EY Tax Alert CBDT notifies additional scope of reporting in Tax Audit Report

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25 July 2018

                                             EY Tax Alert
                                             CBDT notifies additional
                                             scope of reporting in Tax
                                             Audit Report

Tax Alerts cover significant tax    Executive summary
news, developments and changes
                                    The Indian Tax Laws (ITL)[1] require specified taxpayers carrying on business or profession
in legislation that affect Indian   to get their accounts audited by an accountant[2] . The accountant has to furnish a Tax
businesses. They act as technical   Audit Report (TAR) in Form No. 3CD by uploading it in electronic form prior to the taxpayer
summaries to keep you on top of     filing return of income for each tax year (TY) by the specified due date. The TAR includes
                                    several items which are relevant for computation of taxable income, as also for reporting
the latest tax issues. For more     of various tax compliances made by the taxpayer.
information, please contact your    The Central Board of Direct Taxes (CBDT)[3] has issued Notification No. 33/2018 dated 20
Ernst & Young advisor.              July 2018 (Notification) modifying and/or enhancing the disclosure/reporting
                                    requirements in the TAR for TY 2017-18 onwards.
                                    The modifications are effective from 20 August 2018.

                                    [1]
                                          Income-tax Act, 1961 and Income-tax Rules, 1962
                                    [2]
                                        The meaning of the term ”accountant” is defined under the ITL and mainly includes a practicing Chartered
                                    Accountant who fulfills certain independence requirements
                                    [3]
                                        Apex body for administration of direct taxes in India
Page 2

The key amendments in the Notification for the purpose of
reporting in the TAR includes transactions on gift taxation,      CBDT notifies additional
secondary adjustment under transfer pricing provisions,
disallowance of interest deduction under the new interest
                                                                  scope of reporting in Tax
deduction limitation rule as per BEPS[4] Action 4, General
Anti-avoidance Rule (GAAR)-impacted transactions, deemed
                                                                  Audit Report
dividend taxation, certain Specified Financial Transactions
(SFT) and compliance under the Foreign Account Tax
Compliance Act (FATCA), compliance of provisions of
Country-by- Country Reporting (CbCr), details relating to
                                                                  Background
Goods and Service Tax (GST).
                                                                  The Indian Tax Laws (ITL) [5] require specified taxpayers
                                                                  carrying on business or profession to get their accounts
The amended TAR significantly enhances reporting
                                                                  audited by an Accountant [6]. The Accountant has to
obligation for taxpayers and Accountants and is likely to
                                                                  furnish a Tax Audit Report (TAR) in Form No. 3CD by
raise several practical challenges.
                                                                  uploading it in electronic form prior to taxpayer filing
                                                                  return of income for each Tax Year (TY) by specified due
It would be reasonable to expect the Institute of Chartered       date. The TAR includes several items which are relevant
Accountants of India (ICAI) to issue additional guidance to its   for computation of taxable income as also reporting of
members for discharging their attest function in relation to      various tax compliances made by the taxpayers.
amended TAR.
                                                                  The Central Board of Direct Taxes (CBDT) [7] has issued
While some of the reporting requirements relate to                Notification No. 33 /2018 dated 20 July 2018
disclosure of facts (like dates of various tax compliances        (Notification) modifying and/or enhancing the disclosure /
made by the taxpayer or GST data), others are subjective in       reporting requirements in TAR for tax year 2017-18
nature and will require significant exercise of judgement on      onwards.
part of the taxpayer and Accountant. For instance, reporting
whether taxpayer has entered into impermissible avoidance
                                                                  The modifications are effective from 20 August 2018.
arrangement and if yes, to report the amount of tax benefit
to all the parties to the arrangement is likely to place
onerous burden on both taxpayer and the Accountant. The           This Tax Alert summarizes the key amendments made by
guidance to be provided by ICAI will assume significance in       the Notification.
this regard.
                                                                  Key changes in TAR:
Both taxpayers and Accountants will need to critically
evaluate the applicability of enhanced reporting                   1)      Reporting of receipt of forfeited advance for
requirements.                                                              transfer of capital asset [New clause 29A]

The effective date of amended TAR is 20 August 2018.                       Finance Act (FA 2014) inserted a provision for
Hence, it appears TARs furnished prior to 20 August 2018                   taxation of sum of money received as advance or in
need not include enhanced reporting requirements.                          the course of negotiations for transfer of capital
                                                                           asset if such amount is forfeited and the transfer of
                                                                           capital asset does not take place. The amended TAR
                                                                           requires the Accountant to certify whether the
                                                                           taxpayer has received any such income and if yes,
                                                                           the nature and amount of such income.

