March-2017-e-Journal-Digest

VVoolulummee-1-103 DeceMmabrecrh-2-2001167 PPaaggeess11-1-342SBS Interns’ For Private circulation only Digest An attempt to share knowledge By Interns of SBS and Company LLP

SBS Interns' Digest www.sbsandco.com/digestCONTENTSAUDIT................................................................................................................................................1AUDIT OF SCRAP SALE.................................................................................................................................1INTERNAL FINANCIAL CONTROLS .....................................................................................................................5INDIRECT TAXES...............................................................................................................................11LEVY OF PENALTY OR INTEREST FOR NON-SUBMISSION OF FORM 'C' AND FORM 'F' UNDER CST ACT ...........................................11AUDIT..............................................................................................................................................15AUDIT OF PROVIDENT FUND ........................................................................................................................15INSOLVENCY AND BANKRUPTCY CODE, 2016...................................................................................20INSIGHTS INTO INSOLVENCY AND BANKRUPTCY CODE, 2016......................................................................................20UPDATESCOMPANIES ACT, 2013.....................................................................................................................15RULES,CIRCULARS AND NOTIFICATIONS ISSUED DURING THE MONTH OF FEBRUARY, 2017......................................................15FEMA..............................................................................................................................................16FEMA UPDATES.......................................................................................................................................16

SBS Interns' Digest www.sbsandco.com/digestAUDIT Contributed by P. Ashok Reddy & Vetted by CA Sandeep DasAUDIT OF SCRAP SALEWhat is Scrap Sales??During any manufacturing process, different types of scrap are generated due to damage or expiry ofproducts and scrap generation is also depending on the type of industry and the type of the product also.But depending on the type of the scrap, it may be recycled back into the production process or sold asrevenue.Reasons for generation of scrap:üFaulty planning and forecastingüChanges in product designüCannibalizationüFaulty purchase practices Wastage from Production RM wastagesAudit procedure:This procedures will help to organisation to prevent the irregularities (Misstatements, Errors & Frauds)inthe scrap sales from generation point to sales and also the company will get the true financial profitarising from the scrap sales.Documents required for verification,1. Obtain written Policies and Procedures for Scrap sales2. Scrap sales register3. Production details(Normal wastage Vs Actual Wastage)4. Obtain documented list of Authorised Personnel who sanction the Scrap Invoices.5. All contract copies along with copies of contract extension documents for scrap sales, if any6. Hard copies of documents(sample selected)1 |Page

SBS Interns' Digest www.sbsandco.com/digest Audit oCofmSpcanraieps ASctaleAudit Procedure to be followed for verification of Scrap Sales:vUnderstanding of Process: First we should understand the process to be followed for scrap sale (or scrap disposal) by way of discussing with client or read the written policies of the company if any. At the time of capturing the process we should able to answer the below six questions for better understanding the process flow are as follows,nWhatnWhonWhynWherenWhennHowWe should understand and document the process by considering the above procedure. Finalprocess notes should be send to the process owner for review and confirmation. Understandingthe process will help to identify and assessing the risk of material misstatement (Fraud, errorsetc.)vPrepare the audit programme: After developing the process notes we should prepare the Audit Programme, also called audit plan. The prepared audit programme should contain the following elements, üAudit programme should be aligned with the process note üInitial documents (as requested above) required for verification üSteps to be followed for verification. Ex. Control checks, Regulatory Compliances, analytical procedures and other related issues relating to that area. üWorking paper reference for each stage of verification üRemarks or comments if any both from audit and client perspectiveSample format given in Annexure-IvTest check of Internal controls relating to Scrap sales: Steps should involve in the verification of Internal ControlSystem,ØReview the Segregation of Duties as regards to generation, storage and disposal of scrap items.ØExamine the financial power vested in the different persons and conditions under which they exercise them.vAnalytical Procedures: Analytical procedures are an important part of the audit procedures. The analytical procedures include, üReview the production data and cost records for the determination of the extent of scrap materials that may arise in a given period and compare the same with the normal loss and last year figures. üCompare the income from the sale of scraps with the corresponding figures of the preceding year for any abnormal changes. In case of any abnormal changes in the scrap generation same should be taken to notice of the management.2 |Page

SBS Interns' Digest www.sbsandco.com/digest Audit oCofmSpcanraieps ASctale vVerification of the Scrap Records:üEnsure that a separate space / scrap yard is earmarked for keeping the scrap material. The scrap yard should have an enclosure and a gate with a lock and key.üEnsure that scrap records i.e. inward register and outward register at the scrap yard should be updated daily with proper cross verification by the authorized personnel.üEnsure that all scrap sold have been billed and same been accounted in the books of accounts.üVerify the all supporting documents relating to scrap sale sample selected as follows,lInvoice: In invoice we should concentrate on the date of transaction, Vendor name, Amount as per contract if any, Taxes as applicablelWaybills: Ascertain whether the way bill is properly prepared (Description of goods, quantity etc.)lWeighment slips: Ensure proper counting / weighment / measurement of scrap at the scrap yard should be under proper authoritylInternal documents if anyüSample should be selected based invoice value or based on the any abnormal sales in a day or monthvVendor Contract verification:üThe process of entering into contracts have to be documented and the approving authorities for the entering of contracts have to be notedüEnsure that vendor selected for scrap sales should be based on proper evaluation and should verify the supporting of the same i.e. comparative statements.üCheck the rates at which different types of scraps have been sold and compare the same with the rates that prevailed in the preceding year. In case any expiry of the contract, copy of extension taken have to be examined.üEnsure that vendor should follow the terms and conditions specified in the contact i.e. payment terms, security deposits, advances if any, clauses for termination etc.üVerify the vendor ledger account for cross checking of payment of advances as per contact and record of all sales during the period against respective vendor.vOther points:üScrap Generation points should be identified and a booklet of generation slips with a serial control given at each generation point.üEnsure proper counting / weighment / measurement of scrap at the scrap yard should be under proper authority3 |Page

