Internal Controls over Financial Reporting – Mandate under Companies Act 2013 and ICAI Guidance

The new Companies Act, 2013 now requires auditors to also opine on whether a company has an adequate internal financial controls (IFC) system in place and the operating effectiveness of such controls. This is in addition to the existing audit opinion on financial statements. While this requirement was originally applicable to financial statements ending 31 March 2015, considering the lack of guidance, this applicability was deferred and is now effective for the year ending 31 March 2016. Due to the deferral of this reporting requirement, the Ministry of Corporate Affairs (MCA) retained the reporting requirement relating to internal controls in certain specific areas under the Companies (Auditor’s Report) Order, 2013 (CARO). The ICAI has now reissued the long-awaited ‘Guidance Note on Audit of Internal Financial Controls over Financial Reporting’, which provides detailed guidance on this topic.

Internal Controls over Financial Reporting (ICFR): Regulatory Mandate under Companies Act 2013

Relevant Clause	Requirement	Applicability
Directors’ Responsibility Statement: Sec. 134(5)(e)	Board to confirm that ICFR’s are adequate and operating effectively	Listed companies
Board Report: Rule 8(5) of Companies (Accounts) Rules	Board report to state the details in respect of the adequacy of ICFR with reference to the financial statements	All companies
Code for Independent Directors: Section 149(8) and Schedule IV	Independent Directors to satisfy themselves on the integrity of financial information and that financial controls are robust and defensible	All companies having Independent Directors
Audit Committee Terms of Reference: Section 177	Evaluation of ICFR	All companies having an Audit Committee
Auditor’s report: Sec. 143(3)(i)	Auditors to report if the company has adequate ICFR systems and that they are operating effectively (from 2015-16)	All companies

The guidance note clarifies that reporting on ICFR by auditors will be applicable to both listed and unlisted companies, including small and one person companies. This is in line with the requirements of section 143(3)(i) of the Companies Act, 2013. The guidance note also clarifies that auditors will have to report whether a company has an adequate ICFR system in place and whether the same was operating effectively as at the balance sheet date of 31 March 2016. In practice, this will mean that when forming its audit opinion on ICFR, the auditor will surely test transactions during the financial year ending 31 March 2016 and not just as at the balance sheet date, though the extent of testing at or near the balance sheet date may be higher.

Standards on Auditing issued by the ICAI, which now also need to be complied with under the Companies Act, 2013, do not fully address the auditing requirements for reporting on the system of ICFR. The guidance note suggests that the relevant portions of the Standards on Auditing will need to be considered by the auditor when performing an audit of ICFR (e.g. the requirements of SA 230, ‘Audit Documentation’, when documenting the work performed on ICFR; of SA 315, when understating internal controls).

The guidance note provides the necessary criteria for maintaining effective ICFR for companies. It draws upon the ‘Internal Control Components’ of Standard on Auditing (SA) 315, ‘Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment’, which includes the following five required components:

• Control environment
• Entity’s risk assessment process
• Control activities
• Information system and communication
• Monitoring of controls

As per the guidance note, auditors will have to issue a qualified opinion on ICFR if material weaknesses in the company’s ICFR are identified as part of their audit. A material weakness in ICFR may exist even when the financial statements are not materially misstated.

Recommendation:

In the light of the above requirement, it is recommended that an ICFR Manual be developed in writing, recording:

1. All the processes in various departments of the company
2. Authorizations
3. Internal checks involved based on risks
4. Internal Controls on all processes, transactions and IT levels relating to Financial Reporting
5. Specify how the processes address the various types of risks of financial misstatement at entry level in the organization
6. Identify areas of improvement
7. Synchronization of all existing guidelines, training manuals, instructions, internal controls as laid down by the top management
8. It is further recommended that this manual be then approved by the Board, to establish reassurance on effectiveness of the controls. It is recommended that this exercise be performed at the earliest, preferably before the conclusion of the Auditors Report on financial statements for the financial year 2015-16.

Union Budget 2016 - Highlights

I     Income Tax

No change in basic rate of tax in respect of income earned in FY 2016-17 (AY 2017-18)

Benefit of deductions for Research & Development would be limited to 150% from 01.4.2017 and 100% from 1.4.2020. From the financial year 2020-21 onwards the deduction shall be restricted to 100%.

