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PREPARING FOR IMPLEMENTATION OF GASB 87 REGARDING LEASES

In June 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases. The Statement outlines monumental changes to the accounting for leases, with wide-reaching implications to most government entities, beginning after December 15, 2019. As stated in our previous article “GASB 87: Do You Have Your Implementation Plan Ready,” this means the time to prepare for these changes is now. The Statement was designed by GASB to improve information regarding leases for readers of the financial statements, particularly those formerly known as “operating leases.” For these leases, information and transparency has historically been sparse; in order to address this, GASB established a single model for lease accounting, as well as expanding on the disclosures required for these arrangements. Impact on Lessees The revised model requires the inclusion of not just capital leases on the lessee’s balance sheet (as is required under current accounting standards) but also includes operating leases. Except for leases with initial terms of of 12 months or less, the Statement requires leases within scope be recorded as a “right-to-use asset” with a corresponding “lease liability.” As a result, many affected governments will see a substantial increase in both assets and liabilities on the balance sheet. Impact on Lessors Lessors are also affected by the Statement. Previously, lessors with operating leases would generally recognize the revenue on a straight-line basis throughout the term. Such accounting had a limited balance sheet impact, as receivables were only recorded in the period the revenue was to be earned. Under the terms of the Statement, however, lessors will record a receivable with an offsetting deferred inflow for the resources expected to be received at the outset of the arrangement. The receivable and deferred inflow will be reduced over the term of the lease into cash and revenue, respectively. This change adds an additional balance sheet impact not seen previously under existing guidance. In addition to the above effects, disclosures have been increased for both lessors and lessees to detail the balance sheet accounts related to leasing arrangements and to break out assets and liabilities from any existing capital asset or debt footnotes. Taking a Proactive Approach While effective for periods beginning after December 15, 2019, adoption of the Statement requires retrospective adjustment for any leases within scope that are still active at the earliest period presented. With that in mind, many leases that are currently active for governments (or those executed in the time prior to adoption) will be impacted by the standard. Given the breadth of information that will be required upon adoption, being proactive in the preparation for the Statement is critical. Step 1: Form an Implementation Team Having individuals specifically tasked with becoming familiar with the Statement and accumulating the necessary information is critical in ensuring readiness for adoption. This should not only include finance–related individuals, but also a few other key parties. Procurement and facilities management are often aware of leases and similar arrangements that may not have been brought to the attention of finance previously, and thus are important to consult with during this process. Participation by all finance offices is also pertinent in ensuring no leases will be missed (e.g. a town and board of education typically have separate finance functions that should be coordinating during this process). Step 2: Compile a Leases Inventory Once an implementation team has been put together, an inventory must be compiled of all leases for which the government is either a lessor or a lesee. Most governments do not have a financial system capable of extracting all the information necessary for the Statement, leading many to consider purchasing a new IT solution or pairing with a professional services partner to extract the necessary data. Step 3: Assess the Need for Additional Technology Governments with substantial leasing activity may find additional software necessary to compile and track the relevant lease information. This will both facilitate adoption and assist in remaining compliant with the Statement on an ongoing basis. Given the importance of choosing the right software coupled with the costs and time necessary to implement a new IT solution, it is imperative that this be considered now to ensure appropriate steps are taken from a budgeting and implementation plan standpoint. Step 4: Revisit Policies and Procedures Procedures that governments currently have in place regarding leases are generally insufficient to ensure all relevant information is being aggregated. Governments should review their procedures to ensure not only are they updated in a manner that will facilitate compliance with the Statement, but also ensure appropriate controls are in place over the processes. If the government intends to have a de minimis threshold in place, whereby certain leases won’t be recorded on the balance sheet due to immateriality, it is critical that this policy be formalized prior to adoption. Any such policy should not just consider the asset impact (as a capitalization threshold would for capital assets) but also the corresponding liability impact of such a transaction. Step 5: Consider the Impact on Debt Covenants Governments with privately placed debt or any debt with financial covenants should be proactive with their lending institutions to update covenants as appropriate. Case studies show adding lease liabilities from adoption of the Statement causes major changes with debt-related ratios in particular, and merit discussion with lenders prior to adoption. Successful Adoption Starts Now While adoption and ongoing compliance with the Statement places an additional burden on governments, appropriate planning can minimize and ease the difficulty and effort. Savvy finance officials are taking this a step further, seeing it as an opportunity to enhance procedures surrounding leases. Compiled lease information is actionable data that can be used to better plan the timing of resource outflows and improve upon review procedures Opportunities for a seamless adoption and process improvements are available for all governments with a proactive plan that are considering this Statement now and not waiting until the effective date.