SBS Interns' Digest www.sbsandco.com/digest Audit oCofmSpcanraieps ASctaleAnnexure-1: Audit Program for Scrap SalesClientXXXXXXXXXX WP Remarks ReferenceFY 16-17ProcessScrap SalesS No Particulars Documents to be obtained from the client 1 2 Procedure to be followed for verification123This article is contributed by P. Ashok Reddy, Intern of SBS and Company LLP. The author can be reachedat [email protected] 4 |Page

SBS Interns' Digest www.sbsandco.com/digestAUDIT Contributed by Vaishnavi A & Vetted by CA Murali Krishna GINTERNAL FINANCIAL CONTROLSBackground:Section 217(2AA) of the Companies Act, 1956 requires the directors of a company to specifically state inthe Directors’ Responsibility statement that they have taken proper and sufficient care for themaintenance of adequate accounting records in accordance with the provisions of the (1956) Act, forsafeguarding the assets of the company and for preventing and detecting fraud and other irregularities.In India, for Listed companies the concept of Internal Financial Controls is already existing as per theclause 49 of the Equity Listing Agreement which requires certification by the CEO / CFO stating that theyaccept responsibility for establishing and maintaining internal controls for financial reporting and thatthey have evaluated the effectiveness of internal control systems of the company pertaining to financialreporting.Introduction:The Companies Act, 2013 has brought in provisions related to Internal Finance Controls (IFC) & InternalControl over Financial Reporting (ICFR) which is applicable from the financial year 2015-16.Earlier the requirement was only adequacy of internal controls, now also includes operationaleffectiveness as well.Objective:The changes in the Companies Act, 2013 has been done with an objective to improve the integrity andreliability of financial information of corporates, which is shared with the stakeholders.Meaning of Internal Financial Control:As per the Companies Act, 2013:Section 134(5)(e) explains “Internal Financial Controls (IFC)” as the policies and procedures adopted bythe Company for ensuring:• Orderly and efficient conduct of its business, including adherence to Company’s policies,• Safeguarding of its assets,• Prevention and detection of frauds and errors,• Accuracy and completeness of the accounting records and the timely preparation of reliable financial information.5 |Page

SBS Interns' Digest www.sbsandco.com/digest InternaCloFminpaanniescAiactl ControlsAs per CARO, 2015:According to CARO, 2015reporting on adequacy of internal controls is limited to purchase of inventoryand fixed assets and sale of goods and services. The auditor is not required to comment on adequacy of allcontrols relating to financial reporting system of a company.As per the Standards on Auditing:Auditing Standards not fully address the audit requirements for reporting on IFC but while performingprocedures relating to IFC the auditor need to comply with the following standards:• SA-315 – While understating internal controls• SA-200- Auditor need to comply to the applicable laws, regulations and any other specific matters specified by such authority. For ex: forming opinion on IFC• SA-320-While planning and performing an audit of IFC• SA-230-While documenting the work performed on IFCComponents of Internal Controls as per COSO (Committee of Sponsoring Organisation of TreadwayCommission), 2013:1. Control environment2. Risk Assessment3. Control Activities4. Monitoring the activities5. Information & communication.As per the COSO framework, the above five components can be done inThree phases which are done in different levels of the company Entity level Operations Division Reporting operational UnitCompliance6 |Page Function

SBS Interns' Digest www.sbsandco.com/digest ISnetce4rn0aACl(oF3mi)npaoanfnietschAiaectl ICnocnotmroelsTax - Act, 1961Need for the IFC to a company: Financial statements based on the *assertions may result to risk of misstatements which leads to the material misstatement of the financial statements. In order to mitigate this risk, the company need to maintain IFC.*Assertions such ad Completeness, Existence & Occurrence, Rights & Obligations, Valuation,Presentation & disclosure.Roadmap for implementation of IFC by Company:5 Steps that the company need to follow for proper implementation of IFC they are as follows:Step-1: Assess and evaluate Entity Level controlsStep-2: Develop a framework or guidelinesStep-3: Implement the framework or the guidelines that have been developedStep-4: Develop a plan for continuous monitoringStep-5: Test the operating effectiveness through the conduct of IFC auditConduct of the IFC Audit and its reporting:Conduct of Audit:The Audit of IFC is a part of the Statutory Audit and the statutory auditor need to report on the adequacyand operating effectiveness of IFC-FR. The auditor need to test the internal controls throughout the yearbut reporting on IFC is on Balance Sheet date. Methodology for the conduct of audit can be done in 4steps:1. Planning2. Design & Implementation3. Operating Effectiveness4. Reporting7 |Page

