sbs-digest-e-journal-sept-2019

VVoolulummee-1-403 DSeecpetmembebre-r2-0210619 PPaaggeess11-1-242 SBS Interns’ For Private circulation only Digest An attempt to share knowledge By Interns of SBS and Company LLP

SBS Interns' Digest www.sbsandco.com/interns-digest CONTENTS AUDIT................................................................................................................................................1 KEY DIFFERENCE_ DIVISION I AND DIVISION II-SCHEDULE III ..........................................................................................1 FEMA ..............................................................................................................................................13 FEM (IMMOVABLE PROPERTY IN INDIA) REGULATIONS, 2018 .......................................................................................13 DIRECT TAX......................................................................................................................................17 TCS....................................................................................................................................................17

AUDIT KEY DIFFERENCE_ DIVISION I AND DIVISION II-SCHEDULE III Contributed by Samatha G & Vetted by CA Bhyrav INTRODUCTION The Companies Act, 2013 has 470 sections and VII schedules. Section 129 of the Companies Act, 2013 states that the financial statements shall give a true and fair view of the state of affairs of the company or companies, if it is in compliance with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of Companies in Schedule III. In this article, we will discuss about the differences in disclosure requirements between Division I and Division II of schedule III to the Companies Act, 2013. Schedule III - General Instructions for the preparation of Balance sheet and Statement of Profit & Loss of a company. Schedule III of the Companies Act 2013 is divided into 3 divisions. ?Division I– Is applicable for the Companies who are required to prepare the Financial Statements according to Companies (Accounting Standards) Rules, 2006. vPart I – Balance Sheet • General Instructions for the preparation of Balance sheet vPart II – Statement of Profit and Loss • General Instructions for the preparation of Statement of Profit and Loss vGeneral Instructions for the preparation of Consolidated Financial Statements ?Division II – Is applicable for the Companies who are required to prepare the Financial Statements according to Companies (Indian Accounting Standards) Rules, 2015. vPart I – Balance Sheet and Statement of Changes in Equity • General Instructions for the preparation of Balance sheet vPart II – Statement of Profit and Loss • General Instructions for the preparation of Statement of Profit and Loss vGeneral Instructions for the preparation of Consolidated Financial Statements ?Division III – Is applicable for the Non-Banking Financial Companies (NBFC) who are required to prepare the Financial Statements according to Companies (Indian Accounting Standards) Rules, 2015. vPart I – Balance Sheet and Statement of Changes in Equity • General Instructions for the preparation of Balance sheet vPart II – Statement of Profit and Loss • General Instructions for the preparation of Statement of Profit and Loss vGeneral Instructions for the preparation of Consolidated Financial Statements 1 |Page

Disclosure requirements are updated as per the Notification dated 11th Oct 2018. Key Difference_ Division I and Division II-Schedule III Following are the differences in Disclosure Requirements between Division I and Division II of schedule III to the Companies Act, 2013: Division I Division II Applicability Companies required to comply AS Companies required to comply with IND AS Financial Statements comprise of 1. Balance Sheet 1. Balance Sheet 2. Statement of Profit and Loss 2. Statement of Changes in Equity 3. Statement of Cash Flow 3. Statement of Profit and Loss 4. Notes including 4. Statement of Cash Flow 5. Notes including a. Summary of Significant Accounting Policies and a. Summary of Significant Accounting Policies and b. Other Explanatory information b. Other Explanatory information 6. Balance Sheet – At the beginning of the earliest comparative period is required when: a. Accounting policy applied retrospectively b. Retrospective restatement of items in financial statements c. Reclassifies items in financial statements Materiality – Notes to Accounts is required, when any item of income or expenditure in the financial statements is 1. Exceeding 1% of Revenue from Operations 1. Exceeding 1% of Revenue from Operations Or Or 2. Rs. 1,00,000 2. Rs. 10,00,000 Whichever is higher Whichever is higher 1. Depends on Turnover Also, disclosure is required for all material items, 2. Disclosure may be given which will influence the decisions of the users of financial statements. Rounding off disclosures 1. Depends on Turnover 2. Disclosure shall be given 2 |Page

