02 Sep 2015 15:12 IST

The changing face of the legal and tax landscape

Professionals need to keep pace to do justice to their roles and ensure complete support in the transition to new laws and ongoing compliance

We are all aware of how digitalisation and globalisation have changed the traditional brick and mortar business model and altered the landscape in terms of how businesses function. In view of this, in order to have a robust framework, to keep pace with the changing times, the Indian Government is making changes to various legal and tax laws.

Change in Corporate Law

The age old law governing Indian Companies i.e. Companies Act, 1956 has been replaced with Companies Act, 2013.

The new Act is aimed at effectuating greater corporate governance, accountability, e-governance, enhanced disclosure norms, investor protection, thrust on Corporate Social Responsibility (‘CSR’), amongst various other things.

The new Act also aims to bring better corporate governance by mandating the Board of specified companies have Independent Directors as well as women directors, so as to bring new perspectives on the table. Further, every Indian company must have a “Resident” Director on its Board.

This impacts Indian subsidiaries of foreign companies who in major cases earlier had only non-resident directors.

In order to ensure the independence of Auditor, the new Act mandates rotation of auditors after the specified time period.

The new Act has put a CSR obligation on Companies by requiring them to spend 2 per cent of their average net profits on specified CSR activities.

The new Act specifically defines “insider trading” and “price sensitive” information and any person, including any director or key managerial personnel of a company, are prohibited from indulging in insider trading.

Specific provisions are introduced for protection of minority interests where there is an acquisition of more than 90 per cent of the Company. Also, provisions are made for class action suits by members or depositors of a company.

On a detailed analysis of the new Act (and Rules made thereunder), many more such significant changes would be seen.

The Act brings private companies under various requirements which were earlier applicable only to Public companies.

A lot of appeals are being made to relax these rules and suitable amendments are continuously being made by the Government to the Act/Rules, wherever found necessary.

New Accounting Principles notified

The accounting principles followed by businesses are set to change with the introduction of IFRS based Indian Accounting Standards (IND-AS), which are applicable on a staggered basis beginning from next accounting year (i.e. 2016-17). The IND-AS are based on IFRS principles of fair value and substance-based accounting, which is in stark departure to the existing practice of recording assets and liabilities at their historical costs.

The move to transition to IND-AS is quite laudable since various countries the world over have their reporting based on IFRS principles and the adoption of IND-AS will align Indian entities with the global principles.

Considering the significant deviation in the basic principles of accounting in IND-AS, various areas such as revenue recognition, consolidation, business acquisitions, financial instruments, disclosures, etc. would undergo a change.

Different transition timelines have been provided for different categories of companies. Thus, till complete transition to IND-AS takes place, certain companies would follow current accounting principles (based on historic cost) while some others would follow IND-AS. This will lead to players in same industry having different profits to report and comparison of their performance may be challenging.

Specific standards for corporate tax computation

While the corporate tax computation of a Company is based on the provisions of the Indian Income Tax Act, 1961, at a practical level, the profit/loss reported in the financial statements are used as a starting point for computing the taxable income.

To keep consistent the accounting procedures followed in computing taxable income, and reduce litigation over different accounting practices of different companies, the Government has notified 10 Income Computation and Disclosure Standards (ICDS) which are effective from April 1, 2015.

These ICDS provide exceptive rules with respect to the computation of taxable income vis-à-vis the current practice followed and may overturn certain judicial precedents.

While the intent of introduction of ICDS is to address uncertainty and reduce litigation, it seems they would burden the tax payers with multiple set of standards to account transactions for difference purposes and may add to the ever increasing tax litigations.

Goods and Service tax

Existing Indirect taxes to be replaced by Goods and Service Tax Act (‘GST’)

Currently, different indirect taxes are governed by different legislations and governing authority in some cases is the Central Government and in others the State Government. This results in tax leakage in the entire value chain.

To address the concern of multiple indirect taxes at various levels and provide a seamless input tax credit mechanism in the whole value chain, GST has been proposed as a comprehensive tax levy on manufacture, sale and consumption of goods and services on a uniform basis.

It is contemplated that Central taxes like Excise Duty, Service Tax, Additional Customs Duty (CVD), Special Additional Duty of Customs (SAD), etc. will be included in GST. Similarly, at the State level, taxes like VAT/Sales Tax, CST, Entertainment Tax, Entry Tax, Purchase Tax and Luxury Tax, etc. would be included in GST.

Recently, the Union Cabinet approved the amendments proposed by the Select Committee of the Rajya Sabha to the GST Constitution Amendment Bill and one hopes that a political consensus do emerge to make GST a reality at the earliest possible.

Future outlook

With the government changing the legal and tax framework impacting Companies, the businessmen need to understand impact of such changes to ensure smooth transition and hassle free functioning of business as usual.

The amended laws provide various challenges as well as opportunities to the professionals who assist companies meet their regulatory requirements. Thus, professionals would need to keep pace with the evolving and changing legal and tax framework to do justice to their roles and ensure complete support in transition to new laws and ongoing compliances.

With inputs from Naziya Siddiqui is an Assistant Manager with PwC India

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