SBS Interns' Digest www.sbsandco.com/digest ISnetce4rn0aACl(oF3mi)npaoanfnietschAiaectl ICnocnotmroelsTax - Act, 1961Reporting requirement on IFC from F.Y 15-16:Section/Rule/Schedule Related to Applicable Description in relation to concerned Companies Section/Rule/ScheduleSec 143(3)(i) of the Act Auditor’s All Adequacy and operating report effectiveness of IFCSec134(5)(e) of the Act Directors’ Listed In case of Listed companies’ adequacy and operating Report companies only effectiveness of IFCRule 8(5)(viii) of Companies Directors’ All Adequacy Accounts Rules, 2014 ReportSec 177(4)(vii) of the Act Audit All companies Evaluation of IFC and risk committee having Audit management systems; committee All companies Integrity of ?nancial information andSchedule IV of the Act Independent having that ?nancial controls and the Directors independent systems of risk management are directors robust and defensible*Act refers to Companies Act, 2013.Challenges of Internal Control System:Internal control, no matter how effective, can provide an entity with only reasonable assurance and notabsolute assurance about achieving the entity’s operational, financial reporting and complianceobjectives. Internal control systems are subject to certain inherent limitations, such as:Challenges to the Auditor:• As per the Management's consideration the auditor should consider whether the cost of an internal control does not exceed the expected benefits to be derived.• The fact that most internal controls do not tend to be directed at transactions of unusual nature. The auditor need to focus on the potential for human error, such as, due to carelessness, distraction, mistakes and the other transactions of unusual nature of judgement and misunderstanding of instructions.• The possibility of circumvention of internal controls through collusion with employees or with parties outside the entity.8 |Page

SBS Interns' Digest www.sbsandco.com/digest ISnetce4rn0aACl(oF3mi)npaoanfnietschAiaectl ICnocnotmroelsTax - Act, 1961• The possibility that a person responsible for exercising an internal control could abuse that responsibility, for example, a member of management overriding an internal control.• Manipulations by management with respect to transactions or estimates and judgements required in the preparation of financial statements.Challenges to the Company (In general):• If there is no comprehensive system of internal control, it is vulnerable for the management to assess the extent to which requirements and guidelines are to be adhered in different processes.• Even though Internal Controls have been in place, there may be uncertainty around whether procedures and controls are focused on the most critical risks• As the company may not be aware of all the objectives of Internal Control system, the compliance activities may not be clear.• There is uncertainty about whether established internal controls have appropriate scope and maturity in relation to the company's activities• The company may have the control activities but they lack formalization and documentation, and it is therefore difficult to monitor and report compliance• The company may not focus on every level and there can be struggle to get an overview of appropriate level of internal control for the company• As IT is the important area in the present scenario, the company may lack an understanding of appropriate internal control related to the IT-area.• The biggest challenge the company may face is, even though enough controls have been framed by the company the organisations ability to carry out control activities becomes a struggle. They experience that the system fades over time• The company wants to develop further to the existing controls, with respect to cost and resource efficiency• The company lacks adequate processes to monitor and assess whether procedures and internal controls are actually performed.• The Budget which the company need to afford in order to have the Internal Financial Control audit based on the existing controls also becomes the challenge. As it becomes the biggest challenge in case of small companies as they may not afford the cost either the documentation work or the conduct of audit.Challenge to the small companies:1. Separation of Duties2. Policies and procedures3. Documentation4. Oversight and review5. User access rights for information systems.9 |Page

SBS Interns' Digest www.sbsandco.com/digest ISnetce4rn0aACl(oF3mi)npaoanfnietschAiaectl ICnocnotmroelsTax - Act, 1961Consequences of Non-Compliance:As per the section 134(8), If a company contravenes the provisions of this section: ØThe company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and ØEvery officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.Conclusion:In the long term scenario, benefits of implementing robust internal financial controls are far greater thanthe costs of implementation as failure to do so can severely impact the reputation and image of thecompany. A new beginning has been made and there is a strong case to adopt global practices that haveresulted in better Corporate Governance regimes and efficient Capital Markets that can attract higherlevels of investmentThis article is contributed by Vaishnavi A, Intern of SBS and Company LLP. The author can be reachedat [email protected] | P a g e

SBS Interns' Digest www.sbsandco.com/digestINDIRECT TAXESLEVY OF PENALTY OR INTEREST FOR NON-SUBMISSION OF FORM 'C' AND FORM 'F' UNDER CST ACT Contributed by Chandra Shekar G & Vetted by CA Sandeep DasForm ‘C’:1. Definition and governing section under CST Act, 1956:Form ‘C’ is a form issued by the sales tax department to the registered sales tax payer, if he buys any goodfrom another registered sales tax payer of another state.As per Section 8(4), it is mandatory for the selling dealer to furnish to the prescribed authority adeclaration in Form ‘C’ for CST charged @2% on the interstate sale.Example: Interstate sale transaction between a purchaser from Delhi and seller from Kerala Purchase Purchasing Selling Dealer Selling DealerDealer of Delhi Dealer of Delhi of Kerala submit C form > > > collected toobtain C Form Issue C Form Collect C Form > from from VAT to Seller VATDepartment of purchasing department of dealer Delhi Kerala2. Implications in case of default: Case-1: Where purchasing dealer could not issue Form ‘C’ to the selling dealer for various reasons at his end. The seller shall be liable to pay the differential tax with interest. Differential Tax: The differential tax would be the difference between (i) The rate of VAT applicable on the materials sold in the State of selling dealer and (ii)The Concessional rate of tax charged in the invoices Interest @12% p.a: Interest shall be calculated on differential tax from the due date of payment of tax at concessional rate till the date of payment of differential tax. Example: Say 'Mr. Ashok' a registered dealer who is in Delhi buys goods from another registered dealer 'Mr. Chandu' who is in Hyderabad then it is called an interstate purchase. In this process 'Mr. Ashok' is considered as CST customer to 'Mr. Chandu'. During which 'Mr. Ashok' has to issue the 'C' Form to 'Mr. Chandu' from the commercial tax department in order to claim the benefit of CST purchase and 'Mr. Chandu' to show CST sales in his books. He will be levied tax @ 2% by 'Mr. Chandu'. In failure of not submitting the 'C' form by 'Mr. Ashok' to ‘Mr. Chandu’ as per above stated case, the liability on the part of seller shall be calculated as follows, 11 | P a g e

