Companies Act

The Rajya Sabha approved a Bill to amend the Companies Act in May, 2015 with an aim of promoting ease of doing business in the country. The changes were occasioned on account of at least three stated reasons : (i) for the ease of doing business; (ii) to meet corporate demand and address problems faced by stakeholders; and (iii) removal of inadvertent errors or discrepancies. As many as 16 amendments have been made to the Companies Act of 2013 which mainly deal with winding up of companies, board resolutions, bail provisions and utilisation of unclaimed dividends to bring the law in tune with the global standards. Contending that 16 amendments were not enough to cover everything, Finance Minister Arun Jaitley said that “a broad-based committee will continue to go into this question for the next few months as to where the shoe pinches, and this may not be the last amendments which we are bringing in.” The expert committee comprising representatives of bodies of company secretaries, chartered accountants, industry chambers and officials will look into the discrepancies and suggest changes, he said.

At an overall level, the Bill seeks to undo some of the rigidities of the 2013 Act. It has been found that while the 2013 Act enhances corporate governance and compliance requirements in the interests of the investors, it also imposes onerous obligations on companies thereby increasing the costs of doing business. This apparently does not augur well with the Government’s move towards enhancing the ease of doing business with a view to attracting higher levels of foreign investment especially given the express thrust of the “Make in India” policy. Moreover, in order to improve India’s ranking in the World Bank Doing Business report, measures must be seen to be taken. These drivers seem to be behind the Bill.

The amendments have been designed to address some issues raised by stakeholders. Among the major concerns of stakeholders were protecting confidentiality of board resolutions, as well as the provision of auditors being required to report suspected frauds at the companies audited by them. The provision on the public scrutiny of board resolutions, is a practice which is not followed anywhere in the world, and has been amended in the new Bill. A company deciding in its board on its next model, a new product trademark or the funding mechanism would not like such matters to be known to competitors, and thus this is a welcome change.

Towards meeting a “corporate demand”, the relevant amendment now prohibits public inspection of board resolutions filed in the registry. Under the new norms, the paid-up capital criteria has been scrapped while threshold limits for various transactions for getting shareholders’ nod has now been stipulated. Another amendment approves prescribing specific punishment for deposits accepted, a condition that was left out in the act inadvertently.

Stakeholders were also concerned that stringent regulations for related party transactions, or those transactions between the company and another in which a board member or members are interested, could hurt routine business activity. The amendment now exempts corporates from the need to get shareholders’ nod in the case of related party transactions valued lower than Rs.100 crore or 10 percent of net worth. Under the old system, shareholders’ permission through a special resolution was required in case of related party transactions for all firms with a paid up capital of Rs.10 crore or more.

Another amendment exempts related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders.

The amendment bill, is expected to go a long way in creating an enabling regulatory regime necessary for promoting economic growth.

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GST in India

Welcoming the passage of Goods & Services Tax (GST) Bill in the Lok Sabha, industry and experts said roll out of the new tax regime would add  around 1.5 percentage points to the economic growth and create a common market across the country. This is certainly the first step in making India an unified market, and one of the most extensive and far-reaching reform in the tax domain, which would boost industrial growth & economic progress. The GST is a comprehensive value-added tax that will be levied concurrently by the Centre and the states in the form of a Central GST and State GST, and will replace almost all key indirect taxes (like Central excise, Service tax, VAT and Sales tax) barring customs duty and some local levies, on all transactions in goods and services be it sale of goods or services or even stock transfers.

GST is expected to result in a reduction in the cost of doing business by removing the cascading effect of taxes especially for automotive distributors, which attracts high rates of CENVAT duties as well as VAT at State level, in addition to other levies such as NCCD, Auto cess, entry taxes, octroi, registration charges and road taxes. Automobile exports are also likely to benefit, as embedded taxes in India’s export prices will be eliminated.

Under the GST regime, with no embedded tax costs on inter-state movement of goods (CST or entry taxes) and a shift in the point of taxation to the consumer ultimately, businesses would have greater flexibility to re-design their supply chains and thus, optimize logistics costs.

Significant progress has been made on the introduction of GST in the last 5 years, including the issuance of a White Paper and the First Discussion Paper by the Empowered Committee; reduction of CST from 4% to 2%; partial alignment of tax credits on goods and services under CENVAT Credit Rules; introduction of Negative list based taxation of services and Point of Taxation rules; creation of IT platform for processing of transactions & returns and introduction of the Constitutional Amendment Bill in the Parliament in March 2011.