                                                                   [5]
                                                                         Income-tax Act, 1961 and Income tax Rules, 1962
                                                                   [6]
                                                                      The meaning of the term ‘Accountant’ is defined under the ITL and
[4]                                                                mainly includes a practicing Chartered Accountant who fulfills certain
      Base Erosion and Profit Shifting
                                                                   independence requirements
                                                                   [7]
                                                                     Apex body for administration of direct taxes in India
Page 3

2)      Reporting of gift taxation [New clause 29B]                              4)      Disclosure of disallowance of interest deduction
                                                                                         under new interest deduction limitation rule as per
        Finance Act (FA) 2017 significantly expanded scope of                            BEPS[11] Action 4 [New clause 30B]
        gift taxation provision which taxes receipt of sum of
        money or other specified properties[8] by a taxpayer                             Pursuant to BEPS Action 4 recommended by
        without consideration or for inadequate consideration                            OECD[12] , FA 2017 inserted a new provision which
        (subject to certain exceptions[9]). The amended TAR                              limits interest deduction or similar payments made
        has new clause 29B which requires accountant to                                  by Indian company or permanent establishment of
        certify whether the taxpayer has received any such                               foreign company for debt borrowed from Non-
        income and if yes, the nature and amount of such                                 resident (NR) AE or guaranteed by AE. The provision
        income.                                                                          applies only if interest or similar payments on
                                                                                         specified borrowings exceeds.
3)      Secondary Adjustment (SA) [New clause 30A]:
                                                                                         INR10M in which case, interest deduction is limited
        FA 2017 introduced SA provisions in the ITL which                                to lower of actual expenditure in favor of AE or 30%
        trigger in a case where there is a primary transfer                              of EBIDTA[13]. The amended TAR has a new clause
        Pricing Adjustment (PA) under any of the following                               30B which requires the Accountant to certify the
        five scenarios:                                                                  details of expenditure incurred by way of interest or
                                                                                         similar nature, EBIDTA of the TY for which TAR is
            i. Voluntary transfer pricing adjustment made by                             furnished, the quantum of interest expenditure or
            the taxpayer                                                                 similar nature which exceeds 30%of EBDITA and
                                                                                         unclaimed interest expenditure eligible for carry
            ii. Adjustment made by Tax Authority and accepted
                                                                                         forward to subsequent TY and which has been
            by the taxpayer
                                                                                         brought forward from prior TYs.
            iii. Determination by Advance Pricing Agreement
            iv. Determination pursuant to Safe Harbour Rules
                                                                                 5)      Reporting of General Anti Avoidance Rule (GAAR)
            v. Resolution under Mutual Agreement Procedure
                                                                                         impacted transactions [New clause 30C]:
            methodology
                                                                                         GAAR provisions were introduced in the ITL effective
        In terms of SA provisions, in a case where due to a PA
                                                                                         from 1 April 2017 to deal with aggressive tax
        in the hands of the taxpayer, there results an excess                            planning. In past, Shome Committee[14] in its first
        cash with taxpayer’s associated enterprise (AE)                                  report had recommended to amend TAR to include
        outside India then such excess cash is required to be
                                                                                         reporting by the Accountant of impermissible tax
        repatriated to India within the prescribed time
                                                                                         avoidance arrangements. Shome Committee
        limits[10]. In a case where the excess money is not
                                                                                         recommended to include reporting of those
        repatriated to India within the prescribed time, then                            arrangements which are considered by the
        such amount is deemed to be an advance made by the                               Accountant as “more likely than not” to be held as
        taxpayer to its AE and interest is levied on the deemed
                                                                                         impermissible avoidance agreement.
        advance, in a prescribed manner, until it is repatriated
        to India.
                                                                                         The amended TAR requires to report whether the
                                                                                         taxpayer has entered into an impermissible
        The amended TAR requires disclosures relating to SA                              avoidance arrangement. If yes, it further requires to
        provisions which includes:                                                       report the nature of such impermissible avoidance
                                                                                         arrangement and the amount of tax benefit in the
            •Whether there has been a PA during the relevant                             tax year arising, in aggregate, to all the parties to
            tax year?                                                                    the arrangement.
            •Category of PA made
            •Amount of PA
            •Whether the excess money available is required to
            be repatriated to India and if yes, whether the
            excess money has been repatriated to India within
            the prescribed time limit?
            •If the excess money is not repatriated to India
            within the prescribed time, amount of imputed
            interest on such deemed advance