Change in TDS rates & Limits effective from 01^st April 2016 -

Present Section	Heads	Existing (Rs.)	Proposed (Rs.)
192A	Payment of accumulated balance due to an employee in EPF	30000	50000
194C	Payment to contractors	75000 aggregate annual	100000 aggregate annual
194H	Commission on brokerage	5000 Rate- 10%	15000 Rate-5%

Corporate tax rate for establishment with turnover less than Rs. 5 crore lowered to 29% plus surcharge plus cess.

Limit for contribution of employer in recognized Provident and Superannuation Fund of 1.5 lakh per annum for taking tax benefit.

Individuals with income upto Rs. 5 lakhs - ceiling of tax rebate under section 87A raised from Rs. 2000 to Rs. 5000 to lessen tax burden.

Surcharge to be raised from 12% to 15% on persons, other than companies, firms and cooperative societies having income above Rs. 1 crore.

Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in case of National Pension Scheme (NPS).

In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made on or from 01.4.2016.

Deduction for additional interest - Rs. 50,000 per annum for loans up to Rs. 35 lakh sanctioned in 2016-17 for first time home buyers (House cost does not exceed Rs. 50 lakh).

Deduction of interest payable on capital borrowed for acquisition or construction of self occupied house property shall be allowed if such acquisition or construction is completed within 5 years.

For non -residents providing alternative documents to PAN card, higher TDS not to apply.

Additional tax at the rate of 10% of gross amount of dividend will be payable by the recipients receiving dividend in excess of Rs.10 lakh per annum.

The weighted deduction under section 80JJA suffered from a basis anomaly of purpose with the requirement that the new employee must be engaged for at least 300 days. The reduction to 240 days makes it more practical for tax assessees to avail of this well-intentioned deduction.

Presumptive taxation scheme with profit deemed to be 50% to professionals with gross receipts up to Rs. 50 lakh.

Increase the turnover limit under Presumptive taxation scheme under section 44AD of the Income Tax Act from Rs. 1 crore to Rs. 2 crores.

Black Money - Domestic taxpayers can declare undisclosed income or such income represented in the form of any asset by paying tax at 30% and surcharge at 7.5% and penalty at 7.5% - Total 45% of undisclosed income. Declarants will have immunity from prosecution.

TDS @1% on purchase of luxury cars exceeding value of 10 lakh and purchase of goods and services in cash exceeding 2 lakh.

Scope of e-assessment to be expanded to 7 mega cities, to simplify compliance for taxpayers.

Deduction for rent paid under Section 80GG will be raised from Rs. 24,000 to Rs. 60,000 to benefit those living in rented houses.

Tax holiday to start-up’s for 3 to 5 years announced.

Income Tax Disclosure Scheme announced from 1^st June to 30^th September, 2016. Assessees to pay 45% tax on incomes declared. No scrutiny assessment will be carried out on incomes declared under such schemes.

Govt. will pay interest @9% instead of 6% in case there is a delay in giving effect to decision in appellate cases beyond 90 days.

Tax payer can settle by paying disputed tax and interest up to date of assessment.

No penalty where disputed tax is less than Rs. 10 lakhs.

Capital Gains not taxed where investment made in notified funds or in start ups where they hold majority.

Long Term Capital Gain period for unlisted companies reduced to 2 years from 3 years.

Rationalizing formula for calculation of disallowance of expenditure under Rule 8D.

II Excise Duty

To impose additional Excise Duty on jewellery, excluding silver jewellery.

No change in standard ad valorem rate of Basic Excise Duty.

Revised return can be filed by the end of calendar month in which original return is filed by Central excise assesses.

Chief Commissioner of Central Excise are being instructed to file application for withdrawing prosecution in cases involving duty less than Rs. 5 lacs and pending for more than 15 years.

Duty drawback scheme widened to include more products, countries.

Increased Excise Duty on branded readymade garments.

Increase duty on tobacco products (other than beedi) by 10-15%

III Service Tax

Krishi Kalyan Cess @ 0.5% on all taxable services w.e.f. 1 June 2016. Hence effective service tax rate increased from 14.5% to 15%. Input tax credit of this cess will be available for payment of this cess.

Service tax exempted for housing construction of houses less than 60 sq. m

IV  General

National SC/ST Hub to be set up to support entrepreneurs from the Scheduled Caste and Scheduled Tax categories.

 

50,000 km of state highways to be taken up for upgradation as national highways.