Face of the Balance Sheet Key Difference_ Division I and Division II-Schedule III 1. Equity and Liabilities 1. Assets 2. Assets 2. Equity and Liabilities Share Holder’s Funds 1. Share Capital No Share Holder’s funds description on the face 2. Surplus (“Reserve” word is omitted) of Balance sheet. Here it is Equity. 3. Money received against share warrants 1. Equity Share Capital 2. Other Equity Share Application money pending allotment Separate disclosure is required on the face of No Separate disclosure is required on the face of the Balance Sheet. the Balance Sheet. 1. Long Term Borrowings Non-Current Liabilities 2. Deferred Tax Liabilities (Net) 3. Other Long-Term Liabilities 1. Financial liabilities 4. Long Term Provisions a. Borrowings b. Trade Payables (Outstanding to MSME and others) c. Other Financial Liabilities 2. Provisions 3. Deferred Tax Liabilities 4. Other Non-Current Liabilities Current Liabilities 1. Short Term Borrowings 1. Financial liabilities 2. Trade Payables (Outstanding to MSME and a) Borrowings b) Trade Payables (Outstanding to MSME Others) and others) 3. Other Current liabilities c) Other Financial Liabilities 4. Short Term Provisions 2. Other Current Liabilities 3. Provisions 4. Current Tax Liabilities (Net) Non-Current Assets 1. Property, Plant and Equipment 1. Property, Plant and Equipment (i) Tangible assets 2. Capital work-in-progress (ii) Intangible assets 3. Investment Property (iii) Capital work-in-progress 4. Goodwill (iv) Intangible assets under development 5. Other Intangible assets 6. Intangible assets under development 2. Non-current investments 7. Biological Assets other than bearer plants 3. Deferred tax assets (net) 8. Financial Assets 4. Long-term loans and advances 5. Other non-current assets (i) Investments (ii) Trade receivables (iii) Loans (iv) Deferred tax assets (net) (v) Other non-current assets 3 |Page

Current Assets Key Difference_ Division I and Division II-Schedule III 1. Current investments 1. Inventories 2. Inventories 2. Financial Assets 3. Trade receivables 4. Cash and cash equivalents a) Investments 5. Short-term loans and advances b) Trade receivables 6. Other current assets c) Cash and cash equivalents d) Bank balances other than(iii) above e) Loans f) Others (to be specified) 3. Current Tax Assets (Net) 4. Other current assets Earnings Per Share No separate disclosure for continuing and Separate disclosure is required for continuing discontinuing operations. and discontinuing operations Extraordinary Items Separate disclosure is required Separate disclosure is not required Investments Separate Classification as mentioned below Separate Classification as mentioned below 1. Subsidiaries 1. Subsidiaries 2. Associates 2. Associates 3. Joint Ventures 3. Joint Ventures 4. Controlled Special purpose entities 4. Structured entities a. Basis of valuation of individual a. Amount of Quoted investments and investment Market values b. Amount of Quoted investments and b. Amount of Unquoted investments and Market values Market values c. Amount of Unquoted investments and c. Provision for Impairment in value of Market values investments d. Provision for diminution in value of investments 4 |Page

Trade Receivables Key Difference_ Division I and Division II-Schedule III (i) Aggregate amount of Trade Receivables Trade Receivables shall be sub-classified as: outstanding for a period exceeding six (a) Trade Receivables considered good - months from the date they are due for Secured; payment should be separately stated. (b) Trade Receivables considered good - Unsecured; (ii) Trade receivables shall be sub-classified as: (c) Trade Receivables which have significant (a) Secured, considered good; increase in Credit Risk; and (b) Unsecured, considered good; (d) Trade Receivables - credit impaired (c) Doubtful. (iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately. (iv) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. Contingent liabilities Includes Guarantees Excludes financial Guarantees Finance Cost Finance cost shall be classified as Finance cost shall be classified as 1. Interest Expense 1. Interest Expense 2. Other borrowing cost 2. Dividend on redeemable preference shares 3. Applicable net gain/loss on foreign currency 3. Exchange differences regarded as an transactions and translations adjustment to borrowing cost and 4. Other borrowing cost (specify nature) Revenue Sales net of Excise Duty Includes Excise Duty Bank Deposits More than 12 months maturity – Classify as More than 12 months maturity – Classify as Other Bank Balances Other Financial Asset Dividend on irredeemable Preference shares It is an Adjustment to Reserves It is disclosed as a part of finance cost Prior Period Items Separate disclosure is required No concept of prior period items 5 |Page

