FAQs on Corporate Social Responsibility (CSR)

‘Corporate Social Responsibility’ (CSR) is governed by section 135 of the Companies Act, 2013 

With the growing importance of ‘Corporate Social Responsibility’ (CSR) towards socio-economic development of nation, corporates are required to comply with the provisions failing which stringent penal provisions are imposed.

An attempt is made to explain the provisions of CSR in a very unique way:

There are two brothers named Mr Jay and Mr Viru. Mr Jay had just recently incorporated a new company named Socially Responsible Management Pvt Ltd where as Mr Viru is a Chartered Accountant by profession having expertise in company law. Mr Jay was reading an article in the news paper regarding ‘Corporate Social Responsibility’ (CSR) and was highly impressed with the efforts taken by government towards CSR.

Mr Jay, as a person is always motivated to contribute for the betterment of the society (we can clearly reconcile it too with name of his company). So he decided to consult his brother Mr Viru having detailed knowledge of Companies Act & also complete understanding of CSR provisions; to understand various provisions and rules so that he can be a part of contribution towards socioeconomic development of the nation.

Here is the summary of conversation that happened between two brothers which highlights and explains important provisions of ‘Corporate Social Responsibility’under the Companies Act, 2013

1. Jay: What is the provision in Companies Act, 2013 relating to Corporate Social Responsibility (CSR)? Can you explain me in simple terms?

Viru: Every company having net worth of Rs 500 crores or more OR Turnover of Rs. 1000 crores or more OR net profit of Rs 5 crores or more during the immediately preceding financial year is required to spend in every financial year atleast 2% of average net profit of 3 preceding financial years.

Provisions of section 135 are attracted to the company if, in the immediate preceding Financial Year, company falls into ANY of three below given criteria:-

 - Net worth of Rs.500 crore or more

 - Turnover of Rs. 1000 crore or more 

 - Net Profit of Rs. 5 crore or more

2. Jay: I also read, that the Company has to form a CSR committee of the Board. Can you explain me what is composition of such CSR committee, how many minimum and maximum directors can be in such CSR committee?

Viru: Section 135 of Companies states that the CSR committee shall consist of 3 or more directors of which atleast one director should be an independent director.

3. Jay: But according to my knowledge, private limited companies can be incorporated with only 2 directors in its board. So in that case how to form CSR committee of 3 Directors?

Viru: In that case, private limited companies can form the CSR committee with 2 directors only.

4. Jay: Please tell me; do all the companies are required to appoint independent director in its CSR committee because I also read in newspaper that many companies are exempted from appointing independent director; so for forming CSR committee do such exempted companies also require to appoint independent director?

Viru: Companies that are not required to appoint independent director under Companies Act, 2013; its CSR committee can also be without independent director i.e. such companies are exempted from appointing independent director in its CSR committee.

5. Jay: Whether CSR provisions are applicable only to private limited company or applicable only to public limited company or applicable only to section 8 company or applicable to every company?

Viru: Section 135 of the Act reads “Every company” So provisions of CSR is applicable to all the companies whether private limited, public limited or section 8.

6. Jay: What if the company has not completed 3 years from its incorporation? So how to calculate 2% of average net profit in such case?

Viru: In such case, 2% of average net profit of the years since its incorporation is to be taken into consideration.

7. Jay: Whether the ‘average net profit’ criterion is Net profit before tax or Net profit after tax?

Viru: Computation of net profit criterion is net profit before tax.

8. Jay: How to compute net profit for particular financial year?

Viru: It is to be calculated as per section 198 of Companies Act, 2013.

9. Jay: Which activities are considered as CSR activities?

Viru: The activities enlisted in Schedule VII of Companies Act, 2013 are considered as CSR activities. However MCA has clarified that the activities enlisted in Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities.  Activities like educational relief, medical relief, relief to poverty, promotion of sports etc. are included.

10. Jay: How to calculate the amount to be spent by way of CSR & what is the year of spending the CSR amount? Please explain with illustration?

Viru: Say for example the profit of the company for various years are as under:

Financial year	Net profit calculated as per section 198
2015-16	Rs. 2 crore
2016-17	Rs. 3 crore
2017-18	Rs. 3 crore
2018-19	Rs. 6 crore
2019-20	Rs. 4 crore

In Financial year 2018-19, net profit calculated as per section 198 exceeds Rs. 5 crs, hence CSR provisions (i.e. provisions of section 135) are applicable to the company for Financial year 2019-20 and CSR activities is to be undertaken in FY 19-20.

Further in order to calculate the amount of CSR to be spent; 2% of average net profit of preceding three financial years is to be taken. The preceding three financial years in this case are FY 2016-17, FY 2017-18 & FY 2018-19 and the amount to be spent in FY 2019-20 is atleast Rs. 8 lakhs [{(3cr+3cr+6cr)/3}*2%]

11. Jay: What if the company is unable to spend amount of CSR as required (i.e what if the company is unable to spend atleast 2% of average net profit of 3 preceding financial years)?

Viru: If the company fails to spend the amount of CSR as required by the provisions of the Act then following compliances needs to be done by the company as per Amended Companies Act:

a. The Board has to state the reasons for not spending (to the extent of amount of unspent) in its Director’s report vide provisions of section section 134(3)(o). In the above illustration; the board has to state the reasons in the Director’s report of FY 2019-20. 

b. IN CASE OF “NO ONGOING CSR PROJECTS”:

The company has to transfer such unspent amount to any of the following funds within 6 months of closure of financial year in which it was required to be spent (i.e. within 6 months from the end of FY 2019-20 in the above illustration):

~ Swacch Bharat Kosh fund set up by central government for promotion of sanitation 

~ Clean Ganga Fund set up by central government for rejuvenation of river Ganga

 ~ Prime Minister National Relief fund or any other fund set up by central government for socio economic development and relief and welfare of SC/ST other backward classes, minorities and women.

c. IN CASE OF ANY “ONGOING CSR PROJECTS”:

In this case, the company is required to open a separate bank account to be termed as “UNSPENT CSR ACCOUNT’’ within 30 days of closure of financial year (i.e. within 30 days from the end of FY 2019-20 in the above illustration) and such amount shall be spent by the company on the ongoing project within a period of 3 years from the date of such transfer.

12. Jay: What if in case of “ongoing projects”, such CSR amount still remains unspent after the end of 3 years?

Viru: In such case the company shall transfer the amount to Swacch Bharat Kosh Fund or Clean Ganga Fund or Prime minister national relief fund within 30 days of completion of 3 years.

13. Jay: What is the meaning of ‘ongoing projects’ and what are the conditions to be fulfilled to qualify as ongoing projects?

Viru: Ongoing projects shall mean any activity or program being undertaken by the company and still some expenditure is to be incurred for such activity or program which is being undertaken. Still MCA will prescribe conditions to qualify as ongoing projects in due course.