SBS Interns' Digest www.sbsandco.com/digest Non-suCbommpiasnsiieos nActof form 'C' and form 'F' under CST ACT Sale invoice details 12-Apr-2016 Date of sale invoice . 10,000.00 Sale (Goods) value CST @ 2% . 200.00 Total Invoice value . 10,200.00 Other Facts 20-May-20161 Due date of Tax payable on the sale 19-Feb-20172 Actual date of payment of differential tax Calculation of seller's liability 14.50%a Differential tax 2% Actual applicable VAT rate on the goods sold 12.50% Rate at which CST charged . 1,250.00 Differential rate (14.5% - 2%) Differential tax (10,000 * 12.5%)b Interest . 1,250.00 Differential tax 275 Interest period in days ( 1-2 ) 12% Interest rate p.a Interest ( 1,250 * 12% *275/365 ) . 113.01c Total Liability ( a+b ) . 1363.01Case-2:Loss of the original Form ‘C’ in custody of the purchasing dealer or the selling dealerThe purchasing/selling dealer is required to furnish an indemnity bond in Form G to the notifiedauthority.Form “F”:1. Definition and governing section under CST Act, 1956:Form ‘F’ is a form issued by the branch office/consignment agent receiving goods as branch/stocktransfer to its head office/principal who is sending the goods by way of stock/ branch transfer.As per section 6A(1), submission of Form ‘F’ with complete details of movement of goods ismandatory to prove inter state branch stock transfer.Example: Interstate branch stock transfer between two branches of a company located at Delhi andKerala12 | P a g e

SBS Interns' Digest www.sbsandco.com/digest Non-suCbommpiasnsiieos nActof form 'C' and form 'F' under CST ACT Purchasing Purchasing Selling SellingDealer(Branch) Dealer(Branch) Dealer(Branch) Dealer(Branch) will submit F of Delhi of Delhi of Kerala form collected > > > toobtain F Form Issue F Form Collect F Form > from VAT to Seller from VAT Branch department ofDepartment of Purchasing Kerala Delhi Dealer(Branch2. Implications in case of default: Case-1:Where transferee could not issue Form 'F' to the transferor for various reasons at his end. Each transaction will be treated as normal interstate sale as per Sec 6A of CST Act, 1956 and the seller ( transferor ) shall be liable to pay the following amount: ?Actual CST payable at applicable rate plus ?Interest @ 12% p.a from the date of actual due till the date of payment on the actual CST payable Example: Say 'Gutthula Pvt Ltd' a registered dealer having branches in Delhi and Hyderabad. If Delhi branch receives goods from Hyderabad branch then it is called an interstate branch stock transfer. Delhi branch has to issue the 'F' Form to Hyderabad Branch from the commercial tax department in order to claim the benefit of interstate receipt of goods and Hyderabad branch to show branch stock transfer in his books. Delhi Branch will be levied no tax by Hyderabad Branch. In failure of not submitting the 'F' form by Delhi branch to Hyderabad Branch as per above stated case, the liability on the part of seller(transferor) shall be calculated as follows13 | P a g e

SBS Interns' Digest www.sbsandco.com/digest Non-suCbommpiasnsiieos nActof form 'C' and form 'F' under CST ACT Stock transfer details 12-Apr-2016 Stock transfer date ?. 10,000.00 Value of goods transferred Other Facts 20-May-2016 19-Feb-20171 Due date of tax payable on the transfer ( as if it is a sale )2 Actual date of payment of tax Calculation of transferor's liability ?. 10,000.00a Differential tax 14.50% Value of goods transferred ?. 1,450.00 Acutal applicable rate of VAT on goods transferred Actual CST @ 14.5%b Interest ?. 1,450.00 Actual CST @ 14.5% 275 Interest period in days ( 1-2 ) 12% Interest rate p.a ?. 131.10 Interest (1,450 * 12% * 275/365)c Total Liability ( a+b ) ? . 1581.10Case-2:Where lost, destroyed or stolen in custody of the transferor or the transfereeThe transferor/ transferee is required to furnish an indemnity bond in Form G to the notified authority.This article is contributed by Chandra Shekar G, Intern of SBS and Company LLP. The author can be reachedat [email protected] 14 | P a g e

SBS Interns' Digest www.sbsandco.com/digestAUDITAUDIT OF PROVIDENT FUND Contributed by Sai Krishna A & Vetted by CA Bhyrav MHSIntroduction: The objective of introducing Provident Fund is to provide retirement benefits to theemployees or to their family members in case of premature death of employee. The Act that governsProvident fund in India is “The Employees Provident Fund and Miscellaneous Provisions Act, 1952”.Provident fund is a scheme where by employer and / or employee will contribute to an investment fund.The amount invested in the fund can be withdrawn after a specified time or after attaining specific age.In this article, we discussed about the applicability, exemptions to PF, components in Provident Fundcontributed, further we provided with sample Audit Programme wrt Payment of Provident Fund.Applicability:• The Act is applicable to the whole of India except the state of Jammu & Kashmir.• The Act applies to: • every establishment which is a factory engaged in any industry specified in Schedule I and in which twenty or more persons are employed; and • any other establishment employing twenty or more persons or class of such establishments which the Central Government may, by notification in the Official Gazette, specify, in this behalf:• The Central Government may also apply the provisions of the Act to any establishment in which number of persons employed are less than twenty by giving not less than two months’ notice.Note: Once the Act becomes applicable to any establishment, it shall be continued to be governed by theAct, even if the number of persons employed there in falls below twenty.Exemption from applicability of the Act: The appropriate Government may, by notification in the OfficialGazette, and subject to such conditions as may be specified in the notification exempt, whetherprospectively or retrospectively, from the operation of all or any of the provisions.Registration Certificate: Once the Act becomes applicable, establishment shall Register with PFDepartment.Components in Provident Fund: For better understanding we can divide PF components as–Contribution by employee, Contribution by employer, Charges to be paid byPart-1: Contribution by EmployeeRate of Contribution: Every employee is required to contribute to provident fund at a rate of 12% / 10% ofhis wages.15 | P a g e