Investment Property Key Difference_ Division I and Division II-Schedule III It is part of Investments 1. Separate line item in Balance sheet 2. Reconciliation of the same need to be disclosed. a. Opening b. Additions c. Deletions d. Impairment losses e. Depreciation f. Reversals g. Other Adjustments Property, Plant and Equipment and Intangible Assets Tangible assets Property, Plant and Equipment Classification shall be given as: Classification shall be given as: 1. Land; 1. Land; 2. Buildings; 2. Buildings; 3. Plant and Equipment; 3. Plant and Equipment; 4. Furniture and Fixtures; 4. Furniture and Fixtures; 5. Vehicles; 5. Vehicles; 6. Office equipment; 6. Office equipment; 7. Others (specify nature) 7. Bearer Plants 8. Others (specify nature) Intangible Assets included Goodwill Goodwill – Shown on the face of the balance sheet Biological Assets other than Bearer Plants No such requirement Reconciliation for each class of assets need to be disclosed 1. Opening balance 2. Additions 3. Deletions 4. Acquisitions through business combinations 5. Other Adjustments 6 |Page

Loans – Non-Current Assets Key Difference_ Division I and Division II-Schedule III Long-term loans and advances shall be Loans shall be classified as classified as: 1. Security Deposits; 1. Capital Advances; 2. Loans to related parties 2. Security Deposits; 3. Other loans (specify nature). 3. Loans and advances to related parties 4. Loans Receivables shall be sub-classified as: (giving details thereof); a) Loans Receivables considered good - 4. Other loans and advances (specify nature). Secured; b) Loans Receivables considered good – Unsecured c) L o a n s Re ce i v a b l e s w h i c h h a v e significant increase in Credit Risk; and d) Loans Receivables - credit impaired. Other Non-Current Assets Other non-current assets shall be classified as: Other non-current assets shall be classified as: 1. Long-term Trade Receivables (including 1. Capital Advances; 2. Advances other than capital advances; trade receivables on deferred credit terms); 2. Others (specify nature); Advances other than capital advances shall be 3. Long-term Trade Receivables, shall be sub- classified as: 1. Security Deposits; classified as: 2. Advances to related parties (giving details a. Secured, considered good; b. Unsecured, considered good; thereof); and c. Doubtful. 3. Other advances (specify nature) Allowance for bad and doubtful debts shall be Advances to directors or other officers of the disclosed under the relevant heads - separately company or any of them either severally or jointly with any other persons or advances to Debts due by directors or other officers of the firms or private companies respectively in company or any of them either severally or which any director is a partner or a director or a jointly with any other persons or advances to member should be - separately stated. firms or private companies respectively in which any director is a partner or a director or a In case advances are of the nature of a financial member should be - separately stated asset as per relevant Ind AS, these are to be disclosed under ‘other financial assets’ separately. (iii) Others (specify nature) 7 |Page

Loans: Current Assets Key Difference_ Division I and Division II-Schedule III Short-term loans and advances shall be Loans shall be classified as: classified as: (a) Security deposits (a) Loans and advances to related parties (giving (b) Loans to related parties (giving details details thereof); thereof); and (b) Others (specify nature). (c) Others (specify nature) (d) Loans Receivables shall be sub-classified as: 1. Loans Receivables considered good - Secured; 2. Loans Receivables considered good – Unsecured 3. Loans Receivables which have significant increase in Credit Risk; and 4. Loans Receivables - credit impaired. Other Current Assets All-inclusive heading - current assets that do not Other current assets shall be classified as: fit into any other asset categories (i) Advances other than capital advances Advances other than capital advances shall be classified as: a) Security Deposits; b) Advances to related parties (giving details thereof); c) Other advances (specify nature). Advances to directors or other officers of the company or any of them either severally or jointly with any other persons or advances to firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. (ii) Others (specify nature) 8 |Page

