. Step – 6: The new block is added to the existing blockchain (which is permanent and immutable). Step – 7: The transaction is now finished. Types of Blockchain There could be three types of blockchain applications recording different types of information. It assists to record accounting transaction, money, and store agreements between people called smart contracts. 1. Public Blockchain Network (Permissionless) No permit is required to join Public Blockchain Network and public has direct access to this application such as cryptocurrencies like Bitcoin, Ethereum etc. It cannot use consensus algorithms as anyone can take part by verifying and adding data. 2. Private Blockchain Network (Permissioned) Only permitted users hold a copy of a given ledger to ensure the integrity and efficiency of network like RippleNet, NASDAQ LINQ. It can use consensus algorithms as only authorised entities can participate and control network. 3. Hybrid Blockchain Network (Balanced) It is mixture of both public and private blockchain. Participants in public or private network are granted to communicate with each other like Health- Care, Cross border payments for trade/financing. Advantages of Blockchain Technology Experts of blockchain are endorsing blockchain technology as it has the following advantages over the prevailing system of business process: Security: Security is the crux of blockchain. Since transactions are carried out using hash and previous hash of block of information on a decentralised network, it is considered tamper proof and highly secure. Immutable and Accuracy: All the transactions are recorded in real time through blockchain systematically with accuracy and reliability. It cannot be altered easily once the transaction is completed. Cost: Data recording takes place in real time and no intermediaries are involved, therefore cost is less as compared to cost involved in traditional systems. Transparency: Recording of all transactions into blocks is transparent to all participants involved in a system. The transaction originates with one user but propagates to a network of identical ledger, instead of being held centrally controlled. 4. Recent Developments Driving Long-Term Impact There are some recent developments that could drive blockchain’s long term impact in key areas: Multi-Organisational ERP Linking ERP systems could create an over aching ‘super ERP’ for resource planning across organisations. Integration with ERP will bring in transparency of the origin, movement, and possession of goods. Financial Transformation Banks and other financial institutions can move assets with more efficiency and offer new investment alternatives/products. At the initial stage, blockchain is being used by the banking sector for tracing credit information (CIBIL) of loan applicants. Tokenisation It is a process of converting tangible and intangible assets into blockchain tokens. Digitally representing anything has recently acquired a lot of traction. It can be effective in conventional industries like real estate, artwork etc. Governments are piloting blockchain to record asset registries such as corporate shares and land. Blockchain-Fuelled Artificial Intelligence Unleashing machine learning algorithms on a flood of new, far-reaching data will drive more effective pattern matching and predictive analytics. It may assist in projection of any investment in the best possible manner. Decentralised Identity Management Tokenizing a person’s identity can give them more convenience and control over how they share credentials. Healthcare and life science are discovering the use of blockchain to secure the integrity of electronic medical records, claims, medical billing, etc. Supply Chain Transparency Improved interoperability and data integrity could give suppliers and consumers visibility into a product’s entire lifecycle starting with raw material. 5. Blockchain and Accounting: The Three-Dimensional Model & Triple-Entry System After understanding blockchain, applying it to accounting is not difficult. Blockchain as a system of universal entry bookkeeping that can increase the efficiency of the process of accounting for assets, liabilities, capital, revenue and expenses. This would empower the accounting profession to explore its scope to record more types of business events than before and to drill down closer to the economic reality of transactions recorded on real time that may help in attaining the objective of ‘Substance over legal form’. Three dimensional views of account under blockchain technology may be bifurcated into: Nature of Accounts Assets Equity and liabilities In order to provide a better presentation, also mapped in figure 2, the possible three-dimensional graphic according to these three aforesaid perspectives: vertical axis – above - economic accounts, below - financial accounts; concentric circles – external circle - long term; inner circle - short term; horizontal axis –accounting equation / left side - Assets, right side - Equity and Liabilities are illustrated as follows: Fig. 2: The possible three-dimensional outlook of account under blockchain environment Perspective / Axis Left Side: ASSETS Right Side: EQUITY + LIABILITIES Vertical Axis (Above):ECONOMIC ACCOUNTS External Circle (Long Term): Tangibles & Intangibles Inner Circle (Short Term): Inventory and other suspended resources External Circle (Long Term): Equity Capital Inner Circle (Short Term): Expenses accrued in the period; Revenues accrued in the period Vertical Axis (Below):FINANCIAL ACCOUNTS Inner Circle (Short Term): Cash; Receivables (operating & financing) External Circle (Long Term): Financial Investments Inner Circle (Short Term): Current Liabilities (operating & financing) External Circle (Long Term): Non-Current Liabilities The three-dimensional view is an extension of the double-entry system. The distributed registry and other features of the blockchain may benefit accounting wherein reduction in human error, low risk of fraud (as penetration and manipulation under blockchain is not possible), automation of system, increase in reliability in financial reports etc. could be possible. Many experts believe that fully automated accounting and audit can become a reality. Fig. 3: Triple Entry Accounting Under Blockchain First Entry Company A (Buyer) Rs. 1,00,000 ↔ Third Entry (Shared Block) Shared Blockchain Ledger Rs. 1,00,000 (Between A & B) Verified by Miner via Smart Contract ↔ Second Entry Company B (Seller) Rs. 1,00,000 Fig. 3 explains that Company A & Company B will record the transaction in their books in usual manner but the same will be recorded in the block of blockchain. This will be verified by the miner as per the smart contract, wherein all the details of transaction are shared between both the companies. The shared ledger in the blockchain is like a receipt as per which recording is done in the books of both the parties. Hence, there is no chance of error of commission in accounting. Operative Business Transactions Facilitated by Blockchain Accounting profession deals with recording, measurement, communication of financial transactions and interpreting the result thereof. Blockchain from accounting prospective, it has the potential to increase the efficiency of the accounting profession by bringing down the cost of maintaining, updating and reconciling ledgers. It may assist accountants to find out with clarity about the available resources and liabilities of their organizations. It may facilitate the operative business transactions in following manner: Secure to pay regarding purchase orders: Every purchase order can be recorded digitally on real time with acceptance of suppliers’ terms and conditions. Payment can be activated mechanically based on availability of funds and due date, once material is received as per the order parameter. Automated Customer Collections: Similarly, every sales order can be recorded into block and payment from customers can be activated automatically after receipt of goods or rendering of services by customers. Timely Books Closure: It can make possible to close books of account of business process on time. Transactions are digitally recorded and updated on a daily basis automatically under blockchain technology. Accountants need not work overtime for closure of books of account. Accurate GST Records & ITC Scam Eradication: Accurate records of supply under GST, whether received or supplied can be maintained, thereby smooth flow of Input Tax Credit (ITC) would be feasible. Moreover, automated recording of transaction into blocks, scam on ITC could be eradicated. Instantaneous Financial Planning & MIS: Effective financial planning, MIS, financial reporting etc. could be carried out instantaneously and in efficient manner as compared to prevalent accounting system. Smart Contract Revenue Recognition: Recognition of revenue for financial transactions can be booked in a perfect manner as it would be automatically triggered through smart contracts. Automated Tax Return Filing (CBDT & CBIC): Direct tax return filing and GST return filing would be done through automation and technology to control and monitor all these processes accurately. Hence, tax collection, the burden of Central Board of Direct Tax (CBDT) and Central Board of Indirect Tax and Custom (CBIC) would be eliminated. Direct access of public ledger by Government can be envisioned. Immutable Reliability: The best part of blockchain is that all users can have a copy of the ledger, but data will remain immutable. It cannot be altered after completion of transaction and ensures reliability and authenticity of data at any point of time in the future. 6. Blockchain and Auditing: Elimination of Redundancies & Continuous Assurance Stakeholders believe in the auditor appointed by management to reach out to opinion for them. An inevitable question raised by this arrangement: Do auditors perform their duty for the management who pays them or for the stakeholders who rely on their opinion to make investment decisions? Such types of circumstances can be eliminated under blockchain environment. “Blockchain technology will facilitate the organisation with traceability, easy retrieval and archives of all transactions entered through blocks at a lower cost.” Having understood the structure of blockchain technology, the biggest advantage in accounting, is elimination of fraud and error while recording the financial transactions. Accounting procedures are secured, trustworthy and reliable in a blockchain environment and hence it is possible to eliminate many audit procedures while auditing books of account by auditors. Audit procedures like getting confirmation of balance from debtors and creditors, reconciliation of bank statement, intercompany transaction etc. will be removed from audit. Auditors will be forming opinions on system controls and security of database of the organisation. There would be a possibility that audit work might be carried out by auditors as well as software engineers. ‘True and Fair’ view will be ensured for financial statements as well as types of blockchain technology adopted by organisation. Blockchain technology will facilitate the organisation with traceability, easy retrieval and archives of all transactions entered through blocks at a lower cost. It also records the exact date and time of transactions when data was recorded. Recording back dated transactions will never be possible in such an environment. There will be always conclusive evidence for any financial transaction under the blockchain environment. It enables conclusive verification without confirmation from third party. Triple Entry Accounting under blockchain being a source of trust can replace today’s accounting structures. It can be consolidated gradually with classic accounting processes: commencing from securing the reliability of records, to entirely transparent audit trails. Eventually, completely automated audits may be the factual and expected truth. Fig. 4: Blockchain Technology Enables Automated Audits That Can Satisfy All Users Every transaction becomes “notarized”: The cryptographic attestation creates instant validity. Complete and automated audit of all transactions: Continuous real-time algorithmic auditing replaces periodic post-mortem sampling. Simultaneous Dual-Accounting: Blockchain entry serves simultaneously in both companies’ accounting ledgers. Unified Regulatory & Stakeholder Node Access: Automated audit procedure connects auditors, tax authority (CBDT/CBIC), banks, and courts as active participant nodes on the blockchain network. 7. Blockchain and Corporate Governance: Inculcating Unimpeachable Integrity Corporate governance across industries plays a very crucial role in inculcating integrity of business concerns, especially in listed companies on stock exchanges in India. Ministry of Corporate Affairs (MCA)/Securities and Exchange Board of India (SEBI) has taken many initiatives and measures to implant better corporate governance in companies. In spite of that, regulators faces hurdles ensuring implementation of the governance procedures. There is a need of transparency in disclosure and reporting of all financial transactions with compliance of laws. The comprehensive solution for desired governance in corporate bodies could be blockchain technology. “Payment of direct and indirect taxes can be self-operated and self-regulated. There will not be any scope of fraud and error in filing tax returns by business concerns.” Transparency is one of the most important features in this technology. There will be transparency between stakeholders and the management of company under blockchain environment. Each required compliance can be updated timely in the system and automatically mechanised, which can also be transparent between regulatory body and the management. Annual General Meeting (AGM) and other flaws in disclosure and presentation of transactions in financial statements can be automated and mechanised. It may reduce shareholders’ voting cost and increase voter verification mechanism. Payment of direct and indirect taxes can be self-operated and self-regulated. There will not be any scope of fraud and error in filing tax returns by business concerns. Any kind of ITC fraud or delay in tiresome rituals of finalising books of accounts can be avoided under blockchain scenario. Government may contemplate it for pellucid public records to escape from corruption or any other allegation. Smart Contracts of blockchain technology cannot let terms and condition of contractual agreement be diverted or amended or manipulated once entry is finalised. This can also increase the decision-making capacity of management and involving parties in that particular business in a speedy manner. Blockchain experts consider this technology to be most suitable for recording ownership of real estate, stocks, bonds, debentures or any other assets belonging to a company. The entire history is traceable regarding any belonging of a company. Any type of collusion, window dressing, discrepancy in agreement about corporate governance is not possible by one person. Eliminating or modifying records of transaction cannot take place in governance without 51% of node consensus. Feasibility of source of financial transactions and ownership can facilitate the organisation to reduce or eliminate frauds. Additionally, all stakeholders can see to all transactions whereby authenticity and transparency can be incorporated in corporate governance under blockchain environment. 8. Current Issues and Challenges of Blockchain Technology Of course, advantages and disadvantages are two faces of any technology. Technology is desirable to be used when there is excess of benefit over cost. Aforesaid challenges are to be addressed before using blockchain technology in accounting, auditing and corporate governance: 1. Inappropriate Audit Evidence & Off-Chain Risks Recording a transaction in a blockchain may be lacking with appropriate audit evidence related to the nature of the transaction. It does not ensure that a transaction recorded in blockchain is not unauthorised, fraudulent or illegal. It could be executed between related parties or linked to a side agreement that is “off-chain”. After considering the complex nature of IND AS, it may incorrectly be classified in the financial statements. Blockchain technology is still not a complete solution, but technology can be transformed according to the need of accounting and auditing. 2. Absence of Statutory Regulatory Body Absence of monitoring and controlling body under blockchain technology is a perturbing matter. Regulation is a serious issue under blockchain technology. When it is related to accounting, auditing and corporate governance statutory compliances are required to authenticate the financial transactions but there is no statutory regulation for this unique technology. There must be some regulations for ‘Node’ and ‘Miners’ to regulate this system. 3. Environmental Degradation & Energy Intensity Very high-power consumption under this technology may have adverse effects on environment. Excessive usage of technology may lead to depletion of natural resources. ‘Proof of Work’ automated system is used to attest a transaction and it also requires huge, tremendous computational energy. Hence, sustainability development will be questionable under blockchain environment. 4. Technology, Latency & Cryptographic Risks It is related to technology integration, associated IP protection, data privacy and speed and performance. A huge calculation takes on an average 10 minutes to complete the recording of transaction. It may be a delaying factor if the volume of transaction is high per day in business concern. Consensus protocol risk may also be a tough challenge in blockchain. No doubt consensus protocol seals the transaction ledger, though there is chance of private key robbery and ultimatum to assets associated with public. 5. Reporting and Controlling Risk As this technology is not controlled by one person, it may be a threat to the chain of funding, controlling of financial transaction in place and financial reporting risks. It may be an open ended path for illicit activities. 6. Risk of Liquidity Excessive use of blockchain technology may lead to liquidity risk. Bank for International Settlement has also warned that excessive usage of blockchain may boost the risk of liquidity. Maintaining cash balance in business concerns is very important to meet day to day business expenses. 9. Conclusion: Synthesizing Blockchain with Future Governance “Blockchain technology is prominent in cryptocurrency. This technology could be implemented in accounting, auditing and corporate governance successfully in future after addressing challenges and threats.” Presently, blockchain technology is prominent in cryptocurrency. This technology could be implemented in accounting, auditing and corporate governance successfully in future after addressing challenges and threats. Automation of system with smart contracts may lead to flawless and ideal confirmation of debt between organisations as well as account receivable/payable and balance check. Moreover, customised blockchain enables restricting access to data to different parties as per their role. Accounting and auditing standards can be automatically programmed to set uniformity in triple-entry accounting system of blockchain. Tax return filing can also be automated through continuous updates as per CBDT and CBIC announcements. Furthermore, prompt examination of expected fraud and errors in accounting entries and timely transaction verification under automated system of blockchain may result into highly satisfactory audit opinion and the finest corporate governance. 10. Academic References Alessio & Narcisa, 2019. Accounting and blockchain technology: from double-entry to triple-entry, The Business and Management Review, Volume 10, No. 2, pp. 108-116. Dai, J, & Vasarhelyi, M., 2017. Toward Blockchain-Based Accounting and Assurance, Journal Of Information Systems, 31, 3, pp. 5-21, Business Source Complete, EBSCOhost. Brender, N., Gauthier, M., Morin, J.-H., & Salihi, A. (2019). The potential impact of blockchain technology on audit practice. Journal of Strategic Innovation and Sustainability, 14(2), 35–59. Retrieved from https://doi.org/10.33423/jsis.v14i2.1370 Chan, D. Y., & Kogan, A. (2016). Data analytics: Introduction to using analytics in auditing. Journal of Emerging Technologies in Accounting, 13(1), 121–140. DOI:10.2308/jeta-51463

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 60–66 (Journal pp. 1232–1238) INTERNATIONAL TAXATION • RELATED PARTY TRANSACTIONS & TRANSFER PRICING Transfer Pricing of Related Party Transactions – Only a Tax Concern? CA. Satyaprakash Kamath The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at eboard@icai.in. ⚖️ Executive Overview & Multi-Stakeholder Perspective Transfer Pricing is often considered as an international tax issue in isolation and regulations for pricing are oriented primarily towards addressing tax motivations. The methods of pricing related party transactions have been compartmentalized based on the rules and regulations set out under various tax and non-tax regulations having an impact on the transaction. The article aims to provide a perspective regarding how transfer pricing impacts various stakeholders. It also brings together the prescribed methods and the various factors impacting transfer pricing by analysing judgements on transfer pricing dispute. Read on… 1. Introduction: Beyond the Tax Lens Related Party Transactions are subject to intensive scrutiny by tax authorities and consequently subject to additional recognition, valuation and disclosure requirements. This emerges out of the conviction that transfer pricing of related party transactions do not reflect pricing as determined by the market forces. From the point of view of the tax regulator, the relationship between the entities provides an opportunity to the taxpayer to determine the transfer price in a manner that could result in tax savings in the aggregate on account of differential tax regimes for the entities. Accordingly, regulations regarding valuation and pricing of the transactions have been prescribed to control such practices. However, from the point of view of the management, the pricing of a transaction needs to comply with various regulations and at the same time also satisfy the apprehensions of stakeholders other than the tax regulator. 2. Stakeholders and the Diverse Risks Perceived by Them A. Tax Regulators (Direct vs. Indirect Contradictions) Tax regulators are concerned by pricing of the related party transactions since any deviation from the arm’s length price would have the impact of reducing the tax applicable on the transaction or consequent profits arising out of the transaction. Contradictory Regulatory Imperatives: There could be contradictory views from direct and indirect tax authorities also based on the impact on the respective class of revenue. For example, in an import transaction, the customs authority would be on the watch for under reporting of the value for avoidance of duty whereas the income tax authority would be on the watch for overstatement of the purchase value for avoidance of income tax. B. Bankers and Financial Institutions (Lenders) “Any lender would want to monitor proper end-use of borrowed funds and ensure that the borrower always gives preference to repayment of the loan and regular payment of interest.” Diversion of borrowed funds from banks and financial institutions by making over-priced purchases of goods and services from related parties or investments in related parties at exorbitant valuations is a concern for the banker or lender. If any funds are being diverted or being channelled out of the entity, it would create scarcity of liquidity within the entity to repay the loan or interest. Any lender would want to monitor proper end-use of borrowed funds and ensure that the borrower always gives preference to repayment of the loan and regular payment of interest. Lender is thus on the watch as related party transactions can be used by the entity to transfer out funds, consequently impacting the interest of the lender. C. Minority Shareholders vs. Controlling Promoters Majority shareholders in companies having controlling interest could drive the decisions of purchasing goods and services at higher prices from related parties or supplying at lower prices to related parties which are exclusively owned by them. This would drain the profits out of the companies and build up the profits of the related parties. Such practices deprive the minority shareholders of their share of profits and reserves in the companies and hence is a matter of concern to them. D. Employees and Key Management Personnel Employees are impacted if the funds or liquidity of the Company is diverted to related parties and there are insufficient funds available for payment of their remuneration, bonus and retirement benefits. Further, any deviation from the arm’s length price in related party transactions, results in companies within the same group not reporting profits of individual entities correctly. This makes evaluation of the Company’s results and performance of the managers distorted on account of incorrect valuation of related party transactions. E. Public Partners in Public-Private Partnerships (PPP) In Public-private partnership (PPP) which is a funding model for a public infrastructure project, the public partner representing the Government has apprehensions about pricing of related party transactions which would adversely impact the public infrastructure project and result in the funds being channelled out to the private sector partner. It is thus a herculean ordeal for the corporate, to balance the concerns of the different stakeholders, while complying with all the applicable tax and non-tax regulations. 3. Regulations Governing Related Party Transactions: Tax and Non-Tax Regimes Considering that the interest of the stakeholders is to be protected, the Government brought in several regulations to monitor the related party transactions entered into by companies. This includes both tax related regulatory measures as well as non-tax related regulatory measures. Tax Related Regulatory Measures From the perspective of tax related regulatory measures, transfer pricing regulations were introduced in the Income-tax Act, wherein every entity is required to maintain extensive documentation and file report from a Chartered Accountant stating the nature and value of international transactions entered into with the related parties and the method of transfer pricing adopted. “The scope of transfer pricing regulations is also extended to domestic transactions to safeguard the interest of the revenue, in case of transactions between companies existing in jurisdictions having tax differences.” The scope of transfer pricing regulations is also extended to domestic transactions to safeguard the interest of the revenue, in case of transactions between companies existing in jurisdictions having tax differences. Apart from that, the transactions between related parties are regulated by Clause 2(a) of Section 40A of the Income-tax Act, 1961, wherein if expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, or the legitimate needs of the business or profession of the assessee or the benefit derived by, or accruing there from, so much of the expenditure as is so considered to be excessive or unreasonable shall not be allowed as a deduction. Similarly, indirect tax regulations specify separate valuation rules for related party transactions, such as in the Customs regulations and the Goods and Services Tax valuation rules. The methods prescribed under these regulations can be grouped under two categories. The first is where the market price of the transaction is compared with the transfer price of the related party transactions. The second is where the transfer price is justified by deriving the price from the cost, selling price or by justifying the margins by comparing a profit level indicator. The methods prescribed are tabulated as follows: Sr. No. Particulars Market price-based transfer pricing methods Other transfer pricing methods A) Income Tax regulations in case of International Transactions or Specified Domestic Transactions • Comparable Uncontrolled Price method (CUP) • Resale Price Method (RPM); • Cost Plus Method (CPM); • Profit Split Method (PSM); • Transactional Net Margin Method (TNMM); • Such other method as may be prescribed by the Board. B) Income Tax regulations in case of other payments to related parties • Fair Market Value • Not applicable C) Goods and Service Tax • Open Market Value. • Value of supply of like kind and quality. • Amount equivalent to 90% of the price charged for the supply of goods of like kind and quality by the recipient to his unrelated customer. • Value of supply based on cost i.e., cost of supply plus 10% mark-up. • Value of supply determined by using reasonable means consistent with principles and general provisions of GST law. (Best Judgement method) D) Customs Laws • The transaction value of identical goods, or of similar goods, in sales to unrelated buyers in India; • The deductive value for identical goods or similar goods; • The computed value for identical goods or similar goods; • Residual method Non-tax Regulatory Measures From the perspective of non-tax regulatory measures, firstly the Accounting Standards require that all related parties, nature of relationship and the value of transactions are disclosed in the financial statements. Further, the Companies Act 2013 requires that all related party transactions are approved by the Board of Directors as well as the Audit Committee and also requires the auditor to report whether these related party transactions have been correctly disclosed and have been done at a fair value. If the transactions have not been carried out at arm’s length price, the auditor is required to qualify the audit report to bring it to the attention of the various stakeholders such as shareholders, lenders, creditors, employees, regulatory authorities and other users of the financial statements. Till date, no method for determining the arm’s length price has been specifically prescribed either by the Accounting Standards or the Companies Act, 2013. Further, there is no requirement to disclose the method of transfer pricing adopted by the management for these transactions. Other Legal & Economic Considerations Various studies have shown that the transfer pricing of related party transactions is influenced by factors beyond the tax related regulations and non-tax regulations. These comprise of legal factors such as technical or quality norms for products and services, intervention of Government in terms of restrictions on price or volumes, trade policies. Apart from legal factors, the management has to consider the economic factors such as exchange rate, inflation, competition, market penetration, financing modes and investor expectations. 4. Examples from Case Studies: Judicial Jurisprudence in the Automobile Industry The fact that transfer pricing of related party transactions is not merely tax motivated can be observed from the following two case laws relating to transfer pricing disputes from the automobile industry. The method of transfer pricing adopted by companies is not available in the public domain. However, orders on transfer pricing disputes issued by the Income Tax Appellate Tribunal (ITAT) could be analysed. Note on ITAT Authority: The ITAT is the final fact-finding authority for income tax disputes and higher courts take up the matter only if it is a substantial matter of law. These ITAT cases provide an insight into all relevant facts involved in the transfer pricing case. Case 1: Mercedes-Benz India Pvt. Ltd. vs. Assistant Commissioner of Income Tax Citation: [TS-9028-ITAT-2018(Pune)-O, (2018) 196 TTJ 464 (Pune)] The company is a manufacturer of automobiles, specifically luxury passenger cars for sale in the Indian market. The company also undertook resale in the Indian market of certain models of Mercedes-Benz cars by importing them from its associated enterprise outside India in the form of Completely Built Units (CBU). Apart from this, the company also entered into transactions for payment of royalty and import of raw materials and spare parts with its associated enterprise. The transfer price was justified using the Transaction Net Margin Method (TNMM) by the company using net profit as the Profit Level Indicator (PLI) for all transactions by taking the view that the transactions were closely inter-related and inter-linked to the main activity of the company. On the other hand, the Assessing Officer considered resale of CBUs and spare parts as similar activities as having no value addition and having common source of products and intermediary, and hence applied Resale Price Method (RPM) by applying similar margins for both activities. In case of royalty, the Assessing Officer applied Comparable Uncontrolled Price (CUP) Method by considering the rate of royalty paid by a comparable company. Tribunal Findings & Rationale: Import of CBUs: The Tribunal observed that the intention behind the import was to make available the entire global range of products to Indian customers, which ensures customer satisfaction and helps to target and identify the market conditions for a particular range of cars and also to bring new products which would take time to manufacture in India. Spare Parts & Warranty: The Tribunal observed that the company under terms of warranty had an obligation to provide replacement and dealers were obliged to purchase the same from the company only, which ensures genuineness of parts, and to maintain and enhance the performance of vehicles. Further, as the passenger cars had to be sold at competitive prices, the company could compensate from premium pricing of spare parts. Royalty on Know-How: The Tribunal observed that royalty was intrinsically linked with production and sales activity. Case 2: Deputy Commissioner of Income Tax vs. Man Trucks India Pvt. Ltd. Citation: [TS-6887-ITAT-2018(Pune)-O] The company manufactured cargo line shell trucks which is a special line of trucks specifically for Indian market and other developing countries’ markets. The trucks were manufactured as per emission norms which were acceptable in India and other developing countries, but not acceptable in Germany. Due to excess manufacturing capacity available, the company manufactured trucks for export sale to Germany, for ultimate sale in developing countries like South Africa, Ethiopia and Indonesia. Due to stricter emission norms in Europe, these trucks were directly dispatched to the developing countries. The sales were invoiced to Germany at Cost plus 25% less EUR 500 for warranty commitments which would not been borne by the company but would be passed on to the Associated Enterprises. However, the Assessing Officer aggregated the transactions and applied TNMM after rejecting CUP and CPM method adopted by the company. 5. Analysis of the Case Law: Factors Affecting Transfer Price and Objectives The appeals in question are on account of dispute regarding the taxation arising from the pricing of the transactions wherein the Assessing Officer has demanded higher tax. Hence, the objective of the Company to reduce the overall tax is indicated and that of the Assessing Officer to regulate such practices is apparent. Further, other factors affecting transfer pricing can be identified from the case based on the various aspects that have been considered by the ITAT in the course of arriving at the conclusion regarding the method of pricing to be adopted: 1. Impact of Tax Regulations: The transactions in both cases are subject matter of transfer pricing assessment under Income-tax Act and hence were justified by the Companies by applying TNMM, which indicates that tax regulations impact the transfer pricing method. 2. Non-Tax Regulations & Accounting Standards: The Tribunal has drawn reference to Accounting Standards apart from Income-tax Rules while assessing the aggregation of transaction for application of TNMM in the first case and in the second case has drawn reference to segmental reporting to be certified by auditor while assessing the aggregation of transaction for application of TNMM. This confirms that non-tax regulations also impact the transfer pricing method. 3. Contractual Arrangements & Warranties: Both Companies were bound by terms of Warranty Contract with the customers. In the first case, this was a stand taken by the Company to justify aggregation and use of TNMM whereas in the second case the consideration of whether the Company or the Associated Enterprise will provide after sales service and warranty in pursuance of commitments to customers is a pointer to the role of contractual arrangements in determining the transfer pricing method. 4. Domestic & Overseas Government Policies: In the first case, the stand of the Company that the royalty rate was approved by various regulatory authorities like RBI, DIPP indicates that Government policies influence the method in question. The Assessing Officer has stated that the comparable Companies which were Chinese Companies received subsidies from the Government and rejected the comparables for use of TNMM. This indicates that overseas Government policies also play a part in deciding the transfer pricing method. Similarly, in the second case, the discussion of higher emission norms being applicable in Germany and hence the inability of sending trucks there, leading to them being dispatched directly to the developing nations, indicates that conformance to overseas Government policies and non-tax regulations is a necessity in determining the transfer pricing method. 5. Availability of Comparables: In the first case, there was disagreement with the Assessing Officer over the comparable used by the company in applying TNMM. In the second case, there was disagreement with the Assessing Officer over the comparable used in CUP method and the company took a stand that where comparison was available at hand, an endeavour should be made to use the internal comparables available. This indicates that availability of comparables matters while deciding the appropriate method. 6. Intangibles, Joint Ventures & Ownership Control: In the first case the Company was paying royalty to the Holding Company for technical know-how. This shows that the ownership of intangible assets and ensuring compensation for use of such assets has to be considered in this context. In the second case, the Company is a Joint Venture which indicates that contractual arrangements impact the transfer pricing method. The consideration of geographical differences arising out of exports to developed vis- a- vis developing countries indicates that the level of development of nations is important in context of this case. The fact that the trucks were exported to developing countries but the orders were routed through the German Company indicates that ownership and control can play a major role in this decision making. “Management of the company has to reconcile various regulatory and non-regulatory factors and objectives at the time of pricing of the related party transactions which are beyond tax saving motivations or compliance with tax regulations.” Corporate Objectives Manifested in the Decisions Further, various objectives behind transfer pricing can be identified from the cases based on the various aspects that have been considered by the ITAT in the course of arriving at the conclusion regarding the method of pricing to be adopted: Mercedes-Benz India Objectives Customer Satisfaction & Market Penetration: Bringing CBU units to India indicates motives to provide the entire global range, satisfy customers, build brand reputation, and penetrate luxury markets. Warranty & Quality Preservation: Importing genuine spares and restricting dealers preserves operating efficiency and standard of cars. Application Simplification: Aggregation of transactions and application of TNMM on an entity-wide basis simplifies compliance. Intangible Control & Fund Repatriation: Paying royalty for know-how protects group IP, ensures compensation for use, enables repatriation of funds, and facilitates performance evaluation. Man Trucks India Objectives Competitiveness & Capacity Utilization: Exporting trucks to emerging markets due to domestic slowdown maximizes fixed asset utilization. Regulatory Compliance & Penalty Avoidance: Direct dispatch to developing countries without entering Europe bypasses strict EU emission standards. Internal Simplification: Applying internal TNMM benchmarks internal margins while keeping export contracts manageable. Centralized Asset Control: Routing orders and third-party material via the German parent with handling surcharges asserts ownership and enables performance tracking. The companies have thus balanced multiple objectives, by efficiently managing the corporate concerns of fixing product quality and customer service, while ensuring compliance with the transfer pricing tax law. 6. Core Findings: Reconciling Business Reality with Tax Scrutiny It is clear that the management of the company has to reconcile various regulatory and non-regulatory factors and objectives at the time of pricing of the related party transactions which are beyond tax saving motivations or compliance with tax regulations. Further, the management is also bound by commitments, whether contractual or not, to other stakeholders. “The management has to be sensitive to the market, competition and economic environment in order to retain its market share and to sustain operations.” The management has to be sensitive to the market, competition and economic environment in order to retain its market share and to sustain operations. Objectives of compliance with regulations and prudent decision-making practices to manage the business need to be brought together to adopt a single method of pricing for a transaction. The method so adopted needs to play a dual role of satisfying the business requirements and also be acceptable to the tax regulators. In the first case, the assessee adopted TNMM whereas the tax authority chose CUP method and RPM. In the second case, the tax authority adopted TNMM whereas the assessee had chosen CPM. In both cases, the management adopted the transfer pricing method after due consideration of various factors and objectives affecting the transaction. The tax authorities on the other hand chose a different method to arrive at the transfer price with the primary objective of protecting the interest of the revenue. 7. Conclusion: The Need for Harmonization and Mutual Recognition Transfer pricing of related party transactions needs to be perceived in a comprehensive manner and not just as a tax motivated act which needs to be regulated by the authorities. “A broad-based approach from the perspective of all stakeholders needs to be adopted wherein factors beyond tax regulatory requirements need to be considered while evaluating the transfer pricing method adopted.” A broad-based approach from the perspective of all stakeholders needs to be adopted wherein factors beyond tax regulatory requirements need to be considered while evaluating the transfer pricing method adopted. “A more comprehensive approach is the need of the hour wherein uniformity is introduced in the methods and reporting of related party transactions under the various tax and non-tax regulations.” There cannot be separate pricing for tax compliance and for accounting since both are oriented towards reporting transactions at their fair values. Hence, a more comprehensive approach is the need of the hour wherein uniformity is introduced in the methods and reporting of related party transactions under the various tax and non-tax regulations. Further, mutual recognition of the methods by the regulators should be brought in. A uniform reporting system with mutual recognition would benefit all stakeholders facilitating the evaluation of the impact of the same. This would bring in relief to the management, reduce compliance costs and would be a major step towards achieving ease of business.

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 53–59 (Journal pp. 1225–1231) Law / Direct Taxes Use of Affidavit in Tax Proceedings RJ CA. Dr. Rajendrakumar Jain Member of ICAI • rijainip@gmail.com PJ Adv. Puru Jain Advocate & Legal Practitioner • eboard@icai.in Executive Synopsis: Affidavit as a Crucial Evidentiary Instrument An affidavit is a crucial legal tool that is immensely useful in discharging the burden of proof in tax proceedings. Understanding the law surrounding affidavits is essential for tax practitioners. When personal knowledge or information of a witness regarding a particular fact has a significant bearing on a case, the witness can formally share that knowledge with adjudicating authorities through an affidavit. An affidavit does not change the facts; rather, it is a formal legal procedure of narrating facts which converts testimony into legally validated evidence. On numerous occasions, an affidavit becomes clinching evidence upon which cases are decided. Originating in Roman jurisprudence (Latin: “pledge one’s faith”) and introduced to India under British rule, the affidavit has assumed heightened significance in the contemporary era of faceless assessments. 1 Affidavit as Evidence in the Era of Faceless Assessment In today’s faceless assessment environment, the assessee is not permitted to meet the Assessing Officer personally to explain evidence and submissions. Only the written submission of the assessee speaks for his case. Consequently, written submissions must be persuasive, legally sound, and capable of discharging the burden of proof in the most effective manner. Burden of Proof & Inefficacy of Oral Submissions Evidence is the fulcrum of judicial and tax proceedings because the outcome depends strictly upon the quality and nature of evidence produced. In income tax proceedings, the initial burden of proof is predominantly cast upon the assessee. Law is not mathematics; everything is subjective and varies case-to-case. There is no rigid straitjacket formula to distinguish between good and bad evidence. Crucially, oral submissions or oral statements in tax proceedings possess zero evidentiary value. When facts are placed on affidavit, it substantially elevates the quality of evidence, establishes formal credibility, and shifts the burden of proof onto the Department. 2 Legal Definitions and Characteristics of a Valid Affidavit General Clauses Act, 1897 — Section 3(3) “Affidavit” shall include affirmation and declaration in the case of a person by law allowed to affirm or declare instead of swearing. Black’s Law Dictionary An affidavit is “a voluntary declaration of facts written down and sworn to by the declarant before an officer authorised to administer oaths, such as a notary public”. Essential Characteristics & Procedural Requirements Natural Persons Only: Only individuals can make an affidavit. Artificial juridical persons, corporate entities, or firms cannot make an affidavit in their own corporate name. Legal Competency: The affiant (the deponent who makes the affidavit) must be legally competent to execute such a declaration. Sworn Before Authorized Authority: It must be taken before an authority empowered to administer oaths. The foundational legal maxim applies: “judicio non creditor nisi juratis” (in judicial proceedings, testimony is not believed unless given on oath). Stamp Paper: It must be drawn on valid, requisite stamp paper according to state stamp laws. Full Personal Identity: The affiant must state his full name, father’s name, profession or trade, and place of residence. Numbered Paragraphs: The affidavit must be divided into distinct, consecutively numbered paragraphs. Identification & Attestation: The oath administrator must identify the affiant, authenticate his identity, and affix his official seal and signature. Strict Verification Clause: An affidavit must be properly verified. Verification is essential to test genuineness and hold the deponent legally accountable for false statements (Narendra Kumar Saklecha v. Jagjivan Ram, AIR 1974 SC 1957). Judicial Rulings on Unverified Affidavits Inadmissible in Evidence: If an affidavit is not properly verified, it cannot be admitted in evidence (A. K. K. Nambiar v. Union of India, ITR 1970 SC 652, 654). Nullity in Eyes of Law: An unverified affidavit is no affidavit in the eyes of law (State of Rajasthan v. Sindhi Film Exchange, AIR 1974 Raj 31, 33). Worthless in Proceedings: If an affidavit lacks verification, it is of no legal use whatsoever (Sundar Industries v. General Engineering Works, AIR 1982 Del. 220, 223). Permissible Subject-Matter: Knowledge vs. Belief An affiant can give testimony strictly regarding two classes of matters: 1. Matters within Personal Knowledge: When testifying regarding knowledge, testimony cannot be given on behalf of someone else. For instance, a Company Manager is not permitted to give an affidavit on behalf of the company’s accountant regarding what the accountant knew or did. 2. Information Believed to be True: Where belief is based on external information, the source of information must be disclosed with specific words such as “I am informed” and the grounds of belief explicitly stated. Primary Facts vs. Inferences: The assessee is obligated to disclose primary facts fully and truly, but is under no obligation to disclose what inference must be drawn from such facts (Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC): TC51R.779). Under Order XIX Rule 3 CPC and the landmark Calcutta High Court ruling in Padmabati Dasi vs. Rasik Lal Dhar (1910) ILR 37 Cal 259, an affidavit must clearly segregate deponent’s knowledge from his belief to enable the court to judge whether it is safe to act on the belief. 3 Differences Between Hearsay, Statement, and Affidavit To understand why tax law insists upon the stringent format of an affidavit rather than a simple statement or hearsay, the conceptual and evidentiary differences must be appreciated: Dimension Hearsay Statement Affidavit Legal Definition Second-hand gossip, rumor, or unsubstantiated knowledge. Written or oral narration of facts without statutory affirmation. Voluntary written declaration sworn on oath before an authorized officer. Evidentiary Admissibility Inadmissible. Suspicion cannot take the place of evidence (Umacharan Shah & Bros. Vs. CIT, 37 ITR 271 SC). Valid evidence only if given before an officer empowered to administer oath; otherwise mere information. Full legal admissibility as documentary evidence under judicial rules and CPC Order XIX. Retraction & Coercion Defense Not applicable; possesses no legal binding force. Can be easily withdrawn or retracted alleging duress, pressure, or coercion. Cannot plead coercion because it is given voluntarily under oath before a competent authority. Penal Consequences None. Operates as estoppel against the declarant. Knowingly giving a false affidavit exposes the deponent to criminal prosecution for perjury. 4 Practical Situations and Case Illustrations Where Affidavit is Indispensable 1. Proving Innocence in Accounting Errors When an unintentional error is made during bookkeeping, the assessee does not defend the error but seeks to prove innocence. Only an affidavit of the accountant who committed the error can speak to his state of mind, intent, and bona fides. 2. Misplaced Books of Account To establish that books of account were genuinely misplaced and not deliberately withheld or concealed from tax authorities, only an affidavit from the office staff who misplaced the records can prove bona fide conduct. 3. Jewellery Found During Search / Raid When jewellery belonging to a house guest is found during a tax search and the AO alleges it belongs to the assessee, an affidavit from the guest affirming ownership serves as valid, direct evidence. 4. Retraction of Search Statements u/s 132(4) A statement recorded during search that was either factually erroneous or extracted under duress/coercion can legally be withdrawn or retracted only through a formal sworn affidavit explaining circumstances. 5. Proving Blood Relationships & Gifts When the AO disbelieves that transacting parties are blood relatives (e.g., gift received from a maternal uncle or aunt), a sworn affidavit from the relative substantiating the familial relationship serves as legal proof. 6. Admission of Deficiency in Service & Advice Where a professional admits delay in filing an appeal despite receiving timely papers, or clarifies that earlier professional advice was rendered on an erroneous factual premise, an affidavit provides the necessary legal substantiation. Case Precedent: Swift Knit Pvt. Ltd. (ITA No. 533/Ahd/2014, ITAT Ahmedabad) The assessee claimed that the accountant’s failure to write back gratuity of ad hoc employees was a bona fide mistake. The ITAT decisively rejected this contention: “This is a very general and sweeping statement. It should be demonstrated with circumstantial evidence as to how this error has happened; what is operating force in the mind of person who has prepared the return, and how he failed to comprehend a particular item. Even the affidavit of that person has not been filed. Therefore, we are of the view that this statement is just being made for giving an explanation.” 5 Challenges in Using Affidavits & Overcoming Objections Tax authorities frequently dismiss affidavits by raising two standard arguments: Objection 1: Non-applicability of Indian Evidence Act to Tax Proceedings. Rebuttal: Even though the strict technical rules of the Indian Evidence Act do not bind income tax proceedings, courts have consistently held that the broad, equitable principles of the Evidence Act apply to fiscal proceedings. Objection 2: Term “Affidavit” Not Defined under Section 3 of Evidence Act. Authorities often cite Smt. Sudha Devi v. M.P. Narayanan (AIR 1988 SC 1381, 1383), which held that affidavits are not included in Section 3 and can only be used if permitted by the court for sufficient reasons. Rebuttal: This argument fails because independent statutory rules specifically govern affidavits in tax jurisprudence: Supreme Court of India Rules specifying affidavit contents and filing procedures. Income Tax Appellate Tribunal (ITAT) Rules 10 and 29. Rule 10 of Authority for Advance Rulings (AAR) Procedure Rules, 1996 (mandating petitioner affidavits). 6 Is Affidavit Conclusive Evidence? Cross-Examination & Landmark Precedents Affidavits are not sacrosanct, but the claims made in an affidavit must be proved otherwise by the Assessing Officer. When an affidavit is furnished, the AO is entitled to cross-examine the deponent and require the assessee to produce the deponent in person. If the assessee fails to produce the witness for cross-examination, the AO has the option to ignore the affidavit. However, if the AO fails to consider an uncontroverted affidavit on record, the assessment order is invalid for failure to give due consideration to submitted evidence. Revenue Waives Right by Not Disputing Contents: CIT vs. T.I. & M. Sales Ltd. (1987) 166 ITR 93 (SC) Where the facts stated in the affidavit directly bear on the point in issue and the Revenue neither challenges admissibility nor disputes contents, the Supreme Court held: “the Revenue appears to have waived its right to dispute the facts asserted in the affidavit, on the one hand by not challenging its admissibility and on the other, by not disputing the contents thereof”. No Rejection Without Cross-Examination: Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC) Followed in Sri Krishna v. CIT (1983) 142 ITR 618 (All) and Dilip Kumar Roy v. CIT (1974) 94 ITR 1 (Bom). Rejection of an affidavit is unjustified unless the deponent has been discredited in cross-examination or failed to produce supporting evidence when called upon. If the deponent is not cross-examined, the assessee may assume tax authorities are satisfied with the affidavit (L. Sohan Lal Gupta v. CIT (1958) 33 ITR 786 at 791 All). Exceptions Where Material on Record Contradicts: Smt. Gunwati Bai Rati Lal vs. CIT (1984) 146 ITR 140 (MP) The Madhya Pradesh High Court clarified that Mehta Parikh does not lay down an absolute rule. An affidavit can be rejected without cross-examination if there is sufficient independent material on record to doubt the veracity of the statements made in the affidavit. Cross-Examination Rights & Refreshing Memory: Needle Industries & K. Yarappa Reddy In Needle Industries (India) Ltd. v. N.I.N.I.H. Ltd. (AIR 1981 SC 1298), the Supreme Court emphasized that it is unsatisfactory to record findings involving grave consequences on affidavits alone without cross-examination. In State of Karnataka vs. K. Yarappa Reddy (AIR 2000 SC 185), the Supreme Court ruled that when a deponent is produced for cross-examination, it is desirable that he is permitted to go through the contents of the affidavit to refresh his memory. 7 Affidavits Before Appellate Authorities: CIT(A) and ITAT Submission Before CIT (Appeals) as Additional Evidence Under natural justice principles, all material should primarily be led before the Assessing Officer. However, under Rule 46A of the Income-tax Rules, if an assessee was prevented by sufficient cause, or evidence was collected later, or it goes to the root of the matter without negligence, additional evidence in the form of an affidavit can be admitted (Rule 46A(2)(c) & (d)). Even after admitting the affidavit, CIT(A) must provide an opportunity to the AO to rebut or comment. If the AO fails to comment or rebut, the affidavit becomes incontrovertible, valid evidence on record (Keshav Mills Co. Ltd. vs. CIT (1965) 56 ITR 365 SC). Submission Before ITAT (Rules 10 & 29) & Duty to Pray Under ITAT Rules 10 and 29, the Tribunal has jurisdiction to permit new questions and admit affidavits as additional evidence. An appellate finding ignoring an affidavit concerning material evidence is unsustainable in law (Hanutram Ram Prasad v. CIT (1978) 114 ITR 19 Gauh; J.S. Parkar vs. V.B. Palekar (1973) 41 CCH 0195 Mum HC). Mandatory Formal Prayer: Mere submission of an affidavit on record is insufficient. The assessee must formally pray before the Tribunal to admit and consider it. In Dinesh B. Parikh Vs. CIT (2012) 347 ITR 420 (Cal HC), where no formal application or prayer was made to accept a broker’s affidavit as additional evidence, the court held that no duty was cast upon the Tribunal to look into it. Withdrawal, Amendment & The Principle of “No Estoppel” in Tax Law Amendment or Withdrawal: Permissible in special circumstances when new facts emerge, or an earlier affidavit was based on erroneous omissions. No Estoppel in Taxation Law: Under general civil law, an affidavit creates a right of estoppel. However, tax jurisprudence rejects estoppel against statute. In CIT Vs. Bharath General Reinsurance Co. Ltd. (1971) 81 ITR 303 (Del HC), the court held that the Department must assess income in the correct assessment year; an assessee’s mistaken inclusion of income does not confer jurisdiction to tax it. Similarly, in CIT v. Bhanwarlal (2002) 225 ITR 870 (Raj HC), it was held that additions made solely on an assessee’s admission under Section 132(4) cannot be sustained if uncontroverted facts prove otherwise. Conclusion: The Ultimate Bulwark in Faceless Assessments An affidavit is a powerful and indispensable evidentiary instrument available to the taxpayer, particularly in the era of faceless assessments where oral hearings are absent and effective written submissions are the taxpayer’s sole saviour. Discharging the burden of proof with a properly executed, verified, and substantiated affidavit ensures truth-seeking integrity, guards against arbitrary additions, and fortifies the assessee’s legal standing before appellate authorities. The Chartered Accountant • April 2022 Direct Tax Litigation & Law • Journal pp. 1225–1231

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 86–91 (Journal pp. 1258–1263) Indirect Taxes Recent changes proposed under GST and Customs NJ CA. Neha Jain D Member of the Institute • Contact: nehajain1180@gmail.com & eboard@icai.in Executive Synopsis: Amrit Kaal & India@100 Blueprint India is progressively reviving itself from the pandemic and marking its “Azadi ka Amrit Mahotsav”. As the adage declares, “A journey of a thousand leagues begins with a single step.” The Union Budget 2022 seeks to lay the foundation and provide a definitive blueprint to steer the national economy over the Amrit Kaal of the next 25 years, focusing firmly on the vision of India@100. The strategic vision of India@100 rests upon four foundational pillars: (1) PM Gati Shakti, (2) Inclusive Development, (3) Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action, and (4) Financing of Investment. On the indirect tax front, the Finance Bill 2022 introduces radical legislative reforms focused on enhancing ease of doing business, rationalising customs tariffs, overhauling exemptions, establishing stronger digital compliance, and advancing trade facilitation. Part I: Important Changes Proposed in Customs vide Finance Bill 2022 Policy Objectives & Commercial Data Privacy Protection The proposed amendments in the Customs Act are anchored in four strategic goals: domestic capacity creation, providing a level playing field to MSMEs, easing raw material supply constraints, and enhancing ease of doing business. Criminalizing Unauthorized Data Publication: To protect confidential commercial information submitted by importers and exporters in their declarations, the publishing of such trade data, unless explicitly authorized by law, is designated as a punishable statutory offence under the Customs Act. Curbing Import Undervaluation — Section 14 Amendment Section 14 of the Customs Act, 1962 (valuation of goods) is amended to empower the Central Government to prescribe specific obligations on importers of certain specified goods to curb undervaluation. This ensures revenue buoyancy for the government exchequer while safeguarding domestic manufacturers against predatory pricing. However, as valuation has historically been an intense battleground of litigation across tax statutes, the exact criteria specified in future notifications will require rigorous scrutiny. Additional Responsibility on Adjudicating Officials — Insertion of Section 110AA A notable institutional reform is the insertion of Section 110AA into the Customs Act. Under this section, where an officer conducting an audit, inquiry, search, or investigation has reasons to believe that duty is short-paid, erroneously refunded, or drawback erroneously allowed, the officer must—upon completing such inquiry, investigation, or audit—transfer the complete documentation along with a written report to the jurisdictional adjudicating officer (or the officer to whom the adjudicating officer reports). Diligence & Bifurcation: This structural change enforces stricter compliance verification and guarantees that the functions of investigation and adjudication are cleanly segregated, demanding high institutional diligence at the adjudication level. Putting an End to the DRI Jurisdictional Impasse (Canon India Fall-Out) The landmark Supreme Court judgment in Canon India Private Limited (pronounced in March 2021) held that Directorate of Revenue Intelligence (DRI) officers were not empowered to issue Show Cause Notices (SCNs) or pass adjudication orders under Section 28 of the Customs Act. The Supreme Court ruled that Section 28 used the specific term “the” proper officer, and DRI officers did not qualify as proper officers under Section 2(34) and Section 5 of the Customs Act, 1962. Retrospective Legislative Overhaul Empowerment under Section 2(34): The Finance Bill 2022 amends Section 2(34) with retrospective effect to formally designate DRI officers, officers of Customs (Preventive), and audit officers as “Proper Officers”, entrusting powers under Sections 5 and 6 of the Customs Act. Pending Disposals Validated (Clause 96): The Explanation in Clause 96 specifies that any case pending disposal as on the date of enactment will be disposed of in accordance with this retrospective amendment, plugging massive potential revenue leakages. Harmonization with Section 110AA: While past SCNs and actions of DRI are validated retrospectively, going forward under Section 110AA, DRI officers conducting investigations must transfer files to jurisdictional officers for issuing notices and adjudication. Thus, past DRI actions are rescued, but future direct adjudication by DRI is curbed. Customs Duty Rationalisation & Industrial Growth Catalysts Sunset Clause on Exemptions (Section 25(4A)) Stipulating definitive sunset dates under Section 25(4A) for conditional exemptions to protect domestic industry. Critical exclusions from automatic expiry include international commitments (FTAs, ITAs), Foreign Trade Policy concessions (Advance Authorisation), and Phased Manufacturing Programmes (PMP). Regional Cess Exemptions Exemption from Health Cess, Agriculture Infrastructure and Development Cess (AIDC), and Road and Infrastructure Cess (RIC) on imports from neighbouring nations (Bhutan, Nepal, Bangladesh), systematically reducing import dependency on China. Solar Manufacturing PLI (INR 19,500 Cr) Additional allocation of INR 19,500 crore under Production Linked Incentive (PLI) for high-efficiency solar photovoltaic modules to attain 280 GW installed solar power capacity by 2030 under Atmanirbhar Bharat Abhiyaan. Healthcare & Rare Diseases Aligned with the National Policy for Rare Diseases, 2021, full customs duty exemption is provided on life-saving drugs and medicines imported by designated Centres of Excellence (CoE). Electronics PMP & 5G Rollout Phased Manufacturing Programme (PMP) tariff structures introduced for hearables, wearables, and smart meters. Private telecom providers enabled to launch commercial 5G services within FY 2022-23. Advance Rulings Validity & Overhaul of IGCR Rules, 2017 3-Year Sunset on Customs Advance Rulings Previously, customs advance rulings remained valid indefinitely until there was a change in law or facts. The Finance Bill 2022 restricts validity to 3 years (or till change in law/facts, whichever is earlier). For existing rulings, validity is capped at 3 years from presidential assent. Importers must strategically weigh advance rulings against direct assessments based on dispute longevity. Import of Goods at Concessional Rate (IGCR) Rules, 2017 IGCR Rules mandate export of value-added products manufactured using duty-exempt inputs within six months. Key reforms include: Digital Compliance via ICEGATE: Transition to end-to-end digital compliance; review intervals reduced from quarterly to monthly. IIN & Continuity Bond: Importers must submit an Import of Goods at Concessional Rate Identification Number (IIN) and continuity bond details on the bill of entry (operating as a running debit ledger). Capital Goods Clearance: Capital goods used for specified purposes can be cleared on payment of differential duty with interest on depreciated value, with depreciation rates formally prescribed. Practical Bottlenecks: Ambiguity remains on whether EOUs operating under B-17 bond (Notification 52/2003-Customs N.T.) require a separate continuity bond, and differences between IGCR depreciation rates and Notification 52/2003 norms require official clarification. Customs reforms balance stricter border vigilance with global supply chain integration, embodying “vocal for local and local for global”. Part II: Important Changes Proposed in GST vide Finance Bill 2022 5-Year Trajectory of Input Tax Credit (ITC) & Scrapping of Matching Provisions GST was conceived to ensure seamless credit flow via an automated tripartite return architecture (GSTR-1 supplier -> GSTR-2 recipient -> GSTR-3 monthly return). Due to IT infrastructure limitations, the matching provisions under Sections 42 and 43 were never operationalized. To curb fake invoicing, Rule 36(4) of the CGST Rules was inserted on 9th October 2019, capping provisional credit at 20% over GSTR-2A, subsequently reduced to 10% (January 2020) and 5% (January 2021). The Finance Act 2021 mandated that credit could be availed only if declared by the supplier and tax remitted, sparking widespread judicial challenges under the doctrine of impossibility. Formal Repeal of Matching: The Finance Bill 2022 officially removes the defunct matching concept by doing away with Sections 42 and 43 of the CGST Act, 2017, replacing it with a hardcoded statutory return mechanism. Insertion of Section 16(2)(ba) — Hardcoding Auto-Generated Statements A decisive amendment is the insertion of Clause (ba) into Section 16(2). ITC can now be availed strictly on the basis of an auto-generated statement (GSTR-2B) appearing on the common portal, reflecting invoice details uploaded by suppliers in GSTR-1, explicitly classifying credit into eligible and ineligible streams. Self-Assessment & Outward Reconciliation Credit can only be claimed on a self-assessment basis (provisional credit eliminated). Outward supplies reported in GSTR-3B cannot be lower than those declared in GSTR-1 of that month, guaranteeing tax remittance. Vendor Vigilance & Credit Blockage Risk Recipient’s credit is tied to supplier tax payment and correct ITC declaration. Non-filing by vendors causes immediate credit blockage, demanding rigorous vendor screening and communication. Retrospective Overhaul of Section 50(3) — Interest on Wrongly Availed & Utilised ITC Consequent to scrapping matching under Sections 42 and 43, Section 50(3) of the CGST Act is amended retrospectively. Interest on ineligible ITC will be levied only when credit has been wrongly availed AND utilised. Major Taxpayer Relief: If an assessee merely availed ineligible ITC in the electronic credit ledger without utilizing it to discharge outward tax liabilities, no interest penalty can be imposed retrospectively, bringing long-awaited closure to contentious litigation. Extended Cut-Off: 30th November The statutory time limit for availing input tax credit and issuing credit notes or debit notes pertaining to a financial year has been extended from 30th September to 30th November of the subsequent financial year. This provides two additional months for annual reconciliation, vendor communications, and adjustments before final balance sheet finalization. Cross-Registration Fungibility (PMT-09) Amendment to the cash ledger mechanism allows transferring balances available in the electronic cash ledger (tax, interest, penalty, fee) between different GST registrations of the same PAN across states (IGST and CGST), provided no liability is pending in the transferor’s electronic liability register. Automated Registration Cancellation & SEZ Framework Overhaul Automated Registration Cancellation Beyond traditional suo moto cancellations under Section 46 for 6 months default, registration cancellation will now be automated where a return is not filed beyond 3 months from the due date in a financial year, protecting revenue and eliminating non-compliant fly-by-night operators. Revamping SEZ Laws & Refund Timelines A new comprehensive SEZ legislation is slated by 30th September 2022 to optimize infrastructure. SEZ compliance will be monitored via the Customs portal. For GST refunds on SEZ supplies, the relevant date is fixed as 2 years from the due date of furnishing GSTR-3B under Section 39. Conclusion: Amrit Kaal Reforms for India@100 The Finance Bill 2022 indirect tax proposals present a coherent matrix of trade facilitation and anti-evasion safeguards. Providing additional time for ITC availment, cash ledger fungibility across states under the same PAN, retrospective interest relief under Section 50(3), digitization of IGCR rules, rationalisation of customs tariffs, and revamping SEZ laws collectively advance India’s ease of doing business and litigation reduction. As these legislative changes stabilize during Amrit Kaal, the seeds sown today will yield substantial economic dividends for India@100. The Chartered Accountant • April 2022 Indirect Taxes • Journal pp. 1258–1263

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 67–85 (Journal pp. 1239–1257) AUDIT • STATUTORY BANK BRANCH AUDIT & REGULATORY REPORTING LFAR Reporting and its Requirements CA. A. MONY The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at lrp2201@yahoo.co.in and eboard@icai.in. 🏦 Regulatory Scope & Revised Reporting Architecture The Reserve Bank of India has revised the Long Form Audit Report for the banks including for statutory audit of Bank from the year 2020-21 and vide circular Number RBI/2020-21/33 DOS.CO.PPG. / SEC.01/11.01.005/ 2020-21 dated 5th Sept 2020. The new form has widened the scope for verification and reporting on various sensitive areas of the bank branch functioning. The LFAR is structured for the Central Statutory Auditors, Statutory Branch Auditors and the Specialised branches like Foreign Exchange Branch, Asset Recovery Branch, and administrative offices of the bank. The new format is more comprehensive, requiring the auditor to go deep and discrete to the verification and report many intricate aspects of the bank’s functioning. Read on… Overview of the Revised LFAR Framework The Reserve Bank of India has widely covered the scope of LFAR to converge the broad areas of credit risk, market risk, Assurance and operational risk, Capital Adequacy, Liquidity risk and going concern in the newly designed LFAR. This article aims at giving a brief write up on the clause-to-clause points included in the LFAR for the Bank Branch Audit. This format is only an indicative one and the RBI has given leverage to the Central Statutory Auditors to add any further points requiring specific reporting from the Branch Auditors apart from the general points in the indicative format. Thus, it alludes that there is all possibility of a bank specific LFAR with additional clauses as per the reporting requirement envisaged by the Central Statutory Auditors. “The members are expected to bestow utmost care and caution in the reporting as the new format is more subjective and is oriented towards discrete reporting from auditors which will turn out to be fixing specific accountability on the members.” Indicative Format / Coverage in the Long Form Audit Report (LFAR) by Statutory Branch Auditors (SCB) Name of Bank [To be filled by Branch Auditor] Name of Branch [To be filled by Branch Auditor] Branch Code [To be filled by Branch Auditor] Zone / Circle Code [To be filled by Branch Auditor] Financial Year [e.g., 2020-21 / 2021-22] I. ASSETS 1. Cash Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Does the system ensure that cash maintained is in effective joint custody of two or more officials, as per the instructions of the controlling authorities of the bank? • Give details of custodians of cash. • Verify the key register at random. (b) Have the cash balances at the branch/ATMs been checked at periodic intervals as per the procedure prescribed by the controlling authorities of the bank? • The ONLINE ATM cash has to be checked with the cash scroll taken on the closing hours of 31st. • In case of OFFLINE ATMs the cash is controlled by the central Hub. • Cash with ATM replenisher should be reconciled with disbursement account maintained at branch. (c)(i) Does the branch generally maintain / carry cash balances, which vary significantly from the limits fixed by the controlling authorities of the bank? • Verify the cash retention limit. See average cash balance, proper utilization of float. • Desirable to verify physical cash on the date of audit. • Physical cash at chest need not be verified. But the reporting to RBI of cash balance may be verified. • Obtain a letter mentioning retention limit for auditor’s records. (c)(ii) Does the figure of the balance in the branch books in respect of cash with its ATM(s) tally with the amounts of balances with the respective ATMs, based on the year end scrolls generated by the ATMs? If there is any difference, same should be reported. • The timing of taking scroll and the closing of balance sheet is vital for the reconciliation. • In case of OFFLINE ATMs controlled by ATM Hub, branch auditor has limited role. (d) Whether the insurance cover available with the branch adequately meets the requirement to cover the cash-in hand and cash-in transit? • The blanket insurance is usually taken by head office. • Ensure that the copy of policy is at branch or get a representation to the effect. 2. Balances with Reserve Bank of India, State Bank of India and Other Banks (For branches with Treasury Operations — Refers to balance with clearing house and with other banks) Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Were balance confirmation certificates obtained in respect of outstanding balances as at the year-end and whether the aforesaid balances have been reconciled? The nature and extent of differences should be reported. • The confirmation of balance needs to be obtained and copy kept for auditor’s record. • Report difference if any with details. • Reconciliation entries: if any to be verified with specific reference to long outstanding items, unusual items, revenue items requiring adjustments, etc. • The account copy for the year needs to be verified to see huge cash withdrawals, its authority and requirement. • Verify any credits for other claims as pension disbursement routed through the account. (b) Observations on the reconciliation statements may be reported in the following manner: The long outstanding entries, cash transactions and high value entries should be CRITICALLY examined and reported. (b)(i) Cash transactions remaining un-responded (give details) • Get details of such un-responded entries if any and enquire into reasons and furnish date of squaring off, if done before completion of audit. (b)(ii) Revenue items requiring adjustments / write-off (give details) • Usually clearing house charges may appear which should be taken as revenue expenses. • MOC to be passed, if the amount is material. (b)(iii) Other credit and debit entries originated in the statements provided by RBI/other banks, remaining un-responded for more than 15 days: • Old outstanding balances remaining unexplained/unadjusted. • Give details for entries outstanding for more than 15 days. (b)(iv) Where the branch maintains an account with RBI, the following additional matter may be reported: Entries originated prior to but communicated/ recorded after the year end in relation to currency chest operations at the branch/other link branches, involving deposits into/withdrawals from the currency chest attached to such branches (Give details) • This is applicable to branches operating Chest of RBI and direct link branches designated to maintain RBI account. • The pipeline entries between chest and branch as on 31st Mar should be properly addressed by MOC. • Any long outstanding entries other than year-end entries are to be verified CRITICALLY and reported. (c) In case, any matter deserves special attention of the management, the same may be reported. • The reconciliation of cash balance with ATM replenisher with the base branch, un-responded entries of chest branches, holding huge cash balance without sufficient security etc. are to be reported. 3. Money at Call and Short Notice Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Has the branch kept money-at-call and short notice during the year? Usually this is applicable only at treasury branches. Specify if not applicable. (b) Has the year-end balance been duly confirmed and reconciled? This is normally applicable at HO level. (c) Has interest accrued up to the year-end been properly recorded? This is normally applicable at HO level. (d) Whether instructions/guidelines, if any, laid down by the controlling authorities of the bank have been complied with? Verify compliance with treasury circulars. 4. Investments (For Branches Outside India) Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) In respect of purchase and sale of investments, has the branch acted within its delegated authority, having regard to the instructions/ guidelines in this behalf issued by the controlling authorities of the bank? Not applicable for branches in India (b) Have the investments held by the branch whether on its own account or on behalf of the Head Office/other branches been made available for physical verification? Where the investments are not in the possession of the branch, whether evidence with regard to their physical verification have been produced? Not applicable for branches in India (c) Is the mode of valuation of investments in accordance with the RBI guidelines or the norms prescribed by the relevant regulatory authority of the country in which the branch is located whichever are more stringent? Not applicable for branches in India (d) Whether there are any matured or overdue investments which have not been encashed and / or has not been serviced? If so, give details? Not applicable for branches in India 5. Advances (The Core Section of LFAR) Threshold for Large Advances: The answers to the questions may be based on the auditor’s examination of all large advances and a test check of other advances. In respect of large advances, all cases of major adverse features, deficiencies, etc., should be reported. For this purpose, large advances are those in respect of which the outstanding amount is in excess of 10% of outstanding aggregate balance of fund based and non-fund based advances of the branch or Rs. 10 crores, whichever is less. Auditor Guidance on Threshold: Obtain a list of advances above 10 crores or 10% of branch aggregate advances including fund based and non-fund based for thorough verification. Classify the borrower’s constitution-wise for allocation of work among auditors. Also classify as consortium advances, syndicated loans, multiple banking arrangement, group accounts, etc., for bringing more focus. Dual-Methodology Framework: • Transaction Audit: For all accounts above threshold, examine account-specific details: overall operations, cash vs. account transactions, business vs. personal transactions, cheque returns, operating at the brim of limits, frequent overdrawings, frequent inter-bank transfers, and round tripping. • Process Audit: For accounts below threshold, verify overall control framework and procedures: documentation, request letters for OD, flagging stop-payments, monitoring/follow-up, credit department manning, and credit concentration. • COVID Relief & ECLGS: Verify COVID relief packages and Emergency Credit Line Guarantee Scheme loans for special emphasis to Statutory Central Auditors (SCA). Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) List of accounts examined for audit NEWLY ADDED TO BE FILLED AS PER TABLE. (b)(i) Credit Appraisal Compliance: In your opinion, has the branch generally complied with the procedures/ instructions of the controlling authorities of the bank regarding loan applications, preparation of proposals for grant/ renewal of advances, enhancement of limits, etc., including adequate appraisal documentation in respect thereof. What, in your opinion, are the major shortcomings in credit appraisal, etc.? • Any comments on advance processing, preparation of proposals, analysis of financial credentials/statements, rating need to be reported. • The appraisal report of branch manager and his comments and recommendation to higher authorities should be verified. • If it is branch sanction, sanction order and comments of credit manager and senior manager/branch head to be verified. (b)(ii) Quick Mortality in Accounts: Have you come across cases of quick mortality in accounts, where the facility became non-performing within a period of 12 months from the date of first sanction? Details of such accounts may be provided in following manner: • Account No. • Account Name • Balance as at year end • Quick mortality is referred to accounts becoming irregular/sticky and stagnant from day one of availing or becoming NPA within one year of sanction. • The sanction procedure, appraisal, group accounts, accounts opened anew as fresh customer, loans taken over should be given more emphasis. (b)(iii) Interest Rate System Master Feeding: Whether in borrowal accounts the applicable interest rate is correctly fed into the system? Verification points include: • Feeding of rate to account master. • Linking of rates to MCLR. • Periodicity of interest application. • Change management from CORE. • Simple Interest / compound interest Moratorium period interest (compounding factor during COVID period to be excluded). (b)(iv) Floating Rate MCLR / EBLR Periodic Review: Whether the interest rate is reviewed periodically as per the guidelines applicable to floating rate loans linked to MCLR / EBLR (External Benchmark Lending Rate)? • The influence of CORE in the application of interest should be analysed. • The sanction condition as floating/fixed should be fed to master properly. (b)(v) Frequent Renewal / Rollover of Short-Term Loans: Have you come across cases of frequent renewal / rollover of short-term loans? If yes, give the details of such accounts. • Process of renewal/review should be verified. • Rollover of renewal dates and making short/adhoc/limited review should be verified. • Refer RBI Circular: RBI2020-21/Dos_CO-PPG_BC_1/11.01.002/2020-21 (August 2020). • Bank policy for renewal/review to be obtained, strict adherence verified and deviations reported. (b)(vi) Credit Rating from RBI Accredited Agencies: Whether correct and valid credit rating, if available, of the credit facilities of bank’s borrowers from RBI accredited Credit Rating Agencies has been fed into the system? • Comment if time lag between last rating to balance sheet date is more than 2 years. • Deterioration in latest rating is to be considered for further monitoring. • Interest rate setting attuned to rating granted to be verified. • Accounts becoming NPA even after high rating should be commented separately. (c)(i) Sanctions Beyond Delegated Authority & TOD/TOL Reporting: In the cases examined by you, have you come across instances of: (a) Credit facilities having been sanctioned beyond the delegated authority or limit fixed for the branch? Are such cases promptly reported to higher authorities? • Obtain latest extant guidelines of the bank regarding delegated powers. • TOD/TOL powers, casual business powers, loan sanction powers need to be examined. • Verify records / registers maintained for reporting to controlling authority. • Obtain regular/exception report of TOD/TAL as on 31.3.2021 and compare with reports as on 28.2.2021 and 20.3.2021. (c)(ii) Disbursement Without Complying with Sanction Terms: Whether advances have been disbursed without complying with terms and conditions of sanction? If so, give details. Selected accounts should be verified with special reference to sanction terms. Usual slippages are: 1) Failure to conduct pre-sanction and post-sanction inspection. 2) Legal audit of documents executed and obtained. 3) Creation of charge. 4) Conditions attached to and between consortium members. 5) Failure in obtaining personal guarantees of owners and family members, satisfaction letter, NOC etc. as per sanction. (c)(iii) Loans for Buy-Back of Shares / Securities: Did the bank provide loans to companies for buy-back of shares/securities? • Find out for any increase in promoter’s shareholding pattern between last year and this year. • If so, enquire source of buying such shares, and if buy-back, analyse for any funding made by bank just before buy-back. (d)(i) Release Without Execution of Documents: Credit facilities released by branch without execution of all necessary documents. Give details. • Legal audit report needs to be verified for inadequacy of documentation. • Obtain a letter of representation in this regard from branch manager. (d)(ii) Deficiencies in Documentation & Non-Registration of Charge: Deficiencies including non-registration of charges, non-obtaining of guarantees, etc.? • Verify creation of charge: nature, extent, details, and location of assets charged (First charge, second charge, Pari-Passu charge). • Obtain latest search report if any change in advances by our bank or any other bank/FI. Verify loan modifications with charge created. • Obtain MRL from branch manager. (d)(iii) Advances Against Lien of Deposits: Advances against lien of deposits granted without marking lien on deposit receipts and related accounts. • Compare list of advances against TDR with lien-marked report generated from system. • Specific verification regarding continuation for TDR modified as to term, date, interest rate. • Obtain MRL from branch manager. • Deposit lien should extend to related loans/accounts to enforce general lien before return to customer. (e)(i) Periodic Review & Age-wise Overdue Analysis: Is procedure for periodic review of advances followed? Provide analysis of accounts overdue for review/renewal: a) Between 3 to 6 months [Earlier 6 months to 1 year] b) Over 6 months [Earlier over 1 year] • Obtain due date report/diary of advances and inspections. • Ensure no review is overdue for more than six months; classify as NPA if overdue beyond 6 months per prudential norms. • Short reviews and time extensions must be commented on merits. • Obtain confirmation from higher authorities if pending at their end. (e)(ii) Stock / Book Debt Statements & Drawing Power (DP): a) Is DP properly computed? b) Whether latest audited financial statements obtained for accounts reviewed/renewed? • Verify stock statement register, date stamping, and DP calculation. • Eliminate slow moving, obsolete stocks and unpaid creditors. • Separate stock details for packing credit loans. • Eliminate overdue and disputed debtors beyond stipulated sanction periods. • Ensure DP is fed to system periodically for charging interest. • In Consortium/MBA, verify share of DP communicated by lead bank. • Verify audited statements with UDIN and CA membership number. (e)(iii) Stock Audits: a) System of obtaining periodic stock audit reports? b) Compliance with system? c) Details of cases where stock audit required but not conducted, or where conducted but no action taken on adverse features. • Stock audits conducted yearly above bank’s benchmark working capital limits. • Obtain list from BM, verify reports, report adverse features. • Report stock audits initiated but pending with special reference to delinquent accounts. • Report branch regularization of adverse remarks. (e)(iv) Audited Accounts of Non-Corporate Borrowers: Advances to non-corporate entities beyond bank limits without audited accounts. • Obtain list; verify financial statements, auditor seal, and membership number. • Limit is now as per bank policy (earlier fixed at Rs. 10 lakhs and above). (e)(v) Consortium & MBA Due Diligence Reports: Due diligence report in RBI format on record for consortium/multiple banking arrangements. • Information exchange between member banks. • Sharing of DP and status of accounts. • If non-lead branch, obtain copy from lead bank. Report if absent from file. (e)(vi) Security Inspection & Significant Deterioration in Valuation: Physical verification of securities & substantial erosion in value compared to earlier valuation. • Periodical inspection reports and security verification must be recorded. • Report long-pending inspections on COVID-affected borrowers. • Master Circular Clause 4.2.9: Security value erosion below 50% classifies account as Doubtful straight away; erosion below 10% classifies as LOSS asset. (e)(vii) Group Loan Security Coverage & Insurance: Deficiencies in value/inspection, unauthorized overdrawings, inadequate insurance. • Comprehensive analysis of loans to group concerns with overlapping charges on same security. • Analyse overall asset coverage against group outstandings. • Verify insurance register; confirm all policies contain bank clause; obtain MRL. (e)(viii) Red-Flagged Accounts (RFA): Deviations observed related to bank policy on Red Flagged Accounts. • Obtain RFA policy and process. • Synchronise SMA categorization and early warning signals. • Examine EXIT-marked accounts, watch category, and delinquent accounts for red flagging. (e)(ix) Top 5 Standard Large Advances: Comment on adverse features in top 5 standard large advances requiring management attention. • Mandatory minimum of 5 accounts selected based on exposure and CRITICALITY. • Blend post-COVID conduct of accounts with auditor’s industry-specific knowledge. (e)(x) Leasing Finance Activities: Compliance with guidelines relating to security creation, inspection, insurance, and accounting norms. • Verify lease financing where depreciation claim is made by bank. • Report any inconsistencies with accounting standards/principles. (f)(i) Automated System NPA & SMA Classification: a) System-based classification into Standard, Substandard, Doubtful, Loss without manual intervention. b) Alignment with RBI norms. c) Implementation of SMA-0, SMA-1, SMA-2 classification. d) MOC recommendations. e) List of accounts > Rs. 10.00 crore upgraded or downgraded with reasons. f) Compliance with IRAC provisioning guidelines. • Verify system reliability for programming errors, manual intervention in DP feeding, sanction condition tampering, ECLGS loans. • Compare NPA statements across two periods for upgrades/downgrades. • Verify bank year-end circular against RBI Master Circular. • Review SMA reports and keep copy on record. • Document justification for upgrades/downgrades above Rs. 10 crore with auditor remarks. • Restructuring and re-phasing to be reported separately. (f)(ii) Restructuring & Resolution of Stressed Assets: Reporting of restructured/rephased accounts; compliance with RBI Prudential Framework (June 7, 2019 Circular). • Refer RBI Circular: RBI/2018-19/203 DBR No. BP.BC.45/21.04.048/2018-19 dated June 07, 2019. • Verify restructuring provisioning and compliance with Regulatory Packages I to V. (f)(iii) Upgradations in NPA Accounts: Compliance with RBI norms and auditor disagreement. • Upgradation of restructured assets allowed only after satisfactory performance for one year. • Verify critical upgradation factors: Fresh valuation of assets/security, borrower capital infusion, transfer of funds from other branches. (f)(iv) Authorized Legal Action Pending Execution: Cases where recovery/recalling authorized by controlling authority but not initiated. • Obtain list of core NPAs; check stage of legal proceedings. • Verify files for instructions from controlling authority; obtain MRL from BM. (f)(v) IBC Mandated / Initiated Accounts: Accounts where IBC process is mandated but not initiated, or initiated by bank/other creditors. • Obtain list from BM; verify adequacy of provisioning made under IBC norms. (f)(vi) Credit Guarantee Claims (ECGC / DICGC): Lodgement, settlement, claims rejected, and impact on provisioning. • Verify DICGC recovery remittance. • Verify pending and rejected ECGC claims; ensure share of recovery forwarded to DICGC. • Evaluate overseas buyer country risk for rejected claims. • Ensure proper provisioning of ECGC rejected accounts at branch or report to CSA. (f)(vii) Triennial Revaluation of Immovable Securities in NPAs: Valuation reports from approved valuers once in 3 years. • Immovable security valuation must not be older than 3 years. • Insist on fresh valuation if post-COVID market value eroded. • RBI insists on valuation by two valuers for properties above prescribed limits; obtain MRL. (f)(viii) Compromise / OTS / Write-offs > Rs. 50 Lakhs: Compliance with recovery policy for settlements/waivers exceeding Rs. 50.00 lakhs. • Obtain list of OTS/write-offs > Rs. 50 lakhs. • Verify sanction authority, accounting, and compliance with conditions. • Note: OTS/settlement does not impact prudential norms until final settlement/write-off. (f)(ix) Execution of Court / DRT Decrees: Age-wise analysis of decrees obtained and pending execution. • Obtain list of decrees pending execution from legal department/branch and report. (f)(x) Recovery Appropriation Policy: Proper appropriation of recoveries between principal and interest. • Verify bank policy: general rule is adjusting first towards interest then principal. • Note any divergent practices in merged banks vs. parent bank. (f)(xi) Centralised Processing Centres (CPC) Documents: Availability of loan documents held at central processing centres. • Report if physical custody of centralized documents could not be verified. • Report list of documents sought but not provided separately. (f)(xii) Major Deficiencies in Supervision: List major deficiencies in credit review, monitoring, and supervision. • Report follow-up on watch category, SMA 0 to 2 accounts, and recovery initiatives. (g)(i) Devolved LCs / Invoked BGs During the Year: List of borrowers with details of LCs devolved or guarantees invoked during the year [Earlier at year-end]. • Transfer invoked BGs to protested bills account per HO guidelines. • Verify guarantees closed during the year. • Comment on LCs due near balance sheet date for delinquent borrowers; obtain MRL. (g)(ii) Unpaid Devolved LCs / Invoked Guarantees: List of borrowers where LCs devolved / guarantees invoked but unpaid [New Format]. • Verify overdue LCs in NPA accounts. • Insist on provisioning if confirmed/potential loss; escalate to SCA; obtain MRL. (g)(iii) Interchangeability Post-Devolvement: Instances where interchangeability between fund and non-fund based facilities allowed post-devolvement of LC / invocation of BG. • Check if devolved LC was debited to CC/OD to avoid NPA tagging. • Report impact on NPA classification to CSA. • Verify limit enhancements against security cover and borrower capacity. 6. Other Assets: Suspense Accounts / Sundry Assets Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a)(i) Does the system ensure expeditious clearance of items debited to Suspense Account? Details of outstanding entries in excess of 90 days. Does scrutiny reveal unrecoverable balances requiring provision/write-off? • Obtain jotting of sundry deposits and suspense accounts as on 31st March. • Verify long pending, unusual and high-value items. • Long pending debits older than 90 days require special reporting. • Irrecoverable debits must be provided for under prudential norms. (a)(ii) Does test check indicate any unusual items? Report nature and amounts. Are there any intangible items under this head (e.g., losses not provided / pending investigation)? • Obtain details and MRL from branch manager; report material figures. • Any loss DEBITED to suspense account must be reported separately. II. LIABILITIES 1. Deposits Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Does the bank have a system of identification of dormant/inoperative accounts and internal controls with regard to operations in such accounts? Instances where guidelines were not followed? • Study internal control of identification, classification, and activation. • Obtain list of inoperative accounts above benchmark. • Verify operations involving high value put through inoperative accounts immediately upon activation from AML angle. (b) Unusual large movements (increase or decrease) in aggregate deposits held at year-end after balance sheet date till audit date? • Obtain general ledger extract of last reported Friday and compare with 31st March figures. • Verify post balance sheet figures for window dressing. • Obtain written clarification from BM for deviations; report material variances. (c) FCNR(B) deposits auto-renewal: Did branch satisfy itself regarding non-resident status, adhere to regulatory guidelines, and dispatch original/soft receipts? • Pure branch monitoring matter. • Obtain internal instructions on ensuring residential status during auto-renewal of FCNR deposits. • Report compliance or lack of instructions. (d) Compliance with regulations on minimum balance requirement and levy of charges for non-maintenance in individual savings accounts? • Charges must only be proportionate to the shortfall in minimum balance. • Sample accounts just below threshold and verify compliance. 2. Other Liabilities & 3. Contingent Liabilities Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance 2(a) Bills Payable, Sundry Deposits, etc.: Number of items and aggregate amount of old outstanding items pending for 1 year or more. • Obtain jotting of sundry deposits, bills payable, pay orders, banker’s cheques as on 31st March. • Verify long pending and unusual items. 2(b) Unusual items, material withdrawals, or debits in sundry deposits? • Obtain ledger copy of sundry deposits; verify debits and sanctity. • Keep ledger copy on auditor records; obtain MRL from BM. 3 Contingent Liabilities: Major items of contingent liabilities (other than constituent liabilities like guarantees/LCs) not acknowledged by branch. • Common items include rent escalation demanded by landlord pending sanction, litigations on branch premises, ATM claims and customer complaints. • Obtain details and MRL from branch manager. III. PROFIT AND LOSS ACCOUNT Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Test checking of interest / discount / commission / fees: Excess or short credit of material amount? • If system applies patches to software, verify date of receipt, updation at branch, maintained records, and system-generated logs. (b) Compliance with RBI Income Recognition Norms (IRAC): De-recognition of interest on NPAs. • Ensure accounting does not result in income recognition on NPAs. • Treatment and apportionment of recoveries must follow bank accounting policy consistently (read with Para 5(f)(x)). (c) Test check of interest on deposits: Excess or short debit of material amount? • Study system of interest change updates and patch verification logs. (d) System of providing interest accrued on overdue / matured / unpaid / unclaimed deposits including deceased depositors? • Study system for consistency with accounting standards. • Report procedure for handling deposits of deceased without nominees, transmission to legal heirs, and court orders. (e) Divergent trends in major income/expenditure items compared to previous year not satisfactorily explained? • Verify P&L analysis statement sent to controlling office. • Conduct analytical review of deposits/advances with interest margins. • Compare ratio of interest paid to deposits vs. interest received to advances across both years; report major CASA divergences to CASA. IV. GENERAL 1. Gold / Bullion / Security Items Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Joint custody of two or more officials for gold/bullion? • Restricted to metal desk branches; examine custody and physical handling. (b) Adequate records for receipt/issue/balances of gold/bullion; periodic verification for excess/shortage? • Verify against extant RBI guidelines. • Report stock held from suspended gold business with quantity, branch GLB value, custody, and reason for holding. (c) Internal controls over issue and custody of security items (TDRs, Drafts, Pay Orders, Cheque Books, Travellers Cheques)? Cases of missing/lost items? • Verify movement passbook between vault and counters. • Merged Banks Critical Focus: In merged entities (Corporation Bank, Allahabad Bank, Dena Bank, Vijaya Bank, Syndicate Bank), reporting old stationery is VERY CRITICAL from control perspective. 2. Books and Records Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance (a) Software / systems used at branch not integrated with CBS? • Check export platforms, locker software, cheque book issue systems, separate MIS tools, EM Creation registers, and their CBS integration. (b)(i) IS Audit adverse features pending compliance having direct/indirect bearing on branch accounts? • Critically examine financial aspects of IS audit. • Report failure to evaluate financial implications of system/hardware errors as an IS audit weakness. • Report pendency of IS audit. (b)(ii) Generation and verification of exception reports at prescribed periodicity? • Verify regularity in generation and authentication; report non-generation. (b)(iii) Expeditious compliance of daily exception reports and major pending observations at year-end? • Focus on: TOD/TAL reports, Online TODs, DEBIT in Income & CREDIT in Expense, Routing Account reports, Loan Overdues, Disbursement against clearing, Cash transactions without ID proof, Debit balance in SB accounts, Incomplete KYC reports. (b)(iv) Procedures for manual intervention to system-generated data, authentication, and audit trails? • Verify procedures and audit trail for changing parameters in masters, interest rates, limit masters, EMI, and initial holiday periods. (b)(v) Data integrity (data entry, correctness, no back-ended strategies) used for MIS at HO/CO? • Examine data accuracy and timelines of updating DP, security values, insurance, and short review dates. 3. Inter-Branch Accounts & 4. Frauds Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance 3 Inter-Branch Accounts: Expeditious compliance with HO communications regarding unmatched transactions? Un-responded queries beyond 7 days? • Obtain balance jotting and year-wise break-up. • Report core-to-core and core-to-non-core entries separately. • Report all pending items beyond 7 days. 4(i) Frauds detected/classified but confirmation of reporting to RBI not available on record? • Obtain fraud details and MRL from BM. • Recommend 100% provision for any amount lying in fraud account. • Report internal control vulnerabilities. 4(ii) Suspected or likely fraud cases reported to higher office? Details of investigation status. • Report any indications based on auditor’s professional skepticism. 4(iii) Potential Risk Areas Leading to Perpetuation of Fraud: Detailed comments on potential risk areas: falsification of accounts; misappropriation of funds through related party / shell company transactions; forgery and fabrication of invoices, debtor lists, stock statements, trade credit documents, shipping bills, work orders, encumbrance certificates; use of current accounts outside consortium to divert TRA funds; fabricated debtors/creditors; fake export bills; invoice overstatement; fly-by-night operators; round tripping of funds. • The branch auditor must provide comprehensive comments across all potential risk vectors and early warning red flags observed during audit. 4(iv) Early Warning Framework (EWS) effectiveness and classification as Red Flagged Accounts (RFA)? • Verify EWS reports generated, SMA tracking, and RFA classification framework. 5. KYC/AML, 6. MIS Data Integrity & 7. Miscellaneous Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance 5 KYC / AML Guidelines: Adequate systems and processes to ensure adherence to KYC/AML guidelines towards prevention of money laundering and terrorist financing? Did branch follow guidelines based on test check? • Focus on Foreign Inward remittances, foreign cheques, and funds from sensitive countries. • Cross-verify forex transactions with R Returns submitted to RBI. 6(a) MIS Data Integrity: Proper systems/procedures to ensure data integrity for inputs used for MIS at corporate office level and supervisory reporting? Instances where data integrity was compromised? • Examine data accuracy and timelines of DP updates, security values, insurance, short review dates affecting corporate MIS integrity. 7(a) Consideration of Adverse Audit Reports: Have you considered major adverse comments arising out of: i) Previous year’s Branch Audit Report / LFAR; ii) Internal / Snap / Concurrent audit reports; iii) Credit Audit Report; iv) Stock Audit Report; v) RBI Inspection Report; vi) Revenue Audit; vii) IS / IT / Systems Audit; viii) Special inspection / investigation reports? • Report in a Tabular Form: date of audit, next due date, pendency after due date, branch replies, closure by controlling authority, and compliance with previous year MOC. 7(b) Other Matters for SCA / Management Attention: Any other matters branch auditor would like to bring to the notice of management or Statutory Central Auditors? • Report inconsistencies with RBI guidelines or statutes. • Explicitly disclaim matters dealt with at HO where branch has little control. • Report local matters having material impact on branch business, P&L, or balance sheet.

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 92–98 (Journal pp. 1264–1270) Technology The Coming of Age of Risk Analytics SN CA. Sathvik Nishanth Member of the Institute • Contact: sathvik.nishanth@gmail.com & eboard@icai.in Executive Synopsis: Data as the New Oil of Enterprise Risk Data is now the new oil. The application of knowledge and strategic insights gained from data has provided significant competitive advantage to modern enterprises. Audit, compliance, and risk professionals are rapidly embracing the power of data science and risk analytics to unearth hidden risks, identify operational anomalies, and predict emerging threats before they derail corporate objectives. Widespread global digitization and unprecedented technological growth have generated vast, varied, and fast-accumulating data pools. In 2020 alone, every human generated approximately 1.7 MB of data every single second. In this data-saturated environment, the capacity to parse through reams of structured and unstructured information has transformed from a back-office efficiency into a defining corporate competitive edge. 1 The Triad of Modern Data & The Concept of Risk Analytics Vast (Multi-Attribute Expansion) Data encompasses countless events and captures multifaceted attributes. For instance, a traditional Fixed Asset Register historically captured basic accounting fields (purchase cost, useful life, WDV); today, it captures IoT sensor streams, geo-codes of location, and real-time operational imagery. Varied (Ecosystem Integration) Data points extend far beyond internal enterprise ERP transactions, integrating unstructured and semi-structured feeds across the broader ecosystem of customers, vendors, third-party logistics, supply-chain partners, and social platforms. Fast (Velocity & Accumulation) Data accumulates at an unprecedented rate. Every human activity, financial transaction, material movement, or identity authentication is digitally captured, creating compounding torrents of information that require automated processing. Defining Risk Analytics and Data Science Risk analytics represents the structured means, mechanisms, and methodologies adopted by organizations to unearth, identify, monitor, and remediate risks across operational processes, internal controls, IT systems, and overall enterprise strategy. Data science is the operational vehicle through which risk analytics is realized. It constitutes a multidisciplinary body of knowledge combining the scientific method, software engineering principles, and structured statistical and mathematical analysis. Cross-Industry Applications of Data Science in Risk Banking Fraud Detection: Behavioral pattern analysis of customer transaction streams to instantly flag potentially fraudulent charges. Controllership Automated Triggers: Real-time alerts flagging duplicate vendor payments, split purchase orders, or high-risk manual journal entries posted to the general ledger. Internal Audit Pre-Field Analytics: Internal audit teams at consumer goods majors entering plant locations armed with pre-identified anomaly clusters and outlier logs detected during remote planning analytics. Global Ethics Dashboards: Ethics and compliance leaders monitoring weekly interactive dashboards tracking open compliance investigations and audit status across global subsidiaries. Human Resource Attrition Models: Predicting employee turnover risks based on tenure, performance evaluation metrics, and attendance records. 2 Three Architectural Approaches to Deploy Risk Analytics While standardized universal frameworks continue to mature, risk analytics can be systematically deployed across three temporal dimensions: Approach 1 Discovery: Forensic Analysis of Historical Data Discovery evaluates historical data to identify trends, patterns, exceptions, and anomalies. It operates via two complementary paths: (a) Scenario-Driven Analysis (Hypothesis-First) Starts with “what-can-go-wrong” scenarios and queries data to validate or disprove specific risk hypotheses. FMCG Market Share Hypothesis: Comparing sales reach against external district-level census data to identify unserved populous markets. Revenue Leakage Hypothesis: Auditing ERP billing logs to detect unauthorized or excess customer discounts caused by software configuration bugs. (b) Data-First Analysis (Anomaly Hunting) Allows data to reveal truths organically without pre-set biases. It hunts for statistical outliers and non-linear anomalies across four structured phases: Get the Data: Consolidate all relevant data tables. Explore the Data: Cross-plot parameters (e.g., spend value per order vs. product price across top 4 SKUs). Model the Data: Apply time-series clustering to expose suspicious patterns. Get Background Story: Interrogate anomalies to isolate the underlying risk scenario. Iterative Synergy: The most powerful outputs emerge from iterating continuously between data exploration, modeling, scenario generation, and hypothesis questioning. Approach 2 Surveillance: Real-Time & Near-Real-Time Event Monitoring While discovery methods are discrete and backward-looking, surveillance operates as close to the event as possible to facilitate immediate mitigation: Automated Fraud Interventions: Real-time card fraud detection alerting cardholders when transactions occur in unexpected cities or exceed historical spending bounds. Infrastructure Downtime Triggers: E-commerce platforms monitoring user traffic and triggering emergency alerts if zero site access occurs for five minutes, averting revenue collapse. The Surveillance Frequency Decision Matrix Impact of Not Responding Overall Event Impact Low Overall Impact High Overall Impact High Impact of Not Responding High Frequency, Passive Surveillance(Automated logging & tracking) High Frequency, Active Surveillance(Immediate automated alerts & intervention) Low Impact of Not Responding Surveillance Not Needed(Unnecessary resource expenditure) Relaxed Frequency, Intermittent Surveillance(Periodic batch audits & sampling) Approach 3 Forecast: Machine Learning Predictive Risk Modeling Machine learning techniques enable organizations to forecast risk events before they unfold, providing actionable foresight to protect capital. The article presents a detailed, step-by-step implementation framework for predicting B2B customer invoice default: Step 1: Define Quantifiable Prediction Problem A precise problem statement: “Whether an invoice will get collected after 60 days beyond its due date?” Defining the target variable establishes clear model boundaries. Step 2: Identify Potential Indicators (Predictors) Determining payment behavior drivers: invoice monetary value (high-value invoices face multi-level approvals), submission timing (month-end vs. bi-weekly billing cycles), historical settlement velocity, external credit ratings, geography, product lines, and shipment lead times. Step 3: Assemble Sizeable Historical Training Data Sufficient historical observations are essential for statistical significance and capturing multi-variable permutations, analogous to Amazon’s recommendation engines. Step 4: Feature Selection (Narrowing to Dominant Predictors) Good models rely on few but highly predictive features. Data scientists filter variables using statistical techniques like Variable Importance Analysis and Principal Component Analysis (PCA). Step 5: Develop and Train Machine Learning Algorithms Establishing mathematical relationships using algorithms such as Linear Regression, Logistic Regression, Decision Trees, Support Vector Machines (SVM), and K-Nearest Neighbors (KNN). Step 6: Operationalize the Model in Production Passing fresh weekly invoice batches through the trained model to assign default risk scores, empowering collection teams to intervene proactively. Additional Predictive Use Cases: Predicting plant equipment failure for optimized maintenance scheduling; demand surge forecasting across seasonal markets to avoid stock-outs; and employee behavioral scoring (flagging anomalous off-hour ledger postings or access to restricted financial data). 3 Crucial Pitfalls & Implementation Impediments 1. Data Quality & GIGO Principle The classical adage “Garbage-In, Garbage-Out” (GIGO) applies universally. If raw data contains duplications, formatting discrepancies, or gaps, risk models will yield severely flawed outputs. 2. Managing False Positives Poorly calibrated analytics generate overwhelming volumes of irrelevant exceptions, inducing alert fatigue and wasting investigator bandwidth. Thresholds must be carefully curated for high precision. 3. Domain Knowledge Intersection Algorithms cannot function in an abstract vacuum. Peak business value is realized only when models are designed at the intersection of business domain expertise and advanced data engineering. 4. Continuous Feedback Loops Analytics initiatives are rarely “first-time right”. Operational and analytical teams must maintain structured feedback loops to fine-tune algorithms post-deployment. 5. The Hybrid Skill-Set Gap Success demands diverse capabilities spanning risk subject-matter specialists, software engineers, and mathematical statisticians—a synthesis increasingly embodied in modern data scientists. 6. Scalable Technology Infrastructure While accessible open-source libraries simplify prototyping, enterprise-grade risk deployment requires capital investments in scalable, secure, and future-proof data pipelines. Leadership Driving Culture & The Future for Chartered Accountants Business leaders act as primary custodians of organizational risk. By driving cultural change from the top—demanding greater data visibility, challenging data quality, and basing strategic choices on analytical evidence rather than intuition—they cultivate a data-driven enterprise. For Chartered Accountants, risk analytics unlocks an adjacent, highly differentiated competitive skill set across assurance, internal audit, controllership, and forensic investigation. Embracing technology and data science ensures that professionals continue to deliver indispensable strategic value to business and society. The Chartered Accountant • April 2022 Technology & Analytics • Journal pp. 1264–1270

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 105–111 (Journal pp. 1277–1283) E-Commerce E-Commerce Strategies for New Businesses SA Prof. (Dr.) Shivani Arora Academician & Author • Contact: eboard@icai.in KP Kaashvi Piplani Researcher & Scholar • Contact: Kaashvi.piplani@gmail.com Executive Synopsis: Pandemic Resilience & The E-Commerce Imperative E-commerce in India grew exponentially during the COVID-19 pandemic, standing out as one sector that triumphed while the broader macroeconomy suffered extensive disruptions. The pace of technology adoption was unprecedented: mandatory lockdowns and two years of physical distancing compelled even historical laggards to embrace digital commerce. Driven by an unprecedented influx of venture funding, dynamic new enterprises are making their way into the commercial mainstream. This exponential expansion requires Chartered Accountants to stay abreast of structural developments, regulatory shifts, and technical digital models to effectively advise emerging businesses. This paper combines an exhaustive literature and newspaper review with empirical qualitative text mining via NVivo 12 on Twitter discussions to delineate actionable growth strategies for new e-commerce entrants. 1 Literature Review: The Indian E-Commerce Boom & Unicorn Surge During the pandemic, e-commerce platforms transformed from convenience portals into lifeline utilities—supplying daily groceries (Milkbasket) and life-saving medicines during lockdowns (Tata1mg). The health crisis rapidly accelerated adoption among first-time and elderly consumers (Coutinho, 2022). 54 Indian Unicorns (2021) +33 from 2020 • Hurun Research 15 E-Commerce Unicorns Ranked 3rd globally after US & China $8.8 B VC Funding Across 143 Deals 31% of total Indian VC • 6.3x of 2020 140 M Online Shoppers (2020) 3rd largest globally behind China & US Conceptual Demarcation: E-Commerce is a Subset of E-Business (Figure A) While used interchangeably in common parlance, E-Commerce and E-Business represent fundamentally distinct scopes: E-Commerce (Transaction Layer) Specifically defined as the process of buying and selling products or services over digital networks and electronic media. E-Business (Comprehensive Architecture) The overarching enterprise framework encompassing all business processes conducted electronically: ERP systems, CRM, production planning, supply chain partner integration, internal employee communication, and customer care in addition to e-commerce (Arora, 2019). The Chartered Accountant’s Advisory Mandate: The massive explosion in online transactions makes it vital for Chartered Accountants to guide entrepreneurs through entity registration, GST compliances, intellectual property rights (IPR), specialized digital bookkeeping, valuation, and cross-border taxation. 2 Market Catalysts and Government Policy Pillars A. Massive Inflows into E-Commerce Drivers Big Tech Inflows: Global giants—Meta/Facebook (Chaturvedi, 2021), Google, and Microsoft—have pledged multi-billion dollar capital investments towards India’s digital economy. Google-Airtel Strategic Partnership: On February 1, 2022, Google invested $700 million in Bharti Airtel (alongside a broader $1 billion commitment) to build future-ready telecom infrastructure, expand 5G access, and eliminate smartphone adoption barriers (Phadnis, 2022; S. Team, 2022). Surging Internet Penetration: Indian internet penetration surged from 21% in 2017 to 62% in 2021, with the pandemic driving 43 million first-time users online (Khanna, 2021). B. Government Regulatory Architecture Digital India Initiative Launched in August 2014 with an initial commitment of INR 1 lakh crore, catalyzing digital infrastructure and accelerating mobile payments post-demonetization. Draft National E-Commerce Policy Balancing e-commerce growth with offline trader protection (CAIT demands); curbing predatory deep discounting and FDI rule evasions (Abrar, 2022). Ending predatory discounts protects new entrants from wafer-thin margins against deep-pocketed incumbents. 100% FDI in B2B & Marketplace Permitting 100% FDI under the automatic route in B2B transactions and marketplace platforms provides immense fundraising headroom for early-stage start-ups (IBEF, 2021). ONDC (Open Network for Digital Commerce) Government-backed open network democratizing digital commerce, breaking proprietary platform monopolies and onboarding local retailers onto open e-commerce rails (Nandy, 2022). Inclusion of Artisans and Rural Crafts Statutory relief under the GST Act exempting craftsmen selling notified handmade goods from mandatory GST registration; national onboarding of rural products under the One District – One Product (ODOP) initiative; and official retail integration through the KVIC online portal (kviconline.gov.in) (IED, 2022). 3 Emerging Product Verticals & D2C Business Models Online Pharmacies (e-Pharmacies) Indian e-pharmacies accounted for 50 players and 14% of Asia-Pacific revenue in 2020. Projected to grow at an extraordinary CAGR of 40–45% compared to global CAGR of 15–20% (Chawla, 2021). Autonomous drone deliveries are emerging as the next frontier for emergency medicine logistics (Dedhia, 2022). D2C Beauty, Wellness & Sustainability Environmentally conscientious consumerism is surging. Mamaearth leveraged Facebook/Meta performance marketing to achieve massive organic skincare valuation (FB, 2021). Nykaa’s historic 100% premium IPO debut (Jain, 2021) and Sugar Cosmetics prove high customer appetite for differentiated lifestyle brands. Quick Commerce (10–15 Min Delivery) Pioneered by Blinkit (formerly Grofers) and Zepto, ultra-fast hyper-local delivery models are transforming daily staples and grocery distribution, forcing traditional neighborhood kiranas to digitize or partner. Electric Vehicle (EV) Last-Mile Fleet Last-mile delivery aggregators are partnering with EV manufacturers to lower unit economics and fulfill sustainability mandates, bolstered by state regulations like the Delhi EV delivery policy (Auto, 2022). EdTech & Global Tutoring Blended learning platforms (Coursera, Udemy) and boundaryless private tuition ecosystems allowing Indian educators to teach international students without heavy physical infrastructure investments. Creator Economy & Storytelling “Content is king.” Brand building via narrative storytelling across Instagram, YouTube, and podcasts, turning micro-influencers and home chefs into thriving commercial enterprises (O. Credit Team, 2021). 4 Empirical Findings: NVivo 12 Twitter Text Mining Analysis To capture real-time market sentiment and strategic focus areas, qualitative text mining was conducted using NVivo 12 software. English-language tweets containing the keyword “online business” posted during the first week of February 2022 (418 tweets) were mined and analyzed to generate a Word Map (Figure 1) and Tree Map (Figure 2): Core Keyword Frequency (n) Strategic Analytical Interpretation business n = 442 Primary focal point of discussions across commercial and start-up communities. online n = 431 Confirms the central transition from brick-and-mortar storefronts to digital channels. digital n = 201 Represents the underlying technological infrastructure, digital marketing, and payment enablement. skills n = 196 Emphasizes that digital and technical skills must be continuously acquired and upgraded to succeed. books n = 108 Reflects the historical genesis of e-commerce (Amazon and Flipkart), remaining a staple online category. creators n = 53 New businesses must be innovative content creators; stale, commoditized business models cannot compete. economy / built n = 53 each Demonstrating that the macroeconomic fabric is being actively built, stabilized, and propelled by digital firms. academics n = 27 Calls for academic institutions to bridge student gaps through incubation centers, internships, and live projects. Conclusion & Strategic Roadmap for New Entrants E-commerce did not merely survive the COVID-19 pandemic; it served as a catalyst for a structural economic transformation. This is validated by $28.8 billion in Indian VC inflows in 2021 and India hosting 15 e-commerce unicorns. The impending implementation of the National E-Commerce Policy and ONDC will re-level the playing field for small players by curbing predatory discounts. New entrants who combine unique product niches (wellness, organic goods, quick commerce) with data-backed digital marketing, continuous skill upgradation, and compliance rigor will capture substantial market share in India’s surging online economy. The Chartered Accountant • April 2022 E-Commerce Strategies • Journal pp. 105–111 Bibliography & Authoritative References Abrar, P. (2022). Traders body CAIT asks govt for robust and unambiguous e-commerce policy. Business Standard News. Arora, Shivani (2017). E-Commerce. Taxmann Publishers, ISBN 978-93-86635532. Auto, H. (2022). Ride-hailing and delivery services have to adopt electric vehicles: Delhi govt. Hindustan Times. Chaturvedi, A. (2021). Facebook changes its name to Meta... India Today Technology News. Coutinho, A. (2022). VC investments jump 4 times to hit record $28.8 billion in 2021. Business Standard News. Dedhia, Z. (2022). Will drone delivery be the next big thing for pharma logistics in 2022? Aviation / India Transport and Logistics. FB. (2021). How organic skincare brand Mamaearth built a successful digital-first business using robust performance marketing and brand-building solutions from Facebook. Economic Times. Gallagher, L. (2017). The Inside Story Behind the Unlikely Rise of Airbnb. Knowledge@Wharton, University of Pennsylvania. IBEF. (2021). E-commerce in India: Industry Overview, Market Size & Growth. India Brand Equity Foundation. IED. (2022). Government takes several initiatives to enhance collaboration between small business and e-commerce platforms. India Education Diary. Jain, S. (2021). Nykaa makes bumper stock market debut; shares top Rs 2,200, rally 100% over IPO price. The Financial Express. Khanna, M. (2021). Trending stories on Indian Lifestyle, Culture, Internet Usage Report. Indiatimes.

The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 99–104 (Journal pp. 1271–1276) INTERNATIONAL TRADE • FOREIGN TRADE POLICY & FTAs Trade Agreements can be a game changer, if Negotiated Fairly! CA. Manas Chugh The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at camanaschugh@gmail.com and eboard@icai.in. 🌐 Strategic Trade Perspective & Forecasting Dilemma Economists aim to build policies by building on past policies and forecasting the future. The art of forecasting sometimes does not yield results as anticipated forcing them to apprehend what went wrong and what new model has to be constructed. Trade Agreements signed by India illustrate that those trade negotiations have not unlocked India’s true potential as “The World’s Factory”. This necessitates for India to review whether trade agreements are the best way forward to claim the top position in the world’s trade. Read on… 1. Introduction: Global Supply Chains & India’s Strategic Shift International trade plays a notable role in the development of an economy. It is a major source of improving competitiveness, efficiency and innovation. With the rising focus on One World, One Market, each nation is endeavouring to become part of the global supply chain. India too has developed measures to improve its share in the global merchandise exports. The unwritten rule followed by all the nations is making trade agreements a key part of the Foreign Trade Policy. Trade agreements provide access to new markets by offering reduction in tariffs on imported products and addressing issues affecting the free flow of goods and services. The agreement opens up the potential for investments between the negotiating countries and also outlines areas for mutual growth. Until now, the Indian Government was not opening up India’s economy to the world impulsively. This was evident with India signing 11 Preferential/Free Trade Agreements (FTAs) between 2004 to 2011, but hardly thereafter. However, the Government was in dilemma whether to choose liberalism or first protect its domestic industries as the existing FTAs did not result in much economic gain. India intended to import duty free raw materials or at concessional rate from FTA partners and export value added finished goods, but the negotiations and trade number exhibits faulty administrative approach. The Landmark India-UAE CEPA (Signed 18th February 2022) The country is emerging from this stance and has signed the Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates (UAE) on 18th February 2022 which is a landmark move for India’s Foreign Trade. CEPA has holistic coverage area focussing on services, investment, IPR, government procurement, disputes etc. With the special focus on labour intensive sectors, the agreement provides zero duty market access. The historic agreement which was concluded in a record time of 88 days is expected to usher trade volumes from $60 billion to $100 billion within the next 5 years. The agreement is expected to commence from May 2022 and CBIC will issue tariff concessions with the conditions for classifying the origin of goods under Section 25 of the Customs Act, 1962 and Section 5 of the Customs Tariff Act, 1975 respectively. This is a significant step for India as it signifies to the world that the nation is ready to negotiate on equal and fair terms. Pertinent Questions on FTAs: Are FTAs the best solution in addressing trade issues? Have the FTAs resulted in much economic gain for India? Is India ready to face global competition by opening its economy without any barriers? 2. India’s Current Foreign Trade Dynamics India being a consumption-based economy encashes its 130 billion population. Private plus Government consumption contributing 71.1% share in Nominal GDP (FY 22) showcases that it is the major engine for India’s growth. The next big share in Nominal GDP is of Gross Fixed Capital Formation i.e., Investments. Government’s thrust in the Union Budget 2022 is towards capital expenditure and infrastructure spending with an allotment of Rs. 7.5 Lakh crores. Table 4: Share of Sectors in Nominal GDP (per cent) Sectors 2019-20 (1st RE) 2020-21 (PE) 2021-22 (1st AE) Total Consumption 71.7 71.1 69.7 • Government Consumption 11.2 12.5 12.2 • Private Consumption 60.5 58.6 57.5 Gross Fixed Capital Formation 28.8 27.1 29.6 Net Export -2.5 -0.5 -3.0 • Exports 18.4 18.7 20.1 • Imports 21.0 19.2 23.1 GDP 100.0 100.0 100.0 Source: NSO. Note: RE: Revised Estimates, PE: Provisional Estimates, AE: Advance Estimates (Economic Survey 2021-22). Furthermore, the country’s prime focal point is exports as India aims to become Current account surplus thereby improving the foreign exchange reserves of the country. The current Forex Reserves at $630.19 Billion as on 11th February 2022 displays that India can easily meet its external debt liabilities and offer a buffer in the event of any crises. To continue the streak, the Department of Commerce is proactively taking steps to extend India’s export to $2 Trillion by 2027. India’s Foreign Trade in FY 22 has shown a good rebound after the Covid hit economy by growing at 11.1% over 2019-20. It is surprising to note that petroleum products continue to be the top exported item followed by pearls, precious and semiprecious stones, iron and steel respectively. United States of America (USA) remained the top export destination for India accounting for approximately 18% of the total Exports followed by United Arab Emirates (UAE) and China. Government’s path breaking policies in the form of Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme, focusing on districts as export hubs, Manufacture and Other Operations in Customs Warehouse Regulations (MOOWR), Market Access Initiatives etc. will continue to make India’s products efficient and competitive. Import Dependency & Non-Tariff Barriers: As the contribution to GDP is Net Exports i.e., Exports – Imports, concentrating on substituting imports is important. The Government has initiated various efforts by pushing for non-tariff barriers like Quality Control for toys imports, approval from concerned ministry for tyres, TVs, High Speed camera imports etc. India has one of the highest average tariffs of 15% in the Asia-Pacific region according to the WTO Tariff Profile 2021. Despite several efforts and tighter curbs, the dependence on imports specially with China is still surging and is worrisome for the government. Petroleum, oil and lubricants account for roughly 27% of the total imports owing to the rising crude oil price which has already surpassed $100 per barrel. Gold and Silver which accounts for 9.1% in total imports exhibits India’s love for the glittery metal. These numbers indicate our rising dependency on imported products making our overall trade balance for April-January 2022 in deficit ($ -71.19 Billion). Moreover, the merchandise exports from India hovered around +- $300 Billion since the last 10 years. This demonstrates that the current policies are not paying off much for India. Given the mammoth changes in the global supply chain and for India to claim a pole position in the global trade, Free Trade/Preferential Trade is the only way forward. 3. Free Trade Agreements and India’s Experience “World Trade Organisation is a global multilateral agreement operationalised in 1995 to ensure that international trade flows between the countries are in harmony, fairly and freely.” The agreement was signed to provide a framework to resolve disputes arising because of unfair practices and providing structure to negotiate on the trade agreements. After the WTO, Regional Trade Agreements have been prevailing in the trade policies of each country as the world is shifting towards one market. As of 15th October 2021, 350 RTAs were in force globally, corresponding to 568 notifications from WTO members, counting goods, services and accessions separately. For India, the first trade agreement dates back to 1950 with Nepal, when post-independence, the Government of India realised that trade with the bordering nations should be a stepping-stone for strengthening ties and perpetuating trust globally. 10 Article agreements focussed on reciprocal benefit for the 2 nations, not just for trade and commerce but also peace and harmony. At present, India has signed 18 Free/Preferential Trade Agreements and one unilateral DFTP (Duty Free Tariff Preference) Scheme latest being signed on 18th February 2022 with UAE. Trade agreements aim to solve a wide range of issues apart from trade, some of these include human rights, environment safety, Visa, Intellectual Property Rights (IPR), education and gender justice. Bilateral Trade Agreements (12) India Nepal Trade treaty (1950) India Sri Lanka FTA (2000) India Thailand EHS (2004) India Singapore CECA (2005) India Chile PTA (2007) India Korea CEPA (2010) India Japan CEPA (2011) India Malaysia CECA (2011) India Afghanistan (2013) India Bhutan Agreement (2016) India Mauritius CECPA (2021) India UAE CEPA (2022) Regional Trade Agreements (6) Asia Pacific Trade Agreements (APTA) (1975) Global System of Trade Preference (GSTP) (1989) SAARC Preferential Trading Arrangement (SAPTA) (1995) Agreement of South Asian Free Trade Area (SAFTA) (2006) India-MERCOSUR (2009) India-ASEAN (2010) The Indian Government was resistant in negotiating an agreement as the major challenge was to give level playing field to MSMEs for enhancing their competitiveness. Therefore, the Government negotiated majorly with the neighbouring countries rather than advanced countries. The data of YoY growth % overall v/s FTA partners reveals that trade agreements hardly influence the growth of international trade. 4. Analysing the Free Trade Agreements: India’s Experience A. India-Japan CEPA (Signed 2011) India signed CEPA with Japan in 2011 which aimed to eliminate the tariffs on 90% of Japanese exports to India and 97% of exports from India to Japan. UN Comtrade data depicts that the exports from India has marginally increased from $5.5 Billion to $7.32 Billion but decreased thereafter. The trade deficit also grew from $3 Billion in FY 10 to $6 Billion in FY 20. B. India-Korea CEPA (Effective 2010) & DGTR Safeguards India’s CEPA with the Republic of Korea was signed and effective from 2010 spurred Investment and Trade between the two nations. However, India failed to reap the benefits as the deficit has widened since 2010 from $4.5 billion in 2009 to $11.5 billion in 2018. Also, on 28th January 2021, Directorate General of Trade Remedies (DGTR) issued a notification to levy safeguard duty on Polybutadiene Rubber excluding titanium and lithium grades as the Authority found that import has increased because of reduction or elimination of custom duty under CEPA causing serious injury to the domestic industries. C. India-ASEAN FTA (Signed 2010) ASEAN-India FTA was signed and entered into force in 2010 between 10 members of ASEAN and India wherein the respective countries eliminated tariffs on 76% of the goods. The region which comprises 30% of the world population planted seeds for the exponential growth of trade within the region but it resulted in an upsurge in imports into India while India’s exports were hindered by non-tariff barriers, restrictions and taxes. On the contrary, India enjoyed favourable trade balance with most of the ASEAN countries before the FTA but now has resulted in huge deficit. Findings from NITI Aayog & The Decision to Opt Out of RCEP As noted in A note on Free Trade Agreement and their cost by NITI Aayog, these trade figures depict that India stands to lose from these trade agreements and the negotiations have made the country more dependent on the imports. The only exception was the SAFTA agreement wherein there was a significant rise in the trade surplus from US$ 4 billion to US$ 21 billion. With this experience, it was inevitable that India had to opt out from the world’s largest trade deal, Regional Comprehensive Economic Partnership (RCEP). Now, the non-reciprocity has also forced India to re-negotiate these trade agreements as equal market access was not offered. It was also discovered that the FTAs were heavily misused by the importers by manipulating the country of origin. Goods originating from other countries were routed through FTA partners—such as Stainless Steel routed through Indonesia and copper items through Sri Lanka. Therefore, to clamp down this abuse, the Government introduced CAROTAR Rules in Budget 2020. 5. CAROTAR Rules 2020 & Rule of Origin Framework Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 To guard against the misuse of tariff concession announced under the Free/Preferential Trade Agreement, the government rolled out Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020) under Section 28DA of the Customs Act in the Budget 2020. The Rules aim to ensure that the Government can monitor all the duty benefits availed by importers and no undue claims are made without fulfilling the requisite Rule of Origin Criteria. Section 28DA Statutory Mandate: Section 28DA mentions procedure regarding claim of preferential rate of duty which specifies that the Importer needs to declare that goods qualify as originating goods and shall possess sufficient information as regards the manner in which country of origin criteria, including the regional value content and product specific criteria, specified in the rules of origin in the trade agreement, are satisfied. The CAROTAR Rules has put the onus upon the importer to possess Origin related information i.e., the manner in which the country of origin criteria is satisfied and exercise reasonable care to ensure the accuracy and truthfulness of the information. The importer is also required keep all supporting documents for at least five years from date of filing of bill of entry. Rule of Origin Criteria & DVC Formula In accordance with Section 5(1) of the Customs Tariff Act, each Trade Agreement signed by the Government should mention rules for determining if any article is the produce or manufacture of such foreign country or territory. Therefore, each trade agreement specifies the “Rule of Origin” which is determined by the domestic value addition and substantial transformation of the goods during the manufacturing. Domestic Value addition requires that a certain minimum percentage of the good’s value originates in a country for the good to be considered as originating while substantial transformation of the goods is verified as Change in Tariff Classification or Process Rule. Standard Domestic Value Content (DVC) Calculation DVC = [ { Free on Board (FOB Value of Sale) − Value of Non-Originating Materials } ÷ Free on Board Value ] × 100 Majority of the trade agreements have a single rule for all goods but in some trade agreements, some or all tariff headings have Product Specific Rules. Trade Agreement Originating Criteria Prescribed SAFTA NOM*** ≤ 60% + CTH* India-Singapore CECA 35% DVC + CTSH** ASEAN-India FTA 35% DVC + CTSH Sri Lanka FTA NOM ≤ 65% + CTH Malaysia FTA (CECA) 35% DVC + CTSH Nepal FTA NOM ≤ 70% + CTH Definitions: *CTH: Change in Tariff Heading (4-digit HS level) **CTSH: Change in Tariff Sub-Heading (6-digit HS level) ***NOM: Non-Originating Material 6. Industry Reaction & Strategic Roadmap Towards 2030 Industry Challenges & CBIC Clarification The industry feels that after the implementation of these rules, availing the concession of tariff under FTA has become cumbersome and complicated as the seller is resistant in providing information relating to operations and costing which are typically confidential and sensitive for any businesses. Moreover, some of the trade partners contested to review and repeal the CAROTAR Rules as it is provoking non-Tariff barriers in the international trade. Therefore CBIC issued instructions to authorities to raise queries only when there are ‘sufficient grounds’ of non-compliance of Rule of origin. The Roadmap Ahead: Targeting $2 Trillion Total Exports by 2030 India has learnt hard lessons from past experiences and was no longer signing FTAs to merely be a part of the group. Signing FTAs with consumption based and developed economies i.e., the US, the UK and EU may be the way forward which could provide India greater access to these markets and tap into their economic perquisites. India should also work with countries where it can access low-cost raw material to enable our manufacturers to produce goods for exports cost competitively. Since China is our strategic competitor and their agility to adapt to new technologies and build a resilient trading system can create an economic influence within Asia, India has to take the charge and look for reciprocity of benefits and access to avail fair play in the international trade market to reach the ambitious target of $1 Trillion of merchandise exports and $1 Trillion of Service Exports by 2030.

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 47–53 (Journal pp. 1087–1093) UNION BUDGET 2022-23 • INFORMATION TECHNOLOGY & DIGITAL ECONOMY Union Budget 2022-23 – Paving the way for a Digital India CA. Shaifali Mathur* Academician & Member of the ICAI Email: mathurshaifali108@gmail.com Dr. J.K Tandon# Academician & Senior Researcher Correspondence: eboard@icai.in ⚡ Vision of a Pro-Technology Budget The budget 2022-23 is a pro-technology budget. Digital economy and fintech have been mentioned as the vision of the budget. It has embraced digitalisation and the adoption of technology at various levels. This paper elucidates the important digital initiatives like the introduction of CBDC digital currency, digital banking units, taxing the digital assets and most importantly, bringing in of 5 G. 5 G shall enable smart manufacturing which is expected to be game changer for India’s manufacturing industry. These measures are expected to pave way for a new developed digital India and propel the Indian economy towards economic progress. Read on… 1. Introduction: Digital Architecture & Public Spending The Finance Minister, Dr Nirmala Sitaraman set the stage for delivering on the promise of strong digital architecture that supports digital governance, e-health and building digital trust. She started a new trend of a paperless budget in 2021 and this continued with the budget of 2022-23 being presented digitally. Soft copies of the budget and the Economic Survey were distributed to all the members of Parliament. Digitisation ran as one of the principal themes across many of the planned public spending initiatives. The budget has given a fresh digital push and reliance on green energy. In tandem with modern high-technology goals, Rs 19,500 crore of Production Linked Incentive (PLI) for solar manufacturing of high efficiency modules has been announced in the Union Budget for FY 23. 2. Introduction of the Digital Currency: Central Bank Digital Currency (CBDC) The government remained committed to digitalisation, albeit in a more secure manner. The announcement was made by the FM that the Reserve Bank of India (RBI) will roll out the Central Bank Digital Currency (CBDC) in FY 2023, based on the block chain technology. This CBDC, which has not been given any formal name as yet, will be easily exchangeable with the physical currency. Operational Mechanism & Fiscal Benefits Users will be able to transfer purchasing power from their deposit accounts into their smart phone wallets in the form of online tokens, and it would result in the direct liability of the Reserve Bank of India, just like cash. This is expected to significantly lessen the burden of printing paper currency and the logistics of handling and distributing cash across the country. Sovereign Currency versus Private Cryptocurrencies A currency is generally backed by some credible sovereign agency. This is not the case with the existing cryptos in the market like Bitcoin or Ethereum etc. As per the RBI, private virtual currencies are at substantial odds with the historical concept of money since they possess no intrinsic value. In fact, the cryptocurrencies can threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporations or governments that control them, as highlighted by Deputy Governor of RBI, T Rabi Sankar. A much better and safer option, therefore, is for a sovereign country to issue and manage its own digital currency. Global Precedents: The Bahamas, Nigeria, and China As per the International Monetary Fund (IMF), countries like the Bahamas and Nigeria have introduced CBDCs—the “Sand Dollar” and the “e-Naira”—to increase financial inclusion, facilitate remittances and reduce the informal cash economy. The Sand Dollar provides greater flexibility and accessibility for residents who want to participate in financial services via a mobile phone application or using a physical payment card to access a digital wallet. Digital currencies hold massive potential for the 1.7 billion people globally that the World Bank reports do not have a formal bank account. Furthermore, with the Cyber Yuan, the People’s Republic of China became the first large economy to introduce a sovereign CBDC. Widespread deployment of the digital yuan provides Chinese policymakers with substantially greater real-time visibility into how money flows around the macro economy. Prerequisites & Legislative Reforms for Indian CBDC: The RBI has been actively examining the usage of the CBDC and working out the implementation strategy for both retail and wholesale models. A substantial legal and structural overhaul is required prior to roll-out: Enactment of a comprehensive Crypto / Digital Currency law in Parliament. Statutory amendments to the Reserve Bank of India Act, 1934. Amendments to the Coinage Act, 2011. Harmonization with the Foreign Exchange Management Act, 1999 (FEMA). Amendments to the Information Technology Act, 2000. 3. Taxation of Virtual Digital Assets (VDA): Section 115BBH & Section 194S The government has cautioned time and again that the virtual digital currencies in the market do not have underlying values and the exchanges dealing with them are not regulated. The past few years witnessed heavy speculation in cryptocurrencies. Since cryptos had also made their place onto the balance sheets of many corporate entities, the government took cognisance of their existence and promulgated rigorous guidelines for taxing VDAs and Non-Fungible Tokens (NFTs) in the Union Budget 2022-23 (effective from 1st April 2023 / AY 2023-24): Flat 30% Tax & Strict Cost Limitation Income from the transfer of Virtual Digital Assets shall be taxable at a flat rate of 30% (plus applicable surcharge and cess) under Section 115BBH. No deduction in respect of any expenditure (other than the direct cost of acquisition) or allowance shall be allowed. No Set-Off & No Carry Forward of Losses Loss from the transfer of a Virtual Digital Asset shall not be allowed to be set off against income earned under any other head of income or provisions of the Income-tax Act. Furthermore, such losses are strictly prohibited from being carried forward to succeeding assessment years. Taxation of Gifts: Section 56(2)(x) Provisions relating to the taxation of gifts are extended to Virtual Digital Assets. The definition of “property” in the Explanation to Section 56(2)(x) (formerly 56(2)(vii)) is amended to explicitly include Virtual Digital Assets, making gifts of VDAs taxable in the hands of the recipient. 1% TDS Mechanism: Section 194S TDS on purchase/transfer consideration of VDAs under Section 194S is introduced with effect from 1st July 2022 at the rate of 1%. Any person paying consideration to a resident for the transfer of a VDA must deduct 1% tax, creating a 360-degree audit trail. Statutory Exemption Thresholds under Section 194S: Specified Persons (Individual / HUF): Where the payer is an Individual or HUF whose total turnover from business does not exceed Rs 1 crore or professional gross receipts do not exceed Rs 50 lakhs, or who does not have income under PGBP, TDS is deductible only if aggregate consideration exceeds Rs 50,000 during the financial year. All Other Persons: In any other case, the reporting and deduction threshold is proposed at Rs 10,000 during the financial year. Taxing virtual digital assets is unprecedented globally as no other major country had regulated and taxed VDAs comprehensively. Consequently, certain operational teething challenges in execution and classification will need continuous resolution. 4. 5G Telecommunications & Smart Manufacturing Presenting the budget, the Finance Minister announced that the auction for the 5G spectrum will be conducted in 2022, enabling India to roll out commercial 5G services by 2023. Major telecom carriers had already undertaken initial 5G field trials across select Indian cities and upgraded physical mobile towers in active collaboration with global original equipment manufacturers (OEMs). Crucially, 5G is not merely an incremental upgrade for telecommunications—it serves as the critical infrastructural backbone for Smart Manufacturing (SM) in India. Smart Manufacturing is a technology-driven framework utilizing interconnected machinery, high-powered sensors, and data analytics to optimize operations, automate workflows, and boost national productivity. Industrial Internet of Things (IIoT) Paradigm Shift SM involves direct application of Industrial IoT. Sensors embedded in industrial plant machinery continuously monitor operational status and metrics. Previously, diagnostic logs were isolated on individual machines and reviewed only after failure occurred—by which time severe production downtime and damage had already happened. Embedded 5G-connected IIoT provides predictive real-time telemetry to preemptively avert equipment breakdown. Economic Multiplier: $740 Billion Opportunity by 2030 Global market reports indicate that 5G telecommunication technology will be a monumental game changer for the industrial sector. The cumulative economic benefits of 5G to the global manufacturing ecosystem are estimated to reach $740 billion by 2030. Its super-fast speeds, ultra-flexible wireless architecture, and near-zero latency are essential for smart factories, interconnected digital supply chains, and IoT-enabled smart products. “Automated machines and robots equipped with a wide array of sensors, connected to high-powered analytics in the cloud that assess performance, manage production schedules, maintain supplies, and orchestrate all activities on the shop floor.” Table 1: Technology Specifications of 5G in Comparison to 3G and 4G Features 3G 4G 5G Year of Introduction 2001 2009 2018 Based on Technology of WCDMA LTE, WiMAX MIMO, Waves Bandwidth 25 MHz 100 MHz 30 GHz to 300 GHz Internet Service Broadband Ultrabroadband Wireless World Wide Web Throughput (Data Rate) 7 Mbps (megabits per second) 300 Mbps – 1 Gbps Up to 10 Gbps Applications Video conferencing, mobile TV, GPS High speed applications, mobile TV, wearable devices High resolution video streaming, remote control of vehicles, robots, automated procedures Latency (Delay in Transit) 100–500 ms 30–50 ms 1–10 ms Source: Compiled with technical inputs from Rantcell and ICAI Research. 5. Industrial Evolution: Industry 4.0 and Industry 5.0 Industry 4.0 designates the Fourth Industrial Revolution, distinguished by cyber-physical automation where machines largely communicate and govern themselves. It integrates breakthroughs across Internet of Things (IoT), Artificial Intelligence (AI), Big Data analytics, Cloud, and Mobile Edge Computing to digitalize physical production workflows. Adoption by Indian Industrial Champions: Siemens India: Successfully expanded production variants of complex circuit breakers while reducing manufacturing cycle time by 50%. Mahindra & Mahindra: Automotive division achieved double-digit percentage savings in repair and spare costs by retrofitting critical manufacturing machinery with IoT sensors and real-time telemetry. Lloyd (Havells Group): Commissioned an advanced, fully robotized smart manufacturing plant in Ghiloth, Rajasthan, embedding native AI and IoT throughout the fabrication and assembly line. The Dawn of Industry 5.0: Collaborative Robots (Co-bots) While Industry 4.0 focuses on connecting technology with machines via the internet, Industry 5.0 re-introduces the human touch, creating an environment where people and robots work synergistically together. Collaborative robots (co-bots) are deployed to handle repetitive, hazardous, or precision tasks alongside skilled workers to boost process efficiency and customization. 5G is the paramount technical catalyst facilitating this transition. Architectural Capabilities of 5G for Advanced Manufacturing Ultra-Reliable Low-Latency Communication (URLLC): Enables sub-millisecond, real-time machine-to-machine control loops. Massive Bandwidth & Sensor Density: Supports millions of connected sensors per square kilometer, driving massive telemetry throughput. Network Slicing: Creates dedicated, virtually isolated network slices with customized QoS, ensuring uncompromising security and guaranteed SLAs. Mobile Edge Computing (MEC): Houses computing capacity locally at factory gates, preserving low latency and fail-safe operational continuity. Seven Productivity Gains Powered by 5G: 1. Production Optimization Real-time machine telemetry facilitates precision sequencing of factory operations and drastically eliminates scrap and material waste. 2. Modular Factories High density, bandwidth, and low latency allow dynamic reconfiguration of shop floors, enabling mass customization and on-demand production. 3. Infrastructure & ERP Integration Seamless bridging of operational technology (OT) with corporate enterprise resource planning (ERP) enables remote process governance. 4. Supply Chain Synchronization Automated replenishment triggers for assembly components, mitigating inventory bottlenecks and supply disruptions. 5. Enhanced Human-Machine Interface Liberates technicians from fixed monitors through wireless AR smart glasses and immersive 3D industrial visualization gear. 6. Predictive & Remote Maintenance Continuous machine health monitoring enables predictive servicing before breakdown and allows remote OEM engineering diagnostics. 7. Shop Floor Safety & Emergency Response Instantaneous fail-safe shut-off signaling minimizes hazardous human exposure in severe industrial operating conditions. 6. Key Digital Initiatives Across Core Sectors A. Digital Banking Units (DBUs): 75 Units in 75 Districts Commemorating the 75th year of India’s Independence (Azadi ka Amrit Mahotsav), the government announced the establishment of 75 Digital Banking Units (DBUs) across 75 districts by Scheduled Commercial Banks. While digital lending has expanded financial inclusion, empirical studies indicated that advanced digital financial products remained heavily concentrated in urban centers. The DBUs directly address this divide by taking formal digital banking into rural and semi-urban hinterlands. Powered by the JAM Trinity (Jan Dhan, Aadhaar, Mobile) and robust open APIs, DBUs catalyze rapid adoption of Unified Payments Interface (UPI), Buy Now Pay Later (BNPL), and Aadhaar Enabled Payment Systems (AePS), all under the strict prudential oversight of the Reserve Bank of India. B. Biometric Chip-Enabled E-Passports Indian citizens traveling overseas will be transitioned from traditional paper booklets to advanced e-Passports embedded with secure electronic microchips. Manufactured domestically at the India Security Press in Nashik, these next-generation travel documents strictly adhere to the rigorous standards of the International Civil Aviation Organisation (ICAO). The microchips store encrypted biometric and cryptographic credentials, rendering them virtually immune to fraudulent tampering or identity theft. Immigration clearance will occur in mere seconds at automated e-gates globally, positioning India alongside technologically advanced nations like the United States, United Kingdom, and Germany. C. Digital Healthcare: Ayushman Bharat Digital Health System (ABDHS) The Union Budget expanded funding for the Ayushman Bharat Digital Health System (ABDHS / ABDM) by more than 2.5 times to Rs 200 crore (within a total healthcare allocation exceeding Rs 86,600 crore). ABDHS establishes open digital registries for registered healthcare practitioners and medical infrastructure. Citizens are assigned a 14-digit Ayushman Bharat Health Account (ABHA) Unique Health ID linked to Aadhaar and mobile credentials. Through the national portal (abdm.gov.in) and Hospital Information Management Systems (HIMS), citizens can store, access, and share verifiable electronic medical records with healthcare providers on an explicit, consent-driven architecture, dramatically elevating “Ease of Living”. D. Digital Education: Hub-and-Spoke Digital University & PM e-VIDYA With the education budget expanded to Rs 1.04 lakh crore, the government announced the establishment of a world-class Digital University operating on an advanced networked Hub-and-Spoke model. This topology enables hyper-scalable, personalized, and multilingual higher education delivered straight to the student’s home. Network Topology: Hub-and-Spoke Cloud Architecture In the underlying technical topology (as configured in modern Oracle Cloud Infrastructure architectures), the central Hub VCN connects seamlessly to distributed spoke VCNs and on-premise networks through Dynamic Routing Gateways (DRG), Virtual Cloud Network (VCN) Peering, Routing Tables, and Security Lists across geographically dispersed availability domains. Central Hub VCN (Services Subnet, Management Subnet, Bastion) ⇅ (FastConnect VPN / LPG Peering / DRG) Distributed Spoke Networks (Workload Subnets & Regional On-Premise Campuses) 75 Skilling E-Labs: Set up to provide simulated, hands-on science and technology learning environments that foster critical analytical thinking. PM e-VIDYA Expansion: Expansion of the “One Class, One TV Channel” programme from 12 to 200 specialized TV channels, imparting high-quality education in regional vernacular languages across grades 1 to 12. DESH-Stack E-Portal: Launch of Digital Ecosystem for Skilling and Livelihood (DESH-Stack) to skill, up-skill, and re-skill citizen workforces via online training modules and API-driven digital credentials. 7. Conclusion Through the multifaceted digital initiatives presented in the Union Budget 2022-23, the Government of India has clearly articulated its strategic determination to consistently leverage technology wherever it enhances transparency, boosts industrial efficiency, and accelerates administrative governance. The manufacturing sector of India is poised to leapfrog forward with the rollout of 5G infrastructure, achieving unprecedented productivity and global cost competitiveness. Simultaneously, the nationwide expansion of Digital Banking Units, the rollout of sovereign Central Bank Digital Currency (CBDC), digital health registries under ABDM, biometric e-passports, and nationwide skilling portals together construct a resilient digital backbone that underpins sustainable, long-term national economic progress. “The boosting up of digital banking, introduction of CBDC currency, e-health, e-passports, and e-education initiatives will strengthen the digital ecosystem, lead to greater digital governance, and ensure sustainable, equitable development for the nation.” References Business Standard, Sunil Bharti Mittal to Rashesh Shah: BS Jury lauds growth-oriented Budget, 2022. Available at: business-standard.com The Economic Times, In favour of complete ban on cryptos: RBI to Central Board. Available at: economictimes.indiatimes.com International Monetary Fund (IMF), Five Observations on Nigeria’s Central Bank Digital Currency, November 15, 2021. Available at: imf.org Central Bank of The Bahamas, Project Sand Dollar: Central Bank Digital Currency. Available at: sanddollar.bs The Wall Street Journal, China Creates Its Own Digital Currency, a First for Major Economy, April 5, 2021. Available at: wsj.com The Economic Times, India’s plan to launch a Digital Rupee needs more thought, less haste. Available at: economictimes.indiatimes.com Government of India, Union Budget Speech 2022-23, Ministry of Finance. TechTarget, IoT Agenda: Smart Manufacturing and Industrial IoT Frameworks. Available at: techtarget.com GSMA, Smart Manufacturing: Insights On How 5G & IoT Can Transform Industry, April 2020. Available at: gsma.com Ericsson, 5G for Manufacturing: White Papers & Global Industry Reports. Available at: ericsson.com Rantcell, Comparison of 2G, 3G, 4G and 5G Technologies and Architecture. Available at: rantcell.com Global Electronic Services, Understanding Industry 4.0 and Industry 5.0 in Modern Manufacturing. Available at: gesrepair.com Gopalan, K., The New Factory: Robots, Co-bots and Automation, Business Today, Anniversary Issue, February 2022, pp. 190–194. Sharma, R., Technology enabled ecosystem for financial inclusion, The Chartered Accountant, Vol. 70, No. 6, December 2021, p. 677. Bhattacharya, S., India all set to introduce e-passports with chips: Here is how it will work, India Today, January 20, 2022. Available at: indiatoday.in Oracle Corporation, Hub-and-spoke network topology in Oracle Cloud Infrastructure. Available at: docs.oracle.com

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 38–46 (Journal pp. 1078–1086) Union Budget 2022-23 Union Budget 2022-23: A Roadmap for Growth and Sustainable Development RK Dr. Rajeev Kumar Associate Professor, Department of Economics, Shri Ram College of Commerce (SRCC), University of Delhi • Contact: eboard@icai.in “The global economy has been sailing through an agonising, uncertain and turbulent phase in the last two years since the COVID-19 pandemic broke out. India has witnessed three waves of the COVID-19 pandemic so far which had a disruptive impact on the economy, businesses, employment. Normal lives of people remained shattered. Recently, global economy, including India, in its recovery phase from the pandemic is reeling under the tremendous pressure of rising inflation. Supply side disruptions, expansionary monetary policy and rising crude and other input prices have contributed to cost push and demand-pull inflation. Read on…” During the three quarters of the F.Y. 2021-22, headline CPI inflation shot up to 5.6 per cent year on year; fuel inflation is still in double digits; Core inflation, which excludes food and fuel from CPI inflation, remained high. The fast V-shaped recovery witnessed in India was halted due to the emergence of third COVID wave of highly transmissible Omicron variant. Anticipations of the people and businesses from the budget were very high. In such a scenario, economic reinvigoration, revival of growth and macroeconomic stability are anticipated from broader fiscal and monetary policies in the post pandemic scenario. 1. Executive Overview and Macroeconomic Backdrop The Union budget for the ensuing Financial Year, 2022-23 has been prepared to give a big boost to the economy. It targets fast, inclusive and sustainable growth. A closer look at the budget reveals that faster recovery, high rate of economic growth and a vision for inclusive and sustainable development with controlled inflation and prudent fiscal consolidation are the main tenets of the budget this year. Real GDP Trajectory 9.2% Growth Estimated real GDP growth for 2021-22 subsequent to a contraction of 7.3% in 2020-21 (First Advanced Estimates, Economic Survey 2021-22). Nominal GDP Target 11.2% per annum Ambitious nominal GDP growth target set for F.Y. 2022-23 anchoring macroeconomic revenue and fiscal deficit projections. Inflation Pressures 5.6% Headline CPI Shot up during the first three quarters of 2021-22, accompanied by double-digit fuel inflation and stubborn core inflation. This article presents an analysis of the budget, 2022-23 from the perspective of the focus of budget on growth and sustainable development. It attempts to bring out the key aspects of the budget to examine the fiscal policy stance and the future growth prospects for the economy. 2. Amrit Kaal: The 25-Year Futuristic Blueprint (2022–2047) As stated by the Honourable Prime Minister of India on the 75th Independence Day, India has entered into the Amrit Kaal, a period of 25 years from 2022 to 2047 when India completes 100 years of independence. For the Amrit Kaal of 25 years, the budget sets out an ambitious agenda focused on: Speeding up macroeconomic growth: Propelling productive investments and aggregate output across core manufacturing and service sectors. Inclusive and welfare-oriented microeconomic development: Channeling direct benefits to women, farmers, marginalized groups, and aspirational regional clusters. Sustainable development through climate action: Initiating systemic energy transitions, circular economic principles, and low-carbon industrialization. Promotion of the digital economy: Leveraging fintech, Central Bank Digital Currency (CBDC), 5G networks, and trust-based digital governance. The budget prepares a futuristic and inclusive blueprint for the Amrit Kaal by setting priorities and targets. By the completion of one hundred years of independence, the budget sets four major priorities anchored under the PM Gati Shakti master plan. 3. Impetus for Growth through Enhanced Capex and Multipliers Capital expenditure (Capex) is the key to economic growth. Capital expenditure incurred in a variety of forms gives dual benefits to a growing economy like India: The Dual Economic Engine of Public Capital Expenditure: Demand Augmentation: It enhances aggregate demand by creating remunerative opportunities for employment, wage earnings, and raw material off-take. Productivity & Supply Boost: It expands physical capacity, eliminates logistical bottlenecks, increases production efficiency, and crowds in private enterprise. On this premise, Capex has been increased in this budget to Rs. 7.5 lakh crore for the year 2022-23, up from Rs. 6 lakh crore for F.Y. 2021-22 (more than double the corresponding Capex figure for 2019-20). This budget not only envisages faster economic growth but also creation of employment and income opportunities. Hence, the budget provides for enhanced public spending to speed up economic growth through its effect on aggregate demand via fiscal and investment multipliers effects. This represents an unconventional Keynesian-style approach to address the ongoing recession sparked by the pandemic. Macroeconomic Context: Figure-1 Trends in Gross Domestic Product & Gross Value Added Constant Prices, Base Year: 2011-12 | Source: Economic Survey, 2021-22 Trends in GDP and GVA across the four consecutive years from 2018-19 to 2021-22 demonstrate that the initial V-shaped recovery following the national lockdown received sharp setbacks after the second wave (Delta) and third wave (Omicron) in 2021-22. The budget of 2022-23 specifically counters this deceleration by deploying frontloaded public investment to jumpstart stagnant aggregate demand. Expenditure Restructuring and Fiscal Arithmetic A massive expenditure of Rs. 20,000 crore on infrastructure development has been proposed in the budget. The macroeconomic restructuring of Central Government expenditures reveals striking shifts: Effective Capital Expenditure: As a proportion of total budgeted expenditure, effective Capex has been increased by 4.85 percentage points. As a percentage of GDP, effective capital expenditure reaches 4.1% of GDP in 2022-23 (revised to 3.6% of GDP in 2021-22). Revenue Expenditure Compression: Revenue expenditure (net of grants in aid for capital assets creation) has been projected to be 5.5% lesser as a percentage of total budgeted expenditure compared to the revised estimates of 2021-22. Borrowing & Liabilities: As a percentage of total budgeted receipts, borrowings and other liabilities (which includes drawing down of cash balances) of the Union Government are projected to decline slightly by 0.1%. Fiscal Deficit Reduction: Public Capex expansion is harmonized with a reduction in the fiscal deficit to 6.4% of GDP, implying a controlled deceleration in the net addition to public debt. Figure-2: Emerging Trends in Capital and Revenue Expenditure of the Centre (2014-15 to 2022-23 BE) Analysis of central expenditure ratios confirms that the post-2020-21 trajectory marks a sharp, intentional structural reversal: capital expenditure as a percentage of total expenditure is steeply rising, while revenue expenditure as a percentage of total expenditure is declining steadily. 4. Financial Assistance to States for Capital Investment & Sub-National Debt Risks The thrust on capital spending is equally visible in the enhanced financial assistance extended to State Governments under the Scheme for Financial Assistance to States for Capital Investment to create productive assets and generate remunerative employment: Financial Year / Stage Loan Allocation (Rs. Crore) Tenure & Terms Borrowing Ceiling Status 2021-22 Budget Estimates (BE) Rs. 10,000 crore 50-Year Interest-Free Over & above normal borrowing limits 2021-22 Revised Estimates (RE) Rs. 15,000 crore 50-Year Interest-Free Over & above normal borrowing limits 2022-23 Budget Estimates (BE) Rs. 1,00,000 crore (Rs. 1 Lakh Crore) 50-Year Interest-Free Over & above normal borrowing limits Financial assistance of this magnitude for capital investment will improve the overall investment climate in the economy which in turn will augment growth and development in the country. Apart from spending on infrastructural and productive investment, these loans will supplement the spending of states on digitisation of the economy. Critical Caveat: Sub-National Debt Traps & Expenditure Substitution Leakage However, there is a serious caveat to such predictions. State governments are already highly indebted and under immense pressure to meet Fiscal Responsibility and Budget Management (FRBM) targets: Gross Fiscal Deficit of States: Stood at 3.5% (2016-17), 2.4% (2017-18), 2.5% (2018-19), 2.6% (2019-20), jumping to 4.6% of GSDP in 2020-21 (RE) and budgeted at 3.7% in 2021-22 (BE). State Debt-to-GDP Ratio: Escalated steadily from 25.1% in 2016-17 to 26.3% in 2019-20, reaching an alarming 31.1% in 2020-21 (RE) and 31.2% in 2021-22 (BE) (Figure-3: Debt and Deficit of State Governments). Consequently, states face two adverse incentives: either they will be reluctant to borrow further due to sustainability concerns, or they will borrow under this 50-year interest-free scheme merely to substitute and cut back their own debt-financed capital expenditure allocations. This leakage potential casts a significant shadow on the net additionality of the scheme. 5. Infrastructure Transformation under PM Gati Shakti Master Plan Transformation of the transport system under the PM Gati Shakti is central to the budget of this year. Gati Shakti, an ambitious National Master Plan for Multi-modal Connectivity, is a transformative approach for fast and sustainable economic growth and development, aiming to elevate India’s transport logistics to world-class standards. The Seven Engines of PM Gati Shakti 🚆 Railways 🛣️ Roads ✈️ Airports 🚢 Ports ⛴️ Waterways 🚌 Mass Transport 📦 Logistics Infra Supporting Pillars: Information and communication technology (ICT), transmission of clean energy, water supply and sewerage networks, and social infrastructure. The execution approach tightly integrates Central ministries, state bodies, and private sector investments. National Infrastructure Pipeline (NIP) & Capital Commitments Empirical data highlights the scale of capital deployment needed to transition India into an upper-middle-income industrial powerhouse: GDP Target Requirement: India needs to spend about $1.4 trillion on infrastructure to achieve the targeted GDP benchmark of $5 trillion by 2024-25. Historical Benchmark: During the decade of 2008–2017, India spent approximately US$ 1.1 trillion on infrastructure. NIP Outlay: The National Infrastructure Pipeline (NIP) was launched with an aggregate projected investment of US$ 1.5 trillion across FY 2020–2025. Figure-4: Sector-Wise Breakup of National Infrastructure Pipeline (Rs. Lakh Crore) Sector Projected Outlay (Rs. Lakh Crore) Share & Focus Areas Energy ~24.50 Renewable generation, transmission grids, clean storage Roads ~20.00 Bharatmala, economic corridors, expressway networks Urban Infrastructure ~16.50 Smart cities, mass rapid transit, urban water & sewage Railways ~14.00 Track doubling, dedicated freight corridors, passenger modernization Rural Infrastructure ~8.00 Rural roads (PMGSY), storage godowns, rural electrification Irrigation ~8.00 River interlinking, command area development, micro-irrigation Social Infrastructure ~4.00 Healthcare delivery, tertiary education, sports infrastructure Telecommunications ~3.50 BharatNet fiber optics, broadband connectivity, 5G towers Industrial Infrastructure ~3.50 Industrial corridors, manufacturing nodes, defense corridors Airports ~2.50 UDAN regional connectivity, greenfield airport development Ports ~1.50 Sagarmala coastal shipping, port mechanization, deep drafts Agriculture & Food Processing ~1.20 Mega food parks, agro-processing clusters, cold-chain corridors Source: Economic Survey, 2021-22. Specific Sectoral Targets in Budget 2022-23 National Highway Expansion: Under the PM Gati Shakti Master Plan for Expressways, the network of national highways will be expanded by 25,000 km in 2022-23. Road transport expenditure has been enhanced to Rs. 66,494 crore. Multimodal Transport Integration: Developing an integrated multimodal cargo network to reduce logistics costs, eliminate redundant documentation, and compress delivery timelines across road, rail, air, and marine freight. Railways Modernization: Outlay on railways increased to Rs. 30,000 crore, placing exclusive emphasis on optimizing parcel systems, passenger comfort, and freight speeds. 400 Vande Bharat Trains: A landmark proposal to manufacture and deploy 400 new-generation Vande Bharat trains with advanced energy efficiency and passenger amenities over the next three years. 100 Gati Shakti Cargo Terminals: Development of 100 PM Gati Shakti Cargo Terminals for multimodal logistics facilities over the next three years. National Ropeways Development Programme: Construction of 8 ropeways spanning ecological and hilly terrains during 2022-23 on a Public-Private Partnership (PPP) basis, providing a direct boost to eco-tourism and connectivity in congested areas. Urban Development, Clean Mobility & Battery Swapping Policy The budget highlights urban planning as an engine of economic potential, converting cities into centers of sustainable living with livelihood opportunities for women and youth: High-Level Urban Committee: Formation of an expert committee on urban planning to formulate policies, capacity building, modern building bylaws, and town-planning schemes for states. Zero Fossil-Fuel Mobility Zones: Creation of dedicated special mobility zones within major metropolitan hubs restricting combustion engines in favor of non-polluting public transport. National Battery Swapping Policy: To overcome space constraints for EV charging stations in dense urban cores, a comprehensive battery-swapping framework with interoperability standards will be established, accelerating EV adoption across commercial delivery fleets. 6. Productivity Enhancement, Digital Economy & The Digital Rupee Improvement in the productivity of labour and capital is crucial for ramping up economic growth. In this direction, the budget proposes to launch the second phase of Ease of Doing Business 2.0 through a system of trust-based governance. Trust-Based Governance Digitisation of manual processes, integration of central and state systems via IT bridges, single-point access for citizen services, and removal of overlapping compliances. Ease of Living Initiative Modernized urban planning, expanded housing schemes, streamlined land record digitization, and single-window clearances. 5G Telecom Infrastructure Production Linked Incentive (PLI) scheme extended to design-led telecom equipment manufacturing, laying groundwork for 5G network rollout. Digital Banking Units (DBUs) & Central Bank Digital Currency (CBDC) Digital banking and digital payment systems are growing at an extraordinary pace in India. Budget 2022-23 introduces two landmark structural financial reforms: 75 Digital Banking Units (DBUs) in 75 Districts: Set up by Scheduled Commercial Banks to mark 75 years of Independence, DBUs ensure that formal digital financial services reach rural, semi-urban, and unbanked populations in a paperless, cost-effective manner. Introduction of Central Bank Digital Currency (CBDC / Digital Rupee): Issued by the Reserve Bank of India (RBI) using blockchain and related distributed ledger technologies. The Digital Rupee will: Significantly reduce physical cash printing, logistics, and management costs; Eliminate settlement settlement settlement friction in cross-border and interbank transactions; Provide a major institutional boost to India’s digital economy and business environment. Cybersecurity Imperative: The author highlights that adequate cyber safeguards, rigorous encryption protocols, and anti-fraud architectures must be implemented prior to wide-scale CBDC circulation to prevent digital fraud and cyber vulnerabilities. 7. Sustainable Development: Energy Transition, Climate Action & Circular Economy Sustainable development has emerged as an unavoidable paradigm. India needs to adopt best environmental practices across production, transportation, and consumption. Pollution in all forms has been rising, posing grave threats. Global warming and climate change are dominant global concerns. Government of India is strongly committed towards low-carbon and sustainable development. Solar Energy Acceleration & 280 GW Target The budget allocates Rs. 19,500 crore under the Production Linked Incentive (PLI) Scheme for manufacturing high-efficiency solar photovoltaic (PV) modules, reaffirming India’s ambitious goal of reaching 280 GW installed solar capacity by 2030. Transition to Carbon Neutral Economy: Thermal Co-Firing Thermal power is the largest source of electricity in India, with approximately 51% of electricity generated in coal-based power plants. Burning coal emits noxious fumes containing sulphur dioxide, nitrogen oxides, carbon dioxide, and mercury. The budget targets coal plant emissions and crop residue burning through a groundbreaking mandate: 5% to 7% Biomass Pellet Co-Firing Mandate Carbon Abatement: Estimated to abate 38 MMT (Million Metric Tonnes) of carbon dioxide emissions annually. Farmer Income & Rural Jobs: Farmers and rural entrepreneurs gain substantial extra income by collecting agricultural residues and converting farm waste into commercial biomass pellets. Air Quality Improvement: Directly mitigates seasonal smog and severe air pollution caused by stubble burning across northern agricultural plains. Energy Conservation, Agroforestry & The Circular Economy Energy Service Company (ESCO) Model: Institutionalized in large commercial complexes and government estates to conduct energy audits, retrofit smart systems, and guarantee verified power savings. Agroforestry & Private Forestry: Financial support, regulatory streamlining, and legislative amendments to encourage farmers to adopt farm-forestry models, sequestering carbon and augmenting timber supply. Circular Economy Paradigm: Replacing the unsustainable linear “take-make-waste” extractive model with closed-loop recycling, resource efficiency, and reuse. The budget initiates circular frameworks across ten sectors (electronic waste, end-of-life vehicles, used oil, toxic and plastic wastes), requiring behavioral shifts among producers and consumers. 8. Financing Strategy, Subsidy Restructuring & Borrowing Dynamics Capex in 2022-23 is projected to more than double the corresponding figure of 2019-20, alongside a downtrend in the fiscal deficit. How is this ambitious investment funded, given a conservative projected growth of only 6% in revenue receipts? The budget achieves this via a bold structural expenditure swap. Expenditure Restructuring: Developmental vs Non-Developmental Outlays Revenue expenditure compression was achieved without undermining developmental expenditure: Developmental Spend 39% → >41% Increased from 39% in 2021-22 RE to over 41% of total expenditure in 2022-23 BE. Non-Developmental Spend 61% → 58.5% Contracted from 61% in 2021-22 RE to 58.5% of total expenditure in 2022-23 BE. Compression in Major Subsidies: Rs. 1,15,242 Crore Reduction Compression in revenue expenditure is driven primarily by a massive reduction in the central subsidy bill on food, fertiliser, and petroleum. A cut of Rs. 1,15,242 crore is budgeted relative to the revised estimates of 2021-22, representing an outright 3.4% reduction as a percentage of total expenditure: Major Subsidy Category 2020-21 (Actual Estimates) 2021-22 (Revised Estimates) 2022-23 (Budget Estimates) Food Subsidy (% of Revenue Exp.) 17.6% 9.0% 6.5% Fertiliser Subsidy (% of Revenue Exp.) 4.1% 4.4% 3.3% Petroleum Subsidy (% of Revenue Exp.) 1.2% 0.2% 0.2% Source: Union Budget Documents, 2022 (Figure-5: Trend in Three Major Subsidies of the Centre). Sectoral Expenditure Swaps & Rising Interest Burden Figure-6 (Trends in Major Items of Expenditure in Rs. Crore) confirms an internal expenditure reallocation: social sector outlays on education, transport, and social welfare increased, while outlays on rural development and healthcare were pruned back relative to pandemic peaks. Concurrently, pandemic-era borrowing caused a severe build-up of public debt and rising interest burdens: Escalating Interest Payment Share: As a percentage of total budgeted expenditure, interest payments rise from 21.6% in 2021-22 (AE) to 23.8% in 2022-23 (BE), absorbing nearly one-quarter of the Central budget. Sources of Financing Deficit (Figure-7): Deficits are financed through market borrowings, securities against small savings, state provident funds, external debt, and drawdown of cash balances. Crowding In Private Investment & Sovereign Green Bonds Public and private sectors compete for investible funds. Excessive sovereign borrowing in credit markets raises interest rates, increasing capital costs for private industry and causing crowding out. Budget 2022-23 guards against this risk: The Sovereign Green Bond & Crowding-In Strategy Government market borrowings have been curtailed by about 0.5% compared to 2021-22 to ensure investible funds remain accessible to private firms, deliberately creating a crowding-in effect where public Capex stimulates private expansion. Furthermore, funds will be raised through the maiden issuance of Sovereign Green Bonds to finance green public sector infrastructure. This yields a double dividend: mobilizing dedicated ESG capital while significantly reducing the carbon intensity of the domestic economy. 9. Continued Thrust on Inclusive and Regional Development The budget extends the agenda of inclusive development with sustained focus on the welfare of women, poor, and marginalized communities: Nari Shakti & Child Development Recognized as the harbinger of women-led development during Amrit Kaal. Integrated schemes under the Ministry of Women and Child Development: Mission Vatsalya Mission Shakti Saksham Anganwadi & Poshan 2.0 2 Lakh Anganwadis to be upgraded during 2022-23 Basic Amenities: Tap Water & Housing Har Ghar, Nal Se Jal: Rs. 60,000 Crore Providing potable piped tap water to 3.8 crore households. PM Awas Yojana (PMAY): Rs. 48,000 Crore Constructing 80 lakh affordable houses across rural and urban locations. Regional & Border Convergence PM-DevINE (Prime Minister’s Development Initiative for North-East) Dedicated funding for social and infrastructure projects aligned with North-Eastern priorities. Vibrant Villages & Aspirational Blocks Infrastructure, telecom, and livelihood connectivity across border villages and backward blocks. 10. Fiscal Sustainability, Deficit Ratios & The FRBM Glide Path The budget has adopted a cautious approach towards fiscal sustainability. The expenditure profile has been reshuffled to accommodate financial requirements for economic revival, higher growth, and inclusive development: Total Expenditure Growth: Estimated to grow by 4.6% in 2022-23 over the revised figures for 2021-22, perfectly commensurate with targeted deficit contraction. Revenue Receipts: Projected to rise by approximately 6% as economic activities resume. Non-Tax Revenue & Disinvestment: Moderate deceleration in non-tax receipts, with the disinvestment target calibrated conservatively at Rs. 65,000 crore (representing ~1.64% of total projected expenditure). Deficit Indicator (% of GDP) 2020-21 (Actual Peak) 2021-22 (Revised Estimates) 2022-23 (Budget Estimates) Post-Peak Trajectory Gross Fiscal Deficit 9.2% 6.8% 6.4% Declining (-2.8 pp from peak) Revenue Deficit 7.3% 4.7% 3.8% Sharp drop (-3.5 pp from peak) Effective Revenue Deficit 6.2% 3.7% 2.6% Substantial drop (-3.6 pp) Primary Deficit 5.8% 3.3% 2.8% Cut by more than half (-3.0 pp) Source: Union Budget Documents, 2022 (Figure-8: Trends in Central Government Deficits as % of GDP). Fifteenth Finance Commission Targets & The Fiscal Drag Paradox The statutory fiscal benchmarks established under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and revised by the Fifteenth Finance Commission suggest that the Centre should bring down its fiscal deficit to 4.0% of GDP by the year 2025-26: Liability Reduction Target: The Commission observed that the recommended fiscal consolidation path for the Centre will result in a reduction of total liabilities of the Centre from 62.9% of GDP in 2020-21 to 56.6% in 2025-26. Post-Pandemic Reality: Due to emergency pandemic expenditures, India remains far from this glide path. Total increase in Centre liabilities (including drawing down of cash balances) for 2022-23 is estimated at Rs. 16,61,196 crore (about 6.4% of GDP), down from 6.8% of GDP in 2021-22. The Fiscal Drag Paradox: While the expenditure and deficit targets demonstrate prudent fiscal behavior and renewed commitment to FRBM discipline, the post-pandemic domestic economy still urgently requires an expansionary fiscal stance to simultaneously bolster aggregate supply and aggregate demand. A premature or aggressively procyclical contractionary alignment could generate significant fiscal drag in upcoming financial years. 11. Concluding Remarks & The Amrit Kaal Economic Horizon On conventional parameters like health, education, and rural development, the budget of this year might have not come up to the short-term expectations of many, but it definitely carries a farsighted approach with a longer-term vision of the economy. In view of the crucial elections in five states, it was widely anticipated that the budget this year would be full of populist announcements to woo the voters. Against all such political odds, the government demonstrated resolute commitment to genuine economic revival, structural growth, and sustainable development of the nation. The overarching vision of the budget is to prepare the economy for sustained long-term expansion by stimulating demand through substantially enhanced capital expenditure on infrastructure development, matched by decisive supply-side efficiency measures. The budget sets in motion a virtuous cycle of crowding in private investment through public capital investment. Enhanced public sector capital expenditure will bolster productivity and production, enhance GDP through multiplier effects, and create widespread opportunities for income and employment. Thus, the budget of 2022-23 intends to create powerful levers to pull the economy upward into the Amrit Kaal. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) March 2022 Issue • Vol. 70 • No. 9 • pp. 38–46 (Journal pp. 1078–1086) Author may be reached at: eboard@icai.in

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 54–60 (Journal pp. 1094–1100) UNION BUDGET 2022-23 • DIRECT TAXES • TDS & TCS TDS, TCS and Finance Bill CA. Chandrashekhar V. Chitale Author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at eboard@icai.in. 📑 Source Taxation Framework & Core Concepts The TDS and TCS provisions were introduced with an aim to collect tax from the very source of income. As per the TDS concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. While as per the TCS concept, a person (collector) who is liable to receive payment for specified goods and services to any other person (seller) shall collect tax at source and remit it into the account of the Central Government. Read on… The deductee or the seller, as the case may be, from whose income tax has been deducted or collected at source would be entitled to get credit of such amount so deducted or collected. The amount of credit is determined on the basis of Form 26AS or TDS/TCS certificate issued to him. The Finance Bill, 2022 has made comprehensive proposals to amend provisions of the Income-tax Act, 1961 (the Act) relating to TDS and TCS. The proposals are dealt with in this article. 1. Immovable Property Purchase: Alignment with Stamp Duty Value (Section 194-IA) Section 194-IA of the Act provides for TDS from payment of consideration to a resident, on transfer of certain immovable property, where it is not less than Rs. 50 lakh at the rate of 1%. Transfer of agricultural land is spared from TDS. For taxation in the hands of the transferor, any income from such transaction is computed as per Section 43CA (where property is held as stock-in-trade) and Section 50C (where property is held as a capital asset). Under both these sections, the stamp duty value is considered as the full value of consideration if it exceeds the transaction value. Heretofore, TDS under section 194-IA was deducted only from the amount of consideration paid by the transferee to the transferor, without considering the stamp duty value of the immovable property. Definition of “Stamp Duty Value” “Stamp duty value” for this purpose means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property [Section 56(2) – Explanation (f)]. The Finance Bill 2022 Amendment: Higher of Consideration or SDV It is proposed to amend section 194-IA of the Act by providing that in case of transfer of an eligible immovable property, TDS should be made of sum paid or credited to the transferor or the stamp duty value of such property, whichever is higher. Statutory Threshold: Where both the consideration value and the stamp duty value are less than Rs. 50 lakh, then TDS under this section is not required. Effective Date & Part Payment Rules: This amendment takes effect from 1st April, 2022. Therefore, eligible property transactions entered into on or after April 1, 2021 shall be covered under the changed provision where consideration is paid or credited on or after April 1, 2022. Moreover, where part consideration has been paid for property purchase and part TDS has been made before April 1, 2022, the new amendment shall apply for the balance of payment, and TDS should be made with reference to the stamp duty value, if it is higher than transaction value. 2. Immovable Property Rent: Rationalization under Section 194-I & Section 194-IB Any person, not being an individual or a Hindu Undivided Family (HUF), paying rent to a resident is required under Section 194-I to deduct tax at source therefrom, where the amount of rent exceeds Rs. 2,40,000 in a financial year. Rent covered includes rent for land; building (including factory building); land appurtenant to a building (including factory building); machinery; plant; equipment; furniture; or fittings. Whereas, Section 194-IB requires TDS from payment of rent by an individual or Hindu Undivided Family who is not required to make TDS from rent under section 194-I (i.e. those not subjected to tax audit under section 44AB). Section 194-IB provides for TDS from payment of any rent exceeding Rs. 50,000 for a month or part of a month to a resident. The statutory rate of TDS is 5%. Amendment to Section 194-IB(4): Omission of Section 206AB Section 194-IB(4), inter alia, provided that where TDS was required as per the provisions of Section 206AB (higher rate of TDS for non-filers of income-tax returns at twice the normal rate), such deduction shall not exceed the amount of rent payable for the last month of the previous year or tenancy, as the case may be. The Finance Bill 2022 amends sub-section (4) of Section 194-IB to omit the reference to Section 206AB, thereby simplifying compliance for salaried individuals and HUFs paying residential rent without saddling them with the verification of the landlord’s return filing status. 3. Business Perquisites: Introduction of Section 194R & Section 28(iv) Budget Policy Objective (FM Speech Paragraph 137) “It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds Rs. 20,000 during the financial year.” For the purpose of computation of income from ‘Profits and gains of business or profession’, Section 28(iv) of the Act provides that the following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”: Section 28(iv): “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;” Thus, Section 28 requires the value of perquisites to be included in taxable business income. However, as noticed by the Central Board of Direct Taxes (CBDT), recipient businessmen frequently omitted reporting the receipt of such benefits in their returns of income, leading to furnishing of incorrect particulars of income. Heretofore, there existed no reporting mechanism for the Tax Department to track perquisites enjoyed or instituted by businessmen or agents. Clause 58 of Finance Bill, 2022: New Section 194R Framework In order to track transactions relating to business perquisites and widen and deepen the tax base, Clause 58 inserts Section 194R. Any person responsible for providing to a resident, any benefit or perquisite (whether convertible into money or not) arising from business or the exercise of a profession by such resident, shall, before providing such benefit or perquisite, ensure that tax has been deducted at source. Rate of TDS 10% Of the value or aggregate value of such benefit or perquisite. Exemption Threshold Rs. 20,000 Per resident payee during the financial year. Effective Date 1st July, 2022 Perquisites provided on or after this date attract TDS. Perquisites Wholly or Partly in Kind: Where the benefit or perquisite is wholly in kind, or partly in cash and partly in kind but the cash component is insufficient to satisfy the TDS liability, the person responsible for providing the perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid (advance tax / challan) in respect of the benefit or perquisite. Payer Liability & Turnover Thresholds: Every person (companies, firms, LLPs, AOPs) except Individual and HUF is unconditionally liable. An Individual or HUF is liable to deduct TDS under Section 194R only if total sales, gross receipts or turnover exceeds Rs. 1,00,00,000 (Rs. 1 crore) in case of business, or Rs. 50,00,000 (Rs. 50 lakh) in case of profession, during the financial year immediately preceding the financial year in which the perquisite is provided. “Person responsible for providing”: The person providing such benefit/perquisite, or in case of a corporate entity, the company itself including the principal officer thereof. Judicial Precedents & Practical Interpretations A. Waiver of Loan: Outside the Ambit of Section 28(iv) In a present-day context, it is worthwhile to note that waiver of loan cannot be brought to tax under section 28(iv). The Supreme Court in CIT v. Mahindra & Mahindra Ltd. [2018] 255 Taxman 305 / 404 ITR 1 (SC) and the Bombay High Court in Essar Shipping Ltd. v. CIT [2020] 117 taxmann.com 389 held that for applicability of section 28(iv), the benefit received must be in some form other than in the shape of money. Furthermore, Section 41(1) does not apply to loan waiver since waiver of loan does not amount to cessation of a trading liability, as the loan principal was never claimed as a deductible revenue expenditure [PCIT v. SICOM Ltd 116 taxmann.com 410 (Bom.), PCIT v. Gujarat State Financial Corporation [2020] 122 taxmann.com 101 (Guj.)]. B. Sales Tax Deferral Schemes On similar grounds, the difference between the sales tax loan amount and the amount paid on a Net Present Value (NPV) basis as per a sales tax deferral incentive scheme was held not to be a revenue receipt and cannot be treated as income under section 28(iv) [CIT v. Wheels India Ltd 123 taxmann.com 36 (Madras)]. C. Trade Discounts & Free Quantity Special commercial discounts or free volume schemes (e.g. “buy one get one free”, 10+1 free schemes) represent price adjustments and do not fall within the realm of perquisites under Section 194R. D. Pharmaceutical Gifts to Doctors & Explanation 3 to Section 37 The Medical Council of India (MCI) Regulations 2002 barred doctors from soliciting or receiving gifts. In Max Hospital v. MCI (WP 1334/2013, Delhi HC), the Court observed MCI regulations apply only to medical practitioners, not pharmaceutical companies. However, the proposed insertion of Explanation 3 to Section 37 explicitly disallows such promotional expenditure for pharma companies, and the new Section 194R concurrently mandates 10% TDS deduction. E. Business Promotion Tours vs Personal Gifts Business promotion tours, gifts, and performance benefits given to dealers and distributors for achieving sales targets will be squarely covered under Section 194R. Conversely, a personal gift given purely for personal qualities of an assessee as a token of personal esteem and veneration cannot be subjected to tax as perquisite income arising out of business or vocation [Dilip Kumar Roy v. CIT 94 ITR 1 (Bombay)]. In composite corporate events, bona fide conference expenses incurred to educate distributors on product features do not constitute a perquisite, whereas leisure extension tours or hospitality gifts offered to dealers will assume the character of a perquisite requiring meticulous quantification. 4. Virtual Digital Assets: Withholding Tax under Section 194S The Finance Bill, 2022 introduced a dedicated tax regime for Virtual Digital Asset (VDA) transactions, imposing a flat tax rate of 30% on transfer profits, with zero deduction (except direct acquisition cost) and complete prohibition of loss set-off. Statutory Withholding Mandate: Section 194S To capture information and trace the audit trail of crypto transactions, Section 194S mandates that any person responsible for paying to a resident any consideration for the transfer of a VDA shall deduct TDS at the rate of 1%. Timing of Deduction: Deduction must be effected at the time of credit of such sum to the account of the resident (by whatever name called, including a “suspense account”) or at the time of payment by any mode, whichever is earlier. Operative Date: Section 194S is operative from 1st July, 2022. Consideration in Kind & Crypto-to-Crypto Swaps: Where consideration is wholly in kind, or in exchange of another VDA without any cash component, or where cash is insufficient to satisfy the 1% TDS liability, the payer must ensure that tax has been paid in advance before releasing the consideration. Transactions of crypto exchange (swapping Bitcoin for Ethereum) will require TDS deduction at both ends, accompanied by complex Indian Rupee valuation mechanisms. Threshold Limits for Section 194S Deduction: Specified Persons (Individual / HUF): Individuals or HUFs whose business turnover does not exceed Rs. 1 crore or professional receipts do not exceed Rs. 50 lakhs in the preceding financial year, or who have no PGBP income, are exempt from TDS unless aggregate consideration exceeds Rs. 50,000 during the financial year. All Other Persons: For corporate, firm, and high-turnover payers, the exemption threshold is Rs. 10,000 during the financial year. No TAN Requirement: Specified persons are exempted from obtaining a Tax Deduction Account Number (TAN) under Section 203A and from Section 206AB higher rates. Exclusivity: A transaction subjected to Section 194S TDS is not liable for TDS under any other provision of Chapter XVII. The Government projected Rs. 1,000 crore from Section 194S. However, acute market friction arises because TDS is deducted even on loss-making trades (creating locked capital), while high-frequency algorithmic exchanges executing thousands of trades per hour face severe operational bottlenecks. The Finance Ministry explicitly clarified that taxing VDAs does not confer legal legitimacy onto private cryptocurrencies. 5. Interest on TDS / TCS Payment Default: Section 201(1A) & Section 206C(6A) Section 201(1A) of the Act mandates simple interest where any person liable to deduct TDS either fails to deduct it or, after deducting, fails to deposit it to the credit of the Central Government. Compensatory Nature of Interest: Landmark Bombay HC Ruling Interest is not ‘penal’ but strictly ‘compensatory in nature’. In Bennet Coleman & Co. Ltd. v. V.P. Damle, Third ITO [1985] 21 Taxman 131 / [1986] 157 ITR 812 (Bom.), the Bombay High Court held that interest under Section 201(1A) is mandatory and compensatory; therefore, there is no question of waiver on the plea that the default was unintentional. Proposed Amendment & Appellate Remedies: It is now proposed that where an order is passed by the Assessing Officer for default referred to in Section 201(1) or Section 206C(6A) for TCS, interest shall be paid in accordance with such order. This amendment takes effect from 1st April, 2022. In case of continuing default, the order can cover periods prior to that date. While interest orders were traditionally non-appealable, a right of appeal against these orders is now expressly provided under Section 246A, and rectification applications under Section 154 remain available for computational errors. 6. Rationalization of Higher TDS & TCS on Non-Filers: Sections 206AB & 206CCA Sections 206AB and 206CCA levy higher TDS and TCS rates on “specified persons” who fail to file their income tax returns. Under existing law, a specified person was one who had not filed returns for both of the two assessment years preceding the financial year, with aggregate TDS/TCS of Rs. 50,000 or more in each year. Key Amendments Effective 1st April 2022: Reduction from 2 Years to 1 Year: The non-filing condition is tightened from two previous assessment years to only ONE assessment year immediately preceding the financial year in which tax is to be deducted/collected, for which the time limit under section 139(1) has expired. Exclusion of Simplified Individual TDS Sections: To prevent undue compliance burden on individuals and HUFs buying property, paying rent, or hiring contractors, Section 206AB is amended to explicitly exclude payments covered under Sections 194-IA, 194-IB, and 194M. Existing Exclusions Retained: Section 206AB continues not to apply to transactions under Section 192 (Salary), 192A (PF withdrawal), 194B (Lottery), 194BB (Horse racing), 194LBC (Securitisation trust income), and 194N (Cash withdrawals). Drafting Corrections: Erroneous statutory references to “deductor” and “collectee” have been ironed out, and modern e-filing terminology substitues “furnishing of return” in place of “filing of return”. 7. Non-Resident TDS Refund: Insertion of New Section 239A & Section 248 Foreign enterprises contracting with Indian companies frequently insist on contracts structured ‘net of tax’, requiring the Indian resident payer to bear the withholding tax burden. When taxes are withheld and paid to the Government under Section 195, and it is subsequently discovered that no tax was lawfully deductible, the mechanism for claiming a refund was unduly cumbersome. Deficiencies under Existing Section 248: Under Section 248, the deductor was forced to appeal directly to the Commissioner (Appeals) [CIT(A)] within 30 days of payment under Section 249. The Assessing Officer was completely bypassed, denying the AO an opportunity to examine primary facts and documents. Furthermore, Section 248 did not cover TDS deducted from interest payments. The Solution: Dedicated Application to AO under Section 239A Finance Bill 2022 inserts Section 239A (effective 1st April, 2022). A resident payer who has borne tax under Section 195 on payments to a non-resident under an agreement can now make a formal application directly to the Assessing Officer for refund of such tax. If aggrieved by the AO’s order, the payer can file an appeal before the CIT(A) under Section 246A. Section 248 will cease to apply where tax payment is made on or after 01.04.2022. 8. Penalty for Compliance Laxity: 500% Hike under Section 272A Administrative TDS and TCS provisions ensure timely delivery of quarterly statements (Forms 24Q, 26Q, 27Q, 27EQ) and issuance of certificates (Forms 16 and 16A) so that tax credits reflect seamlessly in the deductee’s Form 26AS. Administrative Lapses Subject to Section 272A(2) Penalties: Clause (c): Failure to furnish in due time returns/statements under section 133, section 206 (TDS quarterly statements), section 206C (TCS quarterly statements), or section 285B. Clause (f): Failure to deliver in due time declarations under section 197A (Form 15G / Form 15H). Clause (g): Failure to furnish TDS certificates required by section 203 or TCS certificates under section 206C. Clause (h): Failure to deduct and pay tax required under section 226(2). Clause (i): Failure to furnish statement required by section 192(2C). Clause (j): Failure to deliver declaration under section 206C(1A). Clause (k): Failure to deliver copy of statement under section 200(3) or proviso to section 206C(3). Clause (l): Failure to deliver statements under section 206A(1). Clause (m): Failure to deliver statement under section 200(2A) or section 206C(3A). Penalty Escalated from Rs. 100 to Rs. 500 Per Day The nominal penalty of Rs. 100 per day of continuing failure had remained unrevised since 1999 and was heavily criticized by the Comptroller and Auditor General (CAG) of India for having zero deterrent value. The Finance Bill 2022 increases the penalty under Section 272A(2) by 500%—from Rs. 100 to Rs. 500 for each day of default, with effect from 1st April, 2022. Section 273B continues to safeguard taxpayers against penalties if a reasonable cause for non-compliance is demonstrated. However, this steep escalation will bite erring deductors and instill strict reporting discipline. 9. Summing Up From the legislative proposals across the arena of TDS and TCS in Finance Bill 2022, one can easily decipher that the Tax Department is affording paramount importance to source-based taxation as the primary vehicle of revenue mobilization and audit trail creation. Lapses in compliance will attract stringent consequences, including enhanced interest orders and 500% steeper penalties. It is essential for tax professionals and corporate deductors to discharge these obligations with utmost care, caution, and rigorous diligence.

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 61–66 (Journal pp. 1101–1106) Union Budget 2022-23 Proposed Amendments - Crypto Assets and International Taxation vide Finance Bill, 2022 RA CA. Rajendra Agiwal Member of the Institute of Chartered Accountants of India (ICAI) • Contact: eboard@icai.in “The Finance Bill 2022 has come to give impact to the financial proposals of the Central Government for the financial year 2022-2023. It proposes a number of changes that are directed to galvanize the growth of economy. The budget this year tries to stabilize the economy and set the tone for future growth. Read on…” The article covers proposed amendments in the Finance Bill 2022, specifically in context to Crypto Assets and International Taxation. These statutory interventions establish India’s inaugural formal direct tax regime for virtual digital assets while resolving critical jurisdictional controversies in transfer pricing and dispute resolution procedures. 1. Master Roadmap of Proposed Amendments in Finance Bill, 2022 In Finance Bill 2022, the key legislative amendments proposed across Crypto Assets and International Taxation are summarized below: Sl. No. Section of Income-tax Act Finance Bill Clause Proposed Amendment Scope & Subject Matter 1 Section 2 (47A) Clause 3 Definition of Virtual Digital Assets (VDA), covering codes, tokens, and Non-Fungible Tokens (NFTs). 2 Section 56 (2)(x) & Explanation Clause 16 Enlarging the meaning of the expression “property” to include Virtual Digital Assets received without or for inadequate consideration. 3 Section 115BBH Clause 28 Special tax regime levying 30% flat tax on income from transfer of Virtual Digital Assets with no deduction (except cost of acquisition) and no set off of losses. 4 Section 194S Clause 59 Tax Deduction at Source (TDS) at 1% on payment of consideration for transfer of VDA to a resident. 5 Section 92CA Clause 24 Extension of statutory timeline for notifying Faceless Transfer Pricing Scheme to 31st March 2024. 6 Section 144C Clause 43 Extension of limitation period for notifying Faceless Dispute Resolution Panel (DRP) Scheme till 31st March 2024. 7 Section 153 Clause 48 Consequential time limit granting two months additional time to Assessing Officer to give effect to TPO revision orders. 8 Section 263 Clause 72 Empowering jurisdictional TP Commissioners to revise erroneous and prejudicial orders passed by Transfer Pricing Officers (TPOs). 2. Legality of Crypto Currency vs. Taxability: The Judicial Doctrine Under Indian law, currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange, promissory notes, credit cards, or such other similar instruments as may be notified by the Reserve Bank of India (RBI). The current Finance Bill 2022 has introduced the concept of Virtual Digital Asset (VDA). For quite a long time, from the point of view of legality, crypto currency has been a buzz word. The interesting debate about the legality of crypto currency from the point of view of legal tender or medium of accepting as currency in payments settlement systems and its taxation has been appearing in the public domain. However, the uncertainty which has prevailed all along has been intervened and a change has been brought in by Finance Bill 2022 for the first time by proposing certain amendments regarding taxation of income from virtual currencies as a small step in the onward direction. Taxation Does Not Confer Legality: The Realization Doctrine Though the Finance Minister has proposed levy of tax, there is a view that collection of tax on VDA does not automatically make it legal. The levy of income tax knows no boundaries curtailing its levy, and the levy is fully justified by the Courts on income which is earned illegally. The revenue is concerned only with the realization of income and gains, irrespective of whether the underlying transaction is lawful or prohibited by general law: Dr. T. A. Quereshi vs CIT (2006) [287 ITR 547 (SC)]: The Hon’ble Apex Court held that the Income-tax Act taxes real income and acknowledges commercial losses even if arising from contraband or unlawful trade, firmly establishing that illegality of business does not insulate gains from income-tax assessment. CIT vs K. Thangamani (2009) [309 ITR 15 (Mad)]: The Hon’ble Madras High Court reiterated that tainted or illegally procured gains are fully taxable under the Act. Internet and Mobile Association of India (IMAI) vs RBI (SC, Judgement dated 4 March 2020): The Hon’ble Supreme Court set aside the RBI Circular dated 6 April 2018 (which had directed banks not to deal with crypto exchanges), ruling that virtual currencies were not prohibited by parliamentary statute, while recognizing that they are not legal tender. 3. Definition of Virtual Digital Assets: Section 2(47A) Virtual Digital Assets have gained tremendous popularity in recent times and the volume of trading in such digital assets has increased substantially. Further, a market is emerging where payment for the transfer of VDA can be made through another such asset. Accordingly, a comprehensive statutory definition has been inserted via Section 2(47A): Clause (a): Information, Code or Token Means any information or code or number or token (excluding Indian currency or foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration, that can be transferred, stored, or traded electronically. Clause (b): Non-Fungible Tokens (NFTs) Explicitly encompasses non-fungible tokens or any other token of similar nature, by whatever name called, which provides verifiable ownership of unique digital or digitized assets. Clause (c): Central Government Notifications Empowers the Central Government to notify any other digital asset as VDA, or conversely, exclude any specific asset or currency from the ambit of the definition by official Gazette notification. What is Meant by “Generated Through Cryptographic Means”? Cryptography is a method of protecting information and communications through the use of codes, so that only those for whom the information is intended can read and process it. In computer science, cryptography refers to secure information and communication techniques derived from mathematical concepts and a set of rule-based calculations called algorithms, to transform messages in ways that are hard to decipher. These deterministic algorithms are used for cryptographic key generation, digital signing, and verification to protect data privacy, web browsing on the internet, and confidential communications such as credit card transactions and email. In general, one has to contend that cryptography is in the form of a code/token. Broadly, it can also be understood as an intangible asset like patent, trademark, copyright. However, VDA operates predominantly in the domain of currency and transactional exchange. Furthermore, it is a crucial point to note that not all virtual currencies are anonymous; blockchain distributed ledgers maintain permanent, immutable, and traceable transactional histories. 4. Section 115BBH: Special Tax Regime on Income from Virtual Digital Assets Finance Bill 2022 introduces Section 115BBH, creating an isolated, flat-rate tax regime on transfers of Virtual Digital Assets: Core Pillars of Section 115BBH Flat 30% Tax Rate: Where the total income of an assessee includes income from transfer of any VDA, the tax payable shall be calculated at the flat rate of 30% (plus applicable surcharge and 4% cess). Other income is charged to tax after reducing VDA income. No Deductions Allowed: Absolutely no deduction in respect of any expenditure (such as mining power costs, infrastructure depreciation, interest on borrowed capital, platform trading fees, or transfer commissions) or allowance shall be allowed, except for the direct cost of acquisition. No Set-Off of Losses: Loss arising from the transfer of VDA shall not be allowed to be set off against any other income under any head of income (such as salary, house property, business profits, capital gains, or other sources) during the current financial year. No Carry-Forward of Losses: Unabsorbed losses from VDA transfers shall not be allowed to be carried forward to subsequent assessment years. Structural Anomalies: Omission of Head Characterization under Section 14 The author critically highlights that it is interesting to note that no amendment is proposed in Section 2(24) (definition of income), Section 28 (profits and gains of business or profession), or Section 45 (capital gains). None of the traditional five heads of income specified in Section 14 of the Act are made applicable for the computation of income from transfer of VDA: Generally, the Income-tax Act provides that if income is not taxable under the head Profits and Gains from Business and Profession (PGBP), it is taxed as Income from Other Sources (IFOS). For example: Interest earned in money-lending business is taxable as PGBP or IFOS depending upon facts; Rental income from commercial properties can be taxed under PGBP or House Property based on dominant intent. Statutory clarity for characterization of income under a specific head brings certainty for taxpayers and prevents endless litigation. By failing to integrate VDA transfers within Section 14 heads, the statute creates an anomalous stand-alone tax silo that overlooks the reality of business operations. The Cardinal Principle: Income Includes Negative Income Revisiting the Harsh Disallowance of Losses & The Real Income Theory It is the cardinal principle of tax jurisprudence that income includes negative income. While claiming set-off of losses, inter-source and inter-head adjustments are universally permissible across ordinary business and capital transactions. It is natural that commercial activities do not always produce profits; despite all precautions, bona fide activities may run into severe losses: CIT vs Rajendra Prasad Moody (1978) [115 ITR 519 (SC)]: The Hon’ble Apex Court acknowledged that once an expenditure is incurred, it does not mean that it would necessarily lead to earning profits. Commercial probability of loss is inherent to enterprise. Speculative Business Analogy: Even in the case of highly speculative businesses (governed by Section 73), speculative losses are expressly allowed to be set off against speculative profits. Under Section 115BBH, denying any loss set-off and prohibiting all operational deductions appears excessively harsh. As a taxpayer, if money is lost in a trading cycle, there is no cash flow available for the payment of taxes. This provision therefore demands a relook and should be reconsidered. Virtual currencies must be evaluated qua users, consumers, traders, and long-term investors, allowing real income to be computed in accordance with the established general provisions of the Act. 5. Tax Deduction at Source under Section 194S: Mechanics & Practical Challenges To establish an exhaustive audit trail of all virtual digital asset transactions, Finance Bill 2022 introduces Section 194S, effective from 1st July 2022. Statutory Mandate of Section 194S Any person responsible for paying to a resident any sum by way of consideration for transfer of a Virtual Digital Asset shall, at the time of credit of such sum to the account of the resident or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 1% of such sum as income-tax thereon. Suspense Account Application: Even if consideration is credited to a “Suspense Account” or any other ledger name, the statutory obligation under Section 194S is triggered immediately. Threshold Exemption Limits: Specified Person vs. Other Deductors Payer Category Qualifying Criteria (Explanation to Sec 194S) Annual Threshold Limit Specified Person An Individual or HUF: Having no income under the head Profits and Gains of Business or Profession (PGBP); OR Having business turnover ≤ Rs. 1 crore, or professional gross receipts ≤ Rs. 50 lakh during the preceding financial year. Rs. 50,000 per financial year Other Persons All other entities, companies, LLPs, partnership firms, and high-turnover business individuals/HUFs. Rs. 10,000 per financial year Surcharge Disparity: Section 115BBH vs Section 194S Rates for deduction of tax at source under Sections 193, 194A, 194B, 194BB, 194D, 194LBA, 194LBB, 194LBC, and 195 are specified in Part II of the First Schedule to the Finance Bill, and the tax so deducted is increased by applicable surcharge depending on income slabs and taxpayer status. Crucial Statutory Distinction: The rate of TDS under Section 194S is prescribed at a flat 1% with NO surcharge or health & education cess. In contrast, the final tax liability under Section 115BBH (30%) is subject to mandatory surcharge (up to 37% based on income slab) plus 4% cess. The deductee remains liable for the balance differential tax at the time of filing the return of income. The Critical Legal Argument: Deduction from “Sum” vs. “Income” Section 194S deliberately employs the statutory term “sum” rather than “income”: Under established judicial precedents (such as the Supreme Court ruling in GE India Technology Centre), if there is no chargeable income embedded in a payment, TDS cannot be attracted. However, where a statutory provision expressly prescribes deduction on the gross “sum” transferred, those judicial precedents are rendered inapplicable. Consequently, even if the transaction results in a loss or zero profit for the seller, TDS under Section 194S will still be attracted on the entire gross transaction consideration! Operational Dilemmas: “Cash vs. Kind” and Peer-to-Peer KYC Cash vs. Kind Transfer Dilemma: In barter exchanges (crypto-to-crypto) or where consideration in kind exceeds cash, the deductor must ensure that the cash portion is sufficient to discharge the 1% TDS on the aggregate gross value of the entire transfer. If insufficient, the payer must collect tax advance proof before releasing the asset. Since TDS is a vicarious liability and ultimate tax obligation rests with the deductee, casting this stringent burden on payers causes immense operational hardship. P2P KYC & Identification Hurdle: Identifying counterparties in decentralized, peer-to-peer crypto transactions is exceptionally difficult. Key KYC parameters (PAN, Aadhaar, residential status) are frequently unknown to the counterparty. For the Revenue, detecting default under Section 194S and identifying the assessee-in-default presents a colossal enforcement challenge. Section 194S vs Section 194O Tie-Breaker Priority Where tax is deductible under Section 194O (TDS by e-commerce operators) as well as proposed Section 194S on a digital platform transaction, tax shall be deducted strictly under Section 194S and NOT under Section 194O. Furthermore, once tax is deducted under Section 194S, no other TDS or TCS provisions shall apply to that transaction. 6. Amendment to Section 56(2)(x): Inclusion of VDA within “Property” Section 56(2)(x), inserted by the Finance Act 2017, taxes the receipt of any sum of money or property without consideration or for inadequate consideration (beyond Rs. 50,000) in the hands of the recipient under Income from Other Sources: Enlargement of Definition: The Explanation to clause (vii) of Section 56(2) defines “property”. Finance Bill 2022 amends this Explanation to specifically include Virtual Digital Assets (VDA) within the definition of property. Tax Implication: Gifting or transferring crypto assets or NFTs without consideration, or for consideration less than fair market value, will now be treated as taxable deemed income in the hands of the recipient. Effective Date: This amendment takes effect from 1st April 2023 and applies in relation to Assessment Year 2023-2024 and subsequent years. 7. Faceless Schemes: Extension of Sunset Dates under Sections 92CA & 144C The Central Government has undertaken a series of futuristic reforms in Direct Tax administration to make processes electronic, eliminate person-to-person interface, optimize resources, and deploy team-based assessments with dynamic jurisdiction. Legislative Evolution & IT Stabilization Rationale Provisions for notifying faceless schemes under Section 92CA (Faceless Transfer Pricing) and Section 144C (Faceless Dispute Resolution Panel) were introduced via the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (w.e.f. 01 November 2020) and inserted into Finance Act, 2021 (w.e.f. 01 April 2021). Under the earlier statutory scheme, the date of limitation for notifying directions was 31 March 2022. Developing the requisite secure digital infrastructure, data-flow security, and complex multi-member panel workflows required extensive systemic stabilization. Notifying prematurely would cause technical disruptions. Therefore, Finance Bill 2022 extends the deadline for issuing faceless notifications under Sections 92CA and 144C till 31 March 2024. 8. Section 263 Revision of TPO Orders: Settling the JCB India Controversy One of the most consequential international tax amendments in Finance Bill 2022 addresses the power of the Principal Commissioner of Income Tax (PCIT) to revise orders passed by Transfer Pricing Officers (TPOs) under Section 92CA. The Landmark Ruling: JCB India Ltd vs. PCIT [TS-26-ITAT-2022(DEL)-TP] Just 3 to 4 days prior to the presentation of Budget 2022, the Hon’ble Delhi ITAT delivered a landmark verdict in JCB India Ltd, holding that: Lack of Administrative Jurisdiction: Due to restrictions imposed under Section 263(1), the learned PCIT (having jurisdiction over the Assessing Officer) had no administrative power or supervisory jurisdiction to revise an order passed by the Transfer Pricing Officer (TPO). Mandatory Effect of “Shall” in Section 92CA: When the AO receives the TPO’s order determining Arm’s Length Price (ALP), Section 92CA(4) mandates that the AO “shall proceed to compute the total income in conformity with the arm’s length price so determined by the Transfer Pricing Officer”. Since the AO is bound by statute and possesses zero discretionary power to modify the TPO’s determination, the AO committed no error in adopting it. Quashing of Revisionary Orders: Relying on Mumbai Tribunal rulings in Essar Steel Limited vs Addl. CIT (2012) [28 taxmann.com 232 (Mum)] and Tata Communications Limited vs DCIT (2014) [41 taxmann.com 486 (Mum)], the Delhi ITAT quashed the Section 263 revisionary order as invalid and restored the original assessment. Legislative Intervention: Overruling JCB India in Finance Bill 2022 Before the ink of the JCB India ruling could dry, the Finance Bill 2022 proposed targeted amendments to settle this jurisdictional controversy once and for all: Amendment to Section 263 (Clause 72): Explicitly provides that the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner who is assigned jurisdiction of Transfer Pricing may call for and examine the record of any proceeding under this Act. If he considers that any order passed by the TPO working under his jurisdiction is erroneous in so far as it is prejudicial to the interests of revenue, he may pass an order directing revision of the TPO’s order. Two-Year Limitation Window: Revisions under Section 263 remain subject to the limitation period of within two years from the end of the financial year in which the order sought to be revised was passed. Consequential Amendment to Section 153 (Clause 48): Amends Section 153 to grant an additional two months’ time to the Assessing Officer to give effect to the revised order of the TPO consequent to directions issued in the revision order. Author’s Appraisal: As the provision is intended to remove acute administrative confusion regarding revisionary powers over transfer pricing determinations, it is a timely and positive legislative amendment that saves protracted litigation on technicalities of jurisdiction. 9. Concluding Observations Finance Bill 2022 marks a transformative milestone in Indian direct tax jurisprudence. By crafting an explicit tax architecture for Virtual Digital Assets through Section 2(47A), Section 115BBH, and Section 194S, the legislature has taken an unambiguous stance: economic value realized from digital assets will be tracked and taxed at a flat 30%, irrespective of regulatory debates surrounding legal tender. However, the total prohibition on loss set-off, loss carry-forward, and commercial expenditure deductions (aside from acquisition cost) represents an exceptionally punitive policy choice that stands at odds with the fundamental real-income doctrine (*Rajendra Prasad Moody*). The operational complications of deducting 1% TDS on non-cash barter transfers and untraceable P2P transactions pose immense compliance challenges for market participants and enforcement hurdles for tax authorities. On the international tax front, extending faceless transfer pricing timelines to March 2024 ensures systemic stability, while statutory empowerment of Transfer Pricing Commissioners under Section 263 swiftly nullifies procedural ambiguities highlighted by the Delhi ITAT in *JCB India Ltd*. Chartered Accountants must adapt rapidly to advise clients on VDA reporting, withholding compliances, and evolving transfer pricing audits. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) March 2022 Issue • Vol. 70 • No. 9 • pp. 61–66 (Journal pp. 1101–1106) Author may be reached at: eboard@icai.in

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 67–78 (Journal pp. 1107–1118) Union Budget 2022-23 Personal and Corporate Taxation Proposals of Budget 2022 BB CA. B D Bhide Member of ICAI • Contact: bdbhide@gmail.com KP CA. Kishor Phadke Member of ICAI • Contact: eboard@icai.in “This note takes cognizance of certain amendments proposed by Finance Bill 2022 to existing provisions of Income Tax Act particularly those affecting the corporates. It doesn’t deal with amendments applicable to corporates who are registered with CIT(Exemption) U/Sec.12AA/ 12AB of the Income Tax Act. Read on…” This exhaustive critique explores 29 vital corporate and personal tax amendments across substantive, procedural, withholding, and dispute resolution provisions, examining their underlying rationale, drafting implications, and contentious legal friction points. 1. Virtual Digital Assets / Crypto Currency: Section 2(47A) & Section 115BBH Section 2 deals with definitions of terms referred to in the Income Tax Act under various sections. A new clause, sub-section 2(47A), has been inserted with effect from 1st April 2022, defining “Virtual Digital Asset” (VDA), generally known in popular parlance as ‘Crypto Currency’. Income from such VDAs is to be taxed at a flat rate of 30% (plus applicable surcharge and cess) under newly inserted Section 115BBH. Recognition of an evolving asset class is a typical welcome measure. Yet, a separate, segregated taxation mechanism leads to serious conceptual and equity challenges: Redundancy of Complex Definition: “Property” is a word of widest import under jurisprudence and general law. A VDA is fundamentally a form of property. Was there any real legal necessity to enact a convoluted definition under Section 2(47A)? Past Taxability Uncertainty: Does the enactment of a separate statutory taxation regime now imply that VDA transfers were free from taxation in yester-years? Harsh Disallowance of Intra-Asset Loss Set-Off: Loss incurred in one VDA deal ought to be eligible for set-off against gains in another VDA deal, at least within the same financial year! Denying intra-asset set-off violates the core canon of horizontal equity. Exclusion of Capital Gain Concessions: VDAs are removed from the beneficial ambit of Long Term Capital Assets (Sections 112 and 112A), denying indexation benefits. Transfers are subject to 1% TDS under Section 194S w.e.f. 1st July 2022, posing grave compliance friction when counterparty identity is unknown. 2. Amendment to Section 14A: Overruling the “No Exempt Income, No Disallowance” Doctrine Section 14A restricts the scope of expenditure incurred for earning exempt income (incomes dealt with under Section 10). The section has been a perpetual hotbed of tax litigation since its inception. With prior legislative amendments abolishing dividend exemptions and taxing long-term capital gains on listed equities, the practical field of triggering Section 14A had substantially narrowed. The Non-Obstante Amendment & Judicial Overrule The proposed amendment begins with a non-obstante clause and provides that no deduction of expenditure shall be allowed in respect of exempt income whether such income has accrued, arisen, or been received, or not received during the relevant financial year. This legislative insertion directly overrules a long line of binding High Court and Supreme Court judgments which settled that if no exempt income was actually earned or received during the year, no notional disallowance under Section 14A could be made. Proposed to operate from AY 2022-23 onwards, it departs from the stated sovereign policy of avoiding retrospective or retroactive tax burdens. Key Issue Arising: Is this amendment to be applied where there is miniscule exempt income, or strictly restricted to scenarios where there is zero exempt income at all? 3. Amendment to Section 37: Disallowance of Freebies, Foreign Violations & Compounding Fees Section 37(1) grants deduction of general business expenditure not covered under Sections 30 to 36, barring personal expenses, capital CSR outlays, and expenses incurred for any purpose which is an offence or prohibited by law. Enlarged Scope of Deemed Offences under Explanation 3 to Section 37(1) Pending extensive constitutional and appellate litigation on what constitutes an ‘offence’, Finance Bill 2022 injects an aggressive framework: Deemed Offences: Medical freebies, gifts, travel, and hospitality extended by pharmaceutical and allied healthcare companies to medical practitioners (in breach of Medical Council regulations) are statutorily deemed as prohibited offences. Extraterritorial Application: Expenditure incurred in violation of any foreign law or regulation is explicitly brought within the disallowance net. Compounding Fees Disallowed: Settlement sums or compounding amounts paid under statutory provisions to compound offences are categorized as prohibited expenditure. Critical Legal Friction: Authors observe: Can something be deemed an offence for tax disallowance when regulatory enactments are silent or treat it as a curable administrative irregularity? How can the lawful compounding of an offence be equated with the offence itself? 4. Amendment to Section 40(a)(ii): Retrospective Disallowance of Education Cess from 2005 Section 40(a)(ii) provides that any rate or tax levied on profits or gains of business shall not be deductible. In recent years, multiple High Courts and Appellate Tribunals upheld that ‘Education Cess’ and ‘Secondary & Higher Education Cess’ did not constitute ‘tax’ and were therefore allowable business deductions under Section 37(1). Insertion of Explanation 3 with Retrospective Effect from 1st April 2005 Finance Bill 2022 inserts Explanation 3 to Section 40(a)(ii) stating that “for the removal of doubts, it is hereby clarified that the term ‘tax’ shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax”. The Constitutional Dilemma: This amendment operates with massive retrospective effect from 1st April 2005. Under the parent section, tax is not eligible for deduction because it is assessed as a proportion of profits. Education cess is assessed as a percentage of tax, not profits. Furthermore, past appellate decisions granting deduction up to AY 2021-22 will face reopening or rectification proceedings. 5. Amendment to Section 43B: Conversion of Interest into Debentures Deemed Non-Payment Section 43B restricts deductions to actual payment. Explanations 3C, 3CA, and 3D provide that conversion of unpaid interest into a loan or borrowing does not constitute payment in respect of financial institutions (43B(d)), NBFCs (43B(da)), and banks (43B(e)). Debentures & Debt Instruments Brought under Section 43B Under the proposed amendment, if the due date for payment of interest liability is deferred to a future date by conversion into a “Debenture” or “any other instrument”, the deduction will be allowed only upon actual redemption or cash payment thereof. Structural Asymmetry: Lending institutions/banks are bound to recognize and offer the debenture interest as income upon allotment, yet the borrower is denied deduction, creating timing distortion and tax mismatch. Absence of Redemption Mechanism: The statute omits any specific mechanism for claiming deduction upon future staggered redemption. Conversion Complexities: Acute complexities will arise where debentures are subsequently converted into equity shares. 6. Amendment to Section 50: Removal of Goodwill as a Deemed Transfer Following Finance Act 2021 which stripped Goodwill of depreciation under Section 32, Finance Bill 2022 amends Section 50 (computation of capital gains in depreciable assets): The amendment deals with the removal of ‘Goodwill of a business or profession’ from the ‘block of assets’ in accordance with sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, treating such removal as a deemed transfer. Since the substantive disentitlement of depreciation took effect from AY 2021-22, this computational amendment operates retrospectively from 1st April 2021, applying to Assessment Year 2021-22 and subsequent years. 7. Amendment to Section 68: Onus to Prove “Source of Source” for Cash Credits Section 68 taxes unexplained cash credits appearing in the books of account. Historically, the assessee was required to discharge the three-fold burden: (1) identity of creditor, (2) creditworthiness of creditor, and (3) genuineness of the transaction. The New Burden: Explaining the Creditor’s Underlying Source The proposed amendment severely burdens the assessee to prove the source of such credits in the hands of the person in whose name the entry is recorded to the satisfaction of the Assessing Officer (effective from AY 2023-24 onwards). Statutory Carve-Out: Regulated investment entities—specifically Venture Capital Funds (VCFs) and Venture Capital Companies (VCCs) registered with SEBI—are exempt from proving the source of source. Friction & Double Additions: Forces normal business assessees to act as investigative agencies before accepting loan funds or trade credits. Failure could trigger double additions: under Section 68 in the hands of the receiver, and under Section 69 in the hands of the lender! 8. Insertion of Section 79A: Bar on Set-Off of Losses against Search/Survey Income Newly inserted Section 79A provides that ‘No set-off of losses consequent to search, requisition and survey’ shall be permissible. Where additional income is disclosed or assessed pursuant to a search initiated under Section 132/132A or survey conducted under Section 133A (excluding survey under Section 133A(2A)), no set-off of brought-forward losses or unabsorbed depreciation shall be allowed against such undisclosed income (effective from AY 2022-23 onwards). 9. Corporate Tax Concessions, Anti-Avoidance & Foreign Dividend Parity Section 80-IAC Start-Up Holiday Extension Turnover limit of Rs. 100 crore and Inter-Ministerial Board certification. Period of eligible incorporation extended by one full year up to 31st March 2023 to alleviate pandemic disruptions. Section 115BAB Concessional 15% Manufacturing Rate For new domestic manufacturing companies registered on or after 1st October 2019. The deadline to commence commercial manufacture or production is extended by one year to 31st March 2024. Section 94 Bonus Stripping on Securities & InvIT/REIT/AIFs Anti-avoidance provisions of Section 94(8) are expanded to encompass securities (equity shares) and units of Infrastructure Investment Trusts (InvITs), Real Estate Investment Trusts (REITs), and Alternative Investment Funds (AIFs) w.e.f. AY 2023-24. Section 115BBD Deletion: Foreign Dividend Parity Concessional 15% rate on dividends received by Indian companies from specified foreign companies (≥26% shareholding) is deleted. Foreign dividends will now be taxed at normal corporate rates, establishing parity with domestic dividends w.e.f. AY 2023-24. 10. Amendments in Search & Seizure: Sections 132 and 132B For searches initiated after 1st April 2021, the erstwhile search assessment regime under Sections 153A and 153C was dismantled. Consequential amendments are enacted in Section 132 and Section 132B for holding books of account or other seized assets. Releasing or retaining seized records will now be anchored strictly to orders of assessment or reassessment passed under Section 143(3), Section 144, or Section 147 (effective 1st April 2022). 11. The Updated Return Framework: Section 139(8A), Section 139(9) & Section 140B Finance Bill 2022 introduces a landmark compliance window by inserting sub-section (8A) in Section 139, allowing assessees to file an Updated Return of Income within 24 months from the end of the relevant assessment year to correct omissions and under-reported income. Statutory Bar: When an Updated Return CANNOT be Filed Cannot be filed if it results in reducing total loss returned earlier, reducing tax liability, or increasing refund; Cannot be filed sequel to a search initiated u/s 132/132A or survey conducted u/s 133A; Cannot be filed if notice issued intimating that money, bullion, jewellery, or books seized/requisitioned belong to the person; Cannot be filed if an updated return has already been furnished once for that assessment year; Cannot be filed where any assessment, reassessment, recomputation, or revision is pending or completed; Cannot be filed where AO possesses information under PMLA 2002, Black Money Act 2015, Benami Property Act 1988, or SAFEMA 1976 and communicated to assessee; Cannot be filed where information received under DTAA / Tax Exchange Agreements has been communicated to the assessee; Cannot be filed where prosecution proceedings have been initiated under Chapter XXII (Sections 275A to 280D); Cannot be filed for two preceding assessment years in search/survey cases; Cannot be filed by any notified class of persons. Tax on Updated Return under Section 140B & Defective Return Linkage u/s 139(9) Under Section 139(9), an updated return shall be treated as defective unless accompanied by proof of payment of tax, additional tax, interest, and fee computed under Section 140B: Filing Window Additional Tax Rate Base for Additional Tax Computation Within 12 Months from end of relevant AY 25% Aggregate of tax and interest payable on the additional income returned (including surcharge and cess). Between 12 to 24 Months from end of relevant AY 50% Aggregate of tax and interest payable on the additional income returned (including surcharge and cess). Interest Liability (Sections 234A, 234B & 234C): Additional tax is paid alongside mandatory interest under Section 234A (on total income returned), Section 234B (shortfall of advance tax), and Section 234C. Under Section 153, the time limit for the department to complete assessment of an updated return is 9 months from the end of the financial year in which the updated return is furnished. 12. Amendment to Section 144B: Omission of the “Non-Est” Sub-Section (9) Section 144B governs the procedure for Faceless Assessments. Previously, sub-section (9) contained a vital taxpayer safeguard: if an assessment order was passed in deviation from the statutory faceless procedure, such order was declared non-est (void ab initio). Severe Dilution of Procedural Safeguards Finance Bill 2022 prescribes a revamped faceless workflow with Standard Operating Procedures (SOPs) to be issued by CBDT, while omitting sub-section (9). The authors critique this omission as a potential cause of serious injustice: taxpayers will no longer have the automatic remedy of having arbitrary procedural deviations declared non-est. Furthermore, because internal electronic communications at the back-end are inaccessible to taxpayers, proving non-adherence to SOPs will be exceptionally arduous. 13. Reassessment Overhaul: Sections 148, 148A, 148B, 149 & 153B The revamped reassessment regime enacted in Finance Act 2021 underwent substantial procedural recalibrations in Finance Bill 2022: Section 148 & 148A Carve-Outs No separate approval required to issue notice u/s 148 where an order u/s 148A(d) is passed with prior approval. Inquiries under Section 148A are dispensed with where information is received under faceless collection schemes (Section 135A). New Section 148B Prior Approvals In search/survey assessments, no order shall be passed by an AO below rank of Joint Commissioner without prior supervisory approval of Additional/Joint Commissioner or Director. Section 149(1)(b) Scope Enlargement Reopening beyond 3 years up to 10 years expanded from income represented in the form of an asset to also include expenditure incurred in relation to an event/occasion, or entries in books amounting to Rs. 50 lakh or more. Section 149(1A) Multi-Year Notices Where expenditure or asset investment of Rs. 50 lakh+ spans across more than one previous year, notices u/s 148 can be issued for every such assessment year within the 10-year period. 14. Dispute Management, IBC Harmonization & Business Reorganisation Key Institutional and Dispute Reforms New Section 156A (Demand Modification under IBC): Where tax demands issued under Section 156 are subsequently reduced or modified by an order of the NCLT Adjudicating Authority under Section 31 of IBC 2016, NCLAT, or the Supreme Court, the Assessing Officer is statutorily mandated to modify the demand notice accordingly. New Section 158AB (Avoiding Repetitive Revenue Appeals): Replaces Section 158AA. Where an identical question of law is pending before the jurisdictional High Court or Supreme Court in any assessee’s case, the collegium can direct the Pr. CIT not to file repetitive appeals before ITAT/High Court, deferring filings until the question of law is finally decided. Section 170(2A) & New Section 170A (Business Reorganisation): Where business restructuring (merger/demerger) is sub judice before NCLT/court, predecessor and successor remain governed for intervening proceedings. Upon final sanction, successor entity must furnish a modified return of income within 6 months from the end of the month of the sanction order. Section 179 (Director Liability Clarification): Resolves the misleading title ‘Liability of directors of private company in liquidation’ by clarifying that directors are jointly and severally liable for unpaid taxes of a private company whether the company is under liquidation or not. 15. Enhanced Withholding Tax Ambit: Sections 194-IA, 194R, 201/206C & 239A Section 194-IA: Stamp Duty Value Threshold 1% TDS on immovable property transfer exceeding Rs. 50 lakh must now be deducted on the higher of actual consideration or Stamp Duty Value (SDV) w.e.f. 1st April 2022. New Section 194R: 10% TDS on Business Perquisites Enforces 10% TDS on value of non-monetary benefits or perquisites arising from business/profession u/s 28(iv) exceeding Rs. 20,000 per financial year w.e.f. 1st July 2022. Section 201 / 206C: Statutory Default Interest Explicit liability on assessees to pay interest determined by the AO associated with failure to deduct, collect, or pay TDS/TCS obligations w.e.f. 1st April 2022. New Section 239A: Refund on Section 195 Withholding Where tax on remittance to a non-resident is paid under protest, payer can apply for refund u/s 239A before AO within 30 days. AO passes order within 6 months, appealable to CIT(A) u/s 246A(1)(ia). 16. Conclusion & Professional Impact The corporate and personal direct tax proposals of Budget 2022 represent a dual-track strategy: offering voluntary compliance avenues through Section 139(8A) Updated Returns and relief extensions for new manufacturing units and start-ups, while simultaneously shutting down aggressive tax avoidance windows. However, retrospective disallowances of Education Cess from 2005, the statutory expansion of Section 14A to scenarios with zero exempt income, and shifting the onus of proving the source of source under Section 68 will impose heavy compliance and litigation burdens on businesses. Chartered Accountants play an essential role in auditing transaction trails, evaluating withholding exposures under Sections 194S and 194R, guiding clients on the updated return window under Section 140B, and representing assessees through restructured faceless and reassessment proceedings. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) March 2022 Issue • Vol. 70 • No. 9 • pp. 67–78 (Journal pp. 1107–1118) Authors may be reached at: bdbhide@gmail.com and eboard@icai.in

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 79–82 (Journal pp. 1119–1122) UNION BUDGET 2022-23 • INTERNATIONAL TAXATION • VIRTUAL DIGITAL ASSETS Taxation of Virtual Digital Assets – Ramification for Non-Resident CA. Radhakishan Rawal Member of the Institute of Chartered Accountants of India Correspondence: eboard@icai.in CA. Geeta Bhatia Member of the Institute of Chartered Accountants of India Correspondence: eboard@icai.in 🌐 Cross-Border Perspective on Virtual Digital Assets Crypto assets have been in existence since 2009 and across the globe, rules and regulations are being introduced to regulate and tax transactions in cryptocurrencies. The Finance Bill, 2022 proposes to introduce a regime for taxation of income arising from transfer of “virtual digital assets” (VDA). The scope of VDA as per the proposed definition is wider than the typical cryptocurrencies. The rationale of introducing the tax law seems to be the popularity gained by such assets and also the trading volume of the assets in recent times. Read on… *OECD report suggests that countries such as Australia, France, Chile, Czech Republic, Luxembourg, Nigeria, Spain, Sweden, Switzerland, Argentina, Brazil, Croatia, Denmark, Israel, Japan, Slovak Republic, South Africa and the United Kingdom have introduced guidance on taxation of virtual currencies. 1. The Proposed Legislative Regime: Finance Bill, 2022 The Finance Minister in the Budget speech on 1st February 2022 stated that there has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. The following proposed sections have been introduced in the Income-tax Act, 1961 to govern transactions of virtual digital assets: Statutory Definition: Section 2(47A) Proposed Section 2(47A) contains an expansive definition of the term “virtual digital asset”: “(47A) “virtual digital asset” means–– (a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; (b) a non-fungible token or any other token of similar nature, by whatever name called; (c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify: Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.” Section 115BBH: Flat 30% Tax Provides that any income from transfer of any VDA shall be taxed at the rate of 30%. No deduction in respect of any expenditure or allowance shall be allowed except direct cost of acquisition. Further, loss from transfer of VDA cannot be set off against any other income. Section 194S: 1% TDS on Consideration In order to capture transaction details, it is proposed to provide for Tax Deduction at Source (TDS) on payment made in relation to transfer of VDA at the rate of 1% of such consideration above a specified monetary threshold. Section 56(2)(x): Taxation of Gifts Amendment proposed in section 56(2)(x) to tax gifts of virtual digital assets in the hands of the recipient. The definition of the term “property” is expressly amended to include VDAs. 2. Taxation of Non-Residents: Basis of Charge & The Situs Conundrum India follows a residence basis of taxation: residents are taxed on their worldwide global income, while non-residents are taxed strictly on India-sourced income. Under domestic tax law, the following categories of non-resident income are subject to tax in India: Income received or deemed to be received in India; Income accrues or arises, or is deemed to accrue or arise, in India. If income from the transfer of a VDA is received in India or accrues or is deemed to accrue in India, then the income earned by the non-resident from such transfer shall be chargeable to tax in India. Consequently, the existence of the situs of the asset in India is pivotal in determining whether income from the transfer of a VDA can be said to accrue or arise in India. Identification of Situs: The Mobilia Sequuntur Personam Principle Identification of the situs of an intangible asset like a VDA is notoriously challenging. A VDA is comparable to an intangible asset, and guidance can be availed from judicial precedents relating to intangible property. The Delhi High Court in CUB Pty Ltd. v. Union of India [2016] 71 taxmann.com 315 (Delhi) held that the location of an intangible asset (trademark) owned by a non-resident is not in India. The High Court relied upon the well-accepted international legal principle of ‘mobilia sequuntur personam’, according to which the situs of the owner of an intangible asset represents the closest approximation of the situs of the intangible asset itself. Reference may also be made to CBDT Circular No. 3 (WT) of 1957 (dated 28-9-1957) issued in the context of wealth tax, which deals with the location of intangible assets. The Revenue’s Counter-Stance: Based on the above, a non-resident may argue that the situs of the VDA owned by him is outside India. However, when VDA transactions occur on a cryptocurrency exchange located in India, or when the VDAs are issued by an Indian issuer, it will be arduous to claim that income does not accrue or arise in India. Furthermore, taxability is triggered if sale consideration is received in India. Characterization: Capital Asset vs Stock-in-Trade The taxability in the hands of the non-resident will also depend on whether the VDA is held as stock-in-trade or as a capital asset. Characterization of income from sale of securities has historically provoked extensive litigation; judicial precedents and CBDT circulars can be applied by analogy to VDAs, as the proposed domestic regime does not categorically classify VDAs as capital assets. While domestic taxation under Section 115BBH levies a flat 30% tax regardless of characterization, this distinction is critically decisive for applying the provisions of Double Taxation Avoidance Agreements (DTAAs / Tax Treaties). 3. VDA Held as Stock-in-Trade: Domestic Law vs Treaty Relief (Article 7) A. Domestic Law Position “Business” is defined under Section 2(13) of the Act to include any trade, commerce, manufacture, or any adventure or concern in the nature of trade. A trader who regularly and frequently buys and sells VDAs to extract profit from short-term market fluctuations holds VDAs as stock-in-trade. Under the domestic Act, gains realized by such a trader are taxable under Section 115BBH at the flat rate of 30%. B. Tax Treaty Relief: Article 7 (Business Profits) By virtue of Section 90(2) of the Act, a non-resident has the statutory option of adopting tax treaty provisions if they are more beneficial. Generally, Article 7 provides that business profits of a non-resident enterprise shall be taxable only in the resident State, unless it carries on business in India through a Permanent Establishment (PE). If it has an Indian PE, only profits directly attributable to that PE are taxable in India. Force of Attraction (FOA) Rule Nuance: Non-residents holding VDAs as stock-in-trade are taxable in India only if they maintain a PE in India and VDA profits are attributable to that PE. However, select Indian treaties (e.g. with Belarus, Canada, Slovak Republic, Denmark, Indonesia, Italy, Mongolia, New Zealand, Poland, Spain, and the USA) contain a Force of Attraction (FOA) clause under Article 7, the applicability of which must be evaluated where the enterprise engages in concurrent Indian activities. 4. VDA Held as Capital Asset: Article 13 & Residuary Treaty Exemption Under Section 2(14) of the Act, a capital asset encompasses property of any kind held by an assessee, whether or not connected with business or profession. Under domestic law, gains from alienation of VDAs held as capital assets are taxed at 30% under Section 115BBH. Tax Treaty Framework: Article 13 (Capital Gains) If the VDA is held as a capital asset, the income arising from its transfer is governed by the Capital Gains Article (Article 13) of the applicable tax treaty. Typically, Article 13 allocates specific taxing rights across five asset categories: Alienation of immovable property (taxable where property is situated); Alienation of movable property forming part of the business property of a PE; Alienation of ships and aircraft operated in international traffic; Alienation of shares; Alienation of any other property (The Residuary Clause). The Residuary Clause Exemption for Non-Residents: It can be convincingly maintained that VDAs such as cryptocurrencies and tokens do not qualify as immovable property, nor do they constitute shares. Where the VDA does not form part of the movable property of an Indian PE, the alienation falls squarely under the residuary clause of Article 13. Under the residuary clause of treaties with jurisdictions such as Singapore, Mauritius, the Netherlands, and the Swiss Confederation, capital gains arising from the alienation of “any other property” are taxable exclusively in the resident State of the alienator. Consequently, non-residents can lawfully invoke treaty protection to claim total exemption from Indian capital gains tax on VDA transfers. 5. Income from Other Sources & TDS Obligations under Section 195 Article 21/22: Income from Other Sources If under domestic law provisions, income from the transfer of a VDA is classified under ‘Income from other sources’, it would be governed under the Other Income Article of the tax treaty. Treaties adopting the UN Model provide for source-State taxation of other income (conferring taxing rights on India), whereas treaties patterned after the OECD Model grant exclusive taxation rights to the residence State. Section 194S vs Section 195: Withholding on Non-Residents Proposed Section 194S mandates 1% TDS on consideration paid to a resident; it does not apply to payments made to non-residents. Payments to non-residents for VDA transfers remain governed exclusively by Section 195 of the Act. Section 195 Withholding Scenarios: (i) A resident acquiring VDA from a non-resident; (ii) A non-resident acquiring VDA from another non-resident (under Explanation 2 to Section 195). The Landmark Ruling in GE India Technology Centre: Where the income of the non-resident is not chargeable to tax in India by relying on favourable tax treaty provisions (e.g. Article 7 or Article 13 residuary clause), the purchaser can rely on the Supreme Court ruling in GE India Technology Centre Private Ltd v. CIT (2010) 327 ITR 456, which established that where a payment is not chargeable to tax in India, there is no statutory obligation to withhold tax under Section 195. Practical Exchange Impasse: If the buy-sell transaction occurs through a digital asset exchange, complying with Section 195 is practically impossible because buyer and seller identities are completely anonymous and unknown to each other. 6. Obligation of Non-Residents to Withhold TDS: Section 194S & Extraterritoriality The Broad Reach of “Any Person” under Section 194S Section 194S casts a statutory obligation on ‘any person’ responsible for paying consideration to a resident on transfer of a VDA to deduct tax at source @ 1%. The terminology ‘any person’ is sufficiently wide to encompass non-residents. Consequently, non-residents acquiring VDAs from Indian residents are technically liable to withhold tax under Section 194S. The Vodafone Extraterritoriality Dilemma & Legislative Amendment: On the basis of the Supreme Court observations in Vodafone International Holding B.V. v. UOI [2012] 17 taxmann.com 202 (SC), a non-resident with no presence in India can argue that Indian TDS provisions cannot be applied extraterritorially. However, subsequent to the Vodafone judgment, the Finance Act, 2012 retrospectively amended Section 195 by inserting Explanation 2, clarifying that withholding obligations apply to non-residents irrespective of whether they possess a place of business, residence, or business connection in India. This affirms the legislative policy of extending withholding obligations to offshore entities. Nevertheless, when order matching executes anonymously on digital exchanges, the non-resident buyer cannot ascertain the residency or PAN of the counterparty seller, rendering physical execution of withholding tax legally and practically unworkable. 7. Conclusion & The Road Ahead Substantial ambiguities permeate the proposed taxation regime for virtual digital assets. As per media reports, the Central Board of Direct Taxes (CBDT) is expected to issue comprehensive guidelines shortly to clarify critical aspects of taxation. The precise boundary of the definition of VDA itself, the statutory determination of the situs of digital tokens, and the practical implementation of TDS / TCS mechanisms across decentralized and centralized exchanges require definitive administrative illumination. Until the CBDT releases detailed circulars, cross-border taxpayers and global investors must maintain continuous vigilance and exercise prudent caution in structuring VDA transactions.

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 88–92 (Journal pp. 1128–1132) BANK AUDIT • RISK MANAGEMENT & ASSURANCE Risk Management in Bank Branch Audit CA. Abhijit Sanzgiri Author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at apsanzgiri@hotmail.com and eboard@icai.in. 🛡️ The Ubiquitous Nature of Audit Risk Risk is present in any activity which is carried out and audit is no exception. Any activity that is conducted can go wrong anytime, sometime or at all times despite the controls that have been designed and implemented to specifically address and mitigate the risks inherent therein. Risk is that residual threat, gap or vulnerability that one is finally exposed to. Read on… 1. Fundamentals of Risk Management in Banking Operations The key to risk management is to anticipate, in a formal, structured manner what can go wrong, how and why it can go wrong, and what could be done to ensure that we zeroise or minimize the possibilities of things going wrong. Gross or inherent risk must be kept strictly within the risk appetite, and residual risk within the established risk tolerance. Mathematical Dimension of Risk Risk = Function ( Probability / Likelihood of Adverse Event Occurring × Impact / Loss Caused by Actual Occurrence ) Risk needs to be managed effectively by identifying, analysing, evaluating, measuring, monitoring, treating, and communicating risk on an ongoing basis. Risk cannot operate in a silo and must always be mapped to a corresponding control. Controls have to be proactive, automated, corrective, and collaborative. Properly engineered controls ensure that risk is treated down to an acceptably low level. Banks function as trustees of public money and are heavily regulated by the Reserve Bank of India (RBI). They accept deposits from the public in savings accounts, current accounts, and term deposits, and lend those funds onward for commercial and industrial purposes at an interest spread. A staggering volume of daily transactions occurs in cash, ATMs, cheques, pay-orders, demand drafts, NEFT, and RTGS. Multi-Dimensional Risks Confronting Bank Branches: Bank branches are exposed to diverse operational and financial risk vectors: Operational Risk Credit Risk Regulatory & Legal Risk Technology Risk Reputational Risk Money Laundering Risk Cyber Security Risk Market & Liquidity Risk Interest Rate Risk Concentration Risk Social Media Risk Fraud Risk Branches face these risks in varying degrees depending on their business and customer profile. Hence, comprehensive risk profiling of the branch under audit is indispensable to focus on the key risks genuinely impacting the branch. Banks institute a multitude of controls: maker-checker validation, segregation of duties, job rotation, mandatory leave policies, documented job descriptions, authorizations, ratifications, physical verifications, confirmations, inspections, balancing, reconciliations, and financial delegations. Fundamental Control Directive: Any manual or detective control must be identified and flagged for upgradation into a preventive, system-based, automated control. 2. Mandatory Standards on Auditing (SAs) & Rigorous Documentation In a bank branch audit, the statutory auditor certifies whether the financial statements—comprising the Balance Sheet, Profit and Loss Account, Cash Flow Statement, Accounting Policies, and Notes on Accounts—present a true and fair view free from material misstatement. Furthermore, the auditor issues mandatory certificates and the Long Form Audit Report (LFAR). The Primary Audit Risk: Non-Adherence under Time Constraints The foremost audit risk is that the auditor may certify financial statements as correct while having omitted critical substantive checks due to the absence of a structured audit methodology, accentuated by acute year-end time pressures. Non-compliance with the Standards on Auditing (SAs) tantamounts to professional misconduct under the Chartered Accountants Act, 1949. Audit Documentation: The Bedrock under SA 230 While Chartered Accountants are sound in technical accounting, taxation, and law, they must significantly strengthen the robustness of their working paper documentation. SA 230, “Audit Documentation” specifically prescribes the fundamental requirements of maintaining contemporaneous audit trails. Core Standards on Auditing Governed in Bank Audits: SA 220: Quality Control for an Audit of Financial Statements SA 240: The Auditor’s Responsibilities Relating to Fraud SA 250: Consideration of Laws and Regulations in an Audit SA 260 (Revised): Communication with Those Charged with Governance SA 300: Planning an Audit of Financial Statements SA 315: Identifying & Assessing Risks of Material Misstatement SA 320: Materiality in Planning and Performing an Audit SA 330: The Auditor’s Responses to Assessed Risks SA 450: Evaluation of Misstatements Identified During Audit SA 530: Audit Sampling SA 540: Auditing Accounting Estimates & Fair Value Disclosures SA 550: Related Parties SA 580: Written Representations SA 610 (Revised): Using the Work of Internal Auditors SA 701: Communicating Key Audit Matters SA 720 (Revised): Auditor’s Responsibilities Relating to Other Information Working Paper Sign-Off Protocol: Auditors must review the Standards on Auditing afresh before commencing the audit and formulate structured checklists. Documentation must be executed daily and on an ongoing basis. Crucially, the entire audit working paper file must be thoroughly reviewed and formally signed off by the signing engagement partner prior to signing the final audit report and accounts. 3. Critical Operational Focus Areas & Fraud Governance Auditors must diligently obtain the branch organization chart to trace operational activities, Key Performance Indicators (KPIs), and Key Risk Areas (KRAs), reviewing them in tandem with the Trial Balance. Non-adherence to the bank’s year-end account closing instructions must be qualified in the audit report. A. IRAC Compliance & Systemic NPA Identification Non-Performing Asset (NPA) classification and provisioning represent the highest frequency of divergence in RBI regulatory inspections. NPAs must be identified directly from the core banking system (CBS) without manual intervention. Any interpretive ambiguity regarding RBI IRAC norms must be referred in writing to the Central Statutory Auditors (CSA) to establish an irrefutable audit trail. Tracking the 45 Early Warning Signals (EWS): The auditor must verify whether the bank actively tracks the 45 Early Warning Signals of Fraud prescribed in the RBI Circular dated 7th May, 2015 on the Framework for Dealing with Loan Frauds. Revenue Recognition Verification Verification of system parameters, interest table master updates, and accurate application and modification of interest rates across both advances and customer deposit portfolios. KYC & AML Diligence Verification of Cash Transaction Reports (CTR), transaction monitoring alerts, and filing of Suspicious Transaction Reports (STR) under Financial Action Task Force (FATF) standards and Indian Banks’ Association (IBA) red flags. Fifteen Operational Areas Requiring Targeted Audit Examination: Adherence to key institutional policies (Credit, Investment, KYC-AML). Risk classification of customer accounts into High, Medium, and Low risk bands. Accuracy of Priority Sector Lending (PSL) classifications. Timely transfer of unclaimed balances to the Depositor Education and Awareness Fund (DEAF). Verification and reversal of previous year’s Memorandum of Changes (MOC). Scrutiny of stock audit reports and independent recalculation of Drawing Power (DP). Review of system-generated Management Information System (MIS) exception and dummy reports. Reconciliation of Inter-Office, clearing, and transit accounts. Stringent monitoring of Suspense and Sundry accounts. Verification of end-use of borrowed funds and tracking diversion of funds. Classification of Bank Guarantees as financial guarantees or performance guarantees. Follow-up and resolution of pending audit observations from concurrent, internal, and revenue audits. Capitalization of fixed assets and accurate computation of depreciation. Physical cash and ATM operations (balancing, insurance cover, vault retention limits). Cross-border remittances, SWIFT messaging, and Foreign Currency account operations. 4. Long Form Audit Report (LFAR) & Mandatory Certifications The Long Form Audit Report (LFAR) is a detailed diagnostic questionnaire requiring the branch auditor to evaluate the branch’s internal controls and operations for the entire financial year, despite the auditor being physically or virtually present only for a brief period at year-end. Cardinal Rules for LFAR Reporting: Substantiate Methodology: The auditor must clearly state in each LFAR response What was done (area covered), How it was done (audit methodology), and To what extent (sampling size and transactions examined). Concurrent Audit Coordination: Discussions with concurrent auditors are mandatory, and reliance on their reports or management representations must be explicitly stated. Missing Representations: If Management Representation Letters (MRLs) are not furnished, the auditor must explicitly record disclaimers against the concerned LFAR questions. Golden Rule: The LFAR can only amplify and elaborate upon qualifications in the main Independent Auditor’s Report—it can NEVER serve as a substitute for a qualification in the Statutory Audit Report! Issuance of Mandatory Statutory Certificates Auditors must issue various regulatory and bank certificates (e.g. DICGC, agricultural debt waiver, Ghosh and Jilani committee recommendations, asset classification certificates). Certificates must be issued strictly in accordance with the “Guidance Note on Reports or Certificates for Special Purposes (Revised 2016)” issued by ICAI. Auditors can only express reasonable or limited assurance, and must detail the precise documents verified, actual issues examined, verification methodology, and sampling extent, backed by cross-corroborative audit evidence. 5. Internal Financial Controls Over Financial Reporting (IFC-FR) The Reserve Bank of India has mandated that branch auditors of Public Sector Banks (PSBs) must issue an independent report on Internal Financial Controls Over Financial Reporting (IFC-FR). Appendix V Risk Control Matrices (ICAI Technical Guide) Branch auditors must rigorously consult the “Technical Guide on Audit of Internal Financial Controls in Case of Public Sector Banks” issued by the Auditing and Assurance Standards Board (AASB) of ICAI, specifically referencing Appendix V: 17 Control Points on Advances Covering appraisal, sanction, documentation, disbursement, security creation, drawing power monitoring, review, and recovery. 7 Control Points on Deposits Covering account opening diligence, KYC compliance, interest application, dormant accounts, mandate operations, and term deposit renewals. 6. Navigating Year-End Constraints & Escalation Protocols The central challenge confronting bank branch auditors is navigating intense time compression while managing data delays and securing complete, authentic management responses. Auditor skill lies in framing precise questions and practicing active, attentive listening. Daily Requisition Tracker At the commencement of audit, issue a formal, numbered audit requisition memo. Maintain a daily log tracking items submitted and pending. Countersignatures must be obtained from the Branch Head. Tracking Deployed Man-Hours Factually state the exact date of audit commencement and the actual audit man-hours deployed on the assignment to substantiate audit adequacy under regulatory scrutiny. CSA & RBAD Escalation Maintain active liaison with the Central Statutory Auditors (CSA) and the Regional Bank Audit Department (RBAD), formally communicating constraints or delays hampering audit conduct. Uncompromising Independence: Auditors must never succumb to time pressure and sign off without complete verification. If reports must be signed due to non-negotiable regulatory deadlines while material information remains outstanding, the auditor must fearlessly issue a qualified opinion or disclaimer of opinion, keeping the CSA and RBAD in the loop. 7. Conclusion The statutory bank branch auditor should approach the audit with the full rigor applied to any statutory audit, appreciating the finer aspects of bank functioning and dynamic RBI regulations. Thorough planning, peer consultation, continuous team training, and the right blend of professional skepticism are paramount. “The auditor has to stand firm ethically and do the right things right. Whenever there is a risk, one needs to derisk. Every risk can be derisked.”

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 83–87 (Journal pp. 1123–1127) Union Budget 2022-23 Input Tax Credit – Amendments proposed in Finance Bill, 2022 BK CA. N K Bharath Kumar Member of the Institute of Chartered Accountants of India (ICAI) • Contact: bharath.nkb@gmail.com and eboard@icai.in “During the excise era, a new concept of proforma credit scheme was introduced in order to reduce the double taxation effect with restriction that the credit can be claimed only within the same tariff of goods that were manufactured. This system had lot of deficiencies and hence, the Government came up with a revised version in the name of ‘Modified Value Added Tax’ (MODVAT) in the year 1986-87 with the same objective and permitting credit of excise duty only on inputs for manufacturers. Later on, the scheme was extended to capital goods also. Read on…” This analytical paper traces the historical evolution of Input Tax Credit (ITC) from legacy excise and VAT regimes to GST, evaluating the extensive legislative modifications proposed in Finance Bill 2022. It examines the new restrictions introduced under Section 16(2)(ba), the auto-generated statement under Section 38, the substitution of Section 41, the retrospective amendment to Section 50 interest, the omission of two-way communication under Sections 42 and 43A, and real-world compliance friction. 1. Historical Evolution of Input Tax Credit: From Proforma Credit to GST The quest for mitigating the cascading effect of taxation across supply chains has evolved through several statutory frameworks in Indian indirect taxation: Pre-1986 Era Proforma Credit Scheme Allowed credit only within the identical excise tariff heading of manufactured goods, creating acute structural cascading. 1986-87 MODVAT Introduced Modified Value Added Tax permitted excise duty credit across manufacturing inputs, later expanded to capital goods. 2001–2004 CENVAT Credit Integration Service tax credit introduced in 2002. CENVAT Credit Rules, 2004 integrated goods and service tax credits across borders. 2005 Onwards State VAT Transition States replaced single-point and resale sales taxes with State VAT Acts, permitting input VAT credit for output VAT liabilities. While VAT functioned relatively smoothly, CENVAT Credit Rules, 2004 witnessed relentless annual amendments continuously contracting credit eligibility. This lengthy journey culminated on 1st July 2017 with the implementation of the Goods and Services Tax (GST). Graduation of CENVAT: Input Tax Credit under GST Under GST, Input Tax Credit was given statutory primacy under Section 16 of the Central Goods and Services Tax (CGST) Act, 2017 (whereas under CENVAT it was governed merely by subordinate Rules). The historic rollout slogan presented to the nation was “One Nation One Tax”, underpinned by the solemn promise of “Seamless flow of Input Tax Credit”. 2. The Progressive Erosion of Seamless Credit: Section 17(5) and Concessional Rate Conditions From the inception of GST, the statutory promise of seamless credit was constrained by the concept of “blocked credit” entrenched under Section 17(5) of the CGST Act. Credits were prohibited on commercial construction, motor vehicles, rent-a-cab services, employee insurance, food and catering, and business promotion gifts, despite these transactions being undertaken exclusively for business advancement. Subsequently, based on recommendations of the GST Council, the Central Board of Indirect Taxes and Customs (CBIC) repeatedly tweaked tax rates on various key sectors with an express condition that “no input tax credit shall be availed”: SAC Code Activity / Service Description Rate of Tax Statutory Conditions & ITC Restrictions 9954 Construction of Residential Complex (Affordable / Other) 1% or 5% No ITC 9963 Supply of Food or any article for human consumption (Restaurants, Railways, IRCTC, Outdoor Catering) 5% No ITC 9964 Passenger Transportation Service (except classes other than economy) 5% No ITC 9965 Transport of goods by rail / vessel / Goods Transport Agency (GTA) and multimodal transport 5% No ITC on goods for rail and vessel (except forward charge) 9966 Rental services of transport vehicles with operators 5% No ITC (Option to opt for full rate with ITC available separately) 9971 Financial related services by foreman of a Chit Fund in relation to chit 12% No ITC on goods 9985 Tour operator service 5% No ITC Various Support services by way of house-keeping and plumbing even if supplied through e-commerce operators 5% No ITC The Cascading Reality: Roti and Makaan Tax Burdens Due to the reduction of nominal rates for the apparent benefit of the common man, the cascading effect could not be eliminated because the supplier is strictly barred from taking input tax credit on purchases. The uncredited tax becomes a component of business cost and is passed directly on to the end consumer. Essential sectors symbolizing “Roti and Makaan” (restaurant dining and residential home construction) were placed under concessional rates with zero ITC, transferring the cascading deadweight directly onto the common citizen. Rule 86B & The Rule 36(4) Slide from 20% to “Zero Tolerance” Rule 86B Restriction: Mandated that certain high-turnover taxpayers must pay at least 1% of output tax liability in cash, restricting 100% utilization of accumulated ITC. Rule 36(4) Progressive Squeeze: Initially, taxpayers could claim eligible ITC reflecting in GSTR-2A/2B plus an additional 20% buffer for missing valid invoices. This buffer was sequentially reduced to 10%, then to 5%, and finally brought down to 0%. While intended to combat fake invoicing and circular bill trading, this zero-tolerance stance has severely penalized genuine, honest buyers whose suppliers delayed monthly return uploads. 3. Finance Bill 2022 Amendments to Section 16 & Substituted Section 38 Finance Bill 2022 introduces sweeping amendments tightening the statutory eligibility and conditions for claiming ITC under Section 16 of the CGST Act: Insertion of Clause (ba) in Section 16(2) Inserted immediately after Section 16(2)(b): “(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted” While clause (aa) (effective 1st Jan 2022) made GSTR-2B reflection mandatory, new clause (ba) creates an aggressive subsequent barrier: the credit communicated in GSTR-2B must not be a restricted credit under Section 38. Substituted Section 38: Communication of Inward Supplies & Restrictions Section 38 has been completely substituted to govern the auto-generated statement (Form GSTR-2B) consisting of two distinct compartments: Clause (a): Details of inward supplies in respect of which credit of input tax may be available to the recipient; and Clause (b): Details of supplies in respect of which such credit cannot be availed, whether wholly or partly, by the recipient on account of specified supplier actions or default profiles. Checks Introduced on Supplier’s Action (Form GSTR-1 u/s 37(1)) Statutory Impact on ITC to be Claimed by Recipient By any registered person within such period of taking registration as may be prescribed ITC availed from new registrants may be restricted as per the period that will be specified. (Restriction) By any registered person, who has defaulted in payment of tax and where such default has continued for such period as may be prescribed Credit CANNOT be availed from a supplier who has defaulted in payment of tax for certain prescribed period. (Denial) By any registered person, the output tax payable by whom in GSTR-1 exceeds the output tax paid by him in GSTR-3B during such period by such limit as may be prescribed Credit may be restricted where output liability in GSTR-1 exceeds tax paid in GSTR-3B beyond prescribed limit. (Restriction to the extent of proportionate unpaid portion) By any registered person who, during such period as may be prescribed, has availed credit of input tax of an amount that exceeds the credit that can be availed by him under clause (a), by such limit as may be prescribed The recipient will be denied or restricted credit if the recipient’s supplier has availed ITC in excess of what was eligible to him. (Denial or Restriction) By any registered person who has defaulted in discharging tax liability in accordance with Section 49(12) subject to conditions as may be prescribed Linked to new Section 49(12) non-obstante clause empowering Government to cap ITC electronic credit ledger discharge. Even if no other restrictions exist, Section 49(12) defaults trigger credit usage blocks. (Restriction) By such other class of persons as may be prescribed Government reserves plenary powers to prescribe any further class of persons from whom ITC availed can be restricted or disallowed entirely. (Blanket Reservation) 4. Section 41 Substituted: Self-Assessed ITC, Reversals & Dismantling of Matching Sections Key Structural Changes in Section 16(2)(c) & Substituted Section 41 Section 16(2)(c) Linked to Section 41: Amended to provide that tax charged on supply must be actually paid to the Government, either in cash or through admissible credit. This imposes an impossible compliance standard on the buyer, who has no statutory machinery to compel or verify whether the vendor actually deposited the tax collected into the treasury. Substituted Section 41 – “Availment of Input Tax Credit”: Entitles registered persons to claim ITC on a “self-assessed” mode in returns. The former provisional credit mechanism is abolished, removing statutory two-way reconciliation. Mandatory Reversal with Re-Availment Proviso: If the supplier fails to deposit appropriate taxes, the recipient must reverse the ITC availed along with applicable interest. However, a newly inserted proviso specifies that when the defaulting supplier subsequently pays the tax, the recipient is permitted to re-avail the reversed credit. Retrospective Amendment to Section 50(3): Section 50 is amended with retrospective effect from 1st July 2017 to provide that penal interest will be levied only if ineligible credit is availed AND utilised. Mere availment in the electronic ledger without cash-offset utilization will not attract interest! Complete Omission of Sections 42 and 43A: Consequent to the self-assessment transition, Section 42 (matching, reversal, and reclaim) and Section 43A (procedure for furnishing returns and claiming credit) are omitted from the Act. Taxpayers are stripped of their primary statutory defense against GSTR-2A vs GSTR-3B mismatch notices. 5. Practical Procedural Bottlenecks in Day-to-Day Compliance The author identifies three acute operational dilemmas experienced by taxpayers and tax professionals: 1. Month-End Goods in Transit Friction Supplier dates invoice on 29th of the month; goods arrive at factory on 3rd of the next month. The current month’s GSTR-2B reflects the credit, which Section 16(2)(b) bars the buyer from taking until physical receipt. When availed in the subsequent month, the GST portal generates automated warning popups threatening registration suspension for claiming excess credit! 2. Non-Reflection of Import IGST Credit Customs ICEGATE and GST portal integration frequently fails to auto-populate IGST paid on Bills of Entry into GSTR-2B. Although an individual query tool exists, lack of a bulk-processing window creates immense administrative paralysis for large-scale importers. 3. Inadvertent Head Error (CGST/SGST vs IGST) If a taxpayer mistakenly avails credit under CGST & SGST instead of IGST and detects it during the GSTR-9 annual return, the taxpayer is compelled to reverse CGST & SGST as excess availment with interest, while denied IGST credit because the limitation period has lapsed! Government must permit head adjustment in genuine bona fide errors. 6. Extension of Section 16(4) Time Limit to 30th November: Analysis & Pandemic Hardships Section 16(4) of the CGST Act previously restricted the time limit for claiming ITC in respect of any invoice or debit note to the due date of furnishing the return under Section 39 for the month of September following the end of the financial year (20th October), or furnishing the annual return, whichever is earlier. Statutory Amendment: Extension to “Thirtieth Day of November” Finance Bill 2022 amends Section 16(4) by substituting the September due date with “thirtieth day of November” (30th November) following the end of the financial year. Historical Comparison: Under CENVAT and VAT, taxpayers filing delayed returns after 2 years could still claim and adjust all available ITC. Only in late 2014 was a 1-year limitation from invoice date introduced. Under GST, Covid demonstrated how arbitrary Section 16(4) deadlines harm businesses: taxpayers unable to file March 2020 returns until November 2020 due to pandemic lockdowns had their valid, recorded book credits rejected as time-barred, forcing 100% cash payments! Author’s Policy Reform Proposal: Government should replace rigid calendar cutoffs with a limitation period based on the date of invoice, permitting the claiming of credit in the particular month’s return to which it pertains whenever such return is actually furnished. 7. Concluding Remarks & The Imperative for Genuine Seamlessness Input tax credit is the core fulcrum of GST law. Without an unhindered flow of credit, GST loses its economic identity as a consumption-based value-added tax and degrades into an opaque multi-stage turnover tax that perpetuates severe cascading. While extending the Section 16(4) deadline to 30th November and amending Section 50(3) to tax interest only on utilised credit are highly positive taxpayer reliefs, the sweeping restrictions introduced under Section 16(2)(ba), Section 38, Section 41, and Section 49(12) transfer the entire investigative and enforcement burden of rogue vendors onto innocent purchasing businesses. There is a compelling need for the Government and GST Council to work collaboratively with trade bodies, industry representatives, and the accountancy profession to eliminate procedural traps, facilitate inter-head error corrections, and ensure that the foundational promise of seamless credit flow is genuinely realized. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) March 2022 Issue • Vol. 70 • No. 9 • pp. 83–87 (Journal pp. 1123–1127) Author may be reached at: bharath.nkb@gmail.com and eboard@icai.in

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 100–103 (Journal pp. 1140–1143) Digital Assets Demystifying Non Fungible Tokens MM Dr. Meera Mehta Academician & Researcher • Contact: meeramehta17@gmail.com AJ (Dr) Arun Julka Academician & Financial Scholar • Contact: eboard@icai.in “Non Fungible Tokens (NFT) are the game changers in the world of decentralised digital currencies. NFT are the ownership claims of the virtual assets created by their owners. NFT is a proof that uses the blockchain to record the ownership of the digital asset. In India, the NFT craze is picking up as many celebrities have recently joined the NFT club to launch their digital memorabilia. With the increasing popularity of NFT, this paper tries to demystify these digital assets. This conceptual paper develops an understanding about NFT, their future in India and an analysis of the strength, weaknesses, opportunities and challenges these virtual assets will create. Read on…” In February 2021, the meme of The Nyan Cat was sold for $600,000, and Jack Dorsey, founder of Twitter, auctioned his first Tweet for $2.5 million. These benchmark transactions highlight assets existing purely in the virtual domain where items possess intrinsic individuality without identical substitutes. Ownership claims of such unique virtual assets are minted through Non-Fungible Tokens. 1. Understanding Non-Fungible Tokens (NFTs) Non-Fungible Tokens represent non-flexible, unique cryptographic assets deployed on a blockchain network, predominantly the Ethereum blockchain (Kugler, 2021). While NFTs are minted and sold over the internet in a manner similar to Bitcoins and other cryptocurrencies, there is a fundamental economic distinction between them: Fungible Tokens (e.g. Bitcoin, Fiat Currency) An asset that can be replaced with an identical one in terms of both quality and quantity is deemed fungible. A fungible token is equal to every other token of its kind and capable of mutual substitution; one unit can be freely traded or exchanged for another unit of the same kind (Panel et al., n.d.). Non-Fungible Tokens (e.g. Digital Art, Rare Collectibles) An asset is non-fungible when it is impossible to replace it with a similar item due to the good’s inherent individuality and uniqueness. Each token contains unique metadata and cryptographic proof establishing original provenance and non-interchangeable ownership. Research Methodology & Objectives This study is a conceptual study undertaken in three structured stages: Stage 1: Deciphering the technical, cryptographic, and economic concepts underlying NFTs; Stage 2: Analyzing the market expansion, legal framework, and future trajectory for NFTs in India; Stage 3: Executing an exhaustive Strengths, Weaknesses, Opportunities, and Challenges (SWOC) analysis. 2. Scholarly Literature Review The global academic literature provides profound insights into the evolution, tokenomics, and limitations of NFTs: Wang et al. (2021) – Technical Foundations & Market Scale Discusses technical dimensions, explaining NFTs as unique identifiers tied to virtual/digital properties. Reports that “till May 2021, the total amount spent on completed NFT sales was 34,530,649.86 USD, which was a ten-fold return on its growing market”, attracting global investor attention while noting that underlying protocols remain in their infancy. Lau (2020) – Blockchain Convergence & Adoption Barriers Highlights how decentralized blockchain creates provably rare, legitimate tokens across collectibles, gaming, virtual assets, and real-world tokenization. Concludes that widespread adoption is currently hindered by technology newness, inaccessibility, unpredictable gas transaction fees, and regulatory ambiguity. Kugler (2021) – Digital Art Provenance & Creator Economics Emphasizes that prior to NFTs, “there was no widely accepted way to determine the ‘original’ piece of a digital artwork, nor any widely accepted way to prove or transfer its ownership”. NFTs transform creator livelihoods by enabling artists to mint verified digital scarcity. Trautman (2021) – Virtual Property Evolution & Digital Real Estate Explores expanding digital art markets, virtual property evolution, blockchain/crypto history, unresolved legal conflicts affecting NFT property rights, and potential frameworks for tokenizing virtual real estate. Valeonti et al. (2021) – Digital Scarcity & The openGLAM Sector Demonstrates that NFTs introduce verifiable scarcity into the digital sphere, creating innovative fundraising mechanisms for Galleries, Libraries, Archives, and Museums (GLAM) through sales of digitized historical masterworks. Bao (2021) – CryptoKitties Phenomenon & Volume Explosions Documents the historic December 2017 Ethereum congestion caused by CryptoKitties. Notes that after a stable period ($60,000 daily volume until mid-2020), “daily volume topped $10 million in March 2021, surging 150 times over eight months” across art, gaming, metaverse, and utility sectors. 3. The Indian Landscape: Market Growth, FEMA Legality & Double Taxation Globally, the total market capitalization of NFTs stood at $18,369,471.87 as on December 1, 2021 (CoinMarketCap), jumping 28.49% in 24 hours. In India, adoption is surging as Bollywood celebrities and cricketers enter the space to launch tokenized memorabilia, digital collectibles, and exclusive fan access passes. Are NFTs Legal in India? FEMA and Regulatory Ambiguity As of today, there is no blanket prohibition restricting Indian residents from buying or selling NFTs. However, the Foreign Exchange Management Act of 1999 (FEMA) creates significant ambiguity: NFTs are non-fungible unique goods, whereas currencies (both fiat and crypto) are fungible mediums of exchange. Therefore, prospective rules prohibiting cryptocurrency trading should ideally exempt NFTs. Contracts vs. Derivatives Dilemma: In the absence of an explicit legislative definition in India, intense debate persists regarding classification: “Some argue that NFTs are contracts, while others argue that they are derivatives. If classified as derivatives, trading in NFTs would be prohibited in India under the Securities Contracts (Regulation) Act (SCRA).” The Double Taxation Exposure: GST + 2% Equalisation Levy Despite exploding consumer interest, Indian purchasers of digital collectibles face severe dual fiscal burdens: when acquiring an NFT on international decentralized marketplaces (such as OpenSea), the transaction may attract Goods and Services Tax (GST) alongside a 2% Equalisation Levy, a direct tax mechanism traditionally reserved for foreign e-commerce operators supplying to domestic consumers. 4. Critical Vulnerabilities: Carbon Footprint & Cybersecurity Severe Environmental Carbon Footprint There is mounting concern that NFTs generate millions of tonnes of CO2 emissions via proof-of-work blockchain transactions: One single Ethereum transaction consumes approximately 178.89 kWh (surpassing 1,000 Visa card transactions). In April 2021, Ethereum consumed 33 Terawatt hours (TWh) of power—equivalent to the national energy consumption of Serbia. As of December 2021, Ethereum’s annualized power burn clocked 94.1 TWh per year. Cybersecurity Threats & Attack Vectors As a nascent digital ecosystem, the NFT marketplace exposes users to sophisticated threat vectors: Blockchain-Based Attacks: 51% consensus breaches and smart contract re-entrancy bugs. Tampering & Metadata Spoofing: Hijacking off-chain server storage links pointing to digital images. Denial-of-Service (DoS) Attacks: Crashing marketplace exchange servers during high-demand auction mints. 5. Exhaustive SWOC Analysis of Non-Fungible Tokens A comprehensive SWOC analysis evaluates the internal capabilities and external market dynamics governing NFTs: 💪 Strengths (S) Unique & Non-Fungible: No two NFTs are alike; characteristics recorded immutably in token metadata. Digitally Scarce Resources: Generates provable mathematical scarcity in virtual goods. Indivisible: Cannot be broken into smaller fractions or bought partially. Fraud-Proof Provenance: Stored on decentralized ledgers; transparent, verifiable chain of title. ⚠️ Weaknesses (W) Technology Complexity: Difficult for laymen and retail users to navigate wallets and gas. Accessibility Barriers: Steep learning curve for acquiring cryptocurrencies to mint tokens. Volatile Transaction Fees: Gas fees fluctuate unpredictably during network congestion. Non-Exclusivity: Buying an NFT does not prevent public copying or viewing across the web. 🚀 Opportunities (O) Digital Art & Collectibles: Global monetization platforms for independent artists and creators. Gaming & Metaverse: Interoperable in-game assets, avatar skins, and virtual land parcels. Fashion & Luxury Goods: Tokenized wearable collections and digital twin authenticity verification. Real Estate & Identity: Tokenizing physical deeds, title records, and personal credentials. 🛡️ Challenges (C) Security & Cyber Threats: Smart contract vulnerabilities, phishing, and wallet hacks. Carbon Footprint: Enormous environmental toll of fossil-fueled Proof-of-Work mining. Art Theft & Copyright Plagiarism: Unauthorized minting of artists’ work without consent. Legal & Regulatory Void: Absence of harmonized statutory definitions and tax guidelines. 6. Conclusion: The Rise of an Uncorrelated Digital Asset Class NFTs are unique, traceable, rare, and indivisible, combining non-fungible assets with the finest features of decentralized blockchain technology. Unlike traditional digital assets that are issued, governed, and revocable at any moment by centralized corporate platforms, NFTs confer verifiable, sovereign ownership directly to their holders. Overall, NFTs represent a young asset class with the potential to evolve into a powerful, uncorrelated asset class—a highly desirable characteristic for institutional and retail investors seeking alternative instruments to preserve monetary worth and hedge traditional market exposures. 7. Exhaustive Bibliography & References Martinod, Nicolas J., Kambiz Homayounfar, Davi Nachtigall Lazzarotto, Evgeniy Upenik, and Touradj Ebrahimi. 2021. “Towards a Secure and Trustworthy Imaging with Non-Fungible Tokens.” 47. doi: 10.1117/12.2598436. Bao, H. (2021). Recent Development in Fintech: Non-Fungible Token. FinTech 2021, 1, 44–46. https://doi.org/10.3390/fintech1010003. Kugler, L. (2021). Non-fungible tokens and the future of art. Communications of the ACM, 64(9), 19–20. https://doi.org/10.1145/3474355. Lau, K. (2020). Non-Fungible Tokens. Research and Insights Macro Report, November. Panel, E., Penedo, A. C., Brussel, V. U., Authority, I., & Siadat, A. (n.d.). NFT – Legal Token Classification. 1–14. Trautman, L. J. (2021). Virtual Art and Non-fungible Tokens. SSRN Electronic Journal, 1–76. https://doi.org/10.2139/ssrn.3814087. Valeonti, F., Bikakis, A., Terras, M., Speed, C., Hudson-Smith, A., & Chalkias, K. (2021). Crypto collectibles, museum funding and openGLAM: Challenges, opportunities and the potential of non-fungible tokens (NFTs). Applied Sciences (Switzerland), 11(21). https://doi.org/10.3390/app11219931. Wang, Q., Li, R., Wang, Q., & Chen, S. (2021). Non-Fungible Token (NFT): Overview, Evaluation, Opportunities and Challenges. http://arxiv.org/abs/2105.07447. Outlook India (2021). Cryptocurrency regulation affects NFT in India. Available at: Outlook India Report (accessed on 30/12/2021). NLUJ Law Review (2021). Non-Fungible Tokens: Examining its Legal Validity in India. Available at: NLUJ Law Review (accessed on 31/12/2021). IndiaCorpLaw (2021). Non-Fungible Tokens: An Indian Perspective. Available at: IndiaCorpLaw Analysis (accessed on 1/1/2022). The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) March 2022 Issue • Vol. 70 • No. 9 • pp. 100–103 (Journal pp. 1140–1143) Authors may be reached at: meeramehta17@gmail.com and eboard@icai.in

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 93–99 (Journal pp. 1133–1139) BANK AUDIT • PRUDENTIAL IRAC NORMS • REGULATORY COMPLIANCE Prudential Norms on Income Recognition and Asset Classification – Changes effective for 31.3.2022 CA. P. M.Veeramani Author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at eboard@icai.in. 📑 Critical Regulatory Shift in Asset Classification This Article is intended to provide a look into the Prudential Norms on Income Recognition and Asset Classification for Banks with special reference to the changes which are effective for the year ended 31.3.2022. Read on… 1. Key RBI Regulatory Framework & Master Circulars Foundation RBI Notifications Effective for Audit Period 2021-22: RBI/2020-21/37 Ref. No. DoS.CO.PPG./SEC.03/11.01.005/2020-21 dated September 14, 2020: Automation of Income Recognition, Asset Classification and Provisioning processes in banks. RBI/2021-2022/104 DOR.No.STR.REC.55/21.04.048/2021-22 dated October 1, 2021: Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances. RBI/2021-2022/125 DOR.STR.REC.68/21.04.048/2021-22 dated November 12, 2021: Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications. RBI/2021-2022/158 DOR.STR.REC.85/21.04.048/2021-22 dated February 15, 2022: Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications. 2. Automation of IRAC Norms – Daily Reckoning of NPA Status This should be the most important change in the IRAC norms going forward from the current year and hence the members are advised to familiarise themselves before the audit is taken up. As per the notification dated September 14, 2020, banks were required to put in place or upgrade their systems to conform to the guidelines in respect of automated Asset Classification (classification of advances and investments as NPA/NPI and their upgradation) latest by June 30, 2021. Banks have submitted compliance reports to the RBI. It is understood that while automation is put in place generally, specific modules are still in progress; hence auditors approaching bank branch audits must initially confirm the exact extent to which automated STP rules are operational. Universal Account Coverage All borrowal accounts, including temporary overdrafts (TODs), irrespective of size, sector, or types of limits, must be covered in the automated IT-based system for asset classification, upgradation, and provisioning processes, alongside bank investments. Systemic Provisioning & Reversals Calculation of provisioning must be entirely system-based as per pre-set rules, value of security captured in the system, and regulatory guidelines. Income recognition and reversals on impaired assets (NPAs/NPIs) must be system-driven without manual intervention. Straight Through Process (STP) The system must handle both downgrade and upgrade of accounts through Straight Through Process (STP) without any manual intervention, executing continuous classification as part of the daily Day-End Process (EOD). The Core Structural Shift: The downgrading of borrower accounts as NPA and upgrading as standard asset is now a daily ongoing exercise executed during the day-end process, rather than an exercise carried out periodically as on the balance sheet date. 3. Term Loans: Daily SMA & NPA Stamping Mechanism As a result of moving to daily identification of NPA, the RBI issued vital clarifications vide circular dated 12.11.2021. Borrower accounts shall be flagged as overdue by banks as part of their day-end processes for the due date. Similarly, classification of borrower accounts as Special Mention Account (SMA) as well as NPA shall be done as part of the day-end process for the relevant date, and the SMA or NPA classification date shall be the calendar date for which the day-end process is run. Practical Demonstration of Daily Delinquency Trajectory Example: If the due date of a loan account is March 31, 2021, and full dues are not received before the bank runs the day-end process for this date, the date of overdue shall be March 31, 2021. SMA-1 Tagging: If it continues to remain overdue, the account gets tagged as SMA-1 upon running the day-end process on April 30, 2021 (i.e. upon completion of 30 days of continuous overdue). The classification date for SMA-1 is April 30, 2021. SMA-2 Tagging: If the account continues to remain overdue, it gets tagged as SMA-2 upon running the day-end process on May 30, 2021 (60 days continuous overdue). NPA Classification: If it continues to remain overdue further, it gets classified as NPA upon running the day-end process on June 29, 2021 (completion of 90 days). (Refer paragraph 11.97 of Guidance Note on Audit of Banks 2022 edition). Interest Overdues on Term Loans: Alignment with Monthly Rests Previously, an account was classified as NPA only if the interest due and charged during any quarter was not serviced fully within 90 days from the end of that quarter. To fully align with the 90 days delinquency norm and the requirement to apply interest at monthly rests, the instructions are modified: In case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days. (Refer paragraph 11.99(a) of Guidance Note 2022). Loan agreements must explicitly specify repayment due dates, frequency, principal-interest breakup, and SMA/NPA classification examples. When banks run interest application on staggered dates during the month, the 90-day norm must be tracked from the exact date of debit. 4. Working Capital (CC/OD) Accounts: The New ‘Out of Order’ Rules In Cash Credit / Overdraft accounts, an account was historically treated as ‘out of order’ only if there were no credits continuously for 90 days as on the balance sheet date, or if credits were insufficient to cover interest debited during that same period. The Three Statutory Grounds for ‘Out of Order’ Determination: The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, OR The outstanding balance is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days, OR The outstanding balance is less than the sanctioned limit/drawing power, but credits are not enough to cover the interest debited during the previous 90 days period. Critical Audit Implication: The reckoning of NPA in CC/OD accounts by artificial window-dressing or regularisation near the balance sheet date is no longer possible! (Refer paragraph 11.98 of Guidance Note 2022). Practical Comparative Contrast: Hitherto: If balance exceeded Drawing Power from 15th December, an inflow received on 31st March restored standard status. Similarly, zero credits during December, January, and February cured by an inflow in late March kept the account standard. Under Revised Norms: The account turns NPA by the end of the day on 14th March (being the end of the 90th day), and subsequent credit on 31st March cannot automatically undo NPA tagging unless full arrears are cleared. RBI Clarifications dated 15.2.2022 on Special Overdraft Products: Banks have introduced diverse OD products (e.g. Loans Against Property, personal guarantees) without stock statements, drawing power computations, or fund monitoring, where borrowers only service monthly interest. Doubts arose on whether revised norms applied. The RBI clarified: The definition of ‘out of order’ applies universally to all loan products offered as an overdraft facility, including non-business overdrafts and those entailing interest repayments as the only credits. The ‘previous 90 days period’ for determining ‘out of order’ status shall be inclusive of the day for which the day-end process is being run. 5. Securitisation Exposures & Agricultural Advances Securitisation Liquidity Facilities Under the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated 24.9.2021, securitisation redistributes credit risk into tradeable securities. Paragraph 55: The asset is to be treated as NPA if the amount of liquidity facility remains outstanding for more than 90 days in respect of a securitisation transaction. (Refer paragraph 11.99(d) of Guidance Note 2022). Agricultural Crop Loans Classification is based on crop duration determined by the State Level Bankers’ Committee (SLBC) in each State: Short duration crops: Overdue for two crop seasons. Long duration crops: Overdue for one crop season. Applies strictly to Farm Credit in Annexure-2 of Master Circular dated 1.10.2021. All other agricultural loans follow standard 90-day delinquency. (Refer paragraph 11.101 of Guidance Note 2022). 6. Upgradation of NPA Accounts: The Strict ‘Entire Arrears’ Mandate Due to the percolator effect, once one credit facility of a borrower is classified as NPA, all other facilities granted to the same borrower must also be treated as NPA, even if the other facilities are in standard or SMA status. Prohibition of Upgradation on Partial Recovery The RBI observed that lending institutions were upgrading NPAs to ‘standard’ upon receipt of only partial overdues or interest arrears. The circular dated 12.11.2021 and 15.2.2022 firmly mandates: “In case of borrowers having more than one credit facility from a lending institution, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities.” Upgradation is lawful ONLY if the account achieves “NO OVERDUES” status across all borrower exposures. It must NOT be confused with merely bringing overdues within 90 days! Multi-Facility Upgradation Example: If a borrower has a Term Loan classified as NPA and a Home Loan that was standard, the Home Loan is also classified as NPA. If the Term Loan irregularity is completely removed but the Home Loan slips into SMA, the borrower continues to be classified as NPA across all facilities until the Home Loan also moves from SMA to Standard with zero overdues. (Refer paragraph 11.135(i) and Page 396 of Guidance Note on Audit of Banks 2022). 7. Interest Moratorium, Appropriation Policy & Intangible Collateral Interest Accrual During Moratorium & COVID FITL Where interest repayment moratorium is granted under the Prudential Framework for Resolution of Stressed Assets (June 7, 2019), banks may recognize interest on accrual basis only for accounts continuing in ‘standard’ category. Unrealised Interest Reversal (Para 3.2): All unrealised accrued interest must be reversed when an account turns NPA. However, for loans with sanctioned moratorium, capitalized interest accrued during such moratorium need not be reversed. COVID FITL (March–August 2020): Unpaid FITL due by 31.3.2021 is not reversed, but classified as NPA under the normal 90-day delinquency rule without retrospective penalty. (Refer paragraph 11.185 of Guidance Note 2022). Changed Accounting Policy on NPA Recoveries Historically, banks appropriated recoveries in NPA accounts first towards principal to reduce Gross NPAs. Many banks have recently reversed this policy: recoveries (except in One Time Settlements or explicit agreements) are now appropriated towards interest and charges first, and balance towards principal. Auditors must examine quarterly results and accounting policies to ensure compliance. (Refer paragraph 11.131 of Guidance Note 2022). Schedule 9: Segregation of Intangible Collateral Advances against intangible securities (rights, licenses, authorities) must be culled out of secured advances and reflected as unsecured advances, with detailed Notes to Accounts disclosures. For NPAs, the segregated unsecured portion attracts substantially higher provisioning! (Refer paragraph 11.138 of Guidance Note 2022). CGTMSE & CRGFTLIH Guarantees When advances covered by CGTMSE or CRGFTLIH become non-performing, no provision is required on the guaranteed portion. The outstanding amount in excess of the guaranteed portion must be provided for under standard provisioning norms. (Refer Para 5.9.4 of Master Circular and paragraph 11.151 of Guidance Note 2022). 8. Conclusion & Audit Imperatives Verification of advances and application of IRAC norms continues to be the most critical operational domain in bank audits. While Central Statutory Auditors supervise institution-wide provisioning, branch auditors bear front-line responsibility for rigorous NPA identification and classification. The regulator’s insistence on daily system-driven reckoning and uncompromising upgradation standards emphasizes zero-tolerance for delinquency masking. Auditors must remain vigilant, study the annual ICAI Guidance Note on Audit of Banks, and never let declining divergence numbers lower their professional skepticism. “The changed 90-day norms both for classification and upgrading of NPA reiterated by the RBI through successive clarification circulars demonstrate the unyielding intent of the regulator in enforcing compliance.”

The Chartered Accountant • Journal of ICAI March 2022 • Vol. 70 • No. 9 • pp. 104–109 (Journal pp. 1144–1149) Taxation Key Issues in the Presumptive Taxation Scheme of Section 44AD SM CA. Shashank Ajay Mehta The author is a member of the Institute. He can be reached at shashankmehta1695@gmail.com and eboard@icai.in “This article attempts to highlight key issues which have surfaced over the period of time under the presumptive taxation scheme of section 44AD of the Income-tax Act, 1961. Though the presumptive taxation scheme was introduced to simplify the law for small business/profession, the legal position to certain aspects of these provisions are still subject to diversified views and interpretation. An attempt is made to explain these aspects with illustrations and after considering judicial precedents on the said matters. Read on…” Introduction Considerate about the hardship faced by small business classes in maintaining of books and other records, getting it audited and other compliances; section 44AD and section 44AE of the Income-tax Act, 1961 (“the Act”) were introduced vide Finance Act, 1994 w.e.f. 01.04.1994. Over these years, there have been several amendments in these presumptive provisions apart from new provisions being introduced. In this article, we shall be attempting to address certain prominent intricacies prevailing in section 44AD. Section 44AD provides that an eligible assessee who is engaged in an eligible business may opt for presumptive taxation and can declare a minimum of 8% of his turnover/gross receipt as income under chapter IV-D. Proviso to sub-section (1) provides for incentivized deemed profit rate of 6% in respect of that part of turnover/receipt which is received by specified banking channel or specified electronic mode. Imperative to understand that section 44AD does not operate independently and has interplay with other provisions like section 44AA (maintenance of accounts) and section 44AB (requirement to get accounts audited) which we shall be dealing herewith. I. Section 44AD applies only to ‘business’ or even to ‘profession’? Sub-section (6) specifically provides that a person carrying on any profession as referred to in section 44AA(1) cannot avail benefit of section 44AD. However, what if a person is carrying on a profession which is not covered by sub-section (1) of section 44AA, can such professional opt for section 44AD? The title of section 44AA reads as ‘Maintenance of accounts by certain persons carrying on profession or business’. Further, section 44AA(1) deals with certain specific profession whereas section 44AA(2) deals with ‘business’ or ‘profession’. Similarly, clause (a) of section 44AB specifically provides for threshold limit of ‘business’ to get accounts audited and clause (b) of section 44AB specifically provides for threshold limit of ‘profession’ to get accounts audited. Thus, it can be observed that the legislature in its wisdom has specifically used the term ‘business’ or ‘profession’ wherever required. Now, for the purpose of section 44AD the legislature has only used the term ‘business’; thus, in my opinion provisions of section 44AD shall be applicable only to an activity which qualifies to be called as ‘business’ and not for ‘profession’. Supreme Court Precedent: G.K. Choksi & Co. v. CIT [2007] 295 ITR 376 (SC) To support this contention, reference may also be drawn from the decision of Hon’ble Supreme Court in the case of G.K.Choksi & Co. v. CIT [2007] 295 ITR 376 (SC) wherein it was held that wherever Legislature intended that benefit of a particular provision should be for both business or profession, it has used the words ‘business or profession’ and wherever it intended to restrict benefit to either business or profession, it has used either word ‘business’ or word ‘profession’. The scope of the word ‘business’ as appearing in section 32(1)(iv) does not include in its word ‘profession’. The ratio laid down in this case may even apply to the present intricacy. Partner’s Remuneration and Interest from Partnership Firm Further, can a partner of a firm opt for section 44AD w.r.t. the remuneration and interest earned from the firm? Hon’ble High Court of Madras in the case of Anandkumar vs. ITO [2021] 430 ITR 391 (Madras HC) held that a partner of a firm in his individual capacity cannot be said to be carrying on business just on account of remuneration/interest received from such firm. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover/gross receipts of the assessee. Accordingly, a partner of a firm cannot opt for section 44AD for the remuneration/interest earned. II. Difference in actual income and presumed income On plain reading of sub-section (1) of section 44AD it can be ascertained that the section allows the eligible assessee to declare profit of 8% of the turnover/gross receipt or such higher amount as claimed to have been earned by such assessee. However, a vital question which is asked by the taxpayers is whether in case higher profit is earned (i.e., more than 8%) then is it mandatory to offer such a higher rate of profit only. Firstly, on interpretation of the phrase ‘a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee’ it can be ascertained that the legislature has left upon the assessee to determine and declare the deemed rate of percentage, subject to minimum of 8%. Further, the use of phrase ‘sum claimed to have been earned, shall be deemed to be the profits and gains of such business’ itself leaves some room for discretion upon the Assessee. Here, the Assessee has to determine the income by himself based on his estimation. This does not mean that he should maintain each and every minute detail so as to substantiate the rate of profit, if that was so then the very purpose of presumptive taxation gets defeated. By inserting the word ‘claimed’ the legislature has left the discretion/estimation upon the Assessee. Further, the word ‘presumptive’ as used in the title of the section itself suggests that income shall be determined based on ‘estimation’. Because it is not obligatory to adopt a profit rate of 8% only; hence, it is imperative that the businessmen, based on their understanding and prudence, offer the business income at the profit rate which they are of the view, their business might have reasonably generated (subject to minimum of 8%). If the legislature is entrusting the small businessmen with self-assessment of tax on presumptive basis and provides easement from complex compliance requirements, then it becomes a moral obligation upon such masses to act conscientiously and respect the law. Allahabad High Court: CIT vs. Nitin Soni [2012] 21 taxmann.com 447 (Allahabad) However, at this juncture it is pertinent to refer to the decision of Hon’ble High Court of Allahabad in the case of CIT vs. Nitin Soni [2012] 21 taxmann.com 447 (Allahabad) wherein while interpreting identical provisions of section 44AE it was held that the words ‘shall be deemed’ are the keys words and they are indicative of the legislative intent that the tax shall be chargeable on presumptive income. Such presumptive schemes are made just to complete the assessment without further probing. The presumed deemed income is taxable, such deemed income may be more or less than the actual income. Such an assessee is not required to maintain any account books. Thus, even if, its actual income in a given case, is more than income calculated as per presumptive scheme, cannot be taxed. Punjab & Haryana High Court: CIT Vs. Surinder Pal Anand [2010] 192 Taxman 264 Hon’ble Punjab & Haryana High Court in case of CIT Vs. Surinder Pal Anand [2010] 192 Taxman 264, held that once under a special provision, exemption from maintaining books is provided and rate of 8% of gross receipts itself is the basis for determining the taxable income then the assessee is under no obligation to explain individual entries of bank unless such entry had no nexus with the gross receipts. Chandigarh ITAT: Nandlal Popli Vs. DCIT [ITA no. 1161&1162/Chd/2013] In case of Nandlal Popli Vs. DCIT [ITA no. 1161&1162/Chd/2013], Hon’ble Chandigarh ITAT held that if 8% of gross receipts is ‘deemed’ income then remaining 92% is also ‘deemed’ expenditure for the purpose of taxation and the actual income/expenditure may be varying. Assessing officer cannot ask the assessee to prove the expenditure to the extent of 92%. III. Ineligibility of 5 years Sub-section (4) of section 44AD provides that if for any assessment year the Assessee has opted for provisions of section 44AD and if anytime in immediately succeeding 5 assessment year such assessee declares profit not in accordance with provisions of section 44AD; then in such circumstances, the said assessee will be ineligible to opt for the benefit of presumptive taxation of section 44AD for 5 Assessment Years immediately succeeding the year in which the Assessee decides not to declare profit in accordance with section 44AD. Example: Mr. RST claims to be taxed on presumptive basis under Section 44AD for AY 2019-20. For AY 2020-21 and 2021-22 also he offers income on the basis of presumptive taxation scheme. However, for AY 2022-23, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five Assent Years, i.e., from AY 2023-24 to 2027-28. In other words, once provisions of section 44AD are opted for an Assessment Year, the same shall be opted for subsequent 5 assessment years also; otherwise the said assessee will be ineligible to avail the benefit for 5 Assessment Years subsequent to the Assessment Year of default, moreover he would also be required to get his accounts audited pursuant to sub-section (5) of section 44AD. IV. Requirement of conducting audit Sub-section (5) of section 44AD was substituted vide Finance Act, 2016 w.e.f. AY 2017-18. However, before analyzing the present provisions of sub-section (5) of section 44AD it is important to understand the requirement for audit under the erstwhile law. Requirement for Audit under section 44AD prior to AY 2017-18 The erstwhile sub-section (5) reads as follows: “(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.” The erstwhile provision for audit was plain and clear and requirement for maintaining books of accounts and getting them audited arose only when both of these conditions were fulfilled: 1st condition: The assessee claims that his profit rate is lower than the rate of profit provided in sub-section (1) [i.e., 8%] 2nd condition: Such assessee’s total income exceeded the minimum amount not chargeable to tax [i.e., basic exemption limit]. Thus, for any given year assessee declared profit at lower rate than he was required to maintain books of accounts and get them audited for that particular Assessment Year only. From the subsequent year, the assessee can again opt for presumptive taxation and there was no ineligible criteria for re-opting section 44AD. Presently, similar provision exists in section sub-section (4) of section 44ADA where if profits are declared at the rate lower than that prescribed (i.e., 50%) then tax audit requirements is attracted. Requirement for Audit under section 44AD from AY 2017-18 The present sub-section (5) reads as follows: “(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.” As per the present provisions, an assessee is required to maintain books of accounts and get them audited and furnish audit report if both of the following conditions are fulfilled: 1st condition: Provisions of sub-section (4) are attracted (i.e., opting out of section 44AD). 2nd condition: Such assessee’s total income exceeded the minimum amount not chargeable to tax [i.e., basic exemption limit]. As already discussed before, the first consequence of not opting for section 44AD in any of the subsequent 5 assessment year from a particular base assessment year will attract ineligibility to opt for section 44AD for 5 Assessment Years immediately subsequent to the Assessment Year in which section 44AD was not opted. Now, the second consequence is that the Assessee will be required to maintain books of accounts, get them audited and furnish audit report (only if his total income exceeds the basic amount not chargeable to tax). Moreover, clause (e) of section 44AB also specifically provides that in case provisions of sub-section (4) are applicable and income exceeds the maximum amount which is not chargeable to income-tax then such assessee shall get accounts audited and furnish audit report. Thus, as per the existing provision, the question of getting accounts audited will arise only if provisions of sub-section (4) are attracted (subject to the total income of the assessee). Further, in the erstwhile provisions the requirement of maintaining books of accounts and audit was restricted only for the relevant Assessment Year in which profits lower than the prescribed rate was declared by an assessee and not for any other subsequent year. However, as per the existing provisions of sub-section (5) once provisions of sub-section (4) are applicable, maintaining of books and getting them audited applies. However, the moot issue is when the ineligibility provisions of sub-section (4) are attracted, is it applicable for subsequent 5 assessment year. By strict interpretation of sub-section (4) and sub-section (5) of section 44AD read with clause (e) of section 44AB it can be said that once provisions of sub-section (4) of section 44AD is applicable the assessee will be liable to maintain books of accounts, get them audited and furnish report for total of 6 assessment Years (i.e., the AY in which section 44AD is not opted + subsequent 5 assessment years). The above position is clarified by CBDT in one of the FAQs published on their official website. The same is reproduced below: “If a person adopts the presumptive taxation scheme but he opts out from the scheme in any of the subsequent five years, then what are the consequences?” “If a person opts for presumptive taxation scheme, then he is also required to follow the same scheme for the next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for the next 5 years. He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]” The use of the word ‘from’ instead of ‘for’ in the answer to the above FAQ clearly suggests that the requirement of maintaining books of accounts and audit applies for a total of 6 assessment years. This provision is somewhat more stringent in nature and needs to be reconsidered because, a small businessman cannot be expected to bear the cost of audit and other compliances even for the future assessment years. At the most he may be considered ineligible for availing the benefit of presumptive taxation for 5 years but getting books of accounts audited for these 5 years may prove to be burdensome. As per the erstwhile provisions the requirement of audit was only dependent upon one factor i.e., whether the profits are declared at a lower than the prescribed profit rate. Whereas, as per the existing provisions one must bear in mind following factors while determinate applicability of audit: Whether assessee had opted for section 44AD in the preceding Assessment years? If yes, then for relevant assessment year whether he desires to opt for section 44AD or he desires to opt out? [if opts to stay under section 44AD – no requirement for audit; if desires to opt out- audit applicable] Whether the relevant Assessment Years is falling within the time span of ineligible term of 5 years – [If yes, Audit applicable]. Can there be a scenario where assessee declares profit lower than the prescribed profit rate but still is not liable to do audit? Yes, in the following scenarios it is possible that assessee may declare lower profit rate but still is not required to conduct audit. Scenario No.1 It is the first year of business, turnover is up to Rs. 1 crore (limit of audit as per section 44AB); assessee maintains proper books of accounts and declare lower profit than 8%. In this scenario, provisions of sub-section (4) are not attracted because it is the first year and there is no preceding year in which section 44AD might have opted so as to opt out in the relevant assessment year. Scenario No. 2 Business of the assessee is continuing for several years, however in each of these preceding years the assessee has either gotten his accounts audited u/s. 44AB or has maintained proper books of accounts but was not subject to audit (say, turnover was upto Rs. 1 crore). In this scenario also if assessee declares profit at the lower rate (by duly maintaining books of accounts), he still won’t be attracted by provisions of sub-section (4) because he had never opted in for section 44AD so as to opt out of it. Accordingly, even if lower profit is declared, audit as per clause (e) of section 44AB read with sub-section (5) of section 44AD will not be attracted. Pertinent to mention that compliance of maintaining books of accounts as per the provisions of section 44AA needs to be kept in mind in both of the above scenarios. Conclusion Though the presumptive taxation scheme was introduced to simplify the law for small business/profession. However, the legal position to certain aspects of these sections is still subject to multiple views and interpretation. A layman who wishes to file his income tax return by himself without professional help cannot be expected to know these intricacies and rigors of presumptive taxation scheme, especially the ineligibility and audit requirement as provided in sub-section (4) and (5) of section 44AD. There is certainly a need for further clarifications and easement with regards to certain aspects of these presumptive taxation schemes. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) March 2022 Issue • Vol. 70 • No. 9 • pp. 104–109 (Journal pp. 1144–1149) Author Contact: shashankmehta1695@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI February 2022 • Vol. 70 • No. 8 • pp. 60–63 (Journal pp. 968–971) DIRECT TAXATION • SUCCESSION & ESTATE PLANNING Taxation Aspects of Income of Deceased Person Sonal Sarda The author is an expert in the area of Taxation. She can be reached at snl.sarda@rediffmail.com and eboard@icai.in. ⚖️ Incidence of Tax on Succession & Inheritance There is no exemption from tax on death of a person. Tax planning is required even in cases of succession. This undoubtedly expands the arena of tax professionals and creates new horizons. Assessment of Income and derivation of tax liability in case of death of an individual has constantly been a subject of discussion. Drafting of wills and testamentary documents has been a major avenue for practicing professionals. However, there has been a long-drawn disputes and debates regarding the incidence of taxation of income and tax liability of a deceased person. Under the Income-tax Act, 1961, the relevant sections are 159, 161, 162 and 167. Read on… 1. Who is a Legal Representative? (Section 159 & Section 2(29)) Section 159 of the Income-tax Act, 1961, titled ‘Legal Representatives’, is the primary section that encompasses the statutory liability of a legal representative of a deceased person. The provision of the said section enables an assessment being made and tax recovered in respect of the income of a natural assessee who was alive during a previous year but died either before assessment proceedings were initiated or before they were completed. It enumerates the substantive rights and liabilities of a legal representative. Extent of Legal Representative’s Liability The liability of a legal representative is limited strictly to the extent to which the estate left by the deceased is capable of meeting the tax liability, subject to the specific contingencies mentioned in sub-sections (4) and (5) of Section 159. To appreciate the scope of the term ‘Legal Representative’, Section 2(29) of the Income-tax Act, 1961 provides that: “legal representative has the meaning assigned to it in clause (11) of section 2 of the Code of Civil Procedure, 1908.” Section 2(11) of the Code of Civil Procedure, 1908: “Legal representative means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued.” Another term often used alongside legal representative is ‘Legatee’. Legatees are persons or entities designated within a decedent’s will to receive any gift (a legacy) from the estate—in other words, the beneficiaries under the will. 2. ‘Legal Heir’ versus ‘Legal Representative’: Judicial Pronouncements A recurring question in estate administration is whether the terms ‘legal heir’ and ‘legal representative’ are one and the same. Judicial authorities have established that the concept of a legal representative is much broader: A. Supreme Court of India: Custodian of Branches of BANCO National Ultramarino v. Nalini Bai Naique (AIR 1989 SC 1589) The Supreme Court held that: ‘A “legal representative” as defined in Civil Procedure Code means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in representative character the person on whom the estate devolves on the death of the party so suing or sued. The definition is inclusive in character and its scope is wide; it is not confined to legal heirs only. Instead, it stipulates a person who may or may not be an heir competent to inherit the property of the deceased, but who represents the estate of the deceased person. It includes heirs as well as persons who represent the estate even without title, either as executors or administrators in possession of the estate of the deceased. All such persons would be covered by the expression “legal representative”.’ B. Rajasthan High Court: Smt Kamlawati Gupta vs Kanwari Lal & Ors (21 July, 2011) The High Court held that: ‘The term is inclusive of not only the heirs but also intermeddlers of the estate of the deceased as well as a person who in law represents the estate of the deceased. It is not necessarily confined to heirs alone. The executor, administrators, assigns or persons acquiring interest by devolution under Order 22 Rule 10 or legatee under a will, are legal representatives. Under the personal law of Hindu Succession Act also, not only class one heirs under Section 8 read with Schedule of the Act but also the executor of the will of the deceased testator are legal representatives within the meaning of Section 2(11) of the CPC.’ Crucial Principle: Any person who obtains the legacy (whether a legal heir or not) is termed a Legal Representative. A Legal Representative may or may not be a legal heir of the deceased. 3. Testate versus Intestate Succession & Role of Executor (Section 168) Testate Succession Refers to a situation where the deceased has left a valid will. The will usually names an executor. If no executor is appointed in the will, beneficiaries apply to the Court for Letters of Administration, and the Court appoints an administrator until probate distribution. Intestate Succession Indicates the absence of a will by the deceased. The estate devolves upon legal heirs as per personal succession laws (e.g. Hindu Succession Act, Indian Succession Act). Beneficiaries file for Letters of Administration to administer the estate. Assessment of Estate in Hands of Executor: Section 168 Section 168 of the Income-tax Act, 1961 provides that the income accruing to the estate of a deceased person shall be chargeable to tax in the hands of the executor. Separate assessments shall be made on the total income of each completed previous year or part thereof included in the period from the date of death to the date of complete distribution to the beneficiaries according to their several interests. Partial Distribution: In case of partial distribution, the income distributed shall be excluded from the estate and made taxable in the hands of the legatee. Continuation of Assessment: Under Section 168(3), the executor continues to be assessed until the estate is distributed among the beneficiaries according to their several interests [Navneet Lal Sakarlal vs. CIT (1992) 193 ITR 16 (SC)]. Distinct PAN: The executor must be assessed in respect of the income of the estate under a separate PAN, completely distinct from his personal PAN. Assessment Status: The executor is assessed in the status of an “Individual”. If there are multiple executors, they are assessed as an Association of Persons (AOP). AOP Status is Statistical: CIT vs. G. B. J. Seth and Anr (1982) 133 ITR 192 (MP) The Madhya Pradesh High Court held that though assessment is on the executors, for all practical purposes it is the assessment of the deceased. The status of AOP is merely for statistical purposes; notwithstanding the AOP status, the executors are fully entitled to claim set-off of brought-forward business losses incurred by the deceased prior to his death. 4. Personal Liability of Legal Representative & Section 167 of Indian Succession Act Personal Liability under Section 159(4) of the Income-tax Act Section 159(4) states that where a legal representative creates a charge on, disposes of, or parts with any asset of the estate of the deceased while the tax liability on the income of the deceased remains undischarged, the legal representative shall be personally liable for any tax payable in his capacity as legal representative. However, such personal liability is strictly capped at the value of the assets charged, sold, or parted with. Encumbered Bequests: Section 167 of the Indian Succession Act, 1925 Section 167 provides that where property specifically bequeathed is subject at the death of the testator to any pledge, lien, or incumbrance created by the testator himself, then the legal representative/legatee, if he accepts the bequest, must accept it subject to such pledge or incumbrance, and is liable to make good the amount of such encumbrance. The liability of any legal representative becomes effective only upon the acceptance of the asset inherited through the will and remains limited to the value of that asset. A general direction in the will for payment of the testator’s debts does not imply a contrary intention. Periodical payments like land revenue or rent do not constitute incumbrances under this section. Illustration (i): A bequeaths to B the diamond ring given to him by C. At A’s death, the ring is held in pawn by D to whom it had been pledged by A. It is the duty of A’s executor, if the state of the testator’s assets will allow them, to allow B to redeem the ring. Illustration (ii): A bequeaths to B a zamindari which at A’s death is subject to a mortgage for Rs. 10,000, and interest of Rs. 1,000 is due at A’s death. B, if he accepts the bequest, accepts it subject to this charge, and is liable, as between himself and A’s estate, to pay the sum of Rs. 11,000 thus due. 5. Assessment Proceedings & Validity of Section 148 Reassessment Notice In case a person dies during the pendency of assessment proceedings, the proceedings can be continued against the legal representatives under Section 159(2)(a). Furthermore, any proceedings that could have been initiated against the deceased while alive can be lawfully initiated against the legal representatives under Section 159(2)(b). Reassessment Notice Issued to a Deceased Person is Void Ab Initio Gujarat High Court: Bipinbhai Bachubhai Kataria vs. ITO (Special Civil Application No. 7850 of 2019) “In view of the provisions of section 159(2)(b) of the Act, it is permissible for the Assessing Officer to issue a fresh notice under section 148 of the Act against the legal representative, provided that the same is not barred by limitation; he, however, cannot continue the proceedings on the basis of an invalid notice issued under section 148 of the Act to the dead assessee.” A reassessment notice issued in the name of a deceased individual is a nullity in law, and participation by the legal representative does not cure this jurisdictional defect. 6. Capital Gains Exemptions & Carry Forward of Losses (Section 78(2)) No Capital Gains on Will or Intestate Transmission Under Section 47(iii) of the Income-tax Act, 1961, any transfer of a capital asset under a gift or will is not regarded as a ‘transfer’; hence, no capital gains arise. Similarly, in intestate succession (death without a will), the devolution of assets is not a transfer but a transmission by operation of law without consideration. Hence, no capital gains arise in either testate or intestate devolution. Recipient Tax Exemption: Section 56(2)(x) Assets received on inheritance represent capital receipts. While Section 56(2)(x) taxes property received without consideration, the proviso explicitly exempts property received under a will or by way of inheritance. Under Section 49(1), the cost of acquisition to the legatee shall be the cost to the previous owner, and under Section 2(42A), the period of holding includes the holding period of the previous owner. Carry Forward and Set-Off of Losses: Section 78(2) Section 78(2) of the Income-tax Act, 1961 explicitly provides that where a person carrying on any business or profession has been succeeded by another person, the successor shall not be entitled to carry forward and set off the accumulated business loss of the predecessor, except in the case of succession by inheritance. Therefore, a legal heir who succeeds to the business by inheritance is lawfully entitled to carry forward and set off the unabsorbed business losses of the deceased predecessor. However, whether this statutory privilege extends to non-heir legatees under a will remains an ongoing area of judicial concern. 7. Conclusion & Key Practice Takeaways The primary professional takeaways in estate taxation include: Recognizing the critical legal distinction between a ‘legal heir’ (governed by personal succession laws) and a ‘legal representative’ (broadly encompassing intermeddlers and executors under Section 2(11) of the CPC). Differentiating the dual assessments required upon death: Section 159 for income earned by the deceased up to the date of death, and Section 168 for income accruing to the estate thereafter under a separate PAN in the hands of the executor. Establishing that the personal liability of a legal representative is strictly bounded by the value of the assets inherited or alienated. Ensuring that reassessment notices under Section 148 are issued strictly in the name of the legal representative and never to the deceased person. “Tax liability survives mortality. Diligent mastery of Sections 159, 168, 47, and 78(2) empowers tax practitioners to protect the estate, secure valid assessments, and ensure seamless inter-generational wealth transmission.”

The Chartered Accountant • Journal of ICAI February 2022 • Vol. 70 • No. 8 • pp. 50–56 (Journal pp. 958–964) Taxation Anti - Abuse Tax Provisions on Primary Acquisitions UP CA. Uttam Padival M. The author is a member of the Institute. He can be reached at uttampadival@gmail.com and eboard@icai.in “Section 56(2)(x) is an anti-abuse provision which penalizes by levying tax on acquisition for inadequate consideration of inter-alia, shares. Some argue that application of section 56(2)(x) to cases where shares are acquired through fresh allotments would lead to absurd conclusions. This article highlights that, it is not the provision, but the improper application of the provision which results in absurd conclusions. Read on…” Basics Shares can be acquired through two modes – Primary and Secondary. Primary Acquisition is when shares are acquired on allotment by the company. Hence, Primary Acquisition is also termed as Acquisition Against Allotment (“AAA”). In the case of AAA, new shares are allotted by the company to the shareholders. The shareholder, as consideration, would pay the allotment price to the company. Consequently, the net assets of the company would increase to the extent of the total consideration received on account of the fresh allotment. Correspondingly, there would also be an increase in the total number of shares outstanding. Secondary Acquisition is when a person acquires, from an existing shareholder, shares which have already been allotted by the company. Hence, Secondary Acquisition is also termed as Acquisition Through Transfer (“ATT”). Existing shares when exchanged between parties results in ATT. ATTs do not impact either the net assets of the company or the number of shares outstanding. The only impact of ATT on the company would be the change in the shareholder from transferor to the transferee. Figure 1: Share Acquisition Types Primary / AAA (Acquisition Against Allotment) Issuing Company ➔ [New Shares] ➔ Shareholder / Acquirer Shareholder ➔ [Allotment Consideration] ➔ Issuing Company Impact: Net assets increase; shares outstanding increase. Secondary / ATT (Acquisition Through Transfer) Transferor (Existing Shareholder) ➔ [Existing Shares] ➔ Transferee (Acquirer) Transferee ➔ [Transfer Consideration] ➔ Transferor Impact: No impact on company balance sheet or shares outstanding. Table 1 : Difference between Primary and Secondary Acquisitions Differentiator Primary Acquisition / AAA Secondary Acquisition / ATT Existence of shares prior to the transaction No Yes Recipient of consideration of the transaction Issuing Company Transferee Impact on Issuing Company’s Asset Position Increase No impact Impact on the shares outstanding Increase No impact Anti-Abuse Tax provisions on Share Acquisitions If an asset is exchanged at a price lower than the minimum acceptable rational price, then there is a high probability that the transaction price is vitiated. In the case of Immovables, the price determined by the stamp duty authorities, can be considered as such minimum acceptable rational price. Similarly, in the case of shares, the minimum acceptable rational price is the Book Value per share. No rational person would, in normal circumstances, be willing to sell his shares at a price below its Book Value. Hence, if additional tax is levied on share transacted at less than the Book Value, it would work as an anti-abuse provision dissuading misreporting of the transaction price. The Indian Income-tax Act, 1961 (“Act”; reference to any statutory provision, unless otherwise mentioned, refers to the statutory provisions of the Indian Income-tax Act, 1961) has promulgated certain anti-abuse provisions to check acquisition of shares at prices below the book value. In 2009, section 56(2)(vii) was introduced to tax share acquisitions by individuals and HUFs for inadequate consideration. Subsequently, in the year 2010, section 56(2)(via), widened the scope to cover share acquisitions by partnership firms and closely held companies. In the year 2017, to give complete coverage, section 56(2)(x) was introduced, which provides for taxing share acquisitions for inadequate consideration by all forms of persons. The aforementioned anti-abuse tax provisions provide that, if the transaction price is less than the Adjusted Book Value (“ABV”), difference between ABV and the transaction price will be taxable in the hands of the acquirer. Alternatively put, if the transaction price is higher than ABV, no tax u/s 56(2)(x) is attracted. Hence, these anti-abuse provisions, by prescribing the floor-price, monitor and tax such share acquisitions which are done below the ABV. The methodology for computing the ABV is contained in Rule 11UA of Income Tax Rules, 1962 which have been borrowed from the erstwhile provisions relating to Gift Tax and Wealth Tax. While applicability of section 56(2)(x) on secondary acquisitions has been well-accepted, there has always been debate as to whether section 56(2)(x) is attracted on allotment of shares (primary acquisitions – AAA transactions). In order to clear the air, CBDT issued a circular1 clarifying that no anti-abuse tax is attracted on primary acquisitions. However, within just a week, owing to unintended political controversy, this circular was retracted2 citing the sub-judice status of the matter. There are two judgements3 by the Bombay bench of the Mumbai Income Tax Tribunal, which have held that section 56(2)(x) is equally applicable to primary acquisitions too. Those who advocate applicability of section 56(2)(x) on primary transactions, put forward a simple but elegant argument - Sections 56(2)(x) is applicable on receipt of shares for inadequate consideration. In primary acquisitions too, since the allottee receives shares, if the consideration is inadequate, why should it not attract section 56(2)(x)? Hypothetical Example: How Non-Applicability on Primary Acquisitions Leads to Tax Evasion The promoter subscribed to the entire share capital being 1 Lakh shares of INR 10/- each of a newly incorporated company which was used to acquire an immovable property at fair market value of, say, INR 1 million. Couple of years later, let us assume that the fair market value of the immovable has appreciated to INR 5 million. Thus, the ABV per share would be INR 50/- per share. For avoiding tax, if either the immovable property or the shares are sold for less than adequate consideration, the acquirer will be liable for tax on inadequate consideration by virtue of section 56(2)(x). To evade this, the company allots 2 Lakh new shares at face value for INR 10/- to the acquirer. Now the ABV per share would drop from INR 50/- per share to INR 23.33/- per share. Subsequently, the promoter sells his shareholding of 1 lakh shares at INR 23.33/- per share to the acquirer. Consequently, the right in the immovable property whose fair market value was INR 5 million, got indirectly transferred from the promoter to the acquirer at INR 2.33 million. Since, the transfer of the shares from the promoter to the acquirer is at ABV, the anti-abuse provision is not attracted. This evasion would be possible if section 56(2)(x) is not applied on share acquisitions through allotments. As explained later, these kinds of tax avoidance acrobatics will be dissuaded, if 56(2)(x) is applicable for secondary as well as primary acquisitions. Arguments against applying Anti - Abuse tax provisions on Primary Acquisitions The detractors of applying section 56(2)(x) to primary acquisitions have the following cogent arguments: Primary transactions are not transfers: Non-Transfer Argument; Since shares are chose4-in-action which come into existence on allotment, how can they be termed as property, which is the primary ingredient of section 56(2)(x)?: Non-Existence Argument; If primary transactions are subjugated to taxation, then it would lead to absurdity in case of primary acquisitions as part of bonus allotment or rights allotment: Illogical Ramification Argument. While argument against application of section 56(2)(x) to primary acquisitions, on the face of it, appear to be realistic, on a deeper analysis, application of the anti-abuse tax provision on primary acquisitions, not only fulfils the anti-abuse objective but at the same time does not impinge genuine business transactions as explained further. Arguments against Non-Transfer argument Agreed that primary acquisitions are not a result of transfers. However, transfer is not one of the essential ingredients for section 56(2)(x). The taxing provision is applicable when a person receives the shares. How the shares were acquired, through primary acquisition or through secondary acquisition, is not the lookout of section 56(2)(x). It is a settled matter that when words of the statute are unambiguous, one is not supposed to go beyond the literal interpretation. Further, by applying contemporaneous exposition, we learn that with the intent to dissuade acquisition of shares for inadequate consideration, the legislature has introduced section 56(2)(x) as an anti-abuse provision. Since the mischief sought to be remedied is acquisition and not transfer, section 56(2)(x) is equally applicable to primary acquisitions as it is to secondary acquisitions. Arguments against Non-Existence Argument Non-existence arguers contend that Primary Acquisitions are a result of allotment. Since shares do not exist prior to allotment, how can one be presumed to have received something which did not exist? Hence, provisions of section 56(2)(x), should not be applicable for shares which have been acquired through allotments. The Supreme Court5 has held that, in company law the word “allotment” means appropriation out of previously unappropriated capital of a company, of a certain number of shares, to a person and till such allotment, the shares do not exist as such. It is only on allotment that the shares come into existence and in every case the words “allotment of shares” have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. From the above judgement, it can be inferred that shares do not exist prior to allotment. However, shares come into existence on allotment. The Non-Existence Argument would hold good against transfers, in which case, it can be argued well that the shares cannot be said to be transferred on their allotment, since they came to existence on allotment. However, section 56(2)(x) deals with receipts and not transfers and hence, there is no dispute about primary-acquisitions resulting in receipt of the shares. Arguments against Illogical Ramification Argument The following hypothetical example illustrates how applicability of section 56(2)(x) on primary acquisitions can purportedly lead to taxation and frustrate genuine business transactions. A company has an ABV of INR 12 million. The Company has 2 promoters holding 1 share each. Because of the small number of shares, the shares have a high per share ABV – INR 6 million per share. The high per share value, make the shares illiquid. Hence, the company capitalizes the profits and issues Bonus shares. No monetary transaction has taken place on allotment of bonus shares. If we force section 56(2)(x) to the Primary Acquisition of Bonus shares, it would be akin to a bank charging a customer for exchanging one INR 2000/- denominated note for twenty INR 100/- denominated notes. However, the above anomaly is a result of improper application of the anti-abuse provisions. To recollect the anti-abuse provision, Section 56(2)(x) provides for taxation of the difference between ABV and Consideration. A proper understanding of the above two terms is very important for proper application of the anti-abuse provisions. Proper Application: Understanding ABV and Consideration ABV (Adjusted Book Value) The basic question is, at what point of time should the ABV, be computed: Pre-Acquisition or Post-Acquisition? In the case of Secondary Acquisitions, as inferred from Table 1, there would be no impact on the balance sheet of the company and hence the pre-acquisition and post-acquisition ABV would be the same. However, in case of Primary Acquisitions, both the total ABV of the company as well as the number of shares would increase post-allotment. Hence, for the purpose of section 56(2)(x) should the ABV be computed pre-allotment or post-allotment? The answer lies in Rule 11U(j) of the Income Tax Rules, 1962 which provides that ABV of the shares needs to be computed at the time of receipt of the shares i.e., post-allotment. Consideration Consideration for the purpose of section 56(2)(x) is that which is paid by the acquirer for acquiring the shares. Accordingly, the allotment price paid by the acquirer for acquiring shares would be the consideration for the purpose of 56(2)(x). Additionally, there is one more element of consideration in primary acquisitions, which is not applicable in the case of secondary acquisitions. When new shares are allotted, depending upon the allotment price, the ABV-per share will increase or decrease as illustrated in the following table: Table 2 : Impact of allotment on ABV-per share Notation Particulars Basis / Formula Case 1 Case 2 Case 3 A Pre-Allotment Total ABV Assumption 2,000.00 2,000.00 2,000.00 B Total No. of Shares Pre-Allotment Assumption 100 100 100 C Pre-Allotment ABV per share A ÷ B 20.00 20.00 20.00 D No. of new shares allotted Assumption 50 50 50 E Allotment Price per share Assumption 15.00 20.00 25.00 F Total amount received by the Company on Allotment D × E 750.00 1,000.00 1,250.00 G Post-Allotment Total ABV A + F 2,750.00 3,000.00 3,250.00 H Total No. of Shares Post-Allotment B + D 150 150 150 I Post-Allotment ABV per share G ÷ H 18.33 20.00 21.67 J Increase / (Reduction) in ABV per share on account of allotment I - C (1.67) - 1.67 As can be observed from the above table, if the allotment price per share (Notation, “E”) is more than the pre-allotment ABV per-share (Notation, “C”), it results in an increase in the ABV per-share, post allotment (Notation, “I”) and vice-versa. This increase or reduction in the ABV-per share as a result of a new allotment is nothing but the gain or loss experienced by the existing shareholders for their decision to allot shares at the allotment price. If anything is paid by a person other than the acquirer, then such payment would not form part of the consideration for the purpose of section 56(2)(x). Hence, if the existing shareholder incurs loss in the ABV-per share as a result of the new allotment, but no shares are acquired by the existing shareholder, then such loss would not form part of the consideration for the purpose of section 56(2)(x). In other words, such amount of loss in ABV per-share borne by an existing shareholder to the extent of the new shares acquired, would form part of the 56(2)(x) consideration. Two Components of Consideration in Primary Acquisition: (A) Allotment price per share × No. of Shares Acquired (B) Loss in ABV per share × No. of Shares Acquired If the above peculiarities of ABV and Consideration in the case of primary acquisitions are properly understood and consistently applied, section 56(2)(x) would not result in taxation of genuine business transaction being bonus allotments and proportionate rights allotments. At the same time, Section 56(2)(x) would not leave untaxed such tax evasive manipulations through disproportionate rights allotments and allotments through preferential or private placements at disproportionately low allotment prices, as illustrated in the following table: Table 3 : Impact of 56(2)(x) on various forms of Primary Acquisitions Notation Particulars Basis / Formula Bonus Allotment Rights offer accepted wholly Rights offer accepted partially Preferential / Private Placement A Pre-Allotment Total ABV Assumption 1,000.00 1,000.00 1,000.00 1,000.00 B No. of Shares held by X, pre-allotment Assumption 20 20 20 20 C No. of Shares held by Y, pre-allotment Assumption 30 30 30 30 D No. of Shares held by Z, pre-allotment Assumption - - - - E Total No. of Shares Pre-Allotment B + C + D 50 50 50 50 F Pre-Allotment ABV per share A ÷ E 20.00 20.00 20.00 20.00 G No. of shares allotted to X Assumption 2 2 - - H No. of new shares allotted to Y Assumption 3 3 3 - I No. of new shares allotted to Z Assumption - - - 5 J Total No. of new shares allotted G + H + I 5 5 3 5 K Allotment Price per share Assumption - 10.00 10.00 10.00 L Amount paid by X against new allotment G × K - 20.00 - - M Amount paid by Y against new allotment H × K - 30.00 30.00 - N Amount paid by Z against new allotment I × K - - - 50.00 O Total amount received against new allotment L + M + N - 50.00 30.00 50.00 P Post-Allotment ABV A + O 1,000.00 1,050.00 1,030.00 1,050.00 Q No. of Shares held by X, post-allotment B + G 22 22 20 20 R No. of Shares held by Y, post-allotment C + H 33 33 33 30 S No. of Shares held by Z, post-allotment D + I - - - 5 T Total No. of Shares Post-Allotment Q + R + S 55 55 53 55 U Post-Allotment ABV per share P ÷ T 18.18 19.09 19.43 19.09 V Fall in ABV per share due to allotment of new shares F - U 1.82 0.91 0.57 0.91 W ABV loss borne by X for acquiring new shares B × V 36.36 18.18 11.32 18.18 X ABV loss borne by Y for acquiring new shares C × V 54.55 27.27 16.98 27.27 Y ABV loss borne by Z for acquiring new shares D × V NA NA NA NA Z Total Consideration from X for acquisition of new shares L + W 36.36 38.18 - - AA Total Consideration from Y for acquisition of new shares M + X 54.55 57.27 46.98 - AB Total Consideration from Z for acquisition of new shares N + Y - - - 50.00 AC Post-Allotment ABV of new shares acquired by X G × U 36.36 - - - AD Post-Allotment ABV of new shares acquired by Y H × U 54.55 57.27 58.30 - AE Post-Allotment ABV of new shares acquired by Z I × U - - - 95.45 AF Amount taxable u/s 56(2)(x) for X AC - Z - - - - AG Amount taxable u/s 56(2)(x) for Y AD - AA - - 11.32 - AH Amount taxable u/s 56(2)(x) for Z AE - AB - - - 45.45 Conclusion Thus, we can conclude that section 56(2)(x) would equally be applicable to secondary as well as primary acquisitions. However, in the case of primary acquisition, it would have tax implication, if and only if, the allotment is disproportionate to the existing shareholding. References & Footnotes: CBDT Circular No. 10/2018 dated 31.12.2018 CBDT Circular No. 02/2019 dated 04.01.2019 Sudhir Menon (HUF) Vs. ACIT dated 12.03.2014 and ACIT & Another Vs. Subhodh Menon & Another dated 07.12.2018 (ITAT Mumbai Bench) French for “thing” (chose-in-action) Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Ltd. 1964 (3) SCR 698 (Supreme Court of India) The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) February 2022 Issue • Vol. 70 • No. 8 • pp. 50–56 (Journal pp. 958–964) Author Contact: uttampadival@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI February 2022 • Vol. 70 • No. 8 • pp. 67–70 (Journal pp. 975–978) International Taxation Selection of Overseas AE as Tested Party RP CA. Rajat Sambhaji Powar The author is a member of the Institute. He can be reached at rajatpowar00@gmail.com and eboard@icai.in “Selection of the Tested Party is one of the most crucial steps in the transfer pricing analysis and forms the base for the benchmarking analysis. Selection of Tested Party directly affects the selection of the ‘Most Appropriate Method’ and the comparable. Hence, great caution has to be exercised while selecting the tested party as the choice of a wrong tested party may distort the benchmarking analysis. The Indian Transfer Pricing Regulations do not provide any guidance in respect of selection of tested party. However, as per Organisation for Economic Co-operation and Development (OECD) and UN Transfer Pricing guidelines, broadly speaking, the least complex entity for which the most reliable data is available, and which requires fewer adjustments is to be selected as tested party. In many cases, selection of overseas AE as a Tested Party has been questioned by the tax authorities despite meeting the required conditionalities. Read on...” The Indian Transfer Pricing Provisions The Indian Income Tax law is silent on the aspect of selection of overseas AE as tested party. OECD TP Guidelines1 Paragraph 3.18: “...The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e., it will most often be the one that has the less complex functional analysis.” UN Transfer Pricing Guideline2 “Paragraph B3.5.1.2: The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparing the results of similar independent transactions is available. Either the local or the foreign party may be the tested party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is available to the tax administration in order for the latter to be able to verify the proper selection of the tested party and the accurate application of the transfer pricing method.” UN Transfer Pricing Guidelines (Indian-Country Practice) “Paragraph 3.2.3: …..In most cases, the Indian entity is taken as the tested party and Indian comparables are used. If the foreign associated enterprise is the less complex entity, it is taken as the tested party.” Hence, it can be inferred from the above international guidelines that a selection of overseas AE as a tested party is an internationally accepted practice. However, the Indian judiciary appears to be divided on this point. Cases where Overseas AE was not selected as a Tested Party Onward Technologies Limited vs. DCIT3 “The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) for ascertaining as to whether profit A is at arm’s length vis-a-vis the profit B. If it is not, then the transfer pricing adjustment is made having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus, the calculation of profit B may undergo change with the varying set of comparable cases. However, in so far as calculation of profit A is concerned, there cannot be any dispute as the same has to necessarily result only from the transaction between two or more associated enterprises, as is the mandate of sections 92 read with 92B in juxtaposition to rule 10B. The natural corollary which, thus, follows is that under no situation can the calculation of ‘profit A’ be substituted with anything other than from the international transaction, that is, a transaction between the associated enterprises. So, it is the profit actually realized by the Indian assessee from the transaction with its overseas AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its Overseas AE with the profit realized by the Overseas AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its Overseas AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its Overseas AE. It can neither call for also roping in and taxing in India the margin from the activities undertaken by the Overseas AE nor can it curtail the profit arising out of transaction between the Indian and Overseas AE at arm’s length. The contention of the Id. AR in considering the profit of the Overseas AE as ‘profit A’ for the purposes of comparison with profit of comparables, being ‘profit B’, to determine the ALP of transaction between the assessee and its Overseas AE, misses the wood from the tree making the substantive section 92 otiose arid the definition of ‘internal transaction’ u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention, is therefore, repelled.” Other decisions which relied on the judgment of Onward Technologies Limited v. DCIT (Supra) are: Bekaert Industries (Pvt.) Ltd. v DCIT4 CarraroIndia(Pvt.) Ltd.v. DCIT5 AT & S India Pvt. Ltd.6 The essence of the judgments can be said to be as follows: As per the Indian Transfer Pricing law, for determining ALP of international transaction it is the profit of the Indian AE which is to be compared with the profit of comparable and in no case can this be replaced by the profit which the Overseas AE earns from its ultimate customer. The term Enterprise used in Rule 10B refers to Indian enterprises whose profits are to be benchmarked. If the overseas AE is selected as a Tested Party and profits of the overseas AE are considered to be more than ALP than as a corollary, it would result in the Indian Entity earning less profit than ALP and hence the object of the TP exercise will not be achieved. Cases where Overseas AE was selected as a Tested Party 1. Ranbaxy Laboratories Ltd. v. Additional CIT, Range 15, New Delhi7 “58… The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be a local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that the least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take overseas AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer.” The above view has been followed in the following decisions: Mastek Limited v. Addl. CIT8 ITO vs. WNS Global Services Pvt. Ltd.9 Development Consultants (P.) Ltd. v. Dy. CIT10 TNT India Pvt. Ltd. vs. ACIT11 Almatis Alumina Pvt. Ltd12 Thus, as can be seen from the above judgments that various tribunals have allowed selection of the overseas AE as a tested party where the overseas AE was the least complex entity. The OECD/UN Transfer Pricing guidelines have been accepted in this regard. It is emphasised that “tested party” is the least complex entity for which the most reliable data is available and for which fewer adjustments are required. Analysis Sec 92, which forms the basis of the Transfer Pricing Regulation under the Income-tax Act, 1961, provides that ‘Any income arising from an international transaction shall be computed having regard to the arm’s length price’. Sec 92B specifies that international transaction must be transaction between two AEs, at least one of which is a non-resident. Further, Sec 92A which defines AE also does not make any distinction between an Indian AE and an Overseas AE. Thus, it can be said that Indian Income Tax law does not have any bar against selection of overseas AE as a Tested Party. Selection of tested party is a very important step in functional analysis. After taking into consideration the FAR analysis, the entity which has a least complex functional profile and for which most reliable data is available is to be selected as tested party. In most of the cases, it would be a simpler entity making non-unique contributions and performing simpler functions. Hence, for such an entity performing a benchmarking analysis is easy as comparables may be readily available. In such a case, the complex entity receives a residual return after compensating the tested party at an ALP. On the other hand, if a complex entity is selected as a tested party, performing benchmarking analysis is quite difficult in such a case, because the complex entity may be owning intangibles and making unique contributions for which comparables may not be readily available. Also, the profit of such an AE would be affected due to reasons other than Transfer Pricing. Hence, the results of the whole of TP exercise may be distorted due to this. It is pertinent to note that in Transfer Pricing even though methods except for Profit Split Method are single sided method, yet it is the international transaction which is benchmarked. Even if one AE is selected as tested party and is subjected directly to transfer pricing analysis, indirectly the profit of the overseas AE would also be benchmarked as it would receive a residual return after compensating the Tested Party at an ALP. Even, Sec 92 specifies that the income from the international transaction should be computed having regards to ALP. Even if it is found that the amount charged by the overseas AE is more than ALP, automatically the profit of the Indian AE would be less than ALP and there would be an adjustment in the hands of Indian AE. Hence, for the purpose of establishing that the international transactions have been entered at ALP there is no bar against selection of overseas AE as a tested party. This view is also consistent with the OECD guideline and UN guidelines on Transfer Pricing. Moreover, in the Country Practice part of the UN Transfer Pricing guidelines, it is said that overseas AE can be selected as a tested party if it is the least complex entity. This can be better understood with help of following examples: Example 1: Overseas AE as Reseller & Indian AE as Principal Consider an example where an overseas AE is a reseller and Indian AE is the principal. In such a case, overseas AE would be the least complex entity for which the data would be readily available and hence it should be selected as a tested party. On the other hand, if the Indian AE is selected as a Tested Party, it must be making unique contributions for which comparables may not be readily available. Moreover, if the Indian AE is selected as a tested party, it will not be possible to select RPM (Resale Price Method) as the Most Appropriate Method, which depending on the other factors can be selected as a MAM in case of overseas AE. Example 2: Overseas AE as Toll/Contract Manufacturer & Indian AE as Principal Consider an example where an overseas AE is a Toll/Contract manufacturer and Indian AE is the principal. In such a case, overseas AE would be the least complex entity for which the data would be readily available and hence it should be selected as a tested party. On the other hand, if Indian AE is selected as a Tested Party, it must be making unique contributions for which comparables may not be readily available. Moreover, if the Indian AE is selected as a tested party, it will not be possible to select CPM (Cost Plus Method) as the Most Appropriate Method, which depending on the other factors can be selected as a MAM in case of overseas AE. Onus on Assessee The onus is on the assessee to provide reliable data in respect of comparables of overseas AE. Practically, the assessee may face difficulty in obtaining the data from its overseas AE’s. However, if the assessee is not able to provide reliable data to the TPO/AO, the overseas AE cannot be selected as a tested party. Conclusion There is no express bar in the Indian Income Tax law against selection of the overseas AE as a tested party. However, the assessee should prepare a robust FAR analysis capturing the accurate functional profile of the overseas AE demonstrating how it is the least complex entity and how reliable data regarding the same is available. It should be well documented in the Transfer Pricing Study report as well as the master file of the assessee. References & Footnotes: OECD Transfer Pricing Guidelines (July 2017) UN Practical Manual on Transfer Pricing for Developing Countries (2021) Onward Technologies Limited vs. DCIT [TS-94-ITAT-2013(Mum)-TP] Bekaert Industries (Pvt.) Ltd. v DCIT [TS-1150-ITAT-2019(PUN)-TP] CarraroIndia(Pvt.) Ltd.v. DCIT [TS-124-ITAT-2019(PUN)-TP] AT & S India Pvt. Ltd. [TS-539-ITAT-2016(Kol)-TP] Ranbaxy Laboratories Ltd. v. Additional CIT, Range 15, New Delhi (2008) 299 ITR 0175 (Delhi ITAT) Mastek Limited v. Addl. CIT [ITA No.3120/Ahd/2010 dt.29.02.2012] ITO vs. WNS Global Services Pvt. Ltd. (TS-474-ITAT-2018(Mum)-TP) Development Consultants (P.) Ltd. v. Dy. CIT [136 TTJ 129] TNT India Pvt. Ltd. vs. ACIT [TS-920-ITAT-2016(Bang)-TP] Almatis Alumina Pvt. Ltd [TS-302-ITAT-2019(Kol)-TP] The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) February 2022 Issue • Vol. 70 • No. 8 • pp. 67–70 (Journal pp. 975–978) Author Contact: rajatpowar00@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI February 2022 • Vol. 70 • No. 8 • pp. 73–76 (Journal pp. 981–984) COMMERCIAL LAWS • ANTITRUST & PRACTICE Competition Act 2002 and Opportunities Thereunder CA. Nand Kishore Tulsyan The author is a member of the Institute. He can be reached at nktulsyan32@gmail.com and eboard@icai.in. ⚖️ Antitrust Framework of India The Competition Act 2002 (hereon “the Act”) provides the framework to prevent practices from having an adverse effect on competition. It is the Antitrust Act of India. It provides a mechanism for any person including individuals to register their grievances (Section 19). Similarly, any person who proposes to enter a combination (as defined in Section 5) is required to give notice under Section 6(2) of the Act. Read on… 1. Background of the Act: Constitutional Foundations The background for this Act lies in the Constitution of India. The fundamental rights and Directive Principles of State Policy provide the bedrock of economic regulation in the country: Article 19(1)(g) Provides the right to practise any profession, or to carry on any occupation, trade or business in the country. Article 38(2) Makes it the responsibility of the government to strive to minimize the inequalities in income. Article 39(a) Requires the government to secure that the citizens have the right to an adequate means to livelihood. Article 39(b) Requires securing that ownership and control of the material resources of the community are distributed as best to subserve the common good. Article 39(c) Requires securing the operation of the economic system so that it does not result in the concentration of wealth and means of production to common detriment. All these provisions could not be fulfilled unless the menace of unfair trade practice is stopped. To stop unfair trade practice, the Monopolistic and Restrictive Trade Practices Act, 1969 (MRTP Act) was implemented in India. A decade after the liberalisation of the Indian economy in the 1990s, that old Act was changed. In the year 2002, the old Act was replaced with a modern, dynamic legislation named The Competition Act, 2002. 2. Purpose and Core Provisions of the Act This Act acts as a bulwark for a free and fair market in the country. It prohibits: Anti-Competitive Agreements (Section 3) Prohibits anti-competitive agreements (whether oral or written), including cartels. Abuse of Dominant Position (Section 4) Prohibits abuse of a dominant position by enterprises or group entities in relevant markets. Regulation of Combinations (Section 6(1)) Prohibits combinations which cause or are likely to cause an appreciable adverse effect on competition. In short, this Act ensures that no one (other than the Government in certain sectors like defence) can distort the prevailing free and fair competition in the market by using anti-competitive means, hence providing a level playing field to all. 3. Penal Provisions Under the Act Section 7 establishes a commission named the “Competition Commission of India” (CCI) to oversee the implementation of the provisions of this Act. Penalties for Contravention of Section 3 & Section 4 (Section 27) Section 27 provides for penalties for contravention of Section 3 and Section 4. Under it, the Commission can impose a penalty up to 10% of the average turnover for the last three preceding financial years upon each person or enterprise which is a party to such contravention. Cartel Specific Penalty: In case of a cartel, the penalty is higher—the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to 3 times its profit for each year of the continuance of such agreement or 10% of its turnover for each year of the continuance of such agreement, whichever is higher. Chapter VI: Other Penal Provisions (Sections 42 to 45) Chapter VI covers other penalties under Section 42, 42A, 43, 43A, 44 and 45: Section 42: Contravention of orders of the Commission. Section 42A: Compensation in case of contravention of orders of the Commission. Section 43: Penalty for failure to comply with directions of the Commission and Director General. Section 43A: Penalty for failure to give notice to the Commission of combination before consummation. Section 44: Penalty for making false statement or omission to furnish material information. Section 45: Penalty for offences in relation to furnishing of information. 4. Prior Permission from CCI for Combinations & Pre-Filing Consultation Section 5 and Section 6 deal with the regulation of combinations (mergers, amalgamations, acquisitions, and acquiring of control): Notice & Standstill Obligation: Section 6(2) & Section 6(2A) Section 6(2) requires any person or enterprise proposing to enter into a combination (above certain statutory asset or turnover threshold limits specified under Section 5) to give prior notice to the CCI disclosing the details of the proposed combination. Section 6(2A) provides that no combination shall come into effect until 210 days have passed from the date on which notice was given under Section 6(2), or until the Commission has passed an order, whichever is earlier. However, if the CCI approves the combination earlier, the 210-day standstill rule will not apply. Form Prescribed Fee Purpose & Description Form I Rs. 15,00,000 Standard short-form notification for most combinations under Section 6(2). Form II Rs. 50,00,000 Optional long-form notification preferred when parties have large market shares or vertical integration. Form III Without Fee (Nil) Filing within 7 days of acquisition pursuant to loan agreement or investment agreement by Public Financial Institutions, Foreign Portfolio Investors, Banks, or VC funds. Informal Pre-Filing Consultation Parties can approach the CCI for an informal pre-filing consultation in case of any queries regarding whether a transaction triggers notification thresholds or how to file. However, the advice given at pre-filing is strictly advisory in nature and not binding on the Commission. 5. Grievances Registration by Any Person & E-Filing Any person can register grievances of unfair trade practices to the CCI. Section 19(1)(a) states that the Commission may inquire into any alleged contravention of the provisions contained in Section 3(1) (anti-competitive agreements) and Section 4(1) (abuse of dominant position) either suo-motu or on receipt of any information from any person, consumer or trade association. E-Filing Regulations of 2009 and 2011 & Prescribed Fees Regulations of 2009 and 2011 provide for online “e-filing”. Along with the fee, an application is required to be filed stating the specific grievances and attaching supporting evidence for the same. The person filing the grievance needs to have their Digital Signature Certificate (DSC). Individual, HUF, NGO, Consumer Associations & Cooperative Societies: Rs. 5,000 Firms & Companies (Turnover up to Rs. 1 Crore): Rs. 20,000 Firms & Companies (Turnover exceeding Rs. 1 Crore): Rs. 50,000 General Complaint: A person can also drop a general complaint or tip-off using the Feedback link provided on the official CCI website without formal fee attachment. 6. Statutory Appeal Provisions: NCLAT & Supreme Court Section 53A: National Company Law Appellate Tribunal (NCLAT) The appeal against any direction, decision, or order passed by the CCI lies with the National Company Law Appellate Tribunal (NCLAT) under Section 53A of the Act. NCLAT acts as a single unified appeal point against orders passed by the CCI, NCLT, and the Insolvency and Bankruptcy Board of India (IBBI). Furthermore, it is within the Appellate Tribunal’s purview to hear appeals against orders passed by NFRA (National Financial Reporting Authority) as well. Section 53T: Supreme Court of India As per Section 53T, any person aggrieved by any decision or order of the Appellate Tribunal (NCLAT) may file an appeal to the Supreme Court of India within 60 days from the date of communication of the decision or order, subject to substantial questions of law. 7. Professional Opportunities for Chartered Accountants The Competition Act, 2002 recognizes Chartered Accountants as authorized representatives at every statutory tier—from initial information filing to tribunal hearings: Appearance Before the Commission: Section 35 Section 35 of the Act states that a person or enterprise can authorise his or her Chartered Accountant(s) to present his or her case before the Commission. The e-filing regulations explicitly state that information under Section 19 (grievances) and notice under Section 6(2) (combinations) can be filed by a Chartered Accountant. In such cases, a Power of Attorney (vakalatnama) is to be uploaded. Right to Legal Representation Before NCLAT: Section 53S Section 53S(1): A person can authorise Chartered Accountant(s) to present their case before the Appellate Tribunal (NCLAT). Section 53S(2): Central Government or State Government may authorise Chartered Accountant(s) to present their case with respect to any appeal before the Appellate Tribunal. Section 53S(3): The Commission (CCI) itself may authorise Chartered Accountant(s) to present the case with respect to any appeal before the Appellate Tribunal. Statutory Definition: In all the statutory provisions above, “Chartered Accountant” explicitly means a practicing Chartered Accountant holding a valid Certificate of Practice (COP). 8. Types of Orders Passed by the Competition Commission of India The CCI passes the following statutory types of orders under different sections of the Act: 1. Section 26(1) – Prima Facie Investigation Order: On receipt of information or reference, if the Commission is of the view that there exists a prima facie case, it shall direct the Director General (DG) to cause an investigation into the matter. Such an order also specifies the timeline within which the DG has to complete the investigation and submit the report. 2. Section 26(2) – Closure Order at Inception: When the Commission is of the opinion that there exists no prima facie case, it closes the matter and passes a closure order. 3. Section 26(6) – Closure Post-DG Investigation: When the DG, after investigation as per direction under Section 26(1), recommends that there is no contravention of the provisions of the Act, the Commission may agree with the DG and pass an order under this section to close the matter. 4. Section 26(7) – Direction for Further Investigation: If the Commission does not agree with the DG’s recommendation of non-contravention, it may direct further investigation into the matter by the DG. Such direction is passed under this section. 5. Section 27 – Final Penalty and Cease-and-Desist Order: This is the most critical operative order. After inquiry, if the Commission finds that a contravention of the provisions of the Act has occurred, it passes an order under this section. The Commission may impose severe financial penalties along with cease-and-desist directions to defaulters. 6. Section 33 – Interim Order during Inquiry: Empowers the Commission to issue an interim order temporarily restraining any party from carrying on any anti-competitive act until the conclusion of the inquiry. 9. Recent Landmark Enforcement Activity of the Commission The CCI has wide jurisdiction: it can act suo-motu or on applications received from any person, including Central or State Governments. When an application is received directly from the Government, the CCI probes into the case without charging any fees. Notable headline cases include: 1. Builders Association of India vs. Cement Manufacturers’ Association & Ors. July 2012 CCI imposed a massive penalty exceeding Rs. 6,000 Crore on 10 leading cement companies and their association for extensive cartelisation and price fixing. 2. Sh. Surinder Singh Barmi vs. Board of Control for Cricket in India (BCCI) February 2013 CCI imposed a penalty on BCCI for its IPL Media Rights agreement, whereby it had sought to restrict and foreclosed market access to any other professional domestic Indian T20 competition other than IPL. 3. Express Industry Council of India vs. Jet Airways (India) Ltd. & Others November 2015 Penalty imposed on 3 major domestic airlines for concerted cartelisation in fixing the Fuel Surcharge (FSC) on air cargo at a uniform rate of Rs. 5 per kg. 4. Hemant Sharma & Others vs. All India Chess Federation (AICF) July 2018 Penalty on All India Chess Federation (AICF) for enforcing anti-competitive clauses in its registration forms, stipulating that players will not participate in any chess tournament or championship not authorised by AICF. 5. Cartelisation in Zinc Carbon Dry Cell Batteries Market in India vs. Eveready Industries & Ors. April 2018 In a high-profile suo-motu investigation, CCI passed an order under Section 27 penalising and restricting anti-competitive bid-rigging and price coordination in the Dry-Cell Batteries Market in India. 6. Alleged Anti-Competitive Conduct in the Beer Market in India September 2021 In another landmark suo-motu proceeding, the CCI passed a comprehensive penal order against multi-national and domestic breweries for cartelisation and market-sharing agreements in the Indian beer market. 7. Pharmaceutical Sector & Druggist Associations Restraints Series of Orders Numerous orders were passed across states where retail medicine stores sought relief against chemist and druggist associations. These associations had anti-competitively mandated a “No Objection Certificate” (NOC) or Letter of Intent for the appointment of stockists, repeatedly circumventing previous warnings under changing nomenclatures. 8. E-Commerce Market Study & Self-Regulation Guidelines 08-01-2020 The CCI initiated an active probe into e-commerce market practices and published a pioneering report titled “Market Study on E-Commerce in India - Key Findings and Observations” (dated 08-01-2020), advising digital platforms to establish self-regulatory guidelines regarding search ranking transparency, user review integrity, and non-discriminatory seller access. 9. Pharmaceutical Sector Market Study on Drug Affordability 18-11-2021 The CCI investigated the pharmaceuticals sector to analyze measures to enhance competition and ensure the affordability of life-saving medicines, publishing its report titled “Market Study on the Pharmaceutical Sector in India - Key Findings and Observations” (dated 18-11-2021). 10. Conclusion & References India being a developing country and we, Chartered Accountants being a partner in nation building have an integral role to play beyond auditing. Ensuring businesses are aware of their rights and illegal practices fortifies our role and function. We can stand as a backbone for the market, on which the economy can grow competitively and to its fullest. Official References & Regulatory Links The Competition Act, 2002: https://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf Revised Thresholds for Combination under Section 5: https://www.cci.gov.in/sites/default/files/quick_link_document/Revised%20thresholds.pdf Combination FAQs: https://www.cci.gov.in/node/2847 Orders under Section 27: https://www.cci.gov.in/orders-commission/102 “Ensuring businesses are aware of their rights and illegal practices fortifies our role and function. We can stand as a backbone for the market, on which the economy can grow competitively and to its fullest.”

The Chartered Accountant • Journal of ICAI February 2022 • Vol. 70 • No. 8 • pp. 80–85 (Journal pp. 988–993) LAW • JURISPRUDENCE & ADJUDICATION Principles of Natural Justice in Various Laws CA. Abhishek Raja The author is a member of the Institute. He can be reached at abhishek.raja@icai.org and eboard@icai.in. ⚖️ Fundamental Bedrock of Adjudication & Fairness Both in India and England, it is well-established that natural justice principles can be adapted to different situations. They are neither cast in a rigid mould nor can they be put in a legal strait-jacket. The fundamental rule is that if a person may be subjected to pains or penalties, or be expected to prosecution, he should be told the case made against him and be afforded a fair opportunity of answering it. Each person who appears before an Authority with adjudicatory power has the right to see the evidence being used against him. Purely administrative bodies are also bound to act justly and fairly which may bring in the requirement of natural justice as also the duty to give reasons. Read on… 1. Types of Legislation & The Foundational Rules of Natural Justice Every modern legislation can be grouped in two types: 1. Procedural Legislation The first type of legislation is designed to govern and develop procedure. 2. Problem-Resolving Legislation The second type of legislation consists of those directed to resolve immediate trouble. Taxation laws are of the first category and therefore the Department should follow “Principles of Natural Justice” by providing a hearing. The concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules, namely: Rule I: Nemo debet esse judex in propria causa No one shall be a judge in his own cause (Rule against Bias). Rule II: Audi alteram partem No decision shall be given against a party without affording him a reasonable hearing (Rule of Fair Hearing). The Fundamental Corollary to Audi Alteram Partem: “Qui aliquid, parte inaudita altera aequum licet dixerit, haud aequum fecerit” That is: “He who shall decide anything without the other side having been heard, although he may have said what is right, will not have been what is right”, or in modern expression, “Justice shall not only be done but should manifestly be seen to be done.” Very soon thereafter a third rule was envisaged: that quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonably. But in the course of years, many more subsidiary rules came to be added to the rules of natural justice. 2. What is “Principle of Natural Justice”? The Thorough-Bred Metaphor The “Principles of Natural Justice”, as they are called, must be kept within their limits, and should not be allowed to roam free. This nation is riding on the magnificent horse of natural justice, which is a powerful and well-trained thoroughbred to achieve its goal of “Justice, Social, Economic, and Political”. This thoroughbred must not be allowed to turn into a wild and unruly horse, carrying off where it lists, unsaddling its rider, and bursting into fields where the sign “no passage” is put up. In a judgment, the Apex Court has held that principles of natural justice are not intended to operate as roadblocks to obstruct statutory inquiries. The extent of applicability of principles of natural justice depends upon the nature of the inquiry, and the consequences that may visit a person after such inquiry from out of the decision pursuant to such inquiry. The right to a fair hearing is a guaranteed right. An appellant, however, will not be permitted to raise different pleas in different proceedings. The Three Essential Principles of Natural Justice: Prior Notice: The person whose rights are to be affected must be given notice of the case or the charges which he is to meet. Opportunity to Explain: He must be given an opportunity to make representation, explain the allegations made against him, and have his say in the matter. Good Faith & Non-Bias: The authority conducting the proceedings must not be biased and should act in good faith. 3. Evolution of Natural Justice & Judicial Benchmarks The principles of natural justice are not the creation of Article 14 of the Constitution. Article 14 is not the begetter of the principles of natural justice but is their Constitutional guardian. Both in England and India, it is well-established that natural justice principles can be adapted to different situations. They are neither cast in a rigid mould nor can they be put in a legal straitjacket. They are not immutable but flexible and can be adapted, modified or excluded by statute and statutory rules as also by the constitution of the tribunal which has to decide a particular matter and the rules by which such tribunal is governed. Audi Alteram Partem in Tulsi Ram Patel’s Case (Apex Court): Person against whom an order to his prejudice may be passed should be informed of the charges against him. Such person should be given an opportunity of submitting his explanation, which also includes the right to know the oral and documentary evidence which are to be used against him. Witnesses who are to give evidence against him must be examined in his presence with the right to cross-examine them. He must be allowed to lead his own evidence, both oral and documentary, in his defence. Application of the “Principle of Prejudice”: In Aligarh Muslim University v. Mansoor Ali Khan, the Apex Court observed that it has consistently applied the principles of prejudice across cases, as exhaustively elaborated in State Bank of Patiala v. S.K. Sharma [(1996) 3 SCC 364: 1996 SCC (L&S) 717] and reiterated in Rajendra Singh v. State of M.P. [(1996) 5 SCC 460]. Lord Denning in Selvarajan v. Race Relations Board [(1976) 1 All ER 12]: “The fundamental rule is that if a person may be subjected to pains or penalties, or be expected to prosecution or proceedings, or deprived of remedies or redress, or in some such way adversely affected by an investigation and report. Then he should be told the case made against him and be afforded a fair opportunity of answering it.” 4. Article 21 of the Constitution & “Procedural Due Process” Article 21: Protection of Life and Personal Liberty “No person shall be deprived of his life or personal liberty except according to procedure established by law.” Landmark Interpretation: Maneka Gandhi vs Union of India (AIR 1978 SC 597) The Supreme Court laid down that Article 21 is not only a guarantee against executive action unsupported by law but is also a restriction on law-making. The procedure contemplated by Article 21 must answer the test of reasonableness in order to conform with Article 14 of the Constitution. The principle of reasonableness—which legally as well as philosophically is an essential element of equality or non-arbitrariness—pervades Article 14 like a brooding omnipresence. Therefore, Article 21 means fair, not formal procedure; law is reasonable law and not any enacted piece. This makes the words “Procedure established by Law” by and large synonymous with the “procedural due process” in the USA, making the right of hearing a contemplated part of natural justice. 5. Notice, Service of Summons & Disclosure of Evidence Notice: The First Limb of Audi Alteram Partem “Notice” is knowledge of facts which would lead a person to make inquiry. In another sense, “notice” means information, an advice or written warning, in a more or less formal shape intended to apprise a person of some proceeding in which his interests are involved or informing him of some fact which is his right to know and the duty of the notifying authority to communicate. Since in the absence of notice, hearing becomes hollow and the right becomes a mere ritual, the court may invalidate a decision for lack of pre-decisional notice. Service of Summons & Natural Justice A Summons is served to inform the party to be charged of the offence which he has to meet, when to meet it, and to require his attendance. In other words, the object of serving a summons is to notify the defendant of the charge and to give him the opportunity to defend the charge. A summons’ primary purpose is to ensure that natural justice is accorded to a defendant by giving the defendant notice of the subject of the complaint and an opportunity to be heard. Disclosure of Evidence: An Additional Dimension Each person who appears before an Authority with adjudicatory power has the right to see the evidence being used against him. The disclosure does not have to involve the physical supply of every piece of evidence, but all documents relied on by the Authority are required to be furnished to the noticee enabling him to show proper cause as to why an inquiry should not be held against him—even though statutory rules may not expressly provide for the same. Such a fair reading of the provision would not amount to supplanting the procedure laid down and would in no manner frustrate the apparent purpose of the statute. An accused of mis-declaration has the right to know the grounds on which he will be punished—he might have an answer, or he may not. 6. Right to Cross-Examination: Landmark Supreme Court Decisions It was observed by the Supreme Court in Tulsi Ram Patel’s case that witnesses who give evidence against a person must be examined in his presence with the right to cross-examine them. The affected party has an inherent right to cross-examine witnesses. Swadeshi Polytex Ltd. v Collector of Central Excise Civil Appeal Nos. 3988-90 of 1988, decided on 23-Nov-1989 Lays down that whenever any statement is relied upon by the Revenue, an opportunity of cross-examining the maker of the statement must be given to the person against whom it is being used. Lakshman Exports Limited vs Collector of Central Excise Civil Appeal Nos. 14424-25 of 1996, decided on 18-Apr-2002 Not allowing the assessee to cross-examine witnesses whose statements formed the foundation of the impugned order is a fatal flaw that renders the entire order a nullity. Consequence of Denial: Refusal by the Adjudicating Authority to allow cross-examination of adverse witnesses amounts to a direct violation of natural justice, vitiating the entire adjudication. 7. Natural Justice in Quasi-Judicial Proceedings & Abuse of Discretion Conferment of quasi-judicial power further implies that the person concerned must follow the rules of Natural Justice and must give reasons (speaking order) for making the order which he is empowered to make. Purely administrative bodies are also bound to act justly and fairly, which brings in the requirement of natural justice as also the duty to give reasons. Exception During Criminal Investigations The rule of audi alteram partem is however not attracted during the investigation of a crime under the Criminal Procedure Code, even when the investigating agency applies to the court for the issuance of a Letter of Rogatory to a Court in a foreign country. Speaking generally, a person is not entitled to be heard in a preliminary enquiry or investigation when at a later stage he is to receive full opportunity of defending himself before any final decision is taken against him—yet there is no universal rule to that effect. Abuse of Discretion A judicial abuse of discretion occurs when the trial judge acts in an arbitrary or unreasonable way that results in unfairly denying a person an important right or causes an unjust result. For example, the trial judge’s decision to award or deny attorney fees will be upheld unless there was an abuse of discretion. Doctrine of Harmless Error The appellate court will not overturn a judgment on the basis of any error that is harmless. A harmless error is an insignificant error that does not change the outcome of the case (e.g., introduction of improper evidence that goes to motive in a criminal offence requiring no motive). 8. Natural Justice in Taxation Laws: Income Tax vs. GST Mandatory Hearing under Section 274(1) of the Income Tax Act, 1961 Section 274(1) mandates that no order imposing penalty under various sections of Chapter XXI (i.e. Section 271, etc., and now also Section 270A) shall be made unless: (i) The assessee has been heard, or (ii) The assessee has been given a reasonable opportunity of being heard. Statutory Removal of Pre-Decisional Hearing in GST: Rules 21A & 86A In certain statutory situations under GST, the opportunity of being heard has been deliberately excluded: Rule 21A of CGST Rules, 2017 (Suspension of Registration): For suspension of GST registration, prior notice to the registered person is now not required. Rule 86A of CGST Rules, 2017 (Blocking of Input Tax Credit): Where the Commissioner or an authorized officer has reasons to believe that ITC has been fraudulently availed, they can disallow debit of the electronic credit ledger (block ITC) without providing any pre-decisional opportunity of being heard. Such block remains valid for up to one year from the date of imposition. 9. Landmark Judicial Decisions on Natural Justice in Tax & Excise Case Citation Judicial Ruling & Principle Established Lakshman Exports Ltd. vs Collector of Central Excise Civil Appeal Nos. 14424-25 of 1996, decided on 18-Apr-2002[2005] 10 SCC 634 Duty to give an opportunity to cross-examine witnesses is an inherent part of the Principles of Natural Justice. In reply to a Show-Cause Notice, the assessee specifically sought permission to cross-examine representatives of certain concerns to show that the goods in question had been accounted for in their books and duty paid. However, such opportunity was denied. The Supreme Court remanded the matter to the assessing authority for de novo hearing after removing the lacunae pointed out by the Appellate Tribunal. “Audi alteram partem” (the right of cross-examination) is an essential fundamental of Natural Justice. KBB Nuts (P.) Ltd. v. National Faceless Assessment Centre Delhi (Earlier National E-Assessment Centre Delhi)[2021] 127 taxmann.com 194 (Delhi) Where objections filed by an assessee in response to a show cause notice were not considered by the Assessing Authority before passing the impugned assessment order, the order was set aside to be passed afresh. Failure to consider filed objections violates natural justice. Rupam Mercantiles Ltd v Deputy Commissioner of Income Tax [2004] 91 ITD 237 (Ahmedabad - ITAT) (Third Member) Penalty for concealment cannot be levied where the assessee was not even asked to justify his claim and penalty was levied purely on the basis of presumption that the assessee’s intention was to evade tax. R.B. Shreeram Durga Prasad & Fatehchand Nursingdas vs Settlement Commission (1989) 176 ITR 169 (SC) Mere opportunity to make a submission is not enough; it must be a clear and effective opportunity so that the assessee can make an effective representation against the proposed action. So also, proper opportunity must be given at the proper time. An order passed by the Commissioner without affording the applicant an opportunity of hearing was a nullity, being in violation of natural justice. Premier Breweries Ltd. v Deputy Commissioner of Income Tax (1991) 36 ITD 197 (Cochin - Trib) Where in the course of penalty proceedings, the assessee was not given the material relied upon which would have helped him properly avail of the opportunity to cross-examine witnesses, proceedings were held vitiated. Furthermore, where materials collected in assessment proceedings were relied upon in penalty proceedings without affording an opportunity of being heard to the assessee, it amounted to failure of natural justice, even though such opportunity had been given during assessment proceedings. Commissioner of Income Tax v G.R. Rajendran (2003) 259 ITR 109 (Madras HC) The Assessing Officer was held wrong in levying penalty for concealment of income where the explanation offered by the assessee for an excess quantity of jewellery found during a search/raid was not considered by him. 10. Doctrines of Reasonableness, Legitimate Expectation & The Four Core Essentials Good administration demands the observance of the doctrine of reasonableness in other situations also where citizens may legitimately expect to be treated fairly. The doctrine of legitimate expectation has been developed directly in the context of the Principles of Natural Justice. Rules of Natural Justice are Not Embodied Rules: Suresh Koshy George v. University of Kerala [(1969) 1 SCR 315 / AIR 1969 SC 198] As observed by the Supreme Court, the rules of natural justice are not embodied rules. What particular rule of natural justice shall apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the inquiry is held, and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a court that some principles of natural justice have been contravened, the court has to decide whether the observance of that rule was necessary for a just decision on the facts of that case. Summary: The Four Indispensable Pillars of Natural Justice (a) Notice of Hearing Pre-decisional intimation of charges and grounds. (b) Opportunity of Being Heard Effective, meaningful, and timely right of reply. (c) Impartiality of Officer / Judge Absolute absence of personal, official, or pecuniary bias. (d) Orderly Course of Procedure Reasoned speaking orders, disclosure, and cross-examination. “No code can prescribe or fix the principles of natural justice and fundamental principles of administrative procedure. Many writers, lawyers, and legal systems have used natural justice to mean many things. It comes in many colours and forms.”

The Chartered Accountant • Journal of ICAI February 2022 • Vol. 70 • No. 8 • pp. 88–92 (Journal pp. 996–1000) Technology Adoption of Digital Payment Wallets in India: Key Success Factors in the Journey towards Cashless Economy AUTH Prof. Anuradha Jain, Dr. Harpreet Singh & Dr. D. D. Chaturvedi Authors are academicians. They can be reached at anuradhajain3@gmail.com, ddchaturvedi64@gmail.com and eboard@icai.in “Right from the very beginning of civilization there has been a need to exchange goods for trading purposes. It began from exchange of salt or beads followed by gold and cattle, and then to cash and finally it has reached to a point where people would not need to exchange physical objects for getting goods or services in return. The electronic media is serving their need. Technological advancements are a boon or bane, that’s a separate story but the fact of the day is that the term ‘money’ has been subjected to a lot of change since the advent of digitalization. It has reduced the burden of individuals in some way or the other. Read on…” Introduction and Macro Trends The online transactions which support economic activities of a nation and are highly significant on an individual as well as on a national front. According to Global Payment Report, mobile wallet was the most used method of payment Point of Sales (POS) globally in 2020, with 25.7% of payments done on (POS). This share is estimated 33.4% by 20241. The world is getting techno-savvy and India too. There has been a long debate in the context of digital transactions and digital payments. There is an inevitable need to be receptive to the digital transformation. However, there are certain parameters, which affect the readiness to accept such changes. Shifting the entire population from a cash-based economy to a cashless economy is a huge challenge. The industry 4.0 has brought about several digital innovations, one of them being digital payment wallets. Industry 4.0 is the term used to denote the revolutionary changes in digital functions that have metamorphosized the world economy. Digital payment technology is beneficial to the economy in many ways. With the use of digital mode of transactions, consumers’ purchasing power has subsequently increased giving rise to employment opportunities and the economic growth in large. The infrastructure which supports digital payment makes it easy for the users to transfer money with just a few clicks. The process is a lot easier and efficient than conventional methods of doing transactions. Digitalization is a vital part of a developing economy. It is an integral part of the payment system in the current situation. The major factors having an impact on digitalization used in payment scenarios re-classified into five different categories namely, the infrastructure, the building blocks of the adoption of digital payments, other institutional factors as well as change and innovation with respect to the digital wallets. These factors explain the reasons why digital payments are self-sustaining and do not require extra support from anywhere else. Digital transactions would just require two fundamental elements to support it, that is a good network coverage for the device and properly functioning internet bandwidth. That is enough to cater to the needs of a digital wallet. However, these basic elements can only work proactively depending on the geographical area as well as the electrification level in those areas. The geographical landmarks must also give space to banks for the development of financial inclusion. It is the only pathway to connect the rural and urban areas with the basic financial infrastructure to enrol a greater number of people in the digital platforms. With a larger engagement of people into digital transaction’s technology, it would substantially pave way for a cashless nation in the coming years. Digitalization in India Digitalization has made its mark with the help of innovation. It has brought in new products for digital transactions to take place. Innovation gives rise to new products. But whether the products would be successful depends on the accessibility and affordability of such products. The demographic characteristic of a certain place is important when any innovation or customized products are meant to be made for a targeted customer base. The change can only take place if the customers are receptive of it, based on their education and income level. The growth in digitalization of India can be speculated with the data available on penetration into the smartphone market and the access to internet. India is on the second number in the list of digital transactions growth statistics. The nation has seen a tremendous increase in purchase of mobile subscriptions. The telecom industry in India is improving and giving its 4G services at affordable rates and with this, the demand for smartphones has also shown a huge growth in numbers. Earlier the mobile phones only supported first generation services, wherein only voice calls were possible. However, the 4th generation services along with providing fundamental facilities are also supporting huge bulks of data sharing, streaming multimedia, and higher bandwidth for uploading, downloading, and surfing the internet. Global connectivity has made it possible for digital technologies to prosper in the remote locations as well. Huge investments are being spurred into the industry of mobile payments. The start-ups working on mobile payment applications are being funded by giant companies because it is known to them that these apps could help in adding strategic value to their enterprises. After an underlying wave in the payment systems working digitally, to a great extent ascribed to a deficiency of money in the financial framework or banking system as you may call it. The digital transactions have seen a plunge, showing a slow-moving inversion in the utilization of technological platforms for making payments. Digital Wallet: Concept, Architecture and Adoption Metrics Digital wallet also commonly known as e-wallets refer to an electronic medium which supports payment activities. It could also be a software or an online application which helps different businesses or individuals to perform their transactions electronically with just few clicks. The wallet is just like a physical wallet, but this one is virtual, which stores all the required information about the user’s payment. It could be done via several modes such as net banking credit or debit cards, gift coupons and so on. Customarily conveyed as a cell phone application, an e-wallet can likewise exist in different locations such as desktops or laptops as well. However, it is a user-friendly platform and the mobile version of it, is the more popular and common version of the digital wallet, because of its portability and adaptability. These digital wallets are advantageous to use in specific cases as well as more secure than customary physical wallets. The e-wallet users need to download the applications made by banks or confided in other client companies to offer these services. Blackhawk Network Global Digital Payments Study A study on Global Digital Payments was conducted by Blackhawk Network and the results showed that the acceptance rate of digital rates in India is the highest as compared to other countries in the survey. The report shows that 93% Indians used the e-wallets for their transactions in the preceding one year as contrasted to the global average of 55%. The reason behind the massive number was safety and convenience. In the past couple of years, especially when the pandemic had taken toll over all the countries, people were finding contactless ways to perform the daily activities, transactions being one of them. The pandemic spurred the usage of digital payment apps in different stores and shops as well as online payments. Digitalization has made financial inclusion much easier and far reaching than ever before. The financial technology, commonly called ‘Fintech’ has a wider scope of delivering financial products and services in a much better way than the physical banks. The digital wallets make use of the technological interventions for developing the customer base with the inclusion of personalized solutions for transactions. Types of Digital Wallets 1. Closed Wallet These are the kind of wallets which are developed via the companies selling other products and services. It wishes to have an in-house platform supporting transactions. Amazon Pay is a kind of closed wallet. This wallet is built by the company Amazon to enable its customers to store their payment details and do quick as well as safe transactions while buying its products. Any kind of refund, cancellation or returns are stored back in the same wallet and can be further used on the same platform to purchase any item from the same website or application. 2. Semi-Closed Wallet A semi-closed wallet permits the registered users to make exchanges at recorded locations and sellers. Albeit the inclusion space of such wallets is limited, both on the web and offline purchases can be made with the help of these wallets. This being the case, the sellers need to go into certain agreements with the merchants to accept their payments from the digital or e-wallets. Semi-closed wallets restrict users from withdrawing cash from their accounts. 3. Open Wallet These wallets give the liberty to the users to use the money available in their digital payment apps for making transactions or even withdrawing the funds in cash. These open wallets are most commonly issued by a third party or banks. Few examples of digital payment apps are Paytm, PayPal, Google Pay, PhonePe, and so on. Success Factors in the Journey towards Cashless Economy The perusal of electronic medium for performing transactional activities can be predicted because they are in sync with the education and income level of the consumers. These are such factors which determine the potential as opposed to the desire or willingness of individuals for adopting certain digital payment apps for transactions. If the firms can provide good options or solutions for their digital payments, then they would be able to grasp a larger customer base for their products or services. With user friendly solutions to payment transfers, the development and inclusion of acknowledgment for the cash transactions increases in different consumer groups. The economy, especially the informal sector of the country mirrors the inclination towards use of cash for their transactions or exchanges. The organization impacts, arising out of a predominantly informal economy, where the acceptable form of transactions done in cash has remained the same till date. Whether India is ready for becoming a cashless economy depends on the steps which RBI and other financial institutions are taking along with government interventions for building a solid infrastructure to sustain the process of adapting to the new system. The important aspects with the intention to make a better infrastructure would support digital payments and reduce the risks associated to the system. It has designed an authorization framework which would focus entirely on the payment systems offered by retail merchants. The Reserve Bank of India has set up ATMs for a greater participation of Fintech players. RBI is all set to provide licenses to some of the competitive digital payment organizations. The digital payment entities all over India are on their way to bring up new innovations and strengthen the infrastructure of digital payment systems. They are likely to build more risk free and efficient products which shall enhance the process of smooth transactions and make all parts of India financially inclusive while contributing to the larger goal of Digital India. Figure 1 : UPI Payments in India (2019 Quarterly Volume Breakdown) Figure 1 shows the data of UPI payments in India for 2019, where Google Pay and PhonePe are leading the volume of transactions, followed by Paytm. (Source: S&P Global Report; Data compiled Feb. 17, 2020) Quarter Total Transactions (in Billions) Market Share Leaders Q1 2019 ~ 2.1 Billion Google Pay, PhonePe, Paytm, Others Q2 2019 ~ 2.2 Billion Google Pay, PhonePe, Paytm, Others Q3 2019 ~ 2.6 Billion Google Pay, PhonePe, Paytm, Others Q4 2019 ~ 3.7 Billion Google Pay and PhonePe leading volume, followed by Paytm Financial Inclusion and Access to Digital Products The digital products are much more accessible and easier to use. The products have a far-reaching capacity than done via conventional physical logistics. With the advent of financial technology especially digital payment applications, the users from all over India be it rural or urban have shown a positive acceptance rate towards these Fintech products. The only mandates are strong internet connection along with mobile connectivity and a smartphone that would support the transaction. These would suffice to use the financial products in any nook and corner of the nation. To make this possible, is the aim. However, the Fintech companies are making attempts to include the tier two cities and other remote areas for spreading the reach of the digital transaction applications or platforms catering to the payment needs. Some areas in India have a smaller number of banks or are very far from the proximity of the banks. Those remote locations are being tapped by financial players for financial inclusion. This being a case, financial literacy is an important element without which digitalization would not have a greater impact. Awareness among the public is necessary and so is investment in the support structure of digital payments. The telecom industries also have a greater task ahead of them to expand the internet connectivity in tier two cities and remote locations as well. The products offered by digital payment infrastructure are the initial contact point for the users to get an easier access to the products offered by financial institutions or banks such as small loans, insurance, credit products and other investment products and so on. This means the intervention of digital payments have a lot more to offer than just digitizing the transactional process. The platforms have the capacity to provide a good number of offerings in the financial sector to the customers. With the approval of RBI and the changes that have been made in the recent times, the Fintech companies can now offer various quasi-banking products or services to cater to the demands of the customers in the financial domain. The fintech start-ups have played a very imperative role in the financial domain to offer quick and reliable products to the customers for making different unreachable and untapped locations financially inclusive. This is helping the nation meet the objective of becoming financially inclusive and providing access of digital payment services to the citizens. Benefits of a Cashless Economy Some of the key benefits of the cashless economy have been listed here: Reduction of Cost Various costs related to physical and conventional cash transfers as well as withdrawals such as storing, printing and transporting cash are reduced if the system is cashless. Reduction in Risk Cash getting stolen is a common risk which occurs. However, a cashless economy naturally reduces the risk of cash getting stolen. If a card or mobile phone is lost or stolen, the numbers could easily be blocked. While travelling also, carrying a huge bulk of cash is risky, cashless digital payment apps can serve the purpose and are comparatively risk-free. Convenience Financial transactions can be easily performed with the help of digital wallets. Convenience is one of the biggest reasons to switch to online mode, long queues can be avoided with the help of these digital wallets. Transactions can be done in seconds. The KYC verification can also be done on the mobile itself so a person might not have to visit the physical financial institutions to get their KYC done for making transactions via their smart phones. Additional Benefits: Along with the benefits mentioned above, there are numerous additional benefits such as discounts, cashbacks, tracking the amount spent in different activities or purchases and so on. Conclusion India is moving ahead towards adapting the online environment which necessarily means that they are supporting the contactless services, especially after Covid-19 had taken its toll. Therefore, the way towards a cashless economy has been chosen by Indian citizens. There is an exceptionally strong acceptance for digital infrastructure supporting payments and internet banking driven by Fintech players. Customers are likewise ready to see the benefits and demerits of the digital wallets and other such products available. The digital payment system is today beyond the early adopter stage and a huge part of the nation is embracing it. It is delightful to know that even the lower income groups are a part of this burgeoning development. Thus, India is ready to become a cashless economy in the coming years. References & Data Sources: Worldpay Global Payments Report: https://worldpay.globalpaymentsreport.com/en/ Blackhawk Network Study on Global Digital Payments (India Adoption Statistics) S&P Global Report (UPI Payments in India 2019, Data compiled Feb. 17, 2020) The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) February 2022 Issue • Vol. 70 • No. 8 • pp. 88–92 (Journal pp. 996–1000) Authors Contact: anuradhajain3@gmail.com • ddchaturvedi64@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 36–39 (Journal pp. 812–815) ASPIRATION • ECONOMIC TRENDS & NATIONAL RESILIENCE India’s Growth Story: A New Era of Success and Hope CA. (Dr.) Vikas S. Chaturvedi The author is a member of the Institute. He can be reached at vschaturvedi@gmail.com and eboard@icai.in. 📈 Post-Pandemic Economic Rebound & Macro Projections 2020 has been a year of challenges due to Covid-19. However, India bounced back quickly to growth in 2021 with a GDP growth of 8.4% in the Jul-Sept’21 quarter. The RBI has estimated a GDP growth of 9.5% for the full financial year FY’22. The growth has been driven by all sectors with industry growing at 6.9%, services growing by 10.2% and agriculture by 4.5%. Although the 2nd wave of COVID-19 had cast a long shadow on growth in Q1, India quickly rebounded with growth in vaccination, continuing high investments in infrastructure, increase in consumption and a high growth focused monetary policy. Read on… 1. Global Paradigm Shift: De-risking Supply Chains & Make in India After the pandemic, we observed a completely different approach in which the world conducts business with China. There is an active global effort to find alternatives to the global industrial production supply chain which was disrupted due to the pandemic. In the times to come, localization and building a self-sustained economic model will be the preferred theme of business. We already see a shift towards this theme. Though this will take time, as the right ecosystem needs to be built before full efficiency in localization is achieved. Simultaneously, the pandemic is leading to changes in the globalization strategy of all major economies that are realigning strategies to de-risk their manufacturing supply chains. In these times, India has emerged as a trusted partner for global manufacturing and has shown its technological and intellectual competence by emerging as the leading global producer of vaccinations. Climate of Trust & Make in India In the last 5 years, the Government has promoted Make in India across the world and has built a climate of trust and friendship with significant sections of world leaders both in politics and business. Ease of Doing Business & Global Inflow Due to continuous efforts of simplification of various laws and building infrastructure over the last 5 years, India has gained significant rank in the Ease of Doing Business Index. Over 1,000 international firms are in advanced discussions to consider production in India, creating substantial job opportunities and boosting GDP. The Prime Minister’s Five Pillars for an Emerging Business & Inclusive Culture: 1. Adaptability to survive future crises 2. High Efficiency 3. Primacy to caring for the poor 4. New opportunities in post-pandemic era 5. Unity and brotherhood While FY’21 saw good recovery, FY’22 and FY’23 are expected to be even stronger. Even though the Omicron variant posed brief headwinds, rapid vaccination limited the fallout—about 85% of adults in India were vaccinated with at least 1 dose as of mid-December 2021. 2. World-Class Infrastructure Investments & Financing Architecture India is emerging as a global leader in investing in world-class infrastructure projects, driven by concrete blueprints announced in Union Budget 2021. Current trends suggest an unprecedented boost in infrastructure spending that facilitates the infusion of overseas capital and expands credit availability. National Infrastructure Pipeline (NIP 2019–2025) Supports more than 9,000 projects with a total project cost surpassing USD 1,949 Billion. A live database of infrastructure projects worth more than INR 100 Crores providing lucrative investment avenues across Energy, Transport, Water & Sanitation, Logistics, Communication, Social and Commercial Infrastructure. Development Finance Institution (NaBFID Act, 2021) The National Bank for Financing Infrastructure and Development Act, 2021 established a government-owned DFI for extending long-term, affordable debt financing. Projected to achieve a lending capability of a minimum of INR 5 Trillion by 2024–25. Strategic Financing, Asset Monetization & Sectoral Allocations: India Investment Grid (IIG): Gateway for investing in stressed assets, allowing the acquisition and turnaround of commercially viable stressed projects. National Investment and Infrastructure Fund (NIIF): Anchored in 2015 with an INR 40,000 Crore corpus, deploying funds across three distinct vehicles: Master Fund, Fund of Funds, and Strategic Opportunities Fund. Asset Monetization & InvITs: Highways, railways, power grids, and airports earmarked for monetization through Infrastructure Investment Trusts (InvITs) holding public assets for domestic and global institutional investors. Zero-Coupon Bonds: Issuance of tax-efficient zero-coupon bonds by Infrastructure Debt Funds under active consideration to crowd in retail and public capital. Port PPP Operations: Tenders worth more than INR 20 Billion earmarked for public-private partnerships in port operations and management. Power Sector Discom Revamping: Comprehensive outlay worth INR 3 Trillion planned over 5 years to revamp power distribution companies via smart-metering and modern distribution infrastructure. National Hydrogen Mission: Advanced stages of launch enabling power corporations to meet domestic green energy demand and export green hydrogen and green ammonia. Digital Project Tracking Dashboard: Leveraging India’s IT prowess to deploy real-time monitoring dashboards to track publicly monetized infrastructure assets. 3. Performance Linked Incentives (PLI): INR 1.97 Lakh Crore Outlay The Government of India announced an aggregate outlay of INR 1.97 Lakh Crores for Production Linked Incentive (PLI) Schemes across 13 key sectors. The objective is to establish national manufacturing champions, generate massive employment for India’s youth, and build self-reliance under the ‘Atmanirbhar Bharat’ vision. The scheme creates a significant multiplier effect by driving private capex and boosting the global export competitiveness of Indian products. Target Industry / Key Sector Approved PLI Outlay (INR) Automobiles and Auto Components INR 57,042 Crores Large Scale Electronics Manufacturing INR 40,000 Crores Pharmaceuticals (Pharma) INR 21,940 Crores Chemicals INR 18,100 Crores Telecom and Networking Products INR 12,195 Crores Food Processing INR 10,900 Crores Textiles (MFA & Technical Textiles) INR 10,683 Crores IT Hardware INR 7,325 Crores Metals and Mining INR 6,322 Crores White Goods (Air Conditioners & LED) INR 6,238 Crores Renewable Energy (High Efficiency Solar PV Modules) INR 4,500 Crores Drones and Drone Components (Aviation) INR 120 Crores 4. Green Technology Revolution & Renewable Energy Shift Clean Technology Fund & Solar Ambitions India is pioneering a low-carbon growth trajectory to transform its fossil-dependent energy architecture. The majority of India’s USD 775 Million Clean Technology Fund (CTF) investment plan supports the deployment of over 3 GW of new installed solar power capacity and associated transmission corridors. CTF concessional financing directly mitigates upfront capital burdens for ultra-mega solar parks while de-risking investments in rooftop solar photovoltaic systems. The Electric Vehicle (EV) Transition Green technology is critical for building a sustainable economy and mitigating climate risks. Leading domestic industrial conglomerates have committed massive capital investments into renewable energy and clean mobility. The country is witnessing an unprecedented revolution in the electric vehicle (EV) segment, which presents monumental opportunities across manufacturing, battery storage, and charging infrastructure supported by strategic government subsidies and incentives. 5. Record Foreign Direct Investment (FDI) Inflows & Policy Liberalisation With global manufacturers actively pursuing a “China Plus One” strategy to de-risk component sourcing, India stands out as a stable, predictable, and transparent investment hub. The Government has liberalized the FDI policy framework, permitting 100% FDI under the automatic route in most sectors. Scheme for Investment Promotion (SIP): Extended for another 5-year cycle (FY 2021–22 to 2025–26) with an allocated budget of INR 9.70 Billion to spearhead global investor facilitation. Total FDI Growth: 2007–14 vs 2014–21 USD 266.21 bn ➔ USD 440.01 bn +65.3% Surge FDI Equity Inflow: 2007–14 vs 2014–21 USD 185.03 bn ➔ USD 312.05 bn +68.6% Growth First 4 Months FY 2021–22 Total FDI USD 27.37 Billion +62% higher vs FY 2020–21 (USD 16.92 bn) First 3 Months FY 2021–22 FDI Equity USD 17.57 Billion +168% explosion vs Q1 FY21 (USD 6.56 bn) 6. Export Sector Revival & Bilateral Trade Engagements India’s export sector has mounted a powerful rebound post-pandemic, extending strong double-digit growth driven by resurgent global demand, domestic manufacturing incentives, and newly signed trade agreements. Milestone Targets Merchandise exports on course to hit the historic USD 400 Billion target in FY’22, with momentum projected to carry outbound shipments to USD 475 Billion in 2022–23. Exporters’ Liquidity & RoDTEP Notified rates under RoDTEP (Remission of Duties and Taxes on Exported Products) and released INR 56,027 Crores in pending tax refunds to restore exporter liquidity. New Foreign Trade Policy & FTA Negotiations The Department of Commerce is finalizing a forward-looking Foreign Trade Policy (FTP) while aggressively negotiating comprehensive Free Trade Agreements (FTAs) with premier economic partners, including the United Arab Emirates (UAE), the United Kingdom (UK), and Australia. These pacts, combined with the structural impact of the PLI schemes, ensure India’s sustained emergence as a premier global manufacturing powerhouse. “Exports are set to achieve historic highs as improving global demand aligns with India’s emergence as a reliable, cost-efficient, and trusted global manufacturing hub.”