 

Flexibility for 7-day working of shops in local markets is another step towards improving ease of doing business.

 

100% FDI in the marketing of food products produced and manufactured in India.

Infrastructure cess -

-1% on small petrol, LPG, CNG cars,

-2.5% on diesel cars of certain capacity

-4% on other higher engine capacity vehicles and SUVs.

-No credit of this cess will be available nor credit of any other tax or duty be utilized for paying this cess.

Increase in free baggage allowance for international passengers. Filing of baggage only for those carrying dutiable goods.

13 cesses, levied by various Ministries in which revenue collection is less than Rs. 50 crore in a year to be abolished.

Mandatory for the assessing officer to grant stay of demand once the assesse pays 15% of the disputed demand, while the appeal is pending before Commissioner of Income tax (Appeals).

Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty.

Penalty rates to be 50% of tax in case of under reporting of income and 200% of tax where there is misreporting of facts.

New Dispute Resolution Scheme to be introduced -

-No penalty in respect of cases with disputed tax up to Rs. 10 lacs.

-Cases with        disputed tax exceeding Rs. 10 lacs to be subjected to 25% of the minimum of the imposable penalty.

-Any pending appeal against a penalty order can also be settled by paying 25% of the minimum of the imposable penalty and tax interest on quantum addition.

Interest rates on delayed payment of duty/tax across all indirect taxes being rationalized at 15% except in case of service tax collected but not deposited where rate is 24%.

Government will pay contribution of 8.33% for all new employees enrolling in EPFO for the first three years of their employment.

Implementation of General Anti Avoidance Rules (GAAR) from 1 April 2017.

Introduce targeted delivery of subsidies through Aadhaar, social security platform for use of Aadhaar.

Bill to amend Companies Act - enabling environment for start-ups.

First-time home buyers - relief on interest up to Rs. 50,000 paid on housing loans for houses valued up to Rs. 50 lakh.

New Updated Procedure for Online Filing of First Appeal with CIT Appeal

1. Login to user account in Income Tax E-filing Website

2. Go to menu -> e-File -> Prepare and Submit Online Form (Other than ITR)

3. Fill the PAN, Select  Form  35, Select the Assessment year for which appeal is to be filed 

4. Select the type of Digital Signature Certificate and get DSC registered on Income Tax Portal

5. There are four sections in the form:

        - Instruction,

        - Form-35,

        - Verification, and

        - Attachments (must not exceed 50mb in size/ must be in pdf/zip format)

6.   In Form-35  Name and PAN of the appellant is pre-filled and other paras are required to be responded      by filling/selecting appropriate facts/options.

7. There are columns same as in Old Form except 

    - Facts of the Case not exceeding 1000 Characters are to be entered

    - Grounds of Appeal  maximum 1000 characters are to be filled in the Form 35.

8. Verification is to be filled for the person whose DSC is registered .

9. The following attachments are mandatory required:

a. Copy of Challan for appeal fee paid

b. Copy of order appealed against

c. Notice of demand

d. Grounds of Appeal and Facts of case being brief in column should be attached however not mandatory

10. After fully satisfying that form-35 has been properly filled and all required attachments have been duly attached, it can be submitted, saved as draft for filing later.

Once Submitted take print and submit physically with the department before the end of 30th day from the date of service of notice.

Caution while on line submission of First Appeal Form -35:

1. Maximum 1000 Characters for Facts of the Case and Grounds of Appeal to be filled in Form

2. No Special Characters while entering in Facts of the case and Grounds of Appeal in Form 35

3. In attachments Complete Facts of the Case and Grounds of appeal as well as any other document to    substantiate the facts and grounds in Zip/ pdf format can be attached but attachment must not exceed 50MB in total.

One Person Company - A Good combination of Limited Liability & Monopoly in Management

One Person Company (hereinafter called as OPC) is a form of business, introduced by companies act, 2013 was first recommended by the expert committee of Dr. JJ Irani in 2005, enabling sole proprietors to enter into corporate world. It is like forming a company with the soul of proprietorship and privileges of a Private Limited Company, OPC is a hybrid form of business consisting features of a sole proprietorship and a Private Limited Company. with concessional obligations. OPC has only one shareholder/member that give him power to run the business of the company solely on his decision, i.e., OPC gives MONOPOLY IN MANAGEMENT.