14. Jay: One of my friend who is a director of foreign company told me that as far as foreign companies are concerned, they are not required to prepare director’s report, so in such case whether it is mandatory on the part of foreign companies to give reporting of CSR Activity?

Viru: In case of foreign companies, the balance sheet filed by them shall contain an Annexure regarding report on CSR.

15. Jay: Whether CSR expenditure by the company can be claimed as business expenditure?

Viru: The amount spent by the company for CSR activities cannot be claimed as business expenditure as per Finance Act, 2014. Explanation 2 to section 37(1) of Income tax Act, 1961 states that any expenditure incurred relating to CSR u/s 135 of Companies Act, 2013 shall not be treated as expenditure for business purpose.

16. Jay: What if the company to whom CSR provisions are applicable; donates the amount to charitable institutions such as trusts and/or societies and/or section 8 companies?

Viru: Subject to compliance of Rule 4 of Companies (Corporate Social Responsibility Policy) Rules, 2014 by the company; if the company donates the amount to charitable institutions it will be deemed that CSR provisions are complied by the company as per clarification by MCA through circular No. 21/2014 dated 18.06.2014.

17. Jay: It is quite possible that in order to comply with CSR provisions, company donates the amount to various charitable institutions like trusts and/or societies and/ or section 8 companies and such charitable institutions is yet to utilize such CSR amount received. So will this be treated as non compliance?

Viru: The Amendment in Companies Act has failed to address such issue. So even if such charitable institutions to whom amount has been donated fails to utilize such CSR amount then also it will be deemed as company has complied with CSR provisions.

However company has to also comply with proviso to Rule 4(2) of Companies (CSR Policy) Rules, 2014 which states that company to whom CSR provisions are applicable; can donate to charitable institutions (i.e. trusts and/or societies and/ or section 8 companies) who has an established past trackrecord of charitable activities of 3 years in undertaking similar programs or projects as that of the programs or projects in which company has given the direction for spending and the company monitors the modalities of utilization of such funds and its reporting mechanism. The 3 years are to be counted from date of such donation. (In a nut shell; company has to comply with proviso to Rule 4(2) of Companies (CSR Policy) Rules, 2014)

18. Jay: Whether any amount given directly or indirectly to political parties will be considered as CSR activity?

Viru: Contribution of any amount whether directly or indirectly to any political parties under section 182 will not be considered as CSR activity.

19. Jay: Can the Company collaborate with other Companies for projects or programs undertaken in CSR?

Viru: Yes company can collaborate with such other companies. However reporting of CSR activities is to be done separately by such companies.

20. Jay: What if the company undertakes CSR activities that benefits only the employees of the company & their families. Will it be treated as CSR activity?

Viru: In the above case, it will not be treated as CSR activity as the rationale behind CSR activities is the benefit of the society as a whole and not to particular section or class.

21. Jay: What are penal provisions in case of non compliance of CSR provisions of Companies Act, 2013?

Viru: No specific penal provisions are laid down in section 135 of Companies Act, 2013 in case company fails to spend the amount required. However the company has to specify in its Director’s report the reasons for the amount remaining unspent under section 134(3)(o).

(i) So if the company fails to comply with the provisions of section 134 then:

a) The company shall be punishable with a fine of Rs. 50,000/- minimum which may extend upto Rs. 25,00,000/- and

b) Every officer who is in default shall be punishable with an imprisonment upto maximum 3 years or with a fine of minimum Rs. 50,000/- and maximum upto Rs. 5,00,000/- or both.

(ii) Further there is provision in Companies Act, 2013 vide section 450 which states that in case no specific penalty is provided in the Act then general penal provisions will be attracted which is as follows:

a) Company and every officer in default shall be punishable with fine maximum upto Rs.10,000/- and

b) Further fine maximum upto Rs. 1,000/- per day during which such contravention continues in case of continuing offence.

Tax on Real Estate Sector

Tax Issues : Real Estate Sector

The contribution of real estate sector is significant to the economic development of our country. While we understand that the Government’s moto is “Housing for all”, unfortunately in recent past, this sector is going through a gloomy patch with plethora of challenges piling up. In line with the Government’s moto & to boost this sector, various amendments have been made under the Income Tax Act, 1961 (‘the Act’). However, the tax aspects of this industry are not free from ambiguity. This article seeks to highlight & redress the tax issues specifically focusing on the Joint Development Agreements, profit linked deduction u/s 80IBA of the Act & Valuation of real estate companies.

I. Taxation of the Joint Development Agreements

In recent past, Joint Development Agreements(JDAs) has emerged as an effective & a trending business model, wherein the land owner transfer the development rights to the Developer who in turn develops the project. Typically, the Land owner either gets a share in the constructed units or a consideration in money or a combination of both for transferring the development rights. Since, this transactions different from the traditional model; following are the grey areas which needs to be focused upon:

a. Determination of Date of Transfer:

The most litigated tax issue arising in JDA is the determination of date of transfer for land owner, who will be subjected to capital gain tax.Section 2(47) of the Act defines transfer, which inter alia includes “any transactions involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred in Section 53A of Transfer of Property Act, 1882”. Based on these provisions, revenue contends that the date of transfer is effectuated on giving the possession of the land to the developer. However, it is very draconian to charge tax in the year of transfer, as the land owner in reality has not earned any income by virtue of entering into the JDA.

Generally real estate projects run into years, therefore deferring the taxability in the year of completing the project is very essential. Finance Act, 2017 inserted Section 45(5A) to redress this issue, but unfortunately it extended the benefit of deferment only to Individuals & HUF.

Therefore, following Judicial precedence may be still relevant while dealing with this issue, wherein the courts have held that the tax will not be levied in the year in which the JDA is entered or when the land is handed over to the Developer:

i. PCIT, Jalandhar-I vs Chuni Lal Bhagat [2019] 103 taxmann.com 379 (SC),

ii. PCIT, Kolkata-1 Vs Infinity Infotech Parks Ltd. [2018] 96 taxmann.com 274(Calcutta)

iii. Smt. Lakshmi Swarupa Vs ITO, Ward 4 (4), Bangalore [2018] 100 taxmann.com 148(Bangalore - Trib.)

Also, from the way the courts have opined the date of transfer, it is very critical to note the way in the which the JDA is drafted.While, this has been a long-litigated issue, Government should extend the benefit of deferment to all assesses considering the liquidity crisis.

b. Capital Gain Tax arises even if Part CC of project is received

 As discussed above,the new Section 45(5A) inserted by the Finance Act,2017 extended the benefit of deferment only to Individuals and HUF. Furthermore, if we do a minute reading of this Section one will note that, the tax is levied on the whole project even if completion certificate for part of the project is received. While the term “project” is not defined under the Act, in case of big projects consisting of many towers, the land owner may be burdened with the tax liability in the initial year itself if the part CC of the project is received; therefore, the benefit of deferment in reality is not practically met.

c. Ambiguity on tax treatment for assesses holding the land as “Stock in Trade”

In case the Land is appearing as “stock in trade” of the assessee who enters into a JDA, then the income arising by virtue of JDA, may be charged as business income. However, the Act does not contemplate a specific computation mechanism unlike the provisions of capital gain under section 45(5A) of the Act.