[8]
      Like immovable property, shares, securities, jewellery etc.
                                                                                 [11]
[9]                                                                                     Base Erosion and Profit Shifting
   For instance, receipts from relatives or receipts under tax exempt
                                                                                 [12]
business reorganisations                                                                Organisation for Economic Co-operation and Development
 [10]                                                                            [13]
      The ITL, under relevant rules, prescribes time limit for repatriation of      Earnings before interest depreciation, tax and amortization ike
excess money and the manner of computation of interest on deemed                 immovable property, shares, securities, jewellery etc.
advance. Refer our alert titled “India Tax authority issues rules for            [14]
                                                                                      A Committee constituted by CBDT headed by Dr. Parthasarathy Shome
implementing secondary transfer pricing adjustment provision” dated 21           to give recommendations on GAAR provisions
June 2017.
Page 4

6)   Receipt of cash in excess of INR2 lacs [New clause                     9)       Reporting requirement for certain Specified
     31(ba)/(bb)/(bc)/bd)]:                                                          Financial Transactions (SFT) and compliance under
                                                                                     Foreign Account Tax Compliance Act (FATCA)
     To discourage cash transactions and move to                                     [New clause 42]
     “cashless” economy, FA 2017 inserted a provision in
     ITL to prohibit taxpayers (barring certain                                      ►Statement of SFT
     exceptions[15]) from receiving an amount in excess of
     INR 2 lacs otherwise than by an account payee cheque                            The ITL make it obligatory for taxpayers (reporting
     or an account payee bank draft or use of electronic                             entity) to furnish details of SFTs[17 ] and the parties
     clearing system through a bank account. The                                     with whom such transactions were entered (with
     amended TAR requires disclosure of transactions                                 their PAN) [18 ] . The reporting entity is required to
     which do not comply with this requirement.                                      submit details in a prescribed form (i.e. Form No.
                                                                                     61A[19] ). Similar reporting requirement exists in
7)   Enhanced reporting of Statement of Tax Deducted or                              Form 61[20] for a separate list of PAN reportable
     Collected at Source (TDS statement) [Clause 34(b)]:                             transactions[21] where counter party to the taxpayer
                                                                                     does not possess PAN.
     Prior to amendment, the TAR required disclosure of
     transactional details of tax deduction or collected at                          ►FATCA and Common reporting Standard (CRS)
     source and TDS statements filed in respect thereof. It
     also required the Accountant to certify whether TDS                             With a view to collect required information to enable
     statements are furnished to the Tax Authority within                            India to meet its obligation of automatic exchange of
     prescribed time. In case TDS statements are not                                 information under FATCA and CRS, the ITL require
     furnished on time, it required further disclosure of                            prescribed financial institutions to furnish a
     date when it was furnished (if furnished) and whether                           statement in Form No. 61B of ‘reportable accounts’
     it contains information about all transactions which                            maintained by them. .
     are required to be reported. In other words, the TAR
     did not require disclosure of unreported transactions                           The amended TAR requires the Accountant to report
     in TDS statements if they were furnished within due                             whether the taxpayer is required to furnish Form No.
     date. The disclosure of unreported transactions was                             61 / 61A / 61B and if yes, the relevant details such
     required only if TDS statements were not furnished                              as Taxpayer‘s identification number[22], due date of
     within due date.                                                                furnishing respective forms, date of furnishing the
                                                                                     said form. More significantly, the amended TAR also
     The amended TAR now requires disclosure of                                      requires the Accountant to report whether
     details/transactions which are not reported even in                             submitted forms contains all details or transactions
     TDS statements which are furnished within due date.                             which were required to be reported and if not, list of
                                                                                     details / transactions which are not reported by
8)   Deemed Dividend [New clause 36A]:                                               taxpayer. In other words, the amended TAR requires
                                                                                     the Accountant to audit the submitted forms to
     Under the ITL, any loan or advance given by a closely-                          identify unreported transactions.
     held company (CHC) to its substantial shareholder or a
     concern where such shareholder holds substantial
     interest or any payment made by such CHC for benefit
     of such shareholder is deemed to be “dividend” to the
     extent of accumulated profits possessed by payer
     company. Upto TY 2017-18, such payment triggered
     taxation in the hands of the recipient shareholder[16].

