For Private Circulation Only
February 2017 • Vol 10 Issue 1
Inside this Issue... •
From the Edit Pad
2
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From the President’s Pen
3
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Private Trust as a tool for estate/generational planning
4
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Income Computation and Disclosure Standard 3 – Construction Contracts – Revenue Reversals
5
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Current Trends in Taxation
8
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Examination Results
12
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An open letter to Prime Minister doing rounds in Whatsapp
14
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Oscar Goof-up...!
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AUDITOR A periodical from Society of Auditors, Chennai Society of Auditors “Platinum Chambers”, 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
Editor CA P S Prabhakar President CA R Sivakumar
FROM THE EDIT PAD AUDITOR is back after an unintended long sabbatical. The President has kindly taken up the blame for the prolonged absence on himself but the major share of the blame should be shouldered by me. He knows it and I know it. Some explanations need to be given. President has given one – paucity of funds. However there are others. AUDITOR has never been a run of the mill publication. It was never brought out just to ensure the regularity or to keep repeating the same information processed and commented upon by several other publications many times over. With some justifiable pride, we can say that no other professional publication has brought out articles on subjects like Bitcoins, Crowd Funding, Black Money Law, Ponzi scheme, Open Air Business Schools etc. No other publication also has consistently taken on the issues of misgovernance, lack of transparency etc. at ICAI. Though many members of fraternity have been ‘bold’ enough to ‘privately’ acknowledge that the contents of the magazine have always been gutsy, spicy and incisive, I always felt that the volume of efforts that were consciously put were always met with frugality in reactions. Quite honestly, this slowed down the speed of my selfpropelling machine. As mentioned, again it is only AUDITOR which brought the issues of wrong doings, instances of financial impropriety of ICAI like Nagpur land scam, the mess of Project Parivartan, SIRC’s AGM muddle etc. to the knowledge of members. As there was a regime change at ICAI in 2016 which saw the exit of several ‘veterans’ from the Council, we honestly expected that things would improve and hence didn’t deserve any criticism any time soon! And, what good would be AUDITOR without taking a dig at ICAI?!!!
P.S. Prabhakar
opportunity to chide me for my ‘truant’ behavior (out of sincere concern, of course!). Many professional brethren genuinely kept asking me what happened to the newsletter. So, I requested Sri R. Sivakumar to convene a meeting of some like-minded souls to help me in my attempts to bring out AUDITOR more regularly. Lot of things have happened in the national, international and professional spaces in the last one year when AUDITOR was slumbering. Brexit, political regime change in US etc. are feared in India to a significant extent as these would impact the business and export opportunities. The Constitutional Amendment that has paved the way to the imminent introduction of GST has been both welcomed and feared. (Knowing the mindset of the revenue bureaucracy, there is more justification to the latter). The demonetization bombshell that the PM dropped has had huge ramifications. Whether they are for good or for bad, time will have to tell. (One thing is sure – our FinMin is ever out to destroy the good intents of the PM). The Budget 2017 was more a prosaic affair, as it effectively thrashed all the hopes of substantial relief in personal taxation post demonetisation. Tax Terrorism, a term coined by BJP prior to 2014 elections to decry the then UPA Government’s tax administration, is actually being practiced in a more sinister manner in the present NDA Government. In retrospect, as the President has hinted in his message, things have not at all moved for the better. In this issue, an informative article on Private Trust is featured. A few questions that have been on my mind on CA exams were asked of Mr Sivakumar, who is familiar with the system. He has answered them but I don’t intend valuing them! I shall let him pass! (pun intended).