SBS Interns' Digest www.sbsandco.com/digest AuditCoomfpPanrioesvAidctent FundRate of 10%: The rate of 10% is applicable in the following cases –a) any establishment in which less than 20 persons are employed;b) any sick industrial company and which has been declared as such by the Board for Industrial and Financial Reconstruction;c) any establishment which has at the end of any financial year, accumulated losses equal to or exceeding its entire net worth andd) any establishment in following industries: I. Jute ii. Beedi iii. Brick iv. Coir and v. Guar gum Factories.Employee’s Contribution to PF:a) The contribution shall be rounded off to nearest rupee;b) Once the Act becomes applicable, the contribution shall be made mandatorilyas follows: a. If the Salary of the employee is less than Rs. 15,000 –contribution shall be made directly on the Salary amount. b. If the Salary of the employee is more than or equal to Rs. 15,000 – Contribution shall be made on the ceiling wages of Rs. 15,000/- c. However, the employee can contribute on higher wages, provided, there should be a joint request between employer and employee [Para 26(6) of EPF scheme];c) The employee can also deposit at a rate higher than the rate specified above i.e higher than 12% / 10%.d) For an international worker, wage ceiling of Rs. 15,000/- is not applicable.Minimum Contribution: The minimum contribution that should be made by an employee earning asalary of Rs. 15,000 or more is Rs. 1,800 [if the rate of 12% is applicable] and Rs. 1,500 [if the rate of 10% isapplicable].Part-2: Contribution by EmployerThe employer is liable for following contributions:a) Employees Pension Scheme (EPS);b) Employee Provident Fund (EPF);c) Employee Deposit Linked Insurance Scheme (EDLI);d) Administrative Charges on EPF; ande) Administrative Charges on EDLI.16 | P a g e

SBS Interns' Digest www.sbsandco.com/digest AuditCoomfpPanrioesvAidctent FundEmployees’ Pension Scheme (EPS):a) If EPS is applicable, then the contribution shall be 8.33% on ceiling limit of Rs. 15,000/-b) The contribution shall be rounded off to nearest rupee.Employee Provident Fund (EPF):a) Employer share shall be the difference between Employee share (payable as per statute) and pension contribution.Employee Deposit Linked Insurance Scheme (EDLI):a) Contribution to be made on the ceiling limit on Rs. 15,000, even if the EPF is contributed on higher wages;b) Contribution to be rounded off to nearest rupee;c) The EDLI contribution is to be made even if the member crossed the age of 58.Part-3 Charges to be paid by employerAdministrative Charges on EPF:a) EPF administrative charges shall be paid to EPFO at the rate of 0.85% on i. Ceiling wages (if the employee contributes to EPF by ceiling the wages to the limit of Rs. 15,000); or ii. Normal wages (ifthere is a joint request between employer and employee for contribution at higher wages).b) The minimum amount that is needed to be paid as EPF administrative charges is Rs. 500;c) If there is no contribution from the employer in any month, the minimum administrative charges payable shall be Rs. 75;d) The admin charges shall be rounded off to nearest rupee.Administrative charges on EDLI:a) EDLI administrative charges shall be paid to EPF at the rate of 0.01% on ceiling wages (as EDLI is calculated on ceiling wages);b) The minimum amount that is needed to be paid as EDLI administrative charges is Rs. 200;c) If there is no contribution from the employer in any month, the minimum administrative charges payable shall be Rs. 25;d) The admin charges shall be rounded off to nearest rupee.17 | P a g e

SBS Interns' Digest www.sbsandco.com/digest AuditCoomfpPanrioesvAidctent FundCharges w.r.t Exempted institutionsCharges w.r.t exempted institutions are categorised into two:a) Exempted from PF Scheme – Inspection charges @ 0.18% (minimum of Rs. 5/-) are payable as admin charges;b) Exempted from EDLI Scheme – Inspection charges @ 0.005% (minimum of Rs. 1/-) are payable as admin charges.Other pointsa) Due dates: The due date for depositing the amount to the EPFO is 15th of the following month.Audit Programme:• Check the applicability of the Act to the organisation;• Verification of Provident Fund Registration Certificate of the organisation;• Details of all employees working with organisation shall be obtained including workers through out-sourcing agencies as well.• Verification of PF calculations, whether calculation is in accordance with the Act or not;• Verification of Payment challans against actual liability and also need to verify whether payment has been made with in the due date or not;• In the case of out sourcing employees, need to check whether respective out sourcing agency is duly discharging it’s liability or not, otherwise as a principle employer Auditee will also treated as employer in default along with such out sourcing agency.18 | P a g e