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 40–44 (Journal pp. 816–820) Indirect Taxes and Economy Roadmap for India’s Growth from Taxation and Regulatory Perspective VG CA. (Dr.) V. Gopalan The author is member of the Institute. He can be reached at janharmcs@gmail.com and eboard@icai.in “The empirical evidence on the link between the economic growth of a country and the level of regulations have been mixed. While Fukumoto 20081 and Kirchner 20122 have indicated a positive relationship between the volume of the regulations and the economic growth, Botero et al. 20043, Di Vita 20174 have provided evidence for the negative consequences of the regulations on employment and income of various economies they have researched. It is also to be understood that complex legislations hurt the economy and its growth Foarta and Morelli (2020)5. In this article, the author attempts to correlate the role of taxes and regulations for achieving economic growth in India. Read on…” 1. Introduction: Empirical Correlation Between Regulations and Economic Growth The empirical evidence on the link between the economic growth of a country and the level of regulations has generated considerable debate across economic literature. While researchers such as Fukumoto (2008) and Kirchner (2012) have indicated a positive relationship between the volume of statutory regulations and economic growth, other foundational studies by Botero et al. (2004) and Di Vita (2017) have provided compelling evidence regarding the adverse consequences of regulatory burdens on employment and income levels across diverse economies. Furthermore, as articulated by Foarta and Morelli (2020), excessively complex legislative frameworks create institutional friction that severely damages macroeconomic momentum. Against this academic backdrop, this analysis examines the strategic interplay between taxation architecture, statutory compliance mechanisms, and regulatory interventions in propelling India towards sustainable economic expansion. Indirect taxation represents a structural cornerstone of modern fiscal policy. Taxes such as the Goods and Services Tax (GST), representing the most extensive structural tax reform in India since independence, are levied equally across all taxpayers regardless of income brackets. Consequently, economic growth is distributed uniformly across consumers. Every sector of the economy bears the imprint of the GST framework. Growth in Gross Domestic Product (GDP), exports, commercial trade, manufacturing output, and professional services translates directly into higher indirect tax revenues. On the global stage, over 160 nations have successfully implemented a unified GST/VAT architecture, corroborating its efficiency as a fiscal catalyst. 2. Macroeconomic Rebound and Capital Formation According to authoritative data published by the India Brand Equity Foundation (IBEF), the Indian economy registered an impressive V-shaped recovery following initial pandemic-induced disruptions. In the first quarter of FY22 (Q1 FY22), India’s economic output registered a 20.1% Year-on-Year (YoY) growth, successfully recovering approximately 90% of pre-pandemic output levels observed in the corresponding first quarter of FY20. In FY21, India recorded a current account surplus equivalent to 0.9% of GDP. The IBEF report underscores that the Indian government’s targeted policy thrust towards infrastructure development and capital expenditure (capex) significantly accelerated capital formation within the domestic economy. This intervention elevated the investment-to-GDP ratio to 32% by the fourth quarter of FY21, laying a robust foundation for long-term production capacity and industrial scalability. 3. Fiscal Performance: Custom Duties, Direct Tax and GST Trajectory India’s broader macroeconomic resurgence is directly mirrored in buoyant tax collections, particularly within indirect taxes, notwithstanding unprecedented pandemic headwinds. IBEF reports reveal that between April 2021 and July 2021: Customs Revenue Collection: Surged by 144% YoY, indicating vigorous import-export demand and commercial revival. Central GST Collections: Expanded by 60% YoY, driven by wide-ranging resumption of domestic manufacturing and tertiary service activities. Net Tax Revenue: Reached Rs. 5.29 lakh crore (US$ 71.83 billion), representing a remarkable 2.5-fold increase over the corresponding period of the previous fiscal year. GST revenues maintained robust momentum throughout the calendar year 2021. Gross GST revenue collections climbed 25% YoY to Rs. 1.31 trillion (Rs. 1,31,526 crore) in November 2021—marking the second highest monthly figure on record after the historic peak of Rs. 1.40 trillion (Rs. 1,39,708 crore) recorded in April 2021. This November haul was 27% higher than collections during the pre-Covid corresponding month of FY 2019-20 and reflected continuous month-on-month expansion over four straight months. Trend in Monthly GST Collections (Rs. in crore) Comparative Performance: FY 2020-21 vs. FY 2021-22 • Source: Ministry of Finance, Government of India Month FY 2020-21 (Rs. Crore) FY 2021-22 (Rs. Crore) YoY Variance (%) Key Operational Drivers April 32,172 1,39,708 +334.2% All-time historic high; fiscal year-end reconciliations May 62,151 97,821 +57.4% Wave-2 localized state curbs; resilient supply networks June 90,917 92,800 +2.1% Filing relaxation windows granted across various states July 87,422 1,16,393 +33.1% Economic reopening; robust unlock manufacturing rebound August 86,449 1,12,020 +29.6% Strengthened e-way bill enforcement and compliance September 95,480 1,17,010 +22.5% Pre-festival inventory ramp-up; auto-populated returns October 1,05,155 1,30,127 +23.7% Festive sales peak; IT portal capacity optimization November 1,04,963 1,31,526 +25.3% Second highest ever recorded; +27% over pre-Covid FY20 4. Administrative Compliance Nudges and E-Way Bill Enforcement The Union Ministry of Finance attributed the sustained upsurge in GST revenues not merely to cyclical economic revival, but crucially to systemic administrative and policy nudges engineered to eradicate leakage and enforce statutory discipline. Key administrative interventions include: IT System Capacity Enhancement: Massive upgrades in portal throughput allowing concurrent return filings without technical bottlenecks. Automated Non-Filer Nudging: Targeted SMS, email, and portal notifications sent immediately following statutory due dates. Auto-Population of Returns: Systematic pre-filling of liabilities and input credits (via GSTR-1 to GSTR-3B linkage and GSTR-2B matching) to curb fictitious invoicing. Blocking of E-Way Bills: Automatic suspension of e-way bill generation privileges for taxpayers defaulting on return submissions for consecutive tax periods. Input Tax Credit (ITC) Restrictions: Tightening statutory rules regarding passing and utilization of unverified ITC, incentivizing compliant supplier chains. “E-Way bill is an electronic document generated on the GST portal for causing movement of the goods. It is a mechanism to ensure that the goods being transported comply with the GST laws, tool to track the movement of the goods being transported and above all to check tax evasion.” Prior to the rollout of GST, individual States operated disparate, uncoordinated transit documentation systems (such as road permits, waybills, and transit passes) that generated severe compliance bottlenecks, endless physical check-post queues, and rampant rent-seeking. The nationwide electronic interface under GST eliminates border checkpoints, enhances truck turnaround times by dramatically increasing the average distance covered per vehicle per day, and drastically lowers logistical overheads. Monthly E-Way bill volumes serve as an accurate real-time proxy for aggregate commercial activity. Although November 2021 witnessed a marginal contraction compared to preceding months since July 2021, this transient pause was predominantly attributable to localized state lockdowns and a high concentration of festive holidays throughout the country. Overall, the steadily expanding volume of E-way bills and rising GST receipts provide unmistakable evidence of organic economic revitalization under challenging global conditions. 5. Global GDP Comparison and Post-Pandemic Resilience The imperative of the current juncture extends beyond merely maintaining economic recovery—it demands accelerated, sustainable growth rates capable of realizing the target of a USD 5 trillion economy over the ensuing three years. International macroeconomic comparisons highlight India’s relative outperformance during the second quarter of FY22 (July to September 2021). India emerged as the fastest expanding major economy globally, registering an 8.4% GDP expansion, outpacing all peer developed and emerging markets: Comparative GDP Growth: Major Global Economies (Q2: July–September 2021) Cross-Country Quarterly Performance Analysis Country / Economic Region Q2 Growth Rate (%) Macroeconomic Observations India +8.4% Fastest growing major global economy; strong rebound across services and industry China +4.9% Deceleration prompted by property sector headwinds and power constraints Russia +4.3% Supported by buoyant energy export realizations Italy +3.8% European Union recovery fund stimulus rollout France +3.0% Consumption revival accompanied by services normalization United States +2.9% Moderate annualized quarterly pace impacted by supply chain frictions Germany +1.7% Automotive sector production bottlenecks and component shortages United Kingdom +1.3% Post-Brexit trade adjustments and labour market shortages Japan -3.0% Renewed state-of-emergency restrictions impacting private consumption This performance is particularly remarkable considering that India experienced an unprecedented 23.9% economic contraction during the initial pandemic shock in Q1 FY 2020-21 (April–June 2020). Had the severe health crisis not intervened, the Indian economy would have scaled substantially greater heights across all productive sectors. Historical Shock: GDP Sliced by the Pandemic (April–June 2020 vs. April–June 2019) Source: Official National GDP Releases, CEIC Database India -23.9% United Kingdom -21.7% France -18.9% Italy -17.7% Canada -13.0% Germany -11.3% Japan -9.9% United States -9.1% China +3.2% The Union Ministry of Finance’s monthly economic review for November 2021 recorded that India stands among an exclusive group of global nations that delivered four consecutive quarters of uninterrupted economic expansion amid the pandemic era (Q3 and Q4 of FY 2020-21, alongside Q1 and Q2 of FY 2021-22). This structural resilience was anchored by a synchronized revival in services, comprehensive factory capacity utilization in manufacturing, and buoyant, uninterrupted agricultural production. Reflecting this trajectory, the International Monetary Fund (IMF) projected global economic growth at 6.0% for 2021, while assigning a stellar growth forecast of 9.5% to India. 6. Structural Reforms: Gati Shakti, NIP and Regulatory Overhaul As recognized by the World Economic Forum (WEF), India’s medium- and long-term economic outlook has been decisively fortified through deep institutional transformations. The government’s strategic roadmap is materialized through overarching multi-modal initiatives: PM Gati Shakti National Master Plan: A digital institutional platform breaking bureaucratic silos to execute integrated multi-modal logistics and connectivity across road, rail, air, and ports. Atmanirbhar Bharat Abhiyan: Self-reliance initiatives coupled with Production-Linked Incentive (PLI) schemes across 14 champion industrial sectors to position India as a global manufacturing hub. National Infrastructure Pipeline (NIP): Comprehensive project pipeline spanning energy, roads, railways, and urban infrastructure to crowd-in private capital. National Monetization Pipeline (NMP): Unlocking idle public capital by leasing brownfield infrastructure assets to fund greenfield expansion. Labour Law Consolidation: Rationalization of 29 archaic, fragmented central labour enactments into four modern, simplified Labour Codes. Banking & Resolution Overhaul: Robust non-performing asset resolution, public sector bank recapitalization, and clean balance-sheet operations. “Changes in tax laws such as GST will produce the desired results if only various structural changes are brought in the banking regulations to ensure the availability of funds at affordable cost as that was one of the reasons for the economy to face challenges and difficulties.” Tax reforms like GST cannot operate in an institutional vacuum. They yield optimal macroeconomic dividends only when synchronized with banking regulations that guarantee affordable liquidity to commercial enterprises. The effective deployment of the Insolvency and Bankruptcy Code (IBC) has expedited debt recovery for commercial banks, cleansed financial intermediary books, and facilitated lower corporate borrowing spreads. This funding ease directly invigorates manufacturing and tertiary trade, establishing an expanding tax base that compounds national revenue. Concurrently, India’s drive for digital empowerment and universal financial inclusion has achieved global benchmark status. The unified GST digital ecosystem has catalyzed paperless invoicing, e-way tracking, and electronic audit rails, pushing the digital formalization of commerce to an unprecedented level. 7. Ease of Doing Business and Demographic Dividend The World Bank’s annual ‘Ease of Doing Business’ assessment evaluates 12 crucial regulatory domains across 190 jurisdictions, focusing on three fundamental operational inquiries: When and why do governments initiate regulatory changes to cultivate private enterprise? What institutional characteristics define a truly reformist government? What empirical effects do specific regulatory shifts produce on entrepreneurial investment activity? In the concluding global survey, India distinguished itself as one of the exceedingly rare jurisdictions that single-handedly implemented one-fifth (20%) of all business regulatory reforms recorded worldwide. Consequently, India’s global ranking climbed dramatically to 63rd position among 190 economies, transforming the country into an attractive global manufacturing and foreign investment hub. This empirical trajectory validates the thesis that sustainable output expansion requires robust, transparent, and predictable regulatory architecture. As the World Bank highlighted in its 2019 report, India must continue expanding its infrastructure outlays beyond physical transport (roads and bridges) into social overhead capital—specifically healthcare and higher education. Most critically, India must effectively harvest its vast demographic dividend: ensuring that the millions of educated young entrants joining the labor market annually secure productive, formal employment. India’s public health infrastructure demonstrated exceptional mobilization during the crisis, administering over 135 crore Covid-19 vaccination doses by mid-December 2021, laying the biological groundwork for uninterrupted commercial reopening. 8. Global GDP Standings and the USD 5 Trillion Roadmap With a geographic expanse ranking 7th globally and a population exceeding 1.4 billion people, India has seamlessly integrated into the global trade order. GST laws have been calibrated to satisfy domestic requirements while meeting the rigorous expectations of foreign direct investors. According to the International Monetary Fund (IMF), the global hierarchy of leading nations ranked by nominal GDP stands as follows: Top 10 Global Economies by Nominal GDP IMF Nominal GDP Standings • Baseline Reference Global Rank Country Nominal GDP (USD Trillion) 1 United States $20.49 Trillion 2 China $13.40 Trillion 3 Japan $4.97 Trillion 4 Germany $4.00 Trillion 5 United Kingdom $2.83 Trillion 6 France $2.78 Trillion 7 India (Target: $5T by 2024) $2.72 Trillion 8 Italy $2.07 Trillion 9 Brazil $1.87 Trillion 10 Canada $1.71 Trillion Holding 7th position globally at US$ 2.72 trillion, India’s strategic policy horizon targets reaching US$ 5 trillion by 2024. Although pandemic headwinds necessitated temporal recalibration, reaching this ambitious landmark requires establishing precise milestone tracking, transparent project accountability, and proactive course-correction mechanisms. Vinod Rai Action Plan: Six Priority Focus Sectors In ISAS Working Paper No. 324 (published by the National University of Singapore), Vinod Rai6 outlined a synchronized, closely monitored roadmap to attain the projected US$ 5 trillion target by 2024 across six fundamental economic pillars: 1. Agriculture: Modernization of value chains, warehouse networks, and agro-processing incentives. 2. Infrastructure: Clearing project logjams and securing blended public-private financing. 3. Banking & Financial Intermediation: Strengthening capital adequacy and credit delivery. 4. Real Estate & Construction: Streamlining statutory clearances and resolving stalled projects. 5. Labour Reforms: Formalization of contractual workers and productivity-linked rewards. 6. Water & Natural Resource Management: Conservation, industrial recycling, and urban supply reliability. Crucially, Finance Ministry data indicates that infrastructure projects worth approximately INR 11 trillion remain stalled, heavily concentrated across the power, railway, and highway corridors. To address future deficit requirements, the Task Force on National Infrastructure Pipeline has formulated an overarching capital layout of INR 102 trillion over five years, of which INR 20 trillion is designated to be funded by the private sector. This underscores the urgent necessity for calibrated tax incentives and regulatory stability to unlock institutional and private capital. 9. Banking Sector Reform and the Insolvency and Bankruptcy Code (IBC) Banking sector restructuring constitutes another pillar of India’s economic overhaul. The rollout of the unified GST architecture fundamentally altered banking structures and transactions by generating auditable electronic invoice trails, enhancing borrower transparency. Concurrently, the enactment of the Insolvency and Bankruptcy Code (IBC) represents an epochal departure from legacy enactments (such as SICK Industrial Companies Act and DRT frameworks). IBC replaced the failed “debtor in possession” regime with an empowered “creditor in control” doctrine. Its foundational tenets include: Asset Value Maximization: Preserving the going-concern value of corporate debtor operations rather than executing distress piecemeal liquidation. Early Default Detection: Instituting strict default triggers to initiate corporate resolution before balance sheets suffer irreversible distress. Time-Bound Resolution: Prescribing rigorous statutory timelines to revive viable enterprises and reallocate locked productive capital. Dynamic Regulatory Calibration: Continuous fine-tuning of Insolvency and Bankruptcy Board of India (IBBI) regulations to prevent opportunistic bidder misuse. Nevertheless, operational experience indicates that additional institutional controls, dedicated bench capacity, and procedural refinements are essential to eliminate judicial bottlenecks and resolve cases pending beyond statutory horizons under the IBC. 10. Regulatory Modernization, NaBFID and Green Transition State regulations and fiscal statutes play a definitive role in determining enterprise viability in both domestic and international markets. The delicate equilibrium between regulatory oversight and economic freedom is succinctly captured in the doctrine articulated by the Committee for Economic Development (CED, 1998): “Government regulation of economic and social activities permeates our lives. While regulation in many instances yields important public benefits, regulations often are imposed on individuals and organizations with too little thought or analysis of what is gained in comparison with the losses incurred in time, money, indecision, and productivity... Further, the growth of government involvement in the market system sometimes constrains our ability to achieve fundamental economic and social goals.”7 To address historical bottlenecks in developmental financing, the government established the specialized National Bank for Financing Infrastructure and Development (NaBFID). This development finance institution is specifically chartered to bridge physical infrastructure deficiencies across underdeveloped and rural belts. Simultaneously, India has assumed global leadership in sustainable development by pledging to achieve net zero carbon emissions by 2070 and source 50% of its national energy capacity from renewable resources by 2030. Attaining these green targets requires colossal capital mobilization to modernize transmission grids, expand battery storage, and accelerate installed solar and wind infrastructure. As recognized in the OECD Economic Outlook (December 2021), India has made outstanding progress over the preceding two decades in accelerating wealth creation and reducing absolute poverty. Healing pandemic scars demands refined social delivery systems alongside synchronized regulatory enablers. 11. Conclusion: Strategic Roadmap for Smart, Sustainable Growth With a multipronged developmental strategy, India is uniquely positioned to achieve smart economic recovery and long-term prosperity. The pillars of this roadmap are: A robust, non-intrusive indirect tax collection mechanism backed by advanced digital analytics and universal compliance nudges. Predictable, investor-friendly regulatory frameworks designed to attract domestic and foreign direct investment. Targeted capital outlays establishing last-mile multi-modal logistics networks under the PM Gati Shakti and NIP architectures. Deep financial sector reforms ensuring adequate credit access at low cost of capital. Comprehensive deployment of India’s unmatched demographic dividend via technical upskilling and productive formal employment. Backed by these structural foundations, the Indian economy is firmly poised for a smart recovery and sustainable growth towards the USD 5 trillion milestone. ■ ■ ■ Footnotes and Academic References: Fukumoto, K (2008), “Legislative production in comparative perspective: Cross-sectional study of 42 countries and time-series analysis of the Japan case”, Japanese Journal of Political Science 9(1):1–19. Kirchner, S (2012), “Federal legislative activism in Australia: a new approach to testing Wagner’s law”, Public Choice 153(3):375–392. Botero, J C, S Djankov, R L Porta, F Lopez-de Silanes and A Shleifer (2004), “The regulation of labor”, The Quarterly Journal of Economics 119(4):1339–1382. Di Vita, G (2017), “Institutional quality and the growth rates of the Italian regions: The costs of regulatory complexity”, Papers in Regional Science 97(4): 1057–1081. Foarta, D and M Morelli (2020), “Complexity and the reform process”, Working Paper. Vinod Rai, ISAS Working Paper No.324 dated March 30, 2020 published by National University of Singapore. Committee for Economic Development, Modernizing Government Regulation: The Need for Action, 1998, p. vii (https://www.ced.org/reports/single/modernizing-government-regulation-the-need-for-action). OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 2: December 2021 – PRELIMINARY VERSION © OECD 2021. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) January 2022 Issue • Vol. 70 • No. 7 • pp. 40–44 (Journal pp. 816–820) Author Contact: janharmcs@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 45–49 (Journal pp. 821–825) START-UPS • ENTREPRENEURSHIP & VENTURE CAPITAL The Dawn of the Indian Unicorn Era CA. Anshul Kumar The author is a member of the Institute. He can be reached at eboard@icai.in. 🦄 Evolution of India’s Startup Landscape The Indian economy opened its door to foreign investments in the early 1990s. The last decade of the second millennium witnessed a beeline of foreign multinational enterprises entering Indian markets with their own investments. This paved the way for high-end white collared jobs and India also saw a boom in its services sector. The software industry of India started to flourish with Indian software being regarded as world class in quality. The public listing of Infosys in the mid-90s was a cherry on the cake as it created wealth for the common investor and gave a glimpse of the strength of Indian IT companies. Read on… 1. The Beginning: From IT Services to Consumer Problem Solving Infosys, TCS, Wipro and other IT companies invested in technology and leveraged the country’s young, English-speaking workforce to provide cost-effective technology services to clients across the globe. Naukri.com, launched in the mid-90s, used the sheer growth in job opportunities and soon became the go-to place for candidates as well as recruiters. The 1990s also witnessed the launch of Airtel, which today is one of the leading players in the Indian telecommunications industry, with over USD 14 Billion in revenues in 2021 and more than 350 million consumers. Similarly, the 1990s witnessed the launch of ICICI, HDFC and Axis Bank, which have gone on to rank amongst the top 10 banks in India and ushered in a new era of private sector banking with customer-focused services. Most importantly, they fundamentally reshaped the Indian banking business model, leading to the betterment of the sector as a whole. Generational Transformation of Ambition While the last decade of the second millennium gave jobs to aspiring Indian youth, the first decade of this millennium saw aspirational youth willing to tread the entrepreneurial path with greater zeal. Technology and software solutions, which were predominantly serving corporate demands, were now tilting towards solving problems faced by the common man. Some of the iconic start-ups founded in the first decade of this century—such as Byju’s, Dream11, Paytm, PolicyBazaar, Ola, Quikr, and Zomato—went on to change the landscape of their respective industry segments and permanently modified consumer behaviour. 2. The Push: Broadband Penetration, E-Commerce & Government Catalysts The beginning was slow yet steady. It laid a strong foundation with the strengthening of software, telecommunications, and the financial sector. The further growth of Indian start-ups was fuelled by the increasing speed and penetration of the internet. The majority of start-ups in the late 2000s focused on utilizing technology and providing solutions based on internet access. Rise of Domestic E-Commerce Giants E-commerce gained a firm foothold with the urban population possessing internet access, choosing to buy online rather than visiting traditional brick-and-mortar shops. Flipkart, Snapdeal, ShopClues and other Indian e-commerce players demonstrated the mettle to compete head-on with global titans like Amazon and eBay. E-commerce start-ups brought the shopping experience directly to the consumer’s doorstep, removing the need to step out into physical markets. Government Policy Enablers & Funding Schemes: Startup India & StandUp India (2016): Created widespread public awareness and galvanized the national entrepreneurial mindset. Electronic Development Fund (EDF): Run by SIDBI, marking the first time the Indian Government became a Limited Partner (LP) in a venture fund. Financial & Tax Incentives: Easy credit via the MUDRA Scheme, 100% tax holiday under Section 80-IAC of the Income-tax Act, and relief/exemptions from Angel Tax. Startup India Seed Fund Scheme (SISFS - January 2021): Created by DPIIT with an outlay of INR 945 Crores to provide financial assistance for Proof of Concept (PoC), prototype development, product trials, market entry, and commercialization—supporting an estimated 3,600 entrepreneurs through 300 incubators over 4 years. SISFS Criteria & Priority Sectors: A start-up recognized by DPIIT, incorporated not more than 2 years prior to application, with a scalable business idea and market fit, can secure seed funding up to INR 50 Lakhs. Priority sectors include: social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defence, space, railways, oil & gas, and textiles. 3. Structural Drivers: Why India is a Thriving Startup Ecosystem i) Massive Pool of Talent An overwhelmingly young demographic with millions graduating from universities and business schools annually. Rather than seeking traditional corporate jobs, top graduates are launching independent ventures. ii) Cost-Effective Workforce India is a labour-abundant rather than purely capital-intensive economy. The availability of high-quality technical talent at competitive cost structures substantially lowers operational burn rates compared to western peers. iii) Proliferation of Low-Cost Internet Affordable telecom data unleashed deep rural and semi-urban internet penetration. India possesses the world’s second-largest internet user base after China, offering startups an unprecedented addressable domestic market. iv) Technological Leapfrogging Advancements in hardware, cloud hosting, and data management made processes rapid and scalable. Indian startups are actively integrating Artificial Intelligence (AI) and blockchain to solve high-complexity friction points. v) Diversity of Capital & 100% FDI Automatic Route Shifting away from informal family borrowing and conservative bank debt, founders now tap angel syndicates, institutional venture capital, private equity, and sovereign wealth funds. Liberalized 100% FDI under the automatic route opened floodgates for global capital. 4. The Dawn of the Indian Unicorn Era: Milestones & Records A Unicorn is defined as a privately held start-up that achieves a valuation surpassing USD 1 Billion. The Pioneer: InMobi (September 2011) In September 2011, InMobi became India’s first unicorn after SoftBank invested USD 200 Million in the mobile ad-tech venture. Founded in 2007, InMobi took 4 years to reach the milestone. Soon thereafter, early e-commerce and fintech players—including Flipkart, Snapdeal, Paytm, Quikr, and ShopClues—achieved unicorn status. Over 35 start-ups reached unicorn status across the 2010s decade. 2018 Record Udaan (B2B E-Commerce) Achieved Unicorn status in just over 2 years from inception. September 2021 Record Apna (Jobs Marketplace) Achieved Unicorn status in under 2 years, serving blue-collar workers. All-Time Record (Nov 2021) Mensa Brands (Aggregator) Fastest Unicorn in Indian history—reached valuation in just 6 months. The 2020–2021 Unicorn Explosion Despite COVID-19 disruptions in 2020, India minted 10 Unicorns in 2020. In 2021, the ecosystem exploded with over 40 new Unicorns minted in a single year—surpassing the cumulative total of the entire previous decade! Ecosystem Tally: India has around 80 total unicorns, with more than 40 founded in the last 7 years alone. As of December 2021 (InvestIndia.gov.in), India has 79 unicorns valued at USD 260.5 Billion, standing as the 3rd largest ecosystem globally after the US and China with over 59,000 DPIIT-recognized startups. Valuation Volatility: A few unicorns—specifically ShopClues, Hike, and Quikr—later lost their unicorn badges as subsequent valuations dropped below the USD 1 Billion threshold. 5. Exhaustive Sectoral Mapping of Indian Unicorns Prominent Pre-2021 Decade Unicorns E-commerce/Marketplace: Flipkart, Snapdeal, Paytm Mall, Quikr, ShopClues, Cars24, Udaan, BigBasket, Lenskart, Nykaa Fintech: Paytm, PolicyBazaar, BillDesk, Pine Labs, Razorpay, PhonePe Foodtech: Zomato, Swiggy Edtech: Byju’s, Unacademy Proptech & Hospitality: Oyo Logistics: Delhivery, Rivigo Mobility: Ola Cabs, Ola Electric Gaming: Dream11 Content & Media: Dailyhunt, Glance InMobi Social Media: Hike SaaS & Enterprise: Mu Sigma, Freshworks, Druva, Icertis, Postman, Zenoti The 2021 Class of New Unicorns (40+ Startups) E-commerce & Marketplaces: Infra.Market, FirstCry, Meesho, Moglix, Grofers, Urban Company, Droom, Zetwerk, Apna, MyGlamm, Spinny Fintech: Digit Insurance, Cred, Groww, Zeta, BharatPe, Acko, Upstox, Slice, MobiKwik Foodtech: Rebel Foods, Licious Edtech: upGrad, Eruditus, Vedantu Proptech: NoBroker Logistics: BlackBuck Gaming: Mobile Premier League (MPL) Social Media & Conversational AI: ShareChat, Gupshup SaaS Products: Innovaccer, Chargebee, BrowserStack, MindTickle Cryptocurrency Exchanges: CoinSwitch Kuber, CoinDCX Digital Brand Aggregators: Mensa Brands HealthTech: Curefit, Pristyn Care, PharmEasy NBFC & MSME Lending: OfBusiness, Five Star Business Finance Socio-Economic Inclusion & Future Frontier: Marketplaces are unlocking millions of blue-collar jobs, elevating livelihoods through upskilling portals like Apna. Looking forward, drone technology and the semiconductor industry represent the next breeding ground for future Indian Unicorns. 6. IPO Listings, The Journey to Decacorns & The Missing Link IPO Listings & Maturity Indian startups are maturing into public corporations. Zomato, Nykaa, and Paytm opted for domestic Indian bourses, while Freshworks listed on NASDAQ in the US. MobiKwik secured approval for its domestic IPO. While listing day gyrations vary, the IPO pipeline will expand significantly. The Decacorn Horizon (> USD 10 Bn) The next frontier is the Decacorn—a startup achieving a valuation above USD 10 Billion. In a few short years, unicorns will be commonplace, and India’s discourse will shift to building global decacorns. The Missing Link: Systemic Bottlenecks & Policy Imperatives For every successful Unicorn, countless other startups shut down. Crucial systemic vulnerabilities persist: Foreign Capital Over-Dependence: Mega-rounds are almost entirely bankrolled by offshore giants (SoftBank, Ant Group, Sequoia, Tiger Global, Accel, Matrix). Domestic venture funds (Kalaari, Blume, Nexus) operate at a fraction of their scale. Tax Holiday Bottleneck: Out of 59,000+ DPIIT registered startups, only a few hundred have received second-stage Inter-Ministerial Board (IMB) certification for the 3-year Section 80-IAC tax holiday. Inadequate Loan Caps: MUDRA loans capped at INR 10 Lakhs (INR 1 Million) are negligible for technology startups, and CGTMSE focuses on conventional SME collateral-free debt rather than risk equity. Policy Imperative: India urgently requires more indigenous Venture Capital Funds and agile regulatory frameworks to cement its status as the world’s numero-uno startup nation. “The Unicorn boom of 2021 is just a beginning, and this boom is not going to be short-lived. We are witnessing an exciting phase of Indian resurgence, and we must stand up and be a part of this journey.”

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 50–58 (Journal pp. 826–834) MSME Sector MSME Banking Finance – An Overview of Credit Procedures NA CA. Nitin Kumar Agrawal The author is member of the Institute. He can be reached at ca.nitin7989@gmail.com and eboard@icai.in “MSMEs are the backbone of the Indian economy because of their enormous contribution to GDP, exports and employment. Creating opportunities for MSMEs in the emerging markets is a key way to advance economic development. However, there is a huge understanding gap between the entrepreneurs and bankers when it comes to concluding the eligible finance to an MSME. This article attempts to clarify the understanding of credit assessment among entrepreneurs and finance professionals so that majority of the check points can be cleared at their end to improve the overall Turnaround Time (TAT). Read on…” Introduction: The Credit Assessment Framework Micro, Small, and Medium Enterprises (MSMEs) serve as the primary catalyst for economic expansion in India through significant contributions to national manufacturing output, gross domestic product (GDP), export earnings, and massive employment generation. While government policies actively encourage formal institutional credit to this vital sector, entrepreneurs and financial advisors frequently encounter substantial delays, misunderstandings, and procedural friction during loan appraisal. When an enterprise submits a loan application to a commercial bank or financial institution, the credit underwriting team evaluates the proposal against six core pillars of credit assessment: 1. Business Profile: Legal structure, industry sector, plant capacity, market standing, and enterprise vintage. 2. Credit History: Commercial CIBIL, Consumer CIBIL, dedupe checks, SMA/NPA status, and defaulter lists. 3. Financial Assessment: Turnover trend, EBIDTA/PAT margins, ATNW, TOL/ATNW ratio, current ratio, and operating cycles. 4. Banking Conduct: 12 months bank statements, credit summation matching, bounce track record, and debt servicing. 5. Collateral Comfort: Nature, occupancy, valuation, legal title search, ROC charge registration, and security coverage ratio. 6. Other Aspects: Supplier/buyer references, factory unit inspection, routing conditions, and limit utilization covenants. Pillar 1: Business Profile Analysis The business profile constitutes the primary bedrock upon which a credit underwriting manager establishes baseline comfort for an advance. Commercial enterprises are classified into three primary categories: Manufacturing Firms: Credit assurance is inherently higher for manufacturing enterprises compared to pure traders. A manufacturer commits substantial permanent equity capital into land, physical buildings, and specialized plant and machinery following exhaustive planning, demonstrating a long-term economic stake in the establishment. Credit appraisal for manufacturers is directly supported by rated plant capacity, production bottleneck analysis, and machine specifications. Trading Firms: Because traders possess high liquidity and low fixed asset commitments, credit assurance is predominantly derived from the commercial vintage (age) of the business, established distributor channels, and multi-year turnover growth consistency. Service Enterprises: Assuredness is evaluated based on the certainty of running service contracts in hand, the reputational standing and creditworthiness of the principal corporate clients for whom services are executed, and historical fee generation trends. Vintage & Promoter Track Record: Business vintage and promoter background in the exact line of activity provide critical comfort. Substantial operational vintage demonstrates resilience across macroeconomic cycles. Furthermore, credit managers evaluate the specific product lines handled: General Commodity Products: Goods globally traded in high volumes—such as textiles, pharmaceuticals, chemical intermediates, agricultural food products, ferrous/non-ferrous metals, and paper—enjoy ready liquidity and established secondary markets. Requirement-Specific Products: Specialized custom capital goods, customized engineering moulds, heavy industrial equipment, and niche consumer durables involve higher market risk, client concentration, and longer absorption cycles. Negative & Restricted Industry Lists: Most commercial banks maintain restricted lending sectors due to regulatory, volatility, or environmental risks. Commonly un-funded or restricted sectors include stockbroking, bullion and precious metal trading, private real estate development, speculative land trading, news media channels, distilleries, and alcoholic beverage manufacturing. Pillar 2: Credit History and Dedupe Checks Credit track record verification represents an uncompromising regulatory screening stage. Underwriters perform comprehensive checks covering both the borrowing legal entity and all individuals involved as promoters, partners, directors, or personal guarantors: Commercial CIBIL Report: Assesses historical repayment conduct, fund-based/non-fund-based limits, and past defaults of the commercial entity. Consumer CIBIL Score: Evaluates the personal credit discipline, credit cards, retail loans, and repayment histories of all promoters and guarantors. Negative Regulatory Lists: Comprehensive screening against the Reserve Bank of India (RBI) Wilful Defaulter List, Export Credit Guarantee Corporation (ECGC) Exporter Defaulter List, and the bank’s internal Customer Profile Checking System (CPCS). Dedupe Analysis: Cross-verifying tax identification numbers (PAN, GSTIN), residential addresses, mobile numbers, and director identification numbers (DIN) across existing database exposures to identify concealed inter-connected defaults. “The credit manager requires audit reports of the entity for financial assessment. Generally, the borrower is asked to submit audit reports of 3 years.” Handling Adverse CIBIL Flags: If an applicant’s credit bureau record reveals past instances of default, loan settlements, Days Past Due (DPD), or loan write-offs, the borrower must furnish legitimate justifications supported by documentary evidence. Special Mention Accounts (SMA-1, SMA-2, SMA-3) and Non-Performing Asset (NPA) classifications in any existing facility require rigorous scrutiny. Depending on case merits, credit underwriters may stipulate formal pre-disbursement conditions requiring full settlement of disputed dues with existing lenders and submission of formal No Due Certificates (NDCs). While credit scores improve over time with pristine ongoing conduct, many institutions enforce strict minimum cut-off threshold scores below which applications are summarily rejected. Pillar 3: Financial Assessment and Core Banking Metrics Financial underwriting requires submission of audited financial statements (Balance Sheet, Profit & Loss Account, Schedules, Audit Reports, and Tax Audit Form 3CD) for the preceding three financial years. For entities possessing a shorter track record (vintage under three years), deviations may be granted under institutional policy matrices subject to stringent minimum vintage covenants. Critical Financial Parameters Evaluated by Underwriters 1. Working Capital Limit Eligibility (Turnover Method) Turnover constitutes the foundational baseline for determining working capital requirements (under Nayak Committee norms). Typically, banks sanction fund-based working capital limits equivalent to 20% to 25% of the last audited or CA-certified provisional annual turnover. Where limits are sought against projected sales, the credit manager validates projections against confirmed orders in hand, Letters of Credit (LCs), and contracted production capacities. 2. Turnover Trends and Operating Margins Banks scrutinize the 3-year turnover trajectory (increasing, stagnant, decreasing, or gradual). Exceptional top-line spikes require economic justification regarding capacity and future sustainability; declining sales require comprehensive operational explanations. Underwriters examine Operating EBIDTA (Earnings Before Interest, Depreciation, Tax, and Amortization) and PAT (Profit After Tax) margins relative to established peer industry benchmarks. 3. Adjusted Tangible Net Worth (ATNW) ATNW represents the genuine, unencumbered equity stake committed by the business owners. It is mathematically derived as: ATNW = (Paid-up Capital / Partner Capital + Reserves & Surplus + Subordinated Unsecured Loans from Promoters/Relatives) − (Loans & Advances to Related Entities / Non-Core Asset Diversions) Underwriters demand an expanding ATNW trend, confirming that earnings are retained in the business rather than diverted to external personal ventures. 4. TOL / ATNW Leverage Ratio Total Outside Liabilities (TOL) encompasses bank borrowings, trade payables, statutory dues, and provisions. Underwriters maintain a strict benchmark comfort threshold of TOL / ATNW < 5.0 times (inclusive of the proposed bank exposure). If total leverage exceeds 5.0 times, credit sanction requires upfront promoter equity infusion or subordinated debt prior to fund release. 5. Current Ratio (Liquidity Benchmark) The regulatory benchmark Current Ratio (Current Assets / Current Liabilities) is established at 1.33. Industry deviations are permissible: capital-intensive manufacturing units locking funds into specialized fixed assets, or infrastructure contractors whose liquidity is tied into long-term Earnest Money Deposits (EMDs) and bank guarantee margins, may be sanctioned at lower ratios. 6. Operating Cycle: Debtors vs. Creditors Dynamics Debtors’ collection period normally oscillates between 60 to 90 days or 90 to 120 days, corroborated against trade practices. Creditors’ payment terms typically involve advance payment, payment upon delivery, or 30 to 60 days credit. The structural net working capital gap between customer realization and supplier payments defines the true financing requirement. “The creditor’s cycle gives an idea of how the firm is meeting its trade payables and the overall gap between the debtors and creditors realization period for which working capital is desired.” Pillar 4: Banking Conduct & Forensic Cash Flow Scrutiny Underwriters evaluate proposal banking conduct under two distinct scenarios: (a) a first-time institutional borrowing entity, or (b) a balance transfer (takeover) from another commercial bank. Borrowers must submit 12 continuous months of bank statements for all operational operative accounts. “The bank demands the latest 12 months bank statements to observe the banking conduct of the borrower.” Credit Summation Matching: Cumulative annual credit entries in bank statements must broadly match the reported revenue in financial statements and GST GSTR-3B filings, validating reported business scale. Legitimate Party Invoicing: Operational receipts and disbursements must align with legitimate trade counterparties. Payments to unrelated entities or cash withdrawals indicate fund diversion. Cheque Bounce Analysis: Inward cheque bounces point to weak debtor creditworthiness and customer payment stress. Outward cheque returns indicate working capital mismanagement and severe liquidity stress. Debt Servicing Track Record: Timely servicing of monthly interest and scheduled loan EMIs must adhere strictly to original sanction repayment amortization schedules. “The bank verifies the nature of payments received by the firm and the parties from whom the payments are received. Payments and receipts should be invoiced to and verified with those parties who are related to the business of the firm.” Pillar 5: Collateral Comfort, Valuation & Legal Security To mitigate default risks, banks secure credit exposure via primary movable assets and secondary collateral security: Immovable Properties: Residential buildings, commercial offices, industrial plants, or open plots. Highest underwriter comfort attaches to self-occupied residential properties, followed by commercial spaces, while industrial factory premises rank lower due to limited secondary market liquidity. Movable Assets & Liquid Securities: Hypothecation of current assets (raw materials, work-in-progress, finished goods, book debts), fixed deposit receipts (FDRs), approved government bonds, mutual funds, listed equities, and surrender values of keyman/individual life insurance policies. Security Coverage Ratio: Where financial parameters or vintage are weak, banks demand security coverage exceeding 100% of the loan amount. For established enterprises with sterling repayment records and strong market standing, coverage below 100% may be approved. Legal Title & Mortgage Formalities: Comprehensive Title Search Reports (typically covering 30 years) from empanelled advocates; registered or equitable mortgage execution with appropriate stamp duty; registration of charge with the Registrar of Companies (ROC) under Section 77 of the Companies Act, 2013; and mandatory comprehensive insurance covering fire and perils. Pillar 6: Operational Covenants, Factory Visits & Underwriting Covenants Beyond audited figures and collateral documentation, credit managers implement crucial qualitative underwriting checks: “Reference check is an important aspect about the proposed borrower, which the banker does many times with buyer/suppliers of the applicant firm.” Trade & Market Reference Checks: Discreet background calls made to top suppliers and buyers, as well as peer competitors within the bank’s existing portfolio, verifying business ethics and market standing. Mandatory Factory / Unit Inspection: Physical pre-sanction inspection assessing operational activity, machinery running condition, raw material storage, production cycle, labor strength, and dispatch infrastructure. Conditional Phased Disbursements: Sanctioning limits with milestone riders—linking credit tranches to demonstrated turnover milestones or physical construction stages. Sole Banking & Current Account Routing: Enforcing strict covenants disallowing multi-banking current accounts, mandating exclusive transaction routing through the lender bank. Minimum Limit Utilization (NII Protection): Enforcing penal clauses and requiring an average minimum facility utilization of 60% of sanctioned limits to protect the bank’s Net Interest Income (NII). “Banker may stipulate conditions for release of funds with riders. They may sanction an applied limit and disburse/release by linking it with turnover achievement or fulfilment of particular conditions.” Comprehensive Client Information Dossier for Bank Submission To compress Turnaround Time (TAT) and eliminate repetitive underwriting queries, finance professionals and MSME promoters should assemble a complete loan docket structured across the following five exhaustive schedules: (A) Business Overview Checklist Sr No. Particulars & Operational Detail Underwriting Focus / Client Remarks 1. Product Configuration: • Name of Product that entity is manufacturing/going to manufacture under expansion • Monthly production capacity of each Product Quantify rated machine capacity vs. actual operational throughput per shift. 2. Raw Material: • Raw Materials required for manufacturing such product/products Technical grades, bill of materials (BOM), substitute viability. 3. Sources of Raw Material: • Locality of Suppliers • Whether purchased from original manufacturer or trader/dealer • Average stock of Raw material maintained by the entity • Transport mode of RM procurement • Import/Domestic procurement Percentage Lead time risk, price hedging, LC requirements for imported inputs. 4. Manufacturing Process: • Manufacturing process in brief • Average manufacturing time • Percentage of Wastage Standard conversion cost analysis; scrap recycling and net yield margins. 5. Product Applications: • Industries where the product is used • Whether the product is RM or FG of its customers Assess consumer industry cyclicality and bargaining power over pricing. 6. Factory Land Details: • Obtain land allotment letter if GIDC land • GPCB applicability and clearance • Obtain soft copy of plans if available Freehold vs leasehold tenure; lease payment status, master plan layout. 7. Status of Statutory License / Registrations / Approvals: • Udyam Registration • Building Approval / Layout Approval • Factory License • GPCB approval (Consent to Establish / Consent to Operate) • PF / ESIC registration • GST registration • Drug License (if applicable) Mandatory regulatory compliance dossier; validation of operating licenses. (B) Revenue and Cost Estimations & CMA Data Checklist (Project & Working Capital Finance) Sr No. Financial / Cost Estimation Parameter Underwriting Focus / Client Remarks 1. Capacity Utilization: • Total Month wise production capacity of each product • Capacity utilization percentage presently and in upcoming years • No. of Operational Hours per day • Prepare Excel Sheet for Capacity Utilization Pragmatic ramp-up assumptions (e.g., 60% Year 1, 70% Year 2, 80% Year 3). 2. Revenue Estimation: • Selling price of each product • Selling price hike over a period • GST applicability of Sales • Monthly sales Unit and Finished goods • Closing Stock units monthly • Prepare Excel Sheet for Revenue Projection Reconciliation with GST return tax rates and historical pricing power. 3. Raw Material Cost: • Raw Material cost per unit • Consumption pattern of Raw material per month as per production units • Raw material closing stock maintained per month • Price escalation percentage over a period in RM cost • Prepare Excel Sheet for Raw material Cost calculations Sensitivity to commodity inflation and supplier credit terms. 4. Power, Fuel, Water & ETP Cost: • Details of connected load/power requirement proposed • Details of alternative source of power in case of failure/DG sets if proposed in Cost in project • Prepare Excel sheet for power consumption calculation • Obtain details of fuel cost as percentage of production • Cost of Water and ETP (Effluent Treatment Plant) Sanctioned power load sanction letters; environmental compliance outlays. 5. Manpower Cost: • Prepare excel sheet for manpower cost calculation • Growth percentage in manpower cost over a period Skilled, semi-skilled, administrative headcount with annual wage hikes. 6. Repairs & Maintenance Cost: • R&M cost as percentage of Gross Fixed Assets per annum (say 1% of the FA Block each year) Benchmark industry standard provision on plant maintenance. 7. General and Administration Cost: • General and Administration cost as percentage of Gross sales per year Corporate overheads, audit, legal, insurance, travel. 8. Selling and Marketing Cost: • Selling and Marketing cost as percentage of Gross sales per year Distribution freight, marketing commissions, sales promotional budgets. 9. Depreciation and Income Tax: • Prepare Excel Sheet for above calculations Companies Act vs Income Tax Act rates; deferred tax computation. 10. Margins: • Obtain idea of EBIDTA and PAT margins industry specific Benchmarking projected operating margins against peer companies. 11. Inventory / Debtors / Creditors Cycle: • Average inventory cycle • Average Debtors realization period i.e., the credit period allowed to customers • Average credit period expected to get from suppliers Foundation of CMA operating cycle working capital gap derivation. (C) Promoters & Guarantors Background Checklist Sr No. Promoter / Guarantor Information Underwriting Focus / Client Remarks 1. Name of all Promoters: Full legal names as per PAN and Aadhaar. Identity and shareholding pattern alignment. 2. Name of all Owners of Collateral Offered: Legal titleholders of mortgaged properties. Mandatory personal guarantee requirement for third-party mortgagors. 3. Promoters / Guarantors Background: • Total experience in the field • Brief career/journey of the promoter • Current role in the business entity (Accounts / Finance / Production / Marketing and sales / Liasoning) • Age (can be taken from KYC) • Residential Address (can be taken from KYC) • Education (including name of the institute) • Family tree and Legal Decedents Management succession risk, technical competence, and lineage verification. 4. Net Worth of Promoter / Guarantors: • Net worth Details of each promoter/guarantor and supporting if available • Copies of Index 2 of the properties considered under net worth CA-certified wealth certificates supported by property Index 2 deeds and ITRs. (D) Collateral Security Details Checklist Sr No. Collateral Parameter Underwriting Focus / Client Remarks 1. Details of Collateral Offered: • Nature of Collateral viz Industrial / Commercial / Residential / Liquid etc. • Name of Owners of Collateral • Approx. Market value of collateral • Details of Leasehold / freehold collateral Two independent valuer valuation reports, TSR from advocate, ROC search. (E) Supplementary Operational Details & Additional Checkpoints Sr No. Operational Checklist Item Underwriting Focus / Client Remarks 1. About Technology Acquisition: Details of technical know-how, patent licenses, or proprietary manufacturing processes (if any). Obsolescence risk and royalty commitments. 2. Marketing Strategy of Company: • Targeted markets in India and Abroad • Marketing team at Ground level • Online Marketing (if applicable) • Brand name (if any) • Targeted segments viz., Pvt / Govt • Unique Selling Proposition (USP) of the product Distribution channels, sales force presence, digital customer acquisition. 3. Plans of Import / Export (if any): Foreign exchange exposure, Hedging strategy, Duty drawback benefits. Requirement for non-fund-based LC / BG and Forex limits. 4. Site Photographs: Current photographs of factory premises, plant machinery, inventory yards, and administrative office. Visual confirmation of physical setup. 5. Sample Invoices: Sample copies of 5 largest sales invoices and 5 largest purchase invoices. Pricing verification, GST matching, and trade terms. 6. Top 5 Raw Material Suppliers: Contact person, company address, phone, GSTIN, and annual purchase volume. Supplier concentration check and market feedback. 7. Top 5 Customers: Contact person, corporate address, phone, GSTIN, and annual sales volume. Client concentration risk and debtor reference checks. 8. Sister Concern Details & Cross Experience: Financials, banking limits, and promoter track record in group entities. Assess contagion risk and related-party transactions. 10. Unsecured Loans Analysis: Scrutinize whether promoter/relative unsecured loans are interest-bearing or interest-free. Subordination covenants; interest outgo impact on cash flows. 11. Machinery Suppliers Due Diligence: Due diligence note on equipment manufacturers and technological viability. Validation of machinery quotes and commissioning performance. 12. Competitive Quotations: Comparative quotes for capital equipment to present before the credit underwriting committee. Prevent gold-plating of capital project cost. 13. Additional Critical Legal Checkpoints: • Whether the specific business activity is permitted under the Memorandum of Association (MOA) / Partnership Deed. • Whether the entity and board have requisite borrowing powers under MOA / Section 180(1)(c) of the Companies Act, 2013. • Arrears of statutory dues (GST, Income Tax, PF, ESIC, Customs). • Pending litigation on company / promoters and adverse auditor remarks in audit reports. • Powers of the entity and partners/directors to mortgage property for secured borrowings. Foundational legal validity of loan agreements and mortgage deeds. Conclusion: Proactive Alignment to Optimize Loan Turnaround Time (TAT) The prevailing disconnect between MSME entrepreneurs and commercial banks arises primarily from an informational asymmetry. By preparing financial dossiers that proactively address the credit manager’s mandatory assessment criteria—business profile stability, clean CIBIL track records, audited 3-year performance, realistic CMA operating cycles, spotless banking summation, and comprehensive legal collateral verification—chartered accountants and finance professionals can eliminate procedural bottlenecks. A well-documented, transparently justified loan proposal significantly accelerates credit approval, minimizes pre-disbursement riders, and secures optimal working capital liquidity to fuel MSME growth. ■ ■ ■ The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) January 2022 Issue • Vol. 70 • No. 7 • pp. 50–58 (Journal pp. 826–834) Author Contact: ca.nitin7989@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 59–65 (Journal pp. 835–841) TAXATION • DIRECT & INDIRECT TAXES E-Commerce Transactions and Overview CA. Tejas Savla The author is a member of the Institute. He can be reached at catejassavla@gmail.com and eboard@icai.in. 🛒 The Evolving Landscape of Digital Transactions E-commerce is continuously progressing and is becoming more and more important to businesses as technology continues to advance and is something that should be taken advantage of and implemented. The e-commerce market has become such a vital part of the economy that it is difficult to pinpoint exactly where e-commerce begins and the old world economy ends. It encompasses all spheres of life. Moving towards the economy post the pandemic era, e-commerce will cover more areas than it already does. Newer roles and avenues may give rise to issues in taxation. They need to be addressed as early as possible. Read on… 1. Introduction: Digital Transformation of Retail & B2B Commerce The e-commerce industry has been directly impacting Micro, Small and Medium Enterprises (MSME) in India by providing means of financing, technology, and training, generating a favourable cascading effect on other industries as well. The e-commerce market has fundamentally changed the way business is transacted—whether in retail or business-to-business (B2B), locally or globally. Prior to the internet, success in retail was universally said to hinge on physical location. Today, the internet operates as a global marketplace, affording even the smallest neighborhood retailer a national and global presence. Smartphones and high-speed internet connectivity ensure that every retailer can sell and every buyer can purchase in an instant click. Government Support & Pandemic Resilience Key national initiatives—including Digital India, Startup India, and Government e-Marketplace (GeM)—were established by the Government to ensure institutional support for e-commerce ventures. The sector has also attracted landmark foreign direct investments from global tech conglomerates such as Facebook. While the COVID-19 pandemic caused widespread disruption across the broader Indian economy, the e-commerce sector remained resilient, expanding substantially compared to pre-pandemic years. 2. Product Categories, Transacting Parties & Presence Models 📦 Physical Goods Tangible items such as clothing, furniture, and groceries purchased by visiting online stores, adding items to a cart, and checking out. The store ensures doorstep fulfillment. 🛠️ Services Evolved from physical classified ads to targeted digital platforms, connecting consumers with professionals, technicians, and freelancers seamlessly. 💻 Digital Products Products delivered entirely in electronic format, including E-Books, audiobooks, downloadable software suites, and cloud applications. Key Parties in an E-Commerce Transaction: Buyer: Primarily concerned with obtaining superior quality products at competitive prices from a credible vendor within minimal transit time. Seller: Focused on maximizing market reach and sales velocity by pricing competitively across platforms. Aggregator / E-Commerce Operator (ECO): Bridges the operational vacuum between seller and buyer, serving as the central transactional and logistics mediator without taking ownership of inventory. Option A: Selling via Own Website Complete Ownership: Design, content, and branding are fully controlled by the merchant. Direct Goodwill: High brand recall and customer loyalty accrued directly to the enterprise. Limited Reach: Customer acquisition is constrained by marketing budgets and search visibility. 100% Retained Profit: Aside from software development and annual maintenance contracts (AMC), profits belong entirely to the business owner. Option B: Selling via Established Marketplace Limitless Reach: Immediate access to vast national and international buyer ecosystems. Higher Sales Volume: Tap into established customer bases to scale order volume rapidly. Intense Competition: Multiple vendors list identical goods, driving price competition. Profit Sharing: Marketplace commissions, platform listing fees, and logistics costs must be remitted to the operator. 3. Structural Models & Direct / Indirect Tax Compliances The e-commerce industry operates under three structural frameworks: Model 1: Sales via Own Proprietary Website Income-Tax Compliance: No TDS Implication: No TDS is deductible on direct retail sales executed on own portals. Turnover Reckoning: Digital sales form part of aggregate gross turnover for return filing. Tax Audit: Mandatory tax audit under Section 44AB if turnover exceeds statutory limits. GST Compliance: Registration: Liable to obtain Normal Registration under GST. Tax Invoice: Issue proper tax invoices under Section 31 of CGST Act, 2017. Periodic Returns: Monthly payments in GSTR-3B and outward supply reporting in GSTR-1. Model 2: Aggregator of Goods (Amazon, Flipkart, etc.) The web store acts as a mediator without owning or warehousing inventory. Multiple independent sellers list products for end buyers. Comprehensive Numerical Illustration: Sale of Pens Facts: Seller A sells pens (GST rate: 12%) online through E-Commerce Operator C (ECO). C charges a 5% commission on sales. Buyer B orders pens for INR 10,000 on C’s platform and pays C. Invoicing from A to B: Base Price: INR 10,000 Add: GST @ 12%: INR 1,200 Total Invoice Value: INR 11,200 Invoicing from C (ECO) to A: Commission (5% of 10,000): INR 500 Add: GST @ 18%: INR 90 Total Invoice Value: INR 590 Statutory Deductions & Remittances: TDS u/s 194H by Seller A: A deducts TDS @ 5% on ECO commission (5% of INR 500 = INR 25). Deposited by 7th of subsequent month via Challan ITNS 281 / Form 26Q. Credit reflects in C’s Form 26AS. TDS u/s 194O by ECO C: C deducts TDS @ 1% on gross sales (1% of INR 10,000 = INR 100). Deposited by 7th of subsequent month via Challan ITNS 281 / Form 26Q. Credit reflects in A’s Form 26AS. (Exemption: Individual/HUF sellers up to INR 5 Lakhs annual sales with PAN/Aadhaar are exempt). TCS u/s 52 by ECO C: C collects GST TCS @ 1% on net taxable value (1% of INR 10,000 = INR 100). Deposited by 10th of subsequent month via GSTR-8. Credit populated in A’s monthly electronic cash ledger. Dual GST Registration for ECO: ECO C must hold two distinct GSTINs: (i) Normal Registration for marketplace commissions (GSTR-1 & 3B), and (ii) Dedicated TCS Registration under Section 24(x). Model 3: Aggregator of Services & Section 9(5) Reverse Charge Tax provisions for service aggregators mirror goods aggregators, with vital statutory exceptions governed by Section 9(5) and Section 24(x) of the CGST Act, 2017. Specified Service Exceptions: No TCS, Tax Paid Directly by ECO Under Section 9(5), for the following notified services, TCS is NOT collected; instead, the ECO is deemed the deemed supplier liable to pay GST directly: Passenger transportation (radio taxi, motor cab, motorcycle, omnibus, or any motor vehicle). Hotel accommodation, guest houses, and clubs (where the actual supplier is unregistered). Housekeeping and maintenance services like plumbing, carpentry, etc. (where the actual service provider is unregistered). Practical Scenarios: Carpenter Providing Services via ECO (30% Commission, 18% GST): Scenario 1: Carpenter is Unregistered under GST Carpenter invoices ECO INR 3,000 without GST. ECO invoices client INR 10,000 + 18% GST (INR 1,800) = INR 11,800. ECO pays full GST to Government under Sec 9(5). ECO deducts TDS u/s 194H on commission @ 5% (INR 150). GST TCS is NA. Scenario 2: Carpenter is Registered under GST Carpenter invoices ECO commission INR 3,000 + 18% GST (INR 540) = INR 3,540. ECO invoices client INR 10,000 + 18% GST (INR 1,800) = INR 11,800. ECO deducts TDS u/s 194H @ 5% (INR 150). GST TCS is NA. 4. Equalisation Levy (Digital Taxation under Chapter VIII, Finance Act 2016) To address the challenges posed by the emerging digital economy where multinational tech entities operate without a physical footprint, the Finance Act, 2016 inserted Chapter VIII (Sections 163 to 180) establishing the Equalisation Levy regime. Section 165: Equalisation Levy @ 6% Online Ads Levied @ 6% on gross consideration for specified services (online advertising, digital advertising space, or related facilities) received by a non-resident without a Permanent Establishment (PE) in India from a resident business or non-resident PE, where annual payments exceed INR 1 Lakh. Exemption Conditions: Non-resident has an Indian PE effectively connected with the service. Aggregate annual consideration does not exceed INR 1 Lakh. Payment is not for business or professional purposes. Section 165A: Equalisation Levy @ 2% E-Commerce Supply Introduced w.e.f. 1st April, 2020. Levied @ 2% on consideration received or receivable by a non-resident e-commerce operator for e-commerce supply or services provided to: (i) Indian residents, (ii) non-residents in specified circumstances (targeted ads or data sale), or (iii) persons using an Indian IP address. Exemption Conditions: Operator has an Indian PE effectively connected with the supply. Transaction is already chargeable under Section 165 (6%). Annual gross turnover/receipts from India is less than INR 2 Crores. Quarterly Payment Schedule for Equalisation Levy under Section 165A (2%) Quarter Quarter Ending Date Mandatory Remittance Due Date Quarter 1 30th June 7th July Quarter 2 30th September 7th October Quarter 3 31st December 7th January Quarter 4 31st March 31st March Annual Statement (Form-1): An annual Equalisation Levy Statement in Form-1 must be furnished electronically on or before 30th June immediately following the end of the financial year. Statutory Interest & Penalty Matrix for Defaults under Equalisation Levy Nature of Default Type of Charge Applicable Statutory Rate / Penalty Delay in Remittance / Payment Simple Interest 1% per month or part thereof during which default continues. Failure to Deduct Levy Penalty Equal to the Amount of Levy + Original Outstanding + Interest [Capped at (A)]. Deducted but not Deposited Penalty INR 1,000 per day of default, subject to ceiling of unpaid levy amount. Failure to file Annual Statement (Form-1) Penalty INR 100 per day during which failure continues. 5. Conclusion: Comprehensive Audit Trails & OECD Pillar Two The rapid proliferation of e-commerce has led to a multiplicity of transactions driven by ongoing technological improvements. Tracking transaction flows, intermediary charges, and consumer remittances requires robust accounting and internal control mechanisms. India’s multi-tiered statutory architecture ensures that every transacting party—from vendor and intermediary platform to consumer—is brought within the tax net. Taxation implications trigger at each step through TDS under Section 194-O, Section 194H, GST TCS under Section 52, and Section 9(5) reverse charge obligations. OECD Inclusive Framework & Two-Pillar Solution To comprehensively address tax challenges stemming from the digitalization of the global economy, multilateral deliberations are advancing under the OECD/G20 Inclusive Framework on the Two-Pillar approach. Reconciling international tax profits with domestic statutory accounting profits presents unique complexities in India, demanding dedicated technical frameworks to ensure seamless alignment and prevent double taxation. “The seller’s entire business profile and financial transactions are covered along with the people who are buying and selling on the e-commerce portal. Thus, taxation implication gets triggered at each and every stage of the transaction.”

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 73–76 (Journal pp. 849–852) DIRECT TAXATION • ASSESSMENT & REFUND JURISPRUDENCE Interest on Delayed Tax Refund: The Saga Continues CA. Mohit Choudhary The author is a member of the Institute. He can be reached at camohitchoudhary360@gmail.com and eboard@icai.in. ⚖️ Karnataka High Court in Wipro Limited & Section 244A(1A) The article deals with the recent judgement of the Hon’ble Karnataka High Court in the case of Wipro Limited. In the said decision, the court has discussed in detail the purpose of introduction of section 244A(1A) under the Income-tax Act 1961 and the purpose cannot be defeated because of the whims of the erring officials. The court has taken the cognizance of the arguments contended by the department and has brought a thin line of distinction between assessment, reassessment and assessment order. Additional interest u/s 244A(1A) cannot be denied to the assessee when there is a delay beyond the prescribed period in giving of the order by the Assessing Authority. Read on… “Collect taxes from the citizens as honeybees collect nectar from the flowers, gently and without inflicting pain.” — Chanakya 1. Introduction: Ethical Responsibility & Systemic Delays As the Department of Income Tax charges interest on delayed payment of taxes from the taxpayer, it is its ethical responsibility to pay interest to the assessees on delayed payment of refund as well. However, in the practical world, though the department takes coercive steps for recovery of taxes from the taxpayer, at the time of issuance of refund, the exchequer generally resorts to usual tactics of withholding refunds, causing extraordinary delays, or even denying payment outright. As a result, taxpayers are left with no option other than knocking at the doors of the High Courts by filing writ petitions against the department. The courts on multiple occasions have taken a tough stand on the department for extraordinary delays in issuing refunds. In order to compensate the assessee for delayed or non-payment of refund, the judiciary has frequently ordered the department to pay hefty penal interest. To avoid injustice to taxpayers, the Legislature introduced Section 244A for payment of interest on refund to compensate assessees for delay. Yet the department repeatedly invents novel procedural technicalities to deny or restrict the statutory interest due. Despite numerous binding judicial pronouncements, the arduous fight for refund and statutory interest continues. 2. Landmark Judicial Pronouncements on Interest on Tax Refund 1. Supreme Court: Sandvik Asia Ltd. -vs.- CIT (2006) 280 ITR 643 (SC) The Hon’ble Apex Court held that the assessee was entitled to compensation by way of interest on the delay in the payment of amounts lawfully due to the assessee, which were withheld wrongly and contrary to law by the department for an inordinate period of up to 17 years. Furthermore, the Apex Court observed that while charging interest from the assessee, the department first adjusts payments towards interest so that the principal tax remains outstanding to maximize interest recovery. Conversely, when granting interest on refund of taxes, refunds were first adjusted against taxes and then balance against interest. The Court struck down this stand as discriminatory, arbitrary, and causing grave prejudice to assessees. 2. Supreme Court: CIT -vs.- HEG Ltd. (2010) 324 ITR 331 (SC) The Supreme Court held that the meaning of the words ‘any amount’ as used in Section 244A is not limited to the principal amount of tax alone, but includes within its ambit the interest component that has accrued to the assessee along with the refund of principal tax. 3. Supreme Court: CIT -vs.- Gujarat Fluoro Chemicals (2014) 42 taxmann.com 1 (SC) Clarifying the earlier ruling in Sandvik Asia, the Apex Court held that in the event of extraordinary delay in refunding taxes, the Revenue is liable to pay compensation for the delay. However, the Revenue is not liable for payment of “interest on interest”. The compensation awarded in Sandvik Asia was for extraordinary wrongful withholding by way of penal compensation, not statutory interest on interest. 4. Supreme Court: Union of India -vs.- Tata Chemicals Ltd. (2014) 363 ITR 568 (SC) The Supreme Court articulated the foundational jurisprudence of tax refund interest: A tax refund due and payable to the assessee is a debt owed and payable by the Revenue. The State, having received the money without right, and having retained and used it, is bound to make the party good. The obligation to refund money received and retained without authority of law implies and carries with it the inalienable right to interest. 5. Delhi High Court: India Trade Promotion Organisation -vs.- CIT (2014) 361 ITR 646 (Delhi) Held that the assessee is eligible for refund of any amount due which encompasses not only the tax paid but also the interest element that accrued and is payable on the date of refund. Following HEG Ltd., if the refund granted does not include interest due and payable, the Revenue is liable to pay interest on the shortfall. 3. Genesis of Section 244A(1A): Additional 3% Interest by Finance Act, 2016 In order to infuse fairness, equity, and administrative accountability into the tax administration, Parliament inserted Section 244A(1A) via the Finance Act, 2016: Statutory Provision: Section 244A(1A) Where a refund arises out of an appeal effect order being delayed beyond the time period prescribed under Section 153(5), the assessee shall be entitled to receive, in addition to the standard 6% p.a. interest under Section 244A(1), an additional interest of 3% p.a. (elevating total interest to 9% p.a.) calculated from the expiry of the period allowed under Section 153(5) to the date on which the refund is granted. Time Limit under Section 153(5) Section 153(5) prescribes that where the Assessing Officer is giving effect to an order of an appellate authority or revisions u/s 263 / 264 (without being directed to undertake a fresh assessment or reassessment), the AO must pass the appeal effect order within three months from the end of the month in which the appellate order is received. 4. Landmark Decision: Karnataka High Court in Wipro Limited -vs.- JCIT High Court of Karnataka • Writ Petition No. 20040 of 2019 (T-IT) Chronological Facts of the Wipro Case (AY 2008–09): Return of Income: Assessee filed ROI declaring total income of INR 588.08 Crores. Original Assessment: Subsequently assessed at INR 2,389.89 Crores pursuant to directions of the Dispute Resolution Panel (DRP). ITAT Ruling (04-01-2017): Cross-appeals preferred before ITAT. ITAT vide order u/s 254 dated 04-01-2017 partly favoured the assessee and remitted a single issue to the Transfer Pricing Officer (TPO) for re-computation of transfer pricing adjustment (TPA). First Appeal Effect Order (28-12-2017): Passed by JCIT determining normal income at INR 693.88 Crores (tax: INR 206.69 Cr). However, tax on book profits (MAT) was higher at INR 316.85 Crores, resulting in a refund of INR 1,057.45 Crores (including Section 244A interest of INR 267.54 Crores). Prolonged Rectification & Revised Refund (04-05-2019): Assessee filed rectification petitions before DCIT which were kept pending. Finally, an order was passed on 04-05-2019 enhancing the refund to INR 1,380.13 Crores (including Section 244A interest of INR 397.56 Crores). The Disputed Claim: In addition to interest of INR 397.56 Crores, Wipro claimed additional interest u/s 244A(1A) of INR 59.65 Crores for the delayed period from 28-12-2017 to 04-05-2019. Contentions of the Assessee (Wipro): Withholding an entire refund of over INR 1,000 Crores on the pretext of a pending TP adjustment accounting for a minuscule sum of INR 3.88 Crores offends all sense of fairness and proportionality. The TP adjustment was not even determinative of tax payable because Wipro was assessed under MAT on book profits, not normal income. Appellate effect orders fall into two distinct classes: (i) where fresh assessment is required, and (ii) where effect is given straightaway without fresh assessment. Even if TP remand falls under the former, effect had to be given expeditiously to the rest of the ITAT order which attained finality. Contentions of the Department (Revenue): Assessment cannot be done in piecemeal or truncated fashion; total income can only be determined after fresh assessment is completed as a whole. Section 244A(1A) applies strictly where no fresh assessment is required. Since ITAT remitted the matter to TPO for fresh determination, the case falls outside Section 244A(1A). Under Section 240, refund on appeal arises only when the direction for fresh assessment/reassessment is accomplished in its entirety. Ratio Decidendi: Landmark Principles Laid Down by Karnataka High Court 1. Distinction Between ‘Assessment’ and ‘Assessment Order’: There is a clear legal distinction between an assessment and an assessment order. Assessment includes preparation of assessment order, computation of income, declaration, and imposition of tax liability. Passing of an assessment order is merely an integral part of the process of assessment. 2. Meaning of ‘Fresh Assessment’ under Section 153(3): Section 153(3) uses the term ‘fresh assessment’ alongside ‘setting aside or cancelling’. This refers to cases where the entire assessment is set aside as a whole, not where certain isolated issues are remitted while the rest of the assessment attains finality. When orders are given effect by following principles already laid down by higher forums, it is not a case of fresh assessment under Section 153(3). 3. Accrual of Additional Interest on Concluded Issues: Interest under Section 244A(1A) cannot be denied on concluded issues that give rise to refunds under Section 153(5). The pendency of remitted issues under Section 153(3) does not interdict the statutory accrual of interest on final issues. 4. Rejection of the Revenue’s Absurd Argument: The Revenue’s contention that any order giving effect constitutes a fresh assessment would inexorably allow the Department to indefinitely withhold refunds without liability for additional interest, entirely defeating the legislative object of Section 244A(1A). Ultimate Outcome: Karnataka High Court ruled in favour of Wipro Limited, holding that additional interest of 3% p.a. under Section 244A(1A) was lawfully payable on the delayed refund of concluded issues. 5. Conclusion: Faceless Limitations & Need to Operationalize Taxpayer’s Charter The saga of Wipro Ltd underscores that the friction between the Revenue and taxpayers regarding refunds and statutory interest is far from over. Taxpayers are continuously driven to judicial forums to recover their own money. Faceless Assessment Gaps While faceless assessments eliminate physical touchpoints for initial assessments, taxpayers must still approach jurisdictional AOs for appeal effect orders, rectifications, and refund disbursements, preserving systemic delays. Taxpayer’s Charter in Reality Instead of viewing assessees with perpetual suspicion, the Department must build mutual trust and strictly enforce the principles of the Taxpayer’s Charter in administrative practice. Symmetric Mechanisms: If the Department deploys rigorous, high-speed mechanisms for tax collection and interest recovery, it is duty-bound to institute equally robust, fast-track mechanisms for refund disbursement with statutory interest. Withholding refunds creates severe cash flow burdens, generates unnecessary litigation, and wastes judicial time.

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 66–72 (Journal pp. 842–848) Taxation • Direct Taxes A Critical Analysis of Alternate Tax Regime Under Section 115BAC Of Income Tax Act, 1961 SG Dr. Shikha Gupta The author is an academician. She can be reached at eboard@icai.in “Investment planning is an essential part of financial planning. However, investment decision making is a difficult task since the market is flooded with plethora of investment alternatives which renders an ordinary person having limited knowledge of financial products, confused and lost. As a result, this part of financial planning is side-lined and pushed to some ‘later date’ in future. As the financial year comes to an end and date of income tax return filing nears, a haggard ordinary taxpayer is then forced to rely on so called ‘investment advisors’ who, in pursuit of higher commissions, push sub-standard financial products which are not aligned to his financial needs and goals. Such investment options, no doubt, save taxes but do not provide adequate return or/and are not liquid enough. Read on…” Introduction and Macro Context Investment planning should not only save taxes but also provide competitive returns commensurate with the risk of the underlying security and liquidity according to the needs of the investor. This paper, however, focuses specifically on tax planning as an integral part of comprehensive financial planning. The discussion assumes heightened significance in the wake of the Union Budget 2020, which introduced the Alternate Tax Regime under Section 115BAC of the Income Tax Act, 1961, with the avowed objective of minimizing the burden of purchasing unnecessary, sub-optimal financial policies solely to claim tax exemptions. The newly inserted section provides an annual or standing option to an assessee to either continue with the existing conventional tax structure (with deductions and exemptions) or adopt the new concessional tax regime (with lower slab rates but foregone exemptions). Introduced through the Finance Act, 2020, this optional structure applies exclusively to the Individual and Hindu Undivided Family (HUF) categories of taxpayers. Hailed by the Government as a major milestone towards statutory simplification, it fundamentally alters the personal tax planning, compliance burden, and investment behavior of the largest taxpayer base in India. Objectives, Database and Research Methodology Core Objectives of the Study: To examine the Alternate Tax Regime introduced through Section 115BAC of the Income Tax Act, 1961, to understand its real impact on the (alleged) simplification of the tax structure for the sampled population. To comparatively evaluate the Alternate Tax Regime against the existing tax regime across various income slabs and investment patterns, thereby assisting individual and HUF assessees in arriving at an optimal, mathematically informed tax decision. Database and Methodology: The study is descriptive in nature, drawing upon statutory provisions of the Finance Act, 2020, Section 115BAC, and relevant CBDT notifications (including the Income-tax (13th Amendment) Rules, 2020). Using hypothetical income scenarios spanning various income tiers, the study models exact tax liabilities under both regimes to identify break-even thresholds and disseminate actionable findings. Review of Literature Academic and policy discourse regarding structural tax simplification provides critical context for evaluating Section 115BAC: Sarma (2002): Argued that traditional taxes founded upon complex multi-layered bases (income, wealth, trade, services) severely complicate taxpayer compliance and suggested a revenue-neutral single Transaction Value Tax as a cleaner alternative. Saltiel et al. (2014): Examined the economic effects of individual tax rate cuts, demonstrating that rate reductions must be accompanied by spending restraint or base-broadening to avert fiscal deficits, while acknowledging that base-broadening simultaneously alters savings incentives. Nirmala Sitharaman, Union Finance Minister (Budget Speech 2020-21): Stated that “Currently the Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. Inability to comply with provisions of tax laws has been a major issue for a large number of tax payers.” She stressed that eliminating convoluted deductions and reducing rates would ensure voluntary compliance. Sanjib Ghimire (2020): Conceptually evaluated the pros and cons of the optional regime, establishing that assessees require deep comparative understanding since the regime cannot be blindly presumed beneficial for all individuals. Suresh Surana (2021): Compared both structures and concluded that unlike corporate tax rate rationalizations (such as Section 115BAA/115BAB), concessional individual tax rates under Section 115BAC have selective application and benefit only a specific sub-category of assessees. Significant Statutory Provisions Under Section 115BAC The statutory mechanics governing the alternate regime under Section 115BAC encompass thirteen vital parameters: Effective Date: The provisions take effect from Assessment Year (AY) 2021-22 (Financial Year 2020-21). Eligible Entities: Exclusively applicable to Individuals and Hindu Undivided Families (HUFs), whether resident or non-resident. Optional Nature: The alternate regime does not extinguish the existing tax structure; it provides an optional pathway enabling taxpayers to choose whichever regime minimizes total tax outgo. Concessional Slab Rates: Tax is computed as per the graduated progressive seven-tier slab schedule. Uniform Basic Exemption Limit: The threshold exemption is uniformly fixed at Rs. 2,50,000 for all individual assessees, irrespective of whether they are normal citizens, Senior Citizens (60 years or older), or Super Senior Citizens (80 years or older)—unlike the existing regime which provides higher basic exemptions of Rs. 3,00,000 and Rs. 5,00,000 respectively. Rebate Under Section 87A: Full tax rebate under Section 87A continues to be available under Section 115BAC (tax liability is Nil for net taxable income up to Rs. 5,00,000). Inapplicability to Special Rate Incomes (Chapter XII): Incomes governed by special rates under Chapter XII—such as Long-Term Capital Gains (Section 112/112A), Short-Term Capital Gains on listed equities (Section 111A), and casual incomes/lottery winnings (Section 115BB)—continue to be taxed strictly at their respective special statutory rates. Surcharge and Health & Education Cess: Surcharge (ranging from 10% to 37%) and Health & Education Cess (4%) remain fully applicable on tax computed under the alternate regime. Disallowance of Exemptions and Deductions: A comprehensive list of standard exemptions and Chapter VI-A deductions are entirely disallowed under Section 115BAC (detailed in Table 2 below). House Property Loss Restriction: Any loss arising under the head “Income from house property” cannot be set off against income under any other head. Business Loss & Depreciation Restrictions: Brought forward business losses or unabsorbed depreciation from earlier years cannot be set off against current year business income if attributable to disallowed deductions. Switching Conditions: Taxpayers with no business income can exercise their choice annually on or before the due date of filing returns u/s 139(1). However, taxpayers having business or professional income can opt into the alternate regime once, which then remains binding for all subsequent years; they can withdraw from it only once in a lifetime, after which they are permanently barred from re-entering Section 115BAC (unless they cease to have business income). Mandatory Electronic Filing: Assessees with business income exercising the option must furnish Form No. 10-IE electronically on or before the due date of return filing. “Surcharge and health and education cess will continue to be applicable under alternate tax regime.” Table 1: Income Tax Slab Rates Under Alternate Tax Regime (Section 115BAC) S. No. Total Income Slab (Rs.) Concessional Tax Rate 1. Up to 2,50,000 Nil 2. From 2,50,001 to 5,00,000 5 percent 3. From 5,00,001 to 7,50,000 10 percent 4. From 7,50,001 to 10,00,000 15 percent 5. From 10,00,001 to 12,50,000 20 percent 6. From 12,50,001 to 15,00,000 25 percent 7. Above 15,00,000 30 percent Source: Central Board of Direct Taxes (CBDT), “Income-tax (13th Amendment) Rules, 2020,” Department of Revenue, Ministry of Finance. Table 2: Deductions and Exemptions Forgone Under Alternate Tax Regime S. No. Disallowed Deduction / Exemption Clause i.Leave travel concession [u/s 10(5)] ii.House rent allowance (HRA) [u/s 10(13A)] iii.Special allowances u/s 10(14) other than exemptions pertaining to travel, transfer and conveyance expenses incurred officially (vide Notification No. 38/2020 dated 26/06/2020) iv.Allowances to Members of Parliament / MLAs [u/s 10(17)] v.Exemption [u/s 10(32)] available in case of clubbing of income of minor child (Rs. 1,500 per child) vi.Exemption of perquisite in respect of free food and non-alcoholic beverages provided by employer [u/s 17(2)] vii.Standard deduction (Rs. 50,000), Entertainment allowance, and Professional tax [u/s 16] viii.Interest on housing loan for one or two self-occupied properties up to Rs. 2,00,000 [u/s 24(b)] ix.Additional depreciation on plant and machinery [u/s 32(1)(iia)] x.Deduction for investment in new plant or machinery in notified backward areas in certain States [u/s 32AD] xi.Deduction for tea development account, coffee development account and rubber development account [u/s 33AB] xii.Deduction for site restoration fund [u/s 33ABA] xiii.Deduction for expenditure on scientific research [u/s 35(1)(ii)/(iia)/(iii) and 35(2AA)] xiv.Standard deduction in case of family pension [u/s 57(iia)] xv.All Chapter VI-A deductions from Section 80C to 80U (e.g., 80C, 80CCC, 80CCD(1), 80D, 80E, 80G, 80TTA), except employer’s contribution towards NPS u/s 80CCD(2) Source: Central Board of Direct Taxes (CBDT), “Income-tax (13th Amendment) Rules, 2020,” Department of Revenue, Ministry of Finance. Table 3: Comparative Summary of Slab Rates (Alternate vs. Existing Tax Regime) S. No. Total Income Slab Tax Rate Under Section 115BAC Tax Rate Under Existing Regime 1. Up to Rs. 2,50,000 Nil Nil 2. From Rs. 2,50,001 to Rs. 5,00,000 5 percent 5 percent 3. From Rs. 5,00,001 to Rs. 7,50,000 10 percent 20 percent 4. From Rs. 7,50,001 to Rs. 10,00,000 15 percent 20 percent 5. From Rs. 10,00,001 to Rs. 12,50,000 20 percent 30 percent 6. From Rs. 12,50,001 to Rs. 15,00,000 25 percent 30 percent 7. Above Rs. 15,00,000 30 percent 30 percent “Any loss under the head ‘Income from house property’ cannot be set off with any other head of income.” Comparative Slab Analysis: As Table 3 highlights, both regimes share an identical basic exemption of Rs. 2,50,000 and an identical 5% rate between Rs. 2.50 lakh and Rs. 5.00 lakh. Both regimes culminate in an effective Maximum Marginal Rate (MMR) of 42.744% (30% tax + 37% highest surcharge + 4% cess), among the highest globally. However, Section 115BAC introduces seven distinct tax brackets versus only four under the conventional structure. The peak tax bracket of 30% begins at Rs. 10,00,000 under the old regime, but is deferred to Rs. 15,00,000 under the alternate regime. Empirical Tax Simulations: Situation 1 vs. Situation 2 To evaluate real-world impacts, the author models tax liabilities across two comprehensive behavioral situations (excluding surcharge and cess as they apply symmetrically across both regimes): Situation 1: Assessee Has Made Zero ‘Eligible’ Tax-Saving Investments ‘Eligible investments’ refer to financial disbursements (PPF, ELSS, Life Insurance, Medical Insurance, Housing Loan Interest) deductible in the existing regime but disallowed under Section 115BAC. When no deductions are claimed, the alternate regime proves universally superior, as quantified in Table 4 below: Case No. Total Income (Rs.) Existing Tax Liability (Rs.) Alternate Tax Liability (Rs.) Net Benefit Under 115BAC (Rs.) 1.2,50,000NilNilNil 2.5,00,000Nil (Rebate 87A)Nil (Rebate 87A)Nil 3.7,50,00062,50037,50025,000 4.8,00,00072,50045,00027,500 5.10,00,0001,12,50075,00037,500 6.12,50,0001,87,5001,25,00062,500 7.15,00,0002,62,5001,87,50075,000 (Max Cap) 8.50,00,00013,12,50012,37,50075,000 9.1,00,00,00028,12,50027,37,50075,000 10.2,00,00,00058,12,50057,37,50075,000 11.5,00,00,0001,48,12,5001,47,37,50075,000 Key Finding from Table 4: In the complete absence of tax deductions, the absolute monetary tax savings under Section 115BAC is strictly capped at Rs. 75,000 per annum for all income levels exceeding Rs. 15,00,000. For ultra-high net worth individuals earning Rs. 50 lakh to Rs. 5 crore, an annual benefit of Rs. 75,000 is negligible, corroborating that Section 115BAC offers targeted relief primarily to lower- and middle-income strata. Situation 2: When Assessee Claims Normal Eligible Deductions When an assessee utilizes standard tax-saving avenues (Standard Deduction, Professional Tax, and Section 80C), the superior regime depends directly upon income levels and deduction volume: Table 5: Case Where Alternate Regime is Beneficial (Gross Salary Rs. 13,50,000) Particulars Existing Tax Regime (Rs.) Alternate Regime u/s 115BAC (Rs.) Net Benefit (Rs.) Gross Salary13,50,00013,50,000- Less: Standard Deduction [u/s 16(ia)]50,000-- Less: Professional Tax [u/s 16(iii)]2,400-- Net Salary / Gross Total Income12,97,60013,50,000- Less: Deductions under Section 80C, 80CCC, 80CCD(1)1,50,000-- Total Taxable Income11,47,60013,50,000- Tax Liability (Excl. Cess)1,56,7801,50,000+6,780 Note on Table 5: At Rs. 13,50,000 gross salary with only basic 80C investments, Section 115BAC saves Rs. 6,780. However, if the assessee additionally claims Section 80D (health insurance) or Section 24(b) home loan interest, the old regime immediately regains superiority. Table 6: Case Where Existing Regime is Beneficial (Gross Salary Rs. 9,00,000) Particulars Existing Tax Regime (Rs.) Alternate Regime u/s 115BAC (Rs.) Net Benefit (Rs.) Gross Salary9,00,0009,00,000- Less: Standard Deduction [u/s 16(ia)]50,000-- Less: Professional Tax [u/s 16(iii)]2,400-- Net Salary / Gross Total Income8,47,6009,00,000- Less: Deductions under Section 80C, 80CCC, 80CCD(1)1,50,000-- Total Taxable Income6,97,6009,00,000- Tax Liability (Excl. Cess)52,02060,000+7,980 (Old Regime Win) Key Conclusion from Table 6: For a salary income of Rs. 9,00,000 with basic 80C deductions, the existing tax regime saves Rs. 7,980. Hence, the alternate regime cannot be presumed uniformly superior. Critical Synthesis: Benefits vs. Macroeconomic Costs Promised Benefits & Intent Greater Disposable Income: Gives individuals freedom to deploy surplus cash based on genuine liquidity needs rather than forced lock-in tax products. Reduction in Mis-selling: Curbs predatory marketing of poor-yielding, commission-heavy financial products sold in the eleventh month of the fiscal year. Diminished Compliance Hassles: Eliminates tedious documentation, collecting rent receipts, and verification of investment proofs by employers. Macro Risks & Counter-Productivity Increased Computational Complexity: Assessees now carry the double burden of calculating tax under both regimes every year before deciding. Negative Shock to Domestic Savings: Dilutes institutional savings channeled into provident funds, mutual funds, insurance, and long-term nation-building infrastructure. Depressed Insurance & Healthcare Penetration: Social security in India is self-funded. Without tax nudges u/s 80C and 80D, millions may remain dangerously under-insured. “The primary objective of Alternate Tax Regime under Section 115BAC is to simplify the complex tax structure and free taxpayers from the burden of purchasing unnecessary financial policies solely to claim tax exemptions.” Conclusion and Policy Recommendations While Section 115BAC is a commendable gesture towards reducing litigation and eliminating convoluted exemptions, the dual regime ironically exacerbates compliance anxiety for the ordinary salaried person. It necessitates extensive comparative modeling each assessment year to avoid fiscal detriment. Tax incentives in a developing economy serve as vital behavioral ‘nudges’ cultivating retirement and healthcare resilience. The Government should continuously recalibrate concessional slabs and consider preserving essential social protection exemptions (such as basic health insurance and standard deduction) within Section 115BAC to make it genuinely appealing without sacrificing societal welfare. References Sarma J.V.M. (2002), “Simplifying the Income Tax: Lessons from Theory and Practice”, Economic and Political Weekly, Vol. 37, Issue No. 25, pp. 2400-2404. Saltiel F, Renaud B, Krupkin A, Burman L, Hamilton D, Lim D, Marron D, Toder E, Wu K (2014), “Effects of Income Tax changes on economic growth”, Economic studies at Brookings. Sitharaman, N. (2020), “Budget 2020-21: Speech of Nirmala Sitharaman,” Minister of Finance, Government of India. Available at: https://www.incometaxindia.gov.in/budgets%20and%20bills/2020/budget_speech.pdf Central Board of Direct Taxes (2020), “Income-tax (13th Amendment) Rules, 2020,” Department of Revenue, Ministry of Finance. Available at: https://www.incometaxindia.gov.in/communications/notification/notification_38_2020.pdf Income Tax Act 1961, India (2020). Available at: https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx Ministry of Law and Justice (2020), “The Finance Act, 2020,” Legislative Department, Government of India. Sanjib Ghimire (2020), “A study on optional tax regime for individual and hindu undivided family taxpayers under section 115BAC of the Income Tax Act, 1961”, International Journal of Research in Commerce, Economics and Management. Available at: http://ijrcm.org.in/ The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) January 2022 Issue • Vol. 70 • No. 7 • pp. 66–72 (Journal pp. 842–848) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 77–83 (Journal pp. 853–859) Taxation • International Taxation The Beneficial Ownership Saga VP CA. Vijaykumar Puri The author is a member of the Institute. He can be reached at vkrpuri@gmail.com and eboard@icai.in “The concept of ‘beneficial ownership’ plays a crucial role in determining whether a recipient of income (e.g. dividends, interest, royalties etc.) qualifies for certain benefits under the DTAA. In the absence of any formal rules around this concept, it is a highly fact specific exercise determined largely by legal dictionaries, commentaries and international as well as domestic judicial precedents. Dividend distributing companies are required to undertake this detailed analysis at the time of distribution of dividend (and their Chartered Accountants at the time of issuing Form 15CB certificate). In this article, the author attempts to shed light on the factors determining beneficial ownership based on various meanings assigned to the concept, domestic and international jurisprudence and the way forward in an Indian context. Read on…” Background The concept of “beneficial ownership” (BO) plays a crucial role in determining whether a recipient of income qualifies for certain benefits under the Double Taxation Avoidance Agreement (DTAA). It is quite significant from the perspective of international taxation as a significant number of tax treaties adopt the condition of BO for granting concessional treatment to a resident of another country; in particular, when it comes to articles dealing with dividend, interest, and royalties. BO under tax treaties is a specific anti-abuse rule incorporated to target specific instances of tax treaty shopping involving the use of agents/nominees/conduits i.e., entities which act as mere administrators or fiduciaries of income and have no substance of their own. From an Indian perspective, the concept of BO has gained even more relevance with the abolishment of dividend distribution tax (DDT) on companies whereby the dividend is now taxable in the hands of the investors with effect from 1st April 2020. The domestic tax rate for a non-resident prescribed under Section 115A of the Income-tax Act, 1961 (“Act”) is 20% (plus applicable surcharge and health and education cess), while many of India’s bilateral tax treaties typically provide a concessional tax rate of 5% to 15% subject to BO and certain other shareholding related conditions. Thus, foreign investors exploring to avail benefit under the tax treaty are strictly required to fulfil the BO criteria. To understand the methods for evaluating BO, it is imperative to first discuss the evolution of the concept in the international tax arena. “BO under tax treaties is a specific anti-abuse rule incorporated to target specific instances of tax treaty shopping involving the use of agents/ nominees/ conduits i.e. entities which act as mere administrators or fiduciaries of income and have no substance of their own.” Evolution of the Concept of BO in Tax Treaties The concept of BO was first envisaged in the US-Canada tax treaty of 1942 and has evolved continuously over time. The expression “beneficial owner” has not been defined under the tax treaties or under the Indian Income-tax Act, 1961, and must therefore be interpreted based on general commercial understanding, international tax commentaries, and judicial precedents in this regard. The Model Commentaries (MC) to the tax treaties and leading international tax jurists have commented that the term has to be given a purposive interpretation (viz. prevention of tax avoidance), and persons not entitled to treaty protection are to be prevented from obtaining benefits thereunder by interposing entities between the ultimate beneficiary and the payer. Further, in evaluating the concept of BO, one has to take cognizance of the “substance” of the transaction and not merely its “form”, duly considering all relevant facts and circumstances. In other words, the meaning of the term “BO” should be understood in commercial or general parlance. Definitions of Beneficial Owner In the absence of a codifying statutory definition, reliance is placed upon legal lexicons and authoritative international treaties: Black’s Law Dictionary (6th Edition, 1990) Defined as “one recognized in equity as the owner of something because use and title belongs to that person, even though the legal title belongs to someone else.” Law Lexicon Defines beneficial owner as “one who, though not having apparent legal title, is in equity entitled to enjoy the advantage of ownership.” Prof. Klaus Vogel on Control and Beneficial Ownership: As per Prof. Klaus Vogel, among other factors, the issue of control is the most important factor in deciding the BO. Beneficial owner is the person who is free to decide: Whether or not the capital or other assets should be used or made available for use by others; or On how the yield therefrom should be used; or Both. Further, Klaus Vogel in his authoritative commentary (Klaus Vogel on Double Taxation Conventions, Third Edition, Kluwer Law International, 1977, p. 561) specifically notes: “….even a one hundred per cent interest in a subsidiary does not preclude the latter’s ‘beneficial ownership’ in the assets held by it. There would have to be other indications of the fact that the subsidiary’s management is not in a position to make decisions differing from the will of the controlling shareholders. If it were so, the subsidiary’s power would be no more than formal and the subsidiary would, therefore, not qualify as a ‘beneficial owner’ within the meaning of Arts. 10 to 12.” Reference from Treaty Commentaries (OECD Model Commentary) The OECD Model Commentary (2014 edition), in relation to the “BO” was substantially amended. The key highlights of the commentary in relation to BO are as under: Autonomous Treaty Interpretation: The meaning of “beneficial owner” should be interpreted as not to refer to any technical meaning that it could have had under the domestic law of a specific country, but it must be understood in the light of the context and purpose of the tax treaty. Exclusion of Conduit Companies: In addition to agents and nominees, conduit companies do not satisfy the status of BO. Contractual or Legal Constraints on Enjoyment: A direct recipient of income may not qualify as a “beneficial owner”, if from the very inception of his status, that recipient’s right to use and enjoy the income is constrained by a contractual or legal obligation to pass on the payment received to another person. Related vs. Unrelated Obligations: Reference has been made to the “related” and “unrelated” obligations. In case where the recipient has a specific obligation to pass on the income received, such factor is directly relevant to the BO test. Inference from Documents and Facts: The obligation may be inferred from legal documents or facts and circumstances of the case. Simultaneous Application of Anti-Avoidance Rules: The concept of BO and other forms of anti-avoidance principles are applicable simultaneously since BO addresses specific forms of tax avoidance. Reference from Domestic and International Judiciary A robust body of domestic and global case law provides foundational principles for assessing beneficial ownership: Key Indian Judicial Precedents and Circulars 1. CBDT Circular No. 789 (13 April 2000) & Azadi Bachao Andolan (Supreme Court) Circular No. 789 dated 13 April 2000 issued by the Central Board of Direct Taxes (CBDT) in the context of the India-Mauritius Treaty provides that a Tax Residency Certificate (TRC) issued by the tax authorities of a country would be regarded as conclusive evidence regarding residential status and BO of the income earned by Mauritian entities. The constitutional validity of Circular No. 789 has been affirmed by the Supreme Court of India in its landmark decision in Union of India v. Azadi Bachao Andolan [(2003) 263 ITR 706 (SC)]. 2. Bharti Airtel Limited [TS-141-ITAT-2014(DEL)] The issue before the Income Tax Appellate Tribunal (ITAT) was whether the benefit of Article 11 of the India-Sweden tax treaty would be available when interest was paid to an “arranger” of a loan (ABN Amro Bank, Sweden) instead of the actual lender. The ITAT held that the provisions of Article 11 shall not be applicable since the arranger is a mere conduit for onward payment to the actual lenders. Even though the arranger produced a TRC to establish their residency in Sweden, the interest received by the arranger was not in its own right but merely as a facilitator and thus the arranger is not the beneficial owner of the interest income. 3. HSBC Bank (Mauritius) Ltd. [ITA No. 1078/Mum/2016] In the context of BO of interest income, the ITAT Mumbai Bench adjudicated the following comprehensive standard: “Considering the above, we infer that the ‘beneficial owner’ can be the one with the full right and the privilege to benefit directly from the interest income earned by the FII-Bank (Indofood International Finance Ltd vs. J.P. Morgan Chase Bank NA London Branch [2006] EWCA case 158). The income must be attributable to the assessee for tax purposes and the same should not be aimed at transmitting to the third parties under any contractual agreement / understanding. The bank should not act as a conduit for any person, who in fact receives the benefits of the interest income concerned. The recipient of the interest income should be deemed as the ‘beneficial owner’ unless there is any evidence to suggest that the said interest income is for the benefit of third persons.” 4. Golden Bella Holdings Ltd. [TS-523-ITAT-2019(Mum)] The ITAT held that the mere fact that an investment was funded using a portion of an interest-free shareholder loan shall not deprive the Cyprus entity from enjoying the concessional rate of 10% withholding taxes as per Article 11 of the India-Cyprus tax treaty. It was held that the Cyprus entity is not a conduit to be subject to tax at 42% but is indeed the beneficial owner of the interest income. Key International Judicial Precedents i. Canadian Federal Court of Appeal: Prévost Car Inc. v The Queen [2009 DTC 5053 (FCA)] & Velcro Canada v The Queen [2012 TCC 57] The Canadian Court concluded that the beneficial owner is the person who receives dividends for his own use and assumes the risk and control of the dividend and is not accountable to anyone for how he deals with it. However, where the person receiving the dividend is obligated to pass on such dividends to a third party, such a person would not be considered as a beneficial owner of the dividends. This decision reaffirms the principle that while examining the BO rule, the corporate veil of the entity earning income should be respected unless the corporation is a conduit and has no discretion to deal on its own with the property put through it as a conduit or is acting as an agent, trustee or nominee of its shareholders. A similar view was taken in Velcro Canada v The Queen. ii. UK Court of Appeal: Indofood International Finance Ltd. v JP Morgan Chase Bank NA, London Branch [(2006) EWCA Civ 158] The UK Court of Appeal held that an interposed entity between the beneficiary and the ultimate payer with a back-to-back debt obligation would not qualify as the beneficial owner of such interest income. The UK Court of Appeal arrived at its conclusion on the application of the “substance over form” approach. iii. Swiss Federal Administrative Court & Federal Supreme Court (FSC): The Total Return Swaps Dispute The Federal Administrative Court of Switzerland (Case no. A - 1246/2011 and A-6537/2010), while determining the BO of dividend under the DTAA between Switzerland and Denmark, held that the concept of BO as stated in double tax conventions has to be interpreted based on “substance over form”. The beneficial owner was defined as a person who has broad discretion to decide how dividend shall be utilized. The Court observed that although the taxpayer had a duty to compensate the counterparty of a total return swap for the appreciation of underlying shares including dividends distributed during derivative maturity, the swap did not contractually obligate the taxpayer to hedge its position by acquiring the underlying assets. There was no factual obligation to transfer dividend income to the counterparty (taxpayer was merely obliged to pay an equivalent amount irrespective of actual dividend receipt). The holding period of shares was held to have no impact. Reversal by Federal Supreme Court (FSC) [2C_364/2012, 2C_377/2012, and 2C_895/2012 dated 5 May 2015]: On appeal by the Swiss Federal Tax Authority (SFTA), the FSC reversed the Federal Administrative Court. The FSC held that: There is an implicit BO requirement in treaties even where not explicitly articulated in the text. BO requires that at the time of receiving dividend, the recipient has an unconstrained right to use, enjoy, and dispose of the dividend received. If constrained by legal or factual obligation to pass on under derivatives, BO is denied. The beneficial owner must bear the economic risk of whether dividend is distributed. Where risk is passed to counterparty under derivatives, BO is denied. The Danish banks matched investments accurately in volume and timing, acquired when shares were purchased and terminated when sold; thus risks and rewards were substantially with third parties, Danish banks making only small profit. “The recipient must have full right to directly benefit from the income and must be free to decide the manner of using the income so earned i.e. there should not be any contractual/ legal obligation to pass the income so earned.” Factors for Determining BO – The PURC Matrix Based on the meanings and judicial decisions discussed above, the PURC (Possession, Use, Risk, Control) matrix is a widely regarded test of BO. The elements of the PURC matrix need to be cumulatively fulfilled in order to satisfy the BO condition. Element Factors & Evaluation Criteria Possession This refers to possession of income which is substantiated by factors like receipt of income, exercise of dominion over income and property and valid economic, commercial purpose for the transaction. Further, the recipient should not be acting as a mere conduit, nominee or agent. Legal ownership, ultimate control and holding period of shares are irrelevant factors for fulfilling this element. Use The recipient must have full right to directly benefit from the income and must be free to decide the manner of using the income so earned i.e. there should not be any contractual/ legal obligation to pass the income so earned. An adverse factor denoting lack of use by the recipient is that the right to use and enjoy is constrained by interdependency between obtaining an income and an obligation to pass it on. Risk The recipient must bear the business risk of the income in order to satisfy this element of the matrix. The recipient must be the economic owner i.e. he must bear the consequences of loss as well as enjoy the fruits of income. Further, his liability towards creditors must not be affected by lack of receipt of the income. Any contractual agreement to pass on the risk of bad debt, loss, exchange fluctuation is indicative of lack of risk of the recipient. Control The recipient must retain full control over the income. Even in absence of explicit contractual agreements, the Revenue Authorities have regarded common Board of Directors (between the recipient and the alleged beneficial owner) as a sufficient factor for determining that the recipient does not have control over the income. However, merely because of a holding-subsidiary relationship, it should not be assumed that the subsidiary company does not retain control of the income. “The evaluation of BO is a highly fact specific exercise and there is no one-size-fits-all approach for the evaluation.” Based on the above, it can be concluded that the evaluation of BO is a highly fact-specific exercise and there is no one-size-fits-all approach for the evaluation. Way Forward – Is Evaluating BO a Challenge? Fact-Specific and Evolving Jurisprudence: The evaluation of BO requires a careful study of the facts of the case and is an evolving matter in the courts of law. For instance, in some cases Revenue Authorities have held that merely having a common director leads to non-fulfilment of the “Control” element; however, having common directors across group entities is a normal business practice and driven by commercial considerations – all of which are seldom considered by the Revenue Authorities. Increased Treaty Litigation Post-Abolition of DDT: Given the recent amendment on taxation of dividends in the hands of the investors with effect from 1st April 2020, the BO test would be required to be fulfilled by foreign investors seeking to avail tax treaty benefits for such dividend income. Thus, litigation around the overall concept of BO may increase substantially. Administrative Complexity and Need for GAAR-Like Guidance: The determination of BO will be a time-consuming activity, both for the Assessing Officer (in terms of understanding complex multinational group structures and applying the concept of BO) and the taxpayer (in terms of collating documentation). Similar to the approach adopted under GAAR, the Indian Revenue Authorities should release comprehensive administrative guidance on the BO to provide certainty on the matter. Role and Responsibility of Chartered Accountants in Form 15CB: Chartered Accountants are also required to issue certificates in Form 15CB certifying applicability of beneficial rates under DTAA, which will necessarily include satisfying the BO test. CAs must ensure that there is adequate documentation on record to substantiate that the foreign investor is indeed fulfilling the BO test. Where BO has not been evaluated, it would be a worthwhile exercise to undertake the same before certifying applicability of beneficial rates under DTAA. Conclusion & Hope for Business Certainty: That being said, just like Pandora’s box, there does remain “hope” – that the tax authorities are able to provide clarity around the issue to promote Ease of Doing Business in India instead of resorting to frivolous litigation. “Given the recent amendment on taxation of dividends in the hands of the investors, the BO test would be required to be fulfilled by foreign investors seeking to avail tax treaty benefits for such dividend income. Thus, litigation around the overall concept of BO may increase.” “CAs must ensure that there is adequate documentation on record to substantiate that the foreign investor is indeed fulfilling the BO test. Where BO has not been evaluated, it would be a worthwhile exercise to undertake the same before certifying applicability of beneficial rate under DTAA.” Notes and Citations Black’s Law Dictionary, 6th edition (1990). Klaus Vogel, “Klaus Vogel on Double Taxation Conventions”, Third Edition Kluwer Law international, 1977 at page 561. The OECD Commentary to the Model Convention for tax treaties, 2014 edition. Union of India v Azadi Bachao Andolan, (2003) 263 ITR 706 (SC). Bharti Airtel Limited, [TS-141-ITAT-2014(DEL)]. HSBC Bank (Mauritius) Ltd., ITA No. 1078/Mum/2016. Golden Bella Holdings Ltd, [TS-523-ITAT-2019(Mum)]. Prévost Car Inc. v The Queen, 2009 DTC 5053 (FCA). Velcro Canada v The Queen, 2012 TCC 57. Indofood International Finance Ltd. v JP Morgan Chase Bank NA, London Branch, (2006) EWCA Civ 158. Federal Administrative Court of Switzerland, Case no. A - 1246/2011 and A-6537/2010. Swiss Federal Supreme Court (FSC), 2C_364/2012, 2C_377/2012, and 2C_895/2012 dated 5 May 2015. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) January 2022 Issue • Vol. 70 • No. 7 • pp. 77–83 (Journal pp. 853–859) Author Contact: vkrpuri@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 92–99 (Journal pp. 868–875) Corporate Law • Corporate Governance Governance Code for Managing “Family” in Indian Family Businesses MM SV KM Dr. T R Madan Mohan, Sharadha V & Mukund Mohan K The authors are experts in the field of Business Management. They can be reached at eboard@icai.in “Most family business are likely to fail as they do not address governance issues. Insufficient planning and preparation on succession, balancing family concerns and business interests, inclusion of non-family members in the Board of Directors, and a host of many other issues relating to family firm governance can lead to breakups and sustainability of many family businesses. Recognising this, many countries have developed best practice code that help family firms to grow and sustain across generations. India does not have a governance code or a national guidance specifically for family-owned businesses. In this paper, we present family business code (FBC) for Indian family business, listed and unlisted, that helps them address all facets of governance and sustainability. Read on…” Introduction and Macro Context Family ownership is the most prevalent form of ownership structure in many countries. Family business can be a single-owner firm or large industrial houses. India has a rich business history with a significant number of businesses still being controlled and managed by families (Chahal and Sharma, 2020). Majority of the family business are unlisted companies and sound governance of unlisted companies is key for larger economic stability. Unlisted companies have large borrowings from financial institutions, including public sector banks. Without adequate governance practices, inequality exists between the promoters and stakeholder interests. Recognising the importance of unlisted companies with effect from April 1, 2021, the Indian government has narrowed the definition of “listed company” to exclude those companies which have only listed their debt securities. Even a large systematically important company that has only its debt securities listed will now be classified as an unlisted company. With this amendment, we expect the role of governance in unlisted companies to be robust and mature to arrest any wrongdoings. Without good operating norms, families have less direction when conflicts arise (Sinha and Govindaraj, 2020). Many family businesses do not have a clear demarcation between personal and business areas and expectations and responsibilities in the business. Indian culture certainly plays a role in the affairs of family business. With a strong patriarchal presence, preference to male and firstborn is implicit in some family boards. Sometimes, a traditional mindset and cultural factors prohibit women’s representation in the family council or the holding company’s board. Family businesses have their share of intra-family divisions and suffer from nepotism and adhocism. In volatile and testing economic situations, family businesses not only need good corporate governance practices and systems, but also robust family business practices to sustain profitable business. Good corporate governance of both family and their business are key to survival, growth and sustenance. Family businesses require simple and flexible governance mechanisms that can be adopted and evolve with the family and the business as their needs change. Family business governance is all about preserving the action-oriented mindset that allow the family and its employees to turn an opportunity into a thriving business, also preserve and sustain the business for long-term (Egloff and Bhalla, 2014). Several companies have adopted good governance practices to defuse certain problems in their business management. Several countries have instituted committees to formalise a code of practices for listed and unlisted family businesses as a cornerstone for the creation of sustainable and profitable growth. “A family business code covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalisation, limits on insiders, remuneration for family and family members, succession and social responsibilities.” The Family Business Code (FBC) is a list of mechanisms and rules (or expectations) to which everyone adheres to in a family business. A family business code covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalisation, limits on insiders, remuneration for family and family members, succession and social responsibilities. Family business code assists family-owned businesses to adopt a holistic approach to balance family and business interests and successfully preserve the business for generations to come. Family business owners and their board recognise that they need a list of mechanisms and rules (or expectations) to which everyone adheres to in a family business. What they need is a code that is cognizant of the size and development of both family and business and effective enough to meet the evolving business context. They desire to have a family business code that covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalisation, limits on insiders, remuneration for family and family members, succession and social responsibilities. Their interest in investing and adhering to a family business code is to adopt a holistic approach to balance family and business interests and successfully preserve the business for generations to come. Family business owners and the boards lack a touchstone for common decision-making to build profitable and sustainable businesses, define boundaries and rules for family and business interactions, and mechanism to preserve long-term ownership of the businesses. Lack of a standardised family business code also limits Governance, Risk Management and Compliance (GRC) professionals in their assessments of a family business and identifying which areas need improvements. Towards filling this gap, we have attempted to develop a family business code for Indian family-owned businesses. “Lack of a standardised family business code also limits Governance, Risk Management and Compliance (GRC) professionals in their assessments of a family business and identifying which areas need improvements.” Research Method We adopted a rigorous two-step approach to develop the family business code: International Benchmark Analysis: We first analysed the family business codes of Germany, Switzerland, Italy, Belgium (Code Buysse II), and Gulf Cooperation Council (GCC) countries to generate an exhaustive list of governance variables. Empirical Survey & Professional Interviews: We adopted a national survey to reach out to members of ICAI, ICSI, family business owners, academicians, and legal professionals across India, eliciting their response on the appropriateness of each variable and its relevance to family business governance for the Indian environment. We also conducted telephonic interviews with board members, chartered accountants, and family business advisers to capture qualitative insights and operational realities. Results: 12 Dimensions of the Indian Family Business Code Based on the interviews and survey, we present 12 core dimensions that emerged as family business code measures for Indian family businesses: 1. Family Business Goals Refers to the family’s unwritten and written objectives of doing business and include vision, core values, and practices that are embedded in governance and policies of its business including succession plans, way of carrying on day-to-day activities of the business, business ethics, loyalty, employee welfare, and social relevance. 2. Family Governance Structures Refers to dispute resolution mechanisms and FBC or cousin consortia (CC) or other forms, both informal and formal, that family businesses use to manage their business and family interests. Governance structures bring in professionalism to a family business. This includes family board (size 5–8 members), tenure and rotation of family members, equal representation amongst all family branches or otherwise, women representation on FBC, succession rights of wife and daughters to FBC, FBC composition of family and non-family, non-family and nominated members (with and without voting rights), and family board activism (collective process and access to information and decision-making). “Family governance structures refer to dispute resolution mechanisms and FBC or cousin consortia (CC) or other forms, both informal and formal, that family business use to manage their business and family interests. Governance structures bring in professionalism to a family business.” 3. Family Governance Processes Includes number of board representation amongst different siblings, voting rights, nominations, decision rights, meeting rules, accountability of FBC, removal of members from FBC, decision-making, intra-family buying and white knight limitations (restricting one family branch to buy shares of one family tree and vest complete control), and financial reporting and proprietary audits (both internal and external). Compliance and technological changes and advancements are to be managed by one member each for the entire business. 4. Conflict and Dispute Resolution Includes conflict resolution mechanisms that set means and processes for resolving conflicts amongst family members and the businesses owned by the family. This may include advisory and dictatorial roles, formal and informal dispute resolution mechanisms within FBC and amongst family members, internal members’ mediation mechanisms, third-party professional involvement, and options on when to litigate. The Family council or the Family Business Board (cousin’s consortia) can create or nominate an individual or a group of family members to address conflicts, refer to external arbitrators or trusted advisers for neutral evaluation, and formulate legal recourse guidelines if recommendations remain unaccepted. “Conflict and dispute resolution includes conflict resolution mechanisms that sets means and processes for resolving conflicts amongst family members and the businesses owned by the family.” 5. Family Ownership Control Refers to the legal structures and mechanisms adopted to protect the business and family from opportunism and guile. This includes separation of the CEO and chairperson roles for business units, selection criteria for positions owned by family, rotation or stability on FBC, inheritance of shares whenever separation or marriage affects the business, and issuance of dual-class shares to control family voting power and ward off hostile takeovers. It covers dividend distributions, mediation options, restrictions on transfer of shares upon divorce or death, buy-sell provisions, dissolution of companies, spousal consents, and automatic buy-out mechanisms. 6. Family Communications Includes formal communications through FBC or respective business groups on business and family matters, codes of conduct in formal meetings, communication protocols for sharing and receiving feedback through formal channels only, communication codes for FBC members seeking operational data from business units, and FBC Media policies. 7. Family Rituals and Preserving Identity Refers to the assets and allocations family businesses make to preserve their identity (cultural or religious grants and activities). Builds and reinforces culture to balance personalities and self-interests across generations using rituals, traditions, and routines. Rituals include annual family meets, “back-to-root” celebrations, and founder’s oath ceremonies that embody cultural, religious, and ethnic practices. Traditions and routines include village festivals, cultural summits, or regular dinners to foster informal bonding. Crucially, these activities must be financed by the Family Business Board through royalties or corpus interest, and not charged to company operational accounts. 8. Corporate Governance of Family Business Units Includes balance of family and independent directors on the board, occupation and professional expertise of independents, advisory board composition (insiders vs. independent professionals), appointment of women directors, strict separation of Chair (FBC chairperson or nominee) and CEO (professional manager), formal audit, remuneration, and risk committees, board performance reviews, and adoption of robust GRC tools to track and report ESG metrics. 9. Family Member Assessment and Assimilation Encompasses formal structures and processes through FBC to support each family member in determining their fitment with business units, periodic objective performance evaluations, market-aligned remuneration benchmarks, family member replacement policies from operating units, and career development support for members pursuing non-business or external paths. 10. Succession Management Governs identification, appointment, election, and induction of successors; rules on adopted children, stepchildren, or situations with no direct heirs; emergency succession protocols; marriage, prenuptial, or divorce implications; eliminating gender bias and primogeniture (firstborn bias); policies on in-laws in business; structured ownership transfer methods; multi-track succession paths (intrapreneurship, higher education, shop-floor training); and involvement of non-family professionals in continuous grooming, mentoring, and exit transitions. 11. Family Wealth Management Includes creation of family corpus, establishment of a formal Family Office, professional management vs. family involvement in wealth oversight, profit sharing and royalty payments to family trusts, corpus capital allocation rules, percentage of corporate profits reinvested in operating businesses, risk appetite frameworks, buybacks, M&A evaluation, and wealth reporting. 12. Philanthropy and Corporate Social Responsibility (CSR) Refers to commitment to social impact, key thematic areas for continuous investment, structured involvement of family members, formation of Section 8 / Section 25 Companies or family philanthropic foundations, governance and reporting alignment between foundations and FBC, and reputation management. Table 1: Family Business Code Assessment Checklist For family business owners, the code serves as an actionable self-rating diagnostic. This assessment helps boards identify structural gaps and establish a roadmap for directing requisite governance structures, processes, and practices to support sustainable expansion. Sl. No Dimensions Not Addressed Considered, Yet To Be Implemented Implemented Partially In Force & Extensively Covered 1Family business goals☐☐☐☐ 2Family governance structures☐☐☐☐ 3Family governance processes☐☐☐☐ 4Conflict and dispute resolution☐☐☐☐ 5Family ownership control☐☐☐☐ 6Family Communications☐☐☐☐ 7Family rituals and preserving identity☐☐☐☐ 8Corporate governance of family business units☐☐☐☐ 9Family member assessment and assimilation☐☐☐☐ 10Succession Management☐☐☐☐ 11Family Wealth Management☐☐☐☐ 12Philanthropy and CSR☐☐☐☐ “Family businesses and GRC consultants can also use the family business code to develop a family business governance maturity model.” Table 2: Family Business Governance Maturity Model Analogous to Capability Maturity Models (Madan Mohan et al., 2020), this framework enables analysts, lenders, investors, and GRC professionals to assess the governance maturity of listed and unlisted family businesses across four distinct evolutionary stages: Dimensions Maturity Stage 1 Maturity Stage 2 Maturity Stage 3 Maturity Stage 4 Family Business Goals Weak vision, value, and goals alignment Well defined business and family goals Clear goals, Family charter, council and business units Well aligned goals, objectives and outcomes for both family and business Family Governance Processes Limited Governance structures and mechanisms to manage business and family interests Presence of a family council, Family Assembly, to manage business and family interests Presence of a family council, Family Assembly, cousins’ consortia or other forms to manage business and family interests with complete professionalisation of business All of Stage 3 including clear structures and mechanisms to manage business and family interests including equal representation amongst all family branches or otherwise, women representation on FBC, succession rights of wife and daughters Conflict And Dispute Resolution Avoiding conflict and no formal resolution Broad Conflict resolution Formal conflict resolution mechanisms Clear conflict resolution with inclusion of internal and external mediators Family Ownership Control Limited or no legal structures and mechanisms to protect the family and the business Broad structures and Mechanisms present to protect the family and the business Clear legal structures and mechanisms that are adopted to protect the business and family Well defined legal structures and mechanisms that are adopted to protect the business and family Family Communications Limited or no regular communication within the family members Informal communications within business groups with no documentation or feedback Presence of family assembly or other structures to regularly conduct and facilitate formal communications within respective business groups on business and other areas All of Stage 3 including code of conduct in formal meetings, communication protocols for sharing and receiving feedbacks through formal mechanisms, communication codes for FBC or any of its members seeking information from a business unit Identity Preservation Little or no importance is provided towards family’s business legacy or identity preservation Members are broadly made aware of the business legacy, history and what it stands for Structures and mechanisms in place facilitate irregular rituals, traditions and routines to preserve family identity and culture Structures and mechanisms in place regularly reinforce the culture to balance personalities and self-interests across generations using rituals, traditions and routines among other forms Governance Of Family Business Units Limited or no governance within the family Business units Broad governance over business units with no formal structures to facilitate feedback Presence of formal structures to outline major details (family and independent directors on board, occupation and professional expertise of independents, advisory board composition (internal and external), women directors, separation of ownership and management All of Stage 3 including includes number of formal audits, remuneration and risk committees, performance review of boards and adoption of robust GRC tools Member Assessment And Assimilation Limited or no evaluation or support to members Irregular performance evaluation and little support to family members on career management Formal structures present to periodically assess family members in business, remuneration benchmarks and family member replacement policies from business units All of Stage 3 including assessment of members with their fitment in business and family member career management policies in non-business areas Succession Weak succession planning Succession plans with emphasis on a male heir and firstborn restrictions Succession plans with gender bias but no restrictions on the firstborn Succession planning and execution without any gender/firstborn limitations taking into account adopted children, no children or heir, and stepchildren Wealth Management Informal wealth management Broad wealth management structure Presence of Family office and a formal Wealth Management mechanism Efficient Investment council and a Family office with regular reporting on the same Philanthropy And CSR Limited philanthropy and compliance to CSR Irregular philanthropic duties with compliance to CSR Presence of philanthropy, and reputation management Formal and clear public engagement, political donations and philanthropy Detailed Evolutionary Progression of Maturity Stages Stage 1: Rudimentary Governance At Stage 1, family firms have a weak alignment of the company’s vision, mission, and goals with limited governance structures and mechanisms to manage business and family interests. Governance is largely ad-hoc, informal, and vulnerable to acute operational shocks. Stage 2: Emerging Structure but Patriarchal & Incomplete At Stage 2, broad governance structures to manage business and family interests exist, but with inadequate conflict resolution mechanisms. Wealth management may be ad hoc, it does not tie family members’ remuneration to their contributions, business units have no formal structures to facilitate feedback and communication, and it limits succession strictly to a male heir and firstborn. Stage 3: Professionalized & Structured Management At Stage 3, the family business governance is more matured, with a clear definition of company goals, presence of governance structures like family council or cousin’s consortia to manage business and family interests. Formal structures to assess family members in business, remuneration benchmarks, and family member replacement policies from business units are in place; succession plans with gender bias but no restrictions on the firstborn may be in force. Stage 4: Optimized Multi-Generational Institutionalization At Stage 4, all fronts of governance and risk management are optimised. Governance structures optimally manage business and family interests, and of all family branches. Succession is based strictly on merit and competence. Formal and informal mechanisms exist for successor identification and preparation for the role. The family business employs mechanisms to reinforce the culture to balance personalities and self-interests across generations using rituals, traditions, and routines among other forms. At this stage, a family office supported by an investment council helps to diversify investment and de-risk family business fortunes from vagaries of the market. Philanthropic engagements and donations are formalised and aligned to support the growth and sustainability of the family business. “Stage-wise maturity helps family businesses to invest and support appropriate structure, process and systems to drive superior governance and effective risk controls.” Conclusion In conclusion, the Family Business Code (FBC) presented here delivers an actionable governance framework that empowers family businesses—both listed and unlisted—to navigate intra-family complexities, professionalize boards, and thrive across multiple generations. Stage-wise maturity provides family boards and GRC professionals with a definitive benchmark to invest in and direct appropriate structures, processes, and systems that drive superior governance, long-term wealth preservation, and effective risk controls. References Buysse, Baron (2009). Corporate Governance Recommendations for Non-Listed Enterprises – Code Buysse II. Belgium. Available at: http://www.codebuysse.com/downloads/CodeBuysseII_NL.pdf Continuum and Prager Dreifuss (2008). Code G: Governance Guide for Families and their Businesses, Zurich. Available at: https://ecgi.global/code/code-g-governance-guide-families-and-their-businesses Chahal, H. and Sharma, A. (2020). “Family Business in India: Performance, Challenges and Improvement Measures.” Journal of New Business Ventures, 1(1-2), pp. 9–10. Egloff, C. and Bhalla, V. (2014). “Governance for Family Businesses: Sustaining The ‘Magic’ For Generations To Come.” Boston Consulting Group (BCG). Available at: https://www.bcg.com/publications/2014/corporate-strategy-portfolio-management-leadership-talent-governance-family-business Madan Mohan, T.R., Sharadha V, and Mukund Mohan K (2020). “Internal controls maturity and SME Corporate Governance.” The Management Accountant, October, pp. 86–89. Sinha, J. and Govindaraj, V. (2020). “Great Family Businesses Need Good Governance.” BCG Global. Available at: https://www.bcg.com/publications/2020/great-family-businesses-need-good-governance The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) January 2022 Issue • Vol. 70 • No. 7 • pp. 92–99 (Journal pp. 868–875) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 84–91 (Journal pp. 860–867) CORPORATE LAW • JURISPRUDENCE & STATUTORY ADJUDICATION Doctrine of Judicial Discipline—Meaning, Importance, Exceptions and its Practical Applicability CA. Rajeev Kumar The author is member of the Institute. He can be reached at rks9814214503@gmail.com and eboard@icai.in. ⚖️ Judicial Precedent & Quasi-Judicial Accountability Many a time, adjudicating and appellate authorities appear to pass orders without duly considering the orders of the higher appellate authorities like the Tribunals, the High Courts and the Supreme Court of India, on the identical set of facts and on question of law, which may be brought to their attention by the Noticees/Appellants in their submissions. Such orders are assailed to be passed in a rather casual, cursory, perfunctory and superficial manner in as much as the binding judicial precedents on the issue are ignored while passing such orders. We face orders wherein the allegations in the show cause notice are reproduced in a summarised form and with only cosmetic changes are presented as findings of the adjudicating/appellate authority. Read on… 1. Introduction: Casual Exercise of Quasi-Judicial Power Binding judicial precedents are either just quoted or declared as not applicable to the matter in hand without speaking a word as to how and why these precedents are not so applicable. In some cases, even such precedents are not referred to in the order. This tantamount to casual and indifferent exercise of powers vested in the official acting in the quasi-judicial capacity. Such orders are bad in law, for not following the cardinal principle of demonstrating the inapplicability of a particular binding precedent to notice/appellants. Besides, such orders are against the doctrine of judicial discipline. Objective: The objective of this article is confined to highlight the meaning and importance of the doctrine of judicial discipline, exceptions to it, related practical aspects and citations with the readers that may be referred to while putting forth the contentions in the case whenever this doctrine is not followed by the authorities. 2. The Doctrine of Judicial Discipline & Hierarchy The doctrine of judicial discipline requires that the orders of the higher appellate authorities should be followed “unreservedly” by the subordinate authorities, held in the Union of India and Others Vs Kamlakshi Finance Corporation (AIR 1992 SC 711). “The Rule of Law in respect of Judicial Discipline is that the orders of the higher appellate authorities should be followed ‘unreservedly’ by the subordinate authorities, if the orders of the higher appellate authorities are not so followed by the subordinate authorities, it amounts to judicial indiscipline which will instead of achieving harmony in the judicial system, lead to anarchy by lower authorities.” The order of the Commissioner (Appeals) is binding on the Assistant Commissioner working under him within his jurisdiction, and the order of the Tribunal is binding upon the Assistant Commissioners and the Commissioner (Appeals) functioning under the jurisdiction of the Tribunal. Judicial Discipline is also referred to as the principle to follow the binding precedents. 3. Precedents: Original, Declaratory, and Binding Precedent (Salmond) Precedent is a judgement or decision of a court higher in hierarchy on the similar set of facts which may be cited or followed by subsequent courts. Original vs. Declaratory Precedent When a new law is laid, it is called an original precedent; otherwise, where it merely applies or reiterates existing legal principles, it is a declaratory precedent. Binding Precedent Precedents of a court higher in hierarchy are binding upon the court lower in hierarchy. A binding precedent is a precedent which must be followed by all lower courts under common law legal systems. 4. To Follow the Ratio of the Decision and Not Finding of Facts It is to be noted that subordinate authorities are bound to follow the ratio of the decision and not any finding of facts made by the higher appellate authorities. It is ‘the law laid down in the decision’ which is binding, and the oral or written opinion by a judge that is not essential to the decision is not a binding precedent. Supreme Court in CIT Vs. M/s Sun Engineering Works Private Limited (AIR 1993 SC 43): “While applying the decision to a latter case, the court must carefully try to ascertain the true principle laid down by the decision of Supreme Court and not to pick out words or sentences from the judgements divorced from the context of question under consideration by the court to support their reasoning.” 5. High Courts Cannot Question the Correctness of Supreme Court Decisions It is also trite law that High Courts cannot question the correctness of the decision of the Supreme Court. Regarding the binding nature of the judgement given by the Supreme Court with regards to the High Courts, the Supreme Court held in Suganthi Suresh Kumar Vs. Jagdeeshan [(2002) 2 SCC 420]: “It is impermissible for the High Court to overrule the decision of the Apex Court on the ground that Supreme Court laid down the legal position without considering any other point. It is not only a matter of discipline for the High Courts in India; it is the mandate of the Constitution as provided in Article 141 that the law declared by the Supreme Court shall be binding on all courts within the territory of India.” It was pointed out by the Supreme Court in Anil Kumar Neotia v. Union of India (AIR 1988 SC 1353) that the High Court cannot question the correctness of the decision of the Supreme Court even though the point sought before the High Court was not considered by the Supreme Court. Key Jurisprudential References on this Principle: M/s Gujarat Composite Ltd Vs CCE, Ahmedabad-II (2005-TIOL-1307-CESTAT-MUM) Commissioner of Central Excise, Nasik Vs Jain Vanguard Polybutylene Ltd (2010-TIOL-911-HC-MUM-CX) M/s Nirma Ltd Vs CCE, Ahmedabad (2011-TIOL-1027-CESTAT-AHM) Ram Partap Vs Union India and Others (2014-TIOL-649-HC-P&H-ST) 6. Orders of Higher Appellate Authorities to be Followed “Unreservedly” Even if the adjudicating/appellate authority does not agree to what is laid down by the higher appellate authority, it cannot ignore the orders of the higher appellate authority. The golden law is that the orders of the higher appellate authorities should be followed “unreservedly” by the subordinate authorities unless the operation of the orders of the higher appellate authority has been suspended by a competent court. It is also settled law that a mere appeal that has been filed against the order of the higher authority is not a ground for not following it, as held in Infinity Infotech Parks Ltd. versus Union of India [2018 (18) G.S.T.L. 223 (Cal.)]. Supreme Court in Union of India and Others Vs Kamlakshi Finance Corporation (AIR 1992 SC 711): The Honourable Supreme Court observed that the clause, “the order of the appellate authority is not ‘acceptable’ to the department” is an objectionable phrase by itself. Justice S. Ranganathan, speaking for the Court, enunciated: “The mere fact that the order of the appellate authority is not ‘acceptable’ to the department - in itself an objectionable phrase - and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to the assessees and chaos in administration of tax laws.” 7. The Constitution of India, Judicial Discipline and Hierarchy Importance of the principle of Judicial Discipline is well enshrined in the Constitution of India: Article 141 of the Constitution The law declared by the Supreme Court shall be binding on all courts within the territory of India. The general principles laid down by the Supreme Court are binding on each individual ‘including those who are not a party’ to an order. Article 227 of the Constitution Confers power of superintendence to the High Court over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction. It may also be noted that the ‘Supreme Court is not bound by its own decisions’; it may in some circumstances lay down a new law on the same very set of facts. Bench Strength & Quorum Rules: Subsequent lesser or co-equal strength benches are bound by the law laid down by a bench of larger strength. A bench of lesser quorum cannot disagree from the view of a larger bench. The principle applies in such a manner that only a bench of co-equal strength may express an opinion, share doubt on the correctness of the view taken by an earlier co-equal strength bench, in which case the matter may be put for hearing before a Bench larger than the other co-equal bench which had pronounced the decision laying down the law the correctness of which is doubted [Commissioner of Central Excise v. Mahindra and Mahindra Ltd (2015) 13 SCC 441; see also State of W.B. Vs. Kesoram Industries Ltd. & Others, AIR 2005 SC 1646]. 8. Judicial Discipline and Interest of Revenue There may be a case where the adjudicating/appellate authority feels that if the orders of the higher appellate authorities should be followed “unreservedly”, it may cause loss to the revenue. Even in such cases, the principles of judicial discipline must be followed. In-Built Sufficient Legal Mechanisms for Protection of Revenue Sufficient legal mechanisms are provided in the legislations for eventualities wherein the Adjudicating/Appellate Authority feels that following the higher order may cause loss of revenue: CGST Act, 2017: Section 107 gives a statutory right to file an appeal even to the Revenue, whereby ‘any person’ and not just the taxable person, may file an appeal against any decision or order passed by an adjudicating authority. Central Excise Act, 1944: Section 35-E confers adequate powers on the department to review and file appeals. Department Having Accepted Principles Cannot Take Contra Stand: It is well-settled law that the department, having accepted the principles laid down in an earlier case, cannot be permitted to take a contra stand in subsequent cases. Refer to the Supreme Court ruling in Commissioner of C. Ex. v. Novapan Industries Ltd [(2017) 13 SCC 738, Civil Appeal No. 5278-5282 of 2001]. CBIC Circular No. 1063/2/2018-CX (16th February 2018): Contains references to orders of the Supreme Court, High Courts, and CESTAT accepted by the Department on which no review petitions or SLPs have been filed. As such, the department, having accepted the principles, is precluded from taking a contradictory position. 9. Exceptions to the Principles of Judicial Discipline The noticee/appellant needs to keep in view some vital exceptions to the principle of judicial discipline if seeking to obtain relief. A decision of a higher appellate authority may exist on an issue, but that decision may not constitute a binding precedent under established legal jurisprudence: A. “Per Incuriam” Decisions Are Not Binding Precedents ‘Incuria’ literally means ‘carelessness’. When courts ignore a statutory provision or other binding authority and proceed to pass judgement, the said decision is rendered per incuriam and need not necessarily be followed. In Hyder Consulting (UK) Ltd. v. State of Orissa (CA 3148 of 2012, decided on 25th November 2014), the Supreme Court held: “A decision can be said to be given per incuriam when the court of record has acted in ignorance of any previous decision of its own, or a subordinate court has acted in ignorance of a decision of the court of record. As regards the judgements of this Court rendered per incuriam, it cannot be said that this Court has ‘declared the law’ on a given subject matter, if the relevant law was not duly considered by this Court in its decision.” B. “Judgement Sub-Silentio” Is Not a Binding Precedent A judgement/decision is sub-silentio when the particular point of law involved in the decision is not perceived by the court or present to its mind. Orders of a higher appellate authority in which the point in issue is either not argued or not considered by the Court, or where a decision is rendered without argument on that point, are not binding precedents. i. Concept Defined in Salmond on Jurisprudence: The Supreme Court in Municipal Corpn. of Delhi v. Gurnam Kaur [(1989) 1 SCC 101, paras 11 and 12] quotes Professor P.J. Fitzgerald (editor of Salmond on Jurisprudence, 12th Edn., p. 153): “A decision passes sub-silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind. The court may consciously decide in favour of one party because of point A, which it considers and pronounces upon. It may be shown, however, that logically the court should not have decided in favour of the particular party unless it also decided point B in his favour; but point B was not argued or considered by the court. In such circumstances, although point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on point B. Point B is said to pass sub-silentio.” ii. Jurisprudential Facets of Sub-Silentio: Absence of Conscious Consideration: In State of U.P. v. Synthetics & Chemicals Ltd [1991 SCR (3) 64], the Apex Court observed: “A decision not expressed, not accompanied by reasons and not proceeding on a conscious consideration of an issue cannot be deemed to be a law declared to have a binding effect as is contemplated by Article 141. That which has escaped in the judgement is not the ratio decidendi. This is the rule of sub-silentio, in the technical sense when a particular point of law was not consciously determined.” Mere Directions Are Not Precedents: Decisions passing “mere directions” are sub-silentio and not binding precedents. When the Supreme Court gives a direction without laying down any principle of law, such mere direction is not a precedent. It is only where the Supreme Court lays down a principle of law that it amounts to a precedent [State of UP & Others Vs Jeet S Bisht (2007) 6 SCC 586; Delhi Admn. v. Manohar Lal (1999) 6 SCC 172]. Leading Authorities on Sub-Silentio: State of U.P. & Anr. Vs. Synthetics & Chemicals Ltd. & Anr [(1991) 4 SCC 139], Arnit Das Vs. State of Bihar [(2000) 5 SCC 488], A-One Granites Vs. State of U.P. & Ors [(2001) 3 SCC 537], Divisional Controller, KSRTC Vs. Mahadeva Shetty & Anr [(2003) 7 SCC 197], and State of Punjab & Anr. Vs. Devans Modern Breweries Ltd. & Anr [(2004) 11 SCC 26]. C. Statement of Law vs. Non-Law Only “a statement of law in a decision is binding” and “statements on matters other than law have no binding force” [Municipal Committee, Amritsar v. Hazara Singh, (1975) 1 SCC 794]. D. Obiter-Dictum “Obiter dictum” is an expression of opinion by a judge spoken in court or in a written judgement, but not essential to the decision. It is not legally binding as a precedent. 10. Examining Facts Before Applying Precedents: Lord Denning Dictum The factual background of the case must be looked into before deciding whether reliance can be placed on a decision. Every judgement is not a binding precedent. Only that judgement of a higher court is binding upon subsequent courts ‘which is on the similar set of facts’. Judicial process demands that the court or adjudicating authority must arrive at the conclusion as to how the factual situation of the case in hand fits with the decision cited. Lord Denning in State of Rajasthan vs. Ganeshi Lal (AIR 2008 SC 690): “Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.” In Ganeshi Lal, the Supreme Court held orders of the Labour Court and High Court unsustainable because they held the Law Department to be an ‘industry’ merely citing decisions where the Irrigation or Public Works Departments were held as ‘industry’, without demonstrating how the Law Department met the legal test of industry. Arbitrator of Applicability or Inapplicability: The formation of decision on the applicability or inapplicability of an alleged ‘binding precedent’ is a matter of formation of considered opinion of the person who alleges that a precedent is binding or not binding. Thus, the question of who is to arbitrate on the applicability or inapplicability of an alleged ‘binding precedent’ is more academic in nature. 11. Practical Takeaways from a Pleading Point of View 1. Law Declared During Pendency Operates From Inception In case the Apex Court lays down the law during the pendency of any matter in hand, its decision becomes a binding precedent notwithstanding the fact that it was pronounced during the pendency stage, unless the Court indicates in the order that the law is to prevail prospectively. What is enunciated by the Supreme Court is the law from inception, and there is no prospective overruling unless explicitly indicated. 2. Match Factual Foundations Before Citing Before placing reliance on a particular judgement, make sure the factual situation fits in with the factual situation of the cited decision. Straightaway reliance should never be placed without forming a concrete opinion on factual parity. 3. Remedy Against Judicial Indiscipline in Orders In case judicial indiscipline is noticed in any order, a review application should be filed if the relevant law permits review. Where the law does not provide for review (such as under the GST law), a further appeal must be filed challenging the decision-making process of the concerned authority for violating judicial discipline. 4. Expressly Plead Judicial Indiscipline & Maxim Vigilantibus Non Dormientibus Jura Subveniunt No authority is empowered to allow relief that is not sought by the Noticee/Appellant. This principle of dispensation of justice demands that the Noticee/Appellant include in pleadings this judicial indiscipline so that the first appellate authority is obliged to reach a finding in the appellate order. Such finding (or omission) will then be open for review before the Appellate Tribunal. The maxim vigilantibus non dormientibus jura subveniunt provides that the law lends its assistance to one who is vigilant and not to one who is dormant or asleep about their rights. By exposing omissions in the open, superior appellate authorities will be compelled to record a finding on whether binding precedents were improperly omitted. 12. Conclusion The Doctrine of Judicial Discipline not only promotes certainty and consistency in judicial decisions but also enables stakeholders to take decisions in the light of settled law. Before contending for a decision to be followed, not only this doctrine but also the relevant exceptions must be kept in mind. It is equally important to keep an eye on the decisions of higher authorities on matters similar to those lying pending with us and put them forth before the adjudication or appellate authority at the earliest available opportunity. Let the justice prevail!

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 100–104 (Journal pp. 876–880) Public Finance Management • Municipal Accounting & Audit Towards Audited Financial Statements of Urban Local Bodies in India: Key Issues and Way Forward AR KP CA. Ashok Rao & CA. K R Praveena The authors are members of the Institute. They can be reached at eboard@icai.in “In a recent development, audited financial statements have been made mandatory for urban local bodies (ULBs) across the country to access the 15th Central Finance Commission (CFC) grants. To circumvent capacity gaps in the present statutory audit arrangements (discussed later in this article), State governments are in a rush to get ULB financial statements audited by Chartered Accountants for complying with the grant conditions. This article attempts to highlight certain issues pertaining to the mandate of the financial statements audit and it’s scope, and attempts to offer recommendations for addressing the issues. Doing so will help in placing financial statements audit on a firm footing and contribute to better fiscal accountability of ULBs. Read on…” Accrual Accounting in Urban Local Bodies (ULBs) Although the transition to accrual accounting in ULBs began many years ago, the reforms never took off in the real sense. Even after almost two decades, in states where the transition is supposedly complete, the accrual accounting system is yet to fully stabilize. The transition continues to be plagued by structural bottlenecks that include: Incomplete or piecemeal information for accounting; Underlying business processes not aligned with accrual accounting requirements; Low technical and functional capacities of accounts department personnel; Dysfunctional information technology (IT) and Enterprise Resource Planning (ERP) solutions; and A widespread lack of awareness amongst key municipal stakeholders on using financial statements for policy governance. These chronic issues have fostered a regrettable tendency to fall back to the cash-based legacy system after the initial euphoria of the transition to accrual has died down. “Although the transition to accrual accounting in ULBs began many years ago, the reforms never took off in the real sense. Even after almost two decades, in states where the transition is supposedly complete, the accrual accounting system is yet to fully stabilize.” Audited Financial Statements to Access Grants Successive Central Finance Commissions (CFCs) have highlighted these governance deficits and recommended ways to create better reward mechanisms for states to implement and sustain municipal accounting reforms. Several central urban renewal missions—such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and the 14th CFC grants—have touched upon the subject of accrual accounting reforms in ULBs, either encouraging the transition as a soft reform or by directly linking it to performance grant eligibility. The 15th Central Finance Commission (15th CFC) has gone a step further and made audited annual accounts an entry-level criterion for accessing basic municipal grants. The adoption of accrual accounting, which was expected to pick up in response to market forces and municipal bond issuances, is, unfortunately, now having to be forced by the federal government. Policymakers are hoping that this time around, fiscal conditionality will stir state governments and ULBs into decisive action. Early Trends Look Promising, But Challenges Loom The initial reaction to the 15th CFC recommendations offers genuine hope: The recommendations have been formally accepted by the Union Government. The Ministry of Finance has released comprehensive scheme operational guidelines. The Ministry of Housing and Urban Affairs (MoHUA) has published the official marking scheme and launched an online portal (www.cityfinance.in/fc_grant) for ULBs across India to upload their audited financial statements. The volume of uploaded statements is rising steadily. There is significant momentum at state government levels (anchored either in the state Urban Development Department or Directorate of Municipal Administration). Multiple states—including Karnataka, Odisha, and Himachal Pradesh—have floated Requests for Proposals (RFPs) inviting Chartered Accountant firms to audit ULB financial statements. Other states are scrambling to execute crash transition programs. The Risk of a “Tick-in-the-Box” Exercise Notwithstanding official proactiveness, there are alarming signals that the enthusiasm will degenerate into a mere “tick-in-the-box” compliance ritual. Barring a few exceptions, in most Indian states, financial statement audit is being positioned as an exercise completely distinct from the statutory external audit governed by municipal Acts. Consequently, getting annual accounts audited is being reduced to the level of certifying Utilization Certificates (UC audit) for central schemes, where the auditor operates under a restricted mandate solely to unlock grant tranches. The authors analyze two fundamental structural issues underlying this crisis and propose systemic remedies. Issue 1: Primary Audit Mandate and Legislative Fragmentation A comparative review of state municipal statutes hosted on the MoHUA portal (www.cityfinance.in/municipal-law) reveals that statutory audit responsibility in most states is vested with the State Audit Department (alternatively designated as Local Fund Audit Department or Examiner of Local Funds). A few states, such as Bihar and Jharkhand, statutorily permit a Chartered Accountant appointed by the State Government to serve as the statutory auditor. Under international standards (INTOSAI) and C&AG Auditing Standards, a financial audit culminates in attestation—expressing an opinion on whether financial statements are presented fairly and free from material misstatement. However, state audit departments in most states do not attest full financial statements because municipal corporation and Local Fund Audit Acts contain no such mandate. While Tamil Nadu’s Local Fund Audit Department certifies statements, and Karnataka statutes require CA firms to submit reports to the State Audit Department for reliance, most state audit departments face crushing handicaps: Audit arrears and backlogs spanning multiple financial years; Acute personnel shortages against an expanding roster of auditee institutions; Archaic manual audit processes; and Lack of internal competency to audit double-entry accrual financial statements (Balance Sheet, Income & Expenditure Statement, Cash Flow Statement, and detailed schedules as mandated by Para 7.95 of the 15th CFC Report). The Dual-Audit Anomaly: To meet grant deadlines, state Urban Development Departments engage CA firms to conduct parallel financial audits. These audited statements unlock 15th CFC grants and are promptly shelved. Months or years later, the State Audit Department conducts its statutory audit. This has resulted in bizarre situations where ULBs possess two divergent sets of audited financial statements for the identical financial year—one by the CA firm and another by the state audit department—undermining legal sanctity. Three Policy Pathways to Harmonize Audit Mandates: Statutory Recognition of CA Firms as Primary Auditors: Amend state municipal Acts to formally recognize CA firms appointed by the State Government as primary statutory auditors (emulating the Bihar and Jharkhand model). This eliminates duplicative state audit department inspections and dramatically alleviates the acute workload of overwhelmed state audit departments. Empower State Audit Departments with Outsourcing Frameworks: Retain the state audit department as the primary statutory auditor, statutorily incorporate financial statement certification into its mandate, and institute a transparent mechanism enabling the department to outsource audit field work to empaneled CA firms (resembling the model in Odisha). Legislative Delineation of Complementary Roles: Statutorily delineate the precise division of labor between the CA financial statement auditor and the primary state auditor, explicitly defining how the primary auditor places formal reliance on the CA’s attestation (as successfully practiced in Karnataka). Issue 2: Divergent Scope of Audit – Propriety vs. True and Fair View The traditional “audit of accounts” practiced by state audit departments is dominated by compliance and propriety auditing (evaluating observance of financial rules, procurement codes, sanctions, and anti-waste standards) via 100% voucher verification, often certifying only the closing cash balance. This heavy emphasis exists because ULBs completely lack independent internal audit departments. In contrast, a financial statement audit by Chartered Accountants delivers an opinion on the “true and fair” view of financial affairs. CA audits employ risk-based statistical sampling rather than 100% transaction checking, scrutinizing compliance and internal controls primarily to assess audit risk and certify the complete set of financial statements. “An audit of financial statements is understood by CAs as an opinion on the true and fair representation of the auditee’s financial affairs. Although compliance and propriety aspects are important considerations, these are not the primary focus of a financial statements audit.” Legitimate Administrative Concerns Regarding CA Audits: Omission of Propriety Lapses: Procurement violations, non-adherence to delegation of powers, and service irregularities may not be captured in financial statement audits if they do not lead to material accounting misstatements. Public Funds Risk: Since public money is involved, sample-based audits might omit irregular transactions that fall below materiality thresholds. Perceived Dilution of Public Accountability: The administrative perception that government audit departments possess higher public accountability compared to private CA firms. “Given the involvement of public money, a sample-based audit may omit to catch irregular transactions when they fall below the sampling threshold, and therefore, a more detailed audit is called for.” Four Systemic Solutions to Reconcile Scope and Accountability: a) Institutionalize Independent Internal Audit: Compliance and propriety belong legitimately to internal audit. Larger ULBs should establish dedicated internal audit wings, while smaller ULBs can adopt a cost-effective state-level pooled internal audit framework. The external primary auditor can then evaluate internal audit controls rather than checking 100% of transactions. b) Leverage Automated Pre-Audit and Concurrent Audit: Pre-audit (scrutinizing payment vouchers prior to release) or concurrent audit provides near-100% transaction coverage. With ongoing municipal digitalization, these checks can be automated into financial management software, drastically curtailing error rates and compliance costs. c) Statutory Accountability and C&AG Empanelment: Chartered Accountants are legally bound by ICAI Auditing Standards, the Code of Ethics, and rigorous disciplinary mechanisms. Mandating empanelment with the Comptroller & Auditor General of India (C&AG) as a prerequisite for ULB audit tenders provides institutional assurance over auditor competence and ethical accountability. d) Formulation of Standard Terms of Reference (ToR): Just as the C&AG formulated standard ToRs with the World Bank and Asian Development Bank for externally aided projects, a joint initiative by the C&AG, ICAI, and MoHUA should formulate national standard Terms of Reference for ULB financial audits. These ToRs should standardize scope, computerized audit methods, format of opinion, and auditor capacity-building. “The Comptroller and Auditor General of India (C&AG), working with the World Bank and the Asian Development Bank, has formulated standard terms of reference for the audit of externally aided projects.” Conclusion and Policy Recommendations The 15th Central Finance Commission has set the ball rolling towards institutionalizing accrual accounting reforms in ULBs across India. It is now up to the MoHUA and state governments to ensure that quick-fix workarounds do not proliferate merely to satisfy grant disbursement conditions while leaving structural gaps unresolved. A sustainable national architecture requires the collaborative synergy of State Audit Departments (as statutory auditors), the ICAI (as the regulatory authority of the accounting and auditing profession), and the C&AG of India (as the Supreme Audit Institution). Crucially, the 15th CFC has provided a strategic window of opportunity by relaxing eligibility criteria for FY 2021-22 and FY 2022-23, requiring only 25% of ULBs in a state to submit audited annual accounts. This transitional cushion must be utilized to amend statutes, harmonize audit mandates, institute pooled internal audits, and establish standard ToRs. Doing so will ensure ULB financial audits transcend grant-seeking rituals and establish genuine municipal fiscal accountability. Notes and Statutory Citations MoHUA Finance Commission Grants Portal: http://www.cityfinance.in/fc_grant State-level implementation is anchored either in the state Urban Development Department (UDD) or the Directorate of Municipal Administration (DMA). RFPs floated by States including Karnataka, Odisha, Himachal Pradesh, among others. Cityfinance portal comparison of municipal finance laws; Disclaimer: MaGC is the knowledge partner for the portal. The definition of Financial Audit in C&AG Auditing Standards aligns with INTOSAI: evaluating whether financial information is presented in accordance with the applicable financial reporting framework via sufficient and appropriate audit evidence. Governing Acts include state Municipal Corporation Acts, Municipalities Acts, and Local Fund Audit Acts. 15th CFC Report, Para 7.95 mandates that audited accounts comprise: a) Balance Sheet; b) Income & Expenditure Statement; c) Cash Flow Statement; and d) Schedules to all statements. Statutory framework followed in Bihar and Jharkhand permitting CA appointments as primary auditors. Model currently followed in Odisha, involving outsourcing of field audit work by the audit department. Model followed in Karnataka, where statutory CA audit reports are formally submitted to the State Audit Department. “Audit of accounts” is the statutory phrase standardly deployed in municipal and Local Fund Audit statutes. Compliance Audit definition under C&AG standards evaluates adherence to the Constitution, Acts, Laws, rules, budgetary resolutions, and public sector financial canons. Internal audit must not be confused with pre-audit (an internal control check) or resident audit (a method of audit execution). A few progressive state audit departments are currently transitioning from 100% voucher inspection to risk-based sampling. Traditional municipal audit practice in several states is historically confined to certifying the closing cash balance. Compliance omissions include deviations from public procurement statutes, financial delegation limits, and establishment rules. Pre-audit is a system where every payment voucher is examined by an independent official prior to disbursement, usually staffed by the State Audit Department. Concurrent audit is standard practice in banking and financial services to provide real-time transaction assurance. Empanelment with the Comptroller & Auditor General of India (C&AG) is standardly stipulated in CA tender criteria for municipal audits. References C&AG’s Auditing Standards, 2017 – https://cag.gov.in/en/page-cag-s-auditing-standards-2017 C&AG’s Financial Attest Audit Manual – https://cag.gov.in/uploads/manuals/manual-manuals-5de750de4afcb9-11564781.pdf INTOSAI Standards, ISSAI 100 to 400 – https://www.intosai.org/documents/open-access XV-FC Report (15th Finance Commission) – https://fincomindia.nic.in/howContent.&uid2=0&uid3=0&uid4=0 XV-FC Operational Guidelines – http://www.cityfinance.in/fc_grant MoHUA Marking Scheme for XV-FC eligibility – http://www.cityfinance.in/assets/files/XV%20FC%20Marking%20Scheme%20Guidelines.pdf Comparison of Municipal Finance Provisions – http://www.cityfinance.in/municipal-law The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) January 2022 Issue • Vol. 70 • No. 7 • pp. 100–104 (Journal pp. 876–880) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI January 2022 • Vol. 70 • No. 7 • pp. 105–109 (Journal pp. 881–885) CAPITAL MARKET • TAXATION OF SHARES & SECURITIES Income from shares: Capital Gain or Profits and Gains of Business or Profession? CA. Prachi Agrawal The author is member of the Institute. She can be reached at prachiagrawal26@gmail.com and eboard@icai.in. 📈 Rise in Demat Accounts & The Head of Income Dilemma India has witnessed a very high rise in demat accounts from April 2020. According to data from SEBI, the number of demat accounts opened during April 2020 and January 2021, were around 10.7 million. Many people do not show profit or loss from these transactions in their returns due to lack of awareness. Also, there have been doubts in classification of such transactions under different heads of income. Read on… Overview: Statutory Classification Framework Classification as long-term and short-term A share listed on the stock exchange is classified as long-term capital asset if it is held for a period of more than 12 months. Long-term capital gain on sell of shares is taxable @10% if capital gain is more than Rs. 1,00,000 and STT has been paid. A listed share is classified as short-term capital asset if it is held for a period of less than 12 months. Short-term capital gains are taxable @15%. Short-term capital gain vs business income If transactions are few, they can be classified as short-term capital gain. If transactions occur frequently, then it must be reported as business income. Hon’ble A.P. High Court in case of PVS Raju, has held that the question whether the shares were held as an investment to give rise to capital gain on its sale or as a trading asset to give rise to business income is not a pure question of law but essentially, one of fact. Intraday trading Intraday trading is considered as speculative business income. Turnover of trading is absolute turnover. It is sum of profits and loss from intraday trading in absolute terms. Trading in derivatives Trading in derivatives is considered as a business activity. As per provisions of section 43(5) (d) and (e), income from derivatives is not considered as a speculative business. Assessee has the option to go for presumptive taxation scheme u/s 44AD if turnover is less than 2 crores. Dividends Earlier dividend was tax free in hands of shareholders. From April 1, 2020, dividend is taxable in hands of taxpayers. Dividend Distribution Tax has been abolished. Dividend is now taxable in hands of shareholders at normal rate of tax. Companies need to deduct TDS @10% on dividends. Rise in Share Trading India has witnessed a very high rise in demat accounts from April 2020. People have started showing more interest in share market these days. While people have started earning from share market, they are unaware of showing such income in the returns filled by them. They are also unclear about under which head of income shares income should go. Conventionally, people in India have been scared to invest in the securities market. There has been a common fear among people. We have always heard from our elders not to invest in stock market as it was thought to be a gamble. But recent trends show that there has been a change in the mentality of people. According to data from Securities and Exchange Board of India (SEBI), the number of demat accounts opened during April 2020 and January 2021, were around 10.7 million. This has been a record-breaking rise. During the lockdown imposed due to the COVID-19 pandemic, many people saw an opportunity to acquire new skills. The stock market was open during lockdown and the option of online trading made it easy to enter the stock market. As a result, many people started trading in shares. Many youngsters became interested in trading in the stock market. But they do not have enough knowledge to show this in their income tax returns. Many people do not show profit or loss from these transactions in their returns due to lack of awareness. Also, there have been doubts in classification of such transaction under different heads of income. The most common dispute in this regard is to classify as capital gain or business income. Also, there are doubts in classification as speculative and non-speculative business. This article attempts to resolve some of these doubts. Types of transactions in shares There are different types of transactions that can be done in the stock market. These are, Delivery based: Buying securities in cash and holding them for long-term. This can be called investing. Delivery based: Buying securities in cash and selling them after price rise in short-term. Intraday trading: Generally, these transactions are not settled by actual delivery. They are settled by price difference. Trading in derivatives: They are commonly called future and options. They may or may not involve actual delivery. Let us discuss about these types in detail. 1. Long-term delivery based When you purchase a share, you acquire a right in the company. Share represents a part of the capital of a company. Therefore, shares are an asset for the investor. The value of shares depend on the performance of the company. A share listed on the stock exchange is classified as a long-term capital asset if it is held for a period of more than 12 months. For unlisted shares, the period of holding is 24 months. It is considered as investing in a company. Therefore, it is considered as capital gains. Long-term capital gain on sell of shares is taxable @10% if capital gain is more than Rs. 1,00,000. Benefit of concessional rate of 10% is allowed only if STT has been paid at time of purchase and transfer of shares. Long-term capital gains on sale of listed equity share up to Rs. 1,00,000 are exempt. If assessee is a share trader and wants to treat it as business income, then it would be treated as business income. 2. Short-term delivery based A listed share is classified as short-term capital asset if it is held for a period of less than 12 months. Short-term capital gains are taxable @15%. If transactions are few, they can be classified as short-term capital gain. If transactions occur frequently, then it must be reported as business income. Also, intention of assessee should be considered. If assessee has held asset for investment, then it should be classified as capital gain. On the other hand, if assessee has intention to do trading in shares, it should be treated as business income. It has been a debatable issue for a long time. Many times, this issue has also reached the doors of courts. Hon’ble A.P. High Court in case of PVS Raju, has held that the question whether the shares were held as an investment to give rise to capital gain on its sale or as a trading asset to give rise to business income is not a pure question of law but essentially one of fact. In case of Vaibhav J Shah (HUF), Tax Appeals 77 of 2010, Hon’ble Gujrat High Court held that where number of transactions of sale and purchase of shares takes place, the most important test is volume, frequency, continuity and regularity of transactions. CBDT vide circular no. 4/2007 dated 15-06-2007, laid down the tests for distinction between shares held as stock-in-trade and as investments. This circular also accepts that it is possible for an assessee to have both investment and trading portfolio. Therefore, we have to see whether transactions amount to business or not will depend on the facts and circumstances of each case. It is a matter of judgement as there are no specific rules to classify as short-term capital gain and business income. Scenario 1: Assessee has 10-12 transactions during the year on which he has short-term capital gains. Transactions have been executed in June, November and January. As it is clear that assessee carries transactions rarely and is not involved in trading as businessperson. Hence his income would be treated as capital gains. Scenario 2: Assessee has around 100-120 transactions in shares during the year. He has sold all the shares that he has acquired within 15-20 days of acquisition. Assessee wants to treat it as capital gains. In this case, as we can see that assessee is actively involved in share trading. He frequently executes trade in the market. He is not investing; rather, he is treating it as stock-in-trade. In this case, income shall be treated as business income. 3. Intraday trading Intraday trading means purchasing and selling shares on same trading day. It is also known as day trading. Transactions are squared off at the end of the day even if the desired price is not achieved. Delivery of shares does not take place in intraday trading. Intraday trading is considered as speculative business income. It is so because investing for one day cannot be investment in company. It is only for enjoying the benefits of price fluctuations. Assessee has the option to go for presumptive taxation scheme u/s 44AD if turnover is less than 2 crores. If assessee opts for presumptive taxation, income @6% must be declared mandatorily. Loss cannot be claimed u/s 44AD. Provisions of audit are applicable in accordance with section 44AB. As it is a business income, all the provisions related to PGBP (Profits and Gains from Business or Profession) are applicable to intraday trading. Turnover of trading is absolute turnover. It is the sum of profits and loss from intraday trading in absolute terms. For example, if a trader has profit of Rs. 2,00,000 and loss of Rs. 50,000 from trading, then his turnover would be 2,50,000 (2,00,000+50,000). One should note that a single transaction does not amount to business. We must separate speculative business and not speculative transactions. In case there are very few intraday transactions of intraday say 10-15, then they may not amount to speculative business. To decide whether it is in the nature of business or not would require professional judgement. It would differ from case to case depending on facts and circumstances of a particular case. 4. Trading in derivatives Derivative means a financial asset which derives its value from underlying asset or group of assets acting as benchmark. In the stock market, derivatives derive its value generally from shares, commodities, currencies, market index etc. It is commonly known as futures and options (F&O). Now-a-days, trading in F&O can be easily done through stock market. We can also trade using our laptops or mobiles through our demat account. Due to ease in trading, trading in derivatives has increased in India. Many people who trade in derivatives do not know its taxation aspects. Trading in derivatives is considered a business activity. As per provisions of section 43(5) (d) and (e), income from derivatives is not considered as a speculative business in following cases: Trading in derivatives of shares and market index if done through recognised stock exchange. Trading in commodity derivatives if done through recognised stock exchange on which CTT has been paid. Unlike shares, intraday trading in derivatives is not considered as speculative business. Assessee has the option to go for presumptive taxation scheme u/s 44AD if turnover is less than 2 crores. If assessee opts for presumptive taxation, income @6% must be declared mandatorily. Loss cannot be claimed u/s 44AD. Turnover from trading in derivatives is calculated by adding the following: Absolute profits or price difference Absolute losses or price difference Premium from option writing In case of reverse trades, difference thereon For example, Mr. A has entered into following transactions:- Bought 1 lot of TCS Futures @ Rs. 2000 and sold for Rs. 2200. Bought 1 lots of RIL futures @ Rs. 1500 and sold for Rs. 1400. Bought 1 lot of call option of Tata Chemicals for Rs. 80 and sold at Rs. 100. Sold 1 lot of put option of Infosys for Rs. 40 and bought for Rs. 50. Assume lot size to be 1000 shares in each case. Solution:- Script Name Transaction Type Purchase Price (i) Sale Price (ii) Gain/Loss [(ii-i)*1000] Option Premium Turnover TCS Future 2000 2200 200,000 0 200,000 RIL Future 1500 1400 (100,000) 0 100,000 Tata Chemicals Option 80 100 20,000 100,000 120,000 Infosys Option 50 40 (10,000) 40,000 50,000 Total 1,10,000 1,40,000 470,000 Total turnover of Mr. A will be Rs. 4,70,000. IPO/FPO IPO means Initial Public Offer. FPO means Further Public Offer. IPO means first time issue of shares by the company. FPO is offer of more shares by a company already listed on the stock exchange. IPO and FPO transactions are like normal transactions of shares and period of holding is calculated by methods as discussed in delivery-based transactions. The main issue that some people face is what will be the purchase date of IPO/FPO. As in case of an IPO/FPO, payment date, date of allotment and date of listing are different. At the time of payment, there is no certainty that shares would be allotted or not, therefore payment date cannot be considered as purchase date. Date of purchase would be the date on which shares are allotted to the shareholder as that is the date when purchase transaction would be completed. For example, ABC Ltd.’s IPO opened on 01.05.2021 and closed on 03.05.2021. It means one needs to apply between 01.05.2021 and 03.05.2021. Date of allotment would be 07.05.2021. Share will be credited to demat account on 10.05.2021 and will be listed on 11.05.2021. Money needs to be paid at the time of application. In this case, date of purchase of shares would be 07.05.2021. Dividend Dividend is the share of profit distributed by the company to the shareholders. Earlier dividend was tax free in the hands of shareholders. Companies had to pay Dividend Distribution Tax for distribution of dividends. From April 1, 2020, dividend is taxable in the hands of taxpayers. Dividend Distribution Tax has been abolished. Dividend is now taxable in hands of shareholders at normal rate of tax. Companies need to deduct TDS @10% on dividends. TDS is not required to be deducted in case total income from dividend of a taxpayer is not more than Rs. 5,000 during a financial year. Also, Section 115BBDA which provides for taxation of dividend above 10 lakhs @10% has been abolished in Finance Act, 2020. Dividend is now taxable in the hands of shareholders at the normal rate of tax. Conclusion Reporting of income from shares is very important. People need to be aware of the need to disclose income in their returns. Also, choosing the right head of income is very crucial. We need to examine the facts of the case carefully before determining the head of income. One of the things that people forget is tax is now payable on dividend income.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 23–26 (Journal pp. 667–670) Financial Literacy • Public Policy & Inclusion CAs as Vitiya Mitra – A Call to Action HU CA. Huzeifa Unwala The author is a member of the Institute. He can be reached at eboard@icai.in “On an average, worldwide, only 1 out of 3 adults is financially literate. As per the survey conducted by S&P Global FinLit, Financial Literacy rate in India is 24% as compared to 57% in developed economies such as United States. As partners in nation building Chartered Accountants can play the role of force multipliers in the Financial & Tax Literacy (FTL) initiatives of our country. Read on….” The CA Fraternity as “Lender of Last Advice”: Real-Life Scenarios The Chartered Accountant fraternity has been a silent contributor at various life stages of our clients, family, and friends, acting as the lender of last advice to innumerable people. Let us revisit a few illustrative real-life examples of how CAs naturally play the role of Vitiya Mitra (Financial Friend): Scenario A • Family Crisis Sudden Demise & Transmission When there is an unfortunate and sudden demise in extended family or social network, a CA friend receives a stress call on how to claim monies lying in deceased bank accounts, complete nomination procedures, or execute urgent mutual fund redemptions to tide over bereavement liquidity crises. Scenario B • Youth Career Entry First Job Offer & Take-Home Salary When a young citizen responds to a job offer, he or she reaches out to a CA friend seeking assistance on computing the actual net take-home salary that will be deposited into their bank account post Tax Deducted at Source (TDS) and provident fund deductions. Scenario C • Startup Ecosystem ESOPs & Share-Based Compensation When a start-up entrepreneur seeks strategic guidance on structuring share-based compensation payments or evaluating the precise perquisite tax and capital gains implications of Employee Stock Option Plans (ESOPs) in the hands of key talent. Scenario D • Senior Retirement Corpus Preservation & Annuity When a senior corporate or government employee reaching superannuation seeks advice on how to allocate lifetime retirement savings across instruments that simultaneously ensure capital preservation, inflation hedging, and consistent regular monthly income. The above are everyday instances where our fraternity selflessly guides society in the national interest. As a developing nation, India faces several monumental structural hurdles—foremost among them being pervasive financial illiteracy. Globally, financial literacy is now firmly established on the agendas of the G20, financial sector regulators, statutory bodies, and banking institutions. “Globally financial literacy is now on the agenda of the G 20, financial services regulators, statutory bodies and financial services players as there is an awakening on the significance of the financial literacy or Vitiya shaksharta.” Definitions and The Myth of General Literacy Financial Literacy – For Individuals “Financial literacy is ‘a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being.’” — OECD/INFE High-level Principles on National Strategies for Financial Education (2012) Financial Literacy – For MSMEs “Financial literacy is the combination of awareness, knowledge, skills, attitudes and behaviour that a potential entrepreneur or an owner or manager of a micro, small or medium sized enterprise should have in order to make effective financial decisions to start a business, run a business, and ultimately ensure its sustainability and growth.” — OECD/INFE Core Competencies Framework on Financial Literacy for MSMEs (2018) Debunking the Myth: Educated Does Not Equal Financially Literate A pervasive myth in society is that formally educated individuals are inherently financially literate. Empirical investigations prove that highly educated professionals frequently fall prey to catastrophic financial blunders. Published data from Indian states demonstrates that even in highly literate states like Kerala—where general literacy stands at 84% to 90%—financial literacy is restricted to merely 36% to 40% (National Centre for Financial Education Report, 2015). As observed by a former Governor of the Reserve Bank of India (RBI): “The most fundamental reason why people should strive to become financially literate is to help them reach their personal financial goals. From a national perspective, the payoff is large.” Financial and tax education is thus a vital macro-strategic priority because: The stability of the national financial architecture is intrinsically linked to the quality of financial decision-making at the household level. Financial literacy expands financial inclusion, compresses socioeconomic disparities, and fosters equitable, inclusive growth. Disseminating financial education bolsters consumer resilience against major systemic and personal economic shocks. Building trust is the prime prerequisite for economic stability in the digital era; financial literacy and robust consumer protection empower citizens to become confident, safe users of formal financial services. Financial Inclusion on the Global Agenda: 7 United Nations SDGs Adopted by the United Nations in 2015, the 17 Sustainable Development Goals (SDGs) represent a universal call to end poverty, protect the biosphere, and achieve global prosperity by 2030. Financial inclusion has been formally designated as an indispensable enabler across seven key SDGs, providing clear touchpoints for CA interventions: SDG 1: No Poverty — Accessible tools for savings, formal insurance, and micro-credit empower entire communities to escape generational poverty traps. CAs can conduct pro-bono financial dissemination clinics. SDG 2: Zero Hunger — Financial inclusion of smallholders enables capital investments during planting seasons, elevating crop yields and rural food security. CAs through regional networks can orient distressed agrarian communities. SDG 3: Good Health and Well-Being — Adequate health insurance coverage protects households from crippling out-of-pocket medical expenditures during critical health crises. SDG 5: Gender Equality — Access to digital payment channels and formal bank accounts fosters female financial autonomy. As revealed by the NCFE-FLIS 2019 Survey, financial literacy among women in India is only 21% versus 29% among men; closing this gap is imperative. SDG 8: Decent Work and Economic Growth — Credit intermediation channels capital into productive commercial enterprises, generating employment. CAs can identify viable credit needs and guide first-time borrowers away from predatory moneylenders. SDG 9: Industry, Innovation, and Infrastructure — The advent of Unified Payments Interface (UPI) and digital banking has democratized transaction access across India. CAs as Vitiya Mitras can champion digital literacy, cyber-hygiene, and electronic tax filing. SDG 10: Reduced Inequalities — The COVID-19 pandemic laid bare glaring economic disparities. Targeted financial literacy equips lower-income wage earners with tools for wealth accumulation and structured social protection. “Chartered Accountants are well known for their expertise in finance and tax. They can play a vital role in promoting financial inclusion by creating awareness among the people about financial literacy and can foster gradual nation building.” ICAI’s Institutionalized Platform: Vitiya Gyan Portal To institutionalize national financial education, the Institute of Chartered Accountants of India (ICAI) has launched a dedicated portal: https://vitiyagyan.icai.org/. The Vitiya Gyan portal offers an authoritative starting point for CAs to expand their reach, presenting foundational financial and tax concepts across multiple Indian regional languages as well as English. CAs can utilize this digital infrastructure to conduct corporate seminars, community workshops, and mass outreach campaigns. Combating Scams, Leveraging Social Media & The 4 Educational Pillars With digital penetration surging into rural and semi-urban hubs, tech-savvy CAs are actively producing short, interactive educational content across YouTube, WhatsApp, and Instagram to guide the public. Simultaneously, with financial scams, fraudulent schemes, and unregistered investment syndicates multiplying, Chartered Accountants must act as vigilant gatekeepers advocating safety and ethical literacy. The 4 Core Practical Educational Pillars for the Masses: 1. Benefits of Record Keeping Accurate documentation enables individuals and micro-enterprises to track cashflows, organize liabilities, provide tangible proof of income for credit approvals, and establish a verifiable track record for long-term wealth creation. 2. Discipline of Budgeting (50:30:20) Educating citizens to spend on “needs first, wants later, and never on waste!” Instilling golden budgeting benchmarks—such as allocating 50% to essential Needs, 30% to Wants, and 20% to structured Savings & Debt Retirement. 3. Positive Debt Cycles Ensuring borrowers understand effective interest rates, compounding tenures, processing charges, and penal clauses, steering credit away from depreciating consumption toward acquiring income-generating productive assets. 4. Financial Risk Management Mitigating personal and business vulnerabilities by cultivating multiple revenue streams, creating an inviolable emergency contingency fund, and purchasing term and health insurance policies to transfer catastrophic risks. “CA as Vitiya Mitra can be a financial friend to the masses who can guide the society on ‘Life Skills’ such as Investment basics, Tax basics, Insurance basics, Savings for short term & retirement, Estate planning, Will writing and so on.” Empowering Aspiring CA Students: Take Initiative & Volunteer! CA students undergo intensive rigorous coursework in accounting, taxation, costing, and corporate finance. Blended with practical Articleship exposure, CA students possess unique, practical competencies to resolve financial and tax illiteracy: Four Actionable Volunteering Avenues for Students: Knowledge Broadening: Proactively participate in financial literacy workshops and investor protection symposiums. Campus Outreach: Start within collegiate networks, motivating university faculties to integrate structured personal finance seminars. Field Volunteering: Actively partner with community centers, self-help groups, and local trade associations to conduct basic literacy bootcamps. Thought Leadership: Contribute insightful, plain-language financial articles to student journals, newsletters, and digital media platforms. The National Imperative: A Call to Action The Paradox: 5th Largest Economy vs. 101st in Global Hunger Index India being the 5th largest economy in the world also ranked 101st out of 116 countries in the Global Hunger Index (GHI) 2021, signifying that tens of millions of citizens continue to languish in extreme poverty. While financial illiteracy is a global challenge, India’s 24% rate severely lags global peers. We Chartered Accountants, functioning as Vitiya Mitras, must unleash our professional intellect as a potent catalyst to uplift Indian citizens toward self-reliance. Only through universal financial and tax literacy can our nation capitalize on its historic demographic dividend. India urgently calls upon its CA Vitiya Mitras to liberate our nation from the tag of a developing economy and propel it into an economic powerhouse. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 23–26 (Journal pp. 667–670) Author Contact: eboard@icai.in | Portal: vitiyagyan.icai.org

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 27–32 (Journal pp. 671–676) FINANCIAL LITERACY • CAPITAL FORMATION & INCLUSION Financial Literacy in India CA. Krishna Kanhaiya The author is member of the Institute. He can be reached at eboard@icai.in. 💡 Economic Development & The National Savings Paradigm Economic development of a country is resultant of a robust financial ecosystem which includes, a set of sub system of financial institution, financial markets, financial instruments, and services. A comprehensive ecosystem helps in formation of capital. It provides a mechanism through which savings are transformed to investments. For centuries, India has been a “saving” country that conventionally invests in cash or its kind. However, this saving may not be in formal manner. Read on.... 1. Introduction: Generational Preference for Physical Assets & Literacy Gaps The most preferred investment avenues for the people of our country from generations are in gold and real estate. Gold is one of the most conventional investments in India and is often considered as an alternative to fiat money, and well accepted as a medium of exchange. India is the second highest consumer of gold, as the yellow metal is considered auspicious and has high emotional value. One of the reasons for the investment in gold and real estate compared to other financial products could be financial exclusion and lack of financial literacy regarding different financial products. Governments since independence have made conscious efforts to promote financial literacy as its directly related to financial inclusion, which in turn, plays major role in fostering economic growth of the country. The regulatory bodies RBI, SEBI, IRDA and PFRDA are working together for the improvement of financial literacy and inclusion in the country. The Literacy Deficit: It is alarming to note that financial literacy in India lags behind that of many countries. According to a survey about 27% of Indian adults are financially literate and understand key financial concepts, including risk diversification, inflation, and compound interest. Financial literacy in India though lower than global average, but is in line with other BRICS and South Asian nations. 2. Consequences of Low Levels of Financial Literacy In the recent times, the issue of financial literacy has acquired great significance globally, not limited to developing countries with otherwise low literacy rates. The negative effects of inadequate financial planning spread beyond economic well-being and hinder a decent quality of life. The consequences of poor financial decision-making at an individual level are not just confined to an individual but the outcomes are borne by the future generations. The mishandling of financial resources can pull an individual into spiralling debts, which at times may lead to bankruptcies. Financial illiteracy results in inaccurate and inefficient decisions. Limited knowledge and inability to plan for future, lead to insufficient savings and unplanned retirement that in turn lead to financial difficulties in later stage of life. Another implication of limited financial literacy is limited financial market participation as most of the individuals are not aware about various financial products. However financial literacy is important not only for financial markets but also for banking and various financial products, as a wrong decision in choosing insurance product or taking loan could cost one dearly. Similarly, there are various rules and conditions of various products and not adhering to same may attract penalty. Therefore, financial illiteracy exposes an individual to perils and risk associated with various financial products. Financially illiterate individuals are usually targeted by Ponzi-finance scheme operators where gullible investors have lost lakhs and crores in the lure of high returns. Macroeconomic Liability on the Nation: At a country level, financial illiteracy puts a huge liability on a nation in the form of higher cost of financial security and lesser prosperity. An illustration to this is the fact that most people choose to invest more in physical assets and short-term instruments, which conflicts with the greater need for long-term investments, both for individuals to meet their life stage goals and for the country to meet its long-term capital requirements for its welfare and prosperity. 3. Why is Financial Literacy Important? Financial markets have evolved becoming more complex and complicated. With emergence of new products and financial innovations, information gap between markets and the traditional investor has increased, leading to problems in making correct financial decisions. Indian financial markets are recognized amongst the most effectively regulated financial markets globally. India as a country has one of the highest savings rates in the world. Indians prefer to save, but the savings are not invested in an efficient manner to earn higher return. A majority of the Indian population do not have access to all financial products and most of them do not use modern financial products. Making an individual informed and literate about the changes in the financial markets and products could help one to protect himself from financial distress, and lead to wealth creation for the common man and the economy. Financial literacy will equip an individual with the knowledge about personal management of finances and strategies that are crucial for financial growth and success. It gives the individual the two-fold benefit of planning a financially secured future as well as protection from various prevalent financial frauds. It equips consumers with the requisite knowledge and skill required to comprehend the suitability of various financial products and investments available in the financial market. A financially evolved consumer takes prudent financial decisions which not only helps him but also the economy as a whole. 4. Financial Literacy Education Initiatives In India, Financial Literacy is crucial to improve financial inclusion and a cohesive strategy is being developed wherein various stakeholders like financial regulators, financial institutions, educationists and other agencies are working in tandem to promote financial literacy. Continuous efforts are made to improve the level of financial literacy across the country especially at the grassroot level. Increasing financial literacy is a long-term project, the efforts made in this direction are already yielding dividends. Some of the initiatives undertaken are discussed below: - Securities Exchange Board of India (SEBI) The Securities Exchange Board of India (SEBI) has addressed the issue of financial literacy for investors and acted by mandating that all mutual fund companies set aside 2 bps of their asset under management (AUM) for investor education and awareness initiatives. At the current level of AUM, it translates into an annual budget of around Rs. 750 Cr. Also, there are multiple workshops organised by SEBI Certified professionals on different investment topics like financial planning, retirement planning, wealth management and insurance investments etc. to educate investors and the general public across the country. Reserve Bank of India (RBI) The Reserve Bank of India (RBI) has initiated “Project Financial Literacy”, with an objective to disseminate information on the subject of basic banking concepts to various target groups, including school and college students, women, rural and urban poor and senior citizens. The project is carried out with the help of banks, self-help groups, local government agencies, schools and colleges and knowledge is disseminated by material provided by RBI. Insurance Regulatory and Development Authority (IRDA) The Insurance Regulatory and Development Authority have also taken numerous steps in the field of financial literacy. IRDA conducts awareness programmes regularly to teach about the rights and duties of policyholders, mechanism available for dispute and grievance redressal etc. through National Strategy for Financial Education (NSFE). 5. Status of Financial Literacy in the Country (NSFE 2020-2025) India is demographically a young nation and to take advantage of be amongst the fastest growing economies, financial literacy and education has a huge role to play. As part of efforts or inclusive growth, India launched National Strategy for Financial education in 2013. Since then the financial literacy in the country has increased to 27.18% in 2019 from 20% in 2013 as per NSFE 2020-2025. Financial literacy is on the rise with increasing participation of retail investors across the asset class like Stocks mutual funds, insurance products etc. Today the youth is taking interest in financial literacy and with easy availability of information through internet and mobile the trend will increase. We need to understand that financial literacy needs are universal and the phenomenon observed is concentrated to urban areas, and lot of work is needed to build the financial literacy in rural areas. The various initiatives like UPI, Aadhar based banking is improving the financial inclusion and education across the country. Steps are being taken to build financial literacy as part of curriculum to inculcate these habits amongst the children and youth. NSFE 2020-2025 Survey Data: Demographic & Occupational Literacy Trends Rural Financial Literacy 2013: 15%  →  2019: 24% Urban Financial Literacy 2013: 25%  →  2019: 33% Occupational Category 2013 Literacy Rate 2019 Literacy Rate Growth Trend Self Employed (Agriculture) 14% 31% +17% Agricultural Labourer 10% 11% +1% Self-Employed (Non-agricultural) 28% 31% +3% Student 17% 26% +9% Salaried (Private) 29% 37% +8% Salaried (Govt) 39% 45% +6% Homemaker 13% 16% +3% Retired 25% 38% +13% Others 14% 17% +3% Source: NSFE-2020-25 Report Another important aspect is proper financial planning for which financial literacy is the basic requirement. In this uncertain economic environment, where interest rates are dwindling, building wealth for a secure future needs financial skills and knowledge for participation in the financial markets. Overall, financial literacy is poised to grow in the country and as proposed in NSFE all stakeholders like regulators, institutions, financial service organizations, fintech companies must work together to propagate Financial literacy for building a financially inclusive society. Structural Shift: Physical Assets vs. Financial Assets (2013 vs 2019-2020) Others precious metals & gems account a share of 30% in 2013 and out of the 54% invested in financial, equity as an asset class constituted a share of 13% in 2013. A burgeoning middle-class, along with structural reforms in the financial, infrastructure sectors and increasing awareness about financial markets by financial regulators, the individual wealth across different asset classes has witnessed a significant change in 2019-2020 compared to asset-wise break-up in 2013. At the end of FY-19, individual wealth invested in physical assets stood at 40% whereas wealth in financial assets stood at 60%. Out of the total individual wealth across all assets, the share of gold and others precious metals & gems had reduced to 22% compared to equity which has increased from 13% in 2013 to 19% in 2019. The share of equity in FY20 is lower compared to FY19, as markets had witnessed a drawdown on 23rd March 2020, at the start of pandemic in 2020. 6. Increase of Retail Participation in Capital Markets and Mutual Funds With increased awareness about financial products in the past decade, Indian markets have witnessed a rise of retail investors flocking to the stock markets. India’s stock markets have evolved with increase participation by retail investors, who now contribute 45% of trading turnover on the stock exchange. As per data released by NSE, the retail investors market share has slowly moved up from 33% since 2016, to 45% in 2021. Category-Wise Participation in Capital Markets (FY-16 to FY-21) [Source: NSE] Category FY-16 FY-17 FY-18 FY-19 FY-20 FY-21 Retail Investors 33% 35.9% 38.6% 39% 39% 45% Proprietary (PROP) 21% 16.9% 18.1% 21.5% 23% 25% Foreign Institutional Investors (FII) 23% 20.6% 16.2% 15.4% 15% 11% Domestic Institutional Investors (DII) 9% 9.9% 10.2% 10.3% 10% 7% Corporates 10% 11.8% 10.7% 6.4% 5% 5% Others 4% 4.8% 6.2% 7.3% 8% 7% In addition to capital markets, equity mutual funds in India have also seen a steep rise in number of retail folios and assets under management in the past decade. The number of retail folios investing in equity schemes have increased 85% from 3.81 crore folios in Sep 2011 to 7.05 crore folios in Sep 2021. The assets under management have grown at a CAGR rate of 19.4% from Rs. 1,19,448 Cr in Sep 2011 to Rs. 7,02,595 Cr at the end of Sep 2021. Retail Mutual Fund Growth: Folios & AUM (Equity Schemes) [Source: AMFI] Year (September) 2011 2013 2015 2017 2019 2021 Number of Retail Folios (in Crores) 3.81 3.06 3.28 4.41 5.77 7.05 Retail AUM in Equity Schemes (Rs. Crores) 1,19,448 1,08,793 1,98,774 3,32,319 3,98,608 7,02,595 Source: AMFI; Data as of Sep 30, 2021; Data mentioned is only pertaining to equity schemes. 7. Drivers of the Rise of Retail Investment in Capital Markets & Mutual Funds Firstly, the reach of Internet to the remotest corners of the nation opened a whole new world of online opportunities for Indians. The Internet led to improved accessibility to market news, various investing instruments leading to enhanced learning about investment and financial products. Additionally, with internet’s penetration to tier-2 and tier-3 cities a significant percentage of investors emerged with access to newer asset classes, investment channels and options to diversity portfolio for optimal returns. The emergence of investors from these towns is playing a pivotal role in expansion of financial products markets as well as retail participation in the capital market. Also, with diminishing returns on traditional investment instruments, such as fixed deposits and debt instruments are becoming unattractive. Investors with new knowledge and access to various investment products are looking at new investment avenues to earn higher returns. 8. Increased Use of Banking Products in India With increase in working population, growing disposable income and increased awareness about banking products, the demand for banking and related services is on a rise. As per the latest available World Bank’s Findex 2017 Report, the 80% adults are covered under formal banking system increased from 53% in 2014 and from 35% in 2011. Bank Account Penetration (2011) 35% Bank Account Penetration (2014) 53% Bank Account Penetration (2017) 80% India has also made exemplary improvement in lowering the country’s gender gap in account ownership, falling from nearly 20% in 2014 to 6% in 2017. These improvements can be accredited to the flagship initiative of the Government of India towards financial inclusion, namely the Pradhan Mantri Jan Dhan Yojna (PMJDY), supported by the conducive ecosystem created by the financial sector regulators. Source: World Bank Findex Report, 2017 9. Increased Digital Financial Literacy Among Masses & UPI Revolution Over the past decade or so, three major trends have contributed to the creation of a robust foundation for digital financial inclusion in India. Two of these major initiatives were directly driven by the central government. The first was the introduction and rapid development of the Aadhar card and its use as a validation tool. The second was the mandate to open basic bank accounts to support Direct Benefit Transfer of cash under various government schemes. This has resulted in millions more citizens becoming a part of India’s formal banking system. The third major tilt was the revolutionary evolution of Unified Payments Interface (UPI) infrastructure by the National Payments Corporation of India (NPCI) to enable inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) payment transactions. The volume of transactions has increased at CAGR of 309% from 10 Million transactions in June-17 to 2,807 million transactions recorded at the end of June-21. UPI Transactions Volume Growth (in Millions) [Source: UPI Statistics, NPCI] Period Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Volume (Million) 10 146 246 620 754 1,308 1,336 2,234 2,807 Source: UPI Statistics, NPCI 10. How Does Financial Literacy Help in Efficient Portfolio Management? Investment pattern of Indian investors are often limited to fewer asset-classes. Investors are more inclined towards traditional investments like gold, real estate and fixed deposits etc. Traditionally gold and real estate are believed good for long-term investments, investment options like fixed deposits and bank savings won’t be able to generate inflation beating returns. There is no concept of goal-based investing. This investment approach might lead to investments getting utilised in short-term duties and liabilities with very little being left for long term goals like retirement and welfare of family. Financial literacy essentially helps in broadening the investment horizon of an individual to develop a holistic diversified investment approach, based on selecting investment instruments based on specific goals, from a concentrated investment approach. A diversified investment approach will minimize the overall risk associated with the portfolio and would allow the individual to seek advantage of investing in different instruments across varied asset-classes. Being financial literate will allow the individual to understand the importance of risk-based investing where one should invest in less risky investments in the short-run like debt funds or money market instruments and get exposure to relatively riskier asset-classes like equity in the long run, which have higher potential for creating wealth in the long term which in turn can be used to fulfil crucial goals like child’s marriage, retirement, paying-off mortgage etc. Tax Implications & Inflation-Adjusted Returns: A financial literate individual would be aware that staying invested in safer instruments like bank fixed deposits can negatively affect his/her savings in the long term. In comparison to equity mutual funds and ETFs, returns on long-term investments are taxed at 10% for gains of more than 1 lakh, for a period of more than 1 year, whereas returns from bank deposits are taxed as per the investor’s tax slab. The higher the income, the lower fixed deposit return will be. Moreover, investments in instruments like debt funds and international ETFs enjoy the benefit of indexation which is paying taxes only on returns earned over inflation. Thus, financial literacy can be one of the key ways to bridge the gap between your wealth creation journey and economic growth.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 33–37 (Journal pp. 677–681) Financial Literacy • FinTech & Digital Ecosystem Technology Enabled Ecosystem for Financial Inclusion RS CA. Rajeev Sharma The author is a member of the Institute. He can be reached at eboard@icai.in “Technology has become all pervasive in our day to day lives. Financial Technology (FinTech) ecosystem has now been accepted as the ‘GOTO’ ubiquitous platform for transforming customer experience, increasing the speed, accuracy and transparency of financial services. The Fintech ecosystem enables easy and cheap availability of financial services through its rapid penetration and its accessibility in remote locations to MSME, small business owners and consumers. The easy accessibility of FINTECH has ushered in Financial Inclusion and has brought in a new generation of customers who, in pre-FINTECH era, could never imagine opening and operating bank accounts or having access to formal channels of financial services. Read on….” Conceptual Foundation of Financial Inclusion In the words of a former Governor of the Reserve Bank of India (RBI): “Financial inclusion is the process of ensuring access to financial services and timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost.” Unlike the traditional banking and financial services model, financial inclusion targets to cover the entire population by extending basic financial services without being constrained by a person’s credit standing, income, or existing accumulated savings. It is fundamentally designed to provide bespoke financial products and solutions to the economically and socially underprivileged sections of society. The 40% Exclusion Barrier in Conventional Banking Over 40% of the Indian population does not meet the minimum eligibility criteria laid down by traditional commercial banks—such as formal employment contracts, documented work experience, minimum salary thresholds, or established credit bureau scores (e.g., CIBIL). Economically underprivileged citizens encounter systemic impediments including informal jobs, lack of credit guarantors, structural unemployment, educational deficits, and an absence of standard documentary proofs of identity, address, or income. Historically, this created a vast unbanked population that was compelled to either hoard cash at home or fall prey to fraudulent deposit schemes and predatory informal moneylenders, resulting in inter-generational debt traps. Time and again, common citizens have been defrauded by illegal deposit schemes, pyramid Ponzi schemes, fraudulent gold purchase programs, and misleading unregistered financial products that wiped out lifetime savings. Universal financial inclusion structurally dismantles and eliminates these illegal syndicates. Furthermore, formal financial inclusion captures vast economic transactions that previously thrived in the parallel cash economy, generating a potent multiplier effect across the broader macro-economy. Crucially, it empowers the Union and State Governments to execute Direct Benefit Transfers (DBT) directly into verified bank accounts, sealing leakages in social welfare programs and dramatically rationalizing the national subsidy bill. The Transformative Impact of FinTech FinTech, by its core nature of being agile and possessing an open-access architecture, has emerged as a revolutionary alternative to traditional commercial banking. In emerging markets, FinTech provides frictionless access to low-income households, agricultural wage earners, and micro-enterprises, facilitating online fund transfers, digital remittances, micro-savings, and accessible credit lines. “FINTECH, by its’ core nature of being agile and having open access architecture, has become a modern alternative to the traditional banking and financial services model.” 1. Deep Digital Penetration Overcoming Geographic Barriers Financial penetration was historically concentrated in tier-1 urban hubs. Rural geographies were systematically neglected due to high customer acquisition costs, lack of trained bank officers, harsh climatic conditions, and banking institutions’ fears of high Non-Performing Assets (NPAs). FinTech has dismantled these economic barriers, enabling previously unserviced populations to access formal banking products seamlessly. 2. Accelerating Financial Awareness and Eliminating Opportunity Costs Physical travel to distant rural bank branches entailed prohibitive transaction charges and lost daily wage income. Mobile-first FinTech platforms educate consumers through interactive local-language interfaces, highlighting monetary entitlements and interest accruals directly on their devices. 3. Bridging the Urban-Rural Infrastructure Divide via Mobile Apps Ubiquitous mobile networks have enabled “anywhere, anytime banking,” bypassing poor physical road networks and bringing secure banking operations directly to the user’s doorstep. Building Blocks of the Digital FinTech Stack The rapid evolution of the digital ecosystem is anchored upon advanced cloud-based technologies that undergo iterative transformation every two to three years: “The cloud-based technology stack with extremely Big Data Systems (BDS), Application Programming Interface (API), Artificial Intelligence (AI), Machine Learning (ML), Natural Language Processing (NLP) has provided strong support to the entire financial inclusion technology ecosystem.” Big Data Systems (BDS) & APIs APIs act as universal communicators, enabling divergent financial apps, banks, and credit repositories to exchange authenticated financial data instantaneously. AI & Machine Learning (ML) Deep Learning algorithms evaluate non-traditional data points to make unbiased “First Time Right” underwriting decisions within minutes, eliminating manual prejudices. Natural Language Processing (NLP) Voice-driven bots and multilingual conversational interfaces dismantle literacy hurdles, enabling semi-literate individuals to bank effortlessly using verbal commands. The Bedrock: JAM Trinity (Jan Dhan, Aadhaar, Mobile) The JAM Trinity constitutes the core infrastructure of India’s FinTech revolution. Supported by over 1.2 billion mobile connections and the world’s most competitive telecom data tariffs, digital inclusion operates across two distinct operational models: 1. Technology in Hand (Frictionless Smartphone Apps): Direct-to-consumer mobile apps (UPI, Google Pay, PhonePe, Paytm). Brings auto-rickshaw drivers and street vendors into the formal financial fold, creating digital transaction histories that unlock collateral-free business and housing loans. 2. Technology Driven (Assisted Intermediary Delivery): For non-smartphone owners or digitally hesitant citizens, assisted models—such as Business Correspondents (Bank Mitras), e-ATMs, and e-Suvidha Kendras—deliver biometric banking right to village centers, ensuring no citizen is excluded. Four Flagship FinTech Innovations Fueling Inclusion 1. Digital Lending: Demolishing Underwriting Friction Traditional lending inflicted severe mental and physical stress on borrowers through cumbersome documentation, months of delay, physical branch visits, and arbitrary rejections. Digital lending liberates micro-borrowers, low-income earners, and unorganized enterprises. “Digital lending has emerged from the distress caused by the traditional model of lending, which entailed cumbersome and intimidating procedures consuming lot of time and at end, caused stress to the borrowers.” Powered by high-speed APIs and real-time alternate data scoring, digital lending algorithms render instantaneous “GO” or “NOGO” credit sanctions within minutes. Borrowers’ loan requests can be broadcast across multi-lender market networks to secure competitive borrowing terms without physical collateral. 2. Unified Payments Interface (UPI): Four-Party Broker Architecture Developed by NPCI, UPI offers instant, round-the-clock interoperable fund settlements between accounts using a Virtual Payment Address (VPA) (e.g., xyz@bank). VPAs mask sensitive bank account and IFSC details. Consumers scan dynamic QR codes or accept collect requests authenticated by confidential MPINs. “The UPI platform operates on a broker model where it facilitates role-based transfer of information between all the parties involved in a transaction. The role-based brokering allows a flexible four-party transaction model, due to which the entire banking system becomes highly interoperable.” Under UPI’s four-party broker architecture, the platform neatly separates the Remitter Bank, Payer App Provider, Beneficiary Bank, and Merchant App Provider. The central broker relays requests, validates authentication, and handles asynchronous exceptions, achieving unparalleled national interoperability. 3. Buy Now Pay Later (BNPL): Dynamic 360-Degree Profiling BNPL provides instant point-of-sale micro-credit without upfront payments. By analyzing digital checkout data through AI, ML, and Big Data Systems, BNPL platforms continuously update the borrower’s 360-degree behavioral profile. Prompt repayment patterns automatically enhance credit limits, allowing credit-invisible youth and informal workers to establish credit histories. 4. Aadhaar Enabled Payment System (AEPS): Biometric Micro-ATMs AEPS is a bank-led interoperable model enabling transactions at Point-of-Sale (PoS) devices or handheld Micro-ATMs operated by Business Correspondents (Bank Mitras). “Aadhar Enabled Payment System (AEPS) is a bank led model which allows online interoperable financial transaction at a Point of Sale (PoS) or Micro ATM. The AEPS is used by the Business Correspondent (BC) or the Bank Mitra of any bank for providing the underlying services.” By deploying biometric fingerprint scanners linked directly to UIDAI servers, AEPS eliminates debit cards, PINs, and paperwork, allowing rural citizens to perform cash withdrawals, balance inquiries, and DBT redemptions instantly. Remaining Challenges & Six Continuous Strategic Initiatives Despite extraordinary strides in technology-led FinTech penetration, the fundamental challenge remains educating and training citizens on the availability, prudence, and utility of formal financial instruments. Financial literacy is the indispensable precursor to true financial inclusion. Six Policy Imperatives for Sustainable Financial Inclusion: Affordable Universal Accessibility: Ensuring financial access from any location at low transaction costs across deposits, affordable credit, micro-insurance, and digital payments. Expansion of RBI-Regulated Differentiated Banks: Promoting Small Finance Banks (SFBs) and microfinance institutions specifically structured around low-income segments while maintaining rigorous RBI regulatory supervision. Fostering Fair Lending Competition: Encouraging fair competition among micro-lenders and NBFCs to curb predatory pricing and protect vulnerable borrowers from usurious interest rates. Mass Financial Literacy Campaigns: Educating underprivileged populations regarding available financial products through multi-channel public campaigns across television, radio, regional print, and outdoor media. Bespoke Pro-Poor Financial Product Design: Creating financial products specifically tailored to irregular cashflows, informal wage cycles, and micro-savings habits of vulnerable households. Expanding Rural Mobile & Internet Banking: Guaranteeing high-uptime digital financial solutions to economically disadvantaged communities, particularly across deep rural and tribal geographies. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 33–37 (Journal pp. 677–681) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 38–42 (Journal pp. 682–686) FINANCIAL LITERACY • RETIREMENT PLANNING & PENSION MODELING Old Pension Scheme Vs National Pension System: Which Scheme is Better for Employees? Rahul Rangotra The author can be reached at rahulrangotra@gmail.com and eboard@icai.in. 💡 Executive Summary & Core Thesis The article aims to find the difference between Old Pension Scheme (OPS) and National Pension System (NPS), and which scheme is beneficial for the employees. The article has given a mathematical function to calculate the pension under both systems. The article concludes that if the average annual growth rate of salary is higher than Compound Annual Growth Rate (CAGR), and if the employee has fewer years of service and CAGR is very low, then OPS is better. NPS would be better for employees if CAGR is higher than the average annual growth rate of salary and employees work for a more extended period. Read on … 1. Global Pension System Archetypes: Defined Benefit (DB) vs. Defined Contribution (DC) Governments all over the world offer two types of pensions plans: defined benefit (DB) and defined contribution (DC). In a DB plan, employers give a committed pension to the employee until death and take the risk of the non-fulfilment of pension liability. The employee is free from longevity risk in the DB pension plan. Whereas, in the DC plan, employers contribute a specified amount towards the employee pension during the service and free themselves from the pension liability. The third category is a hybrid pension plan, with characteristics of both DB and DC pension plans. There are several variants of these pension plans worldwide, but broadly, all pension plans can be categorized into DB or DC. Invariably, in all the pension plans, sponsors, mostly employers, invests the pension assets in different investment instruments such as government bonds, stock markets, corporate bonds, etc. As per the Global Pension Assets Study (2021) which covers the twenty-two major pension markets, including the seven largest pension markets, namely Australia, Canada, Japan, Netherlands, Switzerland, UK, and the USA showed that assets under management of DC pension plan have increased from 35 percent to 53 percent from 2000 to 2020. Figure 1: Defined Benefit (DB) and Defined Contribution (DC) Split Across Major Markets Australia DB: 14% | DC: 86% 14% 86% Canada DB: 61% | DC: 39% 61% 39% Japan DB: 95% | DC: 5% 95% 5% Netherlands DB: 94% | DC: 6% 94% 6% United Kingdom DB: 81% | DC: 19% 81% 19% United States DB: 36% | DC: 64% 36% 64% P7 Average DB: 47% | DC: 53% 47% DB 53% DC Source: Thinking Ahead Institute and secondary sources 2. Global Pension Assets Benchmark: India’s Comparative Standing Despite the Covid 19 pandemic, the pension fund’s assets in 2020 have increased by 11 percent, amounting to USD 2.2 trillion in the twenty-two largest pension fund markets, out of which 92 percent are from the seven largest pension markets. According to the study, India has a total estimated asset of USD 184 billion, which is only 7.1 percent of its GDP (an increase from 4 percent of GDP in the last decade). Netherlands has the highest with USD 1,900 billion, which is 214.4 percent of GDP; the USA tops in the total assets of USD 32,567 billion, which is 156.5 percent, and Australia has USD 2,333 billion, which is 175.8 percent of its GDP. Asset Growth vs. Per Capita Penetration: India has the second-highest growth with 10.7% CAGR (in USD) of assets after China, which records 21 percent in the last decade. However, Table 1 reveals that India’s per capita assets are only USD 135.39, which is the lowest among the group of 22 largest pension fund markets worldwide. Table 1: Asset Size and Per Capita Asset Total Assets (Across 22 Major Markets) Country Total Population 2019 (1) Total Estimated Assets 2019 (USD Billion) (2) Assets/GDP Ratio (%) (2) Total Assets / Total Population (USD) (3) Australia 25,364,307 2,077 150.90% 81,886.72 Brazil 211,049,527 253 13.70% 1,198.77 Canada 37,589,262 1,924 111.20% 51,184.83 Chile 18,952,038 218 74.10% 11,502.72 China 1,397,715,000 223 1.60% 159.55 Finland 5,520,314 261 96.70% 47,279.92 France 67,059,887 155 5.70% 2,311.37 Germany 83,132,799 502 13.00% 6,038.53 Hong Kong 7,507,400 188 50.40% 25,041.96 India 1,366,417,754 185 6.30% 135.39 Ireland 4,941,444 184 47.80% 37,236.08 Italy 60,297,396 210 10.60% 3,482.74 Japan 126,264,931 3,386 65.70% 26,816.63 Malaysia 31,949,777 254 69.50% 7,949.98 Mexico 127,575,529 237 18.60% 1,857.72 Netherlands 17,332,850 1,690 187.30% 97,502.72 South Africa 58,558,270 231 64.30% 3,944.79 South Korea 25,666,161 821 50.40% 31,987.64 Spain 47,076,781 43 3.10% 913.40 Switzerland 8,574,832 1,047 146.40% 122,101.52 United Kingdom 66,834,405 3,451 125.80% 51,635.08 United States 328,239,523 29,196 136.20% 88,947.24 Source: (1) The World Bank; (2) Thinking Ahead Institute and Secondary Sources; (3) Author’s Calculations. 3. The Indian Pension Landscape: Shift from OPS to NPS in 2004 In India, different pension schemes are made available for government (both state and central) employees, the organized private sector, and the unorganized sector. For the organized private sector, the pension scheme is organized by Employee Provident Fund Organization (EPFO), for unorganized sector Pradhan Mantri Shram Yogi Maan-Dhan Yojna (PM-SYM) and National Pension Scheme for the Traders and Self-Employed Persons (NPS-Traders), Atal Pension Yojana, etc. Besides these schemes, various pension schemes are provided by the insurance companies in India. For public sector employees (except defence), India shifted from DB (Old Pension Scheme, OPS) to DC pension plan (National Pension System, NPS) in the year 2004. This article analyses the NPS and OPS to find out which pension scheme is better for government employees under different circumstances. Old Pension Scheme (OPS) Mechanics Before 1 January 2004, for all government employees, pension was calculated on 50 percent of their basic salary at the time of retirement plus dearness allowance. It was a burden on the taxpayers. Under OPS, employees were allowed to deposit some percentage of their salary in the GPF (General Provident Fund) account on which the government provided interest. The government changes the interest rate on GPF from time to time. National Pension System (NPS) Mechanics Whereas NPS is a DC pension plan, in which every month employees contribute 10 percent, and the employer (government) contributes 14 percent of the basic salary plus dearness allowance. Every month, this amount is invested in a Tier I account managed by the pension fund managers registered under Pension Fund Regulatory & Development Authority (PFRDA). There are eight registered pension fund managers. Investors are given two choices of active and auto mode. At the time of retirement or the age of 60, (if retired) employee can withdraw a maximum of sixty percent (forty per cent tax-free) of corpus and invest the rest 40% to buy an annuity (under different annuity plans) from annuity service providers (ASPs) empanelled by PFRDA. Vulnerabilities and Longevity Risks Under NPS: As NPS is a DC pension plan, there is no guaranteed fixed or minimum pension. The employees are vulnerable to fluctuations in the financial markets. In the case of voluntary retirement or fewer years of service (e.g., contractual employees become permanent later than 45), employees get less pension in NPS than in the OPS. In case of death/invalidation during the service, either NPS or OPS rules apply as per the choice given by the employee at the time of joining the service (DOPT, 2021). Every public sector employee is curious to know which plan would be beneficial: OPS or NPS? The question is, which scheme is beneficial for employees? And under what circumstances? The following mathematical equations help to answer these questions. 4. Mathematical Modeling & Comparative Pension Formulas // Mathematical Formulation for Corpus and Monthly Pension Payouts V = IBS * [{(1 + r)^n - (1 + g)^n} / (r - g)] * 0.24   // if r ≠ g V = IBS * n * (1 + r)^n * 0.24   // if r = g Pn = [V * a * r / {1 - (1 + r)^(-m)}]   // Monthly Pension in NPS Po = IBS * [{(1 + g)^n / 2}]   // Monthly Pension in OPS Variable Definitions: Pn: Pension in NPS (monthly payout) Po: Pension in OPS (monthly payout) a: Percentage of the corpus invested in the annuity r: Monthly rate of return (CAGR / 12) m: Number of months of life after retirement V: Value of Investment at the time of retirement IBS: Initial basic salary g: Monthly growth rate of salary (annual growth / 12) n: Number of months of service (Equation multiplied by 0.24 because the total contribution of employer and employee in NPS is 24%) Model Assumptions: Average CAGR remains fixed throughout the life of the employee, i.e., both before and after retirement. The average growth rate of salary per year remains fixed. Both CAGR and growth rate of salary are compounded monthly. Pension calculated is per month in both NPS and OPS. 5. Empirical Simulation: Pension Under 40% vs. 60% Annuity Allocation Table 2 evaluates the monthly pension payouts under both systems for an initial basic salary plus dearness allowance of Rs 1 across six distinct economic scenarios, testing 40% and 60% annuity investment allocations. Table 2: Pension Under NPS and OPS for Initial Basic Salary Plus DA of Rs 1 (Scenarios: 40% or 60% Annuity) S. No. Avg Salary Growth p.a. (%) CAGR (%) Total Service (Months) Life Expectancy After Ret. (Months) Pension Under OPS Pension Under NPS (60% Annuity) Pension Under NPS (40% Annuity) 1. 8 10 240 (20 yrs) 360 (30 yrs) 2.463401385 1.820696003 1.213797336 2. 8 420 (35 yrs) 360 (30 yrs) 8.146274949 12.39397037 8.262646912 3. 10 8 420 (35 yrs) 360 (30 yrs) 16.31932522 10.36297972 6.908653148 4. 10 8 240 (20 yrs) 360 (30 yrs) 3.664036817 1.52234 1.014893275 5. 12 15 240 (20 yrs) 360 (30 yrs) 5.446276827 6.425921413 4.283947609 6. 12 15 420 (35 yrs) 360 (30 yrs) 57.85537011 86.78305516 32.65479736 Source: Author’s Calculations Table 2 showcases only four possible scenarios. We can conclude from the above table that, if the average annual growth rate of salary is higher than CAGR, and if the employee has fewer years of service and CAGR is very low, then OPS is better. NPS would be better for employees if CAGR is higher than the average annual growth rate of salary and employees work for a more extended period. Similarly, the pension under NPS and OPS can be calculated using the above formulas under different circumstances. 6. Strategic Policy Alternatives for the Government As inferred from Table 2, in some circumstances, NPS pension is higher than OPS and vice versa. If the pension is less than OPS, the government can contribute the balance at the time of retirement or voluntary retirement. If the NPS pension is more than OPS, an extra amount can be deposited in the government’s account. This can create a balance and compensate the government for the additional burden. To reduce the taxpayer’s burden, instead of forty percent at the time of retirement, the employee, who opt for a pension as per the OPS, can be allowed to withdraw only twenty-five to thirty percent, and the rest of the amount can be used to buy an annuity. Table 3: Pension Under NPS and OPS for Initial Basic Salary Plus DA of Rs 1 (Scenarios: 70% or 75% Annuity) S. No. Avg Salary Growth p.a. (%) CAGR (%) Total Service (Months) Life Expectancy After Ret. (Months) Pension Under OPS Pension Under NPS (75% Annuity) Pension Under NPS (70% Annuity) 1. 8 10 240 (20 yrs) 360 (30 yrs) 2.463401385 2.27587 2.12414534 2. 8 10 420 (35 yrs) 360 (30 yrs) 8.146274949 15.492463 14.4596321 3. 10 8 420 (35 yrs) 360 (30 yrs) 16.31932522 12.9537247 12.090143 4. 10 8 240 (20 yrs) 360 (30 yrs) 3.664036817 1.90292489 1.77606323 5. 12 15 240 (20 yrs) 360 (30 yrs) 5.446276827 8.03240177 7.49690832 6. 12 15 420 (35 yrs) 360 (30 yrs) 57.85537011 108.478819 101.246898 Source: Author’s Calculations Table 3 shows that if seventy to seventy-five percent of the corpus is invested in an annuity, then the difference between pension under NPS and OPS would be reduced. The difference can be reduced further if, instead of ten percent contribution, employees also contribute fourteen percent of basic plus dearness allowance. This can reduce the pension expenditure of the government and save the taxpayers money. Proposed Statutory Implementation Model: The proposed system can be adopted with very few changes in the present statutes. In this system, the employee must give an option at the time of joining of service whether they want the pension under NPS or OPS and contribution of employer and employee remain as it is in the present system of NPS throughout the service. For the overall good, employee satisfaction, reducing taxpayer’s burden and reducing longevity risks, these changes can be introduced. References Department of Personnel and Training (DOPT), Govt. of India. (2021). Central Civil Services (Implementation of National Pension System (NPS)) Rules, 2021. https://documents.doptcirculars.nic.in/D3/D03ppw/NotifiedRule_NPS_300320219S1qV.pdf Thinking Ahead Institute. (2021). Global Pension Assets Study – 2021. https://www.thinkingaheadinstitute.org/content/uploads/2021/02/GPAS__2021.pdf World Bank. (2019). Total Population. https://data.worldbank.org/indicator/SP.POP.TOTL

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 43–46 (Journal pp. 687–690) Tax Literacy • Indirect Taxes & GST Framework GST- Tool for Development of Society SS CA. Satish Saraf The author is a member of the Institute. He can be reached at satish.saraf@icai.org and eboard@icai.in “The article narrates Balancing the imposition of tax versus burden on people, which is a tough act for any country in modern revenue laws, based on Axiom – Caveat Emptor and as advised in Arthasastra, whether GST laws, comply to these or not. Also discussed whether the GST, taxes are harsh or not, transparent or controlled from the view point of a common man. Briefly discussed the aspects such as registration details, Invoice, Tax on Value Addition, Algorithm of GSTIN, Removal of cascading effect of taxes, Anti-profiteering and expectations. This is a plain article to create awareness among everyone on the basic aspects. Read on….” Introduction: The Dual Mandate of Revenue Laws The fundamental axiom “Caveat Emptor” (Let the buyer beware) dictates that every purchaser must actively protect themselves from the malpractices, unfair trade tricks, and non-compliances adopted in the marketplace. In a modern democracy, every common citizen should possess a baseline knowledge of statutory legislation—particularly revenue legislation that directly implicates their personal financial affairs, household budgets, and purchasing power. It is an established notion across fiscal jurisprudence that no revenue law can be drafted entirely without harsh enforcement provisions. However, Indian lawmakers frequently declare that their fiscal philosophy is anchored upon the venerable teachings of Chanakya in the Arthashastra: Chanakya’s Dictum on Equitable Taxation (Arthashastra) “Taxation should not be a painful process for the people. There should be leniency and caution while deciding the tax structure. Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive. Taxes should be collected in small and not in large proportions.” Balancing the imposition of tax versus the economic burden on citizens is a delicate and challenging tightrope walk for any sovereign nation enacting modern revenue codes. Thus, when the Government of India first announced the proposal to introduce the Goods and Services Tax (GST) regime, deep doubts arose as to whether lawmakers would truly succeed in legislating the laws while preserving these core equitable principles. The Indian GST framework is compounded by extraordinary constitutional complexity because two sovereign tiers of government—the Union Government and twenty-eight State Governments (along with Union Territories with legislatures)—had to harmonize distinct revenue requirements and enact identical laws under the Constitution of India. Harmonizing this dual federal structure is akin to resolving the legendary ‘Bermuda Triangle’: collecting revenue without causing pain to taxpayers while instilling radical transparency, establishing uniform chargeability, and integrating all business activities under a single common digital mechanism. Implementation of GST: Navigating Unprecedented Complexity The Indian GST structure is widely acknowledged as one of the most intricate and ambitious indirect tax transformations implemented globally. Compounding its structural intricacy was the timing of its launch: the Government implemented the GST Acts on July 1, 2017—in the middle of the fiscal year upon the conclusion of the first quarter, rather than at the commencement of a fresh financial year on April 1. This mid-year transition created substantial administrative and computational complexities for businesses, practitioners, tax authorities, and the general public alike. The vital inquiry remains: Did the Indian legislatures successfully embed statutory safeguards within the GST Acts that directly or indirectly empower the common citizen to protect themselves, while mobilizing revenues strictly in harmony with the ancient tenets of the Arthashastra? Caveat Emptor & Arthashastra in the GST Ecosystem To breathe practical life into the doctrine of “Let the buyer beware”, the GST framework embeds multi-layered institutional transparency across the entire supply chain. These statutory transparency mechanisms include: Mandatory Invoicing Rules: Binding statutory protocols governing the generation, content, and issuance of invoices for supplies of goods and services. Mandatory Disclosure of HSN / SAC Codes: Clear specification of Harmonised System of Nomenclature (HSN) codes for goods and Services Accounting Codes (SAC) on tax invoices to avoid ambiguous or arbitrary rate classifications. Public Domain Disclosures: Real-time public availability of taxpayers’ registration and filing status over the national portal. Anti-Profiteering Mandate: Statutory compulsion requiring suppliers to pass on the economic benefits of input tax credits and rate reductions directly to end consumers. Dismantling Cascading Tax Barriers: Eradication of the dreaded tax-on-tax phenomenon to ensure that consumers only pay tax on genuine value addition. “To make a buyer aware, the laws introduced registration details to be displayed at business premises of each seller and to let the consumer know the seller is a tax agent for the government or not and also the tax amount can be collected by him or not.” Mandatory Business Premises Display Obligations To ensure consumers are never misled, the law imposes a strict statutory obligation on every GST-registered entity to prominently display specific registration data at their principal place of business and every additional place of business: GSTIN and Legal/Trade Name: Must be displayed on the name board at the prominent entrance of the business premises. Category of Registration: Must clearly specify whether the person is registered as a ‘Regular Taxpayer’ or under the ‘Composition Scheme’. Registration Certificate Display: A physical copy of the GST Registration Certificate (Form GST REG-06) must be prominently displayed inside the premises where it is clearly visible to all visiting customers and inspectors. Two Absolute Statutory Prohibitions Every Consumer Must Know: Prohibition 1: The GST law strictly prohibits any person from collecting GST from customers without holding a valid, active GSTIN. Prohibition 2: A dealer registered under the Composition Scheme is strictly prohibited from collecting tax from customers. A composition dealer cannot issue a Tax Invoice, cannot charge GST to the buyer, and must pay their composition tax liability entirely out of their own turnover collections. Demand for Invoice: The Citizen as a Fiscal Policeman Invoicing is the bedrock of tax compliance and anti-evasion. Under GST law, specific thresholds balance compliance burdens for small traders against the imperative of revenue integrity: “Whether the customer demands for the Tax Invoice or not, the registered supplier has to prepare the Tax Invoice for all transactions of the day individually when more than the Rs. 200/- value and one consolidated for less than Rs. 200/- value transactions.” Transactions Exceeding Rs. 200/- Where the value of supply exceeds Rs. 200/-, the law mandates the issuance of an individual Tax Invoice. A statutory right is expressly bestowed upon the consumer to demand this Tax Invoice, which delineates the taxable value, applicable tax rates (CGST, SGST, IGST), and exact tax quantum. Transactions Lower Than Rs. 200/- To mitigate administrative burdens on micro-merchants, suppliers supplying to unregistered recipients are exempt from issuing individual invoices if the value is below Rs. 200/- (unless the recipient expressly requests one). However, at the close of each business day, the supplier is legally obligated to prepare a consolidated Tax Invoice covering all such sub-Rs. 200 transactions. Therefore, every consumer—especially the common citizen—must actively demand a Tax Invoice whenever paying GST. By doing so, the consumer acts as an empowered decentralised enforcement officer (policing on behalf of the public exchequer). This ensures that taxes collected from consumers are duly remitted to the Treasury rather than illicitly pocketed by dishonest merchants. A simple everyday gesture of insisting on a Tax Invoice yields monumental cumulative gains in national revenue mobilization, ultimately preventing the government from imposing new or higher taxes on essential commodities. Tax on Value Addition & The Matching Principle In harmony with standard Value Added Tax (VAT) principles, GST is levied strictly on the incremental value addition achieved at each stage of the supply chain, rather than on the gross transaction value repeatedly. However, the revolutionary distinction under GST that protects both the common citizen and the exchequer is the mandatory electronic uploading of invoice-level outward supply data to the GST Network (GSTN) servers. This digital architecture enforces the matching principle: input tax credit (ITC) claimed by a recipient is cross-verified against the tax paid and reported by their supplier. Every registered person is entitled to claim ITC on taxes paid on inward supplies, preventing tax leakage and systematically eradicating unrecorded off-the-books transactions. The Algorithm of GSTIN: Decoding the 15-Digit Identifier The Legislature structured the Goods and Services Tax Identification Number (GSTIN) upon an intuitive, transparent algorithm so that even an ordinary consumer can effortlessly decipher it and instantly detect fraudulent or fictitious suppliers. The primary objective of the GSTIN is twofold: to identify the State in which the taxpayer is registered and from which goods or services originate, and to link the business directly to its Permanent Account Number (PAN) allotted under the Income-tax Act, 1961. Anatomy of the 15-Digit GSTIN Algorithm Digits Component Description Functional Significance & Verification Rule Digits 1 & 2 State Code (Census 2011) Represents the specific Indian State/UT of registration (e.g., ‘36’ for Telangana, ‘27’ for Maharashtra, ‘07’ for Delhi). Digits 3 to 12 Entity PAN (10 Digits) The Permanent Account Number of the proprietor, firm, or company under the Income-tax Act, establishing PAN-GSTIN linkage. Digit 13 Entity Code / Registration Count Signifies the consecutive number of registrations held by the same PAN holder within that particular State (1 through 9, then A through Z). Digits 14 & 15 System Generated Check Digits Digit 14 is default alphanumeric (‘Z’ by default), and Digit 15 is an automated mathematical checksum character. Practical Illustration: Spotting a Fake GSTIN in Seconds Suppose a consumer in Hyderabad is issued an invoice where the printed GSTIN begins with the state code ‘36’ (signifying registration in Telangana). If the vendor’s physical address or contact details printed on that same invoice indicate an address located in Karnataka or Maharashtra, the consumer can immediately recognize that the invoice is suspicious or fictitious. If a basic two-digit check coupled with a cursory glance at the address reveals genuineness or fakery, imagine how effortlessly a stakeholder can verify complete details using all 15 digits on official portals. Any citizen can verify a taxpayer instantly by visiting the GST Network (GSTN) portal at www.gst.gov.in and clicking on the “Search Taxpayer” tool (searchable via GSTIN or PAN). Comprehensive statutory guidelines are also accessible via the Central Board of Indirect Taxes and Customs (CBIC) website at www.cbic.gov.in. Removal of the Cascading Effect of Taxes Another direct benefit delivered to the common consumer is the systematic elimination of the cascading effect of taxes (tax on tax). In the fragmented pre-GST regime, numerous central and state levies—including Central Excise Duty, Service Tax, State VAT, Central Sales Tax (CST), Entry Tax, Luxury Tax, and Entertainment Tax—operated in independent silos. Taxes paid under one statute were routinely disallowed as input tax credit against liabilities arising under another statute. This forced businesses to capitalize taxes into their cost base, triggering compounding tax on tax and artificially driving up retail prices. By subsuming and clubbing these disparate duties into a unified GST mechanism with seamless input credit fungibility, the cascading distortion was dismantled, leading to noticeable downward price rationalization across numerous consumer product categories in 2017. Anti-Profiteering: Protecting Consumer Wallets The GST law incorporates a potent statutory weapon known as Anti-Profiteering (Section 171 of the CGST Act). This mandate stipulates that whenever the GST Council reduces the tax rate on any supply of goods or services, or whenever enhanced input tax credits become available, the business is legally compelled to pass on a commensurate reduction in the selling price directly to the recipient. “GST Law has a special provision called Anti-profiteering which stipulates the businessmen to reduce the price of the goods or services where the rate of tax is reduced by the Government during the GST Regime.” Mathematical Case Study: How Rate Reduction Must Lower Retail Price The author provides a precise empirical illustration demonstrating how an anti-profiteering price adjustment functions when the GST rate on a commodity is reduced from 18% to 12%: Baseline Pre-Reduction Transaction: A good is originally sold at a basic price of Rs. 1,000/- with GST @ 18% (Rs. 180/-), yielding a final consumer invoice price of Rs. 1,180/-. Supplier’s Procurement Cost & Tax: The seller had procured the item for Rs. 900/- with GST @ 18%, paying Rs. 162/- as input GST. Revised Purchase Tax Liability: Upon rate reduction to 12%, the tax on the seller’s purchase of Rs. 900/- @ 12% becomes Rs. 108/-. Input Tax Differential: The net input tax savings equals Rs. 54/- (Rs. 162 - Rs. 108). This full benefit of Rs. 54/- must be deducted from the base selling price on all existing inventory held on the effective date. Revised Base Selling Value: Rs. 1,000 - Rs. 54 = Rs. 946/-. Revised Output GST @ 12%: 12% on Rs. 946/- = Rs. 113.52 (rounded to Rs. 114/-). Final Consumer Price Post-Reduction: Rs. 946 + Rs. 114 = Rs. 1,060/- (as compared to the initial price of Rs. 1,180/-, delivering a direct consumer savings of Rs. 120/-). If a supplier refuses to pass on this commensurate reduction, any vigilant consumer has the statutory right under GST law to escalate the matter by filing a formal complaint before the National Anti-profiteering Authority (NAA). “Any consumer is aware of reduction in rate of tax on any particular good or service, as per the provisions of the GST Law he can demand for reduction from the supplier.” Public Expectations: The Imperative to Bring Petroleum Under GST The common citizenry continues to eagerly look forward to both the Union and State Governments bringing petroleum products (petrol, diesel, aviation turbine fuel, crude oil, and natural gas) into the GST net. Currently, the non-inclusion of fuel products results in heavy cascading taxes across state boundaries. Transportation and logistics represent the single largest input cost component immediately following procurement and manufacturing across almost all economic sectors. Bringing petroleum under GST would rationalize fuel prices, unlock unutilized input tax credits for freight operators, significantly lower manufacturing and retail prices, and act as a powerful deflationary force across the Indian economy. Conclusion: Striving Toward Societal Equity In conclusion, although the Indian GST architecture remains one of the most complex fiscal networks in the modern world—with both Union and State administrations naturally focused on safeguarding incremental revenues for their respective exchequers—vital pro-consumer measures have been deliberately engineered into the statutory framework. While contemporary revenue legislation may not strictly embody the ideal honeybee paradigm propounded in Kautilya’s Arthashastra or the pristine rigor of Caveat Emptor, the statutory requirements of mandatory invoicing, GSTIN algorithmic transparency, cascading tax elimination, and anti-profiteering enforcement represent earnest, commendable strides toward delivering justice, equity, and developmental progress to society at large. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 43–46 (Journal pp. 687–690) Author Contact: satish.saraf@icai.org | eboard@icai.in

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 53–58 (Journal pp. 697–702) Taxation • Direct Tax Compliance & Cash Restrictions Keeping a Check on Cash Transactions Under Income Tax SD CA. Supriya Dewan The author is a member of the Institute. She can be reached at casupriyadewan@gmail.com and eboard@icai.in “We come across a common saying ‘Cash is King’. However, idle cash can alone not generate any interest income. Therefore, channelizing idle money into digital mode creates the potential to generate income. A cashless economy is a system where majority of transactions take place by other modes than cash. These modes may be credit cards, debit cards, wallets or digital modes where flow of cash is non-existent or is bare minimum. Read on…” Introduction: The Drive Towards a Cashless Economy A cashless economy serves as an indispensable and highly effective policy instrument to suppress the parallel grey economy, sever terror-financing networks, and curb systemic corruption. In pursuit of these national economic goals, the Government of India has been proactively incentivizing digital financial ecosystems while simultaneously enacting rigorous, deterrent statutory provisions under the Income-tax Act, 1961 to restrict, penalize, and disallow cash transactions. This comprehensive analytical guide highlights the specific transactions under the Income-tax Act where assessees must unequivocally say “No” to cash, as well as the provisions that systematically induce taxpayers to adopt non-cash, verified banking channels. 1. Cash Restrictions in Immovable Property: Sections 43CA & 50C Section 43CA (applicable to transfer of immovable property held as stock-in-trade) and Section 50C (applicable to transfer of capital assets being land, building, or both) govern the determination of the full value of consideration in real estate transactions. Where the date of the Agreement fixing the quantum of consideration and the date of Registration (transfer) are different, the statutory Stamp Duty Value (SDV) on the date of agreement may be adopted as the deemed full value of consideration—provided that the consideration, or at least a part thereof, has been received through banking channels (account payee cheque/draft, ECS, or prescribed electronic modes under Rule 6ABBA) on or before the date of the agreement. “In Section 50C and Section 43CA, Stamp duty value to be adopted is dependent on the mode of consideration if date of agreement and date of transfer are different.” Statutory Benchmark Table: Deemed Full Value of Consideration Scenario / Mode of Receipt of Advance Deemed Full Value of Consideration If the whole or part of consideration has NOT been received by way of account payee cheque/draft, ECS or prescribed electronic mode* on or before the date of Agreement. Stamp duty value on date of transfer (Registration). If the whole or part of consideration HAS been received by way of account payee cheque/draft, ECS or prescribed electronic mode* on or before the date of Agreement. Stamp duty value on date of agreement. Case Illustration: Section 50C (Capital Asset) Mr. Ram transfers land held as a capital asset where the actual declared consideration is Rs. 1,000 lakhs. The stamp duty value as on the date of agreement is Rs. 1,090 lakhs, and the stamp duty value as on the date of transfer of land is Rs. 1,120 lakhs. The date of agreement and the date of transfer are different. Scenario: Mr. Ram receives Rs. 500 lakhs by account payee cheque before the date of agreement. Deemed Full Value of Consideration: The actual declared consideration of Rs. 1,000 lakhs is adopted as the full value of consideration because the stamp duty value on the date of agreement (Rs. 1,090 lakhs) does not exceed 110% of the actual consideration (Rs. 1,000 lakhs × 110% = Rs. 1,100 lakhs safe-harbor ceiling). Case Illustration: Section 43CA (Stock in Trade) Mr. Ram holds a building as stock-in-trade and transfers it on 01/05/2020 for an actual consideration of Rs. 1,000 lakhs. The stamp duty value on the date of agreement (01/09/2019) is Rs. 1,200 lakhs, and the stamp duty value on the date of transfer (01/05/2020) is Rs. 2,100 lakhs. Scenario A (Received via Cheque): Mr. Ram receives Rs. 500 lakhs by account payee cheque on 01/09/2019. Deemed Full Value: The stamp duty value as on the date of agreement, i.e., Rs. 1,200 lakhs, shall be adopted as the full value of consideration under Section 43CA because advance was received by account payee cheque on the date of agreement, even though SDV (Rs. 1,200 lakhs) exceeded 110% of consideration (Rs. 1,100 lakhs). Scenario B (Received in Cash): Mr. Ram receives Rs. 500 lakhs by cash on 01/09/2019. Deemed Full Value: The stamp duty value as on the date of transfer, i.e., Rs. 2,100 lakhs, shall be adopted as the full value of consideration because cash was accepted, completely forfeiting the agreement-date benchmark and subjecting the assessee to enormous additional tax liability on Rs. 2,100 lakhs. 2. Section 269SS: Restrictions on Taking or Accepting Cash Loans & Deposits Under Section 269SS of the Income-tax Act, 1961, no person shall take or accept any loan, deposit, or specified sum (advance or otherwise in relation to transfer of an immovable property, whether or not the transfer takes place) from any person (depositor) by any mode other than account payee cheque, account payee bank draft, or prescribed electronic modes where: The amount of loan, deposit, or specified sum is Rs. 20,000 or more; or The aggregate of total amount of loan, deposit, and specified sum is Rs. 20,000 or more; or Where a person has received such loan, deposit, or specified sum from the depositor at an earlier date but the repayment of such loan, deposit, or specified sum remains outstanding, if such outstanding amount or aggregate outstanding is Rs. 20,000 or more; or The aggregate of all the above loans, deposit, or specified sum received in the above three transactions is Rs. 20,000 or more. Exempted Entities (Non-Applicability to Section 269SS) Any loan or specified sum or deposit “taken or accepted by” or “taken or accepted from” the following entities is exempt: (a) The Government; (b) Any banking company, post office savings bank, or co-operative bank; (c) Any corporation established under a Central, State, or Provincial Act; (d) Any Government company as defined in Section 2(45) of the Companies Act, 2013; (e) Any institution, association, or body or class thereof notified in the Official Gazette. “According to Section 271D of Income Tax Act 1961 a loan or deposit or specified sum is accepted violating the provisions of section 269SS, then a penalty may be levied which shall be equivalent to the amount of such loan or deposit or specified sum by the Joint Commissioner.” Consequences of Violation: Under Section 271D, if a person accepts any loan, deposit, or specified sum in contravention of Section 269SS, the Joint Commissioner may impose a penalty equal to 100% of the amount of the loan, deposit, or specified sum so accepted. 3. Section 269T: Restrictions on Repayment of Loans & Deposits in Cash Section 269T prohibits any branch of a banking company, co-operative bank, firm, company, or other person from repaying any loan, deposit, or specified sum otherwise than by account payee cheque, account payee bank draft, or electronic clearing system through a bank account (Rule 6ABBA), if: (a) The amount of loan or deposit, along with the interest amount, is Rs. 20,000 or more; or (b) The aggregate amount of loans or deposits, including interest held by such person in his own name or jointly with any other person, is Rs. 20,000 or more. Exempted Entities (Non-Applicability to Section 269T) (a) Government; (b) Any banking company, post office savings bank, or co-operative bank; (c) Any corporation established by a Central, State, or Provincial Act; (d) Any Government company as defined in Section 617 of the Companies Act, 1956 (Section 2(45) of Companies Act, 2013); (e) Such other institution, association, or body notified by the Central Government in the Official Gazette. Consequences of Violation: Under Section 271E of the Income-tax Act, 1961, the Assessing Officer / Joint Commissioner shall levy a penalty equivalent to 100% of the loan or deposit amount repaid in cash. Illustrative Practical Examples: Sections 269SS & 269T Example 1: Independent Transactions Across Different Assessment Years Mr. P takes a cash loan of Rs. 17,000 on 01/05/2019 from Mr. R and repays it on 20/12/2019 in cash. He again takes a cash loan from Mr. R of Rs. 19,000 on 01/08/2020 and repays it in cash on 29/10/2020. Verdict: No violation. Because the assessment years are different and each receipt and repayment is below the statutory threshold of Rs. 20,000. Example 2: Outstanding Balance Breaching Repayment Threshold Mr. P receives a cash loan of Rs. 18,000 on 01/10/2020, and an additional loan of Rs. 22,000 by account payee cheque on 04/10/2020. Mr. P repays the entire Rs. 40,000 on 20/11/2020 by paying Rs. 15,000 in cash and Rs. 25,000 by account payee cheque. Verdict: On receipt side, there is no violation of Section 269SS because the second receipt was via account payee cheque. However, as on 20/11/2020, the aggregate outstanding loan was Rs. 40,000 (exceeding Rs. 20,000). Therefore, repaying Rs. 15,000 in cash directly violates Section 269T, attracting a 100% penalty of Rs. 15,000 under Section 271E! 4. Section 269ST: Prohibition on Cash Receipts of Rs. 2 Lakhs or More Section 269ST prohibits any person from receiving an amount of Rs. 2,00,000 or more in cash under any of the following three distinct statutory circumstances: 1. In Aggregate from a Person in a Day A recipient cannot receive cash of Rs. 2 lakhs or more from a single person in a single calendar day, even if split across multiple separate invoices or transactions. 2. In Respect of a Single Transaction A single transaction/bill cannot be settled in cash of Rs. 2 lakhs or more, regardless of whether the cash is received over multiple days or split across dates. 3. In Respect of a Single Event or Occasion Transactions relating to one event or occasion (e.g., wedding, catering, conference) cannot involve aggregate cash receipts of Rs. 2 lakhs or more, irrespective of number of bills or days. Exemptions from Section 269ST (a) Government, any banking company, post office savings bank, or co-operative bank; (b) Transactions of the nature referred to in Section 269SS (acceptance of loans, deposits); (c) Such other persons or class of persons/receipts notified by Central Government; (d) Any corporation established by a Central, State, or Provincial Act. “Failure to comply with Section 269ST would attract penalty under Section 271DA of the Act, equivalent to the amount receipt in cash.” Three Practical Case Studies on Section 269ST Single Day Aggregation Breach: Mr. A receives Rs. 2,35,000 in cash on the same day for two separate invoices (Rs. 1,00,000 and Rs. 1,35,000) from Mr. B. Section 269ST is violated because daily aggregate from one person exceeds Rs. 2,00,000. Single Bill Split Over Multiple Dates: Mr. A sells goods for Rs. 3,50,000 on 02/05/2020. He accepts cash of Rs. 1,90,000 on 10/10/2020 and Rs. 1,60,000 on 12/12/2020. Section 269ST is violated because total cash received for a single transaction/bill exceeds Rs. 2,00,000. Single Occasion / Event: Mr. A undertakes a catering and decoration contract for a marriage and receives Rs. 3,00,000 in cash in full. Section 269ST is violated because the receipt pertains to a single event/occasion. “Section 269ST is applicable on payee and not payer for any receipt whether capital or revenue. This indicates that a borrower remains out of the purview of Section-269ST.” Interplay & Harmonization: Section 269T vs. Section 269ST Scenario Violation U/s Legal Rationale & Applicable Penalties Mr. Ram repays Rs. 60,000 in cash Section 269T Mr. Ram is a borrower. Hence Section 269ST is not applicable to him. Having repaid cash exceeding the Rs. 20,000 limit, he is liable for penalty under Section 271E. Mr. Ram repays Rs. 2,60,000 to Mr. Sham in cash Section 269ST & 269T Dual violation! Mr. Ram (payer/borrower) breached Section 269T and faces penalty u/s 271E. Mr. Sham (recipient/payee) accepted cash of Rs. 2,00,000 or more, violating Section 269ST and facing penalty u/s 271DA. 5. Section 40A(3) & 40A(3A): Disallowance of Cash Business Expenditures Section 40A(3) read with Rule 6DD: Where an assessee incurs any expenditure in respect of which payment or aggregate of payments made to a person in a single day, otherwise than by an account payee cheque, account payee bank draft, ECS, or prescribed electronic modes under Rule 6ABBA (Notification No. 8/2020 dated 29.01.2020), exceeds Rs. 10,000, no deduction shall be allowed in respect of such expenditure. Goods Carriage Special Ceiling: Where payment is made for plying, hiring, or leasing of goods carriages, the statutory daily cash expenditure limit is relaxed to Rs. 35,000 instead of Rs. 10,000. Section 40A(3A): Where an assessee had previously claimed and been allowed a deduction for an expenditure incurred in a preceding year on mercantile basis, and subsequent payment in respect thereof is made in the current year in cash exceeding Rs. 10,000 (or Rs. 35,000 for goods carriages), the payment so made shall be deemed to be profits and gains of business and taxed in the year of payment! Practical Examples: Section 40A(3) & 40A(3A) Five Invoices of Rs. 6,000 in a Day: Payments of 5 invoices of Rs. 6,000 each made in cash on 04/08/2020 to Mr. Ram (leasing of goods carriages). No disallowance under Section 40A(3) because total aggregate payments are Rs. 30,000, which does not exceed the Rs. 35,000 carriage threshold. Two Invoices on Separate Days: Payments of two invoices of Rs. 19,000 each made in cash to Mr. Ram (goods carriages) on 27/10/2020 and 28/10/2020. No disallowance under Section 40A(3) because aggregate payments did not exceed Rs. 35,000 in a single day. Subsequent Cash Settlement of Past Expense: Cash payment of Rs. 38,000 made to Mr. Ram (goods carriages) against an invoice previously booked and allowed as deduction in FY 2017-18. Disallowance under Section 40A(3A) is attracted because payment exceeds Rs. 35,000, and Rs. 38,000 will be taxed as business income in the current year. Specific Cash Prohibitions Across Deductions & Entities (Sections 6 to 12) 6. Tax Exemptions to Political Parties (Section 13A) Registered political parties retain 100% tax exemption on income from house property, other sources, capital gains, and voluntary contributions only if: They receive no donation exceeding Rs. 2,000 in cash (must be by account payee cheque/draft, ECS, or Rule 6ABBA electronic modes). For each voluntary contribution (other than electoral bonds) exceeding Rs. 20,000, they maintain and furnish full donor audit records. Consequence of Violation: Complete forfeiture of statutory exemption; all voluntary contributions, house property income, capital gains, and other receipts become fully taxable! 7. Donations under Section 80G Deductions for contributions to charitable institutions and relief funds are available to all assessees (individuals, companies, firms). Donations in kind are completely ineligible. Furthermore, any donation exceeding Rs. 2,000 must be made in non-cash modes to qualify for tax deduction. “Section 80G covers contributions made to charitable institutions and certain relief funds. The deduction under Section 80G is available to all persons whether a company, individual, firm or any other person. Donations in kind are not entitled for any tax benefits.” 8. Deduction under Section 80D (Health Insurance & Medical Expenditure) Deduction is available for medical insurance premiums and medical expenditure for senior citizens. The statutory deduction is allowable only if payment is made in a mode other than cash. Cash payment is legally permitted exclusively for preventive health check-ups (up to the overall ceiling of Rs. 5,000). 9. Disallowance of Capital Asset Actual Cost: Section 35AD read with Section 43(1) Under the second proviso to Section 43(1), where an assessee incurs expenditure for acquiring a capital asset, and payment or aggregate payments made to a person in a day otherwise than by account payee cheque/draft, ECS, or Rule 6ABBA electronic modes exceeds Rs. 10,000, such expenditure shall NOT form part of the actual cost of the asset for depreciation or investment deductions under Section 35AD. 10. Deduction U/s 80GGA (Donations for Scientific Research & Rural Development) Available to non-business assessees (no PGBP income) for donations to research associations, universities, rural development programs, or the National Urban Poverty Eradication Fund. To discourage cash usage, no deduction is allowed if cash contribution exceeds Rs. 10,000. 11. Employment Incentive: Deduction under Section 80JJAA Provides an incentive deduction equal to 30% of additional employee cost incurred by an assessee subject to tax audit under Section 44AB, allowable for three consecutive assessment years. “Section 80JJAA provides that deduction of 30% of additional employee cost incurred by the assessee shall be allowed as deduction for 3 assessment years.” Banking Mandate: No deduction shall be allowed under Section 80JJAA if emoluments are paid in cash. Emoluments must strictly be disbursed through account payee cheque, bank draft, or electronic clearing system. 12. Section 36(1)(ib): Employer-Paid Employee Health Insurance Explicitly disallows business deduction for any expenditure incurred by an employer towards premium paid for the health insurance of its employees if such premium is paid in cash. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 53–58 (Journal pp. 697–702) Author Contact: casupriyadewan@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 47–52 (Journal pp. 691–696) ACCOUNTING AND FINANCE • EMPIRICAL CAPITAL MARKET RESEARCH The Unsung Sectors in the Indian Manufacturing Industry: An Empirical Study on Influence of Accounting Variables with Share Price Bejoy Joseph (Research Scholar, KUFOS)  •  CA. Deepak. C. (Member of the Institute)  •  Dr. V. Ambilikumar (Director, SME KUFOS) Authors can be reached at eboard@icai.in. 💡 Executive Summary & Research Focus The term unsung sector comprises nine sectors listed in BSE. Despite steady and robust growth in terms of revenue in these sectors from 1997 to 2020, their contribution is unaccounted in the studies that propagated the future of manufacturing sectors in India. Hence the term unsung. An attempt is made to establish the association among accounting variables and share price of these sectors along with pre and post analysis based on the crisis of 2008, for enabling the investors to understand the reliability of these sectors from a fundamental point of view and to invest in them. Read on… 1. Introduction: Manufacturing Dynamics & The Identification of Unsung Sectors The enormous presence of the manufacturing sector in India has often invited many debatable research conclusions among researchers. It was Ahluwalia (1985) who observed that total factor productivity growth (TFPG) in the manufacturing sector in India was not robust during the post reform period of 1991. But the other research contributions have completely rejected the claim made by the former researcher. The research contributions of Balakrishnan & Pushpangadan (1994) claim that TFP growth in the Indian manufacturing sector stood strong and created a positive impact on the Indian economy. Several studies of such kind have disclosed that the manufacturing sectors that were liberalised in terms of FDI and Tariff, experienced 15 percent and 20 percent productivity growth during post reform period (Sivadasan, 2003). This increase in productivity growth has led to a momentum of skill intensive industries in India which would gradually convert India to a manufacturing hub. In the study put forward by Sakhardande & Gaonkar (2021) twenty-five sectors were recognized to be under Make in India (MII). Apart from that, among these sectors, five sectors come under the category of superstar sectors (DPIIT, 2014). But there are many other performing sectors in the category of manufacturing sector in India, which does not find a place in above mentioned studies. This has made the researcher think about such sectors and to study their growth prospect for the prospective investors to invest in them. The share prices are uncertain and there is all possibility of fluctuations. In this scenario, it would be useful for the investors in attaching the share price to a component that displays the strength of a company. The robust performance of a company is disclosed by its accounting variables, and this is made as a component in this research that establishes a relation with share price. The Nine Unsung Manufacturing Sectors & Sample Selection The researcher attempted identifying nine sectors based on the revenue they generated for the past 24 years (1997 to 2020). Among these nine sectors, eighty-four companies based on market capitalisation were selected. The market capitalisation indicates the total value of a firm, and is an indicator of business valuation preferred by the investors for their investment purpose (Jaya & Sundar, 2012). Further the market capitalisation also has a positive association with profitable accounting ratios (Prasad, 2015). 1. Aluminium 2. Cement 3. Commodity Chemicals 4. Heavy Electrical Equipment 5. Industrial Machinery 6. Other Electrical Equipment 7. Other Industrial Goods 8. Other Industrial Products 9. Plastic Products CMIE prowess data for the period 1997 to 2020 displays an impressive performance of these sectors in terms of revenue generated by them for the Indian economy. Despite their supreme performance in terms of growth in revenue, even during the pandemic, they could not find a place in the studies that propagated future prospects of the manufacturing sector in India. Hence the researcher has coined the term unsung sectors for these nine sectors mentioned in the study. Three-Fold Research Objectives: To determine the accounting variables that have an association with the share price of these unsung sectors. To determine the relation of share price and accounting variables on a pre and post analysis based on the global crisis which occurred in 2008 (the sub-prime crisis). To test the sufficiency of variables to remove multicollinearity and eliminate time-series autocorrelation. Note: This study focuses its attention on the entire nine sectors as a whole rather than emphasising on a specific or individual sector. 2. Theoretical Framework & Literature Review There are numerous studies that were performed in finding out the relation between share price and accounting variables. All these studies emphasised on several accounting variables. This has formed the basis for the researcher to select the accounting variables for the study. Among the six accounting variables considered for the study, Book value per share (BPS), Earnings per share (EPS), Dividend per share (DPS) and profit were also considered in the landmark studies of Ball & Brown (1968) and Ohlson (1995). The study conducted by the former was wrapped with the conclusion that profit is value relevant towards the stock price. Whereas the latter in his study proved that all financial information disclosed in balance sheet and income statement has an impact on share price. The other two variables used in this study are Return on Total Assets (ROA) and Return on Capital Employed (ROCE). These variables were used in the study conducted by Lev (1989), Penman (1992), and Marx (2010). All these studies exposed the fact that these accounting variables have explanatory power on stock price. The Ohlson Valuation Model (1995): The methodology used in the above studies for establishing an association with share price was the Ohlson Model. It has been framed as follows: Pt = β0 + β1Bit + β2Xit + β3vit + eit Based on this Ohlson equation, there were several studies that has established association with accounting variables and stock price. This equation was used in the studies of Ali & Hwang (2000), Barth, Landsman, & Lang (2008), Dong & Stettler (2011) and Clarkson, Hanna, Richardson, & Thompson (2011). In all these studies, accounting variables and share price are based on time elements. Hence time series analysis is implemented along with Ohlson Model for a conclusive solution. 3. Empirical Analysis, Model Estimation & Hypotheses The hypothesis used in the study is based on the Ohlson Model, which describes the relation between accounting variables and share price. In this study, the accounting variables are independent variables and the share price is the dependent variable. The six primary hypotheses framed are as follows: H1: There is a positive relation between Stock price and Book Value per share H2: There is a positive relation between Stock price and Earning per Share H3: There is a positive relation between Stock price and Net Profit to sales H4: There is a positive relation between Stock price and Return on Capital Employed H5: There is a positive relation between Stock price and Return on Assets H6: There is a positive relation between Stock price and Dividend per Share 3.1 Application of Ohlson Model (Initial Regression) Coefficients Table: Initial Ohlson Model Estimation Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) -192.686 16.255 — -11.854 .000 Earnings per share -.985 .576 -.036 -1.709 .088 Book value per share 4.375 .112 .766 38.974 .000 Return on capital employed .123 .123 .013 1.001 .317 Return on Asset -.172 .263 -.009 -.652 .514 Net Profit Margin -.025 .005 -.069 -5.252 .000 Dividend Per share 15.440 2.137 .125 7.225 .000 a. Dependent Variable: Share Price of Companies The above table indicates that the accounting variables that have significant values less than .05, has a positive relation with share price. In this case, Book value per Share, Net profit margin and Dividend Per Share would only be taken ahead for establishing an association with share price. As the data collected for the study relates to time series, there could be two obstacles that would hinder the progress of this research. These two obstacles are: 1) Multi collinearity and 2) Auto Correlation. Collinearity Diagnostic Analysis (VIF & Tolerance) Model Unstandardized Coefficients Standardized t Sig. Collinearity Statistics B Std. Error Beta Tolerance VIF 1 (Constant) -189.984 16.049 — -11.838 .000 — — Book value per share 4.263 .092 .746 46.266 .000 .647 1.546 Net Profit Margin -.027 .005 -.073 -5.611 .000 .984 1.016 Dividend Per share 14.057 1.978 .114 7.108 .000 .655 1.527 a. Dependent Variable: Share Price of Companies If the VIF value lies between 1 to 10, then there exists no multicollinearity. At the same time if the VIF value is less than 1 or more than 10, then there is multicollinearity. In the above table, the three significant accounting variables so selected based on Ohlson have VIF values below 10 and not less than 1, hence they are not collinear. Autocorrelation Test (Durbin–Watson Diagnostic) The next obstacle is to ensure that there is no auto correlation among the residuals of variables used in the study. The problem of auto correlation arises if the residuals of the variables are correlated. To address this problem, the Durbin–Watson test is implemented: Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson 1 .814a .662 .661 629.27000 .464 a. Predictors: (Constant), Dividend Per share, Net Profit Margin, Book value per share. b. Dependent Variable: Share Price of Companies. The Durbin–Watson test states that if the result of DW is less than 1 and more than 3 then the residuals are correlated and time series analysis must be performed. In this case, the Durbin–Watson test is less than 1 (DW = .464), hence residuals are correlated. To solve this, Exponential Smoothing model is used. 3.2 Application of Exponential Smoothing & ARIMA Models This table describes the time series model applied for each independent variable based on their respective nature of data: Model Description: ARIMA Time Series Specification Variable Model ID Model Type Book value per share Model_1 ARIMA (1,0,0)(1,0,1) Net Profit Margin Model_2 ARIMA (0,0,1)(0,0,0) Dividend Per share Model_3 ARIMA (2,0,2)(1,0,1) Model Statistics: Ljung–Box Q(18) Residual Independence Diagnostic Model Number of Predictors Model Fit Statistics Ljung-Box Q(18) Number of Outliers Stationary R-squared Statistics DF Sig. Book value per share-Model_1 0 .687 21.547 15 .120 0 Net Profit Margin-Model_2 0 .013 .167 17 1.000 0 Dividend Per Share-Model_3 0 .242 15.100 13 .301 0 In these results, the p-values for the Ljung-Box statistics are all greater than 0.05, which states that the residuals are made independent. The study has overcome the second hurdle that the residuals of selected independent variables are not correlated. This enabled the data to overcome the issues of autocorrelation. 3.3 Re-Applying Ohlson Model on Deseasonalized/Stationary Series Coefficients Table: Re-Applied Ohlson Model Model Unstandardized Coefficients Standardized t Sig. B Std. Error Beta 1 (Constant) -206.027 23.163 — -8.895 .000 Predicted value from BPS-Model_1 4.372 .149 .635 29.409 .000 Predicted value from NETPROFITMARGIN-Model_2 -.203 .052 -.065 -3.924 .000 Predicted value from DPS-Model_3 15.383 5.369 .061 2.865 .004 a. Dependent Variable: Share Price of Companies Predictability of Share Price (Final Model Fit) Model R R Square Adjusted R Square Std. Error of the Estimate 1 .672a .451 .451 801.29342 a. Predictors: (Constant), Predicted value from DPS-Model_3, Predicted value from NETPROFITMARGIN-Model_2, Predicted value from BPS-Model_1. This table indicates that the three accounting variables explain 45.1% of variations occurring in the stock price of unsung sectors in the manufacturing industry. Hence, it can be concluded that the share price of the sectors is predictable by 45% through these accounting variables. 3.4 Pre and Post 2008 Financial Crisis Analysis This analysis is done to understand the stability of these sectors. The stability is understood through sturdiness in the share price. After finding out fundamental strength of these sectors by establishing a relation with accounting variables and share price, an attempt is made to understand the reliability of these sectors. The reliability on these sectors depends on stability of share price. The share price fluctuates even with a minute change in the economy. In this context, to establish the robustness of these sectors, an analysis is done on the share price and accounting variables of these sectors with a comparison of pre and post crisis that occurred in 2008 which named as sub-prime crisis. During this crisis, many established companies went bankrupt. In this context, the stability and reliability of these sectors are analysed based on pre and post crisis comparison: H1: There is no significant difference in the Accounting Variables between Pre and Post Crisis. H2: There is no significant difference in the Share Price between Pre and Post Crisis. Paired Samples Test: Pre vs. Post 2008 Crisis Differences Pair Paired Differences t df Sig. (2-tailed) Mean Std. Deviation Std. Error Mean 95% Confidence Interval Lower Upper Pair 1: sharepriceprecrisis - sharepricepostcrisis -213.29405 1746.54415 76.00858 -362.61105 -63.97705 -2.806 527 .005 Pair 2: epsprecrisis - epspostcrisis -.58500 50.39734 2.19326 -4.89361 3.72361 -.267 527 .790 Pair 3: bpsprecrisis - bpspostcrisis -64.92464 254.26474 11.07595 -86.68316 -43.16612 -5.862 526 .000 Pair 4: roceprecrisis - rocepostcrisis -5.72231 202.78453 8.83343 -23.07545 11.63083 -.648 526 .517 Pair 5: roaprecrisis - roapostcrisis 6.85941 99.44585 4.32783 -1.64250 15.36132 1.585 527 .114 Pair 6: netprofitprecrisis - netprofitpostcrisis 127.62028 2999.51414 130.53710 -128.81666 384.05723 .978 527 .329 Pair 7: dpsprecrisis - dpspostcrisis -1.42977 12.37733 .53865 -2.48795 -.37160 -2.654 527 .008 The above table presents the paired sample ‘t’ test analysis. The P value or significance value of accounting variables like Book Value per share (.000) and Dividend per share (.008) is less than .05. Hence for these two accounting variables, the Null hypothesis is rejected, indicating a significant difference in BPS and DPS between pre and post crisis periods. Whereas other Accounting Variables (EPS, ROCE, ROA, Net Profit) and even Share price do not show any difference between pre and post crisis, hence alternate hypotheses are accepted. 4. Conclusion & Key Findings for Prospective Investors The BPS, DPS, and Net Profit Margin have a positive relationship and explanatory power over the share price of unsung sectors. It is found that these three variables explain 45% of variations in the share price of these sectors. Hence the other 55% of variations in the share price could be due to factors like inflation, interest rate, exchange rate, industry life cycles, labour conditions, trend changes, and macroeconomic parameters. Earnings Durability & Investment Implications: When pre and post crisis comparison was made, it was revealed that the share price of these sectors were the same. Along with share price, the accounting variables also remained the same except BPS and DPS. The BPS and DPS were different in both comparison periods. This further discloses the fact that among three accounting variables that showed positive relationship, it is net profit margin that has more explanatory power on share price than DPS and BPS. It further explains that it is the net profit and operational efficiency of these sectors in maintaining profit during adverse macroeconomic conditions that have made them more consistent and reliable. Hence, prospective investors can undoubtedly rely on these unsung manufacturing sectors from a fundamental investment viewpoint. References Ahluwalia, I. (1985). Industrial Growth in India - Stagnation since Mid-Sixties. Delhi: Oxford University Press. Ali, A., & Hwang, L. S. (2000). Country-Specific Factors Related to Financial Reporting and the Value Relevance of Accounting Data. Journal of Accounting Research, 1-21. Balakrishnan, P., & Pushpangadan, K. (1994, July 30). TFPG in Manufacturing Industry: A fresh Look. Economic and Political Weekly, pp. 2028-2032. Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research, 159-178. Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International Accounting Standards and Accounting Quality. Journal of Accounting Research, 467-498. Clarkson, P., Hanna, D., Richardson, G. D., & Thompson, R. (2011). The impact of IFRS adoption on the value relevance of book value and earnings. Journal of Contemporary Accounting & Economics, 1-17. Dong, M., & Stettler, A. (2011). Estimating firm-level and country-level effects in cross-sectional analyses: An application of hierarchical modeling in corporate disclosure studies. The International Journal of Accounting, 271-303.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 65–70 (Journal pp. 709–714) INTERNATIONAL TAXATION • DIGITAL ECONOMY TAXATION Equalisation Levy CA. Ronak V. Darji The author is member of the Institute. He can be reached at darjironak9@yahoo.com and eboard@icai.in. 💡 Executive Summary & Legislative Background Now-a-days, digital economy is growing faster than the global economy. In short, a person can carry out a business digitally from anywhere in the world. The need for physical presence in a jurisdiction is diminished. So, due to the increase in digital economy and with the intention of taxing the untaxed income earned by non-residents through digital transaction, the Finance Minister in the budget speech, while introducing The Finance Bill, 2016, introduced the provisions relating to Equalisation Levy. Read on… 1. Genesis, Concept & Scope Expansion of Equalisation Levy Equalisation levy also called “Google Tax” is tax levied globally on certain income earned digitally by the non-resident. It is proposed that a person making payment to non-resident (where non-resident does not have a Permanent Establishment (PE) in India) for specified services and such payment exceeds the prescribed limit, then in such a case, a person is required to deduct the tax at the prescribed rate under equalisation levy. Further, the Finance Minister in her budget speech, while introducing The Finance Bill, 2020, amended the provisions relating to Equalisation Levy to widen the scope of equalisation levy. It is proposed that a person received service from e-commerce operator (where e-commerce operator being non-resident person, does not have a Permanent Establishment (PE) in India) for supply or services, an e-commerce operator is required to deduct and pay the tax at the prescribed rate under equalisation levy. So, considering the above, let us understand the provisions one by one… Statutory Dates of Applicability For Specified Services (Section 165) 01st June 2016 Notified via CBDT notification dated 27th May 2016 (Chapter VIII of Finance Act, 2016). For E-Commerce Supply or Services (Section 165A) 01st April 2020 Notified via CBDT notification dated 28th October 2020 (widened scope under Finance Act, 2020). Territorial Extent: Provisions relating to the equalisation levy extends to the whole of India except the state of Jammu and Kashmir. Further, equalisation levy under section 165 is only applicable for Business-to-Business (B2B) transactions. 2. Statutory Definitions under Chapter VIII of Finance Act, 2016 Equalisation levy is defined under section 164(d) of the Finance Act, 2016. Equalisation levy means the tax leviable on consideration received or receivable for any specified services or e-commerce supply or service. The key statutory terms are defined below: Specified Services [Section 164(i)] This includes: Online Advertisement; Any provision for digital advertising spaces or any other facility or service for the purpose of online advertisement; Any other service as may be notified by the Central Government. E-Commerce Supply or Service [Section 164(cb)] This covers: Online sale of goods owned by the e-commerce operator; or Online provision of services provided by the e-commerce operator; or Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or Any combination of (1), (2), or (3) above. E-Commerce Operator [Section 164(ca)] E-commerce operator means a non-resident who owns, operates, or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. 3. Charging Section 165: Equalisation Levy @ 6% on Specified Services Charging section of equalisation levy on specified services is given under section 165 of the Finance Act, 2016. Equalisation levy must be levied at the rate of 6% of the amount of consideration for specified services (Rule 3 of Equalisation Levy Rules, 2016). Conditions to Levy Equalisation Levy for Specified Services: Service provider should be a non-resident. Service provider should not have a permanent establishment in India. If service provider has a permanent establishment in India, but such services are not effectively connected with such permanent establishment in India. Service receiver may be a resident person in India or non-resident person having a permanent establishment in India. Service receiver received the specified services. Service receiver should use the specified services for carrying on business and profession only. Service receivers make payment to non-resident in excess of Rs. 1,00,000/- during a year. Withholding Responsibility: If all the above-mentioned conditions are satisfied, then in such a case, a person making payment is required to deduct the equalisation levy @ 6% of amount of consideration for specified services. In simple terms, liability to deduct and pay to the credit of the Central Government shall be on the person paying to the non-resident. Non-Applicability of Equalisation Levy on Specified Services: The provisions relating to equalisation levy are not applicable if any one of the following conditions is satisfied: Service provider is a non-resident but has a permanent establishment in India and services provided by him are effectively connected with such permanent establishment in India. Service receiver has taken specified services not for the purpose of carrying on business and profession. Service receivers made payment to non-resident below the amount of Rs. 1,00,000 during a year. 4. Charging Section 165A: Equalisation Levy @ 2% on E-Commerce Supply or Services Charging section of equalisation levy on e-commerce supply or services is given under section 165A of the Finance Act, 2016 (introduced by Finance Act, 2020). Equalisation levy must be levied at the rate of 2% of the amount of consideration received or receivable from e-commerce supply or service. Conditions to Levy Equalisation Levy (Section 165A): Service provider should be a non-resident. Service provider should not have a permanent establishment in India. If service provider has a permanent establishment in India, but such services are not effectively connected with corresponding permanent establishments in India. Service provider has sales, turnover or gross receipt from e-commerce supply or service in the previous year of Rs. 2 crores or more. Service receiver may be: A resident person in India; or A non-resident person in the specified circumstances*; or A person who buys goods or services or both, using an internet protocol (IP) address located in India. Service receiver received the service from an e-commerce supply or services. Direct Payment Responsibility: If all the above-mentioned conditions are satisfied, then in such a case, an e-commerce supply or service operator is required to deduct the equalisation levy @ 2% of amount of consideration for e-commerce supply or services. Simply put, liability to deduct and pay to the credit of the Central Government shall be on the non-resident e-commerce service or supply operator. *Specified Circumstances under Section 165A: Sale of advertisement, which targets a customer who is resident in India or a customer who accesses the advertisement through internet protocol address located in India; and Sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India. Non-Applicability of Equalisation Levy on E-Commerce Supply or Services: The provisions relating to equalisation levy under section 165A are not applicable in following cases: Service provider is a non-resident person but has permanent establishment in India and such services provided by him are effectively connected with such permanent establishment in India. Service provider has sales, turnover or gross receipt from e-commerce supply or service in the previous year which is less than Rs. 2 crores. Equalisation levy is applicable as per section 165 of the Finance Act, 2016 (i.e. already taxed as specified services). Note: If any one of the above conditions is satisfied, section 165A is not applicable, but section 165 may apply if its respective conditions are satisfied. 5. Procedural Mechanisms & Compliance Timelines (Sections 166 & 166A) Section 166: Deduction & Payment (Specified Services) Deductor: Resident carrying on business/profession or non-resident with Indian PE. Rounding Off: Consideration, levy, interest, penalty, and refund rounded off to nearest multiple of ten rupees (Rule 3). Monthly Remittance Due Date: By the 7th of the month following the calendar month. Payment Mode: Remitted into RBI, SBI, or authorized bank via Challan No. 285 (ITNS 285) (Rule 4). Failure to Deduct: Notwithstanding failure to deduct, person remains liable to pay levy to Central Government by the 7th of the following month. Section 166A: Payment (E-Commerce Supply or Services) Payer: Non-resident e-commerce operator without PE in India. Rounding Off: Rounded off to nearest multiple of ten rupees (Rule 3 as amended by Amendment Rules, 2020). Quarterly Due Dates: Paid quarterly as prescribed in the schedule below. Payment Mode: Remitted into RBI, SBI, or authorized bank accompanied by Equalisation Levy Challan No. 285 (Rule 4). Quarterly Payment Schedule for E-Commerce Operators (Section 166A) Sr. No. Date of Ending of the Quarter of Financial Year Due Date of Payment 1 30th June 7th July 2 30th September 7th October 3 31st December 7th January 4 31st March 31st March (Same Day) 6. Statements, Processing & Rectification (Sections 167–169) Section 167: Furnishing of Statement (Form No. 1) An assessee or e-commerce operator shall furnish a statement electronically under digital signature or electronically through electronic verification code in Form No. 1, on or before 30th June immediately following that financial year (Rule 5 of Equalisation Levy Rules, 2016 as amended by Amendment Rules, 2020). COVID Extension Note: The deadline for furnishing Form 1 for FY 2020-2021 was extended by CBDT via Circular No. 15/2021 dated 03rd August 2021 to 31st August 2021. Belated / Revised Statement: If not furnished by 30th June, or for any omission or wrong particulars, a revised statement can be filed at any time before the expiry of two years from the end of the financial year in which the specified service was provided or e-commerce supply/service was made or provided or facilitated. Statutory Notice by AO: If an assessee or e-commerce operator fails to furnish the statement, the assessing officer has been empowered to issue notice. Such statement must be furnished within 30 days from the date of serving of such notice (Rule 6). Section 168: Processing of Statement (Form No. 2 Intimation) A statement furnished under section 167 shall be processed by the assessing officer. If amount is payable or refundable, it shall be communicated or intimated to an assessee or e-commerce operator. Intimation issued after processing of statement shall be deemed to be a notice of demand. Where any equalisation levy, interest, or penalty is payable after processing of statement, such intimation shall be issued in Form 2. However, no such intimation shall be sent after the expiry of one year from the end of the financial year in which the statement or revised statement is furnished. Section 169: Rectification of Mistake For any mistake apparent from the record, the assessing officer may amend any intimation issued under section 168 within one year from the end of the financial year in which the intimation sought to be amended was issued. Assessing officer may amend the intimation either suo motu or on any mistake brought to his notice by an assessee or e-commerce operator. Before amending the intimation, the assessing officer shall give the assessee or e-commerce operator a reasonable opportunity of being heard. 7. Interest, Penalties & Prosecution (Sections 170–173, 176) Section 170: Interest on Delayed Payment Assessee or e-commerce operator has deducted the equalisation levy but fails to pay to the credit of the Central Government within the prescribed time limit mentioned under section 166 and 166A of the Finance Act, 2016, in such a case, assessee or e-commerce operator must pay simple interest at the rate of 1% of such levy for every month or part of the month. Section 171: Penalties for Failure to Deduct or Pay Equalisation Levy Case 1: Failure to Deduct (Assessee under Sec 166) An assessee fails to deduct the whole or part of equalisation levy under section 166. Penalty is equal to the amount of equalisation levy that he failed to deduct. Case 2: Failure to Pay (E-Commerce Operator under Sec 166A) An e-commerce operator fails to pay the whole or part of equalisation levy under section 166A. Penalty is equal to the amount of equalisation levy that he failed to pay. Case 3: Failure to Remit Deducted Levy (Assessee under Sec 166) An assessee deducts equalisation levy on specified services but fails to remit the amount to Central Government. Penalty of Rs. 1,000 for every day during which the failure continues, subject to maximum cap equal to the amount of equalisation levy. Section 172: Penalty for Failure to Furnish Statement An assessee or e-commerce operator fails to furnish the statement (Form 1) as per section 167 of the Finance Act, 2016: penalty of Rs. 100 for each day is levied during which the failure continues. Section 173: Relief When Penalty Cannot be Imposed No penalty under section 171 or section 172 shall be imposed if the assessee or e-commerce operator proves to the assessing officer that there was reasonable cause for such failure. No penalty order shall be passed without giving a reasonable opportunity of being heard. Section 176: Prosecution & Punishment for False Statement If a person makes a false statement or delivers an account or statement, which is false, and which he either knows or believes to be false, then in such a case, assessee or e-commerce operator shall be punishable with imprisonment for a term which may extend to three years and with fine. 8. Appellate Mechanisms (Sections 174 & 175) Section 174: Appeal to Commissioner of Income-tax (Appeals) Aggrieved Party: Assessee or e-commerce operator aggrieved by order of Assessing Officer. Limitation Period: Within 30 days from the date of receipt of the order of Assessing Officer. Prescribed Form: Appeal shall be filed in Form 3. Prescribed Fee: Accompanied by a fee of Rs. 1,000/-. Filing Mode: Filed electronically using digital signature or electronic verification code (EVC). Section 175: Appeal to Appellate Tribunal (ITAT) Aggrieved Party: Assessee, e-commerce operator, or the Commissioner of Income-tax aggrieved by order of CIT (Appeals). Limitation Period: Within 60 days from the date of receipt of the order of CIT (Appeals). Prescribed Form: Appeal shall be filed in Form 4. Prescribed Fee: Accompanied by a fee of Rs. 1,000/-. Filing Mode: Filed electronically using digital signature or electronic verification code (EVC). Conclusion There has been a substantial increase in the digital activity in India. Every individual, as well as corporate, is in receipt of some digital service provided by non-resident entities. However, the revenue generated by virtue of said services remains untaxed. To address the said problem, the Finance Minister introduced the concept of Equalization levy in the year 2016. With the introduction of such concept, untaxed income of non-residents can be properly taxed in India.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 59–64 (Journal pp. 703–708) Taxation • Direct Tax Administration & Section 144B Faceless Assessment: A New Paradigm SR CA. Sandeep Raghavan The author is a member of the Institute. He can be reached at sandeep.raghavan31@gmail.com and eboard@icai.in “To ensure transparency, efficiency, and accountability by the Income Tax Department, faceless assessment was introduced by assessing officer for optimum utilization of resources and introducing team-based learning with dynamic jurisdiction. With 70% of the Indian population depending upon agriculture for its livelihood, and a country with literacy rate of 77.7%, introducing faceless assessment is a challenge for both the government and the taxpayers. Read on…” Introduction & Legislative Genesis of Faceless Assessment Taxpayers often perceive the compliance procedures and interaction mechanisms of the Income Tax Department as intricate, adversarial, and exceptionally time-consuming. Ordinary citizens, frequently unversed in the complex nuances of Indian revenue jurisprudence, find it nearly impossible to navigate scrutiny proceedings without dedicated professional assistance. Recognizing these structural bottlenecks, the Government of India has pursued sweeping administrative reforms aimed at eliminating human interface, bridging operational gaps, and enhancing systemic transparency. To institutionalize this radical overhaul, Parliament amended Section 143 of the Income-tax Act, 1961 via the Finance Act, 2018 by inserting sub-sections (3A) and (3B), with effect from April 1, 2018. These provisions empowered the Central Government to frame statutory schemes for making assessments of total income or loss under sub-section (3) of Section 143 or best judgment assessment under Section 144, designed to achieve: (a) Eliminating Physical Interface: Dismantling direct physical contact between the Assessing Officer and the assessee during proceedings to the extent technologically feasible; (b) Resource Optimization: Maximizing operational efficiencies through economies of scale and functional specialization; (c) Team-Based Assessment & Dynamic Jurisdiction: Replacing single-officer discretion with an objective, team-based scrutiny architecture governed by automated allocation. Chronological Evolution of the Scheme 1. Notification S.O. 3264(E) (12th September 2019): The Department of Revenue notified the landmark “E-assessment Scheme, 2019” under Section 143(3A). 2. Notification S.O. 2745(E) (13th August 2020): The Central Government amended the 2019 scheme, formally replacing the nomenclature “e-assessment” with “Faceless Assessment”. 3. Enactment of Section 144B: The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 codified the entire scheme directly into the parent statute by inserting Section 144B operative from 1st April 2021 onwards. Consequently, all previous executive notifications prior to April 1, 2021 stand withdrawn and superseded by Section 144B. Assessment Under the Income Tax Act: Purpose & Mechanics In statutory terms, assessment is the formal verification of statements, claims, and figures submitted by an assessee in their annual Return of Income. Every taxable entity—whether an Individual, Hindu Undivided Family (HUF), Partnership Firm, Company, Trust/NGO, or Association of Persons (AOP)—is legally mandated to file a return of income on or before the prescribed statutory due dates. “Assessment is verification of statement made by assessee in his return of income. Every year, whether an Individual, HUF, Partnership Firm Company, Trust/NGO, Association of Persons needs to file his income tax return before specified due dates applicable to each of them.” Through the scrutiny assessment mechanism, the Assessing Officer ensures that the assessee has not understated total income, has not claimed excessive business losses or unjustified deductions, and has not underpaid taxes in any manner whatsoever. Historically, scrutiny required the Assessing Officer to serve a notice requiring the assessee to attend the income tax office physically or produce voluminous paper records. Under the Faceless Assessment Scheme, all notices, questionnaires, and requisitions are issued electronically through the dedicated e-Proceeding facility on the official e-filing portal (incometaxindia.gov.in). Taxpayers respond by uploading digitally authenticated documents, completely eliminating the need for physical footfall. “Faceless Assessment is assessment where the assessee and assessing officer do not meet face to face. The assessee does not know who the assessing officer is, however, the assessing officer knows his assessee’s name.” The Six Specialized Functional Units Under CBDT To ensure objective decision-making, functional specialization, and rigorous checks and balances, the Central Board of Direct Taxes (CBDT) structured the faceless ecosystem across six dedicated institutional units: 1. National Faceless Assessment Centre (NFAC) The central apex node that coordinates and executes faceless proceedings in a centralized manner. Crucially, all communications to and from the assessee and between internal units are routed exclusively through NFAC. 2. Regional Faceless Assessment Centre (RFAC) Regional operational hubs established across India to facilitate the conduct of faceless assessment proceedings, headed by the Principal Chief Commissioner of Income Tax (Pr. CCIT). 3. Assessment Units (AU) Performs the core assessment functions: identifying material points/issues for determining tax liability or refund, seeking clarifications, analyzing evidentiary material, and drafting assessment orders. 4. Verification Units (VU) Performs specialized verification functions: conducting field inquiries, cross-verification of third-party transactions, examination of books of accounts, examination of witnesses, and recording statements. 5. Technical Units (TU) Provides specialized technical advice on complex legal interpretations, accounting principles, forensic auditing, information technology, asset valuation, transfer pricing, data analytics, and management. 6. Review Units (RU) Conducts independent quality reviews of draft assessment orders: checks whether material evidence is on record, points of fact and law are incorporated, judicial precedents applied, and verifies arithmetical correctness. Strict Unit Communication Protocol: No unit communicates directly with another unit or with the assessee. Every document, clarification, verification request, technical requisition, and draft order is transmitted strictly through the National Faceless Assessment Centre (NFAC). Step-by-Step Procedure of Faceless Assessment under Section 144B The statutory workflow under Section 144B progresses through a structured sequence governed by the Automated Allocation System (AAS) using artificial intelligence and data analytics: Step 1: Notice under Section 143(2) & 15-Day Response Window NFAC serves a statutory notice on the assessee under Section 143(2). The assessee must file a response within 15 days from the date of receipt of the notice. In cases where the return was filed u/s 139, 142(1), or 148, or where no return was filed in response to notices, NFAC intimates the assessee that the assessment will be completed under the Faceless Scheme. Step 2: Automated Case Assignment to Assessment Unit NFAC assigns the selected scrutiny case to a specific Assessment Unit (AU) in any Regional Faceless Assessment Centre across the country via the Automated Allocation System (AAS). Step 3: Requisition for Information, Verification & Technical Assistance The assigned AU may request NFAC to: Obtain further documents, accounts, or evidentiary records from the assessee or third parties; Assign field inquiries or cross-verifications to a Verification Unit (allocated automatically via AAS); Seek specialized technical inputs from a Technical Unit (allocated automatically via AAS). Step 4: Formulation of Draft Assessment Order After considering all material on record, the AU drafts a written assessment order either accepting the returned income or proposing modifications (additions/disallowances), along with details of penalty proceedings to be initiated, if any, and transmits the draft order to NFAC. Step 5: Risk Management Strategy (RMS) Examination by NFAC NFAC evaluates the draft assessment order in accordance with the Board’s Risk Management Strategy and decides to: (a) Finalise the assessment: If no variation prejudicial to the assessee is proposed, serving the order, notice of demand, and penalty notice; or (b) Issue Show Cause Notice (SCN): If an adverse variation is proposed, giving the assessee an opportunity to show cause why the variation should not be made; or (c) Refer to Review Unit: Assign the draft order to a Review Unit (RU) via automated allocation. Step 6: Review Unit Concurrence vs. Variation & Reassignment to a NEW Assessment Unit The Review Unit may concur with the draft order or suggest variations. If variations are suggested, NFAC assigns the case to an Assessment Unit OTHER THAN the unit that prepared the original draft through the Automated Allocation System! The new AU considers RU suggestions, prepares a revised draft order, and sends it to NFAC for finalization or issuance of an SCN. Can the Assessee Seek a Personal Hearing? “When a variation is proposed in the draft assessment order, an opportunity is provided to the assessee by serving a show cause notice calling upon him to give his explanation on the proposed variation.” Yes! In response to the Show Cause Notice, the assessee has the statutory right to request a personal hearing to make oral submissions. Such personal hearings are conducted exclusively through video conferencing or video telephony (including designated telecommunication software), ensuring complete elimination of physical interaction while strictly upholding the principles of natural justice. Role of the Jurisdictional Assessing Officer (JAO) Post-Assessment Upon completion of the scrutiny assessment, NFAC transfers the entire electronic case dossier to the Jurisdictional Assessing Officer (JAO). The JAO retains six critical statutory functions: Imposition of Penalty: Conducting and concluding penalty proceedings initiated during assessment. Recovery & Demand Collection: Enforcing outstanding tax demands and collection proceedings. Rectification of Mistakes: Entertaining applications under Section 154 for rectifying errors apparent from the record. Giving Effect to Appellate Orders: Implementing appeal effect orders passed by the CIT(Appeals), ITAT, High Courts, or Supreme Court. Remand Reports & Judicial Representation: Preparing remand reports, written representations, and producing physical/electronic records before appellate authorities. Prosecution Sanctions: Submitting proposals seeking administrative sanction for the launch of criminal prosecution and filing formal complaints before criminal courts. Statutory Caveat: Notwithstanding the faceless workflow, NFAC preserves the overarching statutory power to transfer a case at any stage of the assessment to the Jurisdictional Assessing Officer having territorial jurisdiction, if considered necessary. Penalty Proceedings for Non-Compliance (Chapter XXI) If an assessee or any other person fails to comply with any notice, direction, or requisition issued under the Faceless Scheme, penalty proceedings under Chapter XXI follow a meticulous procedural sequence: Unit Recommendation: The concerned unit (AU, VU, TU, or RU) sends a recommendation to NFAC for initiating penalty proceedings. Show Cause Notice: NFAC serves an SCN calling upon the assessee to explain why penalty should not be levied. Response Forwarding: NFAC routes the assessee’s written response back to the recommending unit. Draft Order or Dropping: The unit examines the explanation and either: Prepares a draft penalty order and forwards it to NFAC; or Drops the penalty after recording reasons in writing, with intimation to NFAC. Final Levy: NFAC levies the penalty strictly in accordance with the draft order and serves the formal penalty order and demand notice. Societal Challenges & The 14 Commitments of the Taxpayers’ Charter Introducing an entirely internet-driven assessment scheme in a developing country where 70% of the population relies on agriculture for livelihood and national literacy stands at 77.7% poses monumental structural challenges for both the tax administration and ordinary taxpayers. “A move towards the introduction of Faceless Assessment Scheme is a welcome step taken by the Government as it has helped the government officers and taxpayers to overcome the restrictions placed by way of nationwide lockdowns on movement of persons.” Nevertheless, the Faceless Assessment Scheme serves as a decisive game-changer by anchoring administrative actions directly to the Taxpayers’ Charter, under which the Income Tax Department formally commits to: The 14 Statutory Commitments of the Taxpayers’ Charter: 1. Provide fair, courteous, and reasonable treatment. 2. Treat taxpayer as honest. 3. Provide mechanism for appeal and review. 4. Provide complete and accurate information. 5. Provide timely decisions. 6. Collect the correct amount of tax. 7. Respect privacy of taxpayer. 8. Maintain confidentiality. 9. Hold its authorities accountable. 10. Enable representative of choice. 11. Provide mechanism to lodge complaint. 12. Provide a fair and just system. 13. Publish service standards and report periodically. 14. Reduce cost of compliance. Implications for the Accounting Profession: Honouring the Honest While faceless scrutiny proved invaluable during pandemic lockdowns by maintaining uninterrupted operations without physical movement, it simultaneously challenges tax professionals to radically elevate their legal research, forensic analysis, and written drafting skills. The faceless paradigm is an institutional gesture by the Government to “honour the honest”—serving as a true boon for sincere taxpayers and professionals while establishing an unyielding automated mechanism to deter tax evasion. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 59–64 (Journal pp. 703–708) Author Contact: sandeep.raghavan31@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 72–77 (Journal pp. 716–721) CAPITAL MARKET • EMPIRICAL CORPORATE FINANCE Dividend Payment and Stock Price Movement: An Analysis With Respect to Select Indian Firms Puja Mohata (Researcher in Corporate Finance)  •  Radhagobinda Basak (Assistant Professor at the Department of Commerce, Sidho-Kanho-Birsha University) Authors can be reached at pujamohata0304@gmail.com, rgbasak85@gmail.com and eboard@icai.in. 💡 Executive Summary & Core Findings Researchers have divided opinions on the relationship between dividend payment and stock price movement. This study attempts to examine the nature and strength of association between dividend payment and stock price movement. Besides, the relationship between dividend policy and stock price volatility has also been explored. For the purpose of the study, a sample of 20 companies, listed in the Bombay Stock Exchange, has been chosen and the data for the period from 2010-11 to 2019-20 has been examined. The findings of the study suggest that an increase in the dividend payment leads to an increase in the stock price in the market and vice versa. The study also suggests that firms with greater stability in their dividend policy face lesser volatility in their stock price movement. Read on… 1. Introduction: The Dividend Dilemma & Value Relevance The impact of dividend decisions on the market price of the share has been a subject of long-standing debate. But still, there is no single definite result concerning the relationship between dividend payment and the market price of the stock. When a firm’s earnings increase, the shareholders expect more dividends. But earnings are also a source of finance for the firm. The firm can see the impacts of such retained earnings in the form of a decreased leverage ratio, growth of activities, and rise in profit in subsequent years. In contrast, if the firm distributes its earnings as dividends, it may need to raise capital through the capital market, which may dilute the ownership control of existing shareholders. If the firm takes a loan or raises debenture, it will affect the risk characteristics of the firm. But with the payment of dividend, shareholders’ expectation is contented and as a result, their confidence grows. This increased confidence of the investors is expected to be reflected through the firm’s stock price performance. Therefore, there are many dimensions to be considered on dividend theories, policies and practices. Dividend, indeed, is the most exciting aspect of investment in shares of various companies for an investor. Even if dividend affects the firm’s value, unless management knows how they affect the value, there is not much that they can do to increase the shareholder’s wealth. So, the management must understand how the dividend policy affects the firm’s market value or stock prices, or the wealth position of the shareholders. Thus, the present study seeks to find out whether dividend payment has any relationship with the movement of the stock price. Besides, we would also determine whether the dividend policy of a firm is associated with its stock price volatility. 2. Theoretical Perspectives & Literature Review There is a high debate among scholars and professionals on dividend policy and its potential impact on stock prices. In today’s rapidly expanding stock market, organizations must establish the most beneficial policy related to dividend matters. An organization that wants to be the market leader needs to focus on dividend payout and dividend supervision issues. A lot of researchers have analyzed the impact of dividend payment on stock prices earlier. Competing Research Streams on Dividend Impact: Dividend Relevance (Positive Price Impact): The study conducted by Hasan et al. (2013) supports the dividend relevance theory as proposed by Prof. James E. Walter and Myron Gordon. Furthermore, studies by Nishat and Irfan (2004), Masum (2014), Matthew et al. (2014), Maharshi and Malik (2015), Sharif et al. (2015), and Velankar et al. (2017) demonstrated a significant positive impact of dividend policy on the stock price of a company. Volatility Dampening (Negative Volatility Impact): On the other hand, findings by Hussainey et al. (2011), Hashemijoo et al. (2012), and Song (2012) revealed a significant negative relationship between share price volatility and dividend payout, showing that regular dividend distributions anchor price stability. It was observed that previous studies gave contradictory results in this context. While some studies found a positive link between dividend policy and stock prices, some other studies found this link to be negative at a given time. Thus, to bridge this gap of divided opinions, the present work was undertaken with two targeted objectives: To ascertain the nature and strength of association between payment of dividend and stock price movement. To explore the relationship between dividend policy and stock price volatility. 3. Data, Sample Selection & Econometric Methodology Data Sources & Sample Selection The present study is based on secondary data. Company financial data were gathered from annual reports and the Moneycontrol database. Stock prices were retrieved directly from BSE records. The sample comprises 20 companies listed on the Bombay Stock Exchange selected on the basis of net profits (since dividend distributions depend directly on company surplus) retrieved as on 06/01/2021. Sample Period & Time Lag Structure Data across 11 financial years (2009-10 to 2019-20) were analyzed. Crucially, a one-year time-lag structure is implemented: Dividend Data: 10-year period from 2009-10 to 2018-19. Stock Price Data: 10-year period from 2010-11 to 2019-20. Rationale: The dividend decision of period t affects stock market prices in period t + 1. Statistical Metrics & Relative Normalization Formulas: Since the face value of stocks across the 20 companies is not uniform, relative measures were constructed to eliminate scale biases: Dividend Per Rupee Value of Share (DPRS) = Dividend Per Share (DPS) / Face Value Per Share Average Annual Closing Price: Computed from daily closing prices under the rationale that closing price captures the full trading sentiment of the day. Average Annual Closing Price Per Rupee Value: Normalized closing price per rupee of nominal face value. Coefficient of Variation (CV): A relative measure of dispersion (CV = Standard Deviation / Mean × 100) employed instead of absolute standard deviation to evaluate stock price volatility and dividend policy instability. 4. Empirical Findings: Dividend Payment vs. Stock Price Movement For each of the selected 20 companies, average annual closing stock prices per rupee value of share and DPRSs of the past 10 years were computed. Thereafter, Pearson correlation coefficients between the two variables were determined individually and across the entire sample pool: Table 1: Correlation between Average Annual Closing Stock Prices Per Rupee Value of Share and DPRSs Company Name Correlation Coefficient (r) Statistical Significance TCS .715* Significant at 0.05 level Reliance (RIL) -.268 Not Significant HDFCs .981** Significant at 0.01 level Infosys .449 Not Significant ITC -.229 Not Significant HDFC Bank .949** Significant at 0.01 level ONGC .947** Significant at 0.01 level Coal India .047 Not Significant Power Grid Corp .735* Significant at 0.05 level NTPC -.375 Not Significant HCL Tech .185 Not Significant Wipro .901** Significant at 0.01 level Ruchi Soya .951** Significant at 0.01 level Tata Chemicals .659* Significant at 0.05 level Hind Zinc .702* Significant at 0.05 level Tata Steel .187 Not Significant HUL .849** Significant at 0.01 level Larsen -.719* Significant (Neg) at 0.05 level GAIL .143 Not Significant Power Finance .119 Not Significant Overall Correlation Coefficient .888** Significant at 0.01 level *Correlation is significant at the 0.05 level. **Correlation is significant at the 0.01 level. From Table 1, it was observed that only 4 companies, namely Reliance (RIL), ITC, NTPC, and Larsen, showed a negative correlation, while the remaining 16 companies showed a positive correlation between the said variables. Therefore, we can say that the nature of association between dividend payment and stock price movement is positive for the majority of the companies. The correlation was found to be positive and statistically significant at 5% level for TCS, Power Grid Corp, Tata Chemicals, and Hind Zinc. Larsen, however, showed a negative correlation which was statistically significant at 5% level. HDFC, HDFC Bank, ONGC, Wipro, Ruchi Soya, and HUL displayed positive correlation which was statistically significant at 1% level. Pooled Market Confirmation: The overall value of correlation, i.e., 0.888 was found to be statistically significant at 1% level. Thus, we can say that overall, the nature of association between dividend payment and stock price movement is positive and statistically significant. This indicates that an increase in dividend payments increases the stock prices in the market and vice versa. 5. Objective 2: Dividend Policy Stability vs. Stock Price Volatility Consistency in either DPS or DPR of a company is the reflector of its stable dividend policy. To measure the stability (or instability) in dividend policy, the CVs of DPSs, DPRSs and DPRs were calculated. Further, the CV of closing stock prices (daily, average annual and average annual per rupee value) was computed to measure stock price volatility. Table 2: CV of Closing Stock Prices and Dividend Policy Stability Metrics Across 20 Companies Companies CV of Closing Prices CV of DPSs CV of DPRSs CV of DPRs Daily Average (Annual) Average Annual Per Rupee Value TCS 32.23 31.42 31.42 53.07 53.07 36.06 Reliance (RIL) 19.95 16.83 16.83 19.92 19.92 9.20 HDFC 45.55 38.60 49.59 43.77 31.86 8.01 Infosys 51.81 51.59 51.59 39.52 39.52 33.07 ITC 20.02 18.06 18.06 30.05 30.05 20.54 HDFC Bank 48.27 43.10 58.67 53.44 65.59 2.62 ONGC 88.71 85.41 44.21 71.35 29.67 24.14 Coal India 17.95 16.22 16.22 55.30 55.30 25.08 Power Grid Corp 28.14 28.75 28.75 64.62 64.62 22.29 NTPC 14.92 14.04 14.04 26.37 26.37 24.14 HCL Tech 40.78 39.26 39.26 58.43 58.43 51.88 Wipro 27.41 25.18 25.18 61.95 61.95 54.19 Ruchi Soya 74.91 74.72 74.72 103.71 103.71 156.05 Tata Chemicals 33.30 32.61 32.61 32.43 32.43 21.11 Hind Zinc 103.55 102.60 32.82 103.26 111.39 106.78 Tata Steel 27.48 24.83 24.83 19.31 19.31 33.79 HUL 59.59 61.64 61.64 39.95 39.95 17.47 Larsen 17.41 12.37 12.37 14.90 14.90 36.96 GAIL 23.69 21.83 21.83 19.21 19.21 16.56 Power Finance 39.62 38.31 38.31 54.30 54.30 60.07 Table 3: Correlation Matrix: Stock Price Volatility (CV of Prices) vs. Dividend Policy Stability (CV of DPS, DPRS, DPR) Price Volatility Measure CV of DPSs CV of DPRSs CV of DPRs CV of Average Annual closing prices .765** .620** .550* CV of Average Closing Annual Price Per Rupee Value of Share .526* .467* .360 CV of daily closing prices .756** .603** .532* *Correlation is significant at the 0.05 level. **Correlation is significant at the 0.01 level. Source: Author’s computation. All the values of correlation coefficients between the CVs of Stock prices and CVs of dividend policy measures were found to be positive. This indicates that if the stability in dividend policy increases (i.e. CV decreases), the stability in stock prices also increases (volatility decreases). The correlation coefficients between CV of stock prices (average annual and daily) and CV of both DPSs and DPRSs were found to be statistically significant at 1% level. The correlation coefficients between CV of average closing annual price per rupee value of share and CV of DPSs and DPRSs, and the correlation coefficients between CV of stock prices (average annual and daily) and CV of DPRs were found to be statistically significant at 5% level. Thus, we can say that the more the stability in dividend policy, the less will be the volatility in stock prices. 6. Conclusion, Practical Implications & Research Limitations The present study finds that the nature of association between the variables is positive, and the strength of association was found to be statistically significant. These findings are in line with the theories of James E. Walter and Myron Gordon and other researchers (Hasan et al., 2013; Nishat and Irfan, 2004; Maharshi and Malik, 2015; Sharif et al., 2015) who suggest that the dividend decision of a firm affects its market value. Behavioral Mechanics of Investor Confidence: Further, a positive correlation between the variables suggested that the more stability in dividend policy, the lesser the stock price volatility (Hussainey, 2011; Hashemijoo et al., 2012; Song, 2012). It is so because when companies display consistent dividend histories, they often gain the confidence of investors as they believe that the business is performing well. The investors assume that the firm is a reliable and safe investment venture. As a result, the share price of such companies is often found to be steadily rising in the market, owing to its high-demand among risk-averse individuals looking for stable investment ventures. Conversely, the companies choosing to retain their annual earnings for business development purposes fail to incite investors as investors often develop a mind-set that such businesses might have underperformed for a particular year. Thus, it can be concluded that dividend payment is in a positive relationship with the market value of a firm. Moreover, a stable dividend policy is also desirable for attaining stability in stock price. In today’s world, for achieving steady expansion in the stock market, organizations have to establish the most effective policy related to dividend matters. An organization that wants to be the market leader needs to focus on dividend payout and dividend supervision issues. Limitations of the Study: Lastly, some limitations of the present study, in the absence of which the discussion remains incomplete, should be referred to. It must be noted that there are several other factors, besides dividend, which affect the stock prices of a company. The impact of such factors has not been considered in the present study. The sample period and sample size are also insufficient to conclude on all aspects. The present study considers only the nature of the relationship between dividend payment and stock price movement. It does not measure the impact of dividend policy on the stock price movement of a firm, or the impact of dividend yield on stock price movement. Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. Historically, dividend yield ratio has been found to have negative impact on the stock prices. Addressing these issues will further help to improvise the study results. References Mohammed, N. and Mohammad, I.C. (2004). “Dividend policy and stock price volatility in Pakistan”. Paper presented at the PIDE-19th Annual General Meeting and Conference, pp. 13-15. Hussainey, K., Oscar-Mgbame, C. and Chijoke-Mgbame, A. M. (2011). “Dividend policy and share price volatility: UK evidence”. The Journal of Risk Finance, Emerald Group Publishing, vol. 12 (1), pp. 57-68. Hashemijoo, M., Ardekani, A. and Younesi, N. (2012). “The impact of dividend policy on share price volatility in the Malaysian Stock Market”. Journal of Business Studies, vol. 4(1), pp. 111-129. Song, X. (2012). “The relationship between dividend policy and stock price volatility”. Saint Mary’s University. Al-Hasan, M.A., Asaduzzaman, M. and Karim, R. (2013). “The Effect of Dividend Policy on SharePrice: An Evaluative Study”. Journal of Economics and Finance, vol. 1(4), pp. 06-11.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 78–82 (Journal pp. 722–726) FINANCE • CORPORATE FINANCIAL MANAGEMENT Detection of Debt Overhang - A Pragmatic Approach Nilotpal Mukherjee (Research Scholar (PhD), Department of Commerce, The University of Burdwan)  •  Dr. Arindam Das (Professor, Department of Commerce, The University of Burdwan) Authors can be reached at nilubabuji75@gmail.com, arindam_dasbu@yahoo.co.in and eboard@icai.in. 💡 Executive Summary & Research Problem Unsustainable debts create a problem for highly leveraged companies by making their potential investors more conservative about future investments. These companies face a financial crunch to invest in profitable projects due to the trap of debt overhang. Debt overhang obstructs the flow of new investment and leads to insolvency. Operating with high leverage is inevitable in many industries but a comprehensive measure to evaluate the possibility of debt overhang and its discloser is essential for the professional accountants in the current scenario. This paper evaluates some accounting ratios and suggests a regression model to detect debt overhang. Read on… 1. Introduction: Capital Structure Dynamics & The Debt Overhang Trap Every company has a unique composition of debt and equity capital which has a significant role in increasing its valuation and attracting more investment. Judicial use of debt is always appreciated by the shareholders because it may intensify their earnings through trading on equity. But contrary to their expectation, if earnings are not sufficient to cover the contractual payments, it may induce them to shift their fund to other companies which is called capital flight. As investing in a highly leveraged company always invites risk, investors expect return to be high, and if the company has an unsustainable level of debt with a high default chance, investors are not willing to invest in positive net present value (NPV) projects on the ground that the company will try to settle past debt under compulsion by avoiding new investors’ expectation. This is the essence of debt overhang which is nothing but a trap to close the door for inflow of funds as well as struggling with series of defaults in contractual payments which ultimately leads to the insolvency of the company. Theoretical Evolution: From Myers (1977) to Post-Crisis Literature The concept of debt overhang was conceived by Myers (1977) in his seminal work, Determinants of Corporate Borrowings. Debt overhang is defined as a condition of capital structure where disproportionate debt is restricting new investments since the benefits of future profitable investment in firms are used to meet past debt and very little will be available for the shareholders. Later, Krugman (1988) noted that debt overhang is also a country-level problem which may restrict the aggregate flow of investment into a sovereign economy. Furthermore, Sebnem Kalemli-Ozcan et al. (2015) and Gianluca Antonecchia & Monica Ferrari (2016) established empirical evidence of pervasive debt overhang in European firms following the 2008 global financial crisis. The theoretical problem of underinvestment could be diminished by offering a credible commitment to new investors that they would have prior claim on the cash flows arising from projects funded by them (seniority and cash-flow ring-fencing). Distinction: Heavy Indebtedness vs. Debt Overhang Heavy debt in capital structure does not automatically mean debt overhang. If a company can generate sufficient cash flows from its operation to cover its contractual payments in due time, there is no debt overhang. When a heavily indebted company runs short of operational cash flow generation and the chance of default escalates, the company cannot attract new investors even if it possesses highly profitable investment plans. Investment of a company may diminish due to various economic reasons, but when it is directly caused by unsustainable debt and uncertainty of repayment, it is defined as debt overhang. 2. Post-2008 Corporate Context in India & Disclosure Norms (Ind AS 107) After the 2008 worldwide recession, sluggish investment was noticed in corporate sectors in the US as well as in many European countries. In India, corporate debt reached peak levels in highly leveraged, capital-intensive sectors including Real Estate, Telecom, Power, and Steel Manufacturing. The role of credit rating agencies in reflecting true credit risk in proper time is often questioned, and auditors are frequently blamed following corporate collapses. Hence, the mere ex-post diagnosis of unsustainable debt is not enough; detecting whether debt has already started to demotivate new investors and create the vicious circle of debt overhang is an urgent professional requirement. Professional accountants and auditors cannot afford to rely solely on credit rating agencies. Regulatory Mandate: Indian Accounting Standard (Ind AS) 107 Indian Accounting Standard (Ind AS) 107 lays down comprehensive guidelines for the disclosure of credit risk of financial instruments, requiring reporting of: Details of contractual default and breaches; Credit risk exposure categorized by amount, timing, and cash flow uncertainties; Quantitative and qualitative information to evaluate credit exposure for financial statement users; Maximum possible credit risk exposure without taking collateral into account. While increasing probability of default can be reported through statutory disclosure norms, how it alters investors’ perception requires advanced empirical tools. Professional accountants must design such analytical models to evaluate the imminence of debt overhang and enrich financial statement notes by disclosing how close a highly leveraged firm is to the debt overhang threshold. Cascading Financial Health Repercussions: Debt overhang has severe consequential effects across corporate financial health: it depresses capital investment growth, impairs long-term operating performance, dampens sustainable growth rates, diminishes enterprise valuation, and disrupts existing working capital flows, ultimately pushing the corporate entity into statutory insolvency. Earlier detection empowers financial managers to execute timely remedial measures such as debt restructuring, debt rescheduling, or equity recapitalization before value destruction becomes irreversible. 3. Construction of Accounting Ratios for Debt Overhang Detection For the empirical detection of debt overhang, accounting ratios serve as vital diagnostic tools. Each ratio captures debt overhang from a distinct perspective. Myers argued that long-term debt overhang is predominantly hazardous and suggested short-term debt as a potential remedy. However, Diamond and He (2014) demonstrated that short-term debt generates even more acute debt overhang during an economic downturn due to rollover vulnerabilities. Thus, both long-term and short-term debt dimensions must be scrutinized: 1. Investment Ratio (INV) - The Core Dependent Variable A consistent decline in investment is the primary operational hallmark of debt overhang. Conventional balance sheet ratios (Fixed Asset / Total Asset, Fixed Asset / Equity) are inadequate because they reflect static book stocks. Investment must be measured by adopting a flow concept that neutralizes depreciation effects: Investment (INV) = (Increase in Fixed Tangible Assets between Two Accounting Periods + Depreciation) / Proprietor’s Fund (Opening Value) Adjustment for Intangibles and Reserves: If a firm has large investments in intangible assets (patents, intellectual property rights) influencing investor sentiment, depreciation and amortization must be aggregated in compliance with Ind AS 38 / Ind AS 26. Furthermore, while computing the increase in fixed assets, changes in revaluation reserves must be fully adjusted. 2. Long-Term Debt Overhang Measures (LTD and REP) To evaluate long-term overhang, debt maturity structure and debt service capacity relative to operational cash flow must be isolated: a) Long-Term Debt Maturity Ratio (LTD): LTD = Debt in Long Term / Total Debt Measures the proportion of long-term debt in total debt liabilities, reflecting long-term contractual maturity lock-in. b) Repayment Ability Ratio (REP): REP = [Total Debt - Cash & Cash Equivalents] / EBITDA Measures net debt burden relative to operational cash earnings (EBITDA eliminates non-cash depreciation and amortization). An increasing REP signifies declining repayment capacity. Widely utilized for credit risk assessment by rating agencies such as CRISIL. 3. Leverage Ratio (LV) Debt–Equity Ratio (LV) = Long Term Debt / Equity Reflects capital structure gearing. While high debt-equity ratios represent prima-facie evidence of leverage, empirical literature (John & Muthusamy, 2011; Raveesh Krishnankutty, 2014) confirms that LV alone captures only the leverage effect, not the debt overhang effect, because it omits cash flow repayment and maturity dimensions. 4. Short-Term Debt Overhang Measure (Coverage Ratio, CV) Coverage (CV) = Interest / EBITDA Formulated as the inverse of interest coverage, using EBITDA to remove non-cash charges. Any rise in CV signals deteriorating short-term interest servicing capability, proxying short-term debt overhang pressure. 4. Multiple Regression Econometric Model Specification To detect the empirical presence of debt overhang, a multiple regression model linking capital investment to the debt maturity, repayment, leverage, and coverage variables is specified as follows: // Econometric Formulation of Debt Overhang Detection Model INVt = α + β1 * LTDt + β2 * REPt + β3 * LVt + β4 * CVt + εt     [Equation 1] Where: • α = Intercept parameter • β1, β2, β3, β4 = Regression slope coefficients of independent variables • εt = Stochastic disturbance error term • t = Time period (Year) The statistical significance and negative magnitude of coefficients β1, β2, β3, and β4 on investment (INV) substantiate the real existence of corporate debt overhang. 5. Eight-Step Implementation Roadmap for Professional Accountants & Auditors Identify Target Companies: Screen for entities exhibiting elevated financial leverage accompanied by a continuous decline in investment rate over a considerable period. Define Time Window: Identify the specific empirical study period by tracing graphical trend lines showing the onset and persistence of falling capital investment growth. Data Compilation & Econometric Diagnostic Testing: Extract financial statement data from certified databases; compute INV, LTD, REP, LV, and CV ratios; conduct tests for Autocorrelation, Multicollinearity, and Heteroskedasticity. Descriptive Statistics & Sectoral Benchmarking: Calculate descriptive statistical parameters (mean, dispersion) for each ratio and compare against industry peer averages to detect structural divergence. Credit Rating Cross-Verification: If descriptive statistics reveal symptoms of unsustainable debt, cross-reference external credit ratings issued by credit rating agencies. Execute Multiple Regression Estimation: Run the multiple regression model (Equation 1); apply robust standard errors (HAC/White) if econometric diagnostics indicate data irregularities. Coefficient Validation & Granger Causality Testing: Evaluate statistical significance of independent variables. If investment decline is confirmed to stem from debt-related regressors, execute the Granger Causality Test to verify the empirical directional causality running from debt variables to investment contraction. Conclude on Nature & Scope of Debt Overhang: Determine whether the company suffers from short-term debt overhang, long-term debt overhang, or a combined structural overhang. Early Warning System in Debt Sustainability Reporting: Accounting professionals should focus heavily on default probabilities and cash flow patterns to uncover root causes of debt overhang. Incorporating these ratios into periodical accounting reports as an integral part of Debt Sustainability Reports enables accountants to assess the onset of debt overhang well in advance. Continuous ratio monitoring reduces passive reliance on rating agencies, and allows auditors to include caution statements regarding abnormal trends to preserve financial statement transparency before unexpected rating downgrades occur. 6. Conclusion & Policy Recommendations Debt-related distress is poised to intensify in capital-intensive Indian sectors including Real Estate, Aviation, Power, Steel, and Telecom. Prolonged non-recognition of debt overhang complicates corporate rehabilitation; once insolvency is reached, short-term debt restructuring and liquidity restoration become almost impossible. Early diagnosis and disclosure are essential not only for internal corporate management but for external stakeholders as well. Early identification enables operational and financial creditors to engage in constructive debt restructuring negotiations in their mutual interest. Furthermore, prospective investors can be induced to infuse fresh equity if the corporate debtor successfully reschedules past debts. The study emphasizes that rigid, universal standards cannot be mandated for debt ratios because capital requirements are inherently industry-specific and company-specific. Rather, ongoing periodic assessment of debt’s impact on investment provides the true safeguard against corporate failure. Accounting professionals are urged to deploy this econometric model, validate findings across corporate case studies, and advance reporting norms to steer Indian enterprises away from the debt overhang trap. References Antonecchia, G., & Ferrari, M. (2016). The effect of debt overhang on the investment decisions of Italian and Spanish firms. Prometeia Working Paper, (2016-01). Diamond, D. W., & He, Z. (2014). A theory of debt maturity: the long and short of debt overhang. The Journal of Finance, 69(2), 719-762. John, F., & Muthusamy, K. (2011). Impact of leverage on firm investment decision. International Journal of Scientific and Engineering Research, 2(4), 2209-5518. Kalemli-Ozcan, S., Laeven, L., & Moreno, D. (2015). Debt overhang, rollover risk and investment in Europe. Dubrovnik. Krishnankutty, R. (2014). Debt Capital in Indian Corporate Sector: A Study with Reference to Selected Public Limited Companies, (Doctoral Dissertation), The Institute of Chartered Financial Analysts of India University, Tripura, India. Krugman, P. (1988). Financing vs. forgiving a debt overhang. Journal of Development Economics, 29(3), 253-268. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 83–88 (Journal pp. 727–732) Finance • Portfolio Management & Thematic Investing Thematic Investment – Era of Substantial Wealth Creation SD CA. Shubham Dosi The author is a member of the Institute. He can be reached at shubham.mng@gmail.com and eboard@icai.in “Thematic Investment has now become a global preference for substantial wealth creation. Investors are investing based on a strategy that suits them. Potential investors are opting for diversified strategies to create risk free, as well healthy portfolios which generate real growth and value in wealth. To exploit extra funds to yield capital, always think of value investing and growth investing. Thematic Investment has grown to become a valuable strategy to generate substantial wealth and financial synergy. Thematic Investing is a technique to build a healthy investment portfolio which generates higher returns because of its diverse research on the market. Read on…” Introduction: The Rise of Megatrends in Capital Allocation In the modern economic environment, numerous pioneering enterprises provide disruptive services and products that fundamentally transform our daily routines or whose long-term visions correlate directly with our core convictions. In the contemporary landscape, sectors anchored in Artificial Intelligence (AI), Financial Technology (FinTech), Electric Vehicles (EV), Renewable Energy, and Industrial Automation are exhibiting massive, sustainable multi-year expansion. However, when attempting to invest in these transformational trends, individual market participants encounter daunting bottlenecks: selecting the precise single winning stock at the right entry valuation within a broad sector is exceedingly complex. Discerning whether an individual security is genuinely undervalued or dangerously overvalued demands intense quantitative expertise. In this environment, Thematic Investment represents the premier institutional solution, enabling investors to capture secular macro shifts without idiosyncratic single-stock vulnerability. Global Thematic Fund Market Growth According to institutional data compiled by the International Monetary Fund (IMF) and Morningstar (2020), the Global Thematic Fund Market has surged past $420 billion in Assets Under Management (AUM), reflecting an explosive Compound Annual Growth Rate (CAGR) of 20% in thematic Exchange Traded Funds (ETFs): 2015 $155 Billion 2016 $147 Billion 2017 $167 Billion 2018 $270 Billion 2019 $281 Billion Aug 2020 $426 Billion Source: IMF (2020) & Morningstar Data (2020) What is Thematic Investment? In a broader perspective, Thematic Investment means investing in a selected cluster of companies across various industries that participate in secular economic, technological, or demographic themes anticipated to generate superior market returns over an extended horizon. “Thematic Investment means to invest in a certain group of companies which are involved in areas that are anticipated to generate greater market returns over a long period.” Often, retail investors fail to structure optimal portfolios despite possessing sound macroeconomic intuition due to deficits in time, analytical tools, and stock-selection proficiency. Thematic investing directly resolves this operational hurdle: if an investor believes that FinTech will revolutionize financial intermediation over the coming decade, they need not gamble on a single unproven start-up; instead, they allocate across a curated basket of market leaders powering digital payments, core banking software, neo-banking, and algorithmic credit underwriting. It is vital to clarify that thematic funds are fundamentally mutual funds or ETFs governed by strict investment mandates based on targeted themes. While thematic investing delivers high risk-adjusted return potential, its principal structural vulnerability lies in concentration: it is analogous to placing all eggs in a single thematic basket—if the structural theme derails or faces policy reversals, the entire basket declines in unison. Thematic Funds vs. Sectoral Funds: Core Regulatory & Structural Differences Investors frequently confuse thematic funds with sectoral funds. However, their regulatory mandates, exposure boundaries, and diversification profiles differ substantially: Structural Comparison: Sectoral Funds vs. Thematic Funds Feature Sectoral Funds Thematic Funds Scope of Investment Confined strictly to a single economic sector (e.g., Banking, Technology, Pharmaceuticals, Infrastructure, FMCG, Oil & Gas). Spans multiple interconnected sectors unified by an overarching secular theme (e.g., Rural India, Digital Transformation, ESG). Mandatory Asset Allocation Must allocate at least 80% of total assets within the defined specific sector; remaining 20% in debt/hybrid instruments. Must allocate at least 80% of total assets in equities aligned with the defined theme, distributed across various distinct sectors. Diversification Breadth Narrow / Concentrated: Subject to industry-specific down-cycles and regulatory changes directly affecting that lone sector. Broad Cross-Sectoral: Blends capital goods, technology, consumer goods, finance, and utilities participating in the broader theme. Typical Market Themes Banking & Financial Services, IT Services, Pharma & Healthcare, Real Estate. Future Mobility, Clean Energy Transition, Digital India, Robotics & Automation, Export-Oriented Manufacturing, Aging Demographics. “Thematic funds are those that invest in stocks based on a particular theme. These funds invest across sectors that follow a specific theme.” How Thematic Investing Works: The Top-Down Analytical Architecture Thematic investing is fundamentally executed through a rigorous top-down analytical approach. Rather than starting with individual corporate balance sheets, the analyst first evaluates macroeconomic dynamics—such as government capex programs, central bank monetary policy shifts, technological disruptions, and geopolitical realignments—to pinpoint burgeoning sectors, before drilling down to individual corporate champions poised to monetize the structural shift. The Seven Sequential Steps to Build a Thematic Portfolio Step 1: Identifying Themes Identify powerful secular trends (e.g., AI/ML, Future Mobility, Robotics, FinTech, Space Communication, Renewable Energy, Water Management). Evaluate whether the trend is of structural long-term nature or a transient short-term bubble, its geographical manifestations, and visionary corporate backing. Step 2: Selecting Themes (5 Critical Screening Criteria) Screen and rank themes using five comprehensive quantitative and qualitative parameters: i. Annual Growth: Review historical industry compound growth and aggregate budgetary capital outlays. ii. Government Policy: Confirm regulatory stability, production-linked incentives (PLI), and long-term political commitment. iii. Breaking Down the Theme: Deconstruct principal themes into sub-themes (e.g., Future Mobility sub-themes: High-Speed Transportation, Vehicle Automation, and Intelligent Highway Infrastructure). iv. Investor Preference (FII/FPI Flows): Evaluate institutional and foreign portfolio allocations demonstrating large-scale institutional conviction. v. Portfolio Differentiation: Ensure the theme is additive with minimal overlap against traditional benchmark indices (Nifty/Sensex). Step 3: Identifying Beneficiary Sectors Map out all industries that benefit directly or indirectly. For instance, the Digital India theme maps to Automation, IT Infrastructure, Semiconductor Electronics, Computing Hardware, Software Robotics, and AI Platforms. Analyze sectoral momentum across multiple timeframes. “Sectoral Investing is a time-tested way to not only diversify your portfolio but also take advantage of sector specific trends to suit your investment objectives.” Step 4: Identifying Winning Companies & Quantitative Screening Pinpoint corporate leaders capitalizing on first-mover advantages with superior execution, technological agility, robust historical earnings, and expanding profit margins. Apply proven quantitative frameworks: Altman Z-Score / Zeta Model: Evaluates corporate solvency and bankruptcy risk. Piotroski F-Score (0–9): Assesses financial health, operational efficiency, and margin quality. Montier Modified C-Score: Detects accounting anomalies and earnings manipulation risks. CANSLIM & Valuation Filters: Forward P/E expansion, earnings acceleration, and dividend yield balance. “Only companies that make quick decisions, efficient strategies, adequate upgradations and accept challenges shall benefit exponentially.” Step 5: Research & Multi-Asset Benchmarking Conduct deep comparative research against alternative asset classes (Debentures, Corporate Bonds, Sovereign Gilts, diversified Mutual Funds). Compare thematic volatility (beta and standard deviation) against broad indices and conduct rigorous peer comparisons prioritizing financial sustainability. Step 6: Managing Portfolio Weights Establish rigorous weighting protocols using market-cap-weighted or risk-weighted (volatility-adjusted) allocations. Optimize portfolio liquidity, trade execution efficiency, and maintain systematic discipline. Step 7: Dynamic Rebalancing & ETF Exposure Periodically rebalance constituent weightings as price performance diverges. Replace structural laggards or execute divestments in deteriorating business models. Alternatively, deploy specialized thematic ETFs—such as the Vanguard ESG U.S. Stock ETF (ESGV)—which automate rebalancing and weight management, albeit with fixed constituent constraints. Comprehensive Analysis: Advantages vs. Inherent Risks “Thematic investment involves diversified research of market, industry, sectors or companies which potentially make a robust portfolio structure.” Seven Key Advantages of Thematic Investing Conviction-Driven Alpha: Capitalizes directly on high-conviction personal insights, unlocking market-beating excess returns (Alpha). Multi-Industry Structural Synergy: Synthesizes cross-sector research into a coherent, resilient multi-industry portfolio. Outperforming Broad Benchmarks: Concentrated exposure to high-CAGR megatrends (e.g., Renewable Energy, Automation) vastly outperforms general indices like NIFTY. Bounded, Non-Dilutive Diversification: Delivers intense exposure to targeted governance and technological themes without diluting returns through excessive overdiversification. Predictive Growth Anticipation: Deep structural research enables forecasting of multi-year earnings inflection points before general market recognition. Quantifiable Risk Hedge: Functions as a macroeconomic hedge against obsolescence in traditional sunset industries. Access to ‘Businesses of the Future’: Direct alignment of capital with tomorrow’s economic and technological leaders. Critical Risks & Operational Limitations Basket Concentration Risk: Putting all eggs in one thematic basket exposes capital to severe drawdown if market rotations or interest rate cycles disfavor the theme. Regulatory & Policy Uncertainty: Sudden legislative reversals, tariff modifications, or withdrawal of government subsidies can instantly derail thematic profitability. High Volatility: Excessive price swings render thematic funds inappropriate for retail investors seeking stable capital preservation; 100% allocation is strictly discouraged. Elevated Expense Ratios: Management fees and research overheads are significantly higher due to intense proprietary data modeling and specialized sector coverage. False Dawns & Execution Lag: Even if a macroeconomic thesis is conceptually correct, underlying companies may face commercialization delays, underperforming for prolonged multi-year periods. Conclusive Opinion: Investing for Future via Investing in the Future Over the past several decades, sweeping structural reforms across global economies have unlocked extraordinary avenues for systematic wealth creation. Thematic investing is fundamentally about seizing emerging disruptions that offer outsized long-term capital compounding. A successful thematic strategy is not about chasing solitary speculative stocks; it is about constructing diversified, disciplined baskets of innovation grounded in rigorous quantitative analysis, prudent risk budgeting, and continuous rebalancing. When executed through this structured methodology, Thematic Investing generates exceptional financial synergy, robust wealth creation, and true sustainable Alpha. Bibliographic References & Data Sources Winvesta Research: Thematic Investing Principles StockBasket Playbook: Thematic Investment Ideas & Asset Allocation FYERS Financial Analytics: 10 Core Benefits of Thematic Investing IMF (2020) & Morningstar Data (2020): Global Thematic Fund Market Growth & AUM Flow Statistics. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 83–88 (Journal pp. 727–732) Author Contact: shubham.mng@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 89–94 (Journal pp. 733–738) BANKING & FINANCE • FINTECH & REGULATORY FRAMEWORK Decoding of Payment Aggregator and Gateway Guidelines of Reserve Bank of India CA. Subash Thakuri (Member of the Institute of Chartered Accountants of India) The author is a member of the Institute. He can be reached at thakurisubash2017@gmail.com and eboard@icai.in. 💡 Executive Summary & Context Technology is an inevitable tool and almost every organization has adopted it to move onward with digital transformation. Digitalizing the process, undoubtedly has facilitated a smooth and effective process of business operation for the entrepreneur, especially for timely execution of tasks including finance settlement. Innovation in the finance sector has shown drastic improvements in the last two decades unlike earlier with minimum payment options whereas now-a-days, various payment instruments and modes are available for immediate payment settlement. In fact, it is the outcome of available infrastructure and resources leveraging the skill set of the nation’s technocrats. Payment Aggregators and Gateways are milestones for leveraging the next level of innovation, improvisation and better advancement in the financial segment of the country. Read on… 1. Background & Evolution of the Regulatory Architecture In the early 2000’s, the country witnessed drastic changes in user confidence with internet and mobile banking. With innovation, the orientation of the entire payment industry has substantially enhanced functionality. The development is followed by the setting up of the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), formulation and implementation of Payment and Settlement System Act, 2007 read with Payment and Settlement System Regulation, 2008 in addition to establishment of Department of Payment and Settlement in the Reserve Bank of India, as a guiding, licensing and regulating unit of the Payment Industry in India. Subsequently, to leverage the ongoing innovation in terms of financial sector, the Reserve Bank of India issued “Directions for opening and operations of Accounts and settlement of payments for electronic payment transactions involving intermediaries” in late 2009 to guide the market operators involved in payment settlement and facilitation unit. Further, it took a decade’s time for the Reserve Bank of India for institutionalization of earlier issued directions, to issue full-fledged directions as draft in 2019 for public comments, and finally issued Master Direction for Guidelines on Regulation of Payment Aggregators and Payment Gateways dated 17th March, 2020 as implemented source documents for licensing, guiding and managing the operation module of these entities. It is observed the regulator has taken abundant time to understand, experience the process and develop the regulatory framework for such entities in the market to establish safe, secure, reliable and authentic system participants in the Payment Industry. “Digitalization of payment realisation process is undoubtedly a welcome step in the finance sector as the process has drastically reduced the effort and time to process payments at a click.” 2. Operational Scheme & Payment Stakeholder Ecosystem Digitalization of payment realisation process is undoubtedly a welcome step in the finance sector as the process has drastically reduced the effort and time to process payments at a click. Therefore, it is pertinent to understand the involved stakeholders to execute an online payment transaction, precisely: Seller (Merchant) Customer (Buyer) Customer’s Bank / Wallet Account Acquiring Bank The Bank Having the Nodal Account IT and Communication Hardware / Software, Middleware, and Security System Payment Gateways and Payment Aggregators, collectively. On the other hand we need to understand the means of payment which can be credit card, debit card, bank account, wallet, unified payments interface (UPI) etc. Depending on payment mode used, additional players like card networks, National Payments Corporation of India (NPCI), banks offering net-banking services, banks/non-banks issuing wallet, etc. may be part of the payment chain. 3. Understanding Payment Aggregators (PA) vs. Payment Gateways (PG) Payment Aggregator (PA) Payment Aggregators (PA) are companies registered under Companies Act, 2013 with an object to do payment aggregation business which facilitate the e-commerce sites and merchants to accept payment from customer, pool and transfer them on to the merchants after a time period for completion of customers payment obligations. In short, it is an institution which for time being holds money from users against the closure of transaction in between user and merchant and only then settle the payment in respective merchants’ account. Payment Gateway (PG) Similarly, Payment Gateway (PG) are companies incorporated under the Companies Act, 2013 with an object to technology developments. These companies provide core technology infrastructure to route and facilitate processing of an online payment transaction in between participant stakeholders without involvement in handling of funds. In fact, Payment Gateway as the name suggests is the path of an encrypted safe and secure communication channel in between stakeholders to materialize the transaction towards closure of event. Statutory Deadline: Unlike earlier, the issued guidelines mandate existing market players on this activity to obtain the Certificate of Authorization by 30th September, 2021 from the Department of Payment and Settlement, unit of Reserve Bank of India (RBI). Comparative Analysis: Payment Aggregator vs. Payment Gateway Basis Payment Aggregator Payment Gateway Definition Entities that facilitate tripartite money management for consumption of services, goods or both Entities that provide technology infrastructure to route and facilitate processing of an online payment transaction Industry E-commerce and Merchant to accept various instrument from customers Open for all Money It holds money It does not hold money Process It receives payments from customers, pools and transfers them on to the merchants after a time period Collects information on cipher text, transfer between sender, receiver and involves stakeholders to materialize the execution on a secure platform Technology Baseline Pool Fund Management Company with Baseline Technology of Payment Gateway Core Technology Company 4. Statutory Authorization Requirements Entities whosoever planning to enter this business should first incorporate the company as per the provision of Companies Act, 2013 with an object to perform such business. The board of directors shall be aware of business modality, vertical and operating guidelines with fit and proper criteria of Reserve Bank of India. Company should possess the required capital adequacy as well as proper business usage case to get the approval from Reserve Bank of India. Company, being an applicant should file an application to Department of Payment and Settlement in RBI on Form A, prescribed in Payment and Settlement System Act, 2007 (amended 2015) read with its Payment and Settlement System Regulation, 2008 in addition to issued circular and amendment made on it from time to time. Pertinent issues to be acknowledged and addressed upfront before proceeding for application are listed below: Corporate Incorporation: Applicant must be company incorporated under Companies Act, 2013 with an object of doing proposed activity of operating as PAs/PGs business. Regulatory No Objection Certificate: Applicant being company if regulated by any of the financial sector regulators shall apply with a ‘No Objection Certificate’ from their respective regulator, within 45 days of obtaining such clearance. Capital Adequacy & Net-Worth Trajectory: Minimum capital requirement of applicant before application to RBI shall be at least INR 15 Cr as per its latest audited financial statement subject to made this net-worth INR 25 Cr by the end of third financial year of grant of authorization. Data Security Standard Compliance: Applicant shall maintain Payment Card Industry – Data Security Standard (PCI-DSS) and Payment Application – Data Security Standard (PA-DSS) compliance of the Infrastructure. Designated Escrow Account Maintenance: Applicant needs to maintain escrow account with any scheduled commercial bank (maximum two accounts allowed with two different scheduled commercial banks), known as Designated Payment Systems under section 23A of the Payment and Settlement System Act, 2007 (as amended in 2015). Though its PAs business or PGs business, emphasize precisely more on core technology innovation and involvement. Therefore, base line technology is mandated to be adopted and the business vertical is more centric to technology. 5. Corporate Governance & Grievance Redressal Architecture Payment Aggregator and Payment Gateway are two different entities, with its own crucial and critical business operation modality and both have been authorised and licensed by the Reserve Bank of India always requiring maintaining governance in the operation of business process. Non-adherence of issued guidelines and set of regulations will trigger the monetary penalty as well as cancellation of license to operate as PAs or PGs, as the case may be. Key Governance Tenets & Mandates Professional Board & Fit & Proper Criteria: Starting with the Board of Directors (BOD) of entity, it needs to be professionally managed. Promoters of the entity should satisfy the fit and proper criteria prescribed by RBI. Criteria states that such person should have a record of fairness and integrity, including but not limited to financial integrity, good reputation and character and honesty. Website Disclosures & Board Policies: Applicant shall disclose comprehensive information regarding merchant policies, customer grievances, privacy policy and other terms and conditions on the website and/or their mobile applications. Board shall have approved policy for disposal of complaints/dispute resolution mechanism/time-lines for processing refund, turn-around time for resolution of failed transaction as per RBI direction. Multi-Party Commercial Agreements: Agreement between PAs, merchants, acquiring banks, and all other stake holders shall clearly delineate the roles and responsibilities of the involved parties in sorting/handling complaints, refund/failed transaction, return policy, customer grievance redressal (including turnaround time for resolving queries), dispute resolution mechanism, reconciliation, etc. Appointment of Nodal Officer: Applicant shall appoint Nodal Officer responsible for regulatory and customer grievance handling functions. And the details of such Nodal officer shall be disclosed on their website. It is part of governance initiatives as an outcome of Customer Grievance Redressal and Dispute Management Framework in PAs business. Prior Intimation of Management Changes: Besides all these, any takeover or acquisition of control or change in management of entity shall be communicated by way of letter to the CGM, Department of Payment and Settlement Systems, RBI within 15 days with complete details. It is important to note that no threshold limit is prescribed by RBI. Mandatory AML/CFT KYC Norms: The Know Your Customer (KYC) is a crucial aspect of governance for any entity. Hence the RBI has issued direction and guidelines for the adoption of KYC norms and requirements which is applicable to PA/PG to formulate in the course of action as a counter-move to combat with money-laundering, financing of terrorism and so on. 6. Regulatory Reporting Requirements: Periodic & Event-Based Calendar Reserve Bank of India (RBI) has categorised the reporting requirements on periodic terms say monthly, quarterly, annually and event-based reporting: Monthly Reporting By 7th of Next Month Payment Aggregators (PAs) are required to submit the report of “Statistics of Transaction Handled” as per prescribed RBI format. Quarterly Reporting By 15th Following Quarter-End Auditor shall certify regarding maintenance of balance in Escrow Account, and bankers provide Certificate on Escrow Account Debits and Credits (Internally audited). Annual Compliance By 31st May & 30th September • IS & Cyber Security Audit Reports submitted by 31st May. • Net worth certificate along with audited annual report submitted by 30th September. Event-Based Filings Within 7 to 15 Days • Cyber Incident Report with root cause & preventive actions by 7th of next month. • BOD changes / takeover notices within 15 days. 7. Security, Fraud Prevention & CERT-In Audit Architecture It is a crucial part of the entire gamut of PA/PG business stipulated by RBI. Undoubtedly the applicant should frame a strong risk management system to meet the challenges of fraud and ensure customer protection. Applicant is required to place adequate information and data security infrastructure and systems for prevention and detection of frauds. CERT-In Empanelled Audit Mandate Importance of implementation and regular monitoring of security, emphasizes the requirement of Information System Audit Report including cyber security audit conducted by CERT-In empanelled auditors within two months of the close of their financial year to the respective Regional Office of Department of Payment and Settlement System, RBI. 8. Prescribed Baseline Technology Framework (Clauses a to s) Reserve Bank of India (RBI) places the baseline technology framework for the participating entity in this business vertical either as PAs or PGs, to adopt and implement. The prescribed set of technology framework is bare minimum which is most to adopt and implement in system. However, much more powerful and advanced technology can be inbuilt but not below the set given by RBI. Therefore, it can be understood as a benchmark technology framework of RBI for PAs and PGs business in India: Comprehensive Security Risk Assessment: Applicant at a minimum shall carry out comprehensive security risk assessment of its people, IT, business process environment, etc. to identify risk exposure with remedial measures and residual risks. Data Security & Encryption Standards: Data security standards and best practices like PCI-DSS, PA-DSS, latest encryption standards, transport channel security etc. shall be implemented. Mandatory Data Breach Reporting: Any data breach event in terms of card holder or anything else are serious matter and its threat on security, must be reported to RBI within stipulated timeframe. Merchant Onboarding Security Checks: Applicant shall undertake comprehensive security assessment while onboarding the merchant to ensure these minimal baseline security controls. Internal & External Technical Audits: Company shall carry out and submit to the IT Committee quarterly internal and annual external audit reports; bi-annual vulnerability assessment/penetration test reports, PCI-DSS including attestation of compliance and report of compliance. Board-Approved Information Security Policy: Board approved information security policy in alignment with business objectives, scope, ownership and responsibility for the policy, information security organizational structure, maintenance of asset inventory and registers, data classification, authorization, expectations, knowledge and skill sets required, compliance review etc. shall be incorporated and must be reviewed at least annually. Structured IT Governance Framework: An IT Policy shall be framed for regular management of IT functions and ensure that detailed documentation in terms of procedure and guidelines exist and are implemented. It shall have involvement of Board, IT Steering Committee, Enterprise Information Model, Cyber Crisis Management Plan as Governance Framework for IT Policy. Enterprise Data Dictionary: Applicant shall maintain an ‘enterprise data dictionary’ incorporating the organization’s data syntax rules in order to enable sharing of data across the application and systems. Granular Asset Risk Evaluation: Risk assessment shall, for each asset within its scope, identify the threat/vulnerability combinations and likelihood of impact on confidentiality, availability or integrity of that asset – from a business, compliance and/or contractual perspective. Least Privilege & Need-to-Know Access: Access to application has thumb rule across the Industry, to be facilitated on the principle of least privilege and ‘need to know’ commensurate with the job responsibilities, is requirement of applicant to adopt and implement in its platform. Human Resource IT Skills & Training: Resources are trained with requisite skills set for IT function and periodically assessed for the training requirements for human resources. Vendor Risk Management & BCP-DR: Vendor risk management is required for technology support, including Business Continuity Planning – Disaster Recovery (BCP-DR) and data management. IT Maturity Level Benchmarking: Entities shall consider assessing its IT maturity level, based on well known international standards, design an action plan and implement the plan to reach the target maturity level. Robust Encryption Protocols: Applicant shall adopt and implement strong encryption algorithms. Centralized Security Event Logging & SIEM Analysis: Security events from the entities infrastructure including but not limited to application, servers, middleware, endpoint, network, authentication events, database, web services, cryptographic events and log files shall be collected, investigated and analysed on regular intervals, then either enhanced or made proactive for identification of security alerts. Data Localization & Sovereign Jurisdiction: Entities shall take preventive measure to ensure storing data in infrastructure that do not belong to external jurisdiction. Prohibition on Storing Card Credentials: Customer card credentials shall not be stored within database or the server accessed by merchant. Card-Not-Present Authentication Standards: Option for ATM PIN as factor of authentication for card not present transactions shall not be given. Source-Mode Refund Routing: Refunds in case of failed transition or denied etc. shall be made to source mode of payment unless otherwise agreed by the user to credit amount in any other alternate mode. These are few among others to be maintained, implemented and monitored on a regular basis as far technology infrastructure and its security and prevention from fraud is concerned related to the business of PAs/PGs as designed and recommended by the Reserve Bank of India. 9. Conclusion & Future Outlook for Market Operators This is an essential topic in the Fintech industry currently due to requirement of the application for certificate of authorisation and all the existing market player irrespective of performing the activities as PAs or PGs, to Department of Payment and Settlement System, Reserve Bank of India under the Governing Act, Payment and Settlement System Act, 2007 (amended 2015) read with regulation and circular time to time by RBI. “Gateway performs as communication channel whereas aggregator pool’s the fund from users and as per agreed terms and condition with merchant transfer, the eligible amount to their respective account.” The PAs and PGs to be same, and the released guidelines take these as separate entities and refer to a totally different nature of activities. Precisely, Gateway performs as communication channel whereas aggregator pool’s the fund from users and as per agreed terms and condition with merchant transfer, the eligible amount to their respective account. Application for registration needs to be placed to RBI at the earliest to carry on the ongoing business of existing market player else they need to stop the business activities. However, if the existing player has applied for authorization with the Department of Payment and Settlement System as per requirements, then the entity can pursue the ongoing business till the final decision from RBI is not communicated to the applicant entity.