2020-05-13 00:35:10

Applicability of Transfer Pricing

In the Income-tax Act, 1961 (“Act”), Sections 92 to 92F govern and regulate the transfer pricing provisions in India. Section 92(1) provides that any income arising from an International Transaction shall be computed having regard to the arm's length price (“ALP”).
Where in an International Transaction or SDT, two or more Associated Enterprises (“AEs”) enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the ALP of such benefit, service or facility, as the case may be.

Definition of International Transaction
As per Section 92B of the Act, an International Transaction means a transaction between two or more AEs, either or both of whom are non-residents, in the nature of: the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;

  • the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
  • provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
  • lending or borrowing money or capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
  • a transaction of business restructuring or reorganisation, entered into by an enterprise with an AE, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;
  • any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more AEs for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

The term “intangible property” has been defined to include:

  • marketing related intangible assets, such as, trademarks, trade names, brand names, logos;
  • technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how;
  • artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;
  • data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;
  • engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation;
  • customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;
  • contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;
  • human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;
  • location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;
  • goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value;
  • methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data;
  • any other similar item that derives its value from its intellectual content rather than its physical attributes
  • Further, transactions with a third party would be deemed to be a transaction between AEs if:
  • there exists a prior agreement in relation to the relevant transaction between the third party and the AE; or
  • terms of the relevant transaction are determined in substance between the third party and the AE

Maintenance of prescribed transfer pricing documentation
TP Report:Section 92D read with Rule 10D provides that every person who has undertaken an International Transaction or SDT shall keep and maintain such information and documents as
specified by rules made by the Board (Rule 10D) and supported by authentic documents in a case where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee exceed one crore rupees. The Board has also specified by the Rules that information and documents are required to be retained for a period of 8 years.
Form 3CEB:Section 92E read with Rule 10E provides that every person who has entered into an International Transaction/SDT during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date (i.e. 30 November of the relevant Assessment Year) in the prescribed form (Form 3CEB) and manner.

2020-05-12 06:15:27

ODI UNDER AUTOMATIC ROUTE

ODI UNDER AUTOMATIC ROUTE


  • An Indian Party is eligible to make overseas direct investment under the automatic route. An Indian party is a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act 1932 or a Limited Liability Partnership (LLP)incorporated under the Limited Liability Partnership Act, 2008 and any other entity in India as may be notified by the Reserve Bank. When more than one such company, body or entity makes investment in the foreign JV/WOS, such combination will also form an “Indian Party”.
  • Following points should be kept in mind as far as Foreign Exchange Management Act (FEMA) is concerned:
  • An Indian party does not require any prior consent from RBI.
  • An Indian party is required to approach theØ AD categoryØ1 bank.
  • Investment value under ODI cannot exceed 400%* (this figure was reduced to 100%** for a while but has been restored back) of net worth as on the last audited balance sheet of the Indian Company.
  • ODI can be done by resident “individuals” as well. The only difference is that such overseas investments would be under the Liberalised Remittance Scheme (LRS) route. The limit permissible under LRS is US$ 250,000 per person per financial year.
  • The total financial commitment (“FC”) of Indian Party in all overseas JV/ WOS shall not exceed 400% of its net worth (as per the last audited Balance Sheet).
  • FC made out of balances held in the EEFC account of the Indian party or out of funds raised through ADRs/GDRs will not be taken into consideration for the purpose of the aforesaid calculation.
  • Prior approval of RBI is required if the financial commitment exceeds USD 1 Billion in a FY.
  • Indian Party shall not be on the Reserve Bank’s exporters' caution list/list of defaulters/ under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority.
  • The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party.
  • For switching over to another AD, an application shall be made to RBI after obtaining an NOC from the existing AD.
  • ODI in Pakistan is allowed under the approval route. ODI in Nepal can be only in Indian Rupees. ODI in Bhutan are allowed in Indian Rupees and in freely convertible currencies.
  • Investment value need not refer merely to equity purchase; it also includes other forms of financial participation (loans is a classic example).
  • Note: *Net worth = Paid up Capital + Free reserves
  • For the purpose of reckoning net worth of an Indian party, the net worth of its holding company (which holds at least 51% stake in the Indian Party) or its subsidiary company (in which the Indian party holds at least 51% stake) may be taken into account to the extent not availed of by the holding company or the subsidiary independently and has furnished a letter of disclaimer in favour of the Indian Party.