However, the past president of the Society Sri P. Anand never let go of any 2
AUDITOR • February 2017
FROM THE PRESIDENT’S PEN Dear members, It has been more than a year since I wrote a message for our Newsletter Auditor, the reason being Auditor had taken a year long vacation! The Society could not bring out the same due to the heavy cost of printing, which was not backed up by any form of revenue. My special request to each of the committee members to bring in an advertisement worth Rs. 10,000/- also did not materialize. We took an interim decision to go through the E-Mode but that also didn’t fructify. I do not want to blame any member in specific but take the blame myself. Recently, we had committee meeting in which we considered reviving the newsletter once again. Many ideas have been given by the members.We do not want to another interim measure and I do hope that the society will be able to bring out the Auditor on a consistent basis. As the President of the Society I went through my earlier messages and It is no surprise that the problems discussed earlier continue to remain. The major problems that still haunt us are the conduct of the Elections, performance of the students in the exams, uneven level playing feel in the profession and the deterioration of the overall quality in the standards. One has to accept the fact that these problems will continue to remain in the profession as it purely depends upon the contemporary leadership and the volume of the students. One can at least try to minimize the same and in this process as I have already written earlier it is the Individual who can transform. It also depends upon the good of the individual to drive out the evil around. From the students point of view, the failure continued to remain with heavy fluctuations. It is open to the members, students and public at large to criticize the ICAI. However, we should not simply go by the percentage but try to introspect the reason. One measure is to think seriously about the structure and process of the examination system which needsa thorough review, considering the current system of the education prevailing in the country. There is bound to be a large difference on this issue, but it is time that we give importance to the evaluation of the training and a change in the pattern of the examination. On the professional front, we do not seem to see the transparency. Many of the members feel that the quality of the proceedings in the council needs up gradation. The top management at ICAI is now headed by Sri Nilesh Vickamsey and Sri Naveen Gupta. Let us all congratulate the new team and wish them all success. I am glad to inform all of you that the Society has been quite consistent in the conduct of the programs. It was heartening to note the grand success of the Budget meeting convened by the Women Empowerment Committee of the society led by Smt. K. Anusha along with Smt. Revathi Raghunathan. We also had four memorial lectures with the SIRC of the ICAI and the Book release function of the Biography written by our director Sri.S.Rajaratnam in the last few months. I wish you all a happy financial year ahead. R. SIVAKUMAR
AUDITOR • February 2017
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Private Trust as a tool for estate/ generational planning Succession planning would include all kinds of people and institutions including minors, invalids and dependents. A Private Trust route would generally solve almost all, if not all of the problems. Further more, private trusts be beneficial in the management and distribution of assets in the required proportion, to the identified persons and for the duration. In other words, a properly drafted trust would do exactly what the settlor seeks to do in the distribution of his assets to his various heirs, during and after his lifetime. When there are one or more individuals like family members as beneficiaries, a private trust is an optimal solution. Private Trust versus Will Creation of a Private Trust can be very helpful for different family situations and businesses, and many a time is confused or misinterpreted with a will. It is pertinent to note that there are many distinct advantages of a private trust over a will. First of all, a private trust need not be probated. The Trust gets active very soon as per the wish of the settlor. A private trust can be operated during the lifetime of the settlor and need now wait for the demise for the settlor A private trust can be a dynamic instrument and in case of changes, the trust deed can be easily modified subject to certain conditions and fulfillment of certain regulations, which are hitherto not possible in a will. Furthermore, a trust is more confidential and need not be available in the public domain at all unlike a will, which may be needed to be registered in many situations. While planning for succession, especially during one’s lifetime, one would not want to lose control over the assets. This can be achieved efficiently through a private trust as a Will gets executed only after the death. Advantages The trust can be created by any person who is a major and is capable of entering into a contract. A Private trust provides many benefits the most important being the protection of the family members, invalids, minors and the aged. it also is a good means to secure the lives of the family members who are not adept in financial matters. 4
B. Ramana Kumar, M.Com., LLB, FCA, Advocate * The new age India is witnessing many divorces and separations, a private trust can be used to protects the family assets in such situations. Education trusts, marriage trusts, maintenance trusts are some examples of where a private trust can be used to ensure that funding is available for specific needs. A Private trust can thus be used to create the framework for distributions of assets, income and estates both current and futurethat would mirror the wishes of settlor. All this can be achieved with also a good tax benefits and also save on estate and probate costs. A private trust is also a good means to preserve the assets for future generations. Precautions However, all said and done there are quite a few pitfalls and precautions A private trust deed must be a dynamic document and not watertight one. It should be capable of accommodating any genuine changes later. The settlor must be able to lay down the long term objectives very clearly so that the executors do not face any ambiguity The trustees are the backbone of the trusts. Care must be taken to select good trustees, who will work towards fulfilling the objectives of the trust and that of the settlor. The selection of trustees will make or break the trust. Care is to be taken to identify the beneficiaries to avoid any discontent within the family. The list of assets should be carefully selected which needs to be administered during the lifetime of the settlor and after his life time too. While care is to be exercised in drafting the deed, not all situations can be visualized and c l a u s e s i n s e r t e d i n t o t h e s a m e . C l e a r, unambiguous clauses in the trust deed will go a long way in making a deed fulfill its objectives. A private trust can be a very good tool for succession planning provided the precautions mentioned above are followed. To this purpose, assistance of a professional is essential to not only draft the deed but also to understand the pros and cons of the same. * The author can be reached at ramanakumar@ovopaxlegal.com AUDITOR • February 2017
Income Computation and Disclosure Standard 3 – Construction Contracts – Revenue Reversals CBDT has issued 10 standards applicable from AY 2017-18 for Assesses who are having their income under the head‘Profits and gains of business or profession’ or income under the head ‘Income from other sources’. These standards are applicable for any Assessee who is following mercantile basis of accounting. This introduction has paved way to lot of potential issues and qualms for industry.
contract 3. Claims logged on the contractee. These are specific aspects of revenue which are either reimbursements of cost or losses caused due to delays or escalations 4. Incentive payments These are amounts that a contractor received because early completion of the contracts or achieving some fixed time frame. This is very rare to earn.