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 95–100 (Journal pp. 739–744) Banking & Finance • Sustainability & Integrated Reporting Integrated Reporting and Financial Performance of Indian Banks NJ CA. Namratha Jain Member of the Institute of Chartered Accountants of India. Contact: namrathahjain@gmail.com SB Prof. Shurveer S. Bhanawat Head, ABST Dept, Mohanlal Sukhadia University, Udaipur. Contact: eboard@icai.in “A true integrated report is one which shows a clear link between sustainability and financial performance. Banking and financial services is the second top industry/sector using the International Integrated Reporting Framework (IIRF) within BSE 500 group (AICL, Dec 2020). Hence in the present study, our main purpose is to examine the relationship between Integrated Reporting (IR) and Financial Performance (FP) of Indian banks. The results show that Indian banks are at different stages of Integrated Reporting (IR) adoption as they published their first integrated report in different years and the sample scores are between 34% and 85%. Positive correlation was found between IRS and market based financial performance measures. Read on…” Introduction: The Paradigm Shift Towards Holistic Value Creation Integrated Reporting (IR) is a concise yet holistic form of reporting the value that businesses create through the representation of both financial and non-financial performance of an organization. Lately, progressive organizations across the world have realized that traditional corporate financial reporting takes an excessively narrow, short-term approach that is fundamentally inadequate to meet the multi-dimensional expectations of long-term investors, regulators, rating agencies, and wider societal stakeholders. Therefore, the momentum towards integrated reporting is accelerating globally as the premier reporting architecture that establishes explicit guiding principles and eight core content elements. Designed to ensure cross-sectional comparability between reports and temporal consistency in disclosure, IR enables corporate enterprises to publish a unified, coherent annual report with comprehensive disclosures cross-mapped to multiple external reporting frameworks. The landmark initiative to merge the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) into the unified Value Reporting Foundation represents a decisive global step towards consolidating fragmented sustainability reporting standards, lending institutional credibility to disclosures, sharpening key performance indicators (KPIs), and driving intra-industry comparability (AICL, Dec 2020). “The need for integrated reporting is gaining momentum across the world as one of the leading frameworks that lays down clear guiding principles and content elements, prepared with the objective of ensuring comparability between reports and consistency in reporting.” As famously articulated by Mervyn King, Chair of the IIRC: “Business is a part of society, not apart from society.” This profound axiom proved irrefutable amidst the unprecedented disruption of the COVID-19 pandemic. Global business organizations were forced to prioritize the health, safety, and psychological resilience of their workforce, clients, and local communities over immediate accounting profitability—radically restructuring operational models to navigate crisis conditions. Historically, disclosures within the commercial banking sector were strictly anchored in financial capital and, to a limited degree, human capital. However, the aggressive digitization of financial intermediation—creating vast intangible assets alongside cyber risks—demands that financial institutions demonstrate how they preserve and enhance the full spectrum of Six Capitals: 1. Financial Capital Equity, debt, deposits, liquidity pools 2. Manufactured Capital Physical branches, ATMs, data centers 3. Intellectual Capital Proprietary algorithms, fintech IP, brand 4. Human Capital Workforce talent, ethics, training, safety 5. Social & Relationship Customer loyalty, trust, PSL, community 6. Natural Capital Green lending, carbon footprint, water Integrated Reporting Worldwide and in India The institutional concept of Integrated Reporting was formally pioneered in South Africa in 2009 through the King III Code of Corporate Governance, which mandated integrated reporting for all entities listed on the Johannesburg Stock Exchange (JSE). Recognizing the global imperative, the International Integrated Reporting Council (IIRC)—a high-level global coalition of financial regulators, sovereign wealth investors, transnational accounting bodies, multinational corporations, and non-governmental standard setters—was established in June 2010. Within three years of extensive worldwide consultation, the IIRC promulgated the official International Integrated Reporting Framework (IIRF) in December 2013. Today, the adoption of integrated reporting has expanded to over 2,500 major corporations across more than 70 sovereign jurisdictions throughout Africa, Europe, Asia, and the Americas, with over 40 leading securities exchanges explicitly sign-posting the IIRF within their statutory ESG disclosure mandates. In India, adoption was catalyzed by a landmark circular issued in 2017 by the Securities and Exchange Board of India (SEBI). SEBI formally recommended that the Top 500 listed enterprises (which were already required to file a statutory Business Responsibility Report or BRR under Regulation 34(2)(f) of the LODR) voluntarily transition to the International Integrated Reporting Framework. Propelled by this regulatory nudge, 50% of Nifty 50 corporations had formally embraced IR by December 2020, with progressive banking institutions leading the charge (Grant Thornton Bharat, Dec 2020). Empirical Scope, Sample Selection & Methodology The primary research objectives of this investigation are twofold: To rigorously evaluate the level of compliance of integrated reports published by leading Indian commercial banks against the International Integrated Reporting Framework (IIRF). To empirically examine the statistical relationship between the Integrated Reporting Score (IRS) and the Financial Performance Indicators (FPIs) of the sampled banking institutions. The empirical investigation focuses exclusively on the Indian scheduled commercial banking sector. Within the Top 500 companies ranked by market capitalization on the National Stock Exchange (NSE) as on 31st March 2020, exactly 29 commercial banks were voluntarily eligible to adopt IR starting from FY 2017-18. Out of these 29 banks, 10 banks had formally published an integrated report as of 31st March 2020. To ensure statistical reliability and longitudinal consistency, the final sample was restricted to 7 commercial banks whose integrated reports were consistently available across a three-year observation period (FY 2017-18 to FY 2019-20, with mandatory minimum coverage in FY 2018-19 and FY 2019-20): 1. Axis Bank 2. HDFC Bank 3. ICICI Bank 4. State Bank of India (SBI) 5. Yes Bank 6. RBL Bank 7. Karnataka Bank Construction of the Integrated Reporting Score (IRS) To measure disclosure quality objectively, an exhaustive IR Disclosure Checklist comprising 43 granular items was synthesized across all eight content elements defined in the 2013 IIRC Framework, drawing upon empirical benchmarks established in prior international literature (Akhter & Ishihara, 2018; Sofian & Dumitru, 2017; Lee & Yeo, 2015). Consistent with the methodological findings of Lee & Yeo (2015) noting the absence of theoretical justification for differential weighting, equal importance is assigned across each of the eight content elements. The IRS for each bank-year observation is formulated as: IRS = ( Total Number of Disclosed Checklist Items / Maximum Possible Disclosure Score ) × 100 A longitudinal panel of 21 observations (7 banks × 3 years, N = 21, n = 7, T = 3) was scored through comprehensive content analysis of integrated annual reports, standalone annual reports, and sustainability filings. Empirical Findings: Descriptive Statistics & Content Element Compliance Table 1a: Descriptive Statistics of Integrated Reporting Score (IRS) of Indian Banks Variable Mean (%) Std. Deviation Min (%) Max (%) Observations IRS Overall (Pooled Panel) 64.91 16.32 34.25 84.93 N = 21 IRS Between (Cross-Sectional) — 15.12 36.07 79.45 n = 7 Key takeaway: Across the 21 bank-year observations, the average IRS stands at 64.91%. Axis Bank (79% mean) achieved the highest overall disclosure score, whereas Karnataka Bank (36% mean) recorded the lowest level of framework adoption. Table 1b: IRS Breakdown by Content Element (Ranked by Disclosure Level) Code IIRF Content Element Average Score (%) Relative Adoption C1 Organizational Overview and External Environment 84.76% Highest (Top Ranked) C3 Risks and Opportunities 66.67% Moderate-High C2 Business Model 64.94% Moderate C8 Basis of Preparation and Presentation 63.10% Moderate C4 Strategy and Resources Allocation 61.43% Moderate C5 Governance 61.38% Moderate C7 Outlook 58.93% Deficient / Low C6 Performance 56.67% Lowest (Severely Deficient) Granular In-Depth Evaluation Across Content Elements C1: Organizational Overview and External Environment (84.76%) The highest scoring category. Axis Bank obtained the maximum score across all 3 years of study. State Bank of India (SBI) attained the maximum score in the last two years, while RBL Bank and Yes Bank reached full compliance in the final year. Except for Karnataka Bank, Indian banks achieved an average compliance rate of approximately 90%, demonstrating exemplary reporting on institutional vision, mission, ownership structure, operational presence, key quantitative indicators, and external macroeconomic forces. C2: Business Model (64.94%) HDFC Bank and Axis Bank led the cohort with benchmark scores of 84%. However, the majority of banks exhibited significant disclosure gaps in explicitly linking their business models to strategic objectives, risk appetite, resource allocations, and tangible value outcomes across multiple capitals. C3: Risks and Opportunities (66.67%) Yes Bank secured the top disclosure score. While virtually all banks articulated principal sources of operational, credit, and market risks, their potential impacts, and mitigation controls, they substantially lagged in detailing concrete corporate initiatives undertaken to capture commercial value from emerging opportunities and quantify their strategic upside. C4: Strategy and Resource Allocation (61.43%) HDFC Bank (80%) and Axis Bank (76%) were the premier performers. Banks consistently articulated high-level corporate strategies and resource deployment budgets while factoring in environmental and social considerations. Nevertheless, the systematic alignment connecting strategic resource allocations back to stakeholder engagement matrices and core business models remained noticeably weak. C5: Governance (61.38%) HDFC Bank and Yes Bank tied for the top ranking with approximately 78% compliance. Most reports thoroughly documented Board composition, director qualifications, specialized committee mandates, organizational values, and ethical culture. However, disclosures were severely deficient regarding the precise mechanisms through which Board oversight steers strategic risk-taking and how executive remuneration and incentive structures are tied directly to multi-capital long-term value preservation. C6: Performance (56.67%) & C7: Outlook (58.93%) — The Critical Reporting Blind Spots Performance and Outlook represent the two lowest-scoring dimensions across Indian banking reports, exposing an acute corporate reluctance to link empirical performance to pre-established non-financial targets or provide quantitative forward-looking disclosures: Selective Self-Serving Disclosures: Information was heavily slanted towards positive capital developments to manage external perception, while disclosures on negative capital degradation (e.g., carbon externalities, litigation costs, employee attrition) were conspicuously absent. Monetization of ESG Initiatives: Banks disclosed positive operational savings (energy conservation, water preservation, paperless transactions), green lending allocations, CSR disbursements, and Priority Sector Lending volumes. Absence of Integrated Hybrid KPIs: Metrics that bridge financial outcomes with non-financial performance (e.g., ratio of greenhouse gas emissions to net interest income, financial return on employee training outlays per IIRC 2013) were overwhelmingly missing. Inability to Quantify Future Macro Risks: While banks articulated qualitative macroeconomic headwinds, none quantified the financial balance sheet impact of future environmental shocks. State Bank of India (SBI) performed closest to best practice by establishing explicit capital-by-capital forward targets. C8: Basis of Preparation and Presentation (63.10%) Axis Bank ranked first (96%), followed by Yes Bank (88%) and SBI (79%). While reporting boundaries, materiality assessment matrices, and stakeholder consultation protocols were adequately documented, banks failed to demonstrate how identified material matters directly dictate their organizational value creation and capital reallocation processes. “Performance and outlook are the least disclosed category indicating that banks in the current study showed a low level of concern on performance link to previously identified targets and outlook disclosure.” Econometric Analysis: The Empirical Relationship Between IRS and Financial Performance To evaluate whether a statistically significant relationship exists between Integrated Reporting compliance and corporate financial health, the authors conducted univariate Pearson correlation analyses across eight comprehensive accounting and market-based Financial Performance Indicators (FPIs): Table 2: Specification of Financial Performance Variables Acronym Dimension Operational Definition Previous Research Findings ROA Profitability Ratio of Net Profit After Tax to Average Total Assets. Lee & Yeo (2015) found higher IR associated with ROA gains; Matemane & Wentzel (2019), Dey (2019), and Wachira (2019) observed no significant correlation. ROE Profitability Ratio of Net Profit for the Year to Average Shareholders’ Equity (current and previous year). Matemane & Wentzel (2019) identified no significant link; Marx (2019) demonstrated that superior IR quality improves ROE. CAR Capital Adequacy Ratio of Bank Regulatory Capital (Tier I & II) to Total Risk-Weighted Assets. Novel variable developed for banking context (Own Research). COB Cost Management Ratio of Interest Expended on Borrowings (Total Interest Expended minus Interest on Deposits) to Average Borrowings. Novel banking cost efficiency measure (Own Research). PSLR Financial Inclusion Priority Sector Lending Ratio = Advances to Priority Sectors / Total Bank Advances. Measures societal lending mandated by RBI (Own Research). Net NPA Asset Quality Ratio of Net Non-Performing Assets (NPAs) to Net Advances. Credit risk indicator (Own Research). MTB Growth Opportunity Market-to-Book Ratio = Market Price per Share / Year-End Book Value of Equity per Share. Dey (2019) observed statistically significant correlation between IRS and MTB in Bangladesh banking. TOBINQ Firm Valuation Ratio of (Market Value of Equity + Book Value of Total Liabilities) to Total Assets. Lee & Yeo (2015) confirmed positive link with IR; Dey (2019) found no significant link. Table 3: Pearson Correlation Matrix Between IRS and Bank Financial Indicators Variable ROA ROE CAR COB PSLR Net NPA MTB TOBINQ IRS IRS -0.237(0.609) -0.336(0.461) +0.367(0.418) -0.511(0.241) -0.889**(0.007) -0.259(0.576) +0.545(0.205) +0.539(0.212) 1.000 Note: Figures in parentheses represent two-tailed p-values. Statistical significance: ** denotes significance at the 1% level (p < 0.01); * denotes significance at the 5% level (p < 0.05). 1. Positive Market-Based Valuation (MTB & TOBINQ) A strong positive correlation was documented between IRS and both Market-to-Book (r = +0.545) and Tobin’s Q (r = +0.539). As forward-looking valuation metrics, this demonstrates that equity markets and sophisticated institutional investors place a valuation premium on banks demonstrating transparency and multi-capital stewardship, recognizing IR as a leading indicator of long-term sustainable compounding. 2. Lower Cost of Borrowing (COB) A notable negative correlation was observed between IRS and Cost of Borrowing (r = -0.511). Commercial banks exhibiting higher integrated reporting quality and robust governance disclosures are perceived by debt markets as lower-risk credit counterparties, enabling them to raise wholesale funds and issue corporate bonds at significantly tighter credit spreads. 3. The Priority Sector Lending Paradox: Statistically Significant Negative Link (r = -0.889**, p = 0.007) The sole statistically significant relationship at the 1% significance level emerged between IRS and Priority Sector Lending Ratio (PSLR) (r = -0.889, p = 0.007). This unexpected empirical inverse relationship reveals a profound operational paradox within Indian commercial banking: Under Reserve Bank of India (RBI) mandates, banks must deploy 40% of Adjusted Net Bank Credit (ANBC) into designated priority sectors (small and marginal farmers, micro and small enterprises, affordable housing, student education, weaker socioeconomic groups, and renewable energy installations). While PSL constitutes an ideal strategic channel to build social, relationship, and natural capital in alignment with the UN Sustainable Development Goals (SDGs), the empirical findings indicate that banks with the highest IR disclosure scores treat PSL merely as a rigid statutory compliance mandate rather than internalizing integrated thinking into their core lending strategies. “Banks are doing PSL only to meet the targets set by RBI and not considering it as social responsibility towards the society.” Conclusion & Strategic Roadmap for Banking Regulators The empirical findings confirm that Indian commercial banks reside at vastly divergent stages of Integrated Reporting maturity, with compliance scores spanning from a rudimentary 34.25% to an advanced 84.93% (averaging 64.91%). Within a voluntary regulatory regime where IIRF adoption is recommended but not legally compulsory, this represents a commendable baseline of transparency. Nevertheless, Indian banking reports suffer from systemic structural asymmetry: compliance is exceptionally high for static, backward-looking descriptive narratives (organizational mission, ownership, risk matrices, and Board bios), but collapses precipitously when evaluating forward-looking Performance and Outlook disclosures. To evolve from surface-level compliance to genuine integrated thinking, Indian banking boards must implement three imperative reforms: 1. Establish Integrated Hybrid KPIs: Move beyond isolated non-financial metrics by developing quantitative hybrid ratios that explicitly connect sustainability actions to financial metrics—such as carbon intensity per rupee of credit extended, green loan return on risk-adjusted capital, and training return on human capital. 2. Institutionalize Balanced Disclosure of Capital Externalities: Overcome the corporate impulse to publicize only positive capital developments. Reports must provide transparent accounting of negative externalities, environmental transition risks, and climate vulnerability within corporate loan books. 3. Reposition Priority Sector Lending as Core Social Value Creation: Transition PSL away from a mechanical, tick-the-box regulatory quota towards an intentional strategy that builds resilient social, relationship, and natural capital across India’s rural and renewable energy ecosystems. Bibliographic References & Academic Literature AICL. (Dec 2020). India Adopts IR. Retrieved from www.aicl.in/ir/indiaadoptsir/ Akhter, T., & Ishihara, T. (2018). Assessing the Gap between Integrated Reporting and Current Corporate Reporting: A Study in the UK. International Review of Business, 18, 137–157. Dey, P. K. (2019). Value relevance of integrated reporting: a study of the Bangladesh banking sector. International Journal of Disclosure and Governance. https://doi.org/10.1057/s41310-020-00084-z El-Deeb, D. S. (2019). The Impact of Integrated Reporting on Firm Value and Performance: Evidence from Egypt. Alexandria Journal of Accounting Research, 3(2). Grant Thornton Bharat. (Dec 2020). Integrated Reporting in India: Survey on adoption and the way forward. Retrieved from https://integratedreporting.org IIRC. (2013). The International Integrated Reporting Framework. International Integrated Reporting Council. Retrieved from https://integratedreporting.org Marx, A. (2019). Assessing the relationship between integrated reporting and financial indicators of selected JSE companies. Doctoral Dissertation, North-West University. Reserve Bank of India (RBI). (2021). Master Directions – Priority Sector Lending (PSL) – Targets and Classification. RBI/FIDD/2020-21/72. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) December 2021 Issue • Vol. 70 • No. 6 • pp. 95–100 (Journal pp. 739–744) Authors Contact: namrathahjain@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI December 2021 • Vol. 70 • No. 6 • pp. 101–106 (Journal pp. 745–750) BANKING & FINANCE • EMPIRICAL CREDIT RISK ANALYSIS Is the Size of a Bank a Credit Risk Variable? A Study on Indian Public Sector Commercial Banks Dr. Renu Arora (Faculty, Mata Sundri College for Women, University of Delhi) Author is a faculty in Mata Sundri College for Women, DU. She can be reached at 28.renuaroroa@gmail.com and eboard@icai.in. 💡 Executive Summary & Research Findings The study analyses the statistical significance of size of Indian public sector banks (PSBs) as a credit risk variable in the background of large-scale consolidation of these banks from 27 in 2017 to 12 in 2021. Analyzing the credit risk performance of six large and six small PSBs from 2006-17, and a survey on 337 of their credit managers, the study concludes that there was high stress on small PSBs in terms of their stressed assets and capital adequacy ratios. Credit managers in small PSBs also perceived larger gaps in risk infrastructure. The consolidation has improved the profitability, capitalization and asset quality in large banks. Though, it has to be monitored that these mega PSBs do not overlook the credit needs of small and medium businesses. Read on… 1. Introduction: Consolidation Wave & The Bank Size Hypothesis For the last five years, the Finance Minister of the Government of India is announcing mergers/consolidation of small public sector banks (PSBs) with a few large public sector banks and even the privatization of few of these banks. This consolidation of Indian PSBs is aimed at finally four large PSBs only. Reasons are efficient banking, reaping benefits of large-scale banking, reducing overlap of banking services in local areas; and the very important reason of managing poor asset quality and low capital adequacy ratios in the small PSBs. The mounting pile of non-performing assets which has considerably reduced the credit growth in PSBs, gives perceptions of whether the size of a public sector bank is a credit risk variable in real sense. This study researches this phenomenon of impact of size of an Indian public sector bank on efficiency of its credit risk determinants– GNPA and NNPA ratios, Restructured Assets Ratios, Stressed Assets Ratios, Sensitive Assets Ratios, Capital Adequacy Ratios, Net Interest Margin and Return on Assets, from 2006 to 2017. The year 2017 has been selected being the concluding year when merger and consolidation exercise begins with Associate Banks of State Bank of India merged into the State Bank of India on 01 April, 2017. From April 1, 2020, ten PSBs were amalgamated into four, taking the total number to 12 (The Business Standard, 2021, February, 03). The present study into the impact of the size of the PSBs on their credit risk management (CRM) efficiency has been organized in five sections. The next section reviews the existing literature, section 3 and 4 are on the framework of study and data analysis. Last section concludes and recommends. 2. Review of Literature The most immediate challenge for banks worldwide is a possible rise in corporate insolvencies and non-performing assets (NPLs) (RBI, 2021- Financial Stability Report, July). To achieve banking stability, banks are required to maintain quality assets that aid in achieving profitability (Swamy, 2015). The growing incidence of poor bank asset quality calls for a renewed look at the factors that impact the performance of banks (Swamy, 2015). One such factor of interest is size of a bank. The empirical analysis suggests that asset measure of size could yield meaningful results relating to borrowers’ loan response (Ranjan and Dhal, 2003). Large v. Small Banks: Empirical Evidence Larger banks have exhibited better credit risk management with lower NPA levels (Swamy, 2015). There are other studies as well. Chronologically, we start with Ranjan & Dhal (2003). Ranjan & Dhal (2003) had studied NPAs of Indian PSBs from 1990 to 2003. According to them, the bank size measured in terms of assets, has negative impact on NPAs, while the measure of bank size in terms of capital has positive and significant effect on gross NPAs but negligible effect on net NPAs (Ranjan & Dhal, 2003). Thus, appropriate measure of size assumes importance (Ranjan & Dhal, 2003). Nair, Gopikumar & Asha (2018) studied 50 Indian banks, both in public and private sector from 2006-17, the same period as discussed in this paper, to research the “effect of size, capitalization and non-performing assets on the cost efficiency of Indian banks” (Nair, Gopikumar & Asha, 2018). They concluded that “Bank capitalization contributes negatively whereas, bank size contributes positively to bank’s cost efficiency” (Nair, Gopikumar & Asha, 2018). Their paper uses cost-function approach for estimating and modeling inefficiency (Nair, Gopikumar & Asha, 2018). Sarkar & Sarkar’s (2018), “empirical analysis suggests that while board size plays an insignificant role in bank outcomes, board independence plays a significant role”. They favor privatization of banking services for enhanced efficiency. However, empirical studies on a sample of 47 public and private Indian commercial banks from 2000-14, Arrawatia et al. (2019) find that “the results are qualitatively similar across different ownership structures”. They suggest that forecasting models for nonperforming assets should also consider macro-economic and industry-specific factors along with the bank-specific factors (Arrawatia et al., 2019). One such bank-specific factor is the size of the bank. Gupta, Mahakud & McMillan (2020) analyzed 64 public, private and foreign banks in India from 1998-2016 and “focuses on assessing the role of various bank-specific, industry-specific and macroeconomic determinants in Indian commercial banks performance” (Gupta, Mahakud & McMillan, 2020). The results show that bank size, nonperforming loan ratio and revenue diversification are the major determinants of the commercial banks performance in India (Gupta, Mahakud & McMillan, 2020). The larger banks are less profitable (Gupta, Mahakud & McMillan, 2020). The Effect of Merger & Consolidation Gandhi (2016), the Deputy Governor, RBI stated, “It has been argued that India has too many PSBs with similar characteristics and a consolidation among PSBs can result in reaping rich benefits of economies of scale and scope”. Though, he also argued in favor of consolidation beyond mergers. “The merged entities can now reap benefits of synergy, especially in the case of branch network presence across regions. For example, United Bank of India, which had a large presence in the eastern region, will now benefit from the more diversified branch network of Punjab National Bank which had a vast network in the northern and central region before the merger” (Reserve Bank of India, 2020- Trends & Progress of Banking in India). The Press Information Bureau, GOI (2020) informed, “Amalgamation to enable creation of digitally driven consolidated banks with global heft and business synergies…greater scale and synergy through consolidation would lead to cost benefits which should enable the PSBs enhance their competitiveness and positively impact the Indian banking system”. Further, positive outlook was reported by the New Indian Express on 03 August, 2021, though in contrast, its headline was not very encouraging. It reported “Post-merger, public sector banks (PSBs) have seen an improvement in profitability in the year ended March 2021 despite the coronavirus pandemic induced disruptions… In FY21, PSBs reported a combined net profit for the first time in five years… Only two of the 12 public sector banks — Punjab & Sind Bank and Central Bank of India — reported a net loss for the year” (The New Indian Express, 2020). Mergers helped strengthen the capital buffers of banks that were facing challenges in meeting regulatory requirements (Reserve Bank of India, 2020- Trends & Progress of Banking in India). United Bank of India had pre-merger Capital Adequacy Ratio of 5.6 per cent only against the minimum required of 9 per cent under RBI prudential norms. Post-merger, the combined ratio of Punjab National Bank merged with Oriental Bank of Commerce and United Bank of India stood at 12.63 per cent (Reserve Bank of India, 2020- Trends & Progress of Banking in India, Table 3, p.58). The divergent views are also there. In the loans and advances, the PSB market share has gone down to around 60 per cent with the scaling up of private banks (Business Today. In, 2021). With new banks including small finance banks (SFBs) offering higher deposit rates, the deposit share of PSBs may also come under attack (Business Today. In, 2021). In the banks’ consolidation process, the human resource factor has also been underlined to be worst affected and requires upskilling, as per experts on banking and legislators. The mega merger of public sector banks (PSBs) has led to a “turmoil” as the state-owned banks do not have the necessary talent for specialised functions like risk management and new financial technologies, the Parliamentary Standing Committee on Finance said in its report (The Business Standard, 2021, February, 03). 3. Research Objective & Framework of the Study In the background of these studies, this paper sets the research objective to empirically evaluate the historical and primary data on PSBs to research whether the size of a public sector bank is a significant credit risk determinant. Efficient credit risk management ensures high profitability as loans and advances are banks’ primary source of income. Sample Selection & Size Classification Criteria (2006–2017) In a study from 2006-2017, immediately before the start of large size merger and consolidation of Indian PSBs, based on historical data; and also based on the primary survey on 337 credit and risk managers of 12 of such PSBs, the author finds that the size of the bank is a credit risk variable. Large and small PSBs in the study were segregated on the basis of share of assets of a PSB in total assets of all the PSBs in the median year of study, i.e., 2012, with a cut-off percentage of 2.5%. A sample of six large and six small PSBs was drawn: Six Large PSBs: State Bank of India, Punjab National Bank, Bank of Baroda, Oriental Bank of Commerce, IDBI Bank, and Syndicate Bank. Six Small PSBs: Punjab & Sind Bank, Dena Bank, Vijaya Bank, United Bank of India, Andhra Bank, and State Bank of Bikaner & Jaipur (SBBJ). In case we tally the consolidation exercise of this merger of large PSBs with small PSBs, most of the small PSBs in the sample have either merged or will be merged with large banks. For example, State Bank of Bikaner and Jaipur along with other SBI associate banks merged with the State Bank of India (SBI). Dena Bank and Vijaya Bank were merged with Bank of Baroda in 2019 (Sikdar, 2021). In the recent past, the government handed over the IDBI Bank to LIC (Business Today. In, 2021). After the merger exercise, Punjab National Bank, Oriental Bank of Commerce, and United Bank of India combined to form one lender; Canara Bank took over Syndicate Bank; while Union Bank of India amalgamated with Andhra Bank and Corporation Bank (The Business Standard, 2021, February, 03). 4. Empirical Data Analysis & Results The historical data on this study was collected for six large and six small PSBs from 2006-2017 from the Statistical Tables relating to Banks in India (RBI). The credit risk variables under the study are: GNPA Ratio: Gross Non-performing Assets to Gross Advances. NNPA Ratio: Net Non-performing Assets to Net Advances. Sensitive Assets Ratio: Covers advances to capital/commodity market brokers and real estate advances. Stressed Assets Ratio: Takes GNPAs plus restructured loans to Total Advances. NIM (Net Interest Margin) & ROA (Return on Assets): Profitability ratios, used to measure the effect of credit risk variables on operational efficiency. CRAR: Capital to Risk Adjusted Assets Ratio, famously known as Capital Adequacy Ratio. “NIM (Net Interest Margin) and ROA (Return on Assets) are profitability ratios, used to measure the effect of credit risk variables on operational efficiency. CRAR is Capital to Risk Adjusted Assets Ratio and famously known as Capital Adequacy Ratio.” During the periods from 2006-17, the large PSBs have been better capitalized than the small PSBs. Though GNPA ratio is higher in large PSBs, the Stressed Assets Ratio is highly stressed in small PSBs, the real indicator of credit risk stress. Loans to sensitive sectors, is also a great discomfort factor setting high cautions. This is a highly remunerative loan segment but in case of defaults, can create a big pile of bad loans, which happened for IDBI Bank and Vijaya Bank. Table 1: Mean (%) & SD Values of Credit Risk Variables in Sample PSBs (2006-17) Sl. No. Credit Risk Ratios Large PSBs Mean % (S.D.) Small PSBs Mean % (S.D.) 1. GNPA Ratio 4.39 (3.29) 4.24 (3.31) 2. NNPA Ratio 2.31 (2.08) 2.59 (2.45) 3. Sensitive Assets Ratio 17.38 (1.82) 15.91 (3.09) 4. Restructured Debt Ratio 4.01 (2.48) 4.65 (3.28) 5. Stressed Assets Ratio 8.51 (4.71) 9.00 (5.71) 6. NIM (Net Interest Margin) 2.37 (0.35) 2.45 (0.41) 7. ROA (Return on Assets) 0.65 (0.50) 0.63 (0.42) 8. CRAR (Capital Adequacy Ratio) 12.65 (0.82) 12.13 (1.03) (Source: Author’s analytical studies based on RBI’s Statistical Tables related to Banks in India, 2006-17, http://rbidocs.rbi.org.in) Figure 1 Visualization Context: Figure 1 illustrates comparative mean and standard deviation dispersions across all 8 credit risk parameters between large and small PSBs, highlighting greater volatility and stress burdens among smaller banking institutions. When we measure year-wise movement of these ratios (Table 2), the highest stress is appearing in 2015-16 and 2016-17, putting the regulator and policy makers on toes to control state run banking, and one such measure adopted was merger and consolidation of small PSBs into large PSBs. Table 2: Year-wise Mean and Growth Rate Values for Credit Risk Ratios (in %) YEAR GNPA RatioMean / GR NNPA RatioMean / GR Sensitive AssetsMean / GR Restructured DebtMean / GR Stressed AssetsMean / GR NIMMean / GR ROAMean / GR CRARMean / GR 2006-07 2.75- 0.94- 18.38- 0.64- 3.43- 2.83- 0.93- 12.19- 2007-08 2.05-25.5 0.84-10.5 18.29-0.51 0.8532.51 2.94-14.3 2.89-19.3 0.974.4 11.97-1.76 2008-09 1.74-15.0 0.74-12.2 16.56-9.43 2.73223.2 4.3347.28 2.24-2.08 0.92-5.25 13.3511.46 2009-10 1.919.71 0.9224.77 16.17-2.35 3.5128.32 5.1619.3 2.250.60 0.942.36 13.07-2.05 2010-11 2.057.41 0.986.23 16.491.95 2.75-21.6 4.84-6.26 2.77-23.25 0.961.95 13.261.47 2011-12 2.7936.05 1.4345.54 15.10-8.42 4.4461.47 7.1647.91 2.71-2.34 0.91-5.3 13.18-0.65 2012-13 3.2315.61 1.9032.98 15.07-0.18 7.2062.27 10.4946.52 2.51-7.32 0.79-12.5 12.30-6.7 2013-14 4.5641.3 2.8449.69 16.529.6 7.625.81 12.2917.18 2.38-5.18 0.43-45.8 11.97-2.65 2014-15 5.0510.8 3.109.0 15.12-8.48 9.0118.25 14.1915.47 2.21-7.18 0.41-5.03 11.96-0.08 2015-16 8.8374.76 5.3773.23 17.3915.04 5.39-40.2 15.599.88 2.21-0.19 -0.17-141.0 11.56-3.32 2016-17 12.5041.5 7.8646.4 17.993.43 3.50-35.0 15.53-0.43 2.09-5.06 -0.16-7.43 11.590.223 Total Mean(2006-17) 4.32 2.45 16.64 4.33 8.72 2.41 0.63 12.40 (Source: Author’s analytical studies based on RBI’s Statistical Tables related to Banks in India, 2006-17, http://rbidocs.rbi.org.in) Bank-Wise Stress Disparities (Figure 2 Context): Bank-wise analyses for 2006-17 (Figure 2), demarcates that the IDBI bank was under severe pressure of credit risk among large banks, and Punjab & Sind Bank, Dena Bank, United Bank of India and Andhra Bank in credit risk turmoil. IDBI Bank has since been privatized and placed under the control of LIC of India. 5. Primary Survey Findings on 337 Credit & Risk Managers The survey results from a structured questionnaire, which was placed on 337 credit risk professionals in the sampled 12 PSBs, has found a higher level of disintegrated systems and processes, inconsistencies in risk management practices, more subjective risk assessments, lower degree of site inspections and reduced sharing of risk information across multiple lending arrangements in smaller PSBs. Infrastructure Vulnerabilities Identified in Small PSBs The respondent credit managers of small PSBs also find that their banks have larger gaps in risk infrastructure than in the large PSBs. Risk Infrastructure includes: data analytical capabilities, staff trainings, IT management, industry studies etc. 6. Conclusions & Policy Recommendations The problem of managing asset quality in PSBs is grave. RBI repealed all restructuring schemes for commercial bank loans from February, 2018 though for COVID-19 period defaults, restructuring with added strictures has been provided. Indiscriminate rescheduling and restructuring of stressed loans has been found to be the major reason for piling up of bad loans in PSBs. “The problem of managing asset quality in PSBs is grave. RBI repealed all restructuring schemes for commercial bank loans from February, 2018 though for COVID-19 period defaults, restructuring with added strictures has been provided.” Moreover, after the buffer provided through suspension of Insolvency and Bankruptcy Code, 2016 for COVID-19 defaults has ended, serious asset quality deterioration will surface, even for large consolidated PSBs. RBI admits that “The modest GNPA ratio of 7.5 per cent at end- September 2020 veils the strong undercurrent of slippage” (RBI, 2020- Trends & Progress of Banking in India). “Presently, the consolidation in state run banking has improved the capital adequacy ratios and Net Interest Margin. Their financial results for the next two three years will provide more foresight.” Presently, the consolidation in state run banking has improved the capital adequacy ratios and Net Interest Margin. Their financial results for the next two three years will provide more foresight. Along with consolidation, segmentation in banking both in public and private sectors, with differentiated banking services, for example payment banking, wholesale banking, infrastructure banking, global banking, may enhance the core competencies in banking services. Crucial Area of Caution – SME Credit Safeguards: Though, one area of caution remains. Large banks tend to lend to large firms and small banks only tend to small firms (Mkhaiber & Werner, 2021). In India, where small and medium enterprises play a pivotal role in economic growth, sufficient funding for this sector has to be ensured even with consolidation of PSBs in mega global banks. References Arrawatia, R. et al. (2019), ‘Asset Quality Determinants of Indian Banks: Empirical Evidence and Policy Issues’, Journal of Public Affairs-An International Journal, pp. 1-11, [Online], Wiley Online Library, http://doi.org/10.1002/pa.1937 Business Today.In. (2021), “Banking Preview 2021: Consolidation, Privatisation among 5 Themes to Watch Out For”, August 03, http://www.businesstoday.in/industry Gandhi, R. (2016), “Consolidation among Public Sector Banks”, Speech, Mint South Banking Enclave, 22 April, Bangalore, RBI Bulletin May, http://rbidocs.rbi.org.in Gupta, N., Mahakud, J., & McMillan, D. (2020), “Ownership, Bank Size, Capitalization and Bank Performance: Evidence from India”, Cogent Economics & Finance, August, pp. 1-24, http://doi.org/10.1080/23322039.2020.1808282 Mkhaiber, A. & Werner, R.A. (2021), “The Relationship between Bank Size and Propensity to Lend to Small Firms: New Empirical Evidence from a Large Sample”, Journal of International Money and Finance, Vol. 110, http://doi.org/10.1016/j.jimonfin.2020.102281 Nair, S., Gopikumar, V. & Asha, V. (2018), ‘An Empirical Analysis of Banking Sector Efficiency in Emerging Economies’, International Journal of Pure and Applied Mathematics, Vol. 118 No 9, pp. 467-483, http://www.ijpam.eu

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 23–27 (Journal pp. 535–539) INSOLVENCY & BANKRUPTCY • IBC EVOLUTION IBC: A Dynamic Framework, Now Shaping for Version 2 Dr. Ashok Haldia (Chairman, Governing Board of IIIPI of ICAI) Author is Chairman, Governing Board of IIIPI of ICAI. He can be reached at ashokhaldia@hotmail.com and eboard@icai.in. 💡 Executive Summary & Overview The Insolvency and Bankruptcy Code (IBC) 2016 has recently completed five years amidst multiple and varied commentaries in media and otherwise as to whether IBC has been successful or not. While the criticism of IBC seems to be pointing towards its deficiencies, the alternative narrative seems to suggest that critics have not been able to appreciate the IBC’s performance from the right prism. A holistic view is needed to appreciate the salutary aspects of IBC regime in the direction of making it more robust in its next iteration or version 2.0. Read on... 1. IBC – A Showcase Legislation IBC has been considered as showcase legislation and a major economic reform in India, hailed, among others, by the World Bank as reflected in improvement in India’s ‘Ease of Doing Business’ ranking. The founding principle of IBC is to rescue ailing businesses as going concern rather than simply recovering dues through liquidation. Empirical Performance Metrics (Since Inception to June 2021) The promise of IBC framework is reflected in the fact that since inception, realization by Financial Creditors under resolution plans in comparison to liquidation value, is 174%, while the realization by them in comparison to their claims is 39%, much better than that in earlier regime. Total CIRP Initiated 4,541 Cases (By end of June 2021) Closed / Settled 2,859 Cases (~39% withdrawn/settled on appeal) Rescued as Going Concern 396 Businesses (₹ 2.54 Lakh Crore Realized) Liquidated Realization ₹ 1,207 Crore (Against asset value of ₹ 1,195 Cr) So far, 396 business have been rescued through resolution plans from which ₹ 2.54 lakh crore have been realized. This amount is 174% of value of these companies at the time of initiation of the CIRP i.e., liquidation value amounting ₹ 1.46 lakh crore. Furthermore, 254 companies which were liquidated, have yielded ₹ 1,207 crore against their asset value of ₹ 1,195 crore. While these numbers are impressive, the contribution of IBC in bringing about qualitative changes in the industry ecosystem and in particular, relationship between a company and its financial and operational creditors have been enormous and long-lasting. 2. IBC – Evolved and Further Evolving In the initial couple of years, the jurisprudence got settled particularly through judgments bringing clarity on constitutionality of law, roles/responsibilities of different pillars in ecosystem, and primacy of COC’s commercial wisdom. This was aided by timely amendments in the form of, inter alia: Section 29A Disqualification: Debarring existing management to participate in resolution process as applicant. The former amendment proved to be a significant deterrent in altering the psychology of borrowers away from hitherto divine right to continue in the saddle of a distressed corporate. And this behavioural change in fact has resulted in large number of prospective insolvency cases being withdrawn or settled out of court. Real Estate Allottees Recognized as Financial Creditors: Allowing allottees in real-estate project, to participate in resolution process as financial creditors. This latter amendment on the other hand, was an embodiment of public interest being promoted by the economic legislation like IBC in an unprecedented way. During about five years’ period since inception, six amendments in IBC have been promulgated, which indicates complexities involved in implementation of IBC in Indian context on one hand and alacrity of the regulator in squarely responding to those, on the other. The momentum for IBC to adapt to newer emerging realities, is expected to continue in future as well. 3. COVID-19 A Black Swan Event as a Catalyst in Shaping IBC Having begun on a positive note, the IBC regime in India had been gearing up for the next phase comprising cross-border, pre-pack, Individual and group insolvency framework(s) amongst others, when the covid pandemic struck the economy hard as a black swan event, one wave after another and more deadlier. The covid pandemic crippled most businesses resulting in shutdowns, job losses, and labour-migratory challenges. This halted the Indian economy in its tracks, adversely affecting several development agenda of the Government. Macroeconomic & Banking Distress Indicators The recent data of the Ministry of Statistics and Program Implementation reveals that the country’s GDP shrunk by 7.3% in 2020-21. The estimates suggest that about 10 million skilled and non-skilled workers migrated from metros and urban areas to villages. In the context of insolvency regime, these developments meant impending surge of distressed businesses on one hand and least probability of finding a suiter or rescuer as resolution applicant, given the uncertainty and priority for remaining liquid. As an unintended outcome of said predicament, this also meant that more businesses would be pushed into liquidation as against the preferred course of resolution. The small and medium business segment was even more vulnerable in this context. As per an initial estimate the NPAs in Indian banks were likely to nearly double from ~7.5% of gross bank advances in Sept.’20 to ~13.5% in Sept.’21, stung by the twin balance sheet problems, not to talk of consequent cascading impacts. The financial meltdown seemed imminent and drastic efforts were need of the hour. 4. Resilient Response by Stakeholders Upon onslaught by first covid wave and amid the country-wide lockdown, the Government and regulatory bodies launched many counter-offensive measures. Within insolvency resolution ecosystem, the stakeholders tried best to come to terms with harsh reality marred by lack of technological solutions. “Upon onslaught by first covid wave and amid the country-wide lockdown, the Government and regulatory bodies launched many counter-offensive measures. Within insolvency resolution ecosystem, the stakeholders tried best to come to terms with harsh reality marred by lack of technological solutions.” Multi-Pronged Legislative & Judicial Interventions Increase in Default Threshold: The Ministry of Corporate Affairs (MCA), through a notification in March 2020, increased the minimum default from ₹ 1 lakh to ₹ 1 crore for filing insolvency cases. Suspension of Sections 7, 9 & 10: With the promulgation of The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 filing of fresh insolvency cases on account of default due to Covid was prohibited, by suspending Section 7, 9, and 10 of the IBC for a period of six months w.e.f. March 25, 2020. However, the suspension continued till March 24, 2021, through two consecutive extensions. Any default occurring during the said Covid period on or after March 25, 2020 was deemed to be Covid-induced and hence was made ineligible for initiating insolvency during such period. Exclusion of Lockdown Timelines: IBBI came out with clarification in the regulations for excluding Covid period from the mandated timelines under the IBC framework. Virtual Courtrooms & Digitization: Leading from the front, Hon’ble Supreme Court started virtual hearing of cases from March 2020 through videoconferencing and took up about 7,000 cases till June’20. Hon’ble NCLAT started virtual hearing from June 01, 2020, with detailed Standard Operating Procedures (SOP) for online hearing. Subsequently, NCLT benches too resorted to online hearings. MCA initiated implementation of e-courts across all 16 benches of NCLT. Government relaxed timelines for various compliances under Companies Act, and IBBI provided virtual filing/viewing of regulatory forms. RBI Restructuring Frameworks: To ease economic distress and unburden IBC, Reserve Bank of India (RBI) rolled out ‘Resolution Framework for COVID 19-related Stress – Financial Parameters’. During the second wave, RBI announced Resolution Framework 2.0 in May 2021, expanding scope to small businesses after IBC suspension was not extended beyond March 24, 2021. Pre-Packaged Insolvency Resolution Process (PPIRP) for MSMEs: In April 2021, the Government amended IBC via ordinance introducing PPIRP—providing a quicker, cost-effective, and less invasive semi-formal regime allowing out-of-court resolution while preserving statutory sanctity. The minimum threshold for triggering PPIRP for MSMEs was fixed at ₹ 10 lakh (compared to ₹ 1 crore for CIRP). Creation of NARCL (Bad Bank): Government launched National Asset Reconstruction Company Limited (NARCL). Under regular operations, 22 stressed loans amounting to over ₹ 80,000 crore are slated to be transferred from various banks to NARCL for focused resolution including via IBC. 5. The Paradigm Shift Towards IBC 2.0 Amidst the chaotic environment triggered by covid waves, a paradigm shift had been playing out without probably attracting much attention. The public interest is the soul or underlying theme of insolvency law that can be served through ethical conduct of its stakeholders. The pandemic has heightened the imperativeness of public interest and ethics in the minds of stakeholders across the insolvency ecosystem. Moreover, as a parallel narrative, stakeholders across the board including courts, regulators, lenders, professionals, and others resorted to technology as an enabler and a force multiplier, in unimaginably swifter ways. The usage of these solutions though available even earlier, has been advanced by constrains posed by the pandemic. IBC now is poised towards its version 2, having established foothold as per its initial design and made salutary impact both in quantitative and qualitative terms: Digital NCLT & Template Orders: NCLT has embarked on a major initiative to digitize its services, notably e-filing and virtual hearings. As this is work in progress and should continue even during post-Covid period, template-based application and orders would be the way to go. Platform for Distressed Assets (PDA): IPs started using ‘platform for distressed assets’ (PDA), for instance, created by Information Utility, NeSL. Such technological solution enables accessing and managing Record of Default (ROD), end-to-end case management, Virtual Data Room (VDR), e-Voting, and e-auction platforms covering expressions of interest and interim finance. Distressed Asset Market Infrastructure: Development of market for distressed assets in India via information portals (such as Investment Grid platform by Govt. of India), innovative financing products, and institutional structures compatible with financing stressed assets, reinforced by NARCL (Bad Bank). Virtual CoC Meetings: Virtual meetings by lenders as COC members, allowing senior officials from remote locations to participate effectively, thereby enhancing the quality and pace of decisions, supported by compliant document retention and digital storage solutions. Individual, Group & Cross-Border Insolvency: IBC is catapulting into the next phase marked by individual insolvency, group insolvency, and cross-border insolvency frameworks. Government-appointed committees are examining procedural and substantive aspects in alignment with international experience. Individual insolvency will provide significant ‘ease of exit’ and immense professional avenues. Mediation & Negotiated Settlements: Mediation and arbitration in a far more expeditious and transparent manner may become the first and preferred option for stress resolution for MSMEs, and eventually expand to larger corporates. While CIRP was envisaged as a last resort, market realities made it the first preference; pre-pack frameworks and mediation restore out-of-court negotiated settlements. Code of Conduct for CoC Members: In pursuance of value maximization and timeliness, a formal code of conduct for COC members is expected soon, ensuring enhanced trust, accountability, and objectivity in commercial decisions. 6. IIIPI of ICAI – A Prominent Player in Shaping of IBC The Indian Institute of Insolvency Professionals of ICAI (IIIPI) as front-line regulator and the largest IPA in India, has aligned its strategy and work-plans with the changing paradigm, and has now been recognized as a valued partner in IBC framework. IIIPI Institutional Scale & Vision As a body representing more than 60% of IPs having role in managing 75% of the CIRPs so far in the country, IIIPI is cognizant of and is gearing up well to play its developmental role as a front-line regulator and quasi-judicial body in ensuring holistic development of insolvency profession as is reflected in its vision statement: “To be a leading institution for development of an independent, ethical, and world-class insolvency profession responding to needs and expectations of the stakeholders.” IIIPI focused on being a think tank for policy and implementation measures, towards strengthening of IBC and IPs, formulating best practices, apart from capacity building measures including webinars, virtual trainings, web-based discussion forum for members, e-publications, publishing a high-quality quarterly journal, and covid helplines for members. In this direction, very recently, IIIPI presented a report of a roundtable to IBBI in respect of ‘Impact of covid Resurgence on Insolvency Regime’. IIIPI is bracing for IBC version 2.0 with many aces up its sleeves including research initiatives with the research fund being set up, development of best practices to strengthen the insolvency ecosystem, and capacity building programs. 7. Summing Up: The Glass Is Filled and Filling Up In nutshell, IBC has not only been a revolutionary step, but it has revolutionized the entire industrial ecosystem. IBC has virtually become a model law for the world. It is an evolutionary and transformational law as it brings the regime in a phased manner, keeping in view the ground realities and complexities of the Indian economic, industrial, political, and social systems and is poised for next stage of evolution. “IBC has not only been a revolutionary step, but it has revolutionized the entire industrial ecosystem. IBC has virtually become a model law for the world.” Expanding the adoption of technological solutions as such, besides keeping impact of any more Covid waves at bay, could go a long way in improving the dispensation, efficiently and effectively even during post-covid period. Of course, much depends upon the stakeholders and the pillars of IBC, including regulatory bodies and judiciary to take the legacy forward. As acknowledged in the recently released report by parliamentary committee, by allowing closure of non-viable firms, wherever required, the Code enables an entrepreneur to get in and get out of business with ease, undeterred by failure (honest failure for business reasons). In the final analysis and drawing the analogy for IBC’s achievement of its intended objectives, it is neither a glass half full nor half empty, it is in fact a glass which is filled and is filling up. The stakeholders would need to increasingly focus on entire value chain beginning from healthy investment decisions avoiding sickness at the conception stage, to identifying incipient sickness and finally on resolution of distress in a commercial manner under a credible and legally sustainable framework.

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 28–30 (Journal pp. 540–542) Insolvency • Corporate Governance & CIRP Administration Good Governance - A sine qua non in any Corporate Setup (especially under bankruptcy) DS CA. Dhinal Shah The author is a member of the Institute of Chartered Accountants of India. He can be reached at eboard@icai.in “By its very nature, the purpose of a Company is to survive, generate business, and distribute the value for its stakeholders. An important aspect of survival in the corporate ecosystem is ‘governance’. Simply put – governance means the way in which a person/group of person does things. Naturally, what follows is the meaning of good governance, i.e., a manner in which a person/group does things and which is beneficial for all. Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Read on…” Foundational Architecture: Power, Accountability and Stakeholder Trust Corporate Governance fundamentally defines the architecture through which companies are directed, managed, and controlled, and to what ultimate purpose. It establishes an unequivocal delineation of who wields institutional power, who bears accountability, and who executes critical commercial decisions. Commercial enterprises governed by robust corporate governance principles cultivate and sustain enduring trust and satisfaction across the entire spectrum of stakeholders—including customers, vendors, trade suppliers, operational and financial creditors, and equity investors. A comprehensive corporate governance framework is anchored on four non-negotiable pillars: competent leadership, rigorous internal financial controls, an ingrained risk management culture, and transparent accountability to external stakeholders. The Board and executive leadership play an indispensable role in articulating ethical standards, ensuring an appropriate balance of power, avoiding concentration of authority, and maintaining independent decision-making across all group operations. In the modern digital era, effective risk management has grown even more critical as issues surrounding corporate data protection, cloud sovereignty, and cybersecurity threats take center stage. Why Governance Becomes Decisive Under Bankruptcy Within a bankruptcy environment, corporate governance becomes extraordinarily decisive. More often than not, a corporate default in the run-up to insolvency is directly attributable to defective business practices, internal financial mismanagement, and a collapsed governance framework. While occasional genuine business failures arise from exogenous shocks, establishing a disciplined governance framework has never harmed a corporation. While a solvent entity is managed by its Board of Directors under general powers conferred by shareholders and constitutional charters, insolvency abruptly triggers a structural shift in legal control. The Paradigm Shift: From Debtor-in-Possession to Creditor-in-Possession As corporate affairs deteriorate and an enterprise enters payment default, the locus of corporate control undergoes an automatic legal metamorphosis under the Insolvency and Bankruptcy Code (IBC), 2016. Unlike jurisdictions practicing the *“debtor-in-possession”* model (such as Chapter 11 in the United States), Indian insolvency jurisprudence is intentionally designed around the “creditor-in-possession” doctrine. The Bankruptcy Law Reforms Committee (BLRC) Observation: “The limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say.” While baseline compliance stems from mandatory statutory regulations, the proactive governance practices that an enterprise institutes beyond statutory thresholds represent the true boundary separating ordinary firms from exceptional ones. The Art of Balance: Separating the Doer from the Beneficiary The simplest, most elementary axiom of sound governance is separating the doer from the beneficiary of the doer’s actions. In practical corporate administration, this structural separation is institutionalized through six vital operational safeguards: 1. Comprehensive Authority Matrix: Codified financial and administrative delegation thresholds ensuring no single officer exercises unvetted transactional discretion. 2. Committee Governance Structures: Collective executive wisdom is inherently superior to individual bias for commercial procurement and financial outlays. 3. Universal Maker-Checker Controls: Segregation of duties across operational functions where data originators cannot authorize their own transactions. 4. Surprise Internal Control Audits: Unannounced operational audits to identify control lapses, inventory leakage, and cash handling irregularities in real-time. 5. Continuous Policy & Process Review: Iterative updates to standard operating procedures (SOPs) matching evolving market dynamics and regulatory circulars. 6. Cultural Value Inculcation: Embedding ethical behavior and governance discipline deeply into corporate culture so compliance becomes second nature. Life in Default: Mitigating Pre-Bankruptcy Value Dissipation A financial default by a corporation marks the perilous tipping point of a falling house of cards. In the desperate struggle to stave off corporate demise, established internal controls and regulatory compliances are frequently abandoned in favor of crude survival maneuvers. It is precisely during this twilight period of distress that the risk of illicit asset stripping, preferential debt settlements, and fraudulent transactions by errant promoters reaches its apex. Upon admission into the Corporate Insolvency Resolution Process (CIRP), the powers of the Board of Directors are suspended by operation of law. All executive powers, corporate responsibilities, and committee mandates vest immediately in the Resolution Professional (RP). Crucially, the RP must not degenerate into a passive “Compliance Manager”; rather, the RP must actively structure an internal committee architecture mirroring a well-governed Board, maintaining strict checks and balances across operational, financial, and risk dimensions. Statutory Governance Provisions Under the Insolvency and Bankruptcy Code Section 17(1)(d) — Prudent Control Over Financial Institution Accounts: Financial institutions maintaining accounts of the corporate debtor must act exclusively on the instructions of the Interim Resolution Professional (IRP) and furnish all available financial intelligence. With vast control comes solemn fiduciary accountability: the RP must manage corporate cash flows with extraordinary prudence, safeguarding creditor wealth from leakage. Section 17(2)(b) — Regulatory Oversight by IBBI: While the IRP/RP is vested with the entire management of the Corporate Debtor, their authority is subject to statutory boundaries and regulatory restrictions imposed by the Insolvency and Bankruptcy Board of India (IBBI), preventing administrative overreach. Section 17(2)(e) — Strict Personal Liability for Statutory Compliance (“Comply or Pay Up”): The RP bears explicit statutory responsibility for complying with all laws of the land on behalf of the corporate debtor (labor laws, tax filings, environmental consents, factory registrations). Crucially, the law establishes that financial penalties and procedural costs arising from compliance defaults attach personally to the account of the Resolution Professional. Section 21(2) — Disenfranchisement of Related Parties in Committee of Creditors (CoC): To insulate the CoC from conflicts of interest and perverse self-dealing, related-party financial creditors are categorically stripped of all rights of representation, participation, and voting. This statutory firewall guarantees that commercial decisions are made strictly at arm’s length. Section 28 & Sections 43, 45, 50, 66 — Checks on Authority & Clawback of Avoidance Transactions: As William Pitt observed: “Unlimited power corrupts the possessor.” Section 28 curtails the RP’s executive discretion by mandating prior approval of the CoC for major capital actions. Concurrently, Sections 43 (Preferential), 45 (Undervalued), 50 (Extortionate Credit), and 66 (Fraudulent Trading) empower the RP to conduct transaction audits and file avoidance applications before the Hon’ble NCLT to claw back diverted assets. CIRP Governance, Valuation Bidding and Going Concern Protection The maintenance of contemporaneous, verifiable operational records during the CIRP is legally indispensable, enabling reasonable observers to review the commercial rationale of the RP’s decisions. Furthermore, corporate governance during distress directly determines corporate valuation during competitive bidding: Scenario A: Governance Deficits & Bid Discounting When prospective Resolution Applicants encounter systemic compliance defaults, unhedged operational exposures, and regulatory gaps, they aggressively discount their financial bids—calculating substantial future cash outflows to remediate past legacy liabilities. Scenario B: Robust Governance & Value Maximisation Conversely, when a company under CIRP is administered under pristine governance protocols, risk mitigation safeguards, and audit-ready records, incoming bidders compete aggressively, preserving going-concern value and delivering maximum financial recovery to the CoC. Heightened Stakes for Financial Service Providers (FSPs) & Public Entities: Prudent governance is exceptionally paramount for institutions under heightened regulatory supervision, such as Financial Service Providers (FSPs), where operating licenses and statutory charters hinge directly upon real-time regulatory compliance. For enterprises managing public capital, rigorous insolvency governance rebuilds market credibility and public trust—ensuring that the enterprise, once rescued, thrives within the very marketplace where it had earlier defaulted. Conclusion: Inculcating Good Governance Culture In conclusion, the Insolvency and Bankruptcy Code empowers the Resolution Professional to steer the governance framework of the corporate debtor throughout the turbulent distress cycle. It demands the specialized technical and fiduciary skill of the RP to execute CIRP administration in a transparent, independent, and value-accretive manner. “A tad more compliance never affected anyone – infact, it only creates an ecosystem where culturally the stakeholders get habituated to follow the principles of good governance.” The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) November 2021 Issue • Vol. 70 • No. 5 • pp. 28–30 (Journal pp. 540–542) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 31–36 (Journal pp. 543–548) INSOLVENCY & BANKRUPTCY • MSME RESOLUTION MSME: Prepack Insolvency a New Avenue CA. Nipun Singhvi (Member of the Institute of Chartered Accountants of India) The author is a member of the Institute. He can be reached at canipunsinghvi@gmail.com and eboard@icai.in. 💡 Executive Summary & Core Concept The pre-packaged insolvency is an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of insolvency professional. The Pre-packaged Insolvency Resolution Process, referred herein as PIRP, is an alternative available to the Corporate Insolvency Resolution Process, available under Insolvency and Bankruptcy Code, 2016. It was introduced by the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 for the Micro, Small and Medium Enterprises, referred to as MSME’s. This is an alternative process available only to MSME’s, instead of the Corporate Insolvency Resolution Process, which can be financially draining, extremely time consuming along with litigation involved. This particular structure has been devised primarily for the MSME’s for providing financial relief, it is also quicker, and more economical, considering the limited time available for completing the entirety of the process. Also, the business is not disrupted to a great extent under this process. Read on... 1. CIRP v. PIRP: Comparative Interplay & Filing Safeguards CIRP cannot be filed in a case where the company is going through the PIRP process. The financial creditors or the operational creditors can’t file PIRP. The ordinance has provided that no PIRP can be initiated within a period of 3 years of undergoing one PIRP. Even in the case where a CIRP has been completed, PIRP cannot be initiated within 3 years. Therefore, the corporate Debtor is to cautiously use the opportunity to file PIRP, only in cases where relief in financial stress of the Company is required. This protection was provided to avoid repeated attempts of initiating PIRP by the corporate Debtor/ promoter. “CIRP cannot be filed in a case where the company is going through the PIRP process. The financial creditors or the operational creditors can’t file PIRP.” Fourteen-Day Priority Rule: If any PIRP application is pending, no application for initiating CIRP can be accepted by the adjudicating authority. If a CIRP application is pending, within 14 days PIRP application can be filed and will get preference. And if the CIRP application is pending and PIRP application is filed after 14 days, then application for initiating CIRP will be attended and disposed of prior to the other application being taken up. 2. Application and PIRP Process 1. Eligibility Criteria for Application of PIRP (Section 54A) In order to make an application for PIRP, the Corporate Debtor (CD) ought to fulfil the requirements laid down in Section 54A of the Code. These criteria inter alia include: No prior CIRP or liquidation should be admitted against the CD; Financial Creditors (not being related party of the CD) not having less than 66% of the financial debt of the CD have accepted the proposal of an Insolvency Professional to be appointed as the Resolution Professional for PIRP; A specific declaration from the directors/partners of the CD declaring the CD’s intention to initiate PIRP. The Resolution Professional has to file a report confirming that the CD has fulfilled the requirements under Section 54A of the Code. Declaration, special resolution, and base resolution plan must be provided to financial creditors before taking their approval. In addition, the minimum amount of default is ₹ 10 lakh, which can be raised up to ₹ 1 crore by the Central Government. 2. Requirement to File an Application Before Adjudicating Authority The Corporate Debtor must meet the requirement under Section 54A thereafter it becomes a Corporate Applicant and approaches the Adjudicating Authority for initiation of PIRP. The Corporate Applicant shall along with application furnish: declaration, special resolution or resolution and the approval of financial creditors; name and written consent of the IP proposed to be appointed as RP as approved under Section 54A(2)(e) and his report under Section 54B(1)(a); Declaration regarding existence of any avoidance transactions falling under Chapter III (Preferential, undervalued and extortionate transactions) or fraudulent or wrongful trading under Chapter VI; information relating to books of account of the corporate debtor and such other documents relating to such period. The Adjudicating Authority must decide the application of PIRP within 14 days of receipt of application. 3. Strict Timelines for Completion of PIRP Process 120-Day Overall Horizon: The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty (120) days from the pre-packaged insolvency commencement date. 90-Day Plan Submission Window: The resolution professional shall submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority under sub-section (4) or sub-section (12), as the case may be, of Section 54K, within a period of ninety (90) days from the pre-packaged insolvency commencement date. Termination on Non-Approval: Where no resolution plan is approved by the CoC within the prescribed period, the resolution professional shall, on the day after the expiry of such time period, file an application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution process in such form and manner as may be specified. 4. PIRP Procedural Execution & Debtor-in-Possession Model Moratorium: The moratorium shall be applicable mutatis mutandis as per Section 14(3) of the IB Code, 2016 till the end of PIRP. The Adjudicating Authority shall appoint RP as named in the application or recommend the name from IBBI panel. Public Announcement: The Adjudicating Authority shall cause public announcement of the PIRP of the Corporate Debtor and the RP shall make public announcement within 2 days of initiation of PIRP. Essential Goods and Services: Essential goods and services shall mean electricity, water, telecommunication services and information technology services to the extent these are not a direct input to the output produced or supplied by the corporate debtor. Debtor-in-Possession & Claims Submission (Section 54H): The corporate debtor shall, within two days of the pre-packaged insolvency commencement date, submit to the resolution professional a list of claims along with details of the respective creditors, their security interests and guarantees and a preliminary information memorandum containing information relevant for formulating a resolution plan. The management of affairs of the Corporate Debtor shall vest with the Board of Directors or partners, and such persons shall keep the operations of Corporate Debtor as going concern along with discharging their statutory or contractual rights and obligations in relation to Corporate Debtor. Constitution of CoC: The Resolution Professional shall, within seven (7) days of the pre-packaged insolvency commencement date, constitute a committee of creditors, based on the list of claims confirmed under clause (a) of sub-section (2) of Section 54F, and the provisions of Section 21 except sub-section (1) shall mutatis mutandis apply. 3. Duties and Powers of the Resolution Professional (RP) Duties of RP During PIRP: It is the duty of RP to confirm the list of claims submitted by the corporate debtor under Section 54G and inform creditors regarding their claims as confirmed along with maintaining an updated list of claims. RP is required to monitor management of the affairs of the corporate debtor and constitute the committee of creditors and convene and attend all its meetings. RP has obligation to prepare the information memorandum on the basis of the preliminary information memorandum submitted under Section 54G and any other relevant information and file applications for avoidance of transactions (if any) under Chapter III or fraudulent or wrongful trading under Chapter VI. The resolution professional shall ascertain class(es) of creditors, if any for representation of creditors in a class ascertained under sub-regulation (1) of Regulation 15 in the committee, identify three insolvency professionals who are not relatives or related parties of the applicant or the resolution professional having their addresses, as registered with the Board, in the State or Union territory, as the case may be, which has the highest number of creditors in the class as per their addresses in the records of the corporate debtor. Powers of RP During PIRP: RP has access to all books of account, records and information available with the corporate debtor along with electronic records of the corporate debtor from an information utility having financial information of the corporate debtor. RP has access to the books of account, records and other relevant documents of the corporate debtor available with Government authorities, statutory auditors, and accountants. RP has power to attend meetings of members, Board of Directors and committee of directors, or partners and appoint accountants, legal or other professionals. RP is empowered to collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor and the existence of any transactions that may be within the scope of provisions relating to avoidance of transactions under Chapter III or fraudulent or wrongful trading under Chapter VI. Financial institutions are obligated to supply relevant documents to RP and seek cooperation from its promoters and any other person associated with the management of the corporate debtor and for such purpose sub-sections (2) and (3) of Section 19 shall, mutatis mutandis apply, in relation to the proceedings. Vesting of Management with RP (Section 54J): Management can be vested with RP in cases where the Adjudicating Authority is of the view that the affairs of the Corporate Debtor have been conducted in a fraudulent manner or/and there is gross mismanagement of the affairs of the Corporate Debtor. The CoC must approve the same with voting of 66%. 4. Role and Composition of the Committee of Creditors (CoC) The RP shall convene meetings of the financial creditors, who are not related parties of the corporate debtor, and financial creditors who are not related parties of the corporate debtor and have not less than ten percent (10%) of the value of the total financial debt of such creditors may propose names of insolvency professionals for the purposes of clause (e) of sub-section (2) of Section 54A. Where the corporate debtor has only creditors in a class and no other financial creditor who are not related parties of the corporate debtor, the committee shall consist of only the authorised representative(s). Where the corporate debtor has no financial debt or all financial creditors are related parties, the committee shall consist of operational creditors, being not related to the corporate debtor, as ten largest operational creditors by value. It should also consist of one representative elected by all workmen and one representative elected by all employees. Quorum: Meeting of the committee shall quorate if members of the committee representing at least thirty-three percent (33%) of the voting share are present either in person or by video conferencing or other audio and visual means. The meeting can be conducted through video conferencing as well. 5. Statutory Valuation Standards Valuation of Corporate Debtor is based on Fair Value and Liquidation Value which must be in accordance with internationally accepted valuation standards after physical verification of the inventory and fixed assets of the Corporate Debtor. The average of the value determined by the two registered valuers shall be considered the fair value or the liquidation value. Confidentiality Undertaking: The resolution professional shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person. 6. Approval of Plan, Termination & Migration to CIRP Base Resolution Plan & Promoter Equity Dilution Corporate Debtor shall submit base resolution plan within two days of PIRP commencement date and RP must present the same to the CoC. CoC may consider base resolution plan or invite prospective resolution applicants. Corporate Debtor may file plan individually or jointly with any other person. While considering the feasibility and viability of a resolution plan, where the resolution plan submitted by the corporate debtor provides for impairment of claim of operational creditors owed by the corporate debtor, the committee of creditors may require the promoters of the corporate debtor to dilute their shareholding or voting or control rights in the corporate debtor. While the above stated dilution is preferable, the same is not mandatory. If plan does not provide for such dilution the CoC must record reasons for the same. Claims shall be considered to be impaired where the resolution plan does not provide for the full payment of the confirmed claims as per the updated list of claims maintained by the resolution professional. Process for Prospective Resolution Applicants & Swiss Challenge The resolution applicants submitting resolution plans pursuant to invitation, shall fulfil such criteria as may be laid down by the resolution professional with the approval of the committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor. The resolution plans and the base resolution plan, submitted under this section shall conform to the requirements referred to in sub-sections (1) and (2) of Section 30, and the provisions of sub-sections (1), (2) and (5) of Section 30 along with Section 29 shall, mutatis mutandis apply, to the proceedings under this Chapter. Where CoC decides that the resolution plan is better than the base resolution plan, the same shall be subject to approval of CoC and Adjudicating Authority. The plan must be approved by requisite 66% voting. It is a mandate upon CoC to look into feasibility and viability, the manner of distribution proposed, taking into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53, including the priority and value of the security interest of a secured creditor. Performance Security & Compliance: The resolution professional shall require the resolution applicant, in case its resolution plan is approved under subsection (13) of Section 54K, to provide a performance security within the time specified therein and such performance security shall stand forfeited if the resolution applicant of such plan, after its approval by the Adjudicating Authority, fails to implement or contributes to the failure of implementation of that plan in accordance with the terms of the plan and its implementation schedule. The resolution plan must comply with Regulation 44 and Regulation 45 of PIRP Regulations. Role of Adjudicating Authority (AA) While Approving Resolution Plan The AA shall decide upon the resolution plan application within 30 days of receipt of resolution plan. The AA must satisfy itself that the plan has effective provision for its effective implementation. The order of approval under sub-section (1) shall have such effect as provided under sub-sections (1), (3) and (4) of Section 31, which shall, mutatis mutandis apply, to the proceedings under this Chapter. Where the Adjudicating Authority is satisfied that the resolution plan does not conform to the requirements referred to in sub-section (1) of Section 54L, it may, within thirty days of the receipt of such resolution plan, by an order, reject the resolution plan and pass an order under Section 54N. Where plan of Corporate Debtor is approved but affairs of the Corporate Debtor has been handed over to RP vide order of AA under Section 54J, AA is required to ensure that the management has been changed by way of plan to a person who was not promoter of the Corporate Debtor. Termination of PIRP Where the resolution plan selected for approval under sub-section (11) of Section 54K is not approved by the committee of creditors, the resolution professional shall file an application for termination of the pre-packaged insolvency resolution process. The Adjudicating Authority shall, within thirty days of the date of such application, by an order: (i) terminate the pre-packaged insolvency resolution process; and (ii) provide for the manner of continuation of proceedings initiated for avoidance of transactions under Chapter III or proceedings initiated under Section 66 and Section 67A, if any. Initiation of CIRP (Migration) CoC may after the initiation of PIRP but before approval of resolution plan by a vote of not less than sixty-six per cent (66%) of the voting shares, resolve to initiate a corporate insolvency resolution process in respect of the corporate debtor, if eligible under Chapter II. RP must intimate AA of the decision of CoC and AA must within 30 days pass an order to terminate PIRP, initiate CIRP against Corporate Debtor, and appoint IRP as under Section 54E(1)(b). The PIRP cost shall be made part of the CIRP cost. Initiation of CIRP shall be deemed to be an order of admission under Section 7/9/10 of the IB Code, 2016. 7. Statutory Schedule of Regulatory Forms under PIRP Nature & Purpose of Filing Prescribed Form Number / Fee Filing of Application before Adjudicating Authority Form-1 along with a fee of ₹ 15,000 Written consent of RP Form P1 List of Creditors Form P2 Approval of terms of appointment of RP Form P3 Approval for initiating PIRP Form P4 Authorised representative representing class of creditors Form P5 Declaration under Section 54A(2)(f) Form P6 Declaration under Section 54C(3)(c) Form P7 Report prepared by RP Form P8 Public Announcement Form P9 Corporate Debtor to submit list of claims Form P10 Brief particulars of resolution plan Form P11 Compliance Certificate Form P12 Application for termination of PIRP Form P13 Application for vesting management with Corporate Debtor Form P14 8. Conclusion: Pre-Packs as a Hybrid Reform for MSMEs Pre-packs offer a middle way alternative, as a unique mechanism which seeks to combine benefits of informal workouts and legal recognition. Essentially, pre-packs are hybrid mechanisms allowing out-of-court resolutions to be recognised under insolvency law with appropriate safeguards for all stakeholders. PIRP is more beneficial for eligible MSME vis-a-vis CIRP as the objective of maximisation of assets or revival of the Corporate Debtor was getting marred due to limited takers. The hurdle of disqualification under Section 29A of the IB Code, 2016 is relaxed by way of PIRP and therefore giving opportunity to the existing management to revive the Corporate Debtor.

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 37–45 (Journal pp. 549–557) Insolvency • Corporate Governance & Related Party Transactions Do Transactions with Related Parties influence Firm Value and Firm Continuity: Four Case Studies of Large Listed Entities in India BD CA. Binayak Datta Fellow-Member of the Institute of Chartered Accountants of India. Contact: datta.binayak@icai.org PD CA. Purva Hegde Desai Professor, Goa Business School & Program Director, Goa University. Contact: eboard@icai.in “The last two decades have seen several large corporate entities internationally as well as in India, failing unsuspecting non-promoter stakeholders, taking them completely by surprise. On investigations, it was most often found that corporate governance had failed. In most cases, especially in India, expropriations were alleged through a network of related parties, going undetected because of poor corporate governance practices. This article studies whether transactions with related parties could impact firm values and firm continuity. The four cases of leading corporates studied here do reveal an inverse relationship between volume of related party transactions and firm value and firm continuity. Read on…” Introduction: Anatomizing Corporate Insolvencies & Expropriation This empirical investigation examines the systemic effects of the volume of Related Party Transactions (RPTs) on firm valuation and corporate continuity. Over the past two decades (2001–2020), an unprecedented wave of massive corporate insolvencies caught institutional lenders, minority shareholders, and statutory regulators by complete surprise. A rigorous post-mortem of these collapses demonstrates a striking common denominator: the breakdown of internal corporate governance safeguards. A crucial structural divergence exists between corporate failures in Western developed markets and the Indian economic landscape: Corporate Failure Drivers in Western Economies Aggressive financial statement window dressing and revenue smoothing. Unapproved insider trading and concealed executive remuneration schemes. Creation and transfer of sub-prime structured toxic debt assets to balance sheets. Complex derivative speculation unhedged against interest-rate shocks. Corporate Failure Drivers in Indian Listed Corporates Tunnelling & Siphoning: Expropriation of minority capital through a labyrinth of related entities. Round Tripping & Teeming-and-Lading: Artificial inflation of turnover through cyclical invoice discounting. Evergreening & Write-Offs: Rolling over aged inter-corporate deposits before formal write-offs or distressed mergers. Fraudulent Borrowings: Raising credit against fake Letters of Undertaking (LoUs) lacking underlying commercial goods. Capital Misallocation: Diverting low-cost bank loans into speculative, non-core promoter-owned ventures. In response to these systemic vulnerabilities, Indian regulators instituted aggressive compliance frameworks—under the Companies Act 2013, SEBI (LODR) Regulations 2015, and Indian Accounting Standard (Ind AS) 24—imposing rigorous audit committee approvals, mandatory shareholder resolutions for material RPTs exceeding 10% of annual consolidated turnover, and exhaustive disclosures of Key Managerial Personnel (KMP) and Significant Beneficial Ownership (SBO). Research Objectives, Categorization & Altman Z-Score Model Core Research Objectives To examine whether high volumes of transactions with related parties should be subjected to heightened statutory scrutiny as primary conduits of corporate governance failure that erode Firm Value (Price-to-Book Ratio, Absolute Book Value) and destroy Firm Continuity (Altman’s Zed Score). To evaluate whether the impact of RPTs differs materially based on corporate ownership and governance structures: promoter-family driven versus professionally-managed enterprises. Category A: Promoter-Driven (In Default) Enterprises where family promoters exercise controlling business authority and the entity has defaulted on credit obligations (Company A1 and Company A2). Category B: Promoter-Driven (No Default) Enterprises where family promoters control management decisions with no historical record of debt default (Company B1). Category C: Professionally Managed Large conglomerates without promoter-family dominance, administered entirely by professional executives (Company C1). Altman’s Zed Score (Zeta) Formulation & Distress Thresholds Firm continuity is empirically quantified using Edward Altman’s multi-factor bankruptcy prediction model (Altman, 2018), weighting five fundamental parameters of operational discipline and balance sheet strength: Zeta = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 0.999(X5) X1: Working Capital / Total Assets X2: Retained Earnings / Total Assets X3: EBIT / Total Assets X4: Market Value of Equity / Total Liabilities X5: Net Sales / Total Assets Z > 2.99: “Safe Zone” 1.81 < Z < 2.99: “Grey Zone” Z < 1.81: “Distress Zone” (Bankruptcy Probable) Case Study 1: Company A1 (Category A – Basic Manufacturing & Auto Steel Giant) Company A1 was one of India’s premier new-age basic steel manufacturing champions catering to the automobile industry, reporting annual turnover of approximately Rs 13,000 crores with a robust 5-year CAGR of 10.3% (against the industry benchmark of 5.2% per IBEF). Notwithstanding a booming domestic automotive market, when asset valuation was conducted in FY 2017-18, an astonishing impairment of Rs 22,380 crores had materialized. Bizarrely, commercial banks had extended fresh credit lines of Rs 18,000 crores despite existing payment defaults exceeding Rs 6,000 crores. Creditors initiated CIRP under the IBC in 2016, and the entity was acquired by a competing industrial conglomerate under an NCLT resolution plan in 2017. Table 1.1: Company A1 Financial & Governance Performance (Standalone) Year RPT (% Turnover) Defaults (%) EV (Rs Cr) M-Cap (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2014-15 6.5% 3.2% 45,828 5,125 7,378 0.69 0.50 (Distress) 2015-16 7.5% 5.0% 48,234 1,133 4,171 0.27 0.39 (Distress) 2016-17 6.6% 11.3% 57,791 1,000 -1,616 -0.62 0.34 (Distress) 2017-18# 3.5%# Resolved# 64,957 1,466 -26,432 -0.06 -0.15 (Terminal) # Note: In 2017-18, the company was taken over through NCLT; defaults were cleared by the acquirer. RPT reduction reflected post-takeover clean-up. Table 1.2: Company A1 Consolidated Metrics Year EV (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2014-15 45,926 7,049 0.73 0.52 2015-16 48,544 3,847 0.29 0.54 2016-17 57,604 -1,573 -0.64 0.44 2017-18# 64,952 -26,079 -0.06 -1.96 Forensic Governance Audit Findings (Company A1): Purchases from related parties jumped 65% within two years. Unsecured advances granted to related parties amounted to Rs 240 crores in a single year, when total operational cash flow generated across the entire enterprise was merely Rs 752 crores. Enterprise Value expanded not through organic earnings, but due to debt accumulation while market capitalization crashed by 70%, completely destroying shareholder equity. Case Study 2: Company B1 (Category B – Family-Controlled Auto OEM Champion) Company B1 represents India’s largest vertically integrated commercial manufacturing enterprise in its segment, recording standalone turnover exceeding Rs 43,000 crores. Like Company A1, Company B1 sits atop an intricate web of over 100 related parties, joint ventures, and subsidiaries. Crucially, while Company B1 has never defaulted on its banking obligations, its financial data reveals severe underlying distress driven by aggressive capital diversion. Table 2.1: Company B1 Financial & Governance Performance (Standalone) Year RPT (% Turnover) Defaults EV (Rs Cr) M-Cap (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2015-16 8.0% 0.0% 1,84,097 1,62,710 14,402 11.30 3.19 (Safe) 2016-17 10.7% 0.0% 1,47,259 1,31,651 22,767 5.78 3.54 (Safe) 2017-18 9.3% 0.0% 1,65,757 1,46,962 21,027 6.99 3.02 (Safe) 2018-19 (P1) 9.6% 0.0% 1,53,989 1,36,547 19,769 6.91 3.06 (Safe) 2018-19 (P2) 10.6% 0.0% 90,861 73,104 21,761 3.36 2.41 (Grey) 2019-20 9.2% 0.0% 74,316 51,503 17,946 2.87 0.84 (Distress!) Table 2.2: Company B1 Consolidated Metrics (Collapse into Distress Zone) Year EV (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2015-16 2,32,632 54,251 3.00 1.85 (Grey) 2016-17 1,99,078 78,699 1.67 1.58 (Distress) 2017-18 2,42,057 56,767 2.59 1.71 (Distress) 2018-19 (P1) 2,19,775 94,262 1.45 1.47 (Distress) 2018-19 (P2) 2,07,826 62,163 1.18 0.95 (Distress) 2019-20 2,18,260 59,060 0.87 1.04 (Distress) The Pre-Bankruptcy Anomaly (Company B1): Despite the Indian auto market enjoying unprecedented boom conditions from 2014 to 2018, Company B1 suffered relentless valuation degradation: Market-to-Book plunged from 11.30 to 2.87, and standalone Altman Zeta collapsed from 3.19 (Safe) to 0.84 (Distress) in 2019-20, well before COVID-19. In consolidated accounts, Altman Zeta remained trapped in the Distress Zone for five consecutive years. Despite maintaining zero bank defaults, Company B1 posted negative operational cash flow of Rs 1,455 crores and negative investing cash flow of Rs 4,718 crores—proving that its Rs 25,000 crore debt burden is fundamentally unsustainable. Case Study 3: Company C1 (Category C – Professional E&C Conglomerate) Company C1 is one of Asia’s largest vertically integrated Engineering & Construction (E&C) infrastructure conglomerates (spanning defence systems, heavy engineering, civil infrastructure, and industrial machinery). It reported annual turnover of Rs 82,000 crores on an asset base of Rs 1,41,000 crores, maintaining an extensive network of over 140 related entities and Special Purpose Vehicles (SPVs). Table 3.1: Company C1 Financial & Governance Performance (Standalone) Year RPT (% Turnover) Defaults EV (Rs Cr) M-Cap (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2015-16 18.8% 0.0% 1,57,694 1,46,191 36,404 4.02 3.01 (Safe) 2016-17 18.4% 0.0% 149,510 137,462 41,559 3.31 2.70 (Grey) 2017-18 12.7% 0.0% 142,040 133,420 45,313 2.94 2.69 (Grey) 2018-19 (P1) 13.9% 0.0% 187,235 179,862 48,600 3.70 2.78 (Grey) 2018-19 (P2) 20.7% 0.0% 195,087 185,821 49,561 3.75 2.71 (Grey) 2019-20 11.0% 0.0% 2,12,501 1,89,903 51,528 3.69 2.35 (Grey) Table 3.2: Company C1 Consolidated Metrics Year RPT (% Turnover) EV (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2014-15 18.8% 2,63,187 37,449 3.90 1.49 2015-16 18.4% 2,78,184 40,012 3.44 1.32 2016-17 12.7% 2,28,900 50,299 2.65 1.60 2017-18 13.9% 2,85,752 57,185 3.15 1.64 2018-19 20.7% 3,05,219 65,804 2.82 1.64 2019-20 11.0% 3,21,227 63,723 2.98 1.55 Why Professional Governance Insulated Company C1: Unlike family-run entities where RPTs diverted liquidity into promoter pet projects, Company C1 deployed RPTs exclusively into core synergic SPVs (megaproject joint ventures, port/highway concessions). Although these infrastructure assets have long gestation cycles and high working capital intensity (depressing immediate standalone Altman Zeta), Book Value expanded relentlessly from Rs 36,404 crores to Rs 51,528 crores, and market capitalization rose by 30% over six years as related party exposure normalized. Case Study 4: Company A2 (Category A – Blue-Chip Domestic Aviation Giant) Company A2 was India’s iconic blue-chip private airline carrier, at its peak commanding over 400 scheduled daily flights across 70 destinations, generating annual revenues of Rs 23,000 crores on an asset base of Rs 12,000 crores. However, continuous RPT transactions with promoter-controlled overseas entities and subsidiary cross-subsidization rapidly precipitated severe distress. Currently, over 82% of its debt is in default; operations were suspended in April 2019, creditors filed under IBC in 2018, and a resolution plan was approved in October 2020. Table 4.1: Company A2 Financial & Governance Performance (Standalone) Year RPT (% Turnover) Defaults EV (Rs Cr) M-Cap (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2014-15 16.8% 0.9% 14,434 3,469 -4,514 -0.77 1.34 2015-16 26.0% 0.0% 15,184 4,664 -8,015 -0.58 2.20 2016-17 14.8% 0.0% 13,871 5,398 -6,584 -0.82 2.33 2017-18 17.5% 0.0% 16,112 7,938 -7,550 -1.05 1.67 2018-19 19.0% 16.6% 10,482 2,774 -12,773 -0.22 -0.88 2019-20## 136.1% 82.6% 9,164 249 -15,636 -0.02 -3.24 (Terminal) ## Note: In 2019-20, flight operations were fully suspended; RPT percentage skyrocketed mathematically because operating turnover evaporated while legacy related party charges accrued. Table 4.2: Company A2 Consolidated Metrics Year RPT (% Turnover) EV (Rs Cr) BV (Rs Cr) P:B Ratio Altman Zeta 2014-15 16.8% 15,070 -6,379 -0.54 1.24 2015-16 26.0% 14,514 -8,055 -0.58 2.12 2016-17 14.8% 15,084 -6,613 -0.82 2.77 2017-18 17.5% 16,131 -7,212 -1.10 2.34 2018-19 19.0% Consolidated Financials not published 2019-20## 136.1% Consolidated Financials not published Systemic Governance Breaches (Company A2): Company A2 exhibited persistent, chronic RPT volumes with a median of 17.5%—substantially breaching the statutory 10% materiality ceiling established by SEBI LODR. Negative net worth was perpetual, and the Market-to-Book ratio deteriorated relentlessly. Standalone Altman Zeta plummeted to -3.24 in 2019-20, reflecting complete commercial insolvency. Cross-Case Comparative Synthesis: What Was Common Across the Cases? 1. RPT Growth Outpaced Organic Business Activities: Across all three family-controlled entities (A1, A2, and B1), the retrospective 6-year volume of related party transactions expanded substantially faster than baseline operational revenue growth. Only in professional Company C1 was RPT growth strategically controlled. 2. Absence of Group Synergy or Productive Expansion: RPT escalations failed to produce corresponding increases in consolidated earnings, margins, or market share. Related parties functioned not as operational catalysts, but as conduits for capital draining. 3. Debt Escalation and Unsustainable Cash Burn: Default rates climbed from 3% to 11.3% in A1, and reached 82.6% in A2. In Company B1, despite having zero recorded defaults, operations consumed Rs 1,455 crores in operating cash and Rs 4,718 crores in investing cash—rendering its Rs 25,000 crore debt load unserviceable under distress. 4. Inherent Inverse Link Between RPT Volume and Firm Value: In all four corporate cases, a conclusive inverse relationship was documented between RPT volume and the Price-to-Book (P:B) Ratio. Similarly, Book Value per share was systematically eroded in family-controlled entities whenever RPTs expanded. 5. Destruction of Firm Continuity (Altman Zeta Collapse): In all three family-controlled firms, Altman’s Zed Score deteriorated continuously. Even the strongest family-controlled entity (B1) saw its Zeta plunge below the 1.81 threshold into the Distress Zone. In stark contrast, professionally managed C1 maintained a resilient, operationally sound consolidated Z-Score. “Family-controlled companies have generally high levels of related party transactions, which when they increase disproportionately over a given period, can cause unsustainable financial health – in case of weaker ones, (with negative book values of equity) can result in even defaults and insolvency.” Empirical Conclusions & Institutional Governance Imperatives The cross-sectional findings from these four corporate empires yield four foundational conclusions for institutional investors, credit rating agencies, bank lenders, and insolvency professionals: 1. Disproportionate RPTs as Early Warning Signals: High levels of related party transactions that outpace core business revenue represent the most reliable pre-insolvency red flag. In entities with leveraged balance sheets, RPT surges inevitably culminate in negative book values, severe impairment write-downs, and commercial default. 2. The Illusory Nature of Short-Term Group Financing: While family promoters can artificially prop up distressed group entities through intra-group advances in the short run (as demonstrated in B1), this comes at crippling long-term costs to firm value, dragging the parent entity directly into the insolvency distress zone. 3. Structural Quality of Related Parties Dictates Longevity: The qualitative nature of the related party is paramount. In professionally-run Company C1, RPTs were confined strictly to core, synergistic infrastructure SPVs with high-rated long-term cash flow visibility. In family-controlled entities, RPTs drained cash into speculative non-core ventures disconnected from core competencies. 4. Corporate Governance as the Sine Qua Non: Ultimately, long-term firm value and enterprise continuity cannot survive on market momentum alone. They require a rigorous, enforceable corporate governance framework—principally anchored on independent audit committee oversight, robust arm’s length validation, and strict materiality ceilings on related party transactions. “It is ultimately firm value and firm continuity that a company works towards to sustain itself in the long run and it is important that it does so within proper and adequate corporate governance framework, particularly one of its most important drivers – that of transactions with related parties.” The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) November 2021 Issue • Vol. 70 • No. 5 • pp. 37–45 (Journal pp. 549–557) Authors Contact: datta.binayak@icai.org | eboard@icai.in

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 46–49 (Journal pp. 558–561) TAXATION • DIRECT TAX & COMPLIANCE All You Need to Know About Section 206AB and 206CCA CA. Umra Saleem (Member of the Institute of Chartered Accountants of India) The author is a member of the Institute. She can be reached at caumra08@gmail.com and eboard@icai.in. 💡 Executive Summary & Legislative Intent The objective behind this article is to discuss the two newly inserted sections 206AB and 206CCA of the Income-tax Act 1961 vide Finance Act, 2021. Out of the several proposals at the presentation of Budget 2021, the amendment which caught special attention was the proposal of the insertion of a new Section 206AB and Section 206CCA i.e., TDS/TCS at higher rates in case of non-filers of Income Tax Returns. The motive behind introducing these two sections is to ensure the filing of return of income by those persons who have suffered a reasonable amount of TDS/TCS. This amendment will take effect from 1st July 2021. This article presents detailed discussions with examples to get a clear understanding of these new sections. Read on… 1. Introduction: Policy Genesis & Statutory Background The finance budget was presented on 1st February 2021 by our Honourable Finance Minister, and several amendments in various sections of the Income Tax legislation were proposed. Out of the several proposals at the time of the presentation of the Budget 2021, the amendment which caught special attention was the proposal for the insertion of a new section 206AB and section 206CCA i.e., TDS/TCS at higher rates in case of non-filers of Income Tax Returns. At present, Section 206AA of the Income-tax Act, 1961, already provides for a higher rate of TDS for not furnishing PAN details. Similarly, section 206CC of the Income-tax Act, 1961 provides for a higher rate of TCS for not furnishing PAN information. The motive behind introducing these two sections is to ensure the filing of return of income by those persons who have suffered a reasonable amount of TDS/TCS. This section provides for the higher rate of TDS and TCS respectively for those deductees, who had not filed their Income Tax Returns for both assessment years, i.e., relevant to the two previous years which are immediately before the previous year in which tax is required to be deducted or collected. Effective Date of Enforcement: This amendment takes effect from 1st July 2021. 2. Verbatim Statutory Texts: Section 206AB and Section 206CCA Text of Section 206AB: Special Provision for Deduction of Tax at Source for Non-Filers of Income Tax Return (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than sections 192, 192A, 194B, 194BB, 194LBC, or 194N on any sum or income or the amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely: (i) at twice the rate specified in the relevant provision of the Act; or (ii) at twice the rate or rates in force; or (iii) at the rate of five percent. (2) If the provisions of Section 206AA are applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and Section 206AA. (3) For this section “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately before the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years: Provided that the specified person shall not include a non-resident, who does not have a permanent establishment (PE) in India. Explanation: For this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. Text of Section 206CCA: Special Provision for Collection of Tax at Source for Non-Filers of Income Tax Return (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by a person (hereafter referred to as collectee) from a specified person, the tax shall be collected at the higher of the following two rates, namely: (i) at twice the rate specified in the relevant provision of the Act; or (ii) at the rate of five percent. (2) If the provisions of Section 206CC apply to a specified person, in addition to the provisions of this section, the tax shall be collected at the higher one of the two rates provided in this section and Section 206CC. (3) For this section, “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately before the previous year in which tax is required to be collected, for which the time limit of filing return of income under sub-section (1) of Section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years: Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India. 3. In-Depth Analysis of Section 206AB and 206CCA This section proposes to penalize a person for not filing a return of income. It provides that, if an assessee fails to file his return of income for a specified period, the tax will be deductible or collected at higher rates. Income-tax Act already contains two similar provisions—Section 206AA and Section 206CC. As per these provisions, if the deductee or collectee fails to provide his Permanent Account Number (PAN), then tax at the higher rate of 20% will be deducted or collected. As per the memorandum of the Finance Bill 2021, explaining the provisions, has stated that as the provisions of Section 206AA and 206CC have served their purpose in ensuring obtaining and furnishing of PAN by the various persons. Therefore, there is a need to have similar provisions to ensure the filing of return of income by that person who has incurred a reasonable amount of TDS/TCS. Consequent upon which, the Finance Act 2021, has proposed to insert two sections 206AB and 206CCA, with effect from 01.07.2021. These sections provide for deduction or collection of tax at higher rates in the case of non-filers of Income-tax Return. Now, to find out the relevant rate of TDS or TCS, it will be likely to solve the complex theorems of TDS/TCS. 4. Criteria to Determine ‘Specified Person’ This provision applies to a specified person only. The Section 206AB(3) provides the following conditions to classify a recipient as a ‘specified person’: The person who has not filed his return of income for 2 assessment years relevant to the previous years immediately prior to the previous year in which tax is required to be deducted; The due date to file such return of income, as prescribed under Section 139(1), has expired; and The aggregate amount of tax deducted and collected at source is Rs. 50,000 or more in each of these 2 previous years. Operational Testing Timeline for FY 2021–22: This provision is applicable from 01-07-2021. As a result of which any payment made after this date shall go through the testing process of Section 206AB. And for any payment on or after the 01.07.2021 but before 31-03-2022, the deductor shall be under an obligation to check whether the deductee has filed his return of income of the last two assessment years 2020-21 and 2019-20 (previous years 2019-20 and 2018-19). 5. Scope of Payments & Statutory Exclusions These provisions shall apply in respect of every sum or income or amount from which tax is deductible under any provision of Chapter XVII-B except those specified under Section 206AB, namely: (a) Section 192: TDS on Salary (b) Section 192A: TDS on withdrawal from EPF (c) Section 194B: TDS on winning from lotteries, crossword puzzles, etc. (d) Section 194BB: TDS on winning from racehorses (e) Section 194LBC: TDS on income in respect of investment in Securitization Trust (f) Section 194N: TDS on cash withdrawal All other payments shall be going through the test of Section 206AB, even if they are not considered as income in the hands of the assessee. However, this provision shall not apply to such sum (or income or amount) paid (or payable or credited) to a non-resident who does not have a permanent establishment (PE) in India. 6. Non-Obstante Clause & Recipients ‘Not Liable’ to File Returns Overriding Legal Effect of the Non-Obstante Clause The Section 206AB overrides all other provisions of the Income-tax Act. This means that the provisions shall apply even if the assessee has a nil TDS certificate, or has filed a declaration under Section 197A for non-deduction of tax, or is otherwise not liable to file the return of income. What if the Recipient is ‘Not Liable’ to File the Return? No exception is given in these provisions even to the recipient who are not liable to file the return of income. One of the conditions to invoke these provisions is non-filing of return of income by the recipient. The provision does not carve out an exception in favour of the recipient who was otherwise not liable to file the return. This section provides for deduction of tax at higher rates if the deductee has not furnished the return of income of the specified period, irrespective of the fact that whether he was required to furnish it or not. This may invite troubles for the non-residents who are having a permanent establishment in India but otherwise not liable to file the return of income because of the exemption extended by Section 115A(5). The super senior citizens will also face the heat if the tax was deducted from their income yet they did not file the return of income. Practical Case Illustrations Illustration 1: Super Senior Citizen with Interest Income Example: Mr. Naresh (85 Years) earned an interest income of Rs. 5,00,000 in both the preceding years. TDS of Rs. 50,000 has been deducted under Section 194A each year. As his income was below the maximum exemption limit, he was neither liable nor furnished the return of income of the relevant period. But, after insertion of this new section, now the tax will be deducted at the higher rates prescribed under Section 206AB. Illustration 2: Student Remitting Foreign Currency Abroad Example: Mr. Ram is going abroad for higher studies for a period of two years. He buys foreign currency for an amount equivalent to Rs. 20 lakhs each in the next two financial years. The authorized dealer will collect a tax of Rs. 65,000 from such amount under Section 206C(1G)(a). As Mr. Ram will not have any income, he will not file the return of income for both the previous years. When he returns to India after completion of his studies, his income (other than the excluded one) shall be subject to TDS at a higher rate due to the operation of Section 206CCA at least for one year. 7. Prospective Compliance Scenario & Section 194-IB Ceiling Amendment Yearly Verification & CBDT Compliance Functionality These provisions apply only if the deductee or collectee has not furnished the return of income for the specified period. And after insertion of section 206AB it will be mandatory for the deductor to verify the return filing status of every deductee or collectee. It will now be a yearly exercise to verify the ITR status of the deductee and collectee. Therefore, a tool is made available by the government to check the ITR filing status. Circular No. 11 dated 21.06.2021 is also issued regarding the use of functionalities u/s 206AB and 206CCA. Significant Amendment to Section 194-IB (TDS on Rent by Individuals / HUFs) As per section 194-IB: “Every Individual or HUF shall be required to deduct tax at source on any sum payable by way of rent, if his gross receipts or turnover in the financial year immediately preceding the financial year, in which rent is paid or credited, does not exceed Rs. 1 crore in case of business and Rs. 50 lakhs in case of a profession.” Now, as per the existing provisions, if a recipient fails to furnish his PAN, tax is required to be deducted at the higher rates as prescribed under Section 206AA. However, as per Section 194-IB, if the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate prescribed under Section 206AA, subject to the condition that the amount of TDS cannot exceed the amount of rent payable for the last month of the year or the last month of the tenancy, as the case may be. Since Section 206AB is similar to Section 206AA, an amendment has been made to Section 194-IB also, to provide that in case the tax is required to be deducted at the higher rates as prescribed in Section 206AB, the amount of TDS cannot exceed the amount of rent payable for the last month of the year or the last month of the tenancy, as the case may be. 8. Conclusion From the above analysis, it is clear that the above two sections are inserted to keep a check on the persons who are not filing their Income Tax Return and to ensure that such persons file their return of Income within the stipulated time. It is expected that these two sections will also serve the purpose as the sections 206AA and 206CC have done.

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 50–55 (Journal pp. 562–567) International Taxation • Transfer Pricing & BEPS Robust Transfer Pricing Documentation: Can Recharacterization Be Avoided? BB CA. Bhavya Bansal Goyal The author is a member of the Institute of Chartered Accountants of India (ICAI). She can be reached at bhavyabansal@gmail.com and eboard@icai.in Executive Overview: Substance Over Form & Commercial Rationality “There is an increased focus on the commercial rationality of an international transaction which needs the support of a robust transfer pricing document, particularly in these times of low profits during COVID-19. With the ever-growing emphasis on ‘substance over form’ and ‘commercial rationality’ globally, there is an increased focus on analysis of functions performed, assets utilised, and risk assumed.” “The principle of substance over form typically allows tax authorities to disregard the written contractual terms between parties and consider the actual substance to recharacterize/disregard a transaction. In the light of this, it is imperative to support the international transactions with well-drafted transfer pricing documentation, agreements, and transfer pricing policies. Read on…” 1. Introduction & The Evolution of Indian Transfer Pricing Transfer Pricing rules were enacted in the Indian Income Tax Act in 2001. Over the years there have been substantial developments in the jurisprudence of transfer pricing. With thousands of court rulings on varied issues, transfer pricing legislature has truly evolved. With the Base Erosion and Profit Shifting (“BEPS”) guidelines, evolution of e-commerce and globalisation of companies the significance of transfer pricing cannot be stressed enough. This article discusses the elementary issue of preparing a robust transfer pricing documentation. With the ever-growing emphasis on ‘substance over form’ and ‘commercial rationality’ globally, there is an increased focus on the functional asset and risk analysis. Transfer Pricing as a subject is not merely a mechanical exercise, it involves knowledge of economics, business, and industry in which both the company and its comparables operate. 2. Background: Dual Pillars of TP Documentation (FAR & Economic Analysis) Transfer pricing (TP) documentation consists of analysis of functions performed, assets utilised, and risks assumed (FAR analysis) as well as an economic analysis. Pillar I: FAR Analysis The functional, asset, and risk analysis documents the actual conduct of the related parties in an international transaction and provides critical insight into the substantive functions executed, resources allocated, and operational/financial risks undertaken. Pillar II: Economic Analysis Economic analysis aims to establish the arm’s length nature of an international transaction. Therefore, before commencing economic analysis, one first needs to conduct a comprehensive FAR analysis of the tested party and thereafter identify comparables that closely match the tested party’s functional profile. Indian TP Law & ICAI Guidance Note Requirements The Indian TP law and the Institute of Chartered Accountants of India (ICAI) guidance note on transfer pricing provide that the documentation on economic analysis shall provide for the details of the: “data used and data rejected with reasons thereof. Also, different companies follow different accounting policies. There may be differences in terms of sale, etc. These variations call for certain adjustments in the financials to make the data comparable. The reasons and the adjustments so made should also be recorded.” Comparables Selection Under Rule 10B(2) of Income Tax Rules Every transfer pricing report is unique to each international transaction. The comparables must be similar in all material aspects and be compared based on: Specific characteristics of products or services transferred; Functions undertaken by the respective enterprises; Assets employed, tangible and intangible; and Risks assumed by the respective entities. Merely because a certain comparable has been upheld for its exclusion/inclusion by various court decisions should not necessarily lead to exclusion/inclusion in other cases as well. Therefore, exclusion or inclusion of any comparable must strictly be based on functional, asset and risk (FAR) analysis, which is in accordance with Rule 10B(2) of the Income Tax Rules, 1962. Global Judicial Rulings Reinforcing FAR Conduct Various court rulings reinforce the importance of robust FAR analysis in transfer pricing documentation. Multiple landmark rulings across the globe re-emphasize the need to document the actual conduct of the parties: Netherlands: Netherlands vs. Zinc Smelter B.V., March 2020, Court of Appeal; Denmark: Denmark vs. Software A/S, September 2020, Tax Court; France: France vs. Piaggio, July 2020, Administrative Court of Appeal. 3. Increased Focus on ‘Commercial Rationality’ & ‘Substance Over Form’ The Indian Tax Tribunals and courts have increased focus on the substance of the transaction and analysing the parties’ conduct before delivering a judgment. The Bangalore Income Tax Appellate Tribunal (“ITAT”) in the case of Google India Private Limited [TS-335-ITAT-2018(Bang)-TP] noted that characterisation of functions cannot be based merely on terms of contract or description of the services given by the assessee-company. It must be determined with regard to the actual conduct of the parties. To justify the actual functions a well-maintained TP documentation is a must. In cases where there is inaccurate or lack of documentation, it can even give rise to complete disregard or recharacterization of a transaction. The Judicial Two-Prong Recharacterization Test: Roche Products On the issue of recharacterization, the Mumbai ITAT in Roche Products (India) Private Limited [TS-154-ITAT-2016(Mum)-TP] laid down the authoritative conditions under which tax authorities are permitted to recharacterize an international transaction: “tax authorities can recharacterize the transaction in accordance with its substance only when: 1. the economic substance of the transaction differs from its form; and 2. the form and substance are the same but the arrangement, in totality, differs from that which would have been adopted by the independent enterprise behaving in a commercially rational manner.” The principle of ‘substance over form’ typically allows tax authorities to disregard the written contractual terms between parties and consider the actual substance to recharacterize/disregard a transaction. The principle may seem relevant in cases where tax authorities are doubtful as to whether the legal form of transaction varies from its actual substance. The issue has been gaining popularity in recent years given the recommendations arising from the BEPS project of the OECD. While the intercompany agreements are the first step to understand the legal form of a transaction, the parties’ actual conduct should reasonably reflect in the functional analysis (analysis of functions performed, risk undertaken, and assets employed). Any inconsistency between the two often leads to disputes in the Indian context. The discrepancies may at times be only optical yet can trigger the tax authorities to ignore the contractual arrangement and recharacterize the transaction keeping in view the substance, or the conduct as may reflect based on FAR analysis and other supporting facts. 4. Indian Judicial Precedents on Recharacterization Over the last many years, various Courts and ITAT in India and worldwide have examined the issue of recharacterisation in the context of transfer pricing. Key Indian rulings are summarized below: 1. CIT v. EKL Appliances Ltd [TS-206-HC-2012(DEL)-TP] (Delhi High Court) The Delhi High Court, referring to the 2010 OECD Transfer Pricing Guidelines, established that tax authorities cannot arbitrarily restructure legitimate business transactions: “the significance of the guidelines mentioned above lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage restructuring of legitimate business transactions. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustments but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.” 2. Itochu India Pvt Ltd [TS-428-HC-2019(DEL)-TP] & Aegis Limited [TS-65-HC-2019(BOM)-TP] In both cases, the Delhi High Court and the Bombay High Court upheld the ITAT’s view that the Transfer Pricing Officer (TPO) had wrongly recharacterized international transactions, holding firmly that nothing was brought on record by Revenue to demonstrate that the transaction was a sham. In the absence of evidence establishing artificiality or fraud, legitimate arrangements structured by commercial prudence cannot be rewritten. 3. McKinsey Knowledge Centre India Pvt Ltd [TS-49-SC-2019-TP] (Supreme Court) The Supreme Court dismissed McKinsey India’s Special Leave Petition (SLP) against the High Court order. The High Court had upheld the ITAT’s characterization of research and information services rendered by McKinsey India to its AE as high-end knowledge-based research services (KPO), rather than a routine business process outsourcing (BPO) service. The High Court observed that the services were “specialized and require specific skill-based analysis and research that is beyond the more rudimentary nature of services rendered by a BPO”, concluding that “it would be incorrect to slot the services provided by the Assessee into that of a BPO, when it is more akin to a KPO.” 4. Sony Pictures Networks India Pvt Ltd [TS-508-ITAT-2020(Mum)-TP] In this matter (successor of MSM Discovery Private Limited), the issue related to the recharacterization of distribution fees paid by the assessee (a distributor of television channels) to its AE as ‘Royalty’. Relying on the assessee’s factual submission that it only acted as a pure intermediary between the broadcaster and the ultimate customer who views the channel, neither held any right in the content broadcasted over the channel, nor had any right to make changes thereto, the Mumbai ITAT held that the distribution fee paid by the assessee to its AE could not be recharacterized as ‘Royalty’. 5. International Case Laws & Global Comparative Jurisprudence Recharacterization has been litigated before superior courts across prominent international tax jurisdictions, establishing core boundaries on tax administrations: Jurisdiction / Case Forum & Date Core Legal Principle & Judicial Ruling Canada vs. Cameco Corp.Case No 39368 / 2020 FCA 112 Supreme Court of Canada(February 2021) First-ever case where recharacterisation provisions under Canadian transfer pricing rules were interpreted. The Federal Court of Canada (“FCA”) provided a textual, contextual, and purposive interpretation of recharacterisation having high precedential value globally across transfer pricing jurisdictions. Australia vs. GlencoreCase No [2021] HCATrans 098 High Court of Australia(May 2021) Held that a transaction should be restructured only if the economic substance of the transaction differs from its form, or even though form and substance are the same, the arrangements made differ significantly from those that would have been adopted by independent enterprises behaving in a commercially rational manner. ‘A’ Group FinlandA Oyj and A Finance NV Supreme Administrative Court (SAC), Finland Rejected recharacterization of intra-group financial restructuring sans tax avoidance allegations. Referring to the 2010 OECD guidelines, SAC observed that administrations should not disregard actual transactions unless in exceptional circumstances; since no tax avoidance was alleged, the adjustments lacked valid grounds. Nestle Zambia Trading Limited Zambian Tax Court Upheld recharacterization by the tax authority of the taxpayer as a Limited Risk Distributor (LRD). The recharacterization was upheld based on detailed analysis of the actual functions performed by Nestle Zambia rather than contractual labels. Non-Recognition vs. Statutory GAAR Powers in India As can be seen from the above rulings, while non-recognition in transfer pricing is a common approach adopted by the first level tax authorities across the world, complete disregard of a transaction is not very common. In the Indian context, non-recognition is discouraged by the ITATs and High Courts if done without prudent reasoning. However, General Anti Avoidance Rules (GAAR) empower the revenue to deal effectively with and guard against schemes that are designed for tax avoidance. GAAR gives revenue extensive powers to disregard or recharacterize transactions and re-determine the resultant tax consequences if the assessee fails to prove the commercial rationality of the arrangement and that tax avoidance was not the main purpose. 6. BEPS Action 13, BEPS Actions 8–10 & DEMPE Functions In 2016, BEPS Action 13 was adopted by the Indian Tax law, incorporating the preparation of the Master File and Country-by-Country (CbC) reporting into transfer pricing compliance requirements. If applicable, the preparation of the Master File and CbC reporting represents an extensive exercise requiring detailed global disclosures by multinational corporations. The DEMPE Framework for Intangibles (BEPS Actions 8–10) BEPS Action 8 provides a comprehensive framework for identifying members of a multinational Group that contribute to the creation of valuable intangibles, determining ‘arm’s length’ remuneration based on their contribution across the entire value chain. The Final Report on OECD’s BEPS Actions 8–10 (released in October 2015) provides guidance on applying the arm’s length principle to intangibles, focusing on economic substance, risk control, and corresponding rewards rather than mere legal ownership. It establishes the foundational principle that the entity which creates value should be entitled to commensurate returns. Therefore, multinational enterprises must determine and document which entity performs the five DEMPE functions: D Development R&D, conception, and creation of IP E Enhancement Upgrades, modifications, and refinement M Maintenance Quality control, testing, and lifecycle support P Protection Patents, legal defence, and trademark security E Exploitation Commercialization, licensing, and marketing The rewards earned by an entity will fundamentally change depending on this analysis, bringing to light the crucial importance of granular documentation. India’s Pioneering Role: CBDT Circular 6/2013 Much before the BEPS project of the OECD on DEMPE guidelines, the Indian Central Board of Direct Taxes (CBDT) had vide Circular 6/2013 given a preview into DEMPE functions. The circular laid explicit importance on the parties’ actual functions and actual conduct over contractual arrangements, marking a revolutionary shift in the way international transactions are scrutinized. 7. Group Transfer Pricing Policy & Internal Reviews While it is essential to undertake annual TP compliances, it is also imperative to document the group Transfer Pricing Policy, which highlights the pricing policy and the flow of international transactions between the various entities of a multinational group. Hence, it is important to have a robust transfer pricing policy which, inter alia, lists: The comprehensive multinational group structure and legal ownership hierarchy; The specific economic functions undertaken by each entity globally; The intellectual properties (IPs) owned, developed, and commercialized; and The formal pricing methodology established for inter-group transactions. Practical Review Illustration: Cost-Plus 5% Factory Pricing It is highly advisable that periodic internal transfer pricing reviews be undertaken to ensure that TP policies are strictly adhered to in practice: Example: The TP policy may stipulate that a manufacturing factory should charge cost plus 5% for goods produced and transferred to its group company for further distribution. However, regular internal TP reviews are essential to verify whether the factory has included all direct, indirect, and overhead costs as precisely defined in the TP policy. Any disconnect between documentation and actual plant accounting must be identified and corrected immediately to prevent tax adjustments upon audit. 8. Impact of COVID-19 & Benchmarking Challenges COVID-19 has impacted businesses and governments across the world. Enterprises are transitioning into digital integration. The biggest challenge is to manage profitability and disrupted supply chains. During the COVID-19 crisis, companies recorded operational results that differed significantly from normal levels and were likely to incur unprecedented operating losses. While tax authorities appreciate that losses can be incurred in independent situations due to unfavourable economic conditions or other legitimate business factors, it remains to be seen how these factors can be identified and quantified for transfer pricing purposes. The Contemporaneous Data Asymmetry Dilemma From a benchmarking perspective, the search for comparables entails inherent challenges, particularly for FY 2020-21: At the time of preparing contemporaneous documentation, public database availability is practically limited to prior financial years (FY 2018-19 and FY 2019-20); Both of these prior years reflect pre-pandemic economic conditions untouched by the COVID-19 downturn; Conversely, the true impact on profitability is visible only in FY 2020-21 margins for both taxpayers and comparables. Taxpayers must therefore take proactive steps to mitigate potential audit risk by documenting capacity underutilization, abnormal idle costs, and supply chain disruptions. In turn, tax authorities must undertake transfer pricing audits considering prevailing economic headwinds rather than applying mechanical pre-crisis benchmarking filters. The detailed TP documentation and economic analysis will have to factor in changes right down to the individual company level. Within the same industry, certain companies flourished and earned supernormal profits (e.g., healthcare and digital tech), while others were forced to shut down operations entirely. 9. Concluding Remarks & Strategic Imperatives Transfer pricing as a practice has gradually evolved over the last couple of decades. There is an increased focus on whether the actual transaction possesses the ‘commercial rationality’ of arrangements that would be agreed between unrelated parties under comparable economic circumstances. This aligns directly with paragraph 1.122 of the OECD Transfer Pricing Guidelines 2017. From an Indian as well as a global perspective, there has been an increased focus on the substance and commercial rationale of a transaction. Many corporates have undertaken restructuring of their businesses considering the COVID-19 pandemic. From a business perspective, restructuring is considered a favourable business decision to help companies grow or sustain. Tax saving may not necessarily be the only driving force behind a restructuring; however, it attracts extra scrutiny from tax authorities worldwide under transfer pricing tax laws. Therefore, robust TP documentation, well-drafted intra-group agreements, and a commercial rationale driving the transformation are essential in reducing the risk of potential tax audits and consequent adjustments. The functional analysis forms the bedrock of judicial decision-making for appellate tribunals and courts, providing the necessary factual matrix to assess economic reality. Hence, it is paramount that multinational enterprises properly document their international transactions through comprehensive, substance-driven functional and economic analyses. “Robust TP documentation, well-drafted intra-group agreements, and a commercial rationale driving the transformation are essential in reducing the risk of potential tax audits and consequent adjustments. The functional analysis forms the basis of decision-making for the courts and helps them to assess the facts.” The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) November 2021 Issue • Vol. 70 • No. 5 • pp. 50–55 (Journal pp. 562–567) Author Contact: bhavyabansal@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 56–59 (Journal pp. 568–571) INDIRECT TAXES • FOREIGN TRADE POLICY & CUSTOMS RoDTEP: Remission of Duties and Taxes on Export Products CA. Shubham Chandak (Member of the Institute of Chartered Accountants of India) The author is a member of the Institute. He can be reached at shubham.chandak@outlook.com and eboard@icai.in. 💡 Executive Summary & Scope With the withdrawal of existing MEIS export promotion scheme, the RoDTEP (Remission of Duties and Taxes on Export Products) scheme comes as a huge relief to the exporters. The scheme will cover around 8,555 tariff items with rebate in the range of 0.5% to 4.3% with ceiling limits. The aim of the scheme is to refund currently unrefunded duties/taxes/levies charged indirectly in the production of export products. This will help in cost reduction and improved competitiveness of products over a long-time horizon. The scheme covers most of the sectors except steel, organic and inorganic chemicals, pharmaceuticals. The scheme will play a key role in fulfilling exports obligations and helping India embark on its ‘Aatmanirbhar Bharat’ journey at lightning speed. Read on… 1. Preamble & WTO Dispute Genesis Preamble: The scheme’s aim is to refund, currently unrefunded duties/taxes/levies, at the Central, State, and local level, borne on exported products consisting of prior stage cumulative indirect taxes on goods and services utilized in the making of the exported product and such indirect duties/taxes/levies towards the distribution of export. Need for Introduction of the RoDTEP Scheme The RoDTEP Scheme came into existence because USA filed a complaint against India at the World Trade Organization (WTO) claiming the existing scheme harms the American workers. USA argued that export subsidies like the MEIS scheme (The Merchandise Exports from India Scheme) given by GOI distorted trade by providing direct subsidies to Indian exporters and is against the WTO rules. A dispute panel in the WTO ruled against India, stating that the export subsidy scheme that was provided by Government of India violated the provisions of WTO’s norms. Hence, the Finance Minister announced this scheme in replacement of the MEIS scheme. The scheme was approved by the Union cabinet and came into effect from 1st January 2021 and will be until 2025. The Ministry of Commerce and Industry notified about the RoDTEP scheme on 17th August 2021. This is a much-awaited scheme notified by the GOI after phasing out the MEIS scheme. 2. Salient Features of the RoDTEP Scheme The scheme will cover 8,555 export products (Notification No. 19/2015-2020, Dated 17th August 2021). All the eligible products with the benefit rates given under Appendix 4R of Notification. The tax refund rates range from 0.5 percent to 4.3 percent for different sectors. Rebates under the scheme shall not be available in respect of duties and taxes already exempted or deposited or credited. The scheme would operate in a budgetary framework for each financial year and a Rs. 19,400 crore outlay has been announced for the FY 2021-22 under the RoDTEP Scheme and RoSCTL scheme (Rebate of State and Central Taxes and Levies) where RoDTEP scheme’s budget would be Rs. 12,454 crores and the remaining Rs. 6,946 crores is for RoSCTL. Currently, three sectors – steel, chemicals and pharmaceuticals would not get the benefit of RoDTEP. The RoDTEP scheme is primarily a replacement of MEIS scheme. The scheme covers export areas which are relatively lower in volume. The automated refund system in the form of transferable duty credit/electronic scrips, which will be maintained in an electronic ledger. Refunds of Embedded Duties and Taxes: Under the scheme, various central and state duties, taxes, and levies imposed on input products such as duty levied by the state on electricity used for manufacturing, VAT on fuel in transportation, farm sector, captive power generation, Mandi tax, stamp duty and central excise duty on fuel used in transportation, among others, would be refunded to exporters as a percentage of F.O.B Value of exports. The scheme will ensure that our export products do not contain any incidence of taxes and duties, and exporters only export goods and services, and the scheme would cover all indirect Central and State taxes that are not reimbursed/collected. 3. Sectoral Coverage: Eligible vs. Excluded Sectors Sectors that will get the benefits Employment-oriented sectors such as marine, agriculture, leather, gems and jewellery are covered under the scheme. Other sectors such as automobile, plastics, electronics, among others will also be covered. Besides, the entire value chain of the textile sector will get covered through the RoDTEP and RoSCTL schemes. Sectors not covered under the benefits Sectors such as steel, organic and inorganic chemicals, pharmaceuticals have been kept outside the scope of the new scheme. Further, Special Economic Zones (SEZ), Export-Oriented Units (EOUs), Advance Authorization holders, Operators under MOOWR schemes, etc. are excluded from the scheme benefits. Ineligible Supplies / Items / Categories Under the Scheme The transactions mentioned as not eligible for the RoDTEP scheme through the DGFT Notification are listed below. The mentioned class of exports or exporters will not be liable for the levied benefit of the RoDTEP scheme: Export of imported goods included under paragraph 2.46 of FTP. The exports via trans-shipment, direct that the exports which are introduced in the 3rd country are shipped from India. The export product is subjected to a minimum export price or export tax. The product gets restricted for the export beneath “Schedule-2 of Export Policy in ITC (HS)”. Products that are banned for export beneath “Schedule-2 of Export Policy in ITC (HS)”. “Deemed Exports”. Supplies of products manufactured through DTA units to SEZ/FTWZ units. “Products manufactured in EHTP and BTP”. “Products manufactured partly or wholly in a warehouse beneath section 65 of the Customs Act, 1962 (52 of 1962)”. The products made or exported to realize the obligation with respect to the advance Authorization or tax-free Import Authorization or Special Advance Authorization circulated beneath a duty privilege policy of concern Foreign Trade Policy. Under the provisions of the foreign trade policy the product made or exported through the unit licensed as a hundred per cent export-oriented unit (EOU). The products made or exported through any of the units held “in Free Trade Zones or Export Processing Zones or Special Economic Zones”. The products built or exported claiming the advantage of the Notification No. 32/1997- Customs dated 1st April 1997. The exports for which the electronic documentation in ICEGATE EDI is not to be made or exports from non-EDI ports. Post to produce the goods is used. 4. Technologically Advanced Execution & Step-by-Step Claim Workflow Government has introduced various digital platforms to implement different export promotion schemes. As per the government notification, an IT-based risk management system would be introduced under the RoDTEP Scheme which will help in smoother and faster processing and enhance the ease of doing business. The policy will be executed via the digitization of issuance of the levy amount in the form of the transferable tax credit/electronic scrip (e-scrip), which is to be maintained in the electronic ledger through the Central Board of Indirect Taxes and Customs (CBIC). How to Avail the Benefits Under the Scheme? The steps to avail the benefits under RoDTEP Scheme are as follows – Step 1: Claim in the Shipping Bills With effect from 01.01.2021, it is mandatory for the exporters to indicate in their Shipping Bill whether or not they intend to claim RoDTEP on the export items. This claim is mandatory for the items (RITC codes) notified under the new scheme. This declaration has been made mandatory for all items in the Shipping Bill starting from 01.01.2021. Unlike Drawback, there will be no need to declare any separate code or schedule serial number for RoDTEP. The exporter will have to make following declarations in the SW_INFO_TYPE Table of the Shipping Bill for each item: Column Field Value / Specification Required INFO TYPE DTY INFO QFR RDT INFO CODE RODTEPY – If RoDTEP is availedRODTEPN – If not availed INFO MSR Quantity of the items in Statistical UQC as per the Customs Tariff Act for that item RITC INFO UQC UQC for the Quantity indicated in INFO_MSR Step 2: Processing of the Claim Based on the information provided in Step 1, system will process the eligible RoDTEP. Step 3: Generation of Scroll Once the scroll is generated, the amounts would be available with the exporter as credits on the ICEGATE portal. Step 4: Claiming of Credit and Generation of Credit Scrip Once the scroll is generated, the exporter can log into their ICEGATE portal and convert them into credit scripts. The exporter will be able to club the credits allowed for any number of Shipping Bills at a port and generate credit scrip for the same on ICEGATE portal (the same can be done by login to ICEGATE website https://www.icegate.gov.in/ using class 3 Digital signature certificate). Step 5: Utilization of the Scrips These scrips can be used for the payment of import duties as would be notified by CBIC. The exporter can transfer the scrip to any other IEC holder who will be able to use this scrip in the bill of entry by giving the license details. Note on RoDTEP Credit Ledger: The RoDTEP Credit Ledger can be used by the Importer/Exporter/CHA only after creating a successful credit ledger account at ICEGATE. The following information would be available in the ledger account: Scroll Details Scrip Details Transaction Details Transfer Scrips Approved Scrips Transfer 5. Mechanism of Issuance, FEMA Compliance & RMS Audit Architecture Mechanism of Issuance of Rebate Under the scheme, a rebate would be granted to eligible exporters at a notified rate as a percentage of FOB value with a value cap per unit of the exported product, wherever required, on export of items which are categorized under the notified 8-digit HS code. Rate of rebate/value cap per unit under RoDTEP is notified in Appendix 4R. The rebate allowed is subject to the receipt of sale proceeds within time allowed under the Foreign Exchange Management Act, 1999 (FEMA) failing which, such rebate shall be deemed never to have been allowed. The scheme would be implemented through end-to-end digitization of issuance of rebate amount in the form of a transferable duty credit/electronic scrip (e-scrip). Monitoring, Audit and Risk Management System (RMS) Exporters would be required to keep records substantiating claims made under the scheme. For the purpose of audit and verification, a monitoring and audit mechanism with an IT based Risk Management system (RMS) would be put in place by the CBIC, Department of Revenue to physically verify the records of the exporters on sample basis. Sample cases for physical verification will be drawn objectively by the RMS, based on risk and other relevant parameters. Budgetary Framework & Strict Financial Discipline: As per the notification, the scheme will operate in a Budgetary framework for each financial year and necessary calibrations and revisions shall be made to the scheme benefits, as and when required, so that the projected remissions for each financial year are managed within the approved budget of the scheme. No provision for remission of arrears or contingent liabilities is permissible under the scheme to be carried over to the next financial year. 6. Comparative Analysis: MEIS vs. RoDTEP Detail MEIS RoDTEP Incentive scheme Incentive on exports of goods in form of transferable scrips Refund of Indirect taxes on Inputs used in the manufacture of exported product which is not being currently reimbursed by any other existing schemes WTO Compliance Non-Compliant with WTO trade norms Compliant with WTO trade norms Incentive Percentage 2% to 5% of FOB value of Exports Product-based % (0.5% to 4.3%) Mode of Issuance Issuance in the form of transferable scrips (Hard copy/downloadable) Issuance in the form of transferable duty credit/electronic scrip which will be maintained in electronic ledger 7. Conclusion The scheme will play an important role in making internationally competitive goods originating from India. These much-awaited rates will help in easing the liquidity of the exporters, ensuring predictability and stability thus helping competitiveness of exports over a long-time horizon. The scheme will boost Indian exports by providing a level playing field to the domestic industry abroad. The industry can hope for a seamless transition into the scheme with equitable benefit. References Notification No. 19/2015-2020, Dated 17th August 2021 News articles

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 60–65 (Journal pp. 572–577) Indirect Taxes • GST & Corporate Social Responsibility GST and Corporate Social Responsibility: Provisions and Challenges JB CA. Jay Bohra The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at cajaybohra@gmail.com and eboard@icai.in Executive Overview: The Ambiguity of ITC on CSR “This article discusses the impact of GST law on the multifold modes of CSR activities. Further, the question ‘whether Input Tax Credit (ITC) is admissible on expenditure incurred by a company towards CSR activities as per the provisions of Companies Act, 2013’ has been a constant issue of confusion and ambiguity. With the adverse impact of the COVID-19 pandemic, where a lot of organizations are incurring CSR expenditure to fight against the pandemic, the matter has become more problematic across the nation since the GST law does not specifically speak on this issue and the government has not come out with any clarification thereon. Read on…” 1. Introduction to Corporate Social Responsibility The concept of Corporate Social Responsibility (CSR) is well known throughout the business world. It not only speaks of contributions made towards the benefit of the less privileged but also calls for making oneself accountable to the society. Many think that CSR is a new concept. However, in our country, kings have been practicing CSR for thousands of years. Even Kautilya’s Arthashastra speaks about this: “Shresta Dharma – the better off one is in the society, the higher should be one’s sense of responsibility” In India, with the enactment of the Companies Act, 2013, it has now become mandatory for Companies to take up CSR projects on social welfare activities. In the present times, the ambit of CSR activities has grown manifold and is playing an important part in achieving the sustainable development goals and private-public partnership in nation building. CSR has also played a very important role in supporting the social and economic development of the country during the COVID-19 pandemic. 2. GST Implications on the Modes of Discharging Corporate Social Responsibility The implications of GST on the various modes which may be adopted by any corporate to discharge its Corporate Social Responsibility under Section 135 of the Companies Act, 2013 read with Schedule VII are depicted below: Mode (a): Direct Contributions to Statutory / Government Funds Contributions made directly to various funds such as Swachh Bharat Kosh, PM CARES Fund, Clean Ganga Fund, etc. The contributions to such funds are made in the form of pure monetary donations. GST Verdict: GST is not applicable on such monetary contributions, as Section 2(52) and Section 2(102) of the CGST Act, 2017 specifically exclude “money” from the definition of “Goods” as well as “Services” respectively. Mode (b): Providing Funds to Registered Trusts, Societies, or Section 8 Companies Usually, under this scenario, a Memorandum of Understanding (MOU) is entered into between the company and the recipient trust or society. By implementing such an MOU, the corporate discharges its CSR requirement. Although the corporate is not directly performing any CSR activity and such activities are provided by the trust or society to the ultimate beneficiaries, the trust or society may need to charge GST on the funds received by it. Landmark Ruling: Indian Institute of Corporate Affairs [[2019] 107 taxmann.com 413] (AAR New Delhi) The Authority for Advance Ruling (AAR), New Delhi held that the amount paid by companies to external agencies for CSR activities to undertake specified projects would be considered as ‘Consideration’. Therefore, executing CSR activities as per the company’s direction would be interpreted as a Supply and GST would be applicable on the same. Pivotal Drafting Requirement: Drafting the terms and clauses of the MOU plays a pivotal role. Any direct nexus between the amount paid and the supply of taxable service towards a specified project makes the activity leviable to GST. Conversely, if funds are granted without any reciprocal obligation or direct nexus, they represent pure financial grants. Mode (c): Providing Manufactured / Traded Goods or Services Directly to Beneficiaries Under this mode, companies provide their own manufactured or purchased goods such as masks, sanitizers, PPE kits, food products, etc. directly to beneficiaries. Alternatively, services such as providing temporary shelter, COVID-19 education, medical camps, or awareness programmes may be provided by the company to discharge its CSR. GST on Supply of Goods for CSR Activities: The Schedule I Trigger To explore the GST implications on supply of goods given free of cost for CSR activities, it is important to examine Schedule I read with Section 7(1)(c) of the CGST Act, 2017, which specifies activities to be treated as supply even if made without consideration: “1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.” Since the registered person’s own products, viz. manufactured or traded goods, are distributed free of cost for CSR activities, these constitute “finished goods” in the business, and are characterized as business assets. Hence, if the registered person has availed ITC on the said goods (business assets), the permanent transfer of these goods amounts to a deemed supply under Schedule I, even though given without any consideration, thereby attracting GST! GST on Supply of Services for CSR Activities Services supplied free of cost for CSR activities are NOT covered under any entry of Schedule I to the CGST Act: Entry No. 1 on “Permanent transfer or disposal of business assets” particularly covers goods (business assets) but not services; Entry No. 2 on “Supply of goods or services between related persons or between distinct persons” is inapplicable, as CSR services are directed towards independent societal beneficiaries, not related or distinct persons. Hence, any services provided without consideration for CSR activities do not constitute a supply, thereby not attracting GST. On the contrary, CSR activities executed through external agencies for consideration may constitute a supply, unless specifically exempt under Notification No. 12/2017-Central Tax (Rate) as amended. 3. Relevant Statutory Provisions Under CGST Act & Companies Act Since all CSR goods and services are provided without charging monetary or non-monetary consideration, a moot question that arises is: Is GST paid on goods and services used for CSR activities available as Input Tax Credit (ITC)? a. Section 16(1) of the CGST Act, 2017 (Eligibility and Conditions for Taking ITC) “16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.” b. Section 2(17) of the CGST Act, 2017 (Broad Definition of ‘Business’) “2. (17) Business includes – (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; (b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); (c) ……” c. Section 135 of the Companies Act, 2013 (Mandatory CSR Governance & Spending) “135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. ……… (5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy: …….. (7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.” 4. Does CSR Activity Pass the Business Test? “In the Course or Furtherance of Business” Under the GST framework, for an assessee to avail input tax credit it is a sine qua non for the goods or services to be used in the course or furtherance of business. Considering the wide definition of the term ‘business’ under Section 2(17) of the CGST Act, there is no requirement to establish a direct, rigid one-to-one linkage to taxable outward supplies. Even incidental or ancillary activities are treated as ‘in the course of business’, and procurements made for undertaking such activities are legally eligible for ITC. a. CESTAT Mumbai: Essel Propack Ltd. v. Commissioner of CGST [[2020] 117 taxmann.com 409] The Hon’ble CESTAT Mumbai delivered a landmark ruling establishing the commercial character of CSR: “CSR is not a charity anymore since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials and the same also augments the credit rating of the company as well as its standing in the corporate world. Therefore, sustainability is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stakeholders to conduct business in an economically, socially and environmentally sustainable manner. It was further observed that CSR, which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake.” b. Karnataka High Court: CCE v. Millipore India (P) Ltd. [[2011] 16 taxmann.com 363] The Hon’ble Karnataka High Court held that the discharge of corporate social responsibility represents the discharge of a statutory obligation. When an employer incurs expenditure to maintain premises in an eco-friendly manner, the tax paid on such services forms an integral component of the cost of final products. The High Court upheld that taxes paid on such services fall squarely within the ambit of ‘input services’ and the assessee is fully entitled to the benefit of credit. ✓ First Test Cleared: A company is compulsorily mandated by statute to undertake CSR activities to run its operations. ‘In the course or furtherance of business’ encompasses all incidental and ancillary activities incurred in business processes. CSR is an essential statutory component of the enterprise as a whole and therefore passes the business test under Section 16(1). 5. Can ITC of CSR Activities Be Restricted u/s 17(5)(h) by Treating Them as Gifts? Having cleared the business test of Section 16(1), the next critical obstacle is the blocked credit mandate under Section 17(5)(h) of the CGST Act, 2017: “17(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:— …… (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; …..” The Adverse Ruling: Polycab Wires Private Limited [2019 (24) G.S.T.L. 103 (A.A.R. - GST)] The Authority for Advance Ruling (AAR), Kerala denied ITC on CSR expenses by characterizing them as ‘disposal by way of gift’. The applicant had distributed electrical cables and goods to flood victims in Kerala towards discharging its mandatory CSR obligations. The Kerala AAR held that because the applicant distributed electrical goods on a free basis without collecting consideration, ITC would be blocked under Section 17(5)(h). However, the Kerala AAR failed to examine the statutory jurisprudence of what constitutes a ‘gift’ and delivered a summary rejection without plausible legal reasoning. What is the Legal Meaning of the Term ‘Gift’? The term ‘Gift’ is not defined under the GST statutes. However, established legal lexicons and judicial precedents establish that a gift is inherently voluntary, gratuitous, and occasional: The Gift Tax Act, 1958 (18 of 1958): Defined gift as the transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth. Black’s Law Dictionary (4th Edition): “A voluntary transfer of personal property without consideration. A parting by owner with property without pecuniary consideration. A voluntary conveyance of land, or transfer of goods, from one person to another made gratuitously, and not upon any consideration of blood or money.” Webster’s Third New International Dictionary (Unabridged): “Something that is voluntarily transferred by one person to another without compensation; a voluntary transfer of real or personal property without any consideration or without a valuable consideration—distinguished from sale.” Supreme Court of India in Ku. Sonia Bhatia v. State of UP [AIR 1981 SC 1274]: Citing Corpus Juris Secundum (Vol. 38), the Apex Court ruled: “A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. A ‘gift’ is a gratuity and an act of generosity and not only does not require a consideration, but there can be none.” The Authoritative Ruling: Dwarikesh Sugar Industries Ltd [[2021] 125 taxmann.com 329] (AAR Uttar Pradesh) Distinguishing the erroneous reasoning in Polycab, the Authority for Advance Ruling, Uttar Pradesh drew an explicit legal demarcation between voluntary gifts and mandatory CSR disbursements: “…we are in unison with the applicant that a clear distinction needs to be drawn between goods given as ‘gift’ and those provided/supplied as a part of CSR activities. While the former is voluntary and occasional, the latter is obligatory and regular in nature. CSR expenses incurred by the applicant have been mandated under the Companies Act, 2013. It is the applicant’s obligation to incur such expenses in order to be in compliant with the law. Since CSR expenses are not incurred voluntarily, accordingly, we are of the opinion that they do not qualify as ‘gifts’ and therefore its credit is not restricted under section 17(5) of the CGST Act, 2017.” Legal Principle: Gifts stem from love, affection, and volition. CSR expenditure is an involuntary, non-negotiable statutory obligation imposed under Section 135 of the Companies Act, default of which triggers severe financial and penal liabilities under sub-section (7). Consequently, CSR procurements cannot be categorized as gifts, and ITC cannot be barred under Section 17(5)(h). 6. Availability of ITC on Services Used for CSR Activities A deeper and literal analysis of Section 17(5)(h) reveals a profound statutory distinction: Literal Rule of Interpretation: Section 17(5)(h) Covers Only Goods, Never Services Section 17(5)(h) restricts credit solely on “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”. It places no restriction whatsoever on the free distribution of services! Where the language enacted by the legislature is explicit and unambiguous, there is no scope for intendment. Consequently, even if services are supplied free of cost for CSR activities, ITC on inward service procurements is completely unhindered and fully available. 7. CSR Activities Flowchart & GST Decision Matrix The analytical matrix below encapsulates the entire spectrum of CSR modes, outward taxability under GST, and inward Input Tax Credit availability: CSR Operating Mode Specific Sub-Category Taxable Under GST? ITC Availability on Inputs / Services 1. Direct Monetary Contributions Contributions to Swachh Bharat Kosh, PM CARES Fund, etc. NOTransaction in money excluded u/s 2(52) & 2(102) Not Applicable 2. Funding Trusts / Societies / Sec 8 Companies Specific Project executed under MOU / Direction YESConsideration for supply (IICA AAR), unless specifically exempt YESServices not restricted by Section 17(5)(h) Grant / Donation without Direct Nexus or Reciprocal Supply NOTransaction in money, pure grant Not Applicable 3. Direct Provision to Beneficiaries Goods (Manufactured or Traded Goods / Finished Assets) YESSchedule I Entry 1 (permanent disposal of business assets if ITC availed) YES (Juridical Position)Not a gift (Dwarikesh AAR); conflicting ruling in Polycab Wires Services (Shelter, Medical Camps, Awareness Programmes) NOProvided without consideration, outside Schedule I YESSec 17(5)(h) restricts only goods; inward ITC fully admissible 8. Concluding Remarks & The Urgent Need for CBIC Clarification The provision for availing Input Tax Credit has been the peacemaker amidst the chaos subsequent to the introduction of GST. So far, the seamless procedure for utilizing input credit has been commendable; however, it is not free of its own entanglements and there is still a lot of ambiguity. In these times of adversity, where a lot of organizations are incurring substantial CSR expenditure to fight against the COVID-19 pandemic, it is the need of the hour for the Central Board of Indirect Taxes and Customs (CBIC) to come up with positive statutory clarifications to clear the sky relating to such confusions on the availability of ITC. This will ensure active, unhesitating participation of trade and industry to further strengthen the socio-economic fight for nation building. “It is the need of the hour for CBIC to come up with some positive clarifications to clear the sky relating to such confusions on the availability of ITC. This will ensure the active participation of trade and industry to further strengthen the fight against this pandemic.” The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) November 2021 Issue • Vol. 70 • No. 5 • pp. 60–65 (Journal pp. 572–577) Author Contact: cajaybohra@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 66–70 (Journal pp. 578–582) BANKING • GLOBAL FINANCIAL MARKETS LIBOR – Rest In Peace, What Next P.T.S. Murthy The author can be reached at ptsmurthy@yahoo.com and eboard@icai.in. 🌐 Overview & Executive Summary Globally LIBOR is considered as the Benchmark for several International Foreign Exchange transactions based on Interest Rates. The LIBOR which has been in existence for over six decades is being eased out by the end of December 2021. All the transactions sofar entered and outstanding beyond December 2021 need to be renegotiated with Alternate Reference Rates. Globally the Bank regulators, financial institutions and government lending bodies have set the ball rolling to shift to the rates devised by them. Read on… 1. Introduction, Global Scope & India’s External Debt Exposure Reserve Bank of India also set up committee and entrusted the job to Indian Banks Association to evolve strategies to move swiftly to the new regime of Alternate Benchmark Rates. This article explores the LIBOR, the issue, various benchmark rates globally being proposed, the role of RBI sofar and the consequences and constraints. This article is useful for the accounting fraternity to properly guide their clients how they can easily, promptly, and effectively shift to the new regime. Beyond the end of 2021, the Financial Conduct Authority (FCA), UK will not mandate Banks to poll LIBOR, the benchmark which has been used by all Banks/Financial Institutions in the world for financial foreign exchange contracts. These include derivate transactions, bonds, loan agreements both retail and corporate loans. The rate ruled the world for almost five decades. Unfortunately, this rate was found manipulated during the year 2012 by individuals at various financial institutions. As a corrective action, the FCA had decided to leave the LIBOR. Scale of Global and Indian Exposures: The quantum of LIBOR linked exposures globally is estimated to be around USD 240 trillion. At the end of June 2021, India’s external debt was placed at USD 571.3 bn. The External Commercial Borrowings is the largest component of external debt (37.4%) followed by Non Resident Deposits (24.8%). Short-term debt on residual maturity basis (i.e., debt obligations that include long-term debt by original maturity falling due over the next twelve months and short-term debt by original maturity) constituted 44.7 per cent of total external debt at end-June 2021. Residual Maturity of Outstanding External Debt (as at end of June 2021) Residual Maturity Amount in USD billion Short term upto one year 255.60 1 to 2 years 54.30 2 to 3 years 53.50 More than 3 years 207.80 Total 571.30 (Source: RBI press release dated 30.9.2021 on India’s External Debt as at the end of June 2021) 2. What is LIBOR & The Manipulation Scandal What is LIBOR London Inter-Bank Offered Rate is the average interest rate global banks base for their lending and borrowing from one another. The rate is calculated for five currencies namely, USD, Euro, British Pound, JPY and Swiss Franc for seven different maturities. They are overnight/spot, one week, one, two, three, six and twelve months. Thus, the total number of rates quoted on daily basis are five currencies multiplied by seven periods are 35. USD LIBOR is the most used floating interest rate globally. It is calculated daily by ICE (InterContinental Exchange) by obtaining rates from Global banks how much they will charge for short term loans. They take the trimmed average meaning the highest and the lowest rates are trimmed, and the average of the remaining rates are taken for deciding the daily LIBOR rate. Once they are finalized, these rates are announced every day at 11.55 am London time by the ICE Benchmark Administration. The methodology is well documented and unbiased. A panel consisting of 16 major banks active in the London market provide the rates. LIBOR Issue During the year 2012, a scandal came to light in quoting the rates by several major banks in collusion. It was reported that such events were taking place since 2003. The investigation showed that the traders were openly asking each other to set rates at a specified amount so that the positions based on inflated LIBOR rate will be profitable to them. Banks in the USA and UK who were involved in this scandal were fined to the tune of USD 9 billion. What are Transitional Rates After the scandal came to light several parties quoting their floating rates based on LIBOR, lost confidence in the rate. Finally, the ICE took over the supervision of the Rate from the British Bankers Association (BBA) and the rate quoted now is called ICE LIBOR. Now each country is looking for bringing out an Alternate Reference Rate (ARR) for both short term and long-term contracts in the money market, derivative markets, bond markets or repo market and basing the mortgage and other loan agreements once the LIBOR is not available as a benchmark rate. A reference rate is a benchmark interest used to determine other interest rates. 3. Global Alternate Reference Rates (ARRs) Across Major Markets The list below provides various Alternate Reference Rates (ARR) being devised by several countries: Particulars USA UK EU Switzerland Japan ARR Secured Overnight Financing Rate (SOFR) Sterling Overnight Interbank Average Rate (SONIA) Euro Short Term Rate (ESTR) Swiss Average Rate Overnight (SARON) Tokyo Overnight Average Rate (TONAR or TONA) Secured Yes No No Yes No Tenor Overnight Overnight Overnight Overnight Overnight Counterparties Banks and non-banks Banks and non-banks Banks and non-banks Banks only Banks and non-banks (Source: The article “Libor: the Rise and the Fall – RBI Bulletin Nov 2020”) USA – SOFR This rate has been recommended by the Alternative Reference Rates Committee as a benchmark replacement to LIBOR. It measures the cost of borrowing monies from US treasuries against collaterals (Like our Repo Rate in India). Many major Banks in the USA such as Wells Fargo, JP Morgan, Citigroup have conducted transactions with this benchmark rate. It is reported that around USD 37 trillion in Futures, USD 700 billion in Swaps have already been concluded based on this rate. UK – SONIA These rates are chosen by a working group on Sterling Risk-Free Reference Rates as an alternate to LIBOR. It reflects the average interest rates that Banks pay to transact sterling currency in overnight markets from other financial institutions. Contracts to the tune of GBP 5.7 trillions were already traded in Futures markets based on this bench market rate. EURO – ESTR The euro short-term rate (€STR) reflects the wholesale euro unsecured overnight borrowing costs of banks located in the euro area. The €STR is published on each TARGET2 business day based on transactions conducted and settled on the previous TARGET2 business day (the reporting date “T”) with a maturity date of T+1 which are deemed to have been executed at arm’s length and thus reflect market rates in an unbiased way. SWITZERLAND – SARON It represents the overnight interest rate of the secured funding market for the Swiss Franc (CHF). (Swiss Average Rate Overnight) is an overnight interest rates average referencing the Swiss Franc CHF. It is based on transactions and quotes posted in the Swiss repo market. JAPAN – TONAR It is a risk-free rate (“RFR”) based on the uncollateralized overnight Call rate. In 2019, the Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks, together with the Bank of Japan, held a public consultation on the choice of alternative benchmarks to JPY LIBOR, the results of which revealed an industry preference for two alternatives: the Tokyo Interbank Offered Rate (“TIBOR”) and the Tokyo Overnight Average Rate (“TONAR”). 4. Present Status of Transition & Comparative Analysis: LIBOR vs. SOFR Dominance of the Greenback (USD): The Greenback (USD) is the most traded currency in the world forex markets. 88% of global transactions include USD on one side of the transaction. The next comes EURO with 32.28% and JPY with 16.80%. US dollar denominated debt remained the largest component of India’s external debt, with a share of 52.4 per cent at end-June 2021. The USD based contracts will shift to Secured Overnight Financing Rate (SOFR) once the LIBOR is eased out. The major differences in these rates are as under: LIBOR SOFR Bank to Bank Lending Rate including credit risk component. Risk-free rate – base rate. Credit risk is not taken into consideration. Forward-looking rate published daily from one day to one year. Overnight – secured repo rate. Published on daily basis by Federal Reserve Bank of New York. Term structure – available for seven periods. No term structure (as of now). Based on overnight borrowing and lending in the US Treasury Repo market. Based on the panel of Banks submissions and expert judgement. Transaction based. Based on roughly USD 1 Bn transaction per day. Based on roughly USD One Trillion per day. The rate is based partially on market data and expert judgement by the panel. Relies entirely on transaction data. Calculated as a volume weighted median of transaction level data observed over the course of a business day, around 8 am Eastern Time. There is an option to republish the data in case errors are found. Multilateral Adoption & Derivative Protocols (ISDA 2020) All financial institutions including Asian Development Bank have already worked out strategies for the transaction of their loan books linked to LIBOR to different benchmarks for the respective currencies. The derivative transactions are governed by the guidelines issued by the International Swaps and Derivatives Association (ISDA). The counterparties to a derivative transaction need to execute an ISDA document that has listed guidelines regarding interest payments and the structure of the derivative transaction. ISDA 2020 IBOR (Interbank Offered Rate) Fallback Protocol had already set the guidelines w.e.f. 25.1.2021. The method of interest calculation is also different in LIBOR and SOFR. In the case of LIBOR based financing, the benchmark rate is fixed in advance and the interest and principal amount are paid at the end of the period. The borrower will know his outgo of interest payment. In the case of SOFR based borrowing, the SOFR is not determined until the end of the periods as the SOFR to be applied is on day to day basis. In addition to the rate, credit risk premium need to be loaded to the rate. 5. Measures in India & FBIL Benchmark Framework Reserve Bank of India appointed a committee in June 2013 headed by Shri P. Vijaya Bhaskar to review the financial benchmarks in India. Based on the committee’s recommendations, The Financial Benchmarks India Pvt Ltd. (FBIL) was set up to act as administrator for providing benchmarks in India in debt, interest rates and forex markets. The benchmarks pronounced by them are also used for the valuation of investment portfolios of the banks periodically. BENCHMARK BASIS DECLARATION Overnight MIBOR Based on Call money transactions Daily basis. Announced at 10.45 am Market Repo Overnight Rate (FBIL -MROR) Based on basket repo trades Daily at 10.45 am Term MIBOR Based on Pooling based submission by market participants Daily basis at 11.45 am. Three tenors 14 days, 1 and 3 months Reference Rate USD/INR, EURO/INR, GBP/INR, JPY/INR Daily at 1.30 pm Forward Premia curve USD-INR Daily at Overnight, 1 to 12 months tenor. MIFOR curve USD LIBOR Daily at Overnight, 1 to 12 months tenor at 4.15 pm In addition to the above benchmark rates, FBIL also announces benchmark rates for Treasury Bills, CDs, MIBOR-OIS, FC-Rupee Options Volatility Matrix and G-Sec valuations. IBA Preparedness Workstreams The IBA has since formed three workstreams on: (i) LIBOR transition arrangements (ii) Rates and methodology (iii) Outreach to market participants IBA has also circulated a guidance note among its member banks to enable them to assess their preparedness for LIBOR transition on various parameters, viz., exposure assessment and assessment of the accounting, tax, information technology (IT) related implications. They have already communicated to the FICCI, CII and ASSOCHAM to advise their members to prepare for the transition. Regulatory Ceilings Under Existing RBI Guidelines: External Commercial Borrowings (ECBs): Linked to LIBOR (maximum borrowing costs Benchmark rate + 450 bps) with Minimum Average Maturity Period ranging from 1 to 10 years. Trade Credits (Buyers’ Credit and Suppliers’ Credit): Benchmark rate plus 250 bps maturity ranging up to 3 years. FCNR Deposits: Interest Rate on FCNR deposits linked to LIBOR plus 200/300 bps. Interest Rate Derivatives: Several Interest Rate Derivative transactions would also be based on benchmark rates. Government Sovereign & Multilateral Borrowings The Government of India borrows from several international agencies and Countries such as Asian Development Bank, World Bank, International Development Association, International Bank for Reconstruction and Development, International Fund for Agricultural Development and IMF based on bench market rates. As of 31st December 2020, the total bilateral debt India owes is USD 30.5 Bn and multilateral debt of USD 67.9 bn. If these borrowings are based on benchmark rates, they need to be relooked into. A shift away from LIBOR will necessitate a distinct set of risks affecting external commercial borrowings including trade credits, cross-currency swaps, LIBOR-linked interest rate swaps, corporate bonds, credit default swaps and even the LIBOR-based Mumbai Interbank Forward Offer Rate (MIFOR) contracts, FCNR deposit rates and the government borrowings for foreign counterparties. 6. Constraints, Operational Complexities & Accounting Standards Impact The change in benchmark rates from LIBOR to other currency specific benchmark rates may not be a smooth transition. While new contracts entered into on new Alternate Reference Rate after ceasing to exit from LIBOR will yet to test the waters on its implications, where transition of existing contracts based on LIBOR to new ARRs are likely to have impact on Risk assessment, Tax implications, Control mechanism, change in protocols and preparedness of the present IT systems in the Banks to smoothly move to the new Bench mark rates. Accounting and Legal Hurdles (US GAAP, IFRS & IND AS): The accounting Authorities must come out what accounting methods to be amended either in US GAAP & IFRS as well in IND AS. It may also pose new interest rate risks and whether the financial institutions and the Banks and their counterparties are prepared for probable losses is yet be foreseen. The constraints are also foreseen in redrafting the ISDA agreement and redoing the entire exercise of the contracts which have been executed and likely to continue beyond 2021. Portfolio Readjustment & Credit Rating Requirements The corporates need to readjust their portfolios as they may have to hedge the additional exposures and meet the increased costs in lending after shifting to new benchmark rates. They must individually evaluate the transition process by understanding various contracts they have executed, legalities involved in renegotiating the rate and the contracts, measure the additional burden that may arise on costs. Banks must equally scan through their entire portfolios which were based on LIBOR benchmark rates and initiate discussions with the counterparties well in advance to mitigate any hiccups in transition. The ICAI may also investigate the impact of these transitions on the accounting standards. Since the new alternate benchmarks have not considered the credit risk as component in basing the rate, a fresh credit rating may have to be undertaken by the corporates from International Agencies which are not only time consuming but also involving huge costs. 7. Reserve Bank of India (RBI) Directives & Action Plan RBI Guidelines (Circular Dated 8th July 2021) Reserve Bank of India vide circular dated 8th July 2021 had given the following steps to be taken by all the concerned such as Banks and financial institutions: (1) Cessation of New Contracts: They should cease entering into new financial contracts with LIBOR benchmark rates by December 31, 2021. (ii) Robust Fallback Clauses: They must include robust fallback clauses in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the LIBOR settings. (iv) Cessation of MIFOR: Banks have also been advised to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark which references the LIBOR, as soon as practicable and in any event by December 31, 2021. (v) Risk Management Restrictions: Contracts referencing LIBOR / MIFOR may generally be undertaken after December 31, 2021 only for the purpose of managing risks arising out of LIBOR / MIFOR referenced contracts undertaken on or before December 31, 2021. 8. Conclusion The shift away from LIBOR is not as simple as it appears. All the stakeholders namely, Corporates, Financial Institutions, Banks, Regulators, Accounting Standard Authorities, Government need to address the issue fast and make them aware of the implications. “Someone compared this transition as vital as the ‘Y2K’ transition which happened two decades ago. The time is ticking fast. The saying that ‘Cross the bridge once we come to it’ may not jell well in this situation.” References (1) LIBOR: The Rise and the Fall – Article in RBI Bulletin November 2020.

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 71–75 (Journal pp. 583–587) Banking • Capital Markets & Corporate Finance Investment Banking in India: The Ultimate Industry Overview KP CA. Krupali Parekh The author is a member of the Institute of Chartered Accountants of India (ICAI). She can be reached at eboard@icai.in Executive Overview: The Financial Lifeline in Times of Disruption “The importance of finance in business for revenue generation and value creation is indisputable. The COVID-19 pandemic has raised questions on the ongoing viability of businesses and the traditional approach of raising finance. Lockdowns have become an inevitable safety measure, however, giving rise to a situation where businesses are facing cash crunch as a challenge for survival.” “The hardship faced by businesses is due to a fundamental change in consumer behaviour, supply chain, client acquisition, delivery of product/service and conduct of key functions in business. In these hard times, the role of investment banks is vital. An investment bank may act as life support to these devastated businesses requiring funds for sustenance. Read on…” 1. Broad Industry Overview & The Role of Investment Banks Investment banks link businesses looking for funds with potential investors. The investor universe may comprise angel investors, private equity (PE) funds, venture capitalists (VC), or capital market participants. The primary goal of an investment bank is to advise business houses in identifying capital opportunities, structuring and negotiating deals, and executing transactions smoothly. Consulting represents a strategic ‘add-on’ service offered by these institutions. Investment banks recommend customized strategies for business expansion, analyze broader macroeconomic and market performances, provide timely guidance on when to execute an Initial Public Offering (IPO), and identify active investors operating within specific industry sectors. What is Investment Banking? In recent times, the term “Investment Banking” has gained widespread prominence. It is a specialized division of banking that concentrates on raising long-term capital, whether through debt or equity instruments. Investment bankers deliver strategic advisory services to corporations, institutions, and sovereign governments looking to: Raise long-term debt and equity capital; Execute domestic and cross-border mergers and acquisitions (M&A); Structure joint ventures (JVs) and strategic alliances; and Execute corporate restructurings and divestitures. Investment banking means different things to different people. There is no rigid definition or closed boundary of work that a banker is exclusively entitled to execute. Rather, bankers specialize across distinct phases in the deal lifecycle. 2. The Four Primary Deal Mandates Investment bankers generally structure their transaction execution around four major advisory mandates: 1. Sell-Side Mandate Identify appropriate strategic and financial buyers, position the company, and orchestrate a competitive bidding process to maximize shareholder value. 2. Buy-Side Mandate Screen the market to select appropriate corporate acquisition targets that strategically complement the client’s existing business footprint. 3. Fund Raising Mandate Prepare the company for capital market entry, formulating investment theses, and securing the optimal type of equity or debt capital from targeted investors. 4. Leveraged Buyout (LBO) Structure tailor-made, debt-leveraged financing solutions to ensure smooth and efficient ownership transitions between family promoters and external buyers. 3. The Deal Lifecycle: Step-by-Step Transaction Execution The process of fundraising—typically a private equity advisory product—initiates with business development, which involves identifying and assessing companies with pressing capital requirements. Ticket Size: Bulge Bracket vs. Boutique Investment Banks Depending on the type, balance-sheet appetite, and domain specialization of an investment bank, deal ticket sizes vary substantially: A bulge bracket investment bank regularly handles multibillion-dollar transactions, whereas deal ticket sizes in a boutique investment bank may be substantially smaller, servicing mid-market enterprises. Step 1: Origination, Pitchbook & The Engagement Letter (EL) Business development is an ongoing, continuous effort. Top-level leadership—managing directors and business heads—rarely dive into daily spreadsheet modeling. Instead, they spearhead lead generation, new client acquisition, relationship maintenance, and referral networks. To pitch to prospective clients, a comprehensive Pitchbook is crafted. It showcases the IB’s historical track record and credibility, demonstrates how the bank will assist in raising capital, analyzes industry performance and comparable peer groups, highlights prevailing valuation multiples, and proposes the most suitable valuation methodologies. Once the client is convinced, an Engagement Letter (EL) is signed, formalizing the bank’s advisory mandate (joint or exclusive) to market the business. Step 2: Marketing Collaterals Preparation Investment banking analysts spend countless hours on spreadsheets, building integrated financial forecast models and determining valuations. Marketing collaterals are systematically categorized into three tiers: 1 Teaser A high-level 1 to 2-page summary of the investment opportunity prepared on a strictly “no-name” blind basis to gauge investor appetite without disclosing corporate identity prematurely. 2 Information Memorandum (IM) A detailed, comprehensive presentation shared under NDA covering business operations, industry dynamics, competitive landscape, historical accounts, management profiles, and future financial forecasts. 3 Financial Model Dynamic spreadsheet containing historical performance, driver-based revenue and expense projections, capital expenditure schedules, KPI ratios, and multi-scenario DCF/multiple business valuations. Step 3: NDA, LOI, Due Diligence & Definitive Agreement Execution Non-Disclosure Agreement (NDA): Executed prior to releasing sensitive confidential information and the full Information Memorandum. Letter of Intent (LOI): Once the prospective investor validates the company’s potential, a non-binding LOI is submitted, outlining headline purchase consideration, transaction structure, post-deal capital structure, and exclusivity periods. Comprehensive Due Diligence: Conducted by external independent accounting and legal firms covering financial due diligence (Quality of Earnings), commercial checks, and legal/regulatory compliance. Binding Bid & Definitive Agreements: Upon conclusion of diligence, a final binding bid is issued. Intensive negotiations between bankers, buyers, and promoters finalize purchase terms. A formal Purchase Agreement / Shareholders Agreement (SHA) is signed, funds are disbursed via escrow/wire, and the investment bank receives its success fees. ⏱ Transaction Timeline & Economics: While the deal workflow appears linear, a typical fundraising cycle spans 6 to 12 months. Although executed by lean transaction teams, deal considerations are exceptionally large, generating lucrative advisory fee revenues and establishing investment banking as an attractive career destination. 4. Regulatory Framework: Merchant Banking vs. Investment Banking Investment banks incorporated under the Companies Act, 2013 are governed by company law provisions, while statutory financial corporations operate under specialized enactments. The Regulatory Distinction: Merchant Banking vs. Investment Banking Merchant banking is a specialized subset of investment banking that focuses on raising funds through public capital markets. Investment banking is a substantially wider umbrella concept covering private equity, M&A, LBOs, debt syndication, and strategic consulting. “The only difference between a merchant banker and an investment banker is that of a regulator. Since capital markets are primarily governed and regulated by the Securities and Exchange Board of India (SEBI), merchant bankers have to compulsorily register themselves with SEBI.” SEBI (Merchant Bankers) Regulations, 1992 The role, duties, and code of conduct of merchant bankers are governed under the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992. SEBI categorizes authorized merchant banking activities into: 1. Issue Management 2. Underwriting 3. Portfolio Management 4. Consultants / Advisers to Issue 5. Investment Adviser 6. Other Capital Market Services Historical Milestones in Indian Merchant Banking 1967: Merchant banking services commenced in India with the establishment of a dedicated division by National Grindlays Bank. 1970: Citibank introduced structured merchant banking operations in India. 1972: State Bank of India (SBI) became the first Indian commercial bank to establish a specialized merchant banking bureau. 5. Indian Deal Landscape & The Historic Jio Platforms Mega-Deal As reported by The Telegraph (India), the average Indian investment banking revenue pool surged by 30% in 2020, rising from $600–700 million to $800–900 million, with projections to surpass $1 billion over the subsequent 2–3 years. This exponential surge reflects deep global investor confidence in Indian enterprise value. Four Key Drivers Dominating the Indian IB Sector Growing Capital Requirements: Domestic capital remains scarce, necessitating global syndication. Rise in Business Financial Challenges: Stressed balance sheets require debt restructuring and rescue capital. Surge in Demand for Fundamental Advisory: Promoters require strategic guidance on business pivot models. Technological Advancement: Rapid digitization across financial settlement and valuation engines. Deal of the Decade: Jio Platforms (2020) PE / M&A RECORD In 2020, the largest private equity fundraising transaction in Indian history by volume and value was executed by Jio Platforms: Total Capital Raised $17.3 Billion Stake Diluted 22.4% Enterprise Valuation $65–70 Billion The deal attracted tier-one global investors including Facebook, KKR, Vista Equity Partners, Silver Lake, General Atlantic, and Mubadala. This marked the first instance during the global pandemic where an enterprise raised such astronomical capital amidst worldwide lockdowns. Resilience in the Startup Ecosystem: The $1 Billion Unicorn Wave Since 2014, the Indian startup ecosystem has matured exponentially. In a recessionary year characterized by severe cash crunches, innovative new-age companies solved vital logistical and digital hurdles, raising capital at valuations exceeding **$1 billion**: Nykaa: Premier online marketplace for omnichannel beauty, wellness, and fashion. Zerodha: Disruptive discount broking and tech-driven retail capital market platform. DailyHunt: Regional language content aggregation and short-video digital media. Cars24: AI-enabled e-commerce platform for pre-owned automotive transactions. FirstCry: Specialized retail ecosystem for baby, infant, and children’s products. Unacademy: Interactive digital learning and test preparation educational technology platform. 6. Career Pathways & Strategic Opportunities for Chartered Accountants The broad-based expansion of the Indian economy has transformed career horizons for Chartered Accountants beyond traditional domains like Statutory Audit, Taxation, and Commercial Banking. New-age sectors such as Modern Retail, Information Technology, EdTech, Venture Capital, and Investment Banking have created substantial high-yield career avenues. CAs are increasingly ascending the corporate ladder to hold pivotal executive roles as Chief Financial Officers (CFOs) and Chief Executive Officers (CEOs). The Investment Banking Corporate Hierarchy A career in investment banking offers long-term durability and prestigious advancement: Intern / Trainee ➔ Analyst ➔ Associate ➔ Vice President ➔ Director ➔ Managing Director Requisite Competencies for Newly Qualified CAs Many leading investment banks consider newly qualified Chartered Accountants to be the ideal fit for entry-level Analyst positions due to their rigorous training in financial statements. Key competencies required include: Financial Modeling & Valuation: Advanced proficiency in spreadsheets, discounted cash flow (DCF), comparable company analysis (CCA), and precedent transaction multiples; Pitchbook & Presentation Design: High-impact visual synthesis of investment theses for institutional committees; Negotiation & Deal Structuring: Astute commercial negotiation skills between promoters and private equity sponsors; and Tenacity & Entrepreneurial Acumen: Endorsed by business tycoon Ratan Tata as the defining quality to see ambitious deals through to completion. “The career of an investment banker is expected to last forever. With an established start up ecosystem in a country like India and increasing competitive landscape, the future prospects look to be high yielding.” The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) November 2021 Issue • Vol. 70 • No. 5 • pp. 71–75 (Journal pp. 583–587) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 76–83 (Journal pp. 588–595) ACCOUNTING STANDARDS • SUSTAINABILITY REPORTING Carbon Accounting Practices in Select European Companies Neelam Yadav (Research Scholar) & Prof. Shurveer S. Bhanawat (Professor) Authors can be reached at neelamyadav071993@gmail.com, shurveer@gmail.com and eboard@icai.in. 🌿 Executive Summary & Scope In the 21st century, carbon market development has produced a mass of challenges for corporations, societies and nations. Carbon emission disclosures and their accounting treatment are essential for any corporate sector conducting businesses that have carbon emissions. Carbon trading practices in Europe are still working on an agreement on how to record carbon emission rights in the financial statements. The objective of this study is to explore the accounting practices for the recognition and disclosure of carbon allowances in the absence of any specific accounting standard. Results show a large divergence in the accounting of carbon allowances in their financial statements. Read on… 1. Introduction: The Carbon Market Challenge & Reporting Void Carbon markets expansion has produced a mass of challenges for the corporations, societies, nations – of which, accounting for carbon emissions is perhaps the least implicit area for the corporation. Experts of carbon trading in Europe are still working on an agreement on how to record carbon emission rights in the financial statements whereas, companies emitting carbon emissions in the United States have just started to struggle with the accounting issues of an already multifaceted and unknown market. (ACCA, 2010)1 Accounting standard setters globally have made forethoughts on this emergent topic but still, there is an absence of accounting standards to manage carbon emissions accounting. There are no specific guidelines on how to account for carbon emission allowances by companies in their financial statements. One report of (CNBC, February 2019)2 shows that “half of European Union companies have no carbon reduction plan despite admitting climate change risks and these European companies do not show a clear picture of any disclosure of carbon accounting treatment in their financial reports”. Emissions in the European Union (EU): European Union (10.76%) is the third-largest carbon emitter in the world after China and the USA. But EU is consciously aware about mitigating CO2 emissions in the world. Seventeen emission trading schemes are running in the EU right now. Hence, the companies in the EU are facing problems on accounting treatment of carbon because no authoritative accounting standard exists at present. Without any accounting standards that specify how to account for carbon emission allowances, it is hard to compare the financial statements of companies. In general, there are multiple ways to account for carbon emission allowances. According to the different interpretations of general principles of accounting (International Financial Reporting Standards, IFRS), some companies classify emission rights as intangible assets, others as inventory assets and some others as R&D, but the fact is that there is no common standard for different institutional contexts. This article attempts to explore accounting practices of carbon allowances followed by companies in the EU through examination of their financial statements. 2. Standardization of Carbon Accounting at International and National Level Global Standard-Setting Milestones 1. EITF & IFRIC-3 (2003–2005): In 2003, the Emerging Issues Task Force (EITF)1 brought carbon accounting onto the agenda, but it was removed in a very short time. Due to the lack of mandatory regulations, many companies developed their accounting policies related to carbon emissions during this period. Consequently in 2004, the IFRS Interpretations Committee (IFRIC)2 published IFRIC-3 on 2/12/2004, effective from 1/3/2005, which had been withdrawn in June 2005. In IFRIC 3 Emission Rights, emission rights (allowance) are recognized as intangible assets and measured in accordance with IAS-38 Intangible Assets. If the government issues allowances for less than fair value, the difference between the amount paid and fair value of allowance is accounted as government grant in accordance with IAS-20 Accounting for Government Grants and Disclosure of Government Assistance. As a participant produces emissions, a provision for its obligation is recognized to deliver allowances in accordance with IAS-37 Provisions, Contingent Liabilities and Contingent Assets. Recognition under IFRIC-3: Allowances – Intangible asset – fair value at initial recording creates without payments – it recognized a grant which is deferred revenue in the financial statement. Recognition of a provision for its obligation to deliver allowances as emissions are produced and to measure them at fair value. The grant is gradually transferred from deferred revenue to income at its initial value. Reason for IFRIC-3 Withdrawal: IFRIC-3 withdrawal occurred because of the Mixed Presentation Model (gains and losses derived from the valuation of liabilities are reported in the income statement, while the gains and losses derived from any revaluation of the emission allowances were recognized under equity in the balance sheet) and the Mixed Measurement Model (either at cost or fair value). After these mismatches, very few companies subject to such schemes have applied IFRIC 3 voluntarily. Instead, a range of approaches have developed in practice which can be broadly grouped into either the net liability approach or the government grant approach. In Europe, there has, however, been a strong trend towards the net liability approach. In the net liability approach, emission permits granted are recorded at their nominal amount (i.e., nil if granted for nil consideration) and the entity only recognizes a liability once actual emissions exceed the permits granted and are still held. Under this approach, emission permits purchased are accounted for as any other purchased intangible asset. 2. FASB & IASB Joint Project (2007–2015): After this period of time in 2007, FASB3 and IASB4 started a joint project. IASB began a project about emission trading schemes along with FASB in December 2007. This project aims to develop comprehensive guidance in accounting for emission traded schemes and revise existing relevant standards like IAS-38, IAS-39, IAS-20, IAS-2, and IAS-8. In order to tentatively suggest accounting treatment, after May 2010, IASB tentatively decided that an entity should recognize the allowances received free of charge from the government as assets and measure them initially at fair value. Another tentatively decided that an entity recognizes a liability that represents its promise to pay allowances throughout the commitment period irrespective of whether the entity has already emitted. In December 2012, IASB formally reactivated the project as an IASB-only research project and deferred joint work with FASB. In 2015, the project was renamed from “Emission trading schemes” to “Pollutant pricing mechanisms” to address a variety of schemes that use emissions allowances to manage the emission of pollutants. 3. US FERC Accounting Guidance (2007): FERC (Federal Energy Regulatory Commission)5 of the US has issued GHG accounting guidance: there is no accounting standard or interpretation in US GAAP Suggested Accounting Treatment (2007). Emission allowance should be classified as inventory, measured on a historical cost basis (that is, they should be valued at their original cost, in most cases zero), with recognition of costs as emissions are made (that is, as the allowances are consumed) on a weighted average cost basis. 4. Status Under IFRS Framework: There are several IFRS guidelines on the recognition, measurement, and disclosure of financial elements connected to environmental matters. However, there is not a single standard focused exclusively on environmental issues and their associated effects on the firms’ accounts. 3. Indian Standard-Setting: ICAI Guidance Note on Self-Generated CERs (2012) At the national level, The Institute of Chartered Accountants of India (ICAI)6, issued a Guidance Note on ‘Accounting for Self-generated Certified Emission Reductions (CERs)’ in 2012. There is no specific Accounting Standard or interpretation provided by the International Accounting Standard Board (IASB) in relation to the accounting for Certified Emissions Reductions (CERs). There are, however, existing Accounting Standards (AS) that deal with the principles that should govern accounting for Certified Emissions Reductions (CERs). In this note, ICAI provides guidelines on how to account for carbon credits generated under the Clean Development Mechanism, i.e., CERs, which can be considered as assets of the generating entity. ICAI Guidance Framework for Self-Generated CERs: CERs is an Asset: The Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India, defines an ‘asset’ as follows: “An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.” CER is an asset as per the definition. (UNFCCC)7 – Approved CER as an Asset, under approval process – Contingent assets AS 29 (provisions, contingent liabilities, and contingent assets). Recognition of CERs: “An asset is recognized in the balance sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured reliably.” CER should be recognized on certification by UNFCCC at nominal cost (consultant fees and cash payment to UNFCCC towards administrative cost). Type of Assets: CER is an intangible asset as per AS 26: “an intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services for rental to others, or for administrative purposes.” (Ind AS 38). However, other requirements of AS 26 such as an intangible asset should include assets that are developed by the entity. Development should be recognized only if, its intention to complete the IA and use or sell it. CER is an intangible asset. Accounted as Inventories: Intangible assets held for the purpose of sale in the ordinary course of business are excluded from the scope of AS 26 and therefore are to be accounted for as per AS-2, Valuation of Inventories. Therefore, even though CERs are intangible assets these should be accounted for as per the requirements of AS 2. Measurement of CERs: Since CERs are inventories for an entity that generates the CERs, therefore, the valuation principles as prescribed in AS 2 should be followed for CERs. CERs should be measured at cost or net realizable value, whichever is lower. Income Recognition: Since CERs are recognized as inventories, the entity should apply AS-9 to recognize revenue in respect of sales of CER. Disclosure Requirements: An entity should disclose the following information relating to CERs in the financial statements: No. of CERs held as inventory and the basis of valuation. No. of CERs under certification. Depreciation and operating and maintenance costs of emission reduction equipment expensed during the year. 4. Research Methodology & Sample Distribution The objectives of the present research study are: To study carbon accounting practices in select European companies. To identify various heads under which CO2 Emission Allowances are recorded. Research Methodology: For the study, annual reports of 25 companies were analyzed through content analysis technique. The present study covers one year’s data from 2017-18. In order to achieve the objective of the present research work, sample units have been selected on the basis of the ACCA8 (The Association of Chartered Certified Accountants, 2010) report including convenience sampling and data availability. 25 units are selected from the European Union (EU) countries from different sectors i.e., Combustion, Iron, Steel, and Refining. Table 1: Name of the Sample Countries and Sectors S. No. Country No. of Companies Percentage (%) Sector 1. Luxembourg 01 4% Combustion; Iron and Steel 2. Portugal 01 4% Combustion 3. Poland 03 12% Combustion 4. France 01 4% Combustion 5. United Kingdom 03 12% Refining and Combustion 6. Germany 04 16% Combustion, Iron and Steel 7. Czech Republic 01 4% Combustion 8. Spain 01 4% Combustion 9. Slovakia 01 4% Iron and steel 10. Netherlands 03 12% Combustion 11. Austria 01 4% Combustion 12. Italy 02 8% Refining 13. Finland 01 4% Iron and steel 14. Greece 02 8% Combustion Total 25 100% – 5. Carbon Accounting Practices in European Companies: Empirical Findings This section discusses carbon accounting mechanisms followed by European Union Companies which are summarized in Table 2 and Table 3 at a glance. These carbon accounting treatments have been compiled from reference companies. The table shows that sample companies of the study adopted various accounting treatments for carbon emission allowances and the different forms of presentation of carbon emission allowances in their financial statements. Table 2: Accounting Practices for Carbon Emission Allowances S. No. Accounting Treatment of Carbon No. of Companies Percentage (%) Measured At Cost At Fair Value 1. Intangible Assets 08 32% 08 – 2. Inventories 05 20% 05 – 3. (Both Intangible Assets, Inventories) 04 16% 04 – 02 02 4. Other assets 01 04% 01 – 5. No Disclosure 07 28% – – Total 25 100% – Table 3: The Different Forms of Presentation of Carbon Emission Allowances in Financial Statements S. No. Accounting Treatment of Carbon No. of Companies Percentage (%) 1. Provisions 11 44% 2. Derivatives 13 52% 3. CO2 allowances show in cash flow from operating activities. 03 12% 4. Sales of CO2 allowances show in sales revenue. 02 08% 5. CO2 shows in trade payable and other liabilities. 03 12% 6. CO2 emission rights are allocated to the company free of charge. 07 28% 7. Show CO2 emission rights as Non-amortizable assets. 01 04% 8. Cost related to purchasing of emission rights shows under other operating expenses. 01 04% 9. Changes in CO2 emission allowances show in working capital (current assets, Inventories). 01 04% 6. Analysis and Discussions The empirical results show which accounting treatments have been followed across different sectors in the sample: Intangible Assets (32%): Out of 25 companies, 8 companies (32%) have followed accounting treatment for carbon emission allowances (CEA) as intangible assets. Out of 8 companies, some companies held carbon emission allowances for “own use” are booked as intangible assets at cost price and some companies purchase carbon emission allowances (CEA) from the market for their use they are showing as an intangible asset. All 8 companies show CEA as intangible assets at cost price. Out of this 08, 07 companies are showing CEA as an amortizable intangible asset and only 01 company accounted for CEA as a non-amortizable intangible asset. Inventories (20%): Out of 25 companies, 05 companies (20%) show carbon emission allowances as inventories in their financial statements. Inventory is the goods and materials that a business holds for the ultimate goal of resale or trading purposes. When sample units hold Carbon Emission Allowances for a trading purpose then they accounted for CEA as inventories in books of accounts. All 05 companies show CEA as inventories at cost and net realizable value whichever is lower. An interesting fact is that out of 25 companies, only 05 companies treated CEA as an inventories in the head of current assets in the balance sheet but only 01 company shows changes in CEA as current assets in the working capital. It shows diversified accounting treatment followed by sample companies in the EU. Both Intangible Assets and Inventories (16%): Out of 25 companies, only 04 companies (16%) show carbon emission allowances as both intangible assets and inventories in books of accounts when the company used CEA as its own used to show as intangible assets and when held for trading purposes accounted as inventories. In these 04 companies, all show CEA as an intangible asset at cost price and all 04 companies show CEA as an inventories but 02 companies show at a cost price and 02 companies show at fair value. Other Assets (4%): Out of 25 companies, only 01 (04%) company show CEA as other assets (other than intangible assets and inventories). No Disclosure Shock (28%): It’s a very interesting fact that out of 25 sample companies, a huge amount of companies – 07 (28%) companies – do not follow any accounting treatment for CEA. It’s very shocking but true these 07 companies are large energy sector companies in European Union countries but they have not disclosed any accounting treatment for carbon emission allowances. Provisions (44%): A provision is an amount set aside from a company’s profits to cover an expected liability or a decrease in the value of an asset, even though the specific amount might be unknown. A provision is not a form of savings; instead, it is a recognition of an upcoming liability. Out of 25 sample units, only 11 (44%) units create a provision for carbon emission allowances / GHG (greenhouse gases) and disclosed detailed information regarding carbon emission allowances provisions. Derivatives & Commodity Trading (52%): 13 companies out of 25 (52% of sample units) trade carbon emission allowances through derivatives market and show CEA as a commodity. A derivative is a contract between two parties that derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards, and swaps. These companies treat CEA as a financial instrument. Cash Flow from Operating Activities (12%): Out of 25 companies, only 03 (12%) companies show carbon emission allowances (CEA) in cash flow from operating activities. 05 companies show CEA as inventories and other than this, 04 companies show CEA as both intangible and inventories. But out of this 09 total companies, only 03 companies show CEA in cash flow from Operating Activities. Revenue Disclosure Disconnect (8% vs. 36%): In this table out of 25 companies, 09 (36%) of companies treated carbon emission allowances as an inventory for the trading of CEA. But the interesting fact is that only 02 (8%) companies show sales of carbon emission allowances in sales revenue. Other remaining companies used CEA for trading purposes but the purchase and sales of CEA cannot be disclosed in their financial statements. Trade Payables & Other Liabilities (12%): Out of 25, only 03 (12%) companies treated CEA as a trade payable and other liabilities. Free Government Allocations (28%): Only 07 (28%) of companies disclose information about the fact that they are getting CEA free of charge from the government and other authorities. All 07 companies disclosed that they get free of charge carbon emission allowances and show as intangible assets at nominal value or nil value. Other remaining companies are also getting CEA free of charge but they cannot disclose it in their financial statements. Operating Expenses (4%): Only 01 (04%) company disclosed “Cost related to purchasing of emission rights in other operating expenses”. Other companies have not disclosed information regarding this. 7. Concluding Remarks & Framework Synthesis Carbon trading practices in Europe are still working on an agreement on how to record carbon allowances in the financial statements. The result of the study concluded that divergent accounting treatment of carbon emission allowances has been followed by sample companies of European Union countries. All over the world, there is no single set of accounting standards for carbon emission allowances, so a large number of companies have not disclosed any information about carbon trading and some of the companies disclosed information about CEA but in a much-diversified manner. Without consistent accounting practices for carbon emission, it can be hard to compare the financial statements of companies. Sufficiency of Existing Accounting Standards: At present, there is no need for any new accounting standards for carbon allowances, the existing accounting standards are sufficient to deal with accounting issues of carbon allowances. Some accounting bodies previously (IASB and IFRIC) have given guidance to CEA treated as an intangible asset (they are allocated free of charge or purchased) under IAS 38. Other carbon allowances that are allocated for less than fair value should be measured initially at fair value, any difference between the amount paid and fair value should be identified as a government grant and accounted under IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance). For accounting of liabilities, the liability should be recognized in the accounts as the emissions are made, and that this obligation should be treated as a “Provision” and covered by IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets). Only proper guidance for how, when, and which existing standards are followed for carbon accounting treatment for companies all over the world and also companies in the European Union are required. References & Statutory Footnotes Lovell, H., Aguiar, T. S., Bebbington, J., & Gonzalez, C. L. (2010). Accounting for Carbon. The Association of Chartered Certified Accountants. International Emissions Trading Association. CNBC Report (19 February 2019): Half of European Union companies have no carbon reduction plan despite admitting climate risks. Available at: https://www.cnbc.com/2019/02/19/half-of-european-companies-have-no-carbon-reductionplan-report-finds.html The Institute of Chartered Accountants of India (ICAI) (2012). Guidance Note on ‘Accounting for Self-generated Certified Emission Reductions (CERs)’. Retrieved October 01, 2019. The Emerging Issues Task Force (EITF) is an organization formed by the Financial Accounting Standards Board (FASB) in 1984 to identify, discuss and resolve financial accounting issues with an aim to improve financial reporting. IFRIC Interpretations are developed by the IFRS Interpretations Committee (previously International Financial Reporting Interpretations Committee IFRIC) and Interpretations are issued after approval by the International Accounting Standards Board (IASB). IFRIC Interpretations issued IFRIC-3 Emission Rights. The Financial Accounting Standards Board (FASB) is an independent non-profit organization formed in 1973 responsible for establishing financial accounting standards in the United States following US GAAP. The International Accounting Standards Board (IASB) was founded on April 1, 2001, as the successor to the IASC, serving as the independent standard-setting body of the IFRS Foundation. The Federal Energy Regulatory Commission (FERC) founded on October 1, 1977, regulates transmission and wholesale electricity/gas in the US and issued GHG accounting guidance in 2007. The United Nations Framework Convention on Climate Change (UNFCCC) adopted on 9 May 1992 at the Rio Earth Summit, entered into force on 21 March 1994, aiming to stabilize greenhouse gas concentrations (197 Parties). Association of Chartered Certified Accountants (ACCA) founded in 1904, headquartered in London with administrative office in Glasgow, offers the global Chartered Certified Accountant qualification.

The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 84–88 (Journal pp. 596–600) Finance • Real Estate & Capital Market Restructuring SPAC: Solutions to Indian Housing Finance Sector SK CA. Satheesh K V Member of the Institute of Chartered Accountants of India. Contact: kvsatheesh@gmail.com MR Dr. MS Raju Director (Rtd), School of Management and Entrepreneurship, KUFOS, Ernakulam. Contact: eboard@icai.in Executive Overview: Mounting NPAs & The Liquidity Crunch “Financing companies like Micro Finance Institutions (MFIs), Non-Banking Finance Companies (NBFCs), Co-operative Banks (CBs) and Banking companies (BC) are starving from lack of capital due to the threat of mounting Non-Performing Assets (NPAs). The reasons for recent jump in the NPAs and capital requirements were fuelled to a great extent by the COVID-19 pandemic. Collection efficiencies across all the lenders have reduced substantially. Read on....” 1. The Indian Housing Crisis: 4.58 Lakh Stalled Homes Big-ticket industrial loans, luxury housing projects, and commercial loans started displaying symptoms of failure in the early phase of the COVID-19 pandemic and are currently in an acutely weakened state due to a severe liquidity crunch. Crucially, most of these accounts were classified as standard performing assets until lockdowns commenced. While seasoned listed corporations can access capital markets with relative ease, raising primary capital remains a herculean task for unlisted real estate developers. Most residential construction companies in India operate as unlisted entities, confined to localized demographic micro-markets without an all-India corporate presence. The Stalled Project Reality: Metro vs. All-India Figures Seven Major Metros (Delhi-NCR, MMR, Chennai, Kolkata, Bengaluru, Hyderabad, Pune): Nearly 2.20 lakh housing units worth Rs 1.56 lakh crore, where construction commenced on or before 2011, remain stalled and incomplete. All-India Total: Around 4.58 lakh housing units stand incomplete and stalled across the nation as of March 2020. Government SWAMIH Fund Package: The Union Finance Minister announced a support package of Rs 25,000 crore to revive stalled projects. Under this mechanism, the Central Government committed Rs 10,000 crore, with the remaining capital syndicated via state-owned Life Insurance Corporation of India (LIC) and State Bank of India (SBI) through a SEBI-registered Category II Alternative Investment Fund (AIF). However, given the gargantuan scale of capital required to rescue lakhs of stranded middle-class home buyers, public budget allocations alone cannot suffice. The government must explore innovative capital market alternatives such as Special Purpose Acquisition Companies (SPACs). 2. Special Purpose Acquisition Company (SPAC): Anatomy & Operational Life Cycle A SPAC is a publicly traded, developmental-stage company that possesses no commercial operations or established business plan of its own. It is formed strictly to raise capital through an Initial Public Offering (IPO) with the explicit objective of merging with or acquiring an existing operating business entity. SPACs perform as cash-rich enterprises scouting for prime investment opportunities with substantial funds in their kitty—hence popularly termed “Blank Cheque Companies”. Globally, SPACs achieved explosive growth in European capital markets and the United States. In 2020 alone, more than 50 SPACs registered in the USA, raising approximately $21.50 billion from public markets, typically structured to complete an acquisition within 18 to 24 months. The Seven Phases of a SPAC Deal Lifecycle Sponsor Backing & Formation: Formed and led by seasoned private equity investors, venture capitalists, and industry veterans with proven domain track records. Blind Pool Formation: At incorporation, the SPAC identifies no specific acquisition target to the public; internal investment avenues remain undisclosed during the IPO. Underwritten IPO: Shares and warrants are underwritten by investment banks or privately placed with institutional anchors before broader public subscription. Two-Year Trust Escrow: IPO proceeds are quarantined in interest-bearing government securities or trust escrow accounts for a maximum period of 2 years. Interest earned, net of administrative expenses, accrues toward the acquisition. Mandatory Liquidation Safety Net: If the management fails to consummate a qualifying business combination within the 2-year window, the SPAC is dissolved and 100% of escrowed funds are returned pro-rata to public investors. De-SPAC Business Combination: Upon shareholder approval, the target company merges into the SPAC, enabling the operating business to continue as a publicly traded company. Fast-Track Listing Benefits: Unlisted operating targets achieve listed status rapidly, bypassing traditional IPO roadshows, book-building delays, underwriting discounts, and market volatility. Chart 1: Operational Capital Flow in a SPAC Architecture Public Investors & Sponsors ➔ Subscribe to Shares / Warrants ➔ SPAC Issuer Entity ➔ Execution of Trust Agreement & Appointment of Trustee/Board ➔ IPO Proceeds held in Escrow ➔ Disbursed as Acquisition Consideration to Target Operating Company upon De-SPAC closing. 3. Indian Regulatory Bottlenecks: Detrimental Laws Inhibiting Domestic SPACs Currently, SPACs cannot be incorporated or listed domestically in India due to conflicting statutory frameworks that penalize non-operating shell structures: Statutory Enactment Conflicting Legal Provision Practical Impediment to SPACs Companies Act, 2013Section 4 (MoA Objects) Requirement to define specific commercial object clauses in Memorandum. A SPAC is formed with an open-ended mandate without defined commercial operations, creating ambiguity under Section 4. Companies Act, 2013Section 248 (Strike-Off) Failure to commence business within 1 year or inoperation for 2 preceding FYs triggers RoC strike-off. A SPAC legitimately waits 18–24 months to identify an optimal target, exposing it to automatic deregistration unless granted dormant status u/s 455. SEBI (ICDR) RegulationsProfitability Route / Reg 26 Mandates ₹3 cr net tangible assets (3 yrs), ₹15 cr pre-tax operating profit (3 of 5 yrs), and ₹1 cr net worth (3 yrs). Newly incorporated SPAC shell entities possess zero operational track record, making public IPO qualification impossible under existing rules. SEBI (SAST) Takeover Regulations, 2011 Strict triggers for open offers upon acquiring voting rights or control. Applicable if the target is listed, imposing stringent caps on acquired control and stretching transaction timelines. FEMA Regulations, 2018Cross-Border Mergers Overseas investment and inbound/outbound mergers require multistage RBI approvals. Lengthy regulatory clearances severely prolong the 18–24 month deal window when cross-border structures are deployed. Stock Exchange RulesNSE / BSE / Overseas Lack of specialized SPAC listing chapters (contrast: LSE reverse merger delisting rules; NASDAQ $5M asset test). Absence of standardized domestic exchange guidelines leaves promoters without a clear listing roadmap. Shareholder Redemption Indian company law lacks flexible statutory redemption of public equity prior to de-SPAC. US provisions guaranteeing refund of invested capital protect investor liquidity; absence in India weakens retail confidence. Income-tax Act, 1961Capital Gains Tax Transfer of Indian shares for cash or foreign shares triggers capital gains tax. Foreign SPAC deals trigger capital gains for Indian promoters; domestic SPACs could enjoy tax neutrality under Section 47 amalgamation. 4. Indian Precedents: Cross-Border Listings via US SPACs In the absence of a domestic framework, prominent Indian enterprises successfully utilized the US SPAC corridor to access global capital on NASDAQ: 1. ReNew Power ➔ RMG Acquisition Corp II India’s premier renewable energy champion combined with US-based SPAC RMG Acquisition Corporation II (RMG II), achieving a landmark public listing on NASDAQ. 2. Videocon D2H ➔ Silver Eagle Acquisition Listed on NASDAQ via reverse merger with Silver Eagle Acquisition Corporation, co-founded by Harry Sloan (former MGM chief) and Jeff Sagansky, issuing American Depositary Shares (ADSs). 3. Yatra Online ➔ Terrapin 3 Acquisition Corp Leading Indian travel portal Yatra.com achieved a NASDAQ listing via reverse merger with Terrapin 3 Acquisition Corp (TRTL) underwritten by Deutsche Bank through its US holding firm. 5. Deploying SPACs in the Housing Sector: Restructuring Stressed Real Estate SEBI’s Primary Market Advisory Committee (PMAC) has constituted a Committee of Experts (COE) to evaluate the regulatory feasibility of introducing SPAC frameworks in India. While startups are natural beneficiaries, the stalled housing sector represents the most urgent candidate for SPAC intervention. Housing Finance Institutions (HFIs) and banks hold substantial exposure in incomplete real estate projects, where loans have degenerated into Non-Performing Assets (NPAs) with inadequate security to enforce mortgages. A formalized, sector-focused Housing SPAC can operate on a pan-India basis, achieving economies of scale in material procurement, engineering management, construction costs, and professional oversight. Table 1: Location-Specific Breakdown of Delayed Units & Incomplete Housing Projects in India State / Metropolitan Cluster Number of Stuck Units State / Metropolitan Cluster Number of Stuck Units Delhi-NCR Region 83,470 Mumbai Metropolitan Region (MMR) 43,449 Rest of Maharashtra 12,644 Coimbatore & Suburbs 11,954 Chennai 9,650 Hyderabad 8,131 Kolkata 5,468 Bengaluru 4,150 Rest of Tamil Nadu 3,214 Rest of Karnataka 2,817 Goa 3,864 Gujarat (Ahmedabad, Rajkot) 3,864 Madhya Pradesh (Indore, Bhopal) 1,844 Raipur, Chhattisgarh 1,098 Bhubaneswar, Cuttack & Odisha 1,028 Dehradun, Uttarakhand 978 Bihar (Patna) 967 Uttar Pradesh (Lucknow) 887 Guwahati, Assam 814 Jharkhand 718 Patiala, Amritsar, Punjab 371 Rest of Kerala 384 Telangana (Ex-Hyd) 271 West Bengal (Asansol, Haldia) 214 Shimla, Himachal Pradesh 117 Other Outlying Locations 103 Source: Consolidated from industry research reports (Economic Times, JLL, MagicBricks, Times of India, Business Standard). National Urban Housing Shortage: The RICS – Knight Frank Report As evaluated in the research report “Brick by Brick” prepared by the Royal Institution of Chartered Surveyors (RICS) in association with international property consultant Knight Frank: India is projected to require an additional 25 million affordable houses by the year 2030. As of July 2019, the urban housing deficit stood at approximately 10 million units, predominantly concentrated within the Economically Weaker Section (EWS) and Lower Income Group (LIG) segments. Completing partially constructed homes is an urgent national priority. The top three clusters—Delhi-NCR (83,470 units), MMR (43,449 units), and other parts of Maharashtra (12,644 units)—aggregate to approximately 1.40 lakh stalled units. If a specialized Housing SPAC focuses solely on Delhi-NCR and MMR, it could resolve and deliver 1.27 lakh homes through operational synergies, clustered material procurement, and localized project execution. 6. Conclusion & Policy Recommendations: A Pilot Sandbox for Stalled Housing The globally proven SPAC structure should be actively evaluated for implementation in India, at least for capital-starved priority sectors requiring urgent intervention—namely housing construction, infrastructure development, rural healthcare, and tech start-ups. Regulators can test the waters by formulating sector-specific regulatory sandboxes. Based on early performance and monitoring, compliance parameters can be calibrated before expanding across broader industries. Quantifiable Social & Financial Impact of a 20% SPAC Resolution Even if domestic SPACs achieve a modest 20% resolution rate across the Delhi-NCR, MMR, and Maharashtra clusters, approximately 25,000 completed homes would be delivered to families. This would release thousands of crores in frozen HFI loans, turn stressed non-performing assets back into cash-generating units, and provide a permanent institutional panacea for incomplete properties in India. References Harvard Law School Forum on Corporate Governance, Special Purpose Acquisition Companies: An Introduction. Annual Report 2019-2020, Ministry of Housing and Urban Affairs (MoHUA), Government of India; Centre for Policy Research, New Delhi. National Housing Bank (NHB), Annual Report – Report on Trend and Progress of Housing in India 2019-2020. National Stock Exchange of India (NSE), Annual Report 2020. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) November 2021 Issue • Vol. 70 • No. 5 • pp. 84–88 (Journal pp. 596–600) Authors Contact: kvsatheesh@gmail.com | eboard@icai.in

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 27–31 (Journal pp. 407–411) INFORMATION TECHNOLOGY • DATA ANALYTICS & FINTECH Data Science and Analytics Capabilities in Accounting and Finance CA. Saurabh Goenka (Member of the Institute of Chartered Accountants of India) The author is a member of the Institute. The author can be reached at eboard@icai.in. 💡 Executive Summary & Digital Mandate The world is not the same as it has been a few decades back. The pace at which change takes over us is massive and sometimes overwhelming to deal with. Amidst this tsunami of digitization, data plays a central and pivotal role. All digital capabilities have evolved around the need to process data faster and in real time, harness as much insights as possible and deliver it to business users with agility to create maximum impact. Read on… 1. Introduction: The Ubiquity of Data in Modern Finance Without much surprise, data is becoming more and more ubiquitous in accounting and finance professions and is disrupting the world of finance and accounting as much as it has impacted other business functions like operations, supply chain management, demand forecasting, etc. Traditionally, data was derived from research studies. Nowadays, it is being created in real time by machines across various industries. With the rise of machine learning algorithms along with AI, accounting professionals need to keep up with the latest technological developments so they can interpret data to make informed business decisions. Every action a business user takes is being converted into actionable insights and data and the more this is generated, the greater becomes the need to process them in real time. This article intends to give you a very high-level overview of the world of data science in general and how is it playing a role in the world of accounting and finance. 2. Defining Big Data, Data Science and the Four Analytics Tiers What is Big Data? Not far away from its nomenclature, ‘Big data’ is just that—BIG data. This refers to the generation, storage and processing of very large volumes of data which is typically characterized by the following three features: 1. Volume Big data typically operates at a massive data scale, with approximately 80% data lying in the semi-structured to unstructured realm. 2. Velocity Big data is characterized by rapid data flow and dynamic data systems which need real-time analysis, automated insights generation and continuous tweaking of the underlying analytics algorithms to continually move up through the ranks of mere descriptive analytics, through to predictive, diagnostic and prescriptive analytics. 3. Variety Big data typically comprises of highly diverse data types using a combination of emails, files, images, videos, IoT data streams and other proprietary data elements. Big data enables the CFO and his team to proactively identify issues with real-time access to the data, so that businesses can base their decision-making on hard evidence and facts, rather than emphasizing guesswork and assumptions about customers, employees, and vendors. Key Questions Enterprises Are Asking About Big Data: How to store and protect big data How to backup and restore big data How to organise and catalogue the data that you have backed up How to keep costs low while ensuring that all the critical data is available when it is needed The Four Types of Data Analytics To get a better idea of big data, it’s important to understand four types of data analytics: 1. Descriptive Analytics Answers the question of “what” happened. 2. Diagnostic Analytics Historical data can be measured against other data, to uncover “why” something happened. 3. Predictive Analytics Answers “what is likely” to happen in the future. 4. Prescriptive Analytics Indicates recommendations or “best course of action”. What is Data Science & Its Importance for F&A Professionals? Data Science is an interdisciplinary field that uses scientific methods, processes, algorithms, and systems to extract knowledge and insights from data on various forms. What is the importance? What role it is playing for Finance & Accounting professionals? Data Analytics is used to help businesses uncover valuable insights within their financials and process improvement opportunities which can further help increase in efficiency. As businesses increasingly try to position themselves to reap benefits from data analytics, Finance & Accounting professionals are also poised to play a leading role in managing that transition. Digitalisation in modern business means that Finance & Accounting professionals with the skills and aptitude to identify, analyse and use vast amounts of financial data are in high demand. 3. Applications of Data Analytics Capabilities in Finance & Accounting Data analytics play a key role in many aspects of finance and accounting: Eliminate Inefficiencies: Predictive analytics can be used to eliminate inefficiencies and waste by identifying when transactions are at risk of being fraudulent or lost, allowing company leaders to act before it happens. This approach also enables the company to identify which customers are most likely to respond favourably to special offers, allowing businesses to build stronger relationships. Better Corporate Governance: The Board of Directors has a challenge to ensure that the company is run in the best way possible, while also ensuring that its stakeholders are not being taken advantage of. This can be done by focusing on good corporate governance practices, which includes transparency and accountability. Create a match between strategy and resources. Companies are increasingly using the Balanced Scorecard to align their strategies with available resources. Improve Control Processes & Compliance Management: Effective control processes help businesses to realise their potential and improve performance while reducing risk. They should be integrated into the business strategy, governance structures and information systems to create a culture of compliance and control that is sustainable over time. In the past, the primary purpose of a financial controller was to ensure that an organization complied with all relevant legislation and accounting standards. Today, however, organizations need to be aware of a far wider range of legislation and regulation that includes social responsibility requirements such as fair-trade practices or ISO 14001 environmental management systems. Reduce Fraud: Using data analytics, fraud can be reduced by classifying data and transactions to allow for early detection of fraud attempts. Fraudulent activity is easier to detect when the fraudulent activity is similar in style and character to previous frauds, allowing for simple recognition of anomalies. Identify Financial Reporting Issues: Data analytics can also be used to identify areas of concern with financial reporting, such as the existence of duplicate accounts or changes in a company’s reported earnings that seem inconsistent with economic factors. 4. Evolutionary Role of the CFO & Digital Disruption in India From Operator & Controller to Strategic Partner The facet of CFOs in India playing the role of an operator and controller is surely changing. The role played by a CFO has ever been evolutionary. He/she was traditionally seen as someone in charge of ensuring the right accounting governance, managing working capital, controlling the costs of the organization, balancing inventory, and managing capital expenditure. He/She was seen as a controller with a focus on transaction processing and financial reporting. In some cases, the CFOs were able to break out of the archetype and craft a role of finance as a true enabler for business decisions. However, this process of evolution has been a long journey and required significant change management at various levels. Now, a CFO is looked upon as a strategic business partner. The challenge is to prepare the finance leaders for this new ask from the business and society. The digital revolution in India has made this ask even more competitive–not only is the CFO expected to excel as a business partner, but the role also requires the incumbent to thrive and contribute to an ever-changing digital ecosystem. Digital Disruption & India’s ‘Digital Bharat’ Infrastructure As we are on the verge of digital disruption, initiatives such as Aadhaar, the Unified Payments Interface (UPI), and the Jan-Dhan Yojana are classic examples of how the economy is being introduced to Digitalization. It has been a step-by-step implementation by the government. It first established the platform and the ecosystem which paved the inspiration for subsequent steps, a classic example being the Aadhaar enabling Direct Bank Transfer (DBT). It is needless to mention that demonetisation has only accelerated the method. If the whole frontend is becoming more digital and autonomous, it’s only natural that the functions that support this ecosystem should continue with these rapid economic and business model changes. The way Indian businesses and finance leaders are approaching the challenge, Indian finance organisations will soon be recognised as one of the most digitally advanced over time, well aligned to the government’s vision for Digital Bharat. 5. Why F&A Professionals Naturally Excel in Data Science There are three strong foundations on which an F&A professional can make an excellent data scientist: 1. Technical Skills F&A professionals naturally aggregate information in a manner that summarises details of transactions and other numbers. Because they already have quantitative skills, they find it easier to work with descriptive analytics, predictive analytics, and prescriptive analytics. 2. Problem Solvers The jump to predictive and prescriptive analytics requires a shift to an inquisitive mindset – from stacking and sorting information to figuring out how to use that information to make key business decisions. F&A professionals are most equipped to make this shift. 3. Business Implications Over Pure Numbers The true value of data analysis comes not at the point when the data is compiled, but when decisions are made using insights derived from the data. A data scientist must first understand the business context to uncover these insights. F&A professionals understand the context better than any external data scientist because of their connections within the organisation. 6. Data Science in Fintech & Core F&A Operational Arenas Fintech Disruption & Machine Learning Capabilities Data Science in Fintech: Machine learning, artificial intelligence, predictive analytics, and data science technologies are used by Fintech firms to improve financial decision-making and offer superior solutions. Data Analytics in Fintech: Digital platforms create algorithm-driven, automated financial planning and investment services for investors. The client data is used to provide financial advice or to automatically invest client assets in instruments and asset classes that are better suited to their needs and goals. Fraud Detection in Fintech: Big Data and Data Mining techniques can be used where massive volumes of fraudulent online transactions happen, and data models can be created in a manner that will allow to detect or foresee fraud in the future. Acquiring and Retaining Customers: Detailed and diverse customer profiles are created by banks and financial institutions using external and internal customer data. It can be used to provide highly personalized services. For instance, an algorithm could be constructed to predict what additional goods or services the consumer would want to buy based on their historical purchasing behaviour. F&A Arenas Where Data Science is Already Playing a Major Role F&A Decision Making: Finance & Accounting professionals are now expected to add value to decision making and manage risk. Strong data analytics gives them the required tool set for informed decision making to strengthen business leadership. Audit Data Analytics: Auditors monitor much larger data sets instead of a sample-based model. This will result in reduction of errors and more precise recommendations. Tax Consulting: Tax accountants use data science to analyse complex taxation queries related to investment. Investment Advisory: Big data is used by investment advisors to figure out the behavioural patterns of both customers and the market. This also assists the businesses build analytical models to handpick the best investment opportunities. Forensic Support Program: Forensic and analytics expertise is applied to selected audits, fraud brainstorming, journal entry testing, tailored analytics, etc. 7. Emerging Industry Trends & Conclusion The Analytics Readiness Deficit (Harvard Business Review Survey): A 2019 survey of U.S. executives found that most – 63% – do not believe their companies are analytics-driven and 67% say they are not comfortable accessing or using data from their tools and resources (Source: Harvard Business Review). Therefore, organizations across the spectrum are being earnest and nimble-footed about the analytical and technical up-skilling of their workforce. There is a huge investment going into technology and training. Amazon’s USD 700m towards reskilling its employees in tech training over the next 4 years is just one example. Lessons from Indian Public Sector Bank Computerization: A prime example is the banking system in India. Computerization of public sector banks and their evolution from the hardbound ledgers to core-banking would have never been achieved if the employees did not adapt to the change, adopt new technology, and most importantly bring about a shift in mindset. With the rise of new technologies and data analysis capabilities, accounting and finance teams are facing significant changes. These changes are impacting the way they evaluate new opportunities, develop strategies, and optimize their performance. To enhance their abilities associated with advanced analytics, F&A professionals have to upskill themselves through on-the-job training programs and professional courses which will further develop both the foundational areas of data and competency alongside data science and analytics competence. The leaders of tomorrow are going to be those that understand data and therefore the impact of data quicker and are ready to influence it within the most effective way possible by leveraging all the tools, techniques, and processes available in this new Digital Age.

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 32–34 (Journal pp. 412–414) Information Technology • Financial Engineering & Automation Creation of Digital Twin for Accounting and Controllership GA Geeta Ahuja The author is an expert in the area of finance and digital transformation. Contact: eboard@icai.in Executive Overview: The Evolution of Controllership “Controllership is a key function within the CFO’s organization. In the nineties, controllers were mere accountants and had no role to play within the management realm or financial decision making. Fast forward to the current era and we see that the role of the controller has evolved. They are no longer solely “spreadsheet jockeys”. Due to intense scrutiny from regulators in every industry, the controllership organization is an independent authority and plays second fiddle to none. Read on....” 1. The Strategic Elevation of Controllership In order to take away tedious, cumbersome tactical execution, accounting and controllership workflows represent prime candidates for comprehensive digitization. Historically relegated to recording historical transactions on spreadsheets, accounting leaders have undergone an institutional shift. Modern digital controllership enables finance leaders to step firmly into operational leadership, directly applying specialized accounting acumen to corporate strategic planning, enterprise risk management, statutory compliance mitigation, and robust internal controls design. 2. Enter: The Controllership Digital Twin Digitization in enterprise finance has matured significantly—advancing from basic automation of isolated routines and controls to the systematic architecture of intelligent, self-monitoring processes. Automation technologies can automate tedious, time-consuming tasks like inter-company reconciliation, fixed asset accounting, financial closing, and group consolidation. While these operational tasks conventionally require hours of daily manual calculations, automation technology streamlines their execution end-to-end. Core Dimensions of the Intelligent Controllership Engine Continuous KPI & Compliance Measurement: Dynamically measures performance metrics while verifying real-time compliance against both external statutory regulations and internal corporate accounting policies. Finance Transfer Function Architecture: Seamlessly defines and validates the mathematical and operational transfer functions linking upstream supply chain/commercial processes to downstream financial ledgers. Forensic Accounting & Auditing Diagrams: While the Six Sigma methodology has taught process governance within the DMAIC (Define, Measure, Analyse, Improve and Control) framework for decades, the digital definition of financial data diagrams is now recognized as a pre-eminent pillar of forensic auditability. Democratization of Regulatory Machinery: Sophisticated auditing protocols—previously deployed exclusively by institutional regulators such as the US Securities and Exchange Commission (SEC)—are now made internally accessible within enterprise systems. This breakthrough is achieved via Digital Twin technology, which essentially synthesizes decades of sophisticated financial theory and institutional learning into transactional and operational accounting workflows, putting compliance execution on automated “cruise control”. 3. Mechanics of Digital Twinning within Accounting & FP&A Financial Planning & Analysis (FP&A) offers an intuitive starting ground for understanding digital twinning in practice. Management reporting across multi-tiered corporate entities necessitates massive aggregations, roll-ups, and complex multi-currency consolidations. Controllers perpetually face the arduous burden of ensuring that operational definitions remain standardized, comparisons reflect strict “apples-to-apples” parity, and historical figures are properly normalized for recast during corporate reorganizations and restructurings. How the Controllership Digital Twin Executes Process Integrity Operational Definition Induction: Injects rigid operational formulas and transfer functions directly into the processing engine (“the black box”) to guarantee invariant calculations. Financial Engineering Validation: Verifies mathematical computations and balance roll-forwards not merely as arithmetic equations, but through financial engineering lenses—scrutinizing structural trend shifts, statistical outliers, sudden jerks, and anomalous velocity in ledger balances. Digital Anomaly Diagrams & Alerts: Generates real-time visual diagrams of missing transactional data and dispatches automated alerts immediately upon identifying accounting irregularities. Conversion to Live Insight: Elevates reporting from a passive, dumb replica of structured tabular data into an active, live diagnostic environment monitoring strategic KPIs. Rolled Throughput Calculation: Calculates rolled throughput yields—identical to advanced manufacturing assembly lines—by mapping interdependent relationships across Suppliers, Inputs, Processes, Outputs, and Customers (SIPOC). Six Sigma Yields (1.2 DPMO): Grounded in Six Sigma statistical foundations, enabling accounting organizations to target near-zero error rates approaching 1.2 defects per million opportunities. 4. Management Parallel: Jack Welch and the “Tarrytown 21” The conceptual architecture of digital twinning mirrors classic corporate engineering breakthroughs. During the 1980s, when legendary CEO Jack Welch convened his executive management team in the village of Tarrytown, Connecticut, the corporate dashboard running the entire multi-billion-dollar General Electric (GE) conglomerate was distilled into just 21 decisive metrics across all global business units and operating functions (christened the Tarrytown 21). The Power of Reverse-Engineered Six Sigma Welch accomplished this operational feat by mastering financial engineering and reverse-engineering Six Sigma methodologies around every potential failure mode capable of impairing corporate profitability. In the same manner, the modern digital twin mimics this mastery—memorializing the institutional wisdom and analytical rigor of top financial minds into repeatable, automated systems. 5. FMEA Architecture: Why the Controllership Twin is “Suspicious” Controllership has derived its foundational tools from advanced financial management. In addition to transactional SIPOC mapping and procedural workflow documentation, the controllership digital twin incorporates Failure Mode and Effects Analysis (FMEA) to evaluate compliance exposures, vulnerabilities, and internal control thresholds. Tri-Color Control Signal Mechanism The controllership digital twin dynamically “lights up” the control-based process track, emitting clear operational signals: 🟢 GREEN SIGNAL: Fully Compliant & Stable Validates tactical workflow adherence, standard execution frequencies, high repeatability, and unimpeachable data reliability. 🟡 YELLOW SIGNAL: Early Warning / Drift Identifies unusual statistical variance, lagging submission timings, outlier spikes, or reconciliation friction requiring pro-active review. 🔴 RED SIGNAL: Non-Compliance / Breach Flags critical control failures, policy violations, missing audit evidence, regulatory breaches, or balance reconciliation breakdowns. From this vantage point, the controllership digital twin operates in a fundamentally more “suspicious” mode than a general management twin. While management twins emphasize commercial velocity and performance output, the controllership twin relentlessly cross-examines the forensic integrity of the underlying process, transactional data, and statutory compliance. To function successfully, well-documented, battle-tested processes and an established controllership legacy must pre-exist within the enterprise. 6. Why “Twins”? Anatomy of Exact Process Duplication In ordinary process automation, creating “siblings” or “step-siblings” often suffices, as digitization typically seeks efficient, simplified ways of executing tasks without necessarily mirroring the current state. However, the term “twinning” carries a far stricter scientific implication: it requires an exact, conjoined, identical replica rather than a loose fraternal approximation. The science of twinning creates one-for-one measurement imagery where every individual component and procedural step is substituted by a virtual anatomy of the living process. The Circulatory System & Medical Diagnostic Analogy Just as a biological body possesses vital signs (pulse, blood pressure, oxygen saturation) evaluated against upper and lower physiological thresholds, the virtual process anatomy operates with calibrated upper and lower tolerance limits. When actual ledger outputs deviate from defined thresholds, the process is diagnosed as unhealthy. Similarly, just as different branches of medicine govern specific bodily organs, Subject Matter Experts (SMEs) must map out customized operational thresholds for each distinct accounting area. Extending this biological metaphor: just as oxygen is pumped by the heart throughout the circulatory system, financial data must be pumped by a central enterprise data hub that continuously circulates vital transactional metrics to every functional node of the digital twin. 7. Practical Challenges: Human Volatility vs. Mechanical Consistency Replicating physical machinery—such as jet aircraft engines or industrial power turbines—is far simpler than modeling a “living and breathing” organizational process. Human operators are inherently dynamic, fluid, and volatile; individuals may alter operational routines on a daily basis. The Mandatory Prerequisite: Digitization Before Twinning Comprehensive digitization is an indispensable first step prior to digital twinning in order to stabilize the underlying workflow, rendering it repeatable, disciplined, and reliable. Statistical interventions are mandatory to solve complex transfer equations—serving as an indispensable “MRI scan” to pinpoint root causes behind process bottlenecks and balance deviations. While industrial digital twins have matured over decades, digital twins in business processes—and corporate controllership in particular—remain cutting-edge. Mistaking an automated account reconciliation software for a true digital twin represents an elementary misunderstanding of the technology. This massive capability gap underscores the rapid emergence of high-demand techno-functional finance experts who bridge advanced data engineering with rigorous accounting principles. 8. Conclusion: The Techno-Functional Future & Cognitive Governance By leveraging cognitive technologies, financial controllers can attain seamless harmony between operational reality and virtual monitoring. This symbiosis creates a brand-new professional paradigm, progressively replacing purely functional accountants with multifaceted techno-functional leaders. Once rule-based transactional mechanics are automated, controllers shift their intellectual focus toward high-value management analysis, predictive financial modeling, and forensic anomaly investigations. Artificial Intelligence (AI) Analyzes voluminous transactional “big data” across disparate enterprise databases to reveal hidden correlations, generate reliable forecasts, and empower agile decision-making. Machine Learning (ML) Conducts highly accurate predictive financial planning, self-adjusting algorithms based on ongoing performance feedback and operational variances. Cognitive Intelligent Agents Equips financial controllers with advanced strategic acumen, positioning the controllership organization as an indispensable advisory partner to senior management. Full Operational Scope of Controllership Digital Twins Routine operational accounting will be overseen by continually evaluated algorithms, while controllership digital twins are deployed across every functional discipline: Cost Accounting Lease Accounting Fixed Asset Accounting Inter-Company Reconciliations Accruals & Provisions General Ledger Reconciliations Statutory & Regulatory Compliance External & Internal Audit Oversight Revenue Recognition Expense Management Delinquency Tracking Conflicts of Interest Mitigation Sensitive Governance Domains The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) October 2021 Issue • Vol. 70 • No. 4 • pp. 32–34 (Journal pp. 412–414) Author Contact: eboard@icai.in

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 35–42 (Journal pp. 415–422) INFORMATION TECHNOLOGY • DIGITAL AUDIT & AUTOMATION Robotics Process Automation and Audit – A transformation CA. Nisha Kapur (Member of the Institute of Chartered Accountants of India) & Abhishek Kumar Singh Authors can be reached at nisha.kapur@yahoo.com, abhishekbhu008@gmail.com and eboard@icai.in. 🤖 Executive Summary & Scope The advent of Robotic Process Automation (RPA) has the plausible ability to reinforce the traditional audit model. Applying its skill of automation of the task that is rule-based, repetitive, and manual, an RPA can remodel the role of an auditor by substituting stereotype tasks and labour the point on higher-order thinking skills that lead to enhanced audit quality. This paper contemplates the future of audit by unveiling the concept of RPA technology and describing its budding usage in the audit field. The focus will be on the methodology for effective implementation of RPA-based audits and exploring the audit methods where RPA can show its performance and finally, displaying RPA working style to perform significant audit areas. Read on… 1. Understanding Robotic Process Automation (RPA) A layman may fancy RPA robots to be physical machines moving around the office replacing human labour. An RPA robot is a pre-configured software that performs the task on a computer. RPA bots can unbelievably improve processes and economies of scale when the steps to perform are rule-based tasks which are repetitive and manual. Conversely, RPA bots are not well suited for those tasks that require elements of human judgment, have uncertain outcomes, or that occur infrequently. When implementing RPA robots for the first time, organizations should look for enhanced productivity; hence, shun away from complex and subjective tasks. Business Value Proposition of RPA: RPA technology adoption leads to providing superior service quality, exceptional ROI, matchless process automation, enhanced compliance, upgraded business agility, and towering total business value. 2. Characteristics of Processes Suitable for Automation Processes considered suitable for automation are identified based on the following nine characteristics: High volume and value of transactions: Transactions occurring at substantial scale. Limited exception handling: Clear, predictable standardized workflows without erratic edge cases. Stable environment: Operating environments and underlying IT systems that remain consistent over time. Frequent access to multiple systems: Scenarios requiring frequent data movements across ERPs, spreadsheets, and portals. Ease of breakdown into defined and small processes: Modularity that allows breaking procedures into atomic, sequential actions. Clear understanding of manual processing cost: Transparent metrics on time, headcount, and financial expenditure incurred manually. To involve a significant amount of human effort to execute them: High human labour hours expended on mundane data entry or extraction. To be repeatable at the interval: Recurring weekly, monthly, or quarterly reporting rhythms. The solution is based on a clear set of rules: Unambiguous logic trees without subjective human discretion. 3. Work Performed by RPA Robots (Digital Workers) Digital workers are virtual employees who comfortably assist human workers by performing various business functions. These software bots mimic human beings and replicate tasks performed by them, saving time and energy to be fruitfully associable to a complex task requiring intellectual judgment. After configuring the tasks to show these smart bots what to do, then allow them to do the work they perform dexterously. Core Capabilities and Tasks Executed by RPA Software Bots: • Logging into web or enterprise applications • Opening, reading, downloading, and sending emails and attachments • Data collection, processing, and calculations • Extracting and formatting data for documents • Making calculations and validating data • Comparing and contrasting two data sets • Reading, writing, and updating databases • Reformatting data into reports • Generating, sending, and sharing reports • Escalating early-warnings • Connecting to multiple systems, uploading and downloading data 4. RPA Technology in Auditing Audits carry lots of weight as a mechanism to control and constrain violation and corruption in the modern world. Audit assures independent scrutiny and verification of business performance, the ethics of the officer in charge, and the obedience to rules, regulations, and law; to safeguard the confidence of customers, shareholders, suppliers, and public authorities. An RPA-enabled audit targets the audit quality. RPA bots step into the shoes of an auditor and perform all structured, time-consuming, and repetitive activities; as a result, the auditors get plenty of time to focus on complex testing and investigation of accounting anomalies making the audit process more productive and valuable. 4.1 On the Road Towards RPA-Based Audits (Implementation Methodology) RPA robots are a hidden gem for the audit profession as they can change the role and responsibility of an auditor by shifting the focus from data collection, testing, and analysis to complex and high-risk areas of control testing and exception scrutiny. An auditor for yielding the maximum profit from RPA bot employment must address the following points: a) Process Recognition: The first and foremost step for an auditor is to identify the process capable of automation. The process is a series of tedious, manual, and repetitive transactions and requires minimal decision power, most importantly, it should be rule-based and can be automated. b) Defining Steps for Automation: RPA workers follow the pre-embedded conditions built in the small steps of an audit process that executes the task as a human being would perform. For example, for performing the simple task of checking unread e-mails, a software bot follows a series of commands to open the browser, log in with their credentials, identify and read e-mails. Thus, the next vital step for an auditor is to select those audit procedures having the potential of breaking down within the process into narrow categories and define the steps for software bots who can execute the task in series to accomplish the perfect results. c) Data Standardization: Data is the root of an auditing function. For the software program to successfully interpret the inputs (data attributes) in the auditing compilations, it should essentially be in a structured format. Audit data is voluminous and gathered from various and different sources. There is a possibility that collected information lacks uniformity. For example, one report might label sales while the other report might label revenue. Such contradiction may puzzle the robot and create challenges in decoding and portraying the required results. The solution to this problem is simple—to standardize data in a structured format to get the best results of RPA implementation. d) Selection of Audit Procedures for Automation: Several audit procedures may be rule-based and seem to fit the criteria to be automated by preliminary analysis, but it may not be beneficial to automate them all. Each audit procedure chosen further needs critical study and scrutiny on the following parameters for the final selection: Possibility of collection of data inputs digitally or can convert the data in a digital format quickly and accurately. Perform cost-benefit analysis by comparing and evaluating the value to be added over its life to the cost to be incurred for setting up operations and any further anticipated maintenance cost. The auditor must evaluate and choose the process that has readiness in digital format and gives the maximum payoff. e) Prototyping and Experimentation: After identifying and selecting the audit procedures to be automated, the next step that pops up is designing a prototype; whose implementation would award the desired outcome of successful automation. Prototype implementation would start from configuring the steps to be performed by software bots, followed by running the project by feeding sample data, evaluating the results, diagnosing the errors and deviations, and finally debugging and rectifying them. The procedure validates the pre-programmed conditions to mitigate any detour. f) Evaluation and Feedback: The audit environment is dynamic by having many amendments and reforms. After the RPA tool has been successfully launched and implemented in real-audit engagements, there is a need to regularly update and refine the embedded rules and instructions to match the right outcome. 5. Impact of RPA Robots Across Core Auditing Operations RPA robots step into the shoes of an auditor by performing structured, time-consuming, and repetitive activities. Resultant, the audit team gets a good amount of time to focus on complex testing and investigation of accounting anomalies, making the audit process more productive and valuable. RPA transforms six vital auditing areas: a) Audit Confirmations: Confirmations are a necessary tool of an auditing procedure that aids in increase of the reliance on the period-end balance. They support optimally mitigating the audit risk. Traditionally, sending confirmation is a manual process where letters are prepared and sent to period end titleholders, namely, banks, customers, and vendors requesting to confirm the balance. Implementation of RPA bots relieves the auditor with its ability to cover the entire population in no time, reduces the time and energy spent in the process, and ensures mailing of prompt and timely reminders in case of non-receipt. The RPA Confirmation Workflow: Builds in automation starting with logging the system to extract the list of account holders in conjunction with their period-end balance and communication address to send the confirmation. Next, the RPA worker prepares personalized confirmation letters for each recipient based on the model format. Then all confirmation letters are posted via online correspondence, replies received are downloaded and compared with, and finally the discrepancies are highlighted. Thus, the entire process gets automated, leaving just digging reasoning for inconsistency as a manual process. b) Audit Reconciliation: Reconciliations are an essential auditing technique to find out questionable, problematic, and undependable transactions. Working with software bots makes the entire process automated; they can easily perform the tedious task of studying and matching two jumbo sets of data tirelessly with accuracy and give exact results. The RPA Reconciliation Workflow: The RPA worker enables the reconciliation process by performing a series of tasks to push away manual labour, originating from logging into the system, downloading all the statements for reconciliation, followed by vigorous matching, and comparing the transactions in every data set. This performance works with the help of unique identification, for example, invoice number or voucher number. Lastly, it terminates with perfect and detailed identification and compilation of the mismatched entries to formulate the entries to be posted in the ledgers. c) Audit Testing & 3-Way Matching: Transaction testing is a vital auditing technique to look after the assessment of the risk of a material misstatement, done by performing analytical procedures, internal controls, and substantive testing. This technique comforts the auditor to get assurance on the effectiveness of client operations and established internal controls including verifying management’s assertions of existence, completeness, and valuation. RPA robots excel by thoroughly testing the entire population of millions of items to assure the auditor about data veracity. The RPA robots refine the workflow by enabling the management team to focus their in-depth audit lenses on exceptional items. RPA isolates about 60–70 odd transactions to be examined by the management for discussion and comments. Software bots can be easily programmed to automatically perform a 3-way match testing of the invoice, purchase order, and shipping documents for the entire population eliminating sampling risk. d) Audit Documentation: Documentation is a storehouse of the grounds and scenario that enabled the auditor to form its opinion. All the data gathered from varied sources are compiled together and stored as audit evidence. An auditor needs to maintain it properly to support its conclusion whenever required in a review or scrutiny. The exercise demanding manual work can turn out to be burdensome for auditors. RPA robots assist in regularizing the activity of audit documentation by fashioning the mode of collecting audit evidence by taking standardized data from each of the different sources and combining them into one audit report with minimal effort. As a result, the records maintained are well-organized, systematic, and precise. e) Audit Quality: A clear-cut intent of the client and the integral pressure for the auditor is to maintain the quality of an audit. Robots stimulate clients by gifting them a methodical, dependable, and standardized audit process flow by gathering data in a reliable and consistent format. Further, they potentially permit a means to design a robust process-oriented auditing approach by a complete analysis of the financial position by RPA auditor and focus on vital management decisions by human auditors. RPA robots can effortlessly evaluate the quality of the auditing data in any system. For example, concerning master data files, they take care of the completeness of all fields together including diagnosis of all duplicates and their validation. The RPA-based system can automate data collection and classification operations identifying core trends as a medium of the annual risk assessment process. f) Audit Progress Tracking: An audit plan not timely tracked can prove to be a disaster. Manual progress tracing not done dutifully may doom the assignment and reputation of an auditor. RPA robots excel when used to track the progress against the annual audit plan. In other words, they work efficiently to track and monitor key risk indicators (KRIs). RPA workers can automate by identifying open items, sending electronic mails to responsible parties, conducting regular follow-ups with escalating concerns when due dates spill over, and documenting remediation status. 6. RPA Models in Core Auditing Areas: Revenue Audit and Stock Audit Model 1: Revenue Audit Automation Revenue by default is one of the most high-risk areas in audit engagements. Revenue reconciliations and transaction testing are the best audit measures to provide comfort. They are most suitable to be performed by RPA robots being manually repetitive and do not require complex reasoning. RPA worker simulates the job by performing the following operations: Revenue Reconciliation: Software bots perform the reconciliation process, starting by logging into the client secure file transfer protocol (FTP) server, extract transaction listing, compile and compare total sales as per the trial balance. Analytical Procedures: RPA robots retrieve the total revenue amount from previous years’ records, compare with the current year, and generate an alert when the difference exceeds the 5% threshold of materiality. Revenue Testing: If no difference comes across, the RPA bots can test internal controls and substantive testing by accessing and extracting audit evidence in the form of purchase orders, invoices, and shipping listings provided by the client. After comparing all three factors, they flag discrepancies. Thus, using RPA expands coverage and empowers the auditor to focus time and energy on risky areas. Revenue Audit Workflow Architecture: 1. Revenue Reconciliation Log into client secure system to access audit evidence Enter a query to search TB and sales register Extract complete list of sales transactions incurred during the year into excel Compile and recompute the total sales value Compare with trial balance 2. Conducting Analytical Procedures Log in to access the audit workpapers of previous year Retrieve revenue workpaper to extract sales total Compare last year balance with current year Generate alert for difference more than 5% materiality threshold 3. Revenue Testing Log into client secure system to access audit evidence Enter query to search Purchase order, Invoice and shipping documents Extract and import the listings Compare and contrast the attributes in all three documents Generate alert for discrepancy Model 2: Stock Audit Automation Testing inventory is the most crucial area in auditing a financial statement. It is the most time-consuming and requires manual checking; thus, RPA becomes the best choice to unburden the auditors. RPA employees can be a handy asset for inventory management involving automation through the following operations: Stock Reconciliation: RPA robots log into the system and extract the stock quantity outstanding on the closing date along with the stock quantity physically verified by management from e-mail. Then effectively compares and reconciles the stock quantity escalating the variances. Stock Verification: RPA software bots extract the date of receipt of each item from the customer’s inventory system and retrieve the delivery date by searching for the tracking number on the goods carrier’s website. Next, it compares the two sets of data to determine the accuracy of the receipt date. 7. Conclusion & The Future of Audit We can conclude that RPA advocate robots can execute audit tasks in an error-free manner, which results in higher-quality data and refined reports. In addition, robotic auditing work can produce reliable records and deliver superior audit service. Further, it ensures reliability on audit tools and audit data by regular checks and evaluation along with privacy, security and satisfaction of both auditor and auditee. By offloading routine manual tasks to digital workers, audit professionals can redirect their intellect toward professional skepticism, forensic probing, internal control evaluations, and high-level advisory engagements—advancing both the standard of audit quality and stakeholder trust.

Information Technology ICAI Journal Ref: October 2021 • Vol. 70 • No. 4 • pp. 43–48 (423–428) Peer Reviewed Technical Article Reg Tech: Technology - Driven Revolutionary Compliance CA. Piyush H Mekhia (Member of the Institute of Chartered Accountants of India) Contact: ca.mekhia@gmail.com | eboard@icai.in Executive Abstract & Regulatory Context “The ascent of FinTech has not just advanced the operational effectiveness of the financial industry but also presented difficulties with effective regulatory compliance. RegTech – a revolutionary and essential dimension of FinTech – is the promising enabler of regulatory technologies (RegTech). To make regulatory compliance more viable and efficient, RegTech is emerging as mainstream. There is a growing development on the significance of regulatory control administrators to upgrade their ability using RegTech. RegTech holds great potential to enhance regulatory compliance. Although RegTech is considered to be in the early stage of developments, there is a need to discuss and apply it to streamline financial regulations and supervision. This paper focuses on the basic and organisational aspects of RegTech by using AI, Blockchain, Big Data and other embedded technologies—which improves overall RegTech framework.” 1. Introduction and History of RegTech 1.1 Introduction FinTech, through which RegTech originates, depicts technology that looks to automate and improve the delivery and application of services. FinTech can be utilized to help entrepreneurs, customers and businesses better manage their financial tasks, lives and processes using specific applications’ and algorithms which can be applied to PCs as well as progressively, cellular phones. FinTech, is a derivation from “Financial Technology”. RegTech is derived from the words “Regulatory and technology”. It is sphere that provides a variety of regulatory services for businesses inside the monetary, health, insurance coverage, along with other industries. RegTech is managing of regulating procedures in the company via technology. The key functions of RegTech comprise regulatory monitoring, compliance and reporting. RegTech is composed of a group of companies which uses cloud technologies and processing software-as-a-service (SaaS) to help businesses comply with legislation efficiently and less expensively. RegTech may also be known as regulating engineering. Finance associations and regulators both utilize RegTech to deal with complex compliances. RegTech is a result of the emergence of technologies being upgraded. Pre RegTech, firms needed to preserve compliances manually and the process was costly and time consuming. As of now, RegTech firms provide solutions and technology to safeguard issues such as regulating tracking, data analytics, risk management, identity control and compliance. Key Value Propositions: The 7 Core Claims of RegTech RegTech helps financial organisations to enhance their handling of compliances. As an integral part of financial organisations’ push towards going digital, RegTech claims to: 1. Toughen Compliance & Risk: Toughen compliance and risk management across operational facets. 2. Cost Reduction: Diminishing fixed cost of the statutory compliance framework. 3. Client Safety: Boosting safety, confidentiality, and data protection of clients. 4. Resource Enhancements: Direct enhancements and tangible improvements in organizational resources. 5. Business Understanding: Provide an important, data-driven business understanding and operational visibility. 6. Quicker Client Help: Provide clients with better, proactive, and significantly quicker help. 7. Drive Innovation: Drive new innovative items, products, and administrative services. Gradually RegTech is expected to have significant portion of overall regulatory spending. New technologies, very similar to machine learning (ML)/artificial intelligence (AI), predictive analytics, and data-driven promotion, will get rid of the guesswork and dependence outside of financial conclusions. Learning programs will learn the behaviour to produce automatic, subconscious savings and spendings. FinTech is additionally a point of automatic customer service tech, utilizing chatbots and AI ports to help customers with the main mission not to mention hold down staffing expenses. FinTech is additionally being leveraged to combat fraud through leveraging advice regarding the foundation of payment to detain trades which could be outside the door. 1.2 Conceptualisation of RegTech RegTech is a network of technology companies that resolve challenges originating from a technology-driven market through automation. The boost in digital products has increased data breaches, cyber hacks, and concealment, along with other fallacious pursuits. With the usage of both big data and machine-learning technologies, RegTech lowers the opportunity to a firm’s compliance division by offering data on concealment actions conducted online. These are the actions that a normal compliance team may not know, due to the development of underground marketplaces on the internet. RegTech tools conduct searches to detect instances that manifest itself online in the interval to spot issues or irregularities inside the electronic payment world. Any outlier is relayed into the establishment to research and confirm any fraudulent activity. Institutions which establish potential dangers to financial security can minimize the dangers and costs associated with lost data and funds breaches. RegTech businesses team up with financial institutions and prohibitive bodies, utilizing cloud calculating and big data to share information. Cloud computing could be low-cost technology where users will discuss data in a quick and secure manner with different firms. In short, RegTech is the practice of using a software process for regulatory management. A bunch of firms came along when realizing that technology could build the regulatory process easier. RegTech uses Software as a service (SaaS)—cloud computing, big data, and artificial intelligence—to manage regulatory compliance, and it reduces the strain on compliance groups by automating the process. Cyberattacks, security breaches and money laundering are the most common occurrences in such an environment. RegTech helps organisations reduce these threats and is principally used in, however not restricted to, financial sectors and applications. “RegTech firms provide solutions and technology to safeguard issues such as regulating tracking, data analytics, risk management, identity control and compliance.” 1.3 A Quick History of RegTech The financial disaster in 2008 culminated into a boom in financial sector law. There was a growth in the unrestrained use of technologies within the financial industry. Technology led to a growth in the number of FinTech businesses that produced technology-driven tools to improve the consumer experience and involvement with financial firms. The dependence on customer data to generate electronic products has resulted in worries among regulatory bodies, calling for more legislation on data privacy utilization and supply. The coupling of regulatory laws and measures using a business more reliant on technologies caused the demand for technology. Landmark Milestone • UK Government FinTech Report “FinTech has the potential to be applied to regulation and compliance to make financial regulation and reporting more transparent, efficient and effective – creating new mechanisms for regulatory technology, ‘RegTech’.” Many firms are not able to keep themselves updated with expanding compliance requirements and transparent data security measures. These firms needed a robust technological resolution to assist with the following problems: Extreme outlay and complication of compliance: Escalating costs and operational friction in managing vast regulatory mandates; Dense automation methods: Navigating fragmented, rigid, and disconnected automation scripts across divisions; Unsafe financial trades: Detecting malicious, fraudulent, and non-compliant payment transmissions in real time; Human engagements causing mistakes: Eliminating manual clerical oversights, fatigue, and parameter misinterpretations. 2. Elements of RegTech 2.1 From KYC to KYD (The Three Evolutionary Stages) RegTech is not a new category, yet as such distinct applications of technology; it is growing tremendously, driven by an increase in computing capability, the decreasing cost of technologies and big data explosion. We take a look at RegTech’s background into three stages: 1990s – 2000s RegTech 1.0 RegTech 1.0 emerged around the 1990s and 2000s when financial institutions started introducing new technology to detect and investigations risks of particular regulations or procedures. These developed into quite a few of the qualitative risk management practices which we are conversant in now. Last Decade (2010s) RegTech 2.0 Over the last ten years, RegTech 2.0 has assisted companies to befit rules and better their supervision activities. Many RegTech programs have concentrated on ‘know your customer’ (KYC) by customer protection and herd behaviours. Present & Future Frontier RegTech 3.0: KYC to KYD RegTech 3.0 is a transfer from ‘know your client’ to ‘know your data’ as the financial businesses currently on the brink of RegTech institutions have started to appear at regulation and risk as prediction and data issues which might be addressed by technology. Fig. 1. How Know-Your-Client Solutions Work End-to-End KYC/AML Architecture: Data Ingestion, Automated Integration, Rule-Engine Scoring, and Exception File Review A KYC Data Points • Data field/quality standards• Data standards approved by regulators are preferred B Data Integration • Integration solution with structured/unstructured data• Machine learning to improve data integration C Client Scoring (RegTech Stake) • Rule engine analyzing structured/unstructured data• Machine learning to improve score parameter calibration D File Review / Investigation • Automated, smart, algorithm-based review• Machine learning to improve score parameter calibration E Client Filing • Automated data and content management• Semantic data enrichment Decision Pipeline Routing: New and existing clients are enriched with Data Provider and Evolving KYC Market Utilities feeds → Processed at Stage A & B → Evaluated at Stage C (Client Scoring). If passing score criteria (“Yes”), the client is instantly Cleared. If anomalous (“No”), the file routes to Stage D (File Review / In-depth Investigation) & Stage E (Client Filing). From Stage D, verified cases are marked Client Cleared (“Yes”), while unresolved high-risk profiles route to Exit / Termination (“No”). 2.2 The 3 Cs of RegTech 1. Compliance The pace of regulatory change has shrunk – nonetheless – Compliance requirements will continue to grow as regulators concentrate on reforms beginning from oversight to systemic threat and priorities demonstrating data confidentiality and consumer protection. 2. Cost Regulatory limitations and flat interest rates have made it harder for financial institutions to create a steady increase in earnings. Financial institutions’ that reduce price and adopt this technology will empower them to increase efficiency and productiveness with inside the dangers and compliance purposes. Since the price of hardware and applications has come down, investing in RegTech has become more affordable. 3. Complexity Political events are increasing worldwide uncertainties because the financial region seeks to browse new goods, services and regulations. In addition to these components is the difficulty in the data environment, heritage system and functioning models. The Reinvention Section: Since RegTech 3.0, all the 3 Cs are about monetary arrangements’ agenda. But cautious people are more focussed on compliance while radical companies have moved to handle costs. A couple of global investment banks have entered the reinvention section which permits them to look for responses to complexity and doubt and also make the transition to become a data entity. 2.3 Six Priorities to Focus To advantage from this era of technological developments, the organization needs to focus on these 6 key primacies: 1 Modernize IT working system: Equip the core infrastructure and operational workflow for the ‘new normal’. 2 Reduce costs via streamlining: Decommission and streamline legacy systems by utilizing modern SaaS architectures. 3 Form customer-wise tech abilities: Build agile technological capabilities to get extra wise about your customers’ evolving needs. 4 Preparing infrastructure: Standardize and fortify enterprise systems for seamless, uninterrupted connectivity. 5 Strengthen cyber-safety: Reinforce defense barriers and threat detection to completely avoid the threat of loss. 6 Access to skilled workforce: Bridge organizational talent deficits by acquiring experts and a skilled technical workforce. 3. Technologies for RegTech RegTech is based on technologies such as Machine Learning, cloud computing, Big Data and Blockchain. Let us take a look at how RegTech organizations need those tools: Fig. 2. Technologies for RegTech Hub-and-Spoke Architectural Matrix of Core RegTech Capabilities Cloud Computing Artificial Intelligence Big Data Blockchain RegTech Core Machine Learning Virtualisation API Gateways Data Mining & Analytics 3.1 Cloud Computing RegTech firms use cloud computing to supply their goods or services utilizing Software as a Service model. These SaaS make it possible for corporations in maintaining regulation. Cloud computing decreases the premium for hardware and software and also helping data storage economical. It gives access to data within a fraction of seconds. Further, data is captured on the cloud that offers backup and disaster retrieval while cyber-attacks or human errors. 3.2 Machine Learning In RegTech, Machine Learning (ML) plays a crucial role. RegTech uses ML to explore patterns through different datasets to select variations. Moreover, ML empowers to recognize frauds and advances the management of risk. These structures likewise can analyze financial reports and caution firms of tax issues (aiding firm regulatory compliance and evades fines), help firms conduct businesses globally. Some ML algorithms also uncover segments of an organization’s software program that need enhancements. 3.3 Blockchain With the utilization of Blockchain, RegTech firms can ensure that financial instances are executed safely and instantly. Blockchain has a ton of projects within the RegTech business. For example, RegTech firms utilize Blockchain to program documents and data. Blockchain license RegTech firms to approve records, increment in secure DSC and assurance of data due to the Blockchain’s discrete nature. 3.4 Big Data RegTech firms utilize cloud computing and analytics to discover hidden sequences, new tendencies, illegal clients, and dubious transactions – based on large datasets. RegTech firms have embraced big data implementation, by that means; it has gotten more straightforward to administer the data aggregately in a single storage. 4. Core Features of RegTech Firms were using manual compliance method before RegTech developed advanced technology-driven tools and techniques. RegTech has increased the possibilities for value addition to the compliance industry. The following are the core features of RegTech: 4.1 Agile To prepare relevant databases quickly, RegTech firms utilize citation, transformation and load techniques. 4.2 High Speed To process data and generate review in real-time, RegTech takes the help of Big Data and Cognitive Analytics. 4.3 Integrity SaaS model grants RegTech companies to easily consolidate solutions with Software system of the organization with the product arrangement of the firm they collaborate with. 4.4 Improved Analytics RegTech companies intently rely upon the capacity of their preparedness for gathering, processing and analyzing large data that too continuously. They use cutting edge analytics systems to offer customers with appropriate data. 5. Categories of RegTech Services The functional taxonomy of RegTech services spans five primary operational domains, each propelled by distinct distributions of underlying technological tools: 5.1 Compliance RegTech firms assign tech-driven RPA (Robotic Process Automation), ML, NLP, Biometrics, Blockchain, AI and Big data. They use it to cut the cost, save firm from money laundering, reduce cyber risk, upgrade regulatory requirements, credit worthiness etc. Fig. 3. Technologies Used by RegTech Compliance: Key RegTech for compliance management AI / Machine Learning 37% Cloud Computing 37% ERP / Software / Web Platform 13% Other Technologies 13% 5.2 Transaction Monitoring RegTech firms also offer transaction monitoring. In 2017, only payment fraud distressed around 80% of companies. Effective monitoring of transactions is one of the dominant devices to reduce the deception, ultimately saving a huge amount for the firm. “The big banks are looking into this area (transaction monitoring) because at the end of the day they want the process to be effective and efficient.” Fig. 4. Technologies Used by RegTech Transaction Monitoring: Key RegTech to monitor transactions Blockchain 36% AI / Machine Learning 27% Big Data 10% Cloud Computing 9% API Gateways 9% ERP / Software / Web 9% 5.3 Regulatory Reporting RegTech equips firms to noticeably lessen the time taken for making reports by the usage of AI and Cloud-based methods. These processes are machine-driven and hardly require a human touch so the possibility of the error is almost nullified. If such data is up to the mark – then bank authorities, stakeholder and customers’ can examine the financial position faster. Fig. 5. Technologies Used for Regulatory Reporting: Automated report generation architecture Cloud Computing 35% API Gateways 19% AI / Machine Learning 16% Big Data 14% ERP / Software / Web 13% AI / NLP 3% 5.4 Risk Management These are the methods used by RegTech uses to enhance Risk management: It gives custom-designed services with easy to understand model for risk identification; It traces identification theft, money theft and tracks suspicious transactions with ML and RPA; It gathers data from distinct bases. Fig. 6. Key RegTech for Risk Management: Risk identification & analytics breakdown Big Data 46% AI / Machine Learning 13% ERP / Software / Web 13% Cloud Computing 13% AI / RPA 8% Other Technologies 7% 5.5 Identity Management and Control RegTech firm uses KYC structure along with ML, AI and Biometrics to recognize the customers and the fraud. To give access to the right user for the right data is the main aim of identification and control. RegTech resolves this issue by a fast and exceptionally stable identification control system. Fig. 7. Key RegTech for Identity Management and Control: Identity access & control architecture AI / Machine Learning 27% API Gateways 27% Big Data 16% Cloud Computing 8% Blockchain 8% ERP / Software / Web 8% AI / RPA 3.8% AI / NLP 3% 6. Conclusion This paper draws attention to the main features of RegTech and the issues which can be solved by RegTech firms. It also gives some insights into the technologies used by RegTech. The benefit of RegTech is that it processes the compliance of financial data, which includes financial statements and by which it gives the risk exposure of any entity. FinTech and RegTech confirmed its value by using improved products and services and reducing costs. In the coming years, we will see which incumbents stay ahead of the curve and which tech companies overcome hurdles to become big players in the space. In the digital age, where consumers face an abundance of choice, the best products will win out. The seven trends illustrated here will contribute to the development of those products and the proliferation of FinTech. RegTech 3.0 forms a part of the transition from protective mode to reinvention. Financial firms need to consider RegTech as a part of their wider transformation approach and be clear about what they need to achieve. Human-AI Symbiosis: Balancing Automation and Professional Oversight “It’s crucial to note here that AI and RegTech are not expected to widely replace people. We are seeing early AI entries within the RegTech space, however, they’re supporting with lower-hanging fruit and repetitive tasks. AI is improving human tasks, making them extra powerful in their roles. From the start of the regulatory review to the end of the compliance process, AI must work carefully with people, improving activities and balancing the appropriate level of manual oversight.” CA. Piyush H Mekhia Member, The Institute of Chartered Accountants of India (ICAI) Email: ca.mekhia@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 49–52 (Journal pp. 429–432) Information Technology • Collaboration Tools & Data Analytics Usage of Collaboration and Analytics Capabilities in Finance YA CA. Yukti Arora Member of the Institute of Chartered Accountants of India. Contact: yuktiarora@hotmail.com MG CA. Mukesh Kumar Gupta Member of the Institute of Chartered Accountants of India. Contact: mukesh_gupta1977@yahoo.co.in Executive Overview: Human-Machine Synergy in Enterprise Growth “Today all businesses have understood use of collaboration skills, tools, and technologies that are working for their success. We see robots are working alongside human beings to build machine, perform delivery, generate energy and manage business processes. Construction of infrastructure, software and systems development is much faster today due to agile, collaborative and focus technology driven approach. We see supply and demand being generated through use of analytics, AI and collaboration of business stakeholders. Read on....” 1. The Emerging Ecosystem: Automation, Analytics & Cross-Functional Collaboration Modern governments and public institutions are responding to emergencies at unprecedented speed through the integration of automation, analytics, and collaborative, participative approaches. This transformation holds direct relevance for the corporate finance function. Over the coming years, advanced analytics, Robotic Process Automation (RPA), blockchain, and Artificial Intelligence (AI)—already deployed across progressive enterprises—will be heavily leveraged by finance teams to achieve superior efficiency, agility, and strategic effectiveness. The global COVID-19 pandemic dramatically accelerated the worldwide adoption of collaborative and analytical capabilities. Organizations of all scales embraced video conferencing, instant messaging across agile channels, interactive whiteboarding for rapid ideation and co-creation, and virtual offices. The Dissolution of the Operational vs. Analytical Data Boundary Analytics and AI now deliver real-time business insights at the click of a button, empowering rapid executive decision-making. Historically, the finance function produced financial statements and forecasts only at the close of a month, quarter, or fiscal year. Today, both actuals and predictive forecasts can be generated instantly on demand. In fact, the traditional distinction between operational data and analytical data is rapidly vanishing. Achieving agile business growth and superior corporate profitability hinges entirely on cross-functional collaboration. By combining collaborative platforms with robust data analytics, finance teams can satisfy external investor demands for cyclical disclosures while furnishing internal leaders with well-researched, real-time intelligence. 2. Strategic Benefits & Digital Tool Stack in Modern Finance Deploying digital collaborative and analytical tools—including Microsoft Whiteboard, SharePoint, Google Drive, OneDrive, Microsoft Teams, and Zoom, paired with automated workflows and business intelligence platforms like Power BI—empowers finance teams to deliver the right information to the right stakeholders at the right time. Five Key Benefits of Collaborative & Analytical Infrastructure Streamlined Project Management: Consolidates real-time project status trackers, interactive performance dashboards, multi-level approval hierarchies, and automated exception escalations. Multi-Departmental Spreadsheet Collaboration: Enables live, simultaneous cross-functional contribution on master working sheets during data preparation, verification, and managerial review. Automated Data Governance & Version Controls: Designs and enforces robust data controls, automated version comparisons, variance audits, and historical change tracking. Real-Time Visibility & Interaction: Delivers instant visibility into operational metrics and facilitates synchronous cross-departmental deliberations. Enhanced Stakeholder Experience: Elevates engagement quality and decision confidence for internal operational heads, senior executives, and external capital market participants. Classification of Modern Collaborative & Analytical Technologies Data Sharing & Workflow Management SharePoint, Google Drive, Microsoft Teams, Shared Excel Centralizes institutional knowledge, coordinates structured review workflows, and eliminates fragmented local files. Video Conferencing & AI Add-ons Microsoft Teams, Zoom, Google Meet Enables high-fidelity communication with AI-driven face framing, intelligent noise suppression, and virtual background customization. Ideation & Virtual Whiteboarding Microsoft Whiteboard, Mural, Miro Powers collaborative problem-solving labs, scenario mapping, and dynamic visual modeling across distributed teams. Virtual Offices & Interactive Workspaces Pragli, Sococo, Virbela, Slack, MS Teams Simulates physical office connectivity, spontaneous interactions, presence indicators, and borderless co-working environments. Advanced Analytical & Presentation Engines Pairing collaborative platforms with quantitative data programming languages (Python, R) and enterprise visual analytics suites (Power BI, Tableau, QlikView, Grafana) transforms raw transactional databases into actionable strategic intelligence. 3. Annual Budgeting & Dynamic Scenario Planning Annual budgeting represents an extensive, entity-wide initiative demanding exhaustive cross-departmental coordination and sophisticated analytical modeling. When harnessed effectively, digital tools allow finance to orchestrate a far more agile and accurate budgeting cycle. Whiteboarding and video conferencing facilitate high-level corporate strategy deliberations, while shared workflow repositories (SharePoint, Google Drive, Workday) allow sales, operations, HR, IT, and administration to input assumptions into a unified environment. This ensures that the finance function thoroughly comprehends the foundational assumptions underpinning operational projections: Cross-Functional Interdependence in Budgetary Assumptions Production Linked to Sales Production schedules and inventory buffer requirements are strictly dictated by forecasted demand and commercial sales pipelines. Procurement Linked to Sales & Production Raw material purchases, supply contracts, and inventory financing are synchronized with both sales commitments and manufacturing velocity. Talent & Headcount Requirements Hiring plans, compensation budgets, and training allocations depend directly on operational ramp-ups across sales, plants, procurement, and support functions. Navigating the VUCA Environment: Aggressive, Modest & Conservative Scenarios In today’s world—characterized by heightened Volatility, Uncertainty, Complexity, and Ambiguity (VUCA) amplified by macro-disruptions—underlying assumptions shift constantly. Traditional annual budgeting cycles become obsolete within months. Advanced collaborative analytics enables real-time discussions, dynamic assumption documentation, and immediate sensitivity testing across multi-tier scenarios: Aggressive Scenario: Modeling maximum growth trajectories, market expansion, capital expenditure rollouts, and upside capacity. Modest / Baseline Scenario: Measuring calibrated targets, standard demand growth, and predictable inflationary cost pressures. Conservative / Defensive Scenario: Factoring downside demand shocks, supply disruptions, liquidity pinches, and margin compression. Because all underlying data, operational assumptions, and analytical rationales are recorded centrally on a unified platform, finance can adjust plans continuously, shorten budget management cycles, and seamlessly explain budget-versus-actual variances during internal and statutory audits. 4. Complex Commercial Decision Making Modern commercial decisions demand strict objectivity, analytical precision, data interpretation, thorough risk evaluation, and advanced problem-solving capabilities. Corporate deals are increasingly intricate due to the multiplicity of commercial structures and asymmetric risk-reward trade-offs. Every major commercial proposal must be scrutinized through distinct departmental lenses—sales, engineering, project management, human resources, logistics, finance, legal, enterprise risk, and corporate governance. This necessitates rapid, collaborative synthesis to reach an optimal, consensus-driven conclusion. Practical Commercial Applications 1. Project Bid / No-Bid Decisions Evaluating contract feasibility, cash flow burn, margin hurdles, counterparty credit risks, and performance guarantee commitments. 2. Project Revenue Model Selection Analyzing fixed-price, time-and-materials, milestone-based, licensing, or recurring subscription frameworks across operational and tax parameters. 3. Project Claim Management & Disputes Collaborating across project sites and legal teams to document delay damages, change orders, cost overruns, and dispute resolutions. Collaborative workflows, shared datasets, video deliberative sessions, and virtual office spaces enable multidisciplinary teams to evaluate conflicting perspectives, stress-test alternative structures, and achieve superior commercial outcomes. 5. Re-engineering Month-End Financial Closing & Reporting Financial closing and reporting represent mission-critical month-end and quarter-end undertakings governed by strict statutory deadlines and demanding internal management schedules. Although closing is intensely time-bound, it intersects with every operational department across the enterprise. While business units focus on the “what, when, and how” of their operational outputs, the finance function must scrutinize data veracity, accounting compliance, and documentation integrity. Collaborative Closing Workflows in Action By deploying digital workflows for structured data gathering, video conferencing for real-time reconciliation dialogues, and analytics tools to compare current submissions against historical baselines, finance can detect anomalies and resolve closing bottlenecks with unmatched speed. Analytic-based insights empower finance professionals to constructively question ledger submissions, validate cut-off procedures, verify accruals, and close the books accurately—delivering faster, deeper internal MIS reports for executive steering committees. 6. Preparing for the Remote Future of Finance: Five Strategic Directives The future of corporate finance is evolving as rapidly as modern operating models. Finance professionals are required to unlearn legacy practices and continuously relearn digital competencies. The Professional Mindset Pivot: Think Like a CEO Instead of CFO “Finance skills are now being driven by deeper understanding of business models, think like CEO instead of CFO, leverage technology, deliver business insights instead of MIS, ready to evolve and collaborate using cutting edge modern technologies to solve complex business issues.” To maintain strategic relevance, finance organizations should implement the following five actionable directives: Directive 1: Synchronous Real-Time Collaboration & Permanent Analytic Logs Combine advanced data analytics with live collaboration platforms during technical deliberations. Maintain immutable digital logs of discussion threads, decision rationale, and model assumptions. This practice transforms short-term operational insights into institutional foresight while serving as an irrefutable reference audit trail. Directive 2: Version-Controlled Collaborative Repositories Adopt standardized collaborative file systems with automated versioning, concurrent editing permissions, and structured sign-off workflows to eliminate costly spreadsheet errors and ensure prompt, cost-effective finance responses. Directive 3: Workflow-Embedded Project Management Analytics Build real-time analytical monitors into finance workflows to track project deliverables, monitor capacity allocation, evaluate cycle times, and pro-actively mitigate operational slippages. Directive 4: Hybrid Collaborative Decision Architecture Leverage a balanced hybrid model combining online virtual interactions with focused offline deliberative forums to maximize agility, cross-functional alignment, and executive velocity. Directive 5: Change Agents & Digital Upskilling Programs Appoint dedicated internal change champions to steer cultural technology adoption, backed by structured training curricula to empower finance personnel to master interactive collaboration and analytics tools. 7. Conclusion: Developing the Tech-Savvy Digital Mindset Corporate expectations from the finance function will intensify relentlessly. While this transition represents a daunting paradigm shift, it is equally an exhilarating, highly rewarding journey. Is the finance function prepared to seize this burgeoning opportunity? The answer must be an unequivocal yes, given the vast spectrum of collaborative and analytical technologies now at our disposal. The sole prerequisite is cultivating an open, tech-savvy digital mindset. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) October 2021 Issue • Vol. 70 • No. 4 • pp. 49–52 (Journal pp. 429–432) Authors Contact: yuktiarora@hotmail.com | mukesh_gupta1977@yahoo.co.in

Taxation ICAI Journal Ref: October 2021 • Vol. 70 • No. 4 • pp. 61–64 (441–444) Direct Taxes • Appellate Jurisprudence Faceless ITAT proceedings using Technology- Right to a fair trial CA. Aniket Barve (Member of the Institute of Chartered Accountants of India) Contact: aniketbarve164@gmail.com Executive Abstract & Issue Thesis “The Finance Act, 2021 proposes to introduce dramatic procedural changes to the existing Assessments and Appeal functions, whether they are faceless assessments and appeals or the new paradigm of reassessments and search assessments. But among these, the proposal to introduce Faceless proceedings at the Tribunal level has opened up a lot of debates and discussions. The primary purpose behind this proposal is to use technology effectively for appellate functions of the Tribunal. But then we are faced with a question whether this mechanism will ensure a Fair trial. The article tries to analyze faceless Tribunal hearings from the standpoint of technology and Fair hearing. Read on …” 1. Technological Transition in Indian Tax Administration India has been proactive in adopting new technology and moving towards a ‘Digital’ future. This can be seen through the Digital Quality of Life Index 2020, where India outperforms most of the countries when it comes to technology use in governance. Tax administration, more particularly, Income Tax, has seen a dramatic transition from physical filing to e-filing and e-verification, and now the rollout of the Faceless Income Tax Assessments Scheme and Faceless Appeals at the first level of Commissioner of Income tax (Appeals) – ‘CIT(A)’. These rollouts enjoyed their fair share of criticism initially. “Tax administration, more particularly, Income Tax, has seen a dramatic transition from physical filing to e-filing and e-verification, and now the rollout of the Faceless Income Tax Assessments Scheme and Faceless Appeals at the first level of Commissioner of Income tax (Appeals) – ‘CIT(A)’.” Just as the practitioners were getting accustomed to this transition, the Finance Act 2021 came up with yet another surprise—the proposal of Faceless Income Tax Appellate Tribunal (ITAT) to revamp the existing quasi-judicial Tribunal into a Faceless Tribunal. Section 255 of the Income Tax Act, 1961 is proposed to be amended, adding subsections (7) and (8) describing the scheme and that the detailed notification will be rolled out soon. This led the practitioners and Associations like the ITAT Bar Association to file representations to the Finance Ministry. A retired ITAT president too filed a Public Interest Litigation (PIL) before the Hon’ble Delhi High Court, which was dismissed. 2. Historical Legacy & Institutional Evolution of the ITAT Now, coming to the history of ITAT, it dates back to the year 1922 when the Income tax law was being restructured and the need was felt for a distinct forum for hearing Income tax cases. A Select Committee recommendation finally led to the establishment of ITAT in the year 1941. Since 1941, there have not been any fundamental changes in the functioning of the ITAT. It has operated continuously for 80 long years as an independent, open-court quasi-judicial institution, providing judicial comfort and impartial adjudication to taxpayers across the country. 3. Proposed Statutory Amendment under Finance Act, 2021 So, in the light of the announcement of changes in the functioning of ITAT after 80 long years, it would be pertinent to read through the bare text of the Finance Act, 2021: Bare Act Text: Insertion of Sub-Sections (7) & (8) to Section 255 of the Income-tax Act, 1961 In section 255 of the Income-tax Act, after sub-section (6), the following sub-sections shall be inserted, namely: “(7) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of disposal of appeals by the Appellate Tribunal so as to impart greater efficiency, transparency and accountability by— (a) eliminating the interface between the Appellate Tribunal and parties to the appeal in the course of appellate proceedings to the extent technologically feasible; (b) optimising utilization of the resources through economies of scale and functional specialization; (c) introducing an appellate system with dynamic jurisdiction”. “(8) The Central Government may, for the purposes of giving effect to the scheme made under sub-section (7), by notification in the Official Gazette, direct that any of the provisions of this Act shall not apply to such scheme or shall apply with such exceptions, modifications and adaptations as may be specified in the said notification.” (Emphasis supplied) 4. Analysis and Institutional Concerns: ITAT vs. CIT(A) We can see that the intention behind a faceless Tribunal is to impart greater ‘efficiency’, ‘transparency’, and ‘accountability’ to the appellate mechanism. To achieve the same, the interface between the parties and the Judges shall be eliminated by employing technology. Having read this, one may infer that the existing open Court proceedings will be replaced by video conferencing. But, the interesting aspect to note here is that the objectives of faceless Assessment and faceless CIT(A) are exactly the same as above. Under these mechanisms and more particularly under CIT(A), the proceedings are solely based on written submissions. This might lead one to believe that the same will be followed in the case of ITAT as well rather than having video conferencing. First Appellate Authority: CIT(A) The CIT(A) is an Income tax authority with certain powers co-terminus to that of the Assessing Officer. It belongs to the executive tax department machinery under the Central Board of Direct Taxes (CBDT). Second Appellate Authority: ITAT ITAT on the other hand is a dedicated quasi-judicial Tribunal with an identity distinct from the Income tax authorities. It operates under the Ministry of Law and Justice, functioning as an independent judicial arbiter. There exists a fundamental difference between the ITAT proceedings and the CIT(A) proceedings. So if a distinct mechanism is being contemplated, there needs to be a suitable change in the objects and reasons of the same as well. 5. Principles of Natural Justice & ‘Audi Alteram Partem’ Another area which is being debated extensively is whether the faceless ITAT proceedings will be violating the Principles of Natural Justice or a fair trial enshrined in the maxim ‘Audi alteram partem’ i.e., ‘Hear the other side’. The Five Crucial Elements of the Principles of Natural Justice 1. Notice 2. Hearings 3. Evidence 4. Cross-Examination 5. Legal Representation Even though the detailed notification is not released as yet, taking the Faceless CIT(A) notification as a base, these elements appear to have been taken care of. What is changing is the method or the means of communication. “The Faceless scheme by itself does not deny submission of evidence or legal representation. A mere alteration of the methodology of hearing cases to written submissions aided through technology cannot be directly labeled as having denied an opportunity of being heard to the parties.” Further, there have been certain areas like search assessments and International tax matters specifically out of the faceless CIT(A) regime if taken as a base to analyze. The CIT(A) notification does provide an option for hearing through video conferencing in certain exceptional cases. So, considering the above aspects it will be difficult to prove that principles of natural justice have been substantially compromised in this Scheme. 6. Key Reservations and Practical Vulnerabilities of Faceless ITAT However, some tax and legal practitioners have expressed certain reservations about the fairness of the scheme across four critical dimensions: 6.1 Open Court System Vs. Faceless Scheme Any conventional hearing before a Tribunal or Court involves: Pitching arguments before the judges; Responding to the questions asked by the judges; Having a reasonable understanding of the body language of the Judges; and Conveying all the averments with clarity. These proceedings are real-time and interactive and not restricted to mere written words or a submission to a blank screen without being aware as to whom we are addressing. Such interactions provide an additional dimension to the written submissions. 6.2 Fact Finding and Tax Effects Dealt With (Final Fact-Finding Forum) More importantly, ITAT is the last fact-finding authority concerning income tax cases. Even though there exist provisions of further Appeal (High Court and Supreme Court), ITAT is the last Forum for the litigants/assessees to lay down a factual matrix for interpretation before the Judges. “The ITAT deals with the cases having Tax effects of more than Rs. 50 lakh, barring certain exceptional cases admitted on merit. The written submissions in such matters involving high stakes will go into countless pages.” With due respect to the Honourable Members, there exists some chance of a particular point in the submission being overlooked inadvertently when examining voluminous documentary records on a screen without oral synthesis. 6.3 Option of Video Conferencing Facility & Executive Discretion With regard to the option on video conferencing provided to the litigants, the following is prescribed under the Faceless CIT(A) scheme, under Para 12, sub Para 2, 3 and 4: (2) The appellant or his authorized representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the appeal unit under this Scheme. (3) The Chief Commissioner or the Director General, in charge of the Regional Faceless Appeal Centre, under which the concerned appeal unit is set up, may approve the request for personal hearing referred to in sub-paragraph (2), if he is of the opinion that the request is covered by the circumstances referred to in clause (xi) of paragraph 13. (4) Where the request for personal hearing has been approved by the Chief Commissioner or the Director General, in charge of the Regional Faceless Appeal Centre, such hearing shall be conducted exclusively through video conferencing or video telephony, including use of any telecommunication application software which supports video conferencing or video telephony, in accordance with the procedure laid down by the Board. (Emphasis supplied) This indicates that even though the litigants have the option to request a personal hearing, which would be through video conferencing only, it is subject to the approval of the Chief Commissioner or the Director General, in charge of the Regional Faceless Appeal Centre. This approval shall be given if the above authorities find it a fit case as per the reasons in Para 13. The reasons under the Para 13 are yet to be notified. This makes the option of personal hearing discretionary. There may be certain complex aspects of the matter which the litigant wishes to put up through personal hearing. If this case does not fall in the criteria which would be notified in due course, the litigant will not be afforded an opportunity of personal hearing. If a similar mechanism is also put into place in ITAT, this will impact fair hearing to some extent. 6.4 Time-Consuming Procedure & Review Unit Bottleneck The proceedings are solely on the basis of written submissions; a query raised by the Forum is to be responded to in a written form. If not found satisfactory, it will lead to further communications and a delay in the proceedings which can be avoided if the proceedings are held in real time. “The proceedings are solely on the basis of written submissions; a query raised by the Forum is to be responded to in a written form. If not found satisfactory, it will lead to further communications and a delay in the proceedings which can be avoided if the proceedings are held in real time.” The CIT (A) scheme also has a review mechanism in place. As per Para 5 sub Para xix clause a: “Where the aggregate amount of tax, penalty, interest or fee, including surcharge and cess, payable in respect of issues disputed in appeal, is more than a specified amount, as referred to in clause (x) of paragraph 13, send the draft order to an appeal unit, other than the appeal unit which prepared such order, in any one Regional Faceless Appeal Centre through an automated allocation system, for conducting review of such order;” In case of the matters which exceed the pre-determined threshold of aggregate amount of disputed liability, the draft order shall be allocated to any random unit for carrying out a review of the same. This appeal unit will review the entire draft order and variations if any, will be conveyed to the appeal unit which had originally dealt with the matter. Similar review mechanism if also introduced in ITAT proceedings will make the process time consuming, since the review unit has to revisit the entire factual matrix. Considering the above aspects, Faceless ITAT, to a certain extent, might negatively impact fair hearing thereby adversely affecting the chances of the litigant. 7. Concluding Remarks & Institutional Motto While the detailed notification of the scheme is yet to arrive, we must hope that the motto with which ITAT had been constituted: ‘Nishpaksh Sulabh Satvar Nyay’ “Unbiased, Easy and Speedy Justice” The core question remains whether this founding motto will remain relevant in the light of the new scheme. It is undeniably the need of the hour to effectively utilize technology in governance, but technological acceleration must never compromise the substantive constitutional guarantees of fair hearing and natural justice. References & Case Citations Digital Quality of Life Index 2020: Available online at: https://surfshark.com/dql2020-slides.pdf Praveen Kumar Bansal Vs Ministry of Finance and Ors: High Court of Delhi, WP (C) 4237/2021 and CM APPL-02/2021, available at: http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=69087&yr=2021 CA. Aniket Barve Member, The Institute of Chartered Accountants of India (ICAI) Email: aniketbarve164@gmail.com

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 53–60 (Journal pp. 433–440) Accounting • Energy & Natural Resources Accounting Under Ind AS For Upstream Oil & Gas Entities: The Backbone of World Economy RA CA. Ram Awasthi Member of the Institute of Chartered Accountants of India. Contact: awasthi199@gmail.com AD CA. Amrish Diwakar Member of the Institute of Chartered Accountants of India. Contact: eboard@icai.in Executive Overview: The Energy Value Chain & Capital Complexity “Oil & Gas activities are intended to explore, develop, extract, refine, market and sell oil and gas, refined products and petroleum/hydrocarbon products. Generally, these activities require substantially high capital investment and long gestation period to explore and extract the petroleum/hydrocarbons with uncertain consequences. Read on....” 1. Upstream Activities & Structural Realities Upstream activities consist of the exploration for and discovery of hydrocarbons (crude oil and natural gas). The development of these hydrocarbon reserves and resources, and their subsequent extraction (production) also takes place at this stage. Exploration, development, and production activities are frequently structured through joint ventures or unincorporated joint operations to syndicate massive capital outlays and share geological risk. The sector entails extensive transportation logistics via pipelines, ocean tankers, and specialized carriers. Furthermore, because upstream operations carry profound environmental consequences, entities are statutorily obligated to remediate environmental degradation upon field decommissioning. This comprehensive analysis addresses the accounting challenges under Indian Accounting Standards (Ind AS) across the entire upstream value chain: pre-acquisition, exploration and evaluation, development, production, and pervasive industry issues. 2. Typical Stages in Exploration & Production (E&P) Activities The discovered natural resources represent an entity’s most vital economic asset—serving as the engine of future operating cash inflows and providing the collateral foundation for corporate borrowings and equity offerings. E&P activities operate through four distinct stages: S. No. Stage Operational Scope & Particulars i. Pre-exploration Stage or Acquisition Stage Activities carried out by an E&P entity towards the acquisition of right(s) to explore, develop, and produce oil and gas constitute acquisition activities. ii. Exploration and Evaluation (E&E) Stage E&E activities cover prospecting operations conducted in the search for oil and gas after obtaining the legal right to explore a specified acreage, as well as determinations of technical feasibility and commercial viability. iii. Development Stage Encompasses all operations conducted after establishing the technical feasibility and commercial viability of extracting oil and gas reserves. iv. Production Stage Activities for extracting oil and gas, divided into: a. Pre-wellhead: Lifting hydrocarbons to the surface, operating and maintaining production wells. b. Post-wellhead: Gathering, treating, processing, and field pipeline transportation. Applicable Ind AS Standards by E&P Lifecycle Stage Pre-Exploration Stage No specific guidance in standard; expensed immediately to profit or loss. E&E Stage Ind AS 106: Exploration for and Evaluation of Mineral Resources. Development Stage Framework for Preparation and Presentation of Financial Statements under Ind AS; Ind AS 38. Production Stage Framework for Preparation and Presentation of Financial Statements; Ind AS 2, 16, 115. The Institute of Chartered Accountants of India (ICAI) issued the Guidance Note on Accounting for Oil and Gas Producing Activities (Ind AS) in December 2016 for Ind AS compliant entities, complementing the Guidance Note on Accounting for Oil and Gas Producing Activities (revised 2013) for AS entities. Crucially, mineral rights and natural reserves are excluded from the scope of Ind AS 16 (Property, Plant and Equipment) and Ind AS 38 (Intangible Assets). While Ind AS 106 provides policy choices for E&E costs, it does not govern subsequent stages. 3. Accounting Methodologies: Successful Efforts Method (SEM) vs. Full Cost Method (FCM) Two internationally acknowledged accounting conventions govern E&P expenditures, heavily influenced by US GAAP practices in the United States and Canada: (i) Successful Efforts Method (SEM) Under SEM, only costs directly resulting in the successful identification of new commercial reserves are capitalized. Costs associated with unsuccessful exploration (such as exploratory drilling yielding a dry well) are immediately charged to the statement of profit and loss. Costs are capitalized on a field-by-field basis and allocated to commercially viable reserves. If an entity fails to find commercially viable reserves, expenditures are expensed. Capitalized costs are depleted on a field-by-field basis as hydrocarbons are extracted. (ii) Full Cost Method (FCM) FCM permits companies to capitalize virtually all expenditures related to exploration and development across entire cost centers (often an entire country or basin), regardless of whether specific drilling efforts proved successful or resulted in dry holes. The choice of method profoundly impacts reported net income, volatility, and operating cash flow metrics across financial reporting periods. 4. Detailed Accounting for Major Costs Incurred in E&P Operations (a) Pre-Acquisition Costs Expenditures incurred prior to obtaining the legal rights to explore, develop, and produce (e.g., regional geological data purchases, preliminary reconnaissance, and technical analyses to identify target blocks) are expensed immediately in the statement of profit and loss as incurred. (b) Acquisition / Pre-Exploration Costs Entities must capitalize acquisition expenditures as tangible or intangible assets based on their inherent nature. These cover costs to purchase, lease, or acquire mineral rights (proved or unproved), signature bonuses, lease bonuses, brokers’ commissions, legal fees, temporary land occupation charges, landowner compensation, and statutory levies for obtaining the Petroleum Exploration License (PEL), Letter of Authority (LOA), and Mining Lease (ML). (c) Exploration & Evaluation (E&E) Costs Under Ind AS 106, entities elect an accounting policy (FCM or SEM) specifying capitalized vs. expensed expenditures, applied consistently. E&E assets are measured at cost upon initial recognition, covering: Topographical, geological, geochemical, and geophysical (G&G) seismic studies; Exploratory drilling operations; Trenching and sampling; Activities evaluating technical feasibility and commercial viability. Subsequent to initial recognition, entities apply either the cost model or revaluation model. Assets are classified as tangible (e.g., vehicles, specialized drilling rigs) or intangible (e.g., exploration drilling rights). When a tangible asset is consumed in developing an intangible asset, that depreciation is capitalized into the intangible cost, without changing the tangible asset’s legal classification. (d) Development Costs & Commercial Reclassification Once technical feasibility and commercial viability are determined, accumulated E&E assets are reclassified as Capital Work-in-Progress (CWIP) or Intangible Assets Under Development (IAUD). When a well is ready to commence commercial production, capitalized costs corresponding to proved developed reserves are transferred from CWIP/IAUD to the gross block as ‘completed wells / producing wells’. Entire acquisition costs are capitalized to the gross block once commercial reserves are established. This applies even if only a single well within a block commences production, provided the block is treated as a single asset. Wells still under development in the same block remain in CWIP/IAUD. Incidental Revenue Treatment: Any revenue generated from the sale of crude oil and natural gas (net of statutory levies) produced from Exploratory Wells in Progress or Development Wells in Progress during testing is deducted from the capitalized cost of such wells. (e) Production Costs, Profit Petroleum & Rig Days’ Costs Production Costs: Comprise lifting, treating, field gathering, and maintenance costs, absorbed into inventory costs alongside depletion of capitalized acquisition, E&E, and development costs. Cost of Profit Petroleum: Under Production Sharing Contracts (PSCs) with the Government / Directorate General of Hydrocarbons (DGH), the share of revenue paid to the government is termed Profit Petroleum. Under Ind AS 115, Profit Petroleum does NOT form part of revenue from sale of products. Rig Days’ Costs: Mobilization and movement costs of drilling rigs are capitalized to the next well location drilled or scheduled. However, abnormal rig downtime / idle rig days’ costs are un-allocable and must be charged directly to the Statement of Profit and Loss. General & Administrative (G&A) Costs: Only overheads directly attributable to a specific oil and gas field are capitalizable. Corporate G&A (directors’ fees, secretarial, corporate office salaries) are expensed as incurred. 5. Site Restoration & Abandonment Obligations (Ind AS 37 & Ind AS 16) Abandonment costs encompass all expenditures incurred upon field exhaustion: plugging and abandoning wells, dismantling offshore platforms and wellheads, and restoring onshore/offshore sites pursuant to licensing laws and environmental statutes. Decommissioning Accounting Framework Capitalized Provision: In accordance with Ind AS 37, obligations incurred from drilling and evaluating resources are recognized as a decommissioning provision and capitalized into Property, Plant and Equipment (PPE) or intangible assets. Discounting at Pre-Tax Rate: Where the time value of money is material, the provision is measured at the present value of expected settlement expenditures using a current market pre-tax discount rate reflecting risks specific to the liability. Prospective Adjustments: Changes in the estimated timing or quantum of cash outflows, or modifications to discount rates, are adjusted against the asset cost and depleted prospectively over remaining reserves. Unwinding of Discount: The accretion of discount due to the passage of time is recognized immediately in the statement of profit and loss as a finance charge. Crucially, because abandonment obligations do not represent borrowed funds, this unwinding cannot be capitalized as borrowing cost under Ind AS 23. 6. Impairment Testing & Cash-Generating Unit (CGU) Architecture Impairment assessment in upstream entities is governed by specialized multi-standard benchmarks evaluated across each operational stage: E&P Asset Stage Governing Guidance Statutory Impairment Trigger / Mandate Pre-Exploration Stage Ind AS 16 & Ind AS 38 Impairment tested upon occurrence of an impairment trigger event. E&E Assets Ind AS 106 Mandatory impairment testing upon reclassification from exploration to development stage; plus whenever triggering events occur. Development Assets Ind AS 16 & Ind AS 38 Impairment tested upon occurrence of an impairment trigger event. Production Assets Ind AS 16 & Ind AS 38 Impairment tested upon occurrence of an impairment trigger event. CGU Delineation Rules under Ind AS 36 & Ind AS 108 Impairment losses are measured and recognized in accordance with Ind AS 36. Impairment must be performed at the Cash-Generating Unit (CGU) level (or group of CGUs), provided the unit is not larger than an operating segment under Ind AS 108. Onshore Fields: Where multiple onshore oil and gas fields utilize shared production, separation, and pipeline facilities and exhibit substantial economic interdependence, they may be aggregated and tested as a single CGU. Offshore Fields: An individual offshore field is generally treated as a distinct CGU. However, fields developed cooperatively as an integrated offshore cluster sharing common platform infrastructure are tested in aggregate as a cluster CGU. Non-Reinstatement Rule: Exploratory well costs written off to the income statement in previous accounting periods cannot be reinstated under any circumstance, even if the well subsequently achieves commercial hydrocarbon production. 7. Pervasive Industry Operations: Carried Interest, Side-Tracking & Depletion (a) Accounting for Carried Interest Arrangements A carried interest agreement arises where an assignee (the carrying party) undertakes to defray 100% of drilling, development, and operating costs in exchange for receiving 100% of production revenue (net of statutory royalties) until all expended costs are fully recouped (the “payout period”). Thereafter, the assignor (carried party) and carrying party share revenues, operating expenses, and future capital costs according to agreed working interests: Carrying Party: Funds geological risk during exploration and records all costs (including carried portions) per its standard accounting policy. During development, carried outlays are treated as receivables based on proved reserves. It recognizes all production revenues until full recoupment. Carried Party: Records no revenue or operating expenses prior to payout. Following payout, it accounts for its proportionate share of revenues, lifting costs, and capital expenditures. Unit of Production (UOP) Depletion Producing wells and capitalized development costs are depleted using the Unit of Production (UOP) method based on proved developed hydrocarbon reserves over commercial extraction volumes. Pipeline & Tank Inventory Valuation Finished crude oil and gas stocks in storage tanks and transit pipelines are valued at lower of cost and net realizable value (NRV) under Ind AS 2, computed via full absorption costing. (b) Accounting for Side-Tracking Expenditures Side-tracking involves re-drilling from an existing wellbore after the lower hole becomes junked or blocked, saving the expense of re-drilling upper casing sections. Accounting treatment depends on well classification: Exploratory Wells: Side-tracking costs are accounted for as a new exploratory well, while the abandoned wellbore portion is treated as a dry hole under the entity’s chosen SEM/FCM policy. Development Wells: Both the side-tracking outlays and the abandoned portion are capitalized into development CWIP, subject to Ind AS 36 impairment review. Producing Wells: If side-tracking establishes additional proved developed reserves or boosts performance standards beyond prior benchmarks, the side-tracking cost is capitalized, while the abandoned portion is depleted normally. If no additional reserves result, side-tracking costs are expensed immediately, and the abandoned portion is depleted normally. (c) Joint Arrangements in Indian Upstream (Ind AS 111) Joint arrangements are categorized under Ind AS 111 based on contractual rights and obligations: Joint Operations: Where parties hold direct rights to assets and direct obligations for liabilities (joint operators). In India, unincorporated joint ventures under Production Sharing Contracts (PSCs) and Revenue Sharing Contracts (HELP/OALP) are structured as joint operations. Joint Ventures: Where parties hold joint control and rights to net assets via a separate legal vehicle (joint venturers), accounted for via the equity method under Ind AS 28. Accounting for Joint Operations: An upstream operator recognizes its proportionate share of assets, liabilities, expenses, and revenues on a line-by-line consolidation basis, and records its share of hydrocarbon sales as corporate turnover. 8. Mandatory Financial Statement Disclosure Checklist Over and above general statutory and standard-specific notes, an E&P entity must incorporate the following eight mandatory disclosures: Accounting Policies: Comprehensive disclosure of specific policies followed across each E&P stage (SEM vs. FCM, capitalization thresholds, depletion methodology). Reserve Quantities Reconciliation: Net opening balances, extensions/discoveries, revisions, production deductions, and closing reserves of proved and proved developed reserves for (a) crude oil (including condensate and natural gas liquids) and (b) natural gas. Geographical Disclosures: Geographical disaggregation of net proved and proved developed reserves across domestic and international operating basins. Standardized Metric Units: Quantitative reporting strictly in Metric Tonnes (MT) for crude oil reserves and Cubic Meters (m³) for natural gas reserves. Reserves in Impairment Calculations: Qualitative description and net quantities of reserves utilized in impairment cash flow projections. CGU Identification Basis: Contractual and technical rationale used to establish Cash-Generating Units for impairment testing. Evaluation Assumptions & Third-Party Experts: Reserve estimation frequency, core reservoir assumptions, and formal engagement of accredited external petroleum reserve evaluation experts. Exploration Write-Offs: Total quantum of exploratory well costs and dry hole expenditures charged to profit or loss during the reporting period. 9. Conclusion & Policy Consistency Because Ind AS 106 confines its scope primarily to exploration and evaluation assets, comprehensive guidance for subsequent stages relies upon the broader Ind AS Conceptual Framework and ICAI’s specialized Guidance Note on Accounting for Oil and Gas Producing Activities (Ind AS). The multiplicity of allowable policy choices—such as SEM versus FCM—can lead to financial statement non-comparability across upstream operators. It is therefore vital for corporate leadership to establish coherent, transparent accounting policies that reflect the true operational economic realities of their acreage and apply them on a strictly consistent basis. References & Regulatory Frameworks Ind AS 106: Exploration for and Evaluation of Mineral Resources. Ind AS 16: Property, Plant and Equipment; Ind AS 38: Intangible Assets. Ind AS 36: Impairment of Assets; Ind AS 37: Provisions, Contingent Liabilities and Contingent Assets. Ind AS 111: Joint Arrangements; Ind AS 115: Revenue from Contracts with Customers. ICAI Guidance Note on Accounting for Oil and Gas Producing Activities (Ind AS) (December 2016). Oil and Natural Gas Corporation Limited (ONGC), Annual Report FY 2019-20; Investopedia Research. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) October 2021 Issue • Vol. 70 • No. 4 • pp. 53–60 (Journal pp. 433–440) Authors Contact: awasthi199@gmail.com | eboard@icai.in

Taxation ICAI Journal Ref: October 2021 • Vol. 70 • No. 4 • pp. 65–69 (445–449) Direct Tax Amendments • Finance Act 2021 Tax on Transfer of Money or Property by FIRM/AOP/BOI to Partners or Members – Finance Act 2021 Amendment CA. Rangoli Raval (Member of the Institute of Chartered Accountants of India) Contact: rangoliraval313@gmail.com Executive Abstract & Legislative Background “The Finance Act 2021 (FA 2021) introduced over 100 changes to the original Finance Bill presented in Lok Sabha on 1st February 2021. A vital issue addressed by the FA 2021 was the amendment in existing as well as introduction of new sections providing taxation mechanism on income arising out of receipt of money/assets/stock-in-trade by a specified person (partner or member) from a specified entity (firm/AOP/BOI) during the dissolution or reconstitution of such entity. This has been a grey area and a subject of intense litigation in the past. Read on…” 1. Overview of the Interconnected Statutory Architecture Multiple provisions have been inserted and they function both independently and in conjunction to each other which makes the understanding of these provisions somewhat complex to the reader. These amendments will be effective from assessment year (AY) 2021-22 onwards. We have tried to explain these provisions with the comparative matrix below and detailed analytical discussion. Scenario A: When Both Section 9B and Section 45(4) are Triggered Applicability: On dissolution or reconstitution of specified entity. Transfer of: Capital asset or stock in trade or both. Taxability: Capital asset: Chargeable under Section 9B and Section 45(4). Stock in trade: Chargeable under Section 28 (Profits and Gains of Business or Profession). Relief against Double Taxation: Capital gain under Section 45(4) is reduced while calculating Capital Gain under Section 9B read with Section 48(iii). Scenario B: When Only Section 45(4) is Triggered Applicability: Exclusively on reconstitution of specified entity (not applicable on dissolution). Transfer of: Capital asset or money or both. Taxability: Capital asset and money received in excess of net capital balance are taxable under Section 45(4) in the hands of the specified entity as Capital Gains. 2. Detailed Discussion of Substantive Provisions 2.1 Newly Introduced Section 9B – Income on Receipt of Capital Asset or Stock in Trade by a Partner from Firm Section 9B provides that where a specified person receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with dissolution or reconstitution of such entity, then the entity shall be deemed to have transferred such capital asset or stock in trade or both, to the partner/member in the year in which such capital asset or stock in trade or both are received by the partner/member. Further, the section provides that, profits arising out of the aforesaid deemed transfer shall be chargeable to tax in the hands of the entity under the head ‘business or profession’ or ‘capital gain’ in accordance with the provisions of the Act. For computation purposes, the fair market value of the capital asset or stock in trade as on date of its receipt by the partner/member shall be deemed to be full value of consideration. Statutory Definition of ‘Reconstitution of Specified Entity’ [Section 9B] An important point to note here is that this section has introduced the statutory meaning of the term ‘reconstitution’ of the firm as explained below: Reconstitution of the specified entity means, where— (a) One or more of its partners or members ceases to be partner or members; (b) One or more new partners or members are admitted. However, at least one existing partner or member should continue to be partner or members of the specified entity after admission of the new partner or member; or (c) All the partners or members continue with change in their respective share or in share of some of them. 2.2 Tax on Receipt of Money or Capital Asset by Partner/Member in Connection with Reconstitution of Entity [Section 45(4)] The FA 2021 has substituted the earlier sub-section (4) of section 45. The new section 45(4) provides that where a partner/member receives during the previous year any capital asset or money or both from a specified entity in connection with reconstitution of such entity, then any profit and gains arising from such receipt of asset/money by partner/member shall be deemed to be the income of the entity under the head ‘Capital Gains’ of the previous year in which such capital asset or money or both were received by the partner/member. Computation Formula under Substituted Section 45(4) A = B + C − D Wherein: A = Income chargeable under the head ‘Capital Gains’ in the hands of the entity; B = Value of money received by partner/member on the date of such receipt; C = Fair market value of the capital asset received by the partner/member on the date of such receipt; and D = Balance in capital account of the partner/member in the books of account of the entity without considering the increase in capital account due to revaluation of any asset or due to self-generated goodwill or self-generated any other asset at the time of reconstitution. (Note: If the calculated value of A is negative, it shall be deemed to be nil). “When a capital asset is received by the partner/member of the entity in connection with reconstitution, the provision of the said section shall operate in addition to the provision of section 9B. Thus, the taxation under both the provisions shall be worked out independently.” 2.3 Mode of Computation of Capital Gain u/s 48 Modified to Avoid Double Taxation [Section 48(iii)] A new clause (iii) is inserted u/s 48 to provide that capital gains chargeable to tax under section 45(4) which is attributable to capital asset being transferred by the entity shall be reduced while computing capital gain in the hands of the entity. The capital gain attributable to such a capital asset shall be computed in a prescribed manner. Till date no such manner has been prescribed. The computation of capital gain u/s 9B read with section 48(iii) shall be as follows: Particulars Amount Full value of consideration received or accrued (FMV of capital asset) XXXX Less: (a) Expenditure incurred in connection with transfer (xxx) (b) Cost of Acquisition / indexed cost of acquisition (xxx) (c) Cost of improvement / indexed cost of improvement; or (xxx) (d) The amount chargeable to tax as income of the firm under section 45(4) which is attributable to capital asset being transferred by the firm (xxx) (e) Exemption under section 54 to 54GB to the extent of net result of above calculation (xxx) Income under the head Capital Gains xxx 3. Practical Illustrations & Numerical Applications Case Study 1: Practical Example in Case of Reconstitution of the Firm R, S and P are three partners of a firm RSP & Co. On February 28, 2021, P retired from the firm. The following assets were distributed to partners: Particulars Commercial Property (₹) Money (₹) Fair market value on February 28, 2021 45,00,000 10,00,000 Cost of Acquisition 20,00,000 – Written down value as per section 50 of the Act 8,00,000 Not Applicable Balance in capital account of P 25,00,000 (it includes ₹ 5,00,000 on account of revaluation of asset) Solution – Step 1: Computation of Capital Gain in the Hands of Firm for PY 2020-21 u/s 45(4) Fair market value of asset on February 28, 2021 (C) 45,00,000 Money received by partner on February 28, 2021 (B) 10,00,000 Less: Capital balance in account of P (without taking into account revaluation credited to partner’s account) [₹ 25,00,000 − ₹ 5,00,000] (D) (20,00,000) Amount chargeable as Capital Gain in the hands of firm [A = B + C − D] 35,00,000 Solution – Step 2: Computation of Capital Gain in the Hands of Firm for PY 2020-21 as per Section 9B r.w.s. 48 Fair market value of asset on February 28, 2021 45,00,000 Less: Cost of Acquisition of asset as per section 50 (8,00,000) Less: The amount chargeable to tax as income of the firm under section 45(4) which is attributable to capital asset being transferred by the firm* (XXXX)* Amount chargeable as Capital Gain in the hands of firm XXXXX *Note on Attribution Methodology: No specific method has been prescribed to calculate the amount attributable to capital asset being transferred u/s 45(4). One may take a proportionate value of amount calculated u/s 45(4) [i.e., in ratio of money value and FMV of capital asset]. Other possible view is to first apportion the capital gains calculated u/s 45(4) to the money received by the partner and the balance to the capital asset transferred. Case Study 2: Practical Example in Case of Dissolution of the Firm R and S are two partners of a firm RS & Co. On 28th February 2021, the firm was dissolved. The following assets were distributed to partners: Particulars Commercial Property (taken over by R) (₹) Stock in Trade (taken over by S) (₹) Fair market value on 28th February 2021 45,00,000 11,00,000 Cost of Acquisition 20,00,000 9,00,000 Written down value as per section 50 of the Act 8,00,000 Not Applicable Solution – Part A: Computation of Capital Gain for PY 2020-21 in Hands of Firm as per Section 9B r.w.s. 48 (Commercial Property) Full value of consideration (FMV of commercial property) 45,00,000 Less: Expense on transfer – Net Consideration 45,00,000 Less: Cost of Acquisition as per section 50 (8,00,000) Short Term Capital Gain 37,00,000 Solution – Part B: Computation of Business Profit for PY 2020-21 in Hands of Firm as per Section 9B (Stock in Trade) Sale Consideration (FMV of stock in trade) 11,00,000 Less: Cost of acquisition of stock (9,00,000) Business Gain (Chargeable under Section 28) 2,00,000 Crucial Statutory Note: Section 45(4) is not applicable in case of dissolution of the firm; it applies strictly in cases of reconstitution. 4. Judicial Precedents Reversed / Nullified by Finance Act, 2021 By introducing these provisions, some of the contentious issues where taxpayers enjoyed favorable judgements in the past have now been statutorily reversed/nullified by the Government. Some of these are highlighted as under: Earlier Issue Judicial Precedent (Prior Law) Position Now After FA, 2021 Transfer of assets on reconstitution of the firm – taxable? CIT v. G.K. Enterprises [2003] 131 Taxman 181 (Mag.): Section 45(4) is not applicable where some partners retire and the firm continues to carry on the business with remaining partners and with new partners or without new partners. Statutorily Overruled: New section 9B defines reconstitution which includes scenario when one or more of its partners ceases to be partner, admission of new partner, etc. Sum of money received by partner in excess of balance in capital account – taxable to firm or partner? Bangalore Bench of ITAT Ruling: Held that the retiring partner is liable to capital gains tax being the excess payment received over and above the sum to the credit of her capital account at the time of retirement. Taxable in Hands of Firm: As per new provision of section 45(4), sum of money in excess of balance in capital account is taxable in the hands of the Partnership firm. Consideration received by partner on change in profit sharing ratio – Taxability? CIT v. P.N. Panjawani [2012] 208 Taxman 22 (Kar): Section 45(4) is not applicable if on inclusion of new partners, shares of existing partners are reduced. In such a case, there is no provision in the Act for levying capital gain tax on consideration received by a partner for reduction of his share in partnership firm. Reconstitution Broadened: As per new section 9B, reconstitution of firm explicitly includes reduction in profit sharing ratio or change in respective shares. CA. Rangoli Raval Member, The Institute of Chartered Accountants of India (ICAI) Email: rangoliraval313@gmail.com

International Taxation ICAI Journal Ref: October 2021 • Vol. 70 • No. 4 • pp. 82–85 (462–465) BEPS Action 6 • Multilateral Instrument (MLI) • Domestic GAAR Can Principal Purpose Test and GAAR apply when Specific Anti-Avoidance Provisions are not applied to a covered Tax Agreement? CA. Kinjesh Thakkar (Member of the Institute of Chartered Accountants of India) Contact: kinjeshthakkar@gmail.com Executive Abstract & Jurisprudential Scope “Multilateral Instrument (‘MLI’) is historic in terms of curbing tax evasion. It has been effective in India with effect from 01 April 2020. As per MLI, Principal Purpose Test (‘PPT’) is one of the minimum standards. However, other provisions to implement specific Base Erosion and Profit Shifting (‘BEPS’) measures referred as specific anti-avoidance rules are optional for which countries may not opt in for the same limiting application of MLI. However, analysis is made to understand as to whether PPT being a minimum standard of MLI can apply in absence of such specific anti-avoidance rules for such Covered Tax Agreements (‘CTAs’). Read on…” 1. Introduction: The MLI Architecture & Treaty Abuse Framework Bilateral Tax treaties define taxing rights between treaty countries. However, based on loopholes in tax treaty network, various arrangements have been devised to avoid fair share of taxes. To address the same, Multilateral Instrument (‘MLI’) provides for Article 6 and Article 7 as minimum standards for countering treaty abuse. Article 6 of MLI – Purpose of Covered Tax Agreement (‘CTA’) Article 6 provides text that should be included in the Preamble of Covered Tax Agreements. It states that the jurisdictions intend to avoid creation of opportunities for non-taxation or reduced taxation through tax evasion or avoidance, and through treaty shopping. The preamble text reads as below: “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),” (Emphasis supplied). Article 7 of MLI – The Principal Purpose Test (‘PPT’) Another minimum standard, Article 7, introduces the Principal Purpose Test (‘PPT’) to prevent treaty abuse. As per the said rule, treaty benefits are denied when one of the principal purposes is to obtain tax benefit. The bare text of the rule is provided below: “Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement” (Emphasis supplied). Apart from above, there are specific anti-avoidance provisions included in CTA like Limitation of Benefit clauses, Minimum Holding period in case of dividend for application of lower tax rate, countering Permanent Establishment avoidance by Splitting up contracts etc. Such provisions for ease of reference are termed as “Specific anti-avoidance rules” (“SAAR”) in CTAs. However, on account of the nature of MLI, countries may opt-in or opt-out of such provisions of MLI which means that it normally applies only if both the contracting jurisdictions accept these specific anti-avoidance rules. The Core Question: Where a particular CTA is not modified by specific anti-avoidance rules (SAAR), can the PPT rule apply to such transactions or arrangements? 2. Interplay Between PPT and SAAR: Evaluating the Two Competing Views In this connection, two diametrically opposed views are possible among international tax jurists: View 1 – Passive Intent The absence of such rules in a particular CTA indicates the intention of the contracting jurisdictions to grant treaty benefits resulting from transactions. View 2 – Independent Overriding Application The absence of this rule in a particular CTA indicates that contracting jurisdictions intend to rely on the PPT rule to challenge these transactions without adopting such detailed, fact-specific, objective limitations. Whereas View-1 does not require any analysis and is quite clear, analysis of View-2 considering the Commentary to Article 1 of OECD Model Tax Convention (Paragraphs 57 to 65 of OECD Model Tax Convention [2017]), provides that in absence of such specific anti-avoidance rules, PPT is not precluded from its application. This is firmly supported by the following legal grounds: Mandatory Preamble Alignment: The minimum standard requires countries to adopt the amended preamble explicitly stating the intention to eliminate double taxation “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance…”. Overriding Non-Obstante Clause: The PPT rule begins with the words “Notwithstanding any provisions of a Covered Tax Agreement…”. This means it has an overriding impact over other provisions of CTA and can operate independently. Expansive Scope: Furthermore, the phrase “resulted directly or indirectly in that benefit” in the PPT rule is deliberately not restrictive in nature and is quite broad to cover all transactions without any exclusion. Vienna Convention on the Law of Treaties (VCLT): Article 26 of the Vienna Convention on the Law of Treaties provides for the foundational principle of “pacta sunt servanda” which effectively means that: “Every treaty in force is binding upon the parties and must be performed by them in good faith”. Hence, based on the above, it would be reasonable to conclude that View-2 is a better and legally sound view. Practical Demonstration: Article 14 of MLI (Splitting-up of Contracts) Article 14 of MLI counters contracts that are artificially split-up to avoid Permanent Establishment (PE) in a contracting state. However, Article 14 can be opted out by countries, and many contracting states have done so. However, if a contract is artificially split up, then one of the principal purposes of obtaining tax benefit is satisfied for application of PPT. In such cases, even if specific anti-abuse provisions of Article 14 of MLI are absent in the CTA, PPT being the minimum standard rule, can be applied to counter such treaty abuse. This effectively means that specific anti-avoidance rules provided in the convention can be looked at as a guiding principle to determine treaty abuse and in the absence of such specific anti-avoidance rules, PPT shall apply. 3. Interplay Between PPT and Domestic GAAR Commentary to Article 1 of OECD Model Tax Convention (Para 58 [2017]) not only affirms application of PPT in situations where specific anti-avoidance rules are absent, but also provides for possibility of application of General Anti Avoidance Rules (‘GAAR’) under domestic law of countries. As per the said commentary, taking into account the fact that taxes are ultimately imposed through the provisions of domestic law, as restricted by the provisions of a tax treaty, any abuse of the provisions of a tax treaty could also be characterised as an abuse of the provisions of domestic law under which taxes are levied. Such guidance in commentary can ultimately lead to a conclusion that for these cases, provisions of GAAR as per local laws can apply. Statutory Dimension of Indian GAAR [Section 96 & Section 98] Domestic law in India provides for application of GAAR to Impermissible Avoidance Arrangements (‘IAA’). To determine an arrangement as Impermissible Avoidance, Section 96 of the Indian Income Tax Act, 1961 (“the Act”) provides as under: “An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit”. Thus, GAAR applies to an impermissible avoidance arrangement meaning an arrangement whose main purpose is to obtain tax benefit. As per domestic law, GAAR applies to all domestic as well as international transactions with tax benefit exceeding INR 3 crores. Consequence of application of GAAR is that Tax Authorities can re-characterise, combine, disregard, or reclassify a transaction including reattribution of income as per section 98 of the Act. Parameter Principal Purpose Test (PPT) [Article 7 MLI] Domestic GAAR [Chapter X-A, Income Tax Act] Legal Origin Bilateral Tax Treaty / Multilateral Instrument (MLI) Domestic Tax Legislation (Section 95 to 102 of IT Act) Purpose Threshold “One of the principal purposes” (Lower, broader test) “The main purpose” (Primary / dominant purpose test) Monetary Threshold No threshold (Applies to all international transactions) Tax benefit in aggregate exceeding INR 3 Crores Jurisdictional Reach Cross-border Covered Tax Agreements (CTAs) Domestic and cross-border transactions Statutory Consequence Denial of treaty benefits under the CTA Re-characterisation, disregarding conduits, combining steps, and reattribution of income (Section 98) Most cases may have a specific set of facts where either only PPT or either only GAAR shall apply. However, both apply when there is “a cross border transaction or arrangement wherein the main purpose is to obtain tax benefit exceeding INR 3 crores.” Harmonious Co-Existence: Why GAAR Cannot Displace PPT and Vice Versa In such a scenario, it is important to note that GAAR is imposed by domestic tax law which provides for charge of tax. Thus, GAAR is not displaceable which even the Commentary to Article 1 of OECD Model tax convention (Para 58 [2017]) provides to apply. Further, PPT is applicable based on bilateral tax treaties of countries. As per Article 60 of the Vienna Convention on the Law of Treaties, a breach of treaty by one of the parties entitles the other to terminate the tax treaty or suspend its operation either in whole or in part. Thus, GAAR cannot displace PPT which ultimately means both can co-exist. “Application of PPT shall ensure denial of tax treaty benefits and application of GAAR ensures that Tax Authorities can re-characterise, combine, disregard, or reclassify a transaction including reattribution of income as per section 98 of the Income Tax Act. This ensures appropriate tax revenue is due to the country charging tax on a transaction/arrangement.” 4. Comprehensive Practical Case Study: Conduit Loan & Deemed Dividend To illustrate the real-world operational interplay of PPT, domestic law, and GAAR, consider the following tripartite transaction structure: Fact Pattern: The H.Co – S.Co – Financial Institution Arrangement Corporate Structure: H.Co, a company incorporated in State H, has a subsidiary in State S namely S.Co. Financial Need: H.Co needs funds and S.Co has surplus cash as well as substantial accumulated profits. Domestic Tax Rate: Dividend attracts a rate of 20% tax in State S. Domestic law also provides for a rate of 20% on interest income in State S. Conduit Arrangement: To avoid dividend distribution taxation, S.Co provides a deposit to a Financial Institution in State X, which in turn provides a loan to H.Co of a similar amount. Treaty Position: Interest income from Financial Institution is exempted from tax in State S under the X-S tax treaty. H.Co(State H • Parent) ← Loan Disbursed ← Financial Institution(State X • Intermediary Conduit) ← Back-to-Back Deposit ← S.Co(State S • Subsidiary with Profits) Artificial conduit arrangement designed to convert taxable dividend into treaty-exempt interest flow Step-by-Step Legal & Tax Determination: 1. Impact of PPT (Denial of Treaty Exemption): Based on PPT, treaty benefits shall not be allowed for the X-S treaty because one of the principal purposes of placing funds with the Financial Institution in State X was to obtain treaty exemption. Thus, interest income shall be taxable in State S at the rate of 20% based on domestic law. 2. Impact of GAAR (Re-characterisation as Deemed Dividend): Further, GAAR shall also apply on the said transaction as the entire arrangement’s main purpose is to obtain tax benefit. If State S would have been India, the entire arrangement avoided deemed dividend or dividend taxation by artificially providing deposit to a Financial Institution which grants the same amount of loan to H.Co. This would have attracted provisions of Section 2(22)(e) of the Income Tax Act of India if a normal loan transaction would have been undertaken. Cumulative Revenue Assessment: Thus, as per GAAR, the said transaction by S.Co can be re-classified as deemed dividend disregarding Financial Institution of State X. Hence, based on application of GAAR, over and above interest amount, the loan amount shall also be taxable in State S. Thus, it can be concluded that both GAAR and PPT can co-exist and this gives more means to tax authorities to have a fair share of taxes for their country. 5. Conclusion & Global Tax Outlook Internationally, tax avoidance has been recognized as a serious concern. MLI is historic in terms of curbing tax evasion and Base Erosion and Profit Shifting (‘BEPS’). MLI is effective in India with effect from 01 April 2020. The PPT rule is quite broad and can counter all abuses of treaty. Thus, it would be important to consider implications of said rule on any arrangement even if countries have not accepted specific rules of anti-avoidance provided in MLI or GAAR is not part of tax laws. “Thus, PPT or GAAR does not restrict but supplements specific Anti-avoidance rules to avoid tax abuse.” Statutory & Commentary Citations OECD Model Tax Convention [2017]: Commentary on Article 1, Paragraphs 57 to 65 (Application of PPT in absence of SAAR). OECD Model Tax Convention [2017]: Commentary on Article 1, Paragraph 58 (Co-existence of domestic GAAR with tax treaties). Vienna Convention on the Law of Treaties (VCLT): Article 26 (Pacta sunt servanda) and Article 60 (Termination or suspension of a treaty as a consequence of its breach). Income-tax Act, 1961 (India): Section 96 (Impermissible Avoidance Arrangement), Section 98 (Treatment of IAA), and Section 2(22)(e) (Deemed Dividend). Multilateral Convention to Implement Tax Treaty Related Measures (MLI): Article 6 (Purpose of CTA / Preamble) and Article 7 (Principal Purpose Test). CA. Kinjesh Thakkar Member, The Institute of Chartered Accountants of India (ICAI) Email: kinjeshthakkar@gmail.com

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 70–81 (Journal pp. 450–461) International Taxation • OECD/G20 BEPS Project Multilateral Instruments (MLI) – Decoded AR CA. Anil I. Ramdurg Member of the Institute of Chartered Accountants of India. Contact: ramdurgca@gmail.com BD Dr. Basavaraj C. S. Academician & International Tax Researcher. Contact: drbasavarajcs@gmail.com Executive Overview: Combating Global MNE Tax Avoidance “In the throes of the global crisis, tax avoidance was not viewed as a phenomenon pertaining to particular sectors or industries, rather it was perceived to be a phenomenon afflicting the global MNE sector. In some circumstances bad tax avoidances by MNEs are likely to be legal in terms of the strict letter of the law but these tax avoidances rather than tax evasion are viewed as unreflective of the intention of the law. To put an end to these practices, OECD and G20 countries came with an innovative instrument called Multilateral Instrument (MLI). Read on....” 1. Introduction: The Genesis of the Multilateral Instrument Primarily, the Multilateral Instrument (MLI) is a child of the OECD’s Base Erosion and Profit Shifting (BEPS) Project. It was conceived to introduce consistency, clarity, transparency, and operational flexibility within a compressed timeframe, simultaneously modifying over 3,000 existing bilateral tax treaties worldwide. A tax treaty represents an agreement between sovereign jurisdictions designed to eliminate double taxation and resolve conflicts arising from overlapping tax jurisdictions. As acknowledged by the OECD, “abuse of tax treaties is an important source of BEPS”. Bilateral renegotiation of thousands of independent conventions by individual governments is an extraordinarily cumbersome and time-consuming undertaking that would span decades. Under Action Plan 15 of the OECD/G20 BEPS Project, participating nations explored the feasibility of a single multilateral convention. Its core mandate is to “modify existing bilateral tax treaties solely in order to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project”, decisively terminating treaty shopping and systemic treaty abuse. Legal Status: MLI Operates Side-by-Side, Not as a Substitute The MLI does not directly overwrite or replace bilateral Double Taxation Avoidance Agreements (DTAAs). Instead, “the MLI is applied alongside existing bilateral tax treaties modifying their application”. Existing treaties remain in force and continue to operate as modified by the MLI. Crucially, the MLI does not freeze bilateral treaties; sovereign nations retain full autonomy to continue bilateral renegotiations in the future. 2. Covered Tax Agreement (CTA): The Principle of Mutual Notification A Covered Tax Agreement (CTA) is defined as a bilateral tax treaty in force between signatories to the MLI where both contracting states have explicitly notified the OECD Depository that they wish to modify that agreement through the MLI framework. If only one treaty partner notifies an agreement while the counterparty does not, the bilateral treaty fails the dual-notification test, ceases to be a CTA, and remains unaffected by MLI provisions: Qualifies as CTA: India – Australia Treaty India notified Australia in its instrument of ratification, and Australia reciprocal notified India. The treaty qualifies as a CTA and is legally modified by the MLI. Does NOT Qualify as CTA: India – Mauritius Treaty Although India included the Mauritius treaty in its ratification instrument, Mauritius omitted the Indian DTAA from its notified treaties. Due to lack of reciprocity, it is not a CTA. 3. The Six Strategic Rationales for the MLI Mechanism 1. Overcoming Treaty Abuse Traditional bilateral treaties were negotiated purely to eliminate double taxation. Globalization exposed severe statutory gaps and friction between domestic laws, enabling aggressive MNE treaty abuse that fueled base erosion. 2. Eliminating Opportunities for Double Non-Taxation Gaps in Permanent Establishment (PE) definitions, weak dispute settlement frameworks, and hybrid mismatch arrangements created rampant double non-taxation, now neutralized through standardized anti-abuse provisions. 3. Bypassing Cumbersome Bilateral Ratification Cycles Bilateral renegotiation of 3,000 conventions based on vintage model tax treaties requires massive diplomatic resources and decades to conclude, whereas MLI implements changes globally in a unified step. 4. Compressing Urgent Implementation Timeframes The urgency of BEPS demanded a swift execution mechanism that modernizes the international tax architecture while preserving the sovereign bilateral nature of existing treaties. 5. Exceptional Feasibility & Calibrated Flexibility Formulated through an inclusive ad-hoc international conference open to G20, OECD, and developing economies, delivering unprecedented multilateral consensus without compromising national sovereignty. 6. Global Consistency via a “Single Text” Architecture Focuses premier treaty negotiators on a harmonized “Single Text” rather than thousands of divergent bilateral formulations, fostering uniform judicial interpretation across jurisdictions. 4. Historical Timeline & Entry into Force Milestones The journey of the MLI unfolded through pivotal international milestones from February 2013 to its formal entry into force on July 1, 2018: February 12, 2013: Formal launch of the OECD/G20 BEPS Project. July 2013: Endorsement of the BEPS Action Plan by G20 Leaders at Saint Petersburg. February 2015: Commencement of multilateral negotiations by the Ad Hoc Group of over 100 jurisdictions. October 2015: Final release of the comprehensive 15 BEPS Action Reports. November 24, 2016: Formal adoption of the MLI text and explanatory statement. June 7, 2017: Historic high-level signing ceremony in Paris, signed by 67 inaugural countries (including India). July 1, 2018: Entry into force of the MLI following ratification deposits by the first five pioneer jurisdictions. Table 1: Pioneer Jurisdictions Triggering MLI Entry into Force Sl No Country / Territory Deposit Date Legal Remarks 1 Austria 22.09.2017 Under Article 34, the convention enters into force on the first day of the month following the expiry of 3 calendar months after the deposit of the 5th instrument of ratification—formally establishing July 1, 2018 as the global effective date. 2 Isle of Man 25.10.2017 3 Jersey 15.12.2017 4 Poland 23.01.2018 5 Slovenia 22.03.2018 5. The Five Structural Pillars of the MLI Framework The legal architecture of the MLI is structured around five operational building blocks: 1. Minimum Standards (Mandatory) Core anti-abuse measures that all signatories must adopt unless existing treaties already meet them. Covers Action 6 (Countering Treaty Abuse via Articles 6 & 7) and Action 14 (Mutual Agreement Procedure via Article 16). 2. Optional Provisions Non-mandatory clauses where signatories exercise sovereign discretion—such as choosing between Option A, B, or C under Article 5 for double taxation relief. Applies only if both treaty partners align. 3. Reservations (Article 28) Allows countries to opt out of non-minimum standard articles. Reservations cannot be selective or discriminatory across partners; they must apply universally to all CTAs of that signatory. 4. Notification Clauses (Article 29) Mandatory notices deposited with the OECD specifying which bilateral treaties are covered, which options are chosen, and which reservations are invoked. Additions after ratification are prohibited; withdrawals are allowed. 5. The Four Compatibility Clauses Compatibility clauses address statutory overlap and direct conflicts between the MLI and existing bilateral treaties: “In place of”: The MLI provision explicitly replaces an existing CTA provision if one exists. “Applies to” or “Modifies”: Changes the operational scope of an existing provision without entirely replacing it. “In absence of”: Added into the bilateral treaty if no corresponding clause currently exists. “In place of” or “In absence of”: Replaces an existing clause if present, or is added if absent. Table 2: Opt-In & Opt-Out Compatibility Outcomes Between Contracting States Combination Country A Country B In place of Applies / Modifies In absence of In place/absence I Notified (Opt in) Notified (Opt in) Yes Yes Yes Yes II Notified (Opt in) Reserved (Opt out) No No No No III Reserved (Opt out) Reserved (Opt out) No No No No IV Notified (Opt in) Silent No No No Yes V Silent Reserved (Opt out) No No No No VI Silent Silent No No No Yes Rule Note: Where both parties notify existing provisions, the clause is replaced. Where one party notifies and the other is silent, the MLI provision supersedes the CTA provision to the extent of incompatibility (e.g., insertion of Article 6(1) preamble). 6. Effective Dates: Entry into Force vs. Entry into Effect (India-Canada Benchmark) Articles 34 and 35 govern two critical dates: Entry into Force (EIF) (when the convention becomes binding international law) and Entry into Effect (EIE) (when withholding taxes and other taxes are actually impacted): India – Canada Comprehensive Application Case Study Deposit of Ratification: India deposited on 25.06.2019; Canada deposited on 29.08.2019. Entry into Force (EIF): India: 01.10.2019 (first day after 3 months); Canada: 01.12.2019. The latest EIF between both nations is 01.12.2019. Entry into Effect (EIE) for Withholding Taxes (WHT): Applies on the 1st day of the next calendar/taxable year following the latest EIF. For India (chosen taxable fiscal year): 01.04.2020. For Canada (calendar year): 01.01.2020. Entry into Effect (EIE) for All Other Taxes: Taxable periods commencing on or after the expiry of 6 calendar months from the latest EIF (01.12.2019) ➔ 01.06.2020 for both India and Canada. OECD Synthesised Texts: Non-Binding Informative Guides Because reading bilateral DTAA texts alongside disparate MLI options and reservations is complex, the OECD recommended creating Synthesised Texts. A synthesised text consolidates the CTA wording, MLI modifications, and explanatory cross-references into a single document. However, synthesised texts are NOT legal instruments; there is no statutory obligation between treaty partners to consult or agree upon their publication. 7. Structural Architecture of the MLI (7 Parts & 39 Articles) Part Articles Substantive Scope & Content BEPS Action Part I Articles 1–2 Scope of the Convention and Interpretation of Terms — Part II Articles 3–5 Hybrid Mismatches (Transparent Entities, Dual Residents, Methods of Elimination) Action 2 & 6 Part III Articles 6–11 Treaty Abuse (Preamble, PPT, SLOB, Dividend Transfers, Capital Gains on Immovable Property) Action 6 Part IV Articles 12–15 Avoidance of Permanent Establishment (Commissionaires, Specific Activities, Splitting Contracts, Closely Related Persons) Action 7 Part V Articles 16–17 Improving Dispute Resolution (Mutual Agreement Procedure, Corresponding Adjustments) Action 14 Part VI Articles 18–26 Mandatory Binding Arbitration (India opted out of Part VI) Action 14 Part VII Articles 27–39 Final Provisions (Reservations, Notifications, Entry into Force, Depositary) — 8. India’s MLI Trajectory: 93 Notified DTAAs & 46 Effective CTAs India actively signed the MLI on June 7, 2017 in Paris and deposited its Instrument of Ratification with the OECD on June 25, 2019. India maintains comprehensive DTAAs with 96 countries, of which it notified 93 treaties as CTAs. As of June 29, 2021, 65 of India’s treaty partners had deposited their ratifications. However, China, Germany, Oman, Switzerland, and Mauritius omitted India from their CTA notifications. Consequently, tax treaties with these five nations remain unmodified by the MLI. Table 3: Phased Entry into Effect for India’s 46 Notified CTAs (as of August 10, 2021) Sl No Date of Entry into Effect in India Taxes Withheld (WHT) Other Taxes 1 From 1st April 2020 28 21 2 From 1st April 2021 12 15 3 From 1st April 2022 6 10 Total Effective CTAs 46 46 9. Substantive Impact on Indian Treaty Provisions I. Prevention of Treaty Abuse Modified Preamble: Explicitly declares treaty intent to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or treaty shopping. Principal Purpose Test (PPT): Incorporates PPT under Article 7 across all CTAs as a mandatory minimum standard. Treaty benefits are denied if obtaining that benefit was one of the principal purposes of an arrangement. Simplified Limitation on Benefits (SLOB): India chose to supplement PPT with the SLOB provision, applicable where the treaty counterparty also opts in. II. Widening the Scope of Permanent Establishment (PE) Commissionaire Arrangements: Neutralizes artificial avoidance of PE via agency structures under Article 12. Specific Activity Exemptions: Restricts preparatory/auxiliary activity exemptions (Option A under Article 13). Anti-Fragmentation Rule: Prevents artificial splitting of cohesive business operations among group entities. Anti-Splitting of Contracts: Aggregates connected contracts executed by related entities exceeding time thresholds under Article 14. Independent Agent Narrowing: Persons acting exclusively or almost exclusively for closely related enterprises lose independent agent status under Article 15. III. Dispute Resolution, Dual Residency & Immovable Property Mutual Agreement Procedure (MAP): Bilateral consultation under Article 16. India opted OUT of mandatory binding arbitration (Part VI). Corporate Tie-Breaker Test: Dual residency for non-individuals will no longer default to place of effective management (POEM); it must be decided by mutual agreement between Competent Authorities (CAs). 365-Day Lookback for Immovable Property Shares: Source country retains capital gains taxing rights if shares derived >50% of value from immovable property at ANY point within 365 days preceding alienation (Article 9(4)). Dividend Minimum Holding Period: Concessional withholding tax rates on inter-company dividends require a minimum 365-day holding period (Article 8). 10. Comprehensive Interplay: Domestic GAAR vs. MLI Principal Purpose Test (PPT) While domestic General Anti-Avoidance Rules (GAAR) under Chapter X-A of the Income-tax Act, 1961 took effect from AY 2018-19, the MLI introduces the Principal Purpose Test (PPT). Crucial statutory distinctions between both anti-abuse frameworks are detailed below: Point of Difference Domestic GAAR (Income-tax Act) Principal Purpose Test (PPT in MLI) Objective To cover transactions where the main purpose is to obtain a tax benefit. To cover transactions where one of the principal purposes is to obtain treaty benefits through treaty shopping. Applicability Standard Requires satisfaction of main purpose test PLUS at least one tainted element test (e.g., non-arm’s length, misuse/abuse, lack of commercial substance). Applies where granting the benefit would be contrary to the object and purpose of the relevant treaty provisions. Consequences Broad restructuring powers: reclassification of transactions, disregarding entities, reallocation of income, denial of treaty benefit. Specific consequence: treaty benefit under the CTA will be denied. Onus to Prove Primary burden of proof rests on the tax revenue authority. Primary onus on tax authority, with a rebuttal presumption for the taxpayer to prove commercial justification. Monetary Threshold Statutory threshold: tax benefit in excess of Rs. 3 crore. No monetary threshold limit (applies to all transaction values). Administrative Safeguards Mandatory reference to high-level statutory Approving Panel headed by a retired High Court judge. Standard domestic assessment procedures as determined by contracting jurisdictions. Grandfathering Protection Yes, investments made prior to 1st April 2017 are grandfathered. NO grandfathering provisions (applies to pre-existing structures). 11. India’s Final Notified Position Across MLI Articles Article Subject Matter India’s Notified Position & Strategic Election Art. 3Transparent EntitiesFull Reservation (entirety of Article 3 will not apply to India’s CTAs). Art. 4Dual Resident EntitiesNo Reservation (dual residency to be settled by Competent Authorities). Art. 5Methods for Elimination of Double TaxationChosen Option C (Credit method for all income taxed in the other state). Art. 6Purpose of Covered Tax AgreementNo Reservation (adopts anti-abuse preamble as Minimum Standard). Art. 7Prevention of Treaty AbuseAdopts PPT as interim measure; additionally chose Simplified LOB (SLOB). Art. 8Dividend Transfer TransactionsReserved right not to apply to CTAs that already mandate holding period > 365 days. Art. 9Alienation of Shares Deriving Value from Immovable PropertyChooses to apply Paragraph 4 (>50% immovable property value test at ANY point during 365 days prior to transfer). Art. 10Anti-Abuse Rule for PE in Third JurisdictionsNo Reservation. Art. 11Right to Tax Own ResidentsNo Reservation. Art. 12Commissionaire ArrangementsNo Reservation. Art. 13Specific Activity Exemptions for PEChosen Option A (preparatory/auxiliary test). No reservation against anti-fragmentation rule. Art. 14Splitting Up of ContractsNo Reservation. Art. 15Closely Related Enterprise DefinitionNo Reservation. Art. 16Mutual Agreement Procedure (MAP)First sentence of Para 1 not to apply; meets minimum standard by accepting cases in resident state and initiating bilateral consultations. Art. 17Corresponding AdjustmentsReserved right not to apply to CTAs already containing corresponding adjustment rules. Part VIMandatory Binding Arbitration (Art. 18–26)India opted OUT completely (Part VI does not apply). 12. Impact on Withholding Taxes u/s 195 & Six Mandatory Compliance Documents Post-MLI withholding tax rules became operational in India from 1st April 2020 for all ratified CTAs. Whenever a resident payer makes a cross-border payment to a non-resident, Section 195 of the Income-tax Act is triggered. Under Section 90, taxpayers may choose the more beneficial provisions between domestic law and the applicable DTAA. Prior to MLI, obtaining a Tax Residency Certificate (TRC) and Form 10F was widely regarded as sufficient. In the post-MLI era, standard TRC documentation is legally inadequate. Payers must exercise professional due diligence; failure to do so results in TDS default under Section 201, expense disallowance under Section 40(a)(i), and punitive penalties under Sections 221 and 271C. Six Mandatory Documents for Withholding Tax Due Diligence Tax Residency Certificate (TRC) & Form 10F: Standard statutory documentation certifying fiscal residency and verified particulars. Permanent Establishment (PE) Declaration: Comprehensive undertaking certifying non-creation of PE under revised MLI thresholds (Articles 12 to 14). Beneficial Ownership Undertaking: Affirmation that the foreign recipient is the ultimate beneficial owner of income with economic substance. PPT & LOB Declaration: Formal certification affirming that obtaining treaty benefits was not one of the principal purposes, satisfying Article 7. Dividend Holding Period Certificate: Written declaration certifying continuous beneficial ownership of shares for ≥365 days under Article 8. Immovable Property Value Undertaking: Certification that transferred shares did not derive >50% of value from Indian immovable property at any point in the preceding 365 days under Article 9. 13. Conclusion: Global Realignment & Equitable Taxation India’s active leadership in implementing the BEPS project has spearheaded a historic transformation in cross-border taxation. With over 50 treaty partners having deposited their ratifications, international tax treaties are progressively evolving into modern Covered Tax Agreements. The global implementation of the MLI symbolizes victory over artificial treaty abuse, double non-taxation, and base erosion. Premier MNEs are comprehensively restructuring operational models to align with commercial substance. In doing so, the MLI fulfills its cardinal promise: guaranteeing that sovereign nations collect an equitable share of corporate tax revenues directly commensurate with true economic activity conducted within their borders. References OECD (2015), Developing a Multilateral Instrument to Modify Bilateral Tax Treaties, Action 15 – 2015 Final Report, OECD/G20 BEPS Project, OECD Publishing, Paris. OECD, FAQ on the MLI (July 2017) & Legal Note on the Functioning of the MLI under Public International Law (2017). OECD (2018), Guidance for the Development of Synthesised Texts, Multilateral Convention to Implement Tax Treaty Measures to Prevent BEPS. Press Information Bureau, Ministry of Finance, Government of India (02.07.2019), Ratification by India of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. Suranjali Tandon, National Institute of Public Finance and Policy (NIPFP), Working Paper Series No. 220 (15-Feb-2018), The Multilateral Legal Instrument: A Developing Country Perspective. Kluwer International Tax Blog (06-Feb-2020), India Budget 2020: Key International Tax Proposals Impacting Non-Resident Taxpayers and MNCs. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) October 2021 Issue • Vol. 70 • No. 4 • pp. 70–81 (Journal pp. 450–461) Authors Contact: ramdurgca@gmail.com | drbasavarajcs@gmail.com

International Taxation ICAI Journal Ref: October 2021 • Vol. 70 • No. 4 • pp. 86–91 (466–471) Transfer Pricing • Chapter X • Intercompany Dividend Dividend as an ‘International Transaction’ – Will the opinion stand divided or united? CA. Aparna Rajeshwar Naik (Member of the Institute of Chartered Accountants of India) Contact: aparnagurjal@gmail.com Executive Abstract & Issue Thesis “Dividend made a big splash in the Finance Act 2020, wherein, the traditional method of taxing dividends in the hands of the shareholders has been reintroduced. In the past, many intercompany transactions like advertising, marketing, and promotion expenses (AMP expenses), issue of shares, intercompany borrowing, guarantees, cost sharing arrangements etc. have been scrutinized, debated, and continue to be contentious issues. This article discusses the applicability of TP provisions to ‘intercompany dividend’, which has till date remained an unchartered territory for the Indian Tax Authorities (ITA). Read on…” I. What is Dividend? Every company thrives on two main sources of funding, namely capital contribution by its shareholders and borrowings. The word dividend comes from the Latin word dividendum (thing to be divided). Black’s Law Dictionary defines dividend as a portion of a company’s earnings or profits distributed pro rata to its shareholders, usually in the form of cash or additional shares. Dividend in layman’s terms is a return on capital in proportion to ownership (shares held) in a company. a. Dividend is an Appropriation of Profits – Judicial Analysis In one of the rulings the Punjab and Haryana High Court mentioned that dividend is an appropriation of profits in the landmark case of Punjab Distilling Industries Ltd. vs. CIT, (1963) 48 ITR 288: “Speaking generally, ‘dividend’ is a sum of money or portion of divisible thing to be distributed according to a fixed scheme being what the shareholder earns as return on his investment; it is his share of corporate earnings credited to his account. The characteristic feature of ‘dividend’ is that it is declared and paid wholly from the net profits or undivided earnings leaving intact the shareholder’s fractional interest represented by his holding in the capital stock. A ‘dividend’ is not capital but the produce of capital. Subject to well recognised limitations, ‘dividend’ is a word of general and indefinite meaning without any narrow, technical or rigid significance. The term ‘dividend’ is applied to a distributive sum, share or percentage arising from some joint venture as profits of a corporation. In the second sense, it is a proportionate amount paid on liquidation of a company. In this context ‘dividend’ is being referred to in the sense of corporate profits set apart for rateable division amongst the shareholders, being surplus assets obtained in excess of capital”. Having understood the nature of dividend, i.e., appropriated from a post-tax distributable profit (current or previous year), one needs to understand its implications under the Indian TP Regulations. b. Provisions under the Act Dealing with Transfer Pricing The provisions of Section 92 of the Income Tax Act, 1961 (the Act) deal with the applicability of transfer pricing provisions (TP provisions) to transactions between two Associated Enterprises (AEs). Section 92(1) of the Act provides that: “Any income arising from an international transaction shall be computed having regard to the arm’s length price”. In order to apply the provisions of Section 92(1) of the Act to dividend payment, firstly it must qualify as a ‘transaction’; and secondly it must be possible to benchmark the transaction with ‘arm’s length price’. Accordingly, it is important to analyze the definition of ‘international transaction’ and ‘arm’s length price’ as provided in the Indian TP provisions and evaluate its applicability to ‘dividends’. II. Meaning of an International Transaction [Section 92B] As per Section 92B of the Act, the following four conditions should be satisfied to be covered by the definition of international transaction: Condition (a): There should be a transaction. Condition (b): The transaction should be between two or more associated enterprises (AEs). Condition (c): At least, one of the transacting parties should be a non-resident. Condition (d): Purchase, sale, lease of tangible/intangible property, services, lending/borrowing, or having bearing on profits, income, losses, or assets. Thus, all the four conditions as listed above should be cumulatively fulfilled for a transaction to be called an ‘international transaction’ under the Indian TP provisions. III. Can Dividend be Construed to be a Transaction? [Section 92F(v)] For evaluating whether dividend can be a transaction, one needs to refer to its definition under Section 92F(v) of the Act. It refers to any kind of arrangement, understanding or action would be a transaction even if it is not in writing and intent to transact is evident from the conduct of the parties (i.e., oral). Further, even if there is no legal remedy for enforceability of such arrangement, understanding or action, it would still qualify as a transaction. “To ascertain whether the declaration and payment of dividend can be considered to be a transaction, one needs to understand the nature, circumstances permitting payment of dividends and procedural aspects relating to dividend.” Relevant Judicial Rulings in India on the Term ‘Transaction’ (AMP Expense Analogy) The existence of a ‘transaction’ and consequent ‘international transaction’ has been deliberated by the Indian Tax Authorities while adjudicating whether Advertising, Marketing, and Promotion (AMP) expenses incurred by an Indian company was an ‘international transaction’ requiring ALP compensation from Foreign AE: Case / Judicial Authority Ruling in the Context of Arrangement, Understanding and Action in Concert Maruti Suzuki India Ltd. (ITA-710/2015, Delhi High Court) Even if the word ‘transaction’ is given its widest connotation, … it is still incumbent on the Revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ between MSIL and SMC as regards AMP spend for brand promotion. Bacardi India Pvt. Ltd. (ITA No. 1970/Del/2017, ITAT Delhi) The Courts held that the existence of an international transaction will have to be established de hors the Bright Line Test (BLT), the burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An ‘assumed’ price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. [Note: BLT was first deliberated by US Tax Court in DHL Inc. v Commissioner (TCM 1998-461) and challenged in Maruti Suzuki India Ltd. (2010) 328 ITR 210]. Daichi Sankyo v. J. Chiguripati (Civil Appeal No. 7148 of 2009, Supreme Court of India) Supreme Court held that action in concert would necessarily entail a shared common objective or purpose between two or more persons. In the absence of such shared objective or purpose, no presumption of a transaction can be made. Whirlpool of India Ltd. (ITA Nos. 610/2014 & 228/2015, Delhi High Court) The Delhi High Court while negating the AMP adjustment quoted: “A unilateral action by one of the partners without any binding obligation on the other could not be termed as a transaction. There could not be an inference of the existence of such an ‘international transaction’. The onus is on the Revenue to demonstrate the existence of such transaction between the two parties”. Based on the above judicial pronouncements, it needs to be evaluated whether declaration and payment of dividend can be considered to be arrangement, understanding or action in concert between the company and its shareholders at the time of investing in the shares of the company. IV. Declaration and Distribution of Dividend is at Management’s Discretion It would be the endeavour of every company to maximize return on investments of its shareholder’s funds and maintain a good dividend payout ratio to attract further investments. When the shareholder invests in any company (Private or Public) he is not assured of a yearly return in the form of dividend at the outset (i.e., at the time of investing in the company). This is in consonance with any business activity, which can face either of the extremes, profits or losses. But the ability of a company to pay dividends is governed by the applicable laws and management’s discretion. Payment of dividend is discretionary and is dependent on many factors (internal and external) to the organization. Management which oversees day to day running of the business must observe prudence and decide when (timing and frequency), whether to pay or not to pay and how much (quantum) based on the following comprehensive matrix: Internal Factors Influencing Dividend Capital Commitments: Capital expenditure plans, funding for acquisitions / mergers. Operating & Financing: Operating Profit After Tax (PAT), operating cash flows, long-term and short-term debt service obligations, working capital requirements. Statutory & Solvency: Future tax demands / contingencies, capital adequacy ratios, solvency margins, immediate liquid funds. External Factors Influencing Dividend Statutory & Legal: Mandatory statutory restrictions, regulatory requirements, tax laws, governing accounting standards. Macroeconomic Climate: Industry-wide payout ratios, general GDP growth of the host country, capital market trends and cost of alternate debt. Other Factors: Geopolitical risks, currency volatility, and systemic market uncertainties. “Declaration and payment of dividend is solely the management’s judgement and based on the combination of a variety of internal and external factors and commercial realities specific to the company.” V. Restriction under the Companies Act 2013 Though dividend is a return on capital invested in the company, its declaration and distribution are discretionary upon the Management of the company as per the Companies Act 2013. Section 123(1) of the Companies Act 2013 provides that dividend shall be paid by a company for any financial year only out of the profits for that year after providing for depreciation, subject to certain exceptions. Accordingly, the company must strictly comply with the Companies Act 2013 before it decides to declare dividend. VI. Declaration and Payment of Dividend is a ‘Unilateral Act’ The following key gates must be evaluated and satisfied by the management before declaring dividend: 1. Are there sufficient distributable profits? 2. How about working capital, statutory dues, and liquidity? 3. Can debt repayment, capital expenditure, and expansion plans be comfortably met? 4. Will the proposed dividend comply with all mandatory parameters of the Companies Act, 2013? If and only if the above conditions have been met, the Board of Directors (BOD) would recommend the dividend out of profit available for appropriation. Such recommendation is presented for approval of the shareholders in the general meeting. Neither the BOD nor the shareholders can have a say in the dividends unless the above conditions have been satisfied. From the above discussion, it can be observed that declaration and payment of dividends is dependent on Management’s sole discretion, after considering internal and external factors and applicable laws. It needs to be appreciated that no third party would be ready to transact for a consideration which is at the discretion of the recipient of the service (i.e., the company declaring the dividend in the instant case). In other words, if a view otherwise is taken that dividend is a bilateral act, (i.e., it is a return on the capital invested in the company), it needs to be understood that this return is discretionary (timing, quantum, frequency may differ from year to year for the same company) and sometimes never even be paid (if the company continues to be in losses and goes into dissolution). While a transaction involves two parties who discharge their respective obligations, payment of dividend does not arise from any contractual obligation, whether oral or in writing. The company’s ability to declare and pay the dividends for the year is not decided by way of any arrangement or understanding or action between the company and its shareholders. It is merely representing a distribution of post-tax profits that belong to shareholders. Dividend being merely a distribution of post-tax profit belonging to shareholders, payment of dividend does not partake the character of ‘transaction’ between company and shareholders. “Therefore, considering the above discussions it can be concluded that dividend is a unilateral act and in the absence of a bilateralism, dividend fails the quintessential condition to qualify as a ‘transaction’ and consequently ‘international transaction’.” VII. No International Transaction – No Arm’s Length Price Another important aspect for any international transaction is to determine what is the arm’s length price. The arm’s length price under TP provisions (Section 92F) means a price which is applied or proposed to be applied in a transaction between third parties, in uncontrolled conditions. The judicial decisions relating to AMP make it amply clear that in the absence of international transaction, there cannot be an arm’s length price for the same. The celebrated decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) further seconds the said view and mentions that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. VIII. No Available Mechanism for Determination of ALP Even if one attempts to determine the ALP, the quantum, timing, frequency of dividends is specific to the facts of each company and cannot be calibrated with respect to similar transaction with a third party. In the case of dividends declared and paid by Companies to third party shareholders too, there could be a very unpredictable trend in terms of the quantum, timing, frequency of dividends for every company and from year to year for the same company. There is no clear-cut statutory provision / method available to benchmark the payment of dividend, and determination of arm’s length price for such dividend is not possible. Key Principles from Maruti Suzuki India Ltd. (Delhi High Court): Assessing Officers could not apply ‘best judgment’ assessment as a device to disallow what he considers to be an excessive expenditure under section 40A(2) of the Act. There was no corresponding ‘machinery’ provision in Chapter X to compute excessive expenditure. Brand could derive its value from nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour, etc. An alternative approach to what was provided under Section 92C of the Act, was not legally permissible and arbitrary. To address tax avoidance, a provision in the statute giving a clear policy was required to check subjectivity. IX. International Practices & Global Transfer Pricing Rulings (Poland Guidance) In one of the international precedents analysing the non-applicability of TP provisions to dividend transaction, Poland’s Minister of Finance on 6 August 2020 issued official guidance on whether a dividend payment among ‘associated companies’ falls within the scope of the definition of a ‘controlled transaction’ for TP purposes. Economic Activity vs. Produce of Economic Activity A plain reading implies that any activity to be considered as of ‘economic in nature’ needs to satisfy the condition of being an activity (for the purpose of) earning money. Thus, economic activity would consist of activities of ‘economic nature’ i.e., (for the purpose of earning money). Thus, payment of dividends cannot be construed as an economic act in itself (carried out to earn profits). It is the generation, distribution and payment of the profits resulting from an economic activity – e.g., sale of goods or services etc. Accordingly, it was clarified by the Polish tax authority that the dividend payment does not fall within the definition of a ‘controlled transaction’ and therefore there was no need to prepare (local) TP documentation w.r.t payment of dividends. In principle the Polish tax authority clarified that dividend is ‘produce of an economic activity’ and not the ‘economic activity itself’. It is the fruits of the economic activity which is being distributed to the owners (i.e., profit is appropriated, in proportion to the shareholding in the company) in the form of dividend. Thus, the Polish tax authority also concluded that ‘dividend’ needs to be kept out of the rigors of TP. X. Conclusion & Compliance Safeguards Based on the detailed discussion above, it can be observed that taxation of ‘dividend’ till date remains to be a very interesting subject in India. For dividend to be reviewed as an ‘international transaction’ under the Indian TP Regs, it must satisfy the quintessential condition of being a transaction i.e., it needs to be substantiated to be a transaction. Transaction is a two-way act i.e., an arrangement, understanding action in concert to do something for which there would be a consideration. Dividend is a ‘unilateral act’ as the declaration of dividend factors into management’s discretion and regulatory compliance. Therefore, quantum and timing of declaration and payment of dividend is in the hands of the management and not the shareholders (i.e., recipient of the dividend). Also, there is no mechanism by which dividend can be benchmarked under any of the methods envisaged under section 92C of the Act. In the absence of a ‘transaction’ and with ‘no statutory machinery’ to benchmark the transaction, it can be reasonably concluded that Dividend has rightly stayed away from the rigors of TP. Prudent Ring-Fencing Against Severe TP Penalties: Having said this, dividends declared and paid (or received) by closely held private companies in India need to be properly supported with commercial rationale. The timing and quantum of payment / receipts with all the regulatory approvals, needs to be documented proactively while declaring the dividends for ring-fencing from penal consequences for non-disclosure and non-compliance with the arm’s length standard: Section 271AA of the Act: Penalty for non-maintenance of prescribed record/documents – Prescribes imposition of penalty equal to 2% of the value of each international transaction on account of failure to maintain information and document. Section 271BA of the Act: Penalty for failure to submit audit report within prescribed time limit – Penalty equal to Rs. 1,00,000 for failure to furnish audit report from an accountant as required u/s 92E. Section 271G of the Act: Penalty for failure to submit records/documents called for – Penalty of 2% of the value of international transaction for each failure to produce information and document as requisitioned by Income Tax authorities. CA. Aparna Rajeshwar Naik Member, The Institute of Chartered Accountants of India (ICAI) Email: aparnagurjal@gmail.com

GST • Indirect Taxes ICAI Journal Ref: October 2021 • Vol. 70 • No. 4 • pp. 92–99 (472–479) Statutory Interpretation • Enforcement vs. Audit Self-Assessment no longer ‘at large’ in GST Inquiry CA. A Jatin Christopher (Member of the Institute of Chartered Accountants of India) Contact: jatin.christopher@gmail.com • eboard@icai.in Executive Abstract & Statutory Due Process “Audit is guided by the due process laid down in section 65 and enforcement relies on section 67 of Central GST Act for its due process. Enforcement wing in different states called anti-evasion or intelligence has always had the entire ‘assessment at large’ to look into every aspect of compliance by taxpayer. GST has spread this responsibility to ensure taxpayer’s self-assessment of tax payable in different sections from section 61 to be limited to scrutinize returns, section 65 to conduct audit and section 67 to conduct inspection-search-seizure. Read on…” 1. Enforcement is Not Audit: The Boundary of Due Process Audit is defined in section 2(13) and the mandate is “to verify correctness” of GST compliance. This is the provision where taxpayer’s self-assessment is ‘at large’ before the Audit Officers. But that’s exactly why audit cannot be undertaken when proceedings are undertaken in section 67 of Central GST Act. Enforcement Officers recognize the absence of non-specific and routine nature of review of taxpayer’s compliance in the very provision that permits inspection-search-seizure. To select a taxpayer for audit, there are no pre-conditions to be fulfilled. Commissioner or any delegate may issue a general or specific order stating that audit of a registered person be undertaken. It is the wisdom of the Commissioner to expeditiously deploy limited resources available to audit taxpayers. A risk-based approach would be a possible approach for the Commissioner to follow. There are certain industries that may be considered ‘prone to risk of (revenue) leakage’, namely, industries that: a) Involve suppliers who operate in an ‘impoverished’ compliance ecosystem; b) Supply to end-consumers who show ‘indifference’ to tax compliance; c) Operate with unwritten and implied contractual structure. Then there’s product-risk, that is, those goods or services supplied which are prone to tax avoidance and deficient compliance. And there’s entity-risk, where intelligence gathered raises questions about scruples of certain entities. While these categories of risk as well as examples are author’s own imagination, they are provided to extrapolate to the considerations of each Commissioner. Commissioner’s choice in audit selection – industry or product or entity – does not come in for any judicial scrutiny. Commissioner is at liberty to exercise his discretion and there are no safeguards for a taxpayer except that this discretion is left in the hands of a high-ranking Officer of the tax department. The Hon’ble Supreme Court held in Matajog Dobey v. HC Bhari (AIR 1956 SC 44): “A discretionary power is not necessarily a discriminatory power and abuse of power is not easily to be assumed where the discretion is vested in the Government and not in a minor official.” Where specific intelligence is gathered that a firm in an industry is indulging in questionable transactions of a specific nature, certainly that firm can be included within the ‘Commissioner’s discretion’ and audit conducted. In so doing, not only can those specific transactions be verified but all other associated transactions of the firm. Audit Officers are free to limit the scope of their review and are not obliged to cover ‘all’ aspects of GST compliance by that firm. For the reason that even audit must ultimately culminate in the issuance of a show cause notice in the manner prescribed to demand tax or credit. And completion of audit is no bar in issuing show cause notice on any other matter, whether falling within the scope of audit or not, as long as this new demand stays within the period of limitation in law. “It is, therefore, possible to conclude that the authority to audit may overlap with enforcement but the converse does not apply, that is, enforcement proceedings cannot authorize the conduct of proceedings in the nature of audit under section 65, certainly not in the manner contemplated in section 2(13) of Central GST Act.” 2. Jurisdiction for Departmental Action & Rule of Law Jurisdiction is not a reference limited to the geographical limits to which the authority of an Officer extends. It also refers to the authority of an Officer to act in accordance with law and the circumstances or conditions that confers this authority to so act. GST is a self-assessment-based tax and for this reason, there is no general authority to call for books and records and determine liability akin to departmental assessment (under earlier tax regimes). Entire liability stands assessed ‘by self’ and any intervention must strictly be in accordance with ‘due process’ laid down in the law. Privy Council Dictum: Strict Manner of Exercise “When a statute requires a thing to be done in a particular manner, it must be done in that manner or not at all.” — Nazir Ahmad v. King Emperor (AIR 1936 PC 253) Where there is no jurisdiction, the action is illegal, and any discovery is vitiated. Preventing leakage of revenue does not authorize glossing over ‘due process’ in law. Due process is the embodiment of ‘justice in action’ whether in judicial, quasi-judicial or administrative action touching rights of citizens in those proceedings. To this end, all departmental action remains constrained to uphold the ‘Rule of Law’. As held by the Supreme Court in Sakal Papers (P) Ltd. & Ors v. UoI (AIR 1962 SC 305): “Legitimacy of the result intended to be achieved does not necessarily imply that every means to achieve it is permissible; for even if the end is desirable and permissible, the means employed must not transgress the limits laid down by the Constitution….” Passion to prevent leakage of revenue is not the domain of tax administration, Legislature too desires exactly this. And for this purpose, Legislature laid down ‘due process’ so that not only is leakage of revenue arrested but is done while upholding Rule of Law. In the historic judgment of EP Royappa v. State of TN (AIR 1974 SC 555), the Supreme Court laid down: “From a positivistic point of view, equality is antithetic to arbitrariness. In fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Art. 14, and if it affects any matter relating to public employment, it is also violative of Art. 16. Arts. 14 and 16 strike at arbitrariness in State action and ensure fairness and equality of treatment. They require that State action must be based on valent relevant principles applicable alike to all similarly situate and it must not be guided by any extraneous or irrelevant considerations because that would be denial of equality. Where the operative reason for State action, as distinguished from motive inducing from the antechamber of the mind, is not legitimate and relevant but is extraneous and outside the area of permissible considerations, it would amount to mala fide exercise of power and that is hit by Arts. 14 and 16. Mala fide exercise of Power and arbitrariness are different lethal radiations emanating from the same vice : in fact the later comprehends the former.” Principles of natural justice are not limited to judicial actions but are now well accepted to be required in quasi-judicial and administrative actions. As reiterated in Rajesh Kumar & Ors. v. Dy.CIT & Ors. ((2007) 2 SCC 181), referring to State of Orissa v. Dr (Miss) Binapani Dey ((1967) 2 SCR 625): “15. Effect of civil consequences arising out of determination of lis under a statute is stated in State of Orissa v. Dr (Miss) Binapani Dey and Ors. (1967) 2 SCR 625. It is an authority for the proposition when by reason of action of the part of a statutory authority, civil or evil consequence ensue, principles of natural justice are required to be followed. In such an event, although no express provisions is laid down in this behalf compliance of principles of natural justice would be implicit. In case of denial of principles of natural justice in a statute, the same may also be held to be ultra vires Article 14 of the Constitution.” 3. Jurisdiction for Commencement of Enforcement Proceedings [Section 67] Section 67 of Central GST Act furnishes the jurisdiction for enforcement qua ‘taxable person’ differently from ‘any person’. In so far as taxable person is concerned, it is evident that such person ought to attract section 9 and not necessarily be a registered person under section 22 of Central GST Act. Taxable person is defined in like manner in section 2(107) of Central GST Act. At the outset, authority is vested with Proper Officer ‘not below’ the rank of Joint Commissioner who must hold ‘reasons to believe’ about certain specific matters laid down in section 67(1)(a) qua taxable person and section 67(1)(b) qua any person to invoke the authority in section 67 of Central GST Act. Reasons to believe qua taxable person must pertain to any one or all of the matters listed in section 67(1)(a) of Central GST Act and no others. One might argue that in the definition of audit in section 2(13) of Central GST Act that takes within its sweep correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess compliance with provisions of Act or rules, could well cover the specific matters listed in section 67(1)(a) of Central GST Act too. But here, question is not whether audit under section 65 can inquire into matters covered under section 67 of Central GST Act but whether proceedings under section 67 can inquire into matters covered under section 65 of Central GST Act without the pre-requisites of ‘reasons to believe’. Therefore, it is not only that those very specific matters are to be inquired in proceedings under section 67 of Central GST Act but also that ‘reasons to believe’ must pre-exist commencement of any proceedings about ‘evasion of tax’. Here lies taxpayers’ safeguards that improper exercise of authority in section 67 of Central GST Act does not authorize going into matters that lie beyond those reasons to believe. The Inbuilt ‘Evasion of Tax’ Thread in Section 67(1)(a) On a perusal of the specific matters listed in section 67(1)(a) of Central GST Act, ‘evasion of tax’ runs like a common thread in all those matters: First, suppression: Where taxable person ‘has suppressed’ either supply or stock of goods, evasion of tax is inbuilt when there’s suppression. Second, excess ITC: Where taxable person ‘has claimed’ input tax credit in excess of his entitlement is not the result of an exercise to determine ‘entitlement’ but one where the claim is ex facie in excess. Third, contravention: Where taxable person ‘has indulged’ in contravention to evade payment of tax needs no elaboration. And reasons to believe qua any person under section 67(1)(b) identifies (i) such person as one who is engaged in transportation of goods or operates a warehouse, (ii-a) where such transportation or warehouse is involved in keeping goods which have escaped tax, or (ii-b) where accounts or goods are kept such that evasion is likely to be imminent result. If goods are no longer available (in transit or storage), there is no inference that can be drawn about the conveyance or warehouse. Similarly, past investigation into evasion or other antecedents of taxpayer do not furnish reasons by themselves, unless there is material available in each new and current instance to invoke provisions of section 67(1)(b) of Central GST Act. Therefore, the question of ‘reasons to believe’ assumes plenary position as it touches jurisdiction. 4. The Legal Anatomy of ‘Reasons to Believe’ Suspicion is not sufficient to furnish ‘reasons to believe’. Suspicion is the product of an analytical mind examining available information and locating some incongruity in the data. Suspicion is a comparison of what is with what ought to be. Suspicion can arise even when everything is matching because it is an ideal that may not be possible in every area of compliance. Reasons to believe requires that the belief must be held in good faith and it cannot be a mere pretence. Reasons must pre-exist to support the grant of authorization to inspect the premises of taxable person (or any person). Reasons cannot be discovered after conducting inspection. In S Narayanappa & Ors. v. CIT (AIR 1967 SC 523), the Supreme Court held: “The belief must be held in good faith: it cannot be merely a pretence. To put it differently it is open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and, are not extraneous or irrelevant to the purpose of the section.” Whether a bona fide mistake or even misinformation could furnish reasons to believe requires reference to the guidance of the Apex Court in Barium Chemicals Ltd. & Anr. v. AJ Rana & Ors. (AIR 1972 SC 591): “The words ‘consider is necessary’ postulate that the authority concerned has thought over the matter deliberately and with care and it has been found necessary as a result of such thinking to pass the order…………… If the impugned order were to show that there has been no careful thinking or proper application of mind as to the necessity of obtaining and examining the documents specified in the order, the essential requisite to the makings of the order would be held to be non-existent…………… If, however, there has been consideration of the matter regarding the necessity to obtain and examine all the documents and an order is passed thereafter, the Court would stay its hand in the matter and would not substitute its own opinion for that of the authority concerned regarding the necessity to obtain the documents in question.” Since Legislature desired to allow Proper Officer to inspect premises, section 67 of Central GST Act contains all these safeguards, that is, to (i) require that there be reasons to believe (in evasion of tax), (ii) this authority be left in the hands of no less than Joint Commissioner to be satisfied (with evasion), and (iii) specify the circumstances in clause (a) and (b) to inspect the location(s). Compare this law-making effort with the language in section 67(1) with that in section 65(1) of Central GST Act. Inspection of a premises is an extremely invasive power that may be exercised without prior notice to taxable person (or any person) provided the Proper Officer has ‘reasons to believe’. These ‘reasons to believe’ must be founded on some material or grounds and either stated in the search warrant (INS-01) itself or in a record (such as, file noting) anterior in time to the actual issuance of such warrant. And if these were to be called into question, contemporaneous records would be available for the Court to examine and satisfy itself – that there were reasons to believe in the form and manner specified in section 67(1) of Central GST Act – for authorizing such extreme action and that the action was not taken for extraneous and irrelevant reasons. 5. Waiver by Taxpayer & Preservation of Legal Remedies Failure to explicitly question validity of inspection proceedings or implicitly acquiescing to proceedings by reply on merits may result in waiver of taxpayer-rights, as provided in section 160(2) of Central GST Act. Taxpayers’ own acquiescence can result in forfeiture of remedies against invalid proceedings. It is, therefore, imperative that every inspection be questioned as to its validity. Taxable person (or any person) may not be required to prevent inspection on own suspicion about its validity but retain this ground and call it into question in any process such as inquiry or notice issued pursuant to these proceedings. This taxpayer safeguard is evident in the instruction issued by CBIC Instruction No. 1/2020-21 dated 2 Feb 2021. Whether section 160(2) of Central GST Act will be successfully side-stepping taxpayer’s remedies and cause irreparable prejudice even if there were any discovery in illegal inspection without any pre-existing ‘reasons to believe’, is still to be raised for judicial consideration. But it cannot be ignored that when a notice is issued raising legitimate questions about the correctness of compliance, taxpayer runs risk of responding on merits in view of the prohibition from raising grounds that were not raised in earlier proceedings in rule 112 of Central GST Rules. 6. Form GST INS-01 & Jurisdiction for Search Proceedings [Section 67(2)] Authorization must be granted in Form GST INS-01 ‘before’ conducting inspection. And if reasons to believe furnish jurisdiction to inspect, those reasons (with all its ingredients and their due consideration) must also exist prior to grant of such authorization. While it is not necessary to disclose the reasons to believe in the authorization, it is not permissible for it to be undisclosed on the files. The Three Distinct Parts of Form GST INS-01 Part A: Taxable Person Relates to inspection of premises of taxable person (defined in section 2(107) to be a person who is registered or liable to register). Part B: Non-Taxable Person Relates to inspection of premises of any person who is not the taxable person (engaged in transporting or warehousing goods escaping tax, or keeping fraudulent accounts). Part C: Seizure of Articles Relates to articles liable to seizure, recording specific reasons that form the ingredients to conduct search. Jurisdiction for Commencement of Search Proceedings [Section 67(2)] Search proceedings under section 67(2) can be initiated “pursuant to an inspection carried out”, that is, there may be a ‘discovery’ during inspection that justifies that search to be conducted. Authorization granted in INS-01 with reasons to justify ‘inspection only’ indicates that there were no reasons to justify ‘inspection and search’. Even if there may have been some suspicion earlier, since authorization granted was limited to conduct inspection only, search cannot be conducted beyond the scope of authorization granted. Section 67(2) also authorizes search to be conducted “otherwise” than pursuant to inspection, indicating that reasons may exist a priori that are already sufficient to justify both ‘inspect and search’ to be conducted. In such cases, authorization must be accordingly granted. Form GST INS-01 contains Part C, where provision is made for recording reasons that form the ingredients to conduct search. Once authorized, search can be conducted in respect of (i) goods liable to confiscation are secreted or (ii) documents, books or things (which would be useful for any proceedings) are secreted, under section 67(2) of Central GST Act. It is very important to note that search cannot be authorized by ‘guesswork’ that the said articles may be ‘secreted’. Some material must be available on record and after due consideration of such material along with attendant circumstances, a reasonable conclusion may be drawn that at the said place of inspection, the said articles are ‘secreted’. It is not necessary to have proof of said articles being secreted but certainly some reliable material which is more than mere suspicion, howsoever logical and plausible it may be, must exist which furnishes the ‘reasons to believe’. 7. Out-of-Bounds in Enforcement & Contrast with Income Tax Section 147 Enforcement extends to all actions authorized by section 67 and 68 and not under section 61 to 65. With respect to inspection under section 67, persons who do not satisfy the criteria listed in section 67(1)(a) or (b), cannot be brought within the operation of enforcement proceedings. Reasons to believe may exist but such reasons must identify the (i) persons to be inspected and (ii) locations to be inspected. Deficiencies in identifying the specific persons and specific locations would render the inspection unauthorized either against incorrect persons or at incorrect locations. Matters Beyond the Scope of Section 67 Enforcement: Enforcement action by tax administration cannot take up matters such as (i) classification, (ii) valuation, (iii) input tax credit, (iv) monthly returns and annual returns, or (v) other compliance matters, even if there may be errors in taxpayer’s self-assessment carried out. Any enforcement action on these matters must involve reasons to believe that taxable person (a) has suppressed supply or stock or (b) has availed input tax credit beyond entitlement or (c) has indulged in any contravention to evade tax. If all these comprehensive ingredients are not found to exist as documented at the time of grant of authorization, enforcement action will be illegal and contrary to law. Comparison with Language in Income-tax Act [Section 147] A quick comparison with provisions under other legislations can explain the boundaries to the power conferred under section 67. Under Section 147 of the Income-tax Act: “147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned ……………:” Expansive powers in section 147 of Income-tax Act make for very interesting comparison in the nature of powers granted by Legislature where not only income escaping assessment (suspected before initiating proceedings) can be brought under assessment but also income “which comes to his notice subsequently in the course of the proceedings”. Such expansive powers are conspicuously absent in section 67 of Central GST Act. The guidance, therefore, is that there cannot be ‘discovery of reasons’ after conducting inspection-search but all reasons which operate as pre-conditions (to furnish jurisdiction to conduct inspection-search) must pre-exist and pre-date visit to premises and be clearly stated in INS-01 in Parts A, B or C. 8. Role of Commissioner as Magistrate under Section 165(5) of Cr.PC Code of Criminal Procedure (Cr.PC) is made applicable to search and seizure under section 67(10) of Central GST Act. In CCT v. RS Jhaver & Ors. (AIR 1968 SC 59), the Supreme Court held: “We are therefore of opinion that safeguards provided in S.165 also apply to searches made under sub-s.(2). These safeguards are – (i) the empowered officer must have reasonable grounds for believing that anything necessary for the purpose of recovery of tax may be found in any place within the jurisdiction, (ii) he must be of the opinion that such thing cannot be otherwise got without undue delay, (iii) he must record in writing the grounds of his belief, and (iv) he must specify in such writing so far as possible the thing for which search is to be made. After he has done these things, he can make the search. These safeguards, which in our opinion apply to searches under sub-s.(2) also clearly show that the power to search under sub-s.(2) is not arbitrary.” In an earlier and authoritative pronouncement in State of Rajasthan v. Rehman (AIR 1960 SC 210), the Apex Court affirmed: “The power of search given under this chapter is incidental to the conduct of investigation the police officer is authorized by law to make. Under s.165 four conditions are imposed : (i) the police officer must have reasonable ground for believing that anything necessary for the purposes of an investigation of an offence cannot, in his opinion, be obtained otherwise than by making a search, without undue delay; (ii) he should record in writing is to be made; (iii) he must conduct the search, if practicable, in person; and (iv) if it is not practicable to make the search himself, he must record in writing the reasons for not himself making the search and shall authorize a subordinate officer to make the search after specifying in writing the place to be searched, and, so far as possible, the thing for which search is to be made, as search is a process exceedingly arbitrary in character, stringent statutory conditions are imposed on the exercise of the power.” In view of these safeguards imported into section 67, it is important that a person who is issued a notice under section 73, 74, 76 or any other provision must, before responding to the allegations in the notice, make an application to the jurisdictional Commissioner under section 67(10) to be the Magistrate in s.165(5) of Cr.PC which reads as: “s.165…………… (5) Copies of any record made under sub-section (1) or sub-section (3) shall forthwith be sent to the nearest Magistrate empowered to take cognizance of the offence, and the owner or occupier of the place searched shall, on application, be furnished, free of cost, with a copy of the same by the Magistrate.” It is therefore imperative that taxpayers make this ‘application’ to the Commissioner asking for all the information and then ‘question’ matters such as jurisdiction, reasons to believe, and the ingredients necessary to invoke the provisions of section 67 of Central GST Act. 9. Access to Business Premises in Section 71 Does Not Authorize Inspection No authority flows on a standalone basis from section 71, much less any authority to conduct inspection or search when there is express provision in section 67 of Central GST Act. Similarly, when there is express authority in section 65 and 66 to conduct ‘audit’ and in section 22 to grant ‘registration’ or section 69 to ‘arrest’ offender, there is no authority to conduct any specific proceeding on standalone basis under section 71 of Central GST Act. Authority conferred under section 71 is “for the purposes of” conducting (i) audit, (ii) scrutiny, (iii) verification, and (iv) checks. Section 71 cannot compete or operate at cross-purposes with authorized proceedings of audit under section 65 or 66 or inspection-search under section 67 of Central GST Act. Considering that elaborate procedures along with adequate taxpayer-safeguards have been laid down in case of audit and inspection-search under the CGST Act, use of these expressions – audit, scrutiny, verification and checks – cannot authorize yet another provision to conduct a ‘new or special’ kind of inquiry without specifying the (i) nature of inquiry to be conducted and (ii) limits to authority for such inquiry, but only machinery provisions authorizing ‘access to business premises’ for purposes of exercising the authority vested elsewhere in the Central GST Act to audit or inspect premises. This limitation of authority in section 71 of Central GST Act is forthcoming from the fact that “authorized by the proper officer not below Joint Commissioner” is found in the opening words in this section and there is neither a rule corresponding to this section nor a form wherein the Joint Commissioner is to grant authorization. As such, section 71 of Central GST Act precludes taxpayer from refusing access to business premises or to the books and records, to person accessing who is either an Officer acting under section 65 or other specified provisions of law or to the Special Auditor authorized under section 66 of the Central GST Act. 10. Conclusion: Upholding Minimum Government, Maximum Governance When power is given to do a particular thing, then that thing must be done only in that manner. This holds good for Central GST Act also where the law does not provide unrestricted authority for intrusive actions. And therefore, the taxpayers should take note of the contours of this authority to avoid any action which lacks due authority. GST comes through in ensuring that diligent taxpayers will truly experience ‘minimum Government, maximum governance’. CA. A Jatin Christopher Member, The Institute of Chartered Accountants of India (ICAI) Email: jatin.christopher@gmail.com • eboard@icai.in

The Chartered Accountant • Journal of ICAI October 2021 • Vol. 70 • No. 4 • pp. 100–104 (Journal pp. 480–484) GST • Financial Services Taxation The Conundrum of Taxing: Banking Interest Under GST RJ CA. Richi Jain Member of the Institute of Chartered Accountants of India. Contact: richijain06@gmail.com Executive Overview: The Financial Intermediation Dilemma “The banking sector is the lifeline of a modern economy that acts as an intermediary between people having surplus money and those requiring money for various commercial and non-commercial activities. Since financial services are consumed by all the industries, it is imperative to tax it properly and to maintain the credit chain so that it will not result in increasing the cost of the goods and services. This intermediary service is generally exempted from GST worldwide which sounds innocuous, but has extensive ripple effects. The reason behind this exemption is not linked to any economic motive or relief, rather it is the inability of the governments in determining the value on which tax should be levied for such intermediary or financial service. Read on…” 1. Source of Earnings for Financial Services Banks are not involved in mere transactions of money. They earn their revenue by charging interest and fees on loans, deposits, and related financial services, either directly or indirectly, bringing these receipts within the broader economic sphere of GST. Under the Indian Goods and Services Tax framework, financial institution earnings are bifurcated into two distinct streams: i. Explicit Fee Explicit fees represent fixed bank charges levied for rendering specific, identifiable services. Examples include: Performing agency functions and account maintenance; Automated Teller Machine (ATM) fees and Demand Draft (DD) issuance; Safe deposit locker rentals and portfolio management services; Foreign exchange remittances, wire transfers, and internet banking fees. GST Treatment: All such explicit charges are fully liable to GST. Valuation presents zero ambiguity, as tax is charged outrightly on the invoiced fee. ii. Implicit Margin Fee The implicit margin fee is the intermediation spread earned by banks through pooling customer funds as deposits and deploying them as credit advances—namely, the economic spread between interest earned on loans and interest paid on deposits. While pure capital exchanges in deposits and principal repayments represent mere transactions in money (outside the definition of supply), this net interest spread captures the true economic value addition of banking intermediation and theoretically ought to be taxable. Statutory Exemption: Under GST, unconditional exemption is granted to services by way of extending deposits, loans, or advances where consideration is represented by interest or discount. The Core Compliance Dilemma: Mandatory Input Tax Credit Reversal Exempting implicit interest margins seems like a substantial relief at first glance, but it carries profound adverse distortions. Under GST law, any supplier making exempt supplies is legally required to reverse proportionate Input Tax Credit (ITC) incurred on inward supplies. While regular non-banking businesses enjoy statutory relaxation from reversing ITC attributable to deposit interest, this relaxation is expressly denied to banking companies and financial institutions. Under Section 17(4) of the CGST Act, banks must elect either to compute proportionate reversal based on exempt turnover or to mandatorily forfeit and reverse exactly fifty per cent (50%) of all eligible ITC claimed on inputs, capital goods, and input services. This forfeited ITC becomes an unrecoverable business expense embedded directly into operating costs, inflating the end prices of banking services. 2. Structural Inefficiencies Created by the Exemption Framework Lending and deposit mobilization constitute the primary core activities of banking, generating the overwhelming bulk of institutional revenues. Granting an exemption on core revenues—instead of conferring genuine economic relief—inflicts acute structural distortions across the broader economic chain through four main mechanisms: i. Severe Tax Cascading (Tax-on-Tax Effect) When an output supply is exempt from GST, the unbroken chain of VAT credits is severed. No input tax credit is permitted for GST paid on inward infrastructure, IT hardware, ATM networks, premises, software, and professional fees. In commercial B2B lending, because no output GST is charged to the borrowing business, the financial institution embeds its blocked input GST into the interest rate or loan processing cost. The borrower absorbs this hidden tax as an operational cost, loading it into the final consumer price of goods and services, completely defeating the fundamental premise of value-added taxation. ii. Competitive Deformity Between Domestic and Offshore Lenders A severe competitive imbalance arises between domestic financial institutions and foreign cross-border lenders. Domestic Indian banks are burdened by un-creditable, blocked domestic GST, which inflates their operational lending spreads. In contrast, foreign suppliers delivering cross-border financing or external commercial borrowings (ECBs) operate without absorbing Indian domestic input GST burdens, granting foreign financiers an artificial structural cost advantage over domestic banks. iii. Distortion of Tax-Neutral Outsourcing & Creation of Self-Supply Bias Sound commercial operations require corporations to make outsourcing choices based solely on economic efficiency. However, under the exemption system, if a bank outsources specialized operational functions (e.g., credit appraisal, recovery, compliance, back-office processing) to an external entity or intra-group service company, the vendor must charge 18% GST on its service fee. Because the bank cannot utilize this input GST against exempt interest income, the 18% GST becomes a pure deadweight loss. Consequently, banks are artificially incentivized to keep operations in-house (a self-supply bias) even where third-party specialization would achieve higher productivity. iv. Arbitrary Input Allocation & Unfair Disallowance In practice, precisely segregating common overhead input taxes (cloud computing, headquarters leases, auditing, IT networks) between taxable explicit-fee services and exempt lending margins is practically impossible. While Indian GST law provides an elective shortcut—the flat 50% reversal rule—this statutory percentage bears zero relationship to the actual economic consumption of inputs across taxable versus exempt operations. As a result, banks suffer substantial arbitrary loss of legitimate credits earned on fully taxable service lines. 3. The Real Reason Behind the Exemption: The Valuation Dilemma The fundamental question arises: Is the government unaware of these distortions? If aware, why has this exemption persisted across decades of tax policy? The answer is unequivocal: The exemption is not motivated by social or economic benevolence; it stems entirely from the practical administrative impossibility of determining the taxable transaction value under standard invoice-credit VAT mechanisms. Deconstructing the Economic Components of Banking Interest The interest rate charged by a bank on loans and credit advances is a composite price amalgamating three distinct economic elements: Risk of Bad Debt: The credit risk premium compensating the lender for expected loan defaults. Time Value of Money: Pure interest reflecting deferred consumption and macroeconomic inflation expectations. Service Charge for Intermediation: The administrative and operational margin earned for pooling, underwriting, distributing, and monitoring credit. Crucially, neither the risk of bad debt nor the time value of money provides any taxable value addition to the borrower; only the third component (the financial intermediation service charge) represents true economic value addition upon which GST should be levied. Similarly, interest paid on customer deposits equals the pure time value of funds and depositor risk minus an implicit service charge deducted by the bank for safekeeping, transaction clearing, and liquidity management. Consequently, the net interest margin (the difference between loan interest earned and deposit interest paid) is the only genuine measure of value addition that balances risk and the time value of money. However, while this margin concept is clear in economic theory, it breaks down completely in tax administration. In an active bank handling millions of retail and commercial accounts, it is practically impossible to map a specific rupee deposited by Customer X to a specific rupee borrowed by Borrower Y on an individual transaction invoice basis. Because standard GST operates on single-transaction supply invoices, governments globally have historically abandoned attempts to tax the margin and opted for blanket exemption. 4. Comparative Evaluation of Taxation Models for Financial Intermediation To neutralize the severe distortions generated by interest exemptions, fiscal economists and international tax authorities have proposed and tested several structural alternatives: Model A: Zero-Rating or Conditional Zero-Rating of B2B Financial Services Under this international model (utilized in countries such as New Zealand and Singapore for certain supplies), financial services rendered to registered business entities (B2B) are zero-rated. No output tax is charged, but full input tax credits are preserved. However, the cardinal challenge remains identifying, segregating, and allocating common institutional inputs specifically to B2B versus non-creditable B2C retail supplies. Model B: Basic Cash Flow Method All cash inflows (whether interest received or principal capital deposited) are treated as taxable consideration upon which GST is collected; conversely, all cash outflows (whether interest paid or loan principal disbursed) are treated as purchases eligible for input credit. While mathematically simple, this method triggers gigantic gross cash swings between banks and the exchequer and improperly taxes pure capital flows, violating the core constitutional philosophy of VAT/GST. Model C: Reverse Charging Approach & Franking Accounts Reverse charge is applied to borrowings mobilized by banks, generating input tax credits on deposit interest that are subsequently used to discharge output GST on loan interest. A statutory franking account pools credits on a weighted-average basis, eliminating the need to match individual loans to deposits. Nonetheless, maintaining statutory franking accounts introduces extreme compliance complexity. Model D: The Tax Calculation Account (TCA) Method (The Premier Solution) Under the TCA framework, financial institutions do not attempt the impossible task of pairing individual loans to individual deposits. Instead, intermediation value is determined by measuring transactions against a benchmark opportunity cost of funds: Taxable Margin for Loan Transactions: Interest rate charged on the loan minus the Opportunity Cost of Funds. Taxable Margin for Deposit Transactions: Opportunity Cost of Funds minus the Interest rate paid to the depositor. Comprehensive Empirical Illustration of TCA Valuation: Lending Rate charged by bank on loan: 8% Deposit Rate paid by bank to depositors: 4% Benchmark Opportunity Cost of Funds: 6% Taxable Margin on Loan: 8% − 6% = 2% Taxable Margin on Deposit: 6% − 4% = 2% Net Taxable Intermediation Base: 2% + 2% = 4% (8% − 4%) Operational Assumptions: TCA operates on the standard accounting assumption that loan and deposit portfolios are initiated at the commencement of an accounting period and settled at the close (with notional period-end balancing entries adjusting timing mismatches), and that aggregate deposit assets closely approximate active loan assets. 5. The Valuation Breakthrough: RBI’s External Benchmark Mandate While economists have long recognized the elegance of the Tax Calculation Account (TCA) model, its practical Achilles’ heel was always: How should the government objectively establish the “cost of funds” for every bank? The Flaws of Internal MCLR Benchmarking Historically, Indian banks priced loans under the Marginal Cost of Funds Based Lending Rate (MCLR). MCLR was an internal formula determined by each bank’s proprietary cost of deposits, savings ratios, and operating expenses. Because MCLR varied widely across institutions, lacked public transparency, and delayed policy rate transmission when the RBI slashed repo rates, tax authorities could never rely on it as a universal, objective opportunity cost for GST computation. The RBI External Benchmark Mandate In an epochal monetary policy reform, the Reserve Bank of India (RBI) eliminated internal MCLR for new retail and MSME floating-rate advances, mandating banks to anchor lending rates directly to an external, publicly observable benchmark—such as the RBI Repo Rate or Financial Benchmarks India Pvt. Ltd. (FBIL) Treasury Bill yields. This statutory shift guarantees absolute transparency and instantaneous rate transmission. Synthesizing TCA with RBI External Benchmarks for GST Valuation The RBI’s external benchmark framework provides the missing puzzle piece for tax policymakers. With the cost of funds now standardized, transparent, and officially published by the central bank: Taxable GST Valuation = Lending Interest Charged by Bank − Published RBI External Benchmark Rate (e.g., Repo Rate) By adopting the RBI Repo Rate or benchmark Treasury Bill yield as the statutory opportunity cost of funds, the government can easily quantify the net intermediation spread earned on lending without auditing individual deposit flows, thereby unlocking an efficient and administratively feasible method to tax financial services. 6. Conclusion: Restoring the Credit Chain and Economic Neutrality Because interest constitutes the financial bedrock of virtually every commercial enterprise, treating banking interest as an exempt supply distorts India’s macroeconomic value chain. The mandatory 50% credit forfeiture imposed upon Indian banks inflates the operating overhead of the banking sector, forcing financial institutions to pass blocked GST costs down to commercial borrowers. This hidden tax embeds itself into intermediate wholesale prices and consumer goods, eroding the fundamental economic objective of Goods and Services Tax: taxing strictly value addition while upholding unbroken credit fungibility. Transitioning to a transparent Tax Calculation Account (TCA) model anchored to RBI external benchmark rates offers an optimal path forward. By taxing only the spread and restoring full input tax credit recovery to banking institutions, the exchequer can eliminate cascading deadweight costs, establish level competitive footing for domestic lenders, and ensure that GST fulfills its promise of a seamless, non-cascading tax architecture. References IMF Working Paper, WP/04/119 (July 2004), Taxation of Financial Intermediation Services: A Primer, Prepared by Howell H. Zee. The Economic Times (05 September 2019), Link loans to benchmarks: RBI to Banks. The Economic Times (06 December 2018), Linking interest rate to external benchmark: What does the RBI move mean for you? Satya Poddar and Michel Aujean (August 25–28, 1997), Paper presented at the 53rd Congress of the International Institute for Public Finance, Kyoto, Japan. National Tax Journal, Vol. 49, No. 3 (September 1996), pp. 487–500. Edgar, Timothy (May 25, 2009), The Search for Alternatives to Exempt Treatment of Financial Services Under a Value-Added Tax. Richard Krever and David White, eds. (2007), GST in Retrospect and Prospect, pp. 123–154, Thomson Brookers. The Chartered Accountant • Journal of The Institute of Chartered Accountants of India (ICAI) October 2021 Issue • Vol. 70 • No. 4 • pp. 100–104 (Journal pp. 480–484) Author Contact: richijain06@gmail.com

GST • Indirect Taxes ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 32–37 (280–285) Statutory Compliance Master Guide Compliance Requirements under GST Law VC CA. Virender Chauhan Member, Institute of Chartered Accountants of India • vkc.smile@gmail.com “This article attempts to comprehend the compliance requirements under the GST law across the board. GST compliances are amended frequently and staying abreast of the new developments can often be an onerous effort. The types of compliances are assorted with unalike target dates. The author aims to offer a lucid understanding of these new compliance amendments. This compilation entails to cover compliances to be made by numerous taxpayers from pre-registration period till the cancellation of their registration. I hope that this critique would assist the masses who may be in the finance departments of the businesses or in the offices of the practicing members at large. Read on…” 1 Introduction Aimed to highlight the foremost compliances, the author simplifies the task of handling necessary compliances under GST laws both at pre and post registration. Compliance under these laws plays a pivotal role, both for the taxpayer to mitigate liabilities on account of tax, interest and penalties and for the revenue to fill its exchequer better than before. In the modern fiscal laws, trust on a taxpayer is the kernel while codifying the law and its procedures. Over a period, the stakeholders have achieved an acceptable level of digital compliances from registration to filing of returns, from payment of taxes to assessment and refunds, from advance ruling to appeals, etc. The GSTN e-portal has been successfully handling such compliances with ease. E-way bill and e-invoices portals too have proved to be an immense accomplishment. Pre-Registration Compliances & Statutory Thresholds (Section 22 & Section 24) Section 22 of the CGST Act makes it necessary for any person supplying goods/services to seek registration as soon as his aggregate turnover as defined under section 2(6) crosses the threshold limit. Standard Threshold INR 20 Lakhs Normally applicable in a financial year for suppliers of goods or services. Special Category States INR 10 Lakhs Prescribed lower threshold in case of specified special category States. Exclusive Goods Suppliers INR 40 Lakhs Enhanced turnover threshold for persons supplying exclusively goods, subject to conditions. Mandatory Registration irrespective of Threshold Limit (Section 24) Section 24 provides for mandatory registration requirements in certain specific cases: (i) A person making inter-State supply of goods; (ii) Casual taxable person making taxable supply; (iii) Persons who are required to pay tax under reverse charge; (iv) Persons who are required to pay tax under section 9(5); (v) Non-resident taxable person making taxable supply; (vi) Persons who are required to deduct tax under section 51, whether or not separately registered; (vii) Persons who make taxable supply of goods/services on behalf of other persons, whether as an agent or otherwise; (viii) Input Service Distributor (ISD), whether or not separately registered; (ix) Persons who supply goods/services or both, other than supplies specified under section 9(5), through such electronic commerce operator who is required to collect tax at source under section 52; (x) Every electronic commerce operator (who is required to collect tax under section 52); and (xi) Every person supplying online information and database access or retrieval (OIDAR) services from a place outside India to a person in India, other than a registered person. Timeframe for Registration: Ordinarily, a person has to apply for registration within 30 days once it becomes obligatory to seek such registration. Exceptions may be there for voluntary registration, registration of casual taxable person, a non-resident taxable person, etc. 2 Tax Invoice and E-Way Bill Tax-Invoice and Bill of Supply (Section 31 & Rules 46 to 55) Section 31 mandates to issue a Tax-Invoice in case a registered person is making taxable supply and to issue a Bill of Supply in case of exempted supplies or paying tax under the provisions of section 10. Supply of Goods: Such invoices are to be issued at the time of removal of goods. Supply of Services: Such invoices may be issued within 30 days from the date of provision of such services, subject to some exceptions like banking companies, financial institutions, etc. Statutory Particulars: Rules 46 to 55 specify various mandatory fields to be given in various types of invoices, credit and debit notes, delivery challans, etc. to be issued by a registered person. E-Invoice Mandate The Notification No. 5/2021-CT, dated 8-Mar-2021 tumbled the threshold limit for mandatory issuance of e-invoices in case of B2B taxable supplies by a taxpayer whose aggregate turnover is more than INR 50 Crore with effect from 01.04.2021, subject to certain exceptions. QR Code Mandate One must be cautious regarding the applicability of having a Quick Response (QR) code on B2C invoices issued. Various notifications and circulars have been issued by CBIC governing dynamic QR code requirements for large taxpayers. E-Way Bill Compliance (Rule 138) Rule 138 lays down the provisions for generation of e-way bill. As per the said rule, e-way bill is mandatorily required to be generated before the onset of movement of goods, in case of movement of goods of consignment value worth more than INR 50,000, subject to some exceptions. Mandatory E-Way Bill Even if Consignment ≤ INR 50,000: (i) Inter-State movement of goods between principal and job-worker. (ii) Inter-State supply of handicraft goods by a person who is exempted from registration requirement. Exemption from E-Way Bill Even if Consignment > INR 50,000: (i) Movement of exempted goods; (ii) Goods falling under Schedule-III (non-supplies); (iii) Goods being transported through a non-motorised conveyance; (iv) Goods being transported from customs port, airport, air cargo complex and land customs station to an ICD or CFS for clearance. 3 Reverse Charge Mechanism (RCM) Normally, taxes are to be paid by the supplier of goods and services. However, for varying reasons, in certain cases, the Government decides to shift this burden on to the recipient. Section 9(3) Notified Goods & Services Provides that in case of supply of goods as notified under Notification No. 4/2017-CT(R), dated 28-Jun-2017 and in case of supply of services as notified under Notification No. 13/2017-CT(R), dated 28-Jun-2017, the tax shall be paid under RCM by the recipient. Section 9(4) Real Estate Promoters Provides that “promoters” as a class of registered persons shall pay tax under reverse charge on receipt of goods or services from unregistered persons as notified vide Notification No. 7/2019-CT(R), dated 29-Mar-2019. 4 Returns and Payment of Tax Details of Outward Supplies – Form GSTR-1 [Section 37 read with Rule 59] Every registered person, other than – (i) an input service distributor, (ii) a non-resident taxable person, (iii) composition taxpayer, (iv) TDS deductor, (v) TCS collector, (vi) supplier of OIDAR services shall furnish the details of outward supplies in Form GSTR-1 electronically on or before the 11th day of the month succeeding the tax period. Filing of Return in Form GSTR-3B [Section 39 read with Rule 61(5)] Every registered person having an aggregate turnover above INR 5 crores in the previous financial year shall file return in Form GSTR-3B, on or before the 20th day of the month succeeding the tax period. However, in cases where the aggregate turnover is up to INR 5 crores, the due dates are prescribed as given below: S. No. Class of Registered Persons Due Date 1. Registered persons whose principal place of business is in the States of Chhattisgarh, Madhya Pradesh, Gujarat, Maharashtra, Karnataka, Goa, Kerala, Tamil Nadu, Telangana, Andhra Pradesh, the Union territories of Daman and Diu and Dadra and Nagar Haveli, Puducherry, Andaman and Nicobar Islands or Lakshadweep. Twenty-second (22nd) day of the month succeeding such quarter 2. Registered persons whose principal place of business is in the States of Himachal Pradesh, Punjab, Uttarakhand, Haryana, Rajasthan, Uttar Pradesh, Bihar, Sikkim, Arunachal Pradesh, Nagaland, Manipur, Mizoram, Tripura, Meghalaya, Assam, West Bengal, Jharkhand or Odisha, the Union territories. Twenty-fourth (24th) day of the month succeeding such quarter QRMP Scheme – Quarterly Return Monthly Payment Scheme As a measure of trade facilitation, the Board has introduced QRMP Scheme, i.e., Quarterly Return Monthly Payment Scheme. In this scheme, a registered person having an aggregate turnover up to INR 5 crores may be allowed to furnish return on quarterly basis along with monthly payment of tax, w.e.f. 1-Jan-2021. In this respect, the Board has issued NN-81/2020-CT, NN-82/2020-CT, NN-84/2020-CT, NN-85/2020-CT, all dated 10-Nov-2020 along with Circular No. 143/13/2020-GST dated 10-Nov-2020. The abovementioned notifications read with the said Circular make it clear about the ins and outs of such scheme. The scheme comprehends as under: i. Eligibility: A registered person who is required to furnish a return in Form GSTR-3B and whose aggregate turnover is up to INR 5 crores in the preceding financial year is eligible for the QRMP scheme. ii. Effective Date: The scheme would be effective from 1-Jan-2021. iii. Turnover Exceeding Limit in Current Year: In case the aggregate turnover exceeds INR 5 crores during any quarter in the current financial year, the registered person shall not be eligible for the scheme from the first month of the quarter during which his aggregate turnover exceeds INR 5 crore. iv. Opt-in and Opt-out Mechanism: The detailed procedure to opt in and to opt out has been explained in the said Circular. v. Quarterly GSTR-1: The registered person opting for the scheme would be required to furnish the details of outward supply in Form GSTR-1 on quarterly basis. vi. Invoice Furnishing Facility (IFF): For each of the first and second months of the quarter, such registered person will be having the facility, as per his choice, to furnish details of his outward supplies to a registered person under IFF i.e., Invoice Furnishing Facility. vii. Monthly Tax Deposit (Form GST PMT-06): The registered person under the scheme would be required to pay the due tax in each of the first two months of the quarter by depositing the due amount in Form GST PMT-06 by the 25th day of the month succeeding such month. Such payment of taxes can be made by selecting either fixed sum method or self-assessment method as explained in the Circular. viii. Quarterly GSTR-3B: Such registered persons would be required to furnish Form GSTR-3B, for each quarter, on or before 22nd or 24th day of the month succeeding such quarter. Specialized Returns Suite under GST Composition Taxpayers S.39 / R.62 Quarterly statement in Form GST CMP-08 by the 18th day of the month succeeding such quarter; and annual return in Form GSTR-4 till 30th April following the end of the financial year. Non-Resident Taxable Person S.39 / R.63 Return giving outward and inward supplies in Form GSTR-5, within 20 days after the end of a tax period or within 7 days after the last day of validity of registration, whichever is earlier. Input Service Distributor (ISD) S.39 / R.65 Monthly electronic return in Form GSTR-6, containing details of tax invoices on which credit has been received and those issued under section 20, on or before the 13th day of the succeeding month. TDS Deductor S.39 / R.66 Return in Form GSTR-7 on or before 10th of the succeeding month along with tax payment; else interest shall be paid @18% p.a. for the period tax remains unpaid. TCS Collector (ECO) Section 52 Statement in Form GSTR-8 containing details of outward supplies affected through it and returned during a month, within 10 days after the end of such month, along with deposit of TCS. UIN Holder Refund Claim Rule 82 Every person issued a UIN claiming refund of taxes paid on inward supplies furnishes details in Form GSTR-11 along with application for refund claimed. First Return Section 40 Declaration of outward supplies made in the period between the date on which liability arose and the date on which registration was granted, in the first return filed after grant of registration. Final Return S.45 / R.81 Every registered person required to furnish return under Section 39 whose registration has been cancelled must furnish final return in Form GSTR-10 within 3 months from date of cancellation or date of order, whichever is later. Annual Return & Reconciliation Statement [Section 44 read with Rule 80] GSTR-9 Annual Return: Every registered person, other than an ISD, TDS deductor, TCS collector, a casual taxable person, a non-resident taxable person, a person supplying OIDAR from a place outside India to a person in India, any department of the CG/SG/local authority whose books of accounts are subject to audit by CAG of India, an airline company (Notification No. 9/2020-CT, dated 16-Mar-2020), shall furnish an annual return in Form GSTR-9, for every financial year. GSTR-9A: Taxable person paying tax under composition levy shall furnish the annual return in Form GSTR-9A. GSTR-9B: Every electronic commerce operator who is required to collect tax at source under section 52 shall furnish the annual statement in Form GSTR-9B. GSTR-9C Self-Certified Reconciliation: Every registered person, whose aggregate turnover during a financial year exceeds INR 5 crore, shall furnish a self-certified reconciliation statement in Form GSTR-9C along with a copy of his audited annual accounts. Statutory Due Date & Exemption: All such returns are to be filed on or before the 31st day of December, following the end of such financial year. However, taxpayers having AATO upto INR 2 crores are exempt from the requirement of furnishing annual return for FY 2020-21. 5 Payment of Taxes Every taxpayer shall discharge his tax liability on or before the due date of furnishing his return. Under GST law, returns cannot be filed without discharging the applicable liability. Electronic Cash Ledger (Rule 87) Amount available in electronic cash ledger may be used for payment of tax, interest, penalty, fee or any other amount payable in the manner prescribed in rule 87. Electronic Credit Ledger (Rule 86) Amount available in electronic credit ledger may be used for payment of output tax in the manner prescribed in rule 86. Prohibition on Credit Ledger Utilization: Electronic credit ledger cannot be used for making payments on account of interest, fee, penalty or any other payments. The manner of utilization of ITC available in electronic credit ledger is given under section 49(5), 49A and 49B of the Act. Interest for delayed payment of taxes shall be charged as per section 50. 6 Job Work Compliances (Section 143) The word ‘job work’ has been defined under section 2(68) to mean any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly. Time Limits & Deemed Supply Consequences Inputs: In case inputs are sent for job work and are not brought back or supplied within 1 year, it would be considered as deemed supply on the date when such inputs were originally sent to the job worker. Capital Goods: If capital goods are sent to a job worker and are not brought back or supplied within 3 years, it would be considered as deemed supply on the date when such capital goods were originally sent to the job worker. Challan Reporting in Form GST ITC-04: The details of challans in respect of goods dispatched to a job worker or received from a job worker during a quarter shall be reported in Form GST ITC-04 to be furnished for that period, on or before the 25th day of the month succeeding the said quarter. 7 Accounts and Records (Section 35, 36 read with Rules 56, 57, 58) Maintenance of Accounts and Records (Section 35) As per the provisions of section 35, every registered person has to maintain accounts and records at principal place of business in respect of: (i) Production or manufacture of goods (ii) Inward & outward supply of goods/services (iii) Stock of goods (iv) ITC availed (v) Output tax payable and paid In case of more than one place of business, such records are to be maintained at every place of business specified in the certificate of registration. Tea, Coffee & Rubber Auctions Clarification: The Central Government vide Circular No. 23/23/2017-GST dated 21-Dec-2017 provided clarification on issues in respect of maintenance of books of accounts relating to additional place of business by a principal or an auctioneer for the purpose of auction of tea, coffee, rubber, etc. Retention of Records (Section 36) Section 36 provides that the period of retention of such accounts and records shall be for 72 months from the due date of furnishing of annual return. Litigation & Proceedings Rule: In case of appeal, revision or any other Court proceedings, accounts pertaining to the subject matter of such proceeding are required to be maintained for a period of one year after disposal of such matter or 72 months, whichever is later. Types of Records (Rule 56) Rule 56 gives detailed information about the accounts and records to be maintained by a registered person in a comprehensive manner. This rule talks about various types of records to be maintained: Stock records Advances received from customer Payment of taxes made Sundry debtors and creditors Consequences of goods stored at undeclared places Place where books are to be kept Log of entries edited or removed Serial number of books Presumption of ownership of documents Records by an agent Additional records by manufacturer Additional records by service provider Specific records by works contractor Records in electronic form & preservation Records by transporter or C&F agent Electronic Records (Rule 57) Rule 57 gives an understanding about the generation and maintenance of electronic records. This rule comprehensively covers the manner of taking backup of electronic records, production of records before the proper officer along with passwords. Warehouse & Transporter Records (Rule 58) Rule 58 talks about records to be maintained by the owner or operator of godown or warehouse and transporters for storing and moving goods. About the Author CA. Virender Chauhan Member, The Institute of Chartered Accountants of India (ICAI) Email: vkc.smile@gmail.com

GST • Indirect Taxes ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 22–31 (270–279) Statutory ITC Master Treatise Input Tax Credit Under GST AG CA. Atul Gupta Past President of ICAI • Board Member of IFAC VG CA. Vishal Gill Member of the Institute • eboard@icai.in “A new historical development in Tax regime; especially in Indirect Taxes evolves on 1st July 2017 in the shape of Goods and Service Tax (GST) after number of Constitutional & legislative changes and various Central and State Level Indirect Taxes are merged into a single regime, which is known globally as VAT (Value Added Tax). As the name suggests, GST or VAT means value added tax wherein the tax from taxpayer is expected on the value added portion while the credit is passed on for the taxes paid on purchases used for offering supplies. This is not a new phenomenon. The same was also present in the earlier regimes of Central Excise, Service Tax and even VAT when the same was known as MODVAT or CENVAT Credit. Read on…” 1 Introduction & Foundational Concepts Since the Goods and Services Tax removes the notion of manufacturing, job work, works contract and services and converts all of them into supply; commonality of law at the national level (One Nation – One Tax) further aims to offer ease of doing. Inspite of all these efforts, understanding the various aspects around Input Tax Credit are still a tiresome job for taxpayers, professionals and even for the authorities. Here, it is an attempt to offer a 360° view around Input Tax Credit (ITC) about the eligibility to claim and retain the credit, while dealing with specific issues like blocked credit, credit in case of taxpayer dealing in taxable and exempted supplies and others. 2 Eligibility of a Taxpayer to Avail Input Tax Credit (Section 16) As per Section 16 of the CGST Act, there are certain eligibility conditions which a taxpayer has to fulfil before becoming eligible to avail credit. The fundamental conditions are: Eight Core Statutory Conditions under Section 16 Course or Furtherance of Business [Section 16(1)]: That supply of goods or services or both should be made to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Possession of Tax Paying Document [Section 16(2)(a)]: He is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed. Receipt of Goods or Services [Section 16(2)(b)]: He has received the goods or services or both. Furnishing of Invoice Details in GSTR-1 [Section 16(2)(aa)]: Details of the invoice has been furnished by the supplier in GSTR-1. Actual Payment of Tax to Government [Section 16(2)(c)]: Tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply. Filing of Return under Section 39 [Section 16(2)(d)]: He has furnished the return under section 39. Capital Goods Option [Section 16(3)]: In case of Capital Goods, either the depreciation or Input tax credit can be availed on the portion of GST paid on purchase of Capital Goods. Statutory Time Limit [Section 16(4)]: Credit on any invoice need to be claimed in a time frame as prescribed under Section 16(4). Detailed Analytical Breakdown of Eligibility Conditions Condition 1: Use in Business / Ineligible Personal Expenditure As per the first condition, the taxpayer has to ensure that the goods or services purchased on which he wishes to claim credit should be used for business. In case the same is neither used nor intended to be used for his business from where further supplies are offered, then such credit should not be claimed by the taxpayer. An illustration of such ineligible credit can be the processing charges paid by a taxpayer on the bank loan related to the education of his son on which GST was paid. Condition 2: Valid Tax Invoice vs. Tax Paying Document (Notification No. 39/2018-CT) The second condition laid down through Section 16(2) is the availability of a valid tax invoice or tax paying document in the hands of the recipient. Here two concepts are highlighted deliberately: “Valid Invoice/Document” and “Tax Paying Document”. As per legal jurisprudence, eligible tax paying documents comprise: (i) Tax Invoice/Debit Note issued by supplier; (ii) Self-invoice raised for supplies falling under reverse charge mechanism (RCM) subject to payment of tax; (iii) Bill of Entry on import of goods; (iv) Invoice issued by an Input Service Distributor (ISD); and (v) Invoice issued to transfer common input services to the Input Service Distributor. Mandatory Document Ingredients (Notification No. 39/2018-CT): The invoice number, name and address of supplier and recipient along with GST Number, description of goods/services, rate of tax, amount of tax and place of supply are the necessary statutory ingredients without which the document will become invalid to claim credit. Condition 3: Physical Receipt – Goods in Lots & ‘Bill to Ship to’ Model As per the third condition, the goods/services mentioned on the invoice must be received by the recipient. Goods in Lots or Instalments: When goods are received in lots or instalments, Section 16 clarifies that the taxpayer will be eligible to claim credit only once the final instalment or lot is received. For example, if Mr. A ordered goods in September and received the tax invoice in September, but the final lot of goods arrived in October, Mr. A cannot avail the credit in September; he becomes eligible only in October upon updating his stock register. ‘Bill to Ship to’ Supplies for Goods: Where goods are sold before delivery and instructions are given to deliver directly to an ultimate buyer (e.g., Mr. A purchases goods from Mr. B and advises Mr. B to deliver directly to Mr. C), the goods never enter Mr. A’s warehouse. As clarified in Explanation to Section 16(2)(b), the original recipient (Mr. A) is deemed to have received the goods and is fully eligible to claim credit. ‘Bill to Ship to’ for Services: The CGST (Amendment) Act, 2018 inserted corresponding deemed-receipt provisions for services where services are provided by the supplier to any person on the direction of and on account of the original recipient. Conditions 4 & 5: Tax Payment by Supplier, GSTR-1 & Rule 36(4) Restrictions The taxpayer needs to ensure that tax paid to the supplier has been deposited in the government exchequer and is reflected in the electronic credit ledger of the recipient after the supplier files Form GSTR-1. While matching provisions were initially kept suspended, Finance Act, 2021 enacted a statutory condition requiring invoice details to be furnished in GSTR-1. Evolution of Rule 36(4) Cap: For missing invoices not reflected in GSTR-2A/2B, Rule 36(4) originally permitted a provisional buffer of 20%, which was subsequently reduced to 10%, and then tumble-down to 5% of eligible credit appearing in GSTR-1/2B. Illustration: Mr. A purchased goods worth INR 10,000 from B (GST INR 1,800) and INR 20,000 from C (GST INR 3,600). Mr. B filed GSTR-1, reflecting INR 1,800 credit. Mr. C failed to file GSTR-1. Under Rule 36(4), Mr. A can only take 5% of INR 1,800 = INR 90 on account of missing supplier C until C rectifies compliance. Condition 6: Mandatory Filing of Return under Section 39 Certain taxpayers operate under the perception that having excess input tax credit eliminates the urgency of filing returns. However, Section 16 explicitly prescribes that filing the return under Section 39 (Form GSTR-3B) is an essential condition. Unlike pre-GST jurisprudence where entry in books of account was often held sufficient, under GST the return must be filed to establish valid credit entitlement. Condition 7: Capital Goods – Depreciation vs. Input Tax Credit [Section 16(3)] Under Section 16(3), where capital goods are capitalised in the financial statements under Accounting Standards / Ind AS, the taxpayer must elect one of two mutually exclusive options: Illustration: Mr. A purchases Capital Goods worth INR 1,00,000 with GST @18% (INR 18,000). Mr. A has two options: • Option 1: Capitalise the entire gross value of INR 1,18,000 and claim income-tax depreciation on INR 1,18,000 → Zero ITC allowed under Section 16(3). • Option 2: Capitalise INR 1,00,000 as Capital Goods and claim depreciation on INR 1,00,000 → Full ITC of INR 18,000 allowed. Condition 8: Time Limit for Availment vs. Utilization [Section 16(4)] Section 16(4) stipulates that credit on any invoice or debit note must be availed on or before the due date of filing of return under Section 39 for the month of September following the end of financial year, or the actual date of filing of annual return, whichever is earlier. Critical Distinction: Availment vs. Utilization: The Section 16(4) deadline governs initial availment of credit only. Once credit is validly taken and credited to the electronic credit ledger within the Section 16(4) window, there is no time limit whatsoever for its utilization. 3 Retention of Input Tax Credit & The 180-Day Payment Rule Availing credit is only the initial step; the taxpayer must also fulfil statutory requirements to retain the credit. Failure to do so requires reversal along with interest. Second Proviso to Section 16(2) – Payment within 180 Days Every taxpayer who has availed credit on purchase of goods or services (other than supplies subject to reverse charge) must pay to the supplier the value of supply along with applicable GST within 180 days from the date of invoice. If not paid within 180 days, an amount equal to the input tax credit availed must be added to outward tax liability along with interest. (i) Mandatory Interest: Entire unpaid credit must be reversed along with interest @18% p.a. (ii) Part-Payment Flexibility: In case of part-payment, pro-rata credit can be retained and only the balance unpaid credit must be reversed with interest. (iii) Computation Benchmark: The 180 days are strictly counted from the date of invoice, not from the date credit was availed. (iv) Unrestricted Re-availment: The credit so reversed can be re-availed upon making payment to the supplier without any time limit, irrespective of the Section 16(4) time barrier. Wrongful Availment: Pre-GST vs. GST Regime [Section 42(10) ‘OR’ Substitution] In the pre-GST Service Tax and Central Excise regime, interest and penalty were attracted on “wrongful availment AND utilisation” of credit. In GST, under Section 42(10), the word “AND” was replaced with “OR”, meaning thereby that mere wrongful availment of credit, even if unutilised, can trigger interest and penal exposure under the strict reading of the statute. Numerical Illustration: 180-Day Rule Computation Facts: Mr. A purchased goods/services worth INR 1,18,000 (INR 1,00,000 value + INR 18,000 GST) from Mr. Y on 01.03.2019, received invoice on the same date, and availed credit in March 2019. Mr. A paid Mr. Y on 01.12.2019. What is Mr. A’s statutory liability? Solution: • 180 days from invoice date (01.03.2019) expired on 28th August 2019. • As payment was not made within 180 days, INR 18,000 should have been added to outward liability in Form GSTR-3B for September 2019. • Period of interest: From date of ITC availment (01.03.2019) to date of payment (01.12.2019) = 275 Days (1st March 2019 to 30th November 2019). • Interest Liability: INR 18,000 × 18% × 275 / 365 = INR 2,441. • Total Liability payable on reversal: INR 18,000 (tax) + INR 2,441 (interest) = INR 20,430. 4 Blocked Credit under GST – Section 17(5) Carried forward from pre-GST concepts, Section 17(5) of the CGST Act blocks credit on specific goods and services even if incurred in the course or furtherance of business: (a) Motor Vehicles & Conveyances: Motor vehicles for transportation of persons with seating capacity ≤ 13 persons (including driver). Exceptions: Used for further supply of vehicles, transportation of passengers, or imparting training. (b) Vehicle Insurance, Servicing & Repair: Blocked except where taxpayer is eligible for ITC on vehicles under clause (a), or is engaged in manufacturing vehicles or supplying insurance services (e.g., Maruti can claim ITC on repair/insurance of vehicles manufactured). (c) Food, Catering, Beauty & Health: Food and beverages, outdoor catering, beauty treatment, health services, cosmetic/plastic surgery, leasing/renting of vehicles/vessels/aircraft, life and health insurance. Exceptions: Same category outward supply, or statutory obligation under any law. (d) Club & Fitness Memberships: Membership of a club, health and fitness centre. Exception: Where obligatory for an employer to provide to employees under any law. (e) Travel Benefits on Vacation: Leave travel concession (LTC/LTA) extended to employees. Exception: Where obligatory for an employer under any statutory law. (f) Works Contract for Immovable Property: Works contract when supplied for construction of immovable property (other than plant and machinery). Exception: When input service for further supply of works contract. (g) Self-Construction of Immovable Property: Goods/services received for construction of immovable property on own account (other than plant and machinery), even if used in business, to the extent capitalised. (h) Composition Purchases (Section 10): Goods or services on which tax has been paid under Section 10 (composition levy suppliers). (i) Non-Resident Taxable Persons: Goods or services received by a non-resident taxable person, except on goods imported by him. (j) Personal Consumption: Goods or services or both used for personal consumption. (k) Lost, Stolen, Destroyed & Gifts: Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples (read with Schedule I of Section 7). (l) Penal Taxes (Sections 74, 129, 130): Any tax paid in accordance with the provisions of Sections 74 (fraud/suppression), 129 (detention), and 130 (confiscation). Practical Carve-Outs and Statutory Exceptions Motor Vehicles Carve-out: A management consultant buying a car for office use cannot claim ITC; but an automobile dealer running a car showroom can claim full ITC as the vehicles are used for outward taxable supply in the same line of business. Rent-a-Cab Carve-out: Rent-a-cab is blocked generally, but if Mr. A provides rent-a-cab services to clients and hires cabs from vendor Mr. B, Mr. A can claim ITC of GST paid to Mr. B because it is used for outward taxable supply of the same category. 5 Apportionment of Input Tax Credit – Rule 42 & Rule 43 Where goods or services are used partly for business and partly for other purposes, or partly for taxable (including zero-rated) supplies and partly for exempt supplies, Section 17 read with Rules 42 (Inputs & Input Services) and 43 (Capital Goods) governs pro-rata apportionment. Fundamental Variables under Rule 42 T1: Credit specifically attributable to non-business or personal consumption (ineligible). T2: Credit specifically attributable to exempt supplies (including NIL rated, non-taxable petroleum, and Schedule III items) (ineligible). T3: Credit on goods/services on which credit is blocked under Section 17(5) (ineligible). C1: Net eligible credit after removing direct exclusions: C1 = T - (T1 + T2 + T3). T4: Credit specifically attributable to exclusively taxable and zero-rated supplies (fully admissible). C2: Common credit available for pro-rata apportionment: C2 = C1 - T4. D1: Credit attributable to exempt supplies: D1 = (E / F) × C2, where E is exempt turnover and F is total turnover. D2: Deemed credit attributable to non-business purposes: D2 = 5% of C2. C3: Net common credit available for taxable activity: C3 = C2 - (D1 + D2). Total Eligible ITC: C3 + T4. Special Rule for Banking/NBFCs [Section 17(4)]: Banking companies and financial institutions have the statutory option either to follow Rule 42/43 apportionment or to reverse 50% of eligible input tax credit every month. Comprehensive Practical Case Study on Rule 42 Case Parameters: XYZ Ltd has total turnover of INR 10 Crore (Taxable = INR 7 Crore; Exempt = INR 3 Crore). Total Input Tax Credit available is INR 80 Lakh (equal CGST + SGST). • INR 5 Lakh credit for personal consumption services. • INR 5 Lakh credit on godown rental for exempt goods. • INR 20 Lakh credit for building materials/services constructed on own account. • INR 10 Lakh credit for works contract services used for taxable/exempt construction and non-business. • INR 12 Lakh credit on servicing motor vehicle used for passenger transport (taxable/exempt/non-business). • INR 1 Lakh credit for staff food & beverages. • INR 1 Lakh credit for director car servicing. • INR 6 Lakh credit on goods stolen from factory. • INR 20 Lakh credit exclusively for taxable activities. Sl. Details of Credit (CGST + SGST) Classification Amount (INR) 1. Credit specifically related to Personal Consumption (Not Available) T1 5,00,000 2. Credit on Rental for Exempted Activity (goods) – Not Available T2 5,00,000 3. Building Material & Service for Office – Blocked Credit u/s 17(5) T3 20,00,000 4. Works Contract – Used for taxable & exempt works contract – Common C2 10,00,000 5. Servicing motor vehicle for passenger transport (taxable & exempt) – Common C2 12,00,000 6. Food & beverages for office use – Blocked credit u/s 17(5) T3 1,00,000 7. Service of Motor vehicle used for office – Blocked credit u/s 17(5) T3 1,00,000 8. Goods stolen from factory – Credit needs to be reversed u/s 17(5) T3 6,00,000 9. Credit exclusively for Taxable activity T4 20,00,000 10. Total Credit T 80,00,000 11. Rule 42 – Calculation of C1 = T - (T1 + T2 + T3) [80L - (5L+5L+28L)] C1 42,00,000 12. Calculation of Common credit C2 = C1 - T4 [42,00,000 - 20,00,000] C2 22,00,000 13. Credit related to Exempt Activity = D1 = (C2 × E / F) = (22,00,000 × 3 / 10) D1 6,60,000 14. Credit related to Non-Business purposes = D2 = 5% of C2 (Rule 42(1)(j)) D2 1,10,000 15. Common Credit available for Taxable Activity = C3 = C2 - (D1 + D2) C3 14,30,000 16. Total Credit available to utilize for XYZ Ltd = C3 + T4 (14.30L + 20.00L) C3 + T4 34,30,000 6 Input Tax Credit in Special Cases (Section 18) Sections 18(1) to 18(3) provide relief and mechanisms for credit entitlement in distinct transitional circumstances: (a) Mandatory Registration [Section 18(1)(a)]: Person applying within 30 days of becoming liable is entitled to ITC on inputs held in stock, semi-finished, or finished goods on the day immediately preceding the date liability arose. (b) Voluntary Registration [Section 18(1)(b)]: Person taking registration under Section 25(3) is entitled to ITC on inputs in stock, semi-finished, or finished goods on the day immediately preceding the date of grant of registration. (c) Switch from Composition to Normal [Section 18(1)(c)]: Entitled to ITC on inputs in stock and capital goods on the day immediately preceding liability under section 9. Credit on capital goods is reduced by 5% per quarter of asset usage. (d) Exempt Supply Becoming Taxable [Section 18(1)(d)]: Entitled to ITC on inputs in stock relatable to such supply and on capital goods exclusively used, reduced by 5% per quarter from the date the supply becomes taxable. One-Year Invoice Outer Limit [Section 18(2)]: Under all four circumstances of Section 18(1), a registered person is not entitled to take ITC after the expiry of one year from the date of issue of tax invoice. Input Tax Credit under Merger, Demerger & Transfer of Business [Section 18(3) & Form ITC-02] Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business with specific provision for transfer of liabilities, unutilised ITC in the electronic credit ledger can be transferred to the transferee entity by filing Form GST ITC-02. The application must be accompanied by a certificate from a practicing Chartered Accountant or Cost Accountant certifying compliance with statutory transfer provisions. Reversal of GST Credit on Sale / Disposal of Capital Goods [Section 18(6)] As per Section 18(6), in case of supply of capital goods or plant and machinery on which ITC was taken, the registered person must pay an amount equal to: (a) The ITC taken on said capital goods reduced by 5% per quarter of use; OR (b) The tax on the transaction value of such capital goods determined under Section 15, whichever is higher. Practical Illustration on Section 18(6) Mr. A purchased Capital Goods for INR 5,00,000 on 01.01.2018 (GST @18% = INR 90,000). Mr. A disposes of the asset in open market on 31.12.2020 for INR 70,000 (GST rate 18%). Calculation (a) – Tax on Transaction Value: INR 70,000 × 18% = INR 12,600. Calculation (b) – Credit Reversal for Unexpired Period: Asset was used for 12 quarters (3 years). At 5% retention per quarter, Mr. A retains 60% (12 × 5%). The remaining 40% (8 quarters unexpired out of 20 quarters / 5 years) must be reversed: INR 90,000 × 40% = INR 36,000. Statutory Liability: Higher of (a) and (b) = INR 36,000. Mr. A collects INR 12,600 as GST from the buyer and reverses the balance INR 23,400 from his electronic credit ledger. Refractory Bricks, Moulds, Dies, Jigs & Fixtures Exception: Where supplied as scrap, the taxable person may pay tax solely on the transaction value determined under Section 15. In the above case, if moulds were sold as scrap for INR 70,000, total tax liability would be strictly INR 12,600. About the Authors CA. Atul Gupta Past President of ICAI • Board Member of IFAC CA. Vishal Gill Member, The Institute of Chartered Accountants of India (ICAI) Email: eboard@icai.in

GST • Tax Administration & Jurisprudence Detailed analysis of key issues in ‘Interest and Penalties’ under GST Journal: The Chartered Accountant, September 2021 (Vol. 70, No. 3) • Pages: 38–43 (Journal pp. 286–291) SH CA. Saradha Hariharan The author is a member of the Institute of Chartered Accountants of India (ICAI). She can be reached at eboard@icai.in. “For effective implementation of any tax-law and to do justice to tax abiding society, certain provisions to take action against offenders are required. While interest is economic consequence which is compensatory in nature, penal provisions in many cases act as a deterrent and criminal prosecution as a serious punishment against intentional tax evasions. Ignorance is never an excuse in the eyes of law. Hence, all taxpayers, Chartered Accountants and tax professionals are expected to be aware of the severe consequences in the law, which many times may also be due to inadvertent mistakes. In this article, we are going to discuss a few of the key current issues and expected future issues on the topic of interest and penalties under GST. Read on…” 1. Interest on Net Tax Liability – Does the Retrospective Amendment Put an End to All the Chaos? After a long deliberation on whether interest is payable on gross tax liability or net tax liability, and whether the amendment is prospective or retrospective basis, finally the battle gets settled when the retrospective amendment of inserting proviso to subsection (1) of section 50 of CGST Act, 2017 gets notified vide Notification No. 16/2021 – Central Tax dated 1st June, 2021. While the battle gets settled, the war continues. The GST Council gave an in-principle approval for the amendment in law in its 31st meeting held on December 22, 2018 as below: ‘Amendment of section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e., interest would be leviable only on the amount payable through the electronic cash ledger.’ However, when the actual amendment was proposed and implemented, the scope got narrowed down to only a specific scenario. A careful reading of the inserted provision in a sequential manner is as below: Proviso to Section 50(1) of CGST Act, 2017 (Sequential Analysis): Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger. In simple words, interest is payable only on the liability discharged through cash that too only in the scenario of late filing of return, where such return is filed before initiating proceedings u/s 73 or 74. Let us analyse some practical scenarios where interest is still payable on gross tax liability, even though they are discharged of ITC, despite the retrospective amendment being made effective: Scenario 1: When liability is omitted to be declared in the previous month As per Circular No. 26/26/2017-GST dated 29th December, 2017, the same can be rectified by way of including such liability in the current returns to be filed. It is also important to appreciate that the legal eligibility to offset tax liability against ITC is available, only when unutilized ITC is available until the expiry of the period of such liability, either availed in the past or to be availed in the current period. It is not legally valid to discharge current tax liability out of future ITC. Scenario 2: When nil return has been filed inadvertently and both tax liability as well as ITC has been omitted to be declared in Form GSTR-3B of the previous month It is important to understand that non-reporting of equivalent ITC does not entail automatic offset against unreported liability. Tax liability and ITC should be separately declared and then offsetting procedure should be made while filing Form GSTR-3B. Accordingly, as per Circular No. 26/26/2017-GST dated 29th December, 2017, the error has been rectified by way of including both liability and ITC in the current returns to be filed. Scenario 3: Tax liability discharged utilizing ITC through Form DRC-03 before initiation of proceedings u/s 73 or 74 Tax liability discharged utilizing ITC, either voluntarily or after receiving intimation from the proper officer, through Form DRC-03 before initiation of proceedings u/s 73 or 74. Inference on Practical Scenarios: In all these scenarios, even if the liability is met out of eligible ITC available to be offset for the period, going by the strict wordings of the newly inserted proviso, since supplies made during a tax period is not declared in the return u/s 39 for the said period, interest would still be payable on the entire gross liability, even though it is discharged fully or partially by way of ITC. Conclusion on Net Tax Interest: Even though the law has been amended retrospectively for interest to be payable on liability discharged through cash, one has to exercise abundant caution in calculating the interest. A careful understanding of the limited applicability of this proviso would help the taxpayer to be more vigilant in timely tax discharges and to avoid unidentified interest consequences which can arise from department in future. 2. Excess Interest Paid on Gross Tax Liability Basis – Can this be Claimed as Refund and is it Bound by Time Limitation under Section 54 of CGST Act, 2017? Since the inception of the GST law, there were unsettled multiple views on whether interest is payable on gross or net tax liability basis and even after proposing amendment to the law to make interest applicable on net tax liability, clarity had been lacking on whether it is applicable prospectively or retrospectively. In all these times, many taxpayers have paid excessive interest on gross tax liability, either voluntarily or based on demand from the tax department. However, once the law is settled clearly on retrospective amendment, issue arises on whether such excessive interest paid in the past is refundable. APPROACH 1: REFUND OF ‘INTEREST’ As per section 54(1) of the CGST Act, 2017, any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from relevant date in such form and manner as may be prescribed. Without differentiating the interpretation of ‘tax and interest’ as against ‘tax or interest’, a plain reading of section 54 allows refund of interest under GST. As per Explanation 2(h) to section 54 of the Act, ‘relevant date’ means – ‘in any other case, the date of payment of tax.’ It is important to analyse the applicability of such time limitation of two years, since most of the excessive refund would have been paid during the early days of GST implementation. Schlumberger Asia Services Ltd. v. Commissioner of CE & ST, Gurgaon-I (Service Tax Appeal No. 60095 of 2021) In the recent case of Schlumberger Asia Services Ltd. v. Commissioner of CE & ST, Gurgaon-I, Hon’ble CESTAT-Chandigarh, on 24-5-2021, analysed the applicability of time limitation of two years for refund in the case of retrospective amendment to section 140 (Transitional arrangements for ITC) of the Act on 30-8-2018 (w.e.f. 1-7-2017) held that: ‘When there was no provision of law existed, when amendment itself takes on 30-8-2018, therefore, the relevant date of filing the refund claim shall be 30-8-2018. Therefore, refund claim filed within one year of the said date and is not barred by limitation.’ Based on the aforesaid judgement, it can be inferred that the relevant date for retrospective insertion of proviso to section 50 is 1st June, 2021, being the date of Notification No. 16/2021 – Central Tax. Thus, refund of any excess interest paid can be claimed within two years from 1st June, 2021. APPROACH 2: REFUND OF ‘AN AMOUNT PAID ERRONEOUSLY’ In the recent case of Comsol Energy Private Limited vs State of Gujarat (order dated 21st Dec 2020), (Special Civil Application No. 11905 of 2020), Hon’ble Gujarat High Court allowed refund of IGST paid on ocean freight beyond limitation period prescribed under GST Law. M/s Comsol Energy Private Limited filed the refund claims of IGST paid on ocean freight under the RCM after the decision of Hon’ble High Court, Gujarat in Mohit Minerals (Pvt.) Ltd. v. Union of India and others [Special Civil Application No. 726 of 2018 dated January 23, 2020] in which it was held that RCM on ocean freight lack legislative competency and the same were declared as unconstitutional. Department issued Deficiency memo against such refund claim and hence writ application was filed by M/s Comsol Energy, wherein Hon’ble Gujarat High Court: Observed that, Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law. Since, the amount of IGST collected by the Central Government is without authority of law, the Respondent is obliged to refund the amount erroneously collected. Further observed that, section 54 of the CGST Act is applicable only for claiming refund of any tax paid under the provisions of the CGST Act. The amount collected by the respondent without authority of law is not considered as tax collected by them and therefore, section 54 of the CGST Act is not applicable. Noted that, section 17(1) of the Limitation Act is the appropriate provision for claiming the refund of the amount paid to the Respondent under the mistake of law. Set aside Impugned Deficiency Memo and directed the Respondent to process the refund claim along with simple interest at the rate of 6% per annum at the earliest. Based on the aforesaid judgement, it may be argued that the excess amount in the form of interest on gross tax liability is merely an amount collected without authority of law, and hence refundable without time limitation under section 54 of the CGST Act. 3. Possibility of Multiple Penalties for Two Offences in Same Transaction Section 122(1) of the CGST Act contains list of 21 offences for which penalty shall be levied. The issue analysed here is whether penalty can be levied under more than one category of offence arising out of the same transaction. Practical Illustration: A person liable to obtain registration under GST law has issued tax invoice and supplied goods without obtaining the registration. In this scenario, he is issuing an incorrect invoice since he is not allowed to issue invoice without obtaining registration. Thus, the following two penal provisions are attracted under Section 122(1): Clause (i): Where a taxable person supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply; Clause (xi): Where a taxable person is liable to be registered under this Act but fails to obtain registration. Concept of Double Jeopardy ‘Double jeopardy’ refers to the prosecution or punishment of a person twice for the same offence. The rule against double jeopardy is stated in the maxim nemo debet bis vexari pro una et eadem causa. It is a significant basic rule of criminal law that no man shall be put in jeopardy twice for one and the same offence. Reference to Legacy Law Decisions 1. Kerala High Court: Asst. Commissioner of Central Excise vs. Krishna Poduval – 2005 (1) S.T.R. 185 (Kerala) The Hon’ble Kerala High Court held that penalty under section 76 of the Finance Act, 1994 can be imposed for mere default/delay in payment of Service Tax in addition to the penalty under section 78 and these penalties are mutually exclusive and even if offences are committed in the course of same transaction or arise out of the same act, penalty is imposable for ingredients of both offences. The rationale explained in the said decision is as below: ‘The penalty imposable under Section 76 is for failure to pay service tax by the person liable to pay the same in accordance with the provisions of Section 68 and the Rules made thereunder, whereas Section 78 relates to penalty for suppression of the value of taxable service. Of course these two offences may arise in the course of the same transaction, or from the same act of the person concerned. But we are of opinion that the incidents of imposition of penalty are distinct and separate and even if the offences are committed in the course of same transaction or arises out of the same act, the penalty is imposable for ingredients of both the offences. There can be a situation where even without suppressing value of taxable service, the person liable to pay service tax fails to pay. Therefore, penalty can certainly be imposed on erring persons under both the above Sections, especially since the ingredients of the two offences are distinct and separate.’ 2. Punjab & Haryana High Court: Ranjit Singh Alias Jeeta vs Union of India and Another (FAO No. 4458 of 2007 (O&M)) The Hon’ble Punjab and Haryana High Court gave a similar verdict on 11th December, 2009. Relevant extracts of the decision are as below: ‘In order that the prohibition is attracted, the same act must constitute an offence under more than one Act. If there are two distinct and separate offences with different ingredients under two different enactments, a double punishment is not barred. On the face of it, both the statutes and the provisions thereof operate in different fields. Different ingredients have been provided for levy of penalty for different offences, which do not over-lap each other, even if the facts emanating the proceedings under the two statutes may be common. If the facts of the present case are considered in the light of enunciation of law on the principles of double jeopardy, as referred to above, the only conclusion which can be arrived at is that the levy of penalty on the appellant under the 1973 Act cannot be said to be barred on account of principle of double jeopardy, as the proceedings initiated either by the authorities under the 1962 Act or under the 1973 Act cannot be held to be on account of prosecution and conviction by a court of law, as is required to be established and further the same being under two different statutes, where ingredients for levy of penalty are altogether different.’ Inference: If the ingredients of the two offences are different, then there would be two separate offences and consequently two penalties can be levied. Therefore, as stated in the above example, there are two different offences having two separate ingredients: (1) failure to obtain GST registration, and (2) issuance of incorrect invoice, thereby collecting tax without authority of the law. Hence, there would be a scenario where two different penalties can be levied on the same transaction. It is not the act rather the ingredient that determines whether penalty is leviable under more than one provision. Though there is no specific rule that more than one penalty shall be levied, there is no bar for such levy of multiple penalties. 4. Double Penalty under Section 129 & 130 The issue of whether proceeding can be carried out by the authorities under section 129 as well under section 130 at a time for the same offence has been deliberated in detail by the Hon’ble High Court of Gujarat in the case of Synergy Fertichem Private Limited vs. State of Gujarat order dated 23 Dec 2019 (Special Civil Application No. 4730, 6125, 6118, 9105, 10018 of 2019). The key observations of the Hon’ble Court are as below: Independent and Mutually Exclusive: Section 129 of the Act talks about detention, seizure and release of goods and conveyances in transit. On the other hand, Section 130 talks about confiscation of goods or conveyance and levy of penalty and fine. Although, both the sections start with a non-obstante clause, yet, the harmonious reading of the two sections, keeping in mind the object and purpose behind the enactment thereof, would indicate that they are independent of each other. Section 130 of the Act, which provides for confiscation of the goods or conveyance is not, in any manner, dependent or subject to section 129 of the Act. Both the sections are mutually exclusive. Subsequent Incriminating Findings: Even if the goods or the conveyance is released upon payment of the tax and penalty under Section 129 of the Act, later, if the authorities find something incriminating against the owner of the goods in the course of the inquiry, if any, then it would be permissible to them to initiate the confiscation proceedings under Section 130 of the Act. No Dependency on Section 129(6): Section 130 of the Act is not dependent on clause (6) of Section 129 of the Act. Non-Deposit within Statutory Time: Sections 129 and 130 respectively of the Act are mutually exclusive and independent of each other. If the amount of tax and penalty, as determined under Section 129 of the Act for the purpose of release of the goods and the conveyance, is not deposited within the statutory time period, then the consequence of the same would be forfeiture of the goods and the vehicle with the Government. This does not necessarily imply that the confiscation proceedings can be initiated only in the event of the failure on the part of the owner of the goods or the conveyance in depositing the amount towards the tax and liability determined under section 129 of the Act. Two Types of Penalties for Same Breach: From the plain reading of sections 129 and 130 of the Act, it is clear that the suppliers or receivers of the goods transporting any goods in contravention of provisions of the Act or the Rules made thereunder are liable for the detention or seizure of the goods under Section 129 of the Act and under Section 130(1)(v) of the Act for confiscation of the goods and conveyance. Thus, for the same breach and/or contravention of the provisions of the Act, there are two types of penalties provided under Section 129 and Section 130(1)(v) of the Act. Judicial Call for Legislative Amendment: There is need to look into both the provisions, i.e., Sections 129 and 130 of the Act and amend the sections accordingly so as to remove certain inconsistencies. Let this aspect be looked into by the Government in accordance with law. It is interesting to note that the concluding recommendation of the Hon’ble High Court to revisit the two provisions has been considered by the Government and amendment has been proposed in the Finance Act 2021, delinking Section 129 and Section 130 and is yet to be made effective. 5. Penalty under Assessment Provisions vs Penalty Provisions As per Explanation 1(ii) to Section 74 of the Act, where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against the main person have been concluded under section 73 or section 74, the proceedings against all the persons liable to pay penalty under sections 122, 125, 129 and 130 are deemed to be concluded. Note: Reference to Section 129 and 130 has been removed from this explanation as per the amendment in Finance Bill 2021. However, the same is not yet notified. Inference: In such scenarios, where the law explicitly prescribes the restriction, there shall not be any possibility of levy of multiple penalties. Otherwise, where there are multiple ingredients in a single act, it may call for multiple penalties.