SBS Interns' Digest www.sbsandco.com/digestINSOLVENCY AND BANKRUPTCY CODE, 2016INSIGHTS INTO INSOLVENCY AND BANKRUPTCY CODE, 2016 Contributed by Uday Kumar P & Vetted by CA Rajesh DIndia, today, is considered as the one of the fastest growing economy in the world. It is being a veryattractive avenue, drooling many of the foreign investors to invest in the largest emerging economies.However, many intrinsic constraints have been hindering the country to achieve its true potential ingrowth, such as: • Red tape of the governments and authorities; • Domestic players lagging behind and unable to cope up with the big foreign players; • Unbalanced flow of credit to the market players and misuse/abuse of the credit supply system by some faulty players; • Lack of proper mechanism: to clean up the mistakes made in free capitalistic market by the entrepreneurs and to punish the willful offenders/ defaulters, etc.However, in the recent past years, the Indian Government has been taking up various revival andcorrective steps to unleash the true potential of the economy. Kindling the domestic industries, especiallythe MSME, red carpet welcoming to investments into the economy and correcting the flaws in the lawsare some of such steps.Another such landmark step is the passing of “The Insolvency and Bankruptcy Code, 2016”(‘IBC’) toaddress the issue of alarming rise in NPAs and willful defaulters of payment to Banks, having multi-directional impact on all Indian industries, resulting in collapse of the entire financial system. Let us nowtry to understand the causes and the events which triggered the IBC.Basic terms to be understood to proceed further into the topic:• Insolvency;• Bankruptcy;• Liquidation.Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. Inmost jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.Technical insolvency occurs when an individual or a firm is unable to meet their financial obligations.Liquidation is the event in which in solvent company's operations are brought to an end, and its assets aredivided up among creditors and shareholders, according to the priority of their claims.20 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 2016These can be understood using a simple diagram which is presented below:Necessity of new consolidated code for insolvency and bankruptcy:India, though being a mixed economy, practically is (or at least fast moving towards) more of capitalist andfree market economy. The capitalistic system in itself is prone to mistakes made by the entrepreneurs. It isa myth that all projects taken up by the entrepreneurs would be successful; some can be failures becauseof unavoidable and external factors, while others can be dire mistakes. The economy’s efficiency andprogress lies in how the system cleans up the mess created by failed projects, mistakes made by theentrepreneurs and how does it quickly mobilize the possibly productive assets into a more potentiallyproductive projects.Simply stating, the economy should have adequatemechanism and legal system to quickly identifyfailingbusinesses and take proper action as to whether it canbe revived or is still viable to continue its operations orto liquidate it. It should also have punitive measurestaken towards the willful defaulters like Vijay Mallya ofthe Kingfisher Airlines. 21 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 2016Contrastingly, on the parameter of resolving insolvency, India is ranked 136 among 189 countries. Atpresent, it takes more than four years1 to resolve a case of bankruptcy in India, according to the WorldBank. India had many laws dealing with insolvency, but none were effective to punish the liquor baronVijayMallya or to seize the foreign assets held by him.A consortium of 17 banks is locked in legal battle torecover loans worth around Rs. 7000 Crores from the Kingfisher Airlines head. The Banker to Every Indian, SBI, has written off NPAs worth Rs. 7016 Crores owed to it by 63 willful defaulters, the clean- up saw the bank to forgo almost Rs. 1200 Crores owed by Vijay Mallya .2The stressed assets and NPAs of the Indian Banks havebeen increasing at an alarming rate, however, the NPArecovery is being only around 10% of the total NPAs.Through the SARFAESI Act, the Banks can seize theproperties of the defaulters, but coming to thepractical scenario, this has not been achievedeffectively due to many factors.Thus, the Indian economy required a reform in this regard, as for any economy to thrive, the health of thebanking system forms the crux, or else, it would lead to degeneration of confidence in thesystem/economy worldwide and ultimately results in collapse of the economy.The broad factors that were the drawbacks in the past regime are discussed as follows: 1. There were too many laws governing the insolvency, liquidation and recovery; such as: I. The Presidency Towns Insolvency Act, 1909 ii. The Provincial Insolvency Act, 1920 iii. Securitization and Reconstruction of Financial Assets and Enforcement of Security Act (SARFAESI) Act, 2002 iv. Recovery of Debts due to Banks and Financial Institutions Act, 1993 v. Companies Act, 2013 vi. Limited Liability Partnership Act, 2008 vii. Sick Industrial Companies (Special Provisions) Act, 2003 (SICA,2003)Thus, there are different laws for different entities – a company, an LLP or an individual etc. making thetask of creditors’ recovery cumbersome.1http://www.legallyindia.com/views/entry/on-the-insolvency-and-bankruptcy-code2http://indianexpress.com/article/business/banking-and-finance/sbi-write-off-npas-wilful-defaulters-list-vijay-mallya-kingfisher-airlines-4378210/ 22 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 20162. There are mechanisms that delay the process of recognizing insolvency and taking preventive steps – i.e., the banks can wait for 90 days after default on payments in order to recognize an asset as non- performing asset (NPA). Thereafter, they need to wait for 30 days to take any action. Also, the moment an asset is declared as NPA, the banks have to make provision for it, eroding their profit. As a result, the banks choose to delay the recognition of the NPA, sometimes further extends loans (being helpless than optimistic- as happened in Mallya’s