This article is aimed at bringing one of the prominent issue in ICDS 3. ICDS 3 & Section 36(1)(vii). ICDS 3 is the Income computation and Disclosure standard on Construction contract. Although this standard is drafted with AS 7 as its base, it has number of distinctions that result in higher outflow of tax.Before going any further, the patterns/ kinds of revenue arising to any construction contracts are elucidated below. •
Point of Billing & Collection
While billing and payments are governed by contract terms, revenue recognition is based on percentage of completion of contract. Following are the Generally prevalent practices towards point of Billing and payments: 1. Running bill model 2. Milestone bill model. While in former, billing is done considering the periodic progress, in latter, billing is done on completion of certain accepted milestone. •
Classification in Nature of Revenue
Revenue arising from a construction contract can be classified and segregated under following heads. 1. Revenue for carrying out the construction activity as set out in the contract 2. Revenue from Non Tendered activities These activities are performed by the contractor either for efficiently completing the contract terms or on specific requirement of the client. These are termed as Non tendered items as they are not originally part of the AUDITOR • February 2017
CA. Venkatesan Murali
5. Variations These items are additional cost incurred by the contractor subsequently recovered from the contractee. •
Point of Revenue Recognition
Both AS 7 and ICDS 3 states that Revenue shall be reckoned by applying percentage of completion method. ICDS being mirror image of AS 7 with angular and foci differences' even take into account the point of revenue recognition from AS 7 and portrays that revenue shall be reckoned only when there is a reasonable certainty on collection. AS 7 specifies further restrictions on recognizing revenue from specific heads such as Escalations, Non Tendered items, Incentives and Claims being: 1. It is most probable that customer will accept the Contractors claim for the said item and 2. Amounts can be reliably measured. Accordingly, even if reasonable certainty on collection is established, revenue can be recognized only on satisfaction of conditions stated above with respect of specified heads. ICDS is silent on these specific conditions therefore reasonable certainty conditions will be an umbrella clause for revenue recognition even for these specific heads. •
Subsequent Reversal
As dealt initially the cash flows and revenue recognition doesn't go hand in hand in case of (continued on next page)
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construction contracts. Even though collection is taken as an indicator at a macro level to the get an overall comfort on the revenue reckoned, it is not the principle factor of recognition. It is worthwhile to note that payments received towards running bills are treated as interim payments and conclusiveness is achieved only on certification by the client.
To decide on the section under which the same can be claimed, Nature and substance of Revenue reversals are discussed in following pedestals:
These features being •
Revenue recognition being less dependent on collection.
•
Payments received against running bills are interim in nature.Thus certainty is achieved only when final bill is certified. Thispaves way to the risk that revenue recognized earlier based on percentage of completion might become uncollectable or its ultimate collection might become uncertain.
AS 7 having identified such a possibility, has portrayed the treatment in PARA 27 by which the uncollectible portion shall be recognized only as expenditure and not as reduction in Revenue. However, the acceptance and adherence of this treatment as indicated in AS 7 is done only by miniscule part of the industry.ICDS 3 has alsoaccepted this principle and is ‘ad pedemlitterae’ with AS 7. While preparing financial statements of the company viz., Statement of profit and loss account, these reversals are to be treated as expenditure. Adhering to this principle for books of account is less complicated as compared to claiming the same as deduction or expenditure for the purpose of The Income tax act,1961 as a specific section should comprehend and allow such a claim. If any expenditure debited to statement of profit and loss account if not supported by a suitable section, the same will not be eligible for deduction under The Income tax act, 1961. In order to claim this reversal of revenue under the provisions of The Income tax act, a particular section should give its support. There are two sections that can be articulated for this claim •
Section 37 – General deduction
1. Items already reckoned as revenue in books of account and also for income tax purpose and the amounts receivable are treated as debtors in books of account. 2. Receivables are kept in the nomenclature of work in progress in books in account 3. Items are reckoned as income only in ICDs and not in books (This can arise on situations when the contract is more than 25% but ultimate outcome of the contract could not be measured). On analyzing item number 1 – Amounts that are reversed because non-receipt of payments will be routed through Section 36(1)(vi) being bad debts as the amounts are already moved to debtors. Regarding Item Number 2 –whether to treat this as bad debts under 36(1)(vii) or to treat this as expenditure under 37 will be important question.? Arguments in support Section 37 are that these are yet moved to debtors and are in the work in progress and ICDS is not especiallyif these are to be routed through section 36(1)(vii). While considering the above proposition, following are to be analyzed: a) If the substances of these amounts are analyzed, it can be understood that although the nomenclature in the books of accounts is work in progress, these are amounts that are to be receivable from the contractee. This also squarely fits into the limbs and conditions of Section 36(1)(vii) being •
Amounts ought to have been claimed as bad debts are already offered as income.