Important Concepts behind OPC

One Shareholder/Member: This is the main concept behind OPC, that only a natural person who is resident in India and citizen of India can form an OPC.

Nominee: This is also one of the very important concepts behind OPC. In case of death or inability to contract of the sole member of OPC, the nominee appointed will take over the management of OPC. Only natural person who is the citizen of India and a resident in India (i.e. here resident in India means a person who has stayed in India for a period not less than 182 days during the immediately preceding one calendar year) shall be a nominee for the sole member of OPC.

The name of the person nominated shall be mentioned in the memorandum of OPC and such nomination is require to be filled with the ROC in Form no.  INC 2 along with consent of such nominee in form no. INC 3 at the time of incorporation along with its memorandum and articles. Change in the name of the nominee can be done by the company on the event of death, incapacity etc. of the nominee in Form no. INC 4.

The nominee should be appointed at the time of incorporation of OPC with his prior written consent, the nominee cannot be appointed as nominee or member of more than one OPC at the same time and if appointed, he has to choose in which OPC he wishes to continue within a period of 6 months.

Compliances: OPC has been given vast relaxation from legal compliances which are very less than compliance to be done by a Private or Public Co.

OPC can only be incorporated as a Private Ltd Co. It can have only one person as its shareholder/member. Minimum paid up share capital required is Rs. 1,00,000. If the AOA do not contain the name of the first director, member of the OPC will be deemed to be the first director till the time director(s) is duly appointed.

The subscriber to the MOA of an OPC shall nominate a person, after obtaining prior written consent of such person, who shall, in the event of the subscriber’s death or incapacity to contract, become the member of that OPC. Only one director is sufficient to sign the Financial Statement/Director’s Report.

A person shall not be eligible to incorporate more than one OPC or become nominee in more than one such company. A minor cannot become a member or nominee of the OPC or can hold share with beneficial interest. OPC can be incorporated for charitable purpose.

Privileges of OPC

1.      It enjoys the status of being a separate legal entity from its member.

2.      Having the limited liability shrinks the liability of the member to the extent of unpaid amount of shares held by him.

3.      It evolves lesser legal obligations along with lots of exemptions has been provided to OPC in the law.

4.      OPC does not require holding Annual General Meeting.

5.      OPC does not require filling cash flow statement with financial statements.

6.      Compulsory rotation of Auditor after expiry of maximum term is not applicable.

7.      OPC can have maximum number of 15 Directors. This can help in better decision making.

Prohibitions on the formation of OPC

1.      It is mandatory to file financial statements including balance sheet, profit and loss account by OPC.

2.      OPC needs to pay tax at the rate of 30% which is quite high.

3.      Where the paid up share capital of an OPC exceeds 50 lakh rupees or its average annual turnover exceeds during the relevant periods exceeds 2 crore rupees, than it ceases to be entitled as OPC and has to be mandatory convert into private or public company within six month from the date of such increase (here relevant periods means the period of immediately preceding three consecutive financial years).

4.      The sole member of OPC cannot become member in more than one such co.

5.      OPC cannot carry out Non Banking Financial activities and cannot make investment in securities of anybody corporate.

6.      Minor cannot become a member or nominee of any OPC, not even can hold shares with beneficial interest.

Compiled by:Mohd. Sharjeel Awaisi ( Company Secretary, CA Finalist ) 

CAG has extended the last date for online application to 22 Feb 2016

The Last date of filing on line application for empanelling of Chartered Accountants Firm for Audits of Financial Year 2016-17 has been extended to 22 February 2016.

Amendments and FAQs in Reverse Charge mechanism effective from 01.04.2015

As per the rule 2(1)(d) of Service Tax Rules,1994  as amended by Notification NO.7/2015-ST dated  01.03.2015 effective from 1^st April, 2015 there are certain amendments in reverse charge mechanism. Under reverse charge mechanism now the rates are changed as well as responsibility of making the payment of service tax is also changed in few cases. New Services are made taxable for the first time and taxable through the route Reverse charge mechanism with effect from 01 April, 2015.

CBEC has clarified with Notification No 8/2015 dated 01-March-2015 that ancillary service like loading, unloading, packing, unpacking , transshipment, temporary storage etc. provided by GTA along with transport service are considered as composite service and abatement of 70% is allowed on these services.