It is worthwhile to note that there is no specific ICDS (Income computation and disclosure standard) governing the Income recognition on the real estate projects, therefore there is an ambiguity on the quantum of income and the time of chargeability as discussed below:

As regards to the time of chargeability the assessee may opt to defer the tax by following project completion method which may be litigated by the revenue. Also, there are no provisions in the Act to govern the quantum of income that would be taxed. One may take a view that the stamp duty value of the constructed units be considered as the business income &  other may consider the stamp duty valuation on registering the JDA. Clearly,the Government should come up with specific ICDS to govern revenue recognition on real estate projects addressing these issues & reduce the scope of litigation. However, it is important to note that the provisions of the Section 50D of the Act may not be applicable as the asset held is not the capital asset.

II. Profit Linked deduction for developing and building housing projects

The current law exempts 100% profits arising on the developing and building housing projects.Section 80IBA was inserted in Finance Act 2016 in line with the Government’s objective of “Housing for all”. While the section seems attractive, there are still some tax issue and ambiguity that needs to be addressed.

a. Restriction of allotting one unit is only applicable in case of Individuals

Currently, the section 80IBA provides for various conditions that needs to be satisfied in order to claim the tax exemption which inter alia stipulates a condition that, only one residential unit can be allotted to an Individual, his spouse and a minor child. However, this restriction is not applicable to other assesses. For instance, if the assessee sells more than one unit to HUF of an individual, then the provisions of this section have been said to be complied with. Going further, the developer may also allot all the units of the project to a single assessee other than individual & claim deduction. However, if one goes by the intent of “Housing for All” this may be questioned.

b. Sale & lease back transactions may also be eligible for deduction

Presently, this Section does not preclude sale and lease back transaction,implying if the Developer sells the units to Investors who in turn lease back the units to the Developer for earning rental income, then also the deduction may be allowed. However, as stated going by the intent of housing for all which was clearly mentioned in the Memorandum to Finance Bill 2016, tax authorities may invoke GAAR (General Anti Avoidance Rules) on such transactions.

c. No clarity on charging back Income claimed in previous years if any of the other provisions are not complied

Presently, the deduction claimed under this section for previous years is charged back only in case when the project is not completed within a period of 5 years. However, there is no clarity as to what happens if the assessee fails to comply with any other provisions of this Section. Let us say, the assessee claimed exemption under this section for initial 4 years, however in year 5 it has contravened the provisions of this Section by say allotting 3 units to an Individual. Now, the important question is whether the exemptions claimed in earlier years be taxable in the year of contravention. Possibly a view may exist that, as there is no specific clause under the Act, the previous exemption may not be charged back.

d. SPVs may not benefit from this section

The provisions of this Section may not be attractive in case of SPVs specifically formed for this project as the assessee may be subject to MAT/AMT which will not be utilized in future years leading to an effective tax cost of 15% plus cess & surcharge.

III. Valuation of shares of a Real Estate Company in accordance with Rule 11UA

As per the provisions of Section 50CA & 56(2)(x) of the Act, the transferor and transferee cannot transact less than the fair market value as per Rule 11UA(1)(c)(b). There are certain challenges that may be encountered while valuing the shares of a real estate company which may be as under:

a. No mechanism to protest the stamp duty valuation

As per the valuation mechanism prescribed under Rule 11UA, immovable property is valued at the value adopted or assessed or assessable by any authority by the Government for the purpose of payment of stamp duty. As per the provisions of Section 50C, if an assessee transfers a land or a building & the sale consideration is less than the Stamp Duty Valuation, then he has the right to ask the assessing officer to refer it to the Departmental Valuation officer. However, there are no such provisions while valuing the shares of a company which has a immovable property, therefore there may be unwarranted exposure to tax.

b. No Clarity on WIP valuation

The real estate companies typically have an inventory of work in progress (WIP) which is nothing but the capitalization of the project related expenses. There is no clarity on valuation of WIP as to whether WIP qualifies as an immovable property? While the term immovable property is not defined in Rule 11UA, one may take a view that, WIP cannot be considered as immovable property & therefore to be valued at cost.

c. Whether TDRs qualifies as an immovable property?

Another dilemma that needs to be addressed is how the valuation of TDR (Transferable Development Rights) is to be determined. In case of SRA projects or a rehabilitation projects if the developer fulfills its obligation by constructing units to the Slum Dwellers or society members, then certain amount of TDR/FSI is generated for the sale building. Now the question arises is whether the definition of immovable property includes TDR or FSI? It is interesting to note that the term immovable property is not defined in the Rules. However, Section 269UA of the Act defines immovable property which inter alia includes any rights in land or building which is constructed or which is to be constructed. 

Therefore, one may take a view that stamp duty valuation might be considered. However, it is worthwhile to note that this definition is applicable only for that chapter, therefore one may take a view that it cannot be extended to Rule 11UA and not to be treated as Immovable Property.

What is the Purpose of a Share Buyback and How can Shareholders Benefit from it ?

Buyback of shares

Deployment of Profits/ Capital

Normally, a company uses its profits and funds for:

Reinvestment: Investment in current/future value creating and innovative projects, salaries, research and development, repayment of existing/excess debt. Retained earnings lay the foundation for investment in future innovation. For instance,Apple Inc. issued a Press Release on January 17,2018, planning to repatriate billions of overseas cash, pay repatriation tax of approximately US$38 billion, open a second campus and expand its current workforce of 84,000 by 20,000, thereby contributing US$350 billionto the US economy over the next 5 years.

Dividend: Distribution of dividend to its shareholders.

Share Buyback: The net surplus capital/funds left after the above, can be used for share buyback from the existing shareholders.

However, each company will either deploy/reinvest the profit/funds in the business or return it to the shareholders in the form of dividend or share buyback depending heavily also on the stage of the company (start-up or established player), industry in which it operates (old economy like steel, energy, consumer durables or new economy like information technology, cloud computing, artificial intelligence, biotech, electric vehicles).

Forms of Buybacks

Share buybacks can be executed as under:

Tender Offer: The shareholders are given a tender offer, whereby they have the option to submit/ tender some/all their shares with a prescribed period at a specified price, which normally is at a premium to the current market price.

Open Market Purchase: The company buys back shares in the open stock market at the market price over a period of time.

The Buyback Impact

When a company repurchases equity shares, the selling shareholders get an infusion of funds. Theoretically speaking, once these shares are off the market, each remaining equity share becomes more valuable since the future profits would be divided/allocated among fewer equity shares i.e., earnings per share (EPS) increases followed by an increase in stock price. However, this perfect cycle will work if and only if the profits/ earnings, and in turn the share price, keeps rising – but, no company can guarantee future profits!