case). Thus, by the time the insolvency is recognized, all the damage would be done and the NPA would be inflated in size, meaning bigger losses to the banks.3. Another major obstacle is the judiciary/appellant mechanism – The insolvents reach for various mechanisms to suspend/delay the recovery. Many appellant and judicial routes, often basing different laws (supra), hinder the quicker recovery and the damage is done by loss of economic value of the assets or diversion of assets by the defaulters.Also, the judges of the court who entertain the petitions may not have any business or enougheconomic knowledge, which would further delay the recovery process and increase economic lossesto the creditors.How the new IBC 2016 addresses these issues and what are its highlights:The preamble of the Insolvency and bankruptcy Code, 2016is hereby reproduced:“An Act to consolidate and amend the laws relating toreorganisation and insolvency resolution of corporatepersons, partnership firms and individuals in a time boundmanner for maximisation of value of assets of suchpersons, to promote entrepreneurship, availability of creditand balance the interests of all the stakeholders includingalteration in the order of priority of payment of Governmentdues and to establish an Insolvency and Bankruptcy Board ofIndia, and for matters connected therewith or incidentalthereto.”Yes, the Act consolidates and bring to one place all the laws relating to insolvency and liquidation throughrepealing or amending the previous acts, and as it codifies the existing laws, It got the name “CODE”instead of “ACT”. [Codification is an act, process, or result of arranging laws or rules in a systematic formor code.]While the actual provisions are not being discussed here, an attempt is made to portray the spirit of theCode. 23 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 2016Highlights of the Insolvency and Bankruptcy Code:1. Insolvency test moved from ‘erosion of net worth’ to ‘payment default2. The crux of the IBC 2016 lies in the concept of resolving insolvencies in a strict time-bound manner. The insolvency need to be resolved through Resolution plan within a period of 180 days which may extend by 90 days by the Adjudicating authority. The code specifies time limit for most of the actions of the parties (including the regulatory authorities), thereby speeding up the insolvency process;3. The Code has overriding effect on all laws pertaining to insolvency and bankruptcy issues;4. Introduction of qualified insolvency professional (IP) as intermediaries to oversee the process, run the entity as going concern and act as liquidator in case of liquidation; 5. Establishment of information utilities as depository of financial information of the entity, creditors so as to check the moves of willful defaulters and for information certainty; 6. Insolvency professional to take over the management of entity, thereby restraining the promotors/defaulters from diverting the assets; 7. Moratorium period of 180 days (max 270 days) imposed by the NCLT/DRT during the period of insolvency resolution process; 8. Clear definition of waterfall mechanism of priority for settling claims, the landmark change being the placement of government dues junior to financial and operational debt;` 9. Provisions to deal with cross-border insolvency have been inculcated in the Act, such as taking into control foreign assets of the insolvent by the insolvency professional etc; 10. Punitive measures and making the personal assets of the officers liable for seize in case of any diversion of assets made; 11. Separate adjudicating and appellant authorities for companies, LLPs (NCLT and NCLAT) and for Individuals, firms (DRT, DRAT) respectively;24 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 201612. Civil courts barred from trying the cases related to insolvency as against NCLT/NCLAT/DRT/DRAT; Appeal against order of appellant authorities be entertained by Supreme Court.13. Fast track corporate insolvency resolution process for insolvencies satisfying certain conditions; Through this, insolvencies are expected to be resolved within 90 days (extendable by 45 days);Insolvency resolution process:25 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 2016 IBBI - Apex body for Insolvency Information Adjudicating promoting transparency & Professional Utilities Authority NCLT/DRT governance in the Agency administration of the IBC; will NCLAT/DRAT be involved in setting up the Insolvency Corporate/Individual infrastructure and accrediting Professionals (Appellant mechanism IPs & IUs. IPA - registered by the board shall enroll IPs. IUs - centralised repository of financial and credit information of borrowers; would accept, store, authenticate and provide access to financial data provided by creditors. Adjudicating authority (AA) - would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof.IPs- persons enrolled with IPA Supreme Courtand regulated by Board andIPA will conduct resolutionprocess; to act as Liquidator/bankruptcy trustee; appointedby creditors and override thepowers of board of directors.26 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 2016Order of Priority - Waterfall of Claims:Who can become Insolvency Professionals (Ips):This is an important question as Insolvency Professional is one of the core pillar on which the newinsolvency code is based upon. The Insolvency and Bankruptcy Board of India(‘IBBI’)shall conduct a‘National Insolvency Examination’ and ‘Limited Insolvency Examination’. The syllabus, format andfrequency of the ‘Limited Insolvency Examination’, including qualifying marks, has been notified by theIBBI and registration for the examination has been started from 15thDecember 2016. The examinationhas been started from 31stDecember 2016.Eligibility and Qualification for registration of insolvency professionals:Any person resident of India who: • has passed National insolvency examination; or • has passed the Limited Insolvency Examination, and has 15 years of experience in management, after graduation or • has passed the Limited Insolvency Examination and has ten 10 years of experience as a member of ICAI; ICSI; ICAI (Cost); and Bar council. 27 | P a g e