GST • Indirect Taxes ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 44–48 (292–296) Trade Facilitation & Dispute Resolution Advance Ruling Mechanism under the GST law – A tool for trade facilitation? VK CA. Viral Khandhar Member of the Institute • eboard@icai.in “Advance Rulings are a means of facilitating trade, promoting transparency, consistency in approach and beyond all, providing certainty of tax liabilities in transactions – as taxes go a long way in determining the profitability of any enterprise. Well implemented advance ruling systems provide certainty to tax payers which are consistent with a taxpayer’s expectation that they shall be taxed appropriately in accordance with the law. The tax systems of the United States, the United Kingdom, Netherlands, Germany, Australia, and South Africa and many other developed /developing economies have established advance ruling practices. Read on…” 1 Historical Genesis & Evolution of Advance Rulings in India The implementation of advance ruling in India is in line with the World Trade Organization’s (WTO) Trade Facilitation negotiations. The Authority for Advance Ruling in India is a relatively late entrant. Although the concept of obtaining an advance ruling was conceptualized by the Wanchoo Committee in the mid-1970s, it was only in early 1993 that it was implemented. The facility to obtain a ruling was initially available only to non-residents. However, based on the needs of the domestic industry, the advance ruling system was later made available to even domestic taxpayers. Looking at its growth, the advance ruling system was introduced into the indirect tax laws too viz., Central Excise, Customs and Service Tax laws. The advance ruling has also found its place in the GST law. On a comparison of this facility with the erstwhile laws, it can be assuredly said that the GST law has given wide applicability to the advance ruling facility. Earlier, it was only with respect to business transactions which were proposed to be undertaken that an advanced ruling could be applied for or only a certain class of taxpayers could apply for a ruling. But now, in the GST regime, a taxpayer whether or not registered, can apply for a ruling seeking clarification with respect to even its ongoing business activities as well as proposed business transactions. 2 Statutory Framework & Institutional Architecture (Chapter XVII) Self-assessment is the preferred archetype of any taxing statute. And with the onus put on taxpayers to assess and pay taxes, advance ruling systems provide the required facility to the taxpayers and clarity on how tax would apply to their transactions. Since the implementation of GST law in India is relatively new and uncertain, there has been a brisk inflow of applications seeking clarifications on the applicability of the provisions of the law. The legal framework for the advance ruling mechanism is contained in Chapter XVII of the Central Goods and Services Tax laws. The advance ruling mechanism is uniquely set up in India with the Authority for Advance Ruling (AAR) and the Appellate Authority for Advance Ruling (AAAR) set up in each State / Union Territory through the respective State GST laws. Structural Deficiencies & Institutional Revenue Bias This State-level setup is a significant departure from the setup in earlier regimes wherein only a single advance ruling authority was present. Due to this, there are divergent interpretations for the same legal provision by different State AARs, leading to severe challenges for businesses to gain clarity and adhere to the law. The AAR and the AAAR consist of an officer each from Central and State Tax. The presence of only officials from the tax department with no members having judicial experience drags down the purpose of having the advance ruling mechanism – as the pro-revenue bias is quite evident in the decisions. National Appellate Authority for Advance Ruling (NAAAR) – The Unnotified Solution To address conflicting decisions taken by various State AARs/AAARs and to eliminate revenue bias, the GST Council approved the creation of a central appellate authority known as the National Appellate Authority for Advance Ruling (NAAAR), equipped with a member having judicial experience. Enabling provisions have been inserted into the GST law since 2019, but the same are yet to be notified, rendering it a toothless provision without judicial blessing. 3 Permissible Scope of Advance Ruling (Section 97(2)) An advance ruling can be sought strictly within the boundaries of the seven prescribed subject matters under Section 97(2) of the CGST Act: (a) Classification of any goods or services or both; (b) Applicability of a notification issued under the provisions of this Act; (c) Determination of time and value of supply of goods or services or both; (d) Admissibility of input tax credit of tax paid or deemed to have been paid; (e) Determination of the liability to pay tax on any goods or services or both; (f) Whether applicant is required to be registered; (g) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term. The Place of Supply Conundrum – Sutherland Mortgage Services Landmark Ruling Questions involving determining ‘place of supply’ have conspicuously been left out of Section 97(2). Consequently, applications seeking clarification on place of supply were routinely rejected by AARs citing lack of jurisdiction. Sutherland Mortgage Services INC v. Principal Commissioner [TS-148-HC-2020(KER)-NT]: In this landmark case, the AAR rejected an advance ruling application relating to the place of supply issue. On writ petition, the Hon’ble Kerala High Court laid down the correct legal position, observing that tax authorities must endeavor to provide certainty of tax liability to taxpayers so that they can arrange their business affairs accordingly. The High Court held that the place of supply issue squarely falls under the purview of Section 97(2) (as it impacts determination of tax liability under clause (e)) and remitted the case back to the AAR for fresh decision. Proposed Activities & Flawed Rejection: Saint-Gobain India Case Advance ruling is explicitly applicable to activities proposed to be undertaken. In the case of Saint-Gobain India Private Limited [2020 (7) TMI 260 – AAR Maharashtra], the applicant proposed to manufacture Glass-fibre reinforced Gypsum Board and sought clarification on the applicable GST rate. Because samples of the proposed product could not be produced during hearing, the AAR rejected the application on the ground that the product was presently not in existence. This defeats the very rationale of advance rulings, as an applicant approaches the AAR precisely to determine commercial viability prior to committing investment. Crucial Exclusions under Section 97(2) & Lack of Appeal against Summary Rejection Certain critical areas are not covered under Section 97(2), including: (i) ITC reversals, (ii) applicability of interest, (iii) transitional credit (TRAN-credit), and (iv) documents to be issued. If an application touches these excluded domains, it is rejected without entering into merits. No Appeal to AAAR under Section 100: Section 100(1) allows appeal to AAAR only when aggrieved by an advance ruling pronounced under Section 98(4). It provides no appeal against an order of rejection under Section 98(2). Consequently, the applicant’s sole recourse is to challenge the rejection by filing a writ petition for judicial review before the High Court. 4 Procedural Timelines & The Threat of Divergent Rulings The statutory time limit prescribed under the Act is 90 days from the date of filing the application or appeal. While these slim timelines were intended to ensure swift certainty, ground realities reveal that they are routinely bypassed, causing protracted delays that cost businesses critical commercial opportunities. Furthermore, contradictory rulings pronounced by various State AARs add to the woes of stakeholders, threatening the core constitutional objective of “One Nation, One Tax”. Prominent examples of divergent rulings include: 1. Food & Beverages in Trains Delhi AAR ruled that supply of food and beverages in trains would be taxed at rates applicable to each individual item, directly disregarding a departmental Circular specifying a uniform 5% rate. 2. Solar Power Plants Tax Rate Maharashtra AAR levied GST @18%, whereas Karnataka AAR applied 5%, creating confusion across renewable energy developers. 3. ITC on Demo Cars Kerala AAR held ITC on demo cars admissible, whereas Goa AAR and Maharashtra AAR categorically denied ITC. 4. Printed Trade Advertisements (Macro Digital Imaging) Telangana AAR classified supply of printed trade advertisement as supply of goods. On identical facts, West Bengal AAR & AAAR classified it as supply of services. 5. Penal Interest on Loan Defaults (Bajaj Finance) Maharashtra AAR ruled penal interest on loan default/cheque bounce liable to GST, deviating from Section 15. The CBIC intervened via Circular No. 102/21/2019-GST dated 28th June 2019 clarifying penal interest is exempt. 6. SEZ Hotel Services (Gogte Infrastructure) Karnataka AAR held hotel accommodation provided to SEZ guests as taxable intra-state supply. CBIC had to release a Circular in June 2018 clarifying such services to SEZ are zero-rated inter-state supplies. 7. Director Remuneration & Salaries Contradictory rulings between Karnataka AAR and Rajasthan AAR led to nationwide tax demands on directors’ remuneration until CBIC issued a circular settling the controversy. Author’s Proposal on Publication of Rulings: Because an advance ruling is legally binding only on the applicant and the jurisdictional officer under Section 103, publishing rulings in the public domain creates unwarranted panic and conflicting trade practices. It is proposed that rulings should not be published publicly to avoid confusion across the broader taxpayer community. 5 Bar of Pending Proceedings & Finality of Rulings Overbroad Connotation of ‘Pending Proceedings’ (Section 98) – Tirumala Milk Case Section 98 prohibits admission of advance ruling applications where the question raised is already pending or decided in the applicant’s case under any other provisions of the Act. Authorities have given the term ‘proceedings’ an excessively wide interpretation to dismiss genuine applications. IN RE: M/S. Tirumala Milk Products Pvt. Ltd [2020 (9) TMI 353 – AAR Karnataka]: The applicant sought classification of flavoured milk. The application was rejected on the sole ground that general summons had been issued prior to filing. The author emphasizes that general summons, searches, or preliminary investigations cannot be equated to specific pending proceedings on the legal question of classification. Binding Nature & Scope of Judicial Review: JSW Energy Landmark The GST law provides an appeal from AAR to AAAR, but no further statutory appellate forum exists against an AAAR order. This led taxpayers to challenge AAAR rulings before High Courts under Article 226/227 of the Constitution of India. JSW Energy Limited [2019-VIL-276-BOM] (Bombay High Court): The Hon’ble Bombay High Court refused to interfere with the AAAR’s order, ruling that merely because the statute does not provide a further remedy of appeal, it does not become a fit case for appeal before the High Court. Converting writ proceedings under Article 226/227 into appellate proceedings is impermissible. Under judicial review, the High Court only examines the correctness of the decision-making process, and not the correctness of the decision itself. Consequently, AAAR orders are practically final and binding on merits. 6 Parting Thoughts & The Role of Professional Craftsmanship The advance ruling mechanism was conceived to provide transaction certainty so businesses can plan investments factoring in tax costs. To realize its true potential: Administrative Reforms: AARs must act as trade facilitators, incorporate judicial members in their constitution, adhere to the 90-day statutory timeline, and consider withholding public publication of individual rulings to prevent market confusion. Professional Craftsmanship: Being judicious is not the responsibility of authorities alone. Presenting an application before the AAR is as crucial as arguing before a Court. Meticulous preparation demonstrating complete facts and procedural completeness is vital. Given the binding and near-final nature of rulings, professionals must thoroughly evaluate all legal nuances before approaching the AAR, as an unfavorable ruling cannot be easily discarded. About the Author CA. Viral Khandhar Member, The Institute of Chartered Accountants of India (ICAI) Email: eboard@icai.in

GST • Indirect Taxes ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 49–53 (297–301) Chapter XVI • Co-Extended & Secondary Liabilities Liability to Pay in Certain Cases Under GST GG CA. Gaurav Gupta Member of the Institute • eboard@icai.in “Under GST statutes, the liability to pay the tax has been casted on the supplier of goods or services. There are situations where either the effective control of a taxable person is affected by another person or benefits of its property is received by one or more persons. The statute in order to expand the liability of such persons who are in effective control of affairs of business or are in possession of the property of such person has provided their liability under the GST statutes for recovery of any unpaid tax of such taxable person from them. The provisions are absolute in certain cases, but restricted liability is provided in others. This article examines the liability of persons other than the taxable person and limitation of liability in such cases. Read on…” 1 Understanding the Statutory Context & Scope of Chapter XVI Section 9 is the charging section of the Central Goods and Services Tax Act, 2017 (“CGST Act”). The section provides that every supplier of goods or services is liable to pay GST on every taxable supply effected by him. However, under specific provisions of section 9 of the CGST Act, the liability to pay tax has been shifted from the supplier to the recipient in case of notified goods and services (Reverse Charge Mechanism – Section 9(3) and 9(4)) and in certain specified services on the E-commerce operator through whom such services are being supplied (Section 9(5)). The extension of liability to pay tax by persons other than the supplier finds extension beyond section 9 also. While under section 9, the liability has been shifted absolutely from the supplier to the recipient or the e-commerce company, there are certain occasions where the liability to pay tax has not been shifted absolutely but is co-extended to specified persons other than the supplier. Thus, it becomes pertinent for persons undertaking such transactions to understand the nature and extent of the tax liability which they have become liable for. Chapter XVI of the CGST Act (Sections 85 to 94) provides for the specified cases where the liability to pay has been co-extended to specified persons other than the supplier. 2 Liability in Case of Transfer of Business (Section 85) Section 85 of the CGST Act provides that the transferee in case of transfer of business along with transferor shall be jointly and severally liable to pay the tax, interest or any penalty due from the taxable person (transferor) in respect of such business. Thus, the transferee along with the acquisition of business from another person, also acquires his liability of GST which remains unpaid for any period prior to date of such transfer. The determination of such liability would ensure the transferee to take adequate precautions in terms of making due diligence of all GST liabilities which remains unpaid on the date of such transfer of business in whole or in part. Scope of Business Transfer – Whole vs. Part The transfer of business would include the activity continuing or resuming as it was being undertaken prior to such transfer and such entity or part of entity is capable to function as an unit as a whole. Full Transfer: M/s ABC Enterprises purchasing the entire manufacturing facility of M/s Anything Private Limited shall be liable for any GST liability for any past period which is determined or is determined after such transfer. Partial Transfer: In case of part of enterprises, for e.g., purchasing the logistics business of M/s Anything Private Limited which can be run as an independent logistics business by the purchaser, the purchaser would be liable for any GST liability of such part of the enterprise only. Transfer as Going Concern (Exempt) Usually, the purchaser prefers to purchase the business as a going concern since the transfer of such business is exempt from levy of GST under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Thus, GST is not levied on transfer of such business or any part or fixed assets, or stock as part of such business. Individual Asset Purchase (Taxable, No Section 85) In alternate, the purchaser can purchase individual assets of the business, in which case the transfer would be that of assets and not of business. GST would be applicable on different assets as per their applicable rates and no exemption is available. However, in case of individual asset purchase, the transferee would not be liable for any past liability of the transferor under section 85. Registration Requirement on Transfer: In case of transfer of business, the transferee will not continue the business on the GST number of the transferor but shall obtain a new GST registration on his own Permanent Account Number (PAN). If the transferee is already registered, he shall make an amendment to his existing registration to include the newly acquired business. 3 Liability of Agent and Principal (Section 86) Section 86 of the CGST Act provides that where an agent supplies or receives any taxable goods on behalf of his principal, he shall also be jointly and severally liable to pay the tax payable on such goods. Critical Statutory Nuances of Section 86 Goods Only, Not Services: The section is strictly applicable to the supply of goods and does not extend to services. Receipt & Custody Extension: The section is carefully worded to extend the liability of the agent even on goods received from the principal so as to cover situations like goods lost, stolen, destroyed, or not available post-receipt in the hands of the agent. Immunity from Other Dues: The agent shall not be liable for any other liability of the principal under the GST statutes, including in respect of any goods which are not received through/by him. No Liability for Principal’s ITC: In the opinion of the author, the agent shall also not be liable for any Input Tax Credit (“ITC”) which was not available in any manner to the Principal even when such ITC can be linked to such goods. Commencement Point: The liability of the agent shall only start on the receipt of goods which he receives on behalf of the principal and shall be limited strictly in respect of such goods. 4 Liability in Amalgamation or Merger of Companies (Section 87) Section 87 of the CGST Act provides for liability in case of amalgamation and mergers in respect of liability acquired for supply amongst the merging/amalgamating companies: When two or more companies are amalgamated or merged from an earlier date (prior to date of order of such merger or amalgamation) and any of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to pay tax accordingly. Deeming Fiction of Distinct Companies: The liability is fastened by creating a legal deeming fiction that for such interim period, the amalgamating companies shall be deemed to be distinct companies. Date of Cancellation of Registration: The registration of such amalgamating or merging companies shall be cancelled with effect from the date of the said order and NOT retrospectively from the effective date of merger mentioned in such order. 5 Company in Liquidation & Directors of Private Companies (Sections 88 & 89) Company in Liquidation (Section 88) Section 88 prescribes that in the case of a company under liquidation, the Commissioner would notify the liquidator within three months from the date on which he receives intimation of the appointment of the liquidator, the amount which shall be sufficient to provide for any tax, interest or penalty which is then, or is likely thereafter to become, payable by the company. In case of a private company wound up before or during winding up, the liability is cast on person(s) who was director of such company at any time during the period for which tax was due. Such directors are jointly and severally liable unless they prove to the satisfaction of the Commissioner that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part. Key Scope Limit: The director is responsible only for the period during which he held position as a director. This liability has NOT been extended to other key managerial personnel like CEO, CFO, etc. Liability of Directors of Private Company (Section 89) & Judicial Scrutiny Section 89 renders a Director of a private limited company jointly and severally liable for unpaid tax, interest, or penalty due from the company, unless he proves that non-recovery cannot be attributed to gross neglect, misfeasance, or breach of duty on his part in relation to company affairs. Exclusion of Shareholders: Such liability has not been affixed on shareholders. Relying on Nihal Chand v. Kharak Singh Sunder Singh (1936) 2 Comp Cas 418, company liability is not shareholder liability. Courts do not lift the corporate veil unless fraud against the State is demonstrated. Specific Allegation Requirement: In Pepsico India Holdings Private Limited v. Food Inspector [(2011) 1 SCC 176], the Hon’ble Supreme Court held that a mere bald statement that a person was a Director is not sufficient unless a specific allegation regarding his role in management is established. Conversion to Public Company & Companies Act Override: No liability lies on directors under Section 89 if the private limited company is converted into a public limited company. Section 89 contains an express non-obstante clause overriding the Companies Act, 2013 (18 of 2013). Historical Context – Overcoming Sunil Parmeshwar Mittal Ruling: In Sunil Parmeshwar Mittal v. DC (Recovery Cell), Central Excise [2005 (188) E.L.T. 268 (Bom.)], the Bombay High Court held that an incorporated company is an independent juristic entity and directors could not be made liable for excise dues in the absence of explicit statutory provision. Section 89 was specifically introduced into GST to overcome this handicap. 6 Liability of Partners, Guardians, Trustees & Estates (Sections 90 to 94) Absolute Liability of Partners of a Firm (Section 90) & The 1-Month Retirement Rule Section 90 provides that where tax, interest or penalty cannot be recovered from the firm, each partner shall be jointly and severally liable. Unlike directors, partners have no statutory defense of proving absence of gross neglect. The statute fastens absolute liability. Retirement Intimation Rule: A retiring partner is liable only up to the date of retirement if he intimates the Commissioner in writing. However, if the partner fails to intimate the Commissioner within one month of retirement, his liability continues until the date intimation is received! The author observes that this clause overstretches liability by penalizing a procedural lapse for periods when the person had no control over the firm. Fiduciary Liability: Guardians, Trustees & Court of Wards (Sections 91 & 92) Section 91: In business carried on by a guardian, trustee or agent of a minor or incapacitated person, tax dues unrecoverable from the business vest in and are recoverable from the guardian, trustee or agent in like manner and to the same extent as the owner. No exception is carved out even where the fiduciary was not at fault. Section 92: Provides corresponding joint and several liability where business is managed by Court of Wards, Administrator General, Official Trustee, or receiver/manager appointed by court order. Recovery in Case of Death, Dissolution or Termination (Section 93) Section 93 provides for recovery of tax, interest, or penalty upon death or dissolution, expressly subject to the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC): Situation Person Liable to Pay Tax and Other GST Dues In case of death of a person, if business is continued after his death by his legal representative or any other person. Such legal representative or other person. In case of death of a person, if the business carried on by the person is discontinued. His legal representative shall be liable to pay, out of the estate of the deceased. Where property of HUF or AOP is partitioned amongst various members or groups of members. Each member or group of members shall be jointly and severally liable to pay dues from such HUF or AOP. In case of dissolution of a partnership firm. Every person who was a partner shall be jointly and severally liable to pay tax, interest or penalty due. In case of termination of guardianship or trust. The ward or beneficiary shall be liable to pay dues up to the time of termination of guardianship or trust. Supreme Court Precedent on Deceased Taxpayer – Shabina Abraham Case: In Shabina Abraham v. Collector of Central Excise and Customs [2015 (322) E.L.T. 372 (S.C.)], the Supreme Court held that in the absence of an express machinery provision, proceedings could not be continued against legal heirs of a deceased sole proprietor. Under GST, while liability to pay is stipulated, the continuation of determination proceedings against legal heirs remains distinct, and this controversy is poised to be tested before the Supreme Court. Discontinued Business of Firm, AOP or HUF (Section 94): Every person who was a partner or member at the time of discontinuance remains jointly and severally liable for unpaid taxes, interest, or penalties, irrespective of whether the dues were determined prior to or after discontinuance. 7 Author’s Synthesis & Guiding Principles From the comprehensive examination of Chapter XVI, the author deduces the following guiding principles: Primary Liability Remains on Taxable Person: Liability under GST statutes is primarily absolute on the taxable person making taxable supplies. Third-party recovery is an exceptional secondary mechanism. Estate Ceiling on Recovery: While certain sections frame liability as joint and several, recovery from heirs and successors cannot legally exceed the value of estate benefits received on succession, partition, or dissolution. Culpability vs. Fiduciary Status: Liability should be fastened on persons actually responsible for non-payment, rather than universally penalizing individuals merely by virtue of holding a formal fiduciary or managerial title. Mandatory Sequence of Recovery: Tax liability must first be formally determined in the hands of the taxable person. The Revenue must first exhaust recovery against the primary taxable person before invoking secondary recovery provisions against third parties. About the Author CA. Gaurav Gupta Member, The Institute of Chartered Accountants of India (ICAI) Email: eboard@icai.in

Standards • Auditing & Accounting Considerations COVID 19: Sector Wise Analysis of Key Auditing and Accounting Considerations Journal: The Chartered Accountant, September 2021 (Vol. 70, No. 3) • Pages: 54–63 (Journal pp. 302–311) RS CA. Radhika Sharma Member of the Institute • eboard@icai.in HS CA. Harinderjit Singh Member of the Institute • caharinderjit.singh@gmail.com “The COVID-19 pandemic is a global crisis of dramatic proportions and has resulted in widespread instability and disruption across various sectors. The markets have become volatile across all sectors resulting in financial instability and a liquidity crisis for many organisations. To cope, businesses will have to digitise further, cut costs, find new resources and rearrange their supply chains. The focus will also increasingly shift to products and services which focus on wellness, safety and health. On the supply side, establishment of digital operating models and efforts to shift to local supply chains will influence these sectors. Read on…” In today’s environment where many auditors are working remotely, it is their professional responsibility to plan and perform any audit with professional skepticism and with a clear focus on quality and evaluate impact of the various considerations on their audit. Considering the existing economic environment, this article aims to highlight: Key auditing and accounting considerations for the auditors across sectors of (i) Consumer and retail (ii) Automotive (iii) Industrial manufacturing (iv) Technology and (v) Hospitality Sector specific challenges for the Companies Further, this article includes an illustrative Checklist for auditors to help initiate the evaluation of management assessment of COVID-19 impact. The issues discussed in this article are illustrative and by no means exhaustive and their applicability depends on the facts and circumstances of each entity. Audit Consideration Matrix under COVID-19 Disruption Professional judgement and skepticism Planning – Risk identification and assessment Audit evidence & Auditing accounting estimates Compliance with AS/Ind AS, adherence to laws & regulations Going concern assessment ↓   ↓   ↓   ↓ Evaluate impact on audit reporting (SA 700 (Revised), SA 701, SA 705 (Revised), SA 706 (Revised)) Management Role and Responsibility Against the backdrop of COVID-19, it is critical that TCWG (Those Charged with Governance) and the board of directors understand the scope and extent of their statutory and fiduciary duties. As per Standard on Auditing (SA) 260 (Revised), Communication with Those Charged with Governance, it is the responsibility of TCWG to oversee the strategic direction of the entity and obligations related to the accountability of the entity, actively monitor the changing nature of the threat, anticipating and scenario testing how the spread of the COVID-19 is likely to affect their business and its stakeholders for example assessing the business continuity risk, in case a supply chain is disrupted for any critical raw material, evaluating shortage of workforce and its impact, etc. During COVID-19, it has been increasingly noticed that entities are struggling to justify this fundamental assumption and resorting to prepare financial statements on non-going concern basis. Section 134(5)(d) of the Companies Act, 2013 makes it obligatory for the Board of Directors to assess the appropriateness of going concern basis of accounting while preparing the financial statements of the company and state so in the Board’s report. Thus, it is the management’s responsibility to make a judgement on going concern and auditors are responsible in evaluating management’s assessment of the entity’s ability to continue as a going concern. Audit Planning As per SA 300, Planning an Audit of Financial Statements, the objective of the auditor is to plan the audit of financial statements to ensure it is performed in an effective manner and in order to achieve the aforesaid results, the auditor is expected to develop a strategy for addressing potential audit risks and plan the intended course of nature, timing and extent of procedures required to discharge the responsibilities. SA 300 requires that the auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. “The purpose of the audit is to obtain reasonable assurance that the financial statements have been prepared, in all material respects, in accordance with the applicable financial reporting framework.” COVID-19 may result in a rise in modifications to the auditor’s opinion due to, for example, issues related to material misstatement of the financial statements or more circumstances where there is an inability to obtain sufficient appropriate audit evidence. In this context, the auditor must consider the following industry challenges and related considerations to help obtain an understanding of the impact of COVID-19 on the operations and evaluate potential impact on the planning, audit strategy, reporting timelines and audit report. A. Consumer and Retail Industry Industry Challenges Considerations for the Auditor (i) Tackling change in Consumer Behavior - Consumers are embracing e-commerce: Consumers have embraced e-commerce to buy groceries, medicines and other goods online and outside-the-store fulfilment options, such as takeaway/ pickup and home delivery in keeping with the necessary lockdown, social distancing and WFH norms. - Increased Focus on essential buying: The percentage of spending across non-essential categories such as apparel and footwear, consumer durables, automobiles and real estate is likely to decline and there is shift of focus on health, hygiene, and nutrition. Whether forecasts and assumptions prepared by the management are reasonable and free from management bias and have been adjusted for reduction in consumer spending, shift in consumption categories, increased price sensitivity and industry trend in light of existing economic environment. Paragraph 125 of Ind AS 1, Presentation of Financial Statements, requires an entity to disclose information about the assumptions it makes about the future, and other major sources of estimation of uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Whether there are any concerns regarding stock-piling of inventory and whether the company has correctly accounted for obsolete inventory. It might be necessary to write-down inventories to net realisable value due to reduced movement in inventory, lower commodity prices, or inventory obsolescence due to lower than expected sales. (Refer Ind AS 2 and AS 2, ‘Inventories’). Whether estimates made by the management in relation to revenue recognition, inventory valuation, allowance for doubtful accounts, and impairment of long-lived assets, goodwill and other intangibles are reasonable (Refer SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures). Evaluate the Going concern assumption of the business considering the updated business plans, cash management and forecasts (Refer SA 570 (Revised), Going Concern). Have any lease arrangements undergone any change? (e.g., concession with respect to lease payments, rent free holiday, etc.) Has any lease arrangement become onerous, as a result of COVID-19? A Lessor and a lessee might renegotiate the terms of a lease as a result of COVID-19 or a lessor might grant a lessee a concession of some sort in connection with lease payments. Both lessors and lessees should consider the requirements of Ind AS 116, Leases in this regard. Further, paragraph 46A to Ind AS 116 provides that as a practical expedient, a lessee may elect not to assess whether a rent concession that meets the conditions in paragraph 46B of Ind AS 116 is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession the same way it would account for the change applying this Standard if the change were not a lease modification. Whether the auditor has considered (i) Penalties for any order cancellations, (ii) Reduced potential to receive discounts or allowances from vendors (iii) likely increase in sales returns, (iv) significant uncertainty of collection. Whether revenue has been recognized in accordance with Ind AS 115, Revenue from Contracts with Customers / AS 9 Revenue Recognition. (ii) Establishing a responsive and flexible Supply Chain Companies should aim at improving supply chain flexibility and resiliency by creation of shorter, more regional supply chains or a more diverse supplier base. Has the management communicated any disruptions to the supply chain that could impact sourcing or product costs (e.g., delays/ inability to source product)? Auditor to check whether any of contracts have become onerous and have been accounted as per Ind AS 37 / AS 29 (Provisions, Contingent Liabilities and Contingent Assets). (iii) Embracing Technology and Cybersecurity The pandemic has been particularly challenging for companies that are behind on the digital transformation curve. Companies will need to guide their employees who can work remotely on new ways of working. Whether the Company has made the required technology investments to address deficiencies and strengthen cyber security and adopted digital applications such as demand sensing (to understand shifts in consumer behavior), track and trace systems (to drive transparency in supply chain), etc.? If any breakdowns in internal control and heightened fraud risks have been noted, their potential impact on audit to be evaluated. (Refer Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI). B. Automotive Industry The Indian Automotive Industry has been riddled with fundamental economic challenges during the last few years and demand has slowed, credit availability reduced and discretionary spending dropped. Some of the most affected regions are major production hubs and home to key links in the sector’s global supply chain. Industry Challenges Considerations for the Auditor (i) Timely crisis management Considering the nature of industry, careful scenario planning for determining likely impact is crucial for Automotive Industry to help it sustain. Evaluate (i) management plans to address the challenges of reduced production volumes caused by supply chain disruptions, falling consumer demand for new cars, structural and regulatory changes, shift to Shared Mobility and Liquidity Crunch and (ii) impact on Going concern assessment. (Refer SA 570 (Revised), Going Concern). (ii) Impairment triggers Significant disruptions to supply or production, decline in consumer demand, or other relevant impacts may represent events or changes in circumstances that indicate that the carrying amounts of certain assets might not be recoverable (requiring impairment tests for the affected assets). The cash flow forecasts used to test for impairment and discount rate should be updated to reflect the potential impact of COVID-19. Due to COVID-19, there might be temporary ceasing of operations or an immediate decline in demand or prices resulting in lowering of revenues and profitability and reduced economic activity. These are the factors that the management may consider as the indicators that may require impairment testing for the purpose of Ind AS 36 and AS 28, Impairment of Assets. (iii) Inventory valuation Periods of abnormally low production may limit the capitalization of certain costs (e.g., fixed overhead costs) in inventory. Further consumer preferences or demand may affect the valuation of inventory and result in excessive inventory levels. Has a management assessment been done – i. to evaluate the nature of costs to be included in fixed production overheads ii. for determination of net realisable value and write-down of inventories. (Refer Ind AS 2, Inventories / AS 2, Valuation of Inventories). (iv) Management of Workforce A significant share of workforce in the Automotive Industry is employed in factories where components and vehicles are assembled and so cannot perform work remotely. Whether the Company has developed robust business continuity plans that can help to address contingencies like complete shutdown due to lockdown or lack of available workforce? [Refer SA 570 (Revised), Going Concern]. Companies may implement restructuring actions (e.g., layoffs, contract terminations), the accounting for which can vary depending on the nature of the restructuring activity. Whether the same has been accounted for and disclosed as per Ind AS 19 / AS 15 (Employee Benefits)? Also refer Ind AS 37 / AS 29 (Provisions, Contingent Liabilities and Contingent Assets). (v) Operations and Supply chain Company may be required to revisit operations and make changes to vehicle design, where parts are being sourced globally. Whether companies with extensive international supply chains have assessed critical components that may be in short supply and considered alternative sourcing strategies. (Refer SA 570 (Revised), Going Concern). Are there any clauses in any customer or supply agreements which may trigger penalties? Due to COVID-19, there is a need for exercising judgement in making provisions for losses and claims. Evaluate accounting and disclosure as per requirements laid out in Ind AS 37 / AS 29 (Provisions, Contingent Liabilities and Contingent Assets). (vi) Financial considerations and liquidity The automotive original equipment manufacturers and suppliers should carefully consider their cash, liquidity and working capital and recoverability of receivables. Whether the management has addressed liquidity challenges by performing rigorous, forward-looking stress-testing and sensitivity analyses of the cash-flow statement and evaluated availability of alternative financing sources. (Refer SA 570 (Revised), Going Concern). Whether there is adequate establishment and functioning of the controls to aid in identifying potential accounting and reporting issues in a timely manner. (Refer SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment and Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI). (vii) Strategy The economic uncertainty may reduce consumer demand in the short term and trigger a shift in consumer preferences (public transport, shared-mobility options, privately owned vehicles). Whether the company has explored diversification into electric vehicles (EVs) and affordable and environment friendly automobile segments as consumers consider new mobility options and the government takes action to stimulate the local economy. Whether there is any material inconsistency between the other information and the auditor’s knowledge obtained in the audit and report accordingly. (Refer SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information). C. Industrial Manufacturing Industry Amid plummeting demand, supply chain bottlenecks and spending slowdowns, major industrial companies have closed facilities and are mulling the extent of layoffs. Many manufacturing jobs are on-site and cannot be carried out remotely. Plant closures (full or partial) could continue to be necessary for manufacturers in hard-hit regions for a prolonged period as the country faces another wave of the pandemic. Industry Challenges Considerations for the Auditor (i) Crisis management and response Manufacturers are facing continuous downward pressure on demand and global supply chain disruptions, leading to cash-flow, liquidity challenges and difficulties in managing debt obligations. Whether the management has assessed how loans, revolving credit and cash flow reserves can support ongoing operations in a low-revenue environment. Whether the critical issues related to (possible) lack of raw material, productivity loss due to lack of remote working capabilities, limited demand for end products, insufficient staffing/workforce due to spread of infection/restriction on movement etc. have been addressed by the management plans. [Refer SA 570 (Revised), Going Concern]. Cash flows used for impairment testing should be based on a business plan that reflects the expected and most current impacts of COVID-19. The use of forward-looking information is pervasive in an entity’s assessment of, among other things, the impairment of non-financial assets (including goodwill), the realisability of deferred tax assets, and the entity’s ability to continue as a going concern. [Refer Ind AS 36 and AS 28 (Impairment of Assets), Ind AS 1 (Presentation of Financial Statements) and Ind AS 12 (Income Taxes)]. Is there any loan agreement with financial and/or non-financial covenant which may be breached in the current situation? Due to COVID-19 there may be instances of breach of loan covenants which may trigger the liability becoming due for payment and liability becoming current. However, as per paragraph 74 of Ind AS 1, such a liability shall not be classified as current, if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach. (ii) Workforce management Manufacturers should put in place immediate and contingent safety measures for their employees and should decide which functions can be carried out remotely. The sector may also likely face possible staff reductions. Whether the management has considered whether any of the assumptions used to measure employee benefits and share based payments should be revised. Management should also consider whether it has a legal or constructive obligation to its employees for example sick pay to employees that self-isolate, for which a liability should be recognised. Whether the same has been accounted for and disclosed as per Ind AS 19 / AS 15 (Employee Benefits)? (iii) Financial impact and disclosure Disruption in the sector is expected to lead to numerous financial disclosure implications. Stakeholders are making it clear that they expect transparency from companies and disclosures about actual and anticipated impacts, and, most importantly, the risks and vulnerabilities to the business. Whether the management has broadened disclosures considering the impact on the Industry and the business (e.g., inventory obsolescence, receivables collectability, debt covenants, impairments). Auditors to ensure compliance with SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information. Check whether depreciation has been appropriately charged in accordance with Ind AS 16, Property, Plant and Equipment. D. Technology Industry Indian Technology companies have led the way on a variety of strategies that other industries are now using to cope in this crisis — from remote working to a dispersed supply chain, all while ensuring continuity of critical services to clients. Technology demand has risen on account of surge in need for cloud-based, collaborative workplace technologies and increased awareness about Cybersecurity. Industry Challenges Considerations for the Auditor (i) Evaluate operations and crisis management strategy Remote work, online education and social distancing will create demand for products and services delivered by the technology industry. Organizations will require long-lasting increases in computing power, while also seeking more scalability and built-in cybersecurity and it will be increasingly important to understand and forecast the customers’ evolving needs for services in the technology sector. Evaluate the nature of business and services offered by the Company and enquire whether the Company has plans to re-evaluate cost structure, optimize operations and diversify? (Refer SA 570 (Revised), Going Concern and SA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment). (ii) Embracing WFH, Increased focus on Cybersecurity and building secure networks As companies transition to WFH, the demand for security software has increased. Spending in this sphere will increase as organisations race to secure endpoints, particularly cloud-based tools, log management and VPNs. IT companies will play a larger role in business continuity planning to help set up resilient, flexible and secure network and disaster recovery systems. Check whether the remote working practice implemented is secure and whether adequate internal controls are in place. Auditor to evaluate impact on the internal controls and report accordingly. (Refer Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI). E. Hospitality Industry Social distancing in general and closure of restaurants and restrictions on gatherings have meant the hospitality industry is effectively shuttered. Industry Challenges Considerations for the Auditor (i) Liquidity & operational challenges: Limited cash reserves and funding available, accumulated negative cash balances from period of shut down. Intense price competition. Loss of corporate/tourist bookings. Staff retention. As part of the planning and risk assessment procedures, whether the auditor has obtained an understanding of the entity through management inquiries, analytical procedures, observation and inspection including additional risks arising out of: (i) Operational disruption: Impact on changes to key supplier arrangements, termination of management agreements with operators, lease concessions obtained or given; changes to existing financing facilities and changes to legal and regulatory environment will need evaluation. (ii) Contractual non-compliances. (iii) Liquidity and working capital issues. (Refer SA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment). Whether impact of new uncertainties and market volatility on accounting estimates and judgements have been considered. (Refer SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures). (ii) Internal Control Due to shortage of staff, there could be a breakdown of controls such as daily revenue reconciliations, verification of rate variance report, review of rebates provided, payment processing and month-end reporting. Whether auditor has ensured exercise of professional skepticism as there may be instances of increased possibility of recording of fictitious revenue and fraudulent management estimates due to breakdown in segregation of duties and automated controls. (Refer Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI). (iii) Going concern assessment The assessment of going concern basis of accounting is performed for a period of next 12 months from the end of the financial year and while assessing the assumptions, events subsequent to balance sheet date should also be considered. While there may be optimism that more people may choose local holidays providing an opportunity to target this market but lack of consumer confidence is a significant risk. Whether auditor has considered increase in risk of default from travel agents and corporates leading to bad debts, impairment of long-lived assets due to significant reduction in the expected future cash flows and the ability of the hotels to continue as a going concern. Whether auditor has obtained sufficient appropriate audit evidence to conclude on the appropriateness of management’s use of the going concern basis of accounting, and whether a material uncertainty exists. (Refer SA 570 (Revised), Going Concern). Management Disclosure of the Impact of COVID-19 While such a lockdown and disruption is unforeseen and beyond the control of the entities, it is important for entities to ensure that all available information about the impact of these events on the entity and its operations is communicated in a timely manner to its investors and stakeholders. SEBI Advisory – Circular SEBI/HO/CFD/CMD1/CIR/P/2020/84 dated May 20, 2020 SEBI vide Circular SEBI/HO/CFD/CMD1/CIR/P/2020/84 dated May 20, 2020, encouraged listed entities to evaluate the impact of the COVID-19 on their business, performance and financials, both qualitatively and quantitatively, to the extent possible and disseminate the same. Even companies other than listed companies may refer the illustrative list enclosed in the SEBI circular and ensure adequate disclosure is made in the financial statements in respect of impact of COVID-19. Reporting Considerations for Auditor Emphasis of Matter (EOM) Paragraph: Where there are substantive COVID-19 related disclosures in the financial statements made by the management of the entity and the auditor is satisfied that these disclosures are appropriate and adequate, then based on the professional judgment of the auditor, an Emphasis of Matter (EOM) paragraph may be included in the auditor’s report. (SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report). Scope Limitations & Opinion Modifications: Identify scope limitations and cases of non-compliance with laws and regulations which may warrant modification of the audit report. These may be on account of inability to perform physical inventory observations, lack of access to client records, inability to confirm account balances /obtain external confirmations, lack of adequate audit evidence to forecast Going concern assumption, inability to perform subsequent event procedures, inability to obtain management representations. (SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report). Going Concern Uncertainties: Going concern is one of the fundamental assumptions referred in paragraph 10(a) of Accounting Standard (AS) 1 Disclosure of Accounting Policies / paragraph 25 of Ind AS 1. This requires significant judgement by the management, as no statement about the future can be guaranteed. Auditor to check whether Going concern basis of accounting in the preparation of the financial statements is determined to be appropriate and whether there is any material uncertainty related to going concern. (Refer SA 570 (Revised), Going Concern and SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report). Key Audit Matters (KAM): The impact of COVID-19 on specific areas of the financial statements needs to be evaluated for the purpose of reporting KAM. Language of KAM should bring out clearly the complexities arising from COVID-19 and the matter should be considered for inclusion as KAM only when the auditor has concluded that it does not warrant modification of the auditor’s opinion and also does not indicate a material uncertainty related to Going concern. Further, EOM is not a substitute for KAM. (Refer SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report). Conclusion Companies across the sectors will agree that digital transformation is integral to building fit-for-future organisations and driving key aspects of business growth. The management should evaluate financial reporting requirements, revisit key assumptions in financial projections and communicate current and potential future impacts to shareholders. It is imperative for businesses to evaluate the impact of COVID-19 on economy and industry as a whole and not on the business in isolation, as the situation is extremely dynamic and continuously evolving. The uncertainty arising from the current environment may increase the challenge in obtaining the sufficient appropriate audit evidence needed to form an independent view about the reasonableness of the management’s estimates and judgments. Across industries, challenges may be faced on account of various restrictions arising out of lock down or otherwise to perform audit procedures to observe physical inventory, accessing client records, understanding and testing internal control, confirming accounts balances and performing subsequent event procedures. The auditor will need to ensure compliance with the Standards on Auditing and report accordingly.

Accounting Standards • Corporate Law ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 64–69 (312–317) Companies Act 2013 • MCA Amendments Schedule III– Challenges and Opportunities RM CA. Raj Mullick Member of the Institute • eboard@icai.in “Schedule III to the Companies Act 2013, provides guidance with respect to preparation and presentation of Financial Statements (i.e., balance sheet, statement of profit and loss, statement of changes in equity, cash flow statement and notes) of a company. Earlier, the Schedule III was revised or amended on April 6, 2016 to include general instructions on preparation of financial statements of a company, whose financial statements have to comply with Indian Accounting Standards (Ind AS). Read on…” 1 Overview of Schedule III Architecture & The March 2021 Amendments The applicability of Schedule III to the Companies Act, 2013 is structured across three distinct segments: Division I: AS Compliant Companies Applicable to companies whose financial statements are drawn up in compliance with the Companies (Accounting Standards) Rules, 2006. Division II: Ind AS Compliant Companies Applicable to companies whose financial statements are drawn up in compliance with the Companies (Indian Accounting Standards) Rules, 2015. Division III: Ind AS Compliant NBFCs Applicable to Non-Banking Financial Companies (NBFCs) whose financial statements are drawn up in compliance with Ind AS Rules, 2015. On March 24, 2021, the Ministry of Corporate Affairs (MCA) amended the requirements of Schedule III with the overarching objective of enhancing existing disclosure requirements, bridging informational gaps, and establishing stringent transparency. While amendments span all three divisions, this analysis focuses primarily on key developments in Division II (Ind AS), systematically classified into: (A) Disclosures on the Face of the Balance Sheet; (B) Disclosures in Alignment with CARO 2020 Requirements (“Integrated Approach”); and (C) Other Extensive New Disclosures in Notes to Financial Statements. 2 A. Disclosures on the Face of the Balance Sheet Three pivotal presentation modifications have been mandated directly on the face of the Balance Sheet. Notably, no amendments affect disclosures on the face of the Statement of Profit and Loss. 1. Current Maturities of Long-Term Borrowings Prior to Amendments: Disclosed as a line item under ‘Other Financial Liabilities’. Post Amendments: Mandatorily regrouped and presented as part of ‘Current Borrowings’ under Current Liabilities. 2. Security Deposits Regrouping Prior to Amendments: Grouped under ‘Loans’ in non-current/current assets. Post Amendments: Required to be presented under ‘Other Financial Assets’, both current and non-current. 3. Lease Liabilities Presentation Prior to Amendments: Subsumed within ‘Other Financial Liabilities’. Post Amendments: Disclosed separately on the face of the Balance Sheet under ‘Financial Liabilities’, both under Current and Non-Current Liabilities. 3 B. The “Integrated Approach” – Alignment with CARO 2020 A defining breakthrough of the revised Schedule III is its “Integrated Approach”, establishing complete structural harmony between financial statement disclosures by preparers and statutory auditor reporting obligations under the Companies (Auditor’s Report) Order, 2020 (CARO 2020): Disclosures in Notes to Financial Statements Relevant Clauses in CARO 2020 Title Deeds of Immovable Property: Details of immovable property (other than properties where Company is lessee and lease agreements are duly executed in favour of lessee) where title deeds are not held in the name of the Company, in a specified tabular format. Reporting on Property, Plant & Equipment [Clause 3(i)(c)] Fair Valuation of Investment Property: Disclosure whether fair valuation is based on valuation by a registered valuer as defined under Rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017. Reporting on Property, Plant & Equipment [Clause 3(i)(c)] Revaluation by Registered Valuer: Where revaluation of PPE or intangible assets is carried out, disclosure whether based on valuation by registered valuer under Rule 2 of Registered Valuers Rules, 2017. Reporting on Property, Plant & Equipment [Clause 3(i)(c)] 10% Revaluation Variance Reconciliation: Separate disclosure in reconciliation of gross and net carrying amounts if revaluation amount exceeds 10% of net carrying amount of such class of asset. Reporting on Property, Plant & Equipment [Clause 3(i)(d)] Loans to Promoters, Directors & KMPs: Disclosure if loans or advances in the nature of loans are repayable on demand or given without specifying any term or period of repayment, in a specified tabular format. Reporting on Loans Given [Clause 3(iii) and 3(iv)] Layers of Companies: Non-compliance with number of investment layers prescribed under Section 2(87) read with Companies (Restriction on number of Layers) Rules, 2017, disclosing name, CIN, and holding extent of downstream companies beyond specified layers. Reporting on Investments & Loans [Clause 3(iv)] Undisclosed Income in Tax Assessments: Disclosure of previously unrecorded income surrendered or disclosed during Income Tax or other tax assessments, confirming whether recorded properly in books. Reporting on Unrecorded Transactions [Clause 3(viii)] Willful Defaulter Declaration: Disclosure if declared a “willful defaulter” by any bank, financial institution, or lender, including date of declaration and details of defaults. Reporting on Repayment of Loans [Clause 3(ix)(b)] Intermediary Fund Routing (Ultimate Beneficiaries): Disclosures where funds are lent/invested via intermediaries to ultimate beneficiaries (or received for funding others), with full details of fund transactions and compliance with FEMA and PMLA. Reporting on Utilization of Borrowings [Clause 3(ix)(c)] Benami Property Proceedings: Disclosures where proceedings initiated or pending against the Company under Benami Transactions (Prohibition) Act, 1988, including property details, amount, beneficiaries, and company view. Reporting on PPE & Benami Assets [Clause 3(i)(e)] Diversion of Borrowed Funds: Where funds borrowed from banks and FIs were not used for the specific purpose for which they were raised, disclosing where funds were actually deployed. Reporting on Borrowing Utilization [Clause 3(ix)(c)] CSR Expenditure Shortfall: Full details of CSR shortfall for current year and cumulative shortfall amount along with specific reasons thereof. Reporting on Corporate Social Responsibility [Clause 3(xx)] 4 C. Other Comprehensive Disclosures in Notes to Accounts 1. Promoter Shareholding Disclosure Mandatory disclosure of shareholding patterns of promoters at the end of the financial year: Sr. No. Promoter Name No. of Shares % of Total Shares % Change during the FY 1. Promoter / Promoter Group Entity [Number] [% Holding] [% Variance] Note: For listed entities, Regulation 31 of SEBI (LODR) Regulations, 2015 previously mandated website disclosure; now explicitly integrated into audited Notes to Accounts. 2. Trade Payables Ageing Schedule Introduced for the first time in Notes to Financial Statements – reporting by exception for overdue cases (including where no due date is specified): Particulars Outstanding for following periods from due date of payment < 1 year 1–2 years 2–3 years > 3 years Total (i) MSME (ii) Others (iii) Disputed Dues – MSME (iv) Disputed Dues – Others 3. Trade Receivables Ageing Schedule Overdue trade debtors ageing analysis across 6 distinct risk and credit categories: Particulars Outstanding from due date of payment < 6 mos 6 mos – 1 yr 1–2 yrs 2–3 yrs > 3 yrs Total (i) Undisputed – considered good (ii) Undisputed – significant increase in credit risk (iii) Undisputed – credit impaired (iv) Disputed – considered good (v) Disputed – significant increase in credit risk (vi) Disputed – credit impaired 4. Current Assets Statements vs. Books of Accounts (Bank Borrowings) Companies are required to disclose whether periodic statements (stock statements, book debt statements, etc.) filed with banks and financial institutions for borrowing facilities are in agreement with the books of accounts. Where material discrepancies exist, a full reconciliation and description of material discrepancies must be disclosed in the Notes. 5. CWIP & Intangible Assets Under Development (IAUD) Disclosures Mandatory dual-level disclosure for Capital Work-in-Progress (CWIP) and Intangible Assets Under Development (IAUD): CWIP / IAUD Amount in CWIP for a period of Total < 1 year 1–2 years 2–3 years > 3 years Projects in progress Projects temporarily suspended Additionally, for projects whose completion is overdue or has exceeded its cost compared to its original plan, completion timelines must be disclosed across < 1 year, 1–2 years, 2–3 years, and > 3 years. 6. Accounting for Schemes of Arrangements The Company shall disclose that the effect of any Scheme of Arrangements approved by the National Company Law Tribunal (NCLT) has been accounted for in the books of accounts ‘in accordance with the Scheme’ and ‘in accordance with accounting standards’, with explicit explanation of any deviations. 7. Mandatory Disclosure of 11 Financial Ratios & 25% Variance Rule Schedule III mandates disclosure of eleven standard ratios along with formula elements (numerators and denominators): 1. Current Ratio 2. Debt Service Coverage Ratio 3. Inventory Turnover Ratio 4. Trade Payables Turnover Ratio 5. Net Profit Ratio 6. Debt-Equity Ratio 7. Return on Equity (ROE) 8. Trade Receivables Turnover 9. Net Capital Turnover Ratio 10. Return on Capital Employed 11. Return on Investment (ROI) The 25% Variance Rule: In case there is more than 25% change in any ratio compared to the preceding financial year, an additional narrative explanation specifying the operational or structural reasons must be disclosed. 8. Transactions with Struck-Off Companies Where a company transacted with companies struck off by the ROC under Section 248 of the Act, detailed disclosures are required: Name of Struck off Company Nature of Transactions (Investments / Receivables / Payables / Shares / Others) Balance Outstanding Relationship with Struck-off Company [Entity Name] Investments in securities / Payables / Receivables [Amount] [Holding / Subsidiary / Associate / Third Party] 9. Charges Pending Registration with ROC: Disclosure of any charge or satisfaction of charge pending registration with ROC beyond statutory time limits, with specific reasons. 10. Prior Period Errors in SOCIE: Format of Statement of Changes in Equity amended to incorporate a mandatory column for restatement due to prior period errors in share capital reconciliation. 11. Crypto / Virtual Currency Disclosures: Disclosing profit/loss on crypto transactions, currency balances held at reporting date, and customer deposits/advances taken for crypto trading. 5 Key Takeaways & Strategic Implications for Preparers & Auditors Corporate Failures as Catalyst: The revised Schedule III was largely triggered by prominent corporate defaults and governance collapses in recent years, prompting the regulator to enforce airtight financial reporting. Escalating Disclosure Trajectory: Reporting mandates have expanded significantly and this trajectory will continue upward in future iterations. Unprecedented Auditor Responsibility: With Schedule III and CARO 2020 operating synchronously, auditors and corporate preparers must deploy advanced IT tools and analytics to verify vast ledgers (e.g., struck-off company cross-referencing and project ageing). Double-Edged Sword: While presenting substantial compliance challenges for corporates and auditors, the enhanced disclosures represent a historic opportunity for investors, lenders, and rating agencies to conduct profound forensic evaluation of financial health. About the Author CA. Raj Mullick Member, The Institute of Chartered Accountants of India (ICAI) Email: eboard@icai.in

Laws • Commercial Contracts & COVID Jurisprudence Contracts Enforceability and COVID-19- A Review of Extant Legal Opinion Journal: The Chartered Accountant, September 2021 (Vol. 70, No. 3) • Pages: 70–75 (Journal pp. 318–323) PV Dr. (CS) Parimala Veluvali The author is Assistant Professor, SCMS, Pune, Symbiosis International University. She can be reached at veluvaliparimala@gmail.com and eboard@icai.in. “One of the essential features of a contract is its enforceability. Failure of a party to live up to their contractual obligations, amounts to a breach and would invite the natural consequences of such a breach. However, the performance of a contract may at times be hampered by supervening impossibility that is beyond the control of the parties. Law provides relief in such cases where the contract is unfulfilled for unforeseen or unanticipated reasons that are external to the contract. For more than a year, the global economy is witnessing unprecedented crises affecting lives and livelihoods due to the COVID-19 pandemic. Issues relating to enforceability of contracts and remedies under law have been the most visited provisions since the pandemic. Drawing from existing works and recent case judgements in India, this paper studies the jurisprudence that has evolved from the COVID induced litigation. Read on…” Background Consenting parties enter into contracts to bring definiteness and certainty into their business transactions. One of the essential features of a contract is its enforceability and the courts will seek to enforce the terms of the contract in a suit for its performance. Failure of a party to live up to their contractual obligations amounts to a breach and it would invite the consequences of such breach. Performance of a contract is a smooth way of extinguishing mutual obligations arising from the contract. However, it is common knowledge that the performance of a contract may at times be hampered by supervening impossibility that is beyond the control the parties. Sec 56 of the Indian Contract Act, 1872 states that when the performance of the contract is impossible, such contracts need not be performed. Law provides relief in such cases where the contract is frustrated for reasons that are external to the contract, either unforeseen or unanticipated. The relief under the ‘doctrine of frustration’ is invoked when the essence or purpose of the agreement is frustrated or rendered impossible or even illegal to perform. Under such eventualities that upset the very foundation of the contract, the contract is discharged and the party is excused from non-performance. Uncertainty is an integral part of life and is mostly factored by the parties while signing contracts. The Contract Act, 1872 provides for contingent contracts under section 32, where a contract may be contingent upon the happening or non-happening of an uncertain event. Parties to contingent contract make provision for anticipated uncertainties and such contracts come to their natural ending when the said contingency strikes. Parties may protect themselves from the incidence of breach by explicit inclusion of a clause to that effect, absolving themselves from performance. This clause termed as ‘Force majeure Clause’ is incorporated in contracts to cater to events which are unanticipated or uncontrollable. While the Indian contract Act 1872 does not make a specific mention of the term ‘Force majeure’, it is defined as an event that can neither be anticipated nor controlled (The Black’s Law Dictionary, 2019). Since 2020, the global economy is witnessing unprecedented crises affecting lives and livelihoods due to the COVID-19 pandemic. The Indian government has classified COVID-19 as a disaster under the Disaster Management Act, 2005 to make way for uniform lockdown regulations all over the country to spread the control of the pandemic (Chauhan Chetan, 2020). Owning to disruptions in the production, manufacture, distribution, delivery of goods and services, a bulk of business transactions are being suspended, delayed or terminated, with parties defaulting in adhering to the contract terms. This large-scale disruption that hampered business continuity has also compelled businesses to relook into their contracts, to assess the impact of the pandemic on their dealings. There has also been a renewed interest in academia regarding issues of enforceability of contracts and the remedies available under the statutes. Sections 32 and 56 of the Indian Contract Act, 1872 have been the most visited provisions in this context. Recent works have studied the concepts of force majeure and the doctrine of frustration. Drawing from these existing works and recent case judgements, this paper studies the jurisprudence that has evolved from COVID induced litigation. The nature of the study is doctrinal, analysis of legal propositions and extant case laws being the primary source of information for the study. Doctrine of Frustration Doctrine of frustration could be invoked when, subsequent to the contract, the performance has been rendered impossible, illegal or impractical. Fundamentally, all contracts need to be performed. Non-performance of a contract amounts to breach and will invite legal action. Under the common law underpinnings, the enforceability of contracts was stringent and absolute. The possibility of non-performance of the contract due to supervening events rendering it impossible to perform was first acknowledged in the case of Taylor v. Caldwell (1863). As a departure from the extant doctrine of absolute obligations, the doctrine of frustration that emerged from the case of Taylor v. Caldwell (1863), enabled parties to seek refuge from the consequences of non-performance, if their case so merits. Doctrine of frustration could be invoked when, subsequent to the contract, the performance has been rendered impossible, illegal or impractical (Sen, G. 1972). A fit case under this doctrine is one when, the contract is frustrated by occurrence of a events or a change in the circumstances subsequent to formation of the contract as has been reiterated in the case of Krell v. Henry (1903). The essence of the contract is lost in such cases. Courts have also held that mere difficulty in performance cannot be pleaded as an excuse and the change in the circumstances owing to the subsequent eventuality, must bring about a radical or fundamental change in the circumstances shaking the premise on which the contract rests, as held in Davis Contractors v. Fareham (1956). The maxim “Non haec in foedera veni” which means “This was not what I promised to do” explains the parties’ inability to perform the contract owing to changed circumstances rendering the contract radically different from what has been undertaken by the contract. The rationale behind doctrine of frustration was applied to cases involving ‘destruction of subject matter’, failure of the implied condition in the contract and in cases where it was just and equitable to excuse the performance. It applied to cases where the parties did not contemplate such eventualities and have not expressly addressed them in their contracts. Studies (M. P et al, 2020) explain that the evolution of such theories was the result of the courts’ endeavour to take a realistic stance in such cases. Section 56 of the Indian Contract Act, 1872, states—when the performance of the contract becomes impossible, it need not be performed. Studies explain that the decisive wording and the express provision of section 56 under the Act have made it easier for courts to apply this in cases involving supervening impossibility. The doctrine of frustration comes under the ambit of section 56. In the landmark case of Satyabrata Ghose v. Mugneeram Bangur and Co. (1954), it was held that, for section 56 to apply, the subsequent event must render the performance of the contract impossible. Impossibility can be physical or legal. Events that render the contract impracticable or upset the foundations of the contract are also considered impossible to perform under Section 56. Section 56 would apply in cases when the performance of an existing contract has been interrupted by an event that has occurred subsequently frustrating the contract. This is a natural outcome of the event which is involuntary. As has been held in the case of Satyabrata Ghose v. Mugneeram Bangur and Co. (1954), for application of section 56, a substantial portion of the contract must be impacted, changing its basic premise. Cases where the performance is rendered burdensome or commercially impossible in view of additional costs or inconvenience do not merit consideration under this doctrine as has been held in the case of Tsakiroglou & Co. Ltd v. Nablee Thorl Gmbl (1962). The construction of the contract is primarily looked at by the courts before deciding whether the contract is frustrated or not. Contracts that provide for subsequent eventualities as an express clause in the contract also called ‘Force majeure’ are decided as per the terms of the contract. Section 56 would apply when there is no such express provision in the contract. Section 56 is invoked when the subject matter of the contract is destroyed or the performance has become illegal or the purpose for which the contract has been entered is lost. However, when the risk is inherent in the contract, then it is self-induced and held to be in contemplation of the parties. Therefore, it does not merit consideration under section 56 as has been held in the case of Maritime National Fish Limited v. Ocean Trawlers Ltd (1935). Impossibility of performance cannot be used as a defence in all cases. If the party knew of the facts that made the performance impossible when the contract is executed, or assumed, the risk of impossibility or could have acted to prevent its occurrence, the defence would not hold well. Force Majeure Clause in Contracts “The construction of the contract is primarily looked at by the courts before deciding whether the contract is frustrated or not. Contracts that provide for subsequent eventualities as an express clause in the contract also called ‘Force majeure’ are decided as per the terms of the contract.” A contract emerges out of consensus after a careful consideration of all the terms and conditions by the parties. It is common practice for parties to define the limits of their obligations and absolve themselves from performance, in view of external unforeseen events beyond their control. A force majeure clause is incorporated in contracts catering to unforeseen events such as war, epidemics or natural disasters also termed as ‘acts of god’. Force majeure, a French term that means “Superior force” covers unusual or extra ordinary events that may unexpectedly occur. Force majeure clauses are inserted in the contract to provide for externalities that are unforeseeable or uncontrollable by the parties. While the occurrence of the force majeure event may not completely release the parties of all liabilities arising from the contract, they offer relief from absolute adherence to the terms of the contract. Force majeure clauses may be exhaustive or inclusive (Batas and Shah, 2020). The exhaustive clauses expressly spell out specific events which will excuse the performance of the contract. The language of the inclusive clauses is broad and is intended to cover any circumstances that are beyond reasonable control of the parties. Studies (International Bar Association, 2020) explain that parties that have gone ahead with an inclusive approach may stand a strong chance of accommodating COVID-19 as a Force Majeure event. Section 32 (Contingent Contracts) vs. Section 56 (Frustration of Contract) Force majeure clause in contract is covered under section 32 of the Contract Act dealing with contingent contracts, the performance of which is dependent on the happening or non-happening of an event. Section 32 states that “Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void”. On the face of it, while section 32 and section 56 both appear to be similar, the difference lies in the conditions when they can be invoked: Section 32: Invoked when the said contingency occurs and would be decided strictly as per the terms of the contract. Section 56: Comes into play when the contract becomes impossible to perform and relies on the positive rule laid out by the law for want of an express or implied provision in the contract to that effect. In the Satyabrata Ghose v. Mugneeram Bangur case, the Supreme Court cleared the difference between the two, stating that a case under section 56 will hold good only when a force majeure is not inserted in the contract. For section 56 to apply, the nature of the contact must be executory. Essential Requirements for a Successful Force Majeure Claim: Due Notice: An essential requirement of the force majeure is to give due notice to the other party regarding the circumstances that have rendered the contract impossible to perform. Burden of Proof: The burden lies with the party seeking to be relieved from performance, to establish that the excluded event actually prevented it from performing its obligations under the contract. No Alternate Modes of Performance: For a claim to be successful under force majeure, there ought to be no alternate ways of performance of the contract. Relief under force majeure can be sought as a matter of last resort after exhausting all the means of performance. Energy Watchdog v. Central Electricity Regulatory Commissions & Ors (2017) In this case, the petitioner invoked force majeure on account of increase in coal prices. The plea was dismissed by apex court stating that price increase did not render the contract unforeseeable, only commercially difficult. Force majeure cannot be invoked when alternate means of performance are available and the initial premise of the contract is intact subsequent to the event. The Contract Act, 1872 explicitly states under section 56, that commercial impossibility is not an excuse for non-performance. National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A (2020) The apex court clarified on the scope of applicability of section 56 and section 32 of the Indian Contract Act, 1872. It observed that: “If a contract contains impliedly or expressly stipulation according to which it would stand discharged on happening of particular circumstances. The dissolution of the agreement would take place under the terms of the contract itself. Such cases would be outside the purview of section 56 of the Indian Contract Act altogether. They would be dealt with under section 32 of the Contract Act, which deals with contingent contracts.” Analysis of Case Judgements The question whether COVID-19 is a fit case of force majeure or not has been the most debated issue since the pandemic. Reports state that the earliest mention of COVID-19 as a case of force majeure in India, was the Office Memorandum issued by Ministry of Finance, Government of India that recognised ‘the pandemic’ as a force majeure event in relation to a procurement of goods manual (Bandyopadhyay and Ray, 2021) and subsequently granted certain reliefs and extension of time in that regards. Government departments and market regulators including RBI and SEBI also provided relief measures in view of the large scale disruption caused due to the pandemic. While these initiatives have set the ground, the judicial decisions by the courts helped to develop the jurisprudence on the issue. Case / Forum Key Legal Pronouncement & Judicial Principle Standard Retail Pvt Ltd. v. Global Corp (2020) Bombay High Court The earliest legal stand on the pandemic. The court held that the lockdown caused due to the pandemic could be treated as a case of Force Majeure only if one could establish a direct nexus between the occurrence of the event and the non-performance of the contract. While dismissing to treat the case under Force Majeure, the court examined the nature of the contract in question which involved delivery of an essential service. Movement of essential services not being restricted during the pandemic, the court held that the contract was not substantially impacted by the lockdown. South Delhi Municipal Corporation v. MEP Infrastructure Developers Ltd. (2020) Delhi High Court The Delhi High Court granted relief with respect to toll collection from the contractor to SDMC, until such time that 90% traffic stands resumed, thereby acknowledging the effect of the pandemic on business functioning. Indrajit Power Pvt. Ltd. v. Union of India (2020) Delhi High Court The court held that despite an extension of 12 months granted to the petitioner, it was unable to fulfil the contractual obligations and therefore cannot seek refuge under force majeure. The pandemic cannot be used as a shield to cover up for the pre-existing negligence of the defaulting party. Halliburton Offshore Services Ltd v. Vedanta Ltd (2020) Delhi High Court The court held that breach of any contract has to be examined on the basis of the facts and circumstances of the case. A mere inclusion of the force majeure clause in the contract does not automatically guarantee relief from performing the contract. Past non-performance of the party cannot be condoned due to the COVID pandemic. Force majeure has to be interpreted narrowly and not liberally. The court did not intervene in the invocation of a bank guarantee in response to non-performance of the contract, thereby maintaining the sanctity of a contract. Ramanand and others v. Dr Girish Soni and others Delhi High Court (Commercial Leases) The economic consequences of the COVID-19 pandemic have been felt across sectors. With the slowdown in the business, retail outlets and commercial establishments faced the challenge of paying rent under commercial lease agreements albeit loss of earnings. The question whether tenants could seek a waiver or exemption from rent was clarified by the Delhi High Court: “In contracts where there is a profit-sharing arrangement or an arrangement for monthly payment on the basis of sales turnover, the tenant/lessee may be entitled to seek waiver/suspension, strictly in terms of the clause. Such cases would be purely governed by the terms of the contract itself, and the tenant’s claim could be that there were no sales and no profits and thus the monthly payment is not liable to be made. Thus, the entitlement of the client in such a situation is not governed by any overriding force majeure event but by the consequence of the said event, being that there were no sales or profits.” The terms of the lease contract are the determining factors to decide on the admissibility of the pandemic as a force majeure event. Conclusion The applicability of COVID-19 as a force majeure event is dependent on the terms of the contract, with the specific language of the contract being the single most important factor. If expressly provided in the exclusion clause of the contract, the plea for relief has been considered by the courts favourably. Contractual breaches that have occurred prior to the COVID-19 pandemic have not been condoned by the courts. While COVID-19 has disrupted the normal course of business functioning, sheer difficulty in the performance of the contract or additional burden in terms of increased costs owing to the pandemic situation do not merit invocation of force majeure or relief under section 56. The disruption to the contract ought to be the direct result of the pandemic situation. In other words, disruptions to the contracts which cannot be directly and substantial attributed to the pandemic do not merit consideration section 56 and section 32. The parties need to establish that, but for the supervening event, they would have performed the contract. The impossibility to perform must be not self-induced or attributed to any negligence of the party. Duty to mitigate losses ought to have been taken. Courts have also considered the degree of hardship imposed on a party due to the pandemic. An analysis of case judgements arising from the COVID-19 induced litigation reveals that relief under the doctrine of frustration is provided after due consideration of the terms of the contract, the past behaviour of the parties, the construct of the contract, and as a matter of last resort. The courts have applied this in a narrow sense, thus reinforcing the absolute obligations the contract imposes. References Ambica Batas and Meet Shah (2020), ‘The Effect of Outbreak of COVID-19 on Force Majeure Clause in Commercial Contracts: An Indian Perspective’ International Journal of Law Management & Humanities, Vol. 3, Issue 2, pp. 490–497. Chauhan Chetan (2020 March 26th), ‘India under Covid-19 lockdown: All about the disaster management law’, Hindustan Times. https://www.hindustantimes.com/india-news/india-under-covid-19-lockdown-all-about-the-disaster-management-law/story-i7cjfZrUZcbOxamlEOAoPO.html (last accessed 11.05.2021). M. P., Ram Mohan and Murugavelu, Promode and Ray, Gaurav and Parakh, Kritika, The Doctrine of Frustration Under Section 56 of the Indian Contract Act (January 1, 2020). Indian Law Review (DOI: 10.1080/24730580.2019.1709774); IIMA W. P. No. 2020-10-01. Satyabrata Ghose v. Mugneeram Bangur and Co, AIR 1954 SC 44 [14]. Sen, G. (1972). Doctrine of Frustration in The Law of Contract. Journal of the Indian Law Institute, pp. 132–177. Retrieved May 11, 2021, from http://www.jstor.org/stable/43950178.

Insolvency • IBC 2016 ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 76–82 (324–330) Chapter III A • MSME Pre-Pack Framework Pre-Packaged Insolvency Resolution Process For MSMEs RM CA. Reshma Mittal Member of the Institute • careshmamittal@gmail.com • eboard@icai.in “The Micro, Small and Medium Enterprises (MSMEs) are susceptible to distress and failures on account of variety of factors such of undiversified business portfolio, supply chain issues, overdependence on key markets and limited availability of fresh credit. Pre-Packaged insolvency resolution process is a hybrid framework that empowers stakeholders to resolve the stress in MSMEs. It is quick and discreet way of completing the insolvency resolution process with a blend of formal and informal framework. In the process promoters remain in possession of assets and the business is run by them, however creditors decide commercial matters. Read on…” 1 Introduction & Conceptual Foundation of Pre-Packs Pre-Packaged insolvency resolution process (PPIRP) or Pre-pack, as known globally, has emerged as an innovative method to revive stressed enterprises that blends the benefits of both informal (out-of-court) and formal (judicial) insolvency processes. It is a quick and economical method to resolve distress before enterprise value deteriorates. Business continues as a going concern by existing promoters, avoiding business disruption unlike other insolvency resolution processes. The process is initiated with an informal understanding between promoters and stakeholders and concludes with judicial blessing. Many countries, including the United Kingdom (UK) and the United States of America (USA), permit pre-packaged insolvencies. According to a UK report, “majority of pre-packs in the U.K. have been successful in preserving jobs”. Research in the USA credits pre-packs for reducing the time taken by courts and confirming a reorganization plan to half. Pre-Packaged Insolvency Resolution Process in India works within the basic structure of the Insolvency and Bankruptcy Code, 2016. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated on 4th April, 2021, subsequently enacted as The Insolvency and Bankruptcy Code (Amendment) Act, 2021, deemed to have come into force retrospectively on 4th April, 2021. This statutory framework alleviates the severe distress faced by MSMEs due to the COVID-19 pandemic and formally recognizes their foundational economic contribution. 2 Global Comparative Landscape: UK & USA Regimes vs. Indian Architecture Pre-packaged insolvency finds its roots in the United States and the United Kingdom. Substantive laws in the UK are contained in the Insolvency Act, 1986, and in the US under Chapter 11 and Section 363 of the US Bankruptcy Code: United Kingdom Model Provides three formal rescue routes: Administrative Receivership, Company Voluntary Agreements (CVAs), and Administration under Schedule B1 of the Insolvency Act 1986. Crucially, in the UK, pre-packs can be executed without prior unsecured creditors’ approval, rendering them vulnerable. United States Model Implemented via two routes: a formal pre-packaged plan under Chapter 11 (requiring creditor approval) and an expedited asset sale under Section 363 of the Bankruptcy Code (which does not require full creditor voting). Wolverhampton University Review – International Criticisms A seminal review from Wolverhampton University highlighted recurring concerns: “There is a general concern that the pre-pack administrator favours the interests of the management and secured creditors ahead of those of the unsecured creditors. The speed and secrecy of the transaction often lead to a deal being executed, about which the unsecured creditors know nothing and offers them little or no return. There is often a suspicion that the consideration paid for the business may not have been maximized due to the absence of open marketing.” The Indian framework directly addresses these defects by mandating creditor consent and a transparent Swiss challenge mechanism. 3 Statutory Amendments in IBC, 2016 & New MSME Definition The 2021 amendment inserted a complete dedicated chapter – Chapter III A (Pre-Packaged Insolvency Resolution Process) comprising sixteen sections (Sections 54A to 54P) under Part II of the IBC. Three complementary sections were also enacted: Section 11A in Chapter II (CIRP): Prescribes rules of priority when simultaneous applications for CIRP (Section 7, 9, 10) and PPIRP (Section 54C) are pending before the Adjudicating Authority. Section 67A in Chapter VI: Penalizes fraudulent management or disposal of property of the Corporate Debtor during PPIRP. Section 77A in Chapter VII: Imposes stringent penal consequences for contravention of provisions of Chapter III A. Revised Composite MSME Classification (May 13, 2020 Atmanirbhar Package) Revised after 14 years, the composite formula eliminates the distinction between manufacturing and services sectors: Classification of Enterprise Investment in Plant & Machinery or Equipment Turnover Threshold Micro Enterprises Not exceeding INR 1 Crore Not exceeding INR 5 Crore Small Enterprises Not exceeding INR 10 Crore Not exceeding INR 50 Crore Medium Enterprises Not exceeding INR 50 Crore Not exceeding INR 250 Crore • Investment Calculation: Depreciated cost as reported in previous year ITR; invoice value of plant & machinery excluding GST. • Turnover Calculation: Exports of goods and/or services are strictly excluded from total turnover. 4 Comprehensive Comparative Analysis: CIRP vs. PPIRP Parameter Corporate Insolvency Resolution Process (CIRP) Pre-Packaged Insolvency Resolution Process (PPIRP) Initiation by Financial Creditor, Operational Creditor, or Corporate Debtor Corporate Debtor only, with prior consent of 66% of unrelated FCs Default Threshold Default above INR 1 Crore Minimum Default of INR 10 Lakh Appointment of IP IRP proposed by applicant, thereafter CoC approves RP RP approved upfront with consent of 66% unrelated FCs Role of IP & AA Relatively More intrusive Relatively Less intrusive (Facilitator role) Claim Collation IRP invites and collates claims CD invites and prepares claim list; RP confirms from records Moratorium Yes (Covers essential goods/services) Yes (Does NOT cover essential goods/services; excludes PG) Management of CD Creditor-in-Possession: IRP/RP displaces management Debtor-in-Possession: Board/Partners run operations under CoC control Valuation of Assets 2 Valuers + 3rd Valuer if variance exceeds 25% 2 Registered Valuers (No concept of 3rd valuer) Avoidance Review Yes (PUFE transactions) Yes (T+30 opinion, T+45 determination, T+60 filing) Information Memo Prepared exclusively by RP Draft prepared by CD, finalized by RP within 14 days Plan Approval With 66% of CoC voting share With 66% of CoC voting share (Swiss Challenge mechanism) Clean Slate & Benefits All regulatory immunities & Clean Slate available All regulatory immunities & Clean Slate available Statutory Timeline 180 days (+ 90 extension, max 330 days) Strict 120 days (90 days for CoC + 30 days for AA; NO extension) 5 Pre-Requisites, Eligibility & Pre-Initiation Protocol Mandatory Pre-requisites Checklist [Section 54A] • Valid MSME Udyam Registration • Minimum default of INR 10 Lakh • Special Resolution of shareholders (or 3/4th partners) • Form P6 Declaration by majority directors/partners • Consent of 66% unrelated FCs (Form P3 & P4) • Section 29A Eligibility Affidavit for Base Plan • Not undergoing CIRP / No Liquidation order • 3-Year Cooling Period: No prior CIRP/PPIRP in past 3 years No Parallel Proceedings Rule: Ongoing CIRP strictly bars PPIRP; ongoing PPIRP strictly bars CIRP. Filing of Application – Form 1 & Key Statutory Annexures Filed in Form 1 electronically along with fee of INR 15,000. A copy must be submitted to the Insolvency & Bankruptcy Board of India (IBBI) prior to filing with NCLT: Information Utility (IU) default record or financial debt evidence; demand notice/invoices for operational debt. Form P1: Written consent of proposed Resolution Professional. Form P2: 5 days advance meeting notice to creditors with list of creditors. Form P3: Creditors’ approval (66% unrelated FCs) for terms of appointment of proposed RP. Form P4: Approval of creditors (66% unrelated FCs) for initiating PPIRP. Form P5: Consent of Authorized Representative (AR) for creditor classes. Form P6: Declaration by majority directors/partners (solvency, non-fraud, timing). Form P7: Declaration from directors/partners regarding existence of avoidance transactions (PUFE). Form P8: Comprehensive report by proposed RP confirming eligibility criteria. Audited financial statements for last 2 FYs; provisional financials not older than 14 days. Statement of Affairs not older than 14 days (assets/liabilities, claim details, security creation, related party guarantees, shareholding patterns). 6 The 120-Day Statutory Lifecycle & Swiss Challenge Mechanism Chronological Timeline Milestones (T = Commencement Date) T Date: AA admission order; Moratorium begins T+2 Days: PIM, Claims list & BRP; Public Announcement (Form P9) T+3 Days: Appointment of 2 Registered Valuers T+7 Days: Constitution of Committee of Creditors (CoC) T+14 Days: 1st CoC Meeting; RP finalizes Information Memo T+21 Days: Invitation of Resolution Plans (Form P11) T+30 Days: RP forms opinion on PUFE transactions T+45 Days: RP determination of avoidance transactions T+60 Days: Avoidance application filed with NCLT T+90 Days: Approved Resolution Plan submitted to AA T+120 Days: Final Order by AA (30-day window for NCLT) The Base Resolution Plan & Swiss Challenge Contest The CD submits its Base Resolution Plan (BRP) within 2 days of commencement. If the BRP does not impair operational claims, CoC may approve it directly. If operational claims are impaired or CoC requires optimization: RP issues invitation for prospective resolution plans in Form P11 complying with Section 30(2). If an alternative plan is significantly better than the BRP (based on tick size criteria decided upfront by CoC), it is designated the Base Alternative Plan. 48-Hour Swiss Challenge Contest: The BRP competes against the Base Alternative Plan. Submitters receive scores and have the option to iteratively improve their plan by at least the prescribed tick size. The continuous bidding concludes within 48 hours. The plan with highest evaluation score is presented to CoC and must be approved by at least 66% voting share. Where claims are not paid in full, CoC may mandate promoters to dilute shareholding or voting rights in the CD. RP submits approved plan with Compliance Certificate in Form P12 to the NCLT. Upon AA approval, the plan is binding on all stakeholders under a Clean Slate. 7 Conclusion & References Much of the preparatory work needs to be done by Insolvency Professionals along with the Corporate Debtor and creditors before submitting a pre-pack application to the Adjudicating Authority. The Corporate Debtor must bring substantial concessions to the table to secure 66% prior approval. Unlike western models where speed often sacrificed unsecured creditors, India’s codified framework safeguards operational creditors while delivering an expedited, cost-effective corporate rescue. Statutory & Academic References: United States Bankruptcy Code (Chapter 11 and Section 363). United Kingdom Insolvency Act 1986 (Schedule B1 Administration). Vanessa Finch & David Milman, Corporate Insolvency Law: Perspectives and Principles. Mark Wellard & Peter Walton, A Comparative Analysis of Anglo-Australian Pre-packs: Can the Means be Made to Justify the Ends? US Courts Bankruptcy Basics (Chapter 11). Ministry of Corporate Affairs – Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process. Bo Xie (2016), Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue, Edward Elgar Publishing. About the Author CA. Reshma Mittal Member, The Institute of Chartered Accountants of India (ICAI) Email: careshmamittal@gmail.com • eboard@icai.in

Taxation • Corporate Taxation & Maritime Law Tonnage Tax Scheme – Chapter XIIG of Income-tax Act, 1961 Journal: The Chartered Accountant, September 2021 (Vol. 70, No. 3) • Pages: 83–88 (Journal pp. 331–336) KM CA. Kishan Rajubhai Mer The author is member of the Institute of Chartered Accountants of India. He can be reached at kishan_mer@outlook.com. “According to the Ministry of Shipping, around 95% of India’s trading by volume and 70% by value is done through maritime transport. India is the 16th largest maritime country in the world with a coastline of about 7,517 kms. India has 12 major and 205 notified minor and intermediate ports. For taxation of shipping profit, Chapter–XIIG was introduced under the Income-tax Act, 1961 which is a self-contained code. It consists of chargeability of tonnage income and methodology for computation of tonnage income. The method of computation of income does not depend on income or expenses of the assessee. Tonnage income is to be computed based on tonnage capacity of ship and the number of days in operation. In case of loss in financials statement of tonnage of the tax company, it must pay tax on its tonnage income as it is presumptive method of computation of taxable income under profits and gains from business and profession. Read on …” Introduction to Tonnage Tax Scheme (TTS) To promote the Indian shipping industry and make it more competitive with the global market, a Tonnage Tax Scheme (“TTS”) for taxation of shipping profits was introduced vide Finance Act (No. 2), 2004 w.e.f 01/04/2005. Chapter XIIG was inserted in the Income-tax Act, 1961 (“the Act”) containing sections 115V to 115VZC which provides for special provisions relating to the taxation of the income of shipping companies. In this article, the author has made attempt to understand major provisions governing TTS under the Act. Registration under TTS (Section 115VP to 115VR) A qualifying company may opt for TTS by applying through Form 65 to the jurisdictional Joint Commissioner within period of 3 months from the date of incorporation or date on which it becomes a qualifying company. The application shall be signed and verified on behalf of the company by the managing director of the company, or where for any unavoidable reason such as the managing director is not able to sign and verify this Form, or where there is no managing director, by any director of the company. While applying, the company shall give, apart from other general details, the details of all ships owned or chartered by it, whether the ship is qualified or not. Further, the company should enclose to the application for registration, in respect of each of the ships’ details of which are being given in application, a copy of the following certificates: Certificate of registration under the Merchant Shipping Act, 1958 and certificate under Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987 made under the Merchant Shipping Act, 1958. Certificate of registration under the Merchant Shipping Act, 1958 and international tonnage certificate issued under the provisions of the Convention on Tonnage Measurement of Ships, 1969 as specified in the Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987 made under the Merchant Shipping Act, 1958. In case of ships registered outside India, permission obtained from the Director-General of Shipping to charter in a ship. Validity Period: An option for TTS, once approved by the Jurisdictional Joint Commissioner, shall remain valid for period of 10 assessment years from the assessment year relevant to previous year in which the option is exercised. Renewal: The company may renew an option to opt for TTS by making an application as discussed above within one year from the end of the previous year in which the option ceases to have effect. Which is a Qualifying Company (Section 115VC)? Only a qualifying company may opt for TTS. A company is a qualifying company if: It is an Indian Company; Place of effective management of company is in India; It owns at least one qualifying ship; and Main objective of the company is to carry on the business of operating ships. “Place of effective management” means: (A) The place where board of directors or executive directors make their decisions; or (B) Where board routinely approves decisions made by executive directors/officers, the place where such executive directors or officers perform their functions. What is Qualifying Ship (Section 115VD)? To be a qualifying company, it must own at least one qualifying ship. A ship is a qualifying ship if: It is a sea-going ship with 15 Net tonnage or more; It is a ship registered under Merchant Shipping Act, 1958 or a ship registered outside India licensed by DG of Shipping; and Has a valid certificate in respect of such ship indicating its net tonnage is in force. Exclusions from Qualifying Ship: • Ship used for provision of goods/services normally provided on land • Fishing vessels, factory ships, pleasure crafts • Harbour and river ferries, offshore installations • Qualifying ship used as a fishing vessel for > 30 days during previous year. (Note: Dredgers were omitted from exclusions vide Finance Act 2005 w.e.f 01.04.2006, hence dredgers qualify subject to conditions). Operating Ship (Section 115VB) & Charter-in Limits (Section 115VV) A company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it. Hence, where the company has taken ships on charter/lease, whether dry or wet, is covered by the term operating ship. It also includes arrangements such as slot charter, space charter or joint charter. However, it excludes a ship which has been chartered out by the company on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding 3 years. “Bareboat charter”: Hiring of a ship for a stipulated period on terms which gives the charterer possession and control of the ship, including the right to appoint the master and crew. “Bareboat charter-cum-demise”: A bareboat charter where the ownership of the ship is intended to be transferred after a specified period to the company to whom it has been chartered. Limit for Charter-in of Tonnage (Section 115VV) A company which has opted for TTS, shall not charter in more than 49% of the net tonnage of the qualifying ships operated by it during any previous year. It excludes a ship chartered in by the company on bareboat charter-cum-demise terms. Where limit for charter-in of tonnage exceeds 49% in any previous year, then income of such company for that previous year is computed as if TTS does not have effect for that previous year. Where limit exceeds 49% in two consecutive previous years, TTS ceases to have effect from the 3rd year onward. Where TTS ceases to have effect as above, the company is prohibited to opt for TTS for a period of 10 years (Section 115VS). Computation of Profits & Relevant Shipping Income (Sections 115VA & 115VI) Section 115VA overrides sections 28 to 43C. Income from business of operating qualifying ships is computed in accordance with TTS and deemed to be Income chargeable under Profits and gains of Business or profession (“PGBP”). Relevant Shipping Income (Section 115VI) consists of: Profit from core activities: Activities from operating qualifying ship; shipping contracts (pooling arrangements or contract of affreightment); specific shipping trades like on-board passenger services (fares, food & beverages); slot/space/joint charters, feeder services, container box leasing. Profit from incidental activities: Maritime consultancy charges, income from loading/unloading of cargo, ship management fees for managed vessels, and maritime education or recruitment fees. (Turnover of incidental activities should not exceed 25% of turnover of core activities, else excess is taxed under normal provisions). Note: In case the relevant shipping income of a tonnage tax company is a loss, then such loss shall be ignored for the purposes of computing tonnage income. Tonnage Income (Section 115VF) & Computation Slabs (Section 115VG) The tonnage income of the company is the aggregate of tonnage income of each qualifying ship. Tonnage income of each qualifying ship = Daily tonnage income × Number of days in operation during previous year. Qualifying ship having net tonnage (1) Amount of daily tonnage income (2) Up to 1,000 tons ₹ 70 for each 100 tons Exceeding 1,000 but not more than 10,000 tons ₹ 700 plus ₹ 53 for each 100 tons exceeding 1,000 tons Exceeding 10,000 but not more than 25,000 tons ₹ 5,470 plus ₹ 42 for each 100 tons exceeding 10,000 tons Exceeding 25,000 tons ₹ 11,770 plus ₹ 29 for each 100 tons exceeding 25,000 tons Example of Computation of Tonnage Income: Company A, a tonnage tax company, owned qualifying ships details of which are as follows: Name of Ship (A) Net tonnage per cert. (B) Rounded off to ‘100 (C) Daily: up to 1000T (D) Daily: >1000 to <10000T (E) Daily Total (F)=(D)+(E) Days in Op. (G) Tonnage Income (Rs) (H)=(F)×(G) Ship – B 751 800 560 0 560 365 204,400 Ship – C 1749 1700 700 371 1071 180 192,780 Ship – D 3579 3600 700 1378 2078 280 581,840 Total Tonnage Income for previous year: ₹ 979,020 General Exclusion of Deductions (Section 115VL) Deductions under sections 30 to 43B deemed to have been given full effect. No loss shall be allowed to be carried forward or set-off. No deduction allowed under Chapter VIA. Depreciation deemed to have been computed and allowed. Exclusion from MAT (Section 115VO) Book profit or loss derived from activities of a tonnage tax company referred in section 115VI shall be excluded from the book profit of the company for the purposes of section 115JB. For incomes other than TTS income, MAT remains applicable unless opted for section 115BAA. Transfer of Profits to Tonnage Tax Reserve (TTR) Account (Section 115VT) Tonnage tax company shall require to credit to reserve account (“TTR”) an amount not less than 20% of book profits derived from relevant shipping activities for each previous year. TTR created shall be utilized within 8 years for: Acquisition of new ship for the business of the company (cannot be sold/transferred for 3 years, except in demerger). Until acquisition, for the purpose of operating qualifying ships. Prohibited Utilizations: Distribution of dividend/profit; remittance outside India as profit; creation of any assets outside India. Consequences of Non-compliance: If unutilized within 8 years or mis-utilized, proportional relevant shipping income becomes taxable under normal provisions. If credit is < 20%, proportional shortfall is taxable under normal provisions. If TTR is not created for 2 consecutive years, TTS ceases from 3rd year and prohibited for 10 years (Section 115VS). Compliance, Training & Transfer Pricing Jurisprudence Maintenance & Audit of Accounts (Section 115VW) Must maintain separate books of accounts in respect of operating qualifying ships and furnish Audit Report in Form 66 from a Chartered Accountant before the specified date under Section 44AB. Minimum Training Requirement (Section 115VU) Must comply with DG Shipping training guidelines and furnish DG Shipping compliance certificate with return u/s 139. If not complied for 5 consecutive previous years, TTS ceases from 6th year onward and barred for 10 years (Section 115VS). Applicability of Transfer Pricing to Tonnage Tax Companies: Mumbai ITAT Ruling Van Oord India Private Limited v. ACIT – 5(3) Mumbai, [ITA: 7228/Mum/2012] [AY 2007-08] The Mumbai ITAT had the occasion to deal with the question whether transfer pricing provisions contained in Chapter–X of the Act can also apply to tonnage income determined in accordance with TTS under Chapter–XIIG of the Act. Ruling: The ITAT held that tonnage income is computed based on tonnage capacity and number of days in operation and not at arm’s length price. Section 92C prescribes methods for computation of ALP and no method is prescribed which can have application to tonnage income. Thus, the machinery provided under Chapter–X to compute arm’s length price fails, and in such circumstances, applicability of Chapter–X has to fail. Although Chapter–X was invoked to alter rental charges paid to an associated enterprise, it has no effect on income computed under Chapter–XIIG. Hence, Chapter–X has no application in computing income chargeable under Chapter–XIIG.

Taxation • Direct Taxes & Philanthropy Deduction u/s 80G for Donation in Kind – Whether Provision Requires a Revisit? Journal: The Chartered Accountant, September 2021 (Vol. 70, No. 3) • Pages: 89–96 (Journal pp. 337–344) KS CA. Kalapi C. Shah The author is a member of the Institute of Chartered Accountants of India. He can be reached at kalapicshah@gmail.com. “On April 8, 2020, the news was flooded with headlines of Twitter CEO setting aside $1 billion in equity (shares/securities) to support global relief efforts towards COVID-19. This was in USA. India also has many philanthropists; however, we often do not see Indian donors offering donations in kind (in form of securities, immovable properties, etc.). It results in fewer funds available to charitable organizations. The author in this article analyses the ‘why’ aspect and concludes that provisions of section 80G require a revisit to allow the Indian donors a tax deduction for donation in kind. Read on …” Background of Section 80G The term ‘donation’ has been defined by the Hon’ble Supreme Court in the case of E.T. Commissioner v. P.V.G. Raju AIR 1976 SC 140, 142 as: an act by which the owner of a thing voluntarily transfers the title and possession of the same from herself to another, without any consideration. The benefit of deduction under section 80G is available to all types of assessees (Individual, HUF, Company, LLP and Partnership Firm) irrespective of their residential status. An assessee can claim deduction for donation of a sum of money to charitable institutions while computing the total income. The amount of deduction would differ depending upon the type of charitable institutions: 100% deduction without any limit 50% deduction without any limit 100% deduction with upper limit 50% deduction with upper limit The upper limit in case of categories 3 and 4 will be restricted to 10% of the adjusted gross total income. ‘Money’ has not been defined under Income Tax Law. Section 2(75) of CGST Act, 2017 defines: “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value. Judicial Precedents: Substance over Form vs. Strict Literal Interpretation There had been a diverse set of views on whether donation in kind is permissible for deduction under section 80G or not. 1. View Permitting Donation in Kind (Substance Theory) CIT v. Associated Cement Co. Ltd. (1968) 68 ITR 478 (Bom) CIT v. Bangalore Woollen, Cotton and Silk Mills Co. Ltd. (1973) 91 ITR 166 (Mys) Saurashtra Cement & Chemical Industries Ltd. v. CIT (1980) 123 ITR 669 (Guj) It was held that one must look at the substance of the transaction and the underlying purpose of the section. The courts felt that the contention of revenue permitting deduction only for donation in cash is too technical to which the courts could accede. 2. Contrary View (Strict Literal Meaning of ‘Sum’) CIT v. Amonbolu Rajiah (1979) 102 ITR 403 (AP) CIT v. Gopal Krishna Singhania (1980) 121 ITR 260 (All) CIT v. Smt. Dhirajben R. Amin (1983) 12 Taxman 75 (Guj) The keywords are “any sum paid by the assessee……..as donations”. According to Chamber’s 20th Century dictionary, ‘sum’ means a quantity of money. It cannot include property or a thing. Plain reading requires a sum paid, not property having monetary value. Reconciliation of Case Law: Rotary Kiln Case vs. Zilla Parishad School Building In CIT v. Associated Cement Co. Ltd. (1968) 68 ITR 478 (Bom), the University of Bombay requested a rotary experimental kiln for chemical engineering experiments. The board of directors sanctioned ₹5,000 and later ₹1,600. The kiln was prepared at a cost of ₹6,600 in the company’s workshop and handed over. The Bombay High Court held: “In substance, therefore, the amount was paid to the University, though ultimately because of the exertions of the assessee the kiln came to be prepared out of that amount and was handed over to the University. In our opinion, looking to the substance of this transaction there is no doubt that the sum of Rs. 6,600 was paid by the assessee-company as a donation to the University of Bombay. Any other construction upon this transaction would, in our opinion, be unnecessarily limiting the language of the section as well as its purpose.” In CIT v. Amonbolu Rajiah (1979) 102 ITR 403 (AP), Andhra Pradesh HC read down Bombay HC’s judgment, noting that the Bombay HC did not allow donation in kind per se, but held that in substance money was donated. In Amonbolu Rajiah, the assessee agreed to donate funds to construct a Zilla Parishad girls’ school building and advanced amounts directly to the contractor. It was held to be a donation of money and not in kind. In Smt. Dhirajben R. Amin, the assessee donated shares to two charitable trusts. The Gujarat High Court held that donation of shares was a donation in kind and fell outside section 80G. Supreme Court Affirmation: All three judgments (CIT v. Amonbolu Rajiah, CIT v. Gopal Krishna Singhania, and CIT v. Smt. Dhirajben R. Amin) were subsequently affirmed by the Supreme Court in H. H. Sri Rama Verma v. CIT (1991) 57 Taxman 149 (SC). Legislative Bar: Insertion of Explanation 5 to Section 80G Explanation 5 was inserted with effect from April 1, 1976: “For the removal of doubts, it is hereby declared that no deduction shall be allowed under this section in respect of any donation unless such donation is a sum of money”. The Memorandum explaining the provisions clarified that deduction is available only in respect of ‘sums’ paid in cash, cheque, bank draft, etc., and not to donations in kind. Furthermore, Explanation 5 does not mandate that the payment should be made directly to the donee. Nature of Donation Eligible for deduction u/s 80G Donation in cash Yes Donation where substance of transaction is essentially a sum of money (e.g., Payment for Zilla Parishad Building as discussed in CIT v. Amonbolu Rajiah) Yes Donation in kind (e.g., Donation of shares, painting, buildings, clothes, etc.) No Fixed Deposit – Whether a ‘Sum of Money’? In Leena A. Sarabhai v. ITO [1986] 18 ITD 177 (AHD.) (TM), the assessee claimed 80G deduction for donation of fixed deposit receipt. While the Third Member held that donation of a fixed deposit will not be allowed as deduction under section 80G, the Accountant Member made an incisive remark: “Incidentally, a question was put to the learned departmental representative as to what can be the intention behind denying the benefit of section 80G, to donation in kind? No convincing reasons came to be advanced except that of difficulty in putting the value in money terms of the donation in kind… If the donation is convertible into money or is required to be converted into money at future date because of the characteristic of donation… the donation still retains the character of donation in cash for the purpose of benefit under section 80G.” Case Study: Comparative Tax Impact under Different Scenarios Since deduction of donation in kind is not allowed to the donor, the charitable institute has lesser funds at its disposal to undertake charitable activities. Fact Pattern: Mr. A holds 50,000 shares of a listed company purchased 10 years ago at ₹100 per share (Cost: ₹50,00,000). Current market price is ₹1,200 per share (Total Value: ₹6,00,00,000). Capital gains tax rate: 11.96% (including surcharge & cess; ₹1 Lakh limit already exhausted; highest tax bracket: 35.88%). Scenario A: Deduction available under Section 80G is 100% Particulars (i) Sell shares & donate sum of money (ii) Donate shares under existing law (No 80G) (iii) Donate shares (Presuming 80G allowed) Sale Consideration (A) ₹ 60,000,000 – ₹ 60,000,000 Less: Cost of Acquisition ₹ 5,000,000 – – Capital Gain ₹ 55,000,000 – – Tax to be paid on Capital Gain @ 11.96% (B) ₹ 6,578,000 – – Amount available / Funds at disposal for charity (C) ₹ 53,422,000 ₹ 60,000,000 ₹ 60,000,000 Tax Benefit u/s 80G @ 35.88% [(D)=(C)*35.88%*100%] ₹ 19,167,814 – ₹ 21,528,000 Net Tax Benefit to assessee [E = (D) – (B)] ₹ 12,589,814 – ₹ 21,528,000 Effective % Tax Benefit [(E) / (A)] 20.98% 0% 35.88% Scenario B: Deduction available under Section 80G is 50% Particulars (i) Sell shares & donate sum of money (ii) Donate shares under existing law (No 80G) (iii) Donate shares (Presuming 80G allowed) Sale Consideration (A) ₹ 60,000,000 – ₹ 60,000,000 Less: Cost of Acquisition ₹ 5,000,000 – – Capital Gain ₹ 55,000,000 – – Tax to be paid on Capital Gain @ 11.96% (B) ₹ 6,578,000 – – Amount available / Funds at disposal for charity (C) ₹ 53,422,000 ₹ 60,000,000 ₹ 60,000,000 Tax Benefit u/s 80G @ 35.88% [(D)=(C)*35.88%*50%] ₹ 9,583,907 – ₹ 10,764,000 Net Tax Benefit to assessee [E = (D) – (B)] ₹ 3,005,907 – ₹ 10,764,000 Effective % Tax Benefit [(E) / (A)] 5% 0% 18% Key Takeaways from Comparison: Under option (i), assessee effectively enjoys only 21% (under 100% 80G) or 5% (under 50% 80G) tax benefit despite falling in the 35.88% bracket, because capital gains tax erodes the donation amount. Under option (ii), assessee gets 0% tax relief for philanthropy. Under option (iii), the charitable institution receives approx. 12% more funds (₹6.00 Cr vs ₹5.34 Cr) and donor receives the full intended tax relief (35.88% or 18%). International Best Practices: USA, UK, and Canada If we refer to the tax laws of other countries like USA, UK, Canada etc., all such countries allow deduction for donations in kind (subject to various conditions and valuation rules). United States of America (USA) Allows deduction for donation of: household goods, jewellery and gems, paintings, antiques and art, cars, boats, aircraft, inventory, patents, stocks, bonds, and real estate. According to Cocatalyst research, stock donations in the USA reached $21 billion in 2018, up 62% annually. United Kingdom (UK) Allows deduction for donation of shares or securities, and land or buildings, including transfers at concessional amounts. HMRC Practical Illustration: John owns 1,000 shares in XYZ plc valued at £4.50 (£4,500). Sells to charity for £2.00 each (£2,000). Charity gifts a book worth £25. Deduction = £4,500 – £2,000 – £25 = £2,475. Canada Allows deduction for capital property (cottages, stocks, bonds, mutual fund trust units, lands, buildings, equipment) and personal-use property (drawings, paintings, sculptures, jewellery, rare manuscripts/books, stamps, coins). Proposed Way Forward & India’s Capital Needs India’s Social Financing Deficit: According to a Brookings India report (July 2019), India faces an annual financing gap of $565 billion in meeting its Sustainable Development Goals (SDGs). Further, the British Council (2018) revealed that 57% of Indian social enterprises identified access to debt or equity as a barrier to growth and sustainability. The government has already strengthened compliance frameworks for charitable entities across statutes: Mandatory Form CSR-01 with Ministry of Corporate Affairs for receiving CSR funds. Designated bank account for foreign contributions restricted to specified SBI branch at New Delhi. Renewal of registrations under sections 12AB, 10(23C)(vi), and 80G every five years. Mandatory filing of statement of donations received with the Income Tax Department (effective April 1, 2021). Roadmap to Permit 80G Deduction for Securities Donations The main hurdle historically cited was valuation difficulty. However, modern capital markets possess robust digital infrastructure via SEBI and NSDL: Shares are compulsorily held in Demat form with mandatory PAN linkages. NSDL guidelines mandate purpose code “93-Donation” in Delivery Instruction Slips (DIS) for off-market transfers. Unique International Securities Identification Number (ISIN) tracks all securities transparently. Proposed Eligibility Conditions: (1) Listed on recognized stock exchange; (2) Long-term capital asset; (3) Demat transfer with purpose code 93; (4) Prescribed statement filed by donee institution with Income Tax authority. Social Stock Exchange (SSE) & Conclusion: The proposal of the Hon’ble Finance Minister to establish a Social Stock Exchange under SEBI provides an electronic fundraising platform for social enterprises to raise capital. In tandem with these capital market innovations, rationalizing Section 80G to permit deduction for donations in kind (beginning with listed securities) will unlock substantial philanthropic capital and ensure maximum funds are available to charitable institutions.

Capital Market • Corporate Finance ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 102–109 (350–357) SEBI ICDR Regulations 2018 Master Guide Initial Public Offerings–Unlocking Values of a Company SS CA. Sandhya Sama Member of the Institute • sandhya.sama@rediffmail.com “Trends indicate that a number of initial public offerings (IPO) hitting the market this year are high. The valuations are high as investor sentiment is positive and expectation is that economy would rebound with vigour as the second wave of COVID – 19 is over. CFOs are more sought after resource during IPOs and are being offered handsome remuneration alongwith wealth creating esops. Read on…” 1 What is an IPO & Strategic Rationale for Going Public An Initial Public Offer (IPO) is an event where the intrinsic value of an Issuer or Company is unlocked. Typically, an IPO is carried out when the valuation of the business reaches at least INR 1,000 Crore so as to attract institutional and retail investors’ interest. It represents that mature stage of corporate growth where the organisation is capable of facing the rigors of the Securities and Exchange Board of India (SEBI) Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018 (as amended), assuming the duties and responsibilities owed to public shareholders. Primary vs. Secondary Offerings (Offer for Sale) An IPO structure generally combines two kinds of issuances: Primary Issue: Fresh equity shares are issued by the Company, and the proceeds flow directly into the corporate treasury to fund capital expenditures, debt retirement, or strategic growth. Secondary Issue (Offer for Sale – OFS): Existing shareholders (promoters, private equity, or venture capital investors) sell their existing shareholding to new investors without fresh capital entering the company. Complete secondary offers have been exceptionally well received by modern markets. Capital Structure Optimization: Raise public capital for business expansion while maintaining an optimum debt-equity ratio. Debt Deleveraging: Retire high-cost existing borrowings and deploy operating cash flows effectively into core business operations. Early Investor Exit: Provide profitable, structured exit routes to angel investors, PE funds, and early venture backers. Share Liquidity & Currency: Provide transparent daily market liquidity, enabling stock options (ESOPs) to attract leadership talent. 2 Evolution of Indian Capital Market Regulations: CCI to SEBI ICDR 2018 Prior to SEBI, capital issues in India were governed by the Capital Issues (Control) Act, 1947 (CCI). The Controller of Capital Issues determined both the quantum and the issue price of shares based on rigid historical net asset formulas, aimed at preventing corporate overcrowding and aligning private investments with national Five-Year Plans. The Disclosure-Based Regime: SEBI was established in 1988 as a non-statutory body and accorded autonomous statutory authority on 12 April 1992 via the SEBI Act, 1992. The CCI Act was formally repealed on 29th May, 1992. This marked the historic transition from regulatory price control to a disclosure-based regime, allowing market forces and investor appetite to determine share pricing freely. SEBI originally issued its Disclosures and Investor Protection (DIP) Guidelines, which were formally codified in 2009 as the SEBI (ICDR) Regulations, 2009, and subsequently overhauled into the contemporary SEBI (ICDR) Regulations, 2018 (as amended). 3 The End-to-End IPO Process & Corporate Governance Mandates 1. Preparation, Merchant Bankers & Intermediaries The senior management prepares a 5-year business plan and engages SEBI-registered Merchant Bankers (Lead Managers) who conduct extensive due diligence and ensure ICDR compliance. Other critical intermediaries on-boarded include domestic and international legal counsels, statutory auditors, industry experts, advertising agencies, Registrars to the Issue, and financial printers. 10% General Corporate Purposes (GCP) Cap: In primary issuances, the management must specify the deployment of proceeds with absolute precision; only up to 10% of the primary proceeds can be earmarked for general corporate purposes. 2. Governance Architecture under SEBI (LODR) Regulations, 2015 Before filing the offer document, the issuer must reconstitute its Board of Directors and establish mandatory board committees with a majority of Independent Directors: Audit Committee Nomination & Remuneration Committee (NRC) Stakeholders Relationship Committee Corporate Social Responsibility (CSR) Committee Risk Management Committee 3. Offer Documents Lifecycle: DRHP → SEBI CARD → RHP → Prospectus Draft Red Herring Prospectus (DRHP): Filed with SEBI for review, containing business, financials, and risks, but omitting price and issue size. Vetted by lawyers and backed by Lead Managers’ Due Diligence Certificate (Form A, Schedule V). SEBI CARD (12-Month Validity): SEBI reviews DRHP, receives clarifications, and issues observation letter (“SEBI CARD”), valid for 12 months to launch the public offering. Red Herring Prospectus (RHP): Updated with latest financials and filed with SEBI/ROC, containing price band / floor price. Final Prospectus: Filed with ROC after book-building closure, containing final discovered issue price and allotment quantum. 4 Schedule VI DRHP Disclosures & Statutory Auditor Certifications Seventeen Core Disclosure Sections under Schedule VI 1. Cover Pages Disclosures 2. Table of Contents 3. Conventional, Issuer & Industry Definitions 4. Summary of Offer Document 5. Comprehensive Risk Factors 6. Introduction 7. General Information 8. Pre & Post Capital Structure 9. Particulars of Issue (Objects, Means of Finance, Appraisal, Schedule of Deployment, Pricing Basis) 10. About Issuer (Industry/Business Overview, Regulations, History, Management Org, Governance, KMPs, Promoters, Dividend Policy) 11. Restated Financial Statements 12. Legal & Other Information (Litigations, Approvals) 13. Information on Group Companies 14. Other Regulatory & Statutory Disclosures 15. Offering Information 16. Any Other Material Disclosure 17. Other Key Information Statutory Auditor Certification & Comfort Suite (Points 1 to 15) • 1. Examination Report on Restated Consolidated Financial Information (last 3 FYs + stub period) • 2. Restated Consolidated Balance Sheet • 3. Restated Consolidated Profit and Loss • 4. Restated Consolidated Cash Flow Statement • 5. Restated Consolidated Statement of Changes in Equity (SOCIE) • 6. Statement of Significant Accounting Policies • 7. Notes to Restated Financial Statements • 8. Columnar Reconciliation of Audited CFS Equity vs. Restated CFS Equity and Profits • 9. Restated EPS (Basic and Diluted) • 10. Return on Net Worth (RoNW) • 11. Net Asset Value (NAV) per share • 12. Restated EBITDA metrics • 13. Target Business Financials (for acquisitions > 20% turnover/PBT/net worth) • 14. Auditor-certified Proforma Financials for post-period acquisitions/divestments • 15. Statement on Impact of Audit Qualifications in SEBI format 5 Investor Quotas, Bidding Windows & Post-Listing Compliance Retail Individual Investors (RII): 35% Reserved quota of at least 35% of the net issue allocated to retail individual investors bidding up to INR 2 Lakh. Non-Institutional Investors (NII/HNI): 15% Reserved quota of 15% allocated to High Net-Worth Individuals and corporate non-institutional bidders. Qualified Institutional Buyers (QIB): 50% Allocated up to 50% to institutional investors having net worth exceeding INR 500 Crore registered with SEBI. Subscription Timelines: Public issue subscription must remain open for at least 3 working days and not more than 10 working days. In book-built issues, bidding remains open for 3 to 7 working days, extendable by 3 days upon price band revision. Listing Formalities: Issuer applies for in-principle approval under Regulation 28 of SEBI (LODR), completes pre-listing formalities within 21 days from allotment, and executes the formal Listing Agreement. 6 Performance of 49 Public Offerings (Over INR 87,000 Crore Raised) More than INR 87,000 Crore was mobilized from capital markets between January 2020 and August 2021. The complete performance matrix across 49 offerings is presented below: Date IPO Name Issue Size (Cr) Issue Price Open Close Listing Gain % Price (26-Aug-21) Current Gain % 23-08-21Nuvoco Vistas5,089.29570471.00531.30-6.79527.45-7.46 20-08-21CarTrade Tech2,998.001,6181,600.001,500.10-7.291,429.05-11.68 16-08-21Windlas Biotech405.95460439.00406.70-11.59344.45-25.12 16-08-21Devyani Int1,858.0090141.00123.35color: #059669;">37.06112.05color: #059669;">24.50 16-08-21Krsnaa Diagnost1,222.009541,025.00990.75color: #059669;">3.85905.15color: #dc2626;">-5.12 16-08-21Exxaro Tiles161.09120126.00132.25color: #059669;">10.21125.70color: #059669;">4.75 08-09-21Rolex Rings732.279001,249.001,166.55color: #059669;">29.621,100.00color: #059669;">22.22 08-06-21Glenmark Life1,513.00720752.00748.20color: #059669;">3.92670.75color: #dc2626;">-6.84 29-07-21Tatva Chintan500.001,0832,111.802,310.25color: #059669; font-weight: 700;">113.322,129.70color: #059669; font-weight: 700;">96.65 23-07-21Zomato9,375.0076115.00125.85color: #059669;">65.59125.85color: #059669;">65.59 19-07-21Clean Science1,546.009001,784.401,585.20color: #059669;">76.131,426.05color: #059669;">58.45 19-07-21G R Infra963.288371,700.001,746.80color: #059669; font-weight: 700;">108.701,577.35color: #059669; font-weight: 700;">88.45 07-07-21India Pesticide800.00296360.00335.45color: #059669;">13.33308.70color: #059669;">4.29 07-05-21Krishna Inst.2,146.008251,009.001,096.80color: #059669;">32.951,288.65color: #059669;">56.20 28-06-21Dodla Dairy521.00428550.00609.10color: #059669;">42.31554.60color: #059669;">29.58 24-06-21Shyam Metalics909.00306380.00375.85color: #059669;">22.83385.10color: #059669;">25.85 24-06-21Sona BLW5,550.00291302.40362.85color: #059669;">24.69471.70color: #059669;">62.10 14-05-21PowerGrid InvIT7,734.99100104.00102.98color: #059669;">2.98122.22color: #059669;">22.22 19-04-21Macrotech Dev2,500.00486439.00463.15color: #dc2626;">-4.70869.00color: #059669; font-weight: 700;">78.81 04-07-21Barbeque Nat453.60500492.00590.40color: #059669;">18.081,088.00color: #059669; font-weight: 700;">117.60 30-03-21Nazara582.911,1011,971.001,576.80color: #059669;">43.221,686.75color: #059669;">53.20 26-03-21Suryoday Small582.34305274.75276.20color: #dc2626;">-9.44156.70color: #dc2626; font-weight: 700;">-48.62 26-03-21Kalyan Jeweller1,175.008773.9075.30color: #dc2626;">-13.4562.95color: #dc2626;">-27.64 25-03-21Craftsman823.701,4901,440.001,433.00color: #dc2626;">-3.831,927.70color: #059669;">29.38 25-03-21Laxmi Organic600.00130173.00164.60color: #059669;">26.62382.35color: #059669; font-weight: 700;">194.12 24-03-21Anupam Rasayan760.00555534.70525.90color: #dc2626;">-5.24736.10color: #059669;">32.63 19-03-21Easy Trip510.00187182.00208.30color: #059669;">11.39437.00color: #059669; font-weight: 700;">133.69 15-03-21MTAR Tech596.41575990.051,082.25color: #059669; font-weight: 700;">88.221,266.45color: #059669; font-weight: 700;">120.25 03-05-21Heranba60.00627900.00812.25color: #059669;">29.55786.15color: #059669;">25.38 26-02-21Railtel819.2494109.00121.40color: #059669;">29.15125.80color: #059669;">33.83 25-02-21Nureca100.00400634.95666.65color: #059669; font-weight: 700;">66.661,589.85color: #059669; font-weight: 700;">297.46 02-05-21Stove Kraft412.63385498.00445.95color: #059669;">15.83820.50color: #059669; font-weight: 700;">113.12 02-03-21Home First1,153.72518612.15527.40color: #059669;">1.81559.65color: #059669;">8.04 02-02-21Indigo Paints1,170.561,4902,607.503,118.65color: #059669; font-weight: 700;">109.312,533.00color: #059669; font-weight: 700;">70.00 29-01-21IRFC4,633.002625.0024.85color: #dc2626;">-4.4222.90color: #dc2626;">-11.92 01-01-21Antony Waste300.53315430.00407.25color: #059669;">29.29340.65color: #059669;">8.14 24-12-20Bectors Food540.54288501.00595.55color: #059669; font-weight: 700;">106.79394.00color: #059669;">36.81 14-12-20Burger King796.5060115.35138.40color: #059669; font-weight: 700;">130.67170.20color: #059669; font-weight: 700;">183.67 20-11-20Gland6,479.551,5001,710.001,820.45color: #059669;">21.363,879.30color: #059669; font-weight: 700;">158.62 11-02-20Equitas Bank517.603331.0032.75color: #dc2626;">-0.7658.50color: #059669; font-weight: 700;">77.27 10-12-20UTI AMC2,159.88554476.20476.60color: #dc2626;">-13.971,144.50color: #059669; font-weight: 700;">106.59 10-12-20Mazagon Dock443.69145216.25173.00color: #059669;">19.31233.80color: #059669;">61.24 10-05-20Angel Broking600.00306275.00275.85color: #dc2626;">-9.851,106.00color: #059669; font-weight: 700;">261.44 10-01-20Chemcon Special318.00340731.00584.80color: #059669; font-weight: 700;">72.00441.15color: #059669;">29.75 10-01-20CAMS2,244.331,2301,535.001,401.60color: #059669;">13.953,241.05color: #059669; font-weight: 700;">163.50 21-09-20Route600.00350708.00651.10color: #059669; font-weight: 700;">86.031,912.00color: #059669; font-weight: 700;">446.29 17-09-20Happiest Minds702.02166351.00371.00color: #059669; font-weight: 700;">123.491,436.75color: #059669; font-weight: 700;">765.51 23-07-20Rossari496.25425670.00742.35color: #059669; font-weight: 700;">74.671,320.05color: #059669; font-weight: 700;">210.60 16-03-20SBI Card10,286.20755658.00683.20color: #dc2626;">-9.511,088.40color: #059669;">44.16 7 Closing Thoughts: Macro Signals, Retail Demat Surge & CFO Leadership The broader economy and equity markets are demonstrating divergent dynamics. While macro economists repeatedly moderate GDP estimates, stock markets continue scaling record peaks, propelled by immense domestic liquidity and retail investor enthusiasm. Over 1 Crore new Demat accounts were opened in the initial months of the pandemic, catalyzed by digital onboarding, low-cost discount brokerages, and prolonged lockdowns. In parallel with conventional IPOs, alternative financing structures such as Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Special Purpose Acquisition Companies (SPACs) are commanding significant institutional capital. The Transformational Role of the Modern CFO The CFO shoulders unparalleled responsibility and accountability throughout the IPO lifecycle – orchestrating restatements, financial closures, regulatory interfaces with SEBI, and investor relations. With adequate delegation of authority, a well-rounded, intellectually courageous, and business-facilitating CFO transitions into the public face and authoritative spokesperson of the Issuer. About the Author CA. Sandhya Sama Member, The Institute of Chartered Accountants of India (ICAI) Email: sandhya.sama@rediffmail.com

Finance • Forensic & Internal Controls ICAI Journal Ref: September 2021 • Vol. 70 • No. 3 • pp. 97–101 (345–349) Special Feature: SSC & BPO Fraud Analytics Fraud Risk in Technology led Finance Function AG CA. Ajay Gupta Member of the Institute • ajayrgupta121@gmail.com “In age of technological advancement, every organisation either try to set up their own captive SSC or outsources processes to BPOs to take the benefits of cost savings and process efficiencies. Organisations use cutting-edge technologies to improve the quotient of savings. The evolving technologies coupled with high volume of transactions increases the potential risk of fraud, which occur in almost all organizations. More than half of the frauds occur in operations, accounting, executive/upper management and sales functions. Considering the high volume of transactions, it is not possible to check every transaction and the traditional checker or controls are not adequate in present scenario. This creates the need for an improved controls framework and fraud analytics. From ineffective implementation of policies and procedures to lack of awareness among employees about anti-fraud controls, what can be the major reason behind the frauds and what can be done as a solution. Read on…” 1 Introduction and Depth of Fraud Fraud is one of the biggest threats to every organisation. The manner, depth and scale of fraud differ according to industry and function. Some of the frauds like duplicate payments, payment to dummy or non-existent employees are common across every organization while revenue related frauds would depend on the type of industry. Every organisation suffers from fraud. Some admit it while others do not admit in order to avoid negative publicity. While the owners and senior management are experts in managing business, they are not aware of the fraud mechanisms. Some even know the mechanisms but still ignore this risk, assuming fraud cannot impact their organisation. Organisations lose significant amounts of money simply because of lack of anti-fraud controls. The size of the organisation and the complexity of the business are also relevant from a fraud risk perspective. Smaller organisations often lack robust internal controls and segregation of duties. This makes smaller organisations more susceptible to fraud risk. The Dark Figure of Fraud: It is difficult to measure the exact scale of fraud. Many of the frauds go undetected. In some cases, frauds are not reported even after detection due to fear of negative publicity. Due to this, any study conducted is not able to provide an exact amount of fraud; but can only present an indication to the extent of the problem. 2 Global Empirical Evidence: ACFE Occupational Fraud Study The Association of Certified Fraud Examiners (ACFE) survey based on 2,504 real cases of occupational fraud investigated between January 2018 and September 2019 across 125 countries and 23 industries revealed total cumulative losses of 3.6 Billion USD. The investigation highlighted critical baseline benchmarks: Typical Duration & Monthly Burn: Typical fraud schemes last 14 months before detection and cause an average loss of USD 8,300 per month. Annual Revenue Loss: ACFE estimates that organizations lose 5% of revenue to fraud each year, with an average loss per case of 1,509,000 USD. Primary Detection Mode: 43% of fraud schemes were detected by tips, and half of these whistleblower tips originated directly from employees. Internal Control Failure: A lack of internal controls contributed directly to nearly one-third of all frauds. Key Statistical Findings from the ACFE Study Prevalence of Corruption: Corruption emerged as the most common scheme across every global geographical region. Frequency vs. Cost: Asset misappropriation schemes are the most common but least costly; conversely, fraudulent financial statement schemes are the least common but inflict the most catastrophic financial losses. Small vs. Large Entities: Billing, payroll, and payment tampering fraud risks were significantly more likely in small businesses compared to large corporations due to limited internal resources. Control Effectiveness: The presence of structured anti-fraud controls is directly associated with lower fraud losses and substantially quicker detection intervals. Departmental Origination: More than half of occupational frauds originated from four departments: Operations (15%), Accounting (14%), Executive/Upper Management (12%), and Sales (11%). Executive Impact: Owners and executive management committed only 20% of frauds, yet caused the largest aggregate monetary losses. Law Enforcement Referral: 46% of victim organizations declined to refer cases to external law enforcement authorities because their internal administrative discipline was deemed sufficient. According to the ACFE, there are three main categories of fraud: asset misappropriation, fraudulent financial statements, and corruption. While a majority of frauds result from inadequate anti-fraud controls, ethics, or governance, it is exceptionally difficult to identify corruption-related frauds because many transactions occur in unrecorded cash outside formal accounting ledgers. Hence, this analysis primarily focuses on asset misappropriation and fraudulent financial statements, examining the root causes and actionable technological remedies. The Outsourcing Fallacy: Many corporate leaders believe that by outsourcing business processes to third parties, they also outsource the fraud risk. This is a dangerous misconception. The outsourcing partner executes operational routines strictly as per service level agreements (SLAs), but the client organization’s board and executive management remain legally and fiduciary accountable for fraud risk. 3 Shared Service Centre (SSC) & BPO Environment: Past vs. Present Today, almost every enterprise either establishes captive Shared Services Centres (SSCs) or outsources routine transactional finance processes to Business Process Outsourcing (BPO) service providers to achieve cost rationalization and operational scale. While cost-effective, these delivery architectures introduce unique vulnerabilities: Extreme Transaction Volumes: Millions of entries are processed across multi-client shared platforms, rendering line-by-line manual verification physically impossible. Resource Skill Arbitrage: BPOs frequently deploy lower-skilled or entry-level personnel to compress operational costs, leaving front-line processors without adequate training in fraud identification and control mechanics. Past Shared Services Environment Present Shared Services Environment Minimal use of applications. Most of the data in hard copy paper format. Multiple applications and most of the data are in digital form. Hard copy invoices physically stamped as paid, rejected or amended. All invoices are digital and controlled on ERP/ Workflow tools. Payments made by cheque and storing cheque book in lock. Approvals and payments are online with defined role-based access controls. Original receipts / invoices were attached with expense claims. Scanned images of the expense receipts / invoices are attached with expense claim. Purchase orders were signed and sent to suppliers. Computer output / scanned image of purchase order sent to suppliers. Hard copy of purchase invoices. Purchase invoices are booked directly in computer system through Electronic Data Interchange (EDI). Modern finance functions are executed using advanced Enterprise Resource Planning (ERP) suites, Robotics Process Automation (RPA) bots, Artificial Intelligence (AI), and other digital interfaces. Due to this, the inherent risk of fraud by manipulating technological layers has multiplied exponentially. Yet, many organizations continue relying on legacy manual controls like maker-checker sign-offs, superficial supervisor spot checks, and periodic sampling audits by internal or statutory teams—mechanisms that are structurally inadequate in automated environments. 4 Fraud Susceptible Processes & Inherent Risk Across Cycles Fraud can occur in any process, but empirical history demonstrates distinct vulnerability profiles. Executive management, finance & accounting, sales, and operations bear the highest exposures. Billing and payment processing represent far greater systemic fraud risks than payroll or travel reimbursements—while travel expense manipulation is highly prevalent, its fiscal impact is minuscule compared to illicit supplier disbursements or fraudulent top-line revenue inflation. Procure to Pay (P2P) Duplicate or dummy invoice processing and fraudulent disbursement. Payments processed exceeding established price variance tolerances. Multiple payments routed through one-time vendor master records. Unauthorized alteration of payment batch files prior to final bank site release. Splitting purchase orders to circumvent delegation of authority limits. Creation of post-facto purchase orders after goods or services are received. Order to Cash (O2C) Unrecorded revenue, unbilled deliveries, or suppressed accounts receivable. Arbitrary or unauthorized elevation of customer credit limits. Generation of invoices against fictitious customer accounts. Unusually high price discounts and debt waivers granted to related parties. Deliberate overbilling to inflate periodic revenues. Issuance of bogus credit notes, false rebates, or unjustified sales refunds. Travel and Expenses (T&E) Submission of expense reimbursement claims on behalf of terminated or non-existent employees. Submission of duplicate expense claims for identical expense receipts across altered dates. Hire to Retire (H2R) Disbursement of payroll and bonuses to ghost, terminated, or non-existent workers. Systematic fabrication of excessive or unauthorized overtime hours. Unexplained variations across gross pay scales, deduction parameters, hourly wage tables, and net pay transfers. Record to Analyse (R2A) Manual journal entries directly overriding supplier and customer subsidiary ledger control accounts. Unauthorized or unreviewed top-level journal adjustments at period-end closures. Direct manual journal entries impacting core cash and bank ledgers without documentary support. Aged, unresolved open items lingering indefinitely in balance sheet reconciliations. Substantial legacy balances accumulating in internal clearing, suspense, or wash accounts. 5 Key Reasons Leading to Frauds & Manifestations Core Root Cause Category Specific Examples of Resulting Fraudulent Transactions Absence or Ineffective Implementation of Policies and Procedures Unauthorised approval and processing of commercial transactions. Single-sign-off disbursement approvals in direct breach of mandatory company joint/dual-signatory mandates. Lack of Awareness Among Employees About Anti-Fraud Controls Unauthorized modification of vendor beneficiary bank master records resulting in misdirected wire transfers. Operational staff routinely ignoring automated system exception warnings regarding duplicate invoice numbers or matching claim amounts. Lack of Segregation of Duties (SoD) and Excessive User Access Same individual executing both invoice processing and electronic payment release. Same individual executing bank transaction processing and subsequent monthly bank reconciliation. Inadequate or Ineffective Application and Process Controls Overly wide price tolerance parameters between POs and supplier invoices, creating systematic excess payments. ERP allowing goods issuance in excess of physical warehouse stock (negative inventory states). Disbursement executed without automated deduction and adjustment of historical advance payments. Why Do Frauds Go Undetected? Evolving Architectural Complexity: Commercial business models and IT platforms evolve rapidly with minimal manual touchpoints, but control environments lag behind technological shifts. Audit Expectation Gap: Management erroneously assumes internal and statutory auditors will detect fraud, whereas audits routinely focus on standard compliance checks and manual controls rather than core IT application logic. Absence of Data Analytics: Organizations lack automated, full-population continuous fraud analytics systems. Inherent Inadequacy of Sampling: Traditional sample testing covers an infinitesimally small fraction of transactions, inevitably missing deliberate, sophisticated fraud patterns. Subjective Supervisory Reviews: A manager reviewing electronic payment batches on banking portals cannot practically cross-verify complex underlying data fields across thousands of records; manual oversight remains person-dependent and error-prone. 6 Framework to Minimise Fraud Risk & Implement Continuous Analytics It is practically impossible to achieve zero fraud risk. However, enterprises can decisively minimize risk exposure by establishing a robust control environment and enforcing comprehensive prevention policies. Mitigation of technology-driven fraud risks necessitates multi-layered defenses: Workforce Education: Continuous training of personnel across finance, shared service, and outsourced centers. Fraud Awareness Culture: Fostering widespread sensitivity toward suspicious transaction indicators and whistleblowing. Digital Application Controls: Embedding hard validation rules, three-way matching, and tolerance checks directly into ERP systems. Role-Based Access (RBAC): Enforcing strict least-privilege permissions and active Segregation of Duties (SoD) matrices. Fraud Monitoring and Analytics (CAATs) While organizational discipline is fundamental, management urgently requires advanced technological solutions capable of providing comprehensive assurance across the entire data population rather than false comfort derived from small sample testing. Continuous monitoring can be realized through bespoke technology architectures or Computer Assisted Audit Techniques (CAAT). Any adopted solution must empower management to: Identify Suspicious Patterns: Uncover anomalies, out-of-sequence transactions, unusual velocity spikes, and collusive patterns across 100% of corporate records. Test 100% Population: Ensure zero blind spots, as fraudulent and manipulated transactions are deliberately designed to evade random sample selection. 7 Conclusion & Key Takeaways 1. Reliance on Automated Controls: In today’s technology-driven environment, organizations must place paramount reliance on automated, preventive application controls rather than testing and leaning exclusively on post-facto manual checks. 2. Technology-Based Fraud Analytics: Management is strongly advised to deploy enterprise-wide fraud analytics engines that test 100% of transaction populations, replacing the limited assurance provided by conventional sampling. 3. Rigorous Governance & Root Cause Remediation: Implement an enduring governance structure to conduct relentless root cause analyses on detected discrepancies, ensuring system loopholes are rectified to prevent recurring fraud. By adopting these structured technological and governance interventions, organizations can substantially curb fraud vulnerabilities, fortify operational processes, and cultivate a truly resilient control environment. About the Author CA. Ajay Gupta Member, The Institute of Chartered Accountants of India (ICAI) Email: ajayrgupta121@gmail.com

Sustainability • CSR & ESG Strategy Aligning Corporate Social Responsibility Initiatives with Sustainable Development Goals Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 34–37 (Journal pp. 150–153) SPS S P Shukla The author is Chairman, Group Sustainability Council, Mahindra Group. He can be reached at eboard@icai.in. “Corporate Social Responsibility (CSR) initiatives have become an important plank for businesses to position themselves as good corporate citizens. The corporate sector is working in collaboration with government and individuals on social and environment causes beyond the policy mandates and compliance requirements. For leading Indian companies, like their peers across globe, following sustainable practices has become an integral aspect of doing business for the good of all stakeholders – including the society. The impact of businesses on Sustainable Development Goals (SDGs) is inextricably linked with their CSR initiatives. The SDGs provide universally accepted principles to enable companies to formulate their CSR strategy in a holistic manner and provide well-defined targets to enable monitoring of the outcomes of those strategies. Several corporates are making continued efforts in this direction and are ably supported by the accounting professionals who play a key role in the sustainability reporting by the businesses. Read on…” CSR as a Measure to Offset the Social Cost of Doing Business Very often it is not realized that doing business extracts costs beyond the economic costs reported in the accounting statements prepared by the companies. In an ideal scenario, businesses would be adjusting their profits to net out the impact of social and environmental costs but the difficulty in estimation and non-standardization of such an approach renders the idea of accounting for such costs untenable. These costs in an economic sense are negative externalities and stakeholders have become more cognizant of the impact that businesses have on the society and the environment. It is no longer important for businesses to just ‘do well’ but it has also become important to ‘do good’. Therefore, companies all over the globe are making increased efforts to demonstrate that they are committed towards the social and environmental causes. In this context, CSR initiatives prove to be a useful tool to demonstrate this commitment with concrete actionable initiatives. Corporate Social Responsibility Regulations The CSR initiatives impact not only just the companies’ performance and brand perception but it also has an impact on the local communities, which in turn impact the country as well. This is the reason policymakers often make it a point to encourage these programs. Many countries around the world have enacted CSR laws encouraging positive corporate citizenship. There already are mandatory CSR reporting requirements in several countries, including UK, France, Sweden, Norway, Australia etc. CSR is taken very seriously in India as well. In fact, India is among few countries in the world to have rolled out regulations mandating CSR spending. Section 135 on CSR under the Companies Act 2013, provides a framework to help companies to work towards various development challenges. It allows companies to proactively identify and implement projects to meet the social and environmental challenges. The Act provides the criteria to demarcate companies which fall under the ambit of the law. It also prescribes the quantum of the mandatory spends and a broad list of activities which business should undertake using CSR funds, leaving no scope for ambiguity. This also helps the businesses to align their CSR strategy with the key priorities of the nation including health, poverty alleviation, education, clean and safe water etc. which are de-facto part of the SDGs as well. How Corporates Contribute Towards SDGs Climate change risks are now a usual agenda item for discussion in corporate boardrooms. With the shifting focus on Sustainable practices, organization performance is increasingly considering the extent to which Environment, Social, and Governance (ESG) factors are integrated into the long-term value creation. Organizations are witnessing increased expectations from both shareholders and consumers to work on sustainability front and provide transparent disclosures on their impact on climate and put efforts for making operations and products sustainable in terms of impact on climate. “Reporting on sustainable practices together with higher degree of disclosures and accountability has become a common practice among businesses across the globe. This is substantiated by the fact that more than 300 of the Fortune 500 companies have set sustainability-related management targets on which they report regularly (Pivot Goals, www.pivotgoals.com). The sustainability reporting and accountability practices in India are at par with global standards.” In India, pioneering business houses have done exemplary work in terms of not only sustainability reporting but rather incorporating sustainability into the business models and thereby creating value for shareholders while simultaneously having a positive impact on society and environment. For example: Farm Mechanization & Food Security India grows around 300 million tonnes of food-grain on the same amount of land on which it used to grow 190 million tonnes at the turn of the century. One of the key factors behind this 50% increase in productivity is farm mechanization. Tractor penetration has increased from 16 per 1,000 ha. to 35 per 1,000 ha. The farm equipment industry has made a huge contribution to crop productivity and therefore to rural prosperity and reduction of inequalities. Water Security & Micro-Irrigation Since independence, per capita water availability has reduced to one-third today, heading towards becoming a water-scarce country. Around 70% – 80% of fresh-water usage in the country is in farm irrigation and therefore it is a key lever to increase water usage efficiency. Use of micro-irrigation can reduce water required for irrigation by up to 30%, creating economic value while simultaneously conserving water resources. SDGs and their Connect with CSR The SDGs highlight a set of large, chronic, inter-connected and complex challenges plaguing the world. The genesis of SDGs can also be linked with the concept of hidden social and environmental costs. Since Industrial Revolution 1.0, the model of development has been to focus on the economic gains i.e. Profit and Loss, which led to economic growth while adversely affecting the Balance Sheet of natural assets including air, water, soil, forests, etc. which are used to create economic value. This practice is clearly unsustainable and hence, SDGs are in place to monitor progress on these aspects as well. Given that both CSR and SDGs have a similar genesis, it is no surprise that both are interlinked and together they have tremendous potential to provide a suitable model for sustainable growth. In fact, in the Indian context, the CSR activities mentioned in Schedule VII of the Companies Act, 2013 provide guidelines of the areas under which CSR initiatives can be undertaken. Each of these guidelines can be mapped to one or more SDGs: Illustrative Mapping of Schedule VII Activities to UN SDGs: Technology Incubators: Contributions to technology incubators located within Central Government approved academic institutions are directly linked with SDG 9 (Industry, Innovation, and Infrastructure). Rural Development Projects: CSR spends on rural development projects are inextricably linked to SDG 1 (No Poverty), SDG 2 (Zero Hunger), SDG 3 (Good Health & Well-being) and SDG 4 (Quality Education). In a nutshell, CSR regulations provide a broad direction for corporates to engage in activities which will lead to a sustainable future whereas SDGs help in defining tangible well-defined targets to measure the outcome of those activities. Global surveys by leading consulting firms show growing importance of the SDGs to business activity including the CSR strategies. Further, focusing on the SDGs also allows multi-national companies to address a significant challenge – how to devise an effective CSR approach for businesses spanning across multiple geographies. Without common guiding principles in place, developing a cohesive CSR approach may have been difficult for companies with cross-border business operations. Since SDGs are inherently universal, they can serve as a framework to address cross-border CSR issues. SDG Financing Gap – Global and Indian Estimates It has been estimated that funding of USD 5,000 to 7,000 Billion will be required to achieve the SDGs globally by 2030. The corresponding estimates peg the spending needed in India at USD 960 Billion, of which more than USD 500 Billion is the funding gap based on current and planned public expenditures (FICCI – TTC Report: Sustainable Development Goals – Linkages with Corporate Actions in India, 2018). A significant chunk of this gap is expected to be bridged from private sector sources. CSR spends provide a possible way to fund these requirements. Ways to Align CSR Strategies with SDGs Measuring social impact has been an evolving effort for companies over the years. At times, businesses prefer to report efforts rather than impact and most of these disclosures are those that are mandated by the government. However, the pandemic has brought a sharp focus on the ‘S’ in ESG. Investors and businesses are now getting a lot more serious about their social metrics. They are looking for more measurable and meaningful disclosures for social reporting. The SDGs cover a broad spectrum of issues ranging from climate change, gender inequality and the eradication of poverty. It is therefore imperative for companies to map their line of work and then take on goals that they can contribute to and shape their CSR strategies accordingly. Some of the CSR initiatives taken by leading Indian businesses having impact on several SDGs include: Girl Child Education: A leading auto major has an ongoing flagship CSR initiative to provide opportunities for girl children to attend school by providing them economic and social support. This has positively impacted the lives of 4 lakh girls in the country by enabling them to have quality education. Youth Upskilling: A renowned Indian conglomerate is working towards upskilling the youth in multiple sectors such as IT, hospitality, automotive, retail etc. and has set an ambitious commitment to skill as many as 10 lakh youth by 2025, driving significant job creation. Rural Financial Inclusion: In the financial services domain, a company with substantial rural presence is providing financing support to SMEs in these areas, thereby ensuring business growth and employment generation in rural India. Healthcare Access: Corporates are providing better access to healthcare facilities by deploying mobile paramedical units to reach out to remote and less accessible areas, benefiting lakhs of people. Environmental Afforestation: Several businesses run regular tree plantation drives, planting millions of trees while maintaining a high rate of survival of planted saplings, resulting in dramatic improvements in ambient temperature and localized weather conditions. In a nutshell, businesses have tried to touch upon key SDG targets in various ways through their CSR initiatives. These examples are for the purpose of illustrating how CSR initiatives can align with SDGs. However, it may be unrealistic to work out an all-encompassing strategy impacting all the 17 SDGs for most companies. A practical strategy is to focus on specific targets, perhaps those which align with already existing CSR activities. This is a pragmatic and useful way for companies to make the transition, paving way for a longer-term approach through which they commit holistically to working on several SDGs through CSR activities. Role of Chartered Accountants in Sustainability & SDG Alignment Chartered accountants can play an important role in this process. CAs have a visibility of company’s compliance and reporting requirements along with its financial position. They can therefore help in advising the company to aim at CSR initiatives which have financial suitability and would also meet statutory obligations. Also, while monitoring the expenditure under the CSR head, they can monitor the progress on these initiatives and ensure that they are well on track towards meeting the organization’s stated social objectives. Further, when in leadership roles, they can play an even more proactive role by helping corporates to work out strategies and initiatives that serve both the business as well as social goals. By ensuring that highest levels of corporate governance and transparency of disclosures and reporting are maintained, they can ensure that business goals and social values align harmoniously. This would be perhaps one of the biggest contributions from the community of accounting professionals towards the cause of SDGs.

Sustainability • ESG & Development ICAI Journal Ref: August 2021 • Vol. 70 • No. 2 • pp. 27–33 (143–149) UN 2030 Agenda • NITI Aayog SDG India Index SDG Agenda – Partnerships in the Decade of Action IG Isha Gupta Sustainability Expert • ishagupta74@gmail.com NM Dr. Nandita Mishra Sustainability Expert & Academician • saanvinandita@gmail.com “The target to achieve the Sustainable Development Goals (SDGs) by 2030 requires all hands on deck. We need a well-integrated pooling of resources, expertise and actions from different stakeholders to achieve our 2030 Agenda. India needs a multi-stakeholder partnership to attain the 17 entwined SDGs and 169 targets. The outbreak of COVID-19 has impacted the journey towards this goal and this article focuses on India’s initiative towards attaining SDGs and also discusses about the impact of COVID 19 on scoreboard of SDGs. Further, the article focuses on what initiatives stakeholders have taken to achieve the SDGs by 2030. Read on…” 1 Introduction: From MDGs to the 2030 Agenda for Sustainable Development The historic Millennium Declaration had been signed by leaders from 189 countries gathered at the United Nations headquarters in September 2000, in which they pledged to meet a set of eight measurable goals by the year 2015, ranging from halving extreme poverty and hunger to promoting gender equality and lowering child mortality. After 2015, as work on the new goals began, the legacy and accomplishments of the MDGs give essential insights and perspectives. In September 2015, the United Nations General Assembly officially approved the 2030 Agenda for Sustainable Development, a set of 17 SDGs replaced the MDGs and they are universal, integrated, and transformative. From 2016 to 2030, the goals must be implemented and achieved in every country. The Sustainable Development Goals (SDGs)1 are an inter-governmental set of aspirational goals with 169 targets to alter the planet following the Millennium Development Goals (MDGs). India is a signatory to the SDGs and has noble ambitions. All SDGs are extremely important and relevant in India. In terms of the Millennium Development Goals, India failed to meet the targets on 8 out of 12 targets recognized as relevant from India’s standpoint (Millennium Development Goals India Country Report, 2015)2. The Decade of Action & Demographic Imperative: Because of the outbreak of the COVID-19 pandemic, the world is lagging behind the schedule in terms of achieving the 2030 Agenda with ten years remaining. India is also not an exception to this, but the position of India holds great importance in the overall attainment of the SDGs. India is home to one-sixth of the world’s population and accounts for 8% of global GDP, making it imperative to the attainment of the global SDGs. A decade of aggressive action is needed to speed sustainable solutions to the world’s largest challenges and help achieve these goals. This requires a multi-stakeholder approach, because the target cannot be achieved without the participation of all the stakeholders. 2 India Moving Towards Attainment of SDGs & Key Milestones India has adopted the UN SDG framework and has aligned its priorities according to the global goals. The Government of India is taking all possible steps in fulfilling the framework, supervising the development, and bringing on board different stakeholders in the voyage towards accomplishment of the targets. India is a large and diverse country and each region requires different ways of handling the accomplishment of the SDGs. Government has taken many actions to localize the SDG goals. Indian business houses, being the most important stakeholder, have started adopting the Triple Bottom Line (People, Planet, Profit) which is a very important step in attainment of the SDGs. Indian civil society organizations which are an important stakeholder in the attainment of SDGs have been making incredible contributions through spreading awareness and educating the society about the framework. This gives a comprehensive society-based approach towards attainment of the SDGs. Universal Healthcare Coverage: Coverage of citizens by health insurance covering more than 500 million citizens under Ayushman Bharat. Sanitation & Electrification: “Swachh Bharat Abhiyan” building millions of household toilets and achieving 99% electrification of Indian villages. Ease of Doing Business: Dramatic improvement in the global Ease of Doing Business ranking from 142 in 2014 to 63 in 2021. Renewable Energy Surge: Unprecedented capacity additions in renewable power generation towards the national 175 GW target. While India has been doing fairly well in accomplishing the SDGs, the task ahead is a grueling assignment. With huge population size, diverse regions with different economic, social and cultural backgrounds, this is a daunting challenge. COVID-19 has further pushed us back in accomplishing the target and created several challenges. Bringing the economy back to track and accomplishing the SDGs targets is the most pressing task which requires partnership among different stakeholders. India also needs to focus on gender equality, nutrition accomplishment, education at all levels, pollution reduction and employment generation. The SDG India Index is one of the most important steps taken by the government which measures the SDG progress at the state level. The index also facilitates to stimulate competition among the states which eventually will drive the achievement of the SDG targets. Guiding Philosophy – “Sabka Saath Sabka Vikas”: As the world enters the “Decade of Action”, India’s commitment to the principles of SDGs can be attained with the help of Central and State Governments, business houses, NGOs, community and society at large. The principle of “Sabka Saath Sabka Vikas” with sustainability at its core should be our mantra to achieve the SDGs. Harmony with the global community and efforts from each level of community in our country is the need of the hour. 3 Multi-Stakeholder Partnerships (MSP) – Response to the Pandemic COVID-19 has provoked an extraordinary multiple-sector quick response. Governments, public sector, private sector, international organizations, and society’s immediate collaboration is required to accelerate the effort against COVID-19. Partnerships between public and private sector, public sector and society, and private sector and society are the desired ones for the accomplishment of the SDGs. The ACT Accelerator (Access to COVID-19 Tools Accelerator) is one such stellar example which has given increased access to shared knowledge, technology, data and resources globally. Table 1 – India SDGs Scoreboard with Indicator of Performance Indicator Legend: • Green: Improvement in performance  |  • Red: Decline in performance  |  • Blue: No change in improvement  |  • NA: Not Applicable / Specific Impact SDG Goals Improvement in Performance Impact of COVID-19 on SDG Goals SDG 1.No Poverty ← Decline (Red) COVID-19 is estimated to have pushed an additional 354 million people below the poverty line (Kumar, 20203) bringing the overall poverty rate to 46.3 percent. It has also boosted the rate of unemployment to 27.1 percent (Express Healthcare, 20204) with informal labourers and small traders accounting for more than three quarters. SDG 2.Zero Hunger ← Decline (Red) Extreme food insecurity affects an estimated 16 million people (8 percent of the total undernourished population). Due to the pause in mid-day meals, 97 million youngsters are at risk of malnutrition (Business World, 20205). SDG 3.Good Health and Well Being → Improvement (Green) While the pandemic has brought public health to the forefront, with increased financing and policy attention, the focus on COVID-19 care has hampered the delivery of some critical health services, with 1 million children at danger of missing immunization (Business Line, 20206). SDG 4.Quality Education ↔ No Change (Blue) Due to the COVID-19 lockdown, education of over 154 crore students has been disrupted. This increases the gender gap in education as girls are more at risk than boys. The dropout rate of girls is high at the secondary level (19.8%) as compared to primary (6.3%); very few complete their education till Class 12 (Sonawane, 20207). SDG 5.Gender Equality → Improvement (Green) Women have been disproportionately affected by COVID-19, which has resulted in an increase in occurrences of domestic violence calls by 27 percent (Iyengar and Defterios, 20198). SDG 6.Clean Water and Sanitization → Improvement (Green) Due to increased handwashing, COVID-19 has resulted in a 20% increase in per capita water consumption. COVID-19 has become more prevalent in locations where there is a lack of clean water, inadequate sanitation, and long distances to water sources (Aggarwal, 20199). SDG 7.Affordable and Clean Energy → Improvement (Green) In the first four months of the lockdown, COVID-19 had a transient positive impact on energy usage, with per capita power use falling by 13% (Parnell, 202010). SDG 8.Decent Work and Economic Growth ← Decline (Red) There has been a severe impact on economic growth, with GDP contractions of -7.965 percent in 2020 and 14.8 percent expected in 2021 (Dave, 202011). This has had a cascading effect on employment and per capita income. SDG 9.Industry Innovation and Infrastructure → Improvement (Green) The industrial sector took the brunt of the economic downturn, with the Index of Industrial Production falling by 55 percent (Press Information Bureau, 202012). Cost escalations and project delays report cost overruns of INR 4 lakh crores for 1,682 projects (Science Based Projects, 202013) in the infrastructure industry. SDG 10.Reduce Inequalities ← Decline (Red) COVID-19 has expanded inequality: the wealth of billionaires increased by 35% during the lockdown and by 90% since 2009. It would take an unskilled worker 10,000 years to make what Mukesh Ambani made in an hour during the pandemic, and 3 years to make what he made in a second (The Wire, 202114). SDG 11.Sustainable Cities and Communities → Improvement (Green) During the shutdown, 2.6 million migrants were stranded across metropolitan India, highlighting the lack of inclusive cities (Patel, 202015). Furthermore, with more than three people per room, 42 percent of households (HHs) in India are unsuitable for social distancing, indicating a lack of progress toward sustainable communities and affordable homes (UNDP, 201616). SDG 12.Responsible Consumption and Production NA During the lockdown, resource consumption fell by 44 percent (although it has since recovered to pre-lockdown levels), while minerals such as coal saw a decrease in demand (-16 percent in March). However, garbage creation grew, with India producing 18,000 tonnes of COVID-19 waste (Business Roundtable, 201717). SDG 13.Climate Action NA COVID-19 had a favorable influence on climate change, resulting in a 26 percent reduction in emissions during the lockdown period and an overall reduction of 8.2 percent in 2020. It has also attracted more attention to climate change and the need to conserve to avoid future disasters (Shead, 202018). SDG 14.Life Below Water NA It was expected that India will produce over 18,000 tonnes of COVID-19 trash by 2020, with a substantial percentage of that being plastics (gloves, masks, sanitizer bottles) and medical waste tossed into inland lakes, rivers, and oceans, exacerbating marine pollution. The COVID-19 shutdown has had a negative impact on the fisheries industry, resulting in a decrease in production and exports due to fishing restrictions (Accenture and Global Compact Network India, 202119). SDG 15.Life on Land ← Decline (Red) The COVID-19-related lockdown resulted in an increase in urban wildlife appearances. Wildlife poaching, on the other hand, more than doubled during the COVID-19 lockdown, with 88 incidents compared to 35 in the 2019 year (Mishra, 202120). SDG 16.Peace, Justice and Strong Institutions → Improvement (Green) COVID-19 had a major impact on judicial activity, with a 95 percent drop in cases filed due to the courts’ inability to function during the lockdown. Serious crime rates, on the other hand, have dropped by 40 percent to 50 percent (Business World, 202121). SDG 17.Partnerships for the Goals NA COVID-19 sparked a surge in international cooperation to achieve development goals, particularly in the field of public health. A vast number of Indian companies, including Serum Institute of India (SII), Zydus Cadila, Dr. Reddy’s Laboratories (DRL), and Bharat Biotech, have partnered with international organizations for R&D and manufacturing to create COVID-19 vaccines. In bilateral agreements, there was also more traction on education, health, and economic growth (Accenture and Global Compact Network India, 2021). 4 Pathways and Realignment Opportunities for Recovery and Development When it comes to the SDGs, various stakeholders (governments, private companies, NGOs, and civil society) have already taken the road to realize value and achieve shared success. By aligning company strategy with the SDGs, global concerns can be turned into business opportunities while also helping to make the world a better place. Businesses can use the SDGs as a strategic framework to track performance, create targets, and engage with diverse stakeholders. In order to encourage private investment in important industries, the Indian government has implemented a variety of policies, programmes, and packages. The realignment strategy details the focus area of each SDG, the initiatives taken by Government, and the investments made by stakeholders across three overarching strategic pillars: Pillar 1: Build a Strong and Resilient Economy (SDGs 3, 4, 11) a. SDG 3: Good Health and Well-Being – Telemedicine & Digital Health Infrastructure The focus area is “Telemedicine” which includes ICT to exchange patient information and provide healthcare services in remote regions. Through collaboration, NITI Aayog and the Ministry of Health and Family Welfare (MoHFW) have released Telemedicine Practice Guidelines, establishing the regulatory groundwork for remote clinical consultations. The National Health Stack (NHS) and National eHealth Authority (NeHA) have launched a digital framework aiming to compile digital health records of all citizens by 2022. Driven by this expansion, hospital mergers and acquisitions increased by 155 percent to INR 76.15 billion (USD 1.09 billion) in the fiscal year ended March 2019 (Cyrill, 202022). b. SDG 4: Quality Education – EdTech & Digital Learning Platforms The focus area is “EdTech”, targeting to make education accessible via technology instruments. The Government developed SWAYAM (Study Webs of Active Learning for Young Aspiring Minds), a holistic platform connecting online courses. Approximately 1.02 crore students have enrolled under 2,769 Massive Open Online Courses (MOOCs)23. Underscoring massive private capital inflow, investment in ed-tech startups surged fourfold from USD 409 million in 2019 to USD 1.5 billion in 2020. c. SDG 11: Sustainable Cities and Communities – Affordable Housing & Urban PPP Models The focus area is “Affordable Housing”, providing economical dwellings for persons with median household income or less. The Government supports cheaper home loan interest rates and framed the Public Private Partnerships for Affordable Housing policy to attract private capital. With assistance from the International Finance Corporation (IFC), the Bhubaneswar Development Authority (BDA) formulated the “Policy on Housing for All in Urban Areas”, representing India’s first-ever Public Private Partnership (PPP) for affordable housing. Pillar 2: Opportunities for Equitable Business Growth (SDGs 1, 8, 9) d. SDG 1: No Poverty – Financial Inclusion Through Fintech The focus area is “Financial Inclusion through Fintech”, encompassing delivery of formal financial products and services to every citizen and enterprise. Under the Pradhan Mantri Jan-Dhan Yojana (PMJDY), over 365 million accounts have been opened. Under the National Mission for Financial Inclusion (NMFI), 2014, over 35 crore people were brought into the formal banking system. Furthermore, Financial Software and Systems (FSS) partnered with India Post Payments Bank (IPPB) using FSS’s Aadhaar-Enabled Payment System (AePS) to deliver doorstep financial services across rural India. e. SDG 8: Decent Work & Economic Growth – Remote Working & Virtualization Enablement The focus area is “Remote Working (Virtualization enablement)”, structuring workplace environments so employees eliminate daily commuting. Due to COVID-19, widespread work-from-home practices removed over 10,000 vehicles from roads over a year, cutting 29,000 metric tonnes of CO2 emissions (Prasad, 202024). f. SDG 9: Industry, Innovation and Infrastructure – E-Commerce & Digital India Infrastructure The focus area is “E-Commerce and Delivery Services”, empowering entrepreneurs to scale operations and revive economic activity. To accelerate national digitalization, the Government established flagship platforms including UMANG, Startup India Portal, and Bharat Interface for Money (BHIM) under the comprehensive Digital India movement. Pillar 3: Opportunities to Strengthen the Green Economy (SDGs 7, 13) g. SDG 7: Affordable and Clean Energy – Solar Expansion & Gigawatt Targets Focused on accelerating transition to renewable, zero-emission power. Under the Jawaharlal Nehru National Solar Mission (JNNSM), India’s initial 20 GW solar PV target was surpassed in 2018—four years ahead of the 2022 deadline—prompting the Government to raise the target to 100 GW solar and 175 GW total renewable capacity. In corporate consolidation, ReNew Power acquired Ostro Energy for INR 60,000 million (USD 836 million) in March 2018 to bolster green energy generation. h. SDG 13: Climate Action – Electric Mobility & Gigafactory Ecosystems Focused on scaling EV production and adoption. Policy interventions include eliminating customs duties on key EV components, slashing GST on electric vehicles from 28% down to 5%, and granting an income tax deduction of INR 1.5 lakh on EV loans. Nearly a dozen states, led by Delhi, formulated dedicated EV policies. The India Energy Storage Alliance (IESA) projects over USD 3 billion in investment across four domestic “giga factories”, while Bharat Heavy Electricals Limited (BHEL) initiated consortium talks to construct India’s first Lithium-ion Gigafactory. i. SDG 13: Climate Action – Green Finance & Sustainable Capital Instruments Focuses on mobilizing sustainable capital. SIDBI launched the Sustainable Finance Scheme for renewable energy, BEE star ratings, green microfinance, and eco-labelling. Hero Future Energies issued INR 300 crore in Climate Bonds certified green bonds in 2016. Yes Bank became India’s sole commercial bank signatory to the UNEP FI Principles for Responsible Banking (PRB). 5 Conclusion: Subnational Localisation & Multi-Stakeholder Action With a vigorous SDG localisation model which exemplifies our belief in cooperative and competitive federalism, buoyed by evidence-based policy-making mechanisms, India has marched ahead on multiple facades which are key to achieving these Goals. The SDG India Index and Dashboards – the first government-led measure of subnational progress on SDGs, have provided guidance to endeavors of subnational governments. But COVID-19 has shaken the growth rate and has created a sea of tasks to be accomplished for the 2030 agenda. A unified strong multi-stakeholder partnership among the centre, states, community, business and society is the answer to this massive problem. The shockwaves from the pandemic COVID 19 will further disrupt society’s socio-economic structure and harm the natural environment unless decisive efforts are aimed at achieving sustainable growth. This is the decade for achieving the Sustainable Development Goals, and leaders must commit to increase sustainability and accountability. A number of stakeholders have begun to take steps in this approach. The Indian government has been aggressively enacting laws to increase renewable energy production and focus investments on clean energy and electric mobility in India. To foster start-up concepts aiming at social innovation, private investments are being pooled. With the government’s increasing support and incentives, India is becoming an appealing destination for many big private companies’ sustainability-focused products and services. An environment like this is favorable for appealing, sustainable, and implementable routes to recover and expand in order to achieve SDG goals. It is time to seize the emerging opportunities, capitalize on capabilities and strengths, and reimagine a more equitable, inclusive, and greener world. References & Footnotes Sustainable Development Goals. Retrieved from (https://www1.undp.org/content/oslo-governance-centre/en/home/sustainable-development-goals/background.html) on 11/07/2021. Millennium Development Goals, India Country Report 2015. Retrieved from: http://mospi.nic.in/sites/default/files/publication_reports/mdg_2july15_1.pdf Kumar, S. (July 19, 2020). Opinion Impact of COVID 19 pandemic on food security of India. Economic Times. Retrieved from: (https://government.economictimes.indiatimes.com/news/policy/opinon-impact-of-the-covid-19-pandemic-on-food-security-of-india/77048453) on 10/07/2021. India’s Health system will witness the ripple effects of the COVID 19 pandemic (July 16, 2020). Express Healthcare. Retrieved from (https://www.expresshealthcare.in/blogs/indias-health-sys-tem-will-witness-the-ripple-effects-of-covid-19/423343/) on 10/07/2021. COVID-19 Pandemic Accelerated Pace of Broadband Penetration in India: (November 6, 2020). Business World. Retrieved from (http://www.businessworld.in/article/COVID-19-pandemic-accelerated-pace-of-broadband-penetration-in-India-06-11-2020-339934/) on 11/07/2021. Fintech: Digital Payments got a COVID boost in 2020, Business Line (25 December, 2020). Retrieved from (https://www.thehindubusinessline.com/money-and-banking/digital-payments-got-a-covid-boost-in-2020/article33419349.ece) on 10/07/2021. Sonawane, S. (December 1, 2020). The Gendered Impact of COVID-19 on School Education. CBGA. Retrieved from (https://www.cbgaindia.org/blog/gendered-impact-covid-19-school-education/) on 14/07/2021. Iyengar, R. and Defterios, J. (July 1, 2019). Women are bringing solar energy to thousands of Indian villages. CNN Business. Retrieved from (https://edition.cnn.com/2019/07/01/business/india-solar-frontier-markets/index.html) on 09/07/2021. Agarwal, R. (August 16, 2019). Auto slump to hit investors, Indian economy; Here’s what government needs to do. Financial Express. Retrieved from (https://www.financialexpress.com/money/auto-slump-to-hit-investors-indian-economy-heres-what-government-needs-to-do/1677080/) on 09/07/2021. Parnell, J. (January 14, 2020). WoodMac: Volkswagen will be world’s Biggest Electric Car maker by 2030. Greentech Media. Retrieved from (https://www.greentechmedia.com/articles/read/volkswagen-will-be-worlds-biggest-ev-manufacturer-by-2030) on 10/07/2021. Dave, S. (August 11, 2020). India GDP to shrink by 4.5% in 2020 due to COVID 19 pandemic: Dun & Bradstreet Report. Retrieved from (https://economictimes.indiatimes.com/news/economy/indicators/india-gdp-to-shrink-by-4-5-in-2020-due-to-covid-19-pandemic-dun-bradstreet-report/articleshow/77483208.cms?from=mdr) on 10/07/2021. Launch of ‘Aatma Nirbhar Bharat Abhiyaan’ is a “Watershed” moment in the economic history of India: Raksha Mantri. PIB Delhi (December 14, 2020). Retrieved from (https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1680603) on 11/07/2021. Companies Taking Action. Science Based Targets. Retrieved from (https://sciencebasedtargets.org/companies-taking-action/) on 10/07/2021. COVID-19 Sharpened Inequalities in India, Billionaires’ Wealth Increased by 35%: Report. The Wire (January 25, 2021). Retrieved from (https://thewire.in/rights/covid-19-sharpened-inequalities-in-india-billionaires-wealth-increased-by-35-report) on 11/07/2021. Patel, C. (July 13, 2020). COVID-19: The Hidden Majority in India’s Migration Crisis. Chatham House. Retrieved from (https://www.chathamhouse.org/2020/07/covid-19-hidden-majority-indias-migration-crisis) on 14/07/2021. Mapping Mining to the SDGs: An Atlas. UNDP (2016). Retrieved from (https://www.undp.org/publications/mapping-mining-sdgs-atlas) on 10/07/2021. Work in Progress. How CEOs are helping Close America’s skill gap. Business Roundtable (2017). Retrieved from (https://s3.amazonaws.com/brt.org/archive/immigration_reports/BRT%20Work%20in%20Progress_0.pdf) on 10/07/2021. Shead, S. (July 16, 2020). Tesla plans to use Glencore cobalt in new Gigafactories. CNBC. Retrieved from (https://www.cnbc.com/2020/06/16/tesla-glencore-cobalt-gigafactory.html) on 10/07/2021. Raising India’s SDG Ambition-Pathways for sustainable recovery and growth, Accenture (2021). Retrieved from https://www.globalcompact.in/uploads/knowledge-center/1612422074raising-india-sdg-accenture-white-paper-15th-convention.pdf Mishra, D. (September 21, 2021). Edtech funding jumps 4x to USD 1.5 billion this year. Times of India. Retrieved from (https://timesofindia.indiatimes.com/business/india-business/edtech-funding-jumps-4x-to-1-5bn-this-yr/articleshow/78224787.cms) Mindspark in Rajasthan: Personalized Adaptive Learning Tools To Improve Learning Outcomes. Business World (July 12, 2021). Retrieved from (http://www.businessworld.in/article/Mindspark-In-Rajasthan-Personalized-Adaptive-Learning-Tools-To-Improve-Learning-Outcomes/01-11-2019-178372/) on 10/07/2021. Cyrill, M. (October 22, 2021). India’s Healthcare Investment Outlook: A Brief Profile. Retrieved from (https://www.india-briefing.com/news/indias-healthcare-investment-outlook-a-brief-profile-20757.html/) on 10/07/2021. Press Information Bureau, Ministry of Education. Retrieved from (Various initiatives have been taken to promote digital learning under ‘National Mission on Education through Information and Communication Technology’ (NMEICT) (pib.gov.in)) on 10/07/2021. Prasad, N.T. (August 31, 2020). India power demand is almost back to pre-covid levels: POSOCO Report. Retrieved from (India’s Power Demand is Almost Back to Pre-COVID Levels: POSOCO Report - Mercom India) on 10/07/2021. About the Authors Isha Gupta Sustainability Expert Email: ishagupta74@gmail.com Dr. Nandita Mishra Sustainability Expert & Academician Email: saanvinandita@gmail.com

Sustainability • ESG & Non-Financial Reporting BRSR and its Disclosure Challenges Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 38–42 (Journal pp. 154–158) CA CA. Heman Sabharwal The author is the member of the institute. He can be reached at eboard@icai.in. “With the global Environmental, Social and Governance (ESG) reporting landscape changing rapidly, SEBI’s Business Responsibility and Sustainability Report (BRSR) is an upgrade over Business Responsibility Report (BRR) and is the next step for Sustainability Reporting in India. The new format is more comprehensive and is formulated after considering with various international reporting standards/frameworks. Though the transition from BRR to BRSR has its own short-term challenges, these developments will benefit India Inc.’s business sustainability in the long run. As a next step to reporting, assurance of non-financial information is being widely adopted globally for ensuring credibility of information, however there are some challenges associated with it. Read on…” Business Responsibility and Sustainability Report – An Opportunity for Companies Context The push towards climate change adaptation along with responsible corporate behavior has thrusted the investors and companies to embed ESG in their overall business activities. Whilst the globally accepted voluntary frameworks/standards such as Global Reporting Initiative (GRI), Integrated Reporting (<IR>), Sustainability Accounting Standards Board (SASB) are driving the sustainability reporting scenario, several countries have gone to the extent of mandating non-financial disclosures. In April 2021, the Government of New Zealand announced the introduction of legislation that would align climate-related disclosures with the Recommendations of the Task-Force on Climate-related Financial Disclosures (TCFD) mandatory for certain financial services organizations, as well as all equity and debt issuers listed on the New Zealand’s Exchange. India is not behind in this context. The ESG reporting started as early as 2009 in the country with the Ministry of Corporate Affairs (MCA) issuing the ‘Voluntary Guidelines on Corporate Social Responsibility’. In 2012, SEBI mandated the BRR for the top 100 companies by market capitalization. The mandate was then extended to 500 companies in 2015 and later to 1000 companies in 2019. In the same year The National Guideline on Responsible Business Conduct (NGRBC) was released. Recently, in May 2021, SEBI came out with a circular (‘SEBI circular1’) introducing BRSR for the top 1000 listed companies by market capitalization with a new prescribed format of sustainability reporting on the ESG parameters. SEBI Circular and Structure of BRSR The MCA Committee2 (‘Committee’) examined the NGRBC-BRR framework within the broader context of UNGPs, SDGs, and other widely accepted non-financial/sustainability reporting frameworks and refined/enhanced the BRR to be called the Business Responsibility and Sustainability Report (BRSR). The SEBI circular mandates BRSR for top 1000 companies by market capitalization from FY2022-23 onwards; keeping it voluntary for FY2021-22. The structure of BRSR format consists of three sections: 1. General Disclosures Aims to capture basic information of the company such as name, year of incorporation, office address, website, product information, operations, market served by entity, employees, turnover, CSR details etc. 2. Management and Process Disclosures Captures data on the policy and process put in place by the company and requires companies to provide a web-link of the policies that are on their website. Additionally, it also requests for information on Governance, leadership and oversight. 3. Principle-wise Performance Disclosures This is further divided into Essential (mandatory) and Leadership (voluntary) Indicators/ Key Performance Indicators (KPIs) which are taken from the nine principles of NGRBC. The indicators in Principle-wise performance are aligned with the Sustainable Development Goals (SDGs). Essentials (Mandatory) Leadership (Voluntary) BRSR → General Disclosures Management & Process Principle-wise Performance → Essentials (Mandatory) Leadership (Voluntary) Figure 1: Structure of BRSR BRSR circular also provides flexibility to companies already preparing sustainability reports based on international frameworks (such as GRI, SASB, TCFD or <IR>) to cross-refer the information disclosed under such frameworks with the BRSR, thus, avoiding duplication in reporting. It also provides a Guidance Note that shall help companies interpret and understand the requirements under each section for better disclosures. Advancements in BRSR Overall, BRSR is an improvement over the BRR. The structure of BRSR now incorporates Essential and Leadership indicators with quantitative, in-depth questions and granular level KPIs. BRSR covers more KPIs under the three pillars of ESG as compared to the BRR, especially around environmental KPIs such as energy, emissions, water and waste, and health & safety indicators. Reporting Aspect Under Former BRR Under Advanced BRSR Emissions Details Included details on emissions generated by company within permissible limits given by CPCB/SPCB for the financial year. Comprehensive details on GHG Gas emissions and intensity; other emissions details such as NOx, SOx, Particulate Matter (PM), Persistent Organic Pollutants (POP), Volatile Organic Compounds (VOC), Hazardous Air Pollutants (HAP); and details on GHG reduction projects (if existing). Clean Technology & Energy Initiatives Disclose if company had undertaken any initiatives for clean technology, energy efficiency, renewable energy or others (web-link provided, if it exists). Deep quantitative metrics, specific project reporting, tracking energy consumption and conservation across operational boundaries. Historical Comparative Data Primarily single-year reporting. Requires companies to disclose current and previous year data for certain KPIs, establishing comparative granularity. Value Chain Coverage Limited focus beyond immediate direct operations. Incorporates questions on value chain partners in disclosure questionnaire (training programs conducted, health & safety, working condition assessments, corrective actions undertaken, etc.). From this, we can infer the granularity expected from companies in BRSR disclosures. Semblance with the WEF Metrics In 2020, World Economic Forum (WEF) International Business Council3 (IBC) after consultation with various stakeholders came up with a common set of metrics, based on five voluntary frameworks: CDP, the Climate Disclosure Standards Board (CDSB), GRI, <IR> and SASB. Similarly, the MCA’s committee report on BRSR framework draws inference from the globally recognized Sustainability Reporting frameworks – UNGC, CDP, GRI, <IR> and ISO 26000. The following is an attempt to categorize some of the BRSR indicators under the 4 WEF pillars to understand if BRSR broadly covers all the 4 pillars of WEF: Figure 2: Semblance of BRSR KPIs with WEF Pillars 1. Principles of Governance Metrics like anti-corruption, composition and board structure, remuneration policies, ethical behavior, stakeholder engagement. 2. Planet Environmental KPIs such as scope emissions, water consumption, waste disposal, and biodiversity have been partly covered in the BRSR. Details on LCA (Life Cycle Assessment) can also be disclosed under the BRSR framework. 3. People Retention policy of the entity, R&D Expenses, Social Impact Assessments are common KPIs covered under both. 4. Prosperity Common metrics include Human rights policies, Diversity and Equality, Wage level, and trainings provided. Health and Safety theme has been partly covered with metrics such as trainings, incident reporting and disclosing Health & Safety management systems. Potential Enhancements: BRSR partly covers the WEF metrics, there being areas that can be enhanced further in the framework such as implementation of TCFD framework, disclosure on whether the goals and targets set are in alignment with the Paris agreement, societal cost of carbon, land use and ecological sensitivity, societal value generated etc. Challenges in BRSR Disclosures As mentioned above, BRSR is a new requirement and has come into being in May 2021. While it is a positive move and a big change over the current BRR, but only time will tell how the India Inc. adopts or embraces the BRSR. Rather than viewing as a compliance requirement, if corporates use introduction of the BRSR as an opportunity to embed ESG aspects into their strategy and operations, it will be easier and more worthwhile to embrace BRSR. Some of the challenges that companies could face while adopting and implementing BRSR are as follows: Continued Challenges: Though BRR was a very simple format, companies found it challenging to complete it, BRSR is much comprehensive in that manner. The question remains if companies can adhere to the same. For example, the National Stock Exchange – Stakeholder Empowerment Services Report “ESG Analysis on 50 listed companies in India”4, pointed out several deficiencies in reporting for various aspects in BRR. These deficiencies are likely to reflect in the BRSR reporting due to the increase of both qualitative and quantitative disclosures. Transition Process: The BRR mandate was extended from top 500 listed companies to top 1000 listed companies by market capitalization recently in 2019. While the bottom 500 companies have relatively less experience and were still getting to mature with respect to the BRR disclosures, BRSR poses a significant transitional challenge for these companies. Prescriptive Format: Considering that the BRSR has a very specific format to respond upon, companies may find it restrictive and may not be able to disclose information on all initiatives taken other than what the format is requesting for. Accountable Disclosures: BRSR structure comprises of mandatory and voluntary KPIs that are to be reported upon. Being a regulatory compliance, it is anticipated that companies will opt to disclose only under the mandatory section. Companies may choose not to disclose voluntary indicators. Lack of Assurance Guidelines: There is no mention of third-party assurance on the BRSR disclosure data. Hence, the challenge lies in the fact that it would be very difficult to authenticate the veracity of information disclosed therein. Common Template Structure: BRSR provides a common template that is to be followed by all the companies. Considering that all the questions will not be applicable to all the sectors, hence inter-sectoral comparability will be a challenge, especially for the investors. Not Completely Mapped with International Framework: A lot of companies in India are already following some or the other international reporting framework. Considering that companies will not want to stop publishing their sustainability reports following an international standard, completing the BRSR might be a burden to them. Though BRSR gives the option of cross-referencing data points between Sustainability Reporting and BRSR, inconsistency between the definitions of the KPIs may lead to confusion. For e.g., The GRI 403-9 Work related Injuries indicator provides an option to the companies to choose between 200,000 and 1,000,000 man-hours of work for calculating different work-related injury rates. However, the Loss Time Injury Frequency Rate (LTFIR) indicator in Principle 3 of BRSR is calculated per 1,000,000 man-hours of work. This may create a problem for the companies which are looking to map their BRSR indicators with the GRI standards in their Sustainability Report. Assurance of BRSR Context The growth in the number of companies disclosing their non-financial data on ESG performance raises the question pertaining to the credibility of data being disclosed. Sustainability reporting or ESG reporting (as it now being called) always faces a challenge of consistent and accurate disclosures which can be achieved through conducting non-financial data assurance. Also, investors are focusing on embedding ESG aspects in the company’s strategy and their alignment towards developing a low carbon future. Assurance can help ensure the reliability of the data that can help strengthen the trustworthiness of investors and stakeholders. Further, assurance of non-financial data can lead to improved corporate governance practices, risk management process, improved reporting definitions, scope and methodologies. Also, rating agencies such as CDP and Dow Jones Sustainability index (DJSI) provide a better score if the non-financial data is assured by an independent third-party. Some of the prominent assurance standards used globally and in India are International Auditing and Assurance Standards Boards (IAASB)’s International Standards on Assurance Engagements (Revised) [ISAE 3000 (Revised5)], ISAE 3410, Account Ability’s AA1000 series of standards and in India ICAI’s Standards of Assurance Engagements (SAE) 3410 on Assurance Engagements on Greenhouse Gas Statements6. Types of Assurance Engagements as per ISAE 3000 (Revised): Reasonable Assurance Limited Assurance Since BRSR is a very important national sustainability reporting tool, it is important that the data presented in the same is also assured to ensure accuracy and credibility. The guidance note on the BRSR can be used as a base for providing assurance on BRSR. Challenges of BRSR Assurance As mentioned earlier, while it is yet to be seen how companies adopt the BRSR, conducting an assurance can help companies in complementing their internal processes and enhancing the credibility of information and data that are used to make decisions. However, assurance on BRSR could have the following set of challenges: Assurance Not a Mandatory Compliance: Since assurance of BRSR is not mandated, most companies may not see the need to invest in it. Even if they are in full compliance of reporting and disclosing of sustainability/ESG related data under BRSR, without a proper assurance, the data lacks credibility. Limited Guidance on Assurance: Sustainability assurance standards sometimes lack preciseness when compared to financial audit standards, the latter being more developed and in existence for a much longer period. Sustainability Reporting Standards Board of ICAI is now taking significant efforts in bridging the gap. Possibility of Indicators Material to Business Getting Left Out: With the current practices for assurance, companies may choose the indicators under BRSR that they want an assurance based upon on their reporting strategies, degree of information provided and management systems. This may lead to selection of those indicators for assurance which may not be material to the business of the company. Tick in the Box: While BRSR may have become mandatory, most companies have limited knowledge on the importance and usefulness of getting an assurance upon the same. Lack of System Improvement: Conducting an assurance leads the corporates to realize the inadequacies and weaknesses in process/controls around data capturing, collation and reporting. As generally companies may not see the need of conducting an assurance of BRSR, it hinders the scope of improvements of such processes and it may also impact the accuracy of information being reported. There has been a constant development and evolution of non-financial reporting. With time, it has become more forward looking and integrated with defined boundaries and scope. With BRSR replacing BRR, this requires corporates to disclose accurate data in a more holistic manner. Hence, assurance of BRSR should ideally be conducted to provide reliable and credible data for all the stakeholders. Conclusion The post-COVID “new normal” narrative revolves around mainstreaming sustainability into business practices. The introduction of BRSR mandate is an inflection point in the Indian ESG reporting scenario which provides an opportunity for the companies to embed sustainability in their core strategy. SEBI has attempted to benchmark it against some of the leading global reporting frameworks, while keeping in mind the local sustainability challenges. BRSR is an attempt to standardize the ESG reporting landscape in India. As an overall format, it tries to encompass KPIs from all the three pillars of ESG. On a closer look, though BRSR will have transitional and implementation challenges in terms of disclosures, it will pivot the organizations towards more exhaustive non-financial reporting practices, which will be a major contributor in India Inc.’s corporate sustainability journey. Assurance of BRSR will help companies to disclose reliable and provide credible data under BRSR. It will also help in maintaining transparency and aid all the stakeholders (especially investors) to make better decisions. Corporates, regulators and other stakeholders are the key players who can exercise the need and importance of getting BRSR assured. References & Footnotes Available at: SEBI Circular on BRSR (May 2021) Available at: MCA Committee Report on Business Responsibility Reporting Available at: WEF IBC Measuring Stakeholder Capitalism Report (2020) Available at: NSE – SES Report: ESG Analysis on 50 Listed Companies in India (2020) Available at: IAASB ISAE 3000 (Revised) Standards on Assurance Engagements Available at: ICAI SAE 3410 on Assurance Engagements on Greenhouse Gas Statements

Sustainability • ESG Governance ICAI Journal Ref: August 2021 • Vol. 70 • No. 2 • pp. 43–49 (159–165) SEBI Circular May 10, 2021 • BRSR Master Guide Sustainability Reporting Frameworks and SEBI Circular on BRSR NU Naimish Upadhyay Sustainability Expert • naimishupadhyay@gmail.com “A growing realization that non-financial aspects are critical to positive business outcomes in the long term, coupled with rising disclosure expectations from investors and stakeholders on these issues, has led to a proliferation of new frameworks to support non-financial reporting among corporates. While several global coalitions and standards setting bodies have taken a lead in this direction, the launch of Business Responsibility and Sustainability Reporting (BRSR) framework as well as the SEBI mandate for BRSR reporting for the top listed companies signify an important milestone in propagating sustainability and business responsibility principles among Indian companies, through an India-made and India-centric framework. Read on…” 1 Growing Focus on Corporate Sustainability & Stakeholder Capitalism As the COVID-19 pandemic continues to test our societies and economies in drastic, unforeseen ways, it has also brought an unprecedented shift in the business environment. Corporates are re-doubling efforts to strengthen their organizational purpose, chart out strategies to ensure long-term resilience and redefine the metrics of success and value creation. This emergent crisis has presented an opportunity for businesses to sharpen their priorities and re-focus on the role they play in larger society and the planet. Together with the growing urgency around climate change, natural resource constraints and social inequities, the pandemic has served to sharply put the spotlight back on several critical issues around the triple bottom lines of People, Planet and Profits. The Global Risk Report 2021 released by the World Economic Forum strikingly captures the key risks arising out of these issues.1 All of these varied crises have accelerated the momentum around corporate sustainability and responsible business conduct. Companies today are expected to perform well on a range of metrics beyond financial performance, underlining the realization among investors that Environmental, Social and Governance (ESG) factors often have a material outcome on a company’s long-term growth and success. There is also growing awareness and appreciation for the various forms of ‘values’ that a business creates beyond what gets reflected in traditional balance sheets. Such non-financial value is often intangible and difficult to quantify, but can have far-reaching impacts beyond the investors and shareholders of a company. These emerging concepts have aptly been described under the moniker of ‘Stakeholder Capitalism’ by the World Economic Forum, which describes it as a form of capitalism in which companies seek long-term value creation by taking into account the needs of all their stakeholders, and society at large.2 The Institutional Investor Driver: While organizations are internally recognizing that social and environmental responsibility can lead to positive business outcomes, investors are one of the key stakeholder groups driving momentum around ESG actions and disclosures from the outside. Institutional investors are raising the stakes when it comes to assessing company performance using ESG factors. Recent Institutional Investor Surveys indicate that ESG information has become significantly important, with the majority of investors surveyed (98%) signalling a move to a more disciplined and rigorous approach to evaluating non-financial performance of companies. Specifically, 91% of respondents said that non-financial performance played a pivotal role in their investment decision-making. The call for action and demands for transparency on sustainability aspects is also being supported by other stakeholder groups, including issue-driven civic society organizations, an informed customer and employee base, as well as activist media, all of whom are eager to commend positive actions and call out failures in the corporate world. 2 Emergence of Global Sustainability Reporting Frameworks As sustainability, corporate responsibility and ESG issues continue to evolve as strategic business imperatives, there is a greater demand from companies to communicate more information pertaining to their performance, material risks and opportunities as well as strategies around these issues. Investors and other stakeholder groups are keen to assess whether companies are adopting sustainable and resilient business models. Insightful reporting that provides a clear understanding of those models and communicates the company’s performance on a broad variety of metrics is becoming critical for stakeholders while making informed decisions on investment, procurement and other forms of business relationships. The need for sustainability information that is consistent, high-quality, material and easily accessible within the public domain was recently reemphasized by BlackRock CEO Larry Fink in his annual letter to CEOs in 2021.3 A large number of reporting standards and frameworks have emerged globally over the last decade in response to the growing demand for non-financial information. They help provide structure to the multitude of thematic areas and diversity of topics that constitute corporate sustainability. These frameworks are most commonly developed by standard setting bodies, not-for-profit bodies, investor-backed coalitions and analyst agencies. While some frameworks have attempted to comprehensively address the broad spectrum of sustainability and ESG topics, others are more thematic and focussed on individual issues such as climate change. Six prominent global reporting frameworks are detailed below: I. Global Reporting Initiative (GRI) Standards Formed in 1997, GRI developed the first and most widely used global standards for sustainability reporting useful to a broad set of stakeholders. It covers a wide range of topics under the triple bottom line approach (Economic, Environmental and Social performance), with each topic individually comprising a series of quantitative and qualitative indicators. The principle of materiality guides reporting organizations in prioritizing topics which “have a direct or indirect impact on an organization’s ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large”.4 Widely adopted for standalone Sustainability Reports. II. Sustainability Accounting Standards Board (SASB) First published in 2018, the SASB Standards comprise globally applicable standards for 77 different industry sectors, identifying the minimal set of financially material sustainability topics and associated metrics for each sector. The standards are structured as the SASB Materiality Map, engineered to help companies and investors analyze material ESG issues directly affecting a company’s financial performance.5 III. Taskforce on Climate-Related Financial Disclosures (TCFD) Created by the Financial Stability Board (FSB), TCFD in 2017 released climate-related financial disclosure recommendations designed to help companies, banks and institutional investors support informed capital allocation. Recommendations are structured around four thematic pillars: Governance, Strategy, Risk Management, and Metrics & Targets.6 IV. Climate Disclosure Standards Board (CDSB) An international consortium of business and environmental organizations committed to equating natural capital with financial capital. It provides a framework for integrating environmental and climate change information directly into mainstream financial reporting (such as Annual Reports) with the same rigor as financial statements.7 V. International Integrated Reporting Council (IIRC) A global coalition of regulators, investors, companies, and the accounting profession propagating integrated thinking and reporting. Its <IR> Framework uses a value creation model founded on six capitals: Financial, Manufactured, Intellectual, Human, Social & Relationship, and Natural capital.8 Commonly used in conjunction with GRI indicators. VI. CDP (Formerly Carbon Disclosure Project) An international non-profit helping companies and cities disclose environmental impacts across three focus areas: Climate Change, Water Security, and Forests. Its annual survey questionnaires are backed by over 590 institutional investors representing over USD 110 trillion in combined assets.9 Global Convergence Initiatives & Creation of the Value Reporting Foundation The proliferation of multiple reporting frameworks created a crowded landscape with overlapping requirements and reporting fatigue. In response, three critical consolidation movements took shape: Statement of Intent (September 2020): Five leading independent standard setters—CDP, CDSB, GRI, IIRC, and SASB—facilitated by the Impact Management Project, committed to work together towards a comprehensive corporate reporting system complementary to Financial GAAP.10 Value Reporting Foundation (June 2021): IIRC and SASB officially merged to establish the Value Reporting Foundation (VRF) to integrate integrated reporting and industry-specific SASB metrics into a unified structure.11 IFRS Foundation Sustainability Standards (COP26 Roadmap): The Trustees of the IFRS Foundation initiated consultations confirming the urgent need for a dedicated Sustainability Reporting Standards Board (ISSB) to establish a global baseline of investor-oriented sustainability standards in time for COP26 in November 2021.12 3 Background & Evolution of Business Responsibility Reporting in India Over the past decade, Indian corporates have witnessed a manifold growth in voluntary sustainability disclosures through Sustainability Reports or Integrated Reports based on global frameworks. The regulatory evolution has progressed through decisive national milestones: Regulatory Evolution Timeline: NVG (2011) → BRR (2012) → NGRBC (2019) → BRSR (2021) 2011 – National Voluntary Guidelines (NVGs): Ministry of Corporate Affairs (MCA) released the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, articulating nine core principles rooted in India’s socio-cultural context.13 2013 – Companies Act Fiduciary Mandate: Section 166(2) of the Companies Act, 2013 cast a statutory fiduciary duty on directors to act in good faith to promote the objects of the company in the best interests of employees, community, shareholders, and for the protection of the environment. 2012 to 2019 – SEBI BRR Mandate: SEBI made the Business Responsibility Report (BRR) mandatory for the top 100 listed entities by market capitalization in 2012, subsequently extending it to top 500 in 2015, and top 1000 listed entities in 2019. 2019 – National Guidelines on Responsible Business Conduct (NGRBC): In 2019, MCA revised the NVGs into NGRBC to align with emerging global priorities and UN SDGs.14 The Nine Core Principles of NGRBC Principle 1: Businesses should conduct and govern themselves with integrity, and in a manner that is ethical, transparent, and accountable. Principle 2: Businesses should provide goods and services in a manner that is sustainable and safe. Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains. Principle 4: Businesses should respect the interests of and be responsive to all its stakeholders. Principle 5: Businesses should respect and promote human rights. Principle 6: Businesses should respect and make efforts to protect and restore the environment. Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent. Principle 8: Businesses should promote inclusive growth and equitable development. Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner. In 2018, MCA constituted the Committee on Business Responsibility to analyze lessons learnt from BRR filings. In August 2020, the Committee released its report recommending that BRR be upgraded into the Business Responsibility and Sustainability Report (BRSR).15 The Committee recommended that BRSR eventually apply to all companies (listed and unlisted), envisioned a “Lite” format for smaller unlisted entities and SMEs, proposed dual-tier Essential and Leadership Indicators, recommended MCA21 filing integration to prevent duplicate compliance, and suggested the creation of a national BRSR Index to guide public procurement preference. 4 SEBI Circular on BRSR (May 10, 2021): Architecture & Mandate Following public comments on its August 2020 Consultation Paper, SEBI issued a landmark circular on May 10, 2021, notifying new BRSR reporting requirements for the top 1000 listed entities by market capitalization.16 Implementation Roadmap: Filing of BRSR is voluntary for FY 2021-22 and mandatory from FY 2022-23 for the top 1000 listed companies. Essential vs. Leadership: Under each of the 9 NGRBC principles, Essential Indicators are mandatory, while Leadership Indicators remain voluntary for progressive companies. Global Interoperability: Entities reporting under global frameworks (GRI, SASB, TCFD, IIRC) may cross-reference disclosures to prevent duplicate reporting burdens. 5 Implications and Strategic Outlook of BRSR For India Inc. & Corporate Transparency: BRSR heralds a new age of corporate responsibility, positioning Indian corporations on par with leading global jurisdictions in ESG transparency. It offers a locally developed yet globally aligned framework, simplifying investor dialogue and providing a standardized stepping stone for companies initiating sustainability disclosures. While large entities can adapt swiftly, hand-holding and capacity-building will be essential for unlisted entities and SMEs. Robust internal controls and auditable data management systems—akin to those in financial reporting—must now be established for non-financial metrics. For Investors & Stakeholders: BRSR provides consistent, standardized, and comparable metrics spanning greenhouse gas emissions, water stewardship, waste management, employee safety, gender diversity, supply chain sustainability, and human rights. This empirical data empowers domestic and foreign institutional investors to allocate capital toward truly resilient, responsible business models. For the Accountancy Profession: For Chartered Accountants and audit professionals, BRSR presents a transformational opportunity to expand beyond conventional statutory accounting. Professional accountants are exceptionally well placed to engineer ESG data controls, conduct non-financial assurance, perform impact accounting across multi-capital value creation models, and uphold the accuracy and governance integrity of public sustainability disclosures. References & Regulatory Notes The Global Risk Report 2021, World Economic Forum, 2021, http://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2021.pdf World Economic Forum: What is Stakeholder Capitalism? https://www.weforum.org/agenda/2021/01/klaus-schwab-on-what-is-stakeholder-capitalism-history-relevance/ Larry Fink’s 2021 letter to CEOs, 2021, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter GRI Standards, https://www.globalreporting.org/standards SASB Standards, https://www.sasb.org/standards/ TCFD, https://www.fsb-tcfd.org/ CDSB, https://www.cdsb.net/our-story IIRC, https://integratedreporting.org/the-iirc-2/ CDP, https://www.cdp.net/en/info/about-us/what-we-do Statement of Intent to Work Together Towards Comprehensive Corporate Reporting, Impact Management Project, 2020, https://impactmanagementproject.com/structured-network/statement-of-intent-to-work-together-towards-comprehensive-corporate-reporting/ Answering Your Questions about the Value Reporting Foundation, 2020, https://www.sasb.org/blog/answering-your-questions-about-the-value-reporting-foundation/ IFRS Foundation Trustees announce strategic direction and further steps based on feedback to sustainability reporting consultation, 2021, https://www.ifrs.org/news-and-events/news/2021/03/trustees-announce-strategic-direction-based-on-feedback-to-sustainability-reporting-consultation/ National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, https://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf National Guidelines on Responsible Business Conduct, https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf Report of the Committee on Business Responsibility Reporting, Ministry of Corporate Affairs, 2020, https://ies.gov.in/pdfs/Report-Committee-BRR.pdf SEBI Circular on BRSR, https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html About the Author Naimish Upadhyay Expert in the area of Sustainability & ESG Email: naimishupadhyay@gmail.com

Sustainability • Sustainability Reporting & ESG Maturity Building Sustainability Reporting Maturity – SRMM Version 1.0 Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 50–56 (Journal pp. 166–172) SKS CA. (Dr.) Sanjeev Kumar Singhal The author is the member of the Institute. He can be reached at sanjeevsinghalca1997@gmail.com. “Disclosure of non-financial information provides an opportunity for businesses to improve their communication with regulators, employees and other stakeholders by integrating financial and non-financial drivers of value creation into a sustainable business model. Despite the existence of mandatory as well as voluntary disclosures vis-a-vis sustainability reporting, sustainability reporting is an evolving area for businesses. Very few businesses could be seen at higher levels of sustainability reporting maturity where there is a clear focus on Environment, Social and Governance (ESG) issues. It is rightly said that moving towards higher levels of maturity or entering the domain of sustainability reporting needs not only the vision and motivation towards the same but also a model that would facilitate it. Sustainability Reporting Maturity Model (SRMM) Version 1.0 is intended to help businesses assess their current capabilities and conceptualize their progress towards an ideal state of sustainability reporting maturity by providing a score to sustainability disclosures. Read on…” Introduction The triple bottom line framework to the concept of sustainability has gained momentum in terms of increased business sense and encompasses the need for businesses to achieve a balance among its economic, environmental and social bottom lines. Global critical issues such as climate change, gender diversity, energy management, water scarcity, and greenhouse gas emissions, among others, stress the fact that sustainability will continue to be a priority for the foreseeable future. Leading global investment entities investing capital on behalf of pension funds, large institutions and individuals increasingly ask businesses about their environmental and social impact and push for more comprehensive and uniform reporting on sustainability efforts, pushing major global businesses to make significant investments in their ESG initiatives. This has led an increasing number of businesses to not only integrate sustainability into their business, operational, and developmental activities but also advance for consistent measurement and reporting of their sustainability related attributes. Organisations are required to provide commentary on how their operations/activities are directed towards being more sustainable and resilient. Such disclosures come under the ambit of Sustainability Reporting and are included in Annual Reports or as separate Sustainability Reports. Sustainability reporting is the systematic presentation of sustainability data/information so that the present data can be compared with the past and used for measuring progress vis-a-vis selected targets. It has become an important strategic tool for businesses with various internal and external motivations: Internal Motivations Access to better information, improved risk management and performance as well as savings of resources and money. External Motivations Long-term value creation as well as improved stakeholder communication, accountability and transparency. Sustainability reporting involves the disclosure of information across various ESG parameters for stakeholders of varied concerns/interests. Sustainability information can be both quantitative, such as tons (or units) of greenhouse gas, or qualitative, such as governance processes, the reputation of an organisation or the organisation’s impact on the state of biodiversity. This is where the task of report preparers becomes important and challenging. Challenges Faced by Preparers of Sustainability Reports: Increased Expectations: Increased expectations for the level of detail and sophistication to be provided in the business communications on a wide range of sustainability topics — everything from climate change to human rights, and privacy to labour standards. Estimation & Projections: Difficulties of estimation and projections to capture the data around the entity’s environmental and social performance/impact. Ambiguity of “Materiality”: The usage of the term “materiality” in the context of sustainability reporting and identification of issues relevant to stakeholders beyond investors. Limited Assurance Frameworks: Availability of limited assurance frameworks and the challenge of applying the frameworks/standards of assurance and reporting. Organisational Skill Deficits: Lack of organisational skills to provide a summary of the business rationale for reporting and internal education on the value of given frameworks/standards of reporting. These challenges at times result in reactive and tactical, rather than strategic, approaches to sustainability reporting. Background & Regulatory Evolution in India In the last three decades, Sustainability Reporting has evolved from the production of environmental reports to broader reports that also cover social issues. At the same time, different reporting frameworks from different regulators/initiators have emerged which call for mandatory or voluntary disclosures. Such disclosure requirements keep pace with the increasing investor focus on sustainable investing as well growing demands from other stakeholders. In response to the understanding of the increasing importance of ESG issues, there has been a significant increase in the number of companies reporting on sustainability. A 2020 study by the World Business Council for Sustainable Development (WBCSD) indicated that sustainability reporting is improving with 78% of companies improving their overall scores and 26% improving their materiality score. India is increasingly seeking businesses to be responsible and sustainable towards their environment and society with increasing regulatory oversight and progressive market reforms. Regulators have focused on making business disclosures comprehensive and going beyond financial disclosures in the past few years: 2012: SEBI mandated the top 100 listed entities by market capitalisation to file Business Responsibility Reports (BRR) as part of their annual report, emanating from the “National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business” (NVGs). 2015: The requirement for filing BRRs was progressively extended to the top 500 listed entities by market capitalisation. 2017: SEBI soft law passed on voluntary adoption of Integrated Reporting (<IR>) by top 500 listed companies. 2019: BRR mandate extended to the top 1000 listed entities. In March 2019, NVGs were revised and released as the National Guidelines on Responsible Business Conduct (NGRBCs). 2020: The Committee on Business Responsibility Reporting of the Ministry of Corporate Affairs recommended that the Business Responsibility Report be called the Business Responsibility and Sustainability Report (BRSR) to better reflect reporting scope. May 2021: SEBI mandated filing of BRSR for the top 1000 listed companies by market capitalization from FY 2022-2023 onwards, replacing BRR, while keeping it voluntary for FY 2021-22. Sustainability measurement is prospective, positive and credible assessment which correlates with all components that matter in the organisation. The top management or Board vouches a solid business case for pursuing a sustainability strategy. Boards aim to meet their obligations over sustainability and equally see pressure coming from outside the boardroom, with business leaders feeling that stakeholders are driving sustainability activity and policies. Business leaders rank sustainability second only to financial results in terms of the top issues. There is an equally strong belief that the sustainability principles and intentions of their organisations are delivered by effective business policies and objectives. Boards can manage sustainability in several different ways, and there is no hard and fast rule over the right ways to do it as long as it is managed. The Board is well positioned to steer the sustainability agenda by structuring a strategy and a roadmap covering all the organisation’s resources. Every organisation will have a unique way of crafting ESG issues and value creation at the centre of business decision making. The Board needs to ensure that there are no disconnects between what they believe is happening, and what the reality is. They need to have a clear understanding of why sustainability is a key boardroom issue — is it an end in itself or does it form part of a wider, integrated business strategy? They need to be able to measure progress on their sustainability journey. In a nutshell, sustainability is a very broad subject area that encompasses many diverse issues. Businesses must adopt a framework or model for sustainability reporting maturity that allows them to identify the actions required to meet the sustainability related needs of customers, employees, and other stakeholders. The Maturity Model – SRMM Version 1.0 Maturity models are the description of the development of specific capabilities within an organisation over time. Maturity models for a particular capability are built on empirical data derived by studying information of various companies that display varying levels of the capability of interest. Most frameworks for maturity models include four or five levels of maturity, with each level representing a greater degree of competency in the capability than the previous one. All the levels are labelled and refer to a set of behaviours, processes, tools, and outcomes that an organisation at that particular level of competency should demonstrate. “Sustainability Reporting Maturity Model (SRMM) Version 1.0” is an innovative solution for Indian corporates to individually assess its position vis-a-vis various sustainability reporting maturity levels and achieve its vision of sustainable business. The robust, practical, value adding self-assessment tool is based on Business Responsibility and Sustainability Reporting (BRSR) formats issued by the Committee on Business Responsibility Reporting of the Ministry of Corporate Affairs. Presently, the non-existence of a comprehensive scoring tool limits Indian companies from aligning their BRR/BRSR with the standardized international scale. The rating agencies and assurance providers are thus unable to compare the sustainable nature of the Indian companies with other international companies. SRMM based on BRSR Scoring provides a quantitative score to the sustainability measurement by converting qualitative information to a measurable and machine-readable quantitative data. The tool would also act as a basis for providing a “comparability index”. SRMM would also be used to deploy an evolutionary path to help organisations increase the capability of their processes through four consecutive stages or maturity levels. The model offers the possibility for each corporate complying with BRSR to individually assess its position vis-a-vis various sustainability reporting maturity levels and achieve its vision of sustainable business. In other words, the model will help companies identify where their capabilities lie on a maturity continuum. Corporates can self-evaluate their current level of maturity on the SRMM, identify areas where more focus is required, and then develop a road map for upgrading to a higher level of maturity. This would include formulation of strategies for internal controls and data collection to the progress towards achievement of sustainable goals and thereby moving to a higher level of sustainable reporting. The maturity continuum is associated with four discrete levels of sustainability reporting maturity to becoming a sustainable and responsible enterprise. Each maturity level portrays the present level of sustainability reporting and where a new cycle of reporting starts towards a higher level of sustainability reporting. Sustainability Reporting Maturity Levels Level Stage BRSR Score (% of Grand Total) Explanation Level 1 Formative Stage Up to 25% The organisations are at the initial level of reporting and are in the process of identifying the need and responsibility of BRSR. Level 2 Emerging Stage > 25% and Up to 50% The organisations realize the value of BRSR and responds to it by setting up robust mechanism for reporting, etc. Level 3 Established Stage > 50% and Up to 75% The organisations have established formal functions/policies/systems for BRSR. Level 4 Leading by Example > 75% The organisations strive for more than compliance and work towards being a market leader. Scoring Architecture and Formula The total score is 300 with leadership indicators given prominence by allocating a total score of 75 for encouraging companies to target achievement of the same. The balance score of 225 belongs to disclosures as per Section A, Section B and essential indicators of Section C of the BRSR Comprehensive Format. The calculation of BRSR score is percentage of Grand Total Score: Total score obtained by the entity from Section A, Section B and Section C shall be the numerator and total score of 300 shall be the denominator. In case of non-applicability of certain disclosure requirement(s) to a particular entity, the entity shall deduct its respective score from the grand total score denominator, evaluating the percentage only against applicable disclosures. BRSR Scoring Breakdown Table 1: Section Wise BRSR Scoring Section Wise BRSR Scoring Essential Indicators Score Leadership Indicators Score Total Score Section A: General Disclosures — — 37 Section B: Management and Process Disclosures — — 20 Section C: Principle Wise Performance Disclosure 168 75 243 Total 168 75 300 Table 2: Section C – Principle Wise Performance Disclosure Scoring Breakdown NGRBC Principle Description Essential Indicators Leadership Indicators Total Score PRINCIPLE 1: Businesses should conduct and govern themselves with integrity in a manner that is Ethical, Transparent and Accountable 18 7 25 PRINCIPLE 2: Businesses should provide goods and services in a manner that is sustainable and safe 22 13 35 PRINCIPLE 3: Businesses should respect and promote the well-being of all employees, including those in their value chains 30 10 40 PRINCIPLE 4: Businesses should respect the interests and be responsive to all its stakeholders 4 5 9 PRINCIPLE 5: Businesses should respect and promote human rights 11 4 15 PRINCIPLE 6: Businesses should respect and make efforts to protect and restore the environment 40 19 59 PRINCIPLE 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent 2 4 6 PRINCIPLE 8: Businesses should promote inclusive growth and equitable development 16 7 23 PRINCIPLE 9: Businesses should engage with and provide value to their consumers in a responsible manner 25 6 31 Total Section C 168 75 243 The model fits well within the corporate reporting framework and is helpful and useful for all stakeholders in identifying the exact maturity level related to the sustainability of an organisation. The organisations would not only know the present maturity level of their sustainability reporting but would also be able to identify and bridge their planning and operational gaps. The regulators and other related organisations can identify organisations that require improvement in sustainability reporting and measurement. Based on the model, investors will also be able to make appropriate decisions toward their current investments and potential future investments by identifying the maturity level of sustainability, as their decisions can be impacted by the level of maturity (for instance, investors can be eager to invest in companies which are more mature in terms of sustainability reporting instead of those which are immature). Last but not the least, the model obliges management to be proactive in implementing ESG focussed decisions as well as showcasing the stakeholder’s improvement in their overall score over a period. SRMM Version 1.0 is the beginning of a more effective sustainability reporting. Further versions would be developed based on feedbacks received and issues identified in implementation of the same. Mapping of NGRBC Principles with UN Sustainable Development Goals (SDGs) The BRSR Scoring and SRMM are critical to the survival and resilience of businesses. The non-financial information disclosed in the BRSR provides valuable material information for business decision-making, action-planning and innovation along with information on initiatives, actions and outcomes towards achievement of SDGs. Likewise, BRSR disclosures provide a review against the SDGs of an organisation’s current policies and practices, overall governance structure, initiatives, and gaps in relation to environment and social parameters, such as health and safety, human rights, stakeholder engagement, sustainable and safe goods and services, to name a few. The BRSR formats are aligned to the broader context of the SDGs so that businesses may also be able to demonstrate their performance on SDG targets. The NGRBC-BRSR formats put together all relevant information on sustainability emanating from the NGRBCs and further depend on the principles of SDGs and UNGPs. The nine principles of NGRBC-BRSR framework are mapped with 17 SDGs as under: NGRBC Principle Sustainable Development Goals (SDGs) which can be mapped Principle 1 SDG 16, SDG 17 Principle 2 SDG 2, SDG 6, SDG 7, SDG 8, SDG 9, SDG 10, SDG 12, SDG 13, SDG 14, SDG 15 Principle 3 SDG 1, SDG 3, SDG 4, SDG 5, SDG 8, SDG 11, SDG 16 Principle 4 SDG 1, SDG 5, SDG 11, SDG 16 Principle 5 SDG 5, SDG 8, SDG 16 Principle 6 SDG 2, SDG 3, SDG 6, SDG 7, SDG 9, SDG 10, SDG 12, SDG 13, SDG 14, SDG 15 Principle 7 SDG 2, SDG 7, SDG 9, SDG 10, SDG 11, SDG 13, SDG 14, SDG 15, SDG 17 Principle 8 SDG 1, SDG 2, SDG 3, SDG 4, SDG 5, SDG 6, SDG 8, SDG 11, SDG 13, SDG 14, SDG 15, SDG 16, SDG 17 Principle 9 SDG 2, SDG 4, SDG 12, SDG 14, SDG 15 The 2030 Global Agenda of Sustainable Development comprising of 17 SDGs would be broad and ambitious for all businesses to contribute. Organisations should consider how their activities are making a material contribution to (or conversely a negative impact on) achieving the SDGs. Regardless to say, by contributing to just one SDG, other SDGs may be strengthened by default. For example, significant progress on SDG 1 (No Poverty) would bring progress on SDG 8 (Decent Work and Economic Growth) and SDG 12 (Responsible Consumption and Production). Role of Chartered Accountants in Sustainability & Assurance In the present dynamic environment where businesses need to extend the boundaries of responsible business conduct, the accountancy profession needs to respond to the growing and enhanced interest in sustainability and call for the contribution of organisations towards sustainable development. ICAI is emerging as a global leader in the domain of sustainability and working on creating a global network of partnership and linkages with the best of related institutions and organisations on issues related to Sustainability Practices and Disclosures and to propagate the use of Sustainability Reporting Requirements and Assurance Standards both for general purpose reporting and/or specifically for a regulatory requirement. Sustainability Reporting Standards Board (SRSB) of ICAI is undertaking several initiatives to strengthen the sustainability reporting ecosystem in the country, build capacity of chartered accountants and creating awareness of stakeholders towards the environmental and social issues through certificate courses for members, webinars for stakeholders, launching sustainability literacy drive, to name a few. The Government of India has permitted audit firms to transform themselves into multidisciplinary partnerships (MDPs). Thus, Chartered Accountant firms can now tie-up with company secretaries, actuaries, cost accountants, engineers, lawyers and architects to offer a whole bouquet of services. Chartered Accountants can play a key role as internal accountants/auditors as well as external auditors in the sustainability domain. The small and medium firms can scale up and offer a variety of services under one roof while building capacity in the industry. In this regard, accountants need to gain working knowledge of performance measurement and reporting vis-a-vis specific areas such as greenhouse gas emissions applicable to the businesses with which they are involved. However, they may refer to other area specific experts, where necessary. Many Chartered Accountants have up-skilled and specialised in the sustainability domain, for example in green audit, environment audit, CSR audit and the like. An illustrative list of ways that are directly relevant to the role of chartered accountants as internal accountants/auditors and external auditors is as under: For Internal Accountants / Auditors: Support in collecting and interpreting information, monitoring, and controlling market activities. Push and assist organisations increasingly towards assessing their sustainability reporting maturity levels via SRMM. Assist in designing and monitoring of policies that address sustainability issues, such as purchasing policies. Support the stakeholder engagement process with accessible and reliable information. Identify disclosure standards / framework appropriate to the business and integrate the same with the existing management information system. Support benchmarking by providing relevant, material and reliable sustainability information in a coherent and transparent manner. For External Auditors: Review the application and results of the stakeholder engagement process. Review the related operating controls for compliance with mandatory / voluntary code(s) adopted. Support benchmarking of sustainability disclosures by providing credibility of information via assurance reports. Conclusion To conclude, participation in policy formulation and education of stakeholders will bring about the real required changes for business transformations towards sustainability. Businesses need to recognise the impact of their activities on business value and sustainability with the support of accountants/auditors with progressive importance on the valid concerns of multiple stakeholder groups. References Report of the Committee on Business Responsibility Reporting, Ministry of Corporate Affairs. Available at: MCA BRR Committee Report SEBI Circular “Business responsibility and sustainability reporting by listed entities”, No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 Dated May 10, 2021 Available at: SEBI Circular May 10, 2021 Sustainability Reporting Maturity Model (SRMM) Version 1.0 is available on ICAI website at ICAI SRMM Version 1.0 Document

Sustainability • Board Governance ICAI Journal Ref: August 2021 • Vol. 70 • No. 2 • pp. 57–61 (173–177) Boardroom Oversight • ESG Committee Charters Sustainability & ESG: The Next Frontier of Board Room Action VB Vishal Bhavsar Sustainability & ESG Expert • vishal.bhavsar@gmail.com “The coronavirus pandemic has highlighted the importance of financial market risks that arise in the changing landscape including ESG expectations from various stakeholders. The COVID-19 crisis has brought sustainability and ESG focus to the center stage in board room discussions. There are stakeholders across the globe to pushing to move from measuring quarterly financial performance to long term value creation. As ESG moves from ‘good-to-have’ territory to becoming core of corporate thinking – the board of the company has got into the driver’s seat to guide the organization on the ESG mandate as well deliver results. Read on…” 1.0 Which Way is the Wind Blowing? Looking at recent trends, ESG regulations and expectations are bound to rise, as is the interest of stakeholders like customers, investors, value chain partners, employees, civil organizations, regulators, and the media in ESG policies and practices that have a positive impact on society. There are several countries and supervisory authorities in the financial ecosystem that have enhanced focus on climate risk disclosures, and this will only intensify transparency around climate in the buildup to the United Nations Climate Change Conference, or COP26, taking place in Glasgow in November 2021. Similarly, several international and regional policy and regulatory initiatives have also taken the same path: IFRS Foundation Proposals: Proposals around sustainability reporting demonstrate an important international attempt to build further transparency and coherency around global baseline disclosures. Network for Greening the Financial System (NGFS): Coordinating global central banks and supervisory authorities to embed best practices in the financial supervision of climate-related systemic risks. European Union SFDR & Taxonomy: Introduction of the Sustainability Financial Disclosures Regulation (SFDR)1 and EU Sustainable Finance Taxonomy, creating powerful drivers for high-integrity ESG data. United Kingdom Mandatory TCFD: Formal announcement by the UK to make Task Force on Climate-Related Financial Disclosures (TCFD) reporting mandatory across the economy. Institutional Investor Mobilization: The response to ESG has not been limited to regulators and governments; it was kick-started by the leaders of large institutional investors and asset management companies. In his annual letter, BlackRock CEO Larry Fink urged corporate leaders to disclose how they are preparing for a “net zero world” where net greenhouse gas emissions are eliminated by 2050. Underscoring board accountability, State Street Global Advisors announced that it will start voting against the boards of directors of companies that underperform their industry peers when it comes to ESG standards. The story is no different when we examine the domestic landscape in India. The Indian journey on ESG began as early as 2007 and has progressed through major milestones: MCA CSR Guidelines, National Voluntary Guidelines (NVGs), SEBI Green Bonds Guidelines, the SEBI Stewardship Code6, and the recently mandated Business Responsibility and Sustainability Reporting (BRSR)7. Simultaneously, Indian enterprises are rapidly adopting international frameworks including GRI, IIRC, SASB, and CDP. 2.0 What is ESG? Definition & Core Pillars ESG is firmly on the radar of investors worldwide. Focusing on ESG issues brings to light crucial risks and opportunities that dictate a company’s capacity for sustainable value creation: Environmental (E) Social (S) Governance (G) Climate change & GHG emissions Employee development & training Board Independence Water stewardship & conservation Diversity & inclusion Board diversity & expertise Waste generation & circularity Community development & CSR Anti-Corruption & Bribery policies Emissions & air quality management Occupational Health & Safety Tax transparency & disclosure Biodiversity & ecosystem protection Customer privacy & cybersecurity Ethical conduct & executive pay 2.1 Key Trends in ESG Capital Markets Explosive ESG Inflows: Dedicated ESG funds mobilized in excess of USD 50 billion in 2020, pushing total global assets under management (AUM) with an explicit ESG focus past USD 35 trillion.2 USD 1 Trillion Green Bonds: The global green bond market surpassed a monumental milestone of USD 1 trillion in cumulative issuance in 2020. Sustainable Finance Taxonomies: Jurisdictions globally (led by the European Union) are standardizing legal definitions of environmentally sustainable activities. Global Convergence (ISSB): IFRS Foundation initiative to establish a unified International Sustainability Standards Board (ISSB) to end disclosure fragmentation. 2.2 Global Frameworks on the Role of the Board in ESG Oversight Global Reporting Initiative (GRI)3 Task Force on Climate-Related Financial Disclosures (TCFD)4 Carbon Disclosure Project (CDP)5 GRI Standard 102-18 (General Disclosure 102): Explicitly mandates disclosure of the governance structure of the organization, including committees of the highest governance body responsible for decision-making on economic, environmental, and social topics. Governance Pillar Recommendation (a): Mandates entities to “Disclose the organization’s governance around climate-related risks and opportunities”, specifically requiring companies to “Describe the board’s oversight of climate-related risks and opportunities” in mainstream financial filings. Question C1.1b of CDP Questionnaire: Directly measures the involvement and oversight of the highest governance body on climate issues impacting the business: “Provide further details on the board’s oversight of climate-related issues.” 3.0 The Board as Custodian & First Flight of the ESG Journey The Board of Directors represents the best interests of stakeholders. As custodians of reputation and stewards of long-term value creation, board directors hold a vital oversight responsibility in evaluating environmental and social impacts. Boards are transitioning from passive observers to active drivers. 3.1 Actionable Roadmap: Board’s First Flight Activate Board-Level ESG Committee: Establish a dedicated Sustainability/ESG committee or formally expand the mandate of existing board committees to steer the ESG agenda. Adopt Progressive Charters: Commit the enterprise to credible global/national decarbonization charters, such as the TERI Industry Charter for Near Net-Zero Emission by 2050 or the Science Based Targets initiative (SBTi) Business Ambition for 1.5 °C. Assign Dedicated Executive Leadership: Assign designated responsibility for the ESG programme to a C-suite executive: CFO, Head of Investor Relations, Chief Sustainability Officer (CSO), or Chief ESG Officer. Capacity Building Across Tiers: Cultivate an organizational mindset shift from pure short-term profit maximization to triple-bottom-line impact, conducting education sessions for board directors and senior management. 3.2 Sustainable Value Creation – From ‘Good to Have’ to ‘Must-to-Have’: Traditional belief treated ESG as an optional philanthropic add-on. Today, ESG has decisively entered the ‘must-to-have’ domain. ESG performance directly influences corporate financing options: highly rated ESG enterprises enjoy preferential credit terms, reduced borrowing costs, and access to specialized capital pools such as Green, Social, and Sustainability-Linked Bonds. 3.3 Board Oversight & Investor Expectations Institutional investors require transparent disclosure of board governance mechanisms through: Comprehensive disclosures in annual proxy statements describing board-level ESG oversight processes. Formal amendments to board committee charters articulating specific ESG responsibilities. Transparent reporting of individual directors’ skills, credentials, and diversity matrices relevant to ESG topics. 4.0 Mainstreaming ESG into Board Committees: Oversight Questionnaires Whether boards exercise oversight holistically or delegate to specialized committees, oversight mechanisms must be rigorous, comprehensive, and publicly disclosed. Boards must pose pointed governance questions across committees: Full Board / Sustainability Committee Oversight Business Strategy: Are ESG risks and opportunities an integral part of long-term business strategy? How does the organization measure and review targets? Business Context: Does ESG sit at the core of the company’s purpose and stakeholder interests? Risk Management: What is the formal process for identifying and integrating ESG risks into the Enterprise Risk Management (ERM) framework? Reporting Channels: What is the optimal communication approach and disclosure channel for ESG? Audit Committee Oversight Disclosures: Do ESG disclosures meet investor-grade criteria? Which reporting framework (BRSR, GRI, SASB, TCFD) is optimal for the company’s sector? Processes & Controls: Are there robust internal controls ensuring ESG disclosures are accurate, consistent, and comparable? Independent Assurance: Is there an established need to obtain independent third-party assurance over non-financial ESG disclosures? Compensation Committee Oversight Executive Accountability: How are quantitative ESG goals and climate targets reflected in executive compensation structures and performance bonuses? Talent & Culture: How well-equipped is management in terms of capabilities, resources, and culture to execute the corporate ESG strategy? Nominating & Governance Committee Oversight Stakeholder Engagement: Is the ESG strategy being effectively communicated to investors, rating agencies, and wider stakeholders? Board Composition & Diversity: Does the board have the requisite skills, technical expertise, and diversity to oversee complex ESG risks? Capacity Building: What is the awareness level of the board regarding ESG, and is continuous director training being conducted? 5.0 Conclusion & Strategic Value Unlocking Boards should be ready to engage on ESG with priority on sustainability, climate change, biodiversity, diversity, and social responsibility themes to gain momentum. Investors in particular insist that publicly listed companies provide more meaningful and comparable ESG reporting metrics, starting with climate change. Stakeholders now assess how the company unlocks long-term business value creation by deploying ESG at its core strategy. Companies will have to find the right approach to manage ESG depending on their sector, organizational maturity, and stakeholder focus—there is no one-size-fits-all solution. ESG will be an integral component of board governance, as opposed to a “good to have” topic to be covered annually, if at all. Ideally, ESG will be part of company strategy and integrated into the work of the board and its core committees. Progressive companies value being a frontrunner on ESG issues because they see the connection to the company’s long-term success. References & Regulatory Notes EU Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy: https://gresb.com/eu-regulatory-environment-changes-sfdr-eu-taxonomy/ Source: CRISIL ESG Compendium (2020). Global Reporting Initiative (GRI) Standards: https://www.globalreporting.org/standards/ Task Force on Climate-Related Financial Disclosures (TCFD): https://www.fsb-tcfd.org/ Carbon Disclosure Project (CDP): https://www.cdp.net/en SEBI Stewardship Code Circular: https://www.sebi.gov.in/legal/circulars/dec-2019/stewardship-code-for-all-mutual-funds-and-all-categories-of-aifs-in-relation-to-their-investment-in-listed-equities_45451.html SEBI Circular on Business Responsibility and Sustainability Reporting (BRSR): https://www.sebi.gov.in/media/press-releases/may-2021/sebi-issues-circular-on-business-responsibility-and-sustainability-reporting-by-listed-entities-_50097.html About the Author Vishal Bhavsar Expert in the area of Sustainability & ESG Email: vishal.bhavsar@gmail.com

Auditing • Audit Quality & Practice Management Audit Quality Maturity Model – Version 1.0 (AQMM v1.0) Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 67–71 (Journal pp. 183–187) DKK CA. Durgesh Kumar Kabra The author is a member of the Institute. He can be reached at durgeshkabra@gmail.com. “Audit Quality is a very important aspect of the Chartered Accountancy Profession. Today stakeholders have grown beyond shareholders and auditors need to do more in less time. The auditors need to use technologies like Robotic Process Automation and Data Analytics as force and speed multipliers. The expectation from auditors has increased manifold. They would need to upskill themselves and invest in their people. Likewise, there are a variety of factors that will contribute to the success of the auditor – independence of the auditor, ethics, knowledge, and experience of the staff being some factors that are directly proportional to audit quality. Communication is as important as reporting just as prevention is better than cure. Read on…” The Case for Enhancement of Audit Quality Audit documentation is extremely important as what is not documented is not considered done. In these times it becomes almost essential to have an audit documentation tool. Data Analytics also take centre stage as substantive analytical procedures provide the most appropriate audit evidence. Firms need to have these go-to-market tools with checklists. Audit documentation is extremely important as what is not documented is not considered done. Audit Quality Cannot be Measured but a Relative Comparison Between Firms Can be Done Audit quality is a complex subject and no analysis of it has achieved universal recognition. At a macro level, all this can be achieved when there is awareness about audit quality, key stakeholders are encouraged to explore ways to improve audit quality and greater dialogue is facilitated between the key stakeholders on audit quality. Audit quality cannot be measured and judging audit quality can be highly subjective. However a relative comparison is possible between two audit firms. Even though the bird’s eye view of an audit firm’s overall audit quality is important, what is relevant is the worm’s eye view of the quality of the engagement. The performance of each engagement adds to the overall audit quality and one audit gone wrong can undo all the good the firm has done over decades. Our auditors are grappling with new accounting standards and auditing in special circumstances of the pandemic where the fraud triangle is certainly present. The uncertainties and judgment calls of the auditor pose big challenges for the auditor. Is the auditor ready enough to take on the projects that they have taken or would it be better than the auditor had a self-assessment tool that would help it to check its audit quality and diagnose what remedial measured it needs to take? Such a model and Implementation Guide would work like mass education for the already literate chartered accountant. Capacity Building Measure Initiated by the Centre for Audit Quality (CAQ) The Centre for Audit Quality (CAQ) strives to provide an angular discussion on audit quality. To help bridge the expectation gap the CAQ launched a recommendatory Audit Quality Maturity Model – Version 1.0 (AQMM v1.0), which is a capacity-building measure. The objective of this Evaluation Matrix is for sole proprietors and Audit firms to be able to self-evaluate their current level of Audit Maturity, identify areas where competencies are good or lacking and then develop a road map for upgrading to a higher level of maturity. Both the Peer Review Board and the Centre for Audit Quality (CAQ) have adopted a collaborative approach, with the CAQ having developed the quality standards and Peer Review Board testing the said standards when they become mandatory. Using this collaborative approach, the AQMM v1.0 would be recommendatory initially and after 1 year the Council will review the date from which it would become mandatory. Entities Covered under AQMM v1.0: Firms auditing the following entities are covered in AQMM v1.0: (a) A listed entity; or (b) Banks other than co-operative banks (except multi-state co-operative banks); or (c) Insurance Companies Note: Firms doing only branch audits of the above-mentioned entities are not covered. The AQMM v1.0 is divided into three sections and a minimum scoring is required in each section to make it to a certain level of audit maturity: Section Reference Total Possible Points Section 1. Practice Management – Operation 280 Section 2. Human Resource Management 240 Section 3. Practice Management – Strategic / Functional 80 Total Possible Points 600 Audit Maturity Levels and Classification Basis Scoring Threshold Firm Classification Description & Action Required Up to 25% in each section Level 1 Firm Indicates that the firm is very nascent – will have to take immediate steps to upgrade its competency or will be left lagging behind. Above 25% to 50% in each section Level 2 Firm Indicates firm has made some progress – will have to fine-tune further to reach the next level of competency. Above 50% to 75% in each section Level 3 Firm Indicates firm has made substantial progress – will have to fine-tune further to reach the highest level of competency. Above 75% in each section Level 4 Firm Indicates firms that have made significant adoption of standards and procedures – should focus on optimising further. Detailed Evaluation Criteria and Max Scores Section 1: Practice Management – Operation (280 Points) Evaluation Criteria Max Scores 1.1 Practice Areas of the Firm 12 1.2 Work Flow – Practice Manuals 16 1.3 Quality Review Manuals or Audit Tool 24 1.4 Service Delivery – Effort monitoring 36 1.5 Quality Control for engagements 80 1.6 Benchmarking of Service delivery 16 1.7 Client Sensitisation 16 1.8 Technology Adoption 64 1.9 Revenue, Budgeting & Pricing 16 Total of Section 1 280 Section 2: Human Resource Management (240 Points) Evaluation Criteria Max Scores 2.1 Resource Planning & Monitoring as per the firm’s policy 28 2.2 Employee Training & Development 44 2.3 Resources Turnover & Compensation Management 104 2.4 Qualification Skill Set of employees and use of experts 32 2.5 Performance evaluation measures carried out by the firm (KPIs) 32 Total of Section 2 240 Section 3: Practice Management – Strategic / Functional (80 Points) Evaluation Criteria Max Scores 3.1 Practice Management 20 3.2 Infrastructure – Physical & Others 48 3.3 Practice Credentials 12 Total of Section 3 80 High scores are awarded for Quality control and Technology adoption in section 1, Resources turnover and compensation management in section 2, and Infrastructure (Physical & Others) in section 3. The Implementation Guide for the AQMM v1.0 shall follow soon and shall appropriately and effectively guide the users about the relevant tools and techniques to be utilized along with their respective significance, mechanism, and utility. Key Implementation Dimensions Availability and Use of Standard Formats of Documentation The Yes/No criteria in many instances talk of ‘availability’ and ‘use’ of standard formats of checklists and engagement documentation. The firm should allocate 25% of the respective allocated score to the presence of the document format and 75% of the respective allocated score should be for actual implementation and use of the standard formats of documentation/policies. Audit Tools The recent advances in technology have significantly changed the way we audit these days. The Audit Documentation tool, Data Analytics tool, Digital Library and the Practice Management tool are the key essential audit tools needed by auditors today. These go-to-market tools provide a one-stop solution to all the audit documentation and monitoring requirements of the firm. The audit documentation tool should include audit and accounting standard checklists. Technology Adoption The one thing that all successful firms have in common is technology. Technology in today’s scenario has become the backbone of every industry, be it manufacturing or service industry. Not just for survival but an organization uses technology to have a competitive advantage over its peers. The AQMM v1.0 provides a list of to-dos that the organization must maintain as these practices at the office will lead to the smooth and enhanced functioning of the organization. Scoring is based on the presence of items mentioned in the checklist in a binary Yes/No pattern. Technology adoption in service delivery like the use of audit tools, analytical tools and Digital Competency Maturity Model (DCMM) Version 2.0 attracts points. The DCMM Version 2.0 may be referred to arrive at the technical maturity of the firm. Human Resources & Training Hours This model recognizes the importance of human capital, the most crucial resource for the firms, and will help to strengthen its operations. Firms having a revolving door with high staff turnover will attract lower scores. Prescribed Mandatory Training Hours under AQMM v1.0: Junior Level: 60 training hours Mid-Level: 30–60 training hours Partners: More than 30 training hours CPE Compliance: All partners need to comply with the CPE requirements of ICAI. If the firm does not have the qualified resources, the services of an expert should be taken. Negative Scoring Framework The AQMM v1.0 introduces stringent negative scoring mechanisms to discourage malpractice and promote compliance rigor: Disciplinary Misconduct & Advisories: The firm will attract negative scoring in case an advisory has been issued by a government/ICAI, debarment/blacklisting, or if there is a case of professional misconduct on the part of the member of the firm where he has been proven guilty. A firm will attract negative scoring only once for a particular incident. Reworked Statutory Audit Engagements: A firm attracts negative scoring when statutory audit engagements are reworked after the auditor’s report is signed. The same could result from filing errors, information insufficiency or wrong interpretation of provisions, etc. The audit team “moonwalking” at a client’s place may lead to a disciplinary case and hence the firm needs to monitor the percentage of assignments re-worked. Auditor-Client Disagreements & Disputes: The number of client disputes (other than fees disputes) and how they are addressed also attract negative scoring. Auditor-client disagreement is defined as disputes occurring between the client and audit firm involving accounting principles or practices, financial statement disclosure, or auditing scope or procedures. There is a significant positive relation between auditor resignation and auditor client disagreement. The results often suggest that auditor resignations are more often accompanied by auditor-client disagreement disclosure. The disagreements (other than fees disputes) affect the client retention decisions and result in loss due to audit failure. Relative to non-disagreeing clients, disagreeing clients are more likely to have earning manipulations and a higher risk of material misstatement. Thus, successor auditors are more likely to charge disagreement firms with higher audit fees. So, it is highly recommended to avoid disagreements and express opinion on the audit conducted by the firm. AQMM v1.0 Status Should Not be Publicised Strict Ethical Restriction: The AQMM v1.0 status should however not be publicized or mentioned by sole proprietors and Audit firms on the public domain e.g. on professional documents, visiting cards, letterheads, or signboards, etc. as it may amount to solicitation in view of the provisions of Chartered Accountants Act, 1949. It should not be disclosed even on a website. It may, however, be made available to anyone on the specific pull basis i.e. where he wishes to see the said status, it may be provided to him. Conclusion The Audit Quality Indicators (AQIs) should raise more questions, bring about competition between audit firms and create market demand for audit quality. The AQMM not only helps firms arrive at their maturity level but also has a mechanism to help guide the members to specifically improve upon their audit quality. The Audit Quality Maturity Model – Version 1.0 (AQMM v1.0) is a cross-functional evaluation model for practicing firms covering engagement teams, firm leadership, IT helpdesks, human resources team, administration department, legal matters, and the management information systems of the firm. It is a unifying force for having all hands on deck to help steer the firm from the brown waters of unplanned audits to the blue waters of being globally recognized for audit quality.

Taxation • Direct Taxes ICAI Journal Ref: August 2021 • Vol. 70 • No. 2 • pp. 72–76 (188–192) Income-tax Act, 1961 • Sections 44AB, 44AD & 44ADA Whither Tax Audit and Presumptive Taxation DD CA. Dindayal Dhandaria Member of the Institute • d_dhandaria@rediffmail.com • eboard@icai.in “The Finance Act, 2021 increased the threshold limit for applicability of the provisions of section 44AB(a) of the Income Tax Act, 1961 from five crore rupees to ten crore rupees, w.e.f. 1-4-2021. The Memorandum accompanying the relevant Finance Bill, 2021 explained the purpose of the amendment as to incentivise non-cash transactions to promote digital economy and to further reduce compliance burden of small and medium enterprises. Notwithstanding what is stated in the Memorandum, the author feels that the above amendment is a part of a larger strategy to render the provisions of sections 44AB and 44AD of the Act futile in case of assessees having income from business. Moreover, a distinction is made between an assessee carrying on business and others. Read on…” 1 Historical Background & Declared Legislative Intent Tracing the history of the introduction of the provisions relating to compulsory audit and presumptive scheme of taxation contained in sections 44AB and 44AD of the Income-tax Act, 1961 (“the Act”), respectively, and certain recent amendments, it is opined that the scope and coverage of these two sections are being reduced in a phased manner. The assessees having income from business would no longer be able to claim profits lower than presumptive rate by getting their accounts audited and furnishing the audit report. The declared aims for introduction of these provisions would, thus, be negated. The Genesis of Section 44AB (Finance Act, 1984): The Finance Act, 1984 had inserted section 44AB in the Income Tax Act, 1961 w.e.f. 1-4-1985 with the expectation, inter alia, that a proper audit for tax purposes would ensure that the books of accounts and other records are properly maintained, that they faithfully reflect the income of the taxpayer, and that claims for deduction are correctly made by him. 2 Overview & Evolution of the Presumptive Taxation Scheme The Finance Act, 1994 inserted sections 44AD and 44AE in the Act: Section 44AD: Inserted with a view to providing a method of estimating income from the business of civil construction or supply of labour for civil construction work. Section 44AE: Inserted with a view to providing a method of estimating income from the business of plying, hiring, or leasing trucks owned by a taxpayer, owning not more than ten trucks. The scheme, when introduced, was optional and an assessee could claim that his income in respect of the abovementioned business was lower than the specified estimate of income, i.e., the presumptive rate. In such a case, he was subjected to compulsory scrutiny. But initially, he was not required to get his accounts audited. Later, the requirement of compulsory scrutiny was removed and in lieu thereof, the requirements of audit and furnishing of audit report were imposed. Taxpayer-Friendly Reforms by the Finance Act, 1997 Realising the benefit of the presumptive provisions, the Finance Act, 1997 introduced key amendments to make the scheme more popular: It removed the requirement of compulsory scrutiny. It settled the controversy regarding allowability of deduction for salary and interest paid by a partnership firm to its partners in favour of the taxpayers. It introduced section 44AF in the Act providing similar presumptive benefits to retail traders (estimating income at 5% of gross turnover). The benefits of the presumptive taxation scheme were further extended to all businesses by the Finance (No. 2) Act, 2009 w.e.f. 1-4-2011, except in case of income from profession, commission, brokerage, and agency. 3 The Department’s Shifting Approach: Restrictive Amendments (1998 to 2016) The approach of the Department to the scheme has been changing since its introduction. Beginning from 1-4-1998, a series of steps were taken contrary to its declared beneficial objects so far as small traders are concerned: 1. Finance Act, 1999 (Audit Condition Imposed): Amended sections 44AD, 44AE and 44AF w.e.f. 1-4-1998 providing that an assessee could claim his income to be lower than the deemed profits and gains only on the condition that books of account are maintained under section 44AA(2) and the assessee gets accounts audited and furnishes audit report under section 44AB. 2. Finance (No. 2) Act, 2009 (Rate Hike from 5% to 8%): Substituted section 44AD to enlarge coverage to all businesses (except profession, commission, brokerage, agency), but substantially enhanced the presumptive deemed profit rate from 5 per cent to 8 per cent of gross turnover/gross receipts. 3. Finance Act, 2016 (Restrictive Package): Disallowance of Partner Remuneration/Interest: No deduction allowed for salary, remuneration, interest, etc. paid to partners as per clause (b) of section 40 while computing income under section 44AD. Five-Year Lock-In & Disqualification Penalty (Section 44AD(4)): Where an assessee declares profit under 44AD and subsequently opts out in any of the next five consecutive assessment years, he is barred from claiming section 44AD for the subsequent five assessment years. Advance Tax: The assessee was required to pay advance tax. 4 Right to Adopt Lower Than Presumptive Rate: Pre- vs. Post-2017 Regime Position Prior to 1-4-2017 Although sub-section (1) of section 44AD mandated that the specified percentage of gross receipts or gross turnover shall be deemed to be profits, sub-section (5) thereof, starting with a non-obstante clause, provided that an eligible assessee (i.e. a small trader) could claim that his profits and gains from eligible business are lower than the presumptive rate, subject to maintaining books under 44AA and furnishing tax audit report under 44AB. Substitution by Finance Act, 2016 w.e.f. 1-4-2017 The Finance Act, 2016 substituted sub-section (5) of section 44AD w.e.f. 1-4-2017. The words “who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1)” appearing in the existing sub-section were deleted and replaced by the words “to whom the provisions of sub-section (4) are applicable”. Consequently, sub-section (5) no longer overrides sub-section (1) to enable a small businessman to claim lower profits simply by getting audited! Numerical Illustration: Operation of Section 44AD(4) An eligible assessee claims to be taxed on presumptive basis under section 44AD for Assessment Year 2017-18 and offers income of INR 8 lakh (or INR 6 lakh depending upon digital transactions) on turnover of INR 1 crore. For two succeeding Assessment Years 2018-19 and 2019-20, he offers income in accordance with section 44AD. However, in the third assessment year 2020-21, he offers income of INR 4 lakh on turnover of INR 1 crore. Thus, he has not offered income in accordance with section 44AD for five consecutive assessment years. Consequence: After Assessment Year 2020-21, he will not be eligible to claim the benefit of section 44AD for the next five assessment years, i.e., from Assessment Year 2021-22 to Assessment Year 2025-26. Even if his profits increase to 8% or more in those years, he must continue to maintain accounts under 44AA(2), get them audited, and furnish the audit report! Case of a New Assessee Section 44AD(4) applies strictly to an assessee who had declared profit under 44AD in an earlier year and subsequently opted out. Therefore, sub-section (4) does not apply to a person who starts a business and is assessed for the first time; in the first year of his operation, he does not fall within the disqualification of section 44AD(4). 5 Interplay with Section 44AB & Discrimination Against Business Assessees An assessee can get his accounts audited under section 44AB only if his case falls within one of its specific clauses: Clause (a): Business Turnover Threshold Applies to a person carrying on business whose turnover exceeds INR 1 crore (or INR 10 crore if 95% digital transactions). Crucially, clause (a) contains no provision enabling an assessee below the threshold to get audited to claim lower profits! Clause (b) & (d): Professional Advantage (44ADA) Clause (d) specifically empowers a professional under section 44ADA to get accounts audited and declare profits lower than presumptive rates (50%). Clause (e): Restricted to 44AD(4) Cases Only Clause (e) mandates audit only where the provisions of sub-section (4) of section 44AD are applicable and income exceeds the basic exemption limit. It does NOT enable a regular businessman to claim lower profits unless he is serving the sub-section (4) penalty period! The Resulting Legal Dilemma: Two Contrary Views As regards the issue of claiming profits lower than the presumptive rate by maintaining required books of account without audit under section 44AB, two contrary views emerge: View 1 (Mandatory Presumptive Deeming): Since section 44AD uses the mandatory word “shall” and since enabling provisions to declare lower profit have been removed, the assessee must declare profit at presumptive rates (8% or 6%). If upheld, this causes severe injustice to small traders earning genuine lower margins. View 2 (Departmental Scrutiny Discretion): Since section 44AD is not a charging section, the deemed profit rate cannot be imposed involuntarily. The assessee may declare lower profit based on books, leaving it to the Department to scrutinise the case. However, this subjects small traders to the rigours of maintenance of books and scrutiny assessments, defeating the very purpose of presumptive taxation. The Statutory Discrimination: While the Finance Act, 2016 introduced deeming provisions for professionals under section 44ADA alongside enabling provisions under section 44AB(d) allowing them to claim lower profits through audit, it took away similar benefits from business assessees under section 44AD. The newly inserted clause (e) of section 44AB is patently discriminatory. 6 Conclusion & Critical Policy Questions A person carrying on a business is no longer allowed to claim profits lower than the presumptive rate by getting his accounts audited under section 44AB. It is pertinent to ask whether, in the absence of enabling provisions, an assessee can claim profits lower than presumptive rates and if so, how. If it is held that a small trader must declare his profits at presumptive rates as provided in sub-section (1) of section 44AD, there would be injustice to him. If he claims profits lower than presumptive rates by maintaining the prescribed accounts and is subjected to scrutiny to prove the same, he faces immense hardship, and the entire declared legislative purpose of introducing the presumptive scheme is lost. About the Author CA. Dindayal Dhandaria Member, The Institute of Chartered Accountants of India (ICAI) Email: d_dhandaria@rediffmail.com • eboard@icai.in

Taxation • Direct Tax & Charitable Trusts New Compliances & Re-Approval Process under 80G (An Incisive Analysis) Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 77–83 (Journal pp. 193–199) NKK CA. Naresh Kumar Kabra The author is member of the Institute. He can be reached at eboard@icai.in. “This article covers analysis of new compliances u/s 80G which are introduced under Income-tax Law from 01.04.2021. It also covers questions, Key Challenges and certain vital issues, for which clarity is required. All these aspects related to these new compliances, are very meaningful for all NGOs (Charitable Institutions i.e., Trust, Society etc.) having / applying for 80G approval. These amendments will ensure better accountability and transparency. However, non-compliance of the same may lead to serious repercussions for the Institutions. Read on…” The very objective of section 80G is to provide a motivation in the form of incentive (i.e., deduction) for the tax payers to contribute to charity. Charity may be defined as “an altruistic thought and action which comes together for the benefits of others”. The Income-tax Act through Finance Act 2020 made it mandatory for all the NGOs (herein after referred as Institution) to obtain re-approval for 80G. However, due to COVID-19, this amendment was postponed to 31.03.2021. CBDT vide notification dated 26.03.2021, notified that, “The Income-tax (6th Amendment) Rules, 2021” for re-approval of 80G, which is to be ensured by 31.08.2021 (Original due date is 30.06.2021 which has extended vide circular No. 12 of 2021 dated 25.06.2021). It will not be surprising if in future, the Department comes out with the concept of rating the Institutions, on the basis of their conduct and compliance. Therefore it is imperative for all concerned Institutions to strengthen their internal systems and compliance departments. Through this article, an attempt has been made to present the discussion in a simple manner. This includes the key challenges to the new process of approval very specific to re-approval of existing 80G and compliances of return filing, which is divided into the following sections: Timeline of filing application under different situations. List of enclosures to be uploaded in the case of Re-approval of existing 80G. Filing of annual return of donation and issuance of certificate. Consequences in case of failure to file Form 10BD & 10BE. Information to be maintained by the Institution. Issues, which require clarity. Frequently Asked Questions (FAQs). 1. Timeline of Filing Application under Different Situations The timeline of filing application, disposal thereof, the prescribed forms etc. w.r.t seeking re-approval and fresh approval of 80G which were brought by way of amending 1st Proviso to section 80G(5) and introducing new rule 18AB & substituting rule 11AA, is summarized as under: 1st Proviso to Sec 80G(5) Situations Timeline of Filing Application Validity of Approval Disposal of Application Enquiry from Dept. Type of Approval Form to be Filed (i) Re-approval of existing Approval Within three months from the 1st day of April, 2021 5 Years 3 months* No Regular 10A (ii) Regular Approval is due to expire At least six months prior to expiry of the said period (i.e., 5 Years) 5 Years 6 months* Yes Regular 10AB (iii) Provisional Approval is due to expire At least six months prior to expiry of period of the provisional approval (i.e., 3 years) or within six months of commencement of its activities, whichever is earlier 5 Years 6 months* Yes Regular 10AB (iv) In any other case (Provisional Approval) At least one month prior to the commencement of the previous year relevant to the A.Y. from which the said approval is sought 3 Years 1 month* No Provisional 10A *Note: Disposal timelines are calculated from the end of the month in which application was received. Major Amendment – Abolition of Perpetuity 80G approval will now be granted for a period of 5 years, requiring periodic renewals. The concept of perpetual registration has been done away with. Immediate Provisional Approval Provisional approval of 80G will now be granted immediately after incorporation without detailed enquiry, enabling new institutions to receive donations and commence operational activities immediately. 2. List of Enclosures to be Uploaded for Re-Approval of Existing 80G Copy of Instrument: Trust Deed / Society Bye-Laws / Memorandum of Association (MOA) and Articles of Association (AOA). Other Creation Evidence: Copy of other document evidencing creation i.e., Revenue Records, Assessment Order u/s 143(3) etc., if the Institution is not created under an instrument. Registration Certificate: Copy of Registration with Registrar of Public Trusts / Societies / Companies. FCRA Registration: Copy of Foreign Contribution Regulation Act (FCRA) registration (if applicable). Existing 80G Order: Copy of existing approval order u/s 80G. Annual Accounts: Copy of Last 3 Years’ Annual Accounts, only if, the Income-tax Return (ITR) for A.Y. 2020-21 has not been filed. Mandatory Requirement: All the uploaded enclosures must be self-certified. 3. Filing of Annual Return of Donation and Issuance of Certificate The concept of filing of Annual Returns has been introduced for declaring various types of donations received by the Institution: Key Statutory Provisions: Form 10BD [Section 80G(5)(viii)]: Annual Return is to be filed electronically in Form 10BD for the donations received in F.Y. beginning from 2021-22. Form 10BE [Section 80G(5)(ix)]: Donee Institution has to issue a donation certificate to each donor in Form 10BE. Statutory Due Date [Rule 18AB(9)]: Both forms have to be furnished on or before 31st May, immediately following the respective financial year. Pre-Condition for Donor Deduction [Explanation 2A of Section 80G]: Related details w.r.t Donor and Donee will be auto-populated and reflected in Donor’s ITR, which is a pre-condition for the donor to claim deduction u/s 80G. 4. Consequences in Case of Failure to File Form 10BD & 10BE Late Filing Fee u/s 234G A fee of Rs. 200 per day to be paid for every day during which the failure continues. Penalty u/s 271K Assessing Officer may direct payment of a penalty ranging from Rs. 10,000 to Rs. 1,00,000. Operational Bottleneck & Practical Advice The Problem: The due date of filing Annual Return (Form 10BD) and issuance of certificate (Form 10BE) are both on or before 31st May. It is highly impractical to ensure both compliances simultaneously on the last day. The Department should ideally allow a gap, similar to TDS returns and Form 16/16A generation. Practical Advice: To remain strictly compliant, the Institution must file Form 10BD at least two days prior to 31st May, ensuring sufficient time to generate, verify, and issue Form 10BE certificates to all donors within the statutory due date. 5. Information to be Maintained by the Institution From 01.04.2021, the Institution must capture and maintain comprehensive donor-wise and donation-wise records: (a) Name of the Donor (b) Unique Identification Number (UIN): PAN or AADHAAR. If unavailable, any of the following valid documents: Tax Payer Identification of country of residence Passport Number Elector’s Photo Identity Card (Voter ID) Driving License Ration Card (c) Address of the Donor (d) Type of Donation: Corpus / Specific Grant / Others (e) Mode of Receipt: Cash / Kind / Electronic Modes / Others (f) Amount of Donation (g) Deductibility Section: Section 80G or Section 35(1) (Statistical / Social / Scientific Research) Accounting System Re-Engineering: Institutions must customize their chart of accounts and ERP frameworks to capture nature of donation, donor UIN, and mode of receipt at the point of voucher entry. Due to auto-population into donor ITRs, erroneous data will deny tax deduction to the donor, triggering disputes, return revisions, and inefficient resource consumption. 6. Issues Which Require Clarity w.r.t Practical Challenges Issue 1: Can NIL Return be filed in Form 10BD? Author’s Opinion: Nothing is currently prescribed in the law regarding filing of NIL returns. Since Form 10BD was required for the first time by 31.05.2022, clarification from the Department is necessary. Issue 2: Can Institutions receive 80G donations after getting provisional approval? What if regular approval is subsequently denied? Provisionally approved institutions must apply for regular approval at least 6 months prior to expiry of provisional tenure or within 6 months of commencing activities, whichever is earlier. If regular approval is denied, will the donor lose deduction on donations made in the interim? Author’s Opinion: To avoid future litigation and disallowance for donors, institutions should ideally avoid accepting donations during provisional registration until explicit clarification is issued. Issue 3: For existing Institutions holding 80G approval as on 31.03.2021, can they accept donations before the formal re-approval order is passed? Unlike Section 12AA(5) which enacted an express “Sunset Clause” stating “Nothing contained in this section shall apply on or after the 1st day of April, 2021”, no such sunset clause was enacted for Section 80G. Author’s Opinion: Institutions can legally continue receiving donations. The existing 80G approval does not become ineffective, and the Department is duty-bound to re-approve the registration for 5 years upon filing Form 10A within prescribed time. Issue 4: What is the status of 80G deduction if 12AB registration gets cancelled subsequently? Author’s Opinion: Denying donor deduction retrospectively is harsh and inequitable. As established under Explanation to Section 35(1) and consistent judicial rulings, once a donor makes a bona fide donation to an institution holding a valid certificate on the date of donation, subsequent revocation of donee registration cannot take away the donor’s vested tax deduction. Issue 5: Is 80G Return applicable to Religious Institutions? Author’s Opinion: Under Explanation 3 to Section 80G, charitable purposes exclude entities wholly or substantially religious. Hence, religious institutions not approved u/s 80G are exempt from filing Form 10BD. However, all non-80G trusts must maintain complete donor KYC to prevent anonymous donations from being taxed at 30% under Section 115BBC. Issue 6: Implications if a Trust is not a “Public Charitable Trust” under State Laws Section 80G(5) mandates that a trust must be constituted as a “Public Charitable Trust”. India has no central enactment for public trusts (Indian Trusts Act 1882 governs private trusts). Where state governing bodies exist (such as Devasthan Vibhag in Rajasthan, or Charity Commissioner in Maharashtra, Gujarat, and MP), trusts must register with state regulators to prevent rejection or litigation under Section 80G. Issue 7: What if no activities are carried on by a provisionally registered institution for 3 years? Author’s Opinion: The statute requires regular application within 6 months of commencement or 6 months prior to expiry. If no activities take place, specific administrative clarification is needed regarding the eligibility to seek regular 5-year registration. Issue 8: Whether certificates must be issued for donations in kind or cash donations exceeding Rs. 2,000? Author’s Opinion: While cash donations exceeding Rs. 2,000 are not eligible for 80G deduction in donor hands, and donations in kind do not qualify for deduction under Rule 11AA/Section 80G, the reporting format requires complete records. Clarification is expected before return filings commence. 7. Frequently Asked Questions (FAQs) a. Can a Return filed through Form 10BD be revised? Answer: Yes. However, the exact technical procedure to submit a correction statement for rectification of errors or adding/updating entries is yet to be laid down on the e-filing portal. b. How should donation details required in Form 10BD be aggregated? Answer: Multiple donations from different donors can be uploaded in a single consolidated return. However, multiple donations received from a single donor of the identical nature, type, and deductibility category can be aggregated together into a single line-item in Form 10BD. c. Will non-delivery of each certificate in Form 10BE to donors result in separate fine and penalty? Answer: There is no statutory clarity on multiple penalties. Institutions must download all generated Form 10BE certificates and dispatch them via email or speed post, documenting postal proofs and transmission logs to demonstrate bona fide compliance. d. How to disclose donations in case of joint donors? Answer: Report the donation as per the proportion declared by the joint donors. If no proportion is declared, disclose the amount in equal 50:50 proportions between the joint donors. e. Signing issue – Digital Signature (DSC) vs Electronic Verification Code (EVC)? Answer: Form 10A / 10AB must be verified using DSC if the ITR of the preceding financial year was submitted under DSC. In other cases, EVC is permitted. The DSC/EVC must belong to the authorized signatory through whom the last ITR was filed. f. What about applications pending as on 31st March, 2021? Answer: Under Section 80G(5E), all applications pending as on 31.03.2021 are deemed to be filed for provisional approval under clause (iv) of 1st proviso on 01.04.2021, and the order granting provisional approval should be passed within one month from the end of the month, i.e., by 31st May 2021. g. Which approval number is to be mentioned in Form 10A for re-approval? Answer: The original approval number mentioned in the first order granting 80G approval must be entered, not subsequent renewal order numbers. h. What is the difference between Specific Grant and Corpus Donations? Answer: In project or specific grants, the donor imposes terms on utilization and mandates that unspent funds must be refunded. Because of the refund obligation, it cannot be categorized as a permanent capital corpus donation. i. Can anonymous donations be received by an Institution? Answer: Religious trusts are exempt from Section 115BBC taxation. For charitable institutions, anonymous donations exceeding statutory limits are taxed at a flat rate of 30% under Section 115BBC. Maintaining donor identity records is mandatory. Beginning of a New Era of Charitable Institutions Post 01.04.2021 This new process will catalyse the proceedings for the Income-tax Department. Apart from this, it shall promote charitable activities, because now, there is the concept of provisional approval and because of the concept of renewal every 5 years, there will be no roving inquiry in the affairs of the Institutions on day-to-day basis. Due to this, they will be in a better position to run their activities in a smoother manner. Due to these welcome amendments in the law, the ultimate purpose of giving income-tax exemption benefits will be achieved at the best and charity will be done in its true and best sense.

Risk Management • Banking & People Risk People Risk Management at Banking and Financial Institutions Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 89–91 (Journal pp. 205–207) KJ Kirit Jain The author is HR risk expert. He can be reached at kiritjain11.kj@gmail.com. “Risks are everywhere and present in everything we do. Risks are part of life. So what is the need to talk about it? When we view risk from the perspective of a business or organisation, more so from a banking or financial institution perspective, it seems to answer this question profoundly. Risks in financial organisations have the potential to cause adversity, damage or losses in multiple ways affecting people, organisations, economies and nations at large scale. One of the most critical risks is People Risk. People Risk is a potential of loss due to inadequate or inappropriate human behaviour, action or decisions. Through this article, I attempt to explain why and how such risks take place? What can organisations do to identify, assess, mitigate and manage them? Read on…” Risk management in banking and financial organisations of all shapes and sizes have been traditionally an integral part of their functioning. A large part of it is driven by banking regulatory requirement given the nature of business such organisations are in, i.e., money management. Hence, safe guarding a bank from unwanted incidents/accidents that can risk people’s money (and in turn economy at large in eventuality) takes as important a place as generating business and profits for financial institutions. No other industry is as vulnerable as the banking and financial industry when it comes to varied risks, having a potential to collapse even an excellent run organisation – big or small. Such is the strength of risk. When not managed well, it can cause havoc of any magnitude that can crash not only the organisation and the financial industry, but it can also lead to devastating effects to crumble a nation’s or the world’s economy in no time. So, the question is, why do such risks play out in spite of robust risk management practices to manage critical risks such as Credit Risk, Market Risk, Liquidity Risks and Operational Risk in organisations? Today, world class statistical models, highly evolved control and governance mechanism, skilled expertise and superbly engaged Central Banks monitor the financial industry, enabling it to proactively manage these critical risks. Still, risks play out every now and then affecting the organisations’ reputation and finances. So coming back to why these risks still take place? The answer lies in People Risk. Employees at all levels in an organisation carry out a variety of actions amidst facing a variety of choices, circumstances and impulses in their work every day, and their conduct can either help build the organization or lead it to risks. What is People Risk or Human-Factor Risk? Definition: People Risk, alternatively called human-factor risk or human resource risk, is a risk of loss to the organisation due to inadequate or inappropriate human behaviour, action or decisions. Human-factor risk in any financial organisation is the root cause of failure for other risks. People risk precedes all other risks and is caused by people internally within the organisation or from outside. When people risk is inadequately understood and ineffectively managed, it causes other critical risks to snowball and avalanche. Some world class financial organisations have recognised the importance of managing people risk while others across the world are still at an emerging stage to determine how to incorporate people risk management in an overall framework of risk management within their organisation. “Many historical financial crises such as rogue trading, credit defaults including the 2008 Lehman Brothers led financial meltdown are still alive in our minds and hearts. Most of these crises were the results of human-factor risks manifested in operational failure or through misaligned judgement.” How Does People Risk Occur? People Risk manifests through behaviour of people within or outside organisation i.e., action of employees and third-party partners, if error-clad or malicious, can lead to control and governance failure built around processes, systems and activities. In turn, a failed process or a system exposes the associated risks to take place leading an organisation to incur a loss of either financial, reputational, or regulatory nature or all of them. It is people who propel an organisation into the heights of success, but it is also people who can render it to fall like a towering pack of cards. Barings Bank (UK) – Rogue Trading A closest example is the Rogue Trading by a derivative trader whose actions led Barings Bank, UK’s oldest merchant bank, to bankruptcy due to fraudulent, unauthorized and speculative trades. PNB & Gitanjali Gems (India) – System Bypass The case of PNB Bank and jewellery company Gitanjali Gems in India is another stark example that led to massive losses for the bank as internal procedures and systems were bypassed by personnel. Enron Bankruptcy (2001) – Accounting Fraud The Enron Bankruptcy in 2001 is a classic demonstration of people’s misconduct in terms of fraudulent accounting practices and deliberate misrepresentation of financial statements. Airlines & Indian Bank – Credit Policy Conspiracy A recent alleged banking irregularity case involving officials of a reputed Indian bank and a prestigious airline conspiring to sanction and disburse loans of hundreds of crores in direct non-compliance to the bank’s credit policy. Why Do People in Organisations Cause Risk? Human errors, malicious actions or fraudulent intentions by people lead to loss or harm. While a lot of human errors can be caught, managed or prevented through organisation’s control, monitoring and governance mechanism, most malicious intentions and actions are often hard to identify, monitor or prove. There are numerous examples across banks worldwide where losses were caused on the part of human errors with no malefic intentions. A lot of such people’s activities can be attributed to: Lack of skills and inadequate professional training Absence of sound standard operating procedures Poorly defined roles and responsibilities Chronic work overload and cognitive fatigue More often, personal self-serving interest, inaccurate or flawed judgement or decisions, unhappy or disengaged employees, flawed internal organisation culture, greed, and lack of integrity in conducting one’s responsibilities are bigger behavioural misdemeanours that cause the greatest damages. How Can Organisations Manage People Risks? Clearly, organisations need to adopt a two-pronged approach to prevent and manage people risks: Prong 1: Procedures and Systems Deploy rigorous procedures, technical checks, and segregation of duties that can prevent (or correct) human errors from occurring in routine operational activities. Prong 2: Cultural Response & Vigilance Foster a robust cultural response and vigilance mechanism to deter people from engaging in wrong deeds, instilling deep behaviours of integrity, transparency, and personal responsibility. A consistent high level of professional culture requires building of deep behaviours of integrity, transparency and responsibility among people. Any organisation’s long-term guard against people risks is hidden within these fortifying behaviours. The practice of these measures on a day-to-day basis by its people safeguards the organisation from any risks. Instituting a People Risk Index Organisations must institute a People Risk Index capable of showcasing real-time increasing or decreasing risk trends based on quantitative and qualitative human parameters, including: • Knowledge and skills gap • Control failure trend • Fraudulent cases count • Employee happiness level • Development & growth opportunities • Attrition / turnover trends • Employee performance trend • Incentive-evoked wrong doings • Pay gaps among employees • Manager-employee relationship This index can then be complemented by risk-mitigating measures designed and applied consistently addressing each parameter. The composition of people parameters and their relative weightage over each other can vary for each organisation to ensure it remains dynamic and conducive to the progressing nature of the enterprise. Information Technology and AI Can Help Prevent Much of People Risk A robust People Risk Index which can deliver valuable information on people risk will require organisations to leverage or deploy IT-based capabilities. Appropriate IT intervention should be designed to bring together and analyze multitudes of people data from various internal systems, reports, applications as well as external environment. Technologies such as Artificial Intelligence (AI) and Machine Learning (ML) can further make this complex data analysis more accurate, real-time, dynamic and relevant. These data will deliver people risk insights to senior management, people managers and HR through People Risk Index in real-time – enabling them to make informed, timely and impactful decisions in response to emerging or potential people risks and issues. Technology backed People Risk Index can enable organisations institute a culture of preventive measures to eliminate or mitigate high-impact people risks well in time. Who Should Own People Risk in an Organisation? Role of the HR Function The Board or Senior Management must consider People Risk as an accountable variable. However, the HR function in an organisation plays the vital role to drive management of People Risk given their influence and reach across the organisation. As People Risk is significantly associated with people behaviour, HR is best placed to take lead in this area and manage this by mobilizing resources, skills and systems with support from businesses and functions. Strategic Initiatives for the HR Function: Organisation-Wide Deployment: HR can develop a People Risk Index organisation-wide to assess, monitor and report People risks systematically. Managerial Enablement: Training and awareness should be created among people managers on how to leverage the People Risk Index to proactively manage risk issues in their areas of responsibilities. Incentive Realignment: Compensation and performance incentives for employees should be regularly aligned with findings of People Risk Index to ensure monetary rewards do not evoke risk-inducing or reckless behaviours among employees. Culture & Ethics Enforcement: A culture of ethics and good conduct should be promoted, and individuals should be rewarded for consistently living these values in their daily roles and responsibilities. To conclude, HR, from their position of strength in the organisation can regulate right behaviours, policies, procedures and systems by collaborating across all levels in the organisation in cohesive and synchronized manner – in support of making People Risk Management an inseparable cultural reality. Conclusion “People are Master Creators who can also act as ultimate destroyers.” People Risk Management must be made an inseparable cultural reality within an organisation that manifests in every action and decision made by its people. Organisations must work continuously to nurture the Master Creator trait in their people.

Taxation • Direct Taxes ICAI Journal Ref: August 2021 • Vol. 70 • No. 2 • pp. 84–88 (200–204) Income-tax Act, 1961 • Section 115BAC • Finance Act, 2020 Section 115BAC of Income Tax Act, 1961: A step towards the New-Normal SS CA. Saurav Somani Member of the Institute • casauravsomani@gmail.com “The Indian Income Tax Law witnesses every year a gamut of amendments presented in the Union Budget, in tune with the ever-changing, socio-economic scenario. The implication of such changes pervades almost every stratum of society and class across the nation. Finance Act, 2020, inserted a new section 115BAC to the Income Tax Act, 1961, commonly known as ‘New Tax Scheme’, applicable from Assessment Year 2021-22. The new section meant for Individual and Hindu Undivided Family (HUF) will bring about a paradigm shift in the way Income Tax is computed and perceived. Let us dive deeper and dissect all the possible angles of this new provision. Read on…” 1 Background The Income Tax Act, 1961, provides a wide range of deductions from and exemptions of income while computing Total Income and Tax Liability of the taxpayer. Majority of these deductions are enumerated under Chapter VIA of Income Tax Act (Sections 80C to 80U) which is based on various investments/payments. Some deductions/allowances are specific to the Head of Income, for example, statutory deduction & allowances under the head ‘Salary Income’, investment-linked deductions under the head ‘Profits and Gains from Business & Profession’. Also, there are numerous provisions for Inter/Intra head setting-off and carrying forward of losses. Overall, the intent behind such deductions/exemptions/allowances is to lower one’s taxable income and reduce the final tax liability. The new section 115BAC has a kind ‘forgoing’ effect as it dispenses with many of such deductions, allowances and exemptions. 2 Analysis of Section 115BAC Applicability: The new section is applicable only for ‘Individual’ and ‘Hindu Undivided Family (HUF)’ from Assessment Year 2021-2022. If one opts for this New Tax Scheme, the new income tax-rates will be applicable. Following table shows a comparison between the tax-rates under normal provisions and the tax rates under the New Tax Scheme: Sl. No. Total Income Rate of Tax under New Tax Scheme (%) Rate of Tax under Normal Provisions (%) 1. Up to ₹ 2,50,000 Nil Rate Nil Rate 2. From ₹ 2,50,001 to ₹ 5,00,000 5 % 5 % 3. From ₹ 5,00,001 to ₹ 7,50,000 10 % 20 % 4. From ₹ 7,50,001 to ₹ 10,00,000 15 % 20 % 5. From ₹ 10,00,001 to ₹ 12,50,000 20 % 30 % 6. From ₹ 12,50,001 to ₹ 15,00,000 25 % 30 % 7. Above ₹ 15,00,000 30 % 30 % Rebate under section 87A: Rebate under section 87A up to ₹ 12,500 will be allowed to resident individuals if the Total Income is less than ₹ 5,00,000. Category of Assessee: The ‘Individual’ may be a resident or non-resident, senior citizen or a very senior citizen. “Under the New Tax Scheme, sub-section 2 of section 115BAC of the Income Tax Act states that total-income will be calculated without taking into effect certain deductions, exemptions, allowances, and brought forward losses.” 3 Forgoing of Deductions, Exemptions and Allowances Under the New Tax Scheme, sub-section 2 of section 115BAC of the Income Tax Act states that total-income will be calculated without taking into effect certain deductions, exemptions, allowances, and brought forward losses. These have been explained as follows: 1. Deductions & Allowances under the Head ‘Salary’ Disallowed Following deductions/allowances under the head ‘salary’ will not be allowed under the new tax scheme: The standard deduction of Rs 50,000, professional tax and entertainment allowance [section 16]. Leave Travel Concession Allowance (LTA) [Section 10(5)]. House Rent Allowance (HRA) [section 10(13A)]. Minor child income allowance [section 10(32)]. Allowances to MPs/MLA [section 10(17)]. Children education allowance. Some special allowances under section 10(14): children education allowance, hostel expenditure allowance, allowance on transfer from one city to another. Exemption or deduction for any other perquisites or allowances. Permitted Allowances: However, following allowances under section 10(14) can be claimed: Transport allowances in case of a differently abled person (Divyang Employee). Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment. Any compensation received to meet the cost of travel on tour or transfer. Daily allowance received to meet the ordinary daily charges or expenditure which employees incur on account of absence from his/her regular place of duty. 2. Deductions under the Head ‘Other Sources’ Under the head ‘Other Sources’, deduction from family pension income [section 57(iia)] will not be allowed under the new tax scheme. 3. Exemptions Retained and Business/Profession Deductions Disallowed Exemptions Retained: Certain exemptions like interest income on Public Provident Fund (PPF) and interest income on ‘Sukanya Samriddhi’ Scheme will be available under the New Tax Scheme. Deductions Disallowed under ‘Business or Profession’: Under the head ‘Business or Profession’, following will be not allowed under the new tax scheme: Additional depreciation under section 32(1)(iia) for new plant and machinery. It is to be mentioned that ‘normal’ depreciation will be allowed. Investment allowance under section 32AD. Sector-specific business deductions under section 33AB (Tea, Coffee and Rubber producers) and 33ABA (extraction or production of, petroleum or natural gas or both). Expenditure on scientific research under section 35. Capital expenditure under section 35AD. Deduction u/s 35CCC for expenditure on agricultural extension project. Exemption under section 10AA for Special Economic Zones (SEZ) units. 4. Deductions under Chapter VI-A Under Chapter VI-A: Deductions under sections 80C to 80U will not be allowed. Specific Exceptions Allowed under Chapter VI-A: However, deductions under Section 80CCD(2) [contribution by employer under notified pension scheme on behalf of an employee] and under section 80JJAA [in respect of additional employment cost of new employees] will be allowed. Also ‘units’ covered under ‘International Financial Services Centre’ under section 80LA (1A) will be eligible for deduction under 80LA even if they opt for the new tax Scheme. 4 Set Off of Losses Brought Forward Losses and Unabsorbed Depreciation Brought forward losses and unabsorbed depreciation of earlier years to the extent they relate to the deductions/exemptions withdrawn cannot be set off or carried forward in the new tax scheme. Also, such unabsorbed depreciation (relating to additional depreciation) will be adjusted from the opening written down value (WDV) of the block of assets. A Relevant Question: A relevant question might arise: Whether such Brought forward losses or unabsorbed depreciation pertaining to A.Y. 2020-21 or before will be considered or will they be considered up to the year when such option under New Tax Scheme is exercised? The concerned authorities are expected to provide more clarity on this matter. Losses under the Head ‘House Property’ For Self-Occupied or Vacant House Property: Interest on housing loan on such property (Section 24) will not be allowed under the new tax scheme. For Let out House Property: Standard deduction of 30% and deduction of municipal taxes will be allowed under the new tax scheme. Interest on housing loan will be allowed only to the extent of income under this head. In other words, loss from any let-out property can be allowed to be set off against income from other house property and not from any other head of income. Moreover, such loss from let out property will not be allowed to carry forward in subsequent years. “Standard deduction of 30% and deduction of municipal taxes will be allowed under the new tax scheme. Interest on housing loan will be allowed only to the extent of income under this head.” Following is an example when an Individual or HUF opts for the new tax scheme: Particulars House 1 House 2 Rental Income ₹ 2,40,000 ₹ 90,000 Less: Standard Deduction @ 30%: ₹ 72,000 ₹ 27,000 Net Annual Value after Standard Deduction ₹ 1,68,000 ₹ 63,000 Less: Interest on loan against House 1 ₹ 1,75,000.00 ₹ 0 Income/(Loss) under House Property ₹ (7,000) ₹ 63,000 This loss of Rs 7000 can be set off against income of House 2, Rs. 63,000. If no such income is there, such loss cannot be set off from any other head of income and will also not allowed to be carried forward to any subsequent year. On the contrary, if the new tax scheme is not opted, then such loss from house property is allowed to be set off from any other head of income (up to Rs 2 lakh) and is also allowed to be carried forward under the normal provisions. Author’s Observation: The restrictions on setting off or carrying forward of losses under section 115BAC are quite stringent which may prevent the taxpayer from exercising the option despite the concessional tax rates. Some relaxations need to be provided in order to encourage taxpayers to opt for the new tax scheme. 5 When and How the Option under New Tax Scheme is to be Exercised? This new tax scheme is not mandatory but optional subject to some conditions. The option is to be exercised by filing Form 10-IE online before the due date of Income Tax Return under section 139(1) of the Income Tax Act. Author’s Observation: Reading the bare provisions, section 115BAC states that the option can be exercised only before filing Income Tax return under Section 139(1) of the Act. Other sections for belated return u/s 139(4) and revised return u/s 139(5) are not mentioned. Accordingly, it seems that benefit for opting the new tax scheme is restricted only to income tax returns filed under 139(1), and does not extend to belated returns. However, in case of revised return, if the original return was filed under section 139(1) after opting the new tax scheme, then logically new tax scheme will be available for such revised return. Clarification is awaited from the Income Tax authorities on this matter. Following explains the conditions for the option to be exercised: 1. If the Taxpayer is Having Income from Business and Profession The taxpayer can opt for taxation under this new scheme either in A.Y. 2021-22 or in any subsequent year. If the option is exercised, the new scheme will be applicable for subsequent years also. After the option is exercised, the taxpayer can withdraw from this scheme only once in a subsequent year, i.e., the taxpayer cannot choose to opt in again once he/she opts out of the scheme. The table below is for more clarity: Sl No. Nature of Income Assessment Year Status 1 Business or Profession 2021-2022 Option under 115BAC not exercised. Normal provisions applicable. 2 Business or Profession 2022-2023 Option under 115BAC exercised for the first time. ‘New Tax Scheme’ applicable. 3 Business or Profession 2023-2024 New Tax Scheme Applicable 4 Business or Profession 2024-2025 New Tax Scheme Applicable 5 2025-2026 Taxpayer withdraws from this option (can only opt out once). So Normal provisions will be applicable for this A.Y. and subsequent years. From Assessment year 2026-2027 onwards, the taxpayer cannot opt again for New Tax Scheme. However, if the taxpayer ceases to have income from Business and Profession, the taxpayer can again opt under the New Tax Scheme. 2. If the Taxpayer Does Not Have Income from Business or Profession In this case, the taxpayer can decide to opt in or opt out every year, without any restriction. Clarification from CBDT (Circular No. C1/2020 dated 13.04.2020) Since the option under section 115BAC is required to be exercised at the time of filing of the return, the Deductor of TDS, being an employer, would not know if employee opts for the new tax scheme. Hence, there was a lack of clarity regarding whether the provisions of section 115BAC are to be considered at the time of deducting tax. CBDT has issued clarification via circular no. C1/2020 dated 13.04.2020 which is explained as follows: Employees having no Business or Professional Income: The employee taxpayer has to inform/intimate the employer whether or not the option of new tax regime will be exercised. If the employee doesn’t inform, the employer will deduct TDS on employee’s income computed under the normal provisions of Income Tax Act. The intimation to the employer about the exercise of the new option is not equivalent to the exercise of the option under the new tax scheme. In other words, irrespective of the intimation, the employee taxpayer can exercise the option at the time of filing of return which will be considered final. Employees having Business or Professional Income: In this case, the employees need not inform/intimate the employer regarding the exercise of option at the time of deduction of TDS. The reason: since Assessment Year 2021-22 is the first year of section 115BAC, the employee taxpayer having business or professional income will need time to decide carefully about the option to be exercised. The employer will deduct TDS under normal provisions of Income Tax Act. Once such employee has exercised the option under 115BAC at the time of filing of Income Tax Return, the employee will have to intimate/inform the employer about the same. The employer, accordingly, will deduct TDS under the new tax scheme for the subsequent assessment years. “The employee taxpayer has to inform/intimate the employer whether or not the option of new tax regime will be exercised. If the employee doesn’t inform, the employer will deduct TDS on employee’s income computed under the normal provisions of Income Tax Act.” 6 Other Points for Consideration Reduced Tax Rates versus Forgoing of Several Benefits: As the new tax slab is comparatively beneficial compared to the old tax slab in terms of reduced tax rates, the new tax scheme, prima facie, seems to be better. However, since many significant deductions/exemptions will have to be forgone, hence the tax payer has to compute total income and tax liability under both Old and New methods and choose accordingly. Impact on Specified Business: Specified Businesses covered under section 35AD, viz, Cold Storage, Warehousing facility for agriculture produce, specified hotels, specified hospitals, etc, are eligible to get 100% deduction towards capital expenditure under the normal provisions of the Income Tax Act. Also, the businesses involved in scientific research are eligible to get deduction towards scientific research expenditure under normal provisions. Since these deductions are done away under the new tax scheme of section 115BAC, it is unlikely that these specified businesses will opt for the new tax scheme. In near future, it is possible that the new tax scheme might be made compulsory. In such a case, the government must come up with certain relaxations and relief for the benefit of such specified businesses. 7 Conclusion The new tax scheme under section 115BAC is a significant step in the Indian Income Tax Law. The concessional tax rates under the scheme will encourage the taxpayers to offer income with more transparency. However, since there is a crucial departure from many important deductions and exemptions, taxpayers might initially face dilemma while transitioning to the new tax scheme. Also, possible misinterpretations of these new provisions might crop up and lead to litigations. Both income taxpayers and practitioners will have to tread carefully while filing Income Tax Return in the coming years. About the Author CA. Saurav Somani Member, The Institute of Chartered Accountants of India (ICAI) Email: casauravsomani@gmail.com

International Taxation • Transfer Pricing & Intangibles Practical Compliance Guideline on Intangibles by Australia – Lessons for India Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 92–99 (Journal pp. 208–215) TP CA. Sharad Goyal & S. P. Singh CA. Sharad Goyal is a member of the Institute. S. P. Singh is a former IRS officer. They can be reached at spsingh54@gmail.com and eboard@icai.in. “Intangible assets are growing in importance due to developments in the areas of information, communication, and technology. All these are resulting in paradigm changes in the way business is being conducted. It is neither possible, nor advisable for each business organisation to develop all intangibles required for the conduct of its business. Consequently, transfer of intangibles is becoming more and more common. Another dimension to this development is transfer of intangible assets among enterprises of Multinational Enterprises groups. This entails valuation and transfer pricing issues. Read on…” In the absence of proper guidelines controversies keep on arising between taxpayers and tax authorities. When seen from this perspective, Practical Compliance Guidelines (PCG) issued by the Australian Taxation Office (ATO) on 19 May 2021 clarifying tax-compliance approach and associated risks for intangible arrangements is a welcome step. In this article the growing importance of intangibles, salient features of the PCG and lessons for India are discussed. Growing Importance of Intangible Assets In 1912, among the world’s 10 largest companies were the likes of US Steel, Jersey Standard, Pullman and American Tobacco. Their success rested with their physical assets: oil fields, railroads and factories. A century on, oil companies still dominate the top 10, but there have been new entrants: IBM, Microsoft and Apple, with Apple vying the top spot. Unlike the old industrial giants, these three tech companies rely not on physical assets for their prosperity, but on ideas and innovation – in short, their intellectual properties.1 Studies do support and suggest that intangible assets are the fundamental source of competitive advantages for firms in most industries. Technology in the firm, brand of the firm, etc. are some of the intangibles whose value often get unlocked during mergers and acquisitions, which has itself have increased in recent times. Intangible assets could cover a wide array of human accomplishments, covering inventions, works of authorship, software, data, expertise, know-how, experimental designs, technical information, trade secrets, publicity rights, domain names and documentation; anything for which one can anticipate future value. Legal title to intellectual property separates intangible assets into intellectual property and non-intellectual intangible. Identifiable or unidentifiable intangible assets possess and create a huge value and often outperform the value of tangible assets. As a result, in recent times, investment in intangible assets is surpassing investment in tangible assets. In some business intangible assets have become the key driver of value, innovation, and growth. In 2018 intangible assets made 84% of all enterprise value on the S&P 500 companies, a massive increase from just 17% in 1975.2 Surprisingly, the current set of accounting standards do not capture the value of intangible assets unless purchased. As a result, a substantial portion of enterprise value may not be evident on the face of a balance sheet. Companies are now spending millions of dollars in developing, enhancement, maintenance, protection, and exploitation (DEMPE) of intangible assets. Given the recent importance of intangibles for businesses, there have been considerable work by the OECD & G20 on determining arm’s length price of such transfers or uses. It is also that often payment for these assets is considered tax base eroding. BEPS Action Plan 8-10 has given detailed guidance on how to tackle these erosions of taxable base. In a Multinational Enterprise (MNE) set-up where companies distribute among companies in different jurisdictions responsibilities for developing and maintaining intangibles in one jurisdiction, exploitation in other, protection and ownership in other, DEMPE is designed to ensure that allocation of costs for functions like development, enhancement, maintenance and protection and enjoyment of returns from exploitation does not erode the tax base of the jurisdiction. Not only OECD, tax authorities around the globe are cognisant of DEMPE with respect to intangibles and are taking steps to protect their respective tax bases. Initiative by ATO – Practical Compliance Guideline 2021/D4 In order to provide a road map to taxpayers and Tax authorities for dealing with various issues connected to intangibles the ATO on May 19, 2021 released a draft Practical Compliance Guideline (PCG) 2021/D4 for public comment – thereby continuing the trend by ATO to provide a framework to assist taxpayers in assessing the level of risk in their transactions of intangible assets with international related parties. ATO issues practical compliance guidelines on tax issues. Seen from Indian perspective these are a mix of Circular and Instructions. They also address some relevant questions. These provide broad law administration guidance, addressing the practical implications of tax laws and outlining ATO’s administrative approach. For example, they might set out: How ATO assesses tax compliance risk across a range of activities or arrangements in relation to a certain area of the law – an activity or arrangement is considered low risk (unlikely to require scrutiny) and where an activity or arrangement is considered high risk (likely to attract scrutiny). Practical compliance solutions where tax laws are creating a heavy administrative or compliance burden, or where the tax law might be uncertain in its application. “The purpose of the guidelines is to provide taxpayers with additional certainty and compliance savings, thereby reducing compliance costs. These are also helpful to tax authorities in directing their compliance resources to higher risk areas of the law.” Draft PCG 2021/D4 outlines the approach which ATO is going to take with respect to compliance and risk factors connected with Intangible Arrangements including DEMPE of intangible assets or where intangible assets are migrated offshore. In particular, the ATO is concerned with whether the functions performed by Australian entities (in connection with the DEMPE of intangible assets) are properly recognized and remunerated in accordance with the arm’s-length principle embodied in Australia’s transfer pricing rules. For these guidelines the definition of intangible assets and the DEMPE framework are sourced from the OECD Transfer Pricing Guidelines. Draft PCG focuses on identifying Intangible Arrangements that mischaracterise Australian activities connected with DEMPE of intangible assets. Such arrangements may be non-arm’s length or structured to avoid tax obligations, resulting in inappropriate outcomes for Australian tax purposes. As such it covers a wide breadth of arrangements from licensing intangibles, research and development (R&D) activities, cost contribution arrangements, and intangibles migrations. Draft PCG is designed to focus on ‘tax risks’ associated with the potential application of Australia’s provisions regarding: Transfer Pricing Withholding Tax Capital Gains Tax Capital Allowances General Anti-Avoidance Rule (GAAR) Diverted Profits Tax (DPT) These guidelines have been divided by ATO into two parts, viz: Part One – Compliance Approach: Provides an outline of ATO’s compliance approach for Intangible Arrangements. Part Two – Risk Assessment Framework: Provides an outline of ATO’s risk assessment framework, which explains how ATO assesses the compliance risks of Intangible Arrangements. Part One – Compliance Approach Maintenance of adequate documentation and self-assessing the risk is at first the responsibility of the taxpayers. Part One outlines documentation and evidence which ATO would generally expect when assessing the level of compliance risk posed by the Intangible Arrangements according to the ATO’s risk assessment framework set out in Part Two. ATO has provided a preliminary list of information which ATO will examine whether taxpayers have relevant international related party dealings, are a Significant Global Entity (SGE) and/or have disclosed a relevant Category C reportable tax position: Preliminary Information Examined by ATO: Australian income tax returns General purpose financial statements International Dealings Schedules Country-by-Country (CbC) reporting data exchanged automatically or by exchange of information request, including Masterfile, Local File Parts A and B, and/or CbC Report Information obtained from foreign jurisdictions through exchange of information processes Other information obtained previously by the ATO in connection with any engagement or review, and other relevant information from third party / public sources or other government agencies. The Documentation and Evidence Expectations outlined are categorised as: Understanding and evidencing the commercial considerations and taxpayer’s decision making Understanding the legal form of Intangible Arrangements Identifying and evidencing the intangible assets and connected DEMPE activities Analysing the tax and profit outcomes of Intangible Arrangements. It is clarified in the guidelines that the documents list outlined is intended to serve as a general guide and should not be treated as an exhaustive list. Depending upon the business complexities, governance processes and systems, documentation requirements might vary. Part Two – Risk Assessment Framework This part is designed to explain how ATO assesses the compliance risks of Intangible Arrangements. This will act as a guide for taxpayers to assess the Risk Factors as they relate to their Intangible Arrangements. The risk assessment framework includes an assessment of the risk based on: Risk Factors (Appendix 1): Outline features and Examples of Arrangements that ATO will use to inform assessment of compliance risks. Documentation and Evidence Expectations: Including the level of evidence that ATO will have regard to when assessing Intangible Arrangements against Risk Factors. The Risk Factors focus on five parameters: Understanding and evidencing the commercial considerations and decision making, in particular where taxpayer has restructured or had a change associated with Intangible Arrangements; Understanding the form of Intangible Arrangements; Identifying and evidencing the intangible assets and connected DEMPE activities of Intangible Arrangements; Analysing the tax and profit outcomes of Intangible Arrangements; and Understanding the type of example arrangements ATO consider to be High, Medium or Low risk (Appendix 2). Scoring Matrix Principle: If the taxpayer is not able to provide sufficient evidence or substantiate its claim for the parameters mentioned above, the risk is categorised as High. If evidence is available, but incomplete, the risk is Medium, otherwise Low. If an arrangement exhibits one or more High Risk Factors, the taxpayer can expect a deeper level of scrutiny from the ATO. Leanings for India The draft PCG 2021/D4, in a very elaborate manner, lays down the way tax authorities in Australia will perceive and peruse the Intangible Arrangements of taxpayers. It is a commendable step towards establishing a taxpayer-friendly environment. For the tax authorities as well, it will bring discipline and focus in their approach towards Intangible Arrangements. It will be very helpful for taxpayers as they will know in advance as to how their Intangible Arrangements will be looked at by the authorities. This will help taxpayers in planning in a better way. The downside is that the guidelines will put very heavy compliance burden on taxpayers towards documentation and audit, especially since there is no minimum threshold proposed in the guidelines for audit and documentation. In India, there is a plethora of litigation on taxation of royalty on intangible assets. Latest is the landmark ruling of the Supreme Court in February 2021 in Engineering Analysis Centre of Excellence Private Limited vs. CIT (Civil Appeal Nos. 8733-8734 of 2018) on the difference between use of the copyright and the acquisition or use of the copyrighted article. The apex court ruled that any sum paid by resident end-users as consideration for the resale/use of computer software cannot be typically branded as royalty under the tax treaties – it amounts to procurement of goods. Apart from this, there are controversies in many cases regarding valuation for transfer pricing purposes. The Indian tax authorities, in many cases, have held the value of intangibles received by Indian companies from their group companies as “NIL”. In most of such cases, this approach has not found favour with courts. This results in uncertainty for taxpayers and unnecessary costs for taxpayers as well as government. To minimise both, government should come out with detailed guidelines for taxpayers and tax auditors. For this, the draft guidelines issued by ATO would be immensely helpful. Annexure: Summary of Risk Factors (ATO PCG 2021/D4) Risk Focus Areas – Intangibles Arrangements High Risk Factors Medium Risk Factors Low Risk Factors 1. Understanding and evidencing commercial considerations and decision making (restructuring / changes) Documentation and evidence does not substantiate commercial considerations and associated decision making. Failure to substantiate due consideration and assessment of commercial options realistically available as alternatives, disregarding anticipated tax effects. Failure to substantiate clear quantifiable, non-tax financial benefits of Intangibles Arrangements. Documentation and evidence mentioned in High Risk column are incomplete. Documentation and evidence mentioned in High Risk column are adequate. 2. Understanding the form of Intangibles Arrangements The form of Intangibles Arrangements is not substantiated by documents/evidence (legal agreements, correspondence, taxpayer guidelines, manuals, policies, procedures, governance). Documentation does not substantiate that form of arrangements is consistent with substance. Documentation does not substantiate characterisation of payments made (including recognising an amount in nature of royalty where relevant). Documentation and evidence mentioned in High Risk column are incomplete. Documentation and evidence mentioned in High Risk column are adequate. 3. Identifying and evidencing intangible assets and connected DEMPE activities Documentation does not specifically identify intangible assets connected with arrangements. Documentation does not substantiate connected DEMPE activities, including how activities generate value. Documentation does not substantiate that entities stated to manage, perform, and control DEMPE activities and assume risks have necessary capability, financial capacity and/or assets in substance. Documentation and evidence mentioned in High Risk column are incomplete. Documentation and evidence mentioned in High Risk column are adequate. 4. Analysing tax and profit outcomes of Intangibles Arrangements Documentation does not substantiate that economic outcomes/benefits obtained align with DEMPE contributions (functions performed, assets used, risk assumed). Documentation does not substantiate that tax and profit outcomes are consistent with commercial/economic substance. Documentation evidencing transfer pricing methods, valuations, and projections is inconsistent with anticipated benefits, or relies on inadequate, non-contemporaneous, unreliable data. Documentation and evidence mentioned in High Risk column are incomplete. Documentation and evidence mentioned in High Risk column are adequate. 5. Understanding example arrangements (Appendix 2) Arrangements exhibit features or characteristics of high risk examples in Appendix 2. Arrangements exhibit features or characteristics of medium risk examples in Appendix 2. Arrangements exhibit features or characteristics of low risk examples in Appendix 2. Appendix 2: Classification of Example Intangibles Arrangements Examples of High Risk, Medium Risk, and Low Risk Factors as given in Appendix 2 to PCG 2021/D4: High Risk Medium Risk Low Risk 1. Centralisation of intangible assets (limited DEMPE functions offshore with cost-based R&D services in Australia) 6. Centralisation of intangible assets (sale of intangible asset with residual services provided in Australia) 10. Centralisation of intangible assets (third-party purchase and immediate on-sale of intangible asset) 2. Bifurcation of intangible assets 7. Transfer of rights to intangible assets via a Licence Agreement 11. Contract research and development arrangement (cost-based R&D services performed under oversight of foreign parent) 3. Non-recognition of Australian intangible assets and DEMPE activities 8. Contract research and development arrangement (cost-based R&D services with insufficient clarity of functional profile) 12. Cost contribution arrangement (sharing and joint management of intangible asset and DEMPE functions) 4. Migration of pre-commercialised intangible assets 9. Cost contribution arrangement (pre-existing intangible asset values may be incorrect and outcomes do not align with inputs) — 5. Non-arm’s length licence arrangements — — References & Footnotes The increasing importance of intangible assets: SmartCompany Australia (May 2021) Intangible Assets as Driver of Company Value: Visual Capitalist (June 2021) Engineering Analysis Centre of Excellence Private Limited vs. CIT (SC) [Civil Appeal Nos. 8733-8734 of 2018], Supreme Court of India (February 2021).

Industry • Pharmaceutical Sector ICAI Journal Ref: August 2021 • Vol. 70 • No. 2 • pp. 100–105 (216–221) Production Linked Incentive (PLI) Scheme • Atmanirbhar Bharat Enticement For Pharmaceuticals Sector – “Drastic Times Call For Drastic Measures” NJ CA Neha Jain D Member of the Institute • nehajain1180@gmail.com “The pandemic has brought into limelight the Atmanirbhar Mission and the Government’s new initiatives/ schemes are just the steps in right direction. To ensure revival of economy the government has announced various schemes under certain sectors including automotive, pharmaceutical, textiles etc. to establish a global supply chain and fulfil the deeply rooted moto of the Government ‘vocal for local and local for global’. These schemes will not only lead to self-sustainance but will also enable the country to wipe out the unemployment plague in a phased manner. The discussion in the present article highlights certain features of the PLI scheme in pharmaceutical sector announced on 03 March 2021 along with its detailed operational guide issued on 01 June 2021 and corrigendum on 30 June 2021 and 22 July 2021. Read on…” 1 Introduction The Indian economy was primarily an agriculture-based economy and the public sector had the task of industrializing the country. However, the economy was not able to see the sunrise due to the inefficiency of public sector. The private sector was at its initial stages and could not flourish due to non-availability of adequate capital for investment. This proved to be an obstacle in progress of the private sector. However, realizing the importance of industrialization through both the public and private sector, the then government announced industrialization policies enabling adequate investments from foreign to ensure a comprehensive and rapid growth of the Indian economy. Although the measure of foreign investments into the Indian Territory was for industrialization and progress of the economy, it had somewhere still left a loophole in terms of huge dependency on various countries in many sectors. As the COVID-19 pandemic hit the world economy last year, the importance of being ‘Atmanirbhar’ was emphasized and the importance of being self-reliant on various fronts came into spotlight. One such key sector was the pharmaceutical sector. Although India has been a key source for certain drugs required for treatment of the virus on one side, the unavailability of raw materials (drugs) to manufacture vaccines in India has become a major hindrance too. Presently India meets its huge demand for patented drugs through imports but exports only a lower value of generic drugs. This could be due to inadequate facilities for research and development or lack of investment to involve huge production capacities. Keeping in mind all the important factors hindering the growth of the sector in all terms, The Ministry of Chemicals and Fertilizers issued a notification on 03 March 2021 rolling out a Production Linked Incentive scheme for pharmaceutical to incentivize certain high value pharmaceuticals to enable the sector flourish at its best and to penetrate in global markets. The detailed operational guidelines of the scheme were issued on 01 June 2021 providing an incentive of about INR 15000 crore across the sector for a period of 6 years from FY 2022-23 to FY 2028-29. In the present article, we shall discuss certain key features of the scheme as laid down in the operational guidelines and corrigendum thereon: Firstly, it can be noted that the PLI scheme for pharmaceuticals is third scheme issued by the Ministry of Chemicals and Fertilizers after the scheme for promotion of domestic manufacturing of critical key starting materials (KSMs)/ Drug intermediaries/ Active Pharmaceutical Ingredient (API) and scheme for medical devices. 2 Salient Features of the Scheme 1. Ultimate Outcome of the Scheme The ultimate outcome of the scheme to the applicants is the incentive. The incentive under the present scheme is a form of financial benefit provided based on incremental sales and eligible investments done. “The ultimate outcome of the scheme to the applicants is the incentive. The incentive under the present scheme is a form of financial benefit provided based on incremental sales and eligible investments done.” 2. Segregation of Manufacturers by Global Manufacturing Revenue (GMR) The scheme has segregated manufacturers into three different groups basis the global manufacturing revenue (GMR). The term global manufacturing revenue means the consolidated revenue of the group (enterprise which directly or indirectly exercise 26% or more of voting right in the other or appoint more than 50% of the board of directors in other enterprise) and/ or in vitro diagnostic medical devices. Revenues from any other source for instance R&D services, rental incomes, etc., shall be excluded for calculating the GMR. Group GMR – FY 2019-20 (INR) Remarks A 5000 crore or more Inclusive of 5000 crore B 500 crore – 5000 crore Inclusive of 500 crore C Less than 500 crore (incl. MSME entities) – 3. Eligibility of the Applicant The applicant (manufacturer) can be a proprietor, partnership firm, LLP or Company registered in India. However, the applicant should not be any willful defaulter in any Indian laws, declared bankrupt or reported as fraud by the bank or financial institution or non-banking financing company. 4. Categories of Eligible Manufactured Goods The manufactured goods eligible for incentive under the scheme are also classified into three different categories: Category Manufactured Product 1 Specific high value goods such as biopharmaceuticals, complex generic drugs, patented drugs or drugs nearing patent expiry, cell based or gene therapy drugs, Orphan drugs, Special empty capsules like HPMC, Pullulan, enteric etc., complex excipients, phyto-pharmaceuticals, other drugs as approved. 2 Active Pharmaceutical Ingredients / Key Starting materials / Drug Intermediates (Not covered under the earlier PLI scheme). 3 Repurposed drugs, Auto immune drugs, anti-cancer drugs, anti-diabetic drugs, anti-infective drugs, cardiovascular drugs, psychotropic drugs and anti-retroviral drugs, In-vitro diagnostic devices, Other drugs not manufactured in India, Other drugs as approved. It should be taken note that even though the scheme focuses on production of high value drugs, sufficient resilience is given to the API/ KSMs also to avoid any shocks to the Indian Pharmaceutical industry. It specifically also mentions that the “other drugs” as approved by the Department of Pharmaceutical (DoP) would also be eligible for application under the scheme. Hence, even if the drugs manufactured by an applicant do not fall under the general categories stated above, the applicant is eligible to approach the DoP depending on the criticality of drug requirement. 5. Selection of Applicant Only one applicant on behalf of a group is eligible under the scheme and investment and sales will be collectively considered. Weightage has been given to the below criteria for selection of applicants: “Only one applicant on behalf of a group is eligible under the scheme and investment and sales will be collectively considered.” Group A & B Selection Criteria: The applicants under the scheme will be selected based on the gross manufacturing investment in India during the last 10 years (FY 2010-11 to 2019-20); Research and development expenditure as a percentage of the GMR from pharmaceutical goods in last 3 years (FY 2017-18 to 2019-20); Number of new drug applications by the applicant or by group company by the US/ UK/ Japan/ Canada EU country (member of PICS), WHO-GMP compliance certificate from State licensing authority regulatory agencies as on 01.04.2021. Group C Selection Criteria: The applicants under the scheme will be selected based on the gross manufacturing investment in India during the last 10 years (FY 2010-11 to 2019-20); Number of new drug applications by the applicant or by group company by the US/ UK/ Japan/ Canada EU country (member of PICS), WHO-GMP compliance certificate from State licensing authority etc., regulatory agencies as on 01.04.2021; GMR from pharmaceutical goods in FY 2019-20. Group C for MSME: Number of manufacturing plants in India owned by applicant/group company and approved by US/ UK/ Japan/ Canada/ EU country (member of PICS), WHO-GMP compliance certificate from State licensing authority etc., regulatory agencies as on 01.04.2021; GMR from pharmaceutical goods in FY 2019-20. In-vitro Diagnostic Medical Devices: For in-vitro diagnostic medical devices, the selection criteria for all groups remain same except that GMR from in vitro diagnostic medical devices in FY 2019-2020 has to be considered. 6. Investments: “No Pain No Gain” As it is rightly said, No Pain No Gain. It is the responsibility of the manufacturer to make investments to receive reward in the form of incentive. The guidelines of the scheme specifies the types of expenses, which would qualify as eligible investment: Cut-off Date: Most importantly, the investment should be made on or after 01st April 2020. Plant & Machinery: Expense incurred on new plant, machinery, equipment, associated utilities including expense on packaging, freight / transport, insurance, and erection and commissioning of the new plant, machinery, equipment including laboratory equipment, IT systems as part of quality assurance/ certification/ manufacturing etc. Taxes and Finance Leases: The manufacturer can also add the non-creditable taxes as part of the cost. The investment made in plant & machinery can be taken under a Finance lease (as per Accounting Standard 19 – Leases or Indian Accounting Standard (Ind-AS) – 116 Leases). Further, the machinery can be used for production of products not falling under the PLI scheme. However, an appropriate declaration of usage of machinery will have to be submitted. Building Construction & Infrastructure Limits: Expense in relation to construction of building where a new plant and machinery is installed is eligible. However, where the internal compound wall/ roads (associated infrastructure) are constructed, the eligible investment value for such associated infrastructure is limited to 20% of investment in new plant and machinery. R&D Expenditure: Expenditure incurred for Research and Development (R&D) is allowed, provided the clinical trials are conducted in India. Technology Cost: Expenditure incurred on cost of technology purchased will also be considered as eligible investment. Product Registration: Expense incurred in relation to registration of the product in India and other countries including renewal charges is an eligible investment. “Expense in relation to construction of building where a new plant and machinery is installed is eligible. However, where the internal compound wall/ roads (associated infrastructure) are constructed, the eligible investment value for such associated infrastructure is limited to 20% of investment in new plant and machinery.” Ineligible Investments under the Scheme: However, there are a few investments (as mentioned below) which will not be eligible to fulfill the investment criteria under the scheme: Second hand/ used/ refurbished plant, machinery, equipment, utilities or research and development equipment. Expenditure on consumables and raw material used for manufacturing. Expenditure on guest house building, recreational facilities, office building, residential colonies and similar structures. The expenditure incurred on land required for the project / unit shall not be considered for determining threshold investment. 7. Incentive Thresholds: Minimum Investment and Incremental Sales The reward under the scheme is computed based on the incremental sales of the products every year along with the minimum cumulative investment on a timely basis. Group Minimum Investment Minimum Sales of Eligible Product A INR 1000 crores in 5 years(20% incremental every year) For the first Financial year (FY 2022-23) – greater than INR 50 crores and for subsequent financial years 7% of increment in sale of eligible product B INR 250 crores in 5 years(20% incremental every year) For the first Financial year (FY 2022-23) – greater than INR 10 crores and for subsequent financial year 7% of increment in sale of eligible product C INR 50 crores in 5 years(20% incremental every year) For the first Financial year (FY 2022-23) – greater than INR 1 crore and for subsequent financial year 7% of increment in sale of eligible product C (MSME) Committed Investment over a period of 5 years(20% incremental every year) For the first Financial year (FY 2022-23) – INR 50 lakhs and for subsequent financial year 7% of increment in sale of eligible product. 8. Product Mix Flexibility Certain important relaxations in the scheme include that the applicant is eligible to change the product mix up to five times during the tenure of scheme. 9. Non-Fulfillment & Exceeding Prescribed Thresholds Where an applicant is unable to fulfill the minimum investment or incremental sales condition, the applicant will be denied the incentive for the particular year. However, it will not hinder the applicant from being eligible under the scheme in subsequent years too. Also, the applicants who exceed the prescribed minimum investments and sales will be eligible for additional incentive as per direction by DoP. 10. Computation Formula & Incentive Rates Incentive = Net Incremental Sales of Eligible Product × Rate of Incentive The term incremental sales means sales of eligible product during a given Financial Year minus the baseline sales of the product in FY 2019-20. The rate of incentive is computed on the incremental sales over the base line. Financial Year Incentive Rate (Products falling in Category 1 & 2) Incentive Rate (Products falling in Category 3) 2022-23 10% 5% 2023-24 10% 5% 2024-25 10% 5% 2025-26 10% 5% 2026-27 8% 4% 2027-28 6% 3% 3 Numerical Illustration: Complete Scenario Analysis Let us take an instance to understand the complete scenario: X Ltd is engaged in manufacturing of cell based therapy drugs and has global manufacturing revenue of say INR 5000 crores. The Company recorded a turnover of INR 450 crore of the eligible product in India during FY 2019-20. The Company applies under the PLI scheme notified on 3 March 2021. Let us discuss the value of incentive, which would be disbursed to the Company. Assuming that the Company has met the requirement for minimum investment as laid down in the scheme on a timely basis. The incentive eligible under the scheme will be as follows: Financial Year Net Sale of Eligible Product (Assumed) Base Line Sales (FY 19-20) Min. Incentive (Category A Product) 2022-23 500 crores 450 crores 50 crores × 10% = 5 crores 2023-24 (more than min. 7% growth from FY 2022-23 of 500 crores) 550 crores 450 crores 100 crores × 10% = 10 crore 2024-25 (more than min. 7% growth from FY 2023-24 of 550 crores) 680 crores 450 crores 230 crores × 10% = 23 crores 2025-26 (more than min. 7% growth from FY 2024-25 of 680 crores) 750 crores 450 crores 300 crores × 10% = 30 crores 2026-27 (more than min. 7% growth from FY 2025-26 of 750 crores) 850 crores 450 crores 400 crores × 8% = 32 crores 2027-28 (more than min. 7% growth from FY 2026-27 of 850 crores) 920 crores 450 crores 470 crores × 6% = 28.20 crores Therefore, it is very important for the manufacturer to project its business performance in terms of both investment requirements and revenue from eligible product under the scheme. 4 Key Points to Note: In-House Consumption & Inter-Scheme Offsets In-House Consumption of Eligible Product in Another Eligible Product: Where the eligible product under the scheme is used for in-house consumption of another manufactured eligible product that is sold, the Company will be able to claim the benefit only for one of the products. For eg. Z Ltd is engaged in manufacture of drug A which is also used in the manufacture of another drug B and claims benefit under the PLI scheme for both the drugs. The incentive can be claimed on the drug A or drug B when the final product (drug B) is sold. In-House Consumption in Non-Eligible Products: Where the eligible product is used for in-house consumption and used for manufacture of any other product not eligible under the scheme, then in such a scenario the actual cost of the product will be considered as sales when the final product which consumed the eligible product is sold. Let’s say M Ltd is engaged in manufacture of various products including “drug N” for which incentive under the PLI scheme is claimed. Drug N is sold in the market and also used for manufacture of another product by the Company. Hence, when drug N is used for production of another product, M Ltd is eligible to claim the incentive on drug N to the extent of cost of the manufacture when the other product is sold. Inter-Scheme Overlap Prevention: In a case where the applicant has availed incentive under any other scheme on a product which is used for in-house manufacture of eligible product under this scheme. The cost of the product used for manufacture will be reduced from the sales to compute incentive under the present scheme. Thereby, an applicant can claim benefit on a product only once. 5 Disbursement of Incentive Application Window & PMA Inspections: The application for scheme has to be submitted between 2 June 2021 to 15 August 2021 with the Project Management Agency (PMA) appointed by the Department of Pharmaceuticals (DoP) along with necessary declarations and bank guarantee from a scheduled commercial bank. The PMA or any other agency appointed by DoP is duly authorized to visit the offices/ manufacturing facility of the applicant. After obtaining an approval, the applicant will be required to furnish a quarterly review report within 30 days from the end of every quarter. Changes in Ownership / Corporate Structure: However, any changes in terms of shareholding pattern or successor-in interest has to be intimated to the PMA for approval of the DoP to consider for disbursal of incentives. Annual Claim Submission Timeline: The applicant would be required to submit the application to claim the incentive on an annual basis along with relevant supporting within one month from the end of the financial year i.e., 30 April of succeeding FY. Verification & Staggered Claim Release: The PMA after due verification would release 75% of the claim and the balance 25% of the claim will be released after submitting audited accounts. Thus, enabling a successful implementation of incentive scheme to an applicant. 6 Conclusion As it is rightly known, “Health is Wealth”. The health of the Indian economy can be invigorated only after successfully implementing the radical schemes of the government in wealth creating sectors in terms of both strengthening the economy and also creating multiple employment opportunities. Even though the country is witnessing its difficult times presently, it is to be remembered that every cloud has a silver lining. Our steps are in a positive direction and we will have to wait for a few years to reap the harvest. About the Author CA Neha Jain D Member, The Institute of Chartered Accountants of India (ICAI) Email: nehajain1180@gmail.com

Technology • Corporate Law & Auditing Audit Trail in Accounting Software Journal: The Chartered Accountant, August 2021 (Vol. 70, No. 2) • Pages: 106–110 (Journal pp. 222–226) BZ Bharat Zinzuvadia The author is member of the Institute. He can be reached at bmzinzuvadia@gmail.com. “The new requirement for the maintenance of audit trail by the companies will substantially affect the ways, the books of accounts are maintained on computer software especially, by small and medium size companies. The software companies will have upgrade their software to keep it compliant with the new requirements. Besides the new provision for the companies to use a software with audit trail, a new reporting requirement for the auditors of the company is also added, which will pose a challenge, especially in beginning. The drafting of the notification indicates strict application by the company. The notification was issued on 24th March 2021, and it was applicable to all companies (which uses accounting software) for each transaction, with effect from 1st April 2021. However, it is now deferred up to 1st April 2022. The reporting requirement for the auditors of the company is also applicable from the same date. Therefore, the auditors should address a situation where, they have to comment on the audit trail feature of the accounting software being used by the company, but the management of the company is not bound to maintain the audit trail. The reporting requirement is applicable from 1st April 2022 so, the auditors have to give their comments on the audit trail feature before it becomes mandatory for the companies to implement the requirement. Another situation could be, where the company has upgraded its system later, but before the closure of the account next year. Read on…” Introduction The Ministry of Corporate Affairs vide a notification No. G.S.R. 205(E) dated 24th March 2021, has amended The Companies (Accounts) Rules, 2014, and a new proviso is added to sub rule (3), which says: “Provided that for the financial year commencing on or after the 1st day of April, 2021*, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording the audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled”. *The application of this provision is however, now postponed up to 1st April 2022. This amendment will have a substantial impact on the way the accounting software are developed and used by companies in India. The use of accounting software for maintaining financial records is common in these days. In fact, many commercial entities use several accounting software for their specific needs. The amended rules says that “….. every company which uses accounting software for maintaining its books of account……”. It raises a question about what it means by use of accounting software? It also raises the question of what should be included in the books of accounts. Because the rules are applicable without exception to all companies, irrespective of size, nature, and status of the company. Let us take an example of a One Person Company engaged in a trading business and using a readily available mobile application that gives the details of receivables and payables. The rest of the accounting records are kept in physical notebooks. Once, it is established that the company uses an accounting software, these provisions become applicable, (considering the mobile application, and accounting software), and therefore, I do not know if in this situation, whether the company has to compulsorily switch over to an accounting software that keeps the audit trails, because rules require the company to use “…accounting software which has a feature of recording audit trail of each and every transaction…” or the word “each and every” will be understood to have a limited reference to those transactions which are currently kept on accounting software (the mobile application in our above example). The second approach appears to be more practical and advisable. It may also be noted that section 128 of the Companies Act 2013 (the Act) provides for the maintenance of the books of accounts at a registered office or at some other location and it also provide that such records may be kept in electronic form. It does not force a company to keep the accounts in electronic form. “Nowadays, it is practically impossible to avoid use of accounting software. Almost all companies having active businesses, use accounting software. The question here is whether, that software has a feature of keeping audit trail.” To ensure that the accounting software has an audit trail feature, in compliance with the requirement of the new provision, the management may consider the following matters: 1. Minimum Information in Audit Trail Report What would be the minimum information an accounting software should provide as an audit trail report, to render the software, a Companies Act complied accounting software? 2. Effective Date & Penal Consequences The rules provide that this provision is applicable from 1st April 2022. These rules are prescribed under the provisions of section 128 of the Act. The noncompliance of the provisions of section 128 attracts a penalty, which ranges from fifty thousand to five lakh rupees. The management should also think on, how to deal with a situation when it is evident that the accounting software used by the company does not comply with the new provisions. 3. Diversity and Complexity of Accounting Systems There is a range of accounting software available ranging from an extremely basic function to a complex one which takes business decisions with the help of AI (Artificial Intelligence). Different accounting software would record the same transaction in different ways by capturing or not capturing the other dimensions of the same transaction, and therefore it would become highly judgmental as to what would constitute and audit trail. For example, SAP, beside capturing the basic details of a transaction, also captures more information on the same transaction, the audit trail of such additional information may or may not be kept. According to the notification, an accounting software is required to capture the audit trail for all details once it is recorded. 4. Controls to Prevent Disabling The management of the company is to ensure that the accounting software should have a control to ensure that the audit trail feature was prevented from being disabled. Naturally, the audit trail entry cannot be manually changed by the users. The accounting software must capture the trail automatically as the operations are performed. The audit trail feature should be hard coded so that it does not give an option to enable or disable the feature. However, it may not be the case for all accounting software. Where an option is available to change the applicability of the audit trail feature, the management should put in place other controls, to ensure that the audit trail feature remains operative continuously. 5. Direct Database Access Risks For any software, the audit trail data is a set of records like other records and therefore the audit trail records are saved in the same data base besides the other records. Any direct modification to the database will not be captured in the audit trail, secondly, the audit trail records itself can be changed once an access to the database is available. 6. Modifications Bypassing User Interface Any modification in the database, not routed through user interface would not be recorded in the audit trail or audit log. A. Applicability Scope: Every company which uses accounting software for maintaining its books of account. So, the provision is applicable to every company irrespective of size, nature and status except those companies which do not use accounting software. Traditional bookkeeping methods have now been enhanced by computer programs that assist the task with accuracy. Even a very small company involved in simple trading activity would be using mobile applications and other such primary accounting software which provides a basic platform to address their business needs. There could be a situation where though most of the transactions are not kept in accounting software and some to the records are kept in spreadsheet software. The provision is also applicable to a one person company, small company, dormant company and to a section 8 company beside other companies if it maintains its books of account on accounting software. The requirement of maintaining the books of accounts on a software which provide audit trails feature was initially applicable from the financial year starting from the 1st April 2021. However, the MCA vide notification No. 247 (E) dated 1st April 2021 has deferred the application up to 1st April 2022. “The companies must check whether their accounting software comply with this requirement or not. If not, they must upgrade or modify their accounting software to ensure it complies.” As per the amended rules, this requirement of using an accounting software with audit trail feature, will be applicable from 1st April 2022, and therefore the companies and accounting software developers do have a reasonable time to upgrade their systems. Another question it triggers is, whether the auditors should consider a situation where the accounting software adopted by the company is not compliant with Companies (Accounts)rules 2014, while drafting his audit report? The Ministry of Corporate Affairs vide a notification G.S.R. 206(E) dated 24th March 2021, has amended The Companies (Audit and Auditors) Rules, 2014 which provides that, amongst other things to be reported by the auditors under the head “Other Matters to be Included in Auditors Report”, para (g) has been inserted which ask auditor: “(g) Whether the company has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention”. B. What is an Audit Trail? “Audit trail is primarily used to ensure integrity of electronic data. It is a set of system records generated by an accounting software containing details of operations and modification to a transaction from beginning to end. It is also referred as to audit log. It provides details on the operations on a particular transaction in its chronological order.” Audit trail is necessary for verification of different elements of the transaction such as existence, completeness, occurrence, and accuracy. Basically, it contains details such as: Details about origin of the records: Date and time stamp. Reference or copy of basic records: Documents based on which the transaction is recorded – original and new values. Details of approval of transactions: Designation of approving person. Details of modification: In the records of transaction – with reasons of change. Identification of person involved: User ID. Some software provide special reports that help the auditors in the verification of the records. However, there is a difference between the reports for the auditors and audit trail. Such reports may or may not fall within the definition of audit trail report. C. Verification of Software Audit Trail The verification of audit trail is neither a new area nor a new method of audit, in fact it is part of regular audit exercise. The auditor while conducting verification of different audit assertions, verifies audit trail to ensure existence, completeness, occurrence, accuracy etc. However, the format of audit trail defers when it comes to the electronic data processing environment. D. Audit Trail of Each Transaction The notification has specifically clarified that the accounting software should capture audit trail for each transaction to make the software compliant of these rules. The question of which type, and nature of transactions are to be covered under the system of audit trail generation. This question arises because different accounting software records the transaction in different ways and style. A complex accounting software would capture multiple dimensions of a transaction, whereas a basic accounting software would record the transaction with primary details only. Similarly, the method and style of recording the audit trail and generating audit trail report would defer in each of the accounting software. Some software simply highlight the changes whereas some software show changes for the given transaction but do not have the facility to generate a report of the audit log. I think MCA or the ICAI should provide a clarification about the form and style of the audit trail feature in an accounting software. “In the absence of proper guidelines, it would be difficult to determine which transactions should be subjected to the audit log and for which transaction the records of audit trails are not necessary for the compliance of these revised rules.” E. What Type of Report Should the Accounting Software Provide? The audit trail or audit log is required to pinpoint the exact person who has initiated or modified the transactions and the basic records or documents supporting the occurrence of the transactions. It should present the details in sequential order of its occurrence. F. Reporting Requirement in Auditor’s Report The auditor is asked four questions under para (g) of rule 11: Whether the company has used such accounting software for maintaining its books of account which has a feature of recording audit trail? Whether such feature has been operated throughout the year for all transactions recorded in the software? Whether the audit trail feature has been tampered with? Whether the audit trail has been preserved by the company as per the statutory requirements for record retention? The new reporting requirement under The Companies (Audit and Auditors) Rules, 2014 is applicable with effect from 1st April 2022, and therefore, the auditors, while issuing a report on or after 1st April 2022, must consider the new reporting requirement in the report and accordingly, comment on all four questions. The audit plan for the verification of the audit trail should include: 1. IT Team Discussions Discussion with the IT team of the company, about the functioning of the audit trail feature and content of log report (audit trail) among others. 2. System Report Verification Verification of the report generated from the system and checking that the report provided by the software contains all necessary details to constitute it as a proper audit trail. 3. Continuous Operation Assessment The auditors have to comment on whether the audit trail feature was in operation throughout the year and all the transactions recorded are subjected to the audit trail module of the software. If the audit trail feature is hard coded and automatic, the answer to this question involves a low audit risk. In case there is an option to enable or to disable this feature, the auditor should test the other controls, in the system to ensure that the feature was in continuous operation through the audit period. 4. Anti-Tampering Evaluation To answer the third question, whether the audit trail feature has been tampered? This requires knowledge of the ISA audit and a detailed study of the operations of the audit trail function. The possibility of the audit trail feature being tampered also poses a great audit risk, especially in a highly computerized audit environment. The auditor should consider this risk while planning other audit areas. 5. Record Retention Compliance Auditors require commenting on whether the audit trail records were preserved by the company for period as determined by the Companies’ Act 2013. Since the auditors are specifically asked that “Whether the audit trail has been preserved by the company as per the statutory requirements for record retention”, the auditor is required to comment on preservation of audit trail records of earlier years. Reporting on the audit trail of earlier periods would require the auditors to check the records of all earlier periods. Besides, the auditors should also consider: a. Any change or update of the accounting software in past. b. Adoption of new software in recent past. c. If the company is under investigation under any provision of the Companies’ Act 2013, the records should be kept for that period as well. G. At Last The new duty cast on the management to use a software that provides a feature of audit trail and the new duty casted on auditor to report on audit trail are two separate provisions and should be linked with each other. While preparing the audit report after 1st April 2022, the auditors have to comment on the audit trail feature of the accounting software being used by the company, even though, for the accounting period for which the report is being issued, the management of the company was not bound to maintain audit trail. So far as it relates to big business houses, which uses well-structured ERP like SAP or MS Dynamics NAV, the new requirement does not pose a big question, as these ERPs are already in compliance with the requirements. It may pose a challenge where the company uses and in-house developed ERP or and ERP where this feature of audit trail was not given an importance for one or another reason. Some browser-based accounting solutions available in market do have a transaction tracking facility, but they do not provide a log report while other software have not given importance to the audit trail feature though it gives some useful reports for the auditors.