When a company has surplus cash (after repayment of highcost debt) and lucrative growth opportunities and its stock is reasonably priced, a buyback can provide an impetus to the long-term returns of its shareholders.

Why do Companies prefer Buybacks?

Advantages

• Many companies prefer share buybacks over dividends since a buyback is flexible and can be altered (reduced/ increased), if a company is suddenly facing adverse business conditions.
• In contrast to a cut/reduction in dividend, a change in the timing and quantum of buyback is less likely to be considered adversely by the shareholders.
• A buyback or special dividend is better than increasing the ordinary dividend since the latter implicitly increases the expectations of the shareholders to maintain the higher dividend in the future.
• A buyback gives an opportunity to the selling shareholders to invest the funds elsewhere, where they can earn higher returns than what the company is earning. According to the legendary investor, Warren Buffett, CEO of Berkshire Hathaway Inc., “If we reach the point that we can’t create extra value by retaining earnings, we will pay them out and let our shareholders deploy the funds.”   Buybacks enable corporate earnings being deployed from old economy companies not needing funds for their business to the shareholders, who in turn can invest it in other companies, who need funds or in industries of the future viz. new economy companies.
• A buyback reduces the risk that the management may use the excess cash to make value-destroying investments, expansion, management glorification. A buyback helps keep pressure on the company management to use capital prudently or return it, so that companies don’t waste shareholders’ funds.
• A company can achieve the optimal/target capital structure via a buyback, especially with debt finance, provided the company has sufficient profits for the interest expense to shield from taxation and the debt servicing won’t entail financial distress in the future.
• From an income-tax perspective, in India, with effect from April 1, 2020, dividend paid by a company to a shareholder is taxable under the Income-tax Act, 1961 (Act) in the hands of the shareholder at the regular rate and is subject to income-tax deduction at source (TDS)/withholding tax, at the applicable rates. 
• However, in the case of buyback of shares by a listed company, the profit/gain to the shareholder is exempt under section 10(34A) of the Act but the company is liable to pay tax on distributed income under section 115QA of the Act on the difference between the repurchase/buyback price and issue price at 20% plus surcharge and cess, as applicable. Similarly, in U.S.A., dividend is taxed as ordinary income while gains from stock buybacks are taxed at a lower rate of incometax at 20%, if the stock is held for more than a year giving rise to long-term capital gains. Therefore, from a shareholders’ perspective, the income-tax under a share buyback can be lower than under dividend payout – a shareholder-friendly way to distribute cash.
• It can support the market price of the share during sluggish/bear market conditions.
• It enables the consolidation of the stake in the company.

Disadvantages

• When a company announces a large buyback, it may be viewed adversely and raise a red flag, especially in a high growth industry. It provides a lens into what the management thinks about the future prospects of the company – the best investment the company can make is in its own shares?
• When an immediate spike in the EPS rather than value creation is the sole reason for a buyback, the selling shareholders gain at the expense of the non-tendering/ continuing shareholders, if the overvalued shares are repurchased.
• A company may overpay for its own shares, if the management’s estimate of the fair value of the shares is overly optimistic.
• If the management and promoters participate in the buyback themselves as tendering shareholders, then it may indicate an underlying weakness in the long-term business of the company.
• Buyback of shares offsets the dilution in EPS once stock options are granted to the employees/ management of the company.
• In recent years, companies have been using borrowings to fund buybacks, reducing equity and hence, increasing leveraging, which can increase the financial risk of the company and its investors in difficult times.
• When management compensation of companies is linked to the growth in EPS on account of the dilution/reduction in the number of outstanding shares in a buyback, they can earn higher compensation under buybacks although the actual profit is the same. To counter this drawback, the Boards of the companies should delink management compensation to EPS, especially under a buyback.
• If a majority of the compensation of senior management consists of stock options/awards, buybacks may be used to prop-up the stock price.

The Right Timing and Price

Smart companies repurchase shares only when the company’s shares are trading below the management’s best estimate of its fair/intrinsic value and no better investment opportunities or returns are available in the business. When a company follows this practice, it will benefit the long-term interest of the non-tendering shareholders at the expense of the tendering /selling shareholders, if the managements estimates are indeed correct.

Conversely, when a company’s shares are expensive and there are no lucrative investment opportunities available in the business, then paying dividend is probably the better option. Some companies and corporations also set parameters for stock buybacks. 

Buyback ROI from a Company’s Standpoint

The buyback return on investment (ROI) = (Reduction in dividend on the repurchased shares + Change in the stock price since the buyback ) /Amount spent on buyback. For a real world analysis, see Buy it Back.

A high/positive ROI, as of Apple Inc. of 48.81% and LVMH Moët Hennessy - Louis Vuitton of 1.59%, indicates pragmatic financial management by buying shares when they are undervalued and investing the funds for prudent use. While a low/negative ROI, as of Berkshire Hathaway Inc. of (5.19%) and Tata Consultancy Services Ltd. of (4.56%), indicates that the company bought its shares at a high price and that the money could have been used wisely, which investors would hate to hear/ observe.

When companies repurchase their share at a prudent time and price then only the company and its shareholders will benefit. We can also infer that the size of a buyback is no guarantee for an increase in earnings or stock price.

Conclusion

When a share buyback is prudently applied for capital allocation after evaluating various options and aligning it with the short/long-term objectives of the company, it can create value for not only the company but also its shareholders. After all, it is the shareholders’ freedom to invest/deploy cash/ money in companies, where it is being used efficiently, thereby with the rise in the productivity of companies, its employees and other stakeholders will also prosper.

What is Faceless Assessment?

This new scheme is launched with the idea of “Transparent Taxation - Honouring the Honest”, i.e. the platform will lay down this assessment mechanism to honour the honest taxpayers by forging trust and greater transparency and efficiency in the functioning of the Income Tax Department.

What is Faceless Assessment?

Faceless Assessment, in generic terms, means assessing taxpayers in a way where they do not have to visit the Income Tax Department and do not come face-to-face with any Income Tax officials. It aims to eliminate human interface in the direct taxation functioning of the country and introduce widespread adoption and usage of data analytics and artificial intelligence (AI).

However, the most striking feature of the faceless assessment scheme is the introduction of team-based assessment with dynamic jurisdiction which replaces the conventional territorial or jurisdictional based assessment.

Important Elements of the Faceless Assessment Eco-system 

National e-Assessment Centre (NeAC).

 The NeAC is the back-bone of the faceless assessment mechanism and it has widespread functions which are aimed at ensuring accuracy, efficiency and seamless working at back-end of the Income Tax department. The NeAC is located at Delhi and headed by the Principal Chief Commissioner of Income Tax(Pr. CCIT).