SBS Interns' Digest www.sbsandco.com/digest INSIGHTS ICNoTmOpIaNnSieOsLAVcEtNCY AND BANKRUPTCY CODE, 2016Conclusion:Overall, The Insolvency and Bankruptcy Code, 2016 is a verygood law, which simplifies insolvency resolution, recoveryand the liquidation process in India. Successfulimplementation of the Code enables the Bankers in India toprevent further NPA formation, builds confidence of theInternational investor on Indian debt market. Finally itprevents the occurrence of cases of willful defaulters likeKingfisher Airlines.However, the key point here which determines the successof the Code is its implementation. India has many goodlaws, some strongest laws like on environment, road safetyetc. Thus, the approach with which the cases are handled bythe legal system, in a quicker pace and adequateinfrastructure set-up, determines its success.Concluding, the passing of Insolvency and Bankruptcy Code and other reforms are clear signs of theNarendra Modi Government’s determination to make India a more transparent, investor friendly,responsible and stable economy.This article is contributed by Uday Kumar P, Intern of SBS and Company LLP. The author can be reachedat [email protected] 28 | P a g e

SBS Interns' Digest www.sbsandco.com/digestCOMPANIES ACT , 2013RULES,CIRCULARS AND NOTIFICATIONS ISSUED DURING THE MONTH OF FEBRUARY, 2017CIRCULARSvClarification with regard to applicability of sub-section (2) of Section 391 of the Companies Act,2013,Circular No.01/2017,Dt:22.02.2017: Vide the said Circular,the Ministry has clarified that provisions of Sub-section (2) of Section 391 of the Companies Act, 2013, which relates to closure of place of business by a Foreign Company, would apply only in case of a Foreign Company Which has issued prospectus or IDRs pursuant to provisions of Chapter XXII of Companies Act,2013. http://mca.gov.in/Ministry/pdf/GeneralCircular1_2017_23022017.pdfNOTIFICATIONSvExtending the period of tenure of CEO (Additional Charge) in the Investor Education and Protection Fund (IEPF) Authority for a further period of one year with effect from the 1st November, 2016,DT:20.02.2017: Vide the said Notification, the Central Government in exercise of the powers conferred by sub- section (5) and (6) of section 125 of the Companies Act, 2013 (18 of 2013) read with rule 6 of the IEPF Authority (Appointment of Chairman and Members, holding meetings and provision for offices and officers)Rules,2016, extends the period of tenure of Shri Amardeep Singh Bhatia, as Chief Executive Officer (Additional Charge) in the IEPF Authority for a further period of one year with effect from the 1st November, 2016 or till further orders, whichever is earlier. http://mca.gov.in/Ministry/pdf/ExtentionofCEO_28022017.pdfThese updates are contributed by Arun Kumar T and vetted by CS D V K Phanindra of SBS and Company LLP,Chartered Accountants. For any queries, please reach at [email protected] 29 | P a g e

SBS Interns' Digest www.sbsandco.com/digestFEMAFEMA UPDATESMarch 2017:1. Compounding of Contraventions under FEMA, 1999:RBI vide A.P. (DIR Series) Circular No. 29dated February 02, 2017 has invited the attention of ADCategory-I, regarding the delegation of powers to the regional offices (Except kochi and Panaji) ofthe RBI to compound the contraventions of FEMA without any limit on the amount of contravention.Kochi and Panaji Regional offices can compound the above contraventions for amount belowRs.1,00,00,000/- only. The contraventions of Rs.1,00,00,000/ or more will continue to becompounded at Central Office as hitherto.In addition to the existing powers, the RBI has also delegated the power to RO for compounding thedelay in filing of FLA as required under FDI regulations.The circular is applicable with immediate effect. Please refer the above mentioned circular forfurther details.2. Permitting Non Resident Indians (NRIs) access to Exchange Traded Currency Derivatives (ETCD) market:RBI vide A.P. (DIR Series) Circular No. 30dated February 02, 2017 has invited the attention of ADCategory-I, relating to permission for NRIs. Currently NRIs are permitted to hedge their Rupeecurrency risk through OTC transactions with AD banks. With a view to enable additional hedgingproducts for NRIs to hedge their investments in India, it has been decided to allow them access to theETCD market to hedge the currency risk arising out of their investments in India under FEMA, 1999.An announcement to this effect was made in the Monetary Policy Statement on April 5, 2016.NRIsmay access the ETCD market as per the terms and conditions given in the circularPlease refer the above mentioned circular for further details.3. Evidence of Import under Import Data Processing and Monitoring System (IDPMS):RBI vide A.P. (DIR Series) Circular No. 27 dated January 12, 2017 has invited the attention of ADCategory-I, regarding the directions on Obligation of Purchaser of Foreign Exchange and submissionof document as Evidence of Import.30 | P a g e

SBS Interns' Digest www.sbsandco.com/digest FEMA UCopmdpaatneiess ActBill of Entry (BoE) data is received in IDPMS from Customs Department for EDI (Electronic dataInterchange) ports and from NSDL for SEZ (Special Economic Zones) on daily basis. BoE data for non-EDI ports are entered by AD bank of the importer on receipt of BoE (importer’s copy) and then thebank uploads the data in IDPMS through “Manual BOE reporting” process. In order to enhance easeof doing business and reduce transaction costs, it has been decided to discontinue submission ofhardcopy of Evidence of Import documents i.e. BoE, with effect from December 01, 2016, as it isavailable in IDPMS. The extant instructions and guidelines for Evidence of Import in lieu of Bill ofEntry will apply mutatis mutandis. In case of permitted/approved conditions will be created anduploaded by AD bank of the importer in the form of BoE data as per message format “Manual BOEreporting” in IDPMS.Please refer the above mentioned circular for further details.These updates are contributed by Vaishnavi A and vetted by CA Murali Krishna G of SBS and Company LLP,Chartered Accountants. For any queries, please reach at [email protected] | P a g e

SBS Interns' Digest www.sbsandco.com/digestSATURDAY SESSIONS Event Date Speaker Venue S.No. SBS - Hyd SBS - Hyd1 An Overview on NBFCs 04/03/2017 Vaishnavi A SBS - Hyd 11/03/2017 Uday Kumar P SBS - Hyd2 Insights on Credit Rating 18/03/2017 Visweswara Rao3 An overview of NSSO 74th Round Survey4 Compliance procedures with respect to Sales 25/03/2017 Chandra Shekar Returns, Form 'C' and Form 'FSession on OIDAR Services under Service Tax Session on Section 269SS and 269T of Income Tax Act- Bhavani K - Sai Krishna A32 | P a g e

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