Vision – Global Leaders ICAI Journal Ref: July 2021 • Vol. 70 • No. 1 • pp. 30–33 IFAC • Climate Action & Low-Carbon Transition Accountants and Climate Change SR Sanjay Rughani Chair, PAIB Advisory Group, International Federation of Accountants (IFAC) • sanjay.c.rughani@sc.com • eboard@icai.in “A low-carbon transition is underway and will change how economies operate creating both uncertainty and significant opportunities. Politicians, regulators, and institutional investors, and asset managers are all maneuvering towards a world with net-zero emissions. The International Federation of Accountant’s Point of View on climate action outlines the enormous influence on IFAC’s 180 member organizations and on over 3.5 million professional accountants yield in driving climate change transition and adaptation. Read on…” 1 The Imperative for Climate-Literate Accountants As Mark Carney, COP26 Finance Adviser and UN Special Envoy, put it at the 2020 IFAC and ACCA Climate Week event, the accountancy profession is essential in achieving a low-carbon transition. The contribution of an individual accountant will of course depend on their role but there are few roles that accountants undertake which do not require thinking about climate impacts and their financial consequences. The transition to a below 2-degree Celsius net-zero world really needs climate-literate accountants who can: Advise their clients and employers on the risks, liability and reputational damage arising from corporate activity that negatively contributes to climate change; Support the strategic, operational and financial assessment of climate change and steering an organization toward the opportunities that decarbonization brings; and Provide investors the information they need to understand the current and prospective impact of climate-related matters on an organization and its financial position and prospects. 2 Understanding Net-Zero Emissions and Global Commitments Net-zero emissions will be achieved when all anthropogenic GHG emissions are counterbalanced by removing GHGs from the atmosphere by carbon removal. The net-zero premise is that emissions from human activities based on fossil fuels are reduced to as close to zero as possible, and remaining emissions are balanced with an equivalent amount of carbon removal. In scenarios limiting global warming to 1.5 degrees Celsius, GHG emissions need to reach net-zero between 2063-2068 (and carbon dioxide much sooner by around mid-century). Although not all countries need to reach net-zero at the same time, the likelihood of attaining the Paris Agreement and a 1.5 degrees Celsius warming scenario depends on high emitting countries acting sooner. Net-zero emissions commitments are a clear signal of the intent to achieving the International Climate “Paris Agreement”. About 60% of global emissions are now subject to such targets. Undoubtedly, there is significant work to be done to meet such long-term ambitions not least companies putting in place clear strategies and robust short- and medium-term targets, and ensuring where possible future investments are clearly aligned. Climate Action 100+ has put in place a net-zero company benchmark to help track business alignment with the Paris Agreement. Pioneering Net-Zero Targets across Governments and Corporates Governments and businesses are setting net-zero emissions targets with about 120 governments and a fifth of the world’s 2,000 biggest listed companies having made net-zero commitments. In India, which is on a trajectory to meet its current Paris climate commitments, Indian Railways has committed to achieve net-zero emissions by 2030 in addition to various large companies: Reliance Industries: Net carbon zero by 2035; Mahindra Group: Carbon neutral by 2040; Wipro: Net-zero GHG emissions by 2040. More than 40 asset managers including Vanguard and BlackRock, signed up to the Net Zero Asset Managers Initiative pledging to make their portfolios net-zero by 2050 or earlier. The CEO of BlackRock, Larry Fink’s annual letter calls on all companies “to disclose a plan for how their business model will be compatible with a net-zero economy”. The significant threat of climate-related stranded assets is also driving central banks and financial supervisors to assess their role in ensuring the resiliency of the financial system and solvency of financial institutions. Capital markets have started to make decisions about the transition to renewable and sustainable energy with the cost of capital for fossil fuel options increasing. Financial capital is seeking solutions to reduce GHG emissions. World Resources Institute (WRI): 10 Key Solutions Needed to Reduce Greenhouse Gas Emissions 1. Phase out coal plants 2. Invest in clean energy & efficiency 3. Retrofit buildings 4. Decarbonize cement, steel & plastics 5. Shift to electric vehicles 6. Increase public transport 7. Decarbonize aviation and shipping 8. Halt deforestation & restore degraded lands 9. Reduce food loss and waste 10. Eat more plants & less meat 3 Valuations, Accounting Estimates, and the Need for Quantification A major challenge for investors and the capital markets is that climate risk disclosure globally is inadequate. For climate risk to be fully reflected in company valuations every company, every bank, every insurer and investor needs to disclose their climate-related risks on a standardized basis. Company valuations in a 2-degree Celsius or lower world will likely be very different given the potentially significant implications on future cash flows. Climate change can only be fully taken into account in valuations when companies have incorporated climate-related risks in their financial position and performance. As climate is increasingly integrated into corporate decision making and reporting, valuations will better reflect the actual and potential climate impacts. Quantifying and Monetizing Climate Impacts A significant challenge in climate-risk assessments and disclosures is that climate impacts are not quantified and monetized. Quantification helps to drive medium and long-term planning, and is where accountants involved in financial planning and analysis, can significantly contribute by providing financial-related information about profits and valuations that reflect climate-related risks and events. Without quantification of climate risks and opportunities, companies will find it hard to compare climate change against their wider enterprise risks, and investors are unable to make informed decisions about the allocation of their capital. Effective climate risk reporting also requires significantly better disclosure around key accounting estimates and judgements in assessing and reporting on financial position and performance. Investors and regulators, and subsequently auditors, have started to ask questions of companies, particularly those with large carbon footprints, challenging their assumptions and risk disclosures in their financial reporting. Reflecting climate risk in financial reporting is ultimately the same as dealing with other risks. Climate risk may well lead to asset impairment, and provisions and contingent liabilities. Property, plant and equipment can have useful economic lives spanning long periods with significant assumptions about future cash flows taken into perpetuity. Climate-related financial risk and opportunity both largely arise from the need to retire and replace carbon-intensive assets on an expedited basis. “Capital markets have started to make decisions about the transition to renewable and sustainable energy with the cost of capital for fossil fuel options increasing. Financial capital is seeking solutions to reduce GHG emissions.” With climate being a significant financial concern and threat to business resilience and long-term value creation, accountants need to provide actionable information and insights on its opportunities, risks and potential financial impacts. 4 Four Key Areas of Focus for Accountants in Becoming Climate-Literate 1. Know Your Emissions Emissions arise from products, services, and fixed assets. Both absolute emissions reduction and carbon intensity provide a benchmark for targeted decarbonization actions. Establishing a reliable carbon footprint (or GHG emissions inventory) for an organization, or for a product, can be a complex but critical task to measure the energy consumption of activities and the emissions associated with the business model. This requires understanding the absolute emissions across value chains (i.e., beyond Scope 1 direct emissions and Scope 2 electricity indirect emissions). Collecting robust data of Scope 3 or other indirect emissions is challenging but important to understand emissions in the supply chain, how customers use products, and the significant risks and opportunities related to operation licensing. Consequently, more companies are working with customers and suppliers to help address emissions in the consumption and supply parts of the value chain. Setting key performance indicators (KPIs) that improve performance and link to incentives is critical. For example, an airline might reduce emissions per passenger mile traveled, but higher passenger numbers could still increase overall emissions. Accountants need to ensure GHG management plans are in place to prioritize carbon reduction projects and quantify cost savings, carbon savings, and implementation costs. Accountants need to address the emissions data quality challenge through implementing an effective system of internal control over such data and ensuring it is subject to investor-grade assurance. 2. Integrate Climate Information into Strategy and Risk Management Comprehensive understanding of climate risk assessments and scenario modeling supports robust analysis of opportunities and risks of different transition pathways and reveals the resilience of strategies and business models to physical and transition climate risks. Scenario analysis to prepare The Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) recommendations for disclosure will likely include significant assumptions and estimates about the future. Many of these will be important for financial planning and financial statement preparation to underpin balance sheet items. Scenario analysis and risk assessments help quantify potential financial impacts on revenues, expenditures, assets, and liabilities under various climate scenarios. The adaptive capacity of business models in different scenarios is highlighted by the extent to which weather events and increasing carbon costs impact expected cash flows and asset valuations. Climate risks must be embedded in strategic decisions such as capital investment. Existing assets including buildings, machinery, equipment, and vehicles are stores of future emissions which will continue over their remaining use. Asset impairment and replacement costs, and appraisal of new assets, is a fundamental part of achieving net-zero. 3. Understand Your Decarbonization Options This includes options for permanent carbon reduction and removal. Businesses with a decarbonization strategy and plan can respond and adapt to different approaches to achieving net-zero emissions. Investments in low-carbon solutions can often appear economically unviable because of high up-front capital costs. So measuring economic returns, and other potential benefits over longer periods become important. Investments in R&D include resource and energy efficiency, migration to circular business models, avoiding use or production of virgin materials (e.g., using bio-based raw materials like mycelium leather), and diversification into other energy forms. A credible transition plan is needed to access finance for low-carbon investments and products, such as electric fleets or renewable energy generation. Mobilizing equity or debt finance to support new technologies and processes is usually critical. Options for green finance have significantly increased over recent years through green bonds such as the bond and sukuk issuances used at Standard Chartered, and sustainability-linked loans. 4. Tell the Story Communicating how your company is becoming net-zero compatible will be part of any finance leader’s conversations with boards, investors and other stakeholders––explaining risks and opportunities, targets and KPIs, prioritization of capital investment, and financial impacts, including how climate change relates to accounting estimates and judgements used in the preparation of financial statements and reports. For climate reporting to move beyond a marketing exercise to one providing information that boards and investors need to enable decarbonization, accountants need to be part of the equation and rise to the occasion. About the Author Sanjay Rughani Chair, PAIB Advisory Group, International Federation of Accountants (IFAC) Email: sanjay.c.rughani@sc.com • eboard@icai.in

Vision – Global Leaders • International Federation of Accountants Continuing to Develop a Successful & Vibrant Profession Journal: The Chartered Accountant, July 2021 (Vol. 70, No. 1) • Pages: 27–29 (Journal pp. 27–29) JM Jelena Misita The author is Chair, PAO Development Advisory Group, International Federation of Accountants (IFAC). She can be reached at jelena.misita@revicon.info and eboard@icai.in. “Never have we been so challenged globally to think about our future while being cognizant that the pandemic is not over, and our situations continue to change. We want and hope that we will get back to a sense of normalcy. But we have been shown how much life can change in a short period of time and even a return to normalcy will look significantly different for everyone. Read on…” In addressing previous and current adversity, the global accountancy profession has not only remained steadfast and committed, it has also quickly adapted for members’ and society’s benefit. And we must continue to champion adaptability to identify and seize opportunities as we discover them. Although this pandemic presents unprecedented challenges for professional accountancy organizations (PAOs), it has not stopped our efforts to serve members and stakeholders in the public interest and the greater good. For all of us at the Advisory Group, our work also continues to go on, even if done virtually. The pandemic has especially highlighted the importance of strong collaboration among our profession. IFAC PAO Development & Advisory Group’s Role The Advisory Group has significantly evolved since it was first established in 2005. Today, we help IFAC support strong, sustainable PAOs—the most effective, efficient, and sustainable source for advancing the accountancy profession—around the world. We actively contribute to IFAC’s strategic objectives, especially in preparing a future-ready profession in four key areas: 1. Advise Advise IFAC and provide insights on trends and opportunities relevant to capacity building for PAOs, as well as implications for development of the accountancy profession. 2. Advocate Advocate for strengthening PAOs to support of the profession, including through outreach activities and speaking engagements. 3. Assist Provide assistance and mentoring to developing PAOs as they strive to improve and meet IFAC’s membership requirements and global best practices. 4. Access Enable access to resources and expertise from IFAC member organizations and partners, including international development partners, to support PAO development. Advisory Group members are from both developed and emerging economies and represent a variety of different sectors—private and public sector, academia, firms, PAOs, and small businesses. This diversity means we have a breadth of experiences and knowledge to call on to shape our advice and assistance. Despite going virtual in 2020, the Advisory Group accomplished a great deal thanks to members’ commitment to keep carrying out our responsibilities. Accountability & Delivery Fulfilling Our Remit in 2020: The IFAC PAO Development & Advisory Group Highlights The Advisory Group helps IFAC support strong, sustainable professional accountancy organizations—the most effective, efficient, and sustainable source for advancing the accountancy profession. The Advisory Group actively contributes to IFAC’s strategic objectives, especially in preparing a future-ready profession, and its remit includes 4 specific responsibilities: ADVISE Provide insights on trends, opportunities & implications CALL TO ACTION on PAO resilience issued across 4 languages & read 500+ times. JOINED THE IFAC’s IFRS for SMEs Working Group. Supported the MOSAIC Forum including moderating & speaking. Revised Advisory Group’s Terms of Reference to promote agile governance, diversity, and worldwide representation. ADVOCATE Including through outreach & speaking opportunities Participated in 5 WEBINARS in multiple languages reaching 1K+ PEOPLE in 70+ countries. Focused & rapid response engagements including in Maldives. After several years of engagement and advocacy by IFAC and the Advisory Group, legislation to establish a PAO in the Maldives was enacted in 2020. ASSIST And mentor developing PAOs 25+ ONE-ON-ONE MENTORING SESSIONS with PAOs in 16 COUNTRIES. 7 COVID-19 specific webinars targeting 6 key world regions (300 participants). COVID-19 resources webpage visited 11K+ times. ACCESS To resources and expertise Grew and expanded reach of the IFAC GATEWAY. 4 ORIGINAL IFAC GATEWAY ARTICLES published. 21 GATEWAY ARTICLES were translated to 5 LANGUAGES. “We are proud of our achievements from 2020 under very challenging circumstances. If your PAO has a specific request for assistance, please reach out.” 2021 Priorities We know a crucial issue for IFAC’s member organizations, including the Institute of Chartered Accountants of India, is remaining relevant and sustainable for the long term—and ensuring all stakeholders understand our relevance and sustainability. That is why this year we have built upon the lessons from 2020 and are focusing on PAO resiliency and continuing our work to strengthen membership quality. We are working to help PAOs thrive by addressing topics such as digital transformation, mental wellbeing, and stakeholder engagement, to name a few. In focusing on strengthening membership quality, we will continue raising awareness of the international standards—especially the International Education Standards, new audit quality management standards, and the International Code of Ethics for Professional Accountants—as well as investigation & discipline systems and support developing PAOs with resources and best practices. Our Advisory Group works with IFAC staff to connect directly with PAOs to provide guidance, advise and resources. Examples of the Advisory Group’s activities either completed or ongoing in 2021 include: Supporting PAOs to navigate and complete IFAC’s PAO Digital Readiness Assessment Tool; Contributing to articles and videos for IFAC’s Knowledge Gateway; Forming a dedicated PAO Sustainability Working Group to address strategies for PAO development and recovery; Representing IFAC at various webinars and events; Publishing a new article: New Quality Management Standards: A Tremendous Opportunity for PAOs; Supporting PAOs with technical assistance and sharing of best practices for international standards’ adoption and implementation; and Mentoring and answering questions for organizations interested in IFAC membership. The Advisory Group’s ultimate purpose is to be of service to PAOs and ensure wide ranging support for the global accountancy profession, which in turn serves and supports national, regional, and the global economy. Each of our volunteer members are passionate about our work, and we look forward to advancing our plans for 2021. Accountants’ Role in Economic Development IFAC has recently published new data linking the accountancy profession and economic development. The analysis reviewed the accountancy profession in the G20 countries (including each individual country of the European Union), and the results highlight how professional accountants make a significant contribution to the different economies at the local, national, and global levels. In each measure reviewed, a greater number of accountants correlates to better economic performance. Moreover, professional accountants who are members of an IFAC PAO correlate to even stronger performance on the economic indicators. It is because of dedicated and committed IFAC member organizations such as ICAI that such an impact is felt. Economic Indicator / Measure Increase of 500 Accountants per Million Correlates to: If 500 Accountants are IFAC PAO Members: Multiple GDP per capita An increase of USD 5,108 in GDP per capita An increase of USD 11,284 in GDP per capita 2.21x Human Development Index (HDI) An increase of 3.3% An increase of 4.2% 1.27x Gross National Income (GNI) per capita Statistically significant correlation No statistically significant relationship — Corruption Perception Index (CPI) A 7.4% decrease in perceived corruption A 9.8% decrease in perceived corruption 1.32x Global Competitiveness Index (GCI) An increase of 16.0% An increase of 34.3% 2.14x Worldwide Governance Indicators (WGI) – Regulatory Quality An increase of 0.3 index points An increase of 0.4 index points 1.33x Based on this data and our experience working with PAOs, we not only want to recognize the impact of ICAI and the other PAOs globally, but we also want to acknowledge the volunteers and practitioners that make this profession vibrant and successful. If you are reading this and want to get involved with the profession, I encourage you to contact ICAI to seek out further opportunities! Building Relationships & Partnership IFAC Network Partners play an important role in sharing views and trends from across the world. One such Network Partner is the South Asian Federation of Accountants (SAFA) and on behalf of IFAC and the Advisory Group, we would like to thank them and other Network Partners, such as the Confederation of Asian and Pacific Accountants (CAPA) and the ASEAN Federation of Accountants (AFA), for supporting our work and regularly attending our meetings as observers. I would like to make special mention of current Advisory Group members, such as Mr. Prafulla Chhajed, nominated by ICAI, along with his technical advisor Mr. Rajendra Kumar; and Mr. Naeem Akhtar Sheikh, nominated by the Institute of Chartered Accountants of Pakistan, along with his technical advisor, Mr. Farrukh Rehman, for their active contributions to the Advisory Group’s work. I would also like to acknowledge my predecessor Mr. Arjuna Herath, from the Institute of Chartered Accountants of Sri Lanka, for his enthusiasm, energy, and commitment to stewarding the Group to where it is now. In closing, it is quite positive that the profession continues to progress onward and upward. I know that our Advisory Group stands ready to support and advance the profession. We look forward to engaging further with PAOs, our members, and our IFAC Network Partners. Readers interested to know more about IFAC’s work and the Advisory Group’s activities may visit the IFAC website (www.ifac.org), including the Global Knowledge Gateway (www.ifac.org/gateway).

Vision – Global Leaders ICAI Journal Ref: July 2021 • Vol. 70 • No. 1 • pp. 34–36 IFAC SMP Advisory Group • Practice Management & Transformation Small and Medium Practice Transformation During a Crisis MF Monica Foerster Chair, SMP Advisory Group, International Federation of Accountants (IFAC) • monica@confidor.net • eboard@icai.in “There have been many lessons from the pandemic, and small- and medium-sized practices (SMPs) have had to evolve their practices to fit the changing needs of their clients. In some cases, this has meant assisting them with debt covenant waivers, obtaining new sources of financing, navigating cash flow issues, advising them on technology needs, and so much more than they may have been asked to do in the past. It has also changed the way that the firms themselves do business, as many firms, like their clients, have had to shift to a fully virtual working environment. In many cases, it has even changed the way firms try to retain key staff and plan for their future. Read on…” 1 New Service Offerings and Digitalization The pandemic has fostered innovation for many firms. Businesses and individuals that are struggling financially are seeking ways they can operate more efficiently. Because of this, accounting and advisory expertise is needed more than ever. From questions about government stimulus packages, to adjusting business models, to needing general insights on financial health and resilience, accountants are helping current and new clients navigate these challenges. The global health and financial challenges have propelled many professionals and firms further into advisory services, and this need will continue – offering a great opportunity for the industry. The trend towards offering more advisory services is not new, but the pandemic seems to have accelerated the rate at which this work is being undertaken by firms. “The global health and financial challenges have propelled many professionals and firms further into advisory services, and this need will continue – offering a great opportunity for the industry. The trend towards offering more advisory services is not new, but the pandemic seems to have accelerated the rate at which this work is being undertaken by firms.” SMPs need to embrace technology to better serve clients and attract and retain top talent. A survey of 3,300+ Gen Z’ers across G20 countries examined this generation’s views on public policy and the workplace. It showed that Gen Z expects digitalization and emerging technology will be a double-edged sword, both bringing new ways of doing things (meaning new and more interesting jobs) but also driving the decline of traditional job roles and responsibilities. Digitalize First – Before Diversification: According to industry data, SMPs that embark on diversification (before digitalization) tend to have lower productivity. One pointer, noted in the Association of Chartered Certified Accountants and Singapore Commission report and quick guide, is to digitalize first—before diversification. 2 The Virtual Office & Hybrid Models One major challenge for many SMPs in 2020 was converting to a fully virtual work environment. Many firms were not prepared to work in a virtual office setting. With stay-at-home orders and many office locations around the globe being closed even well into 2021, firms have had to figure out how to continue to provide high quality services to their clients, while not being able to be on site. Google’s CEO Sundar Pichai said recently that the future of work involves a “hybrid model.” A March article from IFAC on the virtual environment and the hybrid office notes that as with other trends in technology in the workplace, companies will thoroughly understand the benefits and challenges of a hybrid office model only after it has become a common practice. Remote Onboarding Best Practices (January IFAC Guidance) Onboarding remote staff also comes with challenges. A January IFAC article notes the following measures should be considered: Getting the technology and environment right. Communication between the employer and employee and setting work expectations. Staff interaction. AICPA 2020 Succession Planning Survey: Remote Work Trends A 2020 Succession Planning Survey conducted by the AICPA noted that the majority of firms surveyed expected that more of their staff would work from home after the pandemic ends than they did before it: Almost three-quarters of multi-owner firms (71%) and nearly half of sole owners (47%) said that more of their staff would work remotely once the pandemic is over. In some cases, respondents expected the shift to remote work to be considerable. 18% of respondents from multi-owner firms and 17% of sole owners estimated that their employees would work remotely 40% or more of the time than they did before COVID-19. Effective selection, implementation, and management of technologies, as well as training employees to use software solutions, have become fundamental to the success of any firm. When introducing or reviewing a technology strategy, a firm needs to first define its goals, then find and embrace a system that will achieve most, if not all, of those goals. IFAC has developed a Practice Management Guide, which covers leveraging technology to assist SMPs in developing an effective technology strategy. 3 Staffing Trends & Talent Recruitment Shifts More work and tighter tax and other reporting deadlines have caused widespread staff burnout. Firms will have to be strategic and creative in attracting and keeping talented people as we continue to navigate what seems to be a never-ending busy season. “Firms will have to be strategic and creative in attracting and keeping talented people as we continue to navigate what seems to be a never-ending busy season.” Firms also may need to think outside the box regarding the skills they are seeking to perform new services and how those services are staffed. Firms may also be able to leverage technology tools in order to reduce staff hours spent on projects, allowing them to focus more on the big picture and advising their clients. AICPA 2019 Hiring Data: The Rise of Non-Accountant Recruitment In a 2019 report by AICPA, the recruitment of non-accountants as a percentage of all new graduate hires surged dramatically from 11% to 31%, whereas there has been an approximate 30% decline in the hiring of accounting graduates since 2017. The marketplace continues to demand different competencies and, while accounting graduates are still being hired, firms are also seeking other skill sets to expand their services. There is further anecdotal evidence to suggest that some of the technology-specific hiring is occurring at the “experienced hire” level—not just the entry level. IFAC has developed a Practice Transformation Action Plan that focuses on how SMPs can embrace change, leverage technology, manage talent, and have a renewed emphasis on providing relevant and value-added services. 4 Succession Planning A December 2020 Journal of Accountancy article notes that many CPA firms are now grappling with succession planning issues, according to the results of the AICPA’s 2020 Succession Planning Survey. More than half of multi-owner firms (55%) said they are currently experiencing succession challenges, up from 26% in 2016, the last time the survey was conducted. Pandemic Resilience in Retirement and M&A Timeframes However, the survey results indicate the COVID-19 pandemic has not affected most firms’ plans for succession: More than three-quarters (76%) of single owners and sole practitioners said the pandemic has not changed their time frame for retirement. The vast majority of respondents from multi-owner firms (88%) said it has not changed their senior partners’ time frame for retirement. Most single-owner firms and sole practitioners (72%) also said the pandemic had not changed their plans for merging or selling their firms. 5 Conclusion The pandemic has shown that the pace of change will be faster tomorrow than it is today. Firms will need to continue to adapt and adjust their business models to keep up with their clients’ needs. About the Author Monica Foerster Chair, Small and Medium Practices (SMP) Advisory Group, International Federation of Accountants (IFAC) Email: monica@confidor.net • eboard@icai.in

Vision – Global Leaders • International Ethics Standards Board for Accountants Farsighted Approaches to Auditor Independence: Responding to Global Challenges Journal: The Chartered Accountant, July 2021 (Vol. 70, No. 1) • Pages: 37–41 (Journal pp. 37–41) ST Stavros Thomadakis The author is Chair, International Ethics Standards Board for Accountants (IESBA). He can be reached at thomadakis@econ.uoa.gr and eboard@icai.in. “Auditor Independence is a major component of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code). The International Ethics Standards Board for Accountants (IESBA) has recently issued revisions to its standards of auditor independence with an effective date of December 15, 2022. Read on..” The revised standards address pivotal issues – limits, conditions and prohibitions on the provision of non-assurance services (NAS) to audit clients; principles for the transparency and the distinct separation of fees charged for audit and non-audit services; and restrictions directed to limitation or elimination of fee dependency of the auditor on a single client. All this is viewed by the new standards through the lens of their positive impact upon “independence in fact” and “independence in appearance”, to use the language of the Code. These new provisions are path-breaking in several ways. Their greatest advantage is that they are future-focused as explained below. Project Initiation Concerns among stakeholders, especially from the regulatory and investor communities, have been lingering for quite some time about the impact of the provision of NAS to audit clients on auditor independence. The extant Code includes prohibitions on the provision of NAS, in many cases subject to a materiality threshold. It also requires the use of a “reasonable and informed third party” test implying that outsiders’ perceptions about independence have to be considered in auditor judgments. “The occurrence of corporate failures and the pressures of persistent crises led many around the world to question whether independence could be maintained when NAS were becoming both a significant source of revenue to audit firms.” The occurrence of corporate failures and the pressures of persistent crises led many around the world to question whether independence could be maintained when NAS were becoming both a significant source of revenue to audit firms. The deeper issue has been one of possible distortion of incentives, or, in the language of the Code, emergence of serious threats to independence: Can a firm conduct an independent audit when the provision of NAS to the audit client is becoming a serious business relationship that can influence auditor judgments and objectivity? Are there not situations when safeguards do not suffice and prohibitions must be put in place? Confronted with such questions, the IESBA conducted outreach on the basis of a paper issued in May 2018 and titled “Non-assurance Services: Exploring Issues to Determine a Way Forward”. We also commissioned a review of academic literature on impact of fees on market perceptions about auditor independence. Further, we studied the steps that some advanced jurisdictions took to reinforce independence. “Black lists” of prohibited NAS or “white lists” of allowed NAS to be provided to audit clients have surfaced in national regulations. Fee disclosures and caps on types of fees have also been established in some jurisdictions as a constraint to NAS provision to audit clients. These initiatives furnished a guidepost to the deliberations of the Ethics Board as to the direction of travel. Audit firms themselves, sensitive to perceptions and regulatory pressure, had also been taking steps to reduce in fact and appearance the mixing of audit and non-audit services by instituting various forms of separating walls among various business lines. Thus, both regulatory evidence and wide perceptions pointed to the need for the global standard-setter to step in; and so we did with simultaneous projects on NAS and on fees. The Objectives The overarching objective of the projects has been to strengthen the International Independence Standards (IIS), addressing public interest concerns about independence when firms provide NAS to their audit clients and in certain fee-related situations. An important supplementary objective, common to all Code provisions, is that the standards have to be applicable and operable globally, not being fashioned for a few select jurisdictions. By and large, this “applicability” objective implies the advancement of principles-based provisions with some flexibility to meet local needs. More specifically, the work, consultations and deliberations of IESBA looked for conditions, limits, and targeted prohibitions of the provision of NAS to audit clients; they also viewed mandating transparency of related fees paid by the audit client for both audit services and NAS, and to possible threats to independence that fee correlation between the two categories of services or fee dependency may create. It was clear in the specification of project objectives that the new independence provisions would be differentiated, depending on whether the client entity is a public interest entity (PIE) or not. This distinction rests on the premise that, by definition, independence requirements need to be more stringent for PIEs, as their financial condition is more relevant to a broad set of stakeholders with higher impact on the public interest. The critical distinction between PIEs and non-PIEs already exists in the Code and provides an important and socially meaningful canon for scalability of provisions. It would be disproportionate if SMEs and SMPs were, for example, subjected to strictures as burdensome as for large and more complex entities. IESBA Solution – NAS: Key Features The “IESBA Solution” responds to all these queries and concerns. Here, the focus will be on key provisions, discussing their broad significance. Those who would like to see the complete provisions for NAS and fees, can visit our webpage (ethicsboard.org) for full details, including responses to consultation and justification of IESBA’s choices of standard content and architecture. The structural elements on which the Code is premised are the list of five fundamental principles and a conceptual framework that specifies threats to compliance and how to address them. The five threats are worth repeating here: self-interest, self-review, advocacy, familiarity, and intimidation. All these threats may affect independence. And all, or most, become entwined with the provision of NAS and the payment by the audit client of fees to the audit firm for these services. Examining the black lists in jurisdictions that have regulated this matter, we find a common – and powerful – denominator in the prohibited NAS: the distinct possibility that their provision creates a self-review threat (SRT). Self-review means reviewing your own previous work in the course of an audit; and this is the most evident and most damaging circumstance to both the substance and the appearance of independence. Reflecting about it, review of own work cancels the critical perspective or scepticism – it undermines, or even leads to disappearance of independence. Of all threats, SRT is the most damaging to independence, both in fact and in perception. So IESBA’s global solution has not been yet another black list. It has gone to the heart of the issue mandating for PIEs, a prohibition of any service that might give rise to a SRT. This is a novel approach both in the Code itself and in relation to various national regulatory regimes. It is important to emphasise here that the new standard prohibiting the risk of SRT is efficient, stringent and objective: It is efficient because with one principles-based prohibition, it, in fact, prevents the provision of a whole set of NAS to audit clients. It is stringent because it eliminates not simply all NAS that give rise to a SRT but all NAS that might give rise to a SRT, i.e. not just the fact but even the mere possibility of a SRT occurring. It is objective because the prohibition does not depend on a materiality threshold. So it is not a matter of judgment whether the prohibition will bite or not. It will bite for PIEs. Besides being efficient, stringent and objective, the SRT prohibition has another more powerful advantage: it covers possible future services, embedding new technologies that may present new forms and opportunities for the SRT to surface. In a world of technology-driven innovation, this is a clear advantage as compared to lists of presently defined and known NAS that may well change: The SRT prohibition is farsighted and future-proof. The centerpiece prohibition of services that might give rise to a SRT is complemented by a series of other provisions that enhance independence. For one, the new standards elevate very significantly the role of Those Charged with Governance (TCWG) within the client entity. They have to concur to the provision of any NAS not otherwise prohibited and they approve the fees, as well. Communication of the auditor with those charged with governance (TCWG) is an important feature because it empowers these parties to play a very significant role in the process, to express an opinion on the question of independence and to act on this opinion. This too is a significant novelty. “A noteworthy supplement to the standard is that the provision of NAS, not otherwise subject to the SRT prohibition, to certain members of the PIE’s corporate family, especially the parent entity, must also be disclosed to TCWG of the PIE by the audit firm.” By virtue of the Code’s “related entity” provision, the SRT prohibition of NAS extends to cover related entities of the PIE client. For a listed client in particular, this will include related entities under direct or indirect control of the listed entity, its parent entity as well as its sister entities. A noteworthy supplement to the standard is that the provision of NAS, not otherwise subject to the SRT prohibition, to certain members of the PIE’s corporate family, especially the parent entity, must also be disclosed to TCWG of the PIE by the audit firm. These will be taken into account when assessing independence and concurring with (or rejecting) the provision of the NAS. Core provisions prohibiting the SRT apply to PIEs, as already explained. In the case of non-PIEs, the provisions are scaled down but still involve a strengthening of evaluation and review of the SRT and the application of appropriate safeguards by the auditor. So, on the whole, the new standard represents a general strengthening and clarification of independence requirements with respect to the SRT. This does not mean that other threats are disregarded or omitted. There is ample consideration, requirements or application material for the management and reduction of other threats. Singling out IESBA’s focus on the advocacy threat can also seriously undermine independence. The new standard places limitations on provision of NAS such as legal services or tax-planning services, for example, precisely in order to prevent the erosion of confidence in the auditor’s skepticism and independent judgement. The IESBA Solution – Fees: Key Features The Board and the extant Code recognize the wide acceptance of the audit client payer model. Yet, the payment of fees on the basis of that model may give rise to threats to independence, especially the self-interest threat and the intimidation threat. A clear project objective is to raise the awareness of audit firms about these threats and to make provisions addressing those threats. Approaching the question of fees, the Board stayed away from any attempt to determine what the proper level of fees should be, as this is a business decision and depends on a variety of real-life factors. However, the new provisions flag important elements of principle: 1. Fee Sufficiency & Due Care First, that the audit fee should be sufficient for the provision of audit services as required by the principle of competence and due care. 2. Stand-Alone Determination Second, the audit fee should be determined on a stand-alone basis and not be correlated to fees paid for non-audit services. 3. Perception of Quality and Independence Third, very high or very low fees might affect adversely perceptions of independence or quality. Audit committees of PIEs must be fully informed on the determination of fees and services involved on the basis of requirements of the Code. The new provisions go further: for PIEs, they mandate public disclosure of fees paid by the client to the audit firm and network firms separately and distinctly for the audit and the non-audit services. Thus, market participants will be able to make comparisons and draw their own conclusions about the trustworthiness of audits. “The new provisions banish fee dependency by flagging that, in the case of PIEs, the appearance of revenue concentration of more than 15 percent from a single client must be corrected.” A last important provision relates to “fee dependency”. Already described in the Code, this relates to situations of an audit firm receiving substantial revenue from a single client. This is a situation where “self-interest” and “intimidation” threats come to play. The new provisions banish fee dependency by flagging that, in the case of PIEs, the appearance of revenue concentration of more than 15 percent from a single client must be corrected: Correction Framework for PIE Fee Dependency (> 15%): Measures must be implemented to reduce fee concentration. Public disclosure of the dependency if it occurs for two consecutive years. Compulsory disengagement from the client if fee dependency persists for five years. In the case of non-PIEs, the Code now prescribes a less stringent but still robust use of safeguards. Complementary Projects Two ongoing projects have a bearing on how the NAS and Fees provisions are applied around the world: the revision of the definition of PIE and the work on technology and ethics. The current definition of PIE includes “listed entities” and accepts additional entities that local laws and regulations may specify. This extant specification leads to significant variety across jurisdictions. IESBA is now specifying steering indications of what features PIEs should have so that local definitions are more globally consistent. We are considering consultation results at this point. The project is closely coordinated with the IAASB so that we can work towards a common definition. Our technology initiatives are looking at the impact of innovations on ethical behaviour. A comprehensive review of the Code’s fundamental principles, taking into account current technological inroads, has shown the Code’s fundamental principles to be solid, comprehensive and clear in their coverage of new configurations of technologically-supported human judgment and practice. Nevertheless, we are actively studying potential enhancements to the Code that would enable professional accountants to appropriately respond to threats to ethical behaviour when they are involved in the development, implementation or use of technology. Additionally, in the case of NAS, we plan to offer additional guidance to the implementation of the new NAS provisions, in the context of dense technological applications. Conclusions A principle-based Code with clear guidance for application continues to be the best option for globally consistent practice of ethical precepts and requirements. Code pronouncements must be comprehensive and remain relevant not only in the context of new technologies but also in another context: the pressing needs for more informative and more standardised non-financial reporting, which will require an extension of the system of external examination in the form of audits, reviews and assurance. Lastly, advancements in ethical codes – analogous to the IESBA’s International Code – across the entire eco-system of corporate professions, both within and around corporate organisations should be promoted by the accounting profession, corporate organisations and policy makers. I remain a very strong proponent of a generalised elevation of ethical cultures and behaviours across the actors who move and energise our economies. The International Code of Ethics for professional accountants furnishes an excellent prototype.

Vision – Global Leaders ICAI Journal Ref: July 2021 • Vol. 70 • No. 1 • pp. 42–52 Professional Standards • Ind AS • AASB • Valuation • FAIS • ASLB CA Profession and Professional Standards SZ CA. (Dr.) Shiwaji Bhikaji Zaware Chair, Asian-Oceanian Standard-Setters Group (AOSSG) & Member of the Institute • sbzaware@icai.org • eboard@icai.in “The profession of chartered accountancy is based on code of professionalism and ethics. Often termed as a partner in the process of national development, the Institute of Chartered Accountants of India has been playing a crucial role in Indian economy by successful implementation of various financial and accounting standards. Running on the basis of professional ethics, ICAI is responsible for drafting accounting, auditing and other standards. Considering the amount of challenges in this area, it is advisable that Chartered Accountants must adhere to quality consciousness and professional standards in order to sustain the confidence of all the stakeholders. Read on…” 1 Evolution of the CA Profession and Professionalism A ‘Profession’ is a disciplined group of professionals who adhere to professional standards and who hold themselves out as and are accepted by stakeholders to repose the confidence for possessing special knowledge and skills for. ‘Professionals’ are governed by codes of ethics and professional commitment to competence, integrity, morality, altruism and promotion of the public good within their expert domain and are quality conscious. ‘Professionalism’ is defined as the personally held beliefs of a professional about their own conduct as a member of a profession. The CA profession can be traced all the way back to pre-independence times. The Companies Act, passed by the British administration in India in 1913, required a list of books that a company incorporated under the Act had to maintain. The Act also provided for the appointment of an auditor, who had the power to audit these books. Later, the Government introduced a Diploma in Accountancy course in Bombay (now Mumbai). This course followed a pattern similar to a smaller version of today’s CA course with a three-year training period. Those who completed the course and training could practice as an auditor in India. In 1930, the then Government decided to maintain a ‘Register of Accountants’ and preferred the title as ‘Registered Accountant’. However, even with all these practices, the accountancy profession remained under-regulated until the formation of an expert committee in 1948, which suggested that an autonomous body should be formed for enhanced regulation. By then, many Indians had already become members of the Institute of Chartered Accountants in England and Wales (ICAEW) and were known as Chartered Accountants at that time. An ‘Expert Committee’ was formed in independent India to advocate the formation of an autonomous institution of accountants to govern the accountancy profession. In 1949, soon before India became Republic, the Parliament accepted the Expert Committee’s report and passed “The Chartered Accountants Act”. This Act came into effect from July 1, 1949 and the Institute of Chartered Accountants of India (ICAI) was established as the regulator of the esteemed profession. Since then, July 1 has been commemorated as the CA Day in India. The term “Chartered Accountant” became the preferred title instead of the previously used “Registered Accountant”. However, unlike in other Commonwealth countries, the word ‘Chartered’ when used for Indian Accountants, has no relation to the royal charter of the British (as India is a republic)! The traditional role of a Chartered Accountant as an accountant and auditor has undergone sea changes since 1949 as in today’s commercial world, he/she is recognised as ‘Business Solution Provider’. The Expanding Spectrum of the Chartered Accountant Financial Doctor Financial Architect Financial Engineer Financial Lawyer Business Solution Provider Hon’ble Prime Minister of India, Shri Narendra Modi while addressing during CA day on July 1, 2017 stated that: “Chartered Accountants are like Ambassadors of any country’s economic system. Your signature is more powerful than that of a Prime Minister. Your signature is a testimony to the trust in the truth.” 2 ICAI – Partner in Nation Building and Code of Ethics The ICAI is often termed as a “partner in nation building” as it has played and continues to play a vital role in the Indian economy by successful implementation of various financial reporting standards viz. formulation of accounting standards, convergence with International Financial Reporting Standards (IFRS), implementation of auditing and assurance standards, and so on. The list is endless. ICAI has achieved recognition as a premier accounting body not only in the country but also globally. At a macro level, the ICAI prescribes accounting/financial reporting standards, thus ensuring uniformity in the accounting and financial reporting and helping the stakeholders to assimilate how the financial performance, financial position and cash flow is displayed on historical facts. ICAI, as a regulator, works closely with the Ministry of Corporate affairs and while executing its leadership responsibilities, has intensified its interactions with the Ministry of Finance, Ministry of Human Resource Development, Reserve Bank of India, Ministry of Commerce, Ministry of Railway, Securities and Exchange Board of India and Insurance Regulatory and Development Authority besides a host of other number of government departments. Code of Ethics: Foundation of Professionalism “Ethics is knowing the difference between what you have a right to do and what is right to do.” In today’s ever-changing commercial environment, ethics is not a domain that must be kept distinct from the practical world, but rather is an integral part of it. It must be imparted in the individual’s habits and temperament in order to create an overall culture of ethics. This force must be dominant enough to keep pace with the changing dynamics and quality consciousness of the profession. As a result, it was felt necessary for ICAI to frame ethical framework for Chartered Accountants. The provisions of the Code of Ethics has to be followed by all the members of the Institute, whether in practise or in service. The latest Code has been derived from the International Ethics Standards Board for Accountants (IESBA) as Code of Ethics, 2018 issued by the International Federation of Accountants (IFAC) subject to the required changes that have been made to make it compatible with Indian laws. The Code of Ethics establishes fundamental ethical principles for professional accountants, reflecting the profession’s recognition of its public interest responsibility. These principles define the expected conduct of a professional accountant: 1. Integrity 2. Objectivity 3. Professional Competence & Due Care 4. Confidentiality 5. Professional Behaviour Importance of Code of Ethics: The Code of Ethics serves as a guide for members of the profession. A unique mark of a profession is acceptance of its accountability to the stakeholders. A professional accountant’s responsibility is not limited to meeting the needs of a single client or employer. Professional accountants are trusted by investors, banks, financial institutions, insurers, the government, tax authorities, collaborators, the business and financial community, and other stakeholders. Ethics are vital to encourage Chartered Accountants to maintain rightful professional demeanour. The approach and conduct of professional accountants in providing services have a bearing on the economic well-being of their profession and country. The ethical aspects of carrying profession are becoming just as imperative as the financial ones, and a well-considered code of ethics is an indispensable prerequisite for qualitative output. 3 I. Accounting Standards (AS) and Indian Accounting Standards (Ind AS) In the present era of liberalisation and globalisation, the world has become a global village. Financial reporting plays a very important role in the economic growth of any country. It is a business communication language in which summarised business transactions are reported to the primary and secondary users in the form of ‘General Purpose Financial Statements’. With improving technology and logistics, businesses have the opportunities to expand at an international level. However, different accounting frameworks are observed in different countries for the same transaction. This results in confusion in the minds of the users of financial statements which has resulted in the need to adopting unified international standards that can help economy, industry and accounting professionals. The Accounting Standards Board (ASB) of the ICAI established in the year 1977 issues the accounting standards to establish uniform standards for preparation of financial statements in accordance with the Indian GAAP, for better understanding of the users. These accounting standards are expected to be implemented by non-corporate entities including small and medium sized enterprises (SMEs). The auditors must ensure compliance of the accounting standards while certifying general purpose financial statements. Otherwise audit report needs qualification. ICAI prepares and recommends AS/Ind AS through National Financial Reporting Authority (NFRA), which subsequently gets notified by MCA vide Companies (Accounting Standards) Rules, 2006, Companies (Indian Accounting Standards) Rules, 2015 and related amendments thereto, which are applicable to companies. Ind AS Phased Implementation Roadmap India decided to converge with IFRS for public interest entities and accordingly, IFRS-converged Indian Accounting Standards (Ind AS) were introduced. The Indian Government issued a roadmap for the implementation of Ind AS in a phased manner: Voluntary Phase: Under phase I, all companies are permitted to follow Ind AS on voluntary basis for the accounting period beginning on or after April 1, 2015. Phase I (Mandatory): All domestic public companies (Listed or Non-Listed) having a net worth of INR 500 crore or more are required to follow Ind AS on mandatory basis for the accounting period beginning on or after April 1, 2016. Phase II (Mandatory): Remaining listed companies (irrespective of net worth) and non-listed companies having net worth of INR 250 crore or more are required to follow Ind AS for the accounting period beginning on or after April 1, 2017. Group Entities: Besides, all holding, subsidiary, joint venture or associate companies of companies which are covered by the roadmap are also required to follow Ind AS in all phases. NBFCs, Banks & Insurance: In the similar fashion, the roadmap has also been made applicable for the Non-Banking Finance Companies (NBFCs) by now. However, for banks and insurance companies, Ind AS framework will be applicable from a future date as may be decided by the regulator. The IFRS are principle-based standards issued by the International Accounting Standards Board (IASB) of IFRS Foundation that set common rules so that the financial statements can be consistent, transparent, and comparable globally. The ASB of the ICAI has been a critical wheel in the accounting standard-setting chariot of this nation since its formation, successfully implementing IFRS-converged Ind AS with few essential carve-outs with reference to national laws and practices. Opportunities in Implementation of Ind AS in India Opportunities to the Accounting Profession: Though the initial phase of implementation was challenging, it provided many opportunities to practising professionals and non-practising members. In this huge transition, CAs have a significant role to guide and hand-hold entities for smooth transition requiring complete overhaul of policies, processes, operating structures, and IT systems. CAs can demonstrate talent across the globe as these standards are adopted in over 140 countries, exploring accounting, advisory, and training services. Opportunities to the Industry: The adoption of a single set of high quality globally accepted accounting standards helped reduce the cost of preparing financial statements, streamlined group consolidation, and enhanced stakeholder confidence. Opportunities to the Economy: Convergence with IFRS has helped industrial growth, benefitted corporate entities manifold, and boosted international comparability across industrial and capital markets. Opportunities to the Investors: Increased investor confidence, enhanced transparency, and improved comparability across global markets. Ind AS Implementation Challenges First Time Adoption: Overhauling old accounting policies and adopting new IFRS principles. Issues in Reclassification and Regrouping: Separate disclosure of reclassifications requiring deep professional expertise. Management Training & Transition Plans: Overcoming knowledge deficits via ICAI Certificate Courses on IFRS/Ind AS. Effective Transition Audit: Elevated audit risk, reconfiguration of systems, and internal controls testing. Audit Risk: Vigilance against management misrepresentations, manipulations, or tampering of opening balances. Fair Value Measurement Base: Volatility and subjectivity arising from transitioning from Historical Cost to Fair Value accounting. Dual Accounting Frameworks: Parallel existence of rule-based AS and principle-based Ind AS; ASB is developing simplified Ind AS-conformed standards for SMEs. Change in IT Systems: Re-engineering ERPs to capture fair values, related party transactions, and segmental data. 4 II. Engagement and Quality Control Standards The information provided by the management in financial statements is of utmost importance to investors, bankers and other stakeholders. Hence, it is important that the entity’s annual report provide qualitative information. Auditor plays a very important role in ensuring that the financial statements are acceptable worldwide. Taking these points into consideration, the ICAI has formulated Engagement and Quality Control Standards. The Companies Act of 2013 (erstwhile 1956) state that auditing standards issued by the ICAI are mandatory for the audit of financial statements of companies in India. Standards of the following nature issued by the Auditing and Assurance Standards Board (AASB) shall be collectively known as ‘the Engagement Standards’: Standard Category Mandate & Applicability Standards on Quality Control (SQC) SQC are applicable to the auditing firms which performs audits and reviews of historical financial information and other assurance and related services engagements. Standards on Auditing (SAs) SAs are to be applied in the audit of historical financial information. Standards on Review Engagements (SREs) SREs are to be applied in the review of historical financial information. Standards on Assurance Engagements (SAEs) SAEs are to be applied in assurance engagements, dealing with subject matters other than historical financial information. Standards on Related Services (SRSs) SRSs are to be applied to engagements involving application of agreed upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. Opportunities and Benefits of Engagement Standards Guidance to Auditors: Benchmark yardstick to determine the nature, timing, and extent of audit procedures. Enhance Quality and Relevance: Enables auditors to obtain reasonable assurance that statements are free from material misstatements and reflect true and fair view. Standardised Audit Practices: Uniformity in audit execution across diverse industries. Improved Credibility: Bolsters stakeholder and regulator confidence in audited accounts. Detect and Prevent Fraud: Proactive identification of systemic weaknesses, fulfilling watchdog responsibilities. Challenges in Auditing Engagements Documentation Burden: Tracking queries and extensive audit trails can cause delays. Strict Deadlines: Tight statutory reporting windows for listed companies. COVID-19 Operational Constraints: Travel restrictions and remote auditing limitations. 5 III. Valuation Standards and Registered Valuers Organisations (RVOs) With the commencement of the concept of registered valuers under the Companies Act, 2013 and with the notification of Companies (Registered Valuers and Valuation) Rules, 2017 and amendments thereto, the requirements place a tremendous responsibility on the members of profession in carrying out the valuation. The Government has reposed confidence in CAs to furnish the valuation report. Further, acknowledging the necessity to have consistent, uniform and transparent valuation policies and synchronise varied practices followed by the members undertaking the valuation assignments, ICAI issued Valuation Standards. The ICAI has also formed Registered Valuers Organisation (ICAI RVO), which is a Section 8 Company, to enrol and regulate registered valuers as its members in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017. Applicability of ICAI Valuation Standards 2018 Mandatory for all valuation engagements undertaken by members of ICAI RVO under the Companies Act, 2013. Recommendatory for valuation engagements under other statutes such as Income Tax Act, SEBI, FEMA, etc., for members of the Institute. Effective for valuation reports issued on or after 1st July, 2018. Statutory Mandate for RV Reports under Companies Act, 2013 Issue of new shares to shareholders except in case of rights issue. Merger, amalgamation or restructuring requiring valuation of assets/shares or swap ratio calculation. Acquisition of minority shareholding by existing shareholders holding over 90% of equity. Allotment of shares for consideration other than cash and issue of sweat equity. Buy-back of shares from some or all shareholders. Liquidation of a company under the Insolvency and Bankruptcy Code (IBC), 2016. Valuation Challenges Subjectivity: Inferences depend on individual professional judgement; there is no undisputed single value. Reliance on Management Representations: Potential exposure to losses from management misrepresentations or fraud. Quantifying Intangibles & Qualitative Factors: Difficulty in valuing non-tangible elements in business transactions. Market Volatility during Crises: Extreme fluctuations during disruptions such as COVID-19. 6 IV. Forensic Accounting and Investigation Standards (FAIS) Business ecosystem has become increasingly complex due to rise in white collar crimes, frauds and scams observed recently in public as well as private sectors. Recognising the pressing necessity for proactive action in this area, ICAI has developed a full set of Forensic Accounting and Investigations Standards (FAIS) for its forensic professionals. The FAIS establish uniform performance and evaluation criteria, methods, processes, and practices. These standards are pronouncements, which form the foundation for conducting all forensic accounting and investigation engagements. Further, the Council of the ICAI, recognizing the need for forensic accounting and fraud detection, in the emerging economic scenario, has also launched “Certificate Course on Forensic Accounting and Fraud Detection”. Forensic Accounting: Discovery and evaluation of evidence by a professional to interpret and communicate findings suitable for a Court of law. Investigation: Systematic and critical examination of facts, records and documents for a specific purpose. Basic Principles Governing FAIS: Independence & Objectivity Integrity Due Professional Care Confidentiality Skills & Competence Primacy of Truth Respecting Rights & Obligations Separating Facts from Opinions Quality & Continuous Improvement Note: FAIS are principle-based standards where the spirit of law prevails over the letter of law, setting mandatory minimum requirements for ICAI members. Opportunities and Challenges in Forensic Accounting Key Avenues: Anti-money laundering, tax fraud detection, dispute advisory, M&A due diligence, public sector bank forensic audits, insurance damage quantification, and cyber fraud detection. Challenges: Acute talent shortage of expert forensic accountants, jurisdictional barriers in tracking cross-border FDI fraudsters, and court delays during pandemic disruptions. 7 V. Accounting Standards for Local Bodies (ASLBs) and Other Standards The Local Bodies play a very important role in the planning and development of local areas that include villages, towns and/ or cities. Local Bodies play a role of an agent to implement various government schemes to the local people contributing to the economic development of any country. The AS and Ind AS are not applicable and do not govern the financial statements for Local Bodies. The ICAI formed a Committee on Accounting Standards for Local Bodies (CASLB) with the primary objective of formulating accounting standards that would be made applicable for the Local Bodies. While formulating the Accounting Standards for Local Bodies (ASLBs), CASLB gives due consideration to the International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board (IPSASB) of IFAC and has integrated them, to the extent possible, in the light of the conditions and practices prevailing in India. Currently, most local bodies follow cash basis accounting; transition to accrual accounting remains an ongoing national priority. Other Standards in the Professional Ecosystem Internal Audit Standards: Vital for strengthening internal checks and controls of corporate entities. Income Computation and Disclosure Standards (ICDS): Mandated by the Ministry of Finance for direct tax compliance. Sustainability Reporting Standards: Emerging framework developed by ICAI to report vital environmental and ESG metrics. Global Standard-Setting Forums & AOSSG At an international level, to help jurisdictions adopting or converging with IFRS, many international groups and forums have been formed to exchange ideas and present a unified voice: Asian-Oceanian Standard-Setters Group (AOSSG): A forum of 27 member jurisdictions across the Asia-Oceania region to share convergence experiences and shape global standards. World Standard-Setters (WSS) & IFASS: High-level international forums contributing to IASB and global financial reporting harmonization. 8 Conclusion There are challenges in every profession and we CAs must ensure adherence to quality consciousness and professional standards in order to sustain the confidence of all the stakeholders, who rely on certified financial statements. Hon’ble Prime Minister of India, Shri Narendra Modi had said: “We know that we will be more successful when we pursue our goals in partnership with the world.” About the Author CA. (Dr.) Shiwaji Bhikaji Zaware Chair, Asian-Oceanian Standard-Setters Group (AOSSG) & Member, The Institute of Chartered Accountants of India (ICAI) Email: sbzaware@icai.org • eboard@icai.in

Perspective • Professional Development & Leadership Brand Building by a Chartered Accountant Journal: The Chartered Accountant, July 2021 (Vol. 70, No. 1) • Pages: 54–58 (Journal pp. 54–58) TM CA. T. N. Manoharan The author is a Padma Shri Awardee and Past President of ICAI. He can be reached at tnmanoharan@gmail.com and eboard@icai.in. “The general perception is that the terms ‘Brand’ and ‘Goodwill’ are associated with business enterprises and their products and services. In reality, these terms are equally relevant even for an individual’s life. By one’s conduct and behaviour, a person’s image is built over a period of time in the eyes of society. Every word uttered and every act performed on a day-to-day basis contributes to the image and perceptions about an individual, either positive or negative. If it is positive then it adds to the reputation of the individual and if it is negative, then it adversely impacts the image of the person. These positive perceptions cumulatively build as the ‘Brand’ of the individual which is nothing but goodwill and reputation in personal, professional and social network. Read on…” What applies to the shaping up of the ‘Brand’ of an individual equally applies to a Chartered Accountant (CA). In fact, for a CA it assumes greater relevance because the profession’s reputation depends on the collective reputation of all its members. If a CA is pronounced as guilty of any misconduct or is arrested in a financial scam or caught in a fraudulent transaction, it affects the image of entire profession. Chartered Accountants (CAs) are considered as elite class of citizens in the country. The profession is regulated by the ICAI with participation of the nominees of the Government in the Council and its committees at the helm of affairs. CAs are considered as partners in nation building due to the relevance of their functioning with the credibility of the Economy. Therefore, personal brand of every CA is important in the larger interest of the profession and the Nation. In this article some of the critical ingredients of such brand building are discussed. Respectability – Quality in Thought and Action Every CA should be proud of the profession to which he belongs, having qualified after education on a vast curriculum, undergoing a rigorous training and a robust examination process. Every CA must begin his career by remembering that “Work is worship and talent is capital.” A CA should be conscious of the sanctity of his signature affixed on a financial statement or a certificate issued by him. A CA must realise that the world believes that the qualification he possesses brings along superior and more reliable competence and capability than a non-CA service provider. To meet with such expectation, a CA needs to constantly sharpen the knowledge and skills that enable delivery of quality services. He must harness analytical and critical thinking so that the resultant action adds to his qualitative functioning. He must expand his horizon by continuous learning about the worldwide happenings, especially in the field of accounting, audit, tax, law and finance. He should stay abreast of the evolving business models and innovative trends in execution of transactions. He must look for role models in his field and embrace their best practices. He must not forget the close nexus the financial sector has to the Indian Economy. As a member of the profession perceived as a partner in nation building, he must bear in mind nation’s interest in every facet of the service rendered. Competence backed by macro level vision and micro level proficiency should govern the approach of a CA. Credibility – Adoption of Ethical Values Ours is a profession created by an Act of Parliament and we are regulated by a well laid down Code of Ethics under that enactment. We can be tried under the ethical framework by invoking disciplinary action not only for specific omissions and commissions but also for any other misconduct. Thus, as CAs we are expected to maintain dignity and integrity in anything we do. We should not be lured to do anything unethical or unprofessional, whatever be the rewards promised. “When someone approaches to engage us for any work that appears to compromise on values, our ability to say ‘no’ should stem from a solid ethical foundation embedded within us.” When someone approaches to engage us for any work that appears to compromise on values, our ability to say ‘no’ should stem from a solid ethical foundation embedded within us. We must hold ourselves responsible for a higher standard than anyone expects. If functioning within the ethical framework becomes the culture among CAs, then that would become the hallmark of the profession. Adherence to values, no doubt, is a challenging task in a corrupt environment. Desire to become rich in the shortest possible time can be the root cause for deviation from established principles and ethical values. History tells us that Gautama Buddha deserted his crown, palace and prosperity in search of peace. On the contrary, many in today’s world are abandoning peace by plunging in pursuit of material prospects. Prosperity is welcome but not by compromising on values leading to deprivation of peace of mind. Aspiration is essential but greed should be avoided. Whatever we aspire must be achieved through proper means. Earning money should not be the primary goal while carrying on the profession. Delivering quality service to our fullest satisfaction and matching with the expectations of the client, within the ethical parameters, must be the focus. Money should be a by-product of such services and if this philosophy is followed, rewards would flow in abundant measure in the long run. Contentment is a virtue that would help us to prevent greed from influencing our decision. Besides, by sheer hard work, vision and competence, we may reach the top but we can stay there only if we possess integrity. “It is true that in the modern era we need to be adaptive to many changes happening around us in terms of knowledge, skills, infrastructure, communication, technology, etc. But what remain static and does not undergo any change are the ethical principles underlying human life and the CA profession. This would determine the credibility of the CA profession.” Responsibility – Adhering to Time Schedules Professionalism is also in valuing time which is a precious resource for everyone. Every CA should value others’ time and maintain punctuality in meetings. Punctuality is an essential ingredient that demonstrates the attitude and the responsible behaviour of a person. “Adhering to self-imposed time schedules in the day-to-day life is a virtue that reflects on the discipline of an individual. When that discipline is imbibed by a CA there will be no procrastination.” Adhering to self-imposed time schedules in the day-to-day life is a virtue that reflects on the discipline of an individual. When that discipline is imbibed by a CA there will be no procrastination. Consequently, there will be no stress due to postponement of work execution. A CA must always believe that he will be busier on the following day than today and therefore, each day’s obligations must be fulfilled on the same day. A CA must be habituated to do right things at the right time. Time is a created thing. To say ‘I don’t have time to do something’ is equivalent to saying ‘I don’t want to do it’. If this attitude of adhering to time schedule gets engrained within us, then several magical things would happen around us: First, all the CPE programs and meetings of ICAI would start on time and end on time. Second, even dignitaries who are invited to grace the events would be punctual knowing that we would not delay commencement waiting for anyone. Third, even if any of them turn up late, they would be accommodated to join as they come. Still, when they go back, they would not only carry the memories of the quality program they attended but they would remember never to be late for ICAI events in future. Similarly, CAs must plan their affairs and educate their clients such that all the statutory timelines are adhered to without any need for extension of time. No request should go from ICAI for extension of any statutory timeline which, when made, reflects upon our inability to execute responsibilities entrusted to us in a timely manner. Under exceptional circumstances like the pandemic situation or natural calamities, the Government itself would extend the due dates for filing audit reports, returns etc. In some specific situations, industry forums and chambers of commerce may requisition the Government. But we as professionals must be well organised to deliver services promptly and in a planned manner within the prescribed timelines. This would prompt Central and State Governments and the Regulators to repose faith and confidence on us and entrust additional responsibilities. Reliability – Honouring of Commitments Every commitment made by a CA, irrespective of whether it is small or big, must be duly honoured. It could be a promise to respond to a query, attend a meeting or event, complete an assignment entrusted, return a book borrowed or a debt to be repaid. Everything stands on the same footing. The concept of materiality doesn’t apply. Breach of any promise makes a dent on the image of a CA. In the unfortunate and unavoidable situation of inability to fulfil any such promise, it must be foreseen and proactively modified on mutual consent so that the commitment is restructured and honoured at a later date without default. A CA must be sensitive to feel ashamed even to imagine any such failure to perform. When anyone associates with a CA, he must find him to be absolutely reliable and dignified. Every CA must also be proud to acknowledge with gratitude and a sense of pride, that it is the profession of Chartered Accountancy that made him a person of such a stature in the society. Therefore, even under the most compelling circumstances, the community would believe that a CA would refrain from breaching his commitments. Sustainability – Right Valuation of Services Branding also depends on pricing of the services. The knowledge, experience, efforts and time invested in rendering a service must be duly evaluated and factored in pricing the services rendered to clients. Unless the CA himself values his services correctly, the client will not understand and appreciate the value. Underselling of services should be avoided because that would gradually erode the ability of a CA to hire talented team and invest in infrastructure including modern tools, software and gadgets which in turn would impact adversely on the quality of the services rendered. A CA should also aim to build his brand as a best trainer and employer by moulding and grooming the CA students and employee CAs associated with him. For this necessary infrastructure and work ambience must be created. In the case of a CA rendering specialised services, there has to be a premium loaded in the billing because of the high-end nature of services. Besides, for a specialist, unlike a generalist, the number of clients to be serviced would be limited and more importantly, the delivery of services would be directly by the specialist and not by a team. Components of service rendered, in many cases, is not properly identified and added on to the billing. Invariably when a CA follows the practice of annual billing or lumpsum fee package for various services without adequately defining the scope of services, it may lead to under-selling of services. A CA must properly document and consider the man-hours spent on every assignment. Of course, in certain deserving cases, rendering of services for a low cost or free of charge in a conscious manner may be warranted, especially from client affordability angle. But that approach should be an exception. “Every CA who renders services backed by knowledge, values and competence should rightly price his services with absolute confidence, unmindful of even losing the client. Such a CA would not only sustain quality of services, but would also command respect for self and the profession in the long run.” Sometimes, a CA may charge less on the apprehension that he may lose the client. Proper discussion with the client to explain about the various components of billing should allay this apprehension. Besides, every CA who renders services backed by knowledge, values and competence should rightly price his services with absolute confidence, unmindful of even losing the client. Such a CA would not only sustain quality of services, but would also command respect for self and the profession in the long run. Even the client will not mind paying for the true worth of services if quality is guaranteed. Everyone must understand that the bitterness of poor-quality lasts longer than the taste of cheaper pricing. Capability – Adapt and Stay Relevant The routine services hitherto rendered by a CA such as return filing have been mechanised. Under specific legislation such as GST, even audit requirement has been done away. Digital era and technology evolution have changed the way the businesses are done and correspondingly even CAs have to reorient the way they operate and render services. We need to embrace technology in every facet of our functioning and that is bound to bring about accuracy, quality, speed, scaling and cost optimisation. There are many sunrise services for which we must gear up and adapt to stay relevant. “CAs must elevate themselves from mere number crunching to strategic thinking. Entrepreneurs and corporates expect CAs to be part of the decision-making process instead of merely providing inputs for decision making.” CAs must become proficient in Digital transformation services, Virtual CFO and Business Support Services. Sizable number of CAs can transform their operations from compliance to value addition services. CAs must elevate themselves from mere number crunching to strategic thinking. Entrepreneurs and corporates expect CAs to be part of the decision-making process instead of merely providing inputs for decision making. Earlier CAs in employment ultimately reach the level of CFO whereas in current times, it is a matter of pride that some CAs have attained the position of CEO. Emerging opportunities on investment advisory, wealth management, funding options for businesses, family arrangements, succession planning for HNIs are potential areas for engagement. CAs can explore new avenues in the field of Insolvency and Bankruptcy Code (IBC), particularly as Resolution Professionals. There is scope for more CAs to specialise in Forensic Accounting and Investigation, Risk based Audit and Systems Audit on account of increase in Frauds and cybercrimes. While the statutorily prescribed audits are likely to continue, CAs who have established firms of reasonable size and relevant competence can gear up for broader opportunity given the new guidelines issued by the Reserve Bank of India in the sphere of audit of Banks, Urban Co-operative Banks and NBFCs. Restrictions in the maximum number of entities one firm can audit, introduction of appointment of Joint Auditors, rotation of Auditors once in three years recently introduced by the RBI has opened up this arena for distribution of such audits among larger number of audit firms. Even a mid-size firm meeting the eligibility criteria, as per the RBI guidelines, should be able to undertake and do audit of 4 Banks (including one public sector bank), 8 NBFCs and 8 Urban Co-operative Banks, simultaneously. “Indian companies are expanding their operations by organic and inorganic growth strategically positioning across the globe. Looking at these trends, advisory role of CAs on inbound and outbound investments, international taxation, FEMA related matters, DTAA, Transfer Pricing and GAAR is gaining significance.” With the liberalisation of FDI norms during the past few years coupled with phenomenal improvement in the Ease of Doing Business (from 142nd Rank to 63rd Rank during the last 7 years), India is clearly emerging as the most potential investment hub for global investors. Similarly, Indian companies are expanding their operations by organic and inorganic growth strategically positioning across the globe. Looking at these trends, advisory role of CAs on inbound and outbound investments, international taxation, FEMA related matters, DTAA, Transfer Pricing and GAAR is gaining significance. Being capable of partaking, participating and partnering in all the happening sectors of the economy and staying relevant to be reckoned for rendering services is yet another way of building brand by a CA. When large number of CAs demonstrate this capability, the profession’s branding gets enhanced and sustained. Conclusion Demographic Facts of the Institute: As of date, about 27.5 per cent of the members (91,603 out of 333,882) are women. About 54% of the members (180,610) do not hold Certificate of Practice (CAs in employment). Everything written here applies to both men and women. It also substantially applies to CAs in employment. Past President CA. Y.H. Malegam has made a profound statement: “Important thing for a profession is not the brilliance of the few, but the competence of the many”. Every member is the ambassador of the profession. If each CA builds brand diligently as discussed above, then we need not worry about the future of our profession as it would certainly emerge as the profession of the future.

Perspective • Auditing & Governance ICAI Journal Ref: July 2021 • Vol. 70 • No. 1 • pp. 59–62 Auditor Independence • RBI Norms • Joint Audit • Capacity Building Improving Audit Quality: Significance of Independence and Capacity Building AC CA. Amarjit Chopra Past President, ICAI & Past Chairman, National Advisory Committee on Accounting Standards SD CA. Sabyasachee Dash Member of the Institute • sabyasachee.dash@gmail.com • eboard@icai.in “In the last 20 years, a series of spectacular scams namely Satyam, Global Trust Bank, ILFS, King Fisher, Yes Bank, Dewan Housing Finance Ltd., CG Power Systems etc. hit the economy, disrupting the financial ecosystem. Amongst the trending stories was the Punjab and Maharashtra Cooperative (PMC) Bank, which drew social media attention and ire. Nevertheless, it appears that the voices of the ill-fated depositors are still unheard in the corridors of power. Even Twenty-One months later, the crisis remains unresolved. Read on…” 1 Economic Governance, Scams, and the Regulatory Landscape Joy Thomas, Managing Director of the beleaguered bank, in his five-page letter to the Reserve Bank of India dated 21st September 2019, confessed the role of top management, including a few board members, in hiding the actual NPA numbers and the real exposure to the bankrupt HDIL. He also blamed the auditors for “superficially auditing” the lender’s books due to time constraints. Though Chanakya primarily espoused the idea of economic governance in India in Kautilya’s Arthashastra, it went through a series of evolution over the last few decades. Each scam contributed to strengthening the corporate governance framework of the respective nation. Although it’s practically impossible to eliminate all the threat factors, mitigation strategies are provided both in the statute(s) and the individual organizations. Technology, on the other hand, is acting as a double-edged sword. With the advent of sophisticated detection tool and technique, the scandals are also carried out with the same high-end technology posing unprecedented challenges to enforcement agencies. The government and investors demand more transparency in the overall conduct of affairs. An element of skepticism has become a default factor during the business performance evaluation. The more robust the governance mechanism, the better is the reliance quotient reposed in the management. It’s in this context, the role of independent auditors and directors assumes significance. While the Auditor plays a watchdog role, the Independent Director (ID) acts as a trustee for the shareholders. Both challenge the management responsible for the day-to-day affairs on governance-related matters. While this looks simple on paper, its execution is not that easy due to internal and external factors. “The government and investors demand more transparency in the overall conduct of affairs. An element of skepticism has become a default factor during the business performance evaluation.” 2 Threats and Safeguards to Auditor Independence We now get down to dwell upon the threats and safeguards to the independence of the Auditor. Threats to independence and safeguard measures of auditors are enshrined in the ICAI guidelines. According to the International Federation of Accountants (IFAC), there are five threats: 1. Self-Interest Threat 2. Self-Review Threat 3. Advocacy Threat 4. Familiarity Threat 5. Intimidation Threat These factors are common to all geographies and capable of being adopted without country-specific customization. These threats are unfortunately not easy to safeguard. Theoretically an auditor is appointed by shareholders. However, practically auditors are appointed by a dominant group. Intimidation threat impairs the independence of the auditor to an extent. ICAI Recommended Guiding Principles For the public to have confidence in audit quality, auditors must appear to be independent of the auditing entities. The Auditor should possess integrity, objectivity and professional skepticism, all of which are prerequisites to independence. Before taking on any work, he must conscientiously consider whether it would involve threats to his independence. If he finds any, he should either desist from the task or, at the very least, put in place safeguards that eliminate those threats. All such precaution measures need to be recorded in a form that can serve as evidence of compliance with due process. If the Auditor cannot fully implement reasonable and adequate safeguards, he must not accept the work. Statutory Prescriptions under the Companies Act Apart from the Chartered Accountants Act and Regulations, the Companies Act provides prescriptive measures to ensure independence: Disqualifications on Appointment (Section 141): Restricts appointments where conflicts exist. Prohibition of Non-Audit Services (Section 144): Prohibits certain services to audit clients to eliminate/mitigate conflict of interest. Removal of Existing Auditors: Mandates prior approval of the Regional Director to safeguard auditors against arbitrary dismissals. Against this backdrop, there are adequate legal provisions, guidelines and code of conduct for safeguarding independence. Independence being a state of mind, is not affected by a relationship. However, appearing independent is as crucial as being independent. According to ICAI, in any case, where there is a feeling in the public mind that the close relationship of the Auditor with the management would affect the independence of Auditor, the auditor should use his good sense and refrain from accepting the appointment. The CA should ensure its independence in all assurance services, including concurrent audit, tax audit, and internal audit. Needless to say that independence ensures free and frank expression of opinion/reporting. 3 Regulator-Led Appointments for Public Interest Entities (PIEs) “To improve the quality of reporting there is a need to free the Auditor from the intimidation of removal and to ensure all such measures to eliminate risk of conflict of interest.” We are of the opinion that to improve the quality of reporting there is a need to free the Auditor from the intimidation of removal and to ensure all such measures to eliminate risk of conflict of interest. Laying down a process to ensure appointment of Auditors by an independent agency other than the management, at least in case of Public Interest Entities (PIEs), is key to provide independence to Auditors. We in no way are trying to belittle the performance of Auditors so far. But what we are trying to advocate is a process which is likely to improve the quality of audit and consequently the reporting by Auditors. Appointments of Auditors in PIEs be made by any of the regulators viz. SEBI / MCA / RBI / IRDA depending upon the entities being regulated by each one of them. It is a bit disappointing that none of the regulators is willing to take up this responsibility. In our opinion irrespective of practices worldwide, India may take the lead in this to enhance quality of audit and consequently the credibility of auditing profession. In the recent times it is being generally perceived that there is a need to restrict non audit services being rendered to an audit client by Auditors. Rather, there has been a sense of feeling that there is a need to ensure this control to operate at network level rather at firm level alone. UK has already taken a lead in this matter by requiring bigger firms to segregate audit and non-audit services effective 2024. 4 Joint Audits, Monopolies, and Level Playing Field In India a view has been emerging that probably it would be better to have more than one pair of eyes to scrutinize the financial statements as Auditors. Though there is no empirical evidence to prove that Joint Audit concept is more efficient, yet it is believed that having more than one auditing firm could provide an opportunity for auditing matters to be discussed and concluded by representatives of more than one firm. There has been opposition to the concept of Joint Audit from certain quarters for lack of empirical evidence to prove its superiority. According to them, it may even lead to situations wherein different auditors may not be able to come to unanimity on certain issues. However, it may not be out of place to mention that concept of Joint Audit has worked very well in audit of public sector banks (PSBs) and other public sector undertakings (PSUs). It is also felt that monopolies in general are bad in any sector and our profession is no exception to this. The need for reduction in concentration of audits and other professional work in few hands is well recognized. We are of the opinion that there must be level playing field for all players in profession. We do recognize that profession cannot be run on socialistic pattern of society. But at the same time, it needs to be recognized that tenders floated by government departments and various entities should not be tailor made and skewed heavily in favour of certain firms alone. This has certainly hampered the development of Indian firms. Time is ripe to speak up for small and medium sized firms willing to move to next stage. Reduction in concentration of audit work will certainly encourage Indian firms to invest in technology and to prove that these are second to none in performance. “But at the same time, it needs to be recognized that tenders floated by government departments and various entities should not be tailor made and skewed heavily in favour of certain firms alone.” 5 RBI’s Groundbreaking Auditor Appointment Norms The RBI’s new norms for appointment of auditors have created a buzz in the financial circles. We appreciate the regulator for its commendable measures. RBI has brought far reaching changes in the rules with regard to capping of number of audit appointments in entities regulated by it: Tenure Reduction: Period for which an Auditor can continue has been reduced to three years. Six-Year Cooling Period: Introduced a cooling period of six years after a term of three years’ audit of an entity. Group-Wide Non-Audit Ban: Restricted auditors from accepting any non-audit services in any regulated entity of the same group. Network-Level Applicability: Most importantly, all these new norms have been introduced at network level rather than the firm level. Mandatory Joint Audit: Stipulates Joint Audit in regulated entities beyond a specified threshold limit. Conflict Disclosures: Prescribes factors like exposure of regulated entities to certain clients of proposed auditors to be considered by Audit Committees while determining independence. Implementation Challenges of RBI Norms In our view, the implementation of the new norms could throw a few challenges: First, the audit committee will have to select the auditors, ensuring auditor’s independence appropriately, laying down objective criteria. Another challenge relates to compliance timelines due to cessation of term after three years (compared to earlier 5 years). Capping on the number of appointments that a firm and firms in the same network can accept will create vacancies—good news for medium-sized Indian firms, but causing hardship to firms whose tenure gets curtailed. Recently, SEBI has made it mandatory for an auditor who resigns to give reasons for resignation. MCA is also looking at making it mandatory for the resigning auditor to give the correct reason for resignation. This is one more step to ensure independence of auditors. The new rules are applicable from FY 2021-22 (non-bank lenders may adopt from H2, but banks face immediate compliance). RBI has done its job bringing in the concept of Joint Audit. In our view, this needs to be extended to all PIEs. While a Joint Audit by itself may not do a miracle, there is inbuilt merit when a second pair of eyes is deployed to enhance objectivity and quality of the opinion-making process. In the event of disagreement between joint auditors, both are required to come to a common point which both subscribe. 6 Capacity Building and Level Playing Field for Indian Firms It hardly needs be emphasised that there is a need to build capacities of Indian firms. ICAI has been making efforts to enhance technical skills of members through continuing education programmes. Also various specialised post qualification courses have been introduced to promote specialisation in areas like Forensic Audit, Concurrent Audit of Banks, Ind AS, International Taxation, Valuation Services and so on. Recently, networking guidelines have been revised. ICAI needs to create opportunities for members to ensure utilisation of specialised skills appropriately. For this it may be important to have a dialogue with government agencies and various regulators to allow tendering by networks of small and medium sized firms. This would allow these firms to come together and pool their resources and invest in resources including technology which ultimately will improve the quality of audit and other professional work undertaken by such firms. A vital takeaway is that this is a step towards providing a level playing field between Indian origin and other firms having global networks. For several reasons, Indian firms have been marginalized in having their share of the pie in the profession by losing grounds to the Indian arms of large MNC firms. The widely advocated argument is Indian firms lack techno-investment. This charge may be partially true, but the solution lies in giving them opportunities they deserve on merits rather than sidelining through systematic approaches. Often the government agencies play a crucial role in such act of skepticism antagonism. This practice must stop in the more considerable interest concerning all stakeholders. Many accomplished and astute members are practicing through Indian firms who have demonstrated skills par excellence. We appeal to all Indian firms to consolidate, infuse technology, and improve overall audit infrastructure to achieve the profession’s aspiration. Whatever RBI has done is commendable. But as they say, “Yeh Dil Maange More”. About the Authors CA. Amarjit Chopra Past President, ICAI & Past Chairman, National Advisory Committee on Accounting Standards (NACAS) Email: eboard@icai.in CA. Sabyasachee Dash Member, The Institute of Chartered Accountants of India (ICAI) Email: sabyasachee.dash@gmail.com • eboard@icai.in

Perspective • Technology & Innovation New-Age Technologies to Overcome the Pandemic Challenges Journal: The Chartered Accountant, July 2021 (Vol. 70, No. 1) • Pages: 63–67 (Journal pp. 63–67) KR CA. K. Raghu The author is past President, ICAI and former Board Member, International Federation of Accountants (IFAC). He can be reached at kraghuandco@gmail.com and eboard@icai.in. “The COVID-19 crisis has impacted the global economy and many economies are yet to recover from the multiple waves of Covid and lockdowns. Many of the countries are on the brink of recession and are struggling with rising unemployment. Like other countries, India also witnessed a sharp deterioration in overall business confidence and there is a need for another fiscal package to restart the economy. Today, organisations are quickly adapting to the changing environment to overcome the challenges faced by them due to the pandemic. Read on…” Chartered Accountants have an important role to play in helping business navigate through the long lasting impact of the pandemic. The accountancy profession must remain resilient in times of crisis and the profession should take the lead in helping the economy recover soon. Impact of Covid on Various Sectors of the Economy 1. Manufacturing Sector Countries across the globe were heavily dependent on China for manufacture of goods which contributed 28% of the global manufacturing output. With the Covid disruption, India will emerge as a favoured destination for manufacturers to set up their operations. Manufacturers are aware that when the pandemic ends, the focus would be on greater automation, setting up smaller manufacturing units and sourcing raw materials from local sources. Vietnam, Indonesia, Cambodia and Singapore will also be favoured destinations for manufacturing. 2. IT Sector IT industry’s revenue is estimated at around US$ 191 billion for FY 20-21. The IT industry, as compared to other industries, has witnessed an enormous market boom due to this disruption. The industry has been most successful in thriving this crisis by continuing to work remotely. The pandemic has proved to be a catalyst to speed up technological changes. 3. Healthcare Sector The Healthcare sector comprises of hospitals, medical equipment manufacturers, diagnostics, pharmaceuticals, etc. The COVID-19 pandemic has created a severe strain on healthcare resources across the globe. It has highlighted the weaknesses in the healthcare infrastructure in well-developed countries like USA, Italy, Spain, etc. During the second wave, India witnessed an acute shortage in supply of oxygen, ventilators, hospital beds, etc. The disruption has created new opportunities in the wellness industry by providing nutrition and wellness products, fitness equipments, online medicine delivery services, etc. Online consultations have increased manifold in the back drop of the pandemic. There has been a dramatic rise in the online sales of immunity-related products, masks and sanitisers. The Indian Pharmaceutical industry which is popularly known as “Pharma of the World” was highly benefitted in this disruption due to its huge production capacity. 4. Telecommunication Sector With increasing restrictions, people are spending more time at home for both work and leisure in countries across the globe. This has led to increased voice calls, video calls, etc. and network usage has witnessed a huge spike in the last 2 years which augurs well for the telecommunication sector. 5. Education Sector Virtual classes have now become the new norm as teacher-student interaction is happening through online platforms such as Zoom, Google Meet, Microsoft Teams, etc. and due to this the telecommunication industry has witnessed a boom. Approximately 825 million learners are currently affected due to school closures in response to the pandemic. According to UNICEF monitoring, 23 countries are currently implementing nationwide closures and 40 countries are implementing local closures, impacting about 47% of the world’s student population. 6. Aviation Sector As compared to 2019, more than half the passenger traffic was lost in 2020. Thus, about 4.8 million jobs were affected, i.e., a 43% reduction from pre-covid levels. Significant reductions in passenger numbers have resulted in flights being cancelled or planes flying empty between airports, which in turn massively reduced revenues for airlines and forced many airlines to lay off employees or declare bankruptcy. As passenger flights were cancelled, the cost of sending cargo by air changed rapidly. 7. Insurance Sector While the insurance industry, like every other industry, has taken a major hit during this pandemic, the future prospects of the industry look bright. Since the onset of the pandemic, people are rushing to insure their lives and there seems to be a boost in demand for insurance. India has been an under-insured country and with Government initiatives, such as Ayushman Bharat which aims to insure the poor and vulnerable, the gap is now being bridged. However, Insurance Schemes from Private Insurance Companies cover only 18% of the urban population and a little over 14% of the rural population. 8. Agricultural Sector As compared to the Manufacturing and Service sectors, the Agricultural sector is under dual pressure of COVID-19 and climate change. Agrarian economies such as India, Bangladesh, Vietnam for which agricultural sector accounts for 12-16% of their GDP, have been affected the most. The agricultural sector has been suffering despite the government launching relief schemes and packages for the benefit of small farmers. Adoption of Technology by Businesses – Role of Our Profession The Corporates in India are using new age technologies to capture, record and mine information in their organisations and have invested huge resources to build Cloud based infrastructure. Due to multiple lockdowns put in place by various governments, the pandemic has speeded up the process of technology adoption manifold and these changes are here to stay. To remain competitive in this new business and economic environment, businesses – both big and small – have no choice but to recognise the importance of technology. Technology adoption and implementation has become the need of the hour. In this scenario, Chartered Accountants must have the skill sets to assist companies in implementing new age technologies and also provide support services in developing a robust Information System (IS) Controls and a strong Cyber Security framework. Emerging Technologies that Can Help Business to Be Innovative During Pandemic Times Artificial Intelligence (AI) Artificial Intelligence aims to replicate human intelligence in machines and AI applications are revolutionising all sectors of the economy, be it manufacturing or service organisations, both in the private and the public sector. AI tools are being used in the banking, insurance, retail, healthcare and manufacturing sectors extensively. Robotics Process Automation (RPA) RPA has the potential ability to disrupt the entire business functions across all companies and sectors. Where humans were once the sole resource to perform functions such as customer service, transactional activities and generating insights, RPA technology has advanced to a level where robots can perform these same tasks, with greater efficiency and accuracy. Today’s RPA technology uses software robots to offer improved business efficiency, data security and effectiveness by mimicking human actions and automating repetitive tasks across multiple business applications without altering existing infrastructure and systems. Cloud Accounting Storing data on remote servers opens up opportunities by making geography unimportant. Once data is entered in the cloud, you can work on it anywhere – in your office, at the airport, in your home 500 miles away. Cloud Computing is now evolving like never before, with companies of all shapes and sizes adapting to this new technology. While Cloud Computing is undoubtedly beneficial for mid-size to large companies, it is not without its downsides, especially for smaller businesses. Big Data and Analytics It has the potential to transform almost every aspect of business – from research and development to sales and marketing and to provide new opportunities for growth. Big Data and Analytics help businesses in descriptive analytics, predictive analytics and prescriptive analytics. The availability of online real-time information will assist in quick decision making and will improve the quality and accuracy of financial reporting. Cyber Risk Consulting Cyber Risk services which include Cyber Strategy and Management, Cyber Intelligence and Cyber Analytics are gaining ground due to the advent of mobile technology, cloud computing and social media. Chartered Accountants, as Technology Consultants, can help businessmen in re-aligning their business to the dynamic economic conditions. Block Chain Technology Block chain is a distributed ledger system that allows each participant (or node) to see clearly where information has come from and gone to – in essence, block chain is an innovation in record keeping, a cryptographic chain of proofs. To alter the Block chain without being obvious, anyone wanting to create a false record would supposedly have to modify every subsequent block, which generally requires everyone using the block chain to agree to the fraudulent transaction. Therefore, in a Block chain environment it is extremely difficult to alter data or insert false information. Block chain alters the conventional techniques for invoicing, reconciliation, documentation, contract preparation and mechanises the physically performed assignments. Block chain can streamline financial reporting and audit processes. Chartered Accountants can also assist organisations in help implementing Block chain solutions effectively. Cyber Security Cyber Attacks are becoming a growing reality in the digital world, and today, top banks, financial institutions and corporates are giving a lot of importance for Cyber Security in their organisations and investing heavily on cyber security infrastructure. Chartered Accountants can offer their services to the Cyber Security strategy of a company and help them create a strong cyber security infrastructure that is robust and sophisticated. Cyber Security allows companies to detect frauds and other vulnerabilities in the ERP systems in their organisation and prevent cyber attacks on real time basis across the enterprise. “Cyber Risk and Cyber Security present new opportunities and challenges to the Accountants. Every corporate using sophisticated IT systems are vulnerable to Cyber-attacks. It is assessed that a large cyber security breach currently represents one of the world’s most serious risks, and that it will also trigger an explosion in corporate expenses.” That is unfortunate in a social perspective, but from a commercial perspective, it offers opportunities for new advisory services, risk assessments and assurance engagements. Cyber-attack is an entirely new threat arising in the wake of digitisation. Key areas of knowledge and skills required for effective Cyber Security Risk management include: Relevant IT systems and technology, as well as the ability to be updated about changes in the technology and systems environment. Understanding IT processes and controls and their evaluation. Awareness and relevant experience with Cyber security frameworks. Understanding an entity’s industry and business and whether it is subject to specific types of Cyber security risks. Establishing and engaging multi-disciplinary teams, for example, including information security professionals and auditors. Digital Commerce Digital Commerce uses the Internet, mobile networks and commerce infrastructure to execute transactions with customers or businesses. Today, we find that new business models are driving growth and creating value by disrupting many existing businesses. For example, Amazon, Flipkart, Snapdeal, Big Basket are successful enterprises in the digital commerce space. Aggregators in the travel, food, hospitality, transport, housing, fashion has created many success stories. Example, Uber, Ola, Zomato have created huge valuations. The Government of India is also driving digital commerce and many traditional business houses have ventured into e-commerce in a big way. In this scenario, it is essential for CAs to study the developments in the digital commerce space. CAs can offer pre-funding consulting services, due-diligence, valuation, negotiation and post funding reviews to such digital commerce companies where huge investments are flowing into these companies. We can offer our services as a trusted advisor by providing strategic inputs over and above contributions in core areas of accounting, finance, tax and audit. Adoption of Technology by Our Profession 1. Invest in Technology Every crisis demands difficult decisions to be made. Chartered Accountants need to analyse the size and nature of their organisations to decide the level of investment in technology. For instance, smaller firms having smaller teams require basic VPN and firewall facilities to enable remote working. Applications like Google Meet, Microsoft Teams, WebEx, etc. can be used for holding virtual meetings. However, larger organisations require a larger amount of investment in technology. 2. Engage with IT Companies and Professionals Once the organisation’s tech appetite has been decided, we need to engage IT companies or professionals who can provide their expertise after carefully evaluating the needs of our profession. Professionals need to work closely with Business Process Consultants to create a detailed blue-print and build a suitable digital infrastructure. 3. Up Skilling and Training of Staff Once the digital infrastructure is implemented, the next most important step is to train and up skill the staff with the emerging technologies and this can be achieved by conducting continuous training programmes. 4. Implementation of a Hybrid Workspace The most visible impact of the pandemic was the shift from “Work from Office” to “Work from Home”. Remote working and virtual meetings are here to stay, although less intensely. Offices have started working with less than 100% workforce while continuing to practice working remotely. Chartered Accountants need to adopt a hybrid system of working so as to significantly reduce the cost of workspaces. 5. Building Broader Client Base During the pandemic, there has been a dramatic shift by consumers towards online channels, and businesses have succeeded in responding digitally. Businesses have refocused their attention to existing business processes and industries have witnessed a dramatic change in their operations. Professionals need to look at this shift as an opportunity and seek to broaden their client base beyond geographical boundaries. Ex: The Start-up ecosystem provides an excellent opportunity for our profession to broaden our client base and work with the Next Generation businesses. Conclusion Currently, economies and societies around the world are trying to find a way to move forward from this crisis-laden period. As strategic partners, our profession has a pivotal role to play in helping governments and businesses navigate efficiently in these troubled times. Chartered Accountants can support businesses in expanding and enhancing their digital infrastructure, and in doing so, must innovate and embrace technology. Our profession is future-ready and can meet the pandemic challenges in these testing times.

Perspective • Professional Ethics ICAI Journal Ref: July 2021 • Vol. 70 • No. 1 • pp. 68–71 IESBA 2018 Code • NOCLAR • Section 144 • Disciplinary Mechanism ICAI Code of Ethics– Marching Ahead of Times MF CA Manoj Fadnis Past President, ICAI and Past President, Confederation of Asian and Pacific Accountants • manojfadnis@icai.org • eboard@icai.in “The basic human instinct is to place personal gains above service. Therefore, persons who as individuals and as a class, are willing to place public good above their personal gain have enjoyed respect and honour. But such a relationship can be maintained or enhanced only if the professional body to which they belong would interpret the concept of public interest as broadly as possible. The respect and confidence enjoyed by a profession, to a great extent, is dependent on the strictness and scrupulousness with which such a code is adhered to by self-discipline. Read on…” 1 Evolution of Professional Discipline: From Self-Regulation to Shared Regulation A Chartered Accountant, whether in public practice or in service, should both be, and appear to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity. Self-discipline requires complying with the Ethics not only in letter but also in spirit. The fabric of disciplining the profession was originally weaved on the basis of the self-regulations. Today it has changed to the shared regulations, as happened all over the globe. However, the importance of laying down the Code of Ethics is still a duty which the profession should retain with itself. This can be done only if the Code marches ahead of the times. The Council of the Institute of Chartered Accountants of India (the Council) has always placed importance in keeping the Code ahead of the legal requirements. For instance, Peer Review was introduced in the profession much before the Chartered Accountants (Amendment) Act 2006 brought in Quality Review. Similarly, various pronouncements of the ICAI became applicable before the concept of non-assurance services got codified in section 144 of the Companies Act, 2013. The law regarding the disciplining the profession has also evolved over time. The scams which hit the global profession at the turn of the century and our country in the first decade have forced the change from the self-regulations to the shared regulations. Prior to 2006, there was no concept of monetary penalties being imposed on an erring member when found guilty of professional misconduct. Even reprimand had been considered as an effective deterrent to prevent a professional from doing what is prohibited. Removal of name from the Register of Members had been the severe punishment with permanent removal as the extreme form of punishment. With changing times, monetary penalties have become part of the law. The concept of the monetary penalties has become more pronounced after the Companies Act, 2013 has been implemented. 2 Adoption of the IESBA Code and the 2019/2020 Reforms In such fast-changing times, the Council has done well to keep pace with the global ethical standards. The International Ethics Standards Board for Accountants (IESBA) lays down the ethical standards to be complied with by professional accountants. In 2009 ICAI Council adopted for the first time the IESBA Code, popularly referred to as the IFAC Code of Ethics. They were introduced in the Code of Ethics as Part A. The provisions of the Chartered Accountants Act, the Regulations and the Council decisions were retained as Part B. Since 2006, the powers of the Council to issue notifications have been changed to issuing guidelines. The global ethical standards underwent significant revision in the last 10 years. In 2018, IESBA issued the revised Code of Ethics. The ICAI has been quick to adopt these standards. The same were introduced in our Code of Ethics in 2019 and made applicable in a staggered manner from 1st July 2020. Five Pivotal Changes in the Revised Code of Ethics Prohibition of Management Responsibilities to audit clients (Implemented w.e.f. 1st July 2020). Duty of Accountant in case of breach of independence standards (Implemented w.e.f. 1st July 2020). Responding to Non-Compliance of Laws and Regulations (NOCLAR) (Deferred for the time being). Restriction on fees from a single client exceeding fifteen percent (Deferred for the time being). Restriction on Taxation Services to Audit clients (Deferred for the time being). The first two have been implemented with effect from 1st July 2020. The remaining three have been deferred for the time being to allow detailed deliberation and structured stakeholder engagement. 3 Management Responsibilities vs. Section 144 of the Companies Act “The revised IESBA Code of Ethics as adopted by us, uses the term Management Responsibilities. It rightly points out that an audit firm should not take up any management responsibilities with respect to an audit client.” The revised IESBA Code of Ethics as adopted by us, uses the term Management Responsibilities. It rightly points out that an audit firm should not take up any management responsibilities with respect to an audit client. Obviously, such responsibilities will lead to conflict of interest with the role as an auditor. It creates self-review and self-interest threats. But the Code clarifies that providing advice and recommendations to assist the management of an audit client in discharging its responsibilities is not assuming management responsibilities. Thus, certain non-assurance services can be rendered to an audit client if the auditor does not take up the management responsibilities. However, section 144 of the Companies Act does not permit taking up the Management Services and no distinction is made in the law whether such services are rendered with or without taking up the Management Responsibilities. It is well known that the Companies Act, 2013 made the conduct of the business too stiff. Hence, various Removal of Difficulties Orders were issued and later the law was significantly amended, in 2015, 2017, 2018 and 2020. The motto of the Government of India since 2014 has been ‘ease of doing businesses’. In line with this thinking, section 144 of the Companies Act, to the extent of management services needs re-consideration to calibrate the Indian profession to meet the global challenges. Rotation of Partners vs. Rotation of Audit Firms: Similarly, some of the provisions of the IESBA Code now incorporated in our Code will create practical difficulties for the Indian profession. The IESBA Code requires Rotation of Partners. This was implemented in the ICAI Code of Ethics in 2009. However, with Rotation of Firms becoming applicable under the Companies Act 2013, the rotation of partners has lost its significance. The global ethics still do not require rotation of firms and hence the concept of rotation of partners is justified in that Code. Since India has stricter legal provisions i.e. rotation of firms, one wonders what is the use of rotation of partners. The rotation of partners requires a cooling period not only for the engagement partner but also for the entire audit team. When the firm itself will retire in a period of ten years at the most, the requirement of rotation of partners is not required. This aspect needs to be reconsidered by the Council. 4 Responding to NOCLAR (Non-Compliance of Laws and Regulations) “Responding to Non-compliance of Laws and Regulations (NOCLAR) is an important global development. The IESBA Code envisages that if a professional accountant comes across an instance of non-compliance of laws, compliance of which is of critical importance, then a professional accountant cannot keep his eyes closed. He needs to escalate the issue within the organisation up to the level of Those Charged With Governance (TCWG).” Responding to Non-compliance of Laws and Regulations (NOCLAR) is an important global development. The IESBA Code envisages that if a professional accountant comes across an instance of non-compliance of laws, compliance of which is of critical importance, then a professional accountant cannot keep his eyes closed. He needs to escalate the issue within the organisation up to the level of Those Charged With Governance (TCWG). If at that level also, there is no satisfactory response, then the professional accountant needs to report to the concerned regulatory authority. The laws which are of critical importance will include Fraud, Corruption and Bribery Laws, Money Laundering, Terrorists Financing and Proceeds of Crime, Data Protection, Tax and Pension Liabilities, Environmental Protection and Public Health and Safety etc. Reporting of frauds directly to the regulator has been prescribed in India for a long time. The Reserve Bank of India requires this in the audits of banks and non-banking finance companies. Sub-section (12) of section 143 of the Companies Act, 2013 requires a fraud to be reported directly to the Secretary Ministry of Corporate Affairs, Government of India. Now such requirement has become part of the Ethics. The proper implementation of this provision rightly needs more engagement with all the stakeholders so that the ultimate objective of bringing in this onerous responsibility is achieved. Hence, the provision has not been implemented as of now. 5 Fee Dependency Limits and Restrictions on Taxation Services From 40% Cap to 15% Consecutive Fee Threshold The Code of Ethics, 2009 contained a self-regulatory provision that the fees from one client, with some exceptions, should not exceed forty percent of the total fees. The rationale has been that an excessive dependence on one single client will create a threat. The revised Code of Ethics now requires that where the fees exceed more than fifteen percent from one client for two consecutive years, the audit firm needs to demonstrate its independence. Thus, against a blanket ban, the new proposal seeks to provide a gateway to demonstrate independence even if the fees exceed the threshold levels. But this concept needs to be limited to those entities where TCWG are different from the management. A strong and independent Audit Committee is a pre-requisite. Therefore, whenever introduced, it will be advisable to make it applicable to the listed companies or those companies which have established Audit Committees. Tax Services and the Unique Indian Position (Section 44AB) The tax services rendered to an audit client are also to be restricted from a date to be notified by the Council. Tax services comprise a broad range of services, including: Tax return preparation; Tax calculations for the purpose of preparing accounting entries; Tax planning and other tax advisory services; Tax services involving valuations; Assistance in the resolution of tax disputes. Amongst all the above types of services, tax planning and tax services involving valuations may create threats in terms of an audit client. Therefore, the proposed restrictions will only enhance the credibility of the audit services. However, tax return preparation and representation services do not create a threat. India is probably the only country to have the concept of tax audit, as prescribed under section 44AB of the Income Tax Act. The Council has issued Guidance Note on Tax Audit which is a rich literature bringing out the requirements of the audit. Once the financial statements are audited, then preparation of the tax return does not result in a conflict. Also the Tax laws have evolved over a period of time. In the landmark case of Rajkot Engineering Association [162 ITR 28 (Guj)], the Government of India filed an affidavit to the effect that the views of the tax auditor will not be binding on the assessee. Thus, on an issue where the tax auditor qualifies his report, it is still open to an assessee to take a different position in the tax litigation and under such circumstances if he is being defended by his tax auditor, there cannot be said to be a conflict. Hence, the Indian position is different from the global position. These matters need to be kept in mind as and when the Council decides to implement the above restrictions. 6 Tender Undercutting, Advertisements, and Contingent Fees The revised IESBA Code has also introduced the concept of Key Audit Partner. The ethical requirements are now more clearly extended to the entire audit team and the said Key Audit Partner. Also the extent of documentation has increased. As mentioned before, significant amendments were brought in by the Chartered Accountants (Amendment) Act, 2006 which became effective from 17th November 2006. One such amendment was to empower the Council to lay down guidelines for advertisements by Chartered Accountants in practice. The Council issued the guidelines in this regard in 2008 which have been substantially amended by way of Council Guidelines 2020. The issues relating to social media have also been aptly covered in the revised guidelines. The best advertisement is a satisfied client who speaks well of his auditor/advisor, but limited advertisement is the need of the day and has been properly permitted. Coupled with the empowerment to advertise, the law since 2006 also made competition healthier by doing away with some of the restrictions such as under-cutting to be a professional misconduct. This is based on the premises that once all the members are to adhere to the same technical and ethical standards, the service recipients should be allowed the benefit of cost optimisation and profession should become more competitive. Participation in tenders is permitted with some restrictions. However, the unfortunate reality is that the tenders have seen the fees going down to abnormally low levels. The Institute as a regulator cannot decide the minimum levels of professional fees; at best it can recommend. As professionals, members should strive to see that the client gets more in value than what money he pays, and increase their fees accordingly. Contingent Fees and Regulation 192 Contingent fees are not a desirable way of charging fees for a professional, more so in case of assurance services. However, the position is completely different in the case of management consultancy services. It is necessary to ensure level playing field between the professional firms and those rendering services in the form of corporate entities. Regulation 192 of the Chartered Accountants Regulations, 1988 permits certain specific services where contingent fees can be charged. Also, the Council is authorised to decide other services where fees can be charged on success basis. Acting as Insolvency Professional has been recently included in this list. The ‘Non-Assurance Services to Non-Audit Client’ can be a basis for Council to decide in future. Two-Year Cooling Period: Director to Auditor Keeping the tradition of bringing in Ethical requirements before they become part of the law, the Council has decided that upon laying down the office as director of an entity, one cannot accept the office of auditor of the same entity for a period of two years. This cooling period is necessary to install confidence of the society in the role of the auditor. This is a laudable decision of the Council. 7 Supreme Court Jurisprudence on Disciplinary Mechanism and Conclusion Schedule I Part IV sub-clause (2) provides that where in the opinion of the Council, a member brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work, such an action will be regarded as a professional misconduct. Landmark Supreme Court Ruling on Bringing Disrepute (Schedule I Part IV Clause 2) Interpreting these provisions, the Hon’ble Supreme Court in a recent case held that where a complaint was made against a Chartered Accountant relating to sale of certain shares, the High Court was not justified in reversing the decision of the Disciplinary Committee which had held him guilty. The Hon’ble High Court had concluded that the said Chartered Accountant was not acting as a Chartered Accountant and was not discharging any functions in relation to his practice. This decision has been reversed and the decision of the Disciplinary Committee has been restored by the Hon’ble Supreme Court. This case demonstrates the robustness of the Institute’s disciplinary mechanism. At the same time it is essential to remind ourselves that all our actions should be in accordance with the highest professional standards. To conclude, we need to be proud of the robust professional Code of Ethics given to us. It is our bounden duty to ensure proper compliance. I am always confident and optimist that the profession will continue to grow and prosper in the times to come. About the Author CA Manoj Fadnis Past President, ICAI and Past President, Confederation of Asian and Pacific Accountants (CAPA) Email: manojfadnis@icai.org • eboard@icai.in

Capital Market • Information Systems Audit ICAI Journal Ref: June 2021 • Vol. 69 • No. 12 • pp. 20–24 (1432–1436) SEBI KRA Regulations • Cyber Resilience • VAPT • DISA / CISA Information System (IS) Audit of KRAs – Capital Market SP Dr. P. Siva Rama Prasad Expert in Finance • cma.psrprasad@gmail.com • eboard@icai.in “KYC Registration Agency (KRA) is an agency Registered with Securities Exchange Board of India under the SEBI-KYC (Know Your Client) Registration Agency Regulations, 2011. KRAs have to maintain KYC documents of all investors in a Centralized IT System, on behalf of Capital Market in India through different Intermediaries that are Registered with SEBI. KYC Registration Agencies (KRAs) play a vital role in maintaining KYC documents of various clients of Securities Market, verify and store documents submitted by the clients through various Intermediaries of Securities Market in India. Read on…” 1 Cyber Security System, Cyber Resilience Structure & CIA Triad It is required that KRAs should have the High-Quality Cyber Security System and Cyber Resilience Structure in order to provide indispensable IT facilities and execute the process of systemically risky functions relating to Capital or Securities Market. Cyber-attacks and threats attempt to conciliation of confidentiality, integrity and availability i.e., CIA of the information technology systems, network systems and data stored in databases in servers: Confidentiality: Means to prevent the access of computer systems by unauthorised persons and the information to be available only to the authorized users of the organization. Integrity: The guarantee that the information is dependable and correct in all respects that is stored in the computer system. Availability: Refers to the assurance of reliable access of computer systems and information by authorized users of the IT systems of the organization timely, i.e., as and when they require. Cyber security framework includes procedures, tools and processes that are identified to prevent the access of cyber-attacks by unscrupulous persons and to improve the cyber pliability of the organization’s IT systems. Cyber resilience is an organisation’s ability to prepare or develop the various IT tools and to respond to a cyber-attack on IT systems instantly with less human intervention, automatic and to continue action during, and improve and recover of IT systems from the cyber-attacks. 2 SEBI Regulatory Mandate & Registered KRAs in India Section 11 (1) of the Securities and Exchange Board of India Act, 1992 defines to protect the interests of all types of investors of securities market and to promote the healthy development of, and to regulate the securities market and to maintain good governance. Earlier investors have to complete the KYC procedures as and when they approach each type of SEBI intermediary and submit the relevant KYC documents and procedures of each intermediary may vary from one to another due to lack of non-adherence of the standard and common guidelines that are issued by SEBI to all the intermediaries. This creates a lot of inconvenience to investors and they face many problems like missing of unique system not adopted by the intermediaries uniformly, sometimes it leads to duplication, additional cost and time to the prospective investors. In view of these challenges and also to eliminate such problems of KYC process to be executed by the investors and to have a uniform KYC process across SEBI registered intermediaries, SEBI has introduced the concept of KYC Registration Agency (KRA). As on date the following are registered with SEBI as KRAs: DotEx International Ltd: A unit of the National Stock Exchange of India Ltd (NSE). Karvy Data Management Services Ltd. (KDMS): Registered KRA. NSDL Database Management Limited: A fully owned subsidiary of National Securities Depository Ltd. (NSDL). CAMS KRA: Set up by Computer Age Management Services (CAMS). CDSL Ventures Limited (CVL): A division of Central Depository Services (India) Limited. This enables an investor to invest / trade through various intermediaries, after undergoing onetime KYC process through any intermediary at initial stage. Additionally, if there are any subsequent changes in investor’s KYC information, i.e., static or dynamic or demographic, the investor can approach any one of SEBI Registered intermediary and request change which can be made by intermediary after verification with changes made in the IT system. The originals (subsequent change documents) are submitted to the KRAs by any one of the registered intermediaries of SEBI. 3 Roles and Obligations: KRAs vs. Intermediaries Role of KRAs KRAs are responsible for storing, safeguarding and retrieving the KYC documents submitted by the clients through various intermediaries. KRAs have to retain the original KYC documents submitted by the clients both in physical and electronic form like cheque truncation system of the banks. These KYC documents are preserved for a period as per the guidelines issued by SEBI. Clients common KYC information to be shared or disseminated to all the intermediaries by the KRA through the IT system. Establish inter-operability among KRAs through electronic connectivity. Have a system to send acknowledgement to the clients of various Intermediaries after receipt and verification of the KYC documents. Roles and Obligations of Intermediaries Intermediaries shall perform the initial KYC / due diligence of the client and upload the KYC information / documents in IT System of KRA and arrange to send the original KYC documents to KRA within the prescribed time. When client approaches different intermediary later on, intermediaries need to verify the client’s details from the system of KRAs or if warrants obtain fresh KYC from the clients. On receipt of information on change in KYC details from the clients by intermediary, he is responsible for uploading the revised KYC information on the system of KRA and send the physical KYC documents to KRA. Intermediary have the ultimate responsibility for the KYC documents of its clients with the risk profile of its clients. 4 IS Audit Mandate and Auditor Empanelment Qualifications On annual basis the IS auditors are to audit the KRAs as Registered with SEBI. As per the Guidelines issued by SEBI, qualifications that are required for empanelled IS Auditors are CERT-In empanelment, independent auditor status, and any of the following qualifications: DISA (ICAI): Diploma of Information Systems Auditor from The Institute of Chartered Accountants of India. CISA (ISACA): Certified Information System Auditor from Information Systems Audit and Control Association. CISM (ISACA): Certified Information Securities Manager from ISACA. CISSP (ISC-2): Certified Information Systems Security Professional from International Information Systems Security Certification Consortium. Reporting Timeline: IS Auditors have to verify compliance and submit the IS Audit Report to the Securities and Exchange Board of India (SEBI) along with audit remarks of the Board of KYC Registration Agencies within three months from the end of each financial year. 5 Checklist for IS Auditors to Audit KRAs The objective of IS Audit is to check the Cyber Security and Cyber Resilience Policy of the KRAs across five core functional domains: Identify Protect Detect Respond Recover a) Identify: Critical Assets and Threat Modeling Identify critical assets based on sensitivity and criticality of business operations, services and data management of KRAs. Identify threats and vulnerabilities of cyber risks and control measures taken by KRAs. If third-party service providers are providing various services to KRAs, check whether they are following similar Standards of Information Security. b) Protect: Detailed Security Controls i. Access Controls Check any person other than authorised officials has access to confidential data, applications, system resources or facilities. Check whether KRAs are granted access to IT Systems on need-based approach and defined period with strong authentication mechanisms. Check whether KRA implements strong password controls to access IT systems by authorised users. Check whether KRAs maintain access logs of IT systems preserved for not less than two years. Check whether access lock policy after failed attempts is implemented. Check whether outsourced staff/vendors accessing the system are subject to stringent supervision, monitoring and access restrictions. Check whether two-factor authentication (2FA) at log-in is implemented by KRAs. Check whether IDs of employees who worked earlier or retired are withdrawn from the IT System i.e., “End of Life” Mechanism. ii. Physical Security Check whether KRAs allow access to critical systems by outsourced staff / visitors, etc. Check whether access to physical systems is revoked if there is no need. Check whether KRAs implemented CCTVs, CARD access systems, security guards, mantraps, bollards wherever required to enter system rooms. iii. Network System Management Check whether KRAs conduct regular enforcement checks to ensure baseline standards uniformly. Check whether KRAs introduced firewalls as well as intrusion detection systems to prevent viruses and threats. Check whether anti-virus scanning happens on regular basis and updated versions are available. iv. Data Security Check whether KRAs use strong encryption methods like Advanced Encryption Standard (AES), RSA, SHA-2, etc. Check whether IT systems prevent unauthorised persons from copying and transmitting stored data/information. Check whether information security policy covers mobile phones, photocopiers, scanners to capture and transmit data. Check whether KRAs allow authorized data storage devices to capture data with appropriate validation process. v. Hardware and Software Check whether hardened and vetted hardware/software is used by KRAs. Check whether default passwords are replaced with strong passwords during hardening process. Check whether all open ports are blocked to avoid exploitation of data from IT systems. vi. Application Programmes Security and Testing Check whether KRAs are using regression testing before new or modified systems are implemented. vii. Patches Management of Software Check whether KRAs implement security patches in time, with verification (identification, categorisation, and prioritisation). Check whether rigorous testing is conducted before deployment in the production environment. viii. Disposal of Storage Devices and IT Systems Check whether KRAs use methods like wiping, cleaning, overwriting, degaussing, and physical destruction for disposal. ix. Vulnerability Assessment and Penetration Testing (VAPT) Check whether KRAs conduct VAPT tests in the IT environment at least once in a year. Check whether KRAs take prompt remedial measures for identified vulnerabilities. Check whether KRAs perform vulnerability scanning and penetration tests prior to installation of new IT systems and providing internet access. c) Detection and Monitoring Check whether appropriate security monitoring systems detect unauthorised/malicious activities, changes, access, or copying. Check whether KRAs implement suitable mechanisms to monitor capacity utilization of networks and critical systems. Check whether suitable alerts are generated upon detection of unauthorised or abnormal system activities. d) Recovery and Response Check whether alerts are generated in case of cyber-attack or breach, and suitable eradication systems are in place. Check whether timely restoration of systems is achieved, adhering to SEBI-defined Recovery Time Objective (RTO) and Recovery Point Objective (RPO). Check whether a response plan defines employee and outsourced staff responsibilities during attacks. Check whether any loss or destruction of data happened and if preventive action plans are prepared. Check whether KRAs conduct periodic drills to test the adequacy and effectiveness of the recovery plan. e) Information Sharing & f) Staff Training Information Sharing: Check whether KRAs submit quarterly reports on cyber-attacks and mitigation measures to SEBI regularly (enabling SEBI to share incident alerts with other KRAs). Staff Training: Check whether periodic training programmes cover SEBI IT/cyber security policies for staff, vendors, and outsourced personnel; whether special focus is provided to non-technical staff; and whether training modules are reviewed and updated regularly. 6 Conclusion “Technology is a key game changer in financial services as it cannot only provide fast and better services to the consumer, it can also be a catalyst in improving the ease of doing business.” – Shri Ajay Tyagi, Chairman, SEBI KYC registration agencies (KRAs) play a vital role in maintaining KYC documents of various clients of securities market. Through annual Information Systems Audit (IS Audit), it is not only possible to strengthen the good governance of access controls, network controls and data security of IT systems of KRAs, but also it is also possible to prevent cyber-attacks on IT systems. About the Author Dr. P. Siva Rama Prasad Expert in Finance & Capital Market Systems Email: cma.psrprasad@gmail.com • eboard@icai.in

Capital Market • Behavioural Finance Behavioural Factors Limiting Rationality in the World of Finance Journal: The Chartered Accountant, June 2021 (Vol. 69, No. 12) • Pages: 29–32 (Journal pp. 1441–1444) SS Mr. Shaleen Suneja The author is Deputy Director, ICAI. He can be reached at ssuneja@icai.in and eboard@icai.in. “The efficient market hypothesis that Chartered Accountants learn in their curriculum proposes that there is nothing like overvalued or undervalued stocks. The security markets fully reflect available information without any discrimination and thus provide unbiased estimate of underlying values. The theory states that it is impossible to ‘beat the market’, i.e., outperform the market. It is impossible for investors to either purchase stocks that are undervalued and sell the ones that are overvalued. Read on…” The Chartered Accountants with their acumen in the area of commercial matters display keen interest in the world of capital market, particularly stock markets. The education and training of Chartered Accountancy course has taught them complex tools and strategies to fundamentally analyze the inherent worth of assets and take crucial as well as beneficial financial decisions. Equipped with the knowledge of complex financial strategies they have abilities to proficiently render expert services to create rewarding portfolios. Even before making small value investments, the professionals will study past profits, volumes, growth, price-earnings ratio, promoters and like to judge the worth of assets. It is important to note that the stock market efficiency causes existing share prices to always incorporate and reflect all relevant information thus stocks trade at their fair value. The participants in the markets are assumed to be fully rational in their approach. However, in spite of all this many investors face heavy losses. There are occasions when stocks lose significant portion of their value in no time. Market Volatility and Historical Downturns On eighth of January, 2008, the Nifty reached intra-day all time high of 6357.1 points rising more than 500 per cent in the new millennium. Same year on 27th October, it fell to 2252.75 points, its nadir in the post crisis period. About 64 per cent of the value of Nifty was eroded in less than a year. Again the markets plummeted after the threat on economy was evident after the lockdown in the early part of the year, 2020. The stock markets can be notoriously volatile. They can make paupers, king and kings, pauper. The question which then arises is why markets are so volatile. Where is the efficient market theory? We have also seen people who have made huge empire by investing in stocks. Many of us awe the strategies of Warren Buffet or Rakesh Jhunjhunwala, an ICAI alumni. There are people who will blindly buy stocks recommended by them. Lately, there are numerous studies highlighting the importance of understanding the world of behavioural finance for the traders, investors, fund managers, analysts, and other financial professionals. In the world of behavioral finance, presence of circumstances is acknowledged which naturally makes the financial markets informationally inefficient. In this world, emotions rule and information from psychological factors have similar importance as information from final accounts. Psychological Biases Present in Investors Cognitive psychologists have documented different patterns regarding how people behave. Some of these patterns are heuristics, overconfidence, mental accounting, framing, conservatism, representativeness, disposition effect [Ritter, Jay R., 2003]. Let us see some of the psychological biases present among the traders and investors: 1. Overoptimism and Overconfidence Investors are often found to be optimistic in nature as they feel that they are in control of things while in reality it is other way round. They exaggerate their own abilities to understand things and often harbour the dillusion that things are within their control. Such investors possess self-attribution bias as they attribute success to their own abilities and external factors or bad luck for unsuccessful outcomes. Investors are not only optimistic, but also overconfident. They believe that the actions taken by them are right and they will provide them intended returns. An overconfident person overestimates his ability to successfully perform a particular task. All of us can recall how a classmate who lost in a debate competition blamed judges to be biased or blamed teachers for less marks. A good number of psychological researches indicate that people in general are overconfident. Overconfidence is also labeled as miscalibration as it a belief that one knows more than one actually does. Combined together optimism and overconfidence can impel traders and investors to overrate their abilities to buy stocks and underrate the risks involved. 2. Heuristics Heuristics, or rules of thumb, make decision-making easier. It is a strategy that can be applied to a variety of problems and can lead to correct solutions. Heuristics are the shortcuts to reduce complex problem solving to simpler judgmental operations. Despite what financial experts may assume, many investors do not calculate odds properly when taking investment decisions. They may assign mental subjective probabilities to various alternatives and take decisions. They make the task of decision making easier and simpler. Sometimes heuristics may lead to suboptimal investment decisions. Use of heuristics results in cognitive weaknesses in individuals’ decision-making, leading them to make inferior decisions with regard to their individual welfare. [Akinbami, Folarin. 2011] Three popular heuristics that are applied are Representativeness, Availability, Anchoring and Adjustment [Tversky and Kahneman, 1974]: Representativeness Heuristic A person may estimate likelihood of an event by comparing it to a previous experience or an example that already exists in mind. Our thoughts are conditioned as per the most relevant or typical example of a particular event or object. Suppose if one associates men with long hair to be from entertainment and media industry, will relate any man with long hair with entertainment and media. Representativeness heuristic may lead investors to use their knowledge of one successful company as a stereotype for another similar company and accordingly judge both the companies at par and likely to be equally successful. Availability Bias Human thinking is highly influenced by things that are recently experienced, relevant or are dramatic in nature. It is information-processing bias where likelihood of an outcome is estimated on the basis of how easily the outcome comes to mind. An investor who has lost heavily by investing in shares is more likely to be vary of stock markets in future. However, over time, the person may return to his normal investing pattern. Anchoring and Adjustments Anchoring is an information-processing bias in some of the investors. A ship is anchored so that it does not move. Anchoring happens in investors because relative analysis and comparison seems easier as opposed to understand absolute figures. Investors influenced by this bias, often are fixed on a particular buy-price or sell-price target, even when the investing landscape poses new information. Such investors do not adequately adjust the anchor and therefore their forecast tends to be biased. Sometimes investors anchor themselves with previous high prices and buy stocks that have fallen considerably. While anchoring, far too much emphasis is made on a single piece of information, while ignoring other available information. 3. Loss Aversion There are a number of academic researches suggesting that loss aversion plays an important role in the decisions taken by some of the investors. Loss aversion is the tendency of investors to be more sensitive to losses in comparison to gains. The context is often displayed in pricing decisions by many marketers. It is common for restaurants to offer off-peak hour discounts rather than having surcharges during rush hours. People are happy taking discounts rather than paying extra. As per the concept of loss aversion people experience greater pain in losing than the pleasure they have in getting similar gains. 4. The Disposition Effect Consider example of an investor who buys a share and is happy to sell to make a gain of about 3 per cent in 7-8 days. It is a different story that the momentum took the stock to rise by another 20 per cent in about 3 months. However, another share bought by him fell, he patiently waited for it to revive. However to his dismay the value of this share halved in just two months. Somebody guided him to average out by putting in more money; convinced, he doubled the money put in the scrip. In next couple of months, it again lost another 30 per cent. It is a common mistake many investors make. They book profits too soon and stick to loss making scrips too long. They forget the concept of stop-loss. Here rationality is overshadowed by other psychological factors. Disposition effect is the tendency to sell winners and hold losers. Individual investors have a strong preference for selling stocks that have increased in value relative to stocks that have decreased in value. 5. Narrow Framing Narrow framing is the tendency of investors to focus on narrowly defined losses or gains. People while narrow-framing will take investment decisions without considering the impact on their total portfolio. The notion explains how people mentally evaluate risk while making investments and thus leads to conclude that the manner in which a concept is presented to individual has a bearing on the decisions. A narrow-framing investor may ignore the benefits that can be achieved through diversification. These people may be heavily invested in some of the individual stocks or industry, for example in pharmaceutical stocks that are in interest these days. 6. Herd Behaviour Herd behavior is a phenomenon often seen in stock markets. You may recall the era prior to the financial crisis of 2008. During those times there was unprecedented interest in the stock market. Persons who were otherwise vary of stock markets were not only talking about the market but also making investments, however small they may be. At that time, people who were hardly investing were considering bidding in a particular IPO which was being fancied by many – even by taking a loan. These were clear signs that something was wrong. Money does not come easily, it has to be earned, hard way. During those days some of the IPOs were selling like hot cakes; getting responses as if they can make you millionaire overnight. Companies were also flocking to raise funds. However, the euphoria did not last as the markets fell and investors took a turn to opposite direction. In 2007-8 there were 85 IPOs for 42,595 crores and in 2008-9 there were 21 IPOs amounting to 2,082 crores. The investors and fund managers, without appreciating the trade-off between risk and rewards, acted in herds. Herd behavior may lead to gradual formation of bubbles that may burst to crash. RBI Warning on Asset Price Inflation & Bubble Risk Recently, the Reserve Bank of India (RBI) has warned building of a bubble in the stock market as prices of risky assets surging to record high levels. The Reserve Bank of India has hinted that Indian equity markets are in a bubble, and that high valuations in the market are far from the ground realities. The Central Bank in its annual report 2020-21 stated that the magnitude of asset price inflation in the country poses the risk of a bubble as there is estimated 8% contraction in GDP in 2020-21. In fact, the benchmark Sensex has risen a whopping 100 per cent from the lows reached in March 2020 after pandemic induced lockdown. Herd behaviour is not restricted to stock markets or humans. It is naturally witnessed in animal kingdom. It is found in humans and extends to different aspect of business. We can often observe sudden interests in information technology which shifts to real estate and then to some other sector. The herd behavior may be rational or irrational. In fact herding is a natural instinct that is always present while taking decisions. It is a subconscious bias that is linked to human need to conform to things. Herding may be intentional or spurious. Intentional herding results from obvious intent of investors to copy the behaviour of other investors. Spurious herding is an efficient outcome of groups taking similar decisions when provided with similar information. For example, a general rise in the interest rates may reduce the proportion of stocks in the portfolio of investors. (Bikhchandani and Sharma (2001)) Spurious herding is not a consequence of copying decisions of other investors, but merely a reaction to available information. Endnote The world of finance is highly complex and dynamic. In this article, a number of behavioural factors that limit the rationality aspects of investors and lead to sub-optimal decisions have been explained. The professionals may appreciate that the models of fundamental analysis based on the rationality may not produce the results that are exhibited in the real world. Knowledge of presence of behavioural factors will help investors avoid common pitfalls and take better decisions. There is need to understand the presence of herd-behaviour and cognitive positions that investors may take. Equipped with this knowledge, they can take better decisions for themselves, clients or for their organisations.

The Chartered Accountant • Journal of ICAI June 2021 • Vol. 69 • No. 12 • pp. 33–37 (Journal pp. 1445–1449) CAPITAL MARKET Wealth Creation in Stock Markets *CA. Amit Bagga & #Jitender Kumar *Is a member of the Institute. #Is a financial expert. Communication can be addressed to eboard@icai.in 💡 Executive Overview & Fundamental Premise An intelligent investor is able to make money work to earn more money. Investments help them to improve their status, have future security or prepare for big expenditures in life. The investments vary in terms of returns and risk and the investments with better potential of returns are invariably riskier. Many investors also get misguided and take faulty decisions to make deep burns in their pockets. Investors may not possess adequate knowledge and skills and may not be able to understand risk-return dimensions of investment options available. Read on… Wealth can’t be created just because you want to do so. “Show me the calculations my friend”, you would often ask your advisors. Sounds good! Last month, while I was sitting with one of my friends, the same question cropped up. When asked “do you want my advice or just calculations”, the reply was as expected “I am a long-term investor; advise me on some investment opportunities” and with those lines, the additional conditions were as follows: “Look, I will not invest now, markets are in a bad shape, and we may be in a recession”. Secondly, “the stock must not be of more than 100-200 rupees; I generally do not buy expensive stocks”. Out of curiosity, I asked, what is the time horizon and purpose of the investment? The answer was “long term, but usually, I believe in booking profits as soon as they appear in my account”. All this reminded me of the typical behavioral issues of investors: With the mental sufferings of loss aversion, speculative instincts, and illusions about markets. This is a story of almost all the investors around. They enter the investment world as long-term investors but in reality want quick bucks. They do not invest but try buying some “lottery tickets”. People find lottery tickets fascinating even though almost all lose money on the lottery tickets. “Lottery tickets are the silliest investments, making investors lose money, and yet, for an average investor, the lottery ticket is often the preferred investment, for it can quickly create wealth”. As a standard reply, I must say: “My friend, you want to create wealth, but wealth can’t be created, just because you want to do so”. You will have to learn the art of discipline, behavioral finance, and of course, a little understanding of financial markets. Through this article, I am trying to cover some of these issues and will discuss how some unbiased understanding of the financial market with the help of mathematical tools can help an investor generate better results than an average investor. Where do behavioral issues originate? One of the exciting functions available in almost all spreadsheet calculators is Future Value, “FV”. Based on certain assumptions and guesstimates about the future, it can easily give you the future value or the corpus required to achieve certain goals. Furthermore, with its variant, Payment, “PMT”, you can estimate the number of periodic investments you need to meet these goals. With these handy calculations and a positive mind, you just start investing, probably through some systematic route or lump sum. This fundamental and common strategy is good enough and works at its best if the assumptions that informed the calculations turn out to be true. But here is a common catch: the degree of reliability (i.e. mismatch) of these uncertain assumptions for the goals which are probably more certain. “The goals that are certain and defined are informed by assumptions that are uncertain”. Though we are clear about the fact that all these assumptions are just estimates, we have mostly never questioned the source of these assumptions and questioned what happens if they do not hold true. Have we questioned? If you are an advisor or an investor, the chances are you would care a lot more about the number of investments you are currently making and even more care about odds that you or your client should not lose money. Hence, you go with the mindset (or I call it illusion) that most of these assumptions are common and are the same with all kinds of situations, with all investors, and with some heuristic rules of thumb, and therefore you feel no need to alter or customize them. “All we need to understand is that these assumptions are not only numbers or guesses (about time horizon and expectations of the rate of returns), but are a semblance of one’s behavior and understanding of the real world.” So what should we care about when we are investing? What should be our investment strategy? Well, all we need to understand is that these assumptions are not only numbers or guesses (about time horizon and expectations of the rate of returns), but are a semblance of one’s behavior and understanding of the real world. We have to understand that money has no colour and that it is fungible. Any money can be used to meet any goal. The emotional baskets of goals that we create and sometimes lose track of may not always be fruitful. Understanding markets for wealth creation There is a famous quote “Markets are always right; it’s our decision which is right or wrong”. This phrase highlights important issues that we need to understand. The issues that we need to understand are the very root cause of market existence and why there should be any extra returns in one asset class (say equities) as opposed to others. “In the last 10 years, the median return of open-ended equity-oriented fund is around 10%, with one-year returns ranging from -60% to +110% in any particular year and that of bond funds is 8.5%, with annual returns in the range of approximately -30% to +18% in any particular year”. In some good years, the returns are as high as 100% (in equity funds) and in some, for instance, the present year, they are as low as -60%. This data suggests that in shorter periods, the returns tend to fluctuate and may deviate to a large extent but over a long period they normalize and revert to average, known as the law of mean reversion and thus it is highly probable that you will get average returns over the long time periods. If we take the average risk, the more likely outcome will be that we will have a sort of average returns over the longer term. Wealth creation will have to deal with the problem of market volatility. However, there might be some periods during which any decisions we take can significantly change our return profile without hindering our risk appetite (though it may appear for some time, and we will discuss this in the later section of this article). The answer to this periodic analysis is in the concept of market efficiency or efficient market hypothesis formulated by Eugene Fama in 1970. Though controversial, the thesis suggests that at any given time, prices fully reflect all available information about a particular market. In efficient markets, market prices adjust everything (including foreseeable future), so no investment pattern is fruitful. “We have seen the periods of global financial disaster of 2008 and experienced how markets became so inefficient to predict what happened later. If someone was bold enough to invest in 2008, we all know the kind of returns that could have been generated.” However, EMH does not reject the anomalies in the markets. We have seen the periods of global financial disaster of 2008 and experienced how markets became so inefficient to predict what happened later. If someone was bold enough to invest in 2008, we all know the kind of returns that could have been generated. At the same time, we also often observe the anomalies when the market seems to overreact to positive expectations (small-cap run of 2017). “What should I do with this efficient market theory”, you might ask. Well, as I use to quote “Markets are always right, it’s our decisions which are right or wrong”. This analysis of market efficiency helps you to make the right decisions and to understand why it is so difficult to beat the market for an average behaviorally charged investor and what is actually required to create wealth out of these efficient markets. The first step towards wealth creation The scholars of traditional finance assume that investors are risk-averse and they dislike risk. If I ask someone a question “what is risk?”, the most common answer would be that the “probability of losing my principal is the risk”. This answer is behaviorally correct but not mathematically correct. The technical definition of risk is volatility against the expected returns and not the loss (read more on standard deviation and variance). “The behavioral finance has proved that people are actually not at all risk-averse, they are rather ‘loss averse’ and hence, they do not dislike risk but they dislike loss.” The behavioral finance has proved that people are actually not at all risk-averse, they are rather “loss averse” and hence, they do not dislike risk but they dislike loss. In his book, Your Money & Your Brain, Jason Zweig goes through multiple studies and stories to show how our brains react to different forms of the stimulus (mostly gains and losses). The fact is that the financial losses are processed in the same area of the brain that responds to mortal danger (the danger of death). This helps explain why losses hurt so much more than gains feel good. This loss aversion can be a huge issue that needs to be addressed for our long term financial health as it tends to give birth to “disposition effect”, under which we normally book profits earlier than we book losses. “People like taking risks but hate incurring losses”. Because of another mental block “representativeness”, people tend to weigh short term returns than weigh long term returns. If in a particular year (remember 2018!), the markets are down by 15%-20%, we start believing that this will continue and forget about the long run; similarly, I have heard people talking about doubling their money in just one year and believing that they can do it forever, again not realizing the long term mean reversion effects. The first and foremost rule for long term wealth creation is not only understanding the markets but also understanding them without emotions and inculcating a discipline about investing. If I were to ask you: what is a common trait among market tycoons and legends in the field of investing, almost everyone tries to convince me that they have some super network, some super luck, and knowledge. The answer is actually nothing but “discipline”. They believe in long term investing, in not following the herd, and indisciplined investing. The right strategy The answer about is what is wrong and what is right is although difficult but somewhat given in traditional finance. While behavioral investing focused on “what it is”, the focus under traditional finance is “what it should be”. “While behavioral investing focused on ‘what it is’, the focus under traditional finance is ‘what it should be’.” The traditional or the rational approach is not rocket science but objectively estimate the market’s risk and returns to build your expectations. The returns can simply be expected by the long term average returns given by the investment avenue or through various other quantitative models. The risk is measured through standard deviations of those returns (and not the loss). These values can be put into an optimizer tool which will give you the scientifically calculated proportions of these products in your portfolio based on your return expectations and /or the maximum risk you are able to take for your portfolio. This ability to take risk will be a pure function of the time horizon of your investment (longer the time horizon, higher will be the ability), liquidity requirements and criticality of your goals, your existing net worth, and certainty about your future incomes. A predetermined score should be given to these parameters to come up with a number that will tell you how much risk (or SD times) you can afford with your investment portfolio. The risk and return profile of various investment avenues (risk measured by the standard deviation of returns) Product Expected Returns Risk Risk Adjusted Returns# ETF and Index funds 12% 12% 0.4 Equity Mutual Funds (excl. Index Funds)- large 12%-14% 14% 0.4 Equity Mutual Funds (excl. Index Funds)- Mid 15%-16% 16% 0.5 Debt Mutual Funds 8.5% 5% 0.3 Gold ETFs 7% 12% 0 # Risk-free rate (Rf) taken as 7% for calculating risk-adjusted returns. Once you finalize the proportions, you can invest directly, on your own (if you are smart enough in stocks or bond selection), or using the simpler way, you can go the mutual fund way; you can go ahead and give your money to a professional fund manager. But again, you need to understand the nitty-gritty to some extent. If you go to actively managed PMS or mutual funds, supposedly run by competent fund managers and supported by analysts and market makers, they will charge you some fees to cover their costs. In return, they are supposed (but not obligated) to generate for you more returns than the market does. Or in simpler words, “beat the market”. As an active investor, their performance should be linked with excess returns generated over their benchmark and not with any absolute number, and thus rather than generating the maximum return, the focus of a rational investor is on majorly on those excess returns. The rule can be “Enter or invest in the fund which is beating the benchmark consistently at least in the last 2-3 years and exit, if it is not doing so, inconsistently in the last 1-2 years”. For consistency, the returns can be divided into different quarters so that you can get a better sense of the returns. What if I can’t actively do all this stuff? “I should not invest and stay away”. This could be thought from many of us. The answer is no. You need to adopt a “passive route to investing”. If the intent is to generate market returns, the best instrument is a managed ETF or a low-cost index fund. These funds mimic the return of indices such as Nifty, Sensex, or Nasdaq. They invest in the same constituents of the index with the exact proportion as of their index. The modern finance theory suggests that market portfolios such as Nifty and Sensex are most efficient in the sense that they are relatively lesser volatile than any other portfolio and thus provide the best risk-adjusted returns in all forms of EMH. In one of his interviews given to Fox Business channel, the great economist and author of the bestseller book “A Random Walk Down the Street” Burton Malkiel argued and endorsed this style of investing. The expenses charged by an index fund or an ETF are way lower (almost nil) than the expenses charged by an actively managed fund (around 2% per annum) and this is a major source of underperformance of the active funds according to Malkiel. Think over it, before investing. Does timing matter? It depends on what kind of timing you are looking at. A legend once said, “Be fearful when others are greedy and be greedy when others are fearful”. If I try to guesstimate this fear factor with volatility and chart the volatility adjusted returns of Nifty, I will get the following: Volatility adjusted returns of Nifty [Visual Analysis: Volatility Adjusted Returns Band of Nifty] The chart illustrates the volatility adjusted return clouds of the Nifty alongside the one-year rolling return (blue line). Historical cycles show extreme downside valuation zones touched only two-three times between 2007 and 2021: during 2008–09 (Global Financial Crisis), 2016–17 (Demonetisation & Global Volatility), and March 2020 (Pandemic Crash). These blue clouds are the volatility adjusted returns of the Nifty along with the one year return of the same (the blue line). We can see that we have touched the extreme kinds of zones just two-three times from 2007 to the current period and that we are around there today as well, (off-course on the downside). We touched these down levels once in 2008-09, then in 2016-17, and in 2020. Now let’s see what happened after that. Nifty rebounded sharply and we saw the returns in the range of 30-40% in the next 2-3 years. “Reversion to the mean is the iron law of the financial markets”. History teaches us that when valuations in the markets are at extremes, a move towards historical norms is likely and recoveries are fast. The extremely high levels we saw in 2010, 2015, 2018 and 2020 were also not sustainable levels, and the rest is history. Last but not the least Remember that long term gain can only be created through instruments that get an increase in value with the increase in the overall economic value of the country. Equities can be one of them. The gold, the FDs, and the bond cannot create wealth but can only preserve it from erosion that is caused by inflation. Keep yourself away from wealth destroyers such as high-interest loans, over-limit on credit card purchased, and unnecessary indulgence in luxury goods. Stay healthy and always subscribe to adequate health, auto, and life insurance; they will help you preserve your wealth that can be destroyed by untoward incidents. But the real thing still remains the same “the discipline” in your investing. You have to invest irrespective of market conditions, irrespective of what is reported in the media, TV channels, and the newspapers. Be disciplined about entry, exits, and rebalancing of your portfolio based upon your changing risk tolerance levels (probably, as you age your goals start coming nearer). Some practitioners follow the market valuation based approaches to rebalance. They increase their equity exposure when the P/E ratios of general markets decline to some long term average and similarly decrease their equity exposure when the P/E ratios of general markets deviate significantly over long term averages. Here is a P/E chart (the blue line) with a standard deviation based upper and lower bounds: P/E chart with a standard deviation based upper and lower bounds [Valuation Model: Nifty P/E Statistical Band Analysis] The chart tracks the historical Price-to-Earnings (P/E) trajectory against standard deviation bounds (+1 SD, +2 SD upper bounds, Mean, -1 SD, -2 SD lower bounds). Systematic valuation-based rebalancing increases equity weight when P/E drops toward or below historical mean and SD bands, and trims equity exposure when multiples stretch past upper statistical envelopes. Key Takeaway for Investors The key takeaway is: before investing, understand yourself, analyze your risk, make realistic expectations about the returns on your investment, do some fundamental research and calculations, and be honest to yourself. This is all you need to do to create and preserve wealth. Unless your life circumstances have changed, it doesn’t make sense to change your investment strategy because of any recent ups and downs in the markets. — CA. Amit Bagga & Jitender Kumar

Capital Market • Wealth Management Mutual Funds – Way to Create Wealth Journal: The Chartered Accountant, June 2021 (Vol. 69, No. 12) • Pages: 38–40 (Journal pp. 1450–1452) AC CA. (Dr.) Aman Chugh The author is a member of the Institute. He can be reached at eboard@icai.in. “The mutual fund industry in India finds its roots in the year 1963 when Unit Trust of India was formed at the initiative of the Government of India and Reserve Bank of India. Since then, the industry has come a long way as a large number of investors put in their money in the mutual funds as a way to enter capital markets. In mutual funds money is collected from many investors and investments are made in securities, viz., stocks, bonds and debt. Read on…” Mutual funds as investment vehicle are gaining popularity as an alternative mechanism to invest in capital market. The mutual fund industry is growing at a stupendous pace with assets under management reaching ₹ 32.38 trillion crore as on April 30, 2021. In last ten years there has been more than four fold increase in the assets under management that stood at ₹ 7.85 trillion as on April 30, 2011. It is becoming an acceptable way to enter the equity markets that are considered to be risky by many. Major advantage of mutual funds include advanced portfolio management and risk mitigation. Technology has also made the investment procedure convenient. fair pricing. Mutual fund is a mechanism for collecting money from the investors and issue units in accordance with amount of money invested. Mutual fund managers invest on behalf of original investors in securities in accordance with the purpose of the fund that are disclosed in offer document. Investments are spread over a wide variety of industries and sectors such that risk is diversified and return optimized. After the pandemic last year, the stocks markets plummeted for some time but to recover soon thereafter. With the recovery, the interest in the markets also revived. A record number of people taking to direct investing in the last one year, let us try to discuss and comprehend the one instrument that has been heavily advertised in the Indian markets for years now and that many people believe is the sure shot way to create wealth, investing passively. The catchy tagline - Mutual Funds Sahi Hai, fancied many investors to consider mutual funds. The initiative helped the general public to learn about mutual funds investment and understand the factors to look for when investing in mutual funds. Examining Return Calculations & Post-2008 Market Realities Like any investment, mutual funds are also not free from any risks. Let us try to understand how far the tagline is correct and whether there are any challenges associated with the mutual funds. Whenever we are advised or persuaded by a broker or an advisor to invest money or start a SIP in a Mutual Fund for a long time (in order to create a huge wealth using the compounding of returns), the formula presented includes amount invested every month, period in number of months/ years and rate of return to reach a big corpus. It explains how small investment help an investor to reach a big corpus. The real problem in this methodology is the rate of return. Investors are shown a very rosy picture of high historical returns and told that these returns would also continue in future. But taking a closer look, often we can find the high returns reflect the period when markets grew rapidly. For example, we can see that many time these returns take into account the period starting from before 2003-04 till date (This is because we saw a Multi Year Rally during 2003-04 till 2007-08 in almost several assets classes, increasing valuations multiple times). Two Fundamental Shifts in Financial Markets Post-2008 Honestly speaking one should measure the performance of any Asset class from 2008 till date since after the Great Financial Crisis of 2008, Financial Markets’ dynamics have changed drastically in two ways: Not all Asset classes have performed continuously at all times after 2008. Within each specific asset class, not all types of instruments have performed well at the same time after 2008. Particularly, let us understand with the example of “Equity based Mutual Funds.” There are ample examples to demonstrate that many well known stocks did not move for years, or moved in well defined phases. When underlying equities are not continuously performing well, how can the Mutual Fund that has invested in them, perform well? Same goes for Debt and Hybrid Mutual Funds. Therefore, if we look at the performances of Mutual Funds in the last 3, 5 or 7 years, the results are not very encouraging (Except that again in 2020 due to Covid crises, the massive liquidity pumping by all economies has led to massive rally but such boost is also capable of bringing the jolts in the times to come. One should always remember, “past performance is not indicative of future returns.” In fact, as per independent research, it has been observed that even in the last one year (wherein Markets have given a spectacular rally due to massive liquidity pumping), many leading “Large Cap Mutual Funds” have either failed to outperform the broad Market Indices or barely outperformed them; while some of the theme based or sector specific funds have only performed well for a specific time period (such as Pharma sector funds in the first half of 2020 and now commodity based ones). Factors that Directly and Indirectly Reduce Mutual Fund Returns Now that we understand this aspect, let us take a look at some other factors that reduce our returns directly/ indirectly if we choose to invest in Mutual Funds: 1. Loss of Portfolio Flexibility Investing in Mutual Funds takes away our liberty to further add or exit from the underlying stocks as per changing circumstances. 2. Drag of Loads and Expense Ratios Our Gross Returns get reduced due to Entry Load, Expense Ratio and if applicable, an exit Load. 3. Deprivation of Corporate Action Benefits We are also deprived of bonus issues, rights issues and buyback offers announced by the companies. 4. Additional Brokerage Costs If we invest through a Broker, we also incur brokerage, further reducing our return, even if we don’t earn a decent profit on our investment. Up until here, it is safe to say that various on-screen and social media experts as well as our brokers have been recommending Mutual Funds as an ideal investment vehicle to create wealth in the long term, on some occasions for their own interests. Investing in Knowledge & Direct Investment Alternatives The best way to build a portfolio and create wealth in today’s world is to invest in knowledge first. People with interest and knowledge can directly invest in some the stocks and debt instruments. Some of the investors can proceed passively and invest in the common shares held by some top Mutual Funds as that would provide returns while also giving greater freedom of entry and exit. Thus in the overall portfolio a proportion of investment must include shares of some leading companies. Remember that long term investments are considered better as they smoothen the fluctuations in the market. Still, there might be some people who are of the opinion that they cannot devote much time to learn the market dynamics and hence, cannot actively manage their money. In such cases, mutual funds are good solutions. For those people, even if investing through mutual funds, one needs to periodically review the performance and churn the Mutual Fund investments rather than sticking with the same fund for an indefinite period. It is also important to know that some agents persuade investors to unnecessarily churn the portfolios, may be to earn the commission that they receive. It is worth noting that mutual funds can be subscribed directly without any intermediary. An investor can visit website of the mutual fund to directly subscribe to the mutual fund. Key Strategic Principles to Ponder Upon Hence we need to ponder upon the following important points: Recognise Changing Market Dynamics To reiterate, it is crucial to understand that Financial markets today do not have the same dynamics and do not behave the same way they used to do 10, 15 or 20 years ago. Now, asset classes and various instruments go in and out of trend every now and then. Be Long-Term in the Market, Not Stuck in the Same Asset Class In order to create wealth, it is necessary to understand and follow the changing dynamics and adjust our investment strategies and decisions accordingly. Periodic reviews of our portfolio have become a necessity. Be in the market for “long term” but not in the same asset class or the same instruments within an asset class. Underlying Asset Volatility Precludes Guaranteed Returns Since, underlying Equity Shares or Money Market Instruments or Longer Term Debt Instruments such as Bonds cannot be continuously performing in terms of uniform risk and return all the time, Mutual Funds that put our money into those instruments also cannot be guaranteed to perform continuously. Prudent Churning & Duration Balance Therefore, even if one has to invest in the market through mutual funds, investments should be churned from time to time, booking profits when the opportunity comes and shifting to better alternatives. However, a delicate balance should be maintained as some of the industries are cyclical in nature and accordingly the returns may fluctuate, for example in sector specific mutual funds. Investments should be for sufficiently long duration. Role and Perspective of Chartered Accountants Chartered accountants clearly understand the nuances of the mutual funds. While investing we must have a mix of different asset classes to balance risk and rewards. A lopsided strategy will only increase the risk that should be avoided. Investment in other avenues must not be ignored. Members of accounting profession, with their deep-rooted knowledge of finance may like to invest directly in stocks and debt instruments rather than investing indirectly through mutual funds. At the same time while acting as investment consultants mutual funds can be suggested to clients based on the profile of the investors. It would be easier to convince a risk averse investor to consider mutual fund when compared to shares.

The Chartered Accountant • Journal of ICAI June 2021 • Vol. 69 • No. 12 • pp. 41–50 (Journal pp. 1453–1462) SUSTAINABILITY Environmental, Social and Governance Disclosures – Accomplishing Value with Values in Business CA. Atul Gupta The author is Past-President, ICAI. He is also a Board Member of IFAC and XBRL International. Communication can be addressed to eboard@icai.in 🌱 Preamble & Executive Premise There have been several instances across different jurisdictions where investors have burned their fingers and lost their investments in the companies that were seemingly performing very well. From the earlier times of evolution of trade and commerce to the modern era there have been a number of instances of governance failures leading to substantial losses to the investors. Apart from providing returns, businesses are part of the society and it is their virtuous obligation to recompense the society to create ecosystems for better tomorrow. Need for environmental and social considerations have percolated to various stakeholders and in the recent past many investors in a company look into aspects ranging from value to values (moral values) to judge the long-term potential of their investment. While considering such issues, how as responsible society we see the “sustainable investment” is the focal point which we need to deliberate and discuss. Read on… Work with integrity, ethically strong, ecologically responsible, social welfare, sensitive to human needs, businesses today are expanding their horizons to imbibe strong values as a step towards sustainability. In the evolving world monetary value is seen much narrow and short-sighted when compared to values in business. Where value is perceived from the perspective of financial returns and governance, values are recognized in terms of environmental and social returns. If we broadly classify the issues wherein environment related issues deal with scarcity of natural resources, impact on climate change, changing demographics; Social issues range from reputation of organization, labour conflict, social impact of certain products/activities. On the other hand, governance issues are more attributed towards poor management practices, board compositions, anti-bribery and corruption policy, participation of shareholders. Different Stakeholders define these issues based on their outlook. Whereas ecologist look them as a matter of social responsibility, activist as moral responsibility, investment managers take them as fiduciary duty to see the risk and returns are better controlled. Environmental, Social and Governance popularly known as ESG is not a new phenomenon and was in practice since long with different names like responsible investing, socially responsible investing and was even mandatory to report in many countries. The primary aim for responsible investment was to see more towards investments with moral and societal values rather than looking only for value in form of return on investments. Socially responsible investing look at long term prospective in comparison to value returns that are short term. Even the issues like climate change were seen as burden and left to government and regulators to deal by many businesses. In many countries, green bonds and social impact bonds are being issued in line with progress achieved. In spite of various regulations made and disclosure mandated, the global community always feel challenged to consider ESG issues on account of different reasons such as: Methodological and Valuation Deficits: Non availability of any methodology for assigning monetary values to ESG issues like Air Pollution and fitting them into quantitative models (more subjectivity). Absence of Global Standards: No Standards for ESG disclosure and disclosures remain unverified. Perception of External Responsibility: Organizations always feel that ESG issues are the responsibility of regulators and Governments. Horizon Mismatch: ESG issues influence the financial position in long run whereas investors are often concerned for short term gains. Quantitative Data Gap: Data related to ESG is not available in quantitative terms. Integration of ESG info with financial statement is a challenge in absence of standards. Causal Uncertainty: There was no established causal relationships to link ESG and Financial performance. Lack of Uniform Regulation: No Regulatory requirement across the board for disclosure of ESG. Capability Constraints: Capability of finance team to account the ESG related issues. Regional Inconsistency: There is no uniformity of ESG practices across the organizations and regions. However, with the passage of time and as outcome of UN supported “principles for Responsible Investments (PRI)” framework, keen interest is being taken taken by regulators, standard developers along with investors for more sustainable investment, ESG has started gaining acceptance. ESG issues are not only looked for mitigating risk, proxy of management quality, reputational benefit but also as moral duty of society towards sustainability. ESG issues inculcate the introspections that organization whose activities/product are not climate or society health friendly, will not get the desired investment. If there will not be good labour relations, product of a company will impact health of society, then the sustainability of the organization in long run will be questionable and will not get the desired resources in term of investment. So, it is beyond values (moral duty) and sustainability will be in question if one will not follow and disclose ESG issues. Understanding this change, a number of principles, standards, regulatory requirements, conventions are getting developed and number of international forums/organizations are playing important role in this process including UN, IIRC, OECD, WEF and GRI. Based on these principles, even the investment managers develop various methodologies to identify the organization wherein investment will be more sustainable. Methods like exclusionary screening, best in class selections, thematic Investing, active ownership, impact investing and ESG integration are being used by Investment managers to identify the organizations for more sustainable finance. Out of these, ESG Integration based on certain ESG criterion has become very popular over a period of time. “Methods like exclusionary screening, best in class selections, thematic Investing, active ownership, impact investing and ESG integration are being used by Investment managers to identify the organizations for more sustainable finance.” ESG – Methodology to achieve SDG 2030 ESG disclosure got more relevance in recent past with the evolution of Sustainable Development Goals (SDG 2030) wherein number of goals like good health and well being (SDG 3), gender equality (SDG 5), decent work and economic growth (SDG 8), responsible consumption and production (SDG 12) and climate action (SDG 13) are very closely related to ESG. Being more or less every jurisdiction is the signatory of UN SDG Goals. It is not only the Government and regulators but the organizations also carry the responsibility for promoting sustainability. Alignment with United Nations Sustainable Development Goals (SDG 2030): SDG 3 Good Health and Well-Being SDG 5 Gender Equality SDG 8 Decent Work & Economic Growth SDG 12 Responsible Consumption & Production SDG 13 Climate Action Recent Global Developments Looking into the importance of ESG reporting, in recent past there are global initiatives to address all the concerns including identification of ESG issues, their quantification, objectivity, and universal applicability. Various International Forums/Organizations laid down the preamble on which not only organizations have started disclosures, various funds are launched for responsible investing but also efforts are on to develop eco-system to standardize the reporting, disclosure and integration of ESG issue with financial reporting. Initiatives for Harmonise Disclosure Standards The International Financial Reporting Standards Foundation (IFRS Foundation) formed a working group to focus on harmonizing global sustainability reporting standards in preparation for a potential international sustainability standard board which will offer technical recommendations as a potential basis for the new international sustainability standards board to build on existing initiatives and develop standards for climate-related reporting and other sustainability topics. International financial regulators have been calling for greater consistency among the various environmental, social and governance standards and frameworks as ESG funds grow in popularity with investors, five organizations, i.e., Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB) and the Carbon Disclosure Project (CDP) planned to harmonize their various standards and frameworks to provide more consistency. The World Economic Forum will contribute its work on cross-industry metrics and disclosures that CEOs of a wide variety of large multinational companies have found to be important for disclosure. The IFRS Foundation trustees anticipate that sustainability reporting standards issued by the new board will provide a global sustainability reporting baseline that will allow for better comparability and consistency of application of the standards, while also offering flexibility for coordination on more jurisdictional and multi-stakeholder reporting requirements by taking a “building blocks” approach. A recent statement by Ms. Janet Yellen US Secretary (Treasury) also affirm commitment towards need for initiatives to set climate and sustainability reporting standards. She expressed her support for the International Financial Reporting Standards Foundation’s (IFRS) work to establish a Sustainability Standards Board that will focus first on developing a climate disclosure standard. EU Extends Mandatory Sustainability Reporting to 50,000+ Large and Listed Companies In a recent announcement, the European Commission (EC) adopted a comprehensive package of sustainable finance measures, with rules and proposals encompassing ESG reporting requirements for companies, fiduciary duties relating to sustainability risks, and the EU Taxonomy classification system for sustainable investments. According to the Commission, the new package aims to enable investors to re-orient investments towards more sustainable technologies and businesses, helping make Europe climate neutral by 2050. The new package proposes strengthening the rules under the Non-Financial Reporting Directive (NFRD), the EU directive requiring companies to disclose information on the way they operate and manage social and environmental challenges. The proposals extending the NFRD sustainability reporting requirements to all large and listed companies, meaning that nearly 50,000 companies will now need to follow detailed EU sustainability reporting standards. The Commission has also proposed the development of a separate set of proportionate standards for SMEs. The package also contains the EU Taxonomy Climate Delegated Act, which aims to identify which economic activities contribute to meeting the environmental objectives. This package establishes the first set of technical screening criteria for the first two categories, climate change adaptation and climate change mitigation. Additionally, the package contains amendments to the rules relating to investment and insurance advice, fiduciary duties, and product oversight and governance, including requirements for advisors to assess and discuss clients’ sustainability preferences, and financial firms to consider sustainability risks on investments, and to incorporate sustainability factors when designing financial products. Jurisdictions making ESG Disclosure Mandatory In recent developments, UK made it to have mandatory disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD) following the issue of its first ever sovereign green bond. While many companies across the globe have ramped efforts to operate more sustainably in recent years, and investors have increasingly pursued ESG integration in their investment decision-making, many often report that one of the greatest obstacles to these initiatives remains the lack of consistent, reliable data to know where to target efforts and to measure, analyse and track progress. The TCFD was established to help address these issues. In another development, New Zealand Minister for Climate Change, Mr. James Shaw announced that the country is aiming to become the first in the world to require the financial sector to report on climate risks. Businesses covered by the requirements will have to make annual disclosures, covering governance arrangements, risk management and strategies for mitigating any climate change impacts. The new rules will come into effect by 2023. ESG Factors/Issues & Industry Level Materiality Map In spite of all round development and acceptability of ESG issue and adoption for disclosure, still there is always a challenge to capture all ESG issue which need to be reported. Different jurisdictions, regions and even nature of organisation require different parameters to disclose compliance on ESG issues. To illustrate a sample of issues are highlighted in below table: Industry Level Map: Infrastructure Sector Materiality ■ Likely a material issue for companies in the industry □ Not likely a material issue for companies in the industry Dimension Issue Category Infrastructure Relevance Environment GHG Emissions ■ Likely Material Air Quality ■ Likely Material Energy Management ■ Likely Material Waste & Wastewater Management ■ Likely Material Waste & Hazardous Materials Management ■ Likely Material Ecological Impacts ■ Likely Material Social Capital Human Rights & Community Relations ■ Likely Material Customer Privacy □ Not Likely Material Data Security □ Not Likely Material Access & Affordability ■ Likely Material Product Quality & Safety ■ Likely Material Customer Welfare □ Not Likely Material Selling Practices & Product Labelling □ Not Likely Material Human Capital Labour Practices ■ Likely Material Employee Health & Safety ■ Likely Material Employee Engagement, Diversity & Inclusion ■ Likely Material Business Model & Innovation Product Design & Lifecycle Management ■ Likely Material Business Model Resilience ■ Likely Material Supply Chain Management ■ Likely Material Materials Sourcing & Efficiency ■ Likely Material Physical Impacts of Climate Change ■ Likely Material Leadership & Governance Business Ethics ■ Likely Material Competitive Behaviour ■ Likely Material Management of Legal & Regulatory Environment ■ Likely Material Critical Incident Risk Management ■ Likely Material Systemic Risk Management □ Not Likely Material “While many companies across the globe have ramped efforts to operate more sustainably in recent years, and investors have increasingly pursued ESG integration in their investment decision-making, many often report that one of the greatest obstacles to these initiatives remains the lack of consistent, reliable data to know where to target efforts and to measure, analyse and track progress.” Initiative of Stock Exchanges across the globe to publish ESG reporting by Listed Companies 58 of the 107 stock exchanges have published ESG reporting guidance for their listed companies. These Stock exchanges made it compulsory for Listed companies to report either on GRI or norms developed by other forums/task force based on importance of different stakeholders, which ESG factors were selected and how; developing such a statement is also an opportunity for the board to reflect on the company’s role in society and contribution to sustainable development. It can provide transparency regarding the board’s position on and oversight of the company’s ESG risks and opportunities, and strengthen the company’s credibility when communicating on ESG factors. Few of them also issues advisory/guidance for reporting on ESG issues like: Singapore Exchange (2011): Guide to Sustainability Reporting for Listed Companies. Malaysia (2010): Powering Business Sustainability - A Guide for Directors. Budapest Stock Exchange: Published its first ESG Reporting Guide (2021) for Issuers. Panama Stock Exchange (BVP): Presented the “Guide (2021) for Reporting and Voluntary Disclosure of Environmental, Social and Corporate Governance Factors (ASG)”. UN Global Compact (2015): Board Programme: Unlocking the Value of Corporate Sustainability. On the similar lines in 2012, Securities and Exchange Board of India (SEBI) issued a circular that made it mandatory for the largest 100 listed companies to publish an annual business responsibility report. In a recent move on 9th May 2021, SEBI issued a fresh circular to make it mandatory for 1000 top listed companies in India. World Federation of Exchanges launched Metrics for ESG disclosure Based on the SSE (Sustainability Stock Exchanges) Model Guidance, the World Federation of Exchanges has created a set of recommendations to its member exchanges on how to implement their own sustainability policies. The WFE Guidance & Recommendations identifies material ESG metrics which exchanges can incorporate into disclosure guidance to companies listed on their market. The metrics lay out 34 key performance indicators that are built off of the SSE guidance. WFE Recommended ESG Metrics (SSE Model Guidance Baseline - 34 Key Performance Indicators) ID Category Metric Calculation Guidance E1 Environmental GHG Emissions E1.1) Total amount, in CO2 equivalents, for Scope 1 (if applicable)E1.2) Total amount, in CO2 equivalents, for Scope 2 (if applicable)E1.3) Total amount, in CO2 equivalents, for Scope 3 (if applicable) Please use the WRI/WBCSD GHG protocol. E2 Environmental Emissions Intensity E2.1) Total GHG emissions per output scaling factorE2.2) Total non-GHG emissions per output scaling factor Scaling factors set by reporting company. Examples include: Revenues, sales, production units. E3 Environmental Energy Usage E3.1) Total amount of energy directly consumedE3.2) Total amount of energy indirectly consumed Reported in MWh or GJ. E4 Environmental Energy Intensity Total direct energy usage per output scaling factor Scaling factors set by reporting company. Examples include: Physical space, FTEs, revenues. E5 Environmental Energy Mix Percentage: Energy usage by generation type Examples include: Renewables, hydro, coal, oil, natural gas. E6 Environmental Water Usage E6.1) Total amount of water consumedE6.2) Total amount of water reclaimed Reported in gallons or square meters (m3). E7 Environmental Environmental Operations E7.1) Does your company follow a formal Environmental Policy? Yes, NoE7.2) Does your company follow specific waste, water, energy, and/or recycling polices? Yes/NoE7.3) Does your company use a recognized energy management system? Yes/No Cite public content, if available. ISO 50001, for example. E8 Environmental Environmental Oversight Does your Board/Management Team oversee and/or manage climate-related risks? Yes/No Cite public content, if available. E9 Environmental Environmental Oversight Does your Board/Management Team oversee and/or manage other sustainability issues? Yes/No Cite public content, if available. E10 Environmental Climate Risk Mitigation Total amount invested, annually, in climate-related infrastructure, resilience, and product development? Reported in USD, if possible. S1 Social CEO Pay Ratio S1.1) Ratio: CEO total compensation to median FTE total compensationS1.2) Does your company report this metric in regulatory filings? Yes/No Use total compensation, including all bonus and incentives. For example: Dodd-Frank regulations (US). S2 Social Gender Pay Ratio Ratio: Median male compensation to median female compensation Reported for FTEs only. Use total compensation, including all bonus and incentives. S3 Social Employee Turnover S3.1) Percentage: Year-over-year change for full-time employeesS3.2) Percentage: Year-over-year change for part-time employeesS3.3) Percentage: Year-over-year change for contractors and/or consultants Percentage tracking by employment category. S4 Social Gender Diversity S4.1) Percentage: Total enterprise headcount held by men and womenS4.2) Percentage: Entry- and mid-level positions held by men and womenS4.3) Percentage: Senior- and executive-level positions held by men and women Gender breakdown across organizational hierarchy. S5 Social Temporary Worker Ratio S5.1) Percentage: Total enterprise headcount held by part-time employeesS5.2) Percentage: Total enterprise headcount held by contractors and/or consultants Ratio of non-permanent workforce. S6 Social Non-Discrimination Does your company follow a sexual harassment and/or non-discrimination policy? Yes/No Cite public content, if available. S7 Social Injury Rate Percentage: Frequency of injury events relative to total workforce time Reference ILO & UNDHR standards, if possible. S8 Social Global Health & Safety Does your company follow an occupational health and/or global health & safety policy? Yes/No Cite public content, if available. S9 Social Child & Forced Labor S9.1) Does your company follow a child and/or forced labor policy? Yes/NoS9.2) If yes, does your child and/or forced labor policy also cover suppliers and vendors? Yes/No Cite public content, if available. Reference ILO & UNDHR standards, if possible. S10 Social Human Rights S10.1) Does your company follow a human rights policy? Yes/NoS10.2) If yes, does your human rights policy also cover suppliers and vendors? Yes/No Cite public content, if available. Reference ILO & UNDHR standards, if possible. G1 Governance Board Diversity G1.1) Percentage: Total board seats occupied by men and womenG1.2) Percentage: Committee chairs occupied by men and women Boardroom representation metrics. G2 Governance Board Independence G2.1) Does company prohibit CEO from serving as board chair? Yes/NoG2.2) Percentage: Total board seats occupied by independents Cite public content, if available. G3 Governance Incentivized Pay Are executives formally incentivized to perform on sustainability? Yes/No Cite public content, if available. G4 Governance Collective Bargaining Percentage: Total enterprise headcount covered by collective bargaining agreement(s) Unionization / collective pact coverage. G5 Governance Supplier Code of Conduct G5.1) Are your vendors or suppliers required to follow a Code of Conduct? Yes/NoG5.2) If yes, what percentage of your suppliers have formally certified their compliance with the code? Cite public content, if available. “Percentage” can be defined by number or expenditure. G6 Governance Ethics & Anti-Corruption G6.1) Does your company follow an Ethics and/or Anti-Corruption policy? Yes/NoG6.2) If yes, what percentage of your workforce has formally certified its compliance with the policy? Cite public content, if available. “Percentage” is defined by total FTE headcount. G7 Governance Data Privacy G7.1) Does your company follow a Data Privacy policy? Yes/NoG7.2) Has your company taken steps to comply with GDPR rules? Yes/No Cite public content, if available. General Data Protection Regulation (GDPR). G8 Governance Sustainability Reporting G8.1) Does your company publish a sustainability report? Yes/NoG8.2) Is sustainability data included in your regulatory filings? Yes/No Cite public content, if available. G9 Governance Disclosure Practices G9.1) Does your company provide sustainability data to sustainability reporting frameworks? Yes/NoG9.2) Does your company focus on specific UN Sustainable Development Goals (SDGs)? Yes/NoG9.3) Does your company set targets and report progress on the UN SDGs? Yes/No If yes, cite frameworks used. Cite public content, if available. G10 Governance External Assurance Are your sustainability disclosures assured or validated by a third party? Yes/No Cite third party assurance partner. Source: WFE Revised WFE Recommendations (2018) Version 2* Global economy moved establishing Sustainable funds/Bonds Sustainable funds are those that use environmental, social, and corporate governance (ESG) criteria to evaluate investments or assess their societal impact. They may pursue a sustainability-related theme or explicitly aim to create measurable social impact. Sustainable funds invest with two lenses, they analyze company performance with regard to ESG criteria (environmental, social, and governance) alongside traditional factors such as valuations and earnings growth. Similarly, ESG bonds are debt instruments that encourage investments based on the issuer addressing certain ESG criteria. Climate change concerns in recent years have pushed both investors and companies to incorporate ESG into their corporate operations or investment portfolios. On the same line the first ESG mutual fund was launched by the State Bank of India i.e., SBI Magnum Equity ESG Fund. Globally, in 2020 ESG funds getting unparalleled popularity for such strategies. Investors have poured money into these funds as concern for sustainability, social good, and responsible governance spreads. Even the World Bank launched equity-linked index bonds that link returns to the performance of companies advancing global development priorities set out in the Sustainable Development Goals. According to a report by Morningstar, ESG funds took in USD 51bn of net inflows last year, double the total for 2019 and almost 10 times more than in 2018. Even the Investors are getting good return on their investment in various Funds: Top Performing ESG Funds (2020 One-Year Total Returns) Fund Name 2020 One-Year Total Return USD 255.9m Shelton Green Alpha fund 113.9% USD 4.5bn Eventide Gilead fund 55.1% USD 566m Putnam Sustainable Future fund 52.7% USD 45.1m Reynders McVeigh Core Equity fund 46.4% USD 263.8m Nuveen ESG Mid Cap Growth ETF 45.6% USD 16m River bridge Eco Leaders fund 44.4% USD 13.2m Impact Shares YWCA Women’s empowerment ETF 39.8% USD 4.8bn Brown Advisory Sustainable Growth fund 39.1% Source: Morningstar Direct / Data to December 31, 2020 Increasing Trend of Sustainable Investment for AUM – Sustainable Bond Market Green Bonds Direct financing for climate mitigation and environmental projects. Social Bonds Targeting positive social outcomes, healthcare, and community welfare. ESG / Sustainability / SDG Bonds Blended debt structures tied to UN SDG targets and holistic ESG progress. Thematic Bonds Dedicated issuance focused on gender equality, clean oceans, or biodiversity. There is growing evidence that suggests that ESG factors, when integrated into investment analysis and portfolio construction, may offer investors potential long-term performance advantages. In the continuing research conducted by Bloomberg report that ESG assets may hit USD 53 trillion by 2025, a third of global Asset under Management (AUM). As per reported Global ESG assets are on track to exceed USD 53 trillion by 2025, representing more than a third of the USD 140.5 trillion in projected total assets under management. A perfect storm created by the pandemic and the green recovery in the many countries will likely reveal how ESG can help assess a new set of financial risks and harness capital markets. “The World Bank launched equity-linked index bonds that link returns to the performance of companies advancing global development priorities set out in the Sustainable Development Goals.” Way Forward Various factors, like recent pandemic, constant climate change and collapse of various big-name organizations in recent past, re-emphasised the need to accelerate the adoption of ESG disclosures. In a proactive manner, ICAI in recent past established Sustainability Reporting Standards Board to benchmark Indian sustainability reporting to global best practices. There are challenges with uniformity, subjectivity and quantification, still the progress made in various jurisdictions and forums give us a way forward to implement ESG mechanism at an early stage. Adoption can be achieved by initiating small steps, like, imparting training to staff on ESG, study of ESG issues prevalent in the relevant industry, regular monitoring & reporting, etc. Few steps that can benefit are: Identify Material Factors: Identify the ESG factors related to nature of organisation. Determine the positive value of factors. Consider stakeholders for various factors. Define Goal Horizons: Set overall goals for each of ESG Factor and divide them into short term and long term. Budgeting and Execution: Create a budget and decide timelines to implement strategies. Cross-Functional Capacity: Build a sustainability team fully equipped to understand the ESG framework. Evaluation Metrics: Define success - evaluate the progress on parameters. Active Communication: Promote your performance. Brian Rogers Loop rightly observed, “do what today others won’t, so tomorrow, you can do what others can’t”. There is an emerging need for the companies to be proactive in adopting and implementing ESG disclosures in the current scenario which will entail many benefits to an organization like, giving an edge over competitors in market, gaining confidence of stakeholders, improved compliances, better availability of funds, rating, reputation and many others. — CA. Atul Gupta, Past-President, ICAI

Social Responsibility • Regional Development Role of CSR in Addressing Inequalities of Human Development Indices Journal: The Chartered Accountant, June 2021 (Vol. 69, No. 12) • Pages: 51–56 (Journal pp. 1463–1468) PN PP Praveen Nayak & Dr. Preeti Patil Praveen Nayak is Principal, Vivekanand Institute of Management, Kalaburagi. Dr. Preeti Patil is Assistant Professor, Department of Business Studies, VTU PG Centre, Mysuru. They can be reached at praveen16176@gmail.com and eboard@icai.in. “Aggressive, result oriented, comprehensive, cooperative and coordinated approach on part of companies in their CSR activities can help to have an impact on the stakeholders living in the region where a cluster of business units are operating. Companies are spending huge amounts of money in areas of their own interest, but coordination and cooperation between them can remove duplication and redundancy. The need of the hour is to create a synergistic effect by having a non-competitive, no one-upmanship approach among CSR spenders so that the total budget that they are collectively spending is put to proper use and gives maximum benefits to the society. This conceptual paper is based on discussions with CSR Managers of cement companies, banks and educational institutions in Kalyana Karnataka (KK) Region, and on data available online from government websites is used. Read on…” Richard J. Estes observes ‘World social development has arrived at a critical turning point. Economically advanced nations have made significant progress toward meeting the basic needs of their populations; however, the majority of developing countries have not. Problems of rapid population growth, failing economies, famine, environmental devastation, majority-minority group conflicts, increasing militarization, among others, are pushing many developing nations toward the brink of social chaos’. Desire to addressing these problems could help in identifying focus areas and provide CSR ideas. India in a pioneering manner introduced CSR as a mandatory activity for companies through The Companies Act, 2013. The Rules under the Act also specify the areas of priority for companies to spend their CSR amount. Being a developing country, having a growing population of over 1.35 billion, India is striving to ensure economic growth and development while at the same time trying to ensure that the inequality among its population does not go out of control. There are regional imbalances as well as rural-urban inequalities. The government does take steps to address these inequalities, however, it is not possible to tackle all these problems simultaneously and quickly. These problems in our society provide service for corporate sector to address the issues and contribute to social development while also contributing to economic growth and development. Regional backwardness is a fact in various parts of India. One such area, which is recognized as one of the highly backward in the nation is the Kalyana Karnataka Region. Though bestowed with natural resources and rivers the utilization of these arenot effective. Some major cement and steel manufacturing companies operate in the region. However, the benefits of these industries are enjoyed by non-local population. Be it direct employment or indirect employment, it is mostly the non-locals who have gained out of opportunities. But CSR provides an opportunity for these companies to contribute back to the society from which they derive their resources to function. A cursory glance at the Human Development Index parameters will reveal opportunities for the CSR activities needed in the region. HDI composes of three broad parameters viz., Health measured by Average Life Expectancy, Education measured by Adult Literacy Rate, and Income is measured by Per Capita Income. The Human Development Index of the national level is taken as the benchmark and though the HDI of Karnataka is above the national average, the KK Region is considered to have HDI at less than national average. This was the primary reason why the Central Government introduced Article 371(J) to provide special provisions for development of the region. The extra effort of the government to address the regional imbalance through creation of HKRDB (Hyderabad Karnataka Regional Development Board) is visible. Human Development Indicators in Kalyana Karnataka (KK) Region Table 1: Literacy Levels in KK Region (2011 Census) Region / District Literacy Rate (%) National Average74.04% State Literacy Level (Karnataka)75.36% Bellary67.43% Bidar70.51% Kalaburagi64.85% Koppal68.09% Raichur59.56% Yadagir51.83% KK Average64.45% Table 2: Income Level in KK Region (2016-17) – Economic Survey 2018-19 Region / District Per Capita Income (₹) National Income Level1,03,870 State Income Level (Karnataka)1,61,922 Bellary1,34,150 Bidar85,713 Kalaburagi83,619 Koppal82,787 Raichur90,530 Yadagir81,845 KK Average95,887 Table 3: Life Expectancy at Birth (Years) Region / District 1991 2001 2011 National Avg Life Expectancy60.364.367.9 State Average Life Expectancy62.165.868.8 Bellary62.866.1NA Bidar61.063.3NA Kalaburagi59.562.9NA Koppal60.063.2NA Raichur60.063.9NA Yadagir59.562.9NA Though the government has created social and economic infrastructure it is not sufficient and is plagued by bottlenecks and administrative delays in decision making. CSR expenditure over the years given in Table 4 indicates the potential for CSR Activities to play a role in the HDI improvement. Table 4: CSR Expenditures in INDIA (₹ in Crore) Focus Area FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 Education2,589.424,052.154,491.744,478.88 Health Care1,847.742,563.732,481.942,127.07 Livelihood Enhancement Projects280.17393.38515.47654.04 Opportunities for CSR & Insights from Literature CSR can play a significant role in improving education, health and income level in some parts of the region. Social and economic infrastructure development can play a catalytic role in improvement of HDI. Dr Subash Pawar in his article highlights that there is ample potential for the corporate sector to address the missing gaps in the education system. There are opportunities for Indianc ompanies to restructure the education system at alllevels, i.e., elementary secondary and higher education. He points out that the considerable resources and pool of experience that the corporations possess can go a long way in the effective implementation of the statutory right to education. In his article CSR- Key Issues and Challenges in India, Parveen Maan, proposes that Corporate Social Responsibility is the duty of everyone. i.e., business corporations, governments, individuals because the income is earned only from the society and therefore it should be given back; the wealth is meant for use by self and the public; the basic motive behind all types of business is to quench the hunger of the mankind as a whole; the fundamental objective of all business is only to help people. However he has also observed that NGO’s and Government agencies usually possess a limited outlook towards the CSR initiatives of companies, often defining CSR initiatives more as donor-driven. As a result, corporate find it hard to decide whether they should participate in such activities at all in medium and long run. In their paper titled ‘Aligning CSR activities of Health Care Sector to Developmental Needs of India’, Desai, Preeti S; Chandawarkar, Meena R. propose that corporations must use their expertise of their business to meet the developmental needs of the country. The noted ‘Since no one can understand the health care needs of the country better than Health Care organizations it becomes necessary for them to undertake such CSR activities which address the development needs of the country’, this can be generalized for many other industries. To have practical insight a study is conducted on CSR activities of some cement companies, banks and educational institutions in geographical area of Kalyana Karnataka Region (formerly known as Hyderabad Karnataka Region) covering 3 of the 6 districts viz., Bidar, Kalaburagi and Yadagir. The objective is to study if these CSR activities are addressing problems which can reduce the HDI gap of the region in comparison to developed parts of the state. The study brought out various aspects related to CSR where organisations are contributing. I. Role of CSR in Education The Economic Survey of Karnataka 2015-16 proposed Sahabhagitva Scheme. This scheme has been designed to improve the infrastructure in colleges through Corporate Social Responsibility (CSR) and other funds by establishing linkages between Educational Institutions, Industries and IT/BT Companies. Schooling The government schools are providing basic education. There is need for upgradation of schools, providing toilets especially for girls and teaching aids in many schools. CSR funds can help in making these schools as model schools. Communication Skills The need for good communication skills is essential for employment in the formal service sector. Several talented youth who do not get proper language skills are not able to get opportunities which they could easily discharge if they had command over language. The corporate have engaged services of rural graduates in providing quality communication skills in villages, but the number of such graduates employed for these programs is miniscule. The results are visible wherever these have been practiced. However, the uncovered areas are much more. Tie up with IIT’s and TISS who are conducting these programs using ICT will also ensure quality of classes. Computer Literacy Another gap often found even among the educated persons is the lack of ability to use computers at workplace. The cost of original software is a major hurdle in providing learning opportunities. CSR and NGO’s can help the rural youth learn the computer skills. Scholarships The government scholarships address the financial needs of certain section of the society. There are several families with low income who are not eligible for scholarships, and the first victims of the financial problems of such families are the girl children of such families. Sponsoring Smart Class and Modernization Several private schools which operate in the region operate with shoestring budget find it almost impossible to invest in modern teaching aids. The students, understanding of concepts with the aid of IT enabled visual tools would be greatly enhanced. Companies can identify schools which would utilize such resources properly and sponsor standardized kits. Graduates Finishing Schools The industry is better equipped to assess the knowledge and skill requirement of fresh graduates for employment than schools. They can plan the programs to bridge the gap between what industry needs and what the students’ possess. Skill Development Initiatives & Job Oriented Training Institutes A step ahead than graduates’ finishing schools, the industry can interact with educational institutions to develop industry relevant skills among students during their college days. A well planned approach by coordinating efforts of various companies will help arrange needed man power, financial and physical resources. II. Role of CSR in Health CSR amount is being spent on health care and improvement of health care facilities. Some areas are covered by present activities and in some areas more can be done. Creation and Maintenance of Healthcare Infrastructure Hospitals or clinics and Pathological Labs run by the corporate are benefiting many rural persons in the area. Similarly the assistance given to Primary Health Centers, ambulances provided, donation of equipments has improved the quality of medical services offered. Role during COVID Pandemic Awareness programs, distribution of masks, sanitizers, providing food, water and medicines for migrant labourers, truck drivers, organizing Covid Tests, contributing to state Government Covid fund, PM Cares Fund, are some activities undertaken in the CSR account. Opportunity to support online education, sanitization of public places using heavy machineries, allowing use of guest houses for isolation or as Covid Care Centres, supplying subsidized canteen food to hospitals and Covid Care Centres, encourage volunteerism of employees to volunteer in relief work, organizing blood donation camp, procuring medicines, digital thermometers, pulse oxymeters for clinics, schools etc. are open for all corporates. Oxygen Supply and Ventilators One cement company, Shree Cements in Kalaburagi and one steel company JSW Steel in Ballari have diverted their Oxygen production for medical use, saving hundreds of lives during the second wave. Many corporates have donated ventilators, funded Red Cross activities, provided oxygen cylinders from mid 2020 onwards. Medical Logistics Opportunity to utilize the trucks at their disposal for providing logistic support to Government to move oxygen and medicines, oxygen plants, ventilators, etc. is also open for cement and steel companies. Women’s Health The stress on rural sanitation, construction of toilets has not only made rural places more clean and hygienic, the health of the women folk can be benefitted a lot. Education on basic hygiene healthy food habits, screening camps for various preventive diseases have also contributed to improved health and life expectancy among women. Children and Youth Health, Recreation and Sports CSR to support recreation, sport and physical activity at village level is visible. Low cost kits and sports equipments are being provided to villages and rural schools, which have helped them to spend their spare time usefully and constructively. Banks in the region and a couple of cement companies have helped in providing volley ball , throw ball kits, carrom board, chess sets, cricket set, football and exercise equipments. Sponsoring talented sportspersons has also started in the region. While this is welcome, it would be more useful if the companies could pool their resources and provide basic infrastructure. A level play ground with marked boundaries for various games and standard sized courts would certainly lift the standards of the rural sports oriented children. There are instances where same materials are given by different organizations to same village. Screening for Preventive Diseases & Early Detection Camps Basic health check-up camps, heart, BP, Sugar Test among other tests are being organized occasionally. The frequency and reach must increase. If the companies can pool their resources, they can provide mobile clinics along with basic pathological services round the year covering large population instead of just working in the vicinity where such camps are frequent. Ambulance Services Some companies have their ambulance services which they allow general public to utilize. But the vast size of the HK region and sparse density of hospitals in semi urban and rural areas necessitates greater numbers of ambulances. If joint contributions can be made a good fleet of ambulances can be strategically located to get treatment to the patients in the golden hour/s period in greater geographical area. Food and Accommodation for Attendants of Admitted Patients Kalaburagi, for instance, has several Dharamshalas (free or highly subsidized food and accommodation centre) which are no longer properly maintained and scarcely used. Constructed by various communities, most of these are very old and were meant to cater to travelers belonging to their own communities. If corporate can rope in along with local businessmen, financial burden of accompanying relatives/family members of hospitalized patients can be reduced. Counseling and De-addiction Centers Many social evils can be reduced and both the addicts as well as the family members may need counseling and many drug addicts may need de-addiction or rehabilitation programs. This is once again which only one organization can take up, hence a collective effort where the companies join hand with leading psychiatric institutions such as NIMHANS etc. can run such centers round the year. III. Role of CSR in Increasing Income CSR spending is visible in road construction, technological support to farm & industries, environmental protection, sustainable development and water conservation. These activities have both direct and indirect impact on economic indicators. Marketing Support for Agriculture Corporate aided cooperative stores could act as direct purchaser from agriculture producers and act as liaison agents to sell farm produce across their plants. Joint CSR activities can setup storage facilities, both dry and cold storage, cold transport, which can potentially increase farmers’ income and also stabilize prices during non-season periods. Assisting Technology Induction in Farming Horticulture, floriculture experts employed by corporates can advise farmers; engineers can suggest utility of company’s technology in agriculture. Digging wells & ponds scientifically, controlling soil erosion etc. are areas where corporate can benefit agriculturists. Support Sustainable Development by Assisting Farmers While companies get credit for environmental protection and helping reduce carbon emission, farmers can get better income through CSR sponsored horticulture and commercial plantation. Training for Ancillary Units Technology used in ancillary units cannot be regularly updated. Managers of large companies are usually better exposed and informed about technological developments & improvements which must be shared by arranging training for ancillary units. R & D for Ancillary Units Ancillary units can be helped in R&D activities by major companies, especially those ancillary units which are their suppliers. This would create a win-win situation. Assistance in IPR Matters to Ancillary Units and Innovators Obtaining Patent & protection of IPR, avoiding violation of IPR’s are not easy for small firms and innovators. Corporates can guide them in these matters. Financial Assistance and Livelihood Mentoring Financial guidance for self employment, artisans, self help groups (SHG) by carefully crafted CSR activities, involving proper training and mentoring can improve rural economy. With participation of professionals from industry, banking and academia in such activities, viable models can be created and benchmarked elsewhere. Conclusion & Key Recommendations CSR Budget when compared to Government Budget is miniscule. But it is the desire to put its Human Resources and Physical Resources to socially gainful activities, apart from financial resources, that can make CSR really meaningful. Contributing to improving HDI is just one dimension of their responsibility. On the basis of the study it is suggested that: Companies can come together and plan efforts which would avoid duplication of efforts as well as create possibilities of creating synergistic effect in CSR Activities. CSR activities must be targeted to most needy and not just to areas which are logistically convenient. Big or Major CSR projects requiring round the year and major investment can be taken up jointly in association with government. The very philosophy of CSR should be CSR for social transformation and not merely CSR for legal compliance. The companies are increasingly recognizing that they owe their existence to the society and hence it is imperative for the companies to sustain the society through their activities, directly or indirectly, and with greater purpose while implementing their CSR Activities.

The Chartered Accountant • Journal of ICAI June 2021 • Vol. 69 • No. 12 • pp. 57–60 (Journal pp. 1469–1472) CORPORATE GOVERNANCE Governance – Raising the Bar CA Rajesh Chaplot The author is a member of the Institute. He can be reached at chaplotrajeshug@gmail.com and eboard@icai.in ⚖️ Context & Practical Reality In today’s world, Corporate Governance is highly promoted in business circles and open forums. Corporate Governance principles are often applied according to the business entity’s focus and real-world challenges. In many cases the pillars and core principles of Corporate Governance like; participatory, consensus-oriented, accountable, transparent, responsive, effective, efficient, equitable and inclusive are circumnavigated or gets ignored. There are occasions when business leaders think of and find ways of evading it without being noticed. There are also occasions when corporate sets its own boundaries and limits on corporate governance. It is important that governance issues do not get sidelined in the best interest of business and its stakeholders. Read on… Corporate governance is a organisational structure of policies, processes and rules that direct and control behaviour of business. Organisations have to exercise strategic oversight over business operations while directly measuring and rewarding performance. In companies Board of Directors is central to its decision making and governance process. The Board of Directors in a company has to ensure compliances with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures. It is the responsibility of the Board of Directors to ensure compliances with the law. Organisations have different corporate governance challenges. The practice and adoption of Corporate Governance is different in multinational companies, different in mid-size corporates and different in family-owned businesses. Also, it varies from industry to industry and evolves depending on their own circumstances. Each organization sets its own rules of corporate governance based on peculiarities of its external and internal environment which sometimes, unfortunately, are based on conveniences and fraught with dilutions. Probing Everyday Governance Dilemmas: Consider such as corporate tax avoidance, or employees taking an office pen home a Corporate Governance issue? Is delaying a supplier’s payment a Corporate Governance misdemeanor? Is filing for bankruptcy and still living a lavish life breaking a Corporate Governance standard? Is aiming towards monopoly in business breach of Corporate Governance Principles? Is advertising hoarding saying, in small print, “Terms & conditions apply” be supported as good Corporate Governance? Can posting exaggerated or incorrect reviews on social media and manipulating social media be raised as definable and positively supported within the Corporate Governance framework? Spirit is more important than letter Multinational Companies and big organisations talk about corporate governance the most. However, there are many example where governance principles have been set aside in favour of other considerations. Consider corruption which comes in the form of concealed reward, incentive or inducement. Large companies often work on the “zero tolerance” to corruption mantra, but there are documented evidences, worldwide, of failures to adhere to this principle. To ease the passage of deal or loosen bottlenecks, they will pay an above-board fee to their consultants, advocates or public relations companies who in turn pay a good portion of their fees as inducement to get the work done. Such cases have been seen even in highly progressive nations that are considered to be having best corporate governance structures. Even in mid-sized & family-owned businesses there is presence of improper ways to get the work done. Building trust, empowerment and team work Corporate Governance says employers and employees should trust each other. Trust is another example where rules are different. For mid-sized companies or family-owned business, one can see a different level and form of trust. Employees in these companies can use their phones & laptops with no restrictions. Their laptop ports are not removed as employer and employee trust each other. But, in very large organizations, employees’ laptop ports are disabled or removed for any unauthorized use. Although these controls may stop instances of misuse, they generalize the lack of trust between employers and employees. “Delegation, empowerment and team work, in mid-sized corporates, exist differently than that of multinational companies.” Large corporates talk promote values like delegation, empowerment, and team work. But at the same time these terms and values are often diluted. Especially large corporates or multinational companies have a power center called head office. This head office is not independent. This head office is also governed by a board, consultants & multidiscipline auditors and a strong IT enabled system like ERP. The combination of board, consultants and multi discipline auditors are the people who bring real value and direction to the company. Whatever they decide, is supposed to be executed as it is, by the local resident team of that company; they are not empowered. Even the local managing Director of multinational company has no major empowerment given by the board. For various reasons, the future trend is heading towards centralization. Thus, usage of concepts such as empowerment and delegation in corporate governance policies is not appropriate as it explicitly diverges from the central tenets of the core pillars and principles. Similarly, we can argue upon this term of team work also. Large corporates have a well-documented job description for each employee and nobody prefers or is allowed to enter into the area of others. In fact employees are discouraged from interfering with the matters related to another department. These organizations work in compartments. Also, various management coaches and gurus talks in their corporate workshops in support of team work, while ignoring these facts of strict compartments which exists in multinational corporates. On the contrary delegation, empowerment and team work, in mid-sized corporates, exist differently than that of multinational companies. In family-owned businesses, delegation and empowerment is more or less missing but teamwork exists at a comparatively higher level than very large companies. Brand and its value In the corporate world there is term called brand & brand values, which forms part of corporate governance. Many management geniuses say; brand is an identity of the product. It is asserted that products are changed to accommodate the market. One can buy a toothpaste of a particular brand, which is made in the UK and compare its taste and quality with same brand of toothpaste made in, say, Africa or India. The quality is completely different. The company makes the product based on various local conditions and peculiarities of the local market. Meaning, brand is not an identity of the product. So again, the question arises; where has Corporate Governance been applied by giving variation in the quality for the same product from country to country? Healthy competition Today businesses function in highly competitive scenario. There have been several instances where large businesses, with their power over monetary and other resources to kill small business by dumping products at a loss for sustained periods. Powerful and dominant business in industry uses predatory pricing, a strategy of undercutting prices on a large scale, and deliberately reduce its prices of a product or service to loss-making levels. In the process many good products and services provided by small businesses disappear from the market. Once competition is eliminated, abnormal prices are charged for the same product from the different markets. A question arises is this the correct application of Corporate Governance? “There have been several instances where large businesses, with their power over monetary and other resources to kill small business by dumping products at a loss for sustained periods.” Across nations predatory pricing violates antitrust laws, as it makes markets vulnerable to a monopoly. Is aiming towards monopoly in Business a breach of corporate governance principles. Many corporates generate sales by misleading advertisements of their products quality. In many advertisement, the brand ambassador is often a celebrity who talks & portrays as if, he/she is using the product & has achieved the desired results. This is not true at all, as most of the time the brand ambassador never uses that product. Is it matter of Corporate Governance? Creating controversy to get highlighted in media & attracting consumers attention is another misdemeanour of corporate governance especially in film industry & some other businesses. There have been claimed instances where a celebrity has been given a house or flat by real estate companies for free who never even visits there. This is used as a selling point for marketing to naive consumers, who buys the house thinking celebrity would be their neighbour. Good Corporate Governance! Linking news stories with advertisements in electronic and print media to advertise the is also a big a breach of corporate governance ethics. Many of the leading magazines and newspapers in the world, publish articles that are included not on merit, but are paid. Privacy Concerns Many of the social media apps or TV Channels, project themselves as giving their services free, but in reality, they force advertisements or use your data, by getting authority from you unknowingly. A clear breach of transparency in the approach. Dichotomy in functioning It has been seen that two different wings of same organisation have altogether different approach on same issue. The hotel industry is conspicuous in advancing its environment credentials; hangers and stickers encourage customers to refrain from adding their towels to the daily wash in the name of environmental conservation. By contrast, this very same industry does not promote food wastage as egregious to the environment-meal portions served in half measures are not options presented on a menu nor is their discounted value: you order a meal, you eat half and rest goes to waste. What does this say about the environment standard embedded in Corporate Governance? Another classic example is about corporates recruiting workers through contactors instead of keeping them as regular staff is a perfect example of diluting corporate Governance principles & practice. Such people work similar to regular staff but never get the same benefits. Reducing tax burdens Transfer price is a tool often used by multinational companies for not paying the taxes in the country where income is earned or shifting to tax havens. Does it give justice to country which has made this income possible for that company. Have a responsible approach to CSR It is said that when you donate from one hand, the other hand should not know. This is the true meaning of CSR. But how many corporates follow this. Many corporates design their CSR in such a way that it impresses the government or regulatory body or the general Public. On many occasions CSR activities of corporates targets it current or future market or market strategy. Corporate social responsibility, in real sense should not have any business angle. This practice raises question marks on the true intentions of corporate governance on such CSR activities in many organisations. Endnote Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Let us truly balance these stakeholders. Lectures on Corporate Governance by management gurus, corporate and business leaders are welcome but they need to raise the bar. There are many instances in different industries and within the same company that require a relook to have better governance. It is the spirit of governance which is more important than any rule or law. In India the Companies Act, 2013 lays down a comprehensive governance framework, which as Chartered Accountants we all are aware of. However, time has come when the good governance practices percolates to each minutest aspect of the business. Then only we will enjoy real fruits of corporate governance. “It is the spirit of governance which is more important than any rule or law. In India the Companies Act, 2013 lays down a comprehensive governance framework, which as Chartered Accountants we all are aware of. However, time has come when the good governance practices percolates to each minutest aspect of the business. Then only we will enjoy real fruits of corporate governance.” — CA Rajesh Chaplot

Banking & Finance • Credit Risk & NPA Management Insulating Banks from Non Performing Assets Journal: The Chartered Accountant, June 2021 (Vol. 69, No. 12) • Pages: 61–66 (Journal pp. 1473–1478) SB S. Balakrishnan The author is a member of the Institute. He can be reached at balamng@gmail.com and eboard@icai.in. “Sickness leading to Non Performing Assets (NPAs) are caused by many factors beyond the control of the lender and borrower. The article attempts to analyse different factors related to NPAs. Lenders often consider the ratings of securities. It is important to assess whether the ratings truly reflect the intrinsic value of underlying assets. There are also assertions on diversion of funds. Diversion of funds can be established only when there is investigation on the affairs of the company, including the conduct of people running the company and such investigation, if undertaken, will defeat the whole purpose of speedy settlement of claims through bankruptcy laws. Read on…” Origins of Banking & The Concept of Shadow Banking The meaning of the term bank has its origins in confidence or faith. To bank means, to keep safely, like in a safe deposit vault. Associated with the term is trust. It is assumed that money kept in the bank is as safe as money kept in the house locker, except that there is no fear of theft. A banking company means any company which transacts the business of banking in India. Banking means accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise (The Banking Regulation Act, 1949). Another associated term is ‘shadow banking’ which is doing banking activity, but the shadow bank cannot accept deposits repayable on demand. Popular shadow banks are non-banking financial companies and others who also access public money through deposits and lend to others. However, the term ‘shadow bank’ is a misnomer, since the protection available under deposit insurance is not available for NBFC deposits. Winding Up Hierarchies: Companies Act 2013 vs Insolvency & Bankruptcy Code 2016 Under the Companies Act 2013—Chapter XX Winding up of companies—U/s 326 and 327, priority creditors (employees, taxes due to government, etc), secured creditors and then unsecured creditors will get paid in the order of preference. However, these sections will not apply to winding up under Insolvency and Bankruptcy code, 2016. This article will discuss the impact of such exclusion; it will discuss in detail whether the exclusion was for speedy resolution or for abrogation of rights of secured creditors. The Bankruptcy and Insolvency Code 2016 classifies debts as financial debts and operational debts. The financial creditor may make an application to initiate corporate insolvency process. The resolution professional shall constitute the committee of creditors. U/s 21, decision of committee of creditors shall be through vote, with 51% being the requisite voting share for a resolution. When Insolvency and Bankruptcy code was introduced to expedite the recovery process, it is a point for further debate on whether it diluted the position of secured creditors. Also to be considered is whether the property rights can be abrogated, as secured creditors preferential claim on such assets, except in the case of public interest. Loan book may comprise of individual loans for asset purchase or loans to corporates. In case of individual loans, collateral is the asset (financed asset is normally offered as collateral, while for corporate loans, the security will be charge on the assets or it can also be unsecured loans. For loan book, the security value will depend on the replacement cost or disposal value, and utilisation/earnings from such assets will result in prompt loan repayment, including servicing of interest cost. Various factors may result in erosion in value of assets and drastic variation in earnings. However, larger the number of loan transactions, possibility of few loan portfolio turning bad may not adversely affect the financier. Valuation Principles & Market Dynamics Asset valuation will depend on replacement value or realizable value of the asset, when put up for sale. Business valuation will depend on market conditions and replacement cost. However equity valuation depends on market, growth and earning visibility and market price is mostly factored on future earnings. Normally pledging of equity shares is private borrowing. Margin requirement on this front sometimes play havoc on market price. Fall in equity price result in lower margin. When lenders resort to sale of equity in the market, it will further depress the market price. With listing of equity instruments, market value determines the value of shares; of course, control premium, etc. may play a role. In the eighties and nineties, corporates used to publish accounts on historical basis. This is before the advent of fair value reporting and if no revaluation of assets has been done by the corporates, there used to be huge difference between book value and market value. This resulted in hidden reserves i.e. valuation difference. However present day accounting, viz fair value method has narrowed this gap. Another factor is the emergence of the knowledge sector i.e. advent of asset light companies. With novelty, these companies enjoyed attractive valuation in the stock market. Being asset light companies, normally financing was from equity market. Evolution of Banking & Financial Ratio Benchmarks Entrepreneurship is the cause for business enterprises. When an enterprise is started with one’s own capital, entire risk is borne by the entrepreneur. When additional funds are required, borrowing is an available option. Persons with resources, lacking direct entrepreneurial appetite, lend amount to meet business requirements (though lending also is a business enterprise). Banking as a business evolved when some enterprising individuals turned lending to a business enterprise and such business enjoyed the return differential between loans and deposit interest rates. Even under corporate structure, shareholders are real owners and risk of failure is entirely borne by them. The lenders or financial creditors are to be paid in case of liquidation and then remaining amount is distributed to shareholders. Debt-equity ratio, thus, became one of the measures to determine the safety and security of loan assets. In addition to debt-equity ratio, lenders were also concerned with interest coverage and liquidity ratios. Free cash flow is supposed to provide sufficient cover for interest obligations and repayment obligations and cover of more than 1 was deemed to be safe for the loan creditors. The Crucial Role of Margin Cover & Asset Price Shocks An important factor on security is the asset valuation and ability to pay periodical instalments. Banks keep margins to take care of interest accumulation in case of defaults and changes in the market value of the underline assets. US sub-prime mortgage crisis was purely based on indiscriminate lending on the hope that the increase in real estate prices will justify the loan arrangement. Consider the current scenario on account of Covid—real estate prices dropped resulting in reduction in security cover; further, due to lockdown and loss of employment, repayment capacity (EMI) has been affected. This has been highlighted just to emphasize the importance of margin for adequate security. Corporate Project Case Study: 1600 MW Power Plant Consider the case of a corporate borrower—– Suppose for putting up a power plant of 1600 MW capacity with total outlay of Rs.12000 Cr, the project report is prepared with debt-equity ratio of 3:1, which will mean that the total estimated borrowing for the project is Rs. 9000 Cr. The project has a gestation period of 5 years (from start to production/distribution of electricity). Any delay in project commissioning (for whatever reasons) will push up the project cost. Assuming that the promoters were not able to increase the equity component, then the debt-equity ratio will undergo changes. Further, the viability of the project may undergo changes if for some reason the output viz electricity price is depressed. The erosion in asset value or earning capacity may result in the loan turning non-performing category. Structural Differences: Long-Term Project Financing vs Working Capital Financing Borrowing is of two types—long term borrowing (which normally is to finance acquisition of assets/business undertakings) and short term borrowing (which normally is for working capital financing). Forty/Fifty years back specialized category of financier was there for long term loans viz ‘Financial Institutions’. At that time, banks used to focus on working capital loans viz. short term borrowings. Financial institutions which used to specialize on long term loans will have appraisers who used to carry out project evaluation. While short term loans focus on security of asset (existence and adequacy of asset, loan repayment through liquidation of asset) while long term loans used to focus on revenues and cash flows for repayment of loans. Asset valuation used to be the focus for short term loans while business valuation was the norm for long term loans. Asset valuation is a simpler process compared to business valuation which is complex. Sales realization is used for liquidation of working capital loans while free cash flow was used for term loan repayment. Working capital loans used to be rolled over since the business which is going concern will require funds on a continuous basis. To illustrate, funds from sales realization was used for further purchase of goods for manufacture/trading. Safety/security of working capital loan will depend on sales realization and hence focus used to be on existence of current assets and their quick turnover. Project loan assessment used to focus on project completion and free cash flow while working capital assessment by banks used to focus on net current assets and their quick realisability. Business growth was normal growth (both inflation and real growth) and expansion. Capex for capacity addition was different from capex for asset replacement and project loans were used for capacity creation/addition. The differentiation assumes significance since evaluation tools required for long term loans and short term loans are different. While there will be greater emphasis on asset utilization and cash flow for short term loans, asset valuation and margin is more relevant for long term loans. Liquidity requirement of lenders also plays a part. Lender who may not face immediate liquidity pressure may wait for turnaround which may help to ward off the threat. It may be noted in the recent Union Budget, the Finance Minister highlighted the establishment of Development Financial Institution (DFI) to focus on infrastructure financing, viz long term loans. Project Financing: Requirement of funds for setting up of project by industrial houses, viz., acquisition of land, plant & equipment including commissioning thereof. Capacity utilization used to be progressive over 2-3 years, by scaling up of production. Risk assessment was primarily on project delays and output meeting standards. Asset which comprises of land/buildings & plant and equipment used to appreciate (mostly land/buildings). Only when the industry turns sick, the loan recovery used to be in problem. However, the value of security used to cover the loan liquidation and loss, if any, was borne by equity shareholders. Normally loans get priority on repayment and liquidation proceeds used to be first applied towards loan repayment leaving the surplus to the equity holders. Shortfall in realization of assets used to be borne by the equity holders. Banks Lending & Fiduciary Responsibility Towards Depositors Banks lend money out of deposits which is their borrowings. When one deals with other peoples’ money, one acts as trustee or custodian and has to exercise utmost care and caution. When loans are written off by public sector banks or for that matter even by private sector bank, the write off decision affects the interest of depositors. Deposit insurance by banks is one way to protect the interest of depositors. Risk on unsecured loans granted by banks are borne by the depositors and hence at least to that extent, banks should have deposit insurance. “When one deals with other peoples’ money, one acts as trustee or custodian and has to exercise utmost care and caution.” When agricultural loans are waived due to crop failure, crop insurance is necessary to mitigate the losses. Furthermore, every bank must have a policy on unsecured loans and this must be included in their published accounts. Bank boards must specify the limit of unsecured advances by the bank and this limit should be well below the capital of the bank. This is to ensure that depositors’ money is protected. Micro finance may be warranted to ensure credit for weaker sections of society; however all such unsecured loans and advances pose a risk to depositors and hence to that extent banks should have deposit insurance cover. Since banks lend out of depositors money, the policy directive by central banks or government intervention is not an ideal situation. Such funding requirement should be ideally met out of government revenue through subsidies. Industrial Land Allotments and Reversion to Government Another connected issue is whether land allotted for industrial purpose by State Governments should vest back to government in case the purpose is not met. The State Governments allot land and grant approvals/clearances for setting up industries as industrial activity generates employment (both direct and indirect), and hence such allotment/approval serves the public interest. In such a case, such allotment/approval is like a conditional sale and whether the land should vest back to government in case of project failure/liquidation is a matter which has to be debated. There is merit in the argument that the land should vest back to government so that the same can be allotted to some other undertakings which will fulfil the objective of employment generation in the local are. Proper rules have to be framed in respect of cases where land was allotted at concessional or preferential basis, citing public interest, for setting up industries. Project Stage vs Operational Stage Risk Profiles Risk factors which are to be assessed will be different during the project stage and operational stage. Assuming a power project, the risk factors during project stage will be a) Project completion time of 4 years; land acquisition/allotment, building construction, plant & equipment installation (which will depend on the supply commitment of the manufacturer) etc. Once the trial production is achieved successfully, the risk will shift to operational factors like fuel supply; transportation; transmission to grid, operational power purchase agreement, etc. Hence the loan appraisal/monitoring will have to focus on different parameters during project stage and operational stage. It is important to note that the time for course correction is very small. Also recessionary trend cannot be easily predicted and may occur because of several reasons beyond the control of the project authorities. I am not able to visualize any form of insurance to mitigate the impact of unforeseen economic recession on project overruns. If factors like economic recession is the cause of project delay resulting in NPA issues, can we blame the decision making process in loan sanction? We need to revisit the policies/procedures in such a case to see how the problem can be addressed. The solution will be to complete the project operational so that the losses can be minimized. However, the action cannot be after prolonged delay. The New Age Economy: Financing Asset-Light & Services Businesses In the new age economy, the services sector account for substantial proportion of GDP. If a new airline operator enters the market with leased aircrafts, what will be assets owned against which they can borrow? The borrowings will then be only for operations and the financing is akin to working capital finance. The loan evaluation cannot be as project finance since there is no physical asset to finance but only operational expenditure to cover. Hence a lot will depend on revenue stream and alarm bell should ring if the cycle is broken. Risk assessment should focus on gross revenue stream and operational expenses (including fixed cost like space etc.). Such projects should have more equity component and loan amount should have collateral security. Disclosure, Transparency & Infrastructure BOOT Model Vulnerabilities When corporates borrow (access public money), there has to be accountability. Recent cases of NBFC and Housing Finance Companies liquidity issues highlight the importance of need for further regulation on matters of governance, disclosure & transparency. Creation of step down subsidiaries and borrowings by one corporate and ultimate utilization by some step down subsidiaries create problem of monitoring the funds utilization. Since what is lent is the public money, such disbursal has to be effectively monitored. Currently infrastructure projects like airports, roads etc. are built under BOOT model (build, own, operate and transfer). Since most of these projects are public utilities, contracts are awarded based on cost competitiveness. However, there is no prohibition to transfer the project mid-stream. Transfer of projects actually pushes the enterprise value and when the buyer resorts to borrowings, the security cover comes down. How these transactions are not only against public interest but places lenders in a vulnerable position leading to NPAs will be a fit case study for further research. Corporates which are putting up the project should also exercise due care and caution and select projects based on the viability. Extra care is required where project requires loan funds. If investment decisions are made objectively, possibility of loss will be minimal. The debt-Equity ratio indicates the cushion available for lenders. Further when banks look for unsecured loans (either as priority lending or as economic compulsions), the possibility of bad debt is very high. Hence bank boards should set limit for such unsecured loans in their loan portfolio. Companies Act 2013—Chapter XX deals with winding up of companies and both voluntary winding up and compulsory winding up are covered in that chapter. The purpose of winding up is to have speedy resolution of stressed cases. While loan creditors get preference on distribution over owners, viz. shareholders, even creditors are categorized into preferential, secured and unsecured creditors and the order of preference is set for distribution of monies. The Insolvency and Bankruptcy code was brought into statute book with the express objective of speedy resolution. Once Insolvency resolution process is started, the resolution may be either by sale of undertaking or liquidation by means of sale of assets of undertaking. Secured creditors rights are protected by Sec 52. Time bound settlement will ensure that stressed assets are transferred before further deterioration in value. Secured loans will enjoy preference at the time of liquidation/resolution. To the extent of coverage of security, secured loans will enjoy preferential repayment. However the method of distribution is decided in the meeting of creditors and resolutions are put to vote and are passed with 51% of voting. What happens when unsecured creditors are in the majority and block resolutions for distribution? Secured creditors should have preference over distribution from such covered assets sale proceeds and surplus, if any, only should be transferred to general pool. Chapter VI of Companies Act 2013 covers registration of charges. Sec 77 casts an obligation on the company to register the charges created with the Registrar of Companies. Sec 370 of the Companies Act 2013 provides for 2 modes of winding up, viz by the Tribunal or voluntary winding up. Interest of secured creditors are maintained and not vitiated. Hence the Insolvency and Bankruptcy code, which incidentally was placed in the statute book for quick resolution of insolvency cases, will have to be deemed to be in favour of creditors and liberal interpretation in favour of creditors must be placed. NBFC/HFC Crisis, Corporate Guarantees & Rating Agency Accountability Growth of intermediaries like non-banking finance companies, housing finance companies, etc. is mainly on account of requirement of funds that were unmet by banks. These are types of shadow banking and initially they were regional players but over time, some of the companies reached size and became national players. Most of the finance companies borrowed from the market through public deposits, debentures etc. However, some part of their requirement was also met by banks and banks looking for bulk customers started patronizing them. In the deposit/loan cycle, when the borrower defaults, then the finance company also will not be able to meet their obligations. Whether such indirect lending by banks for further lending by finance companies is desirable or not will depend on prudential norms followed by such finance companies and also on quick resolution of cases where default is there on loans from such intermediaries. Whether ILFS or very recently DHFL, the holding company created subsidiaries, step down subsidiaries, etc. and in some cases also SPV (special purpose vehicles, for a particular bid/execution), the subsidiaries were able to borrow based on parent’s corporate guarantee which means that they enjoyed substantial borrowing limits. How much of a corporate guarantee a company can offer? When the parent company itself is a limited liability company, can it offer unlimited guarantees to its subsidiaries? There should be a limit for such guarantees, whether by banks, financial institutions or even corporates. In bankruptcy code resolution, when the provisions of the Companies Act concerning winding up is specifically excluded, what happens? Will it mean that secured creditors will lose their rights and preferences? The rights of secured creditors are not merely governed by Companies Act but by Law of Contract and securitization rights. These rights are not superseded and hence the right of secured creditors over the assets will rank first and surplus, if any, will only have to accrue to unsecured creditors. When subsidiaries borrowings are covered by corporate guarantee, the parent company must make proper disclosure of this fact together with the limits of such guarantees provided. Further the auditor must comment on going concern concept after taking into consideration such corporate guarantees and the likely cash flow of such subsidiaries. Rating agencies, when they provide rating, must be held accountable for such rating and there should be deterrent for such rating agencies when they suddenly change the ratings. Endnote & Practical Imperatives The fundamental question of safety and security will remain the focal point. Debt-equity coverage will insulate the loan amount to the extent of coverage. Whether banks and other lending agencies who access public money can lend money without security is a question which has to be answered if we have to find the solution to NPA issue. To the extent of unsecured loans, banks should have deposit insurance cover to ensure that depositors’ monies are protected. Timely and corrective action will ensure that the loss amount will be minimized in case of loan default. Lenders must focus on book value and also market value to effectively monitor the debt-equity ratio and interest coverage ratio. Even to realize amount of secured loans by possession and disposal of secured assets is fraught with delays and such delays result in deterioration of asset quality and their realizable value. Speedy resolution of disputes will go a long way in minimizing losses to the lender.

The Chartered Accountant • Journal of ICAI June 2021 • Vol. 69 • No. 12 • pp. 67–72 (Journal pp. 1479–1484) BANKING & FINANCE Non-Banking Finance Company – Gateway to Finance Business in India CA. Subash Thakuri The author is a member of the Institute. He can be reached at thakurisubash2017@gmail.com and eboard@icai.in 🏦 Industry Focus & Practical Objective Non-Banking Finance Companies (NBFCs) are an integral part of the Indian Banking and Financial Service Industry, which aims at catering to large number of unbanked and underbanked users of the Indian Banking System. Over the period, the regulator has made various changeovers to address the needs of Indian Financial System viv-a-vis consumer point of view. It also provides support to scale the businesses to the next level at supervisory model of licensed NBFC. The article tries to spell out the category, market, eligibility, nature and way forward to support readers interested in Banking and Finance. Regulator aspects in the article are drilled down to facilitate layman readers, planning for finance business in future, if any. The article attempts to summarise the NBFC vertical to provide a basic insight on learning idea of NBFCs business in contemporary India. Read on to know more... Introduction Non-Banking Financial Company (NBFC) is a gateway for finance business in India. There are two types of NBFC as per licensing policy: Type I: Deposit Taking Authorised to accept public deposits subject to strict regulatory prudential norms and capital adequacy requirements. Type II: Non-Deposit Taking Operates purely without accepting public deposits; represents over ten thousand operating entities in India. On regulator perspective, again as per the existing structure we can observe around 58 NBFCs, as deposit taking and rest around more than ten thousand NBFCs are non-deposit taking. Further, entire NBFC segment is divided into segments - systematically important and non-systematically important. Any NBFC with assets size of INR 500 Crore or more is termed as Systematically Important. Other than this, special provision and attention is given to all those NBFCs, which have assets size of INR 100 Crore or more. “Any NBFC with assets size of INR 500 crore or more is termed as Systematically Important.” Beyond this, again NBFC is further categorised into special category as per its main nature of activities like Investment and Credit Company (ICC), Infrastructure Finance Company (IFC), Infrastructure Debt Fund (IDF), Micro Finance Institution (MFI), Factors, Core Investment Company (CIC), Mortgage Guarantee Company (MGC), Non-operative Financial Holding Company (NOFHC) and Assets Reconstruction Company (ARC). As part of the process of transferring the regulations of HFCs from the National Housing Bank to the central bank, now the Housing Finance Companies (HFCs) also come under the purview of NBFCs. To cater the market developments and interest of stakeholders in this segment, Reserve Bank of India has further added two categories for NBFC portfolio i.e., Peer to Peer Lending (P2P) and Account Aggregator (AA). Simplifying the category a) Investment and Credit Company (ICC) It is a new amalgamated form of existing - Loan Company (LC), Assets Finance Company (AFC) and Investment Company (ICC). The category came into effect through notification dated 22nd February, 2019 [https://rbi.org.in/scripts/FS_Notification.aspx?Id=11483&fn=14&Mode=0]. It allows ICC with scope of all three functions collectively in one place, be it lending or investment activities or economic productivity related assets finance unlike earlier three different categories. It requires net owned fund of INR 2 crore to start with. b) Infrastructure Finance Company (IFC) IFC is a form of NBFC dealing with financing the Infrastructure Project. It shall deploy at least 75% of its total assets in infrastructure loans. It requires net owned fund of INR 300 crore to begin with. c) Infrastructure Debt Fund (IDF) It is a NBFC company to facilitate the flow of long-term debt into infrastructure projects. It can raise the resources through issue of Rupee or Dollar denominated bond of minimum 5 years maturity. However, only infrastructure finance companies can sponsor of IDF. d) Micro Finance Institution (MFI) It is a NBFC with specific guidelines and instruction on lending business, termed as Qualifying Assets. To remain as MFI, it shall maintain 85% of its business under Qualifying Assets category. Qualifying assets are - the total advances/loan given to client following certain criteria set by Reserve Bank of India. e) Factor It is a NBFC engaged in the principal business of factoring. It is guided from Factoring Regulation Act, 2011. Factoring refers the business of acquisition of receivables of assignor, whether by way of making loans or advances or otherwise against the security interest over any receivables. f) Core Investment Company (CIC) Any NBFC with assets size of INR 100 Crore or more, subject to its major business vertical being acquisition of shares and securities with conditions given by Reserve Bank of India, is termed and defined as Core Investment Company. It holds not less than 90% of its total assets in the form of investment in equity shares, preference shares, debt or loans in group companies. “Any NBFC with assets size of INR 100 crore or more, subject to its major business vertical being acquisition of shares and securities with conditions given by Reserve Bank of India, is termed and defined as Core Investment Company.” g) Mortgage Guarantee Companies (MGC) It is also a kind of NBFC wherein at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business, with requirement of minimum net owned fund INR 100 crore. Mortgage guarantee business is a credit default guarantee taken by mortgage lender against borrower’s payment defaults. h) Non-operative Financial Holding Company (NOFHC) It is a NBFC, which permits the promoter/promoter groups to set up a new bank. It is a wholly owned non-operative financial holding company, which will hold the bank as well as all other financial services companies regulated by Reserve Bank of India or other financial sector regulators. i) Assets Reconstruction Company (ARC) It is a NBFC company with principal business of buying non-performing assets of bank at mutually agreed value and attempts to recover the debts or associated securities by itself. The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002) is principal act to governed this nature of business and licensed by Reserve Bank of India on par as NBFC. j) Housing Finance Company (HFC) It is a NBFC with major business of carrying financing of acquisition or construction of house. Earlier it was licensed from National Housing Bank, however, the same is retrenched and is again licensed by Reserve Bank of India. k) Peer to Peer Lending (P2P) It is also a form of NBFC but the business model is completely reverse in comparison to traditional NBFC, as discussed above. In fact, it is a technology platform provider, which on boards both the borrower and the lender - on approved policy and methodology; and matches the needy with provider of funds, serving the tripartite agreement, in between parties on this. In this model, platform is not providing any loan/advance in fact the system participant on suo moto making transaction, therefore, P2P lending platform is regularised and supervised as NBFC from regulator perspective. l) Account Aggregator (AA) It is an aggregation of financial information of business, as registered with Reserve Bank of India as Account Aggregator, a form of NBFC. The financial information user, financial information provider and applicant have single connecting platform termed as account aggregator that facilitates financial information holder - to speed up and scale the business technology, digitally. Registered Market Player in NBFC Vertical I. Statistically: As on date, the registered market player in this NBFC vertical numerically seen as below: Status on Number of Registered NBFC in India S. No Category Number Data as on Reference 1. Investment and Credit Company (ICC) 9327 31st Jan, 2021 NTC Finance Pvt LtdSmart Prism Fincap Pvt Ltd 2. Infrastructure Finance Company (IFC) 9 31st Jan, 2021 Tata Cleantech Capital LimitedIndian Railway Finance Corporation Limited 3. Infrastructure Debt Fund (IDF) 4 31st Jan, 2021 India Infradebt LimitedKotak Infrastructure Debt Fund Limited 4. Micro Finance Institution (MFI) 94 31st Jan, 2021 Asirvad Micro Finance LimitedM Power Micro Finance Private Limited 5. Factors 7 31st Jan, 2021 India Factoring & Finance Solutions Pvt LtdPinnacle Capital Solutions Pvt Ltd 6. Core Investment Company (CIC) 64 31st Jan, 2021 GMR Airports LimitedTata Capital Limited 7. Mortgage Guarantee Company (MGC) No entity list published on Reserve Bank of India public domain, but 1 Company i.e. India Mortgage Guarantee Corporation Private Limited is in Market for this nature of business 8. Non-operative Financial Holding Company (NOFHC) No list is published by Reserve Bank of India on this category at public domain 9. Assets Reconstruction Company (ARC) 28 31st Jan, 2021 Indiabulls Asset Reconstruction Private LimitedEncore Assets Reconstruction Company Private Limited 10. Housing Finance Company (HFC)@ 17 11 has abstract authority to accept the Public Deposit and balance 6 need to take prior approval LIC Housing Finance LimitedPNB Housing Finance LimitedL & T Housing Finance Limited 11. Housing Finance Company (HFC)# 85 Non-Deposit Taking Magma Housing Finance LimitedTata Capital Housing Finance LimitedFullerton India Home Finance Company Limited 12. Peer to Peer Lending (P2P) 21 31st Jan, 2021 Etyacol Technologies Private Limited “Cashkumar”Bigwin Infotech Private Limited “Paisa Dukan” 13. Account Aggregator (AA) 4 31st Jan, 2021 Finsec AA Solutions Pvt LtdNESL Assets Data Limited Sources: National Housing Bank (NHB) and Reserve Bank of India (RBI) published records (https://nhb.org.in/en/a-list-of-housing-finance-companies-granted/; https://rbi.org.in/Scripts/BS_NBFCList.aspx). Deposit Taking vs Systemically Important Breakdown S. No Particulars Number 1. NBFCs holding Certificate of Registration (CoR) for accepting Public Deposits as on 31st Jan, 2021 Example: a) Fullerton India Credit Company Limited, b) Shriram Transport Finance Company Limited, c) Bajaj Finance Limited, d) The Delhi Safe Deposit Company Limited 58 2. Non-Deposit Taking NBFC Systematically Important (NBFC-ND-SI) as on 31st Jan, 2021 Example: a) Adani Capital Private Limited, b) Aditya Birla Finance Limited, c) MAS Financial Services Limited, d) Unimoni Financial Services Limited 292 3. Non-Deposit Taking NBFC Non-Systematically Important (NBFC-ND-NSI) as on 31st Jan, 2021 Example: a) Downtown Finance Private Limited, b) Punjab Lease Financing Limited, c) Deccan Credit & Investment Private Limited, d) DFL Finance Limited 9123 Source: Reserve Bank of India official registered entity database (https://rbi.org.in/Scripts/BS_NBFCList.aspx). II. Graphically: NBFC Composition in India Overview of Sectoral Share: The data above gives a clear insight as it shows Investment and Credit Company (ICC) as the most popular product among entrepreneurs. An ICC carries on its principal business – asset finance, i.e., financing the assests involved in economic activities; investment in shares and other securities; lending the advances/loan to a needy person or an entity in market, based on its best credit assessment methodology adopted by the Board. “ICC is category formed after harmonisation of Investment Company (IC), Assets Finance Company (AFC) and Loan Company (LC).” Other reason to have huge number of ICC in the market is due to the investment commitment of INR 2 crores as Net Owned Fund, which is comparatively lesser than the other category registration. Market Scenario NBFC segment is a very vital player in Indian Banking and Financial Service Industry serving the unbanked and underbanked individuals and entities to boost ease of speedy and convenient credit facilities. The segment aims at reaching out to every nook and corner of the country to serve the stakeholders with affordable credit facilities. RBI also acknowledges the importance of meeting the stakeholders’ requirements of funds. Latest report on market contribution, share and return on this portfolio from the Regulator would show the potential of the segment. However, according to some report from private entities, there lies huge potential and growth in this segment. NBFC idea was conceptualised in year 1964 - from Reserve Bank of India Act, 1934 amendment, but still except few, most of NBFCs are underdog performer or family based financial institution camp. Moreover, currently, the same has been coming up with better innovative idea and visibility considering the financial inclusion ambition of Reserve Bank of India. In comparison to earlier times, now NBFC is active and well contributor on market credit supply. Similarly, the regulator has opened various doors of opportunity to existing NBFC for its scaling either its adoption of Information Technology mandatorily by registered entity or tie-up with Bank for co-lending model recently. Developments Recently Regulator Reserve Bank of India has made several developments focusing on NBFC sector be it its– a) Relief Package: Government of India has provided COVID-19 relief package to pass it on to the end users for the finance provided by NBFCs. b) Inclusion in Priority Lending: Further, the Finance Minister has announced to include NBFC on priority segment of lending to Banks. In fact, it helps NBFCs to raise Banking Fund to operate its business with no as such liquidity crunch. It shows the importance and market coverage of NBFC in Banking and Financial Service Industry of India. c) Offering NBFC to Open Up Bank: Over and above it, Government of India through Reserve Bank of India is making statement to come forward and open Bank to all the existing NBFCs, on the selection criteria set by Expert Advisory Committee. Reserve Bank of India has observed around 50 NBFCs across India, similar to Banks in terms of Assets Size and Capital Requirement. d) Co-Lending Model with Banks: Recently the Reserve Bank of India, revised the co-lending model allowability to all NBFCs in the market, whereas earlier it was restricted to systematically important NBFCs only. It means, earlier NBFCs, which had assets size of INR 500 crore or more could do co-lending business with Banks, but now it is open for all. New window is open for NBFCs to expand the working skills and size of business, which is welcome step of Reserve Bank of India. e) Revision of Regulatory Framework: Recent important development to note is - the proposed revision of regulatory framework for NBFC, wherein the entry-level net owned fund is revised to INR 20 crore in place of existing INR 2 crore. The step is to make entry level stringent. The proposed revised regulatory framework is with RBI for discussions and finalisation. Therefore, as per existing framework, the entry level net owned fund requirement is INR 2 crore. The link of proposed revised regulatory framework notification is https://rbi.org.in/scripts/FS_PressRelease.aspx?prid=51011&fn=14. Scaling Business to Next Level The next stage discussed in following points: a) Planning to enter into Finance Business This category of people or corporate are in planning stage and accordingly, keeping the view of Regulator can plan the registration process with RBI. As the title of this article suggests -NBFC is gateway of Finance Business in India- one can get basic learning idea on NBFCs – type, category and ancillary aspects of conclusively this portfolio. Only corporate, having valid certificate of registration issued by Reserve Bank of India, can-engage in finance business. b) Already with NBFC Business Existing NBFCs have equal challenges and opportunities. Challenges in terms of “Proposed Revised Regulatory Framework” and “Ongoing Pandemic Business Scenario”, and Opportunities in the form of “Planning for securing Bank license that of universal bank preferably, else that of small finance bank”. Organisations, today, are struggling due to Covid-19 pandemic. Those, which are able to survive, seem to have already planned their survival mechanism. Going forward, such organisations need to make use of proposed regulatory framework, as and when it is implemented. With these two aspects strongly in hold, organisations should target to scale their businesses to next level. Such organisations can plan to apply for getting the license of Small Finance Bank or Universal Bank as the case may be. “It is always a welcome move to promote an eligible market player either in Universal Bank or in Small Finance Bank, subject to fulfilment of criteria mention on licensing guidelines of Reserve Bank of India.” Conclusion Finance Businesses are promising as always. Tried and tested thereon; subject to growth, revenue and returns of investment. So many international market players are entering into this untapped market through its traditional NBFC business or modern technology based NBFC. The hundred per cent allowability of Foreign Direct Investment on financial intermediaries’ services is intended to call international players, so that the competition of market increases. In nutshell, consumer benefits and choices have increased and overall financial inclusion programme of RBI is progressing. “It is always a welcome move to promote an eligible market player either in Universal Bank or in Small Finance Bank, subject to fulfilment of criteria mention on licensing guidelines of Reserve Bank of India.” — CA. Subash Thakuri

Banking & Finance • Asset-Liability Management Funds Transfer Pricing – Methods and Benefits Journal: The Chartered Accountant, June 2021 (Vol. 69, No. 12) • Pages: 73–78 (Journal pp. 1485–1490) PB CA. Pankaj Bankar The author is a member of the Institute. He can be reached at bankarpankaj100@gmail.com and eboard@icai.in. “Funds Transfer Pricing has gained wider acceptance in post global financial crisis era. The crisis made the liquidity scarce and costly. Further, intense competition, complexity of products and increase in regulatory capital requirements forced Banks to efficiently allocate the funding resources to profitable segments. Funds Transfer Pricing enables Banks to adopt to the new era in an effective manner. Funds Transfer Pricing presents granular view of profitability across different segments, products, customer to senior management for calibrating the business strategy. Further, it assists in effective management of liquidity and interest rate risks along with appropriate transaction level pricing. Read on…” Funds Transfer Pricing (FTP) is an important management accounting technique used by Banks. The primary objective of FTP mechanism is to assess Bank’s profitability at micro level and establish the formal mechanism for asset pricing with due weightage on liquidity risk. FTP provides critical strategic input to the management to take decisions with respect to expanding or scaling down business segment/ product/customer segment. Objectives of FTP Emergence of liquidity risk during 2008 Global Financial Crisis (GFC) led to the wide use of FTP mechanism among Banks. In the pre-crisis world, the liquidity risk was taken for granted as abundant liquidity was always present. However, during the crisis this assumption turned faulty. This led to deposit runs, credit crunch, rise in cost of funds, defaults, fire-sale of assets to raise liquidity etc. Thus, liquidity became scarce and costly. Few financial institutions collapsed and many severely impacted. Further, it was noted that not only liquidity and interest rate risk (IRR) were not effectively managed by Banks but also not considered for the asset pricing. This led to mispricing for many lending transactions as the required costs were not passed to the lending units. Also, the borrowing units were not given their due benefits based on the funding mix. Hence, the need to assess and pass on the required costs, benefits and risks to the business units emerged strongly in the post crisis world. FTP mechanism attempts to adequately address these risks within the Bank along with appropriate asset pricing based on the liquidity costs across different maturities. Traditionally, Banks measure their profitability based on several matrices. These include Net Interest Income (NII), Net Interest Margin (NIM), Return on Assets (ROA) and Return on Equity (ROE). Though these matrices are important, they fail to provide micro level view of the profitability. For example, the profitability of the Branch/Region/Zone or Business Vertical/Segment/Product/Customer cannot be assessed from these matrices. The assessment of profitability at granular level is essential to understand the profitable branches, segments, products, customers or relationship managers. This will act as a strategic input to the senior management to take various business decisions with respect to expansion, scaling down, incentive structures, customer relationships etc. This becomes more important considering the increasing competition, regulations and increasing regulatory capital requirements. FTP ensures the necessary costs and benefits are allocated to the respective business units, products and transaction, enabling objectivity in performance monitoring along with granularity. FTP Mechanism – How It Works? Banks are in the business of borrowing and lending. They incur interest costs on the borrowed funds (Cost of Funds (CoF)) and they earn interest income on the lending (Yield). Banks typically borrow short term funds and lend for long term assets. This is called maturity transformation where the short maturity liabilities are transformed into long maturity assets. This typical business structure leads to different risks to Bank. The lending segment generates credit risk for Bank and the borrowing activities leads to liquidity risk and IRR. The profitability every asset created through lending transaction is subject to the behaviour of these risks till the life of the asset. “Banks typically borrow short term funds and lend for long term assets. This is called maturity transformation where the short maturity liabilities are transformed into long maturity assets.” Bank may do good on the credit risk side but may get hurt from the volatility in the interest rates or lack of funding due to credit crunch in the market. At other times, exactly opposite scenario can emerge. Hence, profitability of the Bank is subject to the management of these risks. FTP mechanism ensures the onus of risks are apportioned to the right risk owners and adequately considered during transaction level pricing. Under FTP mechanism, Bank is divided into three segments, viz., liquidity generators, liquidity users and Central Funding Unit (CFU). Liquidity generators raise funds from the market in the form of deposits or debt (Example, Branch accepting deposits from customers). Liquidity users lend funds to the retail and corporate customers also invests the money in different financial instruments (Example, Home Loan or Personal Loan division of Bank). CFU is made responsible to handle maturity mismatches (which leads to liquidity risk) and IRR. CFU generally forms part of the Treasury/ ALM division of Bank. The funds raised by liquidity generators are notionally transferred to the CFU at the Transfer Pricing (TP) rate (will be discussed shortly). The funds received by CFU are in turn notionally transferred to the liquidity users for onward lending at TP rate. TP rate received by liquidity generators is known as transfer credit and the TP rate paid by the liquidity users is known as TP charge. Funds Transfer Pricing Operational Flow Liability Units Liquidity Generators Branches raising deposits (CASA, FDs) Profit = TP Credit − CoF Treasury / ALM Central Funding Unit (CFU) Centralizes IRR & Liquidity Mismatch Profit = TP Charge − TP Credit Asset Units Liquidity Users Lending divisions (Mortgages, Loans) Profit = Yield − TP Charge The profitability of the liquidity generators is the difference between TP credit and CoF whereas the profits of the liquidity users are simply the difference between the Yield and TP charge paid. CFU profits are difference between the TP charge and TP credit. FTP mechanism ensures centralization of liquidity risk and IRR in the CFU of the Bank. CFU takes the responsibility of these risks and relieves the business segments (both assets and liabilities) from the possible stress caused in the profitability due to constant changes in the liquidity conditions and interest rates. This model ensures that spreads of business units are protected from the inception of the transaction. The risk of possible fluctuation in the spread due to changes in the liquidity and interest rates in future are assumed by the CFU. Hence, business segments are relieved from unnecessary stress and thus can focus on their core business strength. How TP Rates Are Determined? Determination of TP rates is the crucial component of the FTP mechanism. If these are not determined with proper methodology and rationale then the whole purpose of the FTP will fail. The TP rates for liquidity generators (TP credit) and liquidity users (TP charge) are different. The steps involved in determining TP rate include identification of appropriate market benchmark and adjustment to the rates by relevant market/internal factors. 1. TP Rate for Liquidity Generators The concept of opportunity cost is applied to determine this rate. For example, if a Branch would not have raised funds from the depositors (say @3%), then the Bank would have had required to raise the funds from the money market at the prevailing rates (say@5%). These money market rates are used by CFU to determine TP rates to be credited to liability unit. In money market, the benchmark rate for short term funding (up to 1 year) is MIBOR. In case of funding in foreign currency, the benchmark rate is LIBOR. If the funding is medium to long term then G-Sec Yield for the equivalent maturity can be used as benchmark. Bank can select appropriate benchmarks based on its liability profile and credit rating. It may use single benchmark or average of two benchmark. For example, Bank may use average for MIBOR and T-Bill rates for determining TP rate for 3-month Fixed Deposit raised by Branch. Further, the funds mobilized by liquidity generators have different maturity profiles. Apart from short term and long-term maturities, the nature of maturities may differ based on the funding source. For example, Fixed Deposits have contractual maturity but CASA does not have any fixed maturity as customer can withdraw money at any time. Hence, to arrive at the TP rate, adequate consideration of the behavioural pattern of the funding source is imperative. Thus, the TP rate for the liquidity generators is determined based on the appropriate benchmark available in the money market and the maturity profile of the funding source. 2. TP Rate for Liquidity Users & Key Adjustments Determination of TP rates for assets units requires some adjustments to the TP rate determined for liquidity generators. These adjustments include negative carry for the CRR/SLR maintenance, costs incurred for maintaining liquidity cushion, embedded optionality in terms of prepayment of loans and liquidity premium. Let’s understand them one by one: Negative Carry for CRR / SLR Maintenance Funds mobilized from depositors are subject to CRR/SLR requirements in India. Due to these requirements, Bank is subject to negative carry as the yield on the CRR/SLR reserves are generally lower than the market yields. Hence, the TP rates need to be adequately adjusted to accommodate this negative carry. Liquidity Cushion & LCR Costs Liquidity costs are incurred to maintain and manage liquidity cushion (Example, High-quality liquid assets, maintaining LCR ratio, contingency funding plans). These costs need to be adjusted to calculate the TP charge. Embedded Prepayment Optionality The customer who borrows funds from the Bank receives an embedded option as part of the contract to prepay the loan before the contractual maturity of the term. The funds received before the contractual maturity creates IRR for the Bank. Hence, CFU should be based on the past behaviour of the prepayments, consider this for adjustments to TP rate to be charged to liquidity users. Liquidity Premium Sometimes, Bank may find it difficult to raise funds at reasonable costs due to market or internal factors. Bank may face this difficulty across all funding sources and maturities or few depending on the specific situation prevalent. This situation may arise either due to worsening liquidity conditions in the market or bank specific factors (Example, credit rating downgrade, deposit run). CFU should take these factors into consideration and levy liquidity premium to the liquidity users. These are important adjustments that are performed to determine the TP rate to be charged to liquidity users. Here, we should note that the adjustments discussed above for both TP credit and TP charge are not exhaustive. Bank may have additional adjustments based on the rates offered by competition, economic outlook, desired funding/asset profile, repricing frequency, basis risk, transaction costs etc. Further, these adjustments can result in either positive or negative margins to be added or subtracted from to the TP rate for respective business units, which can, in turn, increase or decrease both the transfer cost of loans and the transfer income on deposits. For example, negative market adjustments may be considered if there is sharp move in the benchmarks compared to the market deposit rates because of extraneous factors. FTP Methodological Approaches There are different approaches to implement FTP in a Bank: 1. Matched Maturity Approach (Gold Standard) This approach involves determining FTP rates based on the marginal costs (based on appropriate benchmarks), liquidity costs, maturity profile of assets and liabilities along with certain market and internal adjustments. Further, these rates are applied at transaction level. This approach is more logical and used widely across Banks. 2. Average Cost Approach Under this approach, average cost of the funds is calculated and is charged to the asset generators. The CoF is calculated for all funds taken together i.e. for the pooled funds, without specific consideration of maturity profile of funding sources. The performance of the liquidity generators is assessed by comparing the budgeted CoF with actual CoF, while performance of liquidity users is assessed based on the spread earned over and above the CoF. 3. Net Funding Approach Business Unit raises funds and deploys it simultaneously. For example, Branch raising funds and providing loans in the local area/region. Hence, no distinction in terms of asset and liability units is made. Central Treasury lends funds to deficit units and mobilizes funds of surplus units. Business performance is assessed based on NIM achieved by the respective business unit against the budgeted NIM. 4. Benchmark-Linked Approach Under this approach, liquidity generators transfer the funds to CFU and receive TP credit. CFU transfers the funds to liquidity users and levy TP charge. The TP rates are determined based on CoF and market benchmarks. Average Cost and Net Funding Approach are simple to implement in comparison with Matched Maturity Approach. These approaches do not need efficient IT infrastructure to implement FTP mechanism in Bank. However, these approaches do not consider marginal CoF based on market benchmarks, liquidity costs, maturity profile of the assets and liabilities, internal/external adjustments. Hence, these approaches fail to pass on the appropriate costs, benefits and risks to the liquidity generators and users. Further, the IRR and liquidity risks are not objectively managed under these approaches. Benchmark linked approach is bit superior compared to these approaches but still it does not consider other factors which are factored in in the Matched Maturity approach. FTP Mechanism – Key Participants & Governance The important stakeholders and their roles and responsibilities are briefly discussed below: 1. Liquidity Generators They are responsible for raising funds from for the Bank. The funds can be raised from depositors in form of CASA and Term Deposits or from market in form certificate of deposit, bulk deposits, call, repo, term loans, NCDs, debentures, external borrowings etc. Branches raise funds from depositors whereas Treasury unit of the Bank raise funds from the market. The objective of the liquidity generators should be to raise funds with adequate consideration of CoF, funding mix, diversity of borrowers and maturity profile of the assets generated by Bank. 2. Liquidity Users They are responsible to deploy funds generated in the profitable assets for the Bank. These assets can be advances/loans or investments. Different lending divisions across the Bank provide loans to its retail and corporate customers for different end use. These loans can be secured or un-secured, short or long term, floating or fixed, amortized or un amortized. The Treasury division of the Bank invests funds in government and corporate securities. 3. Central Funding Unit (CFU) This unit is generally part of Treasury or ALM department depending on the reporting structure within Bank. It manages the liquidity risk and IRR for the Bank arising out of the maturity mismatches between assets and liabilities. It monitors the market benchmarks, maintains liquidity cushion and determines the FTP rates. 4. Finance and Planning Division Finance division is responsible for implementation of the FTP within Bank. It coordinates with liquidity generators, liquidity users and CFU to ensure smooth functioning of the FTP mechanism. It ensures the FTP rates are finalized after taking inputs and concurrence from all business units. It monitors and reviews the lending or borrowing transactions which are not in line with the defined FTP rates and seeks required justifications from the respective business units. Finance division is responsible for setting up the business budget along for each business segment, product category, branch. It is also responsible for performance monitoring and reporting. 5. Information Technology (IT) IT division is responsible for the availability of adequate IT infrastructure used in FTP mechanism and its uninterrupted functioning. IT division should ensure the most of the critical procedures involved in the FTP (Example, fetching market benchmarks, calculating liquidity costs, assignment of FTP rates, exception approvals in case of breach of FTP rates etc.) are automated. It should be further responsible for the logical access management, change management, maintaining of audit logs and trails. 6. Market Risk Management This division should monitor and report on the liquidity and IRR to the management. It should ensure business units are ensuring compliance with the Market Risk Management policy of the Bank. 7. Asset Liability Committee (ALCO) Asset Liability Committee is responsible for setting up adequate governance framework in terms of FTP policy, reporting mechanism and exception management mechanism. It should have adequate oversight on the FTP mechanism, changing market scenarios, funding mismatches, level of liquidity / IRR risks. ALCO should have members from the respective business units to ensure fair representation. The discussion in the meetings and actions taken by ALCO should be regularly updated to Risk Management Committee/ Board. 8. Internal Audit Internal Audit should perform periodic reviews to ensure adequate controls are in place and working effectively along with compliance with the FTP policy. Benefits of FTP Mechanism Some of the significant advantages of the effective FTP mechanism (viz. Matched Maturity approach) has been listed below: Centralization of Risks IRR and liquidity risks are centralized under FTP mechanism and managed by ALM desk. This leads to close monitoring and management of these risks by specialist function. Controlled Maturity Mismatch Liquidity users in Banks are generally inclined towards generating long term/illiquid assets if they are not charged for the liquidity risk undertaken. This leads to aggressive maturity transformations by liquidity generators, which in turn, leads to cashflow mismatches between assets and liabilities thereby exposing Bank to the structural liquidity risk. FTP mechanism discourages unhealthy maturity transformation as the illiquid assets are charged after due consideration of liquidity risk for the longer maturity. Appropriate Pricing FTP ensures that the pricing of products is based on the market benchmarks, maturity profile, cost of maintaining liquidity cushion and other risk factors. This ensures no undue benefits are received by business units in terms of lower CoF. Use of marginal CoF ensures that the pricing is performed based on the current rates rather than historical rates. Further, the pricing is performed for each transaction separately. Funding Strategy FTP not only identifies profitable /non profitable segments but also identifies the appropriate funding mix suitable for the Bank. For eg, the funding mix for a Bank predominantly in long term lending business (Example, infrastructure loans) will be substantially different from the Bank which is mainly into short term unsecured lending (Example, credit cards/personal loans). It helps management to drive the behaviour of the liquidity generators in terms of raising funds from different instruments in line with the product profile of the liquidity users. Micro Level Performance Monitoring FTP enables management to assess profitability at individual business segment, products, relationship manager and customer level. Margins earned by all business units become comparable as the FTP ensures allocation of CoF appropriately to business units. Further, due to centralized management of the liquidity risk and IRR, the performance of the individual units can be measured purely based on the factors in control of the business units. Appropriate Targets The granular visibility of performance helps management to set appropriate targets, KRAs and incentives for different business units, products and relationship manager. Capital Allocation Banks are required to maintain regulatory capital for every asset created. Further, the quantum of capital depends on the risk profile of the asset. FTP assists management to identify the profitable segments / products from not so profitable segments/products. This critical input enables management to allocate the costly and scarce capital to the areas which are profitable for banks. Thus, FTP mechanism leads to prudent allocation of capital. Conclusion FTP mechanism is an objective management accounting technique which is beneficial to Banks on multiple counts viz. appropriate pricing, effective risk management, correct performance monitoring, and prudent capital allocation decisions. Effective governing framework, availability risk related competencies, access to the relevant market information systems, effective internal IT infrastructure, detailed FTP procedures and comprehensive reporting mechanism will ensure smooth functioning of FTP mechanism in Banks. References Occasional paper No 10. – Liquidity transfer pricing – Financial Stability Institute Liquidity Risk – Management and Supervisory Challenges – BCBS Principles for Sound Liquidity Risk Management and Supervision – BCBS Funds Transfer Pricing in Banks – CAFRAL Consultation Paper on CEBS’s Guidelines on Liquidity Cost Benefit Allocation (CP36) – CEBS

The Chartered Accountant • Journal of ICAI June 2021 • Vol. 69 • No. 12 • pp. 79–82 (Journal pp. 1491–1495) TAXATION Taxation Aspects of Transfer of Property between Firms and Partners CA. Priya Jain The author is a member of the Institute. She can be reached at capriyajain99@gmail.com and eboard@icai.in 📑 Statutory Context & Legislative Intent With the combined aim to promote digitisation, minimising litigations, and addressing the gaps in the tax on transfer of money or property or stock-in-trade by a firm/AOP/BOI to its firm/members, the Government of India unleashed Budget 2021, which received assent from the President of India on 28th March 2021 along with some amendments in the original amendments proposed in Budget 2021. Finance Act, 2021 settled some important issues. One among those issues was–taxation of firms in the event of dissolution/reconstitution, given ample of favourable as well as contradictory judgements available. The article throws light, in detail, on the issues and the implication of the amendments made to resolve those issues. Read on to know more… Background Prior to substitution by Finance Act, 2021, as per Section 45(4) of the Income Tax Act, 1961, profit or gains arising on transfer of capital asset on the dissolution of a firm or other association of persons or body of individuals or otherwise, was chargeable to tax as the income of the firm, association of persons or body of individuals, of the previous year in which the said transfer took place. Further, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing for the purpose of Section 48. However, there has been a long drawn dispute on taxation of capital gain under section 45(4) and it involved lot of controversies and some of them are listed below– Key Pre-Amendment Controversies: Whether the expression “Dissolution of the firm/AOP/BOI or otherwise” as mentioned in Section 45(4) includes reconstitution also? Whether the provisions would be applicable in case where assets are revalued or self-generated assets are recorded in the books and payment made to partner is in excess of capital contribution? Whether money paid to partner would be taxable in the hands of the firm under section 45(4)? All these issues have been addressed by Finance Act, 2021 with the insertion of Section 9B and 48(iii) and substituting Section 45(4) w.e.f. Assessment Year 2021-22. Impact of the Amendments made by the Finance Act 2021, Section-wise Important terms for the purpose of the Section 45(4)/9B of the Income Tax Act: 1. Specified entity: Means a firm or other association of persons or body of individuals (not being a company or a co-operative society). 2. Specified person: Means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. 3. “Reconstitution of the specified entity” means, where— (a) one or more of its partners or members, as the case may be, of such specified entity ceases to be partners or members; or (b) one or more new partners or members, as the case may be, are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, as the case may be, of the specified entity, before the change, continue as partner or partners or member or members after the change; or (c) all the partners or members, as the case may be, of such specified entity continue with a change in their respective share or in the shares of some of them; Section 9B – Income on receipt of capital asset or stock in trade by specified person from specified entity At the time of Reconstitution or dissolution of specified entity– If a specified person receives any capital asset or stock in trade or both, then there shall be deemed transfer of capital asset or stock in trade or both in hands of the specified entity in the year in which such capital asset or stock in trade are received by specified person and Fair Market value of the capital asset or stock in trade shall be deemed to be the full value of the consideration received or accrued and shall be taxable under head “Capital Gain” or “Profits and Gains of Business and profession” in accordance with the provisions of the Act. Computation of Gain arising from deemed transfer of stock-in-trade under section 9B read with Section 28: Fair Market value of stock transferred shall be recorded as sale and forms part of the business profit within the provisions of Section 28 of the specified entity. Computation of Capital Gain arising on deemed transfer of capital asset under section 9B read with Section 48 Fair Market value of capital asset as Full value of consideration received or accrued as a result of the transfer of the capital asset --- Less: Indexed Cost / Cost of acquisition of the asset --- Less: Indexed Cost / Cost of Improvement of the asset --- Income taxable under head capital gain --- “It is pertinent to note that mere reconstitution or dissolution of specified entity would not require application of provision of Section 9B.” It is pertinent to note that mere reconstitution or dissolution of specified entity would not require application of provision of Section 9B. The provision becomes applicable when a specified person receives any capital asset or stock-in-trade at a time of reconstitution or dissolution of the specified entity. However, deemed taxability shall arise in the hands of the specified entity only. Section 45(4) – Capital Gain on receipt of Money or Capital Asset by Specified Person in the hands of the Specified Entity At the time of Reconstitution of specified entity, where a specified person receives any money or capital asset or both; then any profit and gains arising from such receipt of money or capital asset by specified person shall be deemed to be the income of the specified entity under the head “Capital Gains”; in the previous year in which such capital asset or money or both were received by the specified person and such profit or gains shall be calculated in accordance with the following formula– A = B + C - D Where, A = income chargeable to income-tax under the head “Capital gains”; B = value of any money received by the specified person from the specified entity on the date of such receipt; C = the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and D = the amount of balance in the capital account of the specified person in the books of account of the specified entity at the time of its reconstitution without considering increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset (if any). Where the value of A is negative, it shall be deemed to be nil. For the purpose of this sub-section: “Self-generated Goodwill” or “self-generated asset” means goodwill or asset which has been acquired without incurring any cost for purchase or which has been generated during the course of the business or profession. Explanation- It has been clarified that when a capital asset is received by a specified person from the specified entity in connection with the reconstitution of specified entity, the provisions of this sub-section, i.e., 45(4) shall operate in addition to the provisions of Section 9B and the taxation under the said provisions thereof shall be worked out, independently. Important Note on Scope of Section 45(4): Section 45(4) comes only into the light at the time of reconstitution of a specified entity. It provides for taxability of profit and gains on receipt of capital asset or money in the hands of specified entity which is actually the income of specified person. Further, section 45(4) shall operate in addition to the provisions of Section 9B i.e. At the time of reconstitution, suppose if a specified entity transfers capital asset to its specified person then the same shall be taxable under section 9B as well as 45(4). Section 48(iii) – Mode of computation of Capital Gain Section 48 provides for the deduction at the time of calculating capital gain from the full value of consideration received as a result of transfer of capital asset. A new clause (iii) has been inserted vide Finance Act 2021 which provides for an additional deduction in respect of capital gain taxed under section 45(4), i.e., deduction shall be allowed in respect of amount chargeable to tax under section 45(4) from the full value of the consideration of the capital asset at the time of transfer, calculated in the prescribed manner. However, the method for the same is yet to be prescribed by CBDT. Computation of Capital Gain as per amended Section 48 Full value of consideration received or accrued as a result of the transfer of the capital asset --- Less: Indexed Cost / Cost of acquisition of the asset --- Less: Indexed Cost / Cost of Improvement of the asset --- Less: Amount chargeable to tax under section 45(4) in the hands of specified entity which is attributable to capital asset being transferred --- Income taxable under head capital gain --- Note- It is important to note that additional deduction shall arise only in case of reconstitution as section 45(4) cover only the reconstitution aspect and to mitigate the impact of double taxation [i.e. taxability under section 9B and 45(4)], clause (iii) has been inserted. Comparative Analysis of Section 45(4), 9B and 48(iii) of the Income Tax Act, 1961 Section 45(4) provides for taxability in the event of Reconstitution of specified entity whereas Section 9B provides for taxability in the event of reconstitution or dissolution of specified entity. For example- At the time of Reconstitution of the firm, if a partner gets capital asset and stock in trade from the firm, there are two transactions involved. First one is relinquishment of his rights as a partner and second is transfer of money or asset by the firm. Former transaction is dealt under the provisions of Section 45(4) and the latter in section 9B. However, in the former transaction income arises in the hands of the partner but as per section 45(4) it is deemed as income of the firm. Thus, the firm would be assessed under section 9B for its own income and under section 45(4) for the income arising to the partner. Further, in case of reconstitution of firm double taxability will arise once under section 9B and second under section 45(4). To remove the impact of such double taxation, clause (iii) has been inserted to the section 48 which provides for the deduction of the amount attributable to tax under section 45(4) from the full value of consideration received or accrued at the time of transfer of capital asset. “The changes have been made applicable from the Assessment Year 2021-22, wherein if partner(s) or member(s) of the firms/AOP/BOI reconstituted or dissolved during the concerned year received any capital asset, stock and/or money, then the firm/AOP/BOI are required to evaluate the implications of the said amendment.” Concluding Remarks Though the Finance Act, 2021 addressed several debated issues, few clarifications are further required from CBDT with respect to period of holding for capital asset classification for the purpose of Section 9B & 45(4), method of attribution under section48(iii), availability of deduction by virtue of Section 48(iii), bifurcation of amount attributable towards receipt of money and capital asset etc. Further, the changes have been made applicable from the Assessment Year 2021-22, wherein if partner(s) or member(s) of the firms/AOP/BOI, reconstituted or dissolved during the concerned year received any capital asset, stock and/or money, then the firm/AOP/BOI are required to evaluate the implications of the said amendment. — CA. Priya Jain

The Chartered Accountant • Journal of ICAI June 2021 • Vol. 69 • No. 12 • pp. 89–92 (Journal pp. 1501–1504) TECHNOLOGY XBRL in India – Unchartered territories! Revathy Ramanan The author is a Guidance Manager at XBRL International. She can be reached at iyer.revathy@gmail.com and eboard@icai.in 🌐 Digital Transformation Context The pandemic has accelerated an already enormous shift and preference for businesses going digital. Different aspects of doing business have transitioned to a digital mode, benefiting the stakeholders involved. When it comes to digitalising business reporting, a smart way to do this is to adopt a standard such as XBRL that supports key requirements in that area. XBRL is the international standard for digital reporting of financial, performance, risk, and compliance information, although it is also used for many other types of reporting. XBRL specifications are freely licensed to anyone seeking to use the standard. Read on… XBRL provides a language in which reporting terms can be authoritatively defined, facilitates the creation of reports against those authoritative terms, enables definition and execution of validation rules to ensure data quality, offers highly stylised customised presentation as well as a standard tabular representation of reports. The XBRL reports make automatic consumption possible without the need to rekey the data. More than 180 projects have adopted XBRL across more than 60 countries. Securities regulators, stock exchanges, business registrars, central banks top the XBRL implementation list. XBRL adoption in India ticks these popular categories, with the Reserve Bank of India starting the first XBRL implementation in 2008 for Basel II reporting. In 2011-12 Ministry of Corporate Affairs had mandated public companies above a threshold to submit their annual report in XBRL and designated companies to submit their cost audit report in XBRL. BSE had started to collect financial results and other corporate governance data in XBRL since 2015. In 2018 following the advice from the Securities and Exchange Board in India (SEBI), the nationwide exchanges BSE, NSE and MSE shifted towards a unified XBRL taxonomy to enable easier filings and the consumption and comparison of resulting digital disclosures. “In 2018 following the advice from the Securities and Exchange Board in India (SEBI), the nationwide exchanges BSE, NSE and MSE shifted towards a unified XBRL taxonomy to enable easier filings and the consumption and comparison of resulting digital disclosures.” There are avenues to explore where India can implement XBRL beyond the usual suspects and leverage the benefits. A few of those areas are discussed in this article to steer ideas for potential XBRL implementations. Sustainability Reporting The recently introduced Business Responsibility and Sustainability Report (BRSR) applicable to the top 1000 listed companies from the financial year 2022-23 should be the next logical stop for digital reporting in India. The much in focus (rightly so) efforts to mandate non-financial reporting should leapfrog to the digital mode with XBRL. The benefits are pretty straight forward, enabling companies to produce a high-quality digital sustainability report. Investors, analyst, data aggregators, policymakers are all looking for sustainability data. It becomes imperative to make the data available in a usable format. The machine-readable XBRL reports should solve this problem facilitating automatic consumption and analysis without the need to rekey and reimagine data from the PDF reports. “Here it is worth noting the recent proposal of the European Commission to adopt the Corporate Sustainability Reporting Directive (CSRD) to improve the flow of sustainability information in the corporate world. The directive requires companies to use Inline XBRL (XBRL variant), making sustainability reporting more consistent so that stakeholders can use comparable and reliable sustainability information.” Here it is worth noting the recent proposal of the European Commission to adopt the Corporate Sustainability Reporting Directive (CSRD) to improve the flow of sustainability information in the corporate world. The directive requires companies to use Inline XBRL (XBRL variant), making sustainability reporting more consistent so that stakeholders can use comparable and reliable sustainability information. It is also worth underlining the focus on the need to eventually shift towards relevant international disclosure standards. Municipality Reporting Local and national government leaders and officials, researchers, policymakers and wider stakeholders all rely on municipality data for a range of information. Open Government Data Platform does make municipality data accessible; however, the question remains how effectively the data can be used for aggregate and drill-down analysis. For example, the same underlying concept “Residential Property Tax Collection” is referred as “_2017_18_property_tax_collection_in_crores_residential” in one municipality and in other as “residential_collection_in_cr“. Another notable difference is that elements are created for each reporting period in the first case, and in the second case, a separate file for each period is available with the period mentioned in the title. A significant normalisation effort is required before one can start using the data meaningfully. Why XBRL Solves Municipal Reporting Chaos: A common dictionary definition using XBRL can be a good starting point for municipal reporting. XBRL provides a framework to define the reporting requirements unambiguously; it also provides a standard approach to report meta-data such as period, accuracy and currency for each data point. The data definition variation in the above example is because of the absence of any standard that XBRL can easily bridge. XBRL also enables defining machine-executable rules to ensure the data collected meets predefined quality criteria. Efforts are underway in the US where the Comprehensive Annual Financial Reporting (CAFR) and other reporting requirements are being developed as an XBRL taxonomy demonstrating how comparable data standards could benefit all of those involved in reporting, from local governments to bond issuers, analysts and investors. Here in India, while the Municipal Bond market is still relatively new and relatively immature, the use of standardised digital reporting at a state and municipal level offers a unique opportunity to underpin the enhancement of needed infrastructure across our communities. Insurance Supervision The Insurance Regulatory and Development Authority of India (IRDAI) plans to introduce a new risk-based solvency system and strengthen risk-management rules. This should be a good juncture for them to consider supervisory data collection using XBRL. A number of XBRL specifications are especially suited for supervisory data collection, including multi-dimensional data model, definition of complex validation rules, and standard tabular representation of data. It is also now possible to represent XBRL data as CSV, making it easy to collect granular, high volume, large datasets. The collection in a digital format backed up by a detailed taxonomy would accelerate data analysis for IRDAI. “Many European insurance and pension supervisors collect Solvency II data from their regulated entities in XBRL for submission to the European Insurance and Occupational Pensions Authority (EIOPA).” Reporting requirements and rules shared with the Insurance companies in a machine-readable format would facilitate automatic, high-quality creation of required reports. Similar implementation? Many European insurance and pension supervisors collect Solvency II data from their regulated entities in XBRL for submission to the European Insurance and Occupational Pensions Authority (EIOPA). Utilities and other reporting Reporting in XBRL is not restricted to financial reporting as commonly understood. It can be extended to collect operational information related to all kinds of business information. For example, utilities and allied agencies such as power generation distribution, sewage treatment plants, water boards, regional transport office, pollution control boards. A reason to consider XBRL here is to enable smooth data collection across the network of regional offices. The frequency of reporting and the huge number of distributed entities makes it necessary to have a standard for digital data exchange. Data publication is a vital function for these agencies as it supports a considerable socioeconomics and environmental research. With XBRL, the aggregation and publishing of data collected becomes easier as the reports are digital and consistent. Moreover, the well-define data dictionary would be helpful for stakeholders to precisely understand the definition of published data. A similar effort to note is that Colombia’s Superintendency of Residential Public Services has recently launched a project to collect XBRL data from entities and companies that provide domiciliary public services of the aqueduct, sewerage, cleaning, energy and gas. Re-purposing existing filings Financial statements are an essential document sought by credit rating agencies, banks and industry-specific regulators. Currently, these are submitted as PDFs or in other proprietary templates/formats. “One of the perceived benefits of XBRL is enabling the reuse of the report created. It will be prudent to ask the companies to resubmit XBRL reports filed with MCA.” One of the perceived benefits of XBRL is enabling the reuse of the report created. It will be prudent to ask the companies to resubmit XBRL reports filed with MCA (the optimum would be to obtain it from the regulator – that is a conversation for another day). It will immensely benefit from accepting already digitally structured report as the collection agency can immediately use the report in their monitoring/analysis model without requiring rekeying of information or other transformation. From the companies’ perspective, it leads to ease of doing businesses as they need not spend their resources to create financial statements for each agency. One such example of report reuse is BSE permitting companies to file their XBRL Annual Report submitted to the MCA as part of their Annual Returns. An interesting project to note here is SBR Nexus in the Netherlands, aiming at the cross-sectoral exchange of (financial) company data between entrepreneurs, companies, and governments. In the Netherlands, and now in Germany, the reuse of digital private company annual reports to make credit allocation decisions, and to support the efficient allocation of capital within banks, is becoming a key driver for SME company loans. “In the Netherlands, and now in Germany, the reuse of digital private company annual reports to make credit allocation decisions, and to support the efficient allocation of capital within banks, is becoming a key driver for SME company loans.” The XBRL Toolbox & The Road Ahead It goes unsaid that these are sample use cases and not the only areas in which XBRL can be implemented. XBRL is built typically to solve the problem associated with collecting business/performance data across entities for monitoring, analysis, or publications. XBRL is a “toolbox” of specifications offering a wide range of features to support digital data supply chain requirements. It is backed up by a global network of software and services – including a range of leading players from right here in India -- that means that it is easy and increasingly cheap to ensure that disclosures of all kinds can go digital with accurate, timely, comparable XBRL in a surprisingly short time, helping analysis of all kinds. “XBRL is a ‘toolbox’ of specifications offering a wide range of features to support digital data supply chain requirements.” In the era of data transparency, data must be collected and shared in the most useful way, which XBRL aims to achieve. The way forward should be adopting a digital standard without requiring reinventing of the wheel. “In the era of data transparency, data must be collected and shared in the most useful way, which XBRL aims to achieve. The way forward should be adopting a digital standard without requiring reinventing of the wheel.” — Revathy Ramanan, Guidance Manager at XBRL International

Industry • Production Linked Incentive (PLI) Incentivising Indian Manufacturing for Growth Journal: The Chartered Accountant, June 2021 (Vol. 69, No. 12) • Pages: 83–88 (Journal pp. 1495–1500) GR CA. G. Ranganathan The author is a member of the Institute. He can be reached at rangaravi1995@gmail.com and eboard@icai.in. “The Indian Government had recently introduced a production linked incentive (PLI) scheme with the objective to give companies incentives on incremental sales from products manufactured in domestic units. The scheme encourage local businesses to set up or expand manufacturing units as well as it invites foreign companies to set up units in India. The scheme is part of Aatmanirbhar Bharat campaign to reduce reliance on imports and generate more employment. This article will cover details of PLI scheme and how well it augurs for Indian manufacturing. Read on…” To boost domestic manufacturing and as a way to reduce outgo of forex, the Government of India in March 2020 had introduced an incentive scheme for three sectors – Mobile & allied equipment, Pharmaceutical ingredients and Medical devices manufacturing. This incentive is available to foreign entities as well as it encourages local companies to setup or expand existing manufacturing units. The scheme was further expanded by the Cabinet to another ten sectors in November, 2020 totalling the financial outlay for the entire incentive program to about ₹ 2 lakh crores. 1. India’s Manufacturing Post-Independence Before getting into PLI scheme, let us look briefly into India’s manufacturing sector, its contribution to GDP, employment, exports. In 1951, manufacturing sector’s GDP contribution was 11% while its employment contribution also stood at 11%. Contrast this to agricultural sector which employed more than half the population & contributed 53% to GDP. In stark difference to most developed economies, growth trajectory of GDP in India has favoured the services sector. The decline of agriculture in its GDP contribution was taken over by the services sector. In 2019, Sector GDP Contribution (%) Job creation (%) Agriculture 17.76% 42% Industries 27.48% 26% Services 54.77% 32% Over time the service sector has gained substantially as a contributor to GDP at the cost of ground lost by agriculture sector. However, as evident above, service sector is not been able to garner surplus labour from agriculture. Despite the export contribution from labour intensive sectors close to 60%, India’s share in global merchandise exports hovers around 2%. Investment in manufacturing sector and increasing its share in GDP can help absorb the excess labour from agriculture and increase India’s share in global merchandise exports. There is a situation of near stagnation of manufacturing which can be attributed to cost of capital, land, labour productivity, low investment in R&D, lack of size and scale, etc., As a result, it became economical for our industries to import than engage in domestic manufacturing. Governments have tried to offset the imbalance in domestic manufacturing vis-à-vis importing through developing industrial infrastructure, relaxing FDI norms to facilitate foreign inflows, skill development schemes, improving metrics in ease of doing business, make in India, etc. However a needs to be done on ground. India’s Asian counterparts such as Bangladesh, Vietnam have been able to develop more manufacturing facilities that have been shifting from China even before the pandemic (as China’s per capita wages is on the rise – this has led some companies to move out and tap more cost effective markets), while India could not reap the benefits of the same. The Indian economy had signalled a slowdown since second half of 2019 & the pandemic has accelerated the process of slowdown. To counter these and project itself as a viable alternative in the Global supply chain, reduce dependency on China and mark a new lease of life to Indian manufacturing, PLI has been envisioned by the government. 2. Production Linked Incentive (PLI) Production Linked Incentive scheme is an outcome based program to boost domestic manufacturing and attract investments at scale. The scheme provides for an incentive of 4% to 6% to eligible companies on incremental sales (Over base year 2019-20) of manufactured goods for a period of 5 years subsequent to base year (i.e. till 2024-25). 2.1 Eligible Companies A company registered in India, proposing to manufacture goods covered under target segments in India, and making an application for seeking approval under the scheme. Applicant can operate new/existing manufacturing facilities to manufacture goods covered under target segments. Manufacturing to be carried at one/more locations in India. The scheme for Large scale electronics is available to all companies registered in India which meet the threshold of specified investment (₹ 100 to ₹ 1000 crore) in the next four years as well as incremental sales of manufactured goods. Eligibility also subject to criteria under different target segments in the same scheme. Threshold of incremental investment and sales also to be considered for eligibility. 2.2 Incremental Sales & Investment An applicant must meet the threshold of incremental investment and incremental sales of manufactured goods for eligibility of incentive. For incremental investment for any year, cumulative investment done till such year (including year under consideration) over base year shall be considered. For incremental sales, the total sales of manufactured goods under target segments for such year over base year shall be considered. In any given year if the applicant fails to meet the criteria, the applicant shall not be eligible for incentive in that particular year. However, no restrictions are in place for claiming incentive in subsequent years upon the applicant satisfying the criteria. 2.3 Incremental Investment over base year For example, in case of mobile phones (with invoice value of ₹ 15,000 & above) the applicant must have invested ₹ 250 crores or more by 31.03.2021 to satisfy incremental investment in that year. Likewise, Cumulative investment of ₹ 500 crores by 31.03.2022, ₹ 750 crores by 31.03.2023, ₹ 1000 crores by 31.03.2024 needs to made to avail the incentive. 2.4 Some inclusions & exclusion in Incremental Investments All non-creditable taxes and duties would be included. Expenditure on land and building (including factory building/under construction) not to be included. Expenditure on used/refurbished plant, machinery and equipment are included subject to satisfying conditions like minimum residual life of at least 5 years, valuation by a Chartered Engineer assessing value and residual life. With respect to imports, valuation to be in accordance with Customs Valuation rules and circulars. Manpower cost for R&D not to be included. 2.5 Sectors included under PLI scheme Table (A) – Phase 1 (Announced March / February 2020) Sectors Implementing Ministry/ Department Financial Outlay (₹ in crores) Mobile manufacturing & Specified electronic components MEITY 40,951 Critical key starting materials/ drug intermediaries & Active pharma ingredients Dep of Pharmaceuticals 6,940 Manufacturing of medical devices Dep of Pharmaceuticals 3,420 TOTAL 51,311 Table (B) – Phase 2 Expansion (Announced November 2020) Sectors Implementing Ministry/ Department Financial Outlay (₹ in crores) Advance chemical cell battery manufacturing NITI Aayog & Dep of Heavy industries 18,100 Electronic/Tech products MEITY 5,000 Automobile & auto components Dep of Heavy industries 57,042 Pharmaceuticals drugs Dep of Pharmaceuticals 15,000 Telecom & networking products Dep of Telecom 12,195 Textiles: Man-made fibre & technical textiles Mo textiles 10,683 Food processing Mo Food processing Industries 10,900 High Efficiency Solar PV modules Mo New & renewable energy 4,500 White goods (ACs & LED) Dep for Promotion of Industry & Internal trade 6,238 Speciality Steel Mo Steel 6,322 TOTAL 1,45,980 Table (A) represents announcements made in February’ 2020 and based on its response and further work carried by ministries, departments, NITI Aayog, more sectors were included in November’2020 as indicated in Table (B). The final proposals of PLI for individual sectors will be appraised by the Expenditure Finance Committee and approved by the cabinet. Any new sector for PLI will require fresh approval of the cabinet. 3. Positives of the Scheme There are certain features that could make the scheme effective in implementation and are enlisted below: To begin with PLI scheme has been announced after intense stakeholder consultations and deliberations. It is an outcome based scheme, meaning, incentives will be disbursed only after production takes place in the country. Calculation of incentives are based on incremental production and to achieve this additional investments are also expected to either establish green-field or expanding existing facilities. Scheme focuses on size and scale by selecting players who can deliver volumes. Selection of sectors are wide ranging from technology, integration with global value chains, labour intensive to sectors linked with rural economy. Scheme also addresses the financial constraints of companies and helping them achieve scale and size that can enable Indian products to be globally competitive. 4. Immediate Impact of the Scheme The scheme has started to a positive response with names from both global and domestic mobile phone and electronic component makers getting approvals from the government. Of the total production, major companies under Mobile phone segment have proposed more than 10 lakh crore and those under specified electronic components have proposed production of over 15,000 crore. The government has till date approved 16 of the 22 applications that it received under this sector. This segment is alone expected to bring in 3 lakh direct employment in next 5years and thrice the number in indirect employment. Recently TATA Sons has decided to invest $1 billion for a new mobile phone manufacturing facility (for Apple’s sourcing needs) in Tamil Nadu using the benefits under PLI scheme. Add to that this facility is set to employ 18,000 of which 90% shall be women. Other sector which has seen light of the Scheme (Feb’2020 announcement) – visible through the 215 applications under bulk drugs and 28 applications received from 23 Medical devices manufacturers under Medical devices. A maximum of 136 applications in bulk drugs and 28 for medical devices are likely to be approved. 5. Potential of Other Sectors The above (4.) sheds light on the effects of Feb’2020 measures. Similar announcement was made in Nov’2020 enlarging the scope of the scheme to include 10 more sectors. Let us look briefly into the potential of some of those sectors (Reference Table (B)): Advanced Chemistry Cell (ACC) Battery Largest economic opportunities of this era from consumer electronics, electric vehicles to renewable energy. Technology Products India is projected to have $ 1 trillion digital economy by 2025. Add to that the government’s push towards data localisation, projects like smart city, etc., are expected to increase demand for electronic products. Automotive Industry To make an already economic growth contributor more competitive. Pharmaceuticals Indian pharma industry is currently 3rd largest in volume and 14th largest in value globally. It contributes 3.5% of total drugs and medicines exported globally. PLI envisages to make the industry engage in high value production. Telecom & Networking Products India is aspiring to become a major original equipment manufacturer of telecom and networking products. Here PLI is expected to attract large scale global and domestic investments. Textiles: Man-Made Fibre & Technical Textiles India’s share in global exports of textiles and apparel is about 5%. However in man-made fibre India’s contribution is low in comparison to global consumption. PLI lays special emphasis on man-made fibre segment and technical textiles. Food Processing PLI supplements Government’s policy of doubling farm income by 2022 coupled with better prices and reducing high wastages, also potential to generate medium to large scale employment. Solar PV Modules India currently imports Solar PVs (> 70%) and dependent on China. PLI tries to incentivize domestic and global players in building large scale Solar PV capacity to capture global supply chains and also give thrust to India’s green energy aspirations in fulfilling Paris Climate agreement and Sustainable development goal-7 (Clean & affordable energy). White Goods (ACs & LED) High potential of domestic value addition and making globally competitive products. Also reduce import bill and focus on in house manufacturing enabling large scale jobs being created. Speciality Steel India is world’s 2nd largest producer and a net exporter. It also possess potential to become champion in certain grades of steel. PLI tries to enhance capabilities for value added steel that can increase exports. 6. Challenges with PLI “Any scheme will have its own share of challenges and the success or failure depends on how well the ecosystem surrounding it behaves.” Despite the prospects visible through more applications and potential of different sectors there are some areas which can hinder optimum realisation of the scheme some of which are listed below: Fine Print Availability: Guidelines in the form of fine print for the sectors announced are not available in public domain and available currently only for Mobile phones & Specified electronic component manufacturers (refer 2.1 to 2.4). Private Investment in Labour Intensive Sectors: Despite consistently improving in ease of doing business ranking released by World Bank, the private investment in labour intensive sectors has not increased proportionally. Past Initiative Precedents: Similar initiatives in the past have not yielded desired results showing implementation issues and tight regulations making businesses investment options averse. Strict Commitments & Documentation: Requirements of strict commitments from companies, loads of documentation as seen with EV batteries, the scheme may make it tough for India’s EV industry which is at its infancy and also where business visibility is low. Fitch Solutions Assessment on Automotive Sector: According to Fitch Solutions (rating agency), in case of automobile industry (highest recipient of incentives – refer Table (B)), it reiterated that PLI could bring in significant benefits to the sector over next 5 years. However, the sector will continue to face operational challenges in the form of legal risks, excessive bureaucracy, patchy utility infrastructure that increases the cost of doing business in India. This could minimise the impact of PLI in realising its potential. Land Acquisition Challenges: The land acquisition challenge in India is another averse factor for investors both global and domestic with land policies different in many states (as land is a state subject) and often has led to investors exit/shift to nearby Asian countries. Multiplicity of Labour Regulations: Another area of concern for investors is the compliance with numerous labour laws (different in different states as labour is a concurrent list item) and the number of returns associated with it. Commercial Dispute Resolution Delays: Resolution of disputes in commercial cases in India takes longer time to be redressed adding to negative Investor sentiment towards Indian markets. Domestic Capabilities & Long-Term Sustainability: Presence of challenges for domestic players as to whether they can build core design and brand capabilities and also scale up to become globally competitive by optimising PLI incentive and be sustainable in future once the scheme settles down. 7. Conclusion “PLI scheme has come at a most crucial juncture in Indian economy having potential to improve India’s manufacturing sector’s GDP to much higher levels over the next five years in addition to creating more employment opportunities.” Any scheme will have its own share of challenges and the success or failure depends on how well the ecosystem surrounding it behaves and government’s efforts in streamlining policies to meet the logical conclusions. The government on its part had initiated changes to the functioning of business in India in the form of IBC for insolvency resolution proceedings, GST to create a unified tax and one market, New Delhi International arbitration centre to function as a dispute resolution centre with a vision to make India an international arbitration hub, reduction in income tax rates for manufacturing entities, Codifying more than 40 labour laws into 4 codes, more relaxations in FDI, various government programs among others. The government is also planning to have a dedicated single window clearance portal for facilitating easy access to investors to policy makers at Central and State levels, faceless assessment and appeals (at different stages of implementation), creation of land pools for Industrial activity across the country (one estimate says the identified area – 4,61,589 hectares is twice the size of Luxembourg, a European country) among other measures being considered by respective state governments. PLI scheme has come at a most crucial juncture in Indian economy having potential to improve India’s manufacturing sector’s GDP to much higher levels over the next five years in addition to creating more employment opportunities. With the scheme unlocking its true potential, more sectors could be on the anvil and can lead India to transform into a higher-middle income economy, be an integral part of global supply chain and also achieve Aatmanirbhar Bharat. Finally to answer whether PLI can be a game changer in Indian Manufacturing – that time will tell. However, efforts are in right direction and it is hoped that it will Indian manufacturing to the forefront and make India Aatmanirbhar.

The Chartered Accountant • Journal of ICAI May 2021 • Vol. 69 • No. 11 • pp. 51–56 (Journal pp. 1339–1344) AUDITING Frauds and Management Overrides as Contributory Causes CA. Parvathaneni Santosh Kumar The author is a member of the Institute. He can be reached at eboard@icai.in 🔍 Audit Paradigm & Core Dilemma There is an avoidable misconception about the role of auditors in detecting frauds stoked by the recent high-profile corporate failures. While, Kingston Cotton Mills case and the much oft-repeated quote “auditors are watch dogs and not blood hounds” is no longer an acceptable verdict on the role of auditors, neither should auditors be held accountable for non-detection of every fraud especially those involving management overrides. This of course comes with the caveat that compliance with Standards on Auditing is non-negotiable. Read on… Standard on Auditing (SA) 240 – “The Auditor’s Responsibilities Relating to Fraud In An Audit of Financial Statements” deals with a topic that created a chasm between the public at large and the auditing profession. This was caused by the expectations of one group and the refutation of those expectations by the other. While the public at large believes that discovering fraud is part of auditor’s duties, the auditing profession for long refuted the same. SA 240 deals albeit with guidance to the auditors on how to close the window to the occurrence of fraud to the extent possible and reminding auditors that the primary function of auditors is to report whether the financial statements are free from material misstatement either due to fraud or error. SA 240 is a standard that deals with fraud-risk and potential situations that could give rise to situations of fraud, and the manner in which auditors should deal with them. As a class of frauds involving material misstatement in financial statements, the ones that are more difficult to detect than the others are those that arise on account of management override of internal controls (ICs). The colloquial phrase “fence eating the crop” pithily captures the essence of the problem and the helplessness on the part of the auditors to always deal with these situations. This article tries to capture the issues involved in auditing because of the ever-present possibility of management override of controls and procedures in order to achieve their own goals which run counter to the entity’s goals. This is where the crux of the problem lies since auditors necessarily have to rely on the internal controls and are entitled to rely on them. If one analyses the recent spate of frauds, there is a preponderance of management inspired frauds. These are usually of a scale that destroys entire organisations. Standards on Auditing (SAs) which are based on the international standards on auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) teach us that ICs are the first line of defense against fraud in any entity. The larger the size of the entity, the greater is the need for ICs. Probably the most important SA on this topic is SA 315 “Identifying And Assessing The Risk of Material Misstatement Through Understanding the Entity and its Environment” which sheds light on the topic although one should not confine oneself to just reading this SA. The topic is spread over several SAs which should be studied for greater enlightenment. Also, a huge amount of published material is available on this topic. Incidentally, the importance of SA 315 lies in the fact that for the purpose of reporting on Internal Financial Controls as required by section 143(3)(i) of the Companies Act, 2013, ICAI has prescribed SA 315 as the Framework for testing internal controls operating in an entity. Management override and Standards on Auditing SA 200 - “Overall Objectives of the Independent Auditor and the Conduct of An Audit in Accordance with Standards on Auditing” is the mother standard for all SAs. SA 200 under the topic “Complying with SAs Relevant to the Audit” pronounces in paragraph 20 that the auditor shall not represent compliance with SAs in the auditor’s report unless the auditor has complied with the requirements of this SA and all other SAs relevant to the audit. Compliance with SAs is now not only required under paragraph 20 of SA 200, but has also been made mandatory by section 143(9) of the Companies Act, 2013. The said section states that “Every auditor shall comply with the auditing standards”. Further, an auditor when writing the audit report is required to make the assertion to the effect that the audit was conducted in accordance with Standards on Auditing (Paragraph 28(a) of SA 700(Revised)). Therefore, read together there is an overwhelming need for an auditor to be fully compliant with all the SAs insofar as it affects an auditor’s ability to report on financial statements. Management’s responsibility As per paragraph 4 of SA 240, “the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.… In exercising oversight responsibility, those charged with governance consider the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability.” Continuing with the above paragraphs, paragraph 7 of SA 240 states that “Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees”. Continuing with the issue of management override, as discussed in SA 200, paragraph A39 of explanatory material to SA 200 states that “…However, internal control, no matter how well designed and operated, can only reduce, but not eliminate, risks of material misstatement in the financial statements, because of the inherent limitations of internal control. These include, for example, the possibility of human errors or mistakes, or of controls being circumvented by collusion or inappropriate management override.” Pervasive Risk at Financial Statement Level (Paragraph A117 of SA 315): Paragraph A117 of SA 315 is of particular relevance and is the central theme of the article. Paragraph A117 states that “Risks of material misstatement at the financial statement level refer to risks that relate pervasively to the financial statements as a whole and potentially affect many assertions. Risks of this nature are not necessarily risks identifiable with specific assertions at the class of transactions, account balance, or disclosure level. Rather, they represent circumstances that may increase the risks of material misstatement at the assertion level, for example, through management override of internal control. Financial statement level risks may be especially relevant to the auditor’s consideration of the risks of material misstatement arising from fraud.” Thus, what can be observed is that the responsibility for prevention of misstatement of financial statements due to either error or fraud rests with the management and those charged with governance (TCWG) of the entity. There is an overwhelming responsibility on the part of the management and the TCWG to constantly endeavour to ensure that the internal environment in which the entity is operating safeguards the interests of the entity. This is also part of the statute since the Companies Act, 2013 contains requirements for a directors’ responsibility statement to form part of the report of the board of directors. One of the stated responsibilities of the board of directors is safeguarding the assets of the entity. “There is an overwhelming responsibility on the part of the management and the those charged with governance to constantly endeavour to ensure that the internal environment in which the entity is operating safeguards the interests of the entity.” The Fraud Triangle & The Fraud Diamond SA 240 contains in detail the scope for fraud, contributory causes as well as the measures to be taken to counter or reduce the risk of fraud. Paragraph 11 of SA 240 dealing with the definition of fraud and the factors that contribute to fraud-risk states as follows: “For purposes of the SAs, the following terms have the meanings attributed below: (a) Fraud - An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. (b) Fraud risk factors - Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.” While fraud has been defined in several ways by several authorities, what is at the core of fraud is the intention to obtain an unjust or illegal advantage. Coming to the risk factors, what is interesting is sub-paragraph (b) above talks of “incentive” to commit a fraud, “pressure” to commit a fraud, or an “opportunity” to commit fraud. While individually, none of these factors may cause a fraud to occur, collectively, they may pave the way. Paragraph A25 of SA 240 further elucidates that when dealing with fraud risk factors, in addition to the factors specified in paragraph 11, an ability to rationalize the fraudulent action as an additional factor for an auditor to be watchful about. Thus, the three factors together form what is known as a fraud triangle and where all these factors are present, there is potentially a fraud waiting to occur. Elaborating further on these factors, the following paragraphs offer more in terms of explanations. 1. Incentive or pressure to commit fraud Incentive or pressure to commit fraudulent financial reporting may exist when management is under pressure to present financial performance of the entity at a certain level to achieve an expected earnings target or financial outcome. This can happen on account of earlier guidance on earnings issued by the management to the market which subsequently proves to be impossible to achieve. As we know, earnings per share (EPS) could be a dominant factor in market expectations and often taken as a sign of successful management. An incentive or pressure can also arise from plans to go public by way of an initial public offer and the need to create a favourable impression particularly since the consequences of failure can be significant. Very often future capital expenditure depends on the public issues. 2. Perceived opportunity An individual or a group within the entity believes that internal controls can be overridden because of the position that the individual or the group holds. Usually, they are well-versed with the internal control environment and the mechanism and are aware of the deficiencies therein. Probably, in the first place, they are responsible for designing the internal control system. 3. Rationalisation Rationalization is a state of mind whereby an individual or a group can attribute a higher motive to an act of fraud. This will require adopting an attitude that what they are doing is good for the organisation. This provides them with the justification for otherwise an indefensible act. It is not difficult to imagine situations where in an ever-decreasing working capital situation on account of losses incurred, the management to present a better than the real situation for managing working capital requirements. If one were to ask the management, one would get the reply that it was done for the continued well-being of the entity. “Rationalization is a state of mind whereby an individual or a group can attribute a higher motive to an act of fraud. This will require adopting an attitude that what they are doing is good for the organisation. This provides them with the justification for otherwise an indefensible act.” The origins of fraud triangle Donald R. Cressey, an American sociologist and an expert in criminology first propounded the theory in his book “Other People’s Money” in the following words, “Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property”. Eventually, this was adopted for Standards on Auditing as it explained criminal behaviour and recognition of which could put auditors on guard. The fraud diamond As the theory gained acceptance and began to be followed and adopted widely, a fourth leg emerged. Those with forensic experience began to suggest that in addition to the triangle a fourth factor is required to be added viz. capability [Wolfe, David T., and Dana R. Hermanson. “The Fraud Diamond: Considering the Four Elements of Fraud.” CPA Journal 74.12 (2004): 38-42.] The individual or the group planning a fraudulent act would typically look at risk-assessment and their chances of “getting-away” with it since this would provide a totally risk-free environment wherein the act of fraud could be perpetrated with impunity. While SA 240 does not quite use the word ‘capable’, references are there in SA 240 to words such as “management override of internal controls” and the fact where there is likelihood of management override of internal controls and checks & balances, fraud would be more difficult to discover. Thus ‘capability’ is identified by inference as the fourth factor even if SA 240 does not say so in so many words. “The individual or the group planning a fraudulent act would typically look at risk-assessment and their chances of ‘getting-away’ with it since this would provide a totally risk-free environment wherein the act of fraud could be perpetrated with impunity.” Reasons for management override The reasons for management override are myriad and may include the following: Management compensation and remuneration depends on earnings since very often shareholders’ and statutory sanctions require adequate financial performance; The need to meet certain covenants in agreement with banks and the need for funding based on adequate financial performance; Proposals for mergers etc., or even forming alliances where entities would look at financial health of the potential partners; and Threat of bankruptcy that could be postponed by favourable financial statements (this was especially the case in the days of operation of the statute, the Sick Industrial Companies (Special Provisions) Act, 1985 which dealt with sick companies and the need to refer to the Board for Industrial and Financial Reconstruction). Characteristics and indications of fraud Paragraph A3 of SA 240 describes how management can accomplish fraudulent financial reporting and suggests that the following are some of the methods: Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from which the financial statements are prepared; Misrepresentation in or intentional omission from, the financial statements of events, transactions or other significant information; Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure. Paragraph A4 of SA 240 lists the following as indicative of the management override of controls that otherwise may appear to be operating effectively. Fraud can be committed by management overriding controls using such techniques as: Recording fictitious journal entries, particularly close to the end of an accounting period to manipulate operating results or achieve other objectives; Inappropriately adjusting assumptions and changing judgments used to estimate account balances; Omitting, advancing or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period; Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements; Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity; Altering records and terms related to significant and unusual transactions. Methods of override The methods dishonest managements have used to create improper financial reporting are numerous including the following: Transactions with undisclosed related parties, creating fictitious entries boosting revenue and profit; Generate false sales invoices thereby increasing revenue and profit; Falsifying inventory records showing more inventory than the actual case which would boost profit; Not accounting for invoices for expenses and showing the amounts paid as advance instead of charging to the income statement; Capitalizing revenue expenditure; and Deliberate misinterpretation of accounting standards supported by “friendly” expert opinions. Audit procedures responsive to risks related to management override of controls Having explored the possibilities of management override of ICs and the consequences thereof, the auditor is required to be on guard. Paragraphs 31, 32, and 33 of SA 240 offer defensive steps for the auditor as detailed below: Paragraph 31: “Management is in a unique position to perpetrate fraud because of management’s ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively…………...” Paragraph 32 Mandatory Procedures (Irrespective of Assessed Risk): 32. Irrespective of the auditor’s assessment of the risks of management override of controls, the auditor shall design and perform audit procedures to: (a) Test appropriateness of journal entries and adjustments: Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements. In designing and performing audit procedures for such tests, the auditor shall: (i) Make inquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments; (ii) Select journal entries and other adjustments made at the end of a reporting period; and (iii) Consider the need to test journal entries and other adjustments throughout the period. (Ref: Para. A41-A44) (b) Review accounting estimates for biases: Review accounting estimates for biases and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement due to fraud. In performing this review, the auditor shall: (i) Evaluate whether the judgments and decisions made by management in making the accounting estimates included in the financial statements, even if they are individually reasonable, indicate a possible bias on the part of the entity’s management that may represent a risk of material misstatement due to fraud. If so, the auditor shall re-evaluate the accounting estimates taken as a whole; and (ii) Perform a retrospective review of management judgments and assumptions related to significant accounting estimates reflected in the financial statements of the prior year. (Ref: Para. A45- A46) (c) Evaluate business rationale for significant unusual transactions: For significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual given the auditor’s understanding of the entity and its environment and other information obtained during the audit, the auditor shall evaluate whether the business rationale (or the lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets. (Ref: Para. A47) 33. The auditor shall determine whether, in order to respond to the identified risks of management override of controls, the auditor needs to perform other audit procedures…….” SA 330, “The Auditor’s Responses To Assessed Risks” SA 330 deals elaborately with “Substantive Procedures” (paragraphs 18-23 of SA 330). Substantive procedures focus on verification of transactions as opposed to compliance procedures which are ideal in testing control aspects in respect of repetition of transactions. Paragraph A42 of explanatory material to SA 330 talks of the requirement for the auditor to design and perform substantive procedures for each material class of transactions, account balance, and disclosure, irrespective of the assessed risks of material misstatement. This requirement reflects the facts that: (i) the auditor’s assessment of risk is judgmental and so may not identify all risks of material misstatement; and (ii) there are inherent limitations to internal control, including management override.” Conclusion It is no coincidence that the formats of audit reports prescribed by standards on auditing contain assertions that reflect the contents of the standards on auditing. While on the one hand, the audit reports precisely state the management’s responsibilities, on the other, the standards on auditing are quite clear what ought to be done. The question that will continue to be asked is whether auditors in their performance of duties have complied with the auditing standards and if so how they are able to demonstrate through proper documentation. Management frauds by their very nature, as dealt with in the preceding paragraphs are very difficult to detect and if detectable whether they can be detectable in time. Unlike other frauds, management frauds can have a devastating effect on the organisations. “Management frauds by their very nature are very difficult to detect and if detectable whether they can be detectable in time. Unlike other frauds, management frauds can have a devastating effect on the organisations.” One finds these days a great deal of discussion about professional scepticism in audits or the lack of it in view of the reported management frauds. Although fraud triangle or the diamond sums up the existence of a possibility for fraud to occur and presents a usable template for the auditor, in real life it is not always the case since these factors do not present themselves for a working hypothesis. Interestingly paragraph 8 of SA 240 contains the statement “when obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud………”. Therefore, an auditor would do well to remember the various aspects of the matters dealt with above and be on guard. — CA. Parvathaneni Santosh Kumar

Banking & Finance • International Transfer Pricing Transfer Pricing of Interest Rates in the post-LIBOR era Journal: The Chartered Accountant, May 2021 (Vol. 69, No. 11) • Pages: 57–61 (Journal pp. 1345–1349) SJ CA. Sagar Jhalani & Kunal Sawardekar CA. Sagar Jhalani is a member of the Institute. Kunal Sawardekar is a subject expert. The authors can be reached at eboard@icai.in. “LIBOR is a reference interest rate used for various tenors of loans in five hard currencies that is used to price loans and derivatives all over the world. The governing body of LIBOR, ICE has announced that LIBOR will not be published in 4 currencies after 31 December 2021 and in US dollars after 30 June 2023. As LIBOR is used extensively in an Indian transfer pricing context as a base rate for intercompany borrowing in the relevant currencies, and also in regulatory contexts such as Safe Harbours and foreign exchange regulations, it is important for Indian taxpayers to plan for a post-LIBOR world. We examine some of the measures being taken to enable the transition, and suggest some solutions to help Indian taxpayers make their intercompany transactions and arrangements resilient to this change. Read on…” The London Interbank Offered Rate or LIBOR has been a fixture in financial markets for almost four decades. Governed by the British Banking Association (“BBA”) from the mid-1980s to 2014 and the Intercontinental Exchange (“ICE”) thereafter, LIBOR is used as a reference rate to price interbank loans and options, commercial products like variable rate mortgages and floating rate certificates of deposit, and intercompany financial transactions and derivatives such as futures, swaps and options. Approximately USD 300 trillion in derivatives and other financial contracts (such as loans) have interest rates that are referenced to LIBOR. Five global currencies (the US Dollar, the Pound Sterling, the Japanese Yen, the Euro and the Swiss Franc) and seven maturities (overnight, one week, and one, two, three, six, and 12 months) are polled for, resulting in thirty-five different LIBOR currency/maturity pairs being reported for each day1. LIBOR rates are published every business day in London – except for overnight LIBORs in US Dollars and Euros, which are published for every business day in London excepting US and European public holidays, respectively. Background LIBOR has been computed by polling a specific panel of banks about the rate at which they judged that they would be able to borrow in a specific currency in a specific maturity. Starting in 2008, investigations by the press and regulators began uncovering evidence that panel banks had been manipulating LIBOR to advantage their own trading operations, or to show that the bank could borrow at comparatively lower rates for reputational purposes2. Regulators in the United States, the United Kingdom and the European Union investigated these manipulations and undertook enforcement actions against several multinational banks and financial institutions leading to levying of fines exceeding USD 9 billion3. Following these revelations, regulators brought about several changes in the administration of LIBOR, and in 2017, the UK Financial Conduct Authority (“FCA”) announced that it would not mandate banks to provide data for the computation of LIBOR beyond 20214. As a part of this process, on 5 March 2021, the ICE announced that all LIBOR rates in Pounds Sterling, Euros, Swiss Francs and Japanese Yen and US Dollar LIBOR for the 1 week and 2 months maturities would stop being published after 31 December 2021, while US Dollar LIBOR in the overnight, 1 month, 3 months, 6 months and 12 months maturities would stop being published after 30 June 20235. “All LIBOR rates in Pounds Sterling, Euros, Swiss Francs and Japanese Yen and US Dollar LIBOR for the 1 week and 2 months maturities would stop being published after 31 December 2021, while US Dollar LIBOR in the overnight, 1 month, 3 months, 6 months and 12 months maturities would stop being published after 30 June 2023.” LIBOR in an Indian Transfer Pricing Context This issue is important for Indian companies that have entered into inbound or outbound intercompany loan arrangements. From a transfer pricing perspective, the Income-tax Appellate Tribunal (“ITAT”) has held on multiple occasions (starting from the decisions of the Chennai bench of the ITAT in Siva Industries6, the Hyderabad bench of the ITAT in Four Soft7 and the Mumbai bench of the ITAT in the case of Tech Mahindra8) that arm’s length rates for intercompany loans denominated in foreign currencies should be referenced to LIBOR rather than domestic, rupee-denominated rates such as the prime lending rate or the base rate or interest rates charged by banks on rupee-denominated debt. The ITAT also ruled specifically on contentions that LIBOR should not be used as a reference rate in arm’s length determination in the case of Vijay Electricals9 where the Hyderabad bench of the ITAT ruled that: “Even though there may be some fraud involved in fixing the rate of international rates, as it became basis for subsequent international transactions at that point of time, we do not see any reason to differ from the LIBOR plus basis points for T.P. comparison.” Additionally, the all-in-cost ceiling for external commercial borrowing (“ECBs”) allowed by the RBI is also referenced to 6-month LIBOR10 in the relevant currency. Even the Safe Harbour for intra-group loans provided by an Indian taxpayer to its associated enterprises in foreign currency is referenced to 6-month LIBOR in the appropriate currency11. Due to these factors, a large number of intercompany loans have interest rates that are referenced to LIBOR. This has led to many Indian companies borrowing from related parties doing so on the basis of LIBOR-linked interest rates – as per RBI figures, there were USD 74 billion of outstanding ECBs where the interest rate was linked to LIBOR12. In light of the upcoming sunset of LIBOR, regulators in the US, the UK, the EU and indeed all over the world are taking steps to ensure that the transition is handled smoothly. In India, the RBI issued a “Dear CEO” letter to scheduled commercial banks in August 2020 about making sure their clients were prepared for the end of LIBOR. This is especially important from a transfer pricing perspective since Indian companies that have borrowed from related parties on the basis of a LIBOR-linked interest rate face two risks from the scheduled end of the LIBOR era: Risk 1: Contractual Horizon Beyond Cessation In common with all financial counterparties that have ongoing transactions and contracts linked to LIBOR, the transaction / contract may extend to a point of time when LIBOR simply does not exist (e.g., any contract with a reference to Euro LIBOR that is in operation beyond 31 December 2021). Risk 2: Disappearance of Transfer Pricing Comparables More specific to transfer pricing, an Indian company with a contractual interest rate that is linked to a LIBOR rate that is no longer published may not be able to find any comparables with interest rates linked to LIBOR for a financial year after the LIBOR sunset. LIBOR’s Successors Regulators for the jurisdictions where LIBOR is the domestic interbank benchmark have each identified alternative benchmarks for the post-LIBOR era. These include the Secured Overnight Financing Rate (“SOFR”) for the US Dollar and the Sterling Overnight Interbank Average Rate (“SONIA”) for the Pound Sterling. These rates are different in many ways from LIBOR: Parameter LIBOR Successor Rates (SOFR / SONIA) Underlying Risk Profile Unsecured interbank lending rate (includes credit/liquidity premium) Secured overnight financing rates (backed by Treasury/repo collateral) Term Structure / Tenors 7 maturity tenors (Overnight, 1W, 1M, 2M, 3M, 6M, 12M) Overnight only; lacks natural term structure without compounding Pricing Nature Forward-looking polled rate fixed at beginning of interest period Backward-looking compounded overnight transaction rate Both SOFR and SONIA are calculated based on the interest rates on actual overnight lending. Both are secured rates, and both lack the term structure of LIBOR – unlike LIBOR which existed in seven different maturity categories, there is only one SOFR. However, there are encouraging signs that these alternative reference rates are beginning to be referenced in a number of financial transactions. In the first quarter of 2020 for example, there were bond issuances of over USD 200 billion referencing SOFR, and bond issuances of over GBP 18 billion referencing SONIA. The use of these rates in futures, swaps and other derivatives is also increasing. From a transfer pricing perspective this is especially important, since as mentioned above, identifying comparables referencing a common reference rate (for a specific currency) would be important for price-setting and testing at year-end13. Some of the challenges caused by the difference between the alternative reference rates and LIBOR (from a transfer pricing perspective) should be ameliorated by the emergence of such deep markets of transactions or contracts that reference alternative rates. For example, although the SOFR is constructed from interest rates on secured loans, a transfer pricing analysis for an intercompany loan that is unsecured could still identify an arm’s length rate that references SOFR, provided that suitable comparable transactions that are also unsecured and that reference SOFR can be identified. Given that US regulators are keen to ensure that the SOFR is adopted in place of LIBOR, it is likely that such comparable transactions would eventually come into existence. Intercompany Loans Referencing LIBOR – The Way Forward As discussed in the foregoing sections, Indian taxpayers who have entered into financial transactions where the interest rate references LIBOR and extends beyond the sunset of the relevant LIBOR rate face two risks – that the specific LIBOR rate referenced in their contract simply may not exist at a time when interest payments come due and the rate has to be calculated, and that comparables referencing LIBOR do not exist for a period where that transaction under review is still referenced to LIBOR. Hence, Indian taxpayers with intercompany financial transactions such as ECBs, where the interest rate references LIBOR and the life of the transactions extends beyond the sunset date of the relevant LIBOR rate need to plan for the period beyond LIBOR. Step 1: Scoping Exposure in Existing Intercompany Contracts & Policies A first step to planning for the post-LIBOR reality would be to analyse existing intercompany loan agreements, transfer pricing policies and other documentation to determine where the exposure to LIBOR exists. Further, as discussed above, a substantial body of Indian transfer pricing case law exists that reinforces the use of LIBOR as a reference rate in the arm’s length price determination of intercompany financial transactions that are undertaken in foreign currencies. Hence, transfer pricing planning reports, transfer pricing documentation studies and transfer pricing master files should also be analysed to ascertain where the Indian taxpayer and the international group of which it may be a constituent entity relies on LIBOR either to set prices for financial transactions or to determine arm’s length prices. Step 2: Addressing the Spread & Structural Mismatch Once the exposure of the Indian taxpayer and the group to LIBOR has been determined, however, fixing this exposure and ensuring that the company and the group are ready for the post-LIBOR world is not as simple as simply replacing LIBOR in intercompany agreements, transfer pricing policies, documentation studies and master files with the relevant successor rate such as SOFR and SONIA. As mentioned in the foregoing sections, these successor benchmark rates differ in many respects from LIBOR – for example due to their being secured rates as opposed to LIBOR, which is based on interest rates for unsecured borrowing. This would imply that the equivalent of, for example an interest rate expressed as 6-month USD LIBOR plus 200 basis points would not be SOFR plus 200 basis points due to SOFR’s lack of a term structure and due to it measuring a fundamentally different set of transactions than LIBOR did. Approach 1: Relying on Transitional Regulatory Mechanisms (Short-Term Solution) One approach could be relying on transitional mechanisms being developed by jurisdictions in charge of major global financial systems, such as the US State of New York and the UK Financial Conduct Authority (“FCA”). State of New York Statutory Fallback: The State of New York has proposed legislative changes in its latest budget that would interpret references to “LIBOR” in contracts governed under New York law as instead referring to a replacement rate provided by the Alternative Reference Rates Committee of the Federal Reserve Bank of New York (“ARRC”). Such rates are expected to use the SOFR as a base, compounded to create a term structure and also account for the unsecured nature of the original reference to LIBOR14. FCA Synthetic LIBOR: Alternatively, the FCA is proposing to put into place a synthetic LIBOR, which would be a rate published by the ICE in place of LIBOR, which is likely to be SOFR (or SONIA or another relevant successor rate) plus a modifier15. Existing documents such as agreements, TP Documentation and TP policies could be modified to refer to either of these two transitional mechanisms instead of LIBOR, ensuring a smoother transition in the short term. Approach 2: Relying on the Markets & Fresh Benchmarking (Long-Term Solution) These transitional mechanisms are unlikely to survive in the long term, however. Hence, a second approach could be to rely on the markets. As global financial markets move from contracts that reference LIBOR to contracts that reference successor rates such as SOFR and SONIA, new contracts that refer to SOFR and SONIA from the very beginning are likely to become more and more common. As discussed in a previous section, deep financial markets for bonds and other financial instruments referencing SOFR and SONIA are already beginning to develop. Hence, for new financial transactions and existing LIBOR-referencing contracts that are expected to last several years into the post-LIBOR world, a fresh transfer pricing benchmarking analysis to identify comparables that reference these successor rates could be a better, more long-term solution. Conclusion LIBOR, the lynchpin of the international financial system for over three decades is coming close to its end, and Indian taxpayers with intercompany financial dealings with rates referencing this rate will have to join myriad other financial market participants in planning for the end of the benchmark. We have discussed two approaches to manage this transition for Indian taxpayers with intercompany contracts referencing LIBOR beyond the sunset dates of LIBOR – either relying on transitional mechanisms developed by global regulators such as the State of New York or the FCA, or to conduct fresh transfer pricing analyses to determine new comparable transactions whose rates reference benchmarks such as SOFR or SONIA. Whichever approach is selected, it is imperative that taxpayers act to identify their exposure to LIBOR in their intercompany dealings and put in place mechanisms to move past the end of LIBOR. While LIBOR for certain currency and maturity pairs is slated to end in less than a year, prompt action could ensure a smooth transition and operational transfer pricing and transfer pricing compliance issues for the parties involved. References & Footnotes London Interbank Offered Rate (LIBOR) – Kagan, J., Investopedia Updated 3 December 2020 (investopedia.com/terms/l/libor.asp) United States Department of Justice Press Release dated 27 June 2012 (justice.gov/opa/pr/barclays-bank-plc-admits-misconduct-related-submissions-london-interbank-offered-rate-and) Understanding the LIBOR Scandal – McBride, J., Council on Foreign Relations, 12 October 2016 (cfr.org/backgrounder/understanding-libor-scandal) LIBOR: The Rise and Fall – Hemachandran, V., RBI Bulletin November 2020 (rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=19898) Press Release by Intercontinental Exchange, Inc., 5 March 2021 (ir.theice.com) Siva Industries & Holdings Ltd. v. ACIT, TS-438-ITAT-2011(CHNY) Four Soft Ltd. v. DCIT, TS-518-ITAT-2011(HYD)-TP DCIT vs. Tech Mahindra Limited, TS-299-ITAT-2011(Mum) Vijay Electricals Limited vs. Addl. CIT, TS-323-ITAT-2014(HYD)-TP Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations – Reserve Bank of India, updated 8 August 2019 Serial number 5 under sub-rule 2A of Rule 10TA of the Income-tax Rules, 1962 LIBOR: The Rise and Fall, Ibid. LIBOR: The Rise and Fall, Ibid. Draft New York State Budget Addresses LIBOR Transition – Parisi, D. et al., Mondaq.com, 1 March 2021 “Synthetic LIBOR” – What is it? – Schneider, E., Nixon Peabody, 29 October 2020

International Taxation • Transfer Pricing AMP Expenditure : A Treatise Journal: The Chartered Accountant, May 2021 (Vol. 69, No. 11) • Pages: 62–68 (Journal pp. 1350–1356) RP CA. Rajat Powar The author is a member of the Institute. He can be reached at rajatpowar00@gmail.com and eboard@icai.in. “After the reforms of economy, starting early 1990s, through liberalization, privatization and globalization, there has been increase in foreign investment in India. Even now, the Indian Government has been taking steps to attract FDI. The steps taken by the government to increase the ‘ease of doing business’ and to promote the ‘Make In India’ are increasing. Also, the Indian Market is a major growing market, thereby attracting many international players. Hence, many foreign companies have been well established in India in various sectors right from FMCG, mobiles, electronics, e-commerce to Automobile. As a corollary, the foreign brands have been incurring huge amount of Advertising, Marketing and Promotion (AMP) Expenses. Amidst such efforts of the government to increase foreign Investment the MNE’s in India continue to face the heat of tax litigations leading to increasing uncertainty among them. Read on…” One of the major issues in this arena being faced by almost all the major MNE is with respect to Transfer Pricing (TP) adjustment of AMP expenses. The issue of AMP expenditure incurred by the Indian Associated Enterprise (AE) has been a much debated issue and continues to be litigated at various forums and is currently pending before the Supreme Court of India. The Author tries to analyze various tests laid down by the judiciary with respect to the TP analysis of AMP expenditure. I. Issue For Consideration The foreign companies have been typically operating in India by setting up a subsidiary in India. The Indian subsidiaries depending on the business model adopted by the foreign parent are performing variety of functions. These functions include manufacturing of the product, marketing of the product, and distribution of the product. In many of the cases, the Intellectual Property Rights (IPR) such as the technical knowhow, Trade Marks, Patent are owned by the foreign parent Associated Enterprise (AE) and the Indian subsidiary pays royalty for the use of the IPR owned by Foreign AE. In case of manufacturing entities, the parent company also supplies the raw material along with the technical knowhow and other requirements. The Indian subsidiary may also act as distributor for selling the goods supplied by the foreign parent. In order to increase their sales or as per the marketing strategy, the subsidiary often incurs expenses in the nature of Advertisement, Marketing and Promotion. The AMP controversy revolves around the issue whether the expense incurred by such AE are excessive, are of non-routine nature and are in fact being incurred for the purpose of promoting the brand which is owned by the foreign AE and in such a case the Indian subsidiary should be remunerated on Arm’s Length basis for such expenses. “The AMP controversy revolves around the issue whether the expense incurred by such AE are excessive, are of non-routine nature and are in fact being incurred for the purpose of promoting the brand which is owned by the foreign AE and in such a case the Indian subsidiary should be remunerated on Arm’s Length basis for such expenses.” II. Legislative History & Landmark Judgments The TP adjustment in respect of AMP expenses has been a hotbed of perennial litigation. The issue has been considered by various Income Tax Appellate Tribunals (ITATs) and High Courts and is currently pending before the Honorable Supreme Court. Few important judgments in this respect are as follows: 1. Maruti Suzuki India Ltd. vs. Addtl. CIT/TPO (2010) 328 ITR 210 (Del) The first Landmark judgment can be said to be the decision of Delhi High Court In the case of Maruti Suzuki. In this case it was held that the AMP expenses were an international transaction and the Indian AE was to be compensated for the excessive AMP incurred. The matter was remanded back to AO/TPO for fresh determination of the case. The said judgment was challenged before the Honorable Supreme Court, the Supreme Court while observing that the Hon HC not only remitted the case back to AO/TPO but also made certain observations on merits of the case which virtually concluded the matter. The Hon SC then directed the TPO to proceed with the matter without taking into consideration the observations made by Hon HC. Hence, the ratio of the earlier judgment of the Hon HC lost its precedential value. 2. LG Electronics India Pvt Ltd [TS-11-ITAT-2013(DEL)-TP] The issue came up for consideration before the Special Bench of Delhi Income Tax Appellate Tribunal (ITAT) in the case of LG Electronics India Pvt Ltd. The tribunal in this case relied upon the ‘Bright Line Test’ to confirm the existence of international transaction in form of ALP. The tribunal also did not allow aggregation of transaction and held that AMP expenses to be benchmarked separately. 3. Maruti Suzuki India Limited vs CIT (2016) 381 ITR 117 (Delhi) Maruti Suzuki India Limited was Indian subsidiary engaged in manufacturing of passenger cars in India. MSIL was co-owner of the brand in this case. The net Margin of MSIL was higher than other comparables. The Honorable Delhi High Court based on the above facts in this case held that the AMP expenses does not amount to international transaction. 4. Sony Ericsson Mobile Communications India Pvt. Ltd. v Commissioner of Income Tax [(2015) 374 ITR 118] In this case the Indian subsidiaries were engaged in distribution and marketing of branded products, manufactured and sold by foreign AEs. The Honorable Del HC rejected the theory of Bright Line test but held the AMP expense incurred to be an international transaction. Moreover, in this case the Delhi High Court allowed aggregation of transactions of AMP expense and calculation of Net Margin from all the transactions using TNMM method. 5. Diageo India Pvt Ltd (ITA No 1228/Mum/2015) In this case it was held by the Mumbai ITAT that there exists a mutual agreement between the assessee and the foreign AE to incur AMP expense, and agreement also provides for apportionment of cost between the AEs hence this qualifies as an international transaction. 6. NGC Network (India) (P) Ltd. v. Addl. CIT (ITA No. 6829/Mum/2012)1 NGC Network (India) was engaged in business of distribution of two satellite channels and had incurred AMP expenses. The ITAT after relying on the Third member judgment in the assessee’s own case which was later affirmed by the Honorable Bombay High Court, has held that, the AMP expenditure incurred by the assessee was to make the viewers aware about the programs and were for product promotion and not brand promotion, further there was no arrangement/agreement with foreign AE for incurring of AMP expenses. Hence, the amount of AMP expenses cannot be termed as international transaction. 1 Other Relevant Precedents Dealing with AMP Expenditure: Nivea India (P.) Ltd. v. ACIT (2018) 92 taxmann.com 165 (Mum.) : (Mum-Trib) L’Oreal India Pvt. Ltd. & Ors v. DCIT & Ors. (2016) 49 ITR (Trib.) 473 (Mum.) Mondelez India Foods Pvt. Ltd. v. ACIT (2016) 47 CCH 98 Mum Bausch & Lomb Eyecare (India) Pvt. Ltd. & Ors. v. Addl. CIT (2015) (2016) 381 ITR 227 (Del.) CIT v. Whirlpool of India Ltd. (2015) (2016) 381 ITR 154 (Del-HC) Honda Siel Power Products Ltd. v. Deputy CIT (2015) 94 CCH 170 (Del-HC) Johnson & Johnson Pvt. Ltd. v. ACIT [ITA No. 6142/Mum/2017, (Mum-Trib)] III. Key Principles Culled Out from Judicial Precedents Some of the important points which can be culled out from the judgments are as follows: 1. International Transaction Sec 92 provides that income from any international transaction shall be computed having regard to the ALP. In the given case, it is required to be determined whether there is any ‘International Transaction’ between the Indian Company and the foreign AE. Hence, it must be first ascertained as to whether AMP is an international transaction. The term International transaction has been defined under section 92B. The ambit of the definition is very wide. Sec 92B inter alia specifically includes in its ambit a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In accordance with provisions of sec 92B, there must be some mutual agreement or arrangement between the AE’s or some obligation on the part of Indian AE to incur such an expense. The aspect of existence of International transaction in AMP expense is based on the peculiar facts of each case and the judiciary has laid down various tests which are relevant for this purpose. 2. The Bright Line Test In order to prove the existence of International transaction Bright Line Test is often used by the Revenue. As per the test the total AMP expenditure is bifurcated into routine and non-routine expenses based on comparison with other companies. A Bright Line is deduced by calculating the average percentage of AMP expenses. The expenses over and above such bright line is considered to be incurred by the Indian entity for the Foreign AE and accordingly adjustment is made by charging a mark-up on the above cost of AMP applying Cost Plus Method (CPM). “It is pertinent to note that the Bright Line Test does not have any statutory recognition under the Indian Income tax law.” Existence of an international transaction is a sine qua non for provisions of Transfer pricing to apply. The bright line test cannot be used to ascertain the existence of international transaction. This view stands affirmed by the Hon Delhi HC in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. v Commissioner of Income Tax, which has been followed in many cases subsequently. 3. Economic Ownership Ownership of an asset can be divided into two parts – legal ownership and economical ownership. The legal owner refers to a person who is the registered owner of the property, while the economical owner is not the legal owner but is the entity which incurs the expenditure for developing the asset and subsequently may derive economic benefits from the assets. The legal owner of the Intangible Property Rights in almost all the cases is the foreign Parent Company. However, economic ownership of the asset may be with the Indian Counterpart. Economic ownership of brand can also be said to be an Intangible Asset just like a Legal ownership. Consider an example of Entity having a long term contract of Sole distribution arrangement. In such a case, if sole distributor has incurred heavy expenditure on advertisement he may benefit by increased volume of sales and market share. In such a case the entity is said to be economic owner of the brand. In case of economic ownership there cannot be said to be any services provided by the Indian AE to the foreign parent in respect of AMP expense incurred and no compensation is required for the purpose of the excessive expenditure. “Nevertheless, determination of economic ownership is a rigorous factual exercise and would depend on many factors such as the tenure of the contract, the functions being performed by the entities and the contractual arrangements between entities. The burden to prove economic ownership lies on the assessee.” The OECD Transfer Pricing guideline in Para 6.36 to para 6.39 while dealing with marketing intangible also take into consideration the concept of economic ownership. The concept of Economic ownership of the marketing intangibles has also gained judicial recognition in India. 4. Aggregation of Transactions and Set Off of Bundled Transactions Yet another issue which is for consideration is whether the AMP expense incurred should be analyzed separately or should it be aggregated with other transactions of the entity for benchmarking. As per the OECD Guidelines and the judgments of Maruti Suzuki India Limited vs. CIT as referred above If the transaction is aggregated then it would be adequate if the entity is earning adequate net margin on all its transactions combined and there would be no need to benchmark AMP expenses separately. If the transactions are inter-linked and inter-related to such an extent that they cannot be reliably analyzed separately or if aggregating them increases the reliability of comparison then it is desirable to aggregate the transactions. However, when the bundled transactions cannot be adequately compared on aggregated basis, segmentation is essential. The issue of segmentation gains importance especially in the case when the AE has adopted Transactional Net Margin Method (TNMM) and the Net Margin of the AE is higher than other comparable. In the case of Maruti Suzuki India Limited vs. CIT (Supra), the operating margin of the company was 11.19% whereas the margin of other comparables were 4.04%. The Honorable Delhi High Court after taking into consideration this fact and the provisions of Rule 10B, decided that no further TP adjustment is required as the Net margin of the AE is higher than the comparables. 5. Direct Selling / Marketing Expenses The Indian AE while selling the product may allow various trade discounts, cash discounts, loyalty bonus, turnover incentives etc. These expenses are termed as direct/selling or marketing expenses. A question would arise as to whether they would be included in the AMP expenses. It is to be noted that these expenses essentially help in increasing the sales volume/collection and as such are not incurred for the purpose of brand building. Hence, they are not to be included in the AMP expenses. This view is now settled by various judicial decisions as mentioned above. 6. Existence of Prior Arrangement / Agreement As per the Sec 92B, Existence of prior arrangement/agreement between the Indian subsidiary and foreign parent is essential to constitute an international transaction. Even in the absence of a formal written agreement inferences can be drawn from the facts of the case. The Indian AE should be mandated to incur certain amount of AMP expense as per the agreement/arrangement with the foreign AE or the group’s policy, in such a case the AMP expenses incurred can be termed to be international transaction and would require appropriate TP analysis. However, if the Indian AE determines the marketing policy and quantum of AMP expenses itself which are not dictated by foreign AE and there is no prior agreement/arrangement it cannot be termed as an international transaction. 7. Absence of Machinery Provision under the Act As discussed earlier, the Bright Line Test has no statutory recognition in India. The only statutory provision which has application in this case is sec 92. Section 92 provides that in case of international transaction income shall be computed having regards to ALP. Sec 92C deals with Computation of ALP and lists down method for computation of ALP. Hence, it is evident that what is envisaged in the Statutory Provision is a price adjustment. Adjustment of quantum of AMP expense incurred is not envisaged in the Act. Moreover, determination of existence of international transaction precedes determination of ALP. Hence, it can be inferred that under the Indian Tax Regime there is absence of statutory and machinery provision for determination of existence of international transaction in respect of AMP expenditure incurred by the Indian AE. In absence of such a machinery and statutory provisions no TP adjustments can be made. “Hence, it can be inferred that under the Indian Tax Regime there is absence of statutory and machinery provision for determination of existence of international transaction in respect of AMP expenditure incurred by the Indian AE. In absence of such a machinery and statutory provisions no TP adjustments can be made.” The Hon SC in the case of CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) has affirmed that in absence of the necessary machinery provisions to tax the income, no Income Tax can be levied on the same. 8. Difference Between Product Promotion and Brand Promotion AMP expenditure incurred can be necessarily differentiated into expenditure incurred for product promotion and expenditure incurred for brand promotion. The benefit of product promotion accrues to the Indian AE and whereas in the case of brand promotion the benefit would accrue in the form of increase in the brand value to owner of the brand. The presence of an international transaction cannot be inferred merely on the pretext of incidental benefit accrued to the Foreign AE due to the advertisement. Hence, merely because the AE has entered huge amount of expenditure on advertisement It cannot be concluded that the AMP is an international transaction. “The presence of an international transaction cannot be inferred merely on the pretext of incidental benefit accrued to the Foreign AE due to the advertisement. Hence, merely because the AE has entered huge amount of expenditure on advertisement It cannot be concluded that the AMP is an international transaction.” IV. Relevant OECD and UN Guidelines Paragraphs 6.36 to 6.39 of the OECD Transfer Pricing Guidelines deal with the issue of marketing intangibles which have been reproduced for ready reference: OECD Transfer Pricing Guidelines: Paragraph 6.36 “6.36 Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do not own the trademarks or tradenames that they are promoting (such as a distributor of branded goods). In such a case, it is necessary to determine how the marketer should be compensated for those activities. The issue is whether the marketer should be compensated as a service provider, i.e., for providing promotional services, or whether there are any cases in which the marketer should share in any additional return attributable to the marketing intangibles. A related question is how the return attributable to the marketing intangibles can be identified.” OECD Transfer Pricing Guidelines: Paragraph 6.37 “6.37 As regards the first issue- whether the marketer is entitled to a return on the marketing intangibles above a normal return on marketing activities- the analysis requires an assessment of the obligations and rights implied by the agreement between the parties. It will often be the case that the return on marketing activities will be sufficient and appropriate. One relatively clear case is where a distributor acts merely as an agent, being reimbursed for its promotional expenditures by the owner of the marketing intangible. In that case, the distributor would be entitled to compensation appropriate to its agency activities alone and would not be entitled to share in any return attributable to the marketing intangible.” OECD Transfer Pricing Guidelines: Paragraph 6.38 “6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm’s length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor’s share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate.” United Nations TP Manual: Para 10.4.8.17 and Para 10.4.8.18 of the UN TP manual also deal with the issue of Marketing Intangibles. V. Conclusion The question whether the AMP expenditure incurred is an international transaction is a complex question and needs to be answered after undertaking rigorous factual analysis based on the factors mentioned above. Special emphasis should be laid on Functional, Asset and Risk analysis as well as the contractual terms between the entities in this regards. Caution should be exercised by the MNE group while drafting the advertising policy, agreements or arrangements so as to save itself from the TP disputes.

The Chartered Accountant • Journal of ICAI May 2021 • Vol. 69 • No. 11 • pp. 69–73 (Journal pp. 1357–1361) INTERNATIONAL TAXATION Recent Proposed Changes in US Tax Laws and their Impact on India CA. Gaurav Singhal The author is a member of the Institute. He can be reached at eboard@icai.in. Acknowledgement: Inputs by S. P. Singh (Former IRS Officer) “Since time immemorial, taxes have been imposed on income, but the form of their imposition has evolved over time. The quality, quantum and speed of this evolution has been particularly pronounced in the last decade or so– predominantly due to globalization of world economy assisted by digitalisation. However, in spite of these changes, the basic philosophy remains the same – Collection of revenue for the government, arguably, being the first priority, followed by several other socio-economic goals, such as job creation and helping industry to grow in a desired sector / location. A critical objective that has been added lately to this list is – to create a stimulus, in order to help industry get back to the pre-pandemic position and provide job opportunities. Recently, USA has joined the efforts to create such a stimulus. Read on…” On 31st March 2021, an outline of the ‘Made in America Tax Plan’ (MATP) was introduced alongside President Biden’s ‘American Jobs Plan’ (AJP). This has been followed by release of the MATP by the US Department of Treasury, describing President Biden’s tax proposals. In this article we have analyzed the recent historical background of relevant tax laws of US, the MATP proposals, and its potential impact on India. Historical Perspective Last time the US tax laws underwent far reaching changes through the Tax Cuts and Jobs Act of 2017 (TCJA) signed into law by the then US President, Donald Trump, which amended the Internal Revenue Code of 1986. Some of the key changes made by TCJA were as under: Reduction in Corporate Tax Rate: TCJA lowered the federal corporate taxes from 35% to a flat rate of 21%. This reduction lowered the US tax rates below that of OECD’s average corporate tax rates of 23.9% (2018). Foreign Derived Intangible Income (FDII): Introduction of incentives for Foreign Derived Intangible Income (FDII), which represents the category of income that is not specifically traced to intangible assets, but the same is deemed to be generated from IPs. To the extent it is received from any non-US person for services provided to persons outside USA, it enjoys a 37.50% deduction allowance, thereby bringing its Effective Tax Rate (ETR) down to 13.125%. Global Intangible Low Taxed Income (GILTI): Imposition of tax on GILTI, which stands for Global Intangible Low Taxed Income. GILTI is earned abroad by foreign Controlled Foreign Corporations (CFCs) of US companies, from easily movable intangible assets, such as IP rights. TCJA introduced provisions requiring its inclusion in the US shareholder’s taxable income through pro rata attribution of CFC’s gross income to such shareholder. In computing this income, an exemption is allowed for the first 10% return on the CFC’s fixed assets that are depreciable as trade / business assets. Participation Exemption System: Introduction of ‘Participation Exemption’ system under which a US corporation received a 100% Dividends Received Deduction (DRD) for dividends received by it from a foreign company (of which, it owned 10% or more) out of foreign-sourced earnings of the latter. Base Erosion Anti-abuse Tax (BEAT): Introduction of Base Erosion Anti-abuse Tax (BEAT), which applies if 10% of a US corporation’s modified taxable income (computed after adding back cross-border payments to related parties) exceeded its regular tax liability (before certain specified tax credits). Objective of BEAT was to target US corporations that significantly reduced their US tax base by making payments to foreign affiliates. Salient Features of MATP Inter alia, the objectives of MATP can be identified as under: To incentivize job creation and investment in US; To stop profit-shifting to tax havens; and Ensuring that large corporations pay their fair share of taxes. To fully appreciate the sentiments behind MATP, it may be worth noting the backdrop of AJP that focuses extensively upon revitalizing manufacturing sector in US, out-competing China (particularly w.r.t. investment in infrastructure and Research & Development), and creating good quality jobs for American citizens. The AJP also seeks to modernize the US transport infrastructure, improve its drinking water systems, renew the US electricity grid, bring affordable high-speed broadband to every American, build / retrofit / modernize residential and commercial buildings (including schools, child-care facilities and hospitals) and train Americans for future jobs. At the same time, the MATP is up-front in its intent to undo several of the changes introduced by the TCJA. “The American Job Plan also seeks to modernize the US transport infrastructure, improve its drinking water systems, renew the US electricity grid, bring affordable high-speed broadband to every American, build / retrofit / modernize residential and commercial buildings (including schools, child-care facilities and hospitals) and train Americans for future jobs.” Following are the changes proposed to be made by MATP, to present tax laws: 1. Increasing the federal corporate tax rate to 28% As mentioned above, the corporate taxes were brought down by TCJA w.e.f. 1 January 2018, to a flat rate of 21%. Similarly, the TCJA had eliminated the corporate Alternative Minimum Tax (although some states have alternative taxes). It is now proposed to re-introduce the same @ 15% on ‘book income’ of corporations. The MATP has justified such restoration of tax rates by citing several papers and reports to highlight that the aforesaid rate cuts did not result in any long-term economic growth. Of course, one may wonder whether the economic impact of tax rate cuts could have been reasonably measured in such a short span of time (of barely over 3 years), particularly when ongoing pandemic could have significantly skewed the investment and growth statistics. 2. Introduction of a Global Minimum Tax The core philosophy of this proposal is to bring to an end, the ‘race to bottom’ between countries to bring down their respective corporate tax rates, thereby creating tax arbitrage opportunities of shifting profits to low tax jurisdictions (or much worse, tax havens). As a matter of fact, in her recent address at the Chicago Council of Global Affairs, the US Treasury Secretary Ms. Janet Yellen has also called out all the countries to introduce a global minimum tax. 3. Doubling the minimum tax on foreign CFCs with GILTI from 10.5% to 21% In tandem with the pursuit for the global minimum tax, the MATP also proposes to double the minimum tax on US shareholders of foreign CFCs with GILTI, from 10.5% to 21%, and removing the initial exemption therein of 10% of return on its tangible depreciable property. Presently, GILTI computation is undertaken at the shareholder’s level, allowing corporations to offset income in one CFC against losses in another. It is now proposed that the said computation will be made on a country-by-country basis, so that it hits the profits diverted to low tax jurisdictions. It may be worth noting that where any tax is paid on such income (GILTI) in a country other than US, the present law allows a credit of 80% of the amount of such tax, against the US tax liability on the said income. This tax credit has not been curtailed by the MATP, which is a saving grace for US shareholders that are subjected to GILTI taxes. 4. Removal of tax incentives for Foreign Derived Intangible Income (FDII) The MATP also proposes to remove the tax incentives for Foreign Derived Intangible Income (FDII). As discussed above, FDII represents an income from export of services (or property) which is taxed at a low rate – even if such an export is made to a related party – which could incentivize US corporations to shift their assets abroad. This discontinuance of FDII deduction is aimed at neutralizing the abuse of such incentives as a means to reduce group level tax costs. 5. Disallowing write-off / deduction of expenses from off-shoring jobs Disallowing write-off / deduction of expenses from off-shoring jobs and granting a tax credit to support on-shoring of jobs. The specifics of this proposal, as regards manner of identification of the expenses targeted to be disallowed, are still awaited. 6. Replacement of BEAT with SHIELD It is proposed to replace BEAT with Stopping Harmful Inversions and Ending Low-tax Developments or SHIELD (full points for another sleek acronym!). SHIELD should deny US tax deduction by reference to payments by MNEs to related parties that are subject to a low ETR. Such ETR threshold will eventually be defined through / agreed under a multilateral agreement; however, till the time such an agreement is reached, the GILTI tax rate of 21% could act as the trigger point for SHIELD. 7. Provisions making inversions of US entities difficult MATP proposes to introduce provisions that will make inversions of US entities difficult. Inversion is a device through which a taxpayer resident in a particular jurisdiction, changes its tax domicile (often to a low tax country). This is often achieved by merging with a foreign entity, undertaking a share-swap with an intermediate holding company located in a tax friendly jurisdiction, or by simply shifting one’s headquarters. At one point of time, tax inversions were rampant in USA. Even presently, it is common for US corporations to externalize their tax domicile through questionable means, to avoid US taxes. 8. Eliminating special preferences for fossil fuel industry & clean energy tax incentives MATP proposes to eliminate special preferences (by way of subsidies, special foreign tax credits, etc.) for fossil fuel industry, to penalize polluters through tax disincentives, and to restore tax on polluters to pay for Environmental Protection Agency’s clean-up costs associated with Superfund sites1. Further, it proposes to provide a 10-year extension of the production tax credit and investment tax credit for clean energy generation and storage and making those credits direct pay2. It is also proposed to create incentives for long distance transmission lines, state-of-the-art carbon capture and sequestration projects. 9. Reversing trend of reduced tax audits of large corporations Lastly, the MATP makes no reservations in proposing to reverse the trend of reduced tax audits / scrutinization of large corporations. It is expected that broader enforcement initiatives shall be announced, to address tax evasion by corporations and high income Americans. 1 Superfund sites are polluted locations (such as oil refineries, smelting facilities, mines, and other industrial areas) in USA requiring a long-term response to clean up hazardous material contaminations. 2 Direct pay allows taxpayers (such as clean energy developers) to treat certain tax credits as an overpayment of taxes and monetize them as cash refunds from the Treasury after filing their annual tax returns. “Taxation is considered, as one of the tools to revitalize economy. The challenges for all jurisdictions are manifold – protect their economy from sliding down, protect their tax bases and encourage foreign investments.” Likely Impact on India 1. Increased US tax costs: Several of the MATP proposals will result in an increased tax cost for US companies. In short-term, this could make doing business in India, more tax competitive. At the same time, it will adversely affect Indian MNC groups with US subsidiaries and affiliates. 2. Global Minimum Tax: While convincing all the countries (particularly the one’s that strive on their preferential tax regimes) to adopt a global minimum tax could pose a tall challenge, the same should, in the medium-to-long run, create a level playing field. It should also discourage unfair tax competition, particularly affecting high-tax economies such as India, which are often susceptible to base erosion through use of tax havens. 3. Increase in GILTI taxes: This increase should not affect India significantly, since Indian group companies of US entities are seldom the recipients of any such IPs that could redirect towards them, any royalty income of the group / US parent. Even otherwise, there is no significant gap between 80% of tax rate applicable to most Indian companies, and the US GILTI rate of 21%. 4. Removal of FDII deduction: This could result in an increased tax costs for asset-lean US subsidiaries of Indian groups that may be undertaking functions such as R&D, etc. Conversely, the increased tax cost of US companies from rendering services to foreign clients will, in all likelihood, be passed on to such clients, including Indian service recipients. 5. Dis-incentivizing off-shoring of jobs and production: While the exact mechanics of this proposal are still awaited, it could have the most far reaching impact for India, given a significant degree of dependence of the Indian outsourcing industry on US. Also, it is clear that India has been trying to benefit from the anti-China sentiments in global policy-makers’ community, by positioning itself as the global manufacturing hub; and this MATP proposal could put a dampener on such aspirations. Many Indian IT companies are strengthening their subsidiaries / branches with US employees. This may reduce the impact. But, nonetheless, it may have adverse impact on India. 6. Backstop for Inversions: As regards proposals creating a backstop for externalization, they are unlikely to have a significant impact on India Inc – given that India has hardly ever been a choice for such US corporations, to externalize to. Conclusion Tax laws are not static - they undergo changes with the need of economic, social and political situations. The proposed changes in US are driven by these factors, accentuated by COVID-19 pandemic which has been damaging the economy of countries across the globe. Taxation is considered, also, as one of the tools to revitalize economy. The challenges for all jurisdictions are manifold – protect their economy from sliding down, protect their tax bases and encourage foreign investments, under these conditions, staying abreast with the changes in US is indispensable for Indian tax and finance professionals too, since it is natural that such significant changes in tax laws of the most powerful economic jurisdiction could have a significant impact on India Inc, as well as on Indian policy makers. — CA. Gaurav Singhal Accountant’s Browser Professional News & Views Published Elsewhere Index of some useful articles taken from Periodicals for the reference of Faculty/Students & Members of the Institute: 1. Accountancy Accounting services quality: A systematic literature review and bibliometric analysis by Vitor Azzari and Emerson Wagner. Asian Journal of Accounting Research, Vol.6/1, 2021, pp.80-94. Financial Accounting: A new normal by Scott Dietz. International Accountant, January/February 2021 pp.16-17. IND AS/IGAAP- Interpretation and practical application: CSR-Whether a day 1 obligation? by Dolphy D’souza. Bombay Chartered Accountant, Vol.52-B/2, March 2021, pp.63 & 69. 2. Audit Rebuilding faith in audit by Stuart Cobbe. International Accountant, January/February 2021, pp.14-15. Staying vigilant against fraud during the pandemic: Internal controls need to be front and center, as the COVID-19 crisis has increased the incentive and opportunity for fraud by Cecilia. Journal of Accountancy, March 2021, pp.17-19. 3. Economics Growth transitions in India : Myth and Reality. Economic and Political Weekly, Vol.56/11, 13th March 2021, pp.43-49. Unconventional Monetary Policy in Times of Covid-19. R.B.I Bulletin, Vol.75/03, March 2021, pp.41-51. 4. Investment Spillover effects in the financial year cycle for Indian Markets by Parul Bhatia. Asian Journal of Accounting Research, Vol.6/1, 2021, pp.38-54. 5. Management Antecedents and consequences of brand hate: Empirical evidence from the telecommunication industry by Olavo Pinto and Amelia Brandao. European Journal of Management and Business Economics, Vol.30/01, 2021, pp.18-35. How to shift from selling products to selling services: It takes different skills and a different focus by Doug J. Chung. Bombay Chartered Accountant, Vol.52-B/2, March 2021, pp.48-51. Strategic Management and corporate governance-Two sides of the same coin by A Sekar. Chartered Secretary, Vol.51/3, March 2021, pp.105-108. Strategy: The heart of business-Part 1 by V. Shankar. Bombay Chartered Accountant, Vol.52-B/2, March 2021, pp.11-13. 6. Taxation and Finance Acquiring the tax benefits of a corporation: Avoid recharacterization of tax losses in M & As by Ray A. Knight and Lee G Knight. Journal of Accountancy, February 2021, pp.36-41. Future of inheritance tax by Dennis Petri. International Accountant, January/February 2021 pp.22-23. Taxation of Digitised economy- Significant economic presence and extended source rule by Mayur B. Nayak and Tarun Kumar G. Singhal. Bombay Chartered Accountant, Vol.52-B/2, March 2021, pp.56-62. Full Texts of the above articles are available with the Central Council library, ICAI, which can be referred on all working days. For further inquiries please contact on 011-30110419 and 011-30110420 or by e-mail at library@icai.in.

The Chartered Accountant • Journal of ICAI May 2021 • Vol. 69 • No. 11 • pp. 80–87 (Journal pp. 1368–1375) TECHNOLOGY Impact of Artificial Intelligence on Economics, Finance and Accounting Sandeep Ganpat Kudtarkar The author is a faculty at Aruna Manharlal Shah Institute of Management and Research, Mumbai. He can be reached at supsanc@yahoo.co.in and eboard@icai.in. “The strong artificial intelligence (AI) revolution is bringing significant changes in the world of economics, finance and significantly altering the accounting profession. From the perspective of accounting professionals a wise move will be to espouse the technological challenges and adapt to the new business and management requirements by developing new AI skill sets and competencies. The advent of artificial intelligence is a highly important event in the history of economics, finance and accounting and objective should be set to effectively harness the power of AI to enhance the economic conditions in which we all can flourish. Read on…” Artificial intelligence (AI) is the imitation of intelligent human behavior and thought processes in performing of various tasks. The mindboggling processing of almost infinite data at super speed, enormous storing capability and the development of mobile devices using technology are transforming the global economic system fundamentally as steam power did during first industrial revolution with almost godlike capabilities. With the present growth of computational capabilities AI will soon have the skills and intelligence of the human brain. With the developments in machine learning (ML) and deep learning (DL), machines are performing human tasks right from calculations to car driving, speech recognition, legal services, radiology, vaccine research and used in factories and battlefields. Apart from automating routine low-skilled jobs, AI is increasingly automating creative work performed by high-skilled workers. AI has potential not only to compliment human labour but to replace human labour in an entirety. AI is moving toward super intelligence, an intellect much smarter than the best human brains in practically every field, including scientific creativity, general wisdom and social skills. “AI is moving toward super intelligence, an intellect much smarter than the best human brains in practically every field, including scientific creativity, general wisdom and social skills.” The big data science, machine and deep learning algorithms such as Natural language processing (NLP), Support vector machine (SVM), genetic algorithms, clustering/classification-Nearest Neighbor (KNN) and Reinforcement learning (neural network, Bayesian network, Naïve Bayes), Random Forests (RF), Logistic Regression (LR), Naive Bayes (NB) and Convolutional Neural Networks (CNN) are enhancing AI capabilities which can be used in production of goods and services in all the industries and even changing the organization structures of firms using this technology. AI is helping to solve complex problems by creating new ideas and scaling creative efforts. AI’s great ability of self-improvement can lead to “singularities” where boundless computer intelligence and economic prosperity materialize in finite time. AI is the most profound technological advance in human history in the age of “4th Industrial Revolution”. At the heart of AI revolution is data which is called as new oil. For deploying a machine learning system in organization, an infrastructure of data, collecting and mining the useful data is required. The construction of data pipeline is laborious and costly due to idiosyncratic legacy systems of businesses difficult to interconnect. In data management process, a raw data needs to collected, organize and analyze into information understood by humans like a text document. After organizing the data, it is stored in a data warehouse further used by AI based system to interpret and visualize the data. AI is used in financial accounting, auditing, cost accounting, taxation and financial planning. The expert systems (ESs) used in the accounting discipline replicates human expert’s behaviour and expertise and transforms it into system of rules to accomplish accounting jobs and resolve accounting issues and facilitates accounting-based decision processes. This article analyze impact of AI on economic theories and the future prospects of finance and accounting occupations, to explore the required new skill set and competencies, the way humans and machines could work efficiently and effectively together. Based on review of published literature and recently performed surveys and reports, it is an attempt to shed light on some possible development trends in an AI in the context of economics, finance and accounting. It is based on interviews of 50 senior professionals in finance and accounting to study the key characteristics of finance and accounting profession based on standardized and measurable set of variables based on the up-to-date descriptions of the tasks and required set of the knowledge and skills to sustain and grow in future AI environment. Impact of AI on Economic Theories AI is transforming the global industries in unexampled ways and reformulating walks of all fields of humane strive. Economics which was antagonist towards AI has started realizing the value of AI in solving humanity problems. The economists usually adhere to theoretical models despite having no value in practical world due to inability to predict unpredictable human behavior in response to rapid technological changes like AI and big data due to inherent prejudices and biases and take decisions based on inadequate knowledge. The economic theories of rational expectations and efficient market are based on assumption that people react rationally in the given situation. But crises like euro debt crisis and 2008 economic slowdown proved it wrong again and again. An economic model does not work all the times similar to theories in pure sciences due to changing perceptions and mood swings of economic actors and falsification of assumptions based on past experiences. The implementation of AI in economics can change this situation for better. AI can be used to correct these issues by doing data driven modeling of human behaviour by doing sentiment analysis which can improve the accuracy of forecasting future bubbles in economy. By implementing AI techniques and statistics in behavioural economics, economists can predict human behavior under changing situations. “An economic model does not work all the times similar to theories in pure sciences due to changing perceptions and mood swings of economic actors and falsification of assumptions based on past experiences. The implementation of AI in economics can change this situation for better.” The central banks and policy makers by estimating correctly when a recession may irrupt can swiftly implement monetary and fiscal policies to mitigate the effects of business cycles. The changes in supply and demand can be predicted correctly to enact required changes in order to avoid economic downturns by harnessing real time data coming from social media mimicking the price mechanism and consumer sentiments. AI will help the government authorities to base their decisions on correct real time data. AI can significantly contribute in policy formulation, analysis and evaluation using real time data and can accurately predict human responses to policies. With these possibilities, AI will help economics to be closer to pure science. Interaction between Artificial Intelligence and Economic Theories Economic Theory / Concept Interaction with Artificial Intelligence 1. Game Theory The model of “self-programmed machine learning” is an entrancing model for the game theory. So far such models are applied for full information games. The advanced neural networks can compete and cooperate with other players and the learned behavior will create the equilibrium for game theoretic models. The prevailing tax policy models are restricted in accounting for individual behaviour responding to a change in tax policy. With application of reinforcement learning based AI algorithms, the actions of the computational economic agent can be deciphered from an abridged game economy where AI agents can maneuver the game mechanics against its creator’s expectations. 2. Decreasing Marginal Returns The AI data also experience diminishing returns to scale similar to other factors of production. The accuracy of the machine learning based model revamp according to rising training dataset but at diminishing rate. 3. Make or Buy Decision Every organization worried about amount of value creation using AI technology and whether to develop AI capabilities like data mining, labeling and model buildings and data analysis within the firm or outsource it to cloud vendors which resembles classic make or by dilemma. 4. Standardization vs. Differentiation The AI services vendors contest fiercely to provide standard products and cloud services along with some sort of differentiation like better speed and effective performance to eliminate the competition. 5. Minimum Efficient Scale The relationship between fixed costs and variable costs of ML products will increase or decrease minimum efficient scale. The firm needs to occur high fixed cost to develop its own customized solution instead of buying standardized products from vendors. The innovative pricing mechanism like auctions and differentiated pricing can be used by vendors to optimize its cost. 6. Returns to Scale The supply side returns to scale requires incurring a large fixed cost for designing AI system and a small variable cost for distribution. The demand side return to scale depends upon economies of scale, pricing of product and number of incremental customers and quality of the service post sell. 7. Bounded Rationality As per Economics Nobel Laureate Herbert Simon, human lacks perfect information and brain to process facts and take rational decisions which keep on changing as per mood swings. This is called as bounded rationality. Using AI person can collect information and use it for effective decision making. Due to super increment in processing power of computers as per Moore’s law the human bounds can become flexible. 8. Efficient Market Hypothesis As per efficient market hypothesis of Nobel Laureate Eugene Fama states that it is challenging for individual trader with incomplete and imperfect information to beat the efficient market. But with the advent of AI powered computer traders in the markets, the more efficient the market become and degree at which market is efficient depends on the amount of traders in the markets use AI based algo trading. 9. Prospect Theory As per prospect theory of Nobel Laureate Daniel Kahneman and Amos Tversky (1979) when human make decisions with known probability of result, they compare probable losses against profits to make decisions. But in case of AI based technology such decisions are taken by programmed machines challenging the applicability of Prospect Theory. 10. Taxation Policy In Harvard-Salesforce researcher’s game theory model, AI agents with varied skills and specializations assemble resources and then earn money by constructing real estate assets or selling the products and services among themselves which creates inequality in their incomes. An optimal outcome is programmed as a judicial mix of money and leisure time and then the actors make their own choices. The reinforcement learning models creates activities in humans like tax avoidance strategies mimicking real economic actors. This model also creates an agent imitating policy regulators who change marginal tax rates to obtain efficiency and equality in income. 11. Labour Market A data in a firm is useless in terms of decision making if not analyzed efficiently internally by some expert. So it is crucial to hire people with requisite skills and competence to deal with data to gain competitive advantage in the new age of AI and big data. The shortage of such skilled workforce is acute problem firms are facing creating heterogeneity in productivity as this new data science competencies percolates through the labour markets. Impact of AI in Finance Natural Language Processing (NLP) for Credit Appraisal & Document Intelligence: Natural Language Processing (NLP) allows banks and FIs to appraise the risk of a credit applicant, observe consumer sentiments about their brand and customer service across the internet, develop credit score for under-banked clients and superfast document search for business intelligence. Credit Scoring via Digital & Social Media Footprints: The financial institutes firms in developing countries like India can offer mortgages and monetary services using AI to flourishing middle-class natives with lessoned or no credit history by understanding risk involved by analysing their social media footprints using natural language processing (NLP) algorithm based software. The digital footprint of such customer’s such as usage of social media, data about their net browsing, geolocation information is quantified into credit scores using AI. Personalized Investment Advisory: The customer’s spending and investments patterns are observed through their financial transactions which are correlated with market trends evolving through market research through social media, news sites using sentiment analysis software to offer personalized investment suggestion to customers. Dashboard Collation & Customer Profiling: The NLP software select most suitable data as per customer’s profile and his financial needs and collate it with other data such as name or age and present it on the FI’s dashboard. Sentiment-Driven Customer Care: The sentiment analysis software enables the customer care executive to deal with the customer more effectively. A customer care group can better service the customers by arranging tickets with the specific sentiments of the customers. Risk Quantification & Scam Detection: AI transforms issues in terms of risk management, scam detection into as set of numbers which can be easily accessed by the bank staff to make proper decisions and actions. Brand Advocacy & Influencer Identification: By using AI based NLP software influencers who can advocate brand of institute in their community can be spotted through their social media footprints such as blogs. The analyzed trend data about investments, trading can be passed on to customers through such influencers. Enterprise Documentation & Mortgage Automation: The enterprise wide documentation pertaining to loans and mortgages can be automated using NLP and further integrated into existing system without affecting ongoing operations. The historical data can be used as training set and useful information can be extracted out of tons of documents. The output data can be incorporated in dashboards which can be speedily accessed by loan or mortgage officers. The AI system provides a dashboard where employees can access a loan or mortgage application simultaneously. Conversational Chatbots & Proprietary Market Search Engines: A Chatbot interface for the bank allows the bank’s customers to scout the required information on bank’s webpage and get answers to basic transactional questions. Banks can develop their own search engines for extracting useful market information from tons of public company filings, equity research reports for treading in heterogeneous financial markets based on their own investment strategies. Case of Axis Bank’s Multilingual Voice Bot During Covid-19 the operations in Axis bank were challenged during the initial phase of lockdown due to extreme spikes in volumes, increment in complaints and escalations transpired by customer anxiety, which was a repercussion of limited services to customers during the lockdown phase. This affected Axis Bank’s customer experience index and the cross-functional service levels. Axis Bank partnered with an AI-based SaaS voice automation platform Vernacular.ai to optimise voice AI solutions and automate customer interactions via an intelligent human-like dialogue. The company created a multilingual voice bot for Axis Bank that can converse in English, Hindi as well as in mixed dialect. The bot employs automatic speech recognition and natural language conversion technology backed by AI based algorithms to provide an enhanced customer experience through automation of the contact operations and can deal with tons of customer issues raised every day with higher scalability. The state-of-the-art, deep neural networks trained on thousands of hours of acoustic data for text to speech recognition were used. The system was launched in July 2020. AI Voice BOT has catered more than 2.23 million customers at an industry best success rate of an average of 85% and above. Approximately 65%-70% of customers were being touched by the BOT and attempted to connect with the contact center. In case BOT cannot resolve customer issue, the call is delegated to the human experts minimizing the navigation time. The AI system and human expert work together to deliver a rich and satisfying experience to customers. In the next phase, the bank is working on expanding the language capabilities to 10 Indian languages and adds 27 more self-service options. Impact of AI on Accounting Post world financial crisis of 2008, the businesses are delving means of new opportunities for augmenting raising revenue and return on capital through added income, reduction in cost and innovative sources of value creation to become more competitive and sustainable. 1. Opportunities to accounting profession due to AI AI is transforming the future of many professions and accounting is one of the most significant such occupation. Various new job opportunities and roles are emerging as professional competence is augmented by applying AI tools along with creation of new job functions for accounting professionals in organizational setup. The advocator of AI upholds this AI revolution as a leap forward to espouse future challenges while the antagonists look at it as a balk due to skeptical attitude of some accountants to adapt to new changes in the business environment. The accounting and financial activities which are less susceptible to automation such as interfacing with stakeholders, managing and developing people, applying expertise to decision making, planning, and creative tasks. The accountants can gain by using their AI competencies to solve broad issues, support decision-making by providing better and cheaper data, doing rigorous data analysis, imparting new insights on business and focusing on more valuable tasks after freeing up from routine working due to AI applications. There is a scant risk of job displacement for accounting professionals if they adapt to new technology, if accountants adopt new skills according to their changing role in the organization. 2. Challenges for accounting profession due to AI Frey and Osborne examined effects of AI on 700 plus by categorizing them as high, medium and low risk professions setting probabilities thresholds at 0.8 and 0.2. In this study the accounting profession is classified as risky in terms of job displacement due to AI with probability of 0.92. AI systems will substitute accountants in day to day routine activities by doing it speedily and precisely than human beings posing a threat in terms of job displacement. A practical challenge in converting rules and regulations into if-then rules and decision trees to be exercised in AI logic. The diverse and complex nature and large volume of AI and Big data makes it imperative for accountants to acquire new job skills for big data analytics. Technical practicability, higher outlay for setting automation, structural changes in labour markets, regulative and acculturational acceptance are essential elements luring speed of automation in accounting and finance. In changing work culture the productivity from combined efforts of human labour and machines will depend on organization’s structure and culture, patterns of business models and competition in idiosyncratic industry. The key challenges for policy makers are encouraging investment in new technologies and framing policies to assist labour force and organisations to deal with adverse impact of adapting AI automation if any in future. “The leadership skills like strategic thinking, coaching, mentorship, morality and cross functional interventions will take on increased importance in accounting profession. Such professionals can significantly contribute towards organization’s strategic thinking collaborating with other parts of the organization.” 3. Potential Application of AI in accounting Book keeping: Book keeping is the most routine and laborious accounting activity susceptible to automation. The double entry system logic enables the coding of accounting entries. The complex accounting transactions can be expressed in accounting terms and entered into the ledgers. The accounting tasks can be automated using AI to improve accounting accuracy. Fraud prevention and detection: AI can be used for fraud prevention and detection as computers driven by predetermined rules cannot be enticed. The malicious activities like asset embezzlement, tax evasion, cash skimming and larceny, financial statement falsification can be traced with AI. Sales forecasting: The sales forecasting accuracy is crucial for preparing operations budget and AI can improve forecasting accuracy during uncertain and risky environment. Big data acumen: The big data provides new acumen to managers enabling to take better decisions, crafting tactical solutions, valuation of data assets and management of risk. If accountants collect and analyze structured and unstructured data accurately, it would become a great support system for decision making and redefining business strategies. Predictive models & Outlier detection: Accountants can use AI based big data and predictive models to improve budgeting and forecasting accuracy. They can improve internal control and risk management by using advanced outlier detection analysis and improve the efficacy facet of auditing by analysis available data sets. Prudence, skepticism & communication: Accountants can effectively apply their natural prudence and skepticism for improving the quality of data and data testing. Accountant with strong theoretical knowledge, practical skills and communication skills such as presentation skills, credibility, confidence, understanding people’s view point, critical thinking can acquire significant importance in the AI age. Leadership skills: The leadership skills like strategic thinking, coaching, mentorship, morality and cross functional interventions will take on increased importance in accounting profession. Such professionals can significantly contribute towards organization’s strategic thinking collaborating with other parts of the organization. Business awareness & numeracy: Equipped with data analytics skills and complemented by their inherent business awareness and strong numeracy skills, accounts will become more valuable beyond makers of historical financial statements across organisational boundaries. Hybrid professional role: The accountants can participate in training or testing models, auditing algorithms in various projects and integrate results into business processes, handling outliers and preparing data. In the future accounting profession will be become of hybrid nature due to the interaction of finance, analytics and AI capabilities. Internal audit & Expert systems in taxation: AI can be used for sorting and examining business transactions susceptible to fraud during internal audit. AI expert systems can be applied for authorizing and processing various claims, cash-flow examinations, evaluation of merger and acquisitions and investment decisions, calculating financial ratios and preparation of financial reports for filing with regulators. Various expert systems are used in the tax area such as tax treatment on stocks investments, assisting in the work of corporate tax accrual and planning process, calculating value added tax, and international tax planning and optimizing international corporation tax position. “Various expert systems are used in the tax area such as tax treatment on stocks investments, assisting in the work of corporate tax accrual and planning process, calculating value added tax, and international tax planning and optimizing international corporation tax position.” Way-Forward The strong AI revolution is bringing significant changes in the economics, finance and accounting profession’s role and functions. The advent of artificial intelligence is a single most important event in the history of economics, finance and accounting and objective should be set to effectively harness the power of AI to enhance the economic conditions in which we all can flourish. In this direction following may be considered for harnessing AI in the best interest of mankind. An exhaustive listing of the accounting activities may be done to ascertain activities most receptive to automation. The accountants should be sufficiently equipped with a proper skill set to work in AI ecosystem to derive benefit from the technology advances in a volatile business environment and changing management requirements. The right approach to deal with the challenge of job displacement is to analyse which accounting activities can be substituted by AI, when and how. Accountants can play higher level roles in strategic areas. Such skills can be instill through suitable education and training. The continuous and lifelong training and learning is the key for successful adaptation to the ever changing competency requirements. It is important to espouse the technological wherewithal and adapt to the new business and management requirements by developing competencies in AI. The future lies in AI and we must prepare for it. — Sandeep Ganpat Kudtarkar

Technology • Accounting Transformation Blockchain and Accountancy – A Transformation Journal: The Chartered Accountant, May 2021 (Vol. 69, No. 11) • Pages: 74–79 (Journal pp. 1362–1367) NK CA. Nisha Kapur The author is a member of the Institute. She can be reached at nisha.kapur@yahoo.com and eboard@icai.in. “Blockchain gained phenomenal recognition with its association with Bitcoin. The technology standouts with its habit of the decentralized database and distributed trust. This genius is just around the corner to impress each aspect of our life. Its power drives a pathway for this incredible technology to blow away accountancy with its out-of-ordinary style. Read more to deep dive into the design of Blockchain, its components, and the benefits it provides to the accountancy profession along with a review of existing applications utilizing its power. Read on…” What is a Blockchain? Blockchain technology, elucidated in simple words, means a digital and decentralized database that stores assets and transactions across a peer-to-peer network. Blockchain technology is a unification of two familiar words, blocks and chains. Visualize blocks of data in digital form chained together. Breaking Down Blockchain into Its Components Block: A block is like a page of a ledger book. It is a structure made of information stored chronologically but in digital form. Digital signatures or hash: It is a unique identification of a block together with data stored in it. Chain: Chaining is a technique of linking the blocks with each other using the hash. It makes the database immutable. Proof of work: It is a mechanism that slows down the fabrication of new blocks. Consensus mechanism: Each participant (node) of Blockchain performs the job of an admin of the data block. Stringing new input along-with the existing block needs acceptance or authentication by most of its participants. This process is known as consensus. What Makes a Blockchain Special? We all have heard that Blockchain is a revolutionary technology. It becomes essential we investigate what makes it so promising. Traceability Each block resembles a packet consisting of its data, its hash, and the hash of the previous block as its contents. Every new block added is immutably linked to the last block. The chaining of data brings into existence an audit trail making users trace back the data out of a big database with no effort. Data stored in blocks acts as a proof of ownership. Permanent Data Changing or tampering data, any line, word, or even just a single digit in a block generates a new signature for the block. The latest signature is different from the initial hash stored in its subsequent block; this breaks the chain. The process creates an alarm for altered data to the users. Cautious users would reject this change and move back to the original record. The process makes data permanent and immutable. Security For an alteration to stay undetected, the hacker will need to tamper all the blocks, then redo the proof-of-work for each block till the end of the chain and take control of at least 51% of the peer-to-peer network. Only then the tampered block becomes accepted and reflected in the respective user’s Blockchain. Executing this is nearly impossible. As a result, data added can never be changed. Decentralized and Distributed Ledger Instead of using a centralized network, this technology operates on a peer-to-peer network, permitting everyone to join the network. Each participant (nodes) joining the network receives a full copy of the data; gets access, verifies, and validates the data authenticity. Blockchain constructed on the concept of distributed trust requires duly convinced participants for alterations and additions to the Blockchain. How Can Blockchain Impact Accountancy? We frequently hear the term ‘Blockchain technology’ connected with cryptocurrencies. The use-case of its application goes far beyond just trading cryptocurrency, impacting various sectors. Let us solve the puzzle of how Blockchain can impact accountancy. “Blockchain reforms the reporting and recording of monetary transactions; through the medium of creating a decentralized ledger. Permanent and immutable recording of transactions along-with real-time access by the users; demonstrate an immense impact on accounting.” It allows for: Security and Reliability Consolidated bookkeeping and real-time access Privacy of accessibility of digital data Smart-Contracts Efficiency in Auditing To get a picture of the impact of Blockchain on accounting, we need to study and weigh each of the above points. 1. Security and Reliability Transparency and immutability are necessary to avoid manipulation, fraud and offer trusted record-keeping by the accounting industry. Traditionally, storing data in a centralized server makes it effortless for hackers to access. The resultant makes data vulnerable instigating loss and play of valuable information. Born with the talent to store dossier in a distributed manner at multiple nodes cause back up of data. The consensus mechanism acts as a defence for misrepresentation, tampering, and sew-up security. Further, the timestamp feature acts as a digital waxed seal. It contributes to wipe-out backdating; ensure data stored are accurate, authentic, and chronological. It eliminates the chances of any duplication of transactions or fraudulent activity. 2. Consolidated Bookkeeping and Real-Time Access Blocks are digital custodians of data. Bringing to play this speciality of Blockchain gives the power to build a robust database by storing different types of information, maintaining its identity and individuality. Pieces of information stretch from the ledger to transactions, contracts, agreements, purchase orders, invoices, authorizations, and reports. Blockchain stores all these in one consolidated place but distributed to every participant making it easily accessible and impossible to mess around with by any user with wrong objectives. “Pieces of information stretch from the ledger to transactions, contracts, agreements, purchase orders, invoices, authorizations, and reports. Blockchain stores all these in one consolidated place but distributed to every participant making it easily accessible and impossible to mess around with by any user with wrong objectives.” Data stored in blocks acts a proof of ownership. Transaction history pins down each participant’s rights and obligations; these are immutable. It behaves like a registry of who owns what and who transacts what. Its architecture permits a company to share its valuable records with other participants (nodes). A variety of participants, not limited to its employees, departments, suppliers, clients, banks, government authorities, shareholders, or the auditing company, get mileage out of the company data. The real-time element assures each participant that the data shared is dependable, not inflated, dubious, or of an older version. Hence, providing an actual picture of the company’s operations, liquidity, profitability, solvency, and risks at any point in time. 3. Privacy of Accessibility of Digital Data Blockchain in a private permissioned architecture works in a network of known and identified participants rather than an open network of unknown participants. Permissions to assign ‘who can see what’ within a distributed ledger is built by putting cryptography to work. Plugging technology into accounting bears positive implications. The technology improves the efficiency of money, asset, and data transactions by addressing privacy and security. We can understand more clearly with the help of the below use-cases of financial data: Company Management: Managing director, CEO, and CFO retains full access to all accounting data to make business plans and take decisions. Functional Departments: Departments have limited access depending on their functional requirements. The warehouse department deals with stock; they would see the stock records, tracking inventory forecasts and supply, and material inward/outward entries. The human resource department deals with the workforce, having access to information about employees. Smart-contracts could monitor the working hours or holidays, and automate the generation of payslips. External Stakeholders: Shareholders would have access to financial statements, analytical information, and trends, using procedures like data-analytics, which would lead to better-informed decisions. Government Agencies: Tax and regulatory authorities would have access to data such as revenue, purchases, payable and receivable accounts, enabling automated tax filings. Company Auditors: The company auditor would enjoy full access to ensure transactions are according to accounting standards and accounting principles. 4. Smart-Contracts One of the significant developments of Blockchain technology are Smart-contracts. These are self-executing; they handle everything from execution, management, performance, payment, and the recording of transactions. The occurring of an event automatically triggers another event mentioned in the contract. Smart-contracts are terms of an agreement stored as code. They are masters in compliance with the contract terms that reduce any doubts or ambiguity in many situations. Participants benefit by automating tasks that traditionally occur manually through a third-party intermediary. The technology described above is an expert in speeding up business processes, executing complex transactions like an exchange of money, property, shares, or any asset, thus improving cost-efficiency. Cross-Border Settlement Example: The simplest example to imagine, transfer of money to an overseas client on the delivery of goods. Traditionally, the barter materializes by a third-party intermediary. Taking advantage of Blockchain technology reduces the number of intermediaries (e.g., banks) who settle the event manually. It self-executes the entire process from identifying trigger transactions and participants through clearing, settling, and record-keeping. The automated process makes settlements more efficient, faster, and cheaper by reducing high commissions and transfer charges. Derivative Hedging Example: Let us make sense with another example. Two parties may join to run a smart-contract to kick off a derivative contract to hedge the price of an item X at the end of a year. Participators decide the contract terms, collect hedged funds, and tie in with Blockchain. At year-end, the smart-contract would execute the terms. It would start from gathering the price of item X from a dependable source, defined in the smart-contract, then compute the settlement amount, and end by transfer funds. 5. Efficiency in Auditing Current auditing practice is costly, laborious, and time-consuming. Blockchain works over the performance and productivity of the external audit. It amends the way auditors would trust the auditee functioning and management. Blockchain provides the auditor a whole story of the client’s business. Thus, the auditor can address crucial points pumping up labour and cost-efficiency. Thrown in together, they allow zoom-in their time and energy on designing procedures on risky, complex elements and internal controls and shun away from manual data extraction or screening and analysis of repetitive transactions. Blockchain teamed up with the AI procedures would profit auditors by gaining command over transactional analysis and material queries. Blockchain souls a storehouse. Readily available encrypted and secured data allow auditors to complete the audit within the stipulated time and refines the quality of financial reporting. Real-time access to the data via read-only nodes enables them to obtain all required audit information in a consistent and standardized format. The footmarks of the consensus characteristic aids minimize the need for confirmations or reconciliations. Distributed trust rubs out duplication and intentional omission of data-entry. It improves transparency in asset tracking and skilfully deals with the misappropriation of assets. This hallmark of Blockchain turns out good enough to provide comfort on the existence/rights and obligations assertion and certify the completeness of data. False transactions, collusion, bogus and unauthorized entries, and accounting fraud are the main reasons for material misstatement and fraud. The timestamp feature produces a stable audit trail making it impossible to backdate records or tamper data. It retains a permanent record of data for the auditing unit, assuring true and fair presentation and disclosure of financial statements. Auditors work in a diverse and dynamic environment. Blockchain with a programmable personality could greet the auditors with variegated modus operandi. The auditors could shoot to advise management on risks and controls of Blockchain blueprint functioning and processing. They could also land becoming a validator of bonafide participator to access the Blockchain. No doubt, with the use of Blockchain, the audit process and procedure may become more continuous, real-time, effective, and efficient. Still, an auditor’s professional judgment needs to be applied to analyse accounting estimates and assumptions used by management in preparing financial statements. Further, automated processes demand the auditor to evaluate and test internal controls to maintain the integrity of the financial information. Exploring Existing Blockchain Developments Having understood the vast impact Blockchain can provide on the accountancy profession, it would be unjustified to overlook the recent real-world applications developments which have aided and simplified accounting activities. Let us unfold the evolutionary outcomes against the variety of roles the technology plays: 1. Remittances, Payment System, and Bank Guarantee The master has given into existence a new virtual currency which speeds up and simplifies the cross-border payments by reducing the middlemen. Some applications which assist in this role are: We.trade: An IBM product has the expertise to make cross-border trade easier. Leading banks of Europe have joined hands to raise global remittances and payment processes. The We.trade Blockchain platform reduces conflicts and improves the trading process for participating companies, creating trust for global trade. It has simple trading options and standard rules which decrease risk and increase trading opportunities for banks and SMEs. ABRA: A cryptocurrency wallet. It enables buying, trading, borrowing, and earning interest on cryptocurrencies. It helps to track the balance in different currencies. Bitpesa: A Blockchain payments start-up and digital foreign exchange. It focuses on simplifying and polishing payments to and from African markets. Circle: Builds a treasury infrastructure effectively for smoother global payments, pay-outs, and high-yield digital dollar accounts built on USD coin (USDC). Lygon: Blockchain platform is first-of-a-kind to digitize and transform the bank guarantee process for both financial and performance guarantees. It enables applicants, issuers, and beneficiaries for paperless, standardized, secure, and safe management of legally binding guarantees. 2. Derivative and Trading There has been revolution in the process, transparency, and complexity of derivative contracts by providing real-time information on a decentralized distributed network. With proper regulations and controls, trading and short-term investment avenues have been opened. Some applications which assist in this role are: Chainalysis (Chain analysis): Builds tools to help financial institutions and governments to understand, monitor, and comply with regulatory guidance of cryptocurrencies. It has an investigative nature that detects fraudulent trading, monitors laundering and violations of compliances, and builds trust. Chain: Using Sequence, a cloud Blockchain infrastructure provides for building safe and efficient financial services. It manages financial assets in token format and transfers them across public networks. 3. Supplier / Customer KYC Management The technology helps build and retain the reliability of suppliers and customers. It serves to identify the parties to the contract are reputable, qualified, and with no fraudulent background. Some applications which assist in this role are: Trust Your Supplier: An IBM Blockchain-based solution for identifying, onboarding, and managing qualified suppliers. KYC-Chain: Provides services of individual and corporate KYC. They help in document identification, ID verification, and crypto funds screening, providing a check on customer and supplier identities. 4. Supply Chain Management The technology improves the tracking of the origin of manufactured goods from the stage of production to retail destinations, as a result boosting transparency and traceability for everyone in the chain curbing fraud and cheating. It aids in efficient inventory management by enabling accessibility of real-time inventory records by everyone in the network namely, suppliers, distributors, or even retailers, thereby eliminating confusion, tampering, and excessive pricing and hoarding of goods. Blockchain enables digitally secure payment automatically on satisfying the credit terms and conditions. TradeLens: An application which assists in this role is TradeLens, an IBM Blockchain that works on a permissioned network and serves as a digital shipment freight management tool. It provides real-time transport insight, quick access to immutable documents, reduces the cost, and improves security. 5. Warranty Management Blockchain manages false claims, misunderstandings, and fake products by bringing a better customer experience. The company also benefits from using Blockchain for the reconciliation of invoices and resolution of disputes. An application in this regard is Pega which provides warranty solutions with faster and easy tracking of authentic transactions and claims settlements. 6. Taxation and Risk Management Blockchain assists in early identification of risk and fraud and makes the audit and taxation process more continuous, real-time, effective, and efficient. There are different applications that have been developed to assist in taxation and risk management by some of the leading accounting firms. Endnote The world of Blockchain is eye-catching and fascinating, drawing professionals towards its charm. The technology opens the road to bring in its expertise on many unknowns and undiscovered zones. Company management, accountants, auditors, IT professionals, and start-ups must focus on taking action to put ‘theory’ into ‘practice’ and make research and developments. The advantages urge to raise the curtain and capitalize on the rapidly changing technology to digitally transform the picture of accountancy but various other aspects of life.