Reserves and Surplus/ Other Equity Key Difference_ Division I and Division II-Schedule III Surplus (“Reserves” word is omitted) Other Equity 1. Capital Reserves 1. Capital Redemption Reserve 2. Capital Redemption Reserve 2. Debenture Redemption Reserve 3. Security Premium Reserve 3. Share Options Outstanding account 4. Debenture Redemption Reserve; 4. Retained Earnings represents surplus i.e. 5. Revaluation Reserve; 6. Share Options Outstanding Account; balance of the relevant column in the 7. Other Reserves- (specify the nature and Statement of Changes in Equity; 5. Reserve specifically earmarked for purpose of each reserve and the amount in investments respect thereof); 6. Others-(specify the nature and purpose of 8. Surplus i.e., balance in Statement of Profit each reserve and the amount in respect and Loss disclosing allocations and thereof); appropriations such as dividend, bonus shares and transfer to/ from reserves, etc Borrowings – Non-Current Liability 1. Long term Borrowings 1. Long term Borrowings 2. Loans and advances from related parties 2. Loans from related parties 3. Other loans and advances (specify nature) 3. Liability component of compound financial Period and amount of continuing default as on statements the balance sheet date in repayment of loans 4. Other loans (specify nature) and interest, shall be specified separately in each case Period and amount of default as on the balance sheet date in repayment of borrowings and interest, shall be specified separately in each case. Other Non-Current Liabilities Other Long-term Liabilities shall be classified as: Other non-current liabilities; 1. Trade payables 1. Advances 2. Others 2. Others (specify nature) Borrowings – Current liability 1. Short term Borrowings 1. Short term Borrowings 2. Loans and advances from related parties 2. Loans from related parties 3. Other loans and advances (specify nature) 3. Other loans (specify nature) Period and amount of continuing default as on Period and amount of default as on the balance the balance sheet date in repayment of loans sheet date in repayment of borrowings and and interest, shall be specified separately in interest, shall be specified separately in each each case. case. 9 |Page

Other Current Liabilities Key Difference_ Division I and Division II-Schedule III The amounts shall be classified as: Other Financial liabilities shall be classified as- 1. Current maturities of long-term debt; 1. Current maturities of long-term debt; 2. Current maturities of finance lease 2. Current maturities of finance lease obligations; obligations; 3. Interest accrued but not due on borrowings; 3. Interest accrued; 4. Interest accrued and due on borrowings; 4. Unpaid dividends; 5. Income received in advance; 5. Application money received for allotment of 6. Unpaid dividends; 7. Application money received for allotment of securities to the extent refundable and interest accrued thereon; securities and due for refund and interest 6. Unpaid matured deposits and interest accrued thereon; accrued thereon; 8. Unpaid matured deposits and interest 7. Unpaid matured debentures and interest accrued thereon; accrued thereon; and 9. Unpaid matured debentures and interest 8. Others (specify nature). accrued thereon 10. Other payables (specify nature). Other current liabilities shall be classified as- (a) revenue received in advance; (b) other advances (specify nature); and (c) others (specify nature); Non-Current Assets held for sale No such requirement Is to be disclosed as a separate line item on the face of the balance sheet Other Income Other income shall be classified as: Other income shall be classified as- 1. Interest income (in case of a company other 1. Interest income 2. Dividend income than a finance company) 3. other non-operating income 2. Dividend income 3. Net gain/loss on sale of investments 4. other non-operating income (net of expenses directly attributable to such income) Employee Benefit Expense Employee benefits expense shall classify as: Employee benefits expense shall classify as: 1. salaries and wages, 1. salaries and wages 2. contribution to provident and other funds 2. contribution to provident and other funds 3. expense on Employee Stock Option Scheme 3. share based payments to employees 4. staff welfare expenses (ESOP) and Employee Stock Purchase Plan (ESPP) 4. staff welfare expenses 10 | P a g e