2020-05-07 22:46:32

IMPORT EXPORT CODE NUMBER (IEC)

IMPORT EXPORT CODE NUMBER (IEC)


 

  1. It is a unique 10 digit code issued by DGFT to a person.
  2. IEC is mandatory to export any goods out of India or to import any goods into India unless specifically exempt.
  3. Permanent Account Number (PAN) is pre-requisite for grant of an IEC.
  4. Only one IEC can be issued against a single PAN.
  5. An application for IEC is to be made manually to the nearest Regional Authority of DGFT or alternatively, it can be filed online, in Form ANF 2A and shall be accompanied by prescribed documents.
  6. In case of STPI/ EHTP/ BTP units, the Regional Offices of the DGFT having jurisdiction over the district in which the Registered/ Head Office of the STPI unit is located shall issue or amend the IECs.
  7. New Procedure for online IEC application/modification has been introduced vide Trade Notice No 23/2018-19 New Delhi, Dated the 8th August, 2018.
  8. Online application for IEC requires only 2 documents i.e.
    • Address proof the applicant entity; and
    • Cancelled Cheque bearing entity’s pre-printed name or Bank Certificate, to be uploaded

2020-05-07 22:40:18

EXPORT CODE NUMBER (IEC)

EXPORT CODE NUMBER (IEC)


 

  1. It is a unique 10 digit code issued by DGFT to a person.
  2. IEC is mandatory to export any goods out of India or to import any goods into India unless specifically exempt.
  3. Permanent Account Number (PAN) is pre-requisite for grant of an IEC.
  4. Only one IEC can be issued against a single PAN.
  5. An application for IEC is to be made manually to the nearest Regional Authority of DGFT or alternatively, it can be filed online, in Form ANF 2A and shall be accompanied by prescribed documents.
  6. In case of STPI/ EHTP/ BTP units, the Regional Offices of the DGFT having jurisdiction over the district in which the Registered/ Head Office of the STPI unit is located shall issue or amend the IECs.
  7. New Procedure for online IEC application/modification has been introduced vide Trade Notice No 23/2018-19 New Delhi, Dated the 8th August, 2018.
  8. Online application for IEC requires only 2 documents i.e.
    • Address proof the applicant entity; and
    • Cancelled Cheque bearing entity’s pre-printed name or Bank Certificate, to be uploaded.

2020-05-07 22:38:18

Following are the broad procedures from FEMA perspective that needs to be followed for ODI investment in India before FDI receipt of Funds

Following are the broad procedures from FEMA perspective that needs to be followed for ODI investment in India before FDI receipt of Funds


Following are the broad procedures from FEMA perspective that needs to be followed for ODI investment in India before FDI receipt of Funds

Step -1 Online application portal for the entity master form ( the RBI introduced an online portal called the Foreign Investment Reporting and Management System ("FIRMS"), under which every Indian entity, with existing direct or indirect foreign investment, was required to provide certain information to the RBI in the entity master form (the "EMF"), through the website of FIRMS) Basically it is Initial registration for an Entity.

Step -2 KYC of Foreign remitter with Funds

In swift message for Funds, Field 72 must mention---Share capital or Capital Infusion or Purchase of Share capital etc

KYC must contain 6 points

Know Your Customer (KYC) Form in respect of the non-resident investor

  • hashtag#FEMA
  • #www.accorptaxpro.com
  • hashtag#Accorp
  • hashtag#FDI
  • hashtag#FDIinIndia
  • hashtag#FEMA
  • Compliance

2020-05-07 22:31:26

What is Residential Status in India?

What is Residential Status in India?


Our government can collect taxes only from the income generated in India or the income generated from or through the people of India.
Most of the people believe that they are residents of India because they were born here. But, many of them travel outside of India for work. Similarly, people from all over the world come to India.
So, from tax liability point of view, it becomes very confusing whether a person should pay taxes to the Indian Government or Foreign Government. To rest all these confusions , the Income Tax Department has made a standard rules for collection of taxes. These depend on the “Residential Status” of a person.

From income tax point of view, there are normally two categories of residential status in India:

  1. Resident
  2. Non-Resident

Resident is further classified into two sub parts,

  1. Ordinary Resident
  2. Not Ordinary Resident

Depending upon the residential status, the tax department collect taxes from the person. Since the Residential Status may differ from year to year, it is important to be determined every year.

Before, we get into details of understanding the tax liability. Let’s first understand the residential status in detail.

Understanding the Residential Status :

  • Resident Indian

When does a person becomes Resident in India?
Upon fulfilling “ANY ONE” of the following two conditions (known as basic conditions), you are said to be the resident in India for the concerned Financial Year (1, April-31st March of next year). These conditions are:

  1. You have stayed in India for 182 days or more during the relevant financial year;

  2. Or
  3. You have stayed for 60 days or more during the financial year and a total of 365 days or more during 4 years immediately prior to that financial year.