•
These are written off as bad being not receivable. These are debtors’ / amounts receivable in
Section 36(1)(vii) - Bad debts (continued on next page)
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AUDITOR • February 2017
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respect of the services already done tothe client and measured as work in progress or un billed revenue. The recoverability of the same arising at a later year, does not make it as expenditure – this is a specific item of loss b) Further analysis of revenue reversals vs. expenditures will give us clarity that while former is a loss, later is an out flow of resources for acquiring or earning a benefit. As discussed in earlier postulates, for any claim under the provisions of The Income tax act, a specific section support is required. Section 37 provides only revenue expenditures that are not discussed under other sections being 30 to 36 of the act will be allowed as deduction. This reference infers that only expenditures are allowed as deduction under Section 37. Losses, not being in nature of expenditure will be outside its ambit. Losses are allowed onlyunder Section 28 unless any other specific section is providing for the same. As 36(1)(vii) is dealing with losses arising on account of debtors, it would be more appropriate to treat the reversal as bad debts and not as expenditure under section 37. c) In addition to the above fact, Section 37 provides that, any expenditure which is revenue in nature and which are not specifically allowed or discussed under other sections 30 to 36 can be claimed as expenditure under this section. So, when a section between 30 and 36 is discussing upon a item being bad debts, the same can be treated as expenditure under Section 37. In as of the above, Finance act 2015 has come out with a specific proviso regarding allowability of reversals arising on revenue specifically recognized for ICDS which read as under: “Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the Assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of
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an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.” While Section 36(vii) stipulates that the debts have been written off in books of account, Supreme Court in Vijaya bank has pronounced that, it will be enough if the party wise credits being the corresponding impact of the write off is kept in separate ledgers and netted off in the balance sheet along with debtors’ ledgers. So, a write off or separate accounting ledgers are mandatory to ensure the claim of bad debts. However, if the amounts written off is in respect of revenue reckoned only for the purpose of ICDS, such case is not feasible, in order to remove this qualm, proviso has be appended in the act to ensure any revenue reversals can be facilitated. This amendment is also indicating that the claim of deduction on reversal of revenue already reckoned shall be under Section 36(1)(vii) as bad debts and not under any other section. Précis The Introduction of ICDS on construction contracts has opened a lot of issues on allowability and claim of expenditure. With regard to reversal of already recognized revenue, considering the substance and nature of the claim and legislative intent it is quite obvious that the same can be claimed as deduction under Section 36(1)(vii) rather than treating the same under other sections. This will also open a lot of litigations on such claims in the assessment forums. The author of this article can be contacted in mv@themv.in
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Current Trends in Taxation (This was the gist of speech I gave in a city college recently. Reproducing the same here as I felt it would touch some raw nerves in the CA fraternity too. – Editor) Adam Smith, in his 18th century thesis ‘The Wealth of Nations’, has pointed out that four main objectives should be borne in mind by the State levying taxes: First, equity. That is the taxes must be fair and equitable to all sections of society. Second, tax administration should not be cumbersome and complicated. Third, the State should economise and levy only the minimum tax. Fourthly, there has to be certainty and clarity in tax laws. Most countries have forgotten these fundamental canons of taxation. Some have tried wrong approaches of the above and have subjected the citizens to misery. India is certainly one of them. Benjamin Franklin said that death and taxes are the only two certain things in this world. That said, we also have to concede that taxation is the cost that we pay for civilization. The only problem is that the State is unable to collect the right taxes from everyone who should be paying, which results in complete lack of equity. Recently, the budget of the nation was unveiled. In the Budget speech, there are two parts – A &B. Part A deals with allocations and commitments and Part-B deals with revenue mobilization measures and tax administration. Part A is political and Part B is commercial. As the national economy is too much politics and too less economics, political compulsions and the need to appease ‘vote banks’ will result in perceived welfare measures and generous allocations, passing the burden on the too few people who end up paying taxes. Those are the ones carrying the cross of the nation on behalf of all. We shall see about the administration of tax regime and about tax 8
P.S. Prabhakar, FCA laws a little later. It is appropriate to remember the words of the legendary lawyer Nani Palkhiwala. Our direct tax policies suffer from five patent defects: A)
Absolute uncertainty- changes in laws which are as unpredictable as they are frequent.