Payment to Auditors Key Difference_ Division I and Division II-Schedule III Payments to auditor shall be classified as: Payments to auditor shall be classified as: (a) auditor (a) auditor (b) for taxation matters (b) for taxation matters (c) for company law matters (c) for company law matters (d) for management services (d) for other services (e) for other services (e) for reimbursement of expenses (f) for reimbursement of expenses Disclosure when required by other regulatory authorities No such statement mentioned. Where any Act or Regulation requires specific disclosure to be made in the standalone financial statement of a company, the said disclosure shall be made in addition to those required under this Schedule. 11 | P a g e

No such requirement Other Comprehensive Income Key Difference_ Division I and Division II-Schedule III Other Comprehensive Income shall be classified into: (A) Items that will not be reclassified to profit or loss: 1. Changes in revaluation surplus; 2. Remeasurements of the defined benefit plans; 3. Equity Instruments through Other Comprehensive Income; 4. Fair value changes relating to own credit risk of financial liabilities designated at FVTPL; or 5. Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent not to be classified into profit or loss; and 6. Others (specify nature). Income tax relating to items that will not be reclassified to profit or loss (B) Items that will be reclassified to profit or loss: 1. Exchange differences in translating the financial statements of a foreign operation; 2. Debt Instruments through Other Comprehensive Income; 3. The effective portion of gains and loss on hedging instruments in a cash flow hedge; 4. Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent to be classified into profit or loss; and 5. Others (specify nature). Income tax relating to items that will be reclassified to profit or loss. Bibliography:http://ebook.mca.gov.in/default.aspx This article is contributed by Samatha G, Intern of SBS and Company LLP. The author can be reached at [email protected] 12 | P a g e

FEMA FEM(IMMOVABLE PROPERTY IN INDIA) REGULATIONS, 2018 Contributed by Laasya N & Vetted by CA Bharani & CA Murali Krishna Introduction Capital account transaction, under FEMA, is a transaction which alters • the assets or liabilities, including contingent liabilities, outside India of persons resident in India or • assets or liabilities in India of persons resident outside India, and • includes transactions specified in sub-section (3) of section-6 such as - Foreign security by resident (ODI) - Any Security by non-resident (FDI) - Borrowing / Lending in Foreign Exchange (ECB) etc., Capital account transactions are strictly prohibited, until and unless they are expressly permitted by the act/ regulations/ rules. Therefore, to know/ identify whether a capital account transaction is permissible under FEMA, we should check whether the transaction is specified under either of the schedules in the “permissible capital account regulations” (Notification No. FEMA 1/2000-RB dated 03-05-2000). Schedule I and Schedule II of said notification provide the list of permissible capital account transactions of person resident in India and of person resident outside India respectively. In this article, let us restrict our discussion to ‘Dealing with immovable property in India by PROI’ and understand the provisions relating to it, which is permissible as mentioned in clause b of schedule II subject to the conditions specified in the relevant regulations i.e. FEM (Acquisition or Transfer of Immovable Property in India) Regulations, 2018[Notification No. 21(R)-RB, dated 26-03-2018], hereafter referred as “21( R)-RB” for brevity, as amended from time to time. For a better understanding of the regulations under 21(R)-RB and their applicability, the person dealing with the immovable property shall be categorised under either of the below mentioned three: • A person resident in India • PROI who is other than an NRI/ OCI • PROI who is an NRI/ OCI Definitions Non-Resident Indian (NRI)’ means a person resident outside India who is a citizen of India. Overseas Citizen of India (OCI)’ means a person resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955; 13 | P a g e