Primary functions of the NeAC

• Specify various formats, processes and procedures in relation to various aspects of the faceless assessment after approval by the CBDT.
• Assign cases to the Assessment units (AU) by making use of data analytics and AI.
• Facilitate communication among various units of the ReAC.
• Ensure furnishing of notices/ communication to all assesses in a timely and electronic manner.
• Select draft assessment orders(DAO) and allocate them to the review unit via automated allocation system.
• Assist in finalisation and electronic dispatch of assessment orders.

Regional e-Assessment Centres (ReAC)

The ReAC is established to assist the NeAC in smooth functioning of the assessment procedures.

It will function with the support of 4 independent units, whose functions are described as follows:

1. Assessment Unit (AU)

Accept cases assigned to it by the NeAC, identify issues therein, seek information for resolving the issues and analyse materials to frame draft assessment orders.

2. Verification Unit (VU)

It has widespread functions for conducting enquiries:

• Conduct e-verification under section 133C;
• Examination of books of account, examination of witnesses and recording of statement via electronic modes;

3. Technical Unit (TU)

Acts as the knowledge repository of the faceless eco-system by affording advice on legal, accounting, forensic,information technology, valuation, transfer pricing, Data Analytics and so on.

4. Review Unit (RU)

Primarily involved in review of draft assessment orders and verify details pertaining to material evidence brought on record, questions of facts and law, application of judicial decisions, arithmetic correctness and the like.

Location of ReACs

There will be 30 ReACs set-up across 20 cities 4 throughout the country, with 8 already in existence by virtue of the e-Assessment Scheme, 2019 located at Delhi, Mumbai, Chennai, Kolkata, Ahmedabad, Pune, Bangalore and Hyderabad.

Overview of Faceless Assessment Procedures

Apart from a structural change as deliberated above, there is also a fundamental change in the way assessments will be carried out in the course of this Scheme. For instance, an assessee who resides in Mumbai, his/ her Income Tax return may be assigned by the NeAC to any AU of say, Gujarat and the draft assessment order (DAO) may be reviewed by an officer in say, West Bengal. However, the assessment order will not mention these details. It will only make mention of the NeAC.

All assessment orders shall be passed by the NeAC only and all communication among the units of the ReACs shall be facilitated through the NeAC exclusively by electronic mode by affixing a Digital Signature Certificate (DSC).

Let us now understand the procedure of assessment under this Scheme.

• Based on the income tax returns filed, the NeAC allocates cases electronically to the AUs using data analytics, AI and risk parameters pre-defined in the system.
• Based on the facts available,AU may make a request to the NeAC for
• obtaining further information, documents or evidence from the assessee or any other person;
• Conducting enquiry by VU; or
• Seeking technical assistance from the TU.
• Where such request has been made by the AU, the NeAC shall issue appropriate notice or requisition to the assessee or any other person for obtaining requisite information.
• The assessee or any other person, shall file his response (through his registered income tax e-filing account) to the above notice within the stipulated time.
• The assessee may seek a personal hearing to make oral submissions in case of proposed modification of income in the DAO (Draft assessment order) which shall be conducted exclusively through video conferencing or videotelephony as per procedure laid down by the CBDT.
• In case assistance of VU or TU had been taken, the NeAC shall send the verification/ technical report received from the VU or TU, to the concerned AU.
• In all cases, the AU, after taking into account relevant material available on the record and replies or further information received, shall prepare a DAO either accepting the return or modifying the income or sum payable.
• The DAO shall be examined by the NeAC in accordance with the Risk Management Strategy (RMS) laid down by the CBDT. The NeAC may assign the case to any RU of any ReAC through an automated allocation system.

A) If no assignment is made to the RU and

i. No modification in DAO is made to the income or sum payable

Final order based on the DAO shall be served to the assessee along with demand notice specifying the sum payable or refundable, as the case maybe and penalty proceedings, if any; or

ii. Modification in DAO to income or sum payable is proposed 

AU shall communicate modifications to the NeAC; then a show cause notice (SCN)shall be issued along with the DAO and NeAC shall provide an opportunity to the assessee to show cause as to why the assessment should not be completed as per the DAO. 

B) If assignment has been made to any RU and:

i) RU concurs with the DAO – RU shall communicate concurrence to NeAC. Final order based on the DAO shall be served to the assessee along with demand notice specifying the sum payable or refundable, as the case maybe and penalty proceedings, if any; or

ii) RU proposes modifications in the DAO – AU shall communicate modifications to the NeAC. Thereafter, NeAC shall allocatethe case to a fresh AU through automated allocation system.

• This new AU shall draft the final DAO after considering the proposed modifications and send it back to the NeAC. The NeAC shall then follow the procedure described in (i) or (ii) of sub-clause (a) above. 
• In case no reply is received from the assessee, the NeAC shall finalise the assessment based on the DAO and serve the final assessment order along with demand notice specifying the sum payable or refundable, as the case maybe and penalty proceedings, if any.
• The NeAC shall, after completion of assessment, transfer all the electronic records of the case including penalty proceedings to the Assessing Officer having jurisdiction over the said case for such action as may be required under the Act.

Scope of the Scheme

The scheme covers the following cases and aspects under its ambit:

1) All existing cases where the notice under section 143(2) was issued by the NeAC under the erstwhile e-Assessment Scheme, 2019.

2) All other cases where:

a) Returns of income are filed and selected for scrutiny under the extant guidelines by issuing notices under section 143(2);

b) Notices under section 142(1) have been issued for filing the returns and no return thereon has been furnished;

c) The assessee has not furnished return of income under section 148 and a notice under section 142(1) calling for information has been issued.

Conclusion

India has taken a giant leap in moving towards a digital nation by launching this Scheme. Compliances will be easier, assessments will be faster and disputes will be lower. In the last few years, tax scrutiny cases have reduced from 0.71% earlier to now 0.25%. This is a reflection of the trust that the government is placing on the taxpayers. Time only will tell the effectiveness and efficiency of the Scheme but as honest taxpayers, it is definitely something to look forward to.

FAQ on TCS on Sale of Goods U/s Section 206C(1H)

Q1.Who is liable to collect Tax?

Ans. Every Person who is a seller.It means the seller may be an individual or HUF or Firm or LLP or Company or Association Of Persons or Artificial Juridical Person or Local Authority or a Charitable Trust, whether Resident or Non Resident.

Q2. Whether all the sellers are liable to collect the tax and remit to Government of India?

Ans. The seller whose total sales,gross receipts or turnover for the business carried on by him exceed Rs. 10 crores during  the Financial Year immediately preceding the Financial year in which the sale of goods are carried out.

For Example:

The Current Financial Year is 2020-21. If the total sales or gross receipts from the Business for the Financial Year 2019-20 exceeds Rs. 10 crores, then the seller is liable to collect the TCS and remit to the Government irrespective of the Current Financial Year 2020-21 Total Sales or Gross Receipts or Turnover. It may be less than or equal to or more than Rs.10 crores.