B)
Complexity bordering on incomprehensibility.
C)
Excessive and cumulative burden that make dishonesty more rewarding than integrity.
D)
Arbitrary provisions stemming from individual whims and not based on any discernible principle of legislation or taxation.
E)
An administration marked by petrification of discretion and paralysis of the will to do justice.
This, he said in 1965 and half a century later we see that they are relevant even today. Though the trends have been changing and even evolving in the matter of taxation in our nation since the fifties, though different Governments have been promising more equitable structure than before, one thing we can never accuse the powers that be, is inconsistency. Yes, in the matter of troubling the honest tax payers and citizens – not just in the matter of quantum of levy of various taxes but more in the manner of administration of the tax regime – the successive Governments have been abnormally consistent. If the Governments are like cruel Gods, who bestow their unkind glances on the citizens, the revenue bureau(continued on next page)
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crats are like the Poojaris who better the Gods in the matter of handing down the cruelty. The only pretext that they all say is – ‘out there, there are so many who don’t comply’. The FMs (and now even the PM) reel out statistics as to the paltry number of people who pay taxes in our nation to drive home the point how much tax evasion is happening. But, like a typical public sector undertaking or Government organization where, a hard working employee is always rewarded with more work and a hardly working employee is rewarded with more benefits, the Government machinery also typically trouble only those who come and fall in their net. Precious little have been happening in the matter of expanding the tax base, though sermons to this effect have been for ever given by the political class. In our nation, taxes have taken different avatars – however in two major divisions of Direct and Indirect taxes. In the Direct Taxes family, some taxes have come and gone – examples Wealth Tax, Gift Tax, Super Profits Tax, Sur tax, Estate Duty, Fringe Benefit Tax, Banking Cash transaction tax etc. Some taxes have come to stay – like Income Tax, Minimum Alternate Tax, Alternate Minimum Tax, Transfer Pricing taxation, Dividend Distribution tax, Securities Transaction Tax etc. Besides these, you have different kinds of surcharges, levies and fees. Fortunately, the Wealth Tax and Estate Duty have been removed from tax laws and Gift Tax has been merged to Income Tax Act. Similarly, in the Indirect tax family – you have Customs Duty, Excise Duty, Service Tax, VAT, Sales Tax etc. and now the mother of all Indirect taxes – GST. As I said earlier, the constant trend is to tax and tax more. The changing trend is to AUDITOR • February 2017
find different kinds of taxes and tax differently. That said, to be fair, we have to concede one thing – that is the maximum marginal rate of tax that was once at an incredibly high rate of about 97% has been brought down to 30 plus – over the past 50 years or so. But then, do not believe anyone who says that Income Tax Act levies taxes only on incomes. It taxes income, deemed income, perceived income, others’ income and even your expenditure. Transfer pricing, disallowances of 14A, 40(a)(ia), 56, 50C are but a few examples. What all have changed over the last 10/15 years? The plethora of exemptions in tax provisions resulted in corporates which were profit making but paying zero taxes. To rein them in, the concept of MAT was introduced, to tax the book profits at a lesser percentage. However, the concept of MAT has been brutally played with by the various dispensations that today, with all the adjustments that one needs to make in the book profits and the rate steadily nearing the corporate tax rate, MAT stands as a testimony to perversion of the North Block. Similar provisions have been brought for non- company tax payers also in the name of Alternate minimum tax. India is, undoubtedly, becoming a global hub for international business ventures – both as a manufacturing economy and a consumption economy. Many international giants have been investing here and making the country a credible destination for global business opportunities. Accordingly, it is indeed imperative that the area of international taxation has to be fortified to ensure that the nation is not taken for a ride by multinationals who would put in all their expertise to use maximum resources of our (continued on next page)
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report further points out as follows:
nation and pay minimum tax to it. To check these possibilities, the area of international taxation is constantly being reviewed in the nation. Concepts of ‘accrual of income’, POEM, ‘transfer pricing’ have all come in a big way. As the concept of Transfer pricing taxation is to be discussed separately in this seminar, I am leaving the subject untouched except to say that this is completely a tax on perceived income and gives enormous scope to the revenue bureaucrats to decide what your income should have been no matter what it actually was. All these have become a fertile area of litigation.
Over the past few years, many countries have acknowledged that excessive litigation is a barrier to economic development…. Revenue locked in tax litigations not only reduces budgetary collections, but tax litigations over burden the courts. Only 13.68% appeals out of the total appeals filed before the ITAT, were decided in favour of the Department as against 60.35% appeals decided in favour of the taxpayers.