Analysis FEM(Immovable property in India) regulations, 2018 Let’s discuss the applicability of the provisions, validity of the transaction entered, prohibitions and exceptions, and procedures to be followed for each of the category mentioned above. • A person resident in India: At the very outset, the acquisition / transfer of immovable property by a resident is not a capital account transaction under FEMA, hence no provisions will be applicable. However, it may be noted that, if at all a resident transfer such property to a person resident outside India, the transaction will be a capital account transaction for PROI, since it alters the assets in India. However, there are two prohibitions expressly provided in 21(R)-RB. They are: o Prohibition for citizens of certain countries: For citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hongkong, Macau, Korea, Prior permission from RBI is required, even if they are residents in India under FEMA for §Acquiring or transfer of any immovable property §For lease exceeding 5 years. Here, it is interesting to note that this prohibition is not applicable to an OCI, even if he/ she is a citizen of one of the above-mentioned countries. o Long Term Visa Holder: Citizen of Afghanistan, Bangladesh or Pakistan belonging to minority communities can only acquire one residential property for self-occupation / dwelling and one immovable property for self-employment. The property so acquired can be sold only after acquiring Indian citizenship. For selling the property before acquiring citizenship, prior approval of DCP/ FRO/ FRRO is required. Other conditions to be satisfied are §Non location of property in protected areas as notified by CG §Declaration of the property location and source of funds to revenue authority §Submission of property documents to the concerned. Here a point can be re-iterated that a person resident in India, need not be a Citizen of India and an Indian citizen is not always a resident under FEMA. • PROI who is other than an NRI/ OCI (Foreign Citizen with non-residential status):Persons falling under this category, usually cannot acquire/ transfer the immovable property. But few exceptions with conditions, enumerated below, are provided for acquiring the property. o By a Project Office / Branch Office in India: for carrying the activities that are permitted and the activities that are incidental to the main activities. For this, a declaration has to be submitted not later than 90 days from the date of acquisition. 14 | P a g e

o By a spouse of an NRI/ OCI: can acquire one immovable property which is not an FEM(Immovable property in India) regulations, 2018 agricultural land/ farmhouse/ plantation property jointly with his/ her spouse who is a resident in India. However, to be eligible, such marriage should be a registered one and subsist for at least 2 years immediately before such acquisition. However, such non- resident spouse who is willing to acquire the property should not be otherwise prohibited. For transferring the said property, which is acquired in compliance with regulations, it shall be made only to a resident who is not otherwise prohibited from acquisition and such remittances towards transfer shall take place only through the proper banking channels. And when it comes to repatriation of sale proceeds to outside India, it is not allowed without the permission of RBI. In a case where a resident failed to repay ECB (availed against security of an immovable property) from overseas lender, the lender can realise and repatriate the proceeds from the sale of such property subject to the condition that the sale is made to a resident. • PROI who is an NRI/ OCI: In these cases, the differentiation is made between Agricultural land/ Farmhouse/ Plantation property and other immovable property. Differentiation and more restrictions on agricultural land/ plantation property/ farmhouse is because of belief that the buyers usually have little intention to farm. And farmers would be tricked for selling their land at throw-away prices which adversely affects the prices of agricultural produce due to demand-supply mismatch. If immovable property acquired by NRI / OCI is an agri-land/ farmhouse/ plantation property, o Then, only source is either the property is inherited1 , or it is acquired when he/she is a resident in India. o The property in his/ her possession which is acquired/ inherited in compliance with this act shall be transferred only to a person resident in India o And repatriation of sale proceeds cannot be made without obtaining the permission from RBI. If immovable property acquired by NRI / OCI is property other than agri-land/ farmhouse/ plantation property o Such property can be acquired/ received by §purchase from either a resident or an NRI/ OCI. §by way of inheritance §in form of gift from the relatives2 o can be transferred either to a resident or to an NRI/ OCI. 1Inheritance can be from a person who is a resident in India or from a PROI, who has acquired such property in accordance with FEMA rules and regulations in force at the time of acquisition. 2As defined under section 2(77) of the companies Act, 2013. 15 | P a g e

o The sale proceeds can be repatriated outside India, if the amount paid at the time of FEM(Immovable property in India) regulations, 2018 acquisition of the property is out of the funds from FCNR/ NRE account or forex received through normal banking channels. Amount cannot be repatriated if purchased out of the funds from NRO account, usually in which the income earned in India is parked. But repatriation is restricted to two properties in case if sale proceeds are from the residential properties even if the above condition is satisfied. This article is contributed by Laasya N, Intern of SBS and Company LLP. The author can be reached at [email protected] 16 | P a g e