Q3. Whether any of the seller is exempted from this provision?

Ans. Central Government by notification in its Official Gazette can exempt or exempt category of any of the other persons subject to such conditions as may be specified in that notification.

Q4. From whom this Tax shall be collected?

Ans. The tax must be collected by the seller from the buyer from whom he has received any amount as Consideration for sale of any goods of the value or aggregate of such value exceeding Rs. 50 lakhs during the Previous Year.

Q5. What are the Sales exempted from this provision?

Ans. Following Sales are exempted:

i. Sale of goods being exported out of India, or

ii. Sale of following goods mentioned in 206C(1)

a. Alcoholic Liquor for human consumption

b. Tendu leaves

c. Timber obtained under a forest lease

d. Timber obtained by any mode other

e. Any other forest produce not being

f. Scrap

g. Minerals, being coal orlignite or iron ore or

iii. Remittance of money through an Authorised Dealer through Liberalised Remittance Scheme mentioned in 206C(1G)(a),

iv. Seller of Overseas Tour Package u/s 206C(1G)(b), and

v. Every Seller who is making sale of Motor Vehicles value exceeding Rs. 10 lakhs and is liable to collect tax under section 206C(1F)

Q6. Where a seller who has more than one line of business and for each line of business, there is a Separate Books of Accounts, in that case how to apply the Turnover Limit of Rs. 10 crores?

Ans. As per the Law, “Seller means a person whose total sales or gross receipts or turnover from the business carried by him exceed Rs. 10 crores” From the above, the total sales or gross receipts or turnover shall be seen for an assessee as a whole – Aggregate of total Sales or Gross Receipts or Turnover of all the business under one PAN exceed Rs.10 crores in the last financial year, then this provision shall apply for entire business.

Q7. Where the Seller receives Consideration of Sale from the same buyer for different line of Business for which he maintains Separate Books of Accounts, whether the Limit of Sale Consideration from the buyer shall apply independently for each line of Business?

Ans. According to Section 206C(1H), Buyer means a person who purchases any goods from the seller and that seller who receives amount as consideration for sale of any goods of the value or aggregate of such value exceeding Rs. 50 lakhs. From the above, if the seller receives Consideration from the buyer for a value exceeding Rs. 50 lakhs in aggregate during the Financial Year, from all the line of business irrespective of the Separate Set of Books of Accounts, this provision shall apply.

Q8. What is the Rate at which Tax is to be collected from the Buyer and at what point of time?

Ans. The seller shall collect from the buyer at the time of receipt of Sale Consideration, and shall collect the following–

Situation :(a) If the Buyer provides PAN or AADHAR Numbe.

Rate of TCS : A sum equal to 0.1 percent of the Sale Consideration exceeding Rs. 50 lakhs For Financial Year 2020-21 – 0.075% instead of 0.1 % as perthe Press Release of CBDT Dated 13th May 2020

Situation : (b) If Buyer does not provide PAN or AADHAR Number

Rate of TCS : A sum equal to 1 percent of the Sale Consideration exceeding Rs. 50 lakhs 

Q9. Who are the buyers exempted?

Ans. The following Buyers are exempted:

i. Sale consideration from the buyer in aggregate, doesn’t exceed Rs. 50 lakhs 

ii. The Buyer is liable to deduct tax under the provisions of this Act on the goods purchased from the seller and has deducted such amount

iii. the Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or

iv. a local authority as defined in the Explanation to clause (20) of section 10; or

v. a person importing goods into India or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein;

Q10. At what point of time shall the Seller collect TCS of 0.1%?

Ans. The TCS shall be collected at the time of receipt of Sales Consideration from the Buyer,

Q11. Whether the Seller shall charge the TC S of 0.1% on the Sale Invoice and add it to the value of Invoice?

Ans. The levy u/s 206C(1H) is not a levy on sale. It is a mode of recovery of Income Tax on the Sale of goods by the seller made to the buyer.

It is advisable that Sales Invoice shall have a following Clause as the Terms and Conditions of Sales. If the aggregate Purchase by the buyer exceeds Rs. 50 lakhs during the Current Financial Year,the buyer shall pay 0.1% as Tax Collected at Source u/s 206C(1H) along with the sales consideration remittance in excess of Rs. 50 lakhs during that Financial year.

Otherwise TCS shall be adjusted 1st with the Consideration received amount and the balance to be adjusted to Sale Consideration due by using the following Formula

TCS Amount = Amount Received x 0.1% /100.1%

For Financial Year 2020-21 – 0.075% is the reduced rate of TC S as per the Press Release of CBDT Dated 13th May 2020

TCS Amount = Amount Received x 0.075%/100.075%

Q12. For the Financial Year 2020-21, the law is applicable from 1st October 2020 and the aggregate Sale Consideration of exceeding 50 lakhs shall be considered from 1st April 2020 or 1st October 2020?

Ans. In our opinion, the aggregate Sales Consideration is prescribed for the Previous year. Even though, the law came into effect from 1st October 2020, to avoid unnecessary disputes and saving time, it is advisable in case of the buyer for whom the aggregateSale Consideration received already exceeded Rs. 50 lakhs on or before 30-09-2020, the seller shall collect 0.1% on the Sale consideration received on or after 01-10-2020.

In case, the aggregate Sale consideration from the buyer doesn’t exceed Rs. 50 lakhs, it is advisable to collect 0.1% of Sale Consideration at the time of receipt of the amount exceeding Rs. 50 lakhs.

Note: For Financial Year 2020-21 – 0.075% is rate of TCS as per Press Release of CBDT dated 13th May 2020

Q13. Whether the Seller who had a turnover of Rs. 15 crores in the Financial Year 2019-20 and projected to have Rs. 7 crores in Financial Year 2020-21, is liable to collect tax at source for the Financial Year 2020-21?

Ans. Yes, since the sales in the preceding Financial Year 2019-20 exceeds Rs. 10 crores, the seller is liable to collect tax from the buyers from whom, receipt of Consideration of Sale exceeds Rs. 50 lakhs.

Q14. Whether the Seller who had a turnover of Rs. 7 crores in the Financial Year 2019- 20 and projected to have Rs. 15 crores in Financial Year 2020-21, is liable to collect tax at source for the Financial Year 2020-21?

Ans. No, since the sales in the Preceding Financial Year 2019-20 does not exceed Rs. 10 crores, the seller is not liable to collect tax from the buyers u/s 206C(1H).

Q15. What shall be the tax collected at source, for the Financial year 2020-21, if a seller has made sale of goods to a buyer for Rs. 30,00,000 upto 30th September 2020 and from 1st October 2020 to 31st March 2021 has made a sale to the aforementioned buyer for Rs. 25,00,000?