Example to Explain Residential Status in India:-

i) Bill Gates stayed in India from 01st April 2017 to 31st July 2017 and again from 01 September 2017 to 30 November 2017. Is he a Indian resident for the financial year 2017-2018?
Solution: Total no of days = 30 (april) + 31 (may) + 30 (june) + 31 (july) + 30 (sept) + 31 (Oct) + 30 (Nov) = More than 182 .Since Mr. Bill gates stayed in India for more than 182 days he is said to be Resident in India for financial year 2017-18.

Bill Gates stayed in India from 01 April 2017 to 31 July 2017 and from

  • 01 September 2013 to 30 November 2013
  • 01 September 2014 to 30 November 2014
  • 01 September 2016 to 31 March 2017

Is he a Indian resident for the financial year 2017-2018?

Condition (i) = 122 Days (You have stayed for 60 days or more during the financial year)
and
Condition (ii) = 394 Days( A total of 365 days or more during 4 years immediately prior to that financial year)
Thus, he is said to be Resident in India for financial year 2017-18
But, in some cases the 2nd condition mentioned above (60 days & 365 days) doesn’t apply.

Exception to the Second Condition in case of Resident Indian :

The 2nd condition mentioned above (60 days & 365 days) doesn’t apply in case of

“Thus in these cases, only if you stay in India for a period of 182 days or more in the Financial year, you are said to be the Resident of India”

  1. An Indian citizen who has left India for the purpose of employment in foreign or a crew member of an Indian ship, OR
  2. An Indian Citizen or person of Indian origin who comes to visit India

Examples of residential status of an individual

Miss Priyanka Chopra went to work outside India for first time.

  • She stayed in India from 01 April 2017 to 31 October 2017.
  • She stayed in India from 01 April 2017 to 31 May 2017

Is she an Indian resident for the financial year 2017-2018?

Solution:

  1. Miss Priyanka Chopra stayed in India for 214 Days(at least 182 days ),she is said to be Resident in India for financial year 2017-18.
  2. Miss Priyanka Chopra stayed in India for 61 Days(at least 60 days ),she is NOT said to be Resident in India for financial year 2017-18 , since she left India for work . Therefore,
  3. only the first condition for determining the residential status would be applied.
  4. Non Resident Indian(NRI)

When does a person becomes NRI in India?

If “NONE” of the above-mentioned basic conditions (365 or 60 days) are fulfilled, then you are said to be Non-resident in India.
Example:- Bill gates came to visit India on 26 January 2018, the republic day ceremony in India.
Solution: Bill Gates will be Non resident for India because he stayed for less than 182 days and does not even satisfy 60 days condition.

Important Points

  1. Income received outside India, but subsequently sent to India subsequently, does not amount to receiving of income in India. 1st receipt is important for consideration;
  2. Person of Indian origin means a person who himself, either of his parents or either of his grandparents were born in Undivided India.

Now that we know the difference between Resident and Non-Residents.Let’s get in details and see you are are ordinary resident or non-ordinary resident to understand your tax liability in India.

Understanding Not ordinary Resident and Ordinary Resident Who is Ordinary Resident (OR) and Not- Ordinary Resident (NOR) in India?

Once you are clear about your residential status between resident and non-resident. For further understanding about OR [Ordinary Resident] and NOR [Not ordinary Resident ] we need to first learn the additional conditions.

Ordinary Resident (OR)

You will be known as Ordinary resident if you fulfill
Any one of the two basic conditions of 182 or 60 days
+
Both or all two additional conditions of 2 years & 730 days
The additional conditions are:-

  1. You were resident for at least 2 years out of 10 years preceding immediately to the financial year we are talking about;

  2. OR
  3. You were in India for 730 days or more in 7 years immediately preceding to the financial year we are talking about;

 

Example:- Mrs Madhuri Dixit Nene born and bought in India. She went outside india for 2 months of feb 2018-march 2018 Solution: Since she satisfy any one basic condition of 365 or 60 days and all additional conditions. She will be known as Ordinary resident of India.

Not- Ordinary Resident (NOR)

Person other than OR will be called as NOR. Which means you will be called NOR if you satisfy

Any one of the two basic conditions of 182 or 60 days
+
Any or none of two additional conditions of 2 years & 730 days

Example:- Mr Atif Aslam came to India during 01 July 2017 to 28 Feb 2018 for the first time.

Solution: Since Mr. Atif Aslam came to india for first time in last year and stayed for 243 days(31+31+30+31+30+31+31+28) (at least 182 days), he is resident Indian. But since he Does not satisfy any additional condition of 2 years or 730 days he will be termed as – Not ordinary resident of india.

Conclusion:
Saying in Income Tax:
“An Indian Citizen may not be resident Indian, but A Foreign Citizen may be resident Indian.”

Non-understanding of correct residential status creates an air of confusion about the tax liability in India.

 

 

2020-05-07 22:26:59