DIRECT TAX Contributed by Varshitha N & Vetted by CA Madhusudan & CA Ramprasad TCS What is TCS? • TCS is an acronym for Tax collected at Source as per the provisions of Section 206 of Income Tax Act, 1961. • It follows the principle of “Collect as it is being earned” • It is a tax collected on specified goods or services at the time of debiting to the account of buyer or at the time of receipt whichever is earlier. Objective of introducing TCS provisions under Income Tax Act, 1961: • The provisions relating to TCS were introduced in respect of comparatively unorganised sectors involving dealings in cash and to curb the unaccounted transaction • In general terms “direct tax is a tax which is levied on the income or profits of the person, but not on goods and services.” • TCS on the other hand is contradictory to the above terms as it is a tax collected on purchase of specified goods or services. • This constitutional invalidity has been questioned in the case of “[UOI v. A. Sanyasi Rao] [1996] 85 Taxman 321/219 ITR 330” • The Court held that income (profit on sale) is embedded even at the time of purchase. Therefore, according to the Court, what was brought to tax, though levied with reference to the purchase price and at an earlier point was nonetheless income liable to be taxed under the Act. Definitions under section 206 of Income Tax Act, 1961: Seller: 1. Central Government 2. State Government 3. Local Authority 4. Statutory Corporation or authority 5. Company registered under Companies Act 6. Partnership Firms 7. Co- operative Societies 8. Any person or HUF who is subjected to an audit of accounts under Income tax act for a particular financial year 17 | P a g e

TCS Buyer: Buyer means any person who obtains in any sale, by way of any tender or any other mode or the right to receive any goods but does not include the following: 1. Public sector companies 2. Central Government 3. State Government 4. Embassy of High commision 5. Consulate and other Trade Representation of a Foreign Nation 6. Clubs such as sports clubs and social clubs 7. A buyer in the retail sale of such goods purchased by him for personal consumption Categories of Goods/ Services for which TCS is to be collected: Goods and services on which TCS has to are divided in to three categories as follows: Sale of Goods License/ Lease Sale of Motor Vehicles Agreements Sale of Goods: Nature of Goods Percentage S.No 1 Alcoholic Liquor for Human Consumption 1% 2 Tendu Leaves 5% 3 Timber Obtained under a forest lease 2.5% 4 Timber obtained by any mode other than under a forest lease 2.5% 5 Any other Forest produce not being timber or tendu leaves 2.5% 6 Scrap 1% 7 Minerals, being coal or lignite or iron ore 1% 18 | P a g e

TCS Sale of Scrap: • “Scrap\" means waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons • For understanding the above term, we need to understand the following definitions: 1. Manufacture: • According to Section 2(29BA) Manufacture, with its grammatical variations, means a change in a non-living physical object or article or thing - Øresulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or Øbringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; 2. Mechanical Working of Materials: §Mechanical Working of materials means physical operations on a material that deform it into a desired shape, such as bending, cutting, drawing, grinding, hammering, rolling, shaving, and twisting Example: A company named Navine Fluorine International Ltd is in the business of manufacturing Fluorine and other refrigerant gases. In the Financial Year it has sold a scrap of plastic, wooden scrap and electrical cables. Should the company collect TCS on such sale u/s 206C? • The answer would be no because, the scrap sold during the FY cannot be used for manufacturing gases or doing any mechanical working of material for gases and there is no need to deduct TCS on such sale • From the above example it is clearly understood that TCS is to be collected only on such sale of scrap which is a result manufacture or mechanical working of materials. License or Lease Agreements • Every person who grants a lease or license or enters into a contract or transfers any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry, to another person, other than a public sector company for the purpose of business shall collect TCS. S.No Nature of Contract or License or Lease Percentage 1 Parking Lot 2% 2 Toll Plaza 2% 3 Mining and Quarrying 2% 19 | P a g e