     The amended TAR has a new clause 36A which
     requires the recipient of such dividend to report the
     quantum of dividend received and date of such
     receipt. Thus, the new reporting requirement applies
     to the recipient of the dividend who is liable to tax                  [17 ]
                                                                                 There are 13 types of SFTs listed in Rule 114E with varying
     audit and not to the dividend paying CHC.                              thresholds. On illustrative basis, these include cash deposits and
                                                                            withdrawals from banks, fixed deposits with banks, credit card payments,
                                                                            issue of bonds or debentures, buyback of shares, cash sales of goods or
                                                                            services, etc.
                                                                            [18]
                                                                                   Permanent Account Number
                                                                            [19 ]
                                                                                    On or before 31 May immediately following the relevant Tax Year
                                                                            [20 ]
                                                                                Twice for one Tax Year - In relations to transactions entered prior to
                                                                            30 September - due date is 31 October and in relation to transactions
                                                                            entered from 1 October to 31 March – Due date is 30 April
                                                                            [21]
     [15]
            Like Government, banks, etc.                                        List of PAN reportable transactions are specified in Rule 114B.
     [16 ]
                                                                            Reporting in Form 61 triggers if the party required to report his PAN for
          From TY 2018-19, such payment triggers a distribution tax @30%    such transactions does not possess PAN
     (plus applicable surcharge and cess) in the hands of dividend paying   [22]
                                                                                   Income-tax Department Reporting Entity Identification Number
     CHC.
Page 5

10) Reporting of compliance of provisions of Country-by-
    Country reporting (CbCr) [New clause 43(a)]                              Comments
    To implement BEPS Action 13 (Transfer Pricing                            The amended TAR significantly enhances reporting
    Documentation and Country-by-Country Reporting)                          obligation for taxpayers and Accountants and is likely
    recommendations, FA 2016 amended the ITL to                              to raise several practical challenges.
    introduce provisions for additional transfer pricing
    (TP) documentation, consisting of: (i) a master file                     It would be reasonable to expect the Institute of
    containing standardized information relevant for all                     Chartered Accountants of India (ICAI) to issue
    members of a multinational group; and (ii) a Cbc                         additional guidance to its members for discharging
    report containing certain information relating to the                    their attest function in relation to amended TAR.
    global allocation of the group’s income and taxes,
    together with indicators of the location of economic                     While some of the reporting requirements relate to
    activity within the group (CbCR information). Further,                   disclosure of facts (like dates of various tax
    rules along with the relevant forms for implementation                   compliances made by the taxpayer or GST data),
    were issued on 31 October 2017. The first year for                       others are subjective in nature and will require
    which CbCR became applicable was TY 2016-17 for                          significant exercise of judgement on part of the
    which due date was 31 March 2018.                                        taxpayer and Accountant. For instance, reporting
                                                                             whether taxpayer has entered into impermissible
    The amended TAR requires the Accountant to report                        avoidance arrangement and if yes, to report the
    whether the taxpayer or its parent entity or alternate                   amount of tax benefit to all the parties to the
    reporting entity is liable to furnish the CbCr and if yes,               arrangement is likely to place onerous burden on both
    particulars relating to furnishing of such report.                       taxpayer and the Accountant. The guidance to be
                                                                             provided by ICAI will assume significance in this
    Since the due date for furnishing TAR[23] precedes the                   regard.
    due date for furnishing CbCR[24], it appears that
    disclosure in TAR relates to CbCR compliance made                        Both taxpayers and Accountants will need to critically
    for the preceding tax year.                                              evaluate the applicability of enhanced reporting
                                                                             requirements.
11) Details relating to Goods and Service tax (GST) [New
                                                                             The effective date of amended TAR is 20 August
    clause 44]:
                                                                             2018. Hence, it appears TARs furnished prior to 20
                                                                             August 2018 need not include enhanced reporting
    Similar to the amendment made in income tax return                       requirements.
    forms[25], the amended TAR requires reporting of
    details of Goods and Services Tax (GST) viz. break-up
    of total expenditure with GST registered and non-
    registered entities. In relation to expenditure with GST
    registered entities, it further requires the break-up of
    expenditure relating to exempt supply covered under
    the composition scheme and other registered entities.

    [23]
           30 September or 30 November immediately following the tax year
    [24]
           31 March immediately following the tax year
    [25]
        Refer our alert titled “CBDT notifies ITR Forms for tax year 2017-
    18” dated 7 April 2018
Page 6

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