However, there are still certain roadblocks which need to be cleared for timely  implementation of GST such as gaining the States’ consensus on key aspects such as rates, classification, threshold limits, exemptions etc. in order to achieve a smooth transition to GST. Further, the Government needs to relook at the exclusion of levies such as stamp duty or octroi/ cess from the proposed GST model, since due to such exclusion, the cascading impact of taxes for businesses is not fully eliminated. Also, there are various aspects which need clarity in order for the auto industry to be better prepared for the GST regime some key issues being treatment of ongoing area based exemption schemes (from Central Excise perspective) and the State level incentives in form of subsidy or deferment; continuation of end use based exemptions (e.g. for vehicles used as taxis or ambulances) and the continuation of export incentives linked to indirect taxes.

These are only some examples and there would be many similar challenges arising due to interpretational and transitory issues.

The Government needs to urgently address all these issues well within time. This will give the corporate world adequate time to efficiently align its operations with the GST regime and make a smooth transition. “The deadline for actual implementation of GST from April 1, 2016, would be feasible. It all depends on how quickly we are able to reach a consensus on critical issues,” Govt. of India’s Revenue Secretary Mr. Shakti Kanta Das commented recently.

The GST, which has been pending since 2006, is now at a crucial stage where States have proposed to keep products such as petroleum, tobacco and alcohol out of GST ambit and have demanded the exemption list be included in the Constitutional Amendment Bill. As regards the compensation structure, the States have sought a five-year compensation mechanism from the Centre and demanded the same be included in the Constitutional Amendment Bill.

However, the Govt. is quite optimistic that it will be able to reach convergence in the coming weeks or months.

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Regulating Black Money

The black money bill was passed by the Lok Sabha, and then the Rajya Sabha in May, 2015. Titled the “Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015”, it seeks to check the black money menace with stringent provisions for those stashing illegal wealth abroad. The Bill provides for separate taxation of any undisclosed income in relation to foreign income and assets. Such income will henceforth not be taxed under the Income-tax Act but under the stringent provisions of the new legislation. According to the Bill, those who conceal income and assets and indulge in tax evasion in relation to foreign assets can face rigorous imprisonment of up to 10 years. The offence will be non-compoundable and the offenders will not be permitted to approach the Settlement Commission for resolution of disputes. There will also be a penalty of 300 per cent of taxes on the concealed income and assets.

According to the Bill, undisclosed foreign income or assets shall be taxed at the flat rate of 30 per cent. No exemption or deduction or set off of any carried forward losses which may be admissible under the existing Income-tax Act, 1961, shall be allowed. And concealment of income in relation to a foreign asset will attract penalty equal to three times the amount of tax (90 per cent of the undisclosed income or the value of the undisclosed asset). This would be over and above tax at a flat rate of 30 per cent.

The Bill also proposes to make concealment of income and evasion of tax in relation to a foreign asset a ‘predicate offence’ under the Prevention of Money Laundering Act, which will enable the enforcement agencies to attach and confiscate the accounted assets held abroad and launch proceedings.

It seeks to make non-filing of income tax returns or filing of returns with inadequate disclosure of foreign assets liable for prosecution with punishment of rigorous imprisonment of up to 7 years. To protect persons holding foreign accounts with minor balances which may not have been reported out of oversight or ignorance, it has been provided that failure to report bank accounts with a maximum balance of upto Rs.5 lakh at any time during the year will not entail penalty or prosecution.

The tax liability on an overseas property would be computed on the basis of its current market price, not the price at which it was acquired.

The Bill provides for a short window for those holding overseas assets to declare their wealth, pay taxes and penalties to escape punitive action. Failure to furnish return in respect of foreign income or assets shall attract a penalty of Rs.10 lakh. The same amount of penalty is prescribed for cases where although the assessee has filed a return of income, but he has not disclosed the foreign income and asset or has furnished inaccurate particulars of the same.

The Income Tax assesses with overseas assets will get a one-time opportunity for declaring them. The time-frame of the short window will be notified after the passage of the bill.

A comprehensive study on India’s parallel economy, conducted by the Union Finance Ministry’s think tank, National Institute of Public Finance and Policy (NIPFP), has made sensational revelations about black money generated by domestic economic activity. The study, presented to the Finance Minister and the newly-set up SIT on black money, says the extent of unaccounted money generated in today’s globalised Indian economy could go upto 71 per cent of India’s GDP.India’s GDP is roughly $2 trillion. This means the parallel economy could be of the order of $1.4 trillion. This is particularly significant because most studies done on India’s black economy in the past, especially the pre-liberalization era, put the value of the parallel economy at less than 30 per cent of GDP. The study reckons the parallel economy may have multiplied in the past 25 years. This period also saw India’s deeper integration with the world economy which itself may have further boosted the growth of India’s parallel economy.

The Bill, once it is implemented as a Law, will certainly play a significant role in bringing back black money into the declared economy, improve tax collections and boost overall economic growth.

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