TCS • Mining and Quarrying shall not include mining and quarrying mineral oil (Mineral oil includes petroleum and natural gas) Sale of Motor Vehicles • Every person, being a seller, who receives any amount as consideration for sale of a motor vehicle of the value exceeding ten lakh rupees, shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 1% of the sale consideration as income-tax. • TCS on sale of motor vehicle is applicable only for retail transactions and it will not apply on sale of motor vehicles by manufacturers to dealers/ distributors. • Government, institutions notified under United Nations ( Privileges and Immunities) Act 1947, and Embassies, Consulates, High Commission, Legation, Commission and trade representation of a foreign State and shall not be liable to levy of TCS at the rate of 1 % under sub-section (1D) and (IF) of section 206 C of the Act. • Section 206C(9) i.e. declaration of lower deduction cannot be given in the case of Sale of Motor Vehicle. Example: Motor vehicle worth 20 lakh is sold and for which payments are made in instalments as follows Date Amount Paid 01/05/2019 5,00,000 31/05/2019 15,00,000 Is TCS applicable to this transaction and if applicable when should it be collected? Ans Yes, TCS is applicable as consideration is more than Rs 10,00,000.It would be collected as follows: Date Amount Paid TCS 01/05/2019 5,00,000 5,000 31/05/2019 15,00,000 15,000 20 | P a g e

TCS Forms to be filed under Section 206C of Income Tax Act, 1961: S.No Form to be filed Purpose of filing the form 1 27EQ Quarterly statement to be filed by the collector 2 27C Declaration given by buyer that goods are to be used for the purposes of 3 24G Manufacturing, processing or producing articles or things and not for trading purposes. 4 27D 5 Form 13 In case of Government office – details of amount paid as TCS by a Pay 6 Form 27BA accounts officer or Treasury Officer to agency authorized by principle director of Income Tax where there is no production of challan Certificate of Collection of Tax furnished to collectee within 15 days from due date for furnishing the statement of Form 27EQ To be given by buyer for collecting TCS at a lower rate A certificate given by A CA that buyer has shown the amount on which the seller is liable to collect TCS in the ITR filed by him u/s 139 Due Date of payment to Central Government: • Every person liable to collect TCS shall pay the amount so collected within 7 days from last day of month in which the tax was collected in Challan 281. Interest on Late payment: • If the tax collector responsible for collecting the tax and depositing the same to the government does not collect the tax or after collecting doesn’t pay it to the government as per above due dates, then he will be liable to pay interest of 1% per month or a part of the month Providing PAN by buyer or licensee or lessee: • As per section 139A(5C) of Income Tax Act, 1961 every buyer or licensee or lessee referred to in section 206C shall intimate his Permanent Account Number to the person responsible for collecting tax referred to in section 206C.2 Consequences of not providing PAN by buyer or licensee or lessee: • According to section 272B, Assessing Officer may direct a penalty of Rs 10,000 if the person as referred above ØDonot quote or intimate the PAN as per section 139A or, ØQuotes or intimates a number which is false and which he either knows or believes to be false or does not believe to be true. This article is contributed by Varshitha N, Intern of SBS and Company LLP. The author can be reached at [email protected] 21 | P a g e

SBS Interns' Digest www.sbsandco.com/digest SSAATTUURRDDAAYY SSEESSSSIIOONNSS S.No. Event Date Speaker Venue 07/09/2019 Baradwaja SBS - Hyd 1 Practical issues on GSTR 9 and GSTR 9C 14/09/2019 SBS - Hyd 21/09/2019 Sauchit SBS - Hyd 2 FEM (Deposit) Regulations 2016 28/09/2019 Ram Babu SBS - Hyd SBS - Hyd 3 TDS on Professional or consultancy services u/s Monika SBS - Hyd 194J Supriya SBS - Hyd Arun. T 4 An Overview on PF Raju 5 Brief view on new returns 6 Annual Filings under Companies Act,2013 7 Standard On Internal Audit (Sia) 330 Internal Audit Documentation SESSION TIMINGS: 2:30 to 4:30 PM An insight into IL&FS case - Suma B Basics on Tally - Ravi Raju D Foreign Contribution Regulation (Amendment) Rules, 2019 - Laasya 22 | P a g e

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