The Chartered Accountant • Journal of ICAI April 2021 • Vol. 69 • No. 10 • pp. 27–32 (Journal pp. 1199–1204) MSME MSMEs – Cornerstone of Economic Recovery CA. Paresh Daga The author is member of the Institute. He can be reached at eboard@icai.in. “The COVID-19 pandemic has brought unprecedented challenges not only as a public health crisis but also in form of social disarray and slowdown in economic activities. In this backdrop, the 2021 union budget was eagerly anticipated by businesses and individuals alike as a pivotal point from which our economy’s recovery efforts could be jump-started. A large contributor to India’s economic stability is the MSME sector, the revival of which is primarily anticipated to boost economic activity in general. The Union Finance Minister presented the budget with a six-pillar approach for economic revival, focusing on capital expenditure and capacity-building, which was preceded by many other measures. Read on...” 2020 has been one of the most distressing years in recent times due to the global COVID-19 pandemic and its drastic effect on health, businesses, and societies. As we progressed through the outbreak in the first quarter of FY 2020-21, the Indian economy saw a slowdown, with real GDP falling by 23.9% and 7.5% in Q1 and Q2 compared to results for the same period in FY 2019-20. This was brought on by factors like lockdowns, restrictions on non-essential activities, and reduction in discretionary spending by citizens. As restrictions eased out in the second and third quarters, we came to understand some inherent challenges, like vulnerabilities of informal sector workers (including migrant labourers) and global supply chain shortcomings. India also had other pressures like having to increase medical facilities and PPE production capacities and intermittent border aggressions. MSME (Micro, Small and Medium Enterprises) sector is seen as the backbone of the Indian economy as it a huge job creator. It engages our vast working-age population in both rural and urban locations. Presently there are over six crore MSME entities involved in the manufacture of goods or provision of services in India. They contribute to nearly 30% of our exports. During the onset of the COVID-19 crisis as well, domestic manufacturers rose to the occasion by innovating on existing facilities to produce necessary supplies like sanitisers, masks, PPE kits, etc. Hence MSMEs are the natural choice for beneficiaries of Government revival schemes as their growth would have a trickle-down effect on the economy. Recently, the definition of MSMEs was amended to change the criteria for classification as MSME to a combination of annual turnover and investment instead of ‘investment in plant and machinery/equipment’. An enterprise is now classified as a Micro, Small or Medium enterprise if it has an investment of less than INR 1 crore, 10 crores and 50 crores, respectively, and turnover less than INR 5 crore, 50 crores, and 250 crores, respectively. Some necessary pre-budget economic relief measures were rolled out by the Central Government through stimulus packages with multiple tranches under the Atmanirbhar Bharat Yojana (self-reliant India campaign) in May, October, and November 2020. These measures focused on dual goals of strengthening the indigenous market and securing public welfare by providing liquidity to MSMEs and banking institutions, supporting migrant labourers, farmers, and poor sections of society through assured food security schemes, easing entry barriers for private players, boosting infrastructure, etc. Some of the specific benefits to MSMEs under the Atmanirbhar Bharat Abhiyaan included: Emergency Credit Line Guarantee Scheme (ECLGS): INR 3 lakh crore collateral-free automatic loans for MSMEs, as an emergency credit line for covid-relief (ECLGS), out of which over 71% has already been disbursed to qualifying businesses. MSME Fund of Funds: Investment in MSMEs by the central government through MSME fund of funds having a corpus of INR 10,000 crore, for entities demonstrating growth potential. Disallowance of Global Tenders: Global tenders have been disallowed in government procurement orders having value up to INR 200 crore. This will help domestic players in general. Beyond this, there was also a movement dubbed ‘Vocal for Local’, which encouraged the production of domestic goods and services, relying on nationalistic sentiment to reduce dependence on imports. This led to a reduction in Chinese imports by 25% by August compared to the same period last year, which of course, led to a boost in sales of homegrown manufacturers, including MSMEs. Further, the threshold limit for default for initiating corporate insolvency resolution procedures under the Insolvency and Bankruptcy Act, 2016, has been increased to INR 1 crore, as opposed to the previous limit of INR 1 lakh. This display of leniency towards MSMEs is a welcome relief in these uncertain times. In March 2020, the IT Ministry had notified a Production-Linked Incentive (PLI) Scheme under which manufacturers of mobile phones, allied equipment manufacturing, pharmaceutical ingredients and medical devices would receive an incentive of up to 6% on incremental sales from the base year, FY 2019-20. Now, the same has been expanded to include other sectors like food processing, other electronics, telecom, speciality steel, automobiles and auto components, solar photovoltaic modules, textiles, and white goods such as air conditioners and LEDs. Certain threshold criteria have been prescribed, i.e., minimum incremental investment of INR 10 crore (MSME) or INR 100 crore (Others) and a maximum incremental investment of INR 1000 crore. Some sectors also have threshold criteria for incremental sales. “Several regulations around the securities market are proposed to be merged as a single code.” Union Budget 2021-22 Framework The Union Budget for Financial Year 2021-22 was widely anticipated to follow on the same lines of self-reliance, help strengthen the fundamentals of the economy, and bring it back to a healthy growth rate while also keeping in mind the needs of the general population. The budget was presented by the Hon’ble Finance Minister Nirmala Sitharaman on 1 February 2021 in the Parliament. The fiscal deficit target is around 6.8% of the GDP for FY22 and is estimated to rise to 9.5% for FY21, which is nearly thrice the previously set targets of 3.5%. The budget proposes this be brought down to 4.5% of the GDP by FY25-26. This year’s focus was announced as the six pillars for reviving the economy: Health and Wellbeing Physical and Financial Capital and Infrastructure Inclusive Development for Aspirational India Reinvigorating Human Capital Innovation and R&D Minimum Government Maximum Governance Several regulations around the securities market are proposed to be merged as a single code. Several direct taxes and indirect taxes amendments were also proposed. One of the key features of this year’s budget has been the increase in capital expenditure compared to the previous year. The overall capital expenditure for FY22 is INR 5.54 lakh crore. This is expected to increase the economy’s productive capacity directly, thereby charting a course for sustained economic growth and long-term stability instead of the alternative relief measures of disbursing cash benefits or slashing tax rates, which do, of course, boost growth but may not be sustainable. Moreover, India has already seen historic cuts in tax rates since 2016, both for domestic companies and individual taxpayers. Given that the pandemic took most nations by surprise regarding preparedness for a healthcare crisis, the government is focusing on developing the healthcare infrastructure of India through a centrally sponsored scheme called PM Aatmanirbhar Swasth Bharat Yojana, with an initial outlay of INR 64,180 crores over six years to develop existing and new healthcare systems for the detection and cure of new and emerging diseases. The overall outlay for Health and Well-being is around INR 2.24 lakh crores (which has increased by 137% since the previous year) out of which a dedicated sum of INR 35,000 crores has been allocated for the COVID-19 vaccine for FY22. The increased allocation is expected to expand and strengthen existing national health institutions, National Centre for Disease Control (NCDC), Health Emergency Operation Centres and mobile hospitals. Announcements benefiting the agricultural sector were linking 1000 more mandis to the e-national agriculture market (e-NAM) – a big push for e-platforms to help connect small producers and manufacturers to potential buyers. Others include developing five major fishing hubs, enhanced agro-credit lines, and increased contribution to a rural infrastructure development fund. “A new initiative called ‘Turant Customs’ will be likely introduced for faceless, paperless, and contactless customs measures. An electronic portal for facilitating registration, filing of bills, payment of duties etc., has been visualised to streamline the customs process.” Some other significant announcements which are expected to increase robustness in the economy are: Privatisation of two public sector banks and one general insurance company and ongoing disinvestments of four public sector enterprises to be completed in FY22; Regulated gold exchanges to be set up country-wide; Setting up of seven textile parks over three years under the scheme of mega-investment textile parks; Increase in the FDI limits in the insurance sector from 49% to 74%. Government-owned development finance institution for infrastructure debt financing to be set up; Dedicated Asset Reconstruction Company and Asset Management Company to take over stressed assets of public sector banks to be set up; A single securities markets code to be introduced by consolidating four existing acts regulating the capital market, depositories, securities contracts, and government securities; Pipeline for monetisation of public assets such as roads, railways, airports, oil and gas infrastructure, power transmission infrastructure, warehouses, sports stadiums, etc. to be instituted; Launch of voluntary vehicle scrapping policy to retire unfit/outdated vehicles via a vehicle fitness test. Ease of Doing Business Small Company Definition Widened: The scope of Small Company under The Companies Act, 2013 has been widened to include companies with paid-up share capital and turnover of INR 2 Crore and INR 20 Crore. One Person Companies (OPCs): NRIs will now be allowed to establish OPCs (one person company) of any size. NCLT Functioning: e-court systems are likely to be established for smoother NCLT functioning. SEBI Act Coverage: AIFs and Business Trusts likely to be brought within the ambit of the SEBI Act. The Bill has introduced a string of proposals on business taxation and personal taxation and proposals relating to assessment and dispute resolution. Some changes to GST have also been proposed. Easing compliance norms and lessening tax burdens are expected to provide a much-needed boost to the economy. Direct Tax Proposals There are no changes in direct tax rates for individuals or corporate entities. However, in an unprecedented move, the tax audit limit under section 44AB has been increased from INR 5 crore to INR 10 crore (where at least 95% of payments are digitised), which would provide relief to many companies. The following are the other significant proposals: Start-up Tax Holiday: Tax holiday for start-ups on reinvestment of long-term capital gains now extended to include investments in start-ups up to 31 March 2022. Goodwill Depreciation Disallowed: Goodwill of a business or profession will not be considered a depreciable asset, and no depreciation to be allowed even in respect to purchased goodwill. Advance Tax on Dividend Income: Relaxation on interest for default in advance tax payments extended to dividend income. No relaxation in respect of deemed dividend under section 2(22)(e). Advance tax will henceforth be applicable on dividend income only after its declaration. TDS on Purchase of Goods (Section 194Q): A new TDS of 0.1% (5% in the absence of PAN) has been introduced -- where a person’s (deductor’s) total sales, gross receipts or turnover from the business exceeds INR 10 crore during the year, and he is responsible for paying any sum to any resident for purchase of goods of value exceeding INR 50 lakh. Disinvestment and IFSC Relinquishments: Certain relief provisions have been introduced to facilitate the disinvestment of a public sector company. Further, there are some relaxations in provisions applicable to IFSCs. Aircraft Leasing: Tax holidays are proposed for aircraft leasing and rental companies. Assessment and Litigation Reforms Board for Advance Rulings: The Authority for Advance Rulings (AAR) to be discontinued and the Central Government to constitute one or more Board for Advance Rulings, such that ruling of the Board for Advance Rulings will not be binding on the Department or the taxpayer and it would be appealable before the High Court. Faceless ITAT: Faceless, nameless ITAT scheme to be introduced on the same lines as the faceless appeal scheme in a jurisdiction-less manner. This will help in reducing costs and increasing efficiency and transparency. Discontinuance of Settlement Commission: Income Tax Settlement Commission will be discontinued, and an Interim Board will be constituted for pending cases. Vivaad se Vishwas (VsV) scheme not available for cases decided by the Income Tax Settlement Commission. Dispute Resolution Committee: Dispute Resolution Committee to be constituted for preventing new disputes and settling issues at the initial stage in the case. Those assessed with a taxable income of up to INR 50 lakh and any disputed income of INR 10 lakh can approach this committee. Reopening Time Limits: The time limit for reopening assessment proceedings has reduced from 4/6 years to 3 years, except when income concealed exceeds INR 50 lakhs, in which case the time limit is 10 years. Provisional Attachment: Assessing Officer to have the power to provisionally attach taxpayer’s property during the pendency of penalty proceedings for fake entries/invoices if penalty likely to exceed INR 2 crore. Capital Gains The definition of slump sale has been expanded to include all types of ‘transfer’ (including exchange). Section 43CA amended such that the stamp duty value can be up to 120%, as opposed to earlier 110%, of the consideration in case of transfer of residential unit subject to other conditions. Individual Taxation Exemption for Senior Citizens (Section 194P): Senior citizens having annual income consisting of only pension and interest will be exempt from filing income tax returns. New section 194P will be inserted to enforce the deduction of tax for such clients by banks. Tax on PF Interest: Interest accrued on an individual’s contribution to provident fund in an account now taxable (in excess of INR 250,000). LTC Cash Scheme: Expenditure incurred during a specified period, in lieu of Leave Travel Concession (LTC) exempt, subject to fulfilment of the prescribed conditions. Taxation of ULIPs: Maturity proceeds from the unit-linked insurance policy (ULIP) issued on or after 1 February 2021, proposed to be taxable as capital gains if the aggregate annual premium exceeds INR 250,000 in any financial years. Goods and Service Tax (GST) Reforms Certain updates were made in connection with the Goods and Service Tax by amendment of the CGST Act for several provisions as follows: Input Tax Credit Matching (Section 16): Section 16 amended to allow taxpayers’ claim of the input tax credit based on GSTR-2A and GSTR-2B. Retrospective Net Cash Interest (Section 50): Section 50 of the CGST Act is being amended to provide for a retrospective charge of interest on net cash liability with effect from 1 July 2017. GST Annual Return Self-Certification (Section 35 & 44): Section 35 and 44 amended: Mandatory requirement of furnishing the GST reconciliation report signed by the specified professional is relaxed by allowing the filing of annual return on a self-certification basis. The Commissioner can exempt a class of taxpayers from the requirement of filing the annual return. “There is a marked change from established trends regarding capital expenditure and the national deficit. Tax reforms have been mostly procedural to increase efficiency and ensure effective collection.” Customs Reforms Agriculture Infrastructure and Development Cess (AIDC) has been newly imposed on petrol and diesel at INR 2.5 and INR 4 per litre respectively. Further, a new initiative called ‘Turant Customs’ will be likely introduced for faceless, paperless, and contactless customs measures. An electronic portal for facilitating registration, filing of bills, payment of duties etc., has been visualised to streamline the customs process. Also, certain changes have been proposed in the Customs Tariff Act’s Schedule I with effect from 1 January 2022 to align with HSN 2022 to ensure alignment with the global valuation principles. There has been a reduction in customs duty on a few items, such as: Reduced duty on copper scrap from 5% to 2.5% Basic and Special additional excise duty on petrol and high-speed diesel oil (both branded and unbranded) is reduced Increased duty on solar inverters from 5% to 20% Raised duty on solar lanterns from 5% to 15% The basic customs duty on gold and silver reduced. The Department will rationalise duty on textile, chemicals and other products Regarding agricultural products, the customs duty is increased on cotton, silks, alcohol, etc. Exemption of Social Welfare Surcharge on the value of AIDC imposed on gold and silver. The exemption on the import of leather will be withdrawn as they are domestically produced. “MSMEs are the beating heart of our country, propelling job creation, urbanisation, higher education, and increasing quality of life to our population.” These are some of the salient updates brought in by the Finance Bill, 2021 and preceding relief measures. There is a marked change from established trends regarding capital expenditure and the national deficit. Tax reforms have been mostly procedural to increase efficiency and ensure effective collection. However, through economic and public policy measures in the budget, the Indian economy seems to be on the road to recovery in the post-COVID era. The latest economic survey released by the ministry of finance projects the GDP growth rate to rebound to 11% for the 2012-22 period while the budget estimated real GDP to be between 10 and 10.5%. Endnote MSMEs are the beating heart of our country, propelling job creation, urbanisation, higher education, and increasing quality of life to our population. Their revival is a key aspect of building a better India post-covid. This, when combined with our strides made in healthcare, vaccine research and production, and other prevention measures, is likely to help restore some semblance of normalcy in Indian society in FY 2022. The years 2020 and 2021 shall be remembered as a time of resilience by the Indian people – students, private sector employees, and businesses alike. — CA. Paresh Daga

MSME • Economic Revival Survival, Revival and Growth of MSMEs Journal: The Chartered Accountant, April 2021 (Vol. 69, No. 10) • Pages: 33–37 (Journal pp. 1205–1209) NW CA. Nilesh N. Warule The author is member of the Institute. He can be reached at canileshwarule@gmail.com and eboard@icai.in. “MSME sector has emerged as a highly vibrant and dynamic sector of Indian economy with its multifold contributions. However, the sector has not been able to contribute its full potential due to a number of challenges faced that have been aggravated by the pandemic. To ease out the negative repercussions of pandemic on Indian economy a series of steps are being taken that underlined the vision Aatmanirbhar Bharat to convert the tremendous challenges faced by the nation into opportunities and make the country self-reliant. Recognising the importance of the sector in the economy the Budget 2021 include several measures that will have a direct or indirect bearing on the MSME sector. In fact the Budget allocation for F.Y.2021-22 for MSME has been increased from ₹7,572 crore in the previous year to ₹15,700 crore. Read on…” All sectors of the economy are overwhelmed by the havoc exacted by the unanticipated COVID-19. Therefore, the Government of India, Reserve Bank of India, State Governments and other organisations are determined to bring back the economy into the path of progress and prosperity by injecting right medicine in form of proper measures and their execution. The MSME sector is contributing immensely for the overall development of the economy in many ways. Some of the contributions are generation of employment opportunities, production of various range of products and services to fulfill the requirements of domestic and international markets, appropriate utilization of locally available resources, contribution to the gross domestic products (GDP) and contributing towards balance regional developments. Finally, we can say that, these are the backbone of an economy. It has been the lifeline of rural and semi-rural population. Challenges Faced by MSMEs Despite being a vibrant sector, majority of Indian MSMEs have often struggled to grow due to lack of timely financing and the situation is even worse after Covid-19 pandemic. The operational challenges are listed below: 1. High Cost of Credit The cost of credit is high for this sector as cheap funds are not available. The innovation driven units require continuous flow of funds for their research and development (R&D) activities. The high transaction cost for bank loan and high-risk perception towards this sector makes the cost of funds high. In this sector the units are not in a position to provide collateral securities which causes non-availability of funds. 2. Lower Technology Levels The MSMEs in India are categorized by low technology level units except few. The lower technology level in this sector pose a major drawback in emerging globalized market. As a result, the products from these sectors are not comparable to the imported one; which is a major cause for their sustainability into the market. Today; we live in the world that is rapidly changing due to technological advancements. The technological advancements lead to fourth industry revolution which is known as “Industry 4.0”. Industry 4.0 is characterized by the increasing digitization, innovation, interconnection of products, business models and value chains. Various technologies are integral part of Industry 4.0 which includes data volumes, internet of things (IOT), computational power, augmented reality, business analytics, artificial intelligence, simulation, elemental design, advanced robotics, sensor-based technologies, additive manufacturing and cyber-physical systems. This digital revolution changing the business models of all manufacturing industries whether it is large, small or medium. Due to “Industry 4.0” revolution the companies face pressure to transform itself as quickly as possible. The need of digitalization is realized not only for large scale industries even small and medium size industries must be digitized to compete in global market. 3. Insufficient Infrastructure Facilities The profitability and productivity of MSMEs are negatively affected due to insufficient infrastructure facilities including roads, water, power/electricity. There is a need to use updated technology to tune with the global trends to ensure MSMEs competitiveness with availability of skilled workforce and enough infrastructure facilities. The MSMEs which are located either at urban areas which are decades old or located at rural area which are in unorganized manner. The infrastructure facilities are poor and unreliable in these areas which pose great threat to innovate. 4. Lack of Skilled Manpower Innovation needs skilled manpower; though India has a large pool of human resources but there is a scarcity of skilled manpower. The industry continues facing the problem of shortage of skilled manpower which are required for manufacturing, marketing, servicing, etc. Apart from it; there is a lack of culture of research which directly affect the innovations in the industry. 5. Problems of Storage, Product Designing, Packaging and Display MSMEs face problems of storage, product designing, packaging and display their products. These units normally do not have any marketing organization hence products compare unfavorably with the quality products of large scale industries. Selling outlets are not available for their products which is also a serious constraint for MSMEs. The insufficient infrastructural facilities create problems for marketing their products even if a unit innovates the effective monetization remains a key concern. Effective technology will resolve the hindrance and remove the road blocks and allow companies to concentrate on their core business of innovation. 6. Delays in Settlement Owing to limited bargaining power of MSMEs in the market; the largescale buyers usually have long settlement lead times when they deal with these units. It causes shortage of funds for their capex requirements and performance R & D activities. Revival of Indian MSME’s (Post COVID-19) There has been an unprecedented slowdown due to Covid-19 and MSMEs are worst affected. Given their pivotal role in Indian economy, urgent measures need to be taken for their survival, revival and growth. Indian Government has taken various initiatives including Atma Nirbhar Package, however, still majority MSMEs are looking for timely guidance and hand holding at this critical phase. In order to bring more enterprises under MSMEs category, new rationalized pattern has been adopted with dual criteria of turnover as well as investments made. Note: L = Lakhs; Cr = Crores Enterprise Category Old Norms for Manufacturing Sectors Old Norms for Service Sectors New Norms for Manufacturing & Services MICRO Investment < 25 L Investment < 10 L Investment < 1 CrTurnover < 5 Cr SMALL Investment < 5 Cr Investment < 2 Cr Investment < 10 CrTurnover < 50 Cr MEDIUM Investment < 10 Cr Investment < 5 Cr Investment < 50 CrTurnover < 250 Cr The programmes initiated by Government of India “Make in India” pushed the MSMEs to attract FDIs, achieving growth and integrate with major global value chains. Some of the benefits made available are: 1. Benefits for Registration with Udyam Portal Government of India has offered a free one-time registration facility to MSMEs through its Udyam portal and various incentives are available to registered entities. Traders are not allowed to do MSME registration and only manufacturing or service sector units can register with Udyam. Despite having 6.5 crores MSMEs, hardly 25% of them have been registered due to lack of awareness about following key benefits among the businessmen: i) Priority sector lending under Credit Guarantee Trust Fund (CGTMSE) for: Overdraft interest rate concession of 1% Collateral free loans to micro and small enterprises ii) Benefits of sourcing capital goods to start business: Credit Linked Capital Subsidy Scheme (CLCSS) for purchasing machinery & technologies Export Promotion of Capital Goods (EPCG) to allow import of capital goods at zero duty iii) 50% subsidy on patent registration & eligibility for industrial promotion scheme iv) Concessional rate of electricity tariff from few state electricity boards v) Reimbursement of ISO certification charges vi) Protection against delayed payment and allowed to seek interest after 45 days vii) Newly introduced ‘Samadhaan - Sambandh – Sampark’ scheme for empowerment viii) More than 30 schemes are available online at www.champions.gov.in There is an urgent need to create awareness about above schemes offered for the benefits of business enterprises so that maximum entities can avail desired benefits. 2. Start-ups – Powerful Segment of MSMEs As per Department of Promotion of Industry & Internal Trade (DPIIT), any firm or company having innovative approach as well as scalable business model with a high potential to create wealth and employment can register as start-up provided it is less than 10 years old and annual turnover is less than Rs 100 crores since inception. Following is category-wise data with DPIIT as on July 2020: Total Registrations 61,300 DPIIT Recognition 32,849 Eligibility for Angel Tax Benefits 1,658 Eligibility for 80-IAC Benefits (IMB) 266 In order to promote innovation, development and improvement of key products, processes or services, Government of India has offered 100+ benefits to start-ups by launching special Startup India initiative. As a result, India is currently third largest ecosystem in the world after USA and China. Several local companies have started accessing international markets and even, many of them have secured good investments from investors. However, due to Covid19 meltdown, large number of start-ups are facing critical challenges and they urgent need help. 3. Massive Destruction due to Covid-19 Hit Capital markets shrunk by 30% in a span of just few months in March 2020, while key indicators like Industrial Production as well as Purchasing Managers’ Index touched lifetime low in April 2020. The Covid-19 and the accompanying lockdown has impacted almost every sector of the Indian economy. While in case of some sectors like the travel and hospitality sector, the impact has been more profound and disruptive, in other sectors like the service sector, the lockdown has fundamentally altered the manner of doing business. Both the start-up and the MSME sector have also experienced significant slowdown in the past year. However, some selective companies across different sectors made a comeback. Worst Affected Sectors Moderately Affected Sectors Least Affected Sectors Travel & Tourism Metals & Mining Pharmaceuticals Automobiles Textiles FMCG / Consumables Real Estate Logistics Education Aviation Oil & Gas Information Technologies Irrespective of the category to which the company belongs to, everyone is needing money at this critical time. While worst affected and moderately affected companies are needing money for survival, less affected companies are looking to grow inorganically by acquiring good targets at cheaper rates. Utmost Support from Government to MSMEs In the past few months, Covid-19 has taken the entire globe in its grip. It has severely affected the growth prospects of the major economies of the world and India is no exception. To ease out the negative repercussions of covid-19 on Indian economy, the honorable Prime Minister of India has announced a financial package of Rs. 20 lakh crore on 12th March 2020 which underlined the vision ‘Self-reliant India’. Given the massive impact of Covid-19 pandemic and unprecedented slowdown, Government of India had taken various measures for survival, revival and growth of MSMEs. Following are some key measures: i. Liberalized Working Capital Scheme: Launched liberalized working capital scheme for funding up to 5 crores with reduced margins ∼ 10% on stock and 15% on receivables. ii. Speedy Processing of Tax Refunds: Speedy processing of tax refunds of ₹ 1.18 lakh crores to more than 33.5 lakh taxpayers with an intention to introduce liquidity in the system. iii. Incremental Assistance with Atmanirbhar Package (Self-Reliant India): ₹ 3 lakh crores collateral free automatic loans. ₹ 20,000 crores subordinate debt for stressed assets. ₹ 50,000 crores equity infusion through “Fund of Funds” for listed companies. iv. Many Incentives Offered for Reducing Cash Outflow of MSMEs: Reduction in TDS & EPF rates to offer more cash in hand Guidance to PSUs / Government departments for releasing payment in 45 days Relaxation in provisions under Insolvency & Bankruptcy Code in case of default Global tendering allowed only for projects beyond Rs 200 crores Though Government has taken various measures which can help MSMEs to revive, many of them are not properly aware of the same and hence, they continue to face challenges. Being a partner of nation building, CA’s can be helpful for them to understand various schemes and take applicable benefits under them. Endnote In spite of financial difficulties owing to COVID-19 hit, the Government is determined to strengthen the MSMEs to contribute their full potential for the overall development of the country. Now, it is for the MSMEs to make use of these benefits and contribute their best to enable the country to realize its ambitious goals of ‘Make in India’ and ‘Self-Reliant India’ through the development of goods and services to substitute the imported goods and services, and to improve its export performance. Pandemic Covid-19 has brought many challenges for MSMEs with ample number of opportunities too. To catch the domestic market with parallel export opportunities, Indian MSMEs have to prove their worth themselves by playing on volume with the high quality. Extensive product promotion, brand awareness programs, advertisement on different platforms, maintaining efficiency in cost, upgradation of products with the changing needs of customers are the key parameters for the success of Swadeshi Brands. Indians must change their perception towards Swadeshi Brands and switch their preferences to local products and promote them as well. Measures taken by government and changes in perception of Indian towards Swadeshi product will definitely work for the upliftment of MSMEs. A sound industrial policy and a new Innovation policy is required, and policies on making Industrial infrastructure are also required. These all will lead to the fulfilment of dream of “Aatmanirbhar Bharat”. “When the Prime Minister said go ‘vocal for local’, he meant that products be made competitive vis-a-vis global brands. It didn’t mean that one must only buy products that have a logo ‘made in India’ on it. With the Vocal for Local theme capturing the imagination of the nation, the spotlight has also turned to Micro Small and Medium Enterprises (MSMEs) which can play a significant role in tapping the potential of local products.”

The Chartered Accountant • Journal of ICAI April 2021 • Vol. 69 • No. 10 • pp. 42–47 (Journal pp. 1214–1219) MSME Creating Conducive Direct Tax Environment for MSMEs CA. Rajendra Agiwal*, CA. Rayan Doshi* & Saurabh Kulkarni# *The authors are members of the Institute. #The author is subject expert. They can be reached at rajendraagiwal@gmail.com and eboard@icai.in. “India has an entire legislature dedicated to small businesses, known as Micro, Small and Medium Enterprises (MSMEs). The journey of MSMEs at this stage was difficult, since, in the past India’s economy was driven largely through the agriculture and allied sector. Soon came focus on industrial development and now the service sector contributes over 54 per cent of the economy and almost four-fifths of total FDI inflows. At the same time, MSMEs have played a vital role in the Indian economy, significantly to about 24.5% of the country’s gross domestic product (GDP). An integral part of the supply chain, the produce of MSMEs contributes to about 45%1 of the overall exports. Read on....” MSMEs employ a large number of people across the country and play their part as a significant rural employer, as majority of the MSMEs operate in rural India. To mitigate the problem of unemployment is again a challenging task and obviously growth of MSMEs may be the answer to a large extent. As per the MSME Development Act, 2006 (MSMED), the MSME industry has two sectors: the manufacturing sector and the service sector. In India, the manufacturing end of the industry comprises of at least 6% of the GDP and the service end contributes to almost 25% of the GDP. Existing Safeguards for MSME’s MSME’s being the thread that runs throughout the economy is granted additional safeguards by the government specifically relating to the recovery of their sales/ services. The MSMED Act, 2006, has put in place various reporting obligations and safeguards for the MSME sector. The MSMED Act overlaps with the Income-tax Act, 1961 and requires a host of reporting and compliance requirements. Key compliances for the MSME sector in the Income-tax Act have been captured below: Interest Inadmissible under Section 23 of MSMED Act, 2006 The first and foremost enactment piece of legislature which came to notice is separate clause introduced in the tax audit report somewhere in 2009 and applicable to all the assesses, the tax auditor is required to report the amount of interest inadmissible under section 23 of the MSMED Act, 2006. As per the said section, any interest for delayed payment to MSME is not allowed as deductible expenditure while computing the total income of the assessee under the Income-tax Act, 1961 notwithstanding the provisions of section 36(1)(iii) of Income-tax Act, 1961. The intention of inserting such provision is quite obvious, i.e., MSMEs are running their business with limited funds & working capital. Hence, the outstanding dues of MSMEs should be cleared within the stipulated time, so that MSMEs are in a position to run their business smoothly without any financial hurdle. The survey of judicial precedents do not throw any case law on the issue so by and large it can be presumed that the object of inserting this clause is served. Though there could be cases of disclaimer about reporting obligation as required information at the end of the auditee is not provided to the auditor so as to enable him to qualify his report. “Any interest for delayed payment to MSME is not allowed as deductible expenditure while computing the total income of the assessee under the Income-tax Act, 1961 notwithstanding the provisions of section 36(1)(iii) of Income-tax Act, 1961.” Section 15 of MSMED Act, 2006 Requirement on the buyer to make payment on or before the date agreed upon in writing, or where there is no agreement in this behalf, before the appointed day. This section also provides that the period agreed upon in writing shall not exceed 45 days from the day of acceptance or the day of deemed acceptance. Section 16 of MSMED Act, 2006 Section 16 of the MSME Act provides for the date from which and the rate at which the interest is payable. Accordingly, where a buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed date or, as the case may be, from the date immediately following the date agreed upon, at 3 times of the bank rate notified by the Reserve Bank of India (RBI). Section 22 of MSMED Act, 2006 This section provides that where any buyer is required to get his annual accounts audited under section 44AB of Income-tax Act, 1961 or under any law, such buyer shall furnish the following additional information in his annual statement of accounts, namely: The principal amount and interest due thereon (to be shown separately) remaining unpaid. The amount of interest paid by the buyer in terms of Section 16 along with the amount of payment made to supplier beyond the appointed date during each accounting year. The amount of interest due and payable for the delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act. The amount of interest accrued and remaining unpaid at the end of each accounting year. The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure u/s 23. Challenges Faced by MSMEs MSMEs face a number of challenges that relate to absence of adequate and timely banking finance, procurement of raw materials at a competitive rates, need for better Infrastructure facilities, lack of skilled manpower, etc. To overcome these concerns, there are a number of initiatives taken by the Government to create skilled manpower, overcoming the challenges. For example, if the MSME is backed-up with adequate finance, competitive wages/ salary can be offered to it’s manpower, where raw material is available at competitive rates, the MSME will be in a position to break-even early, thereby earning profits which will enable compensation to the manpower. Likewise, if the MSME is equipped with basic infrastructure facilities, the manpower would be willing to work for such MSMEs. Fortunately, Income-tax Act, 1961 in the avatar of section 2(15) which defines “Charitable Purpose” includes one of the purposes as “Education”. Under this piece of legislation if NGOs/ Trusts are formed to impart education under the wider connotation of education as charitable purpose, it will enhance availability of skilled manpower. However, multiple amendments have resulted in added complexities in the trust taxation regime. Professional fraternity should step-up on trust taxation compliance to avoid any consequences. This will help the MSME sector with required skilled employment. Vaccine for the MSMEs As the world is currently reeling from the wrath of the ongoing Coronavirus pandemic, several small businesses have even been forced to shut down their operations completely or go neck-deep in debt in order to try and survive this tough period. The Government of India in order to support the rehabilitation and ensure the upliftment has implemented major economic stimulus with a special focus on MSMEs to better equip them in the current situation. The registration criteria has also been modified so that a large number of enterprises are able to take benefits of the facilities available to the MSMEs and help in Indian growth story by virtue of their registration as an MSME/ SSI (‘Small Scale Industries’) under the MSMED Act, these entities are entitled to certain benefits. Some of the benefits are: Collateral Free Bank Loans: The Government of India has recently notified that collateral-free credit shall be available to all companies in all small and micro business sectors. This initiative ensures funds for MSMEs/SSIs. Under this initiative, existing as well as the new enterprises can claim the benefits enshrined herein. A trust by the name of the Credit Guarantee Trust Fund Scheme was introduced by the Government of India, Small Industries Development Bank of India (‘SIDBI’) and the Ministry of Micro, Small and Medium Enterprise Development to ensure this scheme is implemented for all MSMEs/SSIs. Patent Registration: A significant subsidy of 50% is given to registered MSMEs/SSIs. This subsidy can be availed for patent registration only by furnishing a copy of the application to the respective ministry. Exemption of Interest Rates on Overdrafts: Registered MSMEs/SSIs are eligible to avail a benefit of 1% on overdrafts however the implementation of this scheme differs from bank to bank and clarity needs to be sought from the bank extending the overdraft facility. Eligibility for Industrial Promotion Subsidy: The Government of India also ensures that registered MSMEs/SSIs are eligible for subsidies on amounts spent towards Industrial Promotion. The Micro, Small and Medium Enterprises Ministry regulates the quantum of the subsidy and the same is a regular feature in the budget as well. Protection against delayed payments: Very often buyers of services or products from MSMEs/SSIs usually tend to delay/default on the payments to be made to them. The Ministry of Micro, Small and Medium Enterprise, Government of India with the intention of providing support to these enterprises enshrined upon them the right to charge interest on the payments that are delayed from their buyers/customers. For the quick and easy settlement of such disputes, the government has issued guidelines advising such settlement must be done in minimum time through conciliation and arbitration and other such measures. In case, if any MSME/SSI registered enterprise supplies/provides any goods/services to a buyer/customer then the buyer/customer is required to make the complete payment on or before the agreed date of payment as per the arrangement between the parties or within 15 days from the day they had accepted the goods/services from MSME/SSI registered business in cases where the date of payment is not mentioned. If the buyer/customer causes a delay in the payment for more than 45 days after accepting/consuming the products or services then the buyer/customer is liable to be charged compound interest on the amount that was agreed to be paid for the products/services provided/rendered. The interest rate is usually three times the rate that is notified by the RBI. Concession on electricity bills: This fixed rate of concession is available to all registered MSMEs/SSIs by simply furnishing an application to the Electricity Department or their respective DISCOM, such application shall be accompanied with a copy of the MSME/SSI registration obtained under the MSMED Act. Granting concessions is of course a welcome move, but uninterrupted availability of power supply is of utmost importance. If productivity is hampered due to lack of power supply, MSMEs may not be in a position to sustain such losses in long term. On the power sector, Government has encouraged through providing tax holiday to power sector companies (especially windmill) under section 80IA of the Income-tax Act, 1961 along with accelerated depreciation. Increase in windmill farms as well as other green energy parks, will increase the supply of power. Consequently, will help in providing uninterrupted power supply to MSMEs. So it can be considered as integrated step though there is no evidence to demonstrate that it is for MSMEs. Reimbursement of ISO Certification charges: Any amount spent towards obtaining an ISO certification by registered MSMEs/SSIs is eligible for reimbursement from the Government of India on filing of an application to that effect along with the requisite set of documentation. No global tenders up to INR 200 crores: The government has amended the General Financial Rules 20172 to disallow global tenders in government procurement up to INR 200 crore, as announced in the Aatmanirbhar Bharat package. This bold step is expected to create more opportunities for domestic players and will allow the local industry to gain from this initiative. Recently, the World Bank has allocated about INR 5,600 crore (USD 750 million) emergency response funding to the MSME sector. This provides much-needed liquidity and supports the government’s strategy of using NBFCs and small banks to channelize funds to the MSMEs. Biting the Silver Bullet The government has realized the potential of the MSME sector and at the same time understands the perils plaguing the economy due to its under-performance. While some initiatives have been taken on the policy front, the impact of the taxation system on MSME is twin layered- through the corporate tax and GST. The budget of 2020 had a major focus on accelerating the growth of the MSMEs. As a structural change was made in the definition of an MSME, thereby enhancing the base, more enterprises are now poised to avail tax benefits announced to MSMEs. Some ways in which the current taxation system is expected to boost MSMEs are: Reduction of corporate tax rate: The corporate tax rate for new manufacturing companies has been reduced to 15% while the overall tax rate for all other companies has been cut down to 22%. While the reduction in tax rates puts India in the league of countries having one of the lowest tax rates, the budget has done away with some of the incentives available and utilised by the MSME industry namely, tax holidays for infrastructure, agriculture, and food processing units. While this is a welcome move, government should consider similar rate cuts for business which are in the form of partnership or proprietorship, since there are many MSMEs in this category. Though this move needs applause, at the same time, one should be conscious that certainly it is challenging task before the Government to raise revenue as well to run the economy. Relief from tax audit: In a bid to make tax compliances simpler for a wider number of MSMEs and thereby allowing them to focus on growth, the threshold provided for entities to get their books audited under the income-tax has been increased from the existing limit of INR 1 crore to INR 5 crore (with some conditions). The increase in threshold surely relieves MSMEs which are able to satisfy the prescribed conditions from the compliance burden. Goods and Service Tax: Several changes have been made in the indirect tax system to improve compliance. Simplification of GST returns, Aadhaar-based verification of taxpayers, electronic invoicing to facilitate compliance, etc. have made GST compliance multifold easier for MSMEs. Tax holiday expansion for start-ups: Startups in the MSME sector have not enjoyed the high-ticket funding or unending queues of angel investors filling up gaps caused by cash burnouts. To allow fledgling startups an opportunity to grow, startups having turnover up to INR 25 crores earlier had the tax benefit of getting 100 per cent of profits as a deduction for three consecutive years. In a further bid to support startups, this limit has gone up to INR 100 crore. Additionally, the benefit has been extended to be allowed for three out of the first 10 years instead of the first seven years. Relieving startups from the burden of taxation has provided this ultra-competitive sector with breathing space. “Government’s constant focus on developing infrastructure, such as power, roads, waterways, etc. are steps in the right direction. Such efforts from the Government keeps the MSME sector hopeful of better ways of doing business.” MSME Wishlist Expansion of TDS/TCS: The current Budget, 2021 had expanded the scope of TDS provisions widely, specifically the goods transactions are now proposed to be in the ambit of TDS net. Although the intention of widening the TDS scope is not of much concern, but the MSMEs will need to cope-up with the compliance requirement. Apart from the compliance burden, if the buyer satisfies the conditions prescribed under such TDS provisions, the cash inflow from the buyer will be reduced by the tax deducted amount. Faceless assessment/appeal regime and inability to scale technologically: Lot of new initiatives are brought into the income tax net and all these initiatives are digitally driven. Given that most of the assessments are now conducted in a faceless mechanism, MSMEs will need to invest in digital infrastructure. Lack of good tax advisor: Typically, it is seen that small business struggle to get good tax advice and in turn may end up in an unavoidable situation. The MSME owners are largely occupied in their business activities and hence, a good tax advisor would be of a great help. The chartered accountants with their strong skills in the area of taxation can play a crucial role in correctly advising MSMEs on tax matters. MSME corridor: Given the challenges faced by this upcoming sector, Government may consider allocating dedicated space for MSME entities. Wherein all the basic infrastructure facilities are made available to this sector. Such initiative may provide a larger field of play to the MSME sector. “The government has realized the potential of the MSME sector and at the same time understands the perils plaguing the economy due to its under-performance.” MSMEs may be incorporated in several different legal entity types. From sole proprietorships and One Person Companies to Limited Liability Partnerships and Private/ Public Limited Companies, the choice of the business entity is dependent on various factors such as owner liability, compliance burden, investment and funding, exit strategy, taxation, etc. As most of the MSMEs are formed as a proprietorship or partnership enterprise, it is imperative for the sector to strive towards corporatization of Small & Medium Enterprises for good corporate governance as well as to energize the economy as a whole. Along with choice of form of entity the corresponding provisions under Income-tax Act shall be applicable. For example, compliance of tax deductions at source are mainly applicable to an entity other than individual and HUF unless the individual and HUF are audited in preceding year u/s 44AB, different tax rates, eligible deductions for specific form of entity, etc. However, the choice of form of entity may not be driven by simply looking at direct tax provisions and a host of other considerations would play a role in exercising choice of form of entity. At last there is no other way to conclude the thought but saying that one has to step boldly. Refinement/ Revision/ Improvement is a process and as an accountants’ we know that either there could be profit/ loss/ breakeven, but the show must go on. — CA. Rajendra Agiwal, CA. Rayan Doshi & Saurabh Kulkarni 1 Confederation of Indian Industry (CII) Sector Report on MSMEs 2 Department of Expenditure, Ministry of Finance - GFR 2017 Amendments

MSME • Taxation & Fiscal Policy Perspective to Contributions Made by GST to MSME Sector Journal: The Chartered Accountant, April 2021 (Vol. 69, No. 10) • Pages: 48–53 (Journal pp. 1220–1225) JC CA. A. Jatin Christopher The author is member of the Institute. He can be reached at jatin.christopher@gmail.com and eboard@icai.in. “Lack of extensive employable capital does not bring about establishment of MSME sector. Operations at a certain level of efficiency is best pursued within the limits of an MSME enterprise. There are diminishing returns if overheads of a mega enterprise were to be thrust upon operations that are more efficiently run without those overheads. Therefore, MSME industry is enterprise of choice with a certain extent of investment and a desired extent of diversity. But often MSME sector is looked upon as players in needs of someone’s largesse, which is neither the view of the investors, lenders, Government nor the view of entrepreneurs. Encouragement to MSME enterprise is required by the Government in the form of ‘facilitating and enabling’ the continuation of their own efficiencies and path to growth and success. This article considers contribution of GST to this sector and presents yet another view to these processes which can reveal the true potential of GST. Read on…” GST carries a very powerful legislative framework for flow of credit in the course of creation of value and translates into revenue where consumption takes place. There lies more potential of the system to be explored and revealed, than limiting the concentration to mere generation of revenue. GST promises more than just revenue generation. It is a deft system, especially the one we have here in India, where transactions’ trail is explicit. Here is another perspective to consider whose expectations from GST could be met in ‘facilitating and enabling’ strengthening of the MSME sector. Expectations from GST There have been several aspects to GST that were discussed and therefore expected to find a place in the legislation itself such as: Multi-point tax with credit for taxes paid; Borderless flow of trade and seamless flow of credit; Simplified revenue neutral tax structure with HSN-based classification; Tax on value added with refund of any overflow of credits on account of exports, rate-inversion or other specified end-uses; Self-assessment and simplified compliance and reporting based on online tool; Minimal and essential Governmental intervention and expanded in exceptions; Rule-based and transparent anti-evasion measures; Enforcement of tax avoidance minimally intrusive and based on principles of natural justice; Voluntary compliance ecosystem where compliance rating compels compliance resulting in minimal litigation; Robust advance ruling mechanism to resolve potential disputes; and Appellate mechanism as the arbitrator for addressing interpretational conflicts which would be few and far between. Experience in GST The operational realities of the GST regime diverge significantly across multiple statutory and administrative dimensions: Legislative Challenges Legislative challenges started right from the get-go in reaching an acceptable understanding by all stakeholders: Business and supply; Taxability with a precise definition; Transactions internal to an entity but of inter-State character; Non-taxable and extra-territorial transactions; Threshold exemption and composition schemes. Credit as a Right Credit as a right requires clarity about: Basis for claim: resulting in linkage to end-use of inward supplies; Conditions to claim: resulting in denial for failure of specified conditions; Manner of claim: resulting in a loss of claim if not included in the Form or within the time permitted. Tax Rates Became Complicated Tax rates became complicated due to: Policy to impose Cess on sin goods; Exemption to transactions caught in definitions of taxability; HSN for services needed scheme of classification and notes with explanation to scheme. Valuation Specificity Valuation needed to be specific to cover: Incentives and commissions; Subsidies and price protection; Related party transactions; Transactions with non-monetary forms of consideration. Seamlessness of Credit Took a Beating Blocking of credits based on subjective criteria and not limited to credits on exempt supplies; Taxes paid in other States do not flow to home-State except via ISD route is unnecessary compliance burden. Refunds, Self-Assessment and Anti-Avoidance Refunds was to be precise and limited based on intelligible differentia; Authority to self-assess needed to be monitored by specific provisions such as scrutiny on one end with detailed audit at the other end and best-judgement assessments in between; and Aspects on anti-avoidance, penalty and prosecution are interspersed adequately. “Entire system operates on a technology-enabled Common Portal, but the journey so far has been very unnerving due to Government’s responsiveness to make amends where justified and deserved. While this responsiveness is welcome, it has also attracted the ire of trade due to the number of amendments made.” MSMEs Challenges MSME segment represents a very large population of taxpayers who make a significant contribution not only to the revenues of the Government but also to some very important and efficient links in the supply chain of mega industries. Not all taxpayers absorb changes to the law in the same manner or the same pace. MSME needs more engagement before roll-out. Government’s taxpayer-engagement in certain recent changes is a glorious illustration of how to roll-out changes. Clearly, such taxpayer-engagement was missing in the past and there are non-compliances arising from that limited engagement that is still unresolved and is presenting itself in departmental audits and inquiries with interest and penalties. It is a problem that needs to be addressed and resolved on priority. MSME industries’ experience has been the ‘inherent inflexibility’ in GST that expects all taxpayers to make every transition smoothly. Whether it is transitional credits or belated returns or interest or unpaid arrears. There are challenges that need to be resolved but not without active engagement with the Government. This is not to say that taxpayer has not made bona fide mistakes due to misunderstanding of this new law for which the responsibility is acceptable. But this is a fact that bona fide defaults and on-compliances are lurking with need for proper solution. Any attempt at resolving these deviations should be done with due care so that they do not include and enrich ingenious fraudsters from ‘making hay while the sun shines’. Bona fide taxpayers would like not to be ruffled by the aggressive measures that has fraudsters in the crosshairs. Fraudsters are a separate class of taxpayers and as the Government’s own paper expresses, they too lie in different sub-categories based on their ‘end game’. MSME industries seem to be burdened by the weight of the administrative machinery that challenges gullible taxpayers. Government is welcome to exercise all lawful measures and pursue fraudsters or foil their plans but not before ‘separating the grain from the chaff’. There’s so much publicity around these ‘questionable’ transactions that there is untold fear about carrying out transactions with genuine parties. Everyone is looking over their shoulders to see who is the ‘wolf in sheep’s clothing’. MSMEs are having to prove their bona fides every step of the way. Government’s predicament about lines of distinction being blurry is understandable but it is equally true that not all non-compliant taxpayers are fraudsters. MSME sector cannot afford to engage in fraudulent activities deliberately as the price of fraud can be debilitating. To paint all non-compliance with the same brush would undo all the good work done in nurturing MSME sector and there is not a single MSME enterprise who would speak for fraudsters and the law bring such to justice. Similar differentiation is justified in fatal and non-fatal defects in e-way bill compliance. It is seen that all deviations are met with the same rigorous penalty under Section 129. Allowing time to understand and comply with e-way bill requirement cannot be treated with ‘one size fits all’ rule when Circular 64/38/2018-GST dated 14 Sept 2018 itself admits minor offences and prescribes nominal penalties. MSMEs have borne the brunt of the e-way bill defects as this responsibility has been thrust upon them by mega industries for whom supplies, or job-work is undertaken. MSME enterprises have embraced this new requirement the fastest and are on their way to get ready with e-invoicing when thresholds are reduced further. Empathy in administration will see more than encouraging compliance and surge in revenues too. Credit to Government for Its Responsiveness Credit must be given where it is due and Government’s initiatives that must be commended are: Deferring ‘New Returns 2020’ and introduction of ‘QRMP 2021 with IFF’; Automating self-authenticated refunds; Enabling GSTR2B as a static document; Extending due dates, where justified; Upgrading technology backbone; and Timely amendment to rules to harmonize with the requirements of law. It is this responsiveness that brings hope especially to MSME taxpayers that ‘where Government wills (to alleviate taxpayer’s woes) there are ways. There are many remarkable areas where the principles under earlier tax regime, which shares the same equitable jurisprudence with GST, will meet the ends of justice, namely: Circular 962/5/2012-CX dated 28 Mar 2012: Allows all ‘vesting credit conditions’ be eclipsed where demands are made beyond self-assessment of liability; Circular 1053/2/2017-CX dated 10 Mar 2017: Contains administrative discipline to apply to all quasi-judicial functions such that it is followed mutatis mutandis in GST and in all such proceedings by State Government agencies who seem liberal in exercising authority ‘in the interests of justice’. Justice delivery by Central agency cannot result in an outcome different when delivered by State agency(ies); Circular 213/3/2019-CX dated 5 Jul 2019: Admits that reversal of common credits does not apply when abatements are allowed, which could well be relevant to transactions listed in Schedule III, 1/3rd abatement allowed in HSN 9954 and to all notional values under Rule 32 or where value is imputed. Aspects that Could Greatly Advance Compliance by MSME Sector if Government Were to Consider: Prospective Operation and Transition Plans: All changes introduced be applied with prospective operation and clear transition plan published for taxpayer awareness including its effects for past tax periods; Portal Functionality Publicity: Release of new functionalities on Common Portal be published and made operational from a reasonable but future date. The suddenness of implementing new ways of doing old things makes it cumbersome for taxpayers to attend to these changes. Online service of notice was unknown until recovery action was initiated and taxpayer’s claim that notice was not served came to be dismissed in Court proceedings. New ways of doing old things are acceptable but when these new functionalities are implemented, wide publicity be given to them; and Appellate Simplification and Pre-Deposit: Filing appeal before First Appellate Authority needs to be simplified across agencies and across States. Phased roll-out of automation is understandable but taxpayers have multi-State operations and if practices are uniform or changes notified from a prospective date would help taxpayers adhere to changes. Pre-deposit for appeals still via DRC-03 challan but without option of ‘pre-deposit’. Taxpayer Friendly Measures While there may be certain measures that are common to all taxpayers, but MSME sector feels the burden the most due to the mounting interest liability along with threat to business continuity. Without delving into changes in the law, certain ease-of-doing business measures that could help administration too, namely: 1. Payment ‘Under Protest’ Payment ‘under protest’ is a right in the interests of equity that taxpayers enjoy and providing a payment mechanism which is binary does not allow the law to breath and grow. And every new law needs space for these accommodations. When there are doubts, whether it relates to credit or tax, taxpayers who are not enthused to aggressively litigate would gladly ‘deposit disputed amounts’ and wait for the air to clear. Enabling an interim payment option would go a long way in taking away the anxiety that has suddenly taken severe proportions. Introduction of rules such as 86A or 86B are cases in point where there is a clear sense of anxiety to take sudden measures. 2. Credit ‘Under Protest’ Credit ‘under protest’ is also a remedy that taxpayers require in respect of credit that is doubtful to everyone else but the taxpayer. If taxpayer were permitted to ‘avail without utilizing’ such credit, taxpayers will not forfeit credit due to the time limit in section 16(4) but still enjoy the fruits of litigation or clarity to law. Doubtful credits claimed by taxpayers are aggressively pursued by administration to be reversed, with interest and penalty, adding to eventual pendency in appeals. A remedy similar to rule 37 where credit availed is permitted to be ‘reversed with restoration’ free from any further time limitation would not only single-out credits that taxpayer considers doubtful for inquiry without anxiety and yet protect taxpayer from interest and punitive consequences. Extension of Section 172 Imminent There is no doubt that taxpayers have made mistakes and certainly all of them have been set right and errors greatly reduced. First 5 years is reasonable and certainly first 3 years begs exercise of powers that the Legislature has allowed the Executive under section 172 to ‘remove (following) difficulties’: Transition Credits: Transition credits permitted when Courts across the Nation have issued directions based on bona fides of each case. Taxpayer who is wronged by the law and burdened with disproportionate losses due to innocent mistakes will not be won over to become compliant in future; Inflexibility of Section 16(4): Taxpayers be relieved of the inflexibility of time limit under section 16(4) to claim bona fide credit; Net Tax Liability for Interest: Interest on all belatedly discharged arrears be imposed on ‘net tax’ liability and clever wordings to carve out only one use-case in proviso to section 50(1) of belated returns does good to no one as there are scores of other cases where net tax liability remains unpaid; Alternate Compliance for Section 16(2)(c): Alternate methods be allowed to demonstrate compliance with section 16(2)(c) and not enforce matching as the only method from 1 Jul 2017. Taxpayers will be unable to bear a double impact when the only default by Supplier is in reporting as B2C in GSTR1 returns; Deficiency Memos and Portal Glitches: Refunds met with Deficiency Memos repeatedly or glitches in GSTRx and multiplicity of amendments to rule 89(4) and 96(10) amply justifies reprieve to taxpayers; and Resolution of Indiscreet Orders: Indiscreet orders passed under section 62 and under rule 21 need resolution as time to file appeal has passed even before taxpayer could realize the many different ways section 169 permits ‘service’ of notices and orders. Taxpayers are eager to make amends where they have misunderstood or failed to realize the extent this new law differs from earlier tax regime. Remedial measures foster healthy relations and its no one’s case that GST will be able to deliver on its promises in an adversarial compliance environment. Conclusion There is no incentive to be non-compliant and MSME sector knows this all too well, where its margins are in single digits and GST is in double digits, this sector is all too concerned to deviate. Compliance is a journey that is best undertaken with much preparation and awareness building along with assurance of ‘no sudden changes will augur well with MSME enterprise as well as others. It must be accepted that taxpayer-base is too large for administration to aggressively pursue and effectively implement this new law. Where taxpayers are willing, MSME sector is the one with the greatest motivation to cooperate and be compliant with law, it is important the Government joins hands to ensure self-assessment of liability in its true sense without fear of looming inquiry or demands. MSME industry is willing, even eager, to go from ‘bullock cart to bullet train’ but only seeks time and closer taxpayer-engagement to make through every transition. But the one that brings the most value in GST is one where there is a happy partnership with Government and industry to make this journey pleasant. “Compliance is a journey that is best undertaken with much preparation and awareness building along with assurance of ‘no sudden changes’ will augur well with MSME enterprise as well as others.”

The Chartered Accountant • Journal of ICAI April 2021 • Vol. 69 • No. 10 • pp. 54–57 (Journal pp. 1226–1229) TAXATION Equalisation Levy 2.0 - Proposed Amendments CA. Khushhal Batra & CA. Sunny Mittal The authors are the members of the Institute. They can be reached at cakhushhalbatra@gmail.com and eboard@icai.in. “In order to tackle the tax challenges due to digital economy, several measures are being implemented globally. In this quest, India introduced Equalisation Levy (‘EQL’) in 2016, which was subsequently expanded in 2020. To address the issues faced by industries while applying the EQL provisions, amendments have been proposed in Union Budget 2021 to rationalise and / or clarify the EQL provisions. Read on…” Proposed Amendments at a Glance Exemption Alignment under Section 10(50): To address the issue of double taxation emerged due to amendment brought in Finance Act, 2020, it has been proposed that the transactions which have been subjected to EQL provisions shall be exempt from income tax w.e.f. Financial Year (‘FY’) 2020-21 and onwards (instead of FY 2021-22). Royalty and FTS Exclusion: It has been clarified that EQL provisions shall not apply to the income of non-resident which is in the nature of royalty or fees for technical services. Statutory Scope of Online Transactions: Certain expressions such as ‘online sale of goods’ or ‘online provision of services’ have now been defined, which are relevant to determine the applicability of EQL provisions on e-commerce operators. Background and Legislative Genesis The global economy has undergone a drastic change in last few years in the way of conducting business. Instead of the traditional brick-and-mortar approach of doing business, a good number of business activities can be carried out nowadays through digital or electronic means. This digital economy is a result of various evolving business models such as e-commerce, digital advertisements, social media, payment gateway, etc. Numerous online businesses are now carrying on their business across the world without having any physical presence in a particular jurisdiction (say, India). In such cases, the online businesses might not be subjected to any tax in that jurisdiction (India) on their revenue, in light of the beneficial provisions under the tax treaties, and thus resulting in a loss of tax revenue to the Indian government. In order to tackle the aforesaid tax challenges due to digital economy, countries are implementing several measures by taking a cue from the OECD - G20 project on Base Erosion and Profit Shifting (BEPS). Action Plan 1 of such project which deals with the tax challenges of digital economy, made certain suggestions to address these challenges. One of such measure was EQL, which was introduced in India through the Finance Act, 2016 (‘FA16’). In FA16, EQL @ 6% was made applicable in respect of income of a non-resident from specified services, i.e., online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement (commonly referred to as ‘EQL 1.0’). These provisions were particularly relevant in the context of search engines that provide online advertisement, online classifieds, social media applications and websites which have provisions for promoted content and advertisements. In Finance Act, 2020 (‘FA20’), the scope of EQL was expanded to cover non-resident e-commerce operators w.e.f. FY 2020-21 (commonly referred to as ‘EQL 2.0’). As per expanded scope, EQL @ 2% was levied on any consideration received or receivable by a non-resident e-commerce operator from e-commerce supply or services made or provided or facilitated by it to: a person resident in India; or a non-resident (in respect of the sale of advertisements targeted at, or data collected from, a person resident in India or using an IP address located in India); or a person who buys goods or services using an IP address located in India. Meaning of e-commerce supply or services The term ‘e-commerce supply or services’ was defined as: Online sale of goods owned by the e-commerce operator; or Online provision of services provided by the e-commerce operator; or Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or Any combination of activities listed hereinabove. Further, at that time, Section 10(50) of the Income-tax Act, 1961 (‘the Act’) was also amended to clarify that any income from any e-commerce supply or services that has been subjected to EQL provisions, shall not be taxable w.e.f. FY 2021-22. “Earlier, there was no clarity that whether income of a non-resident e-commerce operator in the nature of royalty and fees for technical services, which are anyway taxable under the Act read with the tax treaty, could also be subjected to EQL 2.0.” Issues and Amendments There were certain loose ends in the existing provisions for which the stakeholders were looking forward to certain clarifications. In order to rationalise and / or clarify, the following amendments have been proposed: 1. Addressing the double taxation for FY 2020-21 The amendment brought through FA20 resulted in an issue / anomaly that while provisions of EQL 2.0 were applicable with effect from 01 April 2020, the corresponding exemption from income tax in the hands of non-resident recipients was applicable only from 01 April 2021. It meant that during FY 2020-21, such income will be taxable under the Act and will also be subject to EQL 2.0 (as the exemption was available for FY 2021-22 and onwards). Amendment to Section 10(50) of the Act In order to remove the aforesaid double taxation, Union Budget 2021 has proposed to amend Section 10(50) of the Act, to provide that any income of a non-resident, which has been subjected to EQL 2.0, shall not be taxable under the Act w.e.f. 01 April 2020. Thus, making the said income exempt for FY 2020-21 as well. 2. Should Royalty and Fee for Technical Services be subject to EQL provisions or Income-tax provisions? Earlier, there was no clarity that whether income of a non-resident e-commerce operator in the nature of royalty and fees for technical services, which are anyway taxable under the Act read with the tax treaty, could also be subjected to EQL 2.0. Also, there was a potential for abuse that a taxpayer could offer certain reasons to levy EQL at the rate of 2% (by taking a position that they qualify as e-commerce operator and their supply comes under the purview of e-commerce supply) on an income in the nature of royalty and fees for technical services and claim exemption under Section 10(50) of the Act, where such income is subjected to tax at 10% under the Act (ignoring beneficial provision under the tax treaty, if any) and could have a saving of 8%. Section 163 of the FA16 and Section 10(50) of the Act - exclusion of Royalty and Fee for Technical Service from the ambit of EQL In order to remove the confusion amongst the taxpayers and to eliminate the aforesaid potential for abuse of Section 10(50) of the Act, it is now proposed to insert an explanation to Section 163 of the FA16, to provide that consideration received or receivable for specified services and e-commerce supply or services shall not include consideration which is taxable as royalty or fees for technical services in India under the provisions of the Act read with respective tax treaty. A corresponding amendment has also been proposed in Section 10(50) of the Act, to clarify that said exemption will also not apply to income in the nature royalty or fees for technical services taxable under the Act read with the tax treaty. 3. What qualify as ‘online sale of goods’ or ‘online provision of services’? The provisions of EQL 2.0 were made applicable to e-commerce supply or services, which were defined to mean ‘online sale of goods’ or ‘online provision of services’. The expressions ‘online sale of goods’ or ‘online provision of services’ are very broad terms and have not been defined anywhere in the Act and EQL provisions. In the absence of any definition of these terms, there was no clarity as regards the applicability of EQL 2.0 where only one element of sale (such as, placing of an order) has taken place through an online medium (such as, an application or email), would it be considered as subjected to EQL 2.0 by the tax authority particularly, when such electronic medium is being maintained and managed by the seller. There could be an interpretation that if all the elements of a sale transaction (i.e. from placing an order to till the transfer of title of goods) have occurred online, then only same could be treated as an online supply of goods, which could exclude a large number of physical goods sold online from application of EQL 2.0. Further, there could be another interpretation that if an order has been placed through an email and where the platform / server used for placing such order is being maintained and managed by the online seller itself, then that could also be classified as e-commerce operator and thus subject to EQL 2.0. “There could be an interpretation that if all the elements of a sale transaction (i.e. from placing an order to till the transfer of title of goods) have occurred online, then only same could be treated as an online supply of goods, which could exclude a large number of physical goods sold online from application of EQL 2.0.” Definition of ‘online sale of goods’ or ‘online provision of services’ In order to clarify the meaning, it is now proposed that an e-commerce supply or service will be subject to EQL 2.0 when any of the following activities takes place online: Acceptance of offer for sale; or Placing of purchase order; or Acceptance of the purchase order; or Payment of consideration; or Supply of goods or provision of services (partly or wholly). On a plain reading of the aforesaid proposed amendments, it appears that the legislature is in favour of levying EQL 2.0 on every transaction including which has taken place entirely in physical world (i.e. without having any element involving electronic means) as long as one single part of such transaction has happened online (for which a platform has been managed by the e-commerce operator). Therefore, this provision may result in a radical expansion of scope of EQL 2.0, perhaps far beyond its original intent. Conclusion & Lingering Ambiguities The objective of amendments brought through Union Budget - 2021 is to clarify the position and intent of the government of introducing the EQL 2.0. While it seeks to clarify certain doubts and settle certain ambiguities, there is still a need for further clarifications to reflect and provide more clarity on other aspects (such as, availability of treaty benefit where EQL provisions apply, applicability of EQL provisions on physical supply of goods, absence of advance ruling mechanism, etc.) to make this levy more viable and acceptable. — CA. Khushhal Batra & CA. Sunny Mittal

GST • Corporate Taxation & Cross-Border Taxability of Liaison Office under GST Journal: The Chartered Accountant, April 2021 (Vol. 69, No. 10) • Pages: 58–62 (Journal pp. 1230–1234) SV CA. Shilpa Verma The author is a member of the Institute. She can be reached at verma.shilpa05@gmail.com and eboard@icai.in. “Liaison office is a viable option for the foreign company proposing to enter the Indian market for the first time to undertake exploratory activities and analyze the growth potential and connect with prospective customers/ vendors without undertaking any commercial activity as such with cost of maintaining such liaison office, being met out of funds repatriated by Head Office. From GST perspective, challenges exist with regard to taxability of liaison office. This article attempts to present an in-depth analysis of the governing provisions for liaison office and to address issues. Read more…” Goods and Services Tax Act (‘GST’), a very big reform is at present in fourth year of implementation. The act which aimed to simplify the taxation process has evolved over time to address the footraces in its path by rationalizing the rate structure, further simplification of compliance norms, ease of doing business and addressing the anomalies in the provisions by issuing requisite notifications / circulars as and when required. However, still there are numerous issues that need to be elucidated to avoid issues among the taxpayers. This article attempts to explain one such uncertainty pertaining to taxability of liaison office under GST. A foreign company may initiate business in India by setting up a liaison office to explore Indian market for their potential opportunities to invest and establish business presence in India. Establishment of liaison office in India by foreign entities is governed by Reserve Bank of India under Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. These regulations define ‘liaison office’ as: “a place of business which act as a communication channel between the principal place of business or Head Office located outside India and entities in India” Under the RBI guidelines, liaison offices cannot undertake any commercial /trading/ industrial activity, directly or indirectly, and must maintain itself out of inward remittances received from abroad through normal banking channel. Activities which can be undertaken by liaison office are specified in Schedule II of the regulations, which are listed under: i. Representing the parent company / group companies in India. ii. Promoting export / import from / to India. iii. Promoting technical/ financial collaborations between parent / group companies and companies in India. iv. Acting as a communication channel between the parent company and Indian companies. Therefore, entire administrative expenses like rent, security, electricity etc. including salary expenses of Indian liaison office are met by foreign parent entity. It merely acts an executing arm of the head office and do not have resources to carry on the business activity. Taxability in GST In order to understand GST taxability on above transaction, let us first analyse whether the liaison office has the capabilities to carryout activities of the nature that would constitute ‘supply’ liable to GST. Section 7 of the Central Goods and Services Tax Act, 2017 defines the term supply, which reads as under: - Section 7(1) of the CGST Act, 2017: For the purposes of this Act, the expression “supply” includes— (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business and; (c) the activities specified in Schedule I, made or agreed to be made without a consideration. It may be worthwhile to mention that ‘place of business’ under the GST law includes: (a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or (b) a place where a taxable person maintains his books of account; or (c) a place where a taxable person is engaged in business through an agent, by whatever name called. Further, Section 2(50) defines “fixed establishment” as a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs. “On conjoint reading of above definitions along RBI regulations as per Foreign Exchange Management Regulations, it is evident that liaison office is not permitted to carry out any commercial / trading / industrial activity directly or indirectly at its place of business or the fixed establishment due to express bar in the regulations.” In the given scenario, liaison office is not undertaking any activity per se on its own. It cannot generate any income in India as per the RBI guidelines. In the absence of consideration, it cannot be termed as supply under Section 7(1)(a). Therefore, reference would now be drawn to Schedule I which list down certain activities which would constitute supply even if there is no component of consideration. Entry 2 of Schedule I of the CGST Act, 2017 specifies supply of services between related parties or distinct persons as specified under Section 25, even without consideration, constitute a supply, when made in the course or furtherance of business. Definition of Related Persons (Explanation to Section 15 of CGST Act): (a) persons shall be deemed to be “related persons” if—— (i) such persons are officers or directors of one another’s businesses; (ii) such persons are legally recognised partners in business; (iii) such persons are employer and employee; (iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; (v) one of them directly or indirectly controls the other; (vi) both of them are directly or indirectly controlled by a third person; (vii) together they directly or indirectly control a third person; or (viii) they are members of the same family; (c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related. Extract of Distinct Persons (Section 25 of CGST Act): (4) A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act. (5) Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act. Given above legal provisions, careful analysis would be required to determine whether liaison office and foreign entity would be treated as related parties or distinct person to attract GST applicability. This is one of the gray area which needs to be addressed under GST. First School of Thought: Extended Arm / Self-Service The liaison office is nothing more than an extended arm of the Head office and performs no separate functions other than those specified and approved by the RBI. It has been established for the ease of communication between Indian counterparts and the foreign entity, accordingly the liaison office is neither related nor distinct persons as it is only one legal entity and no relationship can be established. There cannot be a flow of services inter se the liaison office and head office as it amounts to ‘no supply’ and therefore, the reimbursement of expenses made by the foreign head office cannot be treated as a consideration towards any service. Second School of Thought: Incidental Business Activity & Agency Liaison office and head office are related in terms of explanation (c) to Section 15 of the CGST Act and scope of business, as defined in Section 2(17) of CGST Act is wide enough to include the activities or transactions which are incidental to the main activity of trade, commerce, manufacture, profession etc. And since the liaison office is involved in promoting the business of foreign entity in India, it would constitute ‘SUPPLY’ under GST. Once supply gets attracted, one need to analyse the requirement of getting registered under GST which is governed under Section 22 of the CGST Act, 2017. In case the aggregate turnover in a financial year exceeds the prescribed threshold limit, registration provisions gets attracted. Survey of AARs There are divergent advance rulings under GST regime which are pronounced by Authority for Advance Ruling to determine taxability of GST on transactions by liaison office. Some of the advance rulings are listed below for ease of reference: 1. M/S Habufa Meubelen B.V. [2018 (7) TMI 883 – AAR Rajasthan] Issue: Whether the reimbursement of expenses and salary paid by foreign Head Office (HO) to the liaison office established in India is liable to GST as supply of service, when no consideration for any services is charged/ paid and whether the registration requirement would get attracted. Ruling: It was decided that in the given case, the applicant does not have any other source of income and it is solely dependent on the HO for all its expenses which are subsequently reimbursed by the HO. Therefore, HO and liaison office cannot be treated as separate persons as there cannot be any flow of services between them as one cannot provide service to self and the reimbursement of expenses made by the HO cannot be treated as a consideration towards any service. Further, as there are no taxable supplies made by the liaison office, they are not required to get registered. 2. M/S. Takko Holding GMBH [2018 (10) TMI 1315 – AAR Tamil Nadu] Ruling: On similar issue relating to discharge of GST by liaison office, Tamil Nadu authority for advance ruling held that the applicant is acting as an extension of the German Office in its procurement activities from suppliers in India as has been spelt out in the RBI permission letter. Hence, they are neither related nor distinct persons, but are in fact working as employees of the foreign office. Accordingly, none of the liaison activities of the applicant is covered under the definition of supply, no GST leviable. 3. M/S. Wilhelm Fricke Se [2021 (1) TMI 690 – AAR Haryana] Issue: Whether the reimbursement of expenses and salary paid by Wilhelm Fricke SE, Germany to the liaison office established in India is considered as supply of services as per Section 7 of the CGST Act, 2017 or under Schedule I of CGST Act, 2017, especially when no consideration is charged/ paid. Ruling: It was decided that since there is no commission/ fees being charged or any other remuneration being received/ income being earned by the office in India for the liaison activities/ services rendered by it, the HO and Liaison Office cannot be treated as separate persons. The amount received from HO are the funds for payment of salary, reimbursement of expenses like rent, security, electricity, travelling, etc. No consideration is being charged by the applicant from the HO for such services. 4. M/S. Fraunhofer-Gessellschaft Zur Forderung Der Angewwandten Forschung [2021 (1) TMI 690 – AAR Haryana] Ruling: It was held that Section 2(17)(a) of the CGST Act 2017 stipulates that “business” includes any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit. Further “business” also includes any activity or transaction in connection with or incidental or ancillary to sub-clause (a), in terms of Section 2(17)(b) of the CGST Act 2017. Accordingly, liaison activity falls within the ambit of business. Further, applicant and head office are deemed to be related in terms of explanation (c) of Section 15 of the CGST Act as they act on behalf of its head office for its customers in India. Thus, the activities of the applicant squarely fit to be treated as supply in terms of Section 7(1)(c) of the CGST Act 2017, even in the absence of consideration. The supply of services by the applicant amount to inter-state supply of services in terms of Section 7(5) of the IGST Act 2017. Further persons making any inter-state taxable supply shall be required to be registered compulsorily in terms of Section 24 of the CGST Act 2017. Karnataka Appellate Authority for Advance Ruling (AAAR) It is pertinent to note that Karnataka Appellate AAR has set aside the order of AAR stating that liaison office is a place of business to act as a communication channel between the head office and does not generate any income / commission / remuneration. A service rendered to self cannot come within the purview of supply under GST. Reasons and Reconciliation of Rulings Given the above contrary pronouncements by Authority for Advance ruling, it is quite evident that such decisions add to unwarranted litigation and sows the seeds of doubt among taxpayers. The conflict is not something that can be admitted as a disharmony which will sort itself out in due course to pay GST on the repatriation of cost of maintenance of GST while still maintaining the assertion about the nature of activity to be compliant with extant regulation under FEMA. Income-tax will likely step in to expect that this ‘underlying activity’ being admitted, albeit for GST purposes, to be in the nature of business, would be liable to foreign corporations’ tax and be compliant with transfer pricing regulations. All these compliances render the undertaking given to FEMA void. As such, Applicants must review their presentation of facts and make amends to the nature of activities undertake so as squeeze out any semblance of business in India so that repatriation (of cost of maintenance of liaison offices) steers clear of ‘supply’. And when a transaction is not supply, flow of money will not be consideration. Conclusion Extant regulations in FEMA is a policy statement of the Government to welcome foreign capital to undertake exploratory and non-commercial activities before they make a decision to invest and set-up commercial activities in India. Business is, therefore, understood not as expenditure in a foreign jurisdiction but an enterprise with its own ‘income generating capacity’ that is created in such jurisdiction. It appears that a liaison office that pays GST on the repatriation (of cost of its maintenance) and even pays Income-tax on an arm’s length price would stand of forfeit its status as liaison office and become a branch office or other form of permanent establishment. And the definition of fixed establishment and distinct persons in GST would be a cause of concern for ‘liaison offices’. To conclude, a clarification from the government on this issue will surely be helpful in preventing cognizance of these rulings and will aim to bring more clarity. “Extant regulations in FEMA is a policy statement of the Government to welcome foreign capital to undertake exploratory and non-commercial activities before they make a decision to invest and set-up commercial activities in India.”

The Chartered Accountant • Journal of ICAI April 2021 • Vol. 69 • No. 10 • pp. 63–66 (Journal pp. 1235–1238) GST Classification and Its Relevance in GST Regime CA. Brijesh Kothary The author is a member of the Institute. He can be reached at brijeshkothary@gmail.com and eboard@icai.in. “Classification means arranging in classes or categorising things according to shared qualities or characteristics. Under the Goods and Services Tax (GST) laws, classification of goods and services help in determining its taxability, i.e., the applicable rate of tax or exemption from payment of tax, as the case may be. The scheme of classification of goods is framed in accordance with the Customs Tariff Act, 1975 (hereinafter referred to as ‘CTA’) which is in-turn based upon the Harmonised Coding System, while classification of services is a modified version of the United Nations Central Product Classification. In this article, we intend to limit our discussions on classification of goods. Read more…” India being a signatory to the International Convention on the Harmonized Commodity Description and Coding System, 1983, has adopted the classification codes and the General Rules of Interpretation (GI Rules) as prescribed under the Convention. The classification of goods is governed by the provisions under the CTA. The First Schedule to the CTA specifies the nomenclature that is based on the Harmonised Commodity Description and Coding System generally referred to as “Harmonized System” or simply “HS”, developed by the World Customs Organization (WCO). Methodology of Classification The Harmonised System (HS) provides commodity/product codes and description up to 4-digit (Heading) and 6-digit (Sub-heading) levels only and member countries of WCO are allowed to extend the codes up to any level subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level classifications to indicate specific statistical codes for indigenous products and also to monitor the trade volumes. For legal purposes the texts of the section notes, chapter Notes, subheading notes, supplementary notes, headings, subheadings, and the GI rules should be relied upon to determine the classification of an item. General Rules for Interpretation (GI Rules) Classification of goods covered under the First Schedule to the CTA, is done as per the GI Rules. The GI Rules is a set of six rules for classification of goods in the Tariff Schedule. These rules have to be applied sequentially: Rule 1: Rule 1 gives precedence to the section or chapter notes while classifying a product. Rule 2: Rule 2(a) applies to goods in incomplete or unfinished condition having essential character of complete or finished goods, presented in unassembled or disassembled form. Rule 2(b) is applicable to ‘mixtures’ and ‘composite goods’. Rule 3: Goods which cannot be classified by application of Rule 2(b), shall be classified by application of Rule 3, i.e., by application of ‘most specific description’ as per Rule 3(a) or by ascertaining the ‘essential character’ of the articles per Rule 3(b) or by taking into consideration the heading that occurs last in the numerical order as per Rule 3(c). Rule 4: Goods which cannot be classified in accordance with the above rules will be classified under the heading appropriate to the goods to which they are most akin, by application of Rule 4. Rule 5: Rule 5(a) and (b) relate to classification of packing materials and packing containers. Rule 6: Rule 6 lays down that for legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings and any related sub-heading notes and, mutatis mutandis, to the above rules, on the understanding that only sub-headings at the same level are comparable. For the purposes of this rule the relative section and chapter notes also apply, unless the context otherwise requires. HSN and Classification Jurisprudence The CTA is based on harmonised system of nomenclature; but Tariff nowhere states that notes in HSN will be applicable for its interpretation. For the purpose of uniform interpretation of HSN, the WCO has published detailed explanatory notes to various heading and sub-headings. WCO in its various committees discusses classification of individual products and gives classification opinion of the same. Such information, though not binding in nature, provides a useful guideline for classifying goods. Landmark Ruling: O.K Play (India) Limited v. CCE [2005 (180) ELT 300 (S.C)] In the case of O.K Play (India) Limited v. CCE [2005 (180) ELT 300 (S.C)] the Hon’ble Supreme Court of India made the following observations: There cannot be a static parameter for correct classification. HSN along with the explanatory notes provide a safe guide for interpretation of an entry. Functional utility, design, shape and predominant usage have also got to be taken into account while determining the classification of an item. Aforestated aids and assistance are more important than the names used in the trade or common parlance in the matter of correct classification. Landmark Ruling: L.M.L Limited v. CC [2010 (258) ELT 321 (S.C)] It was held by the Hon’ble Apex Court in L.M.L Limited v. CC [2010 (258) ELT 321 (S.C)] that in order to resolve a dispute on tariff classification, internationally accepted nomenclature emerging from HSN explanatory notes is a safe guide for classification. It was also held that the HSN explanatory notes are also dependable guide for interpretation of Customs Tariff apart from interpreting Central Excise Tariff. As discussed supra, the Customs Tariff generally is based on the tariff classification adopted by WCO in its harmonised commodity description of coding system. Hence, wherever a chapter of Customs Tariff is fully aligned with the corresponding chapter of HSN, the HSN explanatory note explaining the scope of headings of that chapter would have persuasive value in the determination of scope of headings of correspondence chapter of customs Tariff. It is therefore fairly settled that the explanatory notes provided in HSN is an important aid for ascertaining the classification of a product. Principles of Classification Evolved by Courts and Tribunals In addition to the aforesaid rules and principles of classification, certain principles for classification have been evolved over time by the Courts and Tribunals. Few of such significant principles are: (a) Trade Parlance Theory As per this principle, the popular meaning attached to that by those using the product is to be considered and not the scientific and technical meaning of the product for the purpose of classification. (b) Relevance of End Use This principle states that the end use to which a product is put cannot be the basis for determination of its classification. Further, the product should be classified based on its statutory fiscal entry, basic character, function and use of the product. (c) Other Principles of Classification Condition of material at the time of import or clearance; Mere separate price in invoice does not mean goods are to be classified separately; Exemption notification cannot determine classification; Method of showing separate prices in invoice does not mean goods are to be classified separately; Classification cannot be decided on basis of advertisement or product literature of the product; Product literature cannot be sole basis for classification. Classification Disputes under GST The Central Board of Indirect Taxes and Customs (CBIC) has issued notifications prescribing rate of applicable on supply of goods falling under different chapters, chapter headings or tariff Items. The tax rates are revised from time to time as per the recommendations of the GST Council. These rates are divided among multiple slabs (Nil, 0.25%, 3%, 5%, 12%, 18% and 28%) and taxability of each of the products is dependent on its classification. It is therefore natural to expect disputes in determining classification of goods on account of the difference in interpretation of entries in the rate notification between taxpayers and authorities. The CBIC has issued Circulars providing clarification on classification of goods and services from time to time; however, some of these clarifications have led to unsettling the issue. “It is also pertinent to note that taxpayers are mandatorily required to mention 8 digits Tariff Entry for certain category of goods falling under Chapter 28 (organic chemicals), Chapter 29 (pharmaceutical products), Chapter 38 (miscellaneous chemical product) and Chapter 39 (plastics and articles thereof) with effect from 01.12.2020.” Recent Amendments in HSN Reporting The CBIC has notified1 that taxpayers with turnover upto INR 5 crores and beyond are required to mention HSN at 4 digit and 6 digit, respectively, on their tax invoices with effect from 01.04.2021. It is also pertinent to note that taxpayers are mandatorily required to mention 8 digits Tariff Entry for certain category of goods2 falling under Chapter 28 (organic chemicals), Chapter 29 (pharmaceutical products), Chapter 38 (miscellaneous chemical product) and Chapter 39 (plastics and articles thereof) with effect from 01.12.2020. The taxpayers claiming refund of ITC are also required to provide category of input supply along with HSN wise details3 of goods and services in their refund application (in Annexure ‘B’), so as to enable the authorities to easily identify the goods and services. “Supplying goods or services under incorrect classification may not only result in tax disputes but also attract penal provisions.” 1 Notification No. 78/2020-C.T., dt. 15.10.2020 2 Notification No. 90/2020-C.T., dt. 01.12.2020 3 Circular No. 135/05/2020-GST, dt. 31.03.2020 Endnote Determination of classification of goods is not a new phenomenon for importers and manufacturers. It has, however, gained more prominence now since it is one of the mandatory requirements for almost all the taxpayers (including service providers) under GST regime. It is therefore imperative for taxpayers to take due care in identifying accurate classification of goods and services supplied by them. Supplying goods or services under incorrect classification may not only result in tax disputes but also attract penal provisions. It is therefore advisable for all taxpayers to regularly review the correctness of classification adopted with respect to goods or services supplied by them. — CA. Brijesh Kothary ICAI News Last Date: 15th April, 2021 Survey For Seeking Preference For Learning Foreign Language Through Virtual Mode From ICAI Members And Students Committee for Development of International Trade, Services & WTO (CDITSWTO) of ICAI is taking forward the Action Plan for Champion Sector in which promoting foreign language amongst members and students is one of the mandates by Government of India. With an aim to overcome language barrier and thereby to have enhanced professional opportunities overseas, ICAI, under the aegis of the Committee had initiated online batches of German, French, Spanish, Japanese and Business English Languages for its members and students through German, French, Spanish, Japanese and British Embassy and is working to initiate batches for Chinese, Arabic and Dutch languages in next few months based on the demand for said foreign languages. Interested members/students are requested to kindly express their interest for the preferred foreign language which would facilitate ICAI to open up future batches of foreign languages. The expression of interest can be provided at https://www.icai.org/post/survey-seeking-preference-for-learning-foreign-language latest by 15th April 2021. Chairman, Committee for Development of International Trade, Services & WTO Email: cditswto@icai.in

Technology • Audit Transformation Future of Audit – A Journey Towards Automation Journal: The Chartered Accountant, April 2021 (Vol. 69, No. 10) • Pages: 67–71 (Journal pp. 1239–1243) ST CA. Sanket Tanna The author is member of the Institute. He can be reached at sanket2214@gmail.com and eboard@icai.in. “In these unprecedented times when existence and survival is the biggest question, it is very important for all the accountancy professionals both in practice and in industry, to realise that cost savings without affecting the quality of audit is going to be the key factor. Achieving balanced result will not only help in improving efficiency and effectiveness of the audit, but will also bring us closer to the future of audit. If we break down the whole assurance testing approach, it contains Test of Control (TOC), Substantive Procedures, and Substantive Analytical Procedures, etc. Each of these has its own method of testing so that we can gain comfort over balances. It is important for us to realise that automation is the next big thing. Read more…” Many would doubt that automation costs a lot, but that is not the case, if we plan it well then it can turn out to be a huge cost saver. For the big clients there are many monotonous, but logical procedures that Chartered Accountants and articleship trainees perform and it takes lot of time to execute the same. Whereas such logical steps such as excel calculations, tie-outs, attribute testing, sample selections, sending confirmations, etc. can be automated from start till end. Initially, for the first it might add a bit to the cost because we will be performing manually and additional hours will be incurred in automation, but it will surely show its results from the second year onwards, when it will be a huge time saver, resultantly saving money. It will be more interesting to read the article with keeping in mind all the audit clients and areas you are responsible for. Try to recall procedures performed on all the work papers you know. Doing this exercise before reading the next part will help you to correlate the automation possibilities in a much better way. Why Automation? 1. Optimising the Available Time The highly valued benefit of automation is optimization of available time. Automation can free up the capacity for teams by reducing manual efforts and focusing that saved time on high value decision making activities or learning something which really adds value to the overall performance of an employee. Having time to think about something, can help you in planning audits, and think about improving the processes. 2. Improved Output Quality One benefit of the automation is its capacity to cover 100% of the population. Hence, improving the reliance over audit procedures performed. Also automation helps in reducing manual errors, thereby improving accuracy. Further, if there are any mistakes, it can be easily detected by automation solutions. Overall, it leads to accurate audit results and thereby, increasing trust of various stakeholders. 3. Efficiency and Cost Reduction Automation helps in completing the process in less time as compared to the time taken to complete the task manually. Direct benefit of the same is gaining efficiency in completing the task. Further, since lot of time is saved, it also results in reducing cost. Cost savings for automation should always be measured from long term perspective and not from short term, reason being obvious initial cost involved in implementing the automation. 4. Better Questions Since automation gives us accurate analytics and results, it encourages auditors to ask better questions to clients and thereby gaining more in-depth knowledge of business and transactions taking place. It also does a value addition to audit firm’s business value in a way that client acknowledges the efforts put on by audit teams to conclude the audit. What are the Automation Techniques Available? If you ever thought of saving countless hours while engaging in various tasks, then following tools can help you in achieving the same. There are a number automation tools that are available in the market which you can help you in your professional work. There are basic and advanced tools that can be identified by you depending upon your requirements. Some of the tools that are available are: 1. Excel Macro For any formatting, monotonous calculations, analytical procedures etc. that we perform, we can easily create an excel macro. Excel Macro has the lot of unexplored potential to automate many of the excel processes which we otherwise perform manually. It all depends upon how far one is able to think for its usage. Primarily, it’s not easy to code or setup a Macro, but there are lot many courses available on various online education portals where you can learn the implementation. Moreover, you can also hire someone on contract basis to work on the Macro. Some of the use cases of developing automation through macros are: a. Formatting the data b. Comparing the data among multiple files 2. Advanced Excel Macro (Use of VBA) Introspect on what all audit procedures you generally perform and answer this question. Do you take third party data from any website to do some independent recalculations? Or, do you send bulk emails for confirmation purpose and you spend lot of time in sending initial e-mails, tracking them and sending follow-ups? So did you ever think that you are probably spending lot of time and manual effort in carrying out such similar procedures? Yes, we do have solution for all such things. Excel Macro can do any such logical steps as well. Advanced coding of excel Macro is not easy, but resources to deliver the services using excel Macro can surely be hired on contract basis. One more use case for the Advanced Excel Macro, can you recall a process wherein you pull out some data independently from various sources to confirm the valuation or any other percentages for recalculation. Think how time taking it is to pull out individual information and then try to recalculate, but now all those things can also be automated. Can you imagine one thing from this? With the help of excel macros and its usability in numerous areas, you can increase the testing upto 100%. That means, more reliance on the data, more reliance on the testing procedures and resultantly more reliance on the overall result of the financial statement communicated to various stake holders. All these things at no extra effort, rather we will still end up saving lot of time. 3. Mail Merge How many of us send several confirmations or e-mails during our audit? Do you end up creating one confirmation at a time? That is not required if use Mail Merge feature With the help of this feature you can create as many different letters you want in just one go, the whole process would not take more than 15 minutes to create and print the letters into PDF or physical print. This is really an interesting feature with lot of other unexplored used cases, but the whole purpose is to give you a highlight of its possibilities so that you can explore more. 4. Visualisation Tools These tools help in audit planning and decision making. With the data received from client, you can input it in the visualisation tool to come up with various visualisation charts showing trends, that can help you to channelise the audit procedures in the required areas The capability of this tool in strategy and decision making is simply beyond par. Using this tool is not that difficult exercise; one can easily learn this tool from available online education portals. Some of the areas wherein we can use this is: a. Analysis of financial statement line: YoY analysis, Sub-Category analysis, JE analysis, etc. b. Budget to Actual Analysis c. Audit Tasks analysis 5. Python Script What is python script? It is a reusable set of code which is in the form of instructions that interprets the act to be done over computer system. Now since we know that python script is a code, we all might have doubts that how can this code help us in doing audit? This is the technology that will define the real future of audit. With the use of python and advance python script we can automate the tick marks, tie-outs and file references. Moreover, in day-to-day audit we use lots of attributes for control testing, good news is, and all of that can also be automated. Obviously one time cost is involved but the long term benefit can cover all that cost. For sure it will be difficult for you to guess about its cost-benefit analysis, but what if I say that a task that use to take around 20-30 hours, can now be completed within 2-3 hours. That means we will be saving 90% of the time, and saving time means saving cost and also more reliance on the audit results because with automation we eye to cover 100% of the population. 6. Excel Models / Analyzers Just like Excel Macro, even other excel models can also be used for analytical procedures. Excel Model basically is a spreadsheet that helps us in making quantitative estimates, forecasts etc. Further, audit of estimates is one of the most important tasks and generally most of the fraud risk areas are from estimates. With the help of excel model we are just required to input the data and some quantitative and qualitative inputs. Within seconds we will have the estimates ready in front of us. Excel Models will help in taking important decisions related to audit. 7. Audit Techniques to Concise Large Sets of Readable Data This is the audit technique which might not come under budget of many, but considering the capabilities of Artificial Intelligence (AI) and its smart learning capabilities, the use of AI cannot be denied in future. How many times is the auditor required to read various contracts, agreements which could consist of hundreds of pages or more. Reading each and every word, tying out the relevant particulars from various other files is a time consuming process. Often it is seen as one of the most monotonous and time consuming job. Just imagine if one has to read hundreds of such agreements and work on it. Can these numbers be somehow reduced? The answer is yes, audit in future will come down to use of technology at its best. Only the decision making parameters which are subjective in nature will be required to be taken care of. That is what is seen as the future of audit. 8. Checklists Completing an audit successfully is not the end; rather it is just a beginning of another cumbersome process that most of the auditors have to go through. Everyone knows about long checklists that the audit team has to fill in order to complete the final documentation. It is at the top in the to-do-list of auditors, and in a way it is important to comply with the various standards and regulations. But one thing we all can relate is the ambiguities on applicability or non-applicability of series of questions in an audit. Now in medium size firms, it is a tedious job to fill that checklist manually, but what if automation can help in reducing that load. What if only the applicable questions related to the particular audit is shown in the system? Does that help in reducing the time and efforts? Certainly, because filling that checklist is one task and reviewing is another. With the help of intelligent checklists, a team will be able to reduce much of their time spent; in a way it will help everyone to stay compliant. 9. Software Tools for Automating Monotonous Yet Logical Calculations With the help of such tools you can automate many monotonous yet logical calculations. It basically works around excel files, even the most complicated logical steps (including testing and calculations). One can automate lot of processes starting from sample selections to reconciliations and from formatting the file to applying multiple formulas and filters. Tasks which ideally use to take days and hours to finish can now be completed in few minutes and that too with utmost accuracy. Learners can seek certification courses available online. Some of the areas wherein we can use this are: a. Reconciliations b. Recalculations c. Variance Analysis 10. Tools to Convert Readable Data Files to Usable Formats Have you ever faced a situation wherein you got a readable PDF or text file as a support from client and you felt it is too big to convert into excel, and you spent hours extracting the data to excel. There are cost effective solutions that convert the long PDF and text files to excel, and are easy to use. Using such tools, you can convert long pdf and text files to excel and they provide results quickly. Use of such automation tools can also be learned by taking few courses available easily online. 11. RPA Tool You would have observed that most of the tools discussed above are usable when there are logical steps involved and which are quite straight forward. But what about areas or processes which are subjective in nature and requires decision making because lots of qualitative and intuitive factors are involved. You are a big firm and you have money to invest which can give you benefits in long run, Robotic Process Automation (RPA) is definitely the future which one should look for. RPA tools have the ability to get into the systems and perform audit functions and make decisions on the basis of factors involved. Here the article describes the process, at a very basic level. However, its actual capabilities can be extrapolated only after researching your requirement and need for implementing the tool. Conclusion There is lot of unexplored potential in the field of automation and it is strongly believed that lot can be done to make our audits further automated and streamlined. These were some automation techniques that one can start with for the audit, there are other high end techniques which have not been discussed about here. But most importantly, if you implement any of the above mentioned tools/applications, it is going to save a lot of time and money in the long run. “RPA tools have the ability to get into the systems and perform audit functions and make decisions on the basis of factors involved.”

Banking • Financial Sector Reforms Budget, Bad Bank and Chartered Accountants Journal: The Chartered Accountant, April 2021 (Vol. 69, No. 10) • Pages: 72–76 (Journal pp. 1244–1248) SR CA Satheesh & Dr M. S. Raju CA Satheesh is a member of the Institute. Dr M. S. Raju is Director (Rtd), School of Management and Entrepreneurship, KUFOS, Ernakulam. They can be reached at kvsatheesh@gmail.com and eboard@icai.in. “A bad bank is a separate entity that isolates illiquid and high risk assets held by a bank or a financial Institution. They are being seen as panacea for the non-performing assets problems faced by Indian Banks. Will this Bad bank be an elixir for the current and long term problems faced by the PSBs? What Bad Bank could additionally contribute other than the 28 ARCs registered with RBI? Many such questions are lingering in the financial market hence let us analyze the parts and particles of Bad Bank. Read on…” Performance of banking stocks after the budget was not obscure but rather it was scintillating. Reason for the unassailable upswing in the share prices was due to the announcement of Asset Reconstruction Company (ARC) and Asset Management Company (AMC) for managing the Non-Performing Assets (NPAs) of Public sector banks (PSBs), popularly known as Bad Bank. Later Finance Minister has given some hints that this institution will be guaranteed by Central Government and equity will be raised through a consortium of Public, Private banks, large state owned entities like Rural Electrification Corporation (REC), Power Finance Corporation (PFC) etc. What Does Bad Bank Mean? Financial dictionary describes Bad Bank as “A government owned entity that takes over and liquidates toxic assets from failed or declining financial institutions to leave them with a clean balance sheet”. McKinsey observes four basic models of Bad Bank, out of the four, two are internal management proposals like guarantee from Government on part of the portfolio and internal restructuring whereby bank creates a separate dedicated unit to hold and manage the sticky accounts. Two other options have separate existence from that of the parent organization like, bank creates either an independent bank to deal with the delinquent assets or creates a Special Purpose Entity (SPE) which carries the bad books in its portfolio for effective management hence both the external methods are having the characters of a Bad Bank. Formation and Portfolio of Bad Bank Bankers estimate that new Bad Bank will have a capital of around Rs 15,000 crores, which could manage bad loans worth of Rs 3 lacs crores from the existing Gross NPAs of Rs 7 lacs cores. ARCs will normally fund only 10-15% upfront for the loans purchased and rest will be issued as Security Receipts (SRs) which would be paid depending on the amount recovered, same operating method might be followed by Bad Bank also. In nutshell Bad Bank acquires the NPAs like Housing, Industrial, Secured and Unsecured etc. from banks and finds out a buyer for decent price and liquidates the same, difference between buying and selling price will be the operating margin or surplus. Does Bad Bank Differ from ARCs? Operation style of Bad Bank might be more or less same that of ARCs but Bad Bank will have the advantage of a government guarantee which will directly help in obtaining finance at near to zero risk rates. Apart from advantage on financing cost, a government guaranteed Bad Bank could tap the capital market for initial and subsequent capital requirements. Availability of capital and finance at lower cost will ensure liquidity and Bad Bank will have the capacity to hold the loans for a considerable period of time so that pressure on distress selling at huge haircuts could be avoided. As per the initial hints, Bad Bank will be jointly funded by banks and statutory institutions hence will have a better professional management who have adequate knowledge and experience to deal with large stuck industrial projects and also with niche business ventures. Will Bad Bank Have Any Added Advantage in Process or Enforceability? From the discussions, it could be observed that Bad Bank will have a single window type or fast track clearing mechanism and necessary amendments will be made in The Insolvency and Bankruptcy Code, 2016 (IBC), SARFAESI Act, 2002, TDS and Capital gain provisions in the Income Tax Act 1961. Government may constitute special National Company Law Tribunal (NCLT) benches or might give priority to Bad Bank cases in the existing structure itself which will ensure speedy and concreate disposal of cases. A change in the legal system will give considerable confidence to the investors to acquire delinquent assets and a time bound resolution process will keep the organization as an ongoing entity, which could save the employment, creditors and shareholders at large. What’s the Magnitude of the Situation Which Demands Creation of Bad Bank? As per the reports from credit rating agency ICRA, Gross NPA of the Scheduled commercial banks (SCB) will move up to 14 -15% of the advances by the end of Mar 2021 from the existing 8.60% clocked during the end of last FY. RBI’s Financial Stability Report, Jul 2020 (RBIFSR) also mentions about an estimated NPA of around 14.70% by end of Mar 21. Lion’s share of the existing NPAs are pocketed by Public sector banks (9.7% for PSBs, 4.6% for private banks (PVB) and 2.5% for foreign banks (FB)) as on end of Sep 20. If we understand the trend of NPAs in India, we could observe that NPAs have started touching the 5% mark from FY 2015 onwards, a detailed analysis of the reason for such a spike in the year will end up on the structural changes enforced by the RBI in NPA recognition and provisioning requirements. The NPAs which were obscure or managed by the Banks through various types of rescheduling or restructuring methods came to light and from that period and it never went down 5% till closure of FY 20. A quick decision making on a delinquent account, whether to take any legal recourse or to go for a One Time Settlement (OTS) will have far reaching impact on resolution of the NPAs and this opportunity is substantially or completely not available to PSBs due to the threat of future litigations and existing government regulations. Reasons like excess funding on projects, competitive financing without analyzing the viability of the project, highly leveraged financing or inadequate contribution from promoters, unexpected cost overruns etc. are also solid reasons for existing NPA burden but a time bound recovery efforts will have a better chance of higher realization when compared with delayed decision making. Figure 1: Comparison of GNPA and NNPA Ratios across Scheduled Commercial Banks (SCBs) Bank Category Gross NPA (GNPA) Ratio (Sep 2020) Net NPA (NNPA) Ratio (Sep 2020) Comparative Position Public Sector Banks (PSBs) 9.7% 2.9% Double GNPA & triple NNPA of private banks Private Banks (PVBs) 4.6% 1.0% Substantially lower delinquency levels Foreign Banks (FBs) 2.5% 0.4% Best performance metrics across SCBs All Scheduled Commercial Banks (SCBs) 7.5% 2.1% Industry-wide average Source: RBI Financial Stability Report, Jan 2021 Figure 2: Provision Coverage Ratio (PCR) and Capital to Risk-Weighted Assets Ratio (CRAR) Parameter PSBs (Sep 2020) PVBs (Sep 2020) Foreign Banks (Sep 2020) All SCBs (Sep 2020) Provision Coverage Ratio (PCR) 70.5% 78.3% 82.9% 72.4% Capital Adequacy Ratio (CAR/CRAR) 13.5% 18.2% 18.7% 15.8% Source: RBI Financial Stability Report, Jan 2021. PVBs and FBs are better provisioned than PSBs by 9% to 13%, and around 5% better capitalized. Figure 3: Projected GNPA Stress Ratios (Sep 2021 Forecasts) Bank Category Actual (Sep 2020) Baseline Scenario (Sep 2021) Severe Stress Scenario (Sep 2021) Public Sector Banks (PSBs) 9.7% 16.2% 17.6% Private Banks (PVBs) 4.6% 7.9% 8.8% Foreign Banks (FBs) 2.5% 5.4% 7.5% All Scheduled Commercial Banks (SCBs) 7.5% 13.5% 14.8% Source: RBI Financial Stability Report, Jan 2021. Indicates around 5% - 6% of standard performing loans turning bad. How Do Bad Bank Perform Across the World? Official concept of Bad Bank was pioneered in Mellon Bank, Pittsburgh, USA in 1988. Post 2007-08 financial crisis many of the European countries adopted different varieties of Bad Banks. Some of the countries who have experienced some forms of Bad Bank in earlier years are Finland (1990), Sweden (1992), France (1994), Austria (2009), UK (2010), Spain (2012), Portugal (2014) etc. Performance analysis of the Bad Bank was remarkable because of multiple reasons like professionalism, Government support or backing, confidence of investors, concentrated efforts, public awareness, fast track clearance and continuous monitoring of the performance, etc. Asian history of Bad Bank was associated with Indonesian Bank Restructuring Agency (IBRA) in 97-98. India can take inspiration from the successful Korean model of Bad Bank operation. Korea Asset Management Corporation (KAMCO) which has managed sticky assets of around 27% of the GDP and successfully brought down the default ratio from 17% in 1997 to 2.3% in year 2002. What is the Indian Situation and How Could Bad Bank Help to Overcome This? If we consider the published GNPAs of major public sector banks for the year ending March 2020: IDBI Bank 27.53% Central Bank of India 18.92% UCO Bank 16.77% Union Bank of India 14.15% These ratios are much above the global standard of 5%. So from the existing scenario it is evident that some urgent and oriented efforts should be taken to clean the balance sheet of these banks and to recover from the delinquent accounts at the earliest before the RBIFSR estimated standard loans turns to NPAs. If the existing situation is not tackled on war footing basis, PSBs will not have any room to accommodate the spill over from standard loans and marketability of the assets will be limited because of the pandemic related market situations. To sum up, considering the post Covid scenario, formation of Bad Bank with backing by the government will enhance the management and recovery of NPAs of PSBs. As observed, support from government, capital contributions and professional management will help to sail through the assessed crisis. Fast tracking of legal mechanism will be a boon for existing ARCs and Bad Banks to taste the success quickly. Stringent enforceability of punishments should be there for NPAs arising out of funds diversion, fraud and willful mismanagement else Bad Bank will be only a receiving entity and couldn’t do any constructive contribution towards overall management of NPAs. In order to control the NPA menace, accountability should be ensured with lending team also else Bad Bank will only function as a transferee of bad loans without having any ability to contain the further flow into its existing portfolio. Provision for a proper feedback mechanism should be provided in Bad Bank rules so that existing errors could be avoided in future and repeating the lacunas should be dealt seriously. Critical Questions Bad Bank Rules Must Answer: [a] What will be the criteria for transfer of NPAs? [b] How the pricing will be done? [c] What will be the Standard Operating Procedure? [d] How the Government funded and government promoted schemes will be treated? [e] Will there be any Equity contribution from the government etc.? Let’s hope that rules and regulations for the Bad Banks will be published soon and they will get operative quickly and all these questions will be answered. Role of CA in the Bad Banks and Resolution Process Chartered Accountant is having the opportunity to be a part in each and every step of resolution process. CAs will get the assignments from Bad Banks, Government, defaulted company, creditors, investors, etc. To highlight a few major areas where CAs may contribute are: 1. Insolvency Resolution Professional (IRP): Acting as IRP / RP as per The Insolvency and Bankruptcy Code, 2016 (IBC) to conduct corporate insolvency resolution processes. 2. Financial Analyst: Finding out internal and external worthiness of projects, expected cash flows, tracking utilization and diversion of funds by promoters or management, assessing marketability of projects, impairment testing, receivable and payables management, preparation of books of accounts, and conducting viability audits. 3. Statutory Services: Managing statutory dues in Income tax, GST, Provident Fund, and other statutory payments during resolution. 4. Compliance Services: Reporting to statutory authorities including Registrar of Companies (ROC), Securities and Exchange Board of India (SEBI), Stock Exchanges, and Direct and Indirect tax departments. 5. Representation Services: Appearing for Bad Banks or clients in front of various statutory, regulatory, and quasi-judicial authorities (NCLT, DRT, Appellate Authorities). 6. Certification Services: Providing certification services on qualitative and quantitative aspects of the existing financial position and resolution plans. References RBI’s Financial Stability Report, Jul 2020 and Jan 21 Union Budget, 2021-22 and subsequent media discussions. Published Annual reports and Investor presentation slides of IDBI Bank, Central Bank of India, UCO Bank and Union Bank of India.

The Chartered Accountant • Journal of ICAI April 2021 • Vol. 69 • No. 10 • pp. 77–82 (Journal pp. 1249–1254) INDUSTRY Sales Compensation Design: A Cross - Functional Challenge Dr. Dipak Kumar Bhattacharyya The author is faculty in Xavier Institute of Management. He can be reached at eboard@icai.in. “This paper examines faulty compensation design in Indian organisations, which does not benefit either the employers or employees, rather impair organisational growth. Author’s observations are based on his representation as external member of several compensation committees of different organisations. Such organisations include both manufacturing, and service types and even some departmental undertakings. In most of the organisations pre-decided compensation budget are prepared and then decisions on its strategic allocation are taken, based on multiple factors, like; market comparison, internal pay equity, job evaluation, performance criteria, and overall organisational growth issues. Some companies, however, emphasise on criteria like return to shareholders. The paper illustrates some of the issues that deserve attention when organisations aim for strategic compensation design, creating a win-win model. Also, the paper finally concludes design of sales compensation plan is responsibility of Marketing, HR, and Finance functions. Read on...” Compensation design practices vary from organisation to organisation, and also across job families, and levels. Variation of compensation across job levels is known in India, and it is often seen critically by international bodies. Pay gap between the least paid and the highest paid in an organisation is very wide in India, creating serious problem for pay inequity. Although at institutional and regulatory level we have several mechanisms to enforce control over this issue, things are yet to get addressed. This paper being more focused on creating win-win compensation design mode; will not discuss these issues of pay inequity. Among all the compensation design practices, design of sales compensation is considered complicated and requires more strategic consideration. Here our discussion will focus on design of sales compensation that can successfully address all stakeholders’ needs. Some of the challenging issues in sales compensation design are presented below. Biggest challenge faced by organisations is effective design of sales compensation. Sales performance is the lifeline for organisations, as a good performing sales team can ensure uninterrupted cash flow. When cash flow is maintained, organisations do not struggle for operating capital. Many departmental undertakings, despite high market demand and order bookings for their products and services, had to become sick for poor cash flow. We can attribute this to poor sales management practices. Some of these undertakings had to go for distress sales by the government divesting their stake. We will not go into such details here, but at least examine how faulty sales compensation design can adversely affect the cash flow of the organisations. Theories of Sales Compensation Sales compensation design is different from any other types of compensation design, as here we emphasize on compensation payouts based on contribution margin. Salespeople get minimum fixed compensation component, and the rest part of their compensation is aligned with their performance. Organisations select various incentive systems to make a tradeoff between competitive compensation and retention of talent. A typical employment contract for a salesperson will have mention on fixed component and average incentive payouts. Average incentive payouts do not indicate guaranteed component, rather it indicates average incentives that are earned by salespersons of the organisations. However, if an individual salesperson is performing better than average, he/she can earn even more, and such increased incentive payouts to him/her do not strain company’s compensation budget, as payments are made from the contribution margin. This can be understood with examples, presented later. For designing sales compensation managers need to understand the peculiarities of the sales task that is different from other organisational activities. Sales compensation design includes a series of decisions to objectively reward the sales persons, based on the achievement of individuals, groups and of organisation. Separate sales compensation plans are required to control cost, achieve of goals and objectives, and face competition. Sales force in an organisation plays important role in improving the both top line and bottom line financial performance of the organisation. In designing sales compensation, organisation focuses on identification of realistic and challenging sales goals, translating sales goals into measurable objectives, and in designing the sales compensation plan that is competitive and motivational. Obviously, such process requires basic understanding of sales jobs, understanding of organisational sales goals and objectives, basic understanding of all controllable and measurable elements of the sales function, determination of various levels in sales compensation, methods, etc. After consideration of all these aspects, it is necessary to go for pilot testing of initial compensation plan, and carry out corrections, wherever necessary, and finally rolling out of the compensation plan. “Organisations select various incentive systems to make a tradeoff between competitive compensation and retention of talent.” Various components of sales compensation are; base salary (fixed), short-term incentives (aligned with short-term goals), long-term incentives (linked with annual target achievement), incentives in the form of sales commissions, and various perquisites to support sales function. For mutual interest, organisation prefers contribution-based sales compensation strategy, as it benefits the organisation by relating the compensation to the operating costs of the organisation. Such practices benefit sales personnel to earn with no limits or a payment ceiling, without straining the organisation’s compensation budget. Also organisations can drive the culture of performance, and at the same time cost efficiency, avoiding payment to those who underperforms. But designing an effective contribution-based sales compensation plan is not so easy. It requires strategic focus, as it helps on the one hand coverage of organisational expenses, both fixed and variable, and at the same time consideration of built-in profit. Among others, it considers decisions on commission levels, and selection of suitable accelerators and decelerators. Figure-1: Industry Thumb Rule Performance Below threshold (%) Target (100% of goal) (%) Excellence (%) Above excellence Percentage of sales Force 10-15 Above 55, below 45 10-15 Same fraction of excellence Amount to pay 10%-50 100 200-300 No cap (strategic decision) Ideally, sales compensation plans are designed to encourage behaviours that support business strategy. More than 90 percent of companies change their sales compensation plans annually. At different phases of growth, and so also for different verticals, organisations may go for different sales compensation plan, primarily to achieve business goals. For example, in the introduction phase (which is also known as start-up phase), organisations design sales compensation plan for achieving top-line (sales revenue) growth. In the growth phase, organisations emphasize on revenue management, focus on new market development and customer retention, and introduce new products and services. In the maturity phase, organisations re-evaluate themselves, focusing on price curtailment by efficient price management to stay competitive in the market. Gradually organisations achieve optimisation by strategic market segment, new market development, and with new value proposition. This entire journey of organisations, unless reinforced by appropriate sales compensation plan, it will experience difficulty. At every stage, compensation metrics would be different as phase-wise selling objectives also change. For example, in the first or start-up phase, organisations need to emphasize on persuasive selling, which requires aggressive variable compensation in the form of incentives and commission. Here incentives and commission are based on sales revenue, and the payouts are from contribution margin. In the second phase, focus being on volume growth, sales incentives and commission are linked with the sales volume. In the third phase, cost of sales may be added as an additional metrics. Finally, in the optimisation phase, focus being on new value propositions, new market penetration, segmented growth; new metrices are developed for achieving such selling objectives. Developing new KPIs (key performance indicators) or new metrices, matching with organisational needs can only make sales compensation plan effective. “It is necessary to go for pilot testing of initial compensation plan, and carry out corrections, wherever necessary, and finally rolling out of the compensation plan.” Again, compensation payouts to salespeople require adjustment with appropriate accelerators and decelerators. Sales compensation metrices can be profit-based, revenue or quota-based, balanced (both profit and revenue), and team-based. But its selection is the prerogative of the top management, as changing sales objectives, strategies, and phases of organisation can potentially alter the sales compensation plan. While selecting KPIs or sales compensation metrices, it is also important to be strategic in quota setting. Sales potentialities vary territory-wise; hence same KSOs (key sales objectives) or KRAs (key result areas) may not be right. For example, in some market territories, market share of the company may be higher, where salesperson may be at ease in achieving assigned KSOs or KRAs. While in an unrepresented or underrepresented market territory salesperson may face the challenge in achieving the results, hence in such cases, KSOs and KRAs need calibration pacing with market situation. Sales Compensation Design: Challenging Task for Managers Importance of effective sales compensation design has already been highlighted above. Depending on the strategic needs, sales compensation design can be tiered or incremental. Tiered sales compensation plan make provision for higher commission earning with higher levels of sales revenue. For example, commission rate for sale of INR 5 lakhs would be lower than the commission rate for sales above INR 5 lakhs. Some organisations use accelerators and decelerators as multiplier instead of tiered sales compensation. Incremental sales compensation plan uses incremental sales for the purpose of calculation of sales compensation. A base sales level (often organisation use the term threshold level of sales) is assumed while organisation considers average incentive payouts. This level is considered easily achievable; hence salesperson can earn this variable component even with average performance level. Salesperson can earn more incentives, when deliver results over and above the base or threshold sales level. Usually, organisations calculate the sales incentive on incremental sales (increased sales over the base level sales). “Designing an effective contribution-based sales compensation plan is not so easy. It requires strategic focus, as it helps on the one hand coverage of organisational expenses, both fixed and variable, and at the same time consideration of built-in profit.” Some organisations to ensure they remain performance driven, often enforce claw back provision on salespeople. Claw back denotes recovery of the incentives paid in preceding year when performance level in succeeding year falls. However, when performance achievement cannot be attributed to drives or initiatives of the salespeople, like in impending pandemic situation; enforcement of claw back provision should be avoided. In such a situation, organisation can think of embracing performance engineering to calibrate the performance criteria, i.e., review of KRAs, KSOs, or KPAs, and then come out with new set of KPIs. Like in pandemic situation, organisations can make use of their salespeople to contribute to market intelligence, changing expectations of customers, innovative product design, etc. This can ensure retention of salespeople; else organisations may face the challenge of voluntary attrition. Another important challenge for sales compensation is selection of appropriate sales metrics. Sales metrics or compensable factors differ from organisation to organisation, and often decided by the strategic level keeping in view the strategic and business needs of the organisation. We have some common sales metrics, like; sales turnover, cost of sales, lead time for concluding a sales deal, average size of sales deal, conversion rate, new market development, market share percentage, effective sales incentive, etc. Effectiveness of sales incentives is measured in terms of cascading effect of incentives on increased performance of salespeople. But such list of sales metrics may widely vary depending on the organisational needs. Some organisations assign weightage on sales performance in terms of their creative or innovative pursuit in designing new products or services, in framing strategies to fight with competitors, etc. Rather than having multiple sales metrics or compensable factors, it is desirable to have four to five metrics that can best address organisational business and strategic needs. “Depending on the strategic needs, sales compensation design can be tiered or incremental.” Some of the industry thumb rules for sales compensation plan are: Pay three times more incentives to top 20 percent of your sales force to retain talent Limit performance measures to minimum for successful tracking of performance Decide on KSOs that can ensure atleast achievement of threshold level of performance by two third of the sales force Salespeople who deliver higher performance, there earning should be capped at above market rate Salespeople who under performs should earn less than market average Strategically organisations calibrate their sales compensation plan time to time by quota setting, performance engineering, territory mapping, potentiality assessment of aggressive sales performer, etc. Understanding Sales Compensation Based on Payout Calculation For any sales compensation plan, it is already mentioned that payouts are from contribution margin, and such payouts again depend on variation to margin, i.e., the difference between variable revenue and variable cost. From the problem below we can understand how variation to margin increases along with the tiered commission structure. With 30% contribution margin, and tiered commission rate, for different sales figure, salespersons are able to earn higher, and at the same time with increased variation to margin, organisation can cater for different expenses and make surplus. This problem can be better understood with the following example: Let us assume a sales representative has target earnings of INR 150,000 for the year. This includes a fixed component of INR 1,00,000/- and a variable component of INR 50,000/-. The company earns a 30% margin on the sales revenue. The company has tiered commission rate for different levels of performance in terms of sales figure. In table below, we have showed the details, including variation to margin in the last column (see Figure 2). Figure-2: Sales Compensation Based on Payout Calculation Sales Revenue (INR) Margin (30%) = Net Sales (INR) Commission Rate Payout (INR) Variation to Margin (Diff. between variable revenue and variable cost) (INR) 500,000 150,000 5% 25,000 25,000 750,000 225,000 6.7% 50,250 74,750 1,000,000 300,000 7.5% 75,000 125,000 1,500,000 450,000 10% 150,000 200,000 From the figure we can see how the salesperson’s contribution to sales revenue and subsequent variable compensation payouts begin to impact variance to margin. At INR 5,00,000 in sales revenue and a 5% commission rate, the leftover gross margin is INR 25K. Based on the remaining expenses for most companies, this will not allow the company to “breakeven.” Two options to mitigate this: Lower the commission rate to improve the margin. Set a “minimum expectation” in which the representative produces enough to pay for the cost. Correlating sales representative’s sales revenue to cost is critical in this model. Hence decision on the rate of sales commission is critical here. It is important to determine breakeven point of sales productivity minus cost of the sales representative, setting a minimum performance standard and raising payouts accordingly. This will shift the focus of sales representative from quota attainment to commissions earned, and hence can make the sales compensation design effective. Variation to margin is the difference between variable revenue and variable cost. In many organisations, we have systems of assigning weights to different nature of contributions made by salesperson, based on which compensation payouts are determined. For example, a tentative checklist for measurement of effectiveness of salespersons can be drawn classifying their performance in strategic, financial, and tactical types. Here organisations require to develop their own measurement criteria for each of these categories, and also pre-decide weights for each category and subcategories. For example, under strategic category there are number of sub-categories. From organisation point of view decide what are those, then measure the performance of the salesperson using a scale. If it is a 5-point scale, when scores of salespersons are less than three, then put them in underperformer category, and limit their incentive payouts to minimum. But when such performance, as per your scale is more than three, then depending on your grading put them in higher incentive tier. Likewise, we have to do for all categories. Sales Head, HR Head, and Finance Head here must work as a team first identifying categories and sub-categories, and then deciding on the tiered, or incremental incentive payouts. They can also pre-decide accelerators or decelerators to simplify the process of incentive payouts. In all such cases, however, we have considered annual sales cycle, and final incentive payouts at the end of the sales cycle. Accelerators, Decelerators & the Hockey Stick Effect When sales cycle is less than a year, say, monthly or quarterly, then more strategic thoughts on accelerators and decelerators are required, else it may affect the cash flow of the company. This is particularly important for consumer durable companies, automobile companies, or even for capital goods companies. Salesperson to avoid the threat of reduced incentive earnings, may carryforward the poor sales in one sales cycle to next sales cycle. This can get them more incentive payouts for multiplier effect with higher accelerators (as sales performance of two cycles are added together). This is known as ‘hokey stick effect’, as data (in our case incentive payouts) rise and fall sharply for multiplication with accelerators or decelerators. “Salesperson to avoid the threat of reduced incentive earnings, may carryforward the poor sales in one sales cycle to next sales cycle. This can get them more incentive payouts for multiplier effect with higher accelerators (as sales performance of two cycles are added together).” Accelerator/multiplier/bump can also be explained using a sliding scale model. These are intended for upward and downward adjustment of commission percentage. Let us assume target gross margin percentage of a company is 30 percent and the target sales commission percentage is 10 percent of gross margin. In a sliding scale model, the commission percentage would be adjusted upward if the gross margin for a transaction is higher than 30 percent and downward if the gross margin is lower than 30 percent. Some of the incentives offered in sales compensation plan, in addition to fixed rate of commission are; new business development, team selling, cross-selling, sales of specific products, increases in customer satisfaction, etc. In Figure-3 sliding scale is explained: Figure-3: Sliding Scale Margin Base Commission Multiplier (including accelerator and decelerator) Net Commission 40% 10% 1.5 15% 35% 10% 1.25 12.5% 30% 10% 1.00 10% 25% 10% 0.75 7.5% Conclusion & Cross-Functional Imperatives Sales compensation design is the most daunting task for any organisation. While effective sales compensation plan can drive sales performance, ensure cash flow, motivate, and retain salespeople on the one hand, on the other hand it can also ensure organisational growth and sustainability. Organisations can optimize sales compensation costs and at the same time can achieve higher sales performance when a cross-functional team decides on various parameters of sales compensation in alignment with strategic and business needs of the organisations. Sales compensation plan requires time to time calibration with the market conditions with performance engineering approach, else wrongly organisation can adjudge a salesperson as under performer, and correspondingly decrease his/her earnings. In the reverse case also, organisations need to consider upward revision of sales goals, when market is booming. Wrong sales compensation design can adversely affect cash flow of the organisation, primarily for underperformance of the salespeople for poor earning potentiality. While organisational practices vary, in deciding the KSOs it is important to focus on four to five KPIs, which can be decided with inputs form cross-functional team represented by Marketing, HR, and Finance functional heads. It is always advisable to pilot test the sales compensation plan, carry out the corrections, required if any, and then implement it. Depending on the changing business needs, organisations need to calibrate its sales compensation plan. — Dr. Dipak Kumar Bhattacharyya

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 51–56 (Journal pp. 1075–1080) UNION BUDGET 2021-22 Key Provisions of Personal and Corporate taxation in Finance Bill, 2021 CA. Nidhi Jain The author is a member of the Institute. She can be reached at nidhijaincosting@gmail.com and eboard@icai.in. “The Finance Bill, 2021 proposes a number of changes that are directed to revive the growth momentum that India enjoyed for many years, one of the best amongst the emerging economies. The country faced several challenges on account of unprecedented lockdown that continued for a long period last fiscal. The budget this year focuses on disinvestment, giving fillip to IFSC, streamlining of assessment processes and long term infrastructure development. This article highlights important changes proposed in the Finance Bill, 2021 relating to Personal and Corporate taxation. Read on…” Tax payers can take a sigh of relief as no changes / increase has been proposed in the tax rates in spite of the need to have more funds in the challenging times. Personal Taxation Amendments Relief to Senior Citizens from Return Filing Requirement (Section 194P) In order to provide relief to resident senior citizens (aged of 75 year or above) having only pension and interest income accruing to them, an exemption has been proposed from filing the return of income. However, a declaration will have to be filed with specified bank in this regard and bank would be required to compute the income after giving effect to applicable deductions/ rebates and deduct income tax at rates in force. ‘Liable to Tax’ Defined – Section 2(29A) It is proposed to insert a new clause (29A) to section 2 so as to define the expression “liable to tax”, in relation to a person, which means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided. The amendment is in line with judicial pronouncements wherein it has been held that liable to tax does not necessarily imply that taxes are paid in the other contracting state, it is sufficient that contracting state has right to levy taxes. The concept is also relevant to determine if an individual is deemed to be resident under section 6. Exemption of Cash Allowance in Lieu of LTC – Section 10(5) Considering outbreak of Covid-19 and travelling possibilities being hindered, Section 10(5) is proposed to be amended to provide tax exemption of cash allowance in the hands of individuals, if any value or assistance is received by or due to such individual in lieu of any travel concession subject to fulfilment of conditions as may be prescribed. Proposed amendment to be made effective from AY 2021-22. Taxation of Excess PF Contribution Interest – Section 10(11) and 10(12) Payment from provident fund is exempt under Section 10(11) and receipt of accumulated balances from employee recognised provident fund is exempt under section 10(12). It is proposed to provide that such exemption shall not apply to interest income accrued to the extent it relates to the amount or aggregate of the amounts of contribution to such funds made on or after 01st April 2021 in excess of INR 2.5 lakhs in the previous year. This amendment would affect taxpayers contributing huge sum to these funds as exemption would be denied to the extent of interest income on the excess sum contributed. Relief with Respect to Income from Overseas Retirement Funds – Section 89A New section 89A is proposed to be inserted to address mismatch in taxation of income from specified overseas retirement accounts maintained by specified person in a notified country. Specified person is a person resident in India who has opened a retirement benefit account in a notified country while being a non-resident in India and a resident in that country. Said income shall be taxed in such manner and in such year as may be prescribed. It is proposed to shift the taxation of such retirement benefit from accrual basis to receipt basis in India. The aforesaid relief will mainly benefit the NRIs returning to India. Proceeds from Unit Linked Insurance Plan (ULIP) – Section 10(10D) Any proceeds received under ULIP issued on or after 01st February 2021 shall not be eligible for exemption if annual premium exceeds INR 2.5 Lakhs. Such ULIP shall be treated as capital asset (equity oriented unit) and proceeds shall be taxable as capital gains. Rules for computation of capital gains shall be prescribed. This amendment intends to put a cap on the total premium paid under ULIPs majority affecting High Net Worth Individuals. Corporate and Business Taxation Reforms Employee Contribution to Welfare Funds – Section 36(1)(va) and Section 43B There have been numerous judicial pronouncements in favour and against taxpayer, on the issue whether contribution toward employee’s provident fund made by an employer after the due date prescribed under labour welfare laws but before the due date of the filing return of income shall be allowed as deduction or not? To address this, it is proposed to insert explanation in section 36(1)(va) and section 43B to clarify that provisions of 43B shall not apply to employees contribution to welfare funds accordingly, deduction shall be allowed under section 36 only if the deposit is made within the due dates prescribed under the relevant labour laws. This will now ensure stricter compliance adherence in the hands of taxpayers. Complete Carve-Out of Depreciation on Goodwill i. The long-drawn dispute of whether depreciation can be claimed on goodwill for the purpose of business and profession has been put to rest by the amendments proposed, by specifically carving out goodwill on business and profession as a depreciable asset for income tax purposes. ii. It is further proposed to prescribe a specific computation mechanism to determine the written down value and short-term capital gains in case where depreciation on goodwill has already been claimed by the assessee. This amendment clamps down on depreciation on goodwill which was being claimed by the corporate taxpayers all along relying on the Apex court judgement. It would impact depreciation even on concluded transactions. “The long-drawn dispute of whether depreciation can be claimed on goodwill for the purpose of business and profession has been put to rest by the amendments proposed, by specifically carving out goodwill on business and profession as a depreciable asset for income tax purposes.” Safe Harbour Limit Enhanced to 20% – Section 43CA and Section 56(2)(x) It is proposed to increase the safe harbour limit under section 43CA from 10% to 20% in case of transfer of residential unit subject to following conditions: Transfer takes place between 12th November 2020 to 30th June 2021 Transfer is by way of first time allotment to any person Consideration does not exceed INR 2 crore Consequential relief is proposed to be provided under section 56(2)(x) for buyer of the property by increasing the safe harbour from 10% to 20%. These amendments would benefit real estate developers and give fillip to real estate sector. Tax Audit Threshold Increased to INR 10 Crore – Section 44AB It is proposed to increase the threshold limit for tax audit to 10 crores from existing 5 crores to incentivise digital transaction and reduce compliance burden, provided that (i) aggregate amount received for sales/turnover in cash and (ii) aggregate payment (expenditure) in cash does not exceed 5% of said respective amounts. Amendment is effective from AY 2021-22. Section 44ADA Non-Applicability to LLPs Provisions of presumptive taxation is not applicable to LLP since LLPs are required to maintain books of accounts under LLP Act and benefit of non maintenance of books of accounts under 44ADA cannot be availed. It is proposed to explicitly mention non applicability of section 44ADA to LLPs. Capital Gains on Reconstitution or Dissolution of Firms – Section 45(4) and Section 45(4A) It is proposed to substitute section 45(4) and insert 45(4A) to compute tax in the hands of firms on capital gains arising from dissolution or reconstitution of firms as follows: Section Type of asset Consideration Cost of acquisition 45(4) Capital asset Fair market value of the capital asset on the date of receipt of asset by Specified persons (Partner of Firm, Member of AOP or BOI) Cost of the capital asset 45(4A) Money or other asset Value of money / Fair market value of other asset on date of receipt by specified person) Balance in the capital account of the specified person in the books of accounts of the entity For the purpose of both the Sections, balance in capital account is to be calculated without taking into account increase in capital due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset. Self-generated goodwill and self-generated asset are defined to mean goodwill or asset that has been acquired without incurring any cost for purchase or which has been generated during the course of business or profession. It is pertinent to note that, it is explicitly provided that applicability of this section is not just restricted at the time of dissolution but also covers cases of reconstitution, thereby encompassing even cases of admission or retirement of partners, conversion of firm etc. Further, this amendment seeks to reverse various judicial pronouncements which had advocated that what the partner receives at the time of retirement is his own share of interest in the firm, and thus not taxable. Expanding the Scope of Slump Sale (Section 2(42C)) It is proposed to expand the scope of ‘slump sale’ to include transfer of “undertaking, by any means,” thereby including all types of transfers within the ambit of ‘slump sale’. It is pertinent to note that this amendment would overturn the Bombay High Court judgement in the case of Bharat Bijlee wherein taxability of slump exchange was denied in absence of monetary consideration (in this case consideration was in nature of shares). In substance, transfer in the form of exchange shall also be covered under slump sale (provided other conditions are satisfied). Extension of Time Limits for Expiry of Deduction/ Tax Benefit In order to provide an added advantage to the tax payers, it is proposed to extend the due date of claiming deductions under the aforesaid sections: Section Original due date Extension proposed 80EEA (interest on loan taken for residential house property) 31st March 2021 31st March 2022 80-IAC (Deduction by eligible startup) 31st March 2021 31st March 2022 54GB (Deduction for subscription in equity shares of eligible company) 31st March 2021 31st March 2022 80-IBA (Deduction in relation to profit and gain from business of developing and building housing projects) 31st March 2021 31st March 2022 Provisions Relating to Administration and Assessment In the wake of digitisation, the time involved in completion of various processes has reduced, accordingly, to ease out compliance process it is proposed to reduced time lines as follows: Particulars Proposed amendment Filing of the belated and revised return u/s. 139(4) and 139(5) 3 months before the end of the relevant AY (i.e., 31st December) or before the completion of the assessment whichever, is earlier. Due date for the filing of original return of income in case of spouse of a partner of a firm whose accounts are required to be audited if the provisions of section 5A applies to them. 31st October of the Assessment Year Issue of intimation u/s. 143(1) 9 months from end of the financial year in which return is made. It is also proposed to provide for adjustment on account of increase in income indicated in the audit report but not taken into account in computing the total income. Issue of notice initiating assessment u/s. 143(2) 3 months from end of the financial year in which return is furnished Completion of assessment u/s. 143(3) 9 months from end of the relevant assessment year Issue of notice for reopening assessment 3 years from the end of relevant assessment year, or 10 years from the end of relevant assessment year where the Assessing officer has possession of evidence that income escaping assessment is INR 50 Lakh or more Section 142 Notice Powers Centralized It is proposed to empower prescribed income tax authority to issues notices under section 142 (1) besides assessing officer. This is in line with policy on faceless assessment to enable centralised issuance of notices. Revamping of Reassessment Proceedings – Section 147, 148 & Section 148A Unlike the erstwhile reassessment provisions where emphasis was on “reasons to believe”, substituted provisions focus on “information with the Assessing officer” i.e., information flagged in accordance with the risk management strategy formulated by the Board from time to time (or) any objection raised by C&AG. It may be noted that considering ‘flagged information based on risk management strategy’ as an ‘information’ so as to warrant assumption of jurisdiction under section 147/148 in all cases shall tantamount to giving unfettered powers to the assessing authorities for reopening assessment. Section 148A has been inserted to provide that before issuance of notice under Section 148, the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering reply, the Assessing Officer shall decide, by passing an order, whether it is a fit case for issue of notice under Section 148. Giving opportunity of being heard before initiating reassessment proceedings is a welcome step. Further, it is proposed to subsume provisions of section 153A/153C of the block assessments in the newly substituted section 148. Faceless ITAT With an aim to reduce human interface and cost of compliance it is proposed to introduce faceless proceedings before the ITAT. While creating a faceless ITAT is pathbreaking being one more step towards digitisation, its implementation and practical challenges should be closely examined. MAT Provisions – Section 115JB 115JB is proposed to be amended to provide that dividend income earned by foreign companies shall be reduced from the book profit and related expenditure added back where such income is taxed at lower that MAT rate due to DTAA. Further, where past year income is included in books of accounts, on account of Advance Pricing Agreement or secondary adjustment, Assessing Officer shall on application made to him recompute the book profits of past years. Equalisation Levy and Section 10(50) Alignment Equalisation Levy was introduced by India in 2016, on the lines of the recommendations of the OECD BEPS Action Plan aiming to tax revenues generated by e commerce supply or services made which would not fall under the tax net applying the conventional tax norms. E-commerce supply or services is defined to mean “online sale of goods” and “online provision of services”. Definition of term “online sale of goods” and “online provision of services” is now expended to include one or more of the following activities taking place online: Acceptance of offer for sale; Placing the purchase order; Acceptance of the Purchase order; Payment of consideration; or Supply of goods or provision of services, partly or wholly. Further, it is clarified that Equalisation levy is applicable on e-commerce supply or services irrespective of whether the e-commerce operator owns the goods or provides / facilitates the services. Income from any specified service on which equalisation levy is applicable shall be exempt as per section 10(50). Explanation 1 is proposed to be inserted to clarify that the income referred to in this clause shall not include and shall be deemed to have never included income which is chargeable to tax as royalty or Fee for technical service in India under the Income tax Act or DTAA. “Income from any specified service on which equalisation levy is applicable shall be exempt.” Miscellaneous Direct Tax Amendments Provisional Attachment Expansion (Section 281B): It is proposed to widen the ambit of provisional attachment u/s. 281B during pendency of any proceeding for imposition of penalty under section 271AAD (penalty for false entry or omission of entry in books of accounts) where the amount or aggregate amount of penalty likely to be imposed exceeds INR 2 Crores. Infrastructure Debt Fund Zero Coupon Bonds (Section 10(48) & 194A): It is proposed to enable infrastructure debt fund to issue zero coupon bond under section 10(48). Further, TDS under section 194A shall not be applicable on paid or payable by infrastructure debt fund. Dispute Resolution Committee for Small Taxpayers: To settle long pending disputes and to reduce litigation, dispute resolution is proposed for small taxpayers through constitution of a Dispute Resolution Committee. Taxpayers with taxable income up to INR 50 lakh and disputed income up to INR 10 lakh shall be eligible to approach the Committee. Co-operative Bank Conversion to Banking Company (Section 44DB & Section 47): Section 44DB is proposed to be amended to extend the benefit of various deductions to a case where a primary co-operative bank is converted to a banking company. Section 47 is also proposed to be amended to include transfer of capital asset by a primary co-operative bank to a banking company within its scope. Accordingly, such transaction shall not be treated as a transfer. Strategic Disinvestment Loss Carry Forward (Section 72A): Section 72A is proposed to be amended with a view to facilitate strategic divestment by the Government to enable set off and carry forward of loss and allowance of depreciation of amalgamating company to amalgamated company in case of amalgamation of one or more public sector company/companies with another public sector company/companies. Advance Tax on Dividend Income (Section 234C): No interest under section 234C is proposed to be charged on shortfall in payment of advance tax on dividend income (except deemed dividend) provided full tax thereon is paid in subsequent instalments. Offshore Banking Units (Section 115AD): Section 115AD is proposed to be made applicable to investment division of an offshore banking unit to the extend income is attributable to investment division as Category III portfolio investor under SEBI (FPI) Regulations, 2019. Abolition of Income Tax Settlement Commission: Income tax Settlement Commission is abolished with effect from 1 February 2021. Endnote In this unprecedented time government is walking tightrope aiming to revive the economy with various benefits, tax incentives and measures as announced in this budget. The Finance Minister rightly remarked in her speech “‘Faith is the bird that feels the light and sings when the dawn is still dark’”. With these measures, the economy will certainly come out of present problems to reflect its true potential sooner than later. — CA. Nidhi Jain

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 39–50 (Journal pp. 1063–1074) UNION BUDGET 2021-22 Union Budget 2021-22: A Milestone in Nation Building Dr. Rajeev Kumar The author is Assistant Professor, Department of Economics, Shri Ram College of Commerce, University of Delhi. He can be reached at eboard@icai.in. “Budget for 2021-22 has come under tremendous financial constraints and heightened expectations of stakeholders and public at large. The economy has witnessed an unanticipated economic crisis precipitated by the COVID-19 pandemic and an unavoidable nationwide lockdown. GDP is expected to shrink by more than 7 per cent in the year 2020-21 and employment has decreased, drastically. Economy is passing through a contractionary slow-down in economic activities. Consequently, tax revenue of the government is set to fall substantially. Therefore, the budget for the year 2021-22 has been brought out to reinvigorate the economy. Read more…” Among other things, it envisages to accelerated the pace of structural reforms under the Aatmanirbhar Bharat (May 2020) ANB 2.0 and ANB 3.0. The notable reforms included commercialisation of mineral sector, Labour and Agricultural Reforms, Privatisation of PSUs, One Nation one Ration Card, financial inclusion and production linked incentive scheme. Budget has set the pace for India to become self-reliant or Aatmanirbhar. Review of Literature The Constitution of India mandates upon the Union government to lay down ‘annual financial statement’ (which is referred to as budget) before the Parliament. The budget is a statement of the financial statistics of the government for three years, the last year, the current year and the ensuing year. Traditionally, Union budget is classified in revenue and capital budget categories and it comes with proposals for various sectors of the economy and various sections of the society along with tax related proposals in the Finance Bill. The budget is considered as an important policy document because it reflects the financial position and fiscal policy stance of the government along with the direction in which the government intends to steer the economy. Article 112 and 202 of the constitution of India mentions about the presentation of annual financial statements by the Union and State Governments respectively (Basu, 2009). Under article 112(2), the estimates are shown separately for votable expenditure charged upon the Consolidated Fund of India and the sums required to meet other non-votable expenditures proposed to be made from the Consolidated Fund (Sury, 2002). Further, tax proposals are shown in the Annual Finance Bill. As mentioned earlier, Government presents the budget in the form of ‘revenue budget’ and ‘capital budget’. Revenue budget shows revenue receipts and revenue expenditures. While capital budget shows capital receipts and capital expenditures of the Government, revenue receipts are all those receipts which neither reduces the asset position nor increases liability position of the Government. Capital receipts, on the other hand, are all those receipts which either reduces the asset position or increases liability position of the Government. Similarly, the revenue expenditure and capital expenditure can also be defined on the basis of asset and liability. Any expenditure which increases assets or decreases liability is classified as capital expenditure while any expenditure which neither increases assets nor decreases liability of the government is classified as revenue expenditure (CBGA, 2021). The classification of budget in revenue and capital component brings out the spending behaviour of the government in a meaningful manner. Revenue account deficit and capital account deficit, as two components of overall budget deficit; highlight the fiscal policy stance of the government whether it is contractionary or expansionary in nature. Expansionary fiscal policy, incurring high fiscal deficit, is an unavoidable choice for India in the present circumstances. However, we must be mindful that high fiscal deficit relative to GDP tends not only to cause a sharp increase in debt-GDP ratio, but also affect saving and investment and consequently economic growth (Rangarajan & Srivastava, 2005). Hence, a countercyclical fiscal expansion in the budget has been adopted cautiously to crowd in rather than crowd out private investment. Budget 2021-22: Provisions and Prospects Budget 2021 intends to achieve a real GDP growth rate of 11 percent in the coming financial year 2021-22 while the revised estimate of economic growth is -7.7 percent in the current year, 2020-21. Given the shrunk base and 4.2 percent growth rate in 2019-20, a target of 11 percent is quite reasonable but yet will need a lot of efforts to achieve under the prevailing circumstances. Estimated total expenditure in the budget of 2021-22 is INR 34,83,236 crores which is INR 32,931 crores higher than the revised estimates of total expenditure in 2020-21. Revenue expenditure is budgeted at INR 29,92,000 crores with a reduction of INR 19,142 Crore compared to INR 30,11,142 crores in RE 2020-21. Capital expenditure on the other hand is estimated at INR 5,54,236 crores in BE 2021-22 which is 34.5 percent more than the budgeted figure for 2020-21. Thus, revenue expenditure and capital expenditure are about 84 percent and 16 percent respectively of the total budget. Table-1 shows allocation of funds to ministries, departments and others1. The table shows the significance of various major ministries in the overall allocations of funds. There are fifty-three central ministries and about 93 percent of the allocations are concentrated in the 14 ministries only. Such a low significance of the large number of ministries reflects the quest of the Government to achieve ‘minimum government and maximum governance’ where the State is keen to direct and regulate the private sector rather than involve itself directly in the provisioning of goods and services. 1 Apart from 53 ministries and two departments (Department of Atomic Energy and Department of Space) allocations are shown for the President, the Vice President, the Parliament and the Union Public Service Commission in the Expenditure Budget of the Union Government. Table-1: Allocation for Ministries & Departments Ministry Allocation (INR Cr) % of Budget Ministry of Finance 1386273.30 39.8 Ministry of Defence 478195.62 13.7 Ministry of Consumer Affairs, Food and Public Distribution 256948.40 7.4 Ministry of Home Affairs 166546.94 4.8 Ministry of Rural Development 133689.50 3.8 Ministry of Agriculture & Farmer’s Welfare 131531.19 3.8 Ministry of Road Transport and Highways 118101.00 3.4 Ministry of Railways 110054.64 3.2 Ministry of Education 93224.31 2.7 Ministry of Chemical and Fertiliser 80714.94 2.3 Ministry of Communication 75265.22 2.2 Ministry of Health & Family Welfare 73931.77 2.1 Ministry of Jal Shakti 69053.02 2.0 Ministry of Housing & Urban Affairs 54581.00 1.6 Other Ministries and Departments 255124.78 7.3 Total 3483235.63 100.0 Source: Union Budget Documents, 2021 Farmers’ Welfare & Rural Development Assistance to farmers is rendered in various forms like crop insurance, short term credit, marketing, minimum support price and income security, etc. In this direction there are ten central sector schemes and nineteen centrally sponsored schemes through which funds are made available for direct and indirect benefits of the farmers. Apart from that farmers get benefits from the minimum support price system and other schemes of the government for rural development. Table-2: Allocation under MoAFW for Various Central Schemes Scheme under the Ministry of Agriculture 2020-21 (BE) (INR Cr) 2021-22 (BE) (INR Cr) Pradhan Mantri Fasal Bima Yojana 15695 16000 Interest Subsidy for Short Term Credit to Farmers 21175 19468 Pradhan Mantri Annadata Aay Sanrakshan Yojna (PM-AASHA) 500 400 Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) 75000 65000 Pradhan Mantri Kisan Man Dhan Yojana 220 50 Agriculture Infrastructure Fund (AIF) NA* 900 Central Sector Schemes MoA Total (10 Schemes) 116490 105018 Centrally Sponsored Schemes MoA (19 Schemes) 134399 123017 * Launched on 18.09.2020 | Source: Union Budget Documents, 2021 Figure-1: Centrally Sponsored Schemes under the Department of Rural Development (INR Crores) 2017-18 (Actuals) 2018-19 (Actuals) 2019-20 (Actuals) 2020-21 (BE) 2020-21 (RE) 2021-22 (BE) 108175.12 111171.72 121838.81 119506.96 196905.82 130977.61 The budget allocations for the year 2021-22 have been reduced for the central sector schemes and centrally sponsored schemes in comparison to the budgeted figures for the year 2020-21 (Table-2). This is an unanticipated cut which may affect farmers and agriculture sector adversely. However, contractionary effects of this reduction on rural economy may be more than offset by a substantial hike in the allocations under various schemes of the Ministry of Rural Development as shown in the Figure-1. Health and Wellbeing Health and wellbeing of 1.36 billion people of the country, in the hindsight of the pandemic, has become immensely challenging for which capacity enhancement is greatly required in the healthcare sector. Apart from medical facilities, health and wellbeing include nutrition, water and sanitation also. Health sector in India requires infrastructural upgradation along with increase in the human resource. In this direction, the budget substantially expands the investment expenditure on health infrastructure. The budget has a proposal for a centrally Sponsored Scheme, to be named as PM Aatmanirbhar Swasth Bharat Yojna (PMASBY), which aims to develop capacity of health care system by strengthening existing institutions and creating new institutions. As far as financial provisioning is concerned the health and wellbeing allocations have been proposed to be about INR 2.23 lakh crores which is 137 percentage higher than the allocations made in the year 2020-21 which is a steep hike even though the allocations for the Ministry of Health and AYUSH as a percentage of the Budget have been reduced (Figure-2). INR 64180 crores have been proposed for the PMASBY over next six years for capacity enhancement at primary, secondary and tertiary health care. Within the overall allocations for health and wellbeing, an allocation of INR 35000 has been earmarked for COVID-19 vaccination. Looking at the year wise allocations to the Ministry of Health and Family Welfare and Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy the trend in allocation is upward excluding the exceptional year 2020-21 where the allocations to the ministry spiked suddenly above the uptrend due to sudden rise in public expenditure due to COVID-19 pandemic. Figure-2: Allocation for Health & AYUSH (Percentage of Budget) 2017-18 (Actuals) 2018-19 (Actuals) 2019-20 (Actuals) 2020-21 (RE) 2021-22 (BE) 2.55% 2.43% 2.46% 2.28% 2.21% Source: CBGA, 2021 However, if we have a closer look at these allocations as a percentage of GDP have gone up only by a minuscule 0.3 percent of GDP relative to the allocations made in a 2019-20 that too when the country is facing the stiffest challenge in the health sector. It is needless to say that the COVID-19 pandemic reminded us of the importance of public sector health care infrastructure. The country requires free health care to ensure healthy human resource. Hence the sector requires a greater hike in public expenditure on health and wellbeing. Physical Capital, Financial Capital and Infrastructure Capital and infrastructure are considered as the fundamental requirements of economic growth. Future growth prospects of a country depend upon its stock of capital and infrastructure base. So, a growing economy needs to ensure adequate spending on these areas for rapid economic growth. The budget proposals show due recognition to the capital and infrastructural requirements of the country. As an indication, the budget proposes a sharp enhancement of 34.5 per cent in the Capital expenditure. Such an increase in the proportion of capital expenditure is much desirable and likely to boost up the economy from demand as well as supply side. Capital expenditure along with developmental expenditure are two important indicators of the quality of public expenditure. However, raising capital expenditure by raising resources from disinvestment of PSUs and their assets may partly offset the positive effects on demand and supply sides. As a novel initiative, infrastructural projects will be developed under the National Infrastructure Pipeline (NIP) through institutional set up, monetisation of assets and by enhancing the share of capital expenditure in the budgets of the Centre and the States. Proposed Development Financial Institution (DFI) is one such institution which will facilitate in procurement of long-term debt finances for the infrastructural projects. It will prove to be a catalyst for infrastructure financing and development. The budget recognises the need to provide to consumers a choice in choosing service provider in the power distribution sector and to create competition with a focus on the viability of the distribution companies. A key area which has been highlighted in the budget is monetisation of public sector assets for building new infrastructure. Existing idle assets and surplus land with government, ministries, department, public sector enterprises such will be monetised. Asset monetisation will provide necessary finance to the government. National Monetisation Pipeline along with Asset Monetisation Dashboard are proposed to be launched to facilitate the monetisation process. “Asset monetisation will provide necessary finance to the government. National Monetisation Pipeline along with Asset Monetisation Dashboard are proposed to be launched to facilitate the monetisation process.” The budget envisages to reduce the logistic costs of the industry further. It is one of the key essentialities for the ‘Make in India’ campaign. Government has persistently shown its commitment towards this end. Construction of highways has been one of the key achievements of the government in recent years. The budget further adds to the construction of highways through ambitious Bharatmala Pariyojna Project which is a centrally sponsored scheme of the Government of India. The budget proposes financial allocations for the construction of economic corridors under the Bharatmala Pariyojna Project in Tamil Nadu, Kerala, West Bengal and Assam. The budget also allocates funds to further the objectives under the National Rail Plan for India-2030 for achieving ‘future ready’ Railway System by 2030. The proposals include construction of Eastern and Western dedicated freight corridors and electrification of railway tracks with a target of 100 per cent broad gauge electrification by December, 2023. Apart from expansion and upgradation, safety measures have also been well recognised under the National Rail Plan through indigenously developed automatic train protection system that eliminates the possibility of train collision due to human error on high density and high utilised networks. It is a much-needed requirement of the railway operations to prevent enormous loss of life and property. Budget recognised the significance of the Production Linked Incentive Scheme (PLI) which has been introduced by the government in the year 2020 for pharmaceuticals, automobiles and auto components, telecom and networking products, textile, solar modules, food products, white goods, and speciality steel and extended it to thirteen sectors. These incentives are expected to boost up R&D in newer areas and will attract investment in cutting edge technology. This will help in creating a viable environment for Indian companies to be competitive in the global markets and will help the country to move toward a five trillion-dollar economy. It will help our manufacturing sector to become an integral part of the global supply chains. We need Indian global companies for an Aatmanirbhar Bharat in different sectors of the economy. PLI scheme will increase the size and scale of companies in key sectors wherein job opportunities will arise in the near future. The proposed Mega investment Textile Parks (MITRA) will further be an add-on to PLI scheme to enable the Indian textile industry to become globally competitive and attract large investment which will boost employment opportunities. Banking and Financial Sector Reforms In the banking sector the budget proposes recapitalisation of public sector banks of INR 20000 crores along with disinvestment in two public sector banks in the financial year 2021-22. Government has infused capital in banks in each of the successive recent years. Further, proposed amendments in Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 will ensure that bank depositors get easy and timely access to their insured deposits in the event of a bank facing temporary difficulty in meeting its obligations. This is an important step toward increasing confidence of depositors in the banks and lessening the fragility of the banking system. “Proposed amendments in Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 will ensure that bank depositors get easy and timely access to their insured deposits in the event of a bank facing temporary difficulty in meeting its obligations.” Indian capital market suffers from a number of problems like fair disclosure of financial information, prevalence of insider trading, front running, manipulation of security prices, unofficial trading in securities, lack of adequate control over brokers, high cost of transactions due to the lack of well-defined norms for institutional investment. The budget proposes to take us a step ahead in the direction of capital market reforms. Two much needed capital market reforms introduced in the budget are: Rationalised Single Securities Market Code by subsuming the SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1996 and Government Securities Act, 2007. Development of bond market by creating a permanent institutional framework. The reform will ease the process of raising finance capital for corporate sector and will boost up confidence of foreign institutional investors in Indian bond and security markets. Inclusive Development In the direction of inclusive development, budget proposals aim at agriculture, farmers, migrant workers, rural development and financial inclusion among other things. The budget of 2021-22 manifests the commitment of the Government for the welfare of farmers through enhanced MSP for all agricultural commodities, enhanced agricultural credit and substantial hike in allocations to the Rural Infrastructure Development Fund (RIDF) from INR 30,000 crores to INR 40,000 crores. It also proposes to expand the cover of the SWAMITVA scheme to all the States/UTs and enlarge the Operation Green Scheme to include 22 perishable agricultural goods. Apart from that, the proposal of integration of mandies with Electronic National Agriculture Market (e-NAM) will further boost up transparency and competitiveness in agricultural markets. The plight of Indian migrant workers during mass exodus after the announcement of the lockdown of the country damaged the sentiments of the society. This happened primarily due to the lack social security, food security and loss of livelihood of these migrant workers engaged in the unorganised sector. Lack of information on migrant workers with the government agencies proved to be a major hurdle in rendering timely assistance to these people. Government recognised the plight of migrant workers and marginalised people and began a series of initiatives which have been further synergised with the proposals in the budget. Migrant workers usually remain deprived of public sector goods and services in their place of destination due to necessary documentation. In this direction, ‘One Nation One Card (ONOP)’ is a novel initiative through which beneficiaries can claim ration from anywhere in the country. Migrant members of a family will get the benefit of ONOP at the place of destination while the family members staying at home will continue to get their food ration at the native place. The budget proposes to enlarge the ONOP scheme to cover remaining four states and UTs. Another important proposed initiative is launching a portal for migrant workers to collect relevant information about them which will help the government in formulating health, housing, insurance, skills, credit and food scheme for them. Apart from that implementation of four labour codes and extension of social security cover and minimum wages are other important initiatives. Safety concerns for working women have also been explicitly recognised in the budget document. While the series of initiatives are welcome, there is need to provide respectable employment avenues to the inter-state migrant workers by revamping and reinforcing the Inter State Migrant Workers Act (Regulation of Employment and Conditions of Service) Act, 1979 which is the only regulation which explicitly recognises the rights of the inter-state migrant workers. Social Security, Poverty Alleviation and Employment Generation “Social security is the protection that a society provides to individuals and households to ensure access to health care and to guarantee income security, particularly in cases of old age, unemployment, sickness, invalidity, work injury, maternity or loss of a breadwinner” (ILO). Figure-3 shows an upward trend and an unanticipated rise in 2020-21 in the total expenditure on social security schemes for workers. In the hindsight of the pandemic and ensuing difficulties of workers the budget of 2021-22 shows a greater commitment and emphasis on providing better social security cover to the workers. Figure-3: Total Expenditure on Social Security Schemes for Workers (INR Crores) 2017-18 (Actuals) 2018-19 (Actuals) 2019-20 (Actuals) 2020-21 (BE) 2020-21 (RE) 2021-22 (BE) 5221.53 4972.45 5813.93 8430.10 11493.10 11104.10 Source: Union Budget Documents, 2021 On poverty alleviation front, the budget does not appear to be very impressive. Concerted efforts and commitments are not visible in the budget proposal. Budget proposals are mostly built around the Pradhan Mantri Garib Kalyan Yojna to help the most vulnerable sections of society the poorest of the poor, Tribals, Dalits, migrant workers, elderly and children. Apart from the availability of food and social security people also need access to safe water, sanitation and pollution free environment. After the remarkable success of Jal Jeevan Mission (Rural) under the Ministry of Jal Shakti, Jal Jeevan Mission (Urban) will be launched for Universal water supply in all 4378 urban local bodies and liquid waste management in 500 Atal Mission for Rejuvenation and Urban Transformation (AMRUT) cities. Urban Swachh Bharat Mission 2.0 aims at faecal sludge management, waste water treatment, source segregation of garbage, reduction in single use plastic, reduction in air pollution by effectively managing waste from construction and demolition activities. Urban pollution has emerged as a big challenge in recent year. The budget has recognised 42 urban centres and allocations have been made to combat urban air pollution. In the direction of poverty alleviation and in pursuance of the provisions of Article 41 under the Directive Principles of State Policy in the Constitution of India, which mandates upon the State to provide public assistance to its citizens in case of unemployment, old age, sickness and disablement and in other cases of undeserved want within the limit of its economic capacity and development, National Social Assistance Program has played significant role. It intends to secure for the citizens adequate means of livelihood, raise the standard of living, improve public health, provide free and compulsory education for children in rural as well as urban areas. Budgetary allocations for five consecutive years under the NSAP are shown in the Figure-4. The revised figures for the year 2020-21 show a steep hike in the expenditure under NSAP. The expenditure allocations have been moreover restored for the year 2021-22 to pre-COVID-19 level. The allocation under the MNREGA programme has been increased substantially in the budget of 2020-21 (Figure-5), which shows a serious concern for employment generation. It will greatly supplement the job availability and will help many people who became jobless in the pandemic. Figure-4: National Social Assistance Program (INR Crore) 2017-18 (Actuals) 2018-19 (Actuals) 2019-20 (Actuals) 2020-21 (BE) 2020-21 (RE) 2021-22 (BE) 8694.22 8418.47 8692.42 9196.92 42617.22 9200.00 Source: Union Budget Documents, 2021 Figure-5: Mahatma Gandhi National Rural Employment Guarantee Program (INR Crores) 2017-18 (Actuals) 2018-19 (Actuals) 2019-20 (Actuals) 2020-21 (BE) 2020-21 (RE) 2021-22 (BE) 55166.00 61815.09 71686.70 61500.00 111500.00 73000.00 Source: Union Budget Documents, 2021 Education, Skill, Innovation and Research The budget proposes to expand educational infrastructure under the New Education Policy and proposes to establish a Higher Education Commission for India, Central University of Leh and Eklavya model residential schools in tribal areas. In order to add to the Skill India initiatives collaborative skill programs with Japan, U.A.E. and other countries will be launched to benchmark skill qualifications, assessment, certification and transfer of skills. A National Research Foundation will be instituted for innovation and research and development (R&D) and to upgrade overall research ecosystem in the country. Figure-6 shows the dwindling share of education in the budgets of the successive years. The share education in the budget is even lower than many developing countries. Figure-6: Allocation for Education (Percentage of Budget) 2017-18 2018-19 2019-20 (A) 2020-21 (RE) 2021-22 (BE) 3.7% 3.5% 3.3% 2.5% 2.7% Source: CBGA, 2021 Fiscal Reforms Fiscal discipline had been institutionalised since the enactment of the Fiscal Responsibility and Budget Management Act, 2003 wherein the Union Government and State Governments are required to eliminate revenue deficit, prune fiscal deficit and adopt fiscal prudence in the public spending. Sincere, concerted and coordinated efforts have been observed at the central and state government but the central government could not yet achieve the target fiscal deficit of 3% of GDP stipulated under the FRBM rules due to unforeseen and unprecedented circumstances which required huge increase in public expenditure. Pandemic resulted in weak revenue flow along with high expenditure requirements to provide relief to poor, marginalised and vulnerable people. So, the revised fiscal deficit has been estimated to have increased to 9.5 percent of GDP in the year 2020-21 (Table-3). The focus of the budget for the year 2021-22 has now changed to boosting up of aggregate domestic demand. Revised expenditure increased to 34.5 lakh crore from budgeted expenditure of 30.42 lakh crore in the year 2020-21. However, higher quality of expenditure has been maintained with 34.5 percent higher share of capital expenditure than projected. Table-3: Fiscal Indicators S. No. Measure 2020-21 (Revised Estimates) 2021-22 (Budget Estimates) 1. Fiscal Deficit (% of GDP) 9.5 6.8 2. Revenue Deficit (% of GDP) 7.5 5.1 3. Primary Deficit (% of GDP) 5.9 3.1 4. Gross Tax Revenue (% of GDP) 9.8 9.9 5. Non-tax Revenue (% of GDP) 1.1 1.1 Source: Union Budget Documents, 2021 “PLI scheme will increase the size and scale of companies in key sectors wherein job opportunities will arise in the near future.” In spite of tremendous financial pressure, the budgeted fiscal deficit has been proposed to be kept at 6.8 % for the ensuing financial year with gross market borrowings of INR 12 lakh crores. Path of fiscal consolidation is being followed with a serious intention to reach the fiscal deficit to 4.5% of GDP by the year 2025-26 by raising buoyancy of tax revenue through increased compliance and by increased receipts from monetisation of PSUs and public assets. Table-3 shows that the budgeted fiscal deficit for 2021-22 is estimated to be 6.8 percent of GDP which is sharp reduction from the year 2020-21. This sharp decline in fiscal deficit reflects Government’s commitment towards the fiscal health of the economy. The Gross Tax Revenue (GTR) is estimated to grow by 16.7 percent wherein direct tax revenue, indirect tax revenue and non-tax revenue are estimated to grow by 22.4 percent, 11.4 percent and 15.4 percent over the revised estimates of 2020-21. Non-debt capital receipts are estimated to be INR 1,88,000 crores which indicates huge increase of INR 1,41,503 crores over 2020-21. Targeted disinvestment of INR 1,75,000 crores are the main reason behind this estimate. Total net borrowings in BE 2021-22 are projected at INR 9,67,708 crores compared to INR 12,73,788 crores in RE 2020-21 which shows a substantial decline of 25 percent. Concluding Remarks The budget is remarkable in its resolve for Nation First, good governance, inclusive development, doubling farmer’s income, strong infrastructure, healthy India, education for all, opportunities for youth, and Women Empowerment etc. The focus of the budget is two dimensional. First is to supplement the functioning of the private sector through infrastructural development, easing financing norms, easing laws and regulations and disinvestment of public sector. Second is to achieve inclusive development by providing social security, food security, and expanding the access to education and basic facilities for all. In totality the budget tries to address the provision of public goods and services, improve the functioning of markets along with appropriate safety net for poor while speeding up growth to achieve double digit growth in near future through enhanced global competitiveness of Indian companies, structural reforms and self-reliance. The budget also envisages achieving another milestone in achieving ‘minimum government and maximum governance’. — Dr. Rajeev Kumar

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 57–64 (Journal pp. 1081–1088) UNION BUDGET 2021-22 Significant Direct Tax Proposals in The Finance Bill, 2021 - Towards Greater Transparency, Efficiency and Tax Certainty CA. Aparna Chauhan The author is a member of the Institute. She can be reached at eboard@icai.in. “The Union Budget 2021-22 aims to provide strong impetus to an economy that is badly-hit by the novel coronavirus pandemic. The direct tax proposals in the Finance Bill, 2021 seeks to create an enabling framework for an all-inclusive economic growth. It aims to ensure greater efficiency, transparency and accountability in income-tax proceedings. Read on…” A New Faceless Regime encompassing Faceless Assessment Scheme, Faceless Appeal Scheme and Faceless Penalty Scheme was introduced in the Income-tax Act, 1961 (referred as ‘Act’) last year, in order to ensure greater efficiency, transparency and accountability in the proceedings under the Act. In this direction, the Union Budget 2021-22, proposes to also bring the proceedings before the Tribunal under the gamut of Faceless regime. The Finance Bill, 2021 contains the provisions for Constitution of Dispute Resolution Committee (DRC) for small and medium taxpayers and constitution of Board for Advance Ruling for reducing litigations and disputes, the workings of which would also be faceless. An entirely new procedure is being put in place for bringing to tax income escaping assessments (including search assessments), for reducing litigations and for providing ease of doing business to taxpayers. Time limits for completion of assessment u/s 143/144 are proposed to be reduced on account of technological advancement in the processes of assessment. These proposals as well as their impact are discussed at length in this article: I. Revamp of Procedure for Assessment of Escaped Income In the current section 147 of the Act, dealing with income escaping assessment, it is provided, if the Assessing Officer (AO) has reason to believe that any income chargeable to tax has escaped assessment for any assessment year (A.Y.), he may assess or reassess or recompute the total income for such year by issuing a notice u/s 148. Notice u/s 148 can be issued for making assessment or reassessment subject to the time limits prescribed in section 149. Search assessment cases are currently dealt with under sections 153A, 153B, 153C and 153D, where search is initiated u/s 132 or books of account, other documents or any assets are requisitioned u/s 132A, in the case of the assessee, or any other person. The provisions pertaining to search assessment i.e., section 153A/153B/153C/153D, were earlier incorporated in the year 2003 to replace the block assessment. In spite of the same, a spate of litigations emerged over a period of time on these provisions related to search assessments and income escaping assessments. There are plethora of judicial rulings on the provisions contained under section 147, 153A, 153B, 153C and 153D. Accordingly, in order to curtail litigations, the Finance Bill, 2021 has proposed an entirely new procedure of assessment of such cases. Accordingly, sections 147, 148, 149 and 151 are proposed to be substituted. Further, new section 148A is proposed to be inserted to provide for conducting inquiry and giving an opportunity of being heard before issue of notice in certain cases. Relevant provisions for Income Escaping Assessment (including Search Assessment) Section 147 Income escaping assessment Section 148 Issue of notice where income escaped Section 148A Conducting inquiry, providing opportunity of being heard before issue of notice u/s 148 Section 149 Time limit for issue of notice u/s 148 Section 151 Specified Authority Income Escaping Assessment [New Section 147] If any income chargeable to tax has escaped assessment for any A.Y., the AO may assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year. A.Y. for which income has escaped assessment is known as Relevant Assessment Year (RAY) The AO may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section. In such a case, compliance stipulated u/s 148A are not necessary. Issue of notice where income has escaped assessment [Section 148, 148A, 149 & 151] New section 148 lays down the cases where a notice can be issued u/s 148 for making assessment u/s 147. New section 148A specifies the requisite compliances, (with respect to the information suggesting that income chargeable to tax has escaped assessment), to be satisfied, before issuing notice u/s 148. The notice u/s 148 can be issued, within the time limits specified under new section 149 and with the prior approval of the Specified Authority (SA) as referred to in new section 151. When can notice be issued for making assessment u/s 147? The following flow chart provides an overview of the statutory procedure for making assessment u/s 147: Case A: Information in Possession of AO When AO is in possession of following “information” suggesting that income has escaped assessment for the purposes of section 148 & 148A [Explanation 1 to section 148]: Any information flagged for the RAY as per risk management strategy formulated by the Board from time to time. Any final objection raised by CAG that the assessment for RAY has not been made as per the provisions of the Act. Mandatory Section 148A Compliances (with prior approval of SA): Conducting an enquiry, if required, with respect to the information suggesting escapement of income. Providing an opportunity of being heard to the assessee by serving a show cause notice. Based on the material available on record including reply of the assessee, in response to show cause notice, decide, whether or not it is a fit case to issue notice u/s 148, by passing an order, with prior approval of SA. Case B: AO Deemed to Have Information When AO is “deemed to have information” suggesting that income has escaped assessment for the purposes of section 148 [Explanation 2 to section 148]: (1) a search is initiated u/s 132 or books of account, other documents or any assets are requisitioned u/s 132A, on or after 1.4.2021. (2) a survey is conducted u/s 133A on or after 01.04.2021. (3) any money, bullion, jewellery or other valuable article or thing, or any books of account or documents seized or requisitioned, in case of any other person on or after 01.04.2021 belongs to the assessee or any information contained therein, relate to the assessee. Section 148A Compliance Status: In cases (1) and (3) above, compliances stipulated u/s 148A are not necessary [as per proviso to section 148A]. However, in case of survey u/s 133A, such exception has not been expressly spelt out in proviso to section 148A. Deemed Escapement Period: The AO shall be deemed to have information for 3 A.Y.s immediately preceding the A.Y. relevant to the P.Y. in which search/survey/requisition is conducted. AO will serve notice u/s 148 along with a copy of the order passed, if required, u/s 148A, requiring the assessee to furnish Return of Income (ROI) within the specified time limit prescribed u/s 149 for making the assessment u/s 147. Time limit for issue of notice u/s 148 for the RAY [Section 149] Upto 3 years from end of the RAY [Section 149(1)(a)] Notice can be issued within 3 years from the end of the relevant assessment year in normal cases. Beyond 3 years up to 10 years [Section 149(1)(b)] If the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to INR 50 lakh or more for that year. What is the meaning of “Relevant Assessment Year (RAY)”? Explanation 1 to Section 148 Explanation 2 to Section 148 I. Where the information with AO suggests that income has escaped assessment: In such a case, the RAY is the assessment year: for which information is flagged in the system in accordance with risk management strategy formulated by the CBDT or for which CAG has raised final objection II. Where AO shall be deemed to have information suggesting that income has escaped assessment: The RAYs means the 3 A.Y.s immediately preceding the A.Y. relevant to the P.Y. in which the search is initiated u/s 132 or survey is conducted u/s 133A or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person. Let us understand with the help of the following examples, the contextual meaning of RAY and the time limit upto which a notice u/s 148 can be issued in cases mentioned in Explanation 1 & 2 below to section 148. Example 1: In a case, where information is flagged in the system which suggests income has escaped assessment: Information flagged in the system for RAY Date of expiry of the 3 year time limit Can notice be issued on or after 1.4.2021? A.Y. 2016-17 2016-17 31.03.2020 No, notice cannot be issued, since 3 years have elapsed from the end of the RAY. A.Y. 2017-18 2017-18 31.03.2021 A.Y. 2018-19 2018-19 31.03.2022 Yes, notice can be issued, since 3 years have not elapsed from the end of the RAY. A.Y. 2019-20 2019-20 31.03.2023 A.Y. 2020-21 2020-21 31.03.2024 Example 2: Search initiated during P.Y. 2021-22: In a case, where search is initiated u/s 132 during the P.Y. 2021-22, AO is deemed to have information suggesting income has escaped assessment for the 3 A.Y.’s immediately preceding the A.Y. relevant to the P.Y. in which the search is initiated u/s 132. Accordingly, the RAY’s would be A.Y. 2021-22, A.Y. 2020-21 and A.Y. 2019-20. Thus, notice can be issued for these A.Y.’s, since 3 years have not elapsed from the end of the RAY. Applicability of extended time limit of 10 years from the end of RAY As per section 149(1)(b), notice can be issued for the RAY: if 3 years but not more than 10 years have elapsed from the end of RAY, where AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to INR 50 lakh or more for that year. However, the term “asset” has not been defined for applicability of this extended time limit. This needs to be incorporated at the time of enactment of Bill in order to provide clarity. As per Explanation 2 to section 148, AO is deemed to have information for 3 A.Y.s immediately preceding the A.Y. relevant to the P.Y. in which the search is initiated u/s 132 or survey is conducted u/s 133A or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person. Consequently, in these cases, notice can be issued only for these 3 A.Y.’s. The moot point is whether the extended period of 10 years mentioned in section 149(1)(b) for issue of notice u/s 148 would apply in respect of cases covered in Explanation 2 to section 148 (i.e., search & seizure/survey/requisition of books, etc.) or is it intended only for cases covered in Explanation 1 to section 148. The intent is not clear from the language of these sections, since the requirement in section 149(1)(b) that the A.O. should be in possession of books of accounts or other documents (revealing escapement of income, represented in the form of asset, exceeding INR 50 lakhs) seems to indicate that the extended period of 10 years is in respect of search, survey cases etc. referred to in Explanation 2 to section 148; though the said explanation deems income escaping assessment only upto 3 AYs immediately preceding the A.Y. relevant to previous year of search/survey. However, the requirement that possession of “evidence” by AO of income escaping assessment exceeding INR 50 lakhs seems to indicate that it may also apply in respect of a case covered under Explanation 1 to section 148. Specified Authority for the purpose of section 148 and section 148A [Section 151] Upto 3 years from the end of the RAY Principal Commissioner or Principal Director or Commissioner or Director Beyond 3 years from the end of the RAY Principal Chief Commissioner (PCC) or Principal Director General (PDG) where there is no PCC or PDG - Chief Commissioner or Director General II. Reduction in time limits for completion of assessments Existing time limits prescribed u/s 153(1) for completion of assessment u/s 143/144 are proposed to be reduced by three months, keeping in mind the elimination of person-to-person interface between the Taxpayer and the Department and introduction of completely faceless and jurisdiction-less manner of passing assessments orders. Accordingly, the following are the time limits from A.Y. 2017-18 for completing assessment u/s 143/144 :- Assessment Year Statutory Time Limit u/s 153(1) for Assessment Completion For A.Y. 2017-18 21 months from the end of the A.Y. For A.Y. 2018-19 18 months from the end of the A.Y. For A.Y. 2019-20 & A.Y. 2020-21 12 months from the end of the A.Y. A.Y. 2021-22 onwards 9 months from the end of the A.Y. This seems to be consequent to the proposed reduction in time limit for filing belated return u/s 139(4) and revised return u/s 139(5) by three months. In effect, the AOs would continue to have a period of 12 months for completing the assessment. III. Constitution of Dispute Resolution Committee (DRC) In order to prevent new disputes and settle issues at an initial stage, constitution of one or more Dispute Resolution Committee(s) (DRC) has been proposed in the Finance Bill, 2021. This is another welcome move towards providing tax certainty to the taxpayers. At present, a dispute resolution mechanism exists in respect of transfer pricing cases and foreign companies to facilitate expeditious resolution of disputes on fast track basis. Section 144C of the Act lays down the provisions of Dispute Resolution Panel (DRP) in cases where variations are proposed in the assessment order in consequence of the order of TPO, which is prejudicial to the interest of assessee. In such cases, the eligible assessee can file an objection before DRP against the draft assessment order within 30 days of receipt of such order. However, the dispute resolution introduced vide new section 245MA through the Finance Bill, 2021 is intended to provide tax certainty to the small and medium taxpayers and to minimise the disputes at preliminary stage by providing faceless resolution. The provisions pertaining to constitution of DRC are as follows: One or more DRCs to be constituted by the Central Government (CG). DRCs would resolve disputes of such persons or class of person which shall be specified by the Board. An assessee who fulfils the specified conditions can choose to opt for the dispute resolution through the DRC in respect of specified order. Specified Order (SO) An order or draft order, as specified by CBDT, and - aggregate sum of variations proposed in SO does not exceed INR 10 lakhs. total income as per the return filed by the assessee for the A.Y relevant to such order does not exceed INR 50 lakhs. Such order is not based on a search initiated u/s 132 or requisition made u/s 132A or a survey initiated u/s 133A or information received under DTAA. Specified conditions to be fulfilled in relation to a person No order of detention has been made against him under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. No prosecution for any offence punishable under the provisions of the Indian Penal Code, the Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Prohibition of Benami Transactions Act, 1988, the Prevention of Corruption Act, 1988 or the Prevention of Money Laundering Act, 2002 has been instituted and he is not convicted of any offence punishable under any of these Acts; No prosecution has been initiated by an Income-tax Authority for any offence punishable under the provisions of this Act or the Indian Penal Code or for the purpose of enforcement of any civil liability under any law for the time being in force, and he is not convicted of any such offence consequent upon the prosecution initiated by an Income-tax Authority; he is not a person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992; CBDT may prescribe other conditions in due course which would also need to be satisfied for being eligible to opt for dispute resolution under this provision of the Act. Powers of DRC To reduce or waive any penalty imposable under the Act To grant immunity from prosecution for any offence under the Act The above powers can be exercised by DRC subject to conditions to be prescribed. The scheme for faceless working of the DRC will be notified by the CG to impart greater efficiency, transparency and accountability by eliminating interface to the extent technologically feasible, by optimising utilisation of resources and introducing a dispute resolution mechanism with dynamic jurisdiction. IV. Discontinuation of Income Tax Settlement Commission (ITSC) Consequent to the constitution of DRC, Income-tax Settlement Commission (ITSC) proposed to be discontinued, w.e.f. 1st February 2021. Thus, no application can be made before ITSC on or after 1.2.2021. For the disposal of such pending applications before ITSC, one or more Interim Boards of Settlement (IBS) would be constituted by the CG. However, the application in respect of which no order was issued on or before 31.1.2021, would be treated as pending applications, irrespective of the fact that in respect of such applications an order was required to be passed to declare it as invalid. Every Interim Board shall consist of three members, each being an officer of the rank of Chief Commissioner. All the powers exercised by ITSC or functions performed by it, namely, provisional attachment, exclusive jurisdiction over the case, inspection of reports and power to grant immunity shall apply mutatis mutandis to the Interim Board for the disposal of pending applications. V. Constitution of Board for Advance Ruling Another step in the direction of providing certainty to the taxpayers is proposal for constitution of Board for Advance Ruling. The working of AAR has been affected due to the posts of Chairman and Vice Chairman remaining vacant for a long period of time on account of non-availability of eligible persons. This has lead to pendency of large number of applications over the years. There is, therefore, a need to look for an alternative method of providing advance ruling which can give rulings to the taxpayers in timely manner. Therefore, a workable constitution of one or more Boards for Advance Rulings (BAR) has been proposed in the Bill for pronouncing advance rulings under the Act. For this purpose, new section 245-OB is to be inserted providing for the constitution of BAR. As per new section 245W, an advance ruling pronounced by the BAR is appealable before the High Court. Other consequential amendments are also proposed in various sections relating to Advance Ruling in the Finance Bill. Composition of Board for Advance Ruling (Section 245-OB) As per section 245-OB, BAR would consist of Two members who are officers not below the rank of Chief Commissioner. Significant differences between AAR and BAR Authority for Advance Ruling (AAR) Board for Advance Ruling (BAR) I. Binding nature of advance ruling Advance ruling pronounced by the Authority is binding- on the applicant in respect of the transaction on the PCIT or CIT and the income-tax authority subordinate to him, in respect of the applicant and the said transaction Ruling or order passed by the Board for Advance Ruling neither binding on the applicant nor on the Department. Accordingly, section 245S is proposed to be amended to provide that advance ruling pronounced on or after the date as may be notified by the CG would not be binding. II. Appellate/writ remedy Writ petition before the High Court can be filed against such ruling. Appeal against the order or ruling can be filed before the High Court within 60 days from the date of communication of the ruling or order. Authority for Advance Ruling shall cease to operate and BAR will be effective from the date notified by the CG. Consequently, application filed before the AAR on or before such date as may be notified by the CG would be transferred to the BAR along with all the relevant records, documents or material. The working of BAR would be faceless, and the CG may notify a scheme for eliminating interface between the BAR and the applicant. Making the working of BAR faceless is expected to resolve the disputes in timely manner. VI. Appellate Proceedings - Faceless Sans Jurisdiction The Finance Bill, 2021 has also proposed to make ITAT proceedings faceless on the same lines as proceedings before the CIT(Appeals). It is clarified in the memorandum that the aim of introducing faceless working of the Tribunal will not only reduce cost of compliance for taxpayers, but it would also increase transparency in disposal of appeals. It will also help in achieving even work distribution amongst different benches resulting in best utilisation of resources. Section 255 is proposed to be amended to empower the CG to notify a faceless scheme for the purpose of disposal of appeal by the ITAT. Accordingly, all the communication with the taxpayers would take place electronically. It is clarified in the annexures to the Budget Speech that wherever personal hearing is required, the proceeding can take place through video conferencing. It is expected that the faceless scheme so formulated would incorporate provisions for providing opportunity of being heard through video conferencing. To implement the faceless scheme for Tribunals, National Faceless Income Tax Appellate Tribunal Centre would be established. Endnote – Towards giving effect to Taxpayers’ Charter The Taxpayers’ Charter released last year spells out the commitments on the part of the Income Tax Department as well as the expectations from taxpayers. As per the Charter, the Income Tax Department is committed to inter alia provide a mechanism for appeal and review, provide timely decisions and respect privacy of taxpayers. In line with these commitments, the Finance Bill, 2021 seeks to reduce the time limit for completing assessments u/s 143/144 and time limits for issue of notice for reassessment (including search assessments), make the appeal process before the Tribunal faceless, constitute Board for Advance Ruling to provide tax certainty and constitute DRC for resolution of disputes of small and medium taxpayers. While fulfilling its commitment as per the Charter, the Department expects the taxpayers to disclose their income honestly, pay taxes and file returns timely. The Finance Bill, 2021, reflecting the commitment of the Department, would go a long way in instilling the necessary element of confidence in the taxpayers and encouraging them to disclose full information and fulfil their compliance obligations. — CA. Aparna Chauhan

The Chartered Accountant Journal • March 2021 Amendments in TDS/TCS Provisions CA. Avinash Rawani The author is a member of the Institute. Email: arawani@gmail.com • eboard@icai.in Citation: (2021) 69 CAJ 1089–1093 Pages 65–69 • Journal Page Nos. 1089–1093 Executive Overview & Context Over the years it has been observed that TDS is deducted and TCS collected but the corresponding returns of income are not filed within the stipulated time. The Finance Bill, 2021 is set to change the scenario with a significant proposal that is expected to increase the number of return filers. From 1st April, 2021, deductors will have to ensure that before making payment to suppliers and deducting TDS or collecting TCS, the provisions for filing the return of income by certain classes of people are properly complied with. Almost all payments made have been covered for TDS deduction till the last enacted Finance Act, 2020. However, in the proposed Finance Bill, 2021, amendments proposed are only to three existing provisions and the introduction of two new provisions. The amendments and introduction of new provisions are significant and have potential for replacement of Income Tax Returns filings, making it just a procedural submission of documentary evidence for record purposes. Some of the amendments in the proposed provisions are a welcome move as the same were required based on genuine hardships faced by business houses at large and are also in line with globally accepted policies. The Finance Bill, 2021 has also proposed to introduce certain provisions like Section 206AB and Section 206CCA to encourage deductees to file their Returns, pay their correct taxes, and claim their refunds, if any due. Resultingly, the percentage of individual return filers, which are presently less than 1% of the total population of the country, are bound to increase with the implementation of new provisions. The proposed amendments with effective dates have been tabulated as under: Summary of Proposed TDS & TCS Amendments in Finance Bill, 2021 Section TDS/TCS New / Scope Expanded / Relief Assessees Covered Brief Summary of Amendment Basic Exemption Limit Rate of TDS Proposed Effective Date 194 TDS Relief Body Corporate Business Trust notified or any other notified person by Government shall be exempted from deduction. ₹ 5,000 10% 1st April, 2020 194A TDS Relief Infrastructure Debt Company (replaced) Relief to Infrastructure Debt Company. NA – 1st April, 2021 194IB TDS Scope Expanded Non-Filers of Income Tax Returns TDS to be deducted at higher rate in case of certain category of non-filers of Returns. ₹ 50,000 per month 5% 1st April, 2021 194P TDS New Specified Senior Citizens Deductions under Chapter VIA and Rebate under Section 87A to be given. ₹ 5,00,000 10% 1st April, 2021 194Q TDS New Purchase of Goods Purchase of goods exceeding ₹ 50 Lakhs in a financial year to any person. ₹ 50,00,000 0.1%(5% where no PAN/Aadhaar furnished) 1st July, 2021 196D TDS Relief Non Resident Assessees Benefit of Treaty or Income Tax Rate; Lower Rate to be applied. N.A. – 1st April, 2021 Provisions relating to Deductions of Tax effective from 1st April, 2020 Section 194 – TDS on Dividends Provision relating to deduction of TDS on Distribution of Dividend was introduced and made effective from 1st April, 2020 by withdrawing Dividend Distribution Tax (DDT) in the Finance Act, 2020. The second proviso to Section 194 stated that this section shall not apply if dividend is paid to an insurance company or insurers. The Finance Bill, 2021 now proposes to extend this benefit retrospectively also to business trusts and states that if any dividend is paid or credited to a business trust established for a special purpose vehicle (SPV) or in whose hands dividend is exempt, or also payments made to any other person as may be notified by the Government, then TDS will not be deducted. Provisions relating to Deductions of Tax effective from 1st April, 2021 Section 194A – TDS on Interest Other than Interest on Securities In Section 194A of the Income-tax Act, in sub-section (3), in clause (x), after the words “infrastructure capital fund or”, the words “infrastructure debt fund or” shall be inserted. Accordingly, interest payable to an infrastructure debt fund will not be liable for deduction of TDS. Section 196D – TDS on Income of FII from Securities The Section has been modified in order to rationalise the provision concerning withholding on payments made to Foreign Institutional Investors (FIIs). Accordingly, it is proposed to insert a proviso to sub-section (1) of Section 196D of the Act to provide that in case of a payee to whom an agreement referred to in Section 90(1) or Section 90A(1) applies and such payee has furnished the Tax Residency Certificate (TRC) as required under Section 90(4) or Section 90A(4) of the Act, then tax shall be deducted at the rate of twenty per cent or the rate or rates of income-tax provided in such agreement for such income, whichever is lower. Section 194P – TDS on Interest to Specified Senior Citizens Section 194P has been introduced to give specific relief to Senior Citizens. It has been proposed in the Finance Bill that Banks before deducting TDS will have to take into consideration the allowable deductions under Chapter VIA, rebate under Section 87A, and then deduct TDS. The Banks will have to compute the Total Income of specified Senior Citizens and deduct TDS as a certain category of income earners have been exempted from filing of Return of Income. The Banks will have to take appropriate care and precaution as they will be required to report all such details in TDS returns while filing e-returns. The Banks having to update their software accordingly should not be a challenging task in the era of digitisation. “Section 194P has been introduced to give specific relief to the Senior Citizens. It has been proposed in the Finance Bill that the Banks before deducting TDS will have to take into consideration the allowable deductions under Chapter VIA, rebate under Section 87A and then deduct TDS.” For the purpose of this Section, the explanations given by the provisions in the Finance Bill are as under: (a) “Specified bank” means a banking company as the Central Government may, by notification in the Official Gazette, specify; (b) “Specified senior citizen” means an individual, being a resident in India— who is of the age of seventy-five years or more at any time during the previous year; who is having income of the nature of pension and no other income except income of the nature of interest received or receivable from any account maintained by such individual in the same specified bank in which he is receiving his pension income; and has furnished a declaration to the specified bank containing such particulars, in such form and verified in such manner, as may be prescribed. Provisions relating to Deductions of Tax effective from 1st July, 2021 Section 194IB – Payment of Rent by Certain Individuals or Hindu Undivided Family The Finance Bill seeks to include the words, figures, and letters in the said provision “Section 206AA or Section 206AB”, such that TDS is now proposed to be deducted at the higher of the applicable rates of any of such sections, in case of default including non-filing of Return of Income for a consecutive period of two years by a resident individual or HUF rent receiver. Section 194Q – TDS on Purchase of Goods over a Limit In the last Finance Bill, Section 206C(1H) was introduced as a levy being TCS on sale of goods, and this year, a new Section 194Q, being TDS on purchase of goods on similar lines, is proposed to be introduced. The proposed Section mandates TDS on purchase of goods above a specified limit, provided the following conditions are satisfied: Buyer Responsibility: Any person, being a buyer, who is responsible for paying any sum to a resident (hereinafter referred to as the “seller”) for purchase of any goods of the value or aggregate of such value exceeding ₹ 50 Lakhs in a previous year shall deduct 0.1% (5% in cases where no PAN or Aadhaar is furnished) of such sum exceeding ₹ 50 Lakhs as income tax; Turnover Threshold for Buyer: A buyer means a person whose total sales, gross receipts, or turnover from the business carried on by him exceeds ten crore rupees during the financial year immediately preceding the financial year in which goods are purchased; Applicability on Credit: If the amount is credited to any account by whatever name called, these provisions shall apply. However, the Central Government may, by notification in the Official Gazette, specify categories of persons subject to prescribed conditions who shall be exempted from TDS under this section. It is also stated that if the transaction is covered for TDS/TCS under any other provision of the Act and the deductor has deducted such amount, it shall be exempted from this provision. Other Provisions Section 206CC is proposed to be introduced on the lines of Section 206AB wherein the higher of the two rates provided in the section shall apply in case of non-filers of Return of Income. Compliance Provisions – Special Measures for Non-Filers (Sections 206AB & 206CCA) Section 206AB and Section 206CCA have been proposed in the Finance Bill, which will require that the Deductor/Payer will have to ensure that while making payment shall deduct TDS of a resident person under the provisions of Chapter XVIIB (other than Section 192, 192A, 194B, 194BB, 194LBC or 194N), the “specified person” has also filed the Return of Income for the last two financial years immediately prior to the financial year in which payment is made. In case of non-filing of Return of Income by such resident deductee, except in cases where the time limit under Section 139(1) has not expired and the aggregate TDS and TCS in his case is ₹ 50,000 or more in each of these two previous years, then TDS will have to be deducted at the higher of the following rates as applicable under the Section in which payment is made: At twice the rate specified in the relevant provision of the Act; or At twice the rate or rates in force; or At the rate of five percent (5%). On similar lines, the Collector will also have to ensure that while complying with TCS provisions under Chapter XVIIBB, the person from whom payment is collected has filed the Return of Income for the last two financial years immediately prior to the financial year in which collection is made. In case of such non-compliance, TCS will have to be collected at the higher of the following rates as applicable under the Section in which payment is required to be collected: At twice the rate specified in the relevant provision of the Act; or At the rate of five percent (5%). “CPC/Government will provide Online verification mechanism on the website of ITD, in the due course, which will enable the Deductor/Payer to verify whether the Payee/Recipient has filed the Return of Income for the last two years or not as it has now become very user friendly after the implementation of CPC 2.0.” The CPC/Government will provide an Online verification mechanism on the website of the Income Tax Department (ITD) in due course, which will enable the Deductor/Payer to verify whether the Payee/Recipient has filed the Return of Income for the last two years or not, as it has now become very user-friendly after the implementation of CPC 2.0.

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 70–73 (Journal pp. 1094–1097) UNION BUDGET 2021-22 Equalisation Levy – Proposed Amendments in 2021 CA. Ankit Arora The author is a member of the Institute. He can be reached at eboard@icai.in. “There has been massive upsurge in digital transactions in the last few years, particularly during COVID-19 pandemic when the whole world has taken up digitalisation in a big way. This may be owed to a number of reasons including wider reach and ease of business. The growing acceptability and spread of digital transactions can be judged from the fact that as per United Nations Conference on Trade and Development (UNCTAD) the total value of global e-commerce transactions, both domestic and cross-border stood at US 25 trillion in 2015 an increase of around 56 percent compared to 2013, this might have grown substantially in the recent years. Read on…” The biggest advantage of the digital business over traditional brick and mortar form of business is the ease with which companies can promote and sell their goods, and that too at a reduced cost. From a customer perspective it brings advantages in the form of ease in procurement as well as lesser cost in cases where a part of cost saved is passed on by the company to the consumer. Digital platforms are becoming the new market place due to spread of internet and increased mobile connectivity. While digitalisation on the one hand is changing the business dynamics including the way business is done, it is also posing some serious challenges for the tax authorities worldwide. The major challenge is that the existing international tax rules provides taxing rights to one jurisdiction only if nexus is established and one of the key characteristics of a digital business is ability to operate remotely without creating any physical presence. Thus, existing international tax principles have been rendered somewhat inadequate to tax digital transaction and this has created concern in tax jurisdictions across the globe, more so the ones with large consumer base, as they tend to lose a substantial share of tax revenue. Recognising this, on the initiation of G20, under the Base Erosion and Profit Shifting (BEPS) project, OECD examined challenges to the existing tax system due to digitalisation of economy. This resulted in BEPS Action Plan 1, published in 2015. Since, then a lot of work has been done in this direction including proposals to allocate taxing rights to the user jurisdiction as well as mechanism for determination of taxable income. However, considering the existing differences between member countries and conditions due to COVID pandemic, it would still require considerable time for OECD to come out with a globally accepted approach. While the OCED through its task force is working aggressively to devise an appropriate methodology to tax digital transactions, various countries, including India, considering the magnitude of digital transactions and impact it has in terms of loss of tax revenue, have adopted one sided measure to tax digital revenues derived from their jurisdiction. India introduced Equalisation Levy to tax certain digital transactions. “While the OCED through its task force is working aggressively to devise an appropriate methodology to tax digital transactions, various countries, including India, considering the magnitude of digital transactions and impact it has in terms of loss of tax revenue, have adopted one sided measure to tax digital revenues derived from their jurisdiction.” Equalisation Levy in India Equalisation Levy (EL) was introduced by the Finance Act, 2016 (effective from 1st April 2016) wherein digital services in the nature of advertisement, provision of space for digital advertisements or any other facility or services for the purpose of online advertisement were made subject to equalisation levy of 6%. Thus, any resident making payment to a non-resident for any of the above services is required to deduct equalisation levy and pay the amount to the credit of central government within 7 days from the end of month in which EL was deducted. The rationale for introducing this levy was explained in the Memorandum to the Finance Bill, 2016 as follows: “Considering the potential of new digital economy and the rapidly evolving nature of business operations it is found essential to address the challenges in terms of taxation of such digital transactions as mentioned above. In order to address these challenges, it is proposed to insert a new Chapter titled “Equalisation Levy” in the Finance Bill, to provide for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.” “Equalisation Levy (EL) was introduced by the Finance Act, 2016 wherein digital services in the nature of advertisement, provision of space for digital advertisements or any other facility or services for the purpose of online advertisement were made subject to equalisation levy of 6%.” Amendment by Finance Act, 2020 The scope of EL has further been enhanced by Finance Act, 2020, to include e-commerce operators. E-commerce operator is defined as a non-resident that owns, operates, or manages a digital or electronic facility or platform for online sale of goods or the online provision of services. Thus, all e-commerce operators meeting the prescribed conditions will be required to pay a 2% equalisation levy on consideration received or receivable. The EL provisions relating to e-commerce operators are contained in section 165A reads as below: Section 165A(1): “(1) On and from the 1st day of April, 2020, there shall be charged an equalisation levy at the rate of two per cent. of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it— to a person resident in India; or to a non-resident in the specified circumstances as referred to in sub-section (3); or to a person who buys such goods or services or both using internet protocol address located in India.” Section 164 further contains definition of various terms used herein. Some of the important definitions captured therein are reproduced as below: “e-commerce operator” means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both; “e-commerce supply or services” means— online sale of goods owned by the e-commerce operator; or online provision of services provided by the e-commerce operator; or online sale of goods or provision of services or both, facilitated by the e-commerce operator; or any combination of activities listed in clause (i), (ii) or clause (iii); “online” means a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network; “e-commerce operator means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.” “EL is supposed to be a temporary measure until an approach which has global consensus is developed by OECD.” Some of the concerns relating to interpretation of various terms are: Double taxation & credit denial: EL provisions were kept under a separate chapter implying that the credit for the same will not be available in the home country of the e-commerce operators. Thus, this will lead to double taxation and global MNE groups may be inclined to pass on this additional cost to consumers either wholly or partly; Ambiguity in key definitions: Definitions of certain terms were not very clear leading to various interpretation. For e.g., the definition of the term “e-commerce” operator was defined in a manner to even include some of the services such as IT support, database access, etc. provided by one non-resident group company to another group company in India. Similarly, the term “online” was given very wide connotation to include any facility or service or benefit or access obtained through internet or any other form of digital or telecommunications network. Royalty/FTS overlap: It was not specifically mentioned, that income earned by non-resident e-commerce operator in the nature of royalty/fee for technical services will continue to be governed by existing provisions or will be subject to EL. More clarity is required around the nature of transactions proposed to be covered by EL provisions. Amendments Proposed by the Finance Bill 2021 Recognising the issues mentioned above the government on Feb 01, 2021 vide Finance Bill, 2021 has provided clarity on some of the aspects as mentioned above. Some of the major amendments proposed include: Income taxable as royalty or fee for technical services not to be included within the ambit of EL It is proposed to amend section 163, subsection (3) to include a proviso to clarify that considerations received or receivable for specified services and for e-commerce supply or services shall not include the consideration, which are taxable as royalty or fees for technical services in India under the Income-tax Act, read with the agreement notified by the Central Government under section 90 or section 90A of the said Act. Clarification on online sale of goods and services Further, an explanation has been added to the definition of “e-commerce supply or services”, wherein, “online sale of goods” and “online provision of services” shall include one or more of the below mentioned parameters to be identified as an e-commerce supply or service: acceptance of offer for sale; or placing of purchase order; or acceptance of the purchase order; or payment of consideration; or supply of goods or provision of services, partly or wholly; Other Clarifications It has been further clarified that irrespective of the fact whether an e-commerce operator owns the goods, provides online services or facilitates said online services, the consideration received or to be received shall include the consideration as per the mentioned clarification. Another anomaly sought to be removed by the government is through the corresponding amendment in Section 10(50) to provide for exemption of income on which equalisation levy was levied with retrospective effect from April 01, 2020. Thus, all the transactions on which equalisation levy was introduced are exempt from any charge of Income tax. “It has been further clarified that irrespective of the fact whether an e-commerce operator owns the goods, provides online services or facilitates said online services, the consideration received or to be received shall include the consideration as per the mentioned clarification.” Concerns to be addressed It goes without saying that EL is an additional tax burden on the companies and this coupled with the fact that it is intended to be applied as a unilateral measure where corresponding relief/tax credit is not available in the home country may give rise to double taxation, unless a suitable clarification is provided in the Income-tax Act, 1961. EL is supposed to be a temporary measure until an approach which has global consensus is developed by OECD. However, the concern amongst business remains as to what would happen in case where a globally accepted approach is not possible or there are considerable delays in formulating such an approach. While the clarification provided by government through Finance Bill 2021 will certainly help businesses in evaluating the applicability of these provisions on their businesses there are still a lot of factors surrounding the provisions which needs to be addressed, such as: Double taxation & absence of treaty protection: The major issue with EL which has not been addressed so far is the double taxation caused by it. As mentioned earlier EL is outside the scope of Income Tax Act 1961 thus treaty benefits with respect to the same are not available. Excessively wide scope: Further, EL provisions in its present shape seems to have a very vide applicability and cover almost all digital transactions. Heavy compliance & PAN requirements: EL would impose additional compliance burden on non-resident e-commerce operators. The EL provisions relating to e-commerce operators cast liability on non-resident operators to pay the amount of EL to government within stipulated time. This also requires the e-commerce operator to obtain Permanent Account Number (PAN) in India as well as comply with other procedural requirements. Consumer cost pass-through: From consumer perspective, there is no provision restraining large e-commerce operator to shift burden of EL on to the customers making the transactions costlier for the Indian taxpayers. The concern of the tax department in protecting the tax base in respect of digital transactions is genuine and they are within their rights to look for the possible methodologies for taxing such transactions. India, similar to many other tax jurisdictions, has adopted unilateral measures to protect their tax base and this is supposed to continue till global community does not talk in one voice to find the concerns regarding taxation of digital economy. Given this scenario, Indian authorities may take into consideration the Achilles heel of business to find fruitful remedies to curb double taxation, increased burden of compliance and transaction costs. — CA. Ankit Arora

The Chartered Accountant Journal • March 2021 Board for Advance Rulings and Tax Certainty CA. Sharad Goyal* • S. P. Singh** *The author is a member of the Institute. **The author is former IRS officer. They can be reached at spsingh54@gmail.com and eboard@icai.in Citation: (2021) 69 CAJ 1098–1102 Pages 74–78 • Journal Page Nos. 1098–1102 Executive Summary & Scope Finance Bill, 2021 proposes to amend the provisions with aim to pronounce timely rulings to taxpayers. The article discusses the proposed changes in light of international experiences and suggests measures that can make the new scheme more effective and efficient. Read on… Taxation, in one or other form, has been consistent companion of business. More than two centuries back Benjamin Franklin said that, “in this world, nothing is certain except death and taxes”. This being so, the quest has been to have a tax system under which, as said by Chanakya in the Arthashastra, government should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive. Now, the question is what the qualities of a good tax system should be. Adam Smith identified fairness, certainty, convenience and efficiency as the four canons of taxation. Undoubtedly, all four are important, but for businesses it is “certainty” of a tax system which is a necessity for making any long term business plan. With changes in the way business is conducted due to changes in technology, looking for certainty is not easy. In such a scenario, business wants clarity of the tax liability based on the tax law existing at the time of the planning the business. As tax provisions, majorly, are given to differing interpretations disputes arise leading to uncertainty. These have given rise to demand for advance rulings by tax authorities. Several countries have adopted one or multiple ways of advance rulings. India introduced Authority for Advance Rulings (AAR) in 1993 which was received by all with a lot of expectations. It sought to provide certainty to non-residents interested in investing in India, and at the same time wanted to avoid any tax litigation. However, expectations are more. Finance Bill, 2021 proposes to amend the provisions with aim to pronounce timely rulings to taxpayers. Types of Advance Rulings Advance ruling is broadly defined as written opinion/decision by an authority empowered to render it with regard to the tax consequences of a transaction or a proposed transaction or a legal position. The global best practice for advance ruling encompasses two types of rulings: Public Ruling – It represents the administration’s interpretation of particular provisions of law that effect a large number of taxpayers and are issued in the form of interpretative ruling or clarifications. They bind the tax officers but not taxpayers who can resort to the remedies provided under law where they disagree with the ruling. The Central Board of Direct Taxes (CBDT) issues Circulars, Frequently Asked Questions (FAQs), etc. under this category. Private Ruling – These are specific to a taxpayer and specified transactions. These are issued on specific request by a taxpayer. The objective is to provide support and a greater level of certainty to the taxpayers. The system of advance rulings are examples of such rulings. Oral Rulings – An oral ruling is a form of legally binding advice give over the phone to taxpayers who are individuals. This is prevalent in Australia.1 It gives opinion of the Australian Tax Office on how a provision of the law applies to an individual in relation to their specific circumstances. Generally, oral rulings are given on areas of the law such as personal income tax or the Medicare levy. International Experience 1. Timeline A common feature present in almost all systems of advance rulings is a defined timeline for issuing the rulings. Mostly, it is less than one year. The position in some of the countries are as follows: Less than 3 months: United Kingdom (30 days); Austria (2 weeks to 1 year; however, under the Express Answering System time taken is not more than 3–4 weeks); Belgium (1–3 months); Less than a year: Denmark (typically, 6–8 months); France (6–9 months). 2. Constitution of Authority The constitution of authorities differs from country to country. In most of the countries the authority works under the tax department and manned by the officers. For example, in Japan Advance ruling authorities are part of the tax authorities and not a separate body. Similarly, the authority in South Africa and Malaysia is part of the tax department. The position in the Netherlands is interesting. Originally, the tax inspector was giving the ruling. The position changed in 1991 when the issuance of advance rulings in respect of certain international transactions has been centralised at a one-stop shop within the tax authorities. This has further been modified after reforms in 2001 and 2004. The Netherlands has one of the most efficient, robust and open system of advance rulings. The most interesting set up is in Sweden, where the members and deputies are appointed by the government who are tax experts with experience from various business areas such as courts, authorities, universities, etc. 3. Binding Nature The position regarding the binding nature varies from country to country.2 In most of the countries such as Portugal, Spain, Germany, Denmark, etc. it is binding on tax authorities, but not on taxpayers. In Austria it is binding neither on tax administration nor on taxpayers. In Italy, it is not binding on tax administration, while in Luxembourg it is not binding on tax administration only in case of change in law. If the rulings are not obtained in “good faith” or incorrect or incomplete information is provided by taxpayer then in many jurisdictions the rulings are not binding. “Accordingly, a new chapter was inserted by the Finance Act, 1993, in the Income-tax Act, 1961 (‘ITA’ or ‘the Act’), creating the AAR scheme in order to provide certainty, avoid needless litigation in respect of transactions involving non-residents in India.” Tax Disputes and Need for Authority for Advance Rulings (AAR) – Position in India As of March 2018, there were approximately 1,39,221 direct taxes cases under consideration at the level of ITAT, High Courts and Supreme Court. Just 0.2% of these cases constituted nearly 56% of the total demand value; and 66% of pending cases, each less than ₹ 10 lakhs in claim amount, added up to a mere 1.8% of the total locked-up value of pending cases as can be seen from Table 1. Table 1 – Pending Direct Tax Cases and Demands (Amount in INR billion) Financial Year Commissioner of Income Tax (Appeals) CIT(A) ITAT High Court Supreme Court No of cases Amount No of cases Amount No of cases Amount No of cases Amount 2014-15 232,126 3,839 37,506 1,455 34,281 377 5,661 46 2015-16 258,898 5,162 32,834 1,359 32,138 1,614 5,399 70 2016-17 290,227 6,112 37,968 1,438 38,481 2,878 6,357 80 2017-18 304,000 5,185 37,353 2,350 39,066 1,960 6,224 118 2018-19 339,000 5,628 92,205 NA 38,539 1,365 4,425 744 (Source: Report of the Comptroller and Auditor General of India, for the year ending March 2019 Pages 11 and 12) The Economic Survey, 2017-18 highlighted poor success rate in appeals filed by the government. Table 2 shows that though tax department is the biggest litigator (more than 85% cases are filed by the department) the success rate of the Department in Direct Tax cases at all three levels of appeal – ITAT, High Court and Supreme Court is low (under 30%). Table 2 – Success Rate and Petition Rate of Tax Department Courts Success Rate Petition Rate Supreme Court 27% 87% High Courts 13% 83% ITAT 27% 88% (Source: Economic Survey 2017-18, Ministry of Finance) Tax litigation in India has not been a wining proposition, creating disincentive. This was appreciated by various Committees constituted by the government. Finally, while delivering the Budget Speech for 1992, the then Finance Minister accepted need for the Authority for Advance Ruling. Accordingly, a new chapter was inserted by the Finance Act, 1993, in the Income-tax Act, 1961 (“ITA” or “the Act”), creating the AAR scheme in order to provide certainty, avoid needless litigation in respect of transactions involving non-residents in India. In 2000, the government extended the jurisdiction of the AAR to Public Sector Undertakings established under Central, State or Provincial Act or Government Companies for an issue related to computation of income pending before income tax authority and to other residents for determining tax liability for a transaction with non-resident. In 2014, the scope was further expanded to include resident taxpayers where the tax liability in respect of a transaction exceeds 100 crore rupees. Further, with the introduction of provisions of General Anti Avoidance Rules (GAAR) in the Indian statute, the Government has yet again expanded the scope of AAR to include that all taxpayers (i.e., residents and non-residents) may seek advance ruling on whether an arrangement undertaken is an impermissible avoidance arrangement or not. These changes of widening the ambit of application eligible for AAR is a clear reflection of its serious intent and growing popularity. “Section 245R(6) provides that the AAR shall pronounce rulings within six months of the receipt of application.” Features of Existing AAR The provisions regarding AAR are in Chapter XIX-B of the Act. It runs from section 245N to 245V. AAR has one Principal Bench in Delhi, one bench in NCR and one bench in Mumbai. AAR consists of a Chairman and various Vice-Chairmen, revenue member and law members. The principal bench consists of Chairman, one revenue member and one law member. The other benches consist of one Vice-Chairman, one revenue member and one law member, each. A bench cannot function, if the post of Chairman or Vice-Chairman is vacant. As per Section 245-O of the Act, persons eligible for appointment as Chairman of AAR are retired Judges of the Supreme Court, retired Chief Justice of a High Court or a retired Judge of a High Court who has served in that capacity for at least seven years. Similarly, the person eligible for appointment as Vice-Chairman are retired judges of a High Court. Section 245R(6) provides that the AAR shall pronounce rulings within six months of the receipt of application. However, it has been observed that in several occasions rulings were issued much beyond the time limit of six months. The disposal rate of AAR was 80% in FY 2006-07. From FY 2010-11 onwards the disposal rate came down abysmally low within the range of 6% to 23% during the period FY 2010-11 till FY 2017-18. Section 245S of the Act makes the rulings binding on tax administration as well as on taxpayer who had sought it and is non-appealable. In reality, both tax administration and taxpayers take the matter to High Courts of law under the writ provisions of the Constitution of India. AAR – Changes Proposed by the Finance Bill, 2021 The Memorandum to the Finance Bill, 2021 mentions that AAR is proposed to be replaced by a Board of Advance Ruling (BAR). It is proposed that the Central Government shall constitute one or more BAR for giving advance rulings. Each such Board shall consist of two members, each being an officer not below the rank of Chief Commissioner of Income Tax. The advance ruling will neither be binding on tax administration nor on taxpayers. It is, also, proposed that an appeal to High Court against the ruling by the BAR can be filed by the taxpayer as well as tax administration. The appeal shall be filed within sixty days from the date of the communication of such ruling or order. On the date of notification of BAR provisions, all the pending applications before AAR will be transferred to BAR. Comparative provisions are summarized below: Comparative Summary: Authority for Advance Rulings (AAR) vs. Board of Advance Ruling (BAR) Particulars Authority of Advance Ruling (AAR) Board of Advance Ruling (BAR) Introduced Finance Act, 1993 Finance Bill, 2021 Applicability of Ruling Binding on both parties i.e., applicants and tax department Neither binding on applicant, nor on tax department Member Chairman (Retired SC/HC judges) Vice Chairman (Retired HC judges) One Law Member One Revenue Member Two members each being officer of not below the rank of Chief Commissioner Appeal against Ruling No appeal is possible against the ruling of the AAR. Only remedy available is to file writ petition with the HC, which is a constitutional remedy. Ruling of BAR will be appealable before the HC “It is proposed that the Central Government shall constitute one or more BAR for giving advance rulings. Each such Board shall consist of two members, each being an officer not below the rank of Chief Commissioner of Income Tax.” Concerns and Remedies A perusal of the existing provisions regarding AAR shows that it has all the desirable features of a good system – it consists of members who are independent of the tax department, it makes the rulings binding on taxpayers as well as the tax administration and has prescribed a time limit of six months for the issue of rulings. It is to be seen how well the proposed changes are going to bring in a system providing certainty to taxpayers. “Timeline and certainty are the two areas of concerns to be taken care by the proposed amendments in order to increase the effectiveness of advance ruling facility.” Timeline and certainty are the two areas of concerns to be taken care by the proposed amendments in order to increase the effectiveness of advance ruling facility. As has been mentioned earlier, globally, within 3–6 months rulings are issued by the authorities. Similar timeline should be prescribed in India, too. If there is any delay on the part of taxpayer or there is any specific request by taxpayer for delaying the ruling that time may be excluded while computing the timeline. So far as certainty is concerned the proposed changes may not meet the objective of reducing litigation and providing certainty to investors in India. With right of appeal to the tax department as well as to taxpayer, the BAR would work as a normal litigation body and not a “Dispute Prevention” body. A shorter time frame for obtaining a final resolution under the normal litigation process, would facilitate foreign or domestic investors. Government may consider borrowing the concepts of advance rulings from Advance Pricing Agreement (APA) scheme, which has been very successful in bringing down transfer pricing disputes in India. A conciliatory approach adopted by tax administration and taxpayers have inclination and capabilities to reach a mutually beneficial dispute resolution. 1. https://www.ato.gov.au/General/ATO-advice-and-guidance/ATO-advice-products-(rulings)/Oral-rulings (accessed in February 2021) 2. https://www.accountancyeurope.eu/wp-content/uploads/Advance_tax_rulings.pdf (accessed in February 2021)

The Chartered Accountant Journal • March 2021 Key Changes in Indirect Taxes Regime CA. Purushothaman J. The author is a member of the Institute. Email: eboard@icai.in Citation: (2021) 69 CAJ 1103–1109 Pages 79–85 • Journal Page Nos. 1103–1109 Executive Overview & Context The hon’ble Finance Minister has presented her paperless budget on first of February this year. For the first time in India’s independent history, the Union Budget was delivered in paperless form. Though it was paperless it was not an issueless budget as it made several key changes to uplift the economy and bring growth. This article intends to explain the various important amendments proposed by the Hon’ble FM with regard to indirect taxes. Read on… A. Changes in Central Goods and Services Tax Act A.1 Scope of Supply – Amendment to Section 7 and Schedule II The term supply is defined by section 7 of the CGST Act. The Finance Bill seeks to insert, with retrospective effect from 01/07/2017, a sub-clause (aa) in sub-section (1) of section 7. The amendment proposes to bring within the scope of supply the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration. Further an explanation has been added that, notwithstanding anything contained in any other law for the time being in force or any judgement, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another. Further clause no. 113 of the Finance Bill proposes to omit paragraph 7 of Schedule II of the CGST Act with retrospective effect from 1st July 2017. Paragraph 7 of Schedule II of the CGST Act is reproduced below: “The following shall be treated as supply of goods, namely: Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration” The proposed amendment nullifies the decision of the Supreme Court in the Calcutta Club case wherein it was held that the transaction between an Association and its members is not leviable to Sales tax or service tax. However whether this decision is equally applicable to GST Laws is a debatable issue. The above amendments intend to put at rest any controversy on this issue. Another issue which may arise because of this amendment is whether the transaction between a partnership firm and its partners represented by way of salary or share of profit will also constitute a supply. The usage of the words “activities or transaction by a person other than individual, to its members” is wide enough to cover the transactions between a Firm and its partners. It shall be in the larger interest of the trade and industry, if the CBIC comes out with a clarification/exemption notification in this regard. A.2 Input Tax Credit – Amendment to Section 16 The Finance Bill proposes to insert clause (aa) after clause (a) in subsection (2) of section 16. Subsection (2) enumerates various conditions for claiming input tax credit. By the proposed amendment, one more condition is added for claiming Input Tax Credit that the details of the invoice or debit note has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37. Presently the supplier furnishes the information of his outward supply by furnishing Form GSTR 1 which is communicated to the recipient in form GSTR 2A and GSTR 2B. GSTR 2A and 2B have got different characteristics. In GSTR 2A the information is reflected in the month in which the invoice is raised by the supplier. But GSTR 2B will reflect only the invoices furnished by the supplier in GSTR 1 which is filed up to 11th of the following month. If there is a delay on the part of the supplier in filing GSTR 1 beyond 11th of the following month, the corresponding invoices shall be reflected in the GSTR 2B of the recipient pertaining to the month in which GSTR 1 is actually uploaded by the supplier. Presently under rule 36(4) the taxpayer can claim up to 5% over and above the credit reflected in GSTR 2B. With the above proposed amendment, which restricts the ITC to the amount reflected in form 2B, the benefit of 5% extra claim may be withdrawn by notification. A.3 Audit and Annual Return – Section 35 and Section 44 Subsection (5) of Section 35 requires every registered person, whose turnover exceeds the prescribed limit, to get his accounts audited. The Finance Bill proposes to omit subsection (5) of section 35. Hence the audit requirement under CGST is dispensed with. This amendment is to be read in conjunction with the modification of Section 44. Section 44 which prescribes filing of annual return is proposed to be substituted. The proposed amendment provides for furnishing a self-certified reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year, with the audited annual financial statements. A.4 Charging of Interest – Section 50 Section 50(1) of the CGST Act provides for payment of interest for delayed payment of tax. There was an interpretational issue as to whether the interest is to be calculated on the gross tax before adjusting ITC or net tax paid by cash after adjusting ITC. The Finance Act, 2019 inserted a proviso in section 50(1) which clarified that the interest is to be paid only on the portion of the tax which is paid by debiting cash ledger subject to the following conditions: Supplies made during a tax period and declared in the return for the said period Such return is not furnished after commencement of any proceedings under section 73 or section 74 The above amendment was only prospective. Now the current Finance Bill proposes to make it retrospective from 01/07/2017. This is a welcome measure and a large number of members of trade and industry shall stand benefitted. A.5 Recovery of Self-Assessed Tax – Section 75(12) Subsection (12) of section 75 provides for recovery under section 79 of self-assessed tax as per return filed under section 39, if it remains unpaid or any amount of interest payable on such unpaid tax. An explanation is proposed to be inserted in section 75(12) to define self-assessment tax that it shall include tax payable on outward supplies declared in Form GSTR 1 but not included in the return filed under section 39. A.6 Extension of the Power of the Commissioner to Attach Properties – Section 83 Section 83 gives power to the Commissioner, during the pendency of certain proceedings, to provisionally attach any property including bank accounts belonging to the taxable person. The amendment proposes to extend this power to the properties belonging to persons specified in subsection (1A) of section 122. Such specified persons are: any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clauses (ix) of sub-section (1) of section 122 and at whose instance such transactions are conducted. A.7 Release of Goods and Conveyance Detained or Seized – Section 129 Section 129 provides for levy of tax and penalty for release of detained/seized goods and conveyances in transit, while they are in transit in contravention of the provisions of the CGST Act and rules. The existing provision provides for levy of tax and penalty for release of such goods and conveyance, whereas the amended provision contemplates only levy of penalty. Both the existing provision and proposed amendment contemplate two situations and the relevant provisions are explained below: Situation 1: Where the owner of goods comes forward for payment of such tax and penalty: Existing Provision: The goods and conveyance shall be released on payment of the applicable tax and penalty equal to 100% of the tax payable. However, if the goods transported are exempted goods, the goods and conveyance shall be released on payment of an amount equal to 2% of the value of the goods or ₹ 25,000, whichever is less. Proposed Amendment: Provides for release of goods and conveyance on payment of penalty only equal to 200% of the tax payable on such goods. In the case of exempted goods, there is no change. Situation 2: Where the owner of the goods does not come forward for the payment of tax and penalty: Existing Provision: The goods and conveyance shall be released on payment of applicable tax and penalty equal to 50% of the value of the goods reduced by the tax amount paid thereon. In the case of exempted goods, the goods and conveyance shall be released on payment of an amount equal to 5% of the value of the goods or ₹ 25,000, whichever is less. Proposed Amendment: Provides that the goods and conveyance shall be released on payment of only penalty equal to 50% of the value of the goods or 200% of the tax payable on such goods, whichever is higher. In respect of exempted goods, there will be no change. Sub-section (3) of section 129 lays down the procedure for issue of notices and passing of an order for payment of tax and penalty. But the existing provision does not have a time limit. The proposed amendment sets out a time limit for issue of notice and passing an order. Notice shall be issued within seven days of such detention or seizure. The notice shall specify the penalty payable and the order shall be passed within a period of 7 days from the date of service of notice. The existing sub-section (6) of section 129 provides that where there is a failure to pay the amount of tax and penalty within 14 days of detention or seizure, further proceeding shall be initiated in accordance with the provisions of section 130. The proposed amendment delinks this provision with section 130 and provides as follows: The time limit for payment of tax has been increased to fifteen days from the date of receipt of the copy of the order. Where the detained or seized goods are perishable or hazardous in nature or are likely to depreciate in value with passage of time, the said period of fifteen days may be reduced by the proper officer. In the case of default of payment within the specified time limit, the goods or conveyance so detained or seized shall be liable to be sold or disposed of to recover the penalty. However, the conveyance can be released on payment by the transporter the amount of penalty or one lakh rupees, whichever is less. A.8 Appeal – Section 107 A proviso is proposed to be inserted in sub-section (6) of section 107 of the Central Goods and Services Tax Act to provide that no appeal shall be filed against an order under sub-section (3) of section 129 (order levying penalty for release of detained/seized goods and conveyance) unless a sum equal to twenty-five per cent (25%) of the penalty has been paid by the appellant. A.9 Levy of Fine and Penalty for Confiscation of Goods and Conveyance – Section 130 As per the 2nd proviso of sub-section (2) of section 130, the fine and penalty leviable under section 130 was linked to sub-section (1) of section 129. The proposed amendment delinks the above provision from sub-section (1) of section 129 and independently provides that the fine and penalty leviable shall not be less than 100% of the tax payable on such goods. B. Changes in Integrated Goods and Services Tax Act Under the existing provision 16(1)(b), supply of goods or services or both to a special economic zone developer or a special economic zone unit is considered as zero rated supply. This section is proposed to be amended to make supplies for authorised operations only, as Zero rated supply. Existing provision 16(3) is being completely overhauled. As per the existing provisions, a registered person making zero rated supply has got two options to claim refund: Option 1: Make supply of goods or services or both without payment of IGST under bond or LUT and claim refund of unutilised ITC. Option 2: Make supply of goods or services or both on payment of IGST after adjustment of ITC and claim refund of IGST paid. Under the proposed amendment, Option 1 is retained with an added condition that the registered person making zero rated supply of goods shall, in case of non-realisation of sale proceeds, be liable to deposit the refund so received along with the applicable interest within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (FEMA) for receipt of foreign exchange remittances. Option 2 is withdrawn. Instead, sub-section (4) has been added which empowers the Government, on the recommendations of the Council, to specify by notification: A class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid; A class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid. C. Changes in Central Sales Tax Act As per the existing section 8(3)(b) of the C.S.T. Act, a dealer can make interstate purchases of goods at a concessional rate if the said goods are specified in his registration certificate and are used for the following purposes: Intended for resale Manufacturing or processing of goods for sale In the telecommunication network In mining In generation or distribution of electricity or any other form of power “The concession given to telecommunication network, mining and generation and distribution of electricity or any other form of power is proposed to be withdrawn.” The concession given to telecommunication networks, mining, and generation and distribution of electricity or any other form of power is proposed to be withdrawn. In the present scenario, after the implementation of GST, only specified petroleum products are chargeable under CST. Before the proposed amendment, these specified petroleum products could be purchased at a concessional rate even if used for purposes mentioned in (c), (d) and (e) above. Hence, after the amendment, one cannot purchase the specified petroleum products at a concessional rate for use in telecommunication networks, mining, or generation and distribution of electricity/power. D. Changes in Customs Law D.1 Prescription of Expiry Date for Conditional Exemptions Section 25 of the Customs Act, 1962 gives powers to the Central Government to exempt generally either absolutely or subject to such conditions from the whole or any part of duty of Customs. The Bill seeks to insert sub-section (4A) in section 25 to provide that any conditional exemption granted, unless otherwise specified, shall be valid only up to 31st day of March falling immediately after 2 years from the date of such exemption. The Bill also seeks to provide that in respect of such conditional exemptions which are in force as on the date on which the Finance Bill, 2021 receives the assent of the President, the prescribed period of two years shall be reckoned from the first day of February, 2021. It may be noted that this time limit for exemption is prescribed only in respect of conditional exemptions and not in respect of general or absolute exemptions. D.2 Time Limit for Issue of Notice Where Audit, Search, Seizure or Summons Are Initiated Section 28 of the Customs Act provides a time limit for issue of notice for recovery of duties not levied etc., within a period of 2/5 years as the case may be from the relevant date. The law provides for different relevant dates under different circumstances in explanation (1). However, it does not provide for the relevant date for calculating the time limit for issue of notice under section 28 of the Customs Act in circumstances where audit, search, seizure or summons have been initiated. Now the Bill provides that the time limit of two years shall be calculated from the date of initiation of audit, search, seizure or summons, as the case may be. The amendment also gives power to the Principal Commissioner / Commissioner of Customs to extend the said period for a further period of one year. D.3 Time Limit for Presenting the Bill of Entry Presently the Law allows presenting the bill of entry before the end of the next day following the day (excluding holidays) on which the aircraft or vessel or vehicle carrying the goods arrives at a customs station. Now the Bill seeks to provide for presenting the bill of entry before the end of the day preceding the day on which the aircraft or vessel or vehicle carrying the goods arrives at a customs station. “Bill seeks to provide for presenting the bill of entry before the end of the day preceding the day on which the aircraft or vessel or vehicle carrying the goods arrives at a customs station. Further the Board is being given the power to prescribe different time limits for presentation of the bill of entry.” Further the Board is being given the power to prescribe different time limits for presentation of the bill of entry. However, the power to prescribe the time limit cannot go beyond the end of the arrival of such vessel, aircraft, etc. D.4 Confiscation of Goods – Section 113 Section 113 of the Customs Act provides for confiscation of goods attempted to be improperly exported. It specifies the various circumstances under which export goods can be confiscated. The Bill adds one more situation by inserting sub-clause (ja) in section 113. As per this clause, any goods entered for exportation under wrong claim of remission or refund of any duty or tax or levy in contravention of the provisions of the Customs Act or any other law for the time being in force can also be confiscated. D.5 Penal Provisions – Section 114AC A new section 114AC is proposed to be inserted in the Customs Act to provide for penalty where any person has obtained any invoice by fraud, collusion, etc., in order to utilise input tax credit for discharging any duty or tax on goods that are entered for exportation under claim of refund of such duty or tax. Such person shall be liable for penalty not exceeding five times the refund claimed. D.6 Amendment of Documents Submitted – Section 149 Section 149 of the Customs Act provides that the proper officer may authorise any documents to be amended after they have been presented to the customs house. The proposed amendment provides that authorisation/amendments can be done electronically also. Further, it provides that such amendments, as may be specified by the Board, can be done by the importer or exporter on the common portal. D.7 Countervailing and Antidumping Duty Countervailing Duty is levied under Section 9 of the Customs Tariff Act to protect the interest of domestic manufacturers. The following amendments are made with regard to levy of countervailing duty: Section 9(1B): Inserted to provide for modification of Countervailing Duty: (i) where such duty is found to be ineffective as indicated by a decrease in the export price of an article without any commensurate change in the resale price in India of such article imported; (ii) under such other circumstances as may be provided by rules. Section 9(2A): Inserted to provide that levy of countervailing duty is not applicable to an article imported by a hundred per cent export-oriented undertaking (100% EOU) or a unit in a special economic zone (SEZ), unless: (i) it is specifically made applicable in such notification or to such undertaking or unit; or (ii) such article is either cleared as such into the domestic tariff area (DTA) or used in the manufacture of any goods that are cleared into the domestic tariff area. The countervailing duty shall be imposed on that portion of the article so cleared or used, as was applicable when it was imported into India. Anti-Dumping Duty (Section 9A): Sub-section (1B) is inserted and sub-section (2A) is substituted with a new section to provide for modification of anti-dumping duty in similar circumstances and similar ways as provided in proposed section 9(1B) and section 9(2A) above in respect of countervailing duty. E. Agriculture Infrastructure and Development Cess (AIDC) The above cess is proposed to be levied under two clauses, clause 115 and clause 116 of Finance Bill, 2021. The purpose of the levy is to finance agriculture infrastructure and other development expenditure. The details of the levy are as follows: E.1 Cess Levied under Clause 115 of the Finance Bill, 2021: This is a duty of Customs. It is levied on import of goods specified in the First Schedule to the Customs Tariff Act, 1975, except on goods exempted as per Notification No. 11/2021 of Customs. The rate of cess is not to exceed the rate of customs duty as specified in the First Schedule. E.2 Cess Levied under Clause 116 of the Finance Bill, 2021: This is an additional Excise Duty. It is levied on the manufacture or production of goods specified in the Seventh Schedule to the Finance Bill, 2021. The rate of cess is as per the rate specified in column (3) of the Seventh Schedule to the Finance Act, 2021. However, Basic Excise Duty (BED) and Special Additional Excise Duty (SAED) on these goods is being reduced in order to reduce the burden on the end consumer. Conclusion The above amendments aim to set right various controversies like taxability of transactions between clubs/associations and their members, charging of interest on net cash payment, etc. The levy of agriculture, infrastructure and development cess and corresponding adjustment in basic customs and duties will ensure availability of more funds to the agriculture sector without increasing the cost of imports. However, the deletion of the audit provision under Section 35(5), which was of immense help to taxpayers in ensuring their proper and timely compliance with various provisions of the GST Acts, is a retrograde step.

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 86–90 (Journal pp. 1110–1114) BANK AUDIT Reporting on Internal Financial Controls (over Financial Reporting) in Public Sector Banks CA. V. Balaji The author is member of the Institute. He can be reached at ars6566@gmail.com and eboard@icai.in. “RBI has asked the Statutory Central Auditors (SCAs) of public sector banks (PSBs) to mandatorily report on the adequacy and operating effectiveness of internal financial controls with reference to financial statements with effect from the year ended March 31, 2021. The requirement is similar to the auditor’s reporting on internal financial controls over financial reporting prescribed under section 143(3)(i) of the Companies Act, 2013. The ICAI has issued a Guidance Note on Audit of Internal Financial Controls over Financial Reporting in September 2015 which is industry agnostic and can apply to such reporting under any legislation and therefore will apply even for such reporting in PSBs. Read on...” The ICAI is in the process of bringing out a “Technical Guide on Audit of Internal Financial Controls in Case of Public Sector Banks”. The Technical Guide will provide additional guidance in relation to certain specific matters that may arise in an audit of internal financial controls with reference to financial statements of PSBs. The Technical Guide should be used in conjunction with the aforesaid Guidance Note. Reporting on internal financial controls (IFC) for the year ended March 31, 2021 may pose challenges to the SCAs based on the state of readiness of IFC preparation by the PSBs. The RBI vide its letter no. DOS. ARG No.6270 /08.91.001/2019-20 dated 17th March 2020 has directed the Public Sector Banks (“PSB”) to advise their Statutory Central Auditor’s (“SCAs”) to report in their independent auditor’s report, inter alia, whether the Bank has adequate internal financial controls system in place and the operating effectiveness of such controls. Subsequently, on May 19, 2020, the RBI clarified that the reporting on internal financial controls system is with reference to financial statements. Auditor’s reporting on internal financial controls in a PSB will be mandatory from the year ending March 31, 2021. Reporting on internal controls is not new to the auditors. This was introduced in the Manufacturing and Other Companies (Auditor’s Report) Order, 1988 (MAOCARO 1988), wherein the auditors were required to report on the adequacy of internal control on certain aspects of purchases and sales in specified class of companies. The requirement was continued in CARO 2003. The Companies Act, 2013 introduced section 143(3)(i) which requires the auditors of companies (other than exempted class of companies) to report in their independent auditor’s report, whether the company has adequate internal financial controls with reference to financial statements and the operating effectiveness of such controls. The ICAI issued a Guidance Note on Audit of Internal Financial Controls over Financial Reporting (“the Guidance Note”) in September 2015 to assist auditors in meeting their reporting obligations under the Companies Act, 2013. “The ICAI issued a Guidance Note on Audit of Internal Financial Controls over Financial Reporting (“the Guidance Note”) in September 2015 to assist auditors in meeting their reporting obligations under the Companies Act, 2013.” The Guidance Note is industry agnostic and can be applied to an audit of internal financial controls over financial reporting irrespective of the industry or the legislation under which such reporting is required as the Guidance Note clearly lays down the principles of an audit of internal financial controls. In a PSB, the SCAs and the Statutory Branch Auditors (“SBAs”) have been traditionally testing and relying on internal controls at the PSB when performing their audits. Such testing and reliance is essential as it is impracticable for SCAs and SBAs to test the account balances only through substantive procedures, considering the volume of transactions in PSBs. As such the requirement specified by the RBI for the SCAs to report on internal financial controls formalizes what the SCAs were traditionally doing in respect of testing the account balances with an expansion in the scope of testing internal controls from just account balances to include to cover the overall control environment at the PSB such as entity level controls and the financial closing and reporting process. The SCAs have been asked to report on the internal financial controls with reference to financial statements of the PSB. As such, the reporting is for the PSB as a whole and therefore would cover even the branches that are audited by other auditors appointed as the SBAs, whose report is relied upon by the SCAs when forming their audit opinion on the financial statements of the PSB. Accordingly, it becomes important for the SCAs to identify the transactions at the branches that are required to be tested for internal controls. To identify the transactions to be tested the SCA will need to consider the prevalence of common controls as described below. When auditing internal financial controls over financial reporting in a PSB, SCAs will need to consider the following important features of PSB: Prevalence of common controls and scoping of branches Presence of entity level controls to operate the common controls Prevalence of centralized controls Extensive use of information technology The importance of information used in operating the control The importance of regulatory compliance in the financial reporting process Let us understand each of the above. “In a PSB, typically many controls are designed centrally, and the same control is operated across the branches of a PSB. The SCA should identify those controls in a PSB that are common controls to determine the extent of testing such controls.” a. Common controls and scoping of branches As the name suggests, a common control is a control that is designed centrally but operated / implemented on the same basis across various locations of the entity. In a PSB, typically many controls are designed centrally, and the same control is operated across the branches of a PSB. The SCA should identify those controls in a PSB that are common controls to determine the extent of testing such controls. In a PSB it is most likely that all controls are designed centrally and therefore the design (adequacy) of the controls is tested centrally by the SCAs. The SBAs will be required to test only the operating effectiveness of the controls relying on the testing of design of the control by the SCAs. If the population covered by such common control is considered homogenous, then the whole population covered by such control is viewed as a single population, irrespective of the branch where a transaction in such population has occurred. The number of samples should be selected at a minimum based on the sample sizes stated in the Guidance Note. In such situations, it is likely that not all branches may be selected for testing a control as the sample size required to be tested will be lesser than the number of branches. Such scoping would not impact the coverage and consequently the opinion on internal financial controls since the SCAs have assed the control to be a common control. If it is not possible to determine whether the population is homogenous due to variants in the nature of transactions at the branches, the SCA should determine the branches to be covered for testing internal controls based on the guidance given in the Guidance Note and inform the SBAs of the branches so determined for coverage about the need for testing controls. It may be noted that under this alternative only the branch is selected by the SCA and the SBA determines the sample size as per the Guidance Note and selects the sample. In this alternative, the overall sample size tested for controls will be significantly higher than the sample size stated in the Guidance Note but such higher sample size will be distributed across components or locations and will be tested by different SBAs. The SCAs may select the branches for testing internal financial controls based on various factors such as: Branches classified as high risk in current year. Branches assigned need improvement/unsatisfactory rating in current year. High volume of account balances Branches where association of branch head is more than a certain period of time. New branches opened during the year (with significant account balances). Branches which have material decentralized operations. b. Entity level controls to operate the common controls It is common in PSBs to have promotions, transfers, including role changes for key employees. SCAs should understand and test the controls that are designed, implemented and operated by the PSB to familiarise such employees regarding the way in which the controls should be operated by such employees in their new roles such that the controls operate on the same basis as intended. c. Centralized controls Centralized controls are controls that are designed and operated centrally irrespective of the branch to which the transaction belongs. In a centralized control, the population covered by each such control is viewed as a single population and samples are selected across such single population. However, when controls in a centralized environment are designed to operate differently for certain branches or nature of transactions, the auditor tests the controls for each branch or type of transaction as a separate population to address the difference in design of the control for such branch or type of transaction. d. Information technology Today, Banks use sophisticated accounting and core banking software for processing transactions and the Bank’s IT environment is ever evolving. Information generated by IT systems are also used for decision making. Considering the significance of IT environment in the overall accounting and financial reporting process in a PSB, it will be an understatement to state that SCAs should test the design and operation of controls over the IT environment. IT controls that maintain the integrity of information and security of data commonly include controls over the following: Data center and network operations. System change. Access security. From an auditor’s standpoint, it is important to identify applications and related IT elements that are relevant to financial reporting and then evaluate the IT controls for such applications before placing reliance on the automated controls or system generated reports. The auditor should perform an understanding of the relevant flow of transaction or processes that identifies the relevant IT environment related to those flows or processes. This also helps in understanding the effect of IT and the information technology risks on the processes. “The auditor should inquire and obtain a register of all IT applications including the related infrastructure used in the bank, both at central/ corporate level and at a branch level. The auditor shall perform an assessment to identify the relevance of each such IT system for the purposes of internal financial controls over financial reporting.” The auditor should inquire and obtain a register of all IT applications including the related infrastructure used in the bank, both at central/ corporate level and at a branch level. The auditor shall perform an assessment to identify the relevance of each such IT system for the purposes of internal financial controls over financial reporting. The auditor shall also understand, whether the maintenance of any application or infrastructure is outsourced to a third party. Scoping is a continuous exercise and the auditor needs to factor any significant changes to the application landscape during the audit period until completion of the audit. Evaluation of IT controls will also involve cyber security to the extent such cyber applications impact financial reporting. e. Information used in the control Many of the internal controls in a PSB will operate based on the information analyzed by the PSB’s IT system or based on data extracted from such IT system. To test the design of a control that operates based on such information, the auditor should: assess the source data to ensure the completeness of the source from which such information is obtained; the logic used in generating the report of such information to ensure the completeness and accuracy of such information report; and the parameters used in generating such information report to ensure the completeness of such information. f. Ensuring regulatory compliance in the financial reporting process PSBs financial reporting process is directly impacted by the directions and guidance given by the RBI. It is essential for the SCA to understand the PSBs design of controls to ensure regulatory compliances. This involves understanding and testing the PSBs process for: identifying all relevant regulatory requirements applicable during the financial year; the management understanding and disseminating information about such regulatory requirements; laying down action plans by the management to meet the regulatory requirements; monitoring and validating the actual compliance with the regulatory requirements. “Some of the controls operate throughout the year, some only at period ends (like quarterly interest calculation) and some after the year end (like controls in the financial closing and reporting process since the activity of financial closing itself happens only after the year / period end).” Another important aspect is the timing of auditor performing the test of controls. The reporting on internal financial controls is for the year with an emphasis on controls at the year end operating for a reasonable period of time before the year end to determine operating effectiveness of such controls as at the balance sheet date. Some of the controls operate throughout the year, some only at period ends (like quarterly interest calculation) and some after the year end (like controls in the financial closing and reporting process since the activity of financial closing itself happens only after the year / period end). Considering the above, the auditor will need to appropriately plan the timing of testing controls. It may be important for the auditor to test IT controls and automated controls before the year end since those controls may be subject to change after the year-end and may not leave any trail of the operation during the year. Manual controls may be tested after the year end since the evidence of exercise of the control will be available even after the year end. Needless to state, the auditor’s work on testing internal financial controls should comply with the requirements of the standards on auditing. — CA. V. Balaji

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 91–95 (Journal pp. 1115–1119) BANK AUDIT Standards on Auditing for Bank Audit CA. Abhay V Kamat The author is member of the Institute. He can be reached at eboard@icai.in. “A question sometimes raised by some people is that what are the auditing standards that are applicable in case of audit of banks. I feel the question is not appropriate as all the auditing standards are important and are applicable to the audit of banks. Standards on Auditing (SAs) provide guidance to the members in performing quality audits. If professionals adhere to the SAs, the audit can be conducted effectively and efficiently and achieve its objectives. Recently, quite a few times, audit profession has been put under a lense and accordingly, we should follow SAs. We should understand them, learn them and implement them in right spirit. Read on…” 1. Introduction The Standards on Auditing (SAs) are formulated in the context of an audit of financial statements by an independent auditor. They are to be adapted to as necessary to the circumstances when applied to audit of other historical financial information. These SAs give guidance to the auditor in conduct of the audit which is consistent in the quality. Further, SAs demonstrate the responsibility which is casted on the independent auditors. Statutory audit of the banks is an important aspect from the point of view of the banks as well as from the view of the auditors. In case of the bank audit, it becomes a typical exercise because of its strigent timeline, vast scope, repetitive transactions yet variety in transactions. The auditor should not only use one’s professional expertise but also the professional skepticism while carrying out the audit of the bank. 2. Process Of Bank Audit In case of the public sector banks the statutory audit is carried out in two stages. As all of us are aware the bank operates through branches and there are various controlling offices including the head office. Hence the branches are audited by the statutory branch auditors (SBA). The SBAs carry out the branch audit and report to the controlling office as well as the statutory central auditors (SCA). The observations made by the SBAs are considered. [Where the change/ corrections to be made are made at the controlling offices which are verified by the SCAs]. In addition to this the SCAs carry out the audit of various functions at the Head Office level viz. treasury, secretarial, Risk management department, Recovery and restructure, accounts, etc. On the basis of the reports of the branch auditors and the observations in the audit of various functional departments at the head office, SCAs audit the financial statements and issue the audit report on those financial statements. The financial statements of the bank include various details and disclosures apart from the profit and loss account and Balance Sheet. Thus, audit of bank is a multilayer activity wherein many bank functionaries and number of audit professionals are involved. In order to have consistency in approach the guidance from SAs play an important role. Sometimes people ask as to what the applicable auditing standards in bank audit are. I feel this may not be a correct question. In fact, all auditing standards are applicable to the audit of banks and the auditor should follow all the auditing standards. 3. Standards on Auditing The Auditing and Assurance Standard Board (AASB) has issued number of auditing standards. They are classified into various broad areas. Even the numbering of the standards is given on the basis of this classification. This is as follows: SAs 100-199 – Introductory Matters SAs 200-299 – General Principles and Responsibilities SAs 300-499 – Risk Assessment and Response to Assessed Risk SAs 500-599 – Audit Evidence SAs 600-699 – Using Work of Other SAs 700-799 – Audit Conclusions and Reporting When we consider the applicability of SAs for the bank audit we find that all the SAs will be applicable. However, it would be very difficult to explain each and every standard in this article. Hence the endeavour is to discuss the auditing standards on the basis of various functions involved in the bank audit which could be broadly as follows: Initial Engagement (SAs 200, 210) Risk assessment and audit planning (SAs 300, 315, 320, 330, 450, 530) Conduct of the audit (SAs 220, 240, 250, 500, 501, 505, 510, 520, 540, 550, 560, 570, 580) Audit documentation (SAs 230) Using the work of other (SAs 299, 600, 610, 620) Audit conclusions and reporting (SAs 700, 701, 705, 706, 710, 720) 3.1 Initial Engagement The auditor should study the appointment letter. When the terms and conditions are acceptable then the acceptance letter should be sent to the appointing authority after obtaining NOC from the previous auditor of the Branch/Bank. The auditor should draft an engagement letter and send it to the person in charge/ appointing authority for its signature and keep a copy of letter duly signed by the auditor and auditee on the record. The broad contents of the engagement letter are given in the standard. Similarly, the Guidance Note on Audit of Banks gives the standard format for the engagement letter for the bank. 3.2 Risk Assessment and Audit Planning The auditor should prepare a plan for audit. While planning the auditor should form an audit team considering the qualification and experience of a person, availability of the person, size of the audit team. physical infrastructure available at the audit place, time schedule etc. Wherever required the training sessions to the audit teams should be conducted before going to the audit place. The auditor should understand the over all business of a particular branch, composition of the business, major customers of the bank, etc, which will help to assess the risk. E. g. where the branch is situated at the industrial area, the customers will be from the manufacturing sectors as against the location of the bank at the marketplace will make the branch to entertain the customers from the trading business. This will have impact on the composition of the loan portfolio viz. term loans, cash credit, bill discounting, export finance, etc, Even the economic recession in a particular industry will impact a branch business which is having majority of the customers from the same industry. Therefore, understanding the environment and the entity to be audited is must before we start the audit. Having understood the environment and the audit entity, the auditor should assess the risk in the audit. On the basis of the perception of the risk the auditor should plan the audit. The audit program could be designed accordingly and even the audit sampling could also be done considering the initial risk assessment. Audit Sampling As I mentioned initially, the transactions in the bank are multiple and repetitive. Hence audit sampling is a must. The sample selected should cover maximum business at the branch and shall cover all variety of transactions, period (in case of certain seasonal aspects), nature of products, etc, Materiality Considering the risk and overall volume at the entity level the auditor should fix the materiality of misstatement in the financial statements. As standard suggests, in case of deviation in accounting principles the auditor should report the matter irrespective of the materiality fixed. In other case the reporting of material misstatement will have to be done. 3.3 Conduct of the Audit Having done the planning properly the auditor should concentrate on the conduct of the audit. While conducting the audit the auditor should ensure the quality in the audit ( SA 220) In order to achieve the quality in audit the auditor should select proper audit team considering the knowledge, experience, availability and the time schedule. The audit team should be headed by the engagement partner who will be guiding the audit team during the audit, reviewing the work its progress and resolve the unsolved issues or the issues of difference of opinion. The audit should have a competent Engagement Quality Reviewer (EQR) who will review the work of Engagement Partner. In case of any suggestions EQR will guide the engagement team including the partner. Thus, the quality in the assignment is maintained. Initial Audit Engagement – Opening Balances In case of Bank audit the auditor need not verify the opening balances of each and every account. However, the auditor should see whether the entries for last year’s Memorandum of Changes (MoC) are passed properly during the current year. Usually, the MoCs are passed at the Head Office level while finalising the financial statements and they are intimated to the branches subsequently. The auditor of the subsequent audit period should see whether the entries are passed correct. Sometimes there are chances that the entries may get passed twice at the branch level. The auditor should ensure that such mistakes are not there at the branch level. Audit Evidence The auditor should collect the objective audit evidence to satisfy about the transactions recorded at the branch level. The audit evidence may be internal like books, registers, records, vouchers, etc. or the external evidence like third party confirmations, certificates, valuation reports, specific reports, etc. Sometimes the bank makes accounting estimate like provisions, value of security, useful life of fixed assets, contingent liabilities in case of legal disputes, etc. In such cases the auditor should review the basis of the estimate and if required make proper disclosure thereof. Other Aspects One of the fundamental accounting assumptions is going Concern. The auditor should see whether there is any threat to the Going concern principle of the bank. Similarly, the transactions with the related parties need to be scrutinised and disclosed. The auditor should obtain the list of related parties and the transactions with them. Though the time from the year end till the signing of audit report is very short, the auditor should see the subsequent events and take appropriate action on it. In most of the cases the related parties and going concern disclosure may not be relevant in case of bank branch audit. However, for SCAs it will be quite relevant. The auditor should obtain written representation from the management about the assertions made by them during the course of audit. 3.4 Audit Documentation The auditor should maintain proper audit documentation in its working paper file. The working paper file should include the audit plan, audit program, the terms of engagement, execution of audit work, audit evidence, accounting estimates made, management representations, audit findings and audit conclusions, reporting, etc, The audit documentation is helpful in subsequent reviews, investigations, or any other reference in relation to the audit carried out. The retention of audit working papers is seven years as per SQC-1. The working papers can be maintained electronically on computer system. 3.5 Using the Work of Other During the course of audit, the auditor has to depend on the work of other professionals. In case of branch audit, the branch auditor depends on the reports given by the concurrent auditors of the branch. The auditor shall go through the reports and note the concerns mentioned therein. The auditor should plan its audit procedure in such a manner that the concerns noted are examined and the audit conclusions are confirmed. As mentioned earlier the bank audit is carried at two layers branch audit and central office audit. Thus, the CSAs should depend on the work done by the branch auditors. While depending on the work of the branch auditors, the CSA should give the directions to the branch auditors, take a confirmation about the audit procedure used, use audit conclusions of the branch auditors while forming its opinion. However, while using the work of other auditors the auditor should review the reports and ensure that the audit conclusions are drawn properly. The auditor should also consider the materiality while forming its audit opinion. Using the work of an Expert While having accounting estimates the management may take report from the expert in different subjects. e.g. In case of the employee benefit liability the management shall appoint the actuary for actuarial calculation of the liability. In such case the auditor shall depend on the actuarial report. However, it is the duty of the auditor to see whether the data given to the actuary is correct. Similarly, the auditor should review the assumptions made by the actuary such as discount rate, salary escalation rate, composition of the salary, retirement age of the employee, etc, In case of valuation of the security offered against the loan, the bank will take valuation report from the empanelled valuer. In such case the auditor shall consider the same for the security value while making the provision on the NPAs. However, the auditor needs to see the reservations, exclusions, validity of the title of the property, etc, and form the audit opinion. In short, the auditor should apply professional skepticism while accepting the work of another expert. Responsibility of Joint auditors Normally for the banks there are more than one auditor as SCAs. In such case SA 299 gets triggered. In case of the joint auditors the responsibility of individual firm needs to be spelled out clearly. The auditors should sign the work allocation sheet on the basis of the allocation of work agreed. Every individual audit firm is responsible for the area audited by the respective firm. In case an individual audit firm feel that the audit observation needs to be discussed with the other audit firm for taking collective view and conclude on the audit opinion, then it can do so against the principles enunciated in SA 299. 3.6 Audit Conclusions and Reporting The auditor should finalise its audit finding, discuss them with those charged with the governance. After discussion if he is satisfied with the explanations, then it may be concluded that there are no material misstatements. However, if auditor feels that there is material misstatement, he may deal in the audit report appropriately. The audit report is the statement of audit opinion given by the auditor. It may be a clean report which is called as the unmodified report. In case of any material misstatement the auditor may suitably give modified report, which may be a qualified report or adverse report or a disclaimer of opinion. There may be certain facts or matters which, in the opinion of the auditor, are material to be known by the reader of the financial statements, however they will not amount to material misstatement. In such case the auditor may give Emphasis of Opinion (EOM) without qualifying the audit opinion. for using appropriate audit opinion, the auditor should look at the SAs and finalise the audit report. Key Audit Matters (KAM) Key Audit Matters are those matters that in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from the matters communicated with those charged with governance. In case auditor notices such matters, they should be mentioned in the audit report. Other Information The auditor should verify the corresponding figures related to the previous period in the financial statements (SA 710). SA 720 deals with the auditor’s responsibilities relating to other information, whether financial or non-financial information (other than financial statements and the auditor’s report thereon) included in the bank’s annual report. The annual report may be a single document or a combination of documents that serve the same purpose. Thus, the auditor should verify that the information given in the annual report is in line with the details given in the financial statements. In case of discrepancy, the fact should be brought to the notice of those charged with governance. 4. Conclusion Standards on Auditing give a guidance to the members which ultimately lead to good quality in Audit. I am sure that the SAs will definitely come to the help of the auditors to maintain the quality and consistency in the audit. If we follow them properly, the quality in audit will definitely follow. Hence, we should read them, study them and implement them in right spirit. — CA. Abhay V Kamat

The Chartered Accountant Journal • Bank Audit • March 2021 Income Recognition and Asset Classification (IRAC) Norms CA. Dhananjay J. Gokhale The author is a member of the Institute. Email: dhan_gokhale@hotmail.com • eboard@icai.in Citation: (2021) 69 CAJ 1120–1124 Pages 96–100 • Journal Page Nos. 1120–1124 Audit Imperative “The Audit of Advances can never be said to have concluded without verification of classification, income recognition, provisions w.r.t. Advances. Read on…” The classification of assets of banks has to be done on the basis of objective criteria, which would ensure a uniform and consistent application of the norms. The provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof. It is expected that the bank should establish appropriate internal system for proper and timely identification of NPAs. There is no grace period granted for asset classification but a time period of one month as given by RBI is to settle the doubts in asset classification due to any reasons. The RBI issued circular RBI/2020-21/37 DoS.CO.PPG./SEC.03/11.01.005/2020-21 dated September 14, 2020 on ‘Automation of Income Recognition, Asset Classification and Provisioning processes in banks’ with reference to earlier circular DBS.CO.PPD.No.1950/11.01.005/2011-12 dated August 04, 2011 and have advised the banks to put in place / upgrade their systems to ensure completeness and integrity of automated asset classification, provisioning calculation and income recognition process by June 30, 2021 in compliance with the extant guidelines issued vide the circular. A Standard Asset can be defined as an asset which does not carry risk more than normal banking risk, whereas a Non-Performing Asset (NPA) is the one which either carries risk more than normal banking risk or ceases to generate income for the bank. Core Concepts: ‘Overdue’ and ‘Borrower-Wise Classification’ Definition of Overdue: “If an amount due to bank under any credit facility is not paid on the due date fixed by the bank, such amount would be called as Overdue.” Classification Qua Borrower: The classification of advances would be qua borrower unless otherwise stated. Thus, all facilities granted to a borrower shall be treated as NPA and not only that facility which has become irregular. Objective Criteria for Classification of Advances The RBI has defined various objective criteria as regards classification of advances, which are as follows: Term Loan: If Interest and/or installment remains overdue for a period of more than 90 days. However, as per Para 2.1.3 of the Master Circular on IRAC dated 01.07.2015, an account is classified as NPA only if interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. Exception: Term Loans with moratorium period granted for interest as well as principal wherein the interest would be accrued and due only after the completion of the moratorium period. Bills Purchased / Discounted: If such Bill remains overdue for a period of more than 90 days. Agricultural Advances: If Interest or installment remains overdue for two crop seasons for short duration crops, and one crop season for long duration crops. A crop season is defined as ‘period up to harvesting of crops raised’ as determined by State Level Bankers’ Committee (SLBC) and Long duration crop means a Crop wherein crop season is more than 12 months. It is pertinent to note that Banks have discretion of rescheduling agricultural advances in case of natural calamities which impair repaying capacity (refer latest Master Direction dated October 17, 2018 by RBI on Relief Measures by banks in areas affected by Natural Calamities Directions 2018 – SCBs). Derivative Transaction: Overdue receivables representing positive mark to market value of a derivative contract remaining unpaid for a period of 90 days from specified due date. Liquidity Facility: If it remains outstanding for more than 90 days in respect of Securitization transaction. Credit Card Dues: If the minimum amount payable is not paid fully within 90 days from the next statement date. Cash Credit / Overdraft Account: The account is treated as NPA if the same is ‘Out of Order’. The account is called as out of order if any one of the following conditions is fulfilled: a. Outstanding Balance remains continuously in excess of sanctioned limit / drawing power (whichever is lower) for more than 90 days; b. No credit continuously for 90 days as on the date of Balance Sheet; c. Credits in the account are not sufficient to cover interest debited during the same period. Exceptions and Clarifications to NPA Criteria The RBI has clarified as regards certain exceptions / clarifications to the above-mentioned criteria as follows: Non-submission / non-availability of stock statement: Outstanding balance in account based on the drawing power calculated from stock statements older than 3 months would be deemed as irregular and if such irregular drawing is permitted for a period of more than 90 days, the account needs to be classified as NPA. However, it would be pertinent to note that the relaxation so given by RBI is ‘considering the difficulties of large borrowers’, thus, limiting its applicability accordingly and is not a relaxation given at large. Non-renewal / Non-regularization of Regular / Adhoc limit: If the same is not done within 180 days from the due date, the account would be classified as NPA. Advances against Term Deposits, NSCs, IVPs, KVPs and Life Insurance Policies: Need not be treated as NPAs, till security cover is sufficient to cover outstanding balance, provided Income is recognized subject to availability of margin. Central Government Guaranteed Advance: To be classified as NPA only if the Government repudiates the guarantee when invoked. However, income on such accounts is required to be recognized on cash (realization) basis. Letter of Credit Backed Bill Discounted (LCBD) Facilities: The Bill discounted against accepted LC would be treated as PA (Performing Assets) even though the rest of the facilities of the borrower are treated as NPA (since the exposure of the bank in such cases would be on the LC issuing bank and not on the borrower). Consortium Banking Arrangements: Each member bank shall classify the accounts according to their own record of recovery. Potential Threat of Recovery (Straightway Classification): Where realisable value of security is less than 50% of the value assessed (by bank or value accepted in last RBI Inspection), account to be straightaway classified as Doubtful Asset; and where realisable value (as assessed by Bank / Valuator / RBI Inspector) of security is less than 10% of outstanding balance, account to be straightaway classified as Loss Asset. Fraud Accounts: In case of Fraud Accounts, 100% provision is to be made irrespective of security, spread over 4 quarters commencing from the quarter in which fraud has been detected wherein the same is reported to RBI; and in cases wherein the fraud cases are not reported to RBI, 100% to be provided instantly. Solitary or Few Credit Entries Recorded Before Balance Sheet to Regularise the Account: In such cases, if the account is exhibiting signs of inherent weakness, such account is required to be marked as NPA and in other cases, the bank needs to evidence the auditors about manner of regularisation of account or otherwise in absence of such evidence such accounts should be marked as NPA. It would be germane to note that regularisation of the account either at year-end or otherwise needs to be out of genuine sources of funds, ideally by way of income generating activities undertaken by the borrower and not by way of availing additional credit facilities to regularize existent credit facilities. Mandatory Valuation of Securities: In case of NPAs wherein the outstanding balance is more than Rs. 5 crores, it is mandatory to conduct stock audit by external agencies; and as regards immovable properties taken as securities, the valuation is required to be carried out at least once in three years by an approved valuer. Regularisation of Accounts – Partial Regularisation and Regularisation After the Balance Sheet Date: In case if an account is an NPA, irrespective of whether the account is marked by the bank as NPA or not, the upgradation of the account would be subject to the condition that the entire portion of overdues are recovered (in case of Term Loan Accounts) or the working capital accounts are regularised out of genuine business credits. Further, regularisation of the account subsequent to the Balance Sheet date does not affect the asset classification as the upgradation of the account would be effected only prospectively on the date of regularisation. Project Loans & DCCO Deferment Rules The change in repayment schedule is permitted without change in asset classification if the same is caused due to increase in project outlay on account of increase in scope and size of the project, subject to conditions stipulated in Para 4.2.15.5 (ii) of the Master Circular on IRAC dated 01.07.2015. The usual classification norms apply before the commencement of commercial operations. However, in case of accounts wherein the borrower fails to commence the commercial operations within two years and within one year from the date of commencement of commercial operations (DCCO) w.r.t. Infrastructure and non-infrastructure sectors respectively, the account needs to be classified as NPA, unless eligible to be restructured and classified as standard asset. The restructuring of Project Loans is permitted with retention of class of asset provided deferment and consequential shift in repayment schedule is for equal or shorter duration as follows: Permitted Restructuring Duration for Project Loans with Asset Class Retention Particulars Infrastructure Non-Infrastructure Revised DCCO is within Two years from original DCCO One year from original DCCO Revision due to Court Case 2 + 2 Years from original DCCO 1 + 1 Years from original DCCO Revision due to any other reason 2 + 1 Years from original DCCO 1 + 1 Years from original DCCO An additional extension of DCCO is permitted for a further period of two years due to change of ownership of borrower entity, provided the conditions stipulated in Para 4.2.15.4 of the Master Circular on IRAC dated 01.07.2015 are complied with. Further, Financing of Cost Overruns is permitted by way of Standby Credit Facilities, with retention of class of asset subject to compliance of stipulated conditions. Income Recognition Norms The income on Standard Assets is recognised on Accrual basis and the same on NPAs is recognised on Cash (realisation) basis. When an account is marked as NPA, the interest / bank charges debited to the account but not serviced as on the date of NPA are required to be derecognised. Interest on additional finance in NPAs should be recognised on cash basis. If interest due is converted into unlisted equity / Funded Interest Term Loan (FITL), the same should be fully provided for; and if the same is converted into a listed instrument, the interest should be recognised to the extent of market value of such security on the date of conversion. In case of recoveries in NPAs, in the absence of clear agreement between the Bank and the Borrower, an appropriate policy is to be followed in a uniform and consistent manner as regards the order of recovery of outstanding interest and principal amount. Asset Classification and Provisioning Requirements Type of NPA Criteria Provision Secured Portion* Unsecured Portion Sub-Standard (SSA) First 12 months from date of NPA Secured SSA: 15%$ Unsecured SSA: 25% Infrastructure SSA: 20% Doubtful – I Subsequent one year after SSA 25% 100% Doubtful – II Subsequent two years after DA-I 40% 100% Doubtful – III After two years in DA-II 100% 100% Loss Identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off 100% 100% $ Without making any allowance to ECGC guarantee cover and securities available. * Intangible Security is considered only if backed by legally enforceable and recoverable right over collection and rest of intangibles like rights, licenses, etc. are considered as ‘Unsecured’. As regards the prudential provision on Standard Assets, the same has remained unchanged as provided in Para 5.5 of the Master Circular. Restructuring of Advances: Evolution and Regulatory Framework The RBI, vide its Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 issued guidelines on prudential norms on Income Recognition, Assets Classification and Provisioning pertaining to Advances. Further, with issuance of circular no. RBI/2018-19/203 DBR.No.BP.BC.45/21.04.048/2018-19 on Prudential Framework for Resolution of Stressed Assets dated June 07, 2019 and circular no. RBI/2017-18/131 DBR.No.BP.BC.101/21.04.048/2017-18 on Resolution of Stressed Assets – Revised Framework dated February 12, 2018, the extant instructions on resolution of stressed assets such as: Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme (CDR), Flexible Structuring of Existing Long Term Project Loans (5/25 Scheme), Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum (JLF) as a mandatory institutional mechanism for resolution of stressed accounts was discontinued. MSME Sector – Restructuring of Advances The RBI issued circular RBI/2020-21/17 DOR.No.BP.BC/4/21.04.048/2020-21 dated August 06, 2020, in continuation of earlier circular RBI/2019-20/160 DOR.No.BP.BC.34/21.04.048/2019-20 dated February 11, 2020 extending the one-time restructuring of MSME advances classified as ‘standard’ without a downgrade in the asset classification and aligning the guidelines with the Resolution Framework for COVID19 – related Stress announced for other advances, with amended conditions as specified in the said circular. COVID-19 Regulatory Package The RBI issued COVID19 Regulatory package vide circular RBI/2019-20/186 DOR.No.BP.BC.47/21.04.048/2019-20 dated March 27, 2020 granting relief to borrowers, which was further followed by another circular RBI/2019-20/220 DOR.No.BP.BC.63/21.04.048/2019-20 dated April 17, 2020 on COVID 19 Regulatory Package - Asset Classification and Provisioning, granting relief w.r.t. Asset Classification and Provisioning. The RBI also issued circular RBI/2019-20/219 DOR.No.BP.BC.62/21.04.048/2019-20 dated April 17, 2020 on COVID 19 Regulatory Package - Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets. Resolution Framework for COVID-19 Related Stress The RBI issued circular RBI/2020-21/16 DOR.No.BP.BC/3/21.04.048/2020-21 dated August 06, 2020 providing a window under the Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership and personal loans, while classifying such exposures as Standard, subject to certain conditions, enabling them to retain the class of assets. Interim Order of Honourable Supreme Court Dated September 03, 2020 “The honourable Supreme Court has passed an interim order on September 03, 2020 w.r.t. writ petition 825/2020 as: ‘the accounts which were not declared NPA till 31.08.2020 shall not be declared NPA till further orders’.” The RBI has not issued any notification / circular related to the said interim order. In view of the said interim order, if a bank does not classify any account as NPA subsequent to August 31, 2020, which otherwise would have been classified as NPA, the auditor should ensure that: Quantification and Disclosure in Audit Report: A suitable disclosure to that effect is given in the audit report quantifying the details of such accounts in terms of value and quantum (presuming that a similar disclosure is given by the bank in financial statements) along with reference to the said interim order of the Supreme Court; Pro-Forma Application of IRAC Norms: In the accounts which are not marked as NPA by a bank (which otherwise would have been required to be marked as NPA as per IRAC norms), the income recognition and provisioning norms would continue to be applied as if such accounts are marked as NPA, i.e., income on such accounts would be recognised on cash basis and a provision would also be made as would have been required to be made had this account been marked as NPA. In case a bank has followed IRAC norms without any deviation therefrom in context with the said order, there is no additional or specific disclosure required to be given by the auditor in the audit report or otherwise as the extant IRAC norms as specified in the RBI guidelines are followed.

The Chartered Accountant Journal • Bank Audit • March 2021 LFAR for Bank Branch CA. Sandeep D. Welling The author is a member of the Institute. Email: eboard@icai.in Citation: (2021) 69 CAJ 1125–1138 Pages 101–114 • Journal Page Nos. 1125–1138 Executive Overview & Context LFAR format has been revised and a notification is issued by RBI dated September 5, 2020. There is no doubt the old format was long overdue as it contained the questions from pre-CBS era. During our audit for the financial statements as on March 31, 2021 it is necessary that we read and assimilate the questions carefully. The questions are formed in a manner where we may have to be careful in selection of the samples, ensuring that the questions in the LFAR are addressed with reference to the selected accounts. Read on… Hitherto, the accounts selected for the purpose was forming part of our documentations and working papers. However, now LFAR expects us to list the accounts selected, which increase our responsibility manifold as the answers to the question in LFAR are expected with reference to the selection. This article makes an attempt to address the nuances of LFAR. It must be remembered that where any of the comments made by the auditors in their LFAR is adverse, auditor should consider whether a qualification in their main report is necessary. It should not, however, be assumed that every adverse comment in the LFAR would necessarily result in a qualification in the main report. In deciding whether a qualification in the main report is necessary, the auditors should use their professional judgment in the facts and circumstances of each case. Where the auditors have any reservation or adverse remarks with regard to any of the matters to be dealt with in their Long Form Audit Reports, they may give the reasons for the same. Also, where relevant, instances of situations giving rise to their reservations or adverse remarks may also be given. I. ASSETS 1. Cash a) Does the system ensure that cash maintained is in effective joint custody of two or more officials, as per the instructions of the controlling authorities of the bank? b) Have the cash balances at the branch/ATMs been checked at periodic intervals as per the procedure prescribed by the controlling authorities of the bank? c.1) Does the branch generally maintain /carry cash balances, which vary significantly from the limits fixed by the controlling authorities of the bank? c.2) Does the figure of the balance in the branch books in respect of cash with its ATM(s) tally with the amounts of balances with the respective ATMs, based on the year end scrolls generated by the ATMs? If there is any difference, same should be reported. d) Whether the insurance cover available with the branch adequately meets the requirement to cover the cash-in hand and cash-in transit? 2. Balances with Reserve Bank of India, State Bank of India and Other Banks (For branches with Treasury Operations) a) Were balance confirmation certificates obtained in respect of outstanding balances as at the year-end and whether the aforesaid balances have been reconciled? The nature and extent of differences should be reported. b) Observations on the reconciliation statements may be reported in the following manner: i) Cash transactions remaining unresponded (give details) ii) Revenue items requiring adjustments/write-off (give details) iii) Other Credit and debit entries originated in the statements provided by RBI/other banks, remaining unresponded for more than 15 days iv) Where the branch maintains an account with the Reserve Bank of India, the following additional matter may be reported: Entries originated prior to, but communicated/recorded after, the year end in relation to currency chest operations at the branch/other link branches, involving deposits into/ withdrawals from the currency chest attached to such branches (Give details) c) In case any matter deserves special attention of the management, the same may be reported. 3. Money at Call and Short Notice a) Has the Branch kept money-at-call and short notice during the year? b) Has the year end balance been duly confirmed and reconciled? c) Has interest accrued upto the year end been properly recorded? d) Whether instructions/guidelines, if any, laid down by the controlling authorities of the bank have been complied with? 4. Investments (For Branches outside India) a) In respect of purchase and sale of investments, has the branch acted within its delegated authority, having regard to the instructions/ guidelines in this behalf issued by the controlling authorities of the bank? b) Have the investments held by the branch whether on its own account or on behalf of the Head Office/other branches been made available for physical verification? Where the investments are not in the possession of the branch, whether evidences with regard to their physical verification have been produced? c) Is the mode of valuation of investments in accordance with the RBI guidelines or the norms prescribed by the relevant regulatory authority of the country in which the branch is located whichever are more stringent? d) Whether there are any matured or overdue investments which have not been encashed and / or has not been serviced? If so, give details? 5. Advances General Instructions & Thresholds (i) The answers to the following questions may be based on the auditor’s examination of all large advances. For this purpose, large advances are those in respect of which the outstanding amount is in excess of 10% of outstanding aggregate balance of fund based and non-fund based advances of the branch or Rs. 10 crores, whichever is less. Care: For all accounts above the threshold, the transaction audit/account specific details to be seen and commented, whereas below the threshold, the process needs to be checked and commented upon. Comments of the branch auditor on advances with significant adverse features, which might need the attention of the management / Statutory Central Auditors, should be appended to the LFAR. (iii) The critical comments based on the review of the above and other test check should be given in respective paragraphs as given in LFAR given below. a) List of Accounts Examined for Audit Account No. Account Name Balance as at year end – Funded Balance as at year end – Non-funded Total XXXXXX – – – – XXXXXX – – – – Total A B C = A + B Total Outstanding of the Branch X Y Z = X + Y Percentage examined A as % of X B as % of Y C as % of Z You may observe that the LFAR expects us to attach an annexure giving details of the accounts selected during the course of our audit. It may be remembered that the questions at various places have specific purpose. Therefore, one simple selection will not help giving answers to all the questions. It is suggested that for each section and in some cases few questions in the section, list of accounts chosen for audit may be listed separately. However, for the purpose of overall percentage of coverage as envisaged above, common accounts, if any, may have to be merged. b) Credit Appraisal (i) In your opinion, has the branch generally complied with the procedures/instructions of the controlling authorities of the bank regarding loan applications, preparation of proposals for grant/ renewal of advances, enhancement of limits, etc., including adequate appraisal documentation in respect thereof. What, in your opinion, are the major shortcomings in credit appraisal, etc. (ii) Have you come across cases of quick mortality in accounts, where the advance became Non-performing within a period of 12 months from the date of first sanction? Details of such accounts may be provided in following manner: Account No., Account Name, Balance as at year end. (iii) Whether in borrowal accounts the applicable interest rate is correctly fed into the system? (iv) Whether the interest rate is reviewed periodically as per the guidelines applicable to floating rate loans linked to MCLR / EBLR (External Benchmark Lending Rate)? (v) Have you come across cases of frequent renewal / rollover of short-term loans? If yes, give the details of such accounts. (vi) Whether correct and valid credit rating, if available, of the credit facilities of bank’s borrowers from RBI accredited Credit Rating Agencies has been fed into the system? Guidance: The credit rating is essential for all exposures above 5 Cr. This determines the risk weight for the purpose of CRAR calculations. Non availability of credit rating would attract higher risk. In case the rating is not available, auditor should find out the earlier rating. Further banks many times confuse between Govt. Corporations and Government undertaking. Unless there is specific sanction term for not taking rating (only in case of Govt. undertaking, others have to be rated) valid rating certificate should be verified. c) Sanctioning/Disbursement (i) In the cases examined by you, have you come across instances of: (a) credit facilities having been sanctioned beyond the delegated authority or limit fixed for the branch? (b) Are such cases promptly reported to higher authorities? (ii) Whether advances have been disbursed without complying with the terms and conditions of the sanction? If so, give details of such cases. (iii) Did the bank provide loans to companies for buy-back of shares/securities? Guidance: It is suggested that the management representation to this clause should be obtained as it is difficult for an auditor to find out unless specifically mentioned (which is very unlikely). d) Documentation (i) In the cases examined by you, have you come across instances of credit facilities released by the branch without execution of all the necessary documents? If so, give details of such cases. (ii) Deficiencies in documentation, including non-registration of charges, non-obtaining of guarantees, etc.? If so, give details of such cases. (iii) Advances against lien of deposits have been granted without marking a lien on the Bank’s deposit receipts and the related accounts in accordance with the guidelines of the controlling authorities of the bank. e) Review / Monitoring / Supervision (i) Periodic review of advances, balance confirmation/acknowledgement of debts; analysis of accounts overdue for review/renewal: a) between 3 to 6 months, and b) over 6 months; major shortcomings in monitoring. (ii) Regular receipt and scrutiny of stock/book debt statements; proper computation of Drawing Power (DP); latest audited financial statements obtained for reviewed/renewed accounts. (iii) System of periodic stock audit reports; branch compliance; details of cases where stock audit was required but not conducted, or where conducted but no action was taken on adverse features. (iv) Advances to non-corporate entities with limits beyond threshold where audited accounts are not obtained. (v) Due Diligence Report under consortium and multiple banking as per RBI requirements. If branch is not lead bank, copy obtained from lead bank. (vi) Inspection and physical verification of securities charged; substantial deterioration in value of security compared to earlier valuation report. (vii) Deficiencies in securities, frequent/unauthorized overdrawings, inadequate insurance coverage. (viii) Red Flagged Accounts (RFA) compliance and policy deviations. (ix) Comments on adverse features considered significant in top 5 standard large advances. (x) Leasing finance activities compliance with security creation, inspection, insurance, and accounting norms. Guidance: RBI Master circular on Lending to NBFCs (DBOD/IECS.No.7/08.12.01/2004-2005) and Exposure Norms caps must be verified. Categorization errors impact exposure disclosures and risk parameters. f) Asset Classification, Provisioning of Advances and Resolution of Stressed Assets (i) a–d) Automated identification and classification without manual intervention; compliance with RBI norms; SMA-0, SMA-1, SMA-2 classification tracking; auditor disagreements and incorporation in Memorandum of Changes (MOC). (i) e) List of accounts (outstanding > Rs. 10.00 crore) downgraded or upgraded during the year with reasons (upgrades need rigorous checks). (i) f) Compliance with RBI income recognition and provisioning guidelines (forms part of audit opinion). (ii) a–g) Restructured/rephased accounts reporting; board approved resolution stance; accounts with exposure of Rs. 2,000 cr and above in the banking system; prompt CRILC reporting; accounts in SMA for 180 days continuously. (iii) Upgradations in non-performing advances in line with RBI norms; auditor disagreements. (iv) Authorized legal action or recalling of advances not initiated by branch. (v) IBC process mandated but not initiated, or initiated by creditors; adequacy of provisions. (vi) Credit guarantee claims (ECGC and others) lodged, settled, rejected with detailed table and provisioning impact. Particulars Number Amount Claim at the beginning of the year–– Further claim lodged during the year–– Total A–– (i) Claims accepted/settled–– (ii) Claims rejected–– Total B–– Balance as at year end (A–B)–– (vii) Valuation reports from approved valuers for mortgaged immovables once in three years in NPAs. (viii) Recovery policy compliance in compromise/settlements and write-offs exceeding Rs. 50.00 lakhs. (ix) Age-wise analysis of decrees obtained and pending execution. (x) Proper appropriation of recoveries between principal and interest. (xi) Verification of documents held at Centralized Processing Centers (CPCs) on test check basis. (xii) Major deficiencies in credit review, monitoring and supervision. g) Non-Fund Based Facilities (i) Details of LCs devolved or guarantees invoked during the year (Invocation Date, Party Name, Beneficiary Name, Amount, Recovery Date). (ii) Details of LCs devolved or guarantees invoked but not paid (Invocation Date, Party Name, Beneficiary Name, Amount, Reason for non-payment). (iii) Instances where interchangeability between fund based and non-fund based facilities was allowed subsequent to devolvement of LC / invocation of BG. 6. Other Assets – Suspense Accounts / Sundry Assets (a)(i) Expeditious clearance of suspense items; details of entries outstanding > 90 days; ascertainment of unrecoverable balances requiring provision/write-off. (a)(ii) Unusual items, material amounts, intangible items like unprovided losses / pending investigations. II. LIABILITIES 1. Deposits (a) System of identification of dormant / inoperative accounts and internal controls with regard to operations; reporting of deviations. (b) Unusual large movements (increase or decrease) in aggregate deposits between balance sheet date and date of audit. (c) Automatic renewal of FCNR(B) deposits; satisfaction of ‘non-resident status’ of depositor and dispatch of receipts/soft copies. (d) Compliance with minimum balance regulations and levy of charges in savings accounts. Guidance: RBI mandated certification for penalty levied for non-maintenance of minimum balance (DBR.No.Leg.BC.21/09.07.006/2015-16 dated July 1, 2015). Although branches state that calculations are automated, auditor must take at least 5 samples to test fairness and policy compliance. 2. Other Liabilities (Bills Payable, Sundry Deposits, etc.) a) Number of items and aggregate amount of old outstanding items pending for 1 year or more (reported year-wise: Year, Number of Items, Amounts, Remarks). b) Unusual items or material withdrawals/debits in these accounts. 3. Contingent Liabilities List of major items of contingent liabilities (other than constituent’s liabilities such as guarantees, letters of credit, acceptances, endorsements, etc.) not acknowledged by the Branch. III. PROFIT AND LOSS ACCOUNT a) Test checking of interest/discount/commission/fees revealed excess/short credit of a material amount. b) Compliance with RBI Income Recognition norms regarding charging of interest on NPAs. c) Test check of interest on deposits revealing excess/short debit of material amount. d) System of estimating and providing accrued interest on overdue/matured/unpaid/unclaimed term deposits including deceased depositors. e) Divergent trends in major items of income and expenditure compared to previous year without satisfactory explanation. IV. GENERAL 1. Gold / Bullion / Security Items a) Effective joint custody of gold/bullion by two or more officials. b) Adequate records for receipt, issues, and balances; periodic physical verification discrepancies. c) Adequate internal controls over custody and issue of security items (Term Deposit Receipts, Drafts, Pay Orders, Cheque Books, Traveler’s Cheques, Gift Cheques, etc.); reporting missing/lost items. 2. Books and Records & Information Systems a) Standalone software or manual systems not integrated with the Core Banking Solution (CBS). b) i) Information Systems (IS) Audit adverse features pending compliance. b) ii–iii) Regular generation, verification, and expeditious compliance of daily exception reports. b) iv) Procedures and audit trail for manual intervention in system-generated data. b) v) Data integrity for MIS at Head Office / Corporate Office level without back-ended adjustments. 3. Inter-Branch Accounts Expeditious compliance with designated cell / Head Office on unmatched transactions; reporting un-responded queries beyond 7 days. 4. Frauds (i) Frauds detected/classified without RBI reporting confirmation on record. (ii) Suspected/likely fraud cases reported to higher office and status of investigation. (iii) Potential risk areas for fraud (falsification, related party diversion, fake invoices/stock statements/bills, current accounts outside consortium, round tripping). (iv) Effective working of Early Warning Signals (EWS) Framework and Red Flagged Accounts (RFA). 5. KYC / AML Guidelines Adequacy of systems to ensure adherence to KYC/AML guidelines; test checks of accounts and verification of Cash Transaction Reports (CTR) and Suspicious Transaction Reports (STR). 6. Management Information System (MIS) Data integrity for MIS at corporate office level and supervisory reporting; non-adherence to password protection policy and maker-checker principle. 7. Miscellaneous Consideration of previous year’s Branch Audit Report / LFAR, internal/snap/concurrent audits, credit audit, stock audit, RBI inspection, revenue audit, and IS audit reports; matters to be brought to notice of SCAs. Aspects to be Taken Care of During Checking of Profit & Loss Account 1. Application of Interest on Deposits Interest on Term Deposits / Cumulative Deposits: Generally calculated centrally. No branch action necessary. Overdue Term Deposits: System auto-renews during day-end, but manual branch intervention is often required in legacy data migration or system snags. Interest with Treasury Branch: Done at Category A branches for Foreign Currency borrowings or settlement accounts. Current Deposits: Provided only on Individual/Proprietary Current Accounts of deceased persons at SB interest rates from date of death. Savings Bank Deposits: General savings interest at quarterly rest provided at Central Office, but specific schemes require branch verification. 2. Interest on Advances General Advances (EMI & Non-EMI): Charged centrally, but branch must verify actual application since branch has operational control. Interest on Bills Discounted (Advance Interest): Total collected credited to ‘Rebate on Bills Discounted’ and only monthly portion transferred to Income. Outstanding balance must match bill-wise rebate summary. 3. Interest on Overdue Export Bills Export bills overdue < 90 days categorized as Standard Advances: calculate accrual interest up to 31st March, credit to ‘Income Account – Interest on Foreign Bills Purchased’ and debit ‘Suspense Account – Interest Accrued on Advances’ (reversed next working day in April). 4. Interest Paid on Borrowings (Refinance) Refinance availed from IDBI / SIDBI / NABARD / EXIM Bank / NHB: ascertain interest payable up to 31st March, debit ‘Expenditure Account – Interest Paid on Borrowings – Refinance availed from IDBI/SIDBI etc.’ and credit ‘Bills Payable – Others – Int. payable on NABARD/SIDBI/Bank Refinance’ (reversed in April). 5. Other P&L Provisions & Expenses Prepaid & Other Expenses: Common grey area; either pass Memorandum of Changes (MOC) or book entries as on date. Bank Charges with Other Banks: Charges up to 31st March in reconciliation must be responded by debiting Expenditure. Depreciation: Strict compliance with the revised Standard on Property, Plant and Equipment (PPE). Annexure on Fraud: Skepticism, Lapses, and Early Warning Signals In terms of extant RBI guidelines, auditors are required to report any suspicious/fraudulent activities that come to attention during audit. Statutory Auditors must display a greater degree of professional skepticism and independence in assessing asset classification, especially in large-value accounts. In an RBI study of 20 large value fraud cases, except in one case where external auditors pointed out non-compliance with sanction terms, in no other case were frauds detected through internal or external audit processes! Administrative Lapses that May Lead to Fraud: Opening current accounts outside consortium without NOC, facilitating diversion of funds. Deficiency in EWS/RFA implementation: non-adoption of RBI list, non-integration with monitoring software, failure to conclude investigation within 6 months, and inconclusive forensic audits due to borrower non-cooperation. Sale of accounts to Asset Reconstruction Companies (ARCs) just before fraud recognition. Slow progress in investigation and prosecution of fraudsters. Delayed recognition: advances-related frauds often season for 3 to 4 years as NPAs before being recognized as fraud. Time lag between first bank and last bank in consortium reporting fraud (ideally should be within 6 months). Complicity of bank officials and third parties with borrowers. Reluctance to convene lenders’ meetings and delay in reporting to CRILC. Transactions Demanding Extra Skepticism: Liberal cash flow projections at proposal stage Security perfection issues and over-valuation Gold plating of projects Deviation from credit and internal policies Lack of continuous monitoring of cash flows Diversion of funds Key Early Warning Signals (EWS) to Watch: Critical issues highlighted in stock audit reports Poor disclosure of materially adverse information Frequent changes in project scope Liabilities appearing in ROC search reports but omitted from annual reports Failure to route sales through consortium member banks LCs issued for related parties without underlying trade transactions Raids by Income Tax / Sales Tax / Central Excise officials Significant reduction in promoter shareholding or high pledging of promoter shares “Finally, it may be concluded, the responsibility as SBA was always like this. The only difference now is the part our working papers is becoming the reporting requirement.”

The Chartered Accountant • Journal of ICAI March 2021 • Vol. 69 • No. 9 • pp. 116–121 (Journal pp. 1140–1145) BANK AUDIT Importance of Advances in Bank Audit CA. Nilesh Joshi The author is member of the Institute. He can be reached at nileshrsjoshi@gmail.com and eboard@icai.in. “The revenue of the Banks is generated majorly through advances and investments. Hence, both areas form core areas of Bank Audit. As per RBI publication “Operations and Performance of Commercial Banks” dated December 24, 2019 Advances comprise around 58% of total assets of all Scheduled Commercial Banks put together for year ended March 31, 2019. This emphasize importance of Advances in the Banking. Hence, Advances also form an important area of Bank Audit. Read on…” The advances portfolio consists of Fund Based and Non Fund Based Advances. Fund based advances include Term loans, Cash Credits, Housing Loans, Education Loan, Overdrafts, whereas non fund based advances include Bank Guarantee, Letter of Credit. The various stages of advances are Appraisal, Sanctioning & Documentation, Disbursement, Monitoring and Repayment. The audit shall be carried out each of these stages. The revised LFAR issued by RBI consist questions on each of the above stage. Selection of Sample It is advisable that auditor should cover 60% to 70% of the total advances portfolio of the Branch, which covers all types of loan sanctioned by the Branch. As mentioned in Revised LFAR, for all accounts above 10% of outstanding aggregate balance of fund based and non-fund-based advances of the branch or ₹10 crores whichever is less, the transaction audit/account specific details to be seen and commented, whereas below the threshold, the process needs to be checked and commented upon. The Auditor shall read Credit policy / Product Document, delegation of power and Manuals/ Circulars before commencing the audit of advances. Brief Audit Process Appraisal The auditor shall review the appraisal note for sample advances which mainly contain information about Borrower, its business, sector of business, current financial position of the borrower, future financial projections. The auditor shall not only verify whether as part of appraisal process Branch has focussed on objective criteria like Current Ratio, Debt Service Coverage Ratio, Profitability, Debt Equity Ratio but also considered subjective criterias like present challenges to the industry which borrower belongs to, the overall market for the product, the geo political situation affecting borrower’s business, etc. If the Auditor finds factors like subjective factors mentioned above and notes that feasibility of achievement of projections, realizability of security, etc. are not commented in appraisal, the Auditor shall report the same in LFAR. “Auditor should verify whether the advance has been sanctioned by the competent authority and any deviation from standard terms and conditions is approved.” Sanctioning and Documentation Auditor should verify whether the advance has been sanctioned by the competent authority and any deviation from standard terms and conditions is approved. The auditor should verify whether documents are executed as per manuals, circulars and product notes. The auditor should also verify that the executed documentation has been vetted by empanelled advocate or by legal department of the Bank. In respect of Bank Guarantees issued auditor should verify whether Guarantees issued in format other than prescribed by the Bank, the Branch has obtained approval of Bank’s legal department. The auditor should verify whether Letter of Credits issued by the Branch are as per the prescribed norms. Also, verify in case of foreign LCs, the Branch has carried out swift reconciliation with CBS on daily basis. Disbursement The auditor should verify whether masters have been correctly created in the core banking system as per the sanction letters. The maker checker control has been exercised while creating masters. Also, the auditor should verify whether Branch has ensured end use of funds as per the Sanction Letter. Monitoring Auditor should verify whether procedure laid down by the controlling authorities of the bank, for periodic review of advances, including periodic balance confirmation / acknowledgement of debts, followed by the branch. In respect of cash credit account, the Auditor should verify whether stock and book debt statements are received on regular basis and analysed by the Branch. The auditor should also analyse stock and book debt statements on sample basis to verify whether slow moving inventories, debtors beyond days mentioned sanction letter, creditors, unrealisable stock has been reduced while calculating Drawing Power. In respect of Cash Credit accounts on sample basis, the auditor should verify whether funds have been withdrawn for business only. The same can be conducted by extracting account statements in excel. Repayment In respect of repayments of term loan, the auditor should verify whether Bank is exercising due diligence to verify the source of funds and in respect of credits in cash credit accounts, the receipts are business receipts only. Also, auditor shall verify the same on sample basis. In respect of closed accounts, auditor should verify whether account is closed in the CBS after following prescribed procedure. With respect to repayment received by debiting any office account, the auditor should verify the corresponding credit in the respective office account and source thereof. Also, review the process of operations and reconciliation of office accounts. Restructuring of Advances The current financial year 2020-21 has been a year with challenges for economy due to outbreak of pandemic. The first two months of financial year, the economic activity is at minimal due to lockdown. The same has adversely affected businesses and consequentially the repayment capacity of borrowers of the Bank. Hence, RBI has issued / extended following restructuring / resolution guidelines for stressed asset. As per Income Recognition and Asset Classification circular, if the account is restructured, then the same shall be classified as non performing, however RBI has allowed to retain the account as standard by issuing following circulars: RBI/2018-19/100 DBR.No.BP.BC.18/21.04.048/2018-19 dated January 1, 2019 Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances and RBI/2019-20/160 DOR.No.BP.BC.34/21.04.048/2019-20 dated February 11, 2020 Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances [Hereinafter referred as “MSME Restructuring Circulars”] RBI/2020-21/16 DOR.No.BP.BC/3/21.04.048/2020-21 dated August 6, 2020 Resolution Framework for COVID-19-related Stress and RBI/2020-21/34 DOR.No.BP.BC/ 13 /21.04.048/2020-21 dated September 7, 2020 Resolution Framework for COVID-19-related Stress – Financial Parameters [Hereinafter referred as “Covid Relief Circulars”] MSME Restructuring Circulars 1. Restructuring Under MSME Restructuring Circulars Eligible Borrowers Borrowers falling under category MSME borrowers. MSME is defined in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Pre-Conditions The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed ₹25 crore as on March 1, 2020. The borrower’s account was a ‘standard asset’ as on March 1, 2020. The restructuring of the borrower account is implemented by March 31, 2021. The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on March 1, 2020. Asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan. The asset classification benefit will be available only if the restructuring is done as per provisions of this circular. As hitherto, for accounts restructured under these guidelines, banks shall maintain additional provision of 5% over and above the provision already held by them. Account should not have been already restructured in terms of the circular dated January 1, 2019. Details of restructured accounts should be disclosed in notes to accounts in format specified in circular. 2. Covid Relief Circulars Eligible Borrowers are borrowers other than: MSME borrowers whose aggregate exposure to lending institutions collectively, is ₹25 crore or less as on March 1, 2020. Farm credit as listed in Paragraph 6.1 of Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 7, 2016 (as updated) or other relevant instructions as applicable to specific category of lending institutions. Loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi- Purpose Societies (LAMPS) for on-lending to agriculture. Exposures of lending institutions to financial service providers. Exposures of lending institutions to Central and State Governments; Local Government bodies (eg. Municipal Corporations); and, body corporates established by an Act of Parliament or State Legislature. Exposures of housing finance companies where the account has been rescheduled in terms of para 2(1)(zc)(ii) of the Master Circular – The Housing Finance Companies (NHB) Directions, 2010 after March 1, 2020, unless a resolution plan under this framework has been invoked by other lending institutions. However, from the date of this circular, any resolution necessitated on account of the economic fallout of Covid-19 pandemic, shall be undertaken only under this framework. Reference date: 1st March 2020 Date of Invocation: date on which both the borrower and lending institution have agreed to proceed with a resolution plan under this framework. Date of invocation shall not be later than 31 December 2020. Board Approved Policy: Board of Directors of Bank should lay down Board Approved Policy (include eligibility criteria for borrowers & due diligence consideration). Personal Loans Personal Loan refers to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc.). Conditions Standard, but not in default for more than 30 days with the lending institution as on March 1, 2020. Resolution framework must be implemented within 90 days from the date of invocation. Resolution under this framework may be invoked not later than December 31, 2020. The concessions / moratorium under resolution plans shall be subject to a maximum of two years. Criteria for Implementation of Resolution Plan Execution of Documentation. Changes are updated in system/ books. Borrower is not in default with the lending institution as per the revised terms. Asset Classification & Provisioning Lending institutions shall keep provisions from the date of implementation, which are higher of the provisions held as per the extant IRAC norms immediately before implementation, or 10 percent of the renegotiated debt exposure of the lending institution post implementation. Reversal of Provision Half of the above provisions may be written back upon the borrower paying at least 20 per cent of the residual debt without slipping into NPA post implementation of the plan, and the remaining half may be written back upon the borrower paying another 10 per cent of the residual debt without slipping into NPA subsequently. Loans Other than Personal Loans referred above Conditions Standard, but not in default for more than 30 days with the lending institution as on March 1, 2020. In case of multiple lending institution Resolution framework is approved by lenders having 75% of total outstanding (FB + NFB) and 60% of lending institution in numbers. Resolution framework must be implemented within 180 days from the date of invocation. Resolution under this framework may be invoked not later than December 31, 2020. The concessions / moratorium under resolution plans shall be subject to a maximum of two years. The Reserve Bank shall constitute a committee to decide financial parameters which, in their opinion would be required to be factored into the assumptions that go into each resolution plan, and the sector specific benchmark ranges for such parameters (Expert Committee). The financial parameters are prescribed in RBI/2020-21/34 DOR.No.BP.BC/ 13 /21.04.048/2020-21 dated September 7, 2020. Expert Committee shall also have the responsibility of vetting the resolution plans in respect of all accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is ₹1500 crore and above. The concessions / moratorium under resolution plans shall be subject to a maximum of two years. The Resolution Plan may involve any action / plan / reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership and restructuring except compromise settlement. The securities, if any received by Lending Institution by conversion of Debt into security shall be governed by extant instructions on investments. Valuation of Equity Shares Received The valuation of Equity Shares received as per resolution plan shall be as under: Equity instruments, where classified as standard: shall be valued at market value, if quoted, or else, should be valued at the lowest value arrived using the following valuation methodologies: Book value (without considering ‘revaluation reserves’, if any) which is to be ascertained from the company’s latest audited balance sheet. The date as on which the latest balance sheet is drawn up should not precede the date of valuation by more than 18 months. In case the latest audited balance sheet is not available the shares are to be collectively valued at Re.1 per company. Discounted cash flow method where the discount factor is the actual interest rate charged to the borrower on the residual debt post restructuring plus a risk premium to be determined as per the board approved policy considering the factors affecting the value of the equity. The risk premium will be subject to a floor of 3 per cent and the overall discount factor will be subject to a floor of 14 per cent. Further, cash flows (cash flow available from the current as well as immediately prospective (not more than six months) level of operations) occurring within 85 per cent of the useful economic life of the project only shall be reckoned. Equity instruments, where classified as NPA: shall be valued at market value, if quoted, or else, shall be collectively valued at Re.1. In case the lending institutions convert any portion of the debt into any other security, the same shall collectively be valued at Re.1. Resolution plans in respect of accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is ₹100 crore and above, shall require an independent credit evaluation (ICE) by any one credit rating agency (CRA). Additional Lending and Repayment should be routed through escrow mechanism. Criteria for Implementation of Resolution Plan Execution of ICA within 30 days by lenders having 75% of total outstanding (FB + NFB) and 60% of lending institution in numbers. Changes are updated in system/ books. Borrower is not in default with the lending institution as per the revised terms. Asset Classification & Provisioning Additional Finance standard till implementation of resolution plan – Standard, if not implemented within 180 days then classification based on extant guidelines for additional finance or based on original facility whichever is worse. In case where Resolution plan is implemented: For lending institutions which signed ICA within 30 days: higher of the provisions held as per the extant IRAC norms immediately before implementation, or 10 percent of the total debt, including the debt securities issued in terms of clause 30, held by the ICA signatories post-implementation of the plan (residual debt). Lending institutions which did not sign the ICA within 30 days of invocation: shall, immediately upon the expiry of 30 days, keep provisions of 20 per cent of the debt on their books as on this date (carrying debt), or the provisions required as per extant IRAC norms, whichever is higher. Even in cases where the invocation lapses on account of the thresholds for ICA signing not being met, in terms of clause 18 of RBI circular, such lending institutions which had earlier agreed for invocation but did not sign the ICA shall also be required to hold 20 percent provisions on their carrying debt. Reversal of Provision In respect of ICA signatories within 30 days: Half of the above provisions may be written back upon the borrower paying at least 20 per cent of the residual debt without slipping into NPA post implementation of the plan, and the remaining half may be written back upon the borrower paying another 10 per cent of the residual debt without slipping into NPA subsequently. In respect of the others: while half of the provisions may be reversed upon repayment of 20 percent of the carrying debt, the other half may be reversed upon repayment of another 10 per cent of the carrying debt subject to the required IRAC provisions being maintained. Performance Monitoring Default within monitoring period (i.e. 10 percent of the residual debt, subject to a minimum of one year from the commencement of the first payment of interest or principal (whichever is later)) shall trigger review period of 30 days. If default continues then downgraded to NPA from the date of implementation of the resolution plan or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier. Extension for Resolution of Stressed Assets RBI has issued direction ‘Prudential Framework for Resolution of Stressed Assets’ vide circular RBI/2018-19/ 203 DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019 with a view to providing a framework for early recognition, reporting and time bound resolution of stressed assets. The RBI circular RBI/2019-20/219 DOR.No.BP.BC.62/21.04.048/2019-20 dated April 17, 2020 on COVID19 Regulatory Package – Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets states as under: In respect of accounts which were within the Review Period as on March 1, 2020, the period from March 1, 2020 to May 31, 2020 shall be excluded from the calculation of the 30-day timeline for the Review Period. In respect of all such accounts, the residual Review Period shall resume from June 1, 2020, upon expiry of which the lenders shall have the usual 180 days for resolution. In respect of accounts where the Review Period was over, but the 180-day resolution period had not expired as on March 1, 2020, the timeline for resolution shall get extended by 90 days from the date on which the 180-day period was originally set to expire. The requirement of making additional provisions specified in paragraph 17 of the Prudential Framework shall be triggered as and when the extended resolution timeline expires. — CA. Nilesh Joshi

The Chartered Accountant • Journal of ICAI February 2021 • Vol. 69 • No. 8 • pp. 48–55 (Journal pp. 948–955) STRATEGY Mergers & Acquisitions – Growth Driver in Post-pandemic Era CA. Anik R. Koria The author is a member of the Institute. He can be reached at anikkoria@yahoo.co.in and eboard@icai.in. “Covid-19 has disrupted global economy, slowed down investments and growth, and impacted merger and acquisitions (M&As). However, covid-19 has taught the importance of being resilient. With vaccines available now, humanity is at the cusp of a turnaround. Strengthening fundamentals with favourable government policies would drive a V-shaped economic recovery, thus increasing opportunities for growth multifold. Post-pandemic, new opportunities and challenges would compel managements to adopt M&A strategies to grow, and increase competitiveness. “Old is Gold” – time-tested traditional defensive and offensive strategies refined with new learnings during pandemic would drive M&As post-Covid. With support of highly disciplined and objective due diligence and water-tight legal documentation to mitigate risks, M&A strategies can help companies to succeed and create significant shareholder value over long-term. Read on to know more…” I. Introduction Globally, M&As have made their presence felt since 19th century. Over more than a century, M&A tides picked up during economic boom driven by technological innovations, deregulation, privatisation, political stability, favourable laws, etc. and receded during economic turmoil driven by wars, recession, market crash, oil crises, pandemic, etc. Each tide achieved different outcomes such as globalisation, consolidation, diversification, conglomerate building, takeovers, management buyouts, leveraged buyouts, etc. Covid-19 has disrupted global economy. While traditional sectors such as manufacturing, logistics, hospitality, travel, real estate, etc. are bleeding; new-age technology driven sectors with focus on digital space have seen growth. GDP growth forecasts as per October-2020 IMF estimates are: Region 2020 2021 2021-25 average Global 4.4% 5.2% 4.1% India 10.3% 8.8% 7.8% Covid-19 dramatically shifted investor’s outlook, most of whom took conservative wait and watch approach for their investment and growth strategies, impacting global M&A landscape. Certain exceptions, such as M&As in technology and retail sectors, have been a silver lining to this dark cloud providing optimism. “Covid-19 dramatically shifted investor’s outlook, most of whom took conservative wait and watch approach for their investment and growth strategies, impacting global M&A landscape.” With roll-out of vaccines, world is at the cusp of a turnaround. Economic recovery and M&As would drive each other. Let’s revisit some of the traditional M&A strategies and discuss their relevance in post-pandemic era to create shareholder value. II. Alliance vs. Acquisition Ultimate objective of each firm is growth in shareholder value. Both alliances and acquisitions drive growth. While viewed interchangeably, both are alternative strategies. It is important to ensure that firms do not acquire where they should collaborate or vice versa. Decision to ally vs. acquire depends on synergies, resources required and market conditions. Alliances are less risky, co-operative and negotiated. Acquisitions are risky, competitive and at market price. There is no cookie-cutter approach to decide whether to ally or acquire. Managements err by force fitting the same strategy they once successfully implemented to all scenarios. Business development and M&A teams need to work together to adopt correct strategy every time. “Both alliances and acquisitions drive growth. While viewed interchangeably, both are alternative strategies.” Following are select few scenarios where alliance or acquisition may be adopted: Scenarios Suggested Strategy Example Pooling of independent resources Non-equity alliance Partnership between Intermiles loyalty program and airlines and hotels. Consumers earn loyalty points by travelling with airline and burn them to stay at a hotel. Sequencing interdependent resources Equity alliance Vaccine marketing company takes equity stake in Covid-19 vaccine developer to secure marketing rights for the vaccine. Optimising value chain Acquisition Merger of Exxon and Mobil in 1999 improved combined business and financial performance by strengthening global presence and reducing earnings volatility. Combining capacity Acquisition LVMH Moët Hennessy Louis Vuitton SE (“LVMH”), world’s leading luxury products group and owner of famous brands such as Louis Vuitton, Christian Dior Couture and Tiffany, made 65+ acquisitions worth ~USD 43.5bn in last 20 years driving growth through vertical integration, diversification and achieving economies of scope at group level. Eliminating redundant resources Acquisition Merger of SBI with its five associate banks in 2017 created large-scale redundancies. To save costs, SBI redeployed and disposed resources by rationalising several duplicate branches and offering voluntary retirement to several employees of associate banks. Pre-privatisation, BPCL offered voluntary retirement to several employees in redundant roles to reduce costs and become more attractive to bidders. Clarity on when to use which strategy will help to succeed and increase shareholder value. III. Traditional M&A strategies and their relevance in post-Covid era Pre-Covid, over last decade, number of M&As rose globally. Some transactions created value while others eroded value. M&A activities have slowed during pandemic. Post-pandemic, new opportunities and challenges would compel managements to adopt following key M&A strategies for growth: 1. Industry consolidation This has been one of the biggest drivers of M&A globally. Mature industries such as automotive, steel and petrochemicals suffer from overcapacity and related inefficiencies. Well-established industry leaders combine with less competitive players to regain competitive advantage through capacity rationalisation, market share gain, portfolio coherence, increased operational efficiency and enhanced innovation capabilities. To succeed, speed of integration and change management without bureaucracy is essential specially in case of merger of equals. Example: Bayer acquired Monsanto in 2018 for USD 66bn at a premium of ~45% to trading share price. Bayer felt the compulsion to acquire Monsanto, despite high premium, to ensure continued dominance post two large consolidations in global agriculture market in 2015-2017: (a) ChemChina acquired Syngenta for ~USD 43bn and (b) ~USD 130bn merger of Dow Chemical with Dupont. Bayer-Monsanto became a global behemoth with integrated agriculture business, widened product portfolio and strong R&D capabilities enabling it to control the global food value chain in terms of pesticides to be used and seeds to be planted. Some companies use consolidation cum restructuring to create coherent portfolios. Example: Dow Chemicals and Dupont’s merger of equals created a global leader in chemicals sector. Both companies first merged their businesses and realised synergies then over 18-24 months restructured in to three businesses: agriculture, material science and specialty products. Pandemic has led to significant demand destruction and inefficiencies across sectors. While demand would return gradually, there are opportunities across sectors to consolidate through M&A and gain competitiveness. Therefore, post-Covid, consolidation will continue to be one of the biggest drivers of M&A. 2. Diversification This strategy entails extension of company’s product line or market reach. These are win-win propositions. Acquirer gets entry into new product line or new geography with local management. Target gets access to capital, branding, marketing capabilities, modern technology and knowhow to compete rivals. Success depends on the ability to grow on each other’s strengths, market leadership and best practices. Example: Fuels and advanced mobility joint venture between RIL and BP plc enabled BP to enter India to tap large consumer market. Joint venture will leverage joint branding, RIL’s pan-India leadership and millions of consumers, and BP’s global experience in high-quality differentiated fuels and advanced mobility solutions. Example: Some international accounting firms entered India through acquisition of local firms. They acquired local management and talent and local firms benefitted from global brand name and knowhow. Several manufacturers are planning to fully or partially shift from China to India. M&A with Indian entities would enable global players to quickly enter India and shift supply-chains without causing severe disruptions to their global operations. “Well-established industry leaders combine with less competitive players to regain competitive advantage through capacity rationalisation, market share gain, portfolio coherence, increased operational efficiency and enhanced innovation capabilities.” 3. Divestment This strategy involves monetising non-core underperforming assets. This helps sellers to strengthen balance sheet, increase focus on reshaping and strengthening core businesses to increase competitive advantage and unlock shareholder value. It is important to identify correct assets based on strategic unfit, find a suitable buyer through a well-run process and move swiftly to maximise value and avoid stress sale, overcome resistance from stakeholders and minimise opportunity costs. Example: Jack Welch aggressively divested 117 business units accounting for 20% of GE’s assets during his first four years as CEO. Proceeds were deployed to revitalise GE’s core businesses and increase competitiveness over long-term. He viewed holding on to losing businesses as threat to GE’s existence. Ongoing economic stress would create several divestment opportunities including assets which rarely go on the block. Using this strategy proactively rather than reactively would help firms to quickly exit unjustifiable businesses, be future proof and protect shareholder value. 4. Ensuring survival At times M&As do not generate economic returns but are necessary to ensure survival. Survival may be at stake due to changes in technology, changes in consumer preferences, changes in laws, improvement in efficiency and effectiveness of competitors, losing market share, etc. In order to gain competitive parity and advantage and ensure continued survival in the fast-evolving market, an entity may engage in M&A. Example: Facebook acquired WhatsApp for USD 16bn to stay relevant in the social media space. Walmart acquired Flipkart for USD 16bn to achieve competitive parity, specially in e-commerce, with Amazon globally. In both cases acquirers have not reaped returns but deals ensured their global relevance and survival. Covid-19 has affected several large players across sectors. To ensure continued survival, large players with strong balance sheets would be scouting for stressed targets with strong fundamentals to regain market share and competitiveness. 5. Industry convergence This strategy involves evolution of new industry and business model which generates synergies by combining resources from existing industries whose boundaries are disappearing. Historically, this strategy has not been very prevalent. Given the recent focus to create digital platforms by combining several existing sectors such as telecom, technology, media, finance, retail, education, entertainment, etc., this strategy has already gained importance globally. As per NASSCOM, technology spending during pandemic has significantly increased with 30% jump in digital transformation deals and 80% jump in cloud spending. Example: Over last 5 years Jio has converged from a pure play telecom operator to a technology enable digital services company. Driven by this convergence, backed by strong business model, growth plans and relevance in post-pandemic economy, Jio completed one of its kind fund raise of USD 20bn, despite economic downturn, from strategic investors such as Facebook and Google, and several global marquee financial investors who have similar focus. 6. Deploying free cash flows Several firms which generate high cash flows have two alternatives: (a) to distribute dividend or buyback shares, (b) to reinvest in opportunities which would generate high returns for shareholders. In the latter, entities deploy M&A strategy to continue to create shareholder value. Example: In 2017-2018, LVMH deployed its free cash to acquire Christian Dior’s Couture Brand and Belmond. These acquisitions coupled with stabilisation of previous acquisitions of Hermes, Bulgari and Loro Piana during 2010-2016 led to almost tripling of LVMH’s share price in last four years. 7. Agency problems Management compensation is linked to entity’s growth and performance. At times, in order to increase compensation, management uses M&A to show growth despite no expected returns or synergies. Pandemic has taught importance of efficient use of resources. Therefore, shareholders should identify and block such management motives to avoid value erosion. 8. Management hubris At times, out of experience or arrogance and over-confidence, bidding entity’s management believes that they can manage the target assets more efficiently. Therefore, investors should correctly assess management’s capabilities to manage the target assets before approving the M&A to ensure that the investment and monetary discipline achieved during pandemic is not lost. While all M&As aim to create shareholder value, they represent different strategies. Post-Covid, objective evaluation of transaction rationale would be increasingly important to ensure continued focus on larger strategic goals and investors do not lose value due to loss of competitiveness or reckless management decisions. IV. Importance of Due Diligence (“DD”) Deal making is glamorous and exciting. While M&A team’s role is to successfully complete a transaction, it is equally responsible to suggest a no-go to management in case the proposed deal does not fit overall strategy. Initial high-level discussions in buyside M&As focus largely on financial models, valuations and publicity. However, the secret success mantra is a thorough high-quality objective DD deep diving into details to evaluate the following: “Deal making is glamorous and exciting. While M&A team’s role is to successfully complete a transaction, it is equally responsible to suggest a no-go to management in case the proposed deal does not fit overall strategy.” What are we buying? – assets, technology, customers, employees, capacity, supply-chain, new products, etc. Synergies – quantum, time and cost to integrate, realisation probabilities, etc. Intrinsic value – determine target’s standalone valuation on as-in basis excluding synergies using methods such as discounted cash flow, trading comparables, transaction comparables, etc. Risks and liabilities – litigations, regulatory non-compliances, undisclosed liabilities, contingent liabilities, unfunded employee benefits, charges on assets, etc. Price cap – maximum price beyond which one would walk away from the deal. A high-quality objective DD involves testing strategic rationale, SWOT analysis, evaluating entire business case, and identifying unrealistic assumptions and flaws in logic. Some organisations err in considering DD as hypothesis testing paper exercise and end up losing shareholder value. DD is a science as well as an art – combines backward looking findings with forward looking strategy. Pandemic has disrupted businesses across sectors. Therefore, post-pandemic, highly disciplined DD would be significantly important to equip management with effective tools to make right go-no-go decisions to create or safeguard shareholder value. V. Risk mitigation through legal documentation Once decided to go ahead with the transaction, legal documentation is critical to complete the deal. Several transaction issues such as bridging valuation gap, post-closing price adjustments, regulatory compliances, integration plans, governance mechanism, reserved matters, financing mechanism, distribution policy, material adverse event, exit rights, deadlock and dispute resolution mechanisms, warranties and indemnities, etc. get resolved only at documentation stage. “Several transaction issues such as bridging valuation gap, post-closing price adjustments, regulatory compliances, integration plans, governance mechanism, reserved matters, financing mechanism, distribution policy, material adverse event, exit rights, deadlock and dispute resolution mechanisms, warranties and indemnities, etc. get resolved only at documentation stage.” Certain issues have upfront monetary bearing for both parties. They deploy following key measures to mitigate economic risks: 1. Earnouts: Total consideration may be split in to two parts: (a) Upfront consideration, (b) Earnouts, i.e., deferred / contingent consideration. Payment of earnouts is dependent on achieving certain milestones related to growth, earnings, synergies, approvals, etc. to be achieved over a definite period. Larger the valuation gap or uncertainties, higher the earnout component. Earnouts motivate target’s management to deliver promised results and ensure efficient handover to acquirer. Example: In 2019, Saudi Aramco announced purchase of 70% stake in SABIC from PIF for ~USD 69bn. Initial consideration structure was heavy on earnout due to high growth and synergy estimates. Later, crude prices and petrochemicals margins fell and increased uncertainties. To manage cashflow risks, save costs and access debt market, parties agreed to further increase the earnout component. Evolution of earnout structure Upfront (%) Earnout (%) Initial agreement in March-2019 50% 50% up to December-2021 Amendment 1 in October-2019 36% 64% up to September-2025 Amendment 2 in June-2020 ~10% ~90% up to April-2028 While agreeing terms of earnout, it is important that long-term performance is not compromised to achieve short-term results. 2. Warranties, indemnities and holdback: Buyers ask for several warranties from sellers to hold them accountable for the disclosures during DD. In case of breach of warranties, sellers are liable to indemnify buyers subject to a de-minimis, basket and cap over a definite period. Buyers aim to include higher indemnities and sellers aim to minimise the same through warranties. Creating a balance through negotiations is a science as well as an art. To ensure that sellers fulfil their indemnity obligations in case of any warranty breaches, buyers may holdback part consideration to adjust the indemnities at the end of the period. Post-pandemic, buyers would seek Covid-19 specific warranties and higher indemnities to cover the risks of business continuity, operations, and financial performance due to impact of pandemic. Sellers may mitigate this risk by availing Warranty and Indemnity Insurance. 3. Material adverse event (“MAE”): MAE provides parties with walk away rights in certain events which lead to a material change after signing. Such events include insolvency, changes in laws / industry / business / assets, etc. Materiality of change and its long-term impact are important to trigger this. Post-pandemic, buyers would insist on including Covid-19 linked events such as next wave of virus spread, supply-chain interruptions, industry-wide disruptions, etc. Sellers would insist on including only specific and quantifiable events. Tough negotiations would be required to create a balance and ensure that neither party walks away from the transaction at the last minute without penalty. Covid-19 has only increased the M&A risks. Therefore, importance of risk mitigation through water-tight legal documentation has significantly increased for both parties to successfully complete the transaction. Otherwise, the parties would walk away from the deal even if positive synergies are expected. VI. Conclusion Covid-19 has taught importance of being resilient to manage continuity, learn and emerge stronger, and prepare for new normal. To counter economic downturn due to Covid-19, globally governments have introduced several positive fiscal, monetary and financial policy initiatives. Several Indian government initiatives such as “Make in India”, “Aatmanirbhar Bharat”, changes in FDI and other laws and tax concessions have increased the ease of doing business in India. India has become a hot destination for global investments attracting FDI inflows of ~USD 40bn during April-September 2020, despite slowdown due to Covid-19 restrictions. With V-shaped economic recovery and strengthened fundamentals, M&A transactions would increase multifold. “Old is Gold”. M&A principles have been well established over several decades. They have stood the test of time and only evolved and refined during downcycles. Post-pandemic, a combination of above discussed time-tested traditional and new defensive and offensive strategies would drive M&As to seize the opportunities to create shareholder value and overcome challenges to establish new economic order. — CA. Anik R. Koria References Harvard Business Review – March 2001, May 2002, April 2004, July-August 2004 Gaining and Sustaining Competitive Advantage, Fourth edition Media release and public filings of RIL and Saudi Aramco International Monetary Fund, World Economic Outlook Database, October 2020 FDI Statistics updated up to September 2020 by DIPP

The Chartered Accountant Journal • Capital Market • February 2021 Raising Funds with Rights Issue: A Right Strategy for Listed Companies during Covid-19 Era CA. Ketan Kakaria • CA. Amar Kakaria The authors are members of the Institute. Email: amar.kakaria@gmail.com • eboard@icai.in Citation: (2021) 69 CAJ 956–960 Pages 56–60 • Journal Page Nos. 956–960 Executive Overview & Context “Opportunities don’t happen. You create them.” As the saying goes, we know that due to unprecedented Covid-19 pandemic, several companies are struggling to raise finance and listed companies are not an exception. However, SEBI has pro-actively taken various measures to rationalise the process besides offering various relaxations for rights issues which can help listed companies to quickly raise funds to meet their requirements. Already dozens of large listed companies have taken benefits under this special scheme and their rights issues have got great response from the shareholders. Being an expert in financial domain CAs have a critical role to play by offering comprehensive solutions to listed companies by harnessing the opportunities and providing necessary support. Read on to know more… Background & Regulatory Framework Rights issue is a primary market offer in which all existing shareholders get an opportunity to acquire additional shares in the company on a pro-rata basis. Every shareholder can use his own discretion while choosing an option to buy shares and may decide to acquire entire or part of the eligible stake while renouncing balance to others. Though there is no compulsion on any shareholder to subscribe for shares as per his entitlement, often companies offer good discount over prevailing market price and so, usually majority of the shareholders opt for exercising their rights. Any company can raise funds by launching rights issue after complying with the provisions under the Companies Act, 2013, however, if the company is listed on recognised stock exchanges then applicable provisions under multiple SEBI regulations also need to be complied with: SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) SEBI (Buy-back of Securities) Regulations, 2018 Types of Rights Issues Rights issue can be of different types and the company may choose any one or combination of them to suit their requirements while offering an option to all its shareholders: Based on Paid-up Status: Fully Paid Rights Issue Partly Paid Rights Issue Based on Renounceability: Renounceable Rights Issue Non-Renounceable Rights Issue Based on ICDR Regulations: Fast Track Rights Issue Normal Rights Issue > ₹ 50 Cr Normal Rights Issue < ₹ 50 Cr Key Process Outline & Basis of Allotment The companies can opt for ‘Fast-Track Rights Issue’ of more than ₹ 50 crores if the conditions laid down in Regulation 99 of SEBI ICDR Regulations are met and in such cases, SEBI has offered multiple relaxations. Otherwise, the following standard process has to be followed by the company for the rights issue: Obtaining approval from the Board of Directors Appointment of various intermediaries for the issue including lead manager, registrar, banker, legal advisors, advertisement / PR agency, statutory auditors, etc. Underwriter need not be appointed as underwriting is not compulsory. Carrying out due diligence review and legal documentation besides determining offer price Obtaining in-principle approval from the regulator / stock exchanges Fixation of record date in consultation with the lead manager Sending abridged letter of offer and application forms Obtaining ASBA facility through bankers Crediting Right Entitlements (REs) in demat accounts through depositories Opening of Issue: Period remains open for 15 to 30 days Allotment of shares and refund of balance proceeds Sequential Hierarchy for Allotment of Equity Shares: Shareholders to the extent of their entitlement; Renouncees to the extent of their entitlement; If shares are still available, then one share to those eligible shareholders having fractional entitlement and who applied for at least 1 additional share; If shares are still available, then to those eligible shareholders who applied for additional shares in proportion to their holding as on the record date; If shares are still available, then to eligible Renouncees who applied for additional shares; If anything is left even after aforesaid allotment, then it would be treated as unsubscribed portion of the issue. It is generally distributed among the shareholders and renouncees who have applied for any additional shares. “Normal rights issue of more than ₹ 50 crores may usually take upto 6 months for completion. However, in case of ‘Fast-Track Rights Issue’ or issue having size less than ₹ 50 crores, the process can be completed in a span of around 3 months.” Pricing Mechanism & Theoretical Ex-Rights Price (TERP) The companies have been given complete freedom to determine pricing for the rights issue as per their choice, however, usually significant discount is offered over the prevailing market price in order to reward loyal shareholders and make offer attractive. Given the regulatory approvals required for issuing of shares below face value, traditionally offer price has been at the face value or higher. Due to discounted price of rights issue, the price of shares gets diluted. Hence, it is likely to go down with the increase in total number of shares after issue. Share price after issue can be estimated mathematically and is called as “Theoretical Ex-Rights Price” (TERP). Mathematical Formulation: TERP = [(Existing Shares × Existing Price) + (Rights Shares × Offer Price)] / Total Shares Value of Right = TERP – Offer Price Practical Illustration: XYZ Company announces rights issue of 1:2 (i.e. 1 share for every 2 shares held) at a concessional offer price of ₹ 70 while the current market price is ₹ 100. TERP = [(100 × 2) + (70 × 1)] / 3 = 270 / 3 = ₹ 90 Value of Right = 90 – 70 = ₹ 20 The shares of XYZ company may trade at ₹ 90 ex-rights and value of Right will be ₹ 20. However, this is an estimate based on mathematical calculations; actual market price may substantially differ based on market sentiments and prospects. Right Entitlements (REs) & Shareholder Options Rights Entitlements (REs) are the standard rights issued by the company to all its existing shareholders for subscribing to new shares. REs are offered to shareholders on pro-rata basis in proportion with their existing equity shares held as on the record date. If any shareholder is holding shares in physical form then he will have to provide details of his demat account for getting REs. REs are issued in dematerialised form and have separate ISIN, however, they can be traded in online as well as offline mode. Separate scrip code is issued by stock exchanges for trading of REs and while its opening price is decided by the exchanges, subsequently it is determined by the market dynamics. Anybody can purchase REs and also apply for the rights issue in the given proportion during the issue period. However, if no application is made by the purchaser of REs on or before closing date of issue then such REs will lapse. Once trading in REs stop then it cannot be extended again even if there is an extension of rights issue. Eligible shareholders can exercise any of the following 6 options during the rights issue: Apply for their rights fully as per their REs Apply for their rights fully as per their REs and also apply for excess rights shares Apply for their rights partly as per their REs and renounce balance REs Apply for their rights partly as per their REs but don’t renounce balance REs Renounce their REs fully Neither apply for rights shares nor renounce REs (REs will lapse) Strategic Advantages of Rights Issues Advantages to Companies: Very rare chance of failure Fastest mode of raising capital without incurring any extra debt Economical option: saves underwriting, advertising, and roadshow costs Motivation to existing shareholders via discounted pricing Preferred mode over preferential allotment due to relaxation in lock-in requirements Advantages to Shareholders: Retain proportionate voting rights and control Lucrative option to accumulate shares below market price Facility for physical holders to participate by submitting demat details Use of seamless R-WAP platform for resident individuals and HUF investors Promoter Creeping Acquisition & Trading Window Benefits: Exemption Beyond 5% Creeping Limit: Under the SEBI Takeover Code, promoters can ordinarily acquire up to 5% per FY. Through rights issues, promoters can acquire even beyond 5% without triggering a mandatory Open Offer under Regulation 3(2), provided the issue price is less than the ex-rights price. Trading Window Relaxation: As per SEBI circular dated 23-07-2020, REs can be bought or sold by promoters even during the Trading Window closure period. Special Relaxations by SEBI during Covid-19 Era Due to the ongoing Covid-19 pandemic, there is an unprecedented economic crisis resulting into huge scarcity of funds. Every company has to compulsorily wait for at least 1 year after completion of buyback process as per Regulation 24 of SEBI Buyback Regulations, 2018 if it wishes to raise further capital. However, SEBI temporarily reduced this timeline from 1 year to 6 months to give relief to corporates facing acute liquidity crunches. Further, SEBI issued various circulars after March 2020 to rationalise the process and offer major relaxations: Higher Threshold for Draft Filing: Filing of Letter of Offer to SEBI is not required for rights issues up to ₹ 50 crores (raised from earlier threshold of ₹ 10 crores). Minimum Subscription Relaxation: Waiver of compulsory 90% minimum subscription criteria, subject to prescribed conditions. Fast-Track Rights Issue Eligibility: Conditional relaxation to companies in case of pending show-cause notices, provided full disclosure of potential adverse impact is made. Truncated Disclosures: Financial statements restricted to last 1 year instead of the customary 3 years. Examples of Mega Rights Issues Successfully Mobilised: Reliance Industries: ₹ 53,124 crores M&M Financial Services: ₹ 3,089 crores Shriram Transport Finance: ₹ 1,500 crores Aditya Birla Fashion: ₹ 995 crores Key Role of Chartered Accountants In our nation of more than 135 crore Indians, hardly 5,000 companies are listed on nationwide stock exchanges, but their cumulative market valuation exceeds USD 2 Trillion. Under the Companies Act, 2013, financial statements of every company must be audited by a practising Chartered Accountant. Beyond audit, CAs provide premium advisory in accounts, taxation, corporate finance, restructuring, capital markets, risk management, and compliance. “As per Companies Act, 2013 financial statements of every company have to be audited by a practising Chartered Accountant. Besides audit and assurance, CAs are providing premium services to these listed companies in diverse areas such as accounts, finance, tax, fund raising, corporate restructuring, capital market advisory, risk management, compliance, etc.” While large conglomerates have in-house teams, mid-sized and small listed companies urgently need expert guidance to navigate SEBI relaxations. Chartered Accountants can bank upon their expertise and strong network across the entire lifecycle: Analysing requirement of funds and its quantification Devising suitable funding structure and issue type Appointment of intermediaries for the issue and legal documentation Determining size of issue and offer price Assisting the company for successful due diligence review Meeting requirements of regulators and complying with different regulations Co-ordinating with different agencies and bankers for timely receipt of issue proceeds Co-ordinating with stock exchanges and depositories for post-issue formalities Given the very high quantum of penalties for non-compliances under different securities regulations, working with maximum precaution is essential. Chartered Accountants can certainly play a pivotal role in tapping this immense advisory opportunity.

The Chartered Accountant Journal • Startups • February 2021 Startup Ecosystem in India CA. Raj Maniyar The author is a member of the Institute. Email: maniyarraj28@gmail.com • eboard@icai.in Citation: (2021) 69 CAJ 962–965 Pages 62–65 • Journal Page Nos. 962–965 Executive Perspective India is one of the leading hotspots in the world in terms of the startup ecosystem. India has the third largest startup ecosystem in the world, expected to witness year over year growth of a consistent annual growth rate of 12-15%1. Trying times like these have shown some of the brightest stars in this world. Some of the leading companies in the world were founded when the economies worldwide were in deep recession. The one common thing proved by these examples is that human minds and intellect have been pushed to their maximum during these times and the end results have been nothing but wonderful to say the least. The ongoing pandemic would be no exception to it and some large corporates are likely to be formed during these times. Read on… Introduction & Global Lessons from Recessions Some of the leading companies founded during the recession include Netflix (1997, dot.com bubble), Airbnb (2008 recession), and General Electric (1876, The Panic of 1873). The one common thing proved by these examples is that human minds and intellect have been pushed to their maximum during difficult times and the end results have been exceptional. The ongoing pandemic would be no exception to it and some large corporates are likely to be formed during these times. India, the 3rd largest startup ecosystem in the world, has a lot of opportunities to capitalise on the abundance of ideas which may result into wonderful businesses. The mechanism for startups in India is regulated by the Department for Promotion of Industry and Internal Trade (DPIIT). Various benefits, tax as well as non-tax, are available to startups. Now let us delve deeper into the regulatory bodies and statutory authorities providing various benefits to startups: Department for Promotion of Industry and Internal Trade (DPIIT) The DPIIT regulates all the startups in India. It gives recognition to the startups as such because of which startups are eligible to claim various benefits. The Startup India Initiative was announced by the Hon’ble Prime Minister of India on 15th August, 2015. The flagship initiative aims to build a strong eco-system for nurturing innovation and startups in the country that will drive sustainable economic growth and generate large scale employment opportunities. Further to this, an action plan for Startup India was unveiled by the Hon’ble Prime Minister of India on 16th January, 20162. To claim the various benefits available to a Startup, the pre-dominant requirement is that the company/LLP/partnership firm should be recognized as such by DPIIT. The eligibility criteria for startup recognition as per DPIIT, is as follows3: Eligibility Criteria for Startup Recognition as per DPIIT: Entity Structure: The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership (LLP). Turnover Threshold: Turnover should be less than ₹ 100 crores in any of the previous financial years. Age of Entity: An entity shall be considered as a Startup up to 10 years from the date of its incorporation. Innovation & Scalability: The Startup should be working towards innovation/improvement of existing products, services and processes and should have the potential to generate employment/create wealth. Note: An entity formed by splitting up or reconstruction of an existing business shall not be considered as ‘Startup’. Benefits to Startups under the Income Tax Act, 1961 Definition of “Eligible Startup” and “Eligible Business” under the Income-tax Act, 1961: “Eligible Startup” means a company or a limited liability partnership engaged in “eligible business” which fulfils the following conditions namely: Incorporated on or after 01st April, 2016 but before 01st April, 2021. The total turnover of the business doesn’t exceed ₹ 100 Crores4 in the previous year relevant to the Assessment Year for which deduction is being claimed. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government. “Eligible business” means a business carried out by an eligible startup engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation. The various sections/provisions of the Income-tax Act, 1961 which give benefits to startups are as follows: 1. Section 80-IAC: 100% Tax Holiday for Three Consecutive Years The gross total income of an eligible startup from an eligible business will be allowed a deduction of 100% for a period of three consecutive assessment years from any of the 10 assessment years5 starting from assessment year relevant to the previous year in which the company was first incorporated. This period of three assessment years would be at the option of the assessee. It has to be noted by the assessee that only gross total income relating to the eligible business will be allowed as deduction under this section. Any income other than income from eligible business would not be allowed as deduction. 2. Section 54GB: Capital Gains Exemption on Transfer of Residential Property Invested in Eligible Startups When the eligible assessee (being Individual or HUF) transfers any residential property (being a house or a plot of land and should qualify as a long term capital asset) and out of the net consideration6 received, subscribes for the shares of an eligible company before furnishing return of income before due date u/s 139(1) and the eligible company within one year from date of subscription by the assessee, purchases a new asset, then the capital gains arising on such residential house property will be exempted from tax. However, the capital gains will be exempted on a proportionate basis i.e. if amount of cost of acquisition of new asset is less than consideration, then only that proportion of capital gains which bears to the amount invested in new asset as divided by net consideration will be exempt from tax and the balance would be taxable. However, if amount of cost of acquisition of new asset equals to or exceeds net consideration, then the entire capital gains will be exempt. The eligible assessee should have at least 25% shareholding or 25% voting power in the company7. However, the shares subscribed to by the eligible assessee in the new company have to be held for a minimum period of five years and the new asset acquired by the new company also have to be held for a minimum period of five years. If the shares are sold by assessee before five years or new asset acquired by the company is sold within a period of five years, then the capital gains exempted earlier will become taxable. 3. Section 56(2)(viib): Angel Tax Exemption for Investments in Startups This section provides for taxation of income of such amount received for issue of shares to a Resident which exceeds the fair market value of such shares. However, for such amount to be taxed as income, the fair market value of the share should be more than its face value. However, such excess amount would not be taxable as such if such amount is received by a venture capital undertaking8 from a venture capital company or a venture capital fund. “This provides an incentive to these companies as some investors who have invested in the startup from the beginning can exit the company without having to pay tax on the amount received in excess of the fair value of the shares of the company and the company too can receive more funds for further expansion.” Difference in Startup Recognition as per DPIIT vis-à-vis Income-Tax Act, 1961 Partnership Firms: DPIIT recognises a partnership firm as a Startup whereas the Income-tax Act, 1961 (“the Act”) doesn’t recognise a partnership firm as a startup. Foreign LLPs: DPIIT recognises foreign LLPs as startups as well. However, the Act is silent on whether foreign LLPs too would be eligible to be recognised as startups if other conditions are satisfied. “Differences in policies adopted by Income tax Department and DPIIT for this flagship initiative of the Government of India be streamlined so that startup as per the Income-tax Act, 1961 and as well as DPIIT are at the same page. Uniformity in criteria in terms of startup recognition would be more beneficial overall including tax benefits.” Concluding Remarks & Fund of Funds Support Overall, the Indian Startup ecosystem appears to be booming in the years to come. With the appropriate measures taken by the Government, both the Government as well as the startups would benefit. Apart from the various tax benefits given by the Government to startups, it also provides various other services to startups like: Self-certification under labour and environment laws Faster exit for startups: The Ministry of Corporate Affairs (MCA) has notified Startups as ‘fast track firms’ enabling them to wind up operations within 90 days vis-à-vis 180 days for other companies9 Equity funding support: To provide equity funding support for development and growth of innovation driven startups, the GOI has set aside a corpus fund of INR 10,000 crores managed by SIDBI. The fund is in the nature of Fund of Funds, which means the GOI participates in the capital of SEBI registered Venture Funds, who invest twice the amount in startups. “All the above measures taken by the Government only emphasise the Government’s belief in the Startup ecosystem and in the minds, ideas and capabilities of Indians to create wonders. Undoubtedly, India will be instrumental in upspring of unicorns in the years to come.” Statutory Notes & References Startup India Official Portal: www.startupindia.gov.in Ibid. Startup India Action Plan unveiled on 16th January, 2016. G.S.R. notification 127 (E) dated February 19, 2019 issued by DPIIT. Substituted for ₹ 25 Crores by the Finance Act, 2020 w.e.f. 01-04-2021. Substituted for 7 assessment years by the Finance Act, 2020 w.e.f. 01-04-2021. Net consideration = Consideration received – expenses for transfer. Substituted for 50% by the Finance (No. 2) Act, 2019, w.e.f. 01-04-2020. “Venture Capital Undertaking” as per Alternative Investment Funds Regulations means a domestic company which is not listed on a recognized stock exchange in India at the time of investment and is engaged in the business for providing services, production or manufacture of article or things and does not include companies engaged in the following sectors/activities viz. non-banking financial companies, gold financing, activities not permitted under industrial policy of Government of India and any other activity which may be specified by SEBI in consultation with Government of India. The Ministry of Corporate Affairs (MCA) has notified Startups as ‘fast track firms’ enabling them to wind up operations within 90 days vis-à-vis 180 days for other companies.

The Chartered Accountant • Journal of ICAI February 2021 • Vol. 69 • No. 8 • pp. 66–74 (Journal pp. 966–974) GST E-Invoicing: Accelerating Digitisation CA. Anu K. S. The author is a member of the Institute. She can be reached at anu.ks911@gmail.com and eboard@icai.in. “The introduction of E-invoicing under GST in India can be regarded as a conscious step made by the government towards digitisation and transparency which was always been the motive ever since GST was implemented in India. As far as the history of Indian Indirect Taxes regime is concerned, digitisation was a barely explored possibility. It can definitely be argued that introduction of GST has pushed this possibility to a higher extent, by infusing technology into reporting, compliance and communication. One of the major reforms as part of this digitisation effort so far, is the introduction of E-invoicing. Read on to know more...” Introduction of e-invoicing received mixed response from the industry and information technology solution providers, it is evident that they accepted it as a challenge, without which it would not have become a success within such a short span of implementation. In this article, I would like to give a walk through of what E-invoicing is, how it affects the way business functions and what could be some of the best practices. What is E-invoicing? E-invoicing was initially misinterpreted as the generation of invoice on a government-owned portal. However, CBIC through its various FAQs clarified that E-invoicing is only a reporting of an already generated invoice. This is quintessential as business requirements differ significantly from industry to industry so do the form and contents of the tax invoices raised. It is pertinent to note at this point that Section 31 of the CGST Act, 2017 (“the Act”) read with Rule 46 of the CGST Rules, 2017 (“the Rules”) prescribes only the particulars to be included in a tax invoice. Neither does it prevent taxpayers from mentioning particulars over and above those listed in the Rules nor it prescribes any particular format. E-invoicing is a system in which Business to Business (B2B) invoices are authenticated electronically by GST Network (GSTN) for further use on the common GST portal. A 64-digit identification number called as Invoice Reference Number (IRN) will be issued against every invoice by the Invoice Registration Portal (IRP) managed by the GSTN. This IRN serves as a unique number in the GST system, irrespective of tax payer, financial year and document type. A B2B invoice generated by a specified person (to whom E-invoicing applies) without an IRN will not be considered valid under GST. A Quick Response code (QR code) will also be generated for every invoice reported to IRP, which if scanned with the NIC QR code scanning application, will display details relating to the particular invoice including the IRN. The primary purpose of E-invoicing is to bring in more transparency into the reporting in the light of leakage of Government’s revenue due to issue of fake invoices and reporting of bogus transactions for benefitting from input tax credit. The purpose however, is not single-sided. Businesses are also expected to benefit considerably by way of simplification of business to business communication and also from the inter-operability and standardisation which in turn results in ease of flow of information to various returns and other compliance requirements. Applicability of E-invoicing Registered persons covered: To facilitate the implementation of this new mandate, Sub rule 4 to 6 was inserted in Rule 48 vide CGST (Eighth Amendment) Rules, 2019 vide Notification No.68/2019 CT (dated 13/12/2019). Sub rule 4 gave the Government the power to notify the class of registered persons to be whom E-invoicing shall be applied. Accordingly, Central Board of Indirect Taxes and Customs (CBIC) released its first notification (Notification 70/2019 dated 13/12/2019) prescribing April 1, 2020 as the date by which E-invoicing shall be implemented by registered persons whose aggregate turnover in a financial year exceeds ₹100 crores. Subsequently, CBIC extended the time limit to October 1, 2020 and enhanced the turnover limit to ₹500 crores through the notifications that followed. Further, as the second phase of implementation of E-invoicing, vide Notification 88/2020 dated 11/11/2020, CBIC further extended the applicability to registered persons having aggregate turnover above ₹100 crores with effect from 01/01/2021. “Further, as the second phase of implementation of E-invoicing, vide Notification 88/2020 dated 11/11/2020, CBIC further extended the applicability to registered persons having aggregate turnover above ₹100 crores with effect from 01/01/2021.” It is worth noting that the aggregate turnover for this purpose has to be calculated at the PAN level, and not at the GSTIN level. This ensures that businesses which functions across states and across industries under different GSTINs will be uniformly covered under this compliance irrespective of their individual annual turnover, if the aggregate annual turnover of the business as a whole, at the PAN level exceeds the prescribed limit. Exemptions from Application of E-invoicing Exemptions have been given to the following entities from application of E-invoicing: Special Economic Zone Units Insurer or a banking company or a financial institution, including a non-banking financial company Goods transport agency supplying services in relation to transportation of goods by road in a goods carriage Suppliers of passenger transportation service Suppliers of services by way of admission to the exhibition of cinematograph films in multiplex screens Note: It has to be noted that the exemption in a) above is available only to SEZ units and not to SEZ developers. Documents covered: Following are the documents on which E-invoicing shall be applied: Invoices issued by the Supplier; Debit Notes issued by the Supplier; Credit Notes issued by the Supplier; Any other document as notified under the Act to be reported under e-invoicing. This means that documents issued under the Act in respect of a taxable supply alone are subject to E-invoicing. Other documents such as bill of supply, delivery challan etc. do not represent taxable supplies and hence are not under the purview. This essentially safeguards the interests of government towards protecting revenue and curbing fake ITC claims. Process Flow under E-invoicing 1. Invoice is generated as per the existing procedure As discussed earlier, there are no changes in the process of generation of invoice, which can be done as per the existing business process. 2. Details of the invoice are transmitted on to the IRP This is the first crucial step under the E-invoicing whereby businesses have to establish a connection between their local ERP and the GST IRP. At this step, we can examine in detail, what details must be transmitted and how it can be done. a) What must be transmitted? The CBIC has notified the e-invoice schema which is a standard format that contains mandatory and optional fields to be transmitted to the IRP for receiving IRN. Mandatory fields are those that must be compulsorily sent to the IRP without which a successful IRN will not be returned, whereas optional fields may/ may not be transmitted based on the business needs. For better understanding, the overall e-invoice schema which contains more than 200 fields can be broadly classified as under. However, each of the individual fields contain various specifications and validations which must be analysed one-by-one by taxpayers who are in the process of implementation: Basic Invoice details Supplier details Recipient details Item wise details Document level details Other references & additional details b) How it must be transmitted? 1. Using the offline tool: Under this method, taxpayer has to log onto the E-invoice portal and prepare and upload the details using the offline tool. Least automation and direct interaction between taxpayer and the IRP are the specialties of this method. 2. Using API (Application Programming Interface) through GSP integration: This is an automated process wherein the taxpayer’s ERP is integrated with any of the GST Service Providers (GSPs). GSPs are authorized organisations which provide services to taxpayers in various GST compliances through its web platform. Under this method, the taxpayer has to register their GSP on the IRP. The data undergoes a two-step transmission from taxpayer to GSP and then from GSP to IRP (through the established API connectivity) and receives the valid IRN back to the ERP. 3. Using API through direct integration: This method also involves integration with IRP similar to the second method, the difference being the absence of GSPs. Instead, the taxpayer establishes integration directly between the ERP and the IRP. This calls for considerably robust and stable Information Systems and network and hence involves higher cost considerations. 3. IRN and QR code are generated by IRP upon successful validation of the details Upon validation, either the IRP returns error(s) or successfully validates the data. If errors are received, the taxpayers have to analyse the reasons for the error(s) and rectify and reprocess such documents. After successful validation by the IRP, IRN and QR codes are generated. 4. IRN and QR code are received by the taxpayer In this step, the taxpayer receives back the IRN and QR code from the IRP. Mode of receipt differs based on the transmission methodology. 5. E-invoice data is automatically transmitted to GST common portal and E-way bill portal Though the cycle of transmission and validation of invoice details end with the preceding step, the process does not stop there. After the successful generation of IRN, the taxpayer’s invoice data enters into the GST database and is shared with different GST networks such as the common portal, E-way bill portal etc. The purpose of E-invoicing is completed only in this step, which introduces inter-operability of data. Details are auto-populated to GSTR-1 returns and E-way bill portal. Impact of E-invoicing Impact of E-invoice implementation may differ from industry to industry and from entity to entity, based on the nature of their supplies, business processes, billing processes, volume of transactions, level of automation in existing systems etc. However, certain general aspects which may be points of concern for most of the taxpayers can be broadly classified and analysed into two major categories- Outward supplies and Inward supplies. “One of the major benefits of E-invoicing is auto-population of data. The invoice details which are reported to IRP automatically get filled in the GSTR-1 return of the supplier. This simplifies the process of filing the return by avoiding the requirement to upload invoices and thereby also eliminating possibilities of errors.” Outward supplies: Customer confirmation and transport readiness: It might to be essential to ensure confirmation from customer before invoicing owing to the intricacies in the process of invoice cancellation once IRN is generated. Equipping the ERP system: Before the taxpayer decides to opt for API integration method, it is very important to understand the impact of the same in their ERP, identifying the extent to which the ERP can support the integration and enhancing the same to cater to the additional needs. This is a point where the respective IT support teams come into picture. Additions in the invoice format: QR code generated by IRP must be printed on the face of the invoice. Printing of the 64-digit IRN is optional and is left to the businesses to decide. These additional components in invoice will require consequent changes in the print format in the ERP/ billing software used by the taxpayer. Time limit for generation of IRN: IRN has to be generated latest by the day succeeding the date of invoice. That means, for an invoice raised today, IRN has to be generated today or tomorrow. This time limit has to be read keeping in mind Rule 48(5) which says that every invoice issued by a person to whom E-invoicing applies shall not be treated as an invoice if does not satisfy the e-invoice requirements. Therefore, the time limit for validation of an invoice is practically end of the succeeding day of invoice after which the document becomes invalid in the eyes of GST law. Invoice Cancellation: One of the significant impacts of E-invoicing on the billing process is the procedure for invoice cancellation. Taxpayers enjoyed practical freedom in raising and cancelling an invoice until they have filed their GSTR-1 for that particular month. However, E-invoicing provisions goes further and places a time limit for cancellation of E-invoice, as 24 hours. This means that an invoice once reported to IRP can be cancelled only within 24 hours from the time of generation of IRN, beyond which the invoice becomes automatically valid and can only be reversed by way of issue of a credit note. This provision ensures discipline in invoicing process and helps avoid unwarranted and delayed cancellations. Integration of E-invoice with E-way bill: At the time of implementation of E-invoicing, the option was left to the taxpayer to send details simultaneously to the E-way bill portal along with IRN generation. This helps in autopopulation of the invoice details in the E-way bill portal where the taxpayer can enter the transporter details and generate the E-way bill. However, as per the CBIC notifications, with effect from January 1, 2021 this has been made mandatory for all B2B and export invoices. This integration helps the Government considerably in terms of linking the invoice with E-way bill thereby in better tracking of the movement of taxable goods. Auto-population of invoices: As explained earlier, one of the major benefits of E-invoicing is auto-population of data. The invoice details which are reported to IRP automatically get filled in the GSTR-1 return of the supplier. This simplifies the process of filing the return by avoiding the requirement to upload invoices and thereby also eliminating possibilities of errors. From the month of December 2020, this feature has been enabled, through which auto-populated data can be viewed and verified by the taxpayer, and in case of any deviations from the actual invoice details, can be modified/ updated as well. “E-invoicing can be a major challenge for those businesses having limited access to sophisticated IT infrastructure that the reform calls for. However, in the long run it will bring more transparency and ease of operation for the MSMEs which can improve their credibility as well as operational efficiency.” Inward supplies: Enforcing compliance from vendors: It has to be ensured that the vendors having an annual turnover of more than ₹500 Crores at the PAN level submit invoices with valid IRN and QR code. This is important as the invoices issued without IRN will be invalid and accordingly ITC cannot be claimed on such invoices. Hence it is important to identify the vendors covered under E-invoicing. Currently, a functionality is made available on the IRP for downloading the list of taxpayers following E-invoicing all over the country, which will be of use. Amendments in purchase orders: Since E-invoicing is an additional compliance requirement to be taken care by the vendors, a separate clause must be added in purchase orders for enforcing the compliance with E-invoicing regulations. Obtaining written declarations: It is advisable to obtain written declarations from vendors regarding applicability of E-invoicing to them and confirmation of compliance, if applicable. This will serve as a basis for the recipients for availing the ITC. Validation of IRN and QR code: Since invoice must contain a valid IRN and QR code, verification of the same using the NIC QR code reading application is important. This is a challenging requirement considering the volume of purchase invoices that the taxpayer may be dealing with, on a daily basis. Ensuring accuracy in vendor’s E-invoice: E-invoicing adds one more layer to the GSTR-2A reconciliation and further complicates the process. Suppose the vendor reports an invoice against a wrong GSTIN and generates IRN on the same. The invoice will be missing in our GSTR-2A and the same will be reflected only at the time of reconciliation. By that time the time limit for cancellation or amendment of the invoice would have expired and the vendor is left with the only option of issuing a credit note. Hence, close monitoring of the GSTR-2A is furthermore necessitated by the E-invoicing regulations. It is important to note that the second phase of E-invoice implementation has brought under the ambit, those enterprises qualifying as Medium Enterprises as per the new MSME definition (having turnover up to ₹250 Crores). E-invoicing can be a major challenge for those businesses having limited access to sophisticated IT infrastructure that the reform calls for. However, in the long run it will bring more transparency and ease of operation for the MSMEs which can improve their credibility as well as operational efficiency. Best practices under E-invoicing Following could be some of the best practices under E-invoicing to ensure smooth functioning: Ensuring the existence of values in all mandatory fields to avoid errors at the time of IRN generation. Securing access rights on ERP and IRP for generation and cancellation of documents. Daily monitoring of IRNs generated on the previous day by an independent person (preferably person handling GST compliances) could be useful to identify errors if any and enabling cancellation within 24 hours. Printing IRN on the invoice even though optional, is being followed by taxpayers as an additional compliance. Reconciling the ERP report for outward supplies with the auto-populated details as per the GSP/ GST portal. Closely interacting with GSPs and IT personnel to assess the impact and implement changes in the e-invoice schema. GST has brought a new era of digitisation in tax compliance and E-invoicing is a bold move in this direction. Entering into the fourth month of implementation, amidst the difficulties due to changes in schema and technical issues, this initiative has been welcomed by the major GST taxpayers. Going forward, through the phased implementation by other categories of taxpayers as well, it is expected to create an impact on the way businesses function in the Indian economy. Let us appreciate CBIC and NIC for their tremendous efforts in this initiative. — CA. Anu K. S. References: GST Act and Rules CBIC notifications and FAQs

The Chartered Accountant Journal • GST • February 2021 Consideration – Evolving Judicial trends CA. S Rahul Jain The author is member of the Institute. Email: rahul.s.jain1987@gmail.com • eboard@icai.in Citation: (2021) 69 CAJ 975–978 Pages 75–78 • Journal Page Nos. 975–978 Executive Summary & Scope The article attempts to discuss the broad principle of what constitutes ‘consideration’ alongwith two important decisions under the service tax regime which have been rendered in the context of banks and NBFCs. These decisions crystalize certain crucial guidelines to determine as to what constitutes ‘consideration’ and how, not every payment which is collected is a consideration for a service. Read on to know more… Introduction & The Litigative Dilemma What constitutes ‘consideration’ has become one of the most disputed areas of litigation under indirect taxes. The phrase ‘consideration’ attains significance in the context of taxes which are contract-based levies. Under the erstwhile service tax regime, the tax was payable on the consideration which was received by the service provider for the provision of service. In the GST regime as well, but for the exception to Schedule I transactions, a supply is taxed only when it is made for a ‘consideration’. Usually, to tax a transaction, the steps to be followed are: Step 1: Establish the occurrence of the taxable event of provision of service or making of a supply, and Step 2: Identify if there exists a consideration towards such an activity of provision of service or making of a supply. If the conditions given in the aforementioned steps are cumulatively satisfied, one may state that there exists a liability to discharge tax. However, by looking at the recent litigation trends, the revenue authorities appear to directly jump to Step 2 without crossing the threshold of Step 1. In other words, whenever there is any amount which is received or retained by a party, the revenue deems this amount to be a consideration. Subsequently, this amount is mapped towards some activity (in most cases under the declared entry of agreeing to the obligation to perform any act) and tax demand is made. These litigation trends are expected to continue into the GST regime as well. Concept & Statutory Definition of Consideration Before dealing with these decisions, it is pertinent to discuss the meaning and scope of the phrase ‘consideration’ and how it is different from a mere condition of the contract. Under the Service Tax regime, consideration was defined under Explanation to Section 67 interalia to include any amount that is payable for the taxable services provided or to be provided and any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed. Further, Section 2(31) of the CGST Act defines the term ‘consideration’ as any payment (in money or otherwise) or monetary value of any act or forbearance can constitute consideration if it is made in respect of, in response to or for the inducement of supply. In order to understand the true meaning of ‘consideration’, reliance is also placed on the definition of the term ‘consideration’ under Section 2(d) of the Indian Contract Act, 1872 as follows: “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise” As per the above definition, ‘consideration’ requires that something of value must be given and that something will either have a benefit to the promisor or be a detriment to the promisee. But the benefit or detriment for each promise should be looked at separately. [Chitty on Contracts, 28th Edition – Page 170 Para 3-007]. “Thus, on a conjoint reading of the above definitions, ‘consideration’ would refer to everything received or recoverable in return for a promise of supply which may be in the form of a monetary or even non-monetary term.” At this juncture, it is also important to note the decision of the Pinnel’s Case (1602) 5 Co Rep 117, wherein it has been held that the promise to pay part of a debt cannot be consideration for a discharge of the whole debt. In the Indian context, Section 63 of the Indian Contract Act states: ‘Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit’. The effect of this section is that the consideration agreed between the parties will change based on the performance of the contract and consideration need not be static. Condition of Contract vs. Consideration & The N.M. Goel Principle The question of ascertainment of consideration in a particular contract has to be answered from the terms and conditions of a contract. In such a case, the ‘consideration’ in a contract has to be distinguished from the mere ‘conditions of the contract’. The determining factor, therefore, to treat a monetary payment or non-monetary facility as consideration is whether it is in the nature of a mere condition of the contract or consideration providing an economic value to the supplier. Decision of the Hon’ble Apex Court in N.M. Goel & Co. To understand the concept of condition of contract in contradistinction to consideration, it is important to discuss the decision of the Hon’ble Apex Court in N.M. Goel & Co. Vs Sales Tax Officer, Rajnandgaon [1989 AIR SC 285]. In this case, the assessee was engaged by Public Works Department (PWD) for construction work, wherein PWD agreed to supply the materials from its stores for the construction work and the agreement further provided for deduction of the prices of materials so supplied and consumed in the construction, from the final bill of the assessee. The issue therefore was whether there was sale of the material by the PWD (an unregistered dealer) to the assessee. The Hon’ble Apex court held that as per the agreement the iron, steel and cement were supplied by PWD to the assessee not free of cost but were to be deducted from the bills payable by PWD to the assessee. Though there is no inherent sale, a sale can be inferred from the transaction. Thus, the Hon’ble Apex Court held that there was passing of property in the goods to the assessee from the PWD, though these materials were later incorporated in the construction for the benefit of PWD. Judicial Trend 1: Foreclosure Charges – The Repco Finance Case Having laid out the context and scope of the definition of Consideration, the first decision which merits consideration is the case of the Hon’ble Larger Bench of the Tribunal in the case of Repco Home Finance Limited1. The issue pertains to taxability of foreclosure/pre-closure charges collected by the banks. Any financial institution’s primary business involves lending of money and the consideration for such money lent is collection of ‘interest’. The interest compensates for the ‘time value of money’. The arrangement with the borrowers usually contains a clause which allows the borrower to ‘foreclose’ or ‘pre-close’ the loan by repaying the outstanding principal amount before the specified time period. One of the incentives for the borrowers to close the loan before its tenure is in cases where the rates of interest in the market is lower and the interest which he has to pay on the original loan obtained is higher than the market rate. “One of the incentives for the borrowers to close the loan before its tenure is in cases where the rates of interest in the market is lower and the interest which he has to pay on the original loan obtained is higher than the market rate.” Although, prima facie, it may appear that the recovery of principal from borrowers is beneficial for the financial institution; this practice is in fact detrimental as the financial institutions must now find out new investment opportunities to keep earning the ‘interest’ on this principal. In order to compensate for the ‘interest loss’, the banks usually charge foreclosure charges from the borrower who is foreclosing the loan. In this backdrop, the revenue alleged that the amount received by the financial institution in the form of foreclosure charges would constitute a consideration for provision of banking services. The Hon’ble Tribunal examined the concept of ‘consideration’ in detail and held that an amount would qualify as a consideration only if such amount flows from the service recipient to the benefit of the service provider. The foreclosure of loan is, therefore, a material breach of contract as it curtails the loan service period unilaterally, which can prompt the promisor to claim damages. The Tribunal further observed that the charges in the present case are recovered as compensation for disruption of a service and not towards provision of “lending” services. The Tribunal also examined the definition of consideration under Section 2(d) of the Indian Contract Act, 1872, which states that consideration should flow at the desire of the promisor. The Tribunal observed that the financial institutions being the promisors did not desire pre-mature termination of the loan. Once the money did not flow at the desire of the service provider, it no longer retains the character of a consideration. Judicial Trend 2: Foreign Bank Charges – State Bank of Bikaner’s Case Another judgement laying emphasis on the aspect of consideration is the decision of the Hon’ble Tribunal in the case of M/s State Bank of Bikaner2. In this case, a humongous demand of over ₹ 100 Crores was raised on the Assessee claiming they were the recipients of service provided by Foreign Bank. For greater clarity, the brief facts of the case in one of the transactions are stated herein. The Assessee bank was appointed by an Indian Exporter for enabling him to realise the export proceeds from a foreign importer to whom the goods were sold. The Assessee bank, thereafter, co-ordinated with the Foreign Bank of the foreign importer, for realizing the proceeds. For this purpose, various activities were performed by the foreign bank and the Indian Bank (banks in India) such as sending export documents, issuing Letter of Credit, providing documents of title to goods etc. Converse scenarios also existed where the assessee may be an importer and may avail the service of the Indian Bank for remitting payments to foreign suppliers. However, the demand under reverse charge mechanism was made only on export related transactions. In case of exports, the foreign bank usually deducted their fee for the performance of the activity and remitted the net amount to the Indian Bank. Such fee was either borne by the Indian Assessee or the foreign importer based on mutual agreement between the parties. The Department took a view that the amount retained by the Foreign bank was a consideration for the service it provided to the Indian Bank. In other words, the income earned by the foreign bank was an input service for the Indian Bank for them to provide their output service to the Indian Assessee. The matter was extensively argued before the Hon’ble Tribunal. The Hon’ble Tribunal dealt with the core issue of whether the amount retained by the Foreign bank would constitute a consideration for the service provided to the Indian Bank. After relying on the landmark decisions of the Hon’ble Supreme Court in M/s Bhayana Builders3 and M/s Intercontinental Consultants and Technocrats4, the Tribunal held that the Assessee Bank has not paid any consideration to the Foreign Bank and the assessee bank would not qualify as a recipient of any service by the Foreign Bank. The Assessee bank was merely facilitating the transaction of export on behalf of the Indian Exporter and there was no service provider and service receiver relationship between the Indian Bank and Foreign Bank. While holding so, the Hon’ble Tribunal also emphasised on the very important facet that there is a marked distinction between a condition of a contract and a consideration for the contract. A service provider or recipient may be required to fulfil certain conditions of the contract but that may not necessarily mean that same becomes a consideration and thus, a part of the value of the service. The Four Essential Pillars of Taxation: The important take away from the State Bank judgement is that before making a demand of tax, it is imperative to clearly identify the four elements of taxation which creates the levy5: (i) Person providing service; (ii) Person receiving service; (iii) Actual rendering of service; and (iv) Consideration for service. Conclusion & Broad Jurisprudential Implications The two decisions discussed supra are seminal decisions in their own right for determining what constitutes consideration for a service and how to differentiate between a mere condition of the contract which the parties are required to fulfill and the consideration which flows at the desire of the service provider/supplier and has a direct nexus with the service provided. Further, even though the judgements were rendered in the pre-negative list regime, it will nonetheless go a long way in shaping the jurisprudence on ascertaining the liability to pay service tax (negative list regime)/GST on different types of remittances/retentions. To illustrate a few: a. Forfeiture of advance b. Liquidated damages due to delay in performance c. Failure to comply with minimum commitment requirements d. Notice pay One can only hope, that the taxman and the taxpayers truly appreciate the ratio of the above rulings and adopt their positions on taxability of various transactions accordingly. Judicial Citations & References (2020) 117 taxmann.com 755 (Chennai – CESTAT) (LB) 2020 (8) TMI 80 – CESTAT NEW DELHI [(2018) 91 taxmann.com 109 (SC)] [(2018) 91 taxmann.com 67 (SC)] These four elements were explicitly propounded by the Hon’ble Delhi High Court in Delhi Chit Fund Case [(2013) 32 taxmann.com 332 (Delhi)]

The Chartered Accountant • Journal of ICAI February 2021 • Vol. 69 • No. 8 • pp. 79–84 (Journal pp. 979–984) GST Are there any Fetters to the Concept of ‘Supply’ under GST? CA. Gajendra Maheshwari The author is a member of the Institute. He can be reached at gajendramaheshwari2000@gmail.com and eboard@icai.in. “In levying taxes and in shearing sheep it is well to stop when you get down to the skin”, —Austin O’Malley. Even though the definition of ‘supply’ under the GST law is wide, but the courts in India and abroad while dealing with different fact situations have carved out inherent limitations to the scope and meaning of ‘supply’. Such limitations have been determined irrespective of the wording of the charging section, i.e. whether the same is inclusive or restrictive. Read on… 1. Background 1.1 GST is a tax levied on the ‘supply’ of ‘goods’ or ‘services’ or both. While the word ‘goods’ has a specific meaning assigned under the GST law, ‘services’ has been primarily defined to mean ‘anything other than goods’ with specific exceptions. 1.2 Further, the term ‘supply’ has been given an inclusive scope under the GST law. 1.3 Given that there is, (a) the scope of ‘supply’ is extensive; and (b) the word ‘services’ entails a very wide meaning, it is relevant to study whether GST applies on each and every economic activity or there are some boundaries or limitations on its applicability. 1.4 To put this into perspective, understanding the scope of supply is relevant to determine whether GST applies on activities such as, payment of liquidated damages; insurance compensation on account of damage of office building due to fire; payment as a result of out of court settlement with an agreement not to file any court case; government grants etc. 1.5 The purpose of this study paper is to discuss the scope of ‘supply’ and the fetters, if any, that apply so as to limit its applicability in the light of relevant legal provisions, rulings etc. in India and abroad. 2. Relevant GST provisions in India concerning ‘supply’ 2.1 Legal provisions under the GST law to the extent they are relevant for the present study along with their analysis is made hereinbelow1: Legal Provisions Analysis Section 9 of the CGST Act:Levy and Collection (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the Central Goods and Services Tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 … This is the charging section for levy of GST According to the section, the tax is levied on ‘supply’ of ‘goods’ or ‘services’ or both The section does not always require the presence of two persons for attracting the levy. In other words, as soon as a taxable person ‘supplies’ goods or services or both, GST becomes chargeable. There is no distinction between business purpose or non-business purpose Sections 2(52) and 2(102):Definitions of ‘goods’ and ‘services’ 2(52) “goods” means every kind of movable property other than money and securities but include actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply; 2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form currency or denomination for which a separate consideration is charged; Due to the use of word ‘means’ both the definitions are restrictive in nature Only the specific elements are included in the definition of ‘goods’ (e.g., specific movable properties, actionable claims etc.) However, ‘services’ are defined to mean ‘anything other than ‘goods’ The word ‘anything’ has very wide connotation. Accordingly, any activity, action, transaction, thing or subject that is not covered in the definition of ‘good’ falls under the definition of ‘service’2 Section 7 of the CGST ActScope of Supply (1) For the purposes of this Act, the expression “supply” includes– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; … … The definition specifically lists various forms of supplies, i.e.: sale transfer barter exchange licence rental lease disposal In spite of specifically stating various aspects of a transaction, the legislators have still chosen to keep the definition an ‘inclusive’ one, connoting that the scope is wider than what is explicitly stated in the provision 2.2 Thus, solely on a literal interpretation of the provisions one may say that the scope of supply is limitless, i.e. it covers within its ambit each and every economic activity irrespective of its nature apart from the specific forms of supply stated in the section. If that were correct, GST would apply even on alimony money received by a wife upon divorce, winning from game shows (e.g., kaun banega karorpati) etc. 2.3 However, a conclusive view on the nature and scope of supply is only possible on the basis of the careful examination of the legal provisions surrounding the scope of supply in other jurisdictions. 3. Scope of Supply – International Perspective 3.1 For the purpose of the present study, three overseas laws viz., EU, Australia and New Zealand are examined for understanding the scope of supply from an international perspective. EU VAT Australia New Zealand Article 14 - Supply of goods: 1. ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner….. Article 24 – Supply of services: 1. ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods….. You make a taxable supply if: (a) you make the supply for consideration; and (b) the supply is made in the course or furtherance of an enterprise that you carry on; and.... 5. Meaning of term supply (1) For the purposes of this Act, the term supply includes all forms of supply. ….. 3.2 Unlike India, the term ‘supply’ under European Union VAT and Australian GST laws has restrictive definition (due to the use of word ‘means’). However, the GST law in New Zealand provides an inclusive definition of supply (due to the use of word ‘includes’) similar to the one provided under the CGST Act. 3.3 At this stage, it is relevant to examine further key legal provisions and court rulings deliberating on the scope of supply in these three jurisdictions. 3.4 European Union 3.4.1 The EU VAT law provides that the supply of services for consideration within the territory of a Member State by a taxable person acting as such shall be subject to VAT3. 3.4.2 Due to the wide ambit of the definition of ‘service’ (i.e. any transaction which does not constitute a supply of goods)4, the courts on multiple occasions have commented on the true nature of supply. 3.4.3 The ECJ ruled in Tolsma’s case5 that supply of services is taxable only where it is provided for a consideration: “only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.” Applying the above principle, it was held that: “if a musician who performs on the public highway receives donations from passers-by, those receipts cannot be regarded as the consideration for a service supplied to them.” 3.4.4 Another issue came up in the context of the provision that ‘the obligation to refrain from an act, or to tolerate an act or situation’ is included in supply of services6. The question was about applicability of VAT on the compensation received by a farmer from Government pursuant to an undertaking given by him that he would not harvest at least 20% of his potato crop. Giving the verdict, ECJ in Landboden-Agrardienste’s case7 held that: “since the undertaking given by a farmer to reduce production does not entail either for the competent national authorities or for other identifiable persons any benefit which would enable them to be considered to be consumers of a service, it cannot be classified as a supply of services within the meaning of Article 6(1) of the Sixth Directive” 3.4.5 Similarly, in Jurgen Mohr’s case8, ECJ ruled that VAT is a tax on consumption of goods or services. Accordingly, the court held that: “the undertaking given by a farmer that he will discontinue his milk production does not entail either for the Community or for the competent national authorities any benefit which would enable them to be considered consumers of a service. The undertaking in question does not therefore constitute a supply of services within the meaning of Article 6(1) of the Directive. Consequently, any compensation received for that purpose is not subject to turnover tax.” 3.4.6 Hence, by drawing an analogy from the ECJ rulings, it can be said that in order to constitute a taxable supply there should exist: legal relationship between the supplier and recipient; reciprocal performance by the supplier and recipient; and consideration for both supplier and recipient. 3.5 Australia 3.5.1 Even the Australian courts have restricted the scope of supply to a certain extent by holding that the term supply clearly shows that it requires a voluntary act by the supplier. 3.5.2 In Shaw’s case9, it was held that: “The verb “make” indicates a legislative intention to impose the tax only on voluntary supplies, not upon those supplies that occur without an act of the releasor…” 3.5.3 In furtherance of this principle, it was ruled that the compulsory acquisition by the government does not qualify as supply under the Australian GST law as there is no voluntary act by the supplier.10 3.5.4 In this regard, another ruling11 laid down the general principles with respect to consideration: “There must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. … GST is not payable on a supply unless it is made for consideration, and the other tests in section 9-5 are satisfied. There must be a sufficient nexus between the supply and the payment.” 3.5.5 Hence, even under the Australian jurisprudence, for levying the tax on supply: there should be an act of making supplies, i.e. supplies that are involuntary (e.g., compulsory acquisition) are outside the ambit of the tax net; there should be a consideration for making the supply; and nexus should be present between the supply and payment. 3.6 New Zealand 3.6.1 GST law in New Zealand provides a wider ambit to the scope of supply, and the courts have examined its scope on multiple occasions. 3.6.2 In Databank Systems’ case12, while interpreting the scope of supply, the court laid down that the term supply means to ‘furnish’ with or ‘provide’. It was observed that the definitions of ‘provide’ and ‘furnish’ in the Concise Oxford English Dictionary include ‘make available for use; supply’ (provide) and ‘be a source of; provide’ (furnish). Basis this discussion it was held that the scope of ‘supply’ is, wide enough to include both active and passive activities. 3.6.3 In yet another ruling, while interpreting Section 5(1) of the New Zealand GST Act, it was held that supply “includes all forms of supply” which means that virtually any transaction constitutes a supply but a supply is only subject to GST if it is made in the course or furtherance of a taxable activity.13 3.6.4 As regards presence of consideration in order to constitute a taxable supply, in NZ Refining Company’s case14 the court held that for payment to be consideration for a supply, a sufficient connection must exist between the supply and the payment. 3.6.5 Thus, in spite of the wide and inclusive definition of supply the courts in New Zealand have held that for taxability of a transaction: a sufficient connection must exist between the supply and payment of consideration; legal nature of the transaction and the rights and obligations of the parties need to be considered to determine if the necessary relationship exists between the supplier and receiver. 3.7 Having discussed the jurisprudence on the scope of ‘supply’ in the three overseas jurisdictions, it is of utmost importance to discuss one recent ruling by Bombay High Court on the scope of supply. 4. Ruling of Bombay High Court in Bai Mamubai Trust’s case15 4.1 Bombay High Court in Bai Mamubai’s case got an opportunity to divulge the scope of ‘supply’. The issue under consideration was whether GST applies on the royalty that is collected from the occupant for the period he remains in possession of the suit premises either during the pendency of the eviction suit or at the time of passing of the decree of eviction. This issue came up because during the pendency of the case, a Court Receiver was appointed for collection of the royalty (i.e. payment in lieu of the occupation) during the pendency of the dispute. 4.2 The court after closely examining the provisions of CGST Act and various case laws (including case laws of foreign jurisdictions) explained the scope of ‘supply’. The key finding of the court in this respect is summarized below: The supply doctrine does not contemplate or encompass a wrongful unilateral act or any resulting payment of damages (para 58) Presence of reciprocal enforceable obligations is necessary in order to constitute taxable ‘supply’ (para 76) For a supply to fall under Section 7(a), 7(b) or 7(d) of the CGST Act there must be a contemplated consideration. Only activities specified in Schedule I to the CGST Act are considered as supply, even if made without consideration. Other activities (that are not part of Schedule I) if made without consideration, are not taxable (para 79) 4.3 Basis the above, the Hon’ble Court concluded that in the absence of any reciprocal relationship, no GST is payable on the royalty amount. 5. Conclusion 5.1 On a holistic view of the above discussion, it can be noticed that across different jurisdictions there are various common threads about the scope of ‘supply’. The courts while dealing with different fact situations have carved out inherent limitations to the scope and meaning of ‘supply’. Such limitations have been determined irrespective of the wording of the charging section, i.e. whether the same is inclusive or restrictive. 5.2 Three key principles that can be churned out on the basis of the present study are summarized herein below, along with their practical applicability to different activities: Principle 1: An unilateral or voluntary act does not constitute taxable supply For example: an athlete receiving award from government or corporates for winning a medal in an international event, cannot be said to have provided taxable supply for earning the award money. receiving compensation from accident claims tribunal for the injury caused due to road accident is not a taxable supply. Hence, no GST should apply on such compensation amount. Principle 2: Relation between the supplier and recipient and reciprocity of performance is necessary to constitute a taxable supply For example: giving unconditional grant without any obligation should not attract GST due the absence of reciprocity;16 winning from game show should also not be subject to GST on the application of this principle. Principle 3: There should be presence of consideration for both supplier and recipient and the consideration should have nexus with the supply For example: making gratuitous payment or giving voluntary donation should not constitute a taxable supply in the absence of consideration for both the parties; as payment of alimony money on divorce is not a consideration for supply in the eyes of law, the same cannot be subject to GST. 5.3 Please note that in the context of GST law in India, the above principles may not apply in the case of ‘activities treated as supply even if made without consideration’ (i.e., supplies listed in Schedule-I of the CGST Act). For example, giving television as a prize in new year draw by a store, after claiming input tax credit on the television. 5.4 In other words, the above three fetters should apply while interpreting the scope of supply with respect to all the transactions other than those listed in Schedule I of the CGST Act. 5.5 In view of the above principles, the tax authorities in India are expected not to go down below the skin and levy GST on each and every receipt on the basis of the literal interpretation of the provisions relating to ‘supply’. 5.6 In any event, since GST law is still in the nascent stage in India, it is likely that in the times to come the courts will further strengthen the above inherent principles while interpreting supply in relation to different fact situations. — CA. Gajendra Maheshwari Footnotes & Legal Citations: For the purpose of present study paper, reference has been drawn to the CGST Act for examining the relevant legal provisions Even under Article 366(29A) of the Constitution of India, ‘services’ has been defined to mean anything other than goods Article 2(1)(c) of EU VAT Directive Article 24(1) of EU VAT Directive Tolsma vs. Inspecteur der Omzetbelasting [Case C-16/93] Article 25 of EU VAT Directive (Sixth Directive prior to amendment) Landboden-Agrardienste vs. Finanzamt Calau [Case C-384/95] Jürgen Mohr vs. Finanzamt Bad Segeberg [Case C-215/94] Shaw vs. Director of Housing and State of Tasmania (No. 2) [2001] TASSC 2 GST Ruling 2006/9 issued by Australian Tax Office GST Ruling 2001/6 issued by Australian Tax Office Databank Systems Ltd vs. CIR (1987) 9 NZTC 6,213 Case S84 (1996) 17 NZTC 7,526 CIR vs. NZ Refining Co Ltd (1997) 18 NZTC 13,187 Bai Mamumbai Trust and Others vs. Suchitra wd/of Sadhu Koraga 2019-VIL-454-BOM In specific situations, Government grants are exempt from the levy of GST subject to fulfillment of conditions.