Ans. In this scenario, the seller is liable to collect tax on the amount exceeding Rs. 50,00,000, and TCS shall be collected at 0.1% (for the Financial year 2020-21 – rate is 0.075%) 

Tax Collected at Source =[(30,00,000 + 25,00,000) - 50,00,000 ] x 0.075% = Rs. 375

Q16. What shall be the tax collected at source, for the Financial year 2020-21, if a seller has made sale of goods to a buyer for Rs. 80,00,000 upto 30th September 2020 and from 1st October 2020 to 31st March 2021 has made a sale to the aforementioned buyer for Rs. 25,00,000?

Ans. Since the section is applicable only from 1st October 2020, Tax shall be collected at source prospectively from 1st October 2020. Since the Turnover/sale has exceeded Rs. 50 lakhs on the first half of the Financial year 2020-21.The seller in my opinion is liable to collect tax at source on the entire Rs. 25,00,000 in the second half of the year at 0.075% (as per Press Release dated 13th May 2020)

Tax Collected at Source = Rs. 25,00,000 x 0.075% = Rs. 1,875

Q17. Whether Sales Consideration includes any other Charges as well as Goods and Service Taxes if it is forming part of Sales Invoice?

Ans. The charging section specifies with the words Any amount as Consideration for Sale of any goods and it doesn’t mention sale value or Price of the goods. To avoid unnecessary disputes, it is better to Collect tax on the entire amount of Invoice (including Taxes and Duties and other levies)

Q18. What is the application of Provision of law in case of advance received towards sales consideration?

Ans. The tax is to be collected at the time of receipt of such amount from the buyer and so whether the amount is received prior to sale as an advance or after sale,if the aggregate value of Sale Consideration during the previous year exceeds Rs.50 lakhs, the seller is liable to collect Tax at source.Hence it is the duty of the seller to collect TCS at 0.1% at the time of receipt of advance money from the buyer to whom this provision apply.

Q19. In Case of Works Contract liable u/s 194C, whether Contractor Liable to collect this tax?

Situation 1: Composite Contract for Both Supply of Material and other services and the invoice is raised as both supply of goods as well as services together, then TDS may be deducted by the Contractee on the whole value of Invoice u/s 194C. In that case, TCS u/s 206C(1H) shall not apply

Situation 2: Composite Contract for Both Supply of Material and other services and the invoice is raised separately for supply of goods as well as supply of services, then TDS may be deducted by the Contractee u/s 194C for the supply of services and Tax must be collected u/s 206C(1H) on the Sale of goods.

Q20. When should Tax collected at source be remitted to the government?

Ans. The Tax collected at Source shall be remitted to the government on 7th day of succeeding month from the month in which tax is collected at source.

What is a Startup?

What is a Start-Up?

A start-up, in general terms means, an entity formed by a group of entrepreneurs (called “Founder/(s)”) with the idea of introducing a new product/service, a new innovative idea or a big improvement of something already existing in the market. A typical start-up is a brainchild of the founder who needs financial backing to launch the product/service in the market.

Definition

Having briefly understood what a start-up is, now it is critical to see the definition of the term for the purpose of Government Schemes. Following are the key conditions for an entity to be a ‘Start-up’ as per the notification issued by the Ministry of Commerce & Industry, GSR 127(E) dated 19-Feb-2019:

1.An entity can be recognized as a start-up for up to ten years since incorporation.

2.The annual turnover should not excess Rupees 100 crores in any previous financial years since incorporation.

3.The entity should work towards innovation,development, deployment,or improvement of new products, processes or services or if it is a scalable business model with a high potential of employment generation or wealth creation.

In case the entity completes ten years from the date of incorporation/registration, it will cease to be start-up. Also,if the turnover exceeds Rupees 100 Crores in any previous financial years, the entity will lose the start-up identity.

Recognition of a Start-up 

Under the ‘Start-Up India’initiative, The Department of Promotion of Industry and Internal Trade (DPIIT) is authorized to recognize an entity as start-up in order to avail the various tax benefits, IPR fast tracking etc.,

The process of getting recognition from DPIIT is a simple process, focused on getting information about business of the start-up, to check whether the idea is unique, is it a scalable business model, will it create employment opportunities in the future, wealth creation etc. After due verification of documents and information submitted, the DPIIT will issue a certificate recognizing the entity as a Start-up.

It should be noted that only a private limited company incorporated under Companies Act, 2013 is covered under the definition of start-up.Further, both Limited Liability Partnership (LLP) and a partnership firm (registered under the partnership Act) is included in the definition of Start-up.

There are currently more than 32000 startups recognized by the DPIIT all over India.

Income Tax incentive

In order to provide tax incentive to start-ups, Section 80IAC was introduced by Finance Act,2016, whereby 100 percent deduction of profits from the business of an ‘eligible start-up’is allowed for three consecutive years. An option is given to the entity to choose any consecutive period of three years within seven years from incorporation.

Eligible Start-up 

The definition of the term ‘Eligible Start-up’ under the Income tax act is significantly different from that of the DPIIT 

in respect of the criteria to be satisfied by an entity to qualify for tax deductions. The aspects of the definition are as follows:

1. The start-up should have been incorporated on or after 01-04-2016 but before 01-04-2021.

2. The turnover doesn’t exceed Rupees 25 Crores for the year in which the deduction is claimed.

3. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government Further, the benefit is available only for an eligible start-up being a Company incorporated under Companies Act,2013 or a Limited Liability Partnership (LLP).

Procedure to get Certificate

The Inter-Ministerial Board of Certification is a Board set up by Department for Promotion of Industry and Internal Trade (DPIIT) which validates Startups for granting tax related benefits. A startup can make an application in Form-1 along with required documents specified therein to get the certificate for claiming deduction under Section 80IAC.

Following documents are required to be submitted along with the application:

1. Copy of Memorandum of Association or LLP/Partnership Deed etc.,

2. Annual accounts for last three financial years (as applicable)

3. Copies of Income tax returns for the last three financial years (as applicable)

Conditions to claim deduction

This deduction is subject to various conditions laid out under the section 80 IAC (3) as follows:

1. The start-up is not formed by splitting up,or the reconstruction,of a business already in existence.

2. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Any plant or machinery which was used outside India by any person other than the start-up is allowed, provided such machinery is imported into India and it is not used by any person in India prior to its installation. No depreciation should have been claimed in respect of the machinery or plant under the Income Tax Act earlier.

There is a relaxation from condition (2) above, allowed in respect of cases, where the plant or machinery transferred to the new business of the start-up doesn’t exceed 20 percent of the total value of machinery used in the business.

Apart from the specific conditions under section 80IAC, certain conditions as mentioned under sub sections (5) and sub sections (7) to (11) of section 80IA also apply for claiming deduction under this section.

Declaration

A start-up fulfilling the conditions should make a self-declaration in Form 2 and submit the same to DIPP, which will in turn forward the same to CBDT after due consideration.