Talking of litigation, the tax laws of the country are a perennial source of income and pastime for a significant part of tax practitioners, tax lawyers and even tax administrators. One some times wonders as to what leads to so much of litigation – is it incompetent drafting of law which has an inherent divorce between the intent and the language or the possibilities of interpretation of the statutes or the deliberate misapplication of taxing provisions by the tax administrators? The numbers tell a sordid story. Nearly 3.5 lacs cases are pending at the first appellate level with the amount involved at a humongous level of Rs. 5.5 Lac crores. At the higher levels, viz., the Tribunal, the High court and the Supreme court, over 75000 cases are pending and more interestingly 4/5ths of them are filed by the revenue department. To quote from a judgement of the Hon’ble Bombay High court, “The tendency not to accept any adverse verdict on facts results in frivolous Appeals being filed in this court. That causes huge loss to the public exchequer and results in wastage of precious judicial time of this court”. This has been mentioned in a report that has been compiled by the department itself. The 10
Now I’ll leave to the judgement of all of you as to who causes the problem who are the victims. Use of Digital technology The department has been extensively using the digital technology for collecting information as well as collating the information. There is an enabling provision in the income tax act that mandate many agencies like banks, mutual fund companies, credit card agencies, sub- registrars, RTOs, share brokers etc., to furnish information of financial transactions more than a prescribed threshold limit. Such information are also extensively used to cross verify the information given by the assesses. The Tax deduction at source information are captured so well that it is virtually impossible to escape the attention of the department either by the tax deductors or by the deductees. It has to be candidly admitted that in the area of surveillance of tax payers and tax dodgers, the digital transformation of the nation has been doing a phenomenal job. Today, because of a 10 digit alphanumeric code called PAN, almost all financial transactions have come under 360 degree shadowing. The proposed integration of Aadhaar will also ensure avoidance of misuse of subsidies and exemptions. (continued on next page)
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That the complexity of the Indian tax laws is a given. Several unsuccessful attempts have been made in the past several years. Post the liberalization phase, we have had three committees – Raja Chelliah Committee, Kelkar Committee and Justice Eashwar committee, to go in to the area of complexities of the tax laws and to suggest simplification. It is a matter of record that except wasting several thousands of hours of intellectuals’ time by discussing, debating and dissecting these committee reports, virtually nothing has been done. Hold on, I cannot be so uncharitable also. Some provisions that are blatantly tax payer-unfriendly have been culled out and implemented. In the year 2009, the then Government brought a new‘Direct Taxes Code’ ostensibly to replace many of the archaic provisions in the tax laws and to simplify the tax legislation in India. This attempt was scuttled even by an internal power politics of the then UPA Government and now stands buried officially. So much for the sincerity in attempts to do tax reforms in the country! The ongoing war on black money in the country has several connotations in the area of strengthening tax laws and tax administration, like for example, cap on cash expenditure, ceiling on cash transactions etc. If implemented without malice, all these may bring in better financial discipline among the citizens. More importantly, the vast resources of the revenue department should be utilized effectively to convert more tax evaders as tax payers. It is indeed a pity that less than 3% of the populations even file tax returns. The mistake is not entirely the citizens’. The oppressive regime makes one to stay away from the department as far as possible. The
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statistics regarding the litigations give us enough hints. Don’t they? Well, what can be the trends in the foreseeable future? Governments turning tougher on tax evaders, slow phasing out of various exemption provisions, even abolition of MAT (about which a hint was made in this year’s budget) and possible discontinuance of Domestic Transfer Pricing taxation. The Dispute resolution mechanism should be made more practical and with better understanding. The trend of filing tax appeals to get around the accountability factors and doing assessments to escape the audit objections must go. The currently-invogue limited DRP system for TP litigations do not give great comfort to the assesses, as mostly the decisions are revenue-biased. Lot can be done in the areas such as simplification of drafting, benevolent administration, ensuring lesser litigation etc. while not letting tax dodgers escape. The trend in such a direction would come only from a political dispensation which can author the Part B of the Budget also, without outsourcing it to the revenue bureaucracy. In the beginning I quoted Nani Palkhiwala. Let me also end with a quote from him: “Tax evasion is reprehensible and is a social injustice by the evader to his fellow citizens. Arbitrary or excessive taxation is equally reprehensible as it is social injustice by the government to the people. Tax evasion aggrevates arbitrary taxation. And arbitrary taxation aggravates tax evasion. To break this vicious circle, there must be every attempt to check evasion and there must also be every attempt to stop whimsical taxation”. Only such genuine and sincere attempts would signal welcome trend in taxation in our country.
