CII - Tax Conference 2021 (Western Region) | Day 1

In this webinar, we dive deeper into domestic taxation and cross-border taxation in terms of important provisions and recent developments across TDS/TCS, GST audit, digital tax, transfer pricing, compliances, and other development in the realm of global taxation.

Latest provisions under TDS and TCS

“Corporate India needs to gear up to ensure completeness, timeliness, and accuracy in compliance, including taking legal positions considering facts and circumstances of the case. It may need to leverage technology, adopt automation internally, or take the services of technology firms.”

- Anita Basrur, Partner-Direct Tax at Sudit K. Parekh & Co. LLP

Budget 2020 introduced TCS on the sale of goods effective from 1 April 2020 and Budget 2021 introduced TDS on purchase of goods effective 1 July 2021. Both the provisions are a mirror image of each other. The provisions are applicable where the transaction between buyer and seller exceeds 100 million during the previous financial year.

Other provisions include:

1. Scope of equalization levy:
   In 2016, the equalization levy was applicable only in the case of advertisement but now also includes eCommerce transactions.
2. Tax on dividends:
   In budget 2020, dividend distribution tax was abolished and the provision of a tax deduction on dividend payments was reintroduced. This has led to challenges in terms of managing volumes of shareholder data, document verifications, calculation of the correct rate of interest, etc.
3. Applicability of TDS or TCS:
   TDS or TCS is applicable only on unlisted securities, while the threshold limit of INR 5 million needs to be considered from the start of the year irrespective of when the provision becomes applicable.
4. Advance payments:
   The tax needs to be collected on the entire advance because the GST component is not identified or mentioned on the face of the invoice.
5. Applicability of GST:
   GST is not required to be adjusted for purposes of TCS, but in the case of a purchase, GST needs to be considered while determining tax to be withheld.
6. Purchase return:
   No adjustment is required while determining the TCS. For TDS, purchase return needs to be adjusted only in case of an exchange of goods.
7. RTDS for NRIs:
   TDS provisions are not applicable for:
   • A non-resident not having a permanent establishment in India.
   • Companies in the first year of incorporation provided their entire income is exempt.
8. Clarity on tax rates based on turnover:
   If the turnover of preceding financial year
   • Exceeds INR 100 million: check whether purchases from the vendor during the financial year exceed 5 million. If it does not, no action needs to be taken. Hence, one needs to see whether the party is specified or not. If the party is not specified, the tax will have to be deducted at the date of 0.1%. Otherwise, it is at the rate of 5%.
   • Less than INR 100 million: check whether the seller's turnover in the preceding financial year exceeds 100 million or not.

   One also needs to check the aggregate sales made to the buyer during the financial year, whether it exceeds 5 million or not, and whether the buyer has withheld tax.

9. TDS on eCommerce transactions:
   

   Taxes need to be withheld at the rate of 1% on the gross value of sales made by the registered sellers or service provider, with a higher rate of 5% in case of non-availability of PAN.

   TDS is applicable both on the sale of goods and provision of services. The services include professional services and fees for technical services as defined in section 194J.

   No deduction is required under any other provision where taxes have been withheld under these traditions or in case the gross value of a sale of goods or services doesn't exceed INR 5 lakh, and the registered service provider has furnished a PAN.

   The government has taken multiple strict measures to ensure that taxpayers comply and not withhold tax provisions. These include disallowance of the expenditure, various touchpoints for penalty and prosecution permissions.

Tax considerations for internal reorganizations

While pre-pandemic, mergers and acquisitions helped propel growth and financial prospects for potential organizations involved during COVID-19, it proved to be saving companies from a slow death.

Such scenarios force organizations to optimize operations, perform cost/benefit analysis and restructuring by closing loss-making entities, stressed assets, reducing capital expenses, mergers, etc. The panel discussion focuses on the tax aspects of such reorganizations.

Key aspects to consider before undertaking any restructuring exercise:

When the basis is cleared in terms of objective, one will determine the applicable tax considerations. The objective could be to secure loans, optimize costs, or avail tax benefits.

While one can get tempted to restructure for the sake of optimization to bring down ETR or maximize returns to shareholders without any strong commercial rationale. necessary restructuring can bring unforeseen troubles.

Options to provide flexibility to companies for their funding and cash flow requirements shared by panelists:

• Bank loan based on the guarantee or letter of comfort
• A loan from the group company
• Dividend distribution
• Capital reduction
• Buyback of shares, which could take 3-6 months

Impact of provisions on slump sale for internal restructuring:

Slump sale is a popular method for internal restructuring within a group due to the flexibility, low regulatory approvals, and efficiency it provides. With recent amendments, slump sales are taxable and have to be done at fair value. This will push the tax cost of transactions; hence, demergers could be considered as an alternative for slump sales.

Key considerations to look for in stressed assets within a business:

• For stressed assets within a group, one needs to introspect the reason for its existence in terms of business competence for sale. If the sale is not possible, one can try reducing costs.
• For external stressed assets, bankers are in control. Past litigation and past compliance need to be safeguarded from (ex. Early promotors might not be compliant) by asking courts not to be accountable for previous management.
• When banks want you to purchase directly, understand the status of the pending cases with potential tax liability.

Restructuring from Private Limited Entity to LLP structures:

Due to higher taxes of 42% for promotors and 25% corporate tax, companies are giving up on Private Limited status to restructure into LLPs. Here are some considerations shared by panelists:

• LLPs do not have dividend distribution tax and tax payable by partners
• The migration is challenging due to unclarified rules by the government
• It doesn't help large corporates with high revenues considering tax slabs
• There can be an increase in fresh businesses setting up for LLP

In conclusion, for restructuring, one should ensure they do their research and seek the external counsel of experts before jumping into transactions. Research about the transactions and their implication and maintain good documentation practices.

Self-Certification of GST Audit - The Road Ahead

How is the GST audit scenario due to the removal of CA certification:

• The removal eases out the compliance burden for companies
• The task was earlier shared with the auditors, but now the onus is on the industry to self certify in an easy to interpret language in the form of a declaration
• Authorized signatory needs to be cautious about signing final documents with relevant checks in place

Embracing automation and tools like ERP systems would help populate data and ensure accurate auditing will help organizations conduct regular reviews and timely submissions.

Precautions to be taken by authorized signatory:

Although there can be interpretation issues during auditing, in general, the signatory will not fall into trouble. Organizations can safeguard them with the following tactics:

• Organizations can continue working with auditors for internal satisfaction of checking documents to eliminate any chances of errors
• In case of fake invoices, there will be investigation and questioning regarding the authenticity of the audit with the signatory
• Develop an SOP, use automation to track purchase and receivable goods and have internal certifications for transactions taking place by the person on the job
• Delegate the auditing across departments and do not put the complete onus into a single authority

In conclusion, ensure thorough reviews before any information is filed since these audits involve all departments across exports, sales, logistics, etc. Hence, foster a collaborative mindset to smoothen the GST audit process.