Withdrawal of exemption

If it found that the certificate is obtained based on falseinformation or the start-up invests in any of the assets listed in the notification before the stipulated period of seven years,the certificate will be revoked and the exemption provided will be withdrawn with retrospective effect.

Capital Gains

Section 54EE 

This section provides exemption from capital gains tax if the long term capital gains are invested by an assessee in units of such specified fund, as may be notified by the Central Government in this behalf, subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs. 50 lakh.

Section 54GB

Long term capital gains arising on account of transfer of a residential property (ahouse or plot of land) shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to the following conditions:

1. The assessee should invest the amount in the equity share of an eligible company before due date for filing return of income under section 139.

2. The company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset as prescribed.

3. The assessee should hold more than 50 fifty percent of the equity share capital after the subscription of shares.

4. The company in which amount is invested should be a small or medium enterprise or an eligible start-up.

This section was introduced to provide tax exemption to entrepreneurs or promoters of a startup selling their residential property in order to raise funds to invest in the company.

Conclusion

As it can be seen from above discussion, the Government, with a view to accelerate the growth of the startups has introduced many tax incentives which will go a long way in benefitting the start-up ecosystem. As tax professionals, it is our duty to analyse various tax provisions and provide a feasible solution to the start-ups and help them in fighting the ongoing difficult times due the pandemic.

E-Invoice under GST

What is meaning of E-Invoice under GST?

‘e-Invoice’ or ‘electronic invoicing’ means a system in which Business to Business (B2B) invoices are authenticated electronically by GSTN for further use on the common GST portal. Under the electronic  invoicing system, an unique identification number will be issued against every invoice by the Invoice Registration Portal (IRP) to be managed by the GST Network. The firstly IRP was Introduced by the National Informatics Centre(NIC) at einvoice1.gst.gov.in. All invoice information will be transferred from this portal to both the GST portal and e-way bill portal. Therefore, it will be reduce the time of manual data entry while filing GSTR-1 return and generation of part-A of the e-way bills, as the information is passed directly by the IRP to GST portal. So IRP helps to generate e-way bill and GSTR-1 data.

To whom is e-Invoicing mandatory applicable?

In First Stage

E-Invoice will be mandatory applicable from 1st October 2020 to all businesses whose aggregate turnover has exceeded Rs.500 crore for the businesses to generate the entire GST e-invoice including all the value of sales. The assessee whose turnover is more than Rs 500 crore in the previous fiscal year from 2017-18 to 2019-20. Notification No.61/2020 and Notification No.71/2020 – Central Tax prescribes the time period considered for determining eligibility under e-Invoicing. 

In Second Stage

Further, e-Invoicing has been mandatory applicable from 1st January 2021 to businesses whose aggregate turnover has exceeded Rs.100 crore limit in any of the preceding financial years from 2017-18 to 2019-20 as declared in Notification No.88/2020 – Central Tax.

The government try to include all businesses under the provision of e-Invoicing from 1st April 2021. The total turnover will include the turnover of all GSTINs in a single PAN base, across the India.

However, irrespective of the turnover, e-Invoicing shall not be applicable to the following categories of registered persons, as notified in CBIC Notification No.13/2020 – Central Tax:

• An SEZ unit
• A banking company  or an insurer or a financial institution (including an NBFC)
• A Goods Transport Agency (GTA)
• A registered person supplying passenger transportation services and supplying services by way of admission to cinema as Movie Tickets

Benefits to businesses of GST E-invoice :

Businesses will have the following benefits by using e-invoice system by GSTN: 

1. E-invoice will be solves the data gap in reconciliation to reduce mismatch errors.
2. E-invoices made on one software system will be ready for other, So its help reduce data entry errors.
3. Easily availability of input tax credit, improve in business efficiency.
4. Real-time tracking of invoices will be simplified GST Compliance.
5. Automation of the tax return filing process – the details of the invoices will be auto-populated in the GSTR 1 returns and for generating the part-A of e-way bills.
6. E-invoice system will be taken into consideration for the reduction in GST Tax evasion and fraud, it means now not possibility of creating fake GST invoice.

What is the process to Generating an e-invoice?

The following are the steps involved in generating an e-invoice. The process of generating the GST e-invoice will be the same as the e-way bill which is generated on the https://ewaybill.nic.in/ portal.

1.    The Registered person has to ensure to use the reconfigured ERP system as per PEPPOL standard. He could contact with the software service provider to start the standard set for e-Invoicing, i.e. e-invoice schema and must have the mandatory field notified by the CBIC.

Mandatory field are as under :

• Document Type Code – INV/DBN/CRN
• Supplier Legal Name, Supplier GSTIN, Supplier Address, Supplier Place, Supplier State Code, Supplier Pin code, Document Number, Document Date
• IRN- Invoice Reference Number
• Is Service – Y/N
• Supply Type Code - B2B/B2C/SEZWP/SEZWOP/EXPWP/EXPWOP/DEXP
• Item Description, HSN Code, Item Price
• Assessable Taxable Value, GST Rate
• IGST Value, CGST Value and SGST Value
• Total Invoice Value

2. Any Registered person has got primarily two options for IRN generation.

A. The IP address of the computer system can be whitelisted on the e-invoice portal for a direct API integration or integration via GST Suvidha Provider (GSP).

B. Download the Bulk generation tool to bulk upload the invoices. JSON  file will be generate from tool and it will be uploaded on the e-invoice portal to generate IRNs in bulk.

3. The Registered person must thereafter raise a normal invoice on that software. He must provide all the required details like, billing name and address, GSTN of the supplier, taxable value, GST rate applicable, tax amount, etc.

4. Once either of the above options is chosen, raise the invoice on the respective ERP softwares or billing softwares. Thereafter, upload the details of invoice especially mandatory fields onto the IRP using the JSON file or via application service provider (app or through GSP) or through direct API. The IRP will act as the central registrar for e-Invoicing and its authentication. 

5. IRP will Verify and validate the details of the B2B invoice, checks for any duplications and generates an invoice reference number(IRN) for reference. There are four field based on which IRN is generated: GSTIN of Seller, Invoice number, and FY in YYYY-YY and document type (INV/DN/CN).

6. IRP generates the invoice reference number (IRN), digitally signs the invoice and creates a QR code in Output JSON for the supplier. On the other hand, the seller of the supply will get informed of the e-invoice generation through email.

7. IRP will be send the authenticated payload to GST portal for GST returns. other, details will be forwarded to the e-way bill portal. The GSTR-1 of the seller gets auto-filled for that tax period. In turn, it determines the tax liability. A Registered  person can continue to print his invoice as being done presently with logo. e-Invoicing system only mandates all Registered person to report invoices on IRP in electronic format.

8. There is no need for the Registered Person to digitally sign the e-invoice which is to be uploaded on IRP. The e-invoice will automatically get signed after Validation.