The Chartered Accountant Journal • GST • February 2021 Analysis of Provisional Attachment of Property under GST CA. Shradha Agarwal The author is a member of the Institute. Email: agrawal.shradha19@gmail.com • eboard@icai.in Citation: (2021) 69 CAJ 985–990 Pages 85–90 • Journal Page Nos. 985–990 Executive Overview & Context Provisional attachment of property is not a new concept under GST. Similar provisions were also there in the pre-GST regime. Recently it has been observed that the officers are invoking provisions of Section 83 of the CGST Act as per their whims and fancies. However, while invoking provisions of provisional attachment the officers must follow the law. This article analyses the provisions of Section 83 of the CGST Act and when it can be invoked by the officers. Read on… Statutory Framework of Provisional Attachment under GST Provisions related to provisional attachment of property under GST are codified under Section 83 of the CGST Act read with Rule 159 of the CGST Rules: Section 83 of the CGST Act: Provisional Attachment to Protect Revenue in Certain Cases 83. (1) Where during the pendency of any proceedings under section 62 or section 63 or section 64 or section 67 or section 73 or section 74, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property, including bank account, belonging to the taxable person in such manner as may be prescribed. (2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order made under sub-section (1). Rule 159 of the CGST Rules: Detailed Procedure for Provisional Attachment (1) Where the Commissioner decides to attach any property, including bank account in accordance with the provisions of section 83, he shall pass an order in FORM GST DRC-22 to that effect mentioning therein, the details of property which is attached. (2) The Commissioner shall send a copy of the order of attachment to the concerned Revenue Authority or Transport Authority or any such Authority to place encumbrance on the said movable or immovable property, which shall be removed only on the written instructions from the Commissioner to that effect. (3) Where the property attached is of perishable or hazardous nature, and if the taxable person pays an amount equivalent to the market price of such property or the amount that is or may become payable by the taxable person, whichever is lower, then such property shall be released forthwith, by an order in FORM GST DRC-23, on proof of payment. (4) Where the taxable person fails to pay the amount referred to in sub-rule (3) in respect of the said property of perishable or hazardous nature, the Commissioner may dispose of such property and the amount realized thereby shall be adjusted against the tax, interest, penalty, fee or any other amount payable by the taxable person. (5) Any person whose property is attached may, within seven days of the attachment under sub-rule (1), file an objection to the effect that the property attached was or is not liable to attachment, and the Commissioner may, after affording an opportunity of being heard to the person filing the objection, release the said property by an order in FORM GST DRC-23. (6) The Commissioner may, upon being satisfied that the property was, or is no longer liable for attachment, release such property by issuing an order in FORM GST DRC-23. Opportunity of Being Heard in Case of Provisional Attachment Any person whose property is attached under Section 83(1) of the CGST Act may file an objection within seven days of the attachment under FORM GST DRC-22. On the principles of natural justice and Rule 159(5), the commissioner must give an opportunity of being heard to the person filing the objection and if the commissioner is satisfied with the objections raised by the person, he may release the said property by an order in FORM GST DRC-23. “Provision for objection, hearing, and release is provided in sub-rule (5) to Rule 159 of the CGST Act to ensure that the said power is exercised after due consideration and in a reasonable manner and to provide an opportunity to the taxpayer to explain his case1.” It is imperative to note here that, as per Rule 159(2) of the CGST Rules, the Commissioner is not required to serve the order in FORM GST DRC-22 to the person whose property has been attached. Therefore, it has been observed practically that due to non-communication of the order of provisional attachment to the concerned person, the right provided to him under Rule 159(5) cannot be exercised within a given time of seven days. Who Can Provisionally Attach the Property? As per Section 83 of the CGST Act, the Commissioner may pass an order in FORM GST DRC-22 for provisional attachment of any property belonging to the taxable person. Further, as per Section 5(2) of the CGST Act, an officer of central tax can exercise the powers and discharge the duties of other officers of central tax who are subordinate to him. Therefore, the commissioner and any officer superior to him can exercise the powers under Section 83. Further, Section 3 of the CGST Act equates the ‘Principal Commissioner of Central Tax’ to ‘Principal Additional Director of Central Tax’ and ‘Commissioner of Central Tax’ to ‘Additional Director General of Central Tax’. Therefore, Principal Additional Director General, DGGI, and Additional Director General, DGGI are also competent to pass orders under Section 83 of the CGST Act, 20172. Proceedings Must Be Pending in Either Sections 62, 63, 64, 67, 73 or 74 It is important to note that powers under Section 83 can be invoked only when any proceeding is pending under Section 62 (best judgment on non-filers), Section 63 (assessment of unregistered persons), Section 64 (summary assessment), Section 67 (inspection, search & seizure), Section 73 (determination of tax without fraud), or Section 74 (determination of tax involving fraud/wilful-misstatement) of the CGST Act. Judicial Precedent (Gujarat High Court): “In the absence of pendency of any proceedings under sections 62, 63, 64, 67, 73 or, 74 of the GST Acts, the orders of provisional attachment of the bank accounts of the petitioners under section 83 of the GST Acts are without the authority of law and are rendered unsustainable3.” Section 62, 63, 64, 73, and 74 relate to quantification of demand against the assessee. Pendency of proceedings under these sections has been made a precondition for invoking powers under Section 83. The palpable reason could be that while assessing/adjudicating the case, Commissioner may form an opinion that attachment of property is required and he may proceed to do so. It is worth pondering that Section 83 does not refer to Section 61 (scrutiny of returns) and Section 65 (audit by tax authorities). In the opinion of the author, one possible reason for doing so could be that once the proceeding under Section 61 or 65 gets culminating then consequently proceedings under Section 73 or 74 gets started. However, it must also be considered that the legislature in his wisdom has chosen to exclude Section 61 and 65 from the purview of Section 83. Provisions of Section 83 can be invoked only before the conclusion of adjudication proceedings or before passing of order-in-original. Once an adjudication order is passed under Section 73 or 74, the proceedings cannot be said to be ‘pending’ under the said sections. Further, once a demand is crystallized against the assessee and an order has been passed, then the regular recovery proceedings under Section 79 to 82 come into play. Can Section 83 Be Invoked Merely on the Basis of Summons under Section 70? In a case where no proceeding is pending under any section mentioned in Section 83 but a summon is issued to a person, the question that needs consideration is whether in such cases Section 83 can be invoked? The High Court of Bombay in Kaish Impex Private Limited Vs. Union of India4 specifically stated that Section 83 cannot be invoked merely on the basis of summons issued under section 70. The Hon’ble High Court held as under: 15. “Power to provisionally attach bank accounts is a drastic power. Considering the consequences that ensue from provisional attachment of bank accounts, the Courts have repeatedly emphasized that this power is not to be routinely exercised. Under Section 83, the legislature has no doubt conferred power on the authorities to provisionally attach bank accounts to safeguard government revenue, but the same is within well-defined ambit. Only upon contingencies provided therein that the power under section 83 can be exercised. This power is to be used in only limited circumstances and it is not an omnibus power.” 16. “It is therefore not possible to accept the submission of the Respondents that even though specified proceedings have been launched against one taxable person, bank account of another taxable person can be provisionally attached merely based on the summons issued under section 70 to him.” To sum up: Section 70 is not mentioned in Section 83. Therefore, merely on the basis of summons issued under Section 70, the Commissioner cannot invoke Section 83 against the person who has been summoned. Analysis of: ‘For the Purpose of Protecting the Interest of the Government Revenue’ The Commissioner can invoke Section 83 only when he is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary to provisionally attach the property. The phrase ‘for the purpose of protecting the interest of Government revenue’ is nowhere defined in the CGST Act. It has to be understood on case to case basis depending on the facts and circumstances of each case. The Hon’ble Gujarat High Court in Valerius Industries Vs. Union of India5 dealt extensively on this issue and laid down certain basic requirements on the fulfillment of which the officers can resort to Section 83. The important extract of the said judgment is reproduced as follows: Seven Fundamental Guidelines Formulated in Valerius Industries (Para 52): [1] Supervening Factor & Credible Material: The order of provisional attachment before the assessment order is made, may be justified if the assessing authority or any other authority empowered in law is of the opinion that it is necessary to protect the interest of revenue. However, the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief. [2] Drastic & Far-Reaching Power: The power conferred upon the authority under Section 83 of the Act for provisional attachment could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on substantive weighty grounds and reasons. [3] Reasonable Apprehension of Default: The power of provisional attachment under Section 83 of the Act should be exercised by the authority only if there is a reasonable apprehension that the assessee may default the ultimate collection of the demand that is likely to be raised on completion of the assessment. It should, therefore, be exercised with extreme care and caution. [4] Disposing Property to Thwart Collection: The power under Section 83 of the Act for provisional attachment should be exercised only if there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of wholly or any part of his / her property with a view to thwarting the ultimate collection of demand and in order to achieve the said objective, the attachment should be of the properties and to that extent, it is required to achieve this objective. [5] Harassment Prohibited: The power under Section 83 of the Act should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee. [6] Bank Accounts as Last Resort: The attachment of bank account and trading assets should be resorted to only as a last resort or measure. The provisional attachment under Section 83 of the Act should not be equated with the attachment in the course of the recovery proceedings. [7] Revenue Neutrality & ITC Reversal: The authority before exercising power under Section 83 of the Act for provisional attachment should take into consideration two things: (i) whether it is a revenue neutral situation (ii) the statement of “output liability or input credit”. Having regard to the amount paid by reversing the input tax credit if the interest of the revenue is sufficiently secured, then the authority may not be justified in invoking its power under Section 83 of the Act for the purpose of provisional attachment. The commissioner must be of the opinion that it is necessary to provisionally attach the property in order to protect the interest of the government revenue. Such an opinion cannot be formed without any substantive and material evidence. The power given under Section 83 is very drastic and affects the right of the person granted under Article 19(1)(g) (freedom to practice any profession or carry on trade) and Article 301 (freedom of trade, commerce and intercourse) of the Constitution of India. This contention has also been examined by various courts as follows: “The object and intention of the legislature to endow the Commissioner with the power of attachment under Section 83 are very clear. It is a drastic and far-reaching power that must be used sparingly and only on substantive weighty grounds and reasons. The power should be exercised only to protect the interest of revenue and not to ruin the business of any taxable person6.” Section 83 talks about the opinion which is necessary to be formed for the purpose of protecting the interest of the government revenue. Any opinion of the authority to be formed is not subject to an objective test. The language leaves no room for the relevance of an official examination as to the sufficiency of the ground on which the authority may act in forming its opinion. But, at the same time, there must be material based on which alone the authority could form its opinion that it has become necessary to order provisional attachment of the goods or the bank account to protect the interest of the government revenue. The existence of relevant material is a precondition to the formation of opinion7. “The Hon’ble Gujarat High Court8 stated that while exercising powers under section 83, the authorities should try to balance the interest of the Government revenue and the position of the taxable person to continue with his business.” Cases where the taxpayer is fully co-operating in all the proceedings and is not likely to abscond or flee away from justice, invoking Section 83 is a malicious action and will not stand the judicial scrutiny of law. One like example could be invoking Section 83 as a tool for recovery before adjudication, which is obviously not the intent of the legislature. Provisional Attachment Ceases to Have Effect After One Year The proviso to Section 83 of the CGST Act states that every provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order passed in FORM GST DRC-22. It is crystal clear that every provisional attachment will be valid for a period of 1 year and after the expiry of 1 year, the said provisional attachment of any property shall cease to have effect. However, it has been noticed that even after the expiry of 1 year the officers do not release the provisionally attached property, which is illegal and in violation of the statutory provisions. This view has also been strongly affirmed by the Hon’ble High Court of Calcutta in M/s. Amazonite Steel Pvt. Ltd.9, holding as under: “It is obvious that the authorities have acted in a blatantly highhanded and illegal manner by keeping the provisional attachments in a state of continuance for the period from 5th June, 2019 (when the first order of provisional attachment ceases to operate) till 31st October, 2019 (when fresh order for provisional attachment was passed). Section 83(2) is crystal clear that the provisional attachment shall cease upon expiry of one year. It was therefore incumbent on the authorities to either release the provisional attachment by informing the bank or by issuing a fresh order of provisional attachment, if the law so allowed. The failure to do the above is nothing short of being an act of highhandedness.” Comparison with Pre-GST & Other Tax Statutes: In other laws, there was/is a provision for extension of the period of provisional attachment of property and there was an outer limit prescribed by which the said period can be extended, and in most cases, it is 2 years. However, in GST law there is no provision for extension of the period of provisional attachment. In GST law the property can be provisionally attached only for a period of 1 year without any extension and thereafter the officers are duty-bound to release the said property. Provisions related to provisional attachment in other laws include: Section 46A: Delhi Value Added Tax Act, 2004 Section 11DDA: Central Excise Act, 1944 Section 28BA: Customs Act, 1962 Section 73C: Finance Act, 1994 Provisional attachment should be vacated immediately on the completion of adjudication proceedings against the person whose property has been attached and the assessee should be permitted to take recourse of filing an appeal where he may get a statutory stay on demand in terms of Section 107(7) of the CGST Act. Re-Attachment of Property & Restriction to ‘Taxable Person’ Can Fresh / Multiple Orders Be Issued under Section 83? Another question that needs consideration is whether the authorities can issue fresh order of provisional attachment/multiple orders under Section 83 of the CGST Act, 2017? This issue was squarely covered by the High Court of Calcutta10 and the Hon’ble Court was of the view that if the authority is of the opinion that it is further necessary to protect the interest of revenue then a fresh order under Section 83 may be issued: “Section 83 empowers the competent authority to issue an order for provisional attachment of property including bank accounts if it is of the opinion that such step is necessary for protecting the interest of the Revenue. It is palpably clear that Section 83(2) permits continuation of a provisional attachment order for a period of one year from the date of order after which it ceases to remain in effect. However, there is nothing in the section which indicates that upon completion of the prescribed period, a fresh order cannot be issued. To say this would amount to supplying such requirements into the section which would go against the well-established principles of interpretation of statutes. In the view point of the Court, after the expiry of the time period, the appropriate authority may be of the opinion that such an attachment is further required to protect the interest of Revenue, and may therefore, issue a fresh order upon compliance of the formalities in Section 83(1).” Further, it is pertinent to mention here that at the time of issue of a fresh order of provisional attachment all the requirements mentioned under Section 83 should be fulfilled. Fresh order cannot be issued only on the basis of reasons that existed at the time of earlier attachment. The authority must satisfy all the requirements of Section 83 again on the date of issuance of a fresh order of provisional attachment. Property Belonging Only to a ‘Taxable Person’ Can Be Attached Another issue that needs to be examined is whose property can be attached under Section 83. Section 83 states that the property belonging to a taxable person can be attached. Therefore, properties belonging only to the taxable person can be attached. Section 2(107) of the CGST Act defines: ‘Taxable person’ as a person who is registered or liable to be registered under section 22 or section 24. Case Study on Third-Party Attachments: In one such case, proceedings were initiated under Section 67 against M/s X, which is a proprietary concern. In this case, Commissioner attached bank accounts belonging to M/s X, Mr. Y (authorized signatory of M/s X), and Ms. Z (wife of Mr. Y). Neither Mr. Y nor Ms. Z was ‘taxable person’. Now, the legal issue is whether the personal bank account of Mr. Y and Ms. Z can be attached? In the opinion of the author, the action of the commissioner in provisionally attaching the bank account of Mr. Y and Ms. Z is illegal and in contravention of statutory provisions. Circumstances Where Officers Are Compelled to Invoke Section 83 It is a trite law that no provision of a statute can be rendered otiose. Abuse of law should be prevented but it does not mean that the rights conferred by a statute should not be exercised. The author advocates that the power under Section 83 should not be used to harass the assessee but at the same time the powers must be exercised in appropriate cases. Few such cases could be: Where the non-attachment of the property would lead to permanent loss of revenue to the government; Where there is a probability that the assessee will not co-operate in the adjudication proceedings and will encash all his assets with intent to flee away from justice, or where he is likely to abscond; Recent egregious cases of bogus billing and availing fraudulent input tax credit (ITC). In all these cases, it is absolutely justified to invoke section 83 to put a check on wrongdoers. Conclusion “Section 83 of the CGST Act is in juxtaposition to Article 19(1)(g) and Article 301 of the Constitution of India. The provisions being drastic in nature should not be used as a matter of course and while exercising the powers under section 83 the commissioner must strike the balance between the interest of the government revenue and the right of the assessee to carry on the business.” Judicial Precedents & Citations Siddharth Mandavia Vs Union of India & Ors. 2020-VIL-525-BOM M/s. Amazonite Steel Pvt. Ltd. & Anr. Versus Union of India & Ors 2020 (3) TMI 1179 – Calcutta High Court Kushal Ltd. versus Union of India 2019 (12) TMI 1116 – Gujarat High Court Kaish Impex Private Limited Vs. Union of India 2020 (1) TMI 933-Bombay HC Valerius Industries Vs. Union of India 2019-TIOL-2094-HC-AHM-GST Bindal Smelting Pvt. Ltd. Vs. Additional Director General 2020-TIOL-92-HC-P&H-GST M/S Jay Ambey Filament Pvt. Ltd. Vs. Union of India 2020-VIL-544-GUJ M/s Patran Steel Rolling Mill versus Assistant Commissioner of State Tax [2018 (12) TMI 1441 – GUJARAT HIGH COURT] M/s. Amazonite Steel Pvt. Ltd. & Anr. Versus Union of India & Ors., 2020 (3) TMI 1179 – Calcutta High Court M/s. Amazonite Steel Pvt. Ltd. & Anr. Versus Union of India & Ors 2020 (3) TMI 1179 – Calcutta High Court

The Chartered Accountant Journal • Arbitration • February 2021 Efficient Arbitration for Dispute Resolution Navjot Singh Khurana* • Dr. Inderpreet Kaur** *Senior Manager, GAIL (India) Ltd., New Delhi • **Assistant Professor, K.R. Mangalam University Email: nskhurana@gail.co.in • eboard@icai.in Citation: (2021) 69 CAJ 995–1001 Pages 95–101 • Journal Page Nos. 995–1001 Executive Perspective Alternative Dispute Resolution (ADR) Mechanisms were introduced to rescue the condition of litigants from the overburdened courts. Arbitration, being alike to court litigation, gained tremendous popularity and academically acclaimed to be most cost-effective, speedy and flexible method. However, in reality, despite having lot of potential, arbitration is mostly denounced due to high cost, delays and also due to the fact that it has also becoming home to exaggerated claims. Since, arbitration is party-centric, this article has, while analysing the present situation, made an attempt to suggest certain valuable initiatives that are required to be adopted at the organizational level so as to build a robust pro arbitration environment to reap the inherent benefits of this mechanism. Read on… 1. Introduction & The ADR Paradox ‘Arbitration’ has been the preferred choice for dispute resolution among the contracting parties for many reasons such as: Prescribed timelines to conclude the matter Limited grounds to challenge the arbitration award Deposit of awarded amount in courts while challenging the award and praying for stay Court Fee is not involved Award of arbitral cost upon winning the matter Flexibility of procedure Fixed fee of arbitrators Less frightening for companies’ officials as compared to the court rooms Interim stay with time-bound obligation to initiate arbitration, etc. The International Arbitration Survey conducted in 2018 by White & Case LLP along with Queen Mary University of London also revealed that 99.08% of the respondents (in the study) are likely to select or endorse international arbitration for resolving cross-border disputes in future1. Still, different courts, including the Apex court in India, have on number of occasions expressed its resentment towards the plight of arbitration and the disputing parties: The Hon’ble Supreme Court had once stated that arbitration has become a ‘time consuming’ and ‘expensive’ mean of dispute resolution (Dolphin Drilling Ltd. v. ONGC2). Even it has been commented by the Apex court that sometime the cost of arbitration exceeds the actual stake involved in the dispute (Union of India v. Singh Builders Syndicate3). In the recent past, the Gujarat High Court showed its displeasure by stating: “the affairs of the arbitration have touched the state of nadir at the hands of those who care scant for ethics in litigating, where fairness to legal forums and faith in them are sine qua non” (Manbhupinder Singh Atwal v. Neeraj Kumarpal Shah4). Another major issue, which troubles the disputing parties under arbitration, is the value of claims and counter claims filed by each other. It has become a common tendency of the disputing parties in arbitration to park their inflated claims against each other irrespective of their genuineness. Thus, such factors are definitely challenging the reputation of arbitration. So, is there any solution to bring things into a right track? Though, Legislature has been trying hard to sort out shortcoming in the arbitration law by introducing required amendments, however, unless some serious measures are suo motu adopted by the disputing parties (since it is a party-centric mechanism), the situation is not expected to improve. Accordingly, the present article has analysed how grave the above-mentioned issues have developed in the real life and what could be the possible solutions/initiatives which can be adopted by the parties. 2. High Cost and Delays in Arbitration 2.1 Problem Analysis The Law Commission in the 246th Report noted that the major complaint regarding arbitration in our country (especially in the ad-hoc arbitration) is the fact that high fee is involved in the process wherein arbitrators are fixing “arbitrary, unilateral and disproportionate fee”5. Ironically, Arbitration mechanism (as a mode of ADR) was introduced as alternate to court litigation, since the latter was labelled as uneconomical and cost-intensive and it was believed that Arbitration can bring down the cost and time involved in the settlement of disputes and thereby provide an effective way to decongest the courts. It is also observed that the expenses incurred in the courts are far too economical as compared to the expenses incurred in arbitration considering the number of cases for which such expenses are incurred. Primary Drivers of High Cost and Delays in Arbitration: Venue Costs: Venue is required to be arranged by the disputing parties (in Ad-hoc arbitration mainly), which enhances the overall cost. High Arbitral Fees: High Fee being charged by arbitral tribunal, since many arbitrators are still not inclined to follow the model fee structure prescribed under the Arbitration and Conciliation Act, 1996 (the “Act”). Legal Representation Charges: Advocates, Law Firms and Senior Advocates’ fee (most Advocates, Law Firms and Senior Advocates charge relatively high fee for handling arbitration matter). Dual Session Billings: Arbitrators and Senior Advocates normally charge as per two hearings in case hearing continues for longer duration. Institutional Overhead: Administrative expenses of arbitral institutions (in Institutional arbitration). Miscellaneous Costs: Miscellaneous expenses (including expenses related to arrangement of stenographers, secretarial support, refreshments, etc.). 2.2 Required Initiatives to Tackle High Cost and Delays in Arbitration There are some practical ways to make Arbitration cost effective and expeditious. By adopting following practices, parties to the dispute not only can reduce the expenses incurred during the Arbitration but can also actually expedite the dispute settlement process: i) Proper Selection and Fee Fixation of Advocate and Senior Advocate: There is a dearth of focused arbitration lawyers in India. Justice B. N. Srikrishna Report has even suggested for developing an arbitration bar comprised of well-trained advocates6. It is important to engage an advocate who can devote sufficient time and attention in the arbitration matter and has manageable caseload. Further, it is important that the fees of the advocate should be decided and negotiated at the beginning of the matter. Capping of the fee or the manhours till the conclusion of the arbitration matter is essential. Further, considering the criticality of the matter, where complex legal issues, facts and high stakes are involved, the engagement of senior advocates becomes inevitable. The fees being charged by senior advocates are much higher than dealing advocates, which normally ranges between ₹ 1 Lakh to ₹ 25 Lakhs per appearance7. Therefore fee structure of the senior advocate needs to be discussed and negotiated at the time of their engagement itself. ii) Careful Drafting of Arbitration Clause: Mostly, commercial departments are more concerned in the development of relation between the parties and negotiating commercial terms by compromising on other provisions not relevant for them. Accordingly, arbitration clause is just randomly copy-pasted or loosely drafted to hurriedly close the deal and obtain signatures. Later, upon initiation of dispute, such recklessly and loosely drafted language of the arbitration clause may create high complications, requiring parties to spend considerable time and cost litigating before courts to interpret the clause. Recommended Safeguards: Institutional Arbitration: Renowned arbitral institutions provide model arbitration clauses (ICC, LCIA, SIAC)8. It is always prudent to incorporate standard model clauses to eliminate ambiguity. Ad-hoc Arbitration: The dispute resolution clause should be drafted or thoroughly vetted by experienced legal experts. iii) In-house Dispute Settlement Mechanism: Unlike where parties are habitual litigants, the expenses, fatigue and stress involved in the adversarial mechanism may force parties to sit across the table and settle differences. It is advisable to keep an open mind and be prepared to set aside emotions. Companies may decide to set up an internal mechanism of conciliation as per Part III of the Act to take up and settle disputes. This brings finality while preserving commercial relationships. iv) Strict Monitoring of Cases: Devise a mechanism to review arbitration matters on a regular basis by senior management. Review brings forward progress details, fees paid to counsel and arbitrators, and aids future strategy. Since arbitration is not strictly bound by the Indian Evidence Act and the Code of Civil Procedure, decisions can simplify procedure (e.g. relying upon documents on record rather than unnecessarily leading oral evidence for quick disposal). Periodic reviews should be conducted by a committee of senior officers and functional directors. v) Corporate Litigation Policy: A well-structured litigation policy clearly defines roles and responsibilities of different departments in handling dispute resolution. Around 61% of companies in India have established a formal Dispute Resolution Policy (PwC Survey9): PwC Survey: Indian Companies with Dispute Resolution Policy: • Yes: 61% • No: 36% • Not Sure: 3% vi) Selection of Right Arbitrator: Wrong selection of an arbitrator leads to deep trouble – proceedings may be delayed, mishandled, or biased. Companies should conduct thorough research on expertise, temperament, and professionalism, taking unbiased suggestions from panel lawyers devoid of personal or commercial interests. vii) Thorough Study of the Arbitral Award: A study indicates that resolving post-award challenges under Section 34 consumes approximately 24 months in lower courts, 12 months in High Courts, and 48 months in Supreme Court – averaging a staggering 2,508 days to finally settle disputes post-award10. Blindly challenging awards is self-defeating. While courts now cautiously admit Section 34 petitions (e.g. SEAMEC Ltd. v. Oil India Ltd.11), management must pragmatically evaluate chances of success and comply with awards where merits are weak. 3. Frivolous and Exaggerated Claims Involved in Arbitration 3.1 Gravity of the Problem It was reported in the recent past that National Hydro Power Corporation (NHPC), a major CPSE in India, faced disputed claims of around ₹ 10,000 crores, which was double its annual revenue12. Such astronomical claims dangling above corporations act like a Sword of Damocles. Root Causes of Inflated Claims in Arbitration: Absence of Upfront Ad-Valorem Court Fees: In civil suits, plaintiffs must pay substantial ad-valorem court fees (e.g., filing a recovery suit of ₹ 40 crores requires approximately ₹ 40 Lakhs in court fees under High Court schedules13). In arbitration, there is no requirement of upfront court fees, encouraging unrestrained claims. Coercive Tactical Strategy: Inflated claims are strategically filed to factor in delayed decisions and ancillary costs14, scare the counterparty, and coerce them into settlement15. Counsel Fee Incentives: Some legal counsels remain inclined to inflate claim amounts to justify higher fee structures and prolong proceedings for sustained revenue. 3.2 Required Initiatives to Tackle Frivolous and Exaggerated Claims i) Imposition of Exemplary Costs & Deterrence Mechanisms: Tribunals must levy exemplary costs upon dismissal or substantial reduction of inflated claims. Similar deterrence is embedded in ICC Rules of Arbitration under Expedited Procedure Provisions16. Furthermore, Section 31A(3)(c) of the Arbitration and Conciliation Act, 1996 specifically empowers arbitral tribunals to impose costs on parties filing frivolous claims to delay proceedings17. Litigants must actively pray for and press for exemplary costs. ii) Rigorous Selection of Professional Legal Counsel: A professional advocate will never advise clients to artificially inflate claims. Once a tribunal perceives that claims are bloated, the litigant loses credibility as an honest party, risking even genuine and legitimate claims. iii) Contractual Threshold Carve-Outs (Non-Arbitrable Limits): Parties can draft arbitration clauses such that claims exceeding a specified threshold are excluded from arbitration and subject only to the jurisdiction of competent civil courts. An internal due diligence should be conducted to determine appropriate monetary thresholds and identify contracts vulnerable to frivolous filings. 4. Conclusion & Future Outlook Indian companies prefer Arbitration due to its speed, flexibility, privacy, and cost effectiveness18. Globally, institutional arbitration caseloads are rising by 9.9% annually19. However, over time, the real-world advantages of arbitration have eroded. Unless companies take ownership, arbitration risks losing its prime status as an efficient dispute resolution forum. To preserve credibility, Indian arbitration law was amended in 2015, 2019, and 2020 to incorporate stringent statutory timelines, fee caps, restricted grounds for challenge, and promotion of institutional arbitration. However, statutory amendments alone cannot deliver efficiency unless litigants assume institutional responsibility at the organizational level. “There is no hesitation to admit that arbitration mechanism has the potential to improve the condition of dispute settlement. Thus, the need of the hour is that the litigants should revisit and identify the shortcomings in their policies and practices and endeavour to build a robust pro arbitration environment by adopting effective measures.” References & Judicial Authorities White & Case. 2018 International Arbitration Survey: The Evolution of International Arbitration. (2018). Retrieved from http://www.arbitration.qmul.ac.uk Dolphin Drilling Ltd. v. Oil and Natural Gas Corporation Ltd. (17.02.2010 - SC) : MANU/SC/0120/2010 Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523 Manbhupinder Singh Atwal v. Neeraj Kumarpal Shah, judgement dated 21.06.2019, Misc Civil Application No. 90 of 2019 Gujarat High Court Law Commission of India, 246th Report on Amendments to the Arbitration and Conciliation Act 1996 Justice Srikrishna B. N. (2017, July 30). Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India Shrivastava, P. (2015, September 8). How much do Delhi’s top advocates charge? Livemint Model Clauses of International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), and Singapore International Arbitration Centre (SIAC) PricewaterhouseCoopers (PwC). (2013, May). Corporate Attitudes & Practices towards Arbitration in India (p. 8) Debroy, B., & Jain, S. Strengthening Arbitration and its Enforcement in India – Resolve in India, NITI Aayog South East Asia Marine Engineering and Constructions Ltd. (SEAMEC) v. Oil India Limited (11.05.2020 - SC) MANU/SC/0441/2020 Prasad, R. (2013, June 20). NHPC faces ₹ 10,000 crore disputed claims from contractors. Economic Times Punjab & Haryana High Court – Court Fee Schedule Table Chandran, R. (2009, October 15). NHAI proposes panel to settle arbitration claims – Livemint Draetta, U. (2014). Counsel as Client’s First Enemy in Arbitration? (p. 109). Juris Publishing Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under The ICC Rules of Arbitration, Para VII(B)(70) Arbitration and Conciliation Act, 1996 – Section 31A(3)(c) PricewaterhouseCoopers (PwC). Supra note 9 (p. 10) Dr. Altenkirch, M. (2018, April 10). Global Arbitration Cases Still Rise – Arbitral Institutions’ Caseload Statistics, Global Arbitration News

The Chartered Accountant • Journal of ICAI February 2021 • Vol. 69 • No. 8 • pp. 102–105 (Journal pp. 1002–1005) Accounting The Accounting & Bookkeeping in Ancient India CA. Nand Kishore Tulsyan The author is a member of the Institute. He can be reached at nktulsyan32@gmail.com and eboard@icai.in. India has a glorious history and rich traditions. From early Vedic age to the advent of coming of Europeans, our country had a prosperous trade and commerce. There were wealthy merchant class, banking system and proper accounting system which evolved over the years in India. India had invented the ‘Zero’ which is the base for accounting. Accounting and finance have evolved gradually over time in the history of India. Accounting aspects related to bookkeeping, preparation of financial statements, and auditing were available even in before Christ era. Read on…. Kautilya’s Arthashastra mentioned the way to maintain the accounting records. During Sangam age, merchant class were involved in prosperous trades and demand for accountants were more. During the reign of Guptas, accountants were involved from village level of administration. The South India inscriptions mentioned the importance of proper accounting and debarred the defaulters, in furnishing account, from contesting for various village committees. Let us have a look at the various dynasties, their times in the Indian History and their contribution towards accounting system in India in Table 1. Table 1: Historical Dynasties, Timeline & Accounting Contributions in Ancient India Dynasty / Period Name Date Name of Accountant Features Vedic Age Around 1500–600 B.C. Akshavapa was considered to be the accountant. Village was the economic unit. Barter system was prevalent. Wealth was measured in terms of cows. Mauryan Age Around 200 B.C. Akshapataladhyaksha was the Accountant-General. Yuktas were accountant at district level. Gopa worked as accountant at parishad level (10–15 villages). Proper principle was developed for accounting. Budget was made by government annually. Kautilya wrote Arthashastra. Sangam Age (South India) Around 300 B.C. – 300 A.D. Ayakanakkar were accountants who assisted tax officials. Trades were well organised. Merchant class were engaged in both inland and foreign trade. Banking system was there. Accountants were in great demand. Gupta Age Around 300–500 A.D. Gopasvamin and Pustapala were considered to be the accountant of that time. Various gold, silver and copper coins were issued. Sale tax was levied on inter-market trade. High standard of living. Imperial Chola (South India) Around 1000 A.D. Accountants employed at village councils & temples. Uttaramerur inscriptions provide that those who had failed to submit their accounts were disqualified to become member of village council again. Now, let us have a focused discussion about the following: Kautilya and his Arthashastra Kautilya, also known as Chanakya, was a great Indian teacher during 3rd Century B.C. He had written the famous book, “Arthashastra”. In this book, he had discussed the accounting procedures to be followed by Mauryan state among several other administrative, economic and social aspects. Here, Kautilya mentioned various accounting concepts and terminologies. He said that the profit should be distributed. It shows us that people of those times were familiar with the appropriation of profit concept. He discussed that interest on capital outlay should be considered before estimating the cost of the goods. This reflects maturity of ‘interest on capital concept’ along with costing concept where the cost of goods includes the interest portion on deployed fund. At those times, Gopa was the accountant for a group of villages. He had to keep records of tax collected in cash or kind, fines and tolls. He also had to keep records of gift, sales and charities along with remission of taxes relating to the agriculture land. He was also required to keep accounts of income and expenditure of inhabitants of villages among other records. So, here we see that there was an accountant available at parishad level with definite duty. The concept of book-keeping was there and so was the maintenance of individual’s income statements. Kautilya mentioned the term Income and expenditure in his books along with their classification. The income was divided into three types: Current Income (Vartamana), Income of previous period received in current period (puryushita) and other income (anyajatah) which included interest on deposits, recovery of bad debts, damage recovery (parihinikam), gift and booty. A special income was also mentioned which was in nature of saving in expenditure called as “Vyaya Pratyayah”. It was the amount which remained unexpended out of the specific fund (for example, medical treatment of sick) or amount remaining after construction of forts or building out of sanctioned amount. Hence, we find that there was knowledge of accrual concept. The revenue is recognised in way similar to today’s revenue recognition principle. Accounting of bad debt was not unknown at those times. Moreover, reserve fund is separated from revenue generated. So, we can say that there was familiarity about ‘Capital’ and ‘Revenue’ nature of items. Expenditure was said to be of two types – daily expenditure (of daily nature) and profitable expenditure (once in a month or year or so). Here, Kautilya might have tried to differentiate ‘the variable expenses from fixed expenses’ or ‘revenue expenditure from capital expenditure’. In fact, this classification of expenditures into daily and monthly nature throw us light about cost control aspect which Kautilya must have tried at those times. He might have wanted to know the regular expenses and the developmental expenses of state separately. He said that a wise collector should look for increase in income and decrease in expenditure. So this makes clear that there was proper understanding of profit and loss concept. Moreover, the scrutiny systems are found to be present at those times. He said that accountant and other clerks should be spied by honest military officials. This shows the importance that the accounting system had in state administration in ancient India. He wrote that the Superintendent of Accounts shall have office with separate seat for clerks and with shelves of accounts-books properly arranged. The department had to maintain the register regularly keeping details of amount of profit, loss, expenditure, delayed earnings for manufacturing units (karmanta). The accounting period was for 354 days. The accounting year ended around June-July (Ashadha month). There was probably separate account for intercalary month (Adhik Maas). Accounts were required to be submitted by time (in the month of Ashadha). There was fine for delay in presentation on accounts. This all shows the glory of the developed accounting department that used to be there is those times. Fines for delay shows the discipline that this organisation was required to maintain. The accounts so submitted were required to be audited. Kautilya wrote that the receipt should be verified with reference to time and place, person who had paid, officer who received the amount, etc. Similarly, expenditures were verified with reference to time and place, person who remitted the same, person who delivered it and person who finally received it. There was fine for violation of prescribed format of accounts, for unknown entry or double or triple entry. There was double fine for removing the total figure from books and eight times fine for destroying the books. The Gupta Age There was local record-keeper called Pustapalas. Generally, to prevent corruption, there was a committee of three members in Pustapalas. Recommendations of Pustapalas were required for land transactions. They had to confirm that the transfer of land would not lead to loss of revenue to the crown rather there would be some gain from it in the shape of dharma (generally fallow land were given for charity). So we find that book-keeping was done at village/local level, where record-keepers had recommendatory power. We find the presence of proprietary and efficiency concept. The concept of separation of work was also there. This separation might be of the maker-checker type. The banking function was prevalent during Gupta Age. Bankers (Shrenis or guild of bankers) acted as permanent custodian of gift (as a trust-property) of private philanthropists. They paid interest on these deposit and discharged the interest portion on the objects specified by donors. As the payment of interest was available on principal deposit, there must be use of those deposits in business activities. So, the concept of rate of interest was there and which should be less than the rate of profit earned on use of such deposits in business. Moreover, the whole deposits and its accounting must had been trustworthy at those times as depositors would have security against loss, fraud, embezzlement or misappropriation. The deposits in general moved from one merchant to another, based on their requirements. Even that system posed no serious threat to the security of money. So, we can conclude that the banking system along with hundi system, the profit calculation concept and their accounting system were effective and efficient one at those times. The Jataka Story The Buddhist Jataka story describes the prevalent condition during 300 B.C to 400 A.D. In several stories there are mentions of Joint stock principles for trade. This form of trade is ancient one. One of the Jataka story (Chullakasetthi Jataka) mentions 100 merchants from Benares came to purchase the contents of a ship, were required first to pay a thousand each to get share of the merchandise along with initial owner and later paid another thousand each to the owner to get whole merchandise (and initial owner settled). This story tells us the about the development of concept of partnership at those times, the conversion of sole proprietorship to partnership, the admission and retirement of partner(s) and payment to retiring partner. Another story of Jataka (Kuta Vanija Jataka) refers to partnership between two merchants named ‘wise’ and ‘wisest’, who got involved in fighting for distribution of joint earnings of the firm on basis of skills. So this story tells us that recognition of skill as capital in the firm was not truly unknown at that time, which is today considered as modern concept in partnership. Others During Chola period (around 900 A.D.), temples became the important unit and several temple cities were developed (for example Tanjore temple by Rajaraja I). The temples were generally granted several villages around as gift. Kings might also grant money to village council to be used for certain temple activities. In either case, the share of revenue earned from village or interest portion on granted money was used to pay temple expenses. Here, the accounts were maintained at temple level by the accountant employed at temple. So, we find the concept of accounting for Not-for-profit organisation in the above example. Endnote We can deduce the following about the accounting knowledge in ancient India from above discussion: Various accounting terminologies like Expenses and Incomes, Interest, Profit and Loss, Debtors and Creditors are found to be well understood at those times. The modern basic ‘concepts of accounting’ are found to be present in those times like the ‘concept of periodicity’, the ‘concept of revenue recognition’ and ‘matching concept’. It has been found that there was clarity regarding the ‘Cash’ and ‘Accrual’ basis of accounting. The concept of ‘Appropriation of profit’ is well found in Arthashastra. Moreover, there was proper auditing procedure which involved the system of ‘third party confirmation’ and verification. From Gupta Age, we can conclude that there was developed accounting system which had acted as backbone to the prevalent banking system. From Jataka story, we can conclude that accounting for partnership firm and their admission, retirement and goodwill concepts were not unknown to the merchants of those times. From Chola period, we can conclude that accounting as a system of record and source of information was used at the temple level. This supports the assumption that ‘Accounting for Not-for-profit organisation’ was developed at those times. Also, we already found that several moral and disciplinary actions were prevalent at those times which show us the importance of accounting and book-keeping. We can conclude the same as below: There was fine for delay in presentation of accounts. There was fine for unknown, double or triple entry or error in totalling. In village council nomination, non-presentation of accounts amounts to disqualification. So, we can say that accounting as discipline of identifying, measuring, recording, summarising and communicating the information of an organisation or country were found to be flourishing one in ancient India. ∎∎∎

The Chartered Accountant • Journal of ICAI January 2021 • Vol. 69 • No. 7 • pp. 43–46 (Journal pp. 819–822) Valuation Business Valuation in Good and Bad times CA. T V Balasubramanian The author is a member of the Institute. He can be reached at eboard@icai.in. In the world of finance, the valuation of business keeps on fluctuating. The happenings around us in recent times have brought about an accentuated appreciation of the implications of environmental factors and market dynamics over valuations. The stock markets, barometer of economic health, witnessed steep fall in the month of March, 2020 on account of pandemic. As the things settled down the comeback of markets was also quick as it happened later in the year. A new virulent strain in the UK now has again impacted the share prices for similar reasons. These times make it appropriate for us to ponder on changing valuations of business in the good times and bad times. Read on… 1. The Timing of Value: A Classic Global Scenario Let’s start with looking at a classic case from the global scenario. The case of Yahoo! is a great example of the timing of the value – In February 2008, Microsoft made a USD 44.6 billion bid for Yahoo!. However, this did not happen and later in the year 2016, Verizon agrees to purchase Yahoo!’s operating business for USD 4.8 billion. In 2008, the offer was spurned by Yahoo on the grounds that it was being undervalued significantly. While this is so, the transaction with Verizon was consummated about 8 years later. In a span of 8 years, the whole scene becomes completely different! One can be pretty sure there would have been a plethora of advisors including valuers who had advised the parties on both sides and this clearly shows how the valuation could change topsy turvy with changing circumstances. With this, let us proceed to look at what the ICAI Valuation Standards indicate in respect of the connect between valuation and timelines. 2. ICAI Valuation Standards: Valuation Date and Fair Value Valuation of a business is always with a clear linkage to the valuation date. The valuation is relevant and appropriate only as of that valuation date. Valuation date itself is defined in the ICAI Valuation Standards as the specific date at which the valuer estimates the value of the underlying asset. The Standards also define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the valuation date. Thus, one of the key ingredients of determining fair value is the “valuation date”. It is always pertinent to note that the valuation is devoid of a valuation date to which it is linked. The value could soar great heights from a given valuation date to a later date or slip deep into the bottomless pit in the same period, due to a variety of reasons. “The standards also lay down that valuation is time specific and can change with the passage of time due to changes in the condition of the asset to be valued and / or market.” Accordingly, valuation of an asset as at a particular date can be different from other date(s). Some indicative factors which can affect the valuation between different dates classified into these two buckets are as under: Condition of the asset to be valued Condition of the Market Quality being impacted due to efflux of time Macro economic conditions and trends Maturity in the product life cycle Market sentiments towards future Technological changes Demand trend Capability maturity Market size and likely changes to the same These are only some examples of the factors that impact the valuation at different points of time. But, it is pertinent to note that a broad classification of all the factors affecting valuation with passage of time can be into “condition of the asset” or “condition for the market” as mentioned in the standard. 3. Case Study: The Pager Industry in India Those who are aware of Pagers in India would really understand the import of the valuation varying enormously at various points of time. In 1996 March when India commenced the first paging service, the market was expected to reach 600 thousand subscribed by end of 1996, arguably making India the fastest growing market for this service. The overall subscriber level peaked in 1998 with nearly 2 million subscribers to then fall to less than 500 thousand by 2002. Mobile communication brought in a early demise of the pager business in India. In contrast, in the USA, pagers were in vogue for more than a couple of decades. Globally, the peak was somewhere in 1994 when there were an estimated 61 Mn pagers in use. In this backdrop, consider the valuation of pager companies in India in the early 1990s when companies were vying to get the licences which were being sold by the Government. In the early 1990s, pager companies would have been valued at significant amounts. From an asset perspective, the outlook would have been one of significant growths to be achieved with the advent of paging services in India and the power of licences held by the companies which would enable them to have such growths. Thus, the projected business plan and financials would have been on a aggressive growth plan which was expected by nearly anyone in the Industry and even by the investing community. It is, however, a different matter of fact that probably the risk would have been higher and accordingly the discount rate would have been probably higher. With the growth in the industry as it moved forward, say, sometime by end of 1998 or so, any valuation engagement would have probably by then had a better grip on the growth plans which may have been moderated and considering a more informed projections. With this, there is likely that the risk rates applied also were moderated to be lower than what was considered in the early stages of this industry, considering that there is experience of the industry’s performance to rely upon in the business plans forming the basis of the future expectations. However, as the industry moved on into tough times in the later part of 2000s, the business plans would have factored the waning nature of the industry and accordingly would have a dim outlook forming the basis for the valuation. However, with the uncertainty plaguing the industry, the risk profile for the industry would have also probably gone up resulting in the discount rates once again becoming higher, thus leading to a probable double whammy on the business valuation. To summarise what transpires as a principle from this example of the pager industry, the likely implication on the valuation on a comparable basis would have been as under: Valuation Implications Across Industry Lifecycle Stages (Pager Industry Benchmark) Parameter Nascent Maturing Waning Stage of Business Nascent Maturing Waning Business Plans Aggressive Moderate Subdued Risk perception Very High Moderate High Discount Rates Higher Normal Higher Net effect to valuation, say as a multiple to current revenue or PAT Higher multiple Normal Lower multiple From the above illustration of the likely effect to the pager business valuation at various points of time, it clearly emerges that the business valuations are impacted by both the factors of “market condition” and “condition of the asset” with passage of time. 4. Impact of the “Condition of the Market”: Equity Risk Premium & Cost of Equity A look at the equity risk premium determined for India by Sri. Aswath Damodaran in his dataset over the years, clearly it can be seen that there are upward spikes connected with the “economic bad times”. Equity Risk Premium Analysis: India Dataset (Prof. Aswath Damodaran) The dataset tracks the Equity Risk Premium for India over multiple economic cycles, demonstrating prominent upward spikes: Post IT bubble economic slowdown: Upward spike in risk premium reflecting market distress. Global recession – financial market failure: Sharp elevation to peak levels (~11.00%) during the 2008 global financial crisis. Subsequent moderations: Risk premiums returning towards base levels (~5.00% to 8.00%) as macroeconomic stability resumed. This brings out the effect of the “condition of market” with a negative impact to the risk premium in case of “bad times”. The following chart depicts the cost of equity for the US automotive market and it can also be seen that the spikes and troughs therein are linked to the economic condition of this industry. 2001 saw a recession coming in, which led to a small peaking which then ebbed downward. Once again, from 2005 it started peaking in view of the rising oil prices which peaked in 2008, coinciding with the financial crises too. All these led to peaking of the cost of equity too in this period. The automotive industry was in a crisis thereafter for 3 – 4 years which is also reflected in the higher cost of equity in this period. After this period, there was a blip in 2017-18 due to the increasing unemployment, increasing interest costs and the small drop in sales of vehicles in 2017 compared to 2016 – an effect of affecting the consumer confidence at this point of time. Cost of Equity Trends: US Automotive Industry Empirical evaluation of the cost of capital parameters (Long Term Treasury Bond Rate, Risk Premium to use for equity, and Cost of Equity for Auto and Truck) demonstrates: 2001 Recession: Initial peak in cost of equity followed by downward tapering. 2005–2008 Peak: Rising crude oil prices coupled with the subprime mortgage collapse drove the cost of equity to cyclical highs (~12.00% to 14.00%). Post-Crisis Hangover: Elevated cost of capital sustained across a 3–4 year automotive industry restructuring phase. 2017–2018 Blip: Secondary uptick driven by rising interest rates, rising unemployment pressures, and softening vehicle sales impacting consumer confidence. This again reinforces the impact to the valuation in bad times through the “condition of the market” reflected by the cost of capital / discount rate. 5. Impact of the “Condition of the Asset”: Ford Motor Company Valuation Studies Looking at the condition of the asset being valued, the example of Ford Motor Company, USA could be taken for analysing and understanding this aspect. In 2015-16, University of Connecticut MBA program students did a valuation of Ford Motor Company using source data from Bloomberg, which presented a very optimistic scenario being the growth period of automotive industry in the USA, post the financial crisis of 2008. Another valuation which was undertaken in 2018 by Minnesota State University students using projected data from past five years revenue growth. This considered only a smaller growth compared to the estimates used in 2016 and also estimated the operating income to be significantly different. Ford Motor Company’s projected Operating Profit based on these two period studies: Projected Operating Profit in USD 000’s (Ford Motor Company Comparative Analysis) Study Reference 2017 2018 2019 2020 Valuation in 2016 7,730 9,348 8,313 8,507 Valuation in 2018 4,813 4,667 4,820 4,978 This brings out the practical effect of how, the future estimates are also significantly based on the view point of the future developments at a point of time and how these significantly vary over a period of time when new information coming forth could lead to a complete overhaul in the expectations about the future. Without going into the reasons and rationale for the differences between the projections used in these two studies, it can be concluded that the practical application does indicate that the data used to reflect the “condition of the asset” also could significantly be impacted during good and bad times. “A broad classification of all the factors affecting valuation with passage of time can be into ‘condition of the asset’ or ‘condition for the market’ as mentioned in the standard.” 6. Conclusion: The Interplay of Twin Drivers Thus, to conclude, valuation during good times and bad times are impacted by a twin factor of the “condition of the asset” as well as the “condition of the market”. Of course, these two could have varied combination of effect at different points of time. In other words, the market condition may remain the same but the condition of the asset could change or vice versa or even still both could change over the period of time. ∎∎∎ Key Takeaways for Valuation Practitioners: Valuation Date Rigor: Every valuation conclusion is strictly valid only as of its specific valuation date; temporal shifts fundamentally alter both cash flow projections and risk parameters. Discount Rate Dynamics: Economic distress and bad times directly increase risk premiums and discount rates, suppressing terminal values and multiples even if historical revenues appear stable. Asset Condition Calibration: Cash flow forecasts must be continuously re-benchmarked against lifecycle maturation, technological shifts, and emerging industry data to prevent unrealistic optimistic bias.

The Chartered Accountant Journal • Corporate Finance • January 2021 Corporate Finance and Position of Banks CA. Subbarao Peteti The author is a member of the Institute. Email: eboard@icai.in Citation: (2021) 69 CAJ 812–818 Pages 36–42 • Journal Page Nos. 812–818 Executive Perspective The area of corporate finance is complex and intriguing. As the business organisations grew in size the area of corporate finance evolved to acquire quintessential position embracing all other functional areas. Primarily the area deals with sources of funds, capital structuring, investment decisions and other areas that involve finance. The primary objective of the corporate finance is to maximize the shareholder value through long and short term financial planning and the implementation of various strategies. There is reciprocal relationship between the area of corporate finance and economic growth. A growing economy assists in providing conducive environment for the corporates to progress. On the other hand better management of finances at micro level helps the business and contributes to the economy as a whole. In this article position of Banks as a constituent of economic system and contributor to the world of corporates is discussed. Read on… 1. Foundations of Corporate Finance & Financial Management The finance field involves three complex interrelated areas as follows: Financial Systems: Consisting of money and capital markets that deal with financial institutions and the securities market. Investments Decisions: Made by individual and institutional investors. Financial Management: Involves financial decisions on Capital Budgeting / Long Term Investment decisions, Capital Structure involving Procurement of Funds and Working Capital Management to accomplish the goal of the organization i.e. to maximize the returns to all the stakeholders. The key aspects of financial decision making relate to financing, investment, dividend and working capital Management. Therefore, financial management provides a conceptual and analytical framework for financial decision making. In corporates, finance primarily involves acquisition and allocation of funds and resources with the objective of maximizing the wealth of shareholders. Financial management deals with acquiring and deploying funds from various equity and debt instruments and their investment in the income generating assets to reap benefits. At a primary level corporate finance helps in generation of funds both from internal and external sources in an economical manner to keep costs low. Funds from external sources are often acquired from venture capitalist, financial institutions or through tapping stock markets. Stock markets facilitate the raising of resources through equity shares, debentures and bonds to the general investing public besides Indian and foreign institutions. In order to leverage the equity, corporations approach banks and financial institutions for raising debt funds. Corporate finance, as a next step, deals with investment of funds with the objective of increasing wealth of shareholders. It is the job of the Chief Financial Officer or financial controller to conduct both the functions of acquisition of the funds and their investment in a manner that maximises wealth of shareholders. CFO’s must balance the interest of owners, i.e., equity shareholders, creditors and other stake holders in a sustainable manner so that business grows without any adverse impact on society and ecology. At times the corporations may deliberately choose to invest its resources in risky ventures in an effort to generate large profits for the shareholders. Per se, rewards are directly related to returns. Conversely, risky investment would reduce the perceived security of the Bonds resulting in increased rate of interest that the organisations pay to borrow money in future. Alternatively, if the business invests the resources too conservatively it would fail to maximize its value of business and the returns it provides. Thus, finance managers have to generate better returns from the investments while protecting the image of the company amongst the creditors, banks and bond holders. Banks provide credit to different sectors for the growth of economy. 2. Sectoral Deployment of Gross Bank Credit Table 1 reflects the deployment of gross bank credit in various sectors for the growth of the economy across Agriculture, Industry, Services, and Retail segments: Sr. No & Item Mar-18 (₹ Cr) Mar-19 (₹ Cr) Sep-19 (₹ Cr) 2017-18* (%) 2018-19** (%) 2019-20^ (%) 1. Agriculture & Allied Activities 11,93,400 13,25,824 12,06,850 7.2 11.1 -0.6 2. Industry, of which: 31,29,512 33,04,940 31,74,214 6.2 5.6 0.2 2.1 Micro & Small Industries 4,18,225 4,38,392 4,53,908 8.8 4.8 -0.4 2.2 Medium 1,25,960 1,23,843 1,18,261 6.3 -1.7 -6.6 2.3 Large 24,62,576 26,24,288 25,30,553 4.6 6.6 1.8 3. Services, of which: 19,98,817 24,77,517 25,77,530 10.6 23.9 16.9 3.1 Trade 5,19,398 5,83,613 5,83,264 7.5 12.4 12.7 3.2 Commercial Real Estate 2,04,414 2,43,122 2,57,959 3.4 18.9 12.4 3.3 Tourism, Hotels & Restaurants 52,095 56,194 56,766 9.9 7.9 3.2 3.4 Computer Software 22,299 22,236 22,576 14.9 -0.3 -0.7 3.5 Non-Banking Financial Companies 4,53,123 6,14,922 7,09,833 31.7 35.7 30.5 4. Retail Loans, of which: 19,42,501 23,02,173 24,64,985 20.5 18.5 18.1 4.1 Housing Loans 10,08,013 12,04,332 13,03,629 18.0 19.5 18.5 4.2 Consumer Durables 19,036 9,195 8,902 -11.6 -51.7 110.2 4.3 Credit Card Receivables 82,827 1,11,361 1,21,708 27.7 34.5 30.5 4.4 Auto Loans 2,38,787 2,69,672 2,75,500 27.9 12.9 8.6 4.5 Education Loans 74,883 76,210 78,237 2.7 1.8 2.4 4.6 Advances against Fixed Deposits (incl. FCNR (B), etc.) 77,175 77,080 63,215 13.5 -0.1 -4.8 4.7 Advances to Individuals against Shares, Bonds, etc. 6,385 9,339 8,655 26.1 46.3 33.4 4.8 Other Retail Loans 4,35,396 5,44,983 6,05,139 28.2 25.2 24.2 5. Non-food Credit (1-4) 83,61,294 94,71,480 36,71,836 10.5 13.3 8.6 6. Gross Bank Credit 83,99,196 95,19,354 93,37,487 10.4 13.3 8.9 Notes: * March 2018 over March 2017. ** March 2019 over March 2018. ^ September 2019 over September 2018. 3. Global Financial Crisis & Macro-Economic Recovery History has shown that India is able to deal with crisis in an effective manner sooner or later. The current pandemic has led to financial crises for many economies across the world. Businesses go through cycles of highs and lows. Earlier in the year 2008 a crisis shook the world triggered by the collapse of Lehman Brothers, a global financial services firm. The US based firm filed for Chapter XI – Bankruptcy Protection following the massive exodus of most of its clients, substantial losses in its stock and devaluation by credit rating agencies. The debacle was largely contributed by involvement of financial services in the sub-prime mortgage. The ten-year yield of Government Bonds in India dropped from 9% to 5% by the end of 2008. The Central Government expanded the Fiscal deficit to 2.5% of GDP in FY2008 to 6% in FY 2009 and 6.5% in FY 2010. As a result, India’s GDP growth rose to pre-crisis level in 2010. Consequent to global financial crisis of 2008 there was a catastrophic meltdown of the global financial markets. The impact on Indian economy was less severe because of our lower dependence on export markets and the sizable contribution to GDP is from domestic sources. The report on Trend and Progress on Banking in India released by Reserve Bank of India provides graphic description of the status of Financial sector in the country. In the years following financial crisis the negative implication of stressed assets gradually reduced and new slippages were arrested. The Banking sector returned to profitability in the first half of 2019-20. Recapitalisation of public sector banks has helped in improving their capital ratios. The Insolvency and Bankruptcy Code has helped in enhancing resolutions. The private sector Banks have maintained momentum in credit growth. However, overhang of NPAs still remains high and the turnaround would be expected only on reversal in macro economic conditions. The Scheduled Commercial Banks (SCBs) recorded secular deceleration in deposits right from 2009-2010. However the trend was reversed and deposits constituted 77.6% of the total liabilities of SCBs at the end of March 2019. Demonetization induced a spike in deposits in 2016-17. The revival in the growth of loans and advances started in 2017-18 and the same momentum was maintained into 2018-19. 4. Non-Bank Sector, Spreads, and Contingent Liabilities The outlook for the non-bank sector consisting of housing finance companies (HFCs) and non-banking finance companies (NBFCs) remained ‘negative’. During 2018-19 credit flow from HFCs and NBFCs declined; on the contrary a sharp rise in commercial paper issuances, higher accommodation provided by all India financial institutions and pick up in net-flows from foreign sources gained momentum. External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs) registered net inflows for the first time in four years. Further, Foreign Direct Investment (FDI) flows grew at 18.9% in 2018-19. There is a need to improve the credit-to-GDP ratio to support higher economic expansion. The size of contingent liabilities of all SCBs increased to 1.2x of their on-balance sheet position at end of March 2019, driven primarily by expansion in forward exchange contracts. Foreign Banks and private sector banks recorded significantly higher off-balance sheet exposure than Public Sector Banks. Table 2: Cost of Funds and Return on Funds – Bank Group-wise (Per cent) Bank Group Year Cost of Deposits Cost of Borrowings Cost of Funds Return on Advances Return on Investments Return on Funds Spread PSBs 2017-18 5.1 4.7 5.1 7.8 7.1 7.5 2.5 2018-19 5.0 4.8 5.0 8.1 7.2 7.8 2.8 PVBs 2017-18 4.9 6.2 5.2 9.5 6.9 8.8 3.6 2018-19 5.1 6.6 5.4 9.8 7.0 9.0 3.6 FBs 2017-18 3.9 3.0 3.7 8.1 6.6 7.4 3.7 2018-19 3.8 2.9 3.6 8.2 6.2 7.2 3.6 All SCBs 2017-18 5.0 5.3 5.1 8.3 7.0 7.9 2.8 2018-19 5.0 5.5 5.1 8.7 7.1 8.2 3.1 Notes: 1. Cost of deposits = Interest paid on deposits / Average of current and previous year deposits. 2. Cost of borrowings = (Interest expended – Interest on deposits) / Average of current and previous year borrowings. 3. Cost of funds = Interest expended / (Average of current and previous year deposits plus borrowings). 4. Return on advances = Interest earned on advances / Average of current and previous year advances. 5. Return on investments = Interest earned on investments / Average of current and previous year investments. 6. Return on funds = (Interest earned on advances + Interest earned on investments) / (Average of current and previous year advances plus investments). 7. Data include SFBs. Adjusted for IDBI Bank Ltd reclassification. Source: Calculated from balance sheets of respective banks. Table 3: Return on Assets (RoA) and Return on Equity (RoE) of SCBs (at end March) (Per cent) Bank Group Public Sector Banks Private Sector Banks Foreign Banks All Scheduled Commercial Banks Metric 2017-18 2018-19 2017-18 2018-19 2017-18 2018-19 2017-18 2018-19 RoA -0.84 -0.65 1.14 0.63 1.34 1.56 -0.15 -0.09 RoE -14.62 -11.44 10.12 5.45 7.16 8.77 -2.81 -1.85 Note: For PSBs and PVBs, data adjusted for reclassification of IDBI Bank Ltd. Source: Annual Accounts of Banks. 5. Capital Adequacy, Asset Quality & IBC Resolution The financial sector performance of SCBs reported positive net profits in H1 2019-2020 reflecting slackening provisioning requirements. The provision coverage ratio (PCR) improved to 61% by end September 2019 for all SCBs. The leverage of SCBs was reported at 6.6% at the end of March 2019, much above the prescription of 3% by the Basel Committee on Banking Supervision. Further, the Basel III framework prescribes two minimum liquidity standards viz. the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The GNPA ratio of all SCBs declined in 2018-19 after rising for seven consecutive years as recognition of bad loans neared completion. Recovery of stressed assets improved during 2018-19. Recovery of Stressed Assets: The banking sector continues to be marred by Non-performing assets. NPAs in larger borrower accounts [exposure of ₹ 5 crores or more] had contributed 91% of total GNPAs in 2017-18, after the RBI withdrew various legacy restructuring schemes. During 2018-19, propelled by resolutions under the Insolvency and Bankruptcy Code (IBC), recoveries contributed more than half of the total amount recovered. However, recovery rates yielded by major resolution mechanisms declined in 2018-19 especially through the SARFAESI mechanism. Table 4: Classification of Loan Assets – Bank Group-wise (Amount in ₹ crore) Bank Group End-March Standard Assets Sub-Standard Assets Doubtful Assets Loss Assets Amount Per cent* Amount Per cent* Amount Per cent* Amount Per cent* PSBs# 2018 46,02,125 84.5 2,05,340 3.8 5,93,615 10.9 46,521 0.9 2019 50,86,874 87.8 1,37,377 2.4 5,06,492 8.7 66,239 1.1 PVBs^ 2018 24,50,552 96.0 27,203 1.1 69,978 2.7 5,243 0.2 2019 31,03,581 95.2 42,440 1.3 1,04,696 3.2 9,576 0.3 FBs 2018 3,49,475 96.2 3,831 1.1 8,364 2.3 1,635 0.5 2019 3,94,699 97.0 3,163 0.8 7,985 2.0 1,034 0.3 All SCBs** 2018 74,02,152 88.1 2,36,374 2.8 6,71,957 8.0 53,398 0.6 2019 85,85,154 90.2 1,82,980 1.9 6,19,173 6.5 76,849 0.8 Notes: 1. Constituent items may not add up to total due to rounding off. 2. * As per cent to gross advances. 3. # Includes IDBI Bank Ltd for 2018. 4. ^ Includes IDBI Bank Ltd for 2019. 5. ** Excludes SFBs. Source: Off-site returns (domestic operations), RBI. The classification of Loan Assets Bank group-wise as reflected in Table 4 demonstrates that there is no appreciable growth in the percentage of Standard Assets. At the same time, the percentage of Sub-standard Assets recorded an improvement from 2.8% to 1.9%, but the amount of Loss Assets recorded a high level and increased from 0.6% to 0.8%. Cases referred for recovery through legal mechanisms shot up, whereas cleaning up of balance sheets via sales of stressed assets to Asset Reconstruction Companies (ARCs) decelerated on a YoY basis. 6. Financial Frauds in Banks: Risk Profile & Modus Operandi From time to time banks have also faced financial frauds stressing their assets. Frauds particularly the large ones are difficult to detect, tend to get reported with a lag and have significant implications. The number of cases of fraud reported by Banks as well as the amount involved increased during 2018-19. In February 2018 the government issued a framework for timely detection, reporting and investigation relating to Frauds in PSBs. The framework required banks to evaluate NPA accounts exceeding ₹ 50 crores from the angle of possible frauds as a tool to unearth large fraudulent transactions at an early date. Consequently, there was a sharp rise in reported frauds in the year 2018-19. Key Characteristics and Modus Operandi of Large-Value Bank Frauds: Concentration in Loan Portfolio: Frauds have been predominately occurring in the loan portfolio. Large-value frauds accounted for 86.4% of total fraud value. Diversion of Funds: Modus operandi involved diversion of funds by borrowers through associated & shell companies, accounting irregularities, and manipulating financial statements. Non-Consortium Current Accounts: Opening current accounts with banks outside the lending consortium without a No Objection Certificate (NOC) from lending banks helped fraudsters siphon proceeds. PSB Vulnerability: PSBs accounted for a bulk of frauds in 2018-19, comprising 55.4% of reported cases and 90.2% of the total amount involved, reflecting gaps in internal processes and operational risk controls. 7. Endnote & The Role of Chartered Accountants The banking system plays a crucial role in the growth of Indian economy. The problems of banks, accentuated by a variety of factors, can be improved by putting proper governance mechanisms in place. Chartered Accountants functioning diligently and following well established standards can also help the banks. “The chartered accountants as auditors or as employees need to work responsibly, diligently and truthfully to strengthen the health of these financial institutions. Banks are considered to be the life-blood of the economy and the profession can play an important role in maintaining the financial life of a business.”

The Chartered Accountant • Journal of ICAI January 2021 • Vol. 69 • No. 7 • pp. 48–54 (Journal pp. 824–830) Economy Global Footprints of Indian Companies-A Must for Accelerating GDP Growth CA. Ketan Mehta The author is a member of the Institute. He can be reached at kkm7780@gmail.com and eboard@icai.in. Indian Economy has always endeavoured to aim high and achieve farther beyond. There are a number of avenues to materialize India’s target of transforming itself into a three trillion USD economy within the span of next four years; the achievement of which can help facilitate productivity, employment and access to social rights within the country. Further, a comparative analysis of India with respect GDP, PCI, Market Capitalization and National Debt, shows how India can improve in these dimensions besides National Debt. India has immense potential to capture a big growth opportunity and change the course for generations to come. Read on… 1. The Vision: Driving Towards a US$ 10 Trillion Economy Ambitious GDP target of US$5 trillion by 2024! I strongly believe we have potential to achieve even higher - maybe even 10 Trillion or more GDP size by 2030 or earlier - as the Lord Buddha saying goes “believe in yourself and no one & nothing can stop you”. While many experts & analysts have written on “what” should be done to achieve GDP target, in this article, I would be rather focusing on the “how” part, i.e., the execution piece as to how India can drive itself to achieve a US$ 10 Trillion GDP Mark. Let’s first be clear about the motivation behind increasing our GDP, i.e., size of economy. India is today’s 5th largest economy with GDP of $2.94 trillion, but per capita income is just much lower with millions of people, around 3% of population still below extreme poverty. The key reason we need to drive for higher GDP growth, $10 trillion or even more, is to drive productivity, employment and finally improving per capita income at least 5 times thus empowering our citizens to achieve their basic rights to education, health and good quality of living. 2. Comparative Analysis: India vs. USA & China When we compare to USA & China: India’s GDP is 1/10th of USA & 1/7th of China. India’s per capita income (i.e. income per citizen) is just $2k, 1/30th of the USA & 1/5th of Chinese citizens. India’s Market Capitalisation (i.e., valuation of all our Companies listed on Indian Stock Exchange) is 83% of GDP against USA 176%. India’s National Debt is the most conservative at 67% of GDP against USA 116% of GDP. Key inference we can draw from the table below is there is a direct correlation between Market Capitalisation and GDP. The bigger the size of corporations in a country, the larger the GDP. So, we need to analyse what we have to do differently to produce large ‘Market Capitalisation’ corporations. Table 1: GDP Size, Market Capitalisation & National Debt Comparatives Country GDP(USD in Trillion) [A] Population(Million/Billion) [B] Per Capita Income(USD) [C=A/B] Equity Market Cap(USD in Trillion) [D] National Debt(USD in Trillion) [E] Market Cap as % of GDP[F=D/A] Debt as % of GDP[G=E/A] USA 21.4 Tn 328 Mn 65,244 37.7 Tn 24.9 Tn 176% 116% China 14.4 Tn 1,435 bn 10,034 11.7 Tn 5.5 Tn 81% 38% India 2.7 Tn 1,366 bn 1,985 2.2 Tn 1.8 Tn 83% 67% *Source of factual data: Statista (national debt of India and cross-country macroeconomic indicators). To answer that question, we need to ask ourselves: What does India lack and why are we not able to produce ‘at least’ 3 Global companies such as Apple, Microsoft and Google? The market capitalization of each of these 3 companies cumulative is USD $4 trillion higher than the market capitalisation of the entire Indian Stock Market (US$2.2 trillion) despite being a country having an abundance of land, a country with the best demographic (Labour) in the world (young population) & best human capital. So, what does India need to do differently in order to be able to produce at least 3 Global Companies with >$1 trillion Market capitalisation in the next 10 years? In the table below, you will notice that while India has listed companies higher than USA & China, not a single company with US$1 Trillion Market Capitalisation! What is stopping us to reach the $1 trillion milestone? Table 2: Equity Market Capitalisation & Global Giants Country Equity Market Capitalisation Number of Listed Companies on Stock Exchange Companies with >$1 Trillion Market Cap US 37.7 Tn 3,300 (Nasdaq) 8 China 11.7 Tn 3,584 2 India 2.27 Tn 5,065 NIL One key reason for this is that Indian Companies despite best management, corporate culture and highest governance model are not able to become global companies, i.e., companies whose consumers are spread across the globe say more than 75+ countries in the world? We need to create our own ‘Global’ brands to create large Market Capitalisation, resulting in higher GDP for the economy (as per co-relation shown in Table 1 above) - let’s move forward and analyze this further - Why are we not able to achieve this milestone? (despite all challenges) 3. Back to Basics: Land, Labour and Capital In order to answer that question let’s rewind and go “back to basics” - We all know that land, labour and capital are the three main ingredients of business. The article primarily focuses on the ‘capital’ element as so much has already been written and said about ‘land and labour’ reforms. One easy & favorite argument of all experts generally is that we should increase our investment in ‘research & development’ multiple fold to promote “innovation”, that’s a fair argument and definitely lots to be done in this area so that as a country we should be able to produce at least one innovative product. (US $1.4 trillion Market cap of a single company, representing 52% of India’s GDP). However, it is important for a country to focus on ‘execution’ piece as well as to how can we make our ‘policies’ and ‘processes’ efficient to enable execution of those innovative products. So, let’s focus in this section ‘what best can we do’ in terms of execution, within the current opportunities we have on hand in automobile, pharma, chemical, cement, FMCG, banking industry & last but not the least the new fab - digital money. Land Land is a natural resource and one of the main ingredients to start a business but as we know “Land” is a scarce resource as well, i.e., a country cannot produce or increase the amount of land they have even if they want to. Fortunately, India has an abundant and huge ‘land bank’ which is rich in mineral resources as well. So from capability point of view we have a big advantage here over other countries. However, the key question is: How do we make our land policies efficient and industrially friendly in order to make the best use of it? I think we all agree that we need drastic land reforms. Listed below are ways we can make our use and efficiency of land even better: Digitisation of land records Trading of land in dematerialisation form Categorising land into a) Industrial, b) Agricultural, and c) Railway land (relevant for India). The aim of simplifying this is to make sure land availability for industry is available in the most easiest & transparent way and we make our land more productive whether in the field of ‘agriculture’ or extraction of ‘mineral’ resources. Government should define top 3 measurable KPIs (Key Performance Indicators - Measurement of success) - and then ensure, all policies are designed & implemented to achieve those KPIs. These KPIs should be published on monthly basis. Labour India is the 2nd most populated country in the world. So, again like land, labour is abundant in supply in comparison to other countries and the best part is our demography – we are a young nation with 40% of the population < 35 years. So, this resource as well we have in plenty - so now the question here is: How can we make our labour laws more efficient & competitive globally? How can we make our ‘labour’ more skillful. In this competitive world, can we afford to have laws that do not promote meritocracy and promote socialism? There are various other ways to promote socialism, but let’s not be over protective about our labour especially when it makes our products ‘expensive’ & ‘uncompetitive’ than in the international market while competing with global peers. Our labour laws should promote industry growth and not cripple them. Here, as well, the Government should define Top 3 measurable KPIs and publish them on monthly basis. Funds / Capital (Equity and Debt) I would say currently for India, in comparison to ‘land’ and ‘labour’, ‘access to capital’ is a major hurdle for our entrepreneurs to become ‘global’ companies. Indian entrepreneurs have somehow managed to overcome challenges in ‘Land’ and ‘Labour’, despite all negatives vs global peers. However, it is the ‘shortage’ of Capital which I would say causes more than 50% of enterprises to shut down their operations. Let’s evaluate where we stand on the ‘debt’ matrix vs. our global peers: Corporate debt size: 51% of GDP in India vs. 163% in China and 80% in the US. Rate of Interest (cost of funds): 8% to 10% in India vs. sub 3% in USA / China. Default rate: Highest in India at 40% vs. 6% in USA and 24% in China. Table 3: Corporate Debt as % of GDP & Default % (Comparative Analysis) Country Corporate Debt(USD in Trillion) Average Interest Rates GDP(USD in Trillion) Corporate Debt as % of GDP Default % US 17.2 Tn ~2% to 3% 21.4 Tn 80% 6%* China 23.5 Tn ~Nil to 1% 14.4 Tn 163% 24%* India 1.4 Tn ~8% to 10% 2.7 Tn 51% 40% *Source: S&P Capital IQ / McKinsey Global Institute analysis. Note: Figures in USD. IMF data ranks India 33 among 137 nations with a bad NPA ratio in descending order. Of the 32 countries with worse ratios, 16 are in Africa. Agree, we have a big problem here. Hence, we should look at expanding our corporate debt considerably at ‘interest rates’ competitive to our global peers. 4. The Five (5) “Big Changes” to Build Star Companies So, what are the five (5) “Big Changes” we need to execute to rebuild confidence in Indian Corporates and ensure abundance ‘Funds’ inflows for Indian Companies, to enable them to achieve their full potential and am sure by doing so few ‘star companies’ who dream to become ‘Global’ companies will born with US $1 Tn Market cap: 1. Change in Attitude We need to do an in-depth study on options available to entrepreneurs to raise funds for their businesses - whether ‘capital’ or ‘debt’. The policies, processes, rules & laws related to raising capital or granting debts needs suitable reforms. We all know one basic tenet of any business to grow is ‘ability to take risks’, whereas Indian entrepreneurs are constantly afraid of ‘failure’ rather than focusing on ‘growth’. The fears with which a small or mid-size entrepreneur lives with today are: How do I raise capital or debt for growing my business? Where will I get additional funds, even if I grow? - What is the motivation for me to grow when I cannot have access to additional capital or loan? What will happen if my business fails due to external factors? How will I repay my loan? How will I arrange for collateral to raise debt? The Indian Banking system and Government of India has a major role to play in order to be able to provide following support to corporates into becoming Global Companies: Step 1: A structural way of access to Capital or debt viz equity, granting or extinguishing debts, even if it means taking ‘risk’. Step 2: Nurturing companies to become successful at home turf. Step 3: Last but not the least, giving them required support to go ‘Global’. At macro level, India is at a strong short term debt cycle, compare to its global peers where interest rates are significantly lower - near to zero! We have a unique opportunity to expand our corporate debt effectively to increase productivity by reducing interest rates. Hence, Monetary policy support is need of the hour. 2. Change in Processes: “Ways of Doing Things” As mentioned earlier, we should review end to end existing policies & processes related to all the ‘sources’ of funds for all sizes of corporates (Small, Medium & Large enterprises) whether it is about raising ‘Capital or debt’. Corporates should have ease of access to these ‘sources of funds’ where there is reward for good performance & financial penalty for ‘default’. I have picked in this article as an example one of the key source “Corporate debts” issuance by banks. Similar exercise can be done for other sources of funds as well. The mantra is “let’s play a game, let’s take a risk, let’s play ‘1 million to 1 billion’ corporate innings!” Below table depicts how the banking system can play a critical role in ‘corporate life’ journey of an enterprise from a $1mn to $1bn marathon! Table 4: Evaluation & Monitoring Process — Corporate Life Cycle Till It Goes Global Evaluation & Monitoring Parameter <US $1m>>>>>>>> <US $10m>>>>>> <US $100m>>>> <US $500m>>> >US $1bn Pre-clearance of ‘Project’ Business Case Mandatory Mandatory Mandatory Mandatory Mandatory Mentoring & Monitoring ‘Project’ Performance vs Targets - Independent Agency Mandatory Mandatory Mandatory Mandatory Mandatory Project Start & End Date to be Defined Mandatory Mandatory Mandatory Mandatory Mandatory Collateral Guarantee No No No No Yes Loan Repayment Moratorium 2 Years 2 Years 2 Years 1 Year NA Tax Moratorium (Direct, Indirect & Employment Taxes: ESI, PF) 2 Years 2 Years 2 Years 1 Year NA Rate of Interest (Globally Competitive) NIL for first 5 years NIL for first 5 years NIL for first 5 years Benchmark to US Benchmark to US Credit Rating Awarded to Corporation, Promoters, Pre-clearance & Mentoring Agency Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Training & Skill Development Program for Promoters/Employees Yes Yes Yes Yes Yes All of the above steps need to be incorporated in our “Corporate debts” approval cycle to ensure we reduce our ‘default’ rates significantly and at the same time expand our Corporate debt size from 51% to at least 100% of GDP by March 2022 and at the same time improve our default rate/NPAs to same levels as USA, Australia at <5%. 3. Change in “Belief”: Mentoring & Coaching a. Skill Set Development: Investment needs to be made in improving: i. Skill development program for existing WorkForce: Promoters should be obliged to conduct a mandatory number of hours “Skill Development” program for its workers/employees. ii. Skill Development for Future Needs: Education system should link up future needs of the country. A road map should be laid down for the next 10 years of TOP 10 Jobs needed in the country to support Industry/Corporations. iii. Quality of basic Education: Significant investment needs to be made in this area to get us ready for decades to come. b. Training Program (Entrepreneurs): Leadership skill development program to be conducted across the Corporate Life growth journey (as indicated in Table 3 above) for Entrepreneurs. A mandatory number of training ‘hours’ annually should be imparted to Entrepreneurs by astute institutes viz. IIMs, IITs, AIIMs etc. 4. Change in “Scale”: Access to Global Platforms a. International Exposure to Entrepreneurs: Entrepreneurs should be made aware of Global Environment and relevant news & development related to their industry should be shared formally. Cost benchmarking exercise should be carried out for their products with their Global peers and Entrepreneurs should be challenged to produce ‘best quality’ products at Global Competitive prices. There should be healthy interaction & co-operation between CII/relevant bodies & Entrepreneurs. b. Training and Support for Acquisition of Foreign Companies: Entrepreneurs should be given confidence and support to acquire foreign companies to increase global footprint. 5. Change in “Strategy”: FDI - Foreign Ownership & Cost of Capital a. FDI Strategy: We shall have to make some tough choices/decisions - ‘short term sacrifice for long term gains’ i.e., our Foreign Direct Investment (FDI) policy needs to be relooked to ensure that we encourage Indian entrepreneurs to raise funds internally within India instead of looking outward for funds for expansion. Acquisition of Indian companies by foreign companies may sometimes curb our growth globally as explained below. Over the last decade we saw the emergence of quite a few successful Indian corporates which captured the attention of Global Corporate. These are successful companies which should be promoted to go global by providing adequate funding through Indian sources. However, foreign investment is encouraged. The underlying objective of which may be to ensure that these Companies do not go global and compete with them at International stage (this is a highly debatable topic though!) and the biggest factor hindering our companies to go global and enhance their Market Capitalisation. b. Cost of Capital: Cost of Capital/debt in India is quite high compared to global peers - to be Globally competitive RBI shall have to review the “interest rates” for corporate debts for ‘foreign acquisitions’ and ‘exporters’. There is no way India can compete with Global peers when the Cost of Capital is 3 to 4 times higher than their Global partners. 5. Conclusion: Capturing the Big Growth Opportunity The above ‘Changes’ shall go a long way in enhancing confidence of Indian businesses (small, medium & large) enabling them to grow their business multiple fold times, and contribute to nation building by driving GDP growth. True testimony of success shall be to convert “Indian companies” to be at least 3 large corporates of US$1 trillion+ size & 25 large corporates of US $ 0.5bn+ Market Capitalisation in next 10 years - can we? Yes, we can. India has the potential to capture a big growth opportunity in this decade and change the course for generations to come. As Warren Buffet saying goes “Someone’s sitting in the shade today because someone planted a tree a long time ago.” ∎∎∎

The Chartered Accountant Journal • General • January 2021 Exploring the Roots CA. Unna Lakshman The author is a member of the Institute. Email: 253513@icai.org • eboard@icai.in Citation: (2021) 69 CAJ 831–833 Pages 55–57 • Journal Page Nos. 831–833 Historical Overview & Perspective This article is on the journey of accounts and the milestones made. It starts with Vedic Scriptures and how accounts were used in it. The article moves on to how Archaeologists have found evidence of Development of accounts and records on clay tablets which dates back to the ancient Mesopotamia. It portrays on how accounts evolved in India from the era of Chanakya to the modern techno age. Read on… “Behind every good businessman there is a great accountant” – This saying brings great pride to our community and I thought that knowing the roots of accounts is equally essential. 1. Accounts as the Language of Business & Ancient Civilizations Accounts is just not a list of debits and credits but a language of business and finance. Accounts translates the complexities of finance into information which the general public can understand and take informed decisions. Accounting History can be traced to ancient civilizations. Archaeologists have found evidence of Development of accounts and records on clay tablets which dates back to ancient Mesopotamia, Egyptian and Babylonian society as early as 2000 to 3300 B.C. So accounting would have evolved when society started trading. 2. Luca Pacioli – Father of Modern Accountancy Luca Pacioli, father of accountancy who in 1494 first introduced the system of double-entry book keeping which was used in Italy, is regarded as Father of modern accounts, but he did not invent accounts. Rather, he described a method which was used by merchants in Venice. His system introduced accounting cycle as we know it today. Pacioli’s Mathematical Treatise: The first accounting book was one of five sections in Pacioli’s mathematics book, titled “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” (Everything about Arithmetic, Geometry and Proportions). The section on accounting served as the world’s only accounting text until the 16th century. 3. Vedic Scriptures & The Concept of Chitragupta History has evidence that accounts evolved in 2000 B.C, but in India we trace it back to Vedic Scriptures. Chitragupta (meaning ‘rich in secrets’) is a Hindu God who keeps absolute records of the assets and liabilities (Karmas) that every human beings accumulates over their life span. He is also known as Dharmaraja, God of Justice. There is proof that in bygone times accounts were maintained by professionals of Law. Chitragupta is believed to be created from Bramha’s soul and mind, who has the task of deciding heaven or hell for humans according to their actions on Earth, like how accounts is the deciding factor for every business. 4. Chanakya (Kautilya) & The Arthashastra Eventhough Indians followed accounting system from the time of Vedic scriptures evidence of usage of accounts in India was around the second century. Indian economist Chanakya wrote a manuscript similar to a financial management book, during the period of the Mauryan Empire around the third century B.C. His book “Arthashasthra” contains detailed aspects of maintaining books of accounts for a Sovereign State. The book holds advices and details on how to maintain record of books for accounts. Chanakya was an ancient Indian teacher, philosopher, economist, jurist and royal advisor who assisted the first Mauryan emperor, Chandragupta in his rise to power and establish the Maurya empire. He is traditionally identified as Kautilya or Vishnugupta, who authored the ancient Indian political treatise, the Arthashastra. He is considered a pioneer in the field of political science and economics in India. His works were lost near the end of the Gupta Empire in the 6th century B.C. and rediscovered in the early 20th century. He recognised the importance of accounting methods in enhancing economic enterprises. He had a conviction that economic performance was essential for effective allocation of resources. He considered accounts as an integral part of economics. Kautilya enumerated a very broad scope for accounts and considered explanation and prediction as its objective. He made headways in developing book keeping rules to record and classify economic data. He accentuated on independent periodic audit and emphasised on two critical roles, one that of a Treasurer and another of a Comptroller – Auditor to increase accountability and reduce the scope for conflict of interests. Chanakya’s Contribution to Accounts Classified into Four Heads: Development of Principles of Accounting: Formulating systematic foundational rules for tracking state revenue, expenditures, and treasury inflows. Specification of Scope and Methodology of Accounting: Defining clear boundaries, ledger classification frameworks, and computational methodologies. Modification of Financial Rules and Creation of Organisational Structure: Establishing bureaucratic checks, institutional controls, and segregating custodial duties from audit verification. Role of Ethics in Restraining Fraudulent Accounting: Prioritising ethical conduct, strict penalties for misappropriation, and governance standards to eliminate fraud. He has surmised most of the aspects which we use in accounts and finance today. 5. The Pioneer of Accountancy Education – Shri Kalyan Subramani Aiyar A person who took accountancy to the next level in India is Shri Kalyan Subramani Aiyar (1859-1940) who was a pioneer of commercial and accounting education in India. Shri Kalyan Subramani Aiyar started one of the very first accounting firm in India. He is a pioneer in commercial and accountancy education and profession in India. 6. Culminating Milestone: The Institute of Chartered Accountants of India (ICAI) The culminating stage of all the above is – The Institute of Chartered Accountants of India (ICAI). ICAI was established on 1 July 1949 as a statutory body under the The Chartered Accountants Act, 1949 enacted by the Parliament (acting as the provisional Parliament of India) to regulate the profession of Chartered Accountancy in India. The Institute of Chartered Accountants of India (ICAI) is the national professional accounting body of India. ICAI is the second largest professional Accounting & Finance body in the world. ICAI is the only licensing cum regulating body of the financial audit and accountancy profession in India. It recommends the accounting standards to be followed by companies in India to National Financial Reporting Authority (NFRA) and sets the accounting standards to be followed by other types of organisations. ICAI is solely responsible for setting the Standards on Auditing (SAs) to be followed in the audit of financial statements in India. It also issues other technical standards like Standards on Internal Audit (SIA), Corporate Affairs Standards (CAS) and so on. ICAI is one of the founder members of the International Federation of Accountants (IFAC), South Asian Federation of Accountants (SAFA), and Confederation of Asian and Pacific Accountants (CAPA). 7. Comprehensive Chronology: Milestones in Accounts • Book Keepers This method was present during barter system. They maintained accounts in narrative style. • New and Improved Ledgers Ledgers were adapted when currencies became prevalent. They followed narrative style with numbers in one column. • The Mathematical Monk Double entry book keeping was followed. Accounting records were however only for the owners who hired the book keeper. The general public had no access to such records in this age. • The American Touch Book keeping migrated to America with European colonization – the businesses were small and the owners were personally involved and aware of the financial health of their companies. • Early Financial Statements To attract investors, corporates began to publish their financials in the form of a balance sheet, income statement, and cash flow statements. • Birth of a Profession The modern profession of chartered accountant originated in Scotland in the nineteenth century. Accountants often belonged to the same associations as solicitors, who often offered accounting services to their clients. The accounting profession was recognised in 1896 with the establishment of the professional title of certified public accountant (CPA). In India, The Institute of Chartered Accountants of India (ICAI) was established on 1 July, 1949 as a statutory body under the Chartered Accountants Act, 1949 enacted by the Parliament to regulate the profession of Chartered Accountancy in India. • Accounting Today – Technological Transformation Technology has transformed accounting. Bookkeeping is now completely automated. The first accounting records were kept in America, bookkeepers had used a number of tools. The adding machine in 1890 helped early accountants calculate receipts and quickly reconcile their books. When IBM released the first computer in 1952, accountants were among the first to use them. Technology has brought a number of softwares in the areas of accounting. Technology has also led to development of cloud computing, blockchain, automated accounting technology, and so on. These new advancements are much more intuitive, helping accountants do their job quicker, more accurately, and with more ease and helps in transparency. References & Further Reading: Kautilya on the scope and methodology of accounting, organizational design and the role of ethics in ancient India – Balbir. S Sihag ThoughtCo Article https://ksaa.global/wp-content/uploads/2018/04/Legends-of-Accounting-Profession-1.pdf https://online.maryville.edu/blog/accounting-technology-in-2019/ https://www.sanjeev.sabhlokcity.com/Misc/sihag-kautilya-accounting.pdf https://papers.ssrn.com/

The Chartered Accountant • Journal of ICAI January 2021 • Vol. 69 • No. 7 • pp. 58–61 (Journal pp. 834–837) International Taxation Withholding Obligations on Non-residents: Whether an Unintended Consequence? CA. Vibha Venkatesh The author is a member of the Institute. She can be reached at vibhavenky006@gmail.com and eboard@icai.in. This article seeks to examine the legal aspects on the applicability of withholding tax provisions on non-residents under the Income Tax Act, 1961 while making payment to residents of India. The article analyses many aspects including extra territorial operations of law on non-residents, relevance of circular No 726 issued by CBDT, recommendations of working group, various provisions of the Act. It also scrutinizes whether the tax authorities have the jurisdiction over the non-residents to recover any tax from them. As a result, it provides possible option that the non-residents may consider to get away with the penal and the prosecution consequences. Read on… 1. Introduction: The Unresolved Cross-Border Dilemma The Indian Income Tax Act, 1961 (‘the Act’) has evolved over the years, with various amendments pertaining to non-residents. However, still there lies a deep-rooted ambiguity on the applicability of withholding provisions on non-residents. It is a settled law that the payments made to non-residents are subject to withholding tax u/s 195 of the Act. However, the question that needs to be addressed is on the vice versa scenario: whether in legality the non-residents are required to comply with the withholding provisions under the Act, while making payment to Indian residents? 2. Withholding Provisions on Payment to Indian Residents At the outset, the withholding provisions are covered by Chapter XVII B of the Act. This chapter inter alia covers various provisions like Section 193, 194A, 194C, 194D, 194H, 194I, 194IA, 194IB, 194IC, 194J and so on, which deals with payments made to residents. The opening words of majority of these sections generally starts with the phrase “Any person responsible for paying a sum to any resident……”. Therefore, the important question is whether “any person responsible for paying” is defined under the act? Meaning of Person Responsible for Paying Section 204 of the Act defines the meaning of “person responsible for paying”. As per clause (iii) of the said section, in case any credit or payment of any other sum chargeable under the provisions of this Act, person responsible for paying is the payer himself or if the payer is a company, then the company including the principal officer thereof. Therefore, on literal interpretation, one may take a view that the non-resident or the foreign company would be the person responsible for paying and hence the provisions of Chapter XVII would be squarely applicable on them. 3. Extra-Territorial Operation of Law: Constitutional & Judicial Boundaries However, the issue that warrants serious examination is whether, the Indian legislation is empowered to regulate a person, who is residing outside the territory of India with no presence in India? Legally this is understood as the “extra territorial operation of law”. In this context, the privy council in the case of British Columbia Electric Railway Co Ltd Vs King [MANU/PR/0103/1946], while interpreting the Government of India Act, 1935 held that: “A legislature which passes a law having extraterritorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them.” Therefore, the privy council dictum goes on to show that, it is within the powers of the legislature to enforce a law having extraterritorial operations. At the time when the draft Indian constitution was prepared, it contained several clauses for distribution of power to enact a legislature. Clause 179 contained provisions related to extra territorial operations, which stated that “Subject to the provisions of this Constitution, the Federal Parliament may make laws, including laws having extra-territorial operation, for the whole or any part of the territories of the Federation....” which later on was embedded in the constitution as Article 245(1) & 245(2). Article 245(1) of the Indian Constitution, empowers the Parliament to make laws for the whole or any part of the territory of India and the legislature of the state to make any law for the whole or any part of the state. Further, Article 245(2) states that “No law made by Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation”. Therefore, it may appear that Article 245(2) may validate the extra territorial operations of the Income Tax Act. However, the question that remains is, whether the parliament is empowered to enact laws in respect extra territorial aspects or causes that have no nexus with India? This question has been lied to rest by the Apex Court Judgement in the case of GVK Industries Ltd Vs Income Tax Officer [2011 197 Taxman 337 (SC)]. The key observations of the Apex court are as under: “The Court derived the responsibility of the Parliament with the help of word ‘for’ used in article 245(1) and stated that Parliament of India is to act as the Parliament of India and of no other territory, nation or people. The Court also derived two related limitations in this regard, the first being that the Parliament may only exercise its powers for the benefit of India in regard to the necessity. The laws enacted by Parliament may enhance the welfare of people in other territories too but the benefit to or of India remain the central and primary purpose. The second limitation that the law made by Parliament with regard to extra-territorial aspects or causes that do not have any, or may be expected to not have nexus with India, transgress the first condition. The Sudarshan Reddy J. for Constitutional bench negated the answer of question logically and held that the Parliament’s powers to enact legislation, pursuant to clause (1) of article 245 may not extend to those extra-territorial aspects or causes that have no impact on or nexus with India.” Therefore, the key ratio decidendi drawn from Apex court precedence is that the Article 245 cannot be extended to territory beyond India that have no impact or nexus with India. Practically, a non-resident may or may not have a: A presence in India; or Income sourced in India; or A business connection in India. If the non-resident does not have any of the above proximity with India, then it may be reasonably fair to contend that the non-resident does not have any nexus with India and consequently the extra territorial operation of law may not be applicable on them. However, if the non-resident has any proximity with India, then it may be difficult to take the above argument and therefore this leg of argument may not stand in the court of law. Further, in the case of A.H. Wadia vs Income Tax Commissioner [MANU/FE/0004/1948], the federal court opined that the enactment process relating to extra territorial operation of law cannot be challenged in municipal court. Therefore, raising constitutional validity on the extra territorial operation of law may not travel higher in the Judiciary. 4. Administrative & Legislative Perspectives Circular No 726 dated 18-10-1995 In the context of the moot issue under discussion, it will be relevant to peruse the Circular No. 726 which clarifies regarding the payments to Indian residents by foreign companies or foreign law firms that have no presence in India. Representations were made to CBDT from various law and accountancy firms’ resident in India that were receiving fees for professional fees from foreign companies and foreign law firms which had no presence in India regarding the practical difficulty in withholding tax and complying with the filing procedure. The CBDT vide circular no 726 clarified that TDS provisions u/s 194J may not be applicable on the non-resident if the fees are paid through proper banking channels and such non-resident does not have any agent, business connection or permanent establishment in India. The circular further requires the non-resident to send a quarterly statement indicating certain details of the payment to the Income Tax Department. While it may prima facie appear that this circular has provided clarity in this aspect, it has also led to confusion on this issue: Firstly, all the non-residents cannot take a cue from the circular, as this is only applicable for payments made to lawyers and chartered accountants by foreign companies and foreign law firms. Secondly, it appears from the circular that non-residents, who do not have any nexus with India (as held contrary in GVK case supra) are required to comply with withholding provisions under the Act. Thirdly, the circular directly does not absolve the non-residents from any compliance requirements since they are required to submit a quarterly statement to CBDT in these regards. Report of Working Group on Non-Resident Taxation (Dr. Vijay Kelkar Task Force) While analysing this issue it may be relevant to take note of the recommendation made by the working group. The Government appointed a Task Force on Direct Taxes under the Chairmanship of Dr. Vijay Kelkar, which presented a “Consultation Paper” relating to tax treatment of non-residents. The Task Force recommended the creation of a Working Group headed by the Director General of Income Tax (International Taxation) and comprising representatives from trade and industry to examine various issues pertaining to non-resident’s taxation. The working group in para 4.13.4 of the report after taking into consideration the practical difficulty on non-residents to comply with the withholding provisions recommended that: “A provision be introduced to the effect that if the recipient undertakes to pay the withholding tax and completes all formalities including filing of TDS return on behalf of the non-resident payer then the non-resident payer shall be relieved of his obligation of deduction of tax at source. The undertaking and the deposit of the tax in such cases shall be made in non-resident tax circles. This will also safeguard revenue’s interest.” However, the government has not considered this recommendation even after taking cognizance of this issue. This gives out a signal that the intention of the Government is to hold non-residents “the person responsible” for withholding tax. Explanation 2 to Section 195(1) – Whether it Can Protect Non-Residents from Withholding Obligations? As a surgical mission to overrule the landmark decision of Apex court in the case of Vodafone International Holdings B.V vs Union of India [2012 341 ITR 1 (SC)], the government inserted Explanation 2 to Section 195(1) to clarify that the deduction u/s 195(1), was always applicable to both residents and non-residents, whether or not it had any residence, business connection or presence in India in whatsoever manner. Now, one school of interpretation could be that, since the other provisions of chapter XVII B of the Act does not emphatically hold non-residents responsible, it may be possible to take a view that non-residents are not liable under the Act. Another school of thought could be that, Explanation 2 is more of clarificatory in nature and it holds a non-resident responsible for making payment to another non-resident, therefore if it is widely interpreted then even without having a specific explanation in other provisions, it may be said that non-residents would be covered under the provisions of the Act. In the light of the above background let’s analyse the provisions under the Act. 5. Statutory Status: Whether Non-Resident is an Assessee under the Act? As per Section 2(7) of the Act, assessee means any person by whom any tax or any other sum is payable under the Act and it inter alia includes every person who is deemed to be an assessee in default under any provisions of the Act. As per explanation to Section 191 of the Act, if any person who is required to deduct any sum and does not deduct or after deducting fails to pay & where the assessee has also failed to pay such tax directly, then the payer would be deemed to be assessee in default within the meaning of section 201(1) of the Act. Therefore, the non-resident would be an assessee under the Act if he becomes an assessee in default for not withholding tax while making payment to a resident. However, as per first proviso to Section 201(1) of the Act, the non-resident would not be deemed to be assessee in default if the resident payee has: Furnished the return of income; Taken such sum while computing the income; Paid tax on such income; and The payee furnishes Form 26A read with Rule 31ACB to this effect from an accountant. It may be worthwhile to note that this will not absolve the non-resident from the interest implications u/s 201. Therefore, in that case he may be an assessee under the Act for the amount of interest which may be payable by him. Having analysed the definition of assessee under the Act, it may be relevant to analyse the consequence of not withholding tax. 6. Consequences of Not Withholding Tax If the tax is not deducted or after deducting, if it is not paid to the credit of the government, then the deductor will be deemed to be assessee in default and following are the consequences: Interest under Section 201: Interest @ 1% per month or part thereof for non-deduction, and interest @ 1.5% per month or part thereof for non-payment of tax u/s 201. Disallowance of Expenditure: Disallowance of expenditure to the extent of 30% while computing Income u/s 40(a)(ia) of the Act (not relevant for non-residents not having an income sourced in India). Penalty under Section 271C: Penalty u/s 271C of the Act to the extent of tax in arrears in addition to interest. Prosecution under Section 276B: Prosecution u/s 276B of the Act which may not be less than 3 months but may extend up to 7 years. Recovery Proceedings: Recovery proceedings under the Act. 7. The Structural Disconnect in Recovery Provisions (Chapter XVII-D) The recovery provisions under the Act are contained in Chapter XVII D of the Act. Further, as per Section 228A(2) of the Act, if the assessee is in default or deemed to be in default in making a payment of tax, and he has any property outside India, in a country with which central government has entered into agreement for the recovery of income tax, then the tax recovery officer (‘TRO’) may, forward to the board, a certificate drawn up by him u/s 222 of the Act and the board make take such action as it may deem appropriate with such country. Section 223 of the Act defines the TRO competent to take action u/s 222 of the Act and it states that the competent TRO shall be the person within whose jurisdiction the assessee carries on business / profession or his principal place of business / profession is situated or within whose jurisdiction the assessee resides or the property of the assessee is situated. Therefore, technically in case of non-residents not carrying any business in India and neither possessing a property situated in India, there will not be any competent TRO to issue certificate u/s 222 of the Act and consequently, recovery proceeding u/s 228A of the Act cannot be initiated. This does not protect the revenue’s interest in safeguarding the amount of tax that may be withheld. Therefore, there lies a disconnect between the provision of recovery in case of non-residents. 8. Conclusion & Suggested Roadmap The non-residents may opt to take different view on this subject matter depending upon the facts and circumstances. However, the position as on date is that the law does not in black and white obviate the compliance obligations on non-residents. On a conservative stand, the non-residents may contemplate filing Form 26A and ensure that the resident payee has paid the tax in these regards in order to get away with the penal and the prosecution consequence under the Act. However, this may be at a cost of interest u/s 201 of the Act. Practically, it would be very difficult for a non-resident to comply with the provision of Indian Income Tax Act merely for making a payment to a resident in India, especially in case where it does not have any presence or nexus with India. This may create undue hardship and unwarranted obligation on them, moreover this would go against the motto of “ease of doing business”. Also, as analysed in the article the revenue will also not have complete control on the recovery of tax. Therefore, it would be good on the part of the department to come out with a clarification or an alternative approach in these regards to lie the issue to rest. ∎∎∎

The Chartered Accountant • Journal of ICAI January 2021 • Vol. 69 • No. 7 • pp. 62–67 (Journal pp. 838–843) International Taxation The Largest Ever Tax Fine Overturned by the European General Court : A Case Study CA. Mit Gaglani The author is a member of the Institute. He can be reached at mit.gaglani@gmail.com and eboard@icai.in. On 15 July 2020, the European General Court (Seventh Chamber, Extended Composition) pronounced the much awaited Apple-Ireland judgement overturning the entire tax fine imposed by the European Commission amounting to Euros 13 billion (approximately INR 1.15 lac crores) on the ground that the European Commission failed to demonstrate that an unfair state aid/selective tax advantage under article 107(1) of the Treaty on the Functioning of the European Union (“TFEU”) was granted by the Irish tax authorities to the Irish subsidiaries of Apple Inc. namely Apple Sales International (“ASI”) and Apple Operations Europe (“AOE”). Read on... 1. Background & Corporate Structure of the Apple Group To put the facts in right perspective for further discussions, the decision elaborately lays down the history of the Apple Group. It mentions that the Apple Group, founded in 1976 and headquartered in Cupertino, California, U.S is engaged in the designing, manufacturing and marketing of personal computers, mobile communication and media devices and portable digital music players, as well as in sale of related software, services, peripherals, networking solutions and third party digital content and applications worldwide. The Group sells its products worldwide through its online stores, retail stores, third-party wholesalers, resellers, and direct sales force. Apple Inc. incorporated two subsidiaries in Ireland namely Apple Sales International (“ASI”) and Apple Operations Europe (“AOE”). While these two subsidiaries were incorporated in Ireland, they were not tax residents of Ireland. Through a cost sharing arrangement between Apple Inc and ASI and AOE; ASI and AOE agreed to share the research and development costs in relation to the technology/intellectual property (“IP”) incorporated in the products of the Apple Group. In return, Apple Inc. granted royalty free licenses of these IPs to ASI and AOE to manufacture and sell the products of the Apple Group to third party customers in Europe, Middle-East, India and Africa (“EMEIA”) as well as Asia-Pacific (“APAC”) regions, i.e., practically the entire world except North and South America. The parties to the agreement were required to bear risks resulting from the risks, the main risk being the obligation to pay the development costs relating to the Apple Group’s rights. ASI and AOE Further Set Up Branch Offices in Ireland Key functions of ASI’s branch included procurement of finished goods of Apple Group from related party as well as third party manufacturers, sales and distribution of those goods under framework agreements (negotiated and concluded outside Ireland), logistics management and providing after sales services to customers. Key functions of AOE’s branch office included assembly and manufacture of iMac desktops, Macbook laptops and computer accessories and their sale to related party distributors in the assigned territory. Key functions within that branch include production planning and scheduling, process engineering, production and operations, quality assurance and quality control, and refurbishing operations. ASI and AOE sought two tax rulings (“the disputed tax rulings”) from the Irish Tax authorities in 1991 and subsequently updated in 2007 which determined the profits attributable to the activities of the branch offices of ASI and AOE and hence, to be taxed in Ireland. The profit attribution mechanism which was proposed by ASI and AOE and accepted by the Irish tax authorities in these rulings was not based on the arm’s length principles. However, these rulings were given to ASI and AOE on the basis of certain advance tax rulings given by the Irish tax authorities to other taxpayers in the past. 2. The European Commission’s Investigation & Allegations The European Commission (“The EC” or “The Commission”) opened its investigation against the disputed tax rulings which were applicable during the period 1991–2014 and alleged that through the disputed tax rulings, the Irish Tax authorities had granted an unfair state aid/selective tax advantage to ASI and AOE for the purposes of Article 107(1) of the TFEU. The EC’s allegation was mainly based on the following grounds: Through the disputed tax rulings, the Irish Tax authorities agreed to allocate all significant decision making and management functions (and the corresponding profits attributable to these functions) in relation to exploitation of IPs to the head office of ASI and AOE which was for all purposes “stateless”, i.e., existed only on paper and had no staff/operating capacity to perform these functions. Only a minuscule amount of profits was attributed to the activities of the branches of ASI and AOE and hence, was taxed in Ireland. The argument of the Irish Tax authorities that the decision making/management functions in relation to the exploitation of these IPs as well as the activities of the branches were undertaken by the Board of Directors of ASI and AOE (“not Irish residents”) cannot be accepted as the minutes of the board meetings did not reflect any such decision making functions undertaken by the Board of Directors. In the absence of any staff/operating capacity in the head office of ASI and AOE, the significant decision making/management/control functions in relation to exploitation of these IPs and the corresponding profits attributable to the same should have been allocated to the branch offices of ASI and AOE and hence taxed in Ireland. Through the disputed tax rulings, the Irish Tax authorities accepted a level of profits chargeable to tax for the branches of ASI and AOE which did not reflect a market based outcome as envisaged under the arm’s length principle as stated under the OECD Guidelines and further the allocation was not in accordance with the Authorised OECD Approach on attribution of profits to a permanent establishment. The Commission argued that a comparable enterprise, operating under similar market conditions and covered under the “normal” taxation regime of Ireland would have earned more profits. The arm’s length principle can be regarded as a benchmark to assess as to whether an unfair state aid or a selective tax advantage was granted by a member state of the EU for the purposes of Article 107(1) of the TFEU (as per the judgment in the case of Belgium and Forum 187 v/s the Commission). Lastly, the Commission argued that the allocation mechanism which was agreed in the 1991 and 2007 rulings between the Irish Tax authorities and ASI and AOE was ad-hoc and not backed by any scientific analysis. Also, in the ex-post facto reports submitted by ASI and AOE to justify that the profit allocation was at arm’s length, there were three methodological errors namely selection of branch offices as the tested parties, selection of Berry ratio as the profit level indicator (“PLI”) for ASI’s branch and selection of operating profit/operating costs (excluding the cost of materials) as the PLI for AOE’s branch (this argument was a subsidiary argument of the Commission). 3. Counter-Arguments of Irish Tax Authorities (Supported by ASI and AOE) On the other hand, the Irish Tax authorities (supported by ASI and AOE) contended the following: As per the European Union (“EU”) law, corporate taxation regime falls within the purview of a member state of the EU (Ireland in this case) and therefore, by interfering in a corporate taxation matter of Ireland, the Commission has breached the EU law. The disputed rulings were issued to ASI and AOE in 1991 and 2007 respectively and the corporate taxation regime of Ireland did not include the arm’s length principle at that time (Transfer Pricing provisions were formally introduced in Ireland and embedded in the Irish Taxation Regime in 2010). The OECD Guidelines only serve as guidance and are not mandatorily required to be followed by the Irish Tax authorities. Without prejudice to the above, The Authorised OECD Approach on profit attribution requires that profit attribution to the activities of a permanent establishment (branch in this case) should be done on the basis of functions performed, assets employed and risks assumed (“FAR”) by the respective branch. The entire case of the EC was based on an assumption that since the head office of ASI and AOE had no operating capacity/physical staff, the decision making/management/control functions in relation to IPs must have been necessarily performed by their branch offices without actually proving with evidences that these functions were performed by the branches. The Commission therefore adopted the “exclusion” approach which is neither permissible under the Irish Tax regime nor envisaged under the OECD Guidelines. All strategic functions in relation to the IPs namely research and development facilities management, brainstorming in relation to new/enhanced features of the new product/model, design of the product/model, functionalities of the software to be embedded in the product etc. were taken by Apple Inc (based in California). The management decisions in relation to exploitation of these IPs and executing the strategies formulated by Apple Inc. were taken by the Board of Directors of ASI and AOE (not residents of Ireland) and just because these decisions were not reflected in the minutes of the board meetings, it cannot be assumed that these decisions were not taken by the Board. As per the FAR profile of the branch offices of ASI and AOE (as highlighted in the ad-hoc reports submitted by ASI and AOE), it cannot be alleged that significant IP related functions were performed by these branches and hence, more profits should have been allocated to the activities of these branches. Moreover, as per the ex-post facto ad-hoc reports submitted by ASI and AOE, the profit allocation was at arm’s length. In relation to the subsidiary line of argument regarding the methodological errors in relation to selection of branches as tested party and choice of PLI, again the case of EC was based on the assumption that complex functions were performed at the branches and hence they couldn’t be selected as tested parties and this assumption doesn’t hold good. Further, the EC in its analysis changed the PLI of ASI’s branch from Berry ratio to OP/Sales and the PLI of AOE’s branch from OP/VAE to OP/TC without demonstrating as to why the PLIs selected by ASI and AOE were incorrect. Having regard to the above, since the profits allocated towards the activities of the branches of ASI and AOE were as per the activities undertaken at these branches, section 25 of the Taxes Consolidation Act, 1997 (Corporate Tax Regime of Ireland) was complied with and hence, no further profit attribution was essential. 4. Findings & Conclusions of the European General Court The European General Court after observing the arguments of both sides concluded the following: Jurisdiction under Article 107(1) of TFEU: Article 107(1) of TFEU gives the Commission the right to check whether the level of profits allocated to the branches of the non-resident entities would correspond to the level of profits that would have been earned had the activity been carried out under normal market conditions. Validity of Arm’s Length Principle & OECD Tools: The arm’s length principle and the Authorised OECD approach were tools used by the Commission to assess whether the profits attribution made to the branches of ASI and AOE was a reasonable approximation of a market based outcome and whether the attribution was made on the basis of the FAR profiles of these branches. The arm’s length principle as well as the Authorised OECD approach have international consensus and hence the Commission could not be criticized for using these tools. Failure of Primary Line of Reasoning (Flawed “Exclusion” Approach): However, the arguments of the Irish Tax authorities (supported by ASI and AOE) were well founded on the aspect that the entire case of the Commission was based on an assumption that merely because the head office of ASI and AOE had no employees/staff/operating capacity, all significant functions in relation to exploitation of these IPs and the corresponding profits in relation to the same should have been allocated to the activities of the branches. The Commission failed to demonstrate that strategic functions in relation to IPs were actually performed by the branches of ASI and AOE. Therefore, in relation to its primary line of reasoning, the Commission failed to prove that the profit attribution as per the disputed tax rulings did not correspond to the FAR profiles of these branches and thus it failed to demonstrate that an unfair state aid or selective tax advantage for the purposes of Article 107(1) of TFEU was granted by the Irish Tax authorities to ASI and AOE. Failure of Subsidiary Line of Reasoning (Methodological Claims): As far as the subsidiary line of argument of the Commission is concerned, the arguments of the Irish Tax authorities (supported by ASI and AOE) were again well founded on the aspect that the Commission argued that the branches could not be selected as tested parties only on the assumption that they performed complex functions (which the Commission failed to demonstrate as highlighted above). Further, as far as the choice of PLIs is concerned, the Commission asserted that OP/Sales was the right PLI for ASI’s branch and OP/Total Cost was the right PLI for AOE’s branch without demonstrating as to why the PLIs adopted (Berry ratio for ASI’s branch and OP/VAE for AOE’s branch) in the ad-hoc reports furnished by ASI and AOE were incorrect and unreliable. Requirement to Demonstrate Actual Tax Reduction: Moreover, even if according to the Commission these methodological errors existed, still the Commission failed to conduct its analysis in a way to demonstrate that on account of these errors there was a reduction in the taxes actually paid by ASI and AOE as compared to what should have been paid under normal rules of taxation without the issue of these disputed rulings. Lastly, mere methodological errors cannot be used as basis to claim that an unfair state aid/selective tax advantage was granted by the Irish Tax authorities to ASI and AOE. 5. Concluding Remarks & Key Takeaways Defense of Tax Sovereignty: Despite the fact that Euros 13 billion (approximately INR 1.15 lac crores) plus interest on the same could have gone a long way in boosting the economy of Ireland, Ireland still appealed against the decision of the Commission since Ireland was clear that this appeal was to protect the sovereign status of Ireland as far as its taxation regime was concerned. Commission’s Continued Power to Interfere: While, the judgment was pronounced in favour of Irish tax authorities (supported by ASI and AOE), the General Court in its ruling highlighted that article 107(1) gave the right to the Commission to check whether the level of profits allocated to the branches of the non-resident entities would correspond to the level of profits that would have been earned had the activity been carried out under normal market conditions. This indicates that even in the future, the Commission can interfere in the corporate tax regime of its member states by triggering article 107(1) of TFEU. Strict Burden of Proof (Echoing Starbucks Precedent): The judgment was pronounced in favour of the Irish Tax authorities because the Commission failed to discharge its burden of proof, i.e., it failed to demonstrate that management/control/decision making functions in relation to exploitation of IPs were being performed by the branch offices of ASI and AOE. Last year, the arguments of the Commission in the Starbucks case were dismissed by the General Court on a similar footing, i.e., the Commission failed to discharge its burden of proof as it failed to demonstrate that an unlawful state aid under article 107(1) of TFEU was granted by the Dutch Tax authorities to Starbucks. The Ultimate Unanswered Conundrum: This case leaves us with a couple of interesting questions: In which country were profits attributable to critical IP exploitation functions taxed? (If not Ireland). Were these profits even taxed at all? ∎∎∎ References: Judgment of the General Court (Cases T-778/16 and T-892/16).

The Chartered Accountant Journal • Industry Specific • January 2021 Crude Oil: The Big Black Bet CA. Ayush Jain The author is a member of the Institute. Email: jainayush448@gmail.com • eboard@icai.in Citation: (2021) 69 CAJ 844–847 Pages 68–71 • Journal Page Nos. 844–847 Executive Perspective Crude oil prices are critical for Indian economy as its demand, supply, output and other factors directly affect the Indian Trade Deficit. The article provides insight on how few hands control the fuel and enjoy the benefit of regional and demographic imbalance thereby impacting economies. Indian economy which till date has been dependent on Imports of crude is often impacted by sharp changes in crude prices. The US weekly Inventory figures and how the derivatives market for Crude reacts to each and every headline of the day from US and OPEC members has been considered in this article. The once in a lifetime event of negative prices which has at times been a theoretical discussion but had been a practical experience during the times of Pandemic 2020. Overall the article provides a broader view on what exactly is “The Crude Phenomenon” which straightforwardly dents almost each and every sector of the economy. 1. Global Energy Landscape & India’s Import Dependency Crude oil prices drive economic health of many countries. From fueling to farming to ferrying to flying, purchasing power of every single penny starts to decline the moment crude starts to surge. Global economy has seen major swings in the price of this mineral ranging from $150–$165 a barrel during the time of Global Financial Crisis 2008 to $11–$19 a barrel during the times of pandemic’2020 when there was lockdown across the globe. Oil rich countries who have a major chunk of their GDP contribution by exploration and export of oil are United States, Russia, The Gulf (Saudi, Kuwait, Iran, UAE), Venezuela, China and others who directly or indirectly control almost 80% of the worldwide production of this black gold. Heading towards India. We do not have enough oil reserves and thus, import almost 85% of our crude oil requirement. The dollars we spend on this mineral have always made a stiff and strong impact on our finances. During the year 2019-20, crude oil imports amounted to $102 billion of total $467.19 billion of imports, i.e., of every dollar spent on import, 0.22 goes to oil, and thus it can be conceived that crude import contributes maximum to the trade deficit. As far as data for the fiscal 2019-20 is concerned India stands next to China and United States in terms of crude oil imports at around 48–50 lakh barrels of crude being imported in a day. To make it more simple 159 liters make a barrel. 2. Key Drivers Widening the Trade Deficit Routing to some major factors, predominantly related to crude that widen the gap between India’s import and export and thereby funding the trade deficit are: • Rupee to Dollar Relationship Being an imported product, disbursement for crude has to be made in US dollar. Rising crude prices, directly controlled by thirteen OPEC members leads to much higher outflow of foreign reserves contributing to widening of current account deficit, weakening the rupee and accelerating inflation. The rising oil imports and depletion of foreign reserves directly hinder country’s GDP. Again Indian rupee has been on depreciation treadmill against the US dollar where, during the times of Global Financial Crisis 2008 the average price of one dollar was ₹ 50 and today, it is hovering at around ₹ 75 a dollar – meaning almost 50% depreciation in a decade or so. • Geo-Political Scenarios Intensifying geo-political risks post implementation of Iranian Oil Sanctions, Yemen and Syrian War, Fire at Saudi oil facilities and others have led to the assumption that geopolitical risks have uncontrolled impact on global oil prices. Considering the supply and demand relationship, OPEC oil output has hit its 4-year low in Apr’19 post the political tensions gearing up in Iran and Venezuela, both being OPEC members. • Derivatives Market participants are buying and selling crude oil contracts, not in delivery form, but in the form of futures and options. Airlines and other end users use derivative contracts like futures, to hedge their treasury against swing in oil prices, while speculators drive those prices upwards or downwards. Slight movement in prices imply variation in millions of dollars either way. • Duties and Other Levies To curb imports, government levies duties to reduce the reliance on imports, but since crude being the product which by default has to be imported attracts custom duties at ₹ 57.2 per ton principally increasing the oil prices and funding the exchequer. Derivation of Custom Duties (₹ 57.2 per ton): Basic Custom Duty: ₹ 1 per ton National Calamity Contingent Duty (NCCD): ₹ 50 per ton Countervailing Duty (CVD): ₹ 1 per ton Social Welfare Surcharge: 10% calculated on the total of the above three duties (₹ 5.2 per ton) • Supply and Demand Correlation The original supply and demand correlation sometimes doesn’t hold good for crude as the power to concentrate and control the same lies in very few hands whereas the consumption is done by almost everyone across the globe, in some form or the other. • Concentration of Oil Reserves Oil reserves are viewed as a proven reserve where the probability of extraction of oil is ≥ 90%. Venezuela (the crisis hit country as on date) has the highest quantum of reserves, but the density of crude is hard enough, making it difficult to process. Other economies where crude reserves are abundant are Saudi, Iran, Kuwait and others. Since these economies have built-in reserves, they straight forwardly control the supply and prices. “Crude prices in India are not driven by the rising market for it, but by the ability to pay for it.” 3. Crude Oil Classification: Refining Economics & Quality Grading One of the major attribute to the crude pricing is of “Maximum wealth in Minimum hands”. OPEC countries account for almost 70 to 78% of global oil reserves leaving balance in the hands of US, Russia and China, but since the consumption pattern of the Non OPEC countries is too high, i.e. they consume what so ever they can produce, they are second pioneers to determine the pricing schema. The genesis of Crude Oil classification which the global refiners take into account while calculating Cost of production and also the related bottom-line is as below: 1. Sweet v/s Sour Crude Classification of Crude grade as sweet or sour depends on the proportion of Sulphur content in it. According to New York Mercantile Exchange: Sweet Grade: Sulphur content < 0.50% Sour Grade: Sulphur content > 0.50% In layman’s term Sulphur is something which is not desired in crude and hence sweet crude is more desired and demanded and therefore valuable. 2. Light v/s Heavy Crude Classification of crude oil into Heavy and Light depends on oil’s relative density based on American Petroleum Institute (API) gravity. In simple terms this test measures how heavy or light is crude in comparison to water. The lower the gravity the heavier the fuel: Light Crude Oil: API > 35 Medium Crude Oil: API ranging between 26–35 Heavy Crude: API < 26 Light grade of crude is less expensive to refine as it has higher percentage of light hydrocarbons which can easily be refined. 4. Global Benchmarks, Inventory Cycles & Derivatives Trading Global Benchmark for Pricing: Now particularly in respect of pricing, there are two benchmark grades of Crude globally. The WTI in the United States and Brent Crude in rest of the world. West Texas Intermediate (WTI) is standard for US oil prices and Brent Crude which comes from Northern Europe acts as International Standard for Oil prices globally. Crude Oil Inventory: Another important aspect which cannot be overlooked and which influences the price of Crude is the Level of Inventory. When oil inventories rise, derivative traders question the demand levels for oil at the current price and tend to square off their positions, causing a price retreat and vice versa. The U.S. Energy Information Administration (EIA) provides weekly update on crude oil inventories in the United States specifically in Cushing (Oklahoma), the US Crude Oil Store room. This weekly data provide insight on how is the US Oil moving from production areas to refineries. Oil stockpile provides very essential reflection into one of the important fundamentals of the overall market i.e. The level of Supply, meaning the level of supply influences prices. Oil prices can react spontaneously following the US’s weekly inventory report if they are at a variation from analysts’ expectations. Total inventory levels are also significant because weekly inventory adjustments are taken in the reference of the overall level. If inventory level is low and there is a good weekly expectation on inventories, prices could see a sharp rise. If the records provide some other picture where we have abundant and heavy supply weekly inventories continue to increase, oil prices can experience decline. Crude Oil as Derivative: Further going ahead in respect of trading of Crude Oil derivatives in the Indian Commodity market, it is a conceived notion that Crude is one of the most actively traded commodity. At the Multi Commodity Exchange (MCX) commodity exchange: Crude Oil Main Contract: Unit size of 100 BBL (BBL refers to Barrels of Oil). Crude Oil Mini: Contract size of 10 BBL. At the time of writing of this article, January’21 crude oil futures are trading in the range of ₹ 3400–₹ 3600 per contract. Now the interesting theme in respect of trading in Crude Oil Derivatives is that at times it is the most volatile commodity to trade in, whether it’s an economic report or tensions in the Middle East, which can exacerbate price movement. Supply and demand determine the price, but the market also moves on sentiments and emotions, especially with retail traders who day trade in crude derivatives. If tensions escalate in the Middle East, there’s no denying to the fact that possible supply disruptions are hotcake, and traders often have to react within seconds to help themselves out from the position. 5. The Unprecedented Crash into Negative Crude Prices In the recent past, negative crude prices were red hot in the market, wherein it was believed that people will get paid to buy crude, but the picture behind the curtain was altogether different. West Texas Intermediate commonly known as WTI is light sweet grade of crude that is transacted at the New York Mercantile Exchange’s (NYMEX). In Apr’20, WTI crude was trading at negative $37 per barrel. This was the first time in the history of crude futures that prices were negative, which was due to sudden crash in demand due to pandemic’20 and price/output war between Russia and Saudi Arabia – Two major oil giants. Russia decided to increase its output from 01st April, 2020 and in response to the same, OPEC too decided to increase the production. As storage facilities crossed their neckline, the prices started pushing in negative territory. WTI grade of crude is different in a way that it is linked to physical delivery of oil, and as the delivery date of WTI grew near, the contract holders began selling their contracts, resulting in massive sell off and prompting the prices to dive into negatives. Fallout on Capital Market Intermediaries & Indian Brokerages: The above short story has made big holes in the pocket of capital market intermediaries, leading the global markets to observe sudden sell-off. According to one of the largest brokerage house in India, the day when this unprecedented event of negative oil prices occurred, the brokerage house suffered loss of crores of rupees. On each overnight carried crude contract brokerage house suffered loss of some 2 lakh rupees. The reason was simple – margin call. However, situation rebounded quickly and again the futures were trading in positives. 6. Endnote: The “4D” Vulnerability of the Indian Economy Bundling up the above facts, out of the total crude requirement in the hydrocarbon and gasoline sector, India imports to the tune of 85%, meaning a drop cut in output or decimal increase in the prices will hamper the “D” line, i.e.: 1. Deficit (Trade and Current Account Deficits) 2. Rupee Depreciation 3. Depletion of Foreign Reserves 4. Gross Domestic Product (GDP Growth Dampening) The reason being very obvious, we are a consumption based economy for Crude and not a producer based as against Agriculture where we enjoy the producer based advantages. This is a globally accepted phenomenon that whenever a country is dependent on another for any of its means, it is by default prone to the risk of the product availability or the price the country has to pay for that product. Precisely in case of crude the impact is so large that a decimal variation impacts series of sectors starting from oil & gas to aviation to chemicals to automobile to logistics, etc. Strategic and economic ties with OPEC members and other Oil Giants also play a significant and substantial role in getting the giant tanker vessel which boards crude to the Indian coasts. “What India has in its basket is a market fledged with enormous demand but no control over the factors catering that demand. And till then, whenever there is rise in the prices, the common man has to loosen his pocket, because going back to the stone age is not an option.”

The Chartered Accountant • Journal of ICAI January 2021 • Vol. 69 • No. 7 • pp. 72–78 (Journal pp. 848–854) Capital Market Investing in Tough Times CA. Nishant Maheshwari The author is a member of the Institute. He can be reached at nishant_maheshwari_10@hotmail.com and eboard@icai.in. The past decade has seen many simple established investment phenomena been questioned. From negative interest rates to negative prices for crude, what was considered to be once a millennium events have suddenly popped around the world all in a decade. We find that the investment rationale and logic have been stretched to the highest degree in stock valuations and yet we find under performance in other asset classes (commodities) that go past many decades. The current uncertainty in the investment world is probably the highest one has seen in his life time. Never before were the assumptions been questioned and making money so difficult. The one question on most investors and the general public is: where do I deploy my surplus cash? Read on... 1. The Macro Paradox: Benign Inflation vs. Ballooning Expenses If one goes by the figures, inflation has been benign. Yet investors don’t really believe the same. They have seen their expenses balloon and savings rate reduce. Not to mention the underperformance in most major asset classes has reduced their other income. Business growth through organic means is difficult to come by both for most established corporates, industrial capacity utilization is below 70% and small businesses and salaried employees have seen their increments diminish over a period of time. In such case, investors depend on markets and fixed income sources to meet their requirement of retirement planning and investment. But markets performance has been volatile and can be said to be mixed at the best creating doubts in the mind of investors whether they can be entrusted with their life savings not to mention the precarious position of the banking system and the failure of regulatory bodies in stopping the scams. The confidence has been maintained through frequent bail outs and interventions increasing moral hazard. Macro Indicators (RBI Bulletin Benchmarks) Sectoral Saving Rates as % of GDP: Household sector savings dropped steeply from 23.6% in 2011–12 to 17.2% in 2017–18; Private corporate sector grew from 9.5% to 11.6%; Public sector remained stagnant at 1.5% to 1.7%. Capacity Utilisation in Manufacturing: Consistently slipped below the long-term average (74.7%), dropping below 69% (68.6% to 68.2%) by Q3 2019–20. 2. Genesis of the Crisis: Financialization and Shock Vulnerability How is it that a nation that was growing at 7% per annum with increasing educated and young working population has suddenly found itself devoid of investing avenues? To understand this, one also needs to look at global trends. Most analysts feel that India is facing problems created by itself. While this is true to most extent and reforms are need of the day, external factors are also exacerbating the problem. From 1990s, when India unleashed animal spirits in the economy by breaking the license raj till 2008, global economy was undergoing expansion. Many educated Indians settled abroad and remitted their earnings creating stable flow of foreign reserves which were the reason why we had the crisis in the first place. Stock markets boomed, credit flew, IT boomed and mushroomed a lot of other industries with it. Real estate started gaining traction. At the same time, agriculture productivity improved and could feed the growing population. Consumption boomed as income jumped and prospective job opportunities increased too. Infrastructure and investment cycle saw an uptick. The present Foreign reserve in India is USD 479.57 Billion. The unprecedented increase in the forex since 2000 was the real effect of economic development. Then came the global financial crisis in 2008. Post 2008 crisis, there was a dip in the reserves and it remained below 300 billion till 2014. India was expected to come out of global financial crisis unhurt which it did thanks to the Banking system which remained unhurt due to real income in Indian economy and intrinsic value of assets held as collateral with banks. This helped India to come out of the crisis in a ferocious way. But at the same time, the world was a different place. Investments and capital expenditure slowed down. While financial assets rose in value, commodities and other assets got hit. Instead of growing sales, earnings were increased through tax classifications and non-GAAP measures of accounting with share buybacks aiding EPS growth. Executives had no need to drive the top line growth when the only performance indicator, the stock price, could be manipulated through share buybacks and increasing debt. Markets gave insane valuations to “network effect” based businesses neglecting cash flows and increasing debt. The cornerstone has been the support of the central banks who have created the perception of killing risk at every incidence of panic in the market. Post 2008, India has seen growth through consumption and through financialization of the economy. Increased consumption has come at the cost of reduction in savings and increased debt. While general growth in consumption is welcome, it has reduced the capacity of households to absorb shocks. Household debt as a percentage of nominal GDP rose steadily from 8.58% in 2012 to 11.26% by 2019. Those shocks have come in multiple forms: Demonetization and then GST. While these measures have formalised the economy, the impact that was generated was severe and required time to recuperate. An economy ship is not easy to shift especially when millions of people are dependent on informal economy. 3. Incentives of Market Participants & Taxation Headwinds The government has been trying to increase tax to GDP ratio. India has had poor tax to GDP ratio compared to many developing countries. To increase the same, it was decided to cut down sources of black money. As a result, demonetization made cash hoarding difficult, import duty on gold made it expensive and reduced demand, interest rates have been reducing for quite some time and many find it inadequate to generate returns above inflation. Therefore, the only choice was to take shelter in equity and debt markets. Here too, most investors didn’t have much choice except through mutual funds as most investors lacked adequate understanding of the markets and dedicated effort and time for identifying individual stocks and risks (AMFI too came with mutual fund campaign). This made taxing easy. LTCG came with Grandfathering date in and now all gains could be taxed too. This was the important step to ensure that gains in the market could be taxed. From the time LTCG came into existence, dividend distribution tax has been abolished and now dividend is chargeable in the hands of the shareholders. Further, super rich people are now been penalised with surcharge and cess which makes income taxable to the extent of 42%. The dividend is also taxable as normal income under income from other sources which was earlier exempt in the hands of recipient and company declaring dividend needs to pay 20.56% as Tax. These are ways and means to increase the tax. But there are always options and corporates will find a way to skip those too like change of citizenship to obtain benefit of lower tax on dividend, etc. The unfortunate victim will be the shareholder who will increasingly see corporates skip dividends as they don’t make any sense. This is a case of how government incentives are impacting shareholder returns. Every year during the budget we find people and analyst clamouring for LTCG tax removal, but without understanding the incentives for the government they are merely barking at the wrong tree. Moreover, the regulatory oversight in matters of fraud have been found wanting. Companies have been found giving inadequate information and siphoning funds. While the old ways of promoters taking their shareholders for a ride are gone, new methods have been found. Many auditors have been found to have not done proper due diligence. Tax authorities have unearthed scams of GST avoidance by many corporates. Some have even fled the country and the administration has been forced to bring them back. Many are still serving time in judicial custody. The incentives for the promoters haven’t been to increase shareholders wealth as most capital market advocates tend to think. Shareholder’s wealth has been eroding for quite some time (in the broader market). Similarly, the role of the RBI is to maintain stability and confidence in the financial system and maintain price stability. Since 2015, RBI has been at the forefront of breaking the bubble and initiating a soft landing for the financial firms stuck in the non-performing assets trap. It was only due to the actions of the RBI that the bubble in the NBFCs burst and steps were taken to quickly recapitalise the banks. But it was found to have done little to seek credible information. Many rating agencies were caught sleeping and banks were found hiding non-performing assets in spite of standard disclosure norms. The ILFS and DHFL scam have shown that when it comes to understanding the banking and financial industry much of the data is kept obscured. It seems the regulatory mechanisms have failed the investors who had directly or indirectly invested in such firms. Yet even after these episodes have taken place, we still find scheduled banks failing and need bailouts time and again. The virus has given another opportunity for the banking and financial firms to extend. Even before the virus, banks were seeking moratorium for loans to builders and MSME segments. Even the Government in its relief package has directed banks to not to recognise NPAs of MSME till March 2020 which keeps the real picture of banks balance sheets from being unveiled. Unfortunately, these non-performing assets will keep on dragging the weak banking system, keep asset prices inflated and never let the markets clear off the inventory and hence increase the cost of borrowing. Therefore, credit will be difficult to access as banks remain reluctant to lend to people and industry with weak credit ratings and thereby hamper growth. Thus, we find that while the incentive of the RBI is to stabilise the system, the incentives of the banks and the steps taken by the RBI seem to have impacted the economic growth. 4. Investor Psychology & Fund Performance Realities The average time an investor has stayed in the financial markets is less than a decade. Most investors have never seen a bear market in their lifetime. Few have a memory of the bear market in 2008 Global Financial crisis as the resultant rally has left the pain of the bear market in the drain. Investors have been given a false sense of complacency and hope that in case the markets tank, central banks will always come and save the day. Hence, the general consensus is to follow the success of a few investors or the momentum and make gains. The spread of the social media has further increased investors access to information. However, it has also created the scope for herd mentality to takeover. There have been episodes in the past where investors have been lured by particular group of stocks and finding the next multi baggers had become a fantasy game. Those who have been able to stay away have fallen into the trap of attractive investment ideas from mutual funds and other institutionalised investment participants. Most have been delivering subpar returns for past few years as compared to their previous five-year returns. Some may blame the market yet it is also known that mutual funds are flush with funds and have been supporting the markets while foreign portfolio investors have been withdrawing the money. One therefore wonders as to what is it that makes the fund managers so bullish. To answer that one has to look at the incentives of the fund managers. Most fund managers are paid management fees which is a certain percentage of their asset under management (AUM). Thus, there is no need to perform as long as one can increase their AUM. The fund can keep growing while taking increased risk in assets which are perceived to be liquid but not stress tested for liquidity risk. Hence, we are now finding mutual funds writing down NAVs due to actual realization of those risks. Unfortunately, investors are at risk both from the speculators and institutionalised funds. Fund Performance Across Asset Classes & Strategies (10-Year Return Benchmarks) Asset Classes / MF Categories / Strategy Lump Sum 10-Yr Return (%) SIP 10-Yr Return (%) Large Cap 6.94% 6.39% Large and Mid-cap 8.01% 6.83% Multicap 7.91% 6.40% Midcap 10.26% 8.75% Small Cap 7.56% 5.42% Gold 9.78% 9.02% Liquid Fund 7.80% 7.48% Institutional Cash Flows: FII vs. DII Trajectory (NSE Data in INR Crores) While DIIs have consistently pumped liquidity into Indian equity markets (peaking at INR 1,09,366 Cr in 2018, INR 42,228 Cr in 2019, and INR 72,906 Cr in 2020), FIIs have aggressively pulled money out in cash segments (INR -73,733 Cr in 2018, INR -43,497 Cr in 2017, and INR -91,690 Cr in 2020). 5. Analysis of Traditional Safe Havens & Alternative Assets Much of the growth in the past decade has been due to consumption and credit expansion has been at the forefront. At the start of the decade, NBFC led the growth in real estate and moved into consumer finance. Public sector banks had their hands full in lending to corporates and retail. Capital investments made after 2010 had started souring by 2014. Many corporate loans went bust. A few Non-Banking Financial institutions failed as liquidity dried and rates went up. At present, even good franchises are facing problems of Asset Liability mismatch. Public sector banks had to be bailed out and system got frozen. At the height of it, the total Non-Performing assets were 10% of the total loans. This made banks conservative and started raising lending standards. Credit access became difficult. Economy suffered due to lack of easy access to credit and consumption suffered. The economy started performing at less than optimum levels and profits eroded making interest payments difficult. To resolve the economic problem, interest rates have been cut consistently. Interest rates on savings have dipped below 4% to even 3% for savings accounts and below 6.5% for fixed deposits. Inflation currently is above 5% which means that investors are not comfortable to put money in the banks for fixed deposits as interest earned after tax is more or less equal to the inflation. This makes it difficult for investors to earn a fixed income and safe haven investments are decreasing thereby reducing the cushion in case of losses in other investment assets. Most of the globe is facing a similar issue. Corporate fixed deposits are also now been considered risky due to default risk rising. The only place to earn decent returns then is the small savings schemes like PPF whose interest is tax free along with availability of exemption in 80C of Income Tax and SCSS (Senior citizen saving Schemes exempt u/s 80C) which also offer safety of the government. Global Yield Erosion: Annual Income From 10-Year Treasuries on USD 1 Million Starting Point (Decade Benchmark) Annual Income on USD 1,000,000 Deployed 1960USD 47,200 1970USD 77,900 1980 (Peak Yield Era)USD 108,000 1990USD 82,100 2000USD 66,600 2010USD 37,300 2020USD 17,600 Current RegimeUSD 6,500 Real Estate Dynamics under RERA When financial assets fail, one may look at real assets like real estate, gold and other commodities. However, the performance has been mixed at best. Real estate performed at the start of the decade but prices have gone too high in most tier – I cities and inventory is increasing in spite of few projects been launched. RERA has tightened the norms and hence it is now difficult if not impossible for misuse of project funds that kept the boom running. The failure of few projects in the NCR region due to outside borrowings at whooping interest rate along with costly NBFC Loans and several other parts of the country have increased the desire for ready possession flats and apartments. Commercial real estate did well but in wake of the virus such trend can’t be expected to continue. Yields on rents from real estate have been declining (due to increased prices) and interest costs are higher as compared to the yields therefore making less sense as an investment alternative. Besides, prices have remained stable reducing expectations of increased capital appreciation in most cities. Therefore, real estate is proving to be a risky investment alternative with potential to inflict long term loss on the invested capital. Gold and Sovereign Gold Bonds (SGB) This leaves out gold and investible commodities. Gold has only recently started performing. Between 2013–18, its returns have been negative and there has been an increased negative perception on gold as it doesn’t yield anything. The government has been running a sovereign bond scheme which has been providing a yield on gold bonds & Tax free returns on redemption i.e. No capital Gains Tax but it is really a financial vehicle rather an investment in gold. No gold ever gets traded or changes hands. That apart, returns have been increasing and bonds can be traded before maturity, therefore, reducing maturity risk and improves liquidity. But the performance is still dependent on the gold prices which haven’t been impressive in the last seven years (compared to fixed income). Commodities have been in a bear market since many years and hence not attracting investments too. Long-Term Gold Returns (World Gold Council Benchmark) Across 2005–2020, gold generated average annualized returns of 13.7% in INR terms and 10.2% in USD terms. However, volatility remains sharp: double-digit gains in 2005–2011 (+20% to +31%) were followed by prolonged declines (-18.7% in 2013, -5.9% in 2015), before reviving strongly (+21.6% in 2019 and +22.3% in 2020). 6. Conclusion: The Building Analogy & Managing Black Swan Risks The point that we have been trying to make is that there are times when it is easy to make risk free returns, there are times when it is easy to make returns with optimum degree of risk and there are times when a high degree of risk exists in the market. Currently we are in the latter stage and hence it makes sense to tone down returns expectations while trying to deal with the risks involved. These systemic risks will have to be dealt with care as investors can lose their decades of corpus in few months. Hence, while some asset classes will make sense from the point of view of returns the inherent nature of the risk involved will have to be studied with greater sensitivity. There is little margin of safety in equity class as they are overvalued in most aspects. There will be a few winners but the broader markets will underperform. Markets have narrow leadership. Portfolio investing is like making a building. Imagine you are sanctioned to create a building of 15 floors with total of 60 flats. However out of greed and neglect, you plan to add 5 more floors and construct 20 additional flats. You don’t take approvals and flout the norms. You might have a 20th floor building constructed. But the same is untested for external shocks. A single earthquake can jeopardise your years of work and collapse the entire structure. And it will all be because of the extra 33% that you intended to make leading to the destruction of the 100% capital. Systemic risks are such earthquakes. They might not come, but you better be prepared to handle them. While making a ship, planners have to take into consideration various storms and typhoons that the ship can meet. Planning for 5% probability events has become as important as planning for the 95%. You may not encounter them, but the potential loss in case of event happening is guaranteed and will take an entire life to rebuild. Such events today are called black swan events. But they are basically about managing risks. And with the incentives of players in the system far different than those of the investors, they are better off managing these risks. Till the time there are real economic reforms taken up, economic growth will lag and therefore the opportunities to invest one’s surplus will be restricted. Mere tinkering with monetary policy will not help the economic activity. Reforms in the land, labour market and taxation are need of the day and unless the governing bodies of the country take bold steps in providing the opportunities for people to undertake economic activities at globally comparative costs with an enabling regulatory environment, the economic growth is going to lag. The stock market may not be the barometer of the economy, but it does notice the impact the policies of these institutions have on the economy. It has been silent till date occasionally frowning. But if push comes to shove, it may as well dive. ∎∎∎

The Chartered Accountant Journal • Capital Market • January 2021 A Study on the Impact of Covid-19 Lockdown on Share Price CA. Sk. Shakeel & Dr. Sukamal Datta CA. Sk. Shakeel is a Member of the Institute. Dr. Sukamal Datta is Principal, Naba Ballygunge Mahavidyalaya, University of Calcutta. Citation: (2021) 69 CAJ 855–871 Pages 79–95 • Journal Page Nos. 855–871 Executive Perspective This paper attempts to analyze the impact of COVID-19 lockdown on share prices and also to know the percentage variations in share prices of ten selected companies from five different sectors, i.e., banking sector, steel sector, Oil sector, Insurance sector and Pharmaceutical sector. It covers daily price data of the selected companies for 28 days period, i.e., 14 days before the announcement of lockdown and 14 days after the date of lockdown announcement. For this purpose we are conducting t-test-statistics for null hypothesis. We specify a 95% confidence interval, or a 0.05 level of significance for each test-statistic. The study found significant evidence of impact on share price of companies in Banking and Insurance sector due to lockdown while no significant impact on share price of companies in Insurance sector and Pharmaceutical sector. Oil sector has witnessed mixed results. Read on… 1. Introduction, Research Objectives & Hypotheses In the present scenario when the whole world is struggling against COVID-19, a nationwide lockdown was announced from 24th March’2020 by our Prime Minister of India. COVID-19 lockdown degraded the Indian economy. The whole country is suffering from this damage and this has adversely affected the entire economy i.e., Gross Domestic Product (GDP) rate, Consumer Price Inflation (CPI), Revenue Collection, Stock Markets, Employment rate etc. Our study mainly focuses on the impact on share price due to COVID-19 lockdown. Research Objectives: To study the impact of COVID-19 lockdown on share price. To know the percentage variations that has occurred in Share price before and after the COVID-19 lockdown. Statistical Hypotheses: Null Hypothesis (H0): μ1 = μ2 (There is no significant impact of COVID-19 lockdown on share price). Alternative Hypothesis (H1): μ1 ≠ μ2 (There is significant impact of COVID-19 lockdown on share price). 2. Research Methodology & Census of Sample Companies In this study analytical research is used, the available information or data are analyzed and critical evaluations are made. It is primarily concerned with testing of hypothesis and specifying and interpreting relationships. This method was selected due to accurate and availability of quantitative numerical data. The study has formulated a set of hypothesis that needs to be confirmed or rejected during the research process following a deductive approach. This study uses 28 days data selected from March, 2020 to April, 2020 i.e., 14 days before COVID-19 lockdown and 14 days post COVID-19 lockdown. The study collected only secondary data from Moneycontrol. Statistical test like paired t – test, percentage are used in this study. We specify a 95% confidence interval, or a 0.05 level of significance (α = 0.025 for two-tailed test, df = 26, critical t-value = 2.16) for each test-statistic. Population of the study: The study covers the census of ten organizations, two organizations from each of five sectors: Banking Sector: State Bank of India (SBI) and ICICI Bank Steel Sector: TATA Steel and JSW Steel Ltd Oil Sector: Indian Oil Corporation (IOC) and Oil and Natural Gas Corporation (ONGC) Pharmaceutical Sector: Sun Pharmaceutical Industries Ltd and Cipla Ltd Insurance Sector: HDFC Life Insurance Co Ltd and SBI Life Insurance Co Ltd 3. Sectoral Analysis: Banking Sector (SBI & ICICI Bank) A. State Bank of India (SBI) Table 1: Share price of SBI for 28 days Table 2: t-Test Paired Two Sample for Means (SBI) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1289.85189.95Mean (Pre / Post)238.26 / 187.83 2285.30192.85Variance (Pre / Post)1223.78 / 33.80 3288.30196.05Observations14 4270.45186.95Pearson Correlation0.455567 5253.70196.95Hypothesized Mean Diff0 6245.20186.60Degrees of Freedom (df)26 7212.75175.55t Stat5.763041 8242.25186.35P(T<=t) one-tail3.28E-05 9223.25182.90t Critical one-tail1.770933 10214.90187.70P(T<=t) two-tail6.57E-05 11214.65183.55t Critical two-tail2.160369 12203.85182.30ConclusionReject H0 13209.65188.60Percentage Change-33.13% 14181.60193.30Statistical SignificanceSignificant Impact Interpretation (SBI): The calculated t-test is 5.76. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 5.76 is bigger than the rejection point of 2.16; therefore we can reject the null hypothesis and accept the Alternative hypothesis that there is significant impact of COVID-19 lockdown on share price of SBI. The share price of SBI decreased due to COVID-19 lockdown from a mean value of ₹ 238.26 to ₹ 187.82 (-33.13%). B. ICICI Bank Table 3: Share price of ICICI Bank for 28 days Table 4: t-Test Paired Two Sample for Means (ICICI Bank) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1516.45317.15Mean (Pre / Post)421.82 / 327.83 2508.50332.00Variance (Pre / Post)5436.44 / 406.92 3504.75340.10Observations14 4486.25314.00Pearson Correlation-0.520050 5457.15324.50Hypothesized Mean Diff0 6465.40311.45Degrees of Freedom (df)26 7425.00286.50t Stat4.090657 8447.45326.10P(T<=t) one-tail0.000638 9402.90319.00t Critical one-tail1.770933 10366.85342.65P(T<=t) two-tail0.001275 11356.00330.85t Critical two-tail2.160369 12339.15327.30ConclusionReject H0 13345.70342.10Percentage Change-27.20% 14283.90375.95Statistical SignificanceSignificant Impact Interpretation (ICICI Bank): The calculated t-test is 4.09. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 4.09 is bigger than the rejection point of 2.16; therefore we can reject the null hypothesis and accept the Alternative hypothesis that there is significant impact of COVID-19 lockdown on share price of ICICI bank. The share price of ICICI bank decreased from a mean value of ₹ 421.81 to ₹ 327.83 (-27.20%). 4. Sectoral Analysis: Steel Sector (TATA Steel & JSW Steel Ltd) A. TATA Steel Table 5: Share price of Tata Steel for 28 days Table 6: t-Test Paired Two Sample for Means (TATA Steel) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1387.60285.65Mean (Pre / Post)315.67 / 277.01 2377.00285.75Variance (Pre / Post)1710.70 / 149.01 3375.65277.35Observations14 4351.20254.15Pearson Correlation-0.080195 5322.30269.75Hypothesized Mean Diff0 6299.40266.45Degrees of Freedom (df)26 7286.80253.85t Stat3.283331 8325.45276.15P(T<=t) one-tail0.002968 9289.60274.70t Critical one-tail1.770933 10282.30284.80P(T<=t) two-tail0.005935 11280.90282.50t Critical two-tail2.160369 12271.95285.15ConclusionReject H0 13298.05288.60Percentage Change-24.33% 14271.15293.30Statistical SignificanceSignificant Impact Interpretation (TATA Steel): The calculated t-test is 3.28. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 3.28 is bigger than the rejection point of 2.16; therefore we can reject the null hypothesis and accept the Alternative hypothesis that there is significant impact of COVID-19 lockdown on share price of TATA steel. The share price of TATA steel decreased from a mean value of ₹ 315.66 to ₹ 277.01 (-24.33%). B. JSW Steel Ltd Table 7: Share price of JSW Steel ltd for 28 days Table 8: t-Test Paired Two Sample for Means (JSW Steel Ltd) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1245.60150.90Mean (Pre / Post)204.06 / 156.44 2245.35149.70Variance (Pre / Post)1258.56 / 149.49 3247.05151.45Observations14 4238.85142.30Pearson Correlation-0.820977 5229.00146.45Hypothesized Mean Diff0 6223.50142.95Degrees of Freedom (df)26 7203.05140.00t Stat3.869376 8214.85158.25P(T<=t) one-tail0.000968 9185.80154.65t Critical one-tail1.770933 10176.45166.40P(T<=t) two-tail0.001935 11163.85167.70t Critical two-tail2.160369 12162.65171.15ConclusionReject H0 13176.45171.30Percentage Change-27.95% 14144.35176.95Statistical SignificanceSignificant Impact Interpretation (JSW Steel Ltd): The calculated t-test is 3.86. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 3.86 is bigger than the rejection point of 2.16; therefore we can reject the null hypothesis and accept the Alternative hypothesis that there is significant impact of COVID-19 lockdown on share price of JSW Steel ltd. The share price of JSW Steel ltd decreased from a mean value of ₹ 204.05 to ₹ 156.43 (-27.95%). 5. Sectoral Analysis: Oil Sector (IOC & ONGC) A. Indian Oil Corporation (IOC) Table 9: Share price of IOC for 28 days Table 10: t-Test Paired Two Sample for Means (IOC) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1106.7077.95Mean (Pre / Post)94.44 / 81.07 2106.6578.05Variance (Pre / Post)66.09 / 9.23 3104.8576.95Observations14 4100.8076.55Pearson Correlation-0.829347 599.4581.65Hypothesized Mean Diff0 697.0579.00Degrees of Freedom (df)26 787.7579.45t Stat4.638358 892.2083.00P(T<=t) one-tail0.000232 989.7581.85t Critical one-tail1.770933 1089.4583.40P(T<=t) two-tail0.000464 1188.0583.15t Critical two-tail2.160369 1287.9583.20ConclusionReject H0 1390.6084.75Percentage Change-19.40% 1480.8586.00Statistical SignificanceSignificant Impact Interpretation (IOC): The calculated t-test is 4.63. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 4.63 is bigger than the rejection point of 2.16; therefore we can reject the null hypothesis and accept the Alternative hypothesis that there is significant impact of COVID-19 lockdown on share price of IOC. The share price of IOC decreased from a mean value of ₹ 94.43 to ₹ 81.06 (-19.40%). B. Oil and Natural Gas Corporation (ONGC) Table 11: Share price of ONGC for 28 days Table 12: t-Test Paired Two Sample for Means (ONGC) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 193.3061.50Mean (Pre / Post)73.05 / 70.28 292.8564.80Variance (Pre / Post)176.32 / 30.10 392.5064.30Observations14 489.1563.45Pearson Correlation-0.875121 574.6568.30Hypothesized Mean Diff0 671.6565.75Degrees of Freedom (df)26 762.6069.85t Stat0.568204 865.9073.05P(T<=t) one-tail0.289790 960.1574.25t Critical one-tail1.770933 1060.0577.30P(T<=t) two-tail0.579579 1165.9575.05t Critical two-tail2.160369 1261.1074.35ConclusionAccept H0 1372.4575.65Percentage Change-18.22% 1460.4576.30Statistical SignificanceNo Significant Impact Interpretation (ONGC): The calculated t-test is 0.56. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 0.56 is lower than the rejection point of 2.16; therefore we can accept the null hypothesis and reject the Alternative hypothesis that there is no significant impact of COVID-19 lockdown on share price of ONGC. 6. Sectoral Analysis: Pharmaceutical Sector (Sun Pharma & Cipla Ltd) A. Sun Pharmaceutical Industries Ltd Table 13: Share price of Sun Pharma for 28 days Table 14: t-Test Paired Two Sample for Means (Sun Pharma) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1393.35347.05Mean (Pre / Post)376.94 / 397.87 2405.70338.55Variance (Pre / Post)532.95 / 3006.86 3404.85338.15Observations14 4400.90333.65Pearson Correlation-0.776546 5394.95352.20Hypothesized Mean Diff0 6386.30343.55Degrees of Freedom (df)26 7354.85375.90t Stat-1.055155 8384.45417.10P(T<=t) one-tail0.155285 9368.80436.65t Critical one-tail1.770933 10370.55455.20P(T<=t) two-tail0.310570 11362.50462.10t Critical two-tail2.160369 12360.20448.95ConclusionAccept H0 13365.80464.10Percentage Change+16.18% 14324.00457.00Statistical SignificanceNo Significant Impact Interpretation (Sun Pharma): The calculated t-test is -1.05. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of -1.05 is lower than the rejection point of 2.16 (i.e., within range from 2.16 to -2.16); therefore we can accept the null hypothesis and reject the Alternative hypothesis that there is no significant impact of COVID-19 lockdown on share price of Sun Pharmaceutical Industries Ltd (+16.18%). B. Cipla Ltd Table 15: Share price of Cipla Ltd for 28 days Table 16: t-Test Paired Two Sample for Means (Cipla Ltd) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1425.70376.70Mean (Pre / Post)410.11 / 489.85 2447.70386.65Variance (Pre / Post)561.20 / 7618.52 3440.45408.45Observations14 4433.95432.10Pearson Correlation-0.852083 5425.55423.00Hypothesized Mean Diff0 6417.55413.55Degrees of Freedom (df)26 7394.85449.10t Stat-2.757780 8425.20491.95P(T<=t) one-tail0.008147 9396.40513.00t Critical one-tail1.770933 10401.75579.50P(T<=t) two-tail0.016294 11386.70592.70t Critical two-tail2.160369 12374.60592.55ConclusionReject H0 13393.60600.55Percentage Change+40.49% 14377.60598.10Statistical SignificanceSignificant Impact (Surge) Interpretation (Cipla Ltd): The calculated t-test is -2.75. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of -2.75 is greater than the rejection point of -2.16 (two-tailed); therefore we can reject the null hypothesis and accept the Alternative hypothesis that there is significant impact of COVID-19 lockdown on share price of Cipla Ltd. The share price of Cipla Ltd increased due to COVID-19 lockdown from a mean value of ₹ 410.11 to ₹ 489.85 (+40.49%). 7. Sectoral Analysis: Insurance Sector (HDFC Life & SBI Life) A. HDFC Life Insurance Co Ltd Table 17: Share price of HDFC Life for 28 days Table 18: t-Test Paired Two Sample for Means (HDFC Life) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1562.90433.75Mean (Pre / Post)485.30 / 457.69 2568.55477.30Variance (Pre / Post)4645.18 / 717.56 3564.40440.85Observations14 4548.00411.60Pearson Correlation-0.636252 5517.50441.60Hypothesized Mean Diff0 6513.80429.65Degrees of Freedom (df)26 7472.45422.25t Stat1.178248 8511.90470.35P(T<=t) one-tail0.129908 9473.95476.15t Critical one-tail1.770933 10463.90471.35P(T<=t) two-tail0.259816 11419.10477.30t Critical two-tail2.160369 12416.00470.70ConclusionAccept H0 13419.15490.10Percentage Change-12.11% 14342.55494.70Statistical SignificanceNo Significant Impact Interpretation (HDFC Life): The calculated t-test is 1.17. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 1.17 is lower than the rejection point of 2.16; therefore we can accept the null hypothesis and reject the Alternative hypothesis that there is no significant impact of COVID-19 lockdown on share price of HDFC Life Insurance Co Ltd (-12.11%). B. SBI Life Insurance Co Ltd Table 19: Share price of SBI Life for 28 days Table 20: t-Test Paired Two Sample for Means (SBI Life) Day Pre-Lockdown (₹) Post-Lockdown (₹) Metric Value 1899.35586.60Mean (Pre / Post)747.06 / 669.69 2885.65618.20Variance (Pre / Post)14329.3 / 2819.8 3886.25605.60Observations14 4855.85623.15Pearson Correlation-0.752300 5821.15640.95Hypothesized Mean Diff0 6810.50635.40Degrees of Freedom (df)26 7753.75650.50t Stat1.771250 8761.55735.80P(T<=t) one-tail0.049970 9719.40743.20t Critical one-tail1.770930 10687.80739.80P(T<=t) two-tail0.099950 11596.00708.15t Critical two-tail2.160370 12609.35701.10ConclusionAccept H0 13636.45684.75Percentage Change-21.88% 14535.85702.50Statistical SignificanceNo Significant Impact Interpretation (SBI Life): The calculated t-test is 1.77. The critical value for a 0.025 significance level (two-tailed test) with 26 degrees of freedom is 2.16. Our calculated test statistic of 1.77 is lower than the rejection point of 2.16; therefore we can accept the null hypothesis and reject the Alternative hypothesis that there is no significant impact of COVID-19 lockdown on share price of SBI Life Insurance Co Ltd (-21.88%). 8. Summary of Findings Across Ten Companies From the empirical study the consolidated observations and hypothesis test outcomes are tabulated below: Sector Company Change in Share Price Impact on Share Price t-test Decision Banking Sector SBI -33.13% Decrease Reject the null hypothesis ICICI Bank -27.20% Decrease Reject the null hypothesis Steel Sector TATA Steel -24.33% Decrease Reject the null hypothesis JSW Steel Ltd -27.95% Decrease Reject the null hypothesis Oil Sector Indian Oil Corporation -19.40% Decrease Reject the null hypothesis ONGC -18.22% Decrease Accept the null hypothesis Pharmaceutical Sector Sun Pharmaceutical Industries Ltd +16.18% Increase Accept the null hypothesis Cipla Ltd +40.49% Increase Reject the null hypothesis Insurance Sector HDFC Life Insurance Co Ltd. -12.11% Decrease Accept the null hypothesis SBI Life Insurance Co. Ltd -21.88% Decrease Accept the null hypothesis 9. Conclusion & The Role of Chartered Accountants In this study we mainly focus on the impact of COVID-19 lockdown on Share price of selected ten organizations from five sectors, i.e., Banking Sector, Steel Sector, Oil Sector, Pharmaceutical sector and Insurance sector and it is seen that there is a significant impact on share price of companies in banking sector and steel sector, while Oil sector has mixed results IOC has seen a significant impact on share price due to lockdown but ONGC has witnessed no significant impact on share price. It is also observed that there is no significant impact on share price of companies in Pharmaceutical sector and Insurance sector. It is seen that Cipla Ltd has a positive impact with a price change of +40.49%. Role of Chartered Accountants: A CA can: Act as a consultant for providing services relating to share price and future growth of the company thereby providing advisory function to the investors. Act as a financial risk manager. Provide key services to the Organizations relating to Investments and explore new opportunities. References: Johnson Clement Madathil & Ashitha T (2019), “Before and After GST: Impact in CPI (Consumer Price Index) of India”, International Journal Of Research And Analytical Reviews, Vol. 6, Issue 2. Cristiana Tudor, “A Comparative Analysis of Stock Market Behavior after European Accession in Romania and Hungary some Hypotheses Tests”, Faculty of International Business and Economics, the Bucharest Academy of Economic Studies. Mahmood F, Ali N, Khadim I & Amina T (2015), “Company Financial Reports and Efficiency of Stock Exchange”, International Journal Of Research in Business Studies and Management, Vol. 2, Issue 10, pp. 39–47. https://www.moneycontrol.com https://bseindia.com https://m.economictimes.com https://en.m.wikipedia.org https://outlookindia.com

The Chartered Accountant Journal • Resilience • December 2020 Business Resilience Facilitated by Accounting Standards CA. Santosh Maller The author is a member of the Institute. He can be reached at santoshmaller@gmail.com and eboard@icai.in. Citation: (2020) 69 CAJ 678–683 Pages 18–23 • Journal Page Nos. 678–683 Executive Perspective A business is created to run forever, unless it has been started with some specific task that is to be completed within a time frame. Corporate enterprises are incorporated with the principle of perpetual succession, i.e., they do not cease to exist unless they are specifically wound up or the task for which they are formed has been completed. Businesses function within diverse and varied environment that may be favourable or unfavourable. Unfavourable environmental factors can be sometimes very hostile such that they may challenge the very existence of the business on a going concern basis. Businesses need to build resilience in their functioning so that they are able to function through the difficult times in a sustainable manner. This article looks at various requirements of Indian Accounting Standards that contribute towards providing information about business resilience aspects of an enterprise in its financial statements. Read on… 1. Introduction: Economic Disruptions and Business Resilience The world is going through unprecedented challenges in form of COVID 19 pandemic. The World Bank and the International Monetary Fund have warned that the pandemic is pushing the world economy into a recession worse than that after the 2008 financial crisis. Several studies have downgraded the country’s GDP growth rate forecast. Amidst these extremely challenging times in business, one of the major traits that an enterprise needs to survive is resilience. Business resilience is the ability an enterprise has to adapt to disruptions while carrying on its business operations and safeguarding people, resources and overall brand. Per se, Accounting Standards are formulated to bring credibility in the financial statements and allow the stakeholders to take decisions based on accurate and consistent information. By very nature, elements of the resilience is inherent within the standards. Financial reporting helps to track the financial performance of a company on a regular basis with the help of various financial reports. The information provided in financial statements is important for the stakeholders of an enterprise to take key decisions about its future. Business resilience of an enterprise’s management is one of the vital information that the financial statements, if prepared and presented appropriately, would provide to the users. 2. Stewardship: One of the Objectives of Financial Statements The Framework makes similar inferences when discussing stewardship or accountability. Paragraph 14 of the Framework notes: “Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or accountability of management do so in order that they make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management.” The stewardship objective has been portrayed as being about information that provides a foundation for a constructive dialogue between the management of an entity and its stakeholders. This is deemed to be a fundamental building block of corporate governance. 3. Management Judgement and Accounting Estimates (Ind AS 1) Entities make many accounting judgements and estimates in preparing financial statements, some of which will have a significant effect on the reported results and financial position. Key Statutory Mandates under Ind AS 1: Ind AS 1.122 (Judgements): Requires disclosure of the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognised in the financial statements. Ind AS 1.125 (Estimation Uncertainty): Requires disclosure of information about the assumptions the entity makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes to the financial statements include details of their: Nature; and Carrying amount at the end of the reporting period. Value to Investors: Information about the key judgements and estimates made is of value to investors as it helps them to assess an entity’s financial position and performance and understand the sensitivities to changes in assumptions. Transparent disclosure in this area, including quantified information such as sensitivities or a range of possible outcomes on how changes to estimates could affect the following year’s results, enables users to assess the quality of management’s accounting policy decisions and the likelihood of future changes in a way that generic disclosures do not. 4. Going Concern Assumption (Ind AS 1 Paragraphs 25–26) The financial statements are normally prepared on the assumption that an entity is a going concern and will continue to be in operation for the foreseeable future. For the purpose of assessment whether an entity is a going concern, paragraphs 25–26 of Ind AS 1, Presentation of Financial Statements, provide comprehensive guidance: Paragraph 25 of Ind AS 1: The management of an entity shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Paragraph 26 of Ind AS 1: To assess whether the going concern assumption is appropriate, management should consider all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. Assessment Under Hostile Market Conditions: Management typically relies upon historical financial results, known changes in the business and competitor and industry data to provide evidence of the reasonableness of the assumptions used in its assessment. However, given current economic and market conditions, historical results may be unlikely to provide a basis for future cash flows and therefore management may need to consider additional sources of information when evaluating the reasonableness of the assumptions used in its assessment. Management is expected to prepare a range of scenarios based on different dates till which the COVID-19 impact will prevail to determine the potential impact on underlying performance and future funding requirements. 5. Impairment Headroom Disclosures (Ind AS 36) Ind AS 36, Impairment of Assets, requires extensive disclosures that provide direct insight into business resilience by exposing the sensitivity of asset values to stress: Paragraph 134 Disclosures (Significant Goodwill & Indefinite-Life Intangibles): An entity shall disclose the information required by (a)–(f) for each cash generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives: (a) The carrying amount of goodwill allocated to the unit (group of units). (b) The carrying amount of intangible assets with indefinite useful lives allocated to the unit (group of units). (c) The basis on which the unit’s (group of units’) recoverable amount has been determined (i.e. value in use or fair value less costs to sell). (d) If the unit’s (group of units’) recoverable amount is based on value in use: (i) A description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit’s (group of units’) recoverable amount is most sensitive. (ii) A description of management’s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information. (iii) The period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period greater than five years is used for a cash generating unit (group of units), an explanation of why that longer period is justified. (iv) The growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds the long term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit (group of units) is dedicated. (v) The discount rate(s) applied to the cash flow projections. (e) If the unit’s (group of units’) recoverable amount is based on fair value less costs to sell: The methodology used to determine fair value less costs to sell. If fair value less costs to sell is not determined using an observable market price for the unit (group of units), the following information shall also be disclosed: (i) A description of each key assumption on which management has based its determination of fair value less costs to sell. Key assumptions are those to which the unit’s (group of units’) recoverable amount is most sensitive. (ii) A description of management’s approach to determining the value (or values) assigned to each key assumption, whether those values reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information. If fair value less costs to sell is determined using discounted cash flow projections, the following information shall also be disclosed: (iii) The period over which management has projected cash flows. (iv) The growth rate used to extrapolate cash flow projections. (v) The discount rate(s) applied to the cash flow projections. (f) Reasonably possible changes in key assumptions: If a reasonably possible change in a key assumption on which management has based its determination of the unit’s (group of units’) recoverable amount would cause the unit’s (group of units’) carrying amount to exceed its recoverable amount: (i) The amount by which the unit’s (group of units’) recoverable amount exceeds its carrying amount. (ii) The value assigned to the key assumption. (iii) The amount by which the value assigned to the key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit’s (group of units’) recoverable amount to be equal to its carrying amount. Paragraph 135 Disclosures (Goodwill Allocated Across Multiple Units): If some or all of the carrying amount of goodwill or intangible assets with indefinite useful lives is allocated across multiple cash-generating units (groups of units), and the amount so allocated to each unit (group of units) is not significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, that fact shall be disclosed, together with the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to those units (groups of units). In addition, if the recoverable amounts of any of those units (groups of units) are based on the same key assumption(s) and the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to them is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives, an entity shall disclose that fact, together with: (a) The aggregate carrying amount of goodwill allocated to those units (groups of units). (b) The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units (groups of units). (c) A description of the key assumption(s). (d) A description of management’s approach to determining the value(s) assigned to the key assumption(s), whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information. (e) If a reasonably possible change in the key assumption(s) would cause the aggregate of the units’ (groups of units’) carrying amounts to exceed the aggregate of their recoverable amounts: (i) The amount by which the aggregate of the units’ (groups of units’) recoverable amounts exceeds the aggregate of their carrying amounts. (ii) The value(s) assigned to the key assumption(s). (iii) The amount by which the value(s) assigned to the key assumption(s) must change, after incorporating any consequential effects of the change on the other variables used to measure recoverable amount, in order for the aggregate of the units’ (groups of units’) recoverable amounts to be equal to the aggregate of their carrying amounts. Critical Insight: Dispelling the Common Misconception on Impairment Disclosures The above disclosures of paragraphs 134 and 135 of Ind AS 36 kick in to inform the users of the financial statements of the risk associated with a reduced headroom for impairment. Ind AS 36 includes disclosures about impairments and reversals of impairments that have arisen during the period. These impairment or reversal events are the result of either: Indications of impairment: Ad hoc events arising during the period relating to all assets, including goodwill and certain intangibles; or Annual estimation of recoverable amount: Required whenever the financial statements include goodwill and certain intangibles. These disclosures are only needed when an impairment (or reversal) has taken place during the period. Hence many people will feel that if there are no impairments during the period, then there are no disclosures triggered by Ind AS 36. The Mandatory Annual Trigger: But inspect paragraphs 134 and 135 and highlight the phrase during the period. You discover that the phrase is not there at all, for the disclosures required concerning goodwill and/or intangible assets with indefinite useful lives. Therefore, if financial statements include goodwill and/or intangible assets with indefinite useful lives, which are tested for impairment routinely annually, then certain disclosure must be made each year. The disclosures in paragraph 134(f) and paragraph 135(e) represent “headroom” disclosures: By how much could the inputs used in estimating recoverable amount change, before the resulting figure for recoverable amount becomes perilously close to the current carrying amount? Or, put another way, what is the existing headroom, and how close is the entity to finding that the headroom has reduced, triggering an impairment loss as a result of a routine annual estimate of recoverable amount? 6. Financial Risk Management Disclosures (Ind AS 107) Ind AS 107, Financial Instruments: Disclosures, provides comprehensive qualitative and quantitative disclosures that depict the business resilience engineered by the entity’s management across three primary risk dimensions: A. Qualitative Disclosures [Ind AS 107.33] The qualitative disclosures describe: Risk exposures for each type of financial instrument; Management’s objectives, policies, and processes for managing those risks; and Any changes from the prior period. B. Quantitative Disclosures [Ind AS 107.34] The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. These disclosures include: Summary quantitative data about exposure to each risk at the reporting date; Disclosures about credit risk, liquidity risk, and market risk and how these risks are managed; and Concentrations of risk. 1. Credit Risk Definition: The risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. [Ind AS 107 Appendix A] Required Disclosures [Ind AS 107.36–38]: Maximum amount of exposure, description of collateral, information about credit quality of financial assets neither past due nor impaired, and renegotiated assets [Ind AS 107.36]. Analytical disclosures for past due or impaired financial assets [Ind AS 107.37]. Information on collateral or other credit enhancements obtained or called [Ind AS 107.38]. 2. Liquidity Risk Definition: The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. [Ind AS 107 Appendix A] Required Disclosures [Ind AS 107.39]: A contractual maturity analysis for financial liabilities showing remaining contractual maturities. A comprehensive description of the approach to managing liquidity risk and funding lines. 3. Market Risk Definition: The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (interest rate risk, currency risk, and other price risks). [Ind AS 107 Appendix A] Required Disclosures [Ind AS 107.40–42]: Sensitivity analysis for each type of market risk to which the entity is exposed. Additional disclosures if sensitivity analysis is not representative of the year’s exposure. Value-at-Risk (VaR) or interdependent sensitivity analysis permitted if used internally for management purposes. 7. Endnote: Governance, Transparency and Ethical Decision-Making The primary responsibility for preparing financial statements and overseeing financial reporting is with the management of an enterprise. They will have to exercise significant judgement in the current business environment in demonstrating how resilient is their business. Of particular importance is appropriately assessing going concern and disclosures of substantial doubt / material uncertainty when it exists and providing a fair view and presentation of the performance and position of the enterprise, which is likely to require comprehensive disclosure of forward-looking information and cash flow impacts. Core Principle for Decision-Making: Appropriate and timely financial reporting would ensure maintaining a sense of integrity and transparency as the basis for trustworthy and ethical decision-making.

The Chartered Accountant • Journal of ICAI December 2020 • Vol. 69 • No. 6 • pp. 24–28 (Journal pp. 684–688) Resilience & Auditing Standards Role of ‘Auditor’ and ‘Standards on Auditing’, in Building Resilience CA. Deepa Agarwal The author is a member of the Institute. She can be reached at deepa2580@gmail.com and eboard@icai.in. Building the resiliency of the economy is a collective responsibility of companies, regulators, stakeholders and industry associations. Within each organisation, operational resilience calls for stakeholders to promote a culture of resiliency through training and awareness, constant oversight, timely communications and board reporting. The key components of business resilience, which include defining and understanding critical business needs, going concern and impairment assessment, risk assessment, internal control deficiencies are essential guideposts on the road to resiliency. This article is an attempt to highlight the role of audit and underlying Standards on Auditing issued by the ICAI in developing a more resilient organization by providing assurance on financial information and valuable insights in various areas to the stakeholders and regulators. Read on… Recently, there has been manifold increase in the usage of the term resilience. The British Standards Institution published a guidance Standard, BS 65000 – Organisational Resilience, which has attempted to define the term and the principles and attributes associated with it. In essence, this standard calls for much closer integration and alignment of risk management, disaster recovery, crisis management and security. It enables senior management to describe a strategy for the organizational resilience which identifies benefits, behaviours of resilient organizations. Being able to continue critical business functions while responding to a major disaster, and then to return to normal operations efficiently and cohesively afterward, is a critical success factor for all organizations. What is happening around us now due to COVID 19 has proved beyond any doubt that we live in an uncertain, volatile and complex world. Businesses around the world are facing challenges on handling disruption of such a high magnitude. This disruption has warranted a change in technology, information security norms, the work environment, people management, process engineering, risk management and so on. Auditors have used technology and their creativity while exercising their professional skepticism to maintain high quality in audits and issuing an opinion that is relied upon by stakeholders and regulators. Auditors have also shared knowledge and experiences with audit committees facing new and complex accounting issues, all while investing time and resources in businesses hit hard by the pandemic. Auditors play a vital role in assessing various components of Business and providing assurance to stakeholders that financial statements provide a true and fair view of the state of affairs of the entity. Auditors contribute to business in varied ways, for example, through timely communication of issues which requires urgent attention of the board of directors/audit committee and reporting to point out the deficiencies and weaknesses in internal control systems. While conventional auditing based on sampling techniques is followed, it is imperative that auditors provide value beyond audit by use of technology and data analytics. Investors and other stakeholders are looking for more and different information because traditional book value can be an incomplete measure of corporate value in today’s economy. With data analytics, auditors can test complete sets of data, rather than just testing samples to meet increasing expectations of stakeholders and regulators. The auditing profession has the capabilities to bring its expertise, building trust and confidence in information into new areas to enhance the reliability of information for stakeholders through the assurance services they provide. Investors, lenders, and other users of audited financial statements can more confidently use this information because auditors have provided an independent perspective. This assessment, in other words, builds trust and confidence. The key areas wherein audit, and auditors play a significant role in times of disruption and developing resilience in organisations are discussed below: 1. Evaluation of Going Concern The Board and management need assurance regarding the future viability of their business, assessment of the financial position and health of the company, and an assurance that disaster will not impact the continuity of the business. SA 570, Going Concern requires an auditor to make an assessment and conclude on the appropriateness of management’s use of the going concern basis of accounting. Robust going concern analysis by the auditor will highlight the sensitive areas for board to focus on and to assess whether the business can continue as a going concern for the next 12 months. Section 134(5) of the Companies Act, 2013 requires directors to affirm that annual accounts have been prepared on a going concern basis, i.e., whether the Board has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment. As part of a going concern assessment, management can assess what impact the current events and conditions have on the entity’s operations and forecasted cash flows, with a focus on whether the entity will have sufficient liquidity to continue to meet its obligations as they fall due. The businesses can be prepared to deal with the liquidity and operational issues by evaluating various options of restructuring of debt arrangements, capital expenditure reduction etc. “While conventional auditing based on sampling techniques is followed, it is imperative that auditors provide value beyond audit by use of technology and data analytics.” 2. Assessing Level of Preparedness to Deal with Uncertainties The key principles of resilience is the ability to anticipate & assess, plan & prepare, protect & control, and respond & recover in the situation of major disruptive or catastrophic risk, whether they are internal or external, known or unknown, in addition to the ability to adapt & reform in the light of long term strategic risk such as climate change, pandemics or changing markets. SA 260, Communication to Those Charged With Governance requires auditor to communicate with board of directors/audit committees about significant findings, difficulties in conducting audit and matters, arising from the audit that, in the auditor’s professional judgment, are significant to the oversight of the financial reporting process. Audit committee members are the proper channel for communicating audit findings, as well as the right filter for choosing which information goes to investors and taking corrective actions. Unexpected events like COVID 19 can disrupt or slow down business activity significantly. Historically, audit rely upon traditional auditing strategies, working within the same parameters and procedures. Using technology and analytics to drive the risk assessment, performing audit procedures (sampling, estimation, electronic confirmations) can help auditors to be more proactive and help businesses in taking proactive measures to deal with disruptions. 3. Use of Technology and Data Analytics Auditors as well as the companies have extensively used technology, particularly in recent years, to facilitate a smooth transition to a remote working environment. During the pandemic, auditors have really leveraged the technology that they have already been implementing. Cloud-based audit platforms and videoconferencing technology have been particularly valuable during the pandemic both for the auditors and the companies. Better decisions make better businesses and having the right data at the right time is critical for management to be able to address the changing demands of their key stakeholders. Auditing standards are written on the assumption that it is rarely possible to test 100% of the transactions entered by any entity. This is no longer true with the use of data analytics. By integrating this innovative approach into audit — identifying and capturing the right data, analysing, interpreting and presenting it in a more meaningful way, auditors can provide a valuable independent perspective that will support not only the integrity of the financial statements, but also management and audit committees to become proactive. This will enable them to address issues important to the business and its stakeholders with fact-based answers. Data analytics enables the organisations to experience an audit that moves beyond the “traditional” approach, addressing the increasing role of IT systems and mass data, and delivering even more relevance, assurance and quality. New age auditors are leveraging data analytics to provide new approaches to enhance risk identification, obtain better quality audit evidence more effectively, highlight internal control deficiencies, or identify opportunities for improvement. Auditors by virtue of their audit experience and with use of analytics can provide useful information for comparisons with prior years and (potentially) other businesses, predict market trends, help in internal benchmarking and better focus on risk. SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, requires the auditor to consider the implication of such events when obtaining an understanding of the entity and its environment, in light of its objectives, strategies and other business risks. 4. Risk Assessment Risk assessment is critical for every organisation. Management could benefit by taking a clue from auditor’s strategy in assessing risks from such events. For example, adhering to sound internal controls principles and practices, employing robust systems of quality control, and embedding a culture of ethics and integrity can go a long way to helping an organization to remain resilient in times of crisis. The outbreak of COVID-19 can have a number of potential issues for entities, particularly entities that operate in geographies that are significantly exposed to the outbreak. In addition, there could also be impact on those entities whose vendors/ bankers/ suppliers/ service providers are in geographies that are exposed. SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, requires the auditor to consider the implication of such events when obtaining an understanding of the entity and its environment, in light of its objectives, strategies and other business risks. Auditor is required to discuss with those charged with governance and management whether the impact of the COVID 19 has been incorporated into their risk assessment processes and how they have identified and assessed the significance of the emerging business risks. 5. Fraud Prevention and Detection The professional skepticism of the auditor acts as an early warning signal for the audit committees/board of directors in various areas like ratio analysis, fraud prevention and detection, liquidity and solvency issues faced by the companies. Audit serves an important role for companies in fraud prevention and detection. Recurring analysis of a company’s operations and maintaining rigorous systems of internal controls can prevent and detect various forms of fraud and other accounting irregularities. SA 240, — The Auditor’s Responsibilities Relating to Fraud in an audit of financial statements provides that an auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken are free from material misstatement, whether caused by fraud or error. Auditors are also expected to inquire more closely into reasons behind such matters as, for example, errors in accounting estimates, unusual transactions that appear to lack business rationale, and a reluctance to correct immaterial errors discovered by the audit. If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor shall communicate these matters on a timely basis to the appropriate level of management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. An important part of prevention can be deterrence, and if a company is known to have an active and diligent audit system in place, by reputation alone it may prevent an employee or vendor from attempting a scheme to defraud the company. SA 240, — The Auditor’s Responsibilities Relating to Fraud in an audit of financial statements provides that an auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken are free from material misstatement, whether caused by fraud or error. 6. Internal Control Considerations An audit does not only examine whether a company’s financial statements gives a true and fair view, but it also tests that the company’s systems are operating as part of testing of internal controls. The systems an auditor examines include the company’s internal controls, or the measures taken to reduce or eliminate accounting errors or fraud. Based on the results of an audit, the auditors recommend changes the company should make to its processes or systems to eliminate problems and reduce future errors. Companies can improve their financial processes and controls, remedying issues before they become major financial concerns. The auditor needs to reassess the risk, evaluate the design and operating effectiveness of key processes and controls and support remediation. Companies may need to implement new internal controls or modify existing internal controls over financial reporting. SA 265, Communicating Deficiencies in Internal Control to those charged with governance and management requires the auditor to communicate appropriately to those charged with governance and management deficiencies in internal control that the auditor has identified during the audit and that, in the auditor’s professional judgment, are of sufficient importance to merit their respective attentions. Without a system of internal controls or an audit system, a company would not be able to create reliable financial reports for internal or external purposes. Thus, it would not be able to determine how to allocate its resources and would be unable to know which of its segments or product lines are profitable and which are not. The deficiencies identified in control environment and fraud risk assessments will enable management to be cautious as changes in operational management needs to be implemented to deal with the situation. SA 265, Communicating Deficiencies in Internal Control to those charged with governance and management requires the auditor to communicate appropriately to those charged with governance and management deficiencies in internal control that the auditor has identified during the audit and that, in the auditor’s professional judgment, are of sufficient importance to merit their respective attentions. 7. Use the Work of Internal Auditor SA 610, Using the work of internal auditors permit the external auditor to use the work of internal auditor. Internal audit expertise will help the organisation to become resilient in coming out from the COVID 19 impact or any business disruptions. It will not only help to monitor the ongoing practices of the company and reporting the same to the senior management but shall also strive to provide invaluable recommendations in such times. As described in SA 315, the entity’s internal audit function is likely to be relevant to the audit if the nature of the internal audit function’s responsibilities and activities are related to the entity’s financial reporting, and the auditor expects to use the work of the internal auditors to modify the nature or timing, or reduce the extent, of audit procedures to be performed. Internal audits of the Business Continuing Programmes and Disaster Recovery programs are highly recommended. The audit committees and the Board need assurance regarding the effectiveness of these programmes since it helps to minimize the impact of disruption. Plans should be practiced and focused on recovering what is most important to the business. Internal audits can explore the alignment between capability and the organization’s recovery requirements, the usability of plans and the extent to which critical resource dependencies can be recovered in an incident. 8. Looking Forward As businesses continue to adjust to the new normal, understanding the long-term effects of the pandemic/disruptions and determining what actions needed is critical. COVID-19 has revealed just how disruptive events can be on “business as usual” and emphasized the need for better future planning. With threats like climate change ramping up there is a lot to be considered and planned for. Further, the pandemic has brought into sharper focus the need for transparent and reliable information beyond historical financial statements. Doing business has been changed significantly, including how auditors operate. It is clear that the auditing profession has an important role to play in advancing economic recovery. Investor protection is critical to efficient capital formation to fund Innovation and entrepreneurial risk taking. It is the flow of audited information in the marketplace that, when perceived as both reliable and relevant to investment decisions, gives investors the confidence to participate in a market. The auditing profession has steadily developed, systemized, and strengthened this trust and confidence-building role by following professional standards, principles and with robust regulatory oversight. Reinforcing market confidence through audit reliability, supporting the effectiveness of audit committees, increasing audit transparency — these are real challenges for a profession to stay relevant in this agile environment. ∎∎∎

The Chartered Accountant Journal • Corporate Governance • December 2020 Corporate Boards in India and Gender Diversity Dr. Gunjan Khanna The author is Assistant Professor, University of Delhi. She can be reached at gunjank_cs@yahoo.com and eboard@icai.in. Citation: (2020) 69 CAJ 698–702 Pages 38–42 • Journal Page Nos. 698–702 “Women on Boards Not Just the Right Thing … But the Bright Thing” – Brown et al. (2002) Executive Perspective Reports and various codes proposed across the world endorse research on the impact of board gender diversity on performance and governance of corporate sector. Urge for promoting women on corporate boards are based on the principles of fairness and equality as women comprise of half the population and workforce. Further heterogeneity at board level in terms of gender leads to unique and valuable contribution to the board dynamics empirically proven by the studies conducted across the globe. Therefore there is a need to have gender diversity of corporate boards in spirit. India still needs to follow a combination of measures at government as well as corporate leaders level as no “one size fits all” is an enduring solution. Read on… 1. Introduction & The Indian Statutory Reality Forward looking companies may be putting policies and practices in place to promote women on corporate boards but there’s still a long way to go. Legal mandate has been imposed on certain specified corporate boards in India to appoint at least one woman with effect from 1st April, 2015. India pioneered in the category of developing nations to introduce mandatory provision for having gender diverse boards. In spite of almost five years have been completed since the legitimate necessity was instituted, still its implementation has been found wanting. As per the data available on the website of Indian Boards Database: 15.97% Directorships held by women across 1,792 companies listed on the NSE. 61.89% Proportion of women directors who are classified as independent directors. In case of mandatory provision of Section 149 of The Companies Act, 2013 for having at least one woman on corporate boards of certain class of companies with effect from April 1, 2015 leads to a fiasco that many companies have appointed one woman who are directly or indirectly related to promoter group to comply the letters of law and not in spirit. The Securities Exchange Board of India (SEBI) had brought certain amendments in its Listing Obligations and Disclosure Requirements (LODR) based on the Report of the committee on corporate governance under the chairmanship of Mr. Uday Kotak. According to 1st proviso to Regulation 17(1)(a) of LODR amendment regulation, the board shall consist of at least 1 woman independent director: Top 500 listed entities on the basis of market capitalisation (as at the end of the immediate previous financial year): Must comply w.e.f. 1st April, 2019. Top 1000 listed entities on the basis of market capitalisation (as at the end of the immediate previous financial year): Must comply w.e.f. 1st April, 2020. This stringent regulation making it mandatory for companies to appoint an independent person as woman director as it is not enough to appoint symbolic representatives of women in order to marginalize their views. Qualified and competent women should be appointed so that they can actively contribute towards the board effectiveness. 2. Initiatives to Place Women on Corporate Boards in India (Legislative Timeline) The evolutionary trajectory of statutory reforms mandating women representation on corporate boards of directors in India is tabulated below: Year Statutory Instrument / Policy Specific Regulatory Provision 2009 Companies Bill, 2009 Clause 132 proposed appointment of at least one woman director in prescribed class of companies. 2011 Companies Bill, 2011 Section 149(1) 2nd proviso proposed appointment of at least one woman director in prescribed class of companies. 2012 Companies Bill, 2012 Proposed appointment of at least one woman director in prescribed class of companies. 2013 The Companies Act, 2013 Section 149 (1) enacted: Certain specified companies must appoint at least one woman director. 2014 Companies (Appointment and Qualification of Directors) Rules, 2014 2nd Proviso to Section 149(1) read with Rule 3 (Chapter 11) mandates that every listed company and every other public company having (a) paid up share capital ≥ Rs. 100 crore; or (b) turnover ≥ Rs. 300 crore shall appoint at least one woman director. 2015 Listing Agreement Clause 49 The provision related to appointment of women director as provided in Clause 49 (II) (A) (1) of the listing agreement became applicable with effect from April 01, 2015. 2018 SEBI (LODR) Amendment Regulations, 2018 SEBI amended LODR based on recommendations of Uday Kotak committee on corporate governance: 1st proviso to Regulation 17 (1) (a) mandates board shall consist of at least 1 woman independent director: top 500 listed entities to comply w.e.f. 1st April 2019 and top 1000 listed entities to comply w.e.f. 1st April 2020. 3. Empirical Research on Women Directors and Corporate Performance in India Academic and empirical investigations within the Indian corporate ecosystem provide compelling evidence regarding the substantive benefits of gender diversity at the board level: Sen and Mukherjee (2019): Explored the linkage between gender diversity of the corporate board and its performance. They considered a sample of 139 non-financial companies listed on NSE over a period of five years (2011-12 to 2015-16). Applying a Random-Effect GLS Regression Model, the authors uncovered a positive relationship between the proportion of independent women directors on the board and the firm’s performance measured by Market Value Added to Net Worth (MVANW), after controlling for factors such as board size, firm size, and leverage (Debt-Equity Ratio – DER). Das (2019): Investigated the relationship between participation of women on boards with corporate financial performance. The study revealed a positive and statistically significant impact of women directors on financial performance measured by Return on Capital Employed (ROCE) of Indian listed companies. Empirically, it was inferred that women affect financial viability and social outreach, which directly assists the company in its sustainable development. Sikand et al. (2013) & Jonge (2014): Demonstrated that women representation on corporate boards in India varies significantly according to specific company characteristics and industry sectors. Kanojia and Khanna (2019): Revealed that in the context of India, overall participation of women on boards is negligible. Their findings highlighted that the mandatory statutory provisions under the Companies Act, 2013 are absolutely necessary to dismantle homogeneous board composition. Furthermore, the study underscored that women in India face a substantial number of hindrances while climbing the corporate ladder. Empirically, women exhibit diverse leadership styles, their presence brings qualitative advancement, they remain vigilant about all stakeholders’ interests, and they are prudent and risk-averse. Mahalakshmi and Reddy (2017): Proved that boards with women members demonstrate superior competence and governance discipline. Kaur and Singh (2017): Highlighted that the presence of a woman director on the board is perceived by the external market as a positive quality signal, significantly augmenting overall corporate reputation. 4. Measures to Increase Professional Women Representation on Corporate Boards To move beyond tokenism and achieve genuine diversity in spirit, a cohesive, multi-pronged strategy must be executed across corporate leadership, nomination committees, and public policy: A. Setting Internal Quotas and Tracking Workforce Metrics Set internal quotas for women in workforce not only at higher echelon of the company but also at all the levels within the company. The only way to increase women representation on corporate boards is to track it like any other performance and governance parameter. Quota for women on corporate boards can be perceived as a means for empowerment of women and better functioning of the board, which further leads to better efficiency of the company. On the other side, reservation of women ipso facto is debated; however, the foundational reason for introducing quotas was primarily the better representation of women in the corporate sector along with their social upliftment. B. Personal Liability of Promoters and Access to Capital Markets Responsibility of making appointment of one woman director is of the promoters and directors, so they must be held personally liable for all penalties so that they realize the need to comply with the provision. In addition to financial penalties, there is an urgent need to restrain companies that fail to appoint at least one professional woman director from entering into new commercial ventures and accessing the capital markets. C. Constructive Leadership and Key Result Areas (KRAs) Rather than adopting negative measures alone, government must declare board diversity to be a necessary component of good governance. Successful implementation of gender diversity programmes requires a combination of constructive leadership and innovative practices from the government and corporate leaders. It is also necessary to establish Key Result Areas (KRAs) for all corporate leaders to attain designated male-to-female employee ratios across middle management, senior executive tiers, and board levels. D. Public Policy Frameworks and Paid Maternity Benefits Economics Public Policy frameworks that support labour market participation of women are important for the success of gender diversity strategies. A productive discourse among all stakeholders is a prerequisite. Companies must extend diversity initiatives to society and not confine them solely within organizational walls, as external initiatives benefit potential employees, consumers, and investors. The Economic Case for Paid Maternity Leave: Despite the Maternity Benefit Act, 1961 originally stipulating 12 weeks of paid maternity leave, leading organizations allow benefits far beyond statutory minimums (e.g., Accenture India provides 22 weeks with an additional 4 weeks in case of pregnancy-related illness). According to empirical research, companies can save up to US$ 19 billion annually through the provision of 16 weeks of fully paid maternity leave, because the recruitment and training cost to replace women post-delivery reaches US$ 47 billion globally each year, whereas offering 16 weeks of paid leave costs only US$ 28 billion. E. Corporate Diversity Councils and Transparent Reporting Corporate commitment to workforce diversity is measured by the extent to which a company endorses diversity at all levels. A Diversity Council is a vital vehicle through which companies convey their commitment, advising top management on practices, policies, and strategic roadmaps. Furthermore, public disclosure of comprehensive diversity practices and operational implementation challenges must be actively encouraged, reflecting transparent and ethical corporate culture. F. Overcoming Tokenism: The Need for a “Critical Mass of Three or More” Women today face severe work-life balance challenges due to expectations of being present anytime and anywhere; corporate cultures must accommodate flexible schedules. Boards with negligible women directors—often appointed from promoter families (wives, daughters, sisters)—remain male-dominated. Solitary professional women directors feel marginalized and are perceived merely as symbolic tokens. The Critical Mass Imperative: To dismantle the tokenism effect, corporations must advance towards a “critical mass of three or more women directors”. Reaching this threshold fundamentally transforms boardroom dynamics, fostering open, collaborative deliberations and delivering tangible value to corporate governance. G. Nomination Committees and Unbiased Candidate Slates To improve board governance, boards should actively seek qualified women board members and refuse to settle for token appointments. Nomination Committees must eliminate gender bias and mandate recruitment agencies to present slates of interview candidates that consistently include qualified women. Since corporations frequently champion “outside the box” thinking, they must look outside traditional executive networks to recruit women who bring diverse perspectives and elevate board deliberations. H. Closing the Gender Pay Gap through Annual Audits and Certifications Pay equity is another critical area for internal corporate regulation. In May 2016 reports, the gender pay gap in India stood at 27%: men earned a median gross hourly salary of ₹ 288.68, while women received only ₹ 207.85 per hour. Contributing factors include systemic preference for male workers in supervisory promotions, career breaks for parenthood, and socio-cultural barriers. Corporates should undergo third-party assessments for equal pay certifications (as required by governments like Switzerland for procurement contractors) and subscribe to initiatives like the “Talent to the Top” pledge. Companies must conduct annual salary audits to ensure equal pay for equal work and rectify gender-based wage disparities. I. Independent Diversity Benchmarking and Societal Re-Education Independent recognition systems boost corporate adoption. For example, US-based consultancy DiversityInc has surveyed companies since 2001 across four benchmark pillars: CEO Commitment, Human Capital, Corporate Communications, and Supplier Diversity. Finally, systemic education reform is imperative to eliminate cultural gender biases that restrict women to domestic roles while men shoulder commercial leadership. Government and civil society must maintain a constant vigil to eradicate deep-rooted gender stereotypes. 5. Conclusion & Future Governance Outlook Though most companies have development programmes for women, women representation on corporate boards remains poor because accountability towards diversity is deficient across the corporate sector. Contemporary dialogues on corporate governance have placed board gender diversity at the forefront, recognizing that boardrooms continue to be monopolized by men. While natural trends indicate positive augmentation, progress without strenuous, concerted efforts will be painfully slow. Both the government and corporate enterprises must take vigorous, proactive measures. Strategic Governance Imperative: At the outset, there is a need to raise consciousness of gender diversity at board level as a business issue and encourage business leaders to think about the compositions of their boards so that they may more precisely reflect the marketplaces and stakeholders that they serve. Further, as in other areas of corporate governance, the government should take more steps to find enduring solutions to the problem of imbalance representation of professional women on corporate boards. References: Brown, D. A. D., Brown, D. L., & Anastasopoulos, V. (2002), “Women on Boards Not Just the Right Thing … But the ‘Bright’ Thing”, The Conference Board of Canada. Retrieved from http://www.europeanpwn.net/files/women_on_boards_canada.pdf Das, P. K. (2019), “Impact of Women Directors on Corporate Financial Performance - Indian Context”, American Journal of Humanities and Social Sciences Research (AJHSSR), Vol. 3, Issue 2, pp. 29–36. Indian Boards Database, Retrieved on February 24, 2019 from http://www.indianboards.com/pages/index.aspx Jonge, A. de (2014), “The Glass Ceiling That Refuses To Break: Women Directors on the Boards of Listed Firms in China and India”, Women’s Studies International Forum, Elsevier Ltd, doi:10.1016/j.wsif.2014.01.008 Kanojia, S. and Khanna, G. (2019), “Women Directors on Corporate Boards: Evidence for Good Governance”, Corporate Governance Insight, Global Research Foundation for Corporate Governance, Vol. 1, No. 1, May 2019, pp. 26–52. Kaur, A. and Singh, B. (2017), “Construing Reputation from Gender Diversity on Boards: Indian Evidence”, Paradigm, 21(2), pp. 111–125, doi:10.1177/0971890717736195 Mahalakshmi, V. and Reddy, P. N. (2017), “Corporate Governance and Presence of Women Director on Boards”, IOSR Journal of Business and Management, Vol. 19, Issue 1, Ver. III, pp. 59–64. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, Retrieved on February 26, 2019 from sebi.gov.in Sen, S. S. and Mukherjee, T. (2019), “Board Gender Diversity and Firm’s Performance: An Evidence from India”, Journal of Commerce & Accounting Research, Vol. 8, Issue 1, pp. 35–45. Sikand, P., Dhami, J. and Batra, G. S. (2013), “Gender Diversity on Corporate Boards: A Case of India”, International Journal of Management, Vol. 4, Issue 2, pp. 292–305.

The Chartered Accountant • Journal of ICAI December 2020 • Vol. 69 • No. 6 • pp. 29–37 (Journal pp. 689–697) Resilience & Financial Markets Resilience of Indian Financial Market Dr. P. Siva Rama Prasad & Dr. Sai Sudha Dasari The authors are experts in the area of Finance. They can be reached at cma.psrprasad@gmail.com and eboard@icai.in. Sudden financial crises which have struck many parts of the world due to pandemic Covid-19, with extensive consequences for the countries concerned and the global financial system, have prompted attempts to identify ways of preventing unexpected shocks of Covid-19 in national and global finances. It is considered important to ensure effective supervision of financial institutions’ operations and monitor the stability of the financial system as a whole due to standstill of the Economic Activities for a period of 4 to 6 months due to Pandemic. Central Banks have increasingly begun to monitor in particular factors which concern the stability of the financial system as a whole. Read on… The soundness of the financial system is a necessary pre-condition for favourable economic developments and effective monetary Policy. Central banks are turning their attention to the strength and efficiency of the Financial System, the macroeconomic environment and the risks to financial stability that may be concealed in it. It is crucial for Central Banks and financial supervisory agencies to collaborate closely in promoting a solid foundation for the Financial System and its healthy operations in view of challenges such as Covid-19 disaster. As of 22 November 2020, there have been 57,882,183 confirmed cases of COVID-19, including 1,377,395 deaths, worldwide (World Health Organization website, https://covid19.who.int/). This pandemic has severely impacted the world’s economies including Indian Economy with second largest number of cases. The Indian Financial System is having capacity to recover quickly from difficulties. A brief on Market-wise of Indian Financial System, measures taken by the Regulators and Government of India due to Covid-19 and its impact mentioned below: Selected Economic Indicators of India like Primary, Secondary and Tertiary Sectors for the Financial Year 2019-2020, Last Quarter of Financial Year 2019-2020 and the First Quarter of Financial Year 2021 (Lockdown Period) is mentioned below: Selected Economic Indicators of India: Real Sector (% Change) Economic Indicator 2019-2020 Q4 (2019-2020) Q1 (2020-2021) Gross Value Add (GVA) at Basic Prices 3.90 3.00 -22.80 Agriculture 4.00 5.90 3.40 Industry 0.80 -0.01 -33.80 Services 5.00 3.50 -24.30 Final Consumption Expenditure 6.30 4.20 -19.20 Gross Fixed Capital Formation -2.80 -6.50 -47.10 (Source: RBI Bulletin) Industrial Production and Inflation Indicators (2020) Economic Indicator Jan Feb Mar Apr Jun Jul Aug Index of Industrial Production 2.00 4.50 -16.70 -55.50 -16.60 -10.40 - Inflation (%) All India Consumer Price Index 7.60 6.60 5.80 - 6.20 6.70 6.70 Consumer Price Index for Industrial Workers 7.50 6.80 5.50 5.40 5.10 5.30 5.60 Wholesale Price Index 3.10 2.30 1.00 - -1.80 -0.60 0.20 Primary Articles 10.00 6.70 3.70 -0.80 -1.20 0.60 1.60 Fuel and Power 3.40 3.40 -1.80 -10.10 -13.60 -9.80 -9.70 Manufactured Products 0.30 0.40 0.30 - 0.01 0.50 1.30 (Source: RBI Bulletin) Financial markets in India comprise in the main, the credit market, the money market, the foreign exchange market, the debt market and the capital market. Most of the financial markets were characterised till the early ‘nineties by controls over the pricing of financial assets, restrictions on flows or transactions, barriers to entry, low liquidity and high transaction costs. These characteristics came in the way of developments of the markets and allocative efficiency of resources channelled through them. Actions undertaken by financial sector regulators and the government to mitigate the impact of Covid-19 eased operational constraints and helped in maintaining market integrity and resilience in the face of severe risk aversion. a) Credit Market Structure & Regulatory Interventions In the context of relatively underdeveloped capital market and with little internal resources, firms or economic entities depend largely on financial intermediaries for their fund requirements. In terms of sources of credit, they could be broadly categorised as institutional and non-institutional. The major institutional purveyors of credit in India are banks and nonbanking financial institutions, i.e., development financial institutions (DFIs) and other financial institutions (FIs) and non-banking financial companies (NBFCs) including housing finance companies (HFCs). While banks and NBFCs predominantly cater to short-term needs, FIs provide mostly medium and long-term funds. However, the actual time-length of the credit availed would depend, inter alia, on the production-sale cycle. The Credit Market: Steps Taken by RBI to Counter the Coronavirus Impact on Economy Repo Rate: RBI announced that it was cutting the Repo Rate by 75 Basis Points or 0.75% to 4.40%. The Repo Rate was earlier 5.15, last being cut in October 2019. Reverse Repo: The Regulator also announced that it would cut the Reverse Repo rate by 90 bps, or 0.90%. On a daily average, Banks had been parking INR 3 lakh crore with the RBI. Loan Moratorium: In a massive relief for the middle class, the RBI Governor also announced the lenders could give a moratorium of 3 months on term loans, outstanding as on 1 March, 2020. CRR: The RBI also announced that the Cash Reserve Ratio (CRR) would be reduced by 100 bps, or 1%, to 3%. This would be applicable from March 28, and would inject INR 1,37,000 Crores. LTRO: The RBI will also undertake Long Term Repo Operations (LTRO) allowing further liquidity with the Banks. The Banks however are specified that this liquidity will be deployed in Commercial Papers, investment grade Corporate Bonds and Non-convertible Debentures. Ease of Working Capital Financing: Lenders were allowed lending to recalculate drawing power by reducing margins and / or by reassessing the working capital cycle for the borrowers. The RBI also specified that such a move would not result in asset classification downgrade. Working Capital Interest: A Three-month interest moratorium shall also be permitted to all lending institutions. Deferment of NSFR: The Net Stable Funding Ratio (NSFR), which reduces funding Risk by requiring Banks to fund their activities with sufficiently stable sources of funding was postponed to October 1, 2020. The NSFR was earlier supposed to be implemented by April 1, 2020. MSF (Marginal Standing Facility): Marginal Standing Facility (MSF) has also been increased to 3% of SLR, available till June 30, 2020. “This measure should provide comfort to the banking system by allowing it to avail an additional INR 1,37,000 crore of liquidity under the LAF window in times of stress at the reduced”. Fresh Liquidity: The RBI also added that since February 2020 it had injected INR 2.8 lakhs crore of liquidity, equivalent to 1.4 percent of GDP. Money, Banking & Money Stock Measures (% Change - Scheduled Commercial Banks) Economic Indicator Jan Feb Mar Apr Jun Jul Aug Deposits 9.90 9.00 7.90 7.90 9.60 12.10 10.90 Credit 7.20 6.10 6.10 6.80 5.60 6.40 5.50 Non-food Credit 7.10 6.10 6.10 6.70 5.40 6.30 5.50 Investment in Govt. Securities 11.20 10.60 9.10 14.90 18.90 22.50 21.80 Money Stock Measures Reserve Money (M0) 12.30 11.30 9.40 9.10 11.80 14.90 14.70 Broad Money (M3) 11.20 10.20 8.90 10.80 12.30 13.20 12.60 (Source: RBI Bulletin) Banking System Ratios (%) Economic Indicator Jan Feb Mar Apr Jun Jul Aug Cash Reserve Ratio 4.00 4.00 3.00 3.00 3.00 3.00 3.00 Statutory Liquidity Ratio 18.25 18.25 18.25 18.00 18.00 18.00 18.00 Cash-Deposit Ratio 4.70 4.70 4.60 3.70 3.70 3.70 3.70 Credit-Deposit Ratio 75.80 75.80 76.40 74.90 73.60 72.60 72.10 Incremental Credit-Deposit Ratio 44.40 44.30 60.30 -62.60 -37.50 -15.00 -25.40 Investment-Deposit Ratio 28.00 28.30 27.20 28.90 29.90 30.30 30.70 Incremental Investment-Deposit Ratio 46.90 51.80 30.80 182.10 122.80 93.10 101.90 (Source: RBI Bulletin) India Domestic Credit Growth India’s Domestic Credit increased 8.4 % YoY in Sep 2020, compared with an increase of 9.9 % YoY in the Previous Month. It averaged 15.2 %, available from Mar 2000 to Sep 2020. The data reached an all-time high of 27.1 % in Jul 2009 and a record low of 5.6 % in Nov 2017. In the latest reports, India’s Domestic Credit reached 2,370.7 USD bn in Sep 2020. Money Supply M2 in India increased 18.0 % YoY in Sep 2020. The country’s Non-Performing Loans Ratio stood at 9.1 % in Mar 2019, compared with the ratio of 11.2 % in the previous year. What was India’s Domestic Credit Growth in Sep 2020? Last 8.40% September, 2020 Previous 9.90% August, 2020 Minimum 5.60% November, 2017 Maximum 27.10% July 2009 Unit Percentage (%) Frequency Monthly Range: March, 2000 to September, 2020 • Updated on 09.11.2020 • Source: Census and Economic Information Center (CEIC Data) b) Money Market Structure & Interventions Money markets perform the crucial role of providing a conduit for equilibrating short-term demand for and supply of funds, thereby facilitating the conduct of monetary policy. While inter-bank money markets and central bank lending via repo operations or discounting provide liquidity for banks, private non-bank money market instruments, such as, commercial bills and commercial paper provide liquidity to the commercial sector. Unlike in developed economies where money markets are promoted by financial intermediaries out of efficiency considerations, in India, as in many other developing countries, the evolution of the money market and its structure has been integrated into the overall deregulation process of the financial sector. The Money Market: Steps Taken by RBI to Counter the Coronavirus Impact on Economy The RBI has been injecting additional Liquidity in the Banking system to keep down Bond yields. In its February Policy Review, the RBI said it will provide INR 1 Trillion of one-and three-year cash at the Policy Rate via long-term Repo Operations to help Monetary Transmission (Feb. 6). Two variable rate Repo operations of 500 billion Rupees to fine-tune liquidity at the financial year end. Enhanced a Temporary Liquidity tap for Primary Bond underwriters to INR 10,000 Crores from INR 2,800 Crores. INR 1 Lakh Crore of LTROs. Open market purchase of govt bonds worth INR 100 Billion March 20, another total INR 30,000 Crores of OMO Purchases March 24 and March 26. INR 1 Trillion via 16-Day Variable Rate Repos. Interest Rates Trajectory (%) (2020) Economic Indicator Jan Feb Mar Apr Jun Jul Aug Policy Repo Rate 5.15 5.15 4.40 4.40 4.00 4.00 4.00 Reverse Repo Rate 4.90 4.90 4.00 3.75 3.35 3.35 3.35 Marginal Standing Facility (MSF) Rate 5.40 5.40 4.65 4.65 4.25 4.25 4.25 Bank Rate 5.40 5.40 4.65 4.65 4.25 4.25 4.25 Base Rate 8.45/9.40 8.45/9.40 8.15/9.40 8.15/9.40 7.40/9.00 7.40/9.00 7.40/9.00 MCLR (Overnight) 7.50/7.95 7.50/7.90 7.40/7.90 7.10/7.75 6.70/7.45 6.65/7.30 6.65/7.20 Term Deposit Rate >1 Year 6.10/6.40 6.00/6.40 5.90/6.40 5.70/6.00 5.10/5.65 5.10/5.50 5.00/5.50 Savings Deposit Rate 3.25/3.50 3.25/3.50 3.00/4.00 2.75/3.50 2.70/3.50 2.70/3.00 2.70/3.00 Call Money Rate (Weighted Average) 4.94 4.96 5.05 4.09 3.54 3.46 3.43 91-Day Treasury Bill (Primary) Yield 5.13 5.08 4.36 3.64 3.19 3.30 3.24 182-Day Treasury Bill (Primary) Yield 5.24 5.18 4.97 3.66 3.42 3.39 3.49 364-Day Treasury Bill (Primary) Yield 5.29 5.16 4.94 3.70 3.54 3.52 3.59 10-Year G-Sec Par Yield (FBIL) 6.86 6.65 6.71 6.55 5.90 5.78 6.12 (Source: RBI Bulletin) Call Money Market Growth Call Money amount data was reported at INR 82,596.300 mn in 12 Nov 2020. This records a decrease from the previous number of INR 85,770.500 mn for 11 Nov 2020. Averaging INR 120,850.950 mn from Apr, 2006 to 12 Nov, 2020, with 4208 observations. The data reached an all-time high of INR 410,780.000 mn in 09 Dec 2016 and a record low of 0.000 INR mn in 08 Nov 2020. What was India’s Call Money Market-12 Nov 2020? Last 82,596.300 12th November, 2020 Previous 85,770.500 11th November, 2020 Minimum 0.000 8th November, 2020 Maximum 410,780.000 9th December, 2016 Unit INR mn Frequency Daily Range: 24th April, 2006 to 12th November, 2020 • Updated on 13th November, 2020 • Source: Census and Economic Information Center (CEIC Data) c) Foreign Exchange Market Structure & Actions The Foreign Exchange Market in India Comprises Customers, Authorised Dealers (ADs) and the Reserve Bank. With the transition to a market determined Exchange Rate system in March 1993 and the subsequent gradual but significant Liberalisation of restrictions on various external transactions, the Forex Market in India has acquired more depth. Foreign Exchange Market: Steps Taken by RBI to Counter the Coronavirus Impact on Economy Voluntary Retention Route (VRR): ‘Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) Investment in Debt Relaxations. Foreign Portfolio Investors (FPIs) shall invest at least 75% of their ‘Committed Portfolio Size’ (CPS) within three months from the date of allotment. In view of the disruptions caused by COVID-19, it has been decided to allow FPIs that have been allotted investment limits, between January 24, 2020 (the date of reopening of allotment of investment limits) and April 30, 2020, an additional time of three months to invest 75% of their CPS. Directions on the participation of Banks in Offshore Non-deliverable Rupee Derivative Markets issued vide will come into effect from June 1, 2020. The time period for realization and repatriation of export proceeds for shipments before July 31 extended to 15 months to provide greater flexibility to exporters in negotiating future export contracts with buyers abroad. India opened up a wide swath of its Sovereign Bond Market to Overseas Investors, taking its biggest step yet to secure access to Global Indexes as the Government embarks on a record borrowing plan. More Dollars: RBI pledged to inject Dollars through Dollar-Rupee Swaps—Two USD 2 Billion Swap Lines each for March 16 and March 23 provided USD 2.7 billion. Reference Rate, Forward Premia & Foreign Trade (2020) Economic Indicator Jan Feb Mar Apr Jun Jul Aug Reference Rate and Forward Premia INR-US$ Spot Rate (INR Per Foreign Currency) 71.51 72.19 74.84 76.42 75.48 74.77 73.35 INR-Euro Spot Rate (INR Per Foreign Currency) 78.82 79.44 82.64 82.21 84.63 88.87 87.07 Forward Premia of US$ 1-month (%) 3.52 3.82 8.98 3.93 3.66 3.61 3.76 3-month (%) 4.25 3.93 5.93 3.85 3.66 3.74 3.90 6-month (%) 4.21 3.91 5.05 3.93 3.82 3.80 4.01 Foreign Trade (% Change) Imports -0.70 2.50 -28.70 -58.60 -48.50 -29.60 26.00 Exports -1.70 2.90 -34.60 -60.30 -12.50 -9.90 -12.70 (Source: RBI Bulletin) India Foreign Exchange Reserves India’s Foreign Exchange Reserves was measured at 502.2 USD bn in Sep 2020, compared with 498.9 USD bn in the Previous Month. The data reached an all-time high of 502.2 USD bn in Sep 2020 and a record low of 1.1 USD bn in Jun 1991. The Reserve Bank of India provides monthly Foreign Exchange Reserves in USD. The Foreign Exchange Reserves equalled 16.6 Months of Import in Sep 2020. What was India’s Foreign Exchange Reserves in Sep 2020? Last 502,162.0 September, 2020 Previous 498,887.0 August, 2020 Minimum 1,124.0 June, 1991 Maximum 502,162.0 September, 2020 Unit USD mn Frequency Monthly Range: April 1989 to September, 2020 • Updated on 29th October, 2020 • Source: Census and Economic Information Center (CEIC Data) d) Structure of Debt Market & Fiscal Relaxations The domestic debt market comprises two main segments, viz., the Government securities and other (mainly corporate) securities comprising private corporate debt, PSU bonds and DFIs bonds. The government securities market is pre-dominant, while the other segment is not very deep and liquid. The Debt Market: Steps Taken by Government of India to Counter the Coronavirus Impact on Economy State administrations have been permitted to borrow as much as half their annual target for the year starting April 1 whenever they choose. In a typical year, strict rules would govern the timetable, which would include cash transfers from the federal government that are now under threat as the lockdown erodes revenue. RBI decided to increase the Ways and Means limit -- short term funding cap -- by 60% for all States to enable them to “Tide over the Situation.” Revised limits came into effect in April, and will be valid for Six Months. Eases States’ Overdraft Rules through 30th Sept. to handle Cashflow mismatches. Shorter Trading Hours: Trading in sovereign debt and the rupee will be held from 10 a.m. to 2 p.m. Mumbai time starting April 7 through April 30. These markets normally worked from 9 a.m. to 5 p.m. India National Government Debt India’s National Government Debt reached 1,336.4 USD bn in Jun 2020, compared with 1,306.0 USD bn in the previous quarter. The data reached an all-time high of 1,336.4 USD bn in Jun 2020 and a record low of 233.0 USD bn in Dec 1998. CEIC converts quarterly Government Debt into USD. The Ministry of Finance provides Government Debt in local currency. Federal Reserve Board average market exchange rate is used for currency conversions. Government Debt covers Central Government only. India’s Nominal GDP reached 502.1 USD bn in Jun 2020. What was India’s National Government Debt in June 2020? Last 1,336.4 June, 2020 Previous 1,306.0 March, 2020 Minimum 233.0 December, 1998 Maximum 1,336.4 June, 2020 Unit USD bn Frequency Quarterly Range: December, 1998 to June, 2020 • Updated on 18th September, 2020 • Source: Census and Economic Information Center (CEIC Data) e) Capital Market Structure & SEBI Relief Measures Capital market structure has evolved over time with the market practices and conditions generally reflecting the policies put in place. As the process of price formation has to be efficient for the growth and stability of the market, it was considered necessary to orient the Securities and Exchange Board of India (SEBI) to undertake the tasks of regulation and supervision. The Capital Market: Steps Taken by Securities and Exchange Board of India (SEBI) to Counter the Coronavirus Impact on Economy Allows Companies additional 45 days for declaring their quarterly and annual results; extends the date for submission of corporate governance report by a month; Company Boards exempted from provision of maximum time gap between two meetings (March 19). Trading Margin in Stocks increased, market-wide position reduced to ease volatility in Stocks (March 20). Compliance requirements relaxed for ReITs, InVITS, extends deadline for Risk management rules for liquid mutual funds; timeline for filing debenture and preference share issues extended (March 23). Raised the threshold of defaults needed to trigger insolvency proceedings to 10 million rupees from 100,000 rupees (March 24). Capital, Debt market services exempt from lockdown (March 25). Allows Top 100 listed Companies another month to comply with the requirements of holding Annual General Meeting (March 26). Shareholders allowed 45 more days to disclose their consolidated shareholding in Companies for the Financial year ending March 31 (March 27). Relaxed the recognition of default by local credit rating companies if a delay in payment of interest or principal is due; allows foreign portfolio investors relaxation in document processing (March 30). Eased rules to fast-track Rights Issues, and also extended the validity of its observations on public issues by six months from the date of expiry to help companies raise funds amid the coronavirus pandemic (April 17). India Market Capitalization Capital Market India’s Market Capitalization accounted for 75.8 % of its Nominal GDP in Dec 2019, compared with a percentage of 76.8 % in the previous year. The data reached an all-time high of 149.5 % in Dec 2007 and a record low of 45.9 % in Dec 2003. In the latest reports, SENSEX recorded a daily P/E ratio of 29.5 in Oct 2020. SENSEX closed at 38,067.9 points in Sep 2020. What was India’s Market Capitalization: % of GDP in 2019? Last 75.8% 2019 Previous 76.8% 2018 Minimum 45.90% 2003 Maximum 149.50% 2007 Unit Percentage (%) Frequency Yearly Range: 2003–2019 • Updated on 1st July, 2020 • Source: Census and Economic Information Center (CEIC Data) Conclusion Various positive factors characterize the Icelandic Financial System at the moment. Economic growth is slowly increasing and profitability of industries generally appears to be average even though the months of shutdown of some sectors. Defaults with credit institutions appear to have increased considerably. Asset prices have fallen but there seems to be little probability of a sudden general reversal this year. Credit institutions therefore do not appear to face any particular risk. The financial system would be better equipped to tackle sudden changes. Lastly “every cloud has a silver lining”, the world has recovered its economy from various past crisis and this will hopefully be no exception ∎∎∎

The Chartered Accountant Journal • Auditing • December 2020 Simplified Internal Controls for MSME CA. A. Hariharan The author is a member of the Institute. He can be reached at a_hariharan@outlook.com and eboard@icai.in. Citation: (2020) 69 CAJ 709–714 Pages 49–54 • Journal Page Nos. 709–714 Executive Perspective Corporate governance is a term often understood as applicable to large enterprises, within which deployment of internal controls is a crucial element. An effective internal control system plays a key part in helping a company achieve business objectives and financial success. It provides a framework using which employees can deploy sound controls over their areas of business and keep keen watch to ensure the long-term security of the business. In MSME, which typically are thin on resources with, quite often, ownership and management being the same, in the author’s opinion, components “Control Activities” and “Monitoring Activities” of the COSO framework become more critical. Read on… 1. The MSME Landscape and Structural Vulnerabilities Micro, Small and Medium Enterprises (MSME) constitute the backbone of our economy and have contributed significantly to the Indian economy in terms of employment generation and rural industrialisation. This sector has registered remarkable growth in scale of production, quantum of investment, and overall contribution to national GDP. Despite some infrastructural deficiencies and challenges like flow of institutional credit and inadequate market linkages, MSMEs have proved their mettle in all sectors. All MSMEs are spiritedly focusing on increasing the business. Key Challenges Faced by Indian MSMEs: Inappropriate opportunities of adequate capital and institutional credit; Poor and inadequate infrastructural facilities; Inadequate access and marketing linkages; Lack of skilled and qualified human resources; Limited access to new and modern technology; and Lack of specialized knowledge regarding complex regulatory and statutory practices. 2. The Foundational Imperative: Why MSMEs Need Internal Controls Keeping in mind the above challenges, the role of internal auditors and internal controls becomes more important for MSMEs who are always facing rigorous competition and lack of adequate best practices in the sector. For most MSMEs, the Board of Directors has to state in their report whether the company has adequate internal controls over financial reporting (ICFR) in place and whether these are operating effectively. This is more about assuring that financial statements are reported correctly. However, in a forward-looking sense, MSMEs should aim to build a robust internal controls system, which will address broader operational risks and controls and compliance and bring substantial business benefits. “Controls protect weak people from temptation, strong people from opportunity and innocent people from suspicion.” – Institute of Internal Auditors (IIA) Magazine, August 1977 The above quotation demonstrates that effective internal control plays a critical role not only in organisations, but also in the life of individuals. MSMEs with resource constraints are often discouraged from developing sound internal controls, making them vulnerable to fraud, financial errors and non-compliance. Internal controls play an important role in the prevention and detection of fraud and physical protection of assets, and moreover lead to high operational efficiency. Therefore, if there is a strong system of internal controls to monitor and run businesses, the prospect of bankruptcy reduces. Adapting the COSO 2013 Framework for MSMEs: The COSO framework (encompassing Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring Activities) is the universal guiding document for internal controls. While deployment of the full COSO framework may be complex, costly, and overkill for MSMEs, critical elements can certainly be adapted and deployed. Statutory Auditors can play a transformative role in assisting MSMEs to establish the requisite framework—spanning Risk Assessment and Control Activities—testing controls annually during the audit. Aligned with simpler accounting ERPs typically used by MSMEs (such as Tally, Zoho Books, etc.), select Control Activities fulfill statutory reporting requirements while boosting day-to-day operational efficiency. 3. Practical Control Activities Matrix for Trading & Manufacturing MSMEs The following matrix delineates pragmatic, high-impact Control Activities across seven core operational cycles. Modern ERP packages contain these features which can be quickly activated without prohibitive cost: Operational Area Control Activity Operational Notes & Risk Mitigation Purchasing Enable ERP software to perform an automated 3-way match of PO (purchase order), GR (goods received) and invoice. Monthly review of GR for which no invoice received, and of invoice received for which no GR made, should be performed. Unmatched items open for more than 30 days should be followed up and closed. Enables quicker processing and reduced processing errors. Ensures timely and complete accounting and reporting. Nowadays, this is also mandatory for seamless GST input tax credit (ITC) claims. Review changes to vendor master data independently on a regular basis (at least quarterly). Unauthorised changes to vendor details, particularly changes to bank account numbers, can be promptly detected. Review cost of key items (determined using the 80/20 Pareto rule), comparing with prior year and budget costs. Allows management to spot procurement errors, enable timely pricing adjustments, and maintain profitability at the individual item level. Inventory Perform cycle counts monthly or quarterly to ensure all inventory items are counted and reconciled to the ERP at least twice a year. Depending on the number of items, prioritisation can be established using the 80/20 rule. Typically, MSMEs perform inventory counting only annually as part of the Statutory Audit. Discrepancies between physical and book stock surface too late; perpetual cycle counting eliminates sudden year-end write-offs. An inventory ageing report should be prepared twice or thrice a year and reviewed for quality and obsolescence issues; assessment and approval of provisions for slow/non-moving inventory items should be documented. Enables timely inventory liquidation actions, discounting strategies, and prevents working capital lockup. Accounts Receivable (AR) On a monthly basis, an AR ageing report should be prepared, segregating receivable balances into: not yet due, currently due, and overdue. Overdue AR should be categorized into aging buckets of 30, 60, 90, and 180 days, or similar. Enables timely dunning, legal follow-ups, or stop-sale actions on defaulting buyers, dramatically reducing the risk of bad debts. All AR balances should be reviewed monthly for collectability and bad debt provisions established as appropriate. Coupled with Days Sales Outstanding (DSO) calculations, regular reviews directly improve operating cash flows and liquidity. Sales & Revenue Establish credit limits for customers. A simple credit scoring mechanism with highest weightage to payment history can be easily configured in most ERP systems. Other factors like customer reputation and sales staff opinion can be considered. Pre-empts unauthorized credit extensions and minimizes defaults and collection delays. To enable correct sales and inventory cutoff: Monthly review of goods invoiced but not shipped. Monthly review of goods shipped but not invoiced. Prevents unbilled dispatches, delayed receivables collections, and incorrect revenue recognition. Review product and customer pricing master data on a regular basis, and confirm that any pricing modifications are formally authorized. Enforces pricing policy integrity and detects rogue discounting or unauthorized billing rates. Cash & Banking Perform weekly or monthly bank reconciliations using automated ERP reconciliation tools. Unmatched items open for more than 30 days must be rigorously investigated and cleared. Provides early fraud detection, flags uncredited deposits, and triggers prompt recovery in cases of bounced customer cheques. Payroll Comparison of current month payroll totals to prior month totals is adequate when headcount is constant. If headcount fluctuates significantly, a detailed variance review must be performed. Identifies computational discrepancies, unapproved overtime, and phantom wage escalations. Independent review of changes to employee master data (new additions, salary revisions, bank account numbers). Critical for fraud prevention and eliminating “ghost employees” on payroll registers. Balance Sheet Accounts Reconciliation frequency should be tiered according to transaction volume and monetary value: High-activity or high-value accounts reconciled monthly; Other accounts reconciled at least quarterly; At a minimum, all balance sheet accounts reconciled twice a year; All reconciling differences cleared within 30 days. Facilitates timely collection or settlement of tender deposits, earnest money, rental advances, and statutory liabilities. Related-Party Accounts Regular, documented reconciliation of inter-company and related-party balances. Unmatched balances must be resolved immediately rather than parked in “suspense” accounts. With heightened statutory and regulatory focus on related-party transactions, this control prevents transfer pricing disputes and compliance breaches. 4. The “Traffic-Light” Monitoring System To keep internal control monitoring simple and intuitive for MSME owner-managers, a visual “traffic-light” dashboard can be deployed: Green Status Completed & Documented: The control activity has been executed on schedule, verified, and complete audit documentation is archived. Amber Status Completed, Inadequately Documented: The control was performed, but formal sign-offs, reconciliation trails, or supporting vouchers are missing. Red Status Overdue / Unperformed: The control should have been performed by now, but is unexecuted or only partially completed. Immediate management escalation required. Dual-Dimensional Assessment: Beyond tracking whether a control was performed on time, the dashboard evaluates operational effectiveness—for instance, noting where a bank reconciliation was completed on time, but long-outstanding unreconciled items have been left uninvestigated. 5. Remedial and Cost-Effective Measures for MSMEs MSMEs can establish robust internal control health without massive consulting budgets by institutionalizing seven basic disciplines: 1. Document Control: Enforcing strict sequential pre-numbering of purchase orders, sales invoices, goods dispatch notes, and cheques. Pre-numbering instantly highlights missing transactions or duplicate billings. 2. Timely Financial Account Reconciliations: Eliminating items dwelling in suspense or ledger accounts for long durations, which often mask accounting errors or misappropriations. 3. Independent Payroll Review and Sign-off: Prior to batch payment release, an independent review of payroll sheets verifies headcount, hourly rates, and deductions—a vital role where Chartered Accountants add immediate value. 4. Surprise Physical Checks of Petty Cash & Inventory: Conducting unannounced surprise physical counts of petty cash boxes and critical inventory items by an external professional expert to safeguard physical assets. 5. Segregation of Requisition and Payment Authorisation: Separating the personnel who raise purchase indents from those who approve purchase orders and disburse payments. 6. Monthly Business Credit Card Reconciliations: Enforcing strict monthly statement reconciliations where corporate cardholders must furnish valid commercial vouchers for all expenses. 7. Prior Approval for Staff Expense Claims: Mandating standardized expense claim forms with attached supporting invoices before reimbursing employee travel or entertaining costs. Strategic Business Dividends of Simple Controls: Apart from fulfilling statutory reporting requirements under the Companies Act, these pragmatic measures: Yield highly accurate, dependable financial statements; Enable data-driven commercial decisions using clean MIS reports; Substantially lower operational risks (bad debts, stock write-downs, inventory theft); Empower employee upskilling and operating confidence; Significantly enhance bank lender, credit rating, and investor confidence; and Provide the Board with the assurance necessary to expand business operations organically or inorganically. 6. Conclusion: Elevating MSMEs for ‘Make in India’ and Global Value Chains The MSME sector possesses immense potential to pushbutton accelerated industrial growth in our developing economy and is well-prepared to support national initiatives like ‘Make in India’. With a proactive risk management focus, internal audit moves beyond traditional retrospective checking to proactively mitigate risks before they escalate into business crises. Modern commerce is knowledge-intensive, creating complex operational processes and heightened risk exposures. A robust, simplified internal control framework strengthens MSME foundations, ensuring sustainable long-term development. The Transformative Role of Auditing Professionals: As India captures an expanding share of global trade and international supply chains, efficiently governed MSMEs are indispensable. Auditing professionals—both Internal and Statutory Auditors—can contribute immense strategic value by partnering with MSMEs to design, operate, and mature these simplified control frameworks.

The Chartered Accountant Journal • Corporate Governance • December 2020 Shareholders’ say on Executive Compensation is on Rise in India! Dr. Dipak Kumar Bhattacharyya The author is faculty in Xavier Institute of Management. He can be reached at eboard@icai.in. Citation: (2020) 69 CAJ 703–708 Pages 43–48 • Journal Page Nos. 703–708 Executive Perspective Executive compensation issue is one of the areas of concern for shareholders’ in India. High pay inequity in terms of median pay differences between the executives and non-executives, gender pay gap, are some of the dominant issues on executive compensation. Another emerging issue is shareholders’ exercise of voting power for or against executive compensation, as new Companies Act today require companies to disclose executive compensation details in proxy note. In India shareholders now can influence companies’ decisions on diversity in board, issues on re-appointment of directors, terms of stock options, environment issues, etc. All these are happening despite we do not have any Dodd Frank type Act in India. Read on… 1. Introduction: The Emerging Dynamics of ‘Say-on-Pay’ (SOP) in India Rising shareholders’ participation for exercising their ‘say-on-pay’ on executive compensation in India are attributable to regulatory and institutional support, and for proxy advisory firms. Proxy advisory firms’ can recommend their paid members (mostly institutional shareholders) to exercise their voting power either for or against the executive compensation, based on their analysis. They even make their basis of analysis transparent, so that shareholders’ can make an informed choice. However, recent filing of a defamation suit against a proxy advisory firm in India by century old company is likely to gag the spirit of corporate governance. This paper examines important issues on executive compensation, regulatory and institutional frameworks, and role of proxy advisory firms. Dark side of Indian corporate governance practices since 2007 onwards primarily revolves on rising executive compensation. Unlike in other countries, Indian companies whose shares are publicly traded are mostly closely held. Founder promoters and their families largely held majority stake of companies, which typically indicates concentrated ownerships. Obviously, these promoters and their family members represent in the Board of such companies, and key executive positions are also held by them. Minority shareholders hardly get opportunity to represent in the Board and vent their concerns on executive compensation in the annual general meetings. Moreover, in India, we do not have the US type Dodd Frank Act (2010) and consequent institutionalized approach on ‘say-on-pay’ (SOP). In line with the USA and other countries, some proxy advisory firms have been started in India to offer paid services to institutional shareholders on important agenda points of proxy notes, circulated by the companies before their annual general meeting. Recommending institutional shareholders to exercise their options on SOP pertaining to executive compensation has now started getting prominence. Initial response of corporate India on such move was not encouraging. But of-late adverse reporting on corporate governance issues, more particularly on rising executive compensation, are being taken seriously for several ramifications. Proxy advisory firms’ critical notes get widely published in social media, and this dampens the spirit of investors with immediate consequence of reduced share prices and falling market capitalisation. Worst affected in this process are majority shareholders, i.e., founder promoters and their families. Typical Syndromes of Executive Compensation Trends in India: Typical syndromes of executive compensation trend in India are: Delinking of executive compensation from companies’ performance; Widening gap between executive compensation and other employees; and Propensity to pay more to promoter-affiliate CEOs than non-promoter-affiliate CEOs, etc. In India, the term compensation and benefits are defined as remuneration as provided in The Companies Act, 2013, and The Income Tax Act, 1961. The Income Tax Act, 1961 is more inclusive, as it considers any perquisites (weather monetary or non-monetary) within the purview of remuneration, or compensation and benefits per se. Some reviews in the USA indicate growing awareness on corporate governance issues even encompassing environmental, social, climate change, board diversity, etc. In India also we find similar shift for institutional and partly for legal pressures. Companies in India have now started disclosing these aspects in their proxy notes. Again, the report says over all shareholders’ support for SOP in the USA is as high as 91% in year 2017, indicating companies growing awareness on rationalization of executive compensation. Another proxy season review of 2017 by Sullivan & Cromwell of the USA also captures shift on corporate governance issues on the above listed areas, rather than SOP alone. 2. Importance of Executive Compensation in India Balanced approach to executive compensation helps companies in attracting and retaining top talent and at the same time in protecting their interest, benefiting all the stakeholders. It fosters a win-win situation both in terms of increased value proposition for the executives and for the companies. Satisfied executives can perform better, and thus can help companies to achieve their business goals and strategies. The role of executive compensation is to attract and retain top talent at executive position and incentivize them in the way, so that they work for the benefit of the company, furthering the objectives of the company and increasing the business value. Balanced approach to executive compensation requires decision on balanced compensation-mix, suitably delineating fixed and variable components. Variable components are performance aligned with substantial focus on stock options with multiple riders. Typically, in India fixed component of executive compensation is substantially higher. In some organisations it is even more than fifty percent of total pay. Such culture of high fixed compensation even reflects on choosing the variables, which in most of the cases are used as top-ups. For example, Performance Related Pay (PRP) formula is so crafted in India, executives in general get a substantial portion of their total pay as incentives. Culture of putting pay at risk even for executives is yet to get institutionalized in India. Therefore, issues of executive compensation substantially affect the interests of other stakeholders, more particularly investors, whose dividend payouts decreases with the increase in executive compensation. Theoretically such syndrome signifies high agency costs in India, i.e., high cost of executive compensation. 3. Regulatory and Institutional Pressures Regulatory and institutional pressures on executive compensation in India are mounting. For example, The Companies Act, 2013 provide for maximum ceiling on executive compensation, restricting it to 11% of the net profit of the company in a year. When executive compensation exceeds prescribed ceiling, it needs shareholders’ approval in the general meeting. For compensation and benefits plan of CEOs, often companies go for disproportionately higher compensation. To check such propensity, The Companies Act in India also stipulated no individual compensation in a company can exceed 5% of the net profits. Similar cap on sitting fees of the directors (maximum ₹ 1 lakh per meeting), can also be construed as another important move in regulating executive compensation. “The Companies Act, 2013 provide for maximum ceiling on executive compensation, restricting it to 11% of the net profit of the company in a year. Regulatory provisions provided in The Indian Companies Act emphasized on linking executive compensation to performance, stipulating ceiling, based on company’s net worth. The Act further provides the need for shareholders’ approval, when companies decide to pay more, i.e., above the stipulated limit.” Mandatory Disclosures on Executive Compensation in Proxy Statements for Companies in India: Ratio of executive compensation in comparison with the median compensation of the employees; Percentage of increase in CEO compensation vis-à-vis Directors; Percentage increase in compensation of employees; Percentage increase of company’s performance vis-à-vis executive compensation; Variation in the share price of the company (when the company is listed) or net worth (when the company is not listed); Logic behind increase in executive compensation; and List of employees (NEOs, i.e., non-executive officers) whose compensation exceeds ₹ 60 lakhs per year, including specific mention when they are related to any Director or Manager. Regulatory provisions provided in The Indian Companies Act emphasized on linking executive compensation to performance, stipulating ceiling, based on company’s net worth. The Act further provides the need for shareholders’ approval, when companies decide to pay more, i.e., above the stipulated limit. Central Government approval is also necessary when companies pay more than the stipulated limit even when profits are adequate. But with slackened control, for obvious majority stake of owners’ promoters; such provisions are easily flouted. Hence concentrated ownership can be attributed as major reasons for undeterred growth of executive compensation, rising disparities, and affecting the interests of minority stakeholders. Security and Exchange Board of India’s (SEBI) analysis indicates even loss-making companies in India raised executive compensation and widened the gap between compensation of top executives and the median compensation of other employees. 4. Problems of Executive Compensation in India Unlike other countries, in India, we do not have any strict separation of control and ownership of companies. This is also valid in case of listed companies, which are by nature closely held. This indicates managerial positions, more particularly key managerial positions, are mostly staffed by friends and relatives of the promoters. Rising executive compensation for such category of employees obviously conflicts with other stakeholders’ interests. However, such trend is not in the USA and UK for typical distributed ownership of companies, i.e., typical nature of widely held companies. On the one hand agency problem in closely held companies in India does not impair the strategic and business interests, managers and owners being the same; but on the other hand, this affects other stakeholders’ interests, particularly minority shareholders. Although minority shareholders’ vote on SOP cannot be binding on companies, but their negative voting has far reaching implications. Some of the recent cases in India corroborate this. Another important aspect in executive compensation is choosing of appropriate yardstick for executive compensation. In true sense pay for performance as a model has been embraced by Indian companies. However, such practices are strictly enforced for executives who are not part of promoters’ families. For non-family executives, PRP serves as good incentive plan, and this can act as an effective instrument for attracting and retaining talent. From stakeholders’ point of view also PRP model does not invite any criticism, as companies can reduce compensation pay-outs for executives when they fail to perform. But real challenge here is appropriate selection of KPIs (key performance indicators). Both internationally and in India, it is observed that to dole out incentives to executives, performance standards are deliberately kept low. This has reduced the sanctity of PRP, and in India particularly it has now become an additional top-up. Good example is public sector enterprises in India. All executives get some PRP amount at the end of the year, more as additional benefits. Although it is also the responsibility of the compensation committee to guard against such malice, for companies in private sector also, both in India and in abroad, performance standards for PRP have often become an issue for discussion in shareholders’ meetings. Proxy advisory firms also, in many cases, through their critical analysis and research, recommended for negative voting. Despite this, in many companies’ shareholders still nurture their grievances on executive compensation. Other important aspect of executive compensation in India, and so also in abroad, is the propensity to dole out stock options with minimum riders. In most of the cases, other than the minimum period of vesting; executives can enjoy the benefit of stock options, without even committing them to performance achievement. Some good organisations, however, provide restricted stock units (RSUs) with multiple riders, one of which obviously is performance achievement at pre-determined level. However, more important factor is balanced compensation-mix strategies, sustaining maximum stress on variables. While deciding on variables, companies also emphasize on certain other KPIs like; executives’ value addition to the company, ethics and diversity inclusivity, commitment to social responsibility, etc. Therefore, weather executive compensation plan is win-win or not, depends on multiple factors. 5. Institutional and Regulatory Support To curb such trend, SEBI’s consultative paper on Review of Corporate Governance Norms in India suggested mandatory formation of compensation committee and emphasized on the need for enhanced disclosure of compensation policies. However, such disclosure requirements are still considered inadequate, mostly because these are open-ended in respect of valuation of perks and bonus payouts. Institutional Investors Advisory Services (IiAS) in India also recommend the need for compulsory shareholders’ voting on bonus payouts. Fixed components of executive compensation can however be put to vote right in the beginning. There exists immense need for standardized disclosure norms. SEBI’s proposals are in alignment with the Companies Act, 2013. Compensation Committee when constituted in line with SEBI’s proposal with representation of non-executive directors, including those who are independent directors, can enforce proper internal control on executive compensation, protecting the interests of different stakeholders. Such committee can ensure executive compensation and benefits are properly aligned with performance benchmarks and business goals of the companies and can ensure balance between fixed and variable pay of all directors. Regulatory bodies’ insistence on disclosure of the ratio of compensation to each director to the median employee compensation in the proxy note, when enforced diligently, can enforce external control on executive compensation. Thus, prima facie, undeterred increase in executive compensation in India is not attributable to poor regulatory framework; rather it is more for reluctance of Indian companies to comply with such requirements. Some good organisations, however, believe in designing executive compensation plan, linking with long-term growth, and make adequate disclosures on the same. One such case is Infosys, the IT major in India. Incidentally, this company recently faced temporary crisis on corporate governance norms, particularly on CEO and top C-level employees’ compensation issue, and that even persuaded the CEO to step down. The company, however, could quickly resolve the crisis, putting one time-tested old timer to CEO’s position, and subsequently hiring a new CEO. But we also have examples of many other organisations, both in India and abroad, which literally failed to ensure executive compensation in alignment with executives’ and companies’ performance and balancing different stakeholders’ interest. Another critical issue in executive compensation in India is wrong selection of performance criteria. Such wrong selection literally doles out incentives and bonus, in the name of PRP, even when companies suffer in terms of profitability. Widening pay disparity in terms of ratio of executive compensation to the median compensation of employees, poor disclosure on compensation practices and philosophies, etc. often create challenge to attract and retain talent, particularly in middle management level. 6. Good and Bad Side of Executive Compensation in India Shareholders’ Advisory services in India are strictly regulated by SEBI through Investment Advisors Regulations, 2013 and Research Analysts Regulations, 2014. The 2014 regulations detail the terms of references (duties, checks and balances) of proxy advisory firms. Recently, however, these firms are facing the challenge from corporate India. One such case is filing of a defamation suit against one shareholder’s advisory company, for their adverse report on non-executive chairman’s compensation of a widely held organisation, operating in India more than a century. This shareholder’s advisory company’s contention was non-executive Chairman, who was earlier CEO of the company, not only continuing control over the company, even disproportionately raised his compensation. Accordingly, this advisory company recommended shareholders to vote against this resolution on non-executive chairman’s compensation. Although in the AGM, this century old Indian company could get all their resolutions passed, the company feels such adverse reporting significantly affected their image before different stakeholders, resulting reduced stock prices and market capitalisation, hence they filed the suit. This was deterrent to the spirit of SOP, and so also a jolt to corporate governance in India, and ultimately benefitted those companies who wished to continue their age-old practices of paying high executive compensation, at the cost of sufferings of other stakeholders’. In India, we have also faced another recent crisis. But here the case is reverse. Here inadequate disclosure on corporate governance practices, including disclosure on executive and CEO’s compensation was challenged by erstwhile promoter, who hold only 1% stake of the company. The problem escalated to such a level; CEO had to resign. However, problems were resolved with the induction of one old-timer who is known for turning around the company during his days. Later on, however, company recruited a new CEO. Among closely held companies, we have also witnessed another crisis, in another century old conglomerate, which resulted in dismissal of the top boss. The crisis now however got resolved. A Forbes report indicates Indian CEOs get as high as 1200 times of the median pay of employees in their companies. Glaring example is a leading graphite electrode manufacturer in India. In this company the pay gap between CEO and the least paid employee is as high as 4045 times during the year 2019. This sets the world record in pay disparity. This compelled SEBI recently to insist companies to publish their compensation data. However, many companies are yet to comply. Among companies who are yet to comply even we have those who are ranked in top slots of market capitalisation. This contrasts with the US and UK figures. In the USA, such CEOs get maximum 335 times of the median pay of their employees. In Indian corporate world, there have been quite a few instances of shareholders voting against and resenting against executive compensations and stock options. Such moves of corporates have also not escaped the attention of press and social media. While on the other hand we have good example of voluntary acceptance of pay cut by chairman of Wipro for drop in profits of the company; by the chairman and non-executive director of Idea Cellular; by the CEO and CFO of Hindustan Unilever (HUL); by CEO of Cognizant; by CEO and COO of Snapdeal, etc. Globally also we see IBM’s CEO’s cut in annual compensation package. On the one hand, such compensation cut indicates growing awareness among Indian companies the need for balancing stakeholders’ interest, on the other hand such move benefits companies in most of the cases, for sustaining high market capitalisation. 7. Conclusion Shareholders’ voice on SOP in India primarily rests on the Companies Act, 2013 and its time to time updates. Another source is SEBI’s Listing Obligations and Disclosure Requirements Regulations, 2015. These are further supported by Securities Appellate Tribunal and finally the Supreme Court of India. Other than these legal and institutional pressures, in line with the USA and other developed countries, in India also we have handful of proxy advisory companies. Such companies influence on shareholders’ voting has started changing the paradigm of corporate governance and disclosure norms, including executive compensation. Institutional shareholders’ participation in voting has also increased significantly and will continue to increase in coming years. Review indicates companies in India were able to get majority of their proposed resolutions passed by the shareholders. Gender pay gap, policy on accelerated vesting of equity awards in case of change in control (CIC), stock retention and holding requirements, adoption and amendment of claw back policy, etc. are some of the executive compensation issues debated in shareholders’ meetings in India and abroad. Important steps in making executive compensation practices in India more transparent and meaningful with minimum shareholders’ dissent are: Alignment of CEO’s compensation with total shareholder return (TSR); Benchmarking with peer group companies; Rationalizing multiple of median compensation in relation to benchmarking with peer group companies; and Finally balancing between fixed and variable compensation. Other recommended steps are developing suitable performance metrics, some of which are like; return on invested capital (ROIC), return on assets (ROA), return on equity (ROE), earnings before interest, tax, depreciation and amortisation (EBITDA), growth in cash flow, and growth in revenue. In all such cases, benchmarking with peer group companies, and other companies that follow best compensation practices, are necessary.

The Chartered Accountant • Journal of ICAI December 2020 • Vol. 69 • No. 6 • pp. 55–59 (Journal pp. 715–719) Accounting Historical Development of Accounting CA. Isha Bansal The author is a member of the Institute. She can be reached at isha1310@gmail.com and eboard@icai.in. The historical backdrop of financial accounting is something other than an account of cash and numbers. It is the tale of the world’s advancement from bargaining and nearby exchange to a genuine worldwide economy. Many of the inference drawn about the History are through bookkeeping records. They mention to us what individuals ate, how landmarks were made, and how individuals made their living over a very long period sprawling thousands of years. Today, accountancy and finance makes conceivable the tremendous worldwide exchange and monetary development of nations all through the world. Read on… The soonest bookkeeping records date to 7500 BC, when urban areas in the Middle East exchanged coins made of mud for domesticated animals, grains, and texture. Papyrus scrolls dating from 3000 BC still holds true even today indicating budgetary and trade exchanges from old Egypt, including stock of property possessed by Pharaohs just as itemized assembling records and finance reports. It wasn’t until the primary century AD nonetheless, that the Greeks created arch of the main financial frameworks, bookkeeping records of which despite everything exist. In view of the information received from the historical backdrop of advancement and - the highlights of continuous turn of events, history of Accounting can sequentially be characterised into 4 phases, for example: (i) Developing stage (from a crude age to 1494 AD) (ii) Preanalytic stage (1495 – 1799) (iii) Advancement i.e. investigative stage (1800–1950) (iv) Modern age (1951-forward) Early Accounting History Bookkeeping has its underlying foundations in the most punctual history of development. With the ascent of horticulture and exchange, individuals required an approach to monitor their merchandise and of exchanges. Around 7500 B.C., Mesopotamians started utilising mud tokens to represent products, for example, creatures, devices, food things or units of grain. This helped proprietors monitor their property. Rather than checking heads of cattle or kilograms of grain each time one traded or consumed, individuals could just accept or take away tokens. Various shapes were utilised for various products. Around 4000 B.C., the Sumerians started setting these tokens in fixed dirt envelopes. Every token would be stepped into the earth of the outside of the envelope, so the proprietor would realize what number of tokens were inside, yet the tokens themselves would be shielded safe from altering or misfortune. This act of squeezing the tokens into the mud may have been the soonest beginning of composing. A couple hundred years after the fact, more mind-boggling tokens started to be utilised. These tokens had uncommon markings to indicate various units or sorts of merchandise. In India way back in fourth century BC, Vishnugupta Chanakya Kautilya, during the period of the Mauryan Empire, recognized the importance of accounting methods in economic enterprises. He wrote a manuscript similar to a book on financial management ‘Arthashasthra’ that contains few detailed aspects of maintaining books of accounts for a Sovereign State. Crude bookkeeping techniques crop up, in some structure, in most major early civic establishments. The Phoenicians utilized crude bookkeeping to monitor exchange. Early bookkeeping techniques likewise assumed a job in observing tax assessment and open spending among the Greeks, Romans and Egyptians. The progress to utilizing a semiformal bookkeeping framework in singular organisations, as an overall practice, goes back to the thirteenth century Italian republics, where a flourishing vendor class created. The records served the organisations in following cash paid and owed, just as the administration in gathering charges. History of Accounting – Computerised Systems UNIVAC – The Universe’s First Business PC The historical backdrop of the first modernised bookkeeping framework was likewise executed in 1953, when Arthur Anderson Consultancy (presently known as Accenture) was asked by General Electric to play out a robotized finance handling framework at their site in Louisville, Kentucky. The framework contained a UNIVAC 1 (Universal Automatic Computer-1) PC and printer. It was the main ever business PC framework at any point actualized and turned into the primary at any point automated bookkeeping framework. The first mechanised spreadsheet showed up in 1961 while the leading ‘the rack’ bookkeeping evaluating framework seemed seven years after the fact in 1968. The principal ever miniaturised scale PCs began showing up during the 1970s. From the start, these were costly, bulky and of restricted advantage to little or medium-sized organisations. Small scale PCs were seen just like an exorbitant pastime play with restricted advantages. Where smaller scale PCs were utilised in business, it was ordinarily utilised for word handling and word preparing frameworks sold for around GBP 10,000 per framework. Visicalc Rendition 1.0 In 1978, two things occurred ever. The Intel 8080 processor and the MOS 6502 processor opened altogether cutting down the expense of miniaturised scale PCs, Apple propelled the Apple II microcomputer, and the first monetarily accessible off-the-rack spreadsheet bundle was created: Visicalc. By advanced norms, obviously, Visicalc was fantastically unrefined, yet for its time it was progressive: just because you could complete monetary displaying utilizing a small-scale PC. Visicalc altered smaller scale PCs in the business commercial center and was a central cornerstone in the acknowledgment of small scale PCs for little and medium-sized organisations. By the mid-1980s, PCs turned into an ordinary piece of office life. The Apple II was supplanted by the IBM PC and the IBM PC, thus, was supplanted by Microsoft Windows, Visicalc was supplanted by Lotus 1-2-3 and afterward by Microsoft Excel. Bookkeeping programming bundles from ACT and SAGE began to be utilized, and by the last part of the 1990s, PCs were utilized for bookkeeping by most organisations in the UK. Modern Accounting Practices & Double-entry Bookkeeping The introduction of monetary bookkeeping as a regarded calling can be followed to the Italians during the Renaissance. Italian shippers during this time created broad exchanging courses across Europe, just as local financial focuses, where assets and products were painstakingly followed utilizing the principal arrangement of twofold passage accounting. This twofold section framework is yet the most usually utilized today. Double-entry Bookkeeping and Luca Pacioli All through quite a bit of antiquated history and the Middle Ages, bookkeeping stayed a genuinely basic issue. The appropriation of coinage implied that bookkeeping presently managed cash as opposed to genuine products, yet single-section accounting, much like that utilized in current check registers, was utilized to monitor cash traded, where it went and who owed what. During and after the Crusades, European exchange markets opened to Middle Eastern exchange, and European vendors, particularly in Genoa and Venice, turned out to be progressively affluent. They required a superior method to monitor a lot of cash and complex exchanges, and this prompted the advancement of twofold passage accounting. Twofold section accounting implies that every exchange is recorded at any rate twice, as a charge starting with one record and a credit then onto the next. In 1494, a Franciscan priest and mathematician named Luca Pacioli distributed a number related book named “Summa de arithmetica, geometria, proportione et proportionalita,” which contained a portrayal of twofold section bookkeeping. This book itemized the twofold passage accounting framework that was simply coming into utilisation during this period and has driven numerous to call Paciolo “The Father of Accounting.” As the book’s fame developed, twofold passage bookkeeping started to clear Europe, as vendors acknowledged what an important instrument it gave them for monitoring nitty gritty budgetary data. For this achievement, Luca Pacioli is frequently called the “Father of Accounting.” Still, now ever, bookkeeping was not yet a calling, but instead an augmentation of the administrative obligations of recorders, authorities, brokers and vendors. Modern Professional Accounting & GAAP Today, bookkeeping is a business unto itself, with a great many specialists worldwide and an enormous number of expert associations and authority rules to arrange practices and prerequisites. Especially in the United States during the Great Depression, requests were made for better normalisation of bookkeeping rehearses and a set code of expert rules. Today, the Generally Accepted Accounting Principles, or GAAP, presented the guidelines by which open bookkeepers must work together. Each nation has a comparative arrangement of bookkeeping rules. During the 1930’s, the United States government shaped a Committee on Accounting Principles with the objective of standardizing the bookkeeping cycle with the end goal of personal duty and budgetary revealing. The outcome was the creation and execution of GAAP, or Generally Accepted Accounting Principles. This “reading material” on the bookkeeping cycle is yet utilized all through a large portion of the Western world to normalize budgetary revealing. Key Elements of Accounting Theory There can be a contrast between bookkeeping hypothesis and practice. While bookkeeping methodology are conventional, bookkeeping hypothesis is more subjective. It is utilized as a guide for viable bookkeeping and monetary detailing, and that guide should be more adaptable than simple recipes permit. A significant part of bookkeeping hypothesis is handiness. All budget summaries ought to give significant data that can be utilized to settle on educated business choices. This additionally implies bookkeeping hypothesis ought to have the option to create viable budgetary data, in any event, when the legitimate condition changes. Bookkeeping hypothesis likewise expresses that all bookkeeping data ought to be pertinent, solid, equivalent and steady. This implies everything fiscal summaries require to be precise. They ought to likewise stick to the GAAP since this guarantees the arrangement of budget summaries will be both steady and equivalent to an organisation’s past financials, just as the financials of different organisations. Four Primary Assumptions in Accounting and Financial Theory Separate Business Entity: A business is independent from its proprietors. Going Concern: Avows the conviction that an organisation won’t fail however will keep on existing. Monetary Unit: All budget reports ought to be set up with dollar sums and not with different numbers like unit creation. Periodicity: All budget reports must be set up on a month to month or yearly premise. The Industrial Revolution and the Rise of Professional Accountancy With the approach of the Industrial Revolution in the late eighteenth and mid nineteenth hundred of years, bookkeeping formed further and made its mark as a calling. The act of cost bookkeeping got predominant as entrepreneurs and chiefs tried to see how best to make their organisations as cost productive as could reasonably be expected. Josiah Wedgwood, the proprietor of the popular English earthenware industrial facility, was among the first to utilise cost bookkeeping to comprehend what his organisation’s cash was being spent on and to kill pointless spending. With the new intricacy of bookkeeping and the expanding interest for exact accounting, individuals started to spend significant time in bookkeeping, accordingly, turning into the primary expert open bookkeepers. A portion of the bookkeeping firms that are yet in activity today were established during the nineteenth century. William Deloitte opened his firm in 1845, and Samuel Price and Edwin Waterhouse started their joint business in 1849. Specialised Accounting Because of the perplexing idea of the present financial framework, specific parts of bookkeeping have created. Notwithstanding customary money related bookkeeping, there are presently developments, for example, charge bookkeeping, the executives bookkeeping, lean bookkeeping, finance bookkeeping and venture bookkeeping. Proficient bookkeepers are required for these fields, as they include the requirement for an exhaustive and explicit comprehension of business needs and bookkeeping rehearses. Financial and Managerial Accounting The improvement of business entities (a business substance where various stakes can be purchased and possessed by investors), assembled more extensive crowds for bookkeeping data, as financial specialists without firsthand information on their tasks depended on records to give the applicable data. This improvement brought about a split of bookkeeping frameworks for inner (administrative bookkeeping) and outside (monetary bookkeeping) purposes, and hence likewise in bookkeeping and exposure guidelines and a developing requirement for autonomous confirmation of records by evaluators. Managerial bookkeeping gives data to individuals inside an association while the purposed of money related bookkeeping is to give data to those external an association, for example, investors or expected financial specialists. Budgetary bookkeeping is legally necessary while administrative bookkeeping isn’t. “Managerial bookkeeping gives data to individuals inside an association while the purposed of money related bookkeeping is to give data to those external an association, for example, investors or expected financial specialists. Budgetary bookkeeping is legally necessary while administrative bookkeeping isn’t.” Financial Accounting Today Today, there are many large firms. Furthermore, numerous smaller firms utilise bookkeepers who serve both, the partnerships and people searching for help with charges and bookkeeping. These experts likewise give a stamp of legitimacy to organisation budgetary records, offering consolation to financial specialists and examiners. Most bookkeepers today are needed to be affirmed at the State or neighborhood level, and this is valid all through most of the money related world. Accounting History Modern Day – Cloud Accounting & The Modern Accountant The latest change over the most recent couple of years is the change from independent bookkeeping bundles to cloud bookkeeping, where representatives, clerks and bookkeepers would all be able to get to the product online, simultaneously. This advancement permits individuals to telecommute and to impart data to the pertinent individuals. The Modern Accountant With industrialisation came a requirement for further developed bookkeeping techniques. The enormous organisations of the modern upheaval required cost bookkeeping frameworks that tended to outer wellsprings of fund like shareowners and should have been ready to figure and foresee benefits precisely, putting together their activities with respect to genuine budgetary information. The entirety of this called for committed bookkeeping experts who had profoundly concentrated information and could be trusted with incredible monetary obligation. Bookkeepers additionally should have been more mindful of authoritative changes than any time in recent memory. The idea of the sanctioned bookkeeper happened in mid-nineteenth century Scotland, after a gathering of bookkeepers appealed to Queen Victoria for a Royal Charter. It was the ideal opportunity for formal acknowledgment of the decency of the calling, and of the changed mastery of those working inside it. The Institute of Chartered Accountants was shaped in England and Wales towards the finish of the nineteenth century. Growing rapidly, it presented formal assessments for its individuals, with the assignments of Fellow Chartered Accountant (FCA) and Associate Chartered Accountant (ACA) getting exceptionally searched after. The Future of Accounting Similarly as with practically all callings, innovation is hugely affecting bookkeeping. An ongoing study by Accountancy Age asked 250 bookkeepers and clerks what the future may be for the calling. Three things were anticipated by those studied: Computerization of Routine Errands: First, that computerization will assume control over errands, for example, entering information, making electronic records and delivering receipts. Cloud Collaboration: Second, the cloud will change the manner in which experts store information, team up, and accumulate data. Advanced Software Innovations: Third, new advancements in bookkeeping programming will have an effect. While it might seem like these desperate expectations will get rid of the calling, 89 percent of bookkeepers studied said propels in innovation are a genuine positive for the bookkeeping calling and will make new open doors for them. 75 percent said the innovation they have begun utilising as of now has either made their activity simpler or saved time for them to focus on including further an incentive for customers. For instance, they would now be able to invest more energy investigating records and offering business guidance. Subsequently, this implies the abilities utilised by bookkeepers will never get futile or out of date. Those in the calling should keep on keeping up their abilities just as staying up to date with the new aptitudes that could be required by new devices. “As a bookkeeper, it is imperative to stay aware of improvements in bookkeeping innovation and ensure you can adjust. The human cerebrum and its forces of investigation as found in the field of bookkeeping are presently, and soon, thought to be a need by entrepreneurs around the world.” The human cerebrum and its forces of investigation as found in the field of bookkeeping are presently, and soon, thought to be a need by entrepreneurs around the world. ∎∎∎

The Chartered Accountant • Journal of ICAI December 2020 • Vol. 69 • No. 6 • pp. 60–62 (Journal pp. 720–722) International Taxation India Gears up for Digital Taxation CA. Sandeep K. Kamath The author is a member of the Institute. He can be reached at kamathsandeep360@gmail.com and eboard@icai.in. Among the several adversities caused by the Coronavirus outbreak, one positive development, which we cannot deny is that most businesses have gone digital from the traditional brick and mortar models. Yes! This transformation was happening in the recent past. However it has picked up pace now. Whether for survival or growth, businesses have chosen the digital route wherever possible. Small businesses too are now migrating to sell their products on the digital platforms. Thus value is now created digitally. The question is, are these transactions under the ambit of tax authorities? Are the tax authorities ready for Future India? What steps have the regulators taken? What are the challenges at every step? Read on… The outbreak of the Coronavirus has made it a necessity for most businesses to cut across the conventional commercial model and move to the digital ones in order to survive and stay ‘healthy’. Businesses have amplified the usage of information technology abruptly and hence, perform their business transactions with minimum physical presence in other jurisdictions. What is obvious to an accountant is that whenever there are any ‘commercial expansions’ strongly influenced by technology, taxation and regulations also need to be suitably modified. India has nearly 50.4 crore Internet users1 making it the second largest after China. Yet majority of the country’s tax law framework covers transactions occurring in a conventional business model. Thus country’s regulators need to modify and make laws to regulate those unprecedented transactions happening digitally or those traditional transactions which are now substituted by digital technology. In the recent financial years, the Union Government has made amendments to widen the tax base for including the following transactions: Royalty definition Significant Economic Presence (Section 9) Equalisation Levy The Finance Act, 2020 introduced some new provisions and amended some existing ones to ensure no value generated by the digital transactions remain out from being taxed. They are as follows: 1. Amplified Scope of Equalisation Levy Back in 2016, the government introduced the concept of ‘Equalisation levy’ (also referred to as Google Tax) which aimed to tax the gross consideration payable to a non-resident for online advertisement, providing digital advertising space or other services connected with online advertising to be taxed at the rate of 6%. The Indian government was successful to bag taxes over INR 560 - 590 crores in the form of equalisation levy during the financial year 2017-20182. However as per the latest amendment, with effect from 01st April, 2020 the scope of equalisation levy would be applicable to the consideration received/receivable by non-resident e-commerce operators from following activities: Online sale of goods owned by the e-commerce operator; Online provision of services by the e-commerce operator; Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or any combination of activities listed in the above; to a: Person resident in India. Non-resident under specified circumstances such as through sale of data collected from a person resident in India. Person who buys goods or services through an IP address located in India. The levy is fixed at 2% of the consideration receivable (or received) and the obligation of payment and compliance is on the non-resident recipient. What is noteworthy is that the existing 6% of the equalisation levy was on the Indian payer unlike the recent amendment which poses the requirement on the recipient. “What is noteworthy is that the existing 6% of the equalisation levy was on the Indian payer unlike the recent amendment which poses the requirement on the recipient.” No equalisation levy will be applicable if the e-commerce operators have PE within the country and the activities performed against which the consideration received pertain effectively to that PE. No levy will also be applicable in cases where the sales, turnover or gross receipts of the e-commerce operator from such e-commerce supply is less than INR 2 crores during the financial year. 2. Amendment to the Provisions for SEP (i.e. Nexus Rule) With effect from April 01, 2018 the government came up with the concept of ‘Significant Economic Presence’ (SEP). According to this, a non-resident would be subject to tax if it has any Significant Economic Presence in India. However, the government has not yet fixed the threshold limits viz the revenue limit as well as the number of users limit as this is expected to be fixed when the G20-OECD Reports are made available. This OECD framework is currently under discussion and likely available by the end of this year. In the Finance Bill 2020, insertions were made to the SEP rule has to include the following: Advertisement which targets a customer residing in India or who accesses advertisement through internet protocol (IP) address that is located in India. Sale of data collected from a person residing in India or who uses an IP address located in India. Sale of goods/services using data collected from a person residing in India or who uses IP address located in India. As explained above, due to the latency in the G20-OECD Report, the applicability of the SEP Provisions is postponed to Fiscal Year 2021-22 (AY 2022-23). Businesses now have time to evaluate the tax related exposures and consider if they can work on to reduce such exposures by restructuring their business model. “Due to the latency in the G20-OECD Report, the applicability of the SEP Provisions is postponed to Fiscal Year 2021-22 (AY 2022-23).” Thus the strategy of equalisation levy coupled with the concept of Significant Economic Presence are in track with the Organisation for Economic Cooperation and Development (OECD) BEPS Action 1 report of 2015, to tax those digital giants for revenues earned as explained above. 3. Withholding of Taxes (WHT) under Section 194-O The government also laid down the provisions of withholding tax on the sale of goods/provision of services through a digital platform under section 194-O. The e-commerce operator is required to withhold tax at 1% of the gross amount of sales/provision of services facilitated by it through its digital platform. In the case of non-availability of a permanent account number (Indian income tax registration) of the e-commerce participant, the withholding tax rate would be increased to 5% (Section 206AA). The e-commerce operator has to withhold tax at the time of credit or payment to the e-commerce participant, whichever is earlier. What is noteworthy is that the e-commerce operator is deemed to be the person responsible for paying to the e-commerce participant. Again defaulting in withholding of taxes by the e-commerce operator would make him liable to bear additional costs of interest, penalties and face consequences of disallowance. Considering the hardships of the small businessmen, it is suggested that no withholding may be necessary if the e-commerce participant is an individual/HUF and if the gross amount of sale of goods, services, or both during the previous year does not exceed Rs 5 lakh, provided the e-Commerce participant has furnished their PAN or Aadhaar. Also, no withholding may be necessary if the e-commerce participant is a non-resident. Please note that the withholding explained in the above is applicable with effect from October 01, 2020. What These Amendments Mean to India? In the recent past, the non-resident digital giants, despite not having any physical presence within India, managed to make huge chunks of revenue from the country, paying no taxes thereon by remaining outside the ambit of the tax framework. However, this will no longer be possible. Thus, companies with no physical presence but earning revenues from the country’s ‘person’ will no longer be able to evade taxes by moving to the tax heavens. By implementation of those explained above, huge additional revenues are likely to flow to the government in the near future. What These Mean to the World? The flip side however doesn’t look very well either. The country’s imposition of digital taxes may affect the commercial relationship between India and other countries especially the United States as most of these digital giants affected by the above ‘reside’ there. Domestically, the start-ups’ dependencies on these digital platforms is quite high and hence their growth may be adversely hit by the above implications. Administrative burden in terms of cost and money is inevitable. Lastly to survive the impact of the withholding or charge on their revenues, companies may prefer hiking up their prices and making it costly for domestic users to access such digital platforms. Conclusion By the above amendments, the Indian policy makers have firmly laid concrete step to move from conventional tax models to modern digitalized business processes. This welcome move of the government is in consensus with the modern buying behavior of the masses and hence, is making Indian Tax Structure future ready. More so in the current situation, it is helping the government to collect revenues despite undergoing the adverse economic conditions caused due to the Coronavirus outbreak. ∎∎∎ “This welcome move of the government is in consensus with the modern buying behavior of the masses and hence, is making Indian Tax Structure future ready.” References & Footnotes: 1. Times of India: For the first time India has more rural net users than urban (https://m.timesofindia.com/business/india-business/for-the-first-time-india-has-more-rural-net-users-than-urban/articleshow/75566025.cms) 2. The Hindu BusinessLine: Digital tax Centre rakes in moolah with equalisation levy (https://www.thehindubusinessline.com/economy/digital-tax-centre-rakes-in-moolah-with-equalisation-levy/article26260963.ece)

The Chartered Accountant Journal • International Taxation • December 2020 Contours of Availing Tax Treaty Benefits in India CA. Jay Kothari The author is a member of the Institute. He can be reached at jaykothari7@gmail.com and eboard@icai.in. Citation: (2020) 69 CAJ 723–726 Pages 63–66 • Journal Page Nos. 723–726 Executive Perspective Non-residents including foreign companies are taxed only in respect of income accrued or received or income deemed to accrue or arise or deemed to be received in India. Provisions of Indian tax law gives an option to non-residents to be governed by provisions of the tax treaty entered between India and country of which non-residents are tax residents. The article attempts to give a high level view with regards to availing tax treaty benefits in India. Read on to know more… 1. Essential Conditions for Availing Tax Treaty Benefits in India Non-residents can avail benefits of tax treaty, subject to satisfaction of following conditions: The non-residents should be able to obtain tax residency certificate/certificate of tax residency from income tax authorities of home country. It should be regarded as ‘person’ and ‘resident of contracting state’ as defined in the tax treaty. Tax treaties generally provides condition of beneficial ownership of income where benefits are claimed in respect of royalty, interest and dividend income. Affairs of non-residents should not be arranged with the primary purpose of obtaining tax treaty benefits. The non-residents should fulfill Limitation of Benefits (LoB) conditions as provided under respective tax treaties. It is to be noted that non-residents need to evaluate whether they are satisfying above conditions and are eligible to avail treaty benefits in order to avoid penal and other consequences provided under Indian tax laws. 2. Tax Regime for Non-Residents in India: Section 5 & Section 90 Taxation of non-residents in India are governed by Section 5 of the Income-tax Act, 1961 (‘the Act’). It provides that person residents outside India are chargeable to tax in India in respect of following income: Income received in India or deemed to be received in India; Income accruing or arising in India; Income deemed to accrue or arise in India Section 90(2) of the Act provides that non-residents may choose to be governed by the provisions of double tax avoidance agreement entered (‘the tax treaty’) by Indian government with the government of country outside India to the extent provisions of tax treaty are beneficial to the non-residents. Section 90(4) of the Act provides that non-residents shall not be entitled to claim treaty benefits unless they furnish tax residency certificate (‘TRC’) from income tax authorities of foreign country. Rule 21AB of the Income-tax Rules, 1962 provides that the non-residents are required to furnish following information in Form No.10F: Information Required in Form No. 10F (Rule 21AB): Status of the non-resident taxpayer (individual, company, firm etc.); Nationality (in case of an individual) or country or specified territory of incorporation or registration (in case of others); Tax Identification number of the non-residents in the home country; Period for which residential status as mentioned in TRC is applicable; Address of the non-resident. The non-resident may not be required to provide the above information to the extent the information is included in the TRC issued by income tax authorities. 3. Defining ‘Person’ and ‘Resident’ under Tax Treaties (Article 3 & Article 4) While TRC is the pre-requisite to claim benefits of tax treaty in India, Non-residents are also required to be regarded as person and resident of a contracting state as defined in Article 3 and Article 4 of the tax treaties. Most of the tax treaties define person as taxable unit as per the tax laws of respective contracting state (i.e. the state in which non-resident is taxpayer). Many Foreign Portfolio Investors are established as a Trust structure in India. There is a grey area whether these Trusts are regarded as person under tax treaties. In this relation, it is to be noted that some tax treaties specifically include Trust (like Canada, Hong Kong, etc.) in the definition of person. One may need to evaluate treaty benefit for Trust on the case to case basis. Article 4 of the tax treaty provides criteria to be regarded as resident of a contracting state. It provides that the person may be regarded as resident of the contracting state if such person is liable to tax in the contracting state by virtue of its incorporation, domicile, residence or any other similar criteria. Further, Article 4 provides that the person will not be treated as resident of any state because it is taxable in that state only in respect of income earned in that state. In simple words, any non-resident will not be regarded as Indian tax resident just because it pays tax in India for the India source income. Article 4 of the tax treaty also provide the tie breaker rules in case any person is regarded as tax resident in both the contracting states. Article 4 of certain tax treaties (such as United Kingdom, United States, etc.) also provides guidance in respect of tax transparent structures such as Trusts, Partnership Firms, etc. which are not liable to tax but their beneficiaries or partners are taxed in respect of income earned by trust/ partnership firms. Article 4 of the tax treaties provides that Trust and partnership would be regarded as resident of contracting state in case its beneficiaries or partners are subject to tax in the respective contracting state. 4. Conceptual Distinction: “Liable to Tax” vs. “Subject to Tax” One also need to understand that “liable to tax” and “subject to tax” are different terms and have different meanings attached to it. Subject to tax is a narrower concept and liable to tax is a wider concept. In this support, reference is invited to the AAR ruling in case of: General Electric Pension Trust [AAR No. 659 of 2005]: “it is worth pointing out that the phrase ‘liable to tax’ in Para (1) and the phrase ‘subject to tax’ in proviso (b) are not synonymous. If both were to be read as synonymous, proviso (b) would become otiose. Whereas para (1) speaks of being in the tax net, proviso is concerned with actual taxation” Union of India vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC): “Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of Article 4 of the DTAC what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words ‘liable to taxation’, but would have used some appropriate words like ‘pays tax’.” Liable to tax includes a situation where the entity is treated as taxable unit in the home country but not required to pay taxes by virtue of exemption available in the tax law. Example of the same in Indian context could be income of Mutual Funds are liable to tax in India. However, they do not pay taxes in India by virtue of exemption available under section 10 of the Act. While subject to tax is a situation where the entity is actually required to pay taxes in the home country. An issue could arise in broad based trusts (i.e. which has many beneficiaries) where all the beneficiaries are not subject to tax in the home country or in cases where beneficiaries are from multiple tax jurisdictions. It would also be administrative burden on the Trusts to maintain such data in respect of its beneficiaries to claim treaty benefits. There may be controversies in claiming treaty benefits in a case where structure of the entity is treated differently in the two contracting states. In other words, some entities could be treated as corporates in the home country but treated as Trust in other contracting state. This issue is quite litigious and there is not much guidance available in the Indian jurisprudence on this subject. One need to be mindful in claiming treaty benefits in such cases based on the risk appetite of the organisation. 5. Beneficial Ownership of Income & OECD Commentary Beneficial ownership of the income is another essential condition in case treaty benefit is claimed in respect of royalty, fees for technical services, dividend income. The term beneficial ownership is neither defined under the Act nor under tax treaties. In common parlance, the term beneficial ownership means unconditional right to enjoy fruits over income. OECD commentary provides that person is said to be a beneficial owner of the income where there is no legal or contractual obligation on such person to pass on the income received. OECD commentary further provides that person is said to be beneficial owner of the income where the person is not receiving such income in fiduciary capacity or as a custodian or administrator. As mentioned above, there are FPIs which are registered as Trust. As per the common law countries, Trust holds assets on behalf of the beneficiary and can’t be said to be beneficial owner of the income. However, OECD commentary provides that the term “beneficial ownership” mentioned in the tax treaty should not be interpreted in narrow sense. As far as these trusts does not have any legal or contractual obligation to pass on the income, it should be able to claim treaty benefit. Having said so, it is worthwhile to note that OECD commentary is not binding on the Indian tax authority and has persuasive value in deciding any matter in tax court. It is to be noted that beneficial ownership analysis is highly fact driven exercise. It would be interesting to discuss circular no. 786 of 2000 issued in the context of claiming treaty benefits for Mauritius entities. The circular provides that Tax residency certificate issued by Mauritius tax authorities is sufficient proof of residency and beneficial ownership. One may contend that in case any entity has TRC, it need not analyse beneficial ownership and residency condition. However, it is to be noted that this view is not free from litigation. 6. Anti-Avoidance Framework: GAAR and the Multilateral Instrument (MLI) After deliberations and many rounds of discussions, provisions of General Anti Avoidance Rules were made effective from 1st April 2017 in India. Indian tax authorities were provided powers to disregard the tax treaty benefit in case the transaction was sham or colorful transaction and one of the main purpose to enter into such transaction was to claim tax treaty benefit. Onus under GAAR: Under GAAR provisions, onus to prove that purpose of entering into transaction was not for the purpose of claiming treaty benefit is on the tax payer claiming the treaty benefit. Accordingly, any transactions entered with the motive of claiming tax treaty would be under the close scrutiny of the tax authorities. It is to be noted that these are quite early days of GAAR in India. It would be to interesting to see how Indian tax authorities would interpret provisions of GAAR as they are known to be taking aggressive positions. The Multilateral Convention (MLI) & BEPS: In November 2016, over 100 jurisdictions (including India) concluded negotiations on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. Taxpayer claiming treaty benefit would also have to keep in mind MLI provisions which are applicable from 1 April 2020 for tax treaties entered by India with many countries (such as UK, Singapore, Japan, etc.). 7. Conclusion and Practical Takeaways Tax authorities around the world are looking tax treaty benefits claimed by any entity with the mindset that purpose of entering into any transaction is treaty shopping. However, income tax authorities are also not to be blamed completely as there were many instances in past where transactions were made with the intent to circumvent the income tax liability of the entity. Having said so, while interpreting tax treaties, tax authorities needs to keep in mind the economic benefit that the country derives from such foreign investments. To summarise above discussion, entity claiming treaty benefit in India needs to keep in mind that: It is an entity eligible to avail treaty benefits in India (i.e. person and resident of contracting states as defined in Article 3 and 4 of the respective tax treaties which is issued certificate of residence from the income tax authorities of home country). It should be beneficial owner of the income, in case it is claiming treaty benefit in respect of royalty, interest, fees for technical services, dividend, etc. Its main or one of the main purpose is not avail treaty benefits which it needs to prove with the robust documentation to the tax authorities. Strategic Summary: Availing tax treaty relief in India requires meticulous adherence to both procedural documentation (TRC, Form 10F) and substantive economic criteria (‘liable to tax’ status, beneficial ownership, and commercial justification under GAAR and MLI). Robust documentation remains the taxpayer’s foremost safeguard against aggressive scrutiny.

The Chartered Accountant • Journal of ICAI December 2020 • Vol. 69 • No. 6 • pp. 67–73 (Journal pp. 727–733) International Taxation Equalisation Levy: Effective Implementation of New Provisions CA. Parth Panchal The author is a member of the Institute. He can be reached at parthpanchal.ind@gmail.com and eboard@icai.in. A surge is observed in digital transactions over the globe where businesses are conducted without restraint to any geographical boundaries. Where developing a mechanism to tax such transactions has remained a brain storming exercise for every country, the revenue department in India expanded scope of equalisation levy in Finance Act, 2020 to collect tax on certain e-commerce transactions and has recently amended Equalisation Levy Rules in October, 2020. The new provisions have resulted in posing certain challenges before business entities for effective implementation. Read on.... Background In the world of digital transformation, digital presence is increasing where entities are supplying goods or services globally without having any physical presence. In India, digital market has expanded immensely over the years. The growth of digital market is getting strong impetus as a consequence of COVID-19 pandemic. In digital transactions, it becomes difficult for revenue authorities to clearly establish relationship between the source of income, and the geographical location on the one hand, and profit allocation for levy of income tax, on the other. The Organization for Economic Co-operation and Development (OECD) proposed certain options in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1 to resolve this challenge of levy of income tax. OECD made proposals only for foreign trade providers, without a PE, making remote sale of digital goods or services to the in-country customers. The three tax proposals made by OECD were as under: Corporate Income Tax: Corporate income tax on the net income generated from remote sales of digital goods and services to in-country customers by a foreign producer without a PE to which such income is attributed under current law. Equalisation Levy: Equalisation Levy (“excise tax”) imposed on the remote sales of digital goods and services to in-country customers by the providers. Withholding Tax: Withholding tax on the gross receipts from the remote sale of digital goods and services to in-country customers by the providers. (Reference: Part E.1 of Annex E of Action 1:2015 Final Report of OECD/G20 BEPS Project. Available at: https://read.oecd.org/10.1787/9789264241046-en) Subsequently, the CBDT introduced concept of Equalisation Levy (hereinafter referred as ‘EL’) in Chapter VIII of Finance Act, 2016. Equalisation Rules, 2016 were also notified in May 2020. Equalisation Levy is governed by Finance Act, 2016 and it is not a part of Income Tax Act, 1961. Scope of Equalisation Levy (EL) EL is applicable only to consideration received or receivable by NR. EL is not applicable to residents. When EL was introduced in 2016, it was charged on Specified Services provided by NR. Later, Finance Act, 2020 introduced charge of EL on E-commerce transactions undertaken by NR e-commerce operators. The amendment was not proposed in Finance Bill, 2020 presented on 01st February, 2020, but was directly introduced in Finance Act, 2020. So, this new provision came as a surprise for the taxpayers. ‘Specified Services’ covers online advertisement including provision of digital space, facility or service for online advertisement, or any other service as notified by Central Government. However, no service is yet notified for this purpose. ‘E-commerce transactions’ covers following types of e-commerce supply or services: (a) Online sale of goods or provision of services owned by e-commerce operator; (b) Facilitation by e-commerce operator for online sale of goods or services. ‘E-commerce operator’ means a NR who may own, operate or manage digital or electronic facility or platform for online supply of goods or services. If e-commerce operator hires and manages online platform instead of owning it, then also e-commerce transactions shall attract levy. Applicability of EL: Comparative Analysis The provisions for the applicability of EL in both types of transactions are as under: Particulars Specified Services E-commerce Transactions Effective Date 01st June, 2016 01st April, 2020 NR which are covered Provider of digital space or service for online advertisement E-commerce operator NR which are not covered NR-supplier who has PE in India and transaction is connected with such PE NR-supplier who has PE in India and transaction is connected with such PE Applicability If payer of consideration is – (a) Resident person in India (b) NR having PE in India If e-commerce transaction is made or facilitated to – (a) Resident person in India (b) Person who buys goods or services using IP address located in India (c) NR (Refer Note 1 below) Non-Applicability Transaction is not for purpose of business or profession Transaction is for specified services covered u/s 165 Threshold Limit Annual limit of INR 1 lakh for every service recipient Turnover of NR-supplier from all e-commerce transactions is less than INR 2 crores Rate of EL 6% on consideration amount 2% on consideration amount Onus for payment of EL Payer of consideration NR-supplier Payment period Monthly Quarterly Date of payment 7th day of subsequent month 7th day after end of quarter (31st March for last quarter) Note 1: EL is applicable if e-commerce supply of goods or services made or facilitated to NR is for: (a) Sale of advertisement targeting customer resident in India or customer accessing advertisement through IP address located in India; (b) Sale of data collected from a resident in India or person using IP address located in India. In case of Specified Services, onus for collection and payment of levy is on service recipient. This provision has a drawback that NR are not willing to take burden of EL and recipient ultimately bears such EL which results in additional costs to service recipients. In case of e-commerce transactions, onus of payment is on NR e-commerce operator only. If EL is not charged on any transaction of specified service or e-commerce supply or services as per provisions of Finance Act, 2016, then provisions of Income Tax Act shall continue to apply. Other Relevant Provisions of Equalisation Levy Other relevant provisions of EL which are common for both transactions are: Section Particulars Provision 167 Furnishing of Annual Statement in Form No. 1 30th June after end of FY [Rule 5(2) of Equalisation Rules, 2016] 167 Furnishing of Belated or Revised Annual Statement Within two years from end of FY in which transactions were undertaken (Revised Statement can be filed only if Original Statement is timely filed) 170 Interest on delayed payment of EL 1% per month or part thereof from month of liability till month of payment 171 (a) Penalty on failure of deduction of EL on specified services (b) Penalty on failure to pay EL in e-commerce transactions Equal amount of EL 171 Penalty on failure to pay EL deducted for specified services INR 1000 per day from date of failure till date of payment (Maximum upto amount of levy) 172 Penalty on late furnishing of Annual Statement INR 100 per day from date of failure till date of payment 174 Appeal before CIT (Appeals) against penalty order of AO Within 30 days from receipt of order (in Form No. 3 as per Rule 8) 175 Appeal before Appellate Tribunal against appellate order u/s 174 Within 60 days from receipt of order (in Form No. 4 as per Rule 9) 176 Punishment for furnishing false statement Imprisonment upto three years and fine Impact under Income Tax Act and DTAA 1. Income Exemption u/s 10(50) In order to avoid double taxation, section 10(50) is introduced from 01-06-2016, to exempt the income arising from specified services on which EL is charged. Finance Act, 2020 amended this provision to also exempt income arising from e-commerce transactions on or after 01st April, 2021. EL shall be charged on e-commerce transactions from FY 2020-21. However, exemption u/s 10(50) is provided from FY 2021-22. Therefore, e-commerce transactions shall be covered under EL and Income-tax both for FY 2020-21, which results in double taxation. It seems that there is an error in this provision and CBDT may come up with clarification soon. Another issue is as income from such transactions is exempt in hands of NR, revenue authorities may take a view that related expenses shall not be allowed u/s 14A of the Act and determination of such expenses would be a challenging task. 2. Non-deduction of Expense u/s 40(a)(ib) As per section 40(a)(ib), if EL is not deducted on specified services or deducted but not paid before due date of filing return of income, consideration shall not be allowed as deduction to assessee. However, such deduction shall be allowed in the year when EL is actually deducted and paid. 3. TDS u/s 194-O Finance Act, 2020 introduced new TDS provision u/s 194-O. Although this TDS provision does not have direct nexus with Equalisation Levy, but as it is linked with e-commerce transactions, provisions are discussed herewith: Particulars Provision Effective Date 01st October, 2020 Deductor E-commerce operator (a person who owns, operates or manages digital or electronic facility of platform for e-commerce) Deductee E-commerce participant (Resident person selling goods or services, including digital products through e-commerce operator) Transaction Sale of goods or services of e-commerce participant facilitated by e-commerce operator. Services shall include fee for technical services and professional services as defined u/s 194J Point of deduction At the time of credit of amount of sale to account of e-commerce participant, or at the time of payment, whichever is earlier Rate of tax 1% on gross amount of sales or services (0.75% for FY 2020-21) PAN is not furnished TDS rate of 5% shall be applicable u/s 206AA Deeming provision If any payment is made by purchaser directly to e-commerce participant, it shall be deemed that such payment is made by e-commerce operator to e-commerce participant Exclusive provision If TDS is made u/s 194-O, then TDS under any other section is not applicable. This exclusion is not applicable for hosting advertisements or provision of services not covered u/s 194-O Threshold Limit Annual gross sales up to INR 5 lakhs for deductee being Individual / HUF and has also provided PAN / Aadhar Number to deductor 4. Significant Economic Presence (SEP) u/s 9 Finance Act, 2019 introduced Explanation 2A to section 9(1)(i). As per the provision, ‘significant economic presence’ of NR in India shall constitute ‘business connection’ in India. It also defined SEP for this purpose. Finance Act, 2020 amended the definition of SEP. The application of the provision is deferred till FY 2021-22. 5. Insertion of Explanation 3A to Section 9(1)(i) Finance Act, 2020 inserted an Explanation 3A to section 9(1)(i) which shall be effective from FY 2020-21. The provision is reproduced herewith – “For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from– (i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India; (ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and (iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.” There seems to be an overlapping of provisions of Explanation 3A and EL. The charge of EL is an exclusive provision irrespective of its taxability under Income Tax Act. So, if any transaction gets covered under provisions of Equalisation Levy, it shall attract charge of EL and NR shall be able to take benefit of exemption u/s 10(50). In case of specified services, EL is not applicable if recipient is NR and does not have PE in India. In such cases, if transactions gets covered under clause (i) of Explanation 3A, then it shall be governed by the provisions of Income Tax Act, 1961. 6. Double Taxation Avoidance Agreements (DTAA) As Equalisation Levy is not a part of Income Tax Act, 1961 benefit of DTAA is not available for such EL in India. However, NR may receive Foreign Tax Credit of such EL in its resident country according to its domestic taxation law. Manner of Charge and Payment in Case of Specified Services Specified Services shall cover online advertising of products or services on portals like Google, Facebook, etc. As per section 165, 6% EL is charged on amount of consideration received or receivable by such NR. As per section 166 of the Act, the service recipient shall deduct EL from consideration paid or payable. This provision is similar to TDS in Income Tax. On failure to deduct EL, the service recipient shall have to pay EL from its own pocket. After deduction of EL, the payer shall pay net amount of consideration. NR-supplier shall not get any credit of such EL. Example 1: Specified Services (Facebook Ad by ABC Ltd.) ABC Ltd. advertises its products on Facebook portal. Facebook Ireland Limited is NR and therefore Equalisation Levy shall be applicable. Facebook Ireland Limited raises invoice of 1500 USD on 29-05-2020. Forex rate for USD is INR 75.62 on 29-05-2020. Therefore, consideration shall be INR 113,430 on which EL @ 6% shall be charged. ABC Ltd. shall deduct EL of INR 6,806 and pay net consideration of INR 106,624. ABC Ltd. shall have to deposit EL of INR 6,806 by 07-06-2020. If consideration is paid before issue of invoice, EL shall be charged on amount of consideration so paid. However, when consideration is paid after issue of invoice, charge and payment of EL cannot be postponed till actual payment of consideration. (i) Concept of Grossing Up Usually Indian entities pay full amount of consideration to NR and EL is borne by them. The issue arises is whether the consideration paid shall be grossed up for charge of EL or not, i.e. it shall be deemed that consideration is paid after deduction of EL. In example 1, if ABC Ltd. pays entire consideration amount of INR 113,430 to Facebook, then as per concept of grossing up, it shall be assumed that consideration is paid after deduction of EL @ 6%. Accordingly grossed up consideration amount shall be INR 120,670 (113,430 / 94%). Therefore, EL shall be INR 7,240 (6% on INR 120,670). There are two views for grossing up of consideration. One view is that as per section 166, EL is to be deducted and net consideration is to be paid. So, for any consideration paid or payable, it shall be construed to be paid after deduction of EL. Further as per section 165, EL is charged on consideration received or receivable. Therefore, grossing up is required to be done on consideration amount and EL is to be charged accordingly. Another view is that EL is direct charge on consideration. The provisions of deduction of EL is merely a procedural mechanism developed for collection of EL. As per section 166(2) of Finance Act, 2016, if assessee fails to deduct EL, then he is liable to pay such EL from his own pocket. Further under Income Tax Act, 1961, while computing TDS in such cases, there is specific provision u/s 195A for grossing up. However, there is no such provision in Chapter VIII of Finance Act, 2016. Prima facie, both views appear correct. However, the first view of grossing up of consideration seems to be more appropriate as section 166 clearly specifies to deduct EL from consideration paid or payable. However, any clarification from CBDT would be appreciated. (ii) Impact of Foreign Exchange Fluctuation EL is charged as soon as consideration is paid or becomes payable. In example 1, consideration becomes payable on 29-05-2020 which may become due depending upon the credit period. Once consideration becomes payable, EL is charged on consideration and it becomes payable by assessee. Such EL becomes due to be paid by 7th day of subsequent month. EL is to be computed by considering forex rate on the date of consideration becoming payable, i.e. 29-05-2020 in example 1. Some assesses compute EL by applying forex rate on the last day of month for aggregate of all transactions made during the month which is also, appears, an acceptable practice. Hence, forex rate on the date of actual payment is immaterial. Manner of Charge and Payment in Case of E-Commerce Transactions E-commerce transactions shall cover online sale of goods or provision of services by any NR through its portal. It also covers facilitation by NR for such transactions by any person. For example, Amazon, Alibaba, Netflix, Trivago, etc. shall be covered under this provision. As per 165A, EL @ 2% is charged on consideration received or receivable by NR from online supply made or facilitated by it. As per section 166A, NR e-commerce operator shall be liable for deposit of EL. There is no liability for any payment or compliance on the buyer, recipient or consumer in this case. Consequently, question of grossing up shall not arise. EL shall be charged on consideration amount, i.e. before addition of indirect taxes. Further NR shall not collect EL from its recipient of goods or services. EL is a direct charge on consideration amount and has to borne by NR. Example 2: Sale of Goods by NR Portal (PQR Inc.) PQR Inc., is a foreign company which is engaged in sale of shoes. Shoes are also sold online by PQR Inc. through its portal. Mr. X, Indian resident purchases shoes online from portal of PQR Inc. for 50 USD on 29-05-2020. Forex rate for USD is INR 75.62 on 29-05-2020. Therefore, amount of consideration received or receivable by NR-supplier shall INR 3,781. Now Equalisation Levy shall be charged @ 6%, which shall be INR 227. Example 3: Platform Facilitation by NR Marketplace (MNC Inc.) MNC Inc., is a foreign company which owns platform for online sale of goods. It also facilitates platform to other sellers who list their products on its portal for sale. MNC Inc. undertakes transactions in two ways: Case 1: MNC Inc. sales goods itself which are purchased by them from different domestic sellers. In such case, MNC Inc. issues invoice and receives consideration from customer. If MNC Inc. sold watch for INR 5000 plus GST, then EL @ 2% shall be charged on INR 5000 which shall be INR 100. Case 2: JKL Limited lists laptops for sale on portal of MNC Inc. and shall invoice to customer for sale. There can be two scenarios here. One is that MNC Inc. shall receive entire consideration from customer and after deduction of its commission, net amount shall be paid to JKL Limited. Another scenario shall be where JKL Limited receives consideration from customer and pays commission to MNC Inc. In both the scenarios, EL shall be charged on consideration received from customer. Actual sales price of laptop is INR 60,000. But JKL Limited and MNC Inc. provides discount of INR 4,000 and INR 1,000 respectively. So laptop is sold for net amount of INR 55,000 plus GST. EL shall be charged @ 2% on INR 55,000 which shall be INR 1,100. In example 2 and 3, NR e-commerce operator shall have to deposit EL by 07-07-2020 and provisions for date of charge of EL and forex fluctuations shall remain same as discussed in case of Specified Services above. Challenges in Case of E-Commerce Transactions There are various challenges in implementation of provision for charge of EL on ecommerce transactions: In the case where goods are sold by NR e-commerce operator to any resident person, EL is charged. In such cases, resident person shall not be required to withhold tax u/s 195 as such income shall be exempt u/s 10(50). The issue is that by what means NR e-commerce operator shall be able to identify that the buyer is resident or non-resident. Similarly, resident person shall also be required to identify that e-commerce operator is NR and has paid EL. To overcome this situation, if resident person deducts tax u/s 195, then NR e-commerce operator may have to claim refund of such TDS. If any declaration is provided for residential status by e-commerce operator to buyer and vice versa, then the question arises is that whether such declaration would hold good in assessment proceedings or not. Further EL is to be charged if recipient who buys goods or services is using IP address located in India. Hence, if any person, whether resident or non-resident uses IP address which is not located in India, then EL is not to be charged. In order to comply with such provision, NR e-commerce operator has to develop their systems in a way to track location of IP address through which transaction has taken place, keep a record of the same, bifurcate transactions on the basis of IP address and compute EL at the end of every quarter. When e-commerce operator and recipient both are NR, EL is charged only for two specific circumstances as stated earlier. In such cases, also, both the above issues shall arise. Concluding Remarks The government is keen to tax the income of business running through digital platforms. Although the expansion of Equalisation Levy may result in increase of tax revenue, but its implementation has several challenges. Further the amendment in section 9 of Income Tax Act also has a larger impact. When the economies of world and India are already struggling over COVID-19 pandemic period, EL results in additional tax burden to NR. As huge revenues are earned by e-commerce operator in India, it would be interesting to see the figures of year-end revenue collection of Equalisation Levy. With complexities revolving around new provisions of EL, reports also suggests that certain foreign e-commerce operators are evaluating to establish entities in India. It is expected that revenue authority may reconsider contentious aspects of Equalisation Levy and amendments to section 9 and issue necessary amendments or clarifications in this regard. ∎∎∎

ICAI Journal Focus • Technology & Digital Ledger Systems A Journey of Triple-Entry Accounting An Exploratory Historical Analysis of Triple-Entry Accounting: From Yuji Ijiri’s Momentum Bookkeeping (1975/1982) and William McCarthy’s REA Ontology (1982) to Todd Boyle’s Webledgers, Ian Grigg’s Cryptographic Receipts (2005), and Modern Blockchain/Smart Contract Architectures Authors: Gourav Surana & Dr. Shurveer S. Bhanawat (Department of Accountancy & Business Statistics, MLSU Udaipur) Citation: The Chartered Accountant, Vol. 69, No. 6, December 2020, pp. 83–88 (Journal pp. 743–748) Subject: Technology / Distributed Ledger Technology & Accounting Information Systems Executive Summary & Research Foundations “The double-entry accounting principals have used for more than 600 years, with the emergence of the blockchain technology another concept is revived that is triple-entry accounting. This paper conducts an exploratory study on the development of triple-entry accounting concept from its early form to its present incarnation with blockchain technology. We found that there are two different schools of thought for this concept: (i) Yuji Ijiri Momentum Accounting, and (ii) William McCarthy REA ontology. We found that most of the work on triple-entry accounting is going on these days; they have followed the McCarthy REA ontology school of thought. Blockchain Technology based triple-entry accounting will fundamentally improve accounting when properly implemented. Read on…” 1. Introduction The history of accounting is thousands of year old, and it can trace from the ancient civilisations. Luca Pacioli (1494) is known as the father of modern double-entry accounting system. Accounting continuously has developed according to the requirements of the business. Due to increase complexity in economic transactions, some specialised branches (such as Cost Accounting, Financial Accounting, Management Accounting) of accounting have developed. People were doing accounting centuries before computers, at that time accountant used paper-based ledger books or registers to record transactions. Machines started to play a role in the 1800s, and then the invention of computers transformed accounting. After the development of the internet and informatics, the way business entities operate has changed these days. As a result, the cloud accounting and other modern accounting methods emerged, but the double-entry accounting principle always is base for these methods. Yuji Ijiri was the first person who thought ahead of double-entry accounting. In 1975, he introduced a new concept in accounting that is called momentum accounting. Ijiri originally coined the term ‘triple-entry’ in 1982. He proposed that in addition to the debit and credit entries, the third layer of entries called trebit should be included with a new set of accounts to explain changes of income. The idea of such a ‘triple-entry bookkeeping’ system is to provide more momentum financial information to the organisation, enabling better strategic decision making. Ijiri’s ideas were forgotten (Ibañez et al., 2020). In 2005, Ian Grigg published a working paper on his website titled ‘Triple-entry accounting’. He gave a different meaning to this term from Ijiri’s momentum accounting definition. Grigg proposed a new concept, ‘the receipt is the transaction’, wherein a digitally signed receipt backed up by financial cryptograph between two parties can be viewed by a shared third entry to avoid transaction fraud and reduce redundancies in the internal recording. Most of the recent studies believe in this story. Still, this story gives an incomplete presentation of the historical development due to under-appreciation of the work of William McCarthy and Todd Boyle. To fill this gap, we conduct an exploratory study on the development of triple-entry accounting concept from its early form to its present incarnation with blockchain technology. Some of the important milestones in the development of triple-entry accounting concept has been shown in Figure 1. This paper structured in the following manner: Firstly, we discuss the work of Yuji Ijiri, William E. McCarthy, Todd Boyle, and Ian Grigg. Next, we discuss the present incarnation of triple-entry accounting with blockchain technology. Finally, we conclude with some general considerations. Figure 1: Important Milestones in the Development of Triple-Entry Accounting Concept (1975–2020) Year Milestone & Core Contribution in Triple-Entry Evolution 1975 • Yuji Ijiri published “Theory of Accounting Measurement”. 1982 • Yuji Ijiri published “Triple Entry Bookkeeping and Accounting Momentum”. • William McCarthy published “The REA Accounting Model”. 1997 • Todd Boyle sets up GL Dialtone and being to develop Triple Entry Accounting (TEA). • Between 1999 and 2003, Boyle documented his idea on TEA, GLs, PTRs, and STRs. • Boyle met with Haugen, who introduced Boyle to McCarthy & REA and reviews Boyle’s papers. 2005 • Ian Grigg documented TEA (Triple Entry Accounting) with cryptographically signed signed receipts. • Boyle commented on Grigg’s paper. 2008 • Satoshi Nakamoto, pseudonym for unknown person or group, published a White paper that introduce’s Bitcoin the first appliction of Blockchain Technology. 2013 • Vitalik Buterin released a white paper on what would became the “Ethereum Project” – a Blockchain Technology based platform with ability to build decentralised application (Smart Contract). • Blockchain Technology was begining to separated from Bitcoin. 2014 • Jason Tyra wrote a short article in Bitcoin Magazine suggesting that using Bitcoin infrastructure, the triple-entry concept proposed by Grigg (2005) is possible and likely to be highly desirable for both companies and external users. 2016 • Deloitte published a brief article suggesting that the implementation of triple-entry accounting with blockchain will be a game-changer in accounting. • Balanc3 started in 2015 and described its goal in 2016 in a video titled ‘Balanc3- Triple Entry Accounting’. 2017 • Jun Dai and Miklos A. Vasarhelyi proposed a blockchain technology-based accounting system, which incorporates ERP and blockchain technology. • Yunsen Wang & Alexander Kogan introduced a blockchain technology-based AIS (Accounting Information System), including a prototype implementation. • Request Network and bBiller, according to their white papers they aim to develop triple-entry accounting with blockchain based on the spirit of triple-entry framework of Grigg (2005). 2018 • Ledgerium aims to create a decentralised ledger through a triple-entry accounting system with smart contracts. Ledgerium calls this third ledger Luca™, a cloud-based platform that records payment transactions between parties utilising blockchain. • zkLedger is a public ledger with permissioned blockchains and zero-knowledge proofs developed by the MIT Media Lab, US. 2019 • Pacio represents an attempt to build a blockchain network that will facilitate global triple-entry accounting applications. 2020 • Hans Weigand, Ivars Blums, and Joot de Kruijiff introduced a blockchain technology-based shared ledger solution formally and compliant with Financial Reporting Standards. 2. Triple-Entry Bookkeeping by Yuji Ijiri Yuji Ijiri is the first person who thought beyond the principle of double-entry accounting. In 1975, Ijiri came up with the idea of momentum accounting. The term triple-entry bookkeeping originates from a paper written in 1982 by Professor Yuji Ijiri. This paper entitled “Triple-entry bookkeeping and momentum Income” which further elaborated its corresponding framework in his paper entitled “A framework for Triple-entry bookkeeping” in 1986. Ijiri (1986) argued that the double-entry records the changes in wealth through the income earned during a period, but it might be possible that every one-dollar income is earned at a different rate. He referred to the definition of momentum, ‘the rate at which income is earned’, which is measured in monetary units per period, such as dollars per month (Cai, 2019). To record the changes in momentum, he also developed a third-level entry for a new set of trebit accounts. Fundamentally, Yuji’s work extended the accounting equations from two layers to three layers, coinciding with the derivative/integration concept in mathematics as follows: ΔAssetst = Incomet = ∫T=1T=t+n Momentum(n) where n is the time period. Figure 2 – Adopted from (Cai, 2019) “Triple-entry accounting explains how accounting information can facilitate the decision making of internal management.” Ijiri (1986) triple-entry accounting explains how accounting information can facilitate the decision making of internal management. His work is intellectually engaging but its real implementation is very difficult that’s why his work has been strongly criticised. This framework is not currently being used. However, “Whether or not it is worth pursuing this alternative accounting method is still open to debate” (Cai, 2019). 3. Resource-Event-Agent (REA) by William E. McCarthy Almost simultaneously with Yuji Ijiri, William E. McCarthy proposed a generalised accounting model that contained the concepts of Resources, Events, Agents (REA) (McCarthy, 1982). REA is a model of how an accounting system could be re-engineered for the computer age. Note that this system was at the antipodes of Ijiri’s work to broaden the concepts of double-entry accounting, but it still took some insights from the early work of Ijiri (Ibañez et al., 2020). McCarthy system would not have debits, credits, and accounts because he deemed inessential for an accounting system. He argued for recording detailed transaction histories which may be viewed by a different class of users. REA treats the accounting system as a virtual representation of the real business. In other words, it creates computer objects that represent real-world-business objects directly. REA is an ontology in the computer science context. The actual items included in the REA model are as following: Resources – goods, services or money Events – business transactions or agreements that affect resources Agent – people or other human agencies (other companies, firms, etc.) Due to the absence of granularity in the data processed, McCarthy criticised conventional double-entry systems. He proposed that this will be solved by the REA accounting model, more effective and precise, and describe the agents involved, as well as other information while maintaining the duality of economic activities (Causal relationship). Later in his criticism, the absence of automation is also included. 4. GL Dialtone and Triple-Entry Accounting by Todd Boyle Todd Boyle is an American accountant, moved back from Japan in 1997 and set up his company General Ledger (GL) Dialtone in Seattle. GL Dialtone is an accounting solution company specialised in webledgers. He started work with his idea of shared ledger independently. One of McCarthy’s collaborators, Robert Haugen1, later influenced him (Ibañez et al., 2020). Haugen introduced Boyle to McCarthy’s REA, and later with McCarthy himself, which had an impact in Boyle’s ideas (Ibañez et al., 2020). 1 Robert Haugen was a software developer for a Core Components ebXML standards team, who had worked in applying McCarthy’s REA to supply chain Internet-based collaboration. Boyle believed that McCarthy’s work was very high level and ahead of its time. His webledger architecture implemented McCarthy’s economic ontology, and ISO 15944-42 and form “Shared Transaction Repository” (STR) or “Public Transaction Repository” (PTR) based on “single-entry hosted transaction tables”. “There would thus be a single, shared, network-centric record but, because of the triple-signed structure, the system would be called triple-entry accounting” (Ibañez et al., 2020). He developed an REA-based economic ontology to describe this system conceptually. 2 ISO/IEC 15944-4 provides the ontological specification with an enumeration of the primitive and derived data classes needed in a full economic exchange. These definitions are specified with class diagrams from the Unified Modelling Language (UML). This is the declarative component of the Open-edi Business Transaction Ontology (OeBTO). 5. Triple Entry Accounting by Ian Grigg Ian Grigg is a renowned financial cryptographer who has been active in this area since 1995. He developed Ricardian Contract3 with Gray Howland in 1996. Grigg continuously developed this idea and began to document his work in 2000. Around 2004, he realised that his design could have fundamental implications for accounting, and he pursued further development of his ideas, which he called Triple-Entry Accounting. 3 A Ricardian Contract: a human and machine-readable text file containing both the terms of an agreement and the program executing the financial instrument, such that they are the same thing, i.e. “the issue is a contract”. This concept, which Grigg later continued to develop, It was an effort to replicate how, in a shared data environment within firms, economic activities are reported internally within firms via an ERP framework (Ibañez et al., 2020). It involved a shared receipt for the transactions common to two parties, and a trusted third party limited to signing, timestamping and ordering. It originated the genesis of triple-entry. It is not just a receipt, but it is a transaction itself because it holds all the relevant information. An important point to note that at the time of conceptualising his ideas, he was unware of Boyle’s work. The draft of the resulting paper was circulated in June 2005. Boyle saw this paper and found both of them were working on the same idea, so he commented on Grigg’s paper. Inside his article, Grigg incorporated and implemented many of Boyle’s ideas (Ibañez et al., 2020). However, he credited Boyle as an author in his draft, but this was later withdrawn at Boyle’s request due to wider differences between their views. Grigg proposed a solution to deal with accidental errors and fraud in accounting. He believes that companies should not be the sole recorders of business transactions. A third-party, cryptographically secured entry can record for transactions between entities at the same time. In this third entry, the debit registered by one entity is the credit recorded by the counterparty. Initially, this idea is known as triple-entry accounting, but later he pointed out that were triple-entry bookkeeping (Grigg, 2019). Grigg linked the standard accounting techniques with financial cryptography in the form of the signed receipt. In consequence, a more resilient system which will reduce costs and providing reliable accounting is being formed. 6. Blockchain Technology based Triple-Entry Accounting “With the emergence Bitcoin and its underlying blockchain protocol showed that a neutral trusted third party could be replaced by blockchain so the third shared ledger can be decentralised, immutable, secure and automated using blockchain.” In 2005, Ian Grigg proposed a great concept to record business transactions. At that time, it was unclear who would act as the neutral, trusted third party to maintain the shared ledger. With the emergence of Bitcoin and its underlying blockchain protocol showed that a neutral trusted third party could be replaced by blockchain so the third shared ledger can be decentralised, immutable, secure and automated using blockchain (Ibañez et al., 2020). In 2014, Jason Tyra in his short article suggesting that using Bitcoin infrastructure, triple-entry accounting concept proposed by Grigg (2005) is possible and likely to be highly desirable for both companies and their stakeholders (Tyra, 2014). Since then, discussion on blockchain technology-based triple-entry accounting has been started. Despite the potential of triple-entry accounting framework in accounting, there is a limited amount of study done in the academic world (Cai, 2019). Some of the well-cited studies are as follows: Dai & Vasarhelyi (2017) proposed a blockchain technology-based accounting system, and this study incorporates ERP and blockchain technology. Wang & Kogan (2018) introduced a blockchain technology-based AIS (Accounting Information System), including a prototype implementation. The main concern addressed in their paper is the tension between the protection of private data and the desirable public blockchain transparency. The authors solve the tension using Zero-Knowledge Proof encryption. Weigand et al. (2020) introduced a blockchain technology-based shared ledger solution formally and compliant with Financial Reporting Standards. They build on the COFRIS accounting ontology (grounded on UFO) and the blockchain ontology developed by De Kruijff & Weigand that distinguishes between a Datalogical level, an Infological and an Essential (conceptual) level. This study shows how both consensual and enterprise-specific parts of the business exchange transaction can be represented concisely and how this pattern can be implemented using Smart Contracts. Also there was an article in HBR titled “The blockchain will do to financial system, what internet did to media” by Jiochi Ito, Neha Narula and Robleh Ali, where they clearly mentioned that the financial system is ripe for disruption and with blockchain we will see a lot of impact in the near future. Prominent players of the accounting industry move much faster than academia (Karajovic et al., 2019). Several start-up projects such as Request Network, Balanc3, Fizcal, bBiller, Ledgerium, zkLedger, and Pacio have been established to implement the concept of triple-entry accounting. 7. Discussion and Conclusion “The industry has already seen the promising potential of blockchain technology-based accounting. Blockchain Technology based triple-entry accounting will fundamentally improve accounting when properly implemented.” From the above discussion, we can say that triple-entry accounting has two schools of thought: (i) Yuji Ijiri Momentum Accounting, and (ii) William McCarthy REA ontology. Ijiri Momentum Accounting, since it was affected by the physical elements of force and momentum, its fundamental objective was to transfer the focus of management to a company’s future growth rather than the current situation (Gröblacher & Mizdraković, 2019). At present day, it remains subject to researchers’ concerns. Indeed, the structural similarities between REA and TEA are not only a coincidence but a natural outcome, given the historical effect of the former on the latter (Ibañez et al., 2020). We found that most of the work on TEA, going on these days, followed the McCarthy REA school of thought. Todd Boyle had given a new dimension to REA ontology, and with the help of Boyle ideas, Ian Grigg had given the concept of the triple-entry accounting. But at that time its implementation was not possible. With the emergence of blockchain technology, it seems that its application has become possible. The industry has already seen the promising potential of blockchain technology-based accounting. Blockchain Technology based triple-entry accounting will fundamentally improve accounting when properly implemented. Although blockchain technology-based triple-entry accounting could disrupt the entire accounting industry, academic as well as industrial research on the subject is extremely limited in India. We hope that a better understanding of the historical development of triple-entry accounting concept stimulates the academic debate among accounting professionals. ███ References Cai, C. W. (2019). Triple-entry accounting with blockchain: How far have we come? Accounting and Finance. https://doi.org/10.1111/acfi.12556 Dai, J., & Vasarhelyi, M. A. (2017). Toward blockchain-based accounting and assurance. Journal of Information Systems, 31(3), 5–21. https://doi.org/10.2308/isys-51804 Grigg, I. (2005). Triple Entry Accounting. In Systemics, Inc. (pp. 1–15). Grigg, I. (2019). It’s tricky - term was coined 20 years ago by Todd Boyle. My paper was 2004 or so. Oddly - paper is “3E accounting” but techniques are really bookkeeping. Yuri Ijiri’s work was originally labelled “triple entry bookkeeping” but is really accounting… Confu. https://twitter.com/iang_fc/status/1182660123245928449 Grigg Gröblacher, M., & Mizdraković, V. (2019). Triple - Entry Bookkeeping: History and Benefits of the Concept. Proceedings of the 6th International Scientific Conference - FINIZ 2019, 58–61. https://doi.org/10.15308/finiz-2019-58-61 Ibañez, J. I., Bayer, C. N., Tasca, P., & Xu, J. (2020). REA, Triple-Entry Accounting and Blockchain: Converging Paths to Shared Ledger Systems. In papers.ssrn.com. papers.ssrn.com. https://doi.org/10.2139/ssrn.3602207 Karajovic, M., Kim, H. M., & Laskowski, M. (2019). Thinking Outside the Block: Projected Phases of Blockchain Integration in the Accounting Industry. Australian Accounting Review, 29(2), 319–330. https://doi.org/10.1111/auar.12280 McCarthy, W. E. (1982). The REA Accounting Model - A Generalised Framework for Accounting Systems in a Shared Data Environment. The Accounting Review, 57(3), 554–578. https://doi.org/8 Tyra, J. M. (2014). Triple Entry Bookkeeping With Bitcoin. Bitcoin Magazine. https://bitcoinmagazine.com/articles/triple-entry-bookkeeping-bitcoin-1392069656 Wang, Y., & Kogan, A. (2018). Designing confidentiality-preserving Blockchain-based transaction processing systems. International Journal of Accounting Information Systems, 30(xxxx), 1–18. https://doi.org/10.1016/j.accinf.2018.06.001 Weigand, H., Blums, I., & Kruijff, J. de. (2020). Shared Ledger Accounting — Implementing the Economic Exchange pattern. Information Systems, 90, 101437. https://doi.org/10.1016/j.is.201

ICAI Journal Focus • Industry Specific • Global Business Services (GBS) Chartered Accountants Carving a Niche in Shared Services From Efficiency Catalysts to Value Creators: Exploring the Strategic Evolution of Global Business Services (GBS), Capability Centres, CFO Mindset Shift, Technological Transformations, and Expanding Leadership Roles for Chartered Accountants Author: CA. Manoj Kalra (Member of ICAI • manojkalra@rediffmail.com) Citation: The Chartered Accountant, Vol. 69, No. 6, December 2020, pp. 89–96 (Journal pp. 749–756) Focus Area: GBS Transformation, Digital Enablement, Controllership & Strategic Finance Executive Overview “There has never been a better time for chartered accountants to carve a niche for themselves in shared services. Over the years, finance leaders with a technological bent of mind have led the evolution of shared services. Not very long ago, shared service organisations were efficiency catalysts - handling back-office operations to cut down costs and optimise operations. Today, shared services have evolved to lend a competitive advantage to globally networked enterprises. The transition was accelerated amid the COVID-19 pandemic. By aligning cross-functional initiatives with business objectives, chartered accountants can not only navigate their way through balance sheets but also help augment organisational capabilities. Read on…” 1. Introduction & The GBS Landscape Over the last two decades, businesses across sectors have transitioned to a Global Business Services (GBS) model of shared services. At the beginning of this evolution, the intent was to cut down costs and optimise operations. Gradually, however, GBS organisations began to manage end-to-end services for customers and stakeholders across the value chain, cutting across silos and legacy functions. Over time, the role of shared services has witnessed a remarkable evolution. From leading projects across finance, HR, IT and other critical areas, it has moved to spearheading strategic transformative experiences with data-driven insights. As more and more business leaders recognise the value of GBS, shared services share a seat at the table with other stakeholders. GBS leaders are actively assuming responsibilities in strategic business decisions about organisational objectives, capacity building and investments in talent and technology. Thus, business units have more time and resources at their disposal to drive innovative solutions, forge partnerships and dive deep into customer insights. “Business units have more time and resources at their disposal to drive innovative solutions, forge partnerships and dive deep into customer insights.” Aligning cross-functional initiatives with business objectives, chartered accountants in GBS not only navigate their way through balance sheets but also help augment organisational capabilities across functions. 2. Then and Now: The Evolution of Shared Services In the late 1990s, when the concept of offshoring gained widespread momentum, the focus of finance professionals in the GBS space was more around bookkeeping, resource allocation, compliance, and control. Over the years, however, shared services have evolved from efficiency drivers to value creators, as shown in Figure 1. Today, shared service organisations are no longer outsourcing partners. Rather, they are capability centres that deliver cross-functional excellence. They offer value to the customer and act as a competitive advantage for the enterprise. This evolution has triggered transformative changes around three core areas: Value delivery: The definition of critical finance functions has also changed significantly. Two decades ago, only accounts payable and reconciliation were handled by shared service professionals. Now, that spectrum is all-encompassing, including complex, business-critical operations like controllership and taxation. Business partnership: Digitisation of processes and the availability of new-age technologies are also paving the way for higher stakes. The modern-day financial controller is a true business partner and has a significant impact on management decisions. Therefore, the role entails inputs with high management relevance, such as commenting on reports and formulating strategies to reimagine the value proposition. Role of CA professionals: The responsibilities of chartered accountants have also witnessed a paradigm shift. For instance, instead of processing accounts payables, they now focus on managing end-to-end, source-to-pay processing, exploring new revenue channels and creating Intellectual Property (IP). From generating financial reports and providing active decision-making support to leveraging technologies for real-time analysis and forecasting, CA professionals have transformed into finance business partners of C-suite leaders. The transformation has further intensified amid COVID-19, accentuating the role of GBS in today’s fast-changing business landscape. Figure 1: How are Finance Leaders Leading the Evolution of Shared Services ← From Efficiency Catalysts ——————————————————————— To Value Creators → Dimension Offshore Centres Captive Centres Capability Centres Stewardship in GBS Operational Framework Offshore centres Captive centres Capability centres Stewardship in Global Business Services (GBS) Goals To prove the concept Cost arbitrage and optimised profitability Business impact Enterprise excellence Focus Areas • Process set-up • Finance management • Quality and compliance + • Process efficiency • Capacity build-up + • Process change • Improved customer segmentation + • Business model innovation • Identification of profit opportunities for the future Role Perceptions Administrators Technical experts Partner to business leaders and CXOs Change agents and operational performance drivers Key Stakeholders Regulatory bodies +Leadership, MANCOM and BOD +Investors, Customers +Communities, extended ecosystem of stakeholders 3. Evolution of the Mindset of CFO & The 4 Ps Model In the early days of GBS, CFOs across industries were involved in high-stakes decisions around CAPEX, long-term growth, and indictments. Over the years, the industry has also witnessed changes in their responsibilities and priorities, as shown in Figure 2. In terms of customer engagement, C-suite priorities have transformed from broad segmentation and one-time pricing to microtargeting and dynamic, real-time pricing. On the other hand, among operations and processes, the focus has shifted from incremental cost reductions to agile straight-through processing. Technological advancements have augmented this evolution further, reshaping CFO priorities from planning CAPEX investments to strategising variable costs for on-demand cloud solution. “The modern-day financial controller is a true business partner and has a significant impact on management decisions. Therefore, the role entails inputs with high management relevance, such as commenting on reports and formulating strategies to reimagine the value proposition.” Figure 2: 4 Ps – Evolving from Finance Function to Priorities Remodelled by the forces of 2R (Risk & Regulations) + 2D (Digital & Data) The 4 Ps Traditional Finance Function Focus Modern Transformative Priorities Pricing Segmentation Broad and unilateral Micro-targeted, dynamic & real-time Process Focus Cost-reduction and optimisation Straight-through processes Stakeholder Perceptions Retrospective analysis (periodic surveys, focus group discussions) Predictive analysis (big data, instant feedback) Resource Planning Capex infrastructure Variable investments for on-demand solutions The role of CFOs is continually being remoulded under the influence of four fundamental forces: digital, data, risk and regulations. As organisations continue to be disrupted by globalisation and innovative technologies, the finance function will increasingly tilt towards becoming a data-driven decision centre, rather than one that merely does bookkeeping (balances the books). For finance leaders to successfully navigate the challenges of an evolving ecosystem, they must not only rethink their competencies but also surround themselves with the right people and amplify collaborative teamwork. 4. COVID-19 and Shared Services: The Catalyst of Change Across the globe, the outbreak of COVID-19 created widespread repercussions for the economy at large. For every organisation, business continuity became the foremost priority. In the face of unprecedented uncertainties, companies both large and small had to pivot and stand resilient. Business executives have had no choice but to let go of long-standing beliefs and reimagine the traditional ways of work. The upside: strategies that were conceived as quick fixes to stay afloat while navigating unchartered territories are now the exponents of success in the new normal. For instance, the location-based operating model of shared services had been honed for decades. But the pandemic rendered it obsolete within a couple of weeks, upending the dependency on physical infrastructure and sparking off a quick transition to remote work. Thanks to technology, GBS organisations have been able to deliver productivity, even while embracing a wave of changes. Resilience: During the onset of COVID-19, shared service leaders had to empower the entire workforce to work from home rapidly. While several businesses had the majority of their employees working remotely during lockdowns, industry leaders were focused on not only gearing up for the short term but also sustaining the arrangements for the long run. Efficiency: Unsurprisingly, companies that had already built an agile infrastructure were quick to adapt. Collaboration tools, seamless business processes and lean delivery mechanisms ensured business continuity against odds. Employee wellbeing: An empathy-led leadership approach became the need of the hour for GBS executives. Keeping the knowledge workforce engaged, motivated and productive was a key requisite of efficiency, as employees adjusted to remote environments and the inherent challenges. 5. Reimagining the New Normal As companies prepare to bounce back stronger on the road to economic recovery, many of these strategies will continue to be the backbone of service delivery. The need to move fast and offer disruptive products and services has opened up an array of opportunities across four key areas: Remote work: Traditionally, onsite presence was perceived as a fundamental prerequisite for most roles within shared services. However, the pandemic has proved that unnecessary in an overwhelming number of cases, thus forcing GBS leaders to reassess roles and responsibilities across the spectrum. Job functions, complexities, infrastructure requirements and feasibilities have witnessed a complete makeover. Borderless talent: A remote workforce offers several opportunities to rethink the talent landscape. When employees can work from anywhere, location independence opens up employment opportunities for a wider pool of professionals. For instance, companies can hire finance professionals from Tier 2 and Tier 3 cities, instead of restricting their search to metropolitan cities alone. Flexibility and coaching: Several organisations have already embraced flexible work hours to balance the demand and availability of professionals, thus driving higher utilisation and productivity during peak hours. GBS leaders are also actively rolling out reskilling and upskilling programs, to retain, attract and develop a future-ready workforce. Agile processes: With an emphasis on lean teams and business processes that support data-driven decision-making, businesses are weaving in agility in the organisational fabric. Building on the success of distributed agile practices that were beneficial during the crisis, shared service functions are now gearing up for long-term resilience. Technology investments: As businesses gear up for the year ahead, the focus is now on leveraging secure, next-gen tools and technologies to facilitate hybrid working environments. Finance leaders in the GBS space are already allocating budgets to stay abreast of technologies, including cloud-based collaborative tools, Line of Business (LOB) applications like SAP or other ERP tools, and secure information exchange platforms. “A remote workforce offers several opportunities to rethink the talent landscape. When employees can work from anywhere, location independence opens up employment opportunities for a wider pool of professionals.” 6. A Roadmap for Tech-Driven Progress & RPA Adoption As the stewards of organisational resources in GBS, the onus of driving short-term and long-term infrastructural revamp lies on finance professionals. The rapid pace of digital disruption is pushing chartered accountants to the forefront of IT decisions, such as cloud computing, Robotic Process Automation (RPA), data analytics and visualisation platforms, Artificial Intelligence (AI), and Internet of Things (IoT). Technology is playing an increasingly important role in reimagining traditional finance roles. Many CFOs are now actively advocating technology adoption, to transform the nature of services delivered by GBS. “With an emphasis on lean teams and business processes that support data-driven decision-making, businesses are weaving in agility in the organisational fabric.” A case in point is that of RPA, which has transformed GBS into a competitive business function, underpinned by cost efficiency and agility: By freeing up employees from cumbersome, repetitive tasks, RPA is enabling people to pursue more thought-intensive challenges. In addition to remarkable improvements in the productivity and quality of shared services, RPA comes with the added advantage of round-the-clock scalability in line with demand-supply fluctuations, thus optimising the costs further. Figure 3: Benefits of Technology Adoption in Shared Services Higher Quality Elimination of manual errors, consistent execution, and superior service delivery. Simplified Governance & Compliance Built-in audit trails, automated controls, and seamless regulatory reporting. Enhanced Productivity Faster cycle times, straight-through processing, and higher employee output. Seamless Scalability Elastic expansion of capacity on demand without linear headcount growth. Reduced Costs Optimisation of operational expenditure through automation and lean structures. Improved Accuracy Precision reconciliation and standardisation across complex accounting books. 7. Driving Decision-Making with Technology Although one might argue that automation can result in job losses, the relationship between technology and talent is symbiotic. Technology is used in conjunction with human ingenuity to create maximum impact. Over the years, shared services have moved beyond process standardisation to a new paradigm, fortified by technologies such as: Real-time process monitoring: to proactively identify demand fluctuations and trigger appropriate actions. Big data analytics: to derive insights, predict probable outcomes and chart out an action plan. Mobility: to facilitate anywhere, anytime service delivery for stakeholders. As global hubs with follow-the-sun capabilities, shared services organisations are embracing rapid advancements in IoT, industrial analytics and AI to stay on the cutting edge of innovation. Against this backdrop, GBS leaders are increasingly involved in strengthening the technology backbone of the business. In the years ahead, the focus will shift towards a combination of cognitive methods and automation, through predictive analytics and Machine Learning (ML) models that generate invaluable real-time insights. Be it back-office processing operations or first-line customer service, leveraging next-gen technologies is the need of the hour. “Otherwise it will put new pressures on finance shared services professionals, who will require the mastery of team management and communication skills, along with technological expertise and high-value strategic planning techniques. It may become increasingly difficult to source the leaders of the future in shared services, because of the technology capability that will be needed.” Therefore, chartered accountants must equip themselves with the skillsets and mindset they need to redesign shared services for the digital era. 8. Career Outlook for Chartered Accountants In today’s environment, there is a very thin line between the role in a shared service centre and a financial controller: For professionals who aspire to make their career in GBS, it is essential to have a deeper understanding of the nature of business. One needs to be more technology savvy and proficient in technologies like cloud, RPA, and AI along with tools like SAP and Oracle ERPs. For financial controllers, it is all about walking the business through numbers. In contrast, for finance leaders in shared services, it’s about understanding the technologies that generate those numbers and interpreting those numbers. These attributes are what really differentiate someone who is working in a capability centre from a professional in a front-office role. Over the years, GBS has become an attractive career choice for chartered accountants. As the function matures, broadens its scope, and gets a seat at the top table, finance professionals are increasingly opting for roles in shared services, instead of traditionally preferred finance roles. The critical factors that are catalysing these changes are diverse: Being bullish on career growth: Not very long ago, financial shared services were often thought of as transaction factories of the organisation. This perception hindered the talent pool from opting for a career in GBS. The evolution of shared services, however, has uprooted those beliefs. Realising how they’re now creating value, chartered accountants are bullish on their career trajectory and long-term prospects in the field. A broad business view: Given that the scope of GBS extends beyond the conventional gamut of finance, finance professionals can gain a broader perspective of the business landscape. Working closely with business leaders across domains, roles in GBS offer a plethora of opportunities to hone cross-functional expertise. Working on challenging projects: As a hotbed of innovation, GBS has begun to deliver tangible business outcomes, thus offering more challenging work for chartered accountants. Besides, finance leaders in shared services now have a seat at the top table, thereby welding more corporate influence and shaping finance-driven organisational objectives. Opportunities to nurture wider skillsets: A key catalyst of growth in shared services is a broader skillset of corporate leadership. While finance mastery is one part of the equation, communicating with stakeholders, interacting with customers, leading large teams of hundreds of professionals and handling critical projects across functions are quintessential skills as well. Besides, finance professionals must also nurture a growth mindset, to continuously develop a wide range of skills and use them outside the function’s purview. Development of broader business skills: The opportunity that shared services roles afford for the development of broader business skills is profound. The perception that finance shared services is not much more than a “process factory” is not true. Shared services roles offer a superb opportunity to build a broader skills base. Shared services roles are a very good starting point for a finance career. In addition to finance skills, you get solid experience in process, so if you go back into the business, you can provide real value to the organisation. “Working in shared services actually could help the controller role better understand the business partner role, to start to understand commercial principles, start to move from being inwardly focused to externally focused.” 9. Career Challenges in Shared Services Despite the massive advantages, professionals navigating shared services must manage distinct structural challenges: Shared services are still not part of finance function career paths in many organisations: While all accepted that finance shared services is a superb function in which to pick up valuable finance and business skills, creating a multitude of career opportunities, the reality is that it is not yet embedded as part of a formal finance career path in a majority of organisations, especially at the critical senior level. The shared services brand is not always helpful: The perception of the shared services brand is not always helpful. There is a need to change the reputation, it is starting to improve. Culturally, it is not always seen by the finance community as a place they’d desire to work as part of their career plan. Location Challenges: Locating shared services operations in lower-cost locations – away from corporate or regional headquarters locations; means that shared services professionals have limited exposure and access to other parts of the business except at the very senior levels; advancement into the retained team can be problematic. Shared Services are still sometimes seen as a transaction factory for the finance function: Despite broad acceptance as a finance business model, and increasing evidence that shared services create value beyond cost and efficiency, it takes time to earn a “seat at the table”; achieving standardisation, compliance and cost reduction is not going to be sufficient. 10. Carving a Niche & Concluding Remarks In terms of career progression, professionals can move up the ladder either on the people management side or the technical facet. Whether you are a number-savvy professional who can connect the dots and analyse financial figures or a tech-savvy leader who can constantly redefine the system and train people on financial technologies, opportunities are abound in shared services. Finance leaders will always be the right hand of the CEO, much like how the Finance Minister is an indispensable aide of the Prime Minister. And chartered accountancy is a stamp of approval that opens those doors for professionals to get there. Working in shared services actually could help the controller role better understand the business partner role, to start to understand commercial principles, start to move from being inwardly focused to externally focused. For chartered accountants, a career in shared services will be both rewarding and fulfilling. Taking up a role in finance shared services is no longer viewed as career limiting, but rather a unique opportunity to broaden the capabilities and soft skills increasingly sought by the business. Shared services models are here to stay as a vital component of the finance function. Their leaders embrace and harness change, demonstrate strong business acumen, and are passionate about transforming the way finance operates. As finance leaders don more hats and oversee operations beyond the boundaries of traditional finance functions, the horizon of responsibilities is expanding too. Essentially, it boils down to leveraging finance expertise to be a change maker across the board and thereby drive the C-suite agenda. ███

The Chartered Accountant Journal • Social Responsibility • December 2020 CSR Contribution and Financial Performance: A Study on Select Indian Companies Shri Radhagobinda Basak, Dr. Amitava Mondal & Dr. Dhananjoy Rakshit The authors are faculty in Sidho-Kanho-Birsha University, Purulia, West Bengal. They can be reached at rgbasak85@gmail.com and eboard@icai.in. Citation: (2020) 69 CAJ 736–742 Pages 76–82 • Journal Page Nos. 736–742 Executive Perspective Since the past few decades, it has been a debatable issue among the researchers all over the world whether CSR performance has any impact on firm’s financial performance. The present study seeks the answer to this question in Indian context. Multiple regression techniques have been used to analyse the impact of CSR expenditure on firm financial performance. Financial performance has been measured from two approaches—accounting approach and market based approach. The study experienced mixed results. CSR expenditure had insignificant negative impact on accounting based financial performance indicators but significant positive impact on market based financial performance indicators. The findings signify that the firms having strong CSR sense are rewarded by the market itself. Read on… 1. Introduction The issue of Corporate Social Responsibility (CSR) is basically ethical (Hopkins, 2008). But, due to reluctance of most of the Indian companies to spend voluntarily on CSR initiatives, the Government of India introduced the CSR Rules 2014 with effect from 1st April 2014. Still, the results were not as expected. Many firms were found to be unable to spend the amount budgeted for CSR activities (Ministry of Corporate Affairs Reports 2014-15 & 2015-16 on the CSR expenditure of Indian companies). So, the Companies (Amendment) Act, 2019 came into existence with the proposals that the unspent amount on a project, which is not ongoing, is to be transferred to a Fund specified in Schedule VII and the same on an ongoing project is to be transferred to a special account in any scheduled bank. Therefore, mere imposition of legal compulsion can’t motivate Indian firms for undertaking CSR projects. This is where another issue of CSR is important. It is nothing other than the growing awareness about CSR among the customers, employees, investors, and other stakeholders. Due to consciousness of various stakeholders, no unethical and socially irresponsible firm can survive in today’s world. On the contrary, a socially responsible firm easily draws the attention of the customers, employees, investors and other stakeholders. Those firms build a fair and strong image before the society (Krishnan, 2012). Their reputation gets enhanced (Palmer, 2012). They enjoy competitive advantage over their rivals. All these positively contribute to the survival of an entity. Here, CSR is a strategic issue to the firms for their survival. Concentrating on this perception, the researchers all over the world have searched for the answer of a question—whether there is any relation between social responsiveness of a firm and its performance. Some studies found positive relation (Sweeney, 2009) between CSR performance and firm performance whereas some others found no relation (Fiori et al., 2008) between the two. Few studies experienced negative relation (Lungu et al., 2011) between them, and again, a few got mixed results (Tilakasiri, 2012) on the relationship between these two variables. In this backdrop, the present study makes an attempt to get the answer to the same question in the Indian context. For measuring financial performance of firms, two accounting based indicators (ROCE and ROA) and two market based indicators (Market Value to Book Value Ratio and Tobin’s Q) have been chosen (Aggarwal, 2013; Wu and Shen, 2013; Cornett et al., 2014; Saeidi et al., 2015; Resmi et al., 2018; Choi et al., 2010; Cavaco and Crifo, 2014; Zhou et al., 2015). 2. Literature Review & Hypotheses Formulation A number of studies have been carried out to explore the relationship between CSR performance and firm performance. Majority of the researchers found positive relationship between CSR performance and firm performance (Sweeney, 2009; Isaksson, 2012; Kanwal, 2013; Deng et al., 2013; Cornett et al., 2014; Lu et al., 2014). Matsumura et al. (2014) found that excessive carbon emissions decrease firm’s value. As per the findings of Dhaliwal et al. (2011), disclosure of CSR activities helps firms reducing cost of equity capital. Some studies found no relationship between CSR performance and firm performance (Fiori et al., 2008; Anderson and Preteni, 2011; Lys et al., 2015). Lungu et al. (2011) found a significant negative relation between profitability, and social and environmental disclosure. Tilakasiri (2012) experienced mixed results in this connection. The study showed that community related activities had significant positive relationship with company performance but health related activities had negative relationship with company performance. Similar type of mixed results was also experienced by Servaes and Tamayo (2013). In India also, a number of studies were carried out in this broad field of research and like their international peers, majority of the researchers found positive relationship between CSR performance and firm performance (Kadyan, 2009; Krishnan, 2012; Lawande, 2013; Angappan, 2014; Jyothi, 2014; Pradhan, 2015; Panchal, 2017; Padhiyar, 2018). Bhatia (2016) found no significant effect of CSR disclosure on financial performance of automotive sector companies. Similarly, Nagaraju (2017) found no significant influence of CSR expenditure on Net Profit and Net Worth. The relationship between CSR and financial performance of firms has been the most cultivated area of research in the field of CSR (Angelidis et al., 2008, as cited in Krishnan, 2012). However, results have been mixed and hence inconclusive (Aggarwal, 2013; Lu et al., 2014; Saeidi et al., 2015). Most of the studies were conducted in the context of developed countries (Aggarwal, 2013). In most of the earlier Indian studies, either perception based or content based CSR disclosure index was used to measure social performance of firms. Thus, few studies dealt with quantitative data on CSR expenditure. To bridge this gap, the present study has been proposed with the following two major null hypotheses: H01: There is no significant association between CSR expenditure and select financial performance indicators of the sample companies; and H02: There is no significant impact of CSR expenditure on the select financial performance indicators of the sample companies. 3. The Data and Methodology A sample of ten companies has been chosen for the study from the set of first 30 most CSR contributing companies appearing in the list prepared by the Ministry of Corporate Affairs for the year 2016-17. For selection, purposive sampling has been used. The followings were the criteria for selection: Companies belonging to the industries which contribute at least 1% of India’s GDP have been considered. Only one company from one industry has been chosen to bring heterogeneity in the sample; Only BSE listed companies which are leading their respective industries in terms of market capitalization have been chosen; and Companies having a good track record (At least for 4 years prior to the year 2014-15) in CSR practice and reporting have been considered. The study is based on secondary data. Data have been collected from the published annual reports of the selected companies and from the official website of Bombay Stock Exchange. Data for the period from 2010-11 to 2016-17 have been analysed. CSR score of a firm (The independent variable) has been computed as percentage of CSR spending on PAT of the company. Firms’ financial performance has been measured from two approaches—accounting approach and market based approach. In the first approach, ROCE and ROA have been chosen as the indicators of financial performance. In the second approach, Market Value to Book Value Ratio (MVBV) and Tobin’s Q have been selected as the indicators of financial performance. Tobin’s Q has been measured by the following formula (Servaes and Tamayo, 2012; Cahan et al., 2015): Tobin’s Q = (Market Value of Equity + Book Value of Debt) / (Book Value of Total Assets) Some control variables such as Age, Size, Revenue, D/E ratio and Return on Equity (ROE) have been included in the regression equation (Anderson and Preteni, 2011; Maqbool and Zameer, 2018). Therefore, the panel regression equations based on Constant Coefficients model are as below (Anderson and Preteni, 2011): Yit = α + β1X1it + β2X2it + β3X3it + β4X4it + β5X5it + εit     (Equations 1 & 2) Yit = α + β1X1it + β2X2it + β3X3it + β4X4it + β5X5it + β6X6it + εit     (Equations 3 & 4) (i = 1, 2, …, 10; t = 1, 2, …, 6) Where, Y is ROCE in equation (1), ROA in equation (2), MVBV in equation (3), and Tobin’s Q in equation (4), respectively. X1, X2, X3, X4, X5 and X6 are the CSR score, Age, Size, Revenue, D/E ratio and ROE respectively. εit is the disturbance term. α is the intercept. β1, β2, β3, β4, β5 and β6 are the coefficients of CSR score, Age, Size, Revenue, D/E ratio and ROE respectively. 4. Results and Discussion 4.1 Impact of CSR expenditure on ROCE First we will analyse the degree of association between the two as represented by correlation coefficients in the following table: Table 1: Correlation Coefficients Variable CSR D/E Ratio Size Revenue Age ROCE -0.117 -0.209 -0.728 -0.391 0.260 Significance 0.186 0.055 0.000 0.001 0.023 Source: Authors’ calculation From the above table, we find that CSR is slightly negatively associated with ROCE and this association is statistically insignificant at 1% level of significance. So, our hypothesis is accepted. Association between ROCE and D/E ratio is insignificantly negative. Correlation between ROCE and size is significantly negative. The same between ROCE and revenue is also significantly negative. The association between ROCE and age is statistically insignificant though positive. Now, we will analyse the impact of CSR on ROCE with the help of regression and the results are as below: Table 2: Regression Results (Dependent Variable: ROCE) Variable Standardized Coefficients t Significance VIF Constant — 3.537 .001 — CSR -.020 -0.223 .824 1.247 D/E Ratio .123 1.373 .175 1.308 Size -1.275 -8.008 .000 4.100 Revenue .637 4.402 .000 3.382 Age .036 0.390 .698 1.382 R Square: 0.666 • Significance: 0.000 F Value: 21.532 • Significance: 0.000 Durbin-Watson: 0.377 Source: Authors’ calculation As the F value is statistically significant, the regression model is valid. From the value of R Square, it seems that the explanatory variables together can significantly justify more than 2/3rd of the variation in the dependent variable. However, more explanatory variables are needed to explain the dependent variable completely. The Durbin-Watson statistic signifies that the data suffers from positive autocorrelation problem. Impact of CSR expenditure on ROCE is negative but this impact is statistically insignificant at 1% level of significance. Hence, our hypothesis is accepted. D/E ratio and Age have insignificant impact on ROCE. Other two control variables have significant impact on ROCE. Size has negative impact and revenue has positive impact on ROCE. VIF values give the evidence that problem of multicollinearity does not exist in the model. 4.2 Impact of CSR expenditure on ROA Let’s see the results of correlation at first as represented in the following table: Table 3: Correlation Coefficients Variable CSR D/E Ratio Size Revenue Age ROA -0.228 -0.411 -0.698 -0.381 0.144 Significance 0.040 0.001 0.000 0.001 0.135 Source: Authors’ calculation CSR expenditure is negatively associated with ROA and this association is statistically insignificant at 1% level of significance. Hence, our hypothesis gets accepted. ROA is found to be significantly and negatively associated with D/E ratio, size and revenue, respectively. The correlation between ROA and age is however insignificant. Now, we will examine the impact of CSR on ROA with the help of regression and the results are as below: Table 4: Regression Results (Dependent Variable: ROA) Variable Standardized Coefficients t Significance VIF Constant — 3.718 .000 — CSR -.113 -1.193 .238 1.247 D/E Ratio -.124 -1.285 .204 1.308 Size -1.017 -5.946 .000 4.100 Revenue .461 2.972 .004 3.382 Age .030 .298 .767 1.382 R Square: 0.616 • Significance: 0.000 F Value: 17.254 • Significance: 0.000 Durbin-Watson: 0.436 Source: Authors’ calculation The significance level of F statistic signifies that the regression model is valid. Moreover, the explanatory variables together are able to explain about 2/3rd of the variation in the dependent variable. However, more explanatory variables may be employed to capture the variation of the dependent variable completely. Durbin-Watson statistic gives the evidence that the model suffers from positive autocorrelation problem. Impact of CSR expenditure on ROA is negative but statistically insignificant at 1% level of significance. Hence, our hypothesis is accepted. Both D/E ratio and age have insignificant impact on ROA. Other two control variables have significant impact on ROA. Size has negative impact and revenue has positive impact on ROA. VIF values give the evidence that problem of multicollinearity does not exist in the model. 4.3 Impact of CSR expenditure on MVBV Ratio Just like earlier, first we will analyse the degree of association between the two as represented by correlation coefficients in the following table: Table 5: Correlation Coefficients Variable CSR ROE D/E Ratio Size Revenue Age MVBV -0.017 0.963 -0.121 -0.681 -0.361 0.272 Significance 0.448 0.00 0.178 0.00 0.002 0.018 Source: Authors’ calculation From the above table, we find that CSR is slightly negatively associated with MVBV Ratio and this association is statistically insignificant at 1% level of significance. So, our hypothesis is accepted. Both Size and revenue are found to be negatively and significantly associated with MVBV Ratio. ROE is found to be positively and significantly associated with MVBV Ratio. Both D/E Ratio and Age have insignificant association with MVBV Ratio. Now, we will analyse the impact of CSR expenditure on MVBV Ratio with the help of regression and the results are as below: Table 6: Regression Results (Dependent Variable: MVBV Ratio) Variable Standardized Coefficients t Significance VIF Constant — .034 .973 — CSR .115 3.002 .004 1.250 ROE .958 16.463 .000 2.875 D/E Ratio .026 .628 .533 1.408 Size -.081 -.793 .431 8.817 Revenue .057 .769 .445 4.601 Age -.052 -1.294 .201 1.389 R Square: 0.938 • Significance: 0.000 F Value: 132.642 • Significance: 0.000 Durbin-Watson: 1.034 Source: Authors’ calculation The F statistic of the above model is statistically significant. So, the regression model is valid for making some meaningful inferences. From the value of R Square, it seems that the explanatory variables can outstandingly explain the variation in the dependent variable. Moreover, the Durbin-Watson statistic suggests that the model does not suffer from severe autocorrelation problem. Impact of CSR expenditure on MVBV Ratio is positive and this impact is statistically significant at 1% level of significance. Hence, our hypothesis is rejected. D/E Ratio, Size, Revenue and Age have insignificant impact on MVBV Ratio. ROE is found to have significant positive impact on MVBV Ratio. VIF values give the evidence that the model is not influenced by severe multicollinearity problem except in the case of Size variable. 4.4 Impact of CSR expenditure on Tobin’s Q Let’s observe the degree of association between the two as represented by correlation coefficients in the following table: Table 7: Correlation Coefficients Variable CSR ROE D/E Ratio Size Revenue Age Tobin’s Q -0.057 0.907 -0.252 -0.719 -0.390 0.192 Significance 0.332 0.00 0.026 0.00 0.001 0.071 Source: Author’s calculation From the above table, we find that CSR is slightly negatively associated with Tobin’s Q and this association is statistically insignificant at 1% level of significance. So, our hypothesis is accepted. Association between Tobin’s Q and each of the three control variables, ROE, size and revenue respectively, is significant. Tobin’s Q has positive association with ROE but is negatively associated with size and revenue, respectively. Tobin’s Q has insignificant association with the other two control variables, D/E ratio and age. Now, we will analyse the impact of CSR expenditure on Tobin’s Q with the help of regression and the results are as below: Table 8: Regression Results (Dependent Variable: Tobin’s Q) Variable Standardized Coefficients t Significance VIF Constant — 2.059 .044 — CSR .110 3.208 .008 1.250 ROE .790 8.997 .000 2.875 D/E Ratio -.064 -1.035 .305 1.408 Size -.283 -1.840 .071 8.817 Revenue .131 1.179 .244 4.601 Age -.106 -1.739 .088 1.389 R Square: 0.858 • Significance: 0.000 F Value: 53.386 • Significance: 0.000 Durbin-Watson: 1.469 Source: Author’s calculation The value of F statistic is statistically significant and hence the regression model is valid. From the value of R Square, it seems that the model well fits the data as the explanatory variables together can explain more than 85% variation in the dependent variable. Durbin-Watson statistic suggests that the regression model does not suffer from severe autocorrelation problem. Impact of CSR expenditure on Tobin’s Q is positive and this impact is statistically significant at 1% level of significance. Hence, our hypothesis is rejected. D/E ratio, Size, Revenue and Age are found to have insignificant impact on Tobin’s Q. ROE has significant positive impact on Tobin’s Q. VIF values give the evidence that the model is not influenced by severe multicollinearity problem except in the case of Size variable. 5. Conclusion The study was started with the research question whether CSR expenditure has any impact on financial performance of the select Indian firms. Based on this research question, hypotheses were structured. After analysing the data, it is found that CSR expenditure is negatively associated with all the four selected indicators of financial performance. Surprisingly, all the four associations are statistically insignificant. Based on the insignificant results, no meaningful inference regarding the relationship between CSR contribution and corporate financial performance can be drawn. From the regression results, it is observed that CSR expenditure has negative impact on both accounting based financial performance indicators, ROCE and ROA. Again, the impacts are statistically insignificant. Therefore, we can’t draw any conclusion regarding the impact of CSR contribution on accounting based measures of financial performance based on these insignificant results. On the other hand, CSR expenditure is found to have significant positive impact on both market based financial performance indicators, MVBV ratio and Tobin’s Q. Therefore, the study claims that CSR performance has significant positive impact on market based corporate financial performance (Sweeney, 2009; Angappan, 2014; Maqbool and Zameer, 2018). It implies that social responsiveness of a firm is reflected through its market price of securities or it may be said that an entity having strong sense of social responsibility is rewarded by the market itself. If this is the fact, the companies should integrate CSR policy in their corporate strategy voluntarily (Gangopadhyay, 2012) to sustain in the long run. Such kind of findings may motivate Indian firms to undertake CSR projects voluntarily as they will find that social engagement is rewarded by the market. Moreover, socio-economic health of India will surely improve because of successful implementation of varied social initiatives taken by the Indian firms. Core Takeaway: Findings may motivate Indian firms to undertake CSR projects voluntarily as they will find that social engagement is rewarded by the market itself through higher valuation multiples and robust investor confidence. References Aggarwal, P. (2013). “Impact of sustainability performance of company on its financial performance: a study of listed Indian companies”, Global Journal of Management and Business Research Finance, 13(11), pp. 61-70. Andersson, F. and Preteni, S. (2011). “CSR reporting and stock prices: taking a closure look at the Nordic market”, Masters’ thesis, Lund University. Cornett, M. M., Erhemjamts, O. and Tehranian, H. (2014). “Corporate social responsibility and its impact on financial performance: investigation of U.S. commercial banks”. Fiori, G., Donato, F. and Izzo, M.F. (2008). “Corporate social responsibility and firm’s performance: an analysis on Italian listed companies”, available at: http://ssrn.com/abstract=1032851 Krishnan, N. (2012). “Impact of corporate social responsibility on the financial and non financial performance of select BSE listed companies”, Doctoral dissertation, Padmashree Dr. D. Y. Patil University, Navi Mumbai. Maqbool, S. and Zameer, M. N. (2018). “Corporate social responsibility and financial performance: an empirical analysis of Indian banks”, Future Business Journal, 4, pp. 84-93.