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Examination Results Post the recent announcement of results of IPCC and Final examinations, I had a chance to discuss the same with our Society’s President who has a long experience with the examination system of our Institute. I thought I would frame my questions and requested him to answer. You would see that as a disciplined soldier, he is ‘defensive’ of the system that he was (is?) part of for a long time! - Editor Questions: a. The latest results brought out a stark contrast - a pathetically low percentage in Finals and an unexpected generous percentage in IPCC. Do you think it is by design or by chance? The percentage of passes in final as well as IPCC has been subject to lot of fluctuations. It is neither by design nor by change. It just happens as a matter of fact. In terms of absolute measure it could throw out a better comparison. However the presentation of this result by the Institute is totally inadequate for comparative analysis. Perhaps one is forced to think on the m o d e r a t i o n f a c t o r, w h i c h c a n c h a n g e according to circumstances. b. Is the habit of ICAI giving only a single digit percentage (esp. in Finals) reflect on the abysmal quality of the examinees (please do not forget that the same students have passed IPCC, which, by no means, an easy exam?) or is it to demonstrate that our exam system is world class? If you talk about the system, I have no second opinion about it being one of the finest systems. I am reminded of a story told by my teacher way back in 1965. It was a case of a rail accident. The judge questioned the signal man whether he showed the lamp at the appropriate time and same was entered in the record book. The signal man positively asserted that he did show the lamp as well as entered it in the records. The 12
Judge left him without asking any further questions. However a small boy around in the hall said a little later- We have a poor judge, he does not know what questions to be asked. While he asked about whether the signal man showed the lamp he failed to ask the next question whether the lamp was lit. The problem therefore lies not in the system but in the implementation. I am aware of the fact that way back when the central valuation was in vogue there were quite a number of students who scored zero in Final A c c o u n t s p a p e r. T h e r e i s n o s p e c i f i c relationship between inter and final in terms of the subject. Everything is different. The problem is in the understanding of the concepts of the subject. c. Why can't ICAI do a proper filtering at the entry level? Why this cruel pleasure of making an unfit student waste a few years to make him realise that he and the course are mutually unfit to each other? This question has been there for decades. Unfortunately the CA system is as such that any amount of filtering will always result in the nature of the result that we see now. What is required is the structural change in the evaluation process. Even in the past, the average number of attempts was 4 and 4 respectively in the Inter and Final level. Many of the senior members in practice are definitely better off today. What kind of a filtering is required is highly a subjective question. d. I have heard many of our CCMs bragging that the system of our examination is foolproof. And I have also heard that the questions are repeated many times over. With so many lakhs of examinees from different parts of the world, with two language settings, examiners from varied backgrounds, unscientific method of selecting the valuers, impossibility of a 100% second check etc. Can you substantiate that claim? (continued on next page) AUDITOR • February 2017
(continued from previous page)
Whatever you have said in the question is absolutely a matter of fact. In fact in the subject of Cost Accounting (currently it is Advanced Management Accounting), of which I h a p p e n t o b e a t e a c h e r, I c a n authoritatively say that almost all the questions are verbatim reproduction from earlier question papers of other professional organizations. In fact, if I remember it was in 2005 the entire question paper was a complete copy of the questions from CIMA. As already stated earlier there is nothing wrong with the system, it is only in the implementation. The other problem is with reference to the valuation. The time given to the valuers is almost around 30 days for valuing 300 papers. It might be a situation wherein there is no uniformity of valuing 10 papers a day and atleast half an hour per paper. This is never carried out. Valuers hurriedly value and hence there is bound to be variation. It is not necessary to carry out the second check if the first valuation is done properly. On the other hand if we change the system partly to objective and partly to subjective, we can see the difference. e. Why can't our Institute move towards computerised evaluation (which would necessitate objective types of questions), open book examination etc.? Why are we clinging to the archaic system of theory questions, long answers, additional sheets etc. in this digital age? Why can’t the Institute move towards less invasive and zero interventionist method in exams? These questions have been right from 1976. However there could be arguments for and against the same. Here what is needed is a total open approach by forming a separate Board of Exams. It is time that the design has to change. I am a votary for the practical evaluation of the students. In spite of my repeated request to the continuing Professional Education committee at various points of time it has not been forthcoming. AUDITOR • February 2017
f. We have a Hindi medium in exams. I understand that questions are set in Hindi, answers are written in Hindi and a separate set of valuers are roped in. A student in North India can technically become a CA without knowing a word of English and we are talking of globalisation of standards, IFRS etc. How do you explain this dichotomy? This is a clear case of politics. The Institute was forced to do the same. Nothing can be done at this stage as the politics will continue. The recent changes suggested for including English as a subject at the entry level .This is not going to solve the problem as it is open to a student to directly joint the Articleship after graduation. He/ She can be from the Hindi medium. However one should pity them as they also undergo the tyranny of valuation at times. f. My last question, which is more generic: In our country's education system, we produce thousands of medical and engineering professionals, who are intimately connected to basic well being of the population, out of thousands of institutions who are not even coming under any common regulatory authority and who have questionable quality standards, why there is an obsession of producing 'quality' accountants - with ICAI straining every nerve to ensure protect that obsession? I strongly believe that we should not compare ourselves unnecessarily with other professions. Today many of the Doctors and Engineers are not able to find gainful employment. While the Medical Profession is one to one, the CA Profession is one to many. In that sense the quality cannot be compromised. However a change in the overall mindset is called for to enhance the quality.