Major Changes effective from 01.04.2015 and related FAQs are given hereunder:

1. Service provided by individual ,HUF, proprietary ,firm ,partnership firm to  Any Body Corporate registered as business entity located in taxable territory in respect of services provided or agreed  to be provided by way of SUPPLY OF MAN POWER for any purpose or security services.

S.No.	As per the Old Rules		As per the new rules		With effect from.
1.	Liability by Service provider(%)	Liability by Service Receiver(%)	Liability by Service Provider(%)	Liability by Service Receiver(%)	01-04-2015
	25%	75%	0%	100%

     

Then, reverse charge mechanism is applicable as under.

Note - Body corporate  includes company, LLP, Cooperative Society  But firm,HUF, Trust are not included as under Body corporate.

Que : If Service provider is a body corporate and service receiver is individual /HUF/ proprietary firm/ partnership firm then Who will pay the service Tax?

Ans:   As per rule 2(1)d of service tax rule 1994, service provided by any individual, HUF, Partnership firm, Proprietary Firm, AOP, located in taxable territory to an Company Registered under Companies Act or Business Entity registered as body corporate located in Taxable territory. Then servicereceiver  have to pay the full amount of service tax under reverse charge mechanism.

But in this case ,service receiver is individual, so, this rule of reverse charge mechanism  does not apply and hence, The service provider i.e. body corporate is liable to pay full(100%) amount of service tax.

Que:  If service provider is body corporate and servicer receiver is body corporate then Who will pay theservice tax? 

Ans: Body corporate i.e. Service Receiver  is liable to pay  full(100%) amount of service tax under Reverse charge mechanism.

Que:  If service provider is individual /HUF/ proprietary firm ,partnership firm and service receiver is also a body corporate then Who will pay  service tax?

Ans: Body Corporate i.e. Servicer Receiver is liable to pay full (100%) amount of service tax under Reverse charge mechanism.

Que:  If service provider is individual /HUF/ proprietary firm ,partnership firm and service receiver is also individual/HUF/ proprietary firm ,partnership firm then who will pay service tax?

Ans:  Individual /HUF/ proprietary firm ,partnership firm i.e. Service  provider is liable to pay full(100%) amount of service tax in this case as reverse charge mechanism is applicable only when service receiver is body corporate.

Note-Supply of man power means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.

1)      Service which are taxable for the first time and taxable through the route Reverse charge mechanism with effect from 01 April,2015 is as follows.

a)      Service by Mutual Fund Agent or distributer to mutual Fund or Assets Management Company.

b)      Service by Selling or marketing agent of lottery ticket to a lottery distributor or selling agent.

c)       Service provided by a person involving an aggregator in any manner is taxable.

Note-Aggregator means a person who owns and manages a web based software application and by means of the application and communication device ,enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator.

The details  are as under.

Description Services	Liability by service provider(%)	Liability by service Receiver(%)	With effect from
Services of mutual Fund agent or distributor to a mutual fund or asset management Company.	0%	100%	01-04-2015
Services by selling or marketing agent of lottery tickets to lottery distributor or selling agent	0%	100%	01-04-2015
Services involving an aggregator in any manner	0%	100%	01-04-2015

Notification on Goods Transport agency.

 CBEC has clarified with Notification No 8/2015 dated 01-March-2015 that ancillary service like loading, unloading, packing, unpacking , transshipment, temporary storage etc. provided by GTA along with transport service are considered as composite service and abatement of 70% is allowed on these services.

Description of Services	As per old Rules	As per New rules	With Effect From
	Abatement Rate	Abatement Rate
Goods Transport Agency Services	75%	70%	01-Apr-2015

  

Full service tax shall be paid by service receiver after considering abatement. It means on the value of 30%.

 Reverse charge mechanism in good transport agency service is applicable when taxable service provided or agree to be provided by GTA in respect of transport of goods by road where the person liable to pay freight is

a)      Any factory registered under or governed by the Factories Act, 1948 (63 of 1948).

b)      Any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India.

c)       Any co-operative society established by or under any law.

d)      Any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made there under.

e)      Anybody corporate established, by or under any law (Company).

f)       Any partnership firm whether registered or not under any law including association of persons.

    When individual or HUF is availing GTA service and paying freight, they are not liable to pay service tax under reverse charge mechanism and good transport agency is liable to pay service tax on freight by charging in bill. 

     Contributed by : Roshan Paudel ( CA Finalist - Article Assistant at Sandeep Ahuja & Co.)