ICAI Journal Focus • Corporate Governance & Boardroom Leadership Industry Perspective on Governance Moving Beyond Regulatory Compliance to Authentic Value Creation: Culture, Board Independence, Committee Oversight, Internal Financial Controls, Analytics, and Radical Transparency in the Face of Escalating KMP Accountability Author: CA. Subramanian S (Member of ICAI & Technical Advisory Committee, NFRA) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 18–21 (Journal pp. 546–549) Focus: Corporate Governance, Boardroom Fiduciary Duties, Audit Oversight & Risk Mitigation Executive Overview “Corporate Governance has been in the limelight in the recent past, particularly with the enactment of the Companies Act, 2013. History shows that whenever there are major scams or stock market crashes, invariably regulations are introduced by Governments across the world to address the causes of the scam. The article attempts to discuss areas that are not mandated by legislation generally but those which enterprises could focus on to help them maintain high corporate governance standards.” 1. Historical Perspective: Regulatory Reactions to Scams & Limits of Law The Securities and Exchange Commission in the US was established in 1934 as a reaction to the stock market crash in 1929. The Sarbanes Oxley Act came about in 2002 as a response to the Enron and WorldCom scams. The Companies Act, 2013, itself was most probably, a reaction to the Satyam and the Sahara scams. Most of the new regulations were made to address the issues that led to the scams. However, while the new laws will possibly help in preventing scams of similar nature, there still remains possibilities of more such occurrences in the future. Recently, the Wirecard scam in Germany seems to almost mirror what happened in the Satyam scam. Secondly, we may still find some people thinking of newer ways to commit fraud. Recent legislation has put the onus on governance, significantly on the CFO and the Company Secretary, besides the Managing Director/CEO as Key management personnel (KMP). It is therefore, in the interest of KMPs, apart from the Board of the Company, to ensure that governance standards are high in the enterprise. There is also a limit to which law and regulation can address the issue of governance. Corporate governance standards will improve substantially if there is a significant reward to improving them. Companies with high governance standards are rewarded substantially with much higher Price Earnings multiples, thereby increasing their market capitalisation substantially. Further banks tend to offer the required funding at more attractive rates because of the lower perceived risk profile. Therefore, it is in the long term interest of enterprises to maintain high levels of corporate governance. 2. Corporate Culture: The Foundational Bedrock The culture of an organisation starts with the belief of the promoter and top management as to how they wish to conduct themselves. Cultures that do not compromise on integrity, believe in upholding the law of the land in letter and spirit and encourage their employees to speak out without fear when they observe a wrong doing, invariably end up with good governance platforms. “Companies following good corporate governance have specific codes of conduct and various policies on issues like ethics, whistleblowing, sexual harassment, insider trading, etc. that are detailed and cascaded frequently to their employees.” Companies following good corporate governance have specific codes of conduct and various policies on issues like ethics, whistleblowing, sexual harassment, insider trading, etc. that are detailed and cascaded frequently to their employees. The important aspect here is that these organisations should actually believe in the codes and policies deeply rather than just put them out to “tick the box” from a governance perspective. 3. Board of Directors: Genuine Independence & Fiduciary Responsibility The independence of the Board is critical to good governance standards. While all Directors have a fiduciary responsibility to the organisation in whose Boards they are, many Boards do tend to get swayed by the views of the promoter’s or the principal shareholder’s views. Board members, and not just independent Board members, need to realise that their duty is to ensure the benefit of the organisation and not one section of shareholders. The more a Board is truly independent, the better the governance of an organisation will be. “The more a Board is truly independent, the better the governance of an organisation will be. It is important that minutes of Board meetings record dissenting views. It is also recommended that meetings of independent Directors are also held periodically so they can discuss issues on governance between themselves.” It is important that minutes of Board meetings record dissenting views. It is also recommended that meetings of independent Directors are also held periodically so they can discuss issues on governance between themselves. Companies also should have good onboarding programmes for new Directors to help them familiarise with the company and its operations. Another good practice is sending a note on recent regulatory changes to the Board on a quarterly basis. 4. Board Committees: BAC, NRC, Stakeholders & Risk Oversight Board Committees make an important part of the governance structure of a company: Board Audit Committee (BAC): The BAC is one of the most important committees of the Board and has a very big role in driving good governance. While regulations today require the BAC to be manned with at least one financial expert and the others to be financially literate, what is critical is the independence that this committee demonstrates. The BAC has a significant role to play in ensuring that the financials presented give a true and fair view of the company, related party transactions are in the normal course of business and are at arm’s length, the control environment is adequate for the efficient running of the organisation and frauds and wrong doings that come to their notice are thoroughly investigated. It is a good practice for the BAC and / or the BAC Chairman to meet up with the CFO and the auditors separately before the BAC meeting so there is better understanding of issues and any concerns that the CFO or auditors have can be expressed freely to the BAC. Board Nominations and Remuneration Committee (NRC): The NRC is an equally important committee that is responsible for hiring and fixing remuneration for the top management. The NRC ensures that there is sufficient oversight on accountability and rewards for management. Stakeholder & Ethics Committees: There is then the Stakeholder committee that oversees relationship and handling of problems with shareholders and in some companies, an Ethics committee as well that deals with issues of integrity and whistleblowing if not handled by the BAC. While the Board is overall responsible for corporate governance of an organisation, the independence and diligence exhibited by these sub-committees are crucial to helping the Board accomplishing the same. Board Risk Management Committee: Risk management is another important aspect of governance and Board Risk Management committees can play a significant role in identifying risks of all types (statutory, business, sustainability, environment, competition, obsolescence, etc.) so the company can work on risk mitigation if and when the risks were to occur. 5. Management: Reorienting from Shareholder Primacy to All-Stakeholder Sustainability The world is possibly moving from pure shareholder focus to an all stakeholder perspective. Investors are also looking for organisations that are looking long term and have sustainable business models. Organisations that have focused on multiple stakeholder interests and sustainability have actually ended up enhancing shareholder returns substantially. Most of the managements, therefore, are reorienting their focus on all stakeholders. Importantly, belief in the core values and good governance standards for the company is critical for the management team and these beliefs need to be cascaded to all levels of the organisation. 6. Audit Architecture: Auditor Independence & Assurance vs. Advisory Statutory and internal audits are mandated by the Companies Act. Here again, it is how companies use these control mechanisms that make a difference to their governance standards. Independence of auditors is paramount. Both statutory and internal auditors should preferably report to the BAC of the company. The BAC should have the final say on appointment and remuneration of both these auditors. While it is practical for the internal auditor to report to the CEO/MD of the company for administration purposes, the reporting line to the BAC on functional matters should not be compromised. There has also been a constant debate on focus areas for internal audit – assurance or advisory. While the degree of focus on the two aspects may depend on the organisation itself, it is important that the focus on assurance is never compromised. 7. Internal Financial Controls (IFC), Automation and Analytics The Companies Act, 2013, introduced the need for management of companies and its auditors to certify the level and efficacy of internal financial controls in place in the company. This followed the regulations as stipulated under the Sarbanes Oxley Act in the US. Onerous as it seemed at the time of initial compliance, the monitoring of IFC has helped organisations in focusing and substantially improving control mechanisms through use of tools like automation, work flows and self-assessment tests, thereby considerably improving governance standards. “Automation could take out the probability of errors not only by omission but probably also by commission too.” Automation has been the buzzword in the last many years and while the aim primarily was towards improving efficiency, the role that it has played in actually improving the control environment tends to be understated. Automation could take out the probability of errors not only by omission but probably also by commission too. Similarly while analytics is used to get more information in improving business objectives, it also plays a very useful tool in detecting frauds and errors if used properly by the Finance team. 8. Investor Relations: Leveling Information Asymmetry Investor relations, is a function that is an important one in the context of listed entities. While the promoter of the company or the majority shareholder typically is aware of the happenings within an organisation and is privy to the strategy, outlook and actual performance of a company, the minority shareholders do not get the same benefit. This is where investor relations come in. Stock exchange regulations require financial information or other significant price sensitive information to be disseminated, simultaneously. And while the company may do so because of legislation in place, proactively interacting with investors to keep them posted of key developments in the company including possible impact of recent regulations on business; change in strategy or direction; the company wishes to take; change in top management; effect of competition, etc., is a sign of good governance. “Proactively interacting with investors to keep them posted of key developments in the company is a sign of good governance.” 9. Transparency, Escalating Liabilities & Concluding Thoughts This is the hallmark of good corporate governance. Transparency between management and the employees of the company, the management and the Board of Directors, the company and the external world particularly regulatory bodies or investors or media, etc. is an essential part of good governance. “Transparency is normally easy and natural when sharing good news to the various stakeholders, but sharing bad news and that too promptly, is what differentiates companies with good governance from those without.” Transparency is normally easy and natural when sharing good news to the various stakeholders, but sharing bad news and that too promptly, is what differentiates companies with good governance from those without. Of late, Auditors (Statutory and internal), Board Audit committees and Chief Financial Officers (CFO) are being charged for direct responsibility in various companies that are being prosecuted for frauds and serious governance issues. It is concerning that in some cases, it appears that the lack of ability to repay debt possibly due to business factors are also being brought under the ambit of wilful defaults and CFOs are being prosecuted for the same. Prosecution in some cases has included freezing of personal assets. Under these circumstances, the need to focus on good governance, ensuring timely and adequate disclosure of price sensitive information and dealing with all stakeholders particularly lenders with full transparency cannot be overstated. Focussing on maintaining high standards of corporate governance in above areas that which are generally not mandated by legislation, are significant for enterprises when it comes to ensuring good governance. ███

The Chartered Accountant Journal • Corporate Governance • November 2020 Corporate Governance — Managing Companies through Crisis Suhas Tuljapurkar The author is a member of Technical Advisory Committee, NFRA. He can be reached at eboard@icai.in. Citation: (2020) 69 CAJ 550–555 Pages 22–27 • Journal Page Nos. 550–555 Executive Perspective It has been proven that strong and experienced boards following well-defined processes and set protocols are better positioned to make quality decisions and help organisations to prosper. Organisations need to move ahead proactively with future in mind so as to maintain their position and sail through thick and thin and overcome challenges in a sustainable manner. It is almost a certainty that unless the agenda of the Board includes sustainability at all levels, the companies will just aspire to be the ‘best’ but not the ‘next’. Being the best is not going to be enough because the focus of the company would always be on being the best. Not just being ‘The Best’, but ‘The Next’, ought to be the new mantra. Read on… The King, the Queen & the Emperor In January 1996, Bill Gates wrote “Content is King1”. He went on to add – “Content is where I expect much of the real money will be made on the internet, just as it was in broadcasting.” In the grammar class, while teaching the difference between a proverb and an idiom, it was drilled in my head that ‘God is in the Detail’ is a proverb, ‘Devil is in the Details’ is an idiom. The proverb or the idiom, the importance of ‘Details’ became apparent and the both the God and the Devil moved from grammar to real-life situations. As a professional, the life taught us that the ‘Money is in the Details’. So, while ‘Content is King’, Profit became the Queen. Come COVID-19, we all learnt, understood, recognised, respected and bowed down to “Context is the Emperor”. The cardinal principle of ‘Stakeholder at the Center’ pivoted the stakeholder to the Kings’ place. Long-term purpose of the business, together with short-term profits occupies the Queens’ position. However, the issues such as risk and resilience have emerged and will continue to be the Emperor. The Black Elephant The Indian companies seem to have realised that there are Black Elephants in the room today2. COVID-19 is an event that has redefined all relationships—business, family or social. It has once again taught the businesses that while the unplanned catastrophic events will strike them, preparing for these unplanned catastrophic events is only just one function relating to the risk. During the pandemic, business leaders have played a pivotal role in responding to the situation. Initially, the response was varied. Once the learnings pandemic improved, the responses were prioritised around—health, hygiene, social responsibility (proximate), social responsibility (general) and thereafter came the economic realities. While no one would have contemplated the pandemic, have the boards / business leaders now learned to plan for the catastrophic events? There is some criticism about the Directors’ failure in identifying and dealing with the catastrophic events. Responding to ‘unidentified catastrophic events’, is predominantly a ‘Risk’ function. The Boards could have done better in mitigating risks arising from the unidentified catastrophic events. It is only now, after almost three quarters under lockdown, that the boards are focusing on developing resilience through governance. The Good and Not-So Good Leaders During COVID-19, we experienced diametrically opposite leadership traits in India. Some of the remarkable corporate leaders acted responsibly towards the stakeholders3. The activities undertaken by the Indian companies include donating funds, providing hotel capacity as the quarantine centre, IMFL manufacturers producing alcohol-based sanitiser, opening kitchens to supply food to migrant workers, making information available at the COVID Information Resource Centre, providing free Risk Mitigation Software and Standard Operating Procedures, to name a few. Some of the very innovative leaders caused their businesses to quickly launch products, services and solutions that were complimentary to their businesses. Doing good towards society during these times also makes good business sense. Then there are those remarkable leaders who were bogged down by the Black Elephant, its uncertainties, pecuniary consequences and simply the enormity of it all. There are also those remarkable leaders who adopted the ‘conserve-the-cash’ mantra and did not care for anything else. The second set of remarkable leaders did not act so responsibly qua their stakeholders. These leaders will now force their stakeholders to forget them or remember them for wrong reasons. The stakeholders (the clients / customers, included) will not recall the brands led by the bogged-down, not-so good leaders. In this sense, the good and not-so-good leaders will be remarkable in their approach and will be remembered by the stakeholders for a long, long time. “What did you do during the lockdown?”, is the question that will haunt many leaders for a long time to come. Corporate Governance in Crisis There is enough empirical evidence to prove that good governance helps manage the companies through crisis4. Studies have shown that strong and experienced boards following clearly-defined protocols are better positioned to make good decisions. At a time when speed is of the essence, such as when a country is in the grips of open conflict, empowered boards and capable leaders can act quickly and decisively, sustaining the business, even in the midst of the worst. Case Illustration: Infection Control Solutions Provider One of our clients, a leading company in infection control solutions provider, who manufactures and supplies antiseptics, and disinfectants including surface disinfectants, has demonstrated remarkable resilience. The company has been manufacturing and supplying its products globally and has accreditation from various domestic and international certifying agencies. Even before COVID-19 was declared as a National Disaster under the Disaster Management Act 2005, the company entered into a rate contract for supply of disinfectants to the state-run hospitals. Infection control measures required that the COVID-19 hospitals do not turn into distribution hubs and that the doctors and healthcare specialists used proven products as per global standards. When COVID-19 was declared as a National Disaster, firstly the export of some of the company’s products were banned. Secondly, the decisions relating to the procurement of disinfectants suddenly shifted to the District Magistrates exercising powers under the Disaster Management Act, 2005. The funds available for the procurement of disinfectants came from the State Disaster Fund. From IMFL manufacturers to soap producers to specialty chemicals’ company, everyone manufactured disinfectants and supplied it for free or at a marginal cost. Consequently, the company received cancellation of orders placed on it (including in a couple of instances after the disinfectants were supplied). Based on the rate contract, the company had ramped up its manufacturing, on-boarded more employees and augmented its capacities. Anybody would think that a disinfectant manufacturer would thrive during COVID-19 crisis. However, the company’s exports stopped. Its local manufacturing stopped and within a matter of weeks, the company’s survival became an issue. The leadership of the company demonstrated phenomenal resilience. Notwithstanding the travel ban, the company chartered an aircraft, flew its independent directors to the capital, dared to look into the eyes of the decision makers and convinced the opening of exports. India had exported sanitizers worth USD 485 million in 2018-19. However, on March 24, 2020 the Government prohibited exports of sanitisers (both alcohols based and non-alcohol based). On May 6, 2020 the government lifted ban on the export of non-alcoholic sanitizers, but prohibited exports of alcohol-based sanitizers to boost its availability in the domestic market. Later on June 2, 2020 the Directorate General of Foreign Trade (DGFT) banned export of alcohol-based hand sanitisers in containers with dispenser pump. Recently, on October 15, 2020 export of alcohol-based hand sanitisers in container with dispenser pumps also became free. During this period, the company faced many challenges and resisted temptations. As always, some touts came forward with a proposal of managing procurements through the District Magistrates. Following the success of public interest litigation (PIL) on PPE kits quality issues, some NGOs came forward to solve the problem through the same platform of filing PILs. The Board also valuated the option of solving the problem through litigation. The company’s leadership demonstrated that it can use independent directors as the resources of the company. They ensured that questionable practices were not encouraged, and discouraged any unnecessary interference. They did not talk of shutting down, locking-out, furlough or the like. The leadership, through its commitment to good corporate governance, strengthened rebuilding of the company. They eliminated the risk on unnecessary interference by removing hindrances that could have prevented them from ‘being good’. They also paved a way to remove questionable practices. Good governance during the crisis and emergencies sends a very powerful message for rebuilding. Everyone at the Board is often vehemently arguing for rebuilding the business with a longer-term perspective in mind. Short-Termism ‘Short-Termism’5 as a noun finds place in almost all modern dictionaries. As the COVID-19 crisis has moved beyond two quarters, everyone expects that the quarterly reports for a few quarters to come will demonstrate the consequences of this pandemic. In this context, it is interesting to read extracts from the relevant reports: Studies have identified that there can be soft and hard approaches as possible solutions. Soft approach will entail spreading awareness on sustainable corporate governance practices or fostering regulatory initiatives through recommendations. Hard approach will involve setting minimum common rules to enhance long-term through legislative interventions. A September 2020 Position Paper6 makes out a very strong case to revisit the nature of short-termism. The paper is not the sole proponent of need for the balancing act. It articulates: “Covid-19 pandemic shut down most of the global economy in 2020. This event humbly reminded us that sometimes long-term planning cannot take place until short-term survival is ensured. Investors prefer companies managing and investing for the long term, but they have to understand that companies need to strike a balance between short-term operations and long-term planning. In some instances — such as most of 2020 — the short term can and should take precedence.” Notwithstanding the conundrum regarding the ‘quarterly reporting’ (and each such quarterly report taking into consideration Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements), 2015 with respect to the COVID impact) most of the Statutory Auditors are advising, and the boards are readily accepting, a medium-term to long-term outlook supported by the weeding out of all the old questionable accounting practices, qualifications and the like. While very few rogues will try to hide things under the pretext of the pandemic, most of the sensible leaders have embarked upon ironing their accounting practices and revisiting their policies and practices amidst conversations of resetting by businesses. Good governance during the crisis and emergencies sends a very powerful message for rebuilding. Everyone at the Board is often vehemently arguing for rebuilding the business with a longer-term perspective in mind. Reference: The Development Committee of the International Monetary Fund, a ministerial-level forum that represents 189 member countries of the World Bank Group and the International Monetary Fund, on October 16, 2020 issued a statement after the online annual meeting.7 World Bank Group President David Malpass remarked that the pandemic “could lead to a lost decade characterized by weak growth, a collapse in many health and education systems, and a new round of sovereign-debt crises.” Every discussion about the role of directors in current context is focusing on the ‘Re’ factors. Building resilience, no doubt appeared as the most prominent agenda.8 Use of ‘Re’ has been revisited during the pandemic. The speed with which Mother Earth repaired itself startled many scientists, leading to the formation of a firm belief that the war against climate change is not lost. The corporate leaders used ‘Re’ more often than any other prefix. Reimagine, Rethink, Reinvent, Recalibrate, Redesign, Reengineer, Restructure, Revive, Repair, Rebuild, Reset, Restore…. The Re-factor strongly led to redefining Corporate Governance and its relevancy. In most of the companies, the divide between the board and the management blurred, and everyone was united in the face of the catastrophe. ‘Resilient Recovery’ has been the catchword that described the optimism at the Boards. It is interesting to draw a parallel with ‘Surmounting Setbacks’9 that was articulated by the World Bank on October 17, 2020 i.e., End Poverty Day. As the World Bank Group President, Mr. David Malpass said “Even in the midst of a once-in-a-century crisis, I have confidence that sustainable solutions will emerge, in part by embracing constructive change.” He expanded on this vision: “Working together, I believe that we can shorten the downturn and build a strong foundation for a more durable model of prosperity: one that can lift all countries and all people.” It may not be out of place to mention ten tenets articulated by Dr. R. A. Mashelkar in the context of building resilience during crisis. This definitely is the agenda for all boards of the companies. 10 Tenets to become Crisis Resilient —Dr. R. A. Mashelkar 1. Adaptability 2. Agility 3. Resilience Thinking 4. Scenario Based Planning 5. Purpose-Driven 6. Platformisation 7. Digital Ready 8. Foster Self-Disruption 9. Climate Conscious 10. Autonomous Innovation Board Agenda, ATRs and Impact The once-in-a-century crisis has also catapulted hopes for once-in-a-lifetime opportunity. Sustainability solutions are already an emerging trend. During the pandemic while stock exchanges were trading, almost every other investment opportunity was absent, investors supported those companies that demonstrated responsible behavior, exhibited resilience and embraced these sustainability solutions. Whether in development of AI, moving from thermal to renewable, designing a new packaging label and evaluating entire supply chain, business ethics now play a major role in shaping the future of business. The Triple Bottomline, Environmental Social and Corporate Governance, Corporate Sustainability, Business Responsibilities no longer remain mere buzzwords at conferences and workshops, or even simply a part of shiny financial statements and photo ops. The agenda of sustainability has now moved from the conferences and workshops in luxurious hotels to their rightful place i.e., the Board Rooms. The boards will have to drive the agenda of sustainability, not just from the point of view of Sustainable Development Goals, Corporate Social Responsibility, or Global Reporting Initiatives but by measures such as inculcating compassion, by adopting Green Chemistry and by embracing the fundamentals of Circular Economy. The board’s agenda items now ought to include Green Chemistry, Circular Economy, Corporate Compassion and Innovation. Each of these items will now be elements to be tracked as part of the Board’s Action Taken Report. The performance of the board will now be evaluated based on its measurable impact on these parameters. The board’s agenda items now ought to include Green Chemistry, Circular Economy, Corporate Compassion and Innovation. Good to Great It is an inescapable conclusion that if the company aspires to move from being good to becoming great, the DNA of the organisation will have to be formed based on sustainability. As we know by now, if there is deformity in the DNA, there is recombinant DNA technology to solve the problem. There is no better time than now for companies to undertake the genetic reengineering of its DNA so that the organisational culture is reset correctly. World Economic Forum’s COVID-19 Risks Outlook10 published in May, 2020 outlines that: “Despite the grim economic outlook, the solidarity created by the COVID-19 pandemic offers the possibility of investing in building more cohesive, inclusive and equal societies. When it comes to the environmental agenda, the implementation of green stimulus programmes holds the potential to fundamentally change the way economies and industries operate, especially as societal behaviour change may spur more sustainable consumption and mobility habits. For businesses, the opportunity exists to accelerate a transformation towards more sustainable and digital operating models, while enhancing productivity. When it comes to the Fourth Industrial Revolution, technology has demonstrably helped societies manage the crisis and provided a window into the benefits of more technology-enhanced ways of learning, working and producing – from telemedicine to logistics to the knowledge economy. There is potential for a new era of innovation, growth and enhanced technology governance in the service of societal and environmental goals.” It almost imperative that unless the board’s agenda includes sustainability at all levels, the companies will just aspire to be the ‘best’ but not the ‘next’. Being the best is not going to be enough because the focus of the company would always be on being the best albeit ‘in-time’. Not just being ‘The Best’, but ‘The Next’, ought to be the new mantra. Core Takeaway: Being the best is not going to be enough because the focus of the company would always be on being the best, albeit ‘in-time’. Not Just Being ‘The Best’ but ‘The Next’ ought to be the new mantra. Notes & References https://www.craigbailey.net/content-is-king-by-bill-gates The coronavirus epidemic is not the proverbial ‘elephant in the room’. It could, however, be called a ‘black elephant’ event. The environmentalist, Adam Sweidan, explained this idea to Thomas L. Friedman thus: “[It is] a cross between a ‘black swan’ — a rare, low-probability, unanticipated event with enormous ramifications — and ‘the elephant in the room’: a problem that is widely visible to everyone, yet that no one wants to address, even though we absolutely know that one day it will have vast, black-swan-like consequences.” https://corpgov.law.harvard.edu/2020/09/19/how-can-boards-prepare-for-unplanned-catastrophic-events/ ‘Note regarding Positive Developments in the Industry During Lockdown’—Adv Dr Girish Bakshi, July 3, 2020. https://www.ifc.org/.../Strengthening_Governance_During_Crisis_Merima_Buzadzic.pdf Defined as ‘a way of thinking or planning that only considers the advantages or profits you could have now, rather than the effects in the future’: https://www.oxfordlearnersdictionaries.com/definition/english/short-termism https://www.cfainstitute.org/-/media/documents/article/position-paper/Short-termism-revisted.ashx https://www.worldbank.org/en/news/feature/2020/10/16/laying-the-foundations-for-a-resilient-recovery https://corpgov.law.harvard.edu/2020/09/19/how-can-boards-prepare-for-unplanned-catastrophic-events https://live.worldbank.org/end-poverty-day-2020 http://www3.weforum.org/docs/WEF_COVID_19_Risks_Outlook_Special_Edition_Pages.pdf

The Chartered Accountant Journal • Corporate Governance • November 2020 Journey of Corporate Governance CA. Chandrashekhar Vasant Chitale The author is a member of the Institute. He can be reached at eboard@icai.in. Citation: (2020) 69 CAJ 556–567 Pages 28–39 • Journal Page Nos. 556–567 Executive Perspective Corporate form of organisation has enabled creation of large organisations with substantial amount of capital and specialist managers run them to achieve their objectives. Corporate governance refers to the mechanisms, processes and relations by which corporations are managed to achieve their objectives. Governance identifies the distribution of rights and responsibilities among different participants in the corporation and includes the rules and procedures for making decisions in corporate affairs. Read on… Foreword 1. Advent of corporate form of organisation has enabled global size enterprises to come into being. This became the only form of organisation that can augment large amount of capital and specialist managers to propel the business vessel in the turbulent waters to a safe destination of slated stakeholder goals. 2. However, separation of ownership and management has thrown open certain challenges. Owners i.e. shareholders and management can have different interests. The shareholders desire enlargement of returns on their capital contribution through more profits and more dividends, while management may also be guided by other objectives like, higher remuneration conserving cashflows to minimise cost of borrowings or invest in securities to increase returns at corporate level. Corporate governance aims at adoption of set of practices that harmonise interests of the management with those of the owners. 3. Stakeholders are saviour for business, as is witnessed by times. Therefore, in this sense, the corporate governance has to embers stakeholders’ interests. Stakeholders are people interested in your company, ranging from employees to loyal customers and investors to government to general public, communities, activist groups, business support groups, and the media and so on. They broaden the pool of people who care about the well-being of the company, making it less alone in its entrepreneurial work. In current day theory, an enterprise with an engaged community of stakeholders reaps financial benefits from these relationships. At its best, the relationship between a business and its stakeholders is symbiotic and healthy. This is the current date encompass of corporate governance. US Experience 4. US Stock market took biting on account of misreported annual accounts. Story of Enron Corporation presents a case that a Company reached dramatic heights only to face a dizzying fall. The fated company’s collapse affected thousands of employees and shook Wall Street to its core. At Enron’s peak, its shares were worth $90.75; just prior to declaring bankruptcy on Dec. 2, 2001, they were trading at $0.26. Enron was able to keep hundreds of millions worth of debt off its books. The shell companies, run by Enron executives, recorded fictitious revenues, essentially recording one dollar of revenue, multiple times. This practice created the appearance of incredible earnings figures. 5. The WorldCom, the USA’s second largest long-distance telephone company at the relevant time. From 1999 to 2002, senior executives at WorldCom orchestrated a scheme to inflate earnings in order to maintain WorldCom’s stock price. The fraud was uncovered in June 2002. Eventually, WorldCom was forced to admit that it had overstated its assets by over $11 billion. At the time, it was the largest accounting fraud in American history. 6. The reaction at US had been the Sarbanes-Oxley Act is said to have passed due to scandals such as WorldCom and Enron. This is a significant march forward towards embracing corporate governance, more emphatically, more visibly. Other Stories 7. Bre-X Minerals: The Canadian company was involved in one of the largest stock swindles in history. Its Indonesian gold property, which was reported to contain more than 200 million ounces, was considered as the richest gold mine. The stock price skyrocketed to a high of $280 and at its peak, Bre-X had a market capitalization of $4.4 billion. The party ended in 1997, when the gold mine proved to be fraudulent, and the stock tumbled to pennies shortly after. 8. HIH Insurance: HIH Insurance had been second-largest insurance company in Australia. It was placed into provisional liquidation in March, 2001. Liquidation of HIH is the largest corporate collapse in Australia, where liquidators estimate HIH’s losses totalled up to A$ 5.3 billion. Investigations into the cause of the collapse resulted into conviction and imprisonment of a handful of members of HIH management on various charges relating to fraud. 9. Coloroll: In United Kingdom wallpaper brand Coloroll was owned by CWV Ltd. Developed from a family-owned wallpaper company founded in the 1970s, during the 1980s Coloroll Group became a dominant publicly listed home furnishings business, which collapsed in 1990 through excessive debt. 10. Polly Peck International (PPI): PPI was a small British textile company which expanded rapidly in the 1980s and became a constituent of the FTSE 100 Index before collapsing in 1991 with debts of £1.3bn, eventually leading to the flight of its CEO, Asil Nadir to Northern Cyprus in 1993. 11. Polly Peck was one of several corporate scandals that led to the reform of UK company law, resulting in the early versions of the UK Corporate Governance Code. India Developments 12. In India, dodging tax laws and underreporting revenue is noticed on various occasions and has been brought to surface by tax departments. This has impacted shareholders wealth and stakeholder interests. 13. The Satyam Scandal: The biggest ever corporate scandal in India took place from one of the then most respected Corporate entity, Satyam. The Satyam founder and chairman confessed to SEBI of the manipulation done by him in the accounts of the Company. This corporate scam was carried on from 2003 till 2008. It is estimated that the fraud took place for around Rs five thousand crores of cash and bank balances as the company by falsifying revenues, margins. The stock price of Satyam fell drastically after this incident. Eventually, CBI took charge of conducting the investigation into the matter. 14. The CRB / Bhansali Scam: Earlier, there was a Bhansali scam. It resulted in a loss of over ₹ 1,200 crore (₹ 12 billion). He first launched the finance company CRB Capital Markets, followed by CRB Mutual Fund and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996. The Group collecting money from the public through FDs, bonds and debentures, which money was transferred to companies that never existed. CRB Capital Markets raised a whopping ₹ 176 crore in three years. In 1994 CRB Mutual Funds raised ₹ 230 crore and ₹ 180 crore came via fixed deposits. Group also succeeded to raise about ₹ 900 crore from the markets. However, his good days did not last long, after 1995 he received several jolts. Bhansali tried borrowing more money from the market. This led to a financial crisis. It became difficult for Bhansali to sustain himself. The Reserve Bank of India (RBI) refused banking status to CRB and he was in the dock. 15. There were other numerous scams in securities market, in India. As a consolidated effect of the same, the corporate governance model got evolved in India over the period. 16. The Godfather is a celebrated crime novel. The novel’s epigraph is: «Behind every great fortune there is a crime.» In a similar manner, it is noticed that “Behind every development in corporate governance there is a scam.” Corporate Governance: Definition & Landmark Committees 17. Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed. Governance structure identifies the distribution of rights and responsibilities among different participants in the corporation such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies and decisions of corporations and their agents. Corporate governance practices are affected by attempts to align the interests of stakeholders. 18. The report of various committees helped a lot to streamline the corporate throughout the world. Some important Committees on governance is given under the following list: Landmark Corporate Governance Committees Globally and in India S. No. Committee Country Year 1 Cadbury Committee England 1992 2 King Committee South Africa 1994 & 2002 3 CII Task Force (Rahul Bajaj) India 1996 4 Hampel Committee England 1998 5 Kumar Mangalam Birla Committee India 2000 6 SEBI (Clause 49) India 2000 7 Narayana Murthy Committee India 2003 8 Uday Kotak Committee India 2017 Governance mechanisms include monitoring the actions, policies and decisions of corporations and their agents. Corporate governance practices are affected by attempts to align the interests of stakeholders. Cadbury Report (1992) 19. “The Committee on the Financial Aspects of Corporate Governance” chaired by Adrian Cadbury has made recommendations on arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The voluntary code of the Committee Report, the Cadbury Code, recommends: (i) The majority of the Board be comprised of outside directors. (ii) The boards of all listed companies registered in the UK should comply with the Code of Best Practice set out in the Report. (iii) The board should meet regularly, retain full and effective control over the company and monitor the executive management. (iv) The directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities. (v) The directors should report on the effectiveness of the company’s system of internal control and report that the business is a going concern. (vi) It is the board’s duty to present a balanced and understandable assessment of the company’s position. (vii) The Institutional Shareholders’ Committee (ISC) to represent the overwhelming majority of institutional shareholders in the UK. The ISC provides a channel of communication and forum for discussion between institutional shareholders, corporate management and others on wider issues. (viii) The explanation of directors’ responsibilities will require a relatively formal statement, which should cover the following points: (ix) All listed companies which have not already done so should establish an audit committee, and places great emphasis on the importance of properly constituted audit committees in raising standards of corporate governance. (x) The statutory responsibilities of directors and auditors relating to accounts and audit are laid down. (xi) There be a clear division of responsibilities at the top, primarily that the position of Chairman of the Board be separated from that of Chief Executive, or that there be a strong independent element on the board; (xii) Remuneration committees for Board members be made up in the majority of non-executive directors; and (xiii) That the Board should appoint an Audit Committee including at least three non-executive directors. 20. The provisions of the Code were given statutory authority to the extent that the London Stock Exchange required listed companies to ‘comply or explain’; that is, to enumerate to what extent they conform to the Code and, where they do not, state exactly to what degree and why. King Committee (South Africa) 21. In South Africa, the ‘King Report on Corporate Governance’ presents guidelines for the governance structures and operation of companies. This Report has been cited as “the most effective summary of the best international practices in corporate governance”. Four reports have been published in a series. 22. The key principles from the first King report covered: (i) Board composition and mandate, including the role of non-executive directors and guidance on the categories of people who should make up the non-executive directors (ii) Appointments to the board and guidance on the maximum term for executive directors (iii) Determination and disclosure of executive and non-executive director’s remuneration (iv) Board meeting frequency (v) Balanced annual reporting (vi) The requirement for effective auditing (vii) Affirmative action programs (viii) The company’s code of ethics 23. The key principles from the first King report covered: (i) Board of directors’ makeup and mandate, including the role of non-executive directors and guidance on the categories of people who should make up the non-executive directors (ii) Appointments to the board and guidance on the maximum term for executive directors (iii) Determination and disclosure of executive and non-executive director’s remuneration (iv) Board meeting frequency (v) Balanced annual reporting (vi) The requirement for effective auditing (vii) Affirmative action programs (viii) The company’s code of ethics 24. King III is made applicable to all entities including, public, private and non-profit. The report incorporated a number of global emerging governance trends: (i) Alternative dispute resolution (ii) Risk-based internal audit (iii) Shareholder approval of non-executive directors’ remuneration (iv) Evaluation of board and directors’ performance 25. King IV assumes application of all principles, and requires entities to explain how the principles are applied – thus, apply and explain. King IV is principle- and outcomes-based rather than rules-based. It states that corporate governance should be concerned with ethical leadership, attitude, mindset and behaviour. Transparency is the hallmark. Well-considered disclosures are recommended. More prominence is on payment of remuneration, which is in line with international developments. It recognises information in isolation of technology as a corporate asset that is part of the company’s stock of intellectual capital and confirms the need for governance structures to protect and enhance this asset. There is a new emphasis on the roles and responsibilities of stakeholders. Confederation of Indian Industry (CII) — 1996 26. In 1996, CII under initiative on Corporate Governance constituted National Task Force Chaired by Rahul Bajaj, with an objective was to develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, be these in the Private or Public Sector, Banks or Financial Institutions. The Task Force presented the draft guidelines and the code of Corporate Governance in April 1997. 27. The Committee noted that Corporate governance deals with laws, procedures, practices and implicit rules that determine a company’s ability to take managerial decisions vis-à-vis its claimants—in particular, its shareholders, creditors, customers, the State and employees. A Desirable Code of Corporate Governance was published by the Committee. 28. Desirable Code of Corporate Governance, inter alia, provided for: (ix) In case of listed company with turnover exceeding Rs.100 crores, independent directors should consist of: (a). 30% if Chairman is non-executive director, (b). 50% if Chairman & MD is the same person. (x) No single person should hold directorships in more than 10 listed companies. (xi) Non-executive directors should be competent and active. (xii) Commission not exceeding 1% (3%) of net profits for a company with (out) a MD. (xiii) Attendance record of directors should be made explicit at the time of reappointment; less than 50% no re-appointment. (xiv) Key information that must be reported to and placed before the board. (xv) Large listed companies should have an audit committee. (xvi) Compliance certificate signed by CEO & CFO. Transparency is the hallmark. Well-considered disclosures are recommended. Hampel Committee (1998) 29. The Committee’s agenda was to “promote high standards of corporate governance in the interests of investor protection and in order to preserve and enhance the standing of companies listed on the [London] Stock Exchange”. In the Report, the Committee indicated its intention to produce a document containing a set of principles of corporate governance, and (ii) a code of good corporate governance practice – consisting of a combination of the Cadbury and Greenbury Codes and some Hampel Committee recommendations. The intention is that the current listing rules, which require listed UK companies to confirm their compliance with – and explain any non-conformance with – the Cadbury and Greenbury Codes, will be replaced by a rule requiring companies to disclose how they: Apply the principles of corporate governance; and Comply with the combined code including a requirement to justify any significant variances. 30. The Report suggested that companies should be required to include a narrative statement of how they apply a set of principles of corporate governance. The principles set out in the Report are about directors, Directors’ Remuneration, Shareholders and accountability and audit. Kumar Mangalam Birla Committee (2000) 31. In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate governance. The report submitted by the committee is the first formal and comprehensive attempt to evolve a ‘Code of Corporate Governance’, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets. 32. The committee divided the recommendations into two categories, namely, mandatory and non-mandatory. The recommendations which are absolutely essential for corporate governance can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. 33. Mandatory Recommendations include: (i) Composition of Board Of Directors – Optimum Combination Of Executive & Non-Executive Directors (ii) Audit committee – with 3 independent directors with one having financial and accounting knowledge. (iii) Remuneration committee be constituted (iv) Board procedures – at least 4 meetings of the board in a year with maximum gap of four months between two meetings. To review operational plans, capital budgets, quarterly results, minutes of committee’s meeting, etc. (v) Director shall not be member of more than ten committee and shall not act as chairman of more than five committees across all companies (vi) Management discussion and analysis report covering industry structure, opportunities, threats, risks, outlook, internal control system (vii) Information sharing with shareholders 34. Other recommendations include: (i) Role of Chairman (ii) Remuneration Committee of Board (iii) Shareholders’ right for receiving half yearly financial performance postal Ballot (iv) Covering Critical Matters Like Alteration in Memorandum Etc. (v) Sale of Whole or Substantial Part of The Undertaking (vi) Corporate Restructuring (vii) Further Issue of Capital (viii) Venturing into New Businesses Naresh Chandra Committee (2002) 35. The Ministry of Corporate Affairs had appointed a high-level committee in August 2002 to examine various corporate governance issues. The Committee’s recommendations relate to: (i) Disqualifications for audit assignments; (ii) List of prohibited non-audit services; (iii) Independence Standards for Consulting, Other Entities that are Affiliated to Audit Firms; (iv) Compulsory Audit Partner Rotation; (v) Auditor’s disclosure of contingent liabilities; (vi) Auditor’s disclosure of qualifications and consequent action; (vii) Management’s certification in the event of auditor’s replacement; (viii) Auditor’s annual certification of independence; (ix) Appointment of auditors; (x) Setting up of Independent Quality Review Board; (xi) Proposed disciplinary mechanism for auditors; (xii) Defining an independent director; (xiii) Percentage of independent directors; (xiv) Minimum board size of listed companies; 36. In conclusion, one can state that the Committee has observed “Good corporate governance involves a commitment of a company to run its businesses in a legal, ethical and transparent manner – a dedication that must come from the very top and permeate throughout the organisation. That being so, much of what constitutes good corporate governance has to be voluntary. Law and regulations can, at best, define the basic framework – boundary conditions that cannot be crossed.” SEBI and Clause 49 of the Listing Agreement 37. Securities and Exchange Board of India (SEBI) was established in 1992 under an Act of Parliament. It monitors and regulates corporate governance of listed companies in India through Clause 49 of the Listing Agreement. This clause is incorporated in the listing agreement of stock exchanges and it is compulsory for them to comply with its provisions. It was first introduced in the financial year 2000-01 based on the recommendations of Kumar Mangalam Birla committee. 38. As a major step towards codifying the corporate governance norms, SEBI enshrined the Clause 49 in the Equity Listing Agreement (2000). In India, this clause serves as a standard of corporate governance. The clause requires that half the directors on a listed company’s board must be Independent Directors. In the same clause, the SEBI had put forward the responsibilities of the Audit Committee, which was to have a majority Independent Directors. 39. Clause 49 of the Listing Agreement is applicable to companies which wish to get themselves listed in the stock exchanges. This clause has both mandatory and non-mandatory provisions. Key Mandatory provisions are as follows: (i) Composition of Board and its procedure – frequency of meeting, number of independent directors, code of conduct for Board of directors and senior management; (ii) Audit Committee, its composition, and role (iii) Provision relating to Subsidiary Companies (iv) Disclosure to Audit committee, Board and the Shareholders (v) CEO/CFO certification (vi) Quarterly report on corporate governance (vii) Annual compliance certificate In 2014, the clause 49 was amended to include Whistle-blower policy as mandatory provision. 40. Key Non-mandatory provisions include the following: (i) Constitution of Remuneration Committee (ii) Training of Board members (iii) Peer evaluation of Board members 41. After the Satyam Scandal, SEBI became more and more strict towards disclosure norms and implementation of Clause 49 provisions to bring about sea changes in transparency and accountability in the country. The Companies Act gave these norms a proper statutory backing. Narayana Murthy Committee (2002–2003) 42. SEBI, subsequently constituted a Committee on Corporate Governance in 2002, in order to evaluate the adequacy of existing corporate governance practices and further improve these practices. It was under the Chairmanship of Shri N. R. Narayana Murthy. 43. The Committee was set up to review Clause 49, and suggest measures to improve corporate governance standards. 44. Major mandatory recommendations focused on: (i) Strengthening the responsibilities of audit committees; (ii) Improving the quality of financial disclosures, including those related to related party transactions and proceeds from initial public offerings; (iii) Requiring corporate executive boards to assess and disclose business risks in the annual reports of companies; (iv) Introducing responsibilities on boards to adopt formal codes of conduct; the position of nominee directors; (v) Stock holder approval and improved disclosures relating to compensation paid to nonexecutive directors. Non-mandatory recommendations included: (vii) Moving to a regime where corporate financial statements are not qualified; (viii) Instituting a system of training of board members; and (ix) Evaluation of performance of board members. 45. These recommendations codify certain standards of ‘good governance’ into specific requirements, since certain corporate responsibilities are too important to be left to loose concepts of fiduciary responsibility. Their implementation through SEBI’s regulatory framework can strengthen existing governance practices and will provide a strong incentive to avoid corporate failures. The Committee noted that the recommendations contained in their report can be implemented by means of an amendment to the Listing Agreement, with changes made to the existing clause 49. SEBI’s regulatory framework can strengthen existing governance practices and will provide a strong incentive to avoid corporate failures. Uday Kotak Committee (2017) 46. One more Committee on corporate governance was formed by SEBI in 2017 under the Chairmanship of Mr. Uday Kotak. The aim was of improving standards of corporate governance of listed companies in India. A good number of recommendations have been accepted and implemented by SEBI. 47. Major suggestions can be summarised here. On composition and role of the board of directors, the Committee was of the view that the board of directors as a whole is responsible to all stakeholders for meeting the requisite standards of corporate governance in a company. Accordingly, the Committee sought to address the issues inter alia relating to strength of the board, its diversity, issues pertaining to independent directors and disclosure of skills / expertise of the board members. 48. Other recommendations include: (i) The institution of independent directors is essential to a good corporate governance framework as they are expected to bring objectivity into the functioning of the board and improve its effectiveness. (ii) Delegation of responsibilities to committees of the board is necessary for the effective governance of listed entities given the broad range of roles and responsibilities of the board. Committee’s recommendations addressed issues pertaining to representations in the board committees, setting minimum number of meetings and quorum for each such committee and increase in the number and nature of board committees. (iii) Enhanced monitoring of group entities. (iv) To strengthen transparency on related party transactions, new regulation suggested. (v) Increased and better participation by investors will enhance good governance. Removing the boundaries of physical meetings and adopting the use of technology. 49. The Kotak Committee recommendations addressed certain core issues in relation to corporate governance. These recommendations are in line with the global practices and amendments made to the SEBI LODR Regulations are a step forward in terms of achieving transparency and credibility in the corporate environment altogether. The Companies Act, 2013 — Statutory Framework 50. The Companies Act, 2013 also came up with a dedicated chapter on Corporate Governance. Under this law, various provisions have been enacted under at least eleven heads viz. Composition of the Board, Woman Director, Independent Directors, Directors Training and Evaluation, Audit Committee, Nomination and Remuneration Committee, Subsidiary Companies, Internal Audit, SFIO, Risk Management Committee and Compliance to provide a rock-solid framework around Corporate Governance. 51. Making accounting standards for corporates and standards on auditing for company auditors issued by the ICAI mandatory is one singular step that has significantly contributed to the field of corporate governance. These provisions lead to transparent and comparable financial statements to be laid on the table. 52. In Companies Act, 2013 there are the important provisions under the Companies Act, 2013 (the new Act) and the Rules framed thereunder to further strengthen corporate governance. 53. Composition of the Board of Directors [Sections 149, 151]: Minimum number of directors has been prescribed, every company shall have maximum 15 directors, for appointment of more than 15 directors after passing a special resolution, requirement to have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year. Every listed company and large public companies are required to have at least one-third of total number of directors as independent directors. Any intermittent vacancy of an Independent Director is required to be filled up at the earliest. Listed company and large public companies are required to appoint at least one wholetime director, a woman director. i. Concept of Independent Directors (Section 149 and 150): The Concept of Independent Directors has been introduced for the first time in Company Law. The Act says that an independent director must be “a person of integrity and possess the relevant expertise and experience” in the opinion of the board. Every listed company is required to have at least 1/3rd independent directors on its board. The term for appointment of independent directors has also been prescribed with a view to maintain independence. Independent directors shall hold office for a term up to five consecutive years and which shall not exceed for more than two consecutive terms. He is eligible for appointment in same company after cooling period of three years. Also, the company and the independent directors shall abide by the provisions of (Code of Conduct) specified in Schedule IV of the Act. The Central Government is also vested with the power to prescribe qualifications for IDs. The Act contemplates the institution of a data bank of IDs, from which persons may be chosen by companies. ii. Limit on Directors of a Company: The maximum limit of directors in the Company has been increased to 15 from 12 as per Companies Act 1956 with a power to add more directors upon passing of Special Resolution. (Section 149(1)) iii. Restriction on number of directorship a person can hold: A person cannot become director in more than 20 companies as against 15 in Companies Act 1956 and out of this 20, he cannot be director of more than 10 public companies. (Section 165) iv. Requirement of Woman Director: In prescribed class or classes of companies, there should be at least 1 woman director. (Section 149) v. Concept of CSR (Section 135): As per the Act, every company having net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit of Rs. 5 crore or more during the immediately preceding financial year is required to have a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director for companies. The Committee to formulate and recommend to the Board, a Corporate Social Responsibility Policy: — indicating the activities to be undertaken by the Company; and — recommending the amount of expenditure to be incurred on the activities. Also, the Board is required to ensure that at least 2% of average net profits during 3 immediately preceding years spent every year on CSR and in the event of failure, Board to specify the reasons for not spending the amount, in its report made under Section 134(3). vi. Appointment of Internal Auditor (Section 138): Class of companies as may be prescribed is required to appoint an internal auditor to conduct internal audit of the books of company. Internal Auditor shall be a Chartered Accountant or Cost Accountant or such other professional as may be decided by Board. vii. E-Governance Initiatives: In order to give importance to Green initiatives and to make paperless office, E-Governance has been proposed for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, circulation of financial statements electronically and to place on company’s website, holding of board meetings through video conferencing/ other electronic mode; voting through electronic means, permission to pay dividend electronically. viii. Board’s Report (Section 134): The Board’s report for every company except for One Person Company, shall provide various types of additional information like details of web link, number of meetings of the Board, Company’s policy on directors’ appointment and remuneration; explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the Company Secretary in his secretarial audit report, particulars of loans, guarantees or investments etc. The Directors Responsibility Statement in case of listed company shall also include additional statement related to internal finance control and compliance of all applicable laws. The Report of the Board of Directors is required to include a DRS on the aspects of applicable accounting standards compliance, accounting policies as selected are consistently applied and judgments and estimates are made in a reasonable and prudent manner to ensure true and fair view of the state of affairs at the end of financial year and of the profit or loss for that period, maintenance of adequate accounting records, annual accounts prepared on a Going Concern basis, ensure compliance with the provisions of all applicable laws, etc. ix. Annual Evaluation of Board: In case of a listed company and every large public company the Board Report to include, inter alia, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors. x. Codified Duties of Directors: The Act has codified duties of the directors as given below: a) To act in accordance with the articles of the company b) To act in good faith, promote the corporate objects and in the best interests of all stakeholders, community, environment c) Act with due and reasonable care, skill and diligence d) No direct or indirect conflict of interest e) Not to assign director’s office xi. Additional Disclosure Provisions: Code on independent directors, remuneration to directors, etc. And such other disclosure provisions have also been made. xii. Investor Protection Measures: To give more protection to the money invested by the investors, the concept of class action suits has been introduced, penalty and punishment has been widened. A suit may be filed by a person who is affected by any misleading statement or the inclusion or omission of any matter in the Prospectus or who has invested money by fraudulent inducement. Also an exit opportunity to dissenting shareholders on variation in terms of contract or objects in a prospectus is permitted i.e., in cases where 90% or more of the equity shareholding in a company is acquired by any person or group of persons, such a group is obliged to make an offer to buy out the shares held by the minority shareholders. 54. It is evident from provisions of the Companies Act, 2013 that much emphasis has been placed on ensuring greater corporate governance and reporting thereon. Audit & Regulatory Oversight 55. The Ministry of Corporate Affairs constituted a committee for Recommendations on Regulating Audit Firms and the Networks. The Committee has released its Findings and Recommendations. It states that auditors are to resolve agency problems. Moreover, independent audits are fundamental to taking informed and correct investment decisions. Availability of trustworthy financial information on the performance of companies is important to proper functioning of market economy. Serious concerns arise if auditors’ independence is compromised or the trust reposed on them is betrayed. 56. The MCA is making consistent efforts for contributing and enhancing corporate governance. Moreover, independent audits are fundamental to taking informed and correct investment decisions. Availability of trustworthy financial information on the performance of companies is important to proper functioning of market economy. Way Forward 57. The future of corporate governance hinges on stakeholder behaviour and regulatory responses. The managements will yield to stakeholder pressure only when non-compliant entities are ridiculed in business and compelled to trade the path of rectitude. 58. In this sense, corporate governance should become more a habit than regulatory compliance reaction. When this happens, the Companies will strive for excellence in corporate governance. This will happen only when the market recognises value of good corporate behaviour and accord premium therefor, not as a cost, but as a contribution. Core Takeaway: Corporate governance should become more a habit than regulatory compliance reaction. When this happens, companies will strive for excellence in corporate governance, and the market will accord a premium therefor, not as a cost, but as a contribution. References Cadbury, A (1992). ‘Report of the Committee on the Financial Aspects of Corporate Governance’, Gee; London. CII Committee Recommendations Greenbury, R (1995). ‘Directors Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury’, Gee; London. Hampel, R (1998). ‘Committee on Corporate Governance: Final Report’, Gee; London. Kumar Mangalam Birla Committee Recommendations on Corporate Governance Narayana Murthy Committee Recommendations on Corporate Governance Uday Kotak Committee Report SEBI Listing Agreement The Companies Act, 2013

ICAI Journal Focus • Sustainability • Social Finance & Capital Markets Social Stock Exchange – A Lifeline for Social Enterprises A Comprehensive Treatise on the Emerging Social Stock Exchange (SSE) Ecosystem in India: Regulatory Architecture, SEBI Working Group Recommendations, 12 Global Benchmark Models, Impact Measurement Metrics, and the Crucial Role of Chartered Accountants in Social Audit Authors: CA. (Dr.) Sanjeev Kumar Singhal & CA. Durgesh Kabra (Members of ICAI) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 40–50 (Journal pp. 568–578) Subject: Sustainability, Social Stock Exchange, Social Impact Reporting & Social Audit Executive Overview “Traditional businesses are embracing sustainability for innovation, returns, and sustainable impact. At the same time, the broader objectives of a sustainable, resilient, and inclusive economy can be met only with the support of the third sector of the economy, namely the non-profit sector. However, this sector despite its huge relevance and need often faces a dire crunch of financial resources. Honourable Finance Minister Smt. Nirmala Sitharaman in her budget speech 2020 announced the setting up of a Social Stock Exchange. A Social Stock Exchange is a holistic approach towards the overall development of the social sector by unlocking large pools of social capital, where donors and social enterprises will meet together, social enterprises will list to gather social capital via various fundraising additional instruments. However, the setting up of the whole new ecosystem of a social stock exchange needs careful planning and consideration of various related issues to ensure that the social solutions envisaged are safe and sustainable. We need a new set of regulations/procedures for Social Stock Exchanges vis a vis listing of social enterprises, measurement, and reporting of social and/or environmental impacts – preparation of social impact reports, standardizing social finance, to name a few.” 1. Introduction & Typology of Social Enterprises Social Enterprises (SE) are organizations that pursue a social mission. Social Enterprise is more a matter of purpose than legal form. The two types of social enterprises include: For-Profit Social Enterprise (FPE): Includes Companies registered under the Companies Act (both Private Limited and Public Limited), Sole Proprietorships, Partnership Firms, Hindu Undivided Families (HUFs), and Limited Liability Partnerships (LLPs). Non-Profit Social Enterprise (NPO): Includes Section 8 companies, Trusts, and Societies. Defourny and Nyssens (2010)1 have provided four criteria that reflect the economic and entrepreneurial dimensions of social enterprises: A continuous activity producing goods and/or selling services A high degree of autonomy A significant level of economic risk A minimum amount of paid work. Further, Defourny and Nyssens (2010) have also stated five indicators that encapsulate the social dimensions of such enterprises including: An explicit aim to benefit the community An initiative launched by a group of citizens A decision-making power not based on capital ownership A participatory nature, which involves various parties affected by the activity A limited profit distribution. 1 Defourny, J., & Nyssens, M. (2010). Conceptions of Social Enterprise and Social Entrepreneurship in Europe and the United States: Convergences and Divergences. 2. Social Stock Exchange and Prerequisites Along with the ongoing financial crunch, the non-profits face another big challenge of lack of visibility to investors and donors. Social Stock Exchange (SSE) would give social enterprises much greater control over social and environmental missions, boost the availability of funding for scaling up operations, and create an ethical and transparent investment environment. “Social Stock Exchange (SSE) would give social enterprises much greater control over social and environmental missions, boost the availability of funding for scaling up operations, and create an ethical and transparent investment environment.” SSE is indeed a progressive step towards the socio-economic development in the country especially for achieving 13 SDGs (leaving out Goals 12, 13, 14 and 17) as prioritised by Niti Aayog2 wherein a platform will be created for the social enterprises and the investors to come together. 2 Niti Aayog SDG India Index: https://niti.gov.in/sdg-india-index The social enterprises have their unique needs which could be met with an enabling policy and regulatory environment, robust governance structures and measurable social impacts. The basic prerequisite for an SSE is the existence of social enterprises. Besides social enterprises an SSE would operate with: Investors/Donors: Investors could be impact investors, incubators, accelerators, corporations and crowd funders. Impact investors/ESG investors are those investors who invest with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. They evaluate investment avenues based on ESG parameters and/or ratings and are open to accepting below market rate financial returns. Incubators provide financial support and advice to entrepreneurs who want to develop and pilot their social impact ideas. Accelerators facilitate access to funding, provide mentoring and training, help refine business models and provide support for measurement of social impact. Crowd funders are those who provide small amounts of capital but are large in number, to finance a business venture via social media platform and websites. Intermediaries and other independent agencies: Some intermediaries, probably brokers, would facilitate sale and purchase of financial instruments. Other independent agencies/individuals namely, valuers, rating agencies, social impact assessors, information repositories, social auditors would also play an important role in running and functioning of SSE. Infrastructure: Exchange platform – like the existing Bombay Stock Exchange and National Stock Exchange or in partnership with any one of them, with specific listing norms, trading rules, operational processes, reporting requirements and governance structures. Legal framework – Appropriate laws pertaining to formation, listing, reporting and taxation along with the regulatory framework for SE to form and operate is needed wherein the formation and fund raising can be done as early as possible without bureaucratic hiccups. Also, investor protection norms and resolution mechanisms should be put in place. Regulatory framework – Securities and Exchange Board of India (SEBI) / any other body would act as the regulatory authority for the SSE for the smooth functioning of the entire SSE ecosystem. 3. SEBI – Working Group on Social Stock Exchange Securities and Exchange Board of India (SEBI) constituted a Working Group to review and recommend possible structures and mechanisms, within the securities market domain, to facilitate the raising of funds by social enterprises and voluntary organizations as well as associated regulatory framework inter-alia covering the issues relating to eligibility norms for participation, disclosures, listing, trading, oversight etc. The Working Group Report3 on Social Stock Exchange defines SEs as a class or category of enterprises that are engaged in the business of “creating positive social impact”. They would provide a declaration stating their intent to create positive social impact, describing the nature of the impact they wish to create and reporting the impact that they have created. There will be an additional requirement for FPEs to conform to the assessment mechanism to be developed by SEBI. Both FPEs and NPOs will be subject to a common minimum standard of reporting social impact, and operating practices (governance and financial reporting). While both FPEs and NPOs are concerned with social impact, the type of funding avenues open to them are fundamentally different given the nature of their legal structures and expectations of their “fund providers”. Specifically, FPEs can raise equity while NPOs cannot (except Section 8 companies). The report calls for direct listing of NPOs through the issuance of bonds, a range of funding mechanisms, pairing innovative instruments by which NPOs could associate with the SSE, a reporting standard that offers investors and donors a standardized framework for measuring social impact and Sector-level infrastructure institutions such as information repositories and social auditors. 3 Report of the Working Group on Social Stock Exchange: https://ourgovdotin.files.wordpress.com/2020/06/report-of-the-working-group-on-social-stock-exchange.pdf Recommendations of SEBI Working Group Report on Social Stock Exchange The recommendations of the group have been summarized below: Fundraising Instruments: Besides equity, debt and crowdfunding, instruments of fund-raising such as zero-coupon-zero-principal (ZCZP) bonds, social venture funds (SVFs) and mutual funds would provide a wide gamut of options to “donor” investors looking to invest with an objective to create a social impact as well as for corporates to deploy CSR funding by connecting directly with social organisations. ZCZP bond would be listed on SSE and works the same way as a donation providing the NGO both high visibility and credibility. SVFs work as “grants-in, grants-out” vehicles for charitable purposes under the SEBI’s Alternative Investment Fund (AIF) guidelines. Information Repositories (IRs): IRs will provide credible, standardised information about the NPOs. As of now, information of only a small fraction of all NPOs is available. The IRs would perform the functions of enumeration (listing of active NPOs and their activities), standardization (articulating a standard reporting format for NPOs and helping them to do information reporting), and verification (due diligence). This would build greater recognition and trust in the sector among funders and the community at large. Introducing Standard Reporting Norms and Impact Measurement for SE: Measuring social impact poses a huge challenge due to lack of a common currency for measurement, use of proxies often dilute focus on the beneficiary, no defined timescale, difficulties in attribution, and various unintended externalities. Common Minimum Standard for Reporting Social Impact: A common minimum standard for reporting social impact is proposed which comprises three sections: Section 1: Strategic Intent and Goal Setting Section 2: Social Impact Scorecard Section 3: General information about members of governing body, prior funding history and financials, registrations/licenses. To begin with, Minimum Reporting Standard for the immediate term for SE interested to list on SSE has been proposed which would extend to limited third party verification by social auditors in the intermediate term and full third party verification by social auditors in the ideal end state. Outcomes-Oriented Measurement: A greater shift towards outcomes-oriented measurement in place of inputs and outputs-oriented measurement, especially for those NPOs that are looking to create social impact at longer horizons than a year is envisioned. With respect to impact measurements a clearer and more refined statements of intent to create social impact by SE is expected. SE would be subject to more rigorous assessments of the social impact that is being created (along the reach, depth and inclusion dimensions) and more graded evaluations would arise therefrom with more granular disclosures of governance mechanisms and financial operations. Presently Impact Reporting and Investment Standard (IRIS) Metrics and Global Impact Investing Rating System (GIIRS) Rating system is widely used. IRIS provides social and environmental impact indicators with standard definitions. GIIRS is based on IRIS definitions and rates organizations based on Governance, Community, Workers, Environment, Social and Environment Focused Business Models. Standardized metrics of social impact and standardized reporting frameworks are needed that would help SE to measure/quantify and report/disclose social impacts in a transparent and accountable manner. Social Auditors: Social auditors will perform an independent verification of impact reporting. While in the immediate term, NPOs need only self-reporting, from the intermediate term onwards, social auditors can take over this function. Capacity Building Fund: Operating the “capacity building fund” with an initial allocation of INR 100 crore for enhancing reporting capabilities by NPOs (particularly the smaller NPOs). Creating awareness and driving adoption of this fund among NPOs, philanthropists, and donors. “Measuring social impact poses a huge challenge due to lack of a common currency for measurement, use of proxies often dilute focus on the beneficiary, no defined timescale, difficulties in attribution, and various unintended externalities.” Other Essential Policy Interventions for the SSE Ecosystem Allow funding to NPOs on SSE to count towards CSR commitments of companies and authorizing the trading of CSR spends between companies with excess CSR spends and those with deficit CSR spends via the SSE platform. Notification of zero coupon zero principal (ZCZP) bond of NPOs as a security under Securities Contracts (Regulation) Act (SCRA). Enabling foreign entities to invest in SVFs listed on the SSE by clarifying rule 4 of the Foreign Contribution (Regulation) Rules (FCR Rules), 2011. Lowering of the minimum corpus requirement and minimum ticket size for SVFs. The current floors of INR 20 crores and INR 1 crore limit the participation of smaller outcome funders. Investors to get benefits which allow all investments in securities/instruments of NPOs listed on SSE to be tax deductible, and corporates to deduct CSR expenditure from their taxable income, among other things. Investment by companies will be considered as part of their Corporate Social Responsibility (CSR) initiatives. Allowing a tax holiday of 5 years to FPEs listed on the SSE, from the time of first listing and revenue generated by stock exchanges through SSE to be tax deductible. 4. Social Stock Exchange – Global Models (12 Global Benchmarks) Across the world, several jurisdictions have experimented with social stock exchanges and social investment platforms. The key global models include: 1. Brazil – Brazil’s Socio-Environmental Impact Exchange (BVSA) Brazil set up the first SSE in the name of Brazil’s Socio-Environmental Impact Exchange (BVSA) under the umbrella of BOVESPA Stock Exchange in 2003. It is an information exchange which evaluates NPOs and identify projects requiring funds from private investors. It provides fund to specific projects within a fixed timeline. Providers of capital/fund do not receive any financial return. Impact on society is measured through SDGs. Rigorous selection process for listing of projects is followed on the basis of 5 Ps as the selection criteria (SDG–People, Planet, Prosperity, Peace, Partnership). 2. South Africa – South African Social Investment Exchange (SASIX) SASIX is the second SSE in the world, established in 2006, tied with the Johannesburg Stock Exchange. SASIX works like a conventional stock exchange allowing ethical investors to start investing from as little as Rand 50 (~INR 200) to, in turn, get a tax benefit. The exchange provides access to capital for small and remote organisations and investors who want to invest in one project or a portfolio of projects – by purchasing shares online or through the offices of the Greater Good South Africa Trust. In addition to this, Greater Good South Africa provides analysis of the achieved outcomes and an assessment of the lessons learned at the end of the social investment cycle. SASIX provides independent research, evaluation and monitoring to ensure that listed projects meet a set of criteria as well as are able to deliver measurable returns both social and financial or any one of them4. Similar assessment and due diligence considerations are applied to projects as would be applied to financial investments. 4 NABARD Social Enterprise & Social Stock Exchange Report: https://www.nabard.org/auth/writereaddata/tender/0409202831Social%20Enterprise%20and%20Social%20Stock%20Exchange.pdf 3. UK – Social Stock Exchange in London (SSX) Established in June 2013, SSX does not provide share trading facility directly. It provides a database of companies (i.e. lists down social organisations for investors to invest in) who have passed a rigorous “social impact test” while at the same time acting as a research resource for would-be social investors. It acts as a strong information repository – an information provider publishing standardised and comparable social impact data on listed organisations. For any organisation to be listed on the social stock exchange, it must be registered in the London Stock Exchange and must successfully undergo a social impact test conducted by independent experts. There is a four-stage admissions process and mandatory reporting requirement: Step 1: Basic Application Form Step 2: Impact Report addressing six key areas Step 3: SSE Admission Panel judges the suitability Step 4: Annual review of company’s social or environmental metrics by 11 finance and impact investing experts. Mature companies (for profit only) already listed on conventional SE can only list on SSX and can trade on whatever securities. Social Impact report for review is mandatory. To stay listed, annual impact reports to be made available on website. 4. Singapore – Impact Investment Exchange (IIX) IIX (2013) is based on a crowd-funding model that allows mature social enterprises to raise capital by issuing securities to a larger group of investors on a public platform that facilitates trading in listed securities (including shares and bonds). IIX’s USD 20 million (~INR 150 crore) women’s livelihood bond was the first instrument listed on the impact exchange. While being similar to the UK’s SSX model in some ways, the Singapore model also includes non-profits in the sector who can issue debt instruments like bonds. While regulated by the financial services commission and operated by Stock Exchange of Mauritius (SEM), IIX screens potential issues on the impact eligibility criteria and provides recommendations to SEM. IIX uses the Social Return on Investment (SRoI) framework and the IRIS metric. IIX mandates the potential impact issuers to appoint an authorised impact representative (AIR). AIR safeguards the interests of investors by ensuring SE commitments in terms of appropriate usage of capital, compliance to corporate governance norms and financial integrity. 5. Canada – Social Venture Connexion (SVX) SVX established in 2013 is perhaps the only SSE which comes close to being a full-fledged social exchange albeit for institutional investors only. SVX brings social and environmental venture of all types – from early-stage, scaling ventures, to funds that directly invest themselves, to non-profits offering debt opportunities. SVX is an online platform that uses crowd funding and private placement to support capital raising by impact ventures and funds. Only accredited investors (who meet certain net worth or income benchmarks) can transact. For social businesses and organisations, SVX allows provisions to list organisations and its securities, tailor fundraising requirements and attract investors. The broad range of securities issued through SVX includes common shares, preferred shares, bonds, convertible debentures and fund units and currently no secondary trading is allowed, only accredited investors are permitted to access SVX, which include foundations and endowments, asset managers, wealth advisors and HNIs. Satisfactory Global Impact Investment Rating System (GIIRS) rating is mandatory for profit businesses. 6. Mauritius – The Impact Exchange (IX) The IX was established in 2013 and has yet to fully launch in the sense of listing individual social businesses whose securities can be bought and traded. At IX, for-profits SE will be able to sell common equity, preference shares or bonds while non-profit SE will be able to list bonds. So far, it appears that the last piece is closest to completion with the upcoming launch of two new types of social impact bonds. The IX is a joint initiative between the Stock Exchange of Mauritius Ltd (SEM) and Impact Investment exchange Asia (IIX Singapore), based in Singapore. The latter incubated IX “to allow larger Social Enterprises to access the public capital markets while offering socially-minded Impact Investors the opportunity to efficiently and effectively direct their capital into liquid investments that align with their values.” Entities listed are subject to conventional securities regulation. Potential issuers must appoint an Authorized Impact Representative (“AIR”) to support them in the listing process and to ensure compliance with the listing requirements (social and financial)5. All AIRs must be accredited and registered with the SEM. 5 NABARD Social Enterprise & Social Stock Exchange Report: https://www.nabard.org/auth/writereaddata/tender/0409202831Social%20Enterprise%20and%20Social%20Stock%20Exchange.pdf 7. Jamaica – Jamaica Social Stock Exchange (JSSE) JSSE established in January 2019 has the primary objective as: Phase 1 – facilitating and promoting a higher culture of donation in Jamaica. Phase 2 – facilitate Social Value Creation through the business activity of SEs and high-levels of capital investment in Social Service creation. Fundraising by NPO is done via the online platform (Jamaica Social Investment Exchange – JSIX). Organizations list for donations. Donors are given access to site to donate to receive social shares. Social shares to be made tradable in JIIX. JSSE has an Advisory Board along with a Listing and Selection Committee and a dedicated in-house Management Team. Any company registered with the Companies Office or as a NPO with a technically and financially viable project/program with a Social Mission that will solve a social or environmental need, can apply. A selection process is followed to qualify an applicant for funding while listing will follow when full funding is received. 8. Luxembourg – Luxembourg Green Exchange (LGX) LGX is an SSE Equivalent dedicated to sustainable financial instruments, which include bonds, funds and other financial instruments. LGX is not a separate market but rather a unique repository for green, social and sustainability information and thus constitutes an accessible and comprehensive place where trustworthy information can be retrieved easily and for free. Funds getting a label by one of the following label agencies: LuxFLAG (Luxembourg), FNG (Germany), Swan (Nordics), and the TEEC, or SRI labels (French government) can only be exhibited on LGX. Such funds are committed to an ongoing reporting which covers the sustainability performance of the fund’s portfolio and a proof of label accreditation renewal. 9. United States – Mission Market (MM) Mission Market is an SSE Equivalent which connects socially-minded companies to investors, provides review for due diligence and offering documents, brings in the capital, and closes the transactions through its broker dealer partner. Accredited investors registered with MM can view approved offerings of SE on the site. For issuers, it provides support of alternative capital raising structures like the Direct Public Offering, Cooperative Shares, Private Equity, Private Placements, and unregistered debt offerings as well as provides marketing for offerings through widespread promotion of the platform and Virtual Road Show. Investor members are invited to online presentations, where individual issuers create video presentations describing their work and investment opportunities. All issuers must certify their impact and provide annual reporting using quantitative metrics as per the Impact Reporting and Investment Standards (IRIS). 10. Kenya – Kenya Social Investment Exchange (KSIX) Kenya Social Investment Exchange (KSIX) was launched in 2011 as an SSE Equivalent to profile social enterprise investment opportunities in Kenya. Interested impact investors would contact the KSIX to confirm their eligibility and to identify potential debt investment opportunities. It vets social enterprises and connects them with domestic and foreign impact investors. The listed social enterprise has to demonstrate social impact and financial sustainability beyond the funding period. The social purpose enterprise assessment processes must be informed by Global Reporting Initiative (GRI) and Impact Reporting and Investment Standards (IRIS). 11. Austria – Impact Finance Organization (IMFINO) IMFINO is an SSE Equivalent, which aims to connect impact investors with impact investment projects (entrepreneurs). It offers only “Industry Know How” of impact investing sector, and an open marketplace in which entrepreneurs are able to present sustainable projects (companies) for interested investors free of charge. The online platform for investors and entrepreneurs (Global Impact Investing Vienna Exchange – GIIVX) is going to be the major service of IMFINO. 12. New Zealand – New Zealand Stock Exchange (NZX) NZX is an SSE Equivalent which allows investors to donate small parcels of shares to a designated charity. As this could be more of an administrative burden than benefit to investors, all partners waive the fees associated with donations to ensure the viability of the programme. 5. Understanding Social Impact Measurement of Social Enterprises All investments are made as per the risk, return and liquidity trade-offs. However, the investments by SE and impact investors are done weighing all of these factors as well the “Social impact”. Social impact is the positive change that SE has created or effected over time. According to a Social Enterprise East of England (SEEE) booklet on ‘Measuring making a difference’, social impact measurement is the process of providing ‘evidence that your organisation – whether it is a social enterprise, voluntary or community organisation or traditional business – is doing something that provides a real and tangible benefit to other people or the environment.’ (SEEE 2009)6. This change could be social, economic and/or environmental. For SE creating positive social impact is at the heart of what they do and they need to identify, understand and capture the full value of the impact of their activities. It helps to know whether mission and vision is met or not. The benefits of impact measurement are many7. It facilitates not only knowing about the present impacts but also help for further putting the resources at the best use. Social impact assessment helps SE to plan better, work more effectively, and fruitfully build programs to scale. Knowing which activities are beneficial and bringing desired outcomes and which not is crucial. 6 Social Audit Network Guide: https://www.socialauditnetwork.org.uk/files/8113/4996/6882/Getting_started_in_social_impact_measurement_-_270212.pdf 7 FutureLearn Sustainable Business Course: https://www.futurelearn.com/courses/social-enterprise-sustainable-business/0/steps/20920 “Impact is the measure of benefits arising from an investment which is based on intentionality. The expression of an investor’s impact objectives acts as an important precursor to effective measurement. Impact measurement is an extremely difficult challenge.” Impact measurement is an extremely difficult challenge. Some impacts can be easily measured while some impacts are actually very difficult to measure/quantify. For example – How have a service changed lives? Since impacts vary across beneficiaries/ communities etc. it is difficult to end up to a meaningful assessment. Further, SE would measure and report on the impact they’re having, both now and in the future. To begin with measurement may be simple, easy but over time it becomes more and more complex. Impact of an SE reflects the long-term changes for people, the environment or the economy that the SE creates or contributes to. An SE should also know about the impacts which could not be achieved as well as unexpected impacts (either positive or negative) of its activities. Measuring Impact – Core Questions Measuring impact is useful not only to prove the social impact but also holds SE accountable. It furthers helps SE to attract additional funding. To begin with thinking about the impact of one’s activities need answer to the following questions: Changes in the long term for people, the environment or the society that SE creates or contributes to? What are the most important things we need to know about? What desired impacts, if not achieved would stop from meeting the mission? Are there any unexpected impacts of the activities (either positive or negative)? Who do we need to tell and in what form do they need to know (e.g. disclosure and report, funding framework etc.)? Prerequisites for Impact Assessment & Sequential Stages To assess impacts certain prerequisites are warranted: Primacy of social/environmental mission and intent of SE: This articulates the primary reason for the existence of SE, that is, Positive Social Impact. Clear purpose and Theory of Change: This forms the basis for performance assessment in terms of output, outcome, and performance. Impact Performance Measurement and Monitoring Systems: Commitment to ongoing monitoring and evaluation of impact performance using clearly defined impact indicators for performance assessment and reporting. The impact requirements follow multiple stages. The first stage is about mission and intent – specific and clearly stated positive social or environmental impact as the primary reason for the existence of the SE. The second stage is Clear purpose and the theory of change – this forms the basis of performance assessment to demonstrate output, outcomes, and social performance. The third stage is about Impact performance measurement and monitoring systems – commitment to ongoing monitoring and evaluation of impact performance using clearly defined impact indicators. Impact Reporting is the fourth stage – which calls for impact reports as per the reporting principles and requirements applicable to SE. The last stage is Independent Impact Certification by independent entities/bodies/assessors. Stages of Impact Measurement Impact measurement is nothing but the measure of benefits arising to the enterprise itself as well as its stakeholders. It is done in five stages8: Planning: The planning stage includes understanding the use and management of resources that would most likely deliver the desired outcomes. Engaging: At the engaging stage, stakeholders are engaged to identify benefitting stakeholders as well as recognise the nature of the benefit to them. This involves internal stakeholders like employees, management, volunteers, and trustees, present and past to learn together about the proposed intervention and share in the expectation of the value it can bring. Setting relevant measures: The planned intervention and the outcomes and impacts it can deliver are matched to the stakeholders which will benefit to develop measures. This would help in planning the impact measurement and likely improvements needed for future. Measure, validate and value: Helps internal and external parties focus their efforts on what will deliver the desired outcomes. It enables continuous improvement and draws parties together to support each other. Report, learn and improve: Supports outreach, both in reaching more potential partners, beneficiaries, funders to enhance impacts. 8 European Commission Impact Measurement Report: https://op.europa.eu/en/publication-detail/-/publication/0c0b5d38-4ac8-43d1-a7af-32f7b6fcf1cc 6. Disclosure and Reporting – Social Accounts “Social enterprises work to make a difference for people, the planet and the way limited resources are being used. The enterprise and its stakeholders - those associated with it or affected by it – need to know if it is achieving its objectives, what impact it is having on society and on the environment, if it is living up to its values, and if the objectives and values are relevant and appropriate.” Disclosures and accounts facilitate this assessment and when audited, can be published as a Social Report. Publishing the Social Report allows all stakeholders – those who benefit from what is done, those who do the work, those who pay for it, those who work in partnership – to understand the true nature of the enterprise achievements, developments and the differences made. These disclosures and accounts are called Social Accounts. Social accounts are a rich source of information for use internally for strategic and business plans as well as externally to all stakeholders including funders and investors. In a way the enterprise involves stakeholders by providing a useful framework of all its activities and extends its accountability towards them. Two types of disclosures are recommended for social enterprises in line with Impact Exchange Board Listing Guide9: Continuous Disclosures: All material information to be immediately released for the benefit of stakeholders. Periodic Disclosures: Reports at regular intervals: Quarterly Financial Reports Annual Financial Reports (Audited) Half Yearly Impact Reports Annual Impact Reports (Certified) Annual Impact Certification of ongoing status as impact entity. 9 Impact Exchange Listing Guide: https://iixglobal.com/wp-content/uploads/2017/04/Impact_Exchange_Listing_Guide-2017-1.pdf 7. Social Impact Measurement Framework – Inputs to Impact Logic Chain Social impact measurement seeks to identify and quantify the impacts of SE via an impact measurement framework10. The impact measurement framework provides the structure for assessing all aspects of an enterprise impact using multiple tools and/or methods to collect information. The enterprise intended results would be in the form of – Outputs, Outcomes and Impacts. The intended results would flow from Inputs and activities. “The enterprise intended results would be in the form of – Outputs, Outcomes and Impacts. The intended results would flow from Inputs and activities. The various resources supplied are known as inputs.” The measurement of inputs, activities, outputs, outcomes and impact is important because it focusses both on accountability as well as performance of SE. The various resources supplied are known as inputs. Inputs could be financial, intellectual, human or others. Inputs lead to concrete actions in the form of activities aimed at creating improvements – changes – in the lives of beneficiaries. Impacts vary from sector to geography to beneficiaries. Hence the measurement of impact requires an expert who can measure impact on some indicators. Standardized indicators like IRIS may also be used yet at times they might not fit well to the enterprise. Social Impact Logic Model: Organisation’s Planned Work vs. Intended Results Organisation’s Planned Work Organisation’s Intended Results Inputs Activities Outputs Outcomes Impact Definition Concrete actions of the organisation Tangible products from the activity Changes, benefits, learnings, effects resulting from the activity Attributions of an organisation’s activities to broader & longer-term outcomes Resources (capital, human) invested in the activity Development & implementation of programs, building new infrastructure etc. Number of people reached, items sold, etc. Effects on target population e.g. increased level of education Take account of actions of others (alternative programs e.g. open air classes), unintended consequences etc. General Example EUR, number of people etc. School designed & built Class attendance & skills Net educational improvement net of external factors Illustrative Case Study EUR 50k invested, 5 people working on project Land bought, school designed & built New school built with 32 places Places occupied by students: 8 • New students with access to education: 2 Source: Proposed approaches to social impact measurement in European Commission legislation and in practice relating to EuSEFs and the EaSI. 10 Social Audit Network Guide: https://www.socialauditnetwork.org.uk/files/8113/4996/6882/Getting_started_in_social_impact_measurement_-_270212.pdf 8. Social Audit & ICAI Technical Guide Social audit is the audit of accounts of SE which increase their credibility in relation to the attainment of its purpose and goals. Social auditing is a process that allows a SE to evaluate and explain its social, economic, and environmental benefits. It is a way of measuring the extent to which the SE lives up to the shared values and objectives it has committed itself to. It provides an assessment of the impact of an SE’s non-financial objectives through systematic and regular monitoring based on the views of its stakeholders. A social audit helps to reduce gaps between vision and reality as well as between efficiency and effectiveness. Social auditing creates an impact upon governance. It values the voice of especially those stakeholders often whose voices are seldom heard. Social Audit can be used to provide specific inputs for the following: To monitor social and ethical impact and performance of the SE To provide a basis for forming management strategy in a socially responsible and accountable way and to shape strategies To facilitate organisational learning on how to improve social performance To facilitate the strategic management of SE To inform the community, public, other organisations, and institutions about the allocation of their resources (time and money); this refers to issues of accountability, ethics (e.g., ethical investment) etc. The Technical Guide on Social Audit11 issued by ICAI provides that a good social audit carries the following essential characteristics: Improved Social Performance Multiple Stakeholder Perspective Comparability Comprehensiveness Regularity of Coverage Independent Verification Transparent Reporting 11 ICAI Technical Guide on Social Audit: http://kb.icai.org/pdfs/PDFFile5b28e290736540.37919798.pdf 9. Expansive Opportunities for Chartered Accountants There are various agencies engaged in the conduct of Social Audits in various scenarios. These could be independent agencies, accounting firms, or other types of organizations (including accredited agencies that fulfil certain qualification criteria). The Technical Guide on Social Audit issued by ICAI indicates that largely Social Audit is taken up by Civil Society organizations that follow their own standards and train their own auditors to conduct social audits under mandates from auditee organisations. “Chartered Accountants can play a very crucial role in implementation and dissemination of the social audit. Chartered Accountants are probably the best independent expert available and associated with almost all the enterprises/organisations whether small or big, whether in rural or urban areas.” They can facilitate social audit processes for SE at all stages of their activities – right from the planning to the board level governance, to the basic systems to the reporting and disclosure processes. Besides, financial area expertise, expertise in the domain of impact assessment and measurement would be needed which spreads across various and rather all domains in which SE operates. Chartered Accountants would be expected to able to put communities’ interests first, have inquisitiveness coupled with a professional scepticism, ability to understand programmes/activities and their wider social context, follow a systematic approach to the Social Audit task and be unbiased and independent. The newly constituted Sustainability Reporting Standards Board (SRSB) of ICAI is undertaking several initiatives to build capacity of chartered accountants in this emerging area. 10. Way Forward & Strategic Vision If implemented, all the proposals on SSE could help the country lay a comprehensive foundation for social finance and boost the funding of this sector over the years to come. SSEs will be entitled to create a new set of regulations to distinguish social enterprises and impact investors, establish procedures to access social capital, standardize measurement of social impact and fix reporting requirements. SSEs and all the stakeholders must collectively ensure that the social solutions are safe and sustainable. ICAI will play a major role in this area to meet the diverse requirements of the stakeholders. ███

ICAI Journal Focus • Accounting Standards • Ind AS 116 & IFRS 16 MCA Notifies Amendments to Ind AS 116 to Provide Lessee Specific COVID-19 Relaxations A Comprehensive Technical Analysis of the Optional Practical Expedient for COVID-19-Related Rent Concessions: Four Scoping Criteria, Negative Variable Lease Payment Accounting, Comparative Impact Matrices, Numerical Illustrations, Deferral Dynamics, and Transition Disclosures Author: CA. Amit B Bahl (Member of ICAI • amitbahl009@gmail.com) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 62–66 (Journal pp. 590–594) Subject: Ind AS 116 (Leases), IFRS 16 Convergence, MCA Notification 24 July 2020 Executive Overview “The International Accounting Standards Board (IASB) on 28 May 2020 amended IFRS 16, Leases. The amendment makes it easier for lessees to account for covid-19-related rent concessions such as rent holidays and temporary rent reductions. The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the covid-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to covid-19-related rent concessions that reduce lease payments due on or before 30 June 2021. Read on…” 1. Background & Regulatory Framework IFRS 16 specifies how lessees should account for changes in lease payments, including concessions. However, applying those requirements to a potentially large volume of covid-19-related rent concessions could be practically difficult, especially in the light of the many challenges stakeholders face during the pandemic. This optional practical expedient gives timely relief to lessees and enables them to continue providing information about their leases that is useful to investors. The amendment does not affect lessors. The Accounting Standards Board (ASB) of ICAI noted that Indian entities preparing Ind AS based financial statements could be facing similar challenges and situations like the International scenario. In addition, there is a need to remain converged with IFRS standards. Accordingly, the ASB of ICAI had issued the exposure draft of proposed amendments to Ind AS 116, Leases. After following due process, the amendments to Ind AS 116 were notified by the Ministry Corporate Affairs (MCA) on 24 July 2020 to incorporate lessee specific COVID-19 relaxations. “A lessee can apply the amendments to Ind AS 116 for annual reporting periods beginning on or after 1 April 2020. In case a lessee has not yet approved the financial statements for issue before the issuance of this amendment, then the same may be applied for annual reporting periods beginning on or after 1 April 2019.” The amendments notified by MCA to Ind AS 116 are substantially converged with the amendments to IFRS 16. 2. Overview of Amendments to Ind AS 116: The Four Cumulative Criteria A lessee falls within the scope of the amendment when it meets all the four conditions: Decision Tree: Scoping the Practical Expedient under Ind AS 116 Criteria 1: Did the rent concession occur as a direct consequence of the COVID-19 pandemic? Criteria 2: Does the change in lease payments result in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change? Criteria 3: Does the reduction in lease payments affect only payments originally due on or before 30 June 2021? Criteria 4: Is there no substantive changes to other terms and conditions of the lease? ⇒ If the response to all the four questions above is “Yes”, then a lessee can elect to apply the practical expedient to not account for the change in lease payments as a lease modification. In many cases, change in lease payments will then be accounted for as variable lease payment. Detailed Analysis of the Four Conditions Criteria 1: Direct Consequence of COVID-19 A lessee can apply the practical expedient, when a rent concession occurs ‘as a direct consequence of the COVID-19 pandemic’. The amendments do not provide further guidance on how this criterion should be assessed. Judgements need to be applied. The rent concessions provided by lessor due to closure of offices and retail outlets pursuant to the government notified lockdown would generally meet the criteria of “direct consequence of COVID-19”. Criteria 2: Revised Consideration The second criteria for the expedient to apply is that the rent concession must result in revised consideration for the lease that is substantially the same, or less than, the consideration for the lease immediately preceding the change. For example, if the rent concession reduces the nominal cash flows by INR 5 million in comparison to the terms of the lease prior to the change, it would satisfy this criteria. The amendments are not explicit as to whether the ‘revised consideration’ should be assessed based on nominal or discounted cash flows. In certain cases, a lessor may defer rentals for certain period with increase in nominal rentals to compensate for the loss of time value of money due to deferral. Illustrative Scenario: A lessor may defer the 3 months rental of a multiplex building amounting to INR 6 million for a period 9 months. Post deferral period, the lessee would pay INR 6.35 million to compensate for the loss of time value of money. So long as the increase in nominal cash flows reflects the time value of money, the lessee can still apply the expedient. Criteria 3: Concession Affects Lease Payments Originally Due on or Before 30 June 2021 The rent concession must reduce lease payments originally due on or before 30 June 2021. A rent concession that reduces lease payments after 30 June 2021 will disqualify the rent concession from the application of the practical expedient. The rent concession must be assessed for the whole of the period and cannot be sub-divided. A rent concession would meet this condition if it results in reduced lease payments before 30 June 2021 and increased lease payments that extend beyond 30 June 2021. “A rent concession that reduces lease payments after 30 June 2021 will disqualify the rent concession from the application of the practical expedient. The rent concession must be assessed for the whole of the period and cannot be sub-divided.” Criteria 4: No Substantive Changes to Other Terms and Conditions The rent concession must not contain substantive changes to other terms and conditions of the lease. Extensions to the lease term, the introduction or modification of lessee and/or lessor options, or other changes in the scope of leases would disqualify the rent concession from the application of the practical expedient. Instead, the lessee would be required to apply the requirements applicable to lease modifications, if the change meets the definition of a lease modification. Disqualifying Example: If a lessor offered to reduce the lessee’s monthly rent for office space by 50% for a period of six months due to COVID-19, but only on the condition that the lessee reduced its office space from 10,000 square feet to 5,000 square feet, then such concession would not be eligible for the practical expedient. 3. How Will the Practical Expedient Benefit the Lessee? If a rent concession satisfies all conditions discussed above, the practical expedient is available to be applied, however, its application is not mandatory, i.e., a lessee can elect not to apply the practical expedient. All accounting policies relating to leases in the scope of Ind AS 116 are subject to the requirement in paragraph 2 of Ind AS 116, which requires an entity to apply Ind AS 116 consistently to contracts with ‘similar characteristics and in similar circumstances’. The same principle should be followed by applying the practical expedient to similar leases. “If the lessee elects to apply the practical expedient, the lessee does not account for a rent concession as a lease modification. In many situations, a lessee would account for the rent concession applying the requirements of Ind AS 116 para 38(b) i.e. as a negative variable lease payment.” 4. Comparative Accounting Framework & Practical Examples Comparative Accounting Matrix: Practical Expedient Applied vs. Not Applied Element Practical Expedient Applied(Variable lease payment accounting as per para 38 of Ind AS 116) Practical Expedient is Not Applied(Lease modification accounting) Lease liability Reduced for the impact of revised consideration. Reduction is accounted when the waiver is granted. There are no conditions attached to the waiver. Reduced for the overall impact of revised consideration on the date of modification. Right-of-use asset No impact Impact of lease liability reduction is adjusted with the right-of-use asset. Discount rate No change The revised remaining consideration is discounted using a revised discount rate determined on the date of lease modification. Effect on profit or loss Impact of reduction in lease liability is recognized in profit or loss when the waiver occurs. No immediate impact on lease modification. Future amortization of right-of-use asset and interest expense on lease liability will change. Example 1: Forgiveness of Lease Payments – Impact of Amendment ABC Limited leases a property from a lessor. As at 1 June 2020, Lessor grants ABC Limited rental waiver of 3 months due to the COVID-19 pandemic. This rent waiver was not part of the original terms and conditions of the lease. There are no conditions attached to the waiver. Apart from the rent waiver, there is also a non-substantive change to terms of the lease contract. Assume that all the four criteria to apply the COVID-19 practical expedient discussed above are met. Query: How should ABC Limited account for the rent waiver? Response: Ind AS 116 defines lease modification as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term”. The rent concession provided to ABC Limited meets the definition of a lease modification (because it is a change in consideration for a lease that is not part of the original terms) and it would be accounted for as a lease modification, if the practical expedient is not elected by ABC Limited. Example 2: Accounting Treatment of Rent Forgiveness Based on Illustrative Numbers Lessee ABC Limited enters into contract with Lessor LMQ to lease a retail space for 5 years. The lease commenced on 1 April 2018 and rental payments are INR 100,000 per month payable in advance. ABC Limited’s incremental borrowing rate at commencement of lease was 5% per annum. There are no initial direct costs. ABC Limited’s business is significantly impacted by COVID-19 and both ABC Limited and Lessor LMQ negotiate a rent concession. On 31 May 2020, Lessor agrees to provide a concession whereby the Lessor forgives the rentals of the Lessee for next three months provided the retail space is closed due to lockdown. Scenario A (Conditional on Lockdown): Assuming that there are no other changes to the lease and lockdown continues till August 2020, ABC Limited shall recognize the credit of INR 100,000 in each month of June 2020, July 2020 and August 2020 with corresponding adjustment to the lease liability because the waiver is granted on condition that retail space is closed due to lockdown. Scenario B (Unconditional Waiver): In contrast, if ABC Limited was forgiven the lease payments at 31 May 2020 for payments due in June, July and August 2020 without a condition attached to the forgiveness (that is, irrespective of the closure of retail space due to lockdown), the lessee should recognise a gain for the portion of the lease liability that is forgiven (that is, for the present value of INR 300,000) on 31 May 2020. 5. Accounting Treatment of Rent Deferral A change in lease payments that only reduces payments in one period but proportionally increases payments in another does not extinguish the lessee’s liability or substantially change the consideration of the lease. A lessee should recognise in profit or loss the present value effect that would result from discounting the revised payments using an unchanged discount rate at the time when the deferral is granted. 6. Mandatory Disclosure Requirements An entity that applies the practical expedient must disclose: (a) Scope disclosure: That it has applied the practical expedient to all rent concessions that meet the criteria, or if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient; and (b) Profit or loss quantification: The amount recognised in profit or loss to reflect changes in lease payments that arise from COVID-19-related rent concessions. Accordingly, rent concessions accounted for as negative variable lease payments in profit or loss must be disclosed separately from the effect of other variable lease payments included in profit or loss. 7. Transition Provisions and Effective Date Lessees will apply the practical expedient retrospectively, recognising the cumulative effect of initially applying the amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment. In the reporting period in which a lessee first applies the amendment, the lessee is not required to disclose the information required by paragraph 28(f) of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors. A lessee can apply the amendments to Ind AS 116 for annual reporting periods beginning on or after 1 April 2020. In case a lessee has not yet approved the financial statements for issue before the issuance of this amendment, then the same may be applied for annual reporting periods beginning on or after 1 April 2019. 8. Key Takeaways & Concluding Remarks The amendment to Ind AS 116 will provide relief to lessees for accounting for rent concessions from lessors specifically arising from the covid-19 pandemic. While lessees that elect to apply the practical expedient do not need to assess whether a concession constitutes a modification, lessees still need to evaluate the appropriate accounting for each concession as the terms of the concession granted may vary. The practical expedient is not available for lessors. ███ References Ministry of Corporate Affairs (MCA) Notification Rule_24072020: http://www.mca.gov.in/Ministry/pdf/Rule_24072020.pdf IASB Issues Amendment to IFRS Standard on Leases (May 2020): https://www.ifrs.org/news-and-events/2020/05/iasb-issues-amendment-to-ifrs-standard-on-leases/ IFRS 16 COVID-19-Related Rent Concessions Amendment Text: https://cdn.ifrs.org/-/media/project/ifrs-16-covid-19/covid-19-related-rent-concessions-amendment-to-ifrs-16.pdf?la=en ICAI ASB Exposure Draft and Educational Guidance on Ind AS 116: https://resource.cdn.icai.org/59845asb48675.pdf ICAI Ind AS Access Implementation Compendium: https://indasaccess.icai.org/download/2019/asb0719/264/264asb-cias-2019-20-vol1-16.pdf IFRS Foundation Announcement on Leases Standard COVID-19 Concessions (April 2020): https://www.ifrs.org/news-and-events/2020/04/amendment-to-leases-standard-to-help-companies-with-covid-19-related-rent-concessions/

The Chartered Accountant Journal • Accounting • November 2020 Impact of Ind-AS Adoption on Value Relevance of Nifty-50 Firms: An Application of Panel Regression in Ohlson Model Dr. Shilpa Lodha*, Babu Lal Gedar** & Charu Sharma** *The author is Assistant Professor at Department of Accountancy and Statistics at Mohanlal Sukhadia University, Udaipur (India). **The authors are JRF at aforementioned University. Citation: (2020) 69 CAJ 579–589 Pages 51–61 • Journal Page Nos. 579–589 Executive Perspective Present paper attempts to explore the impact of mandatory adoption of Ind-AS on financial ratios of the companies. Companies which were constituents of Nifty-50 on April 1, 2016 were chosen as sample for this study but due to unavailability of data, sample size reduced to 36. Data for six years (three years prior to adoption of Ind-AS and three years post-adoption of Ind-AS) were collected from 2013-14 to 2018-19. Various financial ratios were collected and some were calculated for the purpose of analysis. Read more… After rejection of normality (K-S Test), Wilcoxon Signed Rank was used to find any significant difference in the measures of financial ratios in pre- and post-adoption period. Results revealed no significant difference in the measures during the two periods. Further Kruskal-Wallis H Test was used to find any significant difference among the measures of six years. Results revealed that only market price (MPS) showed significant difference over the years. It was also attempted to estimate Ohlson Model (1995) with some modifications to explore whether there is any change in the predictors of market price of a company during pre- and post-adoption period. Panel Data Regression with three variants (Pooled, Fixed Effect and Random Effect Model) was estimated and compared to choose the most parsimonious model. In both the periods, Fixed Effect Model was proved to be the most parsimonious model. Further, there was major change in the predictors of market price from pre- to post-adoption period. Introduction Globalisation and technological advancements has changed the economic scenario at the world level. Every country used to have its own set of accounting standards and principles. But in past few decades, economies all over the world have become extremely integrated which make it inevitable to have some accounting platform. IFRSs (International Financial Reporting Standards) provide a single set of standards to be used internationally by companies operating in different countries at a time. IFRS provides a common language for standardized accounting practices. Hence countries are motivated to become IFRS compliant and there are two ways for it – (i) Adopting IFRS or (ii) Converging to IFRS. Convergence of accounting standards is a burning issue all over the world. It involves alignment of two different set of standards. Looking at practical difficulties in adopting IFRS, India has converged its Accounting Standards with IFRS so that it may become easy for investors globally to analyse and compare the financial statements of Indian companies. These converged standards are called Ind-AS. The Initial date of implementation of Ind-AS was 2011 but due to certain issues, Ministry of Corporate Affairs postponed its implementation date. In July 2014, the Finance Minister announced to apply Ind-AS urgently. On 16 February 2015, the Ministry of Corporate Affairs had notified with the Companies (Indian Accounting Standards) Rules, 2015. It, therefore, revised the roadmap of implementation of Ind-AS for companies excluding the Banking companies, Insurance companies, and NBFC’S from it. As per the notification, from 1st April 2015, Ind-AS shall be implemented by the companies on a voluntary basis and will be mandatory from 1st April 2016 for companies listed/unlisted or in process of listing on Stock Exchange in India or outside India having net worth greater than equal to 500 crore. Statement of the Problem Companies communicate with the investors through their financial statements or annual reports. All information provided in those statements, are judged on the basis of two parameters – reliability and relevance. Relevance implies that the information has the ability of affect the economic decisions taken by users of financial statements. Value relevance has emerged as an area of research of late. It implies that the information included in the financial statements has an impact on the firm’s value. Market value of firm depends on the perceptions of market participants about the performance of the firm and accounting information provided by the company. In this light, it was felt necessary to examine the impact of adoption of Ind-AS on financial ratios and value relevance of Indian companies. Literature Review Collected literature was classified on the basis of their objectives, tools used, geographical area of research and findings. A summary has been presented below: When a company adopts any new accounting standard to prepare their financial statement it may positively or negatively impact financial indicators. Sometimes it remains unchanged. Several researchers around the globe aimed to find impact of voluntary adoption of IFRS on the financial statements and financial activities of the companies (Achalapathi & BhanuSireesha, 2015; George & Sankaranarayanan, 2017; Thomas & Lukose, 2018; Perafena & Franco, 2017). Some of the researchers tried to examine the perception of Public Sector Banks and awareness level of CAs, academicians and stakeholders of the companies towards the implementation of IFRS (Dhankar, Chaklader & Gupta, 2018; Muniraju & Ganesh, 2016). The objective of some researches was to examine positive and negative outcomes of convergence of GAAP with IFRS (Rawal, 2017). Some of the researchers focused on exploring the impact of IFRS adoption on – financial statements (Achalapathi & BhanuSireesha, 2015; George, & Sankaranarayanan, 2017; Naderian & Mahadevappa; 2014; Thomas & Lukose, 2018; Kantayya & Panduranga, 2017), on financial indicators and market value (Das, 2017); on financial ratios (Swamynathan & Sindhu, 2011); on cash flow predictability and persistence (Kamath & Desai, 2014; Swamynathan & Sindhu, 2013). When it comes to researches in different countries, it was found that some researchers focused on the impact of IFRS adoption; some on annual report length in New Zealand (Morunga & Bradbury, 2012), some on the value relevance of accounting information in Turkey (Karğın, 2013), on the quality of the financial information in UK & France (Perafán & Franco, 2017), on the quality of consolidated financial reporting in some European Countries (Müller, 2014). Majority of researchers, for their study, used the tools like Descriptive statistics (Achalapathi & BhanuSireesha, 2015; Kumara, Erappa & Abhilasha, 2016; Perafán & Franco, 012; Müller, 2014), Kolmogorov-Smirnov Test (Achalapathi & BhanuSireesha, 2015; George & Sankaranarayanan, 2017; Dhankar, Chaklader & Gupta, 2018), Wilcoxon Signed Test (Achalapathi & BhanuSireesha, 2015; Das, 2017), regression and correlation (Das, 2017; Swamynathan & Sindhu, 2013). And some of them applied ratio analysis and comparative analysis of balance sheet for their findings (Thomas & Lukose, 2018; Kamath & Desai, 2014). When it was tried to classify the previous studies on the basis of their findings, some researchers found that value relevance of accounting information has improved with high quality disclosure and by adopting IFRS there would be more transparency in accounting information (Müller, 2014; Sibel, 2013). Some researchers concluded that harmonization of Indian accounting practices with IFRS had improved the accounting quality, measured in terms of cash flow persistence and cash flow predictability and significantly affected the financial indicators, investment activities and operating activities (Swamynathan & Sindhu, 2013; Kamath, & Desai, 2014). IFRS had more significant impact on the Balance sheets as compared to profit and loss of the company and there is only a minimal difference in the values of the components which are recorded in both IFRS and IND-AS statements (Thomas & Alan, 2018). The results of the study showed that IFRS adoption had led to a statistically significant increase in liquidity, profitability and valuation ratios statistics (Achalapathi & BhanuSireesha, 2015). Thus, the synthesis provided that Indian companies were not so prominently chosen as research subject. Researcher could not find any research which studied impact of standards adoption on financial ratios and value relevance at the same time. Further, with the roadmap provided earlier for adoption of Ind-AS, current study of value relevance becomes more relevant. Research Methodology Following research methodology was adopted for the present study: Research Design The study is empirical in nature. It attempts to explore the impact of Ind-AS adoption on the financial performance of the sample companies. Objectives To find difference between the measures of various financial ratios before and after adoption of Ind-AS. To explore any significant change in the variables affecting shareholders’ value before and after adoption of Ind-AS. Hypotheses H01: There is no significant difference between measures of various financial ratios before and after adoption of Ind-AS. H02: There is no significant difference in the predictors of market value of a firm before and after adoption of Ind-AS. Sample and Data Collection For the sample, companies listed in NIFTY-50 in India are taken for the study which has published their financial statements for six financial years, 2013-14 to 2018-19. Out of 50 companies, data of 14 companies could not be found for the study period so the final sample size reduced to 36 companies. The companies taken as sample for the study have been listed in Appendix 1. All these companies were being covered under Phase I mentioned above i.e. they have to compulsorily adopt Ind-AS for their financial statements for the period beginning on or after April 1, 2016. Hence the total sample period was divided into two sub-periods – one was pre-adoption period of three years from 2013-14 to 2015-16 and other one was post-adoption period of three years from 2016-17 to 2018-19. Collected data consisted of various accounting ratios (List mentioned in Appendix 2). Some of the ratios were directly available and some were calculated based on the formulae given in Appendix 2. Data were collected from Ace Equity Knowledge Portal. All data were collected from consolidated financial statements. Tools and Techniques Descriptive statistics was first generated to understand the basic characteristics of the data. Then Kolmogorov-Smirnov (K-S) normality test was used to determine whether parametric or non-parametric test is to be used. When normality was rejected, Wilcoxon Signed Rank Test was used to explore any significant difference among financial ratios in the pre-adoption and post-adoption period. Further, to find out significance of difference over the entire sample period, Kruskal-Wallis H Test has also been applied. For exploring the value relevance of adoption of Ind–AS, panel data regression was run. The dependent variable was market value of shares and the independent variables were various financial ratios with a modification in Ohlson (1995) model. The model was tested with its different variants – pooled, fixed effects and random effects models and the most parsimonious model was selected on the basis of some diagnostics. MPSjt = α1 + α2BVPSjt + α3EPSjt + α4AZSjt + α5ROAjt + α6ROEjt + εjt     Equation 1 This equation was estimated for both pre-adoption period and post-adoption period separately, with all its variants. Here, MPSjt is the market price of firm j for the year t, BVPS is the book value per share of firm j for the year t, EPS is the earnings per share of firm j for the year t, AZS is the Altman’s Z Score of firm j for the year t, ROA is the return on assets of firm j for the year t and ROE is return on equity of firm j for the year t. This variable has the value of 1 for 2017, 2018 and 2019 whereas the value of 0 for 2014, 2015 and 2016. Various coefficients to be estimated were α1, α2, α3, α4, α5, α6 and ε. MS-Excel, SPSS-21 and Eviews 7.0 were used for data compilation and various tests and models. Results and Discussion The finding of the analysis along with the discussion goes on following lines. Descriptive Statistics Table 1 displays the descriptive statistics of various ratios categorizing into Before-adoption and After-adoption of Ind-AS. Mean, standard deviation, skewness and kurtosis have been calculated for the sub-periods. Table 1: Descriptive Statistics Ratios Before 2016-17 After 2015-16 Mean Std. Dev. Skewness Kurtosis Mean Std. Dev. Skewness Kurtosis Debt-Equity Ratio 1.679 1.346 1.712 4.567 1.591 1.330 1.402 2.702 Debt Ratio .852 .457 .910 .427 .756 .371 .374 -.211 Equity Ratio .649 .228 -.086 -1.177 .656 .238 -.067 -1.554 Interest Coverage Ratio 154.973 570.640 5.193 28.315 160.831 736.708 5.921 35.331 Capitalization Ratio .327 .233 .223 -1.157 .314 .234 .230 -1.480 Current Ratio 1.375 .911 1.778 3.692 1.274 .746 1.157 1.651 Quick Ratio .982 .783 1.797 3.084 .906 .644 1.164 .811 Cash Returns to Net Assets -.0547 .389 -5.140 29.046 -.0306 .342 -.790 10.141 Cash Returns to Net Worth .002 .027 -.106 2.904 .003 .0252 .618 8.749 Cash Returns to Current Liabilities .009 .056 1.916 6.756 .009 .050 .015 8.147 Cash Return to Total Liabilities .001 .022 -.144 6.312 .001 .0172 -1.916 11.884 Altman’s Z Score 8.290 7.797 1.387 1.476 8.480 8.501 1.094 .098 Net Profit Ratio .116 .089 .998 1.530 .115 .081 1.439 2.716 Operating Profit Ratio .203 .163 2.045 4.565 .200 .144 1.862 3.052 Return on Assets .174 .202 2.347 6.081 .148 .170 3.222 12.549 Return on Equity .235 .241 2.719 8.815 .205 .200 3.348 13.761 Return on Capital Employed .180 1.873 -1.281 9.167 -.589 6.997 -5.862 34.922 Of the stability ratios, Equity Ratio and Interest coverage ratio showed increased values after adoption of Ind-AS in financial statements. Of the liquidity ratios, only Cash Returns to Net Assets, Cash Returns to Net Worth and Altman’s Z score showed an increase in value after adoption of Ind-AS. Of the profitability ratios, all the ratios showed a decreased value after adoption of Ind-AS in the financial statements. Slight variation in both the directions was observed for standard deviation of pre- and post-adoption period. Skewness for most of the variables was positive in both the periods. Only a few variables had negative skewness. Kurtosis was greater than 3 for majority of variables in both the periods. Normality Test Results of K-S (Kolmogorov-Smirnov) Test have been summarized in Table 2. Table 2: Results of K-S Normality Test Ratios Before 2015-16 After 2015-16 Statistic Sig. Statistic Sig. Debt-Equity Ratio .167 .012 .145 .053 Debt Ratio .123 .183 .122 .192 Equity Ratio .102 .200* .174 .007 Interest Coverage Ratio .417 .000 .414 .000 Capitalization Ratio .116 .200* .158 .023 Current Ratio .175 .007 .169 .011 Quick Ratio .188 .002 .160 .020 Cash Returns to Net Assets .334 .000 .385 .000 Cash Returns to Net Worth .135 .093 .179 .005 Cash Returns to Current Liabilities .188 .003 .272 .000 Cash Return to Total Liabilities .195 .001 .238 .000 Altman’s Z Score .201 .001 .249 .000 Net Profit Ratio .124 .175 .155 .028 Operating Profit Ratio .213 .000 .234 .000 Return on Assets .197 .001 .225 .000 Return on Equity .243 .000 .249 .000 Return on Capital Employed .301 .000 .511 .000 On observing the results of normality tests by applying Kolmogorov-SmirnovTest , it was noted that most of the variables derived from the financial statements, in both the periods – pre- adoption of Ind-AS and post- adoption of Ind-AS are not normally distributed (p<0.05). Hence, choice for further analysis remains with non-parametric tests. Wilcoxon Signed Ranks Test The most common non-parametric test, Wilcoxon signed-ranks test, is used to detect whether the differences between the two populations are statistically significant or not, the results of which are presented in Table 3. Results contain mean rank, sum of ranks, test statistic and its significance. Table 3: Results of Wilcoxon Signed Rank Test Ratios Mean Rank Sum of Ranks Statistics Sig. Negative Ranks Positive Ranks Negative Ranks Positive Ranks Debt-Equity Ratio 19.45 17 428 238 -1.493 .136 Debt Ratio 19.14 17.5 421 245 -1.383 .167 Equity Ratio 18.24 18.74 310 356 -.361 .718 Interest Coverage Ratio 18.63 18.4 298 368 -.550 .582 Capitalization Ratio 17.61 19.89 387.5 278.5 -.856 .392 Current Ratio 19.65 17.06 393 273 -.943 .346 Quick Ratio 17.93 19.3 376.5 289.5 -.683 .494 Cash Returns to Net Assets 18.24 18.74 310 356 -.361 .718 Cash Returns to Net Worth 16.76 19.17 285 345 -.491 .623 Cash Returns to Current Liabilities 16.30 19.28 244.5 385.5 -1.155 .248 Cash Return to Total Liabilities 15.64 21.36 281.5 384.5 -.809 .418 Altman’s Z Score 18.41 18.64 405 261 -1.131 .258 Net Profit Ratio 17.74 19.35 337 329 -.063 .950 Operating Profit Ratio 19.47 17.63 331 335 -.031 .975 Return on Assets 20.32 15.64 447 219 -1.791 .073 Return on Equity 18.42 18.67 442 224 -1.713 .087 Return on Capital Employed 17.43 20 366 300 -.518 .604 It is found that the p-value is greater than 0.05 (p>0.05) in all the ratios. So it can be concluded that adoption of Ind-AS does not significantly affect the financial ratios of NIFTY50 companies. In other words, there is no significant difference between financial ratios of pre-adoption period and post-adoption period. It was further examined that if there is any significant difference among the measures of various ratios over the entire sample period i.e. during six years. For this purpose, Kruskall-Wallis H Test was used and results have been presented in Table 4. Kruskal-Wallis H Test Table 4 displays the results of Kruskal-Wallis H Test. Table 4: Results of Kruskal-Wallis H Test Ratios Chi-Square p-Value Debt-Equity Ratio 1.182 .947 Debt Ratio 1.331 .932 Equity Ratio .761 .979 Interest Coverage Ratio .404 .995 Capitalization Ratio .186 .999 Current Ratio .975 .965 Quick Ratio .819 .976 Cash Returns to Net Assets 5.331 .377 Cash Returns to Net Worth 6.279 .280 Cash Returns to Current Liabilities 5.905 .316 Cash Return to Total Liabilities 6.284 .280 Altman’s Z Score .110 1.000 Net Profit Ratio .675 .984 Operating Profit Ratio .707 .983 Return on Assets .963 .965 Return on Equity 1.746 .883 Return on Capital Employed 1.329 .932 Market Price Per Share 13.735 .017 Earnings Per Share 7.571 .182 Book Value Per Share 6.446 .265 It is revealed from the results that the Chi-square values of all variables except MPS (market price per share) is less than 8 with very high p-values. The Chi-square value of MPS is 13.735 with a p-value of .017. Hence it can be concluded that MPS over different years has significant difference in the measures. All remaining variables do not exhibit significant difference in their measures of different years. Panel Data Regression Panel data regression with its three variants pooled, fixed effects and random effects was run and results have been presented in Table 5. The models were run for both pre-adoption and post-adoption period. Table 5 contains the values of coefficients, their p-values along with diagnostic values for the models. Table 5: Results of Panel Regression Models Variables Pre-Adoption of Ind-AS Post-Adoption of Ind-AS Pooled FE RE Pooled FE RE Coefficient P Value Coefficient P Value Coefficient P Value Coefficient P Value Coefficient P Value Coefficient P Value C -86.59 .20 -733.86 .00 -85.00 .21 -.218 .00 -330.21 .00 -255.84 .00 BVPS 1.317 .00 6.65 .00 1.856 .00 -218.32 .00 3.967 .00 2.351 .00 EPS 14.186 .00 1.622 .47 10.880 .00 1.673 .00 10.878 .00 12.580 .00 AZS 7.317 .15 10.515 .34 6.787 .23 15.416 .00 20.811 .02 20.673 .00 ROA 1840.3 .00 2480.6 .07 2681.3 .00 15.740 .00 186.69 .82 1954.66 .00 ROE -1299.5 .01 -1349.8 .09 -1903.4 .00 1928.96 .00 -1165.03 .03 -1599.568 .00 R-Squared 0.822 .968 .740 .843 .935 .757 Adj. R-Squared 0.813 .948 .722 .839 .918 .745 F 94.23 47.185 40.751 225.42 54.763 63.743 F (p-Value) 0.00 0.00 0.00 0.00 0.00 0.00 Results reveal that in pre-adoption period, except Altman’s Z Score, all other independent variables are significant in pooled and random effect models estimated. Result of Hausman Test Period Chi-square p-Value Pre-Adoption 54.837 0.000 Post-Adoption 42.23 0.00 It was further noticed that all three models were a good fit (Significant F Values). Adjusted R-squared was 0.813, 0.948 and 0.722 respectively for pooled, fixed effects and random effects model. Thus fixed effect model provided the most parsimonious diagnostics. But the choice between fixed effect and random effect model remains with Hausman Test, with the null hypothesis that random effect model is more efficient than the fixed effect model for analyzing the given data. It was found that the Chi-square value was 54.837 with a p-value of 0.00. Thus it can be concluded that fixed effect model is most efficient one. This model, with adjusted R-squared of 0.948, has the ability of explain 94.8% variability in the data. In this model, except Altman’s Z score and EPS, all independent variables have p-Values less than 0.05. Thus all remaining variables are significantly influencing market value. The estimated equation is: MPS = -733.868 + 6.650*BVPS + 1.622*EPS + 10.515 *AZS + 2480.602 *ROA - 1349.864 *ROE + [CX=F, PER=F] Table 5 further discloses that for after-adoption period, all the variables were significant in the pooled and random effect models. On the other hand, in fixed effect model, except Return on Assets, all remaining variables were significantly influencing market value. For the choice between random effect and fixed model, Hausman Test revealed the test value as 42.23 with a p value of 0.00.Thus null hypothesis of superiority of random effect model was rejected at 5% level of significance. The fixed effect model was the most parsimonious model in post-adoption period also. The value of adjusted R-squared was .918 which means that this model is able to explain 91.8% variability in the market price. The estimated equation is: MPS = -330.215 + 3.966 *BVPS + 10.878*EPS + 20.811*AZS + 186.691*ROA - 1165.032*ROE + [CX=F, PER=F] As far as the comparison between results of pre-adoption and post-adoption period is concerned, it is found that all the three models are good fit in both the periods. Adjusted R-squared was highest in fixed effect model in both the periods and that too is above .90. Hence fixed effect model is able to explain more than 90% variability in market price in both the periods. Results of Hausman Test were in favour of fixed effect model in both the periods. Fixed effect model of both the period revealed that in pre-adoption period, only BVPS was a variable which had a significant coefficient. EPS, Altman’s Z Score, ROA and ROE did not show any significant influence on market price. Whereas in post-adoption period, except ROA, all other independent variables – BVPS, EPS, Altman’s Z Score and ROE were significantly influencing market price. Conclusion Present paper attempts to examine the impact of adoption of Ind-AS by the companies which were constituents of Nifty-50. Study aims at exploring any significant difference in financial ratios during pre-adoption and post-adoption period. For this purpose six years data of 36 Nifty-50 companies were collected which majorly consisted of financial ratios. Some ratios were calculated as they were not directly available. The ratios represented three major categories stability, liquidity and profitability. The collected data were divided into two sub-period – pre-adoption of Ind-AS and post-adoption of Ind-AS. Normality was checked using K-S Test which was rejected for all the ratios. Hence non-parametric tests such as Wilcoxon Signed Rank Test and Kruskal-Wallis H Test were used to find any significant difference in the measures of ratios – between two sub-periods and over the years respectively. Only market price (MPS) showed significant change over the years. Further Ohlson model (1995) with some modifications was estimated in three variants – pooled, fixed effect and random effect. Fixed Effect Model, in both the periods, emerged as the most parsimonious model. Results revealed that there was a major change in the predictors of market price during pre- and post-adoption period. Altman’s Z score and EPS were not significantly influencing market price during pre-adoption period whereas these variables turned to be significant predictors in post-adoption period. Return on assets (ROA) remained insignificant in both the periods. Thus it can be concluded that adoption of Ind-AS has major implications for measuring the financial health of the companies. Appendix 1: Sample Companies S. N. Company S. N. Company 1 Adani Ports and Special Economic Zone Ltd. 19 JSW Steel Ltd. 2 Asian Paints Ltd. 20 Larsen & Toubro Ltd. 3 Bajaj Auto Ltd., 21 Mahindra & Mahindra Ltd. 4 Bharat Petroleum Corporation Ltd. 22 Maruti Suzuki India Ltd. 5 Bharti Airtel Ltd. 23 NTPC Ltd. 6 Bharti Infratel Ltd. 24 Oil and Natural Gas Corporation (ONGC) Ltd. 7 Britannia Ltd. 25 Powergrid Corporation Ltd. 8 Cipla Ltd. 26 Reliance Industries Ltd. 9 Coal India Ltd. 27 Sunpharma Ltd. 10 Dr. Reddys Laboratories Ltd. 28 Tata Motors Ltd. 11 GAIL (India) Ltd. 29 Tata Steel Ltd. 12 Grasim Industries Ltd. 30 Tech Mahindra Ltd. 13 HCL Ltd. 31 Titan Company Ltd. 14 HDFC Housing & Finance Ltd. 32 Ultratech Cement Ltd., 15 Hindalco Ltd. 33 UPL Ltd. 16 Hindustan Unilever Ltd. 34 Vedanta Ltd. 17 Indian Oil Corporation Ltd. 35 Wipro Ltd. 18 ITC Ltd. 36 Zee Entertainment Enterprises Ltd. Appendix 2: Financial Ratios and Formulas S. N. Financial Ratio Symbol Used Formula 1 Debt Equity Ratio DER Total Debt / Total Equity 2 Debt Ratio DR Total Debt / Total Assets 3 Equity Ratio ER Total Equity / Total Equity Interest Coverage Ratio ICR EBIT / Interest Expenses 5 Capitalization Ratio CapR Total Debt / (Total Debt + Total Equity) 6 Current Ratio CR Current Assets / Current Liabilities 7 Quick Ratio QR Quick Assets / Current Liabilities 8 Cash Returns to Net Assets CRNA Net Cash Inflows / Net Assets 9 Cash Returns to Net Worth CRNW Net Cash Inflows / Net Worth 10 Cash Returns to Current Liabilities CRCL Net Cash Inflows / Current Liabilities 11 Cash Return to Total Liabilities CRTL Net Cash Inflows / Total Liabilities 12 Altman’s Z Score AZS 1.2 T1 + 1.4 T2 + 3.3 T3 + 0.6 T4 + 0.99 T5* 13 Net Profit Ratio NPR Net Profit / Net Sales 14 Operating Profit Ratio OPR Operating Profit / Net Sales 15 Return on Assets ROA Net Income / Net Assets 16 Return on Equity ROE Net Income / Total Equity 17 Return on Capital Employed ROCE Net Income / Capital Employed 18 Market Price Per Share MPS — 19 Earnings Per Share EPS Total Earnings for Equity Shareholders / No of Equity shares outstanding 20 Book Value Per Share BVPS — * T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = EBIT / Total Assets T4 = Market Value of Equity / Book Value of Liabilities T5 = Sales / Total Assets References Achalapathi, K. V. & BhanuSireesha, P. (2015). Impact of IFRS adoption on financial statements of select Indian companies. Osmania Journal of International Business Studies, 10 (1), 21-33. Das, S., & Saha, T. R. (2017). IFRS and its impact on Indian companies: An empirical study. Parikalpana: KIIT Journal of Management, 13(2), 1. doi: 10.23862/kiit-parikalpana/2017/v13/i2/164516 Dhankar, R. S., Chaklader, B., & Gupta, A. (2018). Application of IFRS/Ind-AS in indian public sector banks: An analysis. Universal Journal of Accounting and Finance, 6(2), 29-46. doi: 10.13189/ujaf.2018.060202 George, V. J. & Sankaranarayanan, K. G. (2017). Financial performance indicators and accounting quality: A comparative study in the context of IFRS and Indian accounting standards. International Research Journal of Commerce, Arts and Science, 8 (9), 181-191. Kamath, R. & Desai, R. (2014). The impact of IFRS adoption on the financial activities of companies in India: An empirical study. 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Procedia - Social and Behavioral Sciences, 109, 976-982. doi: 10.1016/j.sbspro.2013.12.574 Muniraju, M. & Ganesh, s. R. (2016). A study on the impact of International Financial Reporting Standards convergence on Indian corporate sector. IOSR Journal of Business and Management, 18 (4), 34-41. Naderian, A. & Mahadevappa, B. (2014). A study of differences in financial performance inder Indian GAAP and IFRS: Case of Noida Toll Bridge Company Limited. SDMIMD Journal of Management, 5 (1), 15-23. Ohlson, J.A. (1995), Earnings, book values and dividends in equity valuation. Contemporary Accounting Research, 11 (2), 661-687. Perafan Pena, H. F. & Franco, J. B. (2017). Impact of IFRS on the quality of financial information in the United Kingdom and France: Evidence from a new perspective. Intangible Capital, 13 (4), 850-878. Swamynathan S. & Sindhu (2013). Harmonization of Indian Accounting Practices with IFRS – Analysis in terms of cash flow predictability and persistence. IJCEM International Journal of Computational Engineering and Management, 16 (3), 51-58. Thomas, A. S. & Lukose, A. (2018). Financial statement effects on convergence to IFRS – A case study of Infosys Ltd. The Research Journal in Social Sciences, 9 (8), 190-196.

ICAI Journal Focus • Auditing • Internal Control Systems • Research Article Covid-19 — Paycuts Weaken Internal Controls A Behavioural, Organisational, and Auditing Study on How Pandemic-Induced Pay Cuts and Lay-offs Erode Diligence, Provoke Psychological Contract Violation, Distort Organisational Justice, and Complete the Fraud Triangle—With a Four-Tiered Matrix of Firm Vulnerability and Re-Engineering Solutions through Internal Audit Author: CA. Rohit Choraria (Member of the Institute • eboard@icai.in) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 67–72 (Journal pp. 595–600) Classification: Auditing Standards, Internal Control Procedures (ICPs), SIA 120, Behavioural Governance ⚠ Executive Summary • Core Research Proposition “Covid-19 pandemic is causing firms to resort to pay cuts and lay-offs. This helps to save costs, but weakens internal control procedures (ICPs). Using the psychological contract theory, this article demonstrates that pay cuts cause adverse attitudinal changes in employees like lower commitment, diligence and effort. Many internal control procedures rely on people for effective implementation. If their attitudes are adversely impacted by pay cuts, then ICPs also weaken. Organisations should recognise this risk. In such a situation, internal audit function can play a very important role in re-enforcing the existing ICPs so that the firm does not suffer.” 1. Introduction: Pandemic Disruptions, Employee Costs, and Internal Control Breakdown The ongoing pandemic has not only affected the financial performance of firms but has also impacted internal controls. Covid has triggered a series of responses by firms who are grappling with managing their costs. One key cost element that is being targeted is employee cost. Inadvertently, this has an impact on internal control procedures (ICPs). According to the latest results of MyHiringClub.com and Sarkari-Naukri.info Layoff Survey 2020, 68 per cent of the employers surveyed have either started the layoff process or are planning to. The online survey covered 1,124 companies across 11 industry sectors in 25 major cities. The survey was conducted between May 1 to May 10, 2020. Among the surveyed organisations: Key Empirical Findings of the Layoff & Compensation Survey (May 2020): Layoff Initiation: 68 per cent of employers surveyed have either commenced the formal layoff process or are actively planning redundancies. Salary Reductions: 73 per cent of surveyed organisations confirmed explicit plans to decrease the salary and compensation packages of their continuing workforce. Temporary Layoffs: 57 per cent categorized the planned workforce reduction as temporary furloughs or short-term suspensions. Permanent Severance: 21 per cent reported executing permanent layoffs spanning a horizon of at least 2 years. Pay cuts affect employee behaviour in multiple ways. Many ICPs are reliant on people charged with implementing them. If their behaviours are adversely impacted by pay cuts, then ICPs will also suffer. Organisations should recognise this risk. In such a situation, internal audit function can play a very important role in re-enforcing the existing ICPs so that the firm does not suffer. 2. Concept of Psychological Contracts and Its Violation (PCV) The effect of pay cut on employee behaviour can be best explained by a concept from the disciplines of psychology and employee relations, that has gained attention of academics and practitioners in the recent past. This is the concept of psychological contract developed by organisational scholar Denise Rousseau of Carnegie Mellon University in 1995. Psychological contract represents mutual beliefs, perceptions and informal obligations between an employer and an employee. It is distinguishable from the formal written contract of employment which, for the most part, only identifies mutual duties and responsibilities in a generalised form. Psychological contract implies long term job security in return for hard work and loyalty. Employees believe that a promise has been made and consideration offered in exchange for it. But in uncertain times, like what the pandemic has created, it often makes it unclear as to what both the parties, the employer and employee owe each other, thus making fulfilling obligations more difficult. As a result there is increased likelihood of misinterpretation and psychological contract violation (PCV). 3. Psychological Contract Violation and Internal Controls The existence and effectiveness of internal control is often dependent on the supervisory managers. This brings about a certain dependency on people. When psychological contract is violated or perceived to be violated, behaviour of the supervisory manager may also change. Practical Case Illustration 1: The HR Manager and Payroll Authorization To illustrate this, let us consider an HR manager of a manufacturing firm. He would normally review the monthly payroll sheet prepared by his subordinates, in great detail but may do so with less care once he perceives a psychological contract breach. This has internal control and financial implications. Perhaps, an absent worker who should have had a loss of pay may get missed out. Even though the maker-checker mechanism exists, its effective functioning depends on the individual’s diligence. Practical Case Illustration 2: The Purchase Manager and ERP-Housed Approvals There are numerous instances that audit professionals can enumerate where the efficacy of the control is person dependent even though the process itself may be housed within an ERP. For example, a purchase manager till recently would scrutinise every purchase order to ensure that it has the best price and quantity in it. The substantiveness of his checks is personal to him. An ERP may ensure that POs go from the initiator to the purchase manager for approval, but it cannot ensure consistency in his personal diligence. This subjectivity gets challenged when the psychological contract is breached. He may choose to check less, resulting in weaker controls. 4. Diligence is Neither Absolute Nor Permanent One could argue that diligence and care are part of the express contract of employment. Though it is, it is so in a generalised form. Both diligence and care is person dependent. The same employment contract offered to 2 appointees for identical roles may result in different outputs simply due to varying degree of personal application. Hence, organisations that wish to implement pay cuts must make an assessment of the psychological contract violation and its effect on controls. The table below illustrates the common type of PCVs and likely employee reactions: Organisational Justice Triggers Attitudinal Outcomes Behavioural Outcomes Distributive Justice Issues: Arise when outcomes are perceived to be unfairly distributed, such as financial rewards or paycuts. Lower job satisfaction Lower organisational commitment Increased cynicism Lower organisational citizenship Lower effort and diligence Procedural Justice Issues: Relate to perception of unfair application of procedures, such as promotions, evaluations, or selective cuts. Interactional Justice Issues: Relate to employees’ perception of trust by superiors and the organisation when they feel they have been treated badly or communicated with impersonally. These changes in attitudes and behaviours may have severe implications for employee and organisational controls and overall operating performance. 5. Psychological Contract Violation Leading to Incidence of Fraud & The Fraud Triangle Several studies have indicated that perception of organisational justice and occurrence of fraud are significantly correlated. It was found that justice issues (perceived or real) were often used to rationalise fraudulent behaviour. Researchers found that fraud occurs when there is an incentive to commit it, rationalisation for justifying fraudulent behaviour and available opportunity. These three situational factors are collectively known as the “fraud triangle”: 1 Pressure / Incentive Relates to employee’s motivation to commit fraud as a result of greed or personal financial pressure amongst a variety of reasons. In a pandemic scenario, severe compensation cuts trigger acute personal distress. 2 Rationalisation Denotes justification of fraudulent behaviour as a consequence of an employee’s lack of personal integrity, or other moral reasoning. PCV offers the cognitive moral justification that the employer broke promises first. 3 Opportunity Refers to a weakness in the internal control system where the employee has the power or ability to exploit vulnerabilities without timely detection, making fraud execution technically viable. By applying this triangle framework, we could say PCV provides the rationalisation for a motivated employee to exploit a weakness in the internal controls to commit the fraud. The situation is amplified if the internal controls are further weakened as a result of PCV. Pay cuts, like other underpayment inequities are potent triggers for the triangle to complete making organizations more vulnerable. Though frauds are extreme cases, firms must guard themselves against it. An understanding of PCV helps in this direction. 6. Stronger Internal Control Procedures Mitigate Effect of Psychological Contract Violation Be it a mundane outcome of lower effort or a serious fraud, organisations should be prepared for a variety of reactions when they trigger organisational justice issues. Re-enforcing the internal controls should therefore accompany decisions that can be perceived as psychological contract violations. Not doing so, could make the internal controls less effective. Internal controls could broadly be categorised as Process Level Controls (PLCs) and Control Environment. SIA 120 (Standard on Internal Audit on Internal Controls, ICAI) explains that the Control Environment includes the overall culture, attitude, awareness and actions of Board of Directors and management regarding the internal controls and their importance to the organisation. The control environment has an influence on the effectiveness of the overall Internal Control System since it provides the basis for establishing and operating process level controls (such as IFC and OCs) in the organisation. Architectural Anatomy of the Internal Control System (SIA 120 Framework) Internal Control over Financial Reporting (ICFR / IFC) Operational Controls(OC) Internal Financial Controls(IFC) Entity Level Controls(ELC) ↓ Operationalized across Multiple Process Level Controls (PLCs) ↑ Driven by Governing Foundation: CONTROL ENVIRONMENT(Culture, Tone at the Top, Oversight, Ethical Atmosphere) INTERNAL CONTROL SYSTEM (ICS)(Integrated Governance, Risk Management & Assurance) In a PCV situation, the PLCs and the control environment suffer as discussed earlier. Deliberate effort should be made to strengthen their quality. Such re-enforcement could take the form of re-designing existing PLCs, placing additional controls and deepening the involvement of internal audit. Control environment could especially benefit from risk management training and focusing on corporate ethical environment. It is widely accepted, that strong internal control procedures across all units or areas of a firm improve the chances for errors and fraud to be detected and prevented. In particular, employee adherence to the set ICP (e.g. policies on approvals, authorisations, verifications and reconciliations) and segregation of duties need to be both well designed and to be strictly followed by employees. In a recent empirical study conducted in Australia (Rae & Subramaniam, 2008), it was found that the relationship between employee perceptions of organisational justice and incidence of employee fraud is moderated by the quality of ICP. In other words, where the quality of ICP is high, perceptions of organisational injustice led to lower occurrence of frauds. 7. Quality of Internal Control Procedures and Increased Importance of Internal Audit Traditionally, Internal Audit (IA) functions to assess the effectiveness of the organization’s internal controls, and to report to management about where and how internal controls could be strengthened. Besides auditing financial transactions, IA activities may also cover non-financial areas such as business unit processes, geographical areas and compliance with laws and regulations. Studies have shown that IA plays a crucial role in the prevention and detection of fraud within an organisation by ensuring that the audit is well planned and that a proper IA programme exists. Having a broad scope of audit operations and activities in particular is seen as vital for identifying areas where the controls are not fully functioning and procedures are unclear. In the recent past, IA has become a primary agent for transformational change in helping users of systems improve the design of their controls. Studies have revealed that IA recommendations for improving ICP are critical for not only preventing control breakdowns but also in improving the overall quality of ICPs. During uncertain times, like the current pandemic, firms will do well in expanding the scope of internal audit. The more extensive the scope of internal audit, the better it is. With an extensive IA function (i.e. the larger the number of audit activities), the likelihood of identifying the weaknesses in ICP are greater. Consequently, through better identification of ICP weaknesses, appropriate remedial measures may then be undertaken, leading to a higher quality ICP. 8. Adverse Attitudinal Changes Impact Firms Differently: The 2×2 Typology Matrix When PCV is anticipated, firms should actively seek to establish controls with lower person dependencies. Firms should first assess their type. The matrix below demonstrates how adverse attitudinal changes impact internal controls in different firms based on Technology Enabled Controls (Low vs. High), Standard Products (Non-Standard vs. Standard), and Supervisor Retention: The Internal Control Vulnerability Matrix (4 Types of Firms) TYPE 3 FIRMS AVERAGE IMPACT Low Tech-Enabled Controls More Standard Products High / Low Supervisor Retention Profile: Standardized processing provides inherent consistency, but lack of automated controls creates exposures when diligence wanes. TYPE 4 FIRMS LEAST IMPACT Hi Tech-Enabled Controls More Standard Products High / Low Supervisor Retention Profile: Significant tech automation ensures processes are well developed and less person-dependent; resilient against attitude shifts. TYPE 1 FIRMS WORST IMPACT Low Tech-Enabled Controls More Non-Standard Products Low / Hi Supervisor Retention Profile: Riskiest category; heavy reliance on human checks without automation; severe breakdown when pay cuts induce cynical attitudes. TYPE 2 FIRMS AVERAGE IMPACT Hi Tech-Enabled Controls More Non-Standard Products Low / Hi Supervisor Retention Profile: Systemised controls prevent clerical errors, but non-standard customized products still necessitate human discretion. ← Low Technology Enabled Controls • High Technology Enabled Controls → ↑ More Standard Products | More Non-Standard Products ↓ The above diagram illustrates that firms with low tech enabled controls, who make non-standardised products are more at risk from weakening internal controls. The situation gets aggravated if there is increased attrition in the supervisory cadre. Low tech enabled controls result in heavy reliance on people dependent controls, which weaken as a result of pay cut induced attitudinal changes. On a scale of riskiest to least risky, Type 1 firms would be rated riskiest, followed by Type 2, 3 and then Type 4. Type 4 firms have several things going in their favour. Even when psychological contract violation triggers attitudinal changes, internal controls do not suffer. Significant technology adoption in controls means that processes are well developed and less people dependent, hence less subject to changes in people attitudes. Standard products and existence of seasoned supervisors help in making the internal controls even more resilient. 9. Re-Designing Internal Control Procedures & Diagnostic Action Plan A firm cannot alter the Standard / non-standard nature of the business beyond limited modification of its product mix. Neither can it address supervisor retention matters beyond a point, as it involves human expectations. Of the three parameters used in the matrix, the one that the firm can very meaningfully alter is the technology adoption in controls. Focusing on this will yield results. In other words, Type 1 and 3 firms must endeavour to move to Type 2 and 4 respectively to effectively deal with PCV. Key Diagnostic Questions the Firm Must Ask Itself: Q1: Have we determined people to be impacted by paycuts? Q2: Will their attitudes impact any ICPs? Q3: Can the ICPs be systemised? Q4: Can internal audit mitigate risks arising from not systemising? Type 1 firms that face the worst impact on their ICPs due to paycut caused attitudinal changes, benefit the most from higher quality internal audit. Internal Audit Improves ICP Quality During Adverse Attitudinal Changes When employees display adverse changes in attitudes, internal audit can have a moderating effect not only in financial areas, but also non-financial areas. Reduced diligence by a HR manager, while processing monthly attendance, can be compensated by internal audit. Or an internal audit of POs can make good the lack of attention of the purchase manager. This results in an improvement in the quality of existing ICPs. Type 1 firms benefit the most because ICPs are less systemised than a Type 4 firm. Special improvement can be seen in relation to approval frameworks, authorisations of financial and non-financial activities, verifications and reconciliations. 10. Pink Slips Add to ICP Weakness: Three Critical Redundancy Hazards In their attempt to curtail costs in light of a slowdown, firms not only have resorted to pay cuts, but also lay-offs. Though this serves a commercial purpose, its effect on internal controls should not be underestimated. Redundancies can affect internal controls in three distinct ways: i. Elimination of a role that wholly or partly was a part of the internal control procedure: Individual employees often perform multiple tasks some of which relate to internal control procedures. When such an employee is made redundant without moving the ICP to someone else, then it may weaken the control environment. Decision makers may look at the monetary cost saved by the role elimination without adequately assessing the benefits foregone by someone effectively managing the ICP. This aspect is more poignant in Type 1 firms where the tech enabled controls are not fully operational, or firms who are producing non-standard products. ii. Moving the ICP as an “additional” activity to a continuing employee: This pertains to the decision makers recognising the ICP as an essential activity that should not be eliminated, but move it to someone as an added responsibility. This may cause a reduction in importance of the control. Though the control continues to exist, its quality may deteriorate due to reduced importance. Attention should be given not only to existence of controls, but also its quality. iii. Improper handover at the time of laying off employees: Rushed lay-offs, many of them carried out at very short notice, means low quality handover. The leaving employee should explain what work is in his hand, to ensure that smooth transition takes place. The importance of this activity is often not understood. For example, an admin manager, who had held up certain bills of a service provider, had good reason to do so. It is quite likely that request for payment of such old bills will now be made to the replacing manager who might end up passing it, if the handover was not done properly. In the current pandemic, firms will do well to assess the impact lay-offs can have on ICPs. 11. Work From Home (WFH) and ICPs Firms have never tried work from home (WFH), the way they are trying it now. WFH is also having its effect on internal controls. For example, activities requiring more physical engagement like that of purchases will see their ICPs weaken. Especially so in firms that make non-standard products where the manager is constantly evaluating materials for the very first time. Industries or activities that already have a high level of technology adoption could see their controls less impacted. But there is no room for complacency. It is premature to conclude that diligence and care is independent of the location of work. Sporadic examples come to light which suggest that, in Type 4 firms mere higher adoption of technology enabled controls does not ensure adequate diligence. 12. Conclusion & Strategic Roadmap for Governance Custodians Covid-19 pandemic has brought to us several unprecedented scenarios in various activities including internal controls. Be it pay cuts, pink-slips or work from home, all have control implications for firms and their governance custodians. It is essential that firms recognise these implications. The concept of psychological contract violation offers an excellent explanation linking pay cuts and its effect on employee attitudes. Understanding this concept is essential to taking steps to manage ICPs better. Internal audit is emerging as an efficient tool in the hands of managements to mitigate impact of their decisions related to pay cuts, pink-slips and WFH. Internal audit can effectively identify the control weaknesses that have crept in due to such decisions and re-enforce ICP quality. Auditors, on their part, now need to pay attention not only to traditional factors such as ICP quality but also to other organisational factors such as employee perceptions of organisational justice. Auditor may further advise their clients to undertake few positive things like encourage virtual bonding, provide better healthcare and insurance facilities, etc. to boost morale of their employees and promote a positive employee experience among employees instead of pay cuts and layoffs. Maintaining high employee morale is certainly challenging during a global crisis, but it is not unachievable. The little things like strong communication, increased flexibility, and good access to resources – show that the company cares. Additionally, when the crisis concludes, the company will be in a strong position to retain talent and hire new employees quickly. Having a reputation for supporting workers and keeping spirits high during a crisis will certainly boost the employer brand and support long-term success and keep all the Internal Controls intact. References & Statutory Citations Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment Sebastian Kube, Michel André Maréchal and Clemens Puppe, January 2010, Institute for Empirical Research in Economics, University of Zurich Quality of internal control procedures: Antecedents and moderating effect on organisational justice and employee fraud – Kirsty Rae, Nava Subramaniam, (2008) Managerial Auditing Journal, Vol. 23 Iss 2 pp. 104–124 The Impact of psychological contract breach on work-related outcomes: A Meta analysis, Zhao et al. Personnel Psychology, Autumn 2007 The impact of psychological contract violation on employee attitudes and behaviour, Judy pate et al, Employee Relations, 2003 The Role of Perceived Violation in Determining Employees’ Reactions to Psychological Contract Breach, Suazo, Mark M, Turnley, William H, Mai-Dalton, Renate R, Journal of Leadership & Organizational Studies, 2005. Organised private sector plans layoff, salary cut amid COVID-19 crisis: Report Standard on Internal Audit (SIA) 120, Internal Controls, ICAI Standard on Internal Audit (SIA) 230, Objectives of Internal Audit, ICAI Standard on Internal Audit (SIA) 7, Quality Assurance in Internal Audit, ICAI Standard on Internal Audit (SIA) 14, Internal Audit in an Information Technology Environment, ICAI

ICAI Journal Focus • GST • Chapter XVII CGST Act • Statutory Jurisprudence Promises of Ruling in Advance An Incisive Jurisprudential Survey of Advance Rulings under Chapter XVII of the Central Goods and Services Tax Act, 2017: Dissecting the Nature of Statutory Commitments, Binding Force vs. Precedent Value, Information-Sharing Matrices, and the Strategic Balance Between Certainty and Accuracy Author: CA. A. Jatin Christopher (Member of the Institute • jatin.christopher@gmail.com • eboard@icai.in) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 73–77 (Journal pp. 601–605) Classification: GST Law, Advance Ruling Authority (AAR/AAAR), Section 95–106 CGST Act ⚠ Bewilderment vs. Statutory Reality • Core Proposition “Bewilderment appears to be the reaction of taxpayers and every other enthusiast of GST law, every time advance ruling pronounced is published in public domain. But in all fairness, consider the reasons for these reactions; and to discover them, one need not travel far. Where ruling adopts an interpretation that threatens the tax position subscribed by taxpayer empowered to self-assess tax liability, taxpayer’s angst is due to the imminent litigation lurking somewhere waiting to expose the tax position by scrutiny of returns or audit of records. Taxpayers need to entertain the possibility that they might still be right in their own interpretation of the law while leaving a given taxpayer-applicant contented with the certainty that a binding ruling procures. This article attempts to survey the concerns surrounding advance ruling in GST under Chapter XVII of Central Goods and Services Tax Act, 2017 and draw reader’s attention to the exact nature of ‘commitment’ made in the law.” 1. Commitment of Advance Ruling: The Desirous ‘Applicant’ “An applicant desirous of obtaining an advance ruling” has an option to secure a “binding ruling” that even the Government cannot resile from. Not even if a contrary interpretation is laid down by the highest Court. Advance Rulings have been deprecated for their departure from popular interpretation and for disharmony with views of distraught thought-leaders. A ‘desirous applicant’ cannot be bewildered by the outcome of the process consciously entered into knowing fully about the ‘accepted perils’ inherent in such a process. And just because another view is possible, that is no reason for seeking appellate intervention; an order must not only be wrong but so perversely wrong that except by intervention of higher Court, injustice will have triumphed, say experts. ‘Two Views’ to Any Argument It is as old as humanity, that when there is an argument, there will always be two (or more) views. It is this plurality that differentiates our race and perhaps responsible for perfection that we have achieved in the way we shape our society. But anyway, taxpayer who ‘desires’ to be an applicant is not blind to the possibility that ‘the other view’ may be taken. With this clear possibility, taxpayers cannot possibly be found to say that the view pronounced in the ruling was not in their reckoning when the application was filed. Opinion of experts in the field of GST, as compelling as it may be, do not enjoy binding force. It is this ‘certainty’ that taxpayers seek when they opt for a ruling in advance. “Taxpayer who ‘desires’ to be an applicant is not blind to the possibility that ‘the other view’ may be taken. With this clear possibility, taxpayers cannot possibly be found to say that the view pronounced in the ruling was not in their reckoning when the application was filed.” 2. The Economic ‘Reason’ to Seek Ruling: Double-Digit Rates vs. Single-Digit Margins Business environment is riddled with uncertainty about many aspects and GST exasperates this situation in no small measure. Uncertainty is not that the interpretation is not ‘unknowable’ but the very real possibility that another interpretation may be canvassed that was not budgeted by the taxpayer. The Mathematical Asymmetry of Business Margins and Indirect Taxes: Margins in business are in single digits whereas GST is in double digits and any slip in interpretation, could cost the business dearly. Taxpayers are not enthused about this new tax or any new tax, for that matter. When tax is inevitable, it must be unambiguous, that is their only ‘ask’. And when this tax is creditable, any enthusiasm leftover evaporates instantly. Where taxes are non-creditable, there is some motivation to ‘get it right’ (this time at least) and for obvious reasons. Getting it right is not only about the rate of tax but six other things also. Business needs ‘certainty’, not about the interpretation but certainty of ‘no contest’ later. “Getting it right is not only about the rate of tax but six other things also. Business needs ‘certainty’, not about the interpretation but certainty of ‘no contest’ later.” 3. ‘Contest’ by Administration: Justice in Rem vs. Inquiry in Personam Whether administration should canvass an alternate interpretation is a question in rhetoric because society looks to the Government to ensure justice in rem. That is, if one taxpayer were to get away with undue advantage, there is no denying that Government will have done injustice to the rest of society; justice in rem demands inquiry in personam. Mindful of this responsibility, Government will (and must) challenge taxpayers’ tax positions. Some may question reasons for investigative work undertaken, but that is misinformation, and in some instances, exception. It would be failure of administration if investigative work were liberal or lethargic. “If one taxpayer were to get away with undue advantage, there is no denying that Government will have done injustice to the rest of society.” ‘Certainty’ to Taxpayer: The Two-Fold Statutory Bargain Society has accepted, in law made by elected representatives, that a ‘binding’ arrangement be entered into with specific taxpayers through the process of ‘advance ruling’. Such a ruling obliges the State to accept the outcome of the ruling and therefore, the extent of revenue determined and without the expense of investigating the correctness of the self-assessed tax. Consequence of this arrangement is two-fold: Immunity from Contest for the Applicant: A given taxpayer can proceed without fear of contest after implementing the interpretation pronounced in the ruling; and Societal Forfeiture of Alternative Revenue: The rest of society accepts no further cost of exploring the correctness of taxes paid, forfeiting the potential outcome of an alternative, higher-yielding interpretation. When the People have given themselves a law that offers this much certainty, there is no gainsaying about the merits of the People’s will. Every taxpayer enters this ‘option’ in broad daylight and with eyes wide open seeking ‘certainty’. There is not an iota of doubt that after a ruling is passed, administration will revisit the outcome pronounced. 4. ‘No Fear’ of Precedent Value: Narrow Compass vs. Setting the Cat Among the Pigeons Advance ruling bears no ‘binding precedence’ that other taxpayers must abide by or that can be cited by other taxpayers and expect adherence by administration. Rulings hold force over a very narrow compass (binding only on the applicant and the jurisdictional officer in respect of the specific transaction). However, the grief that rulings seem to cause is the possibility that the interpretation taken in one ruling could ‘set the cat among the pigeons’ in cities and jurisdictions where tax compliance was a bliss unaware of this interpretation to identical facts. To expect this new law to be applied selectively or to leave long-standing practices unquestioned is disrespect to this new law. This law came about by no less than a Constitutional amendment and with a commitment to rid society of the ills that many had resigned to live with. “This law came about by no less than a Constitutional amendment and with a commitment to rid society of the ills that many had resigned to live with. When a Chartered Accountant in Trivandrum can advise on GST implications of a transaction to a Company in Dibrugarh, it is nothing short of remarkable.” If one is sure of the tax position then, a ruling is welcome to adopt a different interpretation yet leave this taxpayer unmoved. GST never promised ‘no litigation’ but it certainly promised ‘clarity’. Clarity does not mean continuity of past tax practices and interpretation. Clarity means ‘knowability’. Clarity for all taxpayers, but certainty, only for applicant to ruling. 5. ‘Surprised’ by Exposure of Interpretation Interpretations never before imagined have been revealed by advance rulings. Taxpayers are surprised not with the possibility of the views taken (in a ruling) but that such a view was never considered by the taxpayer, right from July 2017. Nobody likes surprises, certainly not when it comes to tax treatment. If some exceptions are left out, for the most part, interpretations are not impossible because they come out from reading the very words of the lawmaker. One is welcome not to subscribe to such an interpretation but certainly not expect to be free from challenge. Experts caution that advance ruling is patently erroneous and for this reason discourage taxpayers from seeking a ruling. But then, the beeline that taxpayers are seen making to the Office of AAR seems to indicate that public outcry may not be entertained in boardroom deliberations, or are there so many indignant applicants. In either case, every taxpayer with their panel of expert advisors weighs binding certainty of a ruling against perils of prolonged litigation with uncertainty in the interregnum. Taxpayer-applicants have helped bring into the open, interpretations that were never in the reckoning, either due to missing the nuances of GST or its ability to accommodate such new interpretations. Courts will have final say about the interpretation application to other taxpayers on issues involved brought out by taxpayer-applicants. 6. ‘Banking’ on Competence Imbalance & ‘Anxious’ About Exchange of Information Earlier laws will bear testimony of the vast dissimilarities in interpretation of essentially the same law on the same facts. A contractor in one State would be routinely assessed to tax on the basis of ‘standard mark-up over costs’, whereas, in the neighbouring State be assessed on actual ‘contract receipts’ and admissible deductions for taxes already paid. Although GST is a new law, the imbalance remains in administrative skills to comprehend this new law and experiment possible interpretations. Taxpayers accustomed to the skill levels in one jurisdiction are no longer able to bank on them because advance rulings have exposed these new possibilities for administrators in all jurisdictions to be enlightened and to pursue. Cross-Jurisdictional Collaboration and HSN-Wise Intelligence Mining Interpretations adopted in advance rulings are not only made public but possibly put through a process of ‘sorting and sieving’ to extract HSN-wise database of tax positions to challenge taxpayers with granular information on tax positions they currently employ. Domain Specialization and Interstate Administrative Exchange: With extension of cooperation and collaboration amongst tax administrators of all States and Centre, there is no requirement that every State must have its own ‘subject matter experts’: Karnataka could offer administrative expertise in the Information Technology (IT) industry; Goa could offer expertise in the Hospitality and Tourism industry; while Maharashtra could offer specialized competence in the Automotive industry. Collaboration between States with overlapping skills would be just another day at the office for tax administrators. And this is not even an unintended benefit to administration in a ‘connected world’. In fact, exchange of information has uncovered no small share of revenue recently and taxpayers that have been at the receiving end of demands emanating out of ‘intelligence gathered’ will bear witness to this phenomenon. GSTN is committed to taking this exercise of gathering information and turning them into intelligible tax demands to a whole new level, not as something that is possible with the Common Portal but a duty towards society to uncover demands that slipped through the cracks in the unconnected world that GST has left behind. 7. Self-Assessed Tax ‘Almost’ Accurate: Umbral vs. Penumbra Operations While Government has come through on the demands of trade about ‘minimum Government, maximum governance’ by placing the entire responsibility of assessment on taxpayers, the fear now is about the perils associated with interpretational possibilities with this new law. With this new regime of self-assessment here to stay, taxpayers are compelled to ‘unlearn and relearn’ and come to an accurate understanding of the workings of this new law. For the most part, taxpayers have got it right with their understanding: Leasing is now definitively supply of services; High-seas sales are excluded from scope of supply itself; CGST paid in a host-State is not creditable in home-State even against CGST liability. So, for the most part, taxpayers have arrived at the correct interpretation of transactions in the umbral region of their operations. But there are transactions in the penumbra where taxpayers are attempting adventurous interpretation fuelled to some extent by the potential upside and a desire to ‘set this law straight’. These transactions may not occur every day but do occur often enough to significantly affect the operating results of a business. Taxpayers are therefore not ready to sever their recourse to a ruling in advance. 8. ‘Critical’ Examination of GST Law and Constitutional Boundaries Vociferous calls are heard to abandon this forum, if there is to be any chance of securing a lawful and conscientious interpretation of this new law. These calls are from well-meaning enthusiastic thought-leaders and they deserve some latitude about their approach to criticism because, truth be told, pursuing the path that puts to test the boundaries of this law must be counted a service to the Nation. And this pursuit does not augur well with straight-shooting that advance rulings have come to be associated with. The need is to ensure that GST law that has been welcomed by everyone, does not go untested for its vires as well as its boundaries. Constitution has laid boundaries that not even GST law can gloss over or overstep. GST must coexist with levies that have not been subsumed. And responsibility falls on the challengers who need Courts to grant them its indulgence. 9. ‘Defects’ in Facts & ‘Judiciousness’ of Executive Rulings ‘Defects’ in Facts Applicants must share responsibility for failure on their part in bringing to the surface, the ‘fact-in-issue’ before the authorities. It is no one’s case advance rulings are designed to be pro-revenue, even in the backdrop of the mountain of rulings to show. Failure in presenting facts can be fatal even before the highest Court and this cannot be brushed aside. Even if mischievous applications are ignored because discussing rulings on them is underserving of readers’ consideration, there are scores of applications where the fact-in-issue does not appear to have been brought out for consideration of the authorities. Whether this failure was in presentation or its appreciation, there has been a failure that affected the outcome. And implications of such rulings perceived by other taxpayers, is heart-breaking. But the take-away from such rulings is that any anxiety about its ramifications is not entirely justified because of the scope available to distinguish them on law and facts. It is important to note that the blame over the outcome of these rulings has, in part, to be justifiably laid at the doorstep of applicants. When Courts are not free from failure of presentation, advance rulings cannot be protected from this misadventure nor be banished for the inevitable consequences. ‘Judiciousness’ of Rulings Final criticism about this forum is that Executive functionaries occupy the position to pronounce these rulings. Decisions affecting civil consequences must be exercised judiciously. Being judicious is neither the exclusive privilege of the Judiciary nor being injudicious the presumption about the Executive. It is a responsibility that competent, qualified and experienced functionaries are carefully chosen and appointed to discharge. To say that there is not a single ruling that silenced naysayers with its brilliance in elucidating this new law, would be a plain lie. Consider that Executive functionaries are empowered to speak for the State and to grant the applicant a ‘binding pronouncement’ about the interpretation that the State admits unequivocally. And if the People, acting through their elected representatives, have authorised Executive functionaries to speak for the State, there may be little to find fault with such a policy resolve of the People. There is something that taxpayer-applicants seem to find comfort in this forum that motivates them to find their way past all the din around advance rulings. 10. Conclusion: International Treaty Analogy & The Calculus of Certainty International Treaty law may be called to one’s attention where sovereign authorities all too often enter into binding negotiations, with either a contract or policy resolution or State law affording the framework, that parties agree a priori to obey and comply even if it suffers from any interpretational misadventure. Sovereign Nations have been party to such binding negotiations because legal experts say, Courts cannot enter before commencement of lis. Taxpayer-applicants admit that ‘certainty’ has been their primary objective and ‘accuracy’ being a by-product. Our Apex Court has not been shy of moving away from its own past and with great eagerness availed itself of the very next opportunity to lay down the interpretation that needs to be applied. If society has accepted this possibility of the Apex Court even, society must at least reconsider the direction of its criticism, if not its criticism itself, surrounding advance rulings in GST. Advance ruling is an option that well-informed taxpayers choose to avail because it holds the promise of certainty albeit with possibility of disappointment.

ICAI Journal Focus • Banking & Finance • Global Benchmark Reform Phasing Out of LIBOR A Comprehensive Technical Exposition on the Sunset of the London Inter-Bank Offered Rate: Rate-Rigging Investigations, Transition to Alternate Reference Rates (SOFR, SONIA, SARON, €STR, TONAR), Valuation and IFRS 9 / IFRS 7 Hedge Accounting Impacts, Transfer Pricing Adjustments, and Indian Regulatory Implications under RBI FEMA & MIFOR Frameworks Author: CA. Vivek Raju P. (Member of the Institute • vivekrajup@yahoo.co.in • eboard@icai.in) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 78–83 (Journal pp. 606–611) Classification: Banking & Finance, Financial Benchmarks, Alternate Reference Rates (ARRs) ⚠ Executive Summary • The Sunset of a Financial Giant “For finance professionals the term LIBOR (London Inter-Bank Offered Rate) is not new. For last several decades this rate has been in use as benchmark in the global financial markets. Trillions of dollars of financial transactions and derivative products have been riding on this benchmark rate. LIBOR was considered as the gold standard of the financial world as a key reference rate for setting the interest rates charged on adjustable rate loans and a variety of mortgages. Over time however there have been certain happenings that eroded trust on this benchmark rate and it is currently in its sunset period. An attempt is made in this article to provide an overview of LIBOR and the transition towards alternate reference rates.” 1. Historical Evolution and Determination of LIBOR In 1984 the British Bankers Association (BBA) developed the BBAIRS (BBA Interest Rate Settlement Rates) upon request by the member banks for a reliable benchmark to be used for derivative transactions. Over a period of time this rate became London Inter Bank Offered Rate (LIBOR). From January 1986 LIBOR started officially publishing rates for three currencies: USD, JPY and GBP. Through passage of time, two more currencies and further maturities were added. Currently rates are quoted for five currencies: USD, GBP, JPY, EUR and CHF. LIBOR is the reference rate at which the panel banks indicate that they can borrow short term wholesale funds from each other. LIBOR is thus an interbank unsecured rate. The rationale for wide usage of LIBOR in the financial world is due to the fact that it represents the terms at which the world’s largest and financially sound institutions are able to obtain funds on a short-term basis. Determination Process LIBOR is determined daily through a process in which the member banks in the panel submit quotes at 11 AM (London time) in the morning for different currencies and maturities ranging from 1 day to 12 months, and an average of these rates so submitted is taken and published after certain adjustments. The rates thus published are used as reference for a wide variety of financial transactions across the globe. It is estimated that an amount of USD 300 – 350 trillion of financial instruments in corporate debt, mortgages, variable rate loans, consumer loans, municipal debt and other derivative products across the globe are linked to LIBOR as the reference rate. LIBOR has become so important that it is sometimes referred to as the financial world’s most important number. 2. Rate Rigging Scandal, Regulatory Investigations & Loss of Trust In 2010 the British Financial Services Authority (FSA) launched an investigation into allegations of manipulative practices followed by the member banks for determining LIBOR. The Department of Justice (DOJ) of the US and the UK Serious Fraud Office (SFO) investigated the member banks. A lot of US financial instruments are linked to USD LIBOR rate and hence the US had the authority to prosecute the member banks. The investigations revealed that derivatives traders and employees of the member banks discussed and provided artificial rates that would benefit the traders instead of the rates that the bank would actually quote to borrow money. Banks also coordinated with other banks, something akin to a cartel, to alter the rates as well. This made the benchmark rate vary based entirely on the trader’s positions sometimes. Further, during the global financial crisis of 2007-08, banks artificially quoted lower rates to appear that they can borrow money at lower rates to make the bank appear less risky and insulate itself from the global phenomenon. The investigation revealed facts which shocked the financial world as to the scale of wrongdoings and the benefits the member banks got by rigging the benchmark rate. It also shattered the trust the financial system had in the benchmark rates. Reports revealed manipulation could be traced as far back as 2003. There were no proper checks in place in determination of the rates and the conduct of the member banks, and the process relied on a self-policing mechanism left to the banks themselves. Enforcement Actions, Penalties and Regulatory Overhaul: Massive Bank Settlements: Major global institutions like UBS, Barclays, among others, reached settlements with statutory authorities. In its 2012 annual SEC filings, UBS disclosed agreeing to pay Swiss francs 1.4 Billion in regulatory fines. Total Financial Penalties: Authorities in the United States and the United Kingdom levied cumulative fines exceeding USD 9 Billion on participating banks for manipulating LIBOR submissions. Criminal Prosecutions: Criminal charges were brought against individual traders and brokers for their active collusion in rate manipulation. Several high-level bank executives were forced to resign. In October 2019, the UK Serious Fraud Office (SFO) formally concluded its multi-year LIBOR investigation. Administrative Reforms: In 2012, the FSA released a 10-point reform plan. In 2014, the administration of LIBOR was stripped from BBA and transferred to Intercontinental Exchange (ICE). However, despite institutional reforms, market trust stood permanently eroded. 3. Global Phase-Out Roadmap & Emergence of Alternate Reference Rates (ARRs) In July 2017, the UK Financial Conduct Authority (FCA) announced that LIBOR would be phased out by the end of 2021. In April 2017, the Bank of England, as a part of its wider interest rate benchmark reform process, selected a risk-free Alternate Reference Rate (ARR) for GBP financial contracts and derivatives based on the Sterling Over Night Index Average (SONIA). Over a period of time, various other Alternate Reference Rates (ARRs) have been developed by central banks across the globe. Each of the five LIBOR currency jurisdictions is working on the new rates and addressing the transition-related issues that crop up. ARRs fundamentally differ from LIBOR: Transaction-Based vs. Subjective Judgment: ARRs are anchored in actual, observable overnight market transactions (either secured or unsecured), whereas LIBOR relied heavily on subjective hypothetical quotes and the judgment of panel banks. Risk-Free vs. Credit Premium: ARRs are designed to be near risk-free without any term premium or embedded bank credit risk, whereas LIBOR reflected the unsecured interbank credit risk of commercial banks. Tenor Structure: ARRs are predominantly overnight rates, lacking the pre-determined forward-looking term yield curve (1M, 3M, 6M, 12M) traditionally offered by LIBOR. Geography Alternate Reference Rate (ARR) Regulator / Administrator Collateral Nature United Kingdom (UK) Sterling Over Night Index Average (SONIA) Bank of England Unsecured United States (USA) Secured Over Night Financing Rate (SOFR) Federal Reserve / FRBNY Secured (Repo) Switzerland Swiss Average Rate Over Night (SARON) Swiss Exchange (SIX) Secured Euro Zone Euro Short Term Rate (€STR / ESTER) European Central Bank (ECB) Unsecured Japan Tokyo Over Night Average Rate (TONAR) Bank of Japan Unsecured 4. In-Depth Comparative Study: SONIA and SOFR vs. LIBOR Sterling Over Night Index Average (SONIA) This is the longest in existence of all the ARRs identified. Though this rate was in existence for more than two decades, it was not normally used as a benchmark. However, in 2017 it was selected as an alternate preferred risk-free rate as a replacement for LIBOR. The selection was made primarily because it is based on an active liquid underlying market; average daily volume in January 2020 was around GBP 150 Billion. The rate is administered by the Bank of England (BoE). This is an unsecured overnight rate produced by the BoE and is calculated based on actual transactions that banks pay to borrow pound sterling overnight from other financial institutions. Though both LIBOR and SONIA are overnight rates, there are certain limitations for the latter. SONIA is based on past data and is backward-looking, whereas LIBOR was based on expected rates and forward-looking. The other major difference or drawback is that LIBOR is available across a range of maturities like 1 month, 3 months, 6 months and 1 year, etc. SONIA currently does not have any term rates except for the overnight rate. Work is currently underway to arrive at term rates of SONIA for different maturities and these rates are expected to be available in Q3 2020. This coincides with the timeline that FCA has set, that no new LIBOR referenced loans can be issued after Q3, 2020. Structural Parameter LIBOR SONIA Administrator Panel Banks (later ICE) Bank of England Currency Multiple Currencies (5) Pound Sterling (GBP) Term Structure 7 Different Tenors (Overnight to 12M) Overnight (Term rates being developed) Rate Nature Forward-Looking / Expert Judgment Backward-Looking / Actual Overnight Data Credit Premium Includes Bank Credit Risk Near Risk-Free Term Premium Term Premium Built In Based on Tenor No Term Rates Currently Secured Over Night Financing Rate (SOFR) In 2014 the US Federal Reserve Board of Governors convened the Alternative Reference Rates Committee (ARRC) to identify an ARR to USD LIBOR. In 2017 the ARRC selected SOFR from various alternative rates and worked on an implementation plan for the adoption of SOFR in all financial products that reference LIBOR. SOFR is based on overnight transactions in the USD Treasury repurchase (repo) market. The rate is produced by the Federal Reserve Bank of New York (FRBNY), and is based on an active, well-defined market where daily trading volumes are in the tune of USD 700 – 800 Billion. It is an exceptionally transparent rate based on actual observable transactions. As in the case of SONIA in the UK, there are major differences between LIBOR and SOFR which cause difficulties in transition for contracts extending after LIBOR phase-out: Transaction vs. Expert Estimation: SOFR is entirely based on actual repo transaction data, whereas LIBOR reflected speculative quotes and expert projections of future funding costs. Single Overnight Rate vs. Seven Tenors: SOFR is a daily overnight rate, compared to LIBOR’s seven distinct term structures from overnight to one year. Credit-Free Treasury Risk vs. Bank Credit Risk: SOFR carries zero bank credit risk because it is secured by US Treasury collateral, whereas LIBOR incorporated an inherent bank credit-risk spread. Money Market Spikes: Being based on repo market liquidity, SOFR can be subject to quarter-end volatility and short-term liquidity spikes in the money market. SOFR also currently lacks forward-looking term rates across various maturities. The ARRC proposed that FRBNY could construct a forward-looking term rate based on SOFR derivatives markets once trading in SOFR futures and swaps matures and achieves sufficient liquidity depth. 5. The Transition Challenge: Legacy Contracts & Market Depth The transition from LIBOR to the ARRs will be a herculean task and will require coordination across all areas of financial and regulatory environments. The transition will have far-reaching implications across the globe, impacting accounting, reporting, regulatory compliance, taxation, corporate finance, and risk management. Contracts based on LIBOR stretch far into the future beyond the discontinuation date. Market estimates indicate that contracts to the extent of USD 900 Billion will mature beyond 2021. There are also instruments with maturities stretching beyond 2030, and certain hybrid capital bonds are perpetual with no fixed maturity date. Financial institutions and corporate borrowers must actively review legacy contracts extending past 2021 and incorporate robust fall-back clauses referring to the new ARRs, ensuring contracts can seamlessly transition beyond the sunset period. Furthermore, fundamental structural problems arise from a liquidity and market depth perspective. Because LIBOR was a mandated benchmark, panel banks were legally obligated to submit daily quotes across all maturities. Conversely, because ARRs rely entirely on observable market transactions, certain longer-dated tenors may suffer on days when no actual transactions take place, creating severe liquidity handicaps. 6. Accounting, Valuation, and Financial Reporting Considerations Financial Instruments Modification vs. Derecognition (IFRS 9 / Ind AS 109) There are numerous accounting considerations that have to be taken care of around financial instruments. Amending a contract from LIBOR to a new ARR changes contractual cash flows and must be tested to evaluate whether the modified terms are substantially different from the original terms. This determines whether the change is treated as an amortized contractual modification or requires complete derecognition of the existing asset/liability and recognition of a new financial instrument. Hedge Accounting & Discontinuation Risks (IFRS 9, IAS 39 & Ind AS 109) Where debt exposures are hedged with interest rate swaps, hedge documentation must be updated to reflect the new benchmark rate. Entities must evaluate whether the economic relationship remains effective or whether the hedging relationship must be discontinued, which would trigger the recycling of accumulated gains/losses in Other Comprehensive Income (OCI) into the profit and loss statement. Debt covenants must also be closely monitored to ensure that variations in interest benchmarks do not trigger involuntary covenant breaches, requiring advance negotiations with lenders to secure adequate covenant headroom. IASB Phase 1 & Phase 2 Benchmark Reform Relief (IFRS 9, IFRS 7, IAS 39): In September 2019, the International Accounting Standards Board (IASB) issued mandatory Phase 1 amendments to IFRS 9, IFRS 7, and IAS 39 (effective FY 2020), granting temporary relief from certain hedge accounting requirements prior to replacement. Expanded IFRS 7 disclosure mandates require disclosing the company’s exposure to benchmark reform, transition risk management methodology, key assumptions, and the nominal volume of hedging derivatives impacted. Discount Rates in Valuation Models LIBOR is a foundational component for constructing discount rates in valuation models across corporate finance, including impairment testing of goodwill and intangibles, fair value measurements of financial assets and liabilities, and pension obligation discounting. Existing models will require systematic recalibration once LIBOR ceases publication. 7. Indian Legal & Regulatory Dimensions: Transfer Pricing, FEMA, ECB, and MIFOR Transfer Pricing and CBDT Safe Harbour Rules Over a period of time and across numerous judicial rulings, Indian tax tribunals and courts have accepted LIBOR as an arm’s length benchmark for intragroup cross-border financial loans and corporate guarantees. Phasing out LIBOR introduces immediate ambiguity into transfer pricing determinations. The core challenge lies in calculating the appropriate spread over the ARR, which must factor in customer credit risk, maturity period risk, and liquidity premiums. In the initial years, thin transaction volumes may make these spreads contentious and prone to litigation. Assessees must renegotiate intercompany loan agreements to include transition mechanisms. On 20 May 2020, the Central Board of Direct Taxes (CBDT) notified the Safe Harbour Rules for AY 2019-20, which explicitly reference LIBOR plus a credit-rating spread. As new contracts shift to SOFR and SONIA, the CBDT must urgently issue modified Safe Harbour Rules for 2020-21 with calibrated spreads tailored to risk-free ARRs. RBI FEMA Regulations: External Commercial Borrowings (ECBs) Under the Reserve Bank of India (RBI) Master Direction on External Commercial Borrowings, ceiling limits on All-in-Cost (AIC) are capped at 450 basis points over the benchmark rate (defined as 6-Month LIBOR or equivalent interbank rate). In the revised scenario, the RBI will need to: Formally recognize new ARRs (such as SOFR) and determine specific revised AIC spreads to account for the gap between risk-free rates and historical credit-inclusive LIBOR; Address currencies where the chosen ARR lacks a pre-determined 6-month term rate; and Grandfather existing legacy ECBs maturing beyond 2021 so that borrowings compliant when contracted under the LIBOR framework do not involuntarily fall into non-compliance upon benchmark cessation. Mumbai Inter Bank Forward Rate (MIFOR) MIFOR is published by Financial Benchmarks India Pvt Ltd (FBIL) under RBI authorization and serves as the core benchmark for pricing currency swaps and forward rate agreements in Indian financial markets. MIFOR is calculated by compounding the overnight USD LIBOR rate with the domestic foreign exchange forward premium. Discontinuing USD LIBOR directly undermines MIFOR. The domestic derivatives market must formulate an alternate benchmark (such as Modified MIFOR linking SOFR with forward premiums) to avert systemic disruption in foreign exchange hedging. Indian Corporate Exposure & IBA Working Group In 2019, the Indian Banks’ Association (IBA) constituted a dedicated working group to prepare an operational transition roadmap and guidance notes for banks and corporate borrowers. Market estimates indicate that cross-border financing contracts totaling approximately USD 500 Billion are negotiated between Indian companies and offshore lenders. Sectors heavily reliant on long-term foreign currency borrowings—particularly infrastructure and housing finance—face acute exposure and must prioritize contract remediation. 8. Conclusion: The Financial World’s Y2K Moment Every change is hard to overcome; the phasing out of LIBOR—which has been the benchmark and considered the gold standard of the global financial framework for decades—will be even more challenging. The transition from LIBOR to ARRs will be a challenge of daunting proportions. This is the Y2K problem of the financial world, only this time the deadline is 31 December 2021. The stakes are exceptionally high, and transition planning must be highly effective to prevent market chaos and legal paralysis. In the limited time available, the COVID-19 crisis diverted significant attention of both regulators and financial institutions. However, despite the pandemic, the FCA and Bank of England reiterated in March 2020 that the 31 December 2021 sunset date remains unchanged. Despite administrative restructuring and enhanced controls around LIBOR after the rate-rigging scandals, these measures could not reverse the erosion of market trust. The death of the benchmark is inevitable. All stakeholders—banks, corporate treasuries, borrowers, auditors, and regulators—must proactively execute their transition roadmaps. While some degree of turbulence is unavoidable, meticulous preparation will mitigate hardships and ensure financial stability. The phase-out of LIBOR marks an unprecedented paradigm shift from subjective quote-based estimation to observable, transaction-backed, risk-free benchmarking. Proactive renegotiation of legacy agreements, robust hedge re-documentation, and close regulatory alignment are imperative for corporate and banking resilience. References & Regulatory Documentation United States Department of Justice (DOJ) Enforcement Press Release: Five Major Banks Agree to Parent-Level Guilty Pleas in Rigging of Foreign Exchange and Benchmark Rates – https://www.justice.gov/opa/pr/five-major-banks-agree-parent-level-guilty-pleas UK Financial Conduct Authority (FCA) Policy Statements on LIBOR Transition and Ceasing Publication Post-2021 (Andrew Bailey Speech, July 2017) Bank of England (BoE) Working Group on Sterling Risk-Free Reference Rates: Technical Specifications for SONIA Compounded Indices and Term Rates Federal Reserve Bank of New York (FRBNY) & Alternative Reference Rates Committee (ARRC): SOFR User Guide and Implementation Plan for Cash Products International Accounting Standards Board (IASB): Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 (Phase 1 & Phase 2) Central Board of Direct Taxes (CBDT), Ministry of Finance, Government of India: Safe Harbour Rules Notification dated 20 May 2020 for Assessment Year 2019-20 Reserve Bank of India (RBI): Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (FED Master Direction No.5/2018-19) Financial Benchmarks India Pvt. Ltd. (FBIL): Computation Methodology and Governance Architecture for Mumbai Inter Bank Forward Rate (MIFOR)

The Chartered Accountant Journal • Technology • November 2020 Growth of E- Commerce Business in India CA. Divya Chugh The author is a member of the Institute. She can be reached at eboard@icai.in Citation: (2020) 69 CAJ 612–616 Pages 84–88 • Journal Page Nos. 612–616 Executive Perspective As accounting professional, we all have witnessed evolution of e-commerce in India and fancied their financial and economic model. E-commerce has transitioned to become a multi-billion industry covering variety of goods and services – perhaps each and every product is available online today. It has also helped the manufacturers, big and small to reach out customers in every nook and corner of the country bringing unthought-of logistical dimensions. This write-up is an attempt to understand various aspects of E-commerce. For theoretical reasons, it rehashes what is e-commerce, its working models and its types based on operations. The article also dwells on hurdles in e-commerce that is further bifurcated into operational challenges and technical challenges. Aspects related to accounting and compliances applicable to e-commerce in India are also provided. Read on… E-commerce in India is growing rapidly and according to some estimates, it is likely to grow to 200 Billion US dollars by the year 2027. E-commerce businesses have immense growth potential which is evident from countless e-commerce businesses that have started in last decade. It is also estimated that e-commerce will grow at 27 per cent CAGR over next 4-5 years with online grocery as the biggest growth driver. E-commerce is also seen as solution to some of the policy challenges being faced by the country. Recently, National Small Industries Corporation Ltd. has launched an e-commerce platform in the form of www.msmeshopping.com for Micro, small and medium enterprises as a means of aatmanirbhar bharat. In simple words E-Commerce is “selling or buying of goods and services” over the Internet. E-Commerce is grown up version of traditional commerce in which the complete flow of transactions “right from selecting the product till the payment processing” is completed over internet. The scope of the e-commerce is unlimited. Practically every thinkable product or service is offered through e-commerce. E-commerce transactions in case of physical goods are supported by efficient supporting logistical infrastructure. At the same time many services are also being delivered over internet for speedy delivery overcoming physical barriers. In these times of pandemic, education and medical services are extensively using internet for delivery. Working Models of E-Commerce E-commerce based on “their model of work”, can be classified as follows: i) Direct selling of own goods and services Direct selling of own goods and services on the internet is the first working model in e-commerce. In this model own goods and services are sold online though website or other available means. For Example, A designer is selling designer clothes through own exclusive website. This form of E-Commerce is commonly known as E-Shops. Example of E-shops are microsoft.com, dell.com, puma.com, etc. ii) Marketplace on internet Marketplace on internet is another model of E-commerce is another model. Here buyers and the sellers are gather on a platform – e market place - to buy or sell their goods and services. For Example, Amazon, Flipkart, Snapdeal, etc. where sellers can register and sell their products or services to the customers who visit that website. This form of e-commerce is called the electronic retailing or E-tailing. Type of E-Commerce i) B2B (Business to Business) In B2B (Business to Business) e-commerce, trade takes place between two businesses such as between manufacturer and wholesaler or wholesaler and retailer. For example, www.msmemart.com is a B2B market platform by National Small Industries Corporation Ltd. ii) B2C (Business to Customer) B2C (Business to Customer) e-commerce means offering the goods and services directly to the customer. Examples of B2C e-commerce are flipkart.com and Spotify.com. iii) C2C (Customer to Customer) C2C (Customer to Customer) e-commerce brings customers together on a platform to buy and sell from each other. Examples of C2C e-commerce are olx.com and quickr.com. iv) C2B (Customer to Business) C2B (Customer to Business) e-commerce is a platform that facilitates customers to contact the businesses to buy the goods and services. Examples of C2B e-commerce are upwork.com and cj.com (Commission junction). Hurdles in E-commerce Operational Challenges i) Product Assortment: Product assortment means picking the right product and services to offer to the buyer. E-commerce gives option to choose from countless alternatives but also limits the way of buying, that is by viewing the images of the products and reading the description of product and services. Hence product assortment is a new challenge to offer only those products and services that fit best to the customer. ii) Pricing Model: Best pricing is a strategy that will bring back the buyer to the website. But what is the best price? is the biggest question. E-commerce provides effortless price comparison option which makes “Best Pricing” more important to sustain in the market. Also, e-commerce refrains the right to bargain from the customer. Accordingly, Pricing Model should be designed in way that makes the buyer satisfied with the prices even without bargain. iii) Order Management: E-commerce had shattered the barrier of “time to shop” and nowadays one can go for shopping at anytime from anywhere. This brings another challenge for the e-commerce is order management. Each order is important, and it should be delivered on time is the key to success in e-commerce but on the contrary order management is the also biggest challenge for e-commerce. Only way to handle this challenge is to treat “Every Customer as GOD” and treat every order on maximum priority without thinking about any other factor like order value, order volume, order margin etc. iv) Customer Management: E-commerce had made buying quite simple and easy for the customers. Customer is expecting services related to the product, delivery, refund, return, replacement, warranty, copyright, and other similar issues on priority. High-level Expectations by customers makes customer management extremely complex and critical task. The only way of customer management is “minimal human interventions” and “more automation”. “E-commerce had made buying quite simple and easy for the customers. Customer is expecting services related to the product, delivery, refund, return, replacement, warranty, copyright, and other similar issues on priority.” Technical Challenges i) Data Management: E-commerce is largely based on the data collected during each transaction. What makes data management complex? Size of data that becomes bigger and bigger as the business grows. Dynamic Nature of data that will keep the data updated on real time basis. Storage of data Structure which provide the data whenever asked for. Sorting and filtering of data to keep only valuable data. Backup of data to keep it secure. Data should be management in way that optimizes its size by eliminating all the non-useful information and stored in robust and secured structure. ii) Data Privacy and Security: Customer’s shares various personal data while transacting on e-commerce platform. Personal data is private information of the customer merely shared for completing such transaction. To keep customer’s trust intact each detail collected should be stored and processed in a way in which our own personal data is stored. Following practices should be followed to comply with the best practices or regulations related to data privacy: Explicit consent must be taken from the customer for the data to be collected. Notice must be given to the customer stating the purpose, use and time for retention of data to be collected. Risk Associated with E-commerce Business Risk in intrinsic in every business so as in e-commerce. To mitigate the risks of e-commerce, first step is to understand the associated risks. i) User’s Privacy: Customer’s data could be compromised even after having a secure database due to reasons like hacking, cyber-attack, security failure, and malware, etc. and could be used for spamming, identity theft and unsolicited marketing. “Customer’s data could be compromised even after having a secure database due to reasons like hacking, cyber-attack, security failure, and malware, etc. and could be used for spamming, identity theft and unsolicited marketing.” ii) Data integrity, authentication, and transactional risk: E-commerce delivers the order only if the basic authentications like phone number and e-mail verifications are completed. But who knows that even after such verification the order placed is genuine or not, actual sale or not, payment will be received or not? Nobody knows until the order is successfully delivered there is always a question mark on the data integrity, authentication, and transactional risk. iii) Customer Loyalty: Customers are more loyal towards the brands not towards the e-commerce services. Customer can easily switch to competitors because every e-commerce provides the same product or services what customer buys. Then what makes the customer loyal towards e-commerce? An extra effort by e-commerce to retain the customer can minimize this risk in the competitive world of e-commerce but cannot reduce it to zero. iv) Product Warehousing and Logistics: “Committed to timely delivery” is one of the most satisfying attribute of e-commerce and to manage this e-commerce have to assume the risk of loss, theft, damage and many more associated with managing the warehousing and logistics. In case e-commerce does not manage warehouse and logistics than at every order e-commerce have to confirm the seller about the inventory and wait for seller to confirm the product as “ready to ship” and then fully depend on logistics partner to pickup the order and deliver on timely basis but even after so much struggle e-commerce cannot guarantee delivery on time. Hence risk associated with product warehousing and logistics management is directly proportional to guarantee to on-time delivery. ““Committed to timely delivery” is one of the most satisfying attribute of e-commerce and to manage this e-commerce have to assume the risk of loss, theft, damage and many more associated with managing the warehousing and logistics.” v) Customers Charge backs and Disputes: In e-commerce rate of customer dissatisfaction is higher owing to the fundamental property of e-commerce i.e. no personal interface between the seller and the buyer which begins various confusions and misunderstanding. These confusions and misunderstandings give rise to disputes and charge backs which not just results in monetary loss but also the brand image loss. “In e-commerce rate of customer dissatisfaction is higher owing to the fundamental property of e-commerce i.e. no personal interface between the seller and the buyer which begins various confusions and misunderstanding.” vi) Intellectual Property Rights: Photo’s, video’s, content, description, logos as well as the products could be copied easily or violate someone else’s intellectual property. Accounting and Compliances Accounting Accounting of E-commerce companies are guided by the Accounting Standard issued by ICAI and notified by the Ministry of Corporate Affairs. Accounting standard 9 “Revenue Recognition” and Indian Accounting Standard 115 “Revenue from contracts with customer” will be applicable for E-commerce companies to recognize the revenue. As of now, there is no specific accounting standard issued by ICAI for “Accounting for E-commerce”. Recently, an Exposure Draft is issued by ICAI specifically for “E-commerce accounting” as ICAI proposes a comprehensive Guidance Note on accounting in e-commerce and cloud services. Revenue Recognition Service Sector: As per Accounting Standard-9 and Indian Accounting Standard -115, in case of selling services revenue will be recognized only when the services are provided and there is no uncertainty on the realization of payments from the customer. Further as per Ind AS-115, if a certain amount is received at the time of proving services for after support services like maintenance of software after the sale then revenue relating to support services will be recognized only after providing the support services. Wholesaling and Retail Sector (E-tailing): As per Accounting Standard-9 and Indian Accounting Standard-115, in case of selling goods revenue will be recognized only when the ownership/ control of the goods is transferred and there is no uncertainty on the realization of payments from the customer. In the case of sale of goods through e-commerce, an option of return is given which impacts the revenue of the e-commerce. Accordingly, there are two ways to book the revenue: Revenue should be booked after the expiry of the return period or Revenue should be booked after deducting the average amount of return. Recognition of Customer’s Liability Customer’s liability means the amount that belongs to the customer until the service/ goods are not provided, but this amount cannot be treated as an advance in case the e-commerce is not the actual seller. “Customer’s liability means the amount that belongs to the customer until the service/ goods are not provided, but this amount cannot be treated as an advance in case the e-commerce is not the actual seller.” Practical Example: Digital Content Platform For Example, an e-commerce platform is providing online digital content from a registered seller to a particular customer. E-commerce is accepting only prepaid orders. Till the time content for customer is not delivered by the seller, the amount received by the platform will be lying in a nodal account named as “Customer’s Liability”. When the seller transfers the content to the customer only then e-commerce platform will transfer the amount from Customer’s Liability Account to Seller’s Account after booking its service income for providing e-commerce platform. Compliances E-commerce is working under a bundle of regulatory requirements in India. Apart from the normal regulatory requirements that an e-commerce must comply with GST Act, Income Tax Act, ROC regulations if registered as a company, etc. following are the regulations specifically apply on e-commerce in India: i) GST -TCS: GST-TCS means tax collected as a source as per the GST Act. As per section 52 of the CGST Act, 1% of the sale amount (Sale Price excluding GST) transferred to sellers should be deducted as GST-TCS and paid to the GST department on seller’s behalf. For Example: On an e-commerce platform, one of the sellers is selling handmade pen for Rs. 1000. While transferring the payments to the seller, the platform provider must deduct GST-TCS @1% i.e Rs. 10 and deposit the amount with the government on behalf of seller. ii) TDS: As per the Finance Act 2020, section 194O was introduced to impose TDS liability on e-commerce operators. From 1st October 2020 onwards, every e-commerce must deduct 1% TDS on the gross amount transferred to the seller for providing goods services through the e-commerce platform. If the seller registered on the e-commerce platform is an Individual and HUF, then TDS should not be deducted if the sales amount transferred to the seller is up to ₹ 5 lacs in a year provided the PAN or the Aadhar is provided. TDS Rate will be increased to 5% in case PAN or Aadhar is not provided by any seller. For Example: One seller is providing tuition services through online platform to a student. After rendering the services by the seller, platform provider will transfer the fee amount to the seller after deducting TDS @1% if the total amount transferred in a year is more than Rs. 5 lacs. If PAN or Aadhar is not available seller, the TDS rate will be 5%. Endnote Just like traditional commerce businesses e-commerce businesses have their their own nuances, advantages, challenges, and risks that run together. E-commerce has also entered the area finance in a big way. Banking services, investments, loans, share transactions, tax advisory and many more services are being delivered using internet. With technology moving evolving at stupendous speed and with the potential of Indian economy, e-commerce business shall continue to grow.

General The Intangible Personality Drivers The Chartered Accountant • November 2020 • pp. 93–96 (Journal pp. 621–624) CA. Nikhil Kenjale The author is a member of the Institute. He can be reached at nukenjale@gmail.com and eboard@icai.in. “Cognitively, human mind is always active trying to tick off some thoughts in life. The factors that the mind may be paying attention to can be about completing education, settling down financially, having family, good friends, pursuing hobbies, do in social work. All these factors have a common purpose of trying to achieve something sensible, responsibly. Chartered Accountants, the professionals who are always dealing with various forms of intangibles, though of different kind, it can be his/her own assets, clients’ contexts, assets and so on. Let us explore some different dimensions of the word ‘Intangibles’ in context of corporate governance, financial reporting and auditing. Read on...” COVID-19 pandemic is a real challenge for the economy at macro level and to our jobs, health and our lives, at micro level. On the flip side it is also allowing all of us a good opportunity to reflect on various matters including our aspirations, skills, career path and so on. One of the common thing that one might be doing, is to be spending more time on Internet. Talking about the two sets of accounting standards – Accounting Standards (AS) and IFRS as converged and adopted in India i.e. Ind AS. One of the area that always attracts attention is Intangible Assets that is covered by Accounting Standard (AS) 26 for a long time and now by Indian Accounting Standard (Ind AS) 38. When we start reflecting on this, a natural question comes to mind that before standard was issued, were there no intangible assets that entities possessed? Definitely, entities had these assets, but there were no set principles for identification, recognition, measurement and disclosure in the form of an accounting standard. Now let us explore some interesting elements of the concept “Intangible”. In general parlance, it is understood as something “unable to be touched; not having physical presence”. Going by the dictionary meaning the term intangible means, “something that does not exist as a physical thing but is still valuable to a company”. In comparison to intangible assets, tangible assets are easy to identify, recognise and measure as we can see and touch them. Tangible assets includes all things on this earth that can be physically possessed and their ownership be established. Human Cognitive Evolution and Personality Substratum One of the greatest differentiators human beings have when compared to other animals is the ability to use their mind to a different level. Evolution tells us that living in society, forming an association, doing some commercial activity, etc. are some of the things human (rightfully called “Homo Sapiens”) learned and established over a very long period of time covering thousands of years. Mental ability, power of thinking, is something natural to humans and is influenced by the surrounding circumstances, education at home (called “Sanskaras” in Indian culture), learnings from school, colleges and work environments. These factors vary from person to person and therefore, these factors impact differently to each person in terms of nature, timing and extent. This leads to each one of us having a unique personality. This uniqueness gives an edge to some persons to acquire superior position over others. For example, one with higher mental ability would try to do some new things, bring innovations, establish new businesses, write new legislature, create art or music, etc. “Generally, humans want some purpose, a cause for their existence, wish to use their skills and abilities, possess physical goods or money and have emotions and empathy.” Generally, humans want some purpose, a cause for their existence, wish to use their skills and abilities, possess physical goods or money and have emotions and empathy. Humans want to define their personality by deliberately doing or avoiding certain activities. These things in a way form a substratum of the personality. Suppose a person has worked in a multinational company at a very senior position for say 20 years, what all “Intangible” things are likely to be associated with his / her personality? Knowledge and experience about the industry, processes, systems, work culture, handling people at various levels, handling multiple crisis situations and so on. These are knowledge elements that sets him apart from others. It is easy to comprehend that these abilities are innate qualities that are over and above the educational and professional qualifications and enable a person to make quality decisions, lead the organisation, innovate and perform better than others. Accounting, auditing and management practices are essentially imperfect sciences and are called behavioural sciences and hence, one rule cannot apply to every situation. That creates the challenge of valuing these intangibles. Now let us see how ‘intangible’ factors are inherent to few factors of any organisation that an accountany professional ends up dealing with, daily. Corporate Governance Corporate Governance: It is a very broad term which deals more with behavioural and ‘soft’ aspects like trust, fiduciary capacity, surveillance, ethics, enterprise risk management, internal controls, succession, value creation and preservation, brand, sustainability, etc. We know that all the above terms cannot be cardinally quantified, i.e., one cannot assign a number to it. Like it is difficult to say that X organisation’s governance is at seventy percent level. This is because there cannot be a definition of what constitutes hundred per cent. “A careful look at the developments in Corporate Governance requirements, disclosures across the globe reveals that more and more entities are moving beyond traditional financial statements, i.e., number crunching.” A careful look at the developments in Corporate Governance requirements, disclosures across the globe reveals that more and more entities are moving beyond traditional financial statements, i.e., number crunching. This is because studies have proved that there is a positive correlation between the good governance and the long term ROI / value creation by the entity. The human mind (rather brain) always thinks of safety, risk, surety, returns, cash flow timings, ethics, transparency which cannot alone be addressed by the financial statements. Hence, we end up having sections in the annual report on management discussion and analysis, risk management, sustainability reporting, social responsibility and environmental reporting, etc. So going forward, Chartered Accountants will be required to deeply understand the cognitive and behavioural aspects, the importance of emotional quotient, curiosity quotient in order to work on the engagements like enterprise risk management, certifying corporate governance, framing sustainability reporting systems, and so on. The novel form of assurance in future, could include cultural audit, mandatory governance audits, sustainability certification and much more. Financial Reporting Financial Reporting: Financial statements are an outcome of processing business transactions in a disciplined manner and in compliance with the applicable regulatory framework. Chief Financial Officer’s role has undergone a sea change in terms of areas they contribute. It includes business enabling role in the areas of strategy, MIS, risk management, internal controls, compliances and various other things. Coming back to our ‘intangible’ discussion, for a peculiar organisation the hygiene or quality of financial reporting depends on organisational governance and culture, organisation structure, roles and responsibilities of a CFO, level of internal controls invoked through an ERP system and supporting manual internal controls, level of documentation of processes, adoption of internal control framework, internal audit system, skillsets of people involved in the financial reporting, involvement of third party service providers like outsourced accounting/ shared service centres, payroll processing, etc. All these things create a unique understanding about the financial reporting system of an entity and is often termed as ‘Control Environment’. So any change in above variables will impact the level of experience that financial reporting team members will gain over a period, thereby creating different level of ‘intangible assets’ for each of them. “Another important area for finance function is application of judgement in making reasonable estimates and in interpretation of statutes, agreements and contracts.” Another important area for finance function is application of judgement in making reasonable estimates and in interpretation of statutes, agreements and contracts. With technology advancement, more and more activities are performed by machines. So there is good amount of accuracy and predictability possible for certain accounting estimates. For example, warranty provision. Unlike traditional methods of provisioning, one can have a clear trail of parts fitted into a machine, i.e. specification, make year, supplier name, batch name, plant code, etc. and therefore easy to arrange for a product recall and thereby estimate warranty expenses using defined matrices. However, the judgement is required in establishing reliability of this data and factoring the level of innovation planned to reduce defects and similar prospective actions in determining the warranty provision amounts. Suppose an entity in India is planning to acquire another entity in a different geographical area. It requires contextual application of valuation models, applicable corporate laws, transfer pricing laws, land laws of entity being acquired, accounting standards, so on and so forth. These combinations are not readily available and hence, are intangible skills. So from the skillset point of view, an entity needs people who are good at processes, people having good grip on numbers, aggregators, risk managers who can challenge the obvious, those who know the accounting standards, etc. A Chartered Accountant is well positioned to assume these roles and serve the entity, either internally or externally in form of assurance engagements or audit engagements. But a conscious investment is needed to understand comprehensive business perspective around financial reporting and not be confined only to the debit/credit, accounting standards and disclosures. Also experience of dealing with experts like valuation specialists, lawyers, etc. would be an icing on the cake. “A conscious investment is needed to understand comprehensive business perspective around financial reporting and not be confined only to the debit/credit, accounting standards and disclosures.” Auditing and Professional Judgement Auditing: It is one of the most complex and onerous jobs wherein auditors’ main duty is to opine on the financial statement’s truth and fairness. Knowingly or unknowingly we are continuously judging people, situations, scenarios and are forming opinions. The process behind formation of personal opinions is invisible and largely driven by our subconscious mind. But when it comes to forming a professional opinion, the auditors have scope of work mandated by the law/ customer, audit work governed by the auditing standards and various accounting standards and pronouncements. Though large amount of efforts have been put nationally / internationally on codifying the standards by a logical division of the audit steps and technology helping auditors in a big way to analyse huge amount of data, forming an audit opinion will continue to be a matter of professional judgement. Consider a context of auditing a large listed IT company which has 10,000 plus employees, ERP systems and sub-systems, 2 foreign entity acquisitions completed recently, has got 30 subsidiaries across geographies and publishes its audited results on a quarterly basis as per I-GAAP, IFRS and US GAAP. The revenue register consists of 650,000 line items and similar are the line items for procurement and employee reimbursement data put together. In the above context, the typical audit will start with understanding the entity’s business, do a risk assessment, identify internal controls that mitigate these risks, support that effort with substantive testing, and then form an opinion on the fairness of the financial statements. It may sound simple, but when it comes to applying these things to a complex situation as stated above, there cannot be one correct way of doing the audit. There could be multiple ways of gathering the required evidences and thereby an assurance though underlying auditing framework is common. Largely factors like audit team skillsets, availability of experts, documented audit methodology, its enforcements and on top of everything, experience of the person in-charge of an audit play a role. Future Auditors’ Personalities Polymath Person A polymath is someone who has expertise and knowledge in a number of different subjects e.g. blockchain, analytics, regulations, etc. Rather than solely specialising in specific areas, polymaths can identify and assess different risk areas and collaborate across disciplines. They are your innovators, early adopters and self-starters. Purple Person Purple people are those who possess a mix of business and technology skills, going further than the traditional knowledge of an IT Auditor. The combination of business and technology is becoming prevalent in Audit as organisations are looking for increased efficiency and value from audits. Let us take a small example of assessing employees’ risk of committing a fraud in the above stated entity. It requires an auditor to consider frauds happened so far, going through past internal audit reports, level of enforcement of ethics, related internal controls in respective processes wherever human intervention is involved. Before getting into the risk assessment per se, an auditor has to define a canvas in his mind that he is talking about an entity having more than 10,000 people, i.e., so many minds. Statistically, there would be some percentage of people who will be trying to exploit gaps in the internal control systems, have negative intentions. Then the auditor will put a likelihood to these possible risks and try to see controls built by the entity. Likewise, an auditor is always connecting the dots of his experience, auditing framework and client context in mind which is an invisible process. That is ‘intangible asset’. The beauty is, an intangible asset ‘put to use’ as above, instead of getting amortised actually gets appreciated - audit by audit. So in near future a shift will happen to include more qualitative and soft aspects in the audit. Naturally, skillsets which would be required to perform these audits would be different and would have to be achieved by the Chartered Accountants. Conclusion We tried to look at how ‘Intangibles’ i.e. human mind, experience, skillsets play a role in Corporate Governance, Financial Reporting and Auditing. For a Chartered Accountant, a conscious and constant efforts on building these ‘Intangible Assets’ would help in a long way to be successful and remain relevant.

ICAI Journal Focus • Industry Specific • Electronics & Mobile Manufacturing Creating Reliable Manufacturing Ecosystem A Visionary Industrial and Fiscal Policy Framework: Introducing the “Most Favoured Manufacturer (MFM)” Model, Staggered GST Incentives (12%, 9%, 5%), Domestic Sourcing Metrics, SEZ Infrastructure, and Vocational Skilling to Transform India from an Assembly Hub into a Global Electronics Powerhouse Author: CA Hari Subramanian (Member of the Institute • harisubramanian@outlook.com • eboard@icai.in) Citation: The Chartered Accountant, Vol. 69, No. 5, November 2020, pp. 89–92 (Journal pp. 617–620) Classification: Industrial Policy, Make in India, Electronics Manufacturing, Indirect Tax Incentives ⚠ The 500-Million User Paradox • Core Editorial Insight “It’s estimated that as of 2019, India has crossed a mind boggling 500 Million smartphone users. In other words, every third person in India, owns a smartphone which is probably replaced every three years. The number of users has only been increasing exponentially and will continue to do so for the foreseeable future. How big a piece of this enormous pie is enjoyed by Indian companies though, one might ask. The answer is, ‘crumbs’. Can something be done? Answer is ‘yes’. Read on…” 1. Introduction: Market Realities and the Missing Ecosystem The market share of Indian companies in this fast-paced growing multi-trillion-dollar Industry, is almost negligible. And why is that? Is it due to lack of accessible technologies? Surely, it can’t be due to a lack of skilled labour – given the number of professionals including technological experts our country churns out each year? Or is it because India is a cost-sensitive market and we simply prefer to import cheaper phones – perhaps. I believe it is due to the lack of a reliable manufacturing ecosystem for Indian Manufacturers. In this article, I hypothesize and simulate a concept I’d like to call “Most Favoured Manufacturer (MFM)” and explore how a few key fiscal changes can create a thriving ecosystem for localized manufacturing which will eventually lead to a leveled playing field for Indian manufacturers, or perhaps even result in leading the market. Government is already trying to facilitate manufacturing in a big way. As professionals, we Chartered Accountants can also encourage industry, wherever feasible, to adopt diversification and growth strategies in the area to save critical foreign currency, boost Indian business and generate employment. Earlier this year, there have been many discussions lauding India for becoming the second largest mobile phone manufacturing hub in the world. While it certainly sounds positive, is there more to this than meets the eye? 2. The Manufacturing Evolution: From SKD to CKD to Real Value Addition Let’s quickly take a few steps down history lane, right back to 2014, when India’s smartphone manufacturing sector was more or less limited to mobile phone devices in a Semi Knocked-Down (SKD) state, where almost all parts of a phone were assembled in countries such as China, Taiwan, South Korea or Vietnam and thereafter, imported to India. The “manufacturing” was limited to the insertion of battery and perhaps, adding locally sourced headphones along with a charger to the handset box. Fast forward to 2017, India had advanced to Completely Knocked-Down (CKD) manufacturing, where parts such as screens, PCBs, semi-conductors, camera modules came in from different suppliers and were put together in assembly-oriented factories in India. They were then sold as “Made in India”, which begs the rhetoric: were they really “made in India” though? Things have improved ever since and there are brands which claim that 99% of the phones sold in India are locally built, with as much as 65% parts sourced locally. India has also started exporting devices to Bangladesh and Nepal. However, that’s not the case for all manufacturers. Most manufacturers still rely on importing many parts (>50%), and why wouldn’t they? Core Infrastructure Hurdles for Critical Components: Some of the most important components in manufacturing a phone, namely, the chipset, memory and display, require advanced technologies, uninterrupted supply of water and electricity, and highly skilled & trained employees to run high-end automated machines. India’s infrastructure needs a major upgrade to meet the required standards. The government, for one, has taken cognizance of this issue. Earlier this year Hon’ble Finance Minister Smt. Nirmala Sitharaman unveiled an INR 50,000 crore package targeting large smartphone makers operating in India, with Production-Linked Incentives (PLI) that involve cash benefits subject to meeting local sourcing, manufacturing and sales targets. While the local manufacturing of parts would require huge upfront investments by smartphone manufacturers and component suppliers, the benefits would be enormous in terms of savings in import duty costs, which usually vary from 15% to 30% depending on the part imported, country of origin and a few other parameters. 3. The “Most Favoured Manufacturer (MFM)” Concept & Staggered GST Slabs That being said, the fundamental policy question remains: “What more can we do to incentivize local sourcing of parts?” I believe the usage of our current multi-level tax rate structure (GST), as a carrot-and-stick approach towards the manufacturer, would really help address this issue. Currently, 18% GST is levied on smartphones, but what if a manufacturer sourced 60% of its components locally? On this premise, we progress with our vision which leads us to the question: could we perhaps grant them the status of “Most Favoured Manufacturer (MFM)” and levy only 12% GST on their phones – thereby making it a better value for money product compared to its counterparts, who continue to import more than 40% of the parts required? Manufacturer % of Parts Sourced Locally MFM Level Tax Rate Applicable (%) Explanation Company A Up to 59% – 18% No benefits under 60% threshold Company B 60% – 69% Level 1 12% Some fiscal benefits Company C 70% – 79% Level 2 9% More substantive benefits Company D 80% – 100% Level 3 5% Maximum fiscal benefits While the staggered rate benefits would certainly allow competitive pricing, that alone wouldn’t necessarily be enough. The MFM program should also encompass: Vocational Training Centres: Specialized centres where technical training for manufacturing and assembly of parts and electronics can be imparted onto semi-skilled workers. The training would not only upskill the semi-skilled labour available in our country but also generate employment opportunities, possibly in millions. This can be funded partly by the manufacturer and subsidized by the government. Technical and management institutes can also be encouraged to launch focused courses to impart specialized skills. Special Economic Zones (SEZ-Like Infrastructure): Government could allocate dedicated zones specially for manufacturers enrolled under this program. Infrastructure in such SEZs should be built by the government and leased out to manufacturers for a pre-determined period upon promise of fulfilling mutually accepted production quantities. Decade-Long Direct Tax Holidays: Along with physical infrastructure, decade-long direct tax holidays could incentivize and attract more global and domestic manufacturers to join the program. The idea is to have a multipronged approach which is required and now inevitable to make India Aatmanirbhar in manufacturing mobile phones. 4. Methodology: Calculating Local Sourcing Percentage (Value-Oriented Approach) The ideal solution would be to have a value-oriented approach. That is to say, if the value of materials sourced locally is more than sixty per cent of total material cost, the manufacturer qualifies for MFM status. In other words, the total landed cost of materials imported should not exceed forty per cent of the total cost of materials. Numerical Case Simulation: Mobile Manufacturer “X” Handset Bill of Materials Let’s say Mobile Manufacturer “X” procures the following components for a smartphone: Chipset: Imported from South Korea supplier (SKS) at an equivalent of INR 2,000 per piece (CIF + Customs Duty). Memory and Screen: Imported from China paying a total of INR 3,000 per set (CIF + Customs Duty). Rest of Parts: Sourced locally within India at a total cost of INR 8,000 per handset. • Total Pre-Assembly Cost of Materials: INR 13,000 • Total Landed Cost of Imported Components: INR 5,000 (38.47%) • Value of Materials Sourced Locally: INR 8,000 (61.53%) • Determination: Qualifies for MFM Level 1 (12% GST Slab) This would not just allow Manufacturer X to sell his finished product by levying a lower GST rate of 12%, but would also motivate him to procure more locally – thereby moving up in the MFM level scale. He may request his South Korean supplier (SKS) to relocate production capacity to India. Also, it would be safe to assume that manufacturer X isn’t the only Indian customer of SKS, enabling them to tap a potentially huge domestic market while achieving continuous savings in international shipping and freight insurance. In a realistic scenario where a manufacturer has a broad portfolio of smartphones, the percentage of locally sourced materials for his portfolio collectively will be considered for MFM status. 5. Governance Architecture: Online Single-Window Administration & Appeals A seamless and efficient process, with minimal manual intervention, is what we should strive for. This would ensure that the dreadful era of the “License Raj” is left behind once and for all. This would involve the formation of a dedicated committee spearheaded by a high-ranking official with several industry and legal experts. The macro-level administrative workflow is outlined below: 1. Application The manufacturer submits a completely online application with verified bills of material on the official MFM portal. 2. Review (30 Days) A swift audit by the MFM committee and a 3rd party peer review verifies eligibility within 30 days of receipt. 3. Decision (15 Days) Registration certificate and MFM level granted within 15 days. Deemed registration in case of no response within 45 days. 4. Correction In case of rejection due to clerical errors, the manufacturer may rectify defects and re-apply immediately. 5. Appeal (45 Days) Appeals against substantive eligibility rejections to be decided by an appellate expert bench within 45 days. MFM Status once granted will be valid for the financial year. For subsequent years, the manufacturer will file an annual self-declaration to renew the status, subject to audit by the MFM committee within 30 days. If the manufacturer achieves a higher MFM level during the year, a fresh application can be submitted for the enhanced level, with the earlier level prevailing in the interim. Statutory Integration with Existing GST Laws This program can and should be consciously merged into existing GST laws with adequate caution, while leveraging the existing framework of the “Make in India” campaign. An inclusion into the existing HSN rate charts is probably one of the few statutory changes required to integrate it seamlessly with our indirect tax laws. 6. End-Consumer Impact & Market Price Simulation For the sake of simplicity, let’s simulate the market impact, presuming the smartphones manufactured by all four companies are of comparable quality and features, and are currently priced at INR 11,800/-: Manufacturer MFM Level Old GST Rate (%) MFM GST Rate (%) Consumer Price under MFM (INR) Company A – 18% 18% INR 11,800 Company B Level 1 18% 12% INR 11,200 Company C Level 2 18% 9% INR 10,900 Company D Level 3 18% 5% INR 10,500 As evident from the above simulation, Company D’s phones will be flying off the shelves faster than they can be produced, while Company A would eventually have to change their modus operandi to level the playing field. Companies that source most parts locally under the MFM program would also avoid import duties ranging from 15% to 30%, and pay GST at lower rates to their local governments instead, reducing their overall manufacturing costs further. 7. Endnote: 100% FDI Automatic Route & The Broader Electronics Frontier Our existent Foreign Direct Investment (FDI) policy permits 100% FDI under the automatic route for electronics manufacturing. This, for the uninitiated, is the equivalent of a red-carpet invitation to global electronics manufacturing companies. This also leads us to the question: “Why stop at smartphones – why not all electronic devices?” In my opinion, manufacturing has already begun its transformation as a “robot-intensive automated process” and not a labour-intensive process of yesteryears. We need to catch the train before it leaves the station forever. If we are able to carefully weave this program into the “Make in India” campaign, we could achieve several tangible and immediate national benefits: Multiple new MSMEs and countless employment opportunities; Real Manufacturing in India, transitioning definitively beyond mere assembly; Big boost to the “Make in India” campaign and transforming India into a premier global export hub; Reduced economic and strategic reliance on imports from other countries; and Reduced retail costs to millions of end consumers. “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – William Arthur Ward

Technology Need for Cyber Security Post Covid-19 The Chartered Accountant • October 2020 • pp. 82–85 (Journal pp. 430–433) CA. Partho Ghosh The author is a member of the Institute. He can be reached at caparthoghosh@yahoo.com and eboard@icai.in. “Covid-19 has caused a lot of disruption which also resulted in unprecedented lockdown in various countries. Despite the lockdown, companies across the globe were able to restart their operations through technological changes and remote working. Some companies have already adopted technology and have reengineered their business processes and more will follow with time. These changes in business processes and adoption of technologies for going digital not only bring about greater efficiencies but also give rise to new forms of risks, which needs to be addressed Let us understand the new and changing cyber-risks due to this sudden digitisation in the present and post Covid-19 world, and some ways to mitigate these risks. Read on...” Introduction Covid-19 has taken the entire world by surprise and business are also not unaffected by the same. The lockdown across different countries have forced businesses to shut down their offices, and has posed a challenge of continuing operations despite closures of offices. Businesses who have already adopted digitisation, and had their data centres, servers on cloud and were using SaaS based applications saw comparatively lesser disruption vis-a-vis those who had not gone digital. Covid-19 has shown that the traditional ways of working are at a greater risk of disruption caused by pandemics, and that businesses cannot afford to continue working with a physical office setup at the core and they need to go digital and reengineer their processes to facilitate remote working in order to reduce if not completely eliminate the loss due to similar disruptions. In this article, an effort is made to provide an overview on the changes in business processes which are most likely to take place post Covid-19 and its impact on Cyber Security risks and how effectively to mitigate those risk. Business Processes Being Reengineered As social distancing becomes the new normal, companies are looking at ways to adopt to remote working. Organisations have already started reengineering business processes, they are moving their data and applications from on-premise to cloud and are automating the workflows to reduce dependencies on paper documents and are trying to go digital. The current situation require organisations to assess their IT infrastructure, for digitisation and facilitation of remote working and need for advanced cyber security solutions. Most of the organisations lacked adequate Business Continuity Plan or Incident Response Plan, specially the small and medium enterprises and those who had, did not anticipate and plan for the scale of disruption as being faced today due to Covid-19. The organisations will now be forced to understand the criticality of Business Continuity Plan and Incident Response Plan and accordingly need to make plans for. Digitisation and use of Information technology is going to be a critical part of the same. Post Covid-19, digital transformation at companies will accelerate dramatically. We have already seen changes in education and healthcare sector with the spurt in online education and emergence of telemedicine services. Companies are looking at the effectiveness of remote working/ work from home (WFH) concept, and are digitising their records and developing remote working capabilities to insulate its operations against any similar disruptions. Virtual meetings have become the new norm and webinars has taken the place of seminars and people are using video conferencing tools for the same. The management is continuously deliberating on the ways of reducing physical contact for completion of tasks and cloud applications are gradually replacing legacy systems. Covid-19 is in the process of revolutionising the business process like never before, and these changes are not going to be temporary in nature rather they will be the new normal. Risks Associated with Remote Working and Digitisation With more and more businesses adopting to digitisation, the potential number of targets for cyber criminals will also rise. And among these, small and medium enterprises will be the most vulnerable as they often lack the understanding of cyber security risks. SME’s are reluctant to invest in cyber security measures and they think the spending to be an unnecessary expenditure, as they feel they are too small to be a target for a cyber-attack. The lack of security measures leaves them prone to cyber-attacks leading to serious business disruption along with putting financial health and reputation of organisation at stake. In a remote working environment, physical meeting are replaced with virtual meetings and most of the interactions within team and with clients happens over messaging apps and third-party applications through personal user devices. An organisation usually secures its network against any kind of intrusion and unauthorised access, using network firewalls, intrusion detection systems, etc. However, the personal user devices usually have very limited security features installed in them and are prone to cyber security risks. Mostly used unsecured or less secured networks for connectivity raises such risks. In the absence of adequate security measures, the confidentiality of data can be breached by exploiting backdoors in un-secured applications. In such a situation it is critical that all communications and data are shared through secure communication channels only. Remote working environment changes the way data is stored and accessed. Factors such as collaborative tools, availability of data on endpoint devices, virtual meetings, remote access of IT assets give rise to additional cyber security threats and businesses who do not have a secure remote access mechanism becomes most vulnerable. Need for Cyber Security Cyber risks are dynamic and multidimensional in nature. Most of the organisations also undertake cyber risk assessment as part of their overall risk assessment strategy. However, it must be noted that as far as cyber risk is concerned it is not enough to only review cyber risks twice or thrice a year and it requires a continuous review, as against other categories of business risks. Owing to changing threat landscape, it is imperative for an organisation to ensure that their IT assets are secure, and data is efficiently protected and managed. Cyber security measures can provide the required shield against such threats. Measures for Mitigating Cyber Risks User Awareness Programs Most of us have this perception that “Cyber Security is all about use of technology”. Though partially correct it’s not completely true. Sensitising the people about the various ways in which cyber-crimes are committed, educating them about security policies of the company, various technological tools available to detect and prevent any security breach is equally important for any Security Policy to work effectively. The staff needs to be made aware of what precautions they need to take while dealing with sensitive data and how to avoid official data misuse. Intrusion Detection System These are software applications which works as a detective control and are used for monitoring the network. Intrusion Detection System identifies an unauthorised activity or entry into the network of the organisation and can be used to detect and identify and malicious activity or attacks early. Encryption “It is one of the oldest methods used for ensuring that data is available in a meaningful form only to those who are supposed to receive them.” It is one of the oldest methods used for ensuring that data is available in a meaningful form only to those who are supposed to receive them. Simply put Encryption is the method of converting plain text into cipher text. Encryption uses an algorithm to encrypt the data and recipient can decrypt the same using designated keys. A strong encryption i.e. 128 bits will ensure that even if Cyber criminals are able to capture data in encrypted form, it would me of no use to them as data in encrypted form is not readable. “A strong encryption i.e. 128 bits will ensure that even if Cyber criminals are able to capture data in encrypted form, it would me of no use to them as data in encrypted form is not readable.” 128-bit encryption is one of the most secure encryption methods and is considered logically unbreakable. Most of the banks are currently using 128-bit to 256-bit encryption. Multi Factor Authentication Owing to Social distancing and organisations encouraging their staff to work from home, people will have to remotely access their organisational network or database from their devices. Since people are not physically accessing the resources, the login credentials become the only means to track and monitor the user activity. Traditional usernames and passwords can be stolen despite having a strong and effective password policy, by keyloggers, spywares or social engineering and are also susceptible to brute force attack. Multi factor authentication (MFA) provides an additional security layer, where cyber criminals even if they are able to obtain the user name and password, they will not be able to breach the security layer due to want of additional credentials such as OTP or passcodes. Virtual Private Networks Virtual Private Network is like creating a secure tunnel using the internet to provide a secure connection between the remote user and company’s private network. A virtual private network uses firewall, encryption and other security mechanisms to restrict unauthorised access to an organisations private network and facilitate secure communication/ exchange of data between the remote users and the organisations private network. Access Privileges With the reengineering of business processes and increase in the culture of remote working, companies will have no other option but to convert their physical documents into digitised form and store the same in a document repository either on their physical servers or on cloud. Under both the options, all critical, confidential and important data will be stored in the same repository, thereby creating the need to define access privileges, so as to ensure that users can view only those documents, which relates to their work profile and for which they have a permission to access. We cannot have a situation wherein all the company data is accessible by every user. Password Management An organisation should develop a set of principles and guidelines for password management. Following points may be considered while developing a strong password policy: Use a combination of alphabet, numbers, and special characters Minimum length of password should be defined Expiry of passwords after a fixed duration Restriction on use of old passwords again Use of a secure Password Manager Backup “Having a updated backup at a secure and isolated location helps in restricting the spread of the worm into the backup files thus resulting in quicker resumption of business critical operations.” Backup of user and application data is the most critical aspect of a business continuity plan and can also assist an organisation in cases of ransomware attacks. During 2017, in a worldwide cyberattack a ransomware called “WannaCry” targeted Microsoft windows based operating systems by encrypting data and demanding ransom payments in Bitcoin. As per estimates, millions of systems across 150 countries were impacted by the same. The ransomware made the files unreadable by encrypting them and severely affected the business. Having a updated backup at a secure and isolated location helps in restricting the spread of the worm into the backup files thus resulting in quicker resumption of business critical operations. Firewalls These are security systems which monitors and controls incoming and outgoing traffics as per predefined protocols which are configured therein. Firewalls are classified as either network based or host based. Network based firewalls are either software applications or hardware-based firewalls positioned on the gateway. Host based firewalls are positioned within the host and controls network traffic. Chartered Accountants understand Cyber Security Risks and its impact on business operations. The Institute of Chartered Accountants is conducting webinars and providing e-learning platforms to help professionals gain a deeper understanding into Cyber Security area. Also, the accountancy professionals can employ cyber security professionals to provide additional security services to their Clients. There are ample ways of getting insight on these risks and security measures. It is upto us to take that initiative and prepare ourselves for the upcoming changes so that we are ready to embrace and make efficient use of these new business opportunities.

ICAI Journal Focus • Technology • Industry 4.0 & Digital Audit Transformation Technological Disruption Reshaping Audit A Strategic and Methodological Guide to Industry 4.0 in Assurance: Artificial Intelligence, Machine Learning, Robotic Process Automation, Advanced Data Analytics, IoT Sensors, DLT/Blockchain, Triple Ledger Accounting, Smart Contracts, SA 315 & COSO Risk Frameworks, and a 5-Step Action Plan for Future-Ready Practitioners Author: CA. Narasimhan Elangovan (Member of the Institute • ca.narasi23@gmail.com • eboard@icai.in) Citation: The Chartered Accountant, Vol. 69, No. 4, October 2020, pp. 82–86 (Journal pp. 425–429) Classification: Information Technology, Digital Audit, AI & Automation, SA 315 Risk Assessment ⚠ The New ABCDEs of the Fin-Tech Era • Core Proposition “Artificial Intelligence, Blockchain, Cloud Computing, Cyber Security, Data Analytics, Internet of Everything, Robotic Process Automation are the new buzz words in today’s times and are the new ABCDEs of this era. With investments and valuations in these emerging technologies (broadly referred to as Industry 4.0), skyrocketing, companies across the globe are striving hard to develop sustainable use cases to see how they can solve everyday challenges using these. At the same time, as auditors we need to be aware of how these technologies are entering in the domain of finance. The future of Finance is technology driven, and this ‘Fin-Tech Era’ requires accountants and auditors to upgrade their understanding of these technologies and to use them in their profession, or even perhaps audit these technologies.” 1. Introduction: Survey Insights, the Reskilling Imperative & COVID-19 Catalyst In April 2019, the Association of Chartered Certified Accountants (ACCA) surveyed members and affiliates about their understanding of terms such as artificial intelligence (AI), machine learning (ML), natural language processing (NLP), data analytics and robotic process automation (RPA). Empirical Findings from the ACCA Global Technology Awareness Survey: Awareness Deficit: On average for any given technology term, 62% of respondents had either not heard of it, had heard the term but did not know what it was, or possessed only a basic understanding. Expertise Scarcity: On average, only 13% of respondents claimed a ‘high’ or ‘expert level’ of understanding of these disruptive terms. Workforce Projections: The Future of Jobs Report 2018 by the World Economic Forum estimates that the “existing” roles of auditors and accountants are poised to decline significantly in the coming years unless they aggressively upskill themselves with emerging technologies. Be that as it may, one also needs to keep in mind that the post COVID-19 era is an era of accelerated digitisation and adoption of these emerging technologies. We are witnessing an aggressive penetration of technology and automation in our homes, offices, and personal lives. In fact, many companies credit COVID-19 for driving digitisation into their businesses. Our audit offices are no exception. Starting with Work-from-Home solutions, remote accounting and auditing, increased usage of cloud-based applications for everyday tasks, and strengthening cyber security frameworks, COVID-19 provided the initial push toward technology adoption and maturity. However, this is just a beginning – perhaps a trailer! We need to progress systematically to adapt to emerging technologies so that our profession remains “Future-Ready” and “Relevant”. 2. The Core Disruptive Technologies Impacting Audit What are these disruptive technologies and why are they reshaping our profession? Why do we need to invest time in understanding them today to be relevant tomorrow? Let us explore each in depth: A. Artificial Intelligence (AI) Artificial intelligence (AI) is an advanced computer system that can simulate human capabilities based on predetermined sets of rules. Key activities include speech recognition, machine learning, strategic planning, and complex problem-solving. It is an evolving technology equipping computer systems with capabilities akin to human intelligence. Audit Impact & Use Cases: 100% Population Testing: Enables automated scanning of the entire population of financial data to assess risks, identify patterns, flag anomalies, and detect non-conformities. Behavioral & Pattern Profiling: Profiles data based on payment rounding-off, cluster analysis, outlier detection, and sentiment analysis of executive communications. Elimination of Mundane Drudgery: Frees auditors from manual ticking and casting, allowing them to focus on professional skepticism, training, and deploying judgment regarding the nature, timing, and extent (NTE) of audit procedures. Practical Tools & Enterprise Solutions: Botkeeper: Automates full-cycle bookkeeping powered by machine learning algorithms. iManage: Reviews thousands of commercial contracts to extract specific regulatory and compliance clauses. Zoho ZIA: An AI-assisted engine providing real-time automated data analysis acting as an auditor’s “second pair of eyes”. Microsoft Excel “Ideas”: Delivers instant automated trend analyses and visual insights. Transfer Pricing & Leases: AI bots benchmark intragroup transactions and evaluate contract terms for Ind AS 116 / IFRS 16 lease classification (Operating vs. Financial). B. Machine Learning (ML) & Deep Learning A major challenge facing the audit profession is analyzing vast transaction volumes within compressed audit windows while preserving stringent audit quality. Machine Learning coupled with Deep Learning allows algorithms to automatically learn from client datasets to identify complex, non-linear patterns. Key Capabilities: Model Replication: When fraudulent schemes or suspicious behaviors are identified at one client or industry, the predictive ML model can be immediately replicated and tested across other audit clients automatically. Predictive Decisioning: Deploys advanced statistical regression and classification to predict credit scoring for loans and credit loss allowances. Automated Ledger Coding: Cloud platforms like Xero utilize ML to make automated general ledger coding decisions for vendor invoices. Predictions are both backward-looking (historical reconciliation) and forward-looking (risk assessment and fraud warning). C. Robotic Process Automation (RPA) RPA is often mistakenly conflated with AI. In reality, software ‘robots’ are programmatic routines that operate like highly sophisticated Excel spreadsheet macros. RPA performs high-volume, repeatable, rules-based tasks across discrete yet interdependent IT systems. Key Distinctions & Practical Applications: Mimicking Process vs. Analyzing Data: RPA mimics human execution rather than cognitive data analysis. Therefore, RPA itself is not AI, but offers continuous 24/7 execution, absolute consistency, speed, and high scalability. Audit Applications: Automated verification and filing of monthly GST returns, periodic bookkeeping, automated OCR data entry from scanned invoices, transaction vouching, and mapping trial balance ledgers directly to financial statement line items based on pre-configured charts of accounts. D. Data Analytics & CAAT Tools Analytical procedures have long formed a core pillar of auditing. Modern data analytics has evolved far beyond basic sampling, enabling auditors to analyze 100% of transactions to identify high-risk anomalies. Advanced Analytical Methodologies & Software Toolkits: Relative Size Factor (RSF): Identifies unusual spikes by dividing the largest transaction in an account by the second-largest transaction. Benford’s Law: Tests the natural distribution of first and second leading digits to uncover fabricated transactions and manual journal entry fraud. Fuzzy Matching: Detects near-duplicate vendor names, employee bank accounts matching vendor accounts, and fraudulent billing addresses. Audit Software Ecosystem: Excel Add-Ins (eCAAT, Fuzzy Match, Kutools) and standalone CAAT engines (SoftCAAT, IDEA, ACL, Zoho Analytics) facilitate deep forensic slicing. E. Drones, Internet of Things (IoT) & Sensor Technologies IoT represents an interconnected ecosystem of computing devices, mechanical apparatus, and digital machines equipped with unique identifiers (UIDs) transferring data over networks without human intervention. Physical Audit Transformation: Real-Time Asset Tracking: Sensors transmit live operational telemetry, asset utilization rates, and environmental conditions. Drone-Assisted Physical Verification: Gathers substantive audit evidence in real time for verifying inventory in cavernous warehouses, calculating volumetric stockpiles in mines and quarries, and inspecting expansive tracts of land and infrastructure assets. F. Distributed Ledger Technology (DLT) & Triple Ledger Accounting DLT, the architectural family encompassing blockchain, represents a transparent, trustless, append-only, and cryptographically secured distributed database. Transactions are validated prior to ledger entry via consensus algorithms (such as Proof of Work or Proof of Stake), establishing an immutable single source of truth. The Paradigm of Triple Ledger Accounting: Blockchain introduces “Triple Ledger Accounting”, where a third cryptographic component is added to the traditional double-entry debit-credit framework. By mathematically binding two independent double-entry ledgers via a shared distributed receipt, blockchain eliminates the need for manual inter-company reconciliations. Auditors can test core assertions such as occurrence, accuracy, and cut-off with absolute mathematical certainty. G. Smart Contracts & Decentralized Finance (DeFi) A smart contract is a self-executing digital agreement whose terms are written directly into immutable lines of blockchain code. Parametric Insurance Example: An agricultural crop policy automatically executes payout disbursements to farmers upon receiving satellite or government drought declarations. This is enhanced via field IoT sensors reporting soil moisture deficiencies. As FinTech and Decentralized Finance (DeFi) expand, the audit of smart contract code will become as fundamental and mandatory as auditing core banking architectures. 3. Regulatory Compliance: Standards on Auditing (SA 315) & COSO Framework While emerging technologies unlock immense efficiencies, they introduce substantial risks. Assurance professionals must ground technological deployments within statutory auditing standards: Statutory & Internal Control Mandates: SA 315 (Identifying and Assessing the Risks of Material Misstatement): Requires auditors to understand the entity and its environment, specifically encompassing the Information System and related business processes relevant to financial reporting. COSO Internal Control – Integrated Framework: Principle 6: Specify objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives. Principle 11: Select and develop general control activities over technology (ITGCs) to support the achievement of organizational objectives. Five Strategic Audit Focus Areas for Emerging Tech Risks Holistic Environmental Understanding: Comprehend industry-wide IT shifts to effectively evaluate management’s end-to-end process for initiating, processing, and recording transactions before designing audit tests. Problem Statement Alignment: Ascertain the precise problem statement and ensure technology is treated as an enabling mechanism, not the sole panacea. Top-Down Risk Assessment: Adopt a disciplined top-down approach to identify significant accounts, financial statement disclosures, and relevant assertions. Differentiated Emerging Risk Profiling: Contrast novel risks arising from decentralized configurations (e.g. smart contract vulnerabilities, consensus failures) against legacy relational database risks. Deployment of Specialized Technical Skills: Engage forensic IT specialists and data scientists to evaluate the design, implementation, and operating effectiveness of complex automated controls. 4. Disruption Creates Opportunity: The 5-Step Implementation Roadmap for CAs Digital disruption threatens traditional compliance streams with commoditization (“I have a bot that does my bookkeeping”). However, professionals willing to embrace transitional risks will discover superior advisory horizons. Chartered Accountants can operationalize technological transition through a structured 5-step methodology: Step 1: Identify a Real Need Do not adopt technology for novelty. Evaluate audit bottlenecks where risk is highest. Start with simple Excel VBA macros before scaling to complex ML models. Step 2: Explore and Research Survey specialized vendor solutions tailored to audit workflows. Avoid feature overload by aligning research strictly with firm goals. Step 3: Test Before Committing Request product demos and trial sandboxes. Form pilot audit teams to test software against real-world client data before firm-wide procurement. Step 4: Develop Standard Operating Procedures (SOPs) Institutionalize usage across all audit staff through formal SOPs, cultivating a pervasive culture of digital change and continuous innovation. Step 5: Rigorously Measure ROI Define clear performance benchmarks: audit hours saved per engagement vs. software costs. Quantify cost reductions and audit quality enhancements. 5. Concluding Thoughts: Becoming the Change Agent in Industry 4.0 Every industrial epoch is defined by breakthrough discoveries: from the mechanical steam engine to the mass-production electrical assembly line, and onward to integrated circuits and computers. The next frontier is Industry 4.0 – a hyper-connected world where cognitive technologies solve immensely complex societal and economic challenges at accessible cost points. As future-ready accounting and assurance professionals, Chartered Accountants must not merely observe this transformation but act as its primary change agents. Understanding technology, embracing structural shifts, and maintaining unrelenting professional curiosity will ensure our enduring leadership and relevance in the decades to come. “As professionals and auditors of the future, we need to gear up to this era and be the change agent. Understanding technology, embracing the change, and being inquisitive would make us more relevant in the days to come.”

Technology Disruptive Technology—A Game Changer in Audit Processes The Chartered Accountant • October 2020 • pp. 82–88 (Journal pp. 434–440) CA. Anand Prakash Jangid The author is a member of the Institute. He can be reached at anandjangid@gmail.com and eboard@icai.in. “The present-day auditors are struggling to stay up harmony of giant information, thorough administrative weights, and ever-developing customer desires, alongside other headway of innovation. The intensity of cognitive technology, and the way it will change the audit process, is stunning. The many changes occurring within the audit environment as cognitive technology evolves, joined with other innovative evolutions, for instance like AI (AI), Machine Learning (ML), Predicative Analysis, Block Chain and Robotic Process Automation (RPA) — will change the audit for all time the complete effect of those disruptive technologies isn’t felt at now, however the benefits and effectiveness gains are becoming apparent. Read on …” With rapidly evolving inventive advancements and customer expectations regarding the audit functions in offering, some benefit included value addition, auditors must get on top of things by getting adept with technologies utilised by their customers. Simultaneously, adding proficiency to their own job cycles. The text diagrams in the article here show some key territories where technology will change the audit worldview. Understanding the capacities, openings and dangers of these troublesome innovations is basic for the eventual fate of the review calling. Disruptive Technologies are going to be the game changer in Audit Processes. A New Era for Audit It’s essential for audit firms to venture up to this challenge to meet the ever-changing requirements of the profession. As organisations change their activities to turn out to be more advanced, and maybe more worldwide, many will upgrade their IT frameworks with more refined technologies. Subsequently, audit experts must grasp the utilization of cutting-edge devices, for example, Data Analytics, RPA, Automation and Cognitive intelligence to oversee processes, and more informed decision making. Additionally, they will have to keep on updating their innovative capabilities and technologies to keep up their audit quality and fortify the pertinence of their audits into what is to come. Impact on Audit There was a time, when auditors verified physically through financial data to chase down an oddity which will have made them questionable about the appropriateness of a customer’s declaration. Presently, on account of inventive new technologies, the gathering of practically incredible measures of data and therefore, the use of cutting-edge examination and cognitive technologies make it possible to quickly dissect huge, more complete populaces of monetary and non-monetary information. As we will move further in this article, we can see how these cognitive technologies can help auditors to analyse more structured and unstructured data and redesign their audit process. For instance, cognitive technology allows auditors to acquire information from non-traditional sources including online media destinations, TV, radio and the Internet, and process along with client’s internal information. Thereby, improving the quality of the audits by getting a clear picture about the client’s risk profile, financial reporting controls and the operating environment. Additionally, the auditor can accumulate and analyse greater information, alongside the client’s economic and non-financial documents and, using new superior analysis, threat can be examined extra precisely, and the expected threats can be mitigated. These capacities can enhance the satisfactory level of audit and extra facts can be analysed in lesser time. Also, with the assistance of visualisation equipment like Microsoft PowerBI, the auditors can plot the relationships and transactions as nicely as the irregularities of the approaches and statistics for higher understanding. Artificial Intelligence & Data analytics Artificial Intelligence (AI) is now being utilised in various areas of life, transferring to driverless cars, hospitality area and portfolio management. Accounting and auditing will additionally be affected. Auditors can make their systems smarter by making use of algorithms to analyse huge data thereby optimally using synthetic intellingence at work. AI and Machine Learning (ML) are now widely used in applications and processes across the world in every sector. The auditing profession is not an exception. These days, even auditors are utilising AI (Robots) in their professional practices for streamlining the processes involved in their work. Data categorisation can be done by using AI bots to automatically tag information into different accounts. The bots can automatically classify a set of data into different charts of accounts. For example, the repairs bill and purchase of fixed assets bill from the same vendor. Big data sets, including contracts and agreements and other routine transactions, can be scrutinised quickly and accurately, thereby helping the auditors to focus on the more problematic areas, which require human professional judgement. Auditors can perform hundred per cent audit of the client’s entire general ledger data using automated tools. Also, the automated tools can perform a variety of analyses and provide an extensive list of exceptions for the auditors. Based on the validation/invalidation of the exceptions, the machine derives a pattern from the auditor’s conclusions and reciprocates the same pattern in a similar situation. The world says, “We are in the Fourth and the Last Industrial Revolution; and the new technological know-how and digitisation will take over the human race.” So is the concern amongst auditors, they worry that on imposing Leading part technologies, they will be the first to have been changed with the aid of these smart machines, however in truth they must get geared up and put together to adapt to the new procedure via obtaining knowledge, placing belief in the know-how obtained and working towards a sustainable framework by means of gaining knowledge of new skills. They have to meet the expectations of assurance and make auditing efficient. And never forget that one of the synonyms of audit is ‘To Analyse’. Analysis has usually been a sub-genre of Audit, unlikely to current scenario where it is found to be more statistically oriented. Data analytics in audit encompass discovering and analysing patterns, identifying outliers, and extracting other useful information from data through computer-assisted techniques. Data analytics involve both exploratory and predictive modelling, as well as analysis of data with the goal of identifying trends in the underlying data and generating meaningful insights. The use of statistics analytics in the audit can embody a huge vary of techniques. Certain easy statistics analytics can be carried out with the aid of the auditor, whilst greater complicated facts analytics can also contain the use of an inside expert [expert] in the evaluation of information (e.g., Exploratory Data Analysis (EDA) Specialist). With the increasing volume of data in businesses today, data analytics can be used as an audit technique to understand and analyse large volumes of data in a better way. Equipped with a more in-depth knowledge of the entity’s business, auditors can focus on items of greater audit interest. Data analytics may also provide insights to clients. The use of data analytics may not always result in efficiencies, but in all cases data analytics can enhance audit quality through increased effectiveness. Auditors and Machine learning Machine Learning additionally improves the auditor’s capability to ask the proper questions to CFO, audit committee and Directors Board. It additionally helps the auditors to enhance their information with the aid of hastening and automating the audit process, and thereby reaching greater satisfactory and efficiency. “Machine Learning additionally improves the auditor’s capability to ask the proper questions to CFO, audit committee and Directors Board. It additionally helps the auditors to enhance their information with the aid of hastening and automating the audit process, and thereby reaching greater satisfactory and efficiency.” Blockchain Technology Blockchain is a database that holds information and applications in closely encrypted “blocks” of character transactions as effects of executable files. The packages and codes can solely be brought and can’t be edited or deleted, with every block linked to the preceding one making a ‘blockchain’. The digital ledger shares and tracks records associated to contracts and transactions. The documents are permanent, verifiable and secure. In summary, blockchain is a allotted database consisting of blocks of gadgets that are timestamped, verifiable, permanent,hashed and linked to different blocks, with these properties: synchronised, unalterable, deterministic, non-cancellable and fast. According to a white paper subsidised through the Chartered Professional Accountants of Canada, the American Institute of CPAs and the University of Waterloo Centre for Information Integrity and Information System Assurance, “With blockchain-enabled digitisation, auditors ought to installation extra automation, analytics and machine-learning capabilities, such as routinely alerting applicable parties about uncommon transactions on a close to real-time basis. Supporting documentation, such as contracts, agreements, buy orders and invoices, ought to be encrypted and securely saved or linked to a blockchain. By giving CPA auditors get entry to unalterable audit evidence, the tempo of economic reporting and auditing ought to be improved.” “To use blockchain as a credible data source, an audit of the process to ensure system confidence and the integrity of the data is essential, thereby creating the need for more auditors and different skills.” To use blockchain as a credible data source, an audit of the process to ensure system confidence and the integrity of the data is essential, thereby creating the need for more auditors and different skills. Both facets of the transaction are recorded in a shared single set of books, developing a triple entry machine the use of a consensus manner to validate the transaction and create a new entry to be posted in a shared ledger with a cryptographically sealed receipt with a special digital signature. The transparency blended with the non-stop updating offers real-time data to customers and will increase the faith degree in the data. The advantages of the technology are: Transparency due to cryptography and public/private keys. Resiliency due to distributed network; and Immutability due to algorithms that mathematically link data blocks without a third party. The above traits make it a community of have confidence and beautify the potential to function analytics and forecasting. The blockchain method affords auditors the capacity to take a look at the total populace throughout more than one entities in a brief time and generate an exception report, as adversarial to the sampling strategies in use today. Confirmations may additionally now not be wished due to the fact of the allotted ledger verification of transactions at inception. Forgeries and changes to transactions can be detected immediately, due to the signals to all contributors in the chain. Using blockchain will enable auditors to limit time spent on redundant duties and enlarge price by way of devoting greater time to interior controls, analytics, and strategic initiatives. See Table two above for manageable new careers for auditors due to the fact of blockchain. What opportunities does blockchain bring to the audit process? The days of sample-based testing will be obsolete since the auditors will resort to blockchain to test the whole population, thus increase the level of assurance. The transformation that analytics brings to transaction audit and audit risk assessment procedures may require auditors consider redefining audit objectives and use technology-driven approaches to achieve them. Companies facing a pending audit will not be able to reverse engineer documentation in bulk to satisfy compliance, as every action is time stamped and shared with all members of the blockchain, given that editing previous entries is not possible. Blockchain presents a challenge to the traditional audit approach, given there’s no practical way to use point-in-time forensic analysis—the standard audit tool. Assurance in a blockchain environment derives from irrefutable transaction history and integrity. So in essence, you have a system that has full integrity, that’s 100% accurate. Simplify and enhance transparency in core business functions such as supply chain management, auditing, tax, compliance and back-office operations Help reduce fraud through enhanced identity management Rapidly increase the volume of automated transactions and hence drive cost efficiencies in the audit environment. New efficiencies can help enable a culture of innovation. Blockchain are inherently resistant to modification of any stored data. Functionally, a blockchain can serve as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily verify the transactions on publicly available blockchain ledgers. Auditors and Blockchain Blockchain science is built on on statistics , enabling consensus, actual time facts recording and access, retaining audit logs. It provides extremely good chance to optimise monetary reporting and audit processes. Currently, audit requires assessment of more than one control area and their supporting, substantive data and their vouchers, spreadsheet, account reconciliation, third party confirmations, journal ledgers and voucher, assessment of subledgers and path balance. All of these are supplied to auditor in a range of digital and manual formats. In a blockchain environment, the auditor is ought to thoroughly study the bloackchain nodes to have access to real-time records. This may also enable an auditor to attain records required for the audit in a consistent and routine format. Auditor in the long run on maturity of blockchain , may also think about to constantly audit corporations the use of the blockchain. This will make audit extra environment friendly and advantageous, offering possibilities to auditors to centre their attention on riskier and more complicated transactions while performing audit services in close to actual time. Skill which auditors will have to observe is expert judgement when analysing accounting estimates and different judgements made by using administration in the coaching of monetary statements. In addition, for areas that come to be automated, they will additionally want to consider and check inside controls over the information integrity of all sources of applicable monetary statistics such as clever contracts and oracles. “Chartered accountants, besides providing assurance role, can play a significant role in providing advisory on blockchain governance and strategy, risk management.” Chartered accountants, besides providing assurance role, can play a significant role in providing advisory on blockchain governance and strategy, risk management. They can enable review of consensus mechanism, key management, smart contract, oracle review and perform third party control review. They can play significant role in contributing to first time master data input validation, controls and analytic rules and model, laying and challenging assumption, driving reliable automations. Also, they can leverage tool for delivering their assurance role through these technologies to be more agile in leveraging controls and forward-looking on the insights they can bring to decision makers. Internal audit of some business processes could also become more “continuous” and closer to real-time. They could possibly in long run play administrator function in case of permissioned blockchain solutions which require a trusted, independent and unbiased third party to perform the functions of a central KYC before they are granted access to a blockchain. This central administrator could validate the enforcement and monitoring of the blockchain’s protocols. For a permissioned blockchain, an arbitration function might be needed in the future to settle disputes among the consortium-blockchain participants. Participants on the blockchain may require this type of function to enforce contract terms where the spirit of the smart contract departs from a legal document, contractual agreement or letter. “For a permissioned blockchain, an arbitration function might be needed in the future to settle disputes among the consortium-blockchain participants.” Robotic Process Automation (RPA) Auditing techniques have traditionally consisted of personal computer established equipment and strategies linked with guide steps. RPA takes these disparate movements into a single built-in computerised process, permitting the auditors to function at greater effeciency levels. It can automate repetitive duties in taxation, advisory and assurance areas. Some real-life initiatives encompass instruction of tax returns and reconciliations through public audit firms. Software robots can be deployed to operate rule-based features such as reconciliations and analytical methods in income audits. Ever growing quantities of information (‘big data’) makes the audit information preparation, file organisation, integration and audit assessments pretty time eating and inclined to errors. RPA software program can interact with different utility software program and automate strategies that are structured, rule based totally and repetitive, and automate duties that span throughout extraordinary software program processes. While RPA’s attainable to disrupt the standard audit procedures and audit prices are diagnosed with the aid of professionals, it is nevertheless in the preliminary ranges of adoption. It can lead to fee financial savings with the aid of growing efficiencies however combining RPA with auditors’ expert skepticism wishes to be explored to grant a value-added provider to purchasers. Auditors and RPA It is quite vivid that auditing BOT environment is quite different from conventional audits. Auditors must upskill themselves and to adapt to such complex environments. The day is not far when we will see one BOT auditing another BOT, and auditors who manage to remain human will review just the exceptions. Besides Enabling Audit and Assurance, CAs can additionally grant advisory on RPA software administration: protecting identification of appropriate processes, their commercial enterprise instances and prioritisation. Auditors can help in vendor and method determination for prioritising determination standards and supplying a factor of view primarily based on market insights. They can also assist in PoC administration, masking determination and, definition of case and facilitation of supplier workshops. Auditors can also assist in project shipping protecting manner analysis, Robot layout & implementation. They can also provid training on diagrams and execution of distinct tiers of RPA. Auditors, making use of RPA, can also assist in rollout administration for effectively scaling the digital workforce. Cyber Security Cyber protection is the physique of technologies, techniques and practices designed to shield networks, computers, packages and records from attacks, injury or unauthorized get entry to. Cybersecurity, computer security or IT security is the protection of computer systems from the theft and damage to their hardware, software or information, as well as from disruption or misdirection of the services they provide. According to Forbes, the world cybersecurity market is predicted to attain one hundred seventy billion through 2020. This speedy market increase is being fuelled by means of an array of science trends, inclusive of the onslaught of initiatives with ever-evolving safety requirements, like ‘bring your personal device’ (BYOD) and the net of matters (IoT); the fast adoption of cloud-based functions and workloads, extending protection desires past the ordinary facts centre; and stringent records safety mandates. Cyber security has never been simple. And because attacks evolve every day as attackers become more inventive, it is critical to properly define cyber security and identify what constitutes good cyber security. Cyber security protects the data and integrity of computing assets belonging to or connecting to an organization’s network. Its purpose is to defend those assets against all threat actors throughout the entire life cycle of a cyber-attack. Kill chains, zero-day attacks, ransomware, alert fatigue and budgetary constraints are just a few of the challenges that cyber security professionals face. Cyber security experts need a stronger understanding of these topics and many others, to be able to confront those challenges more effectively. A complex hack may not be a CEO’s fault, but it is absolutely his or her responsibility. Investors and consumers need to demand more from the executives to whom they entrust their digital lives. Cybersecurity includes controlling physical access to the hardware, as well as protecting against harm that may come via network access, data and code injection. Also, due to malpractice by operators, whether intentional or accidental, IT security is susceptible to being tricked into deviating from secure procedures through various methods. “Also, due to malpractice by operators, whether intentional or accidental, IT security is susceptible to being tricked into deviating from secure procedures through various methods.” The field is of growing importance due to the increasing reliance on computer systems and the Internet, wireless networks such as Bluetooth and Wi-Fi, the growth of ‘smart’ devices, including smartphones, televisions and tiny devices as part of the Internet of Things. The most difficult challenge in cyber security is the ever-evolving nature of security risks itself. Traditionally, organisations and therefore,the government have focused most of their cyber security resources on perimeter security to guard only their most vital system components and defend against known threats. Auditors and Information Security Auditors can provide services like: Verifying that information processes meet the security criteria, requirements or policy, standards, and procedures. Defining and implementing processes and techniques to ensure ongoing conformance to security policies, standards, and legal and regulatory requirements. Carrying out security compliance audits in accordance with an appropriate methodology, standard or framework. Providing impartial assessment and audit reports covering security compliance audits, investigations, and information risk management. Providing an independent opinion on whether your organisation is meeting information assurance control objectives. Developing audit plans and audit regimes that match your organisation’s business needs and risk appetite. Identifying your organization’s systemic trends and weaknesses in security. Recommending responses to audit findings and appropriate corrective actions. Recommending appropriate security controls. Assessing the management of information risk across the organisation or business unit. Recommending efficiencies and cost-effective options to address non-compliance issues and information assurance gaps identified during the audit process. Objectively assessing the maturity of an existing information auditing function using cross-government benchmark standards. Conclusion: The disruptive technology is creating a challenge for the audit fraternity. However, simultaneously, it is also opening new opportunities for the profession which can be easily explored.

ICAI Journal Focus • Technology • Next-Generation Assurance & Advisory Impact of Technological Disruption in Auditing A Comprehensive Exposition on the Transformation of the Assurance Mandate: The Tripartite Model (Assure, Advise, Anticipate), IFAC and ICAI DCMM 2.0 Benchmarks, Practical Deployment of Digital Assets (RPA, AI, GRC, Cyber Audits), Agile Sprint Auditing, and Transitioning to Foresight-Driven Value Creation Authors: CA. Yukti Arora & CA. Mukesh Gupta (Members of the Institute • yuktiarora@hotmail.com • eboard@icai.in) Citation: The Chartered Accountant, Vol. 69, No. 4, October 2020, pp. 82–85 (Journal pp. 441–444) Classification: Information Technology, Digital Audit, Internal Audit Framework, GRC & Cyber Assurance ⚠ The Next-Generation Auditing Paradigm • Core Editorial Insight “The technological disruptions are bringing multiple changes in the ways we live, interact and work. The evolution in technology has created strong dependence of human beings on gadgets and technologically enabled systems, processes and machines. In the current scenario, auditors are facing challenges in providing assurance and advisory services in different domains that are using emerging technologies like analytics, artificial intelligence, robotic process automation and Internet of things. At the same time they are also faced with challenges in using these technologies to perform their own tasks in much more efficient and effective manner to meet the expectations of various stakeholders. The environment requires auditors to leverage digital assets as well as develop new skills to be change catalyst, be more innovative in their approach and possess a mix of business and technology skills. Adoption of disruptive technology will enable auditor to introduce new and enhanced auditing, advisory and risk management services to their customer. It will also enable them to be ready for next generation auditing model wherein there is, technology adoption for refining auditing procedures as well as for understand complex client landscape and meet ever increasing expectations from varied stakeholder.” 1. Introduction: The Tsunami of Data and Complex Risk Landscapes We are witnessing technology everywhere and are in an environment where there is a tsunami of data, some structured and mostly unstructured. Auditors are experiencing an uphill task of increased demand to understand the risks and customise auditing procedures accordingly. Auditors are required to embrace the change arising from disruptions caused by the use of Artificial Intelligence (AI), Cognitive Computing, Robotics and Internet of Things (IoT) in their clients’ businesses. The auditors are being called upon to provide assurance, advisory services and predict risk arising from these technological disruptions. Hence, it becomes imperative for auditors that they themselves demonstrate how they adopt emerging technologies like AI, Cognitive and Robotics to counter audit challenges posed to them by large datasets or data lakes to review. Auditors are required to be adept in the use of these disruptive technologies in order to deal with the complexities which arise due to: The need for enhanced corporate governance and ethics; The “Blackbox model” of AI algorithms and autonomous neural networks; Rules and exception response mechanisms of robotics; Regularly changing global compliance requirements; and Escalating cyber threats inherent in enterprise digital transformation. Businesses have fast-forwarded the adoption of these technologies due to their obvious benefits and the recent pandemic experienced across the Globe, leading to processes becoming leaner, efficient, rule-based, repeatable and machine-dependent. 2. The Tripartite Auditor Mandate: Assure, Advise, and Anticipate The role of the auditor is witnessing a transformational change due to the rapid evolution and adoption of modern technologies. The auditor’s role can be broadly categorised into three strategic pillars: Assure, Advise, and Anticipate. Pillar 1: Assure The assurance role is governed by various Acts and Rules. In addition to statutory requirements, as defined in the SIA framework governing internal audit issued by ICAI: “Internal audit provides independent assurance on the effectiveness of internal controls and risk management processes to enhance governance and achieve organisational objectives.” Internal Audit is responsible for providing independent and objective assurance on the adequacy and effectiveness of governance and risk management. The biggest consideration is identifying high-risk areas and channelising audit efforts accordingly. Auditor understanding of technology architecture, governance over technological changes, and comfort on design-level controls are critical for discharging duties to the Audit Committee. Pillar 2: Advise The Internal Auditor is uniquely placed to provide valuable real-time advice to business owners as they adopt, upgrade, and modify technologies. In-depth domain knowledge enables advice on IT strategy, governance, application configurations, and cyber controls. Auditors are increasingly called to advise on emerging technology governance, ethics, algorithm and model assumptions, data quality, and cybersecurity standards. Crucial Boundary: In their advisory capacity, auditors must never assume management ownership of controls; designing strategy, processes, and systems remains the sole responsibility of enterprise management. Pillar 3: Anticipate The auditor’s ability to visualise what could go wrong and demonstrate farsightedness provides an indispensable tool to management, establishing a sophisticated technology-led organization with best-in-class control environments. With vast data pools available, auditors must anticipate emerging exposures around transparency, accuracy, privacy, social expectations, and legal shifts. Auditor knowledge must be deployed for “risk learning” – sensitizing process owners on ethical boundaries and regulatory constraints while leveraging analytics, AI, and robotics to deliver proactive risk responses. Institutional Perspectives on Technology-Led Audit: IFAC & ICAI DCMM 2.0 Analytics and AI have elevated stakeholder benchmarks; regulators and investors now expect near-100% assurance. In its resource publication, Data Analytics: An Information Resource for IFAC Members, the International Federation of Accountants (IFAC) observed: “Together with automation, analytics enables better risk understanding across thousands of data points in P&L reporting. Data analytics can improve the co-operation with external auditors to detect patterns and trends, and identify process improvements that can increase efficiency and enhance audit quality. The automation of large parts of audit plans using analytics can also make the internal audit function more efficient and effective.” Similarly, the Digital Competency Maturity Model 2.0 (DCMM 2.0) issued by the ICAI underscores the urgent necessity for CA firms to adopt digital assets to achieve operational upgradation. 3. Digital Assets: Practical Deployment of RPA, AI, GRC & Cyber Audit Tools While auditors have utilized basic analytics and dashboards for over a decade, today’s digital age demands smarter deployment of integrated digital assets: A. Robotic Process Automation (RPA) in Master Data & Expense Testing BOT algorithms can be programmed to automatically log in and download all changes to system master data during a period, cross-reconciling them against ticketing systems that capture approvals and scanned records. A 100% direct exception report is instantly generated identifying unauthorized changes, post-facto approvals, or unreconciled variances. Similar algorithms verify business expense approvals across hard-copy vouchers or emails by combining RPA with Optical Character Recognition (OCR) and AI. Furthermore, RPA validates default system configuration controls, automatically populates audit documentation workpapers, and tests Segregation of Duties (SoD) and environmental controls. B. Customised Analytics Dashboards Exception reports configured with predefined business rules enable auditors to isolate anomalies and focus substantive testing on true high-risk outliers. Client-specific analytics dashboards provide holistic operational views, enabling comprehensive analytical reviews across massive datasets. C. Governance, Risk, and Compliance (GRC) Tools GRC platforms perform dynamic risk scoring for processes managed through enterprise applications. Equipped with pre-built control libraries, GRC software enables an integrated control framework – rationalizing diverse statutory and regulatory mandates (such as SOX, PCI DSS, GDPR) into a unified, streamlined compliance matrix. D. Mandatory System & Cyber Risk Auditing Auditors must mandatorily conduct system and cybersecurity audits using established risk methodologies. Reviewing incident response readiness, containment protocols, and disaster recovery mechanisms is fundamental to guaranteeing the confidentiality, integrity, availability, and authenticity (CIAA) of financial reporting. 4. Emerging Skills, Agile Sprints & Foresight-Based Reporting Next-generation auditing will be technology-led, with routine transactional testing conducted autonomously by machines. The emerging role of the auditor centers on: Value-Chain Synthesis: Connecting disparate datasets, understanding inter-tool dependencies, and identifying missing links within automated workflows (e.g. evaluating automated airport or hotel check-in kiosks to establish precisely when exceptions must escalate to human intervention). Strategic Human Judgment: Channeling professional intellect toward high-end strategic decision-making and governance risks. Agile Auditing Sprints: Because digital issues require rapid rectification, audit engagements are transitioning into agile sprints concluded in real-time or within 2 to 3 weeks maximum. From Observation to Foresight Reporting: Moving away from historical, retrospective observation reporting toward insight- and foresight-based reporting that prevents operational breakdowns and strengthens advisory relationships with the C-suite. “Today, besides finance, cyber and digital technical skills, an auditor requires adaptability, collaboration, social skills, and the capacity for working with tools and techniques effortlessly.” 5. Conclusion: Building the Enterprise Digital DNA Digital transformation is profoundly more than superficial technology adoption. Auditors in the digital era must actively partner with organizations to build a cohesive digital DNA – harmonizing business strategy, organizational structures, operational processes, people, and technological capabilities. By viewing operations through a comprehensive risk lens, auditors harness risk to power performance. In the next-generation assurance model, technology adoption to refine audit testing and decode complex client architectures is no longer optional – it is mandatory. “In next generation auditing model, technology adoption for refining auditing procedures as well as for understanding complex client landscape and meet ever increasing expectations from the auditor shall be mandatory.”

Technology One Step Towards Artificial Intelligence The Chartered Accountant • October 2020 • pp. 82–87 (Journal pp. 445–450) CA. Shubham Dosi The author is a member of the Institute. He can be reached at shubham.mng@gmail.com and eboard@icai.in. “The importance of Artificial Intelligence (AI) & Machine Learning (ML) in every sector including finance is in huge demand and increasing with every passing day. With every moment, technology is enlarging its scope with the intent to make business activities easy and creating global value as well. In return of the investments in AI & ML, we get multiple times excess in the form of permanent cost reduction, systematic resource optimization, improved efficiency & productivity and so on result into creating a global value. Read on to know more on complete discussion mainly focusing on how CA professionals have extreme qualities and opportunities in current “tech-era” to build values which make differentiation among other professionals.” Artificial Intelligence (AI) has grown to become an intrinsic part of the world’s Economy. In a broader sense, we can say that Machine Learning (ML) and Deep Learning (DL) are adjacent to Artificial Intelligence. In this ongoing “FIN-TECH” era, everyone looks forward to achieve financial synergy and build vision to accomplish the value of data on which whole globe can be dependent. ML in finance is restructuring the entire service industry in the past 2 decades. Artificial Intelligence is a technique of developing brilliant machine programs which can think much better than humans because of its diverse training input data. Machine learning is an approach to examine the machine program to constantly improve the efficiency and accuracy of such machine program. In this article the primary object is to discover opportunities with Fin-Tech methodology to grow our CA profession and contribute in nation building. The article is divided into two major categories, ‘Overview of AI & ML’ and ‘What we can do and how we can enhance the worth worldwide?’ A. Overview of Artificial Intelligence and Machine Learning India has become a prime source destination across the world to establish both internal as well external IT infrastructure. Additionally, India is progressing to provide the best financial service with IT collaboration. Machine Learning has been proven as a revolution in technology in the past few years. Data analytics have now become a preference for any organisation to capture market share and enhance the intrinsic value as such. Therefore, it can be easily said that both AI & ML have been creating correlation within each other and focusing on “Learn with Logic” concept. AI is about intellect with reasoning, problem solving and learning capabilities, similarly ML trains with several historical data and behaviour and has become competent to predict and forecast the result. AI & ML can efficiently perform multiple tasks at a time like data visualisation, forecasting & predictions, statistical analysis, translation, resolving puzzles, arithmetic or non-arithmetical computation in a clever manner. Machine Learning is also required to build an algorithm, depend on every incident or diverse instances which assist to train the module. Classification of Machine Learning Machine learning is classified into three comprehensive categories: 1. Supervised Learning Task-driven algorithm / Historical train data 2. Unsupervised Learning Data-driven technique / Cluster analysis 3. Reinforcement Learning Learn by their own / Reward & feedback system Now we are going forward to understand the concept of all these categories in phased manner: 1. Supervised Learning Supervised Learning is one of the most primary type learning in which Learning comes through historical events, historical data or original dataset which is ordinarily called as “Train Data”. Supervised Learning is one of the utmost robust programming techniques which has been proven at various circumstances. In the first phase the algorithm has been trained by providing various data at large size including diverse data in a form of Train Data with help of that program can understand logic, relationship in various parameter of the data, understand the problem and continuously focus on improving results. In a Train Data, user provides multiple parameters based on which algorithm becomes effective and much more capable to predict accurate results on “Test Data” or on future events. The algorithm is much more capable to build prose and cause relationship between structured parameters. Supervised learning makes a machine emphatic and capable to learn with logical experience which helps to produce reliable predictions. We can hence make a favourable remark by saying, “Supervised Learning is a task driven program or task driven algorithm technique”. Supervised Learning is famous to resolve regression & classification complicity. To review the final outcome and accuracy of test data, a user always computes result from test data and compares with original results. With the test outcome, the user can always focus on continuous improvement and making crucial changes in algorithm to enhance the accuracy and reliability of the data. Regression also can be divided into 6 extensive categories: Simple Linear Regression Multiple Linear Regression Polynomial regression Support Vector Regression Decision Tree Regression Random Forest Regression 2. Unsupervised Learning Unsupervised Learning has an additional attribute, which is learning without training data. As opposed to Supervised Learning, Unsupervised Learning is a data driven technique. In the unsupervised learning program human intervention is not much required to train the program. Machine algorithm understands the data, identifies patterns, identifies structures of data by their own explicit hidden attributes. Unsupervised Learning primarily focusses on cluster analysis which is helpful for data analysis to identify hidden relationship in various parameters to identify pattern or classification of the data. Unsupervised learning is practically not relevant for predictions or forecasting, this method is mainly useful to sequence analysis or pattern mining in the dataset. Common clustering algorithms include the following: K-Means clustering Hierarchical clustering Gaussian mixture models Self-organising maps Hidden Markov models 3. Reinforcement Learning Reinforcement Learning is an approach to AI and mainly known for the distinctive quality called “Learn by their Own”. It means that machine algorithm or program is much capable to learn with data as similar to how human beings learn in their lives with experience. Its programs or algorithm attributes always improve by itself and learn from diverse situations with various methods. Every successful output is reinforced and every unsuccessful output again improves the logic and makes adequate changes for improving the subsequent output. In simple terms, learning would yield both positive as well negative reinforcement. In case the algorithm finds the accurate and appropriate result, the interpreter reinforces the solution by providing rewards to such algorithm program. The intention behind the reward is to improve the effectiveness or accuracy of the output. Deep Learning Machine Learning also includes Deep Learning, a specialised direction that carries the future of Artificial Intelligence and ensures the success of Machine Learning as well. Deep Learning eminent “Neural-Networks” is a kind of programming or algorithm that was found to look like the physical form of a human brain. Worldwide Neural networks seem to be the most effective and efficient way for Artificial Intelligence research hereafter. In Deep Learning we can build a relationship between more complex parameters in a very effective manner. In Deep Learning, input data processes within multiple layers and after that, algorithm provides logical and valuable results. Deep Learning algorithm has the ability to learn from unstructured unlabeled data and in this way, it creates a different quality with Machine Learning. Moving forward to discuss about What actually “Neural-Network” is and How effectively it works? As in our brain neurons are the key players to process and manage the information, similarly in Deep Learning we create an “Artificial Neuron Network” (ANN) to process input data and produce accurate result for complex data with the assistance of Machine Learning or algorithm. Neural-Network is a concept in which the user develops an Artificial Neuron Network with algorithm or program, thereby paving way for it to work like the human brain. In our brain more than 100 billion neurons are working to manage our whole-body including the mind. In Artificial Neuron Network, organic neurons have to be substituted by multiple mathematical functions. There are lots of neurons in an artificial network, each with a unique and essential function that assorts the data given to the program. This artificial neuron constructs in various layers to produce accurate results with proper interpretation and understanding of the data. This various layers in neuron are also called as nodes and assign a weight which work as filter for processing the data. All the layers are divided into 3 categories, namely Input layer output layer and hidden layers which are the integral parts. Neural Network is also categorised into three broad terms: Recurrent Neural Networks Convolutional Neural Network Multilayer Perceptron Right now, we are not going to discuss all the three in detail because we are much more interested to discuss about the beauty of all such networks and how it will be better in our profession and how we can create synergy in our profession. B. How AI & ML be succeeding path for our Professionals Artificial Intelligence (AI) & Machine Learning (ML) has become more popular due to easy availability of vast quantum of data at affordable costs. AI & ML have been reshaping the whole financial industry over the past few years. It is difficult to determine the future of financial services without AI & ML. This article is written to give more impetus on AI & ML to provide a capacity to build global value of our services and qualities thereof; how one can set his/her profession as a benchmark worldwide. This article would touch upon the importance of the said revolution in technology, understanding and preparing to bridge the gap between profession and advancement in technology. While we are on the subject of how IT creates revolution in every segment and how revolutionary measures and techniques are followed everywhere, finance has also simultaneously been enhancing to value to match with IT to provide excellent services. No one can deny that AI & ML have created a situation of panic around the professional community and created a hype that AI & ML will drastically impact the profession, but at the same time AI & ML have opened a diverse path to make career and derive the opportunities to succeed. We need to take just one step forward to move towards IT Collaboration in Finance. In the upcoming discussion, let us analyse the road map to match an individual’s profession with AI & ML era: Financial Planning & Analysis (FP&A): When we work in Finance Planning & Analysis (FP&A), with the help of AI & ML we can analyse and define the data from scratch to extreme level for principal conclusion. We can recognise multiple correlation between different parameters of the data and can parallelly build a relationship in various inputs with data models used in AI & ML in the dataset which is primarily useful for taking strategic decisions. AI & ML have been proven as best approaches to forecast and predict a much more accurate result and output with various parameters in dataset. It helps to correlate both internal & external and micro & macro factors which are directly or indirectly relevant for analysis. With AI & ML we can identify the worth of even the smallest data in the dataset and can be able to understand the contribution in analysing whole data. Ordinarily organisation ignore those factors which directly not related to corporate decision making, but with AI/ ML tools, organisation consider all the factors even having less relevance which directly or indirectly worthful to make a strategic decision. Will take an illustration to understand in broader way how AI & ML proven as a path of success in FP&A. It is difficult to understand the human behaviour but with help of past dataset of customer’s age, location, gender, their qualification, their money power and their product selection we can make a various permutation and combination to anticipate will customer be associate with us in upcoming period or customer will get separate from us. We have to make a strategic decision to understand is there any requirement to make changes/ upgradation in quality of our product and service or is their any obligation to modify price of our product and services respectively. Automation of Repetitive Operations: Automation is one of the most common requirements in every segment and in every organisation to improve the accuracy of result, enhance the efficiency of personnel, scale up the quality of product or service, match ourselves with global standards, systematic cost reduction and optimise resource. We can build an algorithm to reduce repetitive activity with successful AI & ML module to improve productivity which is useful to enhance productivity not only in a single department but in the whole organisation. A small illustration of this automation is sending invoice directly to customers with AI & ML technique without human intervention. To determine credit worthiness or credit rating of any consumer, we can train the data with thousands of entries which includes numerous combinations in dataset through which algorithm can make maximum permutations and combinations to derive the most accurate result of test data, it is a very complex task to derive credit value of millions of persons simultaneously, and this is where AI & ML can be of great help for an organisation. Portfolio Management & Robotic Advisory: Recognise intelligent behaviour in machines to manage portfolio and provide choice to view and analyse the return on their own fund with addition impart the recommendation to build robust portfolio with diverse segments. Professionally we can engage in financial services where the primary focus is to offer solutions to Individuals, Institutions or Corporate entities and assist them in exploiting their excessive funds to yield capital. Nowadays, the world is moving towards a robotic advisory to build a faultless service so as to keep their service as a benchmark in the respective industry. Calculation of financial statistics such as daily return, volatility, cumulative return on portfolio, optimise portfolio allocation, computation financial strength of company, time series etc. are few illustrations of Fintech services. Building thematic investment strategies and robust portfolio with study algorithm, computation of NPV, making Capital Asset Pricing Model (CAPM). It is true that the cost of service provided through AI & ML is much cheaper than consulting as a human financial consultant. With AI & ML, it is possible to provide virtual assistance to our customers anytime and anywhere. Algorithmic Trading & Financial Market Modelling: Build a strong algorithm through which user can independently understand the movement in financial market. Data module or algorithm always keeps client ready to instantly respond on real time challenges. He himself can make a strategic portfolio based on present scenario and market conditions. Investor can be making a choice of selection based on various investment strategies in high-frequency trading environment which includes quantum strategy too. Predicting the future trend, movement and price based on historical trend with AI &ML or technical statics, risk of loss in financial market have also been reduced to a great extent. Professionals are playing vital role to make strategies for algorithm trading (algo-trading) which are very much prominent worldwide. We can make an advanced screening tool with various author’s strategy like Value Investing, Growth Investing, CANSLIM, The Naked Traders etc. User can independently select the strategy and explore estimated future outcomes of their particular portfolio. Audit Risk Reduction & Robotic Computer Audit Technique (RCAT): AI & ML have the potential to analyse data and provide a more relevant observation at the time of Audit. Auditor can reduce their risk level at the time of audit. Auditor can check entire entries with AI & ML algorithm or programming which not required to set sample for audit to accompany with this entire verification auditor is capable to reduce control risk and detection risk at negligible level and also can make sure the inherent risk gets reduced as compared to pre-AI & ML era and can make a true & fair audit opinion in the report. In any organisation if all these three risk are under control or at reduced level then we can say the risk management of the particular organisations are well governed and properly managed. Directly or Indirectly it increases the confidence of all the stakeholders of such organisation. Auditor can use AI & ML as a Robotic Computer Audit Technique (RCAT). With AI & ML auditor can identify any exceptional or suspicious transaction that have taken place in the company during the audit period. At an advanced level, the auditor can verify the pattern of transaction, transaction price comparison for every scenario, quantity and price relation for every transaction to identify whether the transaction is normal or not. Auditor role is to now monitor the procedure, interpretation of data, and to ensure effectiveness and efficiency of data module in AI & ML. Decision Support Services & Internal Controls: AI & ML is a replacement of professionals. Simultaneously, it is an opportunity to provide much better decision support services with IT collaboration. We can understand the relevance of data in depth and can make more strategic decisions which would absolutely be worthful for organisation. With AI & ML perfect governance structure can be set-up and any risk associated with internal control can be easily identified and managed accordingly. Professionals need to focus on how machine learning can be leveraged to facilitate our roles & responsibility towards stakeholders. With AI & ML professionals can allocate their valuable time to improve efficiency & productivity of services with the mission to increase the market size. Big Data Analytics Across Business Functions: Big data analytics is becoming a prime choice for various companies and for that they are looking to such professionals who can build logic and can summarise the logic into algorithm. Not only pertains to finance but also having a choice in diversified streams like supply chain management, product management, sustainable market selection, valuation etc. which makes it easy to standardise the global value of any organisation. Most companies are focusing on data analysis through application of multiple statistics on whole data and visualise the entire data. Fraud Detection & Risk Mitigation: Technology has been playing an integral role in many phases of the financial ecosystem. High volume of historical data is now easily available at moderate cost with that it’s very feasible to examine entire data with extreme logical concepts. Fraud detection and risk mitigation are also now easy to control. To verify large number of data entries it’s easy to observe fraudulent or suspicious arrangements like money laundering, unfair transactions, etc. To determine the real long-term value of any entity, technology has been an integral part of it and based on techno level anyone can determine the value of it. Deep Learning in Document Analysis: Documentation and the critical analysis thereof also a complicated job for anyone. Very instant advantage of Deep Learning has transformed image recognition accuracy beyond our capability. Document analysis is also an ideal illustration of AI & ML in finance sector. To reduce human efforts and simultaneously increase efficiency with accuracy with cost optimisation, Machine Learning is seen as a diamond in a coal mine.

MSMEs Role of MSMEs in Indian Growth Story The Chartered Accountant • October 2020 • pp. 1–7 (Journal pp. 464–470) CA. S. Badri Narayanan The author is a member of the Institute. He can be reached at cacsbadri@gmail.com and eboard@icai.in. “In emerging economies, 7 out of 10 jobs are created by Small and Medium Enterprises (“SMEs”). The SMEs play an indispensable role in global value chains and their financial and operational health has a bearing on overall supply chains. It would not be wrong to say that any crisis on the MSME will have a domino effect on the entire economy and undoubtedly MSMEs will act as a catalyst for any future growth. This article is an attempt to evaluate the crisis beckoned upon our MSMEs, the reforms announced, the future opportunities, indispensable role of MSMEs in achieving self-reliance and the role of professionals in achieving this dream. Read on...” Impact of Pandemic on Lives and Livelihoods and Importance of MSMEs The Covid-19 pandemic has impacted both lives and livelihood. India had been under lockdown since 25th March, 2020. Currently, the global count of confirmed Covid positive cases are around 23.4 Million, out of which 15.2 Million have recovered and there has been a loss of 809,000 lives. In India alone, there has been around 3,110,000 plus confirmed cases, with 2,340,000 recoveries and loss of around 57,542 lives. The health emergency has been intrinsically linked with economy and livelihood. The stock markets crashed the world over, with the Indian NIFTY plunging below the 8000 level, in what was being observed as a bigger collapse than the 2008 subprime mortgage crisis which triggered recession across the globe. Further, the pandemic has resulted in mass lay-offs across the industries which is on a cost cutting spree. According to Centre for Monitoring Indian Economy (“CMIE”), India’s unemployment rate had spiked from 8.75% in March to 23.5% in April when around 122 Million Indians lost their jobs and had further peaked up to 27.1% in May. Formal employment generation in April was lowest since 2017 when EPFO started mapping data of net additions to payroll. As per Global Economic Prospect Report of World Bank, nearly 60 million people could be pushed into poverty in 2020. It will not be wrong to say that the pandemic fronted us with the gut-wrenching realisation of the plight of our migrant labourers, who not only lost their livelihood but were battling for their lives and walking thousands of miles to reach their respective homes in search of a social security net. In view of striking a balance between lives and livelihood, the Government recently started relaxing the lockdown restrictions, to prevent an economic collapse which could be far more devastating than the Covid-19 induced health crisis. The country was already witnessing a slow-down in growth prior to Covid-19 outbreak and Covid-19 had made things far worse. The Government had announced a fiscal stimulus package under “Atmanirbhar Bharat Abhiyan” of INR 20 lakh crores, equivalent to 10% of our GDP, in order to support the jittering economy during this crisis. The clarion call was to be vocal about local, and the package would focus on land, labour, liquidity and laws. The special package includes five pillars – Economy, Infrastructure, System, Vibrant Demography and Demand. The roadmap for the package has five phases, the first one being on “Businesses including MSMEs”. This underlines the importance placed by the Government regarding the role played by MSMEs in the reboot of Indian economy and in enabling “self-reliance”. This importance is well founded as MSMEs form the backbone of our economy, and is crucial, not only for our GDP growth, but also for our exports, tax revenue and employment generation. As per the 73rd round of National Sample Survey, conducted during 2015-16, there were 6.3 Crore unincorporated non-agriculture MSMEs in the country engaged in different economic activities. Out of these, 31% were engaged in Manufacturing activities, while 36% were in Trade and 33% in Other Services. The Micro sector accounted for more than 99% of total number of MSMEs. Small sector and Medium sector with accounted for 0.52% and 0.01% of total MSMEs, respectively. 51.25% of MSMEs were in rural area and 48.75% were in the urban areas. These 6.3 crore MSMEs provide employment to over 12 crore people, contribute to 45 percent of exports and over 30 percent of manufacturing value added including service and manufacturing. 90% of India’s estimated 450 million-strong workforce is informal and MSMEs employ about 40 percent of these workers. The MSME Ministry had set a target to up its contribution to GDP to 50% by 2025 in sync with the USD 5 Trillion-dollar economy goal. MSMEs are an important part globally, as they represent 90% of the businesses and more than 50% of employment worldwide. Government Reforms for MSMEs under Atmanirbhar Bharat Abhiyan The government has, over past many years, initiated steps to formalise the financing of MSMEs by setting up a nationwide network of regional rural banks, NBFCs and MFIs, the specialised Small Industries Development Bank of India (SIDBI), and more recently, the Micro Units Development and Refinance Agency (MUDRA) under the Pradhan Mantri MUDRA Yojana. The MSME sector, despite its rapid growth in the past years, was already facing distress before the Covid induced lockdown due to a perceived lack of creditworthiness. Hence, it was very crucial to usher in structural reforms and infuse economic support to address the financial and operational concerns of the leading catalyst of country’s growth. On 12th May, the Prime Minister announced the mega stimulus package for the economy under Atmanirbhar Bharat Abhiyaan. Consequently, on 13th May, the Finance Minister announced several measures under the post pandemic financial package to help restore economic growth and achieve the goal of self- reliance. Out of sixteen measures announced under the package, six were targeted MSME Reliefs highlighting the importance of MSME sector as a catalyst to nations growth. The six measures are briefly as under: Collateral Free Automatic Loans: INR 3 Lakh Crore outlay, benefitting 45 Lakh MSMEs. MSMEs with INR 25 Crore outstanding in loans and INR 100 Crore in turnover will get credit guarantee backed loans of 4 years tenure, with a 12 months moratorium on principal amount and a capped interest rate. The scheme can be availed up to 31st October. Subordinate Debt for stressed MSMEs: INR 20,000 Crore outlay, benefitting 2 Lakh MSMEs. Government to provide INR 4,000 crores towards partial credit guarantee support to banks and banks will do onward lending to promoters who can use it to infuse equity. Fund of Funds for MSMEs: With a corpus of INR 10,000 Crores, operating through primary and secondary funds, and will help leverage INR 50,000 Crore fund at secondary level enabling MSMEs to expand in size. MSME definition amendment: Amendment in MSME definition to ensure efficient targeted reform intervention and in line with global standards and synchronised with GSTN framework. Only Local Bids for Government tenders upto INR 200 Crores: This will act as a boost to MSMEs and protect it from foreign competition. MSME dues and Market Access: E-market linkages for MSMES is on the anvil to promote trade. All receivables of MSME from Government and PSUs to be cleared in 45 days. Further, to ensure liquidity to NBFC, MFI and HFCs with low credit rating to do fresh lending to MSMEs, a INR 45,000 Crore Partial Credit Guarantee Scheme is also introduced, wherein existing partial guarantee scheme will be extended to cover borrowings such as primary issuance of bonds/commercial papers and first 20% of loss will be borne by Government of India. Out of the INR 3 Lakh Crore outlay under 100% Emergency Credit Line Guarantee Scheme (“ECLGS”), as on 9th July, 2020, the total amount sanctioned by Public and Private Banks stood at INR 1,20,099.37 Crores with disbursements of INR 61,987.90 Crores. Amount sanctioned by Public Sector Banks stood at INR 68,145.40 Crores of which INR 38,372.88 was disbursed. State Bank of India leaded the charts with a sanctioning of INR 20,788 Crores and disbursements of INR 13,893 Crores. The States of Maharashtra and Tamil Nadu received the highest sanctions with INR 7.305 Crores and INR 6,955 Crores respectively. There have been many tax relief measures like extension of compliance due dates, reduction in TDS and TCS rates, speedy processing of income tax refunds etc, which will further provide the much required liquidity to MSMEs. Revised MSME Classification (Composite Criteria) In line with the promises made, on 1st June, the Government brought in an amendment to effect change in definition of MSME with effect from 1st July, 2020. The revised MSME classification, with composite criteria of investment and annual turnover, is as under: Classification Micro Small Medium Manufacturing & Services Investment < Rs. 1 Cr.AndTurnover < Rs. 5 Cr. Investment < Rs. 10 Cr.AndTurnover < Rs. 50 Cr. Investment < Rs. 50 Cr.AndTurnover < Rs. 250 Cr. The new definition abandons the difference between manufacturing and service MSMEs and classifies enterprises on the basis of combination of invested capital and annual turn-over. The turnover is excluding all export of products/services for all MSMEs, and hence increasing the coverage of MSME net. The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return of the previous years. Additionally, information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax and GST laws and also the GSTIN. Key Institutional Support Mechanisms: CHAMPIONS, GeM, and Subordinate Debt On 1st June, Government has also launched “Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength” (CHAMPIONS) in the MSME portal to register grievances around finance, raw materials, labour, regulatory permissions etc. and it has started to gain traction. In around five weeks since launch, the portal has resolved nearly 50,000 complaints filed by MSMEs. As the name suggests, the portal is basically for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding. It is a real one-stop-shop solution of MSME Ministry. Another innovative existing mechanism is the GeM Marketplace, which was launched in August, 2016, to bring in transparency and efficiency in the public procurement process. The portal has over 3.87 Lakh sellers out of which 1 Lakh are MSME sellers. Overall, there are more than 17.76 lakh products listed on the portal that has a transaction value of Rs 54,184 crore. According to the government’s Public Procurement Policy (2012) for MSMEs, every central ministry, department, and PSU has been mandated to set an annual procurement target of minimum 25 per cent from micro and small enterprises of their total annual purchases. Further, within this 25%, a sub-target of 4% is earmarked for SC/ST entrepreneurs and 3% for MSMEs owned by women, in order to bridge the societal inequalities. In her Budget 2020 speech, Finance Minister had proposed increasing the turnover of the GeM portal to Rs 3 lakh crore. The portal had also partnered with Trade Receivables Discounting System (TReDS) platform operator Receivables Exchange of India Ltd to help government departments to finance their payments to MSME sellers of goods and services. Most recently, on 24th June, MSME Minister, rolled out the subordinate debt scheme promised under the Atmanirbhar Bharat reforms, to provide INR 20,000 Crore guarantee cover to 2 Lakh MSMEs. This also entails a sub-debt facility to promoters of those operational MSMEs that are distressed or have become NPAs as on 30th April, 2020. It also guarantees covers to the promoters who can take loans from banks and further infuse it as equity in their MSME. Under the scheme, promoters of the MSMEs will be given credit equal to 15% of their stake (equity + debt) or INR 75 lakh, whichever is lower. In turn, promoters are liable to infuse this amount into the MSME unit as equity. This is expected to enhance the liquidity and maintain debt-equity ratio. In this sub-debt scheme, 90% of the cover will be given while the rest 10% falls on promoters concerned. The payment of the principal amount will be under moratorium for seven years. Maximum tenure for repayment will be 10 years. This is expected to ease out the liquidity crunch faced by MSMEs. Impact on MSMEs – Crisis and Course Correction The Indian economy was already suffering from slow growth prior to the pandemic and the Covid-19 has worsened the economic prospects to an unanticipated level. As per CRISIL, the Indian Economy will contract by 5% this fiscal and the MSMEs will be hit the hardest due to the Covid-19 induced lockdown. It is important to understand the MSMEs role in a global context, since the sector is heavily export oriented and plays a significant role across nations. As per International Trade Centre Report titled, “SME Outlook” issued in June 2020, it is observed that there is no one-size-fits-all solution and small business travel through four phases as they travel through Covid-19 crisis: Shutdown Impacts Supply Chain Demand Depression – business investment may remain low and households may cut down on discretionary spends, SME bankruptcy might be on rise Recovery – The new normal will make recovery challenging The accommodation and food services, followed by non-food manufacturing, retail & wholesale, and travel and transport were the most impacted and there are mostly SMEs. One Fifth of surveyed SMEs reported that they risk shutting down permanently within 3 months and highlighted need for rapid government action. Informal firms are 20% more likely to report that the pandemic is pushing them towards bankruptcy. As per the report, given the difficulty of identifying and reaching businesses in the informal sector, the most popular way to support SMEs during the pandemic has been through cash transfers to their employees. India’s state of Uttar Pradesh has transferred INR 1,000 to 2.3 million people who have participated in the National Rural Employment Guarantee Scheme. The Report suggests that four long-term trends will characterize the ‘new normal’ and as MSME play a major role in most economies, they are required to be involved in these four trends: Resilience: This can strengthen the ability of the firms to ride out of crises and can be achieved through diversification, for production or sales, retention of profits, connecting to business support organizations and building collaborative platforms, and even public policy to encourage partnerships and research. Digital: In the near future, digital facilities will no longer be optional. Customers, clients, business partners and workers will come to expect them as a matter of course. Cash payments and paper-based documents will be substituted with digital payments and cloud computing. Inclusive: Making economies more inclusive starts with decent jobs and social protection for all. SME plays a significant role in job creation and without a strong SME sector, it will be impossible to achieve Sustainable Development Goals. Sustainable: Climate change risk was rated as top global business risk in a 2019 survey of insurance industry experts and hence environment friendly development is the need of the hour. CRISIL Report: “The Epicentre of an Existential Crisis” As per a recent CRISIL Report titled “The epicentre of an existential crisis”, MSME sectors revenue growth will plunge into deep red this fiscal because of the Covid-19 pandemic. The fall in revenue for MSMEs has been estimated at 17-21%, while the EBITDA margin may shrink by 200-300 basis points to 4-5%. Demand destruction caused by Covid-19 has far outweighed the benefits of weak commodity prices. As per the Report, the impact on operations due to Covid-19 induced lockdown will additionally impact the creditworthiness and worsen the already existing liquidity crunch for MSMEs. The average interest coverage ratio could deteriorate to 1-1.15 times from the 2.4 level witnessed between fiscal 2017 and 2020. This is post factoring of the moratorium benefit provided by RBI, absence of which could have driven the ratio below 1. Micro Enterprises, which account for 32% of MSME debt are fronted with the maximum complications in view of stretched balance sheet and liquidity issue, particularly working capital. The Report also observes the following sector specific challenges: Small real estate contractors, ceramics and textile makers are the ones having most vulnerable credit profile. Revenue growth of MSMEs in the real estate EPC segment could almost halve with sliding demand, rising cost, labour disruptions and margin pressure. Lower utilisation and partial absorption of BS-VI price hike may erode margins of auto component MSMEs. Working capital is highest for MSME sectors that have higher B2B clientele or dominant export share such as gems & jewellery, ready-made garments and real estate contractors. In upstream sectors like construction, auto component and textiles, inventory build-up and stretched receivables have triggered working capital requirement and rebound is not expected before 2022. Construction units have seen an 80-85% drop in enquiries. In downstream sector, in FMCG, initial benefit was visible by reason of panic buying, however, majority distributors reported 5-10% dip in sales in May due to product and manpower availability. Auto Distributors have reported near zero sales in April and seen more than 50% dip in enquiries in May, signalling a slow recovery. About 70% of 40,000 companies have cash to cover employee cost for only 2 quarters. Further, growth in NBFC credit to MSMEs has been tepid although MSME constitutes 14% in the overall credit book. Lack of credit growth is mainly attributable to lack of demand for new capex funding, low recovery sentiments in unorganized sectors, lack of client connect owing to lockdown, lack of demand or revenue growth visibility and severely impacted cash flow of MSMEs. It is understood that out of the INR 3 Lakh Crore emergency credit guarantee line scheme of the Government to MSME under the May 13 reforms, only INR 32,000 Crore has been sanctioned by Public Sector Banks. To address this, leading public sector banks are appointing zonal officers to establish direct contact with MSMEs and to improve its market share with MSMEs which is currently controlled 30-35% by NBFC and MFIs. A recent survey of over 46,000 MSMEs published by All India Manufacturers Organisation (“AIMO”) found that 1 out of 3 MSME considers its enterprise beyond recovery whereas a further 32 percent expect recovery to take at least six months. This will impact the lives and livelihoods of crores of workers and their families. CEEW & NIPFP Joint Study: “Jobs, Growth and Sustainability” A joint study report by CEEW & NIPFP, titled “Jobs, Growth and Sustainability”, has identified following broad parameters in relation to MSMEs: The Government had announced INR 3 Lakh Crore collateral free loan facility for MSMEs, however, only a fraction of MSMEs are connected to any banking channel/NBFC/MFI. It is suggested that an accurate, scalable and real time information system is built to identify and serve genuine beneficiaries of government schemes and aid. MSME information is currently scattered across datasets as Udhyog Aadhar Memorandum, MSME databank and the GST Network. These are either self-certified data or a mandatory requirement based on a turnover threshold and hence not reliable. A fresh MSME census should be carried out and Unique Business Identity number should be allotted. It is recommended that MSME Ministry prepares a vulnerability assessment framework based on economic importance and business risk dimension, to efficiently target support measures. Enterprises in critical supply chains and markets, specially export oriented need special attention. MSME sector is India’s largest employer after agriculture. The viability of MSMEs decide the livelihood of 12 Crores workers and targeted interventions will preserve these workers and create new opportunities. Textiles, the largest commodity in India’s merchandise export basket, is predominantly manufactured by MSMEs. This sector contributed 12.2 per cent of total exports in 2018-19 and is crucial for India’s forex earnings. Ensuring the vast and rapidly growing MSME sector’s revival after the lockdown will prevent a structural collapse of the economy and set India back on its growth path. As of April, 2020, an estimated amount of INR 10,582 Crores were owed by Central and State Government Departments and PSE’s to MSMEs, and 40,000 delayed payment application filed by MSMEs in SAMADHAAN portal since 2017. These delays pose a huge challenge for MSMEs, which are already constrained by high fixed cost and disruption of revenue streams due to Covid-19. In a major relief, Finance Minister announced the clearing of all MSME dues from Government and PSE within 45 days. In order to improve credit worthiness of MSMEs, the Government should mandate the lenders to introduce a mechanism to track fund utilisation and financial health of the borrowers on monthly basis and intervene at the sign of first distress. Conclusion – Way Forward and Role of Professionals Even in adversities, we can find opportunities. And Covid-19 has come as the biggest adversity which most of us would have faced in our lifetime. It has worked as a wake up call for all of us from slumbers, and made us realise that nothing in certain, whether in life or in business. It has definitely made us realise, how important it is, to have a backup plan to fall back on. Those, who build up resilience and invest in diversification, will fare out much better than those who do not. Businesses have to rethink and reboot on their strategy, and change their risk perception and revise their profitability projections. Diversification of MSMEs into defensive sector like FMCG, pharmaceuticals, food products, hospitals, telecom etc. will make their credit profile less vulnerable and secure their revenue streams. A departure or change in portfolio of verticals may be required if the MSMEs are engaged in automobiles, construction, gems& jewellery, hospitality, textiles etc as recovery is not expected anytime soon. Also, MSMEs should leverage technology and be tech-friendly in order to capitalise on upcoming opportunities. Collaboration with business support organizations will help MSMEs access required ecology support and even enable their entry into sectors based on Artificial Intelligence, Robotics, Commercial Drones etc. It is essential to analyse and evaluate the ground realities, including supply and demand bottlenecks, higher fixed cost, industry sentiments and labour issues, before entering into any business ventures. The sheer statistics with regard to quantum of MSMEs, and their contribution to our GDP, exports and employment, highlight their indispensable role as a catalyst to reset the path to economic recovery from this crisis and enable future economic growth. The professionals, like Chartered Accountants, are well equipped to understand the regulatory and banking framework and have been engaged at ground level with entrepreneurs and start-ups and assisting them in their growth stories. They can play an enabling role by handholding the stressed MSME sector and assisting them in availing the benefits under the announced reforms and further help them optimise their business operation by cutting cost, introducing process improvements and even by facilitating restructuring of debt with the banks. The professionals can provide required expertise to the MSMEs in dealing with the regulators and financial institutions and help MSMEs optimise their working capital cycle by renegotiating credit terms and faster debtor recovery. The importance of the role played and to be played by MSMEs cannot be stressed enough. They are the backbone of our economy and their fate will decide the fate of millions of our citizens and the dependent families. The UN General Assembly in its 74th Plenary had declared 27th June as Micro, Small and Medium-sized Enterprises Day, recognising the importance of Micro, Small and Medium-sized Enterprises in achieving sustainable development goals and in promoting innovation, creativity and sustainable work for all. As we celebrated the International MSME day, we hope that the MSMEs across the globe, receive the required support and infrastructure to truly achieve their potential as the catalyst to the global growth.

Auditing Responsibilities of Auditors in Changing Scenario The Chartered Accountant • October 2020 • pp. 82–88 (Journal pp. 471–477) CA. Arun Kumar Srivastava The author is a member of the Institute. He can be reached at arunkumar.srivastava818@gmail.com and eboard@icai.in. “ICAI has issued various Auditing standards and Guidance notes relating to Internal control system, Reporting on frauds, Risk assessment, External confirmations, Related party transactions etc. Besides, in the companies act 2013, various reporting requirements through CARO 2020 have been introduced regarding end use of Funds, Diversion of funds, Related party transactions and Loans& Investment in subsidiaries, joint ventures and Associates, etc. An attempt has been made in this Article to consolidate/summarize the desired Auditing practices to be adopted by the Auditors considering the guidelines/regulations prescribed in Auditing standards / Guidance notes issued by ICAI and COMPANIES ACT 2013 so that the Expectation of society/Regulatory authorities may be fulfilled. Read on…” During recent times many corporates including NBFC’S Frauds have taken place, which have awakened a need for introspection among professional fraternity to review the Audit strategies and practices. Reserve Bank of India has recently reported that number of frauds have increased from 2251 cases in 2014-15 amounting Rs.17122 crores. to 3606 cases amounting Rs.64548 cr. in 2018-19 and 2438 cases amounting to Rs.110419 crores in H1 financial year 2020. RBI has advised lenders to decide whether loan accounts that have been red flagged as suspicious six months ago are fraudulent or not. Since, it is being alleged by the Regulators that more professional skepticism needs to be adopted by the Auditors as well as adoption of Standards on Auditing in its true spirit. The risk factors and deficiency in the internal control system as reported has revealed following: No proper due diligence was exercised while granting loans and advances by the NBFCs. End use of the funds was not ensured and funds were diverted to Group companies. Short term borrowings were utilized for long gestation projects through Group companies which resulted in default of repayment to the lenders and bondholders, etc. Terms & conditions of loans including interest rates on loans were found prejudicial to the interest of the company. Ever greening of loans had taken place i.e. additional credit facilities have been granted to the defaulting borrowers to adjust their overdue outstanding so that classification of loans as non-performing assets may be avoided. This has also resulted in overstating of profit through generation of fresh interest income. Fresh loans were given to the companies where account was written off in the books of NBFCs. Loans were given to Promoter related entities without proper due diligence. For instance, net worth of the Borrowing entity was not sufficient and full loan was disbursed without monitoring the physical progress as suggested by National Housing Bank. Sales were inflated by raising fictitious invoices resulting into overstating of profit and consequential increase in share prices of the companies. Debtors and Bank deposits were overstated through deficiency in the internal control system. Payments against service contracts were released without taking into account the physical progress of the work / completion of services. Auditing Strategies Considering above and expectations of various regulatory authorities including MCA, SEBI, RBI and NFRA, now there is a need to exercise more professional skepticism while conducting the audit and adopt the auditing strategies religiously and in true spirit as prescribed in various Standards on Auditing (SAs) particularly following standards and Guidance Notes: SA 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements As per this standard, An Auditor is responsible for obtaining reasonable assurance that financial statements taken as a whole are free from material misstatement whether caused by fraud or error. To ensure it, Auditor has to maintain Professional skepticism i.e. questioning mind throughout the audit. Auditor also needs to perform necessary procedures e.g. risk assessment procedures which include inquiries of the management, evaluation of fraud risk factors, evaluation of audit evidence, obtaining management representations, communication to Management and with those charged with the governance and communication to enforcement and regulatory authorities. SA 315 – Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its Environment As per this Standard, Auditor has to assess the risk of material misstatement, whether ,due to fraud or error in the financial statements/ assertions(representations by the management as included in the financial statements). For that purpose ,Auditor has to study the nature of industry to which entity pertains, the nature of entity and its operations, its regulatory environment to which it is exposed and its internal control which will help the auditor in adopting appropriate auditing strategies to reduce the risk level of material misstatement. To achieve this objective, auditor has to enquire appropriate officials including internal audit team, adopt analytical procedures like Ratio/trend analysis and conduct observation and inspections like comparison of Budgets with Actuals, review of minutes of Audit committee and Board of directors and review of internal control/ audit manual etc. Auditor has to examine controls embedded in the IT system, authorization for changes in programs/ data files and overriding of Edit checks etc. Auditor has also to review manual control system like delegation of powers for granting various financial sanctions, rotations of job, segregation of duties, preparation of bank and other reconciliations and generation of various MIS reports etc. For example, in Banks, integration of SWIFT with CBS to be examined so that all Letters of credit/guarantees issued may be recorded, similarly generation of various exception reports in the banks also to be reviewed by the auditor. Selection of accounting policies should be in consistent with the relevant accounting standard/accounting practices adopted in industry so that Revenue and other transactions may be properly recognised, measured, classified and disclosed. SA 450 – Evaluation of Misstatements Identified during the Audit As per this Standards, Auditor has to evaluate the impact of identified accumulated material misstatements on the financial statements. Misstatements may pertain to classification, presentation and disclosure of a reported financial item. Auditor has to evaluate the misstatements considering the aspect of materiality determined as per SA 320.He has to convey the same along with its impact on financial statements to those charged with the governance and request them to correct it. If not corrected , the impact of uncorrected misstatements ,which are material individually or in aggregate, the impact of same on auditors opinion may be communicated to those charged with governance and if, necessary, a written representation may be obtained from them regarding not treating the misstatements to be material.After receipt of representation, auditor has to exercise his professional judgement for inclusion of uncorrected misstatements in the audit report suitably. SA 550 – Related Parties As per this standard, Auditor has to understand related party relationships and transactions to recognise fraud risk factors if any, arising out of those relationships and transactions so that identification and assessment of risk of material misstatement due to fraud may be made. Auditor has to obtain sufficient appropriate audit evidence about identification of related party relationships and transactions, their proper accounting and disclosures in the financial statements in accordance with the applicable financial reporting framework. Guidance Note on Audit of Internal Financial Controls over Financial Reporting Companies Act 2013 requires the Auditor to report on adequacy of internal financial controls with reference to financial statements of the company and the operating effectiveness of such controls. To ensure that, auditor has to understand flow of transactions, risk of material misstatements, identification of applications and associated IT environment, design and implementation of controls and assess audit impact/plan operative effectiveness testing. For detailed guidance on this aspect, reference may be made to the Guidance Note on Audit of Internal Financial Controls over Financial Reporting issued by ICAI. SA 505 – External Confirmations As per this standard, direct confirmations are obtained from third parties regarding account balances, other elements and terms of contracts etc. Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013 Detailed reporting requirement under companies act has been given in the guidance note during audit/attest functions by the auditor if, he has reason to believe in performance of duties that an offence of fraud involving individually an amount of Rs. one crore or above has been/is being committed against the company by the officers/employees, auditor shall report the matter to the Central Government. Key Focus Areas for Auditors Besides above, auditors have to pay special attention to the following areas of an organisation: a) Verification of sales with GST returns: Verification of sales with GST returns and GSTR 9c and scrutinize unbilled Revenue. Review of IT system for ensuring that Raising of invoices are linked with delivery of goods / E –way bills etc. and sales are recognized as per principles envisaged in AS9.ie Revenue recognition / IND AS 115 i.e. Revenue from Customer. b) Minutes of Committee & Board Meetings: Minutes of Audit Committee , Board Meetings and shareholders meetings to ascertain approval/Arms -length of related party transactions , show cause notices issued by Regulatory /Tax authorities, if any and other important matters relating to Misstatements/ frauds in the financial statements, if any. c) IT Risk Assessment & Access Controls: Risk assessment of the Organization particularly information Technology system including segregation of duties ,sharing of passwords, concept of maker, checker and approver etc. and delegation of power issued by the Board of Directors. d) Whistle Blower Policy: Whistle blower policy of the company and detail of complaints if any, after going through the minutes of Audit committee and Board of Directors. e) Vigilance and C&AG Observations: Vigilance department /C&AG observations on propriety cum efficiency audit in case of public sector undertakings. f) Contingent Liabilities & Tax Demands: Contingent liabilities with reference to demands raised by Tax authorities, letter of credits /counter guarantees issued to Bankers / financial institutions so that cases of Tax evasion, issue of in-genuine Letter of credits and Guarantees including its development/ involvement may be ascertained. g) RBI Inspection & Early Warning Signals: Review of reports of RBI, Internal inspection audits and concurrent audits in case of Banks/NBFCs so that fraudulent/suspicious transactions may be ascertained. RBI has issued master directions no. RBI/DBS/2016-17/28 dated 1st July 2016(updated as on 3rd July 2017) on Frauds- classification and reporting by commercial banks and select FIs. Few early warning signals highlighted in the master directions are given below: Critical issues highlighted in stock audit report Liabilities appearing in ROC search report, not reported by borrower in the Annual report Floating front/associate companies by investing borrowed money Not routing of sales proceeds through consortium /member bank/lenders to the company Heavy cash withdrawal in Loan accounts. h) Internal and Forensic Audit Reports: Review of Internal audit and forensic audit reports, if any, to ascertain the risk factors, weakness in internal control system and material misstatement in the financial statements. i) Compliance with Sections 179, 180, 185, 186 & 187: Compliance of sections 179,180,185,186 and 187 of the Companies Act 2013 relating to Powers of Board, Restrictions on loans & advances to Directors and companies/firms in which Directors are interested as well as relating to investment of funds which is presently limited to 60% of paid-up capital, free reserves and securities premium account or 100% of free reserves and securities premium account whichever is higher except with prior approval of General body meeting by way of special resolution. j) Accounting and Auditing Manual: Accounting and Auditing manual prepared by the organization which contains detailed guidelines relating to internal control system and recording of transactions. Regulatory Provisions under Companies Act, 2013 Salient regulatory provisions under Companies Act, 2013 related to responsibilities of an auditor for inquiring /reporting on utilisation of funds/review of internal control system/ misstatements in the financial statements are briefly discussed below: Section 143(1)(a): mentions “whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members” i.e. proper security covering loan amount has been obtained and rate of interest is in conformity with the prevailing market rates (not less than prevailing yield on Govt. securities). Section 143(1)(b): mentions “whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company” (same refers to transactions like in the nature of circular trading which implies that multiple transactions have taken place among various entities without physical movement of goods and raising fabricated invoices. This may also result into fraudulent claim of input tax credit under GST law). Section 143(3)(i): requires Auditor to report whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. Section 143(12) read with Rule 13 of Companies (Audit and Auditors Rules, 2014): if the Auditor of a company in the course of performance of his duties as statutory auditor, has reason to believe that an offence of fraud which involves or is expected to involve individually an amount of Rs. one crore or above, is being or has been committed against the company by its officers or employees, the Auditor shall report the matter to the Central Government. Provided that in case of fraud involving lesser than the specified amount, the auditor shall report the matter to the Audit committee constituted under section 177 or to the Board in other cases within such time and such manner as may be prescribed and in such cases companies shall also disclose the details of such frauds in the Board report. Enhanced Reporting Requirements under CARO 2020 Besides above, CARO 2020 has also inserted various reporting requirements by the auditors considering the issues of diversion/end use/siphoning of funds, which are briefly described below: Agreement of Quarterly Returns with Books (Working Capital > Rs. 5 Crore): Agreement of quarterly returns/statements filed by the company with the banks/financial institutions with the books of Account, in case sanction of working capital limits more than Rs. 5 crore during the year on basis of security of current assets: Auditor has to ensure that stock / book debt statements are in conformity with books of account/ stock records of the company. Terms of Loans, Investments and Guarantees: Whether the investments made, guarantees provided, security given and the terms and conditions of grant of loans and advances in nature of loans and guarantees provided are not prejudicial to the interest of the company: Auditor has to examine sources of funds of the company for such investment, rate of interest as per prevailing market rate, repayment period and other covenants of the loan. Financial standing and credit rating of the investee company needs to be examined. Regularity of Repayment Schedules: Whether schedule of repayment of principal and payment of interest in respect of loans & advances in the nature of loans has been stipulated and whether the same are regular: Auditor has to examine loan agreements and whether repayments including interest as per stipulations are regular or not. Recovery of Overdues Exceeding 90 Days: Whether reasonable steps have been taken in respect of recovery of principal and interest in respect of overdue amount more than ninety days. Evergreening of Loans: Reporting in case of loans or advances in the nature of loan which has fallen due during the year and has been renewed or extended or fresh loan granted to settle the overdues of existing loans given to the same parties: Auditor has to examine the terms of renewal/ extension and granting of fresh loan to settle the old loan considering the Ever greening aspect as mentioned in the preceding paragraphs. Loans to Promoters / Related Parties Payable on Demand: Reporting the aggregate amount of loans granted to promoters under section 2(69), related parties as defined in section 2(76) of companies act 2013 in case of loans either payable on demand or without specifying the terms or repayment period: Auditor has to examine above aspect considering the loan agreements and requirements of SA 550, Related Parties and report accordingly. Compliance with Section 185 and Section 186: Compliance of Section 185 and section 186 of Companies Act 2013 relating to Loans, Investments, Guarantees and security to Directors etc. and other Body corporate: Section 185 relates to restrictions on loans and providing guarantees/security to directors of the company / its holding company, their relatives , partners and the firm in which director and relatives are partner. However, for granting such loans and provision for security/ guarantee to the private companies/ body corporate (excluding wholly owned subsidiaries) in which directors are interested, approval of General meeting by way of special resolution is required. Section 186 relates to restriction on inter-company loans/ investments for which threshold limit is defined as mentioned in preceding paragraphs, rate of interest to be levied not less than applicable rate on government securities as per applicable tenor and prior approval of public financial institutions are to be obtained in case where any term loan is subsisting. Defaults in Repayment of Borrowings: Reporting about period and amount of default in repayment of loans or other borrowings or in the payment of interest to the lender: Auditor has to obtain schedule of repayments including interest and ascertain default position, if any, for reporting. Willful Defaulter Declaration: Whether the company has been declared willful defaulter by any Bank or financial institution or other lender: RBI vide master circular no RBI/2014-15/73 dated July 1st 2014 has defined willful defaulter as those borrower who have defaulted in repayment obligations inspite of having capacity to honour the said obligations/diverted the funds for other purposes/ disposed off the property without knowledge of the lender. The list of willful defaulter may be ascertained from the credit information companies like CIBIL, EQUIFAX etc. who are registered with RBI. End Use and Diversion of Term Loans: Reporting about end use of the term loans and its diversion, if any: Auditor has to examine specific end use of the fund borrowed or its diversion as defined in RBI master direction dated 1st July 2014 as mentioned above which includes diversion of funds to group companies/routing of funds through other bank other than lender/ consortium banks/ utilising short term fund for long term purposes etc. Short-Term Funds Utilised for Long-Term Purposes: Reporting of utilisation of funds raised on short term basis for long term purposes: Auditor has to review sources and Application of funds and current ratio to examine and report above aspect. Funds Raised to Meet Obligations of Subsidiaries/JVs/Associates: In case of funds raised by company from any entity or person on account or to meet the obligations of its subsidiaries, joint ventures or associates, then reporting about details of such transactions: Auditor has to examine above aspect by obtaining a list of subsidiaries, associates and joint venture companies, schedule of borrowings and review the cash flows of the company to ascertain the utilization of borrowed funds for group companies. Confirmations from the auditors of group companies as per SA 600, Using the Work of another auditor to be taken and disclosures required by SA 550 and AS 18 /Ind AS 24 to be checked. Loans Raised on Pledge of Securities in Subsidiaries/JVs: Reporting about loans raised during the year along with default, if any, on the pledge of securities held in its subsidiaries, joint ventures or associates companies: Auditor has to obtain schedule of loans raised during the year against the pledge of securities of subsidiaries, joint ventures and associate companies, examine the loan agreements and details of charges/modifications filed with the ROC and report the defaults taken place, if any, as per terms of the agreement. Frauds Noticed or Reported: Reporting about nature and amount of any fraud by the company or any fraud on the company noticed or reported during the year: Auditor has to review internal audit reports, minutes of meetings of audit committee and Board, show-cause notices issued by regulatory authorities, etc. to ascertain the details of fraud by/ on the company and also obtain management representations for disclosure of all frauds. Whistle Blower Complaints & Vigil Mechanism: Whether the auditor has considered whistle blower complaints if any, received during the year by the company: As per section 177(9) of the Companies Act, 2013, following class of companies are required to establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances: Every listed company Companies which accept deposit from the public Companies which have borrowed money from banks and public financial institutions in excess of Rs. fifty crore Auditor should examine establishment of above system, obtain management representations for completeness of complaints and enquire about their investigations and findings. Related Party Compliance (Sections 177 & 188): Compliance of Sections 177 and 188 of the companies act 2013 for related parties transactions and disclosure thereof in the financial statements as per applicable accounting standards: Auditor has to examine minutes of meetings of Shareholders and Board of directors /Audit committee for approval of related party transactions considering its Arm’s-Length position particularly those outside ordinary business transactions like services rendered to sister concerns without considerations, Major sales discounts and circular transactions etc. Compliance of SA 550 and AS 18/Ind AS 24 to be also checked. Undisclosed Income Surrendered in Tax Assessments: Reporting on recording of transactions surrendered/ disclosed as income during the year in the tax assessment under Income tax act 1961 which was not accounted for earlier: Auditor has to assess whether company had intentionally not accounted for that income in previous years which may be an indication of fraudulent financial reporting. Conclusion In nut shell, emphasis has been laid down on reporting requirements by the auditor on the End use of the fund raised, diversion of funds raised for short term purpose to the projects having long gestation periods, siphoning of funds through shell companies, examining related party transactions for its Arm’s-length nature etc. Any non-compliance by the companies in utilization of funds as mentioned above have resulted in default in repayment of borrowings taken from Banks/ financial institutions/public and non-reporting of above compliances may shake the trust imposed in the auditors by the society and Regulatory authorities. Auditors therefore, have to exercise proper due diligence in auditing the financial transactions as mentioned above following the guidelines and principles prescribed in the Standards on Auditing and Guidance Notes issued by ICAI and directives issued by various regulatory authorities like RBI, MCA, SEBI and NFRA.

The Chartered Accountant Journal Vol. 69 | No. 4 | October 2020 | Pages 1–7 (Journal pp. 457–463) MSMEs – The New Champions of Economic Growth By CA. Ajay Kumar Garg  |  Member of the Institute (garg_ajayk@yahoo.co.in, eboard@icai.in) “Post-corona pandemic and the resultant worldwide lockdown, the entire world economies have plunged into an unprecedented recession. Besides, the unwarranted and unrelenting border skirmishes have posed another threat for India. In this emergent situation, India is endeavoring to find an opportunity to build a new self-reliant India. The recent announcement of Atmanirbhar Bharat Abhiyan giving an enormous package to stimulate the economy has assigned a pivotal role for the MSMEs in the country, both as a support-industry for the large enterprises as well as by providing a major market for them. Various initiatives taken for the growth and development of MSMEs which are expected to uplift the domestic industry, boost the country’s economy and make India even stronger than before, have been comprehensively deliberated upon in this article. Read on...” MSMEs have always been the backbone of Indian industry and have always enjoyed special privileges and incentives in all strategies adopted to boost industrial growth. Be it the first generation reforms which started with the new Industrial Policy document of 1991 or the second generation reforms constituting MSME as a separate focus area with an independent legal framework under the Micro Small and Medium Enterprises Development Act, 2006. Recently, Prime Minister has launched the Atmanirbhar Bharat Abhiyan, giving a humongous stimulus package whereunder MSMEs have been given the lion’s share besides several relaxations and privileges. The classification of MSMEs has been revised in order to include more enterprises under the MSME. Besides, the package announced for MSMEs is expected to have a sizeable bearing on the viability and operations of MSMEs. MSMEs are therefore bound to emerge as the largest contributor in India’s economic growth and the champions of self-reliant India. MSMEs – New Classification As per Section 7(1) of the MSME Development Act, 2006, any class or classes of enterprises may be classified as micro, small or medium enterprises by a notification issued in this behalf. However, the classification shall be based on investment in plant and machinery (in case of manufacturing enterprises) and investment in equipment (in case of service enterprises). The revised classification as notified vide Ministry of MSME Notification no. S.O. 2119(E) dated 26.6.2020 is based on composite criteria of investment and turnover. Under the new criteria, the thresholds have been revised significantly upwards. This is expected to help the MSME sector to grow robustly. The new classification effective from 1.7.2020 is depicted in the chart below: ENTERPRISES(i.e. industrial undertaking or a business concern or any other establishment) Classification Tier Engaged in Manufacture or Production of goods Engaged in providing any service or services MICRO Enterprises Investment in Plant and Machinery* ≤ Rs. 1 crore and Turnover ≤ Rs. 5 crore Investment in Equipment ≤ Rs. 1 crore and Turnover ≤ Rs. 5 crore SMALL Enterprises Investment in Plant and Machinery* ≤ Rs. 10 crore and Turnover ≤ Rs. 50 crore Investment in Equipment ≤ Rs. 10 crore and Turnover ≤ Rs. 50 crore MEDIUM Enterprises Investment in Plant and Machinery* ≤ Rs. 50 crore and Turnover ≤ Rs. 250 crore Investment in Equipment ≤ Rs. 50 crore and Turnover ≤ Rs. 250 crore *Excluding cost of pollution control, research and development, industrial safety devices and other notified items. Enterprise – Meaning of The term ‘enterprise’ has been defined under section 2(e) of the MSMED Act, 2006 so as to mean ‘any industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services. Further, as per section 7(1) of the Act, enterprises shall include proprietorship, Hindu undivided family, association of persons, cooperative society, partnership firm, company or undertaking, by whatever name called. It may be clarified that enterprises engaged exclusively in trading of goods are not included in the above definition, and hence are not covered under MSMEs. Application of Composite Criteria of Investment and Turnover Under the revised classification effective from 1.7.2020, a composite criteria of investment and turnover has been prescribed for classification of enterprises as micro, small or medium, as depicted above. Upscaling of Enterprises: If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to be classified in that category and shall be upscaled in the next higher category. For example, in case of a micro enterprise, while its investment remains below Rs. 1 crore, if its turnover surpasses Rs. 5 crore it will be upscaled as a small enterprise. Downscaling of Enterprises: However, an enterprise shall not be placed in a lower category unless it goes below the ceiling limits specified for both investment and turnover for its present category. For example, if in case of a medium enterprise, while its investment in plant and machinery remains above Rs. 10 crore (but upto Rs. 50 crore) and its turnover falls below Rs. 50 crore, it will not be downscaled to a lower category. However, in case its investment in plant and machinery also comes down below Rs. 10 crore, it will be reclassified as a small enterprise. Consolidated Turnover and Investment of all units to be considered: If an enterprise (with one PAN) has different units (with separate GSTIN) then they shall be collectively treated as one enterprise and their consolidated turnover and investment shall be considered for the purpose of classification criteria. Computation of Investment in Plant and Machinery or Equipment For computation of the investment in plant and machinery or equipment, following principles have to be followed: 1) Scope as per Income Tax Rules: The expression plant and machinery or equipment shall have the same meaning as assigned to plant and machinery in the Income Tax Rules, 1962 and shall include all tangible assets (other than land and building, furniture and fittings). 2) Linking with Income Tax Return: The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous year’s filed under the Income Tax Act, 1961. In case of a new enterprise, where no prior ITR has been filed, the investment will be based on self-declaration by the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year for which it files its first ITR. Thus, once the enterprise files its first ITR, the investment in plant and machinery or equipment, as declared therein, shall be reckoned for the purpose of classification. 3) Valuation to be based on Original Cost: In case of a new enterprise (without any ITR), while calculating the investment in plant and machinery, the original price thereof excluding GST amount, irrespective of whether the plant and machinery are new or second hand, shall be reckoned on self-declaration basis. 4) Items to be Excluded: Cost of following items is to be excluded: (A) Pollution control, research and development and industrial safety devices, and (B) Other items as may be notified. Earlier certain items were notified vide notification no. S.O.1722(E), dated 5.10.2006 which has been superseded. Computation of Turnover For the purposes of classification criteria, in calculating the turnover of an enterprise the value of exports of goods or services or both shall be excluded. This will significantly benefit MSMEs as they will continue to avail the benefits and privileges extended to MSMEs despite having large export turnover. The information relating to turnover and exports turnover of an enterprise will be linked with its ITR or GST return. In case of new enterprises which do not have a PAN, turnover related figures shall be accepted on self-declaration basis up to 31.3.2021 and thereafter, PAN and GSTIN shall be mandatory. Udyam Registration Any person who intends to register a micro, small or medium enterprise may file Udyam Registration online on the Udyam Registration portal (udyamregistration.gov.in). The registration is on self-declaration basis and no documents, papers, certificate or proofs are required to be uploaded. The registration is free and no fee is required to be paid. The entrepreneur is only required to furnish his Aadhaar number (Aadhaar card is not to be uploaded). In case of a proprietorship firm its proprietor, in case of a partnership firm its managing partner and in case of a HUF its karta has to give his Aadhaar number. In case of a company or a Limited Liability Partnership or a Cooperative Society or a society or a Trust, the organization or its authorized signatory shall provide its GSTIN and PAN alongwith its Aadhaar number. In case an enterprise does not have PAN or GSTIN or both, it can be furnished later on, but not beyond 31.3.2021. W.e.f. 1.4.2021, all registered MSMEs must possess PAN and GSTIN. An enterprise can obtain only one Udyam Registration for any number of units/activities including manufacturing or service or both. In case an enterprise is already registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be furnished and accepted on self-declaration basis. Whoever intentionally misrepresents or attempts to suppress the self-declared facts and figures appearing in the Udyam Registration or updation process shall be liable to such penalty as specified under section 27 of the Act. On successful registration, the enterprise shall be assigned a permanent identity number called ‘Udyam Registration Number’. Thereafter, the details furnished by the enterprise shall be verified and validated with PAN and GSTIN details. On completion of registration process, the enterprise shall be issued an e-certificate called ‘Udyam Registration Certificate’ which can be downloaded from the portal. Registration of Existing Enterprises All existing enterprises registered under EM-Part II or UAM shall also be required to obtain Udyam Registration up to 31.3.2021, whereafter the existing registration shall lapse. Enterprises registered with any other organization under Ministry of MSME shall also be required to obtain Udyam Registration. All existing enterprises registered till 30.6.2020 shall be re-classified in accordance with revised criteria w.e.f. 1.7.2020. Updation of Information on Udyam Registration Portal An enterprise having Udyam Registration Number shall be required to update its information on the portal, including the details of the ITR and the GST Return for the previous financial year and such other details as may be required, on self-declaration basis. Failure to do so within the period specified in the online Udyam Registration portal shall render the enterprise liable for suspension of its status. Re-classification and its Effect On the basis of information furnished or gathered from the ITR or GST Return furnished by an enterprise, its classification shall be updated. In case of graduation/upscaling (from lower to higher category) or reverse-graduation /downscaling (from higher to lower category) of an enterprise, an intimation thereof shall be sent to the enterprise about the change in the status. In case of graduation/upscaling, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration. In case of reverse-graduation / downscaling, the enterprise will continue in its present category for the ensuing financial year and the changed status will be effective from the next financial year. Privileges offered to MSMEs under the Act The MSMED Act, 2006 confers following privileges to MSMEs: 1) Buyer’s Liability to make Timely Payment for Goods and Services In order to ensure timely receipt of payment for their goods and services by MSMEs, section 15 casts an obligation upon the buyer of any goods or services, to make payment to the supplier MSME, by the specified date as under: (a) Where there is an agreement in writing: On or before the date agreed upon between them, which shall, in no case, exceed 45 days from the day of acceptance or the day of deemed acceptance. (b) Where there is no agreement: Before the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance. For this purpose, ‘day of acceptance’ means— (i) the day of actual delivery of goods or rendering of services, or (ii) where the buyer makes an objection (in writing) within 15 days from the delivery of goods or rendering of services, the day on which the supplier removes such objection. Further, ‘day of deemed acceptance’ means the day of actual delivery of goods or rendering of services, where the buyer makes no written objection within 15 days from such day. 2) Interest on Delayed Payment In terms of section 16, in case a buyer fails to make payment by the specified date as required under Section 15, he shall be liable to pay interest on the impugned amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, for the period of delay at a rate three times the bank rate compounded monthly, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force. Besides, as per section 23, any such interest paid or payable by the buyer shall not be treated as a deductible expenditure in computing his taxable income for the purposes of Income Tax Act, notwithstanding anything contained in the Income-tax Act, 1961. 3) Dispute Resolution As per section 18, any dispute relating to amount payable for any goods or services, and/or any interest thereon, may be referred by any party to the Micro and Small Enterprises Facilitation Council for conciliation in the matter. The Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act. If conciliation process fails, the Council shall take up the dispute for arbitration either itself or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act. The dispute should be resolved within a maximum period of 90 days from the date of its reference. Notwithstanding anything contained in any other law for the time being in force, the Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India. 4) Other Promotional Measures Sections 9 to 14 of the Act, cast an obligation upon the Central Government, State Government and the Reserve Bank of India to undertake measures for promotion, development and enhancement of competitiveness of MSMEs. These measures may relate to facilitating skill development, provisioning for technological upgradation, marketing assistance, credit facilities, preferential procurement of goods and services from MSMEs, constitution of special fund etc. The important measures taken in this regard are briefly discussed below: (a) Public Procurement Policy for the Micro and Small Enterprises (MSEs) Order, 2012 This order which came into force w.e.f. 1.4.2012, provides for following measures: Mandatory procurement of goods and services from micro and small enterprises, of minimum 25% of total annual purchases, by every Central Ministry/Department or Public Sector Undertaking. A sub-target of 20% (i.e. 5% out of 25%) shall be earmarked for procurement from the MSEs owned by the Scheduled Caste or Scheduled Tribe entrepreneurs. Out of the 25% target procurement, 3% shall be earmarked for procurement from MSEs owned by women. In case of tenders, where L1 price is from someone other than a MSE, participating MSEs quoting price within price band of L1+15% shall also be allowed to supply at least 25% of the total tendered value at L1 price. Central Ministries/Departments or PSUs shall organize Vendor Development Programmes, or Buyer-Seller Meets or enter into Rate Contracts with MSEs for a specified period in respect of periodic requirements. Annual Plan for procurement from MSEs to be uploaded on official websites by Ministries/Departments or PSUs. To reduce transaction cost of doing business, MSEs to be provided tender sets free of cost and exempted from payment of earnest money. Reservation of 358 items for exclusive procurement from MSEs. In order to encourage Startup MSEs (startups recognized by Department for Promotion of Industry & Internal Trade), condition of prior turnover and prior experience with respect to MSEs may be relaxed subject to meeting of quality and technical specifications. [Min. of MSME, Policy Circular No. 1(2)(1)/2016-MA, dated 10.3.2016 read with M.F. Letter no. F. 18/14/2020-PPD, dated 29.6.2020] However, the Policy does not cover any trading activities by MSEs. Besides, an MSE unit will not get purchase preference over another MSE unit. [Min. of MSME Order No. S.O.581(E),dated 23.3.2012 as amended up to S.O. No. 5670(E), dated 9.11.2018] (b) Extending Non-Tax Benefits of Original Category If any MSME graduates to a higher category from its original category or beyond the purview of the Act, it shall continue to avail all non-tax benefits of its original category for a period of three years from the date of such graduation. [Min. of MSME Notification No. S.O.3322(E), dated 1.11.2013] (c) MSME Fund MSME Fund set up by the Central Government, to be utilized exclusively for the measures facilitating MSMEs. [Min. of MSME Notification No. S.O.3356(E), dated 28.10.2016] (d) Trade Receivables Discounting System (TReDS) Platform All companies registered under the Companies Act, 2013 having a turnover of more than Rs. 500 crores and all Central Public Sector Enterprises have been instructed to get themselves onboarded on the Trade Receivables Discounting System platform set up as per the notification of the RBI. The TReDS platform facilitates quick access to the financing/discounting of trade receivables of MSMEs through multiple financiers (i.e. banks, NBFC-Factors and other financial institutions). MSMEs may onboard TReDS platform without payment of any fee. [Min. of MSME Notification No. S.O.5621(E), dated 2.11.2018] (e) Return of Delayed Payments All companies making payments to micro and small enterprises for supplies of goods or services, beyond 45 days from the date of acceptance or the deemed date of acceptance of goods or services, are required to furnish a half-yearly return to the Ministry of Corporate Affairs giving details of amounts of payments due and the reason for the delay. [Min. of MSME Notification No. S.O.5622(E), dated 2.11.2018] New Facilitation Measures Under the Atmanirbhar Bharat package announced by the Government, several new initiatives have been taken to promote the MSME sector. These are briefly as under: (1) Guarantee free and collateral free loans: Guarantee free and collateral free loans amounting to Rs. 3.00 lakh crores with a moratorium of 12 months on payment of principal, is expected to benefit about 45 lakh MSME units. This will help in resumption of business activity and safeguard the employment of people. (2) Disallowance of Global Tender Enquiries up to Rs. 200 Crores: In all Government procurement, there would be no global tender enquiry for procurements up to Rs. 200 crores. Necessary amendments in the General Financial Rules, 2017 have been made for this purpose. This will help domestic companies in general and the MSMEs in particular, as these units find difficult to withstand the pressure of undue competition from foreign companies. (3) E-Marketing Linkages: Since physical trade fairs and exhibitions would be difficult in the present circumstances, promoting e-marketing linkages would go a long way in helping the MSME sector. (4) Settlement of Receivables within 45 Days: All Government Departments and the CPSEs have been directed to pay the receivables to MSMEs within 45 days, thereby easing the working capital situation of the MSMEs. (5) Mandatory GeM Payment within 10 Days & 1% Penal Interest: For all government procurements under rule 149 of General Financial Rules, 2017, that is, on Government e-Marketplace (GeM), government buyers are mandated to make payments within 10 calendar days after generation (including auto generation) of Consignee Receipt and Acceptance Certificate (CRAC) on GeM. In case payment is delayed beyond the prescribed timeline, the buyer organization will be required to pay penal interest @ 1% p.m. for the delayed payment period. [M.F. O.M. no. F. 6/18/2019-PPD, dated 3.7.2020] (6) Restructuring of Standard MSME Loans up to Rs. 25 Crores: Restructuring of existing loans to MSMEs classified as ‘standard’ (as on 1.3.2020), has been allowed without a downgrade in the asset classification, subject to specified conditions including, inter alia, that the aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed Rs. 25 crore (as on 1.3.2020) and the restructuring is implemented by 31.3.2021. [RBI Cir. No. DOR.No.BP.BC/4/21.04.048/2020-21, dated 6.8.2020] (7) 25% Reduction in TDS/TCS Rates & Immediate Refunds: Reduction in TDS/TCS rates by 25% and immediate release of refunds will also improve the liquidity position of MSMEs. Besides, extension of various income-tax compliance dates will allow MSMEs to peacefully focus on their business and productivity for atleast few months. (8) Champions Control Rooms as Single Window Systems: The Champions Control Rooms functioning in various offices of the Ministry of MSME including Development Institutes (MSME-DI) and District Industries Centres shall act as Single Window Systems for facilitating the registration process (including obtaining Aadhaar Number and Udyam Registration) and further handholding the MSMEs in every possible manner. Conclusion The existing as well as the new facilitation measures announced for the MSMEs, envisage to extend both policy and procedural support for the MSMEs enabling them to adopt newer technologies and innovations, to withstand competition both at domestic and global level, to achieve higher productivity and to contribute in a significant way in the evolvement of new self-reliant and vibrant India. MSMEs are bound to emerge as the largest contributor in India’s economic growth and the champions of self-reliant India.

Auditing Building Internal Audit Credibility The Chartered Accountant • October 2020 • pp. 82–87 (Journal pp. 478–483) CA. Narinder Jit Singh The author is a member of the Institute. He can be reached at narinder@icai.org and eboard@icai.in. “Credibility has been an important aspect of life. It touches every part of our daily living. Whether human or organisations, everyone loves to deal with another human or organisations which are credible. It gives peace of mind and satisfaction. People and organisations are willing to make concessions and go step forward beyond required, when dealing with another person or organisations with well-established credibility. Internal Audit credibility has similar significance. Every interaction Internal Audit has within organisations, leads to some formation of perceptions towards its credibility. Internal Audit needs to manage and build credibility, if it intends to excel. Read on…” The origin of word credibility can be traced back to Latin word credibilis and Medieval Latin credibilitas in mid-16th century. As per Oxford dictionary meaning of the word credibility is the quality of being trusted and believed in. Merriam-Webster, whereas, explains credibility as quality or power of inspiring belief. The main components of credibility are trust and belief. Credibility has been an important aspect of life. It touches every part of our daily living. Whether humans or organisations, everyone loves to deal with credible human or organisations. People and organisations are willing to make concessions and go step forward beyond required, when dealing with another person or organisations with well-established credibility. Internal audit derives much of its force and credence from being internal assurance function as a part of legal requirements. However, this force and credence does not lead to actual acceptance in the organisations and building of credibility in the eyes of various stakeholders. Building credibility requires working on multitude of factors. As the internal audit function evolves, the mix of skills, knowledge and attributes that determine professional success transform. Technical skills remain absolutely necessary but is not the only trait that is required. The most effective Internal Auditor should have a broad range of non-technical attributes (such as credibility, integrity, soft and interpersonal skills, relationship building etc.) in addition to deep technical expertise. Three Levels of Credibility Credibility can be viewed at three levels as given below: Individual level: How credible an individual auditor is perceived within the organisation. Collective or group level: How credible the internal audit department is being perceived within the organisation. Profession as a whole: The credibility of the Internal Audit profession across industries and governance frameworks. If correlated with Internal Audit – Credibility can be taken at individual auditor level, how credible he is being perceived within organisation. Second level could be, how credible department is being perceived within organisation. Third can be taken as the Internal Audit profession as a whole. Deliberation on third level is beyond the scope of this article, as it requires participation from Institute of Chartered Accountants of India and Government. It includes host of interventions as setting standards, formulating laws and regulations bringing minimum expected standards and compliances. Our Institute has already come up with various standards on Internal Audit and tirelessly working towards upliftment of the internal audit profession. Perception Dynamics and Stakeholder Matrix One thing is clear, credibility is perceptual and might differ from person to person. Similarly, different stakeholders might have different opinion about how credible auditor or internal audit department is. This difference arises due to different interpretations of interactions and touch points. For Internal Audit at organisational level, following can be identified as the main/ direct stakeholders: 1. Internal Auditors 2. Organisational Employees 3. Functional Heads 4. Senior Leadership 5. Audit Committee 6. Board of Directors 7. Statutory Auditors etc. Formation of Credibility Perceptions As stated earlier, credibility can be at three levels. But it is perceived and retained at the individual level, which has an impact on collective formation of the perception. Individual Auditor Interactions: Whenever an individual auditor interacts with any of the stakeholders, it leads to some impact on the stakeholder. This impact may be negative or positive. These interactions build or destroy individual credibility of the Internal Auditor. Departmental Perception: Multiple interactions of different Internal Auditors with stakeholders leads to the formation of Internal Audit department credibility in the eyes of a particular stakeholder. Collective Organisational Image: This formation of image can get a boost or can get hampered, when stakeholders interact with each other and share insights about individual auditor or department as a whole. This leads to formation of collective credibility in the eyes of organisation. Leadership Role: Internal Audit Leadership interactions also play important role in every aspect building perception for Internal Audit Department. Reputation of the department may get affected depending upon the leadership, ethics, commitment and consistency displayed by the Chief Internal Auditor and second in lead. Morale of team and its interaction with others is also greatly impacted by the leadership team. Interactions which lead to formation of perception between internal auditor and stakeholders can be both formal and informal one. Similarly, interactions between various stakeholders can be at formal and informal levels. These perceptions can be far from objective reality. Number of factors may affect these perceptual interpretations. Factors Impacting the Perceptual Context Following can have an impact on perceptual context, which in turn have bearing on the credibility: 1. Internal Audit History Internal Audit history plays an important role in the establishment of perceptual context for the credibility within the organisations. If internal audit has been life blood of the organisation for long time and has history of his own existence besides existence of the organisation, then it might have extra hold in terms of organisation’s working, culture and heritage along with repository of what it has achieved along the way. It’s common knowledge, you can’t just bank upon laurels of your predecessors, department needs to prove it’s worth along the way. 2. Internal Audit Team Composition History of how well a team is constituted, can also contribute to the credibility of the Internal Audit Department. Balanced composition of technical and professional experts can lend the required punch while carrying out assurance and advisory reviews. By having team composition and expertise, keeping in view nature and scope of organisation’s business, can contribute towards enhancement of organisational efforts in good governance and lending credibility to the departmental efforts. 3. Leaders Churned Out In an organisation, if few prominent leaders are from Internal Audit department over a period of time, it will increase visibility and organisational understanding of its working. It sends right signals of equal importance tended to Internal Audit. As a matter of fact, Internal Audit should be given same preference as others, while deciding about succession planning of critical positions in organisational hierarchy. For this to happen, organisation and Internal Audit needs to imbibe right culture, which gives equal opportunities to everyone in the organisation. Usually few departments, depending upon organisations emphases, get undue advantage in career progression over others. It happens due to visibility accorded to them throughout the organisation and opportunities of the exposure they have. 4. Professional Composition of Leadership, Audit Committee and Board etc. In general, organisations which have balanced composition of professional representations in leadership, audit committee and Board are able to take care of all organisational aspects comparatively better. They tend to give relatively more importance to Corporate Governance and Internal Audit. This situation lends more ear and better credibility to the voice of Internal Audit. 5. Period of Existence In nascent stages of internal audit department setup, no one might be aware of working or utility of the department except for those taking decisions for setting up of the department. But over a period, Internal Audit might be able to build credibility by proving itself relevant to the organisation. 6. Major Historical Achievements and Contributions to the Organisations Whatever said and done, major achievements and contributions which Internal Audit can exhibit to the organisation, is what creates real credibility. These contributions and achievements arise both through assurance and advisory assignments. These contributions could be in terms of strengthening control environments, product, process and technology improvement, bringing realignments in organisational structure etc. These contributions are possible only if there is a balanced blend of technical experts and professionals of different fields in Internal Audit. “Internal Audit Leadership interactions also play important role in every aspect building perception for Internal Audit Department. Reputation of the department may get affected depending upon the leadership, ethics, commitment and consistency displayed by the Chief Internal Auditor and second in lead.” Key Steps for Enhancing or Establishing Credibility Few of above stepping/ corner stones might not be in the control of Internal Auditor or Internal Audit leadership when thinking to established or enhance credibility of the internal audit within organisation. Following are the steps which can be helpful in enhancing or establishing credibility: a) Reality Check – Coming Out of Dilutions First and foremost, step towards building credibility of Internal Audit department within the organisation, is recognition of the fact that Internal department is dwindling, not heard and losing its credibility with stakeholders. Number of factors may point out such situations about loss of credibility: i) Positioning of Internal Audit Head within the organisation ii) Lack of allocations of adequate resources iii) Low morale of the internal audit team iv) Difficulty in getting data and information v) Low quality Internal Audit outputs vi) Unresolved Internal Audit issues or delay in resolutions/ responses/ justifications vii) Inadequate access rights within ERP system viii) Non-acceptance of justifiable audit point ix) Lack of seat on the business table x) Delay in completion of assignments xi) Audit and auditor avoidance xii) Inadequate or insufficient time or hearing during audit committee meetings xiii) Lack of support from Audit committee and Board xiv) Lack of cohesiveness and insights in Internal Audit Team xv) People trying to move out of Internal Audit xvi) Inadequate and malicious reporting structures within Internal Audit xvii) Inadequate engagements of auditors / low utilization rate xviii) Lack of auditors mingling / relationship with stakeholders xix) Non-invitation or participation in business initiatives by Internal Audit or vice-versa not from conflict of responsibility point of view, etc. Based on above factors, an evaluation scale can be devised for taking stock of present situations. Otherwise also, from interactions, informed judgements can be made about existing conditions. Accurate and frank appreciations of current conditions will go to help in long way for identification of lacunae and plugging of the same to build reputation and credibility. b) Adherence to Ethics In any profession, reputations are built on continuous and unwavering adherence to the ethics. Ethical conduct leads to building of faith and trust. Internal Audit is also not an exception. Demonstrating and standing up for the values go in a long way to build credibility for the internal audit department. It is not only an individual internal auditor’s responsibility, but collective accountability within Internal Audit department to ensure that ethical behaviour is observed by one and all. Other members of the organisation might not point out but keep an eye that internal auditor and chief audit executive live up to ethical behavior. Every member of the internal audit team should understand that maximum respect is earned by adhering to ethical and unbiased behaviour. c) Auditor Job Satisfaction Job satisfaction has multitude of factors involved with it, besides the monetary aspect. These factors include: i) Opportunities for career progression ii) Opportunities to demonstrate knowledge and skills iii) Freedom to express views without retributions iv) Opportunities for personal and professional development v) Mentoring and guidance vi) Acceptance and acknowledgements for the contributions vii) Independence to work viii) Adequate monetary compensations ix) Job Stability x) Cohesive team environment, etc. Dissatisfactions churn below average performance along with employee turnover. Continuity and stability are key factors contributing towards performance. Internal auditor’s job satisfaction too is governed by the above-mentioned factors. Organisation and leaders responsible for deciding Internal Audit destiny, needs to build conducive working environment for auditor’s job satisfaction. With existence of these essential parameters, optimum performance can be expected from the auditors. Optimum performance will lead to building of the credibility in the organisation. d) Internal Audit’s Organisational Structure Importance of reporting structure within Internal Audit and its alignment across organisation can’t be neglected. Getting an optimum return from Internal Audit efforts, its structure should be built on factors which take care of organisation needs and environment along with internal skills and capabilities rather than haphazard structuring on the whims and fancies of those at helm of the affairs. It should also consider vertical and horizontal diversification of the organisation along with its geographical spread and internal audit skill-set that the organisation wants to develop. If internal audit department is carefully structured keeping in view various factors, it will go a long way in streamlining efforts and building credibility among stakeholders. e) Competency and Quality of Auditors No credibility is possible to build unless and until, Internal auditors are knowledgeable, skilled and competent keeping in view organisation’s area of operations and requirements. Building knowledge, skill and competency is thought provoking and long drawn process. Routine training relating to internal audit and related seminars might help to develop understanding about internal audit. To develop deep understanding about business and various functions, specialized training and courses are required to give a different perspective to the auditor aside from regular training. These training and courses will help auditors to understand and speak language of the business, which is very essential to build any credibility in their eyes along with own functional knowledge. f) Developing and Using Internal Auditor Strength Matrix Having good delivery is of prime importance and can’t be relegated to backstage. Developing and maintaining Internal Audit strength matrix is one of the ideas for great output delivery to the organisations in terms of assurance and value add. Strength matrix would help in informed decisions regarding allocation of work as per strength of the auditors. To train budding auditors, they can be appended to experienced and more knowledgeable auditors for enhancement of their capabilities for the future. Expert pool can be developed within Internal Audit and organisation as a whole for guidance and fall back mechanism. g) Leaders in Internal Audit Department Great many battles are lost due to incompetent leaders. Selection and placement of leaders in Internal Audit department requires careful deliberation, rather than pushing anyone who fails to deliver anywhere else in the organisation. Any manager can have good output and performance from an exceptional team. But only good leaders have a capacity to take exceptional output and performance from below average or average teams. Having goods leaders with an understanding about functioning and requirements of Internal Audit and organisations are needed to build much required credibility. Having a weary Head Internal Audit will jeopardize the functioning of the department. “Internal Audit Head needs to check his action and behaviour which promotes biases, hyper competition, subjugation of individual auditors, promotes lack of cooperation and suspicion among team members.” h) Internal Department Relationship Building a conducive and cooperative relationship within department can lead to great output and greater job satisfaction on the part of the auditors. It is the most challenging task, as it involves managing human relationship. It requires conscientious efforts on the part of everyone involved especially departmental Head. Internal Audit Head needs to check his action and behaviour which promotes biases, hyper competition, subjugation of individual auditors, promotes lack of cooperation and suspicion among team members. i) Cultural Alignments and Fittings Aligning Internal audit culture with organisational culture is also required to avoid undue friction and frustrations. Any misfits need to be ironed out. To do it, efforts are required on the part of both Internal Audit department and organisation. j) Building Stories Building success stories is a great way of developing internal and organisational bonding. Many organisations build stories and share across organisation. These stories help to establish connection between stakeholders and organisations. On similar lines, internal audit stories can help to build desired long-term connection with various stakeholders. k) Stakeholder Relationship Management In most of the organisations, Internal audit is a mandated activity. Rarely those charged with leading internal audit activity find any need for stakeholder relationship management except for managing direct reporting responsibilities. Stakeholder relationship management is as critical as managing direct reporting responsibilities even though results might not be as visible or lucrative as in the case of direct reporting relationship management. While meeting in any case are conducted for deliverables but it’s also good to meet over cup of tea with various stakeholders. It might give, we are on the same team feeling along with developing and strengthening bond. l) Participation / Marketing Audit Work As earlier highlighted, internal audit is mostly a mandated activity. So, very few think of stakeholder’s participation and marketing of the internal audit work except for direct reporting line and audit committee. How to manage stakeholder participation and marketing audit work, is a difficult proposition, but if managed properly, it can lead to the greatest reap of harvest in building credibility. m) Deliverables For any function, quality deliverables are pre-requisite for building credibility. Internal Audit is also not an exception. Ensuring quality deliverables in terms of assurance and value add, goes without saying for achieving any credibility in the eyes of stakeholders. Volumes of information and auditors’ trainings are available on enhancing quality of internal audit deliverables. n) Power Politics – Can’t Stay Away – Need to Manage Last but not the least, leaders and auditors alike, need to manage organisational power politics. Better if, internal audit can stay away from politics. Any power play politics should be timely addressed, managed and rooted out in an unbiased manner in the interests of organisation as a whole. Conclusion In the end, I would like to add, achieving credibility is not a goal post but a continuous daily journey which every member of the internal audit department, embarking on this arduous voyage, needs to travel to sustain the same.

The Chartered Accountant Journal Vol. 69 | No. 4 | October 2020 | Pages 82–86 (Journal pp. 484–488) Remote Internal Audit in the Covid-19 Era - Key Considerations By CA. Vivek Agarwal & CA. Sonia Singal  |  Members of the Institute (soniaagarwal09@gmail.com, eboard@icai.in) “With the Covid-19 era re-defining the new norm, businesses across the globe are scrambling to cope with the situation. It’s time for Chartered Accountants engaged in the Compliance function to step into the new era and start the process of conducting Remote Internal Audits. In this article, we analyse how the characteristics of Remote Internal Audit, the challenges/opportunities and key considerations to ensure that the objectives of Internal Audit are met in a similar fashion and there is no compromise on quality. Read on to know more…” With the Covid-19 era re-defining the new norm, businesses across the globe are scrambling to cope with the situation. It’s time for Chartered Accountants engaged in the Compliance function to step into the new era and start the process of conducting Remote Internal Audits. One of the pre-requisites of a career in Internal Audit is the willingness of the incumbent to travel extensively. However, it will take some time before the Internal Auditor can travel freely to the manufacturing plants, ports, sales depots and warehouses to conduct the Internal Audit assignments. For now, the audits will have to be done remotely without any site visit. In essence, whether it is site-based or conducted remotely, the purpose of Internal Audit remains the same. Standard on Internal Audit (SIA) 230 - Objectives of Internal Audit- read in conjunction with the “Preface to the Standards on Internal Audit,” “Framework Governing Internal Audits” and “Basic Principles of Internal Audit” issued by the Institute of Chartered Accountants of India governs this theme. “Internal audit provides independent assurance on the effectiveness of internal controls and risk management processes to enhance governance and achieve organisational objectives.” Characteristics of Remote Internal Audit Here, interviews are conducted with the auditee, say using Microsoft Teams, Google Hangouts or any other mode teleconferencing. The auditor reviews the documents and data through screen or file sharing and discussions are held with fellow team members. The auditor selects data points for through Sampling Techniques Records and using a risk-based approach. The auditor is given a walk-through of the processes using technology. In Remote Audit, you may need to bring in aspects of Desktop Auditing (i.e., analyse documents or data in isolation so that you can prepare for / refine interviews and record requests). The key considerations that will emerge are as follows: a) Usage of Technology Technology can be leveraged to ensure access to site data through applicable ERP packages such as SAP, Oracle etc. Manual registers could be scanned and copies made available to the Internal Auditor through Google drive etc. While the internal auditor continues to remain off-site, through Video Conferencing mode, he/she can witness activities such as Physical Verification of Assets and Stock being conducted by the site-personnel. Cloud based technologies can facilitate the collaborative team effort. While using technology is great, however, there is an increased risk-inbuilt of hackers taking advantage of the situation and gaining access to systems and documentation. b) Audit Planning Perhaps, this is the most important consideration which the Team Leader needs to envisage. In view of the changed scenario of businesses, the priorities and business procedure also have changed, which have in-turn affected the risks and control system of the organisation. Since the future is unknown, Instead of building a regular long-term Annual Audit plan, short term assignments may be mandated (“Agile Audit Plan”) The concept of scheduled dedicated days of Audit at site to be converted into a defined work-schedule Working as a business “facilitator” while maintaining its independence viz. Engaging with other stakeholders such as Statutory Audit so that unnecessary duplication may be avoided Providing real-time important updates to management on immediate emerging risks If I am accessing the data through screen sharing, how will the electronic documentation happen? Whereas Standards on Auditing traditionally address as to “What” evidence is required, in the current times, Auditors need to step-up and formulate as to “How” the documentation will take place whilst being fully compliant with the regulatory requirements. The IA personnel can request for a “time-stamped” video or photo, which can be considered an alternative procedure and documentation for Stock taking in the current scenario. In case of accessing any off-ERP report or MIS, a signed PDF may be considered sufficient audit documentation. It is to be stressed upon again that just like documenting any verbal communication, documentation of electronic communication is of prime importance. c) Audit Effectiveness One needs to evaluate whether the objectiveness of the audit can be achieved in the remote mode. For instance, it could be easier for the auditee to keep burning issues under the wraps in the remote mode. This can be an ideal time to completely reassess the defined internal controls over different areas of the business organisation in view of the changed scenario. Short and focussed studies may be carried out in presumed risk areas Identifying areas such as Force Majeure, Liquidated damages, Cyber Security, Business Continuity/ Loss of Income Insurance and its claim Focus may also be given on areas such as changes in supply chain and its consequent changes in cost, losses of customers, credit terms with both vendors and customers Long pending issues which are no longer relevant in current scenario may be discussed and concluded In these times of pandemic wherein the organisations may be working with sub-optimum work-force, there may be instances of control over-ride and also create opportunities of fraud Effectiveness of Audit can be increased by using analytical tools so that coverage of high risk areas can be increased to close to 100% assurance d) Cost Internal Audit in the remote mode will always be more cost effective. Since there will not be any site visit for some time-period. The current year Internal Audit budget may be utilised for: Further strengthening the IT infrastructure and analytical tools used by IA personnel Team members may be encouraged to undertake relevant and emerging online courses In case it is required, a local expert may be engaged for site visit, keeping in mind the risk and cost benefit. e) People Factor It is common knowledge that informal discussions over cups of tea/coffee often lead to camaraderie between the auditor and auditee. The auditor gets a more accurate understanding of the ground realities. The auditee gets the comfort of resolving a lot of audit observations through face-to-face discussion. Non-verbal communication plays a major role here. There are more chances of discovering fraud or catching hold of malafide intentions in case of onsite Audit. Attitude and behaviour of the Auditee plays a big role in assessing the culture and on goings at the Audit location. In remote audits, the latter can feel a bit intimidated because everything is a bit more formal. Another school of thought envisages that remote Audit might create new opportunities, since test-procedures can be conducted without any direct involvement of the Auditee, innovative and unexpected procedures can be used to eliminate any fraud risk areas, thereby enhancing the quality of Audit. Even in case of remote Audit, Video-conferencing can be used intelligently to catch the non-verbal cues. Seeing the “Face” makes such lot of difference. Reception of the Auditee/Client in these times can also be taken as an important cue, while some may be facing real hard-ship in routine jobs, continuous avoidance or indefinite postponement taking Covid-19 as an excuse can be a red flag. f) Engagement with team members A brief distinction between On-site and Remote Audit can be summarized as under: Area On Site Remote Considerations Pre-Audit Senior member/Team Lead in the IA team interacts with functional and location heads Interaction is held online through video-conferencing call Face-to-Face meeting is held to get an initial brief and understanding. Virtual meeting seems to be more formal Interviews Interviews are held in person with the specified personnel Interviews are held over call/VC or through online forms Lack of non-verbal cues Review Physical inspection/walk-through and review of documentation Data from ERP/in-house software are reviewed Dependence on system data Risk profile Risk is assessed as per interaction and interview with the functional managers Focused areas are selected and risk assessed based on continuous online monitoring Major changes in risk profile Evidence Collection Mostly stored in Hard-Copy files Mostly soft-copy, pictorial or video evidence stored on cloud/online Online evidences can be used remotely by anyone of the team-member The senior members from Internal Audit team can virtually try and keep the team motivated and connected in the current times: Primarily checking upon the health of the team members who might be away from their regular base locations. A dedicated session may be kept wherein any emerging issue in the business world or any new challenge may be shared upon by any team member Virtual Coffee/Tea breaks- with change of hosts De-briefing session- A short daily de-briefing session may be held at day end wherein achievements during the day may be appreciated and also challenge for days ahead may be set. Remote Audit: Advantages and Limitations The following is a summary of advantages and limitations that a company may have if it implements remote audits. Advantages of Remote Audit Given the Covid circumstances, normalcy is not expected to return in near future. So, implementing remote audit would give organisations a sense of normalcy in day to day operations. Reduced travel costs. Organisations having multiple annual audits would have significant savings in terms of travel costs, if remote audits are implemented. Since audits would be done remotely, there would indeed be an expanded pool of available auditors rather than just the ones who could travel to the specified location.Also, this would mean we would have more time and thus, areas covered can be expanded. Specialists could be brought in significant areas in case required without worrying about the fact that they need to be present for full audit. Since the documents would be at the disposal of the auditor for a larger time frame, he could easily dig down to details and have a higher quality review. Improved use of available technology strengthens documentation and reporting. Facility personnel’s use of technology to capture video and photographic information contributes to improving their understanding and use of available technology. This contributes to better documentation of facility conditions, improved ability to report incidents and conditions to remote corporate personnel, and increased opportunities for future remote training tools. The audit burden to facility operations is mitigated. This is one of the biggest advantage of remote audit. Audit documents and videos can be gathered and digitized at regular intervals and need not be restricted to the audit period when the auditors visit the organisation. Daily activities of the facility personnel thus don’t get disrupted. Limitations of Remote Audit First-hand observations cannot be replaced: As they said first hand observations are always better than just relying on documents. Documents can be misleading sometimes where operations are secure, highly restricted, or in sensitive environments. Remote auditing makes it hard to build rapport with auditees: Opportunities to provide hints, tips, and observations for improvement are lost. It is hard to identify best practices or describe things that others may benefit from, outside of the documentation process. Good auditors do this, and these are often the most useful things that auditees get from the exercise. The lack of in-person interaction opens other opportunities for fraud: The opportunity to present doctored documents and to omit relevant information is increased. This may call for additional planning, some additional/different audit procedures, or a follow-up once the barriers to a traditional audit lift. Conclusion Remote auditing isn’t going to go away it will become the new normal and hence it’s imperative that we gear up to the changed scenario. If internal auditors provide critical guidance now, while also prepare for the future. Internal Audit function will emerge as a stronger team which provides even greater value to the department and the business. Who knows that some of the work which have been successfully tested and delivered while working virtually might be mandated to be done on “off-site” basis, as it will save both time and resources of the organisation without any compromise on the assurance levels or regulatory norms. This will also potentially open much greater participation from the female workforce who could have had issues with the logistics of long travels to remote locations. In all, it will also ensure greater work-life balance for the audit community as a whole. Challenge for the Internal Audit fraternity also lies in the fact that increased virtual engagement and availability of enhanced analytical tools might call for a reduction in Audit personnel and as such they need to be more abreast with emerging tools and skilled up so that an individual’s relevance and contribution in the team can be counted upon. Thereby the onus would be upon the internal Audit function owners to demonstrate that they can engage teams irrespective of location. Chances are fairly bright they can create an immersive audit experience that comes with similar trusted skillset! Whether conducted on-site or remotely, the core objective under SIA 230 remains intact: providing robust independent assurance and strategic foresight to strengthen organisational governance.

The Chartered Accountant Journal Vol. 69 | No. 4 | October 2020 | Pages 82–85 (Journal pp. 493–496) TCS on Sales Consideration under section 206C(1H) – FAQs By CA. G. Sekar  |  Member of the Institute (sekarg.gurukripa@gmail.com, eboard@icai.in) “Vide the Finance Act, 2020, a new provision under section 206C(1H) was introduced for Collection of Tax at Source on Sale of Goods by a seller (whose Aggregate Gross Receipts or Sales or Turnover in preceding Financial Year exceeds ₹ 10 crores), from the buyers, from whom he has received any amount as Consideration for Sale exceeding ₹ 50 lakhs during the year. The aforesaid provisions are applicable from the 1st day of October 2020. The above sale of goods exclude Sale of Motor Vehicles and other specified goods. Read on...” 1. Who is liable to collect Tax? A. Every Person who is a seller. It means the seller may be an individual or HUF or Firm or LLP or Company or Association Of Persons or Artificial Juridical Person or Local Authority or a Charitable Trust, whether Resident or Non Resident. 2. Whether all the sellers are liable to collect the tax and remit to Government of India? A. The seller whose total sales, gross receipts or turnover for the business carried on by him exceed ₹ 10 crores during the Financial Year immediately preceding the Financial year in which the sale of goods are carried out. For Example: The Current Financial Year is 2020-21. If the total sales or gross receipts from the Business for the Financial Year 2019-20 exceeds ₹ 10 crores, then the seller is liable to collect the TCS and remit to the Government irrespective of the Current Financial Year 2020-21 Total Sales or Gross Receipts or Turnover. It may be less than or equal to or more than ₹ 10 crores. 3. Whether any of the seller is exempted from this provision? A. Central Government by notification in its Official Gazette can exempt or exempt category of any of the other persons subject to such conditions as may be specified in that notification.. 4. From whom this Tax shall be collected? A. The tax must be collected by the seller from the buyer from whom he has received any amount as Consideration for sale of any goods of the value or aggregate of such value exceeding ₹ 50 lakhs during the Previous Year. 5. What are the Sales exempted from this provision? A. Following Sales are exempted: i. Sale of goods being exported out of India, or ii. Sale of following goods mentioned in 206C(1): Alcoholic Liquor for human consumption Tendu leaves Timber obtained under a forest lease Timber obtained by any mode other Any other forest produce not being Scrap Minerals, being coal or lignite or iron ore or iii. Remittance of money through an Authorised Dealer through Liberalised Remittance Scheme mentioned in 206C(1G)(a), iv. Seller of Overseas Tour Package u/s 206C(1G)(b), and v. Every Seller who is making sale of Motor Vehicles value exceeding ₹ 10 lakhs and is liable to collect tax under section 206C(1F) 6. Where a seller who has more than one line of business and for each line of business, there is a Separate Books of Accounts, in that case how to apply the Turnover Limit of ₹ 10 crores? A. As per the Law, “Seller means a person whose total sales or gross receipts or turnover from the business carried by him exceed ₹ 10 crores” From the above, the total sales or gross receipts or turnover shall be seen for an assessee as a whole – Aggregate of total Sales or Gross Receipts or Turnover of all the business under one PAN exceed ₹ 10 crores in the last financial year, then this provision shall apply for entire business. 7. Where the Seller receives Consideration of Sale from the same buyer for different line of Business for which he maintains Separate Books of Accounts, whether the Limit of Sale Consideration from the buyer shall apply independently for each line of Business? A. According to Section 206C(1H), Buyer means a person who purchases any goods from the seller and that seller who receives amount as consideration for sale of any goods of the value or aggregate of such value exceeding ₹ 50 lakhs. From the above, if the seller receives Consideration from the buyer for a value exceeding ₹ 50 lakhs in aggregate during the Financial Year, from all the line of business irrespective of the Separate Set of Books of Accounts, this provision shall apply. 8. What is the Rate at which Tax is to be collected from the Buyer and at what point of time? A. The seller shall collect from the buyer at the time of receipt of Sale Consideration, and shall collect the following– Situation Rate of TCS (a) If the Buyer provides PAN or AADHAR Number a sum equal to 0.1 percent of the Sale Consideration exceeding ₹ 50 lakhs For Financial Year 2020-21 – 0.075% instead of 0.1 % as per the Press Release of CBDT Dated 13th May 2020 (b) If Buyer does not provide PAN or AADHAR Number a sum equal to 1 percent of the Sale Consideration exceeding ₹ 50 lakhs “The tax must be collected by the seller from the buyer from whom he has received any amount as Consideration for sale of any goods of the value or aggregate of such value exceeding ₹ 50 lakhs during the Previous Year.” 9. Who are the buyers exempted? A. The following Buyers are exempted: i. Sale consideration from the buyer in aggregate, doesn’t exceed ₹ 50 lakhs ii. The Buyer is liable to deduct tax under the provisions of this Act on the goods purchased from the seller and has deducted such amount iii. the Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or iv. a local authority as defined in the Explanation to clause (20) of section 10; or v. a person importing goods into India or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein; 10. At what point of time shall the Seller collect TCS of 0.1%? The TCS shall be collected at the time of receipt of Sales Consideration from the Buyer, 11. Whether the Seller shall charge the TCS of 0.1% on the Sale Invoice and add it to the value of Invoice? A. The levy u/s 206C(1H) is not a levy on sale. It is a mode of recovery of Income Tax on the Sale of goods by the seller made to the buyer. It is advisable that Sales Invoice shall have a following Clause as the Terms and Conditions of Sales. If the aggregate Purchase by the buyer exceeds ₹ 50 lakhs during the Current Financial Year, the buyer shall pay 0.1% as Tax Collected at Source u/s 206C(1H) along with the sales consideration remittance in excess of ₹ 50 lakhs during that Financial year. Otherwise TCS shall be adjusted 1st with the Consideration received amount and the balance to be adjusted to Sale Consideration due by using the following Formula TCS Amount = Amount Received x 0.1% /100.1% For Financial Year 2020-21 – 0.075% is the reduced rate of TCS as per the Press Release of CBDT Dated 13th May 2020 TCS Amount = Amount Received x 0.075%/100.075% 12. For the Financial Year 2020-21, the law is applicable from 1st October 2020 and the aggregate Sale Consideration of exceeding 50 lakhs shall be considered from 1st April 2020 or 1st October 2020? A. In our opinion, the aggregate Sales Consideration is prescribed for the Previous year. Even though, the law came into effect from 1st October 2020, to avoid unnecessary disputes and saving time, it is advisable in case of the buyer for whom the aggregate Sale Consideration received already exceeded ₹ 50 lakhs on or before 30-09-2020, the seller shall collect 0.1% on the Sale consideration received on or after 01-10-2020. In case, the aggregate Sale consideration from the buyer doesn’t exceed ₹ 50 lakhs, it is advisable to collect 0.1% of Sale Consideration at the time of receipt of the amount exceeding ₹ 50 lakhs. Note: For Financial Year 2020-21 – 0.075% is rate of TCS as per Press Release of CBDT dated 13th May 2020 13. Whether the Seller who had a turnover of ₹ 15 crores in the Financial Year 2019-20 and projected to have ₹ 7 crores in Financial Year 2020-21, is liable to collect tax at source for the Financial Year 2020-21? A. Yes, since the sales in the preceding Financial Year 2019-20 exceeds ₹ 10 crores, the seller is liable to collect tax from the buyers from whom, receipt of Consideration of Sale exceeds ₹ 50 lakhs. 14. Whether the Seller who had a turnover of ₹ 7 crores in the Financial Year 2019- 20 and projected to have ₹ 15 crores in Financial Year 2020-21, is liable to collect tax at source for the Financial Year 2020-21? A. No, since the sales in the Preceding Financial Year 2019-20 does not exceed ₹ 10 crores, the seller is not liable to collect tax from the buyers u/s 206C(1H). 15. What shall be the tax collected at source, for the Financial year 2020-21, if a seller has made sale of goods to a buyer for ₹ 30,00,000 upto 30th September 2020 and from 1st October 2020 to 31st March 2021 has made a sale to the aforementioned buyer for ₹ 25,00,000? A. In this scenario, the seller is liable to collect tax on the amount exceeding ₹ 50,00,000, and TCS shall be collected at 0.1% (for the Financial year 2020-21 – rate is 0.075%) Tax Collected at Source = [(₹ 30,00,000 + ₹ 25,00,000) - ₹ 50,00,000 ] x 0.075% = ₹ 375 16. What shall be the tax collected at source, for the Financial year 2020-21, if a seller has made sale of goods to a buyer for ₹ 80,00,000 upto 30th September 2020 and from 1st October 2020 to 31st March 2021 has made a sale to the aforementioned buyer for ₹ 25,00,000? A. Since the section is applicable only from 1st October 2020, Tax shall be collected at source prospectively from 1st October 2020. Since the Turnover/sale has exceeded ₹ 50 lakhs on the first half of the Financial year 2020-21. The seller in my opinion is liable to collect tax at source on the entire ₹ 25,00,000 in the second half of the year at 0.075% (as per Press Release dated 13th May 2020) Tax Collected at Source = ₹ 25,00,000 x 0.075% = ₹ 1,875 17. Whether Sales Consideration includes any other Charges as well as Goods and Service Taxes if it is forming part of Sales Invoice? A. The charging section specifies with the words Any amount as Consideration for Sale of any goods and it doesn’t mention sale value or Price of the goods. To avoid unnecessary disputes, it is better to Collect tax on the entire amount of Invoice (including Taxes and Duties and other levies) “The charging section specifies with the words Any amount as Consideration for Sale of any goods and it doesn’t mention sale value or Price of the goods. To avoid unnecessary disputes, it is better to Collect tax on the entire amount of Invoice (including Taxes and Duties and other levies)” 18. What is the application of Provision of law in case of advance received towards sales consideration? A. The tax is to be collected at the time of receipt of such amount from the buyer and so whether the amount is received prior to sale as an advance or after sale, if the aggregate value of Sale Consideration during the previous year exceeds ₹ 50 lakhs, the seller is liable to collect Tax at source. Hence it is the duty of the seller to collect TCS at 0.1% at the time of receipt of advance money from the buyer to whom this provision apply. 19. In Case of Works Contract liable u/s 194C, whether Contractor Liable to collect this tax? Situation 1: Composite Contract for Both Supply of Material and other services and the invoice is raised as both supply of goods as well as services together, then TDS may be deducted by the Contractee on the whole value of Invoice u/s 194C. In that case, TCS u/s 206C(1H) shall not apply Situation 2: Composite Contract for Both Supply of Material and other services and the invoice is raised separately for supply of goods as well as supply of services, then TDS may be deducted by the Contractee u/s 194C for the supply of services and Tax must be collected u/s 206C(1H) on the Sale of goods. 20. When should Tax collected at source be remitted to the government? A. The Tax collected at Source shall be remitted to the government on 7th day of succeeding month from the month in which tax is collected at source. 21. When should the Statement showing the Tax collected at source u/s 206C(1H) be filed? A. A Quarterly Return in Form 27EQ shall be filed for Tax Collected at Source u/s 206C(1H) with the following due dates; Quarter Quarter of the financial year ended Due date 1 30th June 15th July of the financial year 2 30th September 15th October of the financial year 3 31st December 15th January of the financial year 4 31st March 15th May of the financial year immediately following the financial year in which collection is made Please note: For FY 2020-21, the aforesaid general due dates have been extended in view of spread of Covid pandemic. Section 206C(1H) marks an essential compliance milestone under the Income-tax Act, requiring synchronized accounting, ERP configuration, and strict adherence to receipt timelines.