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An open letter to Prime Minister doing rounds in Whatsapp Dear Modiji, This is what we honest citizens feel about our Governments - Central and State. On behalf of professionals & businessmen, I am sending you some facts. Please try to understand. We are not doing Tax '"Chori"'... this is tax saving (a bit of evading too). This is to ensure security of our family, kids and their future for any adversity. 1.
We bought Generators/Inverter in our houses, because Govt. failed to provide constant electricity.
2.
We installed submersible pumps, because Govt. failed to provide water.
3.
We hired own security guards, because Govt. failed to provide security.
4.
We send our kids to private schools, because Govt. failed to provide good education in public schools.
5.
We headed for private hospitals to avail proper care and treatment, because Govt. failed to provide good public hospitals.
6.
We bought cars because Govt. failed to provide good transportation.
Finally, what the tax payer gets in return at the retirement, when he needs most to survive? Nothing, no social security. But instead all his hard earned income resource is used by Government to distribute subsidies and freebies in the name of welfare schemes among masses to buy "free votes" to those who don't pay any taxes. 14
Above all what Govt. do with our (tax) money? Pay to Govt. officials phenomenal salaries just to harass us, the honest citizens. Open courts-which do not give judgments in time. Open police stations, which work for p o l i t i c i a n s o n l y, a n d d o n o t p r o t e c t citizens. Open hospitals, which do not treat us well. Build roads wherein 40-100% of money spent goes in vain due to corruption. Endless list.... Like western democracies, if Indian Government could provide all the above, why would anyone evade taxes? We all know that the major tax revenues collected from us are consumed by Government officials and politicians (billions of dollars are lying in foreign banks). A manufacturer works at a margin of between 2% to 10%, whereas government needs 30% of his income to cover it's expenditure. How fair it is all? That's the reason no one wants to pay taxes. We save taxes for our necessities, family, for our old age, for our safety, security and this phenomenon is the sign of failure of Government in discharging it's own functions fairly and efficiently. Government in alone is responsible for this.
AUDITOR • February 2017
Oscar Goof-up...! A most sensational goof-up occurred at this year's Oscars Award ceremony when a wrong film (La La Land) was announced as the Best Film instead of Moonlight. The blunder was detected only after La La Land producers had made their acceptance speech. The firm managing the event for the Academy of Motion Pictures Arts and Sciences for the past 83 years and responsible for this year's monstrous negligence was PricewaterhouseCoopers (PwC) and this is not its first such scandal in which it was involved. Its negligence contributed to the colossal fraud of more than Rs.7500 crores by Satyam Computers. The US Securities Exchange Commission (SEC) levied a hefty fine of several million dollars on it for violating "its most fundamental duty as a public watchdog by failing to comply with some of the most elementary auditing standards and procedures in conducting the Satyam audits (and follow) procedures to confirm Satyam's cash and cash equivalent balances that resulted in the fraud at Satyam going undetected for a long time." The SEC even said that PwC's audit failures "were not limited to Satyam, but rather indicative of a much
AUDITOR • February 2017
B.S. Raghavan
larger quality control failure throughout PW India." It had to pay a big fine of $51 million for giving misleading certificates of profit year after year for a US firm (MicroStrategy) which had actually incurred losses. The SEC had then said that PwC "gravely compromised its independence by allowing its partners to hold investments in companies of which it was also the auditor and by undertaking non-audit (consultancy) services for them.'' Actually, a House of Commons Committee of UK, where the firm is based, had strongly forbidden any audit firm to be associated with any of its clients for more than five years and to do non-audit services for them. How PwC's association for 83 years with the Academy and its performing event management service for it had gone unnoticed by the SEC is a moot question. The US media has reported that at the very least it might lose the Academy's contract, besides facing SEC's wrath yet again. (The author is a former IAS official and had served as Chief Secretary, Tripura and also as a UN Civil servant)
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Best wishes for a Happy Financial Year...!